What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-07 · 222 added, 158 removed, 531 unchanged (42% of the section changed)

4 unchanged sentences

($ in millions, except per common share amounts)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Net sales $ 665.2 $ 722.8 $ 1,487.6 $ 1,413.7

3 unchanged sentences

General, administrative and other expenses 82.4 72.7 163.0 143.4

Equity loss (income) in earnings of unconsolidated affiliates 0.2 ( 2.9 )

Equity income in earnings of unconsolidated affiliates ( 5.0 ) ( 3.6 ) ( 4.8 ) ( 6.5 )

Operating income 53.4 81.0 158.7 141.5

6 unchanged sentences

Income from continuing operations 23.1 42.7 84.1 71.7

Loss from discontinued operations, net of tax ( 1.2 ) ( 0.4 )

Income (loss) from discontinued operations, net of tax 0.1 ( 1.2 ) ( 1.1 ) ( 1.6 )

Net income before non-controlling interests 23.2 41.5 83.0 70.1

Net income attributable to non-controlling interests 0.1 0.2

Net income (loss) attributable to non-controlling interests 0.2 ( 0.1 ) 0.3 0.1

Net income attributable to Tempur Sealy International, Inc.

15 unchanged sentences

($ in millions)

Three Months Ended March 31,

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Net income before non-controlling interests $ 23.2 $ 41.5 $ 83.0 $ 70.1

1 unchanged sentence

Foreign currency translation adjustments 10.7 3.0 ( 12.3 ) 7.0

Other comprehensive (loss) income, net of tax ( 23.0 ) 4.0

Other comprehensive income (loss), net of tax 10.7 3.0 ( 12.3 ) 7.0

Comprehensive income 33.9 44.5 70.7 77.1

Comprehensive income attributable to non-controlling interests 0.1 0.2

Comprehensive income (loss) attributable to non-controlling interests 0.2 ( 0.1 ) 0.3 0.1

Comprehensive income attributable to Tempur Sealy International, Inc.

5 unchanged sentences

($ in millions)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

ASSETS (Unaudited)

31 unchanged sentences

($ in millions)

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Tempur Sealy International, Inc.

2 unchanged sentences

Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings

Balance as of March 31, 2020

99.2 $ 1.0 47.7 $ ( 2,026.5 ) $ 578.7 $ 1,756.5 $ ( 110.7 ) $ 9.4 $ 208.4

Net income 23.0 23.0

Net income attributable to non-controlling interests 0.2 0.2

Dividend paid to non-controlling interest in subsidiary ( 0.1 ) ( 0.1 )

Foreign currency adjustments 10.7 10.7

Exercise of stock options — — 0.2 0.2

Issuances of PRSUs, RSUs, and DSUs

— 0.4 ( 0.4 ) —

Treasury stock repurchased - PRSU/RSU/DSU releases — ( 0.2 ) ( 0.2 )

Amortization of unearned stock-based compensation

Balance, June 30, 2020

99.2 $ 1.0 47.7 $ ( 2,026.3 ) $ 586.0 $ 1,779.5 $ ( 100.0 ) $ 9.5 $ 249.7

Three Months Ended June 30, 2019

Tempur Sealy International, Inc.

Stockholders' Equity

Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest in Subsidiaries Total Stockholders' Equity

Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings

Balance as of March 31, 2019

99.2 $ 1.0 44.5 $ ( 1,736.7 ) $ 537.1 $ 1,542.2 $ ( 91.3 ) $ 1.2 $ 253.5

Net income 41.6 41.6

Net loss attributable to non-controlling interest ( 0.1 ) ( 0.1 )

Foreign currency adjustments 3.0 3.0

Exercise of stock options ( 0.1 ) 0.9 2.2 3.1

Issuances of PRSUs, RSUs, and DSUs

— 0.3 ( 0.3 ) —

Treasury stock repurchased

— ( 1.5 ) ( 1.5 )

Treasury stock repurchased - PRSU/RSU/DSU releases — ( 0.3 ) ( 0.3 )

Amortization of unearned stock-based compensation

Balance, June 30, 2019

99.2 $ 1.0 44.4 $ ( 1,737.3 ) $ 545.6 $ 1,583.8 $ ( 88.3 ) $ 1.1 $ 305.9

See accompanying Notes to Condensed Consolidated Financial Statements .

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(in millions) (unaudited)

Six Months Ended June 30, 2020

Tempur Sealy International, Inc.

Stockholders' Equity

Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interests in Subsidiaries Total Stockholders' Equity

Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings

Balance as of December 31, 2019

2 unchanged sentences

Net income attributable to non-controlling interests 0.3 0.3

Adoption of accounting standard effective January 1, 2020, net of tax ( 6.5 ) ( 6.5 )

Acquisition of non-controlling interest in subsidiary 8.4 8.4

Dividend paid to non-controlling interest in subsidiary ( 0.1 ) ( 0.1 )

Foreign currency adjustments ( 12.3 ) ( 12.3 )

Adoption of accounting standard effective January 1, 2020, net of tax ( 6.5 ) ( 6.5 )

Exercise of stock options — 0.3 1.2 1.5

5 unchanged sentences

Amortization of unearned stock-based compensation

Balance, March 31, 2020

Balance, June 30, 2020

99.2 $ 1.0 47.7 $ ( 2,026.3 ) $ 586.0 $ 1,779.5 $ ( 100.0 ) $ 9.5 $ 249.7

Three Months Ended March 31, 2019

Six Months Ended June 30, 2019

Tempur Sealy International, Inc.

15 unchanged sentences

Amortization of unearned stock-based compensation

Balance, March 31, 2019

Balance, June 30, 2019

99.2 $ 1.0 44.4 $ ( 1,737.3 ) $ 545.6 $ 1,583.8 $ ( 88.3 ) $ 1.1 $ 305.9

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

Three Months Ended

($ in millions) (unaudited)

Six Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:

1 unchanged sentence

Loss from discontinued operations, net of tax 1.1 1.6

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:

Depreciation and amortization 47.5 43.5

4 unchanged sentences

Dividends received from unconsolidated affiliates 1.5 2.3

Equity loss (income) in earnings of unconsolidated affiliates 0.2 ( 2.9 )

Equity income in earnings of unconsolidated affiliates ( 4.8 ) ( 6.5 )

Foreign currency adjustments and other 1.0 ( 6.3 )

4 unchanged sentences

Acquisitions, net of cash acquired ( 37.9 ) ( 17.1 )

Debtor-in-possession financing arrangement — ( 9.5 )

Other 0.1 10.3

5 unchanged sentences

Treasury stock repurchased ( 199.5 ) ( 5.5 )

Payments of deferred financing costs ( 1.6 ) ( 0.1 )

Repayments of finance lease obligations and other ( 6.0 ) ( 3.3 )

Net cash provided by financing activities from continuing operations 188.1 11.0

Net cash provided by (used in) financing activities from continuing operations 1.4 ( 4.0 )

Net cash provided by (used in) continuing operations 84.6 ( 4.8 )

32 unchanged sentences

The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have control, and consolidation is not otherwise required.

The Company's carrying value in its equity method investments of $ 22.1 million and $ 22.5 million at March 31, 2020 and December 31, 2019, respectively, is recorded in other non-current assets within the accompanying Condensed Consolidated Balance Sheets.

The Company's carrying value in its equity method investments of $ 24.8 million and $ 22.5 million at June 30, 2020 and December 31, 2019, respectively, is recorded in other non-current assets within the accompanying Condensed Consolidated Balance Sheets.

The Company’s equity in the net income and losses of these investments is reported in equity income in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income.

7 unchanged sentences

Under ASU 2017-04, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting units' fair value, not to exceed the total amount of goodwill for the reporting unit.

Adoption of this guidance did not have a material impact on the Company's financial statements.

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill for the reporting unit.

Adoption of this guidance did not have an impact on the Company's financial statements.

Credit Losses .

10 unchanged sentences

Inventories are stated at the lower of cost and net realizable value, determined by the first-in, first-out method , and consist of the following:

March 31, December 31,

June 30, December 31,

(in millions) 2020 2019

9 unchanged sentences

Accrued sales returns are included in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.

The Company had the following activity for sales returns from December 31, 2019 to March 31, 2020:

The Company had the following activity for sales returns from December 31, 2019 to June 30, 2020:

(in millions)

2 unchanged sentences

Returns charged to accrual ( 49.3 )

Balance as of March 31, 2020 $ 38.4

As of March 31, 2020 and December 31, 2019, $ 25.0 million and $ 26.2 million of accrued sales returns are included as a component of accrued expenses and other current liabilities and $ 13.4 million and $ 13.1 million of accrued sales returns are included in other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.

Balance as of June 30, 2020 $ 41.3

As of June 30, 2020 and December 31, 2019, $ 27.9 million and $ 26.2 million of accrued sales returns are included as a component of accrued expenses and other current liabilities and $ 13.4 million and $ 13.1 million of accrued sales returns are included in other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.

(e) Warranties .

7 unchanged sentences

Tempur-Pedic pillows have a warranty term of 3 years, non-prorated.

The Company had the following activity for its accrued warranty expense from December 31, 2019 to March 31, 2020:

The Company had the following activity for its accrued warranty expense from December 31, 2019 to June 30, 2020:

(in millions)

2 unchanged sentences

Warranties charged to accrual ( 10.6 )

Balance as of March 31, 2020 $ 41.3

As of March 31, 2020 and December 31, 2019, $ 19.1 million and $ 19.4 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities, respectively.

Other non-current liabilities included $ 22.2 million of accrued warranty expense as of March 31, 2020 and December 31, 2019 in the Company’s accompanying Condensed Consolidated Balance Sheets.

Balance as of June 30, 2020 $ 40.4

As of June 30, 2020 and December 31, 2019, $ 17.5 million and $ 19.4 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $ 22.9 million and $ 22.2 million of accrued warranty expense is included in other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.

TEMPUR SEALY INTERNATIONAL, INC.

5 unchanged sentences

Other factors considered include historical write-off experience, current economic conditions and also factors such as customer credit, past transaction history with the customer and changes in customer payment terms.

The Company had the following activity for its allowance for credit losses from December 31, 2019 to March 31, 2020:

The Company had the following activity for its allowance for credit losses from December 31, 2019 to June 30, 2020:

(in millions)

3 unchanged sentences

Write-offs charged against the allowance ( 13.4 )

Balance as of March 31, 2020

Balance as of June 30, 2020

(2) Net Sales

The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31, 2020 Three Months Ended March 31, 2019

Three Months Ended June 30, 2020 Six Months Ended June 30, 2020

(in millions) North America International Consolidated North America International Consolidated

12 unchanged sentences

Net sales $ 570.5 $ 94.7 $ 665.2 $ 1,247.7 $ 239.9 $ 1,487.6

(3) Discontinued Operations

The Company sold its operations in the Latin American region in 2018.

The operating results from these divested businesses and subsequent adjustments related to ongoing assessments and activities of certain retained liabilities and tax items are reflected within discontinued operations for all periods presented.

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

Components of amounts reflected in the Condensed Consolidated Statements of Income related to discontinued operations are presented in the following table for each of the periods ended March 31.

Three Months Ended

(in millions) 2020 2019

Three Months Ended June 30, 2019 Six Months Ended June 30, 2019

(in millions) North America International Consolidated North America International Consolidated

Wholesale $ 528.5 $ 103.7 $ 632.2 $ 1,030.3 $ 217.8 $ 1,248.1

Direct 59.6 31.0 90.6 101.8 63.8 165.6

Net sales $ 588.1 $ 134.7 $ 722.8 $ 1,132.1 $ 281.6 $ 1,413.7

Cost of sales — 0.2

Gross profit — —

Selling and marketing expenses — 0.1

General, administrative and other expenses 1.2 0.6

Operating loss ( 1.2 ) ( 0.7 )

Interest income, net and other — ( 0.3 )

Loss from discontinued operations before income taxes ( 1.2 ) ( 0.4 )

Income tax provision — —

Loss from discontinued operations, net of tax $ ( 1.2 ) $ ( 0.4 )

North America International Consolidated North America International Consolidated

Bedding $ 554.2 $ 108.4 $ 662.6 $ 1,068.6 $ 223.8 $ 1,292.4

Other 33.9 26.3 60.2 63.5 57.8 121.3

Net sales $ 588.1 $ 134.7 $ 722.8 $ 1,132.1 $ 281.6 $ 1,413.7

North America International Consolidated North America International Consolidated

Geographical region

United States $ 533.7 $ — $ 533.7 $ 1,030.9 $ — $ 1,030.9

Canada 54.4 — 54.4 101.2 — 101.2

International — 134.7 134.7 — 281.6 281.6

Net sales $ 588.1 $ 134.7 $ 722.8 $ 1,132.1 $ 281.6 $ 1,413.7

(3) Acquisitions

38 unchanged sentences

Foreign currency translation and other ( 2.8 ) 1.3 ( 1.5 )

Balance as of March 31, 2020 $ 598.3 $ 155.3 $ 753.6

Balance as of June 30, 2020 $ 600.5 $ 157.0 $ 757.5

TEMPUR SEALY INTERNATIONAL, INC.

2 unchanged sentences

Debt for the Company consists of the following:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

(in millions, except percentages) Amount Rate Amount Rate Maturity Date

1 unchanged sentence

Term A Facility $ 414.4 (1) $ 425.0 (2) October 16, 2024

364-Day Term Loan 200.0 (3) — (3) May 12, 2021

Revolver — (1) — (2) October 16, 2024

10 unchanged sentences

Total long-term debt, net $ 1,497.2 $ 1,502.6

(1) Interest at LIBOR plus applicable margin of 1.25 % as of March 31, 2020.

(1) Interest at LIBOR plus applicable margin of 1.375 % as of June 30, 2020.

(2) Interest at LIBOR plus applicable margin of 1.625 % as of December 31, 2019.

(3) Interest at base rate plus applicable margin of 1.375 % per annum or a eurocurrency rate (subject to a 1.0 % floor) plus applicable margin of 2.375 % per annum.

(4) Interest at one month LIBOR index plus 80 basis points.

1 unchanged sentence

Refer to Note 6, "Leases".

As of March 31, 2020, the Company was in compliance with all applicable debt covenants.

As of June 30, 2020, the Company was in compliance with all applicable debt covenants.

2019 Credit Agreement

2 unchanged sentences

The 2019 Credit Agreement has a $ 60.0 million sub-facility for the issuance of letters of credit.

As of March 31, 2020, the Company had $ 300.4 million in outstanding borrowings under its revolving credit facility.

Availability as of March 31, 2020 was further reduced by $ 22.7 million for outstanding letters of credit, resulting in remaining availability of $ 101.9 million.

Borrowings under the 2019 Credit Agreement will generally bear interest, at the election of Tempur Sealy International and the subsidiary borrowers, at either (i) Base Rate plus the applicable margin or (ii) LIBOR plus the applicable margin.

For the revolving credit facility and the term loan facility (a) the initial applicable margin for Base Rate advances was 0.625 % per annum and the initial applicable margin for LIBOR advances was 1.625 % per annum, and (b) following the delivery of financial statements for the fiscal quarter ending December 31, 2019, such applicable margins will be determined by a pricing grid based on the consolidated total net leverage ratio of the Company.

Obligations under the 2019 Credit Agreement are guaranteed by the Company’s existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions and are secured by a security interest in substantially all of Tempur Sealy International’s and the other subsidiary borrowers’ domestic assets and the domestic assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0 % of the equity interests of each subsidiary owned by the Company or a subsidiary guarantor that is a domestic entity (subject to certain limited exceptions) and 65.0 % of the voting equity interests of any direct first tier foreign entity owned by the Company or a subsidiary guarantor.

As of June 30, 2020, total availability under the revolving credit facility was $ 423.9 million after a $ 1.1 million reduction for outstanding letters of credit.

On May 13, 2020, the Company and certain of its subsidiaries entered into an amendment to the existing 2019 Credit Agreement.

The amendment provided for a new 364-day $ 200.0 million term loan (the "364-Day Loan").

The Company used the proceeds of the 364-Day Loan to repay borrowings under the existing $ 425.0 million revolving credit facility and to pay fees and expenses in connection with the amendment.

The 364- Day Loan bears interest, at the borrower’s option, at a base rate plus a margin of 1.375 % per annum or a eurocurrency rate (subject to a 1.0 % floor) plus a margin of 2.375 % per annum.

In addition, for so long as the 364-Day Loan remains outstanding, the Company is subject to certain additional restrictions under the covenants provided for in the Credit Agreement, including, but not limited to, the Company's ability to repurchase shares and make certain investments.

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The 2019 Credit Agreement requires compliance with certain financial covenants providing for maintenance of a minimum consolidated interest coverage ratio, maintenance of a maximum consolidated total net leverage ratio and maintenance of a maximum consolidated secured net leverage ratio.

The consolidated total net leverage ratio is calculated using consolidated indebtedness less netted cash (as defined below).

Consolidated indebtedness includes debt recorded on the Condensed Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding in excess of $ 40.0 million and other short-term debt.

The Company is allowed to subtract from consolidated indebtedness an amount equal to 100.0 % of the domestic and foreign unrestricted cash ("netted cash"), the aggregate of which cannot exceed $ 200.0 million at the end of the reporting period.

As of March 31, 2020, netted cash was $ 195.9 million.

The 2019 Credit Agreement contains certain customary negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, transactions with affiliates, use of proceeds, prepayments of certain indebtedness, entry into burdensome agreements and changes to governing documents.

The 2019 Credit Agreement also contains certain customary affirmative covenants and events of default, including upon a change of control.

The Company is required to pay a commitment fee on the unused portion of the revolving credit facility, which initially will be 0.25 % per annum and following the delivery of financial statements for the fiscal quarter ending December 31, 2019, such fees as determined by a pricing grid based on the consolidated total net leverage ratio of the Company.

As of March 31, 2020, the commitment fee was 0.175 %.

This unused commitment fee is payable quarterly in arrears and on the date of termination or expiration of the commitments under the revolving credit facility.

The Company and the other borrowers also pay customary letter of credit issuance and other fees under the 2019 Credit Agreement.

The maturity date of the 2019 Credit Agreement is October 16, 2024.

Amounts under the revolving credit facility may be borrowed, repaid and re-borrowed from time to time until the maturity date.

The term loan facility is subject to quarterly amortization as set forth in the 2019 Credit Agreement.

In addition, the term loan facility is subject to mandatory prepayment in connection with certain debt issuances, asset sales and casualty events, subject to certain reinvestment rights.

Voluntary prepayments and commitment reductions under the 2019 Credit Agreement are permitted at any time without payment of any prepayment premiums.

Securitized Debt

On April 12, 2017, the Company and certain of its subsidiaries entered into a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended, the "Accounts Receivable Securitization").

On April 5, 2019, the Company and its subsidiaries entered into a new amendment to the Accounts Receivable Securitization.

The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2021.

As of March 31, 2020, the Company had completely drawn on the outstanding availability under the Accounts Receivable Securitization.

The Company and certain of its subsidiaries are party to a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended, the "Accounts Receivable Securitization").

As of June 30, 2020, the Company had availability of $ 40.8 million under the Accounts Receivable Securitization.

Fair Value of Financial Instruments

4 unchanged sentences

The fair values of these material financial instruments are as follows:

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

2023 Senior Notes $ 457.5 $ 464.2

2026 Senior Notes 614.2 634.9

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Condensed Consolidated Balance Sheet as of March 31, 2020:

(in millions) March 31, 2020

The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Condensed Consolidated Balance Sheet as of June 30, 2020 and December 31, 2019:

(in millions) June 30, 2020 December 31, 2019

Operating lease assets Operating lease right-of-use assets $ 281.6 $ 245.4

6 unchanged sentences

Total lease obligations $ 368.8 $ 320.3

The following table summarizes the classification of lease expense in the Company's Condensed Consolidated Statement of Income for the three months ended March 31, 2020:

Three Months Ended

(in millions) March 31, 2020

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table summarizes the classification of lease expense in the Company's Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019:

Three Months Ended Six Months Ended

June 30, June 30,

(in millions) 2020 2019 2020 2019

Operating lease expense:

6 unchanged sentences

Total lease expense $ 28.9 $ 25.7 $ 58.8 $ 47.8

The following table sets forth the scheduled maturities of lease obligations as of March 31, 2020:

The following table sets forth the scheduled maturities of lease obligations as of June 30, 2020:

(in millions) Operating Leases Finance Leases Total

Year Ended December 31,

2020 (excluding the three months ended March 31, 2020)

2020 (excluding the six months ended June 30, 2020)

$ 38.2 $ 6.9 $ 45.1

7 unchanged sentences

Present value of lease obligations $ 297.6 $ 71.2 $ 368.8

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table provides lease term and discount rate information related to operating and finance leases as of March 31, 2020:

March 31, 2020

The following table provides lease term and discount rate information related to operating and finance leases as of June 30, 2020:

June 30, 2020

Weighted average remaining lease term (years):

4 unchanged sentences

Finance leases 5.94 %

The following table provides supplemental information related to the Company's Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2020:

Three Months Ended

(in millions) March 31, 2020

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table provides supplemental information related to the Company's Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019:

Six Months Ended

(in millions) June 30, 2020 June 30, 2019

Cash paid for amounts included in the measurement of lease obligations:

5 unchanged sentences

(7) Stockholders' Equity

(a) Common and Preferred Stock.

Tempur Sealy International has 300.0 million authorized shares of common stock with $ 0.01 per share par value and 10.0 million authorized shares of preferred stock with $ 0.01 per share par value.

The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.

Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors out of funds legally available for that purpose.

In the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.

The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by the stockholders, to issue from time to time shares of preferred stock in one or more series.

Each such series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights.

(b) Treasury Stock.

As of March 31, 2020, the Company had approximately $ 131.3 million remaining under the existing share repurchase program initially authorized by the Board of Directors in 2016.

In February 2020, the Board of Directors authorized an increase, of over $ 190.0 million, to its existing share repurchase authorization of Tempur Sealy International's common stock to $ 300.0 million.

The Company repurchased 2.6 million and 15,731 shares, under the program, for approximately $ 187.5 million and $ 0.8 million during the three months ended March 31, 2020 and 2019, respectively.

The Company ceased all share repurchase activity in March 2020.

In addition, the Company acquired 0.1 million shares upon the vesting of certain restricted stock units ("RSUs"), which were withheld to satisfy tax withholding obligations during each of the three months ended March 31, 2020 and 2019.

The shares withheld were valued at the closing price of the stock on the New York Stock Exchange on the vesting date or first business day prior to vesting, resulting in approximately $ 11.8 million and $ 2.9 million in treasury stock acquired during the three months ended March 31, 2020 and 2019, respectively.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(a) Treasury Stock.

As of June 30, 2020, the Company had approximately $ 131.3 million remaining under the existing share repurchase program initially authorized by the Board of Directors in 2016.

In February 2020, the Board of Directors authorized an increase, of $ 194.2 million, to its existing share repurchase authorization of Tempur Sealy International's common stock to $ 300.0 million.

The Company did not repurchase shares under the program during the three months ended June 30, 2020.

The Company repurchased 24,170 shares under the program for approximately $ 1.5 million during the three months ended June 30, 2019.

The Company repurchased 2.6 million shares and 39,901 shares under the program for approximately $ 187.5 million and $ 2.3 million during the six months ended June 30, 2020 and 2019, respectively.

In addition, the Company acquired an insignificant amount of shares upon the vesting of certain restricted stock units ("RSUs"), which were withheld to satisfy tax withholding obligations during each of the three and six months ended June 30, 2020 and 2019.

The shares withheld were valued at the closing price of the stock on the New York Stock Exchange on the vesting date or first business day prior to vesting, resulting in approximately $ 0.2 million and $ 0.3 million in treasury stock acquired during the three months ended June 30, 2020 and 2019, respectively.

The Company acquired approximately $ 12.0 million and $ 3.2 million in treasury stock during the six months ended June 30, 2020 and 2019, respectively.

(b) Shareholder Rights Agreement.

On March 27, 2020, the Board of Directors authorized and declared a dividend distribution of one right (a "Right") for each outstanding share of common stock of the Company to stockholders of record at the close of business on April 7, 2020 (the “Record Date”).

4 unchanged sentences

The Rights expire at the close of business on March 26, 2021 or upon an earlier redemption or exchange as provided in the Rights Agreement.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

AOCL consisted of the following:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(in millions) 2020 2019 2020 2019

3 unchanged sentences

Foreign currency translation adjustments (1)

10.7 3.0 ( 12.3 ) 7.0

Balance at end of period $ ( 94.5 ) $ ( 84.7 ) $ ( 94.5 ) $ ( 84.7 )

3 unchanged sentences

Tax expense (2)

— — ( 0.1 ) —

Total other comprehensive income before reclassifications, net of tax $ — $ — $ — $ —

12 unchanged sentences

Accrued expenses and other current liabilities consisted of the following:

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

Taxes $ 138.6 $ 136.0

Other 89.6 90.8

Operating lease obligations 55.8 50.8

Wages and benefits 59.4 79.5

Operating lease obligations 58.3 50.8

Advertising 42.5 56.9

2 unchanged sentences

Rebates 6.6 13.6

Other 104.4 90.8

$ 455.2 $ 473.2

(9) Stock-Based Compensation

The Company’s stock-based compensation expense for the three months ended March 31, 2020 and 2019 included performance restricted stock units ("PRSUs"), non-qualified stock options, restricted stock units ("RSUs") and deferred stock units ("DSUs").

The Company’s stock-based compensation expense for the three and six months ended June 30, 2020 and 2019 included performance restricted stock units ("PRSUs"), non-qualified stock options, restricted stock units ("RSUs") and deferred stock units ("DSUs").

A summary of the Company’s stock-based compensation expense is presented in the following table:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in millions) 2020 2019 2020 2019

4 unchanged sentences

The Company grants PRSUs to executive officers and certain members of management.

During the first quarter of 2020, the Company granted PRSUs as a component of the long-term incentive plan.

Actual payout under the PRSUs is dependent upon the achievement of certain financial goals.

During 2017, the Company granted executive officers and certain members of management PRSUs if the Company achieves a certain level of adjusted earnings before interest, tax, depreciation and amortization ("Adjusted EBITDA") during four consecutive fiscal quarters as described below (the "2019 Aspirational Plan PRSUs").

Adjusted EBITDA is defined as the Company’s "Consolidated EBITDA" as such term is defined in the Company’s Credit Agreement.

The 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA in any four consecutive fiscal quarter period ending between (and including) March 31, 2018 and December 31, 2019 (the “First Designated Period”).

At the end of the First Designated Period, the Adjusted EBITDA targets were not met and one-half of the total 2019 Aspirational Plan PRSUs were forfeited.

The remaining one-half of the total 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA in any four consecutive fiscal quarter period ending between (and including) March 31, 2020 and December 31, 2020 (the "Second Designated Period").

If the highest Adjusted EBITDA in the Second Designated Period is $ 600.0 million then 66 % of the remaining 2019 Aspirational Plan PRSUs will vest;

if the Adjusted EBITDA is $ 650.0 million or more 100 % will vest;

if Adjusted EBITDA is between $ 600.0 million and $ 650.0 million then a pro rata portion will vest;

and if Adjusted EBITDA is below $ 600.0 million then all of the remaining 2019 Aspirational Plan PRSUs will be forfeited.

During 2017, the Company granted executive officers and certain members of management PRSUs if the Company achieves a certain level of adjusted earnings before interest, tax, depreciation and amortization as defined in the Company’s Credit Agreement ("Adjusted EBITDA per Credit Facility") during four consecutive fiscal quarters as described below (the "2019 Aspirational Plan PRSUs").

The 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA per Credit Facility in any four consecutive fiscal quarter period ending between (and including) March 31, 2018 and December 31, 2019 (the “First Designated Period”).

At the end of the First Designated Period, the Adjusted EBITDA per Credit Facility targets were not met and one-half of the total 2019 Aspirational Plan PRSUs were forfeited.

The remaining one-half of the total 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA per Credit Facility in any four consecutive fiscal quarter period ending between (and including) March 31, 2020 and December 31, 2020 (the "Second Designated Period").

If the highest Adjusted EBITDA per Credit Facility in the Second Designated Period is $ 600.0 million then 66 % of the remaining 2019 Aspirational Plan PRSUs will vest;

if the Adjusted EBITDA per Credit Facility is $ 650.0 million or more 100 % will vest;

if Adjusted EBITDA per Credit Facility is between $ 600.0 million and $ 650.0 million then a pro rata portion will vest;

and if Adjusted EBITDA per Credit Facility is below $ 600.0 million then all of the remaining 2019 Aspirational Plan PRSUs will be forfeited.

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The Company did not record any stock-based compensation expense related to the 2019 Aspirational Plan PRSUs during the three months ended March 31, 2020, as it was not probable that the Company would achieve the specified performance target for the Second Designated Period.

The Company did not record any stock-based compensation expense related to the 2019 Aspirational Plan PRSUs during the three and six months ended June 30, 2020, as it was not probable that the Company would achieve the specified performance target for the Second Designated Period.

The Company will continue to evaluate the probability of achieving the performance condition in future periods and record the appropriate expense if necessary.

4 unchanged sentences

(11) Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2020 and 2019 was 27.8 % and 36.8 %, respectively.

The Company's effective tax rate for the three months ended March 31, 2020 and 2019 differed from the U.S.

The Company’s effective tax rate for the three months ended June 30, 2020 and 2019 was 28.9 % and 27.0 %, respectively.

The Company's effective tax rate for the six months ended June 30, 2020 and 2019 was 28.1 % and 31.3 %, respectively.

The Company's effective tax rate for the three and six months ended June 30, 2020 and 2019 differed from the U.S.

federal statutory rate of 21.0% principally due to subpart F income (i.e., GILTI earned by the Company’s foreign subsidiaries), certain foreign income tax rate differentials, state and local taxes, changes in the Company’s uncertain tax positions, the excess tax deficiency (or benefit) related to stock-based compensation and certain other permanent items.

7 unchanged sentences

production process.

At March 31, 2020 and December 31, 2019, the Danish income tax liability recorded in the Company’s balance sheet for the periods 2001 through March 31, 2020 and December 31, 2019, respectively, is DKK 1,115.8 million (approximately $ 164.8 million using the exchange rate at March 31, 2020) and DKK 1,110.0 million (approximately $ 166.7 million using the exchange rate at December 31, 2019).

The liability at March 31, 2020 is included within the Company’s Condensed Consolidated Balance Sheet (translated at the exchange rate on March 31, 2020) as per below:

At June 30, 2020 and December 31, 2019, the Danish income tax liability recorded in the Company’s balance sheet for the periods 2001 through June 30, 2020 and December 31, 2019, respectively, is DKK 1,121.1 million and DKK 1,110.6 million, respectively (approximately $ 169.1 million and $ 166.7 million using the applicable exchange rates at June 30, 2020 and December 31, 2019, respectively).

The liability at June 30, 2020 and December 31, 2019 is included within the Company’s Condensed Consolidated Balance Sheet (translated at the exchange rate on June 30, 2020 and December 31, 2019) as per below:

June 30, 2020 December 31, 2019

DKK USD DKK USD

Accrued expenses and other current liabilities 847.3 $ 127.8 847.3 $ 127.2

1 unchanged sentence

Total 1,121.1 $ 169.1 1,110.6 $ 166.7

During the three months ended March 31, 2020 the Company made a tax deposit with SKAT of DKK 134.0 million applicable to a finalized tax assessment by SKAT for the years 2012 and 2013.

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 such assessment.

At March 31, 2020 and December 31, 2019, respectively the Company held on deposit with SKAT DKK 1,104.1 million (approximately $ 163.0 million using the applicable exchange rate at March 31, 2020) and DKK 970.1 million (approximately $ 145.6 million using the applicable exchange rate at December 31, 2019).

At June 30, 2020 and December 31, 2019, respectively, the Company held on deposit with SKAT DKK 1,104.1 million and DKK 970.1 million (approximately $ 166.5 million and $ 145.6 million using the applicable exchange rates at June 30, 2020 and December 31, 2019, respectively).

The deposit is for the satisfaction of the anticipated liability for both tax and interest once these matters are concluded.

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The deposit at March 31, 2020 is included within the Company’s Condensed Consolidated Balance Sheet (translated at the exchange rate on March 31, 2020) as per below:

Accrued expenses and other current liabilities $ 847.3 $ 125.1

Other non-current liabilities 256.8 37.9

The deposit at June 30, 2020 and December 31, 2019 is included within the Company’s Condensed Consolidated Balance Sheet (translated at the exchange rates on June 30, 2020 and December 31, 2019) as per below:

June 30, 2020 December 31, 2019

DKK USD DKK USD

Prepaid expenses and other current assets 847.3 $ 127.8 847.3 $ 127.2

Other non-current assets 256.8 38.7 122.8 18.4

Total 1,104.1 $ 166.5 970.1 $ 145.6

There were no other significant changes in the Danish Tax Matter or other uncertain tax positions during the three months ended March 31, 2020.

There were no significant changes in the Danish Tax Matter or other uncertain tax positions during the three or six months ended June 30, 2020.

(12) Earnings Per Common Share

The following table sets forth the components of the numerator and denominator for the computation of basic and diluted earnings per share for net income attributable to Tempur Sealy International.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(in millions, except per common share amounts) 2020 2019 2020 2019

Income from continuing operations, net of income attributable to non-controlling interest $ 60.9 $ 28.8

Income from continuing operations, net of income attributable to non-controlling interests $ 22.9 $ 42.8 $ 83.8 $ 71.6

Denominator for basic earnings per common share-weighted average shares 51.6 54.7 52.5 54.7

4 unchanged sentences

Diluted earnings per common share for continuing operations $ 0.44 $ 0.76 $ 1.58 $ 1.29

The Company excluded 0.2 million and 1.2 million shares for the three months ended March 31, 2020 and 2019, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive.

The Company excluded 1.3 million and 1.1 million shares for the three months ended June 30, 2020 and 2019, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive.

The Company excluded 0.8 million and 1.1 million shares issuable upon exercise of outstanding stock options for the six months ended June 30, 2020 and 2019, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive.

Holders of non-vested stock-based compensation awards do not have voting rights or rights to receive any dividends thereon.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(13) Business Segment Information

8 unchanged sentences

The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payable.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table summarizes total assets by segment:

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

North America $ 3,299.5 $ 3,142.9

4 unchanged sentences

The following table summarizes property, plant and equipment, net, by segment:

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

North America $ 369.0 $ 328.9

3 unchanged sentences

The following table summarizes operating lease right-of-use assets by segment:

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

North America $ 237.0 $ 202.0

2 unchanged sentences

Total operating lease right-of-use assets $ 281.6 $ 245.4

The following table summarizes segment information for the three months ended March 31, 2020:

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table summarizes segment information for the three months ended June 30, 2020:

(in millions) North America International Corporate Eliminations Consolidated

8 unchanged sentences

Capital expenditures 18.1 3.1 2.0 — 23.2

(1) Depreciation and amortization include stock-based compensation amortization expense.

(1) Depreciation and amortization includes stock-based compensation amortization expense.

The following table summarizes segment information for the three months ended June 30, 2019:

(in millions) North America International Corporate Eliminations Consolidated

Net sales $ 588.1 $ 134.7 $ — $ — $ 722.8

Inter-segment sales $ 0.9 $ 0.1 $ — $ ( 1.0 ) $ —

Inter-segment royalty expense (income) 1.0 ( 1.0 ) — — —

Gross profit 240.0 73.4 — — 313.4

Operating income (loss) 80.1 27.4 ( 26.5 ) — 81.0

Income (loss) from continuing operations before income taxes 78.6 23.2 ( 43.3 ) — 58.5

Depreciation and amortization (1)

$ 15.6 $ 3.5 $ 9.5 $ — $ 28.6

Capital expenditures 14.4 3.1 3.3 — 20.8

(1) Depreciation and amortization includes stock-based compensation amortization expense.

The following table summarizes segment information for the six months ended June 30, 2020:

(in millions) North America International Corporate Eliminations Consolidated

Net sales $ 1,247.7 $ 239.9 $ — $ — $ 1,487.6

Inter-segment sales $ 0.9 $ 0.1 $ — $ ( 1.0 ) $ —

Inter-segment royalty expense (income) 2.1 ( 2.1 ) — — —

Gross profit 493.4 129.6 — — 623.0

Operating income (loss) 170.8 36.2 ( 48.3 ) — 158.7

Income (loss) from continuing operations before income taxes 167.6 32.1 ( 82.7 ) — 117.0

Depreciation and amortization (1)

$ 36.2 $ 6.7 $ 19.4 $ — $ 62.3

Capital expenditures 39.4 5.5 4.5 — 49.4

(1) Depreciation and amortization includes stock-based compensation amortization expense.

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table summarizes segment information for the three months ended March 31, 2019:

The following table summarizes segment information for the six months ended June 30, 2019:

(in millions) North America International Corporate Eliminations Consolidated

8 unchanged sentences

Capital expenditures 27.3 6.0 6.6 — 39.9

(1) Depreciation and amortization include stock-based compensation amortization expense.

(1) Depreciation and amortization includes stock-based compensation amortization expense.

The following table summarizes property, plant and equipment, net by geographic region:

(in millions)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

United States

6 unchanged sentences

The following table summarizes operating lease right-of-use assets by geographic region:

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

United States $ 235.4 $ 198.3

4 unchanged sentences

The following table summarizes net sales by geographic region:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(in millions) 2020 2019 2020 2019

4 unchanged sentences

Total International $ 123.2 $ 189.1 $ 313.1 $ 382.8

Table of C o ntents

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements