XML 39 R23.htm IDEA: XBRL DOCUMENT
v3.10.0.1

Income Taxes | 12 Months Ended
--- | ---
Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act”) was signed into law, making significant changes to U.S. tax law. Changes include, but are not limited to, a corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. In accordance with the Act, the Company recorded an income tax benefit of $23.8 million in the fourth quarter of 2017, the period in which the legislation was enacted. The total benefit included a tax benefit of $69.7 million related to the remeasurement of certain deferred tax assets and liabilities net of $45.9 million in additional income tax expense related to the transition tax on foreign earnings. Additionally, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, the Company has completed its analysis based on subsequent guidance issued with respect to the Act currently available which resulted in an additional SAB 118 tax benefit of $6.8 million in 2018 related to the finalization of the Company’s transition tax obligation. 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, 2018, 2017 and 2016:
| Year Ended December 31,
(in millions) | 2018 |  | 2017 |  | 2016
Income before income taxes: |  |  |  |  |
United States | $ | 59.2 |  |  | $ | 97.2 |  |  | $ | 179.0 |
Rest of the world | 105.8 |  |  | 118.2 |  |  | 104.6 |
| $ | 165.0 |  |  | $ | 215.4 |  |  | $ | 283.6 |
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,
| 2018 |  | 2017 |  | 2016
(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 | $ | 34.6 |  |  | 21.0 | % |  | $ | 75.4 |  |  | 35.0 | % |  | $ | 99.3 |  |  | 35.0 | %
State income taxes, net of federal benefit | 1.8 |  |  | 1.1 | % |  | (0.6 | ) |  | (0.3 | )% |  | 8.0 |  |  | 2.8 | %
Foreign repatriation, net of foreign tax credits | — |  |  | — |  |  | — |  |  | — |  |  | (4.3 | ) |  | (1.5 | )%
Foreign tax differential | 2.5 |  |  | 1.5 | % |  | (11.9 | ) |  | (5.5 | )% |  | (12.0 | ) |  | (4.2 | )%
Change in valuation allowances | (17.7 | ) |  | (10.7 | )% |  | 5.6 |  |  | 2.6 | % |  | 19.4 |  |  | 6.8 | %
Uncertain tax positions | 33.1 |  |  | 20.1 | % |  | (1.0 | ) |  | (0.5 | )% |  | (27.1 | ) |  | (9.6 | )%
Subpart F income | 6.6 |  |  | 4.0 | % |  | 2.7 |  |  | 1.2 | % |  | 2.0 |  |  | 0.7 | %
Manufacturing deduction | — |  |  | — |  |  | (1.9 | ) |  | (0.9 | )% |  | (4.2 | ) |  | (1.5 | )%
Remeasurement of deferred taxes | — |  |  | — |  |  | (69.7 | ) |  | (32.3 | )% |  | — |  |  | — |
Transition Tax | (6.8 | ) |  | (4.1 | )% |  | 45.9 |  |  | 21.3 | % |  | — |  |  | — |
Permanent and other | (4.5 | ) |  | (2.8 | )% |  | (0.7 | ) |  | (0.3 | )% |  | 5.2 |  |  | 1.9 | %
Effective income tax provision | $ | 49.6 |  |  | 30.1 | % |  | $ | 43.8 |  |  | 20.3 | % |  | $ | 86.3 |  |  | 30.4 | %
For 2018, Subpart F income includes Global Intangible Low-Taxed Income, or "GILTI" as well as certain sales made by foreign subsidiaries outside their respective countries of incorporation and taxable to Tempur Sealy International as if earned directly by Tempur Sealy International. The Company recognizes GILTI in the period in which such tax arises. For years prior to 2018, 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) | 2018 |  | 2017 |  | 2016
Current provision |  |  |  |  |
Federal | $ | (14.6 | ) |  | $ | 73.5 |  |  | $ | 73.5 |
State | 1.1 |  |  | 3.1 |  |  | 4.6 |
Foreign | 57.1 |  |  | 28.3 |  |  | 39.3 |
Total current | $ | 43.6 |  |  | $ | 104.9 |  |  | $ | 117.4 |
Deferred provision |  |  |  |  |
Federal | $ | 11.4 |  |  | $ | (67.7 | ) |  | $ | (21.4 | )
State | (4.5 | ) |  | 7.6 |  |  | 1.6 |
Foreign | (0.9 | ) |  | (1.0 | ) |  | (11.3 | )
Total deferred | 6.0 |  |  | (61.1 | ) |  | (31.1 | )
Total income tax provision | $ | 49.6 |  |  | $ | 43.8 |  |  | $ | 86.3 |
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) | 2018 |  | 2017
Deferred tax assets: |  |  |
Stock-based compensation | $ | 12.8 |  |  | $ | 10.6 |
Accrued expenses and other | 49.1 |  |  | 36.3 |
Net operating losses, foreign tax credits and other tax attribute carryforwards | 56.1 |  |  | 92.9 |
Inventories | 6.0 |  |  | 6.2 |
Transaction costs | 13.5 |  |  | 13.4 |
Property, plant and equipment | 3.6 |  |  | 2.8 |
Total deferred tax assets | 141.1 |  |  | 162.2 |
Valuation allowances | (43.1 | ) |  | (55.1 | )
Total net deferred tax assets | $ | 98.0 |  |  | $ | 107.1 |
Deferred tax liabilities: |  |  |
Intangible assets | $ | (156.8 | ) |  | $ | (162.1 | )
Property, plant and equipment | (30.3 | ) |  | (29.5 | )
Accrued expenses and other | (5.8 | ) |  | (6.4 | )
Total deferred tax liabilities | (192.9 | ) |  | (198.0 | )
Net deferred tax liabilities | $ | (94.9 | ) |  | $ | (90.9 | )
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, 2018, 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, 2018, the Company has concluded that the Canadian subsidiary does not have material accumulated earnings in excess of its operating needs and as such no material Canadian withholding tax has been accrued. The Company has the following gross income tax attributes available at December 31, 2018 and 2017, respectively:
(in millions) | 2018 |  | 2017
State net operating losses (“SNOLs”) | $ | 355.7 |  |  | $ | 133.9 |
U.S. federal foreign tax credits (“FTCs”) | 12.2 |  |  | 12.2 |
U.S. state income tax credits ("SITCs") | 8.0 |  |  | 8.1 |
Foreign net operating losses (“FNOLs”) | 57.0 |  |  | 33.1 |
Charitable contribution carryover ("CCCs") | 39.6 |  |  | 18.0 |
Interest limitation carryover ("ILC") | 10.6 |  |  | — |
The SNOLs, FTCs, SITCs, FNOLs and CCCs generally expire in 2021, 2023, 2023, 2023 and 2020, respectively. The ILC has an indefinite life. 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, the ILC 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. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions) |
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 |
Additions based on tax positions related to 2018 | 2.5 |
Additions for tax positions of prior years | 21.2 |
Expiration of statutes of limitations | — |
Settlements of uncertain tax positions with tax authorities | (4.4 | )
Balance as of December 31, 2018 | $ | 103.8 |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2018, 2017 and 2016 would be $91.4 million, $31.7 million and $21.4 million, respectively. During the years ended December 31, 2018, 2017 and 2016, the Company recognized approximately $6.4 million, $0.4 million, and $1.6 million in interest and penalties, respectively, in income tax expense. The Company had approximately $66.3 million, $59.9 million, and $52.3 million of accrued interest and penalties at December 31, 2018, 2017, and 2016, respectively. Since 2001, the Company has been involved in a dispute with the Danish Tax Authority ("SKAT") regarding the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish Tax Matter"). 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. SKAT has issued assessments to the Company asserting the royalties paid by the U.S. to the Danish subsidiary were too low, which the Company disputed. The tax assessments received from SKAT were based, in part, on a 20% royalty rate, which is substantially higher than that historically used or deemed appropriate by the Company. During 2018, the Company reached agreements with both SKAT and the U.S. Internal Revenue Service ("IRS") with respect to the adjusted amount of royalties for tax years 2001 through 2011 (the "Settlement Years"). The Company has also entered into the Advance Pricing Agreement program (the “APA Program”) for the tax years 2012 through 2022 in which the IRS, on the Company’s behalf, will negotiate directly with SKAT the royalty to be paid by the U.S. subsidiary to the Danish Subsidiary. The Company maintains an uncertain income tax liability for both the Settlement Years and for the tax years 2012 through 2018 that are included in the APA Program. The APA Program request was filed with the IRS on October 26, 2018. The APA Program negotiation process is not expected to conclude in the near term. The income tax assessed by SKAT for the Settlement Years is DKK 470.5 million ($72.2 million using the December 31, 2018 exchange rate) and has been accrued for by the Company at December 31, 2018 as an uncertain income tax position. The assessed value reflects materially the amount of the Danish tax liability that was historically accrued by the Company as an uncertain income tax position. The Company has determined the interest on such tax to be approximately DKK 376.8 million (approximately $57.8 million using the December 31, 2018 exchange rate), which has also been accrued for by the Company at December 31, 2018. The total tax and interest accrued at December 31, 2018 related to the Settlement Years is DKK 847.3 million (approximately $130.0 million using the December 31, 2018 exchange rate). The liability for the uncertain tax position and related interest is included in accrued expenses and other current liabilities within the Company’s Consolidated Balance Sheet. During 2018 the Company recorded approximately DKK 210.6 million (approximately $32.1 million) for Danish tax and interest related to the Danish Tax Matter for the years 2012 through 2018, applying the concepts of the settlement negotiated with SKAT to the APA Program years. At December 31, 2018, the Company maintained an uncertain Danish tax position and related interest for such years of approximately DKK 230.2 million ($35.3 million using the December 31, 2018 exchange rates). The amount accrued is included in other non-current liabilities on the Company's Consolidated Balance Sheet at December 31, 2018. The deferred tax asset for the U.S. correlative benefit associated with this accrual is approximately $4.2 million. At December 31, 2017, the Company had accrued Danish tax and interest for the Danish Tax Matter of approximately DKK 854.7 million (approximately $137.8 million using the December 31, 2017 exchange rate) as an uncertain income tax position. Approximately DKK 835.0 million (approximately $134.8 million using December 31, 2017 exchange rate) represents the amount accrued with respect to the Settlement Years. The balance of approximately DKK 19.7 million (approximately $3.2 million using the December 31, 2017 exchange rates) was accrued for the tax years 2012 through 2017. The amount accrued at December 31, 2017 is included in other non-current liabilities on the Company's Consolidated Balance Sheet. In addition, the Company had recorded a deferred tax asset for the U.S. correlative benefit related to the Danish Tax Matter of approximately $48.3 million at December 31, 2017. The Company maintained a valuation allowance with respect to this benefit (specifically related to the Settlement Years) of approximately $19.3 million at December 31, 2017, as it was more likely than not that this portion of the deferred tax asset would not be realized as certain periods were closed tax years in the U.S. The gross deferred tax asset was netted with the Company's U.S. deferred tax liabilities in non-current liabilities in the Company's Consolidated Balance Sheet at December 31, 2017. As a result of the settlement with SKAT and the IRS, the Company was able to realize the entire U.S. correlative benefit in its 2017 U.S. federal and state income tax returns (which the Company filed in September 2018). Accordingly, the associated valuation allowance was released and reflected as a benefit within the Company’s 2018 income tax provision. 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, 2018. 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. The Company continues to discuss certain matters with SKAT relating to the Danish Tax Matter. For instance, the Company’s calculation of interest for the Settlement Years differs from the amount asserted by SKAT by approximately DKK 125.0 million (approximately $19.2 million using the December 31, 2018 exchange rate). The Company believes its calculations properly reflect the mechanics of the calculation of interest as provided in Danish tax law and as such has not recorded a liability for the incremental interest proposed by SKAT. Further, if the IRS and SKAT are unable to reach a mutually acceptable agreement with respect to the years included in the APA Program, the Company could be required to make a significant payment to SKAT for Danish tax related to such years, which could have a material adverse effect on the Company’s results of operations and liquidity. From June 2012 through December 31, 2018, SKAT withheld Value Added Tax refunds otherwise owed to the Company, pending resolution of the Danish Tax Matter. Total withheld refunds at December 31, 2018 and 2017 are approximately DKK 347.1 million (approximately $53.3 million at the December 31, 2018 exchange rate) and DKK 336.5 million (approximately $54.1 million at the December 31, 2017 exchange rate), respectively. In July 2016, the Company paid a deposit to SKAT in the amount of approximately DKK 615.2 million (approximately $94.4 million and $98.9 million using the applicable exchange rates at December 31, 2018 and 2017, respectively) (the “Tax Deposit”) and applied approximately DKK 232.1 million (approximately $35.6 million and $37.4 million using the exchange rates at December 31, 2018 and 2017, respectively) 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 prepaid and other current assets and other non-current assets on the Consolidated Balance Sheets as of December 31, 2018 and 2017, respectively. 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. 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 relating to the Danish Tax Matter discussed in the preceding paragraphs, there were no significant changes to the liability for unrecognized tax benefits during the year ended December 31, 2018.

X
- References No definition available. + Details
Name: | us-gaap_IncomeTaxDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
Name: | us-gaap_IncomeTaxDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration