filings.toolsItem 8. Financial Statements and Supplementary Data
155K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Audited Consolidated Financial Statements for the Fiscal Years Ended May 31, 2023, 2022 and 2021
27
Management's Report on
Internal Control over Financial Reporting
To the Shareholders of Cintas Corporation:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.
With the supervision of our President and Chief Executive Officer and our Chief Financial Officer, management assessed our internal control over financial reporting as of May 31, 2023. Management based its assessment on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment. This assessment is supported by testing and monitoring performed by our internal audit function.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of May 31, 2023, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.
We reviewed the results of management's assessment with the Audit Committee of our Board of Directors. Additionally, our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of Cintas Corporation's internal control over financial reporting. Ernst & Young LLP has issued an attestation report, which is included in this Annual Report on Form 10-K.
| Todd M. Schneider President and Chief Executive Officer | ||
| J. Michael Hansen Executive Vice President and Chief Financial Officer |
28
Report of Independent
Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cintas Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cintas Corporation (the Company) as of May 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended May 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively, referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of May 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated July 27, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements, and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
29
| Valuation of Insurance Reserves | |||||
| Description of the Matter | At May 31, 2023, the Company's insurance reserve was $182.0 million. As described in Note 1 to the Company’s consolidated financial statements, the Company’s insurance reserve represents the estimated ultimate cost of all asserted and unasserted (incurred but not reported) claims primarily related to workers' compensation, auto liability and other general liability exposure. The unasserted (incurred but not reported) insurance reserve is estimated through actuarial procedures using industry assumptions, adjusted for Company specific expectations based on claims history. Auditing the Company's estimate of the unasserted (incurred but not reported) insurance reserve is judgmental and complex due to the significant estimation uncertainty of the potential value of unasserted claims, which are developed with the assistance of a third-party actuarial specialist. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company’s unasserted (incurred but not reported) insurance reserve. This includes internal controls over the claims activity and actuarial methods used to establish the unasserted (incurred but not reported) insurance reserve. Specifically, we tested internal controls related to management’s review of data provided to the actuary, validation of claim activity and review of actuarial methods. To test the unasserted (incurred but not reported) insurance reserve, our audit procedures included, among others, assessing the methodologies used to estimate the incurred but not reported insurance reserve, testing the completeness and accuracy of the underlying claims data, vouching payments made to third parties, and testing the mathematical accuracy of the actuarially determined unasserted (incurred but not reported) insurance reserve. Furthermore, we involved our actuarial specialists to assist in evaluating the methodologies used by management to determine the unasserted (incurred but not reported) insurance reserve and comparing the Company’s recorded unasserted (incurred but not reported) insurance reserve to a range developed based on independently selected actuarial methodologies. |
| /s/ Ernst & Young LLP |
We have served as the Company's auditor since 1968
Cincinnati, Ohio
July 27, 2023
30
Report of Independent
Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cintas Corporation
Opinion on Internal Control over Financial Reporting
We have audited Cintas Corporation’s internal control over financial reporting as of May 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Cintas Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of May 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of May 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended May 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated July 27, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management's Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ Ernst & Young LLP |
Cincinnati, Ohio
July 27, 2023
31
| Consolidated Statements of Income | Fiscal Years Ended May 31, | ||||||||||||||||
| (In thousands except per share data) | 2023 | 2022 | 2021 | ||||||||||||||
| Revenue: | |||||||||||||||||
| Uniform rental and facility services | $ | 6,897,130 | $ | 6,226,980 | $ | 5,689,632 | |||||||||||
| Other | 1,918,639 | 1,627,479 | 1,426,708 | ||||||||||||||
| Total revenue | 8,815,769 | 7,854,459 | 7,116,340 | ||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of uniform rental and facility services | 3,632,175 | 3,316,433 | 2,983,514 | ||||||||||||||
| Cost of other | 1,010,226 | 905,780 | 818,175 | ||||||||||||||
| Selling and administrative expenses | 2,370,704 | 2,044,876 | 1,929,159 | ||||||||||||||
| Operating income | 1,802,664 | 1,587,370 | 1,385,492 | ||||||||||||||
| Interest income | (1,716) | (242) | (467) | ||||||||||||||
| Interest expense | 111,232 | 88,844 | 98,210 | ||||||||||||||
| Income before income taxes | 1,693,148 | 1,498,768 | 1,287,749 | ||||||||||||||
| Income taxes | 345,138 | 263,011 | 176,781 | ||||||||||||||
| Net income | $ | 1,348,010 | $ | 1,235,757 | $ | 1,110,968 | |||||||||||
| Basic earnings per share | $ | 13.21 | $ | 11.92 | $ | 10.52 | |||||||||||
| Diluted earnings per share | $ | 12.99 | $ | 11.65 | $ | 10.24 | |||||||||||
| Dividends declared and paid per share | $ | 4.60 | $ | 3.80 | $ | 5.01 |
See accompanying notes.
32
| Consolidated Statements of Comprehensive Income | Fiscal Years Ended May 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Net income | $ | 1,348,010 | $ | 1,235,757 | $ | 1,110,968 | |||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||
| Foreign currency translation adjustments | (34,007) | (24,833) | 68,182 | ||||||||||||||
| Change in fair value of interest rate lock agreements, net of tax expense of $3,461, $34,932 and $36,172, respectively | 10,111 | 102,057 | 106,843 | ||||||||||||||
| Amortization of interest rate lock agreements, net of tax benefit of $(2,049), $(672) and $(463), respectively | (6,085) | (2,061) | (1,433) | ||||||||||||||
| Other, net of tax (benefit) expense of $(54), $638 and $3,578, respectively | (158) | 1,866 | 10,676 | ||||||||||||||
| Other comprehensive (loss) income, net of tax expense of $5,456, $36,242 and $40,213, respectively | (30,139) | 77,029 | 184,268 | ||||||||||||||
| Comprehensive income | $ | 1,317,871 | $ | 1,312,786 | $ | 1,295,236 |
See accompanying notes.
33
| Consolidated Balance Sheets | As of May 31, | ||||||||||
| (In thousands except share data) | 2023 | 2022 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 124,149 | $ | 90,471 | |||||||
| Accounts receivable, principally trade, less allowance of $14,926 and $12,918, respectively | 1,152,993 | 1,006,220 | |||||||||
| Inventories, net | 506,604 | 472,150 | |||||||||
| Uniforms and other rental items in service | 1,011,918 | 916,706 | |||||||||
| Income taxes, current | — | 21,708 | |||||||||
| Prepaid expenses and other current assets | 142,795 | 124,728 | |||||||||
| Total current assets | 2,938,459 | 2,631,983 | |||||||||
| Property and equipment, net | 1,396,476 | 1,323,673 | |||||||||
| Investments | 247,191 | 242,873 | |||||||||
| Goodwill | 3,056,201 | 3,042,976 | |||||||||
| Service contracts, net | 346,574 | 391,638 | |||||||||
| Operating lease right-of-use assets, net | 178,464 | 170,003 | |||||||||
| Other assets, net | 382,991 | 344,110 | |||||||||
| $ | 8,546,356 | $ | 8,147,256 | ||||||||
| Liabilities and Shareholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 302,292 | $ | 251,504 | |||||||
| Accrued compensation and related liabilities | 239,086 | 236,992 | |||||||||
| Accrued liabilities | 632,504 | 588,948 | |||||||||
| Income taxes, current | 12,470 | — | |||||||||
| Operating lease liabilities, current | 43,710 | 43,872 | |||||||||
| Debt due within one year | — | 311,574 | |||||||||
| Total current liabilities | 1,230,062 | 1,432,890 | |||||||||
| Long-term liabilities: | |||||||||||
| Debt due after one year | 2,486,405 | 2,483,932 | |||||||||
| Deferred income taxes | 498,356 | 473,777 | |||||||||
| Operating lease liabilities | 138,278 | 129,064 | |||||||||
| Accrued liabilities | 329,269 | 319,397 | |||||||||
| Total long-term liabilities | 3,452,308 | 3,406,170 | |||||||||
| Shareholders' equity: | |||||||||||
| Preferred stock, no par value: 100,000 shares authorized, none outstanding | — | — | |||||||||
| Common stock, no par value, and paid-in capital: 425,000,000 shares authorized 2023: 192,198,938 shares issued and 101,732,148 shares outstanding 2022: 190,837,921 shares issued and 101,711,215 shares outstanding | 2,031,542 | 1,771,917 | |||||||||
| Retained earnings | 9,597,315 | 8,719,163 | |||||||||
| Treasury stock: 2023: 90,466,790 shares 2022: 89,126,706 shares | (7,842,649) | (7,290,801) | |||||||||
| Accumulated other comprehensive income | 77,778 | 107,917 | |||||||||
| Total shareholders' equity | 3,863,986 | 3,308,196 | |||||||||
| $ | 8,546,356 | $ | 8,147,256 |
See accompanying notes.
34
Consolidated
Statements of Shareholders' Equity
| Common Stock and Paid-In Capital | Retained Earnings | Other Accumulated Comprehensive (Loss) Income | Treasury Stock | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 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 | — | — | 1,110,968 | — | — | — | 1,110,968 | ||||||||||||||||||||||||||||||||||||||||
| Comprehensive income, net of tax | — | — | — | 184,268 | — | — | 184,268 | ||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | (530,462) | — | — | — | (530,462) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 112,035 | — | — | — | — | 112,035 | ||||||||||||||||||||||||||||||||||||||||
| Vesting of stock-based compensation awards | 610 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 1,668 | 129,957 | — | — | — | — | 129,957 | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | (1,632) | (554,121) | (554,121) | ||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2021 | 189,071 | 1,516,202 | 7,877,015 | 30,888 | (85,010) | (5,736,258) | 3,687,847 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 1,235,757 | — | — | — | 1,235,757 | ||||||||||||||||||||||||||||||||||||||||
| Comprehensive income, net of tax | — | — | — | 77,029 | — | — | 77,029 | ||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | (393,609) | — | — | — | (393,609) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 109,308 | — | — | — | — | 109,308 | ||||||||||||||||||||||||||||||||||||||||
| Vesting of stock-based compensation awards | 528 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 1,239 | 146,407 | — | — | (71) | (28,670) | 117,737 | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | (4,046) | (1,525,873) | (1,525,873) | ||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2022 | 190,838 | 1,771,917 | 8,719,163 | 107,917 | (89,127) | (7,290,801) | 3,308,196 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 1,348,010 | — | — | — | 1,348,010 | ||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss, net of tax | — | — | — | (30,139) | — | — | (30,139) | ||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | (469,858) | — | — | — | (469,858) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 103,621 | — | — | — | — | 103,621 | ||||||||||||||||||||||||||||||||||||||||
| Vesting of stock-based compensation awards | 287 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 1,074 | 156,004 | — | — | (360) | (152,983) | 3,021 | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | (980) | (398,865) | (398,865) | ||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2023 | 192,199 | $ | 2,031,542 | $ | 9,597,315 | $ | 77,778 | (90,467) | $ | (7,842,649) | $ | 3,863,986 |
See accompanying notes.
35
| Consolidated Statements of Cash Flows | Fiscal Years Ended May 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | 1,348,010 | $ | 1,235,757 | $ | 1,110,968 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation | 257,041 | 249,376 | 243,836 | ||||||||||||||
| Amortization of intangible assets and capitalized contract costs | 152,121 | 150,325 | 144,115 | ||||||||||||||
| Stock-based compensation | 103,621 | 109,308 | 112,035 | ||||||||||||||
| Gain on equity method investment transaction | — | (30,151) | — | ||||||||||||||
| Net gain on sale of operating assets | — | (12,129) | (22,030) | ||||||||||||||
| Long-lived asset impairment | — | — | 5,114 | ||||||||||||||
| Deferred income taxes | 23,233 | 52,110 | (42,242) | ||||||||||||||
| Change in current assets and liabilities, net of acquisitions of businesses: | |||||||||||||||||
| Accounts receivable, net | (151,771) | (100,392) | (32,576) | ||||||||||||||
| Inventories, net | (35,658) | 16,194 | (75,501) | ||||||||||||||
| Uniforms and other rental items in service | (98,252) | (111,332) | (35,659) | ||||||||||||||
| Prepaid expenses and other current assets and capitalized contract costs | (132,173) | (28,581) | (102,600) | ||||||||||||||
| Accounts payable | 53,369 | 22,697 | (2,604) | ||||||||||||||
| Accrued compensation and related liabilities | 2,711 | (3,625) | 113,769 | ||||||||||||||
| Accrued liabilities and other | 41,314 | (9,241) | (6,735) | ||||||||||||||
| Income taxes, current | 34,248 | (2,691) | (49,150) | ||||||||||||||
| Net cash provided by operating activities | 1,597,814 | 1,537,625 | 1,360,740 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | (331,109) | (240,672) | (143,470) | ||||||||||||||
| Purchases of investments | (4,566) | (6,076) | (4,299) | ||||||||||||||
| Proceeds from sale of operating assets, net of cash disposed | — | 15,347 | 31,705 | ||||||||||||||
| Acquisitions of businesses, net of cash acquired | (46,357) | (164,228) | (10,038) | ||||||||||||||
| Other, net | (6,640) | (7,006) | (11,113) | ||||||||||||||
| Net cash used in investing activities | (388,672) | (402,635) | (137,215) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| (Payments) issuance of commercial paper, net | (261,200) | 261,200 | — | ||||||||||||||
| Proceeds from issuance of debt | — | 1,190,506 | — | ||||||||||||||
| Repayment of debt | (50,000) | (1,200,000) | — | ||||||||||||||
| Proceeds from exercise of stock-based compensation awards | 3,021 | 117,737 | 129,957 | ||||||||||||||
| Dividends paid | (449,917) | (375,119) | (451,327) | ||||||||||||||
| Repurchase of common stock | (398,865) | (1,525,873) | (554,121) | ||||||||||||||
| Other, net | (15,875) | (6,394) | (4,377) | ||||||||||||||
| Net cash used in financing activities | (1,172,836) | (1,537,943) | (879,868) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2,628) | (216) | 4,581 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 33,678 | (403,169) | 348,238 | ||||||||||||||
| Cash and cash equivalents at beginning of year | 90,471 | 493,640 | 145,402 | ||||||||||||||
| Cash and cash equivalents at end of year | $ | 124,149 | $ | 90,471 | $ | 493,640 |
See accompanying notes.
36
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Business description. Cintas Corporation (collectively, with its majority-owned subsidiaries and any entities over which it has control, Cintas, Company, we, us or our) helps more than one million businesses of all types and sizes, primarily in the United States (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®.
Cintas’ reportable operating segments are the Uniform Rental and Facility Services operating segment and the First Aid and Safety Services operating segment. 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, are included in All Other. Cintas evaluates operating segment performance based on revenue and income before income taxes. Revenue and income before income taxes the reportable operating segments for the years ended May 31, 2023, 2022 and 2021 are presented in Note 13 entitled Operating Segment Information. 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.
Principles of consolidation. The consolidated financial statements include the accounts of Cintas controlled majority-owned subsidiaries and any entities over which Cintas has control. Intercompany balances and transactions have been eliminated as appropriate.
Use of estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company’s results are affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of raw materials, can have a significant effect on operations. These factors and other events may cause actual results to differ from management's estimates.
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 performance obligation 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 segment and All Other, is recognized when either services are performed or the performance obligation under the terms of a contract with a customer are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for the performance of the service or transfer of the inventory. See Note 2 entitled Revenue Recognition.
Cost of uniform rental and facility services. 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 Uniform Rental and Facility Services reportable operating segment inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution are included in the cost of uniform rental and facility services.
Cost of other. Cost of other consists primarily of cost of goods sold (predominantly first aid and safety products, 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 includes inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, service costs and other costs of distribution.
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Selling and administrative expenses. Selling and administrative expenses consist primarily of sales labor and commissions, management and administrative labor, payroll taxes, medical expense, insurance expense, legal and professional costs and amortization of finite-lived intangible assets and capitalized contract costs.
Cash and cash equivalents. Cintas considers all highly liquid domestic investments with a maturity of three months or less, at date of purchase, to be cash equivalents. At May 31, 2023 and 2022, cash and cash equivalents includes $32.7 million and $31.8 million, respectively, of restricted cash used as collateral associated with our insurance reserve.
Accounts receivable. Accounts receivable is comprised of amounts owed through product shipments and services provided and is presented net of an allowance for credit losses. The allowance includes 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. When an account is considered uncollectible, it is written off against the allowance for credit losses.
Inventories, net. Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following amounts at May 31:
| (In thousands) | 2023 | 2022 | |||||||||
| Raw materials | $ | 27,878 | $ | 19,071 | |||||||
| Work in process | 56,384 | 34,280 | |||||||||
| Finished goods | 422,342 | 418,799 | |||||||||
| $ | 506,604 | $ | 472,150 |
Inventories are recorded net of reserves for obsolete inventory (excess and slow-moving) of $80.1 million and $100.3 million at May 31, 2023 and 2022, respectively. The inventory obsolescence reserve is determined by specific identification, as well as an estimate based on Cintas' historical rates of obsolescence. Obsolete inventory reserves are recorded in selling and administrative expenses on the consolidated statements of income. The judgment applied to record the obsolete inventory reserve as of May 31, 2023 and 2022, beyond our historical policy was deemed to be reasonable and supportable based on the data available as of the consolidated balance sheet dates. 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.
Uniforms and other rental items in service. These items 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 facility services that are presented in the consolidated financial statements.
Investments. Cintas' investments primarily consist of the cash surrender value of insurance policies. Investments are generally evaluated for impairment on an annual basis or when indicators of impairment exist. For the fiscal years ended May 31, 2023, 2022 and 2021, no impairment losses were recorded.
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Property and equipment. Property and equipment is stated at cost, less accumulated depreciation or at fair value upon acquisition. Depreciation is calculated using the straight-line method primarily over the following estimated useful lives of the assets based on industry and Cintas specific experience:
| Years | |||||
| Buildings | 30 to 40 | ||||
| Building improvements | 5 to 20 | ||||
| Equipment | 3 to 10 | ||||
| Leasehold improvements | 2 to 15 |
When events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the estimated undiscounted future cash flows are compared to the carrying amount of the assets. If the estimated undiscounted future cash flows are less than the carrying amount of the assets, an impairment loss is recorded based on the excess of the carrying amount of the assets over their respective fair values. Fair value is generally determined by discounted cash flows, prices of similar assets or third-party real estate valuations, as appropriate. Based on its regular evaluation and the evolving impact of the COVID-19 pandemic, Cintas recognized a long-lived asset impairment loss of $5.1 million in the Uniform Direct Sale operating segment during the year ended May 31, 2021. The long-lived asset impairment in fiscal 2021 was based on the excess of the carrying amount of asset over their respective fair values and were recorded within selling and administrative expenses on the consolidated statements of income. The undiscounted cash flows were estimated, using Level 2 inputs based on both the cost and market approaches, at the lowest discernible level of cash flows, which is at the location level. Cintas did not identify any indicators of impairment for the fiscal years ended May 31, 2023 and 2022.
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.
Service contracts and other assets. Service contracts and other assets, which consist primarily of capitalized contract costs and noncompete and consulting agreements obtained through acquisitions of businesses, are generally amortized by use of the straight-line method, or an accelerated method that represents the estimated economic benefit, over the estimated lives of the agreements, which are generally 5 to 15 years. Certain noncompete agreements, as well as all service contracts, require that a valuation be determined using a discounted cash flow model. The assumptions and judgments used in these models involve estimates of cash flows and discount rates, among other factors. Because of the assumptions used to value these intangible assets, actual results over time could vary from original estimates. Impairment of service contracts and other assets is accomplished through specific identification. No impairment has been recognized by Cintas for the fiscal years ended May 31, 2023, 2022 and 2021.
Business acquisitions. The Company allocates the purchase price of its acquisitions to the assets acquired and liabilities assumed based upon their respective fair values at the acquisition date. The excess of the acquisition price over the estimated fair value of the net assets acquired is recorded as goodwill. Goodwill is adjusted for any changes to acquisition date fair value amounts made within the measurement period. Acquisition-related transaction costs are recognized separately from the business combinations and expensed as incurred.
On December 10, 2021, Cintas acquired the remaining interest of an equity method investment. The acquisition operates as a component of Cintas' supply chain within the Uniform Rental and Facility Services reportable operating segment. The cash consideration transferred to acquire the remaining interest of the equity method investment was $48.0 million, net of cash acquired of $1.7 million. Under applicable accounting guidance, the Company was required to record its historical equity method investment at fair value ($43.5 million), resulting in a gain of $30.2 million, which is recorded as a reduction in selling and administrative expenses, within the Uniform Rental and Facility Services reportable operating segment, in the fiscal year ended May 31, 2022. The fair value of the historical equity method investment was determined using a combination of a market and income approach
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(discounted cash flow analysis). The key assumptions and estimates utilized in these approaches included market data and market multiples, discount rates, as well as future levels of revenue growth and operating margins. The Company believes these assumptions and estimates are reasonable and based on the best information available at the valuation date.
Debt issuance costs. Debt issuance costs, if any, for the revolving credit facility are included in other assets, net and all other debt issuance costs reduce the carrying amount of debt.
Accrued liabilities. Current accrued liabilities are recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated. Current accrued liabilities consist of the following at May 31:
| (In thousands) | 2023 | 2022 | |||||||||
| Insurance reserve | 182,046 | $ | 163,958 | ||||||||
| Employee benefit related liabilities | 167,095 | 146,237 | |||||||||
| Dividends | 117,565 | 97,525 | |||||||||
| Accrued interest | 15,151 | 15,448 | |||||||||
| Other | 150,647 | 165,780 | |||||||||
| $ | 632,504 | $ | 588,948 |
Long-term accrued liabilities consist primarily of retirement obligations, which are described in more detail in Note 9 entitled Employee Benefit Plans, reserves associated with unrecognized tax benefits, which are described in more detail in Note 8 entitled Income Taxes and environmental obligations, which are further described below.
Insurance reserve. The insurance reserve represents the estimated ultimate cost of all asserted and unasserted claims incurred, primarily related to workers' compensation, auto liability and other general liability exposure through the consolidated balance sheet dates. Our incurred but not reported reserve is 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.
Environmental obligations. Environmental obligations, including obligations obtained through past business acquisitions, are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. Cintas’ environmental obligations are estimated based on an evaluation of various factors, including currently available facts, existing technology, presently enacted laws and regulations, and remediation experience. Where the available information is sufficient to estimate the amount of the obligation, that estimate has been recorded. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. Management actively monitors all locations for compliance and changes in facts and circumstances. No one location or site is deemed to be material or in violation of the applicable laws and regulations, even though costs are being incurred. Costs estimated for environmental obligations are not discounted to their present value.
Pension plans. The Company assumed G&K's noncontributory, defined benefit pension plan (the Pension Plan) covering substantially all employees who were employed as of July 1, 2005, except certain employees who are covered by union-administered plans. Benefits are based on the number of years of service and each employee's compensation near retirement. G&K froze the Pension Plan effective December 31, 2006. Future growth in benefits will not occur after this date. The Company's funding policy provides for contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at May 31, the measurement date. The benefit obligation is 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 fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants. These valuations reflect the terms of the Pension Plan and use participant-specific information such as compensation, age and years of service, as well as certain assumptions that require significant judgment, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates
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and mortality rates. We recognize, as of a measurement date, any unrecognized actuarial net gains or losses that exceed ten percent of the larger of the projected benefit obligations or the plan assets, defined as the "corridor." Amounts outside the corridor are amortized over the plan participants' life expectancy. We determine the expected return on assets using the fair value of plan assets. See Note 9 entitled Employee Benefit Plans.
Stock-based compensation. Compensation expense is recognized for all share-based payments to employees, including stock options and restricted stock awards, in the consolidated statements of income based on the fair value of the awards that are granted. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model. Generally, measured compensation cost, net of actual forfeitures, is recognized on a straight-line basis over the vesting period of the related share-based compensation award. See Note 11 entitled Stock-Based Compensation.
Derivatives and hedging activities. Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Derivatives are recorded at fair value on the consolidated balance sheet, and gains and losses are recorded as adjustments to income or other comprehensive income, as appropriate. For derivative financial instruments that are designated as a hedge, unrealized gains and losses related to the effective portion are either recognized in income immediately to offset the realized gain or loss on the hedged item, or are deferred and reported as a component of other comprehensive income (loss) in shareholders' equity and subsequently recognized in net income when the hedged item affects net income.
Income taxes. The provision for income taxes includes taxes paid, currently payable or receivable and those deferred. 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. Cintas accounts for Global Intangible Low-Taxed Income (GILTI) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in future periods. See Note 8 entitled Income Taxes for the types of items that give rise to significant deferred income tax assets and liabilities. Deferred income taxes are classified as assets or liabilities based on the classification of the related asset or liability for financial reporting purposes. Cintas regularly reviews deferred tax assets for recoverability based upon projected future taxable income and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, as adjusted for valuation allowances, will be realized.
Accounting for uncertain tax positions requires the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Companies may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Cintas is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, Cintas records reserves as deemed appropriate. Based on Cintas' evaluation of current tax positions, Cintas believes its tax related accruals are appropriate.
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. U.S. GAAP requires that a liability for contingencies be recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated. 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 for a detailed discussion of such additional litigation.
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Fair value measurements. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. It also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| Level 1 — | Quoted prices in active markets for identical assets or liabilities. | ||||
| Level 2 — | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. | ||||
| Level 3 — | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Cintas' assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between levels for the years ended May 31, 2023 or 2022. The carrying value of accounts receivable and accounts payable, and other current assets and liabilities, approximate fair value because of the short-term maturity of those instruments.
In order to meet the requirements of ASC 820, Cintas utilizes two basic valuation approaches to determine the fair value of its assets and liabilities required to be recorded on a recurring basis at fair value. The first approach is the cost approach. The cost approach is generally the value a market participant would expect to replace the respective asset or liability. The second approach is the market approach. The market approach looks at what a market participant would consider valuing an exact or similar asset or liability to that of Cintas, including those traded on exchanges.
Cintas' non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis primarily relate to assets revalued in an impairment analysis and to assets and liabilities acquired in a business acquisition unless otherwise noted in Note 3 entitled Fair Value Disclosures. Cintas is required to provide additional disclosures about fair value measurements as part of the consolidated financial statements for each major category of assets and liabilities measured at fair value on a non-recurring basis (including business acquisitions). In general, non-recurring fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows and company specific discount rates.
New accounting pronouncements. 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.
