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Income Taxes | 12 Months Ended
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Dec. 31, 2015
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,
| 2015 |  | 2014 |  | 2013
(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 | $ | 70.0 |  |  | 35.0 | % |  | $ | 61.2 |  |  | 35.0 | % |  | $ | 44.8 |  |  | 35.0 | %
State income taxes, net of federal benefit | 1.1 |  |  | 0.6 | % |  | 1.1 |  |  | 0.6 | % |  | 1.7 |  |  | 1.3 | %
Foreign repatriation, net of foreign tax credits | 0.0 |  |  | 0.0 | % |  | 13.5 |  |  | 7.7 | % |  | (16.0 | ) |  | (12.6 | )%
Foreign tax differential | (10.0 | ) |  | (5.0 | )% |  | (12.6 | ) |  | (7.2 | )% |  | (12.3 | ) |  | (9.6 | )%
Change in valuation allowances | 2.5 |  |  | 1.2 | % |  | (17.7 | ) |  | (10.0 | )% |  | 20.4 |  |  | 15.9 | %
Uncertain tax positions | 59.7 |  |  | 29.8 | % |  | 10.9 |  |  | 6.1 | % |  | 4.7 |  |  | 3.7 | %
Subpart F income | 1.9 |  |  | 1.0 | % |  | 1.9 |  |  | 1.1 | % |  | 1.5 |  |  | 1.2 | %
Manufacturing deduction | (1.6 | ) |  | (0.8 | )% |  | (3.7 | ) |  | (2.1 | )% |  | 0.1 |  |  | — | %
Goodwill on disposal of business | 0.0 |  |  | 0.0 | % |  | 7.5 |  |  | 4.2 | % |  | — |  |  | — | %
Permanent and other | 1.8 |  |  | 0.9 | % |  | 2.8 |  |  | 1.7 | % |  | 4.2 |  |  | 3.5 | %
Effective income tax provision | $ | 125.4 |  |  | 62.7 | % |  | $ | 64.9 |  |  | 37.1 | % |  | $ | 49.1 |  |  | 38.4 | %
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, the Company has recognized cumulative tax on the repatriation transaction of approximately $63.9 million. At December 31, 2015, the Company’s book tax basis in its top tier foreign subsidiary exceeded the Company’s tax basis in such subsidiary in the hands of the top tier foreign subsidiary U.S. shareholder. It is the Company’s intent to permanently reinvest the earnings of this foreign subsidiary back into its operations. As such, no deferred tax liability has been recorded related to this basis difference. 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 cumulative total tax assessment at December 31, 2015 for all years for which an assessment has been received (2001 - 2008) is approximately Danish Krone ("DKK") 1,363.1 million, including interest and penalties ($199.6 million, based on the DKK to USD exchange rate on December 31, 2015). The cumulative total tax assessment at December 31, 2014 for all years for which an assessment had been received up through that date (2001 - 2008) including interest and penalties was approximately DKK 1,317.2 million ($215.1 million, based on the DKK to USD exchange rate on December 31, 2014). The increase of DKK 45.9 million is due to additional interest for the period between December 31, 2014 and December 31, 2015. As of December 31, 2015 and 2014, SKAT had 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. In addition, 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. From June 2012 through December 31, 2015 SKAT has withheld refunds of VAT otherwise owed to the Company, pending resolution of this matter. The total amount of withheld refunds at December 31, 2015 and 2014 is approximately $26 million and $15 million, respectively. This amount is included in other non-current assets on the Consolidated Balance Sheets. The Company filed timely protests with the Danish National Tax Tribunal (the "Tribunal") challenging the tax assessments. The Tribunal formally agreed to place the Tribunal process on hold pending the outcome of a Bilateral Advance Pricing Agreement ("Bilateral APA") between the United States and SKAT, which the Company filed in the third quarter of 2008. 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. In February 2013, as part of the Bilateral APA process, 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. The Company believes it has meritorious defenses to the proposed assessments and plans to oppose the assessments before the Tribunal and in the Danish courts in the event the Company does not resolve this matter outside of litigation. As part of the Tribunal process, the Tribunal assigned an individual to serve as a case manager on the matter. It is the responsibility of the case manager to gather data from both SKAT and the Company and independently evaluate such data. Beginning in April 2014, the Company provided information to the case manager. The output of the case manager’s evaluation is a non-binding recommendation made to the Tribunal on how the case manager believes the Tribunal should decide the issues. In the first half of 2015 the case manager issued a preliminary, non-binding recommendation in favor of each of SKAT’s annual assessments received by the Company. In June 2015, at the request of the case manager, the Company submitted additional information in response to the preliminary recommendation. In the submission, the Company reiterated its strong objection to SKAT’s position and SKAT’s assessments and reiterated the merits of the Company’s position. The Company had expected the case manager to issue the final non-binding recommendation to the Tribunal before the end of 2015; however, a final recommendation has not yet been received, and the issuance of such recommendation has been postponed as described below. During 2015, the Company engaged third-party advisors to assist the Company in further evaluating this matter to determine whether the Company should re-enter negotiations with SKAT. The additional analysis provided the Company with information to evaluate the options available to the Company to resolve this matter, through litigation or through a negotiated settlement, in light of the case manager’s preliminary, non-binding recommendation and the current tax litigation environment in Denmark. Upon evaluation of the advisor’s analysis, which was substantially completed in the fourth quarter of 2015, the Company concluded that it should discuss with SKAT the possibility of formally resuming negotiations on this matter. As a result, the Company met with SKAT in November 2015 to discuss the results of the third-party advisor's analysis and to outline a process to resume negotiations. In November 2015, the Company and its advisors met with SKAT to discuss various matters relating to the assessment. During this meeting, the Company provided general information regarding the output of the analysis of the Company's advisor as well as additional analyses prepared by the Company as a framework for further discussions with SKAT. SKAT and the Company agreed to continue the dialogue regarding a potential negotiated settlement into the future. In anticipation of continuing dialogue with SKAT on this matter, the Company continues to collect and analyze additional information with the assistance of the third-party advisors as well as discussing the tax litigation environment in Denmark with its Danish legal counsel. In December 2015, in response to a request by both the Company and SKAT the Tribunal agreed to delay the continuance of its process, including the issuance by the case manager of his final non-binding recommendation until the second quarter of 2016. The Company expects that it will continue its discussions with SKAT during this period. To date, the Company has received an assessment every year for the next year in the examination cycle. In this regard, the Company had expected to receive an assessment for the year 2009 in the second half of 2015. However, SKAT agreed to delay the issuance of the 2009 assessment until the second quarter of 2016 pending the progress of the discussions with the Company that had resumed in November 2015. If this matter is not resolved or if sufficient progress is not being made, the Company expects that SKAT will issue the 2009 assessment in the second quarter of 2016 as well as its assessment for 2010. Further, in this event the Company would expect to receive an assessment for 2011 in the second quarter of 2017, the 2012 assessment in the second quarter of 2018, and so forth. The Company expects the aggregate assessments for the years 2009 - 2015 to be in excess of the amounts described above as assessed for the years 2001 - 2008. As the result of the Tribunal case manager’s preliminary non-binding recommendation, the analyses prepared by the Company and its third-party advisors, and the evaluation of the increased risk of tax litigation in Denmark the Company has updated its analysis of this uncertain tax position in accordance with ASC 740 and has recorded a change in estimate to increase the uncertain tax liability for this item by approximately $60.7 million, from $18.9 million recorded at December 31, 2014 to $79.6 million recorded at December 31, 2015. The Company’s uncertain tax liability associated with this matter is derived using the cumulative probability analysis as required by ASC 740 with possible outcomes based on the Company's updated evaluation of the facts and circumstances regarding this matter and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standards as required by GAAP, taking into account both the U.S. and Danish income tax implications of such outcomes. In conjunction with this tax examination discussed above, 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. The Company has responded to SKAT’s request for information. During 2013, the Company and SKAT agreed that the examination of this issue for the years 2009 - 2011 would be placed on hold pending the outcome of the Tribunal process above for the years 2001 - 2008, although SKAT would continue to issue assessments as described above. If the Company is not successful in defending its position before the Tribunal or in the Danish courts or in negotiating a mutually acceptable settlement, there is significant risk that the Company could be required to pay significant amounts to SKAT in excess of any related reserve. In addition, the Company could choose to pursue a settlement with SKAT, which could also require the Company to pay significant amounts to SKAT in excess of any related reserve in order to resolve this matter without litigation. Either of these outcomes could have a material adverse impact on the Company’s profitability and liquidity. In addition, prior to any ultimate resolution of this issue before the Tribunal or the Danish courts, based on a change in facts and circumstances, the Company may be required to further increase its uncertain tax liability associated with this matter, which could have a material impact on the Company's reported earnings. 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 and SKAT continue to discuss various matters. No assessment has been made by SKAT as of December 31, 2015. The Company believes it has meritorious defenses for all such items reported in the Danish income tax returns. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. 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 was finalized in the second quarter of 2015 with no material adjustments. In the quarter ended September 30, 2015, the Company was advised by the IRS that the federal income tax return for 2013 would be examined. In November 2015 the IRS began its examination, which is still 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. Other than the changes discussed in the preceding paragraphs, particularly as it relates to the Danish royalty matter, there were no significant changes to the liability for unrecognized tax benefits during the twelve months ended December 31, 2015. 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, 2015, 2014 and 2013:
| Year Ended December 31,
(in millions) | 2015 |  | 2014 |  | 2013
Income before income taxes: |  |  |  |  |
United States | $ | 120.2 |  |  | $ | 46.9 |  |  | $ | (4.5 | )
Rest of the world | 79.9 |  |  | 128.0 |  |  | 132.5 |
| $ | 200.1 |  |  | $ | 174.9 |  |  | $ | 128.0 |
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, 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 |
Additions based on tax positions related to 2015 | 0.9 |
Additions for tax positions of prior years | 25.7 |
Expiration of statutes of limitations | (2.1 | )
Settlements of uncertain tax positions with tax authorities | (2.3 | )
Balance as of December 31, 2015 | $ | 69.8 |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2015, 2014 and 2013 would be $67.7, $44.6 million and $22.2 million, respectively. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During the years ended December 31, 2015, 2014 and 2013, the Company recognized approximately $33.5 million, $1.9 million, and $1.8 million in interest and penalties, respectively, in income tax expense. The Company had approximately $43.8 million, $10.3 million, and $11.0 million of accrued interest and penalties at December 31, 2015, 2014, and 2013, respectively. The Company has the following gross income tax attributes available at December 31, 2015 and 2014 respectively (in millions):
| 2015 |  | 2014
State net operating losses (“SNOLs”) | 128.8 |  |  | 145.3 |
U.S. federal foreign tax credits (“FTCs”) | 7.8 |  |  | 7.8 |
U.S. state income tax credits ("SITCs") | 5.5 |  |  | 1.6 |
Foreign net operating losses (“FNOLs”) | 38.0 |  |  | 44.2 |
Charitable contribution carryover ("CCCs") | 23.7 |  |  | 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. The Company has recorded valuation allowances against approximately $87.0 million of the SNOL, $7.8 million of the FTC, and $3.6 million of SITCs. With respect to all other tax attributes above, 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 underlying deferred tax assets. 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) | 2015 |  | 2014 |  | 2013
Current provision |  |  |  |  |
Federal | $ | 107.1 |  |  | $ | 50.7 |  |  | $ | 48.6 |
State | 7.2 |  |  | 4.5 |  |  | 7.3 |
Foreign | 32.4 |  |  | 36.9 |  |  | 42.3 |
Total current | $ | 146.7 |  |  | $ | 92.1 |  |  | $ | 98.2 |
Deferred provision |  |  |  |  |
Federal | $ | (12.3 | ) |  | $ | (25.2 | ) |  | $ | (47.0 | )
State | (3.7 | ) |  | (1.2 | ) |  | 0.4 |
Foreign | (5.3 | ) |  | (0.8 | ) |  | (2.5 | )
Total deferred | (21.3 | ) |  | (27.2 | ) |  | (49.1 | )
Total income tax provision | $ | 125.4 |  |  | $ | 64.9 |  |  | $ | 49.1 |
The net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets consisted of the following:
| December 31,
(in millions) | 2015 |  | 2014
Deferred tax assets: |  |  |
Stock-based compensation | $ | 16.0 |  |  | $ | 12.4 |
Accrued expenses and other | 57.6 |  |  | 57.9 |
Net operating losses, foreign tax credits and charitable contribution carryforward | 33.1 |  |  | 30.6 |
Inventories | 5.1 |  |  | 4.5 |
Transaction costs | 22.0 |  |  | 14.5 |
Property, plant and equipment | 2.9 |  |  | 4.0 |
Total deferred tax assets | 136.7 |  |  | 123.9 |
Valuation allowances | (24.2 | ) |  | (21.7 | )
Total net deferred tax assets | $ | 112.5 |  |  | $ | 102.2 |
Deferred tax liabilities: |  |  |
Intangible assets | $ | (247.8 | ) |  | $ | (258.1 | )
Property, plant and equipment | (42.0 | ) |  | (45.7 | )
Accrued expenses and other | (5.9 | ) |  | (4.5 | )
Total deferred tax liabilities | (295.7 | ) |  | (308.3 | )
Net deferred tax liabilities | $ | (183.2 | ) |  | $ | (206.1 | )

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 + Details
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