Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
( X )
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2018
 OR 
(    )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                         to                                        
 
Commission file number 0-11399
 
CINTAS CORPORATION
(Exact name of Registrant as specified in its charter)
 
WASHINGTON
 
31-1188630
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
6800 CINTAS BOULEVARD
P.O. BOX 625737
CINCINNATI, OHIO 45262-5737
(Address of principal executive offices)(Zip Code)
 
(513) 459-1200
(Registrant’s telephone number, including area code)
 
Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   ü   No  _   
 
Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes   ü   No   _  
 
Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer   ü          Accelerated Filer   _             Non-Accelerated Filer    _ 
Smaller Reporting Company   _         Emerging Growth Company    _     (Do not check if a smaller reporting company)
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  _   

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes      No     ü  
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding March 31, 2018
Common Stock, no par value
 
106,720,902



CINTAS CORPORATION
TABLE OF CONTENTS

Part I.
Financial Information
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three and Nine Months Ended February 28, 2018 and 2017
 
 
 
 
 
 
 
 
Three and Nine Months Ended February 28, 2018 and 2017
 
 
 
 
 
 
 
 
February 28, 2018 and May 31, 2017
 
 
 
 
 
 
 
 
    Nine Months Ended February 28, 2018 and 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


CINTAS CORPORATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share data)

 
Three Months Ended
 
Nine Months Ended
 
February 28,
2018
 
February 28,
2017
 
February 28,
2018
 
February 28,
2017
Revenue:
 

 
 

 
 
 
 
Uniform rental and facility services
$
1,284,516

 
$
988,178

 
$
3,904,338

 
$
2,982,475

Other
304,622

 
267,189

 
902,744

 
810,619

 
1,589,138

 
1,255,367

 
4,807,082

 
3,793,094

Costs and expenses:
 

 
 

 
 
 
 
Cost of uniform rental and facility services
718,138

 
542,790

 
2,148,961

 
1,631,385

Cost of other
170,537

 
152,653

 
501,936

 
460,140

Selling and administrative expenses
490,618

 
358,589

 
1,444,985

 
1,089,707

G&K Services, Inc. transaction and
    integration expenses
9,821

 
9,344

 
26,866

 
15,478

 
 
 
 
 
 
 
 
Operating income
200,024

 
191,991

 
684,334

 
596,384

 
 
 
 
 
 
 
 
Interest income
(384
)
 
(11
)
 
(972
)
 
(107
)
Interest expense
25,901

 
13,696

 
85,347

 
41,135

 
 
 
 
 
 
 
 
Income before income taxes
174,507


178,306


599,959


555,356

Income tax (benefit) expense
(121,282
)
 
61,352

 
5,325

 
180,244

Income from continuing operations
295,789

 
116,954

 
594,634

 
375,112

Income from discontinued operations,
     net of tax (benefit) expense of $(6,157),
     $2,109, $34,946 and $13,101, respectively
6,306

 
1,051

 
61,781

 
21,361

Net income
$
302,095

 
$
118,005


$
656,415


$
396,473

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
2.73

 
$
1.09

 
$
5.50

 
$
3.51

Discontinued operations
0.06

 
0.01

 
0.57

 
0.20

Basic earnings per share
$
2.79

 
$
1.10


$
6.07


$
3.71

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
2.66

 
$
1.06

 
$
5.35

 
$
3.42

Discontinued operations
0.05

 
0.01

 
0.55

 
0.20

Diluted earnings per share
$
2.71


$
1.07


$
5.90


$
3.62

 
 
 
 
 
 
 
 
Dividends declared per share
$
1.62

 
$
1.33

 
$
1.62

 
$
1.33

 

See accompanying notes.

3


CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

 
Three Months Ended
 
Nine Months Ended
 
February 28, 2018
 
February 28, 2017
 
February 28, 2018
 
February 28, 2017
 
 
 
 
 
 
 
 
Net income
$
302,095

 
$
118,005

 
$
656,415

 
$
396,473

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,374

 
2,400

 
26,184

 
(5,135
)
Change in fair value of cash flow hedges
—

 
2,560

 
—

 
16,913

Amortization of interest rate lock agreements
(294
)
 
385

 
(638
)
 
1,155

 
 
 
 
 
 
 
 
Other comprehensive income
2,080

 
5,345

 
25,546

 
12,933

 
 
 
 
 
 
 
 
Comprehensive income
$
304,175

 
$
123,350

 
$
681,961

 
$
409,406


See accompanying notes.







4


CINTAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share data)
 
February 28,
2018
 
May 31,
2017
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
152,563

 
$
169,266

Marketable securities
33,693

 
22,219

Accounts receivable, net
779,220

 
736,008

Inventories, net
274,819

 
278,218

Uniforms and other rental items in service
682,438

 
635,702

Income taxes, current
21,651

 
44,320

Prepaid expenses and other current assets
35,192

 
30,132

Assets held for sale
—

 
38,613

Total current assets
1,979,576

 
1,954,478

 
 
 
 
Property and equipment, net
1,367,580

 
1,323,501

 
 
 
 
Investments
178,527

 
164,788

Goodwill
2,819,867

 
2,782,335

Service contracts, net
557,477

 
586,988

Other assets, net
25,566

 
31,967

 
$
6,928,593

 
$
6,844,057

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
172,181

 
$
177,051

Accrued compensation and related liabilities
145,066

 
149,635

Accrued liabilities
412,826

 
429,809

Debt due within one year
187,500

 
362,900

Liabilities held for sale
—

 
11,457

Total current liabilities
917,573

 
1,130,852

 
 
 
 
Long-term liabilities:
 

 
 

Debt due after one year
2,534,760

 
2,770,624

Deferred income taxes
376,665

 
469,328

Accrued liabilities
205,598

 
170,460

Total long-term liabilities
3,117,023

 
3,410,412

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock, no par value:
—

 
—

100,000 shares authorized, none outstanding


 


Common stock, no par value:
611,485

 
485,068

425,000,000 shares authorized
 

 
 

FY 2018:  182,558,025 issued and 106,681,417 outstanding
 

 
 

FY 2017:  180,992,605 issued and 105,400,629 outstanding
 
 
 
Paid-in capital
219,389

 
223,924

Retained earnings
5,651,656

 
5,170,830

Treasury stock:
(3,611,050
)
 
(3,574,000
)
FY 2018:  75,876,608 shares
 

 
 

FY 2017:  75,591,976 shares
 
 
 
Accumulated other comprehensive income (loss)
22,517

 
(3,029
)
Total shareholders’ equity
2,893,997

 
2,302,793

 
$
6,928,593

 
$
6,844,057


See accompanying notes.