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Note 2. Revenue Recognition
The following table presents Cintas' total revenue disaggregated by operating segment for the fiscal years ended May 31:
| (In thousands) | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Uniform Rental and Facility Services | $ | 6,897,130 | 78.2 | % | $ | 6,226,980 | 79.3 | % | $ | 5,689,632 | 80.0 | % | ||||||||||||||||||||
| First Aid and Safety Services | 951,496 | 10.8 | % | 832,458 | 10.6 | % | 784,291 | 11.0 | % | |||||||||||||||||||||||
| Fire Protection Services | 627,747 | 7.1 | % | 527,517 | 6.7 | % | 446,441 | 6.3 | % | |||||||||||||||||||||||
| Uniform Direct Sales | 339,396 | 3.9 | % | 267,504 | 3.4 | % | 195,976 | 2.7 | % | |||||||||||||||||||||||
| Total revenue | $ | 8,815,769 | 100.0 | % | $ | 7,854,459 | 100.0 | % | $ | 7,116,340 | 100.0 | % |
The Fire Protection Services and Uniform Direct Sales operating segments are included within All Other as disclosed in Note 13 entitled Operating Segment Information.
Revenue Recognition Policy
Approximately 95% of the Company's revenue is derived from fees for route servicing of Uniform Rental and Facility Services, First Aid and Safety Services and Fire Protection Services customers, performed by a Cintas employee-partner, at the customer's location of business. Revenue from our route servicing customer contracts represent a single-performance obligation. The Company recognizes revenue 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 and is not material in any period presented. 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 fiscal years ended May 31, 2023, 2022 or 2021.
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 for credit losses 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 allowance for credit losses 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 from Contracts with Customers (ASC 606), 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 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
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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 balance sheets. As of May 31, 2023, the current and noncurrent assets related to deferred commissions totaled $92.5 million and $251.6 million, respectively. As of May 31, 2022, the current and noncurrent assets related to deferred commissions totaled $83.7 million and $232.2 million, respectively. We recorded amortization expense related to deferred commissions of $94.8 million, $87.4 million and $83.1 million during the fiscal years ended May 31, 2023, 2022 and 2021, respectively. These expenses are classified in selling and administrative expenses on the consolidated statements of income.
Note 3. Fair Value Disclosures
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 balance sheet dates. These financial instruments measured at fair value on a recurring basis are summarized below:
| As of May 31, 2023 | |||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||||||||
| Cash and cash equivalents | $ | 124,149 | $ | — | $ | — | $ | 124,149 | |||||||||||||||
| Other assets, net: | |||||||||||||||||||||||
| Interest rate lock agreements | — | 70,449 | — | 70,449 | |||||||||||||||||||
| Total assets at fair value | $ | 124,149 | $ | 70,449 | $ | — | $ | 194,598 | |||||||||||||||
| As of May 31, 2022 | |||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||||||||
| Cash and cash equivalents | $ | 90,471 | $ | — | $ | — | $ | 90,471 | |||||||||||||||
| Other assets, net: | |||||||||||||||||||||||
| Interest rate lock agreements | — | 56,877 | — | 56,877 | |||||||||||||||||||
| Total assets at fair value | $ | 90,471 | $ | 56,877 | $ | — | $ | 147,348 | |||||||||||||||
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 asset, net, 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 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.
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Note 4. Property and Equipment
Cintas' property and equipment is summarized as follows at May 31:
| (In thousands) | 2023 | 2022 | |||||||||
| Land | $ | 190,707 | $ | 191,878 | |||||||
| Buildings and improvements | 714,376 | 699,430 | |||||||||
| Equipment | 2,699,728 | 2,548,796 | |||||||||
| Leasehold improvements | 44,897 | 43,426 | |||||||||
| Construction in progress | 109,037 | 52,062 | |||||||||
| 3,758,745 | 3,535,592 | ||||||||||
| Accumulated depreciation | (2,362,269) | (2,211,919) | |||||||||
| Property and equipment, net | $ | 1,396,476 | $ | 1,323,673 |
Cintas capitalizes certain expenditures for software that are purchased or internally developed for use in business. Included in equipment at May 31, 2023 and 2022, were $308.5 million and $293.9 million, respectively, of internal use software. Amortization of internal use software begins when the software is ready for service and continues on the straight-line method over the estimated useful life, generally 10 years. Accumulated amortization related to internal use software was $202.0 million and $177.6 million at May 31, 2023 and 2022, respectively. We recorded amortization expense related to internal use software of $24.5 million, $23.5 million and $22.3 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. These expenses are classified in selling and administrative expenses on the consolidated statements of income.
Note 5. Goodwill, Service Contracts and Other Assets
Changes in the carrying amount of goodwill and service contracts by reportable operating segment and All Other, are presented in the following tables:
| Goodwill (In thousands) | Uniform Rental and Facility Services | First Aid and Safety Services | All Other | Total | |||||||||||||||||||
| Balance at June 1, 2021 | $ | 2,547,510 | $ | 248,571 | $ | 116,988 | $ | 2,913,069 | |||||||||||||||
| Goodwill acquired | 99,826 | 38,281 | 5,162 | 143,269 | |||||||||||||||||||
| Foreign currency translation | (12,237) | (1,083) | (42) | (13,362) | |||||||||||||||||||
| Balance at May 31, 2022 | 2,635,099 | 285,769 | 122,108 | 3,042,976 | |||||||||||||||||||
| Goodwill acquired | 18,729 | 8,624 | 4,678 | 32,031 | |||||||||||||||||||
| Foreign currency translation | (17,221) | (1,525) | (60) | (18,806) | |||||||||||||||||||
| Balance at May 31, 2023 | $ | 2,636,607 | $ | 292,868 | $ | 126,726 | $ | 3,056,201 |
| Service Contracts (In thousands) | Uniform Rental and Facility Services | First Aid and Safety Services | All Other | Total | |||||||||||||||||||
| Balance at June 1, 2021 | $ | 369,141 | $ | 18,294 | $ | 21,010 | $ | 408,445 | |||||||||||||||
| Service contracts acquired | 32,695 | 10,384 | 1,659 | 44,738 | |||||||||||||||||||
| Service contracts amortization | (49,152) | (4,392) | (4,809) | (58,353) | |||||||||||||||||||
| Foreign currency translation | (3,050) | (142) | — | (3,192) | |||||||||||||||||||
| Balance at May 31, 2022 | 349,634 | 24,144 | 17,860 | 391,638 | |||||||||||||||||||
| Service contracts acquired | 6,942 | 2,299 | 1,757 | 10,998 | |||||||||||||||||||
| Service contracts amortization | (43,356) | (5,149) | (4,230) | (52,735) | |||||||||||||||||||
| Foreign currency translation | (3,190) | (137) | — | (3,327) | |||||||||||||||||||
| Balance at May 31, 2023 | $ | 310,030 | $ | 21,157 | $ | 15,387 | $ | 346,574 |
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Information regarding Cintas' service contracts and other assets is as follows as of May 31:
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| (In thousands) | Carrying Amount | Accumulated Amortization | Net | Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||
| Service contracts | $ | 1,004,754 | $ | 658,180 | $ | 346,574 | $ | 1,001,311 | $ | 609,673 | $ | 391,638 | ||||||||||||||||||||||||||
| Capitalized contract costs (1) | $ | 665,705 | $ | 413,680 | $ | 252,025 | $ | 551,582 | $ | 319,358 | $ | 232,224 | ||||||||||||||||||||||||||
| Noncompete and consulting agreements and other | 198,260 | 67,294 | 130,966 | 176,578 | 64,692 | 111,886 | ||||||||||||||||||||||||||||||||
| Other assets | $ | 863,965 | $ | 480,974 | $ | 382,991 | $ | 728,160 | $ | 384,050 | $ | 344,110 |
(1) The current portion of capitalized contract costs, included in prepaid expenses and other current assets on the consolidated balance sheets as of May 31, 2023 and 2022, was $92.5 million and $83.7 million, respectively.
Amortization expense for service contracts and other assets was $150.0 million, $148.4 million and $141.9 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. At May 31, 2023, the weighted average amortization period for service contracts, capitalized contract costs, noncompete and consulting agreements and other was 13 years, 7 years, 5 years and 10 years, respectively. As of May 31, 2023, 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) | ||||||||
| 2024 | $ | 147,939 | ||||||
| 2025 | 133,368 | |||||||
| 2026 | 112,114 | |||||||
| 2027 | 91,492 | |||||||
| 2028 | 67,930 | |||||||
| Thereafter | 147,866 | |||||||
| Total future amortization expense | $ | 700,709 |
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Note 6. Debt, Derivatives and Hedging Activities
Cintas' outstanding debt is summarized as follows 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 rate at May 31, 2022.
(2) Cintas assumed these senior notes with the acquisition of G&K in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate 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 average interest rate for all Cintas debt at May 31, 2023 was 4.0%, with maturity dates through fiscal year 2037. Cintas' senior notes, excluding 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 May 31, 2023 were $2,500.0 million and $2,443.8 million, respectively, and as of May 31, 2022 were $2,811.2 million and $2,862.2 million, respectively.
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 $261.1 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.
Letters of credit outstanding were $99.6 million and $106.7 million at May 31, 2023 and 2022, respectively. Maturities of debt during each of the next five years are $0.0 million, $450.0 million, $0.0 million, $1,000.0 million and $0.0 million, respectively.
Interest paid was $111.5 million, $97.8 million and $98.3 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively.
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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. The fair value of the commercial paper, if any, which approximates carrying value, is estimated using level 2 inputs based on general market prices and interest rates.
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 locks, which represent cash flow hedges, to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2007, fiscal 2013, fiscal 2017 and fiscal 2022. The amortization of the interest rate locks resulted in a decrease to other comprehensive income of $6.1 million, $2.1 million and $1.4 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively.
During fiscal 2022 and fiscal 2020, Cintas entered into interest rate lock agreements for forecasted debt issuances. The aggregate notional value of outstanding cash flow hedges was $500.0 million at both May 31, 2023 and 2022. The fair values of the outstanding interest rate locks, for forecasted debt issuances, are summarized as follows at May 31:
| 2023 | 2022 | |||||||||||||||||||
| Fiscal Year of Issuance (in thousands) | Other assets, net | Other assets, net | ||||||||||||||||||
| 2022 | $ | 44,803 | $ | 18,331 | ||||||||||||||||
| 2020 | $ | 25,646 | $ | 38,546 |
The interest rate locks are also recorded in other comprehensive income (loss), net of tax. In conjunction with the issuance of long-term debt in fiscal 2022, Cintas settled interest rate lock agreements, which were in an asset position of $58.9 million at the date of settlement, with the cash received recorded within operating cash flows, in accordance with Company's accounting policy. The balance recorded in other comprehensive income (loss) will be amortized as a reduction to interest expense beginning in the fourth quarter of fiscal 2022 through the remaining life of the debt.
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 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 7. 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 balance sheets 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 balance sheets.
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
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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 statements of income. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease costs, including short-term lease expense and variable lease costs which were immaterial in each period, were $79.8 million, $74.5 million and $71.0 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively.
The following table provides supplemental information related to the Company's consolidated statements of cash flows for the fiscal years ended May 31:
| (In thousands) | 2023 | 2022 | |||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 49,936 | $ | 49,579 | |||||||
| Operating lease right-of-use assets obtained in exchange for new and renewed operating lease liabilities | $ | 54,214 | $ | 26,862 | |||||||
| Operating lease right-of-use assets acquired in business combinations | $ | — | $ | 17,734 | |||||||
Other information related to the operating lease right-of-use assets, net and operating lease liabilities was as follows at May 31:
| 2023 | 2022 | ||||||||||
| Weighted-average remaining lease term - operating leases | 5.28 years | 5.40 years | |||||||||
| Weighted-average discount rate - operating leases | 2.87% | 2.20% |
The contractual future minimum lease payments of Cintas' operating lease liabilities by fiscal year are as follows as of May 31, 2023:
| (In thousands) | ||||||||
| 2024 | $ | 48,070 | ||||||
| 2025 | 40,455 | |||||||
| 2026 | 33,166 | |||||||
| 2027 | 24,493 | |||||||
| 2028 | 19,728 | |||||||
| Thereafter | 30,776 | |||||||
| Total payments | 196,688 | |||||||
| Less interest | (14,700) | |||||||
| Total present value of lease payments | $ | 181,988 |
Note 8. Income Taxes
Income before income taxes consists of the following components for the fiscal years ended May 31:
| (In thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| U.S. operations | $ | 1,632,391 | $ | 1,445,719 | $ | 1,221,690 | |||||||||||
| Foreign operations | 60,757 | 53,049 | 66,059 | ||||||||||||||
| $ | 1,693,148 | $ | 1,498,768 | $ | 1,287,749 |
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Income tax expense (benefit) consists of the following components for the fiscal years ended May 31:
| (In thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 248,413 | $ | 162,269 | $ | 164,104 | |||||||||||
| State and local | 56,589 | 32,431 | 42,340 | ||||||||||||||
| Foreign | 13,205 | 16,676 | 12,417 | ||||||||||||||
| 318,207 | 211,376 | 218,861 | |||||||||||||||
| Deferred | 26,931 | 51,635 | (42,080) | ||||||||||||||
| $ | 345,138 | $ | 263,011 | $ | 176,781 |
Reconciliation of income tax expense using the statutory rate and actual income tax expense is as follows for the fiscal years ended May 31:
| (In thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Income taxes at the U.S. federal statutory rate | $ | 355,561 | $ | 314,741 | $ | 270,427 | |||||||||||
| Permanent differences (1) | (59,502) | (85,413) | (101,870) | ||||||||||||||
| State and local income taxes, net of federal benefit | 46,245 | 33,547 | 27,304 | ||||||||||||||
| Capital loss carryback | — | — | (14,072) | ||||||||||||||
| Other | 2,834 | 136 | (5,008) | ||||||||||||||
| $ | 345,138 | $ | 263,011 | $ | 176,781 |
(1) Primarily consists of the excess tax benefits related to stock-based compensation.
The components of deferred income taxes included on the consolidated balance sheets are as follows at May 31:
| (In thousands) | 2023 | 2022 | |||||||||
| Deferred tax assets: | |||||||||||
| Reserves related to accounts receivable | $ | 12,562 | $ | 10,928 | |||||||
| Inventory reserves | 22,822 | 28,020 | |||||||||
| Insurance reserves | 45,153 | 45,237 | |||||||||
| Stock-based compensation | 63,186 | 62,522 | |||||||||
| Operating lease liabilities | 46,258 | 43,745 | |||||||||
| Deferred compensation and other | 92,538 | 92,250 | |||||||||
| 282,519 | 282,702 | ||||||||||
| Deferred tax liabilities: | |||||||||||
| Uniform and other rental items in service | 248,883 | 226,510 | |||||||||
| Property and equipment | 171,971 | 171,819 | |||||||||
| Intangibles and other amortizable assets | 190,299 | 199,256 | |||||||||
| Treasury locks | 32,830 | 31,566 | |||||||||
| Capitalized contract costs | 88,056 | 81,314 | |||||||||
| Operating lease right-of-use assets | 46,258 | 43,745 | |||||||||
| State taxes and other | 2,578 | 2,269 | |||||||||
| 780,875 | 756,479 | ||||||||||
| Net deferred tax liability | $ | 498,356 | $ | 473,777 |
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Although realization is not assured, management has evaluated its deferred tax assets to determine whether a valuation allowance is required or should be adjusted. This evaluation considers, among other items, the nature, frequency and amount of recent losses, reversal periods of taxable temporary differences, duration of statutory periods and tax planning strategies. As a result of this analysis, management believes it is more likely than not that the recorded deferred tax assets will be realized.
Income taxes paid were $291.9 million, $208.5 million and $245.5 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively.
As of May 31, 2023 and 2022, there was $29.3 million and $30.8 million, respectively, in total unrecognized tax benefits, which, if recognized, would favorably impact Cintas' effective tax rate. Cintas recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense in the consolidated statements of income, which is consistent with the recognition of these items in prior reporting periods. The total amount accrued for interest and penalties as of May 31, 2023 and 2022, was $3.2 million and $4.0 million, respectively. Cintas records this tax liability in long-term accrued liabilities on the consolidated balance sheets.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits (exclusive of interest and penalties) is as follows:
| (In thousands) | |||||
| Balance at June 1, 2021 | $ | 42,457 | |||
| Additions for tax positions of the current year | 5,558 | ||||
| Additions for tax positions of prior years | 3,093 | ||||
| Settlements | (7,352) | ||||
| Statute expirations | (6,182) | ||||
| Balance at May 31, 2022 | 37,574 | ||||
| Additions for tax positions of the current year | 6,904 | ||||
| Additions for tax positions of prior years | 6,821 | ||||
| Settlements | (12,937) | ||||
| Statute expirations | (1,608) | ||||
| Balance at May 31, 2023 | $ | 36,754 |
The majority of Cintas' operations are in North America. Cintas is required to file U.S. 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 expense, either of which could have an impact on the consolidated results of operation in any given period.
All U.S. federal income tax returns are closed to audit through fiscal 2019. 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 status and resolution of the various audits and other potential regulatory developments, it is expected that the balance of unrecognized tax benefits will not materially change for the fiscal year ending May 31, 2024.
Foreign Withholding Tax
The Company asserts that all foreign earnings will be indefinitely reinvested, with the exception of certain foreign investments in which earnings and cash generation are in excess of local needs. With the passage of the Tax Cuts and Jobs Act in the U.S., dividends of earnings from non-U.S. operations are generally no longer subject to U.S. income tax. Cintas continues to analyze the estimated impact of the non-U.S. income and withholding tax liabilities based on the source of these earnings, as well as the expected means through which those earnings may be taxed; however, the unrecorded tax is not material to the consolidated financial statements.
