What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-08 · 116 added, 285 removed, 273 unchanged (59% of the section changed)

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

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

See "Special Note Regarding Forward-Looking Statements" elsewhere in this Report and in the 2023 Annual Report, the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2023 Annual Report.

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

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

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three months ended March 31, 2024, including the following topics:

• an overview of our business and strategy;

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Utilizing over a century of knowledge and industry-leading innovation, we deliver award-winning products that provide breakthrough sleep solutions to consumers in over 100 countries.

Our highly recognized brands include Tempur-Pedic®, Sealy® and Stearns & Foster® and our non-branded offerings include private label and original equipment manufacturer ("OEM") products.

We operate in two segments:

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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).

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For additional information refer to Note 11, "Business Segment Information," included in Part I, ITEM 1 of this Report.

Our highly recognized brands include Tempur-Pedic®, Sealy® and Stearns & Foster® and our non-branded offerings consist of value-focused private label and OEM products.

Our products allow for complementary merchandising strategies and are sold through third-party retailers, our more than 750 company-owned and joint venture operated retail stores worldwide and our e-commerce channel.

Our distribution model operates through an omni-channel strategy.

Our products are sold through third-party retailers, our more than 700 company-owned stores and our e-commerce platforms.

We distribute through two channels in each operating business segment:

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General Business and Economic Conditions

We believe the bedding industry is structured for sustained growth, driven by product innovation, sleep technology advancements, consumer confidence, housing formations and population growth.

We believe the bedding industry is structured for sustained growth over the long term, driven by product innovation, sleep technology advancements, consumer confidence, housing formations and population growth.

The industry is no longer engaged in uneconomical retail store expansion, startups have shifted from uneconomical strategies to becoming profitable and legacy retailers and manufacturers have become skilled in producing profitable online sales.

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

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

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

These macroeconomic pressures on the consumer continue to challenge the global bedding industry.

Ongoing geopolitical conflicts may also introduce further uncertainty for the consumer.

We expect to outperform the bedding industry, amid these macroeconomic headwinds, as a result of our successful new product launches and recent distribution gains in the U.S.

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.

On May 9, 2023, Tempur Sealy International and Mattress Firm entered into a definitive agreement and plan of merger (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 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.

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

Cybersecurity Event

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

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

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

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

We also notified law enforcement authorities.

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

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

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

Product Launches

In the second quarter of 2023, we completed the rollout of our North American Stearns & Foster® portfolio that began in 2022.

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

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

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

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

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

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 broaden our global addressable market.

Results of Operations

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

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

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

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

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

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

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

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

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

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

Adjusted EPS, which is a non-GAAP financial measure, decreased 1.3% to $0.77 as compared to $0.78 in the third quarter of 2022.

A summary of our results for the three months ended March 31, 2024 include:

• Total net sales decreased 1.5% to $1,189.4 million as compared to $1,208.1 million in the first quarter of 2023, with a decrease of 2.0% in the North America business segment and a decrease of 0.1% in the International business segment.

On a constant currency basis, which is a non-GAAP financial measure, total net sales decreased 2.1%, with a decrease of 2.3% in the North America business segment and an decrease of 1.6% in the International business segment.

• Gross margin was 43.1% as compared to 41.4% in the first quarter of 2023.

Adjusted gross margin, which is a non-GAAP financial measure, was 43.4% as compared to 41.8% in the first quarter of 2023.

• Operating income decreased 8.2% to $131.5 million as compared to $143.3 million in the first quarter of 2023.

Adjusted operating income, which is a non-GAAP financial measure, decreased 2.6% to $149.4 million as compared to $153.4 million in the first quarter of 2023.

• Net income decreased 10.6% to $76.3 million as compared to $85.3 million in the first quarter of 2023.

Adjusted net income, which is a non-GAAP financial measure, decreased 3.4% to $89.7 million as compared to $92.9 million in the first quarter of 2023.

• Earnings per diluted share ("EPS") decreased 10.4% to $0.43 as compared to $0.48 in the first quarter of 2023.

Adjusted EPS, which is a non-GAAP financial measure, decreased 5.7% to $0.50 as compared to $0.53 in the first quarter of 2023.

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

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

THREE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO THE

THREE MONTHS ENDED SEPTEMBER 30, 2022

THREE MONTHS ENDED MARCH 31, 2024 COMPARED TO THE

THREE MONTHS ENDED MARCH 31, 2023

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

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages and per share amounts) 2024 2023

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Interest expense, net 34.3 2.9 32.8 2.7

Other income, net (0.1) — (0.9) (0.1)

Other (income) expense, net (0.3) — 0.1 —

Total other expense, net 34.0 2.9 32.9 2.7

Income from continuing operations before income taxes 150.7 11.8 175.1 13.6

Income before income taxes 97.5 8.2 110.4 9.1

Income tax provision (20.7) (1.7) (24.5) (2.0)

Income from continuing operations 113.9 8.9 134.0 10.4

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

Net income before non-controlling interest 76.8 6.5 85.9 7.0

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Earnings per common share:

Earnings per share for continuing operations $ 0.66 $ 0.78

Loss per share for discontinued operations — (0.01)

Earnings per share $ 0.66 $ 0.77

Earnings per share for continuing operations $ 0.64 $ 0.75

Loss per share for discontinued operations — —

Earnings per share $ 0.64 $ 0.75

Basic $ 0.44 $ 0.50

Diluted $ 0.43 $ 0.48

Weighted average common shares outstanding:

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Diluted 178.0 176.8

Three Months Ended September 30,

Three Months Ended March 31,

2024 2023 2024 2023 2024 2023

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Net sales in the Wholesale channel decreased $27.4 million, or 3.4%.

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

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

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

Net sales in the Direct channel increased $8.9 million, or 7.7%, driven by strength in our e-commerce business.

• International net sales decreased $0.2 million, or 0.1%.

On a constant currency basis, International net sales decreased 1.6%.

Net sales in the Wholesale channel increased 0.9% on a constant currency basis.

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

Three Months Ended September 30,

Net sales in the Direct channel decreased 3.2% on a constant currency basis.

Three Months Ended March 31,

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

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• North America gross margin improved 180 basis points.

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

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

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

The improvement in gross margin was primarily driven by favorable commodity costs of 200 basis points and operational efficiencies of 70 basis points.

These improvements were partially offset by production line changeover to support new OEM distribution and product launch costs.

• International gross margin improved 140 basis points.

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

The improvement in gross margin was primarily driven by favorable commodity costs of 70 basis points and operational efficiencies of 60 basis points.

OPERATING EXPENSES

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

Three Months Ended September 30,

Three Months Ended March 31,

2024 2023 2024 2023 2024 2023 2024 2023

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• Corporate operating expenses increased $10.8 million, or 29.3%, primarily driven by $14.8 million of transaction costs related to the pending acquisition of Mattress Firm.

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

Research and development expenses for the three months ended March 31, 2024 were $8.1 million compared to $7.5 million for the three months ended March 31, 2023, an increase of $0.6 million or 8.0%.

OPERATING INCOME

Three Months Ended September 30,

Three Months Ended March 31,

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

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

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

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

• North America operating income decreased $1.6 million and operating margin improved 10 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 180 basis points, offset by operating expense deleverage of 160 basis points.

• International operating income increased $0.6 million and operating margin improved 20 basis points.

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INTEREST EXPENSE, NET

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages) 2024 2023 % Change

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INCOME TAX PROVISION

Three Months Ended September 30,

Three Months Ended March 31,

(in millions, except percentages) 2024 2023 % Change

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Our income tax provision decreased $3.8 million due to a decrease in income before income taxes.

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

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

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

NINE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO THE

NINE MONTHS ENDED SEPTEMBER 30, 2022

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

Nine Months Ended September 30,

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

Net sales $ 3,754.9 100.0 % $ 3,733.8 100.0 %

Cost of sales 2,139.0 57.0 2,173.4 58.2

Gross profit 1,615.9 43.0 1,560.4 41.8

Selling and marketing expenses 799.8 21.3 744.7 19.9

General, administrative and other expenses 344.2 9.2 296.6 7.9

Equity income in earnings of unconsolidated affiliates (13.4) (0.4) (14.4) (0.4)

Operating income 485.3 12.9 533.5 14.3

Other expense, net:

Interest expense, net 99.0 2.6 71.4 1.9

Other income, net (0.2) — (1.5) —

Total other expense, net 98.8 2.6 69.9 1.9

Income from continuing operations before income taxes 386.5 10.3 463.6 12.4

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

Income from continuing operations 293.0 7.8 356.1 9.5

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

Net income before non-controlling interest 293.0 7.8 355.3 9.5

Net income attributable to non-controlling interest 2.0 0.1 1.3 —

Net income attributable to Tempur Sealy International, Inc.

$ 291.0 7.7 % $ 354.0 9.5 %

Earnings per common share:

Earnings per share for continuing operations $ 1.69 $ 2.01

Loss per share for discontinued operations — —

Earnings per share $ 1.69 $ 2.01

Earnings per share for continuing operations $ 1.64 $ 1.95

Loss per share for discontinued operations — —

Earnings per share $ 1.64 $ 1.95

Weighted average common shares outstanding:

Basic 172.1 176.2

Diluted 177.0 181.5

Nine Months Ended September 30,

2023 2022 2023 2022 2023 2022

(in millions) Consolidated North America International

Net sales by channel

Wholesale $ 2,876.4 $ 2,866.4 $ 2,585.4 $ 2,577.2 $ 291.0 $ 289.2

Direct 878.5 867.4 374.7 376.6 503.8 490.8

Total net sales $ 3,754.9 $ 3,733.8 $ 2,960.1 $ 2,953.8 $ 794.8 $ 780.0

Net sales increased 0.6%, and on a constant currency basis increased 0.9%.

The change in net sales was driven by the following:

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

consumer behavior.

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

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

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

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

Net sales in the Wholesale channel increased 2.2% on a constant currency basis.

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

Nine Months Ended September 30,

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

North America $ 1,177.8 39.8 % $ 1,138.9 38.6 % 1.2 %

International 438.1 55.1 % 421.5 54.0 % 1.1 %

Consolidated gross margin $ 1,615.9 43.0 % $ 1,560.4 41.8 % 1.2 %

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

Gross margin improved 120 basis points.

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

• North America gross margin improved 120 basis points.

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

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

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

• International gross margin improved 110 basis points.

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

OPERATING EXPENSES

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

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

Nine Months Ended September 30,

2023 2022 2023 2022 2023 2022 2023 2022

(in millions) Consolidated North America International Corporate

Operating expenses:

Advertising expenses $ 349.7 $ 337.4 $ 291.6 $ 285.3 $ 58.1 $ 52.1 $ — $ —

Other selling and marketing expenses 450.1 407.3 242.6 212.5 192.1 179.7 15.4 15.1

General, administrative and other expenses 344.2 296.6 138.0 134.6 83.2 68.9 123.0 93.1

Total operating expenses $ 1,144.0 $ 1,041.3 $ 672.2 $ 632.4 $ 333.4 $ 300.7 $ 138.4 $ 108.2

Operating expenses increased $102.7 million, or 9.9%, and increased 260 basis points as a percentage of net sales.

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

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

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

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

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

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

The increase in operating expenses was primarily driven by $31.5 million of transaction costs related to the pending acquisition of Mattress Firm.

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

OPERATING INCOME

Nine Months Ended September 30,

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

North America $ 505.6 17.1 % $ 506.5 17.1 % — %

International 118.1 14.9 % 135.2 17.3 % (2.4) %

Corporate expenses (138.4) (108.2)

Total operating income $ 485.3 12.9 % $ 533.5 14.3 % (1.4) %

Operating income decreased $48.2 million and operating margin declined 140 basis points.

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

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

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

The decline in operating margin was primarily driven by operating expense deleverage of 330 basis points, offset by the improvement in gross margin of 110 basis points.

• Corporate operating expenses increased $30.2 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Nine Months Ended September 30,

(in millions, except percentages) 2023 2022 % Change

Interest expense, net $ 99.0 $ 71.4 38.7 %

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

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

INCOME TAX PROVISION

Nine Months Ended September 30,

(in millions, except percentages) 2023 2022 % Change

Income tax provision $ 93.5 $ 107.5 (13.0) %

Effective tax rate 24.2 % 23.2 %

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

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

Our effective tax rate for the three months ended March 31, 2024 as compared to the prior year declined by 100 basis points.

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

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

federal statutory rates for the three months ended March 31, 2024 and 2023 included the favorable impact of the deductibility of stock compensation in the U.S.

and a net unfavorable impact of other discrete items.

Liquidity and Capital Resources

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

As of September 30, 2023, we had net working capital of $188.8 million, including cash and cash equivalents of $91.6 million, as compared to a working capital of $214.0 million, including cash and cash equivalents of $69.4 million, as of December 31, 2022.

As of March 31, 2024, we had net working capital of $203.7 million, including cash and cash equivalents of $92.5 million, as compared to a working capital of $195.0 million, including cash and cash equivalents of $74.9 million, as of December 31, 2023.

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

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in millions) 2024 2023

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Financing activities (77.9) (28.4)

Cash provided by operating activities increased $195.7 million in the nine months ended September 30, 2023 as compared to the same period in 2022.

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

Cash used in investing activities decreased $72.0 million in the nine months ended September 30, 2023 as compared to the same period in 2022.

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

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

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

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

Cash Used in Discontinued Operations

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

Cash provided by operating activities increased $30.4 million in the three months ended March 31, 2024 as compared to the same period in 2023.

The increase in cash provided by operating activities was driven by a $30.3 million increase in cash provided by changes in operating assets and liabilities.

Cash used in investing activities decreased $20.8 million in the three months ended March 31, 2024 as compared to the same period in 2023.

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

Cash used in financing activities increased $49.5 million in the three months ended March 31, 2024 as compared to the same period in 2023.

For the three months ended March 31, 2024, we had net repayments of $3.7 million on our credit facilities as compared to net borrowings of $32.4 million in the same period in 2023.

During the three months ended March 31, 2024 and 2023, we repurchased $43.8 million and $35.7 million, respectively, of our common stock.

Additionally, we paid dividends to shareholders of $24.9 million and $20.8 million, during the three months ended March 31, 2024 and 2023, respectively.

Capital Expenditures

Capital expenditures totaled $153.3 million and $216.0 million for the nine months ended September 30, 2023 and 2022, respectively.

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

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

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

Capital expenditures totaled $31.5 million and $52.1 million for the three months ended March 31, 2024 and 2023, respectively.

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

Our total debt increased slightly to $2,594.4 million as of March 31, 2024 from $2,593.6 million as of December 31, 2023.

Total availability under our revolving senior secured credit facility was $1,012.4 million as of March 31, 2024.

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

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

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

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

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

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

On February 6, 2024, we 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 revolving loan.

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

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

As of March 31, 2024, our ratio of consolidated indebtedness less netted cash to adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA"), which is a non-GAAP financial measure, in accordance with our 2023 Credit Agreement was 2.85 times.

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

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

As of March 31, 2024, we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances.

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

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

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

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

During the three months ended March 31, 2024, we did not repurchase shares under our share repurchase program.

As of March 31, 2024, we had $774.5 million remaining under our share repurchase authorization.

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

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

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

For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," in the 2023 Annual Report.

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

Future Liquidity Sources and Uses

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

As of March 31, 2024, we had $1,104.9 million of liquidity, including $92.5 million of cash on hand and $1,012.4 million available under our 2023 Credit Agreement.

In addition, we expect to generate cash flow from operations in the full year 2024.

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

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

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

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

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

The Board of Directors declared a dividend of $0.13 per share for the second quarter of 2024.

The dividend is payable on May 30, 2024 to shareholders of record as of May 16, 2024.

As of March 31, 2024, we had $2,594.4 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,501.9 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.85 times for the trailing twelve months ended March 31, 2024.

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

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

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

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended March 31, 2024 and 2023:

Three Months Ended

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

(in millions, except per share amounts) March 31, 2024 March 31, 2023

Net income $ 76.3 $ 85.3

Transaction costs (1)

Cybersecurity event (2)

Operational start-up costs (2)

ERP system transition (3)

Restructuring costs (5)

Loss from discontinued operations, net of tax (6)

Adjusted income tax provision (4)

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Diluted shares outstanding 178.0 176.8

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

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

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

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

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

In the third quarter of 2022, we incurred $1.8 million of operational start-up costs.

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

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

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

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

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

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

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

(1) In the first quarter of 2024, we recorded $14.8 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

In the first quarter of 2023, we recorded $5.2 million of transaction costs primarily associated with the pending acquisition of Mattress Firm.

(2) In the first quarter of 2024, we recorded $3.1 million of operational start-up costs in cost of sales for the capacity expansion of its manufacturing and distribution facilities in the U.S., which include personnel and facility related costs.

In the first quarter of 2023, we recorded $1.7 million of operational start-up costs in cost of sales.

(3) In the first quarter of 2023, we recorded $3.2 million of charges related to the transition of its ERP system in cost of sales.

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

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

The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended September 30, 2023.

Three Months Ended September 30, 2023

Three Months Ended March 31, 2024

(in millions, except percentages) Consolidated

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Gross profit $ 512.6 43.1 % $ 352.8 39.2 % $ 159.8 55.4 % $ —

Cybersecurity event (1)

Operational start-up costs (1)

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14.8 — — 14.8

Cybersecurity event (1)

13.5 10.0 1.1 2.4

Operational start-up costs (1)

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Adjusted operating income (expense) $ 149.4 12.6 % $ 137.5 15.3 % $ 44.8 15.5 % $ (32.9)

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

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

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

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

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

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

Three Months Ended September 30, 2022

(1) In the first quarter of 2024, we recorded $3.1 million of operational start-up costs in cost of sales for the capacity expansion of its manufacturing and distribution facilities in the U.S., which include personnel and facility related costs.

(2) In the first quarter of 2024, we recorded $14.8 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

Three Months Ended March 31, 2023

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

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Operating income (expense) $ 143.3 11.9 % $ 136.0 14.8 % $ 44.2 15.3 % $ (36.9)

Transaction costs (3)

ERP system transition (1)

Operational start-up costs (2)

Restructuring costs (3)

1.2 — 0.6 0.6

Total adjustments 10.1 4.9 — 5.2

Adjusted operating income (expense) $ 153.4 12.7 % $ 140.9 15.3 % $ 44.2 15.3 % $ (31.7)

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

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

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

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

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

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

(1) In the first quarter of 2023, we recorded $3.2 million of charges related to the transition of its ERP system in cost of sales.

(2) In the first quarter of 2023, we recorded $1.7 million of operational start-up costs in cost of sales.

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

EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash

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

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

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the three months ended March 31, 2024 and 2023:

Three Months Ended

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

(in millions) March 31, 2024 March 31, 2023

Net income $ 76.3 $ 85.3

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Transaction costs (1)

Cybersecurity event (2)

Operational start-up costs (2)

ERP system transition (3)

Restructuring costs (5)

Loss from discontinued operations, net of tax (6)

Adjusted EBITDA $ 198.2 $ 197.7

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

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

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

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

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

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

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

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

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

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

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

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

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

(1) In the first quarter of 2024, we recorded $14.8 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

In the first quarter of 2023, we recorded $5.2 million of transaction costs primarily associated with the pending acquisition of Mattress Firm.

In the first quarter of 2023, we recorded $1.7 million of operational start-up costs in cost of sales.

(3) In the first quarter of 2023, we recorded $3.2 million of charges related to the transition of its ERP system in cost of sales.

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and adjusted EBITDA for the trailing twelve months ended March 31, 2024:

Trailing Twelve Months Ended

(in millions) September 30, 2023

(in millions) March 31, 2024

Net income $ 359.1

Interest expense, net 131.4

Loss on extinguishment of debt (1)

Income tax provision 99.6

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Operational start-up costs (4)

ERP system transition (4)

Restructuring costs (5)

Fair value remeasurement (5)

Adjusted EBITDA $ 877.8

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Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 2.85 times

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

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

(1) In the trailing twelve months ended March 31, 2024, we recognized $3.2 million of loss on extinguishment of debt associated with the refinancing of its senior secured credit facilities.

(2) In the trailing twelve months ended March 31, 2024, we recognized $58.6 million of transaction costs associated with the pending acquisition of Mattress Firm.

(3) In the trailing twelve months ended March 31, 2024, we recorded $14.3 million of costs associated with the cybersecurity event identified on July 23, 2023.

Cost of sales included $10.1 million of manufacturing and network disruption costs incurred to ensure business continuity.

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

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

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

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

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

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

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

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

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

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

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

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

(4) In the trailing twelve months ended March 31, 2024, we recognized $11.8 million of operational start-up costs.

(5) In the trailing twelve months ended March 31, 2024, we recorded a fair value remeasurement of $11.0 million related to a strategic investment in a product innovation initiative.

Under the 2023 Credit Agreement, the ratio of adjusted EBITDA to consolidated indebtedness less netted cash was 2.85 times for the trailing twelve months ended March 31, 2024.

The 2023 Credit Agreement requires us to maintain a ratio of consolidated indebtedness less netted cash to adjusted EBITDA of less than 5.00 times.

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

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of March 31, 2024.

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

(in millions) September 30, 2023

(in millions) March 31, 2024

Total debt, net $ 2,573.7

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis