Income Taxes



(In thousands)	2013		2012		2011

Income before income taxes consist of the following components:
U.S. operations	$	485,046	$	454,811	$	377,922
Foreign operations	14,862		16,133		14,747
	$	499,908	$	470,944	$	392,669



(In thousands)	2013		2012		2011

Income tax expense consists of the following components:
Current:
Federal	$	109,964	$	139,251	$	70,811
State and local	12,478		17,780		15,063
	122,442		157,031		85,874
Deferred	62,024		16,276		59,806
	$	184,466	$	173,307	$	145,680



(In thousands)	2013			2012			2011

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	$	174,968		$	164,830		$	137,434
State and local income taxes, net of federal benefit	12,192			11,876			11,984
Other	(2,694		)	(3,399		)	(3,738		)
	$	184,466		$	173,307		$	145,680

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



(In thousands)	2013			2012

Deferred tax assets:
Allowance for doubtful accounts	$	5,322		$	5,577
Inventory obsolescence	12,220			11,507
Insurance and contingencies	33,984			28,708
Stock-based compensation	17,513			16,017
Foreign tax credit carry-forward	5,397			9,054
Treasury locks	8,020			9,032
Other	20,030			9,421
	102,486			89,316
Valuation allowance	(12,789		)	(9,054		)
	89,697			80,262
Deferred tax liabilities:
In service inventory	131,334			64,061
Property	123,904			122,675
Intangibles	99,267			88,696
State taxes and other	22,844			11,970
	377,349			287,402
Net deferred tax liability	$	287,652		$	207,140

Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, net of valuation allowances, will be realized.

Income taxes paid were $122.2 million, $160.8 million and $105.8 million for the fiscal years ended May 31, 2013, 2012 and 2011, 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 $8.9 million, net of foreign tax credits in fiscal 2012 as a result of the repatriation described above.

Undistributed earnings of foreign subsidiaries were approximately $194.0 million, $140.7 million and $222.0 million as of May 31, 2013, 2012 and 2011, 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.

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, 2013 and 2012, there was $10.9 million and $9.0 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, 2013 and 2012, was $1.1 million and $2.0 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 $29.2 million in fiscal 2013, decreased by $55.0 million in fiscal 2012 and increased by $6.4 million in fiscal 2011. Accrued interest decreased by $0.9 million, $7.1 million and $6.6 million in fiscal 2013, 2012 and 2011, respectively.

A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits (exclusive of interest and penalties) is as follows:



(In thousands)

Balance at June 1, 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
Additions based on tax positions related to the current year	1,843
Additions for tax positions of prior years	2,960
Change in tax regulations	(33,600		)
Statute expirations	(2,025		)
Balance at May 31, 2013	$	13,709

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 effective date of the final regulations was extended and will be effective for Cintas' fiscal year ending May 31, 2015. Early adoption is available, and as such, Cintas elected early adoption of the regulations on specific assets (material and supplies) resulting in gross decreases in unrecognized tax benefits of $33.6 million and $57.2 million in fiscal 2013 and 2012, respectively. Due to indications of coming changes to the de minimis and disposition rules, Cintas continues to review these regulations but does not believe there will be a material impact on the consolidated financial statements when they are fully adopted.

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 $1.4 million for the fiscal year ending May 31, 2014.