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Note 9. Employee Benefit Plans
Pension Plans
In conjunction with the acquisition of G&K in fiscal 2017, Cintas assumed 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 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 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. Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive income (loss) on our consolidated balance sheets. The difference between actual amounts and estimates based on actuarial assumptions are recognized in other comprehensive income (loss), net of tax, in the period in which they occur. The estimated amortization from accumulated other comprehensive income (loss) into net periodic benefit cost during fiscal year 2024 is not material.
| Obligations and Funded Status at May 31: (In thousands) | 2023 | 2022 | |||||||||
| Change in benefit obligation: | |||||||||||
| Projected benefit obligation, beginning of year | $ | 84,546 | $ | 99,728 | |||||||
| Interest cost | 3,089 | 2,148 | |||||||||
| Actuarial gain | (6,556) | (14,044) | |||||||||
| Benefits paid | (3,340) | (3,286) | |||||||||
| Projected benefit obligation, end of year | $ | 77,739 | $ | 84,546 | |||||||
| Change in plan assets: | |||||||||||
| Fair value of plan assets, beginning of year | $ | 66,723 | $ | 78,244 | |||||||
| Actual loss on plan assets | (3,345) | (8,322) | |||||||||
| Employer contributions | — | 87 | |||||||||
| Benefits paid | (3,340) | (3,286) | |||||||||
| Fair value of plan assets, end of year | $ | 60,038 | $ | 66,723 | |||||||
| Funded status-net amount recognized | $ | (17,701) | $ | (17,823) |
The net pension liability of $17.7 million and $17.8 million was included in long-term accrued liabilities on the consolidated balance sheets as of May 31, 2023 and 2022, respectively. An unrecognized net actuarial loss of $3.0 million and $2.9 million related to the Pension Plan was included in "other" within the accumulated other comprehensive income (loss) on the consolidated balance sheets at May 31, 2023 and 2022, respectively.
The components of net periodic pension benefit are summarized as follows for the fiscal years ended May 31:
| (In thousands) | 2023 | 2022 | |||||||||
| Interest cost | $ | 3,089 | $ | 2,148 | |||||||
| Expected return on assets | (3,350) | (3,651) | |||||||||
| Net periodic pension benefit | $ | (261) | $ | (1,503) |
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Assumptions
The following weighted average assumptions were used to determine benefit obligations for the Pension Plan for the fiscal years ended May 31:
| 2023 | 2022 | ||||||||||
| Discount rate | 4.89 | % | 4.11 | % |
The following weighted average assumptions were used to determine net periodic pension benefit for the Pension Plan for the fiscal years ended May 31:
| 2023 | 2022 | ||||||||||
| Discount rate | 4.11 | % | 2.83 | % | |||||||
| Expected return on plan assets | 5.20 | % | 4.80 | % |
Plan Assets
The asset allocations in the Pension Plan are as follows at May 31:
| 2023 | 2023 | 2022 | |||||||||||||||
| Target Asset Allocation | Actual Asset Allocation | Actual Asset Allocation | |||||||||||||||
| Large cap equity | 26.0 | % | 27.3 | % | 29.1 | % | |||||||||||
| Small cap equity | 5.0 | % | 5.2 | % | 6.2 | % | |||||||||||
| International equity | 8.0 | % | 8.8 | % | 8.2 | % | |||||||||||
| Fixed income | 45.0 | % | 44.8 | % | 43.2 | % | |||||||||||
| Absolute return strategy funds | 16.0 | % | 13.6 | % | 12.7 | % | |||||||||||
| Cash | 0.0 | % | 0.3 | % | 0.6 | % | |||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % |
Our investment committee, assisted by outside consultants, evaluates the objectives and investment policies concerning our long-term investment goals and asset allocation strategies. Pension Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. To develop the expected long-term rate of return on asset assumptions, we consider the historical returns and future expectations of returns for each asset class, as well as the target asset allocation, changes in investments expenses and investment goals of the pension portfolio. This resulted in the selection of 5.20% expected return on Pension Plan assets for fiscal year 2023 and 4.80% expected return on Pension Plan assets for fiscal year 2022. The investment goals are (1) to meet or exceed the assumed actuarial rate of return over the long term within reasonable and prudent levels of risk, and (2) to preserve the real purchasing power of assets to meet future obligations. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Pension Plan assets for our qualified pension plans are held in a trust for the benefit of the plan participants and are invested in a diversified portfolio of equity investments, fixed income investments and cash. Risk targets are established and monitored against acceptable ranges. All investment policies and procedures are designed to ensure that the plans' investments are in compliance with the Employee Retirement Income Security Act. Guidelines are established defining permitted investments within each asset class.
The implementation of the investment strategy discussed above is executed through a variety of investment types, including U.S. government securities, corporate debt and mutual funds. The mutual fund investments are valued at the closing price reported on the active market on which the individual securities are traded and are not adjusted from the quoted active market price at the consolidated balance sheet dates. The remaining investments, primarily corporate debt, are valued using unadjusted observable inputs such as third-party quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and
53
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 fair value measurement at the consolidated balance sheet dates.
Information on the Pension Plan assets, using the fair value hierarchy discussed in Note 1 entitled Significant Accounting Polices, is as follows as of May 31:
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||||
| Cash equivalents | $ | 211 | $ | — | $ | — | $ | 211 | $ | 503 | $ | — | $ | — | $ | 503 | ||||||||||||||||||||||||||||||||||
| U.S. government securities | 2,983 | 2,280 | — | 5,263 | 2,839 | 3,178 | — | 6,017 | ||||||||||||||||||||||||||||||||||||||||||
| Corporate debt | — | 21,437 | — | 21,437 | — | 22,681 | — | 22,681 | ||||||||||||||||||||||||||||||||||||||||||
| Municipal obligations | — | 151 | — | 151 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Mutual funds: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. securities | 27,681 | — | — | 27,681 | 32,016 | — | — | 32,016 | ||||||||||||||||||||||||||||||||||||||||||
| International securities | 5,295 | — | — | 5,295 | 5,506 | — | — | 5,506 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 36,170 | $ | 23,868 | $ | — | $ | 60,038 | $ | 40,864 | $ | 25,859 | $ | — | $ | 66,723 |
We expect to make contributions of approximately $0.8 million to the Pension Plan during the next 12 months. The Pension Plan benefit payments expected to be paid for each of the next five years and thereafter are $4.4 million, $4.6 million, $4.8 million, $4.9 million, $5.0 million and $54.0 million, respectively.
Future changes in plan asset returns, assumed discount rates and various other factors related to the Pension Plan will impact future net periodic pension benefit (cost) and liabilities, however, any changes would not have a material impact on our consolidated results of operations and consolidated financial position.
Cintas also administers a pension plan that was assumed in a previous acquisition and is immaterial for detailed disclosure purposes. As of May 31, 2023 and 2022, the fair value of this pension plan's total assets was $7.8 million and $8.4 million, respectively, and the PBO was $6.9 million and $7.5 million, respectively.
Non-Contributory Retirement Plans
Cintas' Partners' Plan (the Plan) is a non-contributory profit sharing plan and Employee Stock Ownership Plan (ESOP) for the benefit of substantially all U.S. Cintas employee-partners who have completed one year of service. The Plan also includes a 401(k) savings feature covering substantially all U.S. employee-partners. The amounts of contributions to the Plan and ESOP, as well as the matching contribution to the 401(k), are made at the discretion of the Board of Directors. Total contributions, including Cintas' matching contributions, which approximate cost, were $99.1 million, $85.0 million and $75.6 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. The expense associated with these contributions was recorded in selling and administrative expenses on the consolidated statements of income.
Cintas has a non-contributory deferred profit sharing plan (DPSP), which covers substantially all Canadian employee-partners. In addition, a registered retirement savings plan (RRSP) is offered to those employees. The amounts of contributions to the DPSP, as well as the matching contribution to the RRSP, are made at the discretion of the Board of Directors. Total contributions, which approximate cost, were $3.7 million, $3.4 million and $3.1 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. The expense associated with these contributions was recorded in selling and administrative expenses on the consolidated statements of income.
Cintas has a supplemental executive retirement plan (SERP) subject to Section 409A of the Internal Revenue Code for the benefit of certain highly compensated Cintas employee-partners. The SERP allows participants to defer the receipt of compensation which would otherwise become payable to them. Matching contributions are made at the discretion of the Board of Directors. Total matching contributions, which approximates cost, were $12.3 million, $10.5 million and $9.1 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. The expense associated with these contributions was recorded in selling and administrative expenses on the consolidated statements of income.
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Note 10. 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. See Note 11 entitled Stock-Based Compensation for additional information on 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 fiscal years ended May 31:
| Basic Earnings per Share (In thousands except per share data) | 2023 | 2022 | 2021 | ||||||||||||||
| Net income | $ | 1,348,010 | $ | 1,235,757 | $ | 1,110,968 | |||||||||||
| Less: net income allocated to participating securities | 5,463 | 6,132 | 7,623 | ||||||||||||||
| Net income available to common shareholders | $ | 1,342,547 | $ | 1,229,625 | $ | 1,103,345 | |||||||||||
| Basic weighted average common shares outstanding | 101,645 | 103,172 | 104,874 | ||||||||||||||
| Basic earnings per share | $ | 13.21 | $ | 11.92 | $ | 10.52 |
| Diluted Earnings per Share (In thousands except per share data) | 2023 | 2022 | 2021 | ||||||||||||||
| Net income | $ | 1,348,010 | $ | 1,235,757 | $ | 1,110,968 | |||||||||||
| Less: net income allocated to participating securities | 5,463 | 6,132 | 7,623 | ||||||||||||||
| Net income available to common shareholders | $ | 1,342,547 | $ | 1,229,625 | $ | 1,103,345 | |||||||||||
| Basic weighted average common shares outstanding | 101,645 | 103,172 | 104,874 | ||||||||||||||
| Effect of dilutive securities – employee stock options | 1,732 | 2,351 | 2,833 | ||||||||||||||
| Diluted weighted average common shares outstanding | 103,377 | 105,523 | 107,707 | ||||||||||||||
| Diluted earnings per share | $ | 12.99 | $ | 11.65 | $ | 10.24 |
For the fiscal years ended May 31, 2023, 2022 and 2021, options granted to purchase 1.0 million, 0.5 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 shares (anti-dilutive).
On October 30, 2018, we announced that the Board of Directors authorized a $1.0 billion share buyback program, which was completed during the third quarter of fiscal 2021. On October 29, 2019, we announced the Board of Directors authorized a $1.0 billion share buyback program, which was completed during the first quarter of fiscal 2022. On July 27, 2021, we announced that 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.
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The following table summarizes the buyback activity by program and fiscal year ended May 31:
| 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Buyback Program (In thousands except per share data) | Shares | Average Price per Share | Purchase Price | Shares | Average Price per Share | Purchase Price | Shares | Average Price per Share | Purchase Price | ||||||||||||||||||||||||||||||||||||||||||||
| October 30, 2018 | — | $ | — | $ | — | — | $ | — | $ | — | 190 | $ | 319.88 | $ | 60,877 | ||||||||||||||||||||||||||||||||||||||
| October 29, 2019 | — | — | — | 1,590 | 365.41 | 581,220 | 1,196 | 350.31 | 418,779 | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | 1,386 | $ | 346.13 | $ | 479,656 | |||||||||||||||||||||||||||||||||||||||
| Shares acquired for taxes due (1) | 430 | $ | 420.21 | $ | 180,577 | 305 | $ | 397.16 | $ | 121,224 | 246 | $ | 302.52 | $ | 74,465 | ||||||||||||||||||||||||||||||||||||||
| Total repurchase of Cintas common stock | $ | 398,865 | $ | 1,525,873 | $ | 554,121 |
(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.
In addition to the share buyback activity presented above, beginning in fiscal 2022, Cintas acquired shares of Cintas common stock, via non-cash transactions, in connection with net-share settlements of option exercises. The following table summarizes Cintas' non-cash share buyback activity for the fiscal year ended May 31:
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| Buyback Program (In thousands except per share data) | Shares | Average Price per Share | Non-Cash Value | Shares | Average Price per Share | Non-Cash Value | |||||||||||||||||||||||||||||
| Non-cash transaction activity | 360 | $ | 424.86 | $ | 152,983 | 71 | $ | 402.73 | $ | 28,670 |
Note 11. Stock-Based Compensation
On August 2, 2016, the Board of Directors approved and adopted the Cintas Corporation 2016 Equity and Incentive Compensation Plan (the 2016 Plan) to replace the Cintas' 2005 Equity Compensation Plan, as amended (the 2005 Plan). The 2016 Plan was approved by Cintas shareholders at its Annual Meeting on October 18, 2016, at which time the 2016 Plan became effective. Under the 2016 Plan, Cintas may grant officers and key employee-partners equity compensation in the form of stock options, stock appreciation rights, restricted and unrestricted stock awards, performance awards and other stock unit awards representing up to an aggregate of 12,500,000 shares of Cintas' common stock. Any shares of common stock that remained available under the 2005 Plan became part of the total available share balance of 12,500,000 shares under the 2016 Plan. At May 31, 2023, 5,412,885 shares of common stock were reserved for future issuance under the 2016 Plan. Total compensation cost for stock-based awards was $103.6 million, $109.3 million and $112.0 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. Cintas accounts for forfeitures of stock-based awards as they occur. The total income tax benefit recognized in the consolidated statements of income for share-based compensation arrangements was $26.4 million, $27.9 million and $28.6 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively.
Stock Options
Stock options are granted at the fair market value of the underlying common stock on the date of grant. The option terms are determined by the Compensation Committee of the Board of Directors, but no stock option may be exercised later than 10 years after the date of the grant. The option awards generally have 10-year terms with graded vesting in years 3 through 5 based on continuous service during that period. The majority of stock option grants occur in the first quarter of each fiscal year in connection with the annual grant, which is earned in the prior fiscal year. Cintas recognizes compensation expense for these options using the straight-line recognition method over the vesting period.
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The fair value of options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions for the fiscal years ended May 31:
| 2023 | 2022 | 2021 | |||||||||||||||
| Risk-free interest rate | 2.8 | % | 0.8 | % | 0.4 | % | |||||||||||
| Dividend yield | 1.1 | % | 1.2 | % | 1.1 | % | |||||||||||
| Expected volatility of Cintas' common stock | 26.0 | % | 25.2 | % | 23.5 | % | |||||||||||
| Expected life of the option in years | 5.5 | 5.5 | 5.5 |
The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options. The determination of expected volatility is based on historical volatility of Cintas' common stock over the period commensurate with the expected term of stock options, as well as other relevant factors. The weighted average expected term was determined based on the historical employee exercise behavior of the options. The weighted-average fair value of stock options granted during fiscal 2023, 2022 and 2021 was $120.24, $100.07 and $66.52, respectively.
The information presented in the following table relates primarily to stock options granted and outstanding under either the 2016 Plan or under previously adopted plans:
| Shares | Weighted Average Exercise Price | ||||||||||
| Outstanding, June 1, 2020 (1,913,374 shares exercisable) | 7,105,399 | $ | 145.54 | ||||||||
| Granted | 747,550 | 348.24 | |||||||||
| Canceled | (1,452) | 59.51 | |||||||||
| Forfeited | (91,722) | 193.94 | |||||||||
| Exercised | (1,704,251) | 83.31 | |||||||||
| Outstanding, May 31, 2021 (1,548,867 shares exercisable) | 6,055,524 | 191.11 | |||||||||
| Granted | 531,963 | 398.92 | |||||||||
| Canceled | (877) | 116.25 | |||||||||
| Forfeited | (260,249) | 273.53 | |||||||||
| Exercised | (1,238,959) | 118.21 | |||||||||
| Outstanding, May 31, 2022 (1,575,999 shares exercisable) | 5,087,402 | 230.62 | |||||||||
| Granted | 579,146 | 464.91 | |||||||||
| Canceled | (1,710) | 65.79 | |||||||||
| Forfeited | (162,598) | 339.49 | |||||||||
| Exercised | (1,074,488) | 145.19 | |||||||||
| Outstanding, May 31, 2023 (1,546,346 shares exercisable) | 4,427,752 | $ | 278.01 |
The intrinsic value of stock options exercised was $302.9 million, $348.3 million and $402.3 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. The total cash received from employees as a result of employee stock option exercises for the fiscal years ended May 31, 2023, 2022 and 2021 was $3.0 million, $117.7 million and $130.0 million, respectively.
The fair value of stock options vested was $37.9 million, $36.7 million and $30.5 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively.
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The following table summarizes the information related to stock options outstanding at May 31, 2023:
| Outstanding Options | Exercisable Options | ||||||||||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding | Average Remaining Option Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | ||||||||||||||||||||||||
| $37.91 - $155.83 | 1,000,881 | 3.07 | $ | 109.39 | 1,000,881 | $ | 109.39 | ||||||||||||||||||||||
| $155.84 - $216.78 | 736,299 | 5.21 | 203.60 | 369,557 | 202.04 | ||||||||||||||||||||||||
| $216.79 - $346.61 | 1,087,491 | 6.63 | 275.83 | 169,721 | 262.73 | ||||||||||||||||||||||||
| $346.62 - $472.14 | 1,603,081 | 9.05 | 418.95 | 6,187 | 426.55 | ||||||||||||||||||||||||
| $37.91 - $472.14 | 4,427,752 | 6.46 | $ | 278.01 | 1,546,346 | $ | 149.63 |
At May 31, 2023, the aggregate intrinsic value of stock options outstanding and exercisable was $859.5 million and $498.7 million, respectively. The weighted-average remaining contractual term of stock options exercisable is 4.0 years.
Restricted Stock Awards
Restricted stock awards consist of Cintas' common stock that is subject to such conditions, restrictions and limitations as the Compensation Committee of the Board of Directors determines to be appropriate. The vesting period is generally three years after the grant date. The recipient of restricted stock awards will have all rights of a shareholder of Cintas, including the right to vote and the right to receive cash dividends during the vesting period. Cintas recognizes compensation expense for these restricted stock awards using the straight-line recognition method over the vesting period.
The information presented in the following table relates to restricted stock awards granted and outstanding under either the 2016 Plan or under previously adopted plans:
| Shares | Weighted Average Grant Price | ||||||||||
| Outstanding, unvested grants at June 1, 2020 | 1,625,215 | $ | 199.73 | ||||||||
| Granted | 274,843 | 352.68 | |||||||||
| Forfeited | (48,586) | 241.95 | |||||||||
| Vested | (610,249) | 147.32 | |||||||||
| Outstanding, unvested grants at May 31, 2021 | 1,241,223 | 264.63 | |||||||||
| Granted | 189,874 | 398.30 | |||||||||
| Forfeited | (66,589) | 323.00 | |||||||||
| Vested | (527,899) | 213.36 | |||||||||
| Outstanding, unvested grants at May 31, 2022 | 836,609 | 331.95 | |||||||||
| Granted | 187,750 | 470.11 | |||||||||
| Forfeited | (51,200) | 384.61 | |||||||||
| Vested | (286,529) | 267.65 | |||||||||
| Outstanding, unvested grants at May 31, 2023 | 686,630 | $ | 392.02 |
The remaining unrecognized compensation cost related to unvested stock options and restricted stock at May 31, 2023 was $251.8 million. The weighted-average period of time over which this cost will be recognized is 2.20 years.
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Note 12. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss), net of tax:
| (In thousands) | Foreign Currency | Unrealized (Loss) Income on Interest Rate Locks | Other | Total | |||||||||||||||||||
| Balance at June 1, 2021 | $ | 41,839 | $ | (7,308) | $ | (3,643) | $ | 30,888 | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (24,833) | 102,057 | 1,866 | 79,090 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | (2,061) | — | (2,061) | |||||||||||||||||||
| Net current period other comprehensive (loss) income | (24,833) | 99,996 | 1,866 | 77,029 | |||||||||||||||||||
| Balance at May 31, 2022 | 17,006 | 92,688 | (1,777) | 107,917 | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (34,007) | 10,111 | (158) | (24,054) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | (6,085) | — | (6,085) | |||||||||||||||||||
| Net current period other comprehensive (loss) income | (34,007) | 4,026 | (158) | (30,139) | |||||||||||||||||||
| Balance at May 31, 2023 | $ | (17,001) | $ | 96,714 | $ | (1,935) | $ | 77,778 |
The following table summarizes the reclassifications out of accumulated other comprehensive income (loss) during the fiscal years ended May 31:
| Details about Accumulated Other Comprehensive Income (Loss) Components | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line in the Consolidated Statements of Income | ||||||||||||||||||
| (In thousands) | 2023 | 2022 | ||||||||||||||||||
| Amortization of interest rate locks | $ | 8,134 | $ | 2,733 | Interest expense | |||||||||||||||
| Tax expense | (2,049) | (672) | Income taxes | |||||||||||||||||
| Amortization of interest rate locks, net of tax | $ | 6,085 | $ | 2,061 |
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Note 13. Operating 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 operating income. The accounting policies of the operating segments are the same as those described in Note 1 entitled Significant Accounting Policies. 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 | ||||||||||||||||||||||||
| May 31, 2023 | |||||||||||||||||||||||||||||
| Revenue | $ | 6,897,130 | $ | 951,496 | $ | 967,143 | $ | — | $ | 8,815,769 | |||||||||||||||||||
| Gross margin | $ | 3,264,955 | $ | 482,088 | $ | 426,325 | $ | — | $ | 4,173,368 | |||||||||||||||||||
| Selling and administrative expenses | 1,786,198 | 301,398 | 283,108 | — | 2,370,704 | ||||||||||||||||||||||||
| Interest expense, net | — | — | — | 109,516 | 109,516 | ||||||||||||||||||||||||
| Income before income taxes | $ | 1,478,757 | $ | 180,690 | $ | 143,217 | $ | (109,516) | $ | 1,693,148 | |||||||||||||||||||
| Depreciation and amortization | $ | 326,185 | $ | 62,059 | $ | 20,918 | $ | — | $ | 409,162 | |||||||||||||||||||
| Capital expenditures | $ | 227,436 | $ | 76,549 | $ | 27,124 | $ | — | $ | 331,109 | |||||||||||||||||||
| Total assets | $ | 7,176,257 | $ | 703,226 | $ | 542,724 | $ | 124,149 | $ | 8,546,356 | |||||||||||||||||||
| May 31, 2022 | |||||||||||||||||||||||||||||
| Revenue | $ | 6,226,980 | $ | 832,458 | $ | 795,021 | $ | — | $ | 7,854,459 | |||||||||||||||||||
| Gross margin | $ | 2,910,547 | $ | 372,193 | $ | 349,506 | $ | — | $ | 3,632,246 | |||||||||||||||||||
| Selling and administrative expenses | 1,557,057 | 265,430 | 222,389 | — | 2,044,876 | ||||||||||||||||||||||||
| Interest expense, net | — | — | — | 88,602 | 88,602 | ||||||||||||||||||||||||
| Income before income taxes | $ | 1,353,490 | $ | 106,763 | $ | 127,117 | $ | (88,602) | $ | 1,498,768 | |||||||||||||||||||
| Depreciation and amortization | $ | 329,473 | $ | 48,656 | $ | 21,572 | $ | — | $ | 399,701 | |||||||||||||||||||
| Capital expenditures | $ | 166,559 | $ | 59,656 | $ | 14,457 | $ | — | $ | 240,672 | |||||||||||||||||||
| Total assets | $ | 6,979,731 | $ | 664,040 | $ | 413,014 | $ | 90,471 | $ | 8,147,256 | |||||||||||||||||||
| May 31, 2021 | |||||||||||||||||||||||||||||
| Revenue | $ | 5,689,632 | $ | 784,291 | $ | 642,417 | $ | — | $ | 7,116,340 | |||||||||||||||||||
| Gross margin | $ | 2,706,118 | $ | 332,336 | $ | 276,197 | $ | — | $ | 3,314,651 | |||||||||||||||||||
| Selling and administrative expenses | 1,480,278 | 251,153 | 197,728 | — | 1,929,159 | ||||||||||||||||||||||||
| Interest expense, net | — | — | — | 97,743 | 97,743 | ||||||||||||||||||||||||
| Income before income taxes | $ | 1,225,840 | $ | 81,183 | $ | 78,469 | $ | (97,743) | $ | 1,287,749 | |||||||||||||||||||
| Depreciation and amortization | $ | 323,596 | $ | 43,314 | $ | 21,041 | $ | — | $ | 387,951 | |||||||||||||||||||
| Capital expenditures | $ | 104,020 | $ | 34,384 | $ | 5,066 | $ | — | $ | 143,470 | |||||||||||||||||||
| Total assets | $ | 6,743,272 | $ | 637,663 | $ | 362,248 | $ | 493,640 | $ | 8,236,823 |
(1) Corporate assets represent the consolidated cash balance in all periods presented.
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Note 14 - 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 party to additional litigation not considered in the ordinary course of business, including the litigation discussed below.
The Company is a defendant in a purported class action lawsuit, City of Laurel, Mississippi v. Cintas Corporation No. 2, filed on March 12, 2021. This is a contract dispute whereby plaintiffs allege that Cintas breached its contracts with participating public agencies and seek, among other things, contract-based damages in an unspecified amount. In March 2022, the District Court denied Cintas’ motion to compel arbitration, and on March 6, 2023, the Ninth Circuit Court of Appeals affirmed. Liability in this matter is not probable nor estimable at this time.
The Company, the Board of Directors, Scott Farmer (Executive Chairman) and the Investment Policy Committee are defendants in a purported class action, filed on December 13, 2019, pending in the U.S. District Court for the Southern District of Ohio alleging violations of The Employee Retirement Income Security Act of 1974 (ERISA). The lawsuit asserts that the defendants improperly managed the costs of the employee retirement plan, breached their fiduciary duties in failing to investigate and select lower cost alternative funds and failed to monitor and control the employee retirement plan’s recordkeeping costs. The defendants deny liability and a legal contingency is neither probable nor estimable at this time.
Cintas records an accrual for legal contingencies when Cintas determines that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of May 31, 2023 and 2022, Cintas did not accrue any additional sums in excess of its other legal contingency accruals for adverse jury verdicts arising in the ordinary course of its business. The litigation discussed above, if decided or settled adversely to Cintas, may result in liability material to Cintas' consolidated financial condition, consolidated results of operation or consolidated cash flows and could increase costs of operations on an ongoing basis. Any estimated liability relating to these proceedings is not determinable at this time. Cintas may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements if it believes such settlement is in the best interest of Cintas' shareholders.
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