5


CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) 
 
Nine Months Ended
 
February 28,
2018
 
February 28,
2017
Cash flows from operating activities:
 

 
 

Net income
$
656,415

 
$
396,473

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
157,319

 
120,493

Amortization of intangible assets
47,583

 
11,221

Stock-based compensation
86,044

 
63,578

Gain on sale of business
(99,060
)
 
—

Gain on Shred-it
—

 
(25,876
)
Deferred income taxes
(120,428
)
 
(3,472
)
Change in current assets and liabilities, net of acquisitions of businesses:
 

 
 

Accounts receivable, net
(40,046
)
 
(28,646
)
Inventories, net
4,011

 
(23,364
)
Uniforms and other rental items in service
(44,050
)
 
(53
)
Prepaid expenses and other current assets
(17,925
)
 
(11,387
)
Accounts payable
(580
)
 
15,538

Accrued compensation and related liabilities
(2,209
)
 
(5,812
)
Accrued liabilities and other
10,997

 
(6,079
)
Income taxes, current
22,793

 
(18,856
)
Net cash provided by operating activities
660,864

 
483,758

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(196,040
)
 
(218,621
)
Proceeds from redemption of marketable securities
146,302

 
172,506

Purchase of marketable securities and investments
(157,528
)
 
(125,634
)
Proceeds from sale of business
127,835

 
—

Proceeds from sale of investment in Shred-it
—

 
25,876

Acquisitions of businesses, net of cash acquired
(12,298
)
 
(19,630
)
Other, net
1,746

 
28

Net cash used in investing activities
(89,983
)
 
(165,475
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Issuance of commercial paper, net
137,000

 
99,500

Repayment of debt
(550,000
)
 
(250,000
)
Prepaid short-term debt financing fees
—

 
(13,949
)
Proceeds from exercise of stock-based compensation awards
35,838

 
25,114

Dividends paid
(175,589
)
 
(142,444
)
Repurchase of common stock
(37,050
)
 
(20,054
)
Other, net
(2,489
)
 
(5,801
)
Net cash used in financing activities
(592,290
)
 
(307,634
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
4,706

 
(2,762
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(16,703
)
 
7,887

 
 
 
 
Cash and cash equivalents at beginning of period
169,266

 
139,357

 
 
 
 
Cash and cash equivalents at end of period
$
152,563

 
$
147,244


 
See accompanying notes.

6


CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited) 

1.             Basis of Presentation
 
The consolidated condensed financial statements of Cintas Corporation (Cintas, the Company, we, us or our) included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequately presented, we suggest that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2017. A summary of our significant accounting policies is presented beginning on page 38 of that report. There have been no material changes in the accounting policies followed by Cintas during the current fiscal year other than the adoption of new accounting pronouncements discussed in Note 2. 
 
Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the consolidated results of the interim periods shown have been made.

On March 21, 2017, Cintas completed the acquisition of G&K Services, Inc. (G&K) for consideration of approximately $2.1 billion. G&K is now a wholly-owned subsidiary of Cintas that operates within the Uniform Rental and Facility Services operating segment. To finance the G&K acquisition, Cintas used a combination of new senior notes, a term loan, other borrowings under its existing credit facility and cash on hand. G&K's results of operations are included in Cintas' consolidated financial statements as of and from the date of acquisition.

During the three months ended August 31, 2017, Cintas sold a significant business, referred to as "Discontinued Services," and as a result, its operations are classified as discontinued operations for all periods presented. See Note 13 entitled Discontinued Operations for more information.

Inventories, net are measured at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following amounts at: 
(In thousands)
February 28,
2018
 
May 31,
2017
 
 
 
 
Raw materials
$
18,821

 
$
17,528

Work in process
25,135

 
17,951

Finished goods
230,863

 
242,739

 
$
274,819

 
$
278,218

Inventories are recorded net of reserves for obsolete inventory of $38.5 million and $38.3 million at February 28, 2018 and May 31, 2017, respectively.
 

2.             New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)," to clarify revenue recognition principles. This guidance is intended to improve disclosure requirements and enhance the comparability of revenue recognition practices. Improved disclosures under the amended guidance relate to the nature, amount, timing and uncertainty of revenue that is recognized from contracts with customers. This guidance will be effective for reporting periods beginning after December 15, 2017. A cross-functional implementation team has been established consisting of representatives from all of our operating segments. The implementation team is working to analyze the impact of the standard on Cintas' contract portfolio by reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to revenue contracts. In addition, we are in the process of identifying and implementing the appropriate changes to business processes and controls to support recognition and disclosure under the new standard.

7


Based on our preliminary analysis, we currently do not believe the adoption of this guidance will have a material impact on our consolidated condensed financial statements. Based on our evaluation of each revenue stream, we believe that most revenue transactions will be accounted for in a manner substantially consistent with existing guidance. The majority of our business services revenue transactions represent a series of distinct services over the term of the contract where performance obligations are the same each day. Our implementation activities related to this standard are aligned to meeting the required adoption date. The largest impacts to the Company’s financial statements will result from the new qualitative and quantitative disclosures that will be required upon adoption of the new standard, and the capitalization of certain direct and incremental contract costs that will be required to be capitalized and amortized over the life of the corresponding period of benefit. We have concluded that we will apply the modified retrospective adoption alternative for this standard. Processes and controls are currently being implemented to identify and quantify the cumulative effect adjustment to retained earnings as of June 1, 2018.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Topic 842 supersedes the previous leases standard, Accounting Standards Codification (ASC) 840, "Leases." This guidance is effective for reporting periods beginning after December 15, 2018, however, early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Cintas is currently evaluating the impact that ASU 2016-02 will have on its consolidated condensed financial statements.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference between a reporting unit's carrying value and its fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on the consolidated condensed financial statements.

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.” ASU 2017-07 requires the service component of pension and other postretirement benefit costs to be presented in the same line item as other employee compensation costs on the consolidated condensed statement of income; however, the other components of net benefit costs are required to be presented outside of operating income within the consolidated condensed statements of income. Cintas retrospectively adopted ASU 2017-07 on June 1, 2017.

No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on Cintas' consolidated condensed financial statements.


3.             Fair Value Measurements
 
All financial instruments that are measured at fair value on a recurring basis have been classified within the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the consolidated condensed balance sheet date. These financial instruments measured at fair value on a recurring basis are summarized below: 
 
As of February 28, 2018
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
152,563

 
$
—

 
$
—

 
$
152,563

Marketable securities:
 
 
 
 
 
 
 
Canadian treasury securities
—

 
33,693

 
—

 
33,693

Total assets at fair value
$
152,563

 
$
33,693

 
$
—

 
$
186,256


8


 
As of May 31, 2017
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
169,266

 
$
—

 
$
—

 
$
169,266

Marketable securities:
 
 
 
 
 
 
 
Canadian treasury securities
—

 
22,219

 
—

 
22,219

Total assets at fair value
$
169,266

 
$
22,219

 
$
—

 
$
191,485


Cintas’ cash and cash equivalents and marketable securities are generally classified within Level 1 or Level 2 of the fair value hierarchy. Financial instruments classified as Level 1 are based on quoted market prices in active markets, and financial instruments classified as Level 2 are based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The types of financial instruments Cintas classifies within Level 1 include most bank deposits and money market securities. Cintas does not adjust the quoted market price for such financial instruments.

