SOMNIGROUP INTERNATIONAL INC. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the 2021 Annual Report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in ITEM 7 of Part II of the 2021 Annual Report, and the accompanying Condensed Consolidated Financial Statements and notes thereto included in this Report. Unless otherwise noted, all of the financial information in this Report is consolidated financial information for the Company. The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" elsewhere in this Report, in the 2021 Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2021 Annual Report. Our actual results may differ materially from those contained in any forward-looking statements. In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and six months ended June 30, 2022, including the following topics: • an overview of our business and strategy, • results of operations, including our net sales and costs in the periods presented as well as changes between periods; • expected sources of liquidity for future operations; and • our use of certain non-GAAP financial measures. Business Overview General We are committed to improving the sleep of more people, every night, all around the world. 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. We operate in two segments: North America and International. These segments are strategic business units that are managed separately based on geography. 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 12, "Business Segment Information," included in Part I, 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. We distribute through two channels in each operating business segment: Wholesale and Direct. Our Wholesale channel consists of third-party retailers, including third-party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, online and call centers. General Business and Economic Conditions 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. Over the last decade, consumers have made the connection between a good night's sleep and overall health and wellness. As consumers make this connection they are willing to invest more in their bedding purchases, which positions us well for long-term growth. 20 Table of Contents 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. The war has introduced elements of risk into the supply chain and is affecting global consumer confidence. While we have taken actions that we believe have largely mitigated our broader supply chain risk, the decline in consumer confidence is negatively impacting our order trends, which we expect to continue. In the second quarter of 2022, we implemented our global enterprise resource planning ("ERP") system at all Sealy domestic manufacturing facilities. This transition unfavorably impacted our results for the Sealy business in our North America segment, which we expect to improve in the second half of 2022. The implementation of our common ERP system is expected to drive long-term efficiencies for our global operations, enhance cybersecurity, facilitate customer communications regarding order status and improve our direct-to-consumer capabilities. The COVID-19 global pandemic continues to impact our global operations as variants appear in the markets in which we operate. The recent COVID-19 variant in China and the resulting government mandated lockdowns may negatively impact 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, we believe the many actions we have taken to further insulate our supply chain have largely mitigated their impact. Product Launches In the second quarter of 2022, we completed the rollout of our North American Sealy portfolio featuring new models in our Posturepedic Plus TM , Posturepedic® and Essentials product lines. We also launched our Sealy Naturals eco-friendly mattress collection designed with sustainability and environmental preservation in mind. In the fourth quarter of 2022, we expect to launch a complete refresh of our North American Stearns & Foster® portfolio, 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 2023, we plan to introduce a new line of Tempur® Breeze products, along with a new line of adjustable bases with incremental consumer-focused features and benefits in our North America segment. In our International segment, we plan 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. Our global 2022 marketing plan is to 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 $49.5 million of cash acquired. The transaction was funded using cash on hand and bank financing. 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. 21 Table of Contents Results of Operations A summary of our results for the three months ended June 30, 2022 include: • Total net sales increased 3.6% to $1,211.0 million as compared to $1,169.1 million in the second quarter of 2021. On a constant currency basis, which is a non-GAAP financial measure, total net sales increased 5.1%, with a decrease of 4.6% in the North America business segment and an increase of 68.2% in the International business segment, primarily driven by the acquisition of Dreams in August 2021. • Gross margin was 41.0% as compared to 44.3% in the second quarter 2021. Adjusted gross margin, which is a non-GAAP financial measure, was 41.7% in the second quarter of 2022. There were no adjustments to gross margin in the second quarter of 2021. • Operating income was $143.9 million as compared to $223.3 million in the second quarter 2021. Adjusted operating income, which is a non-GAAP financial measure, was $159.9 million as compared to $227.2 million in the second quarter of 2021. • Net income was $90.6 million as compared to $140.8 million in the second quarter 2021. Adjusted net income, which is a non-GAAP financial measure, was $103.2 million as compared to $161.5 million in the second quarter of 2021. • EBITDA, which is a non-GAAP financial measure, was $186.8 million as compared to $266.1 million in the second quarter 2021. Adjusted EBITDA, which is a non-GAAP financial measure, was $203.4 million as compared to $270.3 million in the second quarter of 2021. • Earnings per diluted share ("EPS") was $0.51 as compared to $0.69 in the second quarter 2021. Adjusted EPS, which is a non-GAAP financial measure, was $0.58 as compared to $0.79 in the second quarter of 2021. 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." We may refer to net sales or earnings or other historical financial information on a "constant currency basis," which is a non-GAAP financial measure. These references to constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates. To provide information on a constant currency basis, the applicable financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior corresponding period's currency conversion rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under GAAP, and it is not intended as an alternative to GAAP measures. Refer to Part I, ITEM 3 of this Report for a discussion of our foreign currency exchange rate risk. 22 Table of Contents THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 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 June 30, (in millions, except percentages and per share amounts) 2022 2021 Net sales $ 1,211.0 100.0 % $ 1,169.1 100.0 % Cost of sales 714.5 59.0 650.9 55.7 Gross profit 496.5 41.0 518.2 44.3 Selling and marketing expenses 252.9 20.9 216.8 18.5 General, administrative and other expenses 102.3 8.4 85.1 7.3 Equity income in earnings of unconsolidated affiliates (2.6) (0.2) (7.0) (0.6) Operating income 143.9 11.9 223.3 19.1 Other expense, net: Interest expense, net 23.7 2.0 20.0 1.7 Loss on extinguishment of debt — — 18.0 1.5 Other expense (income), net 0.7 0.1 (0.1) — Total other expense, net 24.4 2.0 37.9 3.2 Income from continuing operations before income taxes 119.5 9.9 185.4 15.9 Income tax provision (28.3) (2.3) (44.7) (3.8) Income from continuing operations 91.2 7.4 140.7 12.0 Loss from discontinued operations, net of tax — — (0.3) — Net income before non-controlling interests 91.2 7.4 140.4 12.0 Less: Net income (loss) attributable to non-controlling interests 0.6 — (0.4) — Net income attributable to Tempur Sealy International, Inc. $ 90.6 7.5 % $ 140.8 12.0 % Earnings per common share: Basic $ 0.52 $ 0.72 Diluted $ 0.51 $ 0.69 Weighted average common shares outstanding: Basic 174.1 197.0 Diluted 178.8 204.1 NET SALES Three Months Ended June 30, 2022 2021 2022 2021 2022 2021 (in millions) Consolidated North America International Net sales by channel Wholesale $ 939.1 $ 1,005.4 $ 847.8 $ 890.8 $ 91.3 $ 114.6 Direct 271.9 163.7 116.9 123.0 155.0 40.7 Total net sales $ 1,211.0 $ 1,169.1 $ 964.7 $ 1,013.8 $ 246.3 $ 155.3 23 Table of Contents Net sales increased 3.6%, and on a constant currency basis increased 5.1%. The change in net sales was driven by the following: • North America net sales decreased $49.1 million, or 4.8%, primarily due to declining consumer confidence in the U.S., pandemic and geopolitical related disruptions and the unfavorable impact of our ERP system transition. On a constant currency basis, North America net sales decreased 4.6%. Net sales in the Wholesale channel decreased $43.0 million, or 4.8%, to $847.8 million, as compared to second quarter of 2021. Net sales in the Direct channel decreased $6.1 million, or 5.0%, to $116.9 million, as compared to the second quarter of 2021. • International net sales increased $91.0 million, or 58.6%. On a constant currency basis, International net sales increased 68.2%. Net sales in the Wholesale channel decreased 11.0% on a constant currency basis. Net sales in the Direct channel increased 291.2% on a constant currency basis, primarily driven by the acquisition of Dreams in August 2021. GROSS PROFIT Three Months Ended June 30, 2022 2021 (in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change North America $ 365.8 37.9 % $ 425.4 42.0 % (4.1) % International 130.7 53.1 % 92.8 59.8 % (6.7) % Consolidated gross margin $ 496.5 41.0 % $ 518.2 44.3 % (3.3) % Costs associated with net sales are recorded in cost of sales and include the costs of producing, shipping, warehousing, receiving and inspecting goods during the period, as well as depreciation and amortization of long-lived assets used in the manufacturing process. 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. Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes; the cost of raw materials; operational efficiencies due to the utilization in our manufacturing facilities; product, brand, channel and country mix; foreign exchange fluctuations; volume incentives offered to certain retail accounts; participation in our retail cooperative advertising programs; and costs associated with new product introductions. Future changes in raw material prices could have a significant impact on our gross margin. Our margins are also impacted by the growth in our Wholesale channel as sales in our Wholesale channel are at wholesale prices whereas sales in our Direct channel are at retail prices. Gross margin declined 330 basis points. The primary drivers of changes in gross margin by segment are discussed below: • North America gross margin declined 410 basis points. The decline in gross margin was driven by operational investments to service our customers of 370 basis points and pricing increases to customers without a margin benefit 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. These declines were partially offset by favorable mix. Additionally, we incurred $5.4 million of manufacturing facility ERP system transition costs and $2.5 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., which contributed to the decline in gross margin. • International gross margin declined 670 basis points. The decline in gross margin was primarily driven by the acquisition of Dreams of 280 basis points, unfavorable mix of 220 basis points, and price increases to customers without a margin benefit of 140 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. 24 Table of Contents 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. General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs. Three Months Ended June 30, 2022 2021 2022 2021 2022 2021 2022 2021 (in millions) Consolidated North America International Corporate Operating expenses: Advertising expenses $ 119.1 $ 108.0 $ 104.7 $ 97.1 $ 14.4 $ 10.9 $ — $ — Other selling and marketing expenses 133.8 108.8 68.8 70.0 59.9 32.4 5.1 6.4 General, administrative and other expenses 102.3 85.1 46.2 40.9 23.2 13.1 32.9 31.1 Total operating expenses $ 355.2 $ 301.9 $ 219.7 $ 208.0 $ 97.5 $ 56.4 $ 38.0 $ 37.5 Operating expenses increased $53.3 million, or 17.7%, and increased 350 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 $11.7 million, or 5.6%, and increased 230 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by Stearns & Foster® advertising investments ahead of the expected fourth quarter product launch. Additionally, we incurred $2.8 million of professional fees related to the manufacturing facility ERP system transition and $1.8 million of restructuring costs associated with headcount reductions. • International operating expenses increased $41.1 million, or 72.9%, and increased 330 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by the acquisition of Dreams. • Corporate operating expenses increased $0.5 million, or 1.3%, primarily driven by $2.1 million of restructuring costs associated with headcount reductions and $1.2 million of expenses related to manufacturing facility ERP system transition, offset by decreased variable compensation expense. Research and development expenses for the three months ended June 30, 2022 were $7.7 million compared to $6.7 million for the three months ended June 30, 2021, an increase of $1.0 million, or 14.9%. OPERATING INCOME Three Months Ended June 30, 2022 2021 (in millions, except percentages) Operating Income Operating Margin Operating Income Operating Margin Margin Change North America $ 146.1 15.1 % $ 217.4 21.4 % (6.3) % International 35.8 14.5 % 43.4 27.9 % (13.4) % 181.9 260.8 Corporate expenses (38.0) (37.5) Total operating income $ 143.9 11.9 % $ 223.3 19.1 % (7.2) % Operating income decreased $79.4 million and operating margin declined 720 basis points. The primary drivers of changes in operating income and operating margin by segment are discussed below: 25 Table of Contents • North America operating income decreased $71.3 million and operating margin declined 630 basis points. The decline in operating margin was primarily driven by the decline in gross margin of 410 basis points and Stearns & Foster® advertising investments ahead of the expected fourth quarter product launch of 180 basis points. Additionally, we incurred $8.2 million of expenses related to manufacturing facility ERP system transition costs, $2.7 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S. and $1.8 million of restructuring costs associated with headcount reductions. • International operating income decreased $7.6 million and operating margin declined 1,340 basis points. The decline in operating margin was driven by the decline in gross margin of 670 basis points, the decline in Asia joint venture performance due to COVID-19 related shutdowns of 340 basis points and operating expense deleverage of 330 basis points. • Corporate operating expenses increased $0.5 million, which negatively impacted our consolidated operating margin. The increase in operating expenses was primarily driven by $2.1 million of restructuring costs associated with headcount reductions and $1.2 million of expenses related to manufacturing facility ERP system transition, offset by decreased variable compensation expense. INTEREST EXPENSE, NET Three Months Ended June 30, (in millions, except percentages) 2022 2021 % Change Interest expense, net $ 23.7 $ 20.0 18.5 % Interest expense, net, increased $3.7 million, or 18.5%. The increase in interest expense, net, was primarily driven by increased average levels of outstanding debt. LOSS ON EXTINGUISHMENT OF DEBT On March 25, 2021, we issued our 2029 Senior Notes. During the second quarter of 2021, we used the net proceeds from the 2029 Senior Notes to primarily redeem in full our $600.0 million 2026 Senior Notes. As a result of the redemption, we recognized $18.0 million of loss on extinguishment of debt, which included a prepayment premium of $16.5 million and the write-off of $1.5 million of deferred financing costs. INCOME TAX PROVISION Three Months Ended June 30, (in millions, except percentages) 2022 2021 % Change Income tax provision $ 28.3 $ 44.7 (36.7) % Effective tax rate 23.7 % 24.1 % 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 decreased $16.4 million due to a decrease in income before income taxes. Our effective tax rate for the three months ended June 30, 2022 as compared to the same prior year period decreased by 40 basis points. The effective tax rate as compared to the U.S. federal statutory rate for the three months ended June 30, 2022 included the net favorable impact of discrete items. The effective tax rate as compared to the U.S. federal statutory tax rate for the three months ended June 30, 2021 included the favorable impact of the elimination of global intangible low-taxed income ("GILTI") from U.S. taxable income, the favorable impact of the deductibility of stock compensation in the U.S. and included a net unfavorable impact of other discrete items. 26 Table of Contents SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 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: Six Months Ended June 30, (in millions, except percentages and per share amounts) 2022 2021 Net sales $ 2,450.5 100.0 % $ 2,212.9 100.0 % Cost of sales 1,431.2 58.4 1,235.8 55.8 Gross profit 1,019.3 41.6 977.1 44.2 Selling and marketing expenses 496.4 20.3 414.5 18.7 General, administrative and other expenses 199.9 8.2 164.6 7.4 Equity income in earnings of unconsolidated affiliates (9.5) (0.4) (13.7) (0.6) Operating income 332.5 13.6 411.7 18.6 Other expense, net: Interest expense, net 44.6 1.8 32.3 1.5 Loss on extinguishment of debt — — 23.0 1.0 Other income, net (0.6) — (0.4) — Total other expense, net 44.0 1.8 54.9 2.5 Income from continuing operations before income taxes 288.5 11.8 356.8 16.1 Income tax provision (66.4) (2.7) (85.2) (3.9) Income from continuing operations 222.1 9.1 271.6 12.3 Income from discontinued operations, net of tax — — (0.5) — Net income before non-controlling interests 222.1 9.1 271.1 12.3 Less: Net income (loss) attributable to non-controlling interests 0.8 — (0.2) — Net income attributable to Tempur Sealy International, Inc. $ 221.3 9.0 % $ 271.3 12.3 % Earnings per common share: Basic $ 1.24 $ 1.36 Diluted $ 1.20 $ 1.32 Weighted average common shares outstanding: Basic 178.3 200.4 Diluted 183.7 204.9 27 Table of Contents NET SALES Six Months Ended June 30, 2022 2021 2022 2021 2022 2021 (in millions) Consolidated North America International Net sales by channel Wholesale $ 1,863.2 $ 1,886.8 $ 1,659.1 $ 1,656.3 $ 204.1 $ 230.5 Direct 587.3 326.1 237.0 240.8 350.3 85.3 Total net sales $ 2,450.5 $ 2,212.9 $ 1,896.1 $ 1,897.1 $ 554.4 $ 315.8 Net sales increased 10.7%, and on a constant currency basis increased 12.0%. The change in net sales was driven by the following: • North America net sales decreased $1.0 million, or 0.1%, primarily due to declining consumer confidence in the U.S., pandemic and geopolitical related disruptions and the unfavorable impact of our ERP system transition. Net sales in the Wholesale channel increased $2.8 million, or 0.2%. Net sales in the Direct channel decreased $3.8 million, or 1.6%, compared to the six months ended June 30, 2021. • International net sales increased $238.6 million, or 75.6%. On a constant currency basis, International net sales increased 83.7%. Net sales in the Wholesale channel decreased 3.6% on a constant currency basis. Net sales in the Direct channel increased 319.5% on a constant currency basis, primarily driven by the acquisition of Dreams. GROSS PROFIT Six Months Ended June 30, 2022 2021 (in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change North America $ 718.2 37.9 % $ 789.3 41.6 % (3.7) % International 301.1 54.3 % 187.8 59.5 % (5.2) % Consolidated gross margin $ 1,019.3 41.6 % $ 977.1 44.2 % (2.6) % Costs associated with net sales are recorded in cost of sales and include the costs of producing, shipping, warehousing, receiving and inspecting goods during the period, as well as depreciation and amortization of long-lived assets used in the manufacturing process. Gross margin declined 260 basis points. The primary drivers of changes in gross margin by segment are discussed below: • North America gross margin declined 370 basis points. The decline in gross margin was primarily driven by operational investments to service our customers of 220 basis and price increases to customers without a margin benefit of 200 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 of 80 basis points. Additionally, we incurred $5.4 million of manufacturing facility ERP system transition costs and $2.5 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., which contributed to the decline in gross margin. • International gross margin declined 520 basis points. The decline in gross margin was driven by unfavorable mix of 260 basis points, the acquisition of Dreams of 230 basis points, and price increases to customers without a margin benefit of 130 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. These declines were partially offset by increased royalties of 160 basis points. 28 Table of Contents 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. 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. Six Months Ended June 30, 2022 2021 2022 2021 2022 2021 2022 2021 (in millions) Consolidated North America International Corporate Operating expenses: Advertising expenses $ 222.3 $ 198.9 $ 185.6 $ 176.5 $ 36.7 $ 22.4 $ — $ — Other selling and marketing expenses 274.1 215.6 141.2 138.8 122.9 64.0 10.0 12.8 General, administrative and other expenses 199.9 164.6 89.9 83.2 48.4 25.5 61.6 55.9 Total operating expenses $ 696.3 $ 579.1 $ 416.7 $ 398.5 $ 208.0 $ 111.9 $ 71.6 $ 68.7 Operating expenses increased $117.2 million, or 20.2%, and increased 220 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 $18.2 million, or 4.6%, and increased 100 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising and other selling and marketing investments. Additionally, we incurred $2.8 million of professional fees related to the manufacturing facility ERP system transition and $1.8 million of restructuring costs associated with headcount reductions. • International operating expenses increased $96.1 million, or 85.9%, and increased 210 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by other selling and marketing investments, as well as the acquisition of Dreams. • Corporate operating expenses increased $2.9 million, or 4.2%. The increase in operating expenses was primarily driven by $2.1 million of restructuring costs associated with headcount reductions and $1.2 million of expenses related to manufacturing facility ERP system transition, offset by decreased variable compensation expense. Research and development expenses were $15.5 million for the six months ended June 30, 2022 as compared to $13.2 million for the six months ended June 30, 2021, an increase of $2.3 million, or 17.4%. OPERATING INCOME Six Months Ended June 30, 2022 2021 (in millions, except percentages) Operating Income Operating Margin Operating Income Operating Margin Margin Change North America $ 301.5 15.9 % $ 390.8 20.6 % (4.7) % International 102.6 18.5 % 89.6 28.4 % (9.9) % 404.1 480.4 Corporate expenses (71.6) (68.7) Total operating income $ 332.5 13.6 % $ 411.7 18.6 % (5.0) % Operating income decreased $79.2 million and operating margin declined 500 basis points. The primary drivers of changes in operating income and operating margin by segment are discussed below: 29 Table of Contents • North America operating income decreased $89.3 million and operating margin declined 470 basis points. The decrease in operating margin was primarily driven by the decline in gross margin of 370 basis points and operating expense deleverage of 60 basis points. Additionally, we incurred $8.2 million of expenses related to manufacturing facility ERP system transition, $2.7 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S. and $1.8 million of restructuring costs associated with headcount reductions. • International operating income increased $13.0 million and operating margin declined 990 basis points. The decrease in operating margin was primarily driven by the decline in gross margin of 520 basis points, the decline in Asia joint venture performance due to COVID-19 related shutdowns performance of 260 basis points and operating expense deleverage of 210 basis points. • Corporate operating expenses increased $2.9 million, which negatively impacted our consolidated operating margin by 10 basis points. The increase in operating expenses was primarily driven by $2.1 million of restructuring costs associated with headcount reductions and $1.2 million of expenses related to manufacturing facility ERP system transition, offset by decreased variable compensation expense. INTEREST EXPENSE, NET Six Months Ended June 30, (in millions, except percentages) 2022 2021 % Change Interest expense, net $ 44.6 $ 32.3 38.1 % Interest expense, net, increased $12.3 million, or 38.1%. The increase in interest expense, net, was primarily driven by increased average levels of outstanding debt. 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. INCOME TAX PROVISION Six Months Ended June 30, (in millions, except percentages) 2022 2021 % Change Income tax provision $ 66.4 $ 85.2 (22.1) % Effective tax rate 23.0 % 23.9 % Our income tax provision decreased $18.8 million due to a decrease in income before income taxes. Our effective tax rate for the six months ended June 30, 2022 as compared to the same prior year period decreased 90 basis points. The effective tax rate as compared to the U.S. federal statutory rate for the six months ended June 30, 2022 included the net favorable impact of the deductibility of stock compensation in the U.S. and included a net unfavorable impact of other discrete items. The effective tax rate as compared to the U.S. federal statutory rate for the for the six months ended June 30, 2021 included the favorable impact of the elimination of global intangible low-taxed income ("GILTI") from U.S. taxable income, the favorable impact of the deductibility of stock compensation in the U.S. and included a net unfavorable impact of other discrete items. 30 Table of Contents Liquidity and Capital Resources Liquidity Our principal sources of funds are cash flows from operations, supplemented with borrowings in the capital markets and made pursuant to our credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, acquisitions, payments of dividends to our shareholders, capital expenditures and working capital needs. As of June 30, 2022, we had net working capital of $248.1 million, including cash and cash equivalents of $110.3 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 June 30, 2022, total cash and cash equivalents were $110.3 million, of which $53.1 million was held in the U.S. and $57.2 million was held by subsidiaries outside of the U.S. The amount of cash and cash equivalents held by subsidiaries outside of the U.S. and not readily convertible into the U.S. Dollar or other major foreign currencies is not material to our overall liquidity or financial position. Cash Provided by (Used in) Continuing Operations The table below presents net cash provided by (used in) operating, investing and financing activities from continuing operations for the periods indicated below: Six Months Ended June 30, (in millions) 2022 2021 Net cash provided by (used in) continuing operations: Operating activities $ 66.5 $ 313.0 Investing activities (129.1) (57.9) Financing activities (110.2) (260.5) Cash provided by operating activities from continuing operations decreased $246.5 million in the six months ended June 30, 2022 as compared to the same period in 2021. The decrease in cash provided by operating activities was driven by increased inventory investments, as well as the reduction of net income. Our inventory increased significantly in the first half of 2022 as we increased our safety stock of Tempur-Pedic® finished goods, adjustable bases and raw materials to better support our customers. Cash used in investing activities from continuing operations increased $71.2 million in the six months ended June 30, 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 decreased $150.3 million in the six months ended June 30, 2022 as compared to the same period in 2021. For the six months ended June 30, 2022, we had net borrowings of $546.2 million on our credit facilities as compared to net borrowings of $153.8 million in the same period in 2021, 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 six months ended June 30, 2022 and 2021, we repurchased $612.0 million and $374.4 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 June 30, 2022 and 2021 was not material. Capital Expenditures Capital expenditures totaled $130.2 million and $52.6 million for the six months ended June 30, 2022 and 2021, respectively. We currently expect our 2022 capital expenditures to be over $250 million, which includes manufacturing capacity expansion and investments in our other growth initiatives. Indebtedness Our total debt increased to $2,905.1 million as of June 30, 2022 from $2,353.2 million as of December 31, 2021. Total availability under our revolving senior secured credit facility was $295.3 million as of June 30, 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 June 30, 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 2.67 times. This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio as set forth in the 2019 Credit Agreement, which limits this ratio to 5.00 times. As of June 30, 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. The limit on restricted payments under the 2019 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted. For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated indebtedness less netted cash to adjusted EBITDA calculated in accordance with the 2019 Credit Agreement. Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 2019 Credit Agreement are non-GAAP financial measures and do not purport to be alternatives to net income as a measure of operating performance or total debt. Share Repurchase Program Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock. During the six months ended June 30, 2022, we repurchased 16.6 million shares under our share repurchase program for $566.2 million. As of June 30, 2022, we had $834.5 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. These repurchases may be funded by operating cash flows and/or borrowings under our debt arrangements. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program is subject to certain limitations under our debt agreements. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," in the 2021 Annual Report. Please also refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this Report. Future Liquidity Sources and Uses As of June 30, 2022, we had $405.6 million of liquidity, including $110.3 million of cash on hand and $295.3 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. Our capital allocation strategy follows a balanced approach focused on supporting the business, returning shareholder value through share repurchases and quarterly dividends as well as opportunistic and strategic acquisition opportunities that enhance our global competitiveness. Additionally, we have taken capital structure actions to optimize our balance sheet through extending the maturities of our long-term debt. The Board of Directors declared a dividend of $0.10 per share for the third quarter of 2022. The dividend is payable on August 25, 2022 to shareholders of record as of August 11, 2022. As of June 30, 2022, we had $2,905.1 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,795.9 million. Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.67 times for the trailing twelve months ended June 30, 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. Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Similarly, our cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements and debt service obligations. For information regarding the impact of COVID-19 on our business, including our liquidity and capital resources, please refer to "Risk Factors" contained in ITEM 1A of Part I of the 2021 Annual Report. 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, 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. The adjustments we make to derive the non-GAAP financial measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP financial measure, but which we do not consider to be the fundamental attributes or primary drivers of our business. We believe that exclusion of these items assists in providing a more complete understanding of our underlying results from continuing operations and trends, and we use these measures along with the corresponding GAAP financial measures to manage our business, to evaluate our consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. These non-GAAP financial measures should be considered supplemental in nature and should not be construed as more significant than comparable financial measures defined by GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. For more information about these non-GAAP financial measures and a reconciliation to the nearest GAAP financial measure, please refer to the reconciliations on the following pages. Adjusted Net Income and Adjusted EPS A reconciliation of reported net income to adjusted net income and the calculation of adjusted EPS is provided below. 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. 31 Table of Contents The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended June 30, 2022 and 2021: Three Months Ended (in millions, except per share amounts) June 30, 2022 June 30, 2021 Net income $ 90.6 $ 140.8 ERP system transition (1) 9.4 — Restructuring costs (2) 4.1 — Operational start-up costs (3) 3.1 — Loss on extinguishment of debt (4) — 18.0 Overlapping interest expense (5) — 5.2 Acquisition-related costs (6) — 3.9 Loss from discontinued operations, net of tax (7) — 0.3 Adjusted income tax provision (8) (4.0) (6.7) Adjusted net income $ 103.2 $ 161.5 Adjusted earnings per common share, diluted $ 0.58 $ 0.79 Diluted shares outstanding 178.8 204.1 (1) In the second quarter of 2022, we recorded $9.4 million of charges related to the transition of our ERP system. Cost of sales included $5.4 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel. Operating expenses included $4.0 million, primarily related to professional fees. (2) In the second quarter of 2022, we recorded $4.1 million of restructuring costs primarily associated with headcount reductions, including $0.2 million of other expense. (3) In the second quarter of 2022, we incurred $3.1 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including $0.4 million of other expense. Cost of sales and operating expenses included personnel and facility related costs of $2.5 million and $0.2 million, respectively. (4) In the second quarter of 2021, we recognized $18.0 million of loss on extinguishment of debt associated with the redemption of the 2026 Senior Notes. (5) 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. (6) In the second quarter of 2021, we recognized $3.9 million of acquisition related costs, primarily related to legal and professional fees associated the acquisition of Dreams. (7) 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. (8) Adjusted income tax provision represents the tax effects associated with the aforementioned items. 32 Table of Contents Adjusted Gross Profit, Adjusted Gross Margin, Adjusted Operating Income (Expense) and Adjusted Operating Margin The following table sets forth the reconciliation of the Company's reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended June 30, 2022. Three Months Ended June 30, 2022 (in millions, except percentages) Consolidated Margin North America Margin International Margin Corporate Net sales $ 1,211.0 $ 964.7 $ 246.3 $ — Gross profit $ 496.5 41.0 % $ 365.8 37.9 % $ 130.7 53.1 % $ — Adjustments: ERP system transition (1) 5.4 5.4 — — Operational start-up costs (3) 2.5 2.5 — — Total Adjustments 7.9 7.9 — — Adjusted gross profit $ 504.4 41.7 % $ 373.7 38.7 % $ 130.7 53.1 % $ — Operating income (expense) $ 143.9 11.9 % $ 146.1 15.1 % $ 35.8 14.5 % $ (38.0) Adjustments: ERP system transition (1) 9.4 8.2 — 1.2 Restructuring costs (2) 3.9 1.8 — 2.1 Operational start-up costs (3) 2.7 2.7 — — Total adjustments 16.0 12.7 — 3.3 Adjusted operating income (expense) $ 159.9 13.2 % $ 158.8 16.5 % $ 35.8 14.5 % $ (34.7) The following table sets forth the Company's reported gross profit and the reconciliation of the Company's operating income (expense) to the calculation of adjusted operating (income) expense for the three months ended June 30, 2021. The Company had no adjustments to gross profit for the three months ended June 30, 2021. Three Months Ended June 30, 2021 (in millions, except percentages) Consolidated Margin North America Margin International Margin Corporate Net sales $ 1,169.1 $ 1,013.8 $ 155.3 $ — Gross profit $ 518.2 44.3 % $ 425.4 42.0 % $ 92.8 59.8 % $ — Operating income (expense) $ 223.3 19.1 % $ 217.4 21.4 % $ 43.4 27.9 % $ (37.5) Adjustments: Acquisition-related costs (4) 3.9 — — 3.9 Adjusted operating income (expense) $ 227.2 19.4 % $ 217.4 21.4 % $ 43.4 27.9 % $ (33.6) 33 Table of Contents (1) In the second quarter of 2022, we recorded $9.4 million of charges related to the transition of our ERP system. Cost of sales included $5.4 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel. Operating expenses included $4.0 million, primarily related to professional fees. (2) In the second quarter of 2022, we recorded $4.1 million of restructuring costs primarily associated with headcount reductions, including $0.2 million of other expense. (3) In the second quarter of 2022, we incurred $3.1 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including $0.4 million of other expense. Cost of sales and operating expenses included personnel and facility related costs of $2.5 million and $0.2 million, respectively. (4) In the second quarter of 2021, we recognized $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated the acquisition of Dreams. EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash The following reconciliations are provided below: • Net income to EBITDA and adjusted EBITDA • Ratio of consolidated indebtedness less netted cash to adjusted EBITDA • Total debt, net to consolidated indebtedness less netted cash We believe that presenting these non-GAAP measures provides investors with useful information with respect to our operating performance, cash flow generation and comparisons from period to period, as well as general information about our 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 June 30, 2022 and 2021: Three Months Ended (in millions) June 30, 2022 June 30, 2021 Net income $ 90.6 $ 140.8 Interest expense, net 23.7 14.8 Overlapping interest expense (1) — 5.2 Loss on extinguishment of debt (2) — 18.0 Income taxes 28.3 44.7 Depreciation and amortization 44.2 42.6 EBITDA $ 186.8 $ 266.1 Adjustments: ERP system transition (3) $ 9.4 $ — Restructuring costs (4) 4.1 — Operational start-up costs (5) 3.1 — Acquisition-related costs (6) — 3.9 Loss from discontinued operations, net of tax (7) — 0.3 Adjusted EBITDA $ 203.4 $ 270.3 34 Table of Contents (1) In the second quarter of 2021, we incurred $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes. (2) In the second quarter of 2021, we recognized $18.0 million of loss on extinguishment of debt associated with the redemption of the 2026 Senior Notes. (3) In the second quarter of 2022, we recorded $9.4 million of charges related to the transition of our ERP system. Cost of sales included $5.4 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel. Operating expenses included $4.0 million, primarily related to professional fees. (4) In the second quarter of 2022, we recorded $4.1 million of restructuring costs primarily associated with headcount reductions, including $0.2 million of other expense. (5) In the second quarter of 2022, we incurred $3.1 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including $0.4 million of other expense. Cost of sales and operating expenses included personnel and facility related costs of $2.5 million and $0.2 million, respectively. (6) In the second quarter of 2021, we recognized $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated the acquisition of Dreams. (7) 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. 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 June 30, 2022: Trailing Twelve Months Ended (in millions) June 30, 2022 Net income $ 574.5 Interest expense, net 78.6 Income tax provision 179.5 Depreciation and amortization 181.2 EBITDA $ 1,013.8 Adjustments: Earnings from Dreams prior to acquisition (1) 15.1 ERP system transition (2) 9.4 Restructuring costs (3) 4.1 Operational start-up costs (4) 3.1 Acquisition-related costs (5) 2.3 Loss from discontinued operations, net of tax (6) 0.2 Adjusted EBITDA $ 1,048.0 Consolidated indebtedness less netted cash $ 2,795.9 Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 2.67 times 35 Table of Contents (1) 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 $15.1 million of EBITDA from this subsidiary for the one month prior to acquisition in our calculation of adjusted EBITDA for the trailing twelve months ended June 30, 2022. (2) In the second quarter of 2022, we recorded $9.4 million of charges related to the transition of our ERP system. Cost of sales included $5.4 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel. Operating expenses included $4.0 million, primarily related to professional fees. (3) In the second quarter of 2022, we recorded $4.1 million of restructuring costs primarily associated with headcount reductions, including $0.2 million of other expense. (4) In the second quarter of 2022, we incurred $3.1 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including $0.4 million of other expense. Cost of sales and operating expenses included personnel and facility related costs of $2.5 million and $0.2 million, respectively. (5) In the trailing twelve months ended June 30, 2022, we recognized $2.3 million of acquisition-related stamp taxes associated with the acquisition of Dreams. (6) 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. 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 June 30, 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 2.67 times for the trailing twelve months ended June 30, 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 June 30, 2022. "Consolidated Indebtedness" and "Netted Cash" are terms used in the 2019 Credit Agreement for purposes of certain financial covenants. (in millions) June 30, 2022 Total debt, net $ 2,882.6 Plus: Deferred financing costs (1) 22.5 Consolidated indebtedness 2,905.1 Less: Netted cash (2) 109.2 Consolidated indebtedness less netted cash $ 2,795.9 (1) We present deferred financing costs as a direct reduction from the carrying amount of the related debt in the Condensed Consolidated Balance Sheets. For purposes of determining total debt for financial covenant purposes, we have added these costs back to total debt, net as calculated per the Condensed Consolidated Balance Sheets. (2) Netted cash includes cash and cash equivalents for domestic and foreign subsidiaries designated as restricted subsidiaries in the 2019 Credit Agreement. Critical Accounting Policies and Estimates For a discussion of our critical accounting policies and estimates, please refer to ITEM 7 under Part II, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in the 2021 Annual Report. There have been no material changes to our critical accounting policies and estimates in 2022.