Cintas(CTAS) - 2023 Q4 - Annual Report

Part I Business Overview Cintas provides a wide range of products and services to over one million businesses, primarily in the U.S., Canada, and Latin America, focusing on corporate identity uniforms, facility services, first aid and safety, and fire protection Total Revenue by Segment (Fiscal Years 2021-2023, in thousands) | Segment | 2023 Revenue | 2022 Revenue | 2021 Revenue | | :--- | :--- | :--- | :--- | | Uniform Rental and Facility Services | $6,897,130 | $6,226,980 | $5,689,632 | | First Aid and Safety Services | $951,496 | $832,458 | $784,291 | | All Other | $967,143 | $795,021 | $642,417 | | Total Revenue | $8,815,769 | $7,854,459 | $7,116,340 | - Cintas' two reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services, with the "All Other" category including Fire Protection Services and Uniform Direct Sale[59] - As of May 31, 2023, Cintas' operational footprint includes approximately 11,500 local delivery routes, 461 operational facilities, and 12 distribution centers[62] - The company employed approximately 44,500 people as of May 31, 2023, with a focus on attracting, retaining, and developing talent[66] Risk Factors The company identifies several significant risks that could adversely affect its business, categorized into business strategy, operations, financial, and legal and regulatory risks - Negative economic conditions such as unemployment, inflation, and recession could adversely affect demand for Cintas' products and services and increase operating costs[74] - The company operates in highly competitive industries, facing pressure on pricing and competition for acquisitions from national, regional, and local providers[75] - Extensive reliance on computer systems exposes the company to risks of disruption and cybersecurity attacks, which could impact customer service and result in financial losses[77][106] - Financial risks include the potential for outstanding indebtedness to limit cash flow for business needs and for fluctuations in fuel, energy costs, and foreign currency exchange rates to impact results[109][138][139] - The company is subject to complex federal and state regulations, including environmental laws, where compliance costs and potential liabilities from legal proceedings could adversely affect financial results[112][142][470] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[117] Properties As of the report date, Cintas occupies 473 facilities across 338 cities, of which 245 are leased, and owns or leases approximately 20,900 vehicles for its route-based services Cintas Facilities Summary | Type of Facility | of Facilities | | :--- | :--- | | Rental Processing Plants | 205 | | Rental Branches | 135 | | First Aid and Safety Facilities | 63 | | All Other Facilities | 53 | | Distribution Centers | 12 | | Manufacturing Facilities | 5 | | Total | 473 | - Cintas occupies 473 facilities, leasing 245 of them, and considers its facilities adequate for their intended use[147] Legal Proceedings The company is subject to various legal proceedings and claims arising from the ordinary course of business, which management believes will not have a material adverse effect - Material legal proceedings are discussed in Note 14, "Litigation and Other Contingencies," of the Notes to Consolidated Financial Statements[149] - Management does not expect that the aggregate liability from ordinary course legal actions will have a material adverse effect on the company's financial position, results, or cash flows[3] Mine Safety Disclosures This item is not applicable to the company - Not applicable[150] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Cintas' common stock trades on the NASDAQ under the symbol "CTAS," with the company declaring quarterly dividends and repurchasing shares under publicly announced programs Dividends Declared per Share | Fiscal Year | Dividend per Share | | :--- | :--- | | 2023 | $4.60 | | 2022 | $3.80 | Issuer Purchases of Equity Securities (Q4 FY2023) | Period | Total Shares Purchased | Average Price Paid per Share | Total Shares Purchased as Part of Publicly Announced Plan | | :--- | :--- | :--- | :--- | | March 1 - 31, 2023 | 23,794 | $458.03 | — | | April 1 - 30, 2023 | 12,400 | $457.50 | — | | May 1 - 31, 2023 | 24,380 | $466.63 | 6,207 | | Total | 60,574 | $461.38 | 6,207 | - As of May 31, 2023, there were approximately 1,300 shareholders of record, representing an estimated 400,000 beneficial owners[151] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2023, Cintas achieved total revenue of $8.8 billion, a 12.2% increase, with net income rising 9.1% to $1.35 billion, supported by strong operating cash flow and liquidity Fiscal 2023 vs. 2022 Performance | Metric | Fiscal 2023 | Fiscal 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $8.8B | $7.85B | +12.2% | | Net Income | $1.35B | $1.24B | +9.1% | | Diluted EPS | $12.99 | $11.65 | +11.5% | | Operating Cash Flow | $1.60B | $1.54B | +3.9% | - Organic revenue growth for fiscal 2023 was 12.2%, driven by increased sales volume, new business, and price increases[160][186] - The Uniform Rental and Facility Services segment revenue grew 10.8% organically, while the First Aid and Safety Services segment revenue grew 13.1% organically[161][195] - Net cash from operating activities increased by $60.2 million to $1.60 billion in FY2023, primarily due to higher net income and favorable changes in working capital[170] - The company repurchased approximately 2.7 million shares since the beginning of Q3 FY2022, contributing to the increase in diluted EPS[165] Quantitative and Qualitative Disclosures About Market Risk Cintas is exposed to market risks primarily from foreign currency fluctuations and changes in interest rates, with foreign operations representing less than 10% of consolidated revenue - Foreign denominated revenue and profit represent less than 10% of Cintas' consolidated figures, primarily related to the Canadian dollar[139][243] - A hypothetical 50 basis point (0.5%) change in short-term interest rates would change Cintas' income before income taxes by approximately $0.1 million[219] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements for fiscal years ended May 31, 2023, 2022, and 2021, including management's report on internal controls and the independent auditor's report Note 1. Significant Accounting Policies This note outlines the significant accounting policies used in preparing the consolidated financial statements, covering principles of consolidation, revenue recognition, and accounting for key assets and liabilities - Rental revenue is recognized as services are performed, while other revenue is recognized when performance obligations are satisfied, with this policy detailed further in Note 2[270] - Uniforms in service are amortized on a straight-line basis over their useful lives, which range from 18 to 30 months, while other rental items are amortized over 8 to 60 months[273] - Goodwill is tested for impairment annually on March 1 at the reporting unit level, with no impairment recognized in fiscal years 2021, 2022, or 2023[333] Note 2. Revenue Recognition This note disaggregates revenue by operating segment, detailing that approximately 95% of revenue is recognized over time from route servicing contracts, with the remainder recognized at a point in time Revenue by Segment (FY 2023, in thousands) | Segment | 2023 Revenue | % of Total | | :--- | :--- | :--- | | Uniform Rental and Facility Services | $6,897,130 | 78.2% | | First Aid and Safety Services | $951,496 | 10.8% | | Fire Protection Services | $627,747 | 7.1% | | Uniform Direct Sales | $339,396 | 3.9% | | Total Revenue | $8,815,769 | 100.0% | - As of May 31, 2023, the company had $344.1 million in capitalized contract costs (deferred commissions), with $94.8 million amortized as expense during the fiscal year[348] Note 6. Debt, Derivatives and Hedging Activities This note details the company's outstanding debt, derivatives, and hedging activities, including approximately $2.5 billion in long-term debt and a $2.0 billion revolving credit facility Outstanding Debt as of May 31, 2023 (in thousands) | Debt Instrument | Maturity | Amount | | :--- | :--- | :--- | | Senior notes | 2025 | $450,630 | | Senior notes | 2027 | $1,000,000 | | Senior notes | 2032 | $800,000 | | Senior notes | 2037 | $250,000 | | Less: Debt issuance costs | - | ($14,225) | | Total Debt | | $2,486,405 | - The company has a $2.0 billion revolving credit facility maturing in March 2027, with no borrowings outstanding as of May 31, 2023[384] - Cintas was in compliance with all debt covenants for all periods presented[385] Note 8. Income Taxes This note provides a detailed analysis of the company's income tax expense, deferred tax assets and liabilities, and uncertain tax positions, with an effective tax rate of 20.4% for fiscal 2023 Income Tax Expense Reconciliation (in thousands) | Description | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Income taxes at U.S. federal statutory rate | $355,561 | $314,741 | $270,427 | | Permanent differences | ($59,502) | ($85,413) | ($101,870) | | State and local income taxes, net | $46,245 | $33,547 | $27,304 | | Other | $2,834 | $136 | ($19,080) | | Total Income Tax Expense | $345,138 | $263,011 | $176,781 | - The effective tax rate was 20.4% for fiscal 2023, compared to 17.5% for fiscal 2022[191] - As of May 31, 2023, total unrecognized tax benefits were $29.3 million, which, if recognized, would favorably impact the effective tax rate[420] Note 9. Employee Benefit Plans This note describes the company's various employee benefit plans, including a frozen defined benefit pension plan and a 401(k) and ESOP plan, with $99.1 million in contributions made in fiscal 2023 Pension Plan Funded Status (in thousands) | Status | May 31, 2023 | May 31, 2022 | | :--- | :--- | :--- | | Projected benefit obligation | $77,739 | $84,546 | | Fair value of plan assets | $60,038 | $66,723 | | Funded status (Net Liability) | ($17,701) | ($17,823) | - The company's contribution to its Partners' Plan (401(k) and ESOP) was $99.1 million in fiscal 2023, up from $85.0 million in fiscal 2022[402] Note 11. Stock-Based Compensation This note details the company's stock-based compensation plans, primarily the 2016 Equity and Incentive Compensation Plan, with total compensation cost of $103.6 million in fiscal 2023 - Total stock-based compensation cost recognized was $103.6 million in FY2023, $109.3 million in FY2022, and $112.0 million in FY2021[432] - As of May 31, 2023, there were 4.4 million stock options outstanding with a weighted average exercise price of $278.01[409] - There were 686,630 unvested restricted stock awards outstanding as of May 31, 2023, with a weighted average grant price of $392.02[477] - The remaining unrecognized compensation cost related to unvested awards at May 31, 2023 was $251.8 million, to be recognized over a weighted-average period of 2.20 years[411] Note 13. Operating Segment Information This note provides detailed financial information for Cintas' reportable operating segments, showing Uniform Rental and Facility Services as the largest contributor with $6.9 billion in revenue and $1.48 billion in income before taxes for fiscal 2023 Segment Performance - Fiscal Year 2023 (in thousands) | Segment | Revenue | Income Before Income Taxes | Total Assets | | :--- | :--- | :--- | :--- | | Uniform Rental and Facility Services | $6,897,130 | $1,478,757 | $7,176,257 | | First Aid and Safety Services | $951,496 | $180,690 | $703,226 | | All Other | $967,143 | $143,217 | $542,724 | | Corporate | — | ($109,516) | $124,149 | | Total | $8,815,769 | $1,693,148 | $8,546,356 | Note 14 - Litigation and Other Contingencies This note describes material litigation beyond the ordinary course of business, including class action lawsuits, for which liability is currently not probable or estimable - The company is a defendant in a class action lawsuit (City of Laurel, Mississippi v. Cintas) alleging breach of contract, for which liability is not probable nor estimable[414] - A separate class action alleges violations of ERISA regarding the management of the employee retirement plan; the defendants deny liability and a legal contingency is not probable or estimable[456] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[415] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of May 31, 2023, with no material changes to internal control over financial reporting - Based on an evaluation as of May 31, 2023, Cintas' management concluded that the company's disclosure controls and procedures were effective[30] - There were no changes in internal control over financial reporting during the quarter ended May 31, 2023, that have materially affected, or are reasonably likely to materially affect, these controls[458] Other Information The company reports no other information for this item - None[491] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[6] Part III Directors, Executive Officers and Corporate Governance The information required for this item, concerning directors, executive officers, and corporate governance, is incorporated by reference from Cintas' definitive proxy statement - Required information is incorporated by reference from the company's Proxy Statement[7] Executive Compensation The information required for this item, concerning executive compensation, is incorporated by reference from Cintas' definitive proxy statement - Required information is incorporated by reference from the company's Proxy Statement[460] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the Proxy Statement Equity Compensation Plan Information as of May 31, 2023 | Plan Category | Number of shares to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of shares remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 4,427,752 | $278.01 | 5,412,885 | | Equity compensation plans not approved by shareholders | — | — | — | | Total | 4,427,752 | $278.01 | 5,412,885 | Certain Relationships and Related Transactions, and Director Independence The information required for this item, concerning related party transactions and director independence, is incorporated by reference from Cintas' definitive proxy statement - Required information is incorporated by reference from the company's Proxy Statement[488] Principal Accountant Fees and Services The information required for this item, concerning principal accountant fees and services, is incorporated by reference from Cintas' definitive proxy statement - Required information is incorporated by reference from the company's Proxy Statement[9] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including corporate governance documents and material contracts - The report includes financial statements for the three years ended May 31, 2023, and Schedule II: Valuation and Qualifying Accounts and Reserves[463] - Exhibits filed with the report include Restated Articles of Incorporation, various debt indentures, credit agreements, and numerous management compensatory contracts and plans[11][492] Schedule II: Allowance for Doubtful Accounts (in thousands) | Fiscal Year Ended | Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | | :--- | :--- | :--- | :--- | :--- | | May 31, 2021 | $35,433 | $27,517 | $50,853 | $12,097 | | May 31, 2022 | $12,097 | $30,278 | $29,457 | $12,918 | | May 31, 2023 | $12,918 | $40,817 | $38,809 | $14,926 | Form 10-K Summary The company reports no Form 10-K summary - None[451] Signatures The report is duly signed on July 27, 2023, by the company's principal executive and financial officers, as well as other directors, in accordance with the requirements of the Securities Exchange Act of 1934 - The Form 10-K report was signed on July 27, 2023[452] - Signatories include Todd M. Schneider (President, CEO, and Director) and J. Michael Hansen (EVP and CFO), among other directors[14]