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Item 1A. Risk Factors

2021-02-19 compared with 2020-02-24 · 190 added, 237 removed, 125 unchanged (77% of the section changed)

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Set forth below are descriptions of certain risks relating to our business.

Unfavorable economic and market conditions could reduce our sales and profitability and as a result, our operating results may be adversely affected.

Our business is affected by general business and economic conditions, and these conditions could have an impact on future demand for our products.

The global economy has stabilized somewhat since the financial crisis, but we expect economic conditions specific to our markets to remain challenging.

Further, economic and market conditions are inherently complex and subject to change, and any deterioration in those conditions may give households less confidence to make discretionary purchases.

There could be a number of other effects from these economic developments on our business, some of which we have already experienced, including reduced consumer demand for products;

liquidity problems among our customers and related market participants;

insolvency of and bankruptcy filings by our customers and related market participants resulting in increased provisions for credit losses and/or write downs of existing assets;

liquidity problems and/or insolvency of our key suppliers resulting in product delays;

inability of retailers and consumers to obtain credit to finance purchases of our products;

decreased consumer confidence;

decreased retail demand, including order delays or cancellations;

counterparty failures negatively impacting our treasury operations;

inability for us, our customers and our suppliers to accurately forecast future product demand trends;

and adverse movements in foreign currency exchange rates.

If such conditions are experienced in future periods, our industry, business and results of operations may be severely impacted.

Our sales growth is dependent upon our ability to implement strategic initiatives and actions taken to increase sales growth may not be effective.

Our ability to generate sales growth is dependent upon a number of factors, including the following:

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Risks related to our business and industry

The outbreak of COVID-19 has significantly impacted the global economy which could have a material adverse effect on our business, operations, or financial results in future periods.

The novel strain of coronavirus (COVID-19) first identified in Wuhan, China in December 2019 has now spread to nearly all regions around the world.

The outbreak, and measures taken to contain or mitigate it, have had dramatic adverse consequences for the economy, including on demand, operations, supply chains, and financial markets.

The nature and scope of the consequences to date are difficult to evaluate precisely, and their future course is impossible to predict with confidence.

The COVID-19 crisis has already had several significant effects on our business and our financial condition, including the impact of the pandemic on the economies and financial markets of the regions in which we operate.

"Shelter-in-place" and other similar mandated or suggested isolation protocols have disrupted third-party retail stores in our Wholesale channel and company-owned stores in our Direct channel, via store closures or reduced operating hours in the U.S.

and around the world, which has decreased retail traffic and which also, in turn, decreased sales of our products in March and April when COVID-19 began materially impacting our North America business segment.

At this time, most third-party retail stores and our company-owned stores have reopened.

However, we cannot reasonably estimate the length of time these stores will remain open, or if they will be mandated to close again as the COVID-19 crisis continues to evolve.

Our e-commerce operations remain open globally, as do the e-commerce operations for many of our third-party retailers.

The effects of the COVID-19 crisis could be aggravated if the crisis continues, and we could see additional impacts such as the following:

• a continuing global recession, a decline in consumer confidence and spending, or a further increase in unemployment could continue to impact consumers' disposable income and, in turn, decreased sales of our products;

• general economic, financial and industry conditions, particularly conditions relating to liquidity, financial performance, and related credit issues in the retail sector, which may be amplified by the effects of COVID-19;

• the continued disruption to third-party retail stores and company-owned stores resulting from "shelter-in-place" and similar protocols, which, even though largely rolled back, could be reinstated as the pandemic continues to evolve;

• social distancing measures or changes in consumer spending behaviors due to COVID-19 may continue to impact retail demand after the resumption of more normalized operations and such actions could result in a loss of sales and profit;

• the failure of our Wholesale channel customers to whom we extend credit to pay amounts owed to us on time, or at all, particularly if such customers are significantly impacted by COVID-19;

• we have experienced and may continue to experience disruptions in our supply chain, as the outbreak has disrupted travel, manufacturing and distribution throughout the world;

• staffing shortages;

• we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations;

• our success in attempting to reduce operating costs and conserve cash, which could require further actions to improve our cash position, including but not limited to, implementing expanded employee furloughs and foregoing capital expenditures and other discretionary expenses.

The rapid development and uncertainty of the pandemic precludes any prediction as to the ultimate impact of COVID-19.

The full extent of the impact and effects of COVID-19 on our business, operations, liquidity, financial condition and results of operations remain uncertain at this time but could be material.

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We operate in a highly competitive industry and if we are unable to compete successfully, we may lose customers and our sales may decline.

Participants in the mattress and pillow industries compete primarily on price, quality, brand name recognition, product availability and product performance across a range of distribution channels.

A number of our significant competitors offer mattress and pillow products that compete directly with our products.

The effectiveness of our competition relative to our performance, including by established manufacturers or new entrants into the market, could have a material adverse effect on our business, financial condition and/or operating results.

For example, market participants continue to improve their channels of distribution to optimize their reach to the consumer, including by pursuing online direct-to-consumer models.

In addition, retailers in the U.S.

and internationally have integrated vertically in the furniture and bedding industries, and it is possible that such vertical integration may provide conditions that would negatively impact our net sales and results of operations.

The pillow industry in particular is characterized by a large number of competitors, none of which is dominant.

As such, conditions that substantially increase a single participant's market share could be detrimental to our financial performance.

The highly competitive nature of the mattress and pillow industries means we are continually subject to the risk of loss of market share, loss of significant customers, reductions in margins, and the inability to acquire new customers.

Loss of suppliers and disruptions in the supply of our raw materials could increase our costs of sales and reduce our ability to compete effectively.

We acquire raw materials and certain components from a number of suppliers with manufacturing locations around the world.

If we were unable to obtain raw materials and certain components from these suppliers for any reason, we would have to find replacement suppliers.

Any substitute arrangements for raw materials and certain components might not be on terms as favorable to us.

In addition, we outsource the procurement of certain goods and services from suppliers in foreign countries.

If we were no longer able to outsource through these suppliers, we would need to source them elsewhere, potentially at a higher cost.

We maintain relatively small supplies of our raw materials and outsourced goods at our manufacturing facilities, and any disruption in the on-going shipment of supplies could interrupt production of our products, which in turn could result in a decrease of our sales or could cause an increase in our cost of sales, either of which could decrease our liquidity and profitability.

Raw materials for Sealy, Sherwood Bedding and Comfort Revolution products consist mainly of polyethylene foam, textiles and steel innerspring components that we purchase from various suppliers.

and Canada, we source the majority of our requirements for polyurethane foam components and spring components for our Sealy and Stearns & Foster mattress units and adjustable bed bases from a key supplier for each component.

We also purchase a significant portion of our Sealy foundation parts from third party sources under supply agreements.

All critical components are purchased under supply agreements.

We do not consider ourselves to be dependent in the long term upon any single outside vendor as a source of supply to our bedding business, and we believe over time that sufficient alternate sources of supply for the same, similar or alternate components are available.

However, if a key supplier for an applicable component failed to supply components in the amount we require this could significantly interrupt production of our products and increase our production costs in the near term.

Such a disruption could occur for a variety of reasons, including changes in international trade duties and other aspects of international trade policy, natural disasters, pandemics and political events.

Beginning in the second quarter of 2020, one key supplier's inability to supply components in the amount we required, as well as industry supply constraints generally, limited our production levels.

This has constrained production for certain products and has increased our production costs in the near term as further discussed herein.

We are subject to fluctuations in the cost of raw materials, and increases in these costs could reduce our liquidity and profitability.

The bedding industry is subject to volatility in the price of petroleum-based and steel products, which affects the cost of polyurethane foam, polyester, polyethylene foam and steel innerspring component parts.

The price and availability of these raw materials are subject to market conditions affecting supply and demand.

Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities can significantly affect profitability.

We currently expect commodity costs and inflation to increase into 2021.

During the fourth quarter of 2020, we implemented pricing actions that fully mitigated the anticipated commodity costs increases expected for 2021.

In the first quarter of 2021, commodity costs have increased greater than expected and we will consider additional pricing actions as needed.

To the extent we are unable to absorb higher costs, or pass any such higher costs to our customers, our gross margin could be negatively affected, which could result in a decrease in our liquidity and profitability.

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Risks related to operating our business

The performance of our business depends on our ability to implement strategic initiatives and actions taken to increase sales growth may not be effective.

The performance of our business depends upon a number of factors, including the following:

• our ability to continuously improve our products to offer new and enhanced consumer benefits and better quality;

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• the effectiveness of our advertising campaigns and other marketing programs to build product and brand awareness, driving traffic to our distribution channels and increasing sales;

• our ability to successfully launch new products;

• our ability to compete in the mattress and pillow industry;

• our ability to continue to expand into new distribution channels and optimize our existing channels;

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• our ability to manage growth and limit cannibalization associated with new or expanded supply agreements;

the level of consumer acceptance of our products at optimal price points;

• our ability to reduce costs, including the level of consumer acceptance of our products at optimal price points;

• our ability to successfully mitigate the impact of headwinds facing our business, including increased commodity prices and the influx of low-end, imported beds that compete with certain of our products;

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Each year we invest significant time and resources in research and development to improve our product offerings and launch new products.

In 2019, we launched several new products including Tempur-Breeze®, new Stearns & Foster product lines and new compressed bedding products.

In 2020, we introduced the Tempur-Ergo Smart Base Collection with Sleeptracker® technology in our North America segment.

In 2021, we are refreshing our Sealy portfolio with the launch of new models in our Posturepedic Plus TM , Posturepedic® and Essentials product lines.

There are a number of risks that are inherent in our new product line introductions, including that the anticipated level of market acceptance may not be realized, which could negatively impact our sales.

Further, introduction costs, the speed of the rollout of the product and manufacturing inefficiencies may be greater than anticipated, each of which could impact profitability.

We operate in a highly competitive industry and if we are unable to compete successfully, we may lose customers and our sales may decline.

Participants in the mattress and pillow industries compete primarily on price, quality, brand name recognition, product availability and product performance across a range of distribution channels.

A number of our significant competitors offer mattress and pillow products that compete directly with our products.

For example, market participants continue to improve their channels of distribution to optimize their reach to the consumer, including by pursuing online direct-to-consumer models for foam mattresses and offering their own lines of mattresses.

In addition, retailers in the U.S.

The pillow industry in particular is characterized by a large number of competitors, none of which is dominant.

As such, conditions that substantially increase a single participant's market share would likely be detrimental to our financial performance.

Because we depend on certain significant customers, a decrease or interruption in their business with us would reduce our sales and results of operations.

No customer represented 10.0% or more of our net sales for 2019.

Our top five customers, collectively, accounted for approximately 36% of our net sales in 2020, and of these, there was one customer that contributed 10% to 15%.

The credit environment in which our customers operate has been relatively stable over the past few years.

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retail sector, both nationally and regionally.

Regional retail customers in the U.S.

Department store and regional retail customers in the U.S.

continue to file for bankruptcy protection.

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A substantial decrease or interruption in business from these significant customers could result in the loss of future business and could reduce revenue, liquidity and profitability.

In addition, the timing of large purchases by these customers could have an increasingly significant impact on our quarterly net sales and earnings.

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We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including cyber-based attacks, could harm our ability to effectively operate our business.

Consistent with other manufacturing and retail operations, we are increasingly dependent on information technology, including the Internet, for the storage, processing, and transmission of our electronic, business-related information assets.

Consistent with other manufacturing and retail operations, we are dependent on information technology, including the Internet, for the storage, processing, and transmission of our electronic, business-related information assets.

We leverage our internal information technology, infrastructures, and those of our service providers, to enable, sustain and support our global business interests.

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We are actively working to ensure ongoing compliance with all data privacy regulations to which we are subject, which involves substantial costs.

Despite our ongoing efforts to bring our practices into compliance with the GDPR and the CCPA, we may not be successful due to various factors within or outside of our control.

Despite our ongoing efforts to maintain compliance with the GDPR and the CCPA, we may not be successful due to various factors within or outside of our control.

Failure to comply with GDPR, CCPA, country-specific or U.S.

state-specific laws could result in costly investigations and litigation, expose us to potentially significant penalties, and result in negative publicity that could damage our reputation and credibility.

Historically, we have successfully implemented a new enterprise resource planning, or “ERP,” system across several of our global subsidiaries.

We are currently implementing the new ERP in certain significant U.S.

subsidiaries with key go-live dates in 2020 and 2021.

This new system replaces a substantial portion of our legacy systems that have supported our operations in the past.

Prior to 2020, we successfully implemented a new enterprise resource planning, or “ERP,” system across several of our global subsidiaries.

We successfully implemented new ERP systems in certain significant U.S.

subsidiaries in 2020 and January 2021 and are continuing to implement this ERP system in other significant U.S.

subsidiaries with key go-live dates in 2022.

This new system replaces a substantial portion of our legacy systems that have historically supported our operations.

If we are unable to successfully continue the implementation of the replacement system, it could lead to a disruption in our business and unanticipated additional use of capital and other resources, which may adversely impact our results of operations.

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In the event that we or our service providers are unable to prevent or detect and remediate cyber-based attacks or other security incidents in a timely manner, our operations could be disrupted or we may incur financial or reputational losses arising from the theft, misuse, unauthorized disclosure or destruction of our information assets.

Deterioration in labor relations could disrupt our business operations and increase our costs, which could decrease our liquidity and profitability.

As of December 31, 2020, we had approximately 9,000 full-time employees.

Our Asia joint venture also employs approximately 1,350 full-time employees.

Approximately 26% of our employees are represented by various labor unions with separate collective bargaining agreements or government labor union contracts for certain international locations.

Our North American collective bargaining agreements, which are typically three years in length, expire at various times during any given three year period.

Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees.

We may at some point be subject to work stoppages by some of our employees and, if such events were to occur, there may be a material adverse effect on our operations and profitability.

Further, we may not be able to renew our various collective bargaining agreements on a timely basis or on favorable terms, or at all.

Any significant increase in our labor costs could decrease our liquidity and profitability and any deterioration of employee relations, slowdowns or work stoppages at any of our locations, whether due to union activities, employee turnover or otherwise, could result in a decrease in our net sales or an increase in our costs, either of which could decrease our liquidity and profitability.

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We may face exposure to product liability claims and premises liability claims, which could reduce our liquidity and profitability and reduce consumer confidence in our products.

We face an inherent business risk of exposure to product liability claims if the use of any of our products results in personal injury or property damage.

In the event that any of our products prove to be defective, we may be required to recall, redesign or even discontinue those products.

We maintain insurance against product liability claims, but such coverage may not continue to be available on terms acceptable to us or be adequate for liabilities actually incurred.

A successful claim brought against us in excess of available insurance coverage could impair our liquidity and profitability, and any claim or product recall that results in significant adverse publicity against us could result in consumers purchasing fewer of our products, which would also impair our liquidity and profitability.

We also face inherent business risks by operating physical stores that are open to the public.

By opening retail stores, we have increased our exposure to premises liability claims.

We maintain insurance against premises liability claims, but such coverage may not continue to be available on terms acceptable to us or be adequate for liabilities actually incurred.

A successful claim brought against us in excess of available insurance coverage could impair our liquidity and profitability, and any claim or product recall that results in significant adverse publicity against us could adversely affect our reputation or result in consumers purchasing fewer of our products, which would also impair our liquidity and profitability.

If we are not able to protect our trade secrets or maintain our trademarks, patents and other intellectual property, we may not be able to prevent competitors from developing similar products or from marketing in a manner that capitalizes on our intellectual property rights, and this loss of a competitive advantage could decrease our profitability and liquidity.

We rely on patents and trade secrets to protect the design, technology and function of our products.

To date, we have not sought U.S.

or international patent protection for our principal product formula for Tempur® material and certain of our manufacturing processes.

Accordingly, we may not be able to prevent others from developing certain visco-elastic material and products that are similar to or competitive with our products.

Our ability to compete effectively with other companies also depends, to a significant extent, on our ability to maintain the proprietary nature of our owned and licensed intellectual property.

We own a significant number of patents or have patent applications pending on some aspects of our products and certain manufacturing processes.

However, the principal product formula and manufacturing processes for our Tempur® material are not patented and we must maintain these as trade secrets in order to protect this intellectual property.

and foreign registered trademarks and service marks and have applications for the registration of trademarks and service marks pending domestically and abroad.

We also license certain intellectual property rights from third parties.

Certain of our trademarks are currently registered in the U.S.

and are registered or pending in foreign jurisdictions.

Certain other trademarks are the subject of protection under common law.

However, those rights could be circumvented, or violate the proprietary rights of others, or we could be prevented from using them if challenged.

A challenge to our use of our trademarks could result in a negative ruling regarding our use of our trademarks, their validity or their enforceability, or could prove expensive and time consuming in terms of legal costs and time spent defending against such a challenge.

Any loss of trademark protection could result in a decrease in sales or cause us to spend additional amounts on marketing, either of which could decrease our liquidity and profitability.

In addition, if we incur significant costs defending our trademarks, that could also decrease our liquidity and profitability.

In addition, we may not have the financial resources necessary to enforce or defend our trademarks.

Furthermore, our patents may not provide meaningful protection and patents may never issue from pending applications.

It is also possible that others could bring claims of infringement against us, as our principal product formula and manufacturing processes are not patented, and that any licenses protecting our intellectual property could be terminated.

If we were unable to maintain the proprietary nature of our intellectual property and our significant current or proposed products, this loss of a competitive advantage could result in decreased sales or increased operating costs, either of which would decrease our liquidity and profitability.

In addition, the laws of certain foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the U.S.

Third parties, including competitors, may assert intellectual property infringement or invalidity claims against us that could be upheld.

Intellectual property litigation, which could result in substantial cost to and diversion of effort by us, may be necessary to protect our trade secrets or proprietary technology, or for us to defend against claimed infringement of the rights of others and to determine the scope and validity of others’ proprietary rights.

We may not prevail in any such litigation, and if we are unsuccessful, we may not be able to obtain any necessary licenses on reasonable terms or at all.

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The loss of the services of any members of our executive management team could impair our ability to execute our business strategy and as a result, reduce our sales and profitability.

We depend on the continued services of our executive management team.

The loss of key personnel could have a material adverse effect on our ability to execute our business strategy and on our financial condition and results of operations.

We do not maintain key-person insurance for members of our executive management team.

Regulatory, Legal and Financial Risks

We entered into the Advance Pricing Agreement Program to resolve a tax matter in Denmark, and a failure to resolve the matter or a change in factors or circumstances could adversely impact our income tax expense, effective tax rate and cash flows.

In the third quarter of 2018, we entered into the Advance Pricing Agreement Program (the "APA Program") for the tax years 2012 through 2022.

In the APA Program the U.S.

We are a participant in the Advance Pricing Agreement Program (the "APA Program") for the tax years 2012 through 2022, under which the U.S.

Internal Revenue Service ("IRS"), on our behalf, will negotiate directly with the Danish Tax Authority ("SKAT") with respect to the royalty to be paid by a U.S.

subsidiary of the Company to the Company's Danish subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary.

The objective of the APA Program is for the two tax authorities to reach a mutual agreement regarding the royalty to be paid for such years.

We expect the outcome of the APA Program to result in an increase in the royalty resulting in additional taxable income in Denmark for the Danish subsidiary and a decrease in U.S.

taxable income for the U.S.

As it relates to the Danish tax position, we have accrued Danish tax and interest for this matter as an uncertain income tax position.

Conversely, as it relates to the U.S.

position we have recorded a deferred tax asset for the associated correlative U.S.

However, if this matter is not resolved successfully or there is a change in facts or circumstances, we may be required to further increase our uncertain income tax provision or decrease our deferred tax asset related to this matter, which could have a material impact on the Company’s reported earnings.

If this matter is not resolved successfully or there is a change in facts or circumstances, we may be required to further increase our uncertain income tax provision or decrease our deferred tax asset related to this matter, which could have a material impact on the Company's reported earnings.

For a description of these matters and additional information please refer to Note 12, "Income Taxes," to the accompanying Consolidated Financial Statements.

Changes in tax laws and regulations or other factors could cause our income tax rate to increase, potentially reducing net income and adversely affecting cash flows, and fluctuations in our tax obligations and effective tax rate may result in volatility of our financial results and stock price.

We are subject to taxation in various jurisdictions around the world and at any one time multiple tax years are subject to audit by various taxing jurisdictions.

In preparing financial statements, we calculate our annual effective income tax rate based on current tax laws and regulations and the estimated taxable income within each of these jurisdictions.

Our effective income tax rate, however, may be higher due to numerous factors, including, but not limited to, changes in accounting methods or policies, tax laws or regulations, the tax litigation environment in each such jurisdiction, and the outcome of pending or future audits, whether the result of litigation or negotiations with taxing authorities.

Each such item may result in a tax liability that differs from our original estimate.

An effective income tax rate that is significantly higher than currently anticipated could have an adverse effect on our net income and cash flows.

In addition, there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated, which could adversely affect our quarterly results of operations and stock price.

Additionally, the global tax environment is becoming more complex, with government tax authorities becoming increasingly more aggressive in asserting claims for taxes.

Any resulting changes in tax laws or regulations could increase our effective income tax rate or impose new restrictions, costs or prohibitions on our current practices and reduce our net income and adversely affect our cash flows.

In addition to the increased activity of taxing authorities with respect to income tax, taxing authorities are also becoming more aggressive in asserting claims for indirect taxes such as import duties and value added tax.

These types of claims present risks and uncertainties similar to those discussed above.

We believe we are in compliance with all tax laws and regulations that govern such indirect taxes in each of the jurisdictions in which we do business.

However, because the claims taxing authorities assert often involve the question of internal product pricing, which is inherently subjective in nature, any such claim may require us to litigate the matter to defend our position or to negotiate a settlement on the matter with the taxing authorities that differs from the amount of potential exposure recorded in the financial statements.

Our leverage may limit our flexibility and increase our risk of default.

We may be adversely affected by fluctuations in exchange rates, which could affect our results of operations, the costs of our products and our ability to sell our products in foreign markets.

Approximately 21.5% of our net sales were generated outside of the U.S.

We conduct our business in a wide variety of currencies and are therefore subject to market risk relating to changes in foreign exchange rates.

dollar strengthens relative to the Euro or other foreign currencies where we have operations, for example, there will be a negative impact on our operating results upon translation of those foreign operating results into the U.S.

In 2020, foreign currency exchange rate changes positively impacted our net income by approximately 0.3% and positively impacted adjusted EBITDA per credit facility, which is a non-U.S.

GAAP financial measure, by approximately 0.2%.

In 2021, we expect that foreign exchange translation may provide a small benefit to our results of operations.

Changes in foreign currency exchange rates could have an adverse impact on our financial condition, results of operations and cash flows.

Except for the use of foreign exchange forwards contracts described immediately below, we do not hedge the translation of foreign currency operating results into the U.S.

We use foreign exchange forward contracts to manage a portion of the exposure to the risk of the eventual net cash inflows and outflows resulting from foreign currency denominated transactions among certain subsidiaries.

These hedging transactions may not succeed or may be only partially successful in managing our foreign currency exchange rate risk.

Refer to "Management's Discussion and Analysis" included in Part II, ITEM 7 of this Report and "Quantitative and Qualitative Disclosures About Market Risk" included in Part II, ITEM 7A of this Report for further discussion on the impact of foreign exchange rates on our operations.

Our leverage affects how we manage our business and may limit our flexibility.

We operate in the ordinary course of our business with a certain amount of leverage.

Our degree of leverage could have important consequences to our investors, such as:

Our degree of leverage could have important consequences, such as:

• increasing our vulnerability to adverse economic, industry or competitive developments;

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• limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes;

limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate, placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting;

• limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;

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• exposing us to variability in interest rates, as a substantial portion of our indebtedness is and will be at variable rates;

limiting our ability to return capital to our stockholders, including through share repurchases.

• limiting our ability to return capital to our stockholders, including through share repurchases and dividends.

In addition, the instruments governing our debt contain customary financial and other restrictive covenants, which limit our operating flexibility and could prevent us from taking advantage of business opportunities and reduce our flexibility to respond to changing business and economic conditions.

These covenants could put us at a competitive disadvantage.

Failure to comply with our debt covenants may result in a default or event of default under the related credit document.

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For further discussion regarding our debt covenants and compliance, refer to "Management’s Discussion and Analysis" included in Part II, ITEM 7 of this Report and Note 5, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.

We may be unable to sustain our profitability, which could impair our ability to service our indebtedness and make investments in our business and could adversely affect the market price for our stock and increase our leverage.

Our ability to service our indebtedness depends on our ability to maintain our profitability.

We may not be able to maintain our profitability on a quarterly or annual basis in future periods.

Further, our profitability will depend upon a number of factors, including without limitation:

general economic conditions in the markets in which we sell our products and the related impacts on consumers and retailers;

the level of competition in the mattress and pillow industry;

our ability to successfully identify and respond to emerging trends in the mattress and pillow industry;

our ability to successfully launch new products;

our ability to effectively sell our products through our distribution channels, including our new distribution channels, in volumes sufficient to drive growth and leverage our cost structure and advertising spending;

our ability to reduce costs, including our ability to align our cost structure with sales in the existing economic environment;

our ability to successfully manage our relationships with our major customers and navigate any financial difficulties those customers may experience from time to time;

our ability to absorb fluctuations in commodity costs;

our ability to maintain efficient, timely and cost-effective production and utilization of our manufacturing capacity;

our ability to maintain efficient, timely and cost-effective delivery of our products;

our ability to maintain public recognition of our brands.

We are vulnerable to interest rate risk with respect to our debt, which could lead to an increase in interest expense.

Our variable rate debt agreements, including our 2019 Credit Agreement, use the London Interbank Offered Rate (LIBOR) as a reference rate.

In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021.

It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021.

If LIBOR ceases to exist or is no longer representative of the underlying market after 2021, our variable rate debt agreements with interest rates that are indexed to LIBOR will use various alternative methods to calculate the applicable interest rate, which could result in increases in interest rates on such debt and adversely impact our interest expense, results of operations and cash flows.

Our variable rate debt agreements, including our 2019 Credit Agreement, use LIBOR, which is subject to uncertainty.

If LIBOR ceases to exist or is no longer representative of the underlying market at some point in the future, our variable rate debt agreements with interest rates that are indexed to LIBOR will use various alternative methods to calculate the applicable interest rate, which could result in increases in interest rates on such debt and adversely impact our interest expense, results of operations and cash flows.

Further, we may need to amend our variable rate debt agreements to replace LIBOR with a new reference rate.

As of December 31, 2020, we do not utilize any derivatives or hedging strategies that have a LIBOR component.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.

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Dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (SOFR).

At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement.

Furthermore, it is not possible to predict the effect of these changes, the discontinuation of LIBOR, other reforms, or the establishment of alternative reference rates on our borrowing costs, the availability of variable rate financing or the capital markets generally.

Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain.

Because of this uncertainty, we cannot reasonably estimate the expected impact of a transition away from LIBOR to our business.

For information regarding our sensitivity to changes in interest rates, refer to "Quantitative and Qualitative Disclosures About Market Risk" included in Part II, ITEM 7A of this Report.

We may be adversely affected by fluctuations in exchange rates, which could affect our results of operations, the costs of our products and our ability to sell our products in foreign markets.

Approximately 25.6% of our net sales were generated outside of the U.S.

We conduct our business in a wide variety of currencies and are therefore subject to market risk relating to changes in foreign exchange rates.

In 2019 , foreign currency exchange rate changes negatively impacted our net income by approximately 1.9% and negatively impacted adjusted EBITDA, which is a non-U.S.

GAAP financial measure, by approximately 1.1% .

In 2020 , we expect that foreign exchange translation may negatively impact our results of operations.

Changes in foreign currency exchange rates could have an adverse impact on our financial condition, results of operations and cash flows.

Except for the use of foreign exchange forwards contracts described immediately below, we do not hedge the translation of foreign currency operating results into the U.S.

These hedging transactions may not succeed or may be only partially successful in managing our foreign currency exchange rate risk.

Refer to “Management's Discussion and Analysis” included in Part II, ITEM 7 of this Report and “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, ITEM 7A of this Report for further discussion on the impact of foreign exchange rates on our operations.

We are subject to fluctuations in the cost of raw materials, and increases in these costs would reduce our liquidity and profitability.

The bedding industry has been challenged by volatility in the price of petroleum-based and steel products, which affects the cost of polyurethane foam, polyester, polyethylene foam and steel innerspring component parts.

The price and availability of these raw materials are subject to market conditions affecting supply and demand.

Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities can significantly affect profitability.

Loss of suppliers and disruptions in the supply of our raw materials could increase our costs of sales and reduce our ability to compete effectively.

We acquire raw materials and certain components from a number of suppliers with manufacturing locations around the world.

If we were unable to obtain raw materials and certain components from these suppliers for any reason, we would have to find replacement suppliers.

Any substitute arrangements for raw materials and certain components might not be on terms as favorable to us.

In addition, we outsource the procurement of certain goods and services from suppliers in foreign countries.

If we were no longer able to outsource through these suppliers, we could source them elsewhere, which may be at a higher cost.

We maintain relatively small supplies of our raw materials and outsourced goods at our manufacturing facilities, and any disruption in the on-going shipment of supplies to us could interrupt production of our products, which could result in a decrease of our sales or could cause an increase in our cost of sales, either of which could decrease our liquidity and profitability.

Sealy product raw materials consist mainly of polyurethane foam, polyester, polyethylene foam and steel innerspring components that we purchase from various suppliers.

and Canada, we source the majority of our requirements for polyurethane foam components and spring components for our Sealy and Stearns & Foster mattress units from a key supplier for each component.

All critical components are purchased under supply agreements.

We also purchase a significant portion of our Sealy foundation parts from third party sources under supply agreements.

We do not consider ourselves to be dependent in the long term upon any single outside vendor as a source of supply to our bedding business, and we believe over time that sufficient alternative sources of supply for the same, similar or alternative components are available.

For further information relating to this risk in particular, please refer to the discussion under the heading “ We are subject to risks from our international operations, such as complying with U.S.

and foreign laws, foreign exchange exposure, tariffs, increased costs, political risks and our ability to expand in certain international markets, which could impair our ability to compete and our profitability .”

Our ability to expand and effectively manage our Tempur-Pedic® retail stores could affect our sales and results of operations.

As of December 31, 2019, we had opened 56 Tempur-Pedic® retail stores.

Our ability to continue to open new Tempur-Pedic® retail stores in a timely and efficient manner, and effectively operate all of these retail stores, depends upon numerous factors.

Some of these factors are beyond our control, including, but not limited to our ability to identify suitable locations, our ability to negotiate favorable lease terms, our ability to hire, train and retain skilled retail store personnel, and economic factors that impact consumer confidence, disposable income or the availability of consumer financing.

There is no assurance that our retail store expansion strategy will continue to be profitable.

If we are unable to open additional Tempur-Pedic® retail stores, or if our existing retail stores are not profitable, this could adversely affect our sales and results of operations.

We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value.

Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.

Our Board of Directors has authorized a share repurchase program pursuant to which we are authorized to repurchase shares of our common stock.

We did not repurchase any shares under our share repurchase program during the year ended December 31, 2018.

As of December 31, 2019 , we had repurchased an aggregate of 1.3 million shares for approximately $102.3 million under our share repurchase program and had approximately $124.6 million remaining under our share repurchase program.

In February 2020, our Board of Directors authorized an increase, of over $190.0 million , to our share repurchase authorization of our common stock to $300.0 million .

Although our Board of Directors has authorized the share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares and may be suspended or terminated at any time.

Shares may be repurchased from time to time, in the open market or through private transactions, subject to market conditions, in compliance with applicable state and federal securities laws.

The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, restrictions in our debt agreements, the trading price of our common stock and the nature of other investment opportunities.

In addition, repurchases of our common stock pursuant to our share repurchase program could affect the market price of our common stock or increase its volatility.

For example, the existence of a share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock.

Additionally, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions.

There can be no assurance that any share repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we determine to repurchase our stock.

Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.

Our operating results are subject to fluctuations, including as a result of seasonality, which could make sequential quarter-to-quarter comparisons an unreliable indication of our performance and adversely affect the market price of our common stock.

A significant portion of our net sales are attributable to our Wholesale channel, particularly net sales to furniture and bedding stores.

We believe that our sales of products to furniture and bedding stores are typically subject to modest seasonality inherent in the bedding industry, with sales expected to be generally lower in the second and fourth quarters.

Our sales in a particular quarter can be impacted by new product launches.

Additionally, the U.S.

bedding industry generally experiences increases in sales around holidays and promotional periods.

This seasonality means that a sequential quarter-to-quarter comparison may not be a good indication of our performance or of how we will perform in the future.

We are subject to risks from our international operations, such as complying with U.S.

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in the year ended December 31, 2020.

We also participate in international license and joint venture arrangements with independent third parties.

We operate through multiple wholly owned subsidiaries and we also participate in international license and joint venture arrangements with independent third parties.

Our international operations are subject to the customary risks of operating in an international environment, including complying with U.S.

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complying with foreign laws and regulations, including disparate anti-corruption laws and regulations;

risks associated with varying local business customs;

and the potential imposition of trade or foreign exchange restrictions, tariffs and other tax increases, fluctuations in exchange rates, inflation and unstable political situations and labor issues.

and the potential imposition of trade or foreign exchange restrictions, tariffs and other tax increases, inflation and unstable political situations and labor issues.

We are also limited in our ability to independently expand in certain international markets where we have granted licenses to manufacture and sell Sealy® bedding products.

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and abroad, could materially impact our business.

Our business operations and financial results may be impacted by the United Kingdom’s (“UK”) departure from the EU, commonly referred to as Brexit.

Brexit may, among other things, result in certain adverse tax consequences for us relating to the movement of products and related matters between the UK and EU.

If we are not able to protect our trade secrets or maintain our trademarks, patents and other intellectual property, we may not be able to prevent competitors from developing similar products or from marketing in a manner that capitalizes on our trademarks, and this loss of a competitive advantage could decrease our profitability and liquidity.