What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-06 · 325 added, 189 removed, 317 unchanged (62% of the section changed)

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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 months ended March 31, 2021, including the following topics:

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and six months ended June 30, 2021, including the following topics:

• an overview of our business and strategy,

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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.

This momentum has continued as the negative impacts of the COVID-19 pandemic largely subsided in the first half of 2021, as compared to the significant global disruption experienced throughout early 2020.

Our consolidated net sales increased 75.8% as compared to the second quarter of 2020, which was impacted by COVID-19.

Current order trends continue to indicate growth.

As a result, we expect consolidated net sales growth to exceed 35% for the full year 2021.

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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.

In the U.S., the broad-based increase in demand coupled with supply chain constraints has created operational challenges for U.S.

The availability of certain commodities improved throughout the second quarter of 2021.

However, availability declined for other key components as well as inbound and outbound freight.

As a result, the U.S.

sales growth in the first half of 2021 was unfavorably impacted as we could not fulfill the entire domestic demand for these products.

We expect these constraints to continue to impact sales growth into the third quarter of 2021 and now anticipate the demand for these products will likely exceed supply into the fourth quarter of 2021.

We estimate sales would have been approximately $150 million higher in the second quarter of 2021 had we not experienced supply chain constraints.

We expect these supply chain constraints will be largely resolved by the end of 2021 and expect to be well-positioned to meet consumer demand heading into 2022.

During the first half of 2021, commodity costs unfavorably impacted our gross margin.

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

Since then, we have continued to manage through a highly inflationary commodity environment and have taken additional pricing actions that will benefit the fourth quarter of 2021.

Based on our current commodity outlook, we expect gross margin will be positively impacted by our pricing actions net of commodity cost inflation in the first half of 2022.

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.

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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.

Acquisition of Dreams Topco Limited

On May 26, 2021, we entered into a share purchase agreement with Project Dream S.à.r.l.

and certain members of the management team and Dreams Topco Limited to purchase the entire issued share capital of Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams").

Dreams has developed a successful multi-channel sales strategy, with over 200 brick and mortar retail locations in the United Kingdom, an industry-leading online channel, as well as manufacturing and delivery assets.

Dreams generated sales of approximately $400 million and EBITDA of approximately $75 million for the year ending December 31, 2020.

On August 2, 2021, we completed the acquisition of Dreams.

The purchase price was approximately $475 million, less net debt and is subject to a customary working capital adjustment period.

The transaction is expected to be accretive to our EPS by approximately $0.20 and generate annual sales of approximately $450 million in the first year post-acquisition.

Product Launches

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.

In 2021, we began the largest rollout in Sealy North America’s history with the introduction of new Posturepedic Plus™, Posturepedic® and Essentials product lines.

The rollout will be split between two phases with Posturepedic® and Essentials product lines successfully launched in the first half of 2021 and the new higher end Posturepedic Plus™ line planned for 2022.

We expect to launch a new Tempur product line in our International segment in 2022.

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 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.

A summary of our results for the three months ended June 30, 2021 include:

• Total net sales increased 75.8% to $1,169.1 million as compared to $665.2 million in the second quarter of 2020.

On a constant currency basis, which is a non-GAAP financial measure, total net sales increased 72.6%, with an increase of 73.8% in the North America business segment and an increase of 64.5% in the International business segment.

• 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.

• Gross margin was 44.3% as compared to 40.0% in the second quarter of 2020.

Adjusted gross margin, which is a non-GAAP financial measure, was 40.6% in the second quarter of 2020.

There were no adjustments to gross margin in the second quarter of 2021.

• Operating income increased 318.2% to $223.3 million as compared to $53.4 million in the second quarter of 2020.

Adjusted operating income, which is a non-GAAP financial measure, increased 191.7% to $227.2 million as compared to $77.9 million in the second quarter of 2020.

• Net income increased 512.2% to $140.8 million as compared to $23.0 million in the second quarter of 2020.

Adjusted net income, which is a non-GAAP financial measure, increased 294.9% to $161.5 million as compared to $40.9 million in the second quarter of 2020.

• Earnings before interest, tax, depreciation and amortization ("EBITDA"), which is a non-GAAP financial measure, increased 212.3% to $266.1 million as compared to $85.2 million in the second quarter of 2020.

Adjusted EBITDA per credit facility, which is a non-GAAP financial measure, increased 146.6% to $270.3 million as compared to $109.6 million in the second quarter of 2020.

• Earnings per diluted share ("EPS") increased 527.3% to $0.69 as compared to $0.11 in the second quarter of 2020.

Adjusted EPS, which is a non-GAAP financial measure, increased 295.0% to $0.79 as compared to $0.20 in the second 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 MARCH 31, 2021 COMPARED TO THE

THREE MONTHS ENDED MARCH 31, 2020

THREE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, 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 March 31,

Three Months Ended June 30,

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

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General, administrative and other expenses 85.1 7.3 82.4 12.4

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

Equity income in earnings of unconsolidated affiliates (7.0) (0.6) (5.0) (0.7)

Operating income 223.3 19.1 53.4 8.0

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Income from continuing operations 140.7 12.0 23.1 3.5

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

(Loss) income from discontinued operations, net of tax (0.3) — 0.1 —

Net income before non-controlling interests 140.4 12.0 23.2 3.5

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

Net (loss) income attributable to non-controlling interests (0.4) — 0.2 —

Net income attributable to Tempur Sealy International, Inc.

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Diluted 204.1 208.0

Three Months Ended March 31,

Three Months Ended June 30,

2021 2020 2021 2020 2021 2020

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• North America net sales increased $435.2 million, or 75.2%.

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 73.8%.

Net sales in the Wholesale channel increased $388.0 million, or 77.2%.

Net sales in the Direct channel increased $47.2 million, or 62.3%.

The increase in net sales across all channels was driven by higher sales volume compared to the prior year period, which was impacted by COVID-19.

• International net sales increased $68.7 million, or 79.3%.

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Net sales in the Direct channel increased 47.5% on a constant currency basis.

Three Months Ended March 31,

The increase in net sales across all channels was driven by higher sales volume compared to the prior year period, which was impacted by COVID-19.

Three Months Ended June 30,

(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 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.

If 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 430 basis points.

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.

The improvement in gross margin was driven by fixed cost leverage from higher sales volume, resulting in an increase of 410 basis points, compared to the prior year period, which was impacted by COVID-19.

Additionally, in 2020, we incurred $4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which was not repeated in 2021.

• International gross margin improved 500 basis points.

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 .

The improvement in gross margin was primarily driven by fixed cost leverage from higher sales volume resulting in an increase of 470 basis points compared to the prior year, which was impacted by COVID-19.

Additionally, in 2020, we incurred $0.5 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which was not repeated in 2021.

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 March 31,

Three Months Ended June 30,

2021 2020 2021 2020 2021 2020 2021 2020

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• North America operating expenses increased $57.3 million, or 38.0%, and decreased 550 basis points as a percentage of net sales.

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.

The increase in operating expenses was primarily driven by advertising investments and increased variable compensation expense as compared to the prior year period, when the full-year outlook included worldwide shutdowns and significant retailer door closures due to COVID-19.

• International operating expenses increased $15.2 million, or 36.9%, and decreased 1,130 basis points as a percentage of net sales.

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

The increase in operating expenses was primarily driven by advertising and other selling and marketing investments as compared to the prior year period, when cost reduction actions were taken due to COVID-19.

These increases were partially offset by decreased restructuring costs.

In 2020, we recorded $3.4 million of restructuring costs associated with headcount reductions driven by the macro-economic environment, which were not repeated in 2021.

• Corporate operating expenses increased $11.9 million, or 46.5%.

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%.

The increase in operating expenses was primarily driven by the low level of variable compensation expense in prior year when the full-year outlook included worldwide shutdowns and significant retailer door closures due to COVID-19.

Additionally, we recorded $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams.

Research and development expenses for the three months ended June 30, 2021 were $6.7 million compared to $5.2 million for the three months ended June 30, 2020, an increase of $1.5 million, or 28.8%.

OPERATING INCOME

Three Months Ended March 31,

Three Months Ended June 30,

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

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• North America operating income increased $149.7 million and operating margin improved 970 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.

The improvement in operating margin was primarily driven by improvement in gross margin of 430 basis points and favorable operating expense leverage of 280 basis points.

Additionally, in 2020, we recognized $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 $4.3 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which were not repeated in 2021.

• International operating income increased $32.1 million and operating margin improved 1,490 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.

The improvement in operating margin was primarily driven by favorable operating expense leverage of 560 basis points and the improvement in gross margin of 500 basis points.

Additionally, in 2020, we recorded $3.4 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $0.6 million of incremental costs related to the global pandemic, which were not repeated in 2021.

• Corporate operating expenses increased $11.9 million, which negatively impacted our consolidated operating margin by 100 basis points.

Additionally, we recorded $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams.

INTEREST EXPENSE, NET

Three Months Ended March 31,

Three Months Ended June 30,

(in millions, except percentages) 2021 2020 % Change

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Interest expense, net, decreased $0.6 million, or 2.9%.

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.

The decrease in interest expense, net, was primarily driven by lower interest rates on our variable rate debt, partially offset by $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes.

LOSS ON EXTINGUISHMENT OF DEBT

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

During the second quarter of 2021, we used the net proceeds from the 2029 Senior Notes to primarily redeem in full our $600.0 million 2026 Senior Notes.

As a result of the redemption, we recognized $18.0 million of loss on extinguishment of debt, which includes a prepayment premium of $16.5 million and the write-off of $1.5 million of deferred financing costs.

Refer to Note 5, "Debt," in our Notes to Condensed Consolidated Financial Statements included in ITEM 1 under Part I for additional information.

INCOME TAX PROVISION

Three Months Ended March 31,

Three Months Ended June 30,

(in millions, except percentages) 2021 2020 % Change

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Our income tax provision increased $35.3 million due to an increase in income before income taxes.

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.

Our effective tax rate for the three months ended June 30, 2021 as compared to the same prior year period decreased by 480 basis points.

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

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.

federal statutory rate for the three months ended June 30, 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.

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

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.

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

SIX MONTHS ENDED JUNE 30, 2021 COMPARED TO THE

SIX MONTHS ENDED JUNE 30, 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:

Six Months Ended June 30,

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

Net sales $ 2,212.9 100.0 % $ 1,487.6 100.0 %

Cost of sales 1,235.8 55.8 864.6 58.1

Gross profit 977.1 44.2 623.0 41.9

Selling and marketing expenses 414.5 18.7 306.1 20.6

General, administrative and other expenses 164.6 7.4 163.0 10.9

Equity income in earnings of unconsolidated affiliates (13.7) (0.6) (4.8) (0.3)

Operating income 411.7 18.6 158.7 10.7

Other expense, net:

Interest expense, net 32.3 1.5 40.9 2.7

Loss on extinguishment of debt 23.0 1.0 — —

Other (income) expense, net (0.4) — 0.8 0.1

Total other expense, net 54.9 2.5 41.7 2.8

Income from continuing operations before income taxes 356.8 16.1 117.0 7.9

Income tax provision (85.2) (3.9) (32.9) (2.2)

Income from continuing operations 271.6 12.3 84.1 5.7

Loss from discontinued operations, net of tax (0.5) — (1.1) (0.1)

Net income before non-controlling interests 271.1 12.3 83.0 5.6

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

Net income attributable to Tempur Sealy International, Inc.

$ 271.3 12.3 % $ 82.7 5.6 %

Earnings per common share:

Earnings per share for continuing operations $ 1.36 $ 0.39

Loss per share for discontinued operations — —

Earnings per share $ 1.36 $ 0.39

Earnings per share for continuing operations $ 1.32 $ 0.40

Loss per share for discontinued operations — (0.01)

Earnings per share $ 1.32 $ 0.39

Weighted average common shares outstanding:

Basic 200.4 210.0

Diluted 204.9 212.0

Six Months Ended June 30,

2021 2020 2021 2020 2021 2020

(in millions) Consolidated North America International

Net sales by channel

Wholesale $ 1,886.8 $ 1,286.1 $ 1,656.3 $ 1,127.5 $ 230.5 $ 158.6

Direct 326.1 201.5 240.8 143.4 85.3 58.1

Total net sales $ 2,212.9 $ 1,487.6 $ 1,897.1 $ 1,270.9 $ 315.8 $ 216.7

Net sales increased 48.8%, and on a constant currency basis increased 46.4%.

The change in net sales was driven by the following:

• North America net sales increased $626.2 million, or 49.3%.

Net sales in the Wholesale channel increased $528.8 million, or 46.9%, primarily driven by broad-based demand across our retail partners and higher sales volume compared to the prior year period, which was impacted by COVID-19.

Net sales in the Direct channel increased $97.4 million, or 67.9%, primarily driven by growth from web sales and higher retail sales volume compared to the prior year period, which was impacted by COVID-19.

• International net sales increased $99.1 million, or 45.7%.

On a constant currency basis, International net sales increased 34.1%.

Net sales in the Wholesale channel increased 33.1% on a constant currency basis.

Net sales in the Direct channel increased 36.7% on a constant currency basis.

The increase in net sales across all channels was driven by higher sales volume compared to the prior year period, which was impacted by COVID-19.

Six Months Ended June 30,

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

North America $ 789.3 41.6 % $ 499.6 39.3 % 2.3 %

International 187.8 59.5 % 123.4 56.9 % 2.6 %

Consolidated gross margin $ 977.1 44.2 % $ 623.0 41.9 % 2.3 %

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 230 basis points.

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

• North America gross margin improved 230 basis points.

The improvement in gross margin was primarily driven by fixed cost leverage on higher sales volume of 220 basis points, compared to the prior year period which was impacted by COVID-19.

Additionally, in 2020, we incurred $4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which was not repeated in 2021.

• International gross margin improved 260 basis points.

The improvement in gross margin was primarily driven by favorable mix of 120 basis points and fixed cost leverage on higher unit volumes of 110 basis points.

Additionally, in 2020, we incurred $0.5 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which was not repeated in 2021.

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.

Six Months Ended June 30,

2021 2020 2021 2020 2021 2020 2021 2020

(in millions) Consolidated North America International Corporate

Operating expenses:

Advertising expenses $ 198.9 $ 128.6 $ 176.5 $ 113.8 $ 22.4 $ 14.8 $ — $ —

Other selling and marketing expenses 215.6 177.5 138.8 118.7 64.0 52.7 12.8 6.1

General, administrative and other expenses 164.6 163.0 83.2 97.8 25.5 23.0 55.9 42.2

Total operating expenses $ 579.1 $ 469.1 $ 398.5 $ 330.3 $ 111.9 $ 90.5 $ 68.7 $ 48.3

Operating expenses increased $110.0 million, or 23.4%, and decreased 530 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 $68.2 million, or 20.6%, and decreased 500 basis points as a percentage of net sales.

Additionally, in 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 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, which were not repeated in 2021.

• International operating expenses increased $21.4 million, or 23.6%, and decreased 640 basis points as a percentage of net sales.

The increase in operating expenses was primarily driven by other selling and marketing investments and increased advertising as compared to the prior year period, when cost reduction actions were taken due to COVID-19.

Additionally, in 2020, we incurred $3.4 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $2.4 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which were not repeated in 2021.

• Corporate operating expenses increased $20.4 million, or 42.2%.

The increase in operating expenses was primarily driven by amortization of our performance-based stock compensation plans.

Additionally, we recorded $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams.

Research and development expenses were $13.2 million for the six months ended June 30, 2021 as compared to $11.0 million for the six months ended June 30, 2020.

OPERATING INCOME

Six Months Ended June 30,

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

North America $ 390.8 20.6 % $ 169.3 13.3 % 7.3 %

International 89.6 28.4 % 37.7 17.4 % 11.0 %

Corporate expenses (68.7) (48.3)

Total operating income $ 411.7 18.6 % $ 158.7 10.7 % 7.9 %

Operating income increased $253.0 million and operating margin improved 790 basis points.

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

• North America operating income increased $221.5 million and operating margin improved 730 basis points.

The improvement in operating margin was primarily driven by improved operating expense leverage of 270 basis points, improvement in gross margin of 230 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.

Additionally, in 2020, 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 $4.3 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which were not repeated in 2021.

• International operating income increased $51.9 million and operating margin improved 1,100 basis points.

The improvement in operating margin was primarily driven by improved operating expense leverage of 360 basis points, improvement in gross margin of 260 basis points and improved performance of the Asia-Pacific joint ventures of 160 basis points.

Additionally, in 2020, we incurred $3.4 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $2.9 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which were not repeated in 2021.

• Corporate operating expenses increased $20.4 million, which negatively impacted our consolidated operating margin by 90 basis points.

The increase in operating expenses was primarily driven by amortization of our performance-based stock compensation plans.

Additionally, we recorded $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams.

INTEREST EXPENSE, NET

Six Months Ended June 30,

(in millions, except percentages) 2021 2020 % Change

Interest expense, net $ 32.3 $ 40.9 (21.0) %

Interest expense, net, decreased $8.6 million, or 21.0%.

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, partially offset by $5.2 million of overlapping interest expense for the period between the issuance of the 2029 Senior Notes and redemption of the 2026 Senior Notes.

LOSS ON EXTINGUISHMENT OF DEBT

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

During the second quarter of 2021, we used the net proceeds from the 2029 Senior Notes primarily to redeem in full our $600.0 million 2026 Senior Notes, at 102.75% of their principal amount, plus the accrued and unpaid interest.

As a result of the redemption, we recognized $18.0 million of loss on extinguishment of debt, which included a prepayment premium of $ 16.5 million and the write-off of $ 1.5 million of deferred financing costs.

Additionally, in the first quarter of 2021, we 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.

Refer to Note 5, "Debt," in our Notes to Condensed Consolidated Financial Statements included in ITEM 1 under Part I for additional information.

INCOME TAX PROVISION

Six Months Ended June 30,

(in millions, except percentages) 2021 2020 % Change

Income tax provision $ 85.2 $ 32.9 159.0 %

Effective tax rate 23.9 % 28.1 %

Our income tax provision increased $52.3 million due to an increase in income before income taxes.

Our effective tax rate for the six months ended June 30, 2021 as compared to the same prior year period decreased 420 basis points.

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

federal statutory rate for the six months ended June 30, 2021 included the favorable impact of the elimination of 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 six months ended June 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.

Liquidity and Capital Resources

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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.

As of June 30, 2021, we had net working capital of $67.4 million, including cash and cash equivalents of $58.1 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 June 30, 2021, total cash and cash equivalents were $58.1 million, of which $25.5 million was held in the U.S.

and $32.6 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:

Three Months Ended March 31,

Six Months Ended June 30,

(in millions) 2021 2020

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Financing activities (260.5) 1.4

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.

Cash provided by operating activities from continuing operations increased $142.6 million in the six months ended June 30, 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 decreased $39.6 million in the three months ended March 31, 2021 as compared to the same period in 2020.

Cash used in investing activities from continuing operations decreased $29.3 million in the six months ended June 30, 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 used in financing activities from continuing operations increased $261.9 million in the six months ended June 30, 2021 as compared to the same period in 2020.

For the six months ended June 30, 2021, we had net funding of $153.8 million, which included proceeds of $800.0 million from the issuance of our 2029 Senior Notes, offset by repayments of $250.0 million of our 2023 Senior Notes and $600.0 million of our 2026 Senior Notes and net borrowings of $203.8 million on our credit facilities, as compared to net borrowings of $207.0 million in 2020 on our credit facilities.

During the six months ended June 30, 2021 and 2020, we repurchased $374.4 million and $199.5 million, respectively, of our common stock.

Cash used in financing activities also decreased due to dividends paid to shareholders of $28.1 million and payment of deferred financing costs of $14.2 million during the six months ended June 30, 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 March 31, 2021 and 2020 was not material.

Net cash provided by (used in) operating, investing and financing activities from discontinued operations for the periods ended June 30, 2021 and 2020 was not material.

Capital Expenditures

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.

Capital expenditures totaled $52.6 million and $49.4 million for the six months ended June 30, 2021 and 2020, respectively.

We currently expect our 2021 capital expenditures to be approximately $150 million to $165 million, which includes investments in growth initiatives.

Our total debt increased to $1,523.6 million as of June 30, 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.

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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.

Total availability under our revolving senior secured credit facility was $629.3 million as of June 30, 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.

On June 15, 2021, we redeemed our $600.0 million 2026 Senior Notes, in full, using net proceeds from our 2029 Senior Notes.

Additionally, on May 26, 2021, we entered into an amendment to our 2019 Credit Agreement.

The amendment provides for a $300.0 million delayed draw term loan.

On July 30, 2021 we drew down the full $300.0 million available under the delayed draw term loan to fund, in part, the Dreams acquisition.

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

As of June 30, 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 1.44 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 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.

As of June 30, 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.

The 2019 Credit Agreement, 2026 Senior Notes and 2029 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, remains below 3.50 times.

The 2019 Credit Agreement and 2029 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, remains below 3.50 times.

In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility is above 3.50 times.

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.

The limit on restricted payments under the 2019 Credit Agreement 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.

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.

Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 2019 Credit Agreement are non-GAAP financial measures and do not purport to be alternatives to net income as a measure of operating performance or total debt.

Debt Securities Guaranteed by Subsidiaries

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.

The Senior Notes rank equally with or senior to all debt of Tempur Sealy International and the Obligor Group, but are effectively junior to all secured debt, including obligations under the 2019 Credit Agreement, to the extent of the value of the assets securing such debt.

Subject to certain restrictions, Tempur Sealy International and the restricted subsidiaries under the applicable indenture may incur additional secured debt.

Claims of creditors of non-guarantor subsidiaries, including trade creditors, and creditors holding debt and guarantees issued by those subsidiaries, and claims of preferred stockholders (if any) of those subsidiaries generally will have priority with respect to the assets and earnings of those subsidiaries over the claims of creditors of the holders of the Senior Notes.

The Senior Notes and each guarantee are therefore effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of non-guarantor subsidiaries.

Under the applicable indenture, each guarantee is limited to the maximum amount that would not render the subsidiary guarantor's obligations subject to avoidance under the applicable fraudulent conveyance provisions of the United States Bankruptcy Code or any comparable provision of state law.

By virtue of this limitation, a subsidiary guarantor's obligation under its guarantee could be significantly less than amounts payable with respect to the Senior Notes, or could be reduced to zero, depending upon the amount of other obligations of such guarantor.

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

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

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

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

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

(e) the subsidiary is liquidated or dissolved in accordance with the applicable indenture;

or (f) the occurrence of any covenant suspension.

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

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

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 was effective January 4, 2021.

The summarized financial information for the Obligor Group follows:

Three Months Ended

March 31, 2021

Obligor Group

(in millions)

Net sales to unrelated parties $ 823.0

Net sales to non-obligor subsidiaries $ 16.7

Gross profit $ 348.2

Income from continuing operations $ 89.7

Net income attributable to Tempur Sealy International, Inc.

Obligor Group Obligor Group

March 31, 2021 December 31, 2020

(in millions)

Receivables due from non-obligor subsidiaries $ 13.9 $ 13.8

Other current assets 642.5 418.4

Total current assets 656.4 432.2

Loan receivable from non-obligor subsidiaries 162.2 184.8

Goodwill and other intangible assets, net 1,089.2 1,092.5

Other non-current assets 740.0 741.5

Total non-current assets 1,991.4 2,018.8

Payables due to non-obligor subsidiaries 13.7 15.2

Other current liabilities 646.8 618.5

Total current liabilities 660.5 633.7

Loan payable to non-obligor subsidiaries 0.1 14.5

Other non-current liabilities 2,223.9 1,689.2

Total non-current liabilities $ 2,224.0 $ 1,703.7

Share Repurchase Program

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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.

On April 29, 2021, the Board of Directors authorized an additional increase, of $325.3 million, to the share repurchase authorization.

During the six months ended June 30, 2021, we repurchased 10.0 million shares under our share repurchase program for $361.4 million.

As of June 30, 2021, we had $376.8 million remaining under our share repurchase authorization.

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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Future Liquidity Sources and Uses

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.

As of June 30, 2021, we had $987.4 million of liquidity, including $58.1 million of cash on hand, $629.3 million available under our revolving senior secured credit facility and $300.0 million available under our delayed draw term loan.

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

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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.

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.

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.

• For the third quarter of 2021, the Board of Directors has declared a dividend of $0.09 per share.

The dividend is payable on August 26, 2021 to shareholders of record as of August 12, 2021.

This represents a 29% increase over our previous quarterly dividend of $0.07 per share.

• 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.

• On July 30, 2021, we drew down the full $300.0 million available under the delayed draw term loan to fund, in part, the Dreams acquisition.

As of June 30, 2021, we had $1,523.6 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $1,466.6 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 1.44 times for the trailing twelve months ended June 30, 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 $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.

We expect our ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, will be approximately 1.80 times after the acquisition of Dreams.

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

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

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Non-GAAP Financial Information

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.

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, operating income (expense) and operating margin.

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.

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 March 31, 2021 and 2020:

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 June 30, 2021 and 2020:

Three Months Ended

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

(in millions, except per share amounts) June 30, 2021 June 30, 2020

Net income $ 140.8 $ 23.0

Loss from discontinued operations, net of tax (1)

Loss (income) from discontinued operations, net of tax (1)

Loss on extinguishment of debt (2)

Customer-related charges (3)

Overlapping interest expense (3)

Acquisition-related costs (4)

COVID-19 charges (5)

Asset impairments (6)

Incremental operating costs (7)

Restructuring costs (8)

Accounting standard adoption (9)

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

(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.

(2) In the second quarter of 2021, we recognized $18.0 million of loss on extinguishment of debt associated with the redemption of the 2026 Senior Notes.

(3) In the second quarter of 2021, we incurred $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes.

(4) In the second quarter of 2021, we recorded $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams.

(5) In the second quarter of 2020, we recorded $7.9 million of COVID-19 charges associated with temporarily closed company-owned retail stores and sales force retention costs.

(6) In the second quarter of 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets.

(7) In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic.

(8) In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment.

(9) In the second quarter of 2020, we recorded $1.3 million of charges related to the adoption of ASU No.

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

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(10) 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.

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

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

The following table sets forth our reported gross profit and the reconciliation of the Company's operating income (expense) to the calculation of adjusted operating (income) expense for the three months ended June 30, 2021.

We had no adjustments to gross profit for the three months ended June 30, 2021.

Three Months Ended June 30, 2021

(in millions, except percentages) Consolidated

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Operating income (expense) $ 223.3 19.1 % $ 217.4 21.4 % $ 43.4 27.9 % $ (37.5)

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

Acquisition-related costs (1)

Adjusted operating income (expense) $ 227.2 19.4 % $ 217.4 21.4 % $ 43.4 27.9 % $ (33.6)

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 June 30, 2020.

Three Months Ended June 30, 2020

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

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Gross profit $ 265.9 40.0 % $ 218.4 37.7 % $ 47.5 54.8 % $ —

Incremental operating costs (2)

4.5 4.0 0.5 —

Adjusted gross profit $ 270.4 40.6 % $ 222.4 38.4 % $ 48.0 55.4 % $ —

Operating income (expense) $ 53.4 8.0 % $ 67.7 11.7 % $ 11.3 13.0 % $ (25.6)

Customer-related charges (1)

COVID-19 charges (3)

7.9 6.3 1.6 —

Asset impairments (4)

Incremental operating costs (2)

4.9 4.3 0.6 —

Restructuring costs (5)

Accounting standard adoption (6)

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Adjusted operating income (expense) $ 77.9 11.7 % $ 86.6 15.0 % $ 16.9 19.5 % $ (25.6)

(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.

(1) In the second quarter of 2021, we recorded $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams.

(2) In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic.

Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items.

Operating expenses included $0.4 million of charges related to increased sanitation supplies and services.

(3) In the second quarter of 2020, we recorded $7.9 million of COVID-19 charges associated with temporarily closed company-owned retail stores and sales force retention costs.

(4) In the second quarter of 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets.

(5) In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment.

(6) In the second quarter of 2020, we recorded $1.3 million of charges related to the adoption of ASU No.

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

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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 March 31, 2021 and 2020:

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 June 30, 2021 and 2020:

Three Months Ended

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

(in millions) June 30, 2021 June 30, 2020

Net income $ 140.8 $ 23.0

Interest expense, net 14.8 20.6

Overlapping interest expense (1)

Loss on extinguishment of debt (2)

2 unchanged sentences

EBITDA $ 266.1 $ 85.2

Loss from discontinued operations, net of tax (2)

Customer-related charges (3)

Loss (income) from discontinued operations, net of tax (3)

Acquisition-related costs (4)

COVID-19 charges (5)

Asset impairments (6)

Incremental operating costs (7)

Restructuring costs (8)

Accounting standard adoption (9)

Adjusted EBITDA per credit facility $ 270.3 $ 109.6

(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.

(1) In the second quarter of 2021, we incurred $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes.

(2) In the second quarter of 2021, we recognized $18.0 million of loss on extinguishment of debt associated with the redemption of the 2026 Senior Notes.

(3) 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.