SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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


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 if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. x Yes o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ýYes ýo No o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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. (Check one):

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 ~~November 6, 2017~~May 4, 2020 was ~~54,180,629~~51,538,327 shares.

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; future events; future revenues~~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 ~~performance;~~similar expressions are intended to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to the Company's expectations regarding performance generally for 2020 and subsequent periods, the expected impacts of COVID-19 and the Company's expectations for emerging from the market downturn. There can be no assurance that we will realize our ~~implementation~~expectations or that our beliefs will prove correct.

Numerous factors, many of ~~our key strategic priorities and anticipated resulting growth~~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 ~~our sales, earnings and cash flow~~this Report. These risk factors include the impact of the macroeconomic environment in both the ~~United States~~U.S. and ~~internationally;~~internationally on our business segments and expectations regarding growth of the mattress industry; uncertainties arising from global ~~events; general economic, financial~~events, natural disasters or pandemics; risks associated with the duration, scope and ~~industry conditions, particularly in~~severity of COVID-19 and its effects on our business and operations, including the ~~retail sector, as well as consumer confidence and the availability~~disruption or delay of ~~consumer financing; competition in our industry; consumer acceptance of our products; the ability to continuously improve and expand our product line, maintain efficient, timely and cost-effective~~ production and delivery of materials and products in our supply chain; the impact of travel bans, work-from-home policies, or shelter-in-place orders; a temporary or prolonged shutdown of manufacturing facilities or retail stores and ~~manage growth;~~decreased retail traffic; the effects of strategic investments on our operations, including our efforts to expand our global market share; the ability to ~~expand brand awareness, distribution~~develop and successfully launch new products; the efficiency and effectiveness of our advertising campaigns and other marketing programs; the ability to increase sales productivity within existing retail accounts and to further penetrate the ~~wholesale~~retail channel, including the timing of opening or expanding within large retail accounts and the timing and success of product ~~launches;~~launches, and the related expenses and life cycles of such products; the ability to continuously improve and expand our product line; the effects of consolidation of retailers on revenues and costs; ~~changes~~competition in ~~demand for~~our industry; consumer acceptance of our products; general economic, financial and industry conditions, particularly conditions relating to liquidity, financial performance and related credit issues present in the ~~Company's products~~retail sector; financial distress among our business partners, customers and competitors, and financial solvency and related problems experienced by ~~significant retailer customers;~~other market participants, any of which may be amplified by the effects of ~~strategic investments~~COVID-19; risks associated with our acquisition of 80% ownership of Sherwood Acquisition Holdings, LLC, including the possibility that the expected benefits of the acquisition are not realized when expected or at all; our reliance on ~~our operations, including our efforts to expand our global market share; changing commodity costs;~~information technology and the associated risks involving potential security lapses and/or cyber-based attacks; the outcome of pending tax audits or other tax, regulatory or investigation proceedings and pending litigation; changes in ~~product~~foreign tax rates and ~~channel mix and~~changes in tax laws generally, including the ~~impact~~ability to utilize tax loss carryforwards; market disruptions related to COVID-19 which may frustrate our ability to access financing on ~~the Company's gross margin; initiatives to improve gross margin and operating margin;~~acceptable terms or at all; our capital structure and ~~increased~~ debt level, including our ability to meet financial obligations and continue to comply with the terms and financial ratio covenants of our credit facilities; changes in interest rates; ~~changes in foreign tax rates and changes in tax laws generally, including the ability to utilize tax loss carry forwards;~~ effects of changes in foreign exchange rates on our reported earnings; ~~the outcome of pending tax audits or other tax, regulatory or litigation proceedings~~changing commodity costs; expectations regarding our target leverage and ~~similar issues;~~our share repurchase program; sales fluctuations due to seasonality; the effect of future legislative or regulatory ~~changes; financial flexibility; our expected sources of cash flow; our expected level of capital expenditures for 2017 and~~changes, including changes in ~~capital expenditures; expectations regarding the impact~~international trade duties, tariffs and other aspects of ~~costs from headcount reductions and~~ international ~~store closures; and~~trade policy; our ability to ~~effectively manage cash. Many~~protect our intellectual property; and disruptions to the implementation of ~~these statements appear,~~our strategic priorities and business plan caused by changes in particular, under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in ITEM 2 of Part I of this Report. When used in this report, the words "estimates," "expects," "guidance," "anticipates," "proposed," "projects," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our ~~current expectations and various assumptions. There can be no assurance that we will realize our expectations or that our beliefs will prove correct.~~executive management team.

~~There are a number of risks, uncertainties and other important~~ Other potential risk factors ~~many of which are beyond the Company’s control, that could cause our actual results to differ materially from those expressed as forward-looking statements in this report, including~~include the risk factors discussed under the heading "Risk Factors" ~~under~~in Part I, ITEM 1A ~~of Part I~~ of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 (the "2019 Annual Report") and ~~the risks identified~~ in Part II, ITEM 1A, Risk Factors, of this Report. ~~There~~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" ~~refers~~may refer to Sealy-branded products or to Sealy Corporation and its historical ~~subsidiaries.~~subsidiaries, in all cases as the context requires. In addition, when used in this Report, ~~"2016~~"2019 Credit Agreement" refers to the Company's senior credit facility entered into in ~~the first quarter of 2016; "2012 Credit Agreement"~~2019; "2023 Senior Notes" refers to the ~~Company's prior~~5.625% senior ~~credit facility entered into~~notes due 2023 issued in ~~2012;~~2015; and "2026 Senior Notes" refers to the 5.50% senior notes due 2026 issued in ~~2016; and "2023 Senior Notes" refers to the 5.625% senior notes due 2023 issued in 2015.~~2016.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

($ in millions, except per common share amounts)


	Three Months Ended
	March 31,
	2020		2019
Net sales	$	822.4	$	690.9
Cost of sales	465.3		409.1
Gross profit	357.1		281.8
Selling and marketing expenses	171.0		153.5
General, administrative and other expenses	80.6		70.7

Equity loss (income) in earnings of unconsolidated affiliates	0.2		(2.9)
Operating income	105.3		60.5

Other expense, net:
Interest expense, net	20.3		22.4
Other expense (income), net	0.5		(7.8)
Total other expense, net	20.8		14.6

Income from continuing operations before income taxes	84.5		45.9
Income tax provision	(23.5)		(16.9)
Income from continuing operations	61.0		29.0
Loss from discontinued operations, net of tax	(1.2)		(0.4)
Net income before non-controlling interests	59.8		28.6
Less: Net income attributable to non-controlling interests	0.1		0.2
Net income attributable to Tempur Sealy International, Inc.	$	59.7	$	28.4

Earnings per common share:

Basic
Earnings per share for continuing operations	$	1.14	$	0.53
Loss per share for discontinued operations	(0.02)		(0.01)
Earnings per share	$	1.12	$	0.52

Diluted
Earnings per share for continuing operations	$	1.13	$	0.52
Loss per share for discontinued operations	(0.02)		(0.01)
Earnings per share	$	1.11	$	0.51

Weighted average common shares outstanding:
Basic	53.4		54.7
Diluted	54.0		55.7

Three Months Ended March 31, 2020


	Tempur Sealy International, Inc. Stockholders' Equity
	Common Stock				Treasury Stock										Accumulated Other Comprehensive Loss		Non-controlling Interests in Subsidiaries	Total Stockholders' Equity
	Shares Issued	At Par		Shares Issued	At Cost		Additional Paid in Capital		Retained Earnings
Balance as of December 31, 2019	99.2	$	1.0	45.4	$	(1,832.8)	$	575.7	$	1,703.3	$	(87.7)	$	0.9	$	360.4
Net income									59.7						59.7
Net income attributable to non-controlling interests													0.1		0.1
Acquisition of non-controlling interest in subsidiary													8.4		8.4
Foreign currency adjustments											(23.0)				(23.0)
Adoption of accounting standard effective January 1, 2020, net of tax									(6.5)						(6.5)
Exercise of stock options					0.3		1.0								1.3
Issuances of PRSUs, RSUs, and DSUs				(0.4)	5.3		(5.3)								—
Treasury stock repurchased				2.6	(187.5)										(187.5)
Treasury stock repurchased - PRSU/RSU/DSU releases				0.1	(11.8)										(11.8)
Amortization of unearned stock-based compensation							7.3								7.3

Balance, March 31, 2020	99.2	$	1.0	47.7	$	(2,026.5)	$	578.7	$	1,756.5	$	(110.7)	$	9.4	$	208.4

Three Months Ended March 31, 2019


	Tempur Sealy International, Inc. Stockholders' Equity
	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, 2018	99.2	$	1.0	44.7	$	(1,737.0)	$	532.1	$	1,513.8	$	(95.3)	$	2.9	$	217.5
Net income									28.4						28.4
Net income attributable to non-controlling interest													0.2		0.2

Repurchase of interest in subsidiary													(1.9)		(1.9)
Foreign currency adjustments											4.0				4.0
Exercise of stock options				(0.1)	0.8		1.6								2.4
Issuances of PRSUs, RSUs, and DSUs				(0.2)	3.2		(3.2)								—
Treasury stock repurchased					(0.8)										(0.8)
Treasury stock repurchased - PRSU/RSU/DSU releases				0.1	(2.9)										(2.9)
Amortization of unearned stock-based compensation							6.6								6.6

Balance, March 31, 2019	99.2	$	1.0	44.5	$	(1,736.7)	$	537.1	$	1,542.2	$	(91.3)	$	1.2	$	253.5


	Three Months Ended
	March 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net income before non-controlling interests	$	59.8	$	28.6
Loss from discontinued operations, net of tax	1.2		0.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	23.2		21.5
Amortization of stock-based compensation	7.3		6.6
Amortization of deferred financing costs	0.7		0.6
Bad debt expense	15.7		1.6
Deferred income taxes	3.0		(1.8)
Dividends received from unconsolidated affiliates	—		1.3
Equity loss (income) in earnings of unconsolidated affiliates	0.2		(2.9)

Foreign currency adjustments and other	0.6		(6.5)
Changes in operating assets and liabilities, net of effect of business acquisitions	(96.7)		(44.8)
Net cash provided by operating activities from continuing operations	15.0		4.6

CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:
Purchases of property, plant and equipment	(26.2)		(19.1)
Acquisitions, net of cash acquired	(37.9)		—
Debtor-in-possession financing arrangement	—		(9.5)
Other	0.1		8.3
Net cash used in investing activities from continuing operations	(64.0)		(20.3)

CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:
Proceeds from borrowings under long-term debt obligations	611.1		212.6
Repayments of borrowings under long-term debt obligations	(231.0)		(198.7)
Proceeds from exercise of stock options	1.3		2.4
Treasury stock repurchased	(199.3)		(3.7)

Repayments of finance lease obligations and other	6.0		(1.6)
Net cash provided by financing activities from continuing operations	188.1		11.0

Net cash provided by (used in) continuing operations	139.1		(4.7)

CASH USED IN DISCONTINUED OPERATIONS
Operating cash flows	(1.1)		(0.7)
Investing cash flows	—		—
Financing cash flows	—		—
Net cash used in discontinued operations	(1.1)		(0.7)

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(5.9)		(0.8)
Increase (decrease) in cash and cash equivalents	132.1		(6.2)
CASH AND CASH EQUIVALENTS, beginning of period	64.9		45.8
CASH AND CASH EQUIVALENTS, end of period	197.0		39.6
LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS	—		—
CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS	$	197.0	$	39.6

Supplemental cash flow information:
Cash paid during the period for:
Interest	$	6.4	$	8.1
Income taxes, net of refunds	$	6.3	$	7.6

Table of Contents

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 develops, manufactures, markets and sells bedding products, which include mattresses, foundations and adjustable bases, and other products, which include pillows and other accessories. The Company also derives income from royalties by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The Company sells its products through ~~two~~2 sales channels: Wholesale and Direct.

~~The Company’s Condensed Consolidated Financial Statements include the results of Comfort Revolution, LLC ("Comfort Revolution"), a~~ ~~45.0%~~ owned joint venture. Comfort Revolution constitutes a variable interest entity for which the Company is considered to be the primary beneficiary due to the Company's disproportionate share of the economic risk associated with its equity contribution, debt financing and other factors. The operations of Comfort Revolution are not material to the Company's Condensed Consolidated Financial Statements.

The Company ~~also~~ has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions. The Company’s ownership interest in these joint ventures is 50.0%. 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 carrying value in its equity method investments of ~~$18.8~~$22.1 million and ~~$15.5~~$22.5 million at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively, is recorded in other non-current assets within the accompanying Condensed Consolidated Balance Sheets. The Company’s equity in the net income and losses of these investments is ~~recorded as~~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, ~~2016~~,2019, included in the ~~Company’s~~2019 Annual Report ~~on Form 10-K~~ filed with the Securities and Exchange Commission on February ~~24, 2017.~~21, 2020.

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.

Goodwill. Effective January 1, 2020, the Company adopted Accounting Standards Update ("ASU") No. 2017-04, "Intangibles - Goodwill and Other (Topic 350)." The ASU simplifies the test for goodwill impairment, by eliminating Step 2 of the impairment test. Under ASU 2017-04, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting units' fair value, not to exceed the total amount of goodwill for the reporting unit. Adoption of this guidance did not have a material impact on the Company's financial statements.

Credit Losses. Effective January 1, 2020, the Company adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures. The ASU replaces the incurred loss impairment methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The Company adopted the new credit losses standard using the modified retrospective approach. The cumulative effect of adoption at January 1, 2020 was $6.5 million, net of tax. The Company's primary financial assets are its trade accounts receivable, which are short-term financings under industry standard credit and trade terms.

Table of Contents

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 market,~~and net realizable value, determined by the first-in, first-out method, and consist of the following:


	March 31,		December 31,
(in millions)	2020		2019
Finished goods	$	158.4	$	157.4
Work-in-process	10.8		10.8
Raw materials and supplies	104.2		92.3
	$	273.4	$	260.5

September 30, December 31,
(in millions) 2017 2016
Finished goods $ 127.6
$ 130.1
Work-in-process 11.3
10.7
Raw materials and supplies 49.9
56.0
$ 188.8
$ 196.8

~~(c)~~(d) Accrued Sales Returns. The Company allows product returns through certain sales channels and on certain products. Estimated sales returns are provided at the time of sale based on historical sales channel return rates. Estimated future obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized. The Company considers the impact of recoverable salvage value on sales returns by segment in determining its estimate of future sales returns. Accrued sales returns are included in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

The Company had the following activity for sales returns from December 31, ~~2016~~2019 to ~~September 30, 2017:~~March 31, 2020:


(in millions)
Balance as of December 31, 2019	$	39.3
Amounts accrued	29.0
Returns charged to accrual	(29.9)
Balance as of March 31, 2020	$	38.4

(in millions)
Balance as of December 31, 2016 $ 30.3
Amounts accrued 88.1
Returns charged to accrual (85.5 )
Balance as of September 30, 2017 $ 32.9

As of March 31, 2020 and December 31, 2019, $25.0 million and $26.2 million of accrued sales returns are included as a component of accrued expenses and other current liabilities and $13.4 million and $13.1 million of accrued sales returns are included in other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.

~~(d)~~

(e) 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, ~~2016~~2019 to ~~September 30, 2017:~~March 31, 2020:


(in millions)
Balance as of December 31, 2019	$	41.6
Amounts accrued	6.3
Warranties charged to accrual	(6.6)
Balance as of March 31, 2020	$	41.3

(in millions)
Balance as of December 31, 2016 $ 29.9
Amounts accrued 29.0
Warranties charged to accrual (20.0 )
Balance as of September 30, 2017 $ 38.9

As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~, ~~$19.9~~2019, $19.1 million and ~~$14.3~~$19.4 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities, ~~and~~ ~~$19.0~~respectively. Other non-current liabilities included $22.2 million ~~and~~ ~~$15.6 million~~ of accrued warranty expense ~~is included in other non-current liabilities~~as of March 31, 2020 and December 31, 2019 in the Company’s accompanying Condensed Consolidated Balance ~~Sheets, respectively.~~Sheets.

~~(e)~~ ~~Revenue Recognition~~

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

(f) Allowance for Credit Losses. Sales of products are recognized when persuasive evidence of an arrangement exists, title passes to customers and the risks and rewards of ownership are transferred, the sales price is fixed or determinable and collectability is reasonably assured. The Company extends volume discounts to certain customers, as well as promotional allowances, floor sample discounts, commissions paid to retail associates and slotting fees, and reflects these amounts as a reduction of sales at the time revenue is recognized based on historical experience. The Company also reports sales net of tax assessed by qualifying governmental authorities. The Company extends credit based on the creditworthiness of its customers. No collateral is required on sales made in the normal course of business.

The allowance for ~~doubtful accounts~~credit losses is the Company’s best estimate of the amount of ~~probable~~expected lifetime credit losses in the Company’s accounts receivable. The Company ~~regularly reviews~~estimates losses over the ~~adequacy~~contractual life using assumptions to capture the risk of ~~its allowance for doubtful accounts. The Company determines the allowance~~loss, even if remote, based principally on how long a receivable has been outstanding. Other factors considered include historical write-off experience, ~~and~~ current economic conditions and also ~~considers~~ factors such as customer credit, past transaction history with the customer and changes in customer payment ~~terms when determining whether~~terms.

The Company had the ~~collection of a customer receivable is reasonably assured. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential~~following activity for ~~recovery is considered remote. The~~its allowance for ~~doubtful accounts included in accounts receivable, net~~credit losses from December 31, 2019 to March 31, 2020:


(in millions)
Balance as of December 31, 2019	$	71.9
ASU 2016-13 adoption impact	8.9
Amounts accrued	15.7
Write-offs charged against the allowance	(11.7)
Balance as of March 31, 2020	$	84.8

(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, 2020 and 2019:


	Three Months Ended March 31, 2020										Three Months Ended March 31, 2019
(in millions)	North America		International		Consolidated		North America		International		Consolidated
Channel
Wholesale	$	609.6	$	112.8	$	722.4	$	501.8	$	114.1	$	615.9
Direct	67.6		32.4		100.0		42.2		32.8		75.0
Net sales	$	677.2	$	145.2	$	822.4	$	544.0	$	146.9	$	690.9

	North America		International		Consolidated		North America		International		Consolidated
Product
Bedding	$	640.3	$	116.2	$	756.5	$	514.4	$	115.4	$	629.8
Other	36.9		29.0		65.9		29.6		31.5		61.1
Net sales	$	677.2	$	145.2	$	822.4	$	544.0	$	146.9	$	690.9









	North America		International		Consolidated		North America		International		Consolidated
Geographical region
United States	$	632.5	$	—	$	632.5	$	497.2	$	—	$	497.2
Canada	44.7		—		44.7		46.8		—		46.8
International	—		145.2		145.2		—		146.9		146.9
Net sales	$	677.2	$	145.2	$	822.4	$	544.0	$	146.9	$	690.9

(3) Discontinued Operations

The Company sold its operations in the ~~accompanying Condensed Consolidated Balance Sheets was~~ ~~$26.7 million~~Latin American region in 2018. The operating results from these divested businesses and ~~$22.1 million~~ assubsequent adjustments related to ongoing assessments and activities of ~~September 30, 2017~~certain retained liabilities and ~~December 31, 2016, respectively.~~tax items are reflected within discontinued operations for all periods presented.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

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

~~The Company records derivative financial instruments~~amounts reflected in the Condensed Consolidated ~~Balance Sheets as either~~Statements of Income related to discontinued operations are presented in the following table for each of the periods ended March 31.


	Three Months Ended
	March 31,
(in millions)	2020		2019
Net sales	$	—	$	0.2
Cost of sales	—		0.2
Gross profit	—		—
Selling and marketing expenses	—		0.1
General, administrative and other expenses	1.2		0.6




Operating loss	(1.2)		(0.7)

Interest income, net and other	—		(0.3)

Loss from discontinued operations before income taxes	(1.2)		(0.4)

Income tax provision	—		—
Loss from discontinued operations, net of tax	$	(1.2)	$	(0.4)

(4) Acquisitions

Acquisition of Sherwood Bedding

On January 31, 2020, the Company acquired an ~~asset or liability measured at its fair value. Changes~~80% ownership interest in a derivative's fair value (i.e. unrealized gains or losses) are recorded each period in earnings or other comprehensive income, depending on whether the derivative is designated and is effective as a hedged transaction, and on the type of hedging relationship.

For derivative financial instruments that are designated as a hedge, unrealized gains and losses related to the effective portion are either recognized in income immediately to offset the realized gain or loss on the hedged item, or are deferred and reported as a component of accumulated other comprehensive loss (“AOCL”) in stockholders' equity and subsequently recognized in net income when the hedged item affects net income. The change in fair valuenewly formed limited liability company containing substantially all of the ~~ineffective portion of a derivative financial instrument is recognized in net income immediately. The effectiveness~~assets of the Sherwood Bedding business for a cash flow hedge contracts, including time value, is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as other timing and probability criteria. For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded in net income immediately.

purchase price of approximately $39.1 million, which included $1.2 million of cash acquired.

The Company ~~manages~~accounted for this transaction as a ~~portion~~business combination. The preliminary allocation of the risk associated with fluctuations in foreign currencies related to intercompany and third party inventory purchases denominated in foreign currencies through foreign exchange forward contracts designated as cash flow hedges. During 2017,purchase price is based on estimated fair values of the ~~Company had foreign exchange forward contracts designated as cash flow hedges to buy U.S. dollars and to sell Canadian dollars. These foreign exchange forward contracts matured in September 2017.~~

The Company is also exposed to foreign currency risk related to intercompany debt and associated interest payments and certain intercompany accounts receivable and accounts payable. To manage the risk associated with fluctuations in foreign currencies related to these assets acquired and liabilities assumed as of January 31, 2020, which included the ~~Company enters into foreign exchange forward contracts. The Company considers these contracts~~following:


(in millions)
Working capital (accounts receivable and inventory, net of accounts payable and accrued liabilities)	$	5.8
Property and equipment	10.1
Goodwill	26.7
Customer relationships intangible assets	3.7
Operating lease right-of-use assets	19.9
Long-term operating lease liabilities	(19.9)
Non-controlling interest	(8.4)
Purchase price, net of cash acquired	$	37.9

Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the private label product growth opportunities and expected synergistic manufacturing benefits to be ~~economic hedges. Accordingly, changes in~~realized from the ~~fair value of these instruments affect earnings during~~acquisition. The goodwill is deductible for income tax purposes and will be included within the ~~current period. These foreign exchange forward contracts protect against the reduction in value of forecasted foreign currency cash flows resulting from payments in foreign currencies.~~

~~The fair value of the Company's derivative financial instruments that are recorded on a recurring basis at fair value is not material.~~

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

~~(h)~~ ~~Customer Contract Termination.~~ During the week of January 23, 2017, the Company was unexpectedly notified by the senior management of Mattress Firm, Inc. ("Mattress Firm") and representatives of Steinhoff International Holdings Ltd. ("Steinhoff"), its parent company, of Mattress Firm's intent to terminate its business relationship with the Company if the Company did not agree to considerable changes to its agreements with Mattress Firm, including significant economic concessions. The Company engaged in discussions to facilitate a mutually agreeable supply arrangement with Mattress Firm. However, the parties were unable to reach an agreement, and on January 27, 2017, Tempur-Pedic North America, LLC ("Tempur-Pedic") and Sealy Mattress Company ("Sealy Mattress") issued formal termination notices for all of their products to Mattress Firm. On January 30, 2017, Tempur-Pedic and Sealy Mattress entered into transition agreements with Mattress Firm in which they agreed, among other things, to continue supplying Mattress Firm until April 3, 2017, at which time the parties’ business relationship ended.

goodwill impairment assessments.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

~~In the first quarter~~Acquisition of ~~2017,~~Innovative Mattress Solutions, LLC ("iMS")

On January 11, 2019, iMS filed for bankruptcy and the Company ~~took steps to manage its cost structure as a result~~provided debtor-in-possession financing in connection with the iMS Chapter 11 proceedings. On April 1, 2019, the Company acquired substantially all of the ~~termination~~net assets of ~~the contracts with Mattress Firm. For the three months ended March 31, 2017, the Company recognized $25.9~~iMS in a transaction valued at approximately $24.0 million, including assumed liabilities of ~~net charges associated with the termination of the relationship with Mattress Firm. This amount includes $11.5~~approximately $11.0 million of charges within cost of sales and $14.4 million of charges within customer termination charges, net in the Condensed Consolidated Statements of Income. The following amounts are recognized in cost of sales: $5.4 million of charges related to the write-off of customer-unique inventory and $6.1 million of increased warranty costs associated with claims historically retained by Mattress Firm. The following amounts are recognized in customer termination charges, net: $22.8 million of charges related to the write-off of Mattress Firm incentives and marketing assets, employee-related expenses and professional fees; and $0.9 million of accelerated stock-based compensation expense. These charges are offset by $9.3 million of benefit related to the change in estimate associated with performance-based stock compensation that is no longer probable of payout as a result of the termination of the contracts with Mattress Firm.

In the three months ended March 31, 2017, the Company also recognized $9.3 million related to the payments received pursuant to the transition agreements with Mattress Firm. This amount is included within other income, net in the Condensed Consolidated Statements of Income.

~~The termination of the Mattress Firm relationship was identified by the Company as an indicator of potential impairment. The Company conducted an interim impairment analysis~~ as of March 31, ~~2017~~2019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of ~~its~~this regional bedding retailer furthers the Company’s North ~~America reporting unit~~American retail strategy, which is focused on meeting customer demand through geographic representation and ~~indefinite-lived intangible assets, which indicated that the fair values were substantially in excess of their carrying values.~~ sales expertise.

The Company ~~also conducted~~accounted for this transaction as a ~~recoverability analysis~~business combination. Total cash consideration was $13.2 million, which included $5.1 million of ~~its long-lived assets and did not identify an impairment.~~

~~Table~~cash acquired. The final allocation of ~~Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~(2) Recently Issued Accounting Pronouncements~~

~~Revenue from Contracts with Customers~~

~~In May 2014,~~ the ~~Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue From Contracts With Customers~~, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASUpurchase price is based on the ~~core principle that an entity should recognize revenue to depict~~fair values of the ~~transfer~~assets acquired and liabilities assumed as of ~~promised goods or services to customers in an amount that reflects~~April 1, 2019, which included the ~~consideration to which~~following:


(in millions)
Working capital (accounts receivable and inventory, net of accounts payable and accrued liabilities)	$	(1.4)
Property and equipment	5.0
Goodwill	2.4
Other intangible assets	2.1
Operating lease right-of-use assets	28.5
Long-term operating lease liabilities	(28.5)
Purchase price, net of cash acquired	$	8.1

Goodwill is calculated as the ~~entity expects~~excess of the purchase price over the net assets acquired and primarily represents the growth opportunities and expected retail synergistic benefits to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognizedrealized from the ~~costs to obtain or fulfill a contract.~~acquisition. The ~~new standard~~goodwill is ~~effective~~deductible for ~~the Company on January 1, 2018~~income tax purposes and ~~the Company~~ will be ~~using~~included within the ~~modified retrospective method of adoption.~~

The Company has conducted a risk assessment and has developed a transition plan that will enable the Company to meet the implementation requirement. Revenue streams and performance obligations include product sales, sales-based royalties and warranties. The Company's contracts also include forms of variable consideration, including rebates (volume, cash and cooperative advertising), trade or other support, free products, slotting fees, and sales returns. Based on the evaluation of the Company's current contracts and the related revenue streams and performance obligations, most will be recorded consistently under both the current and new standard. The majority of the Company's revenue transactions are not accountedNorth American reporting unit for ~~under industry-specific guidance that will be superseded by ASC 606 and generally consist of a single performance obligation to transfer promised goods.~~

Upon adoption of ASC 606, the Company expects the largest impacts to result from the new qualitative and quantitative disclosures that will be required upon adoption of the new standard. Other anticipated presentation and disclosure changes include the reclassification of royalty income to revenue and changes in the balance sheet classification for sales returns. Under the new standard, the Company will continue to recognize the amount of consideration received or receivable that is expected to be returned as a refund liability, representing the Company's obligation to return the customer’s consideration. The Company will also recognize a return asset (and adjust cost of sales) for the right to recover the goods returned by the customer, which will be subject togoodwill impairment assessments. The Company evaluated the impact of the adoption on the classification of cooperative advertising programs and other promotional programs with the Company's customers. The impact of adoption to these promotional programs is not expected to result in material changes in the Company's recognition or presentation of costs within the Company's consolidated statements of comprehensive income.

~~Leases~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases~~, that requires lessees to recognize most leases on the balance sheet and provides for expanded disclosures on key information about leasing arrangements. This ASU is effective for interim and annual periods beginning after December 15, 2018, however early adoption is permitted. In transition, entities are required to use a modified retrospective approach for the adoption of this ASU. The Company is currently evaluating this ASU to determine the impact it will have on the Company's Condensed Consolidated Financial Statements.

~~Employee Share-Based Payments~~

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~, that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The Company adopted this ASU as of January 1, 2017. As a result of the adoption of this ASU:

The Company recognized all excess tax benefits and tax deficiencies as income tax expense or benefit in the Condensed Consolidated Statement of Income. The Company recognized excess tax benefits of $0.3 million and excess tax deficiencies of $0.8 million in the three and nine months ended September 30, 2017, respectively.

~~The Company is prospectively presenting these excess tax benefits and tax deficiencies as an operating activity on the Condensed Consolidated Statement of Cash Flows.~~

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

The Company adopted a change in accounting policy to recognize forfeitures of awards as they occur instead of estimating potential forfeitures. Historically, the Company estimated the number of awards expected to be forfeited and adjusted the estimate when it was no longer probable that employees would fulfill their service conditions. The effect of this change in accounting policy is not material.

~~Pensions~~

~~In March 2017, the FASB issued ASU No. 2017-07,~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, which is accounting guidance that will change how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Condensed Consolidated Statements of Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Condensed Consolidated Statements of Income as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost will be presented separately outside of the operating income caption. This guidance must be applied retrospectively and will become effective for the Company on January 1, 2018. Adoption of this guidance will result in a reclassification of pension and other postretirement plan non-service income and remeasurement adjustments, net from within operating income to non-operating income.

~~(3)~~(5) Goodwill

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


(in millions)	North America		International		Consolidated
Balance as of December 31, 2019	$	576.6	$	155.7	$	732.3
Goodwill resulting from acquisitions	26.7		—		26.7
Foreign currency translation and other	(5.0)		(0.4)		(5.4)
Balance as of March 31, 2020	$	598.3	$	155.3	$	753.6

(in millions) North America International Consolidated
Balance as of December 31, 2016 $ 572.0
$ 150.5
$ 722.5
Foreign currency translation 4.9
5.5
10.4
Balance as of September 30, 2017 $ 576.9
$ 156.0
$ 732.9

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

~~(4)~~(6) Debt

Debt for the Company consists of the following:


	March 31, 2020					December 31, 2019
(in millions, except percentages)	Amount		Rate	Amount		Rate	Maturity Date
2019 Credit Agreement:
Term A Facility	$	419.7	(1)	$	425.0	(2)	October 16, 2024
Revolver	300.4		(1)	—		(2)	October 16, 2024
2026 Senior Notes	600.0		5.500%	600.0		5.500%	June 15, 2026
2023 Senior Notes	450.0		5.625%	450.0		5.625%	October 15, 2023
Securitized debt	85.0		(3)	—		(3)	April 6, 2021
Finance lease obligations ⁽⁴⁾	70.1			64.1			Various
Other	16.7			7.9			Various
Total debt	1,941.9			1,547.0
Less: Deferred financing costs	8.9			7.0
Total debt, net	1,933.0			1,540.0
Less: Current portion	47.5			37.4
Total long-term debt, net	$	1,885.5		$	1,502.6

September 30, 2017 December 31, 2016
(in millions, except percentages) Amount Rate Amount Rate Maturity Date
2016 Credit Agreement
Term A Facility $ 562.5
(1) $ 585.0
(2) April 6, 2021
Revolver —
(1) 156.9
(2) April 6, 2021
2026 Senior Notes 600.0
5.500% 600.0
5.500% June 15, 2026
2023 Senior Notes 450.0
5.625% 450.0
5.625% October 15, 2023
Securitized debt 46.5
(3) —
N/A April 12, 2019
Capital lease obligations ⁽⁴⁾
73.2
73.3
Various
Other 30.7
35.8
Various
Total debt 1,762.9
1,901.0

Less: deferred financing costs (9.9 ) (12.9 )
Total debt, net 1,753.0
1,888.1

Less: current portion (66.3 ) (70.3 )
Total long-term debt, net $ 1,686.7
$ 1,817.8



(1)			Interest at LIBOR plus applicable margin of ~~1.75%~~1.25% as of ~~September 30, 2017.~~March 31, 2020.
(2)			Interest at LIBOR plus applicable margin of ~~1.50%~~1.625% as of December 31, ~~2016.~~2019.
(3)			Interest at one month LIBOR index plus 80 basis points.
(4)			~~Capital~~Finance lease obligations are a non-cash financing activity. Refer to Note 7, "Leases"

As of March 31, 2020, 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. As of March 31, 2020, the Company had $300.4 million in outstanding borrowings under its revolving credit facility. Availability as of March 31, 2020 was further reduced by $22.7 million for outstanding letters of credit, resulting in remaining availability of $101.9 million.

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

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

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

~~2016 Credit Agreement~~

~~On April 6, 2016, the Company entered into a senior secured credit agreement ("2016 Credit Agreement") with a syndicate of banks.~~ The ~~2016 Credit Agreement replaced the Company’s 2012 Credit Agreement.~~

~~The 2016~~2019 Credit Agreement requires compliance with certain financial covenants providing for maintenance of a minimum consolidated interest coverage ratio, maintenance of a maximum consolidated total net leverage ratio and maintenance of a maximum consolidated secured net leverage ratio. The consolidated total net leverage ratio is calculated using consolidated ~~funded debt~~indebtedness less ~~qualified cash.~~netted cash (as defined below). Consolidated ~~funded debt~~indebtedness includes debt recorded inon the Condensed Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding in excess of $40.0 million and other short-term debt. The Company is allowed to subtract from consolidated ~~funded debt~~indebtedness an amount equal to 100.0% of the domestic ~~qualified~~and foreign unrestricted cash ~~and 60.0% of foreign qualified cash,~~("netted cash"), the aggregate of which cannot exceed ~~$150.0~~$200.0 million at the end of the reporting period. As of ~~September 30, 2017, domestic qualified~~March 31, 2020, netted cash was ~~$17.2 million~~$195.9 million.

The 2019 Credit Agreement contains certain customary negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and ~~foreign qualified cash was $14.7 million.~~acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, transactions with affiliates, use of proceeds, prepayments of certain indebtedness, entry into burdensome agreements and changes to governing documents. The 2019 Credit Agreement also contains certain customary affirmative covenants and events of default, including upon a change of control.

The Company is required to pay a commitment fee on the unused portion of the revolving credit facility, which initially will be 0.25% per annum and following the delivery of financial statements for the fiscal quarter ending December 31, 2019, such fees as determined by a pricing grid based on the consolidated total net leverage ratio of the Company. As of March 31, 2020, the commitment fee was 0.175%. This unused commitment fee is payable quarterly in ~~compliance~~arrears and on the date of termination or expiration of the commitments under the revolving credit facility. The Company and the other borrowers also pay customary letter of credit issuance and other fees under the 2019 Credit Agreement.

The maturity date of the 2019 Credit Agreement is October 16, 2024. Amounts under the revolving credit facility may be borrowed, repaid and re-borrowed from time to time until the maturity date. The term loan facility is subject to quarterly amortization as set forth in the 2019 Credit Agreement. In addition, the term loan facility is subject to mandatory prepayment in connection with ~~all applicable covenants as~~certain debt issuances, asset sales and casualty events, subject to certain reinvestment rights. Voluntary prepayments and commitment reductions under the 2019 Credit Agreement are permitted at any time without payment of ~~September 30, 2017.~~any prepayment premiums.

Securitized Debt

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

The obligations of the Company under the Accounts Receivable Securitization are secured by the accounts receivable and certain related rights and the facility agreements contain customary events of default. The accounts receivable will continue to be owned byOn April 5, 2019, the Company and its subsidiaries ~~and will continue~~entered into a new amendment to ~~be reflected as assets~~the Accounts Receivable Securitization. The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2021. As of March 31, 2020, the Company had completely drawn on the ~~Company’s Condensed Consolidated Balance Sheets and represent collateral up to~~outstanding availability under the ~~amount of the borrowings under this facility. Borrowings under this facility will be classified as long-term debt within the Condensed Consolidated Balance Sheets.~~Accounts Receivable Securitization.

Fair Value of Financial Instruments

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 ~~using Level 1 inputs~~ because of the short-term maturity of those instruments. Borrowings under the ~~2016~~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~~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, 2020		December 31, 2019
2023 Senior Notes	$	419.0	$	464.2
2026 Senior Notes	539.1		634.9

Fair Value
(in millions) September 30, 2017 December 31, 2016
2023 Senior Notes $ 473.9
$ 468.5
2026 Senior Notes 615.9
606.8

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

(7) Leases

~~(5)~~

The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Condensed Consolidated Balance Sheet as of March 31, 2020:

(in millions)

March 31, 2020

Assets

Operating lease assets

Operating lease right-of-use assets

283.2

Finance lease assets

Property, plant and equipment, net

60.3

Total leased assets

343.5

Liabilities

Short-term:

Operating lease obligations

Accrued expenses and other current liabilities

55.8

Finance lease obligations

Current portion of long-term debt

9.5

Long-term:

Operating lease obligations

Long-term operating lease obligations

241.7

Finance lease obligations

Long-term debt, net

60.6

Total lease obligations

367.6

The following table summarizes the classification of lease expense in the Company's Condensed Consolidated Statement of Income for the three months ended March 31, 2020:


	Three Months Ended
(in millions)	March 31, 2020
Operating lease expense:
Operating lease expense	$	18.0
Short-term lease expense	3.2
Variable lease expense	5.3
Finance lease expense:
Amortization of right-of-use assets	2.2
Interest on lease obligations	1.2
Total lease expense	$	29.9

The following table sets forth the scheduled maturities of lease obligations as of March 31, 2020:


(in millions)	Operating Leases		Finance Leases		Total
Year Ended December 31,
2020 (excluding the three months ended March 31, 2020)	$	52.3	$	10.3	$	62.6
2021	63.3		13.6		76.9
2022	55.2		11.5		66.7
2023	43.7		9.1		52.8
2024	35.8		7.4		43.2
Thereafter	101.7		38.6		140.3
Total lease payments	352.0		90.5		442.5
Less: Interest	54.5		20.4		74.9
Present value of lease obligations	$	297.5	$	70.1	$	367.6

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

The following table provides lease term and discount rate information related to operating and finance leases as of March 31, 2020:


	March 31, 2020
Weighted average remaining lease term (years):
Operating leases	6.68
Finance leases	8.58

Weighted average discount rate:
Operating leases	5.20	%
Finance leases	6.05	%

The following table provides supplemental information related to the Company's Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2020:


	Three Months Ended
(in millions)	March 31, 2020
Cash paid for amounts included in the measurement of lease obligations:
Operating cash flows paid for operating leases	$	17.3
Operating cash flows paid for finance leases	$	1.2
Financing cash flows paid for finance leases	$	2.3

Right-of-use assets obtained in exchange for new operating lease obligations	$	35.6
Right-of-use assets obtained in exchange for new finance lease obligations	$	8.2

(8)Stockholders' Equity

(a) Common and Preferred Stock. Tempur Sealy International has 300.0 million authorized shares of common stock with $0.01 per share par value and ~~0.01~~10.0 million authorized shares of preferred stock with $0.01 per share par value. The holders of ~~the~~ common stock are entitled to ~~one~~1 vote for each share held of record on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of ~~the~~ common stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors ~~("Board")~~ out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up, ~~the~~ holders of ~~the~~ common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.

The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by the stockholders, to issue from time to time shares of preferred stock in one or more series. Each such series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights.

(b) Treasury Stock. As of March 31, 2020, the Company had approximately $131.3 million remaining under the existing share repurchase program initially authorized by the Board of Directors in 2016. In February ~~2017,~~2020, the Board of Directors authorized an increase, of ~~$200.0~~over $190.0 million, to its existing share repurchase authorization ~~for repurchases~~ of Tempur Sealy International's common ~~stock. For~~stock to $300.0 million. The Company repurchased 2.6 million and 15,731 shares, under the ~~nine~~program, for approximately $187.5 million and $0.8 million during the three months ended ~~September 30, 2017, the~~March 31, 2020 and 2019, respectively. The Company ~~repurchased 0.6 million shares for approximately $40.1 million. As of September 30, 2017, the Company had approximately $226.9 million remaining under the existing~~ceased all share repurchase ~~authorization.~~activity in March 2020.

In addition, the Company acquired 0.1 million shares upon the vesting of certain ~~performance~~ restricted stock units ("~~PRSUs"~~RSUs"), which were withheld to satisfy tax withholding obligations during each of the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019. The shares withheld were valued at the closing price of the ~~common~~ stock on the New York Stock Exchange on the vesting date or first business day ~~thereafter,~~prior to vesting, resulting in approximately ~~$4.8~~$11.8 million and ~~$2.0~~$2.9 million in treasury stock acquired during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

(c) Shareholder Rights ~~Agreement~~. Agreement. On ~~February 8, 2017,~~March 27, 2020, the Board of Directors authorized and declared a dividend distribution of ~~one~~1 right (a ~~“Right”~~"Right") for each outstanding share of common stock ~~par value $0.01 per share (the “Common Shares”),~~ of the Company to stockholders of record at the close of business on ~~February 20, 2017~~April 7, 2020 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $0.01 par value ~~$0.01~~ per share (the “Preferred Shares”), of the Company at an exercise price of ~~$90~~$273.00 per one one-thousandth of a Preferred Share, subject to adjustment (the “Exercise Price”). Generally, the Rights become exercisable in the event any person or group ~~(including~~of affiliated or associated persons acquires beneficial ownership of 10% (20% in the case of a ~~group of persons that are acting in concert with each other) acquires 20%~~passive institutional investor) or more of the ~~Common Shares~~Company's common stock without the approval of the Board of Directors, and until such time are inseparable from and trade with the Company's common stock. The Rights have a de minimis fair value. The Rights were issued pursuant to the Rights Agreement dated as of ~~February 8, 2017~~March 27, 2020 (the ~~"Original Rights~~"Rights Agreement"), between the Company and American Stock Transfer & Trust Company, LLC, ~~("AST"), the Company's~~as rights agent. ~~These~~The Rights expire ~~February 7, 2018~~at the close of business on March 26, 2021 or upon an earlier redemption or exchange as provided in the Rights Agreement.