The types of financial instruments Cintas classifies within Level 2 are primarily high grade domestic commercial paper and Canadian treasury securities (federal). The valuation technique used for Cintas’ marketable securities classified within Level 2 of the fair value hierarchy is primarily the market approach. The primary inputs to value Cintas’ marketable securities are the respective instrument's future cash flows based on its stated yield and the amount a market participant would pay for a similar instrument. Primarily all of Cintas’ marketable securities are actively traded and the recorded fair value reflects current market conditions. However, due to the inherent volatility in the investment market, there is at least a possibility that recorded investment values may change in the near term.

Interest, realized gains and losses and declines in value determined to be other than temporary on available-for-sale securities are included in interest income or expense. The cost of the securities sold is based on the specific identification method. The amortized cost basis of marketable securities as of February 28, 2018 and May 31, 2017 was $33.7 million and $22.2 million, respectively. All outstanding marketable securities as of February 28, 2018 and May 31, 2017 had contractual maturities due within one year.
The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Cintas believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the consolidated condensed balance sheet dates.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a nonrecurring basis as required under GAAP. The Company's acquisition of G&K in the fourth quarter of fiscal 2017 was recorded at fair value. See Note 9 entitled Acquisitions for additional information on the measurement of the G&K assets acquired and liabilities assumed. There were no material acquisitions during the nine months ended February 28, 2018.


4.             Investments
 
Investments at February 28, 2018 of $178.5 million include the cash surrender value of insurance policies of $153.5 million, equity method investments of $20.0 million and cost method investments of $5.0 million. Investments at May 31, 2017 of $164.8 million include the cash surrender value of insurance policies of $144.0 million, equity method investments of $15.8 million and cost method investments of $5.0 million.

Investments are generally evaluated for impairment on an annual basis or when indicators of impairment exist. For the nine months ended February 28, 2018 and 2017, no impairment losses were recorded.


9


5.             Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per share from continuing operations using the two-class method for amounts attributable to Cintas’ common shares: 
 
Three Months Ended
 
Nine Months Ended
Basic Earnings per Share from Continuing
   Operations (in thousands except per share data)
February 28,
2018
 
February 28,
2017
 
February 28,
2018

February 28,
2017
 
 
 
 
 
 
 
 
Income from continuing operations
$
295,789

 
$
116,954

 
$
594,634

 
$
375,112

Less: income from continuing operations allocated to participating securities
5,248

 
2,573

 
10,546

 
7,348

Income from continuing operations available to common shareholders
$
290,541

 
$
114,381


$
584,088


$
367,764

Basic weighted average common shares outstanding
106,558

 
105,093

 
106,210

 
104,842

 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
$
2.73

 
$
1.09


$
5.50

 
$
3.51

 
Three Months Ended
 
Nine Months Ended
Diluted Earnings per Share from Continuing
   Operations (in thousands except per share data)
February 28,
2018
 
February 28,
2017
 
February 28,
2018
 
February 28,
2017
 
 
 
 
 
 
 
 
Income from continuing operations
$
295,789

 
$
116,954

 
$
594,634

 
$
375,112

Less: income from continuing operations allocated to participating securities
5,248

 
2,573

 
10,546

 
7,348

Income from continuing operations available to common shareholders
$
290,541

 
$
114,381

 
$
584,088

 
$
367,764

Basic weighted average common shares outstanding
106,558

 
105,093

 
106,210

 
104,842

Effect of dilutive securities – employee stock options
3,617

 
2,799

 
3,044

 
2,666

Diluted weighted average common shares outstanding
110,175

 
107,892

 
109,254

 
107,508

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
2.66

 
$
1.06

 
$
5.35

 
$
3.42


For the three months ended February 28, 2018, basic and diluted earnings per share from discontinued operations were $0.06 and $0.05, respectively. Both basic and diluted earnings per share from discontinued operations were $0.01 for the three months ended February 28, 2017. For the nine months ended February 28, 2018, basic and diluted earnings per share from discontinued operations were $0.57 and $0.55, respectively. Both basic and diluted earnings per share from discontinued operations were $0.20 for the nine months ended February 28, 2017.

For the three months ended February 28, 2018 and 2017, options granted to purchase 1.0 million and 0.3 million shares of Cintas common stock, respectively, were excluded from the computation of diluted earnings per share. For the nine months ended February 28, 2018 and 2017, options granted to purchase 0.8 million and 0.5 million shares of Cintas common stock were excluded from the computation of diluted earnings per share. The exercise prices of these options were greater than the average market price of the common stock (anti-dilutive).

On August 2, 2016, Cintas announced that the Board of Directors authorized a $500.0 million share buyback program, which does not have an expiration date. As of February 28, 2018, no share buybacks have occurred under the August 2, 2016 program and there were no share buybacks under this program subsequent to February 28, 2018 through April 6, 2018.

For the nine months ended February 28, 2018, Cintas acquired 0.3 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested during the nine months ended February 28, 2018. These shares were acquired at an average price of $130.00 per share for a total purchase price of $37.0 million.

10


6.             Goodwill, Service Contracts and Other Assets
 
Changes in the carrying amount of goodwill and service contracts for the nine months ended February 28, 2018, by reportable operating segment and All Other, are as follows:
Goodwill (in thousands)
Uniform Rental
 and Facility Services
 
First Aid
 and Safety Services
 
All
Other
 
Total
 
 
 
 
 
 
 
 
Balance as of June 1, 2017
$
2,448,070

 
$
243,112

 
$
91,153

 
$
2,782,335

Goodwill acquired (1)
29,444

 
81

 
5,939

 
35,464

Foreign currency translation
1,032

 
992

 
44

 
2,068

Balance as of February 28, 2018
$
2,478,546

 
$
244,185

 
$
97,136

 
$
2,819,867


(1) Adjustments to the G&K preliminary purchase price allocation represent $27.1 million of the acquired goodwill in the Uniform Rental and Facility Services reportable operating segment. See Note 9 entitled Acquisitions for more information.
Service Contracts (in thousands)
Uniform Rental
 and Facility Services
 
First Aid
 and Safety Services
 
All
Other
 
Total
 
 

 
 

 
 

 
 

Balance as of June 1, 2017
$
529,923

 
$
30,062

 
$
27,003

 
$
586,988

Service contracts acquired
1,635

 
440

 
4,309

 
6,384

Service contracts amortization
(33,701
)
 
(2,910
)
 
(3,658
)
 
(40,269
)
Foreign currency translation
4,243

 
131

 
—

 
4,374

Balance as of February 28, 2018
$
502,100

 
$
27,723

 
$
27,654

 
$
557,477


Information regarding Cintas’ service contracts and other assets is as follows:
 
As of February 28, 2018
(In thousands)
Carrying Amount
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
Service contracts
$
923,020

 
$
365,543

 
$
557,477

 
 
 
 
 
 
Noncompete and consulting agreements
$
41,358

 
$
39,740

 
$
1,618

Other
33,562

 
9,614

 
23,948

Total other assets
$
74,920

 
$
49,354

 
$
25,566

 
As of May 31, 2017
(In thousands)
Carrying Amount
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
Service contracts
$
911,273

 
$
324,285

 
$
586,988

 
 
 
 
 
 
Noncompete and consulting agreements
$
40,743

 
$
39,244

 
$
1,499

Other
34,890

 
4,422

 
30,468

Total other assets
$
75,633

 
$
43,666

 
$
31,967


Amortization expense for service contracts and other assets for continuing operations was $15.7 million and $3.3 million for the three months ended February 28, 2018 and 2017, respectively. Amortization expense for service contracts and other assets for continuing operations was $45.5 million and $9.6 million for the nine months ended February 28, 2018 and 2017, respectively. Estimated amortization expense for service contracts and other assets, excluding any future acquisitions, for each of the next five full fiscal years and thereafter is $61.6 million, $60.2 million, $54.4 million, $52.4 million, $44.2 million and $284.5 million, respectively. The increase in amortization expense in the current year and for the next five years, in comparison to the prior fiscal years, is the result of the G&K acquisition.

11


7.             Debt, Derivatives and Hedging Activities
 
Cintas' debt is summarized as follows:
(In thousands)
Interest
 Rate
 
Fiscal Year
Issued
 
Fiscal Year
Maturity
 
February 28,
2018
 
May 31,
2017
 
 
 
 
 
 
 
 
 
 
Debt due within one year
 
 
 
 
 
 
 
 
 
Commercial paper
1.93
%
(1) 
Various
 
Various
 
$
187,500

 
$
50,500

Senior notes
6.13
%
 
2008
 
2018
 
—

 
300,000

Current portion of term loan
2.00
%
(2) 
2017
 
2018
 
—

 
12,500

Debt issuance costs
 
 
 
 
 
 
—

 
(100
)
Total debt due within one year
 
 
 
 
 
 
$
187,500

 
$
362,900

 
 
 
 
 
 
 
 
 
 
Debt due after one year
 
 
 
 
 
 
 
 
 
Senior notes
4.30
%
 
2012
 
2022
 
$
250,000

 
$
250,000

Senior notes
2.90
%
 
2017
 
2022
 
650,000

 
650,000

Senior notes
3.25
%
 
2013
 
2023
 
300,000

 
300,000

Senior notes (3)
2.78
%
 
2013
 
2023
 
52,228

 
52,554

Senior notes (4)
3.11
%
 
2015
 
2025
 
52,393

 
52,645

Senior notes
3.70
%
 
2017
 
2027
 
1,000,000

 
1,000,000

Senior notes
6.15
%
 
2007
 
2037
 
250,000

 
250,000

Long-term portion of term loan
2.00
%
(2) 
2017
 
2022
 
—

 
237,500

Debt issuance costs
 
 
 
 
 
 
(19,861
)
 
(22,075
)
   Total debt due after one year
 
 
 
 
 
 
$
2,534,760

 
$
2,770,624


(1) Variable rate debt instrument. The rate presented is the variable borrowing rate at February 28, 2018.
(2) Variable rate debt instrument. The rate presented is the variable borrowing rate at May 31, 2017.
(3) Cintas assumed these senior notes with the acquisition of G&K in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.73%.
(4) Cintas assumed these senior notes with the acquisition of G&K in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.88%.

Cintas' senior notes, excluding the G&K senior notes assumed with the acquisition of G&K in fiscal 2017, and term loan 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 February 28, 2018 were $2,742.1 million and $2,789.6 million, respectively, and as of May 31, 2017 were $3,156.0 million and $3,296.8 million, respectively. In the first quarter of fiscal 2018, Cintas paid off the term loan balance of $250.0 million with cash on hand. On December 1, 2017, in accordance with the terms of the notes, Cintas paid the $300.0 million aggregate principal amount of its 6.13% 10-year senior notes that matured on that date with cash on hand and $265.0 million in proceeds from the issuance of commercial paper. During nine months ended February 28, 2018, Cintas issued $137.0 million, net of commercial paper.

The credit agreement that supports our commercial paper program was amended on September 16, 2016. The amendment increased the capacity of the revolving credit facility from $450.0 million to $600.0 million and added a $250.0 million term loan facility. The existing term loan facility was paid in full as of the first quarter of fiscal 2018. The credit agreement has an accordion feature that provides Cintas the ability to request increases to the borrowing commitments under either the revolving credit facility or a new term loan of up to $250.0 million in the aggregate, subject to customary conditions. The maturity date of the credit agreement is September 15, 2021. As of February 28, 2018, there was $187.5 million of commercial paper outstanding with a weighted average interest rate of 1.93% and maturity dates less than 30 days and no borrowings on our revolving credit facility. As of May 31, 2017, there was $50.5 million of commercial paper outstanding with a weighted average interest rate of 1.24% and maturity dates less than 30 days and no borrowings on our revolving credit facility. The fair value of the commercial paper is estimated using Level 2 inputs based on general market prices. Given its short-term nature, the carrying value of the outstanding commercial paper approximates fair value.

12


Cintas uses interest rate locks to manage our overall interest expense as interest rate locks effectively change the interest rate of specific debt issuances. The interest rate locks are entered into to protect against unfavorable movements in the benchmark treasury rate related to forecasted debt issuances. Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2007, fiscal 2008, fiscal 2012, fiscal 2013 and fiscal 2017. The amortization of the cash flow hedges resulted in a decrease to other comprehensive income of $0.3 million for the three months ended February 28, 2018 and an increase to other comprehensive income of $0.4 million for the three months ended February 28, 2017. For the nine months ended February 28, 2018 and 2017, the amortization of the cash flow hedges resulted in a decrease to other comprehensive income of $0.6 million and an increase to other comprehensive income of $1.2 million, respectively.

