UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2022
or
For the transition period from to .
Commission file number 001-31922
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
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 exchange on which registered | ||||||
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. ý Yes
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý 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 definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging Growth Company | |||||||||||
| x | o | o | ||||||||||||
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ý
The number of shares outstanding of the registrant’s common stock as of April 28, 2022 was 175,544,225 shares.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, (this "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 I, ITEM 2 of this Report. When used in this Report, the words "assumes," "estimates," "expects," "guidance," "anticipates," "might," "projects," "predicts," "plans," "proposed," "targets," "intends," "believes," "will," "may," "could," "is likely to" and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our 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; changes in economic conditions, including inflationary trends in the price of raw materials; uncertainties arising from global events (including the Russia-Ukraine conflict), natural disasters or pandemics including COVID-19 and their impact on raw material prices, labor costs and other employment-related costs; loss of suppliers and disruptions in the supply of raw materials; competition in our industry; the effects of strategic investments on our operations, including our efforts to expand our global market share and actions taken to increase sales growth; the ability to develop and successfully launch new products; the ability to realize all synergies and benefits of acquisitions; our reliance on information technology and the associated risks involving potential security lapses and/or cyber-based attacks; deterioration in labor relations; the possibility of exposure of product liability and premises liability claims; our ability to protect our intellectual property; disruptions to the implementation of our strategic priorities and business plan caused by changes in our executive management team; changes in interest rates; effects of changes in foreign exchange rates on our reported earnings; expectations regarding our target leverage and our share repurchase program; compliance with regulatory requirements and the possible exposure to liability for failures to comply with these requirements; 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; and 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;
Other potential risk factors include the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report") and in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022. In addition, 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 "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; "2029 Senior Notes" refers to the 4.00% senior notes due 2029 issued in 2021; and "2031 Senior Notes" refers to the 3.875% senior notes due 2031 issued in 2021.
2
TABLE OF CONTENTS
| Page | ||||||||
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per common share amounts)
(unaudited)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Gross profit | |||||||||||
| Selling and marketing expenses | |||||||||||
| General, administrative and other expenses | |||||||||||
| Equity income in earnings of unconsolidated affiliates | ( | ( | |||||||||
| Operating income | |||||||||||
| Other expense, net: | |||||||||||
| Interest expense, net | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Other income, net | ( | ( | |||||||||
| Total other expense, net | |||||||||||
| Income from continuing operations before income taxes | |||||||||||
| Income tax provision | ( | ( | |||||||||
| Income from continuing operations | |||||||||||
| Loss from discontinued operations, net of tax | ( | ||||||||||
| Net income before non-controlling interests | |||||||||||
| Less: Net income attributable to non-controlling interests | |||||||||||
| Net income attributable to Tempur Sealy International, Inc. | $ | $ | |||||||||
| Earnings per common share: | |||||||||||
| Basic | |||||||||||
| Earnings per share for continuing operations | $ | $ | |||||||||
| Loss per share for discontinued operations | |||||||||||
| Earnings per share | $ | $ | |||||||||
| Diluted | |||||||||||
| Earnings per share for continuing operations | $ | $ | |||||||||
| Loss per share for discontinued operations | |||||||||||
| Earnings per share | $ | $ | |||||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income before non-controlling interests | $ | $ | |||||||||
| Other comprehensive income, net of tax: | |||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||
| Comprehensive income | |||||||||||
| Less: Comprehensive income attributable to non-controlling interests | |||||||||||
| Comprehensive income attributable to Tempur Sealy International, Inc. | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | (Unaudited) | ||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total Current Assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Income taxes payable | |||||||||||
| Total Current Liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Long-term operating lease obligations | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Redeemable non-controlling interest | |||||||||||
| Total Stockholders' (Deficit) Equity | ( | ||||||||||
| Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' (Deficit) Equity | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in millions)
(unaudited)
Three Months Ended March 31, 2022
| Tempur Sealy International, Inc. Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Non-controlling Interest | Common Stock | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Issued | At Par | Shares Issued | At Cost | Additional Paid in Capital | Retained Earnings | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | $ | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to non-controlling interest | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency adjustments, net of tax | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared on common stock ($ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuances of PRSUs, RSUs, and DSUs | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock repurchased | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchased - PRSU/RSU releases | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of unearned stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2022 | $ | $ | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2021
| Tempur Sealy International, Inc. Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Non-controlling Interest | Common Stock | Treasury Stock | Accumulated Other Comprehensive Loss | Non-controlling Interest in Subsidiaries | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Issued | At Par | Shares Issued | At Cost | Additional Paid in Capital | Retained Earnings | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2020 | $ | $ | $ | ( | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to non-controlling interests | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency adjustments, net of tax | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared on common stock ($ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuances of PRSUs, RSUs, and DSUs | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock repurchased | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchased - PRSU/RSU releases | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of unearned stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | $ | $ | $ | ( | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions) (unaudited)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS: | |||||||||||
| Net income before non-controlling interests | $ | $ | |||||||||
| Loss from discontinued operations, net of tax | |||||||||||
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of stock-based compensation | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Bad debt expense | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Dividends received from unconsolidated affiliates | |||||||||||
| Equity income in earnings of unconsolidated affiliates | ( | ( | |||||||||
| Loss on extinguishment of debt | |||||||||||
| Foreign currency adjustments and other | ( | ||||||||||
| Changes in operating assets and liabilities, net of effect of business acquisitions | ( | ( | |||||||||
| Net cash provided by operating activities from continuing operations | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS: | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ||||||||||
| Other | |||||||||||
| Net cash used in investing activities from continuing operations | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS: | |||||||||||
| Proceeds from borrowings under long-term debt obligations | |||||||||||
| Repayments of borrowings under long-term debt obligations | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Treasury stock repurchased | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Payments of deferred financing costs | ( | ||||||||||
| Repayments of finance lease obligations and other | ( | ( | |||||||||
| Net cash (used in) provided by financing activities from continuing operations | ( | ||||||||||
| Net cash (used in) provided by continuing operations | ( | ||||||||||
| Net operating cash flows used in discontinued operations | ( | ||||||||||
| NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | ( | ( | |||||||||
| (Decrease) increase in cash and cash equivalents | ( | ||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | |||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes, net of refunds | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
8
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited)
(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 designs, manufactures and distributes 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.
The Company has ownership interests in Asia-Pacific joint ventures to develop markets for Sealy® branded products and ownership in a United Kingdom joint venture to manufacture, market, and distribute Sealy® and Stearns & Foster® branded products. The Company's ownership interests in each of these joint ventures is 50.0 %. The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have 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 Condensed Consolidated Statements of Income.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States ("GAAP") for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2021, included in the 2021 Annual Report filed with the Securities and Exchange Commission on February 22, 2022.
The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein.
(b) 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:
| March 31, | December 31, | ||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| Finished goods | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials and supplies | |||||||||||
| $ | $ | ||||||||||
(c) 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.
9
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The Company had the following activity for its accrued warranty expense from December 31, 2021 to March 31, 2022:
| (in millions) | |||||
| Balance as of December 31, 2021 | $ | ||||
| Amounts accrued | |||||
| Warranties charged to accrual | ( | ||||
| Balance as of March 31, 2022 | $ | ||||
As of March 31, 2022 and December 31, 2021, $19.9 million and $20.2 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $24.4 million and $23.7 million of accrued warranty expense is included in other non-current liabilities on the Company's accompanying Condensed Consolidated Balance Sheets, respectively.
(d) Allowance for Credit Losses. The allowance for credit losses is the Company's best estimate of the amount of expected lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses. The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. As of March 31, 2022, the Company's accounts receivable were substantially current. Other factors considered include historical write-off experience, current economic conditions and also factors such as customer credit, past transaction history with the customer and changes in customer payment terms. Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. The allowance for credit losses is included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets.
The Company had the following activity for its allowance for credit losses from December 31, 2021 to March 31, 2022:
| (in millions) | ||||||||
Balance as of December 31, 2021 | $ | |||||||
| Amounts accrued | ||||||||
| Write-offs charged against the allowance | ( | |||||||
Balance as of March 31, 2022 | $ | |||||||
(e) 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) | March 31, 2022 | December 31, 2021 | ||||||||||||
| 2029 Senior Notes | $ | $ | ||||||||||||
| 2031 Senior Notes | $ | $ | ||||||||||||
10
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(2) Net Sales
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 three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
| (in millions) | North America | International | Consolidated | North America | International | Consolidated | |||||||||||||||||||||||||||||
| Channel | |||||||||||||||||||||||||||||||||||
| Wholesale | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Direct | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| North America | International | Consolidated | North America | International | Consolidated | ||||||||||||||||||||||||||||||
| Product | |||||||||||||||||||||||||||||||||||
| Bedding | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| North America | International | Consolidated | North America | International | Consolidated | ||||||||||||||||||||||||||||||
| Geographical region | |||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| All Other | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(3) Acquisitions
Acquisition of Dreams Topco Limited
On August 2, 2021, the Company completed the acquisition of Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams"), for a cash purchase price of $476.7 million, which includes $49.5 million of cash acquired. The transaction was funded using cash on hand and bank financing. Dreams has developed a successful multi-channel sales strategy, with over 200 brick and mortar retail locations in the United Kingdom, an industry-leading online channel, as well as manufacturing and delivery assets.
The financial results of Dreams subsequent to the date of acquisition are included in the consolidated financial statements of the Company. The Company accounted for this transaction as a business combination. The preliminary allocation of the purchase price is based on the fair values of the assets acquired and liabilities assumed as of August 2, 2021. The Company continues to obtain information to determine the fair value of acquired assets and liabilities. The components of the preliminary purchase price allocation are as follows:
11
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
| (in millions) | |||||
| Accounts receivable, net | $ | ||||
| Inventory | |||||
| Property, plant and equipment | |||||
| Goodwill | |||||
| Indefinite-lived intangible asset | |||||
| Operating lease right-of-use assets | |||||
| Other current and non-current assets | |||||
| Accounts payable | ( | ||||
| Accrued expenses and other current liabilities | ( | ||||
| Operating lease liabilities | ( | ||||
| Debt | ( | ||||
| Other liabilities | ( | ||||
| Purchase price, net of cash acquired | $ | ||||
The indefinite-lived intangible asset represents the Dreams' portfolio of trade names as marketed through Dreams. The Company applied the income approach through a relief from royalty method to fair value the trade name asset using level 2 inputs. The indefinite-lived intangible asset is not deductible for income tax purposes.
Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the expansion of retail competency and online capabilities, and expected synergistic manufacturing and distribution benefits to be realized from the acquisition. The goodwill is not deductible for income tax purposes and is included within the International business segment.
(4) Goodwill
| (in millions) | North America | International | Consolidated | ||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ||||||||||||||
| Foreign currency translation and other | ( | ( | |||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ||||||||||||||
12
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(5) Debt
Debt for the Company consists of the following:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| (in millions, except percentages) | Amount | Rate | Amount | Rate | Maturity Date | ||||||||||||||||||||||||
| 2019 Credit Agreement: | |||||||||||||||||||||||||||||
| Term A Facility | $ | (1) | $ | (2) | October 16, 2024 | ||||||||||||||||||||||||
| Revolver | (1) | (2) | October 16, 2024 | ||||||||||||||||||||||||||
| 2031 Senior Notes | October 15, 2031 | ||||||||||||||||||||||||||||
| 2029 Senior Notes | April 15, 2029 | ||||||||||||||||||||||||||||
| Securitized debt | (3) | N/A | April 6, 2023 | ||||||||||||||||||||||||||
Finance lease obligations (4) | Various | ||||||||||||||||||||||||||||
| Other | Various | ||||||||||||||||||||||||||||
| Total debt | |||||||||||||||||||||||||||||
| Less: Deferred financing costs | |||||||||||||||||||||||||||||
| Total debt, net | |||||||||||||||||||||||||||||
| Less: Current portion | |||||||||||||||||||||||||||||
| Total long-term debt, net | $ | $ | |||||||||||||||||||||||||||
| (1) | Interest at LIBOR plus applicable margin of | ||||
| (2) | Interest at LIBOR plus applicable margin of | ||||
| (3) | Interest at one month LIBOR index plus | ||||
| (4) | New finance lease obligations are a non-cash financing activity. | ||||
As of March 31, 2022, the Company was in compliance with all applicable debt covenants.
2019 Credit Agreement
On October 16, 2019, the Company 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.
On February 2, 2021, the Company entered into an amendment to the 2019 Credit Agreement. The amendment increased the revolving credit facility from $425.0 million to $725.0 million. On May 26, 2021, the Company entered into an additional amendment to the 2019 Credit Agreement. The amendment provided for a $300.0 million delayed draw term loan. On July 30, 2021 the Company drew down the full $300.0 million available under the delayed draw term loan to fund, in part, the Dreams acquisition. The delayed draw term loan has the same terms and conditions as the Company's existing term loans under the 2019 Credit Agreement. On September 21, 2021, the Company entered into an additional amendment to the 2019 Credit Agreement to remove the limit to the amount of netted cash that may be deducted from indebtedness for purposes of calculating certain leverage ratios.
The Company had $163.3 million in outstanding borrowings under its revolving credit facility as of March 31, 2022. Total availability under the revolving credit facility was $561.0 million after a $0.7 million reduction for outstanding letters of credit as of March 31, 2022.
Securitized Debt
The Company and certain of its subsidiaries are party to a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended, the "Accounts Receivable Securitization"). On April 6, 2021, the Company and certain of its subsidiaries entered into a new amendment to the Accounts Receivable Securitization. The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2023 and increased the overall limit from $120.0 million to $200.0 million. While subject to a $200.0 million overall limit, the availability of revolving loans varies over the course of the year based on the seasonality of the Company's accounts receivable. As of March 31, 2022, the Company had fully drawn down the Accounts Receivable Securitization with borrowings of $153.4 million.
(6) Stockholders' Equity
(a) Treasury Stock. As of March 31, 2022, the Company had approximately $951.5 million remaining under its share repurchase authorization. The Company repurchased 12.2 million and 8.4 million shares, under the program, for approximately $449.2 million and $299.8 million during the three months ended March 31, 2022 and 2021, respectively.
In addition, the Company acquired shares upon the vesting of certain restricted stock units ("RSUs") and performance restricted stock units ("PRSUs"), which were withheld to satisfy tax withholding obligations during the three months ended March 31, 2022 and 2021. 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 $45.6 million and $13.3 million in treasury stock acquired during the three months ended March 31, 2022 and 2021, respectively.
(b) AOCL. AOCL consisted of the following:
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| Foreign Currency Translation | |||||||||||
| Balance at beginning of period | $ | ( | $ | ( | |||||||
| Other comprehensive loss: | |||||||||||
Foreign currency translation adjustments (1) | ( | ( | |||||||||
| Balance at end of period | $ | ( | $ | ( | |||||||
| Pensions | |||||||||||
| Balance at beginning of period | $ | ( | $ | ( | |||||||
| Other comprehensive loss: | |||||||||||
| Net change from period revaluations | |||||||||||
| Balance at end of period | $ | ( | $ | ( | |||||||
| (1) | In 2022 and 2021, there were | ||||
13
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(7) Other Items
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
| (in millions) | March 31, 2022 | December 31, 2021 | |||||||||
| Operating lease obligations | $ | $ | |||||||||
| Wages and benefits | |||||||||||
| Unearned revenue | |||||||||||
| Advertising | |||||||||||
| Taxes | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
(8) Stock-Based Compensation
The Company's stock-based compensation expense for the three months ended March 31, 2022 and 2021 included PRSUs, non-qualified stock options, RSUs and deferred stock units ("DSUs"). A summary of the Company's stock-based compensation expense is presented in the following table:
| Three Months Ended March 31, | |||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| PRSU expense | $ | $ | |||||||||
| Option expense | |||||||||||
| RSU/DSU expense | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
The Company grants PRSUs to executive officers and certain members of management. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals. During the first quarter of 2022, the Company granted PRSUs as a component of the long-term incentive plan ("2022 PRSUs"). The Company has recorded stock-based compensation expense related to the 2022 PRSUs during the three months ended March 31, 2022, as it was probable that the Company would achieve the specified performance target for the performance period.
(9) 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 such pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity or operating results.
(10) Income Taxes
14
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
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 2012 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.
The uncertain income tax liability for the Danish Tax Matter for the years 2012 through 2022 (the "2012 to Current Period") at March 31, 2022 and December 31, 2021 is approximately $49.3 million and $50.1 million, respectively, and is reflected in the Company's Condensed Consolidated Balance Sheet in other non-current liabilities.
The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish tax for the 2012 to Current Period at March 31, 2022 and December 31, 2021 is approximately $16.0 million and $15.5 million, respectively.
As of March 31, 2022, the Company made the following tax deposits with SKAT related to the Danish Tax Matter for the years 2012 through 2015, which are reflected in the Company's Condensed Consolidated Balance Sheet in other non-current assets:
| (in millions) | USD | ||||
| VAT deposits remaining with SKAT | $ | ||||
| Deposit payments made through December 31, 2021 | |||||
| Total | $ | ||||
If the Company is not successful in resolving the Danish Tax Matter for the 2012 to Current Period 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.
There were no other significant changes in the Danish Tax Matter or other uncertain tax positions during the three months ended March 31, 2022.
(11) 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.
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| (in millions, except per common share amounts) | 2022 | 2021 | |||||||||
| Numerator: | |||||||||||
| Income from continuing operations, net of income attributable to non-controlling interests | $ | $ | |||||||||
| Denominator: | |||||||||||
| Denominator for basic earnings per common share-weighted average shares | |||||||||||
| Effect of dilutive securities | |||||||||||
| Denominator for diluted earnings per common share-adjusted weighted average shares | |||||||||||
| Basic earnings per common share for continuing operations | $ | $ | |||||||||
| Diluted earnings per common share for continuing operations | $ | $ | |||||||||
15
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(12) Business Segment Information
The Company operates in two segments: North America and International. These segments are strategic business units that are managed separately based on geography. The North America segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Mexico. The International segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America (other than Mexico). On August 2, 2021, the Company acquired Dreams, which is included in the International segment. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. The Company evaluates segment performance based on net sales, gross profit and operating income.
The Company's North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company's accompanying Condensed Consolidated Financial Statements. The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payable.
The following table summarizes total assets by segment:
| (in millions) | March 31, 2022 | December 31, 2021 | |||||||||
| North America | $ | $ | |||||||||
| International | |||||||||||
| Corporate | |||||||||||
| Inter-segment eliminations | ( | ( | |||||||||
| Total assets | $ | $ | |||||||||
The following table summarizes property, plant and equipment, net, by segment:
| (in millions) | March 31, 2022 | December 31, 2021 | |||||||||
| North America | $ | $ | |||||||||
| International | |||||||||||
| Corporate | |||||||||||
| Total property, plant and equipment, net | $ | $ | |||||||||
The following table summarizes operating lease right-of-use assets by segment:
| (in millions) | March 31, 2022 | December 31, 2021 | |||||||||
| North America | $ | $ | |||||||||
| International | |||||||||||
| Corporate | |||||||||||
| Total operating lease right-of-use assets | $ | $ | |||||||||
16
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The following table summarizes segment information for the three months ended March 31, 2022:
| (in millions) | North America | International | Corporate | Eliminations | Consolidated | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | — | $ | — | $ | ||||||||||||||||||||||
| Inter-segment sales | $ | $ | $ | — | $ | ( | $ | — | |||||||||||||||||||||
| Inter-segment royalty expense (income) | ( | — | — | — | |||||||||||||||||||||||||
| Gross profit | — | — | |||||||||||||||||||||||||||
| Operating income (loss) | ( | — | |||||||||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | ( | — | |||||||||||||||||||||||||||
Depreciation and amortization (1) | $ | $ | $ | $ | — | $ | |||||||||||||||||||||||
| Capital expenditures | — | ||||||||||||||||||||||||||||