What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 204 added, 240 removed, 402 unchanged (52% of the section changed)

5 unchanged sentences

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

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

• an overview of our business and strategy,

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

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

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

On August 2, 2021, we acquired Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams"), which is included in the International segment.

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

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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 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.

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

Our consolidated year-to-date net sales increased 36.3% as compared to the same period in 2020, which was impacted by COVID-19.

Current order trends continue to indicate growth.

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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.

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

However, other key components, as well as inbound and outbound freight, remain challenged.

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.

sales growth in the first three quarters 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 fourth quarter of 2021.

We estimate sales would have been approximately $200 million higher in the third 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 better positioned to meet consumer demand heading into 2022.

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

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

Since then, we have continued to manage through a highly inflationary commodity environment and we expect to take additional pricing actions to offset these headwinds in 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").

Acquisition of Dreams

On August 2, 2021, we completed the acquisition of Dreams, for a cash purchase price of $476.7 million, which included $49.7 million of cash acquired and a working capital adjustment payable of $6.6 million.

The transaction was funded using cash on hand and bank financing.

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.

As a multi-branded retailer, Dreams sells a variety of products across a range of price points with a margin profile lower than our historical International segment margins.

Dreams generated sales of approximately $400 million and earnings before interest, tax, depreciation and amortization ("EBITDA") of approximately $75 million for the year ending December 31, 2020.

Product Launches

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Results of Operations

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.

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

• Total net sales increased 20.0% to $1,358.3 million as compared to $1,132.3 million in the third quarter of 2020.

On a constant currency basis, which is a non-GAAP financial measure, total net sales increased 19.2%, with an increase of 11.9% in the North America business segment and an increase of 71.6% in the International business segment.

• 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.

• Gross margin was 42.5% as compared to 46.8% in the third quarter of 2020.

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

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

• Operating income increased 38.6% to $249.8 million as compared to $180.2 million in the third quarter of 2020.

Adjusted operating income, which is a non-GAAP financial measure, increased 11.0% to $252.1 million as compared to $227.2 million in the third quarter of 2020.

• Net income increased 46.1% to $177.4 million as compared to $121.4 million in the third quarter of 2020.

Adjusted net income, which is a non-GAAP financial measure, increased 15.6% to $179.6 million as compared to $155.4 million in the third quarter of 2020.

• EBITDA which is a non-GAAP financial measure, increased 5.5% to $295.2 million as compared to $279.9 million in the third quarter of 2020.

Adjusted EBITDA, which is a non-GAAP financial measure, increased 6.6% to $297.6 million as compared to $279.3 million in the third quarter of 2020.

• Earnings per diluted share ("EPS") increased 52.6% to $0.87 as compared to $0.57 in the third quarter of 2020.

Adjusted EPS, which is a non-GAAP financial measure, increased 18.9% to $0.88 as compared to $0.74 in the third 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 JUNE 30, 2021 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, 2020

THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE

THREE MONTHS ENDED SEPTEMBER 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 June 30,

Three Months Ended September 30,

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

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Loss on extinguishment of debt — — 0.9 0.1

Other (income) expense, net (0.1) — 0.3 —

Other expense (income), net 0.1 — (0.5) —

Total other expense, net 13.6 1.0 20.5 1.8

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Net income before non-controlling interests 177.4 13.1 121.8 10.8

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

Net income attributable to non-controlling interests — — 0.4 —

Net income attributable to Tempur Sealy International, Inc.

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Earnings per share for continuing operations $ 0.91 $ 0.58

Loss per share for discontinued operations — —

Earnings per share for discontinued operations — 0.01

Earnings per share $ 0.91 $ 0.59

Earnings per share for continuing operations $ 0.87 $ 0.56

Loss per share for discontinued operations — —

Earnings per share for discontinued operations — 0.01

Earnings per share $ 0.87 $ 0.57

2 unchanged sentences

Diluted 203.4 211.6

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 2021 2020 2021 2020

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On a constant currency basis, North America net sales increased 11.9%.

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.

Net sales in the Wholesale channel increased $104.1 million, or 11.7%, primarily driven by broad-based demand across our retail partners.

Net sales in the Direct channel increased $21.2 million, or 19.7%, primarily driven by strong company-owned stores sales growth.

• International net sales increased $100.7 million, or 73.2%.

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

Net sales in the Direct channel increased 47.5% 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.

Three Months Ended June 30,

Net sales in the Direct channel increased 246.4% on a constant currency basis, primarily driven by the acquisition of Dreams.

Three Months Ended September 30,

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

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Our margins are also impacted by the growth in our Wholesale channel as sales in our Wholesale channel are at wholesale prices whereas sales in our Direct channel are at retail prices.

Gross margin improved 430 basis points.

Gross margin declined 430 basis points.

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

• North America gross margin improved 430 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 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.

• North America gross margin declined 480 basis points.

The decline in gross margin was driven by price increases to customers without a margin benefit of 360 basis points, operational inefficiencies of 90 basis points and unfavorable brand mix of 70 basis points.

Our gross margin was impacted as sales increased with no change in gross profit dollars, as our pricing actions have been neutralizing the dollar impact of commodities.

• International gross margin declined 730 basis points.

The decline in gross margin was primarily driven by the acquisition of Dreams of 400 basis points and price increases to customers without a margin benefit of 180 basis points.

Dreams' margin profile is lower than our historical international margins as they sell a variety of products across a range of price points.

OPERATING EXPENSES

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

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 2021 2020 2021 2020 2021 2020

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Total operating expenses $ 334.1 $ 354.8 $ 210.1 $ 209.9 $ 86.5 $ 48.8 $ 37.5 $ 96.1

Operating expenses increased $84.4 million, or 38.8%, and decreased 690 basis points as a percentage of net sales.

Operating expenses decreased $20.7 million, or 5.8%, and decreased 670 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 $0.2 million, or 0.1%, and decreased 230 basis points as a percentage of net sales.

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 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 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%.

The increase in operating expenses was primarily driven by advertising and other selling and marketing investments offset by decreased bad debt expense.

• International operating expenses increased $37.7 million, or 77.3%, and increased 80 basis points as a percentage of net sales.

The increase in operating expenses was primarily driven by advertising and other selling and marketing investments, as well as the acquisition of Dreams.

Additionally, we recorded $2.3 million of stamp taxes associated with the acquisition of Dreams.

• Corporate operating expenses decreased $58.6 million, or 61.0%.

The decrease in operating expenses was primarily driven by decreased amortization for the Company's aspirational plan and other stock-based compensation.

Research and development expenses for the three months ended September 30, 2021 were $6.7 million compared to $6.1 million for the three months ended September 30, 2020, an increase of $0.6 million, or 9.8%.

OPERATING INCOME

Three Months Ended June 30,

Three Months Ended September 30,

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

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

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

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 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.

• North America operating income increased $1.9 million and operating margin declined 240 basis points.

The decline in operating margin was primarily driven by the decline in gross margin of 480 basis points offset by favorable operating expense leverage of 220 basis points.

• International operating income increased $9.1 million and operating margin declined 880 basis points.

The decline in operating margin was primarily driven by the decline in gross margin of 730 basis points and unfavorable operating expense leverage.

Additionally, we recorded $2.3 million of stamp taxes associated with the acquisition of Dreams.

• Corporate operating expenses decreased $58.6 million, which positively impacted our consolidated operating margin by 430 basis points.

The decrease in operating expenses was primarily driven by decreased amortization for the Company's aspirational plan and other stock-based compensation.

INTEREST EXPENSE, NET

Three Months Ended June 30,

Three Months Ended September 30,

(in millions, except percentages) 2021 2020 % Change

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Interest expense, net, decreased $6.6 million, or 32.8%.

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.

The decrease in interest expense, net, was primarily driven by lower interest rates on our debt.

INCOME TAX PROVISION

Three Months Ended June 30,

Three Months Ended September 30,

(in millions, except percentages) 2021 2020 % Change

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Our income tax provision increased $18.4 million due to an increase in income before income taxes.

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.

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

The effective tax rate as compared to the 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.

federal statutory rate for the three months ended September 30, 2021 included 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 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

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

NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE

NINE MONTHS ENDED SEPTEMBER 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,

Nine Months Ended September 30,

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

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Income from continuing operations 449.1 12.6 203.5 7.8

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

(Loss) income from discontinued operations, net of tax (0.6) — 1.3 —

Net income before non-controlling interests 448.5 12.6 204.8 7.8

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Earnings per share for continuing operations $ 2.26 $ 0.97

Loss per share for discontinued operations — —

Earnings per share for discontinued operations — 0.01

Earnings per share $ 2.26 $ 0.98

Earnings per share for continuing operations $ 2.18 $ 0.96

Loss per share for discontinued operations — (0.01)

Earnings per share for discontinued operations — 0.01

Earnings per share $ 2.18 $ 0.97

2 unchanged sentences

Diluted 205.9 211.6

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 2021 2020 2021 2020

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• North America net sales increased $751.5 million, or 33.2%.

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.

Net sales in the Wholesale channel increased $632.9 million, or 31.4%, primarily driven by broad-based demand across our retail partners.

Net sales in the Direct channel increased $118.6 million, or 47.3%, primarily driven by strong company-owned sales growth and higher retail sales volume compared to the prior year period, which was impacted by COVID-19.

• International net sales increased $199.8 million, or 56.4%.

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Net sales in the Wholesale channel increased 22.7% on a constant currency basis.

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

Net sales in the Direct channel increased 118.9% on a constant currency basis, primarily driven by the acquisition of Dreams.

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,

Nine Months Ended September 30,

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

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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.

Gross margin declined 50 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.

• North America gross margin declined 70 basis points.

The decline in gross margin was primarily driven by price increases to customers without a margin benefit of 210 basis points offset by fixed cost leverage on higher sales volumes of 110 basis points.

Our gross margin was impacted as sales increased with no change in gross profit dollars, as our pricing actions have been neutralizing the dollar impact of commodities.

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 declined 150 basis points.

The decline in gross margin was primarily driven by the acquisition of Dreams of 180 basis points.

Dreams' margin profile is lower than our historical international margins as they sell a variety of products across a range of price points.

OPERATING EXPENSES

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Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 2021 2020 2021 2020 2021 2020

8 unchanged sentences

• North America operating expenses increased $68.4 million, or 12.7%, and decreased 360 basis points as a percentage of net sales.

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

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 $59.1 million, or 42.4%, and decreased 350 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.

The increase in operating expenses was primarily driven by advertising and other selling and marketing investments, as well as the acquisition of Dreams.

We also recorded $2.3 million of stamp taxes associated with the acquisition of Dreams.

Additionally, in 2020, we incurred $3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $2.6 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, 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.

• Corporate operating expenses decreased $38.2 million, or 26.5%.

The decrease in operating expenses was primarily driven by amortization for the Company's aspirational plan and other stock-based compensation.

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.

Research and development expenses were $19.9 million for the nine months ended September 30, 2021 as compared to $17.1 million for the nine months ended September 30, 2020, an increase of $2.8 million, or 16.4%.

OPERATING INCOME

Six Months Ended June 30,

Nine Months Ended September 30,

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

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• North America operating income increased $223.4 million and operating margin improved 300 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.

The improvement in operating margin was primarily driven by improved operating expense leverage of 240 basis points and decreased customer-related charges, offset by the decline in gross margin of 70 basis points.

In 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates.

1 unchanged sentence

• International operating income increased $61.0 million and operating margin improved 290 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.

The improvement in operating margin was primarily driven by improved operating expense leverage of 210 basis points, the decline in gross margin of 150 basis points.

Additionally, in 2020, we incurred $3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $3.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, 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.

• Corporate operating expenses decreased $38.2 million, which positively impacted our consolidated operating margin by 110 basis points.

The decrease in operating expenses was primarily driven by amortization for the Company's aspirational plan and other stock-based compensation.

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,

Nine Months Ended September 30,

(in millions, except percentages) 2021 2020 % Change

1 unchanged sentence

Interest expense, net, decreased $15.2 million, or 24.9%.

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, 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.

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

5 unchanged sentences

INCOME TAX PROVISION

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions, except percentages) 2021 2020 % Change

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Our income tax provision increased $70.7 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.

Our effective tax rate for the nine months ended September 30, 2021 as compared to the same prior year period decreased 220 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.

federal statutory rate for the nine months ended September 30, 2021 included 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.

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

Liquidity and Capital Resources

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

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

As of 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.

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

As of September 30, 2021, we had net working capital of $323.4 million, including cash and cash equivalents of $503.3 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 September 30, 2021, total cash and cash equivalents were $503.3 million, of which $369.8 million was held in the U.S.

and $133.5 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:

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) 2021 2020

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Financing activities 356.4 (228.5)

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.

Cash provided by operating activities from continuing operations increased $99.6 million in the nine months ended September 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 $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 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 used in investing activities from continuing operations increased $396.6 million in the nine months ended September 30, 2021 as compared to the same period in 2020.

The increase in cash used in investing activities was due to the acquisition of Dreams, which occurred in the third quarter of 2021.

Cash provided by financing activities from continuing operations increased $584.9 million in the nine months ended September 30, 2021 as compared to the same period in 2020.

For the nine months ended September 30, 2021, we had net funding of $988.4 million as compared to net borrowings of $21.0 million in 2020 on our credit facilities.

This increase included proceeds of $1.6 billion from the issuance of our 2029 and 2031 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 $238.4 million on our credit facilities.

During the nine months ended September 30, 2021 and 2020, we repurchased $565.8 million and $199.6 million, respectively, of our common stock.

Cash provided by financing activities also decreased due to dividends paid to shareholders of $45.8 million and payment of deferred financing costs of $25.3 million during the nine months ended September 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 June 30, 2021 and 2020 was not material.

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

Capital Expenditures

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.

Capital expenditures totaled $82.1 million and $73.6 million for the nine months ended September 30, 2021 and 2020, respectively.

We currently expect our 2021 capital expenditures to be approximately $140 million to $150 million, which includes manufacturing capacity expansion and investments in our other growth initiatives.

Our total debt increased to $2,361.7 million as of September 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 $629.3 million as of June 30, 2021, which matures in 2024.

Total availability under our revolving senior secured credit facility was $724.9 million as of September 30, 2021, which matures in 2024.

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

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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.

On September 21, 2021, we entered into an additional amendment to the 2019 Credit Agreement to remove the limit to the amount of netted cash that may be deducted from indebtedness for purposes of calculating certain leverage ratios.

On September 24, 2021, we issued the 2031 Senior Notes.

The 2031 Senior Notes mature on October 15, 2031 and 3.875% interest is payable semi-annually in arrears on each April 15 and October 15, beginning on April 15, 2022.

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.

As of September 30, 2021, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 1.68 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 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.

As of September 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 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 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 2019 Credit Agreement, 2029 Senior Notes and 2031 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, 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 is above 3.50 times.

The limit on restricted payments under the 2019 Credit Agreement, 2029 Senior Notes and 2031 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.

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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.

During the nine months ended September 30, 2021, we repurchased 14.1 million shares under our share repurchase program for $551.4 million.

As of September 30, 2021, we had $186.9 million remaining under our share repurchase authorization.

On October 28, 2021, the Board of Directors authorized an additional increase to the share repurchase authorization bringing the total authorization to $600.0 million.

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

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Future Liquidity Sources and Uses

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.

As of September 30, 2021, we had $1,397.3 million of liquidity, including $503.3 million of cash on hand, $724.9 million available under our revolving senior secured credit facility and $169.1 million available under our accounts receivable securitization.

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

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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 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.

• 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.

The dividend is payable on November 23, 2021 to shareholders of record as of November 11, 2021.

As of September 30, 2021, we had $2,361.7 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $1,859.7 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 1.68 times for the trailing twelve months ended September 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.

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.

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Non-GAAP Financial Information

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

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

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

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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 June 30, 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 September 30, 2021 and 2020:

Three Months Ended

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

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

Net income $ 177.4 $ 121.4

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

Loss on extinguishment of debt (2)

Overlapping interest expense (3)

Acquisition-related costs (2)

COVID-19 charges (5)

Asset impairments (6)

Incremental operating costs (7)

Restructuring costs (8)

Aspirational plan amortization (3)

Loss on extinguishment of debt (4)

Accounting standard adoption (5)

Facility expansion costs (6)

Restructuring costs (7)

Tax adjustments (8)

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

(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.

(2) In the third quarter of 2021, we recorded $2.3 million of acquisition-related taxes.

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

(4) In the third quarter of 2020, we recognized $0.9 million of loss on extinguishment of debt associated with the early repayment of the 364-day term loan.

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

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

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

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

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

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

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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

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

Three Months Ended September 30, 2021

(in millions, except percentages) Consolidated

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Adjusted operating income (expense) $ 252.1 18.6 % $ 237.0 21.2 % $ 52.6 22.1 % $ (37.5)

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

Three Months Ended September 30, 2020

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

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Gross profit $ 530.2 46.8 % $ 445.0 44.7 % $ 85.2 61.9 % $ —

Incremental operating costs (2)

4.5 4.0 0.5 —

Facility expansion costs (2)

Adjusted gross profit $ 530.8 46.9 % $ 445.6 44.8 % $ 85.2 61.9 % $ —

Operating income (expense) $ 180.2 15.9 % $ 235.1 23.6 % $ 41.2 29.9 % $ (96.1)

COVID-19 charges (3)

7.9 6.3 1.6 —

Asset impairments (4)

Incremental operating costs (2)

Aspirational plan amortization (3)

45.2 — — 45.2

Restructuring costs (5)

Accounting standard adoption (4)

Facility expansion costs (2)

Restructuring costs (5)

Total adjustments 47.0 1.4 0.4 45.2

Adjusted operating income (expense) $ 227.2 20.1 % $ 236.5 23.8 % $ 41.6 30.2 % $ (50.9)

(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.

(1) In the third quarter of 2021, we recorded $2.3 million of acquisition-related taxes.

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

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

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

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

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

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

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

EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash

The following reconciliations are provided below:

• Net income to EBITDA and adjusted EBITDA per credit facility

• Ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility

• Net income to EBITDA and adjusted EBITDA

• Ratio of consolidated indebtedness less netted cash to adjusted EBITDA

• Total debt, net to consolidated indebtedness less netted cash

We believe that presenting these non-GAAP measures provides investors with useful information with respect to our operating performance, cash flow generation and comparisons from period to period, as well as general information about our progress in reducing our leverage.

The 2019 Credit Agreement provides the definition of adjusted EBITDA (“adjusted EBITDA per credit facility”).

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 June 30, 2021 and 2020:

The 2019 Credit Agreement provides the definition of adjusted EBITDA.

Accordingly, we present adjusted EBITDA 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 for the three months ended September 30, 2021 and 2020:

Three Months Ended

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

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

Net income $ 177.4 $ 121.4

Interest expense, net 13.5 20.1

Overlapping interest expense (1)

Loss on extinguishment of debt (1)

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Depreciation and amortization 45.6 52.0

Aspirational plan amortization (2)

EBITDA $ 295.2 $ 279.9

1 unchanged sentence

Acquisition-related costs (4)

COVID-19 charges (5)

Asset impairments (6)

Incremental operating costs (7)

Restructuring costs (8)

Accounting standard adoption (5)

Adjusted EBITDA per credit facility $ 270.3 $ 109.6

(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.

Facility expansion costs (6)

Restructuring costs (7)

Adjusted EBITDA $ 297.6 $ 279.3

(1) In the third quarter of 2020, we recognized $0.9 million of loss on extinguishment of debt associated with the redemption of the 2023 Senior Notes.

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

(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.

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

(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.

(4) In the third quarter of 2021, we recorded $2.3 million of acquisition-related taxes.

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

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

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

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and adjusted EBITDA per credit facility for the trailing twelve months ended June 30, 2021:

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

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

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and adjusted EBITDA for the trailing twelve months ended September 30, 2021:

Trailing Twelve Months Ended

(in millions) June 30, 2021

(in millions) September 30, 2021

Net income $ 593.4

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EBITDA $ 1,029.6

Income from discontinued operations, net of tax (4)

Loss from discontinued operations, net of tax (4)

Earnings from Dreams prior to acquisition (5)

Acquisition-related costs (6)

Aspirational plan employer costs (7)

Accounting standard adoption (7)

Facility expansion costs (8)

Restructuring costs (9)

Other income (8)

Adjusted EBITDA per credit facility $ 1,019.4

Adjusted EBITDA $ 1,107.1

Consolidated indebtedness less netted cash $ 1,859.7

Ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility 1.44 times

Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 1.68 times

(2) We recognized $28.1 million of loss on extinguishment of debt of which $18.0 million is associated with the redemption of the 2026 Senior Notes and $10.1 million is associated with the redemption of the 2023 Senior Notes and early repayment of the 364-day term loan.

(3) In 2020, we recognized $49.4 million of performance-based stock compensation amortization related to our long-term aspirational awards.

(2) In the trailing twelve months ended September 30, 2021, we recognized $27.2 million of loss on extinguishment of debt associated with the redemption of the 2026 and 2023 Senior Notes.

(3) In the trailing twelve months ended September 30, 2021, we recognized $4.2 million of amortization related to the aspirational awards.

(4) 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.

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

(5) 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.

(6) In 2020, we recognized $2.3 million of employer-related tax costs related to the aspirational plan compensation.

(7) During 2020, we recorded $0.8 million of charges related to the adoption of ASU No.

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

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

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

(9) In 2020, we incurred $0.4 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment.

(10) In 2020, we recorded $2.3 million of other income related to the sale of a manufacturing facility.

Under the 2019 Credit Agreement, the definition of adjusted EBITDA (which we refer to as "adjusted EBITDA per credit facility") contains certain restrictions that limit adjustments to net income when calculating adjusted EBITDA.

For the trailing twelve months ended June 30, 2021, our adjustments to net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2019 Credit Agreement.

The ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility is 1.44 times for the trailing twelve months ended June 30, 2021.

(5) We completed the acquisition of Dreams on August 2, 2021 and designated this subsidiary as restricted under the 2019 Credit Agreement.

For covenant compliance purposes, we included $69.4 million of EBITDA from this subsidiary for the ten months prior to acquisition in the Company's calculation of adjusted EBITDA for the trailing twelve months ended September 30, 2021.

(6) In the trailing twelve months ended September 30, 2021, we recognized $6.2 million of acquisition-related costs, primarily related to legal and professional fees and stamp taxes associated with the acquisition of Dreams.

(7) In the fourth quarter of 2020, we recognized $2.3 million of employer-related tax costs related to the aspirational plan compensation.

(8) In the fourth quarter of 2020, we recorded $2.3 million of other income related to the sale of a manufacturing facility.

Under the 2019 Credit Agreement, the definition of adjusted EBITDA contains certain restrictions that limit adjustments to net income when calculating adjusted EBITDA.

For the trailing twelve months ended September 30, 2021, our adjustments to net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2019 Credit Agreement.

The ratio of consolidated indebtedness less netted cash to adjusted EBITDA is 1.68 times for the trailing twelve months ended September 30, 2021.

The 2019 Credit Agreement requires us to maintain a ratio of consolidated indebtedness less netted cash to adjusted EBITDA of less than 5.00:1.00 times.

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of June 30, 2021.

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of September 30, 2021.

"Consolidated Indebtedness" and "Netted Cash" are terms used in the 2019 Credit Agreement for purposes of certain financial covenants.

(in millions) June 30, 2021

(in millions) September 30, 2021

Total debt, net $ 2,338.8

10 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis