10-K 1 ctas531201510k.htm 10-K CTAS 5.31.2015 10K


UNITED STATES
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, 2015
 
 
 
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)
WASHINGTON
 
 
 
31-1188630
(State or Other Jurisdiction of
Incorporation or Organization)
 
 
 
(I.R.S. Employer
Identification No.)
 
 
6800 Cintas Boulevard
P.O. Box 625737
Cincinnati, Ohio 45262-5737
(Address of Principal Executive Offices)
 
 
 
 
 
(513) 459-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, no par value
The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
    
YES
ü
 
NO
 
 
    
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
    
YES
 
 
NO
 
ü
 
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 (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
    
YES
ü
 
NO
 
 
 
Indicate by a check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
    
YES
ü
 
NO
 
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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.        
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
ü
Accelerated Filer
 
Smaller Reporting Company
 
Non-Accelerated Filer
 
(Do not check if a smaller reporting company.)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    
YES
 
 
NO
 
ü
    
The aggregate market value of the Registrant's Common Stock held by non-affiliates as of November 28, 2014, was $8,579,254,230 based on a closing sale price of $73.15 per share. As of June 30, 2015, 178,170,012 shares of the Registrant's Common Stock were issued and 110,211,359 shares were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be filed with the Commission for its 2015 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

1


Cintas Corporation
Index to Annual Report on Form 10-K

 

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Part I

 

Item 1.  Business
Cintas Corporation ("Cintas," "Company," "we," "us" or "our"), a Washington corporation, provides highly specialized products and services to businesses of all types primarily throughout North America, as well as Latin America, Europe and Asia. Cintas' products and services are designed to enhance its customers' images and brand identification, as well as provide a safe and efficient workplace. Cintas was founded in 1968 by Richard T. Farmer, currently the Chairman Emeritus of the Board of Directors, when he left his family's industrial laundry business in order to develop uniform programs using an exclusive new fabric. In the early 1970's, 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.
Effective August 31, 2014, Cintas classifies its businesses into three reportable operating segments ("operating segments") based on the types of products and services provided. The Rental Uniforms and Ancillary Products 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 carpet and tile cleaning services are also provided within this operating segment. The Uniform Direct Sales operating segment consists of the direct sale of uniforms and related items. The First Aid, Safety and Fire Protection Services operating segment consists of first aid, safety and fire protection products and services.
Previously, Cintas classified its businesses into four operating segments. The Document Management Services operating segment is no longer considered an operating segment. This operating segment consisted of document destruction services ("Shredding") and document imaging and retention services ("Storage"). On April 30, 2014, Cintas completed its partnership transaction with the shareholders of Shred-it International Inc. (Shred-it) to combine Cintas' Shredding with Shred-it's shredding business ("the Shredding Transaction"). Due to the deconsolidation of Shredding, fiscal 2015 results exclude the results of Shredding. Shredding remains reported in continuing operations for fiscal 2014 (through April 30, 2014 as previously discussed) and 2013. Based on the change in reportable operating segments, the results of Shredding for the year ended May 31, 2014 are presented within Corporate. Additionally, effective August 31, 2014, Storage is reported as a discontinued operation for all periods presented and has been excluded from continuing operations and from operating segment results for all periods presented. In the quarter ended November 30, 2014, Cintas sold Storage in a series of transactions ("Storage Transactions"). Please see Note 17 entitled Discontinued Operations of "Notes to Consolidated Financial Statements" for additional information.
On April 30, 2014, the Shredding Transaction was completed. Cintas Shredding represented approximately 76%, 80%, and 70% of Cintas' Document Management Services operating segment's assets, revenue, and income before income taxes, respectively, as of and for the quarter ended February 28, 2014. Under the agreement, Cintas and Shred-it each contributed its shredding business to a newly formed partnership owned 42% by Cintas and 58% by the shareholders of Shred-it ("the Shred-it Partnership"). In addition to its 42% ownership of the Shred-it Partnership, Cintas received $180.0 million in cash at the closing of the Shredding Transaction. Cintas' equity interest in the partnership is accounted for under the equity method of accounting as prescribed by U.S. generally accepted accounting principles ("GAAP").
We provide our products and services to over one million businesses of all types — from small service and manufacturing companies to major corporations that employ thousands of people. This diversity in customer base results in no individual customer accounting for greater than one percent of Cintas' total revenue. As a result, the loss of one account would not have a significant financial impact on Cintas.

3



The following table sets forth Cintas' total revenue and the revenue derived from each operating segment:
Fiscal Year Ended May 31, (in thousands) (1)
2015
 
2014
 
2013
 
 
 
 
 
 
Rental Uniforms and Ancillary Products
$
3,454,956

 
$
3,223,930

 
$
3,044,587

Uniform Direct Sales
453,653

 
455,485

 
461,328

First Aid, Safety and Fire Protection Services
568,277

 
514,429

 
460,592

Corporate (2)

 
275,721

 
279,457

Total Revenue
$
4,476,886

 
$
4,469,565

 
$
4,245,964


(1) 
The figures for all years presented reflect the change in classification of Storage to discontinued operations within the Consolidated Statements of Income. See Note 17 entitled Discontinued Operations of "Notes to Consolidated Financial Statements."
(2) 
Corporate results for the fiscal years ended 2014 and 2013 include Shredding revenue. Fiscal year 2014 includes only eleven months of Shredding revenue as the Shredding Transaction closed on April 30, 2014.
Additional information regarding each operating segment is also included in Note 15 entitled Operating Segment Information of "Notes to Consolidated Financial Statements."
The primary markets served by all 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' local operations. Product, design, price, quality, service and convenience to the customer are the competitive elements in each of our operating segments.
Within the Rental Uniforms and Ancillary Products operating segment, Cintas provides its products and services to customers via local delivery routes originating from rental processing plants and branches. Within the Uniform Direct Sales and First Aid, Safety and Fire Protection Services operating segments, Cintas provides its products and services via its distribution network and local delivery routes or local representatives. In total, Cintas has approximately 8,000 local delivery routes, 364 operational facilities and eight distribution centers. At May 31, 2015, Cintas employed approximately 32,000 employees, of which approximately 200 were represented by labor unions.
Cintas sources finished products from many outside suppliers. In addition, Cintas operates five manufacturing facilities that provide for 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 its 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 $12 million in fiscal 2015 and approximately $21 million in fiscal 2014. Capital expenditures to limit or monitor hazardous substances totaled approximately $4 million in fiscal 2015, and there were no capital expenditures in fiscal 2014. Cintas does not expect a material change in the cost of environmental compliance and is not aware of any material non-compliance with environmental laws.
Cintas uses its corporate website, www.cintas.com, as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. Cintas files with or furnishes to the SEC Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, as well as proxy statements and annual reports to shareholders, and, from time to time, other documents. The reports and other documents filed with or furnished to the SEC are available to investors on or through our corporate website free of charge as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. In addition, the public may read and copy any of the materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington D.C. 20549. The public may obtain information on the operation of the facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site located at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, such as Cintas, that file electronically with the SEC. Cintas' SEC filings and its Code of Business Conduct can be found on the Investor Information page of its website at www.cintas-corp.com/company/investor_information/highlights.aspx. These documents are available in print to any shareholder who requests a copy by writing or calling Cintas as set forth on the Investor Information page. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.


4



Item 1A.  Risk Factors
The statements in this section describe the most significant risks that could materially and adversely affect our business, consolidated financial condition and consolidated results of operation and the trading price of our debt or equity securities.
In addition, this section sets forth statements which constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995.
This Annual Report on Form 10-K contains 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," "predicts," "projects," "plans," "expects," "intends," "target," "forecast," "believes," "seeks," "could," "should," "may" and "will" or the negative versions thereof and similar words, terms and 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. You should not place undue reliance on any forward-looking statement. We cannot guarantee that any forward-looking statement will be realized. These statements are subject to various risks, uncertainties, potentially inaccurate assumptions 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 successful completion of the sale of Cintas' investment in the Shred-it Partnership within the expected timeframe or at all; the possibility of greater than anticipated operating costs including energy and fuel costs; lower sales volumes; loss of customers due to outsourcing trends; the performance and costs of integration of acquisitions; fluctuations in costs of materials and labor including increased medical costs costs; costs and possible effects of union organizing activities; failure to comply with government regulations concerning employment discrimination, employee pay and benefits and employee health and safety; the effect on operations of exchange fluctuations, tariffs and other political, economic and regulatory risks; 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; disruptions caused by the inaccessibility of computer systems data, including cybersercurity risks; the initiation or outcome of litigation, investigations or other proceedings; higher assumed sourcing or distribution costs of products, the disruption of operations from catastrophic or extraordinary events; the amount and timing of repurchases of our common stock, if any; changes in federal and state tax and labor laws; the reactions of competitors in terms of price and service; and the ultimate impact of the Affordable Care Act. Cintas undertakes no obligation to publicly release any revisions to any forward-looking statements or to otherwise update any forward-looking statements whether as a result of new information or to reflect events, circumstances or any other unanticipated developments arising after the date on which such statements are made, except otherwise as required by law. The risks and uncertainties described herein are not the only ones we may face. Additional risks and uncertainties presently not known to us or that we currently believe to be immaterial may also harm our business.
Negative global economic factors may adversely affect our financial performance.
Negative economic conditions, in North America and our other markets, 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 the cost to provide employee-partner related healthcare benefits, labor shortages or shortages of skilled labor, higher material costs for items such as fabrics and textiles, the inability to obtain insurance coverage at cost-effective rates, higher interest rates, inflation, higher tax rates and other changes in tax laws and other economic factors could increase our costs of rental uniforms and ancillary products and other services and selling and administrative expenses. As a result, these factors could adversely affect our sales and consolidated results of operations.
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 its results of operations. 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 us. These competitive pressures could adversely affect our sales and consolidated results of operations.

5



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.
Risks associated with our acquisition practice could adversely affect our results of operations.
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 or adequately protect against 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 consolidated results of operations.
Increases in fuel and energy costs could adversely affect our financial condition and results of operations.
The price of fuel and energy needed to run our vehicles and equipment is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns, limits on refining capacities, natural disasters and environmental concerns. Increases in fuel and energy costs could adversely affect our consolidated financial condition and consolidated results of operations.
Unionization campaigns could adversely affect our results of operations.
Cintas has been and could continue to be the target of a unionization campaign by several unions. These unions have attempted to pressure Cintas into surrendering its employees' rights to a government-supervised election by unilaterally accepting union representation. We will continue to vigorously oppose any unionization campaign and defend our employees' rights to a government-supervised election. Unionization campaigns could be materially disruptive to our business and could adversely affect our consolidated results of operations.
Risks associated with the suppliers from whom our products are sourced could adversely affect our results of operations.
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. We require all of our suppliers to 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, U.S. and 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 consolidated results of operations.
Fluctuations in foreign currency exchange could adversely affect our financial condition and results of operations.
We earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including the Canadian dollar, British pound, and the euro. In fiscal years 2015, 2014 and 2013, revenue denominated in currencies other than the U.S. dollar represented less than 10% of our consolidated revenue. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenue, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, fluctuations in the value of the U.S. dollar against other major currencies, particularly in the event of significant increases in foreign currency revenue, will impact our revenue and operating income and the value of balance sheet items denominated in foreign currencies. This impact could adversely affect our consolidated financial condition and consolidated results of operations.

6



Failure to comply with federal and state regulations to which we are subject could result in penalties or costs that could adversely affect our results of operations.  
Our business is subject to complex and stringent state and federal regulations, including employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements, transportation and other laws and regulations.  In particular, we are subject to the regulations promulgated by the U.S. Department of Transportation, or USDOT, and under the Occupational Safety and Health Act of 1970, as amended, or OSHA.  We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with the USDOT, OSHA and other laws and regulations to which we are subject.  Changes in laws, regulations and the related interpretations may alter the landscape in which we do business and may affect our costs of doing business.  The impact of new laws and regulations cannot be predicted. Compliance with new laws and regulations may increase our operating costs or require significant capital expenditures. Any failure to comply with applicable laws or regulations could result in substantial fines by government authorities, payment of damages to private litigants, or possible revocation of our authority to conduct our operations, which could adversely affect our ability to service customers and our consolidated results of operations.  
We are subject to legal proceedings that may adversely affect our financial condition and results of operations.
We are party to various litigation claims and legal proceedings. We discuss these lawsuits and other litigation to which we are party in greater detail under the caption "Item 3. Legal Proceedings" and in Note 13 entitled Litigation and Other Contingencies of "Notes to Consolidated Financial Statements." Certain of these lawsuits or potential future lawsuits, if decided adversely to us or settled by us, may result in liability and expense material to our consolidated financial condition and consolidated results of operations.
Compliance with environmental laws and regulations could result in significant costs that adversely affect our results of operations.
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 significant additional costs which could adversely affect our results of operations. 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 applicable 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 we regularly engage 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.
We rely extensively on computer systems to process transactions, maintain information and manage our businesses. Disruptions in the availability of computer systems, or privacy breaches involving computer systems, could impact our ability to service our customers and adversely affect our sales, results of operations and reputation and expose us to litigation risk.
Our businesses rely on our computer systems to provide customer information, process customer transactions and provide other general information necessary to manage our businesses. We have an active disaster recovery plan in place that is frequently reviewed and tested. However, our computer systems are subject to damage or interruption due to system conversions, power outages, computer or telecommunication failures, catastrophic events such as fires, tornadoes and hurricanes and usage errors by our employees. Although we believe that we have adopted appropriate measures to mitigate potential risks to our technology and our operations from these information technology-related and other potential disruptions, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays and interruptions in our ability to provide products and services to our customers. Any disruption caused by the unavailability of our computer systems could adversely affect our sales, could require us to make a significant investment to fix or replace them and, therefore, could adversely affect our consolidated results of operations. In addition, cyber-security attacks are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches

7



that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. If the network of security controls, policy enforcement mechanisms and monitoring systems to address these threats to our technology fails, the compromising of confidential or otherwise protected Company, customer, or employee information, destruction or corruption of data, security breaches, or other manipulation or improper use of our systems and networks could result in financial losses from remedial actions, loss of business or potential liability and damage to our reputation.
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 the consolidated 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.
We may experience difficulties in attracting and retaining competent personnel in key positions.
We believe that a key component of our success is 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 which could adversely affect our businesses.
Unexpected events could disrupt our operations and adversely affect our results of operations.
Unexpected events, including fires or explosions at facilities, natural disasters such as hurricanes and tornadoes, war or terrorist activities, unplanned outages, supply disruptions, failure of equipment or systems or changes in laws and/or regulations impacting our businesses, could adversely affect our results of operations. 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.
We may recognize impairment charges, which could adversely affect our financial condition and results of operations.
We assess our goodwill and other intangible assets and our long-lived assets for impairment when required by U.S. generally accepted accounting principles. These accounting principles require that we record an impairment charge if circumstances indicate that the asset carrying values exceed their estimated fair values. The estimated fair value of these assets is impacted by general economic conditions in the locations in which we operate. Deterioration in these general economic conditions may result in: declining revenue, which can lead to excess capacity and declining operating cash flow; reductions in management's estimates for future revenue and operating cash flow growth; increases in borrowing rates and other deterioration in factors that impact our weighted average cost of capital; and deteriorating real estate values. If our assessment of goodwill, other intangible assets or long-lived assets indicates an impairment of the carrying value for which we recognize an impairment charge, this may adversely affect our consolidated financial condition and consolidated results of operations.
The effects of credit market volatility and changes in our credit ratings could adversely affect our liquidity and results of operations.
Our operating cash flows, combined with access to the credit markets, provide us with significant discretionary funding capacity. However, deterioration in the global credit markets may limit our ability to access credit markets, which could adversely affect our liquidity and/or increase our cost of borrowing. In addition, credit market deterioration and its actual or perceived effects on our results of operations and financial condition, along with deterioration in general economic conditions, may increase the likelihood that the major independent credit agencies will downgrade our credit ratings, which could increase our cost of borrowing. Increases in our cost of borrowing could adversely affect our consolidated results of operations.





8



We may not be able to successfully complete the pending sale of our interest in the Shred-It Partnership, in which case we may encounter difficulties.
On July 15, 2015, Cintas announced that it entered into a definitive agreement to sell its investment in the Shred-it Partnership to Stericycle, Inc., a global business to business compliance solutions provider specializing in complex and highly regulated arenas. Upon closing of the transaction, the Shred-it Partnership will become a wholly owned subsidiary of Stericycle. The transaction is expected to close in the second quarter of fiscal 2016, subject to obtaining regulatory approvals and satisfaction of other customary closing conditions. However, we may not be able to complete the proposed sale within the expected timeframe or at all.
If we are not able to complete the proposed sale of our equity investment in the Shred-it Partnership, we will encounter risks related to the Shred-it Partnership, including difficulties in the combination of operations, services, and personnel, and may divert management’s attention from business operations. The inability of the Shred-it Partnership to successfully combine the businesses in a manner that permits the entity to achieve the full revenue and cost synergies could adversely impact the value of our investment. The loss of revenue due to the Shred-it Partnership may have a dilutive impact that we may be unable to offset. We may also incur unexpected costs, including impairment charges, litigation, and other liabilities. As a minority partner in the partnership, our ability to influence our partner may be limited, and non-alignment of interests on various strategic decisions in the partnership may adversely impact our business. For example, our partner may: (i) have economic or business interests or goals that are inconsistent with ours; (ii) take actions contrary to our policies or objectives; (iii) undergo a change of control; (iv) experience financial and other difficulties; or (v) be unable or unwilling to fulfill its obligations under the agreements governing the Shred-it Partnership, which may affect our consolidated financial condition or consolidated results of operations.

Item 1B.  Unresolved Staff Comments
None.


9



Item 2.  Properties
Cintas occupies 377 facilities located in 286 cities. Cintas leases 184 of these facilities for various terms ranging from monthly to the year 2027. Cintas expects that it will be able to renew or replace its leases on satisfactory terms. Of the five manufacturing facilities noted below, Cintas controls the operations of one manufacturing facility, but does not own or lease the real estate related to the operation. All other facilities are owned. The principal executive office in Cincinnati, Ohio, provides centrally located administrative functions including accounting, finance, marketing and computer system development and support. Cintas operates rental 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 five manufacturing facilities. Cintas also operates first aid, safety and fire protection and and direct sales offices. Cintas considers the facilities it operates to be adequate for their intended use. Cintas owns or leases approximately 13,600 vehicles which are used for the route-based services and by the sales and management employee-partners.
The following chart provides additional information concerning Cintas' facilities:
Type of Facility
# of Facilities
 
 
 
 
Rental Processing Plants
165

 
Rental Branches
111

 
First Aid, Safety and Fire Protection Facilities
68

 
Distribution Centers
8

*
Manufacturing Facilities
5

 
Direct Sales Offices
15

 
Corporate
5

 
Total
377

 

Rental processing plants, rental branches, distribution centers and manufacturing facilities are used in Cintas' Rental Uniforms and Ancillary Products operating segment. Rental processing plants, rental branches, distribution centers, manufacturing facilities and direct sales offices are all used in the Uniform Direct Sales operating segment. First aid, safety and fire protection facilities, rental processing facilities and distribution centers are used in the First Aid, Safety and Fire Protection Services operating segment. Corporate facilities include facilities previously utilized in the former Document Management Services operating segment that were excluded from the Storage Transactions.
* Includes the principal executive office, which is attached to the distribution center in Cincinnati, Ohio.

Item 3.  Legal Proceedings
We discuss material legal proceedings (other than ordinary routine litigation incidental to our business) pending against us in "Item 8. Financial Statements and Supplementary Data," in Note 13 entitled Litigation and Other Contingencies of "Notes to Consolidated Financial Statements." We refer you to and incorporate by reference into this Item 3 that discussion for important information concerning those legal proceedings, including the basis for such actions and, where known, the relief sought.

Item 4.  Mine Safety Disclosures

Not applicable.


10



Part II

 

Item 5.  Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Cintas' common stock is traded on the NASDAQ Global Select Market under the symbol "CTAS." The following table provides the high and low sales prices of shares of Cintas' common stock by quarter during the last two fiscal years:

Fiscal 2015
 
 
 
Quarter Ended
High
 
Low
 
 
 
 
May 2015
$
88.23

 
$
79.51

February 2015
84.18

 
70.61

November 2014
73.95

 
65.79

August 2014
66.50

 
61.70

 
 
 
 
Fiscal 2014
 
 
 
Quarter Ended
High
 
Low
 
 
 
 
May 2014
$
62.26

 
$
55.65

February 2014
63.28

 
53.83

November 2013
57.99

 
47.64

August 2013
49.42

 
44.55

Holders
At May 31, 2015, there were approximately 2,000 shareholders on record of Cintas' common stock. Cintas believes that this represents approximately 46,000 beneficial owners.
Dividends
Dividends on Cintas' outstanding common stock have been paid annually and amounted to $1.70 per share, $0.77 per share, and $0.64 per share in fiscal 2015, 2014 and 2013, respectively. The fiscal 2015 dividend was comprised of an annual cash dividend of $0.85 per share, and an additional $0.85 per share special dividend related to the cash proceeds received from the Shred-it Transaction.

11



Stock Performance Graph
The following graph summarizes the cumulative return on $100 invested in Cintas' common stock, the S&P 500 Stock Index and the common stocks of a selected peer group of companies. Because our products and services are diverse, Cintas does not believe that any single published industry index is appropriate for comparing shareholder return. Therefore, the peer group used in the performance graph combines four publicly traded companies in the business services industry that have similar characteristics as Cintas, such as route based delivery of products and services. The companies included in the Peer Group are G & K Services, Inc., UniFirst Corporation, ABM Industries, Inc., and Iron Mountain, Inc.
Total shareholder return was based on the increase in the price of the common stock and assumed reinvestment of all dividends. Further, total return was weighted according to market capitalization of each company. The companies in the Peer Group are not the same as those considered by the Compensation Committee of the Board of Directors.

Total Shareholder Returns
Comparison of Five-Year Cumulative Total Return

12



Purchases of Equity Securities by the Issuer and Affiliated Purchases
Period (In millions, except share and per share data)
Total number
of shares
purchased
 
Average
price paid
per share
 
Total number of
shares purchased
as part of the
publicly announced
plan (1)
 
Maximum
approximate dollar
value of shares that
may yet be
purchased under
the plan (1)
 
 
 
 
 
 
 
 
March 1 - 31, 2015 (2)
1,249

 
$
82.74

 

 
$
500.0

April 1 - 30, 2015 (3)
1,013,371

 
81.93

 
1,013,024

 
417.0

May 1 - 31, 2015 (4)
1,858,306

 
82.97

 
1,856,934

 
262.9

Total
2,872,926

 
$
82.60

 
2,869,958

 
$
262.9


(1) On January 13, 2015, Cintas announced that the Board of Directors authorized a new $500.0 million share buyback program, which does not have an expiration date. From the inception of the January 13, 2015 share buyback program through May 31, 2015, Cintas has purchased a total of 2.9 million shares of Cintas common stock at an average price of $82.60 per share for a total purchase price of $237.1 million.
(2) During March 2015, Cintas acquired 1,249 shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were purchased at an average price of $82.74 per share for a total purchase price of $0.1 million.
(3) During April 2015, Cintas acquired 347 shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were purchased at an average price of $81.62 per share for a total purchase price of less than $0.1 million.
(4) During May 2015, Cintas acquired1,372 shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were purchased at an average price of $86.01 per share for a total purchase price of $0.1 million.

13



Item 6.  Selected Financial Data
Five-Year Financial Summary
(In thousands except per share and percentage data)
 
 
 
 
 
 
 
 
 
 
Fiscal Years Ended May 31,
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)(2)
 
2015(1)
 
Compound
Annual
Growth
(2011-2015)
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
3,748,957

 
4,032,464

 
4,245,964

 
4,469,565

 
4,476,886

 
4.5
 %
Net Income, Continuing Operations
249,536

 
300,468

 
316,586

 
374,285

 
408,077

 
13.1
 %
Net (Loss) Income, Discontinued Operations
(2,547
)
 
(2,831
)
 
(1,144
)
 
157

 
22,541

 
72.5
 %
Net Income
246,989


297,637


315,442


374,442

 
430,618

 
14.9
 %
Basic Earnings (Loss) Per Share:
 
 
 
 
 
 
 
 
 
 
 
Continuing Operations
1.69

 
2.29

 
2.54

 
3.08

 
3.49

 
19.9
 %
Discontinued Operations
(0.01
)
 
(0.02
)
 
(0.01
)
 
0.00

 
0.19

 
108.8
 %
Basic Earnings per Share
1.68

 
2.27

 
2.53

 
3.08

 
3.68

 
21.7
 %
Diluted Earnings (Loss) Per Share:
 
 
 
 
 
 
 
 
 
 
 
Continuing Operations
1.69

 
2.29

 
2.53

 
3.05

 
3.44

 
19.4
 %
Discontinued Operations
(0.01
)
 
(0.02
)
 
(0.01
)
 
0.00

 
0.19

 
108.8
 %
Diluted Earnings (Loss) Per Share
1.68

 
2.27

 
2.52

 
3.05

 
3.63

 
21.2
 %
Dividends Per Share
0.49

 
0.54

 
0.64

 
0.77

 
1.70

 
36.5
 %
Total Assets
4,351,940

 
4,165,706

 
4,345,632

 
4,462,452

 
4,192,460

 
(0.9
)%
Shareholders' Equity
2,302,649

 
2,139,135

 
2,201,492

 
2,192,858

 
1,932,455

 
(4.3
)%
Return on Average Equity (3)
10.3
%
 
13.5
%
 
14.6
%
 
17.0
%
 
19.8
%
 
 

Long-Term Debt
1,284,790

 
1,059,166

 
1,300,979

 
1,300,477

 
1,300,000

 
 


(1) 
Effective August 31, 2014, the Storage business was classified as discontinued operations. In accordance with the applicable accounting guidance for the disposal of long-lived assets, the results of Storage have been excluded from continuing operations for all periods presented. Please see Note 17 entitled Discontinued Operations of "Notes to Consolidated Financial Statements" for additional information.

(2) 
On April 30, 2014, the Shredding Transaction was completed with the shareholders of Shred-it to combine Cintas’ Shredding with Shred-it’s shredding business. Under the agreement, Cintas and Shred-it each contributed its shredding business to a newly formed partnership owned 42% by Cintas and 58% by the shareholders of Shred-it. In addition to its 42% ownership of the Shred-it Partnership, Cintas received $180.0 million in cash at the closing of the Shredding Transaction. The Company realized a $106.4 million gain on deconsolidation of Shredding. In addition, as a result of the Shredding Transaction, the Company recorded an asset impairment charge of $16.1 million and other transaction costs of $28.5 million. Please see Note 9 entitled Acquisitions and Deconsolidations of "Notes to Consolidated Financial Statements" for additional information.

(3) 
Return on average equity is computed as net income from continuing operations divided by the average of shareholders' equity. We believe that this calculation gives management and shareholders a good indication of Cintas' historical performance.

14



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 primarily throughout North America, as well as Latin America, Europe and Asia. We bring value to our customers by helping them provide a cleaner, safer and more pleasant atmosphere for their customers and employees. Our products and services are designed to improve our customers' images. We also help our customers protect their employees and their company by enhancing workplace safety and helping to ensure legal compliance in key areas of their business.
We are North America's leading provider of corporate identity uniforms through rental and sales programs, as well as a significant provider of related business services, including entrance mats, restroom cleaning services and supplies, carpet and tile cleaning services, and first aid, safety and fire protection products and services.
Cintas' principal objective is "to exceed customers' expectations in order to maximize the long-term value of Cintas for shareholders and working partners," and it provides the framework and focus for Cintas' business strategy. This strategy is to achieve revenue growth for all of our products and services by increasing our penetration at existing customers and by broadening our customer base to include business segments to which we have not historically served. We will also continue to identify additional product and service opportunities for our current and future customers.
To pursue the strategy of increasing penetration, we have a highly talented and diverse team of service professionals visiting our customers on a regular basis. This frequent contact with our customers enables us to develop close personal relationships. The combination of our distribution system and these strong customer relationships provides a platform from which we launch additional products and services.
We pursue the strategy of broadening our customer base in several ways. Cintas has a national sales organization introducing all of our products and services to prospects in all business segments. Our broad range of products and services allows our sales organization to consider any type of business a prospect. We also broaden our customer base through geographic expansion, especially in our first aid and safety and fire protection businesses. Finally, we evaluate strategic acquisitions as opportunities arise.

Results of Operations
Effective August 31, 2014, Cintas classifies its businesses into three operating segments based on the types of products and services provided. The Rental Uniforms and Ancillary Products 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 carpet and tile cleaning services are also provided within this operating segment. The Uniform Direct Sales operating segment consists of the direct sale of uniforms and related items. The First Aid, Safety and Fire Protection Services operating segment consists of first aid, safety and fire protection products and services. Cintas evaluates operating segment performance based on revenue and income before income taxes. Revenue and income before income taxes for each of these operating segments for the years ended May 31, 2015, 2014, and 2013 are presented in note 15 entitled Operating Segment Information of "Notes to Consolidated Financial Statements." The Company regularly reviews its operating segments for reporting purposes based on the information its chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance and makes changes when appropriate.
Previously, Cintas classified its businesses into four operating segments. The Document Management Services operating segment is no longer considered an operating segment. This operating segment consisted of document destruction services ("Shredding") and document imaging and retention services ("Storage"). On April 30, 2014, Cintas completed its partnership transaction with the shareholders of Shred-it International Inc. (Shred-it) to combine Cintas' Shredding with Shred-it's shredding business. Due to the deconsolidation of Shredding, fiscal 2015 results exclude the results of Shredding. Shredding remains reported in continuing operations for fiscal 2014 (through April 30, 2014) and fiscal 2013. Based on the change in reportable operating segments, the results of Shredding for the years ended May 31, 2014 and 2013 are presented in Corporate. Additionally, effective August 31, 2014, Storage is reported as a discontinued operation for all periods presented and has been excluded from continuing operations and from operating segment results for all periods presented. In the quarter ended November 30, 2014, Cintas sold Storage in a series of transactions ("Storage Transactions"). Please see Note 17 entitled Discontinued Operations of "Notes to Consolidated Financial Statements" for additional information.  


15



The following table sets forth certain consolidated statements of income data as a percent of revenue by operating segment and in total for the fiscal years ended May 31:
 
2015(1)
 
2014(1)(2)
 
2013(1)(2)
 
 
 
 
 
 
Revenue:
 
 
 
 
 
Rental Uniforms and Ancillary Products
77.2
%
 
72.1
%
 
71.7
%
Uniform Direct Sales
10.1
%
 
10.2
%
 
10.9
%
First Aid, Safety and Fire Protection Services
12.7
%
 
11.5
%
 
10.8
%
Corporate
%
 
6.2
%
 
6.6
%
Total revenue
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
Rental Uniforms and Ancillary Products
55.4
%
 
56.7
%
 
57.7
%
Uniform Direct Sales
71.5
%
 
71.5
%
 
70.7
%
First Aid, Safety and Fire Protection Services
55.9
%
 
56.2
%
 
56.7
%
Corporate
%
 
55.1
%
 
53.2
%
Total cost of sales
57.1
%
 
58.1
%
 
58.7
%
 
 
 
 
 
 
Gross margin:
 
 
 
 
 
Rental Uniforms and Ancillary Products
44.6
%
 
43.3
%
 
42.3
%
Uniform Direct Sales
28.5
%
 
28.5
%
 
29.3
%
First Aid, Safety and Fire Protection Services
44.1
%
 
43.8
%
 
43.3
%
Corporate
%
 
44.9
%
 
46.8
%
Total gross margin
42.9
%
 
41.9
%
 
41.3
%
 
 
 
 
 
 
Selling and administrative expenses:
 
 
 
 
 
Rental Uniforms and Ancillary Products
27.5
%
 
27.5
%
 
27.4
%
Uniform Direct Sales
18.8
%
 
18.3
%
 
17.7
%
First Aid, Safety and Fire Protection Services
33.6
%
 
34.3
%
 
33.9
%
Corporate
%
 
42.7
%
 
40.8
%
Total selling and administrative expenses
27.4
%
 
28.3
%
 
28.0
%
 
 
 
 
 
 
Gain on sale of stock of an equity method investment
0.5
%
 
%
 
%
 
 
 
 
 
 
Gain on deconsolidation of Shredding, net of impairment charges and other transaction costs
0.1
%
 
1.4
%
 
%
 
 
 
 
 
 
Interest expense, net
1.4
%
 
1.5
%
 
1.5
%
 
 
 
 
 
 
Income before income taxes
14.7
%
 
13.5
%
 
11.8
%

(1) 
The figures for all years presented reflect the change in classification of Storage to discontinued operations within the Consolidated Statements of Income. See Note 17 entitled Discontinued Operations of "Notes to Consolidated Financial Statements."
(2) 
Corporate results for the fiscal years ended 2014 and 2013 include Shredding. Fiscal year 2014 includes only eleven months of Shredding results as the Shredding Transaction closed on April 30, 2014.






16



Fiscal 2015 Compared to Fiscal 2014
On April 30, 2014, Cintas completed the Shredding Transaction with Shred-it to combine Cintas’ Shredding with Shred-it’s shredding business (the "Shredding Transaction"). Under the agreement, Cintas and Shred-it each contributed its shredding business to a newly formed partnership. Please see Note 9 entitled Acquisitions and Deconsolidations of "Notes to Consolidated Financial Statements" for additional information on the Shredding Transaction.
Fiscal 2015 total revenue was $4.5 billion, an increase of 0.2% over the prior fiscal year. Revenue increased organically by 7.1% as a result of increased sales volume. Organic growth excludes the impact of acquisitions, disposals, deconsolidations and foreign currency exchange rate fluctuations. Revenue growth was negatively impacted by 6.6% because of the deconsolidation of Shredding, which contributed $275.7 million of revenue in fiscal year 2014, and 0.5% due to foreign currency exchange rate fluctuations. Acquisitions positively impacted the growth rate by 0.2%.
Organic growth by quarter is shown in the table below.
 
Organic Growth
 
 
First Quarter Ending August 31, 2014
7.3
%
Second Quarter Ending November 30, 2014
7.2
%
Third Quarter Ending February 28, 2015
7.5
%
Fourth Quarter Ending May 31, 2015
6.0
%
 
 
For the Fiscal Year Ending May 31, 2015
7.1
%

Rental Uniforms and Ancillary Products operating segment revenue consists predominantly of revenue derived from the rental of corporate identity uniforms and other garments, including flame resistant clothing, and the rental and/or sale of mats, mops, shop towels, restroom supplies and other rental services. Revenue from the Rental Uniforms and Ancillary Products operating segment increased 7.2% compared to fiscal 2014. The increase resulted from an organic growth increase in revenue of 7.7%. The amount of new business grew, resulting from an increase in the number and productivity of sales representatives. Generally, sales productivity improvements are the result of increased tenure and improved training, which result in a higher number of products and services sold. Revenue growth was negatively impacted by 0.5% due to foreign currency exchange rate fluctuations.
Other Services revenue, consisting of revenue from the operating segments of Uniform Direct Sales, and First Aid, Safety and Fire Protection Services as well as Shredding (through April 30, 2014), decreased 18.0% compared to fiscal 2014. Revenue increased organically by 5.0%. Revenue growth was negatively impacted by 23.3% due to the deconsolidation of Shredding and by 0.3% due to foreign currency exchange rate fluctuations. Acquisitions positively impacted the growth rate by 0.6%.
Cost of rental uniforms and ancillary products increased 4.6% compared to fiscal 2014. Cost of rental uniforms and ancillary products consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, mops, shop towels and other ancillary items. The cost of rental uniforms and ancillary products increase compared to fiscal 2014 was due to increased Rental Uniforms and Ancillary Products operating segment sales volume.
Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid, safety and fire protection products), delivery expenses and distribution expenses in the Uniform Direct Sales operating segment, the First Aid, Safety and Fire Protection Services operating segment, and Shredding through April 30, 2014. Cost of other services decreased 16.2% in fiscal 2015 compared to fiscal 2014. The decrease was primarily due to the deconsolidation of Shredding partially offset by increases resulting from higher First Aid, Safety and Fire Protection Services operating segment sales volume.
Selling and administrative expenses decreased $39.9 million, or 3.2%, compared to fiscal 2014 due primarily to the deconsolidation of Shredding partially offset by increases resulting from higher Rental Uniforms and Ancillary Products and First Aid, Safety and Fire Protection Services operating segment sales volume.
Cintas realized a gain on the Shredding Transaction of $5.0 million in fiscal 2015 primarily as a result of receiving certain additional proceeds. Also during fiscal 2015, Cintas sold stock in an equity method investment. In conjunction with the sale of the equity method investment, the Company received a cash dividend. The sale resulted in the recording of a gain of $21.7 million in fiscal 2015.

17



Net interest expense (interest expense less interest income) was $64.8 million in fiscal 2015 compared to $65.6 million in fiscal 2014. The decrease in net interest expense is primarily due to the capitalization of $0.6 million of interest in fiscal year 2015 versus no capitalization of interest in fiscal 2014.
Income before income taxes was $658.3 million, an increase of $53.2 million, or 8.8%, compared to fiscal 2014. Income before income taxes was positively impacted by a $5.0 million gain on the Shredding Transaction as a result of receiving certain additional proceeds and by a $21.7 million gain from the sale of the equity method investment. The remaining $26.5 million increase in income before income taxes was due primarily to revenue growing at a faster rate than expenses.
Cintas' effective tax rate on continuing operations was 37.2% for fiscal 2015 compared to 38.3% in fiscal 2014. Excluding the impact of the Shredding Transaction, the effective tax rate for fiscal 2014 would have been 37.2%. See Note 8 entitled Income Taxes of "Notes to Consolidated Financial Statements" for more information.
During fiscal 2015, Cintas recorded a net loss on the investment in the Shred-it Partnership of $5.5 million. This loss was net of a tax benefit of $3.3 million. The Shred-it Partnership results in the period were adversely affected by integration costs and foreign currency exchange rate fluctuations due to the weakened Canadian dollar.
Net income from continuing operations for fiscal 2015 of $408.1 million was a 9.0% increase compared to fiscal 2014. Diluted earnings per share from continuing operations of $3.44 was a 12.8% increase compared to fiscal 2014. Diluted earnings per share from continuing operations increased due to an increase in earnings from continuing operations combined with a decrease in weighted average common shares outstanding. The decrease in weighted average common shares outstanding resulted from purchasing 10.3 million shares of common stock under the October 18, 2011, July 30, 2013 and January 13, 2015 share buyback programs during fiscal 2015 and the fourth quarter of fiscal 2014.
Rental Uniforms and Ancillary Products Operating Segment
Rental Uniforms and Ancillary Products operating segment revenue increased $231.0 million, or 7.2%, and the cost of rental uniforms and ancillary products increased $84.0 million, or 4.6%. The operating segment's fiscal 2015 gross margin was 44.6% of revenue compared to 43.3% in fiscal 2014. The 130 basis point improvement was driven by many factors, including new business sold by sales representatives, penetration of additional products and services into existing customers, and continuously improving the efficiency of internal processes. In addition, lower energy-related expenses increased gross margin 40 basis points.
Selling and administrative expenses for the Rental Uniforms and Ancillary Products operating segment increased $61.0 million in fiscal 2015 compared to fiscal 2014 primarily due to increases in labor and other employee-partner related expenses. Selling and administrative expense as a percent of revenue for fiscal 2015 was 27.5% for both fiscal 2015 and 2014.
Income before income taxes increased $86.0 million to $593.0 million for fiscal 2015 compared to fiscal 2014. Income before income taxes as a percent of revenue, at 17.2%, increased 150 basis points from 15.7% in fiscal 2014. This increase is primarily due to the increase in gross margin discussed above.
Uniform Direct Sales Operating Segment
Uniform Direct Sales operating segment revenue decreased $1.8 million in fiscal 2015, a 0.4% decrease compared to fiscal 2014. Revenue increased organically by 0.2% due to slightly increased sales volume. Revenue growth was negatively impacted by 0.6% due to foreign currency exchange rate fluctuations.
Cost of uniform direct sales decreased $1.3 million, or 0.4%, compared to fiscal 2014. The gross margin as a percent of revenue was 28.5% for both fiscal 2015 and 2014.
Selling and administrative expenses increased $2.0 million, or 2.4%, in fiscal 2015 compared to fiscal 2014 due in large part to foreign currency exchange rate fluctuations. Selling and administrative expenses as a percent of revenue, at 18.8%, increased 50 basis points compared to fiscal 2014, mainly due to lower operating segment revenue and foreign currency exchange rate fluctuations.
Income before income taxes was $44.1 million in fiscal 2015, a decrease of $2.6 million, or 5.5%, compared to fiscal 2014. Income before income taxes as a percent of revenue, at 9.7%, decreased from 10.3% in fiscal 2014. This decrease was due to the reasons discussed above.


18



First Aid, Safety and Fire Protection Services Operating Segment
First Aid, Safety and Fire Protection Services operating segment revenue increased $53.8 million in fiscal 2015, a 10.5% increase compared to fiscal 2014. Revenue increased organically by 9.2% as a result of increased sales volume. Acquisitions resulted in revenue growth of 1.3%.
Cost of First Aid, Safety and Fire Protection Services increased $28.7 million, or 9.9%, in fiscal 2015, due primarily to increased First Aid, Safety and Fire Protection Services operating segment volume. Gross margin for the First Aid, Safety and Fire Protection Services operating segment is defined as revenue less cost of goods, warehouse expenses, service expenses and training expenses. The gross margin as a percent of revenue was 44.1% for fiscal 2015 compared to 43.8% in fiscal 2014. Energy-related expenses decreased 40 basis points from fiscal 2014 and were the primary driver of gross margin improvement in fiscal 2015.
Selling and administrative expenses increased by $14.9 million, or 8.4%, in fiscal 2015 compared to fiscal 2014 primarily due to an increase in labor and other employee-partner related expenses. Selling and administrative expenses as a percent of revenue, at 33.6%, decreased from 34.3% in fiscal 2014, as revenue growth outpaced the increase in expenses.
Income before income taxes was $59.2 million in fiscal 2015, an increase of $10.3 million, or 21.0%, compared to fiscal 2014. Income before income taxes as a percent of revenue, at 10.4%, increased from 9.5% in fiscal 2014, due to the reasons discussed above.
Fiscal 2014 Compared to Fiscal 2013
Fiscal 2014 total revenue was $4.5 billion, an increase of 5.3% compared to fiscal 2013. The increase primarily resulted from an organic growth increase of 6.2%. Organic growth excludes the impact of acquisitions, disposals, deconsolidations, foreign currency exchange rate fluctuations and adjusts for the appropriate number of workdays. Revenue in fiscal 2014 was negatively impacted by 0.4% due to one less workday compared to fiscal 2013 and negatively by 0.4% due to foreign currency exchange rate fluctuations. The Shredding Transaction had a negative impact of 0.4% which was offset by the positive impact of 0.3% from acquisitions.
Organic growth by quarter is shown in the table below.
 
Organic Growth
 
 
First Quarter Ending August 31, 2013
7.2
%
Second Quarter Ending November 30, 2013
7.4
%
Third Quarter Ending February 28, 2014
3.6
%
Fourth Quarter Ending May 31, 2014
6.4
%
 
 
For the Fiscal Year Ending May 31, 2014
6.2
%
Rental Uniforms and Ancillary Products operating segment revenue consists predominantly of revenue derived from the rental of corporate identity uniforms and other garments, including flame resistant clothing, and the rental and/or sale of mats, mops, shop towels, restroom supplies and other rental services. Revenue from the Rental Uniforms and Ancillary Products operating segment increased 5.9% compared to fiscal 2013. The increase resulted from an organic growth increase in revenue of 6.7%. The amount of new business grew, resulting from an increase in the number and productivity of sales representatives. Generally, sales productivity improvements are the result of increased tenure and improved training, which result in a higher number of products and services sold. Revenue in fiscal 2014 was negatively impacted by 0.4% due to one less workday and negatively by 0.4% due to foreign currency exchange rate fluctuations.
Other Services revenue, consisting of revenue from the reportable operating segments of Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Shredding (through April 30, 2014), increased 3.7% compared to fiscal 2013. The increase primarily resulted from an organic growth increase of 4.7%, which was due largely to improved sales representative productivity. Revenue in fiscal 2014 was negatively impacted by 0.4% due to the deconsolidation of Shredding, negatively by 0.4% due to one less workday and negatively by 0.2% due to foreign currency exchange rate fluctuations.


19



Cost of rental uniforms and ancillary products increased 4.2% compared to fiscal 2013. Cost of rental uniforms and ancillary products consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, mops, shop towels and other ancillary items. The increase in the cost of rental uniforms and ancillary products compared to fiscal 2013 was due to increased Rental Uniforms and Ancillary Products operating segment sales volume.
Cost of other services increased 4.1% compared to fiscal 2013. Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses in the Uniform Direct Sales operating segment and the First Aid, Safety and Fire Protection Services operating segment and Shredding (through April 30, 2014). The increase from fiscal 2013 was primarily due to increased Other Services sales volume.
Selling and administrative expenses increased $77.5 million, or 6.5%, compared to fiscal 2013 due primarily to increases in labor and other employee-partner related expenses.
As a result of the Shredding Transaction, the Company recorded in fiscal 2014 an asset impairment charge of $16.1 million and other transaction costs of $28.5 million. The impairment charge was related to the abandonment of information systems assets that were not contributed to the Shred-it Partnership and cannot be used by the Company for other purposes. The other transaction costs consisted of the following: $4.7 million of professional and legal fees; $0.7 million of employee termination benefit costs; $12.4 million of stock compensation expense resulting from the immediate vesting of Cintas stock options and awards of employees contributed to the Shred-it Partnership; a $4.2 million charge for information systems contracts for which no future economic benefit exists; and $6.5 million of incremental profit sharing and employee compensation resulting from the gain, net of the impairment charge and other transaction costs.
Operating income of $564.2 million in fiscal 2014 decreased $1.8 million, or 0.3%, compared to fiscal 2013. Fiscal 2014 operating income was negatively impacted by $44.6 million due to the asset impairment charge and other transaction costs previously described.
In the fourth quarter of fiscal 2014, the Company realized a $106.4 million gain on the Shredding Transaction. The gain was computed as follows: the fair value of consideration received of $180.0 million plus the fair value of Cintas' retained non-controlling interest in the Shred-it Partnership of $339.4 million less the carrying amount of Shredding of $413.0 million.
Net interest expense (interest expense less interest income) of $65.6 million in fiscal 2014 was comparable to fiscal
2013.
Income before income taxes was $605.0 million, an increase of $104.4 million, or 20.8%, compared to fiscal 2013. Income before income taxes was positively impacted by $61.8 million due to the Shredding Transaction. The remaining $42.6 million of increased income before income taxes was due to revenue growing at a faster rate than expenses.
The impact of the Shredding Transaction increased Cintas' effective tax rate in fiscal 2014 from 37.2% to 38.3% compared to an effective tax rate of 36.8% in fiscal 2013. See Note 8 entitled Income Taxes of "Notes to Consolidated Financial Statements" for more information on income taxes.
During fiscal 2014, Cintas recorded a net gain on the investment in the Shred-it Partnership of $1.2 million. This gain was net of taxes of $0.8 million.
Net income from continuing operations for fiscal 2014 of $374.3 million was an 18.2% increase compared to fiscal 2013. Diluted earnings per share from continuing operations of $3.05 was a 20.6% increase compared to fiscal 2013. The increase in diluted earnings per share is higher than the increase in net income due to a decrease in weighted average common stock outstanding as a result of Cintas purchasing 7.3 million shares of common stock under the October 18, 2011 and July 30, 2013 share buyback programs during fiscal 2014 and the fourth quarter of fiscal 2013.
Rental Uniforms and Ancillary Products Operating Segment
Rental Uniforms and Ancillary Products operating segment revenue increased $179.3 million, or 5.9%, and the cost of rental uniforms and ancillary products increased $73.1 million, or 4.2%. Revenue in fiscal 2014 was negatively impacted by 0.4% due to one less workday and by 0.4% due to foreign currency exchange rate changes compared to fiscal 2013. The operating segment's fiscal 2014 gross margin was 43.3% of revenue compared to 42.3% in fiscal 2013. The increase in gross margin as a percent of revenue over fiscal 2013 was due to route efficiencies and increased revenue covering fixed costs including our plant infrastructure.


20



Selling and administrative expenses for the Rental Uniforms and Ancillary Products operating segment increased $52.2 million in fiscal 2014 compared to fiscal 2013 primarily due to increases in labor and other employee-partner related expenses. Selling and administrative expense as a percent of revenue for fiscal 2014 was 27.5% compared to 27.4% in fiscal 2013. The fiscal 2013 percentage was positively impacted by approximately 20 basis points from a gain on sale of stock of an equity method investment.
Income before income taxes increased $54.0 million to $507.1 million for fiscal 2014 compared to fiscal 2013. Income before income taxes as a percent of revenue, at 15.7%, increased 80 basis points from 14.9% in fiscal 2013. This increase is primarily due to the increase in gross margin.
Uniform Direct Sales Operating Segment
Uniform Direct Sales operating segment revenue decreased $5.8 million, or 1.3%, compared to fiscal 2013. Revenue in fiscal 2014 decreased organically by 0.5%. Revenue in fiscal 2014 was negatively impacted by 0.4% due to one less workday and by 0.4% due to foreign currency exchange rate changes compared to fiscal 2013. In fiscal 2013, the Company had some very large national account program sales that by their nature did not repeat in fiscal 2014. The fiscal 2013 activity included the largest customer program roll-out in Cintas history. Cost of uniform direct sales decreased $0.9 million, or 0.3%, compared to fiscal 2013. The gross margin as a percent of revenue was 28.5% for fiscal 2014 compared to 29.3% in fiscal 2013. The fiscal 2013 gross margin benefited significantly from the revenue from our all-time largest customer program roll-out.
Selling and administrative expenses increased $1.6 million, or 1.9%, in fiscal 2014 compared to fiscal 2013 primarily due to increases in labor and other employee-partner related expenses. Selling and administrative expenses as a percent of revenue, at 18.3%, increased from 17.7% in fiscal 2013 mainly due to lower revenue.
Income before income taxes was $46.7 million in fiscal 2014, a decrease of $6.5 million, or 12.3%, compared to fiscal 2013. Income before income taxes as a percent of revenue, at 10.3%, decreased from 11.5% in fiscal 2013. This decrease was primarily due to the decrease in revenue discussed above.
First Aid, Safety and Fire Protection Services Operating Segment
First Aid, Safety and Fire Protection Services operating segment revenue increased $53.8 million in fiscal 2014, a 11.7% increase compared to fiscal 2013. Revenue in fiscal 2014 was negatively impacted by 0.4% due to one less workday compared to fiscal 2013. Revenue increased organically by 9.4% due to improvements in sales representative productivity. Acquisitions resulted in revenue growth of 2.7%.
Cost of first aid, safety and fire protection services increased $27.9 million, or 10.7%, in fiscal 2014, due primarily to increased First Aid, Safety and Fire Protection Services operating segment volume. Gross margin for the First Aid, Safety and Fire Protection Services operating segment is defined as revenue less cost of goods, warehouse expenses, service expenses and training expenses. The gross margin as a percent of revenue was 43.8% for fiscal 2014 compared to 43.3% in fiscal 2013. The margin increased due to an improved mix of higher gross margin revenue.
Selling and administrative expenses increased by $20.1 million, or 12.8%, in fiscal 2014 compared to fiscal 2013 primarily due to an increase in labor and other employee-partner related expenses. Selling and administrative expenses as a percent of revenue, at 34.3%, increased from 33.9% in fiscal 2013. The fiscal 2013 percentage was positively impacted by approximately 20 basis points from a gain on sale of stock of an equity method investment.
Income before income taxes was $49.0 million in fiscal 2014, an increase of $5.9 million, or 13.6%, compared to fiscal 2013. Income before income taxes as a percent of revenue, at 9.5%, increased from 9.4% in fiscal 2013.

21



Liquidity and Capital Resources
The following is a summary of our cash flows and cash, cash equivalents and marketable securities as of and for the fiscal years ending May 31:
(In thousands)
2015
 
2014
 
 
 
 
Net cash provided by operating activities
$
580,276

 
$
605,969

Net cash provided by (used in) investing activities
$
44,987

 
$
(14,543
)
Net cash used in financing activities
$
(712,560
)
 
$
(429,735
)
 
 
 
 
Cash and cash equivalents at the end of the period
$
417,073

 
$
513,288

Marketable securities at the end of the period
$
16,081

 
$


Cash, cash equivalents, and marketable securities as of May 31, 2015 and 2014 include $109.8 million and $40.2 million, respectively, that is located outside of the United States. We expect to use these amounts to fund our international operations and international expansion activities.
Cash flows provided by operating activities have historically supplied us with a significant source of liquidity. We generally use these cash flows to fund most, if not all, of our operations, expansion activities and dividends on our common stock. We may also use cash flows provided by operating activities, as well as proceeds from long-term debt and short-term borrowings, to fund growth and expansion opportunities, as well as other cash requirements such as the repurchase of our common stock.
Net cash provided by operating activities was $580.3 million for fiscal 2015, which was a decrease of $25.7 million compared to fiscal 2014. Although net income increased, cash flow was negatively impacted by changes in working capital resulting from the timing of vendor and other payments compared to prior year.
Net cash of $45.0 million was provided by investing activities in fiscal 2015 compared to net cash of $14.5 million used in investing activities in fiscal 2014. Capital expenditures were $217.7 million and $145.6 million for fiscal 2015 and fiscal 2014, respectively. Capital expenditures for fiscal 2015 included $183.5 million for the Rental Uniforms and Ancillary Products operating segment and $23.9 million for the First Aid, Safety and Fire Protection Services operating segment. Cash paid for acquisitions of businesses was $15.5 million and $33.4 million for fiscal 2015 and fiscal 2014, respectively. The acquisitions in fiscal 2015 occurred in our First Aid, Safety and Fire Protection Services and Rental Uniforms and Ancillary Products operating segments. Acquisitions in fiscal 2014 occurred in our First Aid, Safety and Fire Protection Services operating segment and the former Document Management Services operating segment. In fiscal 2015, net cash provided by investing activities include $35.2 million cash received from the sale of stock of an equity method investment plus receipt of dividends on the same investment. The Company sold Storage during fiscal 2015, receiving proceeds, net of cash contributed, of $158.4 million. Also, during fiscal 2015, net cash provided by investing activities include a dividend received from the Shred-it Partnership of $113.4 million. In fiscal 2014, Cintas completed the Shredding Transaction. In addition to its 42% ownership of the Shred-it Partnership, Cintas received $180.0 million in cash at the closing of the transaction. Net cash provided by (used in) investing activities for fiscal 2015 and 2014 include net purchases of marketable securities and investments of $33.5 million and $9.7 million, respectively.
Net cash used in financing activities was $712.6 million and $429.7 million for fiscal 2015 and 2014, respectively. On October 18, 2011, we announced that the Board of Directors authorized a $500.0 million share buyback program. During fiscal 2014, under the October 18, 2011 share buyback program, Cintas purchased a total of 3.3 million shares of Cintas common stock at an average price of $48.87 per share for a total purchase price of $162.5 million. These purchases completed the October 18, 2011 share buyback program. For the fiscal year ended May 31, 2014, Cintas acquired 0.2 million shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were acquired at an average price of $50.45 per share for a total purchase price of $8.6 million. On July 30, 2013, Cintas announced that the Board of Directors approved a new $500.0 million share buyback program. From April 2014 through February 28, 2015, Cintas purchased a total of 7.3 million shares of Cintas common stock at an average price of $68.29 per share for a total purchase price of $500.0 million. These purchases completed the July 30, 2013 share buyback program. On January 13, 2015, Cintas announced that the Board of Directors authorized a new $500.0 million share buyback program, which does not have an expiration date. From the inception of the January 13, 2015 share buyback program, through May 31, 2015, Cintas has purchased a total of 2.9 million shares of Cintas common stock at an average price of $82.60 per share for a total purchase price of $237.1 million. Under the January 13, 2015 program, through July 30, 2015, Cintas has purchased a total of 4.4

22



million shares of Cintas common stock at an average price of $83.82 per share for a total purchase price of $370.0 million. For the fiscal year ended May 31, 2015, Cintas acquired 0.2 million shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were acquired at an average price of $64.58 per share for a total purchase price of $14.4 million.
On October 21, 2014, Cintas declared an annual cash dividend of $0.85 per share on outstanding common stock, a 10.4% increase over the dividend paid in the prior year. In addition, due to the receipt of $180.0 million at the closing of the Shredding Transaction, Cintas declared an additional $0.85 per share special dividend. The total dividend of $1.70 per share was paid on December 5, 2014, to shareholders of record as of November 7, 2014. This marked the 32nd consecutive year that Cintas has increased its annual dividend, every year since going public in 1983.
As of May 31, 2015, we had $1,300.0 million aggregate principal amount in fixed rate senior notes outstanding with maturities ranging from 2016 to 2036. These senior notes are comprised of $250 million of 30-year senior notes issued in fiscal 2007 at a rate of 6.15%, $300 million of 10-year senior notes issued in fiscal 2008 at a rate of 6.125%, $250 million of 5-year senior notes issued in fiscal 2011 at a rate of 2.85%, $250 million of 10-year senior notes issued in 2011 at a rate of 4.30% and $250 million of 10-year senior notes issued in fiscal 2012 at a rate of 3.25%.
Cintas' commercial paper program has a capacity of $300.0 million that is fully supported by a backup revolving credit facility through a credit agreement with its banking group. This revolving credit facility has an accordion feature that allows for a maximum borrowing capacity of $450.0 million. The revolving credit facility was amended on May 29, 2014 to extend that maturity date from October 6, 2016 to May 28, 2019, to adjust the applicable margin used to calculate the interest payable on any outstanding loans, and to adjust the facility fee payable under the agreement. We believe that this program, along with cash generated from operations, will be adequate to provide necessary funding for our future cash requirements. No commercial paper or borrowings on our revolving credit facility were outstanding at May 31, 2015 or 2014.
Cintas has certain covenants related to debt agreements. These covenants limit our 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 earnings before interest, taxes, depreciation and amortization (EBITDA) and interest coverage ratios. Cross-default provisions exist between certain debt instruments. If a default of a significant covenant were to occur, the default could result in an acceleration of the maturity of the indebtedness, impair liquidity and limit the ability to raise future capital. As of May 31, 2015, Cintas was in compliance with all debt covenants.
Our access to the commercial paper and long-term debt markets has historically provided us with sources of liquidity. We do not anticipate having difficulty in obtaining financing from those markets in the future in view of our favorable experiences in the debt markets in the recent past. Our ability to continue to access the commercial paper and long-term debt markets on favorable interest rate and other terms will depend, to a significant degree, on the ratings assigned by the credit rating agencies to our indebtedness. As of May 31, 2015, our ratings were as follows:
Rating Agency
 
Outlook
 
Commercial Paper
 
Long-term Debt
 
 
 
 
 
 
 
Standard & Poor's
 
Positive
 
A-2
 
BBB+
Moody's Investors Service
 
Stable
 
P-1
 
A2
On June 26, 2015, Standard & Poor's rating agency raised its long-term credit rating for Cintas to A-/Stable.
In the event that the ratings of our commercial paper or our outstanding long-term debt issues were substantially lowered or withdrawn for any reason, or if the ratings assigned to any new issue of long-term debt securities were significantly lower than those noted above, particularly if we no longer had investment grade ratings, our ability to access the debt markets may be adversely affected. In addition, in such a case, our cost of funds for new issues of commercial paper and long-term debt would be higher than our cost of funds would have been had the ratings of those new issues been at or above the level of the ratings noted above. The rating agency ratings are not recommendations to buy, sell or hold our commercial paper or debt securities. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating. Moreover, each credit rating is specific to the security to which it applies.
To monitor our credit rating and our capacity for long-term financing, we consider various qualitative and quantitative factors. One such factor is the ratio of our total debt to EBITDA. For the purpose of this calculation, debt is defined as the sum of short-term borrowings, long-term debt due within one year, obligations under capital leases due in one year, long-term debt and long-term obligations under capital leases.

23



Long-Term Contractual Obligations
 
Payments Due by Period
(In thousands)
Total
 
One year
or less
 
Two to
three years
 
Four to
five years
 
After five
years
 
 
 
 
 
 
 
 
 
 
Long-term debt (1)
$
1,300,000

 
$

 
$
550,000

 
$

 
$
750,000

Operating leases (2)
98,655

 
26,962

 
38,088

 
18,731

 
14,874

Interest payments (3)
524,636

 
64,104

 
102,179

 
73,080

 
285,273

Unconditional purchase obligations

 

 

 

 

Total long-term contractual cash obligations
$
1,923,291

 
$
91,066

 
$
690,267

 
$
91,811

 
$
1,050,147


Cintas also makes payments to defined contribution plans. The amount of contributions made to the defined contribution plans are at the discretion of the Board of Directors of Cintas. Future contributions are expected to be $41.9 million in the next year, $90.3 million in the next two to three years, and $99.5 million in the next four to five years.
(1) 
Long-term debt primarily consists of $1,300.0 million in senior notes (reference Note 6 entitled Long-Term Debt and Derivatives of "Notes to Consolidated Financial Statements" for a detailed discussion of long-term debt).
(2) 
Operating leases consist primarily of operational facility leases.
(3) 
Interest payments could include interest on both fixed and variable rate debt. As of May 31, 2015, Cintas did not have commercial paper outstanding, and therefore did not have any variable rate debt.
Other Commitments
 
Amount of Commitment Expiration per Period
(In thousands)
Total
 
One year
or less
 
Two to
three years
 
Four to
five years
 
After five
Years
 
 
 
 
 
 
 
 
 
 
Lines of credit (1)
$
299,899

 
$

 
$

 
$
299,899

 
$

Standby letters of credit (2)
82,665

 
82,665

 

 

 

Total other commitments
$
382,564

 
$
82,665

 
$

 
$
299,899

 
$


(1) 
Back-up facility for the commercial paper program (reference Note 6 entitled Long-Term Debt and Derivatives of "Notes to Consolidated Financial Statements" for further discussion).
(2) 
Support certain outstanding debt (reference Note 6 entitled Long-Term Debt and Derivatives of "Notes to Consolidated Financial Statements"), self-insured workers' compensation and general liability insurance programs.
Inflation and Changing Prices
Changes in wages, benefits and energy costs have the potential to materially impact Cintas' consolidated financial results. Management believes inflation has not had a material impact on Cintas' consolidated financial condition or a negative impact on consolidated results of operations.
Litigation and Other Contingencies
Cintas is subject to legal proceedings 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 or consolidated results of operations of Cintas. Cintas is party to additional litigation not considered in the ordinary course of business. Please refer to "Part I, Item 3. Legal Proceedings" and Note 13 entitled Litigation and Other Contingencies of "Notes to Consolidated Financial Statements" for a detailed discussion of certain specific litigation.
New Accounting Standards
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU 2013-02 requires an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income if the item reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For reclassification items not required under GAAP to be reclassified

24



directly to net income in their entirety in the same reporting period, an entity is required to cross-reference to other disclosures currently required under GAAP that provide additional detail about those amounts. The Company adopted ASU 2013-02 effective June 1, 2013. See Note 14 entitled Accumulated Other Comprehensive Income (Loss) of "Notes to Consolidated Financial Statements" for details of the required disclosure.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," to clarify revenue recognition principles. This guidance is intended to improve disclosure requirements and enhance the comparability of revenue recognition practices. Improved disclosures under the amended guidance relate to the nature, amount, timing and uncertainty of revenue that is recognized from contracts with customers. This guidance will be effective for reporting periods beginning after December 15, 2017 and will be required to be applied retrospectively. Early application of the amendments in this update is not permitted. Cintas is currently evaluating the impact that ASU 2014-09 will have on its consolidated financial statements.
No other new accounting pronouncement recently issued or newly effective had or is expected to have a material
impact on the Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The preparation of Cintas' consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that have a significant effect on the amounts reported in the consolidated financial statements and accompanying notes. These critical accounting policies should be read in conjunction with Note 1 entitled Significant Accounting Policies of "Notes to Consolidated Financial Statements." Significant changes, estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the consolidated financial statements.
Revenue recognition
Rental revenue, which is recorded in the Rental Uniforms and Ancillary Products operating segment, is recognized when services are performed. Other services revenue, which is recorded in the Uniform Direct Sales operating segment, First Aid, Safety and Fire Protection Services operating segment, Shredding until April 30, 2014 and the Storage business that is reported as discontinued operations, is recognized when either services are performed or when products are shipped and the title and risks of ownership pass to the customer.
Allowance for doubtful accounts
Cintas establishes an allowance for doubtful accounts. This allowance includes an estimate based on historical rates of collections and allowances for specific accounts identified as uncollectible. The allowance that is an estimate based on the Company's historical rates of collections is recorded for overdue amounts, beginning with a nominal percentage and increasing substantially as the account ages. The amount provided as the account ages will differ slightly between the Rental Uniforms and Ancillary Products operating segment and the other operating segments because of differences in customers served and the nature of each operating segment.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market. Cintas applies a commonly accepted practice of using inventory turns to apply variances between actual and standard costs to the inventory balances. The judgments and estimates used to calculate inventory turns will have an impact on the valuation of inventories at the lower of cost or market. An inventory obsolescence reserve is determined by specific identification, as well as an estimate based on the Company's historical rates of obsolescence.
Uniforms and other rental items in service
Uniforms and other rental items in service are valued at cost less amortization, calculated using the straight-line method. Uniforms in service (other than cleanroom and flame resistant clothing) are amortized over their useful life of 18 months. Other rental items, including shop towels, mats, mops, cleanroom garments, flame resistant clothing, 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 that is presented in the consolidated financial statements.



25



Property and equipment
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets based on industry and Company specific experience, which is typically 30 to 40 years for buildings, 5 to 20 years for building improvements, 3 to 10 years for equipment and 2 to 15 years for leasehold improvements. 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 or based on prices of similar assets, as appropriate.
Investments
Investments consists primarily of cash surrender value of life insurance policies and equity method investments. In general, equity method investments are initially measured at cost. However, an equity method investment resulting from a transaction in which a controlled group of assets that constitutes a business is deconsolidated is initially measured at fair value. Cintas recognizes its share of the investee’s earnings or losses in income. Cintas also adjusts its share of the investee's earnings for intra-entity transactions, basis differences, investee capital transactions and other comprehensive income. Equity method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable.
Goodwill
Goodwill, obtained through acquisitions of businesses, is valued at cost less any impairment. Cintas completes an annual impairment test which may include an assessment of 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, which for the Company is at the operating segment level. We determined that our reporting units are our Rental Uniforms and Ancillary Products, Uniform Direct Sales, and First Aid, Safety and Fire Protection Services operating segments. The test may also include the determination of the estimated fair value of Cintas reporting units via comparisons to current market values, where available, and discounted cash flow analyses. Significant assumptions may include growth rates based on historical trends and margin improvement leveraged from such growth, as well as discount rates. 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, 2015, 2014 or 2013. Cintas will continue to perform impairment tests as of March 1 in future years or when indicators of impairment exist.
Service contracts and other assets
Service contracts and other assets, which consist primarily of noncompete and consulting agreements obtained through acquisitions of businesses, are amortized by use of the straight-line method over the estimated lives of the agreements, which are generally 5 to 10 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, 2015, 2014 or 2013.
General insurance liabilities
General insurance liabilities represent the estimated ultimate cost of all asserted and unasserted claims incurred, primarily related to worker's compensation, auto liability and other general liability exposure through the consolidated balance sheet dates. Our reserves are estimated through actuarial procedures 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.

26



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. Measured compensation cost, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period of the related share-based compensation award. See Note 12 entitled Stock-Based Compensation of "Notes to Consolidated Financial Statements" for further information.
Litigation and environmental matters
Cintas is subject to legal proceedings and claims related to environmental matters arising from the ordinary course of business. 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. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. While a significant change in assumptions and judgments could have a material impact on the amounts recorded for contingent liabilities, Cintas does not believe that they will result in a material adverse effect on the consolidated financial statements.
A detailed discussion of litigation matters is discussed in Note 13 entitled Litigation and Other Contingencies of "Notes to Consolidated Financial Statements."
Income taxes
Deferred tax assets and liabilities are determined by the differences between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities. See Note 8 entitled Income Taxes of "Notes to Consolidated Financial Statements" for the types of items that give rise to significant deferred income tax assets and liabilities. Deferred income taxes are classified as assets or liabilities based on the classification of the related asset or liability for financial reporting purposes. Deferred income taxes that are not related to an asset or liability for financial reporting are classified according to the expected reversal date. 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.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
Earnings are affected by changes in short-term interest rates due to investments in marketable securities and money market accounts and periodic issuances of commercial paper. If short-term rates changed by one-half percent (or 50 basis points), Cintas' income before income taxes would change by approximately $0.3 million. This estimated exposure considers the effects on investments. This analysis does not consider the effects of a change in economic activity or a change in Cintas' capital structure.
Through its foreign operations, Cintas is exposed to foreign currency risk. Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenue and profit translated into U.S. dollars. Foreign denominated revenue and profit represents less than 10% of Cintas' consolidated revenue and profit. Cintas periodically uses foreign currency hedges such as average rate options and forward contracts to mitigate the risk of foreign currency exchange rate movements resulting from foreign currency revenue and from international cash flows. The primary foreign currency to which Cintas is exposed is the Canadian dollar.


27



Item 8.  Financial Statements and Supplementary Data

Index to Consolidated Financial Statements
Audited Consolidated Financial Statements for the Fiscal Years Ended May 31, 2015, 2014 and 2013



28



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 Chief Executive Officer and our Chief Financial Officer, management assessed our internal control over financial reporting as of May 31, 2015. 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, 2015, 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.

 
 
Scott D. Farmer
Chief Executive Officer
 
 
 
 
 
J. Michael Hansen
Vice President and Chief Financial Officer

29



Report of Independent Registered Public Accounting Firm
 
 

The Board of Directors and Shareholders of Cintas Corporation

We have audited Cintas Corporation’s internal control over financial reporting as of May 31, 2015, 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). Cintas Corporation’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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.

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.

In our opinion, Cintas Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cintas Corporation as of May 31, 2015 and 2014 and 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, 2015 and our report dated July 30, 2015 expressed an unqualified opinion thereon.


 
 
/s/ ERNST & YOUNG LLP

Cincinnati, Ohio
July 30, 2015



30



Report of Independent Registered Public Accounting Firm
 

The Board of Directors and Shareholders of Cintas Corporation
We have audited the accompanying consolidated balance sheets of Cintas Corporation as of May 31, 2015 and 2014, and 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, 2015. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of Cintas Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cintas Corporation at May 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cintas Corporation’s internal control over financial reporting as of May 31, 2015, 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 30, 2015 expressed an unqualified opinion thereon.

 
 
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
July 30, 2015


31



Consolidated
Statements of Income
 
 
 
 
 
 
Fiscal Years Ended May 31,
(In thousands except per share data)
2015
 
2014
 
2013
 
 
 
 
 
 
Revenue:
 
 
 
 
 
Rental uniforms and ancillary products
$
3,454,956

 
$
3,223,930

 
$
3,044,587

Other services
1,021,930

 
1,245,635

 
1,201,377

 
4,476,886

 
4,469,565

 
4,245,964

Costs and expenses:
 
 
 
 
 
Cost of rental uniforms and ancillary products
1,913,466

 
1,829,427

 
1,756,297

Cost of other services
642,083

 
766,484

 
736,358

Selling and administrative expenses
1,224,930

 
1,264,836

 
1,187,331

Shredding Transaction asset impairment charge

 
16,143

 

Shredding Transaction costs

 
28,481

 

Operating income
696,407

 
564,194

 
565,978

 
 
 
 
 
 
Gain on deconsolidation of Shredding
4,952

 
106,441

 

 
 
 
 
 
 
Gain on sale of stock of an equity method investment
21,739

 

 

 
 
 
 
 
 
Interest income
(339
)
 
(229
)
 
(409
)
Interest expense
65,161

 
65,822

 
65,712

 
 
 
 
 
 
Income before income taxes
658,276

 
605,042

 
500,675

Income taxes
244,660

 
231,991

 
184,089

(Loss) gain on investment in Shred-it Partnership, net of tax benefit
   of $3,264 and tax of $766, respectively
(5,539
)
 
1,234

 

Income from continuing operations
408,077

 
374,285

 
316,586

Income (loss) from discontinued operations, net of tax of $12,320,
  $658, and $377, respectively
22,541

 
157

 
(1,144
)
Net income
$
430,618

 
$
374,442

 
$
315,442

 
 
 
 
 
 
Basic earnings (loss) per share
 
 
 
 
 
Continuing operations
$
3.49

 
$
3.08

 
$
2.54

Discontinued operations
0.19

 
0.00

 
(0.01
)
Basic earnings per share
$
3.68

 
$
3.08

 
$
2.53

 
 
 
 
 
 
Diluted earnings (loss) per share
 
 
 
 
 
Continuing operations
$
3.44

 
$
3.05

 
$
2.53

Discontinued operations
0.19

 
0.00

 
(0.01
)
Diluted earnings per share
$
3.63

 
$
3.05

 
$
2.52

 
 
 
 
 
 
Dividends declared and paid per share
$
1.70

 
$
0.77

 
$
0.64


See accompanying notes.


32


Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
Fiscal Years Ended May 31,
(In thousands)
2015
 
2014
 
2013
 
 
 
 
 
 
Net income
$
430,618

 
$
374,442

 
$
315,442

 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
Foreign currency translation adjustments
(38,538
)
 
(9,787
)
 
(1,087
)
Change in fair value of derivatives
37

 
(228
)
 
(187
)
Amortization of interest rate lock agreements
1,952

 
1,952

 
1,952

Other
(350
)
 
(1,632
)
 
782

 
 
 
 
 
 
Other comprehensive (loss) income
(36,899
)
 
(9,695
)
 
1,460

 
 
 
 
 
 
Comprehensive income
$
393,719

 
$
364,747

 
$
316,902


See accompanying notes.


33



Consolidated
Balance Sheets
 
 
 
 
As of May 31,
(In thousands except share data)
2015
 
2014
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
417,073

 
$
513,288

Marketable securities
16,081

 

Accounts receivable, principally trade, less allowance of $15,674 and $14,906, respectively
496,130

 
508,427

Inventories, net
226,211

 
251,239

Uniforms and other rental items in service
534,005

 
506,537

Income taxes, current
936

 

Assets held for sale
21,341

 

Prepaid expenses and other current assets
24,030

 
26,190

Total current assets
1,735,807

 
1,805,681

 
 
 
 
Property and equipment, at cost, net
871,421

 
855,702

 
 
 
 
Investments
329,692

 
458,357

Goodwill
1,195,612

 
1,267,411

Service contracts, net
42,434

 
55,675

Other assets, net
17,494

 
19,626

 
$
4,192,460

 
$
4,462,452

Liabilities and Shareholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
109,607

 
$
150,070

Accrued compensation and related liabilities
88,423

 
85,026

Accrued liabilities
309,935

 
299,727

Income taxes, current

 
5,960

Deferred tax liability
112,389

 
88,845

Liabilities held for sale
704

 

Long-term debt due within one year

 
503

Total current liabilities
621,058

 
630,131

 
 
 
 
Long-term liabilities:
 
 
 
Long-term debt due after one year
1,300,000

 
1,300,477

Deferred income taxes
226,938

 
246,044

Accrued liabilities
112,009

 
92,942

Total long-term liabilities
1,638,947

 
1,639,463

 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock, no par value:
 
 
 
100,000 shares authorized, none outstanding

 

Common stock, no par value:
 
 
 
425,000,000 shares authorized
 
 
 
2015:  178,117,334 shares issued and 111,702,949 shares outstanding
 

 
 

2014:  176,378,412 shares issued and 117,037,784 shares outstanding
329,248

 
251,753

Paid-in capital
157,183

 
134,939

Retained earnings
4,227,620

 
3,998,893

Treasury stock:
 

 
 

2015: 66,414,385 shares
 
 
 
2014: 59,340,628 shares
(2,773,125
)
 
(2,221,155
)
Accumulated other comprehensive (loss) income
(8,471
)
 
28,428

Total shareholders' equity
1,932,455

 
2,192,858

 
$
4,192,460

 
$
4,462,452

See accompanying notes.

34



Consolidated
Statements of Shareholders' Equity
 
Common Stock  
 
Paid-In
Capital
 
Retained
Earnings
 
Other
Accumulated
Comprehensive
Income (Loss)
 
Treasury Stock  
 
Total
Shareholders'
Equity
(In thousands)
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 1, 2012
173,746

 
$
148,255

 
$
107,019

 
$
3,482,073

 
$
36,663

 
(47,226
)
 
$
(1,634,875
)
 
$
2,139,135

Net income

 

 

 
315,442

 

 

 

 
315,442

Comprehensive income, net of tax

 

 

 

 
1,460

 

 

 
1,460

Dividends

 

 

 
(79,744
)
 

 

 

 
(79,744
)
Stock-based compensation

 

 
23,310

 

 

 

 

 
23,310

Vesting of stock-based compensation awards
610

 
23,270

 
(23,270
)
 

 

 

 

 

Stock options exercised, net of shares surrendered
430

 
14,807

 

 

 

 

 

 
14,807

Repurchase of common stock

 

 

 

 

 
(5,279
)
 
(215,681
)
 
(215,681
)
Other

 

 
2,763

 

 

 

 

 
2,763

Balance at May 31, 2013
174,786

 
186,332

 
109,822

 
3,717,771

 
38,123

 
(52,505
)
 
(1,850,556
)
 
2,201,492

Net income

 

 

 
374,442

 

 

 

 
374,442

Comprehensive loss, net of tax

 

 

 

 
(9,695
)
 

 

 
(9,695
)
Dividends

 

 

 
(93,320
)
 

 

 

 
(93,320
)
Stock-based compensation

 

 
44,746

 

 

 

 

 
44,746

Vesting of stock-based compensation awards
465

 
23,519

 
(23,519
)
 

 

 

 

 

Stock options exercised, net of shares surrendered
1,127

 
41,902

 

 

 

 

 

 
41,902

Repurchase of common stock

 

 

 

 

 
(6,836
)
 
(370,599
)
 
(370,599
)
Other

 

 
3,890

 

 

 

 

 
3,890

Balance at May 31, 2014
176,378

 
251,753

 
134,939

 
3,998,893

 
28,428

 
(59,341
)
 
(2,221,155
)
 
2,192,858

Net income

 

 

 
430,618

 

 

 

 
430,618

Comprehensive loss, net of tax

 

 

 

 
(36,899
)
 

 

 
(36,899
)
Dividends

 

 

 
(201,891
)
 

 

 

 
(201,891
)
Stock-based compensation

 

 
47,002

 

 

 

 

 
47,002

Vesting of stock-based compensation awards
575

 
37,265

 
(37,265
)
 

 

 

 

 

Stock options exercised, net of shares surrendered
1,164

 
40,230

 

 

 

 

 

 
40,230

Repurchase of common stock

 

 

 

 

 
(7,073
)
 
(551,970
)
 
(551,970
)
Other

 

 
12,507

 

 

 

 

 
12,507

Balance at May 31, 2015
178,117

 
$
329,248

 
$
157,183

 
$
4,227,620

 
$
(8,471
)
 
(66,414
)
 
$
(2,773,125
)
 
$
1,932,455


See accompanying notes.

35



Consolidated
Statements of Cash Flows
 
 
 
 
 
 
Fiscal Years Ended May 31,
(In thousands)
2015
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
Net income
$
430,618

 
$
374,442

 
$
315,442

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
140,624

 
168,220

 
165,664

Amortization of intangible assets
14,458

 
22,642

 
23,713

Stock-based compensation
47,002

 
29,875

 
23,310

Gain on sale of Storage
(38,573
)
 

 

Gain on deconsolidation of Shredding
(4,952
)
 
(106,441
)
 

Gain on sale of stock of an equity method investment
(21,739
)
 

 

Loss (gain) on investment in Shred-it Partnership
8,803

 
(2,000
)
 

Shredding Transaction asset impairment charge

 
16,143

 

Shredding Transaction costs

 
26,057

 

Deferred income taxes
20,866

 
47,109

 
48,023

Change in current assets and liabilities, net of acquisitions of businesses:
 

 
 

 
 

Accounts receivable, net
(1,443
)
 
(56,231
)
 
(42,704
)
Inventories, net
23,785

 
(11,062
)
 
10,997

Uniforms and other rental items in service
(31,994
)
 
(11,435
)
 
(44,179
)
Prepaid expenses and other current assets
(3,202
)
 
(2,177
)
 
(3,281
)
Accounts payable
(33,445
)
 
30,446

 
25,023

Accrued compensation and related liabilities
3,234

 
10,931

 
(13,161
)
Accrued liabilities and other
33,066

 
54,237

 
31,873

Income taxes, current
(6,832
)
 
15,213

 
12,028

Net cash provided by operating activities
580,276

 
605,969

 
552,748

 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(217,720
)
 
(145,580
)
 
(196,486
)
Proceeds from redemption of marketable securities
161,938

 
54,196

 
161,478

Purchase of marketable securities and investments
(195,471
)
 
(63,858
)
 
(178,464
)
Proceeds from Storage Transactions, net of cash contributed
158,428

 

 

Proceeds from Shredding Transaction, net of cash contributed
3,344

 
179,359

 

Proceeds from sale of stock of an equity method investment
29,933

 

 

Dividends received on equity method investment
5,247

 

 

Dividends received on Shred-it Partnership investment
113,400

 

 

Acquisitions of businesses, net of cash acquired
(15,495
)
 
(33,441
)
 
(69,370
)
Other
1,383

 
(5,219
)
 
(1,339
)
Net cash provided by (used in) investing activities
44,987

 
(14,543
)
 
(284,181
)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Proceeds from issuance of debt

 

 
250,000

Repayment of debt
(518
)
 
(8,187
)
 
(225,636
)
Proceeds from exercise of stock-based compensation awards
40,230

 
41,902

 
14,807

Dividends paid
(201,891
)
 
(93,320
)
 
(79,744
)
Repurchase of common stock
(551,970
)
 
(370,599
)
 
(215,681
)
Other
1,589

 
469

 
196

Net cash used in financing activities
(712,560
)
 
(429,735
)
 
(256,058
)
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(8,918
)
 
(676
)
 
(61
)
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(96,215
)
 
161,015

 
12,448

Cash and cash equivalents at beginning of year
513,288

 
352,273

 
339,825

Cash and cash equivalents at end of year
$
417,073

 
$
513,288

 
$
352,273

See accompanying notes.

36



Notes to Consolidated Financial Statements
 
1.  Significant Accounting Policies
Business description.  Cintas Corporation (collectively with its majority-owned subsidiaries and any entities over which it has control, "Cintas") provides highly specialized products and services to businesses of all types primarily throughout North America, as well as Latin America, Europe and Asia. Cintas is North America's leading provider of corporate identity uniforms through rental and sales programs, as well as a significant provider of related business services, including entrance mats, restroom cleaning services and supplies, carpet and tile cleaning services, and first aid, safety and fire protection products and services. Cintas' products and services are designed to enhance its customers' images and to provide additional safety and protection in the workplace.
Effective August 31, 2014, Cintas classifies its businesses into three reportable operating segments ("operating segments") based on the types of products and services provided. The Rental Uniforms and Ancillary Products 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 carpet and tile cleaning services are also provided within this operating segment. The Uniform Direct Sales operating segment consists of the direct sale of uniforms and related items. The First Aid, Safety and Fire Protection Services operating segment consists of first aid, safety and fire protection products and services.
Previously, Cintas classified its businesses into four operating segments. The Document Management Services operating segment is no longer considered an operating segment for fiscal 2015 and beyond. This operating segment consisted of document destruction services ("Shredding") and document imaging and retention services ("Storage"). On April 30, 2014, Cintas completed its partnership transaction with the shareholders of Shred-it International Inc. ("Shred-it") to combine Cintas' Shredding with Shred-it's shredding business ("the Shredding Transaction"). Due to the deconsolidation of Shredding, fiscal 2015 results exclude the results of Shredding. Shredding remains reported in continuing operations for fiscal 2014 (through April 30, 2014 as previously discussed) and 2013. Based on the change in reportable operating segments, the results of Shredding for the year ended May 31, 2014 are presented in Corporate. Additionally, effective August 31, 2014, Storage is reported as a discontinued operation for all periods presented and has been excluded from continuing operations and from operating segment results for all periods presented. In the quarter ended November 30, 2014, Cintas sold Storage through a series of transactions. ("Storage Transactions"). Please see Note 17 entitled Discontinued Operations for additional information.  
As previously mentioned, on April 30, 2014, the Shredding Transaction was completed. Cintas Shredding represented approximately 76%, 80%, and 70% of Cintas' Document Management Services operating segment's assets, revenue, and income before income taxes, respectively, as of and for the quarter ended February 28, 2014. Under the agreement, Cintas and Shred-it each contributed its shredding business to a newly formed partnership owned 42% by Cintas and 58% by the shareholders of Shred-it ("the Shred-it Partnership"). In addition to its 42% ownership of the Shred-it Partnership, Cintas received $180.0 million in cash at the closing of the transaction. Cintas' equity interest in the partnership is accounted for under the equity method of accounting as prescribed by U.S. generally accepted accounting principles ("GAAP").
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.
Financial Statement Presentation.  We have reclassified certain prior-year amounts to conform to the current year’s presentation.
Use of estimates.  The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue recognition.  Rental revenue, which is recorded in the Rental Uniforms and Ancillary Products operating segment, is recognized when services are performed. Other Services revenue, which is recorded in the Uniform Direct Sales operating segment, the First Aid, Safety and Fire Protection Services operating segment, Shredding until April 30, 2014 and the Storage business that is reported as discontinued operations, is recognized when either services are performed or when products are shipped and the title and risks of ownership pass to the customer.
Cost of rental uniforms and ancillary products.  Cost of rental uniforms and ancillary products consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, mops,

37



shop towels and other ancillary items. The Rental Uniforms and Ancillary Products operating segment inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution are included in the cost of rental uniforms and ancillary products.
Cost of other services.  Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses. Cost of other services includes inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution.
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.
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, 2015 and 2014, cash and cash equivalents includes $43.0 million and $33.5 million, respectively, of restricted cash used as collateral associated with the general insurance program.
Marketable securities.  Marketable securities are typically comprised of fixed income securities and are classified as available-for-sale.
Accounts receivable.  Accounts receivable is comprised of amounts owed through product shipments and services provided and is presented net of an allowance for doubtful accounts. The allowance is an estimate based on historical rates of collections and allowances for specific accounts identified as uncollectible. The allowance that is an estimate based on Cintas' historical rates of collections is recorded for overdue amounts, beginning with a nominal percentage and increasing substantially as the account ages. The amount provided as the account ages will differ slightly between the Rental Uniforms and Ancillary Products operating segment and the two other operating segments because of differences in customers served and the nature of each operating segment. When an account is considered uncollectible, it is written off against the allowance for doubtful accounts.
Inventories.  Inventories are valued at the lower of cost (first-in, first-out) or market. Cintas applies a commonly accepted practice of using inventory turns to apply variances between actual and standard costs to the inventory balances. The judgments and estimates used to calculate inventory turns will have an impact on the valuation of inventories at the lower of cost or market. Inventory is comprised of the following amounts:
(In thousands)
2015
 
2014
 
 
 
 
Raw materials
$
16,935

 
$
17,984

Work in process
17,079

 
14,304

Finished goods
192,197

 
218,951

 
$
226,211

 
$
251,239


Inventories are recorded net of reserves for obsolete inventory of $30.7 million at both May 31, 2015 and 2014. The inventory obsolescence reserve is determined by specific identification, as well as an estimate based on Cintas' historical rates of obsolescence.
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 and flame resistant clothing) are amortized over their useful life of 18 months. Other rental items, including shop towels, mats, mops, cleanroom garments, flame resistant clothing, linens and restroom dispensers, are amortized over their useful lives, which range from 8 to 60 months. The amortization rates used are based on industry experience, Cintas' specific experience and wear tests performed by Cintas. These factors are critical to determining the amount of in service inventory and related cost of uniforms and ancillary products that are presented in the consolidated financial statements.
Property and equipment.  Property and equipment is stated at cost, less accumulated depreciation. 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, in years:
Buildings
30 to 40
Building improvements
5 to 20
Equipment
3 to 10
Leasehold improvements
2 to 15

38




Investments. Investments consists primarily of equity method investments and the cash surrender value of life insurance policies. The equity method is used to account for an investment if our investment gives us the ability to exercise significant influence over the operating and financial policies of the investee. In general, equity method investments are initially measured at cost. However, an equity method investment resulting from a transaction in which a controlled group of assets that constitutes a business is deconsolidated is initially measured at fair value. Cintas recognizes its share of the investee’s earnings or losses in income. Cintas also adjusts its share of the investee's earnings for intra-entity transactions, basis differences, investee capital transactions and other comprehensive income through income or other comprehensive income as appropriate. Equity method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable.
Long-lived assets.  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 or based on prices of similar assets, as appropriate.
Goodwill.  Goodwill, obtained through acquisitions of businesses, is valued at cost less any impairment. Cintas completes an annual impairment test, which may include an assessment of 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, which for the Company is at the operating segment level. We determined that our reporting units are our Rental Uniforms and Ancillary Products, Uniform Direct Sales, and First Aid, Safety and Fire Protection Services operating segments. The test may also include the determination of the estimated fair value of Cintas' reporting units via comparisons to current market values, where available, and discounted cash flow analyses. Significant assumptions may include growth rates based on historical trends and margin improvement leveraged from such growth, as well as discount rates. In addition to the annual test in fiscal 2014, Cintas was required to perform an impairment test as of April 30, 2014 on the business remaining within the former Document Management Services operating segment as a result of the Shredding Transaction. Based on the results of this test and the annual impairmen