SOMNIGROUP INTERNATIONAL INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME ($ in millions, except per common share amounts) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net sales $ 1,283.3 $ 1,358.3 $ 3,733.8 $ 3,571.2 Cost of sales 742.2 781.2 2,173.4 2,017.0 Gross profit 541.1 577.1 1,560.4 1,554.2 Selling and marketing expenses 248.3 243.8 744.7 658.3 General, administrative and other expenses 96.7 90.3 296.6 254.9 Equity income in earnings of unconsolidated affiliates ( 4.9 ) ( 6.8 ) ( 14.4 ) ( 20.5 ) Operating income 201.0 249.8 533.5 661.5 Other expense, net: Interest expense, net 26.8 13.5 71.4 45.8 Loss on extinguishment of debt — — — 23.0 Other (income) expense, net ( 0.9 ) 0.1 ( 1.5 ) ( 0.3 ) Total other expense, net 25.9 13.6 69.9 68.5 Income from continuing operations before income taxes 175.1 236.2 463.6 593.0 Income tax provision ( 41.1 ) ( 58.7 ) ( 107.5 ) ( 143.9 ) Income from continuing operations 134.0 177.5 356.1 449.1 Loss from discontinued operations, net of tax ( 0.8 ) ( 0.1 ) ( 0.8 ) ( 0.6 ) Net income before non-controlling interests 133.2 177.4 355.3 448.5 Less: Net income (loss) attributable to non-controlling interests 0.5 — 1.3 ( 0.2 ) Net income attributable to Tempur Sealy International, Inc. $ 132.7 $ 177.4 $ 354.0 $ 448.7 Earnings per common share: Basic Earnings per share for continuing operations $ 0.78 $ 0.91 $ 2.01 $ 2.26 Loss per share for discontinued operations ( 0.01 ) — — — Earnings per share $ 0.77 $ 0.91 $ 2.01 $ 2.26 Diluted Earnings per share for continuing operations $ 0.75 $ 0.87 $ 1.95 $ 2.18 Loss per share for discontinued operations — — — — Earnings per share $ 0.75 $ 0.87 $ 1.95 $ 2.18 Weighted average common shares outstanding: Basic 171.9 195.8 176.2 198.9 Diluted 177.0 203.4 181.5 205.9 See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ($ in millions) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net income before non-controlling interests $ 133.2 $ 177.4 $ 355.3 $ 448.5 Other comprehensive income, net of tax: Foreign currency translation adjustments ( 64.8 ) ( 29.9 ) ( 140.1 ) ( 34.0 ) Other comprehensive loss, net of tax ( 64.8 ) ( 29.9 ) ( 140.1 ) ( 34.0 ) Comprehensive income 68.4 147.5 215.2 414.5 Less: Comprehensive income (loss) attributable to non-controlling interests 0.5 — 1.3 ( 0.2 ) Comprehensive income attributable to Tempur Sealy International, Inc. $ 67.9 $ 147.5 $ 213.9 $ 414.7 See accompanying Notes to Condensed Consolidated Financial Statements . 5 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($ in millions) September 30, 2022 December 31, 2021 ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 94.1 $ 300.7 Accounts receivable, net 488.2 419.5 Inventories 599.0 463.9 Prepaid expenses and other current assets 95.1 91.5 Total Current Assets 1,276.4 1,275.6 Property, plant and equipment, net 727.3 583.5 Goodwill 1,032.3 1,107.4 Other intangible assets, net 708.9 750.9 Operating lease right-of-use assets 490.0 480.6 Deferred income taxes 11.8 13.6 Other non-current assets 105.0 111.8 Total Assets $ 4,351.7 $ 4,323.4 LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY Current Liabilities: Accounts payable $ 440.2 $ 432.0 Accrued expenses and other current liabilities 545.8 558.5 Current portion of long-term debt 71.8 53.0 Income taxes payable 20.1 9.9 Total Current Liabilities 1,077.9 1,053.4 Long-term debt, net 2,731.4 2,278.5 Long-term operating lease obligations 440.7 427.0 Deferred income taxes 112.7 129.2 Other non-current liabilities 132.3 140.3 Total Liabilities 4,495.0 4,028.4 Redeemable non-controlling interest 9.3 9.2 Total Stockholders' (Deficit) Equity ( 152.6 ) 285.8 Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' (Deficit) Equity $ 4,351.7 $ 4,323.4 See accompanying Notes to Condensed Consolidated Financial Statements. 6 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY ($ in millions) (unaudited) Three Months Ended September 30, 2022 Tempur Sealy International, Inc. Stockholders' (Deficit) Equity Redeemable Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' (Deficit) Equity Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings Balance as of June 30, 2022 $ 9.0 283.8 $ 2.8 111.4 $ ( 3,381.3 ) $ 573.6 $ 2,789.5 $ ( 174.5 ) $ ( 189.9 ) Net income 132.7 132.7 Net income attributable to non-controlling interest 0.5 — Dividend paid to non-controlling interest in subsidiary ( 0.2 ) — Foreign currency adjustments, net of tax ( 64.8 ) ( 64.8 ) Exercise of stock options — 0.3 ( 0.2 ) 0.1 Dividends declared on common stock ($ 0.10 per share) ( 17.8 ) ( 17.8 ) Issuances of PRSUs, RSUs, and DSUs — 0.4 ( 0.4 ) — Treasury stock repurchased 1.0 ( 25.0 ) ( 25.0 ) Treasury stock repurchased - PRSU/RSU releases — ( 0.2 ) ( 0.2 ) Amortization of unearned stock-based compensation 12.3 12.3 Balance, September 30, 2022 $ 9.3 283.8 $ 2.8 112.4 $ ( 3,405.8 ) $ 585.3 $ 2,904.4 $ ( 239.3 ) $ ( 152.6 ) Three Months Ended September 30, 2021 Tempur Sealy International, Inc. Stockholders' Equity Redeemable Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings Balance as of June 30, 2021 $ 8.5 283.8 $ 2.8 87.3 $ ( 2,416.6 ) $ 597.1 $ 2,287.9 $ ( 69.6 ) $ 401.6 Net income 177.4 177.4 Net loss attributable to non-controlling interests — — Foreign currency adjustments, net of tax ( 29.9 ) ( 29.9 ) Exercise of stock options ( 0.4 ) 10.7 ( 4.8 ) 5.9 Dividends declared on common stock ($ 0.09 per share) ( 18.3 ) ( 18.3 ) Issuances of PRSUs, RSUs, and DSUs — 0.4 ( 0.4 ) — Treasury stock repurchased 4.1 ( 190.0 ) ( 190.0 ) Treasury stock repurchased - PRSU/RSU releases — ( 0.3 ) ( 0.3 ) Amortization of unearned stock-based compensation 16.1 16.1 Balance, September 30, 2021 $ 8.5 283.8 $ 2.8 91.0 $ ( 2,595.8 ) $ 608.0 $ 2,447.0 $ ( 99.5 ) $ 362.5 See accompanying Notes to Condensed Consolidated Financial Statements . 7 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED) ($ in millions) (unaudited) Nine Months Ended September 30, 2022 Tempur Sealy International, Inc. Stockholders' Equity (Deficit) Redeemable Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' Equity (Deficit) Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings Balance as of December 31, 2021 $ 9.2 283.8 $ 2.8 96.4 $ ( 2,844.7 ) $ 622.0 $ 2,604.9 $ ( 99.2 ) $ 285.8 Net income 354.0 354.0 Net income attributable to non-controlling interests 1.3 — Dividend paid to non-controlling interest in subsidiary ( 1.2 ) — Foreign currency adjustments, net of tax ( 140.1 ) ( 140.1 ) Exercise of stock options — 0.7 ( 0.4 ) 0.3 Dividends declared on common stock ($ 0.30 per share) ( 54.5 ) ( 54.5 ) Issuances of RSUs ( 2.6 ) 75.4 ( 75.4 ) — Treasury stock repurchased 17.6 ( 591.2 ) ( 591.2 ) Treasury stock repurchased - PRSU/RSU/DSU releases 1.0 ( 46.0 ) ( 46.0 ) Amortization of unearned stock-based compensation 39.1 39.1 Balance, September 30, 2022 $ 9.3 283.8 $ 2.8 112.4 $ ( 3,405.8 ) $ 585.3 $ 2,904.4 $ ( 239.3 ) $ ( 152.6 ) Nine Months Ended September 30, 2021 Tempur Sealy International, Inc. Stockholders' Equity Redeemable Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest in Subsidiaries Total Stockholders' Equity Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings Balance as of December 31, 2020 $ 8.9 283.8 $ 2.8 78.9 $ ( 2,096.8 ) $ 617.5 $ 2,045.6 $ ( 65.5 ) $ 1.0 $ 504.6 Net income 448.7 448.7 Net (loss) income attributable to non-controlling interests ( 0.4 ) 0.2 0.2 Purchase of remaining interest in subsidiary ( 3.4 ) ( 1.2 ) ( 4.6 ) Foreign currency adjustments, net of tax ( 34.0 ) ( 34.0 ) Exercise of stock options ( 0.9 ) 25.0 ( 10.6 ) 14.4 Dividends declared on common stock ($ 0.23 per share) ( 47.3 ) ( 47.3 ) Issuances of PRSUs, RSUs, and DSUs ( 1.6 ) 41.8 ( 41.8 ) — Treasury stock repurchased 14.1 ( 551.4 ) ( 551.4 ) Treasury stock repurchased - PRSU/RSU/DSU releases 0.5 ( 14.4 ) ( 14.4 ) Amortization of unearned stock-based compensation 46.3 46.3 Balance, September 30, 2021 $ 8.5 283.8 $ 2.8 91.0 $ ( 2,595.8 ) $ 608.0 $ 2,447.0 $ ( 99.5 ) $ — $ 362.5 See accompanying Notes to Condensed Consolidated Financial Statements . 8 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in millions) (unaudited) Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS: Net income before non-controlling interests $ 355.3 $ 448.5 Loss from discontinued operations, net of tax 0.8 0.6 Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: Depreciation and amortization 93.3 82.5 Amortization of stock-based compensation 39.1 46.3 Amortization of deferred financing costs 2.9 1.9 Bad debt expense 5.2 2.4 Deferred income taxes ( 9.9 ) 2.0 Dividends received from unconsolidated affiliates 20.8 18.2 Equity income in earnings of unconsolidated affiliates ( 14.4 ) ( 20.5 ) Loss on extinguishment of debt — 3.0 Foreign currency adjustments and other ( 1.6 ) 1.0 Changes in operating assets and liabilities, net of effect of business acquisitions ( 208.0 ) 11.6 Net cash provided by operating activities from continuing operations 283.5 597.5 CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS: Purchases of property, plant and equipment ( 216.0 ) ( 82.1 ) Acquisitions, net of cash acquired — ( 426.0 ) Other ( 8.8 ) 0.1 Net cash used in investing activities from continuing operations ( 224.8 ) ( 508.0 ) CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS: Proceeds from borrowings under long-term debt obligations 1,904.3 3,664.2 Repayments of borrowings under long-term debt obligations ( 1,435.5 ) ( 2,675.8 ) Proceeds from exercise of stock options 0.3 14.4 Treasury stock repurchased ( 637.2 ) ( 565.8 ) Dividends paid ( 53.4 ) ( 45.8 ) Payments of deferred financing costs — ( 25.3 ) Repayments of finance lease obligations and other ( 12.6 ) ( 9.5 ) Net cash (used in) provided by financing activities from continuing operations ( 234.1 ) 356.4 Net cash (used in) provided by continuing operations ( 175.4 ) 445.9 Net operating cash flows used in discontinued operations ( 0.8 ) ( 0.8 ) NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ( 30.4 ) ( 6.8 ) (Decrease) increase in cash and cash equivalents ( 206.6 ) 438.3 CASH AND CASH EQUIVALENTS, beginning of period 300.7 65.0 CASH AND CASH EQUIVALENTS, end of period $ 94.1 $ 503.3 Supplemental cash flow information: Cash paid during the period for: Interest $ 57.0 $ 32.8 Income taxes, net of refunds $ 105.0 $ 115.0 See accompanying Notes to Condensed Consolidated Financial Statements. 9 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (1) Summary of Significant Accounting Policies (a) Basis of Presentation and Description of Business. Tempur Sealy International, Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term "Tempur Sealy International" refers to Tempur Sealy International, Inc. only, and the term "Company" refers to Tempur Sealy International, Inc. and its consolidated subsidiaries. The Company designs, manufactures and distributes bedding products, which include mattresses, foundations and adjustable bases, and other products, which include pillows and other accessories. The Company also derives income from royalties by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The Company sells its products through two sales channels: Wholesale and Direct. The Company has ownership interests in Asia-Pacific joint ventures to develop markets for Sealy® and Stearns & Foster® branded products and ownership in a United Kingdom joint venture to manufacture, market, and distribute Sealy® and Stearns & Foster® branded products. The Company's ownership interests in each of these joint ventures is 50.0 %. The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have control, and consolidation is not otherwise required. The Company's equity in the net income and losses of these investments is reported in equity income in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States ("GAAP") for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2021, included in the 2021 Annual Report filed with the Securities and Exchange Commission on February 22, 2022. The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. (b) Inventories . Inventories are stated at the lower of cost and net realizable value, determined by the first-in, first-out method , and consist of the following: September 30, December 31, (in millions) 2022 2021 Finished goods $ 406.3 $ 297.8 Work-in-process 22.4 11.4 Raw materials and supplies 170.3 154.7 $ 599.0 $ 463.9 (c) Warranties . The Company provides warranties on certain products, which vary by segment, product and brand. Estimates of warranty expenses are based primarily on historical claims experience and product testing. Estimated future obligations related to these products are charged to cost of sales in the period in which the related revenue is recognized. The Company considers the impact of recoverable salvage value on warranty costs in determining its estimate of future warranty obligations. The Company provides warranties on mattresses with varying warranty terms. Tempur-Pedic mattresses sold in the North America segment and all Sealy mattresses have warranty terms ranging from 10 to 25 years, generally non-prorated for the first 10 to 15 years and then prorated for the balance of the warranty term. Tempur-Pedic mattresses sold in the International segment have warranty terms ranging from 5 to 15 years, non-prorated for the first 5 years and then prorated on a straight-line basis for the last 10 years of the warranty term. Tempur-Pedic pillows have a warranty term of 3 years, non-prorated. 10 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The Company had the following activity for its accrued warranty expense from December 31, 2021 to September 30, 2022: (in millions) Balance as of December 31, 2021 $ 43.9 Amounts accrued 13.1 Warranties charged to accrual ( 14.4 ) Balance as of September 30, 2022 $ 42.6 As of September 30, 2022 and December 31, 2021, $ 18.6 million and $ 20.2 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $ 24.0 million and $ 23.7 million of accrued warranty expense is included in other non-current liabilities on the Company's accompanying Condensed Consolidated Balance Sheets, respectively. (d) Allowance for Credit Losses . The allowance for credit losses is the Company's best estimate of the amount of expected lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses. The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. As of September 30, 2022, the Company's accounts receivable were substantially current. Other factors considered include historical write-off experience, current economic conditions and also factors such as customer credit, past transaction history with the customer and changes in customer payment terms. Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. The allowance for credit losses is included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets. The Company had the following activity for its allowance for credit losses from December 31, 2021 to September 30, 2022: (in millions) Balance as of December 31, 2021 $ 62.1 Amounts accrued 5.2 Write-offs charged against the allowance ( 5.1 ) Balance as of September 30, 2022 $ 62.2 (e) Fair Value. Financial instruments, although not recorded at fair value on a recurring basis, include cash and cash equivalents, accounts receivable, accounts payable and the Company's debt obligations. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those instruments. Borrowings under the 2019 Credit Agreement and the securitized debt are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the following material financial instruments were based on Level 2 inputs, which include observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of debt instruments. The fair values of these material financial instruments are as follows: Fair Value (in millions) September 30, 2022 December 31, 2021 2029 Senior Notes $ 633.8 $ 816.9 2031 Senior Notes $ 584.8 $ 803.7 11 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (2) Net Sales The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the three months ended September 30, 2022 and 2021: Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 (in millions) North America International Consolidated North America International Consolidated Channel Wholesale $ 918.1 $ 85.1 $ 1,003.2 $ 991.2 $ 108.0 $ 1,099.2 Direct 139.6 140.5 280.1 128.8 130.3 259.1 Net sales $ 1,057.7 $ 225.6 $ 1,283.3 $ 1,120.0 $ 238.3 $ 1,358.3 North America International Consolidated North America International Consolidated Product Bedding $ 986.7 $ 185.9 $ 1,172.6 $ 1,047.1 $ 197.4 $ 1,244.5 Other 71.0 39.7 110.7 72.9 40.9 113.8 Net sales $ 1,057.7 $ 225.6 $ 1,283.3 $ 1,120.0 $ 238.3 $ 1,358.3 North America International Consolidated North America International Consolidated Geographical region United States $ 982.6 $ — $ 982.6 $ 1,018.8 $ — $ 1,018.8 All Other 75.1 225.6 300.7 101.2 238.3 339.5 Net sales $ 1,057.7 $ 225.6 $ 1,283.3 $ 1,120.0 $ 238.3 $ 1,358.3 The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the nine months ended September 30, 2022 and 2021: Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 (in millions) North America International Consolidated North America International Consolidated Channel Wholesale $ 2,577.2 $ 289.2 $ 2,866.4 $ 2,647.5 $ 338.5 $ 2,986.0 Direct 376.6 490.8 867.4 369.6 215.6 585.2 Net sales $ 2,953.8 $ 780.0 $ 3,733.8 $ 3,017.1 $ 554.1 $ 3,571.2 North America International Consolidated North America International Consolidated Product Bedding $ 2,760.7 $ 647.5 $ 3,408.2 $ 2,839.9 $ 438.0 $ 3,277.9 Other 193.1 132.5 325.6 177.2 116.1 293.3 Net sales $ 2,953.8 $ 780.0 $ 3,733.8 $ 3,017.1 $ 554.1 $ 3,571.2 North America International Consolidated North America International Consolidated Geographical region United States $ 2,737.2 $ — $ 2,737.2 $ 2,783.6 $ — $ 2,783.6 All Other 216.6 780.0 996.6 233.5 554.1 787.6 Net sales $ 2,953.8 $ 780.0 $ 3,733.8 $ 3,017.1 $ 554.1 $ 3,571.2 12 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (3) Acquisitions Acquisition of Dreams Topco Limited On August 2, 2021, the Company completed the acquisition of Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams"), for a cash purchase price of $ 476.7 million, which includes $ 49.5 million of cash acquired. The transaction was funded using cash on hand and bank financing. Dreams has developed a successful multi-channel sales strategy, with over 200 brick and mortar retail locations in the United Kingdom, an industry-leading online channel, as well as manufacturing and delivery assets. The financial results of Dreams subsequent to the date of acquisition are included in the consolidated financial statements of the Company. The Company accounted for this transaction as a business combination. The final allocation of the purchase price is based on the fair values of the assets acquired and liabilities assumed as of August 2, 2021, which included the following: (in millions) Accounts receivable, net $ 3.5 Inventory 51.2 Property, plant and equipment 33.9 Goodwill 357.1 Indefinite-lived intangible asset 141.9 Operating lease right-of-use assets 158.2 Other current and non-current assets 4.4 Accounts payable ( 55.2 ) Accrued expenses and other current liabilities ( 69.7 ) Operating lease liabilities ( 165.1 ) Debt ( 6.1 ) Other liabilities ( 26.9 ) Purchase price, net of cash acquired $ 427.2 The indefinite-lived intangible asset represents the Dreams' portfolio of trade names as marketed through Dreams. The Company applied the income approach through a relief from royalty method to fair value the trade name asset using Level 2 inputs. The indefinite-lived intangible asset is not deductible for income tax purposes. Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the expansion of retail competency and online capabilities, and expected synergistic manufacturing and distribution benefits to be realized from the acquisition. The goodwill is not deductible for income tax purposes and is included within the International business segment. (4) Goodwill The following summarizes changes to the Company's goodwill, by segment: (in millions) North America International Consolidated Balance as of December 31, 2021 $ 611.5 $ 495.9 $ 1,107.4 Foreign currency translation and other ( 5.6 ) ( 69.5 ) ( 75.1 ) Balance as of September 30, 2022 $ 605.9 $ 426.4 $ 1,032.3 13 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (5) Debt Debt for the Company consists of the following: September 30, 2022 December 31, 2021 (in millions, except percentages) Amount Rate Amount Rate Maturity Date 2019 Credit Agreement: Term A Facility $ 647.8 (1) $ 675.0 (2) October 16, 2024 Revolver 299.0 (1) — (2) October 16, 2024 2031 Senior Notes 800.0 3.875 % 800.0 3.875 % October 15, 2031 2029 Senior Notes 800.0 4.000 % 800.0 4.000 % April 15, 2029 Securitized debt 169.2 (3) — (3) April 6, 2023 Finance lease obligations (4) 78.6 75.2 Various Other 30.1 3.0 Various Total debt 2,824.7 2,353.2 Less: Deferred financing costs 21.5 21.7 Total debt, net 2,803.2 2,331.5 Less: Current portion 71.8 53.0 Total long-term debt, net $ 2,731.4 $ 2,278.5 (1) Interest at LIBOR plus applicable margin of 1.250 % as of September 30, 2022. (2) Interest at LIBOR plus applicable margin of 1.250 % as of December 31, 2021. (3) Interest at one month LIBOR index plus 70 basis points. (4) New finance lease obligations are a non-cash financing activity. As of September 30, 2022, the Company was in compliance with all applicable debt covenants. 2019 Credit Agreement On October 16, 2019, the Company entered into the 2019 Credit Agreement with a syndicate of banks. The 2019 Credit Agreement provided for a $ 425.0 million revolving credit facility, a $ 425.0 million term loan facility, and an incremental facility in an aggregate amount of up to $ 550.0 million plus the amount of certain prepayments plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $ 60.0 million sub-facility for the issuance of letters of credit. On February 2, 2021, the Company entered into an amendment to the 2019 Credit Agreement. The amendment increased the revolving credit facility from $ 425.0 million to $ 725.0 million. On May 26, 2021, the Company entered into an additional amendment to the 2019 Credit Agreement. The amendment provided for a $ 300.0 million delayed draw term loan. On July 30, 2021, the Company drew down the full $ 300.0 million available under the delayed draw term loan to fund, in part, the Dreams acquisition. The delayed draw term loan had the same terms and conditions as the Company's existing term loans under the 2019 Credit Agreement. On September 21, 2021, the Company entered into an additional amendment to the 2019 Credit Agreement to remove the limit to the amount of netted cash that may be deducted from indebtedness for purposes of calculating certain leverage ratios. The Company had $ 299.0 million in outstanding borrowings under its revolving credit facility as of September 30, 2022. Total remaining availability under the revolving credit facility was $ 425.4 million after a $ 0.6 million reduction for outstanding letters of credit as of September 30, 2022. Securitized Debt The Company and certain of its subsidiaries are party to a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended, the "Accounts Receivable Securitization"). On April 6, 2021, the Company and certain of its subsidiaries entered into a new amendment to the Accounts Receivable Securitization. The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2023 and increased the overall limit from $ 120.0 million to $ 200.0 million. While subject to a $ 200.0 million overall limit, the availability of revolving loans varies over the course of the year based on the seasonality of the Company's accounts receivable. As of September 30, 2022, the Company had fully drawn down the Accounts Receivable Securitization with borrowings of $ 169.2 million. (6) Stockholders' Equity (a) Treasury Stock. As of September 30, 2022, the Company had approximately $ 809.5 million remaining under its share repurchase authorization. The Company repurchased 1.0 million and 4.1 million shares, under the program, for approximately $ 25.0 million and $ 190.0 million during the three months ended September 30, 2022 and 2021, respectively. The Company repurchased 17.6 million and 14.1 million shares, under the program, for approximately $ 591.2 million and $ 551.4 million during the nine months ended September 30, 2022 and 2021, respectively. In addition, the Company acquired shares upon the vesting of certain restricted stock units ("RSUs") and performance restricted stock units ("PRSUs"), which were withheld to satisfy tax withholding obligations during each of the three and nine months ended September 30, 2022 and 2021. The shares withheld were valued at the closing price of the stock on the New York Stock Exchange on the vesting date or first business day prior to vesting, resulting in approximately $ 0.2 million and $ 0.3 million in treasury stock acquired during the three months ended September 30, 2022 and 2021, respectively. The Company acquired approximately $ 46.0 million and $ 14.4 million in treasury stock during the nine months ended September 30, 2022 and 2021, respectively. (b) AOCL . AOCL consisted of the following: Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2022 2021 2022 2021 Foreign Currency Translation Balance at beginning of period $ ( 170.5 ) $ ( 62.7 ) $ ( 95.2 ) $ ( 58.6 ) Other comprehensive loss: Foreign currency translation adjustments (1) ( 64.8 ) ( 29.9 ) ( 140.1 ) ( 34.0 ) Balance at end of period $ ( 235.3 ) $ ( 92.6 ) $ ( 235.3 ) $ ( 92.6 ) Pensions Balance at beginning of period $ ( 4.0 ) $ ( 6.9 ) $ ( 4.0 ) $ ( 6.9 ) Other comprehensive loss: Net change from period revaluations — — — — Balance at end of period $ ( 4.0 ) $ ( 6.9 ) $ ( 4.0 ) $ ( 6.9 ) (1) In 2022 and 2021, there were no tax impacts related to foreign currency translation adjustments and no amounts were reclassified to earnings. 14 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (7) Other Items Accrued expenses and other current liabilities Accrued expenses and other current liabilities consisted of the following: (in millions) September 30, 2022 December 31, 2021 Operating lease obligations $ 100.6 $ 101.7 Wages and benefits 76.8 112.2 Advertising 71.7 72.3 Unearned revenue 63.3 51.5 Other 233.4 220.8 $ 545.8 $ 558.5 (8) Stock-Based Compensation The Company's stock-based compensation expense for the three and nine months ended September 30, 2022 and 2021 included PRSUs, non-qualified stock options, RSUs and deferred stock units ("DSUs"). A summary of the Company's stock-based compensation expense is presented in the following table: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2022 2021 2022 2021 PRSU expense $ 6.4 $ 10.3 $ 22.6 $ 29.6 Option expense 0.5 0.4 0.5 1.2 RSU/DSU expense 5.4 5.4 16.0 15.5 Total stock-based compensation expense $ 12.3 $ 16.1 $ 39.1 $ 46.3 The Company grants PRSUs to executive officers and certain members of management. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals. During the first quarter of 2022, the Company granted PRSUs as a component of the long-term incentive plan ("2022 PRSUs"). The Company has recorded stock-based compensation expense related to the 2022 PRSUs during the three and nine months ended September 30, 2022, as it was probable that the Company would achieve the specified performance target for the performance period. (9) Commitments and Contingencies The Company is involved in various legal and administrative proceedings incidental to the operations of its business. The Company believes that the outcome of all such pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity or operating results. (10) Income Taxes The Company's effective tax rate for the three months ended September 30, 2022 and 2021 was 23.5 % and 24.9 %, respectively. The Company's effective tax rate for the nine months ended September 30, 2022 and 2021 was 23.2 % and 24.3 %, respectively. The Company's effective tax rate for the three and nine months ended September 30, 2022 and 2021 differed from the U.S. federal statutory rate of 21.0% principally due to subpart F income (i.e., global intangible low-taxed income, or "GILTI," earned by the Company's foreign subsidiaries), foreign income tax rate differentials, state and local taxes, changes in the Company's uncertain tax positions, the excess tax benefit related to stock-based compensation and certain other permanent items. 15 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which includes a minimum tax equal to 15% of the adjusted financial statement income of certain corporations, as well as a 1% excise tax on share buybacks, effective for the Company beginning January 1, 2023. When effective, it is possible that the minimum tax could result in an additional tax liability over the regular federal corporate tax liability in a given year based on differences between book and taxable income (including as a result of temporary differences). Given its recent pronouncement, it is unclear at this time what, if any, impact the Inflation Reduction Act of 2022 will have on the Company's tax rate and financial results. We will continue to evaluate its impact as further information becomes available. The Company has been involved in a dispute with the Danish Tax Authority ("SKAT") regarding the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish Tax Matter") for tax years 2012 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process. The uncertain income tax liability for the Danish Tax Matter for the years 2012 through 2022 (the "2012 to Current Period") at September 30, 2022 and December 31, 2021 is approximately $ 46.1 million and $ 50.1 million, respectively, and is reflected in the Company's Condensed Consolidated Balance Sheet in other non-current liabilities. The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish tax for the 2012 to Current Period at September 30, 2022 and December 31, 2021 is approximately $ 19.1 million and $ 15.5 million, respectively. As of September 30, 2022, the Company had made the following tax deposits related to assessments received by SKAT for the Danish Tax Matter for the years 2012 through 2015, which are reflected in the Company's Condensed Consolidated Balance Sheet in other non-current assets: (in millions) USD VAT deposits remaining with SKAT $ 1.3 Deposit payments made through December 31, 2021 40.6 Total $ 41.9 No deposit payments were made in the three or nine months ended September 30, 2022. If the Company is not successful in resolving the Danish Tax Matter for the 2012 to Current Period or there is a change in facts and circumstances, the Company may be required to further increase its uncertain income tax position associated with this matter, or decrease its deferred tax asset, also related to this matter, which could have a material impact on the Company's reported earnings. There were no other significant changes in the Danish Tax Matter or other uncertain tax positions during the nine months ended September 30, 2022. 16 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (11) Earnings Per Common Share The following table sets forth the components of the numerator and denominator for the computation of basic and diluted earnings per share for net income attributable to Tempur Sealy International: Three Months Ended Nine Months Ended September 30, September 30, (in millions, except per common share amounts) 2022 2021 2022 2021 Numerator: Net income from continuing operations, net of income attributable to non-controlling interests $ 133.5 $ 177.5 $ 354.8 $ 449.3 Denominator: Denominator for basic earnings per common share-weighted average shares 171.9 195.8 176.2 198.9 Effect of dilutive securities 5.1 7.6 5.3 7.0 Denominator for diluted earnings per common share-adjusted weighted average shares 177.0 203.4 181.5 205.9 Basic earnings per common share $ 0.78 $ 0.91 $ 2.01 $ 2.26 Diluted earnings per common share $ 0.75 $ 0.87 $ 1.95 $ 2.18 The Company excluded 1.5 million and 0.8 million shares from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive for the three and nine months ended September 30, 2022. The Company excluded an immaterial number of shares for the three and nine months ended September 30, 2021. Holders of non-vested stock-based compensation awards do not have voting rights but do participate in dividends declared upon the award vesting. (12) Business Segment Information The Company operates in two segments: North America and International. These segments are strategic business units that are managed separately based on geography. The North America segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Mexico. The 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, the Company acquired Dreams, which is included in the International segment. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. The Company evaluates segment performance based on net sales, gross profit and operating income. The Company's North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company's accompanying Condensed Consolidated Financial Statements. The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payable. The following table summarizes total assets by segment: (in millions) September 30, 2022 December 31, 2021 North America $ 5,010.3 $ 4,360.6 International 1,092.0 1,305.9 Corporate 824.7 730.9 Inter-segment eliminations ( 2,575.3 ) ( 2,074.0 ) Total assets $ 4,351.7 $ 4,323.4 17 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The following table summarizes property, plant and equipment, net, by segment: (in millions) September 30, 2022 December 31, 2021 North America $ 619.7 $ 449.9 International 75.4 82.3 Corporate 32.2 51.3 Total property, plant and equipment, net $ 727.3 $ 583.5 The following table summarizes operating lease right-of-use assets by segment: (in millions) September 30, 2022 December 31, 2021 North America $ 336.7 $ 280.6 International 149.1 199.0 Corporate 4.2 1.0 Total operating lease right-of-use assets $ 490.0 $ 480.6 The following table summarizes segment information for the three months ended September 30, 2022: (in millions) North America International Corporate Eliminations Consolidated Net sales $ 1,057.7 $ 225.6 $ — $ — $ 1,283.3 Inter-segment sales $ 0.5 $ 0.2 $ — $ ( 0.7 ) $ — Inter-segment royalty expense (income) 3.4 ( 3.4 ) — — — Gross profit 420.7 120.4 — — 541.1 Operating income (loss) 205.0 32.6 ( 36.6 ) — 201.0 Income (loss) from continuing operations before income taxes 203.0 33.9 ( 61.8 ) — 175.1 Depreciation and amortization (1) $ 24.5 $ 5.8 $ 14.0 $ — $ 44.3 Capital expenditures 75.3 8.5 2.0 — 85.8 (1) Depreciation and amortization includes stock-based compensation amortization expense. The following table summarizes segment information for the three months ended September 30, 2021: (in millions) North America International Corporate Eliminations Consolidated Net sales $ 1,120.0 $ 238.3 $ — $ — $ 1,358.3 Inter-segment sales $ 0.3 $ 0.6 $ — $ ( 0.9 ) $ — Inter-segment royalty expense (income) 2.1 ( 2.1 ) — — — Gross profit 447.1 130.0 — — 577.1 Operating income (loss) 237.0 50.3 ( 37.5 ) — 249.8 Income (loss) from continuing operations before income taxes 235.7 50.0 ( 49.5 ) — 236.2 Depreciation and amortization (1) $ 22.2 $ 4.9 $ 18.0 $ — $ 45.1 Capital expenditures 21.3 4.1 4.1 — 29.5 (1) Depreciation and amortization includes stock-based compensation amortization expense. 18 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The following table summarizes segment information for the nine months ended September 30, 2022: (in millions) North America International Corporate Eliminations Consolidated Net sales $ 2,953.8 $ 780.0 $ — $ — $ 3,733.8 Inter-segment sales $ 1.4 $ 0.9 $ — $ ( 2.3 ) $ — Inter-segment royalty expense (income) 12.8 ( 12.8 ) — — — Gross profit 1,138.9 421.5 — — 1,560.4 Operating income (loss) 506.5 135.2 ( 108.2 ) — 533.5 Income (loss) from continuing operations before income taxes 503.6 135.0 ( 175.0 ) — 463.6 Depreciation and amortization (1) $ 70.7 $ 17.7 $ 44.1 $ — $ 132.5 Capital expenditures 188.2 23.1 4.7 — 216.0 (1) Depreciation and amortization includes stock-based compensation amortization expense. The following table summarizes segment information for the nine months ended September 30, 2021: (in millions) North America International Corporate Eliminations Consolidated Net sales $ 3,017.1 $ 554.1 $ — $ — $ 3,571.2 Inter-segment sales $ 1.5 $ 0.9 $ — $ ( 2.4 ) $ — Inter-segment royalty expense (income) 6.5 ( 6.5 ) — — — Gross profit 1,236.4 317.8 — — 1,554.2 Operating income (loss) 627.8 139.9 ( 106.2 ) — 661.5 Income (loss) from continuing operations before income taxes 625.0 138.9 ( 170.9 ) — 593.0 Depreciation and amortization (1) $ 64.9 $ 12.0 $ 51.9 $ — $ 128.8 Capital expenditures 62.4 8.7 11.0 — 82.1 (1) Depreciation and amortization includes stock-based compensation amortization expense. The following table summarizes property, plant and equipment, net by geographic region: (in millions) September 30, 2022 December 31, 2021 United States $ 631.6 $ 481.1 All Other 95.7 102.4 Total property, plant and equipment, net $ 727.3 $ 583.5 The following table summarizes operating lease right-of-use assets by geographic region: (in millions) September 30, 2022 December 31, 2021 United States $ 328.5 $ 278.3 United Kingdom 120.0 162.8 All Other 41.5 39.5 Total operating lease right-of-use assets $ 490.0 $ 480.6 19 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The following table summarizes net sales by geographic region: Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2022 2021 2022 2021 United States $ 982.6 $ 1,018.8 $ 2,737.2 $ 2,783.6 All Other 300.7 339.5 996.6 787.6 Total net sales $ 1,283.3 $ 1,358.3 $ 3,733.8 $ 3,571.2 20 Table of Contents