Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per common share amounts)
(unaudited)
Three Months Ended
March 31,
2021 2020
Net sales $ 1,043.8 $ 822.4
Cost of sales 584.9 465.3
Gross profit 458.9 357.1
Selling and marketing expenses 197.7 171.0
General, administrative and other expenses 79.5 80.6
Equity (income) loss in earnings of unconsolidated affiliates ( 6.7 ) 0.2
Operating income 188.4 105.3
Other expense, net:
Interest expense, net 12.3 20.3
Loss on extinguishment of debt 5.0 —
Other (income) expense, net ( 0.3 ) 0.5
Total other expense, net 17.0 20.8
Income from continuing operations before income taxes 171.4 84.5
Income tax provision ( 40.5 ) ( 23.5 )
Income from continuing operations 130.9 61.0
Loss from discontinued operations, net of tax ( 0.2 ) ( 1.2 )
Net income before non-controlling interests 130.7 59.8
Less: Net income attributable to non-controlling interests 0.2 0.1
Net income attributable to Tempur Sealy International, Inc. $ 130.5 $ 59.7
Earnings per common share:
Basic
Earnings per share for continuing operations $ 0.64 $ 0.28
Loss per share for discontinued operations — —
Earnings per share $ 0.64 $ 0.28
Diluted
Earnings per share for continuing operations $ 0.62 $ 0.28
Loss per share for discontinued operations — —
Earnings per share $ 0.62 $ 0.28
Weighted average common shares outstanding:
Basic 203.7 213.6
Diluted 210.1 216.0
See accompanying Notes to Condensed Consolidated Financial Statements.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
Three Months Ended
March 31,
2021 2020
Net income before non-controlling interests $ 130.7 $ 59.8
Other comprehensive income, net of tax:
Foreign currency translation adjustments ( 10.8 ) ( 23.0 )
Other comprehensive loss, net of tax ( 10.8 ) ( 23.0 )
Comprehensive income 119.9 36.8
Less: Comprehensive income attributable to non-controlling interests 0.2 0.1
Comprehensive income attributable to Tempur Sealy International, Inc. $ 119.7 $ 36.7
See accompanying Notes to Condensed Consolidated Financial Statements .
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
March 31, 2021 December 31, 2020
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 290.5 $ 65.0
Accounts receivable, net 397.4 383.7
Inventories 318.8 312.1
Prepaid expenses and other current assets 207.6 207.6
Total Current Assets 1,214.3 968.4
Property, plant and equipment, net 509.0 507.9
Goodwill 765.2 766.3
Other intangible assets, net 626.8 630.1
Operating lease right-of-use assets 294.1 304.3
Deferred income taxes 13.7 13.5
Other non-current assets 119.0 118.1
Total Assets $ 3,542.1 $ 3,308.6
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $ 278.6 $ 324.1
Accrued expenses and other current liabilities 546.2 585.1
Current portion of long-term debt 37.7 43.9
Income taxes payable 33.2 21.7
Total Current Liabilities 895.7 974.8
Long-term debt, net 1,822.4 1,323.0
Long-term operating lease obligations 266.2 275.1
Deferred income taxes 98.2 90.4
Other non-current liabilities 132.4 131.8
Total Liabilities 3,214.9 2,795.1
Redeemable non-controlling interest 8.9 8.9
Total Stockholders' Equity 318.3 504.6
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity $ 3,542.1 $ 3,308.6
See accompanying Notes to Condensed Consolidated Financial Statements.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
($ in millions)
(unaudited)
Three Months Ended March 31, 2021
Tempur Sealy International, Inc. Stockholders' Equity
Redeemable
Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest in Subsidiaries Total Stockholders' Equity
Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings
Balance as of 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
Net income 130.5 130.5
Net income attributable to non-controlling interests — 0.2 0.2
Foreign currency adjustments, net of tax ( 10.8 ) ( 10.8 )
Exercise of stock options ( 0.4 ) 10.9 ( 4.3 ) 6.6
Dividends on common stock ($ 0.07 per share)
( 14.8 ) ( 14.8 )
Issuances of PRSUs, RSUs, and DSUs
( 1.5 ) 38.3 ( 38.3 ) —
Treasury stock repurchased
8.4 ( 299.8 ) ( 299.8 )
Treasury stock repurchased - PRSU/RSU releases 0.5 ( 13.3 ) ( 13.3 )
Amortization of unearned stock-based compensation
15.1 15.1
Balance, March 31, 2021
$ 8.9 283.8 $ 2.8 85.9 $ ( 2,360.7 ) $ 590.0 $ 2,161.3 $ ( 76.3 ) $ 1.2 $ 318.3
Three Months Ended March 31, 2020
Tempur Sealy International, Inc. Stockholders' Equity
Redeemable
Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest in Subsidiaries Total Stockholders' Equity
Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings
Balance as of December 31, 2019
$ — 283.8 $ 2.8 75.1 $ ( 1,832.8 ) $ 573.9 $ 1,703.3 $ ( 87.7 ) $ 0.9 $ 360.4
Adoption of accounting standard effective January 1, 2020, net of tax ( 6.5 ) ( 6.5 )
Net income 59.7 59.7
Net income attributable to non-controlling interests 0.1 0.1
Acquisition of non-controlling interest in subsidiary 8.4 —
Foreign currency adjustments, net of tax ( 23.0 ) ( 23.0 )
Exercise of stock options 0.3 1.0 1.3
Issuances of PRSUs, RSUs, and DSUs
( 0.4 ) 5.3 ( 5.3 ) —
Treasury stock repurchased
2.6 ( 187.5 ) ( 187.5 )
Treasury stock repurchased - PRSU/RSU releases 0.1 ( 11.8 ) ( 11.8 )
Amortization of unearned stock-based compensation
7.3 7.3
Balance, March 31, 2020
$ 8.4 283.8 $ 2.8 77.4 $ ( 2,026.5 ) $ 576.9 $ 1,756.5 $ ( 110.7 ) $ 1.0 $ 200.0
See accompanying Notes to Condensed Consolidated Financial Statements .
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions) (unaudited)
Three Months Ended
March 31,
2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net income before non-controlling interests $ 130.7 $ 59.8
Loss from discontinued operations, net of tax 0.2 1.2
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization 26.5 23.2
Amortization of stock-based compensation 15.1 7.3
Amortization of deferred financing costs 0.6 0.7
Bad debt expense 2.5 15.7
Deferred income taxes 7.1 3.0
Dividends received from unconsolidated affiliates 2.5 —
Equity (income) loss in earnings of unconsolidated affiliates ( 6.7 ) 0.2
Loss on extinguishment of debt 1.5 —
Foreign currency adjustments and other 0.1 0.6
Changes in operating assets and liabilities, net of effect of business acquisitions ( 93.8 ) ( 96.7 )
Net cash provided by operating activities from continuing operations 86.3 15.0
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:
Purchases of property, plant and equipment ( 23.5 ) ( 26.2 )
Acquisitions, net of cash acquired ( 1.0 ) ( 37.9 )
Other 0.1 0.1
Net cash used in investing activities from continuing operations ( 24.4 ) ( 64.0 )
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:
Proceeds from borrowings under long-term debt obligations 1,653.4 611.1
Repayments of borrowings under long-term debt obligations ( 1,148.6 ) ( 231.0 )
Proceeds from exercise of stock options 6.6 1.3
Treasury stock repurchased ( 313.1 ) ( 199.3 )
Dividends paid ( 14.3 ) —
Payments of deferred financing costs ( 12.7 ) —
Repayments of finance lease obligations and other ( 2.4 ) 6.0
Net cash provided by financing activities from continuing operations 168.9 188.1
Net cash provided by continuing operations 230.8 139.1
Net operating cash flows used in discontinued operations ( 0.4 ) ( 1.1 )
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ( 4.9 ) ( 5.9 )
Increase in cash and cash equivalents 225.5 132.1
CASH AND CASH EQUIVALENTS, beginning of period 65.0 64.9
CASH AND CASH EQUIVALENTS, end of period $ 290.5 $ 197.0
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 8.3 $ 6.4
Income taxes, net of refunds $ 20.2 $ 6.3
See accompanying Notes to Condensed Consolidated Financial Statements.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Description of Business. Tempur Sealy International, Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term "Tempur Sealy International" refers to Tempur Sealy International, Inc. only, and the term "Company" refers to Tempur Sealy International, Inc. and its consolidated subsidiaries.
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. The Company sells its products through two sales channels: Wholesale and Direct.
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 %. The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have control, and consolidation is not otherwise required. The Company’s equity in the net income and losses of these investments is reported in equity income in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income. 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.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States ("GAAP") for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2020, included in the 2020 Annual Report filed with the Securities and Exchange Commission on February 19, 2021.
The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein.
(b) Inventories . Inventories are stated at the lower of cost and net realizable value, determined by the first-in, first-out method , and consist of the following:
March 31, December 31,
(in millions) 2021 2020
Finished goods $ 171.3 $ 170.2
Work-in-process 10.6 12.6
Raw materials and supplies 136.9 129.3
$ 318.8 $ 312.1
(c) Accrued Sales Returns . The Company allows product returns through certain sales channels and on certain products. Estimated sales returns are provided at the time of sale based on historical sales channel return rates. 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. Accrued sales returns are included in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
The Company had the following activity for sales returns from December 31, 2020 to March 31, 2021:
(in millions)
Balance as of December 31, 2020 $ 44.9
Amounts accrued 36.7
Returns charged to accrual ( 33.4 )
Balance as of March 31, 2021 $ 48.2
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
As of March 31, 2021 and December 31, 2020, $ 33.8 million and $ 31.6 million of accrued sales returns are included as a component of accrued expenses and other current liabilities and $ 14.4 million and $ 13.3 million of accrued sales returns are included in other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.
(d) Warranties . The Company provides warranties on certain products, which vary by segment, product and brand. Estimates of warranty expenses are based primarily on historical claims experience and product testing. Estimated future obligations related to these products are charged to cost of sales in the period in which the related revenue is recognized. The Company considers the impact of recoverable salvage value on warranty costs in determining its estimate of future warranty obligations.
The Company provides warranties on mattresses with varying warranty terms. Tempur-Pedic mattresses sold in the North America segment and all Sealy mattresses have warranty terms ranging from 10 to 25 years, generally non-prorated for the first 10 to 15 years and then prorated for the balance of the warranty term. Tempur-Pedic mattresses sold in the International segment have warranty terms ranging from 5 to 15 years, non-prorated for the first 5 years and then prorated on a straight-line basis for the last 10 years of the warranty term. Tempur-Pedic pillows have a warranty term of 3 years, non-prorated.
The Company had the following activity for its accrued warranty expense from December 31, 2020 to March 31, 2021:
(in millions)
Balance as of December 31, 2020 $ 44.2
Amounts accrued 5.8
Warranties charged to accrual ( 5.7 )
Balance as of March 31, 2021 $ 44.3
As of March 31, 2021 and December 31, 2020, $ 20.8 million and $ 20.3 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $ 23.5 million and $ 23.9 million of accrued warranty expense is included in other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.
(e) Allowance for Credit Losses . The allowance for credit losses is the Company’s best estimate of the amount of expected 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 March 31, 2021, the Company's accounts receivable were substantially current. 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 Condensed Consolidated Balance Sheets.
The Company had the following activity for its allowance for credit losses from December 31, 2020 to March 31, 2021:
(in millions)
Balance as of December 31, 2020
$ 71.6
Amounts accrued 2.5
Write-offs charged against the allowance ( 1.6 )
Balance as of March 31, 2021
$ 72.5
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(2) Net Sales
The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, 2021 Three Months Ended March 31, 2020
(in millions) North America International Consolidated North America International Consolidated
Channel
Wholesale $ 765.5 $ 115.9 $ 881.4 $ 624.7 $ 97.7 $ 722.4
Direct 117.8 44.6 162.4 67.6 32.4 100.0
Net sales $ 883.3 $ 160.5 $ 1,043.8 $ 692.3 $ 130.1 $ 822.4
North America International Consolidated North America International Consolidated
Product
Bedding $ 830.3 $ 121.7 $ 952.0 $ 654.9 $ 101.5 $ 756.4
Other 53.0 38.8 91.8 37.4 28.6 66.0
Net sales $ 883.3 $ 160.5 $ 1,043.8 $ 692.3 $ 130.1 $ 822.4
North America International Consolidated North America International Consolidated
Geographical region
United States $ 818.5 $ — $ 818.5 $ 632.5 $ — $ 632.5
All Other 64.8 160.5 225.3 59.8 130.1 189.9
Net sales $ 883.3 $ 160.5 $ 1,043.8 $ 692.3 $ 130.1 $ 822.4
(3) Acquisitions
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 approximately $ 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 )
Redeemable 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.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(4) Goodwill
The following summarizes changes to the Company’s goodwill, by segment:
(in millions) North America International Consolidated
Balance as of December 31, 2020 $ 610.3 $ 156.0 $ 766.3
Foreign currency translation and other 1.6 ( 2.7 ) ( 1.1 )
Balance as of March 31, 2021 $ 611.9 $ 153.3 $ 765.2
(5) Debt
Debt for the Company consists of the following:
March 31, 2021 December 31, 2020
(in millions, except percentages) Amount Rate Amount Rate Maturity Date
2019 Credit Agreement:
Term A Facility $ 398.4 (1) $ 409.1 (2) October 16, 2024
Revolver — (1) — (2) October 16, 2024
2029 Senior Notes 800.0 4.00 % — N/A April 15, 2029
2026 Senior Notes 600.0 5.500 % 600.0 5.500 % June 15, 2026
2023 Senior Notes — N/A 250.0 5.625 % October 15, 2023
Securitized debt — (3) 33.9 (4) April 6, 2023
Finance lease obligations (5)
69.7 71.4 Various
Other 5.0 5.9 Various
Total debt 1,873.1 1,370.3
Less: Deferred financing costs 13.0 3.4
Total debt, net 1,860.1 1,366.9
Less: Current portion 37.7 43.9
Total long-term debt, net $ 1,822.4 $ 1,323.0
(1) Interest at LIBOR plus applicable margin of 1.250 % as of March 31, 2021.
(2) Interest at LIBOR plus applicable margin of 1.250 % as of December 31, 2020.
(3) Interest at one month LIBOR index plus 70 basis points.
(4) Interest at one month LIBOR index plus 80 basis points.
(5) New finance lease obligations are a non-cash financing activity. Refer to Note 6, "Leases".
As of March 31, 2021, the Company was in compliance with all applicable debt covenants.
2019 Credit Agreement
On October 16, 2019, the Company entered into the 2019 Credit Agreement with a syndicate of banks. The 2019 Credit Agreement provides for a $ 425.0 million revolving credit facility, a $ 425.0 million term loan facility, and an incremental facility in an aggregate amount of up to $ 550.0 million plus the amount of certain prepayments plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $ 60.0 million sub-facility for the issuance of letters of credit.
On February 2, 2021, the Company entered into an amendment to the 2019 Credit Agreement. The amendment increased the revolving credit facility from $ 425.0 million to $ 725.0 million. As of March 31, 2021, total availability under the revolving credit facility was $ 724.9 million after a $ 0.1 million reduction for outstanding letters of credit.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Securitized Debt
The Company and certain of its subsidiaries are party to a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended, the "Accounts Receivable Securitization"). As of March 31, 2021, the Company had availability of $ 87.2 million under the Accounts Receivable Securitization. On April 6, 2021, the Company and certain of its subsidiaries entered into a new amendment to the Accounts Receivable Securitization. The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2023 and increased the overall limit from $ 120.0 million to $ 200.0 million.
2029 Senior Notes
On March 25, 2021, Tempur Sealy International issued $ 800.0 million in aggregate principal amount of 4.00 % senior notes due 2029 (the "2029 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2029 Senior Notes were issued pursuant to an indenture, dated as of March 25, 2021 (the "2029 Indenture"), among Tempur Sealy International, certain subsidiaries of Tempur Sealy International as guarantors (the "Guarantors"), and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2029 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Guarantors. The 2029 Senior Notes mature on April 15, 2029, and interest is payable semi-annually in arrears on each April 15 and October 15, beginning on October 15, 2021.
Tempur Sealy International has the option to redeem all or a portion of the 2029 Senior Notes at any time on or after April 15, 2024. The initial redemption price is 102.000 % of the principal amount, plus accrued and unpaid interest, if any. The redemption price will decline each year after 2024 until it becomes 100.0 % of the principal amount beginning on April 15, 2026. In addition, Tempur Sealy International has the option at any time prior to April 15, 2024 to redeem some or all of the 2029 Senior Notes at 100.0 % of the original principal amount plus a “make-whole” premium and accrued and unpaid interest, if any. Tempur Sealy International may also redeem up to 40.0 % of the 2029 Senior Notes prior to April 15, 2024, under certain circumstances with the net cash proceeds from certain equity offerings, at 104.000 % of the principal amount plus accrued and unpaid interest, if any. Tempur Sealy International may make such redemptions as described in the preceding sentence only if, after any such redemption, at least 60.0 % of the original aggregate principal amount of the 2029 Senior Notes issued remains outstanding.
The 2029 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things: (i) incur, directly or indirectly, debt; (ii) make, directly or indirectly, certain investments and restricted payments; (iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets; (iv) sell or otherwise dispose of, directly or indirectly, assets; (v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock; and (vi) enter into transactions with affiliates. These covenants are subject to a number of exceptions and qualifications.
As a result of the issuance of the 2029 Senior Notes, $ 11.4 million of deferred financing costs were capitalized in the first quarter of 2021 and will be amortized as interest expense over the respective debt instrument period, 8 years, using the effective interest method.
2026 Senior Notes
On April 28, 2021, the Company announced its election to conditionally redeem the $ 600.0 million issued and outstanding 2026 Senior Notes, in full, on June 15, 2021 (the "Redemption Date"). The 2026 Senior Notes will be redeemed at 102.750 % of their principal amount, plus the accrued and unpaid interest. The redemption is conditional on the determination by the Company's 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 the Company's objectives concerning liquidity, financing needs and funding costs. The Company intends to use net proceeds from the 2029 Senior Notes primarily to fund the redemption.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
2023 Senior Notes
On November 9, 2020, the Company redeemed the first $ 200.0 million of the issued and outstanding 2023 Senior Notes at 101.406 % of the principal amount, plus the accrued and unpaid interest. During the first quarter of 2021, the Company redeemed the remaining $ 250.0 million of the issued and outstanding 2023 Senior Notes at 101.406 % of the principal amount, plus the accrued and unpaid interest. In the first quarter of 2021, the Company recognized $ 5.0 million of loss on extinguishment of debt, which includes a prepayment premium of $ 3.5 million and the write-off of $ 1.5 million of deferred financing costs, associated with the redemption of the remaining amount outstanding of the 2023 Senior Notes.
Fair Value of Financial Instruments
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. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those instruments. Borrowings under the 2019 Credit Agreement and the securitized debt are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the following material financial instruments were based on observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of debt instruments. The fair values of these material financial instruments are as follows:
Fair Value
(in millions) March 31, 2021 December 31, 2020
2023 Senior Notes $ — $ 255.1
2026 Senior Notes 625.2 625.4
2029 Senior Notes 798.2 —
(6) Leases
The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Condensed Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020:
(in millions) March 31, 2021 December 31, 2020
Assets
Operating lease assets Operating lease right-of-use assets $ 294.1 $ 304.3
Finance lease assets Property, plant and equipment, net 59.4 61.2
Total leased assets $ 353.5 $ 365.5
Liabilities
Short-term:
Operating lease obligations Accrued expenses and other current liabilities $ 61.2 $ 61.0
Finance lease obligations Current portion of long-term debt 11.4 11.4
Long-term:
Operating lease obligations Long-term operating lease obligations 266.2 275.1
Finance lease obligations Long-term debt, net 58.3 60.0
Total lease obligations $ 397.1 $ 407.5
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The following table summarizes the classification of lease expense in the Company's Condensed Consolidated Statements of Income for the three months ended March 31, 2021 and 2020:
Three Months Ended
March 31,
(in millions) 2021 2020
Operating lease expense:
Operating lease expense $ 19.4 $ 18.0
Short-term lease expense 3.9 3.2
Variable lease expense 6.4 5.3
Finance lease expense:
Amortization of right-of-use assets 2.8 2.2
Interest on lease obligations 1.1 1.2
Total lease expense $ 33.6 $ 29.9
The following table sets forth the scheduled maturities of lease obligations as of March 31, 2021:
(in millions) Operating Leases Finance Leases Total
Year Ended December 31,
2021 (excluding the three months ended March 31, 2021)
$ 55.5 $ 11.6 $ 67.1
2022 68.3 13.7 82.0
2023 56.3 11.0 67.3
2024 46.7 8.8 55.5
2025 40.0 7.8 47.8
Thereafter 117.1 34.3 151.4
Total lease payments 383.9 87.2 471.1
Less: Interest 56.5 17.5 74.0
Present value of lease obligations $ 327.4 $ 69.7 $ 397.1
The following table provides lease term and discount rate information related to operating and finance leases as of March 31, 2021:
March 31, 2021
Weighted average remaining lease term (years):
Operating leases 6.61
Finance leases 7.75
Weighted average discount rate:
Operating leases 4.92 %
Finance leases 5.75 %
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The following table provides supplemental information related to the Company's Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020:
Three Months Ended
(in millions) March 31, 2021 March 31, 2020
Cash paid for amounts included in the measurement of lease obligations:
Operating cash flows paid for operating leases (a)
$ 18.2 $ 17.3
Operating cash flows paid for finance leases $ 1.1 $ 1.2
Financing cash flows paid for finance leases $ 2.4 $ 2.3
Right-of-use assets obtained in exchange for new operating lease obligations $ 9.2 $ 35.6
Right-of-use assets obtained in exchange for new finance lease obligations $ 1.2 $ 8.2
(a) Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Condensed Consolidated Statement of Cash Flows offset by non-cash right-of-use asset amortization and lease liability accretion.
(7) Stockholders' Equity
(a) Treasury 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. The Company repurchased 8.4 million and 2.6 million shares, under the program, for approximately $ 299.8 million and $ 187.5 million during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the Company had approximately $ 113.2 million remaining under its share repurchase authorization. On April 29, 2021, the Company announced that its Board of Directors authorized an increase to the share repurchase authorization bringing the total authorization to $ 400.0 million.
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 each of the three months ended March 31, 2021 and 2020. 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 $ 13.3 million and $ 11.8 million in treasury stock acquired during the three months ended March 31, 2021 and 2020, respectively.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(b) AOCL . AOCL consisted of the following:
Three Months Ended
March 31,
(in millions) 2021 2020
Foreign Currency Translation
Balance at beginning of period $ ( 58.6 ) $ ( 82.2 )
Other comprehensive loss:
Foreign currency translation adjustments (1)
( 10.8 ) ( 23.0 )
Balance at end of period $ ( 69.4 ) $ ( 105.2 )
Pensions
Balance at beginning of period $ ( 6.9 ) $ ( 5.5 )
Other comprehensive loss:
Net change from period revaluations — 0.1
Tax expense (2)
— ( 0.1 )
Total other comprehensive income before reclassifications, net of tax $ — $ —
Net amount reclassified to earnings (1)
— —
Tax benefit (2)
— —
Total amount reclassified from accumulated other comprehensive loss, net of tax $ — $ —
Total other comprehensive loss — —
Balance at end of period $ ( 6.9 ) $ ( 5.5 )
(1) In 2021 and 2020, 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 Condensed Consolidated Statements of Income.
(8) Other Items
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
(in millions) March 31, 2021 December 31, 2020
Taxes $ 145.0 $ 150.4
Wages and benefits 68.1 102.5
Advertising 61.3 74.4
Operating lease obligations 61.2 61.0
Other 210.6 196.8
$ 546.2 $ 585.1
(9) Stock-Based Compensation
The Company’s stock-based compensation expense for the three months ended March 31, 2021 and 2020 included PRSUs, non-qualified stock options, RSUs and deferred stock units ("DSUs"). A summary of the Company’s stock-based compensation expense is presented in the following table:
Three Months Ended March 31,
(in millions) 2021 2020
PRSU expense $ 9.6 $ 0.3
Option expense 0.4 1.2
RSU/DSU expense 5.1 5.8
Total stock-based compensation expense $ 15.1 $ 7.3
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The Company grants PRSUs to executive officers and certain members of management. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals. During the first quarter of 2021, the Company granted PRSUs as a component of the long-term incentive plan ("2021 PRSUs"). The Company has recorded stock-based compensation expense related to the 2021 PRSUs during the three months ended March 31, 2021, as it was probable that the Company would achieve the specified performance target for the performance period.
(10) Commitments and Contingencies
The Company is involved in various legal and administrative proceedings incidental to the operations of its business. The Company believes that the outcome of all such pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity or operating results.
(11) Income Taxes
The Company’s effective tax rate for the three months ended March 31, 2021 and 2020 was 23.6 % and 27.8 %, respectively. The Company's effective tax rate for the three months ended March 31, 2021 and 2020 differed from the U.S. federal statutory rate of 21.0% principally due to subpart F income (i.e., global intangible low-taxed income, or "GILTI," earned by the Company’s foreign subsidiaries), foreign income tax rate differentials, state and local taxes, changes in the Company’s uncertain tax positions, the excess tax deficiency (or benefit) related to stock-based compensation and certain other permanent items.
The Company has been involved in a dispute with the Danish Tax Authority ("SKAT") regarding the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish Tax Matter") for tax years 2001 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process.
The uncertain income tax liabilities for the Danish Tax Matter for the years 2001 through 2011 (the "Settlement Years") and for the years 2012 through 2021 (the "2012 to Current Period") are reflected in the Company’s Condensed Consolidated Balance Sheet as per below:
March 31, 2021 December 31, 2020
Period Balance Sheet Presentation DKK USD DKK USD
Settlement Years Accrued expenses and other current liabilities 847.3 $ 133.5 847.3 $ 139.1
2012 to Current Period Other non-current liabilities 297.3 46.9 295.0 48.4
Total 1,144.6 $ 180.4 1,142.3 $ 187.5
The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish tax for the 2012 to Current Period at March 31, 2021 and December 31, 2020 is approximately $ 10.4 million and $ 12.0 million, respectively.
At March 31, 2021 and December 31, 2020, respectively, the Company held cash on deposit with SKAT. The deposit at March 31, 2021 and December 31, 2020 is included within the Company’s Condensed Consolidated Balance Sheet (translated at the exchange rates on March 31, 2021 and December 31, 2020, respectively) as per below:
March 31, 2021 December 31, 2020
DKK USD DKK USD
Prepaid expenses and other current assets 847.3 $ 133.5 847.3 $ 139.1
Other non-current assets 333.6 52.6 333.6 54.8
Total 1,180.9 $ 186.1 1,180.9 $ 193.9
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
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.
There were no other significant changes in the Danish Tax Matter or other uncertain tax positions during the three months ended March 31, 2021.
(12) Earnings Per Common Share
The following table sets forth the components of the numerator and denominator for the computation of basic and diluted earnings per share for net income attributable to Tempur Sealy International.
Three Months Ended
March 31,
(in millions, except per common share amounts) 2021 2020
Numerator:
Income from continuing operations, net of income attributable to non-controlling interests $ 130.7 $ 60.9
Denominator:
Denominator for basic earnings per common share-weighted average shares 203.7 213.6
Effect of dilutive securities 6.4 2.4
Denominator for diluted earnings per common share-adjusted weighted average shares 210.1 216.0
Basic earnings per common share for continuing operations $ 0.64 $ 0.28
Diluted earnings per common share for continuing operations $ 0.62 $ 0.28
The Company excluded an insignificant number of shares for the three months ended March 31, 2021, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive. The Company excluded 0.8 million shares for the three months ended March 31, 2020. Holders of non-vested stock-based compensation awards do not have voting rights.
(13) Business Segment Information
The Company operates in two segments: North America and International. 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., Canada and Mexico. The 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. The Company evaluates segment performance based on net sales, gross profit and operating income.
The Company’s North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company’s accompanying Condensed Consolidated Financial Statements. The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payable.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The following table summarizes total assets by segment:
(in millions) March 31, 2021 December 31, 2020
North America $ 3,757.6 $ 3,740.3
International 618.0 639.8
Corporate 656.6 490.3
Inter-segment eliminations ( 1,490.1 ) ( 1,561.8 )
Total assets $ 3,542.1 $ 3,308.6
The following table summarizes property, plant and equipment, net, by segment:
(in millions) March 31, 2021 December 31, 2020
North America $ 418.6 $ 415.3
International 46.8 49.8
Corporate 43.6 42.8
Total property, plant and equipment, net $ 509.0 $ 507.9
The following table summarizes operating lease right-of-use assets by segment:
(in millions) March 31, 2021 December 31, 2020
North America $ 252.9 $ 256.6
International 39.4 45.7
Corporate 1.8 2.0
Total operating lease right-of-use assets $ 294.1 $ 304.3
The following table summarizes segment information for the three months ended March 31, 2021:
(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 883.3 $ 160.5 $ — $ — $ 1,043.8
Inter-segment sales $ 0.7 $ 0.2 $ — $ ( 0.9 ) $ —
Inter-segment royalty expense (income) 2.1 ( 2.1 ) — — —
Gross profit 363.9 95.0 — — 458.9
Operating income (loss) 173.4 46.2 ( 31.2 ) — 188.4
Income (loss) from continuing operations before income taxes 172.5 46.1 ( 47.2 ) — 171.4
Depreciation and amortization (1)
$ 21.0 $ 3.6 $ 17.0 $ — $ 41.6
Capital expenditures 18.8 2.0 2.7 — 23.5
(1) Depreciation and amortization includes stock-based compensation amortization expense.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The following table summarizes segment information for the three months ended March 31, 2020:
(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 692.3 $ 130.1 $ — $ — $ 822.4
Inter-segment sales $ 0.5 $ 0.1 $ — $ ( 0.6 ) $ —
Inter-segment royalty expense (income) 2.1 ( 2.1 ) — — —
Gross profit 281.2 75.9 — — 357.1
Operating income (loss) 101.6 26.4 ( 22.7 ) — 105.3
Income (loss) from continuing operations before income taxes 100.1 24.0 ( 39.6 ) — 84.5
Depreciation and amortization (1)
$ 17.8 $ 3.1 $ 9.6 $ — $ 30.5
Capital expenditures 21.6 2.1 2.5 — 26.2
(1) Depreciation and amortization includes stock-based compensation amortization expense.
The following table summarizes property, plant and equipment, net by geographic region:
(in millions)
March 31, 2021 December 31, 2020
United States
$ 440.6 $ 436.2
All Other 68.4 71.7
Total property, plant and equipment, net
$ 509.0 $ 507.9
The following table summarizes operating lease right-of-use assets by geographic region:
(in millions) March 31, 2021 December 31, 2020
United States $ 250.9 $ 255.0
All Other 43.2 49.3
Total operating lease right-of-use assets $ 294.1 $ 304.3
The following table summarizes net sales by geographic region:
Three Months Ended
March 31,
(in millions) 2021 2020
United States $ 818.5 $ 632.5
All Other 225.3 189.9
Total net sales $ 1,043.8 $ 822.4
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.