Income Taxes



(In thousands)	2012		2011		2010

Income before income taxes consist of the following components:
U.S. operations	$	454,811	$	377,922	$	315,717
Foreign operations	16,133		14,747		28,175
	$	470,944	$	392,669	$	343,892



(In thousands)	2012		2011		2010

Income tax expense consists of the following components:
Current:
Federal	$	139,251	$	70,811	$	106,389
State and local	17,780		15,063		12,909
	157,031		85,874		119,298
Deferred	16,276		59,806		8,974
	$	173,307	$	145,680	$	128,272



(In thousands)	2012			2011			2010

Reconciliation of income tax expense using the statutory rate and actual income tax expense is as follows:
Income taxes at the U.S. federal statutory rate	$	164,830		$	137,434		$	120,362
State and local income taxes, net of federal benefit	11,876			11,984			8,631
Other	(3,399		)	(3,738		)	(721		)
	$	173,307		$	145,680		$	128,272

The components of deferred income taxes included on the consolidated balance sheets are as follows:



(In thousands)	2012			2011

Deferred tax assets:
Allowance for doubtful accounts	$	5,577		$	5,630
Inventory obsolescence	11,507			11,204
Insurance and contingencies	28,708			19,121
Stock-based compensation	16,017			12,585
Foreign tax credit carry-forward	9,054			—
Other	18,453			15,065
	89,316			63,605
Valuation allowance	(9,054		)	—
	80,262			63,605
Deferred tax liabilities:
In service inventory	64,061			10,108
Property	122,675			118,413
Intangibles	88,696			77,910
State taxes and other	11,970			7,682
	287,402			214,113
Net deferred tax liability	$	207,140		$	150,508

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.

Income taxes paid were $160.8 million, $105.8 million and $103.8 million for the fiscal years ended May 31, 2012, 2011 and 2010, respectively.

In the fourth quarter of fiscal 2012, Cintas repatriated approximately $110 million of cash from foreign subsidiaries on which no U.S. federal income taxes were previously provided, since Cintas had previously intended to permanently reinvest cumulative undistributed earnings of its foreign subsidiaries in foreign operations. Cintas recognized an income tax expense of $7.4 million net of foreign tax credits as a result of the repatriation described above.

Remaining undistributed earnings of foreign subsidiaries were approximately $140.7 million, $222.0 million and $198.3 million for the fiscal years ended May 31, 2012, 2011 and 2010, respectively, for which deferred taxes have not been provided. Such earnings are considered to be permanently reinvested in Cintas' foreign subsidiaries. If such earnings were repatriated, additional tax expense may result. The current calculation of such additional taxes is not practicable.

On December 23, 2011, the U.S. Department of the Treasury and the Internal Revenue Service issued temporary regulations (Regulations Section 2011-14) that provide guidance on amounts paid to improve tangible property, and acquire or produce tangible property, as well as guidance regarding the disposition of property and the expensing of supplies and materials. The finalized regulations are effective for Cintas' fiscal year ending May 31, 2013. Cintas continues to review these regulations for their impact on Cintas' consolidated financial statements.

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 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 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.

As of May 31, 2012 and 2011, there was $9.0 million and $18.8 million, respectively, in total unrecognized tax benefits, which, if recognized, would favorably impact Cintas' effective tax rate. Cintas recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense in the consolidated statements of income, which is consistent with the recognition of these items in prior reporting periods. The total amount accrued for interest and penalties as of May 31, 2012 and 2011, was $2.0 million and $9.1 million, respectively. Cintas records this tax liability as current and long-term accrued liabilities on the consolidated balance sheets, as appropriate.

In the normal course of business, Cintas provides for uncertain tax positions and the related interest, and adjusts its unrecognized tax benefits and accrued interest accordingly. Unrecognized tax benefits related to continuing operations decreased by $55.0 million in fiscal 2012, increased by $6.4 million in fiscal 2011 and increased by $0.9 million in fiscal 2010. Accrued interest decreased by $7.1 million in fiscal 2012, decreased by $6.6 million in fiscal 2011 and decreased by less than $0.1 million in fiscal 2010.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(In thousands)

Balance at June 1, 2010	$	95,857
Additions for tax positions of prior years	10,529
Settlements	(2,194		)
Statute expirations	(1,093		)
Balance at May 31, 2011	$	103,099
Additions for tax positions of prior years	5,660
Settlements	(5,048		)
Change in tax regulations	(57,182		)
Statute expirations	(1,998		)
Balance at May 31, 2012	$	44,531

The majority of Cintas' operations are in North America. Cintas is required to file federal income tax returns, as well as state income tax returns in a majority of the domestic states and also in certain Canadian provinces. At times, Cintas is subject to audits in these jurisdictions. The audits, by nature, are sometimes complex and can require several years to resolve. The final resolution of any such tax audit could result in either a reduction in Cintas' accruals or an increase in its income tax provision, either of which could have an impact on the consolidated results of operation in any given period.

All U.S. federal income tax returns are closed to audit through fiscal 2010. Cintas is currently in advanced stages of various audits in certain foreign jurisdictions and certain domestic states. The years under audit cover fiscal years back to 2005. Based on the resolution of the various audits and other potential regulatory developments, it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $2.4 million for the fiscal year ended May 31, 2013.