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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 12/31/2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 001-31922
 
TEMPUR SEALY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
33-1022198
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1000 Tempur Way
Lexington, Kentucky 40511
(Address of registrant’s principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (800) 878-8889
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
TPX
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
 None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer x Accelerated filer o Non-Accelerated filer o Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): ☐ Yes x No
The aggregate market value of the common equity held by non-affiliates of the registrant on June 30, 2019, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter was approximately $3,360,947,634.
The number of shares outstanding of the registrant’s common stock as of February 17, 2020 was 53,863,131 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2020 Annual Meeting of Stockholders, which is to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K.


TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Special Note Regarding Forward-Looking Statements
 
This Annual Report on Form 10-K (the “Report”), including the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which includes information concerning one or more of our plans; objectives; goals; strategies and other information that is not historical information. Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, ITEM 7 of this Report. When used in this Report, the words “assumes,” “estimates,” “expects,” “guidance,” “anticipates,” “might,” “projects,” “plans,” “proposed,” “targets,” “intends,” “believes,” “will” and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations and beliefs and various assumptions. There can be no assurance that we will realize our expectations or that our beliefs will prove correct.
Numerous factors, many of which are beyond the Company’s control, could cause actual results to differ materially from any that may be expressed herein as forward-looking statements in this Report. These risk factors include the impact of the macroeconomic environment in both the U.S. and internationally on our business segments and expectations regarding growth of the mattress industry; uncertainties arising from global events, natural disasters or pandemics; the effects of strategic investments on our operations, including our efforts to expand our global market share; the ability to develop and successfully launch new products; the efficiency and effectiveness of our advertising campaigns and other marketing programs; the ability to increase sales productivity within existing retail accounts and to further penetrate the retail channel, including the timing of opening or expanding within large retail accounts and the timing and success of product launches, and the related expenses and life cycles of such products; the ability to continuously improve and expand our product line; the ability to maintain efficient, timely and cost-effective production and delivery of products and manage growth generally and in connection with the new or expanded supply agreements with Mattress Firm, Inc., Big Lots, Inc. and Beter Bed Holding N.V.; the effects of consolidation of retailers on revenues and costs; competition in our industry; consumer acceptance of our products; general economic, financial and industry conditions, particularly conditions relating to the financial performance and related credit issues present in the retail sector; financial distress among our business partners, customers and competitors; financial solvency and related problems experienced by other market participants; the Company’s ability to execute on its strategy to optimize and integrate assets of Innovative Mattress Solutions, LLC acquired by an affiliate of the Company (Sleep Outfitters); risks associated with the Company's acquisition of 80% ownership of Sherwood Acquisition Holdings, LLC, including the possibility that the expected benefits of the acquisition are not realized when expected or at all; our reliance on information technology and associated risks involving potential security lapses and/or cyber-based attacks; the outcome of pending tax audits or other tax, regulatory or investigation proceedings and pending litigation; changes in foreign tax rates and changes in tax laws generally, including the ability to utilize tax loss carryforwards; our capital structure and debt level, including our ability to meet financial obligations and continue to comply with the terms and financial ratio covenants of our credit facilities; changes in interest rates; effects of changes in foreign exchange rates on our reported earnings; changing commodity costs; disruptions in the supply of raw materials, or loss of suppliers; expectations regarding our target leverage and our share repurchase program; sales fluctuations due to seasonality; the effect of future legislative or regulatory changes, including changes in international trade duties, tariffs and other aspects of international trade policy; our ability to protect our intellectual property; and disruptions to the implementation of our strategic priorities and business plan caused by changes in our executive management team.
Other potential risk factors include the risk factors discussed under the heading “Risk Factors” under Part I, ITEM 1A of this Report. There may be other factors that may cause our actual results to differ materially from the forward-looking statements.
    All forward-looking statements attributable to us apply only as of the date of this Report and are expressly qualified in their entirety by the cautionary statements included in this Report. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements, whether as a result of new information, future events, or otherwise.
     When used in this Report, except as specifically noted otherwise, the term “Tempur Sealy International” refers to Tempur Sealy International, Inc. only, and the terms “Tempur Sealy,” “Company,” “we,” “our,” “ours” and “us” refer to Tempur Sealy International, Inc. and its consolidated subsidiaries. When used in this Report, the term "Tempur" may refer to Tempur-branded products and the term “Sealy” may refer to Sealy-branded products or to Sealy Corporation and its historical subsidiaries, in all cases as the context requires. In addition, when used in this Report, “2019 Credit Agreement” refers to the Company’s senior credit facility entered into in 2019; “2016 Credit Agreement” refers to the Company’s prior senior credit facility entered into in 2016; “2012 Credit Agreement” refers to the Company’s prior senior credit facility entered into in 2012; “2023 Senior Notes” refers to the 5.625% senior notes due 2023 issued in 2015; “2026 Senior Notes” refers to the 5.50% senior notes due 2026 issued in 2016; and "2020 Senior Notes" refers to the 6.875% senior notes due 2020 retired in 2016.

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PART I
 
ITEM 1. BUSINESS    
 
General
 
We are a vertically integrated global bedding company that develops, manufactures and markets bedding products. Tempur Sealy’s stated purpose is “to improve the sleep of more people, every night, all around the world.” This commitment manifests itself in everything we do, including a company-wide decision to undertake global efforts to improve our communities and environment. To that end, we have enlisted the same innovative spirit that has guided our world-class bedding business to the top of the industry in our drive to achieve industry-leading sustainability and environmental initiatives.

Our long-term strategy is to drive earnings growth with high return on invested capital and robust free cash flow, which is a non-GAAP financial measure. In order to achieve our long-term strategy while managing the current economic and competitive environments, we focus on developing the most innovative bedding products in all the markets we serve, making significant investments in our iconic global brands and optimizing our worldwide omni-channel distribution. We also intend to generate earnings growth through ongoing investments in research and development and productivity initiatives, which will improve our profitability and create long-term stockholder value.

Tempur Sealy has strong brands across a portfolio of bedding products serving all price points. Our powerful distribution model operates through an omni-channel strategy across both wholesale and direct, with both channels growing worldwide. We have a global manufacturing footprint with approximately 7,400 employees around the world. Tempur Sealy has a strong competitive presence in the bedding marketplace with a leadership position that comes from product and service quality, culture, strategy, and people, backed with financial strength and a disciplined approach to returning value to shareholders.

Our principal executive office is located at 1000 Tempur Way, Lexington, Kentucky 40511 and our telephone number is (800) 878-8889. Tempur Sealy International, Inc. was incorporated under the laws of the State of Delaware in September 2002. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d) of the Exchange Act, are available free of charge on our website at www.tempursealy.com as soon as reasonably practicable after such reports are electronically filed with the SEC. Our website and its contents are not deemed incorporated by reference into this Report.

The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The website of the SEC is www.sec.gov.
 
Our Products and Brands

We have a comprehensive offering of products that appeal to a broad range of consumers, some of which are covered by one or more patents and/or patent applications. We also routinely introduce new mattress models, launch new products and update our existing mattress products in each of our segments.

In order to achieve our goal to improve the sleep of more people, every night, all around the world, one of our strategic initiatives is to leverage and strengthen our comprehensive portfolio of iconic brands and products. Our portfolio of product brands includes many highly recognized brands, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, Stearns & Foster® and Comfort Revolution®, which are described below:

•
Tempur-Pedic® - Founded in 1991, the Tempur brand is our specialty innovation category leader designed to provide life changing sleep for our wellness-seeking consumers. Our proprietary Tempur material precisely adapts to the shape, weight and temperature of the consumer and creates fewer pressure points, reduces motion transfer and provides personalized comfort and support. Tempur-Pedic was awarded #1 in Customer Satisfaction for the retail mattress segment in the J.D. Power 2019 Mattress Satisfaction Report. In addition to earning the highest score for overall customer satisfaction, Tempur-Pedic was ranked highest for support, durability, comfort, value, warranty, and contact with customer service.


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•
Stearns & Foster® - The Stearns & Foster brand offers our consumers high quality mattresses built by certified craftsmen who have been specially trained. Founded in 1846, the brand is designed and built with precise engineering and relentless attention to detail and fuses new innovative technologies with time-honored techniques, creating supremely comfortable beds.

•
Sealy® featuring Posturepedic® Technology - The Sealy brand originated in 1881 in Sealy, Texas, and for over a century has focused on offering trusted comfort, durability and excellent value while maintaining contemporary styles and great support. The Sealy Posturepedic brand, introduced in 1950, was engineered to provide all-over support and body alignment to allow full relaxation and deliver a comfortable night's sleep. In 2017, we united all of our Sealy products under one masterbrand, which features the Posturepedic Technology™ in the Sealy Performance™, Sealy Posturepedic Plus and Sealy Premium™ collections.

•
Cocoon by SealyTM - The Cocoon by Sealy brand, introduced in 2016, is our offering in the below $1,000 e-commerce space, made with the high quality materials that consumers expect from Sealy, sold online at www.cocoonbysealy.com and delivered in a box directly to consumers' doorsteps.

•
Comfort Revolution® - Comfort Revolution originated in 1986 in West Long Beach, New Jersey. The brand develops, produces, markets and distributes foam and gel bedding products, which we sell through both our Wholesale and Direct channels.

Our portfolio of retail brands includes Tempur-Pedic® retail stores, Sleep Outfitters®, Sleep Solutions OutletTM, SOVA and a variety of other retail brands internationally, which operate in various countries. The retail brands named above are described below:

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Tempur-Pedic® retail stores - Tempur-Pedic® retail stores are designed for the approximately 20% of U.S. consumers, based on our research, that prefer to purchase directly from the manufacturer, and for those seeking a more personalized and educational sales experience. These retail boutiques are strategically located in high traffic, premium retail centers with customer demographics that closely align to the Tempur-Pedic customer profile. As of December 31, 2019 we had 56 retail stores. We expect to open approximately 20 stores in 2020.

•
Sleep Outfitters® - Sleep Outfitters is a regional bedding retailer with 97 stores across five states in the U.S. Sleep Outfitters is a specialty mattress retailer that serves consumers across all price points with its extensive selection of Tempur-Pedic®, Sealy® and Stearns & Foster® products.

•
Sleep Solutions OutletTM - Sleep Solutions Outlet stores serve as a channel of high quality comfort returns, as well as discontinued or factory close-out mattresses and bases. There are a limited number of stores across the U.S. that sell these products, which reduces our disposal costs, and helps reduce the volume of products disposed of via landfill, thereby favorably impacting the environment.

•
SOVA - SOVA is a highly respected and well established premium bedding chain in Sweden. Our stores are connected to the urban areas of Stockholm, Gothenburg and Malmoe. The assortment primarily focuses on premium to super premium brands and well trained sales staff targeting to sell quality beds with a very high average selling price.

In addition to our highly recognized product and retail brands, in January 2020 we acquired a majority ownership in Sherwood Acquisition Holdings, LLC (“Sherwood Bedding”), a major manufacturer in the U.S. private label and original equipment manufacturer (“OEM”) bedding market. Sherwood Bedding operates four domestic manufacturing facilities and is a Top 10 U.S. bedding producer. With our majority ownership in Sherwood Bedding, we have a complete suite of product offerings, from Sherwood Bedding's non-branded private label products to our well-known branded products from Tempur-Pedic, Stearns & Foster, Sealy featuring Posturepedic Technology and Cocoon by Sealy.

In 2019, we launched the all-new Tempur-Breeze® products as well as a new Stearns & Foster lineup in North America. The new Breeze line includes ProBreezeTM and LuxeBreezeTM models offering the most innovative cooling system in the market, re-designed to deliver all night cooling comfort. The new Breeze products complete the largest Tempur rollout in our history. The new Stearns & Foster design utilizes the finest materials and legendary craftsmanship, featuring a premium, timeless look. Our all new IntelliCoil® HD innerspring incorporates 20% more coils, allowing sleepers to find their perfect level of support. This lineup, also features for the first time, the proprietary memory foam engineered exclusively for Stearns & Foster by Tempur-Pedic.


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In 2020, we are completing the national launch of the innovative Tempur-Ergo® Smart Base Collection with Sleeptracker® technology and we are launching the all-new Sealy Posturepedic Plus mattress lineup. The smart base collection is our solution for those that want to improve their health and wellness by sleeping more soundly. The Tempur-Ergo Smart Base with Sleeptracker® technology is a completely integrated sleep system that features automatic snore detection and response, personalized sleep analytics and coaching and smart home connectivity and voice control. The new Sealy Posturepedic Plus mattress line features the impressive all-new Posturepedic Plus technology which offers improved comfort, best-in-class cooling capabilities and increased support.

Omni-Channel Distribution

Our primary selling channels are Wholesale and Direct. These channels align to the margin characteristics of our business and our marketplace.

One of Tempur Sealy's long-term initiatives is to be wherever the consumer wants to shop and our wholesale business strategy brings this key business initiative to life by growing our share with existing customers, gaining new business and expanding into new channels of distribution. In 2018, we focused on growing our relationships with existing third-party retailers. The resulting growth has been broad-based, spanning multiple channels of bedding retail including furniture, big-box, specialty and online-only. Our Wholesale channel includes all third party retailers, including third party distribution, hospitality and healthcare, and represented 87.5% of net sales in 2019. We have also identified new business opportunities. In 2019, we announced three new or expanded third-party retail relationships in the U.S. and Europe. This resulted in the largest expansion of stores in our history.

In 2019, we entered into a supply agreement with Mattress Firm, Inc. ("Mattress Firm"), the largest specialty mattress retailer in North America, to reintroduce Tempur-Pedic, Stearns & Foster, and Sealy branded products into approximately 2,500 Mattress Firm stores across the U.S. This agreement reunites some of the strongest bedding brands with more than three million people a year that find their right sleep solution at Mattress Firm. The reintroduction of products into Mattress Firm stores commenced in the fourth quarter of 2019 and is expected to be completed early in the first quarter of 2020.

In 2019, we also announced the recent expansion of our long-term supply agreement with Big Lots, Inc. (“Big Lots”), a 1,400-store retailer in the U.S. This agreement is expected to grow the sales of entry-level Sealy products and to drive unit volume, primarily in the below $1,000 retail price point. Our launch of Sealy products with Big Lots was completed in 2019.

We also recently extended our European retail distribution network by reaching a supply agreement with Beter Bed Holding, one of Europe’s leading bedding retailers. The launch of new products with Beter Bed Holding was completed in 2019 in over 100 stores.
    
In addition, in 2020 we are expanding our Direct channel to strengthen our distribution footprint to provide alternatives to allow the customer to shop on their preferred terms - whether online, in company-owned stores or through our thousands of third-party retailers. Our Direct channel includes company-owned stores, e-commerce and call centers and represented 12.5% of net sales in 2019. The Direct channel growth rate has surpassed the Wholesale growth rate over the last few years, and we anticipate the Direct channel to continue to grow as a percentage of net sales in future years.

For consumers that prefer to purchase directly from the manufacturer (our research indicates approximately 20%), and for those seeking a more personalized and educational sales experience, we appeal to this consumer through our Tempur-Pedic retail stores. As of December 31, 2019 we had 56 stores throughout the U.S. that provide a low-pressure environment to explore the comprehensive line up of our Tempur-Pedic products. Our retail boutiques are strategically located in high traffic, premium retail centers with customer demographics that closely align to the Tempur-Pedic customer profile. Each showroom features knowledgeable, non-commissioned Brand Ambassadors who educate potential customers on Tempur-Pedic products in a relaxed, comfortable environment.

Going forward, our strategy for opening additional locations of Tempur-Pedic retail stores will remain consistent with our previous expansion approach. We plan to open approximately 20 Tempur-Pedic retail stores in 2020.

In addition to our high-end Tempur-Pedic retail stores, we operate Sleep Outfitters, a regional bedding retailer that had 97 stores across Kentucky, Tennessee, Ohio, West Virginia and Alabama in 2019. Sleep Outfitters is a specialty mattress retailer that serves consumers across all price points with its extensive selection of Tempur-Pedic®, Sealy® and Stearns & Foster® products.


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Our third-party retailers, Tempur-Pedic and Sleep Outfitters retail stores reach the vast majority of consumers who still prefer to touch and feel a mattress and speak to a retail sales associate, prior to making a purchase decision. However, our consumer insights also demonstrate that there is a growing segment of the population that prefers to purchase products online and, to a lesser degree, via a call center. As such, having an omni-channel presence is more important than ever, with most customers completing research and shopping both online and in-stores before making their purchase decision.

For customers that prefer the convenience of making purchases online and having their bedding products delivered right to their front door, we have evolved our distribution model to include multiple online options to reach those that want to purchase our products without the need to go into a brick-and-mortar store.

Tempur Sealy’s Direct channel expansion has evolved over the past two years, increasing our presence to be within reach of consumers no matter how they choose to shop. Our expanded direct channel distribution complements our wholesale business, and we believe this balanced approach enhances the overall sales potential and profitability of Tempur Sealy.

Marketing

Our overall marketing strategy is to drive consumer demand through the use of effective marketing. We invest across multiple media platforms to build brand awareness and drive consumer interest in our products. The majority of our advertising programs are created on a centralized basis through our in-house advertising organization. We plan to drive net sales through continued investments in new products, marketing and other initiatives.

We advertise nationally on television, digitally and through consumer and trade print. In addition, we participate in cooperative advertising on a shared basis with some of our retail customers. Throughout the year, we invested in a series of strategic marketing initiatives, which included new product introductions, advertising and in-store marketing investments.

Seasonality

We believe that sales of products to furniture and bedding stores are typically subject to modest seasonality inherent in the bedding industry, with sales expected to be generally lower in the second and fourth quarters. Sales in a particular quarter can also be impacted by competitive industry dynamics. Additionally, the U.S. bedding industry generally experiences increases in sales around holidays and promotional periods.

Operations
 
Manufacturing and Distribution

Our products are currently manufactured and distributed through our global network of facilities. For a list of our principal manufacturing and distribution facilities, please refer to ITEM 2, "Properties".
    
Suppliers

We obtain the raw materials used to produce our pressure-relieving Tempur® material and components used in the manufacture of Tempur products from outside sources. We currently acquire chemicals and proprietary additives for Tempur products as well as other components such as textiles from a number of suppliers with manufacturing locations around the world. These supplier relationships may be modified in order to maintain quality, cost, and delivery expectations. We do not consider ourselves dependent upon any single outside vendor as a source of raw materials for Tempur products and believe that sufficient alternate sources of supply for the same or similar raw materials are available. Additionally, we source our adjustable bed bases and foundations from third party manufacturers. We do not consider ourselves dependent upon any single outside manufacturer as a source of these products.


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Sealy product raw materials consist mainly of polyethylene foam, textiles and steel innerspring components that we purchase from various suppliers. In the U.S. and Canada, we source the majority of our requirements for polyurethane foam components and spring components for our Sealy and Stearns & Foster mattress units and adjustable bed bases from a key supplier for each component.  We also purchase a significant portion of our Sealy foundation parts from third party sources. All critical components are purchased under supply agreements. We do not consider ourselves to be dependent in the long term upon any single outside vendor as a source of supply to our bedding business, and we believe over time that sufficient alternate sources of supply for the same, similar or alternate components are available. However, if a key supplier for an applicable component failed to supply components in the amount we require, this could significantly interrupt production of our products and increase our production costs in the near term.
    
Research and Development

We have four research and development centers, three in the U.S. and one in Denmark, that conduct technology and product development. Additionally, we have a product testing facility that conducts hundred of consumer tests annually. We believe our consumer-research driven approach to innovation results in best-in-class products that benefit the consumer.

Industry and Competition

We compete in the global bedding industry. The bedding industry is comprised of mattresses and foundations, pillows and accessories. The mattress market category is comprised of traditional innerspring mattresses and non-innerspring mattresses, which includes visco-elastic and foam mattresses, innerspring/foam hybrid mattresses, airbeds and latex mattresses. The foundation category is comprised of traditional foundations and adjustable foundations. Additionally, the pillow market is comprised of traditional foam and feather pillows, as well as pillows made of visco-elastic, latex, foam, sponge, rubber and down. The primary distribution channels for mattresses and foundations are retail furniture and bedding stores, department stores, wholesale clubs and the internet.

We operate in two segments: North America and International. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. Our North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries and licensees located in the U.S. and Canada. Our International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America.
    
We encounter competition from a number of bedding manufacturers in both the highly concentrated domestic and highly fragmented international markets. Participants in each of these markets compete primarily on price, quality, brand name recognition, product availability and product performance. Mattress and pillow manufacturers and retailers are seeking to increase their channels of distribution and are looking for new ways to reach the consumer, including the recent expansion in the number of U.S. and international companies pursuing online direct-to-consumer models for foam mattresses. In addition, retailers in both the U.S. and internationally are increasingly seeking to integrate vertically in the furniture and bedding industries, including by offering their own brands of mattresses and pillows.

Entry-level bedding imports from China significantly increased during 2018 and are competing against our value priced Sealy products in the U.S. market. We believe these imports are being sold below cost. In September 2018, we and other industry participants filed petitions with the U.S. International Trade Commission and the U.S. Department of Commerce, alleging that many of these Chinese imports are being dumped into the U.S. market at prices below cost. As a result of these petitions, the U.S. International Trade Commission and the U.S. Department of Commerce commenced investigations. A final determination was reached by the U.S. Department of Commerce in October 2019, imposing a range of tariffs on these imports from 57% to 1,731%, subject to an affirmative determination by the U.S. International Trade Commission. On December 9, 2019, the U.S. International Trade Commission affirmatively determined that the imports of mattresses from China materially injured an industry in the U.S. Overall, we view the outcome of the case as a positive to the industry as it puts the domestic manufacturers on the same level as the Chinese imports.  However, low-priced imports into the U.S. from other countries in Asia have risen dramatically during the progression of the case. Nevertheless, we believe our focus on internal initiatives to deliver the highest quality product and highest levels of manufacturing reliability and customer service continue to be the reason that existing retailers lean into our portfolio of products.

The international market is served by a large number of manufacturers, primarily operating on a regional and local basis. These manufacturers offer a broad range of mattress and pillow products.
The highly competitive nature of the mattress and pillow industries means we are continually subject to the risk of loss of market share, loss of significant customers, reductions in margins, and the inability to acquire new customers.

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Intellectual Property

Patents, Trademarks and Licensing
 
We hold U.S. and foreign patents and patent applications regarding certain elements of the design and function of many of our mattress and pillow products.
 
As of December 31, 2019, we held trademark registrations worldwide, which we believe have significant value and are important to the marketing of our products to retailers. Tempur® and Tempur-Pedic® are trademarks registered with the U.S. Patent and Trademark Office. In addition, we have U.S. applications pending for additional trademarks. Several of our trademarks have been registered, or are the subject of pending applications, in various foreign countries. Each U.S. trademark registration is renewable indefinitely as long as the trademark remains in use. We also own numerous trademarks, trade names, service marks, logos and design marks, including Sealy®, Stearns & Foster® and Sealy Posturepedic®. In addition, we license the Bassett® trade name in various territories under a long-term agreement.
    
We derive income from royalties by licensing Sealy® brands, technology and trademarks to other manufacturers. Under the license arrangements, licensees have the right to use certain trademarks and current proprietary and/or patented technology that we utilize. We also provide our licensees with product specifications, research and development, statistical services and marketing programs. For the year ended December 31, 2019, our licensing activities as a whole generated unaffiliated net royalties of approximately $22.6 million.

Governmental Regulation
 
Our operations are subject to international, federal, state, and local consumer protection and other regulations, primarily relating to the mattress and pillow industry. These regulations vary among the states, countries, and localities in which we do business. The regulations generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as “new” or otherwise, controls as to hygiene and other aspects of product handling and sale and penalties for violations. The U.S. Consumer Product Safety Commission ("CPSC") has adopted rules relating to fire retardancy standards for the mattress industry. Many foreign jurisdictions also regulate fire retardancy standards. Future changes to these standards may require modifications to our products to comply with such changes. We are also subject to environmental and health and safety requirements with regard to the manufacture of our products and the conduct of our operations and facilities. We have made and will continue to make capital and other expenditures necessary to comply with these requirements. Currently these expenditures are immaterial to our financial results. For a discussion of the risks associated with our compliance programs in connection with these regulations, please refer to "Risk Factors" under Part I, Item 1A of this Report.

Our principal waste products are foam and fabric scraps, wood, cardboard and other non-hazardous materials derived from product component supplies and packaging. We also periodically dispose of small amounts of used machine lubricating oil and air compressor waste oil, primarily by recycling. In the U.S., we are subject to federal, state and local laws and regulations relating to environmental health and safety, including the Federal Water Pollution Control Act and the Comprehensive Environmental Response, Compensation and Liability Act. We believe that we are in compliance with all applicable international, federal, state and local environmental statutes and regulations. We do not expect that compliance with international, federal, state or local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material effect upon our capital expenditures, earnings or competitive position. We are not aware of any pending federal environmental legislation that would have a material impact on our operations, and have not been required to make, and do not expect to make, any material capital expenditures for environmental control facilities in the foreseeable future.

In connection with sales of our products, we often collect and process personal data from our customers. As such, we are subject to certain regulations relating to information technology security and personal data protection and privacy. For example, in 2018, the European Union adopted the General Data Protection Regulation (“GDPR”), which took effect in May 2018. The GDPR imposed a new and expanded set of ongoing compliance requirements on companies, including us, that process personal data from citizens living in the European Union ("EU"). In addition, there are country-specific data privacy laws in Europe which tend to follow the principles laid out in the GDPR, but in some cases, impose additional requirements on data controllers. In addition, several U.S. states have recently introduced legislation that mirror some of the protections provided by the GDPR. California’s Consumer Privacy Act (“CCPA”) came into effect on January 1, 2020 and granted consumers in California certain rights related to the access to, deletion of, and sharing of their personal information that is collected by businesses, including us.

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We have implemented a global compliance system and have put reasonable measures in place to facilitate adherence to the continuing compliance requirements of data privacy laws such as the GDPR and CCPA.
 
Employees
 
As of December 31, 2019, we had approximately 7,400 Tempur Sealy employees, approximately 5,400 of which are located in North America and 2,000 in the rest of the world. We increased headcount in 2019 to handle our unit volume increases. Approximately 28.0% of our employees are represented by various labor unions with separate collective bargaining agreements. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We consider our overall relations with our workforce to be satisfactory. Our current collective bargaining agreements, which are typically one to three years in length, expire at various times beginning in 2020 through 2022. As of December 31, 2019, our North America segment employed approximately 400 individuals covered under collective bargaining agreements expiring in 2020 and our International segment employed approximately 400 individuals covered under collective bargaining agreements expiring in 2020.

ITEM 1A. RISK FACTORS
 
The following risk factors and other information included in this Report should be carefully considered. Please also see “Special Note Regarding Forward-Looking Statements” on page 3.

Set forth below are descriptions of certain risks relating to our business.

Unfavorable economic and market conditions could reduce our sales and profitability and as a result, our operating results may be adversely affected.

Our business is affected by general business and economic conditions, and these conditions could have an impact on future demand for our products. The global economy has stabilized somewhat since the financial crisis, but we expect economic conditions specific to our markets to remain challenging. Further, economic and market conditions are inherently complex and subject to change, and any deterioration in those conditions may give households less confidence to make discretionary purchases.

There could be a number of other effects from these economic developments on our business, some of which we have already experienced, including reduced consumer demand for products; liquidity problems among our customers and related market participants; insolvency of and bankruptcy filings by our customers and related market participants resulting in increased provisions for credit losses and/or write downs of existing assets; liquidity problems and/or insolvency of our key suppliers resulting in product delays; inability of retailers and consumers to obtain credit to finance purchases of our products; decreased consumer confidence; decreased retail demand, including order delays or cancellations; counterparty failures negatively impacting our treasury operations; inability for us, our customers and our suppliers to accurately forecast future product demand trends; and adverse movements in foreign currency exchange rates. If such conditions are experienced in future periods, our industry, business and results of operations may be severely impacted.

Our sales growth is dependent upon our ability to implement strategic initiatives and actions taken to increase sales growth may not be effective.

Our ability to generate sales growth is dependent upon a number of factors, including the following:

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our ability to continuously improve our products to offer new and enhanced consumer benefits and better quality;
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the ability of our current and future product launches to increase net sales;
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the effectiveness of our advertising campaigns and other marketing programs to build product and brand awareness, driving traffic to our distribution channels and increasing sales;
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our ability to continue to expand into new distribution channels and optimize our existing channels;
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our ability to continue to successfully execute our strategic initiatives;
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our ability to manage growth and limit cannibalization associated with new or expanded supply agreements;
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the level of consumer acceptance of our products at optimal price points;
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our ability to successfully mitigate the impact of headwinds facing our business, including increased commodity prices and the influx of low-end, imported beds that compete with certain of our products;
•
our ability to successfully integrate potential acquisition opportunities; and
•
general economic factors that impact consumer confidence, disposable income or the availability of consumer financing.


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Our new product launches may not be successful due to development delays, failure of new products to achieve anticipated levels of market acceptance and significant costs associated with failed product introductions, which could adversely affect our revenues and profitability.

Each year we invest significant time and resources in research and development to improve our product offerings and launch new products. In 2019, we launched several new products including Tempur-Breeze®, new Stearns & Foster product lines and new compressed bedding products. There are a number of risks that are inherent in our new product line introductions, including that the anticipated level of market acceptance may not be realized, which could negatively impact our sales. Further, introduction costs, the speed of the rollout of the product and manufacturing inefficiencies may be greater than anticipated, each of which could impact profitability.

We operate in a highly competitive industry and if we are unable to compete successfully, we may lose customers and our sales may decline.

Participants in the mattress and pillow industries compete primarily on price, quality, brand name recognition, product availability and product performance across a range of distribution channels.

A number of our significant competitors offer mattress and pillow products that compete directly with our products. The effectiveness of our competition relative to our performance, including by established manufacturers or new entrants into the market, could have a material adverse effect on our business, financial condition and/or operating results. For example, market participants continue to improve their channels of distribution to optimize their reach to the consumer, including by pursuing online direct-to-consumer models for foam mattresses and offering their own lines of mattresses. In addition, retailers in the U.S. and internationally have integrated vertically in the furniture and bedding industries, and it is possible that such vertical integration may provide conditions that would negatively impact our net sales and results of operations. The pillow industry in particular is characterized by a large number of competitors, none of which is dominant. As such, conditions that substantially increase a single participant's market share would likely be detrimental to our financial performance. The highly competitive nature of the mattress and pillow industries means we are continually subject to the risk of loss of market share, loss of significant customers, reductions in margins, and the inability to acquire new customers.

Because we depend on certain significant customers, a decrease or interruption in their business with us would reduce our sales and results of operations.

No customer represented 10.0% or more of our net sales for 2019.
    
The credit environment in which our customers operate has been relatively stable over the past few years. However, there have been signs of deterioration in the U.S. retail sector, both nationally and regionally. Regional retail customers in the U.S. continue to file for bankruptcy protection. We expect that some additional retailers that carry our products may consolidate, undergo restructurings or reorganizations, experience financial difficulty, or realign their affiliations, any of which could decrease the number of stores that carry our products or increase the ownership concentration in the retail industry. An increase in the concentration of our sales to large customers may negatively affect our profitability due to the impact of volume and other incentive programs related to these customers. Furthermore, if sales to our large customers grow, our credit exposure to these customers may also increase. Some of these retailers may decide to carry only a limited number of brands of mattress products, which could affect our ability to sell products to them on favorable terms, if at all. A substantial decrease or interruption in business from these significant customers could result in the loss of future business and could reduce revenue, liquidity and profitability. In addition, the timing of large purchases by these customers could have an increasingly significant impact on our quarterly net sales and earnings.

We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including cyber-based attacks, could harm our ability to effectively operate our business.
Consistent with other manufacturing and retail operations, we are increasingly dependent on information technology, including the Internet, for the storage, processing, and transmission of our electronic, business-related information assets. We leverage our internal information technology, infrastructures, and those of our service providers, to enable, sustain and support our global business interests. As such, our ability to effectively manage our business depends significantly on our information systems. The failure of our current systems, or future upgrades, to operate effectively or to integrate with other systems, or a breach in security of these systems could cause reduced efficiency of our operations, and remediation of any such failure, problem or breach could reduce our liquidity and profitability. Any disruptions caused by the failure of these systems could adversely impact our day-to-day business and decision making and could have a material adverse effect on our performance.


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We are subject to laws and regulations relating to information technology security and personal data protection and privacy. For example, the GDPR, which took effect in May 2018, and the CCPA, which took effect in January 2020, have imposed new and expanded compliance requirements on companies, including us, that process personal data from citizens living in the EU and California. In addition, there are country-specific data privacy laws in Europe and elsewhere in the world, and state-specific data privacy laws forthcoming in the U.S., which broadly follow the principles laid out in the GDPR and the CCPA, but in some cases, impose additional requirements on businesses like ours. We are actively working to ensure ongoing compliance with all data privacy regulations to which we are subject, which involves substantial costs. Despite our ongoing efforts to bring our practices into compliance with the GDPR and the CCPA, we may not be successful due to various factors within or outside of our control. Failure to comply with GDPR, CCPA, country-specific or U.S. state-specific laws could result in costly investigations and litigation, expose us to potentially significant penalties, and result in negative publicity that could damage our reputation and credibility.

Historically, we have successfully implemented a new enterprise resource planning, or “ERP,” system across several of our global subsidiaries. We are currently implementing the new ERP in certain significant U.S. subsidiaries with key go-live dates in 2020 and 2021. This new system replaces a substantial portion of our legacy systems that have supported our operations in the past. If we are unable to successfully continue the implementation of the replacement system, it could lead to a disruption in our business and unanticipated additional use of capital and other resources, which may adversely impact our results of operations. In addition, if the cost of implementing this ERP system increases above our estimates, this could have a significant adverse effect on our profitability.

We rely on third party technology service providers in the ordinary course of our Direct channel. The services provided include website infrastructure and hosting services, digital advertising platforms, private label credit card financing program and credit card payment authorization and capture services in support of our business, all of which are customarily provided by third party technology service providers for similarly-situated retail business operations. Like others in the industry, we experience cyber-based attacks and incidents from time to time. In the event that we or our service providers are unable to prevent or detect and remediate cyber-based attacks or other security incidents in a timely manner, our operations could be disrupted or we may incur financial or reputational losses arising from the theft, misuse, unauthorized disclosure or destruction of our information assets.

We entered into the Advance Pricing Agreement Program to resolve a tax matter in Denmark, and a failure to resolve the matter or a change in factors or circumstances could adversely impact our income tax expense, effective tax rate and cash flows.
In the third quarter of 2018, we entered into the Advance Pricing Agreement Program (the "APA Program") for the tax years 2012 through 2022. In the APA Program the U.S. Internal Revenue Service ("IRS"), on our behalf, will negotiate directly with the Danish Tax Authority ("SKAT") with respect to the royalty to be paid by a U.S. subsidiary of the Company to the Company's Danish subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary. The objective of the APA Program is for the two tax authorities to reach a mutual agreement regarding the royalty to be paid for such years. We expect the outcome of the APA Program to result in an increase in the royalty resulting in additional taxable income in Denmark for the Danish subsidiary and a decrease in U.S. taxable income for the U.S. subsidiary. As it relates to the Danish tax position, we have accrued Danish tax and interest for this matter as an uncertain income tax position. Conversely, as it relates to the U.S. position we have recorded a deferred tax asset for the associated correlative U.S. tax benefit. However, if this matter is not resolved successfully or there is a change in facts or circumstances, we may be required to further increase our uncertain income tax provision or decrease our deferred tax asset related to this matter, which could have a material impact on the Company’s reported earnings. For a description of these matters and additional information please refer to Note 15, "Income Taxes," to the accompanying Consolidated Financial Statements.


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Changes in tax laws and regulations or other factors could cause our income tax rate to increase, potentially reducing net income and adversely affecting cash flows, and fluctuations in our tax obligations and effective tax rate may result in volatility of our financial results and stock price.
We are subject to taxation in various jurisdictions around the world and at any one time multiple tax years are subject to audit by various taxing jurisdictions. In preparing financial statements, we calculate our annual effective income tax rate based on current tax laws and regulations and the estimated taxable income within each of these jurisdictions. Our effective income tax rate, however, may be higher due to numerous factors, including, but not limited to, changes in accounting methods or policies, tax laws or regulations, the tax litigation environment in each such jurisdiction, and the outcome of pending or future audits, whether the result of litigation or negotiations with taxing authorities. Each such item may result in a tax liability that differs from our original estimate. An effective income tax rate that is significantly higher than currently anticipated could have an adverse effect on our net income and cash flows. In addition, there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated, which could adversely affect our quarterly results of operations and stock price.

Additionally, the global tax environment is becoming more complex, with government tax authorities becoming increasingly more aggressive in asserting claims for taxes. Any resulting changes in tax laws or regulations could increase our effective income tax rate or impose new restrictions, costs or prohibitions on our current practices and reduce our net income and adversely affect our cash flows.

In addition to the increased activity of taxing authorities with respect to income tax, taxing authorities are also becoming more aggressive in asserting claims for indirect taxes such as import duties and value added tax. These types of claims present risks and uncertainties similar to those discussed above. We believe we are in compliance with all tax laws and regulations that govern such indirect taxes in each of the jurisdictions in which we do business. However, because the claims taxing authorities assert often involve the question of internal product pricing, which is inherently subjective in nature, any such claim may require us to litigate the matter to defend our position or to negotiate a settlement on the matter with the taxing authorities that differs from the amount of potential exposure recorded in the financial statements.

Our leverage may limit our flexibility and increase our risk of default.

We operate in the ordinary course of our business with a certain amount of leverage. Our degree of leverage could have important consequences to our investors, such as:

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increasing our vulnerability to adverse economic, industry or competitive developments;
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requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and other business opportunities;
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making it more difficult for us to satisfy the obligations related to our indebtedness;
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restricting us from making strategic acquisitions or investments or causing us to make non-strategic divestitures;
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limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes;
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limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate, placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting;
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exposing us to variability in interest rates, as a substantial portion of our indebtedness is and will be at variable rates; and
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limiting our ability to return capital to our stockholders, including through share repurchases.

In addition, the instruments governing our debt contain customary financial and other restrictive covenants, which limit our operating flexibility and could prevent us from taking advantage of business opportunities and reduce our flexibility to respond to changing business and economic conditions. These covenants could put us at a competitive disadvantage. Failure to comply with our debt covenants may result in a default or event of default under the related credit document. If such default or event of default is not cured or waived, as applicable, we may suffer adverse effects on our operations, business or financial condition, including acceleration of the maturity date of all amounts outstanding under our debt facilities. For further discussion regarding our debt covenants and compliance, refer to “Management’s Discussion and Analysis” included in Part II, ITEM 7 of this Report and Note 8, “Debt,” in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.


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We may be unable to sustain our profitability, which could impair our ability to service our indebtedness and make investments in our business and could adversely affect the market price for our stock and increase our leverage.

Our ability to service our indebtedness depends on our ability to maintain our profitability. We may not be able to maintain our profitability on a quarterly or annual basis in future periods. Further, our profitability will depend upon a number of factors, including without limitation:

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general economic conditions in the markets in which we sell our products and the related impacts on consumers and retailers;
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the level of competition in the mattress and pillow industry;
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our ability to successfully identify and respond to emerging trends in the mattress and pillow industry;
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our ability to successfully launch new products;
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our ability to effectively sell our products through our distribution channels, including our new distribution channels, in volumes sufficient to drive growth and leverage our cost structure and advertising spending;
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our ability to reduce costs, including our ability to align our cost structure with sales in the existing economic environment;
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our ability to successfully manage our relationships with our major customers and navigate any financial difficulties those customers may experience from time to time;
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our ability to absorb fluctuations in commodity costs;
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our ability to maintain efficient, timely and cost-effective production and utilization of our manufacturing capacity;
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our ability to maintain efficient, timely and cost-effective delivery of our products; and
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our ability to maintain public recognition of our brands.

We are vulnerable to interest rate risk with respect to our debt, which could lead to an increase in interest expense.

Our variable rate debt agreements, including our 2019 Credit Agreement, use the London Interbank Offered Rate (LIBOR) as a reference rate. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist or is no longer representative of the underlying market after 2021, our variable rate debt agreements with interest rates that are indexed to LIBOR will use various alternative methods to calculate the applicable interest rate, which could result in increases in interest rates on such debt and adversely impact our interest expense, results of operations and cash flows. Further, we may need to amend our variable rate debt agreements to replace LIBOR with a new reference rate. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (SOFR). At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement. Furthermore, it is not possible to predict the effect of these changes, the discontinuation of LIBOR, other reforms, or the establishment of alternative reference rates on our borrowing costs, the availability of variable rate financing or the capital markets generally. For information regarding our sensitivity to changes in interest rates, refer to “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, ITEM 7A of this Report.

We may be adversely affected by fluctuations in exchange rates, which could affect our results of operations, the costs of our products and our ability to sell our products in foreign markets.

Approximately 25.6% of our net sales were generated outside of the U.S. in 2019. We conduct our business in a wide variety of currencies and are therefore subject to market risk relating to changes in foreign exchange rates. If the U.S. dollar strengthens relative to the Euro or other foreign currencies where we have operations, for example, there will be a negative impact on our operating results upon translation of those foreign operating results into the U.S. dollar. In 2019, foreign currency exchange rate changes negatively impacted our net income by approximately 1.9% and negatively impacted adjusted EBITDA, which is a non-U.S. GAAP financial measure, by approximately 1.1%. In 2020, we expect that foreign exchange translation may negatively impact our results of operations. Changes in foreign currency exchange rates could have an adverse impact on our financial condition, results of operations and cash flows. Except for the use of foreign exchange forwards contracts described immediately below, we do not hedge the translation of foreign currency operating results into the U.S. dollar.

We use foreign exchange forward contracts to manage a portion of the exposure to the risk of the eventual net cash inflows and outflows resulting from foreign currency denominated transactions among certain subsidiaries. These hedging transactions may not succeed or may be only partially successful in managing our foreign currency exchange rate risk.


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Refer to “Management's Discussion and Analysis” included in Part II, ITEM 7 of this Report and “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, ITEM 7A of this Report for further discussion on the impact of foreign exchange rates on our operations.

We are subject to fluctuations in the cost of raw materials, and increases in these costs would reduce our liquidity and profitability.

The bedding industry has been challenged by volatility in the price of petroleum-based and steel products, which affects the cost of polyurethane foam, polyester, polyethylene foam and steel innerspring component parts. The price and availability of these raw materials are subject to market conditions affecting supply and demand. Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities can significantly affect profitability. To the extent we are unable to absorb higher costs, or pass any such higher costs to our customers, our gross margin could be negatively affected, which could result in a decrease in our liquidity and profitability.

Loss of suppliers and disruptions in the supply of our raw materials could increase our costs of sales and reduce our ability to compete effectively.

We acquire raw materials and certain components from a number of suppliers with manufacturing locations around the world. If we were unable to obtain raw materials and certain components from these suppliers for any reason, we would have to find replacement suppliers. Any substitute arrangements for raw materials and certain components might not be on terms as favorable to us. In addition, we outsource the procurement of certain goods and services from suppliers in foreign countries. If we were no longer able to outsource through these suppliers, we could source them elsewhere, which may be at a higher cost. We maintain relatively small supplies of our raw materials and outsourced goods at our manufacturing facilities, and any disruption in the on-going shipment of supplies to us could interrupt production of our products, which could result in a decrease of our sales or could cause an increase in our cost of sales, either of which could decrease our liquidity and profitability.

Sealy product raw materials consist mainly of polyurethane foam, polyester, polyethylene foam and steel innerspring components that we purchase from various suppliers. In the U.S. and Canada, we source the majority of our requirements for polyurethane foam components and spring components for our Sealy and Stearns & Foster mattress units from a key supplier for each component. All critical components are purchased under supply agreements. We also purchase a significant portion of our Sealy foundation parts from third party sources under supply agreements. We do not consider ourselves to be dependent in the long term upon any single outside vendor as a source of supply to our bedding business, and we believe over time that sufficient alternative sources of supply for the same, similar or alternative components are available. However, if a key supplier for an applicable component failed to supply components in the amount we require this could significantly interrupt production of our products and increase our production costs in the near term. Such a disruption could occur for a variety of reasons, including changes in international trade duties and other aspects of international trade policy, natural disasters, pandemics and political events. For further information relating to this risk in particular, please refer to the discussion under the heading “We are subject to risks from our international operations, such as complying with U.S. and foreign laws, foreign exchange exposure, tariffs, increased costs, political risks and our ability to expand in certain international markets, which could impair our ability to compete and our profitability.”

Our ability to expand and effectively manage our Tempur-Pedic® retail stores could affect our sales and results of operations.

As of December 31, 2019, we had opened 56 Tempur-Pedic® retail stores. Our ability to continue to open new Tempur-Pedic® retail stores in a timely and efficient manner, and effectively operate all of these retail stores, depends upon numerous factors. Some of these factors are beyond our control, including, but not limited to our ability to identify suitable locations, our ability to negotiate favorable lease terms, our ability to hire, train and retain skilled retail store personnel, and economic factors that impact consumer confidence, disposable income or the availability of consumer financing. There is no assurance that our retail store expansion strategy will continue to be profitable. If we are unable to open additional Tempur-Pedic® retail stores, or if our existing retail stores are not profitable, this could adversely affect our sales and results of operations.
  

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We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.

Our Board of Directors has authorized a share repurchase program pursuant to which we are authorized to repurchase shares of our common stock. We did not repurchase any shares under our share repurchase program during the year ended December 31, 2018. As of December 31, 2019, we had repurchased an aggregate of 1.3 million shares for approximately $102.3 million under our share repurchase program and had approximately $124.6 million remaining under our share repurchase program. In February 2020, our Board of Directors authorized an increase, of over $190.0 million, to our share repurchase authorization of our common stock to $300.0 million. Although our Board of Directors has authorized the share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares and may be suspended or terminated at any time. Shares may be repurchased from time to time, in the open market or through private transactions, subject to market conditions, in compliance with applicable state and federal securities laws. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, restrictions in our debt agreements, the trading price of our common stock and the nature of other investment opportunities. In addition, repurchases of our common stock pursuant to our share repurchase program could affect the market price of our common stock or increase its volatility. For example, the existence of a share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we determine to repurchase our stock. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.

Our operating results are subject to fluctuations, including as a result of seasonality, which could make sequential quarter-to-quarter comparisons an unreliable indication of our performance and adversely affect the market price of our common stock.

A significant portion of our net sales are attributable to our Wholesale channel, particularly net sales to furniture and bedding stores. We believe that our sales of products to furniture and bedding stores are typically subject to modest seasonality inherent in the bedding industry, with sales expected to be generally lower in the second and fourth quarters. Our sales in a particular quarter can be impacted by new product launches. Additionally, the U.S. bedding industry generally experiences increases in sales around holidays and promotional periods. This seasonality means that a sequential quarter-to-quarter comparison may not be a good indication of our performance or of how we will perform in the future.

We are subject to risks from our international operations, such as complying with U.S. and foreign laws, foreign exchange exposure, tariffs, increased costs, political risks and our ability to expand in certain international markets, which could impair our ability to compete and our profitability.

We are a global company, selling our products in approximately 100 countries worldwide. We generated approximately 25.6% of our net sales outside of the U.S. in the year ended December 31, 2019.

We also participate in international license and joint venture arrangements with independent third parties. Our international operations are subject to the customary risks of operating in an international environment, including complying with U.S. laws affecting operations outside of the U.S. such as the Foreign Corrupt Practices Act; complying with foreign laws and regulations, including disparate anti-corruption laws and regulations; risks associated with varying local business customs; and the potential imposition of trade or foreign exchange restrictions, tariffs and other tax increases, fluctuations in exchange rates, inflation and unstable political situations and labor issues. We are also limited in our ability to independently expand in certain international markets where we have granted licenses to manufacture and sell Sealy® bedding products. Fluctuations in the rate of exchange between currencies in which we do business may affect our financial condition or results of operations. Additionally, changes in international trade duties and other aspects of international trade policy, both in the U.S. and abroad, could materially impact our business.

Our business operations and financial results may be impacted by the United Kingdom’s (“UK”) departure from the EU, commonly referred to as Brexit. Brexit may, among other things, result in certain adverse tax consequences for us relating to the movement of products and related matters between the UK and EU.


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If we are not able to protect our trade secrets or maintain our trademarks, patents and other intellectual property, we may not be able to prevent competitors from developing similar products or from marketing in a manner that capitalizes on our trademarks, and this loss of a competitive advantage could decrease our profitability and liquidity.

We rely on patents and trade secrets to protect the design, technology and function of our products. To date, we have not sought U.S. or international patent protection for our principal product formula for Tempur® material and certain of our manufacturing processes. Accordingly, we may not be able to prevent others from developing certain visco-elastic material and products that are similar to or competitive with our products. Our ability to compete effectively with other companies also depends, to a significant extent, on our ability to maintain the proprietary nature of our owned and licensed intellectual property. We own a significant number of patents or have patent applications pending on some aspects of our products and certain manufacturing processes. However, the principal product formula and manufacturing processes for our Tempur® material are not patented and we must maintain these as trade secrets in order to protect this intellectual property. We own U.S. and foreign registered trademarks and service marks and have applications for the registration of trademarks and service marks pending domestically and abroad. We also license certain intellectual property rights from third parties.

Certain of our trademarks are currently registered in the U.S. and are registered or pending in foreign jurisdictions. Certain other trademarks are the subject of protection under common law. However, those rights could be circumvented, or violate the proprietary rights of others, or we could be prevented from using them if challenged. A challenge to our use of our trademarks could result in a negative ruling regarding our use of our trademarks, their validity or their enforceability, or could prove expensive and time consuming in terms of legal costs and time spent defending against such a challenge. Any loss of trademark protection could result in a decrease in sales or cause us to spend additional amounts on marketing, either of which could decrease our liquidity and profitability. In addition, if we incur significant costs defending our trademarks, that could also decrease our liquidity and profitability. In addition, we may not have the financial resources necessary to enforce or defend our trademarks. Furthermore, our patents may not provide meaningful protection and patents may never issue from pending applications. It is also possible that others could bring claims of infringement against us, as our principal product formula and manufacturing processes are not patented, and that any licenses protecting our intellectual property could be terminated. If we were unable to maintain the proprietary nature of our intellectual property and our significant current or proposed products, this loss of a competitive advantage could result in decreased sales or increased operating costs, either of which would decrease our liquidity and profitability.

In addition, the laws of certain foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the U.S. or the EU. Third parties, including competitors, may assert intellectual property infringement or invalidity claims against us that could be upheld. Intellectual property litigation, which could result in substantial cost to and diversion of effort by us, may be necessary to protect our trade secrets or proprietary technology, or for us to defend against claimed infringement of the rights of others and to determine the scope and validity of others’ proprietary rights. We may not prevail in any such litigation, and if we are unsuccessful, we may not be able to obtain any necessary licenses on reasonable terms or at all.

The loss of the services of any members of our executive management team could impair our ability to execute our business strategy and as a result, reduce our sales and profitability.

We depend on the continued services of our executive management team. The loss of key personnel could have a material adverse effect on our ability to execute our business strategy and on our financial condition and results of operations. We do not maintain key-person insurance for members of our executive management team.

Deterioration in labor relations could disrupt our business operations and increase our costs, which could decrease our liquidity and profitability.

As of December 31, 2019, we had approximately 7,400 full-time employees. Our Asia joint venture also employs approximately 1,200 full-time employees. Approximately 28.0% of our employees are represented by various labor unions with separate collective bargaining agreements or government labor union contracts for certain international locations. Our North American collective bargaining agreements, which are typically three years in length, expire at various times during any given three year period. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We may at some point be subject to work stoppages by some of our employees and, if such events were to occur, there may be a material adverse effect on our operations and profitability. Further, we may not be able to renew our various collective bargaining agreements on a timely basis or on favorable terms, or at all. Any significant increase in our labor costs could decrease our liquidity and profitability and any deterioration of employee relations, slowdowns or work stoppages at any of our locations, whether due to union activities, employee turnover or otherwise, could result in a decrease in our net sales or an increase in our costs, either of which could decrease our liquidity and profitability.

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We may face exposure to product liability claims and premises liability claims, which could reduce our liquidity and profitability and reduce consumer confidence in our products.

We face an inherent business risk of exposure to product liability claims if the use of any of our products results in personal injury or property damage. In the event that any of our products prove to be defective, we may be required to recall, redesign or even discontinue those products. We maintain insurance against product liability claims, but such coverage may not continue to be available on terms acceptable to us or be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage could impair our liquidity and profitability, and any claim or product recall that results in significant adverse publicity against us could result in consumers purchasing fewer of our products, which would also impair our liquidity and profitability.

We also face inherent business risks by operating physical stores that are open to the public. By opening retail stores, we have increased our exposure to premises liability claims. We maintain insurance against premises liability claims, but such coverage may not continue to be available on terms acceptable to us or be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage could impair our liquidity and profitability, and any claim or product recall that results in significant adverse publicity against us could adversely affect our reputation or result in consumers purchasing fewer of our products, which would also impair our liquidity and profitability.

Regulatory requirements, including, but not limited to, trade, environmental, health and safety requirements, may require costly expenditures and expose us to liability.

Our products and our marketing and advertising programs are subject to regulation in the U.S. by various federal, state and local regulatory authorities, including the Federal Trade Commission and the U.S. Food and Drug Administration. In addition, other governments and agencies in other jurisdictions regulate the sale and distribution of our products. These rules and regulations may change from time to time, or may conflict. There may be continuing costs of regulatory compliance including continuous testing, additional quality control processes and appropriate auditing of design and process compliance. For example, the CPSC and many foreign jurisdictions have adopted rules relating to fire retardancy standards for the mattress industry. Further, some states and the U.S. Congress continue to consider fire retardancy regulations that may be different or more stringent than the CPSC standard. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business. We are also subject to various health and environmental provisions, such as California Proposition 65 (the Safe Drinking Water and Toxic Enforcement Act of 1986) and 16 CFR Part 1633 (Standard for the Flammability (Open Flame) of Mattress Sets).

Our marketing and advertising practices could also become the subject of proceedings before regulatory authorities or the subject of claims by other parties and could require us to alter or end these practices or adopt new practices that are not as effective or are more expensive.

In addition, we are subject to federal, state and local laws and regulations relating to pollution, environmental protection and occupational health and safety. We may not be in complete compliance with all such requirements at all times. We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. If a release of hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material. As a manufacturer of bedding and related products, we use and dispose of a number of substances, such as glue, lubricating oil, solvents and other petroleum products, as well as certain foam ingredients, that may subject us to regulation under numerous foreign, federal and state laws and regulations governing the environment. Among other laws and regulations, we are subject in the U.S. to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Clean Air Act and related state and local statutes and regulations.

Our operations could also be impacted by a number of pending legislative and regulatory proposals to address greenhouse gas emissions in the U.S. and other countries. Certain countries have adopted the Kyoto Protocol. New greenhouse gas reduction targets have been established under the Kyoto Protocol, as amended, and certain countries, including Denmark, have adopted the new reduction targets. This and other international initiatives under consideration could affect our International operations. These actions could increase costs associated with our operations, including costs for raw materials, pollution control equipment and transportation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future consolidated financial condition, results of operations, or cash flows.


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We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. In the event contamination is discovered with respect to one or more of our current or former properties, government authorities or third parties may bring claims related to these properties, which could have a material effect on our profitability.

Our pension plans are currently underfunded and we may be required to make cash payments to the plans, reducing our available cash.

We maintain certain defined benefit pension plans. In addition, hourly employees working at certain of Sealy’s domestic manufacturing facilities are covered by union sponsored retirement and health and welfare plans. These plans cover both active employees and retirees. The plans are currently underfunded, and under certain circumstances, including the decision to close or sell a facility, we could be required to pay amounts with respect to this underfunding. Such events may significantly impair our profitability and liquidity and the possibility of having to make these payments could affect our decision on whether to close or sell a particular facility. For more information, refer to Note 10, “Retirement Plans,” in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.

Challenges to our pricing or promotional allowance policies or practices could adversely affect our operations.

Certain of our retail pricing and promotional allowance policies or practices are subject to antitrust regulations in the U.S. and abroad. If antitrust regulators or private parties in any jurisdiction in which we do business initiate investigations or claims that challenge our pricing or promotional allowance policies or practices, our efforts to respond could force us to divert management resources and we could incur significant unanticipated costs. If such an investigation or claim were to result in a charge that our practices or policies were in violation of applicable antitrust or other laws or regulations, we could be subject to significant additional costs of defending such charges in a variety of venues and, ultimately, if there were a finding that we were in violation of antitrust or other laws or regulations, there could be an imposition of fines, and damages for persons injured, as well as injunctive or other relief. Any requirement that we pay fines or damages (which, under the laws of certain jurisdictions, may be trebled) could decrease our liquidity and profitability, and any investigation or claim that requires significant management attention or causes us to change our business practices could disrupt our operations or increase our costs, also resulting in a decrease in our liquidity and profitability. An antitrust class action or individual suit against us could result in potential liabilities, substantial costs, treble damages, and the diversion of our management’s attention and resources, regardless of the outcome.

Our stock price is likely to continue to be volatile, your investment could decline in value, and we may incur significant costs from class action litigation.

The trading price of our common stock is likely to continue to be volatile and subject to wide price fluctuations. The trading price of our common stock may fluctuate significantly in response to various factors, including but not limited to:

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actual or anticipated variations in our quarterly and annual operating results, including those resulting from seasonal variations in our business;
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general economic conditions, such as unemployment, changes in short-term and long-term interest rates and fluctuations in both debt and equity capital markets;
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terrorist attacks in the U.S. or against U.S. targets, actual or threated acts of war (declared or undeclared) or the escalation of current hostilities involving the U.S. or its allies;
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natural disasters or pandemics disrupting our businesses or suppliers;
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introductions or announcements of technological innovations or new products by us or our competitors;
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disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to patent, or otherwise protect, our products and technologies;
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changes in estimates by securities analysts of our financial performance or the financial performance of our competitors or major customers or statements by others in the investment community relating to such performance;
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the use or non-use of our share repurchase program;
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bankruptcies of any of our nationally or regionally-significant customers;
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loss of any of our major customers;
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conditions or trends in the mattress industry generally;
•
additions or departures of key personnel;
•
announcements by us or our competitors or significant retailer customers of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
•
announcements by our competitors or our major customers of their quarterly operating results or announcements by our competitors or our major customers of their views on trends in the bedding industry;

19

•
regulatory developments in the U.S. and abroad;
•
changes in international trade policy and economic and political factors in the U.S. and abroad;
•
public announcements or filings with the SEC indicating that significant stockholders, directors or officers are buying or selling shares of our common stock; and
•
the declaration or suspension of a cash dividend.

In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market factors may seriously harm the market price of our common stock, regardless of our operating performance.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in potential liabilities, substantial costs, and the diversion of our management’s attention and resources, regardless of the outcome. See “Legal Proceedings” included in Part I, ITEM 3 of this Report.

Future sales of our common stock may depress our stock price.

The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. All shares of our common stock are freely transferable without restriction or further registration under the Securities Act, except for certain shares of our common stock which were purchased by our executive officers, directors, principal stockholders, and some related parties.

We have stockholders who presently beneficially own more than 5.0% of our outstanding capital stock. Sales or other dispositions of our shares by these major stockholders may depress our stock price.

Delaware law and our certificate of incorporation and bylaws contain anti-takeover provisions, any of which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors that some stockholders may consider favorable.

Provisions of Delaware law and our certificate of incorporation and by-laws could hamper a third party’s acquisition of us, or discourage a third party from attempting to acquire control of us. You may not have the opportunity to participate in these transactions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:

•
our ability to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of our common stock;
•
the requirements that our stockholders provide advance notice and certain disclosures when nominating our directors; and
•
the inability of our stockholders to convene a stockholders’ meeting without the chairperson of the Board of Directors, the president, or a majority of the Board of Directors first calling the meeting.

Our Board of Directors could determine in the future that adoption of a stockholder rights agreement is in the best interest of our stockholders and any such stockholder rights agreement, if adopted, could render more difficult, or discourage, a merger, tender offer, or assumption of control of the Company that is not approved by our Board of Directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.


20

ITEM 2. PROPERTIES

The following table sets forth certain information regarding our principal facilities by segment at December 31, 2019.
Name
 
Location
 
Approximate Square Footage
 


Title
 


Type of Facility
North America
 
 
 
 
 
 
 
 
Tempur Production USA, LLC
 
Albuquerque, New Mexico
 
800,000
 
Leased (a)
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Hagerstown, Maryland
 
615,600
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Plainfield, Indiana
 
614,000
 
Leased
 
Manufacturing
Tempur Production USA, LLC
 
Duffield, Virginia
 
581,000
 
Owned
 
Manufacturing
Comfort Revolution, LLC
 
Belmont, MS
 
432,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
City of Industry, California
 
430,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Conyers, Georgia
 
300,000
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Green Island, New York
 
257,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Richmond, California
 
241,000
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Orlando, Florida
 
225,050
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Brenham, Texas
 
220,500
 
Owned
 
Manufacturing
Tempur Production USA, LLC
 
Mountain Top, Pennsylvania
 
210,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Trinity, North Carolina
 
180,000
 
Owned
 
Manufacturing
Sealy Canada, Ltd
 
Alberta, Canada
 
144,500
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Medina, Ohio
 
140,000
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Lacey, Washington
 
134,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Kansas City, Kansas
 
122,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Phoenix, Arizona
 
120,000
 
Leased
 
Manufacturing
Sealy Canada, Ltd
 
Toronto, Canada
 
120,000
 
Leased
 
Manufacturing
Sealy Canada, Ltd
 
Quebec, Canada
 
88,000
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Denver, Colorado
 
82,000
 
Owned
 
Manufacturing
 
 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
 
Dan-Foam ApS
 
Aarup, Denmark
 
523,000
 
Owned (a)
 
Manufacturing
Sealy Mattress Company Mexico, S. de R.L. de C.V.
 
Toluca, Mexico
 
130,500
 
Owned
 
Manufacturing
(a)
 
We have granted a mortgage or otherwise encumbered our interest in this facility as collateral for secured indebtedness.

 In addition to the properties listed above, we have other facilities in the U.S. and other countries, the majority under leases with one to ten year terms. The manufacturing facility in Albuquerque, New Mexico is leased as part of the related industrial revenue bond financing. We have an option to repurchase the property for one dollar upon termination of the lease.

We believe that our existing properties are suitable for the conduct of our business, are adequate for our present needs and will be adequate to meet our future needs.

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings can be found in Note 14, “Commitments and Contingencies,” of the Notes to the Consolidated Financial Statements, included in Part II, ITEM 8 of this Report, “Financial Statements and Supplementary Data,” and is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES
 
None.


21

PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity

Our sole class of common equity is our $0.01 par value common stock, which trades on the New York Stock Exchange ("NYSE") under the symbol “TPX.” Trading of our common stock commenced on the NYSE on December 18, 2003. Prior to that time, there was no public trading market for our common stock.
 
As of February 17, 2020, we had approximately 73 stockholders of record of our common stock.

Dividends

We do not pay a dividend. The decision to pay a dividend in future periods is reviewed by our Board of Directors on a periodic basis. Further, we are subject to certain customary restrictions on dividends under our 2019 Credit Agreement and Indentures. See Note 8, "Debt," in our Consolidated Financial Statements, included in Part II, ITEM 8 of this Report, for a discussion of the 2019 Credit Agreement and Indentures.

Issuer Purchases of Equity Securities

Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock for a total repurchase price of not more than $800.0 million. We did not repurchase any shares under our share repurchase program during the year ended December 31, 2018. As of December 31, 2019, we had repurchased under the share repurchase program an aggregate of 1.3 million shares for approximately $102.3 million and had approximately $124.6 million remaining under the program. In February 2020, the Board of Directors authorized an increase, of over $190.0 million, to our share repurchase authorization of Tempur Sealy International's common stock to $300.0 million.

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. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing, regulatory requirements and other market conditions. The program does not require the repurchase 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.


22

The following table sets forth purchases of our common stock for the three months ended December 31, 2019:

Period
 
(a) Total number of shares purchased
 
(b) Average price paid per share
 
(c) Total number of shares purchased as part of publicly announced plans or programs
 
(d) Maximum number of shares (or approximate dollar value of shares) that may yet be purchased under the plans or programs
(in millions)
October 1, 2019 - October 31, 2019
 
218,360
(1) 
$78.61
 
217,065
 
$157.6
November 1, 2019 - November 30, 2019
 
206,308
(1) 
$85.69
 
205,337
 
$140.0
December 1, 2019 - December 31, 2019
 
177,464
(1) 
$86.44
 
177,464
 
$124.6
 Total
 
602,132
 
 
 
599,866
 
 
(1)
Includes shares withheld upon the vesting of certain equity awards to satisfy tax withholding obligations. The shares withheld were valued at the closing price of the common stock on the New York Stock Exchange on the vesting date or prior business day.

Equity Compensation Plan Information

Equity compensation plan information required by this Item is incorporated by reference from Part III, ITEM 12 of this Report.

Performance Graph

The following Performance Graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.

The following table compares cumulative stockholder returns for us over the last five years to the Standard & Poor’s ("S&P") 500 Stock Composite Index, and a peer group. The S&P 500 Composite Index is a capitalization weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. We selected these stocks based on market size, liquidity and industry group representation. We believe the peer group discussed below closely reflects our business and, as a result, provides a meaningful comparison of stock performance.
 
The peer issuers included in this graph are set forth below in the table. In 2018, HNI Corporation was added to the peer group. In 2019, lululemon athletica inc. and Tupperware Brands Corporation were removed from the peer group due to no longer meeting our market capitalization criteria.

2019 Peer Group
Brunswick Corporation (BC)
Hasbro, Inc. (HAS)
RH (RH)
Carter's, Inc. (CRI)
HNI Corporation (HNI)
Sleep Number Corporation (SNBR)
Columbia Sportswear Company (COLM)
La-Z-Boy Incorporated (LZB)
Steelcase Inc. (SCS)
Deckers Outdoor Corporation (DECK)
Leggett & Platt, Incorporated (LEG)
Under Armour, Inc. (UA)
Gildan Activewear Inc. (GIL)
Herman Miller, Inc. (MLHR)
Williams-Sonoma, Inc. (WSM)
Hanesbrands Inc. (HBI)
Polaris Industries Inc. (PII)
Wolverine World Wide, Inc. (WWW)

2018 Peer Group
Brunswick Corporation (BC)
HNI Corporation (HNI)
Sleep Number Corporation (SNBR)
Carter's, Inc. (CRI)
La-Z-Boy Incorporated (LZB)
Steelcase Inc. (SCS)
Columbia Sportswear Company (COLM)
Leggett & Platt, Incorporated (LEG)
Tupperware Brands Corporation (TUP)
Deckers Outdoor Corporation (DECK)
lululemon athletica inc. (LULU)
Under Armour, Inc. (UA)
Gildan Activewear Inc. (GIL)
Herman Miller, Inc. (MLHR)
Williams-Sonoma, Inc. (WSM)
Hanesbrands Inc. (HBI)
Polaris Industries Inc. (PII)
Wolverine World Wide, Inc. (WWW)
Hasbro, Inc. (HAS)
RH (RH)
 

23



    https://cdn.kscope.io/ac39a5c06836131e6fd46605fb75af47-chart-3e94ef4717775455813.jpg
 
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
 
12/31/2019
Tempur Sealy International, Inc.
 
$
100.00

 
$
128.32

 
$
124.35

 
$
114.17

 
$
75.40

 
$
158.55

S&P 500
 
100.00

 
101.38

 
113.51

 
138.29

 
132.23

 
173.86

2018 Peer Group
 
100.00

 
91.04

 
93.08

 
108.42

 
103.73

 
144.04

2019 Peer Group
 
100.00

 
90.71

 
90.94

 
105.21

 
94.63

 
123.06



24

ITEM 6. SELECTED FINANCIAL DATA
 
The following table sets forth our selected historical consolidated financial and operating data for the periods indicated. Our Consolidated Financial Statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019 are included in Part II, ITEM 8 of this Report.

(in millions, except per common share amounts)
 
 
 
 
 
 
 
 
 
Statement of Income Data:
2019
 
2018
 
2017
 
2016
 
2015
Net sales
$
3,106.0

 
$
2,702.9

 
$
2,700.6

 
$
3,079.7

 
$
3,089.3

Cost of sales
1,763.8

 
1,582.2

 
1,579.6

 
1,790.2

 
1,864.4

Gross profit
1,342.2

 
1,120.7

 
1,121.0

 
1,289.5

 
1,224.9

Operating expense, net (1)
995.5

 
864.4

 
825.5

 
876.1

 
918.3

Operating income
346.7

 
256.3

 
295.5

 
413.4

 
306.6

Interest expense, net
85.7

 
92.3

 
87.3

 
82.9

 
94.0

Loss on extinguishment of debt
—

 
—

 
—

 
47.2

 
—

Other (income) expense, net
(4.5
)
 
(1.0
)
 
(7.2
)
 
(0.3
)
 
9.7

Income before income taxes from continuing operations
265.5

 
165.0

 
215.4

 
283.6

 
202.9

Income tax provision (2)
(74.7
)
 
(49.6
)
 
(43.8
)
 
(86.3
)
 
(125.2
)
Income from continuing operations
190.8

 
115.4

 
171.6

 
197.3

 
77.7

Loss from discontinued operations, net of tax
(1.4
)
 
(17.8
)
 
(30.9
)
 
(12.3
)
 
(12.0
)
Net income before non-controlling interests
189.4

 
97.6

 
140.7

 
185.0

 
65.7

Less: net (loss) income attributable to non-controlling interests
(0.1
)
 
(2.9
)
 
(10.7
)
 
(5.6
)
 
1.2

Net income attributable to Tempur Sealy International, Inc.
$
189.5

 
$
100.5

 
$
151.4

 
$
190.6

 
$
64.5

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at end of period):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
64.9

 
$
45.8

 
$
41.1

 
$
64.6

 
$
153.0

Total assets
3,061.8

 
2,715.4

 
2,694.0

 
2,698.8

 
2,652.0

Total debt, net
1,468.0

 
1,576.5

 
1,644.6

 
1,779.0

 
1,420.8

Finance leases and other debt
72.0

 
69.7

 
108.5

 
109.1

 
34.0

Redeemable non-controlling interest
—

 
—

 
2.2

 
7.6

 
12.4

Total stockholders' equity (deficit)
360.4

 
217.5

 
112.5

 
(41.9
)
 
267.8

 
 
 
 
 
 
 
 
 
 
Other Financial and Operating Data:
 
 
 
 
 
 
 
 
 
Dividends per common share
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Depreciation and amortization (3)
116.5

 
111.9

 
94.0

 
88.6

 
92.6

Net cash provided by operating activities from continuing operations
314.8

 
207.5

 
256.5

 
168.1

 
231.6

Net cash used in investing activities from continuing operations
(90.2
)
 
(71.2
)
 
(65.7
)
 
(61.9
)
 
(58.9
)
Net cash used in financing activities from continuing operations
(203.2
)
 
(107.0
)
 
(175.2
)
 
(185.1
)
 
(90.7
)
Basic earnings per common share for continuing operations
3.50

 
2.17

 
3.37

 
3.44

 
1.24

Diluted earnings per common share for continuing operations
3.45

 
2.15

 
3.33

 
3.39

 
1.22

Capital expenditures
88.2

 
73.6

 
66.6

 
61.9

 
65.1


(1)
Operating expense, net includes $29.8 million and $21.2 million of customer-related charges in connection with certain customer bankruptcies in 2019 and 2018, respectively, and $14.4 million associated with the termination of our relationship with Mattress Firm in 2017.
(2)
Income tax provision for 2015 includes approximately $60.7 million related to changes in estimate related to the uncertain tax position regarding the Danish Tax Matter, as defined in Note 15, "Income Taxes," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report. The income tax provision for 2017 includes the provisional impact of the U.S. Tax Reform Act.
(3)
Includes $26.8 million, $24.8 million, $13.3 million, $16.2 million, $22.5 million in non-cash, stock-based compensation expense related to restricted stock units, performance restricted stock units, deferred stock units and stock options in 2019, 2018, 2017, 2016, and 2015, respectively.


25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with Part II, ITEM 6 of this Report and the audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Report. In addition, prior period amounts have been revised to reflect certain Latin American subsidiaries as discontinued operations. 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” and Part I, ITEM 1A of this Report. Our actual results may differ materially from those contained in any forward-looking statements. For results of operations comparisons relating to years ending December 31, 2018 and 2017, refer to our annual report on Form 10-K, Part II, ITEM 7: Management's Discussion and Analysis of Financial Conditions and Results of Operations filed with the Securities and Exchange Commission on February 25, 2019.

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the years ended December 31, 2019 and 2018, 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 develop, manufacture and market bedding products, which we sell globally. Our product brand portfolio includes many highly recognized and iconic brands in the industry, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, Stearns & Foster® and Comfort Revolution®. Our comprehensive suite of bedding products offers a variety of products to consumers across a broad range of channels and price points.

Our distribution model operates through an omni-channel strategy across two distribution channels in each operating business segment: Wholesale and Direct. Our Wholesale channel consists of third party retailers, including third party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, e-commerce and call centers.

We continue to make strategic investments, including the introduction of new products; investments to increase our global brand awareness; investments in research and development and productivity initiatives; and various other actions aimed at further strengthening our business. In 2020, we expect to increase our investments in research and development, as well as to spend a record amount of advertising dollars to promote our worldwide brands.

Full year net income for 2019 increased 89% and full year earnings per share ("EPS") increased 88% to $3.42. We believe investments we have made over the past four years strengthening the long-term foundation of our company investments have enhanced our competitive position. The combination of our powerful omni-channel distribution platform coupled with our market leading brands and products continues to drive market share gains and solid financial performance.
    
Our results for 2019 included the following significant accomplishments:

•
Completed the launch of the all-new line of Tempur-Pedic products
•
Announced that we were expanding our distribution with new supply agreements
•
Executed the largest expansion of new stores in our history.


26

Business Segments

We operate in two segments: North America and International. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. Our North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries and licensees located in the U.S. and Canada. Our International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America. We evaluate segment performance based on net sales, gross profit and operating income.

Product Launches
        
During the first half of 2019, we completed the rollout of our higher-end Tempur-Breeze, which completed the largest Tempur-Pedic rollout in our history. Additionally, we completed the launch of our Stearns & Foster products. In our North America segment in 2020, we will introduce the Tempur-Ergo Smart Base Collection with Sleeptracker technology and a new Sealy Posturepedic Plus line.We have successfully extended our product life cycle and therefore expect to have favorable launch costs in 2020.

Expanded Distribution Channels

In 2019, we announced three new or expanded third-party retail relationships in the U.S. and Europe. This resulted in the largest expansion of stores in our history.

We announced that we entered into a supply agreement with Mattress Firm, the largest specialty mattress retailer in North America, to reintroduce Tempur-Pedic, Stearns & Foster and Sealy branded products into approximately 2,500 Mattress Firm stores across the U.S. The reintroduction of products into Mattress Firm stores commenced in the fourth quarter of 2019 and is expected to be completed in the first quarter of 2020.

We also announced the recent expansion of our long-term supply agreement with Big Lots, a 1,400-store retailer in the U.S. This agreement is expected to grow the sales of entry-level Sealy products and to drive unit volume, primarily in the below $1,000 retail price point. Our launch of Sealy products with Big Lots was completed in 2019.

In 2019, we also expanded our European retail distribution network by reaching a supply agreement with Beter Bed Holding, one of Europe’s leading bedding retailers. The launch of new products with Beter Bed Holding was completed in 2019 in over 100 stores.

As a result of these new and expanded agreements, we expect significantly higher volume in our North America segment operations in 2020.

Expanding Retail Footprint
 
We are focused on developing our North America distribution network by opening more Tempur-Pedic retail stores and expanding our online availability. As of December 31, 2019, we had 56 Tempur-Pedic retail stores in operation. We plan to open approximately 20 new retail stores in 2020. We expect to recover our initial cash investment on each store after twelve months. We expect these retail stores to complement our existing third-party retail partners by increasing our products' brand awareness in the local markets. We also plan to expand our offerings in our own e-commerce platform and with third-party online retailers where our market share is still very low. Online bedding sales have increased significantly, as a growing segment of consumers prefer to purchase bedding products in this way. During 2019, we have experienced strong growth in both our e-commerce business and our company-owned stores. In 2020, we expect to continue to expand our Direct channel through new stores and by capturing share online.

Acquisition of Innovative Mattress Solutions, LLC ("iMS")

On April 1, 2019, we acquired substantially all of the net assets of iMS in a transaction valued at approximately $24 million, including assumed liabilities of approximately $11 million as of March 31, 2019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of this regional bedding retailer furthers our North American retail strategy, which is focused on meeting customer demand through geographic representation and sales expertise. During the second quarter of 2019, we completed the integration of Sleep Outfitters into the North America segment. Sleep Outfitters, previously a third party retailer, had historically been part of our Wholesale channel. Sleep Outfitters' sales have been reclassified into our Direct channel beginning in the second quarter of 2019.

27


Acquisition of Sherwood Bedding

On January 31, 2020, we acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of approximately $40 million. Sherwood Bedding is a major manufacturer in the U.S. private label and OEM bedding market and this acquisition of a majority interest marks our entrance into the private label category. In 2020, we expect this acquisition to contribute to our cash flow and profits.

Customer-Related Charges

The global economic environment continues to be challenging, and there have been signs of deterioration in the U.S. retail sector. Over the past two years, a national department store retail customer and various regional retail customers have filed for U.S. bankruptcy protection. In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL Holding, LLC ("Mattress PAL") and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. This customer represented less than 1% of our global net sales in 2019. Similarly, in the fourth quarter of 2018, prior to the Sleep Outfitters Acquisition, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account.

2019 Results of Operations
 
A summary of our results for the year ended December 31, 2019 include:

•
Total net sales increased 14.9% to $3,106.0 million from $2,702.9 million in 2018.

•
Gross margin was 43.2% in 2019 as compared to 41.5% in 2018. Adjusted gross margin, which is a non-GAAP financial measure, was 41.9% in 2018. There were no adjustments to gross margin in 2019.

•
Operating income was $346.7 million, or 11.2% of net sales, as compared to $256.3 million, or 9.5% of net sales, in 2018. Adjusted operating income, which is a non-GAAP financial measure was $392.2 million, or 12.6% of net sales, as compared to $307.6 million, or 11.4% of net sales, in 2018.
 
•
Net income was $189.5 million as compared to $100.5 million in 2018. Adjusted net income, which is a non-GAAP financial measure, was $221.9 million as compared to $163.0 million in 2018.

•
EBITDA, which is a non-GAAP financial measure, increased 31.5% to $468.4 million as compared to $356.1 million in 2018. Adjusted EBITDA, which is a non-GAAP financial measure, increased 19.6% to $508.1 million as compared to $424.7 million in 2018.

•
EPS was $3.42 as compared to $1.82 in 2018. Adjusted EPS, which is a non-GAAP financial measure, was $4.01 as compared to $2.96 in 2018.

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 or 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 II, ITEM 7A of this Report for a discussion of our foreign currency exchange rate risk.

28

The following table sets forth the various components of our Consolidated Statements of Income, and expresses each component as a percentage of net sales:
(in millions, except percentages and
Year Ended December 31,
per common share amounts)
2019
 
2018
Net sales
$
3,106.0


100.0
 %

$
2,702.9


100.0
 %
Cost of sales
1,763.8


56.8


1,582.2


58.5

Gross profit
1,342.2


43.2


1,120.7


41.5

Selling and marketing expenses
666.3


21.5


587.8


21.7

General, administrative and other expenses
315.3


10.2


273.0


10.1

Customer-related charges
29.8


1.0


21.2


0.8

Equity income in earnings of unconsolidated affiliates
(15.9
)

(0.5
)

(17.6
)

(0.7
)
Operating income
346.7


11.2


256.3


9.5

 











Other expense, net:











Interest expense, net
85.7


2.8


92.3


3.4

Other income, net
(4.5
)

(0.1
)

(1.0
)

—

Total other expense, net
81.2


2.6


91.3


3.4

 











Income from continuing operations before income taxes
265.5


8.5


165.0


6.1

Income tax provision
(74.7
)

(2.4
)

(49.6
)

(1.8
)
Income from continuing operations
190.8


6.1


115.4


4.3

Loss from discontinued operations, net of tax
(1.4
)

—


(17.8
)

(0.6
)
Net income before non-controlling interests
189.4


6.1


97.6


3.6

Less: Net loss attributable to non-controlling interests
(0.1
)

—


(2.9
)

(0.1
)
Net income attributable to Tempur Sealy International, Inc.
$
189.5


6.1
 %

$
100.5


3.7
 %
 









Earnings per common share:









 









Basic









Earnings per share for continuing operations
$
3.50




$
2.17



Loss per share for discontinued operations
(0.02
)



(0.32
)


Earnings per share
$
3.48




$
1.85



 







Diluted







Earnings per share for continuing operations
$
3.45




$
2.15



Loss per share for discontinued operations
(0.03
)



(0.33
)


Earnings per share
$
3.42




$
1.82



 







Weighted average common shares outstanding:
 
 
 
 
 


Basic
54.5




54.4



Diluted
55.4




55.1












29

NET SALES
 
Year Ended December 31,
 
Consolidated
North America
International
(in millions)
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net sales by channel
 
 
 
 
 
 
 
 
 
 
 
Wholesale
$
2,717.1

 
$
2,452.1

 
$
2,273.5

 
$
1,989.1

 
$
443.6

 
$
463.0

Direct
388.9

 
250.8

 
259.8

 
147.1

 
129.1

 
103.7

Total net sales
$
3,106.0

 
$
2,702.9

 
$
2,533.3

 
$
2,136.2

 
$
572.7

 
$
566.7


Year ended December 31, 2019 compared to year ended December 31, 2018

Net sales increased 14.9%, and on a constant currency basis increased 16.0%. The change in net sales was driven by the following:

•
North America net sales increased $397.1 million, or 18.6%. Net sales in the Wholesale channel increased $284.4 million, or 14.3%, primarily driven by new Tempur product introductions and the expansion of our retail distribution network. Net sales in our Direct channel increased $112.7 million, or 76.6%, primarily driven by growth from company-owned stores, including the Sleep Outfitters Acquisition, and our e-commerce business. Excluding Sleep Outfitters, the Wholesale channel increased approximately 17% and the Direct channel increased approximately 35%. On a constant currency basis, North America net sales increased 18.8%.

•
International net sales increased $6.0 million, or 1.1%. On a constant currency basis, our International net sales increased 5.3%, primarily driven by Direct channel growth. Net sales in the Wholesale channel decreased 0.1% on a constant currency basis, primarily driven by country specific conditions. Net sales in the Direct channel increased 29.5% on a constant currency basis, primarily driven by growth from company-owned stores.

GROSS PROFIT
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Margin Change
(in millions, except percentages)
Gross Profit
 
Gross Margin
 
Gross Profit
 
Gross Margin
 
2019 vs 2018
North America
$
1,035.2

 
40.9
%
 
$
823.4

 
38.5
%
 
2.4
%
International
307.0

 
53.6
%
 
297.3

 
52.5
%
 
1.1
%
Consolidated
$
1,342.2

 
43.2
%
 
$
1,120.7

 
41.5
%
 
1.7
%

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.

Our gross margin is primarily impacted by the relative amount of net sales contributed by our Tempur and Sealy products. Our Sealy products have a significantly lower gross margin than our Tempur products. Our Sealy mattress products range from value to premium priced offerings, and gross margins are typically higher on premium products compared to value priced offerings. Our Tempur products are exclusively premium priced products. As sales of our Sealy products increase relative to sales of our Tempur products, our gross margins will be negatively impacted in both our North America and International 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, channel and geographic mix; foreign exchange fluctuations; volume incentives offered to certain retail accounts; participation in our retail cooperative advertising programs; and costs associated with new product introductions. Future changes in raw material prices could have a significant impact on our gross margin. In 2020, we expect a modest impact on gross margin due to lower commodity costs. 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.

30

Year ended December 31, 2019 compared to year ended December 31, 2018

Gross margin improved 170 basis points. The principal factors impacting gross margin for each segment are discussed below.

•
North America gross margin improved 240 basis points. The improvement in gross margin was primarily driven by favorable pricing of 130 basis points, favorable product and brand mix of 110 basis points and lower commodity costs. Additionally, in 2018, we also recorded $6.1 million of restructuring charges related to our acquisition of the remaining interest in a joint venture and $5.6 million of supply chain transition costs to consolidate certain manufacturing and distribution facilities, resulting in a favorable impact of 50 basis points in 2019. These improvements were partially offset by increased floor model expenses.

•
International gross margin improved 110 basis points. The improvement in gross margin was primarily driven by lower commodity costs and channel mix.

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, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.

Year ended December 31, 2019 compared to year ended December 31, 2018
 
Year Ended December 31,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
(in millions)
Consolidated
 
North America
 
International
 
Corporate
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
280.5

 
$
259.3

 
$
244.1

 
$
220.5

 
$
36.4

 
$
38.8

 
$
—

 
$
—

Other selling and marketing
385.8

 
328.5

 
249.3

 
194.4

 
125.3

 
125.7

 
11.2

 
8.4

General, administrative and other
315.3

 
273.0

 
167.2

 
137.6

 
45.8

 
42.9

 
102.3

 
92.5

Customer-related charges
29.8

 
21.2

 
29.8

 
20.9

 
—

 
—

 
—

 
0.3

Total operating expense
$
1,011.4

 
$
882.0

 
$
690.4

 
$
573.4

 
$
207.5

 
$
207.4

 
$
113.5

 
$
101.2


Operating expenses increased $129.4 million, or 14.7%, and were flat as a percentage of net sales. The primary drivers of changes in operating expenses by segment are discussed below.

•
North America operating expenses increased $117.0 million, or 20.4%, and increased 50 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising and other selling and marketing investments, variable compensation expense and incremental operating expense associated with a higher number of company-owned stores. In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. Additionally, in the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities. In the fourth quarter of 2018, prior to the Sleep Outfitters Acquisition, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account. Additionally, in 2018, we recorded $4.1 million of restructuring charges related to our acquisition of the remaining interest in a joint venture and $7.3 million of supply chain transition costs which represent charges incurred to consolidate certain manufacturing and distribution facilities.
 
•
International operating expenses increased $0.1 million and decreased 40 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by an increase in variable compensation expense, offset by $8.2 million of costs associated with our International simplification efforts, which were not repeated in 2019.


31

•
Corporate operating expenses increased $12.3 million, or 12.2%. The increase in operating expenses was primarily driven by increased variable compensation expense.

Research and development expenses for the year ended December 31, 2019 were $23.0 million compared to $21.9 million for the year ended December 31, 2018, an increase of $1.1 million, or 5.0%.

OPERATING INCOME
 
Year Ended December 31,
 
 
2019
 
2018
 
Margin Change
(in millions, except percentages)
Operating Income
 
Operating Margin
 
Operating Income
 
Operating Margin
 
2019 vs 2018
North America
$
344.8

 
13.6
%
 
$
250.0

 
11.7
%
 
1.9
%
International
115.4

 
20.2
%
 
107.5

 
19.0
%
 
1.2
%
 
460.2

 
 
 
357.5

 
 
 
 
Corporate expenses
(113.5
)
 
 
 
(101.2
)
 
 
 
 
Total operating income
$
346.7

 
11.2
%
 
$
256.3

 
9.5
%
 
1.7
%

Year ended December 31, 2019 compared to year ended December 31, 2018

Operating income increased $90.4 million and operating margin improved 170 basis points. The increase was driven by the following:

•
North America operating income increased $94.8 million and operating margin improved 190 basis points, primarily driven by the improvement in gross margin of 240 basis points. In 2018, we recorded $10.2 million of restructuring charges related to our acquisition of the remaining interest in a joint venture, as well as incremental bad debt expense related to the bankruptcy of a department store retailer, which were not repeated in 2019. These improvements were offset by increased advertising and other selling and marketing investments and variable compensation expense. In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. In the fourth quarter of 2018, prior to the Sleep Outfitters Acquisition, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account. Additionally, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.
•
International operating income increased $7.9 million and operating margin improved 120 basis points. The improvement in operating margin was driven by the improvement in gross margin of 110 basis points. In 2018, we recorded $8.5 million of costs associated with our International simplification efforts, including headcount reduction, professional fees and store closures, which were not repeated in 2019. These improvements were offset by an increase in variable compensation expense.

•
Corporate operating expenses increased $12.3 million, which negatively impacted our consolidated operating margin by 40 basis points. The increase in operating expenses was primarily driven by an increase in variable compensation expense.

INTEREST EXPENSE, NET
 
Year Ended December 31,
 
Percent change
(in millions, except percentages)
2019
 
2018
 
2019 vs 2018
Interest expense, net
$
85.7

 
$
92.3

 
(7.2
)%

Year ended December 31, 2019 compared to year ended December 31, 2018

Interest expense, net, decreased $6.6 million, or 7.2%. The decrease in interest expense, net, was driven by reduced average levels of outstanding debt and lower interest rates on our variable rate debt.


32

INCOME TAXES
 
Year Ended December 31,
 
Percent change
(in millions, except percentages)
2019
 
2018
 
2019 vs 2018
Income tax
$
74.7

 
$
49.6

 
50.6
 %
Effective tax rate
28.1
%
 
30.1
%
 
(2.0
)%

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.

Year ended December 31, 2019 compared to year ended December 31, 2018

Our income tax provision increased $25.1 million due to an increase in income before income taxes and as the result of discrete items. Our 2019 effective tax rate decreased as compared to 2018 by 200 basis points. The effective tax rate as compared to the U.S. federal statutory tax rate for the year ending December 31, 2019 included a net unfavorable impact of discrete items primarily related to the sale of a certain interest in our Asia-Pacific joint venture and the impact of certain stock compensation. The effective tax rate as compared to the U.S. federal statutory tax rate for the year ended December 31, 2018 included a net favorable impact of the settlement of the previously-disclosed Danish Tax Matter for the years 2001 - 2011, the favorable impact of the U.S. Tax Reform Act as reflected on our 2017 U.S. income tax return filed in 2018 and the unfavorable impact of an increase in our uncertain tax position related to the Danish Tax Matter for years after 2011.

Refer to Note 15, “Income Taxes,” in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report for further information.

Liquidity and Capital Resources
 
Liquidity
Our principal sources of funds are cash flows from operations, borrowings 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, share repurchases, capital expenditures and working capital needs. At December 31, 2019, we had working capital of $126.9 million, including cash and cash equivalents of $64.9 million, as compared to working capital of $136.4 million including $45.8 million in cash and cash equivalents as of December 31, 2018.

Cash Provided by (Used in) Continuing Operations

The table below presents net cash provided by (used in) operating, investing and financing activities from continuing operations for the years ended December 31, 2019 and 2018.
 
 
Year Ended December 31,
(in millions)
 
2019
 
2018
Net cash provided by (used in) continuing operations:
 
 
 
 
Operating activities
 
$
314.8

 
$
207.5

Investing activities
 
(90.2
)
 
(71.2
)
Financing activities
 
(203.2
)
 
(107.0
)
 
Cash provided by operating activities from continuing operations increased $107.3 million in 2019 as compared to 2018. The increase in cash provided by operating activities was primarily driven by the increase in cash earnings offset in part by a decrease in working capital. Accounts receivable and inventory were principal uses of cash, which reflect higher sales levels and volumes, the impact of the new and expanded retail relationships, and new product introductions. Accrued expenses and other liabilities were a source of cash in 2019 as a result of increased accruals for variable compensation and other expenses such as advertising given higher revenues and earnings.

Cash used in investing activities from continuing operations increased $19.0 million in 2019 as compared to 2018. The increase in cash used in investing activities was primarily due to cash used for the Sleep Outfitters Acquisition and planned capital expenditures.


33

Cash used in financing activities from continuing operations increased $96.2 million in 2019 as compared to 2018. In 2019, we repurchased $105.7 million of our common stock, which included repurchases of $102.3 million under our share repurchase program and $3.4 million which was withheld to satisfy tax withholding obligations related to stock compensation. In 2018, we repurchased $4.6 million of our common stock which was withheld to satisfy tax withholding obligations related to stock compensation. We did not repurchase any shares under our share repurchase program during 2018. Proceeds from exercise of stock options increased $13.2 million as compared to the same period in 2018. In 2019, we had net repayments of $104.3 million on our credit facilities, as compared to net repayments of $100.9 million in 2018.
 
Cash Used in Discontinued Operations

The table below presents net cash used in operating, investing and financing activities from discontinued operations for the years ended December 31, 2019 and 2018:

 
 
Year Ended December 31,
(in millions)
 
2019
 
2018
Net cash (used in) provided by discontinued operations:
 
 
 
 
Operating activities
 
$
(2.0
)
 
$
(24.4
)
Investing activities
 
—

 
2.1

Financing activities
 
—

 
—


Cash used in discontinued operations decreased $22.4 million in 2019 as compared to 2018, primarily due to the payment of non-income tax obligations and related interest expense in 2018.

Capital Expenditures

Capital expenditures totaled $88.2 million for the year ended December 31, 2019 and $73.6 million for the year ended December 31, 2018. We currently expect our 2020 capital expenditures to be approximately $100 to $110 million, which includes investments in our U.S. ERP projects, domestic manufacturing facilities and our Tempur-Pedic retail stores.

Indebtedness

Our total debt decreased to $1,547.0 million as of December 31, 2019 from $1,653.8 million as of December 31, 2018. In the first half of 2019, we prepaid $75.0 million on the Term A facility under the 2016 Credit Agreement. Refer to Note 8, “Debt,” in our Consolidated Financial Statements included in Part II, ITEM 8 for further discussion of our debt.

On October 16, 2019, we entered into the 2019 Credit Agreement, which provides for a $425.0 million revolving credit facility, a $425.0 million term loan facility and an accordion feature for additional borrowings. Refer to Note 8, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 for further discussion of the accordion feature of the 2019 Credit Agreement. We used the proceeds under the term loan facility to refinance outstanding borrowings under the 2016 Credit Agreement and terminated the existing revolving credit commitments. As of October 16, 2019, the terms of the 2019 Credit Agreement replaced the terms of the 2016 Credit Agreement.

As of December 31, 2019, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 2.92 times, within the terms of the financial covenants for the maximum consolidated total net leverage ratio as set forth in the 2019 Credit Agreement, which limits this ratio to 5.00 times. As of December 31, 2019, we were in compliance with all of the financial covenants in our debt agreements.

Our debt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends.  The 2019 Credit Agreement, 2023 Senior Notes and 2026 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA remains below 3.5 times. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.5 times. The limit on restricted payments under the 2019 Credit Agreement, 2023 Senior Notes and 2026 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. 
    

34

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 our 2019 Credit Agreement. Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 2019 Credit Agreement are terms that are not recognized under GAAP 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 for a total repurchase price of not more than $800.0 million. We did not repurchase any shares under our share repurchase program during 2018. For the year ended 2019, we repurchased 1.3 million shares under our share repurchase program for approximately $102.3 million. As of December 31, 2019, we had approximately $124.6 million remaining under our share repurchase program. In February 2020, the Board of Directors authorized an increase, of over $190.0 million, to our share repurchase authorization of Tempur Sealy International's common stock to $300.0 million. 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.    

Future Liquidity Sources and Uses

Our primary sources of liquidity are cash flows from operations and borrowings, as needed, under our debt facilities. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources. As of December 31, 2019, we had $1,547.0 million in total debt outstanding, and our adjusted EBITDA, which is a non-GAAP financial measure, was $508.1 million for the year ended December 31, 2019. Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Total cash interest payments related to our borrowings are expected to be approximately $80 to $85 million in 2020.

On October 16, 2019, we entered into the 2019 Credit Agreement with a syndicate of banks. The 2019 Credit Agreement provides for a $425.0 million revolving credit facility, a $425.0 million term loan facility, and an incremental facility in an aggregate amount of up to $550.0 million plus the amount of certain prepayments plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $60.0 million sub-facility for the issuance of letters of credit. We expect to use the revolving credit facility from time to time to finance working capital needs and for general corporate purposes.

Our business continues to generate significant cash flows from operations. Based upon the current level of operations, we believe that cash generated from operations and amounts available under our credit facilities will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the foreseeable future. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under our debt facilities or otherwise enable us to service our indebtedness or to make anticipated capital expenditures. In 2020, we expect to be within our target range for our ratio of consolidated indebtedness less netted cash of 2.5 times to 3.5 times. We expect to continue to use excess cash flows from operations for share repurchases and debt repayment. We may also consider other capital allocations, such as acquisitions or other investments.

At December 31, 2019, total cash and cash equivalents were $64.9 million, of which $28.9 million was held in the U.S. and $36.0 million was held by subsidiaries outside of the U.S. The amount of cash and cash equivalents held by subsidiaries outside of the U.S. and not readily convertible into the U.S. Dollar or other major foreign currencies is not material to our overall liquidity or financial position.

Contractual Obligations
 
Our contractual obligations and other commercial commitments as of December 31, 2019 are summarized below:

35

(in millions)
 
Payment Due By Period
Contractual Obligations
 
2020
 
2021
 
2022
 
2023
 
2024
 
After
2024
 
Total
Obligations
Debt (1)
 
$
29.2

 
$
21.3

 
$
21.3

 
$
481.8

 
$
329.3

 
$
600.0

 
$
1,482.9

Letters of credit
 
23.6

 
—

 
—

 
—

 
—

 
—

 
23.6

Interest payments (2)
 
74.0

 
72.8

 
70.2

 
64.5

 
42.6

 
53.0

 
377.1

Operating leases
 
62.1

 
54.5

 
46.6

 
36.2

 
29.0

 
74.5

 
302.9

Finance lease obligations(3)
 
8.5

 
8.7

 
7.1

 
5.5

 
4.2

 
30.1

 
64.1

Pension obligations
 
1.1

 
1.1

 
1.2

 
1.2

 
1.3

 
31.0

 
36.9

Total (4)
 
$
198.5

 
$
158.4

 
$
146.4

 
$
589.2

 
$
406.4

 
$
788.6

 
$
2,287.5


(1)
Debt excludes finance lease obligations and deferred financing costs.
(2)
Interest payments represent obligations under our debt outstanding as of December 31, 2019, applying December 31, 2019 interest rates and assuming scheduled payments are paid as contractually required through maturity.
(3)
The payments due for finance lease obligations excludes $20.3 million in future payments for interest.
(4)
Uncertain tax positions are excluded from this table given the timing of payments cannot be reasonably estimated.

Non-GAAP Financial Information

We provide information regarding adjusted net income, adjusted EPS, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA, free cash flow, 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, operating income (expense), operating margin and net cash provided by operating activities 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, 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 continuing 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.

Key Highlights
 
Year Ended December 31,
(in millions, except percentages)
2019
 
2018
 
% Change
 
% Change Constant Currency (1)
Net sales
$
3,106.0

 
$
2,702.9

 
14.9
%
 
16.0
%
Net income
$
189.5

 
$
100.5

 
88.6
%
 
92.1
%
EBITDA (1)
$
468.4

 
$
356.1

 
31.5
%
 
33.2
%
Adjusted EBITDA (1)
$
508.1

 
$
424.7

 
19.6
%
 
21.0
%
EPS
$
3.42

 
$
1.82

 
87.9
%
 
91.2
%
Adjusted EPS (1)
$
4.01

 
$
2.96

 
35.5
%
 
37.5
%
(1)
 
Non-GAAP financial measure. Please refer to the reconciliations in the following tables.


36

Adjusted Net Income and Adjusted EPS

A reconciliation of net 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 income to adjusted net income and the calculation of adjusted EPS for the years ended December 31, 2019 and 2018.
 
Year Ended December 31,
(in millions, except per common share amounts)
2019
 
2018
Net income
$
189.5

 
$
100.5

Loss from discontinued operations, net of tax (1)
1.4

 
17.8

Customer-related charges (2)
29.8

 
21.2

Charitable stock donation (3)
8.9

 
—

Acquisition-related costs and other (4)
6.1

 
—

Credit facility amendment (5)
0.7

 
—

Other income (6)
(7.2
)
 
—

Restructuring costs (7)
—

 
24.9

Supply chain transition costs (8)
—

 
7.3

Tax adjustments (9)
(7.3
)
 
(8.7
)
Adjusted net income
$
221.9

 
$
163.0

 
 
 
 
Adjusted earnings per share, diluted
$
4.01

 
$
2.96

 
 
 
 
Diluted shares outstanding
55.4

 
55.1

(1)
Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the 2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.
(2)
In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. In the fourth quarter of 2018, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account.

(3)
In the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.
(4)
In the first half of 2019, we recorded $6.1 million of acquisition-related and other costs, primarily related to post acquisition restructuring charges and professional fees incurred in connection with the acquisition of substantially all of the net assets of iMS by an affiliate of ours.

(5)
In the fourth quarter of 2019, we incurred $0.7 million of professional fees in connection with the amendment of the senior secured credit facility.
(6)
In the first quarter of 2019, we recorded $7.2 million of other income related to the sale of our interest in a subsidiary of the Asia-Pacific joint venture.
(7)
In 2018, we recorded $24.9 million of restructuring costs, which included $1.3 million of other expense, net. These costs included $11.5 million of charges related to the operational alignment of a joint venture that was wholly owned in the North America business segment, which included $6.1 million in cost of sales and $1.3 million of other expense, net. Restructuring costs also included $8.5 million of expenses in the International business segment related to International simplification efforts, which included $0.3 million in cost of sales. Corporate recorded $4.9 million of professional fees related to restructuring activities.
(8)
In 2018, we recorded $7.3 million of supply chain transition costs which represent charges incurred to consolidate certain manufacturing and distribution facilities, including $5.6 million in cost of sales and $0.8 million of other expense.

(9)
Adjusted income tax provision represents the tax effects associated with the aforementioned items and other discrete income tax events.


37


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

A reconciliation of gross profit and gross margin to adjusted gross profit and adjusted gross margin, respectively, and operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are 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 gross profit and operating income (expense) to the calculation of adjusted operating income (expense) for the year ended December 31, 2019. We had no adjustments to gross profit for the year ended December 31, 2019.
 
FULL YEAR 2019
(in millions, except percentages)
 Consolidated
 
 Margin
 
 North America
 
 Margin
 
 International
 
 Margin
 
 Corporate
Net sales
$
3,106.0

 
 
 
$
2,533.3

 
 
 
$
572.7

 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
1,342.2

 
43.2
%
 
$
1,035.2

 
40.9
%
 
$
307.0

 
53.6
%
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (expense)
$
346.7

 
11.2
%
 
$
344.8

 
13.6
%
 
$
115.4

 
20.2
%
 
$
(113.5
)
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer-related charges (1)
29.8

 
 
 
29.8

 
 
 
—

 
 
 
—

Charitable stock donation (2)
8.9

 
 
 
8.9

 
 
 
—

 
 
 
—

Acquisition-related costs and other (3)
6.1

 
 
 
1.7

 
 
 
0.3

 
 
 
4.1

Credit facility amendment (4)
0.7

 
 
 
—

 
 
 
—

 
 
 
0.7

Total Adjustments
45.5

 
 
 
40.4

 
 
 
0.3

 
 
 
4.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operating income (expense)
$
392.2

 
12.6
%
 
$
385.2

 
15.2
%
 
$
115.7

 
20.2
%
 
$
(108.7
)
(1)
In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account.
(2)
In the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.
(3)
In the first half of 2019, we recorded $6.1 million of acquisition-related and other costs, primarily related to post acquisition restructuring charges and professional fees incurred in connection with the acquisition of substantially all of the net assets of iMS by an affiliate of ours.
(4)
In the fourth quarter of 2019, we incurred $0.7 million of professional fees in connection with the amendment of the senior secured credit facility.

38

 
The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the year ended December 31, 2018:
 
FULL YEAR 2018
(in millions, except percentages)
 Consolidated
 
 Margin
 
 North America
 
 Margin
 
 International
 
 Margin
 
 Corporate
Net sales
$
2,702.9

 
 
 
$
2,136.2

 
 
 
$
566.7

 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
1,120.7

 
41.5
%
 
$
823.4

 
38.5
%
 
$
297.3

 
52.5
%
 
$
—

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring costs (1)
6.4

 
 
 
6.1

 
 
 
0.3

 
 
 
—

Supply chain transition costs (2)
5.6

 
 
 
5.6

 
 
 
—

 
 
 
—

Total adjustments
12.0

 
 
 
11.7

 
 
 
0.3

 
 
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted gross profit
$
1,132.7

 
41.9
%
 
$
835.1

 
39.1
%
 
$
297.6

 
52.5
%
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (expense)
$
256.3

 
9.5
%
 
$
250.0

 
11.7
%
 
$
107.5

 
19.0
%
 
$
(101.2
)
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring costs (1)
23.6

 
 
 
10.2

 
 
 
8.5

 
 
 
4.9

Customer-related charges (3)
21.2

 
 
 
20.9

 
 
 
—

 
 
 
0.3

Supply chain transition costs (2)
6.5

 
 
 
6.5

 
 
 
—

 
 
 
—

Total adjustments
51.3

 
 
 
37.6

 
 
 
8.5

 
 
 
5.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operating income (expense)
$
307.6

 
11.4
%
 
$
287.6

 
13.5
%
 
$
116.0

 
20.5
%
 
$
(96.0
)
(1)
In 2018, we recorded $24.9 million of restructuring costs, which included $1.3 million of other expense, net. These costs included $11.5 million of charges related to the operational alignment of a joint venture that was wholly owned in the North America business segment, which included $6.1 million in cost of sales and $1.3 million of other expense, net. Restructuring costs also included $8.5 million of expenses in the International business segment related to International simplification efforts, which included $0.3 million in cost of sales. Corporate recorded $4.9 million of professional fees related to restructuring activities.
(2)
In 2018, we recorded $7.3 million of supply chain transition costs which represent charges incurred to consolidate certain manufacturing and distribution facilities, including $5.6 million in cost of sales and $0.8 million of other expense.
(3)
In the fourth quarter of 2018, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account.


EBITDA, Adjusted EBITDA, Consolidated Indebtedness Less Netted Cash and Free Cash Flow

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
•
Net cash provided by operating activities to free cash flow

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 progress in reducing our leverage. The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the years ended December 31, 2019 and 2018:

39

 
 
Year Ended
(in millions)
 
December 31, 2019
 
December 31, 2018
Net income
 
$
189.5

 
$
100.5

Interest expense, net
 
85.7

 
92.3

Income tax provision
 
74.7

 
49.6

Depreciation and amortization
 
118.5

 
113.7

EBITDA
 
$
468.4

 
$
356.1

Adjustments:
 
 
 
 
Loss from discontinued operations, net of tax (1)
 
1.4

 
17.8

Customer-related charges (2)
 
29.8

 
21.2

Charitable stock donation (3)
 
8.9

 
—

Acquisition-related costs and other (4)
 
6.1

 
—

Credit facility amendment (5)
 
0.7

 
—

Other income (6)
 
(7.2
)
 
—

Restructuring costs (7)
 
—

 
22.3

Supply chain transition costs (8)
 
—

 
7.3

Adjusted EBITDA
 
$
508.1

 
$
424.7

 
 
 
 
 
Consolidated indebtedness less netted cash
 
$
1,483.6

 
$
1,644.6

 
 
 
 
 
Ratio of consolidated indebtedness less netted cash to adjusted EBITDA
 
2.92 times
 
3.87 times

(1)
Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the 2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.
(2)
In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. In the fourth quarter of 2018, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account.
(3)
In the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.
(4)
In the first half of 2019, we recorded $6.1 million of acquisition-related and other costs, primarily related to post acquisition restructuring charges and professional fees incurred in connection with the acquisition of substantially all of the net assets of iMS by an affiliate of ours.
(5)
In the fourth quarter of 2019, we incurred $0.7 million of professional fees in connection with the amendment of the senior secured credit facility.
(6)
In the first quarter of 2019, we recorded $7.2 million of other income related to the sale of our interest in a subsidiary of the Asia-Pacific joint venture.
(7)
In 2018, we recorded $24.9 million of restructuring costs, including $2.6 million of depreciation expense and $1.3 million of other expense, net. These costs included $11.5 million of charges related to the operational alignment of a joint venture that was wholly owned in the North America business segment, which included $6.1 million in cost of sales and $1.3 million of other expense, net. Restructuring costs also included $8.5 million of expenses in the International business segment related to International simplification efforts, which included $0.3 million in cost of sales. Corporate recorded $4.9 million of professional fees related to restructuring activities.
(8)
In 2018, we recorded $7.3 million of supply chain transition costs which represent charges incurred to consolidate certain manufacturing and distribution facilities, including $5.6 million in cost of sales and $0.8 million of other expense.
    
On October 16, 2019, we entered into the 2019 Credit Agreement with a syndicate of banks. Under the 2019 Credit Agreement, the definition of adjusted EBITDA contains certain restrictions that limit adjustments to net income when calculating adjusted EBITDA. For the year ended December 31, 2019, our adjustments to net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2019 Credit Agreement.
    
The ratio of adjusted EBITDA under the 2019 Credit Agreement to consolidated indebtedness less netted cash was 2.92 times for the trailing twelve months ended December 31, 2019. The 2019 Credit Agreement requires us to maintain a ratio of consolidated indebtedness less netted cash to adjusted EBITDA of less than 5.00:1.00 times.
    

40

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of December 31, 2019 and 2018. "Consolidated Indebtedness" and "Netted Cash" are terms used in the 2019 Credit Agreement for purposes of certain financial covenants.
(in millions)
December 31, 2019
 
December 31, 2018
Total debt, net
$
1,540.0

 
$
1,646.2

Plus: Deferred financing costs (1)
7.0

 
7.6

Consolidated indebtedness
1,547.0

 
1,653.8

Less: Netted cash (2)
63.4

 
32.9

Consolidated indebtedness less netted cash
$
1,483.6

 
$
1,644.6

(1)
We present deferred financing costs as a direct reduction from the carrying amount of the related debt in the Consolidated Balance Sheets. For purposes of determining total debt for financial covenant purposes, we added these costs back to total debt, net as calculated per the Consolidated Balance Sheets.
(2)
Netted cash includes cash and cash equivalents for domestic and foreign subsidiaries designated as restricted subsidiaries in the 2019 Credit Agreement.

The following table sets forth the reconciliation of our net cash from operating activities to free cash flow for the years ended December 31, 2019 and 2018:
 
Year Ended December 31,
(in millions)
2019
 
2018
Net cash provided by operating activities
$
314.8

 
$
207.5

Subtract: Purchases of property, plant and equipment
88.2

 
73.6

Free cash flow
$
226.6

 
$
133.9


Critical Accounting Policies and Estimates
 
Our management is responsible for our financial statements and has evaluated the accounting policies to be used in their preparation. Our management believes these policies are reasonable and appropriate. The following discussion identifies those accounting policies that we believe are critical in the preparation of our financial statements, the judgments and uncertainties affecting the application of those policies and the possibility that materially different amounts will be reported under different conditions or using different assumptions.
 
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates.

Revenue Recognition. Sales of product are recognized when the obligations under the terms of the contract with the customer are satisfied, which is generally when control of the product has transferred to the customer. Transferring control of each product sold is considered a separate performance obligation. We transfer control and recognize a sale when the product ships to the customer or when the customer receives the product based upon agreed shipping terms. Each unit sold is considered an independent, unbundled performance obligation. We do not have any additional performance obligations other than product sales that are material in the context of the contract. We extend volume discounts to certain customers and reflect these amounts as a reduction of net sales.

We estimate the liability for sales returns at the time of sale, based on our level of historical sales returns. We allow returns following a sale, depending on the channel and promotion. Our level of sales returns differs by channel, with our Direct channel typically experiencing the higher rate of returns.

We record an allowance for doubtful accounts receivable for amounts due from third parties that we do not expect to collect. We estimate the allowance based on historical write-off experience and current economic conditions and also consider factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a receivable is reasonably assured.


41

The credit environment in which our customers operate has been relatively stable over the past few years. Historically, less than 1.0% of net sales ultimately prove to be uncollectible. However, there have been signs of deterioration in the U.S. retail sector. Total bad debt expense was $29.3 million in 2019, $31.3 million in 2018 and $9.8 million in 2017.

We regularly review the adequacy of our allowance for doubtful accounts based on the latest information available and accrue losses from uncollectible receivables when such losses can reasonably be estimated. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. The allowance for doubtful accounts included in accounts receivable, net in the accompanying Consolidated Balance Sheets was $71.9 million and $47.6 million as of December 31, 2019 and 2018, respectively. If circumstances change, for example, due to the occurrence of higher-than-expected defaults or a significant adverse change in a major customer’s ability to meet our financial obligations, estimates of the recoverability of receivable amounts due could be reduced.

Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the amount and timing of future sales returns and uncollectible accounts. Our estimate of the amount and timing of sales returns and uncollectible accounts is based primarily on historical transaction experience.

We have not made any material changes in the accounting methodology we use to measure the estimated liability for sales returns and exchanges or doubtful accounts during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to establish the liability for sales returns and exchanges and doubtful accounts. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.

On January 1, 2020, we adopted Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures. The ASU replaced the incurred loss impairment methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of the standard did not have a significant impact on our financial statements or our critical accounting policies.

Income Taxes. Accounting for income taxes requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities.

We recognize deferred tax assets in our Consolidated Balance Sheets, and these deferred tax assets typically represent items deducted currently from operating income in the financial statements that will be deducted in future periods in tax returns. A valuation allowance is recorded against certain deferred tax assets to reduce the consolidated deferred tax asset to an amount that will, more likely than not, be realized in future periods. At December 31, 2019 the valuation allowance of $30.0 million was primarily related to certain tax attributes and various foreign jurisdictions. The valuation allowance is based, in part, on our estimate of future taxable income, the expected utilization of foreign and state tax loss carryforwards, and credits and the expiration dates of such tax loss carryforwards.

We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At December 31, 2019, our estimated gross unrecognized tax benefits were $104.5 million of which $96.8 million, if recognized, would favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates.

We have been involved in a dispute with SKAT regarding the Danish Tax Matter for tax years 2001 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process.


42

During 2018, we negotiated a settlement with SKAT for the tax years 2001 through 2011 (the “Settlement Years”). In addition, we have entered into the APA Program for the tax years 2012 through 2022 in which the IRS, on our behalf, will negotiate directly with SKAT the royalty to be paid by the U.S. subsidiary to the Danish Subsidiary. We maintain an uncertain income tax liability for both the Settlement Years and for the tax years 2012 through 2019 that are included in the APA Program. If we are required to further increase the uncertain tax liability for either or both periods based on a change in facts and circumstances, it could have a material impact on our reported earnings. Further, if the IRS and SKAT are unable to reach a mutually acceptable agreement with respect to the tax years included in the APA Program, we could be required to make a significant payment to SKAT for Danish tax related to such years, which could have a material adverse effect on our results of operations and liquidity.    

Our liability for the Danish Tax Matter uncertain tax position is derived using a cumulative probability analysis with possible outcomes based on an evaluation of the facts and circumstances and applying the technical requirements applicable to U.S., Danish, and the international transfer pricing standards, taking into account both the U.S. and Danish income tax implications of such outcomes. For a description of these matters and additional information please refer to Note 15, "Income Taxes," to the accompanying Consolidated Financial Statements.

Goodwill and Indefinite-Lived Intangible Assets. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually as of October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred.

We test goodwill for impairment by comparing the book values to the fair value at the reporting unit level. Our reporting units are our North America and International segments. We test individual indefinite-lived intangible assets by comparing the book values of each asset to the estimated fair value. If the fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, further analysis is performed to measure the impairment loss.

The fair value of each reporting unit is determined by using an income approach, which uses a discounted cash flow approach and a market approach. The fair value of each indefinite-lived intangible asset is determined using an income approach. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on each reporting unit. The significant estimates and assumptions include projected sales growth, gross profit rates, selling, general and administrative rates, working capital requirements, capital expenditures and terminal growth rates, discount rates per reporting unit, and the selection of peer company multiples. We determine discount rates separately for each reporting unit using the weighted average cost of capital, which includes a calculation of cost of equity, which is developed using the capital asset pricing model and comparable company betas (a measure of systemic risk), and cost of debt. We also use comparable market earnings multiple data and our market capitalization to corroborate our reporting unit valuations.

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

The most recent annual impairment tests performed as of October 1, 2019 indicated that the fair values of each of our reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values. Despite that excess, however, impairment charges could still be required if a divestiture decision were made or other significant economic event were made or occurred with respect to one of our reporting units. Subsequent to our October 1, 2019 annual impairment test, no indications of impairment were identified.

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill and indefinite-lived intangible assets. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.

Impact of Recently Issued Accounting Pronouncements
 
Refer to Note 2, "Recently Issued Accounting Pronouncements," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.


43

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Foreign Currency Exposures

We manage a portion of our exposure in foreign currency transactions through the use of foreign exchange forward contracts. Refer to Note 1(f), "Derivative Financial Instruments," to the accompanying Consolidated Financial Statements for a summary of our foreign exchange forward contracts as of December 31, 2019.

As a result of our global operations, our earnings are exposed to changes in foreign currency exchange rates. Many of our foreign businesses operate in functional currencies other than the U.S. dollar. As the U.S. dollar strengthens relative to the Euro or other foreign currencies where we have operations, there will be a negative impact on our operating results upon translation of those foreign operating results into the U.S. dollar. Foreign currency exchange rate changes negatively impacted our adjusted EBITDA, which is a non-GAAP financial measure, by approximately 1.1% in the year ended December 31, 2019. We do not hedge the translation of foreign currency operating results into the U.S. dollar.

We hedge a portion of our currency exchange exposure relating to foreign currency transactions with foreign exchange forward contracts. A sensitivity analysis indicates the potential loss in fair value on foreign exchange forward contracts outstanding at December 31, 2019, resulting from a hypothetical 10.0% adverse change in all foreign currency exchange rates against the U.S. dollar, is approximately $9.1 million. Such losses would be largely offset by gains from the revaluation or settlement of the underlying assets and liabilities that are being protected by the foreign exchange forward contracts.

In the fourth quarter of 2018, we converted $75 million of our 5.50% fixed-rate USD-denominated 2026 Senior Notes, including the semi-annual interest payments thereunder, to fixed-rate DKK denominated debt at an average rate of 2.131%. During January 2019, we converted an additional $25 million of our 5.50% fixed-rate USD-denominated 2026 Senior Notes, including the semi-annual interest payments thereunder, to fixed-rate DKK denominated debt at an average rate of 2.316%. We have designated these cross currency swap agreements as qualifying hedging instruments and are accounting for these as net investment hedges.

Effective June 30, 2018, we determined that the economy in Argentina is highly inflationary. Beginning July 1, 2018, the U.S. Dollar is the functional currency for our subsidiaries in Argentina. Remeasurement adjustments in a highly inflationary economy and other transactional gains and losses are reflected in net earnings and were not material for the year ended December 31, 2019. These subsidiaries are included in loss from discontinued operations, net of tax, on our Consolidated Statements of Income and are not material as of December 31, 2019.

Interest Rate Risk
 
On December 31, 2019, we had variable-rate debt of $432.9 million. Holding other variables constant, including levels of indebtedness, a one hundred basis point increase in interest rates on our variable-rate debt would cause an estimated reduction in income before income taxes of $4.3 million. We continue to evaluate the interest rate environment and look for opportunities to improve our debt structure and minimize our interest rate risk and expense.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 

44



Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Tempur Sealy International, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Tempur Sealy International, Inc. and Subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated February 21, 2020, expressed an unqualified opinion thereon.

Adoption of Accounting Standards

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue in 2018 and changed its method of accounting for leases in 2019.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.


45

 
Danish Tax Matter Uncertain Tax Position
 
 
Description of the Matter
As described in Note 15 to the consolidated financial statements, the Company’s liability for the Danish Tax Matter uncertain tax position, including interest and penalties, was approximately $166.7 million as of December 31, 2019. The Company’s liability for the Danish Tax Matter uncertain tax position is derived using the cumulative probability analysis with possible outcomes based on an evaluation of the facts and circumstances and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standards, taking into account both the U.S. and Danish income tax implications of such outcomes.

Auditing the measurement of the liability for the Danish Tax Matter uncertain tax position was complex and highly judgmental due to the significant judgment to measure the largest amount of benefit that is more likely than not to be realized upon ultimate settlement.
 
 
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to measure the liability for the Danish Tax Matter uncertain tax position. For example, we tested management’s review of inputs and calculations of the liability for the Danish Tax Matter uncertain tax position.

To test the Company’s measurement of the liability for the Danish Tax Matter uncertain tax position, we involved our tax professionals to evaluate the pricing conclusions reached by the Company. For example, we compared the transfer pricing methodology utilized by management to alternative methodologies. We also reviewed the Company’s correspondence with the relevant tax authorities and any third-party professional and legal advice obtained by the Company. In addition, we used our knowledge of international, domestic and local income tax laws, as well as settlement activity from the relevant income tax authorities, to evaluate the Company’s measurement of the liability for the Danish Tax Matter uncertain tax position.

/s/ Ernst & Young LLP        
We have served as the Company's auditor since 2002.
Louisville, Kentucky
February 21, 2020


46

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per common share amounts)
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net sales
$
3,106.0

 
$
2,702.9

 
$
2,700.6

Cost of sales
1,763.8

 
1,582.2

 
1,579.6

Gross profit
1,342.2

 
1,120.7

 
1,121.0

Selling and marketing expenses
666.3

 
587.8

 
586.1

General, administrative and other expenses
315.3

 
273.0

 
261.4

Customer-related charges
29.8

 
21.2

 
14.4

Equity income in earnings of unconsolidated affiliates
(15.9
)
 
(17.6
)
 
(15.6
)
Royalty income, net of royalty expense
—

 
—

 
(20.8
)
Operating income
346.7

 
256.3

 
295.5

 
 
 
 
 
 
Other expense, net:
 
 
 
 
 
Interest expense, net
85.7

 
92.3

 
87.3

Other income, net
(4.5
)
 
(1.0
)
 
(7.2
)
Total other expense, net
81.2

 
91.3

 
80.1

 
 
 
 
 
 
Income from continuing operations before income taxes
265.5

 
165.0

 
215.4

Income tax provision
(74.7
)
 
(49.6
)
 
(43.8
)
Income from continuing operations
190.8

 
115.4

 
171.6

Loss from discontinued operations, net of tax
(1.4
)
 
(17.8
)
 
(30.9
)
Net income before non-controlling interests
189.4

 
97.6

 
140.7

Less: Net loss attributable to non-controlling interests
(0.1
)
 
(2.9
)
 
(10.7
)
Net income attributable to Tempur Sealy International, Inc.
$
189.5

 
$
100.5

 
$
151.4

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
Earnings per share for continuing operations
$
3.50

 
$
2.17

 
$
3.37

Loss per share for discontinued operations
(0.02
)
 
(0.32
)
 
(0.57
)
Earnings per share
$
3.48

 
$
1.85

 
$
2.80

 
 
 
 
 
 
Diluted
 
 
 
 
 
Earnings per share for continuing operations
$
3.45

 
$
2.15

 
$
3.33

Loss per share for discontinued operations
(0.03
)
 
(0.33
)
 
(0.56
)
Earnings per share
$
3.42

 
$
1.82

 
$
2.77

 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
Basic
54.5

 
54.4

 
54.0

Diluted
55.4

 
55.1

 
54.7


The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
 



47

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net income before non-controlling interests
$
189.4

 
$
97.6

 
$
140.7

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments
9.5

 
(18.9
)
 
29.1

Net change in pension benefits, net of tax
(1.9
)
 
(0.9
)
 
(0.5
)
Unrealized loss on cash flow hedging derivatives, net of tax
—

 
—

 
(0.6
)
Other comprehensive income (loss), net of tax
7.6

 
(19.8
)
 
28.0

Comprehensive income
197.0

 
77.8

 
168.7

Less: Comprehensive loss attributable to non-controlling interests
(0.1
)
 
(2.9
)
 
(10.7
)
Comprehensive income attributable to Tempur Sealy International, Inc.
$
197.1

 
$
80.7

 
$
179.4


The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.



48

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS
(in millions)
 
December 31, 2019

December 31, 2018
ASSETS





 





Current Assets:





Cash and cash equivalents
$
64.9


$
45.8

Accounts receivable, net
372.0


321.5

Inventories
260.5


222.3

Prepaid expenses and other current assets
202.8


215.8

Total Current Assets
900.2


805.4

Property, plant and equipment, net
435.8


420.8

Goodwill
732.3


723.0

Other intangible assets, net
641.4


649.3

Operating lease right-of-use assets
245.4

 
—

Deferred income taxes
14.1


22.6

Other non-current assets
92.6


94.3

Total Assets
$
3,061.8


$
2,715.4

 



LIABILITIES AND STOCKHOLDERS’ EQUITY



 



Current Liabilities:



Accounts payable
$
251.7


$
253.0

Accrued expenses and other current liabilities
473.2


359.2

Income taxes payable
11.0


9.7

Current portion of long-term debt
37.4


47.1

Total Current Liabilities
773.3


669.0

Long-term debt, net
1,502.6


1,599.1

Long-term operating lease obligations
205.4

 
—

Deferred income taxes
102.1


117.5

Other non-current liabilities
118.0


112.3

Total Liabilities
2,701.4


2,497.9

 



Stockholders' Equity:



Common stock, $0.01 par value, 300.0 million shares authorized; 99.2 million shares issued as of December 31, 2019 and 2018
1.0


1.0

Additional paid in capital
575.7


532.1

Retained earnings
1,703.3


1,513.8

Accumulated other comprehensive loss
(87.7
)

(95.3
)
Treasury stock at cost; 45.4 million and 44.7 million shares as of December 31, 2019 and 2018, respectively
(1,832.8
)

(1,737.0
)
Total stockholders' equity, net of non-controlling interest in subsidiaries
359.5


214.6

Non-controlling interest in subsidiaries
0.9


2.9

Total Stockholders' Equity
360.4


217.5

Total Liabilities and Stockholders' Equity
$
3,061.8


$
2,715.4


The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

49

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
 
 
 
Tempur Sealy International, Inc. Stockholders' Equity
 
 
 
 
 
Redeemable
Non-controlling Interest
 
Common Stock
 
Treasury Stock
 
 
 
 
 
Accumulated Other Comprehensive (Loss) Income
 
Non-controlling Interest in Subsidiaries
 
Total Stockholders' Equity (Deficit)
 
 
Shares Issued
 
At Par
 
Shares Issued
 
At Cost
 
Additional Paid in Capital
 
Retained Earnings
 
 
 
Balance, December 31, 2016
$
7.6

 
99.2

 
$
1.0

 
44.8

 
$
(1,700.0
)
 
$
492.8

 
$
1,264.8

 
$
(103.5
)
 
$
3.0

 
$
(41.9
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
151.4

 
 
 
 
 
151.4

Net loss attributable to non-controlling interests
(5.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5.3
)
 
(5.3
)
Acquisition of non-controlling interest in subsidiary
 
 
 
 
 
 
 
 
 
 
(3.2
)
 
 
 
 
 
2.3

 
(0.9
)
Adjustment to pension liability, net of tax of $(0.3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.5
)
 
 
 
(0.5
)
Derivative instruments accounted for as hedges, net of tax of $(0.1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.6
)
 
 
 
(0.6
)
Foreign currency adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29.1

 
 
 
29.1

Exercise of stock options
 
 
 
 
 
 
(0.3
)
 
4.5

 
8.3

 
 
 
 
 
 
 
12.8

Issuances of PRSUs, RSUs, and DSUs
 
 
 
 
 
 
(0.2
)
 
3.2

 
(3.2
)
 
 
 
 
 
 
 
—

Treasury stock repurchased
 
 
 
 
 
 
0.6

 
(40.1
)
 
 
 
 
 
 
 
 
 
(40.1
)
Treasury stock repurchased - PRSU/RSU/DSU releases
 
 
 
 
 
 
0.1

 
(4.8
)
 
 
 
 
 
 
 
 
 
(4.8
)
Amortization of unearned stock-based compensation
 
 
 
 
 
 
 
 
 
 
13.3

 
 
 
 
 
 
 
13.3

Balance, December 31, 2017
$
2.2

 
99.2

 
$
1.0

 
45.0

 
$
(1,737.2
)
 
$
508.0

 
$
1,416.2

 
$
(75.5
)
 
$
—

 
$
112.5

Adoption of accounting standards effective January 1, 2018
 
 
 
 
 
 
 
 
 
 
 
 
(2.9
)
 
$
(0.5
)
 
 
 
(3.4
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
100.5

 
 
 
 
 
100.5

Net loss attributable to non-controlling interests
(2.7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.2
)
 
(0.2
)
Acquisition of non-controlling interest in subsidiary
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
3.1

 
3.1

Adjustment to pension liability, net of tax of $(0.1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.4
)
 
 
 
(0.4
)
Foreign currency adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(18.9
)
 
 
 
(18.9
)
Exercise of stock options
 
 
 
 
 
 
(0.2
)
 
2.1

 
2.5

 
 
 
 
 
 
 
4.6

Issuances of PRSUs, RSUs, and DSUs
 
 
 
 
 
 
(0.2
)
 
2.7

 
(2.7
)
 
 
 
 
 
 
 
—

Treasury stock repurchased - PRSU/RSU/DSU releases
 
 
 
 
 
 
0.1

 
(4.6
)
 
 
 
 
 
 
 
 
 
(4.6
)
Amortization of unearned stock-based compensation
 
 
 
 
 
 
 
 
 
 
24.8

 
 
 
 
 
 
 
24.8

Acquisition of non-controlling interest
0.5

 
 
 
 
 
 
 
 
 
(0.5
)
 
 
 
 
 
 
 
(0.5
)
Balance, December 31, 2018
$
—

 
99.2

 
$
1.0

 
44.7

 
$
(1,737.0
)
 
$
532.1

 
$
1,513.8

 
$
(95.3
)
 
$
2.9

 
$
217.5

Net income
 
 
 
 
 
 
 
 
 
 
 
 
189.5

 
 
 
 
 
189.5

Net loss attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.1
)
 
(0.1
)
Repurchase of interest in subsidiary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1.9
)
 
(1.9
)
Adjustment to pension liability, net of tax of $(0.7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1.9
)
 
 
 
(1.9
)
Foreign currency adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9.5

 
 
 
9.5

Exercise of stock options
 
 
 
 
 
 
(0.3
)
 
4.8

 
13.0

 
 
 
 
 
 
 
17.8

Issuances of PRSUs, RSUs, and DSUs
 
 
 
 
 
 
(0.3
)
 
3.7

 
(3.7
)
 
 
 
 
 
 
 
—

Treasury stock repurchased
 
 
 
 
 
 
1.3

 
(102.3
)
 
 
 
 
 
 
 
 
 
(102.3
)
Treasury stock repurchased - PRSU/RSU/DSU releases
 
 
 
 
 
 
0.1

 
(3.4
)
 
 
 
 
 
 
 
 
 
(3.4
)
Amortization of unearned stock-based compensation
 
 
 
 
 
 
 
 
 
 
26.8

 
 
 
 
 
 
 
26.8

Charitable stock donation
 
 
 
 
 
 
(0.1
)
 
1.4

 
7.5

 
 
 
 
 
 
 
8.9

Balance, December 31, 2019
$
—

 
99.2

 
$
1.0

 
45.4

 
$
(1,832.8
)
 
$
575.7

 
$
1,703.3

 
$
(87.7
)
 
$
0.9

 
$
360.4


The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

50

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Year Ended December 31,
 
2019

2018

2017
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:





Net income before non-controlling interests
$
189.4


$
97.6


$
140.7

Loss from discontinued operations, net of tax
1.4


17.8


30.9

Adjustments to reconcile net income to net cash provided by operating activities:








Depreciation and amortization
89.7


87.1


80.7

Amortization of stock-based compensation
26.8


24.8


13.3

Amortization of deferred financing costs
2.4


2.3


2.2

Bad debt expense
29.3


31.3


9.8

Charitable stock donation
8.9

 
—

 
—

Deferred income taxes
(7.1
)

6.0


(61.1
)
Dividends received from unconsolidated affiliates
13.4


14.8


11.3

Equity income in earnings of unconsolidated affiliates
(15.9
)

(17.6
)

(15.6
)
Loss on sale of assets
1.0


3.3


2.2

Foreign currency adjustments and other
(5.2
)
 
(2.1
)
 
(2.9
)
Changes in operating assets and liabilities, net of effect of business acquisitions:








Accounts receivable
(76.0
)

(46.3
)

21.0

Inventories
(28.2
)

(44.6
)

16.3

Prepaid expenses and other assets
11.3


(14.4
)

(15.2
)
Operating leases, net
8.6

 
—

 
—

Accounts payable
(4.8
)

28.7


3.8

Accrued expenses and other liabilities
67.3


43.2


(4.9
)
Income taxes, net
2.5


(24.4
)

24.0

Net cash provided by operating activities from continuing operations
314.8


207.5


256.5

 








CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:








Purchases of property, plant and equipment
(88.2
)

(73.6
)

(66.6
)
Acquisitions, net of cash acquired
(17.1
)
 
—

 
—

Other
15.1


2.4


0.9

 Net cash used in investing activities from continuing operations
(90.2
)

(71.2
)

(65.7
)
 








CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:








Proceeds from borrowings under long-term debt obligations
1,242.8


1,094.9


1,332.9

Repayments of borrowings under long-term debt obligations
(1,347.1
)

(1,195.8
)

(1,471.5
)
Proceeds from exercise of stock options
17.8


4.6


12.8

Treasury stock repurchased
(105.7
)

(4.6
)

(44.9
)
Payment of deferred financing costs
(3.2
)

—


(0.5
)
Repayments of finance lease obligations and other
(7.8
)

(6.1
)

(4.0
)
Net cash used in financing activities from continuing operations
(203.2
)

(107.0
)

(175.2
)
 








Net cash provided by continuing operations
21.4


29.3


15.6

 








CASH USED IN DISCONTINUED OPERATIONS








Operating cash flows
(2.0
)

(24.4
)

(33.6
)
Investing cash flows
—


2.1


3.6

Financing cash flows
—


—


—

Net cash used in discontinued operations
(2.0
)

(22.3
)

(30.0
)
 








NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(0.3
)

(3.1
)

(9.4
)
Increase (decrease) in cash and cash equivalents
19.1


3.9


(23.8
)
CASH AND CASH EQUIVALENTS, beginning of period
45.8


41.9


65.7

CASH AND CASH EQUIVALENTS, end of period
64.9


45.8


41.9

LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS
—

 
—

 
0.8

CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
$
64.9


$
45.8


$
41.1

 
 
 
 
 
 
Supplemental cash flow information:








Cash paid during the period for:








Interest
$
89.0


$
91.8


$
86.6

Income taxes, net of refunds
$
73.8


$
32.5


$
79.8

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.


51

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies
 
(a) Basis of Presentation and Description of Business. Tempur Sealy International, Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term “Tempur Sealy International” refers to Tempur Sealy International, Inc. only, and the term “Company” refers to Tempur Sealy International, Inc. and its consolidated subsidiaries.

The Company develops, manufactures, markets and sells bedding products, which include mattresses, foundations and adjustable bases, and other products, which include pillows and other accessories. The Company also derives income from royalties by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The Company sells its products through two sales channels: Wholesale and Direct.

(b) Basis of Consolidation. The accompanying financial statements include the accounts of Tempur Sealy International and its controlled subsidiaries. Intercompany balances and transactions have been eliminated.

The Company's Consolidated Financial Statements include the results of Comfort Revolution, LLC ("Comfort Revolution"). Prior to July 11, 2018, Comfort Revolution constituted a variable interest entity for which the Company was considered to be the primary beneficiary due to the Company's disproportionate share of the economic risk associated with its equity contribution, debt financing and other factors. On July 11, 2018, the Company acquired the remaining 55% equity interest in Comfort Revolution, which did not result in a material impact to the Company's Consolidated Financial Statements.

The Company has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions. The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have effective control, and consolidation is not otherwise required. The Company’s equity in the net income and losses of these investments is reported in equity income in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income. The Company’s Asia-Pacific joint ventures are more fully described in Note 7, "Unconsolidated Affiliate Companies."

(c) Use of Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s results are affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of raw materials, can have a significant effect on operations.

(d) Adoption of New Accounting Standards.

Revenue Recognition. On January 1, 2018, the Company adopted ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" using the modified retrospective method. Under the modified retrospective method, the Company recognized the cumulative effect of initially applying the new revenue standard as a decrease to the opening balance of retained earnings. Topic 606 required additional qualitative and quantitative disclosures. Other presentation and disclosure changes include the classification of royalty income to net sales and changes in the balance sheet classification and measurement for accrued sales returns. For additional information, see Note 4, "Revenue Recognition" of the Consolidated Financial Statements.

Pensions. In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", which is accounting guidance that changed how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Consolidated Statements of Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Consolidated Statements of Income as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost are presented separately outside of the operating income caption. The Company adopted ASU No. 2017-07 as of January 1, 2018 and applied the accounting guidance retrospectively. Adoption of this guidance resulted in a reclassification of pension and other postretirement plan non-service income and remeasurement adjustments, net, from within operating income to non-operating income. The adoption of this guidance was not material to the Consolidated Statement of Income for any periods presented.


52
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accumulated Other Comprehensive Income.    In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", which allows entities to reclassify tax effects stranded in accumulated other comprehensive loss ("AOCL") as a result of the Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform Act") to retained earnings. The Company early adopted ASU No. 2018-02 on March 31, 2018. The impact of adoption was not material to the Company's Consolidated Financial Statements.

Derivatives and Hedging. In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which simplifies hedge accounting by better aligning a company's financial reporting for hedging relationships with its risk management activities. This guidance expands an entity’s ability to hedge non-financial and financial risk components and reduces complexity in fair value hedges of interest rate risk; eliminates the requirement to separately measure and report hedge ineffectiveness and present the entire change in the fair value of a hedging instrument in the same income statement line as the hedged item; eases certain documentation and assessment requirements; and modifies the accounting for components excluded from the assessment of hedge effectiveness. The Company early adopted this ASU in the third quarter of 2018. There were no adjustments to the Company's Consolidated Financial Statements as a result of the adoption.

Leases. Effective January 1, 2019, the Company adopted Accounting Standards Codification 842, Leases ("ASC 842"). ASC 842 consists of a comprehensive lease accounting standard requiring most leases to be recognized on the Consolidated Balance Sheet and significant new disclosures. The Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed it to carry forward the historical lease classification.

Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded within the Consolidated Balance Sheet and are expensed on a straight-line basis over the lease term within the Consolidated Statement of Income. The lease term is determined by assuming the exercise of renewal options that are reasonably certain. As most leases do not provide an implicit interest rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. When contracts contain lease and non-lease components, the Company generally accounts for both components as a single lease component.

The adoption of ASC 842 resulted in the recognition of right-of-use assets, net of prepaid lease payments and lease incentives, of $197.2 million and operating lease liabilities of $203.3 million as of January 1, 2019. Results for reporting periods beginning prior to January 1, 2019 continue to be reported in accordance with our historical accounting treatment. The adoption of ASC 842 did not have a material impact on the Company's results of operations, cash flows or debt covenants. For additional information, see Note 9, "Leases" of the Consolidated Financial Statements.

(e) Foreign Currency. Assets and liabilities of non-U.S. subsidiaries, whose functional currency is the local currency, are translated into U.S. dollars at period-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the period. The adjustments resulting from translating the financial statements of foreign subsidiaries are included in accumulated other comprehensive loss (“AOCL”), a component of stockholders’ equity, and included in net earnings only upon sale or liquidation of the underlying foreign subsidiary or affiliated company. Foreign currency transaction gains and losses are recognized in net earnings based on differences between foreign exchange rates on the transaction date and on the settlement date. These amounts are not considered material to the Consolidated Financial Statements.

(f) Derivative Financial Instruments. Derivative financial instruments are used in the normal course of business to manage interest rate and foreign currency exchange risks. The financial instruments used by the Company are straight-forward, non-leveraged instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit ratings of these institutions. For all transactions designated as hedges, the hedging relationships are formally documented at the inception and on an ongoing basis in offsetting changes in cash flows of the hedged transaction.


53
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company records derivative financial instruments on the Consolidated Balance Sheets as either an asset or liability measured at its fair value. Changes in a derivative's fair value (i.e. unrealized gains or losses) are recorded each period in earnings unless the derivative qualifies as a hedge on future cash flows or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item, or deferred and recorded in the stockholders’ equity section of the Consolidated Balance Sheets as a component of AOCL and subsequently recognized in the Consolidated Statements of Comprehensive Income when the hedged item affects net income. The ineffective portion of the change in fair value of a hedge is recognized in income immediately.

For derivative financial instruments that are designated as a hedge, unrealized gains and losses related to the effective portion are either recognized in income immediately to offset the realized gain or loss on the hedged item, or are deferred and reported as a component of AOCL in stockholders' equity and subsequently recognized in net income when the hedged item affects net income. The change in fair value of the ineffective portion of a derivative financial instrument is recognized in net income immediately. For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded to net income immediately. The effectiveness of the cash flow hedge contracts, including time value, is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as other timing and probability criteria. For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded in net income immediately.

The forward exchange contract assets and liabilities as of December 31, 2019 and 2018 were not material in any period presented.

(g) Cash and Cash Equivalents. Cash and cash equivalents consist of all highly liquid investments with initial maturities of three months or less. The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments.

(h) Inventories. Inventories are stated at the lower of cost and net realizable value, determined by the first-in, first-out method and consist of the following:
 
December 31,
(in millions)
2019
 
2018
Finished goods
$
157.4

 
$
148.9

Work-in-process
10.8

 
11.8

Raw materials and supplies
92.3

 
61.6

 
$
260.5

 
$
222.3



     (i) Property, Plant and Equipment. Property, plant and equipment are carried at cost at acquisition date and are depreciated using the straight-line method over their estimated useful lives as follows:
 
Estimated
Useful Lives
(in years)
Buildings
25-30
Computer equipment and software
3-7
Leasehold improvements
4-7
Machinery and equipment
3-7
Office furniture and fixtures
5-7

 
The Company records depreciation and amortization in cost of sales for long-lived assets used in the manufacturing process, and within each line item of operating expenses for all other long-lived assets. Leasehold improvements are amortized over the shorter of the life of the lease or seven years. Assets under finance leases are included within property, plant and equipment and represent non-cash investing activities.


54
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Property, plant and equipment, net consisted of the following:
 
December 31,
(in millions)
2019
 
2018
Machinery and equipment
$
350.7

 
$
319.3

Land and buildings
317.8

 
328.5

Computer equipment and software
155.2

 
142.2

Furniture and fixtures
52.5

 
50.4

Construction in progress
65.0

 
52.4

Total property, plant, and equipment
941.2

 
892.8

Accumulated depreciation
(505.4
)
 
(472.0
)
Total property, plant and equipment, net
$
435.8

 
$
420.8



Depreciation expense, which includes depreciation expense for finance and capital lease assets, for the Company was $73.8 million, $71.8 million and $64.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
 
(j) Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. If estimated future undiscounted net cash flows are less than the carrying amount of the asset or group of assets, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset to its then fair value. Fair value generally is determined from estimated discounted future net cash flows (for assets held for use) or net realizable value (for assets held for sale). The Company did not identify any impairments for the years ended December 31, 2019, 2018 and 2017.
 
(k) Goodwill and Other Intangible Assets. Intangible assets with finite useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate impairment may have occurred. The Company performs an annual impairment test on goodwill and indefinite-lived intangible assets on October 1 of each year and whenever events or circumstances make it more likely than not that impairment may have occurred. In conducting the impairment test for the North America and International reporting units, the fair value of each of the Company's reporting units is compared to its respective carrying amount including goodwill. If the fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, further analysis is performed to assess impairment. The Company’s determination of fair value of the reporting units is based on a discounted cash flow approach, with an appropriate risk-adjusted discount rate, and a market approach. Any identified impairment would result in an adjustment to the Company’s results of operations.
    
The Company also tests its indefinite-lived intangible assets, principally the Tempur and Sealy trade names. The Company tested both trade names for impairment using a “relief-from-royalty” method. Significant assumptions inherent in the methodologies are employed and include such estimates as royalty and discount rates.

The Company performed its annual impairment test of goodwill and indefinite-lived intangible assets in 2019, 2018 and 2017, none of which resulted in the recognition of impairment charges. The most recent annual impairment tests performed as of October 1, 2019, indicated that the fair values of each of the Company's reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values. For further information on goodwill and other intangible assets, refer to Note 6, “Goodwill and Other Intangible Assets.”


55
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(l) Accrued Sales Returns. The Company allows product returns through certain sales channels and on certain products. Estimated sales returns are provided at the time of sale based on historical sales channel return rates. Estimated future obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized. The Company considers the impact of recoverable salvage value on sales returns by segment in determining its estimate of future sales returns. Effective January 1, 2018 with the Company's adoption of Topic 606, the Company recognizes a return asset for the right to recover the goods returned by the customer. The right of return asset is recognized on a gross basis outside of the accrued sales returns and is not material to the Company's Consolidated Balance Sheets.

The Company had the following activity for accrued sales returns from December 31, 2017 to December 31, 2019:
 (in millions)
 
Balance as of December 31, 2017
$
30.0

Reclassification and remeasurement of sales return asset under Topic 606
1.7

Balance as of January 1, 2018
31.7

Amounts accrued
83.8

Returns charged to accrual
(81.2
)
Balance as of December 31, 2018
34.3

Amounts accrued
112.4

Returns charged to accrual
(107.4
)
Balance as of December 31, 2019
$
39.3



As of December 31, 2019 and 2018, $26.2 million and $22.0 million of accrued sales returns is included as a component of accrued expenses and other current liabilities and $13.1 million and $12.3 million of accrued sales returns is included in other non-current liabilities on the Company’s accompanying Consolidated Balance Sheets, respectively.
 
(m) Warranties. The Company provides warranties on certain products, which vary by segment, product and brand. Estimates of warranty expenses are based primarily on historical claims experience and product testing. Estimated future obligations related to these products are charged to cost of sales in the period in which the related revenue is recognized. The Company considers the impact of recoverable salvage value on warranty costs in determining its estimate of future warranty obligations.

The Company provides warranties on mattresses with varying warranty terms. Tempur-Pedic mattresses sold in the North America segment and all Sealy mattresses have warranty terms ranging from 10 to 25 years, generally non-prorated for the first 10 to 15 years and then prorated for the balance of the warranty term. Tempur-Pedic mattresses sold in the International segment have warranty terms ranging from 5 to 15 years, non-prorated for the first 5 years and then prorated on a straight-line basis for the last 10 years of the warranty term. Tempur-Pedic pillows have a warranty term of 3 years, non-prorated.

The Company had the following activity for its accrued warranty expense from December 31, 2017 to December 31, 2019:
 (in millions)
 
Balance as of December 31, 2017
$
36.7

Remeasurement of obligations under Topic 606
2.8

Balance as of January 1, 2018
39.5

Amounts accrued
21.9

Warranties charged to accrual
(25.0
)
Balance as of December 31, 2018
36.4

Amounts accrued
29.4

Warranties charged to accrual
(24.2
)
Balance as of December 31, 2019
$
41.6



As of December 31, 2019 and 2018, $19.4 million and $14.9 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $22.2 million and $21.5 million of accrued warranty expense is included in other non-current liabilities on the Company’s accompanying Consolidated Balance Sheets, respectively.


56
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(n) Allowance for Doubtful Accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company regularly reviews the adequacy of its allowance for doubtful accounts. The Company determines the allowance for doubtful accounts based on historical write-off experience and current economic conditions and also considers factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a customer receivable is reasonably assured. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts included in accounts receivable, net in the accompanying Consolidated Balance Sheets was $71.9 million and $47.6 million as of December 31, 2019 and 2018, respectively.

 (o) Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are also recognized for the estimated future effects of tax loss carry forwards. The effect of changes in tax rates on deferred taxes is recognized in the period in which the enactment dates change. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized. The Company accounts for uncertain foreign and domestic tax positions utilizing a proscribed recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

(p) Cost of Sales. Costs associated with net sales are recorded in cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring, and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in these processes. Cost of sales also includes shipping and handling costs associated with the delivery of goods to customers and costs associated with internal transfers between plant locations. Amounts included in cost of sales for shipping and handling were $192.5 million, $169.1 million and $155.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. Additionally, cost of sales for 2019 and 2018 include royalties that the Company pays to other entities for the use of their names on products produced by the Company. Prior to the adoption of Topic 606 as of January 1, 2018, royalty income, net of royalty expense was an operating expense line item presented separately on the Company's Consolidated Statements of Income. For additional information, please refer to Note 4, “Revenue Recognition.” Royalty expense is not material to the Company's Consolidated Statements of Income.

(q) Cooperative Advertising, Rebate and Other Promotional Programs. The Company enters into programs with customers to provide funds for advertising and promotions. The Company also enters into volume and other rebate programs with customers. When sales are made to these customers, the Company records liabilities pursuant to these programs. The Company periodically assesses these liabilities based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer or whether the customer will meet the requirements to receive rebate funds. The Company generally negotiates these programs on a customer-by-customer basis. Some of these agreements extend over several years. Significant estimates are required at any point in time with regard to the ultimate reimbursement to be claimed by the customers. Subsequent revisions to the estimates are recorded and charged to earnings in the period in which they are identified. Rebates and cooperative advertising are classified as a reduction of revenue and presented within net sales in the accompanying Consolidated Statements of Income. Certain cooperative advertising expenses are reported as components of selling and marketing expenses in the accompanying Consolidated Statements of Income because the Company receives an identifiable benefit and the fair value of the advertising benefit can be reasonably estimated.

(r) Advertising Costs. The Company expenses advertising costs as incurred except for production costs and advance payments, which are deferred and expensed when advertisements run for the first time. Direct response advance payments are deferred and amortized over the life of the program. Advertising costs are included in selling and marketing expenses in the accompanying Consolidated Statements of Income. Advertising costs charged to expense were $280.5 million, $259.3 million and $283.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Advertising costs include expenditures for shared advertising costs that the Company reimburses to customers under its integrated and cooperative advertising programs. Cooperative advertising costs paid to customers are recorded as a component of selling and marketing expenses within the Consolidated Statements of Income to the extent the fair value of the distinct good or service can reasonably be estimated. The Company periodically assesses the liabilities recorded for cooperative advertising based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer. Advertising costs deferred and included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets were $3.6 million and $8.5 million as of December 31, 2019 and 2018, respectively.


57
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(s) Research and Development Expenses. Research and development expenses for new products are expensed as they are incurred and are included in general, administrative and other expenses in the accompanying Consolidated Statements of Income. Research and development costs charged to expense were $23.0 million, $21.9 million and $21.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.

(t) Stock-based Compensation. The Company accounts for stock-based payment transactions in which the Company receives employee services in exchange for equity instruments of the Company. Stock-based compensation cost for restricted stock units (“RSUs”), performance restricted stock units (“PRSUs”) and deferred stock units (“DSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair value as calculated by the Black-Scholes option-pricing model. The Company recognizes stock-based compensation cost as expense for awards other than its PRSUs ratably on a straight-line basis over the requisite service period. The Company recognizes stock-based compensation cost associated with its PRSUs over the requisite service period if it is probable that the performance conditions will be satisfied. The Company recognizes forfeitures of awards as they occur. Further information regarding stock-based compensation can be found in Note 13, “Stock-based Compensation.”

(u) Treasury Stock. Subject to Delaware law, and the limitations in the 2019 Credit Agreement (as defined in Note 8, "Debt") and the Company's other debt agreements, the Board of Directors may authorize share repurchases of the Company’s common stock. Purchases made pursuant to these authorizations may be carried out through open market transactions, negotiated purchases or otherwise, at times and in such amounts as the Company deems appropriate. Shares repurchased under such authorizations are held in treasury for general corporate purposes, including issuances under various employee stock-based award plans. On February 1, 2016, the Board of Directors authorized a share repurchase program pursuant to which the Company was permitted to repurchase shares of Tempur Sealy International's common stock. The Board of Directors authorized an increase in the amount of shares available for repurchase under this program in February 2020. Treasury stock is accounted for under the cost method and reported as a reduction of stockholders’ equity. The authority provided under the share repurchase program may be suspended, limited or terminated at any time without notice. Please refer to Note 11, "Stockholders' Equity", for additional information.

(v) Pension Obligations. The Company has a noncontributory, defined benefit pension plan covering current and former hourly employees at two of its active Sealy plants and ten previously-closed Sealy U.S. facilities. Sealy Canada, Ltd. (a 100.0% owned subsidiary of the Company) also sponsors a noncontributory, defined benefit pension plan covering hourly employees at one of its facilities. Both plans provide retirement and survivorship benefits based on the employees' credited years of service. The Company's funding policy provides for contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date. The benefit obligation is the projected benefit obligation (“PBO”). The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. The measurement of the PBO is based on the Company’s estimates and actuarial valuations. The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates.


(2) Recently Issued Accounting Pronouncements

Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures. The ASU replaces the incurred loss impairment methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
The Company adopted the new credit losses standard effective January 1, 2020 using the modified retrospective approach. The Company recognized a cumulative effect of initially applying the new standard as a decrease to the opening balance of retained earnings, which was not material to the Company's Consolidated Financial Statements.

58
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) Discontinued Operations

The Company sold its operations in the Latin American region in 2018. The operating results from these divested businesses and subsequent adjustments related to ongoing assessments and activities of certain retained liabilities and tax items are reflected within discontinued operations for all periods presented.

Components of amounts reflected in the Consolidated Statements of Income related to discontinued operations are presented in the following table for the years ended December 31.
 
Twelve Months Ended
 
December 31,
 
2019
 
2018
 
2017
Net sales
$
—

 
$
31.1

 
$
53.8

Cost of sales
—

 
23.0

 
34.1

Gross profit
—

 
8.1

 
19.7

Selling and marketing expenses
0.1

 
12.4

 
15.2

General, administrative and other expenses
2.6

 
6.8

 
11.6

Operating loss
(2.7
)
 
(11.1
)
 
(7.1
)
 
 
 
 
 
 
Interest (income) expense, net and other
(1.5
)
 
7.7

 
19.9

Loss from discontinued operations before income taxes
(1.2
)
 
(18.8
)
 
(27.0
)
 
 
 
 
 
 
Income tax provision
(0.2
)
 
—

 
(3.9
)
Loss generated from discontinued operations, net of tax
(1.4
)
 
(18.8
)
 
(30.9
)
Gain on disposal of business
—

 
1.0

 
—

Loss from discontinued operations, net of tax
$
(1.4
)
 
$
(17.8
)
 
$
(30.9
)



59
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) Revenue Recognition

Disaggregation of Revenue
The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the years ended December 31.
 
Twelve Months Ended December 31, 2019
 
Twelve Months Ended December 31, 2018
(in millions)
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Channel
 
 
 
 
 
 
 
 
 
 
 
Wholesale
$
2,273.5

 
$
443.6

 
$
2,717.1

 
$
1,989.1

 
$
463.0

 
$
2,452.1

Direct
259.8

 
129.1

 
388.9

 
147.1

 
103.7

 
250.8

Net sales
$
2,533.3

 
$
572.7

 
$
3,106.0

 
$
2,136.2

 
$
566.7

 
$
2,702.9

 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Product
 
 
 
 
 
 
 
 
 
 
 
Bedding
$
2,379.6

 
$
455.7

 
$
2,835.3

 
$
2,002.1

 
$
453.2

 
$
2,455.3

Other
153.7

 
117.0

 
270.7

 
134.1

 
113.5

 
247.6

Net sales
$
2,533.3

 
$
572.7

 
$
3,106.0

 
$
2,136.2

 
$
566.7

 
$
2,702.9

 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Geographical region
 
 
 
 
 
 
 
 
 
 
 
United States
$
2,312.3

 
$
—

 
$
2,312.3

 
$
1,928.9

 
$
—

 
$
1,928.9

Canada
221.0

 
—

 
221.0

 
207.3

 
—

 
207.3

International
—

 
572.7

 
572.7

 
—

 
566.7

 
566.7

Net sales
$
2,533.3

 
$
572.7

 
$
3,106.0

 
$
2,136.2

 
$
566.7

 
$
2,702.9



The North America and International segments sell product through two channels: Wholesale and Direct. The Wholesale channel includes all product sales to third party retailers, including third party distribution, hospitality and healthcare. The Direct channel includes product sales to company-owned stores, e-commerce and call centers. The North America and International segments classify products into two major categories: Bedding and Other. Bedding products include mattresses, foundations and adjustable foundations. Other products include pillows, mattress covers, sheets, cushions and various other comfort products.

The Wholesale channel also includes income from royalties derived by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The licenses include rights for the licensees to use trademarks as well as current proprietary or patented technology that the Company utilizes. The Company also provides its licensees with product specifications, research and development, statistical services and marketing programs. The Company recognizes royalty income based on the occurrence of sales of Sealy® and Stearns & Foster® branded products by various licensees. Royalty income was $22.6 million, $20.9 million and $20.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

For product sales in each of the Company's channels, the Company recognizes a sale when the obligations under the terms of the contract with the customer are satisfied, which is generally when control of the product has transferred to the customer. Transferring control of each product sold is considered a separate performance obligation. The Company transfers control and recognizes a sale when the customer receives the product. Each unit sold is considered an independent, unbundled performance obligation. The Company does not have any additional performance obligations other than product sales that are material in the context of the contract. The Company also offers assurance type warranties on certain of its products, which is not accounted for as separate performance obligations under the revenue model.


60
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The transaction price is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives, and correspondingly, the revenue that is recognized, varies due to sales incentives and returns the Company offers to its Wholesale and Direct channel customers. Specifically, the Company extends volume discounts, as well as promotional allowances, floor sample discounts, commissions paid to retail associates and slotting fees to its Wholesale channel customers and reflects these amounts as a reduction of sales at the time revenue is recognized based on historical experience. The Company allows returns following a sale, depending on the channel and promotion. The Company reduces revenue and cost of sales for its estimate of the expected returns, which is primarily based on the level of historical sales returns. The Company does not offer extended payment terms beyond one year to customers. As such, the Company does not adjust its consideration for financing arrangements.

In certain jurisdictions, the Company is subject to certain non-income taxes including, but not limited to, sales tax, value added tax, excise tax and other taxes. These taxes are excluded from the transaction price, and therefore, excluded from revenue. The Company has elected to account for shipping and handling activities as a fulfillment cost as permitted by Topic 606. Accordingly, the Company reflects all amounts billed to customers for shipping and handling in revenue and the costs of fulfillment in cost of sales. Amounts included in net sales for shipping and handling were $19.3 million, $13.6 million and $11.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.

(5) Acquisitions and Divestitures

Acquisition of Innovative Mattress Solutions, LLC ("iMS")

On January 11, 2019, iMS filed for bankruptcy and the Company provided debtor-in-possession financing in connection with the iMS Chapter 11 proceedings. On April 1, 2019, the Company acquired substantially all of the net assets of iMS in a transaction valued at approximately $24 million, including assumed liabilities of approximately $11 million as of March 31, 2019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of this regional bedding retailer furthers the Company’s North American retail strategy, which is focused on meeting customer demand through geographic representation and sales expertise.

The Company accounted for this transaction as a business combination. Total cash consideration was $13.2 million, less cash acquired of $5.1 million, resulting in a purchase price of $8.1 million. The final allocation of the purchase price is based on the fair values of the assets acquired and liabilities assumed as of April 1, 2019, which includes the following:
(in millions)
 
Working capital (accounts receivable and inventory, net of accounts payable and accrued liabilities)
$
(1.4
)
Property and equipment
5.0

Goodwill
2.4

Other intangible assets
2.1

Operating lease right-of-use assets
28.5

Long-term operating lease liabilities
(28.5
)
Net purchase price
$
8.1



Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the growth opportunities and synergistic benefits to be realized from the acquisition.  The goodwill is deductible for income tax purposes and will be included within the North American reporting unit for goodwill impairment assessments. 
As a result of the acquisition, the Company acquired trade names and customer database of $2.1 million.
Acquisition of Sherwood Bedding

On January 31, 2020, the Company acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of approximately $40 million. The Company will account for this transaction as a business combination in 2020. The purchase price allocation will principally include working capital, property plant and equipment, and goodwill. Any excess of the purchase price over the fair value of the net assets acquired will be recorded as goodwill, which will be deductible for income tax purposes.
        

61
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(6) Goodwill and Other Intangible Assets

The following summarizes the Company's goodwill by reportable segment:    
(in millions) 
North America
 
International
 
Consolidated
Balance as of December 31, 2017
$
576.6

 
$
156.1

 
$
732.7

Foreign currency translation adjustments and other
(5.5
)
 
(4.2
)
 
(9.7
)
Balance as of December 31, 2018
$
571.1

 
$
151.9

 
$
723.0

Goodwill resulting from acquisitions
2.4

 
5.4

 
7.8

Foreign currency translation adjustments and other
3.1

 
(1.6
)
 
1.5

Balance as of December 31, 2019
$
576.6

 
$
155.7

 
$
732.3



The following table summarizes information relating to the Company’s other intangible assets, net:
($ in millions)
 
 
December 31, 2019
 
December 31, 2018
Useful
Lives
(Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Unamortized indefinite life intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
 
$
559.5

 
$
—

 
$
559.5

 
$
556.5

 
$
—

 
$
556.5

Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contractual distributor relationships
15
 
85.5

 
38.7

 
46.8

 
84.7

 
32.7

 
52.0

Technology and other
4-10
 
91.1

 
68.7

 
22.4

 
90.2

 
61.1

 
29.1

Patents, other trademarks and other trade names
5-20
 
27.9

 
18.6

 
9.3

 
32.0

 
21.0

 
11.0

Customer databases, relationships and reacquired rights
2-5
 
30.9

 
27.5

 
3.4

 
21.3

 
20.6

 
0.7

Total
 
 
$
794.9

 
$
153.5

 
$
641.4

 
$
784.7

 
$
135.4

 
$
649.3


 
Amortization expense relating to intangible assets for the Company was $15.9 million, $15.3 million and $16.0 million for the years ended December 31, 2019, 2018 and 2017, respectively, and is recorded in general, administrative and other expenses in the Company's Consolidated Statements of Income. No impairments of goodwill or other intangible assets have adjusted the gross carrying amount of these assets in any period.

Estimated annual amortization of intangible assets is expected to be as follows for the years ending December 31:
(in millions)
 
2020
$
17.1

2021
15.9

2022
15.1

2023
8.3

2024
6.4

Thereafter
19.1

Total
$
81.9




62
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(7) Unconsolidated Affiliate Companies

The Company has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions. The Company’s ownership interest in these joint ventures is 50.0% and is accounted for under the equity method. The Company’s investment of $22.5 million at December 31, 2019 and 2018, is recorded in other non-current assets in the accompanying Consolidated Balance Sheets. The Company’s share of earnings for the years ended December 31, 2019, 2018 and 2017 respectively, are recorded in equity income in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income.

The tables below present summarized financial information for joint ventures as of and for the years ended December 31:
(in millions)
2019
 
2018
Current assets
$
81.0

 
$
81.8

Non-current assets
15.3

 
18.6

Total liabilities
55.4

 
59.0

Equity
40.9

 
41.4

(in millions)
2019
 
2018
 
2017
Net sales
$
212.6

 
$
220.5

 
$
195.1

Gross profit
147.2

 
147.8

 
129.9

Income from operations
44.6

 
46.6

 
43.3

Net income
32.4

 
33.5

 
31.7


(8) Debt

Debt for the Company consists of the following:
(in millions)
December 31, 2019
 
December 31, 2018
 
 
Debt:
Amount
 
Rate
 
Amount
 
Rate
 
Maturity Date
2019 Credit Agreement:
 
 
 
 
 
 
 
 
 
Term A Facility
$
425.0

 
(1)
 
$
—

 
N/A
 
October 16, 2024
Revolver
—

 
(1)
 
—

 
N/A
 
October 16, 2024
2016 Credit Agreement:
 
 
 
 
 
 
 
 
 
Term A Facility
—

 
N/A
 
525.0

 
(2)
 
 
Revolver
—

 
N/A
 
—

 
(2)
 
 
2026 Senior Notes
600.0

 
5.500%
 
600.0

 
5.500%
 
June 15, 2026
2023 Senior Notes
450.0

 
5.625%
 
450.0

 
5.625%
 
October 15, 2023
Securitized debt
—

 
(3)
 
9.1

 
(3)
 
April 6, 2021
Finance lease obligations (4)
64.1

 
 
 
66.7

 
 
 
Various
Other
7.9

 
 
 
3.0

 
 
 
Various
Total debt
1,547.0

 
 
 
1,653.8

 
 
 
 
Less: Deferred financing costs
7.0

 
 
 
7.6

 
 
 
 
Total debt, net
1,540.0

 
 
 
1,646.2

 
 
 
 
Less: Current portion
37.4

 
 
 
47.1

 
 
 
 
Total long-term debt, net
$
1,502.6

 
 
 
$
1,599.1

 
 
 
 
(1)
Interest at LIBOR plus applicable margin of 1.625% as of December 31, 2019.
(2)
Interest at LIBOR plus applicable margin of 2.00% as of December 31, 2018.
(3)
Interest at one month LIBOR index plus 80 basis points.
(4)
Finance lease obligations are a non-cash financing activity. Refer to Note 9, "Leases."



63
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2019 Credit Agreement

On October 16, 2019, the Company entered into the 2019 Credit Agreement with a syndicate of banks. The 2019 Credit Agreement replaced the Company's 2016 Credit Agreement. The 2019 Credit Agreement provides for a $425.0 million revolving credit facility, a $425.0 million term loan facility, and an incremental facility in an aggregate amount of up to $550.0 million plus the amount of certain prepayments plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $60.0 million sub-facility for the issuance of letters of credit. Total availability under the revolving facility was $402.8 million, after giving effect to letters of credit outstanding of $22.2 million, as of December 31, 2019.

Borrowings under the 2019 Credit Agreement will generally bear interest, at the election of Tempur Sealy International and the other subsidiary borrowers, at either (i) Base Rate plus the applicable margin or (ii) LIBOR plus the applicable margin. For the revolving credit facility and the term loan facility (a) the initial applicable margin for Base Rate advances was 0.625% per annum and the initial applicable margin for LIBOR advances was 1.625% per annum, and (b) following the delivery of financial statements for the fiscal quarter ending December 31, 2019, such applicable margins will be determined by a pricing grid based on the consolidated total net leverage ratio of the Company.

Obligations under the 2019 Credit Agreement are guaranteed by the Company’s existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions and are secured by a security interest in substantially all of Tempur Sealy International’s and the other subsidiary borrowers’ domestic assets and the domestic assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0% of the equity interests of each subsidiary owned by the Company or a subsidiary guarantor that is a domestic entity (subject to certain limited exceptions) and 65.0% of the voting equity interests of any direct first tier foreign entity owned by the Company or a subsidiary guarantor.

The 2019 Credit Agreement requires compliance with certain financial covenants providing for maintenance of a minimum consolidated interest coverage ratio, maintenance of a maximum consolidated total net leverage ratio, and maintenance of a maximum consolidated secured net leverage ratio. The consolidated total net leverage ratio is calculated using consolidated indebtedness less netted cash (as defined below). Consolidated indebtedness includes debt recorded on the Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding in excess of $40.0 million and other short-term debt. The Company is allowed to subtract from consolidated indebtedness an amount equal to 100.0% of the domestic and foreign unrestricted cash ("netted cash"), the aggregate of which cannot exceed $200.0 million at the end of the reporting period. As of December 31, 2019, netted cash was $63.4 million. As of December 31, 2019, the Company's consolidated total net leverage ratio was 2.92 times, within the covenant in the Company's debt agreements which limits this ratio to 5.00 times.

The 2019 Credit Agreement contains certain customary negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, transactions with affiliates, use of proceeds, prepayments of certain indebtedness, entry into burdensome agreements and changes to governing documents. The 2019 Credit Agreement also contains certain customary affirmative covenants and events of default, including upon a change of control.

The Company was in compliance with all applicable covenants in the 2019 Credit Agreement at December 31, 2019.

The Company is required to pay a commitment fee on the unused portion of the revolving credit facility, which initially will be 0.25% per annum and following the delivery of financial statements for the fiscal quarter ending December 31, 2019, such fees as determined by a pricing grid based on the consolidated total net leverage ratio of the Company. This unused commitment fee is payable quarterly in arrears and on the date of termination or expiration of the commitments under the revolving credit facility. The Company and the other borrowers also pay customary letter of credit issuance and other fees under the 2019 Credit Agreement.

The maturity date of the 2019 Credit Agreement is October 16, 2024. Amounts under the revolving credit facility may be borrowed, repaid and re-borrowed from time to time until the maturity date. The term loan facility is subject to quarterly amortization as set forth in the 2019 Credit Agreement. In addition, the term loan facility is subject to mandatory prepayment in connection with certain debt issuances, asset sales and casualty events, subject to certain reinvestment rights. Voluntary prepayments and commitment reductions under the 2019 Credit Agreement are permitted at any time without payment of any prepayment premiums.

64
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2016 Credit Agreement

The Company used the proceeds from the 2019 Credit Agreement to refinance outstanding borrowings under the 2016 Credit Agreement and terminated the existing revolving credit commitments. The 2016 Credit Agreement initially provided for a $500.0 million revolving credit facility, a $500.0 million initial term loan facility and a $100.0 million delayed draw term loan facility.

During the twelve months ended December 31, 2019, the Company prepaid $75.0 million on the Term A facility under the 2016 Credit Agreement.

Senior Notes

2026 Senior Notes

On May 24, 2016, Tempur Sealy International issued $600.0 million aggregate principal amount of 5.500% 2026 Senior Notes in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2026 Senior Notes were issued pursuant to an indenture, dated as of May 24, 2016 (the "2026 Indenture"), among Tempur Sealy International, certain subsidiaries of Tempur Sealy International as guarantors (the "Combined Guarantor Subsidiaries"), and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2026 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Combined Guarantor Subsidiaries. The 2026 Senior Notes mature on June 15, 2026, and interest is payable semi-annually in arrears on each June 15 and December 15, which began on December 15, 2016. The gross proceeds from the 2026 Senior Notes were used to refinance the $375.0 million aggregate principal amount of 2020 Senior Notes and to pay related fees and expenses, and the remaining funds were used for share repurchases and general corporate purposes.

Tempur Sealy International has the option to redeem all or a portion of the 2026 Senior Notes at any time on or after June 15, 2021. The initial redemption price is 102.750% of the principal amount, plus accrued and unpaid interest, if any. The redemption price will decline each year after 2021 until it becomes 100.0% of the principal amount beginning on June 15, 2024. In addition, Tempur Sealy International has the option at any time prior to June 15, 2021 to redeem some or all of the 2026 Senior Notes at 100.0% of the original principal amount plus a “make-whole” premium and accrued and unpaid interest, if any. Tempur Sealy International had the option to redeem up to 35.0% of the 2026 Senior Notes prior to June 15, 2019, under certain circumstances with the net cash proceeds from certain equity offerings, at 105.500% of the principal amount plus accrued and unpaid interest, if any. Tempur Sealy International could have made such redemptions as described in the preceding sentence only if, after any such redemption, at least 65.0% of the original aggregate principal amount of the 2026 Senior Notes issued remains outstanding.

The 2026 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things: (i) incur, directly or indirectly, debt; (ii) make, directly or indirectly, certain investments and restricted payments; (iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets; (iv) sell or otherwise dispose of assets, directly or indirectly; (v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock; (vi) enter into transactions with affiliates; (vii) engage in sale-leaseback transactions; (viii) purchase or redeem capital stock or subordinated indebtedness; (ix) issue or sell stock of restricted subsidiaries; and (x) effect a consolidation or merger. These covenants are subject to a number of exceptions and qualifications.

In conjunction with the issuance and sale of the 2026 Senior Notes, Tempur Sealy International and the Combined Guarantor Subsidiaries agreed through a Registration Rights Agreement to exchange the 2026 Senior Notes for a new issue of substantially identical senior notes registered under the Securities Act (the "Exchange Offer"). On October 18, 2016, Tempur Sealy International completed the Exchange Offer, with 100% of the outstanding notes tendered and received for new 2026 Senior Notes registered under the Securities Act.


65
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    
2023 Senior Notes

On September 24, 2015, Tempur Sealy International issued $450.0 million aggregate principal amount of 5.625% 2023 Senior Notes in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2023 Senior Notes were issued pursuant to an indenture, dated as of September 24, 2015 (the “2023 Indenture”), among Tempur Sealy International, the Combined Guarantor Subsidiaries (the Combined Guarantor Subsidiaries are the same under the 2026 Indenture, the 2023 Indenture and the 2020 Indenture), and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2023 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Combined Guarantor Subsidiaries. The 2023 Senior Notes mature on October 15, 2023, and interest is payable semi-annually in arrears on each April 15 and October 15, which began on April 15, 2016. The gross proceeds from the 2023 Senior Notes were used to refinance a portion of the term loan debt under the 2012 Credit Agreement and to pay related fees and expenses.

Since October 15, 2018, Tempur Sealy International has had the option to redeem all or a portion of the 2023 Senior Notes at any time. The initial redemption price is 104.219% of the principal amount, plus accrued and unpaid interest, if any. The redemption price will decline each year after 2018 until it becomes 100.0% of the principal amount beginning on October 15, 2021.
    
The 2023 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things: (i) incur, directly or indirectly, debt; (ii) make, directly or indirectly, certain investments and restricted payments; (iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets; (iv) sell or otherwise dispose of, directly or indirectly, assets; (v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock; (vi) enter into transactions with affiliates; (vii) engage in sale-leaseback transactions; (viii) purchase or redeem capital stock or subordinated indebtedness; (ix) issue or sell stock of restricted subsidiaries; and (x) effect a consolidation or merger. These covenants are subject to a number of exceptions and qualifications.

In conjunction with the issuance and sale of the 2023 Senior Notes, Tempur Sealy International and the Combined Guarantor Subsidiaries agreed through a Registration Rights Agreement to exchange the 2023 Senior Notes for a new issue of substantially identical senior notes registered under the Securities Act (the "2023 Exchange Offer"). On April 4, 2016, Tempur Sealy International completed the 2023 Exchange Offer, with 100% of the outstanding notes tendered and received for new 2023 Senior Notes registered under the Securities Act.

Securitized Debt

On April 12, 2017, the Company and certain of its subsidiaries entered into a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended the "Accounts Receivable Securitization"). In connection with this transaction, Tempur Sealy International and its wholly-owned special purpose subsidiary, Tempur Sealy Receivables, LLC, entered into a credit agreement that provides for revolving loans to be made from time to time in a maximum amount that varies over the course of the year based on the seasonality of the Company's accounts receivable and is subject to an overall limit of $120.0 million. On April 5, 2019, the Company and its subsidiaries entered into a new amendment to the Accounts Receivables Securitization. The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2021.

The obligations of the Company and its relevant subsidiaries under the Accounts Receivable Securitization are secured by the accounts receivable and certain related rights and the facility agreements contain customary events of default. The accounts receivable continue to be owned by the Company and its subsidiaries and continue to be reflected as assets on the Company’s Consolidated Balance Sheets and represent collateral up to the amount of the borrowings under this facility. Borrowings under this facility are classified as long-term debt within the Consolidated Balance Sheets.


66
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Fair Value

Financial instruments, although not recorded at fair value on a recurring basis, include cash and cash equivalents, accounts receivable, accounts payable, and the Company's debt obligations. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those instruments. Borrowings under the 2019 Credit Agreement and the securitized debt are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the following material financial instruments were based on observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of debt instruments. The fair values of these material financial instruments are as follows:
 
 
Fair Value
(in millions)
 
December 31, 2019
 
December 31, 2018
2023 Senior Notes
 
$
464.2

 
$
435.6

2026 Senior Notes
 
634.9

 
549.3



Deferred Financing Costs

The Company capitalizes costs associated with the issuance of debt and amortizes these costs as additional interest expense over the lives of the debt instruments using the effective interest method. These costs are recorded as deferred financing costs as a direct reduction from the carrying amount of the corresponding debt liability in the accompanying Consolidated Balance Sheets and the related amortization is included in interest expense, net in the accompanying Consolidated Statements of Income. Upon the prepayment of the related debt, the Company accelerates the recognition of an appropriate amount of the costs.

Future Obligations

As of December 31, 2019, the scheduled maturities of long-term debt outstanding, excluding finance lease obligations, for each of the next five years and thereafter are as follows:
(in millions)
 
 
2020
 
$
29.2

2021
 
21.3

2022
 
21.3

2023
 
481.8

2024
 
329.3

Thereafter
 
600.0

Total
 
$
1,482.9



67
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) Leases

The Company leases retail stores, manufacturing and distribution facilities, office space and equipment under operating lease agreements. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to several years, with the longest renewal period extending through 2042. The exercise of lease renewal options are at the Company's sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Consolidated Balance Sheet as of December 31, 2019:
(in millions)
 
 
 
December 31, 2019
Assets
 
 
 
 
Operating lease assets
 
Operating lease right-of-use assets
 
$
245.4

Finance lease assets
 
Property, plant and equipment, net
 
54.4

Total leased assets
 
 
 
$
299.8

 
 
 
 
 
Liabilities
 
 
 
 
Short-term:
 
 
 
 
Operating lease obligations
 
Accrued expenses and other current liabilities
 
$
50.8

Finance lease obligations
 
Current portion of long-term debt
 
8.2

Long-term:
 
 
 
 
Operating lease obligations
 
Long-term operating lease obligations
 
205.4

Finance lease obligations
 
Long-term debt, net
 
55.9

Total lease obligations
 
 
 
$
320.3



The following table summarizes the classification of lease expense in the Company's Consolidated Statement of Income for the year ended December 31, 2019:
 
 
Twelve months ended
(in millions)
 
December 31, 2019
Operating lease expense:
 
 
Operating lease expense
 
$
63.8

Short-term lease expense
 
9.0

Variable lease expense
 
18.8

Finance lease expense:
 
 
Amortization of right-of-use assets
 
8.5

Interest on lease obligations
 
4.7

Total lease expense
 
$
104.8



68
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    
The following table sets forth the scheduled maturities of lease obligations as of December 31, 2019:
(in millions)
 
Operating Leases
 
Finance Leases
 
Total
Year Ended December 31,
 
 
 
 
 
 
2020
 
$
62.1

 
$
12.3

 
$
74.4

2021
 
54.5

 
12.0

 
66.5

2022
 
46.6

 
9.8

 
56.4

2023
 
36.2

 
7.8

 
44.0

2024
 
29.0

 
6.2

 
35.2

Thereafter
 
74.5

 
36.3

 
110.8

Total lease payments
 
302.9

 
84.4

 
387.3

Less: Interest
 
(46.7
)
 
(20.3
)
 
(67.0
)
Present value of lease obligations
 
$
256.2

 
$
64.1

 
$
320.3



The following table provides lease term and discount rate information related to operating and finance leases as of December 31, 2019:
 
 
December 31, 2019
Weighted average remaining lease term (years):
 
 
Operating leases
 
6.43

Finance leases
 
9.03

 
 
 
Weighted average discount rate:
 
 
Operating leases
 
5.42
%
Finance leases
 
6.27
%


The following table provides supplemental information related to the Company's Consolidated Statement of Cash Flows for the year ended December 31, 2019:
 
 
Twelve months ended
(in millions)
 
December 31, 2019
Cash paid for amounts included in the measurement of lease obligations:
 
 
Operating cash flows paid for operating leases
 
$
62.7

Operating cash flows paid for finance leases
 
$
3.7

Financing cash flows paid for finance leases
 
$
7.7

 
 
 
Right-of-use assets obtained in exchange for new operating lease obligations
 
$
60.9

Right-of-use assets obtained in exchange for new finance lease obligations
 
$
4.1



(10) Retirement Plans

401(k) Plan

The Company has a defined contribution plan ("the 401(k) Plan") whereby eligible employees may contribute up to 85.0% of their pay subject to certain limitations as defined by the 401(k) Plan. Employees are eligible to participate in the 401(k) Plan upon hire and are eligible to receive matching contributions upon six months of continuous employment with the Company. The 401(k) Plan provides a 100.0% match of the first 3.0% and 50.0% of the next 2.0% of eligible employee contributions. The match for union employees is based on the applicable collective bargaining arrangement. All matching contributions vest immediately. The Company incurred $6.0 million, $5.8 million and $4.0 million of expenses associated with the 401(k) Plan for the years ended December 31, 2019, 2018 and 2017, respectively, which are included in the Consolidated Statements of Income.

69
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Defined Benefit Pension Plans

The Company has a noncontributory, defined benefit pension plan covering current and former hourly employees at two of its active Sealy plants and ten previously closed Sealy U.S. facilities. Sealy Canada, Ltd. (a wholly-owned subsidiary of the Company) also sponsors a noncontributory, defined benefit pension plan covering hourly employees at one of its facilities (collectively, referred to as the "Plans"). The Plans provide retirement and survivorship benefits based on the employees’ credited years of service. The Company’s funding policy provides for contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes.

The Plans' assets consist of investments in various common/collective trusts with equity investment strategies diversified across multiple industry sectors and company market capitalization within specific geographical investment strategies, fixed income common/collective trusts, which invest primarily in investment-grade and high-yield corporate bonds and U.S. treasury securities, as well as money market mutual funds. The fixed income investments are diversified as to ratings, maturities, industries and other factors. The Plans' assets contain no significant concentrations of risk related to individual securities or industry sectors. The Plans have no direct investment in the Company's common stock.

The long-term rate of return for the Plans is based on the weighted average of the Plans’ investment allocation and the historical returns for those asset categories. Because future compensation levels are not a factor in these Plans’ benefit formulas, the accumulated benefit obligation is equal to the projected benefit obligation as reported below. The discount rate is based on the returns on long-term bonds in the private sector and incorporates a long-term inflation rate. Summarized information for the Plans follows:

Expenses and Status

The Company recognizes the service cost component of net periodic pension cost within general, administrative and other expenses and all other components of net periodic pension cost are recognized within other income, net, in the accompanying Consolidated Statements of Income. Components of total net periodic pension cost for the years ended December 31 were as follows:
(in millions)
2019
 
2018
 
2017
Service cost
$
0.9

 
$
1.0

 
$
0.9

Interest cost
1.2

 
1.1

 
1.2

Expected return on assets
(1.3
)
 
(1.5
)
 
(1.5
)
Amortization of prior service cost
0.1

 
0.1

 
0.1

Amortization of net gain
0.1

 
—

 
—

Net periodic pension cost
$
1.0

 
$
0.7

 
$
0.7



The other changes in plan assets and benefit obligations recognized in other comprehensive loss, before tax effects, for the years ended December 31 were:
(in millions)
2019
 
2018
 
2017
Net loss
$
2.2

 
$
0.6

 
$
0.4

New prior service cost
0.6

 
0.1

 
0.5

Amortization of prior service cost
(0.1
)
 
(0.1
)
 
(0.1
)
Amortization or settlement recognition of net loss
(0.1
)
 
—

 
—

Total recognized in other comprehensive loss
$
2.6

 
$
0.6

 
$
0.8



The following assumptions, calculated on a weighted-average basis, were used to determine net periodic pension cost for the Company’s Plans for the years ended December 31:
 
2019
 
2018
 
2017
Discount rate (a)
4.10
%
 
3.58
%
 
4.07
%
Expected long-term return on plan assets
6.16
%
 
6.25
%
 
6.64
%

70
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(a)
The discount rates used in 2019 to determine the expenses for the U.S. retirement plan and Canadian retirement plan were 4.16% and 3.90%, respectively. The discount rates used in 2018 to determine the expenses for the U.S. retirement plan and Canadian retirement plan were 3.54% and 3.70%, respectively. The discount rates used in 2017 to determine the expenses for the U.S. retirement plan and Canadian retirement plan were 4.06% and 4.10%

Obligations and Funded Status

The measurement date for the Company's Plans is December 31. The funded status of the Plans as of December 31 was as follows:
(in millions)
2019
 
2018
Change in Benefit Obligation:
 
 
 
Projected benefit obligation at beginning of year
$
30.0

 
$
32.1

Service cost
0.9

 
1.0

Interest cost
1.2

 
1.1

Plan amendments
0.5

 
0.1

Actuarial (gain) loss
5.5

 
(3.0
)
Benefits paid
(1.3
)
 
(0.9
)
Expenses paid
(0.1
)
 
(0.1
)
Foreign currency exchange rate changes
0.2

 
(0.3
)
Projected benefit obligation at end of year
$
36.9

 
$
30.0

Change in Plan Assets:
 
 
 
Fair value of plan assets at beginning of year
$
22.2

 
$
25.3

Actual return on plan assets
4.6

 
(2.1
)
Employer contribution
1.4

 
0.3

Benefits paid
(1.3
)
 
(0.9
)
Expenses paid
(0.1
)
 
(0.1
)
Foreign currency exchange rate changes
0.2

 
(0.3
)
Fair value of plan assets at end of year
$
27.0

 
$
22.2

Funded status
$
(9.9
)
 
$
(7.8
)


The Company’s defined benefit pension plan for U.S. Sealy employees is underfunded. As of December 31, 2019, the projected benefit obligation and fair value of plan assets were $32.6 million and $22.6 million, respectively. As of December 31, 2018, the projected benefit obligation and fair value of plan assets were $26.5 million and $18.4 million, respectively. As of December 31, 2019, the projected benefit obligation and fair value of plan assets for the Sealy Canada Ltd. pension plan were $4.3 million and $4.4 million, respectively. As of December 31, 2018, the projected benefit obligation and fair value of plan assets for the Sealy Canada Ltd. pension plan were $3.5 million and $3.8 million, respectively.
    
The accumulated benefit obligation for all pension plans was $36.9 million at December 31, 2019 and $30.0 million at December 31, 2018.

The following table represents amounts recorded in the Consolidated Balance Sheets:
 
December 31,
(in millions)
2019
 
2018
Amounts recognized in the Consolidated Balance Sheets:
 
 
 
Non-current benefit liability
$
10.0

 
$
8.1

Non-current benefit asset
0.1

 
0.3




71
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following assumption, calculated on a weighted-average basis, was used to determine benefit obligations for the Company’s defined benefit pension plans as of December 31:
 
2019
 
2018
Discount rate (a)
3.16
%
 
4.13
%
(a)
The discount rates used in 2019 to determine the benefit obligations for the U.S. retirement plan and Canadian retirement plan were 3.15% and 3.20%, respectively. The discount rates used in 2018 to determine the benefit obligations for the U.S. and Canadian defined benefit pension plans were 4.16% and 3.90%, respectively.

No material amounts are expected to be reclassified from AOCL to be recognized as components of net income during 2020.

Plan Contributions and Expected Benefit Payments

During 2020, the Company expects to contribute $1.2 million to the Company's Plans from available cash and cash equivalents.

The following table presents estimated future benefit payments:
(in millions)
 
Fiscal 2020
$
1.1

Fiscal 2021
1.1

Fiscal 2022
1.2

Fiscal 2023
1.2

Fiscal 2024
1.3

Fiscal 2025 ‑ Fiscal 2028
8.0



Pension Plan Asset Information

Investment Objective and Strategies
    
The Company's investment objectives are to minimize the volatility of the value of the Company's pension assets relative to pension liabilities and to ensure assets are sufficient to pay plan benefits. Target and actual asset allocations are as follows:
 
2019 Target
 
2019
Actual
Common/collective trust consisting primarily of:
 
 
 
Equity securities
60.0
%
 
55.7
%
Debt securities
40.0
%
 
44.0
%
Other
—
%
 
0.3
%
Total plan assets
100.0
%
 
100.0
%


Investment strategies and policies reflect a balance of risk-reducing and return-seeking considerations. The objective of minimizing the volatility of assets relative to liabilities is addressed primarily through asset diversification. Assets are broadly diversified across many asset classes to achieve risk-adjusted returns that, in total, lower asset volatility relative to liabilities. The Company's policy to rebalance the Company's investment regularly ensures that actual allocations are in line with target allocations as appropriate.

Strategies to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes that provide return, diversification and liquidity.

The plan investment fiduciaries are responsible for setting asset allocation targets, and monitoring asset allocation and investment performance. The Company’s pension investment manager has discretion to manage assets to ensure compliance with the asset allocations approved by the plan fiduciaries.


72
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Significant Concentrations of Risk
    
Significant concentrations of risk in the Company's plan assets relate to equity, interest rate, and operating risk. In order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to equity investments that are expected, over time, to earn higher returns with more volatility than fixed income investments which more closely match pension liabilities. Within the common/collective trusts, the plan assets contain no significant concentrations of risk related to individual securities or industry sectors.

In order to minimize asset volatility relative to the liabilities, a portion of the plan assets are allocated to fixed income investments that are exposed to interest rate risk. Rate increases will generally result in a decline in fixed income assets while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities.

Operating risks primarily include the risks of inadequate diversification and insufficient oversight. To mitigate this risk, investments are diversified across and within asset classes in support of investment objectives. Policies and practices to address operating risks include ongoing oversight, plan and asset class investment guidelines, and periodic reviews against these guidelines to ensure adherence.

Expected Long-Term Return on Plan Assets

The expected long-term return assumption at December 31, 2019 was 6.50% for the defined benefit pension plan for U.S. Sealy employees and 5.00% for the defined benefit pension plan for Sealy Canada, Ltd. The expected long-term return assumption is based on historical and projected rates of return for current and planned asset classes in the plan’s investment portfolio. The assumption considers various sources, primarily inputs from advisors for long-term capital market returns, inflation, bond yields, and other variables, adjusted for specific aspects of the Company's investment strategy by plan.

The investments in plan assets primarily consist of common collective trusts and money market funds. Investments in common collective trusts and money market funds are valued at the net asset value ("NAV") per share or unit multiplied by the number of shares or units held as of the measurement date. The determination of NAV for the common/collective trusts includes market pricing of the underlying assets as well as broker quotes and other valuation techniques that represent fair value as determined by the respective administrator of the common/collective trust. Management has determined that the NAV is an appropriate estimate of the fair value of the common collective trusts at December 31, 2019 and 2018, based on the fact that the common/collective trusts are audited and accounted for at fair value by the administrators of the respective common/collective trusts.  The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair value. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the Consolidated Balance Sheet dates.

The fair value of the Company’s plan assets, all valued at NAV, at December 31 by asset category was as follows:
(in millions)
2019
 
2018
Asset Category
 
 
 
Common/collective trust
 
 
 
U.S. equity
$
5.5

 
$
14.1

International equity
9.5

 
3.6

Total equity based funds
15.0

 
17.7

Common/collective trust - fixed income
11.9

 
4.4

Money market funds
0.1

 
0.1

Total
$
27.0

 
$
22.2




73
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Multi‑Employer Benefit Plans

Approximately 25.0% of the Company’s domestic employees are represented by various labor unions with separate collective bargaining agreements. Hourly employees working at six of the Company’s domestic manufacturing facilities are covered by union sponsored retirement plans. Further, employees working at three of the Company’s domestic manufacturing facilities are covered by union sponsored health and welfare plans. These plans cover both active employees and retirees. Through the health and welfare plans, employees receive medical, dental, vision, prescription and disability coverage. The Company’s cost associated with these plans consists of periodic contributions to these plans based upon employee participation. The expense recognized by the Company for such contributions for the years ended December 31 was follows:
(in millions)
2019
 
2018
 
2017
Multi‑employer retirement plan expense
$
4.3

 
$
3.9

 
$
4.3

Multi‑employer health and welfare plan expense
3.8

 
3.6

 
3.5



The risks of participating in multi‑employer pension plans are different from the risks of sponsoring single‑employer pension plans in the following respects: 1) contributions to the multi‑employer plan by one employer may be used to provide benefits to employees of other participating employers; 2) if a participating employer ceases its contributions to the plan, the unfunded obligations of the plan allocable to the withdrawing employer may be borne by the remaining participating employers; and 3) if the Company withdraws from the multi‑employer pension plans in which it participates, the Company may be required to pay those plans an amount based on its allocable share of the underfunded status of the plan.

The following table presents information regarding the multi‑employer pension plans that are significant to the Company for the years ended December 31, 2019 and 2018, respectively:
Pension Fund
 
EIN/Pension Plan Number
 
Date of Plan Year-End
 
Pension Protection Act
Zone Status(1) 2019
 
FIP/RP Status
Pending/Implemented(2)
 
Contributions of the Company in 2019
 
Surcharge Imposed(3)
 
Expiration Date
of Collective
Bargaining Agreement
 
Year Contributions to Plan Exceeded More than 5 Percent of Total Contributions
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Furniture Workers Pension Fund A(4)
 
13-5511877-001
 
2/28/19
 
Red
 
Implemented
 
$
1.1

 
No
 
2020
 
2017, 2018, 2019
Pension Plan of the National Retirement Fund
 
13-6130178-001
 
12/31/18
 
Red
 
Implemented
 
$
1.0

 
Yes, 10.0%
 
2022
 
N/A
Central States, Southeast & Southwest Areas Pension Plan
 
36-6044243-001
 
12/31/18
 
Red
 
Implemented
 
$
0.8

 
Yes, 10.0%
 
2021
 
N/A
Pension Fund
 
EIN/Pension Plan Number
 
Date of Plan Year-End
 
Pension Protection Act
Zone Status(1) 2018
 
FIP/RP Status
Pending/Implemented(2)
 
Contributions of the Company in 2018
 
Surcharge Imposed(3)
 
Expiration Date
of Collective
Bargaining Agreement
 
Year Contributions to Plan Exceeded More than 5 Percent of Total Contributions
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Furniture Workers Pension Fund A(4)
 
13-5511877-001
 
2/28/18
 
Red
 
Implemented
 
$
0.7

 
No
 
2020
 
2016, 2017, 2018
Pension Plan of the National Retirement Fund
 
13-6130178-001
 
12/31/17
 
Red
 
Implemented
 
$
0.7

 
Yes, 10.0%
 
2019
 
N/A
Central States, Southeast & Southwest Areas Pension Plan
 
36-6044243-001
 
12/31/17
 
Red
 
Implemented
 
$
0.8

 
Yes, 10.0%
 
2021
 
N/A

74
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(1)
The Pension Protection Act of 2006 ranks the funded status of multi-employer pension plans depending upon a plan’s current and projected funding. A plan is in the Red Zone (Critical) if it has a current funded percentage of less than 65.0%. A plan is in the Yellow Zone (Endangered) if it has a current funded percentage of less than 80.0%, or projects a credit balance deficit within seven years. A plan is in the Green Zone (Healthy) if it has a current funded percentage greater than 80.0% and does not have a projected credit balance deficit within seven years. The zone status is based on the plan’s year end rather than the Company’s. The zone status listed for each plan is based on information that the Company received from that plan and is certified by that plan’s actuary for the most recent year available.
(2)
Funding Improvement Plan or Rehabilitation Plan as defined in the Employee Retirement Income Security Act of 1974 has been implemented or is pending.
(3)
Indicates whether the Company paid a surcharge to the plan in the most current year due to funding shortfalls and the amount of the surcharge.
(4)
The Company represented more than 5.0% of the total contributions for the most recent plan year available. For year ended December 31, 2017, the Company contributed $1.1 million to the plan.

(11) Stockholders' Equity
 
(a) Common and Preferred Stock. Tempur Sealy International has 300.0 million authorized shares of common stock with $0.01 per share par value and 10.0 million authorized shares of preferred stock with $0.01 per share par value. The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.
    
The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by the stockholders, to issue from time to time shares of preferred stock in one or more series. Each such series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights.

(b) Treasury Stock. As of December 31, 2019, the Company had approximately $124.6 million remaining under an existing share repurchase program initially authorized by the Board of Directors in 2016. In February 2020, the Board of Directors authorized an increase, of over $190.0 million, to its existing share repurchase authorization of Tempur Sealy International's common stock to $300.0 million. For the year ended December 31, 2019, the Company repurchased 1.3 million shares for approximately $102.3 million under the program. The Company did not repurchase any shares under the program during the year ended December 31, 2018. For the year ended December 31, 2017, the Company repurchased 0.6 million shares for approximately $40.1 million under the program.

In addition, the Company acquired 0.1 million, 0.1 million, and 0.1 million shares upon the vesting of certain restricted stock units ("RSUs"), which were withheld to satisfy tax withholding obligations during the years ended December 31, 2019, 2018 and 2017, respectively. The shares withheld were valued at the closing price of the stock on the New York Stock Exchange on the vesting date or first business day prior to vesting, resulting in approximately $3.4 million, $4.6 million, and 4.8 million in treasury stock acquired during the years ended December 31, 2019, 2018 and 2017, respectively.

(c) Charitable Stock Donation. In the fourth quarter of 2019, the Company recorded an $8.9 million charge, recorded in General, administrative and other expenses, related to the donation of 100,000 shares of its common stock at fair market value to certain public charities.


75
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(d) AOCL. AOCL consisted of the following:
 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
Foreign Currency Translation
 
 
 
 
 
Balance at beginning of period
$
(91.7
)
 
$
(72.8
)
 
$
(101.9
)
Other comprehensive loss:
 
 
 
 
 
Foreign currency translation adjustments (1)
9.5

 
(18.9
)
 
29.1

Balance at end of period
$
(82.2
)
 
$
(91.7
)
 
$
(72.8
)
 
 
 
 
 
 
Pension Benefits
 
 
 
 
 
Balance at beginning of period
$
(3.6
)
 
$
(2.7
)
 
$
(2.2
)
Other comprehensive loss:
 
 
 
 
 
Net change from period revaluation
(2.6
)
 
(0.4
)
 
(0.8
)
Tax benefit (2)
0.7

 
0.1

 
0.3

Total other comprehensive loss before reclassifications, net of tax
(1.9
)
 
(0.3
)
 
(0.5
)
Net amount reclassified to earnings
—

 
—

 
—

U.S tax reform - reclassification to retained earnings upon adoption of ASU No. 2018-02
—

 
(0.5
)
 
—

Tax expense (2)
—

 
(0.1
)
 
—

Total amount reclassified from accumulated other comprehensive loss, net of tax
—

 
(0.6
)
 
—

Total other comprehensive loss
(1.9
)
 
(0.9
)
 
(0.5
)
Balance at end of period
$
(5.5
)
 
$
(3.6
)
 
$
(2.7
)
 
 
 
 
 
 
Foreign Exchange Forward Contracts
 
 
 
 
 
Balance at beginning of period
$
—

 
$
—

 
$
0.6

Other comprehensive loss:
 
 
 
 
 
Net change from period revaluation
—

 
—

 
(0.6
)
Tax benefit (2)
—

 
—

 
0.1

Total other comprehensive loss before reclassifications, net of tax
—

 
—

 
(0.5
)
Net amount reclassified to earnings (3)
—

 
—

 
(0.1
)
Total amount reclassified from accumulated other comprehensive loss, net of tax
—

 
—

 
(0.1
)
Total other comprehensive loss
—

 
—

 
(0.6
)
Balance at end of period
$
—

 
$
—

 
$
—


(1)
In 2019, 2018 and 2017, there were no tax impacts related to foreign currency translation adjustments and no amounts were reclassified to earnings.
(2)
These amounts were included in the income tax provision in the accompanying Consolidated Statements of Income.
(3)
This amount was included in cost of sales, net in the accompanying Consolidated Statements of Income.

76
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) Other Items

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following:
 
December 31,
 
December 31,
(in millions)
2019
 
2018
Taxes
$
136.0

 
$
136.8

Other
90.8

 
84.1

Wages and benefits
79.5

 
43.7

Advertising
56.9

 
46.1

Operating leases obligations
50.8

 
—

Sales returns
26.2

 
22.0

Warranty
19.4

 
14.9

Rebates
13.6

 
11.6

 
$
473.2

 
$
359.2



(13) Stock-based Compensation
 
Tempur Sealy International has two stock-based compensation plans which provide for grants of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock unit awards, performance shares, stock grants and performance based awards to employees, non-employee directors, consultants and Company advisors. The plan under which equity awards may be granted in the future is the Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan"). It is the policy of the Company to issue stock out of treasury shares upon issuance or exercise of share-based awards. The Company believes that awards and purchases made under these plans better align the interests of the plan participants with those of its stockholders.

On May 11, 2017, the Company's stockholders approved the amendment and restatement of the original 2013 Plan. The 2013 Plan provides for grants of stock options to purchase shares of common stock to employees and directors of the Company. The 2013 Plan may be administered by the Compensation Committee of the Board of Directors, by the Board of Directors directly, or, in certain cases, by an executive officer or officers of the Company designated by the Compensation Committee. The shares issued or to be issued under the 2013 Plan may be either authorized but unissued shares of the Company’s common stock or shares held by the Company in its treasury. Tempur Sealy International may issue a maximum of 8.7 million shares of common stock under the 2013 Plan, subject to certain adjustment provisions.

The Amended and Restated 2003 Equity Incentive Plan, as amended (the “2003 Plan”), was administered by the Compensation Committee of the Board of Directors, which, together with the Board of Directors, had the exclusive authority to administer the 2003 Plan, including the power to determine eligibility to receive awards, the types and number of shares of stock subject to the awards, the price and timing of awards and the acceleration or waiver of any vesting and performance of forfeiture restrictions, in each case subject to the terms of the 2003 Plan. Any of the Company’s employees, non-employee directors, consultants and Company advisors, as determined by the Compensation Committee, were eligible to be selected to participate in the 2003 Plan. Tempur Sealy International allowed a maximum of 11.5 million shares of its common stock under the 2003 Plan to be issued. In May 2013, the Company's Board of Directors adopted a resolution that prohibited further grants under the 2003 Plan.

In 2010, the Board of Directors approved the terms of a Long-Term Incentive Plan established under the 2003 Plan. In 2013, the Board of Directors approved the terms of another Long-Term Incentive Plan established under the 2013 Plan. Awards under both Long-Term Incentive Plans have typically consisted primarily of a mix of stock options, RSUs and PRSUs. Shares with respect to the PRSUs will be granted and vest following the end of the applicable performance period and achievement of applicable performance metrics as determined by the Compensation Committee of the Board of Directors.


77
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company’s stock-based compensation expense for the year ended December 31, 2019 included PRSUs, stock options, RSUs and DSUs. A summary of the Company’s stock-based compensation expense is presented below:

 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
PRSU expense (benefit)
$
1.4

 
$
2.5

 
$
(6.5
)
Stock option expense
4.9

 
6.7

 
7.1

RSU/DSU expense
20.5

 
15.6

 
12.7

Total stock-based compensation expense
$
26.8

 
$
24.8

 
$
13.3



The Company granted PRSUs during the years ended December 31, 2019, 2018 and 2017. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals. The Company recorded a benefit in the accompanying Consolidated Statements of Income of $9.3 million for the year ended December 31, 2017, after the change in estimate to reduce accumulated performance stock-based compensation amortization to actual cost based on updated projected or final financial results.

Performance Restricted Stock Units

A summary of the Company’s PRSU activity and related information for the years ended December 31, 2019 and 2018 is presented below:
(shares in millions)
Shares
 
Weighted Average Grant Date Fair Value
Awards unvested at December 31, 2017
2.7

 
$
64.13

Granted
0.2

 
51.72

Vested
(0.1
)
 
68.57

Forfeited
(0.8
)
 
68.07

Awards unvested at December 31, 2018
2.0

 
61.07

Granted
0.1

 
85.41

Vested
—

 
59.21

Forfeited
(1.3
)
 
70.94

Awards unvested at December 31, 2019
0.8

 
$
60.09



During 2017, the Company granted executive officers and certain members of management PRSUs if the Company achieves a certain level of adjusted earnings before interest, tax, depreciation and amortization ("Adjusted EBITDA") during four consecutive fiscal quarters as described below (the "2019 Aspirational Plan PRSUs"). Adjusted EBITDA is defined as the Company’s "Consolidated EBITDA" as such term is defined in the Company’s 2016 Credit Agreement. The 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA in any four consecutive fiscal quarter period ending between (and including) March 31, 2018 and December 31, 2019 (the “First Designated Period”). At the end of the First Designated Period, the Adjusted EBITDA targets were not met. As a result, one-half of the total 2019 Aspirational Plan PRSUs are no longer available for vesting based on performance and are included in forfeitures in the table above.

The remaining one-half of the total 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA in any four consecutive fiscal quarter period ending between (and including) March 31, 2020 and December 31, 2020 (the “Second Designated Period”). If the highest Adjusted EBITDA in the Second Designated Period is $600.0 million then 66% of the remaining 2019 Aspirational Plan PRSUs will vest; if the Adjusted EBITDA is $650.0 million or more 100% will vest; if Adjusted EBITDA is between $600.0 million and $650.0 million then a pro rata portion will vest; and if Adjusted EBITDA is below $600.0 million then all of the remaining 2019 Aspirational Plan PRSUs will be forfeited.

78
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company did not record any stock-based compensation expense related to the 2019 Aspirational Plan PRSUs during the years ended December 31, 2019, 2018 and 2017, as it was not probable that the Company would achieve the specified performance target for either the First Designated Period or the Second Designated Period. The Company will continue to evaluate the probability of achieving the performance condition in future periods and record the appropriate expense if necessary. Based on the price of the Company’s common stock on the grant date, the total unrecognized compensation expense related to this award if the performance target is met for the Second Designated Period would range from $33.1 million to $49.7 million, which would be expensed over the remaining service period if achievement of the performance condition becomes probable.
As of December 31, 2019, the Company has 0.8 million of the 2019 Aspirational PRSUs outstanding that will fully vest if the Company achieves $650.0 million or more of Adjusted EBITDA for 2020. All remaining 2019 Aspirational Plan PRSUs will be forfeited if the performance metric is not met in 2020.
In March 2019, the Compensation Committee of the Board of Directors formally determined that the Company did not have more than $650.0 million of Adjusted EBITDA for payout under the PRSUs granted in 2017 ("the 2017 Aspirational Plan PRSUs"). As a result, the remaining one-third of the 2017 Aspirational Plan PRSUs previously granted with a performance period for 2018 were forfeited as of this date.

Stock Options

The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock options granted. During the year ended December 31, 2019, no stock options were granted. The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2019, 2018 and 2017 are set forth in the following table. Expected volatility is based on the unbiased standard deviation of Tempur Sealy International’s common stock over the option term. The expected life of the options represents the period of time that the Company expects the options granted to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option for the expected term of the instrument. The dividend yield reflects an estimate of dividend payouts over the term of the award. The Company uses historical data to determine these assumptions.
 
Year Ended December 31,
 
2019
 
2018
 
2017
Expected volatility range of stock
N/A
 
39.8% - 40.1%
 
37.4% - 40.8%
Expected life of option, range in years
N/A
 
5
 
5
Risk-free interest range rate
N/A
 
2.2% - 2.8%
 
1.8% - 1.9%
Expected dividend yield on stock
N/A
 
—%
 
—%

    
A summary of the Company’s stock option activity under the 2003 Plan and 2013 Plan for the years ended December 31, 2019 and 2018 is presented below:
(in millions, except per share amounts and years)
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value
Options outstanding at December 31, 2017
1.7

 
$
58.93

 
 
 
 
Granted
0.3

 
61.84

 
 
 
 
Exercised
(0.2
)
 
28.20

 
 
 
 
Forfeited
(0.2
)
 
60.45

 
 
 
 
Options outstanding at December 31, 2018
1.6

 
$
62.51

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
(0.3
)
 
52.49

 
 
 
 
Forfeited
—

 
46.36

 
 
 
 
Options outstanding at December 31, 2019
1.3

 
$
65.18

 
6.35
 
20.8

 
 
 
 
 
 
 
 
Options exercisable at December 31, 2019
0.8

 
$
64.72

 
5.73
 
18.4



 

79
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The aggregate intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $5.9 million, $3.9 million and $5.4 million, respectively.

Cash received from options exercised under all stock-based compensation plans, including cash received from options issued from treasury shares, for the years ended December 31, 2019, 2018 and 2017, was $17.8 million, $4.6 million, and $12.8 million, respectively.

A summary of the Company’s unvested shares relating to stock options as of December 31, 2019 and 2018, and changes during the years ended December 31, 2019 and 2018, are presented below:
(shares in millions)
Shares
 
Weighted Average Grant Date Fair Value
Options unvested at December 31, 2017
0.7

 
$
67.95

Granted
0.3

 
61.84

Vested
(0.2
)
 
66.72

Forfeited
(0.2
)
 
60.45

Options unvested at December 31, 2018
0.6

 
$
66.20

Granted
—

 
—

Vested
(0.1
)
 
66.66

Forfeited
—

 
46.36

Options unvested at December 31, 2019
0.5

 
$
65.99



Restricted/Deferred Stock Units

A summary of the Company's RSU and DSU activity and related information for the years ended December 31, 2019 and 2018 is presented below:
(in millions, except per share amounts)
Shares
 
Weighted Average Release Price
 
Aggregate Intrinsic Value
Awards outstanding at December 31, 2017
0.6

 
$
64.94

 
 
Granted
0.3

 
61.29

 
 
Vested
(0.1
)
 
62.85

 
 
Terminated
—

 
64.00

 
 
Awards outstanding at December 31, 2018
0.8

 
$
63.82

 
$
34.6

Granted
0.7

 
43.07

 
 
Vested
(0.3
)
 
62.54

 
 
Terminated
—

 
58.07

 
 
Awards outstanding at December 31, 2019
1.2

 
$
52.96

 
$
110.5



The aggregate intrinsic value of RSUs and DSUs vested during the year ended December 31, 2019 was $14.7 million.


80
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Excluding any potential compensation expense related to the 2019 Aspirational Plan PRSUs discussed above, a summary of total unrecognized stock-based compensation expense based on current performance estimates related to stock options, DSUs, RSUs and PRSUs for the year ended December 31, 2019 is presented below:
(in millions, except years)
December 31, 2019
 
Weighted Average Remaining Vesting Period (Years)
Unrecognized stock option expense
$
6.6

 
1.50
Unrecognized DSU/RSU expense
37.6

 
2.42
Unrecognized PRSU expense
2.0

 
1.73
Total unrecognized stock-based compensation expense
$
46.2

 
2.25



(14) Commitments and Contingencies
 
The Company is involved in various legal and administrative proceedings incidental to the operations of its business. The Company believes that the outcome of all pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity, or operating results.

(15) Income Taxes

Pre-tax Income by Jurisdiction

The following sets forth the amount of income before income taxes attributable to each of the Company’s geographies for the years ended December 31, 2019, 2018 and 2017:
 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
Income before income taxes:
 
 
 
 
 
United States
$
150.9

 
$
59.2

 
$
97.2

Rest of the world
114.6

 
105.8

 
118.2

 
$
265.5

 
$
165.0

 
$
215.4



Reconciliation of Statutory Tax Rate to Effective Tax Rate

The Company’s effective income tax provision differs from the amount calculated using the statutory U.S. federal income tax rate, principally due to the following:
 
Year Ended December 31,
 
2019
 
2018
 
2017
(dollars in millions)
Amount
 
Percentage of Income
Before Income Taxes
 
Amount
 
Percentage of Income
Before Income Taxes
 
Amount
 
Percentage of Income
Before Income Taxes
Statutory U.S. federal income tax
$
55.8

 
21.0
 %
 
$
34.6

 
21.0
 %
 
$
75.4

 
35.0
 %
State income taxes, net of federal benefit
8.7

 
3.3
 %
 
1.8

 
1.1
 %
 
(0.6
)
 
(0.3
)%
Foreign tax differential
2.1

 
0.8
 %
 
2.5

 
1.5
 %
 
(11.9
)
 
(5.5
)%
Change in valuation allowances
(8.6
)
 
(3.2
)%
 
(17.7
)
 
(10.7
)%
 
5.6

 
2.6
 %
Uncertain tax positions and interest
2.4

 
0.9
 %
 
33.1

 
20.1
 %
 
(1.0
)
 
(0.5
)%
Subpart F income
11.0

 
4.1
 %
 
6.6

 
4.0
 %
 
2.7

 
1.2
 %
Manufacturing deduction
—

 
—

 
—

 
—

 
(1.9
)
 
(0.9
)%
Remeasurement of deferred taxes
—

 
—

 
—

 
—

 
(69.7
)
 
(32.3
)%
Transition Tax
—

 
—

 
(6.8
)
 
(4.1
)%
 
45.9

 
21.3
 %
Permanent and other
3.3

 
1.2
 %
 
(4.5
)
 
(2.8
)%
 
(0.7
)
 
(0.3
)%
Effective income tax provision
$
74.7

 
28.1
 %
 
$
49.6

 
30.1
 %
 
$
43.8

 
20.3
 %



81
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For 2019 and 2018, Subpart F income consists primarily of Global Intangible Low-Taxed Income ("GILTI") which is taxable to Tempur Sealy International as if earned directly by Tempur Sealy International. The Company recognizes GILTI in the period in which such tax arises. For years prior to 2018, Subpart F income represents interest and royalties earned by a foreign subsidiary as well as sales made by certain foreign subsidiaries outside of their country of incorporation and is taxable to Tempur Sealy International as if earned directly by Tempur Sealy International. The Transition Tax, described below, represents taxes on certain foreign sourced earnings and profits that were previously tax deferred.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law, making significant changes to U.S. tax law. Changes include, but are not limited to, a corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 ("Transition Tax"). In accordance with the Act, the Company recorded an income tax benefit of $23.8 million in the fourth quarter of 2017, the period in which the legislation was enacted. The total benefit included a tax benefit of $69.7 million related to the remeasurement of certain deferred tax assets and liabilities net of $45.9 million in additional income tax expense related to the Transition Tax on foreign earnings. Pursuant to Staff Accounting Bulletin No. 118 ("SAB 118") the Company recorded an additional SAB 118 tax benefit of $6.8 million in 2018 related to the finalization of the Company’s Transition Tax obligation.
Income Tax Provision
The income tax provision consisted of the following:
 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
Current provision
 
 
 
 
 
Federal
$
50.4

 
$
(14.6
)
 
$
73.5

State
11.9

 
1.1

 
3.1

Foreign
19.5

 
57.1

 
28.3

Total current
$
81.8

 
$
43.6

 
$
104.9

Deferred provision
 
 
 
 
 
Federal
$
(10.8
)
 
$
11.4

 
$
(67.7
)
State
(8.0
)
 
(4.5
)
 
7.6

Foreign
11.7

 
(0.9
)
 
(1.0
)
Total deferred
(7.1
)
 
6.0

 
(61.1
)
Total income tax provision
$
74.7

 
$
49.6

 
$
43.8


The income tax provision includes federal, state and foreign income taxes currently payable and those deferred or prepaid because of temporary differences between financial statement and tax bases of assets and liabilities. The Company records income taxes under the liability method. Under this method, deferred income taxes are recognized for the estimated future tax effects of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws. The amount provided for deferred income taxes reflects that impact of the revaluation of the Company's deferred income tax assets and liabilities required as the result of the change in the U.S. federal and state income tax rates, as discussed above.

Deferred Income Tax Assets and Liabilities

The net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets, determined using the income tax rate applicable to each period in which those items will reverse, consist of the following:

82
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 
December 31,
(in millions)
2019
 
2018
Deferred tax assets:
 
 
 
Stock-based compensation
$
13.9

 
$
12.8

Accrued expenses and other
129.7

 
49.1

Net operating losses, foreign tax credits and other tax attribute carryforwards
43.1

 
56.1

Inventories
8.2

 
6.0

Transaction costs
6.6

 
13.5

Property, plant and equipment
2.9

 
3.6

Total deferred tax assets
204.4

 
141.1

Valuation allowances
(30.0
)
 
(43.1
)
Total net deferred tax assets
$
174.4

 
$
98.0

Deferred tax liabilities:
 
 
 
Intangible assets
$
(156.4
)
 
$
(156.8
)
Property, plant and equipment
(36.9
)
 
(30.3
)
Accrued expenses and other
(69.1
)
 
(5.8
)
Total deferred tax liabilities
(262.4
)
 
(192.9
)
Net deferred tax liabilities
$
(88.0
)
 
$
(94.9
)

Tax Attributes Included in Deferred Tax Assets
Included in the calculation of the Company’s deferred tax assets are the following gross income tax attributes available at December 31, 2019 and 2018, respectively:
(in millions)
2019
 
2018
State net operating losses (“SNOLs”)
$
165.7

 
$
355.7

U.S. federal foreign tax credits (“FTCs”)
12.2

 
12.2

U.S. state income tax credits ("SITCs")
5.3

 
8.0

Foreign net operating losses (“FNOLs”)
36.9

 
57.0

Charitable contribution carryover ("CCCs")
32.9

 
39.6

Interest limitation carryover ("ILC")
—

 
10.6



The SNOLs, FTCs, SITCs, FNOLs and CCCs generally expire in 2021, 2023, 2023, 2023 and 2020, respectively.
    
Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of certain of the SNOLs, FTCs, SITCs, FNOLs, CCCs, the ILC and certain other deferred tax assets related to certain foreign operations (together, the “Tax Attributes”). In assessing the realizability of deferred tax assets (including the Tax Attributes), management considers whether it is more likely than not that some portion of all of such deferred tax assets will not be realized. Accordingly, the Company has established a valuation allowance for certain Tax Attributes. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible or creditable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company has recorded valuation allowances against $89.5 million of the SNOLs, $12.2 million of the FTCs and $1.4 million of SITCs. With respect to all other Tax Attributes above, based upon the level of historical taxable income and projections for future taxable income, management believes it is more likely than not the Company will realize the benefits of the underlying deferred tax assets. However, there can be no assurance that such assets will be realized if circumstances change.


83
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred Tax Liability for Undistributed Foreign Earnings
    
No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the Transition Tax, or any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. At December 31, 2019, the Company’s tax basis in its top tier foreign subsidiary exceeded the Company’s book basis in this subsidiary in the hands of the top tier foreign subsidiary's U.S. shareholder. The Company has not recorded a deferred tax asset on such excess tax basis as it is not apparent that the excess tax basis will reverse in the foreseeable future. As it relates to the book to tax basis difference with respect to the stock of each of the Company’s lower tier foreign subsidiaries, as a general matter, the book basis exceeds the tax basis in the hands of such foreign subsidiaries' shareholders. By operation of the tax laws of the various countries in which these subsidiaries are domiciled, earnings of lower tier foreign subsidiaries are not subject to tax, in all material respects, when distributed to a foreign shareholder. It is the Company’s intent that the earnings of each lower tier foreign subsidiary, with the exception of its Danish subsidiary and one of its Canadian subsidiaries, will be permanently reinvested in each such foreign subsidiaries' own operations. As it relates to the Danish subsidiary, its earnings may be distributed without any income tax impact. Thus, no tax is provided for with respect to the book to tax basis difference of its stock. With respect to the Canadian subsidiary, Canadian income tax withholding applies to any distribution it makes to its foreign parent company. The Company concluded that at December 31, 2019 the Canadian subsidiary has accumulated earnings in excess of its operating needs and as such Canadian withholding tax has been accrued on such excess. The amount accrued is not material.

Uncertain Income Tax Positions
    
GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured at the largest amount of benefit that has a greater than 50.0% likelihood of being realized. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions)
 
Balance as of December 31, 2017
$
84.5

Additions based on tax positions related to 2018
2.5

Additions for tax positions of prior years
21.2

Expiration of statutes of limitations
—

Settlements of uncertain tax positions with tax authorities
(4.4
)
Balance as of December 31, 2018
$
103.8

Additions based on tax positions related to 2019
—

Additions for tax positions of prior years
0.7

Expiration of statutes of limitations
—

Settlements of uncertain tax positions with tax authorities
—

Balance as of December 31, 2019
$
104.5



The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2019, 2018 and 2017 would be $96.8 million, $91.4 million and $31.7 million, respectively. During the years ended December 31, 2019, 2018 and 2017, the Company recognized $1.3 million, $6.4 million and $0.4 million in interest and penalties, respectively, in income tax expense. The Company had $67.9 million, $66.3 million and $59.9 million of accrued interest and penalties at December 31, 2019, 2018 and 2017, respectively.

The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months as a result of the statute of limitations expiring and/or the examinations being concluded on these returns. However, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the Consolidated Financial Statements, other than the Danish Tax Matter discussed below which the Company believes will be settled commensurate with the amount previously accrued. With few exceptions, the Company is no longer subject to tax examinations by the U.S., state and local municipalities for periods prior to 2011, and in non-U.S. jurisdictions for periods prior to 2001. The Company is currently under examination by various tax authorities around the world. 

84
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's liability for the Danish Tax Matter uncertain tax position is derived using a cumulative probability analysis with possible outcomes based on an evaluation of facts and circumstances and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standard, taking into account the U.S. and Danish income tax implications of such outcomes. The Company’s remaining uncertain tax liability is derived using the cumulative probability analysis with possible outcomes for each relevant matter based on the Company's updated evaluation of the facts and circumstances regarding each such matter and applying the technical requirements applicable to each tax position taken as it relates to each applicable taxing jurisdiction. The uncertain tax liability reflects the Company’s best judgment of the facts, circumstances and information available related to each matter through the balance sheet date.

The Danish Tax Matter

The Company has been involved in a dispute with the Danish Tax Authority ("SKAT") regarding the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish Tax Matter") for tax years 2001 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process.

During 2018, the Company reached agreements with both SKAT and the U.S. Internal Revenue Service ("IRS") (the "Settlement") with respect to the adjusted amount of royalties for tax years 2001 through 2011. The Company and SKAT are currently discussing the appropriate administrative process required to implement the Settlement as it relates to both tax and interest. During this process, the Company continues to maintain a liability on its balance sheet for tax and interest under the terms of the Settlement. At December 31, 2019 and December 31, 2018, the Danish liability related to the Settlement is DKK 847.3 million (approximately $127.2 million and $130.0 million using the applicable exchange rates at December 31, 2019 and December 31, 2018, respectively) and is included in accrued expenses and other current liabilities within the Company’s Consolidated Balance Sheet. At December 31, 2019 and December 31, 2018, respectively the Company had on deposit with SKAT DKK 970.1 million (approximately $145.6 million using the applicable exchange rate at December 31, 2019) and DKK 962.3 million (approximately $147.7 million using the applicable exchange rate at December 31, 2018) for the satisfaction of the anticipated liability for both tax and interest once the administrative process is concluded. The deposit held by SKAT is included in "Prepaid expenses and other current assets" within the Company's Consolidated Balance Sheet.
    
SKAT has issued income tax assessments for the years 2012 through 2017 asserting an increase in the royalty earned by the Danish subsidiary. The Company expects to continue to receive income tax assessments from SKAT for the tax years 2018 and forward, asserting the royalties paid by the U.S. to the Danish subsidiary were too low, which the Company disputes. The Company entered into the Advance Pricing Agreement Program (the "APA Program") for the tax years 2012 through 2022 (the "Post-2011 Years") in which the IRS, on the Company’s behalf, will negotiate directly with SKAT for a mutually agreeable royalty due from the U.S. subsidiary to the Danish Subsidiary (the "APA"). That APA is in the early stages of negotiations. Such negotiations are not expected to be concluded in the near term. The Company anticipates such negotiations will result in an increase in the amount of royalties due from the U.S subsidiary to the Danish subsidiary (the "Post-2011 Years Adjustment") for the years 2012 - 2019 (the "2012 to Current Period"). It is expected that the Post-2011 Years Adjustment will result in additional income tax in Denmark and a reduction of tax in the United States for the 2012 to Current Period. Consequently, the Company maintains an uncertain income tax liability for its estimate of the potential Danish income tax liability and a deferred tax asset for the associated United States tax benefit for the Post-2011 Years Adjustment. As of December 31, 2019 and December 31, 2018, the Company had accrued Danish tax and interest for Post-2011 Years of approximately DKK 263.3 million and DKK 230.3 million ($39.5 million and $35.3 million using the applicable exchange rates at December 31, 2019 and December 31, 2018, respectively) as an uncertain income tax liability, which is included in other non-current liabilities on the Company's Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively. The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish tax for the Post-2011 Years as of December 31, 2019 and 2018, respectively, is approximately $7.2 million and $4.2 million. Both the uncertain income tax liability and the deferred tax asset reflect the Company’s best judgment of the facts, circumstances and information available through December 31, 2019.

If the Company is not successful in resolving the Danish Tax Matter for the Post-2011 Years or there is a change in facts and circumstances, the Company may be required to further increase its uncertain income tax position associated with this matter, or decrease its deferred tax asset, also related to this matter, which could have a material impact on the Company's reported earnings.
    

85
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company continues to discuss certain matters with SKAT relating to the Danish Tax Matter. For instance, the Company’s calculation of interest for the Settlement Years differs from the amount asserted by SKAT by approximately DKK 125.0 million (approximately $18.8 million using the December 31, 2019 exchange rate). The Company believes its calculations properly reflect the mechanics of the calculation of interest as provided in Danish tax law and as such has not recorded a liability for the incremental interest proposed by SKAT. Further, if the IRS and SKAT are unable to reach a mutually acceptable agreement with respect to the years included in the APA Program, the Company could be required to make a significant payment to SKAT for Danish tax related to such years, which could have a material adverse effect on the Company’s results of operations and liquidity.
    
From June 2012 through December 31, 2018, SKAT withheld Value Added Tax refunds otherwise owed to the Company, pending resolution of the Danish Tax Matter. Total withheld refunds at both December 31, 2019 and 2018 is approximately DKK 347.1 million (approximately $52.1 million and $53.3 million at the December 31, 2019 and 2018 exchange rates, respectively). In July 2016, the Company paid a deposit to SKAT in the amount of approximately DKK 615.2 million (approximately $92.3 million and $94.4 million using the applicable exchange rates at December 31, 2019 and 2018, respectively) (the “Tax Deposit”) and applied approximately DKK 232.1 million (approximately $34.8 million and $35.6 million using the applicable exchange rates at December 31, 2019 and 2018, respectively) of its Value Added Tax refund (the “VAT Refund Applied”) to the aforementioned potential Danish income tax liability, consistent with the Company’s reserve position for this royalty matter. The deposit was made to mitigate additional interest and foreign exchange exposure. The Tax Deposit and the VAT Refund Applied are included within prepaid and other current assets and other non-current assets on the Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively.

(16) Earnings Per Common Share

The following table sets forth the components of the numerator and denominator for the computation of basic and diluted earnings per share for net income attributable to Tempur Sealy International.
 
Year Ended December 31,
(in millions, except per common share amounts)
2019
 
2018
 
2017
Numerator:
 
 
 
 
 
Net income from continuing operations, net of loss attributable to non-controlling interests
$
190.9

 
$
118.3

 
$
182.3

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Denominator for basic earnings per common share—weighted average shares
54.5

 
54.4

 
54.0

Effect of dilutive securities:
 
 
 
 
 
Employee stock-based compensation
0.9

 
0.7

 
0.7

Denominator for diluted earnings per common share—adjusted weighted average shares
55.4

 
55.1

 
54.7

 
 
 
 
 
 
Basic earnings per common share for continuing operations
$
3.50

 
$
2.17

 
$
3.37

 
 
 
 
 
 
Diluted earnings per common share for continuing operations
$
3.45

 
$
2.15

 
$
3.33



The Company excluded 1.1 million, 1.5 million and 1.3 million shares issuable upon exercise of outstanding stock options for the years ended December 31, 2019, 2018 and 2017, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International’s common stock or they were otherwise anti-dilutive. Holders of non-vested stock-based compensation awards do not have voting rights or rights to receive any dividends thereon.


86
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(17) Business Segment Information

The Company operates in two segments: North America and International. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. The North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S. and Canada. The International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America. The Company evaluates segment performance based on net sales, gross profit and operating income. There were no customers that contributed more than 10% of the Company's sales in 2019 or 2018.

The Company’s North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company’s accompanying Consolidated Financial Statements. The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payable.

The following table summarizes total assets by segment:
 
December 31,
 
December 31,
(in millions)
2019
 
2018
North America
$
3,142.9

 
$
2,788.1

International
615.3

 
604.8

Corporate
477.1

 
569.0

Inter-segment eliminations
(1,173.5
)
 
(1,246.5
)
Total assets
$
3,061.8

 
$
2,715.4


     The following table summarizes property, plant and equipment, net, by segment:
 
December 31,
 
December 31,
(in millions)
2019
 
2018
North America
$
328.9

 
$
317.5

International
51.8

 
51.1

Corporate
55.1

 
52.2

Total property, plant and equipment, net
$
435.8

 
$
420.8


 
The following table summarizes operating lease right-of-use assets by segment:
 
December 31,
 
December 31,
(in millions)
2019
 
2018
North America
$
202.0

 
$
—

International
42.2

 
—

Corporate
1.2

 
—

Total operating lease right-of-use assets
$
245.4

 
$
—





87
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes segment information for the year ended December 31, 2019:
(in millions)
North America
 
International
 
Corporate
 
Eliminations
 
Consolidated
Bedding sales
$
2,379.6

 
$
455.7

 
$
—

 
$
—

 
$
2,835.3

Other sales
153.7

 
117.0

 
—

 
—

 
270.7

Net sales
$
2,533.3

 
$
572.7

 
$
—

 
$
—

 
$
3,106.0

 
 
 
 
 
 
 
 
 
 
Inter-segment sales
$
3.4

 
$
0.7

 
$
—

 
$
(4.1
)
 
$
—

Inter-segment royalty expense (income)
4.5

 
(4.5
)
 
—

 
—

 
—

Gross profit
1,035.2

 
307.0

 
—

 
—

 
1,342.2

Operating income (loss)
344.8

 
115.4

 
(113.5
)
 
—

 
346.7

Income (loss) from continuing operations before income taxes
337.0

 
109.7

 
(181.2
)
 
—

 
265.5

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization (1)
$
64.4

 
$
13.7

 
$
38.4

 
$
—

 
$
116.5

Capital expenditures
62.1

 
11.6

 
14.5

 
—

 
88.2

(1)
Depreciation and amortization includes stock-based compensation amortization expense.

The following table summarizes segment information for the year ended December 31, 2018:
(in millions)
North America
 
International
 
Corporate
 
Eliminations
 
Consolidated
Bedding sales
$
2,002.1

 
$
453.2

 
$
—

 
$
—

 
$
2,455.3

Other sales
134.1

 
113.5

 
—

 
—

 
247.6

Net sales
$
2,136.2

 
$
566.7

 
$
—

 
$
—

 
$
2,702.9

 
 
 
 
 
 
 
 
 
 
Inter-segment sales
$
3.4

 
$
0.5

 
$
—

 
$
(3.9
)
 
$
—

Inter-segment royalty expense (income)
3.1

 
(3.1
)
 
—

 
—

 
—

Gross profit
823.4

 
297.3

 
—

 
—

 
1,120.7

Operating income (loss)
250.0

 
107.5

 
(101.2
)
 
—

 
256.3

Income (loss) from continuing operations before income taxes
241.1

 
101.0

 
(177.1
)
 
—

 
165.0

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization (1)
$
59.0

 
$
13.5

 
$
39.4

 
$
—

 
$
111.9

Capital expenditures
52.7

 
14.0

 
6.9

 
—

 
73.6

(1)
Depreciation and amortization includes stock-based compensation amortization expense.


88
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes segment information for the year ended December 31, 2017:
(in millions)
North America
 
International
 
Corporate
 
Eliminations
 
Consolidated
Bedding sales
$
2,051.8

 
$
421.6

 
$
—

 
$
—

 
$
2,473.4

Other sales
122.0

 
105.2

 
—

 
—

 
227.2

Net sales
$
2,173.8

 
$
526.8

 
$
—

 
$
—

 
$
2,700.6

 
 
 
 
 
 
 
 
 
 
Inter-segment sales
$
3.8

 
$
1.0

 
$
—

 
$
(4.8
)
 
$
—

Inter-segment royalty expense (income)
5.5

 
(5.5
)
 
—

 
—

 
—

Gross profit
844.7

 
276.3

 
—

 
—

 
1,121.0

Operating income (loss)
273.2

 
112.0

 
(89.7
)
 
—

 
295.5

Income (loss) from continuing operations before income taxes
276.0

 
104.5

 
(165.1
)
 
—

 
215.4

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization (1)
$
51.4

 
$
14.1

 
$
28.5

 
$
—

 
$
94.0

Capital expenditures
39.9

 
9.0

 
17.7

 
—

 
66.6

(1)
Depreciation and amortization includes stock-based compensation amortization expense.

The following table summarizes property, plant and equipment, net, by geographic region:
 
December 31,
 
December 31,
(in millions)
2019
 
2018
United States
$
366.4

 
$
350.7

Canada
17.5

 
19.1

Other International
51.9

 
51.0

Total property, plant and equipment, net
$
435.8

 
$
420.8

Total International
$
69.4

 
$
70.1



The following table summarizes operating lease right-of-use assets by geographic region:
 
December 31,
 
December 31,
(in millions)
2019
 
2018
United States
$
198.3

 
$
—

Canada
4.9

 
—

Other International
42.2

 
—

Total operating lease right-of-use assets
$
245.4

 
$
—

Total International
$
47.1

 
$
—



The following table summarizes net sales by geographic region:
 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
United States
$
2,312.3

 
$
1,928.9

 
$
1,954.2

Canada
221.0

 
207.3

 
219.6

Other International
572.7

 
566.7

 
526.8

Total net sales
$
3,106.0

 
$
2,702.9

 
$
2,700.6

Total International
$
793.7

 
$
774.0

 
$
746.4



89
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(18) Quarterly Financial Data (unaudited)
 
Quarterly results of operations for the years ended December 31, 2019 and 2018 are summarized below:
(in millions, except per share amounts)
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
2019
 
 
 
 
 
 
 
Net sales
$
690.9

 
$
722.8

 
$
821.0

 
$
871.3

Gross profit
281.8

 
313.4

 
360.6

 
386.4

Operating income
60.5

 
81.0

 
120.6

 
84.6

Income from continuing operations
29.0

 
42.7

 
72.4

 
46.7

Net income attributable to Tempur Sealy International, Inc.
28.4

 
41.6

 
73.3

 
46.2

Basic earnings per common share for continuing operations
$
0.53

 
$
0.78

 
$
1.33

 
$
0.87

Diluted earnings per common share for continuing operations
$
0.52

 
$
0.76

 
$
1.30

 
$
0.85

 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
Net sales
$
637.4

 
$
659.9

 
$
729.5

 
$
676.1

Gross profit
264.7

 
272.8

 
300.0

 
283.2

Operating income
55.7

 
58.0

 
84.7

 
57.9

Income from continuing operations
25.6

 
26.6

 
44.1

 
19.1

Net income attributable to Tempur Sealy International, Inc.
23.1

 
22.8

 
42.3

 
12.3

Basic earnings per common share for continuing operations
$
0.48

 
$
0.52

 
$
0.83

 
$
0.35

Diluted earnings per common share for continuing operations
$
0.47

 
$
0.52

 
$
0.82

 
$
0.35


 
The sum of the quarterly earnings per common share amounts may not equal the annual amount reported because per share amounts are computed independently for each quarter and for the full year based on respective weighted-average common shares outstanding and other dilutive potential common shares. The Company’s quarterly operating results fluctuate as a result of seasonal variations in the Company’s business.
    
In the fourth quarter of 2019, the Company recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL Holding, LLC ("Mattress PAL") and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. Additionally, in the fourth quarter of 2019, the Company recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.

In the fourth quarter of 2018, prior to the Sleep Outfitters Acquisition, the Company recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account. Additionally, in the fourth quarter of 2018, the Company recorded $9.1 million of restructuring costs. These costs included $4.7 million of charges in the International business segment associated with International simplification efforts, including headcount reduction, professional fees, store closures and other costs, $2.9 million of Corporate professional fees related to restructuring activities and $1.5 million of charges associated with the operational alignment of a previous joint venture that became wholly acquired in the North America business segment.


90
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(19) Guarantor/Non-Guarantor Financial Information

The $450.0 million and $600.0 million aggregate principal amount of 2023 Senior Notes and 2026 Senior Notes (collectively the "Senior Notes"), respectively, are general unsecured senior obligations of Tempur Sealy International and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by the Combined Guarantor Subsidiaries. The $375.0 million aggregate principal amount of 2020 Senior Notes were general unsecured senior obligations at December 31, 2015 but were redeemed in full in 2016. The foreign subsidiaries (the "Combined Non-Guarantor Subsidiaries") represent the foreign operations of the Company and do not guarantee the Senior Notes. A subsidiary guarantor will be released from its obligations under the applicable indenture governing the Senior Notes when: (a) the subsidiary guarantor is sold or sells all or substantially all of its assets; (b) the subsidiary is declared "unrestricted" under the applicable indenture governing the Senior Notes; (c) the subsidiary’s guarantee of indebtedness under the 2019 Credit Agreement (as it may be amended, refinanced or replaced) is released (other than a discharge through repayment); or (d) the requirements for legal or covenant defeasance or discharge of the applicable indenture have been satisfied. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Company’s wholly-owned subsidiary guarantors and non-guarantor subsidiaries. The Company has accounted for its investments in its subsidiaries under the equity method.

The following financial information presents Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018, and the related Consolidated Statements of Income and Comprehensive Income and Cash Flows for the years ended December 31, 2019, 2018 and 2017 for Tempur Sealy International, Combined Guarantor Subsidiaries and Combined Non-Guarantor Subsidiaries.


91
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.
Supplemental Consolidated Statements of Income and Comprehensive Income
Year Ended December 31, 2019
(in millions)

 
Tempur Sealy International, Inc. (Ultimate Parent)
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Reclassifications and Eliminations
 
Consolidated
Net sales
$
—

 
$
2,387.1

 
$
793.5

 
$
(74.6
)
 
$
3,106.0

Cost of sales
—

 
1,390.6

 
447.8

 
(74.6
)
 
1,763.8

Gross profit
—

 
996.5

 
345.7

 
—

 
1,342.2

Selling and marketing expenses
11.2

 
466.0

 
189.2

 
(0.1
)
 
666.3

General, administrative and other expenses
17.4

 
242.8

 
57.7

 
(2.6
)
 
315.3

Customer-related charges
—

 
29.8

 
—

 
—

 
29.8

Equity income in earnings of unconsolidated affiliates
—

 
—

 
(15.9
)
 
—

 
(15.9
)
Operating (loss) income
(28.6
)
 
257.9

 
114.7

 
2.7

 
346.7

 
 
 
 
 
 
 
 
 
 
Other expense, net:
 
 
 
 
 
 
 
 
 
Third party interest expense, net
56.3

 
26.7

 
2.7

 
—

 
85.7

Intercompany interest (income) expense, net
(9.8
)
 
13.2

 
(3.4
)
 
—

 
—

Interest expense (income), net
46.5

 
39.9

 
(0.7
)
 
—

 
85.7

Other (income) expense, net
—

 
(7.6
)
 
1.6

 
1.5

 
(4.5
)
Total other expense, net
46.5

 
32.3

 
0.9

 
1.5

 
81.2

 
 
 
 
 
 
 
 
 
 
Income from equity investees
250.7

 
84.3

 
—

 
(335.0
)
 
—

 
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
175.6

 
309.9

 
113.8

 
(333.8
)
 
265.5

Income tax benefit (provision)
13.8

 
(59.2
)
 
(29.5
)
 
0.2

 
(74.7
)
Income from continuing operations
189.4

 
250.7

 
84.3

 
(333.6
)
 
190.8

Loss from discontinued operations, net of tax
—

 
—

 
—

 
(1.4
)
 
(1.4
)
Net income before non-controlling interests
189.4

 
250.7

 
84.3

 
(335.0
)
 
189.4

Less: Net loss attributable to non-controlling interest
(0.1
)
 
—

 
(0.1
)
 
0.1

 
(0.1
)
Net income attributable to Tempur Sealy International, Inc.
$
189.5

 
$
250.7

 
$
84.4

 
$
(335.1
)
 
$
189.5

 
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to Tempur Sealy International, Inc.
$
197.1

 
$
251.9

 
$
90.8

 
$
(342.7
)
 
$
197.1

 

92
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.
Supplemental Consolidated Statements of Income and Comprehensive Income
Year Ended December 31, 2018
(in millions)

 
Tempur Sealy International, Inc. (Ultimate Parent)
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Reclassifications and Eliminations
 
Consolidated
Net sales
$
—

 
$
2,000.9

 
$
800.5

 
$
(98.5
)
 
$
2,702.9

Cost of sales
—

 
1,208.3

 
464.3

 
(90.4
)
 
1,582.2

Gross profit
—

 
792.6

 
336.2

 
(8.1
)
 
1,120.7

Selling and marketing expenses
8.4

 
392.0

 
199.8

 
(12.4
)
 
587.8

General, administrative and other expenses
17.8

 
204.6

 
57.4

 
(6.8
)
 
273.0

Customer-related charges
—

 
21.2

 
—

 
—

 
21.2

Equity income in earnings of unconsolidated affiliates
—

 
—

 
(17.6
)
 
—

 
(17.6
)
Operating (loss) income
(26.2
)
 
174.8

 
96.6

 
11.1

 
256.3

 
 
 
 
 
 
 
 
 
 
Other expense, net:
 
 
 
 
 
 
 
 
 
Third party interest expense, net
59.2

 
30.2

 
4.6

 
(1.7
)
 
92.3

Intercompany interest (income) expense, net
(6.9
)
 
10.8

 
(3.9
)
 
—

 
—

Interest expense, net
52.3

 
41.0

 
0.7

 
(1.7
)
 
92.3

Other (income) expense, net
—

 
(9.9
)
 
13.9

 
(5.0
)
 
(1.0
)
Total other expense, net
52.3

 
31.1

 
14.6

 
(6.7
)
 
91.3

 
 
 
 
 
 
 
 
 
 
Income from equity investees
162.0

 
26.6

 
—

 
(188.6
)
 
—

 
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
83.5

 
170.3

 
82.0

 
(170.8
)
 
165.0

Income tax benefit (provision)
14.1

 
(8.3
)
 
(55.4
)
 
—

 
(49.6
)
Income from continuing operations
97.6

 
162.0

 
26.6

 
(170.8
)
 
115.4

Loss from discontinued operations, net of tax
—

 
—

 
—

 
(17.8
)
 
(17.8
)
Net income before non-controlling interests
97.6

 
162.0

 
26.6

 
(188.6
)
 
97.6

Less: Net loss attributable to non-controlling interests
(2.9
)
 
(2.6
)
 
(0.3
)
 
2.9

 
(2.9
)
Net income attributable to Tempur Sealy International, Inc.
$
100.5

 
$
164.6

 
$
26.9

 
$
(191.5
)
 
$
100.5

 
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to Tempur Sealy International, Inc.
$
80.7

 
$
164.2

 
$
7.5

 
$
(171.7
)
 
$
80.7



93
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.
Supplemental Consolidated Statements of Income and Comprehensive Income
Year Ended December 31, 2017
(in millions)
 
Tempur Sealy International, Inc. (Ultimate Parent)
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Reclassifications and Eliminations
 
Consolidated
Net sales
$
—

 
$
1,961.2

 
$
862.5

 
$
(123.1
)
 
$
2,700.6

Cost of sales
—

 
1,185.4

 
497.6

 
(103.4
)
 
1,579.6

Gross profit
—

 
775.8

 
364.9

 
(19.7
)
 
1,121.0

Selling and marketing expenses
5.6

 
406.8

 
188.9

 
(15.2
)
 
586.1

General, administrative and other expenses
17.5

 
176.6

 
78.9

 
(11.6
)
 
261.4

Customer-related charges
(8.4
)
 
21.7

 
1.1

 
—

 
14.4

Equity income in earnings of unconsolidated affiliates
—

 
—

 
(15.6
)
 
—

 
(15.6
)
Royalty income, net of royalty expense
—

 
(20.8
)
 
—

 
—

 
(20.8
)
Operating (loss) income
(14.7
)
 
191.5

 
111.6

 
7.1

 
295.5

 
 
 
 
 
 
 
 
 
 
Other expense, net:
 
 
 
 
 
 
 
 
 
Third party interest expense, net
59.6

 
26.0

 
22.4

 
(20.7
)
 
87.3

Intercompany interest (income) expense, net
(4.7
)
 
8.3

 
(3.6
)
 
—

 
—

Interest expense, net
54.9

 
34.3

 
18.8

 
(20.7
)
 
87.3

Other (income) expense, net
—

 
(17.2
)
 
9.2

 
0.8

 
(7.2
)
Total other expense, net
54.9

 
17.1

 
28.0

 
(19.9
)
 
80.1

 
 
 
 
 
 
 
 
 
 
Income from equity investees
193.1

 
51.3

 
—

 
(244.4
)
 
—

 
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
123.5

 
225.7

 
83.6

 
(217.4
)
 
215.4

Income tax benefit (provision)
17.2

 
(32.6
)
 
(32.3
)
 
3.9

 
(43.8
)
Income from continuing operations
140.7

 
193.1

 
51.3

 
(213.5
)
 
171.6

Loss from discontinued operations
—

 
—

 
—

 
(30.9
)
 
(30.9
)
Net income before non-controlling interests
140.7

 
193.1

 
51.3

 
(244.4
)
 
140.7

Less: Net loss attributable to non-controlling interests
(10.7
)
 
(5.2
)
 
(5.5
)
 
10.7

 
(10.7
)
Net income attributable to Tempur Sealy International, Inc.
$
151.4

 
$
198.3

 
$
56.8

 
$
(255.1
)
 
$
151.4

 
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to Tempur Sealy International, Inc.
$
179.4

 
$
193.0

 
$
89.9

 
$
(282.9
)
 
$
179.4



    


94
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.
Supplemental Consolidated Balance Sheets
December 31, 2019
(in millions)
 
Tempur Sealy International, Inc. (Ultimate Parent)
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Reclassifications and Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
0.2

 
$
20.0

 
$
44.7

 
$
—

 
$
64.9

Accounts receivable, net
0.2

 
21.9

 
352.5

 
(2.6
)
 
372.0

Inventories
—

 
199.9

 
60.6

 
—

 
260.5

Prepaid expenses and other current assets
12.9

 
59.5

 
140.2

 
(9.8
)
 
202.8

Total Current Assets
13.3

 
301.3

 
598.0

 
(12.4
)
 
900.2

Property, plant and equipment, net
—

 
366.5

 
69.3

 
—

 
435.8

Goodwill
—

 
511.2

 
221.1

 
—

 
732.3

Other intangible assets, net
—

 
564.3

 
77.1

 
—

 
641.4

Operating lease right-of-use assets
—

 
198.2

 
47.2

 
—

 
245.4

Deferred income taxes
13.0

 
—

 
14.1

 
(13.0
)
 
14.1

Other non-current assets
0.4

 
46.6

 
45.6

 
—

 
92.6

Net investment in subsidiaries
1,143.3

 
369.0

 
—

 
(1,512.3
)
 
—

Due from affiliates
341.6

 
125.4

 
19.6

 
(486.6
)
 
—

Total Assets
$
1,511.6

 
$
2,482.5

 
$
1,092.0

 
$
(2,024.3
)
 
$
3,061.8

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
198.4

 
$
55.9

 
$
(2.6
)
 
$
251.7

Accrued expenses and other current liabilities
6.8

 
245.7

 
220.7

 
—

 
473.2

Income taxes payable
—

 
10.0

 
10.8

 
(9.8
)
 
11.0

Current portion of long-term debt
—

 
29.5

 
7.9

 
—

 
37.4

Total Current Liabilities
6.8

 
483.6

 
295.3

 
(12.4
)
 
773.3

Long-term debt, net
1,044.3

 
458.1

 
0.2

 
—

 
1,502.6

Long-term operating lease obligations
—

 
172.4

 
33.0

 
—

 
205.4

Deferred income taxes
—

 
98.5

 
16.6

 
(13.0
)
 
102.1

Other non-current liabilities
0.2

 
59.4

 
58.4

 
—

 
118.0

Due to affiliates
99.9

 
67.2

 
319.5

 
(486.6
)
 
—

Total Liabilities
1,151.2

 
1,339.2

 
723.0

 
(512.0
)
 
2,701.4

 
 
 
 
 
 
 
 
 
 
Total Stockholders' Equity
360.4

 
1,143.3

 
369.0

 
(1,512.3
)
 
360.4

Total Liabilities and Stockholders’ Equity
$
1,511.6

 
$
2,482.5

 
$
1,092.0

 
$
(2,024.3
)
 
$
3,061.8


95
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.
Supplemental Consolidated Balance Sheets
December 31, 2018
(in millions)


Tempur Sealy International, Inc. (Ultimate Parent)
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Reclassifications and Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
0.1

 
$
6.2

 
$
39.5

 
$
—

 
$
45.8

Accounts receivable, net
—

 
15.2

 
303.3

 
3.0

 
321.5

Inventories
—

 
159.4

 
62.9

 
—

 
222.3

Prepaid expenses and other current assets
276.9

 
65.4

 
148.1

 
(274.6
)
 
215.8

Total Current Assets
277.0

 
246.2

 
553.8

 
(271.6
)
 
805.4

Property, plant and equipment, net
—

 
350.7

 
70.1

 
—

 
420.8

Goodwill
—

 
508.8

 
214.2

 
—

 
723.0

Other intangible assets, net
—

 
572.7

 
76.6

 
—

 
649.3

Deferred income taxes
15.0

 
—

 
22.6

 
(15.0
)
 
22.6

Other non-current assets
—

 
49.2

 
45.1

 
—

 
94.3

Net investment in subsidiaries
661.7

 
210.0

 
—

 
(871.7
)
 
—

Due from affiliates
422.1

 
153.8

 
15.4

 
(591.3
)
 
—

Total Assets
$
1,375.8

 
$
2,091.4

 
$
997.8

 
$
(1,749.6
)
 
$
2,715.4

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
186.7

 
$
63.3

 
$
3.0

 
$
253.0

Accrued expenses and other current liabilities
6.7

 
143.9

 
208.6

 
—

 
359.2

Income taxes payable
—

 
274.7

 
9.6

 
(274.6
)
 
9.7

Current portion of long-term debt
—

 
44.0

 
3.1

 
—

 
47.1

Total Current Liabilities
6.7

 
649.3

 
284.6

 
(271.6
)
 
669.0

Long-term debt, net
1,043.0

 
547.1

 
9.0

 
—

 
1,599.1

Deferred income taxes
—

 
118.0

 
14.5

 
(15.0
)
 
117.5

Other non-current liabilities
1.9

 
58.2

 
52.2

 
—

 
112.3

Due to affiliates
106.7

 
57.1

 
427.5

 
(591.3
)
 
—

Total Liabilities
1,158.3

 
1,429.7

 
787.8

 
(877.9
)
 
2,497.9

 
 
 
 
 
 
 
 
 
 
Total Stockholders’ Equity
217.5

 
661.7

 
210.0

 
(871.7
)
 
217.5

Total Liabilities and Stockholders’ Equity
$
1,375.8

 
$
2,091.4

 
$
997.8

 
$
(1,749.6
)
 
$
2,715.4




96
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.
Supplemental Consolidated Statements of Cash Flows
Year Ended December 31, 2019
(in millions)

 
Tempur Sealy International, Inc. (Ultimate Parent)
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Reclassifications and Eliminations
 
Consolidated
Net cash (used in) provided by operating activities from continuing operations
$
(47.6
)
 
$
295.2

 
$
65.2

 
$
2.0

 
$
314.8

 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Contributions (paid to) received from subsidiaries and affiliates
—

 
(68.4
)
 
68.4

 
—

 
—

Purchases of property, plant and equipment
—

 
(76.2
)
 
(12.0
)
 
—

 
(88.2
)
Acquisitions, net of cash acquired
—

 
(8.1
)
 
(9.0
)
 
—

 
(17.1
)
Other
—

 
4.9

 
10.2

 
—

 
15.1

Net cash (used in) provided by investing activities from continuing operations
—

 
(147.8
)
 
57.6

 
—

 
(90.2
)
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings under long-term debt obligations
—

 
607.8

 
635.0

 
—

 
1,242.8

Repayments of borrowings under long-term debt obligations
—

 
(707.6
)
 
(639.5
)
 
—

 
(1,347.1
)
Net activity in investment in and advances from (to) subsidiaries and affiliates
135.6

 
(22.8
)
 
(112.8
)
 
—

 
—

Proceeds from exercise of stock options
17.8

 
—

 
—

 
—

 
17.8

Treasury stock repurchased
(105.7
)
 
—

 
—

 
—

 
(105.7
)
Repayments of deferred financing costs
—

 
(3.2
)
 
—

 
—

 
(3.2
)
Repayments of finance lease obligations and other
—

 
(7.8
)
 
—

 
—

 
(7.8
)
Net cash provided by (used in) financing activities from continuing operations
47.7

 
(133.6
)
 
(117.3
)
 
—

 
(203.2
)
 
 
 
 
 
 
 
 
 
 
Net cash provided by continuing operations
0.1

 
13.8

 
5.5

 
2.0

 
21.4

 
 
 
 
 
 
 
 
 
 
CASH USED IN DISCONTINUED OPERATIONS
 
 
 
 
 
 
 
 
 
Operating cash flows, net
—

 
—

 
—

 
(2.0
)
 
(2.0
)
Investing cash flows, net
—

 
—

 
—

 
—

 
—

Financing cash flows, net
—

 
—

 
—

 
—

 
—

Net cash used in discontinued operations
—

 
—

 
—

 
(2.0
)
 
(2.0
)
 
 
 
 
 
 
 
 
 
 
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
—

 
—

 
(0.3
)
 
—

 
(0.3
)
Increase in cash and cash equivalents
0.1

 
13.8

 
5.2

 
—

 
19.1

CASH AND CASH EQUIVALENTS, beginning of period
0.1

 
6.2

 
39.5

 
—

 
45.8

CASH AND CASH EQUIVALENTS, end of period
$
0.2

 
$
20.0

 
$
44.7

 
$
—

 
$
64.9

 

97
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.
Supplemental Consolidated Statements of Cash Flows
Year Ended December 31, 2018
(in millions)

 
Tempur Sealy International, Inc. (Ultimate Parent)
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Reclassifications and Eliminations
 
Consolidated
Net cash (used in) provided by operating activities from continuing operations
$
(55.8
)
 
$
166.6

 
$
72.3

 
$
24.4

 
$
207.5

 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Contributions (paid to) received from subsidiaries and affiliates
—

 
(75.8
)
 
75.8

 
—

 
—

Purchases of property, plant and equipment
—

 
(58.8
)
 
(15.3
)
 
0.5

 
(73.6
)
Other
—

 
0.1

 
4.9

 
(2.6
)
 
2.4

Net cash (used in) provided by investing activities from continuing operations
—

 
(134.5
)
 
65.4

 
(2.1
)
 
(71.2
)
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings under long-term debt obligations
—

 
414.0

 
680.9

 
—

 
1,094.9

Repayments of borrowings under long-term debt obligations
—

 
(444.0
)
 
(751.8
)
 
—

 
(1,195.8
)
Net activity in investment in and advances from (to) subsidiaries and affiliates
55.8

 
(3.0
)
 
(52.8
)
 
—

 
—

Proceeds from exercise of stock options
4.6

 
—

 
—

 
—

 
4.6

Treasury stock repurchased
(4.6
)
 
—

 
—

 
—

 
(4.6
)
Repayments of finance lease obligations and other
—

 
(5.2
)
 
(0.9
)
 
—

 
(6.1
)
Net cash provided by (used in) financing activities from continuing operations
55.8

 
(38.2
)
 
(124.6
)
 
—

 
(107.0
)
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by continuing operations
—

 
(6.1
)
 
13.1

 
22.3

 
29.3

 
 
 
 
 
 
 
 
 
 
CASH USED IN DISCONTINUED OPERATIONS
 
 
 
 
 
 
 
 
 
Operating cash flows, net
—

 
—

 
—

 
(24.4
)
 
(24.4
)
Investing cash flow, net
—

 
—

 
—

 
2.1

 
2.1

Financing cash flows, net
—

 
—

 
—

 
—

 
—

Net cash used in discontinued operations
—

 
—

 
—

 
(22.3
)
 
(22.3
)
 
 
 
 
 
 
 
 
 
 
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
—

 
—

 
(3.1
)
 
—

 
(3.1
)
(Decrease) increase in cash and cash equivalents
—

 
(6.1
)
 
10.0

 
—

 
3.9

CASH AND CASH EQUIVALENTS, beginning of period
0.1

 
12.3

 
29.5

 
—

 
41.9

CASH AND CASH EQUIVALENTS, end of period
$
0.1

 
$
6.2

 
$
39.5

 
$
—

 
$
45.8


98
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TEMPUR SEALY INTERNATIONAL, INC.
Supplemental Consolidated Statements of Cash Flows
Year Ended December 31, 2017
(in millions)
 
Tempur Sealy International, Inc. (Ultimate Parent)
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Reclassifications and Eliminations
 
Consolidated
Net cash (used in) provided by operating activities from continuing operations
$
(55.3
)
 
$
376.9

 
$
(98.7
)
 
$
33.6

 
$
256.5

 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Contributions (paid to) received from subsidiaries and affiliates
—

 
(129.7
)
 
129.7

 
—

 
—

Purchases of property, plant and equipment
—

 
(55.8
)
 
(11.2
)
 
0.4

 
(66.6
)
  Other
—

 
0.8

 
4.1

 
(4.0
)
 
0.9

Net cash (used in) provided by investing activities from continuing operations
—

 
(184.7
)
 
122.6

 
(3.6
)
 
(65.7
)
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings under long-term debt obligations
—

 
603.9

 
729.0

 
—

 
1,332.9

Repayments of borrowings under long-term debt obligations
—

 
(790.8
)
 
(680.7
)
 
—

 
(1,471.5
)
Net activity in investment in and advances from (to) subsidiaries and affiliates
87.5

 
0.5

 
(88.0
)
 
—

 
—

Proceeds from exercise of stock options
12.8

 
—

 
—

 
—

 
12.8

Treasury stock repurchased
(44.9
)
 
—

 
—

 
—

 
(44.9
)
Payment of deferred financing costs
—

 
—

 
(0.5
)
 
—

 
(0.5
)
Other
—

 
(1.4
)
 
(2.6
)
 
—

 
(4.0
)
Net cash provided by (used in) financing activities from continuing operations
55.4

 
(187.8
)
 
(42.8
)
 
—

 
(175.2
)
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) continuing operations
0.1

 
4.4

 
(18.9
)
 
30.0

 
15.6

 
 
 
 
 
 
 
 
 
 
CASH USED IN DISCONTINUED OPERATIONS
 
 
 
 
 
 
 
 
 
Operating cash flows, net
—

 
—

 
—

 
(33.6
)
 
(33.6
)
Investing cash flow, net
—

 
—

 
—

 
3.6

 
3.6

Financing cash flows, net
—

 
—

 
—

 
—

 
—

Net cash used in discontinued operations
—

 
—

 
—

 
(30.0
)
 
(30.0
)
 
 
 
 
 
 
 
 
 
 
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
—

 
—

 
(9.4
)
 
—

 
(9.4
)
Increase (decrease) in cash and cash equivalents
0.1

 
4.4

 
(28.3
)
 
—

 
(23.8
)
CASH AND CASH EQUIVALENTS, beginning of period
—

 
7.9

 
57.8

 
—

 
65.7

CASH AND CASH EQUIVALENTS, end of period
0.1

 
12.3

 
29.5

 
—

 
41.9

LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS
—

 
—

 
0.8

 
—

 
0.8

CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
$
0.1

 
$
12.3

 
$
28.7

 
$
—

 
$
41.1




99

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2019, and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019 based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of December 31, 2019.

Our independent registered public accounting firm, Ernst & Young LLP, has issued a report on the Company’s internal control over financial reporting as of December 31, 2019. That report appears on page 101 of this Report.

Changes in Internal Control over Financial Reporting
 
There have not been any changes in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

100

Report of Independent Registered Public Accounting Firm


The Stockholders and the Board of Directors of Tempur Sealy International, Inc. and Subsidiaries

Opinion on Internal Control over Financial Reporting

We have audited Tempur Sealy International, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Tempur Sealy International, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 21, 2020, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ Ernst & Young LLP

Louisville, Kentucky
February 21, 2020

101

PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this Item is incorporated herein by reference from our definitive proxy statement for the 2020 Annual Meeting of Stockholders (the "Proxy Statement") under the sections entitled "Proposal One—Election of Directors," and "Board of Directors’ Meetings, Committees of the Board and Related Matters—Corporate Governance," — "Committees of the Board," —"Policies Governing Director Nominations," and "Executive Compensation and Related Information—Delinquent Section 16(a) Reports."
 
Information relating to executive officers is incorporated herein by reference from our Proxy Statement under the section entitled "Proposal One—Election of Directors—Executive Officers."
 
ITEM 11. EXECUTIVE COMPENSATION
 
The information required by this Item is incorporated by reference from the Proxy Statement under the sections entitled “Executive Compensation and Related Information” and “Board of Directors’ Meetings, Committees of the Board and Related Matters—Compensation Committee Interlocks and Insider Participation.”
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Equity Compensation Plan Information

The following table sets forth equity compensation plan information as of December 31, 2019:
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders:
 
 
 
 
 
 
  Amended and Restated 2003 Equity Incentive Plan (1)
 
100,317

 
$
44.11

 
—

  Amended and Restated 2013 Equity Incentive Plan (2)
 
4,165,274

 
61.75

 
2,948,158

Total
 
4,265,591

 
$
105.86

 
2,948,158


(1)
In May 2013, our Board of Directors adopted a resolution that prohibited further grants under the Amended and Restated 2003 Equity Incentive Plan. The number of securities to be issued upon exercise of outstanding stock options, warrants and rights issued under the Amended and Restated 2003 Equity Incentive Plan includes 404 shares issuable under restricted stock units and deferred stock units. These restricted and deferred stock units are excluded from the weighted average exercise price calculation above.
(2)
The number of securities to be issued upon exercise of outstanding stock options, warrants and rights issued under the Amended and Restated 2013 Equity Incentive Plan includes 1,268,462 shares issuable under restricted stock units and deferred stock units. Additionally, this number includes 1,701,245 performance restricted stock units which reflects a maximum payout of the awards granted. The Company expects that in early March 2019 the Compensation Committee of the Board of Directors will formally determine that the Company did not have $600.0 million or more in Adjusted EBITDA for 2019 in accordance with the 2019 Aspirational Plan PRSUs. As a result, half of the total outstanding PRSUs above will be forfeited as of this date. These restricted, deferred and performance restricted stock units are excluded from the weighted average exercise price calculation above.

For information regarding the material features of each of the above plans see Note 13, “Stock-based Compensation,” in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.

All other information required by this Item is incorporated by reference from the Proxy Statement under the section entitled "Principal Security Ownership and Certain Beneficial Owners."
 

102

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
The information required by this Item is incorporated by reference from the Proxy Statement under the section entitled “Executive Compensation and Related Information—Certain Relationships and Related Transactions” and “Board of Directors' Meetings, Committees of the Board and Related Matters—Board and Committee Independence; Audit Committee Financial Experts.”

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this Item is incorporated by reference from the Proxy Statement under the sections entitled “Proposal Two— Ratification of Independent Auditors—Fees for Independent Auditors During the Years Ended December 31, 2019 and 2018” and “—Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditors.”

PART IV
 

103

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a)
1.
The following is a list of the financial statements of Tempur Sealy International, Inc. included in this Report, which are filed herewith pursuant to ITEM 8:
 
 
Report of Independent Registered Public Accounting Firm
 
 
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017
 
 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
 
 
Consolidated Balance Sheets as of December 31, 2019 and 2018
 
 
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2019, 2018 and 2017
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
 
 
Notes to the Consolidated Financial Statements
 
 
 
 
2.
Financial Statement Schedule:
 
 
Schedule II—Valuation and Qualifying Accounts
 
 
 
 
 
All other schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or notes thereto.
 
 
 
 
3.
Exhibits:

The following is an index of the exhibits included in this Report or incorporated herein by reference.
(b)
 
EXHIBIT INDEX
3.1
3.2
3.3

3.4
4.1
4.2
4.3

4.4
4.5

4.6
10.1
10.2

10.3

10.4

104

10.5

10.6
10.7
10.8
10.9
10.10
10.11
10.12

10.13†

10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28

105

10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57

106

10.58
10.59
10.60
10.61
10.62

10.63
10.64
10.65
10.66
21.1
23.1
31.1
31.2
32.1
101
The following materials from Tempur Sealy International Inc.'s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Stockholders' Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.
104
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in Inline XBRL.

† Certain portions of this exhibit have been omitted.
(1)
Incorporated by reference.
(2)
Indicates management contract or compensatory plan or arrangement.
(3)
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

107

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
SCHEDULE II
(in millions)
 
 
 
 
Additions
 
 
 
 
Description
 
Balance at
Beginning of
Period
 
Charges to
Costs and
Expenses
 
Charged to Other
Accounts
 
Deductions
 
Balance at
End of
Period
Allowance for doubtful accounts:
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2017
 
$
20.9

 
9.8

 
—

 
(6.0
)
 
$
24.7

Year Ended December 31, 2018
 
$
24.7

 
31.3

 
—

 
(8.4
)
 
$
47.6

Year Ended December 31, 2019
 
$
47.6

 
29.3

 
—

 
(5.0
)
 
$
71.9


 
 
 
 
Additions
 
 
 
 
Description
 
Balance at
Beginning of
Period
 
Charges to
Costs and
Expenses
 
Charged to Other
Accounts
 
Deductions
 
Balance at
End of
Period
Valuation allowance for deferred tax assets:
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2017
 
$
45.2

 
9.9

 
—

 
—

 
$
55.1

Year Ended December 31, 2018
 
$
55.1

 
9.5

 
—

 
(21.5
)
 
$
43.1

Year Ended December 31, 2019
 
$
43.1

 
0.8

 
—

 
(13.9
)
 
$
30.0



ITEM 16. FORM 10-K SUMMARY

None.


108

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
TEMPUR SEALY INTERNATIONAL, INC.
(Registrant)
 
 
 
 
 
Date: February 21, 2020
 
By:
 
/S/ Scott L. Thompson
 
 
 
 
Scott L. Thompson
Chairman, President and Chief Executive Officer


109

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on February 21, 2020, on behalf of the registrant and in the capacities indicated.
Signature
 
Capacity
 
 
/S/ SCOTT L. THOMPSON
 
Chairman, President and Chief Executive Officer (Principal Executive Officer)
Scott L. Thompson
 
 
 
/S/ BHASKAR RAO
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Bhaskar Rao
 
 
 
/S/ EVELYN S. DILSAVER
 
Director
Evelyn S. Dilsaver
 
 
 
/S/ CATHY R. GATES
 
Director
Cathy R. Gates
 
 
 
/S/ JOHN A. HEIL
 
Director
John A. Heil
 
 
 
/S/ JON L. LUTHER
 
Director
Jon L. Luther
 
 
 
/S/ RICHARD W. NEU
 
Director
Richard W. Neu
 
 
 
/S/ ARIK W. RUCHIM
 
Director
Arik W. Ruchim
 
 
 
/S/ ROBERT B. TRUSSELL, JR.
 
Director
Robert B. Trussell, Jr.
 


110
Exhibit



DESCRIPTION OF CAPITAL STOCK

General

Tempur Sealy International, Inc. (the “Company, “ “we,” or “our”) is incorporated in the State of Delaware. The rights of our stockholders are generally governed by our certificate of incorporation and by-laws (each as amended and restated and in effect on the date hereof), and the common and constitutional law of Delaware.

This exhibit describes the general terms of our common stock. This is a summary and does not purport to be complete. Our certificate of incorporation and by-laws as they exist on the date of this Annual Report on Form 10-K are incorporated by reference or filed as an exhibit to the Annual Report on Form 10-K of which this exhibit is a part, and amendments or restatements of each will be filed with the Securities and Exchange Commission (“SEC”) in future periodic or current reports in accordance with the rules of the SEC. You are encouraged to read these documents.

For more detailed information about the rights of our common stock you should refer to our certificate of incorporation and by-laws and the applicable provisions of Delaware law for additional information.

Authorized Capital Stock

Our authorized capital stock is 300,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of undesignated preferred stock, $0.01 par value per share, none of which are issued and outstanding.
 
Common Stock
 
Voting Rights. Holders of our common stock are entitled to one vote per share for each share held of record on all matters to be voted upon by the stockholders.

With respect to any matter other than the election of directors or a matter for which the affirmative vote of the holders of a specified portion of the shares entitled to vote is required by Delaware law or our certificate of incorporation, the act of the stockholders shall be the affirmative vote of the holders of a majority of the shares present or represented by proxy and entitled to vote on the matter at a meeting of stockholders at which a quorum is present; provided that, for purposes thereof, (a) all abstentions are counted as votes present and entitled to vote and have the same effect as votes against the matter and (b) broker nonvotes are not counted as voted either for or against such matter. 

Holders of a majority of the shares of our common stock entitled to vote in any election of directors may elect all of the directors standing for election. The Company’s by-laws provide that a director in an uncontested election will be elected by a majority of the votes cast at the annual meeting of stockholders. In the event that the number of votes “against” a director exceeds the number of votes “for” that director, that director must tender his or her resignation to our board of directors. The nominating and corporate governance committee of our board of directors will make a recommendation to the board whether to accept the resignation. In an election for directors where the number of nominees exceeds the number of directors to be elected - a contested election - the by-laws provide that each director shall be elected by the vote of a plurality of the shares represented at the meeting and entitled to vote on the matter. Abstentions, broker nonvotes and withheld votes are not counted as votes cast.

Classified Board. Neither the Company’s certificate of incorporation nor its by-laws provide for a classified Board.

Dividend Rights. Subject to preferences that may be applicable to any outstanding preferred stock, holders of our common stock are entitled to receive ratably such dividends as may be declared from time to time by our board of directors out of funds legally available for that purpose.

Liquidation Rights. In the event of our liquidation, dissolution, or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.

Preemptive, Conversion, Subscription, or Redemptive or Sinking Fund Rights. The holders of our common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock.





Certain Business Combination Restrictions. We are not subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to certain exceptions, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with approval of our board of directors or unless the business combination is approved in a prescribed manner. A “business combination” includes certain mergers, asset sales or other transactions resulting in a financial benefit to the interested stockholder. Subject to various exceptions, an “interested stockholder” is a person who, together with his or her affiliates and associates, owns, or within the past three years did own, 15% or more of the corporation’s voting stock. The statute is intended to prohibit or delay mergers or other takeover or change in control attempts. Although we have elected out of the statute’s provisions, we could elect to be subject to Section 203 in the future.

Preferred Stock

Our amended and restated certificate of incorporation provides for the authorization of 10,000,000 shares of preferred stock. The shares of preferred stock may be issued by our board of directors, subject to any limitations prescribed by law, without further vote or action by the stockholders from time to time in one or more series. Each such series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by the board of directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights.

The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Such rights may include voting and conversion rights which could adversely affect the holders of our common stock. Satisfaction of any dividend preferences of outstanding preferred stock would reduce the amount of funds available, if any, for the payment of dividends on common stock. Holders of our preferred stock would typically be entitled to receive a preference payment in the event of our liquidation, dissolution or winding up before any payment is made to the holders of common stock. Additionally, the issuance of our preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. There are currently no shares of preferred stock outstanding.

Certain Provisions of Our Certificate of Incorporation and By-Laws

Stockholder Action; Special Meeting of Stockholders. Our certificate of incorporation and by-laws provide that stockholders may not take action by written consent, but only at a duly called annual or special meeting of the stockholders, and that special meetings of our stockholders may be called only the chairman of the board of directors, the president, or a majority of the board of directors. Thus, without approval by the chairman of the board of directors, the president or a majority of the board of directors, stockholders may take no action between meetings. These provisions may have the effect of delaying until the next annual stockholders’ meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities, including actions to remove directors. These provisions may also discourage another person or entity from making a tender offer for our common stock, because such person or entity, even if it acquired all or a majority of our outstanding voting securities, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders’ meeting, and not by written consent.

Proxy Access. Our by-laws permit a stockholder or group of stockholders meeting certain eligibility requirements to nominate directors (up to the greater of two or twenty percent of the number of directors then in office) to serve on the board and to have those nominees included in the Company’s proxy solicitation materials. The eligibility requirements include the requirement to continuously hold an aggregate of three percent or more of the voting power of the Company’s outstanding common stock for at least three years, with up to twenty stockholders being able to aggregate their holdings to meet this requirement.

Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our certificate of incorporation and by-laws provide that a stockholder seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, provide timely notice of this intention in writing. To be timely, a stockholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Company not less than 120 days nor more than 150 days prior to the first anniversary of the preceding year’s annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting of stockholders is advanced more than 30 days prior to such anniversary date or delayed more than 60 days after such anniversary date, then to be timely such notice must be received by the Company no later than the later of (i) 60 days prior to the date of the meeting or (ii) the 10th day following the day on which public announcement of the date of the meeting was made. With respect to special meetings of stockholders, such notice must be delivered to our secretary not more than 90 days prior to such meeting and not later than the later of (i) 60 days prior to such meeting or (ii) 10 days following the date on which public announcement of the date of such meeting is first made.





The notice must contain, among other things, certain information about the stockholder delivering the notice and, as applicable, background information about each nominee or a description of the proposed business to be brought before the meeting. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual or special meeting of stockholders.

Authorized but Unissued Shares. The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the New York Stock Exchange. These additional shares may be utilized for a variety of corporate acquisitions and employee benefit plans.

Super-Majority Voting. Delaware law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or by-laws, unless a corporation’s certificate of incorporation or by-laws require a greater percentage. Provisions in our certificate of incorporation require the affirmative vote of the holders of at least 67% of our authorized voting stock to amend or repeal certain provisions of our certificate of incorporation which include, but are not limited to provisions which would reduce or eliminate the number of authorized common or preferred shares and all indemnification provisions. Such 67% stockholder vote would in either case be in addition to any separate class vote that might in the future be required pursuant to the terms of any preferred stock at the time any such amendments are submitted to stockholders. Our by-laws may also be amended or repealed by a majority vote of our board of directors.

Board Discretion in Considering Certain Offers. Our certificate of incorporation empowers our board of directors, when considering a tender offer or merger or acquisition proposal, to take into account factors in addition to potential economic benefit to stockholders. Such factors may include (i) comparison of the proposed consideration to be received by stockholders in relation to the then-current market price of our capital stock, our estimated current value in a freely negotiated transaction, and our estimated future value as an independent entity, and (ii) the impact of such a transaction on our employees, suppliers, and customers and its effect on the communities in which we operate.

Limitation of liability. Our certificate of incorporation contains certain provisions permitted under Delaware General Corporation Law relating to the liability of directors. These provisions eliminate a director’s personal liability for monetary damages resulting from a breach of fiduciary duty, except in certain circumstances involving certain wrongful acts, such as the breach of a director’s duty of loyalty or acts or omissions that involve intentional misconduct or a knowing violation of law. These provisions do not limit or eliminate our rights or the rights of any stockholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director’s fiduciary duty. These provisions will not alter a director’s liability under federal securities laws. Our certificate of incorporation and by-laws also contain provisions indemnifying our directors and officers to the fullest extent permitted by the Delaware General Corporation Law. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as directors.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is American Stock Transfer and Trust Company, LLC.

New York Stock Exchange Listing

Our common stock is listed on the New York Stock Exchange under the symbol “TPX.”


DESCRIPTION OF 5.625% SENIOR NOTES DUE 2023
DESCRIPTION OF 5.500% SENIOR NOTES DUE 2026

The following summary of our 5.625% Senior Notes due 2023 (the “2023 Notes”) and our 5.500% Senior Notes due 2026 (the “2026 Notes,” and together with the 2023 Notes, the “Notes”) is based upon the Indenture dated as September 24, 2015, among the Company, the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A. (“BNYM”), as trustee, as amended by the Supplemental Indenture dated as of October 21, 2019 (as amended, the “2023 Indenture”) and the Indenture dated as May 24, 2016, among the Company, the guarantors party thereto and BNYM, as trustee, as amended by the Supplemental Indenture dated as of October 21, 2019 (as amended, the “2026 Indenture” and with the 2023 Indenture, the “Note Indentures”). Together, the documents comprising the Note Indentures set forth the terms of the Notes. This summary is not complete, and is qualified by reference to (a) the Note Indentures, (b) the Registration Rights Agreement, dated as of September 24, 2015, by and among the Company, the guarantors party thereto, and BNYM regarding the 2023 Notes (“2023 Registration Rights Agreement”),




and (c) the Registration Rights Agreement, dated as of May 24, 2016, by and among the Company, the guarantors party thereto, and BNYM regarding the 2026 Notes (“2026 Registration Rights Agreement”), which are filed as exhibits to this Annual Report on Form 10-K and are incorporated by reference herein. Amendments or restatements of any of the above described documents will be filed with the SEC in future periodic or current reports in accordance with the rules of the SEC.

References in this section to “us,” “we” and “our” are solely to Tempur Sealy International, Inc. and not to any of its subsidiaries, unless the context requires otherwise.

General

2023 Notes. On September 24, 2015, we issued 5.625% Senior Notes due 2023 in the aggregate principal amount of $450 million in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2023 Notes were issued pursuant to the 2023 Indenture.

In conjunction with the issuance and sale of the 2023 Notes, the Company and certain domestic restricted guarantor subsidiaries agreed through the 2023 Registration Rights Agreement to exchange the 2023 Notes for a new issue of substantially identical senior notes registered under the Securities Act (the “2023 Exchange Offer”). On April 4, 2016, we completed the 2023 Exchange Offer, with 100% of the outstanding notes tendered and received for new 2023 Notes registered under the Securities Act. As of December 31, 2019, there were 2023 Notes in the aggregate principal amount of $450 million outstanding.

2026 Notes. On May 24, 2016, we issued 5.500% Senior Notes due 2026 in the aggregate principal amount of $600 million in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2026 Notes were issued pursuant to the 2026 Indenture.

In conjunction with the issuance and sale of the 2026 Notes, the Company and certain domestic restricted guarantor subsidiaries agreed through the 2026 Registration Rights Agreement to exchange the 2026 Notes for a new issue of substantially identical senior notes registered under the Securities Act (the “2026 Exchange Offer”). On October 18, 2016, we completed the 2026 Exchange Offer, with 100% of the outstanding notes tendered and received for new 2026 Notes registered under the Securities Act. As of December 31, 2019, there were 2026 Notes in the aggregate principal amount of $600 million outstanding.

2023 Notes and 2026 Notes Deemed to be Same Class. In the event of our liquidation, dissolution, or winding up, or failure to make payments on the Notes, the holders of the 2023 Notes and the 2026 Notes will participate ratably and are deemed to be in the same class.
 
Summary of Note Indentures. The 2023 Indenture and the 2026 Indenture are substantially identical except as to maturity, interest rate and a few other matters. As a result, the following description is a summary of the material provisions of the Note Indentures with differences unique to the 2023 Notes and to the 2026 Notes separately described. The following summary does not restate either the 2023 Indenture or the 2026 Indenture in its entirety. We urge you to read the Note Indentures in their entirety because those documents, and not this description, defines the rights of a holder of the Notes.

Maturity

The 2023 Notes mature on October 15, 2023. The 2026 Notes mature on June 15, 2026.
Interest
Interest on the 2023 Notes is payable in cash in arrears on April 15 and October 15 of each year and on the maturity date.
Interest on the 2026 Notes is payable in cash in arrears on June 15 and December 15 of each year and on the maturity date.

Guarantees

The Notes are guaranteed by all of our existing and future domestic restricted subsidiaries (the “Guarantors”) that guarantee or are borrowers under our Amendment and Restatement Agreement, dated as of October 16, 2019 (the “2019 Credit Agreement”), by and among the Company, as parent borrower, Tempur-Pedic Management, LLC, as additional borrower, the subsidiary guarantors party thereto, the several banks and other financial institutions party thereto, and JP Morgan Chase Bank, N.A., as administrative




agent. The guarantees will rank equally to all other unsecured and unsubordinated indebtedness of the Guarantors, but will be effectively junior to all of the secured indebtedness of the guarantors, to the extent of the value of the assets securing that indebtedness.
Each guaranty is evidenced by a note guaranty from a particular Guarantor and limited to the maximum amount that would not render the Guarantor’s obligations subject to avoidance under applicable fraudulent conveyance provisions of the United States Bankruptcy Code or any comparable provision of state law. By virtue of this limitation, a Guarantor’s obligation under its note guaranty could be significantly less than amounts payable with respect to the Notes, or a Guarantor may have effectively no obligation under its note guaranty.

Ranking

The Notes rank equally to all of our other unsecured and unsubordinated indebtedness, but will be effectively junior to all of our secured indebtedness, to the extent of the value of the assets securing that indebtedness. The Notes also effectively rank junior to all liabilities of our subsidiaries that do not guarantee the Notes. As of December 31, 2019:

•
The Notes would have effectively ranked junior to $472.5 million of secured indebtedness of the Company and the subsidiaries guaranteeing the Notes (including outstanding letters of credit, plus up to an additional $487.8 million available for borrowing under our 2019 Credit Agreement and Accounts Receivable Securitization); and

•
The Notes would have effectively ranked junior to $403.5 million of liabilities of our non-guarantor subsidiaries (excluding intercompany liabilities).

Open-Market and Other Purchases; No Sinking Fund

The Company at any time and from time to time may purchase Notes in the open market or otherwise. There are no mandatory sinking fund payments for the Notes.

Optional Redemption

2023 Notes. We may redeem all or a portion of the 2023 Notes at any time on or after October 15, 2018. The initial redemption price was 104.219% of the principal amount, plus accrued and unpaid interest, if any. The redemption price declined in 2019 and will continue to decline each year and will be 100.0% of the principal amount, plus accrued and unpaid interest, beginning on October 15, 2021 and thereafter.

2026 Notes. We may redeem any of the 2026 Notes beginning on June 15, 2021. The initial redemption price is 102.750% of their principal amount, plus accrued interest. The redemption price will decline each year after 2021 and will be 100% of their principal amount, plus accrued and unpaid interest, beginning on June 15, 2024. We may also redeem some or all of the 2026 Notes before June 15, 2021 at a redemption price of 100% of their principal amount, plus accrued and unpaid interest, to the redemption date, plus an applicable “make-whole” premium.

Repurchase at the Option of Holders Upon a Change of Control

Upon a Change of Control, each holder of the Notes will have the right to require us to repurchase all or any part of that holder’s Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the purchase date.
We will not be required to make a change of control offer following a Change of Control if (1) a third party makes the change of control offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Note Indentures or (2) notice of redemption has been given pursuant to the Note Indentures to redeem all of the Notes, as described above under the caption “-Optional Redemption,” unless and until there is a default in payment of the applicable redemption price. Notwithstanding anything to the contrary contained herein, a change of control offer may be made in advance of a Change of Control, conditioned upon the consummation of such Change of Control, if a definitive agreement is in place for the Change of Control at the time the change of control offer is made.

The 2019 Credit Agreement restricts us in certain circumstances from purchasing any Notes prior to maturity of the Notes and also provides that the occurrence of some of the events that would constitute a Change of Control would constitute a default under the 2019 Credit Agreement. Future Debt of the Company may contain prohibitions of certain events which would constitute a Change of Control or require that future Debt be repurchased upon a Change of Control. Our failure to purchase the Notes in




connection with a Change of Control would result in a default under the Note Indentures. Any such default would, in turn, constitute a default under the 2019 Credit Agreement, and may constitute a default under any of our future Debt as well.
If holders of not less than 90% in aggregate principal amount of the outstanding of the 2023 Notes or the 2026 Notes, as applicable, accept a change of control offer and the Company (or any third party making such change of control offer in lieu of the Company as described above) purchases all of the 2023 Notes or the 2026 Notes, as applicable, held by such holders, the Company will have the right, to redeem all of the 2023 Notes or 2026 Notes, as applicable, that remain outstanding following such purchase at a redemption price equal to the change of control purchase price plus, to the extent not included in the change of control purchase price, accrued and unpaid interest, if any, on the 2023 Notes or the 2026 Notes that remain outstanding, to the date of redemption.
Definition of Change of Control. “Change of Control” means the occurrence of any of the following events:

(a)    if any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act with certain exceptions defined in the 2026 Indenture), directly or indirectly, of 50% or more of the total voting power of the voting stock of the Company; or

(b)    the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the Property of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of assets as an entirety or virtually as an entirety to a wholly owned Restricted Subsidiary) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person or any other Person merges, consolidates or amalgamates with or into the Company, in any event pursuant to a transaction in which the outstanding voting stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than a transaction where:
 
 
(1)    the outstanding voting stock of the Company is reclassified into or exchanged for other voting stock of the Company or for voting stock of the surviving corporation or transferee, and
 
(2)    the holders of the voting stock of the Company immediately prior to the transaction own, directly or indirectly, not less than a majority of the voting stock of the Company or the surviving corporation or transferee immediately after the transaction and in substantially the same proportion as before the transaction; or
 
         (c)    the stockholders of the Company shall have approved any plan of liquidation or dissolution of the Company.

Certain Covenants and Covenant Suspension
General Overview of Covenants. We and certain of our subsidiaries are subject to various covenants described in the Note Indentures, including our ability to:
•
incur additional indebtedness or provide guarantees in respect of obligations of other persons;
•
pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
•
prepay, redeem or repurchase subordinated debt;
•
make loans or investments;
•
sell or otherwise dispose of certain assets;
•
incur liens;
•
restrict dividends, loans or asset transfers from our subsidiaries;
•
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
•
enter into a new or different line of business; and
•
enter into certain transactions with our affiliates.

Covenant Suspension. During any period of time that:
(a)
the Notes have Investment Grade Ratings from both Rating Agencies, and
(b)
no Default or Event of Default has occurred and is continuing under the Note Indentures,




then we and our Restricted Subsidiaries will not be subject to the following provisions of the Note Indentures:
“-Limitation on Debt,”
“-Limitation on Restricted Payments,”
“-Limitation on Asset Sales,”
“-Limitation on Restrictions on Distributions from Restricted Subsidiaries,”
clause (x) of the third paragraph (and as referred to in the first paragraph) of “-Designation of Restricted and Unrestricted Subsidiaries,” and
clause (d) of the first paragraph of “-Merger, Consolidation and Sale of Property”
Limitations on Issuance of Additional Notes

Subject to compliance with the covenant described under “-Limitations on Debt,” we can issue an unlimited amount of additional notes at later dates.

Covenant “-Limitations on Debt”
The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving effect to the application of the proceeds thereof, either:
(1)    the Debt is Debt of the Company or a Guarantor and after giving effect to the Incurrence of the Debt and the application of the proceeds thereof, the Consolidated Fixed Charges Coverage Ratio would be greater than 2.00 to 1.00, or
(2)    the Debt is Permitted Debt.
The term “Permitted Debt” is defined to include the following:
(a)    Debt of the Company evidenced by the Notes;
(b)    Debt of the Company or a Restricted Subsidiary Incurred under any Credit Facilities; provided that the aggregate principal amount of all Debt Incurred under this clause (b) at any one time outstanding shall not exceed the greater of:
(1)    $2.124 billion, and
(2)    the sum of the amounts equal to:
(A)
60% of the book value of the inventory of the Company and the Restricted Subsidiaries, and
(B)
85% of the book value of the accounts receivable of the Company and the Restricted Subsidiaries (including any Receivables Entity that is a Restricted Subsidiary),
in the case of each of clauses (A) and (B) as of last day of the most recently ended fiscal quarter of the Company for which internal financial statements of the Company are available;
(c)    Debt of the Company or a Restricted Subsidiary Incurred by a Receivables Entity in a qualified receivables transaction that is not recourse to the Company or any other Restricted Subsidiary of the Company (except for Standard Securitization Undertakings);
(d)    Debt of the Company owing to and held by any Restricted Subsidiary and Debt of a Restricted Subsidiary owing to and held by the Company or any Restricted Subsidiary; provided that (1) any subsequent issue or transfer of Capital Stock or other event that results in any Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of that Debt (except to the Company or a Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of that




Debt by the issuer thereof, and (2) if the Company is the obligor on that Debt, the Debt is expressly subordinated to the prior payment in full in cash of all obligations with respect to the 2026 Notes;
(e)    Debt of a Restricted Subsidiary outstanding on the date on which that Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, a transaction or series of transactions pursuant to which the Restricted Subsidiary became a Restricted Subsidiary of the Company or was otherwise acquired by the Company); provided that at the time that Person was acquired by the Company or otherwise became a Restricted Subsidiary and after giving effect to the Incurrence of that Debt, (i) the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (1) of the first paragraph of this covenant or (ii) the Consolidated Fixed Charges Coverage Ratio would have been greater than or equal to such ratio immediately prior to such transaction;
(f)    Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, a transaction or series of transactions pursuant to which a Person became a Restricted Subsidiary of the Company or was otherwise acquired by the Company; provided that at the time that Person was acquired by the Company or otherwise became a Restricted Subsidiary and after giving effect to the Incurrence of that Debt, (i) the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (1) of the first paragraph of this covenant or (ii) the Consolidated Fixed Charges Coverage Ratio would have been greater than or equal to such ratio immediately prior to such transaction;
(g)    Debt under interest rate agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the financial management of the Company or that Restricted Subsidiary and not for speculative purposes;
(h)    Debt under currency exchange protection agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks in the financial management of the Company or that Restricted Subsidiary and not for speculative purposes;
(i)    Debt under commodity price protection agreements entered into by the Company or a Restricted Subsidiary in the financial management of the Company or that Restricted Subsidiary and not for speculative purposes;
(j)    Debt in connection with one or more standby letters of credit or performance or surety bonds or completion guarantees issued by the Company or a Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances or credit;
(k)    Debt arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, Incurred in connection with the disposition of any business, assets or Capital Stock of a subsidiary, other than guarantees of Debt Incurred by any Person acquiring all or any portion of such business, assets or Capital Stock; provided that the maximum aggregate liability in respect of all such Debt shall at no time exceed the gross proceeds actually received by the Company or such Restricted Subsidiary in connection with such disposition;
(l)    Debt of the Company and its Restricted Subsidiaries outstanding on the issue date of the 2023 Notes and on the issue date of the 2026 Notes, in each case not otherwise described in clauses (a) through (k) above;
(m)    Debt of the Company or a Restricted Subsidiary in an aggregate principal amount outstanding at any one time not to exceed the greater of $100.0 million and 14.0% of the Company’s Consolidated Net Tangible Assets (as calculated at the time of Incurrence);
(n)    (i) Debt of one or more Foreign Restricted Subsidiaries in an aggregate principal amount outstanding at any one time not to exceed the greater of $250.0 million and 75.0% of EBITDA for the period of four fiscal quarters of the Company ended as of the last day of the most recent fiscal quarter for which internal financial statements of the Company are available (measured at the date of Incurrence and calculated with such pro-forma adjustments as are set forth in the definition of Consolidated Fixed Charges Coverage Ratio) and (ii) Debt of one or more Foreign Restricted Subsidiaries incurred to satisfy the Danish Tax Assessment;
(o)    Debt of the Company or a Restricted Subsidiary Incurred (i) in respect of Capital Lease Obligations and purchase money debt (including Debt Incurred pursuant to a real estate financing transaction or an equipment financing transaction); provided that the principal amount of any Debt Incurred pursuant to this clause (i), plus the aggregate outstanding amount of permitted refinancing debt Incurred to refinance Debt Incurred pursuant to this clause, outstanding at any one time may




not exceed the greater of (a) $100.0 million and (b) 14.0% of Consolidated Net Tangible Assets and (ii) in respect of any Capital Lease Obligation with respect to a sale and leaseback of the headquarters of the Company in Lexington, Kentucky;
(p)    Debt of the Company or any Guarantor consisting of guarantees of Debt of the Company or any Restricted Subsidiary Incurred under any other clause of this covenant;
(q)    Debt under the industrial revenue bond financing for the Company’s real property and fixtures located in Albuquerque, New Mexico (the “Albuquerque IRB Financing”) in an aggregate principal amount not to exceed $100,000 and any refinancings, refundings, renewals and extensions thereof;
(r)    Debt of the Company or any Restricted Subsidiary arising in connection with the endorsement of instruments for deposit in the ordinary course of business;
(s)    Debt of the Company or any Restricted Subsidiary incurred in the ordinary course of business under guarantees of Debt of suppliers, licensees, franchisees or customers in an aggregate principal amount at any time outstanding not to exceed $10.0 million;
(t)    Debt of the Company or any Restricted Subsidiary arising from guarantees of Debt of joint ventures at any time outstanding under this clause (t) not to exceed the greater of $25.0 million and 3.5% of Consolidated Net Tangible Assets of the Company determined as of the date of incurrence of such Debt after giving pro-forma effect to such incurrence and the application of proceeds thereof;
(u)    Debt of the Company or any Restricted Subsidiary in respect of Debt of an Unrestricted Subsidiary or joint venture, to the extent that such liability is the result of the pledge of (or guaranty with recourse limited solely to) Capital Stock of such Unrestricted Subsidiary or joint venture; and
(v)    Permitted refinancing debt Incurred in respect of Debt Incurred pursuant to clause (1) of the first paragraph of this covenant and clauses (a), (e), (f), (l), (n)(ii) and (o) above or this clause (v).
Events of Default and Trustee Actions and Indemnification
Events of Default in respect of the Notes include:
(1)    failure to make the payment of any interest on the Notes when the same becomes due and payable, and that failure continues for a period of 30 days;
(2)    failure to make the payment of any principal of, or premium, if any, on, any of the Notes when the same becomes due and payable at its stated maturity, upon acceleration, redemption, optional redemption, required repurchase or otherwise;
(3)    failure to comply with the covenant described under “-Certain Covenants-Merger, Consolidation and Sale of Property”;
(4)    failure to comply with any other covenant or agreement in the Notes or in the Note Indentures (other than a failure that is the subject of the foregoing clause (1), (2) or (3)) and such failure continues for 30 days (180 days in the case of a failure to comply with a provision under “-Certain Covenants- SEC Reports”) after written notice is given to the Company as provided in the Note Indentures;
(5)    a default under any Debt by the Company or any Restricted Subsidiary that results in acceleration of the maturity of that Debt, or failure to pay any Debt at maturity, in an aggregate amount greater than $50.0 million or its foreign currency equivalent at the time (the “cross acceleration provisions”);
(6)    any judgment or judgments for the payment of money in an aggregate amount in excess of $50.0 million (or its foreign currency equivalent at the time) (net of amounts covered by insurance or bonded) that shall be rendered against the Company or any Restricted Subsidiary and that shall not be waived, satisfied, annulled, discharged or rescinded for any period of 30 consecutive days during which a stay of enforcement shall not be in effect (the “judgment default provisions”);
(7)    specified events involving bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary (the “bankruptcy provisions”); and




(8)    any note guaranty by any Significant Subsidiary ceases to be in full force and effect, other than in accordance with the terms of the Note Indentures, or a Guarantor denies or disaffirms its obligations under its note guaranty (the “note guaranty provisions”).
A Default under clause (4) is not an Event of Default until the trustee or the holders of not less than 25% in aggregate principal amount of the 2023 Notes or the 2026 Notes, as applicable, then outstanding notify the Company of the Default and the Company does not cure that Default within the time specified after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a “Notice of Default.”
If an Event of Default with respect to the Notes (other than an Event of Default resulting from particular events involving bankruptcy, insolvency or reorganization with respect to the Company) shall have occurred and be continuing, the trustee or the registered holders of not less than 25% in aggregate principal amount of 2023 Notes or the 2026 Notes, as applicable, then outstanding may declare to be immediately due and payable the principal amount of all the 2023 Notes or the 2026 Notes, as applicable, then outstanding, plus accrued but unpaid interest to the date of acceleration. In case an Event of Default resulting from events of bankruptcy, insolvency or reorganization with respect to the Company shall occur, the amount with respect to all the 2023 Notes or the 2026 Notes, as applicable, shall be due and payable immediately without any declaration or other act on the part of the trustee or the holders of the 2023 Notes or the 2026 Notes, as applicable. After any such acceleration, but before a judgment or decree based on acceleration is obtained by the trustee, the registered holders of a majority in aggregate principal amount of the applicable Notes then outstanding may, under some circumstances, rescind and annul the acceleration if all Events of Default, other than the nonpayment of accelerated principal, premium or interest, have been cured or waived as provided in the applicable Note Indenture.
Notwithstanding the foregoing, if an Event of Default described in clause (5) above shall have occurred and be continuing, such Event of Default and any consequential acceleration (to the extent not in violation of any applicable law or in conflict with any judgment or decree of a court of competent jurisdiction) shall be automatically rescinded if (a) the default relating to such Debt is waived by the holders of such Debt or cured and if such Debt has been accelerated, then the holders thereof have rescinded their declaration of acceleration in respect of such Debt, (b) any other existing Events of Default, except nonpayment of principal, premium, if any, or interest on the applicable Notes that became due solely because of the acceleration of such Notes, have been cured or waived and (c) there has been deposited with the trustee a sum sufficient to pay all sums paid or advanced by the trustee and the reasonable compensation, expenses, disbursements and advances of the trustee, its agents and counsel incurred in connection with the rescinded Event of Default.
Subject to the provisions of the Note Indentures relating to the duties of the trustee, in case an Event of Default shall occur and be continuing, the trustee will be under no obligation to exercise any of its rights or powers under the Note Indentures at the request or direction of any of the holders of the Notes, unless the holders shall have offered to the trustee reasonable indemnity. Subject to the provisions for the indemnification of the trustee, the holders of a majority in aggregate principal amount of the 2023 Notes or the 2026 Notes, as applicable, then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee with respect to the 2023 Notes or the 2026 Notes, as applicable.
No holder of any Note will have any right to institute any proceeding with respect to the applicable Note Indenture, or for the appointment of a receiver or trustee, or for any remedy thereunder, unless:

(a)    that holder has previously given to the trustee written notice of a continuing Event of Default,

(b)    the registered holders of at least 25% in aggregate principal amount of the applicable Notes then outstanding have made written request and offered reasonable indemnity to the trustee to institute the proceeding as trustee, and
 
(c)    the trustee shall not have received from the registered holders of a majority in aggregate principal amount of the applicable Notes then outstanding a direction inconsistent with that request and shall have failed to institute the proceeding within 60 days.
However, these limitations do not apply to a suit instituted by a holder of any Note for enforcement of payment of the principal of, and premium, if any, or interest on, that Note on or after the respective due dates expressed in that Note. The trustee shall not be deemed to have notice of any Default or Event of Default unless an officer of the trustee having direct responsibility for the administration of the applicable Note Indenture has received written notice of any such event and such notice references the applicable Notes and the related Note Indenture.





Annual Officer’s Certificate as to Compliance
Not later than June 1 every year, the Company is required to deliver to the trustee a certificate executed by the principal executive officer, principal financial officer or principal accounting officer of the Company as to such officer’s knowledge of the Company’s compliance with all conditions and covenants under each Note Indenture.
Defeasance and Discharge
We may discharge our obligations under the 2023 Notes or the 2026 Notes and the related Note Indenture by irrevocably depositing in trust with the trustee money or Government Obligations sufficient to pay principal of and interest on such Notes to maturity or redemption within one year, subject to meeting certain other conditions.
The Note Indentures provide that we may at any time terminate all our obligations under the 2023 Notes or the 2026 Notes and the related Note Indenture (“legal defeasance”), except for particular obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the applicable Notes, to replace mutilated, destroyed, lost or stolen notes and to maintain a registrar and paying agent in respect of such notes.
In addition, we may elect to have our obligations released with respect to certain covenants in the Note Indentures (“covenant defeasance”). Any failure to comply with these obligations will not constitute a default or an event of default with respect to the Notes. In the event covenant defeasance occurs, certain events, not including non-payment, bankruptcy and insolvency events, described under “Events of Default” will no longer constitute an event of default.
The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option.
The legal defeasance option or the covenant defeasance option may be exercised only if:
(a)    we irrevocably deposit in trust with the trustee money in U.S. dollars or U.S. dollar-denominated Government Obligations for the payment of principal of and interest (including premium, if any) on the 2023 Notes or 2026 Notes, as applicable, to maturity or redemption;
(b)    we deliver to the trustee a certificate of a nationally recognized accounting firm expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited Government Obligations plus any deposited money without investment will provide cash at the times and in amounts as will be sufficient to pay principal and interest (including premium, if any) when due on all the 2023 Notes or 2026 Notes, as applicable, to maturity or redemption, as the case may be;
(c)    123 days pass after the deposit is made and during the 123-day period no Default described in clause (7) under “-Events of Default” occurs with respect to the Company or any other Person making the deposit which is continuing at the end of the period;
(d)    no Default or Event of Default has occurred and is continuing on the date of the deposit and after giving effect thereto;
(e)    the deposit does not constitute a default under any other agreement or instrument binding on the Company;
(f)    in the case of the legal defeasance option, the Company delivers to the trustee an opinion of counsel stating that:
(1)    the Company has received from the Internal Revenue Service a ruling, or
(2)    since the issue date of the applicable Notes there has been a change in the applicable Federal income tax law,
to the effect, in either case, that, and based thereon the opinion of counsel shall confirm that, the beneficial owners of the 2023 Notes or the 2026 Notes, as applicable, will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if the defeasance had not occurred;




(g)    in the case of the covenant defeasance option, the Company delivers to the trustee an opinion of counsel to the effect that the beneficial owners of the 2023 Notes or the 2026 Notes, as applicable, will not recognize income, gain or loss for Federal income tax purposes as a result of that covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if that covenant defeasance had not occurred; and
(h)    the Company delivers to the trustee an officers’ certificate and an opinion of counsel, each stating that all conditions precedent to the defeasance and discharge of the notes have been complied with as required by the indenture.
In the case of either discharge or defeasance, the note guaranties, if any, will terminate.
Amendments and Waivers
Subject to some exceptions, the Note Indentures may be amended with the consent of the registered holders of a majority in aggregate principal amount of the 2023 Notes or the 2026 Notes, as applicable, then outstanding and any past default or compliance with any provisions may also be waived with the consent of the registered holders of a majority in aggregate principal amount of the 2023 Notes or the 2026 Notes, as applicable, then outstanding, except a default in the payment of principal, premium, if any, or interest and particular covenants and provisions of the Note Indentures which cannot be amended without the consent of each holder of an outstanding 2023 Note or 2026 Note, as applicable. However, without the consent of each holder of an outstanding 2023 Note or 2026 Note, as applicable, affected thereby, no amendment may, among other things,

(1)    reduce the amount of the Notes whose holders must consent to an amendment or waiver,

(2)    reduce the rate of or extend the time for payment of interest on any Note,

(3)    reduce the principal of or extend the stated maturity of any Note,

(4)    make any Note payable in money other than U.S. dollars,

(5)    impair the right of any holder of the Notes to receive payment of principal of and interest on that holder’s Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to that holder’s Notes,

(6)    subordinate the Notes to any other obligation of the Company,

(7)    reduce the premium payable upon the redemption of any Note or change the time at which any Note may be redeemed, as described under “-Optional Redemption,”

(8)    at any time after a Change of Control has occurred, reduce the premium payable upon a Change of Control or change the time at which the change of control offer relating thereto must be made or at which the Notes must be repurchased pursuant to that change of control offer, or

(9)    at any time after the Company is obligated to make a prepayment offer with the excess proceeds from asset sales, change the time at which the prepayment offer must be made or at which the Notes must be repurchased pursuant thereto.
Without the consent of any holder of the Notes, the Company and the trustee may amend the Note Indentures to:

(1)    cure any ambiguity, omission, defect or inconsistency,

(2)    provide for the assumption by a successor of the obligations of the Company or any Guarantor under the Note Indentures,

(3)    provide for uncertificated Notes in addition to or in place of certificated Notes; provided that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Internal Revenue Code of 1986, as amended (the “Code”), or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code,

(4)    add guarantees with respect to the Notes or release Guarantors from their note guaranties as provided by the terms of the Note Indentures or the note guaranties,





(5)    secure the Notes or the note guarantees (and, thereafter, provide releases of collateral in accordance with the security documents entered into in connection therewith), add to the covenants of the Company for the benefit of the holders of the Notes or surrender any right or power conferred upon the Company,

(6)    make any change that does not adversely affect the rights of any holder of the Notes,

(7)    comply with any requirement of the SEC in connection with the qualification of the Note Indentures under the Trust Indenture Act of 1939, as amended,

(8)    provide for the issuance of additional Notes in accordance with the Note Indentures,

(9)    conform any provisions to the “Description of Exchange Notes” as appearing in the applicable offering document,

(10)    to evidence or provide for the acceptance of appointment under either Note Indenture of a successor trustee;

(11)    to provide for the addition of a corporate co-issuer in accordance with the covenant described under the subheading “-Certain Covenants-Merger, Consolidation or Sale of Assets;” or

(12)    to add covenants or Events of Default for the benefit of the holders or surrender any right or power conferred upon the Company or any Guarantor.

Certain Definitions

“Capital Lease Obligation” means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by that obligation shall be the capitalized amount of the obligations determined in accordance with GAAP; and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under that lease prior to the first date upon which that lease may be terminated by the lessee without payment of a penalty. For purposes of “-Certain Covenants-Limitation on Liens,” a Capital Lease Obligation shall be deemed secured by a lien on the Property being leased.

“Capital Stock” means, with respect to any Person, any shares or other equivalents (however designated) of any class of corporate stock or partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in that Person, including preferred stock, but excluding any debt security convertible or exchangeable into that equity interest.
“Consolidated Current Liabilities” means, as of any date of determination, the consolidated current liabilities of the Company and its Restricted Subsidiaries that may properly be classified as current liabilities in conformity with GAAP, excluding, without duplication, (a) the current portion of any long-term Debt and (b) the aggregate outstanding principal amount of the revolving credit loans made to the Company under the Credit Agreement.
“Consolidated Fixed Charges” means, for any period for the Company and its consolidated Restricted Subsidiaries, the sum, without duplication, of,

(a)    Consolidated Interest Expense for such period, plus
(b)    Disqualified stock dividends paid, accrued or scheduled to be paid or accrued during such period, excluding dividends paid in qualified capital stock, plus
(c)    Preferred Stock Dividends paid, accrued or scheduled to be paid or accrued during such period, excluding dividends paid or scheduled to be paid in Qualified Capital Stock.
“Consolidated Fixed Charges Coverage Ratio” means, as of any date of determination, the ratio of:
(a)    the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending prior to such determination date for which internal financial statements of the Company are available, to
(b)    Consolidated Fixed Charges for those four fiscal quarters;




provided that:
(1)    if
(a)
since the beginning of that period the Company or any Restricted Subsidiary has Incurred any Debt that remains outstanding or repaid any Debt, or
(b)
the transaction giving rise to the need to calculate the Consolidated Fixed Charges Coverage Ratio involves an Incurrence or repayment of Debt,
Consolidated Fixed Charges for that period shall be calculated after giving effect on a pro-forma basis to that Incurrence or repayment as if the Debt was Incurred or repaid on the first day of that period; provided that, in the event of any repayment of Debt, EBITDA for that period shall be calculated as if the Company or such Restricted Subsidiary had not earned any interest income actually earned during such period in respect of the funds used to repay such Debt, and
(2)    if
(a)
since the beginning of that period the Company or any Restricted Subsidiary shall have made any asset sale or an Investment (by merger or otherwise) in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property which constitutes all or substantially all of an operating unit of a business,
(b)
the transaction giving rise to the need to calculate the Consolidated Fixed Charges Coverage Ratio involves an asset sale, Investment or acquisition, or
(c)
since the beginning of that period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of that period) shall have made such an asset sale, Investment or acquisition,
EBITDA for that period shall be calculated after giving pro-forma effect to the Asset Sale, Investment or acquisition as if the asset sale, Investment or acquisition occurred on the first day of that period.
If any Debt bears a floating rate of interest and is being given pro-forma effect, the interest expense on that Debt shall be calculated as if the base interest rate in effect for the floating rate of interest on the date of determination had been the applicable base interest rate for the entire period (taking into account any interest rate agreement applicable to that Debt if the applicable interest rate agreement has a remaining term in excess of 12 months). In the event the Capital Stock of any Restricted Subsidiary is sold during the period, the Company shall be deemed, for purposes of clause (1) above, to have repaid during that period the Debt of that Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for that Debt after the sale.
“Consolidated Interest Expense” means, for any period for the Company and its Restricted Subsidiaries, all interest expense on a consolidated basis determined in accordance with GAAP, but, in any event, including the interest component under Capital Lease Obligations and the implied interest component under qualified receivables transactions and excluding (i) commissions, discounts, yield and other fees and charges related to qualified receivables transaction and (ii) amortization or write-off of deferred financing fees, debt issuance costs, commissions and fees and expenses with respect to Debt.
“Consolidated Net Income” means, for any period for the Company and its Restricted Subsidiaries, net income (or loss) determined on a consolidated basis in accordance with GAAP, but excluding:
(a)    unusual or non-recurring charges for such period, including restructuring charges or reserves, severance, relocation costs and one-time compensation charges (including without limitation retention bonuses) and other costs relating to the closure of facilities or impairment of facilities; provided that the aggregate amount added back pursuant to this clause (a) shall not exceed, for any period of four consecutive fiscal quarters, 15% of EBITDA for such period (prior to giving effect to any adjustment pursuant to this clause (a);
(b)    the non-cash effects of purchase accounting under Accounting Standards Codification of the Financial Accounting Standards Board 805;




(c)    any deduction for income (or addition for losses) attributable to the minority equity interests of third parties in any Restricted Subsidiary except, in the case of income, to the extent of dividends paid in respect of such period to the holder of such minority equity interest;
(d)    any gain (or loss) realized upon the sale or other disposition of any Property of the Company or any of its Restricted Subsidiaries (including pursuant to any sale and leaseback transaction) that is not sold or otherwise disposed of in the ordinary course of business;
(e)    any gain or loss attributable to the early extinguishment of Debt;
(f)    any extraordinary gain or loss or cumulative effect of a change in accounting principles to the extent disclosed separately on the consolidated statement of income;
(g)    any unrealized gains or losses of the Company or its Restricted Subsidiaries on any Hedging Obligations;
(h)    the undistributed earnings of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary is not at the time permitted by the terms of any agreement, instrument, contract or other undertaking to which such Restricted Subsidiary is a party or by which any of its property is bound or any law, treaty, rule, regulation or determination of an arbitrator or a court of competent jurisdiction or other Governmental Authority, in each case, applicable or binding upon such Restricted Subsidiary or any of its property or to which such Restricted Subsidiary or any of its property is subject;
(i)    costs, fees, expenses or premiums incurred during such period in connection with the transactions; and
(j)    costs, fees and expenses incurred during such period in connection with acquisitions (whether or not consummated), other Investments consisting of acquisitions of assets or equity constituting a business unit, line of business, division or entity (whether or not consummated) and dispositions of Property (whether or not consummated), other than dispositions, to the extent considered dispositions (or any equivalent term used in the 2019 Credit Agreement) under the 2019 Credit Agreement, of Property effected in the ordinary course of business.
Notwithstanding the foregoing, (i) for purposes of the covenant described under “-Certain Covenants-Limitation on Restricted Payments” only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent the dividends, repayments or transfers increase the amount of Restricted Payments permitted under that covenant pursuant to clause (c)(4) thereof, and (ii) any net income (loss) of any Person (other than the Company) that is not a Restricted Subsidiary shall be excluded in calculating Consolidated Net Income, except that the Company’s equity in the net income of any such Person for any period shall be included, without duplication, in such Consolidated Net Income up to the aggregate amount of cash distributed by the Person during such period to the Company or a Restricted Subsidiary as a dividend or distribution.
“Consolidated Net Tangible Assets” means, as of any date of determination, the sum of the amounts that would appear on a consolidated balance sheet of the Company and its consolidated Restricted Subsidiaries as the total assets (less accumulated depreciation, amortization, allowances for doubtful receivables, other applicable allowances and other properly deductible items) of the Company and its Restricted Subsidiaries, after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of (without duplication):
(a)    the excess of cost over fair market value of assets or businesses acquired;
(b)    any revaluation or other write-up in book value of assets subsequent to the last day of the fiscal quarter of the Company immediately preceding the issue date of the Notes as a result of a change in the method of valuation in accordance with GAAP;
(c)    unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items;
(d)    noncontrolling interests in consolidated Subsidiaries held by Persons other than the Company or any Restricted Subsidiary;
(e)    treasury stock;




(f)    cash or securities set aside and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and
(g)    Investments in and assets of Unrestricted Subsidiaries.
For the avoidance of doubt any deferred tax assets that would appear on a consolidated balance sheet of the Company and its Restricted Subsidiaries shall be included in the calculation of Consolidated Net Tangible Assets.
“Consolidated Secured Leverage Ratio” means, as of any date of determination, the ratio of
(a)
(x) the aggregate amount of all Debt of the Company and its Restricted Subsidiaries secured by liens at the date of determination (on a pro-forma basis reflecting any Incurrence of Debt and repayment of Debt made on such date), less
(y) the aggregate amount (not to exceed $150.0 million) of Qualified Cash on such date of determination, to
(b)    the aggregate amount of EBITDA for the Company for the four full fiscal quarters, treated as one period, ending prior to the date of the transaction (the “Transaction Date”) giving rise to the need to calculate the Consolidated Secured Leverage Ratio for which internal financial statements of the Company are available (such four full fiscal quarter period being referred to herein as the “Four Quarter Period”).
In addition to and without limitation of the foregoing, for purposes of this definition, this ratio shall be calculated after giving effect to the following:
(1)    if since the beginning of that period the Company or any Restricted Subsidiary shall have made any asset sale or an Investment (by merger or otherwise) in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property which constitutes all or substantially all of an operating unit of a business,
(2)    if the transaction giving rise to the need to calculate the Consolidated Secured Leverage Ratio involves an asset sale, Investment or acquisition, or
(3)    since the beginning of the Four Quarter Period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of the Four Quarter Period) shall have made such an asset sale, Investment or acquisition,
EBITDA for that period shall be calculated after giving pro-forma effect to the asset sale, Investment or acquisition as if the asset sale, Investment or acquisition occurred on the first day of the Four Quarter Period.
For purposes of calculating the Consolidated Secured Leverage Ratio, the Company may elect to treat the entire commitment of any secured revolving credit facility of the Company or any Restricted Subsidiary to be deemed to be fully drawn as of the date such agreement is executed, and thereafter the amount of such commitment shall be deemed to be fully borrowed and outstanding at all times for purposes of the covenant described under “-Certain Covenants-Limitation on Debt” and calculation of the Consolidated Secured Leverage Ratio, and shall not be required to retest upon any borrowings thereunder.
“Consolidated Total Debt Ratio” means, as of any date of determination, the ratio of:
(a)
(x) the aggregate amount of all Debt of the Company and its Restricted Subsidiaries secured by liens at the date of determination (on a pro-forma basis reflecting any Incurrence of Debt and repayment of Debt made on such date), less
(y) the aggregate amount (not to exceed $150.0 million) of Qualified Cash on such date of determination, to
(b)
the aggregate amount of EBITDA for the Company for the four full fiscal quarters, treated as one period, ending prior such date of determination for which internal financial statements of the Company are available,




in each case with such pro-forma adjustments to Consolidated Total Indebtedness, cash and Temporary Cash Investments and EBITDA as are appropriate and consistent with the pro-forma adjustment provisions in the definition of Consolidated Secured Leverage Ratio.
“Credit Facilities” means, one or more debt facilities (including the 2019 Credit Agreement), loan agreements, indentures, commercial-paper or other facilities, in each case, with banks or other institutional lenders, institutional investors or other lenders, investors or credit providers providing for revolving credit loans, term loans, term debt, debt securities, receivables financing (including through qualified receivables transactions and other transactions involving the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit or other Debt, in each case, as amended, restated, modified, renewed, extended, increased, refunded, replaced in any manner (whether upon or after termination or otherwise) or refinanced in whole or in part from time to time.
“Danish Tax Assessment” means the pending income tax assessment from the Danish Tax Authority and any related assessment from the Danish Tax Authority for subsequent years and related interest and penalties, as described in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
“Debt” means, with respect to any Person on any date of determination (without duplication):
(a)    the principal of and premium (if any) in respect of:
(1)    debt of the Person for money borrowed, and
(2)
debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which the Person is responsible or liable;
(b)    all Capital Lease Obligations of the Person;
(c)    all obligations of the Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of the Person and all obligations of the Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business);
(d)    all obligations of the Person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (a) through (c) above) entered into in the ordinary course of business of the Person to the extent those letters of credit are not drawn upon or, if and to the extent drawn upon, the drawing is reimbursed no later than the third business day following receipt by the Person of a demand for reimbursement following payment on the letter of credit);
(e)    the amount of all obligations of the Person with respect to the Repayment of any Disqualified Stock or, with respect to any subsidiary of the Person, any Preferred Stock (but excluding, in each case, any accrued dividends);
(f)    all obligations of the type referred to in clauses (a) through (e) of other Persons the payment of which, in either case, the Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee;
(g)    all obligations of the type referred to in clauses (a) through (f) of other Persons secured by any Lien on any Property of the Person (whether or not such obligation is assumed by the Person), the amount of such obligation being deemed to be the lesser of the value of that Property or the amount of the obligation so secured; and
(h)    to the extent not otherwise included in this definition, Hedging Obligations of such Person.
The amount of Debt of any Person will be deemed to be:
(1)
with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation;
(2)
with respect to Debt secured by a Lien on an asset of such Person but not otherwise the obligation, contingent or otherwise, of such Person, the lesser of (x) the fair market value of such asset on the date the Lien attached and (y) the amount of such Debt;




(3)
with respect to any Debt issued with original issue discount, the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt;
(4)
with respect to any Hedging Obligation, zero if the Hedging Obligation has been incurred pursuant to clause (g), (h) or (i) of the second paragraph of the covenant described under “-Certain Covenants-Limitation on Debt,” or otherwise the net amount payable if such Hedging Obligation terminated at that time due to default by such Person; and
(5)
otherwise, the outstanding principal amount thereof.
Notwithstanding the foregoing, the following shall not constitute or be deemed to be “Debt”:
(i)
any debt that has been defeased in accordance with GAAP or defeased pursuant to the deposit of cash or Temporary Cash Investments (in an amount sufficient to satisfy all such indebtedness at maturity or redemption, as applicable, and all payments of interest and premium, if any) in a trust or account created or pledged for the sole benefit of the holders of such indebtedness, and subject to no other liens, and the other applicable terms of the instrument governing such indebtedness;
(ii)
any obligations arising from agreements of a Person providing for indemnification, adjustment of purchase price, holdbacks, contingent payment obligations based on a final financial statement or performance of acquired or disposed of assets or similar obligations (other than guarantees of Debt), in each case incurred or assumed by such Person in connection with the acquisition or disposition of assets (including through mergers, consolidations or otherwise);
(iii)
accrued expenses or trade payables;
(iv)
contingent obligations incurred in the ordinary course of business and not in respect of borrowed money; and
(v)
deferred or prepaid revenues.
“Domestic Restricted Subsidiary” means any Restricted Subsidiary formed under the laws of the United States of America or any jurisdiction thereof.
“Foreign Restricted Subsidiary” means any Restricted Subsidiary that is not a Domestic Restricted Subsidiary.
“GAAP” means United States generally accepted accounting principles as in effect on the date of issue of the Notes, including those set forth in the Accounting Standards Codification of the Financial Accounting Standards Board and in the rules and regulations of the SEC governing the inclusion of financial statements (including pro-forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. Notwithstanding the foregoing, for purposes of determining compliance with any covenant (including the computation of any financial covenant) contained herein, Debt shall be deemed to be carried at 100% of the outstanding principal amount thereof, and the effects of Accounting Standards Codification of the Financial Accounting Standards Board 825 and 470-20 (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) on financial liabilities (including valuing any such Debt in a reduced or bifurcated manner as described therein) shall be disregarded.
“Governmental Authority” means the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank) and any group or body charged with setting financial accounting or regulatory capital rules or standards (including, without limitation, the Financial Accounting Standards Board, the Bank for International Settlements or the Basel Committee on Banking Supervision or any successor or similar authority to any of the foregoing).
“Government Obligations” means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America or any country that is a member of the European Union on the Issue Date (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America or such European Union country is pledged and which are not callable or redeemable at the issuer’s option.




“Hedging Obligation” of any Person means any obligation of that Person pursuant to any interest rate agreement, currency exchange protection agreement, commodity price protection agreement or any other similar agreement or arrangement.
“Incur” means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of that Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any Debt or obligation on the balance sheet of that Person (and “Incurrence” and “Incurred” shall have meanings correlative to the foregoing); provided that a change in GAAP that results in an obligation of that Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of that Debt; provided further that any Debt or other obligations of a Person existing at the time the Person becomes a subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by that Subsidiary at the time it becomes a subsidiary; and provided further that solely for purposes of determining compliance with “-Certain Covenants-Limitation on Debt,” amortization of debt discount or premium shall not be deemed to be the Incurrence of Debt; provided that in the case of Debt sold at a discount or at a premium, the amount of the Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity.
“Investment” by any Person means any direct or indirect loan (other than advances to customers and suppliers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of that Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person, including any partnership or joint venture interest in such other Person and any arrangement pursuant to which the investor undertakes any Support Obligation with respect to Debt or other obligations of such other Person.
In determining the amount of any Investment made by transfer of any Property other than cash, the Property shall be valued at its fair market value at the time of the Investment.
“Investment Grade Rating” means a rating equal to or higher than Baa3 (or the equivalent) by Moody’s and BBB-(or the equivalent) by S&P.
“Moody’s” means Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.
“Person” means any individual, corporation, company (including any limited liability company), association, partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.
“Property” means, with respect to any Person, any interest of that Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. For purposes of any calculation required pursuant to the indenture, the value of any Property shall be its Fair Market Value.
“Qualified Cash” means the sum of (a) 100% of the unrestricted cash and Temporary Cash Investments of the Company and its Domestic Restricted Subsidiaries and (b) 60% of the unrestricted cash and Temporary Cash Investments of the Company’s Foreign Restricted Subsidiaries.
“Rating Agencies” mean Moody’s and S&P.
“Receivables Entity” means a wholly owned subsidiary of the Company (or another Person formed for the purposes of engaging in a qualified receivables transaction with the Company in which the Company or any subsidiary of the Company makes an Investment and to which the Company or any subsidiary of the Company transfers accounts receivable and related assets) which engages in no activities other than in connection with the financing of accounts receivable of the Company and its subsidiaries, all proceeds thereof and all rights (contractual or other), collateral and other assets relating thereto, and any business or activities incidental or related to that business, and (with respect to any Receivables Entity formed after the issue date of the Notes) which is designated by the Board of Directors (as provided below) as a Receivables Entity and
(a)    no portion of the Debt or any other obligations (contingent or otherwise) of which
(1)
is Guaranteed by the Company or any subsidiary of the Company (excluding guarantees of obligations (other than the principal of, and interest on, Debt) pursuant to Standard Securitization Undertakings),




(2)
is recourse to or obligates the Company or any subsidiary of the Company in any way other than pursuant to Standard Securitization Undertakings, or
(3)
subjects any property or asset of the Company or any subsidiary of the Company, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization Undertakings;
(b)    with which neither the Company nor any subsidiary of the Company has any material contract, agreement, arrangement or understanding other than on terms which the Company reasonably believes to be no less favorable to the Company or the subsidiary than those that might be obtained at the time from Persons that are not affiliates of the Company, and
(c)    to which neither the Company nor any subsidiary of the Company has any obligation to maintain or preserve the entity’s financial condition or cause the entity to achieve certain levels of operating results other than pursuant to Standard Securitization Undertakings.
“Restricted Subsidiary” means any subsidiary of the Company other than an Unrestricted Subsidiary.
“S&P” means Standard & Poor’s Ratings Services, a business of Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw Hill Companies, Inc., or any successor to the rating agency business thereof.
“Significant Subsidiary” means any Restricted Subsidiary or group of Restricted Subsidiaries that would be a “Significant Subsidiary” of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.
“Standard Securitization Undertakings” means representations, warranties, covenants and indemnities entered into by the Company or any subsidiary of the Company which are customary in an accounts receivable securitization transaction involving a comparable company.
“Temporary Cash Investments” means any of the following:
(a)    securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition,
(b)    U.S. dollar denominated deposit accounts, time deposits and certificates of deposit of (i) any lender under the 2019 Credit Agreement, (ii) any domestic commercial bank of recognized standing having capital and surplus in excess of $500.0 million or (iii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody’s is at least P-1 or the equivalent thereof (collectively, an “Approved Bank”), in each case with maturities of not more than 364 days from the date of acquisition,
(c)    commercial paper and variable or fixed rate notes issued by any approved bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody’s and maturing within twelve months of the date of acquisition,
(d)    repurchase agreements entered into by any Person with a bank or trust company or recognized securities dealer having capital and surplus in excess of $500.0 million for direct obligations issued by or fully guaranteed by the United States in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least one hundred percent (100%) of the amount of the repurchase obligations,
(e)    Investments (classified in accordance with GAAP as current assets) in money market investment programs registered under the Investment Company Act of 1940 that are administered by reputable financial institutions having capital of at least $500.0 million and the portfolios of which are limited to Investments of the character described in the foregoing subclauses hereof, and
(f)    other short-term investments utilized by Foreign Restricted Subsidiaries in accordance with normal investment practices for cash management in investments of a type analogous to the foregoing.





“Unrestricted Subsidiary” means:

(a subsidiary of the Company that is designated after the issue date of the Notes as an Unrestricted Subsidiary as permitted or required pursuant to the covenant described under “-Certain Covenants- Designation of Restricted and Unrestricted Subsidiaries” and is not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto; and

(b)    any subsidiary)    any of an Unrestricted Subsidiary.

Trustee

The Bank of New York Mellon Trust Company, N.A. is the trustee under the 2026 Indenture. We have commercial deposits and custodial arrangements with The Bank of New York Mellon Trust Company, N.A. and its affiliates (“BNYM”). We may enter into similar or other banking relationships with BNYM in the future in the normal course of business. In addition, BNYM acts as trustee and as paying agent with respect to other debt securities issued by us, and may do so for future issuances of debt securities by us as well.




Exhibit
Exhibit 10.33

EMPLOYMENT AND NON-COMPETITION AGREEMENT
(Thomas Murray)


THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the “Agreement”) is dated February 10, 2020 and effective as of January 1, 2020 (the “Effective Date”), by and between Tempur Sealy International, Inc., a Delaware corporation (the “Company”), and Thomas Murray, an individual (“Employee”).

In consideration of the premises and the mutual agreements and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Company and Employee,

IT IS HEREBY AGREED AS FOLLOWS:

ARTICLE I

EMPLOYMENT

1.1     Term of Employment. Effective as of the Effective Date, the Company agrees to continue to employ Employee and to promote Employee to the position of Executive Vice President, Chief Marketing Officer, U.S. Sales, and Employee agrees to continue employment by the Company, for the period commencing on the Effective Date and ending on December 31, 2020 (the “Initial Term”), subject to earlier termination as hereinafter set forth in Article III. Unless earlier terminated in accordance with Article III, following the expiration of the Initial Term, this Agreement shall be automatically renewed for successive one-year periods (collectively, the “Renewal Terms”; individually, a “Renewal Term”) unless, at least ninety (90) days prior to the expiration of the Initial Term or the then current Renewal Term, either party provides the other with a written notice of intention not to renew, in which case the Employee’s employment with the Company, and the Company’s obligations hereunder, shall terminate as of the end of the Initial Term or said Renewal Term, as applicable. Except as otherwise expressly provided herein, the terms of this Agreement during any Renewal Term shall be the same as the terms in effect immediately prior to such renewal, subject to any such changes or modifications as mutually may be agreed between the parties as evidenced in a written instrument signed by both the Company and Employee.

1.2     Position and Duties. Employee shall be employed in the position of Executive Vice President, Chief Marketing Officer, U.S. Sales or such other executive position as may be assigned from time to time by the Company’s Chief Executive Officer. In such capacity, Employee shall be subject to the authority of, and shall report to, the Company’s Chief Executive Officer. Employee’s duties and responsibilities shall include those customarily attendant to Employee’s position and such other duties and responsibilities as may be assigned from time to time by the Chief Executive Officer. Employee shall devote Employee’s entire business time, loyalty, attention and energies exclusively to the business interests of the Company while employed by the Company, and shall perform his duties and responsibilities diligently and to the best of his ability.

ARTICLE II

COMPENSATION AND OTHER BENEFITS

2.1     Base Salary. The Company shall pay Employee an initial annual salary of $375,000.00 (“Base Salary”), payable in accordance with the normal payroll practices of the Company. The Employee’s Base Salary will be reviewed and be subject to adjustment from time to time by the Board of Directors or its Compensation Committee at their discretion in accordance with the Company’s annual review policy. Based on the Company’s current policy, the Company expects Employee’s first annual review would be during the first quarter of 2021.

2.2     Performance Bonus.

(a)    Employee will be eligible to earn an annual performance-based bonus based on performance criteria approved by the Company’s Board of Directors or its Compensation Committee for each full or pro rata portion of any fiscal year during which Employee is employed by the Company (each, a “Bonus Year”), the terms and conditions of which as well as Employee’s entitlement thereto being determined annually in the sole discretion of the Company’s Board of Directors or its Compensation Committee (the “Performance Bonus”). The amount of the Performance Bonus will vary based on the achievement of Company and individual performance criteria established by the Company’s Board of Directors or its Compensation Committee, but the performance criteria will be set to target a Performance Bonus equal to a designated percentage of Base Salary as of December 31st of the applicable Bonus Year if the performance criteria are met (the “Target Bonus”).


Exhibit 10.33

(b)    For 2020, the amount of his Target Bonus will be based on 75% of his Base Salary (the “2020 Bonus”). The 2020 Bonus if earned will be paid on or before March 15, 2021.

2.3    Equity Awards. The Company anticipates that commencing in 2020 Employee will be considered for future equity awards in accordance with the Company’s process for executives, but the timing, amount and terms of any future grants will be subject to the discretion of the Board of Directors or the Compensation Committee.
    
2.4     Benefit Plans. Employee will be eligible to participate in the Company’s retirement plans that are qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and in the Company’s welfare benefit plans that are generally applicable to all executive employees of the Company (the “Plans”), in accordance with the terms and conditions thereof.

2.5     Financial Planning. Employee shall be eligible to participate in the Company’s executive financial planning program which provides reimbursement of financial planning expenses to eligible executives in accordance to the terms of the program.

2.6     Vacation. Employee shall be entitled to vacation days in any calendar year in accordance with the Company’s general vacation policies for senior executive employees.

2.7     Expenses. The Company shall reimburse Employee for all authorized and approved expenses incurred in the course of the performance of Employee’s duties and responsibilities pursuant to this Agreement and consistent with the Company’s policies with respect to travel, entertainment and miscellaneous expenses, and the requirements with respect to the reporting of such expenses.

2.8     Withholdings. All payments to be made by the Company hereunder will be subject to any withholding requirements.

ARTICLE III

TERMINATION

3.1     Right to Terminate; Automatic Termination.

(a) Termination by Company Without Cause. Subject to Section 3.2, the Company may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time and for any reason.

(b) Termination by Employee for Good Reason. Subject to Section 3.2, Employee may terminate his employment obligation hereunder (but not his obligations under Article IV hereof) for “Good Reason” (as hereinafter defined) if (i) Employee reasonably determines in good faith that a Good Reason condition has occurred, (ii) Employee gives written notice thereof to the Company within thirty (30) days of the Good Reason event (which notice shall specify in reasonable detail the grounds upon which such notice is given), (iii) the Company fails, within thirty (30) days of receipt of such notice, to cure or rectify the grounds for such Good Reason termination set forth in such notice, and Employee has cooperated in good faith with the Company’s efforts to cure such condition, (iv) notwithstanding such efforts, the Good Reason condition continues to exist, and (v) Employee terminates his employment within thirty (30) days after the end of such thirty (30)-day cure period. “Good Reason” shall mean any of the following: (i) relocation of Employee’s principal workplace over sixty (60) miles from any of the Company’s then existing workplaces without the consent of Employee (which consent shall not be unreasonably withheld, delayed or conditioned), or (ii) the Company’s material breach of this Agreement or any other written agreement between Employee and the Company which is not cured within thirty (30) days after receipt by the Company from Employee of written notice of such breach.

(c)     Termination by Company For Cause. Subject to Section 3.2, the Company may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time “For Cause” (as defined below) by giving notice to Employee stating the basis for such termination, effective immediately upon giving such notice or at such other time thereafter as the Company may designate. “For Cause” shall mean any of the following: (i) Employee’s willful and continued failure to substantially perform the reasonably assigned duties with the Company which are consistent with Employee’s position and job description referred to in this Agreement, other than any such failure resulting from incapacity due to physical or mental illness, after a written notice is delivered to Employee by the Board of Directors of the Company which specifically identifies the manner in which Employee has not substantially performed the assigned duties and allowing Employee thirty (30) days after receipt by Employee of such notice to cure such failure to perform, (ii) material breach of this or any other written agreement between Employee and the Company which is not cured within thirty (30) days after receipt by the Employee from the Company

Exhibit 10.33

of written notice of such breach, (iii) any material violation of any written policy of the Company which is not cured within thirty (30) days after receipt by Employee from the Company of written notice of such violation, (iv) Employee’s willful misconduct which is materially and demonstrably injurious to the Company, (v) Employee’s conviction by a court of competent jurisdiction of, or his pleading guilty or nolo contendere to, any felony, or (vi) Employee’s commission of an act of fraud, embezzlement, or misappropriation against the Company or any breach of fiduciary duty or breach of the duty of loyalty, including, but not limited to, the offer, payment, solicitation or acceptance of any unlawful bribe or kickback with respect to the Company’s business. For purposes of this paragraph, no act, or failure to act, on Employee’s part shall be considered “willful” unless done, or omitted to be done, in knowing bad faith and without reasonable belief that the action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, expressly authorized by a resolution duly adopted by the Board of Directors or based upon the written advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, in good faith and in the best interests of the Company. Notwithstanding the foregoing, Employee shall not be deemed to have been terminated For Cause unless and until there shall have been delivered to Employee a copy of a resolution, duly adopted by the Board of Directors at a meeting of the Board called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee’s counsel, to be heard before the Board), finding that in the good faith opinion of the Board of Directors Employee committed the conduct set forth above in (i), (ii), (iii), (iv), (v) or (vi) of this Section and specifying the particulars thereof in detail.

(d)     Termination Upon Death or Disability. Subject to Section 3.2, Employee’s employment and the Company’s obligations under this Agreement shall terminate: (i) automatically, effective immediately and without any notice being necessary, upon Employee’s death; and (ii) in the event of the disability of Employee, by the Company giving notice of termination to Employee. For purposes of this Agreement, “disability” means the inability of Employee, due to a physical or mental impairment, for ninety (90) days (whether or not consecutive) during any period of 360 days, to perform, with reasonable accommodation, the essential functions of the work contemplated by this Agreement. In the event of any dispute as to whether Employee is disabled, the matter shall be determined by the Company’s Board of Directors in consultation with a physician selected by the Company’s health or disability insurer or another physician mutually satisfactory to the Company and the Employee. The Employee shall cooperate with the efforts to make such determination or be subject to immediate discharge. Any such determination shall be conclusive and binding on the parties. Any determination of disability under this Section 3.1 is not intended to alter any benefits any party may be entitled to receive under any long-term disability insurance policy carried by either the Company or Employee with respect to Employee, which benefits shall be governed solely by the terms of any such insurance policy. Nothing in this subsection shall be construed as limiting or altering any of Employee’s rights under State workers compensation laws or State or federal Family and Medical Leave laws.

3.2     Rights Upon Termination.

(a)     Section 3.1(a) and 3.1(b) Termination. If Employee’s employment terminates pursuant to Section 3.1(a) or 3.1(b) hereof, in each case Employee shall have no further rights against the Company hereunder, except for the right to receive, following execution of a release and waiver in form satisfactory to the Company in the case of clauses (ii), (iii) and (v) below, (i) any unpaid Base Salary and the value of any accrued but unused vacation, (ii) a pro-rata portion of any Performance Bonus that would be payable with respect to the Bonus Year in which the termination occurs (based on the number of days of the Bonus Year prior to the effective date of termination and the amount of the Target Bonus set by the Board of Directors or Compensation Committee for the Employee for such Bonus Year) and whatever rights as to equity awards as Employee may have pursuant to any equity awards agreement with the Company, (iii) payment of Base Salary for twelve (12) months (the “Severance Period”), payable in accordance with the normal payroll practices of the Company, (iv) reimbursement of expenses to which Employee is entitled under Section 2.7 hereof, and (v) to the extent Employee timely elects “continuation coverage” under Section 4980B of the Code (“COBRA”) reimbursement for the cost of continuation of the group medical plans of the Company as detailed in Section 2.4 hereof for the duration of the Severance Period, at the same rate of the Company’s portion of the shared costs of such benefits as in effect from time to time for active employees of the Company; provided, however that (x) if the Company cannot continue such COBRA benefits, the Company shall reimburse Employee for the cost of replacing such benefits, and (y) such COBRA benefits shall be discontinued in the event Employee becomes eligible for similar benefits from a successor employer (and Employee shall promptly notify the Company of his eligibility for any such benefits).

(b)     Section 3.1(c) and 3.1(d) Termination; Termination By Employee (Not for Good Reason). If Employee’s employment is terminated pursuant to Sections 3.1(c) or 3.1(d) hereof, or if Employee quits employment (other than for Good Reason) notwithstanding the terms of this Agreement, Employee or Employee’s estate shall have no further rights against the Company hereunder, except for the right to receive, following execution of a release and waiver in form satisfactory to the Company in the case of clause (iii) below, (i) any unpaid Base Salary, (ii) in the case of Section 3.1(d) hereof, the value of any accrued but unused vacation, (iii) in the case of Section 3.1(d) hereof, a pro-rata portion (based on the number of days of the Bonus Year prior to the effective date of termination) of any Performance Bonus that would be payable with respect to the Bonus Year in which the

Exhibit 10.33

termination occurs, and whatever rights as to equity awards as Employee may have pursuant to any equity award agreement with the Company and (iv) reimbursement of expenses to which Employee is entitled under Section 2.7 hereof.

(c)    Release; Timing of Payments. The release and waiver described in Sections 3.2(a) and (b) shall be delivered to the Employee on or before the fourteenth (14th) day following separation from employment with the Company. Further and notwithstanding the foregoing provisions of this Section 3.2, if the release and waiver described in, and required by, Section 3.2(a) and 3.2(b) as applicable, has not been executed, delivered and become irrevocable on or before the end of the sixty (60)-day period following Employee's termination of employment with the Company, no payments due pursuant to Section 3.2(a) or (b), as applicable, shall be, or shall become, payable. Further, to the extent that (A) such termination of employment occurs within 60 days of the end of any calendar year, and (B) any of such payments and severance benefits constitute "nonqualified deferred compensation" for purposes of Section 409A of the Code, any payment of any amount, or provision of any benefit, otherwise scheduled to occur prior to the 60th day following the date of Employee's termination of employment hereunder, but for the condition on executing the release and waiver as set forth herein, shall be made (or commence being made) on the later of January 15th of the next calendar year following termination of employment or the date such release and waiver is delivered and has become irrevocable, after which any remaining payments and severance benefits shall thereafter be provided to Employee without interest according to the applicable schedule set forth herein.

ARTICLE IV

CONFIDENTIALITY; NON-COMPETITION; NON-SOLICITATION

4.1    Covenants Regarding Confidential Information, Trade Secrets and Other Matters. Employee covenants and agrees as follows:

(a)     Definitions. For purposes of this Agreement, the following terms are defined as follows:

(1) “Trade Secret” means all information possessed by or developed for the Company or any of its subsidiaries, including, without limitation, a compilation, program, device, method, system, technique or process, to which all of the following apply: (i) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and (ii) the information is the subject of efforts to maintain its secrecy that are reasonable under the circumstances.

(2) “Confidential Information” means information, to the extent it is not a Trade Secret, which is possessed by or developed for the Company or any of its subsidiaries and which relates to the Company’s or any of its subsidiaries’ existing or potential business or technology, which information is generally not known to the public and which information the Company or any of its subsidiaries seeks to protect from disclosure to its existing or potential competitors or others, including, without limitation, for example: business plans, strategies, existing or proposed bids, costs, technical developments, existing or proposed research projects, financial or business projections, investments, marketing plans, negotiation strategies, training information and materials, information generated for client engagements and information stored or developed for use in or with computers. Confidential Information also includes information received by the Company or any of its subsidiaries from others which the Company or any of its subsidiaries has an obligation to treat as confidential.

(b)     Nondisclosure of Confidential Information. Except as required in the conduct of the Company’s or any of its subsidiaries’ business or as expressly authorized in writing on behalf of the Company or any of its subsidiaries, Employee shall not use or disclose, directly or indirectly, any Confidential Information during the period of his employment with the Company. In addition, following the termination for any reason of Employee’s employment with the Company, Employee shall not use or disclose, directly or indirectly, any Confidential Information. This prohibition does not apply to Confidential Information after it has become generally known in the industry in which the Company conducts its business. This prohibition also does not prohibit Employee’s use of general skills and know-how acquired during and prior to employment by the Company, as long as such use does not involve the use or disclosure of Confidential Information or Trade Secrets.

(c)     Trade Secrets. During Employee’s employment by the Company, Employee shall do what is reasonably necessary to prevent unauthorized misappropriation or disclosure and threatened misappropriation or disclosure of the Company’s or any of its subsidiaries’ Trade Secrets and, after termination of employment, Employee shall not use or disclose the Company’s or any of its subsidiaries’ Trade Secrets as long as they remain, without misappropriation, Trade Secrets.

(d)     Copyright. All copyrightable work by the Employee relating to the Company’s business or the business of any subsidiary or affiliate of the Company during the term of the Employee’s employment by the Company is intended to be “work made for hire” as defined in Section 101 of the Copyright Act of 1976, and shall be the property of the Company. If the

Exhibit 10.33

copyright to any such copyrightable work is not the property of the Company by operation of law, the Employee will, without further consideration, assign to the Company all right, title and interest in such copyrightable work and will assist the Company and its nominees in every way, at the Company’s expense, to secure, maintain and defend for the Company’s benefit, copyrights and any extensions and renewals thereof on any and all such work including translations thereof in any and all countries, such work to be and remain the property of the Company whether copyrighted or not.

(e)    Exceptions. The provisions of paragraphs (b) and (c) above will not be deemed to prohibit any disclosure that is required by law or court order, provided that Employee has not intentionally taken actions to trigger such required disclosure and the Company is given reasonable prior notice and an opportunity to contest or minimize such disclosure.

4.2     Non-Competition.

(a)     During Employment. During Employee’s employment hereunder, Employee shall not engage, directly or indirectly, as an employee, officer, director, partner, manager, consultant, agent, owner (other than a minority shareholder or other equity interest of not more than 1% of a company whose equity interests are publicly traded on a nationally recognized stock exchange or over-the-counter) or in any other capacity, in any competition with the Company or any of its subsidiaries.

(b)     Subsequent to Employment. For a two year period following the termination of Employee’s employment for any reason or without reason, Employee shall not in any capacity (whether in the capacity as an employee, officer, director, partner, manager, consultant, agent or owner (other than a minority shareholder or other equity interest of not more than 1% of a company whose equity interests are publicly traded on a nationally recognized stock exchange or over-the-counter), directly or indirectly advise, manage, render or perform services to or for any person or entity which is engaged in a business competitive to that of the Company or any of its subsidiaries (including without limitation those businesses listed in Exhibit A attached hereto) within any geographical location wherein the Company or any of its subsidiaries produces, sells or markets its goods and services at the time of such termination or within a one-year period prior to such termination.

4.3     Non-solicitation. For a two year period following the termination of Employee’s employment for any reason or without reason, Employee shall not solicit or induce any person who was an employee of the Company or any of its subsidiaries on the date of Employee’s termination or within three months prior to leaving his employment with the Company or any of its subsidiaries to leave their employment with the Company.

4.4     Return of Documents. Immediately upon termination of employment, Employee will return to the Company, and so certify in writing to the Company, all the Company’s or any of its subsidiaries’ papers, documents and things, including information stored for use in or with computers and software applicable to the Company’s and its subsidiaries’ business (and all copies thereof), which are in Employee’s possession or under Employee’s control, regardless whether such papers, documents or things contain Confidential Information or Trade Secrets.

4.5     No Conflicts. To the extent that they exist, Employee will not disclose to the Company or any of its subsidiaries any of Employee’s previous employer’s confidential information or trade secrets. Further, Employee represents and warrants that Employee has not previously assumed any obligations inconsistent with those of this Agreement and that employment by the Company does not conflict with any prior obligations to third parties. In addition, Employee and the Company agree that it is important for any prospective employer to be aware of this Agreement, so that disputes concerning this Agreement can be avoided in the future. Therefore, the Employee agrees that, following termination of employment with the Company, the Company may forward a copy of Article IV of this Agreement (and any related Exhibits hereto) to any future prospective or actual employer, and the Employee releases the Company from any claimed liability or damage caused to the Employee by virtue of the Company’s act in making that prospective or actual employer aware of Article IV of this Agreement (and any related Exhibits hereto).

4.6     Agreement on Fairness. Employee acknowledges that: (i) this Agreement has been specifically bargained between the parties and reviewed by Employee, (ii) Employee has had an opportunity to obtain legal counsel to review this Agreement, and (iii) the covenants made by and duties imposed upon Employee hereby are fair, reasonable and minimally necessary to protect the legitimate business interests of the Company, and such covenants and duties will not place an undue burden upon Employee’s livelihood in the event of termination of Employee’s employment by the Company and the strict enforcement of the covenants contained herein.

4.7     Equitable Relief and Remedies. Employee acknowledges that any breach of this Agreement will cause substantial and irreparable harm to the Company for which money damages would be an inadequate remedy. Accordingly, notwithstanding the provisions of Article V below, the Company shall in any such event be entitled to seek injunctive and other forms of equitable relief to prevent such breach and the prevailing party shall be entitled to recover from the other, the prevailing party’s costs

Exhibit 10.33

(including, without limitation, reasonable attorneys’ fees) incurred in connection with enforcing this Agreement, in addition to any other rights or remedies available at law, in equity, by statute or pursuant to Article V below.

ARTICLE V

AGREEMENT TO SUBMIT ALL EXISTING OR FUTURE DISPUTES
TO BINDING ARBITRATION

The Company and Employee agree that any controversy or claim arising out of or related to this Agreement or Employee’s employment with or termination by the Company that is not resolved by the parties shall be settled by arbitration administered by the American Arbitration Association under its National Rules for the Resolution of Employment Disputes. Said arbitration shall be conducted in Lexington, Kentucky. The parties further agree that the arbitrator may resolve issues of contract interpretation as well as law and award damages, if any, to the extent provided by the Agreement or applicable law. The parties agree that the costs of the arbitrator’s services shall be borne by the Company. The parties further agree that the arbitrator’s decision will be final and binding and enforceable in any court of competent jurisdiction. In addition to the A.A.A.’s Arbitration Rules and unless otherwise agreed to by the parties, the following rules shall apply:

(a)     Each party shall be entitled to discovery exclusively by the following means: (i) requests for admission, (ii) requests for production of documents, (iii) up to fifteen (15) written interrogatories (with any subpart to be counted as a separate interrogatory), and (iv) depositions of no more than six individuals.

(b)     Unless the arbitrator finds that delay is reasonably justified or as otherwise agreed to by the parties, all discovery shall be completed, and the arbitration hearing shall commence within five months after the appointment of the arbitrator.

(c)     Unless the arbitrator finds that delay is reasonably justified, the hearing will be completed, and an award rendered within thirty (30) days of commencement of the hearing.

The arbitrator’s authority shall include the ability to render equitable types of relief and, in such event, any aforesaid court may enter an order enjoining and/or compelling such actions or relief ordered or as found by the arbitrator. The arbitrator also shall make a determination regarding which party’s legal position in any such controversy or claim is the more substantially correct (the “Prevailing Party”) and the arbitrator shall require the other party to pay the legal and other professional fees and costs incurred by the Prevailing Party in connection with such arbitration proceeding and any necessary court action.

Notwithstanding the foregoing provisions of this Article V, the parties expressly agree that a court of competent jurisdiction may enter a temporary restraining order or an order enjoining a breach of Article IV of this Agreement without submission of the underlying dispute to an arbitrator. Such remedy shall be cumulative and nonexclusive, and shall be in addition to any other remedy to which the parties may be entitled.

ARTICLE VI

GENERAL PROVISIONS

6.1     Notices. Any and all notices provided for in this Agreement shall be given in writing and shall be deemed given to a party at the earlier of (i) when actually delivered to such party, or (ii) when mailed to such party by registered or certified mail (return receipt requested) or sent to such party by courier, confirmed by receipt, and addressed to such party at the address designated below for such party as follows (or to such other address for such party as such party may have substituted by notice pursuant to this Section 6.1):

(a)     If to the Company:        Tempur Sealy International, Inc.
1000 Tempur Way
Lexington, KY 40511
Attention: Chief Executive Officer
                            
With a copy to Senior Vice President
and General Counsel


Exhibit 10.33

(b)     If to Employee:            Thomas Murray
10998 NW 78th Place
Parkland, FL 33076
                                        
6.2     Entire Agreement. This Agreement, together with the exhibits hereto, contains the entire understanding and the full and complete agreement of the parties and supersedes and replaces any prior understandings and agreements among the parties with respect to the subject matter hereof.

6.3     Miscellaneous. This Agreement may be altered, amended or modified only in writing, signed by both of the parties hereto, except that either party may update its address set forth in Section 6.1 by providing a notice of the updated address in the manner set forth in Section 6.1. Headings included in this Agreement are for convenience only and are not intended to limit or expand the rights of the parties hereto. References to Sections herein shall mean sections of the text of this Agreement, unless otherwise indicated.

6.4     Assignability. This Agreement and the rights and duties set forth herein may not be assigned by either of the parties without the express written consent of the other party. This Agreement shall be binding on and inure to the benefit of each party and such party’s respective heirs, legal representatives, successors and assigns.

6.5     Severability. If any court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then such invalidity or unenforceability shall have no effect on the other provisions hereof, which shall remain valid, binding and enforceable and in full force and effect, and such invalid or unenforceable provision shall be construed in a manner so as to give the maximum valid and enforceable effect to the intent of the parties expressed therein.

6.6     Waiver of Breach. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party.

6.7     Governing Law; Jurisdiction; Construction. This Agreement shall be governed by the internal laws of the Commonwealth of Kentucky, without regard to any rules of construction that would require application of the laws of another jurisdiction. The parties agree that they have been represented by counsel during the negotiation and execution of this Agreement, and accordingly each party waives the application of any law, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party responsible for the drafting thereof.

6.8.     Effective Date. The terms and conditions of this Agreement shall be effective as of the Effective Date.

6.9.     Tax Compliance.

(a)     The Company may withhold from any amounts payable hereunder any amounts required to be withheld under federal, state or local law and any other deductions authorized by Employee. The Company and the Employee agree that they will execute any and all amendments to this Agreement as they mutually agree in good faith may be necessary to ensure compliance with the provisions of Section 409A (together with any implementing regulations, “Section 409A”) of the Code while preserving insofar as possible the economic intent of the respective provisions, so that Employee will not be subject to any tax (including interest and penalties) under Section 409A.
(b)     For purposes of Section 409A, the right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments.
(c)     With respect to any reimbursement of expenses of, or any provision of in-kind benefits to, the Employee, as specified under this Agreement, such reimbursement of expenses or provision of in-kind benefits shall be subject to the following conditions: (1) the expenses eligible for reimbursement or the amount of in-kind benefits provided in one taxable year shall not affect the expenses eligible for reimbursement or the amount of in-kind benefits provided in any other taxable year, except for any medical reimbursement arrangement providing for the reimbursement of expenses referred to in Section 105(b) of the Code; (2) the reimbursement of an eligible expense shall be made no later than the end of the year after the year in which such expense was incurred; and (3) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit.

(d)     Notwithstanding anything to the contrary in this Agreement, if Employee is a “specified employee” as determined pursuant to Section 409A as of the date of Employee’s “separation from service” as defined in Treasury Regulation Section 1.409A-1(h) (or any successor regulation) and if any payments or entitlements provided for in this Agreement constitute a “deferral of compensation” within the meaning of Section 409A and cannot be paid or provided in the manner provided herein without subjecting Employee to additional tax, interest or penalties under Section 409A, then any such payment or entitlement

Exhibit 10.33

which is payable during the first six months following Employee’s “separation from service” shall be paid or provided to Employee in a cash lump-sum on the first business day of the seventh calendar month immediately following the month in which Employee’s “separation from service” occurs or, if earlier, upon the Employee’s death. In addition, any payments or benefits due hereunder upon a termination of Employee’s employment which are a “deferral of compensation” within the meaning of Section 409A shall only be payable or provided to Employee (or Employee’s estate) upon a “separation from service” as defined in Section 409A. Finally, for the purposes of this Agreement, amounts payable under Section 3.2 shall be deemed not to be a “deferral of compensation” subject to Section 409A to the extent provided in the exceptions in Treasury Regulation Sections 1.409A-1(b)(4) (“short-term deferrals”) and (b)(9) (“separation pay plans,” including the exception under subparagraph (iii)) and other applicable provisions of Treasury Regulation Section 1.409A-1 - A-6.

(e)    Whenever a payment under this Agreement specifies a payment period with reference to a number of days (for example, "payment shall be made within thirty (30) days following the date of termination"), the actual date of payment within the specified period shall be within the sole discretion of the Company. In no event may Employee, directly or indirectly, designate the calendar year of any payment to be made under this Agreement, to the extent such payment is subject to Code Section 409A.

(f) The Company makes no representation or warranty and shall have no liability to Employee or any other person if any provisions of this Agreement are determined to constitute deferred compensation subject to Code Section 409A but do not satisfy an exemption from, or the conditions of, Code Section 409A.

6.10    Clawback Policy. Employee acknowledges receipt of a copy of the Company’s Clawback Policy, and acknowledges and agrees that all performance bonuses awarded pursuant to Section 2.2 and all equity awards pursuant to Section 2.3 will be subject to the Clawback Policy or any amended version thereof and any other clawback policy adopted by the Board of Directors of the Company, in each case to the extent the Clawback Policy or any other clawback policy applies by its terms to Employee. The Employee agrees that he is obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup any bonuses paid under this Agreement or awards or amounts paid under the Company’s Amended and Restated 2013 Equity Incentive Plan (“EIP”) and that are subject to clawback pursuant to the Clawback Policy or any other such clawback policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup any bonuses paid under this Agreement or any equity awards or amounts paid under the EIP from the Employee’s accounts, or pending or future compensation or equity awards.

[Remainder of Page Intentionally Left Blank]

Exhibit 10.33

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written above.

COMPANY:

TEMPUR SEALY INTERNATIONAL, INC.


/s/ Diana Strickland_____________________
By:    Diana Strickland
Title:
Senior Vice President, Chief Human Resources Officer


EMPLOYEE:


/s/ Thomas Murray_______________________
Thomas Murray


WITNESSED BY:


/s/ Joseph M. Kamer________________________                                        Joseph M. Kamer
Title:     SVP, General Counsel and Secretary

Date: February 10, 2020


Exhibits:

Exhibit A
Competitive Enterprises of the Company and its Affiliates











[Signature Page to Employment and Non-Competition Agreement]

Exhibit 10.33

Exhibit A
Competitive Enterprises of the Company and its Affiliates
Ace
AH Beard
Auping
Ashley Sleep
Bedshed
Better Bed
Bohus
Botafogo
Boyd
Bruno
Carpe Diem
Carpenter
Carolina Mattress
Casper
Cauval Group
Chaide & Chaide
Classic Sleep Products
Coin
Colunex
Copel
Comforpedic
Comfort Group
Comfort Solutions
COFEL group
Correct
De Rucci
Diamona
Doremo Octaspring
Dorelan
Dreams
Drommeland
Dunlopillo
Duxiana
Eastborne
Eight Sleep
El Corte Ingles
Eminflex
Englander
Eve
Falafella
Flex Group of Companies
Foamex
Forty Winks
Furniture Village

Exhibit 10.33

France Bed
Future Foam
Harrisons
Harvey Norman Group
Hastens
Helix Sleep
Hilding Anders Group
Hyundai Retail Group
Hypnos
IBC
Jysk Group
KayMed
King Koil
Kingsdown
Koala
Lady Americana
Land and Sky
Leesa Sleep
Leggett & Platt
Lo Monaco
Lotte Retail Group
Luna
Lutz Group
Magniflex
Metzler
Mlily
Myers
Nature’s Sleep (GhostBed)
Nectar
Optimo
Ortobom
Per Dormire
Purple, Inc.
Natura
Natures Rest
Park Place
Permaflex
Pikolin Group
Recticel Group
Relyon
Restonic
Reverie
Rosen
Rowe
Saatva
Sapsa Bedding
Select Comfort
Sherwood Bedding
Silentnight
Simba

Exhibit 10.33

Serta Simmons Bedding/Beautyrest and any direct or indirect parent company
Sinomax
Sleep Innovations
Sleepmaker
Sleep Number
Spring Air
Steinhoff
Sterling
Stobel
Swiss Comfort
Swiss Sense
Tediber
Therapedic
Tuft and Needle
Whisper

RETAILERS

Ashley
Mattress Firm/Steinhoff
Sleepy’s
Wayfair
 



Exhibit
Exhibit 10.34


EMPLOYMENT AND NON-COMPETITION AGREEMENT
(Steven Rusing)


THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the “Agreement”) is dated February 19, 2020 and effective as of January 1, 2020 (the “Effective Date”), by and between Tempur Sealy International, Inc., a Delaware corporation (the “Company”), and Steven Rusing, an individual (“Employee”).

Employee and Company are parties to that certain Employment Agreement dated as of April 17, 2008, as amended, between Sealy Corporation and Employee (the “Current Employment Agreement”). In consideration of the promotion of Employee, Employee and Company desire to terminate the Current Employment Agreement and enter into this Agreement in replacement thereof. In consideration of the premises and the mutual agreements and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Company and Employee,

IT IS HEREBY AGREED AS FOLLOWS:

ARTICLE I

EMPLOYMENT

1.1     Term of Employment. Effective as of the Effective Date the Current Employment Agreement is hereby terminated and the Company agrees to continue to employ Employee and to promote Employee to the position of President, U.S. Sales, and Employee agrees to continue employment by the Company, for the period commencing on the Effective Date and ending on December 31, 2020 (the “Initial Term”), subject to earlier termination as hereinafter set forth in Article III. Unless earlier terminated in accordance with Article III, following the expiration of the Initial Term, this Agreement shall be automatically renewed for successive one-year periods (collectively, the “Renewal Terms”; individually, a “Renewal Term”) unless, at least ninety (90) days prior to the expiration of the Initial Term or the then current Renewal Term, either party provides the other with a written notice of intention not to renew, in which case the Employee’s employment with the Company, and the Company’s obligations hereunder, shall terminate as of the end of the Initial Term or said Renewal Term, as applicable. Except as otherwise expressly provided herein, the terms of this Agreement during any Renewal Term shall be the same as the terms in effect immediately prior to such renewal, subject to any such changes or modifications as mutually may be agreed between the parties as evidenced in a written instrument signed by both the Company and Employee.

1.2     Position and Duties. Employee shall be employed in the position of President, U.S. Sales or such other executive position as may be assigned from time to time by the Company’s Chief Executive Officer. In such capacity, Employee shall be subject to the authority of, and shall report to, the Company’s Chief Executive Officer. Employee’s duties and responsibilities shall include those customarily attendant to Employee’s position and such other duties and responsibilities as may be assigned from time to time by the Chief Executive Officer. Employee shall devote Employee’s entire business time, loyalty, attention and energies exclusively to the business interests of the Company while employed by the Company, and shall perform his duties and responsibilities diligently and to the best of his ability.

ARTICLE II

COMPENSATION AND OTHER BENEFITS

2.1     Base Salary. The Company shall pay Employee an initial annual salary of $400,000.00 (“Base Salary”), payable in accordance with the normal payroll practices of the Company. The Employee’s Base Salary will be reviewed and be subject to adjustment from time to time by the Board of Directors or its Compensation Committee at their discretion in accordance with the Company’s annual review policy. Based on the Company’s current policy, the Company expects Employee’s first annual review would be during the first quarter of 2021.

2.2     Performance Bonus.

(a)    Employee will be eligible to earn an annual performance-based bonus based on performance criteria approved by the Company’s Board of Directors or its Compensation Committee for each full or pro rata portion of any fiscal year during which Employee is employed by the Company (each, a “Bonus Year”), the terms and conditions of which as well as Employee’s entitlement thereto being determined annually in the sole discretion of the Company’s Board of Directors or its Compensation Committee (the “Performance Bonus”). The amount of the Performance Bonus will vary based on the achievement of Company and individual performance criteria established by the Company’s Board of Directors or its Compensation Committee,


Exhibit 10.34


but the performance criteria will be set to target a Performance Bonus equal to a designated percentage of Base Salary as of December 31st of the applicable Bonus Year if the performance criteria are met (the “Target Bonus”).

(b)    For 2020, the amount of his Target Bonus will be based on 75% of his Base Salary (the “2020 Bonus”). The 2020 Bonus if earned will be paid on or before March 15, 2021.

2.3    Equity Awards. The Company anticipates that commencing in 2020 Employee will be considered for future equity awards in accordance with the Company’s process for executives, but the timing, amount and terms of any future grants will be subject to the discretion of the Board of Directors or the Compensation Committee.
    
2.4     Benefit Plans. Employee will be eligible to participate in the Company’s retirement plans that are qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and in the Company’s welfare benefit plans that are generally applicable to all executive employees of the Company (the “Plans”), in accordance with the terms and conditions thereof.

2.5     Financial Planning. Employee shall be eligible to participate in the Company’s executive financial planning program which provides reimbursement of financial planning expenses to eligible executives in accordance to the terms of the program.

2.6     Vacation. Employee shall be entitled to vacation days in any calendar year in accordance with the Company’s general vacation policies for senior executive employees.

2.7     Expenses. The Company shall reimburse Employee for all authorized and approved expenses incurred in the course of the performance of Employee’s duties and responsibilities pursuant to this Agreement and consistent with the Company’s policies with respect to travel, entertainment and miscellaneous expenses, and the requirements with respect to the reporting of such expenses.

2.8     Withholdings. All payments to be made by the Company hereunder will be subject to any withholding requirements.

ARTICLE III

TERMINATION

3.1     Right to Terminate; Automatic Termination.

(a) Termination by Company Without Cause. Subject to Section 3.2, the Company may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time and for any reason.

(b) Termination by Employee for Good Reason. Subject to Section 3.2, Employee may terminate his employment obligation hereunder (but not his obligations under Article IV hereof) for “Good Reason” (as hereinafter defined) if (i) Employee reasonably determines in good faith that a Good Reason condition has occurred, (ii) Employee gives written notice thereof to the Company within thirty (30) days of the Good Reason event (which notice shall specify in reasonable detail the grounds upon which such notice is given), (iii) the Company fails, within thirty (30) days of receipt of such notice, to cure or rectify the grounds for such Good Reason termination set forth in such notice, and Employee has cooperated in good faith with the Company’s efforts to cure such condition, (iv) notwithstanding such efforts, the Good Reason condition continues to exist, and (v) Employee terminates his employment within thirty (30) days after the end of such thirty (30)-day cure period. “Good Reason” shall mean any of the following: (i) relocation of Employee’s principal workplace over sixty (60) miles from any of the Company’s then existing workplaces without the consent of Employee (which consent shall not be unreasonably withheld, delayed or conditioned), or (ii) the Company’s material breach of this Agreement or any other written agreement between Employee and the Company which is not cured within thirty (30) days after receipt by the Company from Employee of written notice of such breach.

(c)     Termination by Company For Cause. Subject to Section 3.2, the Company may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time “For Cause” (as defined below) by giving notice to Employee stating the basis for such termination, effective immediately upon giving such notice or at such other time thereafter as the Company may designate. “For Cause” shall mean any of the following: (i) Employee’s willful and continued failure to substantially perform the reasonably assigned duties with the Company which are consistent with Employee’s position and job description referred to in this Agreement, other than any such failure resulting from incapacity due to physical or mental illness, after a written notice is delivered to Employee by the Board of Directors of the Company which specifically identifies the


Exhibit 10.34


manner in which Employee has not substantially performed the assigned duties and allowing Employee thirty (30) days after receipt by Employee of such notice to cure such failure to perform, (ii) material breach of this or any other written agreement between Employee and the Company which is not cured within thirty (30) days after receipt by the Employee from the Company of written notice of such breach, (iii) any material violation of any written policy of the Company which is not cured within thirty (30) days after receipt by Employee from the Company of written notice of such violation, (iv) Employee’s willful misconduct which is materially and demonstrably injurious to the Company, (v) Employee’s conviction by a court of competent jurisdiction of, or his pleading guilty or nolo contendere to, any felony, or (vi) Employee’s commission of an act of fraud, embezzlement, or misappropriation against the Company or any breach of fiduciary duty or breach of the duty of loyalty, including, but not limited to, the offer, payment, solicitation or acceptance of any unlawful bribe or kickback with respect to the Company’s business. For purposes of this paragraph, no act, or failure to act, on Employee’s part shall be considered “willful” unless done, or omitted to be done, in knowing bad faith and without reasonable belief that the action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, expressly authorized by a resolution duly adopted by the Board of Directors or based upon the written advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, in good faith and in the best interests of the Company. Notwithstanding the foregoing, Employee shall not be deemed to have been terminated For Cause unless and until there shall have been delivered to Employee a copy of a resolution, duly adopted by the Board of Directors at a meeting of the Board called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee’s counsel, to be heard before the Board), finding that in the good faith opinion of the Board of Directors Employee committed the conduct set forth above in (i), (ii), (iii), (iv), (v) or (vi) of this Section and specifying the particulars thereof in detail.

(d)     Termination Upon Death or Disability. Subject to Section 3.2, Employee’s employment and the Company’s obligations under this Agreement shall terminate: (i) automatically, effective immediately and without any notice being necessary, upon Employee’s death; and (ii) in the event of the disability of Employee, by the Company giving notice of termination to Employee. For purposes of this Agreement, “disability” means the inability of Employee, due to a physical or mental impairment, for ninety (90) days (whether or not consecutive) during any period of 360 days, to perform, with reasonable accommodation, the essential functions of the work contemplated by this Agreement. In the event of any dispute as to whether Employee is disabled, the matter shall be determined by the Company’s Board of Directors in consultation with a physician selected by the Company’s health or disability insurer or another physician mutually satisfactory to the Company and the Employee. The Employee shall cooperate with the efforts to make such determination or be subject to immediate discharge. Any such determination shall be conclusive and binding on the parties. Any determination of disability under this Section 3.1 is not intended to alter any benefits any party may be entitled to receive under any long-term disability insurance policy carried by either the Company or Employee with respect to Employee, which benefits shall be governed solely by the terms of any such insurance policy. Nothing in this subsection shall be construed as limiting or altering any of Employee’s rights under State workers compensation laws or State or federal Family and Medical Leave laws.

3.2     Rights Upon Termination.

(a)     Section 3.1(a) and 3.1(b) Termination. If Employee’s employment terminates pursuant to Section 3.1(a) or 3.1(b) hereof, in each case Employee shall have no further rights against the Company hereunder, except for the right to receive, following execution of a release and waiver in form satisfactory to the Company in the case of clauses (ii), (iii) and (v) below, (i) any unpaid Base Salary and the value of any accrued but unused vacation, (ii) a pro-rata portion of any Performance Bonus that would be payable with respect to the Bonus Year in which the termination occurs (based on the number of days of the Bonus Year prior to the effective date of termination and the amount of the Target Bonus set by the Board of Directors or Compensation Committee for the Employee for such Bonus Year) and whatever rights as to equity awards as Employee may have pursuant to any equity awards agreement with the Company, (iii) payment of Base Salary for twelve (12) months (the “Severance Period”), payable in accordance with the normal payroll practices of the Company, (iv) reimbursement of expenses to which Employee is entitled under Section 2.7 hereof, and (v) to the extent Employee timely elects “continuation coverage” under Section 4980B of the Code (“COBRA”) reimbursement for the cost of continuation of the group medical plans of the Company as detailed in Section 2.4 hereof for the duration of the Severance Period, at the same rate of the Company’s portion of the shared costs of such benefits as in effect from time to time for active employees of the Company; provided, however that (x) if the Company cannot continue such COBRA benefits, the Company shall reimburse Employee for the cost of replacing such benefits, and (y) such COBRA benefits shall be discontinued in the event Employee becomes eligible for similar benefits from a successor employer (and Employee shall promptly notify the Company of his eligibility for any such benefits).

(b)     Section 3.1(c) and 3.1(d) Termination; Termination By Employee (Not for Good Reason). If Employee’s employment is terminated pursuant to Sections 3.1(c) or 3.1(d) hereof, or if Employee quits employment (other than for Good Reason) notwithstanding the terms of this Agreement, Employee or Employee’s estate shall have no further rights against the Company hereunder, except for the right to receive, following execution of a release and waiver in form satisfactory to the Company in the case of clause (iii) below, (i) any unpaid Base Salary, (ii) in the case of Section 3.1(d) hereof, the value of any accrued but


Exhibit 10.34


unused vacation, (iii) in the case of Section 3.1(d) hereof, a pro-rata portion (based on the number of days of the Bonus Year prior to the effective date of termination) of any Performance Bonus that would be payable with respect to the Bonus Year in which the termination occurs, and whatever rights as to equity awards as Employee may have pursuant to any equity award agreement with the Company and (iv) reimbursement of expenses to which Employee is entitled under Section 2.7 hereof.

(c)    Release; Timing of Payments. The release and waiver described in Sections 3.2(a) and (b) shall be delivered to the Employee on or before the fourteenth (14th) day following separation from employment with the Company. Further and notwithstanding the foregoing provisions of this Section 3.2, if the release and waiver described in, and required by, Section 3.2(a) and 3.2(b) as applicable, has not been executed, delivered and become irrevocable on or before the end of the sixty (60)-day period following Employee's termination of employment with the Company, no payments due pursuant to Section 3.2(a) or (b), as applicable, shall be, or shall become, payable. Further, to the extent that (A) such termination of employment occurs within 60 days of the end of any calendar year, and (B) any of such payments and severance benefits constitute "nonqualified deferred compensation" for purposes of Section 409A of the Code, any payment of any amount, or provision of any benefit, otherwise scheduled to occur prior to the 60th day following the date of Employee's termination of employment hereunder, but for the condition on executing the release and waiver as set forth herein, shall be made (or commence being made) on the later of January 15th of the next calendar year following termination of employment or the date such release and waiver is delivered and has become irrevocable, after which any remaining payments and severance benefits shall thereafter be provided to Employee without interest according to the applicable schedule set forth herein.

ARTICLE IV

CONFIDENTIALITY; NON-COMPETITION; NON-SOLICITATION

4.1    Covenants Regarding Confidential Information, Trade Secrets and Other Matters. Employee covenants and agrees as follows:

(a)     Definitions. For purposes of this Agreement, the following terms are defined as follows:

(1) “Trade Secret” means all information possessed by or developed for the Company or any of its subsidiaries, including, without limitation, a compilation, program, device, method, system, technique or process, to which all of the following apply: (i) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and (ii) the information is the subject of efforts to maintain its secrecy that are reasonable under the circumstances.

(2) “Confidential Information” means information, to the extent it is not a Trade Secret, which is possessed by or developed for the Company or any of its subsidiaries and which relates to the Company’s or any of its subsidiaries’ existing or potential business or technology, which information is generally not known to the public and which information the Company or any of its subsidiaries seeks to protect from disclosure to its existing or potential competitors or others, including, without limitation, for example: business plans, strategies, existing or proposed bids, costs, technical developments, existing or proposed research projects, financial or business projections, investments, marketing plans, negotiation strategies, training information and materials, information generated for client engagements and information stored or developed for use in or with computers. Confidential Information also includes information received by the Company or any of its subsidiaries from others which the Company or any of its subsidiaries has an obligation to treat as confidential.

(b)     Nondisclosure of Confidential Information. Except as required in the conduct of the Company’s or any of its subsidiaries’ business or as expressly authorized in writing on behalf of the Company or any of its subsidiaries, Employee shall not use or disclose, directly or indirectly, any Confidential Information during the period of his employment with the Company. In addition, following the termination for any reason of Employee’s employment with the Company, Employee shall not use or disclose, directly or indirectly, any Confidential Information. This prohibition does not apply to Confidential Information after it has become generally known in the industry in which the Company conducts its business. This prohibition also does not prohibit Employee’s use of general skills and know-how acquired during and prior to employment by the Company, as long as such use does not involve the use or disclosure of Confidential Information or Trade Secrets.

(c)     Trade Secrets. During Employee’s employment by the Company, Employee shall do what is reasonably necessary to prevent unauthorized misappropriation or disclosure and threatened misappropriation or disclosure of the Company’s or any of its subsidiaries’ Trade Secrets and, after termination of employment, Employee shall not use or disclose the Company’s or any of its subsidiaries’ Trade Secrets as long as they remain, without misappropriation, Trade Secrets.



Exhibit 10.34


(d)     Copyright. All copyrightable work by the Employee relating to the Company’s business or the business of any subsidiary or affiliate of the Company during the term of the Employee’s employment by the Company is intended to be “work made for hire” as defined in Section 101 of the Copyright Act of 1976, and shall be the property of the Company. If the copyright to any such copyrightable work is not the property of the Company by operation of law, the Employee will, without further consideration, assign to the Company all right, title and interest in such copyrightable work and will assist the Company and its nominees in every way, at the Company’s expense, to secure, maintain and defend for the Company’s benefit, copyrights and any extensions and renewals thereof on any and all such work including translations thereof in any and all countries, such work to be and remain the property of the Company whether copyrighted or not.

(e)    Exceptions. The provisions of paragraphs (b) and (c) above will not be deemed to prohibit any disclosure that is required by law or court order, provided that Employee has not intentionally taken actions to trigger such required disclosure and the Company is given reasonable prior notice and an opportunity to contest or minimize such disclosure.

4.2     Non-Competition.

(a)     During Employment. During Employee’s employment hereunder, Employee shall not engage, directly or indirectly, as an employee, officer, director, partner, manager, consultant, agent, owner (other than a minority shareholder or other equity interest of not more than 1% of a company whose equity interests are publicly traded on a nationally recognized stock exchange or over-the-counter) or in any other capacity, in any competition with the Company or any of its subsidiaries.

(b)     Subsequent to Employment. For a two year period following the termination of Employee’s employment for any reason or without reason, Employee shall not in any capacity (whether in the capacity as an employee, officer, director, partner, manager, consultant, agent or owner (other than a minority shareholder or other equity interest of not more than 1% of a company whose equity interests are publicly traded on a nationally recognized stock exchange or over-the-counter), directly or indirectly advise, manage, render or perform services to or for any person or entity which is engaged in a business competitive to that of the Company or any of its subsidiaries (including without limitation those businesses listed in Exhibit A attached hereto) within any geographical location wherein the Company or any of its subsidiaries produces, sells or markets its goods and services at the time of such termination or within a one-year period prior to such termination.

4.3     Non-solicitation. For a two year period following the termination of Employee’s employment for any reason or without reason, Employee shall not solicit or induce any person who was an employee of the Company or any of its subsidiaries on the date of Employee’s termination or within three months prior to leaving his employment with the Company or any of its subsidiaries to leave their employment with the Company.

4.4     Return of Documents. Immediately upon termination of employment, Employee will return to the Company, and so certify in writing to the Company, all the Company’s or any of its subsidiaries’ papers, documents and things, including information stored for use in or with computers and software applicable to the Company’s and its subsidiaries’ business (and all copies thereof), which are in Employee’s possession or under Employee’s control, regardless whether such papers, documents or things contain Confidential Information or Trade Secrets.

4.5     No Conflicts. To the extent that they exist, Employee will not disclose to the Company or any of its subsidiaries any of Employee’s previous employer’s confidential information or trade secrets. Further, Employee represents and warrants that Employee has not previously assumed any obligations inconsistent with those of this Agreement and that employment by the Company does not conflict with any prior obligations to third parties. In addition, Employee and the Company agree that it is important for any prospective employer to be aware of this Agreement, so that disputes concerning this Agreement can be avoided in the future. Therefore, the Employee agrees that, following termination of employment with the Company, the Company may forward a copy of Article IV of this Agreement (and any related Exhibits hereto) to any future prospective or actual employer, and the Employee releases the Company from any claimed liability or damage caused to the Employee by virtue of the Company’s act in making that prospective or actual employer aware of Article IV of this Agreement (and any related Exhibits hereto).

4.6     Agreement on Fairness. Employee acknowledges that: (i) this Agreement has been specifically bargained between the parties and reviewed by Employee, (ii) Employee has had an opportunity to obtain legal counsel to review this Agreement, and (iii) the covenants made by and duties imposed upon Employee hereby are fair, reasonable and minimally necessary to protect the legitimate business interests of the Company, and such covenants and duties will not place an undue burden upon Employee’s livelihood in the event of termination of Employee’s employment by the Company and the strict enforcement of the covenants contained herein.

4.7     Equitable Relief and Remedies. Employee acknowledges that any breach of this Agreement will cause substantial and irreparable harm to the Company for which money damages would be an inadequate remedy. Accordingly, notwithstanding


Exhibit 10.34


the provisions of Article V below, the Company shall in any such event be entitled to seek injunctive and other forms of equitable relief to prevent such breach and the prevailing party shall be entitled to recover from the other, the prevailing party’s costs (including, without limitation, reasonable attorneys’ fees) incurred in connection with enforcing this Agreement, in addition to any other rights or remedies available at law, in equity, by statute or pursuant to Article V below.

ARTICLE V

AGREEMENT TO SUBMIT ALL EXISTING OR FUTURE DISPUTES
TO BINDING ARBITRATION

The Company and Employee agree that any controversy or claim arising out of or related to this Agreement or Employee’s employment with or termination by the Company that is not resolved by the parties shall be settled by arbitration administered by the American Arbitration Association under its National Rules for the Resolution of Employment Disputes. Said arbitration shall be conducted in Lexington, Kentucky. The parties further agree that the arbitrator may resolve issues of contract interpretation as well as law and award damages, if any, to the extent provided by the Agreement or applicable law. The parties agree that the costs of the arbitrator’s services shall be borne by the Company. The parties further agree that the arbitrator’s decision will be final and binding and enforceable in any court of competent jurisdiction. In addition to the A.A.A.’s Arbitration Rules and unless otherwise agreed to by the parties, the following rules shall apply:

(a)     Each party shall be entitled to discovery exclusively by the following means: (i) requests for admission, (ii) requests for production of documents, (iii) up to fifteen (15) written interrogatories (with any subpart to be counted as a separate interrogatory), and (iv) depositions of no more than six individuals.

(b)     Unless the arbitrator finds that delay is reasonably justified or as otherwise agreed to by the parties, all discovery shall be completed, and the arbitration hearing shall commence within five months after the appointment of the arbitrator.

(c)     Unless the arbitrator finds that delay is reasonably justified, the hearing will be completed, and an award rendered within thirty (30) days of commencement of the hearing.

The arbitrator’s authority shall include the ability to render equitable types of relief and, in such event, any aforesaid court may enter an order enjoining and/or compelling such actions or relief ordered or as found by the arbitrator. The arbitrator also shall make a determination regarding which party’s legal position in any such controversy or claim is the more substantially correct (the “Prevailing Party”) and the arbitrator shall require the other party to pay the legal and other professional fees and costs incurred by the Prevailing Party in connection with such arbitration proceeding and any necessary court action.

Notwithstanding the foregoing provisions of this Article V, the parties expressly agree that a court of competent jurisdiction may enter a temporary restraining order or an order enjoining a breach of Article IV of this Agreement without submission of the underlying dispute to an arbitrator. Such remedy shall be cumulative and nonexclusive, and shall be in addition to any other remedy to which the parties may be entitled.

ARTICLE VI

GENERAL PROVISIONS

6.1     Notices. Any and all notices provided for in this Agreement shall be given in writing and shall be deemed given to a party at the earlier of (i) when actually delivered to such party, or (ii) when mailed to such party by registered or certified mail (return receipt requested) or sent to such party by courier, confirmed by receipt, and addressed to such party at the address designated below for such party as follows (or to such other address for such party as such party may have substituted by notice pursuant to this Section 6.1):

(a)     If to the Company:        Tempur Sealy International, Inc.
1000 Tempur Way
Lexington, KY 40511
Attention: Chief Executive Officer
                            
With a copy to Senior Vice President
and General Counsel



Exhibit 10.34


(b)     If to Employee:            Steven Rusing
2233 Guilford Lane
Lexington, KY 40513        
                            
6.2     Entire Agreement. This Agreement, together with the exhibits hereto, contains the entire understanding and the full and complete agreement of the parties and supersedes and replaces any prior understandings and agreements among the parties with respect to the subject matter hereof.

6.3     Miscellaneous. This Agreement may be altered, amended or modified only in writing, signed by both of the parties hereto, except that either party may update its address set forth in Section 6.1 by providing a notice of the updated address in the manner set forth in Section 6.1. Headings included in this Agreement are for convenience only and are not intended to limit or expand the rights of the parties hereto. References to Sections herein shall mean sections of the text of this Agreement, unless otherwise indicated.

6.4     Assignability. This Agreement and the rights and duties set forth herein may not be assigned by either of the parties without the express written consent of the other party. This Agreement shall be binding on and inure to the benefit of each party and such party’s respective heirs, legal representatives, successors and assigns.

6.5     Severability. If any court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then such invalidity or unenforceability shall have no effect on the other provisions hereof, which shall remain valid, binding and enforceable and in full force and effect, and such invalid or unenforceable provision shall be construed in a manner so as to give the maximum valid and enforceable effect to the intent of the parties expressed therein.

6.6     Waiver of Breach. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party.

6.7     Governing Law; Jurisdiction; Construction. This Agreement shall be governed by the internal laws of the Commonwealth of Kentucky, without regard to any rules of construction that would require application of the laws of another jurisdiction. The parties agree that they have been represented by counsel during the negotiation and execution of this Agreement, and accordingly each party waives the application of any law, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party responsible for the drafting thereof.

6.8.     Effective Date. The terms and conditions of this Agreement shall be effective as of the Effective Date.

6.9.     Tax Compliance.

(a)     The Company may withhold from any amounts payable hereunder any amounts required to be withheld under federal, state or local law and any other deductions authorized by Employee. The Company and the Employee agree that they will execute any and all amendments to this Agreement as they mutually agree in good faith may be necessary to ensure compliance with the provisions of Section 409A (together with any implementing regulations, “Section 409A”) of the Code while preserving insofar as possible the economic intent of the respective provisions, so that Employee will not be subject to any tax (including interest and penalties) under Section 409A.
(b)     For purposes of Section 409A, the right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments.
(c)     With respect to any reimbursement of expenses of, or any provision of in-kind benefits to, the Employee, as specified under this Agreement, such reimbursement of expenses or provision of in-kind benefits shall be subject to the following conditions: (1) the expenses eligible for reimbursement or the amount of in-kind benefits provided in one taxable year shall not affect the expenses eligible for reimbursement or the amount of in-kind benefits provided in any other taxable year, except for any medical reimbursement arrangement providing for the reimbursement of expenses referred to in Section 105(b) of the Code; (2) the reimbursement of an eligible expense shall be made no later than the end of the year after the year in which such expense was incurred; and (3) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit.

(d)     Notwithstanding anything to the contrary in this Agreement, if Employee is a “specified employee” as determined pursuant to Section 409A as of the date of Employee’s “separation from service” as defined in Treasury Regulation Section 1.409A-1(h) (or any successor regulation) and if any payments or entitlements provided for in this Agreement constitute a “deferral of compensation” within the meaning of Section 409A and cannot be paid or provided in the manner provided herein without subjecting Employee to additional tax, interest or penalties under Section 409A, then any such payment or entitlement


Exhibit 10.34


which is payable during the first six months following Employee’s “separation from service” shall be paid or provided to Employee in a cash lump-sum on the first business day of the seventh calendar month immediately following the month in which Employee’s “separation from service” occurs or, if earlier, upon the Employee’s death. In addition, any payments or benefits due hereunder upon a termination of Employee’s employment which are a “deferral of compensation” within the meaning of Section 409A shall only be payable or provided to Employee (or Employee’s estate) upon a “separation from service” as defined in Section 409A. Finally, for the purposes of this Agreement, amounts payable under Section 3.2 shall be deemed not to be a “deferral of compensation” subject to Section 409A to the extent provided in the exceptions in Treasury Regulation Sections 1.409A-1(b)(4) (“short-term deferrals”) and (b)(9) (“separation pay plans,” including the exception under subparagraph (iii)) and other applicable provisions of Treasury Regulation Section 1.409A-1 - A-6.

(e)    Whenever a payment under this Agreement specifies a payment period with reference to a number of days (for example, "payment shall be made within thirty (30) days following the date of termination"), the actual date of payment within the specified period shall be within the sole discretion of the Company. In no event may Employee, directly or indirectly, designate the calendar year of any payment to be made under this Agreement, to the extent such payment is subject to Code Section 409A.

(f) The Company makes no representation or warranty and shall have no liability to Employee or any other person if any provisions of this Agreement are determined to constitute deferred compensation subject to Code Section 409A but do not satisfy an exemption from, or the conditions of, Code Section 409A.

6.10    Clawback Policy. Employee acknowledges receipt of a copy of the Company’s Clawback Policy, and acknowledges and agrees that all performance bonuses awarded pursuant to Section 2.2 and all equity awards pursuant to Section 2.3 will be subject to the Clawback Policy or any amended version thereof and any other clawback policy adopted by the Board of Directors of the Company, in each case to the extent the Clawback Policy or any other clawback policy applies by its terms to Employee. The Employee agrees that he is obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup any bonuses paid under this Agreement or awards or amounts paid under the Company’s Amended and Restated 2013 Equity Incentive Plan (“EIP”) and that are subject to clawback pursuant to the Clawback Policy or any other such clawback policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup any bonuses paid under this Agreement or any equity awards or amounts paid under the EIP from the Employee’s accounts, or pending or future compensation or equity awards.

[Remainder of Page Intentionally Left Blank]





























Exhibit 10.34


IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written above.

COMPANY:

TEMPUR SEALY INTERNATIONAL, INC.


_/s/ Diana Strickland_______________________
By:    Diana Strickland
Title:
Senior Vice President, Chief Human Resources Officer


EMPLOYEE:


_/s/ Steven Rusing_________________________
Steven Rusing


WITNESSED BY:


_/s/ Joseph M. Kamer______________________
Joseph M. Kamer
Title:     SVP, General Counsel and Secretary

Date: February 19, 2020


Exhibits:

Exhibit A
Competitive Enterprises of the Company and its Affiliates
























[Signature Page to Employment and Non-Competition Agreement]



Exhibit 10.34


Exhibit A
Competitive Enterprises of the Company and its Affiliates
Ace
AH Beard
Auping
Ashley Sleep
Bedshed
Better Bed
Bohus
Botafogo
Boyd
Bruno
Carpe Diem
Carpenter
Carolina Mattress
Casper
Cauval Group
Chaide & Chaide
Classic Sleep Products
Coin
Colunex
Copel
Comforpedic
Comfort Group
Comfort Solutions
COFEL group
Correct
De Rucci
Diamona
Doremo Octaspring
Dorelan
Dreams
Drommeland
Dunlopillo
Duxiana
Eastborne
El Corte Ingles
Eminflex
Englander
Eve
Falafella
Flex Group of Companies
Foamex
Forty Winks
Furniture Village
France Bed


Exhibit 10.34


Future Foam
Harrisons
Harvey Norman Group
Hastens
Helix Sleep
Hilding Anders Group
Hyundai Retail Group
Hypnos
IBC
Jysk Group
KayMed
King Koil
Kingsdown
Koala
Lady Americana
Land and Sky
Leesa Sleep
Leggett & Platt
Lo Monaco
Lotte Retail Group
Luna
Lutz Group
Magniflex
Metzler
Myers
Nature’s Sleep (GhostBed)
Optimo
Ortobom
Per Dormire
Purple, Inc.
Natura
Natures Rest
Park Place
Permaflex
Pikolin Group
Recticel Group
Relyon
Restonic
Reverie
Rosen
Rowe
Saatva
Sapsa Bedding
Select Comfort
Sherwood Bedding
Silentnight
Simba
Serta Simmons Bedding/Beautyrest and any direct or indirect parent company
Sinomax
Sleep Innovations


Exhibit 10.34


Sleepmaker
Sleep Number
Spring Air
Steinhoff
Sterling
Stobel
Swiss Comfort
Swiss Sense
Tediber
Therapedic
Tuft and Needle
Whisper

RETAILERS

Ashley
Mattress Firm/Steinhoff
Sleepy’s
Wayfair
 



Exhibit
Exhibit 10.63


TEMPUR SEALY INTERNATIONAL, INC.
AMENDED AND RESTATED 2013 EQUITY INCENTIVE PLAN
2020 Restricted Stock Unit Award Agreement
[Name]
This Restricted Stock Unit Award Agreement (this “Agreement”), dated as of January 3, 2020, is between Tempur Sealy International, Inc., a corporation organized under the laws of the State of Delaware (the “Company”), and the individual identified above (the “Recipient”).
1.    Award of Restricted Stock Units. Pursuant and subject to the Company’s Amended and Restated 2013 Equity Incentive Plan (as the same may be amended from time to time, the “Plan”), the Company grants the Recipient an award (the “Award”) for ______ restricted stock units (“Restricted Stock Units”), each representing the right to a share of the common stock, par value $0.01 per share (the “Common Stock”), of the Company (the “Stock”) on and subject to the terms and conditions of this Agreement. This Award is granted as of January 3, 2020 (the “Grant Date”).

2.    Rights of Restricted Stock Units. If the Company declares and pays a dividend or other distribution with respect to the outstanding Common Stock (collectively “Stock Payments”) at or before the issuance of the Stock to the Recipient pursuant to Section 4(f), then the Company shall pay to the Recipient, at the time it delivers the Stock pursuant to Section 4(f) (the “Delivered Shares”), the Stock Payments that would have been paid on the Delivered Shares had they been outstanding at the time the Stock Payments were made. In no event will any Stock Payment be paid to the Recipient prior to delivery of Delivered Shares, and if the Restricted Stock Units do not vest for any reason then no Stock Payments will ever be paid with respect thereto and all rights thereto will be forfeited. Except for the contingent rights described in the preceding sentence, unless and until the vesting conditions of the Award have been satisfied and the Recipient has received the shares of Stock in accordance with the terms and conditions described herein, the Recipient shall have none of the attributes of ownership with respect to such shares of Stock.

3.    Vesting Period and Rights; Taxes; and Filings.

(a)    Vesting Period and Rights. The Award will vest in four equal installments on the first four anniversaries of the Grant Date (each “Vesting Date”), unless the Award terminates or vests earlier in accordance with Section 4 or 5 hereof. Subject to the provisions of Sections 4 and 5 below, any vesting is subject to the Recipient continuing to be employed by the Company or an Affiliate of the Company on the applicable Vesting Date. Any Restricted Stock Units that have been vested as described above are referred to herein as “Vested RSUs”.

(b)    Taxes. The Recipient is required to provide sufficient funds to pay all withholding taxes. Pursuant to the Plan, the Company shall have the right to require the Recipient to remit to the Company an amount sufficient to satisfy federal, state, local or other withholding tax requirements if, when, and to the extent required by law (whether so required to secure for the Company an otherwise available tax deduction or otherwise) attributable to the Award awarded under this Agreement, including without limitation, the award or lapsing of stock restrictions on the Award. The obligations of the Company under this Agreement shall be conditional on satisfaction of all such withholding obligations and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Recipient. However, in such cases Recipient may elect, subject to any reasonable administrative procedures for timely compliance established by the Committee, to satisfy an applicable withholding requirement, in whole or in part, by having the Company withhold a portion of the shares of Stock to be issued under the Award to satisfy the Recipient’s tax obligations. The Recipient may only elect to have shares of Stock withheld having a Market Value on the date the tax is to be determined equal to at least the minimum statutory total withholding taxes arising upon the vesting of the Award or such higher amount approved by the Committee. If the Recipient has not submitted an election on or before the thirtieth (30) day prior to a Vesting Date, Recipient shall be deemed to have elected to have shares withheld from the shares of Stock to be issued under the Award to satisfy the Recipient’s tax obligation in an amount equal to the minimum statutory total withholding taxes. All elections shall be irrevocable, made in writing, signed by the Recipient, and shall be subject to any restrictions or limitations that the Committee deems appropriate.
   
(c)    Filings. The Recipient is responsible for any filings required under Section 16 of the Securities Exchange Act of 1934 and the rules thereunder.

[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit 10.63

4.    Termination of Employment. If the Recipient’s employment with the Company or an Affiliate of the Company terminates prior to the fourth anniversary of the Grant Date, including because the Recipient’s employer ceases to be an Affiliate, the right to the Restricted Stock Units and the Stock shall be as follows:

(a)    Death. If the Recipient dies, the Restricted Stock Units granted hereunder will vest immediately and the person or persons to whom the Recipient’s rights shall pass by will or the laws of descent and distribution shall be entitled to receive all of the Stock with respect thereto.

(b)    Long-Term Disability. If the Company or an Affiliate of the Company terminates the Recipient’s employment as a result of long-term disability (within the meaning of Section 409A of the Code), the Restricted Stock Units granted hereunder will vest immediately and Recipient shall be entitled to receive all of the Stock with respect thereto.

(c)    By the Company or By the Recipient. If the Recipient ceases to be an employee of the Company or an Affiliate of the Company due to the Recipient’s termination by the Company or such Affiliate other than as provided in Section 4(b) or if the Recipient resigns or otherwise terminates his or her employment for any reason other than for an Approved Retirement, the Recipient’s right to the unvested Restricted Stock Units and the Stock issuable thereunder shall be forfeited, no Stock shall be issued and the Restricted Stock Units shall be cancelled. The term “Approved Retirement” is defined below.

(d)    Approved Retirement. In the event of the Recipient’s Approved Retirement, the Committee (or any person delegated authority to act on its behalf in respect of the matter) may at its discretion consent to the continued vesting in accordance with Section 3 hereof (notwithstanding such Approved Retirement) until the third anniversary of the date of such Approved Retirement of all or part of the unvested Restricted Stock Units on such date, in which case Recipient’s right to the unvested Restricted Stock Units and the Stock issuable thereunder that would not vest upon or prior to such anniversary shall be forfeited, no Stock shall be issued and the Restricted Stock Units shall be cancelled at the time of such Approved Retirement. Notwithstanding the foregoing, no continued vesting shall occur, no Stock shall be issued and all of Recipient’s rights to the unvested Restricted Stock Units and related Stock issuable thereunder shall be forfeited, expire and terminate at the time of such Approved Retirement unless (i) the Company shall have received a release of all claims from the Recipient (a “Release and Waiver”) (and said Release and Waiver shall have become irrevocable in accordance with its terms) prior to the next applicable Vesting Date (or if earlier, the deadline established in the form of Release and Waiver delivered by the Company to Recipient for execution) and (ii) the Recipient shall have complied with the covenants set forth in Section 10 of this Agreement. If and to the extent the Committee shall for any reason decline to consent to continued vesting on the Recipient’s Approved Retirement, then the provisions of subsection (c) above shall instead apply.

(e)    Definitions. As used in this Agreement:

(i)    “Approved Retirement” shall mean any Retirement of the Recipient the Committee determines in its sole discretion shall be treated as an “Approved Retirement” for purposes of this Agreement;

(ii)    “Change of Control” shall have the meaning set forth in the Plan, provided, that no event or transaction shall constitute a Change of Control for purposes of this Agreement unless it also qualifies as a change of control for purposes of Section 409A of the Code; and

(iii)    “Employee”, “employment”, “termination of employment” and “cease to be employed,” and other words or phrases of similar import, shall mean the continued provision of substantial services to the Company or any of its Affiliates (or the cessation or termination of such services) whether as an employee, consultant or director.

(f)    Payment. In all cases, payment (i.e., issuance of the Stock and payment of any applicable Stock Payments as provided in Section 2) with respect to any Vested RSUs shall be made promptly and, in any event, within twenty (20) days following the applicable Vesting Date or the date of any accelerated vesting as described in Section 4(a) or Section 4(b) above. For this purpose, Restricted Stock Units continuing to vest on account of an Approved Retirement, shall continue to vest as provided above only if the Company has received the required Release and Waiver, but delivery of the Stock and payment of any applicable Stock Payments as provided in Section 2 on or after the next applicable Vesting Date pursuant to this subsection (f) shall not obviate the need to comply with the covenants contained in Section 10 until the Covenant Termination Date in order to retain the Stock then delivered.

5.    Change of Control Provisions.

(a)     If a Change of Control occurs, the provisions of Section 9(b) of the Plan shall apply.

[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit 10.63

(b)    The Company (or any successor organization) may require the Recipient to enter into a restricted stock unit award agreement that replaces this Agreement and reflects the terms described above.
6.    Other Provisions.

(a)    This Award of Restricted Stock Units does not give the Recipient any right to continue to be employed by the Company or any of its Affiliates, or limit, in any way, the right of the Company or its Affiliates to terminate the Recipient’s employment, at any time, for any reason not specifically prohibited by law.

(b)    The Company is not liable for the non-issuance or non-transfer, nor for any delay in the issuance or transfer of any shares of Stock due to the Recipient upon the Vesting Date (or, if vesting of the Restricted Stock Units is accelerated pursuant to Section 4 or 5, such earlier date) with respect to vested Restricted Stock Units which results from the inability of the Company to obtain, from each regulatory body having jurisdiction, all requisite authority to issue or transfer shares of common stock of the Company if counsel for the Company deems such authority necessary for the lawful issuance or transfer of any such shares. Acceptance of this Award constitutes the Recipient’s agreement that the shares of Stock subsequently acquired hereunder, if any, will not be sold or otherwise disposed of by the Recipient in violation of any applicable securities laws or regulations.

(c)    The Award, the Restricted Stock Units and entitlement to the Stock are subject to this Agreement and Recipient’s acceptance hereof shall constitute the Recipient’s agreement to any administrative regulations of the Committee of the Board. In the event of any inconsistency between this Agreement and the provisions of the Plan, the provisions of the Plan shall prevail.

(d)    All decisions of the Committee upon any questions arising under the Plan or under these terms and conditions shall be conclusive and binding, including, without limitation, those decisions and determinations to adjust the Restricted Stock Units made by the Committee pursuant to the authority granted under Section 8.4(d) of the Plan.

(e)    Except as provided in Section 6.4 of the Plan, no right hereunder related to the Award or these Restricted Stock Units and no rights hereunder to the underlying Stock shall be transferable (except by will or the laws of descent and distribution) until such time, if ever, that the Stock is earned and delivered.

7.    Incorporation of Plan Terms. This Award is granted subject to all of the applicable terms and provisions of the Plan, including but not limited to Section 8 of the Plan, “Adjustment Provisions”, and the limitations on the Company's obligation to deliver Stock upon vesting set forth in Section 10 of the Plan, “Settlement of Awards”. Capitalized terms used but not defined herein shall have the meaning assigned under the Plan. In the event of any conflict between the terms of this Agreement and the terms of the Plan, the provisions of the Plan shall control.

8.    Miscellaneous. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof and shall be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guardian, or other legal representative of the Recipient. This Agreement may be executed in one or more counterparts all of which together shall constitute one instrument.

9.    Tax Consequences.

(a)    The Company makes no representation or warranty as to the tax treatment of this Award, including upon the issuance of the Stock or upon the Recipient’s sale or other disposition of the Stock. The Recipient should rely on his or her own tax advisors for such advice. Notwithstanding the foregoing, the Recipient and the Company hereby acknowledge that both the Recipient and the Company may be subject to certain obligations for tax withholdings, social security taxes and other applicable taxes associated with the vesting of the Restricted Stock Units or the Stock by the Recipient pursuant to this Agreement. The Recipient hereby affirmatively consents to the transfer between his or her employer and the Company of any and all personal information necessary for the Company and his or her employer to comply with its obligations.

(b)    All amounts earned and paid pursuant to this Agreement are intended to be paid in compliance with, or on a basis exempt from, Section 409A of the Code.  This Agreement, and all terms and conditions used herein, shall be interpreted and construed consistent with that intent.  However, the Company does not warrant all such payments will be exempt from, or paid in compliance with, Section 409A.  The Recipient bears the entire risk of any adverse federal, state or local tax consequences and penalty taxes which may result from payments made on a basis contrary to the provisions of Section 409A or comparable provisions of any applicable state or local income tax laws.


[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit 10.63

10.    Certain Remedies.

(a)    If at any time prior to the later of (y) the last day of the two (2) year period after termination of the Recipient’s employment with the Company and its Affiliates and (z) the last Vesting Date (the later of such days being the “Covenant Termination Date”), any of the following occur:

(i)    the Recipient unreasonably refuses to comply with lawful requests for cooperation made by the Company, its board of directors, or its Affiliates;

(ii)    the Recipient accepts employment or a consulting or advisory engagement with (A) any Competitive Enterprise (as defined in Section 10(c)) of the Company or its Affiliates, or (B) any Significant Retailer (as defined in Section 10(d)), or the Recipient otherwise engages in competition with the Company or its Affiliates;

(iii)    the Recipient acts against the interests of the Company and its Affiliates, including recruiting or employing, or encouraging or assisting the Recipient’s new employer to recruit or employ, an employee of the Company or any Affiliate without the Company’s written consent;

(iv)    the Recipient fails to protect and safeguard while in his or her possession or control, or surrender to the Company upon termination of the Recipient’s employment with the Company or any Affiliate or such earlier time or times as the Company or its board of directors or any Affiliate may specify, all documents, records, tapes, disks and other media of every kind and description relating to the business, present or otherwise, of the Company and its Affiliates and any copies, in whole or in part thereof, whether or not prepared by the Recipient;

(v)    the Recipient solicits or encourages any person or enterprise with which the Recipient has had business-related contact, who has been a customer of the Company or any of its Affiliates, to terminate its relationship with any of them;

(vi)    the Recipient takes any action or makes any statement, written or oral, that disparages the business, products, services or management of Company or its Affiliates, or any of their respective directors, officers, agents, or employees, or the Recipient takes any action that is intended to, or that does in fact, damage the business or reputation of the Company or its Affiliates, or the personal or business reputations of any of their respective directors, officers, agents, or employees, or that interferes with, impairs or disrupts the normal operations of the Company or its Affiliates; or

(vii)    the Recipient breaches any confidentiality obligations the Recipient has to the Company or an Affiliate, the Recipient fails to comply with the policies and procedures of the Company or its Affiliates for protecting confidential information, the Recipient uses confidential information of the Company or its Affiliates for his or her own benefit or gain, or the Recipient discloses or otherwise misuses confidential information or materials of the Company or its Affiliates (except as required by applicable law); then

(1)    this Award shall terminate and be cancelled effective as of the date on which the Recipient entered into such activity, unless terminated or cancelled sooner by operation of another term or condition of this Agreement or the Plan;

(2)    any Stock acquired and held by the Recipient pursuant to the Award during the Applicable Period (as defined below) may be repurchased by the Company at a purchase price of $0.01 per share; and

(3)    any after-tax proceeds realized by the Recipient from the sale of Stock acquired through the Award during the Applicable Period or realized from the receipt of Stock Payments pursuant to Section 2 shall be paid by the Recipient to the Company.

(b)    The term “Applicable Period” shall mean the period commencing on the later of the date of this Agreement or the date which is one (1) year prior to the Recipient’s termination of employment with the Company or any Affiliate and ending on the Covenant Termination Date.
    
(c)    The term “Competitive Enterprise” shall mean a business enterprise that engages in, or owns or controls a significant interest in, any entity that engages in, the manufacture, sale or distribution of mattresses or pillows or other bedding products or other products competitive with the Company’s products. Competitive Enterprise shall include, but not be limited to, the entities set forth on Appendix A hereto, which may be amended by the Company from time to time upon notice to the Recipient. At any time the Recipient may request in writing that the Company make a determination whether a particular

[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit 10.63

enterprise is a Competitive Enterprise. Such determination will be made within fourteen (14) days after the receipt of sufficient information from the Recipient about the enterprise, and the determination will be valid for a period of ninety (90) days from the date of determination.

(d)    The term “Significant Retailer” means those retailers identified in Appendix A hereto under the heading “RETAILERS.” The Recipient acknowledges that the Significant Retailers may now or in the future compete directly or indirectly with the Company, and that, whether or not a Significant Retailer competes directly with the Company, the Recipient because of his or her knowledge of the industry and his or her knowledge of confidential information about the Company’s commercial relationships with many large retailers, including one or more of the Significant Retailers, could damage the Company’s competitive position and business if he worked with a Significant Retailer in any of the capacities described above.

11.    Right of Set Off. By executing this Agreement, the Recipient consents to a deduction from any amounts the Company or any Affiliate owes the Recipient from time to time, to the extent of the amounts the Recipient owes the Company under Section 10 above, provided that this set-off right may not be applied against wages, salary or other amounts payable to the Recipient to the extent that the exercise of such set-off right would violate any applicable law. If the Company does not recover by means of set-off the full amount the Recipient owes the Company, calculated as set forth above, the Recipient agrees to pay immediately the unpaid balance to the Company upon the Company’s demand.

12.    Nature of Remedies.

(a)    The remedies set forth in Sections 10 and 11 above are in addition to any remedies available to the Company and its Affiliates in any non-competition, employment, confidentiality or other agreement, and all such rights are cumulative. The exercise of any rights hereunder or under any such other agreement shall not constitute an election of remedies.
(b)    The Company shall be entitled to place a legend on any certificate evidencing any Stock acquired upon vesting of this Award referring to the repurchase right set forth in Section 10(a) above. The Company shall also be entitled to issue stop transfer instructions to the Company’s stock transfer agent in the event the Company believes that any event referred to in Section 10(a) has occurred or is reasonably likely to occur.
13.    Clawback Policy. The Recipient acknowledges receipt of a copy of the Company’s Clawback Policy, and acknowledges and agrees that all shares of Stock issued under this Agreement will be subject to the Clawback Policy or any amended version thereof and any other clawback policy adopted by the Board of Directors of the Company, in each case to the extent the Clawback Policy or any other clawback policy applies by its terms to the Recipient. By accepting this Award, the Recipient agrees that he or she is obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup any Award or amounts paid under the Plan subject to clawback pursuant to the Clawback Policy or any such other clawback policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup any Award or amounts paid under the Plan from the Recipient’s accounts, or pending or future compensation or Awards.



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[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit 10.63


In Witness Whereof, the parties have executed this Restricted Stock Unit Award Agreement as a sealed instrument as of the date first above written.
TEMPUR SEALY INTERNATIONAL, INC.
By:                            
Name:    Bhaskar Rao     
Title:    Executive Vice President and Chief Financial Officer    

RECIPIENT


__________________________________________________
Recipient signature

[Name]                            
Name of Recipient









































[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit 10.63

Appendix A

Competitive Enterprises of the Company and its Affiliates
Ace
AH Beard
Auping
Ashley Sleep
Bedshed
Better Bed
Bohus
Botafogo
Boyd
Bruno
Carpe Diem
Carpenter
Carolina Mattress
Casper
Cauval Group
Chaide & Chaide
Classic Sleep Products
Coin
Colunex
Copel
Comforpedic
Comfort Group
Comfort Solutions
COFEL group
Correct
De Rucci
Diamona
Doremo Octaspring
Dorelan
Dreams
Drommeland
Dunlopillo
Duxiana
Eastborne
Eight Sleep
El Corte Ingles
Eminflex
Englander
Eve
Falafella
Flex Group of Companies
Foamex
Forty Winks
Furniture Village
France Bed

[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit 10.63

Future Foam
Harrisons
Harvey Norman Group
Hastens
Helix Sleep
Hilding Anders Group
Hyundai Retail Group
Hypnos
IBC
Jysk Group
KayMed
King Koil
Kingsdown
Koala
Lady Americana
Land and Sky
Leesa Sleep
Leggett & Platt
Lo Monaco
Lotte Retail Group
Luna
Lutz Group
Magniflex
Metzler
Mlily
Myers
Nature’s Sleep (GhostBed)
Nectar
Optimo
Ortobom
Per Dormire
Purple, Inc.
Natura
Natures Rest
Park Place
Permaflex
Pikolin Group
Recticel Group
Relyon
Restonic
Reverie
Rosen
Rowe
Saatva
Sapsa Bedding
Select Comfort
Sherwood Bedding
Silentnight
Simba
Serta Simmons Bedding/Beautyrest and any direct or indirect parent company

[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit 10.63

Sinomax
Sleep Innovations
Sleepmaker
Sleep Number
Spring Air
Steinhoff
Sterling
Stobel
Swiss Comfort
Swiss Sense
Tediber
Therapedic
Tuft and Needle
Whisper

RETAILERS

Ashley
Mattress Firm/Steinhoff
Sleepy’s
Wayfair


[Signature Page to Regular Grant Restricted Stock Unit Award Agreement]

Exhibit
Exhibit 10.64


    
TEMPUR SEALY INTERNATIONAL, INC.
AMENDED AND RESTATED 2013 EQUITY INCENTIVE PLAN
2020 Performance Restricted Stock Unit Award Agreement
[Name]
This Performance Restricted Stock Unit Award Agreement (this “Agreement”), dated as of January 3, 2020, is between Tempur Sealy International, Inc., a corporation organized under the laws of the State of Delaware (the “Company”), and the individual identified below (the “Recipient”).
Recipient:
 
 
 
Number of Target Shares in Award:
 
 
 
Date of Award:
January 3, 2020
 
 
Designated Period:
The one (1) year period commencing January 1, 2020 and ending December 31, 2020

1.    Award of Performance Restricted Stock Units. Pursuant and subject to the Company’s Amended and Restated 2013 Equity Incentive Plan (as the same may be amended from time to time, the “Plan”), and the Company’s Amended and Restated 2013 Long-Term Incentive Plan as adopted in connection with the Plan (the “LTI Plan”), the Company grants the Recipient an award (the “Award”) for ______ performance restricted stock units (“PRSUs”), each constituting the right on the terms and conditions set forth herein to a share of the Company’s common stock, par value $0.01 per share (the “Target Shares”), subject to upward or downward adjustment upon the determination of a Final Award (as defined in Section 3 below) (such Target Shares, as so adjusted, the “Shares”). This Award is granted as of January 3, 2020 (the “Grant Date”).

2.    Rights of PRSUs and Target Shares. If the Company declares and pays a dividend or other distribution with respect to the outstanding Common Stock (collectively “Stock Payments”) at or before the issuance of the Shares to the Recipient pursuant to Section 5(d), then the Company shall pay to the Recipient, at the time it delivers the Shares pursuant to Section 5(d) (the “Delivered Shares”), the Stock Payments that would have been paid on the Delivered Shares had they been outstanding at the time the Stock Payments were made. In no event will any Stock Payment be paid to the Recipient prior to delivery of Delivered Shares, and if the Restricted Stock Units do not vest for any reason then no Stock Payments will ever be paid with respect thereto and all rights thereto will be forfeited. Except for the contingent rights described in the preceding sentence, unless and until the vesting conditions of the Award have been satisfied and the Recipient has received the shares of Stock in accordance with the terms and conditions described herein, the Recipient shall have none of the attributes of ownership with respect to such shares of Stock.

3.    Determination of Final Award.

(a)The Target Shares ultimately issued by the Company pursuant to the Award shall be subject to adjustment according to the Company’s achievement (“Performance”) of the Performance Metrics for the Award and compliance with the provisions and rules set forth on Appendix A attached hereto (the “Performance Metrics”) and incorporated herein by this reference (the Award as so adjusted, “Final Award”).

(b)As provided in the LTI Plan, within sixty (60) days after the end of the Designated Period, the Compensation Committee shall determine and certify in writing (a) whether and to what extent the Performance Metrics have been achieved and (b) based on such Performance, the number of Shares to be issued to Recipient as the Final Award (with the date of such determination referred to as the “Determination Date”).

4.    Vesting Period and Rights; Taxes; and Filings.

(a)    Vesting Period and Rights. The Final Award, if any, will vest in three equal installments after determination of the Final Award beginning on the second anniversary of the Grant Date and each of the following two grant date anniversaries thereafter (each a “Vesting Date”), unless the Final Award terminates or vests earlier in accordance with Section 5 or 6 hereof.

[Signature Page to Regular Grant Performance Restricted Stock Unit Award Agreement]

Exhibit 10.64


Subject to the provisions of Sections 5 and 6 below, any vesting is subject to the Recipient continuing to be employed by the Company or an Affiliate of the Company on the applicable Vesting Date. Any portion of the Final Award that has vested as described above is referred to herein as “Vested PRSUs”.

(b)    Taxes. The Recipient is required to provide sufficient funds to pay all withholding taxes. Pursuant to the Plan, the Company shall have the right to require the Recipient to remit to the Company an amount sufficient to satisfy federal, state, local or other withholding tax requirements if, when, and to the extent required by law (whether so required to secure for the Company an otherwise available tax deduction or otherwise) attributable any Award awarded under this Agreement, including without limitation, the award or lapsing of stock restrictions on such Award. The obligations of the Company under this Agreement shall be conditional on satisfaction of all such withholding obligations and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Recipient. However, in such cases Recipient may elect, subject to any reasonable administrative procedures for timely compliance established by the Compensation Committee, to satisfy an applicable withholding requirement, in whole or in part, by having the Company withhold a portion of the Shares to be issued under the Award to satisfy the Recipient’s tax obligations. The Recipient may only elect to have Shares withheld having a Market Value on the date the tax is to be determined equal to at least the minimum statutory total withholding taxes arising upon the vesting of any Shares. If the Recipient has not submitted an election on or before the thirtieth (30) day prior to the Determination Date, Recipient shall be deemed to have elected to have shares withheld from the Shares to be issued under the Award to satisfy the Recipient’s tax obligation in an amount equal to the minimum statutory total withholding taxes. All elections shall be irrevocable, made in writing, signed by the Recipient, and shall be subject to any restrictions or limitations that the Compensation Committee deems appropriate.

(c)Filings. The Recipient is responsible for any filings required under Section 16 of the Securities Exchange Act of 1934 and the rules thereunder.

5.    Termination of Employment.

(a)    During Designated Period or Before Determination Date. If the Recipient’s employment with the Company or an Affiliate of the Company terminates at any time during the Designated Period or prior to the Determination Date, including because the Recipient’s employer ceases to be an Affiliate, the right to the Shares and the Final Award shall be as follows:

(i)
Death. If the Recipient dies at any time during the Designated Period or before the Determination Date, the PRSUs granted hereunder will vest immediately and the person or persons to whom the Recipient’s rights shall pass by will or the laws of descent and distribution shall be entitled to receive Shares equal to the number of Target Shares granted to the Recipient pursuant to this Award in lieu of any claim to the Final Shares (if any).

(ii)
Long-Term Disability. If the Company or an Affiliate of the Company terminates the Recipient’s employment as a result of long-term disability (within the meaning of Section 409A of the Code) at any time during the Designated Period or before the Determination Date, the PRSUs granted hereunder will vest immediately and Recipient shall be entitled to receive Shares equal to the number of Target Shares granted to the Recipient pursuant to this Award in lieu of any claim to the Final Shares (if any).
 
(iii)
By the Company or By the Recipient. If at any time during the Designated Period or before the Determination Date: (A) the Recipient ceases to be an employee of the Company or an Affiliate of the Company due to the Recipient’s termination by the Company or such Affiliate for any reason other than as provided in Section 5(a)(ii) or (B) if the Recipient resigns or otherwise terminates his or her employment for any reason, then the Recipient’s right to the PRSUs and the Shares issuable thereunder shall be forfeited, no Shares shall be issued and the PRSUs shall be cancelled.

(b)    On or After the Determination Date. If the Recipient’s employment with the Company or an Affiliate of the Company terminates on or after the Determination Date but prior to the fourth anniversary of the Grant Date, including because the Recipient’s employer ceases to be an Affiliate, the right to the Final Award and the Shares shall be as follows:

(i)
Death. If the Recipient dies, the unvested PRSUs relating to the Final Award granted hereunder will vest immediately and the person or persons to whom the Recipient’s rights shall pass by will or the laws of descent and distribution shall be entitled to receive all of the Shares with respect thereto.



[Signature Page to Regular Grant Performance Restricted Stock Unit Award Agreement]

Exhibit 10.64


(ii)
Long-Term Disability. If the Company or an Affiliate of the Company terminates the Recipient’s employment as a result of long-term disability (within the meaning of Section 409A of the Code), the unvested PRSUs relating to the Final Award granted hereunder will vest immediately and Recipient shall be entitled to receive all of the Shares with respect thereto.

(iii)
By the Company or By the Recipient. If the Recipient ceases to be an employee of the Company or an Affiliate of the Company due to the Recipient’s termination by the Company or such Affiliate for any reason other than as provided in Section 5(b)(ii) or if the Recipient resigns or otherwise terminates his or her employment for any reason other than for an Approved Retirement, the Recipient’s right to the unvested PRSUs relating to the Final Award and the Shares issuable thereunder shall be forfeited, no Shares shall be issued and the unvested Performance Restricted Stock Units shall be cancelled. The term “Approved Retirement” is defined below.

(iv)
Approved Retirement. In the event of the Recipient’s Approved Retirement, the Compensation Committee (or any person delegated authority to act on its behalf in respect of the matter) may at its discretion consent to the continued vesting in accordance with Section 4 hereof (notwithstanding such Approved Retirement) until the third anniversary of the date of such Approved Retirement of all or part of the unvested PRSUs relating to the Final Award on such date, in which case Recipient’s right to the unvested PRSUs relating to the Final Award and the Shares issuable thereunder that would not vest upon or prior to such anniversary shall be forfeited, no Shares shall be issued and the unvested Performance Restricted Stock Units shall be cancelled at the time of such Approved Retirement. Notwithstanding the foregoing, no continued vesting shall occur, no Shares shall be issued and all of Recipient’s rights to the unvested PRSUs relating to the Final Award and related Shares issuable thereunder shall be forfeited, expire and terminate at the time of such Approved Retirement unless (i) the Company shall have received a release of all claims from the Recipient (a “Release and Waiver”) (and said Release and Waiver shall have become irrevocable in accordance with its terms) prior to the next applicable Vesting Date (or if earlier, the deadline established in the form of Release and Waiver delivered by the Company to Recipient for execution) and (ii) the Recipient shall have complied with the covenants set forth in Section 11 of this Agreement. If and to the extent the Compensation Committee shall for any reason decline to consent to continued vesting on the Recipient’s Approved Retirement, then the provisions of subsection 5(b)(iii) above shall instead apply.

(c)    Definitions. As used in this Agreement:

(i)
“Approved Retirement” shall mean any Retirement of the Recipient the Compensation Committee determines in its sole discretion shall be treated as an “Approved Retirement” for purposes of this Agreement;

(ii)
“Change of Control” shall have the meaning set forth in the Plan, provided, that no event or transaction shall constitute a Change of Control for purposes of this Agreement unless it also qualifies as a change of control for purposes of Section 409A of the Code; and

(iii)
“Employee”, “employment”, “termination of employment” and “cease to be employed,” and other words or phrases of similar import, shall mean the continued provision of substantial services to the Company or any of its Affiliates (or the cessation or termination of such services) whether as an employee, consultant or director.

(d)Payment. In all cases, payment (i.e., issuance of the Shares and payment of any applicable Stock Payments as provided in Section 2) with respect to any Vested PRSUs shall be made promptly and, in any event, within twenty (20) days following the applicable Vesting Date or the date of any accelerated vesting as described in Sections 5(a)(i) or (ii) or Sections 5(b)(i) or (ii) above. For this purpose, PRSUs of the Final Award continuing to vest on account of an Approved Retirement, shall continue to vest as provided above only if the Company has received the required Release and Waiver, but delivery of the Shares and payment of any applicable Stock Payments as provided in Section 2 on or after the next applicable Vesting Date pursuant to this subsection 5(d) shall not obviate the need to comply with the covenants contained in Section 11 until the Covenant Termination Date (as defined in Section 11) in order to retain the Shares then delivered.


[Signature Page to Regular Grant Performance Restricted Stock Unit Award Agreement]

Exhibit 10.64


6.    Change of Control Provisions.

(a)    If a Change of Control occurs, the provisions of Section 9(b) of the Plan shall apply.

(b)    The Company (or any successor organization) may require the Recipient to enter into a performance restricted stock unit award agreement that replaces this Agreement and reflects the terms described above.

7.    Other Provisions.

(a)    This Award of Performance Restricted Stock Units does not give the Recipient any right to continue to be employed by the Company or any of its Affiliates, or limit, in any way, the right of the Company or its Affiliates to terminate the Recipient’s employment, at any time, for any reason not specifically prohibited by law.

(b)    The Company is not liable for the non-issuance or non-transfer, nor for any delay in the issuance or transfer of any shares of common stock due to the Recipient upon the Vesting Date (or, if vesting of the Performance Restricted Stock Units is accelerated pursuant to Section 5 or 6, such earlier date) with respect to vested Performance Restricted Stock Units which results from the inability of the Company to obtain, from each regulatory body having jurisdiction, all requisite authority to issue or transfer shares of common stock of the Company if counsel for the Company deems such authority necessary for the lawful issuance or transfer of any such shares. Acceptance of this Award constitutes the Recipient’s agreement that the shares of common stock subsequently acquired hereunder, if any, will not be sold or otherwise disposed of by the Recipient in violation of any applicable securities laws or regulations.

(c)    The Award, the Performance Restricted Stock Units and entitlement to the Shares are subject to this Agreement and Recipient’s acceptance hereof shall constitute the Recipient’s agreement to any administrative regulations of the Compensation Committee of the Board. In the event of any inconsistency between this Agreement and the provisions of the Plan, the provisions of the Plan shall prevail.

(d)    All decisions of the Compensation Committee upon any questions arising under the Plan or under these terms and conditions shall be conclusive and binding, including, without limitation, those decisions and determinations to adjust the Performance Restricted Stock Units made by the Compensation Committee pursuant to the authority granted under Section 8.4(d) of the Plan.

(e)Except as provided in Section 6.4 of the Plan, no right hereunder related to the Award or these Performance Restricted Stock Units and no rights hereunder to the underlying Shares shall be transferable (except by will or the laws of descent and distribution) until such time, if ever, that the Shares are earned and delivered.

8.    Incorporation of Plan Terms. This Award is granted subject to all of the applicable terms and provisions of the Plan, including but not limited to Section 8 of the Plan, “Adjustment Provisions”, and the limitations on the Company's obligation to deliver Shares upon vesting set forth in Section 10 of the Plan, “Settlement of Awards”. Capitalized terms used but not defined herein shall have the meaning assigned under the Plan. In the event of any conflict between the terms of this Agreement and the terms of the Plan, the provisions of the Plan shall control.

9.    Miscellaneous. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof and shall be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guardian, or other legal representative of the Recipient. This Agreement may be executed in one or more counterparts all of which together shall constitute one instrument.

10.    Tax Consequences.

(a)    The Company makes no representation or warranty as to the tax treatment of this Award, including upon the issuance of the Shares or upon the Recipient’s sale or other disposition of the Shares. The Recipient should rely on his or her own tax advisors for such advice. Notwithstanding the foregoing, the Recipient and the Company hereby acknowledge that both the Recipient and the Company may be subject to certain obligations for tax withholdings, social security taxes and other applicable taxes associated with the vesting of the Performance Restricted Stock Units or the Shares by the Recipient pursuant to this Agreement. The Recipient hereby affirmatively consents to the transfer between his or her employer and the Company of any and all personal information necessary for the Company and his or her employer to comply with its obligations.

(b)    All amounts earned and paid pursuant to this Agreement are intended to be paid in compliance with, or on a basis exempt from, Section 409A of the Code.  This Agreement, and all terms and conditions used herein, shall be interpreted and

[Signature Page to Regular Grant Performance Restricted Stock Unit Award Agreement]

Exhibit 10.64


construed consistent with that intent.  However, the Company does not warrant all such payments will be exempt from, or paid in compliance with, Section 409A.  The Recipient bears the entire risk of any adverse federal, state or local tax consequences and penalty taxes which may result from payments made on a basis contrary to the provisions of Section 409A or comparable provisions of any applicable state or local income tax laws.

11.    Certain Remedies.

(a)    If at any time prior to the later of (y) the last day of the two (2) year period after termination of the Recipient’s employment with the Company and its Affiliates and (z) the last Vesting Date (the later of such days being the “Covenant Termination Date”), any of the following occur:

(i)the Recipient unreasonably refuses to comply with lawful requests for cooperation made by the Company, its board of directors, or its Affiliates;

(ii)the Recipient accepts employment or a consulting or advisory engagement with (A) any Competitive Enterprise (as defined in Section 11(c)) of the Company or its Affiliates, or (B) any Significant Retailer (as defined in Section 11(d)), or the Recipient otherwise engages in competition with the Company or its Affiliates;

(iii)the Recipient acts against the interests of the Company and its Affiliates, including recruiting or employing, or encouraging or assisting the Recipient’s new employer to recruit or employ, an employee of the Company or any Affiliate without the Company’s written consent;

(iv)the Recipient fails to protect and safeguard while in his or her possession or control, or surrender to the Company upon termination of the Recipient’s employment with the Company or any Affiliate or such earlier time or times as the Company or its board of directors or any Affiliate may specify, all documents, records, tapes, disks and other media of every kind and description relating to the business, present or otherwise, of the Company and its Affiliates and any copies, in whole or in part thereof, whether or not prepared by the Recipient;

(v)the Recipient solicits or encourages any person or enterprise with which the Recipient has had business-related contact, who has been a customer of the Company or any of its Affiliates, to terminate its relationship with any of them;

(vi)the Recipient takes any action or makes any statement, written or oral, that disparages the business, products, services or management of Company or its Affiliates, or any of their respective directors, officers, agents, or employees, or the Recipient takes any action that is intended to, or that does in fact, damage the business or reputation of the Company or its Affiliates, or the personal or business reputations of any of their respective directors, officers, agents, or employees, or that interferes with, impairs or disrupts the normal operations of the Company or its Affiliates; or
(vii)the Recipient breaches any confidentiality obligations the Recipient has to the Company or an Affiliate, the Recipient fails to comply with the policies and procedures of the Company or its Affiliates for protecting confidential information, the Recipient uses confidential information of the Company or its Affiliates for his or her own benefit or gain, or the Recipient discloses or otherwise misuses confidential information or materials of the Company or its Affiliates (except as required by applicable law); then
(1)this Award shall terminate and be cancelled effective as of the date on which the Recipient entered into such activity, unless terminated or cancelled sooner by operation of another term or condition of this Agreement or the Plan;

(2)any Shares acquired and held by the Recipient pursuant to the Award during the Applicable Period (as defined below) may be repurchased by the Company at a purchase price of $0.01 per share; and

(3)any after-tax proceeds realized by the Recipient from the sale of Shares acquired through the Award during the Applicable Period or realized from the receipt of Stock Payments pursuant to Section 2 shall be paid by the Recipient to the Company.

(b)    The term “Applicable Period” shall mean the period commencing on the later of the date of this Agreement or the date which is one (1) year prior to the Recipient’s termination of employment with the Company or any Affiliate and ending on the Covenant Termination Date.


[Signature Page to Regular Grant Performance Restricted Stock Unit Award Agreement]

Exhibit 10.64


(c)    The term “Competitive Enterprise” shall mean a business enterprise that engages in, or owns or controls a significant interest in, any entity that engages in, the manufacture, sale or distribution of mattresses or pillows or other bedding products or other products competitive with the Company’s products. Competitive Enterprise shall include, but not be limited to, the entities set forth on Appendix B hereto, which may be amended by the Company from time to time upon notice to the Recipient. At any time the Recipient may request in writing that the Company make a determination whether a particular enterprise is a Competitive Enterprise. Such determination will be made within fourteen (14) days after the receipt of sufficient information from the Recipient about the enterprise, and the determination will be valid for a period of ninety (90) days from the date of determination.

(d)    The term “Significant Retailer” means those retailers identified in Appendix B hereto under the heading “RETAILERS.” The Recipient acknowledges that the Significant Retailers may now or in the future compete directly or indirectly with the Company, and that, whether or not a Significant Retailer competes directly with the Company, the Recipient because of his or her knowledge of the industry and his or her knowledge of confidential information about the Company’s commercial relationships with many large retailers, including one or more of the Significant Retailers, could damage the Company’s competitive position and business if he worked with a Significant Retailer in any of the capacities described above.

12.    Right of Set Off. By executing this Agreement, the Recipient consents to a deduction from any amounts the Company or any Affiliate owes the Recipient from time to time, to the extent of the amounts the Recipient owes the Company under Section 11 above, provided that this set-off right may not be applied against wages, salary or other amounts payable to the Recipient to the extent that the exercise of such set-off right would violate any applicable law. If the Company does not recover by means of set-off the full amount the Recipient owes the Company, calculated as set forth above, the Recipient agrees to pay immediately the unpaid balance to the Company upon the Company’s demand.

13.    Nature of Remedies.
(a)    The remedies set forth in Sections 11 and 12 above are in addition to any remedies available to the Company and its Affiliates in any non-competition, employment, confidentiality or other agreement, and all such rights are cumulative. The exercise of any rights hereunder or under any such other agreement shall not constitute an election of remedies.
(b)    The Company shall be entitled to place a legend on any certificate evidencing any Shares acquired upon vesting of this Award referring to the repurchase right set forth in Section 11(a) above. The Company shall also be entitled to issue stop transfer instructions to the Company’s stock transfer agent in the event the Company believes that any event referred to in Section 11(a) has occurred or is reasonably likely to occur.
14.    Clawback Policy. The Recipient acknowledges receipt of a copy of the Company’s Clawback Policy, and acknowledges and agrees that all shares of common stock issued under this Agreement will be subject to the Clawback Policy or any amended version thereof and any other clawback policy adopted by the Board of Directors of the Company, in each case to the extent the Clawback Policy or any other clawback policy applies by its terms to the Recipient. By accepting this Award, the Recipient agrees that he or she is obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup any Award or amounts paid under the Plan subject to clawback pursuant to the Clawback Policy or any such other clawback policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup any Award or amounts paid under the Plan from the Recipient’s accounts, or pending or future compensation or Awards.

[Remainder of page intentionally left blank]















[Signature Page to Regular Grant Performance Restricted Stock Unit Award Agreement]

Exhibit 10.64


In Witness Whereof, the parties have executed this Performance Restricted Stock Unit Award Agreement as a sealed instrument as of the date first above written.
TEMPUR SEALY INTERNATIONAL, INC.

By:                            
Name:    Bhaskar Rao                    
Title:    Executive Vice President and Chief Financial Officer    

RECIPIENT

                            
Recipient signature

[Name]                            
Name of Recipient




[Signature Page to Regular Grant Performance Restricted Stock Unit Award Agreement]

Exhibit


Exhibit 21.1
 
SUBSIDIARIES OF TEMPUR SEALY INTERNATIONAL, INC.
Entity
State or Country of Organization
Tempur World, LLC
Delaware
Tempur-Pedic Management, LLC
Delaware
Tempur Production USA, LLC
Virginia
Tempur-Pedic North America, LLC
Delaware
Tempur-Pedic Technologies, LLC
Delaware
Tempur Retail Stores, LLC
Delaware
Tempur Sealy Receivables, LLC
Delaware
Sleep Insurance, Inc.
Vermont
Tempur Sealy International Distribution, LLC
Delaware
Tempur Holdings B.V.
Netherlands
Dan-Foam ApS
Denmark
Tempur UK, Ltd.
United Kingdom
Tempur Japan Yugen Kaisha
Japan
Tempur Sealy International Limited
United Kingdom
Tempur Sealy France SAS
France
Tempur Sealy DACH GmbH fka
Germany
Tempur Singapore Pte Ltd.
Singapore
Tempur Sealy Benelux B.V.
Netherlands
Tempur Australia Pty. Ltd.
Australia
Tempur Korea Limited
Republic of Korea
Sealy Ecommerce, LLC
Delaware
Sealy Mattress Corporation
Delaware
Sealy Mattress Company
Ohio
Sealy Mattress Company of Puerto Rico
Ohio
Sealy, Inc.
Ohio
The Ohio Mattress Company Licensing and Components Group, Inc.
Delaware
Sealy Mattress Manufacturing Company, LLC.
Delaware
Sealy Technology LLC
North Carolina
Sleep Outfitters USA, LLC
Delaware
Comfort Revolution, LLC
Delaware
Burlington Mattress Co. LLC
Delaware
Sealy (Switzerland) Gmbh
Switzerland
Mattress Holdings International B.V.
The Netherlands
Sealy Canada, Ltd.
Alberta
Gestion Centurion Inc.
Quebec
Tempur Sealy Mexico S. de R.L. de C.V.
Mexico
Sealy Servicios de Mexico S.A. de C.V.
Mexico
Sealy Colchones de Mexico S.A. de C.V.
Mexico


Exhibit


Exhibit 23.1
 
Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

(1)
Registration Statement (Form S-8 No. 333-160821) pertaining to the Tempur-Pedic International, Inc. Amended and Restated 2003 Equity Incentive Plan,
(2)
Registration Statement (Form S-8 No. 333-154966) pertaining to the Tempur-Pedic International, Inc. Amended and Restated 2003 Equity Incentive Plan,
(3)
Registration Statement (Form S-8 No. 333-111545) pertaining to the Tempur-Pedic International, Inc. 2003 Equity Incentive Plan, the 2003 Employee Stock Purchase Plan, and the 2002 Stock Option Plan,
(4)
Registration Statement (Form S-8 No. 333-192220) pertaining to the Tempur Sealy International, Inc. 2013 Equity Incentive Plan,
(5)
Registration Statement (Form S-8 No. 333-217901) pertaining to the Tempur Sealy International, Inc. Amended and Restated 2013 Equity Incentive Plan,
(6)
Registration Statement (Form S-4 No. 333-209511) of Tempur Sealy International, Inc., and
(7)
Registration Statement (Form S-4 No. 333-212943) of Tempur Sealy International, Inc.;

of our reports dated February 21, 2020, with respect to the consolidated financial statements and schedule of Tempur Sealy International, Inc. and Subsidiaries and the effectiveness of internal control over financial reporting of Tempur Sealy International, Inc. and Subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2019.


/s/ Ernst & Young LLP

Louisville, Kentucky
February 21, 2020



Exhibit


Exhibit 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Scott L. Thompson, certify that:
 
1. I have reviewed this Annual Report on Form 10-K of Tempur Sealy International, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: February 21, 2020
By:
/S/ SCOTT L. THOMPSON
 
 
Scott L. Thompson
 
 
President and Chief Executive Officer




Exhibit


Exhibit 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Bhaskar Rao, certify that:
 
1. I have reviewed this Annual Report on Form 10-K of Tempur Sealy International, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: February 21, 2020
By:
/S/ BHASKAR RAO
 
 
Bhaskar Rao
 
 
Executive Vice President and Chief Financial Officer



Exhibit


Exhibit 32.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
Each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Tempur Sealy International, Inc. (the “Company”), that, to his knowledge, the Annual Report of the Company on Form 10-K for the period ended December 31, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. § 78m or 78o(d)) and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-K. A signed original of this statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
 
 
Date: February 21, 2020
 
/S/ SCOTT L. THOMPSON
 
 
Scott L. Thompson
President and Chief Executive Officer
 
 
Date: February 21, 2020
 
/S/ BHASKAR RAO
 
 
Bhaskar Rao
Executive Vice President and Chief Financial Officer