JELD-WEN Holding, Inc.

Income Taxes

Income (loss) before taxes, equity earnings (loss) and discontinued operations was comprised of the following for the years ended December 31:



(amounts in thousands)	2017			2016		2015
Domestic income (loss)	$	(7,346	)	$	25,042	$	24,146
Foreign income	153,101			105,278		61,809
	$	145,755		$	130,320	$	85,955

Our foreign income is primarily driven by our subsidiaries in Australia, Canada and the U.K. The statutory tax rates are 30%, 27% and 19% respectively.

Significant components of the provision for income taxes are as follows for the years ended December 31:



(amounts in thousands)	2017		2016			2015
Federal	$	11,699	$	1,015		$	(14,124	)
State	667		72			731
Foreign	29,461		18,274			28,289
Current taxes	41,827		19,361			14,896

Federal	60,618		(164,765		)	(3,508		)
State	27,241		(74,882		)	(290		)
Foreign	8,917		(26,108		)	(16,533		)
Deferred taxes	96,776		(265,755		)	(20,331		)
Income tax provision (benefit) for continuing operations	138,603		(246,394		)	(5,435		)
Income tax provision for discontinued operations	—		—			—
Total provision (benefit) for income taxes	$	138,603	$	(246,394	)	$	(5,435	)

On December 22, 2017, the Tax Act was enacted in the U.S. The specific provisions of the Tax Act had both direct and indirect impacts on our 2017 results and will continue to materially affect our financial results in the future. The direct impacts were due primarily to the change in the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017 and the one-time deemed repatriation tax. As a result of the lowering of the U.S. federal tax rate, we revalued our net deferred tax assets in the U.S. reflecting the lower expected benefit in the U.S. in the future. This revaluation resulted in additional tax expense totaling approximately $21.1 million. The one-time deemed repatriation tax, which effectively subjected the Company’s net aggregate historic foreign earnings to taxation in the U.S., resulted in a further tax charge of $11.3 million. While this repatriation tax is measured as of December 31, 2017, taxpayers can pay the tax over an 8-year period resulting in an increase to our non-current liabilities.

During the fourth quarter, the Company undertook certain transactions which involved the repatriation of certain earnings from foreign subsidiaries. While these transactions were not undertaken as a direct result of tax reform, the U.S. tax implications were heavily impacted due to the timing of the transactions and the measurement dates as outlined in the Tax Act. We have recorded a net increase to tax expense of $65.8 million related to these transactions and their impacts under the Tax Act.

While we have recorded provisional estimates of the tax impact of the above transactions as of December 31, 2017 based on information available to us, we have not yet completed our full analysis of the net effects of the Tax Act. The final net effects of the Tax Act may differ, possibly materially, due to many factors including, among other things, i) adjustments to historic foreign earnings and profits or the associated tax credit pools which are significant factors in the calculation of the repatriation tax, ii) changes in interpretations and assumptions that we have made, and iii) related accounting policy decisions we may take. Most significantly, definitive guidance and regulations surrounding the implementation of the various provisions in the Tax Act and, specifically, the interactions of those provisions with the other transactions outlined above have not been issued to date. This guidance, once issued, may materially affect our conclusions regarding the net related effects of the Tax Act on our financial statements. We will complete our analysis over a one-year measurement period as outlined in Staff Accounting Bulletin #118 issued by the SEC in December 2017, and any adjustments during this measurement period will be recorded in earnings from continuing operations.

The significant components of the deferred income tax expense attributed to income from continuing operations for the year ended December 31, 2017, were the revaluation of our U.S. deferred tax assets under the Tax Act and the increases in valuation allowances for deferred tax assets, primarily in the U.S. The significant component of the deferred income tax benefit attributed to income from continuing operations for the year ended December 31, 2016, was the decrease in the valuation allowances for deferred tax assets, primarily in the U.S. and U.K.

Reconciliation of the U.S. federal statutory income tax rate to our effective tax rate is as follows for the years ended December 31:



	2017				2016				2015
(amounts in thousands)	Amount			%	Amount			%	Amount			%
Statutory rate	$	51,015		35.0	$	45,612		35.0	$	30,085		35.0
State income tax, net of federal benefit	(4,784		)	(3.3)	221			0.2	3,397			4.0
Nondeductible expenses	1,950			1.3	1,797			1.4	6,064			7.1
Equity based compensation	(12,718		)	(8.7)	826			0.6	—			—
Deferred benefit on acquisitions	(6,201		)	(4.2)	—			—	(2,919		)	(3.4)
Foreign tax rate differential	(17,959		)	(12.3)	(12,237		)	(9.4)	(7,225		)	(8.4)
Tax rate differences and credits	(91,109		)	(62.5)	382			0.3	698			0.7
Uncertain tax positions	736			0.5	406			0.3	11,634			13.5
Foreign source dividends	86,119			59.1	1,992			1.5	5,193			6.0
Valuation allowance	98,156			67.3	(282,616		)	(216.9)	(41,196		)	(47.9)
IRS audit adjustments	(699		)	(0.5)	113			0.1	(13,079		)	(15.2)
Prior year correction	—			—	(1,392		)	(1.1)	(2,094		)	(2.4)
U.S. Tax Reform	32,414			22.2	—			—	—			—
Other	1,683			1.2	(1,498		)	(1.1)	4,007			4.7
Effective rate for continuing operations	$	138,603		95.1	$	(246,394	)	(189.1)	$	(5,435	)	(6.3)
Effective rate including discontinued operations	$	138,603		95.1	$	(246,394	)	(189.1)	$	(5,435	)	(6.4)

Certain items in the table above have been reclassified to conform to the current year's presentation. Prior year balances have been revised, see detail in Note 36 - Revision of Prior Period Financial Statements.

We recorded provisional estimates of the items directly impacted by the Tax Act within the “U.S. Tax Reform” line in the reconciliation of tax expense above. The tax charge of $32.4 million is comprised of (i) the repricing our U.S. deferred tax balances of $21.1 million from 35% to 21%, and (ii) one-time deemed repatriation tax of $11.3 million. As previously, discussed, certain other transactions undertaken by the Company in the fourth quarter of 2017 were indirectly impacted by the Tax Act and the measurement periods as outlined therein. The provisional estimates of the following amounts are included in the Company’s tax expense for the year: additional tax expense of $85.5 million included as “Foreign Source Dividends”, a tax benefit of $90.8 million included as “Tax rate differences and credits”, and additional tax expense of $71.1 million included as “Valuation allowance” above. Once we complete our final analysis of the Tax Act and its provisions, each of these amounts may be altered, perhaps materially.

We recorded a tax benefit of $0.7 million, a charge of $0.1 million and a benefit of $13.1 million in 2017, 2016 and 2015, respectively, as a result of favorable audit settlements in the U.S., which allowed the use of tax attributes that previously had a valuation allowance reserve. We recorded a tax benefit of $6.2 million primarily relating to the change in disposition for certain intellectual property in the “Deferred benefit on acquisitions” line and a corresponding tax charge in the same amount in the “Valuation allowance” line, resulting in nil impact to the effective rate for continuing operations in 2017.

During the fourth quarter of 2016, we recorded an out-of-period correction to previously overstated international deferred tax asset balances which resulted in a benefit of $5.4 million, $1.4 million of which is shown above on the line "Prior year correction", and the remaining amount of which is within the "Valuation allowance" and “Other” line items in the reconciliation of tax expense above. This correction was not material to 2016 or prior periods. During 2015, we recorded an out of period correction to an income tax payable account which resulted in a benefit of $2.1 million. This correction was not material to 2015 or prior periods.

Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of our assets, liabilities and operating loss carryforwards. Significant deferred tax assets and liabilities are as follows as of December 31:



(amounts in thousands)	2017			2016
Allowance for doubtful accounts and notes receivable	$	1,102		$	4,807
Employee benefits and compensation	54,961			88,383
Net operating loss and tax credit carryforwards	292,957			287,907
Inventory	4,125			2,034
Deferred credits	889			865
Accrued liabilities and other	17,478			17,731
Gross deferred tax assets	371,512			401,727
Valuation allowance	(144,701		)	(40,118		)
Deferred tax assets	226,811			361,609
Depreciation and amortization	(42,632		)	(73,665		)
Investments and marketable securities	(9,702		)	(9,431		)
Deferred tax liabilities	(52,334		)	(83,096		)

Net deferred tax assets	$	174,477		$	278,513
Balance sheet presentation:
Long-term assets	$	183,726		$	287,699
Long-term liabilities	(9,249		)	(9,186		)
Net deferred tax assets	$	174,477		$	278,513

Impact of Divestitures and Acquisitions – As discussed in Note 2 - Acquisitions, we completed three acquisitions in fiscal year 2017 and two acquisitions in fiscal 2016 that had an immaterial impact on our income tax assets and liabilities. As discussed in Note 3 - Discontinued Operations and Divestitures, we sold the assets of our Silver Mountain resort and real estate development in Idaho, which closed on October 20, 2016. The sale and resulting reversal of the Silver Mountain deferred tax assets and liabilities generated a $24.3 million tax loss in 2016. The tax loss was mainly a result of assets that had been previously impaired for book purposes and fixed assets with remaining tax basis in excess of book basis.

Valuation Allowance – The realization of deferred tax assets is based on historical tax positions and estimates of future taxable income. We evaluate both the positive and negative evidence that we believe is relevant in assessing whether we will realize the deferred tax assets. A valuation allowance is recorded when it is more likely than not that some portion of the deferred tax assets will not be realized.

Our valuation allowance was $144.7 million as of December 31, 2017, which represents an increase of $104.6 million from December 31, 2016 and was allocated to continuing operations. The increase in the valuation allowance primarily relates to the following: (i) an increase of $71.1 million relating to U.S. foreign tax credits generated in 2017, (ii) an increase of $28.3 million for state net operating losses ("NOL") and credits due to the impact of reductions in forecasted taxable income in the carry-forward period, (iii) a release of $2.0 million for our Canadian subsidiary due to its continued profitability in recent years, (iv) an increase of $6.7 million for our Australian subsidiary relating to certain deferred tax assets recognized on capital assets, and (v) other changes to existing valuations totaling approximately $0.5 million for changes in current year earnings for certain other subsidiaries and foreign exchange.

The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. We consider the scheduled reversal of deferred tax liabilities (including the effect of available carryback and carryforward periods), and projected taxable income in making this assessment. In order to fully utilize the NOL and tax credits carryforwards we will need to generate sufficient future taxable income before the expiration of the deferred tax assets governed by the applicable tax code.

Our valuation allowance was $40.1 million as of December 31, 2016, which represents a decrease of $278.4 million from December 31, 2015 and was allocated to continuing operations. The decrease was primarily the result of (i) the release of $236.5 million of valuation allowances associated with NOL carryforwards primarily for our U.S. subsidiaries as we concluded at December 31, 2016 that it was more likely than not that the deferred tax assets will be realized based on our forecasted earnings , (ii) the release of $40.2 of valuation allowance (inclusive of $8.4 million reduction to deferred tax assets related to prior years) associated primarily with the NOL's of our U.K. subsidiary based on anticipated earnings arising from the changes in the manner in which we manage our capacity and distribution in Europe, (iii) the establishment of a valuation allowance for our St. Maarten subsidiary of $0.8 million, (iv) the release through goodwill of a valuation allowance for two of our Dooria foreign subsidiaries in Norway of $4.2 million, (v) the release of a valuation allowance attributed to certain tax credit for our Mexican subsidiaries of $0.2 million, (vi) the partial release of a valuation allowance attributed to capital loss carry-forwards of our Australian subsidiary, and (vi) changes to existing valuations for changes in current year earnings for our subsidiaries in Peru, Canada, New Zealand and the U.K.

The following is the activity in our valuation allowance:



(amounts in thousands)	2017			2016			2015
Balance as of January 1,	$	(40,118	)	$	(318,480	)	$	(361,470	)
Valuation allowances established	—			(1,489		)	(4,381		)
Changes to existing valuation allowances	(105,453		)	5,006			24,302
Release of valuation allowances	2,006			272,291			19,612
Currency translation	(1,136		)	2,554			3,457
Balance as of December 31,	$	(144,701	)	$	(40,118	)	$	(318,480	)

There were no valuation allowances included in discontinued operations for the years ended December 31, 2017, December 31, 2016 and 7.8 million for the years ended December 31, 2015 , respectively and are excluded from the table above.

Loss Carryforwards – We reduced our income tax payments by utilizing NOL carryforwards of $249.4 million in 2017, $256.2 million in 2016 and $123.8 million in 2015. At December 31, 2017, our federal, state and foreign NOL carryforwards totaled $1,450.1 million, of which $106.5 million does not expire and the remainder expires as follows (amounts in thousands):



2018	$	10,445
2019	10,373
2020	8,671
2021	19,238
Thereafter	1,294,842
	$	1,343,569

We utilized $1.2 million capital loss carryforwards in 2016. We did not utilize capital loss carryforwards in 2017 and 2015. At December 31, 2017, our capital loss carryforwards totaled $21.3 million. All of the capital losses are foreign and do not expire.

Section 382 Net Operating Loss Limitation – On November 20, 2017 and October 3, 2011, we had a change in ownership pursuant to Section 382 of the Internal Revenue Code of 1986 as amended (“Code”). Under this provision of the Code, the utilization of any of our NOL or tax credit carryforwards, incurred prior to the date of ownership change, may be limited. Analyses of the respective limits for each ownership change indicated no reason to believe the annual limitation would impair our ability to utilize our NOL carryforward or net tax credit carryforwards as provided. As part of the acquisitions we completed in 2015, we acquired the historical NOL's of the entities of $24.7 million. We have concluded the limitation under Section 382 will not prevent us from fully utilizing these historical NOL's.

Tax Credit Carryforwards – Our tax credit carryforwards expire as follows:



(amounts in thousands)	EZ Credit		R & E credit		Foreign Tax Credit		Work Opportunity & Welfare to Work Credit		State Investment Tax Credits		Tip Credit		Other		TOTAL
2018	$	—	$	—	$	8,690	$	—	$	266	$	—	$	—	$	8,956
2019	—		—		—		—		253		—		—		253
2020	—		—		12,975		—		174		—		—		13,149
2021	—		—		14,990		—		225		—		—		15,215
2022	—		—		1,061		—		216		—		—		1,277
Thereafter	68		5,799		108,031		5,268		632		102		12		119,912
	$	68	$	5,799	$	145,747	$	5,268	$	1,766	$	102	$	12	$	158,762

Earnings of Foreign Subsidiaries – As a result of the passage of the Tax Act, U.S. income taxes have been provided on deemed repatriated earnings of $133.7 million related to our foreign subsidiaries. Our provisional estimate of the deemed repatriation tax of $11.3 million was recorded in the fourth quarter of 2017. Before the Tax Act, U.S. income taxes had not been recorded on certain unremitted earnings of foreign subsidiaries of approximately $265.2 million as the Company intended to permanently reinvest those earnings. The amount of foreign earnings subject to tax decreased dramatically as a result of the operations of the Tax Act and its inclusion of entities with deficits in earnings within the calculation, which could have been disallowed upon any distribution prior to the Tax Act. We have not completed our accounting for the deemed repatriation and expect to finalize this amount within the twelve-month period proscribed by Staff Accounting Bulletin No. 118. The Company’s intention to indefinitely reinvest these earnings outside the U.S. remains unchanged, despite the effect of the Tax Act. The determination of the amount of the unrecognized deferred U.S. income tax liability on the unremitted earnings or any other associated outside basis difference is not practicable because of the complexities associated with the calculation.

Dual-Rate Jurisdiction – Estonia taxes the corporate profits of resident corporations at different rates depending upon whether the profits are distributed. The undistributed profits of resident corporations are exempt from taxation while any distributed profits are subject to a 20% corporate income tax rate. The liability for the tax on distributed profits is recorded as an income tax expense in the period in which we declare the dividend. This tax must be remitted to the local tax authorities by the tenth day of the month following the month of the dividend distribution. The amount of undistributed earnings at December 31, 2017 and 2016 which, if distributed, would be subject to this tax was $66.3 million and $65.2 million, respectively. During 2017, Latvia enacted a similar system in which a company’s local earnings are not subject to tax until distributed. No earnings are currently deferred in Latvia as the legislation does not take effect until 2018.

Tax Payments and Balances – We made tax payments of $29.0 million in 2017, $34.7 million in 2016 and $9.1 million in 2015 primarily for foreign liabilities. We received tax refunds of $6.5 million in 2017, $7.9 million in 2016 and $15.5 million in 2015 primarily related to U.S. federal tax. We recorded receivables for U.S. federal, foreign and state refunds of $4.2 million at December 31, 2017 and $6.4 million at December 31, 2016 which is included in other current assets on the accompanying consolidated balance sheets. We recorded payables for U.S. federal, foreign and state taxes of $11.0 million at December 31, 2017 and 4.7 million at December 31, 2016 which is included in accrued income taxes payable in the accompanying consolidated balance sheets. We recorded non-current U.S. payables of $11.3 million at December 31, 2017, which is included in deferred credits and other liabilities in the accompanying consolidated balance sheets. The refunds received in 2017 were in excess of the receivables recorded at December 31, 2016 due primarily to a refund of $1.1 million received relating to the conclusion of the audit in the U.S.

Accounting for Uncertain Tax Positions – A reconciliation of the beginning and ending amounts of unrecognized tax benefits excluding interest and penalties is as follows:



(amounts in thousands)	2017			2016			2015
Balance as of January 1,	$	12,054		$	11,634		$	—
Increase for tax positions taken during the prior period	252			359			786
Decrease for settlements with taxing authorities	(788		)	—			—
Increase for tax positions taken during the current period	107			—			10,848
Currency translation	1,626			(345		)	—
Balance as of end of period - unrecognized tax benefit	13,251			11,648			11,634
Accrued interest and penalties	1,268			406			—
	$	14,519		$	12,054		$	11,634

Unrecognized tax benefits were $13.3 million and $11.6 million at December 31, 2017 and December 31, 2016. The changes during the current period relate to the establishment of an uncertain tax position for certain intercompany expenses offset by a currency translation during the period. As of December 31, 2014, we had no unrecognized tax benefits. Interest and penalties related to uncertain tax positions are reported as a component of tax expense and included in the total uncertain tax position balance within deferred credits and other liabilities in the accompanying consolidated balance sheets.

Uncertain tax positions recorded in 2015 are due to changes in the manner in which we manage our manufacturing capacity and the distribution and sale of our products in Europe. The reorganization of our Europe segment was part of our review of our operations structure and management that began in 2014 and resulted in changes in taxable income for certain of our subsidiaries within that reportable segment. Effective January 1, 2015, our subsidiary JELD-WEN U.K. Limited (the “Managing Subsidiary”) entered into an agreement (the “Managing Agreement”) with several of our other subsidiaries in Europe (collectively, the “Operating Subsidiaries”). The Managing Agreement provides that the Managing Subsidiary will receive a fee from the Operating Subsidiaries in exchange for performing various management and decision-making services for the Operating Subsidiaries. As a result, the Managing Agreement shifts certain risks (and correlated benefits) from the Operating Subsidiaries to the Managing Subsidiary. In exchange, the Managing Subsidiary guarantees a specific return to each Operating Subsidiary on a before interest and taxes basis, commensurate with such Operating Subsidiary’s functions and risk profile. While there is no impact on the consolidated reporting of the Europe segment due to the Managing Agreement, there may be changes in taxable income of the Operating Subsidiaries. Therefore, we have reserved for a potential loss resulting from such uncertainty.

Included in the balance of unrecognized tax benefits as of December 31, 2017, December 31, 2016, and December 31, 2015, are $13.3 million, $11.6 million, and $11.6 million respectively, of tax benefits that, if recognized, would affect the effective tax rate. We cannot reasonably estimate the conclusion of certain non-US income tax examinations and its outcome at this time.

We operate in multiple foreign tax jurisdictions and are generally open to examination for tax years 2012 and forward. In the U.S., we are open to examination at a federal level for tax years 2013 forward. We are under examination by certain federal, state and local jurisdictions for tax years 2005 through 2008, but generally we are open to examination for state and local jurisdictions for tax years 2012 forward. We are under examination in Australia, Austria, Denmark, Estonia, France, Germany, and Indonesia for tax years 2010 through 2016, and generally remain open to examination for other non-US jurisdictions for tax years 2012 forward.