On March 14, 2017, the Company entered into an Amended and Restated Rights Agreement (the "Amended Rights Agreement") with AST, as rights agent, to amend certain provisions of the Original Rights Agreement. The primary purpose of the amendment and restatement of the Original Rights Agreement is to provide the holders of the Common Shares and the attached Rights issued under the Original Rights Agreement with the ability to exempt an offer to acquire, or engage in another business combination transaction involving, the Company that is deemed a "Qualifying Offer" (as defined in the Amended and Restated Rights Agreement) from the terms of the Amended and Restated Rights Agreement. The Rights have a de minimis fair value as of September 30, 2017.

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~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

(d) AOCL. AOCL consisted of the following:


	Three Months Ended						Nine Months Ended							Three Months Ended
	September 30,						September 30,							March 31,
(in millions)	2017			2016			2017			2016			(in millions)	2020		2019
Foreign Currency Translation													Foreign Currency Translation
Balance at beginning of period	$	(101.8	)	$	(98.6	)	$	(119.9	)	$	(115.4	)	Balance at beginning of period	$	(82.2)	$	(91.7)
Other comprehensive income (loss):
Other comprehensive loss:													Other comprehensive loss:
Foreign currency translation adjustments ⁽¹⁾	9.6			(5.0		)	27.7			11.8			Foreign currency translation adjustments ⁽¹⁾	(23.0)		4.0

Balance at end of period	$	(92.2	)	$	(103.6	)	$	(92.2	)	$	(103.6	)	Balance at end of period	$	(105.2)	$	(87.7)


Pensions													Pensions
Balance at beginning of period	$	(2.2	)	$	(1.4	)	$	(2.2	)	$	(1.4	)	Balance at beginning of period	$	(5.5)	$	(3.6)
Other comprehensive loss:													Other comprehensive loss:
Net change from period revaluations, net of tax	—			—			—			—
Net change from period revaluations													Net change from period revaluations	0.1		—
Tax expense ⁽²⁾													Tax expense ⁽²⁾	(0.1)		—
Total other comprehensive income before reclassifications, net of tax													Total other comprehensive income before reclassifications, net of tax	$	—	$	—
Net amount reclassified to earnings ⁽¹⁾													Net amount reclassified to earnings ⁽¹⁾	—		—
Tax benefit ⁽²⁾													Tax benefit ⁽²⁾	—		—
Total amount reclassified from accumulated other comprehensive loss, net of tax													Total amount reclassified from accumulated other comprehensive loss, net of tax	$	—	$	—
Total other comprehensive loss													Total other comprehensive loss	—		—
Balance at end of period	$	(2.2	)	$	(1.4	)	$	(2.2	)	$	(1.4	)	Balance at end of period	$	(5.5)	$	(3.6)

Foreign Exchange Forward Contracts
Balance at beginning of period	$	—		$	0.7		$	0.6		$	6.6
Other comprehensive (loss) income:
Net change from period revaluations	(0.2		)	0.8			(0.6		)	(4.5		)
Tax (provision) benefit ⁽²⁾	—			(0.2		)	0.1			1.2
Total other comprehensive (loss) income before reclassifications, net of tax	$	(0.2	)	$	0.6		$	(0.5	)	$	(3.3	)
Net amount reclassified to earnings ⁽³⁾	0.3			(1.1		)	(0.1		)	(3.8		)
Tax (provision) benefit ⁽²⁾	(0.1		)	0.3			—			1.0
Total amount reclassified from AOCL, net of tax	$	0.2		$	(0.8	)	$	(0.1	)	$	(2.8	)
Total other comprehensive loss	—			(0.2		)	(0.6		)	(6.1		)
Balance at end of period	$	—		$	0.5		$	—		$	0.5



(1)		In ~~2017~~2020 and ~~2016,~~2019, there were no0 tax impacts related to foreign currency translation adjustments and no0 amounts were reclassified to earnings.
(2)		These amounts were included in the income tax provision in the accompanying Condensed Consolidated Statements of Income.
~~(3)~~	~~This amount was included in cost of sales in the accompanying Condensed Consolidated Statements of Income.~~

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following:


(in millions)	March 31, 2020		December 31, 2019
Taxes	$	133.6	$	136.0
Other	89.6		90.8
Operating lease obligations	55.8		50.8
Wages and benefits	43.6		79.5
Advertising	34.4		56.9
Sales returns	25.0		26.2
Warranty	19.1		19.4
Rebates	11.9		13.6
	$	413.0	$	473.2

(in millions) September 30, 2017 December 31, 2016
Wages and benefits $ 55.5
$ 65.5
Advertising 44.6
48.6
Sales returns 32.9
30.3
Warranty 19.9
14.3
Rebates 10.8
8.4
Other 109.5
83.0
$ 273.2
$ 250.1

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~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~(7)~~(10)Stock-Based Compensation

The Company’s stock-based compensation expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 included ~~PRSUs,~~performance restricted stock units ("PRSUs"), non-qualified stock options, restricted stock units ("RSUs") and deferred stock units ("DSUs"). A summary of the Company’s stock-based compensation expense is presented in the following ~~table.~~table:


	Three Months Ended March 31,
(in millions)	2020		2019
PRSU expense	$	0.3	$	0.3
Option expense	1.2		1.2
RSU/DSU expense	5.8		5.1
Total stock-based compensation expense	$	7.3	$	6.6

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2017 2016 2017 2016
PRSU expense (benefit) $ 1.0
$ 1.8
$ (7.1 ) $ 6.0
Option expense 1.8
1.2
5.6
4.0
RSU/DSU expense 3.1
1.7
10.0
5.3
Total stock-based compensation expense $ 5.9
$ 4.7
$ 8.5
$ 15.3

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 nine months ended September 30,~~ 2017, the Company ~~recorded a $9.3 million benefit in the Condensed Consolidated Statements~~granted executive officers and certain members of ~~Income related to a change in estimate associated with performance-based stock compensation that is no longer probable of payout as a result of the termination of the Mattress Firm relationship.~~

During the three months ended September 30, 2017, the Company granted executive officers and certain members of management 1.5 million PRSUs if the Company achieves a certain level of Adjusted EBITDA during four consecutive fiscal quarters as described below (the "2019 Aspirational Plan PRSUs").The 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA in any four consecutive fiscal quarter period ending between (and including) March 31, 2018 and December 31, 2019 (the “First Designated Period”). IfAt the ~~highest Adjusted EBITDA in~~end of the First Designated Period, ~~is $600.0 million, 66%~~ ~~will vest; if~~ the ~~highest~~ Adjusted EBITDA ~~equals or exceeds $650.0 million, then 100% will vest; if the highest Adjusted EBITDA is between $600.0 million~~targets were not met and ~~$650.0 million then a pro rata portion will vest; and if the highest Adjusted EBITDA is less than $600.0 million then~~ one-half of the total 2019 Aspirational Plan PRSUs were forfeited.

The remaining one-half of the total 2019 Aspirational Plan PRSUs will ~~no longer be available for vesting based on performance and the remaining one-half will remain available for vesting~~vest based on the highest Adjusted EBITDA in any four consecutive fiscal quarter period ending between (and including) March 31, 2020 and December 31, 2020 (the ~~“Second~~"Second Designated ~~Period”~~Period"). If the highest Adjusted EBITDA in the Second Designated Period is $600.0 million then 66% of the remaining 2019 Aspirational Plan PRSUs will vest; if the Adjusted EBITDA is $650.0 million or more 100% will vest; if Adjusted EBITDA is between $600.0 million and $650.0 million then a pro rata portion will vest; and if Adjusted EBITDA is below $600.0 million then all of the remaining 2019 Aspirational Plan PRSUs will be forfeited. ~~Adjusted EBITDA units is defined as the Company’s "Consolidated EBITDA" as such term is defined in the Company’s 2016 Credit Agreement.~~

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

The Company did not record any stock-based compensation expense related to the 2019 Aspirational Plan PRSUs during the three months ended ~~September 30, 2017,~~March 31, 2020, as it iswas not ~~considered~~ probable that the Company ~~will~~would achieve the specified performance target for ~~either~~ the ~~First Designated Period or~~ Second Designated Period. The Company will continue to evaluate the probability of achieving the performance condition in future periods and record the appropriate expense if necessary. Based on the price of the Company’s common stock on the grant date, the total unrecognized compensation expense related to this award if the performance target is met for the ~~First~~Second Designated Period ~~is $90.0~~would range from $33.1 million to $49.7 million, which would be ~~expensed~~a non-cash expense over the remaining service period if achievement of the performance condition becomes probable.

~~(8)~~(11)Commitments and Contingencies

~~(a)~~ Alvin Todd, and Henry and Mary Thompson, individually and on behalf of all others similarly situated, Plaintiffs v. Tempur Sealy International, Inc., formerly known as Tempur-Pedic International, Inc. and Tempur-Pedic North America, LLC, Defendants; filed October 25, 2013.

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

During July 2017, three putative shareholder derivative suits were filed against the Company, each member of its Board of Directors and two of its officers. Each complaint alleges that the Board of Directors and officers caused the Company to make materially false and misleading statements regarding its business and financial prospects, including those with one of its retailers, Mattress Firm, which was a violation of the fiduciary duties they owed to the Company. The Company does not believe any of the suits have merit and intends to vigorously defend against the claims in each case. The Plaintiffs in each of the cases have agreed to stay their respective actions until after a decision is rendered on the Motion to Dismiss in the Buehring action noted above. These cases are in the early stages of litigation. As a result, the outcome of each case is unclear and the Company is unable to reasonably estimate the possible loss or range of loss, if any.

~~(9)~~(12)Income Taxes

The Company’s effective tax rate for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 was ~~33.0%~~27.8% and ~~30.6%~~36.8%, respectively. The ~~Company’s~~Company's effective tax rate for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016 was 33.6% and 30.7%, respectively. The Company’s income tax rate for the three and nine months ended September 30, 2017 and 2016~~2019 differed from the U.S. federal statutory rate of ~~35.0%~~21.0% principally due to subpart F income (i.e., GILTI earned by the Company’s foreign subsidiaries), certain foreign income tax rate differentials, state and local ~~income~~ taxes, ~~the production activities deduction, certain other permanent differences,~~ changes in the Company’s uncertain tax positions, ~~and for the three and nine months ended September 30, 2017,~~ the excess tax deficiency (or benefit) related to stock-based ~~compensation.~~compensation and certain other permanent items.

On March 27, 2020, the U.S. Government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes modifications to the limitation on business interest expense and net operating loss provisions. The CARES Act is not expected to have a material impact on the Company’s consolidated financial statements.

The Company has ~~received income tax assessments from~~been involved in a dispute with the Danish Tax Authority ("SKAT") ~~with respect to the tax years 2001 through 2008 relating to~~regarding the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish ~~Assessments"~~Tax Matter"). for tax years 2001 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process. ~~In its assessment, SKAT asserts that the amount of royalty rate paid by the U.S. subsidiary to~~

At March 31, 2020 and December 31, 2019, the Danish ~~subsidiary~~income tax liability recorded in the Company’s balance sheet for the periods 2001 through March 31, 2020 and December 31, 2019, respectively, is ~~not reflective~~DKK 1,115.8 million (approximately $164.8 million using the exchange rate at March 31, 2020) and DKK 1,110.0 million (approximately $166.7 million using the exchange rate at December 31, 2019). The liability at March 31, 2020 is included within the Company’s Condensed Consolidated Balance Sheet (translated at the exchange rate on March 31, 2020) as per below:


	DKK		USD
Accrued expenses and other current liabilities	$	847.3	$	125.1
Other non-current liabilities	268.5		39.7
Total	$	1,115.8	$	164.8

During the three months ended March 31, 2020 the Company made a tax deposit with SKAT of ~~an arms-length transaction. Accordingly, the~~DKK 134.0 million applicable to a finalized tax assessment ~~received from~~by SKAT for the years 2012 and 2013.The Company is ~~based, in part,~~contesting such assessment. At March 31, 2020 and December 31, 2019, respectively the Company held on ~~a 20% royalty~~deposit with SKAT DKK 1,104.1 million (approximately $163.0 million using the applicable exchange rate ~~which~~at March 31, 2020) and DKK 970.1 million (approximately $145.6 million using the applicable exchange rate at December 31, 2019).The deposit is ~~substantially higher than that historically used or deemed appropriate by~~for the ~~Company.~~satisfaction of the anticipated liability for both tax and interest once these matters are concluded.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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


	DKK		USD
Accrued expenses and other current liabilities	$	847.3	$	125.1
Other non-current liabilities	256.8		37.9
Total	$	1,104.1	$	163.0

There were no other significant changes in ~~excess of the amounts described above as assessed for the years 2001 - 2008 (collectively the years 2001 through 2016 are referred to as the "Danish Tax Matter").~~

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~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~(10)~~(13)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 Nine Months Ended
September 30, September 30,
(in millions, except per common share amounts) 2017 2016 2017 2016
Numerator:
Net income attributable to Tempur Sealy International, Inc. $ 44.6
$ 77.8
$ 103.0
$ 138.7

Denominator:

Denominator for basic earnings per common share-weighted average shares 54.0
58.2
54.0
60.1
Effect of dilutive securities:

Employee stock-based compensation 0.9
0.6
0.6
0.7
Denominator for diluted earnings per common share-adjusted weighted average shares 54.9
58.8
54.6
60.8

Basic earnings per common share $ 0.83
$ 1.34
$ 1.91
$ 2.31

Diluted earnings per common share $ 0.81
$ 1.32
$ 1.89
$ 2.28

The Company excluded ~~1.1~~0.2 million and ~~0.4~~1.2 million shares ~~issuable upon exercise of outstanding stock options~~ for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International’s common stock or they were otherwise anti-dilutive. The Company excluded 1.3 million and 0.4 million shares issuable upon exercise of outstanding stock options for the nine months ended September 30, 2017 and 2016, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International’sInternational's common stock or they were otherwise anti-dilutive. Holders of non-vested ~~stock-based~~stock- based compensation awards do not ~~maintain~~have voting rights or ~~maintain~~ rights to receive any dividends thereon.

~~(11)~~(14)Business Segment Information

The Company operates in ~~two~~2 segments: North America and International. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. The North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S. and Canada. The International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America. The Company evaluates segment performance based on net sales, gross profit and operating income.

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.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

The following table summarizes total assets by segment:

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

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


(in millions)	March 31, 2020		December 31, 2019
North America	$	240.4	$	202.0
International	41.9		42.2
Corporate	0.9		1.2
Total operating lease right-of-use assets	$	283.2	$	245.4

The following table summarizes segment information for the three months ended ~~September 30, 2017:~~March 31, 2020:


(in millions)	North America		International		Corporate		Eliminations		Consolidated
Net sales	$	677.2	$	145.2	$	—	$	—	$	822.4

Inter-segment sales	$	0.8	$	0.1	$	—	$	(0.9)	$	—
Inter-segment royalty expense (income)	1.4		(1.4)		—		—		—
Gross profit	277.2		79.9		—		—		357.1
Operating income (loss)	101.4		26.6		(22.7)		—		105.3
Income (loss) from continuing operations before income taxes	99.6		24.5		(39.6)		—		84.5

Depreciation and amortization ⁽¹⁾	$	17.6	$	3.3	$	9.6	$	—	$	30.5
Capital expenditures	21.3		2.4		2.5		—		26.2

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

(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 580.6
$ 144.2
$ —
$ —
$ 724.8

Inter-segment sales $ 0.9
$ 0.4
$ —
$ (1.3 ) $ —
Inter-segment royalty expense (income) 1.5
(1.5 ) —
—
—
Gross profit 238.4
73.8
—
—
312.2
Operating income (loss) 99.7
20.8
(25.9 ) —
94.6
Income (loss) before income taxes 97.0
9.3
(44.8 ) —
61.5

Depreciation and amortization ⁽¹⁾
$ 13.1
$ 3.8
$ 10.0
$ —
$ 26.9
Capital expenditures 9.3
1.8
6.4
—
17.5

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

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 ~~September 30, 2016:~~March 31, 2019:

(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 698.5
$ 133.9
$ —
$ —
$ 832.4

Inter-segment sales $ 1.0
$ 0.2
$ —
$ (1.2 ) $ —
Inter-segment royalty expense (income) 1.8
(1.8 ) —
—
—
Gross profit 290.1
72.0
—
—
362.1
Operating income (loss) 128.3
25.6
(22.8 ) —
131.1
Income (loss) before income taxes 127.1
23.6
(40.4 ) —
110.3

Depreciation and amortization ⁽¹⁾
$ 10.8
$ 4.0
$ 8.2
$ —
$ 23.0
Capital expenditures 10.7
3.6
3.3
—
17.6


(in millions)	North America		International		Corporate		Eliminations		Consolidated


Net sales	$	544.0	$	146.9	$	—	$	—	$	690.9

Inter-segment sales	$	1.0	$	0.3	$	—	$	(1.3)	$	—
Inter-segment royalty expense (income)	1.0		(1.0)		—		—		—
Gross profit	204.4		77.4		—		—		281.8
Operating income (loss)	64.3		25.2		(29.0)		—		60.5
Income (loss) from continuing operations before income taxes	62.4		29.8		(46.3)		—		45.9

Depreciation and amortization ⁽¹⁾	$	15.0	$	3.3	$	9.8	$	—	$	28.1
Capital expenditures	12.9		2.9		3.3		—		19.1

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

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~The following table summarizes segment information for the nine months ended September 30, 2017:~~

(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 1,688.3
$ 417.9
$ —
$ —
$ 2,106.2

Inter-segment sales $ 3.1
$ 0.7
$ —
$ (3.8 ) $ —
Inter-segment royalty expense (income) 4.4
(4.4 ) —
—
—
Gross profit 651.8
215.6
—
—
867.4
Operating income (loss) 206.9
73.0
(69.2 ) —
210.7
Income (loss) before income taxes 210.7
58.0
(125.8 ) —
142.9

Depreciation and amortization ⁽¹⁾
$ 38.3
$ 11.1
$ 19.8
$ —
$ 69.2
Capital expenditures 23.0
5.4
15.0
—
43.4

~~The following table summarizes segment information for the nine months ended September 30, 2016:~~

(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 1,946.7
$ 411.1
$ —
$ —
$ 2,357.8

Inter-segment sales $ 3.5
$ 0.4
$ —
$ (3.9 ) $ —
Inter-segment royalty expense (income) 5.6
(5.6 ) —
—
—
Gross profit 771.9
218.1
—
—
990.0
Operating income (loss) 308.9
76.1
(77.0 ) —
308.0
Income (loss) before income taxes 304.3
69.0
(177.5 ) —
195.8

Depreciation and amortization ⁽¹⁾
$ 32.1
$ 11.7
$ 25.8
$ —
$ 69.6
Capital expenditures 22.0
8.3
11.6
—
41.9

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

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


(in millions)	March 31, 2020		December 31, 2019
United States	$	237.1	$	198.3
Canada	4.2		4.9
Other International	41.9		42.2
Total operating lease right-of-use assets	$	283.2	$	245.4
Total International	$	46.1	$	47.1

The following table summarizes net sales by geographic region:


	Three Months Ended
	March 31,
(in millions)	2020		2019
United States	$	632.5	$	497.2
Canada	44.7		46.8
Other International	145.2		146.9
Total net sales	$	822.4	$	690.9
Total International	$	189.9	$	193.7

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2017 2016 2017 2016
United States $ 517.8
$ 641.4
$ 1,522.5
$ 1,792.7
Canada 62.8
57.1
165.8
154.0
Other International 144.2
133.9
417.9
411.1
Total net sales $ 724.8
$ 832.4
$ 2,106.2
$ 2,357.8
Total International $ 207.0
$ 191.0
$ 583.7
$ 565.1

Table of ~~Contents~~C

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)~~o ntents

~~(12)Guarantor/Non-Guarantor Financial Information~~

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~Three Months Ended September 30, 2017~~

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~Three Months Ended~~ ~~September 30, 2016~~

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~Nine Months Ended September 30, 2016~~

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

Tempur Sealy International, Inc. (Ultimate Parent) Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Eliminations Consolidated
ASSETS

Current Assets:
Cash and cash equivalents $ 0.7
$ 8.0
$ 33.1
$ —
$ 41.8
Accounts receivable, net —
12.6
351.0
—
363.6
Inventories —
101.8
87.0
—
188.8
Income taxes receivable 254.1
—
—
(254.1 ) —
Prepaid expenses and other current assets 0.2
48.0
14.9
—
63.1
Total Current Assets 255.0
170.4
486.0
(254.1 ) 657.3
Property, plant and equipment, net —
348.5
75.6
—
424.1
Goodwill —
500.2
232.7
—
732.9
Other intangible assets, net —
580.4
91.5
—
671.9
Deferred income taxes 17.2
—
27.3
(17.2 ) 27.3
Other non-current assets —
50.1
171.7
—
221.8
Net investment in subsidiaries 2,380.8
174.2
—
(2,555.0 ) —
Due from affiliates 107.0
1,994.1
15.7
(2,116.8 ) —
Total Assets $ 2,760.0
$ 3,817.9
$ 1,100.5
$ (4,943.1 ) $ 2,735.3

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable $ —
$ 169.1
$ 75.6
$ —
$ 244.7
Accrued expenses and other current liabilities 21.4
166.6
85.2
—
273.2
Income taxes payable —
267.0
13.5
(254.1 ) 26.4
Current portion of long-term debt —
35.5
30.8
—
66.3
Total Current Liabilities 21.4
638.2
205.1
(254.1 ) 610.6
Long-term debt, net 1,041.4
598.2
47.1
—
1,686.7
Deferred income taxes —
159.7
17.9
(17.2 ) 160.4
Other non-current liabilities —
41.0
149.0
—
190.0
Due to affiliates 1,609.6
—
507.2
(2,116.8 ) —
Total Liabilities 2,672.4
1,437.1
926.3
(2,388.1 ) 2,647.7

Redeemable non-controlling interest 3.4
—
3.4
(3.4 ) 3.4

Total Stockholders' Equity 84.2
2,380.8
170.8
(2,551.6 ) 84.2
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity $ 2,760.0
$ 3,817.9
$ 1,100.5
$ (4,943.1 ) $ 2,735.3

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~December 31, 2016~~

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~Nine Months Ended~~ ~~September 30, 2017~~

~~Table of Contents~~

~~TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES~~

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

~~Nine Months EndedSeptember 30, 2016~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with ~~our~~the 2019 Annual Report, ~~on Form 10-K for the year ended December 31, 2016,~~ including "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in ITEM 7 of Part II of the 2019 Annual Report, and the accompanying Condensed Consolidated Financial Statements and ~~accompanying~~ notes thereto included in this ~~Form 10-Q.~~Report. Unless otherwise noted, all of the financial information in this Report is consolidated financial information for the Company. The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our ~~strategy, our~~ future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" elsewhere in this ~~quarterly report on Form 10-Q~~Report, in the 2019 Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2019 Annual Report and in ~~our Annual Report on Form 10-K for the year ended December 31, 2016 and "Risk Factors"~~ITEM 1A, Risk Factors, in ~~our Annual Report on Form 10-K for the year ended December 31, 2016.~~this Report. Our actual results may differ materially from those contained in any forward-looking statements.

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2020, including the following topics:

•an overview of our ~~business;~~business and strategy, including uncertainty relating to COVID-19;

~~factors impacting results of operations;~~

•expected sources of liquidity for future operations; and

•our use of certain non-GAAP financial measures.

We develop, manufacture and market bedding products, which we sell globally. Our product brand portfolio includes many highly recognized and iconic brands in the industry, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, ~~and~~ Stearns & Foster® and Comfort Revolution®. Our comprehensive suite of bedding products offers a variety of products to consumers across a broad range of ~~channels.~~channels and price points.

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

~~Factors That Could Impact Results of Operations~~Uncertainty Relating to COVID-19

~~The factors outlined below could impact~~Prior to the global COVID-19 health crisis, our ~~future results of operations. For more extensive discussion of these~~iconic brands and ~~other risk factors that could impact our future results of operations, please refer to "Risk Factors," under ITEM 1A of Part I~~products had been performing very well throughout the world. We had been experiencing growth in all markets and ~~"Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That Could Impact Results of Operations" included~~especially strong growth in ~~ITEM 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2016.~~

~~General Business and Economic Conditions~~

~~Termination of Mattress Firm Relationship~~

The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely continue to adversely affect our business. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Many stores of our third-party retailers within the Wholesale channel are closed in the U.S. and around the world. In addition, company-owned stores within the Direct channel are either closed or operating under restricted conditions. These closures have negatively impacted sales at the end of the first quarter and may negatively impact sales until the COVID-19 pandemic moderates. Our e-commerce operations remain open globally and ready to serve our customers, as do the e-commerce operations for many of our third-party retailers.

During this time of uncertainty, keeping our employees safe and healthy is a top priority. We have implemented precautionary measures to protect our employees, including restricting travel and face-to-face meetings, allowing employees to work from home where possible and adopting all region-specific public health protocols applicable to our global operations. While providing a healthy and safe work environment is a top priority during these unprecedented times, our entire organization is also focused on our commitments to our customers, suppliers and shareholders. We are also working with various government and healthcare organizations to provide products and services in this time of crisis. For more than a decade, we have donated tens of thousands of mattresses annually to charities and organizations in need across the country. For the immediate future, we are focusing all of the power of our philanthropic efforts on getting our products to governments, healthcare organizations and charities that have a need related to the pandemic.

The situation surrounding COVID-19 remains fluid, and we are actively managing our response in collaboration with customers, government officials, employees and business partners. Our business model has a highly variable cost structure that naturally adjusts with changes in sales. Given the sudden and significant change in volume beginning in mid-March, actions were quickly implemented to further mitigate the financial impact. These actions included reducing expenses by approximately $300 million on an annualized basis, with approximately $225 million expected to occur in the last nine months ~~ended September 30, 2016.~~of 2020. These reductions are primarily in advertising, personnel, including a furlough of 35% of U.S. salaried employees, other staffing related expenses and variable compensation. Additionally, we ceased share repurchases, delayed certain capital projects and canceled or suspended non-critical projects.

~~During the week of January 23, 2017,~~Despite these cost actions, we ~~were unexpectedly notified by the senior management of Mattress Firm and representatives of Steinhoff International Holdings N. V. ("Steinhoff"), its parent company, of Mattress Firm's intent~~expect significant headwinds to ~~terminate Mattress Firm's business relationship with us if we did not agree to considerable changes to our relationship with Mattress Firm, including significant economic concessions. We engaged~~gross margin in discussions to facilitate a mutually agreeable supply arrangement with Mattress Firm. However, the parties were unable to reach an agreement, and, on January 27, 2017, Tempur-Pedic North America, LLC ("Tempur-Pedic") and Sealy Mattress Company ("Sealy Mattress") issued formal termination notices for all of their products to Mattress Firm. On January 30, 2017, Tempur-Pedic and Sealy Mattress entered into transition agreements with Mattress Firm in which they agreed, among other things, to continue supplying Mattress Firm until April 3, 2017, at which time the parties’ business relationship ended. We expect that the termination of our relationship with Mattress Firm will have a significant negative impact on our financial performance in the short-term, but that this termination is in the long-term interests of our stockholders.

~~Financial Leverage~~

Additionally, to provide greater financial flexibility in response to the continued impact of COVID-19, we elected to hold approximately $200 million ~~for~~of cash by borrowing on our revolving senior secured credit facility. Total remaining availability under our revolving senior secured credit facility is $101.9 million. We have no major debt maturities until 2023, and our senior secured credit facility matures in 2024. However, given the ~~trailing twelve months ended September 30, 2017. Higher financial leverage makes us more vulnerable~~uncertainty and the nature of this crisis, we are in advanced discussions with our commercial banks to ~~general adverse competitive, economic~~obtain additional incremental liquidity.

We will continue to actively monitor the situation and ~~industry conditions. There can be no assurance~~may take further actions that alter our business ~~will generate sufficient cash flow from~~ operations as may be required by federal, state or local authorities or that ~~future borrowing~~we determine are in the best interests of our employees, customers, suppliers and stockholders. While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will ~~be available. As~~have on our business, results of ~~September 30, 2017,~~operations, liquidity or capital resources, we believe that it is important to share where our ~~ratio~~company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses. For further information regarding the impact of ~~consolidated funded debt less qualified cash to Adjusted EBITDA calculated in accordance with our 2016 Credit Agreement was 3.70 times, within~~COVID-19 on the covenant in our debt agreements which limits this ratio to 5.00 times for the trailing twelve months ended September 30, 2017. For more information on this non-GAAP measure and compliance with our 2016 Credit Agreement,Company, please refer to ~~“Non-GAAP Financial Information” below.~~"Risk Factors" in ITEM 1A of Part II of this Report.

~~Commodities~~Product Launches

~~Future changes~~In 2020, we are introducing the Tempur-Ergo Smart Base Collection with Sleeptracker technology and a new Sealy Posturepedic Plus line.

Acquisition of Sherwood Bedding

On January 31, 2020, we acquired an 80% ownership interest in ~~raw material prices could have~~ a ~~significant impact on our gross margin, and we expect commodity inflation~~newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of approximately ~~$10 million~~$39.1 million. Sherwood Bedding is a major manufacturer in the ~~fourth~~U.S. private label and original equipment manufacturer bedding market, and this acquisition of a majority interest marks our entrance into the private label category. During the first quarter of ~~2017.~~2020, we completed the integration of Sherwood Bedding into our portfolio of product brands. We ~~also~~ expect ~~commodity inflation~~ to ~~continue in 2018.~~leverage our overall brand portfolio to gain additional distribution for Sherwood products.

Results of Operations

A summary of our results for the three months ended ~~September 30, 2017~~March 31, 2020 include:

•Total net sales ~~decreased 12.9%~~increased 19.0% to ~~$724.8~~$822.4 million ~~from $832.4~~as compared to $690.9 million in the ~~third~~first quarter of ~~2016.~~2019. On a constant currency basis, which is a non-GAAP financial measure, total net sales ~~decreased 13.3%~~increased 19.8%, with ~~a decrease~~an increase of ~~17.2%~~24.5% in the North America business segment and an increase of ~~7.0%~~2.0% in the International business segment.

•Gross margin was ~~43.1%~~43.4% as compared to ~~43.5%~~40.8% in the ~~third~~first quarter of ~~2016.~~2019.

•Operating income ~~decreased 27.8%~~increased 74.0% to ~~$94.6~~$105.3 million as compared to ~~$131.1~~$60.5 million in the ~~third~~first quarter of ~~2016.~~2019. Operating income in the first quarter of 2020 included $11.7 million of charges associated with a wholesale customer bankruptcy. Adjusted operating income, which is a non-GAAP financial measure, ~~decreased 23.6%~~increased 89.3% to ~~$100.1~~$120.8 million as compared to ~~$131.1~~$63.8 million in the ~~third~~first quarter of ~~2016.~~2019.

•Net income ~~decreased 42.7%~~increased 110.2% to ~~$44.6~~$59.7 million as compared to ~~$77.8~~$28.4 million in the ~~third~~first quarter of ~~2016.~~2019. Adjusted net income, which is a non-GAAP financial measure, ~~decreased 29.4%~~increased 143.3% to ~~$54.9~~$72.5 million as compared to ~~$77.8~~$29.8 million in the ~~third~~first quarter of ~~2016.~~2019.

~~Earnings before interest, tax, depreciation and amortization ("EBITDA")~~decreased 20.1% to $123.8 million as compared to $155.0 million for the third quarter of 2016. Adjusted EBITDA decreased 16.6% to $129.3 million as compared to $155.0 million in the third quarter of 2016.

•EBITDA, which is a non-GAAP financial measure,increased 39.7% to $134.5 million as compared to $96.3 million for the first quarter of 2019. Adjusted EBITDA, which is a non-GAAP financial measure, increased 62.9% to $151.2 million as compared to $92.8 million in the first quarter of 2019.

•Earnings per diluted share ("EPS") ~~decreased 38.6%~~increased 117.6% to ~~$0.81~~$1.11 as compared to ~~$1.32~~$0.51 in the ~~third~~first quarter of ~~2016.~~2019. Adjusted EPS, which is a non-GAAP financial measure, ~~decreased 24.2%~~increased 148.1% to ~~$1.00~~$1.34 as compared to ~~$1.32~~$0.54 in the ~~third~~first quarter of ~~2016.~~2019.

•For the trailing twelve months ended March 31, 2020, leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 3.03 times as compared to 3.84 times in the first quarter of 2019.

For a discussion and reconciliation of non-GAAP financial measures as discussed above to the corresponding GAAP financial results, refer to the non-GAAP financial information set forth below under the heading "Non-GAAP Financial Information."

We may refer to net sales or earnings or other historical financial information on a ~~“constant~~"constant currency basis,”" which is a non-GAAP financial measure. These references to constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates. To provide information on a constant currency basis, the applicable financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior ~~year~~corresponding period’s currency conversion rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under GAAP, and it is not intended as an alternative to GAAP measures. Refer to Part I, ITEM 3 ~~under Part I~~ of this Report for a discussion of our foreign currency ~~disclosure.~~exchange rate risk.

The following table sets forth the various components of our Condensed Consolidated Statements of Income and expresses each component as a percentage of net sales:


	Three Months Ended March 31,
(in millions, except percentages and per share amounts)	2020						2019
Net sales	$	822.4	100.0	%	$	690.9	100.0	%
Cost of sales	465.3		56.6		409.1		59.2
Gross profit	357.1		43.4		281.8		40.8
Selling and marketing expenses	171.0		20.8		153.5		22.2
General, administrative and other expenses	80.6		9.8		70.7		10.2

Equity loss (income) in earnings of unconsolidated affiliates	0.2		—		(2.9)		(0.4)
Operating income	105.3		12.8		60.5		8.8

Other expense, net:
Interest expense, net	20.3		2.5		22.4		3.2


Other expense (income), net	0.5		0.1		(7.8)		(1.1)
Total other expense, net	20.8		2.6		14.6		2.1

Income from continuing operations before income taxes	84.5		10.3		45.9		6.6
Income tax provision	(23.5)		(2.9)		(16.9)		(2.4)
Income from continuing operations	61.0		7.4		29.0		4.2
Loss from discontinued operations, net of tax	(1.2)		(0.1)		(0.4)		(0.1)
Net income before non-controlling interests	59.8		7.3		28.6		4.1
Less: Net income attributable to non-controlling interests	0.1		—		0.2		—
Net income attributable to Tempur Sealy International, Inc.	$	59.7	7.3	%	$	28.4	4.1	%

Earnings per common share:

Basic
Earnings per share for continuing operations	$	1.14			$	0.53
Loss per share for discontinued operations	(0.02)				(0.01)
Earnings per share	$	1.12			$	0.52

Diluted
Earnings per share for continuing operations	$	1.13			$	0.52
Loss per share for discontinued operations	(0.02)				(0.01)
Earnings per share	$	1.11			$	0.51

Weighted average common shares outstanding:
Basic	53.4				54.7
Diluted	54.0				55.7

Three Months Ended September 30,
(in millions, except percentages and per share amounts) 2017 2016
Net sales $ 724.8
100.0 % $ 832.4
100.0 %
Cost of sales 412.6
56.9
470.3
56.5
Gross profit 312.2
43.1
362.1
43.5
Selling and marketing expenses 155.4
21.4
175.2
21.0
General, administrative and other expenses 71.0
9.8
64.0
7.7
Equity income in earnings of unconsolidated affiliates (3.5 ) (0.5 ) (2.4 ) (0.2 )
Royalty income, net of royalty expense (5.3 ) (0.7 ) (5.8 ) (0.7 )
Operating income 94.6
13.1
131.1
15.7

Other expense, net:

Interest expense, net 32.0
4.4
20.5
2.5
Other expense, net 1.1
0.2
0.3
—
Total other expense, net 33.1
4.6
20.8
2.5

Income before income taxes 61.5
8.5
110.3
13.3
Income tax provision (20.3 ) (2.8 ) (33.7 ) (4.1 )
Net income before non-controlling interests 41.2
5.7
76.6
9.2
Less: Net loss attributable to non-controlling interests (3.4 ) (0.5 ) (1.2 ) (0.1 )
Net income attributable to Tempur Sealy International, Inc. $ 44.6
6.2 % $ 77.8
9.3 %

Earnings per common share:
Basic $ 0.83
$ 1.34

Diluted $ 0.81
$ 1.32

Weighted average common shares outstanding:
Basic 54.0
58.2

Diluted 54.9
58.8

Table of C o ntents

NET SALES


	Three Months Ended March 31,
	2020		2019		2020		2019		2020		2019
(in millions)	Consolidated						North America						International
Net sales by channel
Wholesale	$	722.4	$	615.9	$	609.6	$	501.8	$	112.8	$	114.1
Direct	100.0		75.0		67.6		42.2		32.4		32.8
Total net sales	$	822.4	$	690.9	$	677.2	$	544.0	$	145.2	$	146.9

Three Months Ended September 30,
2017 2016 2017 2016 2017 2016
(in millions) Consolidated North America International
Net sales by channel
Wholesale channel $ 664.0
$ 791.3
$ 547.3
$ 685.1
$ 116.7
$ 106.2
Direct channel 60.8
41.1
33.3
13.4
27.5
27.7
Total net sales $ 724.8
$ 832.4
$ 580.6
$ 698.5
$ 144.2
$ 133.9

Net sales ~~decreased 12.9%~~increased 19.0%, and on a constant currency basis ~~decreased 13.3%~~increased 19.8%. The ~~decrease~~change in net sales was driven ~~by:~~by the following:

•North America ~~net sales decreased $117.9 million, or 16.9%. Excluding Mattress Firm, North America~~ net sales increased ~~$53.6~~$133.2 million, or ~~10.2%, driven by growth across all of our brands. In the third quarter of 2016, net sales to Mattress Firm were $171.5 million.~~24.5%. Net sales in the Wholesale channel ~~decreased $137.8~~increased $107.8 million, or ~~20.1%~~21.5%, primarily driven ~~primarily~~ by the ~~termination~~expansion of our contract with Mattress Firm. Excluding sales to Mattress Firm, Wholesale net sales increased 6.6%. During the third quarter of 2017, hurricanes impacted operations in two of our largest markets, Texas and Florida. We estimate that the hurricanes impacted our netretail distribution network. Net sales in the third quarter by approximately $10 to $15 million. Additionally, sales to a national department store retailer in the wholesale channel significantly declined in 2017 as compared to 2016. Net sales in our Direct channel increased ~~$19.9~~$25.4 million, or ~~148.5%~~60.2%, primarily driven ~~primarily~~ by growth ~~in e-commerce. Canada~~from company-owned stores, including the Sleep Outfitters Acquisition and our e-commerce business. Excluding Sleep Outfitters, the Wholesale channel increased approximately 24% and the Direct channel increased approximately 20%.

•International net sales ~~increased 5.8% on a constant currency basis.~~

~~International~~ ~~net sales increased $10.3~~decreased $1.7 million, or ~~7.7%~~1.2%. On a constant currency basis, International net sales increased ~~7.0%, driven primarily by growth in Asia-Pacific and Latin America.~~2.0%. Net sales in the Wholesale channel increased ~~7.7%~~2.3% on a constant currency basis. Net sales in the Direct channel increased ~~4.3%~~1.2% on a constant currency basis.

GROSS PROFIT


	Three Months Ended March 31,
	2020						2019
(in millions, except percentages)	Gross Profit		Gross Margin		Gross Profit		Gross Margin		Margin Change
North America	$	277.2	40.9	%	$	204.4	37.6	%	3.3	%
International	79.9		55.0	%	77.4		52.7	%	2.3	%
Consolidated gross margin	$	357.1	43.4	%	$	281.8	40.8	%	2.6	%

Three Months Ended September 30,
2017 2016
(in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change
North America $ 238.4
41.1 % $ 290.1
41.5 % (0.4 )%
International 73.8
51.2 % 72.0
53.8 % (2.6 )%
Consolidated gross margin $ 312.2
43.1 % $ 362.1
43.5 % (0.4 )%

Costs associated with net sales are recorded in cost of sales and include the costs of producing, shipping, warehousing, receiving and inspecting goods during the period, as well as depreciation and amortization of long-lived assets used in the manufacturing process.

Our gross margin is primarily impacted by the relative amount of net sales contributed by our Tempur and Sealy products. Our Sealy products have a significantly lower gross margin than our Tempur products. Our Sealy mattress products range from value to premium priced offerings, and gross margins are typically higher on premium products compared to value priced offerings. Our Tempur products are exclusively premium priced products. As sales of our Sealy products increase relative to sales of our Tempur products, our gross margins will be negatively impacted in both our North America and International segments.

Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes; the cost of raw materials; operational efficiencies due to the utilization in our manufacturing facilities; product, channel and country mix; foreign exchange fluctuations; volume incentives offered to certain retail accounts; participation in our retail cooperative advertising programs; and costs associated with new product introductions. Future changes in raw material prices could have a significant impact on our gross margin. Our margins are also impacted by the growth in our Wholesale channel as sales in our Wholesale channel are at wholesale prices whereas sales in our Direct channel are at retail prices.

Gross margin ~~declined 40~~improved 260 basis points. The ~~principal factors impacting~~primary drivers of changes in gross margin ~~for each~~by segment are discussed ~~below.~~below:

•North America gross margin ~~declined 40~~improved 330 basis points. The ~~decline~~improvement in gross margin was primarily driven by ~~the termination of the Mattress Firm relationship, which resulted in~~a favorable impact from fixed cost ~~deleverage~~leverage on higher unit volume of ~~160~~140 basis points, on lower ~~net sales and 80~~commodity costs of 120 basis points and decreased floor model expenses of ~~unfavorable brand mix. The loss~~90 basis points.

Table of ~~net sales had a disproportionate impact on higher~~C o ntents

•International gross margin Tempur products. We also recorded $1.0 million of hurricane-related manufacturing and logistics costs in the third quarter of 2017 due to the impact on certain manufacturing facilities and distribution centers. Additionally, the declineimproved 230 basis points. The improvement in gross margin was ~~due to unfavorable commodity costs of 150 basis points, offset~~primarily driven by operational improvements of ~~160~~100 basis points, favorable ~~channel~~country mix of ~~100~~70 basis points and ~~favorable product mix of 60 basis points.~~

lower commodity costs.

~~International~~ ~~gross margin declined 260 basis points. The decline was primarily driven by product launch costs of 130 basis points, as well as unfavorable channel mix and brand mix.~~

OPERATING EXPENSES

Three Months Ended September 30,
2017 2016 2017 2016 2017 2016 2017 2016
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising expenses $ 76.9
$ 104.3
$ 66.4
$ 95.8
$ 10.5
$ 8.5
$ —
$ —
Other selling and marketing expenses 78.5
70.9
45.5
39.3
31.6
30.7
1.4
0.9
General, administrative and other expenses 71.0
64.0
29.1
29.4
17.4
12.7
24.5
21.9
Total operating expenses $ 226.4
$ 239.2
$ 141.0
$ 164.5
$ 59.5
$ 51.9
$ 25.9
$ 22.8

Selling and marketing expenses include advertising and media production associated with the promotion of our brands, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials and sales force compensation. We also include in selling and marketing expense certain new product development costs, including market research and new product ~~testing in selling and marketing expenses.~~testing.

General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of ~~buildings, furniture and fixtures, machinery, leasehold improvements and computer equipment,~~long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.


	Three Months Ended March 31,
	2020		2019		2020		2019		2020		2019		2020		2019
(in millions)	Consolidated						North America						International				Corporate
Operating expenses:
Advertising expenses	$	73.5	$	62.5	$	63.4	$	50.5	$	10.1	$	12.0	$	—	$	—
Other selling and marketing expenses	97.5		91.0		63.6		56.6		30.9		31.6		3.0		2.8
General, administrative and other expenses	80.6		70.7		48.8		33.0		12.1		11.5		19.7		26.2

Total operating expenses	$	251.6	$	224.2	$	175.8	$	140.1	$	53.1	$	55.1	$	22.7	$	29.0

Operating expenses ~~decreased $12.8~~increased $27.4 million, or ~~5.4%~~12.2%, and ~~improved 250~~decreased 190 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained ~~below.~~below:

•North America operating expenses increased $35.7 million, or 25.5%, and increased 20 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising and other selling and marketing investments. Additionally, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account. We have adapted our marketing in response to the current market created by COVID-19 to help ensure we can maximize the effectiveness of our marketing investments during this time. We have adjusted our media mix to focus on digital channels to reach consumers shopping online.

•Internationaloperating expenses decreased ~~$23.5~~$2.0 million, or ~~14.3%~~3.6%, and ~~improved 70~~decreased 90 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by ~~decreased participation~~decreases in ~~our wholesale cooperative~~ advertising ~~programs, offset by unfavorable operating expense leverage, which includes investments in marketing.~~

and other selling and marketing investments.

~~International~~•Corporate operating expenses ~~increased $7.6~~decreased $6.3 million, or ~~14.6%, and improved 250 basis points as a percentage of net sales.~~21.7%. In the ~~third~~first quarter of ~~2017,~~2019, we ~~recognized $2.5~~recorded $3.0 million of ~~additional non-income tax obligations~~professional fees related to the acquisition of Sleep Outfitters, which were not repeated in ~~one of our Latin American subsidiaries. We also recognized $1.9 million of additional bad debt expense associated with a European customer who initiated bankruptcy proceedings. The remaining changes~~2020. Additionally, the decrease in operating expenses ~~were~~was primarily driven by ~~increased investments~~a decrease in ~~our advertising.~~

variable compensation expense.

~~Corporate~~ ~~operating~~Research and development expenses ~~increased $3.1~~for the three months ended March 31, 2020 were $5.8 million compared to $5.2 million for the three months ended March 31, 2019, an increase of $0.6 million, or ~~13.6%~~11.5%. ~~The increase is primarily due to professional fees incurred in 2017 as compared to the same period in 2016.~~

Table of C o ntents

OPERATING INCOME


	Three Months Ended March 31,
	2020						2019
(in millions, except percentages)	Operating Income		Operating Margin		Operating Income		Operating Margin		Margin Change
North America	$	101.4	15.0	%	$	64.3	11.8	%	3.2	%
International	26.6		18.3	%	25.2		17.2	%	1.1	%
	128.0				89.5
Corporate expenses	(22.7)				(29.0)
Total operating income	$	105.3	12.8	%	$	60.5	8.8	%	4.0	%

Three Months Ended September 30,
2017 2016
(in millions, except percentages) Operating Income Operating Margin Operating Income Operating Margin Margin Change
North America $ 99.7
17.2 % $ 128.3
18.4 % (1.2 )%
International 20.8
14.4 % 25.6
19.1 % (4.7 )%
120.5
153.9

Corporate expenses (25.9 ) (22.8 )
Total operating income $ 94.6
13.1 % $ 131.1
15.7 % (2.6 )%

Operating income ~~decreased $36.5~~increased $44.8 million and operating margin ~~declined 260~~improved 400 basis points. The ~~decreases~~primary drivers of changes in operating income and operating margin by segment are discussed ~~below.~~below:

•North America operating income ~~decreased $28.6~~increased $37.1 million and operating margin ~~declined 120~~improved 320 basis points. The ~~decline~~improvement in operating margin was primarily driven by the ~~termination of our contract with Mattress Firm at the beginning of the second quarter, which resulted~~improvement in gross margin ~~decline~~of 330 basis points and ~~unfavorable~~improved operating expense leverage.

These improvements were offset by $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.

•International operating income ~~decreased $4.8~~increased $1.4 million and operating margin ~~declined 470~~improved 110 basis points. The ~~decline~~improvement in operating margin was primarily driven by the ~~decline~~improvement in gross margin and ~~increases~~improved operating expense leverage, partially offset by the performance of the Asia-Pacific joint venture as a result of the reduction in contributions from its operations in China.

•Corporate operating expenses decreased $6.3 million, which positively impacted our consolidated operating margin by 80 basis points. In the first quarter of 2019, we recorded $3.0 million of professional fees related to the acquisition of Sleep Outfitters, which were not repeated in 2020. Additionally, the decrease in operating ~~expenses. Operating expense increases include additional non-income tax obligations~~expenses was primarily driven by a decrease in ~~one of our Latin American subsidiaries, additional bad debt expense associated with the bankruptcy of a European customer and increased investments in our advertising.~~

variable compensation expense.

~~Corporate~~ ~~operating expenses increased $3.1 million, or 13.6%. The increase is primarily due to professional fees incurred in 2017 as compared to the same period in 2016.~~

INTEREST EXPENSE, NET


	Three Months Ended March 31,
(in millions, except percentages)	2020		2019		% Change
Interest expense, net	$	20.3	$	22.4	(9.4)	%

Three Months Ended September 30,
(in millions, except percentages) 2017 2016 % Change
Interest expense, net $ 32.0
$ 20.5
56.1 %

Interest expense, net, ~~increased $11.5~~decreased $2.1 million, or ~~56.1%~~9.4%. ~~In the third quarter of 2017, we incurred approximately $9.2 million of~~The decrease in interest expense, ~~related to deferred payment programs~~net, was primarily driven by reduced average levels of outstanding debt and lower interest rates on ~~non-income tax obligations and local market financing arrangements in one of~~ our ~~Latin American subsidiaries. We are in the process of unwinding the deferred payment programs and financing arrangements, and we do not expect this type of interest expense to recur in the future.~~variable rate debt.

INCOME TAX PROVISION


	Three Months Ended March 31,
(in millions, except percentages)	2020			2019			% Change
Income tax provision	$	23.5		$	16.9		39.1	%
Effective tax rate	27.8		%	36.8		%

Three Months Ended September 30,
(in millions, except percentages) 2017 2016 % Change
Income tax provision $ 20.3
$ 33.7
(39.8 )%
Effective tax rate 33.0 % 30.6 %

Income tax provision includes income taxes associated with taxes currently payable and deferred taxes and includes the impact of net operating losses for certain of our foreign operations.

Table of C o ntents

Our income tax provision ~~decreased $13.4~~increased $6.6 million ~~or 39.8%.~~due to an increase in income before income taxes. Our effective tax rate ~~increased 240 basis points as the result of the net impact of discrete items~~ for the three months ended ~~September 30, 2017, which~~March 31, 2020 as compared to the same prior year period decreased by 900 basis points. The effective tax rate as compared to the U.S. federal statutory tax rate for the three months ended March 31, 2020 included a net unfavorable impact of discrete items primarily related to the ~~recognition~~impact of ~~valuation allowances in one~~the likelihood of ~~our Latin American subsidiaries. There was no material net impact as the result~~realization of ~~discrete items that impacted the~~certain deferred tax assets and certain stock compensation. The effective tax rate ~~in the period ending September 30, 2016.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THE~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2016~~

~~The following table sets forth the various components of our Condensed Consolidated Statements of Income, and expresses each component as a percentage of net sales:~~

Nine Months Ended September 30,
(in millions, except per share amounts) 2017 2016
Net sales $ 2,106.2
100.0 % $ 2,357.8
100.0 %
Cost of sales 1,238.8
58.8
1,367.8
58.0
Gross profit 867.4
41.2
990.0
42.0
Selling and marketing expenses 461.4
21.9
498.1
21.1
General, administrative and other expenses 206.5
9.8
207.6
8.8
Customer termination charges, net 14.4
0.7
—
—
Equity income in earnings of unconsolidated affiliates (10.6 ) (0.5 ) (8.6 ) (0.4 )
Royalty income, net of royalty expense (15.0 ) (0.7 ) (15.1 ) (0.6 )
Operating income 210.7
10.0
308.0
13.1

Other expense, net:
Interest expense, net 76.2
3.6
65.0
2.8
Loss on extinguishment of debt —
—
47.2
2.0
Other income, net (8.4 ) (0.4 ) —
—
Total other expense, net 67.8
3.2
112.2
4.8

Income before income taxes 142.9
6.8
195.8
8.3
Income tax provision (48.0 ) (2.3 ) (60.2 ) (2.5 )
Net income before non-controlling interests 94.9
4.5
135.6
5.8
Less: Net loss attributable to non-controlling interests (8.1 ) (0.4 ) (3.1 ) (0.1 )
Net income attributable to Tempur Sealy International, Inc. $ 103.0
4.9 % $ 138.7
5.9 %

Earnings per common share:
Basic $ 1.91
$ 2.31

Diluted $ 1.89
$ 2.28

Weighted average common shares outstanding:
Basic 54.0
60.1

Diluted 54.6
60.8

~~NET SALES~~

Nine Months Ended September 30,
2017 2016 2017 2016 2017 2016
(in millions) Consolidated North America International
Net sales by channel
Wholesale channel $ 1,940.7
$ 2,242.4
$ 1,601.5
$ 1,910.4
$ 339.2
$ 332.0
Direct channel 165.5
115.4
86.8
36.3
78.7
79.1
Total net sales $ 2,106.2
$ 2,357.8
$ 1,688.3
$ 1,946.7
$ 417.9
$ 411.1

~~Net sales decreased $251.6 million, or 10.7%, and on a constant currency basis decreased 10.4%. The decrease in net sales was driven by:~~

~~North America~~ ~~net sales decreased $258.4 million, or 13.3%. Net sales to Mattress Firm were $95.7 million prior to the termination of our contract at the beginning of the second quarter of 2017~~ as compared to ~~$512.9 million~~the U.S. federal statutory tax rate for the ~~nine~~three months ended September 30, 2016, which resulted in a net sales decrease of $417.2 million. Excluding Mattress Firm, North America net sales increased $158.8 million, or 11.1%, driven by growth across all of our brands. Net sales in the Wholesale channel decreased $308.9 million, or 16.2%, driven primarily by the termination of our contract with Mattress Firm. Excluding sales to Mattress Firm, wholesale net sales increased 7.7%. During the third quarter of 2017, hurricanes impacted operations in two of our largest markets, Texas and Florida. We estimate that the hurricanes impacted our net sales in the third quarter by approximately $10 to $15 million. Additionally, sales to a national department store retailer in the Wholesale channel significantly declined in 2017 as compared to 2016. Net sales in our Direct channel increased $50.5 million, or 139.1%, driven primarily by growth in e-commerce. Canada net sales increased 6.6% on a constant currency basis.

~~International~~ net sales increased $6.8 million, or 1.7%. On a constant currency basis, International net sales increased 3.8%, driven primarily by growth in Asia-Pacific and Latin America, which was offset by weakness in certain European markets. Net sales in the Wholesale channel increased 4.0% on a constant currency basis. Net sales in the Direct channel increased 3.2% on a constant currency basis.

~~GROSS PROFIT~~

Nine Months Ended September 30,
2017 2016
(in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change
North America $ 651.8
38.6 % $ 771.9
39.7 % (1.1 )%
International 215.6
51.6 % 218.1
53.1 % (1.5 )%
Consolidated gross margin $ 867.4
41.2 % $ 990.0
42.0 % (0.8 )%

~~Gross margin declined 80 basis points. The principal factors impacting gross margin for each segment are discussed below.~~

~~North America~~ gross margin declined 110 basis points. The decline was driven primarily by the termination of the Mattress Firm relationship, which resulted in unfavorable brand mix of 110 basis points and fixed cost deleverage of 110 basis points. In the first quarter of 2017, we also recorded charges associated with the Mattress Firm termination for an unfavorable impact of 70 basis points. These charges included a $5.4 million write-off of customer-unique inventory and $6.1 million of increased product obligations. The decline in gross margin was also due to unfavorable commodity costs of 90 basis points, offset by favorable channel mix of 140 basis points and operational productivity of 90 basis points. We recorded $1.0 million of hurricane-related manufacturing and logistics costs in the third quarter of 2017 due to the impact on certain manufacturing facilities and distribution centers.

~~International~~ ~~gross margin declined 150 basis points. The decline was driven primarily by product launch costs and mix.~~

~~OPERATING EXPENSES~~

Nine Months Ended September 30,
2017 2016 2017 2016 2017 2016 2017 2016
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising expenses $ 220.9
$ 275.1
$ 193.4
$ 247.9
$ 27.5
$ 27.2
$ —
$ —
Other selling and marketing expenses 240.5
223.0
144.6
127.8
91.7
91.6
4.2
3.6
General, administrative and other expenses 206.5
207.6
92.5
93.7
41.7
40.3
72.3
73.6
Customer termination charges, net 14.4
—
20.9
—
0.8
—
(7.3 ) —
Total operating expenses $ 682.3
$ 705.7
$ 451.4
$ 469.4
�� $ 161.7
$ 159.1
$ 69.2
$ 77.2

Selling and marketing expenses include advertising and media production associated with the promotion of our brands, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials, and sales force compensation. We also include certain new product development costs, including market research and new product testing in selling and marketing expenses.

General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation of buildings, furniture and fixtures, machinery, leasehold improvements and computer equipment, expenses for administrative functions and research and development costs.

~~Operating expenses decreased $23.4 million, or 3.3%, and improved 250 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained below.~~

~~North America~~ operating expenses decreased $18.0 million and improved 260 basis points as a percentage of net sales. In the first quarter of 2017, we recorded $20.9 million of charges related to the Mattress Firm termination, whichMarch 31, 2019 included the ~~$17.2 million write-off of the March 31, 2017 value of customer incentives and marketing assets and $3.7 million of employee-related and professional fees. Additionally, we had~~net unfavorable ~~operating expense leverage, including investments in marketing. These were offset by decreased participation in our wholesale cooperative advertising programs.~~

~~International~~ operating expenses increased $2.6 million and were flat as a percentage of net sales. In the third quarter of 2017, we recognized $2.5 million of non-income tax obligations in one of our Latin American subsidiaries. We also recognized $1.9 million of additional bad debt expense associated with a customer in Europe who went bankrupt. In the first quarter of 2017, we recorded $0.8 million of charges for certain employee-related expenses. These increases were offset by improved operating expense leverage.

~~Corporate~~ operating expenses decreased $8.0 million, or 10.4%. The decrease in operating expenses was primarily driven by a $9.3 million benefit recorded in the first quarter of 2017 for the change in estimate associated with performance-based stock compensation that is no longer probable of payout following the Mattress Firm termination, offset by $0.9 million of accelerated stock-based compensation and $1.1 million of other employee-related expenses and professional fees. Additionally, we incurred $3.0 million of executive management transition expenses in the first quarter of 2016.

Research and development expenses for the nine months ended September 30, 2017 were $16.9 million compared to $19.7 million for the nine months ended September 30, 2016, a decrease of $2.8 million, or 14.2%.

~~OPERATING INCOME~~

Nine Months Ended September 30,
2017 2016
(in millions, except percentages) Operating Income Operating Margin Operating Income Operating Margin Margin Change
North America $ 206.9
12.3 % $ 308.9
15.9 % (3.6 )%
International 73.0
17.5 % 76.1
18.5 % (1.0 )%
279.9
385.0

Corporate expenses (69.2 ) (77.0 )
Total operating income $ 210.7
10.0 % $ 308.0
13.1 % (3.1 )%

~~Operating income decreased $97.3 million and operating margin declined 310 basis points. The decreases in operating income and operating margin by segment are discussed below.~~

~~North America~~ operating income decreased $102.0 million and operating margin declined 360 basis points. The decline in operating margin was primarily driven by the termination of our contract with Mattress Firm at the beginning of the second quarter, which resulted in gross margin decline and unfavorable operating expense leverage. The decline in operating margin was also driven by charges of $32.4 million recorded in the first quarter of 2017 associated with the Mattress Firm termination. Cost of sales included $11.5 million of charges related to the write-off of customer-unique inventory and increased product obligations. Operating expenses included $20.9 million of charges related to the write-off of customer incentives and marketing assets, as well as employee-related expenses.

~~International~~ ~~operating income decreased $3.1 million and operating margin declined 100 basis points, which is primarily due to the decline in gross margin.~~

~~Corporate~~ operating expenses decreased $7.8 million, which improved our consolidated operating margin by 40 basis points. In the first quarter of 2017, we recorded $8.4 million of net stock-based compensation benefit.

~~INTEREST EXPENSE, NET~~

Nine Months Ended September 30,
(in millions, except percentages) 2017 2016 % Change
Interest expense, net $ 76.2
$ 65.0
17.2 %

Interest expense, net, increased $11.2 million, or 17.2%. During the third quarter of 2017, we incurred approximately $9.2 million of interest expense related to deferred payment programs on non-income tax obligations and local market financing arrangements in one of our Latin American subsidiaries. We are in the process of unwinding the deferred payment programs and financing arrangements, and we do not expect this type of interest expense to recur in the future.Additionally, during the second quarter of 2016, we incurred an additional $2.1 million of interest related to overlapping periods between the issuance of the 2026 Senior Notes on May 24, 2016 and redemption of the 2020 Senior Notes on June 23, 2016.

~~LOSS ON EXTINGUISHMENT OF DEBT~~

In the second quarter of 2016, we issued our 2026 Senior Notes and completed our 2016 Credit Agreement. The net proceeds of the 2026 Senior Notes offering were used in part to redeem the Company's 2020 Senior Notes. The net proceeds from the 2016 Credit Agreement were used to repay the 2012 Credit Agreement in full and to pay certain transaction fees and expenses incurred in connection with the negotiation and execution of 2016 Credit Agreement. In association with these transactions, we recorded a $47.2 million loss on extinguishment of debt. The $47.2 million loss includes a $23.6 million premium on the prepayment of our 2020 Senior Notes, $11.0 million and $4.8 million of deferred financing cost write-offs for the 2012 Credit Agreement and 2020 Senior Notes, respectively, and $1.9 million and $5.9 million of lender expenses for the 2016 Credit Agreement and 2026 Senior Notes, respectively.

~~OTHER INCOME, NET~~

Other income primarily includes $9.3 million of payments received pursuant to the transition agreements with Mattress Firm, which were entered into during the first quarter of 2017. During the fourth quarter of 2016, we spent approximately $13 million to support Mattress Firm with store transitions and product launches. The $9.3 million of payments received from Mattress Firm during the first quarter of 2017 were intended to partially reimburse that prior investment.

~~INCOME TAX PROVISION~~

Nine Months Ended September 30,
(in millions, except percentages) 2017 2016 % Change
Income tax provision $ 48.0
$ 60.2
(20.3 )%
Effective tax rate 33.6 % 30.7 %

~~Income tax provision includes income taxes associated with taxes currently payable and deferred taxes and includes the impact of net operating losses for certain of our foreign operations.~~

~~Our income tax provision decreased $12.2 million, or 20.3%. Our effective tax rate increased 290 basis points as the result of the net~~ impact of discrete items ~~for the nine months ended September 30, 2017, which~~ primarily related to the ~~recognition~~sale of ~~valuation allowances~~a certain interest in ~~one of~~ our ~~Latin American subsidiaries, increases in uncertain tax positions,~~Asia-Pacific joint venture and the ~~repatriation~~impact of ~~cash from our Canadian subsidiary. There was no material net impact as the result of discrete items that impacted the effective tax rate in the period ending September 30, 2016.~~certain stock compensation.

Liquidity and Capital Resources

Liquidity

Our principal sources of funds are cash flows from operations, borrowings made pursuant to our credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, capital expenditures and working capital needs. As of ~~September 30, 2017,~~March 31, 2020, we had working capital of ~~$46.7~~$296.0 million, including cash and cash equivalents of ~~$41.8~~$197.0 million, as compared to working capital of ~~$126.0~~$126.9 million including ~~$65.7 million in~~ cash and cash equivalents of $64.9 million as of December 31, ~~2016.~~2019.

~~The decrease in working capital was primarily driven by decreases in~~At March 31, 2020, total cash and cash equivalents ~~as well as increases~~were $197.0 million, of which $171.6 million was held in ~~accounts payable, income taxes payable~~the U.S. and ~~accrued expenses and other current liabilities. These changes were offset~~$25.4 million was held by ~~an increase in accounts receivable.~~subsidiaries outside of the U.S. The ~~decrease in~~amount of cash and cash equivalents ~~was primarily due~~held by subsidiaries outside of the U.S. and not readily convertible into the U.S. Dollar or other major foreign currencies is not material to ~~timing of principal and interest payments on~~ our ~~debt facilities, our share repurchase program and operating capital needs. Accounts payable changes are primarily driven~~overall liquidity or financial position.

Cash Provided by the timing of payments to vendors. Income taxes payable changes are primarily driven by the timing of estimated income tax payments. Accrued expenses and other current liabilities increases are primarily driven by the timing of interest payments on our senior notes, offset by the funding of employee compensation programs. Accounts receivable changes are primarily driven by net sales, in addition to timing of customer collections.(Used in) Continuing Operations

The table below presents net cash provided by (used in) operating, investing and financing activities from continuing operations for the periods indicated below:


	Three Months Ended March 31,
(in millions)	2020		2019
Net cash provided by (used in) continuing operations:
Operating activities	$	15.0	$	4.6
Investing activities	(64.0)		(20.3)
Financing activities	188.1		11.0

Nine Months Ended September 30,
(in millions) 2017 2016
Net cash provided by (used in):
Operating activities $ 202.5
$ 109.8
Investing activities (38.5 ) (41.9 )
Financing activities (180.6 ) (124.2 )

Cash provided by operating activities from continuing operations increased ~~$92.7~~$10.4 million in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020, as compared to the same period in ~~2016.~~2019. The increase in cash provided by operating activities was primarily driven by the ~~result of an~~ increase in cash ~~provided~~earnings offset in part by ~~operating assets and liabilities. In the third quarter of 2016, we paid~~ a ~~$92.0 million deposit with the Danish Tax Authority ("SKAT"). The remaining~~ increase in working capital. Accrued expenses and other liabilities were a use of cash ~~provided by operating assets and liabilities was primarily~~in 2020 due to ~~changes~~the payout of variable compensation and other expenses such as advertising given higher revenues and earnings in accounts payable and inventories. Additionally, we recorded a loss on extinguishment of debt of $47.2 million associated with financing activities in 2016. Cash provided by operating activities includes $9.3 million for payments received pursuant to the transition agreements with Mattress Firm.2019.

Cash used in investing activities ~~decreased $3.4~~from continuing operations increased $43.7 million in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 as compared to the same period in ~~2016. In 2017, we received $4.9 million~~2019. The increase in ~~proceeds related~~cash used in investing activities was primarily due to cash used to acquire the ~~sale of assets.~~Sherwood Bedding business and planned capital expenditures.

Cash ~~used in~~provided by financing activities from continuing operations increased ~~$56.4~~$177.1 million in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 as compared to the same period in ~~2016. In 2017,~~2019. For the three months ended March 31, 2020, we ~~made~~had net ~~repayments~~borrowings of ~~$138.8~~$380.1 million on our credit facilities, as compared to net borrowings of ~~$212.2~~$13.9 million in ~~2016. This decrease was primarily offset by a decrease in share~~2019. During the three months ended March 31, 2020, we repurchased $199.3 million of our common stock, which included repurchases of ~~$274.8~~$187.5 million under our share repurchase program and $11.8 million which was withheld to satisfy tax withholding obligations related to stock compensation. During the three months ended March 31, 2019, we repurchased 15,731 shares for $0.8 million under our share repurchase program and $2.9 million which was withheld to satisfy tax withholding obligations related to stock compensation. To provide greater financial flexibility in ~~2017 as compared~~response to ~~2016. Additionally,~~the continued impact of COVID-19, we ~~incurred other costs associated with the~~elected to hold approximately $200 million of cash by borrowing on our revolving senior secured credit facility.

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Cash Used in Discontinued Operations

Net cash used in operating, investing and financing activities ~~in 2016.~~from discontinued operations for the periods ended March 31, 2020 and 2019 was not material.

Capital Expenditures

Capital expenditures totaled ~~$43.4~~$26.2 million and ~~$41.9~~$19.1 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively. Given the current global COVID-19 health crisis and resulting business impacts, we have delayed certain capital projects and cancelled or suspended non-critical projects. We currently expect our ~~2017~~2020 capital expenditures to be approximately ~~$60~~$75 to ~~$70~~$90 million, which ~~relate to continued strategic~~includes investments ~~that we believe will support~~in our ~~future plans.~~U.S. enterprise resource planning projects and domestic manufacturing facility.

~~Debt Service~~Indebtedness

On April 12, 2017, we entered into a securitization transaction with respect to certain accounts receivable. In connection with this transaction, we entered into a credit agreement that provides for revolving loans to be made from time to time in a maximum amount that varies over the course of the year based on the seasonality of our accounts receivable and that is subject to an overall limit of $120.0 million. Revolving loans extended under this facility bear interest at a floating rate equal to a one month LIBOR index plus 80 basis points.

Our obligations under the securitization facility are secured by the accounts receivable and certain related rights and the facility agreements contain customary events of default. We continue to own the accounts receivable, which continue to be reflected as assets on our Condensed Consolidated Balance Sheets. Borrowings under this facility are classified as long-term debt within the Condensed Consolidated Balance Sheets. This credit agreement matures on April 12, 2019. As of September 30, 2017, the amount outstanding under this facility was $46.5 million.

Our total debt ~~decreased~~increased to ~~$1,762.9~~$1,941.9 million as of ~~September 30, 2017~~March 31, 2020 from ~~$1,901.0~~$1,547.0 million as of December 31, ~~2016. After giving effect~~2019. To provide greater financial flexibility in response to ~~letters~~the continued impact of COVID-19, we elected to hold approximately $200 million of cash by borrowing on our revolving senior secured credit ~~outstanding~~facility during the first quarter of ~~$21.9 million under the 2016 Credit Agreement, total~~2020. Total remaining availability under ~~the~~our revolving senior secured credit facility ~~was $478.1 million as of September 30, 2017. Refer to Note 4, "Debt~~,"is $101.9 million. We have no major debt maturities until 2023, and our senior secured credit facility matures in ~~our Condensed Consolidated Financial Statements included in ITEM 1 under Part I for further discussion of our debt and applicable interest rates.~~2024.

As of ~~September 30, 2017,~~March 31, 2020, our ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA, ~~as calculated~~which is a non-GAAP financial measure, in accordance with our ~~2016~~2019 Credit Agreement was ~~3.70 times, which was~~3.03 times. This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio ~~covenant~~as set forth in the ~~2016~~2019 Credit Agreement, which limits this ratio to 5.00 times. As of ~~September 30, 2017,~~March 31, 2020, we were in compliance with all of the financial covenants in our debt ~~agreements.~~agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances.

Our ~~business continues~~debt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends. The 2019 Credit Agreement, 2023 Senior Notes and 2026 Senior Notes contain similar limitations which, subject to ~~generate significant cash flows from operations. Our target~~other conditions, allow unlimited restricted payments at times when the ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA, which is a non-GAAP financial measure, remains below 3.5 times. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.5 ~~times,~~times. The limit on restricted payments under the 2019 Credit Agreement, 2023 Senior Notes and ~~we expect~~2026 Senior Notes is in part determined by a basket that this ratio could typically range from 3.0 times to 4.0 times. We expect to continue to use excess cash flows from operations for debt repayment. Subject to market conditions, we may also resume our share repurchase program sometime in 2018.grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted.

For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA calculated in accordance with ~~our 2016~~the 2019 Credit Agreement. Both consolidated ~~funded debt~~indebtedness and ~~Adjusted~~adjusted EBITDA as used in discussion of ~~our 2016~~the 2019 Credit Agreement are ~~terms that are not recognized under GAAP~~non-GAAP financial measures and do not purport to be alternatives to net income as a measure of operating performance or total debt.

Debt Securities Guaranteed by Subsidiaries

The $450.0 million and $600.0 million aggregate principal amount of 2023 Senior Notes and 2026 Senior Notes (collectively the "Senior Notes"), respectively, are general unsecured senior obligations of Tempur Sealy International and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by all of Tempur Sealy International’s 100% directly or indirectly owned domestic subsidiaries (together, the "Obligor Group"). The foreign subsidiaries represent the foreign operations of the Company and do not guarantee the Senior Notes.

The Senior Notes rank equally with or senior to all debt of Tempur Sealy International and the Obligor Group, but are effectively junior to all secured debt, including obligations under the 2019 Credit Agreement, to the extent of the value of the assets securing such debt. Subject to certain restrictions, Tempur Sealy International and the restricted subsidiaries under the applicable indenture may incur additional secured debt. Claims of creditors of non-guarantor subsidiaries, including trade creditors, and creditors holding debt and guarantees issued by those subsidiaries, and claims of preferred stockholders (if any) of those subsidiaries generally will have priority with respect to the assets and earnings of those subsidiaries over the claims of creditors of the holders of the Senior Notes. The Senior Notes and each guarantee are therefore effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of non-guarantor subsidiaries.

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Under the applicable indenture, each guarantee is limited to the maximum amount that would not render the subsidiary guarantor's obligations subject to avoidance under the applicable fraudulent conveyance provisions of the United States Bankruptcy Code or any comparable provision of state law. By virtue of this limitation, a subsidiary guarantor's obligation under its guarantee could be significantly less than amounts payable with respect to the Senior Notes, or could be reduced to zero, depending upon the amount of other obligations of such guarantor.

A subsidiary guarantor will be released from its obligations under the applicable indenture governing the Senior Notes when: (a) the subsidiary guarantor is sold or sells all or substantially all of its assets; (b) the subsidiary is declared "unrestricted" under the applicable indenture; (c) the subsidiary’s guarantee of indebtedness under the 2019 Credit Agreement (as it may be amended, refinanced or replaced) is released (other than a discharge through repayment); (d) the requirements for legal or covenant defeasance or discharge of the applicable indenture have been satisfied; (e) the subsidiary is liquidated or dissolved in accordance with the applicable indenture; or (f) the occurrence of any covenant suspension. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Company’s wholly-owned subsidiary guarantors and non-guarantor subsidiaries. The Company has accounted for its investments in its subsidiaries under the equity method.

In March 2020, the SEC adopted final rules that amend the financial disclosure requirements for subsidiary issuers and guarantors of registered debt securities under Rule 3-10 of Regulation S-X, permitting registrants to disclose summarized financial information for such subsidiary issuers and guarantors. The rule is effective January 4, 2021; however, earlier compliance is permitted. The Company elected to early comply with this rule in this Report.

The summarized financial information for the Obligor Group follows.


	Three Months Ended March 31, 2020
	Obligor Group
(in millions)	(Unaudited)
Net sales to unrelated parties	$	635.9
Net sales to non-obligor subsidiaries	$	15.3
Gross profit	$	269.6
Income from continuing operations	$	60.5
Net income attributable to Tempur Sealy International, Inc.	$	43.0

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	Obligor Group		Obligor Group
	March 31, 2020		December 31, 2019
(in millions)	(Unaudited)
ASSETS

Receivables due from non-obligor subsidiaries	$	93.3	$	161.4
Other current assets	484.1		314.6
Total current assets	577.4		476.0
Loan receivable from non-obligor subsidiaries	315.7		310.1
Goodwill and other intangible assets, net	1,102.7		1,075.5
Other non-current assets	692.7		624.7
Total non-current assets	2,111.1		2,010.3

LIABILITIES

Payables due to non-obligor subsidiaries	93.9		163.3
Other current liabilities	513.8		490.4
Total current liabilities	607.7		653.7
Loan payable to non-obligor subsidiaries	22.0		8.3
Other non-current liabilities	2,169.7		1,832.9
Total non-current liabilities	$	2,191.7	$	1,841.2

Share Repurchase Program

Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock for a total repurchase price of not more than $800.0 million. During the three months ended March 31, 2020, we repurchased 2.6 million shares for approximately $187.5 million. As of March 31, 2020, we had approximately $131.3 million remaining under our existing share repurchase authorization. In February 2020, the Board of Directors authorized an increase, of $194.2 million, to our share repurchase authorization of Tempur Sealy International's common stock to $300.0 million. Share repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate. These repurchases may be funded by operating cash flows and/or borrowings under our debt arrangements. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program is subject to certain limitations under our debt agreements. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws.

We ceased all share repurchase activity in March 2020. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. For a complete description of our Share Repurchase Program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," in the 2019 Annual Report. Please also refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this Report.

Future Liquidity Sources and Uses

We have taken actions and may continue to take actions intended to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets. These actions include:

•Elected to hold approximately $200 million of cash by borrowing on our revolving senior secured credit facility during the first quarter of 2020. Total remaining availability under our facility is $101.9 million. We have no major debt maturities until 2023, and our senior secured credit facility matures in 2024.

•Suspended our share repurchase program.

•Delayed certain capital projects and canceled or suspended non-critical projects.

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•Evaluated and took actions to reduce costs and spending across our organization, which included reductions in advertising, personnel, including a furlough of 35% of U.S. salaried employees, other staffing related expenses and variable compensation.

•Worked closely with our customers, especially third-party retailers, to support their operations and ensure timely collection of amounts owed.

•Closely managed working capital.

•Advanced discussions with commercial banks to obtain additional incremental liquidity in the form of a variable rate term loan.

We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for our foreseeable working capital needs, necessary capital expenditures, and debt service obligations. Our cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements. For information regarding the impact of COVID-19 on our business, including our liquidity and capital resources, please refer to "Risk Factors" in ITEM 1A of Part II of this Report.

Our primary sources of liquidity are cash flows from operations and borrowings, as needed, under our debt facilities. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources. As of March 31, 2020, we had $1,941.9 million in total debt outstanding and our adjusted EBITDA, which is a non-GAAP financial measure, was $151.2 million for the three months ended March 31, 2020. Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Total cash interest payments related to our borrowings are expected to be approximately $90 to $95 million in 2020. Our target range for our ratio of consolidated indebtedness less netted cash, which is a non-GAAP financial measure, is 2.5 to 3.5 times. As a result of the current environment, we anticipate our ratio of consolidated indebtedness less netted cash to temporarily increase above our target range in 2020.

Non-GAAP Financial Information

We provide information regarding adjusted net income, adjusted EPS, adjusted ~~gross profit, adjusted gross margin, adjusted~~ operating income (expense), adjusted operating margin, EBITDA, ~~Adjusted~~adjusted EBITDA, consolidated ~~funded debt~~indebtedness and consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash, ~~and free cash flow,~~ which are not recognized terms under GAAP and do not purport to be alternatives to net income, ~~and~~ earnings per share, operating income (expense), operating margin and net cash provided by operating activities as a measure of operating performance or an alternative to total ~~debt.~~debt as a measure of liquidity. We believe these non-GAAP financial measures provide investors with performance measures that better reflect our underlying operations and trends, providing a perspective not immediately apparent from net income, operating income (expense) and operating ~~income.~~margin. The adjustments ~~management makes~~we make to derive the non-GAAP financial measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP financial measure, but which ~~management does~~we do not consider to be the fundamental attributes or primary drivers of our ~~business, including the exclusion of charges associated with the Mattress Firm termination in the first quarter of 2017 and other costs.~~ business.

We believe that exclusion of these items assists in providing a more complete understanding of our underlying results from continuing operations and trends, and ~~management uses~~we use these measures along with the corresponding GAAP financial measures to manage our business, to evaluate our consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with ~~GAAP and these~~GAAP. These non-GAAP financial measures should be considered supplemental in nature and should not be construed as more significant than comparable financial measures defined by GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. For more information about these non-GAAP financial measures and a reconciliation to the nearest GAAP financial measure, please refer to the reconciliations on the following pages.

~~Third Quarter 2017 Key Highlights~~

(in millions, except percentages and per common share amounts) Three Months Ended % Change
% Change Constant Currency ⁽¹⁾
September 30, 2017 September 30, 2016
Net sales $ 724.8
$ 832.4
(12.9 )% (13.3 )%
Net income 44.6
77.8
(42.7 )% (43.3 )%
Adjusted net income ⁽¹⁾
54.9
77.8
(29.4 )% (30.1 )%
EPS 0.81
1.32
(38.6 )% (39.4 )%
Adjusted EPS ⁽¹⁾
1.00
1.32
(24.2 )% (25.0 )%
EBITDA ⁽¹⁾
123.8
155.0
(20.1 )% (20.6 )%
Adjusted EBITDA ⁽¹⁾
129.3
155.0
(16.6 )% (17.1 )%



~~(1)~~	~~This is a non-GAAP financial measure. Please refer to the reconciliations in the following tables.~~

Adjusted Net Income and Adjusted EPS

A reconciliation of ~~GAAP~~reported net income to adjusted net income and athe calculation of adjusted EPS is provided below. Management believes that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes at the end of the following table.

~~The following table sets forth the reconciliation of our GAAP net income to adjusted net income and a calculation of adjusted EPS for the three months ended September 30, 2017 and 2016:~~

Three Months Ended
(in millions, except per share amounts) September 30, 2017 September 30, 2016
GAAP net income $ 44.6
$ 77.8
Latin American subsidiary charges ⁽¹⁾
11.7
—
Other costs ⁽²⁾
3.0
—
Tax adjustments ⁽³⁾
(4.4 ) —
Adjusted net income $ 54.9
$ 77.8

Adjusted earnings per common share, diluted $ 1.00
$ 1.32

Diluted shares outstanding 54.9
58.8



~~(1)~~	In the third quarter of 2017, we recorded $11.7 million of charges related to non-income taxes and financing arrangements in one of our Latin American subsidiaries. Interest expense includes $9.2 million of charges, comprised of $4.9 million of interest expense on the non-income tax obligations and $4.3 million of interest expense on the financing arrangements. Operating expenses include $2.5 million of non-income tax charges.
~~(2)~~	In the third quarter of 2017, we incurred $3.0 million in other costs. Cost of sales include $1.0 million of hurricane-related manufacturing and logistics costs due to the impact on certain manufacturing facilities and distribution centers. Operating expenses include $2.0 million of bad debt expense associated with a customer's bankruptcy and donations for hurricane relief efforts.
~~(3)~~	~~Adjusted income tax provision represents adjustments associated with the aforementioned items and other discrete income tax events.~~

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

A reconciliation of GAAP gross profit and gross margin to adjusted gross profit and gross margin, respectively, and GAAP operating income (expense) and operating margin to adjusted operating income (expense) and operating margin, respectively, is provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes ~~at the end~~below.

Table of ~~the following table.~~ C o ntents

The following table sets forth the reconciliation of our reported ~~GAAP gross profit~~net income to adjusted net income and ~~operating income (expense) to~~ the calculation of adjusted ~~gross profit and operating income (expense)~~EPS for the three months ended ~~September 30, 2017:~~March 31, 2020 and 2019:

Three Months Ended September 30, 2017
(in millions, except percentages)
Consolidated
Margin
North America ⁽¹⁾
Margin
International (2)
Margin Corporate
Net sales $ 724.8
$ 580.6
$ 144.2
$ —

Gross profit $ 312.2
43.1 % $ 238.4
41.1 % $ 73.8
51.2 % $ —
Adjustments 1.0
1.0
—
—
Adjusted gross profit $ 313.2
43.2 % $ 239.4
41.2 % $ 73.8
51.2 % $ —

Operating income (expense) $ 94.6
13.1 % $ 99.7
17.2 % $ 20.8
14.4 % $ (25.9 )
Adjustments 5.5
1.1
4.4
—
Adjusted operating income (expense) $ 100.1
13.8 % $ 100.8
17.4 % $ 25.2
17.5 % $ (25.9 )


	Three Months Ended
(in millions, except per share amounts)	March 31, 2020		March 31, 2019
Net income	$	59.7	$	28.4
Loss from discontinued operations, net of tax ⁽¹⁾	1.2		0.4
Customer-related charges ⁽²⁾	11.7		—
Operational disruptions ⁽³⁾	2.3		—
Accounting standard adoption ⁽⁴⁾	1.5		—
Acquisition-related costs and other ⁽⁵⁾	—		(3.9)

Tax adjustments ⁽⁶⁾	(3.9)		4.9
Adjusted net income	$	72.5	$	29.8

Adjusted earnings per share, diluted	$	1.34	$	0.54

Diluted shares outstanding	54.0		55.7



(1)		~~Adjustments for the North America business segment represent $1.1 million of hurricane-related costs, which were recorded primarily~~	Certain subsidiaries in ~~cost of sales.~~
~~(2)~~	~~Adjustments for~~ the International business segment ~~represent $2.5~~are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the 2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.
(2)			In the first quarter of 2020, we recorded $11.7 million of ~~non-income tax~~customer-related charges in ~~one~~connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.
(3)			In the first quarter of 2020, in applying contractual definitions under the 2019 Credit Agreement, we recorded $2.3 million of certain direct charges related to operational disruptions caused by the government shutdowns as a result of COVID-19.
(4)			In the first quarter of 2020, we recorded $1.5 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within the covenant compliance calculation.
(5)			In the first quarter of 2019, we recorded $3.3 million of acquisition-related and other costs in operating expenses, primarily related to professional fees for the acquisition of Sleep Outfitters. These costs were offset by $7.2 million of other income related to the sale of our ~~Latin American subsidiaries and $1.9 million~~interest in a subsidiary of ~~bad debt expense~~the Asia-Pacific joint venture.
(6)			Adjusted income tax provision represents the tax effects associated with ~~a customer's bankruptcy.~~the aforementioned items and other discrete income tax events.

Adjusted Operating Income (Expense) and Adjusted Operating Margin

A reconciliation of operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below.

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The following table sets forth our reported ~~GAAP~~ gross profit and the reconciliation of our operating income (expense) and operating margin to the calculation of adjusted operating income (expense) and adjusted operating margin for the three months ended ~~September 30, 2016.~~March 31, 2020. We had no adjustments to ~~GAAP~~ gross profit ~~and operating income (expense)~~ for the three months ended ~~September 30, 2016:~~March 31, 2020.


	Three Months Ended March 31, 2020
(in millions, except percentages)	Consolidated		Margin		North America		Margin		International		Margin		Corporate
Net sales	$	822.4			$	677.2			$	145.2			$	—

Gross profit	$	357.1	43.4	%	$	277.2	40.9	%	$	79.9	55.0	%	$	—



Operating income (expense)	$	105.3	12.8	%	$	101.4	15.0	%	$	26.6	18.3	%	$	(22.7)
Adjustments:
Customer-related charges ⁽¹⁾	11.7				11.7				—				—
Operational disruptions ⁽²⁾	2.3				—				2.3				—
Accounting standard adoption ⁽³⁾	1.5				1.5				—				—
Total adjustments	15.5				13.2				2.3				—

Adjusted operating income (expense)	$	120.8	14.7	%	$	114.6	16.9	%	$	28.9	19.9	%	$	(22.7)

The following table sets forth our reported gross profit and the reconciliation of our operating income (expense) and operating margin to the calculation of adjusted operating income (expense) and adjusted operating margin for the three months ended March 31, 2019. We had no adjustments to gross profit for the three months ended March 31, 2019.


	Three Months Ended March 31, 2019
(in millions, except percentages)	Consolidated		Margin		North America		Margin		International		Margin		Corporate
Net sales	$	690.9			$	544.0			$	146.9			$	—

Gross profit	$	281.8	40.8	%	$	204.4	37.6	%	$	77.4	52.7	%	$	—







Operating income (expense)	$	60.5	8.8	%	$	64.3	11.8	%	$	25.2	17.2	%	$	(29.0)
Adjustments:

Acquisition-related costs and other ⁽⁴⁾	3.3				—				0.3				3.0
Total adjustments	3.3				—				0.3				3.0

Adjusted operating income (expense)	$	63.8	9.2	%	$	64.3	11.8	%	$	25.5	17.4	%	$	(26.0)


(1)			In the first quarter of 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.
(2)			In the first quarter of 2020, in applying contractual definitions under the 2019 Credit Agreement, we recorded $2.3 million of certain direct charges related to operational disruptions caused by the government shutdowns as a result of COVID-19.
(3)			In the first quarter of 2020, we recorded $1.5 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within the covenant compliance calculation.
(4)			In the first quarter of 2019, we recorded $3.3 million of acquisition-related and other costs in operating expenses, primarily related to professional fees for the acquisition of Sleep Outfitters.

Three Months Ended September 30, 2016
(in millions, except percentages) Consolidated Margin North America Margin International Margin Corporate
Net sales $ 832.4
$ 698.5
$ 133.9
$ —

Gross profit $ 362.1
43.5 % $ 290.1
41.5 % $ 72.0
53.8 % $ —

Operating income (expense) $ 131.1
15.7 % $ 128.3
18.4 % $ 25.6
19.1 % $ (22.8 )

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EBITDA, Adjusted EBITDA, Consolidated ~~Funded Debt~~Indebtedness Less ~~Qualified~~Netted Cash ~~and Free Cash Flow~~

The following reconciliations are provided below:

~~GAAP net~~•Net income to EBITDA and ~~Adjusted~~adjusted EBITDA

~~Total debt to consolidated funded debt less qualified cash~~

•Ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA

~~Net~~•Total debt, net to consolidated indebtedness less netted cash ~~provided by operating activities to free cash flow~~

We believe that presenting these non-GAAP measures provides investors with useful information with respect to our operating performance, cash flow generation and comparisons from period to period, as well as general information about our progress in reducing our leverage.

The following table sets forth the reconciliation of our reported ~~GAAP~~ net income to the calculations of EBITDA and ~~Adjusted~~adjusted EBITDA for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016:~~2019:


	Three Months Ended
(in millions)	March 31, 2020		March 31, 2019
Net income	$	59.7	$	28.4
Interest expense, net	20.3		22.4
Income taxes	23.5		16.9
Depreciation and amortization	31.0		28.6
EBITDA	$	134.5	$	96.3
Adjustments:
Loss from discontinued operations, net of tax ⁽¹⁾	1.2		0.4
Customer-related charges ⁽²⁾	11.7		—
Operational disruptions ⁽³⁾	2.3		—
Accounting standard adoption ⁽⁴⁾	1.5		—
Acquisition-related costs and other ⁽⁵⁾	—		(3.9)

Adjusted EBITDA	$	151.2	$	92.8

Three Months Ended
(in millions) September 30, 2017 September 30, 2016
GAAP net income $ 44.6
$ 77.8
Interest expense, net 32.0
20.5
Income taxes 20.3
33.7
Depreciation and amortization 26.9
23.0
EBITDA $ 123.8
$ 155.0
Adjustments:
Latin American subsidiary charges ⁽¹⁾
2.5
—
Other costs ⁽²⁾
3.0
—
Adjusted EBITDA $ 129.3
$ 155.0



(1)		Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the 2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.
(2)		In the ~~third~~first quarter of ~~2017,~~2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account.
(3)		In the first quarter of 2020, in applying contractual definitions under the 2019 Credit Agreement, we recorded $2.3 million of certain direct charges related to ~~non-income taxes and financing arrangements in one~~operational disruptions caused by the government shutdowns as a result of ~~our Latin American subsidiaries. Interest expense includes $9.2~~COVID-19.
(4)		In the first quarter of 2020, we recorded $1.5 million of charges ~~comprised~~related to the adoption of ~~$4.9~~ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within the covenant compliance calculation.
(5)		In the first quarter of 2019, we recorded $3.3 million of ~~interest expense on~~acquisition-related and other costs in operating expenses, primarily related to professional fees for the ~~non-income tax obligations and $4.3~~acquisition of Sleep Outfitters. These costs were offset by $7.2 million of ~~interest expense on the financing arrangements. Operating expenses include $2.5 million of non-income tax charges.~~
~~(2)~~	~~In the third quarter of 2017, the we incurred $3.0 million in~~ other ~~costs. Cost of sales include $1.0 million of hurricane-related manufacturing and logistics costs due~~income related to the ~~impact on certain manufacturing facilities and distribution centers. Operating expenses include $2.0 million~~sale of ~~bad debt expense associated with~~our interest in a ~~customer's bankruptcy and donations for hurricane relief efforts.~~subsidiary of the Asia-Pacific joint venture.

Table of C o ntents

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and ~~Adjusted~~adjusted EBITDA for the trailing twelve months ended ~~September 30, 2017:~~

Trailing Twelve Months Ended
(in millions) September 30, 2017
GAAP net income $ 166.4
Interest expense, net 96.4
Income taxes 74.6
Depreciation and amortization 89.1
EBITDA $ 426.5
Adjustments:
Customer termination charges ⁽¹⁾
34.3
Restructuring costs ⁽²⁾
7.8
Latin American subsidiary charges ⁽³⁾
2.5
Other costs ⁽⁴⁾
3.0
Adjusted EBITDA $ 474.1

Consolidated funded debt less qualified cash $ 1,753.4

Ratio of consolidated funded debt less qualified cash to Adjusted EBITDA 3.70 times

March 31, 2020:


	Trailing Twelve Months Ended
~~(1)~~(in millions)	March 31, 2020
Net income	$	220.8
Interest expense, net	83.6
Income taxes	81.3
Depreciation and amortization	120.9
EBITDA	$	506.6
Adjustments:
Loss from discontinued operations, net of tax ⁽¹⁾	2.2
Customer-related charges ⁽²⁾	41.5
Earnings from Sherwood prior to acquisition ⁽³⁾	9.8
Charitable stock donation ⁽⁴⁾	8.9

Acquisition-related costs and other ⁽⁵⁾	3.5
Operational disruptions ⁽⁶⁾	2.3
Accounting standard adoption ⁽⁷⁾	1.5



Adjusted EBITDA ~~excludes $34.3~~	$	576.3

Consolidated indebtedness less netted cash	$	1,746.0

Ratio of consolidated indebtedness less netted cash to adjusted EBITDA	3.03 times


(1)		Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the 2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.
(2)		In the first quarter of 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account. In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL Holding, LLC ("Mattress PAL") and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account.
(3)		We completed the acquisition of Sherwood Bedding on January 31, 2020 and designated this subsidiary as restricted under the 2019 Credit Agreement. For covenant compliance purposes, we included $9.8 million of EBITDA from this subsidiary for the ten months prior to acquisition in our calculation of adjusted EBITDA for the trailing twelve months ended March 31, 2020.
(4)		In 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.
(5)		In 2019, we recorded $3.5 million of acquisition-related and other costs. These costs included $2.8 million of post-acquisition restructuring charges and professional fees incurred in the acquisition of Sleep Outfitters and $0.7 million of professional fees in connection with the amendment of the senior secured credit facility.
(6)		In the first quarter of 2020, in applying contractual definitions under the 2019 Credit Agreement, we recorded $2.3 million of certain direct charges related to operational disruptions caused by the government shutdowns as a result of COVID-19.
(7)		In the first quarter of 2020, we recorded $1.5 million of charges related to the ~~termination~~adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)". As permitted by the ~~relationship with Mattress Firm. This amount represents~~2019 Credit Agreement, we elected to eliminate the ~~$25.9 million~~effect of ~~net charges and adds~~this accounting change within the ~~net amortization impact of $8.4 million of stock-based compensation benefit incurred in the first quarter of 2017.~~
~~(2)~~	~~Restructuring costs represents costs associated with headcount reduction and store closures.~~
~~(3)~~	In the third quarter of 2017, we recorded $11.7 million of charges related to non-income taxes and financing arrangements in one of our Latin American subsidiaries. Interest expense includes $9.2 million of charges, comprised of $4.9 million of interest expense on the non-income tax obligations and $4.3 million of interest expense on the financing arrangements. Operating expenses include $2.5 million of non-income tax charges.
~~(4)~~	In the third quarter of 2017, we incurred $3.0 million in other costs. Cost of sales include $1.0 million of hurricane-related manufacturing and logistics costs due to the impact on certain manufacturing facilities and distribution centers. Operating expenses include $2.0 million of bad debt expense associated with a customer's bankruptcy and donations for hurricane relief efforts.covenant compliance calculation.

~~Under our 2016~~On October 16, 2019, we entered into the 2019 Credit Agreement ~~Adjusted~~with a syndicate of banks. Under the 2019 Credit Agreement, the definition of adjusted EBITDA contains certain restrictions that limit adjustments to ~~GAAP~~ net income when calculating ~~Adjusted~~adjusted EBITDA. For the trailing twelve months ended ~~September 30, 2017 and 2016,~~March 31, 2020, our adjustments to ~~GAAP~~ net income when calculating ~~Adjusted~~adjusted EBITDA did not exceed the allowable amount under the ~~2016~~2019 Credit Agreement.

The ratio of ~~Adjusted~~adjusted EBITDA under ~~our 2016~~the 2019 Credit Agreement to consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash ~~is 3.70~~was 3.03 times for the trailing twelve months ended ~~September 30, 2017. Our 2016~~March 31, 2020. The 2019 Credit Agreement requires us to maintain a ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA of less than 5.00:1.00 times.

Table of C o ntents

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash as of ~~September 30, 2017.~~March 31, 2020. "Consolidated ~~funded debt"~~Indebtedness" and ~~"qualified cash"~~"Netted Cash" are terms used in ~~our 2016~~the 2019 Credit Agreement for purposes of certain financial covenants.

(in millions) September 30, 2017
Total debt, net $ 1,753.0
Plus: Deferred financing costs ⁽¹⁾
9.9
Total debt 1,762.9
Plus: Letters of credit outstanding 22.4
Consolidated funded debt $ 1,785.3
Less:
Domestic qualified cash⁽²⁾
17.2
Foreign qualified cash ⁽²⁾
14.7
Consolidated funded debt less qualified cash $ 1,753.4



~~(1)~~(in millions)	March 31, 2020
Total debt, net	$	1,933.0
Plus: Deferred financing costs ⁽¹⁾	8.9
Consolidated indebtedness	1,941.9
Less: Netted cash ⁽²⁾	195.9
Consolidated indebtedness less netted cash	$	1,746.0


(1)		We present deferred financing costs as a direct reduction from the carrying amount of the related debt in the Condensed Consolidated Balance Sheets. For purposes of determining total debt for financial covenant purposes, we have added these costs back to total debt, net as calculated inper the Condensed Consolidated Balance Sheets.
(2)	~~Qualified~~	Netted cash includes cash and cash equivalents for domestic and foreign subsidiaries designated as ~~defined~~restricted subsidiaries in the ~~2016~~2019 Credit ~~Agreement equals 100.0% of unrestricted domestic cash plus 60.0% of unrestricted foreign cash. For purposes of calculating leverage ratios, qualified cash is capped at $150.0 million.~~Agreement.

~~The following table sets forth the reconciliation of our net cash from operating activities to free cash flow for the three and nine months ended September��30, 2017 and 2016:~~

Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2,017 2,016 2,017 2,016
Net cash provided by operating activities $ 127.3
$ 57.9
$ 202.5
$ 109.8
Subtract: Purchases of property, plant and equipment 17.5
17.6
43.4
41.9
Free cash flow $ 109.8
$ 40.3
$ 159.1
$ 67.9

~~Stockholders’ Equity~~

~~Share Repurchase Program~~

In February 2017, the Board authorized a $200.0 million increase in the existing share repurchase authorization for repurchases of Tempur Sealy International's common stock. During the first quarter of 2017, we repurchased 0.6 million shares for approximately $40.1 million. We did not repurchase any shares during the second quarter or third quarter of 2017 under this program. As of September 30, 2017, we had approximately $226.9 million remaining under the existing share repurchase authorization. For a complete description of our Share Repurchase Program, please refer to our Annual Report on Form 10-K, including "~~Management's Discussion and Analysis of Financial Condition and Results of Operations -Stockholders' Equity" included in ITEM 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2016.~~

~~Future Liquidity Sources and Uses~~

Our primary sources of liquidity are cash flows from operations and borrowings under our debt facilities. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources. As of September 30, 2017, we had $1,762.9 million in total debt outstanding, and our Adjusted EBITDA was $129.3 million for the three months ended September 30, 2017. Our debt service obligations could, under certain circumstances, have material consequences to our security holders. Total cash interest payments related to our borrowings are expected to be approximately $85.0 to $90.0 million in 2017.

On April 12, 2017, we entered into a securitization transaction with respect to certain accounts receivable. In connection with this transaction, we entered into a credit agreement that provides for revolving loans to be made from time to time in a maximum amount that varies over the course of the year based on seasonality subject to an overall limit of $120.0 million. The revolving loans bear interest at a floating rate equal to a one month LIBOR index plus 80 basis points.

Based upon the current level of operations, we believe that cash generated from operations and amounts available under our credit facilities will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the foreseeable future. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under our debt facilities or otherwise enable us to service our indebtedness or to make anticipated capital expenditures.

During the third quarter of 2017, we recorded $11.7 million of charges, including interest expense of $9.2 million, related to deferred payment programs on non-income tax obligations and local market financing arrangements in one of our Latin American subsidiaries. We are in the process of unwinding the deferred payment programs and financing arrangements, and we will begin repaying these obligations and related interest in the fourth quarter of 2017.

At September 30, 2017, total cash and cash equivalents were $41.8 million, of which $17.2 million was held in the U.S. and $24.6 million was held by subsidiaries outside of the U.S. The amount of cash and cash equivalents held by subsidiaries outside of the U.S. and not readily convertible into other major foreign currencies, or the U.S. Dollar, is not material to our overall liquidity or financial position.

~~Contractual Obligations~~

On April 12, 2017, we entered into a securitization transaction with respect to certain accounts receivable. In connection with this transaction, we entered into a credit agreement that provides for revolving loans to be made from time to time in a maximum amount that varies over the course of the year based on the seasonality of our accounts receivable and that is subject to an overall limit of $120.0 million. The revolving loans bear interest at a floating rate equal to a one month LIBOR index plus 80 basis points.

Our obligations under the securitization transaction facility are secured by the accounts receivable and certain related rights and the facility agreements contain customary events of default. We continue to own the accounts receivable, which continue to be reflected as assets on our Condensed Consolidated Balance Sheets. Borrowings under this facility are classified as long-term debt within the Condensed Consolidated Balance Sheets. This credit agreement matures on April 12, 2019. As of September 30, 2017, the amount outstanding under this facility was $46.5 million.

Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and estimates, please refer to ITEM 7 under Part II, "Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations"~~Operations," in ~~our~~the 2019 Annual ~~Report on Form 10-K for the year ended December 31, 2016.~~Report. There have been no material changes to our critical accounting policies and estimates in ~~2017, other than Goodwill and Indefinite-Lived Intangible Assets discussed below.~~2020.

~~Goodwill and Indefinite-Lived Intangible Assets~~

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

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

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

~~We have not made any material changes in our reporting units or the accounting methodology we use to assess impairment loss on goodwill and indefinite-lived intangible assets since December 31, 2016.~~

On January 30, 2017, we agreed to terminate our relationship with Mattress Firm effective April 3, 2017. Mattress Firm was a customer within the North America segment and was our largest customer for 2016 and the first quarter of 2017. We conducted an interim impairment analysis on our North America reporting unit and indefinite-lived intangible assets during the first quarter of 2017, whichOctober 1, 2019 indicated that the fair values of ~~the North America~~each of our reporting ~~unit~~units and indefinite-lived intangible assets ~~remained~~were substantially in excess of their carrying values. ~~Despite~~Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that ~~excess, however,~~the carrying amount of an asset may not be recoverable. Our assessment of an impairment ~~charges~~on any of these assets could ~~still be required~~change in future periods if significant events happen and/or circumstances change that effect the previously mentioned assumptions included in our 2019 Annual Report, which could result in an impairment charge in future periods. Significant assumptions inherent in the valuation methodologies include, but are not limited to, such estimates as future ~~if other significant economic events occur~~projected business results, growth rates, the weighted average cost of capital, and royalty and discount rates. While we are unable to currently determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our ~~assumptions on how quickly we can recapture market share and net sales following the termination~~business, a substantial decline in our operating performance over an extended period of time could cause us to recognize an impairment of some or all of our ~~Mattress Firm relationship do not meet our current expectations. No additional impairment indicators were identified during the three months ended September 30, 2017.~~tangible and intangible assets.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exposures

We manage a portion of our exposure in foreign currency transactions through the use of foreign exchange forward contracts. Refer to Note 1, "Summary of Significant Accounting Policies," to the accompanying consolidated financial statements for a summary of our foreign exchange forward contracts as of September 30, 2017.

As a result of our global operations, our earnings are exposed to changes in foreign currency exchange rates. Many of our foreign businesses operate in functional currencies other than the U.S. dollar. IfAs the U.S. dollar ~~weakened~~strengthens relative to the ~~euro~~Euro or other foreign currencies where we have operations, there would be a positive impact on our operating results upon translation of those foreign operating results into the U.S. dollar. Foreign currency exchange rate changes positively impacted our Adjusted EBITDA by approximately 0.6% in the three months ended September 30, 2017. If the U.S. dollar strengthened relative to the euro or other foreign currencies where we have operations, there wouldwill be a negative impact on our operating results upon translation of those foreign operating results into the U.S. dollar. Foreign currency exchange rate changes negatively impacted our ~~Adjusted~~adjusted EBITDA, which is a non-GAAP financial measure, by ~~approximately 1.1%~~0.3% in the ~~nine~~three months ended ~~September 30, 2017. We do not hedge the translation of foreign currency operating results into the U.S. dollar.~~March 31, 2020.

We hedge a portion of our currency exchange exposure relating to foreign currency transactions with foreign exchange forward contracts. A sensitivity analysis indicates the potential loss in fair value on foreign exchange forward contracts outstanding at ~~September 30, 2017,~~March 31, 2020, resulting from a hypothetical 10.0% adverse change in all foreign currency exchange rates against the U.S. dollar, is approximately ~~$5.2~~$6.8 million. Such losses would be largely offset by gains from the revaluation or settlement of the underlying assets and liabilities that are being protected by the foreign exchange forward contracts.

Table of C o ntents

Interest Rate Risk

~~On September 30, 2017,~~As of March 31, 2020, we had variable-rate debt of approximately ~~$609.0~~$821.8 million. Holding other variables constant, including levels of indebtedness, a one hundred basis point increase in interest rates on our variable-rate debt would cause an estimated reduction in income before income taxes of approximately ~~$6.1~~$8.2 million. We continue to evaluate the interest rate environment and look for opportunities to improve our debt structure and minimize interest rate risk and expense.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the period covered by this ~~report.~~Report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of ~~September 30, 2017,~~March 31, 2020, and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~See~~Information regarding legal proceedings can be found in Note ~~8, "Commitments~~11, "Commitments and Contingencies,," inof the "Notes to Condensed Consolidated Financial Statements," ~~in ITEM 1~~ under Part I, ITEM 1, "Financial Statements" of this Report ~~for a description of certain legal proceedings.~~and is incorporated by reference herein.

We are involved in various other legal proceedings incidental to the operations of our business. We believe that the outcome of all such pending other legal proceedings in the aggregate will not have a material adverse effect on our business, financial condition, liquidity or operating results.

ITEM 1A. RISK FACTORS

~~None.~~The outbreak of COVID-19 has had, and may continue to have, a negative impact on the global economy and on our business, operations, or financial results.

The novel strain of coronavirus (COVID-19) first identified in Wuhan, China in December 2019 has now spread to nearly all regions around the world. The outbreak, and measures taken to contain or mitigate it, have had dramatic adverse consequences for the economy, including on demand, operations, supply chains, and financial markets. The nature and scope of the consequences to date are difficult to evaluate precisely, and their future course is impossible to predict with confidence.

The COVID-19 crisis has already had several significant effects on our business and our financial condition, including the following:

•the impact of the pandemic on the economies and financial markets of the regions in which we operate, including an increase in unemployment, has resulted in consumers having less disposable income and, in turn, in decreased sales of our products;

•“shelter in place” and other similar mandated or suggested isolation protocols have disrupted third-party retailer stores and company-owned stores, via store closures or reduced operating hours and decreased retail traffic;

•many of our third-party retailer stores within the Wholesale channel are closed in the U.S. and around the world; and

•company-owned stores within the Direct channel are either closed or operating under restricted conditions.

Table of C o ntents

These effects, particularly store closures, have negatively impacted sales at the end of the quarter and may negatively impact sales until the COVID-19 pandemic moderates. At this time, we cannot reasonably estimate the length of time these closures will remain in effect, and the inability to sell our products through the Wholesale channel and within company-owned stores within the Direct channel has had and will continue to have a material adverse effect on our revenues and results of operation. Our e-commerce operations remain open globally and ready to serve our customers, as do the e-commerce operations for many of our third-party retailers. The COVID-19 pandemic is also shifting demand patterns to favor our lower-margin products, which is producing a reduction in our gross margins.

These effects began in the latter weeks of March and have continued to date, so effects on the second quarter are likely to be more significant.

The effects of the COVID-19 crisis could be aggravated if the crisis continues, and we could also see additional impacts that might include the following:

•a potential global recession, a decline in consumer confidence and spending, or a further increase in unemployment could continue to result in consumers having less disposable income and, in turn, in decreased sales of our products;

•the continued disruption to third-party retailer stores and company-owned stores resulting from "shelter in place" and similar protocols, which, even if rolled back, could be reinstated as the pandemic continues to evolve;

•social distancing measures or changes in consumer spending behaviors due to COVID-19 may continue to impact retail demand after the resumption of more normalized operations and such actions could result in a loss of sales and profit;

•difficulty accessing debt and equity on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions may affect our ability to access capital necessary to operate our business;

•the failure of our Wholesale channel customers to whom we extend credit to pay amounts owed to us on time, or at all, particularly if such customers are significantly impacted by COVID-19;

•the risk that even after the pandemic has initially subsided, fear of COVID-19 re-occurrence could cause customers to avoid public places where our stores and those of our Wholesale partners are located;

•we may experience temporary or long-term disruptions in our supply chain, as the outbreak has resulted in travel disruptions and has impacted manufacturing and distribution throughout the world;

•we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations.

The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate impact of COVID-19. The full extent of the impact and effects of COVID-19 on our business, operations, liquidity, financial condition and results of operations remain uncertain at this time but could be material.

The future impact of the COVID-19 crisis on our business, operations, or financial results is highly uncertain and will depend on numerous evolving factors that we cannot predict precisely, including, but not limited to:

•the duration, scope, and severity of the COVID-19 pandemic;

•the disruption or delay of production and delivery of materials and products in our supply chain;

•the impact of travel bans, work-from-home policies, or shelter-in-place orders;

•the temporary or prolonged shutdown of manufacturing facilities or retail stores and decreased retail traffic;

•staffing shortages;

•general economic, financial, and industry conditions, particularly conditions relating to liquidity, financial performance, and related credit issues in the retail sector, which may be amplified by the effects of COVID-19;

•the long-term effects of COVID-19 on the national and global economy, including on consumer confidence and spending, financial markets and the availability of credit for us, our suppliers and our customers; and

•our success in attempting to reduce operating costs and conserve cash, which could require further actions to improve our cash position, including but not limited to, implementing expanded employee furloughs, and foregoing capital expenditures and other discretionary expenses.

Table of C o ntents

Delaware law and our certificate of incorporation and by-laws contain anti-takeover provisions, and on March 27, 2020 our Board of Directors adopted a limited duration shareholder rights agreement, any of which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors that some stockholders may consider favorable.

Provisions of Delaware law, our certificate of incorporation and by-laws and our limited duration shareholder rights agreement adopted on March 27, 2020 (with an ownership trigger of 10% (20% in the case of a passive institutional investor)) could hamper a third party's acquisition of us, or delay or discourage a third party from attempting to acquire control of us via a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors. You may not have the opportunity to participate in these transactions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:

•our ability to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of our common stock;

•the requirements that our stockholders provide advance notice when nominating our directors; and

•the inability of our stockholders to convene a stockholders' meeting without the chairperson of the Board of Directors, the president, or a majority of the Board of Directors first calling the meeting.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

The following table sets forth purchases of our common stock for the three months ended ~~September 30, 2017:~~March 31, 2020:


Period	(a) Total number of shares purchased		(b) Average Price Paid per Share	(c) Total number of shares purchased as part of publicly announced plans or programs	(d) Maximum number of shares (or approximate dollar value of shares) that may yet be purchased under the plans or programs (in millions) ⁽²⁾
January 1, 2020 - January 31, 2020	221,585	⁽¹⁾	$87.80	103,681	$115.3
February 1, 2020 - February 29, 2020	477,587	⁽¹⁾	$82.48	459,898	$271.7
March 1, 2020 - March 31, 2020	2,020,932	⁽¹⁾	$69.49	2,018,940	$131.3
Total	2,720,104			2,582,519

Period (a) Total number of shares purchased (b) Average Price Paid per Share (c) Total number of shares purchased as part of publicly announced plans or programs
(d) Maximum number of shares (or approximate dollar value of shares) that may yet be purchased under the plans or programs
(in millions)
July 1, 2017 - July 31, 2017 — $— — $226.9
August 1, 2017 - August 31, 2017 — $— — $226.9
September 1, 2017 - September 30, 2017 13,255
⁽¹⁾
$62.10 — $226.9
Total 13,255 —



(1)			Includes shares withheld upon the vesting of certain equity awards to satisfy tax withholding obligations. The shares withheld were valued at the closing price of the common stock on the New York Stock Exchange on the vesting date or prior business day.
(2)			In February 2020, the Board of Directors increased the authorization under the Company's share repurchase program by an additional $194.2 million. The Company ceased all share repurchase activity in March 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

(a) Not applicable.

(b) Not applicable.

Table of C o ntents

ITEM 6. EXHIBITS

The following is an index of the exhibits included in this report:



~~10.1~~3.1		~~Tempur Sealy~~A mended and Restated Certificate of Inco rporation of Tempur-Pe dic International Inc. ~~Long-Term Incentive Plan (incorporated by reference~~(filed as Exhibit 3.1 to ~~Exhibit 10.1~~Amendment No. 3 to the ~~Company’s~~R egistrant's registration statement on Form S-1 (File No. 333-109798) as filed on December 12, 2003). ⁽¹⁾
3.2		A mendment to Certificate of Incorporation of Tempur-Pedic International Inc. (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K ~~(File No. 001-31922)~~as filed on ~~July 26, 2017)~~May 24, 2013). ⁽¹⁾
~~10.2~~3.3		~~Form~~A mended and Restated Certificate of ~~2017 Performance Restricted~~Designation of Series A Junior Participating Preferred Stock ~~Unit Award Agreement (Project 650 Award) (incorporated by reference to~~of Tempur S ealy International , Inc. (filed as Exhibit ~~10.1~~3.1 to the ~~Company’s~~Registrant 's Current Report on Form 8-K ~~(File No. 001-31922)~~as filed on ~~August~~ Ma rch 1 5 , 201 7 ~~2017)~~).⁽¹⁾
~~10.3~~3.4		~~Employment~~S econd Amended and ~~Non-Competition~~Restated Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Te mpur Seal y International, Inc. (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K as filed on March 27, 2020)⁽¹⁾
4.1		R ights Agreement, dated ~~September 5, 2017,~~as of March 27, 2020, by and between Tempur Sealy International, Inc. and ~~H. Clifford Buster, III~~American Stock Transfer & Trust Company, LLC, as rights agent (filed as Exhibit 4.1 to the Registrant's Cur rent Report on Form 8-K as filed on March 27, 2020)⁽¹⁾
~~10.4~~10.1		~~2017 Performance Restricted Stock Unit Award Agreement dated as of September 5, 2017, between Tempur Sealy International, Inc. and H. Clifford Buster, III~~⁽¹⁾
~~10.5~~	~~Restricted Stock Unit Award Agreement dated as of September 5, 2017, between Tempur Sealy International, Inc. and H. Clifford Buster, III~~⁽¹⁾
~~10.6~~	Second Amendment to Employment and Non-Competition Agreement dated ~~October 13, 2017~~March 25, 2020 by and between Tempur Sealy International, Inc. and ~~Bhaskar Rao~~Scott L. Thompson (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8 -K as filed on March 27, 2020)^{(1) (2)}
~~10.7~~22		~~2017 Performance Restricted Stock Unit Award Agreement dated as~~List of ~~October 13, 2017, between Tempur Sealy International, Inc. and Bhaskar Rao~~Subsidiary Guarantors⁽¹⁾
~~10.8~~31.1		~~Restricted Stock Unit Award Agreement dated October 13, 2017, between Tempur Sealy International, Inc. and Bhaskar Rao~~⁽¹⁾
~~31.1~~	Certification of Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
~~101.0~~101		The following materials from Tempur Sealy International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017,~~March 31, 2020, formatted in Inline XBRL ~~(Extensible~~(eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and ~~(v)~~(vi) the Notes to Condensed Consolidated Financial ~~Statements~~ Statements.
104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL.

Table of C o ntents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			TEMPUR SEALY INTERNATIONAL, INC.

Date: May 7, 2020			~~TEMPUR SEALY INTERNATIONAL, INC.~~
By:
~~Date: November 9, 2017~~	~~By:~~	/s/ BHASKAR RAO
				Bhaskar Rao
				Executive Vice President and Chief Financial Officer



Delaware						33-1022198
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


(in millions)	September 30, 2017			December 31, 2016			(in millions)	March 31, 2020		December 31, 2019
North America	$	2,731.7		$	2,581.4		North America	$	3,327.6	$	3,142.9
International	613.6			572.6			International	631.8		615.3
Corporate	604.2			658.7			Corporate	647.5		477.1
Inter-segment eliminations	(1,214.2		)	(1,110.1		)	Inter-segment eliminations	(1,300.7)		(1,173.5)
Total assets	$	2,735.3		$	2,702.6		Total assets	$	3,306.2	$	3,061.8



o☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


			Page

				~~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		7
	Condensed Consolidated Statements of Cash Flows		78
	Notes to Condensed Consolidated Financial Statements		89

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3324

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		5140

ITEM 4.	Controls and Procedures		5241

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings		5241

ITEM 1A.	Risk Factors		5241

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		5343

ITEM 3.	Defaults upon Senior Securities		5343

ITEM 4.	Mine Safety Disclosures		5343

ITEM 5.	Other Information		5343

ITEM 6.	Exhibits		5444

Signatures					5545


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
	2017			2016			2017			2016				2020		2019
Net income before non-controlling interests	$	41.2		$	76.6		$	94.9		$	135.6		Net income before non-controlling interests	$	59.8	$	28.6
Other comprehensive income (loss), net of tax
Other comprehensive income, net of tax:													Other comprehensive income, net of tax:
Foreign currency translation adjustments	9.6			(5.0		)	27.7			11.8			Foreign currency translation adjustments	(23.0)		4.0
Unrealized loss on cash flow hedging derivatives, net of tax	—			(0.2		)	(0.6		)	(6.1		)
Other comprehensive income (loss), net of tax	9.6			(5.2		)	27.1			5.7

Other comprehensive (loss) income, net of tax													Other comprehensive (loss) income, net of tax	(23.0)		4.0
Comprehensive income	50.8			71.4			122.0			141.3			Comprehensive income	36.8		32.6
Less: Comprehensive loss attributable to non-controlling interests	(3.4		)	(1.2		)	(8.1		)	(3.1		)
Less: Comprehensive income attributable to non-controlling interests													Less: Comprehensive income attributable to non-controlling interests	0.1		0.2
Comprehensive income attributable to Tempur Sealy International, Inc.	$	54.2		$	72.6		$	130.1		$	144.4		Comprehensive income attributable to Tempur Sealy International, Inc.	$	36.7	$	32.4



(in millions)
Balance as of December 31, 2016	$	30.3
Amounts accrued	88.1
Returns charged to accrual	(85.5		)
Balance as of September 30, 2017	$	32.9


	Three Months Ended
	March 31,
(in millions, except per common share amounts)	2020		2019
Numerator:
Income from continuing operations, net of income attributable to non-controlling interest	$	60.9	$	28.8

Denominator:
Denominator for basic earnings per common share-weighted average shares	53.4		54.7
Effect of dilutive securities:
Employee stock-based compensation	0.6		1.0
Denominator for diluted earnings per common share-adjusted weighted average shares	54.0		55.7

Basic earnings per common share for continuing operations	$	1.14	$	0.53

Diluted earnings per common share for continuing operations	$	1.13	$	0.52



	Tempur Sealy International, Inc. (Ultimate Parent)			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	520.2		$	222.8		$	(18.2	)	$	724.8
Cost of sales	—			300.4			130.4			(18.2		)	412.6
Gross profit	—			219.8			92.4			—			312.2
Selling and marketing expenses	1.4			101.7			52.3			—			155.4
General, administrative and other expenses	4.9			42.4			23.7			—			71.0
Equity income in earnings of unconsolidated affiliates	—			—			(3.5		)	—			(3.5		)
Royalty income, net of royalty expense	—			(5.3		)	—			—			(5.3		)
Operating (loss) income	(6.3		)	81.0			19.9			—			94.6

Other expense, net:
Third party interest expense, net	14.8			6.7			10.5			—			32.0
Intercompany interest (income) expense, net	(1.1		)	2.8			(1.7		)	—			—
Interest expense, net	13.7			9.5			8.8			—			32.0
Other (income) expense, net	—			(4.5		)	5.6			—			1.1
Total other expense, net	13.7			5.0			14.4			—			33.1

Income from equity investees	53.8			1.7			—			(55.5		)	—

Income before income taxes	33.8			77.7			5.5			(55.5		)	61.5
Income tax benefit (provision)	7.4			(23.9		)	(3.8		)	—			(20.3		)
Net income before non-controlling interests	41.2			53.8			1.7			(55.5		)	41.2
Less: Net loss attributable to non-controlling interests	(3.4		)	—			(3.4		)	3.4			(3.4		)
Net income attributable to Tempur Sealy International, Inc.	$	44.6		$	53.8		$	5.1		$	(58.9	)	$	44.6

Comprehensive income attributable to Tempur Sealy International, Inc.	$	54.2		$	54.0		$	14.6		$	(68.6	)	$	54.2



	Three Months Ended September 30,
(in millions, except percentages and per share amounts)	2017					2016
Net sales	$	724.8		100.0	%	$	832.4		100.0	%
Cost of sales	412.6			56.9		470.3			56.5
Gross profit	312.2			43.1		362.1			43.5
Selling and marketing expenses	155.4			21.4		175.2			21.0
General, administrative and other expenses	71.0			9.8		64.0			7.7
Equity income in earnings of unconsolidated affiliates	(3.5		)	(0.5	)	(2.4		)	(0.2	)
Royalty income, net of royalty expense	(5.3		)	(0.7	)	(5.8		)	(0.7	)
Operating income	94.6			13.1		131.1			15.7

Other expense, net:
Interest expense, net	32.0			4.4		20.5			2.5
Other expense, net	1.1			0.2		0.3			—
Total other expense, net	33.1			4.6		20.8			2.5

Income before income taxes	61.5			8.5		110.3			13.3
Income tax provision	(20.3		)	(2.8	)	(33.7		)	(4.1	)
Net income before non-controlling interests	41.2			5.7		76.6			9.2
Less: Net loss attributable to non-controlling interests	(3.4		)	(0.5	)	(1.2		)	(0.1	)
Net income attributable to Tempur Sealy International, Inc.	$	44.6		6.2	%	$	77.8		9.3	%

Earnings per common share:
Basic	$	0.83				$	1.34
Diluted	$	0.81				$	1.32

Weighted average common shares outstanding:
Basic	54.0					58.2
Diluted	54.9					58.8



	Nine Months Ended September 30,
(in millions, except per share amounts)	2017					2016
Net sales	$	2,106.2		100.0	%	$	2,357.8		100.0	%
Cost of sales	1,238.8			58.8		1,367.8			58.0
Gross profit	867.4			41.2		990.0			42.0
Selling and marketing expenses	461.4			21.9		498.1			21.1
General, administrative and other expenses	206.5			9.8		207.6			8.8
Customer termination charges, net	14.4			0.7		—			—
Equity income in earnings of unconsolidated affiliates	(10.6		)	(0.5	)	(8.6		)	(0.4	)
Royalty income, net of royalty expense	(15.0		)	(0.7	)	(15.1		)	(0.6	)
Operating income	210.7			10.0		308.0			13.1

Other expense, net:
Interest expense, net	76.2			3.6		65.0			2.8
Loss on extinguishment of debt	—			—		47.2			2.0
Other income, net	(8.4		)	(0.4	)	—			—
Total other expense, net	67.8			3.2		112.2			4.8

Income before income taxes	142.9			6.8		195.8			8.3
Income tax provision	(48.0		)	(2.3	)	(60.2		)	(2.5	)
Net income before non-controlling interests	94.9			4.5		135.6			5.8
Less: Net loss attributable to non-controlling interests	(8.1		)	(0.4	)	(3.1		)	(0.1	)
Net income attributable to Tempur Sealy International, Inc.	$	103.0		4.9	%	$	138.7		5.9	%

Earnings per common share:
Basic	$	1.91				$	2.31
Diluted	$	1.89				$	2.28

Weighted average common shares outstanding:
Basic	54.0					60.1
Diluted	54.6					60.8



	Three Months Ended September 30, 2017
(in millions, except percentages)	Consolidated		Margin		North America ⁽¹⁾		Margin		International (2)		Margin		Corporate
Net sales	$	724.8			$	580.6			$	144.2			$	—

Gross profit	$	312.2	43.1	%	$	238.4	41.1	%	$	73.8	51.2	%	$	—
Adjustments	1.0				1.0				—				—
Adjusted gross profit	$	313.2	43.2	%	$	239.4	41.2	%	$	73.8	51.2	%	$	—

Operating income (expense)	$	94.6	13.1	%	$	99.7	17.2	%	$	20.8	14.4	%	$	(25.9	)
Adjustments	5.5				1.1				4.4				—
Adjusted operating income (expense)	$	100.1	13.8	%	$	100.8	17.4	%	$	25.2	17.5	%	$	(25.9	)



	Three Months Ended September 30, 2016
(in millions, except percentages)	Consolidated		Margin		North America		Margin		International		Margin		Corporate
Net sales	$	832.4			$	698.5			$	133.9			$	—

Gross profit	$	362.1	43.5	%	$	290.1	41.5	%	$	72.0	53.8	%	$	—

Operating income (expense)	$	131.1	15.7	%	$	128.3	18.4	%	$	25.6	19.1	%	$	(22.8	)

Incorporated by reference.

Indicates management contract or compensatory plan or arrangement.

This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.