What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 254 added, 124 removed, 257 unchanged (60% of the section changed)

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The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties.

See "Special Note Regarding Forward-Looking Statements" elsewhere in this Report, in the 2022 Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2022 Annual Report.

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

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three months ended March 31, 2023, including the following topics:

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and six months ended June 30, 2023, including the following topics:

• an overview of our business and strategy;

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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 first quarter of 2023, global consumer spending continued to be unfavorably impacted by macroeconomic pressures, particularly from inflation and rising interest rates.

In the first half of 2023, global consumer spending continued to be unfavorably impacted by macroeconomic pressures, particularly from inflation and rising interest rates.

Definitive Agreement with Mattress Firm.

On May 9, 2023, Tempur Sealy International and Mattress Firm entered into a definitive agreement and plan of merger (the "Merger Agreement") for a proposed business acquisition in which Tempur Sealy International, through a wholly-owned subsidiary, will acquire Mattress Firm in a transaction valued at approximately $4.0 billion.

The transaction is expected to be funded by approximately $2.7 billion of cash consideration and the issuance of 34.2 million shares of common stock, resulting in a total stock consideration value of $1.3 billion based on a closing share price of $37.62 as of May 8, 2023.

We expect the transaction to close in the second half of 2024, subject to the satisfaction of customary closing conditions, including applicable regulatory approvals.

Following the close of the transaction, Mattress Firm is expected to operate as a separate business unit.

Cybersecurity Event

On July 31, 2023, we disclosed a cybersecurity event identified on July 23, 2023 affecting certain of our data and IT systems.

Upon discovery of the event, we activated our incident response and business continuity plans designed to contain the incident.

This included proactively shutting down certain of our IT systems, resulting in the temporary interruption of our operations.

Legal counsel, a cybersecurity forensic firm and other incident response professionals have been engaged to advise on the matter.

We have also notified law enforcement authorities.

We have incurred, and we may continue to incur, certain expenses related to this attack, including expenses to respond to, remediate and investigate this matter.

Such expenses, net of any insurance coverage provided for under our cybersecurity insurance policy, may be significant.

Our cybersecurity insurance policy provides coverage for certain losses not to exceed $5.0 million over the annual term of the policy, and we have not yet submitted a claim for this incident.

Our assessment of the impact of this event remains ongoing, but we currently do not expect it to have a material impact on our business, operations or financial results.

Based on estimated lost production due to the shutdown of our IT systems for one week, we currently estimate a potential negative impact to net sales of approximately 2% in the third quarter of 2023.

The cybersecurity event did not have any impact on our financial results for the second quarter of 2023.

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.

In the second quarter of 2023, we completed the rollout 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.

We also completed the launch of our new portfolio of Tempur-Pedic® Breeze mattresses and Tempur-Ergo® Smart Bases in the second quarter of 2023.

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

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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.

We expect this new line of products to 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.

Definitive Agreement with Mattress Firm Group Inc.

We expect the transaction to close in the second half of 2024, subject to the satisfaction of customary closing conditions, including applicable regulatory approvals.

Following the close of the transaction, Mattress Firm is expected to operate as a separate business unit.

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

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

Results of Operations

A summary of our results for the three months ended March 31, 2023 include:

• Total net sales decreased 2.5% to $1,208.1 million as compared to $1,239.5 million in the first quarter of 2022.

On a constant currency basis, which is a non-GAAP financial measure, total net sales decreased 0.5%, with a decrease of 1.2% in the North America business segment and an increase of 1.7% in the International business segment.

• Gross margin was 41.4% as compared to 42.2% in the first quarter of 2022.

Adjusted gross margin, which is a non-GAAP financial measure, was 41.8% in the first quarter of 2023.

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

• Operating income decreased 24.0% to $143.3 million as compared to $188.6 million in the first quarter of 2022.

Adjusted operating income, which is a non-GAAP financial measure, was $153.4 million in the first quarter of 2023.

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

• Net income decreased 34.7% to $85.3 million as compared to $130.7 million in the first quarter of 2022.

Adjusted net income, which is a non-GAAP financial measure, was $92.9 million in the first quarter of 2023.

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

• Earnings per diluted share ("EPS") decreased 30.4% to $0.48 as compared to $0.69 in the first quarter of 2022.

Adjusted EPS, which is a non-GAAP financial measure, was $0.53 in the first quarter of 2023.

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

A summary of our results for the three months ended June 30, 2023 include:

• Total net sales increased 4.8% to $1,269.7 million as compared to $1,211.0 million in the second quarter of 2022.

On a constant currency basis, which is a non-GAAP financial measure, total net sales increased 5.0%, with an increase of 5.3% in the North America business segment and an increase of 3.9% in the International business segment.

• Gross margin was 42.7% as compared to 41.0% in the second quarter of 2022.

Adjusted gross margin, which is a non-GAAP financial measure, was 42.9% as compared to 41.7% in the second quarter of 2022.

• Operating income increased 10.4% to $158.8 million as compared to $143.9 million in the second quarter of 2022.

Adjusted operating income, which is a non-GAAP financial measure, was $171.8 million as compared to $159.9 million in the second quarter of 2022.

• Net income increased 2.0% to $92.4 million as compared to $90.6 million in the second quarter of 2022.

Adjusted net income, which is a non-GAAP financial measure, was $102.0 million as compared to $103.2 million in the second quarter of 2022.

• Earnings per diluted share ("EPS") increased 2.0% to $0.52 as compared to $0.51 in the second quarter of 2022.

Adjusted EPS, which is a non-GAAP financial measure, was $0.58 in the second quarter of 2023 and 2022.

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

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

THREE MONTHS ENDED MARCH 31, 2023 COMPARED TO THE

THREE MONTHS ENDED MARCH 31, 2022

THREE MONTHS ENDED JUNE 30, 2023 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, 2022

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

Three Months Ended March 31,

Three Months Ended June 30,

(in millions, except percentages and per share amounts) 2023 2022

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Interest expense, net 33.6 2.6 23.7 2.0

Other expense (income), net 0.1 — (1.3) (0.1)

Other (income) expense, net (0.2) — 0.7 0.1

Total other expense, net 33.4 2.6 24.4 2.0

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Diluted 176.8 178.8

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 2023 2022 2023 2022

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Total net sales $ 1,269.7 $ 1,211.0 $ 1,016.8 $ 964.7 $ 252.9 $ 246.3

Net sales decreased 2.5%, and on a constant currency basis decreased 0.5%.

Net sales increased 4.8%, and on a constant currency basis increased 5.0%.

The change in net sales was driven by the following:

• North America net sales decreased $11.8 million, or 1.3%.

On a constant currency basis, North America net sales decreased 1.2%.

Net sales in the Wholesale channel decreased $7.0 million, or 0.9%.

Net sales in the Direct channel decreased $4.8 million, or 4.0%.

These decreases were primarily driven by continued macroeconomic pressures impacting U.S.

consumer behavior.

• International net sales decreased $19.6 million, or 6.4%, primarily driven by unfavorable foreign exchange rates.

• North America net sales increased $52.1 million, or 5.4%, primarily driven by the success of new product launches for Tempur-Pedic® and Stearns & Foster®.

On a constant currency basis, North America net sales increased 5.3%.

Net sales in the Wholesale channel increased $48.2 million, or 5.7%.

Net sales in the Direct channel increased $3.9 million, or 3.3%.

• International net sales increased $6.6 million, or 2.7%.

On a constant currency basis, International net sales increased 3.9%.

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Net sales in the Direct channel increased 4.3% on a constant currency basis.

Three Months Ended March 31,

Three Months Ended June 30,

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

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

Gross margin declined 80 basis points.

Gross margin improved 170 basis points.

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

• North America gross margin declined 40 basis points.

The decline in gross margin was primarily driven by operational headwinds of 150 basis points, expense deleverage of 80 basis points and product launch costs.

Additionally, we incurred $3.2 million of manufacturing facility enterprise resource planning ("ERP") system transition costs and $1.7 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., which contributed to the decline in gross margin.

These declines were partially offset by pricing actions of 260 basis points.

• International gross margin declined 130 basis points.

The decline in gross margin was primarily driven by product launch costs of 190 basis points, partially offset by pricing actions of 50 basis points.

• North America gross margin improved 180 basis points.

The improvement in gross margin was primarily driven by pricing actions of 220 basis points and normalizing commodity costs of 190 basis points.

Additionally, in 2022, we incurred $5.4 million of manufacturing facility enterprise resource planning ("ERP") system transition costs, which were not incurred in 2023.

These improvements were partially offset by product launch costs of 180 basis points and operational headwinds of 80 basis points.

• International gross margin improved 180 basis points.

The improvement in gross margin was primarily driven by favorable mix of 150 basis points and pricing actions.

OPERATING EXPENSES

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

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

Three Months Ended March 31,

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

Three Months Ended June 30,

2023 2022 2023 2022 2023 2022 2023 2022

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

• North America operating expenses increased $9.6 million, or 4.4%, and decreased 20 basis points as a percentage of net sales.

The increase in operating expenses was primarily driven by product launch initiatives.

• International operating expenses increased $11.7 million, or 12.0%, and increased 360 basis points as a percentage of net sales.

The increase in operating expenses was primarily driven by investments in advertising and product launch initiatives.

• Corporate operating expenses increased $11.2 million, or 29.5%, primarily driven by $10.6 million of transaction costs related to the pending acquisition of Mattress Firm.

Research and development expenses for the three months ended June 30, 2023 were $7.3 million compared to $7.7 million for the three months ended June 30, 2022, a decrease of $0.4 million or 5.2%.

OPERATING INCOME

Three Months Ended June 30,

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

North America $ 174.1 17.1 % $ 146.1 15.1 % 2.0 %

International 33.9 13.4 % 35.8 14.5 % (1.1) %

Corporate expenses (49.2) (38.0)

Total operating income $ 158.8 12.5 % $ 143.9 11.9 % 0.6 %

Operating income increased $14.9 million and operating margin improved 60 basis points.

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

• North America operating income increased $28.0 million and operating margin improved 200 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 180 basis points and operating expense deleverage of 20 basis points.

• International operating income decreased $1.9 million and operating margin declined 110 basis points.

The decline in operating margin was driven by operating expense deleverage of 360 basis points offset by the improvement in gross margin of 180 basis points.

• Corporate operating expenses increased $11.2 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Three Months Ended June 30,

(in millions, except percentages) 2023 2022 % Change

Interest expense, net $ 33.6 $ 23.7 41.8 %

Interest expense, net, increased $9.9 million, or 41.8%.

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

INCOME TAX PROVISION

Three Months Ended June 30,

(in millions, except percentages) 2023 2022 % Change

Income tax provision $ 32.2 $ 28.3 13.8 %

Effective tax rate 25.7 % 23.7 %

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

Our income tax provision increased $3.9 million due to an increase in income before income taxes.

Our effective tax rate for the three months ended June 30, 2023 as compared to the prior year increased by 200 basis points.

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

federal statutory rates for the three months ended June 30, 2023 and 2022 included a net favorable impact of other discrete items.

SIX MONTHS ENDED JUNE 30, 2023 COMPARED TO THE

SIX MONTHS ENDED JUNE 30, 2022

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

Six Months Ended June 30,

(in millions, except percentages and per share amounts) 2023 2022

Net sales $ 2,477.8 100.0 % $ 2,450.5 100.0 %

Cost of sales 1,435.6 57.9 1,431.2 58.4

Gross profit 1,042.2 42.1 1,019.3 41.6

Selling and marketing expenses 526.9 21.3 496.4 20.3

General, administrative and other expenses 222.0 9.0 199.9 8.2

Equity income in earnings of unconsolidated affiliates (8.8) (0.4) (9.5) (0.4)

Operating income 302.1 12.2 332.5 13.6

Other expense, net:

Interest expense, net 66.4 2.7 44.6 1.8

Other income, net (0.1) — (0.6) —

Total other expense, net 66.3 2.7 44.0 1.8

Income before income taxes 235.8 9.5 288.5 11.8

Income tax provision (56.7) (2.3) (66.4) (2.7)

Net income before non-controlling interest 179.1 7.2 222.1 9.1

Net income attributable to non-controlling interest 1.4 0.1 0.8 —

Net income attributable to Tempur Sealy International, Inc.

$ 177.7 7.2 % $ 221.3 9.0 %

Earnings per common share:

Basic $ 1.03 $ 1.24

Diluted $ 1.01 $ 1.20

Weighted average common shares outstanding:

Basic 172.1 178.3

Diluted 176.8 183.7

Six Months Ended June 30,

2023 2022 2023 2022 2023 2022

(in millions) Consolidated North America International

Net sales by channel

Wholesale $ 1,901.8 $ 1,863.2 $ 1,700.3 $ 1,659.1 $ 201.5 $ 204.1

Direct 576.0 587.3 236.1 237.0 339.9 350.3

Total net sales $ 2,477.8 $ 2,450.5 $ 1,936.4 $ 1,896.1 $ 541.4 $ 554.4

Net sales increased 1.1%, and on a constant currency basis increased 2.3%.

The change in net sales was driven by the following:

• North America net sales increased $40.3 million, or 2.1%, primarily driven by the success of new product launches for Tempur-Pedic® and Stearns & Foster®.

Net sales in the Wholesale channel increased $41.2 million, or 2.5%.

Net sales in the Direct channel decreased $0.9 million, or 0.4%.

• International net sales decreased $13.0 million, or 2.3%.

On a constant currency basis, International net sales increased 2.6%.

Net sales in the Wholesale channel increased 2.6% on a constant currency basis.

Net sales in the Direct channel increased 2.6% on a constant currency basis.

Six Months Ended June 30,

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

North America $ 747.4 38.6 % $ 718.2 37.9 % 0.7 %

International 294.8 54.5 % 301.1 54.3 % 0.2 %

Consolidated gross margin $ 1,042.2 42.1 % $ 1,019.3 41.6 % 0.5 %

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

Gross margin improved 50 basis points.

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

• North America gross margin improved 70 basis points.

The improvement in gross margin was primarily driven by pricing actions of 240 basis points and normalizing commodity costs of 120 basis points.

These improvements were offset by product launch costs of 120 basis points, operational headwinds of 90 basis points and expense deleverage of 50 basis points.

• International gross margin improved 20 basis points.

The improvement in gross margin was driven by favorable mix and pricing actions, offset by product launch costs.

OPERATING EXPENSES

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

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

Six Months Ended June 30,

2023 2022 2023 2022 2023 2022 2023 2022

(in millions) Consolidated North America International Corporate

Operating expenses:

Advertising expenses $ 230.7 $ 222.3 $ 188.7 $ 185.6 $ 42.0 $ 36.7 $ — $ —

Other selling and marketing expenses 296.2 274.1 157.5 141.2 128.3 122.9 10.4 10.0

General, administrative and other expenses 222.0 199.9 91.1 89.9 55.2 48.4 75.7 61.6

Total operating expenses $ 748.9 $ 696.3 $ 437.3 $ 416.7 $ 225.5 $ 208.0 $ 86.1 $ 71.6

Operating expenses increased $52.6 million, or 7.6%, and increased 180 basis points as a percentage of net sales.

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

• North America operating expenses increased $20.6 million, or 4.9%, and increased 60 basis points as a percentage of net sales.

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The increase in operating expenses was primarily driven by investments in advertising and product launch initiatives.

• Corporate operating expenses increased $3.3 million, or 9.8%, primarily driven by $5.2 million of restructuring costs associated with the acquisition of Mattress Firm.

Research and development expenses for the three months ended March 31, 2023 were $7.5 million compared to $7.8 million for the three months ended March 31, 2022, a decrease of $0.3 million, or 3.8%.

• Corporate operating expenses increased $14.5 million, or 20.3%.

The increase in operating expenses was primarily driven by $15.8 million of transaction costs related to the pending acquisition of Mattress Firm.

Research and development expenses were $14.8 million for the six months ended June 30, 2023 as compared to $15.5 million for the six months ended June 30, 2022, a decrease of $0.7 million, or 4.5%.

OPERATING INCOME

Three Months Ended March 31,

Six Months Ended June 30,

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

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

• North America operating income decreased $19.4 million and operating margin declined 190 basis points.

The decline in operating margin was primarily driven by operating expense deleverage of 140 basis points and the decline in gross margin of 40 basis points.

• North America operating income increased $8.6 million and operating margin improved 10 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 70 basis points, offset by operating expense deleverage of 60 basis points.

• International operating income decreased $24.5 million and operating margin declined 410 basis points.

The decline in operating margin was driven by operating expense deleverage of 440 basis points and the decline in gross margin of 130 basis points.

The decline in operating margin was primarily driven by operating expense deleverage of 420 basis points, offset by the improvement in gross margin of 20 basis points.

• Corporate operating expenses increased $14.5 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Three Months Ended March 31,

Six Months Ended June 30,

(in millions, except percentages) 2023 2022 % Change

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INCOME TAX PROVISION

Three Months Ended March 31,

Six Months Ended June 30,

(in millions, except percentages) 2023 2022 % Change

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Effective tax rate 24.1 % 23.0 %

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

Our income tax provision decreased $9.7 million due to a decrease in income before income taxes.

Our effective tax rate for the three months ended March 31, 2023 as compared to the same prior year period declined by 30 basis points.

Our effective tax rate for the six months ended June 30, 2023 as compared to the prior year increased 110 basis points.

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

federal statutory rates for the three months ended March 31, 2023 and 2022 included the favorable impact of the deductibility of stock compensation in the U.S.

and included a net unfavorable impact of other discrete items.

federal statutory rates for the six months ended June 30, 2023 and 2022 included the net favorable impact of the deductibility of stock compensation in the U.S., which were offset by the unfavorable impact of other discrete items.

Liquidity and Capital Resources

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

As of March 31, 2023, we had net working capital of $247.8 million, including cash and cash equivalents of $91.0 million, as compared to a working capital of $214.0 million, including cash and cash equivalents of $69.4 million, as of December 31, 2022.

At March 31, 2023, total cash and cash equivalents were $91.0 million, of which $55.7 million was held in the U.S.

As of June 30, 2023, we had net working capital of $247.4 million, including cash and cash equivalents of $101.8 million, as compared to a working capital of $214.0 million, including cash and cash equivalents of $69.4 million, as of December 31, 2022.

At June 30, 2023, total cash and cash equivalents were $101.8 million, of which $61.2 million was held in the U.S.

and $40.6 million was held by subsidiaries outside of the U.S.

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

Three Months Ended March 31,

Six Months Ended June 30,

(in millions) 2023 2022

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Financing activities (111.4) (110.2)

Cash provided by operating activities increased $14.2 million in the three months ended March 31, 2023 as compared to the same period in 2022.

The increase in cash provided by operating activities was driven by the reduction of inventory spend as compared to prior year, which was offset by the decline in net income and increased accounts payable spend.

Cash used in investing activities decreased $7.3 million in the three months ended March 31, 2023 as compared to the same period in 2022.

The decrease in cash used in investing activities was driven by decreased capital expenditures related to our manufacturing capacity expansion projects in 2023.

Cash used in financing activities decreased $176.4 million in the three months ended March 31, 2023 as compared to the same period in 2022.

For the three months ended March 31, 2023, we had net borrowings of $32.4 million on our credit facilities as compared to net borrowings of $312.1 million in the same period in 2022, driven primarily by reduced repurchases of common stock.

During the three months ended March 31, 2023 and 2022, we repurchased $35.7 million and $494.8 million, respectively, of our common stock.

Cash provided by operating activities increased $184.0 million in the six months ended June 30, 2023 as compared to the same period in 2022.

The increase in cash provided by operating activities was primarily driven by the reduction of inventory levels as compared to the prior year.

Cash used in investing activities decreased $16.8 million in the six months ended June 30, 2023 as compared to the same period in 2022.

The decrease in cash used in investing activities was driven by decreased capital expenditures related to our manufacturing capacity expansion projects nearing completion in 2023.

Cash used in financing activities increased $1.2 million in the six months ended June 30, 2023 as compared to the same period in 2022.

For the six months ended June 30, 2023, we had net repayments of $27.6 million on our credit facilities as compared to net borrowings of $546.2 million in the same period in 2022, driven primarily by reduced repurchases of common stock.

During the six months ended June 30, 2023 and 2022, we repurchased $35.9 million and $612.0 million, respectively, of our common stock.

Capital Expenditures

Capital expenditures totaled $52.1 million and $60.3 million for the three months ended March 31, 2023 and 2022, respectively.

Capital expenditures totaled $112.7 million and $130.2 million for the six months ended June 30, 2023 and 2022, respectively.

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

Our total debt increased to $2,862.6 million as of March 31, 2023 from $2,830.8 million as of December 31, 2022.

Total availability under our revolving senior secured credit facility was $374.4 million as of March 31, 2023, which matures in 2024.

Our total debt decreased to $2,799.9 million as of June 30, 2023 from $2,830.8 million as of December 31, 2022.

Total availability under our revolving senior secured credit facility was $442.4 million as of June 30, 2023, which matures in October 2024.

We expect to amend our credit facility later this year.

Refer to Note 4, "Debt" in the "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1 for further discussion of our debt.

As of March 31, 2023, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 3.24 times.

As of June 30, 2023, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 3.10 times.

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

As of March 31, 2023, we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances.

As of June 30, 2023, we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances.

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

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

During the three months ended March 31, 2023, we repurchased 0.1 million shares under our share repurchase program for $5.0 million.

As of March 31, 2023, we had $774.5 million remaining under our share repurchase authorization.

During the six months ended June 30, 2023, we repurchased 0.1 million shares under our share repurchase program for $5.0 million.

As of June 30, 2023, we had $774.5 million remaining under our share repurchase authorization.

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

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We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities.

As a result of the proposed Mattress Firm acquisition, we expect to limit our repurchase of shares in advance of closing the transaction.

For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," in the 2022 Annual Report.

As a result of the pending Mattress Firm acquisition, we have temporarily suspended our repurchase of shares in advance of closing the transaction.

For further information on our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," in the 2022 Annual Report.

Please also refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this Report.

Future Liquidity Sources and Uses

As of March 31, 2023, we had $466.4 million of liquidity, including $91.0 million of cash on hand and $374.4 million available under our revolving senior secured credit facility.

As of June 30, 2023, we had $544.2 million of liquidity, including $101.8 million of cash on hand and $442.4 million available under our revolving senior secured credit facility.

In addition, we expect to generate cash flow from operations in the full year 2023.

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 strategic acquisition opportunities that enhance our global competitiveness.

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

The dividend is payable on June 6, 2023 to shareholders of record as of May 23, 2023.

As of March 31, 2023, we had $2,862.6 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,772.7 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 3.24 times for the trailing twelve months ended March 31, 2023.

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

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

The dividend is payable on August 31, 2023 to shareholders of record as of August 17, 2023.

As of June 30, 2023, we had $2,799.9 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,699.1 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 trailing twelve months ended June 30, 2023.

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

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The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements and debt service obligations.

For information regarding the impact of COVID-19 on our business, including our liquidity and capital resources, please refer to "Risk Factors" contained in ITEM 1A of Part I of the 2022 Annual Report.

Non-GAAP Financial Information

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

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended March 31, 2023 and 2022:

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended June 30, 2023 and 2022:

Three Months Ended

(in millions, except per share amounts) March 31, 2023 March 31, 2022

(in millions, except per share amounts) June 30, 2023 June 30, 2022

Net income $ 92.4 $ 90.6

Restructuring costs and other (1)

ERP system transition (2)

Transaction costs (1)

Operational start-up costs (2)

ERP system transition (3)

Restructuring costs (4)

Adjusted income tax provision (5)

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Diluted shares outstanding 176.8 178.8

(1) In the first quarter of 2023, we recorded $5.2 million of restructuring costs primarily associated with the acquisition of Mattress Firm.

(2) In the first quarter of 2023, we recorded $3.2 million of charges related to the transition of our ERP system, including labor, logistics, training and travel.

(3) In the first quarter of 2023, we recorded $1.7 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

(1) In the second quarter of 2023, we recorded $10.6 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

(2) In the second quarter of 2023, we recorded $2.4 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

In the second quarter of 2022, we incurred $3.1 million of operational start-up costs.

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

(4) In the second quarter of 2022, we recorded $4.1 million of restructuring costs primarily associated with headcount reductions.

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

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

The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended March 31, 2023.

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

(in millions, except percentages) Consolidated

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Gross profit $ 542.3 42.7 % $ 403.4 39.7 % $ 138.9 54.9 % $ —

ERP system transition (1)

Operational start-up costs (1)

Total adjustments 4.9 4.9 — —

Adjusted gross profit $ 544.7 42.9 % $ 405.8 39.9 % $ 138.9 54.9 % $ —

Operating income (expense) $ 158.8 12.5 % $ 174.1 17.1 % $ 33.9 13.4 % $ (49.2)

Restructuring costs and other (3)

ERP system transition (1)

Transaction costs (2)

10.6 — — 10.6

Operational start-up costs (1)

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Adjusted operating income (expense) $ 171.8 13.5 % $ 176.5 17.4 % $ 33.9 13.4 % $ (38.6)

(1) In the first quarter of 2023, we recorded $3.2 million of charges related to the transition of our ERP system, including labor, logistics, training and travel.

(2) In the first quarter of 2023, we recorded $1.7 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

(3) In the first quarter of 2023, we recorded $5.2 million of restructuring costs primarily associated with the acquisition of Mattress Firm.

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

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

Three Months Ended March 31, 2022

(1) In the second quarter of 2023, we recorded $2.4 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

(2) In the second quarter of 2023, we recorded $10.6 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

The following table sets forth our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended June 30, 2022.

Three Months Ended June 30, 2022

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

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Gross profit $ 496.5 41.0 % $ 365.8 37.9 % $ 130.7 53.1 % $ —

ERP system transition (1)

Operational start-up costs (2)

Total adjustments 7.9 7.9 — —

Adjusted gross profit $ 504.4 41.7 % $ 373.7 38.7 % $ 130.7 53.1 % $ —

Operating income (expense) $ 143.9 11.9 % $ 146.1 15.1 % $ 35.8 14.5 % $ (38.0)

ERP system transition (1)

9.4 8.2 — 1.2

Restructuring costs (3)

3.9 1.8 — 2.1

Operational start-up costs (2)

Total adjustments 16.0 12.7 — 3.3

Adjusted operating income (expense) $ 159.9 13.2 % $ 158.8 16.5 % $ 35.8 14.5 % $ (34.7)

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

(2) In the second quarter of 2022, we incurred $3.1 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including $0.4 million of other expense.

(3) In the second quarter of 2022, we recorded $4.1 million of restructuring costs primarily associated with headcount reductions, including $0.2 million of other expense.

EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash

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

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the three months ended March 31, 2023 and 2022:

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the three months ended June 30, 2023 and 2022:

Three Months Ended

(in millions) March 31, 2023 March 31, 2022

(in millions) June 30, 2023 June 30, 2022

Net income $ 92.4 $ 90.6

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EBITDA $ 204.5 $ 186.8

Restructuring costs and other (1)

ERP system transition (2)

Transaction costs (1)

Operational start-up costs (2)

ERP system transition (3)

Restructuring costs (4)

Adjusted EBITDA $ 217.5 $ 203.4

(1) In the first quarter of 2023, we recorded $5.2 million of restructuring costs primarily associated with the acquisition of Mattress Firm.

(2) In the first quarter of 2023, we recorded $3.2 million of charges related to the transition of our ERP system, including labor, logistics, training and travel.

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and adjusted EBITDA for the trailing twelve months ended March 31, 2023:

(1) In the second quarter of 2023, we recorded $10.6 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

In the second quarter of 2022, we incurred $3.1 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S.

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

(4) In the second quarter of 2022, we recorded $4.1 million of restructuring costs primarily associated with headcount reductions.

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and adjusted EBITDA for the trailing twelve months ended June 30, 2023:

Trailing Twelve Months Ended

(in millions) March 31, 2023

(in millions) June 30, 2023

Net income $ 412.1

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Loss from discontinued operations, net of tax (1)

Transaction costs (2)

ERP system transition (3)

Restructuring costs and other (3)

Operational start-up costs (4)

Restructuring costs (5)

Adjusted EBITDA $ 869.4

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

(2) In the trailing twelve months ended March 31, 2023, we recognized $18.7 million of charges related to the transition of our ERP system, including labor, logistics, training and travel.

(3) In the trailing twelve months ended March 31, 2023, we recognized $15.2 million of restructuring costs primarily associated with the acquisition of Mattress Firm and headcount reductions related to organizational changes.

(4) In the trailing twelve months ended March 31, 2023, we recognized $8.2 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

(2) In the trailing twelve months ended June 30, 2023, we recognized $15.8 million of transaction costs associated with the pending acquisition of Mattress Firm.

(3) In the trailing twelve months ended June 30, 2023, we recognized $9.3 million of charges related to the transition of our ERP system.

(4) In the trailing twelve months ended June 30, 2023, we recognized $7.5 million of operational start-up costs primarily related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

(5) In the trailing twelve months ended June 30, 2023, we recognized $5.9 million of restructuring costs primarily associated with headcount reductions related to organizational changes.

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

For the trailing twelve months ended March 31, 2023, our adjustments to net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2019 Credit Agreement.

The ratio of consolidated indebtedness less netted cash to adjusted EBITDA is 3.24 times for the trailing twelve months ended March 31, 2023.

For the trailing twelve months ended June 30, 2023, our adjustments to net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2019 Credit Agreement.

The ratio of consolidated indebtedness less netted cash to adjusted EBITDA is 3.10 times for the trailing twelve months ended June 30, 2023.

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

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of March 31, 2023.

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of June 30, 2023.

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

(in millions) March 31, 2023

(in millions) June 30, 2023

Total debt, net $ 2,781.1

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis