Entity information:

• Entity registrant name: ARMSTRONG WORLD INDUSTRIES INC
• CIK: 0000007431
• SEC filing page: http://www.sec.gov/Archives/edgar/data/7431/000156459018003128/0001564590-18-003128-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/7431/000156459018003128/awi-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/7431/000156459018003128/awi-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0000007431
• Generator: Donnelley Financial Solutions
• Total assets: 1,873,500,000
• Income tax expense (benefit): 1,500,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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NOTE 14. INCOME TAXES

On December 22, 2017, the U.S. federal government enacted the 2017 Tax Act, resulting in significant changes from existing U.S. tax laws that impact us, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21%, allowing immediate 100% deduction for the cost of qualified property, eliminating the domestic production activities deduction, and imposing a one-time transition tax on the cumulative earnings and profits of certain foreign subsidiaries that were previously not repatriated and therefore not taxed for U.S. income tax purposes. Our federal income tax expense for periods beginning in 2018 will be based on the new rate.

In December 2017, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the accounting is incomplete for the income tax effects of the 2017 Tax Act.  SAB 118 directs registrants to consider the impact of the Act as “provisional” when they do not have the necessary information available, prepared or analyzed (including computations) to finalize the accounting for the change in tax law.  Registrants are provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated as of December 31, 2017.  

As a result of the reduction of the corporate income tax rate to 21%, we were required to re-measure our deferred tax assets and liabilities as of the date of enactment based on the rates at which they are expected to be utilized in the future.  The rate change resulted in an $87.2 million reduction of our net deferred tax liabilities and a corresponding deferred income tax benefit in the fourth quarter of 2017.

The 2017 Tax Act also changes the taxation of foreign earnings.  Generally, corporations are no longer subject to U.S. federal income tax upon the receipt of dividends from foreign subsidiaries and are not permitted foreign tax credits (“FTCs”) related to such dividends. Accordingly, we recorded an additional valuation allowance on $9.5 million of FTCs as of December 31, 2017.  This increase in our valuation allowance was due to these 2017 Tax Act provisions and as a result of the anticipated sale of our EMEA and Pacific Rim businesses.  As we continue to analyze the 2017 Tax Act and refine our calculations, it could give rise to additional changes in our valuation allowance and the realizability of foreign tax credits.

The one-time transition tax is based on the total post-1986 earnings and profits of our foreign subsidiaries. Substantially all of our earnings and profits were permanently reinvested outside the U.S prior to the 2017 Tax Act. We recorded provisional U.S. amounts for the one-time transition tax liabilities, resulting in an increase in income tax expense of $10.3 million.  We have not yet completed our calculation of the total post-1986 earnings and profits for our foreign subsidiaries or the tax pools of our foreign subsidiaries. Further, the one-time transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of tax pools, finalize the calculation of post-1986 foreign earnings and profits previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.  Taxes due on the one-time transition tax are payable as of December 31, 2017 and may be elected to be paid over a period of eight years. We intend on making this election.  

The 2017 Tax Act also provides for immediate 100% deduction of the costs of qualified property placed in service from September 27, 2017 to December 31, 2022.  This provision will begin to phase down by 20% per year beginning January 1, 2023 and will be completely phased out as of January 1, 2027.  As of December 31, 2017, we have not completed our analysis of qualifying expenditures for purposes of determining the expenditures that qualify for the immediate 100% deduction under the 2017 Tax Act.

The adjustments to deferred tax assets and liabilities, the liability related to the one-time transition tax, changes in our valuation allowance, the realizability of foreign tax credits and the immediate deduction of 100% of the costs of qualifying property are provisional amounts estimated based on information available as of December 31, 2017.  These amounts are subject to change as we obtain information necessary to complete the calculations.  Additional information that may affect our provisional amounts would include further clarification and guidance on how the Internal Revenue Service will implement tax reform, including guidance with respect to the one-time transition tax, further clarification and guidance on the impact of the 2017 Act from state taxing authorities and completion of our 2017 tax return filings.  We will recognize any changes to the provisional amounts as we refine our estimates of cumulative temporary differences and our interpretations of the application of the 2017 Tax Act. We expect to complete our analysis of the provisional items by the second half of 2018.

The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax basis are summarized below.  Management believes it is more likely than not that the results of future operations will generate sufficient taxable income in the appropriate jurisdiction and will generate 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.

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.

As of December 31, 2017 and 2016, we had $664.6 million and $760.6 million, respectively, of gross state net operating loss (“NOL”) carryforwards expiring between 2018 and 2036.  As of December 31, 2017, we also had FTC carryforwards of $15.7 million that expire between 2018 and 2022. U.S. FTC carryforwards as of December 31, 2016 were $22.1 million on a gross basis, $19.3 million when netted with unrecognized tax benefits.

As of December 31, 2017 and 2016, we had valuation allowances of $47.4 million and $17.3 million, respectively.  As of December 31, 2017, our valuation allowance consisted of $10.3 million for federal deferred tax assets related to FTC carryforwards, $17.7 million for the outside basis difference between book and tax of our EMEA and Pacific Rim businesses and $19.4 million for state deferred tax assets, primarily operating loss carryforwards.  Our valuation allowance increased in comparison to December 31, 2016 primarily as a result of the 2017 Tax Act and the anticipated sale of our EMEA and Pacific Rim businesses.

We estimate we will need to generate future federal taxable foreign source income of $74.8 million to fully realize FTC carryforwards before they expire in 2022.  We estimate we will need to generate future taxable income of approximately $506.8 million for state income tax purposes during the respective realization periods (ranging from 2018 to 2036) in order to fully realize the net deferred income tax assets discussed above.

Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation or insufficient future taxable income prior to expiration of certain deferred tax assets.

 

 

 

We reviewed our position with regards to foreign unremitted earnings and determined that unremitted earnings will not be permanently reinvested as a result of the anticipated sale of our EMEA and Pacific Rim businesses.  Accordingly, we have recorded foreign withholding taxes of $7.6 million, primarily within discontinued operations, on approximately $245.5 million of net undistributed earnings of foreign subsidiaries.

 

We recognize the tax benefits of an uncertain tax position only if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities.  Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.

We have $53.4 million of Unrecognized Tax Benefits (“UTB”) as of December 31, 2017, $36.9 million ($35.2 million, net of federal benefit) of this amount, if recognized in future periods, would impact the reported effective tax rate.

It is reasonably possible that certain UTB’s 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 that UTB’s may decrease by $0.1 million related to state statutes expiring and increase by $2.8 million due to uncertain tax positions expected to be taken on domestic tax returns.

We account for all interest and penalties on uncertain income tax positions as income tax expense.  We reported $3.5 million of interest and penalty exposure as noncurrent income tax payable in the Consolidated Balance Sheet as of December 31, 2017.

We had the following activity for UTB’s for the years ended December 31, 2017, 2016 and 2015:

 

 

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 in Canada and the United States.  Generally, we have open tax years subject to tax audit on average of between three years and six years.  The statute of limitations is no longer open for U.S. federal returns before 2014.  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.