ERICKSON INC. - 10-K filing on 2015-03-10

Income Taxes

12 Months Ended

Dec. 31, 2014

The components of income (loss) before noncontrolling interest and income taxes are as follows (in thousands):



	Year Ended December 31, 2014			Year Ended December 31, 2013		Year Ended December 31, 2012
Domestic	$	(21,533	)	$	13,200	$	24,407
Foreign	6,870			2,786		1,442
Income (loss) before noncontrolling interest and income taxes	$	(14,663	)	$	15,986	$	25,849

Income tax expense (benefit) consisted of the following (in thousands):



	Year Ended December 31, 2014			Year Ended December 31, 2013			Year Ended December 31, 2012
Current income tax expense:
U.S. federal income taxes	$	—		$	125		$	1,028
State and local income taxes	10			50			59
Foreign income taxes	3,684			2,107			6,444
Total current income tax expense	$	3,694		$	2,282		$	7,531
Deferred income tax expense (benefit):
U.S. federal income taxes	$	(8,115	)	$	4,168		$	2,375
State and local income taxes	(555		)	(185		)	303
Foreign income taxes	544			(145		)	4
Total deferred income tax expense (benefit)	$	(8,126	)	$	3,838		$	2,682
Total income tax expense (benefit)	$	(4,432	)	$	6,120		$	10,213

A reconciliation from the U.S statutory rate to the effective tax rate is as follows (in thousands):



	Year Ended December 31, 2014			Year Ended December 31, 2013			Year Ended December 31, 2012
Tax at U.S. statutory rate	$	(5,132	)	$	5,595		$	9,047
State taxes, net of federal benefit	(316		)	258			569
Nondeductible expenses	1,069			805			333
Foreign withholding taxes	1,722			1,442			1,031
Foreign tax rate differences - current year earnings	(327		)	(485		)	(55		)
Foreign tax rate differences - deemed dividends and unremitted earnings	789			—			—
Non-deductible receivable allowance	—			—			295
Tax credits	(2,800		)	(1,755		)	(7,155		)
Change in tax contingency items	42			72			5,964
Foreign tax attribute adjustment	—			(1,450		)	—
Valuation allowance	691			2,067			—
Other, net	(170		)	(429		)	184
Total income tax expense (benefit)	$	(4,432	)	$	6,120		$	10,213

Deferred income tax balances reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are paid or recovered. Significant components of the Company's deferred tax assets and liabilities and balance sheet classifications are as follows (in thousands):



	December 31, 2014			December 31, 2013
Deferred tax assets:
Accrued liabilities and other reserves	$	2,227		$	2,405
Accrued benefits	490			661
Accrued incentive compensation	209			1,321
Inventory reserve	2,057			2,188
Deferred revenue from sale leaseback	4,169			—
Foreign tax credits	11,793			9,103
Research and other credits	763			775
Net operating loss carryforwards	17,862			14,461
Total deferred tax assets	39,570			30,914
Valuation allowance	(2,758		)	(2,067		)
Net deferred tax assets	36,812			28,847
Deferred tax liabilities:
Tax-over-book depreciation and amortization	(21,646		)	(17,613		)
Basis difference in aircrane support parts	(17,961		)	(23,890		)
Prepaid expenses and deferred costs	(562		)	(404		)
Total deferred tax liabilities	(40,169		)	(41,907		)
Net deferred tax assets (liabilities)	$	(3,357	)	$	(13,060	)
Net current deferred tax assets	$	346		$	3,715
Net noncurrent deferred tax liabilities	(3,703		)	(16,775		)
Net deferred tax assets (liabilities)	$	(3,357	)	$	(13,060	)

The Company's tax credit and loss carryforwards at December 31, 2014 are as follows (in thousands):



	December 31, 2014	Expiration
Federal net operating loss carryforward	42,864	2031 - 2034
Foreign tax credits	6,024	2018 - 2024
Federal research & experimentation credits	616	2029 - 2034
State net operating loss carryforwards	15,711	2015 - 2034
State tax credits	199	2015 - 2019

In accounting for income taxes, the Company recognizes deferred tax assets if realization of such assets is more likely than not. The Company believes based on factors including, but not limited to, the ability to generate future taxable income from reversing taxable temporary differences and forecasts of financial and taxable income or loss by jurisdiction, that as of December 31, 2014 it is more likely than not that the Company will realize all of its deferred tax assets, including its net operating loss carry forwards and tax credits, with the exception of those related to Malaysia where the Company has recorded a full valuation allowance against its net operating loss carryforwards. The Company’s utilization of net operating loss carryforwards and credits may be subject to annual limitations due to ownership change provisions of Internal Revenue Code Sections 382 and 383.

The Company no longer intends to permanently reinvest the undistributed earnings of its foreign subsidiaries and the current year tax expense includes $0.2 million for the deferred tax liabilities for future repatriations of unremitted earnings from all foreign subsidiaries. All future years earnings will include the U.S. tax tax effect of both actual and deemed repatriation.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	December 31, 2014			December 31, 2013
Unrecognized tax benefits beginning of year	$	5,740		$	5,964
Gross increases - tax positions in prior periods	99			71
Gross decreases - tax positions in prior periods	(8		)	(295		)
Gross increases - current period	507			—
Unrecognized tax benefits end of year	$	6,338		$	5,740

Unrecognized tax benefits for all periods presented include $5.7 million for potential income taxes due if the Company were determined to have a permanent establishment in Greece. The Greek taxing authorities have recently completed their permanent establishment examination of the Company's 2010 and 2011 tax years and we expect to receive their audit findings in the coming weeks. Management continues to evaluate its permanent establishment position in Greece and believes it is reasonably possible a resolution could occur in the near future at which time the unrecognized tax benefit would be removed through successful resolution or settlement. Unrecognized tax benefits increased in 2014 and decreased in 2013 primarily due to positions associated with permanent establishment that could be challenged by taxing authorities although management believes the positions taken are appropriate. Payment of tax related to unrecognized tax benefits of both prior and current periods would result in a foreign tax credit in the United States which the Company included in its deferred assets.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other income (expense), net. During the year ended December 31, 2014 the Company recognized approximately $0.8 million in interest and penalties. The Company had a total of $2.5 million of interest and penalties related to unrecognized tax benefits accrued at December 31, 2014.

The IRS has completed their income tax examination of the Company's 2012 tax year and notified the Company that they will expand the scope of their audit examination to include the 2013 tax year. At this time, the Company is not aware of any adjustments that will have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

The Italian tax authorities have examined our fiscal years 2008 to 2010. All assessments issued by the taxing authorities have either been appealed and await hearing or Management intends to appeal within the statutory timer period allowed.

The Malaysian taxing authorities have examined our fiscal years 2008 through 2011 and have proposed adjustments relating to certain withholding tax liabilities. Management does not believe the ultimate outcome of this audit will result in any material adjustments.

All material uncertain tax positions associated with the aforementioned audit examinations are reflected in the ending balance of unrecognized tax benefits at December 31, 2014 and 2013.

The Company is subject to income taxes in the U.S. and several foreign jurisdictions. Depending on the jurisdiction, the Company is generally no longer subject to examinations by tax authorities for years prior to the December 31, 2010 tax year.