SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended May 31, 2006
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 0-11399

CINTAS CORPORATION

(Exact name of registrant as specified in its charter)

 

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, No Par Value
(Title of class)

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

	YES		NO
	x		o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12 b-2 of the Exchange Act).

Large Accelerated Filer x

Accelerated Filer o

Non-Accelerated Filer o

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act).  Yes o No x

The aggregate market value of the Common Stock held by non-affiliates as of November 30, 2005, was $7,512,621,962 based on a closing sale price of $44.72 per share.  As of July 31, 2006, 172,797,254 shares of Common Stock were issued and 160,663,118 shares were outstanding.

Documents Incorporated by Reference

Portions of the Registrant’s Proxy Statement to be filed with the Commission for its 2006 Annual Meeting are incorporated by reference in Part II and Part III as specified.

16851-1-da-19.doc - Items10111213And14OfPartIiiAreInc_175931

CINTAS CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K

Part I
	Item 1.	-	Business.
	Item 1A.	-	Risk Factors.
	Item 2.	-	Properties.
	Item 3.	-	Legal Proceedings.
	Item 4.	-	Submission of Matters to a Vote of Security Holders.
Part II		-
	Item 5.	-	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
	Item 6.	-	Selected Financial Data.
	Item 7.	-	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 7A.	-	Quantitative and Qualitative Disclosure About Market Risk.
	Item 8.	-	Financial Statements and Supplementary Data.
	Item 9.	-	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
	Item 9A.	-	Controls and Procedures.
	Item 9B.	-	Other Information.
Part III
	Item 10.	-	Directors and Executive Officers of the Registrant.
	Item 11.	-	Executive Compensation.
	Item 12.	-	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
	Item 13.	-	Certain Relationships and Related Transactions.
	Item 14.	-	Principal Accountant Fees and Services.
Part IV
	Item 15.	-	Exhibits and Financial Statement Schedules.

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PART I

ITEM 1.
BUSINESS

Cintas Corporation, a Washington corporation, provides highly specialized products and services to businesses of all types throughout the United States and Canada.  Cintas’ products and services are designed to enhance its customers’ images and brand identification as well as provide a safe and efficient work place.  Cintas was founded in 1968 by Richard T. Farmer, Chairman of the Board, when he left his family’s industrial laundry business in order to develop uniform programs using an exclusive new fabric.  In the early 1970s, Cintas acquired the family industrial laundry business.  Over the years, Cintas developed additional products and services that complemented its core uniform business and broadened the scope of products and services available to its customers.

The products and services provided by Cintas are as follows:

·                  Uniforms and Apparel

·                  Mats, Mops and Towels

·                  Restroom and Hygiene Service

·                  First Aid and Safety

·                  Fire Protection

·                  Branded Promotional Products

·                  Document Shredding and Storage

·                  Cleanroom Resources

·                  Flame Resistant Clothing

These products and services are provided to over 700,000 businesses of all types – from small service and manufacturing companies to major corporations that employ thousands of people.  No individual customer accounts for greater than one-half of one percent of Cintas’ total revenues.  As a result, the loss of one account would not have a significant financial impact on Cintas.

Cintas classifies its business into two operating segments, Rentals and Other Services, based on the similar economic characteristics of the products and services within each segment. The Rentals operating segment reflects the rental and servicing of uniforms and other garments, mats, mops and shop towels.  In addition to these rental items, we also provide restroom and hygiene products and services within this segment.  The Other Services operating segment consists of the direct sale of uniforms and related items, first aid, safety and fire protection products and services, document management services and branded promotional products.

The following table sets forth the revenues derived from each operating segment provided by Cintas:

		Year Ended May 31
		2006			2005			2004
		(in thousands)
Rentals		$	2,568,776		$	2,363,397		$	2,201,405
Other Services		834,832			703,886			612,654
		$	3,403,608		$	3,067,283		$	2,814,059

 

See Note 13 entitled Segment Information in “Notes to Consolidated Financial Statements.”

The primary markets served by both Cintas operating segments are local in nature and highly fragmented.  Cintas competes with national, regional and local providers, and the level of competition varies at each of Cintas’ locations.  Product, design, price, quality, service and convenience to the customer are the competitive elements in both operating segments.

Within the Rentals operating segment, Cintas provides its products and services to customers via local delivery routes based out of rental processing plants and branches.  Within the Other Services operating segment, Cintas provides its products and services via its distribution network and local delivery routes or

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local representatives.  In total, Cintas has approximately 7,000 local delivery routes, 404 operations and 8 distribution centers.

Cintas purchases finished products from many outside suppliers.  In addition, Cintas operates twelve manufacturing facilities which provide for a substantial amount of its standard uniform needs.  Cintas purchases fabric, used in its manufacturing process, from several suppliers.  Cintas is not aware of any circumstances that would hinder its ability to continue obtaining these materials.

Cintas is subject to various environmental laws and regulations, as are other companies in the uniform rental industry.  While environmental compliance is not a material component of our costs, Cintas must incur capital expenditures and associated operating costs, primarily for water treatment and waste removal, on a regular basis.  Environmental spending related to water treatment and waste removal was approximately $16 million in fiscal 2006 and approximately $14 million in fiscal 2005.  Capital expenditures to limit or monitor hazardous substances were $2 million in fiscal 2006 and $4 million in fiscal 2005.  These expenditures were primarily related to the purchase of water treatment systems, which are depreciated over a useful life of ten years.  Cintas does not expect a material change in the cost of environmental compliance on a percent to sale basis and is not aware of any material non-compliance with environmental laws.

