SOMNIGROUP INTERNATIONAL INC. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the 2024 Annual Report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in ITEM 7 of Part II of the 2024 Annual Report, and the accompanying Condensed Consolidated Financial Statements and notes thereto included in this Report. Unless otherwise noted, all of the financial information in this Report is consolidated financial information for the Company. 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 2024 Annual Report, the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2024 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, 2025, including the following topics: • an overview of our business and strategy; • results of operations, including our net sales and costs in the periods presented as well as changes between periods; • expected sources of liquidity for future operations; and • our use of certain non-GAAP financial measures. Business Overview General We are the world's largest bedding company, dedicated to improving people's lives through better sleep. With superior capabilities in design, manufacturing, distribution and retail, we deliver breakthrough sleep solutions and serve the evolving needs of consumers in more than 100 countries worldwide through our fully-owned businesses, Tempur Sealy, Mattress Firm and Dreams. We operate in three segments: Tempur Sealy North America, Tempur Sealy International and Mattress Firm. These segments are strategic business units that are managed separately. Our Tempur Sealy North America segment consists of manufacturing, distribution and retail subsidiaries and licensees located in the U.S., Canada and Mexico (other than Mattress Firm retail and distribution locations). Our Tempur Sealy International segment consists of manufacturing, distribution and retail subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America (other than Mexico). The Mattress Firm segment consists of retail stores and distribution centers located in the U.S. Corporate operating expenses are not included in any of the segments and are presented separately as a reconciling item to consolidated results. We evaluate segment performance based on net sales, gross profit and operating income. For additional information refer to Note 12, "Business Segment Information," included in Part I, ITEM 1 of this Report. Our portfolio includes the most highly recognized brands in the industry, including Tempur-Pedic®, Sealy®, Stearns & Foster®, and Sleepy's®, and our global omni-channel platform enables us to meet consumers wherever they shop, offering a personal connection and innovation to provide a unique retail experience and tailored sleep solutions. Our products allow for complementary merchandising strategies and are sold through third-party retailers, our company-owned and joint venture operated retail stores worldwide and our e-commerce channel. Our distribution model operates through an omni-channel strategy. We distribute through two channels in the Tempur Sealy North America and Tempur Sealy International operating business segments: Wholesale and Direct. We distribute through one channel in the Mattress Firm operating business segment: Direct. Our Wholesale channel consists of third-party retailers, including third-party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, online and call centers. General Business and Economic Conditions We believe the bedding industry is structured for sustained growth, driven by product innovation, sleep technology advancements, consumer confidence, housing formations and population growth. The industry is no longer engaged in uneconomical retail store expansion, startups have shifted from uneconomical strategies to becoming profitable and legacy retailers and manufacturers have become skilled in producing profitable online sales. 23 Table of Contents Over the last decade, consumers have made the connection between a good night's sleep and overall health and wellness. As consumers make this connection, they are willing to invest more in their bedding purchases, which positions us well for long-term growth. The global bedding industry was challenged in 2024 due to certain macroeconomic pressures on the consumer, and we expect these pressures to continue throughout 2025. Ongoing geopolitical conflicts, including trade disputes and the imposition of tariffs, may also introduce further uncertainty for the consumer. We have taken actions to mitigate the impact of the proposed tariffs, and we will implement pricing actions to mitigate the remaining impact. The majority of our products sold are also manufactured in the U.S. Accordingly, we believe the proposed tariffs will not have a material impact on our results of operations in 2025. We expect to outperform the bedding industry as a result of our investments in new product launches and continued investments in innovation, quality, advertising and customer service. Acquisition of Mattress Firm On February 5, 2025, we completed the Mattress Firm Acquisition for an aggregate purchase price of approximately $5.2 billion, net of cash acquired of $0.3 billion. The aggregate purchase price consisted of $3.1 billion in cash and approximately 34.2 million shares of common stock valued at $65.65 per share, which represents the simple average of the opening and closing price per share of our common stock on the NYSE on the trading day immediately prior to the date of acquisition, with the value of any fractional shares paid in cash. In connection with the consummation of the merger, we borrowed $625.0 million on the Delayed Draw Term A Loan and $679.5 million of revolving commitments under our senior credit facility. In addition, approximately $1,592.0 million of proceeds in respect of the Term B Loan were released from escrow. The proceeds of this financing were collectively used to fund a portion of the cash consideration, the repayment of Mattress Firm's debt and the payment of certain fees and expenses related to the merger. Mattress Firm operates as a separate business segment. Mattress Firm's financial results for the period from February 5, 2025 through March 31, 2025 (the "stub period") are included in our consolidated financial statements in the first quarter of 2025. On May 1, 2025, we completed the previously announced divestiture of 73 Mattress Firm retail locations and our Sleep Outfitters subsidiary, which includes 103 specialty mattress retail locations and seven distribution centers, to Mattress Warehouse. We do not expect the divestiture to have a material impact on our results of operations. Product Launches In 2025, we launched an all-new collection of Sealy Posturepedic products in North America. This reinvention of the Sealy Posturepedic® brand is strategically aimed at reigniting growth in the mid-to-entry level market, which has experienced outsized pressures relative to other price points in recent years. The new collection incorporates innovative technologies, including our proprietary PrecisionFit™ coils which were expertly designed to provide superior support. Results of Operations A summary of our results for the three months ended March 31, 2025 include: • Total net sales increased 34.9% to $1,604.7 million as compared to $1,189.4 million in the first quarter of 2024, primarily driven by the inclusion of $593.7 million of Mattress Firm sales for the stub period, offset by the elimination of $130.1 million of sales from the Tempur Sealy North America segment to the Mattress Firm segment for the stub period. • Gross margin was 36.2% as compared to 39.9% in the first quarter of 2024. Adjusted gross margin, which is a non-GAAP financial measure, was 42.2% as compared to 40.1% in the first quarter of 2024. • Operating income was $13.2 million as compared to $131.5 million in the first quarter of 2024, primarily driven by costs during the quarter related to the Mattress Firm Acquisition. Adjusted operating income, which is a non-GAAP financial measure, was $182.8 million as compared to $149.4 million in the first quarter of 2024. • Net loss was $(33.1) million as compared to net income of $76.3 million in the first quarter of 2024, primarily driven by the acquisition of Mattress Firm. Adjusted net income, which is a non-GAAP financial measure, was $97.0 million as compared to $89.7 million in the first quarter of 2024. 24 Table of Contents • Loss per diluted share was $(0.17) as compared to earnings per diluted share ("EPS") $0.43 in the first quarter of 2024. Adjusted EPS, which is a non-GAAP financial measure, was $0.49 as compared to $0.50 in the first quarter of 2024. 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." We may refer to net sales, earnings or other historical financial information on a "constant currency basis," which is a non-GAAP financial measure. These references to constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates. To provide information on a constant currency basis, the applicable financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior corresponding period's currency conversion rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under GAAP, and it is not intended as an alternative to GAAP measures. Refer to Part I, ITEM 3 of this Report for a discussion of our foreign currency exchange rate risk. 25 Table of Contents THREE MONTHS ENDED MARCH 31, 2025 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2024 The following table sets forth the various components of our Condensed Consolidated Statements of (Loss) Income and expresses each component as a percentage of net sales: Three Months Ended March 31, (in millions, except percentages and per share amounts) 2025 2024 Net sales $ 1,604.7 100.0 % $ 1,189.4 100.0 % Cost of sales 1,024.2 63.8 715.1 60.1 Gross profit 580.5 36.2 474.3 39.9 Selling and marketing expenses 362.6 22.6 226.7 19.1 General, administrative and other expenses 209.5 13.1 121.0 10.2 Equity income in earnings of unconsolidated affiliates (4.8) (0.3) (4.9) (0.4) Operating income 13.2 0.8 131.5 11.1 Other expense, net: Interest expense, net 61.3 3.8 34.3 2.9 Other expense (income), net 1.2 0.1 (0.3) — Total other expense, net 62.5 3.9 34.0 2.9 (Loss) income before income taxes (49.3) (3.1) 97.5 8.2 Income tax benefit (provision) 16.5 1.0 (20.7) (1.7) Net (loss) income before non-controlling interest (32.8) (2.0) 76.8 6.5 Less: Net income attributable to non-controlling interest 0.3 — 0.5 — Net (loss) income attributable to Somnigroup International Inc. $ (33.1) (2.0) % $ 76.3 6.5 % (Loss) earnings per common share: Basic $ (0.17) $ 0.44 Diluted $ (0.17) $ 0.43 Weighted average common shares outstanding: Basic 194.9 173.6 Diluted 198.9 178.0 26 Table of Contents NET SALES Three Months Ended March 31, 2025 2024 2025 2024 2025 2024 2025 2024 (in millions) Consolidated Tempur Sealy North America Tempur Sealy International Mattress Firm Net sales by channel Wholesale $ 698.7 $ 885.8 $ 584.5 $ 776.9 $ 114.2 $ 108.9 $ — $ — Direct 906.0 303.6 121.7 124.2 190.6 179.4 593.7 — Total net sales $ 1,604.7 $ 1,189.4 $ 706.2 $ 901.1 $ 304.8 $ 288.3 $ 593.7 $ — Net sales increased 34.9%, and on a constant currency basis increased 35.8%. The change in net sales was driven by the following: • Tempur Sealy North America net sales decreased $194.9 million, or 21.6%. Net sales in the Wholesale channel decreased $192.4 million, primarily driven by a 16.7% decline from the elimination of intercompany sales to Mattress Firm of $130.1 million and an 8.0% decline from continued macroeconomic pressures impacting U.S. consumer behavior of $62.3 million. Net sales in the Direct channel decreased $2.5 million, or 2.0%, as compared to the first quarter of 2024. • Tempur Sealy International net sales increased $16.5 million, or 5.7%, primarily driven by the success of new product launches. On a constant currency basis, International net sales increased 7.7%. Net sales in the Wholesale channel increased 8.4% on a constant currency basis. Net sales in the Direct channel increased 7.3% on a constant currency basis. • Mattress Firm net sales were $593.7 million for the stub period. GROSS PROFIT Three Months Ended March 31, 2025 2024 (in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change Tempur Sealy North America $ 240.0 34.0 % $ 336.7 37.4 % (3.4) % Tempur Sealy International 149.3 49.0 % 137.6 47.7 % 1.3 % Mattress Firm 191.2 32.2 % — — % 32.2 % Consolidated gross margin $ 580.5 36.2 % $ 474.3 39.9 % (3.7) % 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. Cost of sales also includes retail store occupancy costs such as rent, common area maintenance charges, real estate and other asset-based taxes, general maintenance, utilities, depreciation and certain insurance expenses. Our gross margin is primarily impacted by the relative amount of net sales contributed by our premium or value products. Our value products have a significantly lower gross margin than our premium products. If sales of our value priced products increase relative to sales of our premium priced products, our gross margins will be negatively impacted across all segments. Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes; the cost of raw materials; operational efficiencies due to the utilization in our manufacturing facilities; product, brand, channel and country mix; foreign exchange fluctuations; volume incentives offered to certain retail accounts; participation in our retail cooperative advertising programs; vendor incentives earned on supply agreements, retail store fixed cost leverage based on unit volumes and costs associated with new product introductions. Future changes in raw material prices could have a significant impact on our gross margin. Our margins are also impacted by the growth in our Wholesale channel as sales in our Wholesale channel are at wholesale prices, whereas sales in our Direct channel are at retail prices. Gross margin declined 370 basis points. The primary drivers of changes in gross margin by segment are discussed below: • Tempur Sealy North America gross margin declined 340 basis points. The decline in gross margin was primarily driven by operating expense deleverage of 120 basis points and commodity cost inflation. Additionally, we incurred $78.0 million of one-time business combination accounting adjustments related to the Mattress Firm Acquisition, which contributed to the decline in gross margin. These declines were partially offset by the elimination of intercompany sales to Mattress Firm of 530 basis points, operational efficiencies of 120 basis points and favorable mix of 110 basis points. • Tempur Sealy International gross margin improved 130 basis points. The improvement in gross margin was primarily driven by decreased product launch costs. • Mattress Firm gross margin was 32.2% for the stub period. 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. 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, distribution and retail store operations, expenses for administrative functions and research and development costs. Three Months Ended March 31, 2025 2024 2025 2024 2025 2024 2025 2024 2025 2024 (in millions) Consolidated Tempur Sealy North America Tempur Sealy International Mattress Firm Corporate Operating expenses: Advertising expenses $ 142.9 $ 108.0 $ 83.6 $ 84.4 $ 25.7 $ 23.6 $ 33.6 $ — $ — $ — Other selling and marketing expenses 219.7 118.7 68.0 69.2 46.6 45.4 101.5 — 3.6 4.1 General, administrative and other expenses 209.5 121.0 48.1 48.7 30.7 28.7 49.3 — 81.4 43.6 Total operating expenses $ 572.1 $ 347.7 $ 199.7 $ 202.3 $ 103.0 $ 97.7 $ 184.4 $ — $ 85.0 $ 47.7 Operating expenses increased $224.4 million, or 64.5%, and increased 650 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained below: • Tempur Sealy North America operating expenses decreased $2.6 million, or 1.3%, and increased 580 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreases in advertising and other selling and marketing expenses. • Tempur Sealy International operating expenses increased $5.3 million, or 5.4%, and decreased 10 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by investments in growth initiatives. • Mattress Firm operating expenses were $184.4 million for the stub period. • Corporate operating expenses increased $37.3 million, or 78.2%. The increase in operating expenses was primarily driven by transaction costs related to the Mattress Firm Acquisition. Research and development expenses for the three months ended March 31, 2025 were $8.1 million, consistent with the three months ended March 31, 2024. 27 Table of Contents OPERATING INCOME Three Months Ended March 31, 2025 2024 (in millions, except percentages) Operating Income Operating Margin Operating Income Operating Margin Margin Change Tempur Sealy North America $ 40.3 5.7 % $ 134.4 14.9 % (9.2) % Tempur Sealy International 51.1 16.8 % 44.8 15.5 % 1.3 % Mattress Firm 6.8 1.1 % — — % 1.1 % 98.2 179.2 Corporate expenses (85.0) (47.7) Total operating income $ 13.2 0.8 % $ 131.5 11.1 % (10.3) % Operating income decreased $118.3 million and operating margin declined 1,030 basis points. The primary drivers of changes in operating income and operating margin by segment are discussed below: • Tempur Sealy North America operating income decreased $94.1 million and operating margin declined 920 basis points. The decline in operating margin was primarily driven by operating expense deleverage of 580 basis points and the decline in gross margin of 340 basis points. • Tempur Sealy International operating income increased $6.3 million and operating margin improved 130 basis points. The improvement in operating margin was driven by the improvement in gross margin of 130 basis points. • Mattress Firm operating income was $6.8 million and operating margin was 1.1% for the stub period. • Corporate operating expenses increased $37.3 million, which negatively impacted our consolidated operating margin. INTEREST EXPENSE, NET Three Months Ended March 31, (in millions, except percentages) 2025 2024 % Change Interest expense, net $ 61.3 $ 34.3 78.7 % Interest expense, net, increased $27.0 million, or 78.7%. The increase in interest expense, net, was primarily driven by increased average levels of outstanding variable rate debt. INCOME TAX PROVISION Three Months Ended March 31, (in millions, except percentages) 2025 2024 % Change Income tax (benefit) provision $ (16.5) $ 20.7 (179.7) % Effective tax rate 33.5 % 21.2 % 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 $37.2 million due to a decrease in income before income taxes. Our effective tax rate for the three months ended March 31, 2025 as compared to the prior year increased by 1,230 basis points. The effective tax rates as compared to the U.S. federal statutory rates for the three months ended March 31, 2025 and 2024 included the favorable impact of the deductibility of stock compensation in the U.S. and a net unfavorable impact of other discrete items. Liquidity and Capital Resources Liquidity Our principal sources of funds are cash flows from operations, supplemented with borrowings in the capital markets and made pursuant to our credit facilities and cash and cash equivalents on hand. 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. Cash and Working Capital Cash and cash equivalents were $111.1 million and $117.4 million as of March 31, 2025 and December 31, 2024, respectively. We had a working capital deficit of $268.9 million as of March 31, 2025, as compared to working capital of $105.1 million as of December 31, 2024. The reduction in our working capital to a deficit position in the first quarter of 2025 was primarily driven by a $251.2 million increase in our short-term operating lease obligations as a result of the Mattress Firm Acquisition, and we expect to operate with a working capital deficit in the future. The amount of cash and cash equivalents held by subsidiaries outside of the U.S. and not readily convertible into the U.S. Dollar or other major foreign currencies is not material to our overall liquidity or financial position. Cash Provided by (Used in) Operations 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, (in millions) 2025 2024 Net cash provided by (used in) operations: Operating activities $ 106.4 $ 130.2 Investing activities (2,858.9) (31.2) Financing activities 1,142.1 (77.9) Cash provided by operating activities decreased $23.8 million in the three months ended March 31, 2025 as compared to the same period in 2024. The decrease in cash provided by operating activities was driven by a $109.6 million decrease in net income, offset by a $18.5 million increase in non-cash depreciation expense, primarily associated with our new Tempur manufacturing facility and a $65.1 million increase in cash provided by changes in operating assets and liabilities. Cash used in investing activities increased $2,827.7 million in the three months ended March 31, 2025 as compared to the same period in 2024. The increase in cash used in investing activities was primarily driven by the acquisition of Mattress Firm on February 5, 2025. Cash provided by financing activities increased $1,220.0 million in the three months ended March 31, 2025 as compared to the same period in 2024. For the three months ended March 31, 2025, we had net borrowings of $1,217.3 million on our credit facilities as compared to net repayments of $3.7 million in the same period in 2024. We paid dividends to shareholders of $32.9 million and $24.9 million, during the three months ended March 31, 2025 and 2024, respectively. Additionally, we repurchased $37.5 million and $43.8 million of our common stock to satisfy tax withholding obligations upon the vesting of our long-term incentive plans during the three months ended March 31, 2025 and 2024, respectively. Capital Expenditures Capital expenditures totaled $24.0 million and $31.5 million for the three months ended March 31, 2025 and 2024, respectively. We currently expect our 2025 capital expenditures to be approximately $250 million, including $50 million of investments to refresh Mattress Firm stores. Indebtedness Our total debt increased to $5,069.9 million as of March 31, 2025 from $3,844.5 million as of December 31, 2024. Total availability under our revolving senior secured credit facility was $708.3 million as of March 31, 2025. Refer to Note 5, "Debt" in the "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1 for further discussion of our debt. As of March 31, 2025, 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 3.51 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, 2025, 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. The 2023 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes contain similar limitations which, subject to certain conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, remains below 3.75 times in the case of the 2023 Credit Agreement and remains below 3.50 times in the cases of the 2029 Senior Notes and 2031 Senior Notes. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.75 times in the case of the 2023 Credit Agreement and above 3.50 times in the cases of the 2029 Senior Notes and 2031 Senior Notes. The limit on restricted payments under the 2023 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted. For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated indebtedness less netted cash to adjusted EBITDA calculated in accordance with the 2023 Credit Agreement. Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 2023 Credit Agreement are non-GAAP financial measures and do not purport to be alternatives to net income as a measure of operating performance or total debt. Share Repurchase Program 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, 2025, we did not repurchase shares under our share repurchase program. As of March 31, 2025, 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. These repurchases may be funded by operating cash flows and/or borrowings under our debt arrangements. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program is subject to certain limitations under our debt agreements. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws. We manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. In 2025, we expect to engage in strategic share repurchases as we primarily focus on debt repayment to reduce leverage to our target ratio of 2.0 to 3.0 times. For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," in the 2024 Annual Report. Please also refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this Report. Future Liquidity Sources and Uses As of March 31, 2025, we had $819.4 million of liquidity, including $111.1 million of cash on hand and $708.3 million available under our 2023 Credit Agreement. In addition, we expect to generate cash flow from operations in the full year 2025. We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for our foreseeable working capital needs, necessary capital expenditures, debt service obligations and dividend payments. Our capital allocation strategy follows a balanced approach focused on supporting the business, returning shareholder value through strategic acquisition opportunities that enhance our global competitiveness, as well as quarterly dividends and opportunistic share repurchases. The Board of Directors declared a dividend of $0.15 per share for the second quarter of 2025. The dividend is payable on June 5, 2025 to shareholders of record as of May 22, 2025. As of March 31, 2025, we had $5,069.9 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $4,958.8 million. Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 3.51 times for the trailing twelve months ended March 31, 2025. We currently expect our target leverage ratio to return to 2.0 to 3.0 times in the first twelve months following the close of the transaction. Total cash interest payments related to our borrowings are expected to be between approximately $265 million to $275 million in 2025. Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Similarly, our cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements and debt service obligations. Non-GAAP Financial Information We provide information regarding adjusted net income, EBITDA, adjusted EBITDA, adjusted EPS, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, consolidated indebtedness and consolidated indebtedness less netted cash, which are not recognized terms under GAAP and do not purport to be alternatives to net income, earnings per share, gross profit, gross margin, operating income (expense) and operating margin as a measure of operating performance, or an alternative to total debt as a measure of liquidity. We believe these non-GAAP financial measures provide investors with performance measures that better reflect our underlying operations and trends, providing a perspective not immediately apparent from net income, gross profit, gross margin, operating income (expense) and operating margin. The adjustments we make to derive the non-GAAP financial measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP financial measure, but which we do not consider to be the fundamental attributes or primary drivers of our business. We believe that exclusion of these items assists in providing a more complete understanding of our underlying results from operations and trends, and we use these measures along with the corresponding GAAP financial measures to manage our business, to evaluate our consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. These non-GAAP financial measures should be considered supplemental in nature and should not be construed as more significant than comparable financial measures defined by GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. For more information about these non-GAAP financial measures and a reconciliation to the nearest GAAP financial measure, please refer to the reconciliations on the following pages. 28 Table of Contents Adjusted Net Income and Adjusted EPS A reconciliation of reported net (loss) income to adjusted net income and the calculation of adjusted EPS is provided below. 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 (loss) income to adjusted net income and the calculation of adjusted EPS for the three months ended March 31, 2025 and 2024: Three Months Ended (in millions, except per share amounts) March 31, 2025 March 31, 2024 Net (loss) income $ (33.1) $ 76.3 Acquisition-related costs (1) 114.2 — Transaction costs (2) 51.9 14.8 Transaction-related interest expense, net (3) 6.8 — Supply chain transition costs (4) 3.5 — Operational start-up costs (5) — 3.1 Adjusted income tax provision (6) (46.3) (4.5) Adjusted net income $ 97.0 $ 89.7 Adjusted earnings per common share, diluted $ 0.49 $ 0.50 Diluted shares outstanding 198.9 178.0 (1) In the first quarter of 2025, we recorded $114.2 million of acquisition-related costs. Cost of sales included $95.4 million, primarily related to one-time business combination accounting and purchase price allocation adjustments. Operating expenses included $18.8 million of professional fees and restructuring costs. (2) In the first quarter of 2025, we recorded $51.9 million of transaction costs associated with the Mattress Firm Acquisition. Operating expenses primarily included legal and professional fees associated with the Mattress Firm Acquisition. In the first quarter of 2024, we recorded $14.8 million of transaction costs primarily related to legal and professional fees associated with the Mattress Firm Acquisition. (3) In the first quarter of 2025, we incurred $6.8 million of transaction-related interest expense, net of interest income, related to the Term B Loan drawn and held in escrow. The proceeds of the Term B Loan were released upon the closing of the Mattress Firm Acquisition on February 5, 2025. (4) In the first quarter of 2025, we recorded $3.5 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $1.9 million recorded in cost of sales and $1.6 million recorded in operating expenses. (5) In the first quarter of 2024, we recorded $3.1 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. (6) Adjusted income tax provision represents the tax effects associated with the aforementioned items. 29 Table of Contents 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, 2025. Three Months Ended March 31, 2025 (in millions, except percentages) Consolidated Margin Tempur Sealy North America Margin Tempur Sealy International Margin Mattress Firm Margin Corporate Net sales $ 1,604.7 $ 706.2 $ 304.8 $ 593.7 $ — Gross profit $ 580.5 36.2 % $ 240.0 34.0 % $ 149.3 49.0 % $ 191.2 32.2 % $ — Adjustments: Acquisition-related costs (1) 95.4 78.0 — 17.4 — Supply chain transition costs (2) 1.9 1.9 — — — Total adjustments 97.3 79.9 — 17.4 — Adjusted gross profit $ 677.8 42.2 % $ 319.9 45.3 % $ 149.3 49.0 % $ 208.6 35.1 % $ — Operating income (expense) $ 13.2 0.8 % $ 40.3 5.7 % $ 51.1 16.8 % $ 6.8 1.1 % $ (85.0) Adjustments: Acquisition-related costs (1) 114.2 78.0 — 34.2 2.0 Transaction costs (3) 51.9 — — 1.7 50.2 Supply chain transition costs (2) 3.5 3.5 — — — Total adjustments 169.6 81.5 — 35.9 52.2 Adjusted operating income (expense) $ 182.8 11.4 % $ 121.8 17.2 % $ 51.1 16.8 % $ 42.7 7.2 % $ (32.8) (1) In the first quarter of 2025, we recorded $114.2 million of acquisition-related costs. Cost of sales included $95.4 million, primarily related to one-time business combination accounting and purchase price allocation adjustments. Operating expenses included $18.8 million of professional fees and restructuring costs. (2) In the first quarter of 2025, we recorded $3.5 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $1.9 million recorded in cost of sales and $1.6 million recorded in operating expenses. (3) In the first quarter of 2025, we recorded $51.9 million of transaction costs associated with the Mattress Firm Acquisition. Operating expenses primarily included legal and professional fees associated with the Mattress Firm Acquisition. 30 Table of Contents 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, 2024. Three Months Ended March 31, 2024 (in millions, except percentages) Consolidated Margin Tempur Sealy North America Margin Tempur Sealy International Margin Corporate Net sales $ 1,189.4 $ 901.1 $ 288.3 $ — Gross profit $ 474.3 39.9 % $ 336.7 37.4 % $ 137.6 47.7 % $ — Adjustments: Operational start-up costs (1) 3.1 3.1 — — Total adjustments 3.1 3.1 — — Adjusted gross profit $ 477.4 40.1 % $ 339.8 37.7 % $ 137.6 47.7 % $ — Operating income (expense) $ 131.5 11.1 % $ 134.4 14.9 % $ 44.8 15.5 % $ (47.7) Adjustments: Transaction costs (2) 14.8 — — 14.8 Operational start-up costs (1) 3.1 3.1 — — Total adjustments 17.9 3.1 — 14.8 Adjusted operating income (expense) $ 149.4 12.6 % $ 137.5 15.3 % $ 44.8 15.5 % $ (32.9) (1) In the first quarter of 2024, we recorded $3.1 million of operational start-up costs related to the capacity expansion of manufacturing and distribution facilities in the U.S., including 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 Mattress Firm Acquisition. 31 Table of Contents EBITDA, Adjusted EBITDA and Consolidated Indebtedness less Netted Cash The following reconciliations are provided below: • Net income to EBITDA and adjusted EBITDA • Ratio of consolidated indebtedness less netted cash to adjusted EBITDA • Total debt, net to consolidated indebtedness less netted cash We believe that presenting these non-GAAP measures provides investors with useful information with respect to our operating performance, cash flow generation and comparisons from period to period, as well as general information about our leverage. The 2023 Credit Agreement provides the definition of adjusted EBITDA. 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, 2025 and 2024: Three Months Ended (in millions) March 31, 2025 March 31, 2024 Net (loss) income $ (33.1) $ 76.3 Interest expense, net 54.5 34.3 Transaction-related interest expense, net (1) 6.8 — Income tax (benefit) provision (16.5) 20.7 Depreciation and amortization 66.6 49.0 EBITDA $ 78.3 $ 180.3 Adjustments: Acquisition-related costs (2) 114.2 — Transaction costs (3) 51.9 14.8 Supply chain transition costs (4) 3.5 — Operational start-up costs (5) $ — $ 3.1 Adjusted EBITDA $ 247.9 $ 198.2 (1) In the first quarter of 2025, we incurred $6.8 million of transaction-related interest expense, net of interest income, related to the Term B Loan drawn and held in escrow. The proceeds of the Term B Loan were released upon the closing of the Mattress Firm Acquisition on February 5, 2025. (2) In the first quarter of 2025, we recorded $114.2 million of acquisition-related costs. Cost of sales included $95.4 million, primarily related to one-time business combination accounting and purchase price allocation adjustments. Operating expenses included $18.8 million of professional fees and restructuring costs. (3) In the first quarter of 2025, we recorded $51.9 million of transaction costs associated with the Mattress Firm Acquisition. Operating expenses primarily included legal and professional fees associated with the Mattress Firm Acquisition. In the first quarter of 2024, we recorded $14.8 million of transaction costs primarily related to legal and professional fees associated with the Mattress Firm Acquisition. (4) In the first quarter of 2025, we recorded $3.5 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $1.9 million recorded in cost of sales and $1.6 million recorded in operating expenses. (5) In the first quarter of 2024, we recorded $3.1 million of operational start-up costs related to the capacity expansion of manufacturing and distribution facilities in the U.S., including personnel and facility related costs. 32 Table of Contents 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, 2025: Trailing Twelve Months Ended (in millions) March 31, 2025 Net income $ 274.9 Interest expense, net 145.2 Transaction-related interest expense, net (1) 16.6 Income tax provision 81.4 Depreciation and amortization 221.5 EBITDA $ 739.6 Adjustments for financial covenant purposes: Acquisition-related costs (2) 114.2 Transaction costs (3) 84.9 Customer-related transition charges (4) 26.7 Supply chain transition costs (5) 13.0 Cybersecurity event (6) (4.9) Adjusted EBITDA $ 973.5 Adjustments for financial covenant purposes: Unrestricted subsidiary (7) 10.1 Earnings from Mattress Firm prior to acquisition (8) 329.6 Future synergies to be realized from Mattress Firm Acquisition (9) 100.0 Adjusted EBITDA per credit facility $ 1,413.2 Consolidated indebtedness less netted cash $ 4,958.8 Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 3.51 times (1) In the trailing twelve months ended March 31, 2025, we recognized $16.6 million of transaction-related interest expense, net of interest income, related to the Term B Loan drawn and held in escrow. The proceeds of the Term B Loan were released upon the closing of the Mattress Firm Acquisition on February 5, 2025. (2) In the first quarter of 2025, we recorded $114.2 million of acquisition-related costs. Cost of sales included $95.4 million, primarily related to one-time business combination accounting and purchase price allocation adjustments. Operating expenses included $18.8 million of professional fees and restructuring costs. (3) In the trailing twelve months ended March 31, 2025, we recognized $84.9 million of transaction costs associated with the Mattress Firm Acquisition. (4) In the trailing twelve months ended March 31, 2025, we recorded $26.7 million of transition charges as a result of a customer's acquisition which foreclosed on our OEM distribution to this customer. (5) In the trailing twelve months ended March 31, 2025, we recognized $13.0 million in supply chain transition costs associated with the consolidation of certain manufacturing facilities. (6) In the trailing twelve months ended March 31, 2025, the Company received proceeds of $4.9 million for an insurance claim related to the previously disclosed cybersecurity event identified on July 23, 2023. (7) A subsidiary in the Tempur Sealy North America business segment was accounted for as held for sale and designated as an unrestricted subsidiary under the 2023 Credit Agreement. Therefore, this subsidiary's financial results were excluded from the Company's adjusted financial measures for covenant compliance purposes. (8) We completed the Mattress Firm Acquisition on February 5, 2025 and the Mattress Firm subsidiaries are designated as restricted under the 2023 Credit Agreement. For covenant compliance purposes, we included $329.6 million of Mattress Firm EBITDA for the period prior to acquisition in our calculation of adjusted EBITDA per credit facility for the trailing twelve months ended March 31, 2025. (9) For the trailing twelve months ended March 31, 2025, we are permitted to include $100.0 million of future synergies expected to be realized with 36 months in connection with the Mattress Firm acquisition for the purpose of calculating our adjusted EBITDA in accordance with the 2023 Credit Agreement. Under the 2023 Credit Agreement, the ratio of adjusted EBITDA to consolidated indebtedness less netted cash was 3.51 times for the trailing twelve months ended March 31, 2025. 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. 33 Table of Contents 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, 2025. "Consolidated Indebtedness" and "Netted Cash" are terms used in the 2023 Credit Agreement for purposes of certain financial covenants. (in millions) March 31, 2025 Total debt, net $ 5,033.0 Plus: Deferred financing costs (1) 36.9 Consolidated indebtedness 5,069.9 Less: Netted cash (2) 111.1 Consolidated indebtedness less netted cash $ 4,958.8 (1) We present deferred financing costs as a direct reduction from the carrying amount of the related debt in the Condensed Consolidated Balance Sheets. For purposes of determining total debt for financial covenant purposes, we have added these costs back to total debt, net as calculated per the Condensed Consolidated Balance Sheets. (2) Netted cash includes cash and cash equivalents for domestic and foreign subsidiaries designated as restricted subsidiaries in the 2023 Credit Agreement. Critical Accounting Policies and Estimates During the three months ended March 31, 2025, there were no material changes to our critical accounting policies and estimates as described in our 2024 Annual Report, except as set forth below. Business Combinations. We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques when fair value is not readily available and requires a significant amount of management judgment. For the valuation of intangible assets acquired in the Mattress Firm Acquisition, we applied the income approach through a relief from royalty method. Although we believe these estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair values of the intangible assets acquired. The excess of the purchase price over fair values of identifiable assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill due to the use of preliminary information in our initial estimates. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. For additional discussion of our critical accounting policies and estimates, please refer to ITEM 7 under Part II, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in the 2024 Annual Report.