Item 1. FINANCIAL STATEMENTS

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Item 1. FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share data)


	Three Months Ended
	August 31, 2021		August 31, 2020
Revenue:
Uniform rental and facility services	$	1,508,176	$	1,394,411
Other	388,774		352,164
Total revenue	1,896,950		1,746,575

Costs and expenses:
Cost of uniform rental and facility services	779,301		715,412
Cost of other	214,893		204,962
Selling and administrative expenses	508,655		476,495

Operating income	394,101		349,706

Interest income	(56)		(64)
Interest expense	21,854		24,550

Income before income taxes	372,303		325,220
Income taxes	41,124		25,215


Net income	$	331,179	$	300,005




Basic earnings per share	$	3.19	$	2.86




Diluted earnings per share	$	3.11	$	2.78

Dividends declared per share	$	0.95	$	—

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)


	Three Months Ended
	August 31, 2021		August 31, 2020

Net income	$	331,179	$	300,005

Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments	(24,016)		26,946
Change in fair value of interest rate lock agreements, net of tax (benefit) expense of $(12,554) and $3,672, respectively	(36,679)		10,842
Amortization of interest rate lock agreements, net of tax benefit of $148 and $116, respectively	(459)		(358)

Other comprehensive (loss) income, net of tax (benefit) expense of $(12,406) and $3,788, respectively	(61,154)		37,430

Comprehensive income	$	270,025	$	337,435

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands except share data)


	August 31, 2021		May 31, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	79,749	$	493,640

Accounts receivable, net	927,360		901,710
Inventories, net	463,692		481,797
Uniforms and other rental items in service	846,656		810,104
Income taxes, current	11,249		22,282
Prepaid expenses and other current assets	148,960		133,776
Total current assets	2,477,666		2,843,309

Property and equipment, net	1,301,233		1,318,438

Investments	295,268		274,616
Goodwill	2,924,993		2,913,069
Service contracts, net	403,982		408,445
Operating lease right-of-use assets, net	159,289		168,532
Other assets, net	295,319		310,414
	$	7,857,750	$	8,236,823

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	202,968	$	230,786
Accrued compensation and related liabilities	155,212		241,469
Accrued liabilities	592,384		518,910

Operating lease liabilities, current	43,308		43,850
Debt due within one year	1,275,167		899,070
Total current liabilities	2,269,039		1,934,085

Long-term liabilities:
Debt due after one year	1,343,222		1,642,833
Deferred income taxes	395,599		386,647
Operating lease liabilities	122,291		130,774
Accrued liabilities	418,396		454,637
Total long-term liabilities	2,279,508		2,614,891

Shareholders’ equity:
Preferred stock, no par value:	—		—
100,000 shares authorized, none outstanding
Common stock, no par value, and paid-in capital:	1,625,594		1,516,202
425,000,000 shares authorized
FY 2022: 190,127,513 shares issued and 103,329,218 shares outstanding
FY 2021: 189,071,185 shares issued and 104,061,391 shares outstanding

Retained earnings	8,109,368		7,877,015
Treasury stock:	(6,395,493)		(5,736,258)
FY 2022: 86,798,295 shares
FY 2021: 85,009,794 shares
Accumulated other comprehensive (loss) income	(30,266)		30,888
Total shareholders’ equity	3,309,203		3,687,847
	$	7,857,750	$	8,236,823

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)


	Common Stock and Paid-In Capital			Retained Earnings			Other Accumulated Comprehensive Income (Loss)			Treasury Stock			Total Shareholders' Equity
	Shares	Amount				Shares			Amount

Balance at June 1, 2021	189,071	$	1,516,202	$	7,877,015		$	30,888		(85,010)	$	(5,736,258)	$	3,687,847
Net income	—	—		331,179			—			—	—		331,179
Comprehensive loss, net of tax	—	—		—			(61,154)			—	—		(61,154)
Dividends	—	—		(98,826)			—			—	—		(98,826)
Stock-based compensation	—	36,496		—			—			—	—		36,496
Vesting of stock-based compensation awards	493	—		—			—			—	—		—
Stock options exercised, net of shares surrendered	564	72,896		—			—			—	—		72,896
Repurchase of common stock	—	—		—			—			(1,788)	(659,235)		(659,235)


Balance at August 31, 2021	190,128	$	1,625,594	$	8,109,368		$	(30,266)		(86,798)	$	(6,395,493)	$	3,309,203


	Common Stock and Paid-In Capital			Retained Earnings			Other Accumulated Comprehensive Loss			Treasury Stock			Total Shareholders' Equity
	Shares	Amount				Shares			Amount

Balance at June 1, 2020	186,793	$	1,274,210	$	7,296,509		$	(153,380)		(83,378)	$	(5,182,137)	$	3,235,202
Net income	—	—		300,005			—			—	—		300,005
Comprehensive income, net of tax	—	—		—			37,430			—	—		37,430

Stock-based compensation	—	29,055		—			—			—	—		29,055
Vesting of stock-based compensation awards	568	—		—			—			—	—		—
Stock options exercised, net of shares surrendered	795	72,123		—			—			—	—		72,123
Repurchase of common stock	—	—		—			—			(230)	(69,011)		(69,011)
Balance at August 31, 2020	188,156	$	1,375,388	$	7,596,514		$	(115,950)		(83,608)	$	(5,251,148)	$	3,604,804

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended
	August 31, 2021		August 31, 2020
Cash flows from operating activities:
Net income	$	331,179	$	300,005
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	60,955		60,574
Amortization of intangible assets and capitalized contract costs	36,994		35,605
Stock-based compensation	36,496		29,055
Gain on sale of operating assets	(12,178)		—

Deferred income taxes	22,887		(8,716)
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net	(27,742)		7,118
Inventories, net	14,986		(77,944)
Uniforms and other rental items in service	(39,274)		16,552
Prepaid expenses and other current assets and capitalized contract costs	(36,724)		(42,277)
Accounts payable	(26,272)		20,358
Accrued compensation and related liabilities	(85,834)		(10,067)
Accrued liabilities and other	(24,342)		(14,297)
Income taxes, current	11,010		(3,674)
Net cash provided by operating activities	262,141		312,292

Cash flows from investing activities:
Capital expenditures	(48,748)		(30,876)

Purchases of investments	(8,738)		(4,940)

Proceeds from sale of operating assets	15,070		—
Acquisitions of businesses, net of cash acquired	(35,725)		(1,984)
Other, net	(6,180)		(2,142)
Net cash used in investing activities	(84,321)		(39,942)

Cash flows from financing activities:
Issuance of commercial paper, net	326,000		—

Repayment of debt	(250,000)		—
Proceeds from exercise of stock-based compensation awards	72,896		72,123
Dividends paid	(79,135)		—
Repurchase of common stock	(659,235)		(69,011)
Other, net	(610)		(869)
Net cash (used in) provided by financing activities	(590,084)		2,243

Effect of exchange rate changes on cash and cash equivalents	(1,627)		1,547

Net (decrease) increase in cash and cash equivalents	(413,891)		276,140

Cash and cash equivalents at beginning of period	493,640		145,402

Cash and cash equivalents at end of period	$	79,749	$	421,542

See accompanying notes.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

The consolidated condensed financial statements of Cintas Corporation (Cintas, the Company, we, us or our) included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with United States generally accepted accounting principles (U.S. 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, 2021. A summary of our significant accounting policies is presented beginning on page 40 of that report. There have been no material changes in the accounting policies followed by Cintas during the current fiscal year.

Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the consolidated results of the interim periods shown have been made.

Inventories, net are valued at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following:


(In thousands)	August 31, 2021		May 31, 2021

Raw materials	$	15,732	$	15,109
Work in process	30,681		37,664
Finished goods	417,279		429,024
	$	463,692	$	481,797

Inventories are recorded net of reserves for obsolete inventory (excess and slow-moving) of $110.2 million and $111.0 million at August 31, 2021 and May 31, 2021, respectively. The inventory obsolescence reserve is determined by specific identification, as well as an estimate based on Cintas' historical rates of obsolescence. Once a specific inventory item is written down to the lower of cost or net realizable value, a new cost basis has been established, and that inventory item cannot subsequently be marked up.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. The reclassification has been reflected in the consolidated condensed balance sheet and consolidated condensed statement of shareholders' equity for the fiscal year ended May 31, 2021 and the three months ended August 31, 2020, to combine common stock and paid-in capital for disclosure purposes. These reclassifications had no effect on the Company's reported results of operations.

New Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is part of the FASB’s overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 removes certain exceptions to the general principles of Accounting Standards Codification (ASC) 740, Income Taxes (ASC 740), in order to reduce the cost and complexity of its application in the areas of intraperiod tax allocation, deferred tax liabilities related to outside basis differences, year-to-date losses in interim periods and other areas within ASC 740. The Company adopted ASU 2019-12 on June 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated condensed financial statements currently but may in future periods.

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

Note 2 - Revenue Recognition

The following table presents Cintas' total revenue disaggregated by operating segment for the three months ended August 31:




(In thousands)	2021				2020


Uniform Rental and Facility Services	$	1,508,176	79.5	%	$	1,394,411	79.8	%
First Aid and Safety Services	199,116		10.5	%	204,481		11.7	%
Fire Protection Services	128,218		6.8	%	108,065		6.2	%
Uniform Direct Sales	61,440		3.2	%	39,618		2.3	%
Total revenue	$	1,896,950	100.0	%	$	1,746,575	100.0	%

Fire Protection Services and Uniform Direct Sales operating segments are included within All Other as disclosed in Note 12 entitled Segment Information.

Revenue Recognition Policy

Approximately 95% of the Company's revenues are derived from fees for route servicing of Uniform Rental and Facility Services, First Aid and Safety Services and Fire Protection Services, performed by a Cintas employee-partner, at the customer's location of business. Revenues from our route servicing customer contracts represent a single-performance obligation. The Company recognizes revenues over time as services are performed based on the nature of services provided and contractual rates (output method) or at a point in time when the performance obligation under the terms of the contract with a customer are satisfied, at the customer's location of business. The Company's remaining revenue, primarily within the Uniform Direct Sales operating segment, and representing approximately 5% of the Company's total revenue, is recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer.

Revenue recorded is presented net of sales and other taxes we collect on behalf of governmental authorities. Shipping and handling costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Certain of our customer contracts, include pricing terms and conditions that include components of variable consideration. The variable consideration is typically in the form of consideration paid to a customer based on performance metrics specified within the contract. Specifically, some contracts contain discounts or rebates that the customer can earn through the achievement of specified volume levels. Each component of variable consideration is earned based on the Company's actual performance during the measurement period specified within the contract. To determine the transaction price, the Company estimates the variable consideration using the most likely amount method, based on the specific contract provisions and known performance results during the relevant measurement period. When determining if variable consideration should be constrained, the Company considers whether factors outside its control could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal. The Company's performance period generally corresponds with the monthly invoice period. No constraints on our revenue recognition were applied during the three months ended August 31, 2021 or 2020. The Company reassesses these estimates during each reporting period. Cintas maintains a liability for these discounts and rebates within accrued liabilities on the consolidated condensed balance sheets. Variable consideration also includes consideration paid to a customer at the beginning of a contract. Cintas capitalizes this consideration and amortizes it over the life of the contract as a reduction to revenue. These assets are included in other assets, net on the consolidated condensed balance sheets.

Additionally, certain Uniform Direct Sales operating segment customer contracts contain a provision with an enforceable right of payment, and the underlying product has no alternative use to Cintas. Consequently, when both aforementioned provisions are prevalent in a customer contract, the revenue is recorded for finished goods that the customer is obligated to purchase under the termination terms of the contract.

We are exposed to credit losses primarily through our trade receivables. We determine the allowance for credit losses using both an estimate, based on historical rates of collections, and reserves for specific accounts identified as uncollectible. The portion of the allowance that is an estimate based on Cintas' historical rates of collections is recorded for overdue amounts, beginning with a nominal percentage when the account is current and increasing substantially as the account ages. The amount provided as the account ages will differ slightly between the Uniform

Rental and Facility Services reportable operating segment, the First Aid and Safety Services reportable operating segment and All Other because of differences in customers served and the nature of each business. We update our estimate of credit loss reserves quarterly, considering recent write-offs and collections information and underlying economic expectations.

Costs to Obtain a Contract

The Company capitalizes commission expenses paid to our employee-partners when the commissions are deemed to be incremental for obtaining the route servicing customer contract. As permitted by ASC 606, "Revenue", the Company has elected to apply the guidance to a portfolio of contracts (or performance obligations) with similar characteristics because the Company reasonably expects that the effects on the consolidated condensed financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within the portfolio. The Company also continues to expense certain costs to obtain a contract if those costs do not meet the criteria of the standard or the amortization period of the asset would have been one year or less. The deferred commissions are amortized on a straight-line basis over the expected period of benefit. We review the deferred commission balances for impairment on an ongoing basis. Deferred commissions are classified as current or noncurrent based on the timing of when we expect to recognize the expense. The current portion is included in prepaid expenses and other current assets and the noncurrent portion is included in other assets, net on the Company's consolidated condensed balance sheets. As of August 31, 2021, the current and noncurrent assets related to deferred commissions totaled $80.2 million and $227.2 million, respectively. As of May 31, 2021, the current and noncurrent assets related to deferred commissions totaled $79.4 million and $227.1 million, respectively. We recorded amortization expense related to deferred commissions of $21.4 million and $20.4 million during the three months ended August 31, 2021 and 2020, respectively. These expenses are classified in selling and administrative expenses on the consolidated condensed statements of income.

Note 3 - Leases

Cintas has operating leases for certain operating facilities, vehicles and equipment, which provide the right to use the underlying asset and require lease payments over the term of the lease. Each new contract is evaluated to determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. All identified leases are recorded on the consolidated condensed balance sheet with a corresponding operating lease right-of-use asset, net, representing the right to use the underlying asset for the lease term and the operating lease liabilities representing the obligation to make lease payments arising from the lease. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the consolidated condensed balance sheet.

Operating lease right-of-use assets, net and operating lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Lease expense for operating leases is recorded on a straight-line basis over the lease term and variable lease costs are recorded as incurred. Both lease expense and variable lease costs are primarily recorded in cost of uniform rental and facility services and other on the Company's consolidated condensed statements of income. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating lease costs were $18.2 million and $17.1 million for the three months ended August 31, 2021 and 2020, respectively. Short-term lease expense and variable lease costs are included within operating lease costs and immaterial for the three months ended August 31, 2021 and 2020.

The following table provides supplemental information related to the Company's consolidated condensed statements of cash flows for the three months ended August 31:


(In thousands)	2021		2020


Cash paid for amounts included in the measurement of operating lease liabilities	$	11,913	$	12,254
Operating lease right-of-use assets obtained in exchange for new and renewed operating lease liabilities	$	2,792	$	9,317

Other information related to the operating lease right-of-use assets, net and operating lease liabilities was as follows:



	August 31, 2021	May 31, 2021

Weighted-average remaining lease term - operating leases	5.22 years	5.33 years
Weighted-average discount rate - operating leases	2.29%	2.32%

The contractual future minimum lease payments of Cintas' operating lease liabilities by fiscal year are as follows as of August 31, 2021:


(In thousands)

2022 (remaining nine months)	$	35,794
2023	40,285
2024	29,941
2025	22,509
2026	16,995
Thereafter	30,336
Total payments	175,860
Less interest	(10,261)
Total present value of lease payments	$	165,599

Note 4 - Fair Value Measurements

All financial instruments that are measured at fair value on a recurring basis (at least annually) have been classified within the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the consolidated condensed balance sheet date. These financial instruments measured at fair value on a recurring basis are summarized below:


	As of August 31, 2021
(In thousands)	Level 1		Level 2		Level 3		Fair Value

Cash and cash equivalents	$	79,749	$	—	$	—	$	79,749




Other assets, net:
Interest rate lock agreements	—		18,335		—		18,335
Total assets at fair value	$	79,749	$	18,335	$	—	$	98,084

Current accrued liabilities:
Interest rate lock agreements	$	—	$	88,736	$	—	$	88,736
Total liabilities at fair value	$	—	$	88,736	$	—	$	88,736


	As of May 31, 2021
(In thousands)	Level 1		Level 2		Level 3		Fair Value

Cash and cash equivalents	$	493,640	$	—	$	—	$	493,640


Other assets, net:
Interest rate lock agreements	—		40,400		—		40,400
Total assets at fair value	$	493,640	$	40,400	$	—	$	534,040

Long-term accrued liabilities:
Interest rate lock agreements	$	—	$	61,567	$	—	$	61,567
Total liabilities at fair value	$	—	$	61,567	$	—	$	61,567

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

The fair values of Cintas' interest rate lock agreements are based on similar exchange traded derivatives (market approach) and are, therefore, included within Level 2 of the fair value hierarchy. The fair value was determined by comparing the locked rates against the benchmarked treasury rate. No other amounts included in other assets, net, current accrued liabilities or long-term accrued liabilities are recorded at fair value on a recurring basis.

The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Cintas believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the consolidated condensed balance sheet dates.

In addition to assets and liabilities that are recorded at fair value on a recurring basis, Cintas records assets and liabilities at fair value on a nonrecurring basis as required under U.S. GAAP. The assets and liabilities measured at fair value on a nonrecurring basis primarily relate to assets and liabilities acquired in a business acquisition, which were not material during the three months ended August 31, 2021 and 2020.

Note 5 - Investments

Cintas' investments are summarized as follows:



(In thousands)	August 31, 2021		May 31, 2021

Cash surrender value of insurance policies	$	274,721	$	252,061
Equity method investments	18,383		19,388
Cost method investments	2,164		3,167
Total investments	$	295,268	$	274,616

Investments are generally evaluated for impairment on an annual basis or when indicators of impairment exist. For the three months ended August 31, 2021 and 2020, no impairment losses were recorded.

Note 6 - Earnings Per Share

Cintas uses the two-class method to calculate basic and diluted earnings per share as a result of outstanding participating securities in the form of restricted stock awards. The following tables set forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Cintas’ common shares for the three months ending August 31:


Basic Earnings per Share (In thousands except per share data)	2021		2020



Net income	$	331,179	$	300,005
Less: income allocated to participating securities	1,765		2,173
Income available to common shareholders	$	329,414	$	297,832
Basic weighted average common shares outstanding	103,295		104,110

Basic earnings per share	$	3.19	$	2.86


Diluted Earnings per Share (In thousands except per share data)	2021		2020



Net income	$	331,179	$	300,005
Less: income allocated to participating securities	1,765		2,173
Income available to common shareholders	$	329,414	$	297,832
Basic weighted average common shares outstanding	103,295		104,110
Effect of dilutive securities – employee stock options	2,649		3,019
Diluted weighted average common shares outstanding	105,944		107,129

Diluted earnings per share	$	3.11	$	2.78

For the three months ended August 31, 2021 and 2020, options granted to purchase 0.1 million and 0.2 million shares of Cintas common stock, respectively, were excluded from the computation of diluted earnings per share. The exercise prices of these options were greater than the average market price of the common stock (anti-dilutive).

On October 29, 2019, Cintas announced that the Board of Directors authorized a $1.0 billion share buyback program, which was completed during the first quarter of fiscal 2022. From the inception of the October 29, 2019 share buyback program through July 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. On July 27, 2021, Cintas announced that the Board of Directors authorized a new $1.5 billion share buyback program, which does not have an expiration date. The following tables summarize the share buyback activity by program for the three months ended August 31:



	2021					2020
Buyback Program (In thousands except per share data)	Shares	Avg. Price per Share		Purchase Price		Shares	Avg. Price per Share		Purchase Price


October 29, 2019	1,590	$	365.41	$	581,220	—	$	—	$	—
July 27, 2021	—	$	—	$	—	—	$	—	$	—
	1,590	$	365.41	$	581,220	—	$	—	$	—

There were no share buybacks in the period subsequent to August 31, 2021, through October 7, 2021 under any share buyback program.

For the three months ended August 31, 2021, Cintas acquired 0.2 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested. These shares were acquired at an average price of $394.19 per share for a total purchase price of $78.0 million. For the three months ended August 31, 2020, Cintas acquired 0.2 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested. These shares were acquired at an average price of $300.01 per share for a total purchase price of $69.0 million.

Note 7 - Goodwill, Service Contracts and Other Assets

Changes in the carrying amount of goodwill and service contracts for the three months ended August 31, 2021, 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, 2021	$	2,547,510	$	248,571	$	116,988	$	2,913,069
Goodwill acquired	24,512		—		41		24,553

Foreign currency translation	(11,565)		(1,024)		(40)		(12,629)
Balance as of August 31, 2021	$	2,560,457	$	247,547	$	116,989	$	2,924,993


Service Contracts (in thousands)	Uniform Rental and Facility Services		First Aid and Safety Services		All Other		Total

Balance as of June 1, 2021	$	369,141	$	18,294	$	21,010	$	408,445
Service contracts acquired	12,807		—		53		12,860
Service contracts amortization	(12,380)		(991)		(1,190)		(14,561)
Foreign currency translation	(2,637)		(125)		—		(2,762)
Balance as of August 31, 2021	$	366,931	$	17,178	$	19,873	$	403,982

Information regarding Cintas’ service contracts and other assets is as follows:


	As of August 31, 2021						As of May 31, 2021
(In thousands)	Carrying Amount		Accumulated Amortization		Net		Carrying Amount		Accumulated Amortization		Net

Service contracts	$	969,728	$	565,746	$	403,982	$	961,942	$	553,497	$	408,445

Capitalized contract costs (1)	$	480,535	$	253,298	$	227,237	$	459,079	$	231,940	$	227,139
Noncompete and consulting agreements	45,783		42,601		3,182		44,683		42,408		2,275
Other	89,293		24,393		64,900		105,371		24,371		81,000
Total other assets	$	615,611	$	320,292	$	295,319	$	609,133	$	298,719	$	310,414

(1) The current portion of capitalized contract costs, included in prepaid expenses and other current assets on the consolidated condensed balance sheets as of August 31, 2021 and May 31, 2021, is $80.2 million and $79.4 million, respectively.

Amortization expense for service contracts and other assets was $36.5 million and $35.1 million for the three months ended August 31, 2021 and 2020, respectively. These expenses are recorded in selling and administrative expenses on the consolidated condensed statements of income. As of August 31, 2021, the estimated future amortization expense for service contracts and other assets, excluding any future acquisitions and commissions to be earned, is as follows:


Fiscal Year (In thousands)

2022 (remaining nine months)	$	104,871
2023	122,464
2024	110,029
2025	96,113
2026	79,013
Thereafter	204,245
Total future amortization expense	$	716,735

Note 8 - Debt, Derivatives and Hedging Activities

Cintas' outstanding debt is summarized as follows:


(In thousands)	Interest Rate			Fiscal Year Issued	Fiscal Year Maturity	August 31, 2021		May 31, 2021

Debt due within one year
Senior notes	4.30	%		2012	2022	$	—	$	250,000
Senior notes	2.90	%		2017	2022	650,000		650,000
Senior notes	3.25	%		2013	2023	300,000		—
Commercial paper	0.20	%	(1)	2022	2022	326,000		—
Debt issuance costs						(833)		(930)
Total debt due within one year						$	1,275,167	$	899,070

Debt due after one year
Senior notes	3.25	%		2013	2023	$	—	$	300,000
Senior notes (2)	2.78	%		2013	2023	50,707		50,815
Senior notes (3)	3.11	%		2015	2025	51,217		51,301
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						(8,702)		(9,283)
Total debt due after one year						$	1,343,222	$	1,642,833

(1) Variable rate debt instrument. The rate presented is the variable borrowing rate at August 31, 2021.

(2) Cintas assumed these senior notes with the acquisition of G&K Services, Inc. (G&K) in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.73%.

(3) Cintas assumed these senior notes with the acquisition of G&K in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.88%.

Cintas' senior notes, excluding the G&K senior notes assumed with the acquisition of G&K in fiscal 2017, are recorded at cost, net of debt issuance costs. The fair value of the long-term debt is estimated using Level 2 inputs based on general market prices. The carrying value and fair value of Cintas' debt as of August 31, 2021 were $2,626.0 million and $2,863.8 million, respectively, and as of May 31, 2021 were $2,550.0 million and $2,788.8 million, respectively. On June 1, 2021, in accordance with the terms of the notes, Cintas paid the $250.0 million aggregate principal amount of its 4.30%, 10-year senior notes that matured on that date with cash on hand. During the three months ended August 31, 2021, Cintas issued $326.0 million, net of commercial paper borrowings.

The credit agreement that supports our commercial paper program has a revolving credit facility with a capacity of $1.0 billion. The credit agreement has an accordion feature that provides Cintas the ability to request increases to the borrowing commitments under the revolving credit facility of up to $250.0 million in the aggregate, subject to customary conditions. The maturity date of the revolving credit facility is May 23, 2024. As of August 31, 2021, there was $326.0 million of commercial paper outstanding with maturity dates less than 30 days and with a weighted average interest rate of 0.20% and there was no borrowings on our revolving credit facility. As of May 31, 2021, there was no commercial paper outstanding and no borrowings on our revolving credit facility.

Cintas uses interest rate locks to manage its overall interest expense as interest rate locks effectively change the interest rate of specific debt issuances. The interest rate locks are entered into to protect against unfavorable movements in the benchmark treasury rate related to forecasted debt issuances. Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2007, fiscal 2012, fiscal 2013 and fiscal 2017. The amortization of the cash flow hedges resulted in a decrease to other comprehensive income of $0.5 million and $0.4 million three months ended August 31, 2021 and 2020, respectively. During fiscal 2020 and fiscal 2019, Cintas entered into interest rate lock agreements with a total

notional value of $950.0 million and $500.0 million, respectively, for forecasted debt issuances in connection with upcoming debt maturities.

The fair values of the outstanding interest rate lock agreements are summarized as follows:


			August 31, 2021				May 31, 2021
Fiscal Year of Issuance (in thousands)	Notional Value		Other assets, net		Current accrued liabilities		Other assets, net		Long-term accrued liabilities

2020	$	950,000	$	18,335	$	10,264	$	40,400	$	—
2019	$	500,000	$	—	$	78,472	$	—	$	61,657

The interest rate locks are also recorded in other comprehensive income (loss), net of tax. These interest rate locks had no impact on net income or cash flows for the three months ended August 31, 2021 or 2020.

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.

Note 9 - 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 August 31, 2021 and May 31, 2021, recorded unrecognized tax benefits were $34.6 million and $34.2 million, respectively, and are included in long-term accrued liabilities on the consolidated condensed balance sheets.

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

All United States federal income tax returns are closed to audit through fiscal 2017. Cintas is currently in various audits in certain foreign jurisdictions and certain domestic states. The years under foreign and domestic state audits cover fiscal years back to 2014. Based on the resolution of the various audits and other potential regulatory developments, it is reasonably possible that the balance of unrecognized tax benefits would not change for the fiscal year ending May 31, 2022.

Cintas’ effective tax rate was 11.0% and 7.8% for the three months ended August 31, 2021 and 2020, respectively. The effective tax rate for all periods was impacted by certain discrete items (primarily the tax accounting for stock-based compensation).

Note 10 - Pension Plans

In conjunction with the acquisition of G&K in fiscal 2017, Cintas assumed G&K's noncontributory defined benefit pension plan (the Pension Plan) that covers substantially all legacy G&K employees who were employed as of July 1, 2005, except certain employees who were covered by union-administered plans. Benefits are based on the number of years of service and each employee’s compensation near retirement. We will make annual contributions to the Pension Plan consistent with federal funding requirements. The Pension Plan was frozen by G&K effective December 31, 2006. Future growth in benefits will not occur beyond this date. Applicable accounting standards require that the consolidated condensed balance sheets reflect the funded status of the Pension Plan. The funded status of the Pension Plan is measured as the difference between the plan assets at fair value and the projected benefit obligation (PBO). The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. The measurement of the PBO is based on the Company’s estimates and actuarial valuations. The net pension liability is included in long-term accrued liabilities on the consolidated condensed balance sheets. Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive (loss) income on our consolidated condensed balance sheets. The difference between actual amounts and estimates based on actuarial assumptions are recognized in other comprehensive (loss) income, net of tax, 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 benefit are summarized as follows for the three months ended August 31:


(In thousands)	2021		2020




Interest cost	$	542	$	512
Expected return on assets	(917)		(731)
Amortization of net loss	—		56
Net periodic pension benefit	$	(375)	$	(163)

Note 11 - Accumulated Other Comprehensive Income (Loss)

The following tables summarize the changes in the accumulated balances for each component of accumulated other comprehensive (loss) income, net of tax:


(In thousands)	Foreign Currency		Unrealized Loss on Interest Rate Hedges		Other		Total

Balance at June 1, 2021	$	41,839	$	(7,308)	$	(3,643)	$	30,888
Other comprehensive loss before reclassifications	(24,016)		(36,679)		—		(60,695)
Amounts reclassified from accumulated other comprehensive (loss) income	—		(459)		—		(459)
Net current period other comprehensive loss	(24,016)		(37,138)		—		(61,154)
Balance at August 31, 2021	$	17,823	$	(44,446)	$	(3,643)	$	(30,266)


(In thousands)	Foreign Currency		Unrealized Loss on Interest Rate Hedges		Other		Total

Balance at June 1, 2020	$	(26,343)	$	(112,718)	$	(14,319)	$	(153,380)
Other comprehensive income before reclassifications	26,946		10,842		—		37,788
Amounts reclassified from accumulated other comprehensive (loss) income	—		(358)		—		(358)
Net current period other comprehensive income	26,946		10,484		—		37,430
Balance at August 31, 2020	$	603	$	(102,234)	$	(14,319)	$	(115,950)

The following table summarizes the reclassifications out of accumulated other comprehensive (loss) income for the three months ended August 31:


Details about Accumulated Other Comprehensive (Loss) Income Components	Amount Reclassified from Accumulated Other Comprehensive (Loss) Income				Affected Line in the Consolidated Condensed Statements of Income
(In thousands)	2021		2020



Amortization of interest rate locks	$	607	$	474		Interest expense
Tax expense	(148)		(116)			Income taxes
Amortization of interest rate locks, net of tax	$	459	$	358

Note 12 - Segment Information

Cintas’ reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services. The Uniform Rental and Facility Services reportable operating segment consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops and shop towels and other ancillary items. In addition to these rental items, restroom cleaning services and supplies, and the sale of items from our catalogs to our customers on route are included within this reportable operating segment. The First Aid and Safety Services reportable operating segment consists of first aid and safety products and services. The remainder of Cintas’ operating segments, which consists of the Fire Protection Services operating segment and the Uniform Direct Sale operating segment, is included in All Other.

Cintas evaluates the performance of each operating segment based on several factors of which the primary financial measures are operating segment revenue and income before income taxes. The accounting policies of the operating segments are the same as those described in Note 1 entitled Basis of Presentation. Information related to the operations of Cintas’ reportable operating segments and All Other is set forth below:


(In thousands)	Uniform Rental and Facility Services		First Aid and Safety Services		All Other		Corporate (1)		Total









As of and for the three months ended August 31, 2021

Revenue	$	1,508,176	$	199,116	$	189,658	$	—	$	1,896,950
Income (loss) before income taxes	$	329,382	$	25,728	$	38,991	$	(21,798)	$	372,303
Total assets	$	6,770,296	$	636,829	$	370,876	$	79,749	$	7,857,750

As of and for the three months ended August 31, 2020

Revenue	$	1,394,411	$	204,481	$	147,683	$	—	$	1,746,575
Income (loss) before income taxes	$	315,028	$	18,527	$	16,151	$	(24,486)	$	325,220
Total assets	$	6,628,127	$	620,169	$	373,543	$	421,542	$	8,043,381

(1) Corporate assets include cash and cash equivalents and marketable securities, if applicable, in all periods.

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