What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-17 compared with 2022-02-22 · 162 added, 254 removed, 390 unchanged (52% of the section changed)

33 unchanged sentences

Our Direct channel includes company-owned stores, online and call centers.

Full year net income for 2021 increased 79.0% and full year diluted earnings per share ("EPS") increased 86.6% to $3.06.

We also maintain a strong competitive position within the industry.

We believe the investments that we have made over the past several years have strengthened the long-term foundation of our company and enhanced our competitive position.

The combination of our product superiority, brand strength, manufacturing efficiency and quality, powerful omni-channel distribution platform, substantial cash flow and fortified balance sheet continue to drive market share gains and solid financial performance.

General Business and Economic Conditions

1 unchanged sentence

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

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

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

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

As a result, the U.S.

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

These supply chain constraints were largely resolved by the end of 2021.

We expect to be better positioned to meet consumer demand in 2022.

During 2021, commodity costs unfavorably impacted our gross margin.

Throughout 2021, we implemented pricing actions to mitigate the dollar impact of these known commodity headwinds.

In January 2022, we implemented further pricing actions designed to offset the dollar impact of these inflationary headwinds.

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

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

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 geopolitical events in Ukraine have affected both international and domestic markets.

These events have introduced elements of risk into the supply chain and are affecting global consumer confidence, as it compounds global macroeconomic factors and uncertainty.

Furthermore, international responses to the ongoing COVID-19 pandemic, including in China, continue to contribute elements of risk into the supply chain.

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 2022, we implemented our global enterprise resource planning ("ERP") system at all Sealy domestic manufacturing facilities.

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.

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

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

Product Launches

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

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

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

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

In our international segment, we expect to begin the launch an all-new line of Tempur® products in Europe and Asia-Pacific in 2022 with the objective of reaching a new segment of international consumers.

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

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

In 2023, we plan to complete the rollout of a complete refresh of our North American Stearns & Foster® portfolio that began in 2022.

The new line is designed to further distinguish our high-end traditional innerspring brand and includes superior technologies, clear product step-up stories and a new, contemporary look.

We also expect to launch a new portfolio of Tempur-Pedic® Breeze mattresses and Tempur-Ergo® Smart Bases in 2023.

The new lineup of Tempur-Pedic® Breeze products build upon our successful legacy Breeze portfolio.

The updated collection features incremental innovation and technologies that were designed to be a solution to the most common causes of poor sleep, including aches and pains, sleeping hot and snoring.

The upgraded Tempur-Ergo® Smart Base assortment features improved ergonomic design with new, proprietary lumbar support, upgraded Sleeptracker-AI® technology and industry-leading relaxation modes, including Wave Form TM massage.

In our International segment, we are launching an all-new line of Tempur® products in over 90 markets through our wholly-owned subsidiaries and third-party distributors in 2023.

This new line of products will broaden Tempur®'s price range, with the super-premium price point ceiling maintained and the floor expanded into the premium category to expand our global addressable market.

Omni-Channel Distribution Expansion

We have a diversified group of strong retail partners and a rapidly growing direct business.

Due to supply chain constraints, we were not able to fulfill the entire domestic demand for our products in 2021.

As a result, we focused on our existing third-party retailer relationships and did not meaningfully expand domestic distribution through new or existing retail partners during the year.

In 2022, we expect to be better positioned to meet consumer demand and able to reengage with opportunities to expand our distribution through our domestic wholesale channel.

The largest pillar of our omni-channel distribution strategy is our more than 26,000 third-party retail doors.

This broad footprint ensures that consumers can easily find and experience our products in person.

While we are well represented at third-party retailers in the U.S.

today, there are opportunities to both increase the presence of our brands with existing retail partners and to sell into certain key retailers that do not have our products on their floors today.

We strengthened these relationships in 2022, which we expect to support our sales growth in 2023.

We have been focused on building our direct channel, both online and company-owned retail stores in recent years.

The development of our online business has been particularly important as consumers have grown more comfortable shopping for bedding products online.

Online purchases accelerated during the pandemic and we expect that consumers will continue to lean into this channel in the future.

The direct channel growth rate has surpassed the wholesale growth rate over the last few years, and we anticipate the direct channel to continue to grow as a percentage of net sales in future years.

We currently operate over 650 retail stores globally through our wholly-owned and joint venture operations.

We expect to continue to increase our store count organically through opening an average of 60 new stores per year over the next several years.

As of December 31, 2021, we had 88 Tempur-Pedic retail stores throughout the U.S.

We plan to expand our network to 125 to 150 new retail stores in the long-term.

We currently operate over 700 retail stores globally through our wholly-owned and joint venture operations, led by over 200 Tempur-Pedic and Sleep Outfitters retail stores in the U.S.

and over 200 Dreams locations in the U.K.

We expect these retail stores to complement our existing third-party retail partners by increasing our products' brand awareness in the local markets.

In addition to our high-end Tempur-Pedic retail stores, we operate Sleep Outfitters, a regional bedding retailer that had 104 stores in 2021.

Additionally, in 2021, we expanded our retail presence in the International segment through our acquisition of Dreams.

Dreams has a successful multi-channel sales strategy, with over 200 brick and mortar retail locations in the U.K., an industry-leading online channel, as well as manufacturing and delivery assets.

In 2020, we expanded our presence into the OEM market by offering non-branded products, including mattresses, pillows, and other bedding products and components at a wide range of price points.

We expanded our presence into the OEM market in 2020 by offering non-branded products, including mattresses, pillows and other bedding products and components at a wide range of price points.

The addition of non-branded offerings expands our capabilities to service third-party retailers and creates opportunity to capture manufacturing profits from bedding brands outside our own.

Acquisition of Dreams

On August 2, 2021, we completed the acquisition of Dreams, for a cash purchase price of $476.7 million, which included $49.5 million of cash acquired.

The transaction was funded using cash on hand and bank financing.

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

We made significant progress growing our OEM business in 2022 and continue to target obtaining a meaningful share of the OEM market in the long-term.

2022 Results of Operations

A summary of our results for the year ended December 31, 2022 include:

• Total net sales increased 34.1% to $4,930.8 million as compared to $3,676.9 million in 2020.

• Gross margin was 43.8% in 2021 as compared to 44.6% in 2020.

• Total net sales decreased 0.2% to $4,921.2 million as compared to $4,930.8 million in 2021.

• Gross margin was 41.6% as compared to 43.8% in 2021.

Adjusted gross margin, which is a non-GAAP financial measure, was 42.0% in 2022.

There were no adjustments to gross margin in 2021.

• Operating income was $680.6 million as compared to $912.3 million in 2021.

2 unchanged sentences

Adjusted net income, which is a non-GAAP financial measure, was $467.9 million as compared to $651.7 million in 2021.

• EPS increased to $3.06 as compared to $1.64 in 2020.

Adjusted EPS, which is a non-GAAP financial measure, increased 67.0% to $3.19 as compared to $1.91 in 2020.

• EPS decreased to $2.53 as compared to $3.06 in 2021.

Adjusted EPS, which is a non-GAAP financial measure, was $2.60 as compared to $3.19 in 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."

19 unchanged sentences

Loss on extinguishment of debt — — 23.0 0.5

Other income, net (1.0) — (2.4) (0.1)

Other expense (income), net 0.4 — (1.0) —

Total other expense, net 103.4 2.1 88.3 1.8

3 unchanged sentences

Loss from discontinued operations, net of tax (0.4) — (0.7) —

Net income before non-controlling interests 625.0 12.7 349.8 9.5

Net income attributable to non-controlling interests 0.5 — 1.0 —

Net income before non-controlling interest 457.8 9.3 625.0 12.7

Net income attributable to non-controlling interest 2.1 — 0.5 —

Net income attributable to Tempur Sealy International, Inc.

17 unchanged sentences

Total net sales $ 4,921.2 $ 4,930.8 $ 3,886.1 $ 4,079.2 $ 1,035.1 $ 851.6

Net sales increased 34.1%, and on a constant currency basis increased 33.0%.

Net sales decreased 0.2%, and on a constant currency basis increased 1.8%.

The change in net sales was driven by the following:

• North America net sales increased $920 million, or 29.1%.

Net sales in the Wholesale channel increased $777.4 million, or 27.7%, primarily driven by broad-based demand across our retail partners.

Net sales in our Direct channel increased $142.6 million, or 40.5%, primarily driven by strong company-owned sales growth and higher retail sales volume compared to the prior year period, which was impacted by COVID-19.

• North America net sales decreased $193.1 million, or 4.7%.

Net sales in the Wholesale channel decreased $194.0 million, or 5.4%, primarily driven by macroeconomic pressures impacting U.S.

consumer behavior.

Net sales in our Direct channel increased $0.9 million, or 0.2%.

• International net sales increased $183.5 million, or 21.5%.

On a constant currency basis, our International net sales increased 32.4%.

Net sales in the Wholesale channel increased 14.1% on a constant currency basis.

Net sales in the Direct channel increased 186.1% on a constant currency basis, driven by the acquisition of Dreams.

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

Net sales in the Wholesale channel decreased 5.6% on a constant currency basis.

Net sales in the Direct channel increased 74.9% on a constant currency basis, driven by the acquisition of Dreams in August of 2021.

Year Ended December 31,

5 unchanged sentences

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

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

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

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

Our Tempur products are exclusively premium priced products.

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

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

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

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

Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes;

the cost of raw materials;

operational productivity due to the utilization in our manufacturing facilities;

product, channel and geographic mix;

the margin profile of acquired subsidiaries;

operational efficiencies due to the utilization in our manufacturing facilities;

product, brand, channel and geographic mix;

foreign exchange fluctuations;

3 unchanged sentences

Future changes in raw material prices could have a significant impact on our gross margin.

In 2021, commodity cost inflation negatively impacted gross margin.

Our margins are also impacted by the growth in our Wholesale channel as sales in our Wholesale channel are at wholesale prices whereas sales in our Direct channel are at retail prices.

2 unchanged sentences

• North America gross margin declined 280 basis points.

The decline in gross margin was primarily driven by price increases to customers without a margin benefit of 120 basis points.

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

The decline in gross margin was primarily driven by operational headwinds of 170 basis points and expense deleverage of 90 basis points.

Additionally, we incurred $11.1 million of manufacturing ERP system transition costs, including labor, logistics, training and travel, and $5.8 million of operational start-up costs related to capacity expansion of our manufacturing and distribution facilities in the U.S., which contributed to the decline in gross margin.

• International gross margin declined 210 basis points.

The decline in gross margin was primarily driven by the acquisition of Dreams of 210 basis points and price increases to customers without a margin benefit of 100 basis points.

The decline in gross margin was primarily driven by unfavorable mix of 120 basis points, price increases to customers without a margin benefit of 80 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.

The declines were partially offset by increased royalties of 70 basis points.

OPERATING EXPENSES

10 unchanged sentences

Total operating expense $ 1,390.1 $ 1,277.0 $ 844.9 $ 821.3 $ 396.2 $ 311.3 $ 149.0 $ 144.4

Operating expenses increased $154.3 million, or 13.7%, and decreased 460 basis points as a percentage of net sales.

Operating expenses increased $113.1 million, or 8.9%, and increased 230 basis points as a percentage of net sales.

The primary drivers of changes in operating expenses by segment are discussed below.

• North America operating expenses increased $80.7 million, or 10.9%, and decreased 330 basis points as a percentage of net sales.

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

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

• International operating expenses increased $116.1 million and decreased 110 basis points as a percentage of net sales.

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

• Corporate operating expenses decreased $42.5 million, or 22.7%.

The decrease in operating expenses was primarily driven by increased amortization for the Company's aspirational plan and other stock-based compensation in 2020.

This decrease was offset by $3.9 million of acquisition-related costs, primarily legal and professional fees associated with the acquisition of Dreams in 2021.

• North America operating expenses increased $23.6 million, or 2.9%, and increased 160 basis points as a percentage of net sales.

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

Additionally, we incurred $3.2 million of professional fees related to our 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 $84.9 million, or 27.3% and increased 170 basis points as a percentage of net sales.

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

Additionally, we incurred $1.3 million of restructuring costs associated with headcount reductions.

• Corporate operating expenses increased $4.6 million, or 3.2%.

The increase in operating expenses was primarily driven by $6.7 million of restructuring costs associated with professional fees and headcount reductions related to organizational changes.

Additionally, we incurred $1.2 million of expenses related to our manufacturing facility ERP system transition.

These expenses were partially offset by decreased variable compensation expense.

Research and development expenses for the year ended December 31, 2022 were $29.2 million compared to $27.3 million for the year ended December 31, 2021, an increase of $1.9 million, or 7.0%.

8 unchanged sentences

Total operating income $ 680.6 13.8 % $ 912.3 18.5 % (4.7) %

Operating income increased $380.2 million and operating margin improved 400 basis points.

The increase was driven by the following:

• North America operating income increased $265.3 million and operating margin improved 230 basis points.

The improvement in operating margin was primarily driven by improved operating expense leverage of 240 basis points and decreased customer-related charges, offset by the decline in gross margin of 110 basis points.

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

Additionally, in 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the macro-economic environment, which were not repeated in 2021.

• International operating income increased $72.4 million and operating margin declined 110 basis points.

The decline in operating margin was primarily driven by the decline in gross margin of 280 basis points, offset by operating expense leverage.

• Corporate operating expenses decreased $42.5 million, which positively impacted our consolidated operating margin by 90 basis points.

The decrease in operating expenses was primarily driven by increased amortization for the Company's aspirational plan and other stock-based compensation in 2020.

This decrease was offset by $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams recognized in 2021.

Operating income decreased $231.7 million and operating margin declined 470 basis points.

The decrease was driven by the following:

• North America operating income decreased $214.3 million and operating margin declined 450 basis points.

The decline in operating margin was primarily driven by the decline in gross margin of 280 basis points and operating expense deleverage of 140 basis points.

• International operating income decreased $12.8 million and operating margin declined 540 basis points.

The decline in operating margin was primarily driven by the decline in gross margin of 210 basis points, operating expense deleverage of 190 basis points and the decline in Asia joint venture performance due to COVID-19 of 160 basis points.

• Corporate operating expenses increased $4.6 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

2 unchanged sentences

Interest expense, net $ 103.0 $ 66.3 55.4 %

Interest expense, net, decreased $10.7 million, or 13.9%.

The decrease in interest expense, net, was primarily driven by reduced average levels of outstanding debt and lower interest rates on our debt, primarily offset by $5.2 million of overlapping interest expense for the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes incurred in 2021.

Interest expense, net, increased $36.7 million, or 55.4%.

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.

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

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

Refer to Note 6, "Debt," in our Notes to Condensed Consolidated Financial Statements included in ITEM 8 under Part II for additional information.

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

4 unchanged sentences

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

Our income tax provision increased $95.7 million due to an increase in income before income taxes, net of the favorable impact of discrete items.

Our 2021 effective tax rate increased as compared to 2020 by 140 basis points.

Our income tax provision decreased $79.3 million due to a decrease in income before income taxes and the favorable impact of discrete items.

Our 2022 effective tax rate decreased as compared to 2021 by 350 basis points.

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

federal statutory tax rate for the year ending December 31, 2021 included a net favorable impact of discrete items, primarily related to excess tax benefits from the vesting of certain stock awards under our incentive stock compensation plan.

federal statutory tax rate for 2022 included a net favorable impact of discrete items, primarily related to excess tax benefits from the vesting of certain stock awards under our incentive stock compensation plan and a benefit related to release of reserves for uncertain tax positions related to a tax matter in Denmark.

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

federal statutory tax rate for the year ended December 31, 2020 included the impact of net favorable discrete items primarily related to the implementation of income tax regulations in 2020 that favorably impacted our global intangible low-taxed income ("GILTI") starting from the year ending December 31, 2018 onward and the excess tax benefits from the vesting of certain stock awards under our incentive stock compensation plan.

federal statutory tax rate for 2021 included the impact of net favorable discrete items primarily related to excess tax benefits from the vesting of certain stock awards under our incentive stock compensation plan.

Refer to Note 13, "Income Taxes," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report for further information.

2 unchanged sentences

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

As of December 31, 2021, we had net working capital of $222.2 million, including cash and cash equivalents of $300.7 million, as compared to working capital deficit of $6.4 million, including cash and cash equivalents of $65.0 million, as of December 31, 2020.

As of December 31, 2022, we had net working capital of $214.0 million, including cash and cash equivalents of $69.4 million, as compared to working capital of $222.2 million, including cash and cash equivalents of $300.7 million, as of December 31, 2021.

At December 31, 2022, total cash and cash equivalents were $69.4 million, of which $37.3 million was held in the U.S.

11 unchanged sentences

Financing activities (279.1) 76.5

Cash provided by operating activities from continuing operations increased $68.4 million in 2021 as compared to 2020.

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

Cash used in investing activities from continuing operations increased $408.2 million in 2021 as compared to 2020.

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

Cash provided by financing activities from continuing operations increased $599.1 million in 2021 as compared to 2020.

In 2021, we had net funding of $979.3 million as compared to net repayments of $184.5 million in 2020 on our credit facilities.

This increase included proceeds of $1.6 billion from the issuance of our 2029 and 2031 Senior Notes, offset by repayments of $250.0 million of our 2023 Senior Notes and $600.0 million of our 2026 Senior Notes and net borrowings of $229.3 million on our credit facilities.

In 2021, we repurchased $816.3 million of our common stock, as compared to $331.8 million in 2020.

Cash provided by financing activities also decreased due to dividends paid to shareholders of $63.1 million and payments of deferred financing costs of $24.9 million in 2021.

Cash Provided by (Used in) Discontinued Operations

Net cash provided by (used in) operating, investing and financing activities from discontinued operations for the years ended December 31, 2021 and 2020 was not material.

Cash provided by operating activities from continuing operations decreased $344.3 million in 2022 as compared to 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 during the year ended 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 $239.5 million in 2022 as compared to 2021.

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

Cash used in financing activities from continuing operations increased $355.6 million in 2022 as compared to 2021.

In 2022, we had net funding of $474.5 million as compared to net funding of $979.3 million in 2021 from our credit facilities.

This decrease was driven by proceeds of $1.6 billion from the issuance of our 2029 and 2031 Senior Notes, offset by repayments of $250.0 million of our 2023 Senior Notes and $600.0 million of our 2026 Senior Notes in 2021.

In 2022, we repurchased shares of our common stock for $667.4 million as compared to $816.3 million in 2021.

Cash (Used in) Provided by Discontinued Operations

Net cash (used in) provided by operating, investing and financing activities from discontinued operations for the years ended December 31, 2022 and 2021 was not material.

Capital Expenditures

Capital expenditures totaled $306.5 million and $123.3 million for the year ended December 31, 2022 and 2021, respectively.

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

We expect to generate operating cash flows sufficient to fully fund our anticipated capital expenditures in 2022.

We currently expect our 2023 capital expenditures to decrease significantly to approximately $200 million, which includes investments to complete our manufacturing capacity expansion.

Our total debt increased to $2,830.8 million as of December 31, 2022 from $2,353.2 million as of December 31, 2021.

Total availability under our revolving senior secured credit facility was $387.4 million as of December 31, 2022, which matures in 2024.

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

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

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

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

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

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

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

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

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

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

Refer to Note 6, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 for further discussion of our debt.

As of December 31, 2022, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure defined in the 2019 Credit Agreement, was 3.10 times.

8 unchanged sentences

Share Repurchase Program

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

The Board of Directors authorized increases to our share repurchase authorization of $211.4 million, $325.3 million, $431.5 million and $1,032.3 million during February, April, October and December 2021, respectively.

Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock, and the Board of Directors has authorized increases to this authorization from time to time.

For the year ended December 31, 2022, we repurchased 18.6 million shares under our share repurchase program for approximately $621.2 million and had approximately $779.5 million remaining under our share repurchase program.

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

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.

8 unchanged sentences

Future Liquidity Sources and Uses

As of December 31, 2021, we had $1.2 billion of liquidity, including $300.7 million of cash on hand and $724.3 million available under our revolving senior secured credit facility and $160.0 million available under our securitization facility.

As of December 31, 2022, we had $464.8 million of liquidity, including $69.4 million of cash on hand and $387.4 million available under our revolving senior secured credit facility and $8.0 million available under our securitization facility.

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

Our capital allocation strategy follows a balanced approach focused on supporting the business, returning shareholder value through share repurchases and quarterly dividends as well as opportunistic and strategic acquisition opportunities that enhance our global competitiveness.

Throughout 2021, we took capital structure actions to optimize our balance sheet, through extending the maturities of our long-term debt and lowering our fixed interest rates.

The Board of Directors declared a dividend of 10 cents per share for the first quarter of 2022.

The dividend is payable on March 22, 2022 to shareholders of record as of March 8, 2022.

The Board of Directors declared a dividend of $0.11 per share for the first quarter of 2023.

The dividend is payable on March 9, 2023 to shareholders of record as of February 23, 2023.

As of December 31, 2022, we had $2,830.8 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,762.6 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 3.10 times for the year ended December 31, 2022.

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

We expect our leverage ratio to return to our target range of 2.0 to 3.0 times in 2023.

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

20 unchanged sentences

Non-GAAP Financial Information

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

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

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

12 unchanged sentences

$ 467.9 $ 651.7 (28.2) %

$ 1,088.7 $ 737.8 47.6 %

Adjusted EBITDA (1)

$ 1,135.9 $ 779.9 45.6 %

EPS $ 2.53 $ 3.06 (17.3) %

4 unchanged sentences

Adjusted Net Income and Adjusted EPS

A reconciliation of net income to adjusted net income and the calculation of adjusted EPS is provided below.

A reconciliation of reported net income to adjusted net income and the calculation of adjusted EPS is provided below.

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

4 unchanged sentences

Loss from discontinued operations, net of tax (1)

ERP system transition (2)

Restructuring costs (3)

Operational start-up costs (4)

Loss on extinguishment of debt (5)

1 unchanged sentence

Overlapping interest expense (7)

Aspirational plan amortization (5)

Customer-related charges (6)

Incremental operating costs (7)

Asset impairments (8)

Restructuring costs (9)

Accounting standard adoption (10)

Aspirational plan employer costs (11)

Facility expansion costs (12)

Other income (13)

Tax adjustments (14)

Danish tax matter (8)

Adjusted income tax provision (9)

Adjusted net income $ 467.9 $ 651.7

3 unchanged sentences

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

(2) We recorded $15.5 million of charges related to the transition of our ERP system in the year ended 2022.

Cost of sales included $11.1 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel.

Operating expenses included $4.4 million, primarily related to professional fees.

(3) We recorded $10.0 million of restructuring costs primarily associated with professional fees and headcount reductions related to organizational changes in the year ended 2022, including $0.2 million of other expense.

(4) We recorded $6.5 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S.

in the year ended 2022, including $0.4 million of other expense.

Cost of sales and operating expenses included personnel and facility related costs of $5.8 million and $0.3 million, respectively.

(5) In the year ended December 31, 2021, we recognized $23.0 million of loss on extinguishment of debt associated with the redemption of the 2026 and 2023 senior notes.

In the year ended December 31, 2020, we recognized $5.1 million of loss on extinguishment of debt associated with the redemption of the 2023 senior notes and the early repayment of the 364-day term loan.

(6) In the year ended December 31, 2021, we recognized $6.2 million of acquisition-related costs, primarily related to legal and professional fees and stamp taxes associated with the acquisition of Dreams.

(7) In the year ended December 31, 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.

(5) In the year ended December 31, 2020, we recognized $49.4 million which represented the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020 and the remaining requisite service period in the fourth quarter of 2020.

(6) In the year ended December 31, 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.

(7) In the year ended December 31, 2020, we recorded $7.2 million of incremental operating costs and charges associated with the global pandemic.

Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items.

Operating expenses included $2.7 million of charges related to increased sanitation supplies and services.

(8) In the year ended December 31, 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets.

(9) In the year ended December 31, 2020, we incurred $3.8 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment.

(10) In the year ended December 31, 2020, we recorded $3.6 million of charges related to the adoption of ASU No.

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

As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within its covenant compliance calculation.

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

(12) In the year ended December 31, 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility.

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

(14) Adjusted income tax provision represents the tax effects associated with the aforementioned items and discrete income tax events.

In the fourth quarter of 2020, we recorded a $9.5 million discrete income tax benefit upon the vesting of our long-term aspirational plan awards.

(8) The Company recorded an income tax benefit, on a net basis, of $12.3 million related to its Danish tax matter in the fourth quarter of 2022.

In December 2022, the Danish tax authority and the IRS agreed on a preliminary framework to conclude the Company's Danish tax matter for the years 2012 through 2024.

(9) Adjusted income tax provision represents the tax effects associated with the aforementioned items, excluding the income tax benefit for the Danish tax matter.

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

1 unchanged sentence

The following table sets forth our reported gross profit and the reconciliation of our operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the year ended December 31, 2021.

We had no adjustments to gross profit for the year ended December 31, 2021.

The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the year ended December 31, 2022.

FULL YEAR 2022

2 unchanged sentences

Gross profit $ 2,049.6 41.6 % $ 1,487.3 38.3 % $ 562.3 54.3 % $ —

ERP system transition (1)

11.1 11.1 — —

Operational start-up costs (2)

Total adjustments 16.9 16.9 — —

Adjusted gross profit $ 2,066.5 42.0 % $ 1,504.2 38.7 % $ 562.3 54.3 % $ —

Operating income (expense) $ 680.6 13.8 % $ 642.4 16.5 % $ 187.2 18.1 % $ (149.0)

Acquisition-related costs (1)

ERP system transition (1)

15.5 14.3 — 1.2

Restructuring costs (3)

9.8 1.8 1.3 6.7

Operational start-up costs (2)

Total adjustments 31.4 22.2 1.3 7.9

Adjusted operating income (expense) $ 712.0 14.5 % $ 664.6 17.1 % $ 188.5 18.2 % $ (141.1)

(1) In the year ended December 31, 2021, we recognized $6.2 million of acquisition-related costs, primarily related to legal and professional fees and stamp taxes associated with the acquisition of Dreams.

The following table sets forth the reconciliation of our operating income (expense) and operating margin to the calculation of adjusted operating income (expense) and adjusted operating margin for the year ended December 31, 2020:

(1) We recorded $15.5 million of charges related to the transition of our ERP system in the year ended 2022.

Cost of sales included $11.1 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel.

Operating expenses included $4.4 million, primarily related to professional fees.

(2) We recorded $6.5 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S.

in the year ended 2022, including $0.4 million of other expense.

Cost of sales and operating expenses included personnel and facility related costs of $5.8 million and $0.3 million, respectively.

(3) We recorded $10.0 million of restructuring costs in the year ended 2022.

These costs were primarily associated with professional fees and headcount reductions related to organizational changes, including $0.2 million of other expense.

The following table sets forth our reported gross profit and the reconciliation of our operating income (expense) to the calculation of adjusted operating income (expense) for the year ended December 31, 2021.

We had no adjustments to gross profit for the year ended December 31, 2021.

FULL YEAR 2021

2 unchanged sentences

Gross profit $ 2,158.7 43.8 % $ 1,678.0 41.1 % $ 480.7 56.4 % $ —

Incremental operating costs (1)

4.5 4.0 0.5 —

Facility expansion costs (2)

Total adjustments 5.1 4.6 0.5 —

Adjusted gross profit $ 1,643.5 44.7 % $ 1,336.6 42.3 % $ 306.9 59.3 % $ —

Operating income (expense) $ 912.3 18.5 % $ 856.7 21.0 % $ 200.0 23.5 % $ (144.4)

Aspirational plan amortization (3)

49.4 — — 49.4

Customer-related charges (4)

11.7 11.7 — —

Incremental operating costs (1)

Acquisition-related costs (1)

6.2 — 2.3 3.9

Asset impairments (5)

Restructuring costs (6)

Accounting standard adoption (7)

Aspirational plan employer costs (8)

Facility expansion costs (2)

Total adjustments 85.6 27.2 6.7 51.7

Adjusted operating income (expense) $ 918.5 18.6 % $ 856.7 21.0 % $ 202.3 23.8 % $ (140.5)

(1) In the year ended December 31, 2020, we recorded $7.2 million of incremental operating costs and charges associated with the global pandemic.

Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items.

Operating expenses included $2.7 million of charges related to increased sanitation supplies and services.

(2) In the year ended December 31, 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility.

(3) In the year ended December 31, 2020, we recognized $49.4 million which represented the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020 and the remaining requisite service period in the fourth quarter of 2020.

(4) In the year ended December 31, 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.

(5) In the year ended December 31, 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets.

(6) In the year ended December 31, 2020, we incurred $3.8 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment.

(7) In the year ended December 31, 2020, we recorded $3.6 million of charges related to the adoption of ASU No.

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

As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within its covenant compliance calculation.

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

EBITDA, Adjusted EBITDA and Consolidated Indebtedness Less Netted Cash

10 unchanged sentences

Interest expense, net 103.0 61.1

Overlapping interest expense (1)

Loss on extinguishment of debt (2)

Income tax provision 119.0 198.3

Depreciation and amortization 182.0 176.6

Aspirational plan amortization (3)

Overlapping interest expense (1)

Loss on extinguishment of debt (2)

EBITDA $ 859.7 $ 1,088.7

Loss from discontinued operations, net of tax (3)

Acquisition-related costs (5)

Earnings from Dreams/Sherwood prior to acquisition (6)

Customer-related charges (7)

COVID-19 charges (8)

Incremental operating costs (9)

Asset impairments (10)

ERP system transition (4)

Restructuring costs (5)

Accounting standard adoption (12)

Aspirational plan employer costs (13)

Facility expansion costs (14)

Other income (15)

Operational start-up costs (6)

Acquisition-related costs (7)

Earnings from Dreams prior to acquisition (8)

Adjusted EBITDA $ 892.1 $ 1,135.9

3 unchanged sentences

(2) In the year ended December 31, 2021, we recognized $23.0 million of loss on extinguishment of debt associated with the redemption of the 2026 and 2023 senior notes.

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

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

(4) We recorded $15.5 million of charges related to the transition of our ERP system in the year ended 2022.

(5) We recorded $10.0 million of restructuring costs primarily associated with professional fees and headcount reductions related to organization changes in the year ended 2022.

(6) We recorded $6.5 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S in the year ended 2022.

(7) In the year ended December 31, 2021, we recognized $6.2 million of acquisition-related costs, primarily related to legal and professional fees and stamp taxes associated with the acquisition of Dreams.

1 unchanged sentence

For covenant compliance purposes, we included $40.3 million of EBITDA from this subsidiary for the seven months prior to acquisition in our calculation of adjusted EBITDA for the year ended December 31, 2021.

We completed the acquisition of Sherwood Bedding on January 31, 2020 and designated this subsidiary as restricted under the 2019 Credit Agreement.

For covenant compliance purposes, we included $0.3 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 December 31, 2020.

(7) In the year ended December 31, 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.

(8) In the year ended December 31, 2020, adjusted EBITDA excluded $7.9 million of COVID-19 charges associated with temporarily closed company-owned retail stores and sales force retention costs.

(9) In the year ended December 31, 2020, we recorded $7.2 million of incremental operating costs and charges associated with the global pandemic.

Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items.

Operating expenses included $2.7 million of charges related to increased sanitation supplies and services.

(10) In the year ended December 31, 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets.

(11) In the year ended December 31, 2020, we incurred $3.8 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment.

(12) In the year ended December 31, 2020, we recorded $3.6 million of charges related to the adoption of ASU No.

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

As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within its covenant compliance calculation.

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

(14) In the year ended December 31, 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility.

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

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

20 unchanged sentences

Revenue Recognition .

Sales of product are recognized when the obligations under the terms of the contract with the customer are satisfied, which is generally when control of the product has transferred to the customer.

Sales of product are recognized when the performance obligations under the terms of the contract with the customer are satisfied, which is generally when control of the product has transferred to the customer.

Transferring control of each product sold is considered a separate performance obligation.

2 unchanged sentences

We do not have any additional performance obligations other than product sales that are material in the context of the contract.

We extend volume discounts to certain customers and reflect these amounts as a reduction of net sales.

We extend volume discounts to certain customers and reflect these amounts as a reduction of net sales as variable consideration.

We allow product returns through certain sales channels and on certain products.

5 unchanged sentences

The right of return asset is recognized on a gross basis outside of the accrued sales returns and is not material to our Consolidated Balance Sheets.

Our level of sales returns differs by channel, with our Direct channel typically experiencing the higher rate of returns.

Our level of sales returns differs by channel, with our Direct channel typically experiencing a higher rate of returns.

In the event future sales returns claims are higher than our historical experiences, such as a 50 basis point increase, the impacts would not be material to the Consolidated Financial Statements.

1 unchanged sentence

The allowance for credit losses included in accounts receivable, net in the accompanying Consolidated Balance Sheets was $62.4 million and $62.1 million as of December 31, 2022 and 2021, respectively.

We regularly review the adequacy of its allowance for credit losses.

We regularly review the adequacy of our allowance for credit losses.

We estimate 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.

18 unchanged sentences

The valuation allowance is based, in part, on our estimate of future taxable income, the expected utilization of foreign and state tax loss carryforwards, and credits and the expiration dates of such tax loss carryforwards.

We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes.

We did not recognize tax benefits from uncertain tax positions within the provision for income taxes.

We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

6 unchanged sentences

production process.

During 2018, we negotiated a settlement with SKAT (the "Settlement") for the tax years 2001 through 2011 (the "Settlement Years").

During 2021, the Company resolved in all material respects the calculation of interest payable to SKAT related to the Settlement Years.

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

In addition, we have entered into the APA Program for the tax years 2012 through 2022 in which the IRS, on our behalf, will negotiate directly with SKAT the royalty to be paid by the U.S.

We have entered into the Advance Pricing Agreement ("APA") Program for the tax years 2012 to 2024 in which the IRS, on our behalf, has been negotiating directly with SKAT with respect to the royalty to be paid by the U.S.

subsidiary to the Danish subsidiary.

We maintain an uncertain income tax liability for the tax years 2012 through 2021 that are included in the APA Program.

If we are required to further increase the uncertain tax liability for any year after the Settlement Years based on a change in facts and circumstances, it could have a material impact on our reported earnings.

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

We maintain an uncertain income tax liability for the 2012 to 2022 tax years that are included in the APA Program.

If we are required to further increase the uncertain tax liability for any year after the 2012 to 2022 tax years based on a change in facts and circumstances, it could have a material impact on our reported earnings.

During the quarter ended December 31, 2022, pursuant to the negotiations described above with respect to the APA Program, SKAT and the IRS preliminarily concluded on a mutually acceptable framework ("Preliminary Framework") to resolve the Danish Tax Matter for the 2012 to 2022 tax years.

It is expected the Preliminary Framework will be formally agreed upon in the next twelve months.

If ultimately agreed upon by the two tax authorities, the terms of the Preliminary Framework would extend to the years 2023 and 2024, as well.

The Preliminary Framework is not a definitive agreement, but its terms provide updated definitive data for the Company to determine the potential Danish income tax exposure for the 2012 to 2022 tax years as well as the associated deferred tax asset for the U.S.

correlative benefit for such period.

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

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

and Danish income tax implications of such outcomes.

The key assumption in these outcomes relates to the underlying royalty rate which the U.S.

subsidiary would be required to pay to the Danish subsidiary.

Assuming the U.S.

IRS and SKAT conclude the APA with a mutually acceptable royalty rate, an increase in that royalty rate (over the rate used in our calculation of both the uncertain tax position and the correlative deferred tax asset associated with the U.S.

tax benefit of the additional royalty expense) will increase the Danish income tax liability resulting from such agreement but also decrease the U.S.

income tax liability associated with the correlative deduction for such additional royalty.

For example, if the royalty rate agreed upon by the IRS and SKAT is 10% more per year than the rate used in our calculations of both the uncertain tax liability and correlative deferred tax asset, our uncertain tax position would increase approximately $8.0 million while the associated deferred tax asset for the U.S.

correlative benefit would increase by approximately $2.2 million.

Thus, the net impact on the income tax provision would be

approximately $5.8 million .

For a description of these matters and additional information please refer to Note 13, "Income Taxes," to the accompanying Consolidated Financial Statements.

The key assumption in these outcomes is that the IRS and SKAT ultimately finalize the APA within the parameters of the Preliminary Framework discussed in Note 13, "Income Taxes" of the Consolidated Financial Statements.

Goodwill and Indefinite-Lived Intangible Assets.

11 unchanged sentences

Under the qualitative approach, we review macroeconomic conditions, industry and market conditions and entity specific factors, including strategies and financial performance for potential indicators of impairment.

With the exception of the addition of the Dreams reporting unit, we have not made any changes in 2021 to our reporting units.

We have not made any changes in 2022 to our reporting units or the accounting methodology we use to assess impairment loss on goodwill and indefinite-lived intangible assets.

Prior to 2021, Management performed an assessment of the impairment of goodwill for our reporting units and indefinite-lived intangible assets using a quantitative approach, which indicated that the fair values of each of our reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values.

3 unchanged sentences

However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.

Business Combinations.

Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values.

Goodwill as of the acquisition date is measured as the excess of the purchase price over the acquisition date fair values of the assets acquired and the liabilities assumed.

Management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses.

We make various estimates and assumptions in determining the estimated fair value of intangible assets acquired, which include assumptions about the period of time the acquired tradenames will continue to be valuable, projected business results, long-term growth factors, discount rates and royalty rates.

While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.

If actual results are materially different than the assumptions used to determine fair value of the assets acquired and liabilities assumed through a business combination, or the useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations.

Furthermore, if actual results are not consistent with estimates or assumptions, the Company may be exposed to an impairment charge that could materially adversely impact its consolidated financial position and results of operations.

For additional information of our recent acquisitions, please refer to Note 3, "Acquisitions and Divestitures," to the accompanying Consolidated Financial Statements in Part II, ITEM 8 of this report.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis