Income Taxes

3 Months Ended

May 31, 2012

Income Taxes

(10) Income Taxes. The Company evaluates its deferred income taxes on a quarterly basis to determine if valuation allowances are required, in full or in part. This includes considering available positive and negative evidence, such as past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction-by-jurisdiction basis. In determining future taxable income, we review the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. The Company had a full valuation allowance on its U.S. and German deferred tax assets as of May 31, 2011. At May 31, 2012, the only valuation allowance that remains relates to certain state net operating losses.

The Company estimates that it is reasonably possible that the total amount of unrecognized tax benefits of $1.1 million at May 31, 2012, will significantly change during the next 12 months. The estimated range is a decrease of zero to $0.5 million.

For the three months ended May 31, 2012, MSC’s effective income tax rate for continuing operations was an expense of 35.3%, compared with an expense of 5.9% in the same period last year. The low rate in the period ended May 31, 2011, is due to the utilization of deferred tax assets—principally AMT credits—while having a valuation allowance on the related deferred tax assets.