Cintas has certain covenants related to debt agreements. These covenants limit Cintas’ ability to incur certain liens, to engage in sale-leaseback transactions and to merge, consolidate or sell all or substantially all of Cintas’ assets. These covenants also require Cintas to maintain certain debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) and interest coverage ratios. Cross-default provisions exist between certain debt instruments. If a default of a significant covenant were to occur, the default could result in an acceleration of the maturity of the indebtedness, impair liquidity and limit the ability to raise future capital. Cintas was in compliance with all debt covenants for all periods presented.


8.             Income Taxes
 
In the normal course of business, Cintas provides for uncertain tax positions and the related interest and adjusts its unrecognized tax benefits and accrued interest accordingly. As of February 28, 2018 and May 31, 2017, recorded unrecognized tax benefits were $18.5 million and $12.6 million, respectively, and are included in long-term accrued liabilities on the consolidated condensed balance sheet. The increase in the liability for the nine months ended February 28, 2018 is primarily related to an adjustment to the preliminary purchase price allocation for the G&K acquisition.

All U.S. federal income tax returns are closed to audit through fiscal 2014. Cintas is currently in various audits in certain foreign jurisdictions and certain domestic states. The years under foreign and domestic state audits cover fiscal years back to 2013. Based on the resolution of the various audits and other potential regulatory developments, it is reasonably possible that the balance of unrecognized tax benefits would not change for the fiscal year ending May 31, 2018.

The majority of Cintas' operations are in North America. Cintas is required to file federal income tax returns, as well as state income tax returns in a majority of the domestic states and also in certain Canadian provinces. At times, Cintas is subject to audits in these jurisdictions. The audits, by nature, are sometimes complex and can require several years to resolve. The final resolution of any such tax audit could result in either a reduction in Cintas' accruals or an increase in its income tax provision, either of which could have an impact on the consolidated condensed results of operations in any given period.

On December 22, 2017, the President signed into legislation the Tax Cuts and Jobs Act (the Tax Act). Among other changes, the Tax Act reduces the U.S. corporate tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of foreign subsidiaries. The Tax Act also includes provisions that are expected to offset some of the benefit of the U.S. corporate tax rate reduction, including the repeal of the deduction for domestic production activities and the expansion of the limitation on the deduction of certain executive compensation. In addition, the Tax Act alters the landscape of taxation of non-U.S. operations and provides immediate deductions for certain new investments, among other provisions.

Cintas’ effective tax rate for continuing operations was (69.5)% and 34.4% for the three months ended February 28, 2018 and 2017, respectively. For the nine months ended February 28, 2018 and 2017, Cintas' effective tax rate for continuing operations was 0.9% and 32.5%, respectively. The effective tax rate for the three and nine month periods ended February 28, 2018 were primarily impacted by the reduced U.S. corporate tax rate, which was partially offset by other provisions of the Tax Act, and resulted in a net favorable discrete provisional adjustment of $150.5 million related to the Tax Act. The net favorable discrete provisional adjustment is discussed in more detail in the following paragraphs. The three and nine month periods ended February 28, 2017 were also impacted by certain discrete items (primarily the tax accounting for stock-based compensation).



13


In acknowledgment of the substantial changes incorporated in the U.S. Tax Reform, in conjunction with the timing of the enactment being just weeks before the majority of the provisions became effective, the SEC staff issued Staff Accounting Bulletin ("SAB") 118 to provide certain guidance in determining the accounting for income tax effects of the legislation in the accounting period of enactment as well as provide a measurement period within which to finalize and reflect such final effects associated with U.S. Tax Reform. During the three months ended February 28, 2018, enactment of the Tax Act resulted in the following provisional impacts on income tax expense:

Provisional Deferred Tax Revaluation
Cintas’ net deferred income taxes represent benefits that will be used to reduce corporate taxes expected to be paid as well as differences between the tax bases and carrying amounts of assets and liabilities that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates occur, deferred tax assets and liabilities are adjusted through income tax expense in the period changes are enacted.

Upon enactment of the Tax Act, Cintas revalued its deferred tax assets and liabilities based on the rates at which they are expected to reverse in future periods (primarily at the newly enacted 21% U.S. corporate tax rate). Cintas will continue to revise certain aspects of the calculation, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount related to the revaluation of the net deferred tax liability balance was a benefit of $163.8 million, which was recognized as a component of income tax expense for the three months ended February 28, 2018.

Provisional Transition Tax
The one-time transition tax is based on Cintas’ post 1986 earnings and profits (E&P) of foreign subsidiaries that were previously deferred for U.S. Income tax purposes. Cintas recorded a provisional transition tax liability, net of foreign tax credits, of $9.5 million that was recognized as additional income tax expense during the three months ended February 28, 2018. Cintas is still revising the transition tax calculation, and this amount is subject to change based on computation of final fiscal 2018 E&P and the amounts held in cash and cash equivalents at the end of fiscal 2018. 

Provisional Foreign Withholding Tax
Foreign withholding taxes of $3.8 million have been recognized on certain non-U.S. earnings subject to repatriation that were previously tax deferred. This is a provisional estimate and may change based on final E&P computations through fiscal 2018. We will continue to monitor those earnings we believe to be permanently reinvested in foreign operations, if any.

As of February 28, 2018, the estimated impacts of the Tax Act recorded during the three months ended February 28, 2018 are provisional in nature. Cintas will continue to assess the impact of the Tax Act and will record adjustments through the income tax provision in the relevant period as amounts are known and reasonably estimable during the measurement period. As Cintas has not completed the final analysis of the tax impact of the Tax Act, the impact of the Tax Act may differ from Cintas’ quarterly provisional estimates due to information currently unavailable, changes in interpretations, the issuance of additional guidance and changes in assumptions, including actions Cintas may take in future periods as a result of the Tax Act. However, Cintas has recognized a reasonable estimate of the effects of the Tax Act on its deferred tax balances, the one-time transition tax and the withholding taxes related to foreign cash distributions within the consolidated condensed financial statements for the three months ending February 28, 2018.

Given the effective date of the U.S. corporate tax rate reduction in the Tax Act, Cintas’ statutory federal corporate tax rate for fiscal 2018 will be a blended rate of 29.17% and will decline to 21% for fiscal 2019 and beyond.











