Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.8.0.1
Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes
INCOME TAXES
Historically, AFI was included with the AWI and affiliated entities in filing a consolidated U.S. federal income tax return, and as part of a unitary or combined group in some states. Income taxes are computed and reported herein under the separate return method as if AFI were a separate taxpayer for periods prior to and on March 31, 2016. Use of the separate return method requires significant judgment and may result in differences when the sum of the amounts allocated to stand-alone tax provisions are compared with amounts presented in Consolidated Financial Statements. In that event, the related deferred tax assets and liabilities could be significantly different from those presented herein.

U.S. Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and provides for a one-time deemed repatriation on certain foreign earnings.

We are required to record the effects of a tax law change in the period of enactment; however, shortly after the enactment of the Tax Reform Act, the SEC staff issued SAB 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

We have calculated our best estimate of the impact of the Tax Reform Act in our year end income tax provision in accordance with our understanding of the Tax Reform Act and guidance available as of the date of this filing and as a result, we have recorded additional income tax expense of $0.8 million in the fourth quarter of 2017 related to the remeasurement of certain deferred tax assets and liabilities. Given our historical geographic mix of income and losses, the deemed repatriation is estimated to have no impact.

The effects of the Tax Reform Act recorded as of December 31, 2017, are provisional and adjustments may be made as a result of future changes in interpretation, information available, assumptions made by the Company, issuance of additional guidance and the completion of our 2017 tax return filings. We currently anticipate finalizing and recording any resulting adjustments by December 31, 2018.

The following table presents (loss) income from continuing operations before income taxes for U.S. and international operations based on the location of the entity to which such earnings are attributable:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Domestic
$
(50.9
)
 
$
14.3

 
$
(41.6
)
Foreign
0.9

 
(2.7
)
 
24.0

Total
$
(50.0
)
 
$
11.6

 
$
(17.6
)


The following table presents the components of the income tax (benefit) expense:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Current
 
 
 
 
 
Federal
$
(4.6
)
 
$
6.2

 
$
5.0

Foreign
0.8

 
0.4

 
1.6

State and local

 
1.2

 
1.1

Subtotal
(3.8
)
 
7.8

 
7.7

Deferred
 
 
 
 
 
Federal
(7.2
)
 
(3.8
)
 
(14.5
)
Foreign
(0.3
)
 
0.5

 
0.6

State and local
3.1

 
(0.4
)
 
(1.1
)
Subtotal
(4.4
)
 
(3.7
)
 
(15.0
)
Total
$
(8.2
)
 
$
4.1

 
$
(7.3
)


As of December 31, 2017, we reviewed our position with regard to foreign unremitted earnings and determined that unremitted earnings would continue to be permanently reinvested. Accordingly, we have not recorded foreign withholding taxes on approximately $8.7 million of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because we currently plan to keep these amounts permanently invested overseas. It is not practicable to calculate the residual income tax that would result if these basis differences reversed due to the complexities of the tax law and the hypothetical nature of the calculations.
The following table presents the differences between our income tax (benefit) expense at the U.S. federal statutory income tax rate and our effective income tax rate:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Continuing operations tax at statutory rate
$
(17.5
)
 
$
4.0

 
$
(6.2
)
Increase in valuation allowances on deferred state income tax assets
7.9

 
0.1

 

Increase in valuation allowances on deferred federal income tax assets
3.8

 

 

State income tax (benefit) expense, net of federal benefit
(3.7
)
 
0.3

 
(0.9
)
Increase in valuation allowances on deferred foreign income tax assets
2.3

 
2.4

 
3.4

Tax on foreign and foreign-source income
(1.4
)
 
(1.9
)
 
(3.6
)
State law changes, net of federal benefit
(1.1
)
 

 

Impact of Tax Reform Act
0.8

 

 

Research and development credits
(0.7
)
 
(0.8
)
 
(0.9
)
Permanent book/tax differences
0.7

 
0.5

 
0.9

Domestic production activities

 
(0.4
)
 

Other
0.7

 
(0.1
)
 

Total
$
(8.2
)
 
$
4.1

 
$
(7.3
)

The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax bases are summarized in the following table. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income in the appropriate jurisdiction and foreign source income to realize deferred tax assets, net of valuation allowances. In arriving at this conclusion, we considered the profit before tax generated for the years 2015 through 2017, as well as future reversals of existing taxable temporary differences and projections of future profit before tax and foreign source income.
 
December 31, 2017
 
December 31, 2016
Deferred income tax assets (liabilities)
 
 
 
Postretirement and postemployment benefits
$
20.7

 
$
33.0

Net operating losses
36.8

 
26.9

Accrued expenses
9.7

 
12.1

Deferred compensation
2.4

 
7.8

Customer claims reserves
3.6

 
5.0

Goodwill
2.6

 
2.7

Pension benefit liabilities
1.2

 
0.4

Tax credit carryforwards
3.7

 
0.4

Other
1.7

 
2.6

Total deferred income tax assets
82.4

 
90.9

Valuation allowances
(41.1
)
 
(28.2
)
Net deferred income tax assets
41.3

 
62.7

Accumulated depreciation
(29.3
)
 
(43.5
)
Inventories
(9.6
)
 
(12.2
)
Intangibles
(3.0
)
 
(10.2
)
Other
(0.4
)
 
(0.7
)
Total deferred income tax liabilities
(42.3
)
 
(66.6
)
Net deferred income tax (liabilities)
$
(1.0
)
 
$
(3.9
)
Deferred income taxes have been classified in the Consolidated Balance Sheet as:
 
 
 
Deferred income tax assets—noncurrent
$
3.4

 
$
4.5

Deferred income tax liabilities—noncurrent
(4.4
)
 
(8.4
)
Net deferred income tax (liabilities)
$
(1.0
)
 
$
(3.9
)


We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income, the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.

Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years. We use the current year and prior two years as a measure of our cumulative losses in recent years. We then adjust those historical results to remove certain unusual items and charges. In the United States, our analysis indicates that we entered into a cumulative three year historical loss on an adjusted basis as of December 31, 2017. Based on the considerations described above, we recorded a charge of $11.7 million during the fourth quarter of 2017 related to establishing valuation allowances against net deferred income tax assets in the United States. If and when our operating performance improves on a sustained basis, our conclusion regarding the need for full valuation allowances could change, resulting in the reversal of some or all of the valuation allowances in the future.

The following table presents the components of our valuation allowance against deferred income tax assets:
 
Year Ended December 31,
 
2017
 
2016
Foreign
$
23.5


$
23.3

State
13.8


4.9

Federal
3.8

 

Total
$
41.1

 
$
28.2



The valuation allowances offset federal, state and foreign deferred tax assets, credits, and operating loss carryforwards.

The following is a summary of our net operating loss (“NOL”) carryforwards:
 
Year Ended December 31,
 
2017
 
2016
State
$
176.5

 
$
152.0

Foreign
83.2

 
79.9

Federal
30.5

 



As of December 31, 2017, federal NOL carryforwards expire between 2018 and 2037, state NOL carryforwards expire between 2018 and 2037, and foreign NOL carryforwards expire between 2018 and 2022.

We estimate we will need to generate future taxable income of approximately $190.8 million for state income tax purposes during the respective realization periods (ranging from 2018 to 2037) in order to fully realize the net deferred income tax assets discussed above.

We have $4.8 million of unrecognized tax benefits ("UTBs") as of December 31, 2017. Of this amount, $0.3 million ($0.2 million, net of federal benefit), if recognized in future periods, would impact the reported effective tax rate.

It is reasonably possible that certain UTBs may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. Over the next twelve months, we estimate no changes to UTBs.








The following table presents a reconciliation of the total amounts of UTBs, excluding interest and penalties:
 
2017
 
2016
 
2015
Unrecognized tax benefits as of January 1,
$
5.0

 
$
81.9

 
$
76.1

Gross change for current year positions
0.4

 
1.3

 
5.7

(Decreases) increases for prior period positions
(0.6
)
 
(78.2
)
 
0.1

Unrecognized tax benefits balance as of December 31,
$
4.8

 
$
5.0

 
$
81.9



The 2017 decrease related to prior period positions includes $0.5 million that resulted from the reduction of the U.S. income tax rate from 35% to 21% since these positions represent a reduction of U.S. net operating losses. The $78.2 million decrease for prior period positions in 2016 were UTBs allocated to AFI as a result of the separate return method, which remained with AWI upon Spin-off.

We conduct business globally, and as a result, we file income tax returns in the U.S., various states and international jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world in such major jurisdictions as Australia, Canada, China and the U.S. Generally, we have open tax years subject to tax audit on average of between three years and six years. With few exceptions, the statute of limitations is no longer open for state or non-U.S. income tax examinations for the years before 2012. We have not significantly extended any open statutes of limitation for any major jurisdiction and have reviewed and accrued for, where necessary, tax liabilities for open periods. The tax years 2012 through 2017 are subject to future potential tax adjustments.

The following table details amounts related to certain other taxes:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Payroll taxes
$
17.3

 
$
18.9

 
$
19.2

Property and franchise taxes
4.7

 
4.8

 
4.9