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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (public law 115-97, the “U.S. Tax Reform Act”). The U.S. Tax Reform Act reduces the U.S. federal corporate income tax rate from 35% to 21%. The U.S. Tax Reform Act implements a new territorial tax system that imposes a one-time transition tax, or deemed repatriation, on the earnings and profits of the Company’s controlled and non-controlled foreign subsidiaries to the extent such earnings and profits have not previously been subject to U.S. income tax (the “Transition Tax”). The amount subject to tax is reduced pursuant to the U.S. Tax Reform Act by a dividend received deduction, and as such, the amount that is taxable is substantially less than the amount of previously untaxed earnings and profits. The amount of the Transition Tax is based in part on the amount of earnings held by the foreign subsidiaries in cash and other specified assets. While the effective date of the new corporate tax rates for the Company is January 1, 2018, the Company is required to calculate the effects of changes in tax rates and laws on deferred tax balances in 2017, the period in which the legislation was enacted. For the year-ended December 31, 2017, enactment of the U.S. Tax Reform Act resulted in the following impacts to income tax provision: Remeasurement of deferred taxes The remeasurement of deferred tax assets and liabilities at the lower enacted U.S. federal corporate tax rate resulted in a net benefit to income tax provision of approximately $69.7 million for the year ended December 31, 2017, which represents a benefit to the Company’s effective income tax rate of approximately 37.0%. The reduction in the federal income tax rate indirectly impacted the Company’s state income tax rate applicable to its state deferred income tax assets and liabilities to the extent such items are reported net of federal income tax expense or benefit. The applicable combined income tax rate used to measure the deferred income tax assets and liabilities of the U.S. companies in the consolidated group at December 31, 2017 and 2016 was approximately 25.7% and 39.0%, respectively. Transition tax The Transition Tax resulted in a $45.9 million increase in income tax expense for the year ended December 31, 2017, which represents an increase to the Company’s effective tax rate of approximately 24.4%. Global Intangible Low-Taxed Income The U.S. Tax Reform Act subjects U.S. taxpayers to current tax on “global intangible low-taxed income” (“GILTI”) of its controlled foreign corporations. GAAP provides that a taxpayer may elect to either record a charge for the GILTI tax in a future period to the extent such tax arises in that period, or to record the future impact to the taxpayer of GILTI as part of deferred taxes related to its controlled foreign corporations. The Company is evaluating the accounting for the effects of the GILTI tax law provisions. Such evaluation is not yet complete. As such, the Company has not yet made an accounting policy election with respect to GILTI. The estimated impacts of the U.S. Tax Reform Act recorded during the year ended December 31, 2017 are provisional in nature, and the Company will continue to assess the impact of the U.S. Tax Reform Act and will record adjustments through the income tax provision in the relevant period as authoritative guidance is made available to the public. In addition, in reflecting the impact of the U.S. Tax Reform Act in the Company’s 2017 consolidated financial statements it was necessary to, in some cases, make estimates of one or more items to calculate such impact during the measurement period. Accordingly, the impact of the U.S. Tax Reform Act may differ from the Company's provisional estimates due to and among other factors, information currently not available, changes in interpretations and the issuance of additional guidance, as well as changes in assumptions the Company has currently made, including actions the Company may take in future periods as a result of the U.S. Tax Reform Act. In particular, there is currently a lack of clarity regarding the application of the executive compensation deduction limitations and state tax implications as a result of the U.S. Tax Reform Act. The Company currently estimates that the effect of the U.S. Tax Reform Act on executive compensation deduction limitations will primarily be effective in future periods. With regard to state tax implications, the Company generally expects state taxable income will increase as a result of deduction limitations associated with the U.S. Tax Reform Act, though the impact is not currently reasonably estimable as most U.S. state tax jurisdictions have not responded to the specific effects of the U.S. Tax Reform Act. The Company will make relevant updates to management's estimates and assumptions as additional information becomes available. 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, 2017, 2016 and 2015:
| Year Ended December 31,
(in millions) | 2017 |  | 2016 |  | 2015
Income before income taxes: |  |  |  |  |
United States | $ | 97.2 |  |  | $ | 179.0 |  |  | $ | 120.2 |
Rest of the world | 91.2 |  |  | 92.8 |  |  | 70.9 |
| $ | 188.4 |  |  | $ | 271.8 |  |  | $ | 191.1 |
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,
| 2017 |  | 2016 |  | 2015
(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 | $ | 65.9 |  |  | 35.0 | % |  | $ | 95.1 |  |  | 35.0 | % |  | $ | 66.9 |  |  | 35.0 | %
State income taxes, net of federal benefit | (0.6 | ) |  | (0.3 | )% |  | 8.0 |  |  | 2.9 | % |  | 1.1 |  |  | 0.6 | %
Foreign repatriation, net of foreign tax credits | — |  |  | — |  |  | (4.3 | ) |  | (1.6 | )% |  | — |  |  | — |
Foreign tax differential | (11.6 | ) |  | (6.1 | )% |  | (11.9 | ) |  | (4.4 | )% |  | (10.0 | ) |  | (5.2 | )%
Change in valuation allowances | 8.3 |  |  | 4.4 | % |  | 20.2 |  |  | 7.4 | % |  | 2.5 |  |  | 1.3 | %
Uncertain tax positions | 0.2 |  |  | 0.0 | % |  | (27.1 | ) |  | (9.9 | )% |  | 59.7 |  |  | 31.2 | %
Subpart F income | 2.7 |  |  | 1.4 | % |  | 2.0 |  |  | 0.7 | % |  | 1.9 |  |  | 1.0 | %
Manufacturing deduction | (1.9 | ) |  | (1.0 | )% |  | (4.2 | ) |  | (1.5 | )% |  | (1.6 | ) |  | (0.8 | )%
Remeasurement of deferred taxes | (69.7 | ) |  | (37.0 | )% |  | — |  |  | — |  |  | — |  |  | — |
Transition Tax | 45.9 |  |  | 24.4 | % |  | — |  |  | — |  |  | — |  |  | — |
Permanent and other | 8.5 |  |  | 4.5 | % |  | 9.0 |  |  | 3.3 | % |  | 4.9 |  |  | 2.5 | %
Effective income tax provision | $ | 47.7 |  |  | 25.3 | % |  | $ | 86.8 |  |  | 31.9 | % |  | $ | 125.4 |  |  | 65.6 | %
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 and is taxable to Tempur Sealy International as if earned directly by Tempur Sealy International. The Transition Tax represents taxes on certain foreign sourced earnings and profits that were previously tax deferred. The income tax provision consisted of the following:
| Year Ended December 31,
(in millions) | 2017 |  | 2016 |  | 2015
Current provision |  |  |  |  |
Federal | $ | 73.5 |  |  | $ | 73.5 |  |  | $ | 107.1 |
State | 3.1 |  |  | 4.5 |  |  | 7.2 |
Foreign | 31.3 |  |  | 39.9 |  |  | 32.4 |
Total current | $ | 107.9 |  |  | $ | 117.9 |  |  | $ | 146.7 |
Deferred provision |  |  |  |  |
Federal | $ | (67.7 | ) |  | $ | (21.4 | ) |  | $ | (12.3 | )
State | 7.5 |  |  | 1.6 |  |  | (3.7 | )
Foreign | — |  |  | (11.3 | ) |  | (5.3 | )
Total deferred | (60.2 | ) |  | (31.1 | ) |  | (21.3 | )
Total income tax provision | $ | 47.7 |  |  | $ | 86.8 |  |  | $ | 125.4 |
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 amount provided for deferred income taxes reflects that impact of the revaluation of the Company's deferred income tax assets and liabilities required as the result of the change in the U.S. federal and state income tax rates, as discussed above. The net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets, determined using the income tax rate applicable to each period, consist of the following:
| December 31,
(in millions) | 2017 |  | 2016
Deferred tax assets: |  |  |
Stock-based compensation | $ | 10.6 |  |  | $ | 18.4 |
Accrued expenses and other | 36.3 |  |  | 49.9 |
Net operating losses, foreign tax credits and other tax attribute carryforwards | 92.9 |  |  | 98.5 |
Inventories | 6.2 |  |  | 7.2 |
Transaction costs | 13.4 |  |  | 10.2 |
Property, plant and equipment | 2.8 |  |  | 3.4 |
Total deferred tax assets | 162.2 |  |  | 187.6 |
Valuation allowances | (55.1 | ) |  | (45.2 | )
Total net deferred tax assets | $ | 107.1 |  |  | $ | 142.4 |
Deferred tax liabilities: |  |  |
Intangible assets | $ | (161.9 | ) |  | $ | (242.4 | )
Property, plant and equipment | (29.5 | ) |  | (42.4 | )
Accrued expenses and other | (6.4 | ) |  | (9.7 | )
Total deferred tax liabilities | (197.8 | ) |  | (294.5 | )
Net deferred tax liabilities | $ | (90.7 | ) |  | $ | (152.1 | )
No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the Transition Tax, or any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. At December 31, 2017, the Company’s tax basis in its top tier foreign subsidiary exceeded the Company’s book basis in this subsidiary in the hands of the top tier foreign subsidiary's U.S. shareholder. The Company has not recorded a deferred tax asset on such excess tax basis as it is not apparent that the excess tax basis will reverse in the foreseeable future. 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. At December 31, 2017, the Company has concluded that the Canadian subsidiary does not have accumulated earnings in excess of its operating needs. As such no Canadian withholding tax has been accrued at December 31, 2017. The Company has the following gross income tax attributes available at December 31, 2017 and 2016, respectively:
(in millions) | 2017 |  | 2016
State net operating losses (“SNOLs”) | $ | 133.9 |  |  | $ | 131.2 |
U.S. federal foreign tax credits (“FTCs”) | 12.2 |  |  | 12.2 |
U.S. state income tax credits ("SITCs") | 8.1 |  |  | 4.0 |
Foreign net operating losses (“FNOLs”) | 33.1 |  |  | 34.1 |
Charitable contribution carryover ("CCCs") | 18.0 |  |  | 38.4 |
The SNOLs, FTCs, SITCs, FNOLs and CCCs generally expire in 2021, 2023, 2023, 2023 and 2020, 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 $124.2 million of the SNOLs, $12.2 million of the FTCs, and $8.1 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, 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 |
Additions based on tax positions related to 2017 | 3.9 |
Additions for tax positions of prior years | 11.4 |
Expiration of statutes of limitations | — |
Settlements of uncertain tax positions with tax authorities | (2.5 | )
Balance as of December 31, 2017 | $ | 84.5 |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2017, 2016 and 2015 would be $31.7 million, $21.4 million and $67.7 million, respectively. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company recognized approximately $0.4 million, $1.6 million, and $33.5 million in interest and penalties, respectively, in income tax expense. The Company had approximately $59.9 million, $52.3 million, and $43.8 million of accrued interest and penalties at December 31, 2017, 2016, and 2015, 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, 2017 for all years for which an assessment has been received (2001 - 2008) is approximately Danish Krone ("DKK") 1,638.4 million, including interest and penalties ($264.3 million, based on the DKK to USD exchange rate on December 31, 2017). The cumulative total tax assessment at December 31, 2016 for all years for which an assessment had been received up through that date (2001 - 2008), including interest and penalties, was approximately DKK 1,547.3 million ($219.3 million, based on the DKK to USD exchange rate on December 31, 2016). If SKAT continues to issue assessments for each year not currently assessed, the Company expects the aggregate assessments for such years (2009 - 2017) to be in excess of the amounts described above as assessed for the years 2001 - 2008 (collectively the years 2001 through 2017 are referred to as the "Danish Tax Matter"). At December 31, 2017 and 2016, the Company had accrued Danish tax and interest for the Danish Tax Matter of approximately DKK 854 million and DKK 850 million respectively (approximately $137.8 million and $120.6 million using the December 31, 2017 and 2016 exchange rates, as applicable) as an uncertain income tax liability. Approximately DKK 835 million (approximately $134.8 million and $118.5 million using December 31, 2017 and 2016 exchange rates, as applicable) 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 18 million and DKK 15 million (approximately $3.0 million and $2.1 million respectively using the December 31, 2017 and 2016 exchange rates, as applicable) 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, 2017 and 2016 the Company had recorded a deferred tax asset of approximately $47.2 million and $43.5 million, respectively, for the U.S. correlative benefit related to this matter. At December 31, 2017 and 2016, the Company has recorded a valuation allowance with respect to this benefit of approximately $19.3 million and $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, 2017 and 2016. 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, 2017. 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, 2017, SKAT withheld Value Added Tax refunds otherwise owed to the Company, pending resolution of this matter. Total withheld refunds at December 31, 2017 and 2016 are approximately DKK 336.5 million (approximately $54.1 million) and DKK 258.0 million (approximately $36.6 million), respectively. In July 2016, the Company paid a deposit to SKAT in the amount of approximately DKK 615.2 (approximately $98.9 million and $87.2 million using the applicable exchange rates at December 31, 2017 and 2016, respectively) (the “Tax Deposit”) and applied approximately DKK 224.6 million (approximately $36.1 million and $31.8 million using the exchange rate at December 31, 2017 and 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. 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, 2017.

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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 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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