What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 180 added, 122 removed, 357 unchanged (46% 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 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, 2024.

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 six months ended June 30, 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 nine months ended September 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 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.

In the remainder 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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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.

On October 4, 2024, the Company filed a complaint in the Court seeking an injunction against the FTC's administrative proceeding.

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.

On September 23, 2024, we announced that we entered into a purchase agreement with MW SO Holdings Company, LLC (“Mattress Warehouse”), a leading independently owned bedding specialty retailer, for the sale of 73 Mattress Firm retail locations and our Sleep Outfitters subsidiary, which includes 103 specialty mattress retail locations and seven distribution centers.

Mattress Warehouse is a multi-branded retailer offering a full array of mattresses at various price points.

We will continue to supply our Tempur-Pedic®, Stearns & Foster® and Sealy® products to the divested Mattress Firm and Sleep Outfitters stores.

The divestiture is subject to the closing of our acquisition of Mattress Firm and other customary closing conditions.

It is expected to close approximately one quarter after the closing of the Mattress Firm transaction.

We continue to 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.

Product Launches

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

In 2024, we completed the launch of 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.

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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.

In 2025, we will launch an all-new collection of Sealy Posturepedic products.

This is a significant re-imagining of the Posturepedic collection and will feature new proprietary coil technology, a new aesthetic and an updated merchandising strategy.

Results of Operations

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.

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

• Total net sales increased 1.8% to $1,300.0 million as compared to $1,277.1 million in the third quarter of 2023, with a decrease of 0.8% in the North America business segment and an increase of 12.4% in the International business segment.

On a constant currency basis, which is a non-GAAP financial measure, total net sales increased 1.7%, with a decrease of 0.4% in the North America business segment and an increase of 10.5% in the International business segment.

• Gross margin was 45.4% as compared to 44.9% in the third quarter of 2023.

Adjusted gross margin, which is a non-GAAP financial measure, was 46.2% as compared to 45.9% in the third quarter of 2023.

• Operating income increased 10.2% to $201.8 million as compared to $183.2 million in the third quarter of 2023.

Adjusted operating income, which is a non-GAAP financial measure, increased 4.2% to $223.7 million as compared to $214.7 million in the third quarter of 2023.

• Net income increased 14.7% to $130.0 million as compared to $113.3 million in the third quarter of 2023.

Adjusted net income, which is a non-GAAP financial measure, increased 7.1% to $146.5 million as compared to $136.8 million in the third quarter of 2023.

• Earnings per diluted share ("EPS") increased 14.1% to $0.73 as compared to $0.64 in the third quarter of 2023.

Adjusted EPS, which is a non-GAAP financial measure, increased 6.5% to $0.82 as compared to $0.77 in the third 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 JUNE 30, 2024 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, 2023

THREE MONTHS ENDED SEPTEMBER 30, 2024 COMPARED TO THE

THREE MONTHS ENDED SEPTEMBER 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 June 30,

Three Months Ended September 30,

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

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Interest expense, net 30.8 2.4 32.6 2.6

Other income, net (0.6) — (0.2) —

Other expense (income), net 0.4 — (0.1) —

Total other expense, net 31.2 2.4 32.5 2.5

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Net income before non-controlling interest 129.8 10.0 113.9 8.9

Net income attributable to non-controlling interest 0.4 — 0.8 0.1

Net (loss) income attributable to non-controlling interest (0.2) — 0.6 —

Net income attributable to Tempur Sealy International, Inc.

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Diluted 178.2 177.6

Three Months Ended June 30,

Three Months Ended September 30,

2024 2023 2024 2023 2024 2023

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Total net sales $ 1,300.0 $ 1,277.1 $ 1,015.3 $ 1,023.7 $ 284.7 $ 253.4

Net sales decreased 2.8%, and on a constant currency basis decreased 2.6%.

Net sales increased 1.8%, and on a constant currency basis increased 1.7%.

The change in net sales was driven by the following:

• 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.

• North America net sales decreased $8.4 million, or 0.8%, primarily driven by continued macroeconomic pressures impacting U.S.

consumer behavior.

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%.

Net sales in the Wholesale channel decreased $6.7 million, or 0.8%.

Net sales in the Direct channel decreased $1.7 million, or 1.2%, as compared to the third quarter of 2023.

• International net sales increased $31.3 million, or 12.4%, primarily driven by the success of new product launches.

On a constant currency basis, International net sales increased 10.5%.

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Net sales in the Direct channel increased 8.2% on a constant currency basis.

Three Months Ended June 30,

Three Months Ended September 30,

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

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

• North America gross margin improved 220 basis points.

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.

• North America gross margin was flat as compared to the third quarter of 2023.

The factors impacting gross margin were primarily driven by the unfavorable mix of new OEM distribution of 150 basis points, offset by favorable commodity costs of 80 basis points and operational efficiencies.

• International gross margin improved 70 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.

The improvement in gross margin was primarily driven by 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 June 30,

Three Months Ended September 30,

2024 2023 2024 2023 2024 2023 2024 2023

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Total operating expenses $ 390.6 $ 395.1 $ 233.4 $ 234.9 $ 114.0 $ 107.9 $ 43.2 $ 52.3

Operating expenses decreased $3.7 million, or 1.0%, and increased 60 basis points as a percentage of net sales.

Operating expenses decreased $4.5 million, or 1.1%, and decreased 90 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.

• North America operating expenses decreased $1.5 million, or 0.6%, and increased 10 basis points as a percentage of net sales.

The decrease in operating expenses was primarily driven by decreases in advertising, offset by incremental bad debt expense related to retailer bankruptcies.

• International operating expenses increased $6.1 million, or 5.7%, and decreased 260 basis points as a percentage of net sales.

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

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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%.

Research and development expenses for the three months ended September 30, 2024 were $7.0 million compared to $8.2 million for the three months ended September 30, 2023, an decrease of $1.2 million, or 14.6%.

OPERATING INCOME

Three Months Ended June 30,

Three Months Ended September 30,

(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 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.

• North America operating income decreased $2.2 million and operating margin declined 10 basis points.

The decline in operating margin was primarily driven by operating expense deleverage of 10 basis points.

• International operating income increased $11.7 million and operating margin improved 240 basis points.

The improvement in operating margin was driven by operating expense leverage of 260 basis points and the improvement in gross margin of 70 basis points, partially offset by Asia joint venture performance of 90 basis points.

• Corporate operating expenses decreased $9.1 million, which positively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Three Months Ended June 30,

Three Months Ended September 30,

(in millions, except percentages) 2024 2023 % Change

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INCOME TAX PROVISION

Three Months Ended June 30,

Three Months Ended September 30,

(in millions, except percentages) 2024 2023 % Change

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Our income tax provision increased $4.0 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.

Our effective tax rate for the three months ended September 30, 2024 as compared to the prior year declined by 50 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

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

NINE MONTHS ENDED SEPTEMBER 30, 2024 COMPARED TO THE

NINE MONTHS ENDED SEPTEMBER 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,

Nine Months Ended September 30,

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

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Diluted 178.1 177.0

Six Months Ended June 30,

Nine Months Ended September 30,

2024 2023 2024 2023 2024 2023

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Net sales in the Direct channel increased $10.0 million, or 2.7%, 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.

• International net sales increased $33.4 million, or 4.2%, primarily driven by the success of new product launches.

On a constant currency basis, International net sales increased $26.4 million, or 3.3%.

Net sales in the Wholesale channel increased 6.4% on a constant currency basis.

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

Six Months Ended June 30,

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

Nine Months Ended September 30,

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

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• North America gross margin improved 130 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.

The improvement in gross margin was primarily driven by favorable commodity costs of 130 basis points and operational efficiencies of 70 basis points.

These improvements were partially offset by the unfavorable mix of new OEM distribution of 100 basis points.

• International gross margin improved 130 basis points.

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

The improvement in gross margin was primarily driven by operational efficiencies of 80 basis points and favorable commodity costs of 50 basis points.

OPERATING EXPENSES

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Six Months Ended June 30,

Nine Months Ended September 30,

2024 2023 2024 2023 2024 2023 2024 2023

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• North America operating expenses increased $9.0 million, or 1.3%, and increased 80 basis points as a percentage of net sales.

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

The increase in operating expenses was primarily driven by investments in growth initiatives and incremental bad debt expense related to retailer bankruptcies, offset by decreases in advertising.

• International operating expenses increased $16.2 million, or 4.9%, and increased 30 basis points as a percentage of net sales.

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

• 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%.

• Corporate operating expenses decreased $8.6 million, or 6.2%.

The decrease in operating expenses was primarily driven by decreased variable compensation expense.

Research and development expenses were $22.8 million for the nine months ended September 30, 2024 as compared to $23.0 million for the nine months ended September 30, 2023, an decrease of $0.2 million, or 0.9%.

OPERATING INCOME

Six Months Ended June 30,

Nine Months Ended September 30,

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

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The improvement in operating margin was primarily driven by the improvement in gross margin of 130 basis points, partially offset by operating expense deleverage of 80 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.

• International operating income increased $10.2 million and operating margin improved 60 basis points.

The improvement in operating margin was primarily driven by the improvement in gross margin of 130 basis points, partially offset by operating expense deleverage of 30 basis points and Asia joint venture performance.

• Corporate operating expenses decreased $8.6 million, which positively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions, except percentages) 2024 2023 % Change

Interest expense, net $ 98.5 $ 99.0 (0.5) %

Interest expense, net, increased $1.3 million, or 2.0%.

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

Interest expense, net, decreased $0.5 million, or 0.5%.

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

INCOME TAX PROVISION

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions, except percentages) 2024 2023 % Change

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Effective tax rate 23.4 % 24.3 %

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.

Our income tax provision increased $2.0 million driven by an increase in income before income taxes.

Our effective tax rate for the nine months ended September 30, 2024 as compared to the prior year declined 90 basis points.

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

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.

federal statutory rates for the nine months ended September 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 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.

As of September 30, 2024, we had net working capital of $143.5 million, including cash and cash equivalents of $104.2 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:

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) 2024 2023

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Financing activities (435.7) (303.2)

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.

Cash provided by operating activities increased $58.2 million in the nine months ended September 30, 2024 as compared to the same period in 2023.

The increase in cash provided by operating activities was driven by a $22.3 million increase in non-cash depreciation expense, primarily associated with our new Tempur manufacturing facility, a $20.1 million increase in net income and a $10.6 million increase in cash provided by changes in operating assets and liabilities.

Cash used in investing activities decreased $76.9 million in the nine months ended September 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.

Cash used in financing activities increased $132.5 million in the nine months ended September 30, 2024 as compared to the same period in 2023.

For the nine months ended September 30, 2024, we had net repayments of $307.3 million on our credit facilities as compared to $198.4 million in the same period in 2023.

We paid dividends to shareholders of $70.1 million and $58.8 million, during the nine months ended September 30, 2024 and 2023, respectively.

Additionally, we repurchased $43.8 million and $36.0 million of our common stock to satisfy tax withholding obligations upon the vesting of our long-term incentive plans during the nine months ended September 30, 2024 and 2023, respectively.

Capital Expenditures

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

Capital expenditures totaled $76.4 million and $153.3 million for the nine months ended September 30, 2024 and 2023, respectively.

We currently expect our 2024 capital expenditures to be approximately $125 million, which includes maintenance capital expenditures of $110 million.

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.

Our total debt decreased to $2,287.8 million as of September 30, 2024 from $2,593.6 million as of December 31, 2023.

Total availability under our revolving senior secured credit facility was $1,189.2 million as of September 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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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.

On October 24, 2024, we entered into an Amendment No.

2 ("Amendment No.

2") and an Amendment No.

3 ("Amendment No.

3" and together with Amendment No.

2, the "Amendments") to the 2023 Credit Agreement dated as of October 10, 2023, as amended.

Amendment No.

2 extends the termination date for $605 million of our existing delayed draw term A loan commitments until October 24, 2025, among other changes.

Amendment No.

3 provides for an incremental term B loan in the aggregate principal amount of $1.6 billion (the "Term B Loan").

The proceeds of the Term B Loan were funded into escrow on the closing of Amendment No.

3 and will mature on October 24, 2031.

The proceeds of the Term B Loan will be used to pay fees and expenses in connection with Amendment No.

3 and may be released upon the closing of the previously disclosed Mattress Firm acquisition.

If the closing of the Mattress Firm acquisition does not occur prior to the first anniversary of the funding date, we will be required to repay the Term B Loan.

As of September 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 2.41 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 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.

As of September 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 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.

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

As of September 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 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.

As of September 30, 2024, we had $1,293.4 million of liquidity, including $104.2 million of cash on hand and $1,189.2 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 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.

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

The dividend is payable on December 5, 2024 to shareholders of record as of November 21, 2024.

As of September 30, 2024, we had $2,287.8 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,183.6 million.

Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.41 times for the trailing twelve months ended September 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 June 30, 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 September 30, 2024 and 2023:

Three Months Ended

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

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

Net income $ 130.0 $ 113.3

Transaction costs (1)

Supply chain transition costs (2)

Cybersecurity event (3)

Operational start-up costs (4)

3 unchanged sentences

Diluted shares outstanding 178.2 177.6

(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.

(1) In the third quarter of 2024, we recorded $13.7 million of transaction costs, primarily related to legal and professional fees associated with the pending acquisition of Mattress Firm.

Cost of sales included $2.4 million of charges related to customer-specific inventory.

Operating expenses primarily included legal and professional fees associated with the pending acquisition of Mattress Firm.

In the third quarter of 2023, we recorded $15.7 million of transaction costs primarily associated with the pending acquisition of Mattress Firm.

(2) In the third quarter of 2024, we recorded $8.2 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $8.0 million recorded in cost of sales and $0.2 million recorded in operating expenses.

(3) 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 the Company's information systems.

(4) 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.

(5) 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 operating income (expense) for the three months ended June 30, 2024.

Three Months Ended June 30, 2024

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, 2024.

Three Months Ended September 30, 2024

(in millions, except percentages) Consolidated

2 unchanged sentences

Gross profit $ 589.9 45.4 % $ 426.7 42.0 % $ 163.2 57.3 % $ —

Supply chain transition costs (1)

Transaction costs (2)

Total adjustments 10.4 10.4 — —

Adjusted gross profit $ 600.3 46.2 % $ 437.1 43.1 % $ 163.2 57.3 % $ —

Operating income (expense) $ 201.8 15.5 % $ 193.3 19.0 % $ 51.7 18.2 % $ (43.2)

Transaction costs (2)

13.7 2.5 — 11.2

Supply chain transition costs (1)

Total adjustments 21.9 10.7 — 11.2

Adjusted operating income (expense) $ 223.7 17.2 % $ 204.0 20.1 % $ 51.7 18.2 % $ (32.0)

(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.

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 June 30, 2023.

Three Months Ended June 30, 2023

(1) In the third quarter of 2024, we recorded $8.2 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $8.0 million recorded in cost of sales and $0.2 million recorded in operating expenses.

(2) In the third quarter of 2024, we recorded $13.7 million of transaction costs.

Cost of sales included $2.4 million of charges related to customer-specific inventory.

Operating expenses primarily included legal and professional fees associated with the pending acquisition of Mattress Firm.

Three Months Ended September 30, 2023

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

1 unchanged sentence

Gross profit $ 573.7 44.9 % $ 430.4 42.0 % $ 143.3 56.6 % $ —

Cybersecurity event (1)

Operational start-up costs (2)

Total adjustments 11.9 11.9 — —

Adjusted gross profit $ 585.6 45.9 % $ 442.3 43.2 % $ 143.3 56.6 % $ —

2 unchanged sentences

15.7 — — 15.7

Cybersecurity event (1)

13.5 10.0 1.1 2.4

Operational start-up costs (2)

1 unchanged sentence

Adjusted operating income (expense) $ 214.7 16.8 % $ 207.8 20.3 % $ 41.1 16.2 % $ (34.2)

(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.

(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.

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 June 30, 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 September 30, 2024 and 2023:

Three Months Ended

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

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

Net income $ 130.0 $ 113.3

4 unchanged sentences

Transaction costs (1)

Supply chain transition costs (2)

Cybersecurity event (3)

Operational start-up costs (4)

Adjusted EBITDA $ 274.8 $ 259.7

(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:

(1) In the third quarter of 2024, we recorded $13.7 million of transaction costs associated with the pending acquisition of Mattress Firm.

Cost of sales included $2.4 million of charges related to customer-specific inventory.

Operating expenses primarily included legal and professional fees associated with the pending acquisition of Mattress Firm.

In the third quarter of 2023, we recorded $15.7 million of transaction costs primarily associated with the pending acquisition of Mattress Firm.

(3) 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.

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

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, 2024:

Trailing Twelve Months Ended

(in millions) June 30, 2024

(in millions) September 30, 2024

Net income $ 389.5

5 unchanged sentences

Transaction costs (2)

Cybersecurity event (3)

Fair value remeasurement (3)

Supply chain transition costs (4)

Operational start-up costs (5)

Cybersecurity event (6)

Adjusted EBITDA $ 906.8

1 unchanged sentence

Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 2.41 times

(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.

(1) In the trailing twelve months ended September 30, 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 September 30, 2024, we recognized $53.3 million of transaction costs associated with the pending acquisition of Mattress Firm, primarily recorded in operating expenses.

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

(4) In the trailing twelve months ended September 30, 2024, we recorded $8.2 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $8.0 million recorded in cost of sales and $0.2 million recorded in operating expenses.

(5) In the trailing twelve months ended September 30, 2024, we recognized $7.1 million of operational start-up costs.

(6) In the trailing twelve months ended September 30, 2024, we recorded $0.8 million of costs associated with the cybersecurity event identified on July 23, 2023.

Under the 2023 Credit Agreement, the ratio of adjusted EBITDA to consolidated indebtedness less netted cash was 2.41 times for the trailing twelve months ended September 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 June 30, 2024.

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, 2024.

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

(in millions) June 30, 2024

(in millions) September 30, 2024

Total debt, net $ 2,273.5

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