Income Taxes

3 Months Ended

Mar. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company's effective tax rate for the three months ended March 31, 2023 and 2022 was 22.2% and 22.5%, respectively. The Company's effective tax rate for the three months ended March 31, 2023 and 2022 differed from the U.S. federal statutory rate of 21.0% principally due to subpart F income (i.e., global intangible low-taxed income, or "GILTI," earned by the Company's foreign subsidiaries), foreign income tax rate differentials, state and local taxes, changes in the Company's uncertain tax positions, the excess tax benefit related to stock-based compensation and certain other permanent items.

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 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 November 2018, the Company entered into the Advanced Pricing Agreement program (the "APA Program") requesting SKAT and the U.S. Internal Revenue Service ("IRS") to directly negotiate a mutually acceptable agreement on the Danish Tax Matter.

During the quarter ended December 31, 2022, pursuant to the negotiations described above with respect to the APA Program, SKAT and the IRS preliminarily concluded on a mutually acceptable framework ("Preliminary Framework") to resolve the Danish Tax Matter for the 2012 to 2022 tax years. 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 2022 tax years as well as the associated deferred tax asset for the U.S. correlative benefit for such periods. During the quarter ended March 31, 2023, the Company began discussions individually with both SKAT and the IRS regarding the implementation of the Preliminary Framework. In this regard, it is expected that the Preliminary Framework will be finalized into a definitive agreement in 2023. Starting January 1, 2023 the Company adopted the terms of the Preliminary Framework in the calculation of the royalty described above. As such, there is no uncertain income tax liability or deferred tax asset associated with 2023.

The uncertain income tax liability for the Danish Tax Matter for the years 2012 through 2022 (the "2012 to Current Period") at March 31, 2023 and December 31, 2022 is approximately $38.3 million and $37.8 million, respectively, and is reflected in the Company's Condensed Consolidated Balance Sheet in accrued expenses and other current liabilities.

The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish tax for the 2012 to Current Period at March 31, 2023 and December 31, 2022 is approximately $21.6 million for both periods.

As of March 31, 2023, the Company had made the following tax deposits related to assessments received by SKAT for the Danish Tax Matter for the years 2012 through 2016, which are reflected in the Company's Condensed Consolidated Balance Sheet in other current assets:

(in millions)	USD
VAT deposits remaining with SKAT	$	1.4
Deposit payments	58.0
Total	$	59.4

If the Company is not successful in concluding the Preliminary Framework for 2012 to Current Period or if there is a change in facts and circumstances as it relates to the Danish Tax Matter, 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.

There were no other significant changes in the Danish Tax Matter or other uncertain tax positions during the three months ended March 31, 2023.