CINTAS CORPORATION Business Strategy Cintas helps more than one million businesses of all types and sizes, primarily in theU.S. , as well asCanada andLatin 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. We areNorth America's leading provider of corporate identity uniforms through rental and sales programs, as well as a significant provider of related business services, including entrance mats, restroom cleaning services and supplies, first aid and safety services and fire protection products and services. Cintas' principal objective is "to exceed customers' expectations in order to maximize the long-term value of Cintas for shareholders and working partners," and it provides the framework and focus for Cintas' business strategy. This strategy is to achieve revenue growth for all our products and services by increasing our penetration at existing customers and by broadening our customer base to include market segments to which we have not historically served. We will also continue to identify additional product and service opportunities for our current and future customers. To pursue the strategy of increasing penetration, we have a highly talented and diverse team of service professionals visiting our customers on a regular basis. This frequent contact with our customers enables us to develop close personal relationships. The combination of our distribution system and these strong customer relationships provides a platform from which we launch additional products and services. We pursue the strategy of broadening our customer base in several ways. Cintas has a national sales organization introducing all its products and services to prospects in all market segments. Our broad range of products and services allows our sales organization to consider any type of business a prospect. We also broaden our customer base through geographic expansion. Finally, we evaluate strategic acquisitions as opportunities arise.
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Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations focuses on discussion of fiscal 2021 results compared to fiscal 2020 results. For discussion of fiscal 2020 results compared to fiscal 2019 results, see the "Management's Discussion and Analysis of Financial Condition and Results of Operations" within our Annual Report on Form 10-K for the fiscal year endedMay 31, 2020 , filed with theSEC onJuly 29, 2020 . 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 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 the Fire Protection Services operating segment and the Uniform Direct Sale operating segment, is included in All Other. These operating segments consist of fire protection products and services and the direct sale of uniforms and related items. 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 endedMay 31, 2021 , 2020 and 2019 are presented in Note 14 entitled Operating Segment Information of " Notes to Consolidated Financial Statements ." 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. InDecember 2019 , a novel strain of coronavirus (COVID-19) was reported to have surfaced inWuhan, China , and has since spread globally. InMarch 2020 , theWorld 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 theU.S. , as well asCanada , 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 theU.S. , our business was designated an essential business, which allowed us to continue to serve customers that remained open. During our fiscal 2021 fourth quarter, the roll out of vaccines, lower COVID-19 case counts and lifting of restrictions on businesses had a positive impact on our business. We have operations throughout theU.S. andCanada and participate in a global supply chain. During most of fiscal 2021, the existence of the COVID-19 pandemic, the fear associated with the COVID-19 pandemic and the reactions of governments around the world in response to the COVID-19 pandemic to regulate the flow of labor and products and impede the business of our customers, impacted our ability to conduct normal business operations, which had an adverse effect on our business. Many of Cintas' customers were also impacted by the COVID-19 pandemic, and we saw an impact on some customer's ability to pay timely. While there was minimal disruption to our supply chain, Cintas did increase inventory, primarily personal protective equipment and facility services inventory, in response to the customer needs and demand associated with the safety and cleanliness requirements of COVID-19. The increase in inventory resulted in additional inventory reserves during fiscal 2021 and could result in future inventory reserve increases if demand for personal protective equipment declines. See Note 1 entitled Significant Accounting Policies of " Notes to Consolidated Financial Statements " for additional detail on the additional reserve placed on inventory. 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.
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The following table sets forth certain consolidated statements of income data as a percent of revenue by reportable operating segment, All Other and in total for the fiscal years endedMay 31 : 2021 2020
2019
Revenue:
Uniform Rental and Facility Services 80.0% 79.7% 80.6% First Aid and Safety Services 11.0% 10.0% 9.0% All Other 9.0% 10.3% 10.4% Total revenue 100.0% 100.0% 100.0% Cost of sales: Uniform Rental and Facility Services 52.4% 54.1% 54.5% First Aid and Safety Services 57.6% 52.2% 52.0% All Other 57.0% 58.2% 57.4% Total cost of sales 53.4% 54.4% 54.6% Gross margin: Uniform Rental and Facility Services 47.6% 45.9% 45.5% First Aid and Safety Services 42.4% 47.8% 48.0% All Other 43.0% 41.8% 42.6% Total gross margin 46.6% 45.6% 45.4% Selling and administrative expenses: Uniform Rental and Facility Services 26.0% 28.1% 27.6% First Aid and Safety Services 32.0% 32.7% 33.4% All Other 30.8% 34.9% 33.3% Total selling and administrative expenses 27.1% 29.2%
28.7%
G&K Services, Inc. integration expenses -% -%
0.2%
Gain on sale of a cost method investment -% -% 1.0% Interest expense, net 1.4% 1.5% 1.5%
Income from continuing operations before income taxes 18.1% 14.9%
16.0%
Fiscal 2021 Compared to Fiscal 2020 Fiscal 2021 total revenue was$7.1 billion , an increase of 0.4% over the prior fiscal year. Revenue increased organically by 0.2% as a result of increased sales volume. Organic growth adjusts for the impact of acquisitions and divestitures, foreign currency exchange rate fluctuations and workday differences. Total revenue was negatively impacted by a net 0.3% due to acquisitions and divestitures, positively impacted by 0.2% due to foreign currency exchange rate fluctuations and positively impacted by 0.3% due to one more workday in fiscal 2021 compared to fiscal 2020. As previously discussed, government enactments of temporary and indefinite closures of certain businesses in response to the COVID-19 pandemic continued to impact our ability to access and service some of our customers impacted by these mandates during fiscal 2021. Due to the constantly changing impact of the COVID-19 pandemic, uncertainty remains about the pace of the economic recovery and about its impact on future Cintas consolidated financial results.
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Organic revenue by quarter for fiscal 2021 is as follows:
Organic Revenue
First quarter ended August 31, 2020 (5.0)%
Second quarter ended
11.5%
For the fiscal year ended
Uniform Rental and Facility Services reportable operating segment revenue consists predominantly of revenue derived from the rental of corporate identity uniforms and other garments, including flame resistant clothing and the rental and/or sale of mats, mops, shop towels, restroom supplies and other rental services. Revenue from the Uniform Rental and Facility Services reportable operating segment increased 0.8% compared to fiscal 2020 due to an organic growth increase of 0.7%. Revenue growth was negatively impacted by a net 0.5% due to acquisitions and divestitures, positively impacted by 0.2% due to foreign currency exchange rate fluctuations and positively impacted by 0.4% due to one more workday in fiscal 2021 compared to fiscal 2020. Revenue growth was a result of new business, the penetration of additional products and services into existing customers, partially offset by lost business. New business growth resulted from an increase in the productivity of sales representatives. Generally, sales productivity improvements are due to increased tenure and improved training, which produce a higher number of products and services sold. Other revenue, consisting of revenue from the First Aid and Safety Services reportable operating segment and All Other, decreased 1.0% compared to fiscal 2020. Revenue improvement from increases in sales representative productivity and sales of personal protection equipment was more than offset by a decrease in sales related to customers in All Other as a result of the impact from the COVID-19 pandemic. Revenue declined organically by 1.9%. Revenue growth was positively impacted by 0.5% due to revenue growth derived through acquisitions in our First Aid and Safety Services reportable operating segment and our Fire Protection operating segment, which is included in All Other, and by 0.4% due to one more workday in fiscal 2021 compared to fiscal 2020. Cost of uniform rental and facility services decreased 2.3% compared to fiscal 2020. 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 cost of uniform rental and facility services decreased compared to fiscal 2020 primarily due to certain cost control measures such as reduced labor and supplies that were partially offset by increases in material cost, primarily related to personal protective equipment. Cost of other consists primarily of cost of goods sold (predominantly first aid and safety products, personal protective equipment, 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 increased 2.8% in fiscal 2021 compared to fiscal 2020. The increase was primarily due to an increase in the proportion of sales in the First Aid and Safety Services reportable operating segment of personal protective equipment, which typically have lower gross margins compared to other First Aid and Safety Services reportable operating segment products. Selling and administrative expenses decreased$141.9 million , to 27.1% as a percent of revenue, compared to 29.2% in fiscal 2020. The improvement as a percent of revenue was primarily due to efficiencies in labor and employee-partner related expenses as well as lower discretionary spending and a one-time benefit from the gain on the sale of certain operating assets. In addition, during the fourth quarter of fiscal 2020, Cintas initiated certain one-time activities to reduce operating costs and better align its workforce with the needs of its ongoing business and recorded$24.5 million in employee termination costs and$9.2 million in long-lived asset impairment costs. Net interest expense (interest expense less interest income) was$97.7 million in fiscal 2021 compared to$104.4 million in fiscal 2020. The decrease in net interest expense was primarily due to the decrease in total debt outstanding during fiscal 2021 compared to fiscal 2020.
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Income before income taxes was$1,287.7 million , an increase of$229.5 million , or 21.7%, compared to fiscal 2020. The increase in income before income taxes was primarily due to both cost of sales and selling and administrative expenses decreasing in total and as a percent of revenue in fiscal 2021. Income before income taxes also benefited from a one-time net gain on the sale of certain operating assets. Cintas' effective tax rate on continuing operations was 13.7% for fiscal 2021 compared to 17.2% in fiscal 2020. The effective tax rate in both periods was impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. In addition, the effective tax rate for fiscal 2021 included a one-time tax benefit on the sale of certain operating assets. Net income from continuing operations for fiscal 2021 of$1,111.0 million was a 26.8% increase compared to fiscal 2020. Diluted earnings per share from continuing operations of$10.24 was a 26.3% increase compared to fiscal 2020 diluted earnings per share from continuing operations of$8.11 . Diluted earnings per share from continuing operations increased primarily due to the increase in net income. Uniform Rental and Facility Services Reportable Operating Segment Uniform Rental and Facility Services reportable operating segment revenue increased$46.1 million , or 0.8%, and the cost of uniform rental and facility services decreased$71.6 million , or 2.3%, due to the reasons previously discussed. The reportable operating segment's fiscal 2021 gross margin was 47.6% of revenue compared to 45.9% in fiscal 2020. The increase in gross margin was primarily due to certain cost control measures such as reduced labor and supplies that were partially offset by increases in material cost, including increases related to increased sales of personal protective equipment. Selling and administrative expenses for the Uniform Rental and Facility Services reportable operating segment decreased$103.5 million in fiscal 2021 compared to fiscal 2020. Selling and administrative expense as a percent of revenue for fiscal 2021 was 26.0% compared to 28.1% in fiscal 2020. The improvement in selling and administrative expenses as a percent of revenue was primarily due to efficiencies in labor and employee-partner related expenses as well as lower discretionary spending and a one-time benefit from the gain on the sale of certain operating assets, which was partially offset by a one-time asset impairment on certain long-lived assets. Also, in the fourth quarter of fiscal 2020, the Uniform Rental and Facility Services reportable operating segment initiated certain one-time activities to reduce operating costs and better align its workforce with the needs of its ongoing business. During the fourth quarter of fiscal 2020, the reportable operating segment recorded$20.2 million in employee termination costs and$9.2 million in long-lived asset impairment costs.
Income before income taxes increased
First Aid and Safety Services Reportable Operating Segment First Aid and Safety Services reportable operating segment revenue increased$75.7 million in fiscal 2021, a 10.7% increase compared to fiscal 2020. Revenue increased organically by 10.0% as a result of new business and sales productivity increases, penetration of additional products and services into existing customers and sales of personal protective equipment in response to the COVID-19 pandemic. Revenue growth was positively impacted by 0.2% due to acquisitions, by 0.1% due to foreign currency exchange rate fluctuations and by 0.4% due to one more workday in fiscal 2021 compared to fiscal 2020. Cost of sales for the First Aid and Safety Services reportable operating segment increased$82.0 million , or 22.2%, in fiscal 2021, primarily due to higher sales volume and change in sales mix. Gross margin for the First Aid and Safety Services reportable operating segment is defined as revenue less cost of goods, warehouse expenses, service expenses and training expenses. The gross margin as a percent of revenue was 42.4% for fiscal 2021 compared to 47.8% in fiscal 2020. The decrease was primarily a result of the increase in the proportion of sales related to personal protective equipment, as a result of the impact of the COVID-19 pandemic. Personal protective equipment typically has lower gross margins than other First Aid and Safety Services reportable operating segment products.
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Selling and administrative expenses for the First Aid and Safety Services reportable operating segment increased by$19.4 million , or 8.4%, in fiscal 2021 compared to fiscal 2020, but improved as a percent of revenue to 32.0% in fiscal 2021 compared to 32.7% in fiscal 2020. The improvement as a percent of revenue was primarily due to revenue growing at a faster pace than labor and employee-partner related expenses and lower discretionary spending. Income before income taxes for the First Aid and Safety Services reportable operating segment was$81.2 million in fiscal 2021, a decrease of$25.7 million , or 24.1%, compared to fiscal 2020. Income before income taxes as a percent of revenue at 10.4%, decreased from 15.1% in fiscal 2020 due to the previously discussed decrease in gross margin. Liquidity and Capital Resources The following table summarizes our cash flows and cash and cash equivalents as of and for the fiscal years endedMay 31 : (In thousands) 2021 2020
Net cash provided by operating activities
Cash and cash equivalents at end of year
Cash and cash equivalents as of
Cash flows provided by operating activities have historically supplied us with a significant source of liquidity. We generally use these cash flows to fund most, if not all, of our operations and expansion activities and dividends on our common stock. We may also use cash flows provided by operating activities, as well as proceeds from long-term debt and short-term borrowings, to fund growth and expansion opportunities, as well as other cash requirements such as the repurchase of our common stock and payment of long-term debt. The disruption from the COVID-19 pandemic continued to have an impact on Cintas' fiscal 2021 financial results. However, net cash flow provided by operating activities was not significantly impacted. We expect our cash flows from operating activities to remain sufficient to provide us with adequate levels of short-term liquidity. In addition, we have access to$1.0 billion of short-term debt from our revolving credit facility. Although the impact of the COVID-19 pandemic is fluid and continues to evolve, we believe our long-term liquidity position remains strong. We believe the Company has sufficient liquidity to operate in the current business environment. Acquisitions and dividends remain strategic objectives, but they will be dependent on the economic outlook and liquidity of the Company. Net cash provided by operating activities was$1.36 billion for fiscal 2021, which was an increase of$69.3 million compared to fiscal 2020. The increase was primarily the result of increased net income and favorable changes in accrued compensation and other, partially offset by changes in working capital, specifically income taxes, accounts receivable and accrued liabilities and other. Net cash used in investing activities was$137.2 million in fiscal 2021, compared to$285.4 million in fiscal 2020. Net cash used in investing activities includes capital expenditures, purchases of investments, proceeds from the sale of operating assets and cash paid for acquisitions of businesses. Capital expenditures were$143.5 million and$230.3 million for fiscal 2021 and fiscal 2020, respectively. Capital expenditures for fiscal 2021 included$104.0 million for the Uniform Rental and Facility Services reportable operating segment and$34.4 million for the First Aid and Safety Services reportable operating segment. The decrease in capital expenditures from fiscal 2020 to fiscal 2021 was due to reduced growth capacity needs within the slower growth landscape of the COVID-19 pandemic. Cash paid for acquisitions of businesses, net of cash acquired, was$10.0 million and$53.7 million for fiscal 2021 and fiscal 2020, respectively. The acquisitions in both fiscal 2021 and 2020 occurred in our Uniform Rental and Facility Services reportable operating segment, our First Aid and Safety Services reportable operating segment and our Fire Protection operating segment, which is included in All Other. In fiscal 2021 and fiscal 2020, investing activities included proceeds of$31.7 million and$13.3 million , respectively, from the sale of certain operating assets, net of
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cash disposed. Net cash used in investing activities also included
Net cash used in financing activities was$879.9 million for fiscal 2021, compared to$955.2 million in fiscal 2020. The decrease in cash used from financing activities from fiscal 2020 is primarily due to the payment of the$312.5 million of debt in fiscal 2020, partially offset by an increase in cash used to pay dividends and repurchase common stock in fiscal 2021. OnOctober 30, 2018 , we announced that the Board of Directors authorized a$1.0 billion share buyback program, which was completed during fiscal 2021. OnOctober 29, 2019 , we announced the Board of Directors authorized a new$1.0 billion share buyback program, which does not have an expiration date. The following table summarizes the buyback activity by program and fiscal year endedMay 31 : 2021 2020 Buyback Program (In thousands except per Avg. Price Avg. Price share data) Shares per Share Purchase Price Shares per Share Purchase Price October 30, 2018 190$ 319.88 $ 60,877 1,607$ 246.19 $ 395,681 October 29, 2019 1,196 350.31 418,779 - - - 1,386$ 346.13 $ 479,656 1,607$ 246.19 $ 395,681 In the period subsequent toMay 31, 2021 throughJuly 28, 2021 , we completed theOctober 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 theOctober 29, 2019 program throughJuly 28, 2021 , Cintas 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, for the fiscal year endedMay 31, 2021 , Cintas acquired 0.2 million shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were acquired at an average price of$302.52 per share for a total purchase price of$74.4 million . For the fiscal year endedMay 31, 2020 , Cintas acquired 0.3 million shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted awards that vested during the fiscal year. These shares were acquired at an average price of$260.89 per share for a total purchase price of$68.8 million . OnOctober 27, 2020 , Cintas declared an annual cash dividend on outstanding common stock, representing a 10.2% increase over the annual dividend paid in the prior fiscal year. This marked the 38th consecutive year that Cintas has increased its annual dividend, every year since going public in 1983. Also onOctober 27, 2020 , the Cintas Board of Directors approved a change in the dividend policy from an annual dividend to a quarterly dividend and subsequently declared a quarterly dividend on outstanding common stock. Any future dividend declarations, including the amount of any dividends, are at the discretion of the Board of Directors and dependent upon then-existing conditions, including the Company's consolidated operating results and consolidated financial condition, capital requirements, contractual restrictions, business prospects and other factors that the Board of Directors may deem relevant. Our Board of Directors declared the following dividends during the fiscal years endedMay 31 : Declaration Date (In millions except per share Record Payment Dividend data) Date Date Per Share Amount Fiscal Year 2021 October 27, 2020 November 6, 2020 December 4, 2020$ 2.81 $ 297.7 October 27, 2020 November 6, 2020 December 4, 2020 0.70 74.1 January 19, 2021 February 15, 2021 March 15, 2021 0.75 79.5 April 13, 2021 (1) May 15, 2021 June 15, 2021 0.75 79.2 Total$ 5.01 $ 530.5 Fiscal Year 2020 October 29, 2019 November 8, 2019 December 6, 2019$ 2.55 $ 268.0 Fiscal Year 2019 October 30, 2018 November 9, 2018 December 7, 2018$ 2.05 $ 220.8
.(1) The dividend declared on
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During the fiscal year endedMay 31, 2020 , Cintas paid a net total of$112.5 million on commercial paper borrowings and paid off the term loan balance of$200.0 million with cash on hand. There was no commercial paper outstanding during fiscal 2021. The following table summarizes Cintas' outstanding debt atMay 31 : Interest Fiscal Year Fiscal Year (In thousands) Rate Issued Maturity 2021 2020 Debt due within one year Senior notes 4.30% 2012 2022$ 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 credit agreement that supports our commercial paper program was amended and restated onMay 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 isMay 23, 2024 . As ofMay 31, 2021 and 2020, there was no commercial paper outstanding and no borrowings on our credit facility. OnJune 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. During fiscal 2022, Cintas expects to issue long-term debt to pay the$650.0 million principal amount of its 2.90%, 5-year senior notes that mature in the fourth quarter of fiscal 2022. 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 of the debt covenants for all periods presented. Our access to the commercial paper and long-term debt markets has historically provided us with sources of liquidity. We do not anticipate having difficulty in obtaining financing from those markets in the future in view of our favorable experiences in the debt markets in the recent past, including our ability to refinance the$650.0 million aggregate principal amount of our senior notes that mature in fiscal 2022. Additionally, our ability to continue to access the commercial paper and long-term debt markets on favorable interest rate and other terms will depend, to a significant degree, on the ratings assigned by the credit rating agencies to our indebtedness.
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As of
Commercial Long-term
Rating Agency Outlook Paper Debt
Standard & Poor's Stable A-2 A-
Moody's Investors Service Stable P-2 A3
In the event that the ratings of our commercial paper or our outstanding
long-term debt issues were substantially lowered or withdrawn for any reason, or
if the ratings assigned to any new issue of long-term debt securities were
significantly lower than those noted above, particularly if we no longer had
investment grade ratings, our ability to access the debt markets may be
adversely affected. In addition, in such a case, our cost of funds for new
issues of commercial paper and long-term debt would be higher than our cost of
funds would have been had the ratings of those new issues been at or above the
level of the ratings noted above. The rating agency ratings are not
recommendations to buy, sell or hold our commercial paper or debt securities.
Each rating may be subject to revision or withdrawal at any time by the
assigning rating organization and should be evaluated independently of any other
rating. Moreover, each credit rating is specific to the security to which it
applies.
To monitor our credit rating and our capacity for long-term financing, we
consider various qualitative and quantitative factors. One such factor is the
ratio of our total debt to EBITDA. For the purpose of this calculation, debt is
defined as the sum of short-term borrowings, long-term debt due within one year,
long-term debt and standby letters of credit.
Financial and Nonfinancial Disclosure About Issuers and Guarantors of Cintas'
Senior Notes
Cintas Corporation No. 2 (Corp. 2) is the indirectly, wholly owned principal
operating subsidiary of Cintas. Corp. 2 is the issuer of the $2,550.0 million
aggregate principal amount of senior notes outstanding as of May 31, 2021 , which
are unconditionally guaranteed, jointly and severally, by Cintas Corporation and
its wholly owned, direct and indirect domestic subsidiaries. See Note 7
entitled Debt and Derivatives of " Notes to Consolidated Financial
Statements " for more information on Cintas' outstanding debt.
Basis of Preparation of the Summarized Financial Information
The following tables include summarized financial information of Cintas
Corporation (Issuer), Corp. 2 and subsidiary guarantors (together, the Obligor
Group ). Investments in and equity in the earnings of non-guarantors, which are
not members of the Obligor Group , have been excluded. Non-guarantor subsidiaries
are located outside the U.S. , and therefore, excluded from the Obligor Group .
The summarized financial information of the Obligor Group is presented on a
combined basis with intercompany balances and transactions between entities in
the Obligor Group eliminated. The Obligor Group's amounts due from, amounts due
to and transactions with non-guarantors have been presented in separate line
items, if they are material. Summarized financial information of the Obligor
Group is as follows for the fiscal years ended May 31 :
Summarized Consolidated Statements of Income
(In thousands) 2021 2020
Net sales to unrelated parties$ 6,705,820 $ 6,642,196 Net sales to non-guarantors$ 3,460 $ 4,778 Operating income$ 1,319,444 $ 1,140,318 Net income$ 1,058,837 $ 860,022 25
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Summarized Consolidated Balance Sheets (In thousands) 2021
2020
Assets
Receivables due from non-obligor subsidiaries$ 2,292 $ 3,199 Total other current assets$ 2,652,810 $ 2,143,489 Total other noncurrent assets$ 4,924,550 $ 4,938,093 Liabilities Amounts due to non-obligor subsidiaries$ 457 $ 3,437 Current liabilities$ 1,893,352 $ 843,203 Noncurrent liabilities$ 2,549,911 $ 3,495,956 Contractual Obligations Payments Due by Period One year Two to Four to After five (In thousands) Total or less three years five years years Debt (1)$ 2,550,000 $ 900,000 $ 350,000 $ 50,000 $ 1,250,000 Operating leases (2) 185,801 47,564 69,138 39,089 30,010 Interest payments 510,653 90,155 115,370 106,690 198,438
Total contractual cash obligations
(1)See Note 7 entitled Debt and Derivatives of " Notes to Consolidated Financial Statements " for a detailed presentation of Cintas' debt. (2)See Note 8 entitled Leases of " Notes to Consolidated financial Statements " for a detailed presentation of Cintas' leases. Cintas also makes payments to defined contribution plans and may make payments to defined benefit plans to satisfy minimum funding requirements. The amount of contributions made to the defined contribution plans are at the discretion of the Board of Directors of Cintas. Future contributions to the defined contribution plans are expected to be$82.6 million in the next year,$177.9 million in the next two to three years and$196.1 million in the next four to five years. Future contributions to the defined benefit plans are expected to be$0.3 million in the next year,$3.0 million in the next two to three years and$3.0 million in the next four to five years. Other Commitments Amount of
Commitment Expiration per Period
One year Two to Four to After five
(In thousands) Total or less three years five years years
Lines of credit (1) $ 999,234 $ -
120,597 120,597 - - -
Total other commitments $ 1,119,831 $ 120,597
(1)Back-up facility for the commercial paper program (reference Note 7
entitled Debt and Derivatives of " Notes to Consolidated Financial
Statements " for further discussion).
(2)These standby letters of credit and surety bonds support certain outstanding
debt (reference Note 7 entitled Debt and Derivatives of " Notes to
Consolidated Financial Statements "), self-insured workers' compensation and
general liability insurance programs.
Inflation and Changing Prices
Changes in wages, benefits and energy costs have the potential to materially
impact Cintas' consolidated results of operations. Management believes inflation
has not had a material impact on Cintas' consolidated financial condition or a
negative impact on the consolidated results of operations.
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Litigation and Other Contingencies Cintas is subject to legal proceedings, insurance receipts, legal settlements and claims arising from the ordinary course of its business, including personal injury, customer contract, environmental and employment claims. 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, consolidated results of operations or consolidated cash flows of Cintas. The Company, the Board of Directors,Scott Farmer (Executive Chairman) and theInvestment Policy Committee are defendants in a purported class action, filed onDecember 13, 2019 , pending in theU.S. District Court for the Southern District of Ohio alleging violations of ERISA. The lawsuit asserts that the defendants improperly managed the costs of the employee retirement plan, breached their fiduciary duties in failing to investigate and select lower cost alternative funds and failed to monitor and control the employee retirement plan's recordkeeping costs. The defendants deny liability. New Accounting Standards InApril 2019 , theFinancial Accounting Standards Board (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 onJune 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.
Critical Accounting Policies and Estimates The preparation of Cintas' consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and judgments that have a significant effect on the amounts reported in the consolidated financial statements and accompanying notes. These critical accounting policies should be read in conjunction with Note 1 entitled Significant Accounting Policies of " Notes to Consolidated Financial Statements ." Significant changes, estimates or assumptions related to any of the following critical accounting policies, including those impacted by the COVID-19 pandemic, could possibly have a material impact on the consolidated financial statements. 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 obligations 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 segments and All Other, is recognized when either services are performed or the obligations under the terms of a contract with a customer are satisfied. See Note 2 entitled Revenue Recognition of the " Notes to Consolidated Financial Statements " for more information on Cintas' revenue. Uniforms and other rental items in service Uniforms and other rental items in service 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 ancillary products that are presented in the consolidated financial statements.
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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 endedMay 31, 2021 , 2020 or 2019. Cintas will continue to perform impairment tests as ofMarch 1 in future years and when indicators of impairment exist. Insurance reserve The insurance reserve represents the estimated ultimate cost of all asserted and unasserted claims, primarily related to workers' compensation, auto liability and other general liability exposure through the consolidated balance sheet dates. Our incurred but not reported reserves are 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. 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 of " Notes to Consolidated Financial Statements " for further information. 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. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. While a significant change in assumptions and judgments could have a material impact on the amounts recorded for contingent liabilities, Cintas does not believe that they will result in a material adverse effect on the consolidated financial statements. Income taxes 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 of " Notes to Consolidated Financial Statements " 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.
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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.
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