14


9.             Acquisitions

On March 21, 2017, Cintas acquired G&K for consideration of approximately $2.1 billion. Pursuant to the merger agreement among Cintas, G&K and Bravo Merger Sub, Inc., a wholly-owned subsidiary of Cintas, each share of common stock of G&K issued and outstanding immediately prior to the effective time of the G&K acquisition was canceled and converted into the right to receive $97.50 in cash. The total purchase price was $2,078.4 million, which was funded using a combination of new senior notes, a term loan, other borrowings under our existing credit facility and cash on hand. The net consideration transferred for G&K consisted of the following items:
(In thousands)
 
 
 
 
 
Cash consideration for common stock
$
1,901,845

(1) 
Cash consideration for share-based awards
62,257

(2) 
Cash consideration for G&K revolving debt
124,180

(3) 
Cash consideration for transaction expenses
24,529

(4) 
Total consideration
2,112,811

 
Cash acquired
(34,393
)
(5) 
Net consideration transferred
$
2,078,418

 
(1) The cash consideration for outstanding shares of G&K common stock is the product of the agreed-upon cash per share price of $97.50 and total G&K outstanding shares of approximately 19.5 million.
(2) The cash consideration for share-based awards is the product of the agreed-upon cash per share price of $97.50 and the total number of restricted stock outstanding and the “in the money” stock options net of the weighted average exercise price.
(3) The cash consideration for G&K revolving debt reflects the repayment of the outstanding obligation.
(4) Represents G&K legal and professional fees that were incurred prior to acquisition and were due upon the closing of the transaction.
(5) Represents the G&K cash balance acquired at acquisition.
Cintas accounted for the G&K acquisition using the acquisition method. The preliminary allocation of the purchase price was determined by management with the assistance of third-party valuation specialists and was based on estimates of the fair value of assets acquired and liabilities assumed as of March 21, 2017. During the nine months ended February 28, 2018, $28.3 million of adjustments related to deferred taxes and $1.2 million of adjustments related to income taxes, current were made to the preliminary purchase price allocation. Cintas is continuing to evaluate information to determine the fair value of acquired assets and liabilities. As of February 28, 2018, the purchase price allocation for the acquisition was preliminary and subject to completion. The components of the preliminary purchase price allocation, at fair value, are as follows:
Assets
 
Accounts receivable
$
95,846

Inventories
30,254

Uniforms and other rental items in service
93,659

Income taxes, current
15,873

Prepaid expenses and other current assets
43,235

Property and equipment
254,035

Goodwill
1,520,295

Service contracts
519,000

Trade names
17,000

Other assets
15,585

Liabilities
 
Accounts payable
(53,220
)
Accrued compensation and related liabilities
(9,594
)
Accrued liabilities
(115,109
)
Long-term accrued liabilities
(28,380
)
G&K senior notes
(105,359
)
Deferred income taxes
(214,702
)
Total consideration
$
2,078,418


15


The preliminary fair value of the intangible assets has been estimated using the income approach through a discounted cash flow analysis (except as noted below with respect to the trade names) with the cash flow projections discounted using a rate of 9.5%. The cash flows are based on estimates used to price the G&K acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from Cintas’ pricing model and the weighted average cost of capital.

The G&K service contract intangible asset will be amortized over a period of 15 years, which represents the estimated useful life of the economic benefit and the asset amortization is based on the annual economic value of the underlying asset which generally decreases over the 15-year term. The trade names represent the G&K corporate trade name and all of the branded variations thereof. Cintas applied the income approach through a relief from royalty method analysis to determine the preliminary fair value of the trade name assets.

The table below sets forth the preliminary valuation and amortization period of identifiable intangible assets:
Identifiable intangible assets
Preliminary Valuation
Amortization Period
 
 
 
Service contracts
$
519,000

15 years
Trade names
17,000

3 years
Total
$
536,000

 

Cintas estimated the preliminary fair value of the acquired property, plant and equipment using a combination of the cost and market approaches, depending on the type of asset. The preliminary fair value of property, plant and equipment consisted of real property of $141.8 million and personal property of $112.2 million.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. None of the goodwill is expected to be deductible for income tax purposes. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the G&K acquisition. These benefits include improved service capabilities, an enhanced footprint in the markets that we serve, attractive synergy opportunities and value creation. The goodwill is entirely allocated to the Uniform Rental and Facility Services reportable operating segment.

The following unaudited pro forma information presents the combined financial results for Cintas and G&K as if the G&K acquisition had been completed at the beginning of Cintas’ prior fiscal year, June 1, 2016. Prior to the acquisition, G&K used a 52-week or 53-week fiscal year ending on the Saturday nearest June 30. The pro forma financial information set forth below for the three and nine months ended February 28, 2017 includes G&K's publicly reported results for the period of July 2, 2016 through December 31, 2016 annualized and adjusted for number of working days in Cintas' first, second and third quarters of fiscal 2017.
 
Three Months Ended
 
Nine Months Ended
(In thousands except per share data)
February 28,
2017
 
February 28,
2017
 
 
 
 
Net sales
$
1,494,918

 
$
4,521,542

Net income from continuing operations
$
126,490

 
$
404,110

 
 
 
 
Earnings from continuing operations per common share - diluted
$
1.15

 
$
3.69

The information above does not include the pro forma adjustments that would be required under Regulation S-X for pro forma financial information, and does not reflect future events that may occur after February 28, 2018 or any operating efficiencies or inefficiencies that may result from the G&K acquisition and related financing. Therefore, the information is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented or the results that Cintas will experience going forward.

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 nonrecurring basis (including business acquisitions). The working capital assets and liabilities, as well as the property and equipment acquired, were valued using Level 2 inputs which included data points that are observable, such as definitive sales agreements,

16


appraisals or established market values of comparable assets (market approach). Goodwill, service contracts and other intangibles were valued using Level 3 inputs, which are unobservable by nature, and included internal estimates of future cash flow using a discount rate of 9.5% (income approach). Significant increases (decreases) in any of those unobservable inputs in isolation would result in a significantly lower (higher) fair value measurement.  Management utilizes third-party valuation firms to assist in the determination of purchase accounting fair values, and specifically those considered Level 3 measurements. Management ultimately oversees the third-party valuation firms to ensure that the transaction-specific assumptions are appropriate for Cintas.


10. Pension Plans

In conjunction with the acquisition of G&K, Cintas assumed G&K's noncontributory frozen defined benefit pension plan (the Pension Plan) that covers substantially all G&K employees who were employed as of July 1, 2005, except certain employees who were covered by union-administered plans. Benefits are based on the number of years of service and each employee’s compensation near retirement. We will make annual contributions to the Pension Plan consistent with federal funding requirements. The Pension Plan was frozen by G&K effective December 31, 2006. Future growth in benefits will not occur beyond this date. Applicable accounting standards require that the consolidated condensed balance sheet reflect the funded status of the Pension Plan. The funded status of the Pension Plan is measured as the difference between the plan assets at fair value and the projected benefit obligation. The net pension liability at February 28, 2018 is included in long-term accrued liabilities on the consolidated condensed balance sheet. Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive income in our consolidated condensed balance sheet. The difference between actual amounts and estimates based on actuarial assumptions are recognized in other comprehensive income in the period in which they occur. The Pension Plan assumptions are evaluated annually and are updated as deemed necessary.

The components of net periodic pension cost recognized in other comprehensive income for the Pension Plan are as follows:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
February 28,
2018
 
February 28,
2018
 
 
 
 
Interest cost
$
711

 
$
2,132

Expected return on assets
(716
)
 
(2,148
)
Amortization of net loss
—

 
—

Total net periodic benefit cost
$
(5
)
 
$
(16
)


17


11. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss), net of tax:
(In thousands)
Foreign Currency
 
Unrealized Income on Cash Flow Hedges
 
Other
 
Total
 
 
 
 
 
 
 
 
Balance at June 1, 2017
$
(12,726
)
 
$
11,382

 
$
(1,685
)
 
$
(3,029
)
Other comprehensive income before reclassifications
35,184

 
—

 
20

 
35,204

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
(172
)
 
—

 
(172
)
Net current period other comprehensive income (loss)
35,184


(172
)

20


35,032

Balance at August 31, 2017
22,458


11,210


(1,665
)

32,003

Other comprehensive loss before reclassifications
(11,374
)
 
—

 
(20
)
 
(11,394
)
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
(172
)
 
—

 
(172
)
Net current period other comprehensive loss
(11,374
)
 
(172
)
 
(20
)
 
(11,566
)
Balance at November 30, 2017
11,084


11,038


(1,685
)

20,437

Other comprehensive income before reclassifications
2,374

 
—

 
—

 
2,374

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
(294
)
 
—

 
(294
)
Net current period other comprehensive income (loss)
2,374

 
(294
)
 
—

 
2,080

Balance at February 28, 2018
$
13,458

 
$
10,744

 
$
(1,685
)
 
$
22,517

(In thousands)
Foreign Currency
 
Unrealized Loss on Cash Flow Hedges
 
Other
 
Total
 
 
 
 
 
 
 
 
Balance at June 1, 2016
$
(2,474
)
 
$
(20,830
)
 
$
(1,570
)
 
$
(24,874
)
Other comprehensive income (loss) before
    reclassifications
115

 
(12,037
)
 
(1
)
 
(11,923
)
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
385

 
—

 
385

Net current period other comprehensive income (loss)
115


(11,652
)

(1
)

(11,538
)
Balance at August 31, 2016
(2,359
)
 
(32,482
)
 
(1,571
)
 
(36,412
)
Other comprehensive (loss) income before
   reclassifications
(7,650
)
 
26,390

 
1

 
18,741

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
385

 
—

 
385

Net current period other comprehensive (loss) income
(7,650
)
 
26,775

 
1

 
19,126

Balance at November 30, 2016
(10,009
)
 
(5,707
)
 
(1,570
)
 
(17,286
)
Other comprehensive income before reclassifications
2,400

 
2,560

 
—

 
4,960

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
385

 
—

 
385

Net current period other comprehensive income
2,400

 
2,945

 
—

 
5,345

Balance at February 28, 2017
$
(7,609
)
 
$
(2,762
)
 
$
(1,570
)
 
$
(11,941
)


18


The following table summarizes the reclassifications out of accumulated other comprehensive income (loss):
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other
 Comprehensive Income (Loss)
 
Affected Line in the Consolidated Condensed Statements of Income
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
(In thousands)
 
February 28, 2018
 
February 28, 2017
 
February 28, 2018
 
February 28, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of interest rate locks
 
$
474

 
$
(615
)
 
$
1,030

 
$
(1,845
)
 
Interest expense
Tax (expense) benefit
 
(180
)
 
230

 
(392
)
 
690

 
Income taxes
Amortization of interest rate locks, net of tax
 
$
294

 
$
(385
)

$
638


$
(1,155
)
 
Net income


19


12.      Segment Information
 
Cintas classifies its business into two reportable operating segments and places the remainder of its operating segments in an All Other category. Cintas’ two reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services. The Uniform Rental and Facility Services reportable operating segment, consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops and shop towels and other ancillary items. In addition to these rental items, restroom cleaning services and supplies, carpet and tile cleaning services and the sale of items from our catalogs to our customers on route are included within this reportable operating segment. The First Aid and Safety Services reportable operating segment consists of first aid and safety products and services. The remainder of Cintas’ business, which consists of Fire Protection Services and its Uniform Direct Sale business, is included in All Other.
 
Cintas evaluates the performance of each operating segment based on several factors of which the primary financial measures are operating segment revenue and income before income taxes. The accounting policies of the operating segments are the same as those described in Note 1 entitled Basis of Presentation. Information related to the operations of Cintas’ operating segments is set forth below: 
(In thousands)
Uniform Rental
and Facility Services
 
First Aid
and Safety Services
 
All
Other
 
Corporate (1)
 
Total
 
 
 
 
 
 
 
 
 
 
For the three months ended
February 28, 2018
 

 
 

 
 

 
 

 
 

Revenue
$
1,284,516

 
$
137,327

 
$
167,295

 
$
—

 
$
1,589,138

Income (loss) before income taxes
$
173,287

 
$
16,705

 
$
10,032

 
$
(25,517
)
 
$
174,507

 
 
 
 
 
 
 
 
 
 
For the three months ended
February 28, 2017
 

 
 

 
 

 
 

 
 

Revenue
$
988,178

 
$
124,239

 
$
142,950

 
$
—

 
$
1,255,367

Income (loss) before income taxes
$
171,933

 
$
12,235

 
$
7,823

 
$
(13,685
)
 
$
178,306

 
 
 
 
 
 
 
 
 
 
As of and for the nine months ended
February 28, 2018
 

 
 

 
 

 
 

 
 

Revenue
$
3,904,338

 
$
416,999

 
$
485,745

 
$
—

 
$
4,807,082

Income (loss) before income taxes
$
596,011

 
$
54,091

 
$
34,232

 
$
(84,375
)
 
$
599,959

Total assets
$
5,900,987

 
$
472,982

 
$
368,368

 
$
186,256

 
$
6,928,593

 
 
 
 
 
 
 
 
 
 
As of and for the nine months ended
February 28, 2017
 
 
 
 
 
 
 
 
 
Revenue
$
2,982,475

 
$
373,875

 
$
436,744

 
$
—

 
$
3,793,094

Income (loss) before income taxes
$
533,668

 
$
38,525

 
$
24,191

 
$
(41,028
)
 
$
555,356

Total assets
$
3,283,382

 
$
452,397

 
$
348,703

 
$
186,682

 
$
4,271,164

(1) Corporate assets include cash and marketable securities in all periods. Corporate assets as of February 28, 2017 include the assets of Discontinued Services, which were classified as held for sale at May 31, 2017 and sold during the nine months ended February 28, 2018.

20


13.      Discontinued Operations
 
In fiscal 2018, Cintas sold a significant business referred to as Discontinued Services and received proceeds from the sale of $127.8 million. The results of Discontinued Services are included in discontinued operations for all periods presented. In accordance with the applicable accounting guidance for the disposal of long-lived assets and discontinued operations, the results of Discontinued Services have been excluded from both continuing operations and operating segment results for all periods presented.

During the nine months ended February 28, 2017, we received additional proceeds related to contingent consideration on the sale of Shred-it. Cintas realized a pre-tax gain of $25.9 million as a result of the additional consideration received. As of February 28, 2018, Cintas still has the opportunity to receive additional consideration, subject to certain holdback provisions. Because of the uncertainty surrounding the holdback provision, this opportunity represents a gain contingency that has not been recorded.

Following is selected financial information included in net income from discontinued operations for Discontinued Services and Shred-it:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
February 28, 2018
 
February 28, 2017 (1)
 
February 28, 2018
 
February 28, 2017 (1)
 
 
 
 
 
 
 
 
Revenue
$
—

 
$
25,768

 
$
10,773

 
$
79,094

 
 
 
 
 
 
 
 
Income (loss) before income taxes
149

 
3,160

 
(2,333
)
 
8,586

Income tax (expense) benefit
(242
)
 
(2,109
)
 
678

 
(4,148
)
Gain on sale of business
—

 
—

 
99,060

 
—

Gain on Shred-it
—

 
—

 
—

 
25,876

Income tax benefit (expense) on net gain
6,399

 
—

 
(35,624
)
 
(8,953
)
Net income from discontinued operations
$
6,306

 
$
1,051


$
61,781


$
21,361

(1) The results of Discontinued Services for the three and nine months ended February 28, 2017 were previously included in continuing operations.


14.      G&K Services, Inc. Transaction and Integration Expenses
 
As a result of the acquisition of G&K in fiscal 2017, the Company incurred $9.8 million and $9.3 million in transaction and integration expenses during the three months ended February 28, 2018 and 2017, respectively, and $26.9 million and $15.5 million during the nine months ended February 28, 2018 and 2017, respectively. The $9.8 million of costs incurred in the three months ended February 28, 2018 related to integration expenses directly related to the acquisition. During the nine months ended February 28, 2018, the costs incurred related to $25.9 million of integration expenses directly related to the acquisition and $1.0 million of employee termination expenses recognized under ASC Topic 712, "Compensation - Nonretirement Postemployment Benefits." The costs incurred in the three and nine months ended February 28, 2017 related primarily to legal and professional fees directly related to the acquisition. As of February 28, 2018 and May 31, 2017, employee termination benefits included in accrued compensation and related liabilities on the consolidated condensed balance sheet was $13.4 million and $24.3 million, respectively. The amount of employee termination benefits paid during the three and nine months ended February 28, 2018 was $2.3 million and $11.9 million, respectively. We anticipate the remaining accrued employee termination benefits will generally be paid over the next 12 months. 

 

21


15.      Supplemental Guarantor Information
 
Cintas Corporation No. 2 (Corp. 2) is the indirectly, wholly-owned principal operating subsidiary of Cintas. Corp. 2 is the issuer of the $187.5 million aggregate principal amount of commercial paper and the $2,555.0 million aggregate principal amount of senior notes outstanding as of February 28, 2018, which are unconditionally guaranteed, jointly and severally, by Cintas Corporation and certain wholly-owned, direct and indirect domestic subsidiaries.
 
As allowed by SEC rules, the following consolidating condensed financial statements are provided as an alternative to filing separate financial statements of the guarantors. Each of the subsidiaries presented in the following consolidating condensed financial statements has been fully consolidated in Cintas’ consolidated condensed financial statements. The following consolidating condensed financial statements should be read in conjunction with the consolidated condensed financial statements of Cintas and notes thereto of which this note is an integral part. During fiscal 2018, the Company sold Discontinued Services (see Note 13) previously included in Cintas Corporation and Corp. 2. The sale of Discontinued Services has been reflected as discontinued operations as of the beginning of the earliest period presented herein. Consolidating condensed financial statements for Cintas, Corp. 2, the subsidiary guarantors and non-guarantors are presented on the following pages: 




22


Consolidating Condensed Income Statement
Three Months Ended February 28, 2018
(In thousands)

 
Cintas
Corporation
 
Corp. 2
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Cintas
Corporation
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 

 
 

 
 

 
 

 
 

 
 

Uniform rental and facility services
$
—

 
$
1,059,184

 
$
169,308

 
$
100,941

 
$
(44,917
)
 
$
1,284,516

Other
—

 
437,042

 
56

 
21,396

 
(153,872
)
 
304,622

Equity in net income of affiliates
295,789

 
—

 
—

 
—

 
(295,789
)
 
—

 
295,789

 
1,496,226

 
169,364

 
122,337

 
(494,578
)
 
1,589,138

Costs and expenses (income):
 

 
 

 
 

 
 

 
 

 
 

Cost of uniform rental and facility services
—

 
617,276

 
106,066

 
64,952

 
(70,156
)
 
718,138

Cost of other
—

 
301,217

 
(24,654
)
 
14,888

 
(120,914
)
 
170,537

Selling and administrative expenses
—

 
491,924

 
(28,110
)
 
33,959

 
(7,155
)
 
490,618

G&K Services, Inc. transaction and
    integration expenses
—

 
5,101

 
3,968

 
752

 
—

 
9,821

Operating income
295,789

 
80,708

 
112,094

 
7,786

 
(296,353
)
 
200,024

 
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
(103
)
 
(24
)
 
(259
)
 
2

 
(384
)
Interest expense (income)
—

 
26,105

 
(207
)
 
3

 
—

 
25,901

 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
295,789


54,706


112,325


8,042


(296,355
)

174,507

Income tax (benefit) expense
—

 
(88,275
)
 
(38,777
)
 
5,820

 
(50
)
 
(121,282
)
Income from continuing operations
295,789


142,981


151,102


2,222


(296,305
)
 
295,789

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax
6,306

 
7,269

 
(1,012
)
 
—

 
(6,257
)
 
6,306

 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
302,095

 
$
150,250

 
$
150,090

 
$
2,222

 
$
(302,562
)
 
$
302,095



23


Consolidating Condensed Income Statement
Three Months Ended February 28, 2017
(In thousands)

 
Cintas
Corporation
 
Corp. 2
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Cintas
Corporation
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 

 
 

 
 

 
 

 
 

 
 

Uniform rental and facility services
$
—

 
$
821,386

 
$
147,293

 
$
57,082

 
$
(37,583
)
 
$
988,178

Other
—

 
383,043

 
297

 
16,672

 
(132,823
)
 
267,189

Equity in net income of affiliates
116,954

 
—

 
—

 
—

 
(116,954
)