At May 31, 2006, Cintas employed approximately 32,000 employees of whom approximately 450 were represented by labor unions.  Since January 2003, Cintas has been the target of a corporate unionization campaign by Unite Here and the Teamsters unions.  These unions are attempting to pressure Cintas into surrendering its employees’ rights to a government-supervised election and unilaterally accept union representation.  This is unacceptable.  Cintas’ philosophy in regard to unions is straightforward:  We believe that employees have the right to say yes to union representation and the freedom to say no.  This campaign could be materially disruptive to our business and could materially adversely affect results of operations.  We will continue to vigorously oppose this campaign and to defend our employees’ rights.  Cintas considers its relationships with its employees to be satisfactory.

Cintas files annual and quarterly reports and proxy materials with the Securities and Exchange Commission.  The public may copy these materials at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580 Washington, D.C.  20549 and may obtain further information concerning the operation of the Public Reference Room by calling the SEC at (800) SEC-0330.  The SEC maintains an Internet site that contains the same information regarding Cintas that is filed electronically with the SEC.  The address of that site is: http://www.sec.gov.  Cintas’ Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K and amendments to those reports are posted on its website, www.cintas.com, as soon as practicable after filing with the SEC.

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ITEM 1A.
RISK FACTORS

The statements in this section, as well as statements described elsewhere in this Form 10-K, or in other SEC filings, describe risks that could materially and adversely affect our business, financial condition and results of operations and the trading price of our debt or equity securities could decline.  These risks are not the only risks that we face.  Our business, financial condition and results of operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.

In addition, this section sets forth statements which constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements.  Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “could,” “should,” “may” and “will” or the negative versions thereof and similar expressions and by the context in which they are used.  Such statements are based upon current expectations of Cintas and speak only as of the date made.  These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ from those set forth in or implied by this Annual Report.  Factors that might cause such a difference include, but are not limited to, the possibility of greater than anticipated operating costs including energy costs, lower sales volumes, the performance and costs of integration of acquisitions, fluctuations in costs of materials and labor including increased medical costs, costs and possible effects of union organizing activities, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, the cost, results and ongoing assessment of internal controls for financial reporting required by the Sarbanes-Oxley Act of 2002, the initiation or outcome of litigation, higher assumed sourcing or distribution costs of products, the disruption of operations from catastrophic events, changes in federal and state tax laws and the reactions of competitors in terms of price and service.  Cintas undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

Also note that we provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.

General economic factors may adversely affect our financial performance.

General economic conditions, in North America and globally, may adversely affect our financial performance.  Higher levels of unemployment, inflation, tax rates and other changes in tax laws and other economic factors could adversely affect the demand for Cintas products and services.  Increases in labor costs including healthcare and insurance costs, higher material costs for items such as linens and textiles, higher fuel and other energy costs, higher interest rates, inflation, higher tax rates and other changes in tax laws and other economic factors could increase our costs of rentals and other services and selling and administrative expenses and could adversely affect our operating results.

Increased competition could adversely affect our financial performance.

We operate in highly competitive industries and compete with national, regional and local providers.  Product, design, price, quality, service and convenience to the customer are the competitive elements in these industries.  If existing or future competitors seek to gain or retain market share by reducing prices, Cintas may be required to lower prices, which would hurt our operating results. Cintas’ competitors also generally compete with Cintas for acquisition candidates, which can increase the price for acquisitions and reduce the number of available acquisition candidates.  In addition, our customers and prospects may decide to perform certain services in-house instead of outsourcing these services to Cintas.  These competitive pressures could adversely affect our sales and operating results.

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Risks associated with the suppliers from whom our products are sourced could adversely affect our operating results.

The products we sell are sourced from a wide variety of domestic and international suppliers. Global sourcing of many of the products we sell is an important factor in our financial performance. All of our suppliers must comply with applicable laws, including labor and environmental laws, and otherwise be certified as meeting our required supplier standards of conduct. Our ability to find qualified suppliers who meet our standards, and to access products in a timely and efficient manner is a significant challenge, especially with respect to suppliers located and goods sourced outside the United States. Political and economic stability in the countries in which foreign suppliers are located, the financial stability of suppliers, suppliers’ failure to meet our supplier standards, labor problems experienced by our suppliers, the availability of raw materials to suppliers, currency exchange rates, transport availability and cost, inflation and other factors relating to the suppliers and the countries in which they are located are beyond our control. In addition, United States and Canadian foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade are beyond our control. These and other factors affecting our suppliers and our access to products could adversely affect our operating results.

An inability to open new, cost effective operating facilities may adversely affect our expansion efforts.

We plan to expand our presence in existing markets and enter new markets.  The opening of new operating facilities is necessary to gain the capacity required for this expansion.  Our ability to open new operating facilities depends on our ability to identify attractive locations, negotiate leases or real estate purchase agreements on acceptable terms, identify and obtain adequate utility and water sources, and comply with environmental regulations, zoning laws and other similar factors.  Any inability to effectively identify and manage these items may adversely affect our expansion efforts, and, consequently, adversely affect our financial performance.

Unionization campaigns could adversely affect our operating results.

Cintas continues to be the target of a corporate unionization campaign by several unions.  These unions are attempting to pressure Cintas into surrendering our employees’ rights to a government-supervised election by unilaterally accepting union representation.  We continue to vigorously oppose this campaign and defend our employees’ rights to a government-supervised election.  This campaign could be materially disruptive to our business and could materially adversely affect our operating results.

Compliance with environmental laws and regulations could result in significant costs that adversely affect our operating results.

Our operating locations are subject to environmental laws and regulations relating to the protection of the environment and health and safety matters, including those governing discharges of pollutants to the air and water, the management and disposal of hazardous substances and wastes and the clean-up of contaminated sites. The operation of our businesses entails risks under environmental laws and regulations. We could incur significant costs, including clean-up costs, fines and sanctions and claims by third parties for property damage and personal injury, as a result of violations of or liabilities under these laws and regulations. We are currently involved in a limited number of remedial investigations and actions at various locations.  While, based on information currently known to us, we believe that we maintain adequate reserves with respect to these matters, our liability could exceed forecasted amounts, and the imposition of additional clean-up obligations or the discovery of additional contamination at these or other sites could result in additional costs. In addition, potentially significant expenditures could be required to comply with environmental laws and regulations, including requirements that may be adopted or imposed in the future.

