What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-03 · 165 added, 186 removed, 389 unchanged (47% of the section changed)

5 unchanged sentences

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

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and six months ended June 30, 2022, including the following topics:

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and nine months ended September 30, 2022, including the following topics:

• an overview of our business and strategy,

28 unchanged sentences

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.

In the near term, we continue to see impacts on global consumer behavior from macroeconomic pressures, particularly from strong inflation and a sense of economic uncertainty.

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.

While we have taken actions that we believe have largely mitigated our broader supply chain risk, the decline in consumer confidence has impacted 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.

This transition unfavorably impacted our results for the Sealy business in our North America segment for the first nine months of 2022, which we expect to improve in the fourth quarter.

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.

COVID-19 variants in our Asian markets 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.

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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 the fourth quarter of 2022, we began a rollout of a complete refresh of our North American Stearns & Foster® portfolio, and launched the Sealy FlexGrid™ mattress line 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.

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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.

A summary of our results for the three months ended September 30, 2022 include:

• Total net sales decreased 5.5% to $1,283.3 million as compared to $1,358.3 million in the third quarter of 2021.

On a constant currency basis, which is a non-GAAP financial measure, total net sales decreased 3.1%, with a decrease of 5.4% in the North America business segment and an increase of 7.4% in the International business segment.

• Gross margin was 42.2% as compared to 42.5% in the third quarter of 2021.

Adjusted gross margin, which is a non-GAAP financial measure, was 42.5% in the third quarter of 2022.

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

• Operating income decreased 19.5% to $201.0 million as compared to $249.8 million in the third quarter of 2021.

Adjusted operating income, which is a non-GAAP financial measure, was $206.7 million as compared to $252.1 million in the third quarter of 2021.

• Net income decreased 25.2% to $132.7 million as compared to $177.4 million in the third quarter of 2021.

Adjusted net income, which is a non-GAAP financial measure, decreased 23.3% to $137.8 million as compared to $179.6 million in the third quarter of 2021.

• EBITDA, which is a non-GAAP financial measure, decreased 16.9% to $245.4 million as compared to $295.2 million in the third quarter of 2021.

Adjusted EBITDA, which is a non-GAAP financial measure, decreased 15.4% to $251.9 million as compared to $297.6 million in the third quarter of 2021.

• Earnings per diluted share ("EPS") decreased 13.8% to $0.75 as compared to $0.87 in the third quarter of 2021.

Adjusted EPS, which is a non-GAAP financial measure, decreased 11.4% to $0.78 as compared to $0.88 in the third 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."

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

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, 2021

THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THE

THREE MONTHS ENDED SEPTEMBER 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,

Three Months Ended September 30,

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

8 unchanged sentences

Interest expense, net 26.8 2.1 13.5 1.0

Loss on extinguishment of debt — — 18.0 1.5

Other expense (income), net 0.7 0.1 (0.1) —

Other (income) expense, net (0.9) (0.1) 0.1 —

Total other expense, net 25.9 2.0 13.6 1.0

4 unchanged sentences

Net income before non-controlling interests 133.2 10.3 177.4 13.1

Net income (loss) attributable to non-controlling interests 0.6 — (0.4) —

Net income attributable to non-controlling interests 0.5 — — —

Net income attributable to Tempur Sealy International, Inc.

1 unchanged sentence

Earnings per common share:

Basic $ 0.52 $ 0.72

Diluted $ 0.51 $ 0.69

Earnings per share for continuing operations $ 0.78 $ 0.91

Loss per share for discontinued operations (0.01) —

Earnings per share $ 0.77 $ 0.91

Earnings per share for continuing operations $ 0.75 $ 0.87

Loss per share for discontinued operations — —

Earnings per share $ 0.75 $ 0.87

Weighted average common shares outstanding:

1 unchanged sentence

Diluted 177.0 203.4

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 2022 2021 2022 2021

4 unchanged sentences

Total net sales $ 1,283.3 $ 1,358.3 $ 1,057.7 $ 1,120.0 $ 225.6 $ 238.3

Net sales increased 3.6%, and on a constant currency basis increased 5.1%.

Net sales decreased 5.5%, and on a constant currency basis decreased 3.1%.

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.

• North America net sales decreased $62.3 million, or 5.6%.

On a constant currency basis, North America net sales decreased 5.4%.

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%.

Net sales in the Wholesale channel decreased $73.1 million, or 7.4%, primarily driven by macroeconomic pressures impacting U.S.

consumer behavior.

Net sales in the Direct channel increased $10.8 million, or 8.4%, primarily driven by growth in our e-commerce channel and company-owned stores.

• International net sales decreased $12.7 million, or 5.3%, primarily due to unfavorable foreign exchange.

On a constant currency basis, International net sales increased 7.4%.

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Net sales in the Direct channel increased 21.3% on a constant currency basis, primarily driven by the acquisition of Dreams in August 2021.

Three Months Ended June 30,

Three Months Ended September 30,

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

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• North America gross margin declined 10 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.

The decline in gross margin was primarily driven by operational investments to service our customers of 200 basis points.

Additionally, we incurred $2.3 million of manufacturing facility ERP system transition costs and $1.7 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.

These declines were partially offset by pricing actions to offset commodity inflation of 130 basis points and favorable brand mix of 110 basis points.

• International gross margin declined 120 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.

The decline in gross margin was primarily driven by unfavorable mix of 120 basis points and unfavorable foreign exchange.

Dreams' margin profile is lower than our historical international margins as they sell a variety of products across a range of price 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 June 30,

Three Months Ended September 30,

2022 2021 2022 2021 2022 2021 2022 2021

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• North America operating expenses increased $5.6 million, or 2.7%, and increased 160 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.

The increase in operating expenses was primarily driven by investments in advertising and expansion of our company-owned store strategy.

Additionally, we incurred $0.4 million of professional fees related to the manufacturing facility ERP system transition.

These investments were partially offset by decreased variable compensation expense.

• International operating expenses increased $6.2 million, or 7.2%, and increased 480 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%.

The increase in operating expenses was primarily driven by the acquisition of Dreams in August 2021.

Additionally, we incurred $0.6 million of restructuring costs associated with headcount reductions.

• Corporate operating expenses decreased $0.9 million, or 2.4%, primarily driven by decreased variable compensation expense.

Additionally, we incurred $0.6 million of restructuring costs associated with headcount reductions.

Research and development expenses for the three months ended September 30, 2022 were $6.6 million compared to $6.7 million for the three months ended September 30, 2021, an decrease of $0.1 million, or 1.5%.

OPERATING INCOME

Three Months Ended June 30,

Three Months Ended September 30,

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

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• North America operating income decreased $32.0 million and operating margin declined 180 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.

The decline in operating margin was primarily driven by operating expense deleverage of 160 basis points and the decline in gross margin.

• International operating income decreased $17.7 million and operating margin declined 660 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.

The decline in operating margin was driven by operating expense deleverage of 480 basis points, the decline in gross margin of 120 basis points, and the decline in Asia joint venture performance due to COVID-19 related shutdowns.

• Corporate operating expenses decreased $0.9 million, which positively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Three Months Ended June 30,

Three Months Ended September 30,

(in millions, except percentages) 2022 2021 % Change

1 unchanged sentence

Interest expense, net, increased $13.3 million, or 98.5%.

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.

The increase in interest expense, net, was primarily driven by increased average levels of outstanding debt and higher interest rates on our variable rate debt.

INCOME TAX PROVISION

Three Months Ended June 30,

Three Months Ended September 30,

(in millions, except percentages) 2022 2021 % Change

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Our income tax provision decreased $17.6 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.

Our effective tax rate for the three months ended September 30, 2022 as compared to the same prior year period declined by 140 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.

federal statutory rate for the three months ended September 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.

federal statutory tax 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.

SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO THE

SIX MONTHS ENDED JUNE 30, 2021

NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THE

NINE MONTHS ENDED SEPTEMBER 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,

Nine Months Ended September 30,

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

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Income from continuing operations 356.1 9.5 449.1 12.6

Income from discontinued operations, net of tax — — (0.5) —

Loss from discontinued operations, net of tax (0.8) — (0.6) —

Net income before non-controlling interests 355.3 9.5 448.5 12.6

3 unchanged sentences

Earnings per common share:

Basic $ 1.24 $ 1.36

Diluted $ 1.20 $ 1.32

Earnings per share for continuing operations $ 2.01 $ 2.26

Loss per share for discontinued operations — —

Earnings per share $ 2.01 $ 2.26

Earnings per share for continuing operations $ 1.95 $ 2.18

Loss per share for discontinued operations — —

Earnings per share $ 1.95 $ 2.18

Weighted average common shares outstanding:

1 unchanged sentence

Diluted 181.5 205.9

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 2022 2021 2022 2021

6 unchanged sentences

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.

• North America net sales decreased $63.3 million, or 2.1%.

Net sales in the Wholesale channel decreased $70.3 million, or 2.7%, primarily driven by macroeconomic pressures impacting U.S.

consumer behavior and the unfavorable impact of our ERP system transition.

Net sales in the Direct channel increased $7.0 million, or 1.9%.

• International net sales increased $225.9 million, or 40.8%.

1 unchanged sentence

Net sales in the Wholesale channel decreased 5.4% 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.

Six Months Ended June 30,

Net sales in the Direct channel increased 139.2% on a constant currency basis, primarily driven by the acquisition of Dreams in August 2021.

Nine Months Ended September 30,

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

6 unchanged sentences

• North America gross margin declined 240 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.

The decline in gross margin was primarily driven by operational investments to service our customers of 160 basis points and price increases to customers without a benefit to margin of 160 basis points.

Additionally, we incurred $7.7 million of manufacturing facility ERP system transition costs and $4.2 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.

These declines were partially offset by favorable mix of 140 basis points.

• International gross margin declined 340 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.

The decline in gross margin was driven by unfavorable mix of 160 basis points, price increases to customers without a benefit to margin of 150 basis points and the acquisition of Dreams in August 2021.

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

4 unchanged sentences

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 2022 2021 2022 2021 2022 2021

8 unchanged sentences

• North America operating expenses increased $23.8 million, or 3.9%, and increased 120 basis points as a percentage of net sales.

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

The increase in operating expenses was primarily driven by advertising investments and expansion of our company-owned store strategy.

Additionally, we incurred $3.2 million of professional fees related to the manufacturing facility ERP system transition and $1.8 million of restructuring costs associated with headcount reductions.

These investments were partially offset by decreased variable compensation expense.

• International operating expenses increased $102.3 million, or 51.6%, and increased 280 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.

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

Additionally, we incurred $0.6 million of restructuring costs associated with headcount reductions.

• Corporate operating expenses increased $2.0 million, or 1.9%.

The increase in operating expenses was primarily driven by $2.7 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%.

Research and development expenses were $22.1 million for the nine months ended September 30, 2022 as compared to $19.9 million for the nine months ended September 30, 2021, an increase of $2.2 million, or 11.1%.

OPERATING INCOME

Six Months Ended June 30,

Nine Months Ended September 30,

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

6 unchanged sentences

• North America operating income decreased $121.3 million and operating margin declined 370 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 decline in operating margin was primarily driven by the decline in gross margin of 240 basis points and operating expense deleverage of 120 basis points.

• International operating income decreased $4.7 million and operating margin declined 790 basis points.

The decline in operating margin was primarily driven by the decline in gross margin of 340 basis points, operating expense deleverage of 280 basis points and the decline in Asia joint venture performance due to COVID-19 related shutdowns performance of 190 basis points.

• Corporate operating expenses increased $2.0 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions, except percentages) 2022 2021 % Change

1 unchanged sentence

Interest expense, net, increased $25.6 million, or 55.9%.

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

The increase in interest expense, net, was primarily driven by increased average levels of outstanding debt and higher interest rates on our variable rate 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.

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.

In the first half of 2021, we issued our 2029 Senior Notes and we redeemed our 2023 Senior Notes and our 2026 Senior Notes.

Accordingly, we incurred $23.0 million of loss on extinguishment of debt in 2021.

INCOME TAX PROVISION

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions, except percentages) 2022 2021 % Change

2 unchanged sentences

Our income tax provision decreased $36.4 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.

Our effective tax rate for the nine months ended September 30, 2022 as compared to the same prior year period declined 110 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.

federal statutory rate for the nine months ended September 30, 2022 included the net favorable impact of the deductibility of stock compensation in the U.S., which were offset by the 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.

federal statutory rate for the for the nine months ended September 30, 2021 included the favorable impact of the deductibility of stock compensation in the U.S., which were offset by the net unfavorable impact of other discrete items.

Liquidity and Capital Resources

1 unchanged sentence

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.

As of September 30, 2022, we had net working capital of $198.5 million, including cash and cash equivalents of $94.1 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 September 30, 2022, total cash and cash equivalents were $94.1 million, of which $23.9 million was held in the U.S.

and $70.2 million was held by subsidiaries outside of the U.S.

4 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) 2022 2021

3 unchanged sentences

Financing activities (234.1) 356.4

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.

Cash provided by operating activities from continuing operations decreased $314.0 million in the nine months ended September 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.

Our inventory increased significantly in the first nine months 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 decreased $283.2 million in the nine months ended September 30, 2022 as compared to the same period in 2021.

The decrease in cash used in investing activities was driven by the Dreams acquisition in August 2021, which is partially offset by increased capital expenditures in 2022.

Cash used in financing activities from continuing operations increased $590.5 million in the nine months ended September 30, 2022 as compared to the same period in 2021.

For the nine months ended September 30, 2022, we had net borrowings of $468.8 million on our credit facilities as compared to net borrowings of $988.4 million in the same period in 2021, which included proceeds of $1.6 billion from the issuance of our 2029 and 2031 Senior Notes, partially offset by repayments of $250.0 million of our 2023 Senior Notes and $600.0 million of our 2026 Senior Notes in 2021.

During the nine months ended September 30, 2022 and 2021, we repurchased $637.2 million and $565.8 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.

Net cash used in operating, investing and financing activities from discontinued operations for the periods ended September 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.

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.

Capital expenditures totaled $216.0 million and $82.1 million for the nine months ended September 30, 2022 and 2021, respectively.

We currently expect our 2022 capital expenditures to be over $275 million, which includes spend for our new foam-pouring plant in Crawfordsville, Indiana, and other manufacturing and distribution capacity expansion and growth initiatives.

We expect our capital expenditures to decrease significantly in 2023 and return to normal levels of spend thereafter.

Our total debt increased to $2,824.7 million as of September 30, 2022 from $2,353.2 million as of December 31, 2021.

Total availability under our revolving senior secured credit facility was $425.4 million as of September 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.

As of September 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 2.77 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.

As of September 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.

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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.

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.

During the nine months ended September 30, 2022, we repurchased 17.6 million shares under our share repurchase program for $591.2 million.

As of September 30, 2022, we had $809.5 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 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.

As of September 30, 2022, we had $519.5 million of liquidity, including $94.1 million of cash on hand and $425.4 million available under our revolving senior secured credit facility.

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

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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.

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.

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

The dividend is payable on December 1, 2022 to shareholders of record as of November 17, 2022.

As of September 30, 2022, we had $2,824.7 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,731.9 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.77 times for the trailing twelve months ended September 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.

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

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended June 30, 2022 and 2021:

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, 2022 and 2021:

Three Months Ended

(in millions, except per share amounts) June 30, 2022 June 30, 2021

(in millions, except per share amounts) September 30, 2022 September 30, 2021

Net income $ 132.7 $ 177.4

Loss from discontinued operations, net of tax (1)

ERP system transition (2)

Restructuring costs (2)

Operational start-up costs (3)

Loss on extinguishment of debt (4)

Overlapping interest expense (5)

Restructuring costs (4)

Acquisition-related costs (5)

Loss from discontinued operations, net of tax (7)

Adjusted income tax provision (6)

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Diluted shares outstanding 177.0 203.4

(1) In the second quarter of 2022, we recorded $9.4 million of charges related to the transition of our ERP system.

(1) 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.

(2) In the third quarter of 2022, we recorded $2.7 million of charges related to the transition of our ERP system.

Cost of sales included $2.3 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel.

Operating expenses included $0.4 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.

(3) In the third quarter of 2022, we incurred $1.8 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S.

Cost of sales and operating expenses included personnel and facility related costs of $1.7 million and $0.1 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.

(4) In the third quarter of 2022, we recorded $1.2 million of restructuring costs primarily associated with headcount reductions.

(5) In the third quarter of 2021, we recorded $2.3 million of acquisition-related stamp taxes associated with the acquisition of Dreams.

(6) 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

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

Three Months Ended September 30, 2022

(in millions, except percentages) Consolidated

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ERP system transition (1)

9.4 8.2 — 1.2

Operational start-up costs (2)

Restructuring costs (3)

1.2 — 0.6 0.6

Operational start-up costs (3)

Total adjustments 5.7 4.5 0.6 0.6

Adjusted operating income (expense) $ 206.7 16.1 % $ 209.5 19.8 % $ 33.2 14.7 % $ (36.0)

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

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 September 30, 2021.

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

Three Months Ended September 30, 2021

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

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

(1) In the second quarter of 2022, we recorded $9.4 million of charges related to the transition of our ERP system.

(1) In the third quarter of 2022, we recorded $2.7 million of charges related to the transition of our ERP system.

Cost of sales included $2.3 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel.

Operating expenses included $0.4 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.

(2) In the third quarter of 2022, we incurred $1.8 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S.

Cost of sales and operating expenses included personnel and facility related costs of $1.7 million and $0.1 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.

(3) In the third quarter of 2022, we recorded $1.2 million of restructuring costs primarily associated with headcount reductions.

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

EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash

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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:

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, 2022 and 2021:

Three Months Ended

(in millions) June 30, 2022 June 30, 2021

(in millions) September 30, 2022 September 30, 2021

Net income $ 132.7 $ 177.4

Interest expense, net 26.8 13.5

Overlapping interest expense (1)

Loss on extinguishment of debt (2)

Income taxes 41.1 58.7

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EBITDA $ 245.4 $ 295.2

Loss from discontinued operations, net of tax (1)

ERP system transition (2)

Restructuring costs (4)

Operational start-up costs (3)

Restructuring costs (4)

Acquisition-related costs (5)

Loss from discontinued operations, net of tax (7)

Adjusted EBITDA $ 251.9 $ 297.6

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

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

(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.

(1) 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:

(2) In the third quarter of 2022, we recorded $2.7 million of charges related to the transition of our ERP system.

Cost of sales included $2.3 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel.

Operating expenses included $0.4 million, primarily related to professional fees.

(3) In the third quarter of 2022, we recorded $1.8 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S.

(4) In the third quarter of 2022, we recorded $1.2 million of restructuring costs primarily associated with headcount reductions.

(5) In the third quarter of 2021, we recorded $2.3 million of acquisition-related stamp taxes associated with the acquisition of Dreams.

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, 2022:

Trailing Twelve Months Ended

(in millions) June 30, 2022

(in millions) September 30, 2022

Net income $ 529.8

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EBITDA $ 964.0

Earnings from Dreams prior to acquisition (1)

Loss from discontinued operations, net of tax (1)

ERP system transition (2)

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Operational start-up costs (4)

Acquisition-related costs (5)

Loss from discontinued operations, net of tax (6)

Adjusted EBITDA $ 987.2

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Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 2.77 times

(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.

(1) 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.

(2) In the trailing twelve months ended September 30, 2022, we recognized $12.1 million of charges related to the transition of our ERP system.

(3) In the trailing twelve months ended September 30, 2022, we recognized $5.3 million of restructuring costs primarily associated with headcount reductions.

(4) In the trailing twelve months ended September 30, 2022, we recognized $4.9 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S.

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.

For the trailing twelve months ended September 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 2.77 times for the trailing twelve months ended September 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.

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, 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

(in millions) September 30, 2022

Total debt, net $ 2,803.2

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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