What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-02-22 compared with 2021-02-19 · 258 added, 501 removed, 1175 unchanged (39% of the section changed)

1 unchanged sentence

INDEX TO HISTORICAL FINANCIAL STATEMENTS

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019

4 unchanged sentences

Notes to the Consolidated Financial Statements

Table of Co ntents

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Tempur Sealy International, Inc.

To the Stockholders and Board of Directors of Tempur Sealy International, Inc.

and Subsidiaries

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2022, expressed an unqualified opinion thereon.

Adoption of Accounting Standards

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

Basis for Opinion

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(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

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

Table of Co ntents

Danish Tax Matter Uncertain Tax Position

1 unchanged sentence

As described in Note 13 to the consolidated financial statements, the Company’s liability for the Danish Tax Matter uncertain tax position, including interest and penalties, was approximately $50.1 million as of December 31, 2021.

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

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

and Danish income tax implications of such outcomes.

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For example, we tested management's review of inputs and calculations of the liability for the Danish Tax Matter uncertain tax position.

To test the Company’s measurement of the liability for the Danish Tax Matter uncertain tax position, we involved our tax professionals to evaluate the pricing conclusions reached by the Company.

To test the Company’s measurement of the liability for the Danish Tax Matter uncertain tax position, we involved our tax professionals to evaluate the transfer pricing conclusions reached by the Company.

For example, we compared the transfer pricing methodology utilized by management to alternative methodologies.

We also reviewed the Company’s correspondence with the relevant tax authorities and any third-party professional and legal advice obtained by the Company.

In addition, we used our knowledge of international, domestic and local income tax laws, as well as settlement activity from the relevant income tax authorities, to evaluate the Company’s measurement of the liability for the Danish Tax Matter uncertain tax position.

In addition, we used our knowledge of U.S., Danish and international income tax laws, as well as settlement activity from the relevant income tax authorities, to evaluate the Company’s measurement of the liability for the Danish Tax Matter uncertain tax position.

/s/ Ernst & Young LLP

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February 22, 2022

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

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

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

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Net income before non-controlling interests $ 625.0 $ 349.8 $ 189.4

Other comprehensive income (loss), net of tax:

Other comprehensive (loss) income, net of tax:

Foreign currency translation adjustments ( 36.6 ) 23.6 9.5

Net change in pension benefits, net of tax 2.9 ( 1.4 ) ( 1.9 )

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

Other comprehensive (loss) income, net of tax ( 33.7 ) 22.2 7.6

Comprehensive income 591.3 372.0 197.0

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

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

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

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

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

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

Net income 189.5 189.5

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

Acquisition of non-controlling interest in subsidiary — 3.1 3.1

Repurchase of interest in subsidiary ( 1.9 ) ( 1.9 )

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

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( 0.3 ) 3.7 ( 3.7 ) —

Treasury stock repurchased 1.3 ( 102.3 ) ( 102.3 )

Treasury stock repurchased - PRSU/RSU/DSU releases

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Amortization of unearned stock-based compensation

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

Charitable stock donation ( 0.1 ) $ 1.4 7.5 8.9

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

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

Net income 348.8 348.8

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

Repurchase of interest in subsidiary ( 1.9 ) ( 1.9 )

Net income attributable to non-controlling interests 0.9 0.1 0.1

Acquisition of non-controlling interest in subsidiary 8.4 —

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

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

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Amortization of unearned stock-based compensation

Charitable stock donation

( 0.1 ) 1.4 7.5 8.9

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

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

Net income 624.5 624.5

Net income attributable to non-controlling interests 0.3 0.2 0.2

Acquisition of non-controlling interest in subsidiary 8.4 —

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

Purchase of remaining interest in subsidiary ( 3.4 ) ( 1.2 ) ( 4.6 )

Adjustment to pension liability, net of tax of $ 0.9

( 1.4 ) ( 1.4 )

Foreign currency translation adjustments ( 36.6 ) ( 36.6 )

Dividends declared on common stock ( 65.2 ) ( 65.2 )

Exercise of stock options ( 0.9 ) 25.9 ( 11.0 ) 14.9

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

Table of Co ntents

TEMPUR SEALY INTERNATIONAL, INC.

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Loss on extinguishment of debt 3.0 2.3 —

Loss on sale of assets ( 1.7 ) 1.0 3.3

Loss (gain) on sale of assets 0.5 ( 1.7 ) 1.0

Foreign currency adjustments and other 1.0 ( 0.5 ) ( 5.2 )

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Treasury stock repurchased ( 816.3 ) ( 331.8 ) ( 105.7 )

Dividends paid ( 63.1 ) — —

Payment of deferred financing costs ( 24.9 ) ( 1.3 ) ( 3.2 )

Repayments of finance lease obligations and other ( 13.4 ) ( 11.9 ) ( 7.8 )

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

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

CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS

Operating cash flows 0.3 ( 2.0 ) ( 24.4 )

Investing cash flows — — 2.1

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

Net cash provided by (used in) financing activities from continuing operations 76.5 ( 522.6 ) ( 203.2 )

Net cash provided by (used in) continuing operations 244.8 ( 14.5 ) 21.4

Net operating cash flows (used in) provided by discontinued operations ( 0.9 ) 0.3 ( 2.0 )

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ( 8.2 ) 14.3 ( 0.3 )

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Wholesale and Direct.

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

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

(b) Basis of Consolidation.

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

The Company's ownership interest in these joint ventures is 50.0 %.

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

The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have effective control, and consolidation is not otherwise required.

The Company's equity in the net income and losses of these investments is reported in equity income in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income.

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Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of raw materials, can have a significant effect on operations.

(d) Adoption of New Accounting Standards.

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

ASC 842 consists of a comprehensive lease accounting standard requiring most leases to be recognized on the Consolidated Balance Sheet and significant new disclosures.

The Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances.

The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed it to carry forward the historical lease classification.

Operating lease right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date.

Leases with a lease term of 12 months or less at inception are not recorded within the Consolidated Balance Sheet and are expensed on a straight-line basis over the lease term within the Consolidated Statement of Income.

The lease term is determined by assuming the exercise of renewal options that are reasonably certain.

As most leases do not provide an implicit interest rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Results for reporting periods beginning prior to January 1, 2019 continue to be reported in accordance with our historical accounting treatment.

The adoption of ASC 842 did not have a material impact on the Company's results of operations, cash flows or debt covenants.

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

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

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

Under ASU 2017-04, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill for the reporting unit.

Adoption of this guidance did not have an impact on the Company's financial statements.

Credit Losses.

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

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

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

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

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

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

(e) Foreign Currency.

(d) Foreign Currency.

Assets and liabilities of non-U.S.

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These amounts are not considered material to the Consolidated Financial Statements.

(f) Derivative Financial Instruments.

(e) Derivative Financial Instruments.

Derivative financial instruments are used in the normal course of business to manage interest rate and foreign currency exchange risks.

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

The effectiveness of the cash flow hedge contracts, including time value, is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as other timing and probability criteria to test whether the hedge continues to be effective.

Changes in a derivative's fair value (i.e.

unrealized gains or losses) are recorded each period in earnings unless the derivative qualifies as a hedge on future cash flows or a hedge of a net investment in a foreign operation.

Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item, or deferred and recorded in the stockholders' equity section of the Consolidated Balance Sheets as a component of AOCL and subsequently recognized in the Consolidated Statements of Comprehensive Income when the hedged item affects net income.

The ineffective portion of the change in fair value of a hedge is recognized in income immediately.

For derivative financial instruments that are designated as a hedge, unrealized gains and losses related to the effective portion are either recognized in income immediately to offset the realized gain or loss on the hedged item, or are deferred and reported as a component of AOCL in stockholders' equity and subsequently recognized in net income when the hedged item affects net income.

The change in fair value of the ineffective portion of a derivative financial instrument is recognized in net income immediately.

For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded to net income immediately.

For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded in net income immediately.

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

unrealized gains or losses) related to an effective hedge are deferred and recorded in the stockholders' equity section of the Consolidated Balance Sheets as a component of AOCL and subsequently recognized in the Consolidated Statements of Comprehensive Income when the hedged item affects net income.

The ineffective portion, if any, of the change in fair value of a hedge is recognized in income immediately in the same line item as the hedged risk.

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(g) Cash and Cash Equivalents.

For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value (i.e.

unrealized gains or losses) is also recorded in net income immediately in the same line item as the hedged risk.

The Company's derivative instruments are limited to forward exchange contract assets and liabilities which were not designated as hedges as of December 31, 2021 and 2020 and were not material in any period presented.

(f) Cash and Cash Equivalents.

Cash and cash equivalents consist of all highly liquid investments with initial maturities of three months or less.

The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments.

(h) Inventories.

(g) Inventories.

Inventories are stated at the lower of cost and net realizable value, determined by the first-in, first-out method and consist of the following:

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$ 463.9 $ 312.1

(i) Property, Plant and Equipment.

(h) Property, Plant and Equipment.

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

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Total property, plant and equipment, net $ 583.5 $ 507.9

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

Depreciation expense, which includes depreciation expense for finance lease assets, for the Company was $ 94.7 million, $ 80.5 million and $ 73.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(j) Long-Lived Assets.

(i) Long-Lived Assets.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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The Company did not identify any impairments for the years ended December 31, 2021, 2020 and 2019.

(k) Goodwill and Other Intangible Assets.

(j) Goodwill and Other Intangible Assets.

Intangible assets with finite useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate impairment may have occurred.

The Company performs an annual impairment test on goodwill and indefinite-lived intangible assets on October 1 of each year and whenever events or circumstances make it more likely than not that impairment may have occurred.

In conducting the impairment test for the North America and International reporting units, the fair value of each of the Company's reporting units is compared to its respective carrying amount including goodwill.

This assessment may be performed quantitatively or qualitatively.

In conducting the impairment test for the North America, International and Dreams reporting units, the fair value of each of the Company's reporting units is compared to its respective carrying amount including goodwill.

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

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

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

The Company tested both trade names for impairment using a “relief-from-royalty” method.

Using the qualitative approach, the Company reviews macroeconomic conditions, industry and market conditions and entity specific factors, including strategies and financial performance for potential indicators of impairment.

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

Under a quantitative approach, the Company uses a "relief-from-royalty" method.

Significant assumptions inherent in the methodologies are employed and include such estimates as royalty and discount rates.

The Company performed its annual impairment test of goodwill and indefinite-lived intangible assets in 2020, 2019 and 2018, none of which resulted in the recognition of impairment charges.

The most recent annual impairment tests performed as of October 1, 2020, indicated that the fair values of each of the Company's reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values.

The Company performed its annual impairment test of goodwill and indefinite-lived intangible assets qualitatively in 2021 and quantitatively in 2020 and 2019, none of which resulted in the recognition of impairment charges.

For further information on goodwill and other intangible assets, refer to Note 4, "Goodwill and Other Intangible Assets."

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(l) Accrued Sales Returns.

(k) Accrued Sales Returns.

The Company allows product returns through certain sales channels and on certain products.

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As of December 31, 2021 and 2020, $ 33.7 million and $ 31.6 million of accrued sales returns is included as a component of accrued expenses and other current liabilities and $ 16.1 million and $ 13.3 million of accrued sales returns is included in other non-current liabilities on the Company’s accompanying Consolidated Balance Sheets, respectively.

(m) Warranties.

(l) Warranties.

The Company provides warranties on certain products, which vary by segment, product and brand.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(n) Allowance for Credit Losses.

(m) Allowance for Credit Losses.

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

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

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

As of December 31, 2021, the Company's accounts receivable were substantially current.

Other factors considered include historical write-off experience, current economic conditions and also factors such as customer credit, past transaction history with the customer and changes in customer payment terms.

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Balance as of December 31, 2019

ASU 2016-13 adoption impact (before tax) 8.9

Balance as of January 1, 2020 80.8

Amounts accrued 35.8

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Balance as of December 31, 2020

ASU 2016-13 adoption impact (before tax) 8.9

Balance as of January 1, 2020 80.8

Amounts accrued 2.7

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Balance as of December 31, 2021

(n) Fair Value .

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

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those instruments.

Borrowings under the 2019 Credit Agreement and the securitized debt are at variable interest rates and accordingly their carrying amounts approximate fair value.

The fair value of the following material financial instruments were based on Level 2 inputs, which include observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of debt instruments.

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

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

2023 Senior Notes $ — $ 255.1

2026 Senior Notes — 625.4

2029 Senior Notes 816.9 —

2031 Senior Notes 803.7 —

(o) Income Taxes.

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The Company accounts for uncertain foreign and domestic tax positions utilizing a proscribed recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Interest and penalties related to uncertain tax positions are recognized as part of the income tax provision and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law and until such time that the related tax benefits are recognized.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(p) Cost of Sales .

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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Stock-based compensation cost for stock options is estimated at the grant date based on each option's fair value as calculated by the Black-Scholes option-pricing model.

Stock-based compensation cost for equity instruments that include a market performance condition are determined using a Monte Carlo simulation valuation model.

The Company recognizes stock-based compensation cost as expense for awards other than its PRSUs ratably on a straight-line basis over the requisite service period.

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Further information regarding stock-based compensation can be found in Note 11, "Stock-based Compensation."

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(u) Treasury Stock.

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

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

retirement based on estimated future compensation levels.

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

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

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

The Company's PBO and fair value of plan assets were $ 42.1 million and $ 34.3 million as of December 31, 2021, respectively, and $ 42.5 million and $ 31.3 million as of December 31, 2020, respectively.

The Company recognizes the funded status of each applicable plan within the Consolidated Balance Sheets as either an asset or liability based on its funded status measured as the difference between the fair value of plan assets and the PBO, which was not material as of December 31, 2021 or 2020.

(2) Net Sales

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Net sales $ 4,079.2 $ 851.6 $ 4,930.8

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Twelve Months Ended December 31, 2020

12 unchanged sentences

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Twelve Months Ended December 31, 2019

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The Wholesale channel includes all product sales to third party retailers, including third party distribution, hospitality and healthcare.

The Direct channel includes product sales to company-owned stores, e-commerce and call centers.

The Direct channel includes product sales through company-owned stores, e-commerce and call centers.

The North America and International segments classify products into two major categories:

2 unchanged sentences

Other products include pillows, mattress covers, sheets, cushions and various other comfort products.

The Wholesale channel also includes income from royalties derived by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Wholesale channel also includes income from royalties derived by licensing Sealy®, Stearns & Foster® and Tempur® brands, technology and trademarks to other manufacturers.

The licenses include rights for the licensees to use trademarks as well as current proprietary or patented technology that the Company utilizes.

The Company also provides its licensees with product specifications, research and development, statistical services and marketing programs.

The Company recognizes royalty income based on the occurrence of sales of Sealy® and Stearns & Foster® branded products by various licensees.

The Company recognizes royalty income based on the occurrence of sales of Sealy®, Stearns & Foster® and Tempur® branded products by various licensees.

Royalty income was $ 29.1 million, $ 21.9 million and $ 22.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

These taxes are excluded from the transaction price, and therefore, excluded from revenue.

The Company has elected to account for shipping and handling activities as a fulfillment cost as permitted by Topic 606.

The Company has elected to account for shipping and handling activities as a fulfillment cost.

Accordingly, the Company reflects all amounts billed to customers for shipping and handling in revenue and the costs of fulfillment in cost of sales.

1 unchanged sentence

(3) Acquisitions and Divestitures

Acquisition of Sherwood Bedding

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

Acquisition of Dreams Topco Limited

On August 2, 2021, the Company completed the acquisition of Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams"), for a cash purchase price of $ 476.7 million, which includes $ 49.5 million of cash acquired.

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.

The financial results of Dreams subsequent to the date of acquisition are included in the consolidated financial statements of the Company.

The Company accounted for this transaction as a business combination.

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

The preliminary allocation of the purchase price is based on the fair values of the assets acquired and liabilities assumed as of August 2, 2021.

The Company continues to obtain information to determine the fair value of acquired assets and liabilities.

The components of the preliminary purchase price allocation are as follows:

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in millions)

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

Property and equipment 10.1

Accounts receivable, net $ 3.5

Inventory 51.2

Property, plant and equipment 33.9

Goodwill 357.1

Customer relationships intangible assets 3.7

Indefinite-lived intangible asset 141.9

Operating lease right-of-use assets 158.2

Other current and non-current assets 4.4

Accounts payable ( 55.2 )

Accrued expenses and other current liabilities ( 69.7 )

Operating lease liabilities ( 165.1 )

Non-controlling interest ( 8.4 )

Other liabilities ( 26.9 )

Purchase price, net of cash acquired $ 427.2

The indefinite-lived intangible asset represents Dreams' portfolio of trade names as marketed through Dreams.

The Company applied the income approach through a relief from royalty method to fair value the trade name asset using level 2 inputs.

The indefinite-lived intangible asset is not deductible for income tax purposes.

Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the expansion of retail competency and online capabilities, and expected synergistic manufacturing and distribution benefits to be realized from the acquisition.

The goodwill is not deductible for income tax purposes and is included within the International business segment.

Acquisition of Sherwood Bedding

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

6 unchanged sentences

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

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

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

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

TEMPUR SEALY INTERNATIONAL, INC.

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in millions)

Working capital (accounts receivable and inventory, net of accounts payable and accrued liabilities) $ ( 1.4 )

Property and equipment 5.0

Other intangible assets 2.1

Operating lease right-of-use assets 28.5

Long-term operating lease liabilities ( 28.5 )

Purchase price, net of cash acquired $ 8.1

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

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

(4) Goodwill and Other Intangible Assets

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

The following summarizes the Company's goodwill by segment:

(in millions) North America International Consolidated

28 unchanged sentences

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

4 unchanged sentences

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) Unconsolidated Affiliate Companies

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

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

The Company’s investment of $ 27.0 million and $ 23.6 million at December 31, 2021 and 2020, respectively, is recorded in other non-current assets in the accompanying Consolidated Balance Sheets.

The Company’s share of earnings for the years ended December 31, 2021, 2020 and 2019 respectively, is recorded in equity income in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income.

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

(in millions)

2021 2020 2019

$ 339.7 $ 225.0 $ 212.6

Income from operations 70.9 46.9 44.6

Debt for the Company consists of the following:

4 unchanged sentences

Revolver — (1) — (2) October 16, 2024

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

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

2031 Senior Notes 800.0 3.875 % — N/A October 15, 2031

2029 Senior Notes 800.0 4.000 % — N/A April 15, 2029

2026 Senior Notes — N/A 600.0 5.500 % June 15, 2026

2023 Senior Notes — N/A 250.0 5.625 % October 15, 2023

Securitized debt — (3) 33.9 (4) April 6, 2023

10 unchanged sentences

(3) Interest at one month LIBOR index plus 70 basis points.

(4) Interest at one month LIBOR index plus 80 basis points.

(5) Finance lease obligations are a non-cash financing activity.

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

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

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

The amendment increased the revolving credit facility from $ 425.0 million to $ 725.0 million.

On May 26, 2021, the Company entered into an additional amendment to the 2019 Credit Agreement.

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

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

The delayed draw term loan has the same terms and conditions as the Company's existing term loans under the 2019 Credit Agreement.

Total availability under the revolving facility was $ 724.3 million, after a $ 0.7 million reduction for outstanding letters of credit, as of December 31, 2021.

On September 21, 2021, the Company 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.

Borrowings under the 2019 Credit Agreement will generally bear interest, at the election of Tempur Sealy International and the other subsidiary borrowers, at either Base Rate or LIBOR plus the applicable margin.

1 unchanged sentence

Obligations under the 2019 Credit Agreement are guaranteed by the Company’s existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions and are secured by a security interest in substantially all of Tempur Sealy International’s and the other subsidiary borrowers’ domestic assets and the domestic assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0 % of the equity interests of each subsidiary owned by the Company or a subsidiary guarantor that is a domestic entity (subject to certain limited exceptions) and 65.0 % of the voting equity interests of any direct first tier foreign entity owned by the Company or a subsidiary guarantor.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The 2019 Credit Agreement requires compliance with certain financial covenants providing for maintenance of a minimum consolidated interest coverage ratio, maintenance of a maximum consolidated total net leverage ratio, and maintenance of a maximum consolidated secured net leverage ratio.

1 unchanged sentence

Consolidated indebtedness includes debt recorded on the Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding in excess of $ 40.0 million and other short-term debt.

The Company is allowed to subtract from consolidated indebtedness an amount equal to 100.0 % of the domestic and foreign unrestricted cash ("netted cash"), the aggregate of which cannot exceed $ 200.0 million at the end of the reporting period.

As of December 31, 2020, netted cash was $ 63.6 million.

As of December 31, 2020, the Company's consolidated total net leverage ratio was 1.68 times, within the covenant in the Company's debt agreements which limits this ratio to 5.00 times.

The Company is allowed to subtract from consolidated indebtedness an amount equal to 100.0 % of the domestic and foreign unrestricted cash ("netted cash").

As of December 31, 2021, the Company's consolidated total net leverage ratio was 1.81 times, which complies with the covenant in the 2019 Credit Agreement that limits this ratio to 5.00 times.

The 2019 Credit Agreement contains certain customary negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, transactions with affiliates, use of proceeds, prepayments of certain indebtedness, entry into burdensome agreements and changes to governing documents.

2 unchanged sentences

The maturity date of the 2019 Credit Agreement is October 16, 2024.

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

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

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

1 unchanged sentence

In addition, the term loan facility is subject to mandatory prepayment in connection with certain debt issuances, asset sales and casualty events, subject to certain reinvestment rights.

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

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

Securitized Debt

On April 12, 2017, the Company and certain of its subsidiaries entered into a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended the "Accounts Receivable Securitization").

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

On April 6, 2021, the Company and certain of its subsidiaries entered into a new amendment to the Accounts Receivable Securitization.

The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2023 and increased the overall limit from $ 120.0 million to $ 200.0 million.

While subject to a $ 200.0 million overall limit, the availability of revolving loans varies over the course of the year based on the seasonality of the Company's accounts receivable.

As of December 31, 2021, total availability under the Accounts Receivable Securitization was $ 160.0 million.

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

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

2031 Senior Notes

On May 24, 2016, Tempur Sealy International issued $ 600.0 million aggregate principal amount of 5.500 % 2026 Senior Notes in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S.

On September 24, 2021, Tempur Sealy International issued $ 800.0 million in aggregate principal amount of 3.875 % senior notes due 2031 (the "2031 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S.

persons in accordance with Regulation S under the Securities Act.

The 2026 Senior Notes were issued pursuant to an indenture, dated as of May 24, 2016 (the "2026 Indenture"), among Tempur Sealy International, certain subsidiaries of Tempur Sealy International as guarantors (the "Combined Guarantor Subsidiaries"), and The Bank of New York Mellon Trust Company, N.A., as trustee.

The 2026 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Combined Guarantor Subsidiaries.

The 2026 Senior Notes mature on June 15, 2026, and interest is payable semi-annually in arrears on each June 15 and December 15, which began on December 15, 2016.

The gross proceeds from the 2026 Senior Notes were used to refinance the $ 375.0 million aggregate principal amount of 2020 Senior Notes and to pay related fees and expenses, and the remaining funds were used for share repurchases and general corporate purposes.

Tempur Sealy International has the option to redeem all or a portion of the 2026 Senior Notes at any time on or after June 15, 2021.

The 2031 Senior Notes were issued pursuant to an indenture, dated as of September 24, 2021 (the "2031 Indenture"), among Tempur Sealy International, certain subsidiaries of Tempur Sealy International as guarantors (the "Guarantors"), and The Bank of New York Mellon Trust Company, N.A., as trustee.

The 2031 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Guarantors.

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

Tempur Sealy International has the option to redeem all or a portion of the 2031 Senior Notes at any time on or after October 15, 2026.

The initial redemption price is 101.938 % of the principal amount, plus accrued and unpaid interest, if any.

The redemption price will decline each year after 2021 until it becomes 100.0 % of the principal amount beginning on June 15, 2024.

In addition, Tempur Sealy International has the option at any time prior to June 15, 2021 to redeem some or all of the 2026 Senior Notes at 100.0 % of the original principal amount plus a “make-whole” premium and accrued and unpaid interest, if any.

Tempur Sealy International had the option to redeem up to 35.0 % of the 2026 Senior Notes prior to June 15, 2019, under certain circumstances with the net cash proceeds from certain equity offerings, at 105.500 % of the principal amount plus accrued and unpaid interest, if any.

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The redemption price will decline each year after 2026 until it becomes 100.0 % of the principal amount beginning on October 15, 2029.

In addition, Tempur Sealy International has the option at any time prior to October 15, 2026 to redeem some or all of the 2031 Senior Notes at 100.0 % of the original principal amount plus a "make-whole" premium and accrued and unpaid interest, if any.

Tempur Sealy International may also redeem up to 40.0 % of the 2031 Senior Notes prior to October 15, 2024, under certain circumstances with the net cash proceeds from certain equity offerings, at 103.875 % of the principal amount plus accrued and unpaid interest, if any.

Tempur Sealy International may make such redemptions as described in the preceding sentence only if, after any such redemption, at least 60.0 % of the original aggregate principal amount of the 2031 Senior Notes issued remains outstanding.

The 2031 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things:

2 unchanged sentences

(iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets;

(iv) sell or otherwise dispose of assets, directly or indirectly;

(iv) sell or otherwise dispose of, directly or indirectly, assets;

(v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock;

(vi) enter into transactions with affiliates;

(vii) engage in sale-leaseback transactions;

(viii) purchase or redeem capital stock or subordinated indebtedness;

(ix) issue or sell stock of restricted subsidiaries;

and (x) effect a consolidation or merger.

and (vi) enter into transactions with affiliates.

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

In conjunction with the issuance and sale of the 2026 Senior Notes, Tempur Sealy International and the Combined Guarantor Subsidiaries agreed through a Registration Rights Agreement to exchange the 2026 Senior Notes for a new issue of substantially identical senior notes registered under the Securities Act (the "Exchange Offer").

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

2029 Senior Notes

On September 24, 2015, Tempur Sealy International issued $ 450.0 million aggregate principal amount of 5.625 % 2023 Senior Notes in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act, and to certain non-U.S.

On March 25, 2021, Tempur Sealy International issued $ 800.0 million in aggregate principal amount of 4.00 % senior notes due 2029 (the "2029 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act, and to certain non-U.S.

persons in accordance with Regulation S under the Securities Act.

The 2023 Senior Notes were issued pursuant to an indenture, dated as of September 24, 2015 (the "2023 Indenture"), among Tempur Sealy International, the Combined Guarantor Subsidiaries (the Combined Guarantor Subsidiaries are the same under the 2026 Indenture, the 2023 Indenture and the 2020 Indenture), and The Bank of New York Mellon Trust Company, N.A., as trustee.

The 2023 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Combined Guarantor Subsidiaries.

The 2023 Senior Notes mature on October 15, 2023, and interest is payable semi-annually in arrears on each April 15 and October 15, which began on April 15, 2016.

The gross proceeds from the 2023 Senior Notes were used to refinance a portion of the term loan debt under the 2012 Credit Agreement and to pay related fees and expenses.

Since October 15, 2018, Tempur Sealy International has had the option to redeem all or a portion of the 2023 Senior Notes at any time.

The 2029 Senior Notes were issued pursuant to an indenture, dated as of March 25, 2021 (the "2029 Indenture"), among Tempur Sealy International, the Guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee.

The 2029 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Guarantors.

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

Tempur Sealy International has the option to redeem all or a portion of the 2029 Senior Notes at any time on or after April 15, 2024.

The initial redemption price is 102.00 % of the principal amount, plus accrued and unpaid interest, if any.

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

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

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

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

redemption price will decline each year after 2024 until it becomes 100.0 % of the principal amount beginning on April 15, 2026.

In addition, Tempur Sealy International has the option at any time prior to April 15, 2024 to redeem some or all of the 2029 Senior Notes at 100.0 % of the original principal amount plus a "make-whole" premium and accrued and unpaid interest, if any.

Tempur Sealy International may also redeem up to 40.0 % of the 2029 Senior Notes prior to April 15, 2024, under certain circumstances with the net cash proceeds from certain equity offerings, at 104.00 % of the principal amount plus accrued and unpaid interest, if any.

The 2029 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things:

4 unchanged sentences

(vi) enter into transactions with affiliates;

(vii) engage in sale-leaseback transactions;

(viii) purchase or redeem capital stock or subordinated indebtedness;

(ix) issue or sell stock of restricted subsidiaries;

and (x) effect a consolidation or merger.

and (vi) enter into transactions with affiliates.

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

Securitized Debt

The Accounts Receivable Securitization matures April 6, 2021.

The Company is in the process of refinancing this facility.

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those instruments.

Borrowings under the 2019 Credit Agreement and the securitized debt are at variable interest rates and accordingly their carrying amounts approximate fair value.

The fair value of the following material financial instruments were based on observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of debt instruments.

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

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

2026 Senior Notes

On June 15, 2021, the Company redeemed its $ 600.0 million issued and outstanding 2026 Senior Notes, in full, at 102.75 % of their principal amount, plus the accrued and unpaid interest.

The Company used net proceeds from the 2029 Senior Notes primarily to fund the redemption.

As a result of the Company's redemption of the 2026 Senior Notes, the Company incurred $ 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 unamortized deferred financing costs.

Additionally, the Company incurred $ 5.2 million of overlapping interest expense for the final 83 day period between the issuance of the 2029 Senior Notes and redemption of the 2026 Senior Notes.

2023 Senior Notes

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

During the first quarter of 2021, the Company redeemed the remaining $ 250.0 million of the issued and outstanding 2023 Senior Notes at 101.406 % of the principal amount, plus the accrued and unpaid interest.

In 2021, the Company recognized $ 5.0 million of loss on extinguishment of debt, which includes a prepayment premium of $ 3.5 million and the write-off of $ 1.5 million of unamortized deferred financing costs, associated with the redemption of the remaining amount outstanding of the 2023 Senior Notes.

Deferred Financing Costs

2 unchanged sentences

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

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

As a result of the issuance of the 2031 Senior Notes, $ 11.4 million of deferred financing costs were capitalized in 2021 and will be amortized as interest expense over the respective debt instrument period, 10 years, using the effective interest method.

As a result of the issuance of the 2029 Senior Notes, $ 11.4 million of deferred financing costs were capitalized in 2021 and will be amortized as interest expense over the respective debt instrument period, 8 years, using the effective interest method.

Future Obligations

23 unchanged sentences

Twelve Months Ended

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

(in millions) December 31, 2021 December 31, 2020 December 31, 2019

Operating lease expense:

30 unchanged sentences

The following table provides supplemental information related to the Company's Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020:

Twelve Months Ended

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

Twelve Months Ended December 31,

(in millions) 2021 2020 2019

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

16 unchanged sentences

The Company incurred $ 7.6 million, $ 5.8 million and $ 6.0 million of expenses associated with the 401(k) Plan for the years ended December 31, 2021, 2020 and 2019, respectively, which are included in the Consolidated Statements of Income.

Defined Benefit Pension Plans

The Company has a noncontributory, defined benefit pension plan covering current and former hourly employees at two of its active Sealy plants and ten previously closed Sealy U.S.

Sealy Canada, Ltd.

(a wholly-owned subsidiary of the Company) also sponsors a noncontributory, defined benefit pension plan covering hourly employees at one of its facilities (collectively, referred to as the "Plans").

The Plans provide retirement and survivorship benefits based on the employees’ credited years of service.

The Company’s funding policy provides for contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes.

The Plans' assets consist of investments in various common/collective trusts with equity investment strategies diversified across multiple industry sectors and company market capitalization within specific geographical investment strategies, fixed income common/collective trusts, which invest primarily in investment-grade and high-yield corporate bonds and U.S.

treasury securities, as well as money market mutual funds.

The fixed income investments are diversified as to ratings, maturities, industries and other factors.

The Plans' assets contain no significant concentrations of risk related to individual securities or industry sectors.

The Plans have no direct investment in the Company's common stock.

The long-term rate of return for the Plans is based on the weighted average of the Plans’ investment allocation and the historical returns for those asset categories.

Because future compensation levels are not a factor in these Plans' benefit formulas, the accumulated benefit obligation is equal to the projected benefit obligation as reported below.

The discount rate is based on the returns on long-term bonds in the private sector and incorporates a long-term inflation rate.

Summarized information for the Plans follows:

Expenses and Status

The Company recognizes the service cost component of net periodic pension cost within general, administrative and other expenses and all other components of net periodic pension cost are recognized within other income, net, in the accompanying Consolidated Statements of Income.

Components of total net periodic pension cost for the years ended December 31 were as follows:

(in millions)

2020 2019 2018

$ 1.1 $ 0.9 $ 1.0

Interest cost

Expected return on assets

( 1.5 ) ( 1.3 ) ( 1.5 )

Amortization of prior service cost

Amortization of net gain

Net periodic pension cost

$ 0.9 $ 1.0 $ 0.7

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in millions)

2020 2019 2018

$ 1.9 $ 2.2 $ 0.6

New prior service cost

Amortization of prior service cost

( 0.1 ) ( 0.1 ) ( 0.1 )

Amortization or settlement recognition of net loss

( 0.1 ) ( 0.1 ) —

Total recognized in other comprehensive loss

$ 1.8 $ 2.6 $ 0.6

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

2020 2019 2018

Discount rate (a)

3.16 % 4.10 % 3.58 %

Expected long-term return on plan assets (b)

5.37 % 6.16 % 6.25 %

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

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

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

retirement plan and Canadian retirement plan were 4.16 % and 3.90 %, respectively.

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

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

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

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

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

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

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

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Obligations and Funded Status

The measurement date for the Company's Plans is December 31.

The funded status of the Plans as of December 31 was as follows:

(in millions)

Change in Benefit Obligation:

Projected benefit obligation at beginning of year

$ 36.9 $ 30.0

Interest cost

Plan amendments

Actuarial loss 4.6 5.5

Benefits paid

( 1.3 ) ( 1.3 )

Expenses paid

( 0.1 ) ( 0.1 )

Foreign currency exchange rate changes

Projected benefit obligation at end of year

$ 42.5 $ 36.9

Change in Plan Assets:

Fair value of plan assets at beginning of year

$ 27.0 $ 22.2

Actual return on plan assets

Employer contribution

Benefits paid

( 1.3 ) ( 1.3 )

Expenses paid

( 0.1 ) ( 0.1 )

Foreign currency exchange rate changes

Fair value of plan assets at end of year

$ 31.3 $ 27.0

Funded status

$ ( 11.2 ) $ ( 9.9 )

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

Sealy employees is underfunded.

As of December 31, 2020, the projected benefit obligation and fair value of plan assets were $ 37.7 million and $ 26.5 million, respectively.

As of December 31, 2019, the projected benefit obligation and fair value of plan assets were $ 32.6 million and $ 22.6 million, respectively.

As of December 31, 2020, the projected benefit obligation and fair value of plan assets for the Sealy Canada Ltd.

pension plan were $ 4.8 million and $ 4.8 million, respectively.

As of December 31, 2019, the projected benefit obligation and fair value of plan assets for the Sealy Canada Ltd.

pension plan were $ 4.3 million and $ 4.4 million, respectively.

The accumulated benefit obligation for all pension plans was $ 42.5 million at December 31, 2020 and $ 36.9 million at December 31, 2019.

The following table represents amounts recorded in the Consolidated Balance Sheets:

(in millions)

Amounts recognized in the Consolidated Balance Sheets:

Non-current benefit liability

$ 11.2 $ 10.0

Non-current benefit asset

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

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Discount rate (a)

2.47 % 3.16 %

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

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

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

and Canadian defined benefit pension plans were 3.15 % and 3.20 %, respectively.

No material amounts are expected to be reclassified from AOCL to be recognized as components of net income during 2021.

Plan Contributions and Expected Benefit Payments

During 2021, the Company expects to contribute $ 1.1 million to the Company's Plans from available cash and cash equivalents.

The following table presents estimated future benefit payments:

(in millions)

Fiscal 2021 $ 1.0

Fiscal 2022 1.1

Fiscal 2023 1.2

Fiscal 2024 1.2

Fiscal 2025 1.3

Fiscal 2026 ‑ Fiscal 2029 8.0

Pension Plan Asset Information

Investment Objective and Strategies

The Company's investment objectives are to minimize the volatility of the value of the Company's pension assets relative to pension liabilities and to ensure assets are sufficient to pay plan benefits.

Target and actual asset allocations are as follows:

Common/collective trust consisting primarily of:

Equity securities

60.0 % 56.6 %

Debt securities

40.0 % 43.1 %

Total plan assets

100.0 % 100.0 %

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

The objective of minimizing the volatility of assets relative to liabilities is addressed primarily through asset diversification.

Assets are broadly diversified across many asset classes to achieve risk-adjusted returns that, in total, lower asset volatility relative to liabilities.

The Company's policy to rebalance the Company's investment regularly ensures that actual allocations are in line with target allocations as appropriate.

Strategies to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes that provide return, diversification and liquidity.

The plan investment fiduciaries are responsible for setting asset allocation targets, and monitoring asset allocation and investment performance.

The Company’s pension investment manager has discretion to manage assets to ensure compliance with the asset allocations approved by the plan fiduciaries.

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Significant Concentrations of Risk

Significant concentrations of risk in the Company's plan assets relate to equity, interest rate, and operating risk.

In order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to equity investments that are expected, over time, to earn higher returns with more volatility than fixed income investments which more closely match pension liabilities.

Within the common/collective trusts, the plan assets contain no significant concentrations of risk related to individual securities or industry sectors.

In order to minimize asset volatility relative to the liabilities, a portion of the plan assets are allocated to fixed income investments that are exposed to interest rate risk.

Rate increases will generally result in a decline in fixed income assets while reducing the present value of the liabilities.

Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities.

Operating risks primarily include the risks of inadequate diversification and insufficient oversight.

To mitigate this risk, investments are diversified across and within asset classes in support of investment objectives.

Policies and practices to address operating risks include ongoing oversight, plan and asset class investment guidelines, and periodic reviews against these guidelines to ensure adherence.

Expected Long-Term Return on Plan Assets

The expected long-term return assumption at December 31, 2020 was 5.75 % for the defined benefit pension plan for U.S.

Sealy employees and 4.30 % for the defined benefit pension plan for Sealy Canada, Ltd.

The expected long-term return assumption is based on historical and projected rates of return for current and planned asset classes in the plan’s investment portfolio.

The assumption considers various sources, primarily inputs from advisors for long-term capital market returns, inflation, bond yields, and other variables, adjusted for specific aspects of the Company's investment strategy by plan.

The investments in plan assets primarily consist of common collective trusts and money market funds.

Investments in common collective trusts and money market funds are valued at the net asset value ("NAV") per share or unit multiplied by the number of shares or units held as of the measurement date.

The determination of NAV for the common/collective trusts includes market pricing of the underlying assets as well as broker quotes and other valuation techniques that represent fair value as determined by the respective administrator of the common/collective trust.

Management has determined that the NAV is an appropriate estimate of the fair value of the common collective trusts at December 31, 2020 and 2019, based on the fact that the common/collective trusts are audited and accounted for at fair value by the administrators of the respective common/collective trusts.

The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair value.

Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the Consolidated Balance Sheet dates.

The fair value of the Company’s plan assets, all valued at NAV, at December 31 by asset category was as follows:

(in millions)

Asset Category

Common/collective trust

International equity

Total equity based funds

Common/collective trust - fixed income

Money market funds

$ 31.3 $ 27.0

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Multi‑Employer Benefit Plans

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36-6044243-001 12/31/20 Red Implemented $ 1.2 Yes, 10.0 %

2022, 2024 N/A

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EIN/Pension Plan Number

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

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2021, 2022 N/A

(1) The Pension Protection Act of 2006 ranks the funded status of multi-employer pension plans depending upon a plan's current and projected funding.

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As of December 31, 2021, the Company had approximately $ 1,400.7 million remaining under an existing share repurchase program initially authorized by the Board of Directors in 2016.

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

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

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

The Company repurchased 19.5 million shares, 6.5 million shares and 1.3 million shares under the program, for approximately $ 801.4 million, $ 285.9 million and $ 102.3 million during the years ended December 31, 2021, 2020 and 2019, respectively.

Subsequent to year-end, the Company repurchased an additional 7.7 million shares for approximately $ 305.0 million.

In addition, the Company acquired shares upon the vesting of certain restricted stock units ("RSUs") and performance restricted stock units ("PRSUs"), which were withheld to satisfy tax withholding obligations during the years ended December 31, 2021, 2020 and 2019, respectively.

The shares withheld were valued at the closing price of the stock on the New York Stock Exchange on the vesting date or first business day prior to vesting, resulting in approximately $ 14.9 million, $ 45.9 million and $ 3.4 million in treasury stock acquired during the years ended December 31, 2021, 2020 and 2019, respectively.

In the fourth quarter of 2019, the Company recorded an $ 8.9 million charge, recorded in General, administrative and other expenses, related to the donation of 100,000 shares of its common stock at fair market value to certain public charities.

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AOCL consisted of the following:

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

Other comprehensive loss:

Other comprehensive (loss) income:

Foreign currency translation adjustments (1)

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

Other comprehensive loss:

Other comprehensive income (loss):

Net change from period revaluation

3.8 ( 1.8 ) ( 2.6 )

Tax benefit (2)

Total other comprehensive loss before reclassifications, net of tax

Tax (expense) benefit (2)

( 0.9 ) 0.4 0.7

Net amount reclassified to earnings

U.S tax reform - reclassification to retained earnings upon adoption of ASU No.

Tax expense (2)

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

Total other comprehensive loss

Total other comprehensive income (loss)

2.9 ( 1.4 ) ( 1.9 )

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(in millions)

$ 150.4 $ 136.0

Wages and benefits

Operating leases obligations 101.7 61.0

Taxes 15.0 150.4

$ 558.5 $ 585.1

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

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

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

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

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

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

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Awards under both Long-Term Incentive Plans have typically consisted primarily of a mix of stock options, RSUs and PRSUs.

Shares with respect to the PRSUs will be granted and vest following the end of the applicable performance period and achievement of applicable performance metrics as determined by the Compensation Committee of the Board of Directors.

Shares with respect to the PRSUs will be granted and vest following the end of the applicable performance period and achievement of applicable performance metrics, market and environmental, social and corporate governance ("ESG") conditions as determined by the Compensation Committee of the Board of Directors.

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's stock-based compensation expense for the year ended December 31, 2020 included PRSUs, stock options, RSUs and DSUs.

The Company's stock-based compensation expense for the year ended December 31, 2021, 2020 and 2019 included PRSUs, stock options, RSUs and DSUs.

A summary of the Company’s stock-based compensation expense is presented below:

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Granted 3.5 21.39

Vested ( 3.4 ) 15.03

Forfeited — —

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

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

During the first quarter of 2021, the Company granted 0.5 million PRSUs at target at a weighted average grant date fair value of $ 28.92 per share with a performance period of January 1, 2021 through December 31, 2021 as a component of the long-term incentive plan ("2021 PRSUs").

For the year ended December 31, 2021, the Company recognized stock-based compensation expense related to the 2021 PRSUs, as the Company achieved the maximum specified performance target for the performance period.

During 2017, the Company granted executive officers and certain members of management PRSUs if the Company achieves a certain level of adjusted earnings before interest, tax, depreciation and amortization ("Adjusted EBITDA") during four consecutive fiscal quarters as described below (the "2019 Aspirational Plan PRSUs").

Adjusted EBITDA is defined as the Company’s "Consolidated EBITDA" as such term is defined in the Company’s 2016 Credit Agreement.

The 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA in any four consecutive fiscal quarter period ending between (and including) March 31, 2018 and December 31, 2019 (the “First Designated Period”).

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

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

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

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

During 2017, the Company granted executive officers and certain members of management PRSUs if the Company achieved a certain level of adjusted earnings before interest, tax, depreciation and amortization ("Adjusted EBITDA") during four consecutive fiscal quarter period ending between (and including) March 31, 2020 and December 31, 2020 (the "Aspirational Plan PRSUs").

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

The Aspirational Plan PRSUs vested on December 15, 2020.

The Company recorded $ 49.4 million of stock-based compensation expense related to the Aspirational Plan PRSUs for the year ended December 31, 2020.

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Vesting for the remaining one-half of the total 2019 Aspirational Plan PRSUs was based on the highest Adjusted EBITDA per credit facility in any four consecutive fiscal quarter period ending between (and including) March 31, 2020 and December 31, 2020 (the "Second Designated Period").

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

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

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

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

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

Stock Options

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

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

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

Expected volatility is based on the unbiased standard deviation of Tempur Sealy International’s common stock over the option term.

The expected life of the options represents the period of time that the Company expects the options granted to be outstanding.

The risk-free rate is based on the U.S.

Treasury yield curve in effect at the time of the grant of the option for the expected term of the instrument.

The dividend yield reflects an estimate of dividend payouts over the term of the award.

The Company uses historical data to determine these assumptions.

Year Ended December 31,

2020 2019 2018

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

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

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

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

A summary of the Company's stock option activity under the 2003 Plan and 2013 Plan for the years ended December 31, 2021 and 2020 is presented below:

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The aggregate intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 was $ 22.3 million, $ 6.0 million and $ 5.9 million, respectively.

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the Company's unvested shares relating to stock options as of December 31, 2021 and 2020, and changes during the years ended December 31, 2021 and 2020, are presented below:

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Options unvested at December 31, 2021 0.3 $ 15.45

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Restricted/Deferred Stock Units

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(in millions, except years) December 31, 2021 Weighted Average Remaining Vesting Period (Years)

Unrecognized stock option expense $ 1.6 1

Unrecognized DSU/RSU expense 27.6 2.27

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Total unrecognized stock-based compensation expense $ 70.4 2.03

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) Commitments and Contingencies

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$ 824.0 $ 452.4 $ 265.5

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Reconciliation of Statutory Tax Rate to Effective Tax Rate

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Stock compensation ( 8.1 ) ( 1.0 ) % ( 10.9 ) ( 2.4 ) % 0.9 0.3 %

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

Permanent and other ( 5.0 ) ( 0.7 ) % 5.1 1.2 % 2.4 0.9 %

Effective income tax provision $ 198.3 24.1 % $ 102.6 22.7 % $ 74.7 28.1 %

TEMPUR SEALY INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In July 2020 the U.S.

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

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

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

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

The relief from U.S.

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

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

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

Income Tax Provision

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The income tax provision includes federal, state and foreign income taxes currently payable and those deferred or prepaid because of temporary differences between financial statement and tax bases of assets and liabilities.

The Company records income taxes under the liability method.

Under this method, deferred income taxes are recognized for the estimated future tax effects of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws.

The amount provided for deferred income taxes reflects that impact of the revaluation of the Company's deferred income tax assets and liabilities required as the result of the change in the U.S.

federal and state income tax rates, as discussed above.

Deferred Income Tax Assets and Liabilities

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

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

The Company has recorded valuation allowances against $ 49.7 million of the SNOLs and $ 12.2 million of the FTCs.

With respect to all other Tax Attributes above, based upon the level of historical taxable income and projections for future taxable income, management believes it is more likely than not the Company will realize the benefits of the underlying deferred tax assets.

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Deferred Tax Liability for Undistributed Foreign Earnings

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

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

The Company has not recorded a deferred tax asset on such excess tax basis as it is not apparent that the excess tax basis will reverse in the foreseeable future.

As it relates to the book to tax basis difference with respect to the stock of each of the Company's lower tier foreign subsidiaries, as a general matter, the book basis exceeds the tax basis in the hands of such foreign subsidiaries' shareholders.

As it relates to stock of the Company's top tier foreign subsidiaries in the hands of each such subsidiary's U.S.

shareholder, at December 31, 2021, the book basis of each such subsidiary exceeds the tax basis in each such subsidiary.

No income taxes have been provided for the book to tax basis differences (including undistributed foreign earnings) inherent in these entities except to the extent of certain earnings that have been previously subject to U.S.

income tax ("PTEP").

During the three month period ended December 31, 2021, the Company recorded a deferred income tax liability associated with the PTEP.

Such amount is not material.

As it relates to the book to tax basis difference with respect to the stock of each of the Company's second and lower tier foreign subsidiaries, as a general matter, the book basis exceeds the tax basis in the hands of such foreign subsidiaries' shareholders.

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

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Balance as of December 31, 2021 $ 45.3

The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2020, 2019 and 2018 would be $ 106.0 million, $ 96.8 million and $ 91.4 million, respectively.

During the years ended December 31, 2020, 2019 and 2018, the Company recognized $ 1.0 million, $ 1.3 million and $ 6.4 million in interest and penalties, respectively, in income tax expense.

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

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

The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2021 and 2020 would be $ 29.1 million and $ 106.0 million, respectively.

During the years ended December 31, 2021 and 2020, the Company recognized $ 3.2 million and $ 1.0 million in interest and penalties, respectively, in income tax expense.

The Company had $ 15.7 million and $ 74.9 million of accrued interest and penalties at December 31, 2021 and 2020.

As discussed below, during the quarter ended June 30, 2021 the Company resolved in all material respects the calculation of interest payable to SKAT related to the settlement of the Danish Tax Matters for the years 2001 through 2011 (the "Settlement Years").

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the Danish Tax Matter for the Settlement Years is considered in all material respects, closed.

Consequently, the tax deposits previously with SKAT were offset against the uncertain income tax liability for the Settlement Years as reflected in the table above.

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

However, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the Consolidated Financial Statements, other than the Danish Tax Matter discussed below which the Company believes will be settled commensurate with the amount previously accrued.

With few exceptions, the Company is no longer subject to tax examinations by the U.S., state and local municipalities for periods prior to 2011, and in non-U.S.

With few exceptions, the Company is no longer subject to tax examinations by the U.S., state and local municipalities or non-U.S.

jurisdictions for periods prior to 2012.

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

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

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

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

Internal Revenue Service ("IRS") with respect to the adjusted amount of royalties (the "Settlement") for the Settlement Years.

During the quarter ended June 30, 2021 the Company and SKAT resolved in all material respects the calculation of interest payable to SKAT (which had previously been under discussion with SKAT) related to the settlement of the Danish Tax Matters for Settlement Years.

This resolution resulted in SKAT refunding substantially all of the excess tax deposits it was holding for the Settlement Years (all other aspects of the settlement of the Settlement Years had previously been agreed upon).

As such, the Danish Tax Matter for the Settlement Years is considered in all material respects, closed.

Consequently, the tax deposits previously with SKAT were applied to offset the uncertain income tax liability for the Settlement Years.

The tax years 2012 through 2021 (the "2012 to Current Period") are currently the subject of the Advance Pricing Agreement procedure ("APA") request filed by the Company with SKAT and the IRS in the third quarter of 2018.

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December 31, 2021 December 31, 2020

Period Balance Sheet Presentation DKK USD DKK USD

Period Balance Sheet Presentation USD USD

Settlement Years Accrued expenses and other current liabilities $ — $ 139.1

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correlative benefit associated with the accrual of Danish tax for the 2012 to Current Period at December 31, 2021 and 2020 is approximately $ 15.5 million and $ 12.0 million, respectively.

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

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

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

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

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

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

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

The Company is contesting all three assessments.

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

TEMPUR SEALY INTERNATIONAL, INC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

SKAT has issued income tax assessments for the years 2012 through 2015.

The Company is contesting all four assessments.

Further, SKAT has proposed assessments for the years 2016 through 2017.

For each of the years 2012 through 2017, SKAT is asserting an increase in the royalty earned by the Danish subsidiary.

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

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

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

After application of the VAT refunds to the liability associated with the Settlement Years, the remaining VAT on deposit with SKAT is approximately $ 1.5 million.

As of December 31, 2021, the Company made the following tax deposits with SKAT related to the Danish Tax Matter for the years 2012 through 2015:

VAT deposits remaining with SKAT $ 1.5

The three months ended March 31, 2020 20.5

The three months ended September 30, 2020 11.7

The three months ended September 30, 2021 14.9

The above VAT refunds withheld and the tax deposits made are reflected in the Company's Consolidated Balance Sheet, as per below:

December 31, 2021 December 31, 2020

DKK USD DKK USD

Prepaid expenses and other current assets $ — $ 139.1

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Total $ 48.6 $ 193.9

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

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

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

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

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

TEMPUR SEALY INTERNATIONAL, INC.

AND CONSOLIDATED SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(14) Earnings Per Common Share

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(in millions, except per common share amounts) 2021 2020 2019

Net income from continuing operations, net of loss attributable to non-controlling interests $ 348.8 $ 190.9 $ 118.3

Net income from continuing operations, net of income attributable to non-controlling interests $ 625.2 $ 348.8 $ 190.9

Denominator for basic earnings per common share—weighted average shares 197.0 207.9 218.0

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Diluted earnings per common share for continuing operations $ 3.06 $ 1.64 $ 0.86

The Company excluded an insignificant number of shares for the year ended December 31, 2020, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive.

The Company excluded 4.4 million and 6.0 million shares issuable upon exercise of outstanding stock options for the years ended, December 31, 2019 and 2018, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive.

For the years ended December 31, 2021 and December 31, 2020, the Company excluded an insignificant number of shares from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive.

For the year ended December 31, 2019, the Company excluded 4.4 million shares issuable upon exercise of outstanding stock options from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive.

Holders of non-vested stock-based compensation awards do not have voting rights.

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North America and International.

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

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

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

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

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

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

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

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

On August 2, 2021, the Company acquired Dreams, which is also 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.

1 unchanged sentence

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

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

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

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

The Company’s Direct channel represents 18.2 % of the Company’s consolidated net sales in 2021.

One wholesale customer contributed approximately 15 % of the Company’s consolidated net sales in the years ended 2021 and 2020.

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

81 unchanged sentences

United States $ 278.3 $ 255.0

United Kingdom 162.8 4.7

All Other 39.5 44.6

9 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-K

Item 8. Financial Statements and Supplementary Data