Under environmental laws, an owner or operator of real estate may be required to pay the costs of removing or remediating hazardous materials located on or emanating from property, whether or not the owner or operator knew of or was responsible for the presence of such hazardous materials.  While Cintas regularly engages in environmental due diligence in connection with acquisitions, we can give no assurance that locations that have been acquired or leased have been operated in compliance with environmental laws and regulations during prior periods or that future uses or conditions will not make us liable under these laws or expose us to third-party actions including tort suits.

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We are subject to legal proceedings that may adversely affect our financial condition and operating results.

We are party to various litigation claims and legal proceedings.  Certain of these lawsuits or potential future lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial condition and operating results.  We discuss these lawsuits and other litigation to which we are party in greater detail below under the caption “Item 3. Legal Proceedings” and in Note 12 to our consolidated financial statements.

Risks associated with our acquisition policy could adversely affect our operating results.

Historically, a portion of our growth has come from acquisitions.  We continue to evaluate opportunities for acquiring businesses that may supplement our internal growth.  However, there can be no assurance that we will be able to locate and purchase suitable acquisitions.  In addition, the success of any acquisition depends in part on our ability to integrate the acquired company.  The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our management’s attention and our financial and other resources.  Although we conduct due diligence investigations prior to each acquisition, there can be no assurance that we will discover all material liabilities of an acquired business for which we may be responsible as a successor owner or operator.  The failure to successfully integrate these acquired businesses or to discover such liabilities could adversely affect our operating results.

We may experience difficulties in attracting and retaining competent personnel in key positions.

We believe that part of our success is due to our corporate culture which has been imparted by management throughout our corporate organization.  This factor, along with our entire operation, depends on our ability to attract and retain key employees.  Competitive pressures within and outside our industry may make it more difficult and expensive for us to attract and retain key employees.

Unexpected events could disrupt our operations and adversely affect our operating results.

Unexpected events, including fires or explosions at facilities, natural disasters such as hurricanes and tornados, war or terrorist activities, unplanned outages, supply disruptions, failure of equipment or systems or changes in laws and/or regulations impacting our business, could adversely affect our operating results.  These events could result in customer disruption, physical damage to one or more key operating facilities, the temporary closure of one or more key operating facilities or the temporary disruption of information systems.

Failure to achieve and maintain effective internal controls could adversely affect our business and stock price.

Effective internal controls are necessary for us to provide reliable financial reports.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  While we continue to evaluate our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future.  If we fail to maintain the adequacy of our internal controls or if we or our independent registered public accounting firm were to discover material weaknesses in our internal controls, as such standards are modified, supplemented or amended, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.  Failure to achieve and maintain an effective internal control environment could cause us to be unable to produce reliable financial reports or prevent fraud.  This may cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.

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ITEM 2.
PROPERTIES

Cintas occupies 412 facilities located in 280 cities, of which 217 facilities are leased for various terms ranging from monthly to the year 2016.  Cintas expects that it will be able to renew its leases on satisfactory terms.  Of the twelve manufacturing facilities listed below, Cintas controls the operations of three of these manufacturing plants, but does not own or lease the real estate related to these operations.  All other properties are owned.  The corporate offices provide centrally located administrative functions including accounting, finance, marketing and computer system development and support. Cintas operates processing plants that house administrative, sales and service personnel and the necessary equipment involved in the cleaning of uniforms and bulk items, such as entrance mats and shop towels.  Branch operations provide administrative, sales and service functions. Cintas operates eight distribution centers and twelve manufacturing plants.  Cintas also operates first aid, safety and fire protection and document management facilities and direct sales offices.  Cintas considers the facilities it operates to be adequate for their intended use. Cintas owns or leases 12,617 vehicles.

The following chart provides additional information concerning Cintas’ facilities:

 

Rental processing plants, rental branches, distribution centers and manufacturing facilities are used in Cintas’ Rentals segment.  Rental processing plants, rental branches, first aid, safety and fire protection facilities, document management facilities, distribution centers, manufacturing facilities and direct sale offices are all used in the Other Services segment.

* Includes the Corporate office, which is attached to the distribution center in Cincinnati, OH.

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ITEM 3.

LEGAL PROCEEDINGS

We discuss certain legal proceedings pending against us in Part II of this Annual Report on Form 10-K under the caption “Item 8. Financial Statements and Supplementary Data,” in Note 12 to our consolidated financial statements, which is captioned “Litigation and Other Contingencies,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Litigation and Other Contingencies.”  We refer you to those discussions for important information concerning those legal proceedings, including the basis for such actions and, where known, the relief sought. We provide the following additional information concerning those legal proceedings which sets forth the name of the lawsuit, the court in which the lawsuit is pending and the date on which the petition commencing the lawsuit was filed.

Wage and Hour Litigation: Paul Veliz, et al., v. Cintas Corporation, United States District Court, Northern District of California, Oakland Division, March 19, 2003. On August 23, 2005, an amended complaint was filed alleging additional state law wage and hour claims under the following state laws: Arkansas, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Mexico, Ohio, Oregon, Pennsylvania, Rhode Island, Washington, West Virginia and Wisconsin. On February 14, 2006, the court permitted plaintiffs to file a second amended complaint alleging state law claims in the 15 states listed above only with respect to the putative class members that may litigate their claims in court.

Race and Gender Litigation and Related Charges: Robert Ramirez, et al., v. Cintas Corporation, United States District Court, Northern District of California, San Francisco Division, January 20, 2004; On April 27, 2005, the EEOC intervened in Ramirez; Mirna E. Serrano, et al., v. Cintas Corporation, United States District Court for the Eastern District of Michigan, Southern Division, May 10, 2004; On November 15, 2005, the EEOC intervened in Serrano; On May 11, 2006, the Ramirez African-American, Hispanic and female failure to hire into service sales representative position claims and the EEOC’s intervention were transferred to the Serrano case, the remaining claims in Ramirez were dismissed or compelled to arbitration; Larry Houston, et al., v. Cintas Corporation, United States District Court for the Northern District of California, August 3, 2005; On November 22, 2005, the named plaintiffs in Houston were ordered to arbitration; EEOC charge filed by an EEOC Commissioner on November 30, 2004, with the EEOC Systemic Litigation Unit; EEOC charge filed by Jennifer Fargo on January 24, 2005, with the Augusta Human Relations Commission and the EEOC Detroit District and an EEOC charge filed by Clifton Cooper on March 23, 2005, with the EEOC Systemic Litigation Unit. On May 18, 2006, the EEOC issued a dismissal and notice of rights and closed its file on the previously disclosed class action charge filed by Mattie Cooper on June 10, 2005, with the EEOC Systemic Litigation Unit. On May 26, 2006, the EEOC issued a dismissal and notice of rights and closed its file on the previously disclosed class action charge filed by Melissa Schulz on April 25, 2005, with the EEOC Systemic Litigation Unit and the Oregon Bureau of Labor and Industries, Civil Rights Division.

Breach of Fiduciary Duties:  J. Lester Alexander, III vs. Cintas Corp., et al., United States

Bankruptcy Court for the Middle District of Alabama, Eastern Division, October 25, 2004.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None in the fourth quarter of fiscal 2006.

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PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY,

RELATED STOCKHOLDER MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Cintas Corporation’s Common Stock is traded on the NASDAQ Global Select Market under the symbol “CTAS”. The following table shows the high and low closing prices by quarter during the last two fiscal years:

 

Fiscal 2006

 

Quarter Ended		High			Low
May 2006		$	44.30		$	39.90
February 2006		45.40			39.78
November 2005		45.17			38.31
August 2005		45.49			37.51

 

Fiscal 2005

 

Quarter Ended		High			Low
May 2005		$	44.55		$	37.89
February 2005		46.87			41.77
November 2004		45.91			40.38
August 2004		48.06			39.51

 

Holders

At May 31, 2006, there were approximately 2,000 shareholders of record of Cintas’ Common Stock. Cintas believes that this represents approximately 66,000 beneficial owners.

Dividends

Dividends on the outstanding Common Stock have been paid annually and amounted to $0.35 per share, $0.32 per share and $0.29 per share in fiscal 2006, fiscal 2005 and fiscal 2004, respectively.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

							Number of shares
		Number of shares					remaining available
		to be issued		Weighted average			for future issuance
		upon exercise of		exercise price of			under equity
Plan category		outstanding options (1)		outstanding options (1)			compensation plans
Equity compensation plans approved by shareholders		6,535,404		$	40.08		13,853,250
Equity compensation plans not approved by shareholders		—		—			—
Total		6,535,404		$	40.08		13,853,250

(1)             Excludes 128,075 unvested restricted stock units.

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Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities

None in the fourth quarter of fiscal 2006.

Purchases of Equity Securities by the Issuer and Affiliated Purchases

On May 2, 2005, Cintas announced that the Board of Directors authorized a $500 million stock repurchase program at market prices. During fiscal 2006, Cintas purchased approximately 7.9 million shares of Cintas stock at an average price of $40.83 per share, for a total purchase price of approximately $323 million. The Board did not specify an expiration date for this program.

 

 

In fiscal 2006, Cintas also acquired 73,848 shares as payment received from employees upon the exercise of options under the stock option plan.

In addition to the purchases made in fiscal 2006, Cintas has subsequently purchased 2.7 million shares of Cintas stock at an average price of $41.69 per share for a purchase price of approximately $114 million. From the inception of the stock repurchase program through July 21, 2006, Cintas has purchased a total of approximately 12.1 million shares of Cintas stock at an average price of $40.88 per share for a total purchase price of approximately $496 million. The maximum approximate dollar value of shares that may yet be purchased under the plan as of July 21, 2006, is approximately $4 million.

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ITEM 6.

SELECTED FINANCIAL DATA

Eleven Year Financial Summary

(In thousands except per share and percentage data)

 

Years Ended May 31		1996			1997		1998		1999		2000		2001		2002		2003		2004		2005		2006		10-Year Compd Growth
Revenue		$	1,103,492		1,261,899		1,476,945		1,751,568		1,901,991		2,160,700		2,271,052		2,686,585		2,814,059		3,067,283		3,403,608		11.9	%(3)
Net Income		$	98,956		118,557		133,654		138,939		193,387		222,451		234,251		249,253		272,205		300,518		327,178		12.7	%
Pro Forma Net Income (1)		$	94,151		112,763		128,704		138,939		193,387		222,451		234,251		249,253		272,205		300,518		327,178		13.3	%
Basic EPS		$	0.64		0.75		0.83		0.84		1.16		1.32		1.38		1.46		1.59		1.75		1.95		11.8	%
Diluted EPS		$	0.63		0.75		0.82		0.82		1.14		1.30		1.36		1.45		1.58		1.74		1.94		11.9	%
Pro Forma Basic EPS  (1)		$	0.61		0.72		0.80		0.84		1.16		1.32		1.38		1.46		1.59		1.75		1.95		12.3	%
Pro Forma Diluted EPS (1)		$	0.60		0.71		0.79		0.82		1.14		1.30		1.36		1.45		1.58		1.74		1.94		12.5	%
Dividends Per Share		$	0.09		0.10		0.12		0.15		0.19		0.22		0.25		0.27		0.29		0.32		0.35		14.5	%
Total Assets		$	996,046		1,101,182		1,305,400		1,407,818		1,581,342		1,752,224		2,519,234		2,582,946		2,810,297		3,059,744		3,425,237		13.1	%
Shareholders’ Equity		$	553,701		650,603		756,795		871,423		1,042,876		1,231,315		1,423,759		1,646,332		1,887,969		2,104,135		2,087,963		14.2	%
Return on Average Equity (2)		18.2		%	18.7	%	18.3	%	17.1	%	20.2	%	19.6	%	17.6	%	16.2	%	15.4	%	15.1	%	15.6	%
Long-Term Debt		$	237,550		227,799		307,633		283,581		254,378		220,940		703,250		534,763		473,685		465,291		794,454

Note:           Results prior to March 24, 1999, have been restated to include Unitog Company. Results prior to April 8, 1998, have also been restated to include Uniforms To You Companies.

(1)             Results for 1998 and prior years were adjusted on a pro forma basis to reflect the true tax impact of Uniforms To You as if it had been reported as a C Corporation prior to the merger with Cintas.

(2)             Return on average equity using pro forma net income. Return on average equity is computed as net income divided by the average of shareholders’ equity. We believe that this calculation gives management and shareholders a good indication of Cintas’ historical performance.

(3)             Represents the 10-year compound annual growth rate based on revenue as restated for pooling of interests transactions noted above.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS STRATEGY

Cintas provides highly specialized products and services to businesses of all types throughout the United States and Canada. We are North America’s leading provider of corporate identity uniforms through rental and sales programs, as well as a significant provider of related business services, including entrance mats, restroom products and services, first aid, safety and fire protection products and services, document management services and branded promotional products. Our products and services are designed to enhance our customers’ images and to provide additional safety and protection in the workplace.

Our business strategy is to increase our market share of the uniform rental and sales business in North America through the sale of new uniform programs and to provide our customers with all of the products and services we offer. We will also continue to identify additional product and service opportunities for our current and future customers. Our long-term goal is to provide a product or service to every business in North America.

To pursue this strategy, we focus on the development of a highly talented and diverse team of employees (whom we call partners) – a team that is properly trained and motivated to service our customers. We support our partners’ service efforts by providing superior products with distinct competitive advantages, and we embrace technological advances.

Continuous cost containment and product and process innovation are considered hallmarks of our organization. In order to sustain these efforts, we employ a Six Sigma effort within Cintas. Six Sigma is an analytical process that assists companies in improving quality and customer satisfaction while reducing cycle time and operating costs. We are pleased with our progress in this endeavor and are optimistic about the improved efficiencies that this process has and will continue to yield to Cintas.

We continue to leverage our size and core competencies to become a more valued business service provider to our current and future customers. We will also continue to supplement our internal growth with strategic acquisitions and the cultivation of new businesses.

RESULTS OF OPERATIONS

Fiscal 2006 marked the 37th consecutive year of uninterrupted growth in sales and profits for Cintas. In addition to achieving this milestone, Cintas experienced healthy improvements in profits, cash flow and balance sheet strength.

Cintas classifies its businesses into two operating segments, Rentals and Other Services, based on the similar economic characteristics of the products and services within each segment. The Rentals operating segment reflects the rental and servicing of uniforms and other garments, mats, mops and shop towels. In addition to these rental items, we also provide our restroom and hygiene products and services within this segment. The Other Services operating segment consists of the direct sale of uniforms and related items, first aid, safety and fire protection products and services, document management services and branded promotional products. Both segments provide these products and services throughout the United States and Canada to businesses of all types - from small service and manufacturing companies to major corporations that employ thousands of people.

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The following table sets forth certain consolidated statements of income data as a percentage of revenue by reporting segment and in total for the periods indicated:

 

 

As evidenced above, our revenue growth was higher in Other Services versus Rentals during fiscal 2006 and fiscal 2005, resulting in a moderate shift in the percentage of revenue between our reporting segments. This shift was mainly driven by the acquisitions of first aid, safety and fire protection businesses and document management businesses. Information related to acquisitions is discussed in Note 8 entitled Acquisitions of “Notes to Consolidated Financial Statements.”

FISCAL 2006 COMPARED TO FISCAL 2005

Fiscal 2006 total revenue was $3.4 billion, an increase of 11.0% over fiscal 2005. Internal growth improved in fiscal 2006 to 7.8%, up from 6.3% in fiscal 2005. Our internal growth continues to be generated mainly through the continued sale of uniform rental programs to new customers and the increased penetration of ancillary products to our existing customer base. The remaining growth in total revenue was generated predominantly through acquisitions of rental, first aid, safety and fire protection service businesses and document management businesses. Information related to acquisitions is discussed in Note 8 entitled Acquisitions of “Notes to Consolidated Financial Statements.”

Rentals operating segment revenues consist predominantly of revenues derived from the rental of corporate identity uniforms and other garments, and the rental and/or sale of mats, mops, shop towels, restroom supplies and other rental services. Revenue from the Rentals segment increased 8.7% over fiscal 2005. The increase in Rentals revenue was primarily due to growth in the customer base as well as the continued penetration of ancillary products into our existing customer base. New business remained healthy as we experienced continued success in selling rental programs to new customers. We also continued to expand our rental market, with over half of our new business being comprised of customers who were first time users of uniform rental programs. Internal revenue growth for the Rentals segment was 7.3% in fiscal 2006 compared to 6.8% in fiscal 2005. We estimate that the effects of hurricanes Katrina, Rita and Wilma negatively impacted our Rentals internal growth rate by approximately 0.3%. The 1.4% of remaining growth in fiscal 2006 resulted from the acquisition of rental volume.

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Other Services operating segment revenues are predominantly derived from the design, manufacture and direct sale of uniforms and related items, first aid, safety and fire protection products and services, document management services and branded promotional products. Other Services revenue increased 18.6% over fiscal 2005, primarily due to acquisitions of first aid, safety and fire protection businesses and document management businesses.

