What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-17 · 172 added, 157 removed, 395 unchanged (45% of the section changed)

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These segments are strategic business units that are managed separately based on geography.

Our North America segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Mexico.

Our North America segment consists of manufacturing and distribution subsidiaries and licensees located in the U.S., Canada and Mexico.

Our International segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America (other than Mexico).

On August 2, 2021, we acquired Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams").

Dreams is also included in the International segment.

Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results.

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

In the near term, we continue to see impacts on global consumer behavior from macroeconomic pressures, particularly from strong inflation and a sense of economic uncertainty.

While we do not have any operations in Ukraine or Russia, the geopolitical events in Ukraine have affected both international and domestic markets.

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

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

While we have taken actions that we believe have largely mitigated our broader supply chain risk, the decline in consumer confidence has impacted our order trends, which we expect to continue.

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

The implementation of our common ERP system is expected to drive long-term efficiencies for our global operations, enhance cybersecurity, facilitate customer communications regarding order status and improve our direct-to-consumer capabilities.

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

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

In 2024, we expect a continuation of the current macroeconomic environment, which includes the impact of inflation and interest rate pressures on the consumer.

The global bedding industry was challenged in 2023 due to these macroeconomic pressures on the consumer.

Ongoing geopolitical conflicts may introduce further uncertainty for the consumer.

However, we expect consumer confidence to stabilize in 2024.

Definitive Agreement with Mattress Firm.

On May 9, 2023, Tempur Sealy International and Mattress Firm entered into the Merger Agreement for a pending 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 the Company's common stock, resulting in a total stock consideration value of $1.3 billion based on a closing share price of $37.62 as of May 8, 2023.

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

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

Product Launches

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

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

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

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

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

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

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

In 2024, we are launching a new portfolio of Tempur-Pedic® Adapt mattresses in our North America segment.

This next-generation technology sets the standard for support, pressure relief, and motion cancellation with Tempur material precisely responding to your body's weight, shape, and temperature in a way no other mattress does.

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.

In our International segment in 2024, we plan to complete the rollout of the new line of Tempur® products in over 90 markets through our wholly-owned subsidiaries and third-party distributors.

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

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

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

The largest pillar of our omni-channel distribution strategy is our distribution across tens of thousands of third-party retail doors.

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

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

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

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

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

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

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and over 200 Dreams locations in the U.K.

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

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

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

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We made significant progress growing our OEM business in 2023 and continue to target obtaining a meaningful share of the OEM market in the long-term.

Cybersecurity Event

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

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

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

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

We also notified law enforcement authorities.

We incurred $14.3 million of costs in connection with this event, primarily consisting of $10.1 million of manufacturing and network disruption costs incurred to ensure business continuity and $4.2 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 for the year ended 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.

2023 Results of Operations

A summary of our results for the year ended December 31, 2023 include:

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

• Total net sales increased 0.1% to $4,925.4 million as compared to $4,921.2 million in 2022.

• Gross margin was 43.2% as compared to 41.6% in 2022.

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

There were no adjustments to gross margin in 2021.

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

Adjusted operating income, which is a non-GAAP financial measure, was $712.0 million as compared to $918.5 million in 2021.

• Net income was $455.7 million as compared to $624.5 million in 2021.

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

Adjusted gross margin, which is a non-GAAP financial measure, was 43.7% as compared to 42.0% in 2022.

• Operating income decreased 10.8% to $607.2 million as compared to $680.6 million in 2022.

Adjusted operating income, which is a non-GAAP financial measure, decreased 2.4% to $695.1 million as compared to $712.0 million in 2022.

• Net income decreased 19.2% to $368.1 million as compared to $455.7 million in 2022.

Adjusted net income, which is a non-GAAP financial measure, decreased 9.0% to $425.6 million as compared to $467.9 million in 2022.

• EPS decreased 17.8% to $2.08 as compared to $2.53 in 2022.

Adjusted EPS, which is a non-GAAP financial measure, was $2.60 as compared to $3.19 in 2021.

Adjusted EPS, which is a non-GAAP financial measure, decreased 7.7% to $2.40 as compared to $2.60 in 2022.

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

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Loss on extinguishment of debt 3.2 0.1 — —

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

Other expense, net — — 0.4 —

Total other expense, net 133.1 2.7 103.4 2.1

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Total net sales $ 4,925.4 $ 4,921.2 $ 3,855.5 $ 3,886.1 $ 1,069.9 $ 1,035.1

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

Net sales increased 0.1% (including on a constant currency basis).

The change in net sales was driven by the following:

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Net sales in our Direct channel increased $11.3 million, or 2.3%.

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

• International net sales increased $34.8 million, or 3.4%, primarily driven by the success of new Tempur® product introductions.

On a constant currency basis, our International net sales increased 3.7%.

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

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

Net sales in the Wholesale channel increased 4.4% on a constant currency basis.

Net sales in the Direct channel increased 3.4% on a constant currency basis.

Year Ended December 31,

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

Gross margin declined 220 basis points.

Gross margin improved 160 basis points.

The principal factors impacting gross margin for each segment are discussed below.

• North America gross margin declined 280 basis points.

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

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

• International gross margin declined 210 basis points.

The decline in gross margin was primarily driven by unfavorable mix of 120 basis points, price increases to customers without a margin benefit of 80 basis points, and the acquisition of Dreams in August 2021.

Dreams' margin profile is lower than our historical international margins as they sell a variety of products across a range of price points.

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

• North America gross margin improved 160 basis points.

The improvement in gross margin was primarily driven by normalizing commodity costs of 220 basis points and pricing actions of 120 basis points.

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

Additionally, in 2023, we incurred $10.2 million of operational start-up costs related to capacity expansion of our manufacturing and distribution facilities in the U.S.

and $10.1 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 100 basis points.

The improvement in gross margin was primarily driven by favorable mix of 80 basis points and pricing actions of 60 basis points.

These improvements were offset by product launch costs of 60 basis points.

OPERATING EXPENSES

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• North America operating expenses increased $49.5 million, or 5.9%, and increased 150 basis points as a percentage of net sales.

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

Additionally, we incurred $3.2 million of professional fees related to our manufacturing facility ERP system transition and $1.8 million of restructuring costs associated with headcount reductions.

These investments were partially offset by decreased variable compensation expense.

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

• International operating expenses increased $47.1 million, or 11.9% and increased 310 basis points as a percentage of net sales.

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

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

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

• Corporate operating expenses increased $57.8 million, or 38.8%.

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

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

These expenses were partially offset by decreased variable compensation expense.

The increase in operating expenses was primarily driven by $49.0 million of transaction costs related to the pending acquisition of Mattress Firm and a fair value remeasurement of $11.0 million related to a strategic investment in a product innovation initiative.

Research and development expenses for the year ended December 31, 2023 were $30.6 million compared to $29.2 million for the year ended December 31, 2022, an increase of $1.4 million, or 4.8%.

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International 170.9 16.0 % 187.2 18.1 % (2.1) %

829.6 1,056.7

Corporate expenses (206.8) (149.0)

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The decrease was driven by the following:

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

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

• North America operating income increased $0.7 million and operating margin improved 20 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 160 basis points, offset by operating expense deleverage of 160 basis points.

• International operating income decreased $16.3 million and operating margin declined 210 basis points.

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

The decline in operating margin was primarily driven by operating expense deleverage of 330 basis points, offset by the improvement in gross margin of 100 basis points.

• Corporate operating expenses increased $57.8 million, which negatively impacted our consolidated operating margin.

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Interest expense, net, increased $26.9 million, or 26.1%.

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

LOSS ON EXTINGUISHMENT OF DEBT

In the first half of 2021, we issued our 2029 Senior Notes and we redeemed our 2023 Senior Notes and our 2026 Senior Notes.

Accordingly, we incurred $23.0 million of loss on extinguishment of debt in 2021.

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

INCOME TAX PROVISION

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Our income tax provision decreased $15.6 million due to a decrease in income before income taxes and the favorable impact of discrete items.

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

Our 2023 effective tax rate increased 120 basis points as compared to 2022.

The 2023 effective tax rate as compared to the U.S.

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

federal statutory tax rate included a net favorable impact of discrete items, primarily related to excess tax benefits from the vesting of certain stock awards under our incentive stock compensation plan and a benefit related to the final settlement of the Danish Tax Matter.

The 2022 effective tax rate, as compared to the U.S.

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

federal statutory tax rate, also included the impact of net favorable discrete items related to our incentive stock compensation plan and the Danish Tax Matter.

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

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As of December 31, 2023, we had net working capital of $195.0 million, including cash and cash equivalents of $74.9 million, as compared to working capital of $214.0 million, including cash and cash equivalents of $69.4 million, as of December 31, 2022.

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

and $32.1 million was held by subsidiaries outside of the U.S.

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

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Financing activities (384.3) (279.1)

Cash provided by operating activities from continuing operations decreased $344.3 million in 2022 as compared to 2021.

The decrease in cash provided by operating activities was driven by increased inventory investments, as well as the reduction of net income.

Our inventory increased significantly during the year ended 2022 as we increased our safety stock of Tempur-Pedic® finished goods, adjustable bases and raw materials to better support our customers.

Cash provided by operating activities from continuing operations increased $191.5 million in 2023 as compared to 2022.

The increase in cash provided by operating activities was driven by a $260.1 million increase in cash provided by changes in operating assets and liabilities, primarily due to decreases in inventory, prepaid expenses and other assets, and income taxes receivable, which were offset by increases in accrued expenses and other liabilities.

The changes in operating assets and liabilities were primarily offset by a decrease in net income of $87.1 million.

Cash used in investing activities from continuing operations decreased $127.5 million in 2023 as compared to 2022.

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

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 from continuing operations increased $105.2 million in 2023 as compared to 2022.

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

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

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

Cash (Used in) Provided by Discontinued Operations

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

In 2023, we had net repayments of $250.8 million as compared to net borrowings of $474.5 million in 2022 from our credit facilities.

Additionally, we repurchased shares of our common stock for $36.0 million in 2023 as compared to $667.4 million in 2022.

Capital Expenditures

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

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

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

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

Capital expenditures were $185.4 million and $306.5 million for the year ended December 31, 2023 and 2022, respectively.

We currently expect our 2024 capital expenditures to decrease to approximately $150 million, which includes maintenance capital expenditures of $110 million.

Our total debt decreased to $2,593.6 million as of December 31, 2023 from $2,830.8 million as of December 31, 2022.

Total availability under our revolving senior secured credit facility was $966.4 million as of December 31, 2023.

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 incremental facility for additional borrowings.

Refer to Note 6, "Debt" in our Consolidated Financial Statements included in Part II, ITEM 8 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.

On February 6, 2024, we and certain other parties thereto entered into an amendment to the 2023 Credit Agreement which provides for a $625.0 million delayed draw term loan and a $40.0 million increase in availability on the existing incremental revolving loan.

Once drawn, the instruments will have the same terms and conditions as our existing term loans and revolving loans, respectively, under the 2023 Credit Agreement.

This amendment was executed in connection with our financing strategy for the pending acquisition of Mattress Firm expected to close in the second half of 2024.

As of December 31, 2023, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure defined in the 2023 Credit Agreement, was 2.87 times.

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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 remains below 3.5 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 3.5 times.

The 2023 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 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.

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Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws.

In 2023, subject to market conditions, we expect to repurchase at least 5.0% of common shares outstanding.

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

In 2024, we will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities.

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

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

Future Liquidity Sources and Uses

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

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

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

As of December 31, 2023, we had $1,041.3 million of liquidity, including $74.9 million of cash on hand and $966.4 million available under our revolving senior secured credit facility.

We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash balances and the ability to obtain other financing, if

necessary, will provide adequate cash funds for our foreseeable working capital needs, necessary capital expenditures, debt service obligations and dividend payments.

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 $0.13 per share for the first quarter of 2024.

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Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.87 times for the year ended December 31, 2023.

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

As a result of the pending Mattress Firm acquisition, we expect our leverage ratio in 2024 to be between 3.0 and 3.25 times.

We currently expect to close the transaction in the second half of 2024 and expect our target leverage ratio to return to 2.0 to 3.0 times in the first twelve months following the close of the transaction.

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

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

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

Material Cash Requirements

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Net income $ 368.1 $ 455.7

Loss from discontinued operations, net of tax (1)

ERP system transition (2)

Restructuring costs (3)

Transaction costs (1)

Cybersecurity event (2)

Fair value remeasurement (3)

Operational start-up costs (4)

ERP system transition (5)

Loss on extinguishment of debt (6)

Acquisition-related costs (6)

Overlapping interest expense (7)

Restructuring costs (7)

Loss from discontinued operations, net of tax (8)

Danish tax matter (9)

(10.2) (12.3)

Adjusted income tax provision (10)

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Diluted shares outstanding 177.3 180.3

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

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

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

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

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

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

(1) We recorded $49.0 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm in the year ended 2023.

(2) We recorded $14.3 million of costs associated with the cybersecurity event identified on July 23, 2023 in the year ended 2023.

Cost of sales included $10.1 million of manufacturing and network disruption costs incurred to ensure business continuity in the year ended 2023.

Operating expenses included $4.2 million, primarily related to professional fees incurred for incident response, containment measures and stabilization of our information systems in the year ended 2023.

(3) In the year ended 2023, we recorded a fair value remeasurement of $11.0 million primarily related to a strategic investment in a product innovation initiative.

(4) We recorded $10.4 million of operational start-up costs related to the capacity expansion of its manufacturing and distribution facilities in the U.S.

in the year ended 2023.

Cost of sales included personnel and facility related costs of $10.2 million in the year ended 2023.

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

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

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

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

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

(7) In the year ended December 31, 2021, we incurred $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes.

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

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

(5) We recorded $3.2 million of charges related to the transition of its ERP system in the year ended 2023.

We recorded $15.5 million of charges related to the transition of its ERP system in the year ended 2022.

Cost of sales included $11.1 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel in the year ended 2022, respectively.

Operating expenses included $4.4 million, primarily related to professional fees for the year ended 2022.

(6) In the year ended 2023, we recognized $3.2 million of loss on extinguishment of debt associated with the refinancing of our senior secured credit facilities.

(7) In the year ended December 31, 2022, we recorded $10.0 million of restructuring costs, primarily associated with professional fees and headcount reductions related to organizational changes, including $0.2 million of other expense.

(8) 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.

(9) We recorded an income tax benefit, on a net basis, of $10.2 million and $12.3 million related to its Danish tax matter in the years ended 2023 and 2022, respectively.

In December 2022, the Danish tax authority ("DTA") and the IRS agreed on a preliminary framework to conclude its Danish tax matter for the years 2012 through 2022.

In October 2023, the DTA and the IRS formally concluded the matter.

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

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Gross profit $ 2,128.7 43.2 % $ 1,537.5 39.9 % $ 591.2 55.3 % $ —

Operational start-up costs (1)

10.2 10.2 — —

Cybersecurity event (2)

10.1 10.1 — —

ERP system transition (3)

Total adjustments 23.5 23.5 — —

Adjusted gross profit $ 2,152.2 43.7 % $ 1,561.0 40.5 % $ 591.2 55.3 % $ —

Operating income (expense) $ 607.2 12.3 % $ 643.1 16.7 % $ 170.9 16.0 % $ (206.8)

Transaction costs (4)

49.0 — — 49.0

Cybersecurity event (2)

14.3 10.5 1.1 2.7

Fair value remeasurement (5)

11.0 — — 11.0

Operational start-up costs (1)

10.4 10.4 — —

ERP system transition (3)

Total adjustments 87.9 24.1 1.1 62.7

Adjusted operating income (expense) $ 695.1 14.1 % $ 667.2 17.3 % $ 172.0 16.1 % $ (144.1)

(1) We recorded $10.4 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S.

in the year ended 2023.

Cost of sales and operating expenses included personnel and facility related costs of $10.2 million and $0.2 million, respectively.

(2) We recorded $14.3 million of costs associated with the cybersecurity event identified on July 23, 2023 in the year ended 2023.

Cost of sales included $10.1 million of manufacturing and network disruption costs incurred to ensure business continuity in the year ended 2023.

(3) We recorded $3.2 million of charges related to the transition of our ERP system in the year ended 2023.

Cost of sales included $3.2 million of manufacturing facility ERP system transition costs, including labor, logistics, training and travel.

(4) We recorded $49.0 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm in the year ended 2023.

(5) In the year ended 2023, we recorded a fair value remeasurement of $11.0 million primarily related to a strategic investment in a product innovation initiative.

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

FULL YEAR 2022

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

Net sales $ 4,921.2 $ 3,886.1 $ 1,035.1 $ —

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

ERP system transition (1)

11.1 11.1 — —

Operational start-up costs (2)

Total adjustments 16.9 16.9 — —

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

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

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

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

FULL YEAR 2021

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

Net sales $ 4,930.8 $ 4,079.2 $ 851.6 $ —

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

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

Acquisition-related costs (1)

6.2 — 2.3 3.9

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

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

EBITDA, Adjusted EBITDA and Consolidated Indebtedness Less Netted Cash

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Interest expense, net 129.9 103.0

Loss on extinguishment of debt (1)

Income tax provision 103.4 119.0

Depreciation and amortization 184.8 182.0

Overlapping interest expense (1)

Loss on extinguishment of debt (2)

EBITDA $ 789.4 $ 859.7

Loss from discontinued operations, net of tax (3)

Transaction costs (2)

Cybersecurity event (3)

Fair value remeasurement (4)

Operational start-up costs (5)

ERP system transition (6)

Restructuring costs (7)

Operational start-up costs (6)

Acquisition-related costs (7)

Earnings from Dreams prior to acquisition (8)

Loss from discontinued operations, net of tax (8)

Adjusted EBITDA $ 877.3 $ 892.1

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Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 2.87 times 3.10 times

(1) In the year ended December 31, 2021, we incurred $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes.

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

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

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

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

(1) In the year ended 2023, we recognized $3.2 million of loss on extinguishment of debt associated with the refinancing of our senior secured credit facilities.

(2) We recorded $49.0 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm in the year ended 2023.

(3) We recorded $14.3 million of costs associated with the cybersecurity event identified on July 23, 2023 in the year ended 2023.

Cost of sales included $10.1 million of manufacturing and network disruption costs incurred to ensure business continuity in the year ended 2023.

(4) In the year ended 2023, we recorded a fair value remeasurement of $11.0 million primarily related to a strategic investment in a product innovation initiative.

(5) We recorded $10.4 million and $6.5 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S in the year ended 2023 and 2022, respectively.

(6) We recorded $3.2 million and $15.5 million of charges related to the transition of our ERP system in the year ended 2023 and 2022, respectively.

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

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

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

(8) We completed the acquisition of Dreams on August 2, 2021 and designated this subsidiary as restricted under the 2019 Credit Agreement.

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

(8) 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.

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

Under the 2023 Credit Agreement, the definition of adjusted EBITDA contains certain restrictions that limit adjustments to net income when calculating adjusted EBITDA.

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

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

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

The allowance for credit losses is our best estimate of the amount of estimated lifetime credit losses in our accounts receivable.

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Historically, less than 1.0% of net sales ultimately prove to be uncollectible.

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

retail sector, with certain key retailer bankruptcies over the last few years.

Total bad debt expense was $6.7 million in 2022, $2.7 million in 2021 and $35.8 million in 2020 which were predominantly related to customer bankruptcies which were current on payments at the time proceedings began.

Total bad debt expense was $8.2 million in 2023, $6.7 million in 2022 and $2.7 million in 2021.

If circumstances change, for example, due to the occurrence of higher-than-expected defaults or a significant adverse change in a major customer’s ability to meet our financial obligations such as bankruptcies, estimates of the recoverability of receivable amounts due could be reduced.

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The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

At December 31, 2022, our estimated gross unrecognized tax benefits were $39.0 million of which $17.6 million, if recognized, would favorably impact our future earnings.

At December 31, 2023, our estimated gross unrecognized tax benefits were $4.5 million which, if recognized, would favorably impact our future earnings.

Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates.

We have been involved in a dispute with SKAT regarding the Danish Tax Matter for tax years 2001 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.

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

subsidiary to the Danish subsidiary.

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

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

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

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

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

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

correlative benefit for such period.

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

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

and Danish income tax implications of such outcomes.

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

We had previously been involved in a dispute with SKAT regarding the Danish Tax Matter for tax years 2012 through 2022.

The matter was formally resolved in the three months ended December 31, 2023 with terms of the final resolution substantially identical as those preliminarily agreed to in the three months ended December 31, 2022.

As a result of the resolution of the matter, there is no uncertain tax position reflected in our Consolidated Balance Sheet at December 31, 2023 related to the Danish Tax Matter.

The resolution of this matter is discussed in Note 13, "Income Taxes" in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.

Goodwill and Indefinite-Lived Intangible Assets.

2 unchanged sentences

Our reporting units are our North America segment, our International segment (excluding Dreams) and Dreams.

Dreams was added as a separate reporting unit upon acquisition of the business on August 2, 2021.

We test individual indefinite-lived intangible assets at the brand level.

6 unchanged sentences

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

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

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

In 2022, we elected to qualitatively perform our annual impairment analysis for all reporting units and indefinite-lived intangible assets.

In 2023, we did not make any changes to our reporting units or the accounting methodology we use to assess impairment loss on goodwill and indefinite-lived intangible assets, which included an assessment of the impairment of goodwill for our reporting units and indefinite-lived intangible assets using a quantitative approach.

The results indicated that the fair values of each of our reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values.

Subsequent to our October 1, 2023 annual impairment test, no indications of impairment were identified.

2 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-K

Item 7. Management’s Discussion and Analysis