Note 17. Income Taxes

12 Months Ended

May 31, 2012

Income Tax Disclosure [Text Block]

17.   INCOME TAXES

As a result of the Acquisition, effective on August 20, 2011, the Company is included in the consolidated income tax returns of Holdings. In accordance with GAAP, allocation of the consolidated income tax expense is necessary when separate financial statements are prepared for affiliates. The Company uses a method that allocates current and deferred taxes to members of the consolidated group by applying the liability method to each member as if it were a separate taxpayer.

Also as a result of the Acquisition, the Company has a short tax year that coincides with the Predecessor period ending August 19, 2011. As such, the income tax provision for the Predecessor period reflects the income tax results that are expected to be reported on the short period income tax returns for the tax year ending August 19, 2011.  

The following is a geographic breakdown of (loss) income before income taxes:

	Successor			Predecessor
	August 20, 2011 through May 31, 2012			June 1, 2011 through August 19, 2011			For the Year Ended May 31, 2011		For the Year Ended May 31, 2010
	(in thousands)
Domestic Operations	$	(69,012	)	$	(10,820	)	$	105,060	$	105,181
Foreign Operations		(12,181	)		7,127			25,570		20,031
(Loss) income before income taxes	$	(81,193	)	$	(3,693	)	$	130,630	$	125,212

The (benefit) provision for income taxes is summarized as follows:

	Successor			Predecessor
	August 20, 2011 through May 31, 2012			June 1, 2011 through August 19, 2011			For the Year Ended May 31, 2011			For the Year Ended May 31, 2010
	(in thousands)
Current:
Federal	$	700		$	3,161		$	26,542		$	28,815
State and Local		143			673			6,102			2,796
Foreign		3,706			2,823			7,718			6,080
		4,549			6,657			40,362			37,691
Non-Current:
Federal		328			-			-			-
State and Local		-			-			-			-
Foreign		-			-			-			-
		328			-			-			-
Deferred:
Federal		(31,946	)		(3,429	)		3,551			4,134
State and Local		(1,639	)		(494	)		(2,873	)		525
Foreign		(2,838	)		(53	)		263			279
		(36,423	)		(3,976	)		941			4,938
(Benefit) Provision for income taxes	$	(31,546	)	$	2,681		$	41,303		$	42,629

The Company’s effective tax rate differs from the federal statutory rate as follows:

	Successor		Predecessor
	August 20, 2011 through May 31, 2012		June 1, 2011 through August 19, 2011		For the Year Ended May 31, 2011		For the Year Ended May 31, 2010
Federal statutory tax rate		35.0%		35.0%		35.0%		35.0%
State income taxes, net of federal tax benefit		1.5%		1.5%		0.4%		3.0%
Foreign taxes		-0.9%		-37.2%		-0.3%		-0.3%
Incremental U.S. benefit related to foreign dividends		3.5%		-9.8%		-0.4%		0.0%
Tax Credits		0.4%		3.1%		-0.4%		-0.6%
Permanent items		-0.2%		-66.7%		-0.7%		-0.2%
Production activity deduction		0.0%		0.0%		-2.1%		-1.5%
Change in analysis of uncertain income tax positions		-0.3%		1.55		0.3%		-1.2%
Other		-0.1%		0.05		-0.2%		-0.2%
Effective tax rate		38.9%		-72.6%		31.6%		34.0%

The difference between the federal statutory rate of 35% and the effective tax rate for the Successor fiscal 2012 period primarily relates to state income taxes, foreign dividends and foreign tax credits. The difference between the federal statutory rate and the effective tax rate for the Predecessor fiscal 2012 period primarily relates to the income taxes associated with the repatriation of foreign earnings in excess of foreign tax credits earned, the non-deductibility of certain transaction costs, and state income taxes.

At May 31, 2012, other assets includes $7.8 million of competent authority offsets related to transfer pricing.  At May 31, 2011, the competent authority offset of $5.4 million was included in deferred income tax assets, current portion.

Deferred income taxes reflect the net tax effects of: (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes; and (b) net operating losses and tax credit carry-forwards.  In accounting for the Acquisition, the Company recorded deferred tax liabilities of approximately $291.9 million associated with acquired intangible assets that have no income tax basis. These liabilities were offset by deferred tax assets primarily associated with net operating losses and tax credit carry-forwards.

The significant items comprising the Company’s net deferred tax assets (liabilities) at May 31, 2012 and 2011 are as follows:

	Successor			Predecessor
	For the Year Ended May 31, 2012			For the Year Ended May 31, 2011
	(in thousands)
Deferred tax liabilities:
Intangibles	$	(277,816	)	$	(19,282	)
Property, Plant & Equipment		(4,504	)		(4,931	)
Prepaids and other		(324	)		(346	)
Deferred tax assets:
Tax Credit carry-forwards		25,109			2,736
Net operating loss carry-forwards		10,371			11,580
Compensation expense		3,165			5,617
Reserves not currently deductible		1,723			4,376
Inventory		950			603
Deferred revenue		279			2,923
Other		2,928			6,187
		(238,119	)		9,463
Valuation Allowance		(1,888	)		(2,467	)
Net deferred tax assets (liabilities)	$	(240,007	)	$	6,996

As of May 31, 2012 and 2011, net deferred tax assets (liabilities) located in countries outside the U.S. were $(11.6) million and $(0.3) million, respectively.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions.  The Company’s largest foreign tax jurisdictions are Canada, Germany and Italy.  The Company’s tax years for the fiscal years ended August 19, 2011, May 31, 2011, May 31, 2010 and May 31, 2009 remain subject to examination by various tax authorities.  As of May 31, 2012, $19.0 million of Federal net operating loss carry-forwards were available to reduce future Federal taxable income related.  These net operating loss carry-forwards begin to expire in fiscal 2025.  The Company’s $21.0 million of foreign tax credit carry forwards expire between fiscal 2018 and fiscal 2022.  The Company’s $2.0 million of research and development credits expire between fiscal 2019 and fiscal 2032.  The Federal net operating loss and certain tax credit carry-forwards are subject to annual limitations on their usage resulting from the BioArray acquisition in fiscal 2008.

In the Predecessor periods, the Company considered its investment in foreign subsidiaries to be permanently invested. Accordingly, no deferred tax liabilities were provided for its investments in foreign subsidiaries. Subsequent to the Acquisition, the Company no longer considers itself to be permanently reinvested with respect to its accumulated and unrepatriated earnings as well as the future earnings of each foreign subsidiary. As of May 31, 2012, the result of taking into account estimated foreign tax credits associated with unremitted foreign earnings results in a net deferred tax asset.  As a result, the Company has not provided for deferred taxes related to unremitted foreign earnings.  The Company continues to consider its investment in each foreign subsidiary to be permanently reinvested and thus has not recorded a deferred tax liability on that amount.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized primarily as a result of uncertainties regarding the future realization of recorded tax benefits on tax net operating loss carry-forwards from operations in various jurisdictions. These valuation allowances are primarily related to deferred tax assets generated from state net operating losses and tax credit carry-forwards.  Current evidence does not suggest the Company will realize sufficient taxable income of the appropriate character within the carry-forward period to allow us to realize these deferred tax benefits.  If the Company were to identify and implement tax planning strategies to recover these deferred tax assets or generate sufficient income of the appropriate character in these jurisdictions in the future, it could lead to the reversal of these valuation allowances and a reduction of income tax expense. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets.

During fiscal 2011, due to a law change in New Jersey income tax apportionment factors, the Company experienced a positive adjustment of approximately $2.3 million to its deferred income tax liabilities that was established on the acquisition of BioArray. Additionally, in fiscal 2011, the Company wrote off approximately $3.9 of net operating loss carry-forwards which were fully reserved in previous years.

The Company has net operating loss carry-forwards of $3.3 million in Belgium and $2.4 million in France.  The net operating loss carry-forwards for Belgium and France do not expire.  Prior to August 19, 2011, the Company had provided a full valuation allowance against these net operating loss carry-forwards.  As a result of the Acquisition, deferred tax liabilities were recorded in both Belgium and France for certain intangible assets that are deductible for accounting purposes but not for income tax purposes.  As a result, a portion of the valuation allowance in Belgium and the full valuation allowance in France was released through purchase accounting.

An analysis of the Company’s deferred tax asset valuation allowance is as follows:

	Successor			Predecessor
	For the Year Ended May 31, 2012			For the Year Ended May 31, 2011
	(in thousands)
Balance, beginning of period	$	2,467		$	6,716
Change due to Acquisition		(753	)
Additions		592
Reductions		(418	)		(4,249	)
Balance, end of period	$	1,888		$	2,467

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the years ended May 31, 2012 and 2011:

	Successor			Predecessor
	For the Year Ended May 31, 2012			For the Year Ended May 31, 2011
	(in thousands)
Balance, beginning of period	$	9,766		$	8,093
Change due to Acquisition		1,018			-
Gross increases in unrecognized tax benefits as a result of tax positions taken during a prior period		-			-
Gross decreases in unrecognized tax benefits as a result of tax positions taken during a prior period		-			-
Gross increases in unrecognized tax benefits as a result of tax positions taken during current period		5,314			2,107
Gross decreases in unrecognized tax benefits as a result of tax positions taken during current period		-			-
Decrease in unrecognized tax benefits relating to settlements with taxing authorities		-			-
Reductions to unrecognized tax benefits as a result of the applicable statute of limitations		(1,267	)		(434	)
Balance, end of period	$	14,831		$	9,766

The Company has not accrued penalties since adoption of the update to ASC 740, “Income Taxes.”

Interest related to unrecognized tax benefits is recorded in the consolidated statements of operations as follows (in thousands):

	Successor		Predecessor
	August 20, 2011 through May 31, 2012		June 1, 2011 through August 19, 2011		For the Year Ended May 31, 2011		For the Year Ended May 31, 2010
	(in thousands)
Interest included in provision for income taxes	$	278	$	55	$	309	$	122

Interest included in the consolidated balance sheets is as follows:

	Successor		Predecessor
	For the Year Ended May 31, 2012		For the Year Ended May 31, 2011
	(in thousands)
Interest included in the liability for unrecognized tax benefits above	$	1,234	$	901

The Company does not anticipate that within the next twelve months the total amount of unrecognized tax benefits will significantly increase or decrease.  The total balance of unrecognized tax benefits that would decrease the effective tax rate, if recognized, is $4.1 million as of May 31, 2012.  Approximately $12.7 million of the unrecognized tax benefit is reflected as a non-current liability as it is unlikely to require payment during the twelve-month period ending May 31, 2013.  The remaining $2.1 million is reflected as an offset to non-current deferred tax assets.  At May 31, 2011, the liability for unrecognized tax benefits of $9.8 million was recorded in income taxes payable.