What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-09 · 196 added, 149 removed, 362 unchanged (49% of the section changed)

3 unchanged sentences

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 and in this Report.

See "Special Note Regarding Forward-Looking Statements" elsewhere in this Report and in the 2022 Annual Report, the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2022 Annual Report and in the Quarterly Report on Form 10-Q in the section titled "Risk Factors" contained in ITEM 1A of Part II for the quarter ended June 30, 2023.

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

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

• an overview of our business and strategy;

26 unchanged sentences

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

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

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

Definitive Agreement with Mattress Firm.

7 unchanged sentences

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.

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

We also notified law enforcement authorities.

We incurred $13.5 million of costs in connection with this event, primarily consisting of $9.6 million of manufacturing and network disruption costs incurred to ensure business continuity and $3.9 million primarily related to professional fees incurred for incident response, containment measures and stabilization of the Company's information systems.

Following the forensic investigation, we concluded there was no material impact to our financial results in the third quarter of 2023.

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

8 unchanged sentences

Results of Operations

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.

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

• Total net sales decreased 0.5% to $1,277.1 million as compared to $1,283.3 million in the third quarter of 2022, with a decrease of 3.2% in the North America business segment and and increase of 12.3% in the International business segment.

On a constant currency basis, which is a non-GAAP financial measure, total net sales decreased 1.7%, with a decrease of 3.5% in the North America business segment and an increase of 6.7% in the International business segment.

• Gross margin was 44.9% as compared to 42.2% in the third quarter of 2022.

Adjusted gross margin, which is a non-GAAP financial measure, was 45.9% as compared to 42.5% in the third quarter of 2022.

• Operating income decreased 8.9% to $183.2 million as compared to $201.0 million in the third quarter of 2022.

Adjusted operating income, which is a non-GAAP financial measure, increased 3.9% to $214.7 million as compared to $206.7 million in the third quarter of 2022.

• Net income decreased 14.6% to $113.3 million as compared to $132.7 million in the third quarter of 2022.

Adjusted net income, which is a non-GAAP financial measure, decreased 0.7% to $136.8 million as compared to $137.8 million in the third quarter of 2022.

• Earnings per diluted share ("EPS") decreased 14.7% to $0.64 as compared to $0.75 in the third quarter of 2022.

Adjusted EPS, which is a non-GAAP financial measure, decreased 1.3% to $0.77 as compared to $0.78 in the third quarter of 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."

6 unchanged sentences

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

THREE MONTHS ENDED JUNE 30, 2023 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, 2022

THREE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO THE

THREE MONTHS ENDED SEPTEMBER 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 June 30,

Three Months Ended September 30,

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

8 unchanged sentences

Interest expense, net 32.6 2.6 26.8 2.1

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

Other income, net (0.1) — (0.9) (0.1)

Total other expense, net 32.5 2.5 25.9 2.0

Income before income taxes 125.4 9.9 119.5 9.9

Income from continuing operations before income taxes 150.7 11.8 175.1 13.6

Income tax provision (36.8) (2.9) (41.1) (3.2)

Income from continuing operations 113.9 8.9 134.0 10.4

Loss from discontinued operations, net of tax — — (0.8) (0.1)

Net income before non-controlling interest 113.9 8.9 133.2 10.3

3 unchanged sentences

Earnings per common share:

Basic $ 0.54 $ 0.52

Diluted $ 0.52 $ 0.51

Earnings per share for continuing operations $ 0.66 $ 0.78

Loss per share for discontinued operations — (0.01)

Earnings per share $ 0.66 $ 0.77

Earnings per share for continuing operations $ 0.64 $ 0.75

Loss per share for discontinued operations — —

Earnings per share $ 0.64 $ 0.75

Weighted average common shares outstanding:

1 unchanged sentence

Diluted 177.6 177.0

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 2023 2022 2023 2022

4 unchanged sentences

Total net sales $ 1,277.1 $ 1,283.3 $ 1,023.7 $ 1,057.7 $ 253.4 $ 225.6

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

Net sales decreased 0.5%, and on a constant currency basis decreased 1.7%.

The change in net sales was driven by the following:

• 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%.

• North America net sales decreased $34.0 million, or 3.2%, primarily driven by continued macroeconomic pressures impacting U.S.

consumer behavior.

On a constant currency basis, North America net sales decreased 3.5%.

Net sales in the Wholesale channel decreased $33.0 million, or 3.6%.

Net sales in the Direct channel decreased $1.0 million, or 0.7%.

• International net sales increased $27.8 million, or 12.3%, primarily driven by the success of new TEMPUR® product introductions and favorable foreign exchange.

On a constant currency basis, International net sales increased 6.7%.

1 unchanged sentence

Net sales in the Direct channel increased 10.1% on a constant currency basis.

Three Months Ended June 30,

Three Months Ended September 30,

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

19 unchanged sentences

• North America gross margin improved 220 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.

The improvement in gross margin was primarily driven by normalizing commodity costs of 310 basis points.

These improvements were partially offset by expense deleverage, net of operational efficiencies.

Additionally, in 2023, we incurred $9.6 million of costs associated with the cybersecurity event identified on July 23, 2023, which partially offset the improvement in gross margin.

• International gross margin improved 320 basis points.

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

The improvement in gross margin was primarily driven by normalizing commodity costs of 150 basis points, favorable mix of 120 basis points and expense leverage of 60 basis points.

OPERATING EXPENSES

2 unchanged sentences

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,

Three Months Ended September 30,

2023 2022 2023 2022 2023 2022 2023 2022

7 unchanged sentences

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.

• North America operating expenses increased $19.2 million, or 8.9%, and increased 250 basis points as a percentage of net sales.

The increase in operating expenses was primarily driven by investments in growth initiatives.

• International operating expenses increased $15.2 million, or 16.4%, and increased 150 basis points as a percentage of net sales.

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

The increase in operating expenses was primarily driven by investments in growth initiatives.

• Corporate operating expenses increased $15.7 million, or 42.9%, primarily driven by $15.7 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%.

Research and development expenses for the three months ended September 30, 2023 were $8.2 million compared to $6.6 million for the three months ended September 30, 2022, an increase of $1.6 million or 24.2%.

OPERATING INCOME

Three Months Ended June 30,

Three Months Ended September 30,

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

3 unchanged sentences

Total operating income $ 183.2 14.3 % $ 201.0 15.7 % (1.4) %

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

Operating income decreased $17.8 million and operating margin declined 140 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.

• North America operating income decreased $9.5 million and operating margin declined 30 basis points.

The decline in operating margin was primarily driven by operating expense deleverage of 250 basis points, offset by the improvement in gross margin of 220 basis points.

• International operating income increased $7.4 million and operating margin improved 130 basis points.

The improvement in operating margin was driven by the improvement in gross margin of 320 basis points, offset by operating expense deleverage of 150 basis points.

• Corporate operating expenses increased $15.7 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Three Months Ended June 30,

Three Months Ended September 30,

(in millions, except percentages) 2023 2022 % Change

1 unchanged sentence

Interest expense, net, increased $5.8 million, or 21.6%.

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.

The increase in interest expense, net, was primarily driven by higher interest rates on our variable rate debt.

INCOME TAX PROVISION

Three Months Ended June 30,

Three Months Ended September 30,

(in millions, except percentages) 2023 2022 % Change

2 unchanged sentences

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.

Our income tax provision decreased $4.3 million due to a decrease in income before income taxes.

Our effective tax rate for the three months ended September 30, 2023 as compared to the prior year increased by 90 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

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

NINE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO THE

NINE MONTHS ENDED SEPTEMBER 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,

Nine Months Ended September 30,

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

10 unchanged sentences

Total other expense, net 98.8 2.6 69.9 1.9

Income before income taxes 235.8 9.5 288.5 11.8

Income from continuing operations before income taxes 386.5 10.3 463.6 12.4

Income tax provision (93.5) (2.5) (107.5) (2.9)

Income from continuing operations 293.0 7.8 356.1 9.5

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

Net income before non-controlling interest 293.0 7.8 355.3 9.5

3 unchanged sentences

Earnings per common share:

Basic $ 1.03 $ 1.24

Diluted $ 1.01 $ 1.20

Earnings per share for continuing operations $ 1.69 $ 2.01

Loss per share for discontinued operations — —

Earnings per share $ 1.69 $ 2.01

Earnings per share for continuing operations $ 1.64 $ 1.95

Loss per share for discontinued operations — —

Earnings per share $ 1.64 $ 1.95

Weighted average common shares outstanding:

1 unchanged sentence

Diluted 177.0 181.5

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 2023 2022 2023 2022

6 unchanged sentences

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®.

• North America net sales increased $6.3 million, or 0.2%, primarily driven by the success of new product launches for Tempur-Pedic® and Stearns & Foster®, partially offset by macroeconomic pressures impacting U.S.

consumer behavior.

Net sales in the Wholesale channel increased $8.2 million, or 0.3%.

Net sales in the Direct channel decreased $1.9 million, or 0.5%.

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

• International net sales increased $14.8 million, or 1.9%, primarily driven by the success of new TEMPUR® product introductions.

On a constant currency basis, International net sales increased 3.8%.

1 unchanged sentence

Net sales in the Direct channel increased 4.8% on a constant currency basis.

Six Months Ended June 30,

Nine Months Ended September 30,

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

6 unchanged sentences

• North America gross margin improved 120 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.

The improvement in gross margin was primarily driven by normalizing commodity costs of 190 basis points and pricing actions of 150 basis points.

These improvements were offset by product launch costs of 80 basis points, expense deleverage of 60 basis points and operational headwinds of 40 basis points.

Additionally, in 2023, we incurred $9.6 million of costs associated with the cybersecurity event identified on July 23, 2023, which partially offset the improvement in gross margin.

• International gross margin improved 110 basis points.

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

The improvement in gross margin was driven by favorable mix of 170 basis points and pricing actions, offset by product launch costs of 80 basis points.

OPERATING EXPENSES

2 unchanged sentences

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 2023 2022 2023 2022 2023 2022

8 unchanged sentences

• North America operating expenses increased $39.8 million, or 6.3%, and increased 130 basis points as a percentage of net sales.

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

The increase in operating expenses was primarily driven by investments in growth initiatives.

• International operating expenses increased $32.7 million, or 10.9%, and increased 330 basis points as a percentage of net sales.

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

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

• Corporate operating expenses increased $30.2 million, or 27.9%.

The increase in operating expenses was primarily driven by $31.5 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%.

Research and development expenses were $23.0 million for the nine months ended September 30, 2023 as compared to $22.1 million for the nine months ended September 30, 2022, a increase of $0.9 million, or 4.1%.

OPERATING INCOME

Six Months Ended June 30,

Nine Months Ended September 30,

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

5 unchanged sentences

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

• 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.

• North America operating income decreased $0.9 million and operating margin was consistent with the prior year driven by operating expense deleverage of 130 basis points, offset by the improvement in gross margin of 120 basis points.

• International operating income decreased $17.1 million and operating margin declined 240 basis points.

2 unchanged sentences

INTEREST EXPENSE, NET

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions, except percentages) 2023 2022 % Change

1 unchanged sentence

Interest expense, net, increased $27.6 million, or 38.7%.

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.

The increase in interest expense, net, was primarily driven by higher interest rates on our variable rate debt.

INCOME TAX PROVISION

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions, except percentages) 2023 2022 % Change

2 unchanged sentences

Our income tax provision decreased $14.0 million due to a decrease in income before income taxes.

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

Our effective tax rate for the nine months ended September 30, 2023 as compared to the prior year increased 100 basis points.

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

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.

federal statutory rates for the nine months ended September 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

Our principal sources of funds are cash flows from operations, supplemented with borrowings in the capital markets and made pursuant to our credit facilities and cash and cash equivalents on hand.

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

As of June 30, 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.

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

As of September 30, 2023, we had net working capital of $188.8 million, including cash and cash equivalents of $91.6 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.

The amount of cash and cash equivalents held by subsidiaries outside of the U.S.

3 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) 2023 2022

3 unchanged sentences

Financing activities (303.2) (234.1)

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.

Cash provided by operating activities increased $195.7 million in the nine months ended September 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.

Cash used in investing activities decreased $72.0 million in the nine months ended September 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.

Cash used in financing activities increased $69.1 million in the nine months ended September 30, 2023 as compared to the same period in 2022.

For the nine months ended September 30, 2023, we had net repayments of $198.4 million on our credit facilities as compared to net borrowings of $468.8 million in the same period in 2022, driven primarily by reduced repurchases of common stock.

During the nine months ended September 30, 2023 and 2022, we repurchased $36.0 million and $637.2 million, respectively, of our common stock.

Cash Used in Discontinued Operations

Net cash used in operating, investing and financing activities from discontinued operations for the periods ended September 30, 2022 was not material.

Capital Expenditures

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

Capital expenditures totaled $153.3 million and $216.0 million for the nine months ended September 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 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.

Our total debt decreased to $2,626.3 million as of September 30, 2023 from $2,830.8 million as of December 31, 2022.

Total availability under our revolving senior secured credit facility was $589.4 million as of September 30, 2023.

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 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.

On October 10, 2023, we entered into the 2023 Credit Agreement, which provides for a $1.15 billion revolving credit facility, a $500.0 million term loan facility and an accordion feature for additional borrowings.

Refer to Note 4, "Debt" in the "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1 for further discussion of the accordion feature of the 2023 Credit Agreement.

We used the proceeds under these facilities to refinance outstanding borrowings under the 2019 Credit Agreement and terminated the existing revolving credit commitments.

As of October 10, 2023, the terms of the 2023 Credit Agreement replaced the terms of the 2019 Credit Agreement.

As of September 30, 2023, our ratio of consolidated indebtedness less netted cash to adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA"), which is a non-GAAP financial measure, in accordance with our 2023 Credit Agreement was 2.89 times.

This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio as set forth in the 2023 Credit Agreement, which limits this ratio to 5.00 times.

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.

As of September 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.

The 2019 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, remains below 3.50 times.

In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.50 times.

The 2023 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes contain similar limitations which, subject to certain conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, remains below 3.75 times in the case of the 2023 Credit Agreement and remains below 3.50 times in the cases of the 2029 Senior Notes and 2031 Senior Notes.

In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.75 times in the case of the 2023 Credit Agreement and above 3.50 times in the cases of the 2029 Senior Notes and 2031 Senior Notes.

The limit on restricted payments under the 2023 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted.

3 unchanged sentences

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 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.

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

As of September 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.

9 unchanged sentences

Future Liquidity Sources and Uses

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.

As of September 30, 2023, we had $681.0 million of liquidity, including $91.6 million of cash on hand and $589.4 million available under our 2019 Credit Agreement.

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 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.

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

The dividend is payable on December 4, 2023 to shareholders of record as of November 16, 2023.

As of September 30, 2023, we had $2,626.3 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,534.7 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.89 times for the trailing twelve months ended September 30, 2023.

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

13 unchanged sentences

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

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

Three Months Ended

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

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

Net income $ 113.3 $ 132.7

Transaction costs (1)

Cybersecurity event (2)

Operational start-up costs (3)

1 unchanged sentence

Restructuring costs (5)

Loss from discontinued operations, net of tax (6)

Adjusted income tax provision (7)

2 unchanged sentences

Diluted shares outstanding 177.6 177.0

(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.

(1) In the third quarter of 2023, we recorded $15.7 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

(2) In the third quarter of 2023, we recorded $13.5 million of costs associated with the cybersecurity event identified on July 23, 2023.

Cost of sales included $9.6 million of manufacturing and network disruption costs incurred to ensure business continuity.

Operating expenses included $3.9 million, primarily related to professional fees incurred for incident response, containment measures and stabilization of our information systems.

(3) In the third quarter of 2023, we recorded $2.3 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 third quarter of 2022, we incurred $1.8 million of operational start-up costs.

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

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

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

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

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

(6) Certain subsidiaries in the International business segment were accounted for as discontinued operations and had been designated as unrestricted subsidiaries in the 2019 Credit Agreement.

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

(7) 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 June 30, 2023.

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

(in millions, except percentages) Consolidated

2 unchanged sentences

Gross profit $ 573.7 44.9 % $ 430.4 42.0 % $ 143.3 56.6 % $ —

Cybersecurity event (1)

Operational start-up costs (2)

Total adjustments 11.9 11.9 — —

Adjusted gross profit $ 585.6 45.9 % $ 442.3 43.2 % $ 143.3 56.6 % $ —

2 unchanged sentences

15.7 — — 15.7

Cybersecurity event (1)

13.5 10.0 1.1 2.4

Operational start-up costs (2)

1 unchanged sentence

Adjusted operating income (expense) $ 214.7 16.8 % $ 207.8 20.3 % $ 41.1 16.2 % $ (34.2)

(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

(1) In the third quarter of 2023, we recorded $13.5 million of costs associated with the cybersecurity event identified on July 23, 2023.

Cost of sales included $9.6 million of manufacturing and network disruption costs incurred to ensure business continuity.

Operating expenses included $3.9 million, primarily related to professional fees incurred for incident response, containment measures and stabilization of our information systems.

(2) In the third quarter of 2023, we recorded $2.3 million of operational start-up costs in cost of sales related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

(3) In the third quarter of 2023, we recorded $15.7 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

Three Months Ended September 30, 2022

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

7 unchanged sentences

ERP system transition (1)

9.4 8.2 — 1.2

Operational start-up costs (2)

Restructuring costs (3)

1.2 — 0.6 0.6

Operational start-up costs (2)

Total adjustments 5.7 4.5 0.6 0.6

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

(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.

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

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

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

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

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

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

EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash

6 unchanged sentences

Accordingly, we present adjusted EBITDA to provide information regarding our compliance with requirements under the 2023 Credit Agreement.

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

Three Months Ended

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

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

Net income $ 113.3 $ 132.7

4 unchanged sentences

Transaction costs (1)

Cybersecurity event (2)

Operational start-up costs (3)

1 unchanged sentence

Restructuring costs (5)

Loss from discontinued operations, net of tax (6)

Adjusted EBITDA $ 259.7 $ 251.9

(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:

(1) In the third quarter of 2023, we recorded $15.7 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

(2) In the third quarter of 2023, we recorded $13.5 million of costs associated with the cybersecurity event identified on July 23, 2023.

Cost of sales included $9.6 million of manufacturing and network disruption costs incurred to ensure business continuity.

Operating expenses included $3.9 million, primarily related to professional fees incurred for incident response, containment measures and stabilization of our information systems.

(3) In the third quarter of 2023, we recorded $2.3 million of operational start-up costs in cost of sales related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

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

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

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

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

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

(6) Certain subsidiaries in the International business segment were accounted for as discontinued operations and had been designated as unrestricted subsidiaries in the 2019 Credit Agreement.

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

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

Trailing Twelve Months Ended

(in millions) June 30, 2023

(in millions) September 30, 2023

Net income $ 392.7

3 unchanged sentences

EBITDA $ 813.3

Loss from discontinued operations, net of tax (1)

Transaction costs (1)

ERP system transition (3)

Cybersecurity event (2)

Operational start-up costs (3)

ERP system transition (4)

Restructuring costs (5)

2 unchanged sentences

Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 2.89 times

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

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

(2) In the trailing twelve months ended 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 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.

(1) In the trailing twelve months ended September 30, 2023, we recognized $31.5 million of transaction costs associated with the pending acquisition of Mattress Firm.

(2) In the trailing twelve months ended September 30, 2023, we recorded $13.5 million of costs associated with the cybersecurity event identified on July 23, 2023.

Cost of sales included $9.6 million of manufacturing and network disruption costs incurred to ensure business continuity.

Operating expenses included $3.9 million, primarily related to professional fees incurred for incident response, containment measures and stabilization of our information systems.

(3) In the trailing twelve months ended September 30, 2023, we recognized $8.0 million of operational start-up costs in cost of sales for the capacity expansion of our manufacturing and distribution facilities in the U.S., which include personnel and facility related costs.

(4) In the trailing twelve months ended September 30, 2023, we recognized $6.6 million of charges related to the transition of our ERP system.

(5) In the trailing twelve months ended September 30, 2023, we recognized $4.7 million of restructuring costs primarily associated with headcount reductions related to organizational changes.

On October 10, 2023, our 2023 Credit Agreement replaced our 2019 Credit Agreement.

Adjusted EBITDA contains certain restrictions that limit adjustments to net income when calculating adjusted EBITDA under both the 2019 Credit Agreement and the 2023 Credit Agreement.

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

The 2023 Credit Agreement requires compliance with certain financial covenants providing, among other things, for maintenance of a minimum consolidated interest coverage ratio, maintenance of a maximum consolidated total net leverage ratio, and maintenance of a maximum consolidated secured net leverage ratio.

The consolidated total net leverage ratio is calculated using consolidated indebtedness less netted cash.

Consolidated indebtedness includes debt recorded on the Condensed Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding in excess of $60.0 million and short-term other debt.

We are allowed to subtract from consolidated indebtedness an amount equal to 100.0% of the domestic and foreign unrestricted cash ("netted cash").

Under the 2023 Credit Agreement and the 2019 Credit Agreement, the ratio of adjusted EBITDA to consolidated indebtedness less netted cash was 2.89 times for the trailing twelve months ended September 30, 2023.

The 2023 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 June 30, 2023.

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

"Consolidated Indebtedness" and "Netted Cash" are terms used in the 2023 Credit Agreement for purposes of certain financial covenants.

(in millions) June 30, 2023

(in millions) September 30, 2023

Total debt, net $ 2,608.5

10 unchanged sentences

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