SOMNIGROUP INTERNATIONAL INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME ($ in millions, except per common share amounts) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Net sales $ 1,277.1 $ 1,283.3 $ 3,754.9 $ 3,733.8 Cost of sales 703.4 742.2 2,139.0 2,173.4 Gross profit 573.7 541.1 1,615.9 1,560.4 Selling and marketing expenses 272.9 248.3 799.8 744.7 General, administrative and other expenses 122.2 96.7 344.2 296.6 Equity income in earnings of unconsolidated affiliates ( 4.6 ) ( 4.9 ) ( 13.4 ) ( 14.4 ) Operating income 183.2 201.0 485.3 533.5 Other expense, net: Interest expense, net 32.6 26.8 99.0 71.4 Other income, net ( 0.1 ) ( 0.9 ) ( 0.2 ) ( 1.5 ) Total other expense, net 32.5 25.9 98.8 69.9 Income from continuing operations before income taxes 150.7 175.1 386.5 463.6 Income tax provision ( 36.8 ) ( 41.1 ) ( 93.5 ) ( 107.5 ) Income from continuing operations 113.9 134.0 293.0 356.1 Loss from discontinued operations, net of tax — ( 0.8 ) — ( 0.8 ) Net income before non-controlling interest 113.9 133.2 293.0 355.3 Less: Net income attributable to non-controlling interest 0.6 0.5 2.0 1.3 Net income attributable to Tempur Sealy International, Inc. $ 113.3 $ 132.7 $ 291.0 $ 354.0 Earnings per common share: Basic Earnings per share for continuing operations $ 0.66 $ 0.78 $ 1.69 $ 2.01 Loss per share for discontinued operations — ( 0.01 ) — — Earnings per share $ 0.66 $ 0.77 $ 1.69 $ 2.01 Diluted Earnings per share for continuing operations $ 0.64 $ 0.75 $ 1.64 $ 1.95 Loss per share for discontinued operations — — — — Earnings per share $ 0.64 $ 0.75 $ 1.64 $ 1.95 Weighted average common shares outstanding: Basic 172.2 171.9 172.1 176.2 Diluted 177.6 177.0 177.0 181.5 See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ($ in millions) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Net income before non-controlling interest $ 113.9 $ 133.2 $ 293.0 $ 355.3 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments ( 31.5 ) ( 64.8 ) 0.6 ( 140.1 ) Other comprehensive (loss) income, net of tax ( 31.5 ) ( 64.8 ) 0.6 ( 140.1 ) Comprehensive income 82.4 68.4 293.6 215.2 Less: Comprehensive income attributable to non-controlling interest 0.6 0.5 2.0 1.3 Comprehensive income attributable to Tempur Sealy International, Inc. $ 81.8 $ 67.9 $ 291.6 $ 213.9 See accompanying Notes to Condensed Consolidated Financial Statements . 5 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($ in millions) September 30, 2023 December 31, 2022 ASSETS (unaudited) Current Assets: Cash and cash equivalents $ 91.6 $ 69.4 Accounts receivable, net 525.8 422.6 Inventories 485.5 555.0 Prepaid expenses and other current assets 144.8 148.2 Total Current Assets 1,247.7 1,195.2 Property, plant and equipment, net 849.4 791.1 Goodwill 1,064.8 1,062.3 Other intangible assets, net 709.4 715.8 Operating lease right-of-use assets 585.5 506.8 Deferred income taxes 12.7 11.3 Other non-current assets 76.6 77.3 Total Assets $ 4,546.1 $ 4,359.8 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current Liabilities: Accounts payable $ 361.7 $ 359.8 Accrued expenses and other current liabilities 502.9 432.7 Short-term operating lease obligations 112.7 105.5 Current portion of long-term debt 70.0 70.4 Income taxes payable 11.6 12.8 Total Current Liabilities 1,058.9 981.2 Long-term debt, net 2,538.5 2,739.9 Long-term operating lease obligations 527.8 453.5 Deferred income taxes 116.1 114.0 Other non-current liabilities 81.1 83.5 Total Liabilities 4,322.4 4,372.1 Redeemable non-controlling interest 9.6 9.8 Total Stockholders' Equity (Deficit) 214.1 ( 22.1 ) Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity (Deficit) $ 4,546.1 $ 4,359.8 See accompanying Notes to Condensed Consolidated Financial Statements. 6 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) ($ in millions) (unaudited) Three Months Ended September 30, 2023 Tempur Sealy International, Inc. Stockholders' Equity Redeemable Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings Balance, June 30, 2023 $ 9.4 283.8 $ 2.8 111.6 $ ( 3,384.1 ) $ 536.7 $ 3,127.5 $ ( 144.8 ) $ 138.1 Net income 113.3 113.3 Net income attributable to non-controlling interest 0.6 — Dividend paid to non-controlling interest in subsidiary ( 0.4 ) — Foreign currency adjustments, net of tax ( 31.5 ) ( 31.5 ) Exercise of stock options ( 0.1 ) 3.1 ( 1.1 ) 2.0 Dividends declared on common stock ($ 0.11 per share) ( 19.4 ) ( 19.4 ) Issuances of PRSUs and RSUs — 0.2 ( 0.2 ) — Treasury stock repurchased — — — Treasury stock repurchased - PRSU/RSU releases — ( 0.1 ) ( 0.1 ) Amortization of unearned stock-based compensation 11.7 11.7 Balance, September 30, 2023 $ 9.6 283.8 $ 2.8 111.5 $ ( 3,380.9 ) $ 547.1 $ 3,221.4 $ ( 176.3 ) $ 214.1 Three Months Ended September 30, 2022 Tempur Sealy International, Inc. Stockholders' Deficit Redeemable Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' Deficit Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings Balance, June 30, 2022 $ 9.0 283.8 $ 2.8 111.4 $ ( 3,381.3 ) $ 573.6 $ 2,789.5 $ ( 174.5 ) $ ( 189.9 ) Net income 132.7 132.7 Net income attributable to non-controlling interest 0.5 — Dividend paid to non-controlling interest in subsidiary ( 0.2 ) — Foreign currency adjustments, net of tax ( 64.8 ) ( 64.8 ) Exercise of stock options — 0.3 ( 0.2 ) 0.1 Dividends declared on common stock ($ 0.10 per share) ( 17.8 ) ( 17.8 ) Issuances of PRSUs and RSUs — 0.4 ( 0.4 ) — Treasury stock repurchased 1.0 ( 25.0 ) ( 25.0 ) Treasury stock repurchased - PRSU/RSU releases — ( 0.2 ) ( 0.2 ) Amortization of unearned stock-based compensation 12.3 12.3 Balance, September 30, 2022 $ 9.3 283.8 $ 2.8 112.4 $ ( 3,405.8 ) $ 585.3 $ 2,904.4 $ ( 239.3 ) $ ( 152.6 ) See accompanying Notes to Condensed Consolidated Financial Statements . 7 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) ($ in millions) (unaudited) Nine Months Ended September 30, 2023 Tempur Sealy International, Inc. Stockholders' (Deficit) Equity Redeemable Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' (Deficit) Equity Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings Balance as of December 31, 2022 $ 9.8 283.8 $ 2.8 113.4 $ ( 3,434.7 ) $ 598.2 $ 2,988.5 $ ( 176.9 ) $ ( 22.1 ) Net income 291.0 291.0 Net income attributable to non-controlling interests 2.0 — Dividend paid to non-controlling interest in subsidiary ( 2.2 ) — Foreign currency adjustments, net of tax 0.6 0.6 Exercise of stock options ( 0.2 ) 4.6 ( 1.8 ) 2.8 Dividends declared on common stock ($ 0.33 per share) ( 58.1 ) ( 58.1 ) Issuances of PRSUs and RSUs ( 2.7 ) 85.2 ( 85.2 ) — Treasury stock repurchased 0.1 ( 5.0 ) ( 5.0 ) Treasury stock repurchased - PRSU/RSU releases 0.9 ( 31.0 ) ( 31.0 ) Amortization of unearned stock-based compensation 35.9 35.9 Balance, September 30, 2023 $ 9.6 283.8 $ 2.8 111.5 $ ( 3,380.9 ) $ 547.1 $ 3,221.4 $ ( 176.3 ) $ 214.1 Nine Months Ended September 30, 2022 Tempur Sealy International, Inc. Stockholders' Equity (Deficit) Redeemable Non-controlling Interest Common Stock Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' Equity (Deficit) Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings Balance as of December 31, 2021 $ 9.2 283.8 $ 2.8 96.4 $ ( 2,844.7 ) $ 622.0 $ 2,604.9 $ ( 99.2 ) $ 285.8 Net income 354.0 354.0 Net income attributable to non-controlling interests 1.3 — Dividend paid to non-controlling interest in subsidiary ( 1.2 ) — Foreign currency adjustments, net of tax ( 140.1 ) ( 140.1 ) Exercise of stock options — 0.7 ( 0.4 ) 0.3 Dividends declared on common stock ($ 0.30 per share) ( 54.5 ) ( 54.5 ) Issuances of PRSUs and RSUs ( 2.6 ) 75.4 ( 75.4 ) — Treasury stock repurchased 17.6 ( 591.2 ) ( 591.2 ) Treasury stock repurchased - PRSU/RSU releases 1.0 ( 46.0 ) ( 46.0 ) Amortization of unearned stock-based compensation 39.1 39.1 Balance, September 30, 2022 $ 9.3 283.8 $ 2.8 112.4 $ ( 3,405.8 ) $ 585.3 $ 2,904.4 $ ( 239.3 ) $ ( 152.6 ) See accompanying Notes to Condensed Consolidated Financial Statements . 8 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in millions) (unaudited) Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS: Net income before non-controlling interest $ 293.0 $ 355.3 Loss from discontinued operations, net of tax — 0.8 Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: Depreciation and amortization 99.6 93.3 Amortization of stock-based compensation 35.9 39.1 Amortization of deferred financing costs 2.9 2.9 Bad debt expense 7.1 5.2 Deferred income taxes 0.5 ( 9.9 ) Dividends received from unconsolidated affiliates 18.1 20.8 Equity income in earnings of unconsolidated affiliates ( 13.4 ) ( 14.4 ) Foreign currency adjustments and other ( 1.9 ) ( 1.6 ) Changes in operating assets and liabilities 37.4 ( 208.0 ) Net cash provided by operating activities from continuing operations 479.2 283.5 CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS: Purchases of property, plant and equipment ( 153.3 ) ( 216.0 ) Other 0.5 ( 8.8 ) Net cash used in investing activities from continuing operations ( 152.8 ) ( 224.8 ) CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS: Proceeds from borrowings under long-term debt obligations 1,491.5 1,904.3 Repayments of borrowings under long-term debt obligations ( 1,689.9 ) ( 1,435.5 ) Proceeds from exercise of stock options 2.8 0.3 Treasury stock repurchased ( 36.0 ) ( 637.2 ) Dividends paid ( 58.8 ) ( 53.4 ) Repayments of finance lease obligations and other ( 12.8 ) ( 12.6 ) Net cash used in financing activities from continuing operations ( 303.2 ) ( 234.1 ) Net cash provided by (used in) continuing operations 23.2 ( 175.4 ) Net operating cash flows used in discontinued operations — ( 0.8 ) NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ( 1.0 ) ( 30.4 ) Increase (decrease) in cash and cash equivalents 22.2 ( 206.6 ) CASH AND CASH EQUIVALENTS, beginning of period 69.4 300.7 CASH AND CASH EQUIVALENTS, end of period $ 91.6 $ 94.1 Supplemental cash flow information: Cash paid during the period for: Interest $ 92.2 $ 57.0 Income taxes, net of refunds $ 84.4 $ 105.0 See accompanying Notes to Condensed Consolidated Financial Statements. 9 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (1) Summary of Significant Accounting Policies (a) Basis of Presentation and Description of Business. Tempur Sealy International, Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term "Tempur Sealy International" refers to Tempur Sealy International, Inc. only, and the term "Company" refers to Tempur Sealy International, Inc. and its consolidated subsidiaries. The Company designs, manufactures and distributes bedding products, which include mattresses, foundations and adjustable bases, and other products, which include pillows and other accessories. The Company also derives income from royalties by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The Company sells its products through two sales channels: Wholesale and Direct. The Company has ownership interests in Asia-Pacific joint ventures to develop markets for Sealy® and Stearns & Foster® branded products and ownership in a United Kingdom joint venture to manufacture, market, and distribute Sealy® and Stearns & Foster® branded products. The Company's ownership interests in each of these joint ventures is 50.0 %. The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have control, and consolidation is not otherwise required. The Company's equity in the net income and losses of these investments is reported in equity income in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States ("GAAP") for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2022, included in the 2022 Annual Report filed with the Securities and Exchange Commission on February 17, 2023. The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. (b) Adoption of New Accounting Standards Reference Rate Reform. In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides guidance on the accounting impacts due to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). The FASB continued to refine its guidance with the January 2021 ASU 2021-01 issued update, "Reference Rate Reform (Topic 848): Scope" and the December 2022 ASU 2022-06 issued update, "Reference Rate Reform ("Topic 848"): Deferral of the Sunset Date of Topic 848", of which all were effective upon issuance. These updates provide entities with certain optional relief expedients and exceptions for applying GAAP to contract modifications, hedge accounting and other transactions affected by reference rate reform if certain criteria are met. An entity that makes this election would present and account for a modified contract as a continuation of the existing contract. Entities are afforded these relief options until December 31, 2024, after which time they will no longer be permitted. In May 2023, the Company amended its 2019 Credit Agreement to transition the applicable reference rate from LIBOR to SOFR. In October 2023, the Company entered into the 2023 Credit Agreement, which uses SOFR as the applicable reference rate. See "Note 4 - Debt" for additional details. The results of this guidance did not have a material impact on the condensed consolidated financial statements. 10 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (c) Inventories . Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out method , and consist of the following: September 30, December 31, (in millions) 2023 2022 Finished goods $ 310.3 $ 352.9 Work-in-process 15.9 19.4 Raw materials and supplies 159.3 182.7 $ 485.5 $ 555.0 (d) Warranties . The Company provides warranties on certain products, which vary by segment, product and brand. Estimates of warranty expenses are based primarily on historical claims experience and product testing. Estimated future obligations related to these products are charged to cost of sales in the period in which the related revenue is recognized. The Company considers the impact of recoverable salvage value on warranty costs in determining its estimate of future warranty obligations. The Company provides warranties on mattresses with varying warranty terms. Tempur-Pedic mattresses sold in the North America segment and all Sealy mattresses have warranty terms ranging from 10 to 25 years, generally non-prorated for the first 10 to 15 years and then prorated for the balance of the warranty term. Tempur-Pedic mattresses sold in the International segment have warranty terms ranging from 5 to 15 years, non-prorated for the first 5 years and then prorated on a straight-line basis for the last 10 years of the warranty term. Tempur-Pedic pillows have a warranty term of 3 years, non-prorated. The Company had the following activity for its accrued warranty expense from December 31, 2022 to September 30, 2023: (in millions) Balance as of December 31, 2022 $ 41.6 Amounts accrued 17.5 Warranties charged to accrual ( 18.5 ) Balance as of September 30, 2023 $ 40.6 As of September 30, 2023 and December 31, 2022, $ 18.4 million and $ 17.8 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $ 22.2 million and $ 23.8 million of accrued warranty expense is included in other non-current liabilities on the Company's accompanying Condensed Consolidated Balance Sheets, respectively. (e) Allowance for Credit Losses . The allowance for credit losses is the Company's best estimate of the amount of expected lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses. The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. As of September 30, 2023, the Company's accounts receivable were substantially current. Other factors considered include historical write-off experience, current economic conditions and also factors such as customer credit, past transaction history with the customer and changes in customer payment terms. Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. The allowance for credit losses is included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets. The Company had the following activity for its allowance for credit losses from December 31, 2022 to September 30, 2023: (in millions) Balance as of December 31, 2022 $ 62.4 Amounts accrued 7.1 Write-offs charged against the allowance ( 1.8 ) Balance as of September 30, 2023 $ 67.7 11 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (f) Fair Value. Financial instruments, although not recorded at fair value on a recurring basis, include cash and cash equivalents, accounts receivable, accounts payable and the Company's debt obligations. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those instruments. Borrowings under the 2019 Credit Agreement and the securitized debt are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the following material financial instruments were based on Level 2 inputs, which include observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of debt instruments. The fair values of these material financial instruments are as follows: Fair Value (in millions) September 30, 2023 December 31, 2022 2029 Senior Notes $ 668.4 $ 672.7 2031 Senior Notes $ 618.7 $ 627.1 (g) 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. The Company expects 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 within the Company. (2) Net Sales The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the three months ended September 30, 2023 and 2022: Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 (in millions) North America International Consolidated North America International Consolidated Channel Wholesale $ 885.1 $ 89.5 $ 974.6 $ 918.1 $ 85.1 $ 1,003.2 Direct 138.6 163.9 302.5 139.6 140.5 280.1 Net sales $ 1,023.7 $ 253.4 $ 1,277.1 $ 1,057.7 $ 225.6 $ 1,283.3 North America International Consolidated North America International Consolidated Product Bedding $ 949.5 $ 209.5 $ 1,159.0 $ 986.7 $ 185.9 $ 1,172.6 Other 74.2 43.9 118.1 71.0 39.7 110.7 Net sales $ 1,023.7 $ 253.4 $ 1,277.1 $ 1,057.7 $ 225.6 $ 1,283.3 North America International Consolidated North America International Consolidated Geographical region United States $ 939.1 $ — $ 939.1 $ 982.6 $ — $ 982.6 All Other 84.6 253.4 338.0 75.1 225.6 300.7 Net sales $ 1,023.7 $ 253.4 $ 1,277.1 $ 1,057.7 $ 225.6 $ 1,283.3 12 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the nine months ended September 30, 2023 and 2022: Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 (in millions) North America International Consolidated North America International Consolidated Channel Wholesale $ 2,585.4 $ 291.0 $ 2,876.4 $ 2,577.2 $ 289.2 $ 2,866.4 Direct 374.7 503.8 878.5 376.6 490.8 867.4 Net sales $ 2,960.1 $ 794.8 $ 3,754.9 $ 2,953.8 $ 780.0 $ 3,733.8 North America International Consolidated North America International Consolidated Product Bedding $ 2,759.4 $ 653.9 $ 3,413.3 $ 2,760.7 $ 647.5 $ 3,408.2 Other 200.7 140.9 341.6 193.1 132.5 325.6 Net sales $ 2,960.1 $ 794.8 $ 3,754.9 $ 2,953.8 $ 780.0 $ 3,733.8 North America International Consolidated North America International Consolidated Geographical region United States $ 2,740.2 $ — $ 2,740.2 $ 2,737.2 $ — $ 2,737.2 All Other 219.9 794.8 1,014.7 216.6 780.0 996.6 Net sales $ 2,960.1 $ 794.8 $ 3,754.9 $ 2,953.8 $ 780.0 $ 3,733.8 (3) Goodwill The following summarizes changes to the Company's goodwill, by segment: (in millions) North America International Consolidated Balance as of December 31, 2022 $ 607.3 $ 455.0 $ 1,062.3 Foreign currency translation and other 0.6 1.9 2.5 Balance as of September 30, 2023 $ 607.9 $ 456.9 $ 1,064.8 13 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (4) Debt Debt for the Company consists of the following: September 30, 2023 December 31, 2022 (in millions, except percentages) Amount Rate Amount Rate Maturity Date 2019 Credit Agreement: Term A Facility $ 598.0 (1) $ 638.8 (2) October 16, 2024 Revolver 135.0 (1) 337.0 (2) October 16, 2024 2031 Senior Notes 800.0 3.875 % 800.0 3.875 % October 15, 2031 2029 Senior Notes 800.0 4.000 % 800.0 4.000 % April 15, 2029 Securitized debt 162.0 (3) 139.3 (4) April 7, 2025 Finance lease obligations (5) 72.6 78.7 Various Other 58.7 37.0 Various Total debt 2,626.3 2,830.8 Less: Deferred financing costs 17.8 20.5 Total debt, net 2,608.5 2,810.3 Less: Current portion 70.0 70.4 Total long-term debt, net $ 2,538.5 $ 2,739.9 (1) Interest at SOFR index plus 10 basis points of credit spread adjustment, plus applicable margin of 1.375 % as of September 30, 2023. (2) Interest at LIBOR plus applicable margin of 1.250 % as of December 31, 2022. (3) Interest at one month SOFR index plus 10 basis points of credit spread adjustment, plus 85 basis points. (4) Interest at one month LIBOR index plus 70 basis points. (5) New finance lease obligations are a non-cash financing activity. As of September 30, 2023, the Company was in compliance with all applicable debt covenants. 2023 Credit Agreement On October 10, 2023, the Company entered into the 2023 Credit Agreement with a syndicate of banks. The 2023 Credit Agreement replaced the Company's 2019 Credit Agreement. The 2023 Credit Agreement provides for a $ 1.15 billion revolving credit facility, a $ 500.0 million term loan facility, and an incremental facility in an aggregate amount of up to the greater of $ 850.0 million and additional amounts subject to the conditions set forth in the 2023 Credit Agreement, plus the amount of certain prepayments, plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2023 Credit Agreement has a $ 60.0 million sub-facility for the issuance of letters of credit. Borrowings under the 2023 Credit Agreement will generally bear interest, at the election of Tempur Sealy International and the other subsidiary borrowers, at either (i) base rate plus the applicable margin, (ii) "Eurocurrency" rate plus the applicable margin, (iii) "RFR" rate plus the applicable margin or (iv) a "Term Benchmark" rate plus the applicable margin. The aforementioned rates are defined in the 2023 Credit Agreement, which was previously filed as an exhibit to the Company's Current Report on Form 8-K, which was filed on October 11, 2023. For the revolving credit facility and the term loan facility (a) the initial applicable margin for base rate advances was 0.625 % per annum and the initial applicable margin for Eurocurrency rate, RFR rate and Term Benchmark advances was 1.625 % per annum, and (b) following the delivery of financial statements for the fiscal quarter ending March 31, 2024 and for subsequent fiscal quarters, such applicable margins will be determined by a pricing grid based on the consolidated total net leverage ratio of the Company. Obligations under the 2023 Credit Agreement are guaranteed by the Company's existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions and are secured by a security interest in substantially all of Tempur Sealy International’s and the other subsidiary borrowers' domestic assets and the domestic assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0 % of the equity interests of each subsidiary owned by the Company or a subsidiary guarantor that is a domestic entity (subject to certain limited exceptions) and 65.0 % of the voting equity interests of any direct first tier foreign entity owned by the Company or a subsidiary guarantor. The 2023 Credit Agreement requires compliance with certain financial covenants providing 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 (as defined below). 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 other short-term debt. The Company is allowed to subtract from consolidated indebtedness an amount equal to 100.0 % of the domestic and foreign unrestricted cash ("netted cash"). As of September 30, 2023, netted cash was $ 91.6 million. The 2023 Credit Agreement contains certain customary negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, transactions with affiliates, use of proceeds, prepayments of certain indebtedness, entry into burdensome agreements and changes to governing documents. The 2023 Credit Agreement also contains certain customary affirmative covenants and events of default, including upon a change of control. The Company is required to pay a commitment fee on the unused portion of the revolving credit facility, which initially will be 0.25 % per annum and following the delivery of financial statements for the fiscal quarter ending March 31, 2024 and for subsequent fiscal quarters, such fees will be determined by a pricing grid based on the consolidated total net leverage ratio of the Company. This unused commitment fee is payable quarterly in arrears and on the date of termination or expiration of the commitments under the revolving credit facility. The Company and the other borrowers also pay customary letter of credit issuance and other fees under the 2023 Credit Agreement. The maturity date of the 2023 Credit Agreement is October 10, 2028. Amounts under the revolving credit facility may be borrowed, repaid and re-borrowed from time to time until the maturity date. The term loan facility is subject to quarterly amortization as set forth in the 2023 Credit Agreement. In addition, the term loan facility is subject to mandatory prepayment in connection with certain debt issuances, asset sales and casualty events, subject to certain reinvestment rights. Voluntary prepayments and commitment reductions under the 2023 Credit Agreement are permitted at any time without payment of any prepayment premiums. 2019 Credit Agreement The Company used the proceeds from the 2023 Credit Agreement to refinance outstanding borrowings under the 2019 Credit Agreement and terminated the existing revolving credit commitments. The 2019 Credit Agreement, as amended, initially provided for a $ 725.0 million revolving credit facility and a $ 725.0 million term loan facility. The Company had $ 135.0 million in outstanding borrowings under its revolving credit facility as of September 30, 2023. Total remaining availability under the revolving credit facility was $ 589.4 million after a $ 0.6 million reduction for outstanding letters of credit as of September 30, 2023. Securitized Debt The Company and certain of its subsidiaries are party to a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended, the "Accounts Receivable Securitization"). As of September 30, 2023, total availability under the Accounts Receivable Securitization was $ 28.4 million. On April 6, 2023, the Company and certain of its subsidiaries entered into a second amendment to the Accounts Receivable Securitization. The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 7, 2025. While subject to a $ 200.0 million overall limit, the availability of revolving loans varies over the course of the year based on the seasonality of the Company's accounts receivable. 14 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (5) Stockholders' Equity (a) Treasury Stock. As of September 30, 2023, the Company had approximately $ 774.5 million remaining under its share repurchase authorization. The Company did not repurchase shares, under the program, during the three months ended September 30, 2023. The Company repurchased 1.0 million shares, under the program, for approximately $ 25.0 million during the three months ended September 30, 2022. The Company repurchased 0.1 million and 17.6 million shares, under the program, for approximately $ 5.0 million and $ 591.2 million during the nine months ended September 30, 2023 and 2022, respectively. In addition, the Company acquired shares upon the vesting of certain restricted stock units ("RSUs") and performance restricted stock units ("PRSUs"), which were withheld to satisfy tax withholding obligations during each of the three and nine months ended September 30, 2023 and 2022, respectively. The shares withheld were valued at the closing price of the stock on the New York Stock Exchange on the vesting date or first business day prior to vesting, resulting in $ 0.1 million and $ 0.2 million in treasury stock acquired during the three months ended September 30, 2023 and 2022, respectively. The Company acquired approximately $ 31.0 million and $ 46.0 million in treasury stock during the nine months ended September 30, 2023 and 2022, respectively. (b) Accumulated Other Comprehensive Loss ("AOCL"). AOCL consisted of the following: Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2023 2022 2023 2022 Foreign Currency Translation Balance at beginning of period $ ( 143.2 ) $ ( 170.5 ) $ ( 175.3 ) $ ( 95.2 ) Other comprehensive loss: Foreign currency translation adjustments (1) ( 31.5 ) ( 64.8 ) 0.6 ( 140.1 ) Balance at end of period $ ( 174.7 ) $ ( 235.3 ) $ ( 174.7 ) $ ( 235.3 ) Pensions Balance at beginning of period $ ( 1.6 ) $ ( 4.0 ) $ ( 1.6 ) $ ( 4.0 ) Other comprehensive loss: Net change from period revaluations — — — — Balance at end of period $ ( 1.6 ) $ ( 4.0 ) $ ( 1.6 ) $ ( 4.0 ) (1) In 2023 and 2022, there were no tax impacts related to foreign currency translation adjustments and no amounts were reclassified to earnings. (6) Other Items Accrued expenses and other current liabilities Accrued expenses and other current liabilities consisted of the following: (in millions) September 30, 2023 December 31, 2022 Wages and benefits $ 97.8 $ 78.0 Advertising 66.5 64.9 Unearned revenue 64.1 48.5 Taxes 58.7 52.1 Other 215.8 189.2 $ 502.9 $ 432.7 15 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (7) Stock-Based Compensation The Company's stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022 included PRSUs, non-qualified stock options and RSUs. A summary of the Company's stock-based compensation expense is presented in the following table: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 PRSU expense $ 5.9 $ 6.4 $ 18.8 $ 22.6 Option expense 0.5 0.5 1.6 0.5 RSU expense 5.3 5.4 15.5 16.0 Total stock-based compensation expense $ 11.7 $ 12.3 $ 35.9 $ 39.1 The Company grants PRSUs to executive officers and certain members of management. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals. During the first quarter of 2023, the Company granted PRSUs as a component of the long-term incentive plan ("2023 PRSUs"). The Company has recorded stock-based compensation expense related to the 2023 PRSUs during the three and nine months ended September 30, 2023, as it was probable that the Company would achieve the specified performance targets for the performance period. (8) Commitments and Contingencies The Company is involved in various legal and administrative proceedings incidental to the operations of its business. The Company believes that the outcome of all such pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity or operating results. (9) Income Taxes The Company's effective tax rates for the three months ended September 30, 2023 and 2022 were 24.4 % and 23.5 %, respectively. The Company's effective tax rates for the nine months ended September 30, 2023 and 2022 were 24.2 % and 23.2 %, respectively. The Company's effective tax rates for the three and nine months ended September 30, 2023 and 2022 differed from the U.S. federal statutory rate of 21.0% principally due to subpart F income (i.e., global intangible low-taxed income, or "GILTI," earned by the Company's foreign subsidiaries), foreign income tax rate differentials, state and local taxes, changes in the Company's uncertain tax positions, the excess tax benefit related to stock-based compensation and certain other permanent items. The Company has been involved in a dispute with the Danish Tax Authority ("SKAT") regarding the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish Tax Matter") for tax years 2012 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process. In November 2018, the Company entered into the Advanced Pricing Agreement program (the "APA Program") requesting SKAT and the U.S. Internal Revenue Service ("IRS") to directly negotiate a mutually acceptable agreement on the Danish Tax Matter. During December 2022, pursuant to the negotiations described above with respect to the APA Program, SKAT and the IRS preliminarily concluded on a mutually acceptable framework ("Preliminary Framework") to resolve the Danish Tax Matter for the 2012 to 2022 tax years. On October 12, 2023, the two tax authorities formally signed, pursuant to the APA Program, the bilateral APA case and mutual agreement procedure (the "Mutual Agreement") cases between the U.S. and the Kingdom of Denmark. The terms of the Mutual Agreement reflect in all material respects those terms contained in the Preliminary Framework. It is anticipated that implementation of the terms of the Mutual Agreement (as reflected in the calculation of taxable income in both Denmark and the U.S. for the years covered in such agreement) will be materially and substantially consistent with those previously recorded in the Company’s Consolidated Balance Sheets as of September 30, 2023 (pursuant to the Preliminary Framework which was preliminary as of that date) and will be completed in the next twelve months. 16 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The uncertain income tax liability for the Danish Tax Matter for the years 2012 through 2022 was approximately $ 37.2 million and $ 37.8 million at September 30, 2023 and December 31, 2022, respectively, and is reflected in the Company's Condensed Consolidated Balance Sheets in accrued expenses and other current liabilities. Conversely, the deferred tax asset for the U.S. correlative benefit associated with the accrual of the Danish Tax Matter for the 2012 to 2022 tax years was approximately $ 21.6 million for both periods ended September 30, 2023 and December 31, 2022. Starting January 1, 2023, the Company adopted the terms of the Preliminary Framework for the calculation of the royalty as described above. As such, there is no uncertain income tax liability or deferred tax asset associated with the adoption of the terms of the Mutual Agreement. As of September 30, 2023, the Company had made the following tax deposits related to assessments received by SKAT for the Danish Tax Matter for the years 2012 through 2016, which are reflected in the Company's Condensed Consolidated Balance Sheets in other current assets: (in millions) USD VAT deposits remaining with SKAT $ 1.4 Deposit payments 56.4 Total $ 57.8 (10) Earnings Per Common Share The following table sets forth the components of the numerator and denominator for the computation of basic and diluted earnings per share for net income attributable to Tempur Sealy International: Three Months Ended Nine Months Ended September 30, September 30, (in millions, except per common share amounts) 2023 2022 2023 2022 Numerator: Net income from continuing operations, net of income attributable to non-controlling interests $ 113.3 $ 133.5 $ 291.0 $ 354.8 Denominator: Denominator for basic earnings per common share-weighted average shares 172.2 171.9 172.1 176.2 Effect of dilutive securities 5.4 5.1 4.9 5.3 Denominator for diluted earnings per common share-adjusted weighted average shares 177.6 177.0 177.0 181.5 Basic earnings per common share $ 0.66 $ 0.78 $ 1.69 $ 2.01 Diluted earnings per common share $ 0.64 $ 0.75 $ 1.64 $ 1.95 The Company excludes shares issuable upon exercise of outstanding stock options from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive. The Company did not exclude any shares for the three months ended September 30, 2023 and excluded 1.5 million shares for the three months ended September 30, 2022. The Company excluded 0.2 million and 0.8 million shares for the nine months ended September 30, 2023 and September 30, 2022, respectively. Holders of non-vested stock-based compensation awards do not have voting rights but do participate in dividend equivalents distributed upon the award vesting. (11) Business Segment Information The Company operates in two segments: North America and International. These segments are strategic business units that are managed separately based on geography. The North America segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Mexico. The International segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America (other than Mexico). The Company evaluates segment performance based on net sales, gross profit and operating income. 17 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The Company's North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company's accompanying Condensed Consolidated Financial Statements. The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payable. The following table summarizes total assets by segment: (in millions) September 30, 2023 December 31, 2022 North America $ 5,476.1 $ 5,161.7 International 1,336.4 1,181.5 Corporate 1,230.4 1,077.1 Inter-segment eliminations ( 3,496.8 ) ( 3,060.5 ) Total assets $ 4,546.1 $ 4,359.8 The following table summarizes property, plant and equipment, net, by segment: (in millions) September 30, 2023 December 31, 2022 North America $ 728.6 $ 672.1 International 86.9 87.3 Corporate 33.9 31.7 Total property, plant and equipment, net $ 849.4 $ 791.1 The following table summarizes operating lease right-of-use assets by segment: (in millions) September 30, 2023 December 31, 2022 North America $ 414.9 $ 349.0 International 167.6 154.1 Corporate 3.0 3.7 Total operating lease right-of-use assets $ 585.5 $ 506.8 The following table summarizes segment information for the three months ended September 30, 2023: (in millions) North America International Corporate Eliminations Consolidated Net sales $ 1,023.7 $ 253.4 $ — $ — $ 1,277.1 Inter-segment sales $ 0.2 $ 0.1 $ — $ ( 0.3 ) $ — Inter-segment royalty expense (income) 9.5 ( 9.5 ) — — — Gross profit 430.4 143.3 — — 573.7 Operating income (loss) 195.5 40.0 ( 52.3 ) — 183.2 Income (loss) before income taxes 192.5 41.2 ( 83.0 ) — 150.7 Depreciation and amortization (1) $ 25.1 $ 6.3 $ 13.5 $ — $ 44.9 Capital expenditures 28.8 7.7 4.1 — 40.6 (1) Depreciation and amortization includes stock-based compensation amortization expense. 18 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The following table summarizes segment information for the three months ended September 30, 2022: (in millions) North America International Corporate Eliminations Consolidated Net sales $ 1,057.7 $ 225.6 $ — $ — $ 1,283.3 Inter-segment sales $ 0.5 $ 0.2 $ — $ ( 0.7 ) $ — Inter-segment royalty expense (income) 3.4 ( 3.4 ) — — — Gross profit 420.7 120.4 — — 541.1 Operating income (loss) 205.0 32.6 ( 36.6 ) — 201.0 Income (loss) from continuing operations before income taxes 203.0 33.9 ( 61.8 ) — 175.1 Depreciation and amortization (1) $ 24.5 $ 5.8 $ 14.0 $ — $ 44.3 Capital expenditures 75.3 8.5 2.0 — 85.8 (1) Depreciation and amortization includes stock-based compensation amortization expense. The following table summarizes segment information for the nine months ended September 30, 2023: (in millions) North America International Corporate Eliminations Consolidated Net sales $ 2,960.1 $ 794.8 $ — $ — $ 3,754.9 Inter-segment sales $ 0.8 $ 0.5 $ — $ ( 1.3 ) $ — Inter-segment royalty expense (income) 26.2 ( 26.2 ) — — — Gross profit 1,177.8 438.1 — — 1,615.9 Operating income (loss) 505.6 118.1 ( 138.4 ) — 485.3 Income (loss) before income taxes 499.1 116.9 ( 229.5 ) — 386.5 Depreciation and amortization (1) $ 74.9 $ 19.2 $ 41.4 $ — $ 135.5 Capital expenditures 126.9 19.2 7.2 — 153.3 (1) Depreciation and amortization includes stock-based compensation amortization expense. The following table summarizes segment information for the nine months ended September 30, 2022: (in millions) North America International Corporate Eliminations Consolidated Net sales $ 2,953.8 $ 780.0 $ — $ — $ 3,733.8 Inter-segment sales $ 1.4 $ 0.9 $ — $ ( 2.3 ) $ — Inter-segment royalty expense (income) 12.8 ( 12.8 ) — — — Gross profit 1,138.9 421.5 — — 1,560.4 Operating income (loss) 506.5 135.2 ( 108.2 ) — 533.5 Income (loss) from continuing operations before income taxes 503.6 135.0 ( 175.0 ) — 463.6 Depreciation and amortization (1) $ 70.7 $ 17.7 $ 44.1 $ — $ 132.5 Capital expenditures 188.2 23.1 4.7 — 216.0 (1) Depreciation and amortization includes stock-based compensation amortization expense. 19 Table of Contents TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) The following table summarizes property, plant and equipment, net by geographic region: (in millions) September 30, 2023 December 31, 2022 United States $ 739.8 $ 682.0 All other 109.6 109.1 Total property, plant and equipment, net $ 849.4 $ 791.1 The following table summarizes operating lease right-of-use assets by geographic region: (in millions) September 30, 2023 December 31, 2022 United States $ 405.6 $ 339.6 United Kingdom 135.7 122.9 All other 44.2 44.3 Total operating lease right-of-use assets $ 585.5 $ 506.8 20 Table of Contents