What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 208 added, 408 removed, 298 unchanged (67% of the section changed)

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The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties.

See "Special Note Regarding Forward-Looking Statements" elsewhere in this Report, in the 2019 Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2019 Annual Report and in ITEM 1A, Risk Factors, in this Report.

See "Special Note Regarding Forward-Looking Statements" elsewhere in this Report, in the 2020 Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2020 Annual Report.

Our actual results may differ materially from those contained in any forward-looking statements.

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and nine months ended September 30, 2020, including the following topics:

• an overview of our business and strategy, including uncertainty relating to COVID-19;

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three months ended March 31, 2021, including the following topics:

• an overview of our business and strategy,

• results of operations, including our net sales and costs in the periods presented as well as changes between periods;

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Business Overview

We are the world's largest bedding manufacturer.

We develop, manufacture and market bedding products, which we sell globally.

Our product brand portfolio includes many highly recognized and iconic brands in the industry, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, Stearns & Foster® and Comfort Revolution®.

Our comprehensive suite of bedding products offers a variety of products to consumers across a broad range of channels and price points.

Our distribution model operates through an omni-channel strategy with two distribution channels in each operating business segment:

Wholesale and Direct.

Our Wholesale channel consists of third-party retailers, including third-party distribution, hospitality and healthcare.

Our Direct channel includes company-owned stores, e-commerce and call centers.

Business Segments

We are committed to improving the sleep of more people, every night, all around the world.

As a global leader in the design, manufacture and distribution of bedding products, we know how crucial a good night of sleep is to overall health and wellness.

Utilizing over a century of knowledge and industry-leading innovation, we deliver award-winning products that provide breakthrough sleep solutions to consumers in over 100 countries.

We operate in two segments:

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.

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

Our North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries and licensees located in the U.S.

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

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

In 2020, we acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business, which is included in the North America segment.

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

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

We evaluate segment performance based on net sales, gross profit and operating income.

Capital Allocation

In the fourth quarter, we announced our new long-term capital allocation strategy, which includes a quarterly cash dividend beginning in 2021, an increase to our share repurchase authorization and a four-for-one stock split.

Our complete capital allocation strategy includes the following components:

• Invest approximately $70 million annually for capital expenditures to invest in our people, products and processes.

• Initiate a quarterly cash dividend beginning in early 2021, subject to approval by the Board of Directors, targeting an annual distribution to our stockholders of approximately 15% of net income.

• Resume our share repurchase program and target to repurchase at least 3% of shares outstanding per year in the near-term, depending on market conditions.

• Evaluate acquisition opportunities with a focus on strategic acquisitions similar to those we have completed over the past few years.

• Execute a four-for-one stock split, which will be effected through a stock dividend in the fourth quarter of 2020, to make our common stock more accessible and improve trading liquidity.

Environmental, Social and Corporate Governance

We have announced multiple initiatives to further reduce our global environmental footprint.

In 2020, we began sourcing 100% renewable electricity for our U.S.

and European Tempur-Pedic and Sealy manufacturing operations.

Additionally, we remain committed to our investment in solar power technology and expect to complete the installation of the solar panel technology at our Albuquerque, New Mexico manufacturing facility in the first half of 2021.

Finally, we announced a commitment to achieving zero landfill waste for our U.S.

and European manufacturing operations by the end of 2022.

Keeping our employees safe and healthy is a top priority during this time of uncertainty caused by COVID-19.

We have implemented precautionary measures to protect our employees, including restricting travel and face-to-face meetings, allowing employees to work from home where possible and adopting all region-specific public health protocols applicable to our global operations.

While providing a healthy and safe work environment is a top priority during these unprecedented times, our entire organization is also focused on our commitments to our customers, suppliers and shareholders.

During the second quarter of 2020, we began offering our Clean Shop Promise TM protocol to third-party retailers and our company-owned stores, which is being broadly adopted to provide customers with a sense of comfort as they return to shopping in stores.

Additionally, we worked with various government and healthcare organizations to provide products and services.

Business Update

We believe the U.S.

bedding industry has evolved to be healthy and is now structured for sustained growth.

The industry is no longer engaged in uneconomical retail store expansion, startups have shifted from uneconomical strategies to becoming profitable, and legacy retailers and manufacturers have become skilled in producing profitable internet sales.

Additionally, the U.S.

Department of Commerce recently announced its preliminary determination of tariffs on certain imports which are expected to benefit U.S.

manufacturers, including us.

We continue to study and optimize our operations in response to the challenges from the COVID-19 crisis.

We have taken and continue to take precautionary measures to mitigate health risks during the evolving situation resulting from COVID-19.

We experienced a major reduction in total net sales when COVID-19 began materially impacting our North America business segment in mid-March.

In the second quarter, order trends reached their lowest point in early April when they had declined approximately 80% as compared to prior year.

Order trends significantly improved beginning in late May, and this improvement continued throughout the second and third quarters of 2020.

This improvement was primarily due to the reopening of brick-and-mortar stores on a reduced or appointment only basis as restrictions were lifted, the acceleration of e-commerce business trends and a shift in consumer spending habits towards in-home products, including bedding products.

We believe this may be a long-term shift in consumer spending habits, which could continue to favorably impact our business.

This unexpected and rapid increase in demand for bedding products has challenged the entire bedding industry and supply chain, including our business.

Additionally, the U.S.

government has mandated that domestic suppliers of certain materials used in the production of bedding products redirect such materials towards the production of personal protective equipment.

The broad-based increase in demand coupled with supply chain constraints, primarily related to an encased innerspring component, has created operational challenges in the production of Sealy and Sherwood bedding products in the U.S.

As a result, Sealy's third quarter sales growth was unfavorably impacted by these supply chain constraints, as we could not fulfill the domestic demand for Sealy mattresses.

We expect these supply chain constraints to continue for the next few quarters.

The Tempur-Pedic manufacturing process has not been as impacted by the current supply chain constraints.

Our business has a highly variable cost structure that can flex with changes in sales, as evidenced by our ability to quickly reduce costs in the second quarter of 2020 to maintain profitability when we were uncertain of the impact of COVID-19.

In the third quarter of 2020, most of these cost reductions were reversed.

This increase in spending reflects our forward-looking confidence in the business as we make the necessary investments to support long-term growth.

Certain international markets are now experiencing new restrictions related to COVID-19 that are expected to cause some headwinds for the remainder of 2020.

Additionally, in the fourth quarter of 2019, we shipped a large amount of floor models and back stock inventory as we expanded into new distribution networks, which we expect will impact comparisons with the fourth quarter of 2020.

We are targeting net sales to increase by low double digits and adjusted EBITDA per credit facility, which is a non-GAAP financial measure, to grow by high teens in the fourth quarter of 2020, as compared to the same period in 2019.

For additional information refer to Note 13, "Business Segment Information," included in Part I, ITEM 1 of this Report.

Our distinct brands allow for complementary merchandising strategies.

Our distribution model operates through an omni-channel strategy.

We distribute through two channels in each operating business segment:

Wholesale and Direct.

Our Wholesale channel consists of third-party retailers, including third-party distribution, hospitality and healthcare.

Our Direct channel includes company-owned stores, online and call centers.

General Business and Economic Conditions

We believe the bedding industry is structured for sustained growth driven by product innovation, consumer confidence, housing formations and population growth.

The industry is no longer engaged in uneconomical retail store expansion, startups have shifted from uneconomical strategies to becoming profitable and legacy retailers and manufacturers have become skilled in producing profitable online sales.

At the outset of the COVID-19 global pandemic we experienced a reduction in total net sales across both of our business segments in the first quarter of 2020.

Our North America business began experiencing sharp declines in total net sales and orders in mid-March.

Order trends reached their lowest point in early April 2020 when they had declined approximately 80% as compared to the prior year.

North American order trends significantly improved beginning in late May, and this improvement continued throughout the remainder of 2020.

This momentum continued in the first quarter of 2021, with consolidated net sales increasing 26.9% as compared to the first quarter of 2020, as the negative impacts of the global COVID-19 pandemic have largely subsided as compared to the significant global disruption experienced throughout early 2020.

Order trends within our International markets are experiencing volatility due to restrictions on retail activity related to the COVID-19 global pandemic, however we are confident in our ability to operate in this retail environment.

Current order trends continue to indicate growth in the U.S.

As a result, we expect consolidated net sales growth to exceed 20% for the full year 2021.

Over the past several years and accelerating during the COVID-19 global pandemic, consumers have shifted their spending habits towards in-home products, including bedding products.

We believe this may be a long-term shift in consumer spending habits, which could continue to favorably impact our industry.

The rapid increase in demand for bedding products has challenged the entire bedding industry and supply chain, including our business.

In the U.S., the broad-based increase in demand coupled with supply chain constraints, primarily related to an encased innerspring component and chemicals, has created operational challenges in the production of Sealy and Sherwood products.

As a result, the sales growth of Sealy and Sherwood in the first quarter of 2021 was unfavorably impacted as we could not fulfill the entire domestic demand for these products.

For the second quarter of 2021, we expect the innerspring supply chain to be largely unconstrained and the constraints in the chemical supply chain to mitigate significantly by the end of the quarter.

During the first quarter of 2021, commodity costs unfavorably impacted our gross margin as they were higher than expected.

We implemented pricing actions in the fourth quarter of 2020 and in early April 2021 to mitigate these known commodity headwinds.

Since then, commodity costs have continued to rise due to the winter storm in the Gulf of Mexico, which caused a temporary industry-wide reduction in chemical availability.

We believe this commodity cost inflation to be temporary and do not expect to take additional pricing actions at this time.

We anticipate the chemical constraints will largely be resolved by the end of the second quarter.

Based on our current commodity outlook, we expect commodity cost inflation to negatively impact gross margin by approximately $25 million, predominantly occurring in the second quarter of 2021, which will not be offset by price.

While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe that it is important to share where our Company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders.

While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe that it is important to share where the Company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses.

For further information regarding the potential impacts of COVID-19 on the Company, please refer to "Risk Factors" in ITEM 1A of Part II of this Report.

Future changes in raw material prices could have an unfavorable impact on our gross margin.

In the nine months ended September 30, 2020, commodity costs favorably impacted our gross margin.

However commodity costs were higher than expected for the third quarter of 2020.

We currently expect commodity cost inflation to continue into 2021.

As a result, we plan to implement a price increase in the fourth quarter of 2020 across all of our U.S.

brands, including Sealy, Stearns & Foster, and Tempur-Pedic products, which we expect to mitigate or fully offset the commodity cost inflation we anticipate in 2021.

For further information regarding the impact of COVID-19 on the Company, please refer to "Risk Factors" in ITEM 1A of Part I of the 2020 Annual Report.

Product Launches

In 2020, we are introducing the Tempur-Ergo Smart Base Collection with Sleeptracker technology and a new Sealy Posturepedic Plus line.

Acquisition of Sherwood Bedding

On January 31, 2020, we 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 approximately $39.1 million.

Sherwood Bedding is a major manufacturer in the U.S.

private label and original equipment manufacturer bedding market, and this acquisition of a majority interest marks our entrance into the private label category.

During the first quarter of 2020, we completed the integration of Sherwood Bedding into our portfolio of product brands.

Since the acquisition, we have leveraged our overall brand portfolio to gain additional distribution for Sherwood products.

During the first quarter of 2021, we completed the launch of our Tempur-Ergo Smart Base Collection with Sleeptracker® technology in North America.

In 2021, we are refreshing our Sealy portfolio in our North America segment and launching new models in our Posturepedic Plus™, Posturepedic® and Essentials product lines.

We plan to launch the refresh in two phases.

In the first quarter of 2021, we began rolling out our Posturepedic® and Essentials product lines.

We expect to complete the launch of our Essentials and Posturepedic® lines in the second quarter of 2021.

Additionally, we expect to complete the launch of the higher end Posturepedic Plus™ line in the second half of 2021, which will complete the largest rollout in Sealy's history.

In 2022, we expect to launch a new Tempur product line in our International segment.

Our global 2021 marketing plan is to aggressively support our innovative bedding products through investing significant marketing dollars to promote our worldwide brands.

Results of Operations

A summary of our results for the three months ended September 30, 2020 include:

• Total net sales increased 37.9% to $1,132.3 million as compared to $821.0 million in the third quarter of 2019.

A summary of our results for the three months ended March 31, 2021 include:

• Total net sales increased 26.9% to $1,043.8 million as compared to $822.4 million in the first quarter of 2020.

On a constant currency basis, which is a non-GAAP financial measure, total net sales increased 25.1%, with an increase of 27.3% in the North America business segment and an increase of 13.8% in the International business segment.

• Gross margin was 46.8% as compared to 43.9% in the third quarter of 2019.

Adjusted gross margin, which is a non-GAAP financial measure, was 46.9% in the third quarter of 2020.

There were no adjustments to gross margin in the third quarter of 2019.

• Operating income increased 49.4% to $180.2 million as compared to $120.6 million in the third quarter of 2019.

Operating income in the third quarter of 2020 included $45.2 million of amortization for aspirational plan stock-based compensation.

Adjusted operating income, which is a non-GAAP financial measure, was $227.2 million in the third quarter of 2020.

There were no adjustments to operating income in the third quarter of 2019.

• Net income increased 65.6% to $121.4 million as compared to $73.3 million in the third quarter of 2019.

Adjusted net income, which is a non-GAAP financial measure, increased 114.3% to $155.4 million as compared to $72.5 million in the third quarter of 2019.

• Earnings before interest, tax, depreciation and amortization ("EBITDA"), which is a non-GAAP financial measure, increased 85.7% to $279.9 million as compared to $150.7 million in the third quarter of 2019.

Adjusted EBITDA per credit facility, which is a non-GAAP financial measure, increased 86.3% to $279.3 million as compared to $149.9 million in the third quarter of 2019.

• Earnings per diluted share ("EPS") increased 74.8% to $2.29 as compared to $1.31 in the third quarter of 2019.

Adjusted EPS, which is a non-GAAP financial measure, increased 126.2% to $2.94 as compared to $1.30 in the third quarter of 2019.

• For the trailing twelve months ended September 30, 2020, leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, was 1.92 times as compared to 3.22 times in the corresponding prior year period.

• Gross margin was 44.0% as compared to 43.4% in the first quarter of 2020.

• Operating income increased 78.9% to $188.4 million as compared to $105.3 million in the first quarter of 2020.

Adjusted operating income, which is a non-GAAP financial measure, was $120.8 million in the first quarter of 2020.

There were no adjustments to operating income in the first quarter of 2021.

• Net income increased 118.6% to $130.5 million as compared to $59.7 million in the first quarter of 2020.

Adjusted net income, which is a non-GAAP financial measure, increased 85.7% to $134.6 million as compared to $72.5 million in the first quarter of 2020.

• Earnings before interest, tax, depreciation and amortization ("EBITDA"), which is a non-GAAP financial measure, increased 71.1% to $230.1 million as compared to $134.5 million in the first quarter of 2020.

Adjusted EBITDA per credit facility, which is a non-GAAP financial measure, increased 52.3% to $230.3 million as compared to $151.2 million in the first quarter of 2020.

• Earnings per diluted share ("EPS") increased 121.4% to $0.62 as compared to $0.28 in the first quarter of 2020.

Adjusted EPS, which is a non-GAAP financial measure, increased 88.2% to $0.64 as compared to $0.34 in the first quarter of 2020.

For a discussion and reconciliation of non-GAAP financial measures as discussed above to the corresponding GAAP financial results, refer to the non-GAAP financial information set forth below under the heading "Non-GAAP Financial Information."

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Refer to Part I, ITEM 3 of this Report for a discussion of our foreign currency exchange rate risk.

THREE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THE

THREE MONTHS ENDED SEPTEMBER 30, 2019

THREE MONTHS ENDED MARCH 31, 2021 COMPARED TO THE

THREE MONTHS ENDED MARCH 31, 2020

The following table sets forth the various components of our Condensed Consolidated Statements of Income and expresses each component as a percentage of net sales:

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages and per share amounts) 2021 2020

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General, administrative and other expenses 79.5 7.6 80.6 9.8

Equity income in earnings of unconsolidated affiliates (4.8) (0.4) (3.9) (0.5)

Equity (income) loss in earnings of unconsolidated affiliates (6.7) (0.6) 0.2 —

Operating income 188.4 18.0 105.3 12.8

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Income from continuing operations 130.9 12.5 61.0 7.4

Income from discontinued operations, net of tax 2.4 0.2 0.8 0.1

Loss from discontinued operations, net of tax (0.2) — (1.2) (0.1)

Net income before non-controlling interests 130.7 12.5 59.8 7.3

Net income (loss) attributable to non-controlling interests 0.4 — (0.1) —

Net income attributable to non-controlling interests 0.2 — 0.1 —

Net income attributable to Tempur Sealy International, Inc.

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Earnings per share for continuing operations $ 0.64 $ 0.28

Earnings per share for discontinued operations 0.04 0.01

Loss per share for discontinued operations — —

Earnings per share $ 0.64 $ 0.28

Earnings per share for continuing operations $ 0.62 $ 0.28

Earnings per share for discontinued operations 0.04 0.01

Loss per share for discontinued operations — —

Earnings per share $ 0.62 $ 0.28

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Diluted 210.1 216.0

Three Months Ended September 30,

Three Months Ended March 31,

2021 2020 2021 2020 2021 2020

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• North America net sales increased $191.0 million, or 27.6%.

Net sales in the Wholesale channel increased $266.9 million, or 44.3%, primarily driven by broad-based demand across both existing and new distribution networks.

Net sales in the Direct channel increased $27.6 million, or 34.6%, primarily driven by growth from our e-commerce business, offset by slightly decreased performance at our company owned stores which were closed or operating under reduced hours or modified operations for a time during the third quarter as a result of the global pandemic.

Net sales in the Wholesale channel increased $140.8 million, or 22.5%, primarily driven by broad-based demand across our retail partners.

Net sales in the Direct channel increased $50.2 million, or 74.3%, primarily driven by growth from our e-commerce business.

On a constant currency basis, North America net sales increased 27.3%.

• International net sales increased $30.4 million, or 23.4%.

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Net sales in the Direct channel increased 28.1% on a constant currency basis.

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change

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Our Tempur products are exclusively premium priced products.

As sales of our Sealy products increase relative to sales of our Tempur products, our gross margins will be negatively impacted in both our North America and International segments.

As sales of our value priced products increase relative to sales of our premium priced products, our gross margins will be negatively impacted in both our North America and International segments.

Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes;

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• North America gross margin improved 60 basis points.

The improvement in gross margin was primarily driven by fixed cost leverage and productivity on higher unit volumes of 200 basis points, brand mix of 90 basis points and

lower commodity costs.

Additionally, we incurred $0.6 million of operational expansion costs related to the opening of a Sealy manufacturing facility, which partially offset the improvement in gross margin.

The improvement in gross margin was primarily driven by brand and channel mix of 140 basis points, partially offset by operational inefficiencies related to supply chain constraints of 100 basis points.

• International gross margin improved 90 basis points.

The improvement in gross margin was primarily driven by favorable mix of 220 basis points, fixed cost leverage and productivity on higher unit volumes of 170 basis points and lower commodity costs .

The improvement in gross margin was primarily driven by favorable mix of 160 basis points as well as operational efficiencies of 150 basis points, partially offset by increased commodity costs of 220 basis points .

OPERATING EXPENSES

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General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.

Three Months Ended September 30,

Three Months Ended March 31,

2021 2020 2021 2020 2021 2020 2021 2020

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Total operating expenses $ 277.2 $ 251.6 $ 190.5 $ 179.6 $ 55.5 $ 49.3 $ 31.2 $ 22.7

Operating expenses increased $110.9 million, or 45.5%, and increased 160 basis points as a percentage of net sales.

Operating expenses increased $25.6 million, or 10.2%, and decreased 400 basis points as a percentage of net sales.

The primary drivers of changes in operating expenses by segment are explained below:

• North America operating expenses increased $10.9 million, or 6.1%, and decreased 430 basis points as a percentage of net sales.

The increase in operating expenses was primarily driven by advertising and variable compensation costs.

The increase in operating expenses was primarily driven by advertising investments, partially offset by decreased customer-related charges.

In 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates, which was not repeated in the same period in 2021.

• International operating expenses increased $6.2 million, or 12.6%, and decreased 330 basis points as a percentage of net sales.

The increase in operating expenses was due to variable compensation costs and increased advertising investments.

The increase in operating expenses was primarily driven by advertising and other selling and marketing investments.

• Corporate operating expenses increased $8.5 million, or 37.4%.

The increase in operating expenses was primarily driven by $45.2 million of amortization for our long-term aspirational plan stock-based compensation.

The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards which became probable of vesting during the third quarter of 2020.

The awards are subject to a remaining service vesting condition which will lapse in December 2020.

Additionally, we expect to reach the maximum payout for our 2020 annual incentive and performance-based stock compensation plans, which increased operating expense in the third quarter of 2020.

We will record additional amortization related to these compensation plans and the aspirational plan in the fourth quarter of 2020.

For information regarding our aspirational plan refer to Note 9, "Stock-Based Compensation," of the "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1, "Financial Statements" of this Report.

Research and development expenses for the three months ended September 30, 2020 were $6.1 million compared to $5.6 million for the three months ended September 30, 2019, a increase of $0.5 million, or 8.9%.

The increase in operating expenses was primarily driven by variable compensation due to a reduction in prior year when the full year outlook included worldwide shutdowns and significant retailer door closures.

Research and development expenses for the three months ended March 31, 2021 were $6.5 million compared to $5.8 million for the three months ended March 31, 2020, an increase of $0.7 million, or 12.1%.

OPERATING INCOME

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages) Operating Income Operating Margin Operating Income Operating Margin Margin Change

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• North America operating income increased $71.8 million and operating margin improved 490 basis points.

The improvement in operating margin was primarily driven by improved operating expense leverage of 330 basis points and the improvement in gross margin of 280 basis points.

The improvement in operating margin was primarily driven by favorable operating expense leverage of 240 basis points, improvement in gross margin of 60 basis points and decreased customer-related charges.

In 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates, which was not repeated in the same period in 2021.

• International operating income increased $19.8 million and operating margin improved 850 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 570 basis points and improved operating expense leverage of 320 basis points.

The improvement in operating margin was primarily driven by improved performance of the Asia-Pacific joint ventures of 340 basis points, favorable operating expense leverage of 240 basis points and the improvement in gross margin of 90 basis points.

Additionally, in 2020, we recorded $2.3 million of charges associated with the global pandemic, which were not repeated in 2021.

• Corporate operating expenses increased $8.5 million, which negatively impacted our consolidated operating margin by 80 basis points.

The increase in operating expenses was primarily driven by $45.2 million of amortization for our long-term aspirational plan stock-based compensation.

The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards which became probable of vesting during the third quarter of 2020.

The awards are subject to a remaining service vesting condition which will lapse in December 2020.

Additionally, we expect to reach the maximum payout for our 2020 annual incentive and performance-based stock compensation plans, which increased operating expense in the third quarter of 2020.

We will record additional amortization related to these compensation plans and the aspirational plan in the fourth quarter of 2020.

INTEREST EXPENSE, NET

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages) 2021 2020 % Change

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INCOME TAX PROVISION

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages) 2021 2020 % Change

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Our income tax provision increased $17.0 million due to an increase in income before income taxes.

Our effective tax rate for the three months ended September 30, 2020 as compared to the same prior year period decreased by 130 basis points.

The effective tax rate as compared to the U.S.

federal statutory tax rate for the three months ended September 30, 2020 and 2019 included a net favorable impact of discrete items.

NINE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THE

NINE MONTHS ENDED SEPTEMBER 30, 2019

The following table sets forth the various components of our Condensed Consolidated Statements of Income, and expresses each component as a percentage of net sales:

Nine Months Ended September 30,

(in millions, except percentages and per share amounts) 2020 2019

Net sales $ 2,619.9 100.0 % $ 2,234.7 100.0 %

Cost of sales 1,466.7 56.0 1,278.9 57.2

Gross profit 1,153.2 44.0 955.8 42.8

Selling and marketing expenses 535.8 20.5 485.4 21.7

General, administrative and other expenses 288.1 11.0 218.7 9.8

Equity income in earnings of unconsolidated affiliates (9.6) (0.4) (10.4) (0.5)

Operating income 338.9 12.9 262.1 11.7

Other expense, net:

Interest expense, net 61.0 2.3 65.7 2.9

Loss on extinguishment of debt 0.9 — — —

Other expense (income), net 0.3 — (6.5) (0.3)

Total other expense, net 62.2 2.4 59.2 2.6

Income from continuing operations before income taxes 276.7 10.6 202.9 9.1

Income tax provision (73.2) (2.8) (58.8) (2.6)

Income from continuing operations 203.5 7.8 144.1 6.4

Income (loss) from discontinued operations, net of tax 1.3 — (0.8) —

Net income before non-controlling interests 204.8 7.8 143.3 6.4

Net income attributable to non-controlling interests 0.7 — — —

Net income attributable to Tempur Sealy International, Inc.

$ 204.1 7.8 % $ 143.3 6.4 %

Earnings per common share:

Earnings per share for continuing operations $ 3.89 $ 2.63

Earnings (loss) per share for discontinued operations 0.02 (0.01)

Earnings per share $ 3.91 $ 2.62

Earnings per share for continuing operations $ 3.83 $ 2.57

Earnings (loss) per share for discontinued operations 0.03 (0.01)

Earnings per share $ 3.86 $ 2.56

Weighted average common shares outstanding:

Basic 52.2 54.7

Diluted 52.9 56.0

Nine Months Ended September 30,

2020 2019 2020 2019 2020 2019

(in millions) Consolidated North America International

Net sales by channel

Wholesale $ 2,273.3 $ 1,958.2 $ 1,973.3 $ 1,632.5 $ 300.0 $ 325.7

Direct 346.6 276.5 250.9 181.6 95.7 94.9

Total net sales $ 2,619.9 $ 2,234.7 $ 2,224.2 $ 1,814.1 $ 395.7 $ 420.6

Net sales increased 17.2%, and on a constant currency basis increased 17.6%.

The change in net sales was driven by the following:

• North America net sales increased $410.1 million, or 22.6%.

Net sales in the Wholesale channel increased $340.8 million, or 20.9%, primarily driven by broad-based demand across both existing and new distribution.

Net sales in the Direct channel increased $69.3 million, or 38.2%, primarily driven by growth from our e-commerce business.

• International net sales decreased $24.9 million, or 5.9%.

On a constant currency basis, International net sales decreased 4.6% as a result of the global pandemic.

Net sales in the Wholesale channel decreased 6.1% on a constant currency basis.

Net sales in the Direct channel increased 0.7% on a constant currency basis.

Nine Months Ended September 30,

(in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change

North America $ 932.0 41.9 % $ 731.2 40.3 % 1.6 %

International 221.2 55.9 % 224.6 53.4 % 2.5 %

Consolidated gross margin $ 1,153.2 44.0 % $ 955.8 42.8 % 1.2 %

Costs associated with net sales are recorded in cost of sales and include the costs of producing, shipping, warehousing, receiving and inspecting goods during the period, as well as depreciation and amortization of long-lived assets used in the manufacturing process.

Gross margin improved 120 basis points.

The primary drivers of changes in gross margin by segment are discussed below:

• North America gross margin improved 160 basis points.

The improvement in gross margin was primarily driven by fixed cost leverage and productivity on higher unit volume of 190 basis points, decreased floor model expenses of 70 basis points and lower commodity costs of 70 basis points.

These improvements were partially offset by unfavorable product and brand mix of 170 basis points.

Additionally, we incurred $4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items and $0.6 million of operational expansion costs related to the opening of a Sealy manufacturing facility, which partially offset the improvement in gross margin.

• International gross margin improved 250 basis points.

The improvement in gross margin was primarily driven by favorable mix of 110 basis points, fixed cost leverage and productivity on higher unit volumes of 60 basis points and lower commodity costs .

Additionally, we incurred $0.5 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which partially offset the improvement in gross margin.

OPERATING EXPENSES

Selling and marketing expenses include advertising and media production associated with the promotion of our brands, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials and sales force compensation.

We also include in selling and marketing expense certain new product development costs, including market research and new product testing.

Nine Months Ended September 30,

2020 2019 2020 2019 2020 2019 2020 2019

(in millions) Consolidated North America International Corporate

Operating expenses:

Advertising expenses $ 229.8 $ 203.0 $ 204.7 $ 174.6 $ 25.1 $ 28.4 $ — $ —

Other selling and marketing expenses 306.0 282.4 182.6 180.6 86.6 93.4 36.8 8.4

General, administrative and other expenses 288.1 218.7 142.4 111.8 38.1 33.3 107.6 73.6

Total operating expenses $ 823.9 $ 704.1 $ 529.7 $ 467.0 $ 149.8 $ 155.1 $ 144.4 $ 82.0

Operating expenses increased $119.8 million, or 17.0%, and decreased 10 basis points as a percentage of net sales.

The primary drivers of changes in operating expenses by segment are explained below:

• North America operating expenses increased $62.7 million, or 13.4%, and decreased 190 basis points as a percentage of net sales.

The increase in operating expenses was primarily driven by advertising and incremental bad debt expense primarily related to the bankruptcy of one department store in the U.S.

Additionally, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account and $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the macro-economic environment.

• International operating expenses decreased $5.3 million, or 3.4%, and increased 100 basis points as a percentage of net sales.

The decrease in operating expenses was primarily driven by lower advertising and other selling and marketing investments, partially offset by increased bad debt expense.

Additionally, we incurred $3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $2.6 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.

• Corporate operating expenses increased $62.4 million, or 76.1%.

The increase in operating expenses was primarily driven by $45.2 million of amortization for our long-term aspirational plan stock-based compensation.

The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards which became probable of vesting during the third quarter of 2020.

The awards are subject to a remaining service vesting condition which will lapse in December 2020.

Additionally, we expect to reach the maximum payout for our 2020 annual incentive and performance-based stock compensation plans, which increased operating expense in the third quarter of 2020.

We will record additional amortization related to these compensation plans and the aspirational plan in the fourth quarter of 2020.

This increase was partially offset by $4.1 million of professional fees recorded in the first half of 2019 related to the acquisition of Sleep Outfitters, which were not repeated in 2020.

Research and development expenses were $17.1 million for the nine months ended September 30, 2020 as compared to $16.8 million for the nine months ended September 30, 2019.

OPERATING INCOME

Nine Months Ended September 30,

(in millions, except percentages) Operating Income Operating Margin Operating Income Operating Margin Margin Change

North America $ 402.3 18.1 % $ 264.2 14.6 % 3.5 %

International 81.0 20.5 % 79.9 19.0 % 1.5 %

Corporate expenses (144.4) (82.0)

Total operating income $ 338.9 12.9 % $ 262.1 11.7 % 1.2 %

Operating income increased $76.8 million and operating margin improved 120 basis points.

The primary drivers of changes in operating income and operating margin by segment are discussed below:

• North America operating income increased $138.1 million and operating margin improved 350 basis points.

The improvement in operating margin was primarily driven by improved operating expense leverage of 310 basis points and the improvement in gross margin of 160 basis points.

These improvements were offset by $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.

Additionally, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the macro-economic environment and incurred $4.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.

• International operating income increased $1.1 million and operating margin improved 150 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 250 basis points and improved operating expense leverage.

These improvements were offset by $3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $3.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.

• Corporate operating expenses increased $62.4 million, which negatively impacted our consolidated operating margin by 240 basis points.

The increase in operating expenses was primarily driven by $45.2 million of amortization for our long-term aspirational plan stock-based compensation.

The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards which became probable of vesting during the third quarter of 2020.

The awards are subject to a remaining service vesting condition which will lapse in December 2020.

Additionally, we expect to reach the maximum payout for our 2020 annual incentive and performance-based stock compensation plans, which increased operating expense in the third quarter of 2020.

We will record additional amortization related to these compensation plans and the aspirational plan in the fourth quarter of 2020.

This increase was partially offset by $4.1 million of professional fees recorded in the first half of 2019 related to the acquisition of Sleep Outfitters, which were not repeated in 2020.

INTEREST EXPENSE, NET

Nine Months Ended September 30,

(in millions, except percentages) 2020 2019 % Change

Interest expense, net $ 61.0 $ 65.7 (7.2) %

Interest expense, net, decreased $4.7 million, or 7.2%.

The decrease in interest expense, net, was primarily driven by reduced average levels of outstanding debt and lower interest rates on our variable rate debt.

INCOME TAX PROVISION

Nine Months Ended September 30,

(in millions, except percentages) 2020 2019 % Change

Income tax provision $ 73.2 $ 58.8 24.5 %

Effective tax rate 26.5 % 29.0 %

Our income tax provision increased $14.4 million due to an increase in income before income taxes.

Our effective tax rate for the nine months ended September 30, 2020 as compared to the same prior year period decreased 250 basis points.

Our effective tax rate for the three months ended March 31, 2021 as compared to the same prior year period decreased by 420 basis points.

The effective tax rate as compared to the U.S.

federal statutory rate for the nine months ended September 30, 2020 included a net unfavorable impact of discrete items, primarily related to the impact of the likelihood of realization of certain deferred tax assets.

federal statutory rate for the three months ended March 31, 2021 included the favorable impact of the elimination of global intangible low-taxed income ("GILTI") from U.S.

taxable income, the favorable impact of the deductibility of stock compensation in the U.S.

and included a net unfavorable impact of other discrete items.

The effective tax rate as compared to the U.S.

federal statutory rate for the for the nine months ended September 30, 2019 included a net unfavorable impact of discrete items primarily related to the sale of a certain interest in our Asia-Pacific joint venture and the impact of certain stock compensation.

federal statutory tax rate for the three months ended March 31, 2020 included a net unfavorable impact of discrete items primarily related to the likelihood of the realization of certain deferred tax assets, i.e., the future deductibility of such items for income tax purposes, and certain stock compensation.

Liquidity and Capital Resources

Our principal sources of funds are cash flows from operations, borrowings made pursuant to our credit facilities and cash and cash equivalents on hand.

Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, capital expenditures and working capital needs.

As of September 30, 2020, we had net working capital of $121.4 million, including cash and cash equivalents of $229.2 million, as compared to $126.9 million, including cash and cash equivalents of $64.9 million, as of December 31, 2019.

At September 30, 2020, total cash and cash equivalents were $229.2 million, of which $186.3 million was held in the U.S.

Our principal sources of funds are cash flows from operations, supplemented with borrowings in the capital markets and made pursuant to our credit facilities and cash and cash equivalents on hand.

Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, payments of dividends to our shareholders, capital expenditures and working capital needs.

As of March 31, 2021, we had net working capital of $318.6 million, including cash and cash equivalents of $290.5 million, as compared to a working capital deficit of $6.4 million, including cash and cash equivalents of $65.0 million, as of December 31, 2020.

At March 31, 2021, total cash and cash equivalents were $290.5 million, of which $264.6 million was held in the U.S.

and $25.9 million was held by subsidiaries outside of the U.S.

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The table below presents net cash provided by (used in) operating, investing and financing activities from continuing operations for the periods indicated below:

Nine Months Ended September 30,

Three Months Ended March 31,

(in millions) 2021 2020

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Financing activities 168.9 188.1

Cash provided by operating activities from continuing operations increased $296.2 million in the nine months ended September 30, 2020 as compared to the same period in 2019.

Cash provided by operating activities from continuing operations increased $71.3 million in the three months ended March 31, 2021 as compared to the same period in 2020.

The increase in cash provided by operating activities was driven by strong operational performance in the period.

Cash used in investing activities from continuing operations increased $47.4 million in the nine months ended September 30, 2020 as compared to the same period in 2019.

The increase in cash used in investing activities was primarily due to cash used to acquire the Sherwood Bedding business and planned capital expenditures.

Cash used in financing activities from continuing operations increased $103.7 million in the nine months ended September 30, 2020 as compared to the same period in 2019.

For the nine months ended September 30, 2020, we had net repayments of $21.0 million on our credit facilities, as compared to net repayments of $76.0 million in 2019.

During the nine months ended September 30, 2020 and 2019, respectively, we repurchased $187.5 million and $52.3 million of our common stock under our share repurchase program.

In 2020, these repurchases were largely made in the first quarter prior to the impact of COVID-19 on our business.

Additionally, we repurchased $12.1 million and $3.2 million of our common stock which was withheld to satisfy tax withholding obligations related to stock compensation during the nine months ended September 30, 2020 and 2019, respectively.

Cash used in investing activities from continuing operations decreased $39.6 million in the three months ended March 31, 2021 as compared to the same period in 2020.

The decrease in cash used in investing activities was due to the acquisition of the Sherwood Bedding business, which occurred in the first quarter of 2020.

Cash provided by financing activities from continuing operations decreased $19.2 million in the three months ended March 31, 2021 as compared to the same period in 2020.

For the three months ended March 31, 2021, we had net funding of $504.8 million, which included proceeds of $800.0 million from the issuance of our 2029 Senior Notes partially offset by net repayments under our credit facilities and 2023 Senior Notes, as compared to net borrowings of $380.1 million in 2020 on our credit facilities.

During the three months ended March 31, 2021 and 2020, we repurchased $313.1 million and $199.3 million, respectively, of our common stock.

Cash provided by financing activities also decreased due to dividends paid to shareholders of $14.3 million and payment of deferred financing costs of $12.7 million during the three months ended March 31, 2021.

Cash Provided by (Used in) Discontinued Operations

Net cash provided by (used in) operating, investing and financing activities from discontinued operations for the periods ended September 30, 2020 and 2019 was not material.

Net cash provided by (used in) operating, investing and financing activities from discontinued operations for the periods ended March 31, 2021 and 2020 was not material.

Capital Expenditures

Capital expenditures totaled $73.6 million and $61.9 million for the nine months ended September 30, 2020 and 2019, respectively.

We currently expect our 2020 capital expenditures to be approximately $110 to $115 million, which includes investments in our U.S.

enterprise resource planning projects and domestic manufacturing facilities.

Our total debt decreased to $1,535.3 million as of September 30, 2020 from $1,547.0 million as of December 31, 2019.

During the first quarter of 2020, we took initial actions to mitigate the impact of the material slowdown in business activity resulting from COVID-19 and to provide greater financial flexibility.

As a result, we entered into a new $200.0 million 364-day term loan (the "364-Day Loan") in the second quarter of 2020.

As industry trends improved in the third quarter of 2020, we generated record operating cash flow which allowed us to repay the 364-Day Loan referred to below.

Total availability under our revolving senior secured credit facility was $424.9 million as of September 30, 2020, which matures in 2024.

As of September 30, 2020, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 1.92 times.

Our leverage ratio as of September 30, 2020 was the lowest in our history.

Capital expenditures totaled $23.5 million and $26.2 million for the three months ended March 31, 2021 and 2020, respectively.

We currently expect our 2021 capital expenditures to be approximately $125 million to $140 million, which includes investments in growth initiatives and maintenance capital expenditures of $75 million.

Our total debt increased to $1,873.1 million as of March 31, 2021 from $1,370.3 million as of December 31, 2020.

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

During the first quarter of 2021, we redeemed the remaining $250.0 million of our 2023 Senior Notes, principally funded by our revolving credit facility, at 101.406% of the principal amount, plus the accrued and unpaid interest.

On February 2, 2021 we entered into an amendment to our 2019 Credit Agreement, which increased our revolving credit facility from $425.0 million to $725.0 million.

Total availability under our revolving senior secured credit facility was $724.9 million as of March 31, 2021, which matures in 2024.

On March 25, 2021, we issued the 2029 Senior Notes.

The 2029 Senior Notes mature on April 15, 2029 and 4.00% interest is payable semi-annually in arrears on each April 15 and October 15, beginning on October 15, 2021.

Refer to Note 5, "Debt" in our of the "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1 for further discussion of our debt.

As of March 31, 2021, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 1.95 times.

This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio as set forth in the 2019 Credit Agreement, which limits this ratio to 5.00 times.

As of September 30, 2020, we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances.

As of March 31, 2021, we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances.

Our debt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends.

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The limit on restricted payments under the 2019 Credit Agreement, 2026 Senior Notes and 2029 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted.

On May 13, 2020, we entered into an amendment to the existing 2019 Credit Agreement, which provided for the $200.0 million 364-Day Loan.

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

On September 14, 2020, we repaid the 364-Day Loan.

Repayment of the 364-Day Loan lifted certain restrictions on dividends, share repurchases and our ability to make certain investments.

For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated indebtedness less netted cash to adjusted EBITDA calculated in accordance with the 2019 Credit Agreement.

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Debt Securities Guaranteed by Subsidiaries

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 all of Tempur Sealy International’s 100% directly or indirectly owned domestic subsidiaries (together, the "Obligor Group").

The $600.0 million aggregate principal amount of 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 all of Tempur Sealy International’s 100% directly or indirectly owned domestic subsidiaries guaranteeing Tempur Sealy International's obligations under the 2019 Credit Agreement (together, the "Obligor Group").

The $450.0 million aggregate principal amount of 2023 Senior Notes were general unsecured senior obligations at December 31, 2020.

The foreign subsidiaries represent the foreign operations of the Company and do not guarantee the Senior Notes.

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In March 2020, the SEC adopted final rules that amend the financial disclosure requirements for subsidiary issuers and guarantors of registered debt securities under Rule 3-10 of Regulation S-X, permitting registrants to disclose summarized financial information for such subsidiary issuers and guarantors.

The rule is effective January 4, 2021;

however, earlier compliance is permitted.

We elected to early comply with this rule.

The rule was effective January 4, 2021.

The summarized financial information for the Obligor Group follows:

Nine Months Ended

September 30, 2020

Three Months Ended

March 31, 2021

Obligor Group

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Obligor Group Obligor Group

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(in millions)

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Share Repurchase Program

Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock for a total repurchase price of not more than $800.0 million.

During the nine months ended September 30, 2020, we repurchased 2.6 million shares for approximately $187.5 million.

As of September 30, 2020, we had approximately $131.3 million remaining under our existing share repurchase authorization.

In October 2020, the Board of Directors authorized an additional increase, of $168.7 million, to the existing share repurchase authorization of Tempur Sealy International's common stock to $300.0 million.

Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock.

On February 11, 2021, the Board of Directors authorized an increase of $211.4 million, to the existing share repurchase authorization of Tempur Sealy International's common stock.

During the three months ended March 31, 2021, we repurchased 8.4 million shares under our share repurchase program for $299.8 million.

As of March 31, 2021, we had $113.2 million remaining under our share repurchase authorization.

On April 29, 2021, the Board of Directors authorized an additional increase to the share repurchase authorization bringing the total authorization to $400.0 million.

Share repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate.

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Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws.

In connection with the 364-Day Loan, we agreed to certain limitations on our ability to repurchase shares and make investments while the 364-Day Loan was outstanding.

These limitations were lifted upon repayment of the 364-Day Loan in the third quarter of 2020.

In the near term, subject to market conditions, we expect to repurchase at least 3% of shares outstanding per year.

We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities.

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Future Liquidity Sources and Uses

As of September 30, 2020, we had $737.7 million of liquidity, including $229.2 million of cash on hand and $424.9 million available under our revolving senior secured credit facility.

As of March 31, 2021, we had $1,102.6 million of liquidity, including $290.5 million of cash on hand and $724.9 million available under our revolving senior secured credit facility.

We also had availability of $87.2 million under our securitization facility.

In addition, we expect to generate additional cash flow from operations in the fourth quarter of 2020.

In addition, we expect to generate significant cash flow from operations in the full year 2021.

We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for our foreseeable working capital needs, necessary capital expenditures and debt service obligations.

Operating cash flow and liquidity exceeded our expectations in 2020.

As a result, we have developed a new capital allocation plan to drive shareholder value over time.

Our plan is focused on the following:

• Invest approximately $70 million annually for capital expenditures to invest in our people, products and processes.

• Initiate a quarterly cash dividend beginning in early 2021, subject to approval by the Board of Directors, targeting an annual distribution to our stockholders of approximately 15% of net income.

• Resume our share repurchase program and target to repurchase at least 3% of shares outstanding per year in the near-term, depending on market conditions.

• Evaluate acquisition opportunities with a focus on strategic acquisitions similar to those we have completed over the past few years.

• Execute a four-for-one stock split, which will be effected through a stock dividend in the fourth quarter of 2020, to make our common stock more accessible and improve trading liquidity.

As of September 30, 2020, we had $1,535.3 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $1,335.3 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, was 1.92 times for the trailing twelve months ended September 30, 2020, the lowest in our history.

Our capital allocation strategy follows a balanced approach focused on supporting the business, returning shareholder value through share repurchases and quarterly dividends as well as opportunistic and strategic acquisition opportunities that enhance our global competitiveness.

Additionally, we have taken capital structure actions to optimize our balance sheet, through extending the maturities of our long-term debt and lowering our annualized interest expense by approximately $23 million.

We plan to take the following additional actions in 2021:

• For the second quarter of 2021, the Board of Directors has declared a dividend of $0.07 per share.

The dividend is payable on May 27, 2021 to shareholders of record as of May 13, 2021.

• Repurchase at least 6% of shares outstanding over the course of 2021, subject to market conditions.

• We intend to use the net proceeds from the 2029 Senior Notes to redeem in full the $600.0 million 2026 Senior Notes.

The remaining funds will be used for general corporate purposes.

As of March 31, 2021, we had $1,873.1 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $1,673.1 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, was 1.95 times for the trailing twelve months ended March 31, 2021.

Our target range for our ratio of consolidated indebtedness less netted cash, which is a non-GAAP financial measure, is 2.0 to 3.0 times.

Total cash interest payments related to our borrowings are expected to be approximately $75 to $80 million in 2020.

On October 8, 2020, we announced our election to conditionally redeem $200.0 million of our $450.0 million of our issued and outstanding 2023 Senior Notes on November 9, 2020 (the "Redemption Date").

The 2023 Senior Notes selected for redemption will be redeemed at 101.406% of their principal amount, plus the accrued and unpaid interest.

The redemption is conditioned on the determination by our Chief Financial Officer, in his sole discretion, as of the second business day before the Redemption Date, that the redemption continues to be reasonably prudent and consistent with our objectives concerning liquidity, financing needs and funding costs.

Total cash interest payments related to our borrowings are expected to be approximately $50 million to $55 million in 2021.

On April 6, 2021, we entered into a new amendment to our Accounts Receivable Securitization that, among other things, extended its maturity date to April 6, 2023 and increased the overall limit from $120.0 million to $200.0 million.

Our debt service obligations could, under certain circumstances, have material consequences to our stockholders.

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The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements and debt service obligations.

For information regarding the impact of COVID-19 on our business, including our liquidity and capital resources, please refer to "Risk Factors" in ITEM 1A of Part II of this Report.

For information regarding the impact of COVID-19 on our business, including our liquidity and capital resources, please refer to "Risk Factors" contained in ITEM 1A of Part I of the 2020 Annual Report.

Non-GAAP Financial Information

We provide information regarding adjusted net income, adjusted EPS, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA per credit facility, consolidated indebtedness and consolidated indebtedness less netted cash, which are not recognized terms under GAAP and do not purport to be alternatives to net income, earnings per share, gross profit, gross margin, operating income (expense), operating margin or an alternative to total debt as a measure of liquidity.

We believe these non-GAAP financial measures provide investors with performance measures that better reflect our underlying operations and trends, providing a perspective not immediately apparent from net income, gross profit, gross margin, operating income (expense) and operating margin.

We provide information regarding adjusted net income, adjusted EPS, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA per credit facility, consolidated indebtedness and consolidated indebtedness less netted cash, which are not recognized terms under GAAP and do not purport to be alternatives to net income, earnings per share, operating income (expense), operating margin or an alternative to total debt as a measure of liquidity.

The adjustments we make to derive the non-GAAP financial measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP financial measure, but which we do not consider to be the fundamental attributes or primary drivers of our business.

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We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below.

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended September 30, 2020 and 2019:

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended March 31, 2021 and 2020:

Three Months Ended

(in millions, except per share amounts) September 30, 2020 September 30, 2019

(in millions, except per share amounts) March 31, 2021 March 31, 2020

Net income $ 130.5 $ 59.7

Income from discontinued operations, net of tax (1)

Aspirational plan amortization (2)

Loss from discontinued operations, net of tax (1)

Loss on extinguishment of debt (2)

Customer-related charges (3)

Incremental operating costs (4)

Accounting standard adoption (5)

Facility expansion costs (5)

Restructuring costs (6)

Tax adjustments (6)

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Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.

(2) In the third quarter of 2020, we recognized $45.2 million of performance-based stock compensation amortization related to our long-term aspirational awards.

The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020.

The awards are subject to a remaining service vesting condition which will lapse in December 2020.

(3) In the third quarter of 2020, loss on extinguishment of debt represents costs associated with the early repayment of the 364-Day Loan.

(4) In the third quarter of 2020, we recorded $0.8 million of charges related to the adoption of ASU No.

(2) In the first quarter of 2021, we recognized $5.0 million of loss on extinguishment of debt associated with the redemption of the remaining amount outstanding on the 2023 senior notes.

(3) In the first quarter of 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.

(4) In the first quarter of 2020, we recorded $2.3 million of charges related to the global pandemic.

(5) In the first quarter of 2020, we recorded $1.5 million of charges related to the adoption of ASU No.

2016-13, "Financial Instruments - Credit Losses (Topic 326)".

As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation.

(5) In the third quarter of 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility.

(6) We incurred $0.4 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment, in the third quarter of 2020.

(7) Adjusted income tax provision represents the tax effects associated with the aforementioned items and other discrete income tax events.

Adjusted Gross Profit and Gross Margin and Adjusted Operating Income (Expense) and Operating Margin

A reconciliation of gross profit and gross margin to adjusted gross profit and adjusted gross margin, respectively, and operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are provided below.

(6) Adjusted income tax provision represents the tax effects associated with the aforementioned items.

Adjusted Operating Income (Expense) and Operating Margin

A reconciliation of operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are provided below.

The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended September 30, 2020.

Three Months Ended September 30, 2020

The following table sets forth our reported gross profit and operating income (expense) for the three months ended March 31, 2021.

We had no adjustments to gross profit and operating income (expense) for the three months ended March 31, 2021.

Three Months Ended March 31, 2021

(in millions, except percentages) Consolidated

2 unchanged sentences

Gross profit $ 458.9 44.0 % $ 363.9 41.2 % $ 95.0 59.2 % $ —

Facility expansion costs (1)

Adjusted gross profit $ 530.8 46.9 % $ 439.2 45.0 % $ 91.6 58.8 % $ —

Operating income (expense) $ 188.4 18.0 % $ 173.4 19.6 % $ 46.2 28.8 % $ (31.2)

Aspirational plan amortization (2)

45.2 — — 45.2

Accounting standard adoption (3)

Facility expansion costs (1)

Restructuring costs (4)

Total adjustments 47.0 1.4 0.4 45.2

Adjusted operating income (expense) $ 227.2 20.1 % $ 232.9 23.9 % $ 45.2 29.0 % $ (50.9)

The following table sets forth our reported gross profit and operating income (expense) for the three months ended September 30, 2019.

We had no adjustments to gross profit and operating income (expense) for the three months ended September 30, 2019.

Three Months Ended September 30, 2019

The following table sets forth our reported gross profit and the reconciliation of our operating income (expense) and operating margin to the calculation of adjusted operating income (expense) and adjusted operating margin for the three months ended March 31, 2020.

We had no adjustments to gross profit for the three months ended March 31, 2020.

Three Months Ended March 31, 2020

(in millions, except percentages) Consolidated Margin North America Margin International Margin Corporate

2 unchanged sentences

Operating income (expense) $ 105.3 12.8 % $ 101.6 14.7 % $ 26.4 20.3 % $ (22.7)

(1) In the third quarter of 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility.

(2) In the third quarter of 2020, we recognized $45.2 million of performance-based stock compensation amortization related to our long-term aspirational awards.

The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020.

The awards are subject to a remaining service vesting condition which will lapse in December 2020.

(3) In the third quarter of 2020, we recorded $0.8 million of charges related to the adoption of ASU No.

Customer-related charges (1)

11.7 11.7 — —

Incremental operating costs (2)

Accounting standard adoption (3)

Total adjustments 15.5 13.2 2.3 —

Adjusted operating income (expense) $ 120.8 14.7 % $ 114.8 16.6 % $ 28.7 22.1 % $ (22.7)

(1) In the first quarter of 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.

(2) In the first quarter of 2020, we recorded $2.3 million of charges related to the global pandemic.

(3) In the first quarter of 2020, we recorded $1.5 million of charges related to the adoption of ASU No.

2016-13, "Financial Instruments - Credit Losses (Topic 326)".

As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation.

(4) We incurred $0.4 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment, in the third quarter of 2020.

EBITDA, Adjusted EBITDA per Credit Facility and Consolidated Indebtedness less Netted Cash

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Accordingly, we present adjusted EBITDA per credit facility to provide information regarding our compliance with requirements under the 2019 Credit Agreement.

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA per credit facility for the three months ended September 30, 2020 and 2019:

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA per credit facility for the three months ended March 31, 2021 and 2020:

Three Months Ended

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

(in millions) March 31, 2021 March 31, 2020

Net income $ 130.5 $ 59.7

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Depreciation and amortization 41.8 31.0

Aspirational plan amortization (2)

EBITDA $ 230.1 $ 134.5

Income from discontinued operations, net of tax (3)

Loss from discontinued operations, net of tax (2)

Customer-related charges (3)

Incremental operating costs (4)

Accounting standard adoption (5)

Facility expansion costs (5)

Restructuring costs (6)

Adjusted EBITDA per credit facility $ 230.3 $ 151.2

(1) In the third quarter of 2020, loss on extinguishment of debt represents costs associated with the early repayment of the 364-Day Loan.

(2) In the third quarter of 2020, we recognized $45.2 million of performance-based stock compensation amortization related to our long-term aspirational awards.

The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020.

The awards are subject to a remaining service vesting condition which will lapse in December 2020.

(1) In the first quarter of 2021, we recognized $5.0 million of loss on extinguishment of debt associated with the redemption of the remaining amount outstanding on the 2023 senior notes.

(2) Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the 2019 Credit Agreement.