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Income Taxes | 12 Months Ended
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Dec. 31, 2014
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The Company’s effective income tax provision differs from the amount calculated using the statutory U.S. federal income tax rate, principally due to the following:
| Year Ended December 31,
| 2014 |  | 2013 |  | 2012
(dollars in millions) | Amount |  | Percentage of Income Before Income Taxes |  | Amount |  | Percentage of Income Before Income Taxes |  | Amount |  | Percentage of Income Before Income Taxes
Statutory U.S. federal income tax | $ | 61.2 |  |  | 35.0 | % |  | $ | 44.8 |  |  | 35.0 | % |  | $ | 80.2 |  |  | 35.0 | %
State income taxes, net of federal benefit | 1.1 |  |  | 0.6 | % |  | 1.7 |  |  | 1.3 | % |  | 4.5 |  |  | 2.0 | %
Foreign repatriation, net of foreign tax credits | 13.5 |  |  | 7.7 | % |  | (16.0 | ) |  | (12.6 | )% |  | 48.1 |  |  | 21.0 | %
Foreign tax differential | (12.6 | ) |  | (7.2 | )% |  | (12.3 | ) |  | (9.6 | )% |  | (9.7 | ) |  | (4.2 | )%
Change in valuation allowances | (17.7 | ) |  | (10.0 | )% |  | 20.4 |  |  | 15.9 | % |  | (2.8 | ) |  | (1.2 | )%
Uncertain tax positions | 10.9 |  |  | 6.1 | % |  | 4.7 |  |  | 3.7 | % |  | 2.6 |  |  | 1.1 | %
Subpart F income | 1.9 |  |  | 1.1 | % |  | 1.5 |  |  | 1.2 | % |  | 4.1 |  |  | 1.8 | %
Manufacturing deduction | (3.7 | ) |  | (2.1 | )% |  | 0.1 |  |  | — | % |  | (3.8 | ) |  | (1.7 | )%
Goodwill on disposal of business | 7.5 |  |  | 4.2 | % |  | — |  |  | — | % |  | — |  |  | — | %
Permanent and other | 2.8 |  |  | 1.7 | % |  | 4.2 |  |  | 3.5 | % |  | (0.8 | ) |  | (0.4 | )%
Effective income tax provision | $ | 64.9 |  |  | 37.1 | % |  | $ | 49.1 |  |  | 38.4 | % |  | $ | 122.4 |  |  | 53.4 | %
Subpart F income represents interest and royalties earned by a foreign subsidiary as well as sales made by certain foreign subsidiaries outside of their country of incorporation. Under the Internal Revenue Code of 1986, as amended (the "Code"), such income is taxable to Tempur Sealy International as if earned directly by Tempur Sealy International. In conjunction with the Sealy Acquisition, the Company repatriated substantially all of its current and accumulated foreign earnings associated with the legacy Tempur foreign subsidiaries in a taxable transaction. The Company had previously tax effected those earnings and at December 31, 2012 had recorded a $48.1 million deferred tax liability on such earnings. As a result of the Sealy Acquisition, the Company recognized the benefit of certain foreign tax credit attributes associated with Sealy’s foreign subsidiaries’ earnings. These foreign tax credits could not be taken into account in calculating the Company’s tax on the book to tax basis difference of its foreign subsidiaries until the Sealy Acquisition closed. As a result of the taxable transaction and taking into consideration the application of these foreign tax credits, as of December 31, 2014 the Company has recognized cumulative tax on the repatriation transaction of approximately $63.9 million. At December 31, 2014, the Company’s tax basis in its top tier foreign subsidiary exceeds the Company’s book basis. Accordingly, no deferred tax has been recorded related to this basis difference as it is not apparent that the difference will reverse in the foreseeable future. As it relates to the book to tax basis difference with respect of the stock of each of the Company’s lower tier foreign subsidiaries, as a general matter, the book basis exceeds the tax basis in the hands of the foreign subsidiary shareholder. By operation of the tax laws of the various countries in which such subsidiaries are domiciled, earnings of lower tier foreign subsidiaries are not subject to tax, in all material respects, when distributed to the foreign shareholder. It is the Company’s intent that the earnings of each lower tier foreign subsidiary, with the exception of its Danish subsidiary, will be permanently reinvested in its own operations. As it relates to the Danish subsidiary, its earnings may be distributed without any income tax impact in any case. Thus, no tax is provided for with respect to the book to tax basis difference of its stock. The Company has received income tax assessments from SKAT with respect to the tax years 2001 through 2008 relating to the royalty paid by one of Tempur Sealy International’s U.S. subsidiaries to a Danish subsidiary. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production processes. In its assessment, SKAT asserts that the amount of royalty rate paid by the U.S. subsidiary to the Danish subsidiary is not reflective of an arms-length transaction. Accordingly, the tax assessment received from SKAT is based, in part, on a 20% royalty rate which is substantially higher than that historically used or deemed appropriate by the Company. The 2008 income tax assessment was received in March 2014. The cumulative tax assessment for all years through 2008 is approximately $215.1 million including interest and penalties. The Company filed timely protests with the Danish National Tax Tribunal (the “Tribunal”) challenging the tax assessments. The Tribunal formally agreed to place the Danish tax litigation on hold pending the outcome of a Bilateral Advance Pricing Agreement (“Bilateral APA”) between the United States and SKAT. A Bilateral APA involves an agreement between the Internal Revenue Service (“IRS”) and the taxpayer, as well as a negotiated agreement with one or more foreign competent authorities under applicable income tax treaties. During the third quarter of 2008, the Company filed the Bilateral APA with the IRS and SKAT. SKAT and the IRS met several times since 2011, most recently in February 2013, to discuss the matter. At the conclusion of the February 2013 meeting, the IRS and SKAT concluded that a mutually acceptable agreement on the matter could not be reached and, as a result, the Bilateral APA process was terminated. The matter is now before the Tribunal. The Tribunal is a branch of SKAT that is independent of the discussions and negotiations that have taken place to date. If the Tribunal does not rule to the satisfaction of one or both parties, the party seeking redress may choose to litigate the issue in the Danish court system. In 2013, the Company was notified by SKAT that SKAT granted the deferral to 2017 of the requirement to post a cash deposit or other form of security for taxes that have been assessed for the period 2001 through 2007. During the quarter ended June 30, 2014, the Company was granted a deferral to 2018 of the requirement to post a cash deposit or other form of security for taxes that have been assessed for 2008. The Company believes it has meritorious defenses to the proposed adjustments and will oppose the assessments before the Tribunal and in the Danish courts, as necessary. The impact of terminating the Bilateral APA program has been considered by the Company in its December 31, 2014 estimate of unrecognized tax benefits. The Company maintains an uncertain tax position associated with this matter, the amount of which is based on a royalty methodology and royalty rates that the Company considers to be reflective of arm’s length transactions. It is reasonably possible the amount of the recognized tax benefits may change in the next twelve months. An estimate of the amount of such change cannot be made at this time. If the Company is not successful in defending its position before the Tribunal or in the Danish courts, the Company could be required to pay significant amounts to SKAT, which could impair or reduce its liquidity and profitability. In conjunction with the tax examination discussed below, during the year ended December 31, 2013 the Company received correspondence from SKAT requesting information regarding the royalty for the years 2009 through 2011. The correspondence indicated that SKAT would be evaluating the royalty paid for each of the years under examination in addition to other issues normally evaluated in a tax examination. The Company has responded to SKAT’s request for information. During the three months ended December 31, 2013, the Company and SKAT agreed that the examination of the royalty issue for the years 2009 - 2011 would be placed on hold pending the outcome of the Tribunal process relating to the years 2001 through 2008. As it relates to SKAT's examination of other items, particularly transactions between the Company’s Danish subsidiary and its foreign distribution subsidiaries, the Company believes it has meritorious defenses for all items reported in the Danish income tax returns. Through December 31, 2014, the Company has not been contacted by SKAT in response to the information provided by the Company. The aggregate amount of uncertain tax benefits for all matters as of December 31, 2014 and 2013 were $47.6 million and $26.1 million, respectively. The unrecognized tax benefits as of December 31, 2014 and 2013 were $44.6 million and $22.2 million, respectively, which would impact the effective rate if recognized. The Company had approximately $10.3 million and $11.0 of accrued interest and penalties at December 31, 2014 and December 31, 2013, respectively. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. During the twelve months ended December 31, 2013, the Company concluded the tax examination of the U.S. federal income tax return for the years 2008 and 2009. During 2014 the Company was advised by the IRS that the years 2010 and 2011 would not be examined but that 2012 would be examined. That examination is in progress. With few exceptions, the Company is no longer subject to tax examinations by the U.S. state and local municipalities for periods prior to 2006, and in non-U.S. jurisdictions for periods prior to 2001. As it relates to Sealy for years prior to the Sealy Acquisition, Sealy or one of its subsidiaries was required to file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Sealy’s U.S. federal income tax returns and with few exceptions its foreign income tax returns are no longer subject to examination for years prior to 2006. Generally Sealy’s state and local jurisdiction income tax returns are no longer subject to examination for years prior to 2010. Additionally, the Company is currently under examination by various tax authorities around the world. The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months as a result of the statute of limitations expiring and/or the examinations being concluded on these returns. However, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the consolidated financial statements. The following sets forth the amount of income or (loss) before income taxes attributable to each of the Company’s geographies for the years ended December 31, 2014, 2013 and 2012:
| Year Ended December 31,
(in millions) | 2014 |  | 2013 |  | 2012
Income before income taxes: |  |  |  |  |
United States | $ | 46.9 |  |  | $ | (4.5 | ) |  | $ | 126.2 |
Rest of the world | 128.0 |  |  | 132.5 |  |  | 103.0 |
| $ | 174.9 |  |  | $ | 128.0 |  |  | $ | 229.2 |
U.S. GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured at the largest amount of benefit that has a greater than 50.0% likelihood of being realized. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions) |
Balance as of December 31, 2012 | $ | 12.9 |
Additions attributable to Sealy on date of acquisition | 9.2 |
Additions based on tax positions related to 2013 | 2.3 |
Additions for tax positions of prior years | 7.2 |
Settlements of uncertain tax positions with tax authorities | (5.5 | )
Balance as of December 31, 2013 | 26.1 |
Additions based on tax positions related to 2014 | 24.3 |
Additions for tax positions of prior years | 0.5 |
Expiration of statutes of limitations | (3.2 | )
Settlements of uncertain tax positions with tax authorities | (0.1 | )
Balance as of December 31, 2014 | $ | 47.6 |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized would be approximately $47.6 million. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During the years ended December 31, 2014, 2013 and 2012, the Company recognized approximately $1.9 million, $1.8 million, and $3.0 million in interest and penalties, respectively, in income tax expense. The Company had approximately $10.3 million, $11.0 million, and $5.8 million of accrued interest and penalties at December 31, 2014, 2013, and 2012, respectively. The Company has the following gross income tax attributes available at December 31, 2014 and 2013 respectively (in millions):
| 2014 |  | 2013
U.S. federal net operating loss (“FedNOLs”) | $ | — |  |  | $ | 19.6 |
State net operating losses (“SNOLs”) | 145.3 |  |  | 135.6 |
U.S. federal foreign tax credits (“FTCs”) | 7.8 |  |  | 20.4 |
U.S. state income tax credits ("SITCs") | 1.6 |  |  | 0.7 |
Foreign net operating losses (“FNOLs”) | 44.2 |  |  | 67.1 |
Charitable contribution carryover ("CCCs") | 8.4 |  |  | — |
The SNOLs, FTCs, FNOLs, SITCs and CCCs generally expire in 2021, 2023, 2023, 2023 and 2019, respectively. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of certain of the SNOLs, FTCs, SITCs, FNOLs, CCCs and certain other deferred tax assets related to certain foreign operations (together, the “Tax Attributes”). In assessing the realizability of deferred tax assets (including the Tax Attributes), management considers whether it is more likely than not that some portion of all of such deferred tax assets will not be realized. Accordingly, the Company has established a valuation allowance for Tax Attributes. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible or creditable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income, management believes it is more likely than not the Company will realize the benefits of the deferred tax assets, other than those related to some or all of the Tax Attributes as discussed above. However, there can be no assurance that such assets will be realized if circumstances change. The income tax provision includes federal, state, and foreign income taxes currently payable and those deferred or prepaid because of temporary differences between financial statement and tax bases of assets and liabilities. The Company records income taxes under the liability method. Under this method, deferred income taxes are recognized for the estimated future tax effects of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws. The income tax provision consisted of the following:
| Year Ended December 31,
(in millions) | 2014 |  | 2013 |  | 2012
Current provision |  |  |  |  |
Federal | $ | 50.7 |  |  | $ | 48.6 |  |  | $ | 49.9 |
State | 4.5 |  |  | 7.3 |  |  | 7.8 |
Foreign | 36.9 |  |  | 42.3 |  |  | 26.3 |
Total current | $ | 92.1 |  |  | $ | 98.2 |  |  | $ | 84.0 |
Deferred provision |  |  |  |  |
Federal | $ | (25.2 | ) |  | $ | (47.0 | ) |  | $ | 37.1 |
State | (1.2 | ) |  | 0.4 |  |  | 4.2 |
Foreign | (0.8 | ) |  | (2.5 | ) |  | (2.9 | )
Total deferred | (27.2 | ) |  | (49.1 | ) |  | 38.4 |
Total income tax provision | $ | 64.9 |  |  | $ | 49.1 |  |  | $ | 122.4 |
The net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets consisted of the following:
| December 31,
(in millions) | 2014 |  | 2013
Deferred tax assets: |  |  |
Stock-based compensation | $ | 12.4 |  |  | $ | 10.0 |
Accrued expenses and other | 57.9 |  |  | 53.7 |
Net operating losses, foreign tax credits and charitable contribution carryforward | 30.6 |  |  | 55.3 |
Inventories | 4.5 |  |  | 4.6 |
Intangible assets | 14.5 |  |  | 9.0 |
Property, plant and equipment | 4.0 |  |  | 3.9 |
Total deferred tax assets | 123.9 |  |  | 136.5 |
Valuation allowances | (21.7 | ) |  | (39.4 | )
Total net deferred tax assets | $ | 102.2 |  |  | $ | 97.1 |
Deferred tax liabilities: |  |  |
Transaction costs | $ | (258.1 | ) |  | $ | (261.9 | )
Property, plant and equipment | (45.7 | ) |  | (62.5 | )
Accrued expenses and other | (4.5 | ) |  | (4.3 | )
Total deferred tax liabilities | (308.3 | ) |  | (328.7 | )
Net deferred tax liabilities | $ | (206.1 | ) |  | $ | (231.6 | )

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