What changed in this filing

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Item 1A. Risk Factors

2024-02-16 compared with 2023-02-17 · 65 added, 63 removed, 192 unchanged (40% of the section changed)

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The highly competitive nature of the mattress and pillow industries means we are continually subject to the risk of loss of market share, loss of significant customers, reductions in margins, and the inability to acquire new customers.

Loss of suppliers and disruptions in the supply of our raw materials and components could increase our costs of sales and reduce our ability to compete effectively.

Loss of suppliers and disruptions in the supply of our raw materials and components has increased and may continue to increase our costs of sales and reduce our ability to compete effectively.

We acquire raw materials and components from a number of suppliers with manufacturing locations around the world.

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If a key supplier for an applicable component failed to supply components in the amount we require, this could significantly interrupt production of our products and increase our production costs in the near term.

Such a disruption could occur for a variety of reasons, including changes in international trade duties and other aspects of international trade policy, labor shortages, natural disasters or climate-change related events (including severe weather events), pandemics and political events.

We have experienced and may continue to experience disruptions for a variety of reasons, including disruptions in international trade routes, changes in international trade duties and other aspects of international trade policy, labor shortages, natural disasters or climate-change related events (including severe weather events), pandemics and political events.

If we are not able to successfully mitigate such supply chain risks, we could experience disruptions in production or increased costs, which may result in a decrease in our gross margin or reduced sales, and have a material adverse effect on our business, results of operations and financial condition.

Changes in economic conditions, including inflationary trends in the price of our input costs, such as raw materials, has adversely affected our business and financial results and could continue to do so in the future.

The bedding industry is subject to volatility in the price of petroleum-based and steel products, which affects the cost of polyurethane foam, polyester, polyethylene foam and steel innerspring component parts.

Changes in economic conditions, including inflationary trends in the price of our input costs, such as raw materials, due to, among other things, current geopolitical events, have adversely affected our business and financial results and could continue to do so in the future.

The bedding industry is subject to volatility in the price of petroleum-based and steel products, which affects the cost of polyurethane foam, polyester and steel innerspring component parts.

The price and availability of these raw materials are subject to market conditions affecting supply and demand.

Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities can significantly affect profitability.

Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities has and will significantly affect profitability.

The global economy continues to experience high rates of inflation, and inflationary pressure and price uncertainty may continue in 2024.

We have experienced, and may continue to experience, volatility and increases in the price of certain of these raw materials as a result of global market and supply chain disruptions and the broader inflationary environment related to the ongoing macroeconomic conditions.

Throughout 2022, we implemented pricing actions to mitigate these known commodity headwinds.

Interest rates remain relatively high and may continue to remain at such levels.

To the extent we are unable to absorb higher costs, or pass any such higher costs to our customers, our gross margin could be negatively affected, which could result in a decrease in our liquidity and profitability.

The ongoing COVID-19 pandemic, as well as other global health crises, could have a material adverse effect on our business, operations, or financial results in future periods.

The COVID-19 pandemic and it's variants, as well as periodic spikes in infection rates globally, and related responses are continuing to evolve and, therefore, could continue to present potential new risks to our business.

We have seen and expect to continue to see that the COVID-19 pandemic has, and there may be other global health crises in the future that will have, effects on our business operations, including secondary and tertiary effects such as increased raw material prices, a decline in consumer confidence and spending, further increase in unemployment which could impact consumers' disposable income and, in turn, decrease sales of our products, required isolation in certain markets, disruptions in our supply chain, as the outbreak has disrupted travel, manufacturing and distribution throughout the world and increases in operating costs due to disruptions.

As COVID-19 continues to evolve, or if similarly severe global health crises were to develop, the full extent of the impact and effects on our business, operations, liquidity, financial condition and results of operations remain uncertain and could be material.

Any of these events could potentially result in a material adverse impact on our business and results of operations.

In addition, monetary policies to counter inflation could negatively affect our borrowing costs and those of our customers and suppliers, as well as exchange rates and other macroeconomic factors.

Geopolitical developments, such as trade wars, the Russia-Ukraine conflict, the Israel-Hamas conflict and wider Middle East developments (including disruptions to the Red Sea passage or such conflicts spreading further in the relevant regions), have adversely impacted and could continue to adversely impact, among other things, our raw material, energy and transportation costs, certain of our suppliers, distributors, customers and local markets, global and local macroeconomic conditions, and cause further supply chain disruptions (including by delaying the delivery times of raw materials needed for our business or our products to customers).

In order to consummate the previously disclosed, pending merger with Mattress Firm, we and Mattress Firm must obtain certain governmental approvals, and if such approvals are not granted or are granted with conditions, consummation of the merger may be jeopardized, may not occur or may be delayed, or the anticipated benefits of the merger may not be achieved.

On May 9, 2023, we entered into an Agreement and Plan of Merger (the "Merger Agreement") to acquire Mattress Firm Group Inc.

("Mattress Firm").

Although we and Mattress Firm have agreed to use reasonable best efforts to make certain governmental filings and obtain the required governmental approvals, including from the Federal Trade Commission ("FTC"), and to observe the expiration and termination of relevant waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (the "HSR Act"), there can be no assurance that the relevant approvals will be obtained.

In the fourth quarter of 2023, we announced that we certified substantial compliance with the FTC’s second request for documents pursuant to the HSR Act, in connection with the merger.

The governmental entities from which these approvals are required have broad discretion in administering the governing laws and regulations, and may take into account various facts and circumstances in their consideration of the merger.

These governmental entities may initiate proceedings seeking to prevent, or otherwise seek to prevent, the merger.

As a condition to approving the merger, these governmental entities may impose conditions, terms, obligations or restrictions or require divestitures or place restrictions on the conduct of our business after consummation of the merger.

As further described in the Merger Agreement, we have agreed to take certain divestiture actions and agree to certain other obligations or commitments in connection with the consummation of the merger if reasonably likely to permit consummation of the merger, provided that we are not required to take any divestiture actions in excess of an agreed amount specified in the Merger Agreement or if such actions, commitments and divestitures individually or in the aggregate would or would reasonably be expected to have a material and adverse impact on our business or the business of Mattress Firm or the anticipated benefits to the Company of the merger.

While we are pursuing the divestiture of certain of our and Mattress Firm’s stores, the progress of such process may change and there can be no assurance that we will successfully complete this process on the expected timing or at all.

There can be no assurance that governmental entities will not impose the aforementioned divestiture obligations, conditions, terms, obligations or restrictions and that such divestiture obligations, conditions, terms, obligations or restrictions will not have the effect of delaying or preventing consummation of the merger or imposing additional material costs on or limiting the benefits of the merger to the Company, or otherwise adversely affecting, including to a material extent, our business, results of operations and financial condition after consummation of the merger.

If we are required to divest assets or businesses, there can be no assurance that we will be able to negotiate such divestitures expeditiously or on favorable terms or that the governmental entities will approve the terms of such divestitures.

We can provide no assurance that these divestiture obligations, conditions, terms, obligations or restrictions will not result in the abandonment of the merger and termination of the Merger Agreement.

Risks related to operating our business

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• our ability to successfully mitigate the impact of headwinds facing our business, including increased commodity prices and the influx of low-end, imported beds that compete with certain of our products;

• our ability to pursue and successfully integrate potential acquisition opportunities;

• our ability to pursue, successfully integrate and capture the synergies from potential acquisition opportunities, including the pending Mattress Firm acquisition;

• general economic factors that impact consumer confidence, disposable income or the availability of consumer financing.

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Each year we invest significant time and resources in research and development to improve our product offerings and launch new products.

In 2022, we completed the launch of our refreshed Sealy portfolio of new models in our Posturepedic Plus TM , Posturepedic® and Essentials product lines.

We also began the launch of a refreshed Stearns & Foster product line and introduced a new Sealy® Naturals™ product line in the U.S.

In 2023, we expect to complete the launch of our refreshed Stearns & Foster® product line and begin the launch of a new line of Tempur® mattresses internationally.

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

In 2023, we launched our refreshed Stearns & Foster® product line and a new line of Tempur® mattresses internationally.

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

We expect to complete the multi-year refresh of Tempur-Pedic® products in 2024 with a new portfolio of Tempur-Pedic® Adapt mattresses and accessories in North America in 2024.

This collection was designed to complement the Tempur-Pedic® Breeze collection and Tempur-Ergo® Smart Bases launched in 2023 and finishes the complete reset of our core Tempur lineup.

There are a number of risks that are inherent in our new product line introductions, including that the anticipated level of market acceptance may not be realized, which could negatively impact our sales.

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Because we depend on certain significant customers, a decrease or interruption in their business with us would reduce our sales and results of operations.

Our top five customers, collectively, accounted for approximately 32% of our net sales in 2022, and of these, one wholesale customer contributed over 15%.

The credit environment in which our customers operate has been relatively stable over the past few years.

However, there have been signs of deterioration in the U.S.

Our top five customers, collectively, accounted for approximately 32% of our net sales in 2023, and Mattress Firm contributed over 15%.

If we are successful in closing the pending Mattress Firm acquisition, our significant customer concentration will be significantly reduced.

There have been signs of deterioration in the U.S.

retail sector, both nationally and regionally, including among our competitors.

Some additional retailers that carry our products, as well as some of our competitors, may

consolidate, undergo restructurings or reorganizations, may be acquired, experience financial difficulty or bankruptcy, or realign their affiliations, any of which could decrease the number of stores that carry our products, increase the ownership concentration in the retail industry or otherwise negatively impact the credit and retail environments in which we operate.

Some additional retailers that carry our products, as well as some of our competitors, may consolidate, undergo restructurings or reorganizations, may be acquired, experience financial difficulty or bankruptcy, or realign their affiliations, any of which could decrease the number of stores that carry our products, increase the ownership concentration in the retail industry or otherwise negatively impact the credit and retail environments in which we operate.

An increase in the concentration of our sales to large customers may negatively affect our profitability due to the impact of volume and other incentive programs related to these customers.

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A substantial decrease or interruption in business from these significant customers could result in the loss of future business and could reduce revenue, liquidity and profitability.

We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including cyber-based attacks, could harm our ability to effectively operate our business.

We rely on information technology systems to operate and manage our business and to process, maintain and safeguard information essential to our business as well as information relating to third-parties, including our customers, suppliers and employees.

These systems are vulnerable to events beyond our reasonable control, including cyberattacks and security breaches, and we may be subject to failure of our current systems, or future upgrades, to operate effectively or to integrate with other systems.

Such events could result in operational slowdowns, shutdowns or other difficulties;

loss of revenues or market share;

compromise or loss of sensitive or proprietary information;

destruction or corruption of data;

We rely significantly on information technology ("IT") and we have experienced and in the future could experience cyber-based attacks which have and in the future could harm our ability to effectively operate our business.

We rely on IT systems to operate and manage our business and to process, maintain and safeguard information essential to our business as well as information relating to third-parties, including our customers, suppliers and employees.

These systems are vulnerable to events beyond our reasonable control, including cyberattacks and security breaches.

Such events have resulted in and in the future could result in operational slowdowns, shutdowns or other difficulties;

loss of sales, revenues or market share;

compromise or loss of sensitive or proprietary information, including the misappropriation of our customers' or employees' personal information;

destruction or corruption of data, including valuable business data;

costs of remediation, upgrades, repair or recovery;

breaches of obligations to third parties under privacy laws or contracts;

or damage to our reputation or customer relationships;

exhaustion of insurance coverage and increased insurance premiums;

fines or lawsuits;

or other damage to our reputation or customer relationships;

each of which, depending on the extent or duration of the event, could materially and adversely impact our business, operating results or financial condition.

For example, we have implemented a new enterprise resource planning system ("ERP") across several of our global subsidiaries and in certain significant U.S.

subsidiaries throughout 2020, 2021 and 2022.

The new ERP system replaces a substantial portion of our legacy systems and if we are unable to successfully implement the replacement system or if errors or failures in the implementation process lead to production shutdowns, our business may be materially impacted and disrupted and we may be required to engage in unanticipated additional use of capital and other resources, which may adversely impact our results of operations or reduce our profitability.

We also rely on third-party technology service providers in ordinary course operations of our Direct channel, such as website hosting, payment systems and digital advertising.

We and our third-party service providers may be victims to cyber-based attacks and incidents from time to time, and failure to prevent, detect or remediate such events may disrupt our operations could and cause financial or reputational harm, including if insurance coverage is insufficient to cover all losses or all types of claims that may arise.

Furthermore, we are subject to a constantly evolving regulatory landscape of laws and regulations relating to information technology security and personal data protection and privacy, including but not limited to the EU's GDPR and California’s CCPA, each of which have imposed new and expanded compliance requirements on companies, including us, that process personal data from citizens living in applicable jurisdictions.

Any failure to comply with applicable laws and regulations relating to information technology and data privacy, due to various factors within or outside of our control, could result in costly investigations from regulators and litigation, expose us to potentially significant penalties, and result in negative publicity that could damage our reputation and credibility.

We have been, and may in the future be, subject to cybersecurity incidents.

As these attacks increase and become more sophisticated, the risks associated with such an event continue to increase, particularly as our digital business footprint expands.

Our security measures and internal controls are designed to protect personal data, business information, including intellectual property, and other confidential information, to prevent data loss, and to prevent or detect security breaches.

However, such measures and controls do not provide absolute security in preventing these cybersecurity events from occurring, particularly given that techniques used to access, disable or degrade service, or sabotage systems change frequently.

Moreover, we rely on third-party technology service providers in ordinary course operations of our Direct channel, such as website hosting, payment systems and digital advertising.

Our third-party service providers may be victims to cybersecurity events from time to time, and failure to prevent, detect or remediate such events may disrupt our operations and could cause financial or reputational harm, including if insurance coverage is insufficient to cover all losses or all types of claims that may arise.

As previously disclosed, we identified a cybersecurity event on July 23, 2023 affecting certain of our data and IT systems, which resulted in the temporary interruption of our operations when we proactively shut down certain of our systems.

This cybersecurity event, as well as any other breach of our network or databases, or those of our third-party providers, have resulted and may in the future result in the risks discussed herein.

Furthermore, we are subject to a constantly evolving regulatory landscape of laws and regulations relating to IT security and personal data protection and privacy, including but not limited to the EU's GDPR and the CCPA, each of which have imposed new and expanded compliance requirements on companies, including us, that process personal data from citizens living in applicable jurisdictions.

Any failure to comply with applicable laws and regulations relating to data security and privacy, due to various factors within or outside of our control, could result in costly investigations from regulators and litigation, expose us to potentially significant penalties, and result in negative publicity that could damage our reputation and credibility.

Deterioration in labor relations could disrupt our business operations and increase our costs, which could decrease our liquidity and profitability.

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dollar strengthens relative to the Euro or other foreign currencies where we have operations, for example, there will be a negative impact on our operating results upon translation of those foreign operating results into the U.S.

In 2022, foreign currency exchange rate changes negatively impacted our net income by approximately 2.5% and negatively impacted adjusted EBITDA, which is a non-GAAP financial measure, by approximately 0.8%.

In 2023, foreign currency exchange rate changes positively impacted our net income by approximately 1.5% and positively impacted adjusted EBITDA, which is a non-GAAP financial measure, by approximately 0.8%.

Changes in foreign currency exchange rates could have an adverse impact on our financial condition, results of operations and cash flows.

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• restricting us from making strategic acquisitions or investments or causing us to make non-strategic divestitures;

• limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes;

• limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, including the pending Mattress Firm acquisition, and general corporate or other purposes;

• limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;

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For further discussion regarding our debt covenants and compliance, refer to "Management's Discussion and Analysis" included in Part II, ITEM 7 of this Report and Note 6, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.

We entered into the Advance Pricing Agreement Program to resolve a tax matter in Denmark, and a failure to resolve the matter or a change in factors or circumstances could adversely impact our income tax expense, effective tax rate and cash flows.

We are a participant in the Advance Pricing Agreement Program (the "APA Program") for the tax years 2012 through 2024, under which the U.S.

Internal Revenue Service ("IRS"), on our behalf, will negotiate directly with the Danish Tax Authority ("SKAT") with respect to the royalty to be paid by a U.S.

subsidiary of the Company to the Company's Danish subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary.

In December 2022, SKAT and the IRS agreed on a preliminary framework to conclude the Company's Danish tax matter for the years 2012 through 2024, which resulted in an income tax benefit recorded in the fourth quarter of 2022.

The preliminary framework is expected to be finalized during 2023.

If this matter is not resolved successfully or there is a change in facts or circumstances, we may be required to further increase our uncertain income tax provision or decrease our deferred tax asset related to this matter, which could have a material impact on the Company's reported earnings.

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

We are subject to risks from our international operations, such as complying with U.S.

and foreign laws, foreign exchange exposure, tariffs, increased costs, political risks and our ability to expand in certain international markets, which could impair our ability to compete and our profitability.

and foreign laws, foreign exchange exposure, tariffs, increased costs, political risks, geopolitical conflicts and our ability to expand in certain international markets, which could impair our ability to compete and our profitability.

We are a global company, selling our products in approximately 100 countries worldwide.

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complying with foreign laws and regulations, including disparate anti-corruption laws and regulations;

and the potential imposition of trade or foreign exchange restrictions, tariffs and other tax increases, inflation and unstable political situations and labor issues.

and the potential imposition of trade or foreign exchange restrictions, tariffs and other tax increases, inflation, unstable political situations, labor issues and geopolitical conflicts (including the Russia-Ukraine conflict, the Israel-Hamas conflict and wider Middle East developments).

We are also limited in our ability to independently expand in certain international markets where we have granted licenses to manufacture and sell Sealy® bedding products.

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We, and our products, are subject to extensive regulation in the U.S.

by various federal, state and local regulatory authorities, including the Federal Trade Commission, the Consumer Product Safety Commission ("CSPC") and the U.S.

by various federal, state and local regulatory authorities, including the FTC, the Consumer Product Safety Commission ("CPSC") and the U.S.

Food and Drug Administration, and by similar international regulatory regimes.

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As a manufacturer of bedding and related products, we are subject to regulations governing the environment.

Failure to comply with any of these regulatory requirements may result in liability exposure and costly expenditures to remediate or pay for liabilities.

Any violation or failure to comply with any of these regulatory requirements may result in liability exposure and costly expenditures to remediate or pay for liabilities.

For example, if a release of hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable if there has been a violation of the regulatory requirement, and the amount of such liability could be material.

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Any disruption in our operations or additional expenses caused by the long-term effects of climate change could have a material adverse effect on our operations.

Changes in tax laws could have an adverse effect on us, the mattress and pillow industries, our customers, and the value of collateral securing our loans.

The Inflation Reduction Act of 2022 was signed into law by President Biden on August 16, 2022 which makes significant changes to the U.S.

tax law, including the introduction of a corporate alternative minimum tax of 15% of the "adjusted financial statement income" of certain domestic corporations as well as a 1% excise tax on the fair market value of stock repurchases by certain domestic corporations, effective for tax years beginning in 2023.

We currently do not expect the tax-related provision of the Inflation Reduction Act to have a material impact on our financial results.

Risks Related to Ownership of Our Common Stock

Although we recently announced a quarterly cash dividend, there can be no assurance as to the declaration or amount of future dividends.

We previously announced our intention to begin paying a quarterly cash dividend beginning in 2021 and recently declared a dividend of 11 cents per share for the first quarter of 2023.

There can be no assurance as to the declaration or amount of future dividends.

We recently announced an increase in our quarterly dividend to $0.13 per share, effective for the first quarter of 2024.

Any decision to declare and pay dividends, and the amount of any such dividends, will be dependent on a variety of factors, including compliance with Section 170 of the Delaware General Corporation Law;

changes to our capital allocation policies;

our results of operation, liquidity and cash flows;

our results of operations, liquidity and cash flows;

contractual restrictions in our debt agreements;

economic conditions, including the impact of COVID-19 and related macroeconomic impacts on our business and financial condition;

economic conditions, including the impact of geopolitical uncertainty and related macroeconomic impacts on our business and financial condition;

and other factors the Board of Directors may deem relevant.

There can be no assurance that we will declare dividends in any particular amounts or at all, and changes in our dividend policy could adversely affect the market price for our stock.

Our share repurchase program could be suspended or terminated, and may not enhance long-term stockholder value.

Our share repurchase program is subject to suspension or termination at any time, and may not enhance long-term stockholder value.

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

From 2016 through December 31, 2022, we had repurchased an aggregate of 55.2 million shares for approximately $2,383.9 million under our share repurchase program.

As of December 31, 2022, we had approximately $779.5 million remaining under the share repurchase authorization.

The share repurchase program may be suspended or terminated at any time.

From 2016 through December 31, 2023, we had repurchased an aggregate of 55.3 million shares for approximately $2,388.9 million under our share repurchase program.

For the year ended and as of December 31, 2023, we repurchased an aggregate of $5.0 million of shares under our share repurchase program and had approximately $774.5 million remaining under the share repurchase authorization.

Upon the announcement of our pending acquisition of Mattress Firm, we suspended our share repurchase program.

Shares may be repurchased from time to time, in the open market or through private transactions, subject to market conditions, in compliance with applicable state and federal securities laws.

It is uncertain how the Inflation Reduction Act of 2022 and the imposition of a 1% excise tax on the fair market value of share repurchases by certain domestic corporations, effective for tax years beginning in 2023, will affect our share repurchase program.

The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, restrictions in our debt agreements, the trading price of our common stock and the nature of other investment opportunities.

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Our Board of Directors could determine in the future that adoption of a stockholder rights agreement is in the best interest of our stockholders and any such stockholder rights agreement, if adopted, could render more difficult, or discourage, a merger, tender offer, or assumption of control of the Company that is not approved by our Board of Directors.

UNRESOLVED STAFF COMMENTS

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

What changed 10-K

Item 1A. Risk Factors