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Income Taxes | 12 Months Ended
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Dec. 31, 2022
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, 2022, 2021 and 2020:
| Year Ended December 31,
(in millions) | 2022 |  | 2021 |  | 2020
Income before income taxes: |  |  |  |  |
United States | $ | 382.5 |  |  | $ | 602.5 |  |  | $ | 319.5 |
Rest of the world | 194.7 |  |  | 221.5 |  |  | 132.9 |
| $ | 577.2 |  |  | $ | 824.0 |  |  | $ | 452.4 |
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,
| 2022 |  | 2021 |  | 2020
(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 | $ | 121.2 |  |  | 21.0 | % |  | $ | 172.9 |  |  | 21.0 | % |  | $ | 95.0 |  |  | 21.0 | %
State income taxes, net of federal benefit | 12.5 |  |  | 2.2 | % |  | 21.0 |  |  | 2.6 | % |  | 9.9 |  |  | 2.2 | %
Foreign tax differential | 2.9 |  |  | 0.5 | % |  | 4.6 |  |  | 0.6 | % |  | 2.8 |  |  | 0.6 | %
Change in valuation allowances | 1.3 |  |  | 0.2 | % |  | 4.9 |  |  | 0.6 | % |  | 5.5 |  |  | 1.2 | %
Uncertain tax positions and interest | (19.2) |  |  | (3.3) | % |  | 6.5 |  |  | 0.8 | % |  | 0.5 |  |  | 0.1 | %
Subpart F income | — |  |  | — | % |  | — |  |  | — | % |  | 3.3 |  |  | 0.7 | %
Global Intangible Low-Taxed Income ("GILTI") | 3.2 |  |  | 0.5 | % |  | 1.5 |  |  | 0.2 | % |  | — |  |  | — |
GILTI High-Taxed Exception | — |  |  | — | % |  | — |  |  | — | % |  | (8.6) |  |  | (1.9) | %
Stock compensation | (13.8) |  |  | (2.4) | % |  | (8.1) |  |  | (1.0) | % |  | (10.9) |  |  | (2.4) | %
Nondeductible compensation | 14.6 |  |  | 2.5 | % |  | 5.1 |  |  | 0.6 | % |  | 3.7 |  |  | 0.8 | %
Permanent and other | (3.7) |  |  | (0.6) | % |  | (10.1) |  |  | (1.3) | % |  | 1.4 |  |  | 0.4 | %
Effective income tax provision | $ | 119.0 |  |  | 20.6 | % |  | $ | 198.3 |  |  | 24.1 | % |  | $ | 102.6 |  |  | 22.7 | %
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022, which includes a minimum tax equal to 15% of the adjusted financial statement income of certain corporations as well as a 1% excise tax on share buybacks, effective for tax years beginning in 2023. It is possible that the minimum tax could result in an additional tax liability over the regular federal corporate tax liability in a given year based on differences between book and taxable income (including as a result of temporary differences). Given its recent pronouncement, it is unclear at this time what, if any, impact the Inflation Reduction Act of 2022 will have on the Company's tax rate and financial results. We will continue to evaluate its impact as further information becomes available. Income Tax Provision The income tax provision consisted of the following:
| Year Ended December 31,
(in millions) | 2022 |  | 2021 |  | 2020
Current provision |  |  |  |  |
Federal | $ | 85.0 |  |  | $ | 109.9 |  |  | $ | 55.1 |
State | 18.3 |  |  | 24.5 |  |  | 17.3 |
Foreign | 26.2 |  |  | 52.8 |  |  | 38.8 |
Total current | $ | 129.5 |  |  | $ | 187.2 |  |  | $ | 111.2 |
Deferred provision |  |  |  |  |
Federal | $ | (7.7) |  |  | $ | 11.6 |  |  | $ | (3.4) |
State | (2.3) |  |  | 0.4 |  |  | (3.4) |
Foreign | (0.5) |  |  | (0.9) |  |  | (1.8) |
Total deferred | (10.5) |  |  | 11.1 |  |  | (8.6) |
Total income tax provision | $ | 119.0 |  |  | $ | 198.3 |  |  | $ | 102.6 |
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. 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) | 2022 |  | 2021
Deferred tax assets: |  |  |
Stock-based compensation | $ | 31.8 |  |  | $ | 30.1 |
Operating lease obligations | 147.5 |  |  | 137.6 |
Accrued expenses and other | 64.1 |  |  | 41.8 |
Net operating losses, foreign tax credits and other tax attribute carryforwards | 58.0 |  |  | 49.6 |
Inventories | 10.3 |  |  | 9.0 |
Transaction costs | 4.3 |  |  | 3.9 |
Property, plant and equipment | 9.7 |  |  | 12.9 |
Total deferred tax assets | 325.7 |  |  | 284.9 |
Valuation allowances | (42.3) |  |  | (42.6) |
Total net deferred tax assets | $ | 283.4 |  |  | $ | 242.3 |
Deferred tax liabilities: |  |  |
Intangible assets | $ | (174.0) |  |  | $ | (181.7) |
Operating lease right-of-use assets | (132.0) |  |  | (122.8) |
Property, plant and equipment | (60.0) |  |  | (37.1) |
Accrued expenses and other | (20.1) |  |  | (16.3) |
Total deferred tax liabilities | (386.1) |  |  | (357.9) |
Net deferred tax liabilities | $ | (102.7) |  |  | $ | (115.6) |
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, 2022 and 2021, respectively:
(in millions) | 2022 |  | 2021
State net operating losses ("SNOLs") | $ | 103.8 |  |  | $ | 114.9 |
U.S. federal foreign tax credits ("FTCs") | 10.6 |  |  | 12.2 |
U.S. state income tax credits ("SITCs") | 3.7 |  |  | 3.2 |
Foreign net operating losses ("FNOLs") | 63.6 |  |  | 50.6 |
Charitable contribution carryover ("CCCs") | 0.9 |  |  | 1.2 |
The SNOLs, FTCs, SITCs, FNOLs and CCCs generally begin to expire in 2023, 2023, 2031, 2023 and 2023, 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 $54.9 million of the SNOLs and $10.6 million of the FTCs. 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 As it relates to stock of the Company's top tier foreign subsidiaries in the hands of each such subsidiary's U.S. shareholder, at December 31, 2022, the book basis of each such subsidiary exceeds the tax basis in each such subsidiary. No income taxes have been provided for the book to tax basis differences (including undistributed foreign earnings) inherent in these entities except to the extent of certain earnings that have been previously subject to U.S. income tax ("PTEP"). During the three month period ended December 31, 2022, the Company recorded a deferred income tax liability associated with the PTEP of approximately $2.4 million. The $2.4 million is primarily attributable to the developments in the Danish Tax Matter, which is discussed below. As it relates to the book to tax basis difference with respect to the stock of each of the Company's second and 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, its two Canadian subsidiaries and its Mexican subsidiary, 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 and Mexican subsidiaries, Canadian and Mexican income tax withholding applies, respectively, to any distribution each such subsidiary makes to its foreign parent company. The Company concluded that at December 31, 2022 it is likely that the Canadian subsidiaries and the Mexican subsidiary will each make dividend distributions in the next twelve months. In each case, local country income tax withholding, i.e., Canada and Mexico, applies. Consequently at December 31, 2022 the Company has accrued approximately $0.9 million for such withholding tax. 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, 2022. 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, 2020 | $ | 118.6 |
Additions based on tax positions related to 2021 | 1.4 |
Additions for tax positions of prior years | 2.5 |
Expiration of statutes of limitations | — |
Settlements of uncertain tax positions with tax authorities | (77.2) |
Balance as of December 31, 2021 | $ | 45.3 |
Additions based on tax positions related to 2022 | 0.3 |
Additions for tax positions of prior years | 0.2 |
Expiration of statutes of limitations | (1.9) |
Reduction for tax positions of prior years | (4.9) |
Settlements of uncertain tax positions with tax authorities | — |
Balance as of December 31, 2022 | $ | 39.0 |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2022 and 2021 would be $17.6 million and $29.1 million, respectively. During the years ended December 31, 2022 and 2021, the Company recognized $(6.9) million and $3.2 million in interest and penalties in income tax (benefit) expense, respectively. The Company had $5.0 million and $15.7 million of accrued interest and penalties at December 31, 2022 and 2021, respectively. As discussed below, in the three months ended December 31, 2022, the Company reevaluated its position with respect to the Danish Tax Matter (defined below) related to 2012 to 2022. Such reevaluation resulted in a reduction of the Company’s liability for uncertain income tax position of approximately $(4.9) million, which is reflected in “Reduction for tax positions of prior years” in the table above. As also discussed below, during the three months ended June 30, 2021 the Company resolved the calculation of interest payable to the Danish Tax Authority ("SKAT") related to the settlement of the Danish Tax Matter (defined below) for the years 2001 through 2011 (the "Settlement Years"). As such, the Danish Tax Matter for the Settlement Years is considered closed. Consequently, the tax deposits previously with SKAT were offset against the uncertain income tax liability for the Settlement Years as reflected in the table above. 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 conclude within the parameters of the Preliminary Framework (defined below) reached between the U.S. Internal Revenue Service ("IRS)" and SKAT. With few exceptions, the Company is no longer subject to tax examinations by the U.S., state and local municipalities or non-U.S. jurisdictions for periods prior to 2012. 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 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 2012 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. In this regard, the tax years 2012 through 2022 (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 with respect to the royalty due from the U.S. subsidiary to the Danish subsidiary, and may include certain other charges required to be made between the U.S. subsidiary and the Danish subsidiary. With respect to the APA, during the quarter ended December 31, 2022, SKAT and the IRS preliminarily concluded on a mutually acceptable framework (“Preliminary Framework”) to resolve the Danish Tax Matter for the 2012 to Current Period. If ultimately agreed upon by the two tax authorities, the terms of the Preliminary Framework would extend to the years 2023 and 2024, as well. The Preliminary Framework is not a definitive agreement, but its terms provide updated definitive data for the Company to determine the potential Danish income tax exposure for the 2012 to Current Period as well as the associated deferred tax asset for the U.S. correlative benefit for such period. 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 U.S. tax benefit for the 2012 to Current Period. In this respect, during the three months ended December 31, 2022, the Company decreased the liability for uncertain income tax positions approximately $(12.3) million (including interest and penalty but excluding the impact of foreign exchange). The associated deferred tax asset for the U.S. correlative benefit position increased by approximately $2.4 million. The year-over-year change in the liability for the uncertain tax position is a decrease of approximately $(9.3) million (including interest and penalty, but excluding the impact of foreign exchange). The APA negotiation is ongoing. Pursuant to the Preliminary Framework, it is expected the APA will conclude in the next twelve months. During 2018, the Company reached agreements with both SKAT and the IRS with respect to the adjusted amount of royalties (the "Settlement") for the Settlement Years. During the three months ended June 30, 2021 the Company and SKAT resolved in all material respects the calculation of interest payable to SKAT (which had previously been under discussion with SKAT) related to the settlement of the Danish Tax Matters for Settlement Years. This resolution resulted in SKAT refunding substantially all of the excess tax deposits it was holding for the Settlement Years (all other aspects of the settlement of the Settlement Years had previously been agreed upon). As such, the Danish Tax Matter for the Settlement Years is considered in all material respects, closed. Consequently, the tax deposits previously with SKAT were applied to offset the uncertain income tax liability for the Settlement Years. It is expected that taxes remaining on deposit with SKAT after all taxes have been applied to the 2012 to Current Period years will be sufficient to offset any Danish income tax liability, including interest and penalty, for all years in the 2012 to Current Period that would arise as the result of the implementation of the Preliminary Framework. The uncertain income tax liabilities for the Danish Tax Matter for the 2012 to Current Period are reflected in the Company Consolidated Balance Sheet as per below:
|  |  |  | December 31, 2022 |  | December 31, 2021
Period |  | Balance Sheet Presentation |  | USD |  | USD
2012 to Current Period |  | Accrued expenses and other current liabilities |  | $ | 37.8 |  |  | $ | — |
2012 to Current Period |  | Other non-current liabilities |  | — |  |  | 50.1
|  | Total |  | $ | 37.8 |  |  | $ | 50.1 |
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, 2022 and 2021 is approximately $21.6 million and $15.5 million, respectively. If the Preliminary Framework is not ultimately concluded by IRS and SKAT, 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. SKAT has issued income tax assessments for the years 2012 through 2016. The Company is contesting all five assessments. Further, SKAT has proposed an assessment for the year 2017. For each of the years 2012 through 2017, SKAT is asserting an increase in the royalty earned by the Danish subsidiary. The aforementioned assessments would be superseded by any final agreement between SKAT and the IRS for the 2012 to Current Period years pursuant to the previously mentioned Preliminary Framework. From June 2012 through December 31, 2018, SKAT withheld Value Added Tax ("VAT") refunds otherwise owed to the Company, pending resolution of the Danish Tax Matter. After application of the VAT refunds to the liability associated with the Settlement Years, the remaining VAT on deposit with SKAT is approximately $1.5 million. As of December 31, 2022, the Company made the following tax deposits with SKAT related to the Danish Tax Matter for the years 2012 through 2016:
| USD
VAT deposits remaining with SKAT | $ | 1.4 |
Payments during the three months ended March 31, 2020 | 19.3
Payments during the three months ended September 30, 2020 | 11.1 |
Payments during the three months ended September 30, 2021 | 14.0 |
Payments during the three months ended December 31, 2022 | 13.0 |
Total | $ | 58.8 |
The above VAT refunds withheld and the tax deposits made are reflected in the Company's Consolidated Balance Sheets, as per below:
| December 31, 2022 |  | December 31, 2021
| USD |  | USD
Prepaid expenses and other current assets | $ | 58.8 |  |  | $ | — |
Other non-current assets | — |  |  | 48.6 |
Total | $ | 58.8 |  |  | $ | 48.6 |

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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 https://asc.fasb.org/extlink&oid=121826272&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 https://asc.fasb.org/extlink&oid=122134291&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 https://asc.fasb.org/extlink&oid=121826272&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 https://asc.fasb.org/extlink&oid=122134291&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 https://asc.fasb.org/extlink&oid=121826272&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 https://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 https://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 https://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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