What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-19 compared with 2020-02-24 · 514 added, 744 removed, 1162 unchanged (52% of the section changed)

8 unchanged sentences

Notes to the Consolidated Financial Statements

Table of Co ntents

Report of Independent Registered Public Accounting Firm

8 unchanged sentences

Adoption of Accounting Standards

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue in 2018 and changed its method of accounting for leases in 2019.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019.

Basis for Opinion

13 unchanged sentences

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.

Table of Co ntents

Danish Tax Matter Uncertain Tax Position

15 unchanged sentences

February 19, 2021

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

Net sales $ 3,676.9 $ 3,106.0 $ 2,702.9

Cost of sales 2,038.5 1,763.8 1,582.2

Gross profit 1,638.4 1,342.2 1,120.7

Selling and marketing expenses 740.2 666.3 587.8

General, administrative and other expenses 382.5 345.1 294.2

Customer-related charges

Equity income in earnings of unconsolidated affiliates ( 16.4 ) ( 15.9 ) ( 17.6 )

Royalty income, net of royalty expense

Operating income 532.1 346.7 256.3

1 unchanged sentence

Interest expense, net 77.0 85.7 92.3

Loss on extinguishment of debt 5.1 — —

Other income, net ( 2.4 ) ( 4.5 ) ( 1.0 )

5 unchanged sentences

Net income before non-controlling interests 349.8 189.4 97.6

Net loss attributable to non-controlling interests

Net income (loss) attributable to non-controlling interests 1.0 ( 0.1 ) ( 2.9 )

Net income attributable to Tempur Sealy International, Inc.

$ 348.8 $ 189.5 $ 100.5

Earnings per common share:

6 unchanged sentences

Weighted average common shares outstanding:

Basic 207.9 218.0 217.6

Diluted 212.3 221.6 220.4

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

Net income before non-controlling interests $ 349.8 $ 189.4 $ 97.6

2 unchanged sentences

Net change in pension benefits, net of tax ( 1.4 ) ( 1.9 ) ( 0.9 )

Unrealized loss on cash flow hedging derivatives, net of tax

Other comprehensive income (loss), net of tax 22.2 7.6 ( 19.8 )

Comprehensive income 372.0 197.0 77.8

Comprehensive loss attributable to non-controlling interests

Comprehensive income (loss) attributable to non-controlling interests 1.0 ( 0.1 ) ( 2.9 )

Comprehensive income attributable to Tempur Sealy International, Inc.

$ 371.0 $ 197.1 $ 80.7

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

2 unchanged sentences

(in millions)

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Current Assets:

1 unchanged sentence

Accounts receivable, net 383.7 372.0

Inventories 312.1 260.5

Prepaid expenses and other current assets 207.6 202.8

1 unchanged sentence

Property, plant and equipment, net 507.9 435.8

Goodwill 766.3 732.3

Other intangible assets, net 630.1 641.4

2 unchanged sentences

Other non-current assets 118.1 92.6

Total Assets $ 3,308.6 $ 3,061.8

LIABILITIES AND STOCKHOLDERS’ EQUITY

10 unchanged sentences

Total Liabilities 2,795.1 2,701.4

Redeemable non-controlling interest 8.9 —

Stockholders' Equity:

6 unchanged sentences

78.9 million and 75.1 million shares as of December 31, 2020 and 2019, respectively

Total stockholders' equity, net of non-controlling interest in subsidiaries

Non-controlling interest in subsidiaries

( 2,096.8 ) ( 1,832.8 )

Total stockholders' equity, net of non-controlling interests in subsidiaries 503.6 359.5

Non-controlling interests in subsidiaries 1.0 0.9

Total Stockholders' Equity 504.6 360.4

Total Liabilities and Stockholders' Equity

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity $ 3,308.6 $ 3,061.8

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

4 unchanged sentences

Stockholders' Equity

Non-controlling Interest

Treasury Stock

Accumulated Other Comprehensive (Loss) Income

Non-controlling Interest in Subsidiaries

Total Stockholders' Equity (Deficit)

Shares Issued

Additional Paid in Capital

Retained Earnings

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

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

Balance, December 31, 2017 $ 2.2 283.8 $ 2.8 74.7 $ ( 1,737.2 ) $ 506.2 $ 1,416.2 $ ( 75.5 ) $ — $ 112.5

Adoption of accounting standards effective January 1, 2018 ( 2.9 ) ( 0.5 ) ( 3.4 )

Net income 100.5 100.5

Net loss attributable to non-controlling interests ( 2.7 ) ( 0.2 ) ( 0.2 )

1 unchanged sentence

Adjustment to pension liability, net of tax of $( 0.1 )

Derivative instruments accounted for as hedges, net of tax of $(0.1)

Foreign currency adjustments

( 0.4 ) ( 0.4 )

Foreign currency translation adjustments ( 18.9 ) ( 18.9 )

Exercise of stock options ( 0.2 ) 2.1 2.5 4.6

Issuances of PRSUs, RSUs, and DSUs

Treasury stock repurchased

( 0.2 ) 2.7 ( 2.7 ) —

Treasury stock repurchased - PRSU/RSU/DSU releases

0.1 ( 4.6 ) ( 4.6 )

Amortization of unearned stock-based compensation

Acquisition of non-controlling interest 0.5 ( 0.5 ) ( 0.5 )

Balance, December 31, 2018 $ — 283.8 $ 2.8 74.4 $ ( 1,737.0 ) $ 530.3 $ 1,513.8 $ ( 95.3 ) $ 2.9 $ 217.5

Adoption of accounting standards effective January 1, 2018

Net income 189.5 189.5

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

Acquisition of non-controlling interest in subsidiary

Repurchase of interest in subsidiary ( 1.9 ) ( 1.9 )

Adjustment to pension liability, net of tax of $( 0.7 )

Foreign currency adjustments

( 1.9 ) ( 1.9 )

Foreign currency translation adjustments 9.5 9.5

Exercise of stock options ( 0.3 ) 4.8 13.0 17.8

Issuances of PRSUs, RSUs, and DSUs

( 0.3 ) 3.7 ( 3.7 ) —

Treasury stock repurchased 1.3 ( 102.3 ) ( 102.3 )

Treasury stock repurchased - PRSU/RSU/DSU releases

0.1 ( 3.4 ) ( 3.4 )

Amortization of unearned stock-based compensation

Acquisition of non-controlling interest

Charitable stock donation

( 0.1 ) 1.4 7.5 8.9

Balance, December 31, 2019 $ — 283.8 $ 2.8 75.1 $ ( 1,832.8 ) $ 573.9 $ 1,703.3 $ ( 87.7 ) $ 0.9 $ 360.4

Net loss attributable to non-controlling interests

Repurchase of interest in subsidiary

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

Net income 348.8 348.8

Net income attributable to non-controlling interests 0.9 0.1 0.1

Acquisition of non-controlling interest in subsidiary 8.4 —

Dividend paid to non-controlling interest in subsidiary ( 0.4 ) —

Adjustment to pension liability, net of tax of $( 0.4 )

Foreign currency adjustments

( 1.4 ) ( 1.4 )

Foreign currency translation adjustments 23.6 23.6

Exercise of stock options ( 0.5 ) 9.6 ( 2.7 ) 6.9

Issuances of PRSUs, RSUs, and DSUs

( 3.6 ) 58.2 ( 58.2 ) —

Treasury stock repurchased

6.5 ( 285.9 ) ( 285.9 )

Treasury stock repurchased - PRSU/RSU/DSU releases

1.4 ( 45.9 ) ( 45.9 )

Amortization of unearned stock-based compensation

Charitable stock donation

Balance, December 31, 2020 $ 8.9 283.8 $ 2.8 78.9 $ ( 2,096.8 ) $ 617.5 $ 2,045.6 $ ( 65.5 ) $ 1.0 $ 504.6

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

Year Ended December 31,

(in millions) Year Ended December 31,

2020 2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:

10 unchanged sentences

Equity income in earnings of unconsolidated affiliates ( 16.4 ) ( 15.9 ) ( 17.6 )

Loss on extinguishment of debt 2.3 — —

Loss on sale of assets ( 1.7 ) 1.0 3.3

2 unchanged sentences

Accounts receivable ( 55.7 ) ( 76.0 ) ( 46.3 )

Inventories ( 42.5 ) ( 28.2 ) ( 44.6 )

Prepaid expenses and other assets ( 19.4 ) 11.3 ( 14.4 )

7 unchanged sentences

Acquisitions, net of cash acquired ( 41.2 ) ( 17.1 ) —

Other 5.9 15.1 2.4

Net cash used in investing activities from continuing operations ( 146.6 ) ( 90.2 ) ( 71.2 )

7 unchanged sentences

Net cash used in financing activities from continuing operations ( 522.6 ) ( 203.2 ) ( 107.0 )

Net cash provided by continuing operations

CASH USED IN DISCONTINUED OPERATIONS

Net cash (used in) provided by continuing operations ( 14.5 ) 21.4 29.3

CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS

Operating cash flows 0.3 ( 2.0 ) ( 24.4 )

Investing cash flows — — 2.1

Financing cash flows

Net cash used in discontinued operations

Net cash provided by (used in) discontinued operations 0.3 ( 2.0 ) ( 22.3 )

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 14.3 ( 0.3 ) ( 3.1 )

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents 0.1 19.1 3.9

CASH AND CASH EQUIVALENTS, beginning of period 64.9 45.8 41.9

CASH AND CASH EQUIVALENTS, end of period 65.0 64.9 45.8

CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS

CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS

Supplemental cash flow information:

Cash paid during the period for:

Interest $ 79.0 $ 89.0 $ 91.8

Income taxes, net of refunds $ 93.8 $ 73.8 $ 32.5

10 unchanged sentences

and its consolidated subsidiaries.

The Company develops, manufactures, markets and sells bedding products, which include mattresses, foundations and adjustable bases, and other products, which include pillows and other accessories.

The Company designs, manufactures and distributes bedding products, which include mattresses, foundations and adjustable bases, and other products, which include pillows and other accessories.

The Company also derives income from royalties by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers.

1 unchanged sentence

Wholesale and Direct.

On November 24, 2020, the Company effected a four -for-one stock split to shareholders of record on November 10, 2020.

All share and per share information (including share and per share information related to share-based compensation) has been retroactively adjusted to reflect the stock split, except for certain shares held as treasury stock that were not subject to the split.

(b) Basis of Consolidation.

1 unchanged sentence

Intercompany balances and transactions have been eliminated.

The Company's Consolidated Financial Statements include the results of Comfort Revolution, LLC ("Comfort Revolution").

Prior to July 11, 2018, Comfort Revolution constituted a variable interest entity for which the Company was considered to be the primary beneficiary due to the Company's disproportionate share of the economic risk associated with its equity contribution, debt financing and other factors.

On July 11, 2018, the Company acquired the remaining 55 % equity interest in Comfort Revolution, which did not result in a material impact to the Company's Consolidated Financial Statements.

The Company has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions.

1 unchanged sentence

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 Consolidated Statements of Income.

The Company’s Asia-Pacific joint ventures are more fully described in Note 7 , "Unconsolidated Affiliate Companies."

Additionally, in October 2020, the Company entered into a 50.0 % ownership joint venture to reacquire the rights and acquire the assets to manufacture, market and distribute Sealy® and Stearns & Foster® branded products in the United Kingdom.

5 unchanged sentences

(d) Adoption of New Accounting Standards.

Revenue Recognition.

On January 1, 2018, the Company adopted ASU No.

2014-09, "Revenue from Contracts with Customers (Topic 606)" using the modified retrospective method.

Under the modified retrospective method, the Company recognized the cumulative effect of initially applying the new revenue standard as a decrease to the opening balance of retained earnings.

Topic 606 required additional qualitative and quantitative disclosures.

Other presentation and disclosure changes include the classification of royalty income to net sales and changes in the balance sheet classification and measurement for accrued sales returns.

For additional information, see Note 4 , " Revenue Recognition " of the Consolidated Financial Statements.

In March 2017, the FASB issued ASU No.

2017-07, "Compensation - Retirement Benefits (Topic 715):

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", which is accounting guidance that changed how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Consolidated Statements of Income.

This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Consolidated Statements of Income as other employee compensation costs from services rendered during the period.

All other components of the net periodic benefit cost are presented separately outside of the operating income caption.

The Company adopted ASU No.

2017-07 as of January 1, 2018 and applied the accounting guidance retrospectively.

Adoption of this guidance resulted in a reclassification of pension and other postretirement plan non-service income and remeasurement adjustments, net, from within operating income to non-operating income.

The adoption of this guidance was not material to the Consolidated Statement of Income for any periods presented.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accumulated Other Comprehensive Income.

In February 2018, the FASB issued ASU No.

2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" , which allows entities to reclassify tax effects stranded in accumulated other comprehensive loss ("AOCL") as a result of the Tax Cuts and Jobs Act of 2017 ("U.S.

Tax Reform Act") to retained earnings.

The Company early adopted ASU No.

2018-02 on March 31, 2018.

The impact of adoption was not material to the Company's Consolidated Financial Statements.

Derivatives and Hedging.

In August 2017, the FASB issued ASU No.

2017-12, "Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities", which simplifies hedge accounting by better aligning a company's financial reporting for hedging relationships with its risk management activities.

This guidance expands an entity’s ability to hedge non-financial and financial risk components and reduces complexity in fair value hedges of interest rate risk;

eliminates the requirement to separately measure and report hedge ineffectiveness and present the entire change in the fair value of a hedging instrument in the same income statement line as the hedged item;

eases certain documentation and assessment requirements;

and modifies the accounting for components excluded from the assessment of hedge effectiveness.

The Company early adopted this ASU in the third quarter of 2018.

There were no adjustments to the Company's Consolidated Financial Statements as a result of the adoption.

Effective January 1, 2019, the Company adopted Accounting Standards Codification 842, Leases ("ASC 842").

7 unchanged sentences

When contracts contain lease and non-lease components, the Company generally accounts for both components as a single lease component.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The adoption of ASC 842 resulted in the recognition of right-of-use assets, net of prepaid lease payments and lease incentives, of $ 197.2 million and operating lease liabilities of $ 203.3 million as of January 1, 2019.

2 unchanged sentences

For additional information, see Note 6, "Leases" of the Consolidated Financial Statements

Effective January 1, 2020, the Company adopted Accounting Standards Update ("ASU") No.

2017-04, "Intangibles - Goodwill and Other (Topic 350)." The ASU simplifies the test for goodwill impairment, by eliminating Step 2 of the impairment test.

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 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.

Effective January 1, 2020, the Company adopted ASU No.

2016-13, "Financial Instruments - Credit Losses (Topic 326)," which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures.

The ASU replaces the incurred loss impairment methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The Company adopted the new credit losses standard using the modified retrospective approach.

The cumulative effect of adoption at January 1, 2020 was $ 6.5 million, net of tax.

The Company's primary financial assets are its trade accounts receivable, which are short-term financings under industry standard credit and trade terms.

(e) Foreign Currency.

12 unchanged sentences

For all transactions designated as hedges, the hedging relationships are formally documented at the inception and on an ongoing basis in offsetting changes in cash flows of the hedged transaction.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company records derivative financial instruments on the Consolidated Balance Sheets as either an asset or liability measured at its fair value.

9 unchanged sentences

The forward exchange contract assets and liabilities as of December 31, 2020 and 2019 were not material in any period presented.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(g) Cash and Cash Equivalents.

7 unchanged sentences

Raw materials and supplies 129.3 92.3

$ 312.1 $ 260.5

(i) Property, Plant and Equipment.

Property, plant and equipment are carried at cost at acquisition date and are depreciated using the straight-line method over their estimated useful lives as follows:

Buildings 25 - 30

Computer equipment and software 3 - 7

5 unchanged sentences

Assets under finance leases are included within property, plant and equipment and represent non-cash investing activities.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Property, plant and equipment, net consisted of the following:

9 unchanged sentences

Depreciation expense, which includes depreciation expense for finance and capital lease assets, for the Company was $ 80.5 million, $ 73.8 million and $ 71.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(j) Long-Lived Assets.

9 unchanged sentences

If the fair value exceeds the carrying amount, then no impairment exists.

If the carrying amount exceeds the fair value, further analysis is performed to assess impairment.

The Company’s determination of fair value of the reporting units is based on a discounted cash flow approach, with an appropriate risk-adjusted discount rate, and a market approach.

Any identified impairment would result in an adjustment to the Company’s results of operations.

If the carrying amount exceeds the fair value, the goodwill is written down for the amount by which the carrying amount exceeds the fair value.

However, the loss recognized cannot exceed the carrying amount of goodwill.

Using the quantitative approach, the Company makes various estimates and assumptions in determining the estimated fair value of each reporting unit using a combination of discounted cash flow models and valuations based on earnings multiples for guideline public companies in each reporting unit’s industry peer group, when externally quoted market prices are not readily available.

Discounted cash flow models are reliant on various assumptions, including projected business results, long-term growth factors and weighted-average cost of capital.

Management judgement is involved in estimating these variables, and they include inherent uncertainties as they are forecasting future events.

The Company performs sensitivity analyses by using a range of inputs to confirm the reasonableness of the long-term growth rate and weighted average cost of capital.

Additionally, the Company compares the indicated equity value to its market capitalization and evaluates the resulting implied control premium/discount to determine if the estimated enterprise value is reasonable compared to external market indicators.

The Company also tests its indefinite-lived intangible assets, principally the Tempur and Sealy trade names.

11 unchanged sentences

Estimated future obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized.

The Company considers the impact of recoverable salvage value on sales returns by segment in determining its estimate of future sales returns.

Effective January 1, 2018 with the Company's adoption of Topic 606, the Company recognizes a return asset for the right to recover the goods returned by the customer.

The Company considers the impact of recoverable salvage value on sales returns by product in determining its estimate of future sales returns.

The Company recognizes a return asset for the right to recover the goods returned by the customer.

The right of return asset is recognized on a gross basis outside of the accrued sales returns and is not material to the Company's Consolidated Balance Sheets.

2 unchanged sentences

Balance as of December 31, 2018 $ 34.3

Reclassification and remeasurement of sales return asset under Topic 606

Balance as of January 1, 2018

Amounts accrued 112.4

17 unchanged sentences

Balance as of December 31, 2018 $ 36.4

Remeasurement of obligations under Topic 606

Balance as of January 1, 2018

Amounts accrued 29.4

8 unchanged sentences

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(n) Allowance for Doubtful Accounts.

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable.

The Company regularly reviews the adequacy of its allowance for doubtful accounts.

The Company determines the allowance for doubtful accounts based on historical write-off experience and current economic conditions and also considers factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a customer receivable is reasonably assured.

Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote.

The allowance for doubtful accounts included in accounts receivable, net in the accompanying Consolidated Balance Sheets was $ 71.9 million and $ 47.6 million as of December 31, 2019 and 2018 , respectively.

(n) Allowance for Credit Losses.

The allowance for credit losses is the Company's best estimate of the amount of estimated lifetime credit losses in the Company's accounts receivable.

The Company regularly reviews the adequacy of its allowance for credit losses.

The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding.

Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote.

As of December 31, 2020, the Company's accounts receivable were substantially current, and there were no significant changes to the aging of receivables as a result of the impact of the global pandemic.

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 allowance for credit losses is included in accounts receivable, net in the accompanying Consolidated Balance Sheets.

The Company had the following activity for its allowance for credit losses from December 31, 2018 to December 31, 2020.

(in millions)

Balance as of December 31, 2018

Amounts accrued 29.3

Write-offs charged against the allowance ( 5.0 )

Balance as of December 31, 2019

ASU 2016-13 adoption impact (before tax) 8.9

Balance as of January 1, 2020 80.8

Amounts accrued 35.8

Write-offs charged against the allowance ( 45.0 )

Balance as of December 31, 2020

(o) Income Taxes.

10 unchanged sentences

Amounts included in cost of sales for shipping and handling were $ 223.1 million, $ 192.2 million and $ 169.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Additionally, cost of sales for 2019 and 2018 include royalties that the Company pays to other entities for the use of their names on products produced by the Company.

Prior to the adoption of Topic 606 as of January 1, 2018, royalty income, net of royalty expense was an operating expense line item presented separately on the Company's Consolidated Statements of Income.

For additional information, please refer to Note 4 , “ Revenue Recognition .” Royalty expense is not material to the Company's Consolidated Statements of Income.

Additionally, cost of sales include royalties that the Company pays to other entities for the use of their names on products produced by the Company.

For additional information, please refer to Note 2, "Net Sales." Royalty expense is not material to the Company's Consolidated Statements of Income.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(q) Cooperative Advertising, Rebate and Other Promotional Programs.

15 unchanged sentences

Advertising costs include expenditures for shared advertising costs that the Company reimburses to customers under its integrated and cooperative advertising programs.

Cooperative advertising costs paid to customers are recorded as a component of selling and marketing expenses within the Consolidated Statements of Income to the extent the fair value of the distinct good or service can reasonably be estimated.

The Company periodically assesses the liabilities recorded for cooperative advertising based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer.

Advertising costs deferred and included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets were $ 4.7 million and $ 3.6 million as of December 31, 2020 and 2019, respectively.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(s) Research and Development Expenses.

14 unchanged sentences

On February 1, 2016, the Board of Directors authorized a share repurchase program pursuant to which the Company was permitted to repurchase shares of Tempur Sealy International's common stock.

The Board of Directors authorized an increase in the amount of shares available for repurchase under this program in February 2020.

Treasury stock is accounted for under the cost method and reported as a reduction of stockholders’ equity.

9 unchanged sentences

The benefit obligation is the projected benefit obligation ("PBO").

The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels.

The measurement of the PBO is based on the Company’s estimates and actuarial valuations.

The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants.

These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates.

(2) Recently Issued Accounting Pronouncements

Credit Losses

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures.

The Company adopted the new credit losses standard effective January 1, 2020 using the modified retrospective approach.

The Company recognized a cumulative effect of initially applying the new standard as a decrease to the opening balance of retained earnings, which was not material to the Company's Consolidated Financial Statements.

The PBO represents the actuarial present value of benefits expected to be paid upon

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(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.

Components of amounts reflected in the Consolidated Statements of Income related to discontinued operations are presented in the following table for the years ended December 31.

Twelve Months Ended

Cost of sales

Selling and marketing expenses

General, administrative and other expenses

Operating loss

Interest (income) expense, net and other

Loss from discontinued operations before income taxes

Income tax provision

Loss generated from discontinued operations, net of tax

Gain on disposal of business

Loss from discontinued operations, net of tax

retirement based on estimated future compensation levels.

The measurement of the PBO is based on the Company's estimates and actuarial valuations.

The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants.

(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 years ended December 31.

Twelve Months Ended December 31, 2020

(in millions) North America International Consolidated

Wholesale $ 2,806.7 $ 379.1 $ 3,185.8

Direct 352.5 138.6 491.1

Net sales $ 3,159.2 $ 517.7 $ 3,676.9

North America International Consolidated

Bedding $ 2,956.3 $ 397.5 $ 3,353.8

Other 202.9 120.2 323.1

Net sales $ 3,159.2 $ 517.7 $ 3,676.9

North America International Consolidated

Geographical region

United States $ 2,886.6 $ — $ 2,886.6

All other 272.6 517.7 790.3

Net sales $ 3,159.2 $ 517.7 $ 3,676.9

Twelve Months Ended December 31, 2019

(in millions) North America International Consolidated

Wholesale $ 2,343.5 $ 373.6 $ 2,717.1

Direct 260.0 128.9 388.9

Net sales $ 2,603.5 $ 502.5 $ 3,106.0

North America International Consolidated

Bedding $ 2,448.8 $ 388.2 $ 2,837.0

Other 154.7 114.3 269.0

Net sales $ 2,603.5 $ 502.5 $ 3,106.0

North America International Consolidated

Geographical region

United States $ 2,312.1 $ — $ 2,312.1

All other 291.4 502.5 793.9

Net sales $ 2,603.5 $ 502.5 $ 3,106.0

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) Revenue Recognition

Disaggregation of Revenue

Twelve Months Ended December 31, 2018

(in millions)

North America

International

North America

International

North America

International

North America

International

North America

International

North America

International

(in millions) North America International Consolidated

Wholesale $ 2,059.5 $ 392.6 $ 2,452.1

Direct 147.5 103.3 250.8

Net sales $ 2,207.0 $ 495.9 $ 2,702.9

North America International Consolidated

Bedding $ 2,069.5 $ 385.8 $ 2,455.3

Other 137.5 110.1 247.6

Net sales $ 2,207.0 $ 495.9 $ 2,702.9

North America International Consolidated

Geographical region

United States $ 1,928.8 $ — $ 1,928.8

International

All Other 278.2 495.9 774.1

Net sales $ 2,207.0 $ 495.9 $ 2,702.9

The North America and International segments sell product through two channels:

17 unchanged sentences

The Company also offers assurance type warranties on certain of its products, which is not accounted for as separate performance obligations under the revenue model.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The transaction price is measured as the amount of consideration the Company expects to receive in exchange for transferring goods.

5 unchanged sentences

As such, the Company does not adjust its consideration for financing arrangements.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In certain jurisdictions, the Company is subject to certain non-income taxes including, but not limited to, sales tax, value added tax, excise tax and other taxes.

4 unchanged sentences

(3) Acquisitions and Divestitures

Acquisition of Sherwood Bedding

On January 31, 2020, the Company acquired an 80 % ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of $ 39.1 million, which included $ 1.2 million of cash acquired.

The Company accounted for this transaction as a business combination.

The final allocation of the purchase price is based on the fair values of the assets acquired and liabilities assumed as of January 31, 2020, which included the following:

(in millions)

Working capital (accounts receivable and inventory, net of accounts payable and accrued liabilities) $ 5.8

Property and equipment 10.1

Goodwill 26.7

Customer relationships intangible assets 3.7

Operating lease right-of-use assets 19.9

Operating lease liabilities ( 19.9 )

Non-controlling interest ( 8.4 )

Purchase price, net of cash acquired $ 37.9

Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the private label product growth opportunities and expected synergistic manufacturing benefits to be realized from the acquisition.

The goodwill is deductible for income tax purposes and is included within the North American reporting unit for goodwill impairment assessments.

Acquisition of Innovative Mattress Solutions, LLC ("iMS")

3 unchanged sentences

The Company accounted for this transaction as a business combination.

Total cash consideration was $ 13.2 million , less cash acquired of $ 5.1 million , resulting in a purchase price of $ 8.1 million .

The final allocation of the purchase price is based on the fair values of the assets acquired and liabilities assumed as of April 1, 2019, which includes the following:

Total cash consideration was $ 13.2 million, which included $ 5.1 million of cash acquired.

The final allocation of the purchase price is based on the fair values of the assets acquired and liabilities assumed as of April 1, 2019, which included the following:

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in millions)

4 unchanged sentences

Long-term operating lease liabilities ( 28.5 )

Net purchase price

Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the growth opportunities and synergistic benefits to be realized from the acquisition.

The goodwill is deductible for income tax purposes and will be included within the North American reporting unit for goodwill impairment assessments.

Purchase price, net of cash acquired $ 8.1

Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the growth opportunities and expected retail synergistic benefits to be realized from the acquisition.

The goodwill is deductible for income tax purposes and is included within the North American reporting unit for goodwill impairment assessments.

As a result of the acquisition, the Company acquired trade names and customer database of $ 2.1 million.

Acquisition of Sherwood Bedding

The Company will account for this transaction as a business combination in 2020.

The purchase price allocation will principally include working capital, property plant and equipment, and goodwill.

Any excess of the purchase price over the fair value of the net assets acquired will be recorded as goodwill, which will be deductible for income tax purposes.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) Goodwill and Other Intangible Assets

The following summarizes the Company's goodwill by reportable segment:

(in millions)

North America

International

(in millions) North America International Consolidated

Balance as of December 31, 2018 $ 576.7 $ 146.3 $ 723.0

Goodwill resulting from acquisitions 2.4 5.4 7.8

Foreign currency translation adjustments and other 2.8 ( 1.3 ) 1.5

Balance as of December 31, 2019 $ 581.9 $ 150.4 $ 732.3

Goodwill resulting from acquisitions

Goodwill resulting from acquisition 26.7 — 26.7

Foreign currency translation adjustments and other 1.7 5.6 7.3

2 unchanged sentences

($ in millions)

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(Years) Gross

Amount Accumulated

Amortization Net

Amount Accumulated

Amortization Net

Unamortized indefinite life intangible assets:

$ 560.7 $ 560.7 $ 559.5 $ 559.5

Amortized intangible assets:

Contractual distributor relationships

15 85.7 44.5 41.2 85.5 38.7 46.8

Technology and other

91.3 75.9 15.4 91.1 68.7 22.4

Patents, other trademarks and other trade names

28.7 21.3 7.4 27.9 18.6 9.3

Customer databases, relationships and reacquired rights

35.1 29.7 5.4 30.9 27.5 3.4

$ 801.5 $ 171.4 $ 630.1 $ 794.9 $ 153.5 $ 641.4

Amortization expense relating to intangible assets for the Company was $ 17.5 million, $ 15.9 million and $ 15.3 million for the years ended December 31, 2020, 2019 and 2018, respectively, and is recorded in general, administrative and other expenses in the Company's Consolidated Statements of Income.

No impairments of goodwill or other intangible assets have adjusted the gross carrying amount of these assets in any period.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Estimated annual amortization of intangible assets is expected to be as follows for the years ending December 31:

(in millions)

Thereafter 13.9

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) Unconsolidated Affiliate Companies

The Company has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions.

The Company’s ownership interest in these joint ventures is 50.0 % and is accounted for under the equity method.

The Company’s investment of $ 22.5 million at December 31, 2019 and 2018 , is recorded in other non-current assets in the accompanying Consolidated Balance Sheets.

The Company’s share of earnings for the years ended December 31, 2019 , 2018 and 2017 respectively, are recorded in equity income in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income.

The tables below present summarized financial information for joint ventures as of and for the years ended December 31:

(in millions)

Current assets

Non-current assets

Total liabilities

(in millions)

Income from operations

Debt for the Company consists of the following:

(in millions)

December 31, 2019

December 31, 2018

Maturity Date

2019 Credit Agreement:

Term A Facility

October 16, 2024

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

Amount Rate Amount Rate Maturity Date

2019 Credit Agreement:

Term A Facility

2026 Senior Notes

June 15, 2026

2023 Senior Notes

October 15, 2023

Securitized debt

April 6, 2021

Term A Facility $ 409.1 (1) $ 425.0 (2) October 16, 2024

Revolver — (1) — (2) October 16, 2024

2026 Senior Notes 600.0 5.500 % 600.0 5.500 % June 15, 2026

2023 Senior Notes 250.0 5.625 % 450.0 5.625 % October 15, 2023

Securitized debt 33.9 (3) — (3) April 6, 2021

Finance lease obligations (4)

71.4 64.1 Various

Other 5.9 7.9 Various

Total debt 1,370.3 1,547.0

Deferred financing costs 3.4 7.0

7 unchanged sentences

Refer to Note 6, "Leases."

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2019 Credit Agreement

3 unchanged sentences

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

Total availability under the revolving facility was $ 402.8 million , after giving effect to letters of credit outstanding of $ 22.2 million , as of December 31, 2019.

Borrowings under the 2019 Credit Agreement will generally bear interest, at the election of Tempur Sealy International and the other 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.

Total availability under the revolving facility was $ 424.9 million, after a $ 0.1 million reduction for outstanding letters of credit.

Borrowings under the 2019 Credit Agreement will generally bear interest, at the election of Tempur Sealy International and the other subsidiary borrowers, at either Base Rate or 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, 2020, such applicable margins that are 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.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (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.

7 unchanged sentences

The Company was in compliance with all applicable covenants in the 2019 Credit Agreement at December 31, 2020.

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.

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.

On February 2, 2021 the Company entered into an amendment to the 2019 Credit Agreement.

The amendment provides for an increase to the revolving credit facility from $ 425.0 million to $ 725.0 million.

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

2 unchanged sentences

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2016 Credit Agreement

The Company used the proceeds from the 2019 Credit Agreement to refinance outstanding borrowings under the 2016 Credit Agreement and terminated the existing revolving credit commitments.

The 2016 Credit Agreement initially provided for a $ 500.0 million revolving credit facility, a $ 500.0 million initial term loan facility and a $ 100.0 million delayed draw term loan facility.

During the twelve months ended December 31, 2019 , the Company prepaid $ 75.0 million on the Term A facility under the 2016 Credit Agreement.

2026 Senior Notes

11 unchanged sentences

Tempur Sealy International could have made such redemptions as described in the preceding sentence only if, after any such redemption, at least 65.0 % of the original aggregate principal amount of the 2026 Senior Notes issued remains outstanding.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The 2026 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things:

12 unchanged sentences

On October 18, 2016, Tempur Sealy International completed the Exchange Offer, with 100 % of the outstanding notes tendered and received for new 2026 Senior Notes registered under the Securities Act.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2023 Senior Notes

8 unchanged sentences

The redemption price will decline each year after 2018 until it becomes 100.0 % of the principal amount beginning on October 15, 2021.

On November 9, 2020, the Company redeemed the first $ 200.0 million of the issued and outstanding 2023 Notes at 101.406 % of the principal amount, plus the accrued and unpaid interest.

On January 13, 2021, the Company redeemed $ 125.0 million of the remaining $ 250.0 million issued and outstanding 2023 Senior Notes at 101.406 % of the principal amount, plus the accrued and unpaid interest.

On February 8, 2021 the Company redeemed the remaining $ 125.0 million of its 2023 Senior Notes at 101.406 % of the principal amount, plus the accrued and unpaid interest.

The 2023 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things:

10 unchanged sentences

These covenants are subject to a number of exceptions and qualifications.

In conjunction with the issuance and sale of the 2023 Senior Notes, Tempur Sealy International and the Combined Guarantor Subsidiaries agreed through a Registration Rights Agreement to exchange the 2023 Senior Notes for a new issue of substantially identical senior notes registered under the Securities Act (the "2023 Exchange Offer").

On April 4, 2016, Tempur Sealy International completed the 2023 Exchange Offer, with 100 % of the outstanding notes tendered and received for new 2023 Senior Notes registered under the Securities Act.

Securitized Debt

1 unchanged sentence

In connection with this transaction, Tempur Sealy International and its wholly-owned special purpose subsidiary, Tempur Sealy Receivables, LLC, entered into a credit agreement that provides for revolving loans to be made from time to time in a maximum amount that varies over the course of the year based on the seasonality of the Company's accounts receivable and is subject to an overall limit of $ 120.0 million.

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

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

The obligations of the Company and its relevant subsidiaries under the Accounts Receivable Securitization are secured by the accounts receivable and certain related rights and the facility agreements contain customary events of default.

The accounts receivable continue to be owned by the Company and its subsidiaries and continue to be reflected as assets on the Company’s Consolidated Balance Sheets and represent collateral up to the amount of the borrowings under this facility.

Borrowings under this facility are classified as long-term debt within the Consolidated Balance Sheets.

The Accounts Receivable Securitization matures April 6, 2021.

The Company is in the process of refinancing this facility.

Borrowings under this facility are classified as long-term debt within

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the Consolidated Balance Sheets at December 31, 2020, based on the Company's ability and intent to refinance on a long-term basis.

The accounts receivable continue to be owned by the Company and its subsidiaries and continue to be reflected as assets on the Company's Consolidated Balance Sheets and represent collateral up to the amount of the borrowings under this facility.

Financial instruments, although not recorded at fair value on a recurring basis, include cash and cash equivalents, accounts receivable, accounts payable and the Company's debt obligations.

3 unchanged sentences

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

(in millions)

December 31, 2019

December 31, 2018

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

2023 Senior Notes $ 255.1 $ 464.2

4 unchanged sentences

Upon the prepayment of the related debt, the Company accelerates the recognition of an appropriate amount of the costs.

As a result of the redemption of $ 200.0 million of the 2023 Senior Notes, the Company expensed $ 2.3 million of deferred financing costs, which are included within loss on extinguishment of debt in the Consolidated Statement of Income for the twelve months ended December 31, 2020.

Future Obligations

1 unchanged sentence

(in millions)

Thereafter 600.0

Total $ 1,298.9

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company leases retail stores, manufacturing and distribution facilities, office space and equipment under operating lease agreements.

The Company leases retail stores, manufacturing and distribution facilities, office space and equipment under operating and finance lease agreements.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to several years, with the longest renewal period extending through 2034.

2 unchanged sentences

The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

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

(in millions)

December 31, 2019

Operating lease assets

Operating lease right-of-use assets

Finance lease assets

Property, plant and equipment, net

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

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

Operating lease assets Operating lease right-of-use assets $ 304.3 $ 245.4

Finance lease assets Property, plant and equipment, net 61.2 54.4

Total leased assets $ 365.5 $ 299.8

Operating lease obligations

Accrued expenses and other current liabilities

Finance lease obligations

Current portion of long-term debt

Operating lease obligations

Long-term operating lease obligations

Finance lease obligations

Long-term debt, net

Operating lease obligations Accrued expenses and other current liabilities $ 61.0 $ 50.8

Finance lease obligations Current portion of long-term debt 11.4 8.2

Operating lease obligations Long-term operating lease obligations 275.1 205.4

Finance lease obligations Long-term debt, net 60.0 55.9

Total lease obligations $ 407.5 $ 320.3

The following table summarizes the classification of lease expense in the Company's Consolidated Statement of Income for the year ended December 31, 2019 :

The following table summarizes the classification of lease expense in the Company's Consolidated Statements of Income for the years ended December 31, 2020 and 2019:

Twelve Months Ended

(in millions)

December 31, 2019

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

Operating lease expense:

10 unchanged sentences

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

(in millions)

Operating Leases

Finance Leases

(in millions) Operating Leases Finance Leases Total

Year Ended December 31,

2021 $ 74.1 $ 15.3 $ 89.4

2022 67.9 13.4 81.3

2023 55.5 10.7 66.2

2024 46.0 8.6 54.6

2025 39.3 7.7 47.0

Thereafter 112.3 34.2 146.5

Total lease payments 395.1 89.9 485.0

Interest ( 59.0 ) ( 18.5 ) ( 77.5 )

Present value of lease obligations $ 336.1 $ 71.4 $ 407.5

7 unchanged sentences

Finance leases 5.80 %

The following table provides supplemental information related to the Company's Consolidated Statement of Cash Flows for the year ended December 31, 2019 :

The following table provides supplemental information related to the Company's Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019:

Twelve Months Ended

(in millions)

December 31, 2019

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

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

Operating cash flows paid for operating leases

Operating cash flows paid for operating leases (a)

$ 70.1 $ 62.7

Operating cash flows paid for finance leases $ 4.7 $ 3.7

2 unchanged sentences

Right-of-use assets obtained in exchange for new finance lease obligations $ 17.6 $ 4.1

(a) Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Consolidated Statement of Cash Flows offset by non-cash right-of-use asset amortization and lease liability accretion.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) Retirement Plans

5 unchanged sentences

The Company incurred $ 5.8 million, $ 6.0 million and $ 5.8 million of expenses associated with the 401(k) Plan for the years ended December 31, 2020, 2019 and 2018, respectively, which are included in the Consolidated Statements of Income.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Defined Benefit Pension Plans

17 unchanged sentences

(in millions)

2020 2019 2018

$ 1.1 $ 0.9 $ 1.0

Interest cost

Expected return on assets

( 1.5 ) ( 1.3 ) ( 1.5 )

Amortization of prior service cost

1 unchanged sentence

Net periodic pension cost

$ 0.9 $ 1.0 $ 0.7

The other changes in plan assets and benefit obligations recognized in other comprehensive loss, before tax effects, for the years ended December 31 were:

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in millions)

2020 2019 2018

$ 1.9 $ 2.2 $ 0.6

New prior service cost

Amortization of prior service cost

( 0.1 ) ( 0.1 ) ( 0.1 )

Amortization or settlement recognition of net loss

( 0.1 ) ( 0.1 ) —

Total recognized in other comprehensive loss

$ 1.8 $ 2.6 $ 0.6

The following assumptions, calculated on a weighted-average basis, were used to determine net periodic pension cost for the Company’s Plans for the years ended December 31:

2020 2019 2018

Discount rate (a)

Expected long-term return on plan assets

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The discount rates used in 2019 to determine the expenses for the U.S.

3.16 % 4.10 % 3.58 %

Expected long-term return on plan assets (b)

5.37 % 6.16 % 6.25 %

(a) The discount rates used in 2020 to determine the expenses for the U.S.

retirement plan and Canadian retirement plan were 3.15 % and 3.20 %, respectively.

3 unchanged sentences

retirement plan and Canadian retirement plan were 3.54 % and 3.70 %.

(b) The expected long-term return on plan assets in 2020 to determine the expenses for the U.S.

retirement plan and Canadian retirement plan were 5.75 % and 4.30 %, respectively.

The discount rates used in 2019 to determine the expenses for the U.S.

retirement plan and Canadian retirement plan were 6.50 % and 5.00 %, respectively.

The discount rates used in 2018 to determine the expenses for the U.S.

retirement plan and Canadian retirement plan were 6.50 % and 5.50 %, respectively.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Obligations and Funded Status

4 unchanged sentences

Projected benefit obligation at beginning of year

$ 36.9 $ 30.0

Interest cost

Plan amendments

Actuarial (gain) loss

Actuarial loss 4.6 5.5

Benefits paid

( 1.3 ) ( 1.3 )

Expenses paid

( 0.1 ) ( 0.1 )

Foreign currency exchange rate changes

Projected benefit obligation at end of year

$ 42.5 $ 36.9

Change in Plan Assets:

Fair value of plan assets at beginning of year

$ 27.0 $ 22.2

Actual return on plan assets

1 unchanged sentence

Benefits paid

( 1.3 ) ( 1.3 )

Expenses paid

( 0.1 ) ( 0.1 )

Foreign currency exchange rate changes

Fair value of plan assets at end of year

$ 31.3 $ 27.0

Funded status

$ ( 11.2 ) $ ( 9.9 )

The Company’s defined benefit pension plan for U.S.

11 unchanged sentences

Non-current benefit liability

$ 11.2 $ 10.0

Non-current benefit asset

The following assumption, calculated on a weighted-average basis, was used to determine benefit obligations for the Company’s defined benefit pension plans as of December 31:

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following assumption, calculated on a weighted-average basis, was used to determine benefit obligations for the Company’s defined benefit pension plans as of December 31:

Discount rate (a)

The discount rates used in 2019 to determine the benefit obligations for the U.S.

2.47 % 3.16 %

(a) The discount rates used in 2020 to determine the benefit obligations for the U.S.

retirement plan and Canadian retirement plan were 2.43 % and 2.80 %, respectively.

6 unchanged sentences

(in millions)

Fiscal 2021 $ 1.0

Fiscal 2022 1.1

Fiscal 2023 1.2

Fiscal 2024 1.2

Fiscal 2025 1.3

Fiscal 2026 ‑ Fiscal 2029 8.0

5 unchanged sentences

Equity securities

60.0 % 56.6 %

Debt securities

40.0 % 43.1 %

Total plan assets

100.0 % 100.0 %

Investment strategies and policies reflect a balance of risk-reducing and return-seeking considerations.

37 unchanged sentences

Money market funds

$ 31.3 $ 27.0

TEMPUR SEALY INTERNATIONAL, INC.

10 unchanged sentences

(in millions)

2020 2019 2018

Multi‑employer retirement plan expense

$ 4.6 $ 4.3 $ 3.9

Multi‑employer health and welfare plan expense

18 unchanged sentences

United Furniture Workers Pension Fund A (4)

13-5511877-001

2017, 2018, 2019

13-5511877-001 2/28/20 Red Implemented $ 1.5 No 2023 2018, 2019, 2020

Pension Plan of the National Retirement Fund

13-6130178-001

13-6130178-001 12/31/19 Red Implemented $ 1.1 Yes, 10.0 %

Central States, Southeast & Southwest Areas Pension Plan

36-6044243-001

36-6044243-001 12/31/19 Red Implemented $ 1.0 Yes, 10.0 %

EIN/Pension Plan Number

12 unchanged sentences

United Furniture Workers Pension Fund A (4)

13-5511877-001

2016, 2017, 2018

13-5511877-001 2/28/19 Red Implemented $ 1.1 No 2020 2017, 2018, 2019

Pension Plan of the National Retirement Fund

13-6130178-001

13-6130178-001 12/31/18 Red Implemented $ 1.0 Yes, 10.0 %

Central States, Southeast & Southwest Areas Pension Plan

36-6044243-001

36-6044243-001 12/31/18 Red Implemented $ 0.8 Yes, 10.0 %

TEMPUR SEALY INTERNATIONAL, INC.

21 unchanged sentences

As of December 31, 2020, the Company had approximately $ 201.6 million remaining under an 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 .

For the year ended December 31, 2019 , the Company repurchased 1.3 million shares for approximately $ 102.3 million under the program.

The Company did not repurchase any shares under the program during the year ended December 31, 2018 .

For the year ended December 31, 2017 , the Company repurchased 0.6 million shares for approximately $ 40.1 million under the program.

In addition, the Company acquired 0.1 million , 0.1 million , and 0.1 million shares upon the vesting of certain restricted stock units ("RSUs"), which were withheld to satisfy tax withholding obligations during the years ended December 31, 2019 , 2018 and 2017 , respectively.

The Company repurchased 6.5 million shares and 1.3 million shares, under the program, for approximately $ 285.9 million and $ 102.3 million during the years ended December 31, 2020 and 2019, respectively.

In February 2021, the Board of Directors authorized an increase to our share repurchase authorization to bring the total authorization to $ 400.0 million.

The Company did no t repurchase any shares under the program during the year ended December 31, 2018.

In addition, the Company acquired shares upon the vesting of certain restricted stock units ("RSUs") and performance restricted stock units ("PRSUs"), which were withheld to satisfy tax withholding obligations during the years ended December 31, 2020, 2019 and 2018, respectively.

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 $ 45.9 million, $ 3.4 million and $ 4.6 million in treasury stock acquired during the years ended December 31, 2020, 2019 and 2018, respectively.

7 unchanged sentences

(in millions)

2020 2019 2018

Foreign Currency Translation

Balance at beginning of period

$ ( 82.2 ) $ ( 91.7 ) $ ( 72.8 )

Other comprehensive loss:

Foreign currency translation adjustments (1)

23.6 9.5 ( 18.9 )

Balance at end of period

$ ( 58.6 ) $ ( 82.2 ) $ ( 91.7 )

Pension Benefits

Balance at beginning of period

$ ( 5.5 ) $ ( 3.6 ) $ ( 2.7 )

Other comprehensive loss:

Net change from period revaluation

( 1.8 ) ( 2.6 ) ( 0.4 )

Tax benefit (2)

Total other comprehensive loss before reclassifications, net of tax

( 1.4 ) ( 1.9 ) ( 0.3 )

Net amount reclassified to earnings

3 unchanged sentences

Total other comprehensive loss

Balance at end of period

Foreign Exchange Forward Contracts

Balance at beginning of period

Other comprehensive loss:

Net change from period revaluation

Tax benefit (2)

Total other comprehensive loss before reclassifications, net of tax

Net amount reclassified to earnings (3)

Total amount reclassified from accumulated other comprehensive loss, net of tax

Total other comprehensive loss

( 1.4 ) ( 1.9 ) ( 0.9 )

Balance at end of period

$ ( 6.9 ) $ ( 5.5 ) $ ( 3.6 )

(1) In 2020, 2019 and 2018, there were no tax impacts related to foreign currency translation adjustments and no amounts were reclassified to earnings.

(2) These amounts were included in the income tax provision in the accompanying Consolidated Statements of Income.

This amount was included in cost of sales, net in the accompanying Consolidated Statements of Income .

TEMPUR SEALY INTERNATIONAL, INC.

5 unchanged sentences

(in millions)

$ 150.4 $ 136.0

Wages and benefits

Operating leases obligations

Sales returns

$ 585.1 $ 473.2

(10) Stock-based Compensation

8 unchanged sentences

Tempur Sealy International may issue a maximum of 34.8 million shares of common stock under the 2013 Plan, subject to certain adjustment provisions.

The maximum number of shares of common stock has been adjusted to include 26.1 million additional shares as a result of the four -for-one stock-split that occurred on November 24, 2020.

The Amended and Restated 2003 Equity Incentive Plan, as amended (the "2003 Plan"), was administered by the Compensation Committee of the Board of Directors, which, together with the Board of Directors, had the exclusive authority to administer the 2003 Plan, including the power to determine eligibility to receive awards, the types and number of shares of stock subject to the awards, the price and timing of awards and the acceleration or waiver of any vesting and performance of forfeiture restrictions, in each case subject to the terms of the 2003 Plan.

2 unchanged sentences

In May 2013, the Company's Board of Directors adopted a resolution that prohibited further grants under the 2003 Plan.

The maximum allowed shares of common stock under the 2003 Plan has been adjusted to include 34.5 million additional shares as a result of the four -for-one stock-split that occurred on November 24, 2020.

In 2010, the Board of Directors approved the terms of a Long-Term Incentive Plan established under the 2003 Plan.

9 unchanged sentences

(in millions) 2020 2019 2018

PRSU expense (benefit)

PRSU expense $ 77.4 $ 1.4 $ 2.5

Stock option expense 4.9 4.9 6.7

1 unchanged sentence

Total stock-based compensation expense $ 104.5 $ 26.8 $ 24.8

The Company granted PRSUs during the years ended December 31, 2019 , 2018 and 2017 .

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

The Company recorded a benefit in the accompanying Consolidated Statements of Income of $ 9.3 million for the year ended December 31, 2017 , after the change in estimate to reduce accumulated performance stock-based compensation amortization to actual cost based on updated projected or final financial results.

Performance Restricted Stock Units

A summary of the Company's PRSU activity and related information for the years ended December 31, 2020 and 2019 is presented below:

(shares in millions)

Weighted Average Grant Date Fair Value

(shares in millions) Shares Weighted Average Grant Date Fair Value

Awards unvested at December 31, 2018 8.0 $ 15.27

Granted 0.3 21.35

Forfeited ( 4.8 ) 17.74

Awards unvested at December 31, 2019 3.5 15.02

Granted 3.5 21.39

Vested ( 3.4 ) 15.03

Forfeited — —

Awards unvested at December 31, 2020 3.6 $ 21.18

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

The Company granted PRSUs during the years ended December 31, 2020, 2019 and 2018.

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

During the first quarter of 2020, the Company granted 0.6 million PRSUs at target at a weighted average grant date fair value of $ 21.39 per share with a performance January 1, 2020 through December 31, 2020 as a component of the long-term incentive plan ("2020 PRSUs").

For the year ended December 31, 2020, the Company recognized stock-based compensation expense related to the 2020 PRSUs, as the Company achieved the maximum specified performance target for the performance period.

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").

2 unchanged sentences

At the end of the First Designated Period, the Adjusted EBITDA targets were not met.

As a result, one-half of the total 2019 Aspirational Plan PRSUs are no longer available for vesting based on performance and are included in forfeitures in the table above.

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.

As a result, one-half of the total 2019 Aspirational Plan PRSUs are no longer available for vesting based on performance and were forfeited in 2019.

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company did not record any stock-based compensation expense related to the 2019 Aspirational Plan PRSUs during the years ended December 31, 2019 , 2018 and 2017, as it was not probable that the Company would achieve the specified performance target for either the First Designated Period or 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.

Based on the price of the Company’s common stock on the grant date, the total unrecognized compensation expense related to this award if the performance target is met for the Second Designated Period would range from $ 33.1 million to $ 49.7 million , which would be expensed over the remaining service period if achievement of the performance condition becomes probable.

As of December 31, 2019 , the Company has 0.8 million of the 2019 Aspirational PRSUs outstanding that will fully vest if the Company achieves $ 650.0 million or more of Adjusted EBITDA for 2020.

All remaining 2019 Aspirational Plan PRSUs will be forfeited if the performance metric is not met in 2020.

In March 2019, the Compensation Committee of the Board of Directors formally determined that the Company did not have more than $ 650.0 million of Adjusted EBITDA for payout under the PRSUs granted in 2017 ("the 2017 Aspirational Plan PRSUs").

As a result, the remaining one-third of the 2017 Aspirational Plan PRSUs previously granted with a performance period for 2018 were forfeited as of this date.

Vesting for the remaining one-half of the total 2019 Aspirational Plan PRSUs was 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").

On November 16, 2020, the Compensation Committee of the Board of Directors determined that the maximum performance condition was achieved during the Second Designated Period.

The 2019 Aspirational Plan PRSUs vested on December 15, 2020.

The Company recorded $ 45.2 million of stock-based compensation expense related to the 2019 Aspirational Plan PRSUs during the third quarter of 2020, as it became probable the Company would achieve the highest specified performance target.

The amount recognized in the third quarter represents the cumulative catch-up adjustment.

The Company recognized an additional $ 4.2 million of stock-based compensation expense in the fourth quarter of 2020 commensurate with the remaining requisite service period.

Stock Options

The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock options granted.

During the year ended December 31, 2019, no stock options were granted.

During the year ended December 31, 2020 and 2019, no stock options were granted.

The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2020, 2019 and 2018 are set forth in the following table.

6 unchanged sentences

Year Ended December 31,

Expected volatility range of stock

2020 2019 2018

37.4% - 40.8%

Expected life of option, range in years

Risk-free interest range rate

Expected dividend yield on stock

Expected volatility range of stock N/A N/A 39.8 % - 40.1 %

Expected life of option, range in years N/A N/A 5

Risk-free interest range rate N/A N/A 2.2 % - 2.8 %

Expected dividend yield on stock N/A N/A — %

A summary of the Company's stock option activity under the 2003 Plan and 2013 Plan for the years ended December 31, 2020 and 2019 is presented below:

(in millions, except per share amounts and years)

Weighted Average Exercise Price

Weighted Average Remaining Contractual Term (Years)

Aggregate Intrinsic Value

(in millions, except per share amounts and years) Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value

Options outstanding at December 31, 2018 6.4 $ 15.63

Exercised ( 1.2 ) 13.12

Forfeited — —

Options outstanding at December 31, 2019 5.2 $ 16.30

Exercised ( 0.5 ) 13.03

Forfeited — —

Options outstanding at December 31, 2020 4.7 $ 16.69 5.59 47.7

Options exercisable at December 31, 2020 3.6 $ 16.78 5.32 36.3

The aggregate intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was $ 6.0 million, $ 5.9 million and $ 3.9 million, respectively.

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The aggregate intrinsic value of options exercised during the years ended December 31, 2019 , 2018 and 2017 was $ 5.9 million , $ 3.9 million and $ 5.4 million , respectively.

Cash received from options exercised under all stock-based compensation plans, including cash received from options issued from treasury shares, for the years ended December 31, 2019 , 2018 and 2017 , was $ 17.8 million , $ 4.6 million , and $ 12.8 million , respectively.

A summary of the Company's unvested shares relating to stock options as of December 31, 2020 and 2019, and changes during the years ended December 31, 2020 and 2019, are presented below:

(shares in millions)

Weighted Average Grant Date Fair Value

(shares in millions) Shares Weighted Average Grant Date Fair Value

Options unvested at December 31, 2018 2.4 $ 16.55

Vested ( 0.4 ) 16.67

Forfeited — —

Options unvested at December 31, 2019 2.0 $ 16.50

Vested ( 0.9 ) 16.67

Forfeited — —

Options unvested at December 31, 2020 1.1 $ 16.38

1 unchanged sentence

A summary of the Company's RSU and DSU activity and related information for the years ended December 31, 2020 and 2019 is presented below:

(in millions, except per share amounts)

Weighted Average Release Price

Aggregate Intrinsic Value

(in millions, except per share amounts) Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value

Awards outstanding at December 31, 2018 3.3 $ 15.96

Granted 2.7 10.77

Vested ( 0.9 ) 15.64

Terminated — —

Awards outstanding at December 31, 2019 5.1 $ 13.24 $ 110.3

Granted 0.8 20.81

Vested ( 1.6 ) 13.43

Terminated ( 0.1 ) 13.99

Awards outstanding at December 31, 2020 4.2 $ 14.57 $ 113.6

The aggregate intrinsic value of RSUs and DSUs vested during the year ended December 31, 2020 was $ 33.0 million.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Excluding any potential compensation expense related to the 2019 Aspirational Plan PRSUs discussed above, a summary of total unrecognized stock-based compensation expense based on current performance estimates related to stock options, DSUs, RSUs and PRSUs for the year ended December 31, 2019 is presented below:

(in millions, except years)

December 31, 2019

Weighted Average Remaining Vesting Period (Years)

A summary of total unrecognized stock-based compensation expense based on current performance estimates related to stock options, DSUs, RSUs and PRSUs for the year ended December 31, 2020 is presented below:

(in millions, except years) December 31, 2020 Weighted Average Remaining Vesting Period (Years)

Unrecognized stock option expense $ 1.6 1

2 unchanged sentences

Total unrecognized stock-based compensation expense $ 79.1 2.12

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) Commitments and Contingencies

9 unchanged sentences

Rest of the world 132.9 114.6 105.8

$ 452.4 $ 265.5 $ 165.0

Reconciliation of Statutory Tax Rate to Effective Tax Rate

2 unchanged sentences

Year Ended December 31,

(dollars in millions)

Percentage of Income

Before Income Taxes

Percentage of Income

Before Income Taxes

Percentage of Income

2020 2019 2018

(dollars in millions) Amount Percentage of Income

Before Income Taxes Amount Percentage of Income

Before Income Taxes

6 unchanged sentences

Subpart F income 3.3 0.7 % 1.8 0.7 % ( 0.8 ) ( 0.5 ) %

Manufacturing deduction

Remeasurement of deferred taxes

Global Intangible Low-Taxed Income (“GILTI”)

— — 9.2 3.4 % 7.4 4.5 %

GILTI High-Taxed Exception

( 8.6 ) ( 1.9 ) % — — — —

Stock compensation ( 10.9 ) ( 2.4 ) % 0.9 0.3 % 0.8 0.5 %

Transition Tax — — — — ( 6.8 ) ( 4.1 ) %

4 unchanged sentences

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For 2019 and 2018, Subpart F income consists primarily of Global Intangible Low-Taxed Income ("GILTI") which is taxable to Tempur Sealy International as if earned directly by Tempur Sealy International.

The Company recognizes GILTI in the period in which such tax arises.

For years prior to 2018, Subpart F income represents interest and royalties earned by a foreign subsidiary as well as sales made by certain foreign subsidiaries outside of their country of incorporation and is taxable to Tempur Sealy International as if earned directly by Tempur Sealy International.

The Transition Tax, described below, represents taxes on certain foreign sourced earnings and profits that were previously tax deferred.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law, making significant changes to U.S.

Changes include, but are not limited to, a corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S.

international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 ("Transition Tax").

In accordance with the Act, the Company recorded an income tax benefit of $ 23.8 million in the fourth quarter of 2017, the period in which the legislation was enacted.

The total benefit included a tax benefit of $ 69.7 million related to the remeasurement of certain deferred tax assets and liabilities net of $ 45.9 million in additional income tax expense related to the Transition Tax on foreign earnings.

Pursuant to Staff Accounting Bulletin No.

118 ("SAB 118") the Company recorded an additional SAB 118 tax benefit of $ 6.8 million in 2018 related to the finalization of the Company’s Transition Tax obligation.

In July 2020 the U.S.

Treasury finalized income tax regulations applicable to the global intangible low-taxed income ("GILTI") provisions of the Internal Revenue Code (the "High Taxed Regulations").

The Company recognizes income tax expense on GILTI in the period in which such tax arises.

The High Taxed Regulations provide for full or partial relief from U.S.

taxation of current period earnings of foreign subsidiaries otherwise taxable under the GILTI regime.

The relief from U.S.

taxation may be achieved pursuant to an exception to GILTI for earnings of any individual foreign subsidiary subject to a high rate of local country income tax (the exception is referred to as the "high-taxed exception" or "HTE").

Each foreign subsidiary's facts and circumstances must be individually analyzed to determine whether the current earnings of such subsidiary qualify for the HTE and thus are excepted from GILTI.

The benefit of the HTE is retroactive to the Company's tax years starting with the tax year ended December 31, 2018 and was recognized in 2020.

Income Tax Provision

3 unchanged sentences

Current provision

Federal $ 55.1 $ 50.4 $ ( 14.6 )

State 17.3 11.9 1.1

Foreign 38.8 19.5 57.1

Total current $ 111.2 $ 81.8 $ 43.6

Deferred provision

Federal $ ( 3.4 ) $ ( 10.8 ) $ 11.4

State ( 3.4 ) ( 8.0 ) ( 4.5 )

Foreign ( 1.8 ) 11.7 ( 0.9 )

Total deferred ( 8.6 ) ( 7.1 ) 6.0

13 unchanged sentences

Stock-based compensation $ 21.6 $ 13.9

Operating lease obligations 92.9 67.2

Accrued expenses and other 55.1 62.5

Net operating losses, foreign tax credits and other tax attribute carryforwards 50.6 43.1

Inventories 11.1 8.2

Transaction costs 6.0 6.6

5 unchanged sentences

Intangible assets $ ( 150.7 ) $ ( 156.4 )

Operating lease right-of-use assets ( 82.3 ) ( 63.9 )

Property, plant and equipment ( 34.3 ) ( 36.9 )

10 unchanged sentences

Charitable contribution carryover ("CCCs") 23.6 32.9

Interest limitation carryover ("ILC")

The SNOLs, FTCs, SITCs, FNOLs and CCCs generally expire in 2021, 2023, 2023, 2023 and 2021, respectively.

Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of certain of the SNOLs, FTCs, SITCs, FNOLs, CCCs, the ILC and certain other deferred tax assets related to certain foreign operations (together, the “Tax Attributes”).

In assessing the realizability of deferred tax assets (including the Tax Attributes), management considers whether it is more likely than not that some portion of all of such deferred tax assets will not be realized.

Accordingly, the Company has established a valuation allowance for certain Tax Attributes.

Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of certain of the SNOLs, FTCs, SITCs, FNOLs, the CCCs and certain other deferred tax assets related to certain foreign operations (together, the "Tax Attributes").

The Company has established a valuation allowance for certain deferred tax assets (including the Tax Attributes) where it is more-likely-than-not such deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible or creditable.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making its assessment regarding the recoverability of its deferred tax assets.

The Company has recorded valuation allowances against $ 88.1 million of the SNOLs, $ 12.2 million of the FTCs and $ 1.4 million of SITCs.

5 unchanged sentences

Deferred Tax Liability for Undistributed Foreign Earnings

No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the Transition Tax, or any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

No additional income taxes have been provided for undistributed foreign earnings not otherwise subject to tax, or any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

At December 31, 2020, the Company's tax basis in its top tier foreign subsidiary exceeded the Company's book basis in this subsidiary in the hands of the top tier foreign subsidiary's U.S.

2 unchanged sentences

By operation of the tax laws of the various countries in which these subsidiaries are domiciled, earnings of lower tier foreign subsidiaries are not subject to tax, in all material respects, when distributed to a foreign shareholder.

It is the Company’s intent that the earnings of each lower tier foreign subsidiary, with the exception of its Danish subsidiary and one of its Canadian subsidiaries, will be permanently reinvested in each such foreign subsidiaries' own operations.

It is the Company's intent that the earnings of each lower tier foreign subsidiary, with the exception of its Danish subsidiary and its two Canadian subsidiaries, will be permanently reinvested in each such foreign subsidiaries' own operations.

As it relates to the Danish subsidiary, its earnings may be distributed without any income tax impact.

Thus, no tax is provided for with respect to the book to tax basis difference of its stock.

With respect to the Canadian subsidiary, Canadian income tax withholding applies to any distribution it makes to its foreign parent company.

The Company concluded that at December 31, 2019 the Canadian subsidiary has accumulated earnings in excess of its operating needs and as such Canadian withholding tax has been accrued on such excess.

With respect to the Canadian subsidiaries, Canadian income tax withholding applies to any distribution each subsidiary makes to its foreign parent company.

The Company concluded that at December 31, 2020 each Canadian subsidiary has accumulated earnings in excess of its operating needs and as such Canadian withholding tax has been accrued on such excess.

The amount accrued is not material.

5 unchanged sentences

Interest and penalties related to unrecognized tax benefits are recorded in income tax expense.

Uncertain income tax liabilities reflect the Company's best judgement of the facts, circumstances and information available through December 31, 2020.

Uncertain income tax liabilities are derived using the cumulative probability approach and applying the tax technical requirements applicable to U.S.

and other international tax and transfer pricing requirements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

14 unchanged sentences

The Company had $ 74.9 million, $ 67.9 million and $ 66.3 million of accrued interest and penalties at December 31, 2020, 2019 and 2018, respectively.

There were no significant changes in any uncertain tax positions during the three or twelve month periods ended December 31, 2020.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months as a result of the statute of limitations expiring and/or the examinations being concluded on these returns.

3 unchanged sentences

The Company is currently under examination by various tax authorities around the world.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's liability for the Danish Tax Matter uncertain tax position is derived using a cumulative probability analysis with possible outcomes based on an evaluation of facts and circumstances and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standard, taking into account the U.S.

and Danish income tax implications of such outcomes.

The Company’s remaining uncertain tax liability is derived using the cumulative probability analysis with possible outcomes for each relevant matter based on the Company's updated evaluation of the facts and circumstances regarding each such matter and applying the technical requirements applicable to each tax position taken as it relates to each applicable taxing jurisdiction.

The uncertain tax liability reflects the Company’s best judgment of the facts, circumstances and information available related to each matter through the balance sheet date.

The Danish Tax Matter

5 unchanged sentences

During 2018, the Company reached agreements with both SKAT and the U.S.

Internal Revenue Service ("IRS") (the "Settlement") with respect to the adjusted amount of royalties for tax years 2001 through 2011.

The Company and SKAT are currently discussing the appropriate administrative process required to implement the Settlement as it relates to both tax and interest.

During this process, the Company continues to maintain a liability on its balance sheet for tax and interest under the terms of the Settlement.

At December 31, 2019 and December 31, 2018, the Danish liability related to the Settlement is DKK 847.3 million (approximately $ 127.2 million and $ 130.0 million using the applicable exchange rates at December 31, 2019 and December 31, 2018, respectively) and is included in accrued expenses and other current liabilities within the Company’s Consolidated Balance Sheet.

At December 31, 2019 and December 31, 2018, respectively the Company had on deposit with SKAT DKK 970.1 million (approximately $ 145.6 million using the applicable exchange rate at December 31, 2019) and DKK 962.3 million (approximately $ 147.7 million using the applicable exchange rate at December 31, 2018) for the satisfaction of the anticipated liability for both tax and interest once the administrative process is concluded.

The deposit held by SKAT is included in "Prepaid expenses and other current assets" within the Company's Consolidated Balance Sheet.

SKAT has issued income tax assessments for the years 2012 through 2017 asserting an increase in the royalty earned by the Danish subsidiary.

Internal Revenue Service ("IRS") with respect to the adjusted amount of royalties (the "Settlement") for tax years 2001 through 2011 (the "Settlement Years").

The Company and SKAT are currently discussing the appropriate administrative process required to implement the Settlement as it relates to the computation of interest.

During this process, the Company continues to maintain an uncertain income tax liability on its balance sheet for tax and interest under the terms of the Settlement.

The tax years 2012 through 2020 (the "2012 to Current Period") are currently the subject of the Advance Pricing Agreement procedure ("APA") request filed by the Company with SKAT and the IRS in the third quarter of 2018.

As part of the APA, the IRS is negotiating on the Company’s behalf directly with SKAT for a mutually agreeable royalty due from the U.S.

subsidiary to the Danish Subsidiary.

The APA negotiation is ongoing and is not expected to conclude in the near term.

The Company anticipates such negotiations will result in additional income tax in Denmark and a reduction of income tax in the U.S.

Consequently, the Company maintains both an uncertain income tax liability for its estimate of the potential Danish income tax and a deferred tax asset for the associated United States tax benefit for the 2012 to Current Period.

The uncertain income tax liabilities for the Danish Tax Matter Settlement Years and for the 2012 to Current Period are reflected in the Company Consolidated Balance Sheet as per below:

December 31, 2020 December 31, 2019

Period Balance Sheet Presentation DKK USD DKK USD

Settlement Years Accrued expenses and other current liabilities 847.3 $ 139.1 847.3 $ 127.2

2012 to Current Period Other non-current liabilities 295.0 48.4 263.3 39.5

Total 1,142.3 $ 187.5 1,110.6 $ 166.7

The deferred tax asset for the U.S.

correlative benefit associated with the accrual of Danish tax for the 2012 to Current Period at December 31, 2020 and 2019 is approximately $ 12.0 million and $ 7.2 million, respectively.

SKAT has issued income tax assessments for the years 2012 through 2014 and has proposed assessments for the years 2015 through 2017, in each case asserting an increase in the royalty earned by the Danish subsidiary.

The Company expects to continue to receive income tax assessments from SKAT for the tax years 2018 and forward, asserting the royalties paid by the U.S.

to the Danish subsidiary were too low, which the Company disputes.

The Company entered into the Advance Pricing Agreement Program (the "APA Program") for the tax years 2012 through 2022 (the "Post-2011 Years") in which the IRS, on the Company’s behalf, will negotiate directly with SKAT for a mutually agreeable royalty due from the U.S.

subsidiary to the Danish Subsidiary (the "APA").

That APA is in the early stages of negotiations.

Such negotiations are not expected to be concluded in the near term.

The Company anticipates such negotiations will result in an increase in the amount of royalties due from the U.S subsidiary to the Danish subsidiary (the "Post-2011 Years Adjustment") for the years 2012 - 2019 (the "2012 to Current Period").

It is expected that the Post-2011 Years Adjustment will result in additional income tax in Denmark and a reduction of tax in the United States for the 2012 to Current Period.

Consequently, the Company maintains an uncertain income tax liability for its estimate of the potential Danish income tax liability and a deferred tax asset for the associated United States tax benefit for the Post-2011 Years Adjustment.

As of December 31, 2019 and December 31, 2018, the Company had accrued Danish tax and interest for Post-2011 Years of approximately DKK 263.3 million and DKK 230.3 million ( $ 39.5 million and $ 35.3 million using the applicable exchange rates at December 31, 2019 and December 31, 2018, respectively) as an uncertain income tax liability, which is included in other non-current liabilities on the Company's Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively.

The deferred tax asset for the U.S.

correlative benefit associated with the accrual of Danish tax for the Post-2011 Years as of December 31, 2019 and 2018, respectively, is approximately $ 7.2 million and $ 4.2 million .

Both the uncertain income tax liability and the deferred tax asset reflect the Company’s best judgment of the facts, circumstances and information available through December 31, 2019.

If the Company is not successful in resolving the Danish Tax Matter for the Post-2011 Years or there is a change in facts and circumstances, the Company may be required to further increase its uncertain income tax position associated with this matter, or decrease its deferred tax asset, also related to this matter, which could have a material impact on the Company's reported earnings.

From June 2012 through December 31, 2018, SKAT withheld Value Added Tax refunds otherwise owed to the Company, pending resolution of the Danish Tax Matter.

In July 2016, the Company paid a deposit to SKAT in the amount of approximately DKK 615.2 million related to the Settlement.

In addition, during the three months ended September 30, 2020, the Company made a tax deposit with SKAT of DKK 76.8 million applicable to a tax assessment by SKAT for the year 2014.

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

The Company is contesting all three assessments.

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The above Value Added Tax refunds withheld and the tax deposits made are reflected in the Company's Consolidated Balance Sheet (translated at the exchange rates on December 31, 2020 and December 31, 2019), as per below:

December 31, 2020 December 31, 2019

DKK USD DKK USD

Prepaid expenses and other current assets 847.3 $ 139.1 847.3 $ 127.2

Other non-current assets 333.6 54.8 122.8 18.4

Total 1,180.9 $ 193.9 970.1 $ 145.6

The Company continues to discuss certain matters with SKAT relating to the Danish Tax Matter.

For instance, the Company’s calculation of interest for the Settlement Years differs from the amount asserted by SKAT by approximately DKK 125.0 million (approximately $ 18.8 million using the December 31, 2019 exchange rate).

For instance, the Company’s calculation of interest for the Settlement Years differs from the amount asserted by SKAT by approximately DKK 125.0 million (approximately $ 20.5 million and $ 18.8 million using the applicable exchange rates at December 31, 2020 and December 31, 2019).

The Company believes its calculations properly reflect the mechanics of the calculation of interest as provided in Danish tax law and as such has not recorded a liability for the incremental interest proposed by SKAT.

Further, if the IRS and SKAT are unable to reach a mutually acceptable agreement with respect to the years included in the APA Program, the Company could be required to make a significant payment to SKAT for Danish tax related to such years, which could have a material adverse effect on the Company’s results of operations and liquidity.

From June 2012 through December 31, 2018, SKAT withheld Value Added Tax refunds otherwise owed to the Company, pending resolution of the Danish Tax Matter.

Total withheld refunds at both December 31, 2019 and 2018 is approximately DKK 347.1 million (approximately $ 52.1 million and $ 53.3 million at the December 31, 2019 and 2018 exchange rates, respectively).

In July 2016, the Company paid a deposit to SKAT in the amount of approximately DKK 615.2 million (approximately $ 92.3 million and $ 94.4 million using the applicable exchange rates at December 31, 2019 and 2018, respectively) (the “Tax Deposit”) and applied approximately DKK 232.1 million (approximately $ 34.8 million and $ 35.6 million using the applicable exchange rates at December 31, 2019 and 2018, respectively) of its Value Added Tax refund (the “VAT Refund Applied”) to the aforementioned potential Danish income tax liability, consistent with the Company’s reserve position for this royalty matter.

The deposit was made to mitigate additional interest and foreign exchange exposure.

The Tax Deposit and the VAT Refund Applied are included within prepaid and other current assets and other non-current assets on the Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively.

If the Company is not successful in resolving the Danish Tax Matter for the 2012 to Current Period or there is a change in facts and circumstances, the Company may be required to further increase its uncertain income tax position associated with this matter, or decrease its deferred tax asset, also related to this matter, which could have a material impact on the Company's reported earnings.

(13) Earnings Per Common Share

9 unchanged sentences

Diluted earnings per common share for continuing operations $ 1.64 $ 0.86 $ 0.54

The Company excluded 1.1 million , 1.5 million and 1.3 million shares issuable upon exercise of outstanding stock options for the years ended December 31, 2019 , 2018 and 2017 , 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.

The Company excluded an insignificant number of shares for the year ended December 31, 2020, 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 4.4 million and 6.0 million shares issuable upon exercise of outstanding stock options for the years ended, December 31, 2019 and 2018, 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.

TEMPUR SEALY INTERNATIONAL, INC.

4 unchanged sentences

North America and International.

Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results.

In the fourth quarter of 2020, the Company realigned its business segment reporting to include Mexico within the North America segment, which was previously included in the International segment.

The change in segment reporting aligned with changes in how our global operations are managed.

These segments are strategic business units that are managed separately based on geography.

The North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S.

The International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America.

The North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Mexico.

The International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America (other than Mexico).

This segment change was retrospectively applied to all prior periods presented.

Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results.

The Company evaluates segment performance based on net sales, gross profit and operating income.

There were no customers that contributed more than 10% of the Company's sales in 2019 or 2018 .

The Company sells its products in over 100 countries to over 10,000 wholesale customers.

The Company’s Direct channel represents 13.4 % of the Company’s consolidated net sales.

One customer contributed between 10 % and 15 % of the Company’s net sales in 2020.

No customer contributed more than 10% of the Company's net sales in 2019.

The Company’s North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company’s accompanying Consolidated Financial Statements.

1 unchanged sentence

The following table summarizes total assets by segment:

December 31, December 31,

(in millions) 2020 2019

1 unchanged sentence

International 639.8 569.0

Corporate 490.3 477.1

Inter-segment eliminations ( 1,561.8 ) ( 1,172.0 )

Total assets $ 3,308.6 $ 3,061.8

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

December 31, December 31,

(in millions) 2020 2019

1 unchanged sentence

International 49.8 45.9

Corporate 42.8 55.1

Total property, plant and equipment, net $ 507.9 $ 435.8

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

December 31, December 31,

(in millions) 2020 2019

1 unchanged sentence

International 45.7 42.2

Corporate 2.0 1.2

Total operating lease right-of-use assets $ 304.3 $ 245.4

3 unchanged sentences

The following table summarizes segment information for the year ended December 31, 2020:

(in millions)

North America

International

(in millions) North America International Corporate Eliminations Consolidated

Bedding sales $ 2,956.3 $ 397.5 $ — $ — $ 3,353.8

Other sales 202.9 120.2 — — 323.1

Net sales $ 3,159.2 $ 517.7 $ — $ — $ 3,676.9

Inter-segment sales $ 1.2 $ 0.7 $ — $ ( 1.9 ) $ —

Inter-segment royalty expense (income) 9.4 ( 9.4 ) — — —

Gross profit 1,332.0 306.4 — — 1,638.4

Operating income (loss) 591.4 127.6 ( 186.9 ) — 532.1

1 unchanged sentence

Depreciation and amortization (1)

$ 76.3 $ 13.6 $ 112.6 $ — $ 202.5

Capital expenditures 92.6 11.0 7.7 — 111.3

1 unchanged sentence

The following table summarizes segment information for the year ended December 31, 2019:

(in millions)

North America

International

(in millions) North America International Corporate Eliminations Consolidated

Bedding sales $ 2,448.8 $ 388.2 $ — $ — $ 2,837.0

Other sales 154.7 114.3 — — 269.0

Net sales $ 2,603.5 $ 502.5 $ — $ — $ 3,106.0

Inter-segment sales $ 1.2 $ 1.1 $ — $ ( 2.3 ) $ —

Inter-segment royalty expense (income) 7.6 ( 7.6 ) — — —

Gross profit 1,055.2 287.0 — — 1,342.2

Operating income (loss) 349.9 110.3 ( 113.5 ) — 346.7

1 unchanged sentence

Depreciation and amortization (1)

$ 65.1 $ 13.0 $ 38.4 $ — $ 116.5

Capital expenditures 63.0 10.7 14.5 — 88.2

4 unchanged sentences

The following table summarizes segment information for the year ended December 31, 2018:

(in millions)

North America

International

(in millions) North America International Corporate Eliminations Consolidated

Bedding sales 2,069.5 $ 385.8 $ — $ — $ 2,455.3

Other sales 137.5 110.1 — — 247.6

Net sales $ 2,207.0 $ 495.9 $ — $ — $ 2,702.9

Inter-segment sales $ 1.3 $ 0.6 $ — $ ( 1.9 ) $ —

Inter-segment royalty expense (income) 6.2 ( 6.2 ) — — —

Gross profit 843.4 277.3 — — 1,120.7

Operating income (loss) 256.5 101.0 ( 101.2 ) — 256.3

1 unchanged sentence

Depreciation and amortization (1)

$ 59.5 $ 13.0 $ 39.4 $ — $ 111.9

Capital expenditures 53.6 13.1 6.9 — 73.6

1 unchanged sentence

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

December 31, December 31,

(in millions)

United States $ 436.2 $ 366.4

Other International

All other 71.7 69.4

Total property, plant and equipment, net

Total International

$ 507.9 $ 435.8

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

December 31, December 31,

(in millions)

United States $ 255.0 $ 198.3

Other International

All Other 49.3 47.1

Total operating lease right-of-use assets

Total International

$ 304.3 $ 245.4

The following table summarizes net sales by geographic region:

2 unchanged sentences

United States $ 2,886.6 $ 2,312.1 $ 1,928.8

Other International

All other 790.3 793.9 774.1

Total net sales $ 3,676.9 $ 3,106.0 $ 2,702.9

Total International

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(18) Quarterly Financial Data (unaudited)

Quarterly results of operations for the years ended December 31, 2019 and 2018 are summarized below:

(in millions, except per share amounts)

Operating income

Income from continuing operations

Net income attributable to Tempur Sealy International, Inc.

Basic earnings per common share for continuing operations

Diluted earnings per common share for continuing operations

Operating income

Income from continuing operations

Net income attributable to Tempur Sealy International, Inc.

Basic earnings per common share for continuing operations

Diluted earnings per common share for continuing operations

The sum of the quarterly earnings per common share amounts may not equal the annual amount reported because per share amounts are computed independently for each quarter and for the full year based on respective weighted-average common shares outstanding and other dilutive potential common shares.

The Company’s quarterly operating results fluctuate as a result of seasonal variations in the Company’s business.

In the fourth quarter of 2019, the Company recorded $ 29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL Holding, LLC ("Mattress PAL") and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account.

Additionally, in the fourth quarter of 2019, the Company recorded an $ 8.9 million charge related to the donation of common stock at fair market value to certain public charities.

In the fourth quarter of 2018, prior to the Sleep Outfitters Acquisition, the Company recorded $ 21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account.

Additionally, in the fourth quarter of 2018, the Company recorded $ 9.1 million of restructuring costs.

These costs included $ 4.7 million of charges in the International business segment associated with International simplification efforts, including headcount reduction, professional fees, store closures and other costs, $ 2.9 million of Corporate professional fees related to restructuring activities and $ 1.5 million of charges associated with the operational alignment of a previous joint venture that became wholly acquired in the North America business segment.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(19) Guarantor/Non-Guarantor Financial Information

The $ 450.0 million and $ 600.0 million aggregate principal amount of 2023 Senior Notes and 2026 Senior Notes (collectively the "Senior Notes"), respectively, are general unsecured senior obligations of Tempur Sealy International and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by the Combined Guarantor Subsidiaries.

The $ 375.0 million aggregate principal amount of 2020 Senior Notes were general unsecured senior obligations at December 31, 2015 but were redeemed in full in 2016.

The foreign subsidiaries (the "Combined Non-Guarantor Subsidiaries") represent the foreign operations of the Company and do not guarantee the Senior Notes.

A subsidiary guarantor will be released from its obligations under the applicable indenture governing the Senior Notes when:

(a) the subsidiary guarantor is sold or sells all or substantially all of its assets;

(b) the subsidiary is declared "unrestricted" under the applicable indenture governing the Senior Notes;

(c) the subsidiary’s guarantee of indebtedness under the 2019 Credit Agreement (as it may be amended, refinanced or replaced) is released (other than a discharge through repayment);

or (d) the requirements for legal or covenant defeasance or discharge of the applicable indenture have been satisfied.

The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Company’s wholly-owned subsidiary guarantors and non-guarantor subsidiaries.

The Company has accounted for its investments in its subsidiaries under the equity method.

The following financial information presents Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018 , and the related Consolidated Statements of Income and Comprehensive Income and Cash Flows for the years ended December 31, 2019 , 2018 and 2017 for Tempur Sealy International, Combined Guarantor Subsidiaries and Combined Non-Guarantor Subsidiaries.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.

Supplemental Consolidated Statements of Income and Comprehensive Income

Year Ended December 31, 2019

(in millions)

Tempur Sealy International, Inc.

(Ultimate Parent)

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Reclassifications and Eliminations

Cost of sales

Selling and marketing expenses

General, administrative and other expenses

Customer-related charges

Equity income in earnings of unconsolidated affiliates

Operating (loss) income

Other expense, net:

Third party interest expense, net

Intercompany interest (income) expense, net

Interest expense (income), net

Other (income) expense, net

Total other expense, net

Income from equity investees

Income from continuing operations before income taxes

Income tax benefit (provision)

Income from continuing operations

Loss from discontinued operations, net of tax

Net income before non-controlling interests

Net loss attributable to non-controlling interest

Net income attributable to Tempur Sealy International, Inc.

Comprehensive income attributable to Tempur Sealy International, Inc.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.

Supplemental Consolidated Statements of Income and Comprehensive Income

Year Ended December 31, 2018

(in millions)

Tempur Sealy International, Inc.

(Ultimate Parent)

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Reclassifications and Eliminations

Cost of sales

Selling and marketing expenses

General, administrative and other expenses

Customer-related charges

Equity income in earnings of unconsolidated affiliates

Operating (loss) income

Other expense, net:

Third party interest expense, net

Intercompany interest (income) expense, net

Interest expense, net

Other (income) expense, net

Total other expense, net

Income from equity investees

Income from continuing operations before income taxes

Income tax benefit (provision)

Income from continuing operations

Loss from discontinued operations, net of tax

Net income before non-controlling interests

Net loss attributable to non-controlling interests

Net income attributable to Tempur Sealy International, Inc.

Comprehensive income attributable to Tempur Sealy International, Inc.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.

Supplemental Consolidated Statements of Income and Comprehensive Income

Year Ended December 31, 2017

(in millions)

Tempur Sealy International, Inc.

(Ultimate Parent)

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Reclassifications and Eliminations

Cost of sales

Selling and marketing expenses

General, administrative and other expenses

Customer-related charges

Equity income in earnings of unconsolidated affiliates

Royalty income, net of royalty expense

Operating (loss) income

Other expense, net:

Third party interest expense, net

Intercompany interest (income) expense, net

Interest expense, net

Other (income) expense, net

Total other expense, net

Income from equity investees

Income from continuing operations before income taxes

Income tax benefit (provision)

Income from continuing operations

Loss from discontinued operations

Net income before non-controlling interests

Net loss attributable to non-controlling interests

Net income attributable to Tempur Sealy International, Inc.

Comprehensive income attributable to Tempur Sealy International, Inc.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.

Supplemental Consolidated Balance Sheets

December 31, 2019

(in millions)

Tempur Sealy International, Inc.

(Ultimate Parent)

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Reclassifications and Eliminations

Current Assets:

Cash and cash equivalents

Accounts receivable, net

Prepaid expenses and other current assets

Total Current Assets

Property, plant and equipment, net

Other intangible assets, net

Operating lease right-of-use assets

Deferred income taxes

Other non-current assets

Net investment in subsidiaries

Due from affiliates

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

Accrued expenses and other current liabilities

Income taxes payable

Current portion of long-term debt

Total Current Liabilities

Long-term debt, net

Long-term operating lease obligations

Deferred income taxes

Other non-current liabilities

Due to affiliates

Total Liabilities

Total Stockholders' Equity

Total Liabilities and Stockholders’ Equity

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.

Supplemental Consolidated Balance Sheets

December 31, 2018

(in millions)

Tempur Sealy International, Inc.

(Ultimate Parent)

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Reclassifications and Eliminations

Current Assets:

Cash and cash equivalents

Accounts receivable, net

Prepaid expenses and other current assets

Total Current Assets

Property, plant and equipment, net

Other intangible assets, net

Deferred income taxes

Other non-current assets

Net investment in subsidiaries

Due from affiliates

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

Accrued expenses and other current liabilities

Income taxes payable

Current portion of long-term debt

Total Current Liabilities

Long-term debt, net

Deferred income taxes

Other non-current liabilities

Due to affiliates

Total Liabilities

Total Stockholders’ Equity

Total Liabilities and Stockholders’ Equity

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.

Supplemental Consolidated Statements of Cash Flows

Year Ended December 31, 2019

(in millions)

Tempur Sealy International, Inc.

(Ultimate Parent)

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Reclassifications and Eliminations

Net cash (used in) provided by operating activities from continuing operations

CASH FLOWS FROM INVESTING ACTIVITIES:

Contributions (paid to) received from subsidiaries and affiliates

Purchases of property, plant and equipment

Acquisitions, net of cash acquired

Net cash (used in) provided by investing activities from continuing operations

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from borrowings under long-term debt obligations

Repayments of borrowings under long-term debt obligations

Net activity in investment in and advances from (to) subsidiaries and affiliates

Proceeds from exercise of stock options

Treasury stock repurchased

Repayments of deferred financing costs

Repayments of finance lease obligations and other

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

Net cash provided by continuing operations

CASH USED IN DISCONTINUED OPERATIONS

Operating cash flows, net

Investing cash flows, net

Financing cash flows, net

Net cash used in discontinued operations

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

Increase in cash and cash equivalents

CASH AND CASH EQUIVALENTS, beginning of period

CASH AND CASH EQUIVALENTS, end of period

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.

Supplemental Consolidated Statements of Cash Flows

Year Ended December 31, 2018

(in millions)

Tempur Sealy International, Inc.

(Ultimate Parent)

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Reclassifications and Eliminations

Net cash (used in) provided by operating activities from continuing operations

CASH FLOWS FROM INVESTING ACTIVITIES:

Contributions (paid to) received from subsidiaries and affiliates

Purchases of property, plant and equipment

Net cash (used in) provided by investing activities from continuing operations

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from borrowings under long-term debt obligations

Repayments of borrowings under long-term debt obligations

Net activity in investment in and advances from (to) subsidiaries and affiliates

Proceeds from exercise of stock options

Treasury stock repurchased

Repayments of finance lease obligations and other

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

Net cash (used in) provided by continuing operations

CASH USED IN DISCONTINUED OPERATIONS

Operating cash flows, net

Investing cash flow, net

Financing cash flows, net

Net cash used in discontinued operations

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

(Decrease) increase in cash and cash equivalents

CASH AND CASH EQUIVALENTS, beginning of period

CASH AND CASH EQUIVALENTS, end of period

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.

Supplemental Consolidated Statements of Cash Flows

Year Ended December 31, 2017

(in millions)

Tempur Sealy International, Inc.

(Ultimate Parent)

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Reclassifications and Eliminations

Net cash (used in) provided by operating activities from continuing operations

CASH FLOWS FROM INVESTING ACTIVITIES:

Contributions (paid to) received from subsidiaries and affiliates

Purchases of property, plant and equipment

Net cash (used in) provided by investing activities from continuing operations

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from borrowings under long-term debt obligations

Repayments of borrowings under long-term debt obligations

Net activity in investment in and advances from (to) subsidiaries and affiliates

Proceeds from exercise of stock options

Treasury stock repurchased

Payment of deferred financing costs

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

Net cash provided by (used in) continuing operations

CASH USED IN DISCONTINUED OPERATIONS

Operating cash flows, net

Investing cash flow, net

Financing cash flows, net

Net cash used in discontinued operations

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

Increase (decrease) in cash and cash equivalents

CASH AND CASH EQUIVALENTS, beginning of period

CASH AND CASH EQUIVALENTS, end of period

CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS

CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 8. Financial Statements and Supplementary Data