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Income Taxes | 12 Months Ended
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Dec. 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Pre-tax Income by Jurisdiction 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, 2020, 2019 and 2018:
| Year Ended December 31,
(in millions) | 2020 |  | 2019 |  | 2018
Income before income taxes: |  |  |  |  |
United States | $ | 319.5 |  |  | $ | 150.9 |  |  | $ | 59.2 |
Rest of the world | 132.9 |  |  | 114.6 |  |  | 105.8 |
| $ | 452.4 |  |  | $ | 265.5 |  |  | $ | 165.0 |
Reconciliation of Statutory Tax Rate to Effective Tax Rate 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,
| 2020 |  | 2019 |  | 2018
(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 | $ | 95.0 |  |  | 21.0 | % |  | $ | 55.8 |  |  | 21.0 | % |  | $ | 34.6 |  |  | 21.0 | %
State income taxes, net of federal benefit | 9.9 |  |  | 2.2 | % |  | 8.7 |  |  | 3.3 | % |  | 1.8 |  |  | 1.1 | %
Foreign tax differential | 2.8 |  |  | 0.6 | % |  | 2.1 |  |  | 0.8 | % |  | 2.5 |  |  | 1.5 | %
Change in valuation allowances | 5.5 |  |  | 1.2 | % |  | (8.6) |  |  | (3.2) | % |  | (17.7) |  |  | (10.7) | %
Uncertain tax positions and interest | 0.5 |  |  | 0.1 | % |  | 2.4 |  |  | 0.9 | % |  | 33.1 |  |  | 20.1 | %
Subpart F income | 3.3 |  |  | 0.7 | % |  | 1.8 |  |  | 0.7 | % |  | (0.8) |  |  | (0.5) | %
Global Intangible Low-Taxed Income (“GILTI”) | — |  |  | — |  |  | 9.2 |  |  | 3.4 | % |  | 7.4 |  |  | 4.5 | %
GILTI High-Taxed Exception | (8.6) |  |  | (1.9) | % |  | — |  |  | — |  |  | — |  |  | — |
Stock compensation | (10.9) |  |  | (2.4) | % |  | 0.9 |  |  | 0.3 | % |  | 0.8 |  |  | 0.5 | %
Transition Tax | — |  |  | — |  |  | — |  |  | — |  |  | (6.8) |  |  | (4.1) | %
Permanent and other | 5.1 |  |  | 1.2 | % |  | 2.4 |  |  | 0.9 | % |  | (5.3) |  |  | (3.3) | %
Effective income tax provision | $ | 102.6 |  |  | 22.7 | % |  | $ | 74.7 |  |  | 28.1 | % |  | $ | 49.6 |  |  | 30.1 | %
In July 2020 the U.S. Treasury finalized income tax regulations applicable to the global intangible low-taxed income ("GILTI") provisions of the Internal Revenue Code (the "High Taxed Regulations"). The Company recognizes income tax expense on GILTI in the period in which such tax arises. The High Taxed Regulations provide for full or partial relief from U.S. taxation of current period earnings of foreign subsidiaries otherwise taxable under the GILTI regime. The relief from U.S. taxation may be achieved pursuant to an exception to GILTI for earnings of any individual foreign subsidiary subject to a high rate of local country income tax (the exception is referred to as the "high-taxed exception" or "HTE"). Each foreign subsidiary's facts and circumstances must be individually analyzed to determine whether the current earnings of such subsidiary qualify for the HTE and thus are excepted from GILTI. The benefit of the HTE is retroactive to the Company's tax years starting with the tax year ended December 31, 2018 and was recognized in 2020. Income Tax Provision The income tax provision consisted of the following:
| Year Ended December 31,
(in millions) | 2020 |  | 2019 |  | 2018
Current provision |  |  |  |  |
Federal | $ | 55.1 |  |  | $ | 50.4 |  |  | $ | (14.6) |
State | 17.3 |  |  | 11.9 |  |  | 1.1 |
Foreign | 38.8 |  |  | 19.5 |  |  | 57.1 |
Total current | $ | 111.2 |  |  | $ | 81.8 |  |  | $ | 43.6 |
Deferred provision |  |  |  |  |
Federal | $ | (3.4) |  |  | $ | (10.8) |  |  | $ | 11.4 |
State | (3.4) |  |  | (8.0) |  |  | (4.5) |
Foreign | (1.8) |  |  | 11.7 |  |  | (0.9) |
Total deferred | (8.6) |  |  | (7.1) |  |  | 6.0 |
Total income tax provision | $ | 102.6 |  |  | $ | 74.7 |  |  | $ | 49.6 |
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. Deferred Income Tax Assets and Liabilities The net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets, determined using the income tax rate applicable to each period in which those items will reverse, consist of the following:
| December 31,
(in millions) | 2020 |  | 2019
Deferred tax assets: |  |  |
Stock-based compensation | $ | 21.6 |  |  | $ | 13.9 |
Operating lease obligations | 92.9 |  |  | 67.2 |
Accrued expenses and other | 55.1 |  |  | 62.5 |
Net operating losses, foreign tax credits and other tax attribute carryforwards | 50.6 |  |  | 43.1 |
Inventories | 11.1 |  |  | 8.2 |
Transaction costs | 6.0 |  |  | 6.6 |
Property, plant and equipment | 2.5 |  |  | 2.9 |
Total deferred tax assets | 239.8 |  |  | 204.4 |
Valuation allowances | (33.5) |  |  | (30.0) |
Total net deferred tax assets | $ | 206.3 |  |  | $ | 174.4 |
Deferred tax liabilities: |  |  |
Intangible assets | $ | (150.7) |  |  | $ | (156.4) |
Operating lease right-of-use assets | (82.3) |  |  | (63.9) |
Property, plant and equipment | (34.3) |  |  | (36.9) |
Accrued expenses and other | (15.9) |  |  | (5.2) |
Total deferred tax liabilities | (283.2) |  |  | (262.4) |
Net deferred tax liabilities | $ | (76.9) |  |  | $ | (88.0) |
Tax Attributes Included in Deferred Tax Assets Included in the calculation of the Company's deferred tax assets are the following gross income tax attributes available at December 31, 2020 and 2019, respectively:
(in millions) | 2020 |  | 2019
State net operating losses (“SNOLs”) | $ | 157.0 |  |  | $ | 165.7 |
U.S. federal foreign tax credits (“FTCs”) | 12.2 |  |  | 12.2 |
U.S. state income tax credits ("SITCs") | 4.9 |  |  | 5.3 |
Foreign net operating losses (“FNOLs”) | 54.1 |  |  | 36.9 |
Charitable contribution carryover ("CCCs") | 23.6 |  |  | 32.9 |
The SNOLs, FTCs, SITCs, FNOLs and CCCs generally expire in 2021, 2023, 2023, 2023 and 2021, 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, the CCCs and certain other deferred tax assets related to certain foreign operations (together, the "Tax Attributes"). The Company has established a valuation allowance for certain deferred tax assets (including the Tax Attributes) where it is more-likely-than-not such deferred tax assets will not be realized. 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 its assessment regarding the recoverability of its deferred tax assets. The Company has recorded valuation allowances against $88.1 million of the SNOLs, $12.2 million of the FTCs and $1.4 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. Deferred Tax Liability for Undistributed Foreign Earnings No additional income taxes have been provided for undistributed foreign earnings not otherwise subject to 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, 2020, 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 its two 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. With respect to the Canadian subsidiaries, Canadian income tax withholding applies to any distribution each subsidiary makes to its foreign parent company. The Company concluded that at December 31, 2020 each Canadian subsidiary has accumulated earnings in excess of its operating needs and as such Canadian withholding tax has been accrued on such excess. The amount accrued is not material. Uncertain Income Tax Positions 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. Uncertain income tax liabilities reflect the Company's best judgement of the facts, circumstances and information available through December 31, 2020. Uncertain income tax liabilities are derived using the cumulative probability approach and applying the tax technical requirements applicable to U.S. and other international tax and transfer pricing requirements. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions) |
Balance as of December 31, 2018 | $ | 103.8 |
Additions based on tax positions related to 2019 | — |
Additions for tax positions of prior years | 0.7 |
Expiration of statutes of limitations | — |
Settlements of uncertain tax positions with tax authorities | — |
Balance as of December 31, 2019 | $ | 104.5 |
Additions based on tax positions related to 2020 | — |
Additions for tax positions of prior years | 14.1 |
Expiration of statutes of limitations | — |
Settlements of uncertain tax positions with tax authorities | — |
Balance as of December 31, 2020 | $ | 118.6 |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2020, 2019 and 2018 would be $106.0 million, $96.8 million and $91.4 million, respectively. During the years ended December 31, 2020, 2019 and 2018, the Company recognized $1.0 million, $1.3 million and $6.4 million in interest and penalties, respectively, in income tax expense. The Company had $74.9 million, $67.9 million and $66.3 million of accrued interest and penalties at December 31, 2020, 2019 and 2018, respectively. There were no significant changes in any uncertain tax positions during the three or twelve month periods ended December 31, 2020. 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 Danish Tax Matter discussed below which the Company believes will be settled commensurate with the amount previously accrued. 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 Danish Tax Matter 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") for tax years 2001 through current. 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. 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 (the "Settlement") for tax years 2001 through 2011 (the "Settlement Years"). The Company and SKAT are currently discussing the appropriate administrative process required to implement the Settlement as it relates to the computation of interest. During this process, the Company continues to maintain an uncertain income tax liability on its balance sheet for tax and interest under the terms of the Settlement. The tax years 2012 through 2020 (the "2012 to Current Period") are currently the subject of the Advance Pricing Agreement procedure ("APA") request filed by the Company with SKAT and the IRS in the third quarter of 2018. As part of the APA, the IRS is negotiating on the Company’s behalf directly with SKAT for a mutually agreeable royalty due from the U.S. subsidiary to the Danish Subsidiary. The APA negotiation is ongoing and is not expected to conclude in the near term. The Company anticipates such negotiations will result in additional income tax in Denmark and a reduction of income tax in the U.S. Consequently, the Company maintains both an uncertain income tax liability for its estimate of the potential Danish income tax and a deferred tax asset for the associated United States tax benefit for the 2012 to Current Period. The uncertain income tax liabilities for the Danish Tax Matter Settlement Years and for the 2012 to Current Period are reflected in the Company Consolidated Balance Sheet as per below:
|  |  |  | December 31, 2020 |  | December 31, 2019
Period |  | Balance Sheet Presentation |  | DKK |  | USD |  | DKK |  | USD
Settlement Years |  | Accrued expenses and other current liabilities |  | 847.3 |  | $ | 139.1 |  |  | 847.3 |  | $ | 127.2 |
2012 to Current Period |  | Other non-current liabilities |  | 295.0 |  | 48.4 |  | 263.3 |  | 39.5
|  | Total |  | 1,142.3 |  | $ | 187.5 |  |  | 1,110.6 |  | $ | 166.7 |
The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish tax for the 2012 to Current Period at December 31, 2020 and 2019 is approximately $12.0 million and $7.2 million, respectively. SKAT has issued income tax assessments for the years 2012 through 2014 and has proposed assessments for the years 2015 through 2017, in each case asserting an increase in the royalty earned by the Danish subsidiary. The Company expects to continue to receive income tax assessments from SKAT for the tax years 2018 and forward, asserting the royalties paid by the U.S. to the Danish subsidiary were too low, which the Company disputes. 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. In July 2016, the Company paid a deposit to SKAT in the amount of approximately DKK 615.2 million related to the Settlement. In addition, during the three months ended September 30, 2020, the Company made a tax deposit with SKAT of DKK 76.8 million applicable to a tax assessment by SKAT for the year 2014. Also, during the three months ended March 31, 2020 the Company made a tax deposit with SKAT of DKK 134.0 million applicable to a tax assessment by SKAT for the years 2012 and 2013. The Company is contesting all three assessments. The above Value Added Tax refunds withheld and the tax deposits made are reflected in the Company's Consolidated Balance Sheet (translated at the exchange rates on December 31, 2020 and December 31, 2019), as per below:
| December 31, 2020 |  | December 31, 2019
| DKK |  | USD |  | DKK |  | USD
Prepaid expenses and other current assets | 847.3 |  | $ | 139.1 |  |  | 847.3 |  | $ | 127.2 |
Other non-current assets | 333.6 |  | 54.8 |  |  | 122.8 |  | 18.4 |
Total | 1,180.9 |  |  | $ | 193.9 |  |  | 970.1 |  | $ | 145.6 |
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 $20.5 million and $18.8 million using the applicable exchange rates at December 31, 2020 and December 31, 2019). 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. If the Company is not successful in resolving the Danish Tax Matter for the 2012 to Current Period or there is a change in facts and circumstances, the Company may be required to further increase its uncertain income tax position associated with this matter, or decrease its deferred tax asset, also related to this matter, which could have a material impact on the Company's reported earnings.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 + Details
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