Note 18 - Income Taxes

12 Months Ended

May 31, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

18. INCOME TAXES

As a result of the Immucor 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 (benefit) 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. As of May 31, 2014 and 2013, the Company had no amounts due to or from Holdings related to income taxes.

Also, as a result of the Immucor Acquisition, the Company had a short tax year that coincided with the Predecessor period ending August 19, 2011. As such, the income tax provision for the Predecessor period reflects the income tax results that were 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 (in thousands):

							Successor			Predecessor
							August 20, 2011			June 1, 2011
	Year Ended			Year Ended			through			through
	May 31, 2014			May 31, 2013			May 31, 2012			August 19, 2011
Domestic operations	$	(210,354	)		(74,451	)		(69,012	)		(10,820	)
Foreign operations		12,181			10,743			(12,181	)		7,127
(Loss) income before income taxes	$	(198,173	)		(63,708	)		(81,193	)		(3,693	)

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

							Successor			Predecessor
							August 20, 2011			June 1, 2011
	Year Ended			Year Ended			through			through
	May 31, 2014			May 31, 2013			May 31, 2012			August 19, 2011
Current:
Federal	$	321			403			700			3,161
State and Local		914			69			143			673
Foreign		4,107			4,434			3,706			2,823
		5,342			4,906			4,549			6,657
Non-Current:
Federal		(298	)		(899	)		328			-
State and Local		-			-			-			-
Foreign		-			-			-			-
		(298	)		(899	)		328			-
Deferred:
Federal		(19,030	)		(26,319	)		(31,946	)		(3,429	)
State and Local		(1,092	)		(1,522	)		(1,639	)		(494	)
Foreign		(838	)		(732	)		(2,838	)		(53	)
		(20,960	)		(28,573	)		(36,423	)		(3,976	)
(Benefit) provision for income taxes	$	(15,916	)		(24,566	)		(31,546	)		2,681

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

							Successor			Predecessor
							August 20, 2011			June 1, 2011
	Year Ended			Year Ended			through			through
	May 31, 2014			May 31, 2013			May 31, 2012			August 19, 2011
Federal statutory tax rate		35.0	%		35.0			35.0			35.0
State income taxes, net of federal tax benefit		0.8			3.7			1.5			1.5
Foreign taxes		(0.1	)		(0.9	)		(0.9	)		(37.2	)
Incremental U.S. benefit related to foreign dividends		0.4			0.8			3.5			(9.8	)
Tax Credits		0.2			1.9			0.4			3.1
Permanent items		(0.3	)		(1.3	)		(0.2	)		(66.7	)
Impairment of Goodwill		(28.3	)		-			-			-
Acquistion-related items		0.8			-			-			-
Change in analysis of uncertain income tax positions		(0.1	)		0.9			(0.3	)		1.5
Valuation Allowance		(0.4	)		(1.5	)		-			-
Other		-			-			(0.1	)		-
Effective tax rate		8.0	%		38.6			38.9			(72.6	)

The difference between the federal statutory rate of 35% and the effective tax rate for fiscal 2014 primarily relates to the following: (1) the impairment of Goodwill is not deductible for income tax purposes, (2) the gain on acquisition-related item is not taxable, (3) a portion of the Company’s income is subject to tax in various tax jurisdictions with tax rates which differ from the U.S. statutory tax rate, (3) the impact of recording U.S. income taxes associated with current and future distributions of foreign earnings, (4) changes in discrete tax items recognized during the period based on enacted tax laws, and (5) the expiration of the statute of limitations for the benefits associated with uncertain tax positions.

The difference between the federal statutory rate of 35% and the effective tax rate for fiscal 2013 primarily relates to state income taxes and tax credits net of the changes in the valuation allowance.

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.

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 Immucor 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. In accounting for LIFECODES acquisition, the Company recorded deferred tax liabilities of approximately $12.7 million associated with acquired intangible assets that have no income tax basis. These liabilities were offset by deferred tax assets primarily associated with reserves and state tax credit carry-forwards. In accounting for the Organ-i acquisition, the Company recorded deferred tax liabilities of approximately $10.2 million primarily associated with acquired intangible assets that have no income tax basis. These liabilities were offset by deferred tax assets primarily associated with net operating loss carry-forwards.

The significant items comprising the Company’s net deferred tax assets (liabilities) as of May 31, 2014 and 2013 are as follows (in thousands):

	Years Ended May 31
	2014			2013
Deferred tax liabilities:
Intangibles	$	(260,981	)		(269,972	)
Interest expense		(11,291	)		(13,685	)
Property and equipment		(2,224	)		(4,765	)
Transfer pricing		(238	)		(2,022	)
Prepaids and other		(492	)		(309	)
Deferred tax assets:
Tax credit carry-forwards		32,632			30,797
Capitalized research		15,122			-
Net operating loss carry-forwards		6,793			27,532
Compensation expense		3,543			3,002
Inventory		3,351			1,894
Reserves not currently deductible		1,110			1,194
Other		1,526			3,640
		(211,149	)		(222,694	)
Valuation Allowance		(3,962	)		(3,234	)
Net deferred tax assets (liabilities)	$	(215,111	)		(225,928	)

As of May 31, 2014 and 2013, net deferred tax liabilities located in countries outside the U.S. were $10.7 million and $10.9 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 U.S. tax returns for all fiscal years beginning after May 31, 2009 remain subject to examination by various tax authorities. As of May 31, 2014, $8.7 million of Federal net operating loss carry-forwards were available to reduce future U.S. Federal taxable income. These net operating loss carry-forwards begin to expire in fiscal 2025. The Company has $25.7 million of foreign tax credit carry-forwards which expire between fiscal 2018 and fiscal 2024. The Company has $4.1 million of research and development credits which expire between fiscal 2019 and fiscal 2034. Certain portions of 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 and the Organ-i acquisition in fiscal 2014.

In September 2013, the U.S. Department of the Treasury and the IRS issued final regulations addressing the acquisition, production and improvement of tangible property, and also proposed regulations addressing the disposition of property. These regulations are effective for tax years beginning after January 1, 2014. The Company has analyzed the expected impact of these regulations on the Company and concluded that the expected impact is minimal. The Company will continue to monitor the impact of any future changes to these regulations and any changes will be reported prospectively.

In the Predecessor period, 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 Immucor 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. During fiscal 2014, the Company recorded a deferred tax liability associated with unremitted foreign earnings of certain subsidiaries. At May 31, 2013, the Company’s unremitted foreign earnings resulted in a net deferred tax asset. Accordingly, the Company did not provide for any deferred income taxes related to unremitted foreign earnings during fiscal 2013. The Company considers its equity investment in each foreign subsidiary to be permanently reinvested and thus has not recorded a deferred tax liability on such amounts.

The Company has net operating loss carry-forwards of $3.4 million in Belgium and $1.2 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 Immucor 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.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company’s valuation allowances are primarily related to deferred tax assets generated from certain foreign net operating losses, 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 tax planning strategies that become available in the future 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.

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

	Years Ended May 31
	2014			2013
Balance, beginning of period	$	3,234			1,888
Change due to acquisitions		-			362
Additions		1,111			984
Reductions		(367	)		-
Other		(16	)		-
Balance, end of period	$	3,962			3,234

The following is a tabular reconciliation of the total tax liability for unrecognized tax benefits for the years ended May 31, 2014 and 2013 (in thousands):

	Years Ended May 31
	2014			2013
Balance, beginning of period	$	12,729			13,597
Change due to Acquisitions		-			324
Gross (decreases)increases in unrecognized tax benefits as a result of tax positions taken during a prior period		(35	)		172
Gross increases(decreases) in unrecognized tax benefits as a result of tax positions taken during current period		788			1,690
Reductions to unrecognized tax benefits as a result of the applicable statute of limitations		(619	)		(3,054	)
Balance, end of period	$	12,863			12,729

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 at May 31, 2014 is $14.5 million, including accrued interest. Of this amount, the amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, is $14.2 million.

Approximately $10.4 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, 2015. The remaining $4.1 million is included in non-current deferred tax liabilities. At May 31, 2013, the liability for unrecognized tax benefits, including accrued interest, of $10.2 million was included as a non-current liability and $3.8 million was included in non-current deferred tax liabilities.

As of May 31, 2014 and 2013, the Company had recorded accrued interest related to the unrecognized tax benefits of $1.6 million and $1.3 million, respectively. During fiscal 2014, fiscal 2013, the Successor period ended May 31, 2012 and the Predecessor period ended August 19, 2011, the Company recognized income tax expense of $0.3 million, $0.1 million, $0.3 million and $0.1 million, respectively, due to the increase in the reserves for interest. The Company has not accrued penalties since adoption of the update to ASC 740, “Income Taxes.”

At May 31, 2014 and 2013, other assets in the consolidated balance sheets include $6.7 million and $6.2 million, respectively, of competent authority offsets related to transfer pricing. Competent authority offsets represent anticipated refunds from bilateral agreements between the taxing authorities of two countries which eliminates double taxation by treaty. For Immucor, this competent authority offset represents anticipated refunds by taxing authorities that will offset potential uncertain tax positions related to transfer pricing.