Internal revenue in the Other Services segment increased 9.6% over fiscal 2005. This increase was mainly driven by the growth of the sale of first aid, safety and fire protection products and services and document management services. We estimate that the effects of hurricanes Katrina, Rita and Wilma negatively impacted our Other Services internal growth rate by approximately 0.4%. Growth in the Other Services segment continues to be through an increase in the customer base and through further penetration of additional products and services into our existing customer base.

Cost of rentals increased 8.6% over fiscal 2005. Cost of rentals consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other rental items. The cost increase over fiscal 2005 was primarily driven by the growth in Rentals segment revenues. However, rising energy costs also contributed to this increase. Rentals energy costs increased 32% in fiscal 2006, from approximately $78 million in fiscal 2005 to approximately $102 million in fiscal 2006. Various cost containment initiatives implemented throughout the year helped offset the significant increase in energy costs. As a result, cost of rentals as of percent of Rentals revenues remained at 54.8% in both fiscal 2006 and fiscal 2005.

Increases in energy costs will continue to impact our operating results negatively in coming quarters, except to the extent we are able to offset such costs with price increases and increased operating efficiencies. Our New Orleans rental operation and Gulf Coast direct sale business continue to be impacted negatively by hurricanes Katrina, Rita and Wilma. While physical damage to our facilities was minimal, many of our customers in the region have yet to reopen or to return to pre-hurricane staffing levels. This lower business volume will continue to have an impact on our results. We are actively pursuing recoupment of our losses related to these hurricanes with our insurance carrier. We do not yet have a clear indication of when a recoupment agreement will be resolved, nor can we be sure of the amount we will receive.

Cost of other services increased 16.2% over fiscal 2005. Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses. The increase over fiscal 2005 was due to the growth in Other Services revenue, derived through a combination of internal growth and acquisitions. Gross margin within this segment may fluctuate depending on the type of product or service sold, as more cost efficient sourcing is employed and as products which require additional services or specialization generate higher gross margins. For example, tailored garments that incorporate high levels of design and customization tend to generate higher gross margins than work wear and standard catalog items. The gross margin for fiscal 2006 is 35.1%. The gross margin for Other Services has historically been in the 30% to 35% range. However, Six Sigma and other cost containment initiatives have allowed us to exceed this historical range. Due to the success of these initiatives and our continued efforts, we believe the future gross margins will be in the 32% to 37% range.

Selling and administrative expenses increased 12.1% over fiscal 2005. Selling and administrative expenses increased mainly due to higher selling expenses. In order to accelerate revenue growth, we have increased our sales force, marketing plans and sales promotions. These measures combined to increase our selling costs by approximately $24.0 million over the prior fiscal year. The cost of providing medical and retirement benefits to our employees increased $17.0 million, representing a 13.9% increase over the prior year. In addition, administrative expenses increased by $4.7 million as a result of an increase in the bad debt reserve and by $11.8 million as a result of an increase in professional services relating to legal and the outsourcing of certain human resource functions. Administrative expenses also increased by $5.2 million due to the amortization of intangibles, generated by new acquisitions.

Net interest expense (interest expense less interest income) increased $7.5 million from the prior fiscal year. This increase in net interest expense is due to increased interest rates on our outstanding debt and the increased level of borrowing used to fund acquisitions and the stock repurchase program.

Pre-tax income was $522 million, a 9.4% increase over fiscal 2005. Pre-tax income from the Rentals segment increased 8.6% over the prior year due to higher rental revenue and various cost containment initiatives, which offset the increases in selling expenses, medical and energy costs. Pre-tax income for the Other Services segment increased 24.7% from the prior year mainly due to increased revenue and cost containment initiatives.

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Cintas’ effective tax rate was 37.3% for fiscal 2006 which is comparable to the 37.0% in fiscal 2005 (see also Note 7 entitled Income Taxes of “Notes to Consolidated Financial Statements” and the Outlook section below).

Net income for fiscal 2006 of $327 million was an 8.9% increase over fiscal 2005, and diluted earnings per share of $1.94 was an 11.5% increase over fiscal 2005. The increase in diluted earnings per share was greater than the increase in net income due to the impact of the share repurchase program, which is discussed in more detail in the Liquidity and Capital Resources section below. Return on average equity was 15.6% in fiscal 2006 and 15.1% in fiscal 2005. Return on average equity is computed as net income divided by the average of shareholders’ equity. We believe that this calculation gives management and shareholders a good indication of Cintas’ historical performance.

FISCAL 2005 COMPARED TO FISCAL 2004

Fiscal 2005 total revenue was $3.1 billion, an increase of 9.0% over fiscal 2004. Internal growth improved throughout fiscal 2005 and was 6.3% for the year. As the economy continued to strengthen and employment rates improved, our internal growth rates improved. Internal growth by quarter is shown in the table below. Internal growth percentages have been adjusted for the appropriate number of workdays, by quarter and for the year, where applicable.

		Total Company Internal Growth
First Quarter Ending August 31, 2004		5.6	%
Second Quarter Ending November 30, 2004		5.0	%
Third Quarter Ending February 28, 2005		7.1	%
Fourth Quarter Ending May 31, 2005		7.5	%
For the Year Ending May 31, 2005		6.3	%

 

Historically, increases in our internal growth rate have lagged an economic upturn as customers add individuals to existing rental or sales programs or enter into new rental or sales programs. Our internal growth continues to be generated mainly through the continued sale of uniform rental programs to new customers and the increased penetration of ancillary products to our existing customer base. The remaining growth in total revenue was generated predominantly through acquisitions of first aid, safety and fire protection service businesses and document management businesses. Information related to acquisitions is discussed in Note 8 entitled Acquisitions of “Notes to Consolidated Financial Statements.”

Rentals operating segment revenues consist predominantly of revenues derived from the rental and/or sale of corporate identity uniforms, mats, shop towels, restroom supplies and other rental services. Revenue from the Rentals segment increased 7.4% over fiscal 2004. Internal revenue growth for the Rentals segment was 6.8% in fiscal 2005 compared to 4.2% in fiscal 2004. The 0.6% of remaining growth in fiscal 2005 resulted from the acquisition of rental volume.

The increase in Rentals revenue was primarily due to growth in the customer base as well as the continued penetration of ancillary products into our existing customer base. New business remained healthy as we experienced continued success in selling uniform rental programs to new customers. We also continued to expand our rental market, with over half of our new business being comprised of customers who were first time users of uniform rental programs. Rentals revenue growth was partially offset by lost business of approximately 7.0%.

Other Services operating segment revenues are predominantly derived from the design, manufacture and direct sale of uniforms to our customers and the sale of other direct sale products and services. Other direct sale products and services include cleanroom supplies, first aid, safety and fire protection products and services and document management services. Other Services revenue increased 14.9% over fiscal 2004, primarily due to acquisitions of first aid, safety and fire protection businesses and document management businesses.

Internal revenue growth in the Other Services segment was 4.4% for the year. This increase was mainly driven by the growth of the sale of first aid, safety and fire protection products and services and document management services. Growth in these areas continues to be through an increase in the customer base and through further penetration of additional products and services into our existing customer base.

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Cost of rentals increased 6.0% over fiscal 2004. Cost of rentals consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other rental items. The cost increase over fiscal 2004 was primarily driven by the growth in Rentals segment revenues. Rising energy costs also contributed to this increase. Various cost containment initiatives implemented throughout the year provided a decrease in cost of rentals as a percent to Rentals revenue from 55.5% in fiscal 2004 to 54.8% in fiscal 2005.

Cost of other services increased 15.2% over fiscal 2004. Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses. The increase over fiscal 2004 was due to the growth in Other Services revenue, derived through a combination of internal growth and acquisitions. Gross margin within this segment generally fluctuates between 30% to 35%, depending on the type of product or service sold. Products which require additional services generate higher gross margins. The gross margin for fiscal 2005 is 33.7%, which is in the upper portion of that general range, mainly due to a shift in the product mix.

Selling and administrative expenses increased 11.4% over fiscal 2004. Selling and administrative expenses increased mainly due to higher selling expenses. In order to accelerate revenue growth, we have increased our sales force, marketing plans and sales promotions. These measures combined to increase our selling costs by approximately $36 million over the prior fiscal year. The cost of providing medical benefits to our employees also increased approximately $15 million. The costs of providing medical benefits are anticipated to continue to rise.

Net interest expense decreased $5 million from the prior fiscal year. This decrease was primarily a result of increased interest income due to higher levels of cash and marketable securities throughout the entire year and an increase in the interest rate environment.

Pre-tax income was $477 million, a 10.4% increase over fiscal 2004. Pre-tax income from the Rentals segment increased 9.2% over the prior year due to higher rental revenue and various cost containment initiatives, which more than offset the increases in selling expenses and medical costs. Pre-tax income for the Other Services segment decreased 1.4% from the prior year mainly due to increased selling expenses and medical costs.

Cintas’ effective tax rate was 37.0% for both fiscal 2005 and fiscal 2004 (see also Note 7 entitled Income Taxes of “Notes to Consolidated Financial Statements” and the Outlook section below).

Net income for fiscal 2005 of $301 million was a 10.4% increase over fiscal 2004 and diluted earnings per share of $1.74 was a 10.1% increase over fiscal 2004, both of which are consistent with the increases in pre-tax income. Return on average equity was approximately 15% in both fiscal 2005 and 2004. Return on average equity is computed as net income divided by the average of shareholders’ equity. We believe that this calculation gives management and shareholders a good indication of Cintas’ historical performance.

Cash, cash equivalents and marketable securities increased by $55 million in fiscal 2005, or 21.7%, primarily due to increased revenues. Cash, cash equivalents and marketable securities will be used to finance future acquisitions, capital expenditures, expansion and possible stock repurchases. Marketable securities consist primarily of municipal bonds and federal government securities.

Accounts receivable increased $41 million due to increased revenues. Accounts receivable also increased due to a loan to an affiliated company. During the fourth quarter of fiscal 2005, the Board of Directors approved and Cintas provided a $10 million loan to an affiliated company with specific repayment terms over the next three years. This affiliated company manufactures a significant portion of Cintas’ mats. A dividend of $5 million was subsequently received by Cintas from this affiliate in the first quarter of fiscal 2006.

Inventories increased $28 million mainly due to increased revenues. Other contributing factors include the continued increase in international sourcing of product, a current conversion of our comfort pant to a new fabric and style, and additional inventory requirements for our Uniform Book, a large catalog used for the direct sale of uniforms and accessories.

Net property and equipment increased by $32 million due to continued investment in rental facilities and equipment and real estate purchased in conjunction with the acquisitions of first aid, safety and fire protection and document management businesses. Capital expenditures exceeded depreciation expense by $21 million. During the year, Cintas completed construction of five new uniform rental facilities and has an additional three uniform rental facilities in various stages of construction to accommodate growth in rental operations.

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Total debt decreased $12 million through repayment of certain debt, net of the change in fair market value of the debt (see Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”).

LIQUIDITY AND CAPITAL RESOURCES

At May 31, 2006, Cintas had $241 million in cash, cash equivalents and marketable securities, representing a decrease of $68 million from May 31, 2005, or 22%. This decrease is primarily due to acquisitions and the share repurchase program. Cash generated from operations was $462 million in fiscal 2006 as compared to $414 million generated in fiscal 2005. This $48 million increase was primarily due to increased net income. Significant uses of cash in fiscal 2006 were capital expenditures of $157 million, acquisitions of $346 million (net of cash acquired), common stock repurchases of $323 million and dividends of $59 million. Cash, cash equivalents and marketable securities will be used to finance future acquisitions, capital expenditures, expansion and share repurchases.

Marketable securities consist primarily of municipal bonds and federal government securities. Cintas’ investment policy pertaining to marketable securities is conservative. Preservation of principal, while earning an attractive yield, is the criteria used in making investment decisions.

Accounts receivable increased $63 million, primarily due to increased revenues. The average collection period in fiscal 2006 remained comparable with fiscal 2005.

Inventories decreased $18 million, or 8.5%, mainly due to inventory management initiatives within our distribution network. We were able to reduce inventory despite an 11% increase in revenues.

Working capital decreased $45 million to $766 million in fiscal 2006. This decrease is primarily the result of decreased cash and marketable securities and inventories and increased accrued liabilities, offset by an increase in accounts receivable.

Net property and equipment increased by $47 million due to continued investment in rental facilities and equipment and real estate purchased in conjunction with the acquisitions of rental, first aid, safety and fire protection and document management businesses. Capital expenditures for fiscal 2006 totaled $157 million, including $125 million for the Rentals segment and $32 million for Other Services, exceeding depreciation expense by $30 million. Cintas continues to reinvest in land, buildings and equipment in an effort to expand capacity for future growth. During the year, Cintas completed construction of one new uniform rental facility and has an additional two uniform rental facilities in various stages of construction to accommodate growth in rental operations. Cintas anticipates that capital expenditures for fiscal 2007 will be between $150 and $170 million.

Long-term debt totaled $794.5 million at May 31, 2006. This includes $225 million with five-year maturities at a rate of 5.125% and $225 million with ten-year maturities at a rate of 6.0% which was borrowed in order to finance the Omni acquisition in fiscal 2002. Cintas has earned credit ratings on these notes of “A” from Standard & Poor’s and “A2” from Moody’s. In addition, long-term debt also includes $333.5 million in commercial paper. Cintas utilizes a $400 million commercial paper program, on which it has earned credit ratings of “A-1” from Standard & Poor’s and “Prime-1” from Moody’s. According to Standard & Poor’s and Moody’s, these ratings reflect Cintas’ commitment to conservative financial policies, strong financial management and a disciplined integration strategy for acquisitions. The commercial paper program is fully supported by a long-term credit facility that matures in 2011.

Cintas’ total debt to capitalization ratio has increased from 18.3% at May 31, 2005, to 27.6% at May 31, 2006. Total debt increased $326 million in fiscal 2006 due to the issuance of commercial paper through our line of credit. Cintas issued commercial paper in fiscal 2006 in order to use the proceeds to execute the share repurchase program. During fiscal 2006, Cintas repurchased $323 million of Cintas stock. In addition, commercial paper proceeds were used to fund multiple acquisitions (see Note 5 entitled Long-Term Debt and Note 8 entitled Acquisitions of “Notes to Consolidated Financial Statements”). Subsequent to May 31, 2006, Cintas borrowed an additional $56 million under the $400 million commercial paper program for short-term cash requirements. This financing decision was made in order to allow certain marketable securities to reach maturity rather than Cintas incurring a penalty for early redemption.

During the year, Cintas paid dividends of $59 million, or $0.35 per share. On a per share basis, this dividend is an increase of 9.4% over the dividend paid in fiscal 2005. This marks the 23rd consecutive year that Cintas has increased its annual dividend since going public in 1983.

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On May 2, 2005, Cintas announced that the Board of Directors authorized a $500 million stock repurchase program at market prices. During fiscal 2006, Cintas purchased approximately 7.9 million shares of Cintas stock at an average price of $40.83 per share, for a total purchase price of approximately $323 million. Subsequent to May 31, 2006, Cintas purchased approximately 2.7 million additional shares of Cintas stock at an average price of $41.69 per share for a total purchase price of approximately $114 million. From the inception of the stock repurchase program through July 21, 2006, Cintas has purchased approximately 12.1 million shares of Cintas stock at an average price of $40.88 per share for a total purchase price of approximately $496 million. In July 2006, Cintas announced that the Board of Directors approved the expansion of its share repurchase program by an additional $500 million. The Board did not specify an expiration date for this program.

Following is information regarding Cintas’ long-term contractual obligations and other commitments outstanding as of May 31, 2006:

LONG-TERM CONTRACTUAL OBLIGATIONS

 

Cintas also makes payments to defined contribution plans. The amounts of contributions made to the plans are made at the discretion of Cintas. Future contributions are expected to increase 15% annually. Assuming this 15% increase, payments due in one year or less would be $31,791, two to three years would be $78,602 and four to five years would be $103,951. Payments for years thereafter are expected to continue increasing by 15% each year.

(1)             Long-term debt primarily consists of $450,000 in long-term notes related to the Omni acquisition and $333,500 in commercial paper. Reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements” for a detailed discussion of long-term debt.

(2)             Capital lease obligations are included in long-term debt detailed in Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements.”

(3)             Operating leases consist primarily of building leases and a synthetic lease on a corporate jet.

(4)             Interest payments include interest on both fixed and variable rate debt. Rates have been assumed to increase 75 basis points for fiscal 2007, an additional 25 basis points in fiscal 2008, an additional 25 basis points in fiscal 2009 and then remain constant in future years.

(5)             Reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements” for a detailed discussion of interest swap agreements.

OTHER COMMITMENTS

 

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(1)             Back-up facility for the commercial paper program (reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements” for further discussion).

(2)             Support certain outstanding debt (reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”), self-insured workers’ compensation and general liability insurance programs.

Cintas has no off-balance sheet arrangements other than the synthetic lease on a corporate jet. The synthetic lease on the aircraft does not currently have, and is not reasonably likely to have, a current or future material effect on Cintas’ financial condition, changes in Cintas’ financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

INFLATION AND CHANGING PRICES

Changes in wages, benefits and energy costs have the potential to materially impact Cintas’ financial results. Medical benefits and energy costs, in particular, continue to rise. M