CINTAS CORP (CTAS) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations
Business Strategy
Cintas helps more than one million businesses of all types and sizes, primarily in the U.S., as well as Canada and Latin America, get READY™ to open their doors with confidence every day by providing a wide range of products and services that enhance our customers’ image and help keep their facilities and employees clean, safe and looking their best. With products and services including uniforms, mats, mops, restroom supplies, first aid and safety products, fire extinguishers and testing, and safety training, Cintas helps customers get Ready for the Workday®.
We are North 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.
Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations focuses on discussion of fiscal 2023 results compared to fiscal 2022 results. For discussion of fiscal 2022 results compared to fiscal 2021 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 ended May 31, 2022, filed with the SEC on July 27, 2022.
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 operating income. Revenue and operating income for the reportable operating segments for the years ended May 31, 2023, 2022 and 2021 are presented in Note 13 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.
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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 ended May 31:
| 2023 | 2022 | ||
|---|---|---|---|
| Revenue: | |||
| Uniform Rental and Facility Services | 78.2% | 79.3% | |
| First Aid and Safety Services | 10.8% | 10.6% | |
| All Other | 11.0% | 10.1% | |
| Total revenue | 100.0% | 100.0% | |
| Cost of sales: | |||
| Uniform Rental and Facility Services | 52.7% | 53.3% | |
| First Aid and Safety Services | 49.3% | 55.3% | |
| All Other | 55.9% | 56.0% | |
| Total cost of sales | 52.7% | 53.8% | |
| Gross margin: | |||
| Uniform Rental and Facility Services | 47.3% | 46.7% | |
| First Aid and Safety Services | 50.7% | 44.7% | |
| All Other | 44.1% | 44.0% | |
| Total gross margin | 47.3% | 46.2% | |
| Selling and administrative expenses: | |||
| Uniform Rental and Facility Services | 25.9% | 25.0% | |
| First Aid and Safety Services | 31.7% | 31.9% | |
| All Other | 29.3% | 28.0% | |
| Total selling and administrative expenses | 26.9% | 26.0% | |
| Operating income: | |||
| Uniform Rental and Facility Services | 21.4% | 21.7% | |
| First Aid and Safety Services | 19.0% | 12.8% | |
| All Other | 14.8% | 16.0% | |
| Total operating income | 20.4% | 20.2% | |
| Interest expense, net | 1.2% | 1.1% | |
| Income before income taxes | 19.2% | 19.1% |
Fiscal 2023 Compared to Fiscal 2022
Fiscal 2023 total revenue was $8.8 billion, an increase of 12.2% over the prior fiscal year. Revenue increased organically by 12.2% as a result of increased sales volume. Organic growth adjusts for the impact of acquisitions, divestitures and foreign currency exchange rate fluctuations. Total revenue was positively impacted by 0.4% due primarily to acquisitions and negatively impacted by 0.4% due to foreign currency exchange rate fluctuations.
Organic revenue growth by quarter for fiscal 2023 is as follows:
| Organic Growth | |
|---|---|
| First quarter ended August 31, 2022 | 13.9% |
| Second quarter ended November 30, 2022 | 12.8% |
| Third quarter ended February 28, 2023 | 11.8% |
| Fourth quarter ended May 31, 2023 | 10.3% |
| For the fiscal year ended May 31, 2023 | 12.2% |
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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 10.8% compared to fiscal 2022. Organic revenue growth for this reportable operating segment was 10.8%. Revenue growth was positively impacted by 0.4% due to acquisitions and negatively impacted by 0.4% due to foreign currency exchange rate fluctuations. Revenue growth was a result of new business, the penetration of additional products and services into existing customers and price increases, partially offset by lost business. New business growth resulted from an increase in the number and 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, increased 17.9% compared to fiscal 2022. Revenue improved from increases in sales representative productivity. Revenue increased organically by 17.4%. Revenue growth was positively impacted by 0.6% due primarily to acquisitions and negatively impacted by 0.1% due to foreign currency exchange rate fluctuations.
Cost of uniform rental and facility services increased 9.5% compared to fiscal 2022. 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 change from the prior year was primarily due to higher Uniform Rental and Facility Services reportable operating segment sales volume, as well as investments in material cost to support increased revenue growth. The cost of uniform rental and facility services as a percent of revenue improved compared to fiscal 2022 from 53.3% to 52.7% as a result of efficiencies in labor and improved leverage of fixed costs.
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 11.5% in fiscal 2023 compared to fiscal 2022, but decreased as a percent of revenue to 52.7%, compared to 55.7% in fiscal 2022. The improvement in cost of sales as a percent to revenue was primarily due to favorable changes in the sales mix in the First Aid and Safety Services reportable operating segment as well as improved leverage of fixed costs for both the First Aid and Safety Services reportable operating segment and All Other.
Selling and administrative expenses increased $325.8 million, to 26.9% as a percent of revenue, compared to 26.0% in fiscal 2022. The change as a percent of revenue was primarily due to a $12.1 million gain on the sale of certain operating assets recorded within All Other and a $30.2 million one-time gain on an equity method investment transaction recorded in fiscal 2022.
Net interest expense (interest expense less interest income) was $109.5 million in fiscal 2023 compared to $88.6 million in fiscal 2022. The change was to an due increase in the interest rates on outstanding debt, specifically commercial paper, as well as an increase in the average amount of outstanding debt during fiscal 2023.
Income before income taxes was $1,693.1 million, an increase of $194.4 million, or 13.0%, compared to fiscal 2022. The increase in income before income taxes was primarily due to revenue growth, as well as the improvements in gross margin previously mentioned.
Cintas' effective tax rate was 20.4% for fiscal 2023 compared to 17.5% in fiscal 2022. 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 2022 included one-time tax benefits from a gain on an equity method investment transaction and from the sale of certain operating assets.
Net income for fiscal 2023 of $1,348.0 million was a 9.1% increase compared to fiscal 2022. Diluted earnings per share of $12.99 was an 11.5% increase compared to fiscal 2022 diluted earnings per share of $11.65. Diluted earnings per share increased primarily due to the increase in net income combined with the decrease in diluted weighted average common shares outstanding. The decrease in diluted weighted average common shares outstanding resulted from purchasing an aggregate of approximately 2.7 million shares of common stock under the Board of Directors approved share buyback programs since the beginning of the third quarter of fiscal 2022 through the fourth quarter of fiscal 2023.
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Uniform Rental and Facility Services Reportable Operating Segment
Uniform Rental and Facility Services reportable operating segment revenue increased $670.2 million, or 10.8%, and the cost of uniform rental and facility services increased $315.7 million, or 9.5%, due to the reasons previously discussed. The reportable operating segment's fiscal 2023 gross margin was 47.3% of revenue compared to 46.7% in fiscal 2022. The improvement in gross margin was the result of efficiencies in labor and improved leverage of fixed costs, partially offset by investments in material cost to support increased revenue growth.
Selling and administrative expenses for the Uniform Rental and Facility Services reportable operating segment increased $229.1 million in fiscal 2023 compared to fiscal 2022. Selling and administrative expense as a percent of revenue for fiscal 2023 was 25.9% compared to 25.0% in fiscal 2022. The change as a percent of revenue was primarily due to the previously mentioned one-time gain on an equity method investment transaction of $30.2 million recorded in fiscal 2022.
Income before income taxes for the Uniform Rental and Facility Services reportable operating segment increased $125.3 million, or 9.3%, for fiscal 2023 compared to fiscal 2022. The increase in income before income taxes was due to the previously discussed growth in revenue and gross margin improvement. Income before income taxes as a percent of revenue was 21.4% compared to 21.7% in fiscal 2022. The change over the prior fiscal year was primarily due to the previously discussed one-time gain on an equity method investment transaction recorded in fiscal 2022.
First Aid and Safety Services Reportable Operating Segment
First Aid and Safety Services reportable operating segment revenue increased $119.0 million in fiscal 2023, a 14.3% increase compared to fiscal 2022. Organic revenue growth for this reportable operating segment was 13.1%. Revenue growth was positively impacted by 1.3% due to acquisitions and negatively impacted by 0.1% due to foreign currency exchange rate fluctuations. This increase in revenue was driven by many factors including increases in new business sold by sales representatives, penetration of additional products and services into existing customers and strong customer retention.
Cost of sales for the First Aid and Safety Services reportable operating segment increased $9.1 million, or 2.0%, in fiscal 2023, due to higher sales volume. Gross margin for the First Aid and Safety Services reportable operating segment is defined as revenue less cost of goods, warehouse expenses and service expenses. Gross margin as a percent of revenue was 50.7% for fiscal 2023 compared to 44.7% in fiscal 2022. The improvement in gross margin as a percentage of revenue was primarily due to a decrease in the proportion of sales related to personal protective equipment, which typically have lower gross margins compared to the first aid cabinet sales, as well as improved leverage of fixed costs.
Selling and administrative expenses for the First Aid and Safety Services reportable operating segment increased by $36.0 million, or 13.6%, in fiscal 2023 compared to fiscal 2022, and improved as a percent of revenue to 31.7% in fiscal 2023 compared to 31.9% in fiscal 2022. The improvement as a percent of revenue was primarily due to efficiencies realized in selling and administrative labor expenses.
Income before income taxes for the First Aid and Safety Services reportable operating segment was $180.7 million in fiscal 2023, an increase of $73.9 million, or 69.2%, compared to fiscal 2022. Income before income taxes as a percent of revenue at 19.0%, increased from 12.8% in fiscal 2022 due to the previously discussed improvements in both gross margin and selling and administrative expenses.
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Liquidity and Capital Resources
The following table summarizes our cash flows and cash and cash equivalents as of and for the fiscal years ended May 31:
| (In thousands) | 2023 | 2022 | ||||
|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 1,597,814 | $ | 1,537,625 | ||
| Net cash used in investing activities | $ | (388,672) | $ | (402,635) | ||
| Net cash used in financing activities | $ | (1,172,836) | $ | (1,537,943) | ||
| Cash and cash equivalents at end of year | $ | 124,149 | $ | 90,471 |
Cash and cash equivalents as of May 31, 2023 and 2022, include $29.9 million and $43.1 million, respectively, that is located outside of the U.S.
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.
We expect our cash flows from operating activities to remain sufficient to provide us with adequate levels of liquidity. In addition, we have access to $2.0 billion of debt capacity from our amended and restated revolving credit facility, which matures on March 23, 2027. We believe the Company has sufficient liquidity to operate in the current business environment for at least the next 12 months and the foreseeable future thereafter. Acquisitions, repurchases of our common stock 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 $1.60 billion for fiscal 2023, which was an increase of $60.2 million, or 3.9%, compared to fiscal 2022. The increase was primarily the result of an increase in net income and favorable changes in working capital, specifically accrued liabilities, current income taxes and accounts payable. These improvements were partially offset by unfavorable changes in working capital, specifically, capitalized contract costs, inventories and accounts receivable, which resulted from the growth in revenue.
Net cash used in investing activities was $388.7 million in fiscal 2023, compared to $402.6 million in fiscal 2022. 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 $331.1 million and $240.7 million for fiscal 2023 and fiscal 2022, respectively. Capital expenditures for fiscal 2023 included $227.4 million for the Uniform Rental and Facility Services reportable operating segment and $76.5 million for the First Aid and Safety Services reportable operating segment. The increase in capital expenditures from fiscal 2022 to fiscal 2023 was due to an investment in the operating segments to support continued market penetration and revenue growth. Cash paid for acquisitions of businesses, net of cash acquired, was $46.4 million and $164.2 million for fiscal 2023 and fiscal 2022, respectively. The acquisitions in both fiscal 2023 and 2022 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. The fiscal 2022 acquisitions also include the acquisition of the remaining interest of an equity method investment. In fiscal 2022 investing activities included proceeds of $15.3 million from the sale of certain operating assets, net of cash disposed in the Uniform Direct Sales operating segment, which is included in All Other. Net cash used in investing activities also included $4.6 million and $6.1 million of purchases of investments during fiscal 2023 and fiscal 2022, respectively.
Net cash used in financing activities was $1,172.8 million for fiscal 2023, compared to $1,537.9 million in fiscal 2022. The decrease in cash used in financing activities was due to the decrease in share buyback activity, partially offset by the $562.9 million increase in net debt payments, the $74.8 million increase in dividends paid and the $114.7 million decrease in proceeds from the exercise of stock-based compensation awards.
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On October 29, 2019, we announced the Board of Directors authorized a $1.0 billion share buyback program, which was completed during fiscal 2022. On July 27, 2021, we announced the Board of Directors authorized a $1.5 billion share buyback program, which does not have an expiration date. From the inception of the July 27, 2021 share buyback program through May 31, 2023, Cintas purchased a total of 2.7 million shares of Cintas common stock at an average price of $385.80 per share for a total purchase price of $1.0 billion. On July 26, 2022, Cintas announced that the Board of Directors authorized a new $1.0 billion share buyback program, which does not have an expiration date. The following table summarizes the buyback activity by program and fiscal year ended May 31:
| 2023 | 2022 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Buyback Program(In thousands except per share data) | Shares | Average Price per Share | Purchase Price | Shares | Average Price per Share | Purchase Price | |||||||||||||||
| October 29, 2019 | — | $ | — | $ | — | 1,590 | $ | 365.41 | $ | 581,220 | |||||||||||
| July 27, 2021 | 550 | 396.69 | 218,288 | 2,150 | 383.01 | 823,429 | |||||||||||||||
| July 26, 2022 | — | — | — | — | — | — | |||||||||||||||
| 550 | $ | 396.69 | $ | 218,288 | 3,740 | $ | 375.53 | $ | 1,404,649 | ||||||||||||
| Shares acquired for taxes due (1) | 430 | $ | 420.21 | $ | 180,577 | 305 | $ | 397.16 | $ | 121,224 | |||||||||||
| Total repurchase of Cintas common stock | $ | 398,865 | $ | 1,525,873 |
(1) Shares of Cintas stock acquired for employee payroll taxes due on options exercised and vested restricted stock awards.
There were no share buybacks in the period subsequent to May 31, 2023, through July 27, 2023, under any share buyback program.
Our Board of Directors declared the following dividends:
| Paid Dividends | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Declaration Date(In millions except per share data) | Record Date | Payment Date | Dividend Per Share | Total Amount | |||||
| Fiscal Year 2023 | |||||||||
| April 12, 2022 | May 16, 2022 | June 15, 2022 | $ | 0.95 | $ | 97.7 | |||
| July 26, 2022 | August 15, 2022 | September 15, 2022 | 1.15 | 117.3 | |||||
| October 25, 2022 | November 15, 2022 | December 15, 2022 | 1.15 | 117.4 | |||||
| January 10, 2023 | February 15, 2023 | March 15, 2023 | 1.15 | 117.5 | |||||
| Total | $ | 4.40 | $ | 449.9 | |||||
| Fiscal Year 2022 | |||||||||
| April 13, 2021 | May 15, 2021 | June 15, 2021 | $ | 0.75 | $ | 79.1 | |||
| July 27, 2021 | August 13, 2021 | September 15, 2021 | 0.95 | 98.8 | |||||
| October 26, 2021 | November 15, 2021 | December 15, 2022 | 0.95 | 99.0 | |||||
| January 12, 2022 | February 15, 2022 | March 15, 2022 | 0.95 | 98.2 | |||||
| Total | $ | 3.60 | $ | 375.1 | |||||
| Accrued Dividends | |||||||||
| As of May 31, 2023 | |||||||||
| April 11, 2023 (1) | May 15, 2023 | June 15, 2023 | $ | 1.15 | $ | 117.6 | |||
| As of May 31, 2022 | |||||||||
| April 12, 2022 (1) | May 16, 2022 | June 15, 2022 | $ | 0.95 | $ | 97.5 |
(1) The dividends declared on April 11, 2023 and April 12, 2022 were included in current accrued liabilities on the consolidated balance sheets at May 31, 2023 and 2022, respectively.
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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.
During the fiscal year ended May 31, 2023, Cintas paid $261.2 million, net of commercial paper. On April 17, 2023, in accordance with the terms of the notes, Cintas paid the $50.0 million aggregate principal amount outstanding of its 3.73%, private placement, 10-year senior notes that matured on that date with proceeds from short-term commercial paper issuance. During the fiscal year ended May 31, 2022, Cintas issued $261.2 million, net of commercial paper. On June 1, 2021, in accordance with the terms of the notes, Cintas paid the $250.0 million aggregate principal amount outstanding of its 4.30%, 10-year senior notes that matured on that date with cash on hand. On April 1, 2022, in accordance with the terms of the notes, Cintas paid the $650.0 million aggregate principal amount outstanding of its 2.90%, 5-year senior notes that matured on that date with proceeds from short-term borrowings. On May 1, 2022, Cintas redeemed at par value the $300.0 million aggregate principal amount outstanding of its 3.25%, 10-year senior notes 30 days in advance of the maturation date with proceeds from short-term borrowings. On May 3, 2022, Cintas issued $400.0 million aggregate principal amount of senior notes that bear an interest rate of 3.45% and mature on May 1, 2025. On May 3, 2022, Cintas also issued $800.0 million aggregate principal amount of senior notes that bear an interest rate of 4.00% and mature on May 1, 2032. The net proceeds from these issuances were utilized for general business purposes, including reducing Cintas’ short-term borrowings.
The following table summarizes Cintas' outstanding debt at May 31:
| (In thousands) | Interest Rate | Fiscal Year Issued | Fiscal Year Maturity | 2023 | 2022 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Debt due within one year | ||||||||||||
| Commercial paper | 1.20% | (1) | 2022 | 2023 | $ | — | $ | 261,200 | ||||
| Senior notes (2) | 2.78% | 2013 | 2023 | — | 50,380 | |||||||
| Debt issuance costs | — | (6) | ||||||||||
| Total debt due within one year | $ | — | $ | 311,574 | ||||||||
| Debt due after one year | ||||||||||||
| Senior notes (3) | 3.11% | 2015 | 2025 | $ | 50,630 | $ | 50,965 | |||||
| Senior notes | 3.45% | 2022 | 2025 | 400,000 | 400,000 | |||||||
| Senior notes | 3.70% | 2017 | 2027 | 1,000,000 | 1,000,000 | |||||||
| Senior notes | 4.00% | 2022 | 2032 | 800,000 | 800,000 | |||||||
| Senior notes | 6.15% | 2007 | 2037 | 250,000 | 250,000 | |||||||
| Debt issuance costs | (14,225) | (17,033) | ||||||||||
| Total debt due after one year | $ | 2,486,405 | $ | 2,483,932 |
(1) Variable rate debt instrument. The rate presented is the variable borrowing rate at May 31, 2022.
(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 until repayment in fiscal 2023.
(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%.
The credit agreement that supports our commercial paper program has capacity under the revolving credit facility of $2.0 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 $500.0 million in the aggregate, subject to customary conditions. The maturity date of the revolving credit facility is March 23, 2027. As of May 31, 2023, there was no commercial paper outstanding and no borrowings on our revolving credit facility. As of May 31, 2022, there was $261.2 million commercial paper outstanding and no borrowings on our revolving credit facility.
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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 both short-term and long-term liquidity to meet material cash obligations. 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. 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. As of May 31, 2023, our ratings were as follows:
| Rating Agency | Outlook | Commercial Paper | Long-term 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 $2,500.0 million aggregate principal amount of senior notes outstanding as of May 31, 2023, which are unconditionally guaranteed, jointly and severally, by Cintas Corporation and its wholly owned, direct and indirect domestic subsidiaries. See Note 6 entitled Debt, Derivatives and Hedging Activities 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.
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Summarized financial information of the Obligor Group is as follows for the fiscal years ended May 31:
| Summarized Consolidated Statements of Income(In thousands) | 2023 | 2022 | |||||
|---|---|---|---|---|---|---|---|
| Net sales to unrelated parties | $ | 8,333,404 | $ | 7,398,923 | |||
| Net sales to non-guarantors | $ | 13,791 | $ | 8,461 | |||
| Operating income | $ | 1,742,304 | $ | 1,534,320 | |||
| Net income | $ | 1,301,073 | $ | 1,197,830 |
| Summarized Consolidated Balance Sheets(In thousands) | 2023 | 2022 | |||||
|---|---|---|---|---|---|---|---|
| Assets | |||||||
| Receivables due from non-obligor subsidiaries | $ | 9,168 | $ | 11,759 | |||
| Total other current assets | $ | 2,738,095 | $ | 2,427,494 | |||
| Total other noncurrent assets | $ | 5,210,312 | $ | 5,081,265 | |||
| Liabilities | |||||||
| Amounts due to non-obligor subsidiaries | $ | 11,902 | $ | 11,383 | |||
| Current liabilities | $ | 1,183,511 | $ | 1,388,310 | |||
| Noncurrent liabilities | $ | 3,399,191 | $ | 3,346,851 |
Contractual and Other Material Cash Obligations
| Payments Due by Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | Total | One year or less | Two to three years | Four to five years | After five years | |||||||||||||
| Debt (1) | $ | 2,500,000 | $ | — | $ | 450,000 | $ | 1,000,000 | $ | 1,050,000 | ||||||||
| Operating leases (2) | 196,688 | 48,070 | 73,621 | 44,221 | 30,776 | |||||||||||||
| Interest payments | 675,043 | 100,115 | 184,490 | 131,750 | 258,688 | |||||||||||||
| Total contractual and other material cash obligations | $ | 3,371,731 | $ | 148,185 | $ | 708,111 | $ | 1,175,971 | $ | 1,339,464 |
(1)See Note 6 entitled Debt, Derivatives and Hedging Activities of "Notes to Consolidated Financial Statements" for a detailed presentation of Cintas' debt.
(2)See Note 7 entitled Leases of "Notes to Consolidated financial Statements" for a detailed presentation of Cintas' operating 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. Future contributions to the defined contribution plans are expected to be $107.9 million in the next year, $232.3 million in the next two to three years and $256.2 million in the next four to five years. Future contributions to the defined benefit plans are expected to be $0.8 million in the next year, $9.5 million in the next two to three years and $6.0 million in the next four to five years.
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Other Commitments
| Amount of Commitment Expiration per Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | Total | One year or less | Two to three years | Four to five years | After five years | |||||||||||||
| Lines of credit (1) | $ | 1,999,299 | $ | — | $ | — | $ | 1,999,299 | $ | — | ||||||||
| Standby letters of credit and surety bonds (2) | 99,579 | 99,579 | — | — | — | |||||||||||||
| Total other commitments | $ | 2,098,878 | $ | 99,579 | $ | — | $ | 1,999,299 | $ | — |
(1)Back-up facility for the commercial paper program (reference Note 6 entitled Debt, Derivatives and Hedging Activities of "Notes to Consolidated Financial Statements" for further discussion).
(2)These standby letters of credit and surety bonds support certain outstanding debt (reference Note 6 entitled Debt, Derivatives and Hedging Activities 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. In fiscal 2023 and 2022, we experienced impacts from inflation, including, but not limited to, higher labor, fuel and transportation costs. Management has been able to mitigate these inflationary pressures through pricing and various efficiency initiatives. Management has mitigated these impacts such that net of the mitigation strategy and initiatives, inflation and changing prices has not had a material impact on Cintas' consolidated financial condition or a negative impact on the consolidated results of operations.
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. Cintas is also party to additional litigation not considered in the ordinary course of business. See Note 14 entitled Litigation and Other Contingencies of "Notes to Consolidated Financial Statements" for a detailed discussion of such additional litigation.
New Accounting Standards
There are no new accounting pronouncements recently issued or newly effective that had, or are expected to have, a material impact on Cintas' consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of Cintas' consolidated financial statements in conformity with U.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 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.
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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 garments) are amortized over their useful lives, which range from 18 to 30 months. Other rental items, including shop towels, mats, mops, cleanroom garments, 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.
Goodwill. Goodwill, obtained through acquisitions of businesses, is valued at cost less any impairment. Cintas completes an annual impairment test, that includes an assessment of quantitative and qualitative factors including, but not limited to, macroeconomic conditions, industry and market conditions and entity specific factors such as strategies and financial performance. We test for goodwill impairment at the reporting unit level. Cintas has identified four reporting units for purposes of evaluating goodwill impairment: Uniform Rental and Facility Services, First Aid and Safety Services and two reporting units within All Other. Based on the results of the annual impairment tests, Cintas was not required to recognize an impairment of goodwill for the fiscal years ended May 31, 2023, 2022 or 2021. Cintas will continue to perform impairment tests as of March 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.
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. See Note 8 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.