What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-03 · 136 added, 351 removed, 255 unchanged (66% of the section changed)

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

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

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three months ended March 31, 2022, including the following topics:

• an overview of our business and strategy,

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

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

As a leading designer, manufacturer, distributor and retailer of bedding products worldwide, we know how crucial a good night of sleep is to overall health and wellness.

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

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

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

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

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

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

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

On August 2, 2021, we acquired Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams").

Dreams 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.

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

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

Our product brand portfolio includes many highly recognized and iconic brands in the industry, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology and Stearns & Foster® and our non-branded offerings include value-focused private label OEM products.

Our distinct brands allow for complementary merchandising strategies.

For additional information refer to Note 12, "Business Segment Information," included in Part II, ITEM 1 of this Report.

Our highly recognized brands include Tempur-Pedic®, Sealy® and Stearns & Foster® and our non-branded offerings consist of value-focused private label and OEM products.

Our products allow for complementary merchandising strategies and are sold through third-party retailers, our more than 650 company-owned and joint venture operated retail stores worldwide and our e-commerce channel.

Our distribution model operates through an omni-channel strategy.

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General Business and Economic Conditions

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

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

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

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

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

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

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

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

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

Current order trends continue to indicate growth.

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

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

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

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

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

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

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

As a result, the U.S.

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

We expect these constraints to continue to impact sales growth into the fourth quarter of 2021.

We estimate sales would have been approximately $200 million higher in the third quarter of 2021 had we not experienced supply chain constraints.

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

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

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

Since then, we have continued to manage through a highly inflationary commodity environment and we expect to take additional pricing actions to offset these headwinds in 2022.

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

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

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

Over the last decade, consumers have made the connection between a good night's sleep and overall health and wellness.

In recent years, this trend accelerated during the COVID-19 global pandemic.

As consumers make this connection they are willing to invest more in their bedding purchases, which positions us well for long-term growth.

In the near term, there are various macro-economic factors impacting the business.

While we do not have any operations in Ukraine or Russia, the war in Ukraine has affected both international and domestic markets.

Internationally, the war has introduced elements of risk into the supply chain and is affecting consumer confidence in Europe.

consumer confidence has declined due to inflation and geopolitical uncertainty.

While we have taken actions that have largely mitigated our broader supply chain risk, declining consumer confidence is negatively impacting our order trends, which we expect to continue.

The COVID-19 global pandemic continues to impact our global operations as variants appear in the markets in which we operate.

The recent variant in China and the resulting government mandated lockdowns are negatively impacting our wholly-owned and joint-venture operations in the region.

Our recent actions to expand capacity, diversify our supplier base, increase our safety stock and improve vendor and customer communications have strengthened our supply chain, putting us in a more favorable position to meet consumer demand.

Though geopolitical and pandemic-related disruptions continue to create challenges, the many actions we have taken to further insulate our supply chain have largely mitigated their impact.

During the first quarter of 2022, commodity costs unfavorably impacted our gross margin and we implemented pricing actions to mitigate the dollar impact of these known commodity headwinds.

We now anticipate additional commodity cost inflation for the remainder of 2022 and expect to implement another round of pricing actions that will neutralize the effect of the incremental inflation on a full year basis.

Product Launches

In 2022, we plan to complete the rollout of a complete refresh of our North American Sealy portfolio that began in 2021.

The updated Sealy portfolio features new models in our Posturepedic Plus TM , Posturepedic® and Essentials product lines.

We also expect to launch a complete refresh of our North American Stearns & Foster portfolio in 2022.

In the U.S., we plan to launch a Sealy-branded, eco-friendly mattress collection, as well as a Sealy mattress with a best-in-class pressure-relieving gel grid layer at a consumer-appealing, mid-market price point, in 2022.

In our International segment, we expect to launch an all-new line of Tempur® products in Europe and Asia-Pacific with the objective of reaching a new segment of international consumers.

This new line of products will broaden Tempur®'s price range with the super-premium average selling price ceiling maintained and the floor expanded into the premium category.

In response to the current geopolitical uncertainty permeating the European market, we have elected to postpone the launch of the new international line of Tempur® products that was planned for 2022 to the first quarter of 2023.

Our global 2022 marketing plan is to aggressively support our innovative bedding products through investing significant marketing dollars to promote our worldwide brands and product launches.

Acquisition of Dreams

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

On August 2, 2021, we completed the acquisition of Dreams, for a cash purchase price of $476.7 million, which included $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.

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

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

Product Launches

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

Adjusted EPS, which is a non-GAAP financial measure, increased 18.9% to $0.88 as compared to $0.74 in the third quarter of 2020.

A summary of our results for the three months ended March 31, 2022 include:

• Total net sales increased 18.7% to $1,239.5 million as compared to $1,043.8 million in the first quarter of 2021.

On a constant currency basis, which is a non-GAAP financial measure, total net sales increased 19.8%, with an increase of 5.5% in the North America business segment and an increase of 98.6% in the International business segment, primarily driven by the acquisition of Dreams in August 2021.

• Gross margin was 42.2% as compared to 44.0% in the first quarter of 2021.

• Operating income increased to $188.6 million as compared to $188.4 million in the first quarter of 2021.

• Net income increased to $130.7 million as compared to $130.5 million in the first quarter of 2021.

Adjusted net income, which is a non-GAAP financial measure, was $134.6 million in the first quarter of 2021.

There were no adjustments to net income in the first quarter of 2022.

• EBITDA, which is a non-GAAP financial measure, increased 1.9% to $234.5 million as compared to $230.1 million in the first quarter of 2021.

• Earnings per diluted share ("EPS") increased 11.3% to $0.69 as compared to $0.62 in the first quarter of 2021.

Adjusted EPS, which is a non-GAAP financial measure, was $0.64 in the first quarter of 2021.

There were no adjustments to EPS in the first quarter of 2022.

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

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

THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE

THREE MONTHS ENDED SEPTEMBER 30, 2020

THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO THE

THREE MONTHS ENDED MARCH 31, 2021

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

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages and per share amounts) 2022 2021

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Loss on extinguishment of debt — — 5.0 0.5

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

Other income, net (1.3) (0.1) (0.3) —

Total other expense, net 19.6 1.6 17.0 1.6

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Income from continuing operations 130.9 10.5 130.9 12.5

(Loss) income from discontinued operations, net of tax (0.1) — 2.4 0.2

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

Net income before non-controlling interests 130.9 10.5 130.7 12.5

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Earnings per share for continuing operations $ 0.72 $ 0.64

Earnings per share for discontinued operations — 0.01

Loss per share for discontinued operations — —

Earnings per share $ 0.72 $ 0.64

Earnings per share for continuing operations $ 0.69 $ 0.62

Earnings per share for discontinued operations — 0.01

Loss per share for discontinued operations — —

Earnings per share $ 0.69 $ 0.62

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Diluted 188.5 210.1

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 2022 2021 2022 2021

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On a constant currency basis, North America net sales increased 5.5%.

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

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

Net sales in the Wholesale channel increased $45.8 million, or 6.0%, to $811.3 million, as compared to first quarter of 2021.

Net sales in the Direct channel increased $2.3 million, or 2.0% to $120.1 million, as compared to the first quarter of 2021.

• International net sales increased $147.6 million, or 92.0%.

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Net sales in the Wholesale channel increased 3.7% on a constant currency basis.

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

Three Months Ended September 30,

Net sales in the Direct channel increased 345.3% on a constant currency basis, primarily driven by the acquisition of Dreams in August 2021.

Three Months Ended March 31,

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

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

Our gross margin is primarily impacted by the relative amount of net sales contributed by our Tempur and Sealy products.

Our Sealy products have a significantly lower gross margin than our Tempur products.

Our Sealy mattress products range from value to premium priced offerings, and gross margins are typically higher on premium products compared to value priced offerings.

Our Tempur products are exclusively premium priced products.

Our gross margin is primarily impacted by the relative amount of net sales contributed by our premium or value products.

Our value products have a significantly lower gross margin than our premium products.

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

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• North America gross margin declined 340 basis points.

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

The decline in gross margin was driven by price increases to customers without a margin benefit of 280 basis points and operational inefficiencies related to supply chain constraints of 120 basis points.

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

These declines were partially offset by favorable mix.

• International gross margin declined 390 basis points.

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

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 2022 2021 2022 2021 2022 2021

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Total operating expenses $ 341.1 $ 277.2 $ 197.0 $ 190.5 $ 110.5 $ 55.5 $ 33.6 $ 31.2

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

Operating expenses increased $63.9 million, or 23.1%, and increased 90 basis points as a percentage of net sales.

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

• North America operating expenses increased $6.5 million, or 3.4%, and decreased 40 basis points as a percentage of net sales.

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

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

• International operating expenses increased $55.0 million, or 99.1%, and increased 130 basis points as a percentage of net sales.

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

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

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

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

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

• Corporate operating expenses increased $2.4 million, or 7.7%, primarily driven by ERP implementation costs.

Research and development expenses for the three months ended March 31, 2022 were $7.8 million compared to $6.5 million for the three months ended March 31, 2021, an increase of $1.3 million, or 20.0%.

OPERATING INCOME

Three Months Ended September 30,

Three Months Ended March 31,

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

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Total operating income $ 188.6 15.2 % $ 188.4 18.0 % (2.8) %

Operating income increased $69.6 million and operating margin improved 250 basis points.

Operating income increased $0.2 million and operating margin declined 280 basis points.

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

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

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

• North America operating income decreased $18.0 million and operating margin declined 290 basis points.

The decline in operating margin was primarily driven by the decline in gross margin of 340 basis points, partially offset by favorable operating expense leverage.

• International operating income increased $20.6 million and operating margin declined 710 basis points.

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

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

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

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

The decline in operating margin was primarily driven by the decline in gross margin of 390 basis points and unfavorable operating expense leverage of 120 basis points.

• Corporate operating expenses increased $2.4 million, which negatively impacted our consolidated operating margin by 20 basis points, primarily driven by ERP implementation costs.

INTEREST EXPENSE, NET

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages) 2022 2021 % Change

Interest expense, net $ 20.9 $ 12.3 69.9 %

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

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

Interest expense, net, increased $8.6 million, or 69.9%.

The increase in interest expense, net, was primarily driven by increased average levels of outstanding debt.

INCOME TAX PROVISION

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages) 2022 2021 % Change

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Our income tax provision includes income taxes associated with taxes currently payable and deferred taxes and includes the impact of net operating losses for certain of our foreign operations.

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

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

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

federal statutory rate for the three months ended September 30, 2021 included the favorable impact of the deductibility of stock compensation in the U.S.

and included a net unfavorable impact of other discrete items.

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

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

NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE

NINE MONTHS ENDED SEPTEMBER 30, 2020

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

Nine Months Ended September 30,

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

Net sales $ 3,571.2 100.0 % $ 2,619.9 100.0 %

Cost of sales 2,017.0 56.5 1,466.7 56.0

Gross profit 1,554.2 43.5 1,153.2 44.0

Selling and marketing expenses 658.3 18.4 535.8 20.5

General, administrative and other expenses 254.9 7.1 288.1 11.0

Equity income in earnings of unconsolidated affiliates (20.5) (0.6) (9.6) (0.4)

Operating income 661.5 18.5 338.9 12.9

Other expense, net:

Interest expense, net 45.8 1.3 61.0 2.3

Loss on extinguishment of debt 23.0 0.6 0.9 —

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

Total other expense, net 68.5 1.9 62.2 2.4

Income from continuing operations before income taxes 593.0 16.6 276.7 10.6

Income tax provision (143.9) (4.0) (73.2) (2.8)

Income from continuing operations 449.1 12.6 203.5 7.8

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

Net income before non-controlling interests 448.5 12.6 204.8 7.8

Net (loss) income attributable to non-controlling interests (0.2) — 0.7 —

Net income attributable to Tempur Sealy International, Inc.

$ 448.7 12.6 % $ 204.1 7.8 %

Earnings per common share:

Earnings per share for continuing operations $ 2.26 $ 0.97

Earnings per share for discontinued operations — 0.01

Earnings per share $ 2.26 $ 0.98

Earnings per share for continuing operations $ 2.18 $ 0.96

Earnings per share for discontinued operations — 0.01

Earnings per share $ 2.18 $ 0.97

Weighted average common shares outstanding:

Basic 198.9 208.8

Diluted 205.9 211.6

Nine Months Ended September 30,

2021 2020 2021 2020 2021 2020

(in millions) Consolidated North America International

Net sales by channel

Wholesale $ 2,986.0 $ 2,273.3 $ 2,647.5 $ 2,014.6 $ 338.5 $ 258.7

Direct 585.2 346.6 369.6 251.0 215.6 95.6

Total net sales $ 3,571.2 $ 2,619.9 $ 3,017.1 $ 2,265.6 $ 554.1 $ 354.3

Net sales increased 36.3%, and on a constant currency basis increased 34.6%.

The change in net sales was driven by the following:

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

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

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

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

On a constant currency basis, International net sales increased 48.6%.

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

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

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

Nine Months Ended September 30,

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

North America $ 1,236.4 41.0 % $ 944.6 41.7 % (0.7) %

International 317.8 57.4 % 208.6 58.9 % (1.5) %

Consolidated gross margin $ 1,554.2 43.5 % $ 1,153.2 44.0 % (0.5) %

Gross margin declined 50 basis points.

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

• North America gross margin declined 70 basis points.

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

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

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

• International gross margin declined 150 basis points.

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

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

OPERATING EXPENSES

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

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

Nine Months Ended September 30,

2021 2020 2021 2020 2021 2020 2021 2020

(in millions) Consolidated North America International Corporate

Operating expenses:

Advertising expenses $ 310.3 $ 229.8 $ 271.8 $ 205.7 $ 38.5 $ 24.1 $ — $ —

Other selling and marketing expenses 348.0 306.0 214.2 187.8 114.5 81.4 19.3 36.8

General, administrative and other expenses 254.9 288.1 122.6 146.7 45.4 33.8 86.9 107.6

Total operating expenses $ 913.2 $ 823.9 $ 608.6 $ 540.2 $ 198.4 $ 139.3 $ 106.2 $ 144.4

Operating expenses increased $89.3 million, or 10.8%, and decreased 580 basis points as a percentage of net sales.

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

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

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

Additionally, in 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account and $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the macro-economic environment, which were not repeated in 2021.

• International operating expenses increased $59.1 million, or 42.4%, and decreased 350 basis points as a percentage of net sales.

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

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

Additionally, in 2020, we incurred $3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $2.6 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which were not repeated in 2021.

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

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

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

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

OPERATING INCOME

Nine Months Ended September 30,

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

North America $ 627.8 20.8 % $ 404.4 17.8 % 3.0 %

International 139.9 25.2 % 78.9 22.3 % 2.9 %

Corporate expenses (106.2) (144.4)

Total operating income $ 661.5 18.5 % $ 338.9 12.9 % 5.6 %

Operating income increased $322.6 million and operating margin improved 560 basis points.

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

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

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

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

Additionally, in 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the macro-economic environment and incurred $4.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which were not repeated in 2021.

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

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

Additionally, in 2020, we incurred $3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $3.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which were not repeated in 2021.

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

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

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

INTEREST EXPENSE, NET

Nine Months Ended September 30,

(in millions, except percentages) 2021 2020 % Change

Interest expense, net $ 45.8 $ 61.0 (24.9) %

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

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

LOSS ON EXTINGUISHMENT OF DEBT

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

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

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

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

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

INCOME TAX PROVISION

Nine Months Ended September 30,

(in millions, except percentages) 2021 2020 % Change

Income tax provision $ 143.9 $ 73.2 96.6 %

Effective tax rate 24.3 % 26.5 %

Our income tax provision increased $70.7 million due to an increase in income before income taxes.

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

Our income tax provision decreased $2.4 million due to a decrease in income before income taxes.

Our effective tax rate for the three months ended March 31, 2022 as compared to the same prior year period decreased by 110 basis points.

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

federal statutory rate for the nine months ended September 30, 2021 included the favorable impact of the deductibility of stock compensation in the U.S.

federal statutory rate for the three months ended March 31, 2022 included the favorable impact of the deductibility of stock compensation in the U.S.

and included a net unfavorable impact of other discrete items.

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

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

federal statutory tax rate for the three months ended March 31, 2021 included the favorable impact of the deductibility of stock compensation in the U.S.

and included a net unfavorable impact of discrete items.

Liquidity and Capital Resources

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

As of September 30, 2021, we had net working capital of $323.4 million, including cash and cash equivalents of $503.3 million, as compared to a working capital deficit of $6.4 million, including cash and cash equivalents of $65.0 million, as of December 31, 2020.

At September 30, 2021, total cash and cash equivalents were $503.3 million, of which $369.8 million was held in the U.S.

As of March 31, 2022, we had net working capital of $117.7 million, including cash and cash equivalents of $116.3 million, as compared to a working capital of $222.2 million, including cash and cash equivalents of $300.7 million, as of December 31, 2021.

At March 31, 2022, total cash and cash equivalents were $116.3 million, of which $29.9 million was held in the U.S.

and $86.4 million was held by subsidiaries outside of the U.S.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in millions) 2022 2021

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Financing activities (204.8) 168.9

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

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

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

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

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

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

This increase included proceeds of $1.6 billion from the issuance of our 2029 and 2031 Senior Notes, offset by repayments of $250.0 million of our 2023 Senior Notes and $600.0 million of our 2026 Senior Notes and net borrowings of $238.4 million on our credit facilities.

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

Cash provided by financing activities also decreased due to dividends paid to shareholders of $45.8 million and payment of deferred financing costs of $25.3 million during the nine months ended September 30, 2021.

Cash Provided by (Used in) Discontinued Operations

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

Cash provided by operating activities from continuing operations decreased $0.7 million in the three months ended March 31, 2022 as compared to the same period in 2021.

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

Cash used in investing activities from continuing operations increased $34.9 million in the three months ended March 31, 2022 as compared to the same period in 2021.

The increase in cash used in investing activities was due to increased capital expenditures related to our manufacturing capacity expansion projects.

Cash used in financing activities from continuing operations increased $373.7 million in the three months ended March 31, 2022 as compared to the same period in 2021.

For the three months ended March 31, 2022, we had net borrowings of $312.1 million on our credit facilities as compared to net borrowings of $504.8 million, which included proceeds of $800.0 million from the issuance of our 2029 Senior Notes partially offset by net repayments under our credit facilities and 2023 Senior Notes in 2021.

During the three months ended March 31, 2022 and 2021, we repurchased $494.8 million and $313.1 million, respectively, of our common stock.

Cash Used in Discontinued Operations

Net cash used in operating, investing and financing activities from discontinued operations for the periods ended March 31, 2022 and 2021 was not material.

Capital Expenditures

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

Capital expenditures totaled $60.3 million and $23.5 million for the three months ended March 31, 2022 and 2021, respectively.

We currently expect our 2022 capital expenditures to be approximately $250 million to $280 million, which includes manufacturing capacity expansion and investments in our other growth initiatives.

Our total debt increased to $2,361.7 million as of September 30, 2021 from $1,370.3 million as of December 31, 2020.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our total debt increased to $2,674.7 million as of March 31, 2022 from $2,353.2 million as of December 31, 2021.

Total availability under our revolving senior secured credit facility was $561.0 million as of March 31, 2022, which matures in 2024.

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

As of March 31, 2022, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 2.25 times.

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

As of September 30, 2021, we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances.

As of March 31, 2022, we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances.

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

The 2019 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, remains below 3.50 times.

In addition, these agreements permit

limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.50 times.

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

The limit on restricted payments under the 2019 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted.

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

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

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

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

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

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

During the three months ended March 31, 2022, we repurchased 12.2 million shares under our share repurchase program for $449.2 million.

As of March 31, 2022, we had $951.5 million remaining under our share repurchase authorization.

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

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Future Liquidity Sources and Uses

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

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

As of March 31, 2022, we had $677.3 million of liquidity, including $116.3 million of cash on hand and $561.0 million available under our revolving senior secured credit facility.

In addition, we expect to generate cash flow from operations in the full year 2022.

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

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

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

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

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

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 1.68 times for the trailing twelve months ended September 30, 2021.

The Board of Directors declared a dividend of $0.10 per share for the second quarter of 2022.

The dividend is payable on May 26, 2022 to shareholders of record as of May 12, 2022.

As of March 31, 2022, we had $2,674.7 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,559.7 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.25 times for the trailing twelve months ended March 31, 2022.

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

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

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

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Non-GAAP Financial Information

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

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

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

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

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended September 30, 2021 and 2020:

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended March 31, 2022 and 2021:

Three Months Ended

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

(in millions, except per share amounts) March 31, 2022 March 31, 2021

Net income $ 130.7 $ 130.5

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

Acquisition-related costs (2)

Aspirational plan amortization (3)

Loss from discontinued operations, net of tax (1)

Loss on extinguishment of debt (2)

Accounting standard adoption (5)

Facility expansion costs (6)

Restructuring costs (7)

Tax adjustments (3)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Three Months Ended September 30, 2021

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

The following table sets forth our reported gross profit and reported operating income (expense) for the three months ended March 31, 2022.

We had no adjustments to gross profit or operating income (expense) for the three months ended March 31, 2022.

Three Months Ended March 31, 2022

(in millions, except percentages) Consolidated

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Operating income (expense) $ 188.6 15.2 % $ 155.4 16.7 % $ 66.8 21.7 % $ (33.6)

Acquisition-related costs (1)

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

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

Three Months Ended September 30, 2020

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

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

Three Months Ended March 31, 2021

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

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

Facility expansion costs (2)

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

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

Aspirational plan amortization (3)

45.2 — — 45.2

Accounting standard adoption (4)

Facility expansion costs (2)

Restructuring costs (5)

Total adjustments 47.0 1.4 0.4 45.2

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

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

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

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

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

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

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

EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash

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• Total debt, net to consolidated indebtedness less netted cash

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

The 2019 Credit Agreement provides the definition of adjusted EBITDA.

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

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the three months ended September 30, 2021 and 2020:

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the three months ended March 31, 2022 and 2021:

Three Months Ended

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

(in millions) March 31, 2022 March 31, 2021

Net income $ 130.7 $ 130.5

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Depreciation and amortization 44.8 41.8

Aspirational plan amortization (2)

EBITDA $ 234.5 $ 230.1

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

Acquisition-related costs (4)

Accounting standard adoption (5)

Facility expansion costs (6)

Restructuring costs (7)

Loss from discontinued operations, net of tax (2)

Adjusted EBITDA $ 234.5 $ 230.3

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

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

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

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

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

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

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

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

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

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

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

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and adjusted EBITDA for the trailing twelve months ended March 31, 2022:

Trailing Twelve Months Ended

(in millions) September 30, 2021

(in millions) March 31, 2022

Net income $ 624.7

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Depreciation and amortization 179.6

Aspirational plan amortization (3)

EBITDA $ 1,093.1

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Acquisition-related costs (5)

Aspirational plan employer costs (7)

Other income (8)

Adjusted EBITDA $ 1,138.5

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Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 2.25 times

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

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

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

(1) In the trailing twelve months ended March 31, 2022, we incurred $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes.

(2) In the trailing twelve months ended March 31, 2022, we recognized $18.0 million of loss on extinguishment of debt associated with the redemption of the 2026 and 2023 Senior Notes.

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

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

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

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

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

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

For covenant compliance purposes, we included $38.7 million of EBITDA from this subsidiary for the four months prior to acquisition in our calculation of adjusted EBITDA for the trailing twelve months ended March 31, 2022.

(5) In the trailing twelve months ended March 31, 2022, we recognized $6.2 million of acquisition-related costs, primarily related to legal and professional fees and stamp taxes associated with the acquisition of Dreams.

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

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

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

For the trailing twelve months ended March 31, 2022, our adjustments to net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2019 Credit Agreement.

The ratio of consolidated indebtedness less netted cash to adjusted EBITDA is 2.25 times for the trailing twelve months ended March 31, 2022.

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

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

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of March 31, 2022.

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

(in millions) September 30, 2021

(in millions) March 31, 2022

Total debt, net $ 2,651.3

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis