SEC Filing | Tempur Sealy International, Inc.

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tpx-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐ 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 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
Common Stock, $0.01 par value	TPX	New York Stock Exchange

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 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 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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

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. ¨

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 August 3, 2023 was 172,156,898 shares.

Table of Contents

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 including its impact on consumer behavior 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), labor costs and other employment-related costs; loss of suppliers and disruptions in the supply of raw materials; the effects of strategic investments on our operations, including our efforts to expand our global market share and actions taken to increase sales growth and including the pending merger with Mattress Firm Group Inc. ("Mattress Firm"); the ability to develop and successfully launch new products; capital project timelines; the ability to realize all synergies and benefits of acquisitions; our reliance on information technology ("IT") and the associated risks involving realized or potential security lapses and/or cyber based attacks; the impact of cybersecurity incidents (including the July 2023 incident) on our business, results of operations or financial condition, including our assessments of such impact; the Company's ability to restore its critical operational data and IT systems in a reasonable time frame following a cybersecurity incident; 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, 2022 (the "2022 Annual Report") and in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2023. 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.

TABLE OF CONTENTS


		Page

Special Note Regarding Forward-Looking Statements		2

PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Stockholders' Equity (Deficit)	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	10

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	34

ITEM 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	34

ITEM 1A.	Risk Factors	35

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

ITEM 3.	Defaults upon Senior Securities	36

ITEM 4.	Mine Safety Disclosures	36

ITEM 5.	Other Information	36

ITEM 6.	Exhibits	37

Signatures		38

Table of Contents

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				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net sales	$	1,269.7	$	1,211.0	$	2,477.8	$	2,450.5
Cost of sales	727.4		714.5		1,435.6		1,431.2
Gross profit	542.3		496.5		1,042.2		1,019.3
Selling and marketing expenses	270.2		252.9		526.9		496.4
General, administrative and other expenses	117.5		102.3		222.0		199.9

Equity income in earnings of unconsolidated affiliates	(4.2)		(2.6)		(8.8)		(9.5)
Operating income	158.8		143.9		302.1		332.5

Other expense, net:
Interest expense, net	33.6		23.7		66.4		44.6

Other (income) expense, net	(0.2)		0.7		(0.1)		(0.6)
Total other expense, net	33.4		24.4		66.3		44.0

Income before income taxes	125.4		119.5		235.8		288.5
Income tax provision	(32.2)		(28.3)		(56.7)		(66.4)


Net income before non-controlling interest	93.2		91.2		179.1		222.1
Less: Net income attributable to non-controlling interest	0.8		0.6		1.4		0.8
Net income attributable to Tempur Sealy International, Inc.	$	92.4	$	90.6	$	177.7	$	221.3

Earnings per common share:
Basic	$	0.54	$	0.52	$	1.03	$	1.24
Diluted	$	0.52	$	0.51	$	1.01	$	1.20












Weighted average common shares outstanding:
Basic	172.1		174.1		172.1		178.3
Diluted	176.8		178.8		176.8		183.7

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in millions)

(unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net income before non-controlling interest	$	93.2	$	91.2	$	179.1	$	222.1
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	17.2		(57.8)		32.1		(75.3)

Other comprehensive income (loss), net of tax	17.2		(57.8)		32.1		(75.3)
Comprehensive income	110.4		33.4		211.2		146.8
Less: Comprehensive income attributable to non-controlling interest	0.8		0.6		1.4		0.8
Comprehensive income attributable to Tempur Sealy International, Inc.	$	109.6	$	32.8	$	209.8	$	146.0

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)


	June 30, 2023		December 31, 2022
ASSETS	(unaudited)

Current Assets:
Cash and cash equivalents	$	101.8	$	69.4
Accounts receivable, net	476.1		422.6
Inventories	529.3		555.0
Prepaid expenses and other current assets	146.9		148.2
Total Current Assets	1,254.1		1,195.2
Property, plant and equipment, net	850.9		791.1
Goodwill	1,080.9		1,062.3
Other intangible assets, net	717.6		715.8
Operating lease right-of-use assets	568.0		506.8
Deferred income taxes	12.7		11.3
Other non-current assets	86.6		77.3
Total Assets	$	4,570.8	$	4,359.8

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current Liabilities:
Accounts payable	$	362.6	$	359.8
Accrued expenses and other current liabilities	452.8		432.7
Short-term operating lease obligations	114.8		105.5
Current portion of long-term debt	73.6		70.4
Income taxes payable	2.9		12.8
Total Current Liabilities	1,006.7		981.2
Long-term debt, net	2,707.5		2,739.9
Long-term operating lease obligations	507.3		453.5
Deferred income taxes	117.6		114.0
Other non-current liabilities	84.2		83.5
Total Liabilities	4,423.3		4,372.1

Redeemable non-controlling interest	9.4		9.8

Total Stockholders' Equity (Deficit)	138.1		(22.1)
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity (Deficit)	$	4,570.8	$	4,359.8

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

($ in millions)

(unaudited)

Three Months Ended June 30, 2023


			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, March 31, 2023	$	8.9	283.8	$	2.8	111.7	$	(3,386.3)	$	525.7	$	3,054.5	$	(162.0)	$	34.7
Net income											92.4				92.4
Net income attributable to non-controlling interest	0.8														—
Dividend paid to non-controlling interest in subsidiary	(0.3)														—

Foreign currency adjustments, net of tax													17.2		17.2

Exercise of stock options						—	—		—						—
Dividends declared on common stock ($0.11 per share)											(19.4)				(19.4)
Issuances of PRSUs and RSUs						(0.1)	2.4		(2.4)						—
Treasury stock repurchased						—	—								—
Treasury stock repurchased - PRSU/RSU releases						—	(0.2)								(0.2)
Amortization of unearned stock-based compensation									13.4						13.4

Balance, June 30, 2023	$	9.4	283.8	$	2.8	111.6	$	(3,384.1)	$	536.7	$	3,127.5	$	(144.8)	$	138.1

Three Months Ended June 30, 2022


			Tempur Sealy International, Inc. Stockholders' Deficit
	Redeemable Non-controlling Interest		Common Stock			Treasury Stock							Accumulated Other Comprehensive Loss		Total Stockholders' Deficit
			Shares Issued	At Par		Shares Issued	At Cost		Additional Paid in Capital		Retained Earnings
Balance, March 31, 2022	$	9.4	283.8	$	2.8	107.1	$	(3,267.2)	$	563.6	$	2,716.8	$	(116.7)	$	(100.7)

Net income											90.6				90.6
Net income attributable to non-controlling interest	0.6														—
Dividend paid to non-controlling interest in subsidiary	(1.0)														—
Foreign currency adjustments, net of tax													(57.8)		(57.8)
Exercise of stock options						—	0.2		(0.1)						0.1
Dividends declared on common stock ($0.10 per share)											(17.9)				(17.9)
Issuances of PRSUs and RSUs						(0.1)	2.9		(2.9)						—
Treasury stock repurchased						4.4	(117.0)								(117.0)
Treasury stock repurchased - PRSU/RSU releases						—	(0.2)								(0.2)
Amortization of unearned stock-based compensation									13.0						13.0

Balance, June 30, 2022	$	9.0	283.8	$	2.8	111.4	$	(3,381.3)	$	573.6	$	2,789.5	$	(174.5)	$	(189.9)

See accompanying Notes to Condensed Consolidated Financial Statements.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

($ in millions)

(unaudited)

Six Months Ended June 30, 2023


			Tempur Sealy International, Inc. Stockholders' (Deficit) Equity
	Redeemable Non-controlling Interest		Common Stock			Treasury Stock							Accumulated Other Comprehensive Loss		Total Stockholders' (Deficit) Equity
			Shares Issued	At Par		Shares Issued	At Cost		Additional Paid in Capital		Retained Earnings
Balance as of December 31, 2022	$	9.8	283.8	$	2.8	113.4	$	(3,434.7)	$	598.2	$	2,988.5	$	(176.9)	$	(22.1)
Net income											177.7				177.7
Net income attributable to non-controlling interests	1.4														—


Dividend paid to non-controlling interest in subsidiary	(1.8)														—
Foreign currency adjustments, net of tax													32.1		32.1
Exercise of stock options						(0.1)	1.5		(0.7)						0.8
Dividends declared on common stock ($0.22 per share)											(38.7)				(38.7)
Issuances of PRSUs and RSUs						(2.7)	85.0		(85.0)						—
Treasury stock repurchased						0.1	(5.0)								(5.0)
Treasury stock repurchased - PRSU/RSU releases						0.9	(30.9)								(30.9)
Amortization of unearned stock-based compensation									24.2						24.2

Balance, June 30, 2023	$	9.4	283.8	$	2.8	111.6	$	(3,384.1)	$	536.7	$	3,127.5	$	(144.8)	$	138.1

Six Months Ended June 30, 2022


			Tempur Sealy International, Inc. Stockholders' Equity (Deficit)
	Redeemable Non-controlling Interest		Common Stock			Treasury Stock							Accumulated Other Comprehensive Loss		Total Stockholders' Equity (Deficit)
			Shares Issued	At Par		Shares Issued	At Cost		Additional Paid in Capital		Retained Earnings
Balance as of December 31, 2021	$	9.2	283.8	$	2.8	96.4	$	(2,844.7)	$	622.0	$	2,604.9	$	(99.2)	$	285.8
Net income											221.3				221.3
Net income attributable to non-controlling interests	0.8														—
Dividend paid to non-controlling interest in subsidiary	(1.0)														—
Foreign currency adjustments, net of tax													(75.3)		(75.3)
Exercise of stock options						—	0.4		(0.2)						0.2
Dividends declared on common stock ($0.20 per share)											(36.7)				(36.7)
Issuances of PRSUs and RSUs						(2.6)	75.0		(75.0)						—
Treasury stock repurchased						16.6	(566.2)								(566.2)
Treasury stock repurchased - PRSU/RSU releases						1.0	(45.8)								(45.8)
Amortization of unearned stock-based compensation									26.8						26.8
Balance, June 30, 2022	$	9.0	283.8	$	2.8	111.4	$	(3,381.3)	$	573.6	$	2,789.5	$	(174.5)	$	(189.9)

See accompanying Notes to Condensed Consolidated Financial Statements.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(unaudited)


	Six Months Ended
	June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before non-controlling interest	$	179.1	$	222.1

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	66.4		61.3
Amortization of stock-based compensation	24.2		26.9
Amortization of deferred financing costs	1.9		1.9
Bad debt expense	4.2		3.8
Deferred income taxes	0.8		(6.7)
Dividends received from unconsolidated affiliates	3.4		3.9
Equity income in earnings of unconsolidated affiliates	(8.8)		(9.5)

Foreign currency adjustments and other	(1.1)		0.2
Changes in operating assets and liabilities	(19.6)		(237.4)
Net cash provided by operating activities	250.5		66.5

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(112.7)		(130.2)

Other	0.4		1.1
Net cash used in investing activities	(112.3)		(129.1)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under long-term debt obligations	1,005.7		1,317.9
Repayments of borrowings under long-term debt obligations	(1,033.3)		(771.7)
Proceeds from exercise of stock options	0.8		0.2
Treasury stock repurchased	(35.9)		(612.0)
Dividends paid	(39.8)		(36.2)

Repayments of finance lease obligations and other	(8.9)		(8.4)
Net cash used in financing activities	(111.4)		(110.2)



NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	5.6		(17.6)
Increase (decrease) in cash and cash equivalents	32.4		(190.4)
CASH AND CASH EQUIVALENTS, beginning of period	69.4		300.7
CASH AND CASH EQUIVALENTS, end of period	$	101.8	$	110.3

Supplemental cash flow information:
Cash paid during the period for:
Interest	$	72.1	$	45.6
Income taxes, net of refunds	$	52.0	$	48.0

See accompanying Notes to Condensed Consolidated Financial Statements.

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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® and Stearns & Foster® 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, 2022, included in the 2022 Annual Report filed with the Securities and Exchange Commission on February 17, 2023.

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) Adoption of New Accounting Standards

Reference Rate Reform. In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides guidance on the accounting impacts due to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). The FASB continued to refine its guidance with the January 2021 ASU 2021-01 issued update, "Reference Rate Reform (Topic 848): Scope" and the December 2022 ASU 2022-06 issued update, "Reference Rate Reform ("Topic 848"): Deferral of the Sunset Date of Topic 848", of which all were effective upon issuance. These updates provide entities with certain optional relief expedients and exceptions for applying GAAP to contract modifications, hedge accounting, and other transactions affected by reference rate reform if certain criteria are met. An entity that makes this election would present and account for a modified contract as a continuation of the existing contract. Entities are afforded these relief options until December 31, 2024, after which time they will no longer be permitted. In May 2023, the Company amended its 2019 Credit Agreement to transition the applicable reference rate from LIBOR to SOFR. See "Note 4 - Debt" for additional details. The results of this guidance did not have a material impact on the condensed consolidated financial statements.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(c) Inventories. Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out method, and consist of the following:


	June 30,		December 31,
(in millions)	2023		2022
Finished goods	$	346.4	$	352.9
Work-in-process	17.5		19.4
Raw materials and supplies	165.4		182.7
	$	529.3	$	555.0

(d) 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, 2022 to June 30, 2023:


(in millions)
Balance as of December 31, 2022	$	41.6
Amounts accrued	11.4
Warranties charged to accrual	(9.0)
Balance as of June 30, 2023	$	44.0

As of June 30, 2023 and December 31, 2022, $19.9 million and $17.8 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $24.1 million and $23.8 million of accrued warranty expense is included in other non-current liabilities on the Company's accompanying Condensed Consolidated Balance Sheets, respectively.

(e) 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 June 30, 2023, 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, 2022 to June 30, 2023:


(in millions)
Balance as of December 31, 2022	$	62.4
Amounts accrued	4.2
Write-offs charged against the allowance	(1.2)
Balance as of June 30, 2023	$	65.4

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(f) 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 Level 2 inputs, which include 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)	June 30, 2023		December 31, 2022
2029 Senior Notes	$	693.6	$	672.7
2031 Senior Notes	$	651.0	$	627.1

(g) Definitive Agreement with Mattress Firm. On May 9, 2023, Tempur Sealy International and Mattress Firm entered into a definitive agreement and plan of merger (the "Merger Agreement") for a proposed business acquisition in which Tempur Sealy International, through a wholly-owned subsidiary, will acquire Mattress Firm in a transaction valued at approximately $4.0 billion. The transaction is expected to be funded by approximately $2.7 billion of cash consideration and the issuance of 34.2 million shares of common stock resulting in a total stock consideration value of $1.3 billion based on a closing share price of $37.62 as of May 8, 2023.

The Company expects the transaction to close in the second half of 2024, subject to the satisfaction of customary closing conditions, including applicable regulatory approvals. Following the close of the transaction, Mattress Firm is expected to operate as a separate business unit within the Company.

(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 June 30, 2023 and 2022:


	Three Months Ended June 30, 2023						Three Months Ended June 30, 2022
(in millions)	North America		International		Consolidated		North America		International		Consolidated
Channel
Wholesale	$	896.0	$	93.2	$	989.2	$	847.8	$	91.3	$	939.1
Direct	120.8		159.7		280.5		116.9		155.0		271.9
Net sales	$	1,016.8	$	252.9	$	1,269.7	$	964.7	$	246.3	$	1,211.0

	North America		International		Consolidated		North America		International		Consolidated
Product
Bedding	$	955.6	$	206.4	$	1,162.0	$	909.1	$	205.1	$	1,114.2
Other	61.2		46.5		107.7		55.6		41.2		96.8
Net sales	$	1,016.8	$	252.9	$	1,269.7	$	964.7	$	246.3	$	1,211.0









	North America		International		Consolidated		North America		International		Consolidated
Geographical region
United States	$	946.2	$	—	$	946.2	$	890.3	$	—	$	890.3

All Other	70.6		252.9		323.5		74.4		246.3		320.7
Net sales	$	1,016.8	$	252.9	$	1,269.7	$	964.7	$	246.3	$	1,211.0

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)


	Six Months Ended June 30, 2023						Six Months Ended June 30, 2022
(in millions)	North America		International		Consolidated		North America		International		Consolidated
Channel
Wholesale	$	1,700.3	$	201.5	$	1,901.8	$	1,659.1	$	204.1	$	1,863.2
Direct	236.1		339.9		576.0		237.0		350.3		587.3
Net sales	$	1,936.4	$	541.4	$	2,477.8	$	1,896.1	$	554.4	$	2,450.5

	North America		International		Consolidated		North America		International		Consolidated
Product
Bedding	$	1,809.9	$	444.4	$	2,254.3	$	1,774.0	$	461.6	$	2,235.6
Other	126.5		97.0		223.5		122.1		92.8		214.9
Net sales	$	1,936.4	$	541.4	$	2,477.8	$	1,896.1	$	554.4	$	2,450.5








	North America		International		Consolidated		North America		International		Consolidated
Geographical region
United States	$	1,801.1	$	—	$	1,801.1	$	1,754.6	$	—	$	1,754.6


All Other	135.3		541.4		676.7		141.5		554.4		695.9
Net sales	$	1,936.4	$	541.4	$	2,477.8	$	1,896.1	$	554.4	$	2,450.5

(3) Goodwill

The following summarizes changes to the Company's goodwill, by segment:


(in millions)	North America		International		Consolidated
Balance as of December 31, 2022	$	607.3	$	455.0	$	1,062.3

Foreign currency translation and other	2.3		16.3		18.6
Balance as of June 30, 2023	$	609.6	$	471.3	$	1,080.9

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(4) Debt

Debt for the Company consists of the following:


	June 30, 2023			December 31, 2022
(in millions, except percentages)	Amount		Rate	Amount		Rate	Maturity Date
2019 Credit Agreement:
Term A Facility	$	611.6	(1)	$	638.8	(2)	October 16, 2024
Revolver	282.0		(1)	337.0		(2)	October 16, 2024
2031 Senior Notes	800.0		3.875%	800.0		3.875%	October 15, 2031
2029 Senior Notes	800.0		4.000%	800.0		4.000%	April 15, 2029


Securitized debt	175.3		(3)	139.3		(4)	April 7, 2025
Finance lease obligations (5)	75.3			78.7			Various
Other	55.7			37.0			Various
Total debt	2,799.9			2,830.8
Less: Deferred financing costs	18.8			20.5
Total debt, net	2,781.1			2,810.3
Less: Current portion	73.6			70.4
Total long-term debt, net	$	2,707.5		$	2,739.9


(1)			Interest at SOFR index plus 10 basis points of credit spread adjustment, plus applicable margin of 1.375% as of June 30, 2023.
(2)			Interest at LIBOR plus applicable margin of 1.250% as of December 31, 2022.
(3)			Interest at one month SOFR index plus 10 basis points of credit spread adjustment, plus 85 basis points.
(4)			Interest at one month LIBOR index plus 70 basis points.
(5)			New finance lease obligations are a non-cash financing activity.

As of June 30, 2023, 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, as amended, provides for a $725.0 million revolving credit facility and a $725.0 million term loan facility. On May 19, 2023, the Company entered into an amendment to the 2019 Credit Agreement that replaced LIBOR with SOFR as the reference rate for U.S. dollar-denominated loans. Borrowings under the amended Credit Agreement will bear interest at a base rate or a rate equal to SOFR plus an applicable margin. For the revolving credit facility and the term loan facility such applicable margins are determined by a pricing grid based on the consolidated total net leverage ratio of the Company.

The Company had $282.0 million in outstanding borrowings under its revolving credit facility as of June 30, 2023. Total remaining availability under the revolving credit facility was $442.4 million after a $0.6 million reduction for outstanding letters of credit as of June 30, 2023.

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, 2023, the Company and certain of its subsidiaries entered into a second amendment to the Accounts Receivable Securitization. The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 7, 2025. 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 June 30, 2023, the Company had completely drawn on the outstanding availability of the Accounts Receivable Securitization with borrowings of $175.3 million.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(5) Stockholders' Equity

(a) Treasury Stock. As of June 30, 2023, the Company had approximately $774.5 million remaining under its share repurchase authorization. The Company did not repurchase shares, under the program, during the three months ended June 30, 2023. The Company repurchased 4.4 million shares, under the program, for approximately $117.0 million during the three months ended June 30, 2022. The Company repurchased 0.1 million and 16.6 million shares, under the program, for approximately $5.0 million and $566.2 million during the six months ended June 30, 2023 and 2022, 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 each of the three and six months ended June 30, 2023 and 2022, 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 $0.3 million and $0.2 million in treasury stock acquired during the three months ended June 30, 2023 and 2022, respectively. The Company acquired approximately $31.0 million and $45.8 million in treasury stock during the six months ended June 30, 2023 and 2022, respectively.

(b) AOCL. AOCL consisted of the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2023		2022		2023		2022
Foreign Currency Translation
Balance at beginning of period	$	(160.4)	$	(112.7)	$	(175.3)	$	(95.2)
Other comprehensive loss:
Foreign currency translation adjustments (1)	17.2		(57.8)		32.1		(75.3)

Balance at end of period	$	(143.2)	$	(170.5)	$	(143.2)	$	(170.5)













Pensions
Balance at beginning of period	$	(1.6)	$	(4.0)	$	(1.6)	$	(4.0)
Other comprehensive loss:
Net change from period revaluations	—		—		—		—






Balance at end of period	$	(1.6)	$	(4.0)	$	(1.6)	$	(4.0)


(1)			In 2023 and 2022, there were no tax impacts related to foreign currency translation adjustments and no amounts were reclassified to earnings.

(6) Other Items

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following:


(in millions)	June 30, 2023		December 31, 2022
Wages and benefits	$	91.3	$	78.0
Unearned revenue	58.8		48.5
Advertising	57.7		64.9
Taxes	55.7		52.1
Other	189.3		189.2
	$	452.8	$	432.7

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(7) Stock-Based Compensation

The Company's stock-based compensation expense for the three and six months ended June 30, 2023 and 2022 included PRSUs, non-qualified stock options and RSUs. A summary of the Company's stock-based compensation expense is presented in the following table:


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2023		2022		2023		2022
PRSU expense	$	7.8	$	7.9	$	12.9	$	16.2
Option expense	0.5		—		1.1		—
RSU expense	5.1		5.1		10.2		10.7
Total stock-based compensation expense	$	13.4	$	13.0	$	24.2	$	26.9

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 2023, the Company granted PRSUs as a component of the long-term incentive plan ("2023 PRSUs"). The Company has recorded stock-based compensation expense related to the 2023 PRSUs during the three and six months ended June 30, 2023, as it was probable that the Company would achieve the specified performance targets for the performance period.

(8) 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.

(9) Income Taxes

The Company's effective tax rates for the three months ended June 30, 2023 and 2022 were 25.7% and 23.7%, respectively. The Company's effective tax rates for the six months ended June 30, 2023 and 2022 were 24.1% and 23.0%, respectively. The Company's effective tax rates for the three and six months ended June 30, 2023 and 2022 differed from the U.S. federal statutory rate of 21.0% principally due to subpart F income (i.e., global intangible low-taxed income, or "GILTI," earned by the Company's foreign subsidiaries), foreign income tax rate differentials, state and local taxes, changes in the Company's uncertain tax positions, the excess tax benefit related to stock-based compensation and certain other permanent items.

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. In November 2018, the Company entered into the Advanced Pricing Agreement program (the "APA Program") requesting SKAT and the U.S. Internal Revenue Service ("IRS") to directly negotiate a mutually acceptable agreement on the Danish Tax Matter.

During December 2022, pursuant to the negotiations described above with respect to the APA Program, SKAT and the IRS preliminarily concluded on a mutually acceptable framework ("Preliminary Framework") to resolve the Danish Tax Matter for the 2012 to 2022 tax years. If ultimately agreed upon by the two tax authorities, the terms of the Preliminary Framework would extend to the years 2023 and 2024, as well. The Preliminary Framework is not a definitive agreement, but its terms provide updated definitive data for the Company to determine the potential Danish income tax exposure for the 2012 to 2022 tax years as well as the associated deferred tax asset for the U.S. correlative benefit for such periods. Subsequent to December 31, 2022, the Company began discussions individually with both SKAT and the IRS regarding the implementation of the Preliminary Framework. In this regard, it is expected that the Preliminary Framework will be finalized into a definitive agreement in 2023. Starting January 1, 2023 the Company adopted the terms of the Preliminary Framework in the calculation of the royalty described above. As such, there is no uncertain income tax liability or deferred tax asset associated with 2023.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The uncertain income tax liability for the Danish Tax Matter for the years 2012 through 2022 was approximately $38.5 million and $37.8 million at June 30, 2023 and December 31, 2022, respectively, and is reflected in the Company's Condensed Consolidated Balance Sheet in accrued expenses and other current liabilities.

The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish Tax Matter for the 2012 to 2022 tax years was approximately $21.6 million for both periods ended June 30, 2023 and December 31, 2022.

As of June 30, 2023, the Company had made the following tax deposits related to assessments received by SKAT for the Danish Tax Matter for the years 2012 through 2016, which are reflected in the Company's Condensed Consolidated Balance Sheet in other current assets:


(in millions)	USD
VAT deposits remaining with SKAT	$	1.4
Deposit payments	58.3
Total	$	59.7

If the Company is not successful in concluding the Preliminary Framework for the 2012 to 2022 tax years or if there is a change in facts and circumstances as it relates to the Danish Tax Matter, 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 six months ended June 30, 2023.

(10) 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				Six Months Ended
	June 30,				June 30,
(in millions, except per common share amounts)	2023		2022		2023		2022
Numerator:
Net income attributable to Tempur Sealy International, Inc.	$	92.4	$	90.6	$	177.7	$	221.3

Denominator:
Denominator for basic earnings per common share-weighted average shares	172.1		174.1		172.1		178.3
Effect of dilutive securities	4.7		4.7		4.7		5.4
Denominator for diluted earnings per common share-adjusted weighted average shares	176.8		178.8		176.8		183.7

Basic earnings per common share	$	0.54	$	0.52	$	1.03	$	1.24

Diluted earnings per common share	$	0.52	$	0.51	$	1.01	$	1.20

The Company excluded 0.6 million and 0.4 million shares 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 for the three and six months ended June 30, 2023 and 2022, respectively. Holders of non-vested stock-based compensation awards do not have voting rights but do participate in dividend equivalents distributed upon the award vesting.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(11) 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). 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)	June 30, 2023		December 31, 2022
North America	$	5,166.5	$	5,161.7
International	1,214.6		1,181.5
Corporate	1,187.0		1,077.1
Inter-segment eliminations	(2,997.3)		(3,060.5)
Total assets	$	4,570.8	$	4,359.8

The following table summarizes property, plant and equipment, net, by segment:


(in millions)	June 30, 2023		December 31, 2022
North America	$	727.2	$	672.1
International	92.3		87.3
Corporate	31.4		31.7
Total property, plant and equipment, net	$	850.9	$	791.1

The following table summarizes operating lease right-of-use assets by segment:


(in millions)	June 30, 2023		December 31, 2022
North America	$	408.1	$	349.0
International	156.6		154.1
Corporate	3.3		3.7
Total operating lease right-of-use assets	$	568.0	$	506.8

The following table summarizes segment information for the three months ended June 30, 2023:


(in millions)	North America		International		Corporate		Eliminations		Consolidated
Net sales	$	1,016.8	$	252.9	$	—	$	—	$	1,269.7

Inter-segment sales	$	0.3	$	0.4	$	—	$	(0.7)	$	—
Inter-segment royalty expense (income)	9.3		(9.3)		—		—		—
Gross profit	403.4		138.9		—		—		542.3
Operating income (loss)	174.1		33.9		(49.2)		—		158.8
Income (loss) before income taxes	172.4		32.7		(79.7)		—		125.4

Depreciation and amortization (1)	$	24.3	$	6.4	$	15.3	$	—	$	46.0
Capital expenditures	52.3		6.8		1.5		—		60.6

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

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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 June 30, 2022:


(in millions)	North America		International		Corporate		Eliminations		Consolidated


Net sales	$	964.7	$	246.3	$	—	$	—	$	1,211.0

Inter-segment sales	$	0.4	$	0.5	$	—	$	(0.9)	$	—
Inter-segment royalty expense (income)	2.4		(2.4)		—		—		—
Gross profit	365.8		130.7		—		—		496.5
Operating income (loss)	146.1		35.8		(38.0)		—		143.9
Income (loss) before income taxes	144.8		34.7		(60.0)		—		119.5

Depreciation and amortization (1)	$	23.5	$	5.9	$	14.6	$	—	$	44.0
Capital expenditures	61.9		6.8		1.2		—		69.9

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

The following table summarizes segment information for the six months ended June 30, 2023:


(in millions)	North America		International		Corporate		Eliminations		Consolidated
Net sales	$	1,936.4	$	541.4	$	—	$	—	$	2,477.8

Inter-segment sales	$	0.6