What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-09 · 208 added, 118 removed, 271 unchanged (55% 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 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 months ended March 31, 2024, including the following topics:

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and six months ended June 30, 2024, including the following topics:

• an overview of our business and strategy;

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

In the second half of 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.

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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.

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

On July 2, 2024, the FTC filed a complaint for temporary restraining order and preliminary injunction in the United States District Court for the Southern District of Texas (the "Court") and an administrative complaint (together with the complaint filed with the Court, the "Actions") to challenge our proposed acquisition of Mattress Firm.

Refer to Note 8, "Commitments and Contingencies" in the "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1 of this Report for further details.

We believe that a successful litigation process can be completed in the coming months, which would allow the transaction to close in late 2024 or early 2025.

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

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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.

In our International segment in 2024, we completed 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 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.

A summary of our results for the three months ended June 30, 2024 include:

• Total net sales decreased 2.8% to $1,233.6 million as compared to $1,269.7 million in the second quarter of 2023, with a decrease of 3.8% in the North America business segment and consistent sales in the International business segment.

On a constant currency basis, which is a non-GAAP financial measure, total net sales decreased 2.6%, with a decrease of 3.8% in the North America business segment and an increase of 1.9% in the International business segment.

• Gross margin was 44.9% as compared to 42.7% in the second quarter of 2023.

• Operating income increased 9.1% to $173.3 million as compared to $158.8 million in the second quarter of 2023.

Adjusted operating income, which is a non-GAAP financial measure, increased 5.1% to $180.6 million as compared to $171.8 million in the second quarter of 2023.

• Net income increased 14.8% to $106.1 million as compared to $92.4 million in the second quarter of 2023.

Adjusted net income, which is a non-GAAP financial measure, increased 9.5% to $111.7 million as compared to $102.0 million in the second quarter of 2023.

• Earnings per diluted share ("EPS") increased 15.4% to $0.60 as compared to $0.52 in the second quarter of 2023.

Adjusted EPS, which is a non-GAAP financial measure, increased 8.6% to $0.63 as compared to $0.58 in the second 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 MARCH 31, 2024 COMPARED TO THE

THREE MONTHS ENDED MARCH 31, 2023

THREE MONTHS ENDED JUNE 30, 2024 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, 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 March 31,

Three Months Ended June 30,

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

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Interest expense, net 33.4 2.7 33.6 2.6

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

Other income, net (0.6) — (0.2) —

Total other expense, net 32.8 2.7 33.4 2.6

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Diluted 178.0 176.8

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 2024 2023 2024 2023

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The change in net sales was driven by the following:

• North America net sales decreased $18.5 million, or 2.0%, primarily driven by continued macroeconomic pressures impacting U.S.

• North America net sales decreased $38.4 million, or 3.8%.

Net sales in the Wholesale channel decreased $41.2 million, or 4.6%, primarily driven by continued macroeconomic pressures impacting U.S.

consumer behavior.

On a constant currency basis, North America net sales decreased 2.3%.

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

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 Direct channel increased $2.8 million, or 2.3%, as compared to the second quarter of 2023.

• International net sales increased $2.3 million, or 0.9%.

On a constant currency basis, International net sales increased 1.9%.

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

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

Three Months Ended March 31,

Net sales in the Direct channel increased 0.1% on a constant currency basis.

Three Months Ended June 30,

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

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• North America gross margin improved 220 basis points.

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.

The improvement in gross margin was primarily driven by favorable commodity costs of 130 basis points, operational efficiencies of 120 basis points and favorable product launch costs of 110 basis points.

These improvements were partially offset by the mix impact of the new distribution win for our OEM business of 140 basis points.

• International gross margin improved 170 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.

The improvement in gross margin was primarily driven by operational efficiencies of 110 basis points and favorable product launch costs of 80 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 March 31,

Three Months Ended June 30,

2024 2023 2024 2023 2024 2023 2024 2023

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Total operating expenses $ 384.0 $ 387.7 $ 229.4 $ 229.3 $ 115.7 $ 109.2 $ 38.9 $ 49.2

Operating expenses decreased $3.7 million, or 1.0%, and increased 60 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 $0.1 million, consistent with prior year, and increased 80 basis points as a percentage of net sales.

The increase in operating expenses was primarily driven by investments in growth initiatives, partially offset by decreased variable compensation expense.

• International operating expenses increased $6.5 million, or 6.0%, and increased 210 basis points as a percentage of net sales.

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

• Corporate operating expenses decreased $10.3 million, or 20.9%.

The decrease in operating expenses was primarily driven by decreased variable compensation expense and transaction costs related to the pending acquisition of Mattress Firm.

Research and development expenses for the three months ended June 30, 2024 were $7.7 million compared to $7.3 million for the three months ended June 30, 2023, an increase of $0.4 million, or 5.5%.

OPERATING INCOME

Three Months Ended June 30,

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

North America $ 180.4 18.4 % $ 174.1 17.1 % 1.3 %

International 31.8 12.5 % 33.9 13.4 % (0.9) %

Corporate expenses (38.9) (49.2)

Total operating income $ 173.3 14.0 % $ 158.8 12.5 % 1.5 %

Operating income increased $14.5 million and operating margin improved 150 basis points.

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

• North America operating income increased $6.3 million and operating margin improved 130 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 220 basis points, partially offset by operating expense deleverage of 80 basis points.

• International operating income decreased $2.1 million and operating margin declined 90 basis points.

The decline in operating margin was driven by operating expense deleverage of 210 basis points and Asia joint venture performance, partially offset by the improvement in gross margin of 170 basis points.

• Corporate operating expenses decreased $10.3 million, which positively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Three Months Ended June 30,

(in millions, except percentages) 2024 2023 % Change

Interest expense, net $ 33.4 $ 33.6 (0.6) %

Interest expense, net, decreased $0.2 million, or 0.6%.

The decrease in interest expense, net, was primarily driven by reduced average levels of outstanding variable rate debt.

INCOME TAX PROVISION

Three Months Ended June 30,

(in millions, except percentages) 2024 2023 % Change

Income tax provision $ 34.0 $ 32.2 5.6 %

Effective tax rate 24.2 % 25.7 %

Our income tax provision includes income taxes associated with taxes currently payable and deferred taxes and includes the impact of net operating losses for certain of our foreign operations.

Our income tax provision increased $1.8 million due to an increase in income before income taxes.

Our effective tax rate for the three months ended June 30, 2024 as compared to the prior year declined by 150 basis points.

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

federal statutory rates for the three months ended June 30, 2024 and 2023 included a net favorable impact of other discrete items.

SIX MONTHS ENDED JUNE 30, 2024 COMPARED TO THE

SIX MONTHS ENDED JUNE 30, 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:

Six Months Ended June 30,

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

Net sales $ 2,423.0 100.0 % $ 2,477.8 100.0 %

Cost of sales 1,356.2 56.0 1,435.6 57.9

Gross profit 1,066.8 44.0 1,042.2 42.1

Selling and marketing expenses 541.2 22.3 526.9 21.3

General, administrative and other expenses 228.8 9.4 222.0 9.0

Equity income in earnings of unconsolidated affiliates (8.0) (0.3) (8.8) (0.4)

Operating income 304.8 12.6 302.1 12.2

Other expense, net:

Interest expense, net 67.7 2.8 66.4 2.7

Other income, net (0.9) — (0.1) —

Total other expense, net 66.8 2.8 66.3 2.7

Income before income taxes 238.0 9.8 235.8 9.5

Income tax provision (54.7) (2.3) (56.7) (2.3)

Net income before non-controlling interest 183.3 7.6 179.1 7.2

Net income attributable to non-controlling interest 0.9 — 1.4 0.1

Net income attributable to Tempur Sealy International, Inc.

$ 182.4 7.6 % $ 177.7 7.1 %

Earnings per common share:

Basic $ 1.05 $ 1.03

Diluted $ 1.02 $ 1.01

Weighted average common shares outstanding:

Basic 173.6 172.1

Diluted 178.0 176.8

Six Months Ended June 30,

2024 2023 2024 2023 2024 2023

(in millions) Consolidated North America International

Net sales by channel

Wholesale $ 1,836.3 $ 1,901.8 $ 1,631.7 $ 1,700.3 $ 204.6 $ 201.5

Direct 586.7 576.0 247.8 236.1 338.9 339.9

Total net sales $ 2,423.0 $ 2,477.8 $ 1,879.5 $ 1,936.4 $ 543.5 $ 541.4

Net sales decreased 2.2%, and on a constant currency basis decreased 2.4%.

The change in net sales was driven by the following:

• North America net sales decreased $56.9 million, or 2.9%.

Net sales in the Wholesale channel decreased $68.6 million, or 4.0%, primarily driven by continued macroeconomic pressures impacting U.S.

consumer behavior.

Net sales in the Direct channel increased $11.7 million, or 5.0%, primarily driven by strength in our e-commerce business.

• International net sales increased $2.1 million, or 0.4%.

On a constant currency basis, International net sales were consistent with the prior year.

Net sales in the Wholesale channel increased 2.7% on a constant currency basis.

Net sales in the Direct channel decreased 1.6% on a constant currency basis.

Six Months Ended June 30,

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

North America $ 762.6 40.6 % $ 747.4 38.6 % 2.0 %

International 304.2 56.0 % 294.8 54.5 % 1.5 %

Consolidated gross margin $ 1,066.8 44.0 % $ 1,042.2 42.1 % 1.9 %

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 190 basis points.

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

• North America gross margin improved 200 basis points.

The improvement in gross margin was primarily driven by favorable commodity costs of 150 basis points, operational efficiencies of 70 basis points and favorable product launch costs.

These improvements were partially offset by the mix impact of the new distribution win for our OEM business of 70 basis points.

• International gross margin improved 150 basis points.

The improvement in gross margin was primarily driven by operational efficiencies of 90 basis points and favorable commodity costs.

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.

Six Months Ended June 30,

2024 2023 2024 2023 2024 2023 2024 2023

(in millions) Consolidated North America International Corporate

Operating expenses:

Advertising expenses $ 227.3 $ 230.7 $ 182.9 $ 188.7 $ 44.4 $ 42.0 $ — $ —

Other selling and marketing expenses 313.9 296.2 170.5 157.5 135.1 128.3 8.3 10.4

General, administrative and other expenses 228.8 222.0 94.4 91.1 56.1 55.2 78.3 75.7

Total operating expenses $ 770.0 $ 748.9 $ 447.8 $ 437.3 $ 235.6 $ 225.5 $ 86.6 $ 86.1

Operating expenses increased $21.1 million, or 2.8%, and increased 160 basis points as a percentage of net sales.

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

• 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 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%.

• Corporate operating expenses increased $0.5 million, or 0.6%.

The increase in operating expenses was primarily driven by transaction costs related to the pending acquisition of Mattress Firm, partially offset by decreased variable compensation expense.

Research and development expenses were $15.8 million for the six months ended June 30, 2024 as compared to $14.8 million for the six months ended June 30, 2023, an increase of $1.0 million, or 6.8%.

OPERATING INCOME

Three Months Ended March 31,

Six Months Ended June 30,

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

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Total operating income $ 304.8 12.6 % $ 302.1 12.2 % 0.4 %

Operating income decreased $11.8 million and operating margin declined 80 basis points.

Operating income increased $2.7 million and operating margin improved 40 basis points.

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

• 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.

The improvement in operating margin was driven by the improvement in gross margin of 140 basis points, offset by operating expense deleverage of 130 basis points.

• North America operating income increased $4.7 million and operating margin improved 70 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 200 basis points, partially offset by operating expense deleverage of 120 basis points.

• International operating income decreased $1.5 million and operating margin declined 30 basis points.

The decline in operating margin was primarily driven by operating expense deleverage of 160 basis points, partially offset by the improvement in gross margin of 150 basis points.

• Corporate operating expenses increased $0.5 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Three Months Ended March 31,

Six Months Ended June 30,

(in millions, except percentages) 2024 2023 % Change

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INCOME TAX PROVISION

Three Months Ended March 31,

Six Months Ended June 30,

(in millions, except percentages) 2024 2023 % Change

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Effective tax rate 23.0 % 24.1 %

Our income tax provision includes income taxes associated with taxes currently payable and deferred taxes and includes the impact of net operating losses for certain of our foreign operations.

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

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

Our income tax provision decreased $2.0 million.

Our effective tax rate for the six months ended June 30, 2024 as compared to the prior year declined 110 basis points.

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

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.

federal statutory rates for the six months ended June 30, 2024 and 2023 included the net favorable impact of the deductibility of stock compensation in the U.S., which was offset by the unfavorable impact of 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 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.

As of June 30, 2024, we had net working capital of $203.9 million, including cash and cash equivalents of $95.8 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:

Three Months Ended March 31,

Six Months Ended June 30,

(in millions) 2024 2023

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Financing activities (195.0) (111.4)

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.

Cash provided by operating activities increased $30.3 million in the six months ended June 30, 2024 as compared to the same period in 2023.

The increase in cash provided by operating activities was primarily driven by a $14.1 million increase in cash provided by changes in operating assets and liabilities and a $13.3 million increase in depreciation expense associated with our new Tempur manufacturing facility.

Cash used in investing activities decreased $52.6 million in the six months ended June 30, 2024 as compared to the same period in 2023.

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

Cash used in financing activities increased $83.6 million in the six months ended June 30, 2024 as compared to the same period in 2023.

For the six months ended June 30, 2024, we had net repayments of $93.7 million on our credit facilities as compared to $27.6 million in the same period in 2023.

We repurchased $43.8 million and $35.9 million of our common stock to satisfy tax withholding obligations upon the vesting of our long-term incentive plans during the six months ended June 30, 2024 and 2023, respectively.

Additionally, we paid dividends to shareholders of $47.5 million and $39.8 million, during the six months ended June 30, 2024 and 2023, respectively.

Capital Expenditures

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

Capital expenditures totaled $60.0 million and $112.7 million for the six months ended June 30, 2024 and 2023, respectively.

We currently expect our 2024 capital expenditures to be approximately $140 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.

Our total debt decreased to $2,505.8 million as of June 30, 2024 from $2,593.6 million as of December 31, 2023.

Total availability under our revolving senior secured credit facility was $1,112.9 million as of June 30, 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.

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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 amendment was executed in connection with the Company's financing strategy for the pending acquisition of Mattress Firm.

As of June 30, 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 2.70 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 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.

As of June 30, 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 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.

During the six months ended June 30, 2024, we did not repurchase shares under our share repurchase program.

As of June 30, 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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Future Liquidity Sources and Uses

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.

As of June 30, 2024, we had $1,208.7 million of liquidity, including $95.8 million of cash on hand and $1,112.9 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 $0.13 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.

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

The dividend is payable on August 29, 2024 to shareholders of record as of August 15, 2024.

As of June 30, 2024, we had $2,505.8 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,410.0 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.70 times for the trailing twelve months ended June 30, 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 March 31, 2024 and 2023:

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended June 30, 2024 and 2023:

Three Months Ended

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

(in millions, except per share amounts) June 30, 2024 June 30, 2023

Net income $ 106.1 $ 92.4

1 unchanged sentence

Operational start-up costs (2)

ERP system transition (3)

Adjusted income tax provision (3)

2 unchanged sentences

Diluted shares outstanding 178.0 176.8

(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.

(1) In the second quarter of 2024, we recorded $7.3 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

In the second quarter of 2023, we recorded $10.6 million of transaction costs primarily associated with the pending acquisition of Mattress Firm.

(2) In the second quarter of 2023, we recorded $2.4 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

(3) 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 March 31, 2024.

Three Months Ended March 31, 2024

The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted operating income (expense) for the three months ended June 30, 2024.

Three Months Ended June 30, 2024

(in millions, except percentages) Consolidated

2 unchanged sentences

Gross profit $ 554.2 44.9 % $ 409.8 41.9 % $ 144.4 56.6 % $ —

Operational start-up costs (1)

Total adjustments 3.1 3.1 — —

Adjusted gross profit $ 515.7 43.4 % $ 355.9 39.5 % $ 159.8 55.4 % $ —

Operating income (expense) $ 173.3 14.0 % $ 180.4 18.4 % $ 31.8 12.5 % $ (38.9)

Transaction costs (1)

14.8 — — 14.8

Operational start-up costs (1)

Total adjustments 17.9 3.1 — 14.8

Adjusted operating income (expense) $ 180.6 14.6 % $ 180.4 18.4 % $ 31.8 12.5 % $ (31.6)

(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.

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 March 31, 2023.

Three Months Ended March 31, 2023

(1) In the second quarter of 2024, we recorded $7.3 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

Three Months Ended June 30, 2023

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

1 unchanged sentence

Gross profit $ 542.3 42.7 % $ 403.4 39.7 % $ 138.9 54.9 % $ —

ERP system transition (1)

Operational start-up costs (1)

Total adjustments 4.9 4.9 — —

Adjusted gross profit $ 544.7 42.9 % $ 405.8 39.9 % $ 138.9 54.9 % $ —

1 unchanged sentence

Transaction costs (2)

ERP system transition (1)

10.6 — — 10.6

Operational start-up costs (1)

1 unchanged sentence

Adjusted operating income (expense) $ 171.8 13.5 % $ 176.5 17.4 % $ 33.9 13.4 % $ (38.6)

(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.

(1) In the second quarter of 2023, we recorded $2.4 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in the U.S., including personnel and facility related costs.

(2) In the second quarter of 2023, we recorded $10.6 million of transaction costs primarily associated with the pending acquisition of Mattress Firm.

EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash

6 unchanged sentences

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

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

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the three months ended June 30, 2024 and 2023:

Three Months Ended

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

(in millions) June 30, 2024 June 30, 2023

Net income $ 106.1 $ 92.4

5 unchanged sentences

Operational start-up costs (2)

ERP system transition (3)

Adjusted EBITDA $ 231.4 $ 217.5

(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:

(1) In the second quarter of 2024, we recorded $7.3 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

In the second quarter of 2023, we recorded $10.6 million of transaction costs primarily associated with the pending acquisition of Mattress Firm.

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and adjusted EBITDA for the trailing twelve months ended June 30, 2024:

Trailing Twelve Months Ended

(in millions) March 31, 2024

(in millions) June 30, 2024

Net income $ 372.8

6 unchanged sentences

Cybersecurity event (3)

Operational start-up costs (4)

Fair value remeasurement (4)

Operational start-up costs (5)

Adjusted EBITDA $ 891.7

1 unchanged sentence

Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 2.70 times

(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.

(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.

(1) In the trailing twelve months ended June 30, 2024, we recognized $3.2 million of loss on extinguishment of debt associated with the refinancing of our senior secured credit facilities.

(2) In the trailing twelve months ended June 30, 2024, we recognized $55.3 million of transaction costs associated with the pending acquisition of Mattress Firm.

(3) In the trailing twelve months ended June 30, 2024, we recorded $14.3 million of costs associated with the cybersecurity event identified on July 23, 2023.

(4) In the trailing twelve months ended June 30, 2024, we recorded a fair value remeasurement of $11.0 million related to a strategic investment in a product innovation initiative.

(5) In the trailing twelve months ended June 30, 2024, we recognized $9.4 million of operational start-up costs.

Under the 2023 Credit Agreement, the ratio of adjusted EBITDA to consolidated indebtedness less netted cash was 2.70 times for the trailing twelve months ended June 30, 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 March 31, 2024.

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of June 30, 2024.

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

(in millions) March 31, 2024

(in millions) June 30, 2024

Total debt, net $ 2,486.5

10 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis