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Income Taxes | 12 Months Ended
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Dec. 31, 2016
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The following sets forth the amount of income before income taxes attributable to each of the Company’s geographies for the years ended December 31, 2016, 2015 and 2014:
| Year Ended December 31,
(in millions) | 2016 |  | 2015 |  | 2014
Income before income taxes: |  |  |  |  |
United States | $ | 179.0 |  |  | $ | 120.2 |  |  | $ | 46.9 |
Rest of the world | 104.3 |  |  | 79.9 |  |  | 128.0 |
| $ | 283.3 |  |  | $ | 200.1 |  |  | $ | 174.9 |
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,
| 2016 |  | 2015 |  | 2014
(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 | $ | 99.2 |  |  | 35.0 | % |  | $ | 70.0 |  |  | 35.0 | % |  | $ | 61.2 |  |  | 35.0 | %
State income taxes, net of federal benefit | 8.0 |  |  | 2.8 | % |  | 1.1 |  |  | 0.6 | % |  | 1.1 |  |  | 0.6 | %
Foreign repatriation, net of foreign tax credits | (4.3 | ) |  | (1.5 | )% |  | 0.0 |  |  | 0.0 | % |  | 13.5 |  |  | 7.7 | %
Foreign tax differential | (11.9 | ) |  | (4.2 | )% |  | (10.0 | ) |  | (5.0 | )% |  | (12.6 | ) |  | (7.2 | )%
Change in valuation allowances | 20.2 |  |  | 7.1 | % |  | 2.5 |  |  | 1.2 | % |  | (17.7 | ) |  | (10.0 | )%
Uncertain tax positions | (27.1 | ) |  | (9.6 | )% |  | 59.7 |  |  | 29.8 | % |  | 10.9 |  |  | 6.1 | %
Subpart F income | 2.0 |  |  | 0.7 | % |  | 1.9 |  |  | 1.0 | % |  | 1.9 |  |  | 1.1 | %
Manufacturing deduction | (4.2 | ) |  | (1.5 | )% |  | (1.6 | ) |  | (0.8 | )% |  | (3.7 | ) |  | (2.1 | )%
Goodwill on disposal of business | 0.0 |  |  | 0.0 | % |  | 0.0 |  |  | 0.0 | % |  | 7.5 |  |  | 4.2 | %
Permanent and other | 4.9 |  |  | 1.8 | % |  | 1.8 |  |  | 0.9 | % |  | 2.8 |  |  | 1.7 | %
Effective income tax provision | $ | 86.8 |  |  | 30.6 | % |  | $ | 125.4 |  |  | 62.7 | % |  | $ | 64.9 |  |  | 37.1 | %
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. The income tax provision consisted of the following:
| Year Ended December 31,
(in millions) | 2016 |  | 2015 |  | 2014
Current provision |  |  |  |  |
Federal | $ | 73.5 |  |  | $ | 107.1 |  |  | $ | 50.7 |
State | 4.5 |  |  | 7.2 |  |  | 4.5 |
Foreign | 39.9 |  |  | 32.4 |  |  | 36.9 |
Total current | $ | 117.9 |  |  | $ | 146.7 |  |  | $ | 92.1 |
Deferred provision |  |  |  |  |
Federal | $ | (21.4 | ) |  | $ | (12.3 | ) |  | $ | (25.2 | )
State | 1.6 |  |  | (3.7 | ) |  | (1.2 | )
Foreign | (11.3 | ) |  | (5.3 | ) |  | (0.8 | )
Total deferred | (31.1 | ) |  | (21.3 | ) |  | (27.2 | )
Total income tax provision | $ | 86.8 |  |  | $ | 125.4 |  |  | $ | 64.9 |
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 net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets consisted of the following:
| December 31,
(in millions) | 2016 |  | 2015
Deferred tax assets: |  |  |
Stock-based compensation | $ | 18.4 |  |  | $ | 16.0 |
Accrued expenses and other | 49.9 |  |  | 57.6 |
Net operating losses, foreign tax credits and other tax attribute carryforwards | 98.5 |  |  | 33.1 |
Inventories | 7.2 |  |  | 5.1 |
Transaction costs | 10.2 |  |  | 22.0 |
Property, plant and equipment | 3.4 |  |  | 2.9 |
Total deferred tax assets | 187.6 |  |  | 136.7 |
Valuation allowances | (45.2 | ) |  | (24.2 | )
Total net deferred tax assets | $ | 142.4 |  |  | $ | 112.5 |
Deferred tax liabilities: |  |  |
Intangible assets | $ | (242.4 | ) |  | $ | (247.8 | )
Property, plant and equipment | (42.4 | ) |  | (42.0 | )
Accrued expenses and other | (9.7 | ) |  | (5.9 | )
Total deferred tax liabilities | (294.5 | ) |  | (295.7 | )
Net deferred tax liabilities | $ | (152.1 | ) |  | $ | (183.2 | )
At December 31, 2016, the Company’s book tax basis in its top tier foreign subsidiary exceeded the Company’s tax basis in this subsidiary in the hands of the top tier foreign subsidiary's U.S. shareholder. It is the Company’s intent to permanently reinvest the earnings of this foreign subsidiary back into this subsidiary's 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 to 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 such foreign subsidiaries' shareholders. By operation of the tax laws of the various countries in which these subsidiaries are domiciled, earnings of lower tier foreign subsidiaries are not subject to tax, in all material respects, when distributed to a foreign shareholder. It is the Company’s intent that the earnings of each lower tier foreign subsidiary, with the exception of its Danish subsidiary and one of its Canadian subsidiaries, will be permanently reinvested in each such foreign subsidiaries' own operations. As it relates to the Danish subsidiary, its earnings may be distributed without any income tax impact. Thus, no tax is provided for with respect to the book to tax basis difference of its stock. With respect to the Canadian subsidiary, Canadian income tax withholding applies to any distribution it makes to its foreign parent company. The Company has concluded that the Canadian subsidiary has accumulated earnings in excess of its operating needs. Consequently, the earnings in excess of the Canadian subsidiary's operating needs is not permanently reinvested in the Canadian subsidiary's operations, and as such the Company has provided for Canadian withholding tax on the excess amount (which would be available for distribution to its foreign parent). Any such distribution is not taxable to the recipient. Consequently, no further tax would result from the distribution by the Canadian subsidiary. The Company has the following gross income tax attributes available at December 31, 2016 and 2015, respectively:
(in millions) | 2016 |  | 2015
State net operating losses (“SNOLs”) | $ | 131.2 |  |  | $ | 128.8 |
U.S. federal foreign tax credits (“FTCs”) | 12.2 |  |  | 7.8 |
U.S. state income tax credits ("SITCs") | 4.0 |  |  | 5.5 |
Foreign net operating losses (“FNOLs”) | 34.1 |  |  | 38.0 |
Charitable contribution carryover ("CCCs") | 38.4 |  |  | 23.7 |
The SNOLs, FTCs, SITCs, FNOLs 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 certain 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 $118.9 million of the SNOLs, $12.2 million of the FTCs, and $3.5 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. 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, 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 |
Additions based on tax positions related to 2016 | 2.5 |
Additions for tax positions of prior years | 29.2 |
Expiration of statutes of limitations | (5.0 | )
Settlements of uncertain tax positions with tax authorities | (24.8 | )
Balance as of December 31, 2016 | $ | 71.7 |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2016, 2015 and 2014 would be $21.4 million, $67.7 million and $44.6 million, respectively. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During the years ended December 31, 2016, 2015 and 2014, the Company recognized approximately $1.6 million, $33.5 million, and $1.9 million in interest and penalties, respectively, in income tax expense. The Company had approximately $52.3 million, $43.8 million, and $10.3 million of accrued interest and penalties at December 31, 2016, 2015, and 2014, respectively. The Company has received income tax assessments from the Danish Tax Authority ("SKAT") with respect to the tax years 2001 through 2008 relating to the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish Assessments"). 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 process. 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 for the Danish Assessments at December 31, 2016 for all years for which an assessment has been received (2001 - 2008) is approximately Danish Krone ("DKK") 1,547.3 million, including interest and penalties ($219.3 million, based on the DKK to USD exchange rate on December 31, 2016). The cumulative total tax assessment at December 31, 2015 for all years for which an assessment had been received up through that date (2001 - 2008), including interest and penalties, was approximately DKK 1,363.1 million ($199.6 million, based on the DKK to USD exchange rate on December 31, 2015). If SKAT continues to issue assessments for each year not currently assessed, the Company expects the aggregate assessments for such years (2009 - 2016) to be in excess of the amounts described above as assessed for the years 2001 - 2008 (collectively the years 2001 through 2016 are referred to as the "Danish Tax Matter"). During 2015, the Company engaged third-party advisors to assist the Company in further evaluating the Danish Tax 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 SKAT’s view of this matter 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. 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. 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. As the result of the negotiations, 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 recorded a change in estimate to increase the uncertain tax liability for the Danish Tax Matter by approximately $60.7 million in 2015. At December 31, 2016, the Company had accrued Danish tax and interest for the Danish Tax Matter of approximately DKK 850 million (approximately $120.6 million using the December 31, 2016 exchange rate) as an uncertain income tax liability. Approximately DKK 835 million (approximately $118.5 million using December 31, 2016 exchange rate) represents the amount that the Company and SKAT preliminarily agreed to in a non-binding proposed resolution for the years 2001 through 2011. The balance of approximately DKK 15 million (approximately $2.1 million using the December 31, 2016 exchange rate) may be subject to further negotiation in the future as part of an Advanced Pricing Agreement the Company may choose to pursue for years after 2011. The amount accrued is included in other non-current liabilities on the Company's Consolidated Balance Sheets. In addition, at December 31, 2016 the Company had recorded a deferred tax asset of approximately $43.5 million for the U.S. correlative benefit related to this matter. The Company has recorded a valuation allowance with respect to this benefit of approximately $17.6 million related to years for which relief may not be realized. Because the Company is in a net deferred tax liability position, the deferred tax asset referred to herein is netted with the Company’s deferred tax liabilities as reflected on the Consolidated Balance Sheets at December 31, 2016. At December 31, 2015, the Company had accrued approximately DKK 856.0 million of Danish tax and interest for the Danish Tax Matter (approximately $125.6 million using the December 31, 2015 exchange rate) as well as approximately $46.0 million of U.S. correlative benefit related to this matter. Both were reflected in other non-current liabilities on the Consolidated Balance Sheets at December 31, 2015. The Company’s uncertain tax liability associated with the Danish Tax Matter is derived using the cumulative probability analysis 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. Both the uncertain tax liability and the deferred tax asset discussed herein reflects the Company’s best judgment of the facts, circumstances and information available through December 31, 2016. If the Company is not successful in defending its position before the Danish National Tax Tribunal (the "Tribunal"), the appeals division within SKAT, or in the Danish courts or in negotiating a mutually acceptable settlement, there is significant risk that the Company could be required to pay a significant amount to SKAT in excess of any related reserve. Such an outcome 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. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. It is reasonably possible that there could be material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues, reassessment of existing uncertain tax positions, including the Danish tax matter, or the expiration of applicable statute of limitations; however, the Company is not able to estimate the impact of these items at this time. From June 2012 through December 31, 2016, SKAT withheld Value Added Tax refunds otherwise owed to the Company, pending resolution of this matter. Total withheld refunds at December 31, 2016 and 2015 are approximately DKK 258.0 million (approximately $36.6 million) and DKK 176.4 million (approximately $26.0 million), respectively. In July 2016, the Company paid a deposit to SKAT in the amount of approximately DKK 615.2 (approximately $87.2 million using the exchange rate at December 31, 2016) (the “Tax Deposit”) and applied approximately DKK 224.6 million (approximately $31.8 million using the exchange rate at December 31, 2016) of its Value Added Tax refund (the “VAT Refund Applied”) to the aforementioned potential Danish income tax liability, consistent with the Company’s reserve position for this royalty matter. The deposit was made to mitigate additional interest and foreign exchange exposure. The Tax Deposit and the VAT Refund Applied are included within other non-current assets on the Consolidated Balance Sheets. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. 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. That examination was settled and finalized in the fourth quarter of 2016 commensurate with the Company’s expectations. With few exceptions, the Company is no longer subject to tax examinations by the U.S. state and local municipalities for periods prior to 2011, and in non-U.S. jurisdictions for periods prior to 2001. Generally Sealy’s state and local jurisdiction income tax returns are no longer subject to examination for years prior to 2011. 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 year ended December 31, 2016.

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