UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172020
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .
to
Commission file number 001-31922
TEMPUR SEALY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
| Delaware | | 33-1022198 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1000 Tempur Way
Lexington, Kentucky 40511
(Address, including zip code, of principal executive offices)
Registrant’s telephone number, including area code: (800) 878-8889
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of exchange on which registered |
| Common Stock, $0.01 par value | TPX | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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):
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| | | | | | | | | | | | | |
Large accelerated filerx | Accelerated filero | Non-accelerated filero | Smaller reporting companyo | Emerging Growth Companyo |
| x | o | (Do not check if a smaller reporting company) o | ☐ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨☐ No ý
The number of shares outstanding of the registrant’s common stock as of November 6, 2017August 3, 2020 was 54,180,62951,566,272 shares.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, (this "Report"), including the information incorporated by reference herein, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which includes information concerning one or more of our plans; objectives; goals; strategies; future events; future revenuesstrategies 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 sales and demand trends, performance generally for 2020 and subsequent periods, the potential vesting of the Company’s long-term aspirational plan, 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 implementationexpectations or that our beliefs will prove correct.
Numerous factors, many of our key strategic priorities and anticipated resulting growthwhich 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 flowthis Report. These risk factors include the impact of the macroeconomic environment in both the United StatesU.S. and internationally;internationally on our business segments and expectations regarding growth of the mattress industry; uncertainties arising from global events; general economic, financialevents, natural disasters or pandemics; risks associated with the duration, scope and industry conditions, particularly inseverity of COVID-19 and its effects on our business and operations, including the retail sector, as well as consumer confidence and the availabilitydisruption 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, distributiondevelop 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 wholesaleretail 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; changescompetition in demand forour 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 productsretail 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 investmentsCOVID-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 productforeign tax rates and channel mix andchanges in tax laws generally, including the impactability 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 proceedingschanging 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 andchanges, including changes in capital expenditures; expectations regarding the impactinternational trade duties, tariffs and other aspects of costs from headcount reductions and international store closures; andtrade policy; our ability to effectively manage cash. Manyprotect 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, includinginclude the risk factors discussed under the heading "Risk Factors" underin Part I, ITEM 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 20162019 (the "2019 Annual Report"), and the risks identified in Part II, ITEM 1A, Risk Factors, of this Report. ThereIn 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" refersmay 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 prior5.625% senior credit facility entered intonotes 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.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per common share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Six Months Ended | | |
| | June 30, | | | | June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Net sales | $ | 665.2 | | | $ | 722.8 | | | $ | 1,487.6 | | | $ | 1,413.7 | |
| Cost of sales | 399.3 | | | 409.4 | | | 864.6 | | | 818.5 | |
| Gross profit | 265.9 | | | 313.4 | | | 623.0 | | | 595.2 | |
| Selling and marketing expenses | 135.1 | | | 163.3 | | | 306.1 | | | 316.8 | |
| General, administrative and other expenses | 82.4 | | | 72.7 | | | 163.0 | | | 143.4 | |
| | | | | | | |
| Equity income in earnings of unconsolidated affiliates | (5.0) | | | (3.6) | | | (4.8) | | | (6.5) | |
| Operating income | 53.4 | | | 81.0 | | | 158.7 | | | 141.5 | |
| | | | | | | |
| Other expense, net: | | | | | | | |
| Interest expense, net | 20.6 | | | 22.5 | | | 40.9 | | | 44.9 | |
| Other expense (income), net | 0.3 | | | — | | | 0.8 | | | (7.8) | |
| Total other expense, net | 20.9 | | | 22.5 | | | 41.7 | | | 37.1 | |
| | | | | | | |
| Income from continuing operations before income taxes | 32.5 | | | 58.5 | | | 117.0 | | | 104.4 | |
| Income tax provision | (9.4) | | | (15.8) | | | (32.9) | | | (32.7) | |
| Income from continuing operations | 23.1 | | | 42.7 | | | 84.1 | | | 71.7 | |
| Income (loss) from discontinued operations, net of tax | 0.1 | | | (1.2) | | | (1.1) | | | (1.6) | |
| Net income before non-controlling interests | 23.2 | | | 41.5 | | | 83.0 | | | 70.1 | |
| Less: Net income (loss) attributable to non-controlling interests | 0.2 | | | (0.1) | | | 0.3 | | | 0.1 | |
| Net income attributable to Tempur Sealy International, Inc. | $ | 23.0 | | | $ | 41.6 | | | $ | 82.7 | | | $ | 70.0 | |
| | | | | | | |
| Earnings per common share: | | | | | | | |
| | | | | | | |
| Basic | | | | | | | |
| Earnings per share for continuing operations | $ | 0.44 | | | $ | 0.78 | | | $ | 1.60 | | | $ | 1.31 | |
| Loss per share for discontinued operations | — | | | (0.02) | | | (0.02) | | | (0.03) | |
| Earnings per share | $ | 0.44 | | | $ | 0.76 | | | $ | 1.58 | | | $ | 1.28 | |
| | | | | | | |
| Diluted | | | | | | | |
| Earnings per share for continuing operations | $ | 0.44 | | | $ | 0.76 | | | $ | 1.58 | | | $ | 1.29 | |
| Loss per share for discontinued operations | — | | | (0.02) | | | (0.02) | | | (0.03) | |
| Earnings per share | $ | 0.44 | | | $ | 0.74 | | | $ | 1.56 | | | $ | 1.26 | |
| | | | | | | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 51.6 | | | 54.7 | | | 52.5 | | | 54.7 | |
| Diluted | 52.0 | | | 56.0 | | | 53.0 | | | 55.6 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net sales | $ | 724.8 |
| | $ | 832.4 |
| | $ | 2,106.2 |
| | $ | 2,357.8 |
|
| Cost of sales | 412.6 |
| | 470.3 |
| | 1,238.8 |
| | 1,367.8 |
|
| Gross profit | 312.2 |
| | 362.1 |
| | 867.4 |
| | 990.0 |
|
| Selling and marketing expenses | 155.4 |
| | 175.2 |
| | 461.4 |
| | 498.1 |
|
| General, administrative and other expenses | 71.0 |
| | 64.0 |
| | 206.5 |
| | 207.6 |
|
| Customer termination charges, net | — |
| | — |
| | 14.4 |
| | — |
|
| Equity income in earnings of unconsolidated affiliates | (3.5 | ) | | (2.4 | ) | | (10.6 | ) | | (8.6 | ) |
| Royalty income, net of royalty expense | (5.3 | ) | | (5.8 | ) | | (15.0 | ) | | (15.1 | ) |
| Operating income | 94.6 |
| | 131.1 |
| | 210.7 |
| | 308.0 |
|
| | | | | | | | |
| Other expense, net: | | | | | | | |
| Interest expense, net | 32.0 |
| | 20.5 |
| | 76.2 |
| | 65.0 |
|
| Loss on extinguishment of debt | — |
| | — |
| | — |
| | 47.2 |
|
| Other expense (income), net | 1.1 |
| | 0.3 |
| | (8.4 | ) | | — |
|
| Total other expense, net | 33.1 |
| | 20.8 |
| | 67.8 |
| | 112.2 |
|
| | | | | | | | |
| Income before income taxes | 61.5 |
| | 110.3 |
| | 142.9 |
| | 195.8 |
|
| Income tax provision | (20.3 | ) | | (33.7 | ) | | (48.0 | ) | | (60.2 | ) |
| Net income before non-controlling interests | 41.2 |
| | 76.6 |
| | 94.9 |
| | 135.6 |
|
| Less: Net loss attributable to non-controlling interests | (3.4 | ) | | (1.2 | ) | | (8.1 | ) | | (3.1 | ) |
| Net income attributable to Tempur Sealy International, Inc. | $ | 44.6 |
| | $ | 77.8 |
| | $ | 103.0 |
| | $ | 138.7 |
|
| | | | | | | | |
| Earnings per common share: | | | | | | | |
| Basic | $ | 0.83 |
| | $ | 1.34 |
| | $ | 1.91 |
| | $ | 2.31 |
|
| Diluted | $ | 0.81 |
| | $ | 1.32 |
| | $ | 1.89 |
| | $ | 2.28 |
|
| | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 54.0 |
| | 58.2 |
| | 54.0 |
| | 60.1 |
|
| Diluted | 54.9 |
| | 58.8 |
| | 54.6 |
| | 60.8 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
| | | | | | | | | | | | | | | | Three Months Ended | | | Six Months Ended | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | June 30, | | | June 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| Net income before non-controlling interests | $ | 41.2 |
| | $ | 76.6 |
| | $ | 94.9 |
| | $ | 135.6 |
| Net income before non-controlling interests | $ | 23.2 | | | $ | 41.5 | | | $ | 83.0 | | | $ | 70.1 | |
| 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 | 10.7 | | | 3.0 | | | (12.3) | | | 7.0 | |
| 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 income (loss), net of tax | 10.7 | | | 3.0 | | | (12.3) | | | 7.0 | |
| Comprehensive income | 50.8 |
| | 71.4 |
| | 122.0 |
| | 141.3 |
| Comprehensive income | 33.9 | | | 44.5 | | | 70.7 | | | 77.1 | |
| Less: Comprehensive loss attributable to non-controlling interests | (3.4 | ) | | (1.2 | ) | | (8.1 | ) | | (3.1 | ) | |
| Less: Comprehensive income (loss) attributable to non-controlling interests | | Less: Comprehensive income (loss) attributable to non-controlling interests | 0.2 | | | (0.1) | | | 0.3 | | | 0.1 | |
| Comprehensive income attributable to Tempur Sealy International, Inc. | $ | 54.2 |
| | $ | 72.6 |
| | $ | 130.1 |
| | $ | 144.4 |
| Comprehensive income attributable to Tempur Sealy International, Inc. | $ | 33.7 | | | $ | 44.6 | | | $ | 70.4 | | | $ | 77.0 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | December 31, 2019 |
| ASSETS | (Unaudited) | | | ASSETS | (Unaudited) | | |
| | | | | |
| Current Assets: | | | | Current Assets: | |
| Cash and cash equivalents | $ | 41.8 |
| | $ | 65.7 |
| Cash and cash equivalents | $ | 146.8 | | | $ | 64.9 | |
| Accounts receivable, net | 363.6 |
| | 345.1 |
| Accounts receivable, net | 341.8 | | | 372.0 | |
| Inventories | 188.8 |
| | 196.8 |
| Inventories | 258.8 | | | 260.5 | |
| Prepaid expenses and other current assets | 63.1 |
| | 63.9 |
| Prepaid expenses and other current assets | 198.1 | | | 202.8 | |
| Total Current Assets | 657.3 |
| | 671.5 |
| Total Current Assets | 945.5 | | | 900.2 | |
| Property, plant and equipment, net | 424.1 |
| | 422.2 |
| Property, plant and equipment, net | 462.8 | | | 435.8 | |
| Goodwill | 732.9 |
| | 722.5 |
| Goodwill | 757.5 | | | 732.3 | |
| Other intangible assets, net | 671.9 |
| | 678.7 |
| Other intangible assets, net | 633.5 | | | 641.4 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 281.6 | | | 245.4 | |
| Deferred income taxes | 27.3 |
| | 22.5 |
| Deferred income taxes | 13.6 | | | 14.1 | |
| Other non-current assets | 221.8 |
| | 185.2 |
| Other non-current assets | 107.4 | | | 92.6 | |
| Total Assets | $ | 2,735.3 |
| | $ | 2,702.6 |
| Total Assets | $ | 3,201.9 | | | $ | 3,061.8 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| | | | | |
| Current Liabilities: | |
| | |
| Current Liabilities: | | | |
| Accounts payable | $ | 244.7 |
| | $ | 219.3 |
| Accounts payable | $ | 247.1 | | | $ | 251.7 | |
| Accrued expenses and other current liabilities | 273.2 |
| | 250.1 |
| Accrued expenses and other current liabilities | 455.2 | | | 473.2 | |
| Current portion of long-term debt | | Current portion of long-term debt | 256.4 | | | 37.4 | |
| Income taxes payable | 26.4 |
| | 5.8 |
| Income taxes payable | 43.0 | | | 11.0 | |
| Current portion of long-term debt | 66.3 |
| | 70.3 |
| |
| Total Current Liabilities | 610.6 |
| | 545.5 |
| Total Current Liabilities | 1,001.7 | | | 773.3 | |
| Long-term debt, net | 1,686.7 |
| | 1,817.8 |
| Long-term debt, net | 1,497.2 | | | 1,502.6 | |
| Long-term operating lease obligations | | Long-term operating lease obligations | 239.3 | | | 205.4 | |
| Deferred income taxes | 160.4 |
| | 174.6 |
| Deferred income taxes | 93.0 | | | 102.1 | |
| Other non-current liabilities | 190.0 |
| | 169.3 |
| Other non-current liabilities | 121.0 | | | 118.0 | |
| Total Liabilities | 2,647.7 |
| | 2,707.2 |
| Total Liabilities | 2,952.2 | | | 2,701.4 | |
| | | | | |
| Commitments and contingencies—see Note 8 |
|
| |
|
| |
| | | | | |
| Redeemable non-controlling interest | 3.4 |
| | 7.6 |
| |
| | | | | |
| Total Stockholders' Equity (Deficit) | 84.2 |
| | (12.2 | ) | |
| Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity (Deficit) | $ | 2,735.3 |
| | $ | 2,702.6 |
| |
| | Total Stockholders' Equity | | Total Stockholders' Equity | 249.7 | | | 360.4 | |
| Total Liabilities and Stockholders' Equity | | Total Liabilities and Stockholders' Equity | $ | 3,201.9 | | | $ | 3,061.8 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
($ in millions)
(unaudited)
Three Months Ended June 30, 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 March 31, 2020 | | | 99.2 | | | $ | 1.0 | | | 47.7 | | | $ | (2,026.5) | | | $ | 578.7 | | | $ | 1,756.5 | | | $ | (110.7) | | | $ | 9.4 | | | $ | 208.4 | | | |
| Net income | | | | | | | | | | | | | 23.0 | | | | | | | 23.0 | | | |
| Net income attributable to non-controlling interests | | | | | | | | | | | | | | | | | 0.2 | | | 0.2 | | | |
| Dividend paid to non-controlling interest in subsidiary | | | | | | | | | | | | | | | | | (0.1) | | | (0.1) | | | |
| Foreign currency adjustments | | | | | | | | | | | | | | | 10.7 | | | | | 10.7 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Exercise of stock options | | | | | | | — | | | — | | | 0.2 | | | | | | | | | 0.2 | | | |
| Issuances of PRSUs, RSUs, and DSUs | | | | | | | — | | | 0.4 | | | (0.4) | | | | | | | | | — | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Treasury stock repurchased - PRSU/RSU/DSU releases | | | | | | | — | | | (0.2) | | | | | | | | | | | (0.2) | | | |
| Amortization of unearned stock-based compensation | | | | | | | | | | | 7.5 | | | | | | | | | 7.5 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2020 | | | 99.2 | | | $ | 1.0 | | | 47.7 | | | $ | (2,026.3) | | | $ | 586.0 | | | $ | 1,779.5 | | | $ | (100.0) | | | $ | 9.5 | | | $ | 249.7 | | | |
Three Months Ended June 30, 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 March 31, 2019 | | | 99.2 | | | $ | 1.0 | | | 44.5 | | | $ | (1,736.7) | | | $ | 537.1 | | | $ | 1,542.2 | | | $ | (91.3) | | | $ | 1.2 | | | $ | 253.5 | | | |
| Net income | | | | | | | | | | | | | 41.6 | | | | | | | 41.6 | | | |
| Net loss attributable to non-controlling interest | | | | | | | | | | | | | | | | | (0.1) | | | (0.1) | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Foreign currency adjustments | | | | | | | | | | | | | | | 3.0 | | | | | 3.0 | | | |
| Exercise of stock options | | | | | | | (0.1) | | | 0.9 | | | 2.2 | | | | | | | | | 3.1 | | | |
| Issuances of PRSUs, RSUs, and DSUs | | | | | | | — | | | 0.3 | | | (0.3) | | | | | | | | | — | | | |
| Treasury stock repurchased | | | | | | | — | | | (1.5) | | | | | | | | | | | (1.5) | | | |
| Treasury stock repurchased - PRSU/RSU/DSU releases | | | | | | | — | | | (0.3) | | | | | | | | | | | (0.3) | | | |
| Amortization of unearned stock-based compensation | | | | | | | | | | | 6.6 | | | | | | | | | 6.6 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2019 | | | 99.2 | | | $ | 1.0 | | | 44.4 | | | $ | (1,737.3) | | | $ | 545.6 | | | $ | 1,583.8 | | | $ | (88.3) | | | $ | 1.1 | | | $ | 305.9 | | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
(in millions) (unaudited)
Six Months Ended June 30, 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 | | | | | | | | | | | | | 82.7 | | | | | | | 82.7 | |
| Net income attributable to non-controlling interests | | | | | | | | | | | | | | | | | 0.3 | | | 0.3 | |
| Adoption of accounting standard effective January 1, 2020, net of tax | | | | | | | | | | | | | (6.5) | | | | | | | (6.5) | |
| Acquisition of non-controlling interest in subsidiary | | | | | | | | | | | | | | | | | 8.4 | | | 8.4 | |
| Dividend paid to non-controlling interest in subsidiary | | | | | | | | | | | | | | | | | (0.1) | | | (0.1) | |
| Foreign currency adjustments | | | | | | | | | | | | | | | (12.3) | | | | | (12.3) | |
| Exercise of stock options | | | | | | | — | | | 0.3 | | | 1.2 | | | | | | | | | 1.5 | �� |
| Issuances of PRSUs, RSUs, and DSUs | | | | | | | (0.4) | | | 5.7 | | | (5.7) | | | | | | | | | — | |
| Treasury stock repurchased | | | | | | | 2.6 | | | (187.5) | | | | | | | | | | | (187.5) | |
| Treasury stock repurchased - PRSU/RSU/DSU releases | | | | | | | 0.1 | | (12.0) | | | | | | | | | | | (12.0) | |
| Amortization of unearned stock-based compensation | | | | | | | | | | | 14.8 | | | | | | | | | 14.8 | |
| | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2020 | | | 99.2 | | | $ | 1.0 | | | 47.7 | | | $ | (2,026.3) | | | $ | 586.0 | | | $ | 1,779.5 | | | $ | (100.0) | | | $ | 9.5 | | | $ | 249.7 | |
Six Months Ended June 30, 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 | | | | | | | | | | | | | 70.0 | | | | | | | 70.0 | | | |
| Net income attributable to non-controlling interest | | | | | | | | | | | | | | | | | 0.1 | | | 0.1 | | | |
| Repurchase of interest in subsidiary | | | | | | | | | | | | | | | | | (1.9) | | | (1.9) | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Foreign currency adjustments | | | | | | | | | | | | | | | 7.0 | | | | | 7.0 | | | |
| Exercise of stock options | | | | | | | (0.2) | | | 1.7 | | | 3.8 | | | | | | | | | 5.5 | | | |
| Issuances of PRSUs, RSUs, and DSUs | | | | | | | (0.2) | | | 3.5 | | | (3.5) | | | | | | | | | — | | | |
| Treasury stock repurchased | | | | | | | — | | | (2.3) | | | | | | | | | | | (2.3) | | | |
| Treasury stock repurchased - PRSU/RSU/DSU releases | | | | | | | 0.1 | | (3.2) | | | | | | | | | | | (3.2) | | | |
| Amortization of unearned stock-based compensation | | | | | | | | | | | 13.2 | | | | | | | | | 13.2 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2019 | | | 99.2 | | | $ | 1.0 | | | 44.4 | | | $ | (1,737.3) | | | $ | 545.6 | | | $ | 1,583.8 | | | $ | (88.3) | | | $ | 1.1 | | | $ | 305.9 | | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
| | | | | | | | | | | |
| | Six Months Ended | | |
| | June 30, | | |
| | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS: | | | |
| Net income before non-controlling interests | $ | 83.0 | | | $ | 70.1 | |
| Loss from discontinued operations, net of tax | 1.1 | | | 1.6 | |
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | |
| Depreciation and amortization | 47.5 | | | 43.5 | |
| Amortization of stock-based compensation | 14.8 | | | 13.2 | |
| Amortization of deferred financing costs | 1.7 | | | 1.2 | |
| Bad debt expense | 26.5 | | | 4.6 | |
| Deferred income taxes | (6.6) | | | 8.8 | |
| Dividends received from unconsolidated affiliates | 1.5 | | | 2.3 | |
| Equity income in earnings of unconsolidated affiliates | (4.8) | | | (6.5) | |
| | | |
| Foreign currency adjustments and other | 1.0 | | | (6.3) | |
| Changes in operating assets and liabilities, net of effect of business acquisitions | 4.7 | | | (86.6) | |
| Net cash provided by operating activities from continuing operations | 170.4 | | | 45.9 | |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS: | | | |
| Purchases of property, plant and equipment | (49.4) | | | (39.9) | |
| Acquisitions, net of cash acquired | (37.9) | | | (17.1) | |
| | | |
| Other | 0.1 | | | 10.3 | |
| Net cash used in investing activities from continuing operations | (87.2) | | | (46.7) | |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS: | | | |
| Proceeds from borrowings under long-term debt obligations | 1,073.9 | | | 509.2 | |
| Repayments of borrowings under long-term debt obligations | (866.9) | | | (509.8) | |
| Proceeds from exercise of stock options | 1.5 | | | 5.5 | |
| Treasury stock repurchased | (199.5) | | | (5.5) | |
| Payments of deferred financing costs | (1.6) | | | (0.1) | |
| Repayments of finance lease obligations and other | (6.0) | | | (3.3) | |
| Net cash provided by (used in) financing activities from continuing operations | 1.4 | | | (4.0) | |
| | | |
| Net cash provided by (used in) continuing operations | 84.6 | | | (4.8) | |
| | | |
| CASH USED IN DISCONTINUED OPERATIONS | | | |
| Operating cash flows | (1.0) | | | (2.0) | |
| Investing cash flows | — | | | — | |
| Financing cash flows | — | | | — | |
| Net cash used in discontinued operations | (1.0) | | | (2.0) | |
| | | |
| NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (1.7) | | | (0.7) | |
| Increase (decrease) in cash and cash equivalents | 81.9 | | | (7.5) | |
| CASH AND CASH EQUIVALENTS, beginning of period | 64.9 | | | 45.8 | |
| CASH AND CASH EQUIVALENTS, end of period | 146.8 | | | 38.3 | |
| LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS | — | | | — | |
| CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS | $ | 146.8 | | | $ | 38.3 | |
| | | |
| Supplemental cash flow information: | | | |
| Cash paid during the period for: | | | |
| Interest | $ | 41.1 | | | $ | 45.9 | |
| Income taxes, net of refunds | $ | 7.2 | | | $ | 35.2 | |
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income before non-controlling interests | $ | 94.9 |
| | $ | 135.6 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 60.7 |
| | 54.3 |
|
| Amortization of stock-based compensation | 8.5 |
| | 15.3 |
|
| Amortization of deferred financing costs | 1.6 |
| | 3.0 |
|
| Bad debt expense | 10.1 |
| | 3.2 |
|
| Deferred income taxes | (18.4 | ) | | (15.7 | ) |
| Dividends received from unconsolidated affiliates | 8.7 |
| | 7.3 |
|
| Equity income in earnings of unconsolidated affiliates | (10.6 | ) | | (8.6 | ) |
| Non-cash interest expense on 8.0% Sealy Notes | — |
| | 4.0 |
|
| Loss on extinguishment of debt | — |
| | 47.2 |
|
| (Gain) loss on sale of assets | (0.4 | ) | | 0.8 |
|
| Foreign currency adjustments and other | (2.3 | ) | | (1.5 | ) |
| Changes in operating assets and liabilities | 49.7 |
| | (135.1 | ) |
| Net cash provided by operating activities | 202.5 |
| | 109.8 |
|
| | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
|
| Purchases of property, plant and equipment | (43.4 | ) | | (41.9 | ) |
| Other | 4.9 |
| | — |
|
| Net cash used in investing activities | (38.5 | ) | | (41.9 | ) |
| | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
|
| Proceeds from borrowings under long-term debt obligations | 985.9 |
| | 1,871.5 |
|
| Repayments of borrowings under long-term debt obligations | (1,124.7 | ) | | (1,659.3 | ) |
| Proceeds from exercise of stock options | 6.5 |
| | 15.2 |
|
| Excess tax benefit from stock-based compensation | — |
| | 6.0 |
|
| Treasury stock repurchased | (44.9 | ) | | (319.7 | ) |
| Payments of deferred financing costs | (0.5 | ) | | (6.6 | ) |
| Fees paid to lenders | — |
| | (7.8 | ) |
| Call premium on 2020 Senior Notes | — |
| | (23.6 | ) |
| Other | (2.9 | ) | | 0.1 |
|
| Net cash used in financing activities | (180.6 | ) | | (124.2 | ) |
| NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (7.3 | ) | | (8.6 | ) |
| Decrease in cash and cash equivalents | (23.9 | ) | | (64.9 | ) |
| CASH AND CASH EQUIVALENTS, beginning of period | 65.7 |
| | 153.9 |
|
| CASH AND CASH EQUIVALENTS, end of period | $ | 41.8 |
| | $ | 89.0 |
|
| | | | |
| Supplemental cash flow information: | |
| | |
|
| Cash paid during the period for: | |
| | |
|
| Interest | $ | 59.0 |
| | $ | 41.0 |
|
| Income taxes, net of refunds | 45.3 |
| | 57.2 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
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 two2 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$24.8 million and $15.5$22.5 million at SeptemberJune 30, 20172020 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 asreported 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’s2019 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 unit's fair value, not to exceed the total amount of goodwill for the reporting unit. Adoption of this guidance did not have an 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.
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:
| | | | | | | | | | | |
| June 30, | | December 31, |
| (in millions) | 2020 | | 2019 |
| Finished goods | $ | 136.4 | | | $ | 157.4 | |
| Work-in-process | 10.6 | | | 10.8 | |
| Raw materials and supplies | 111.8 | | | 92.3 | |
| | $ | 258.8 | | | $ | 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.
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, 20162019 to SeptemberJune 30, 2017:2020:
| | | | | |
| (in millions) | |
| Balance as of December 31, 2019 | $ | 39.3 | |
| Amounts accrued | 51.3 | |
| Returns charged to accrual | (49.3) | |
| Balance as of June 30, 2020 | $ | 41.3 | |
|
| | | |
| (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 June 30, 2020 and December 31, 2019, $27.9 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, 20162019 to SeptemberJune 30, 2017:2020:
| | | | | |
| (in millions) | |
| Balance as of December 31, 2019 | $ | 41.6 | |
| Amounts accrued | 9.4 | |
| Warranties charged to accrual | (10.6) | |
| Balance as of June 30, 2020 | $ | 40.4 | |
|
| | | |
| (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 SeptemberJune 30, 20172020 and December 31, 2016, $19.92019, $17.5 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$22.9 million and $15.6$22.2 million of accrued warranty expense is included in other non-current liabilities inon the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.
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 accountscredit losses is the Company’s best estimate of the amount of probableexpected lifetime credit losses in the Company’s accounts receivable. The Company regularly reviewsestimates losses over the adequacycontractual life using assumptions to capture the risk of its allowance for doubtful accounts. The Company determines the allowanceloss, 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 whetherterms.
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 potentialfollowing activity for recovery is considered remote. Theits allowance for doubtful accounts included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets was $26.7 million and $22.1 million as of September 30, 2017 and credit losses from December 31, 2016, respectively.2019 to June 30, 2020:
| | | | | | | | |
| (in millions) | | |
| Balance as of December 31, 2019 | | $ | 71.9 | |
| ASU 2016-13 adoption impact | | 8.9 | |
| Amounts accrued | | 26.5 | |
| Write-offs charged against the allowance | | (13.4) | |
| Balance as of June 30, 2020 | | $ | 93.9 | |
(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 and six months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | Six Months Ended June 30, 2020 | | | | |
| (in millions) | North America | | International | | Consolidated | | North America | | International | | Consolidated |
| Channel | | | | | | | | | | | |
| Wholesale | $ | 494.6 | | | $ | 69.1 | | | $ | 563.7 | | | $ | 1,104.2 | | | $ | 181.9 | | | $ | 1,286.1 | |
| Direct | 75.9 | | | 25.6 | | | 101.5 | | | 143.5 | | | 58.0 | | | 201.5 | |
| Net sales | $ | 570.5 | | | $ | 94.7 | | | $ | 665.2 | | | $ | 1,247.7 | | | $ | 239.9 | | | $ | 1,487.6 | |
| | | | | | | | | | | |
| North America | | International | | Consolidated | | North America | | International | | Consolidated |
| Product | | | | | | | | | | | |
| Bedding | $ | 533.0 | | | $ | 73.6 | | | $ | 606.6 | | | $ | 1,173.3 | | | $ | 189.8 | | | $ | 1,363.1 | |
| Other | 37.5 | | | 21.1 | | | 58.6 | | | 74.4 | | | 50.1 | | | 124.5 | |
| Net sales | $ | 570.5 | | | $ | 94.7 | | | $ | 665.2 | | | $ | 1,247.7 | | | $ | 239.9 | | | $ | 1,487.6 | |
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| North America | | International | | Consolidated | | North America | | International | | Consolidated |
| Geographical region | | | | | | | | | | | |
| United States | $ | 542.0 | | | $ | — | | | $ | 542.0 | | | $ | 1,174.5 | | | $ | — | | | $ | 1,174.5 | |
| Canada | 28.5 | | | — | | | 28.5 | | | 73.2 | | | — | | | 73.2 | |
| International | — | | | 94.7 | | | 94.7 | | | — | | | 239.9 | | | 239.9 | |
| Net sales | $ | 570.5 | | | $ | 94.7 | | | $ | 665.2 | | | $ | 1,247.7 | | | $ | 239.9 | | | $ | 1,487.6 | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
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 and six months ended June 30, 2019:
(f) Derivative Financial Instruments. Derivative financial instruments are used in the normal course
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | | | | | Six Months Ended June 30, 2019 | | | | |
| (in millions) | North America | | International | | Consolidated | | North America | | International | | Consolidated |
| Channel | | | | | | | | | | | |
| Wholesale | $ | 528.5 | | | $ | 103.7 | | | $ | 632.2 | | | $ | 1,030.3 | | | $ | 217.8 | | | $ | 1,248.1 | |
| Direct | 59.6 | | | 31.0 | | | 90.6 | | | 101.8 | | | 63.8 | | | 165.6 | |
| Net sales | $ | 588.1 | | | $ | 134.7 | | | $ | 722.8 | | | $ | 1,132.1 | | | $ | 281.6 | | | $ | 1,413.7 | |
| | | | | | | | | | | |
| North America | | International | | Consolidated | | North America | | International | | Consolidated |
| Product | | | | | | | | | | | |
| Bedding | $ | 554.2 | | | $ | 108.4 | | | $ | 662.6 | | | $ | 1,068.6 | | | $ | 223.8 | | | $ | 1,292.4 | |
| Other | 33.9 | | | 26.3 | | | 60.2 | | | 63.5 | | | 57.8 | | | 121.3 | |
| Net sales | $ | 588.1 | | | $ | 134.7 | | | $ | 722.8 | | | $ | 1,132.1 | | | $ | 281.6 | | | $ | 1,413.7 | |
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| North America | | International | | Consolidated | | North America | | International | | Consolidated |
| Geographical region | | | | | | | | | | | |
| United States | $ | 533.7 | | | $ | — | | | $ | 533.7 | | | $ | 1,030.9 | | | $ | — | | | $ | 1,030.9 | |
| Canada | 54.4 | | | — | | | 54.4 | | | 101.2 | | | — | | | 101.2 | |
| International | — | | | 134.7 | | | 134.7 | | | — | | | 281.6 | | | 281.6 | |
| Net sales | $ | 588.1 | | | $ | 134.7 | | | $ | 722.8 | | | $ | 1,132.1 | | | $ | 281.6 | | | $ | 1,413.7 | |
(3) Acquisitions
Acquisition of business to manage interest rate and foreign currency exchange risks. The financial instruments used bySherwood Bedding
On January 31, 2020, 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. Foracquired an 80% ownership interest in a newly formed limited liability company containing substantially 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.
assets of the Sherwood Bedding business for a cash purchase price of approximately $39.1 million, which included $1.2 million of cash acquired.
The Company records derivative financial instruments in the Condensed Consolidated Balance Sheets as either an asset or liability measured at its fair value. Changes in a derivative's fair value (i.e. unrealized gains or losses) are recorded each period in earnings or other comprehensive income, depending on whether the derivative is designated and is effectiveaccounted for this transaction 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.business combination. The change in fair valuepreliminary allocation of the ineffective portion of a derivative financial instrumentpurchase price is recognized in net income immediately. The effectivenessbased on estimated fair values of the cash flow hedge contracts, including time value,assets acquired and liabilities assumed as of January 31, 2020, which included the 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 assessed prospectively and retrospectively on a monthly basis using regression analysis,calculated as well as other timing and probability criteria. For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded in net income immediately.
The Company manages a portionexcess of the risk associated with fluctuations in foreign currencies related to intercompanypurchase price over the net assets acquired and third party inventory purchases denominated in foreign currencies through foreign exchange forward contracts designated as cash flow hedges. During 2017,primarily represents the Company had foreign exchange forward contracts designated as cash flow hedges to buy U.S. dollarsprivate label product growth opportunities 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 and liabilities, the Company enters into foreign exchange forward contracts. The Company considers these contractsexpected synergistic manufacturing benefits to be economic hedges. Accordingly, changes inrealized from the fair value of these instruments affect earnings duringacquisition. 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 recognizedNorth 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.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
In the first quarterAcquisition 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 resultprovided debtor-in-possession financing in connection with the iMS Chapter 11 proceedings. On April 1, 2019, the Company acquired substantially all of the terminationnet assets of the contracts with Mattress Firm. For the three months ended March 31, 2017, the Company recognized $25.9iMS 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 $11.5approximately $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, 20172019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of itsthis regional bedding retailer furthers the Company’s North America reporting unitAmerican 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 conductedaccounted for this transaction as a recoverability analysisbusiness combination. Total cash consideration was $13.2 million, which included $5.1 million of its long-lived assets and did not identify an impairment.
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 depictfair values of the transferassets acquired and liabilities assumed as of promised goods or services to customers in an amount that reflectsApril 1, 2019, which included the consideration to whichfollowing:
| | | | | |
| (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 expectsexcess 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 standardgoodwill is effectivedeductible for the Company on January 1, 2018income tax purposes and the Company will be usingincluded 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.
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)(4) 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 | (2.8) | | | 1.3 | | | (1.5) | |
| Balance as of June 30, 2020 | $ | 600.5 | | | $ | 157.0 | | | $ | 757.5 | |
|
| | | | | | | | | | | |
| (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 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued) (4)(5) Debt
Debt for the Company consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | | | |
| (in millions, except percentages) | Amount | | Rate | | Amount | | Rate | | Maturity Date |
| 2019 Credit Agreement: | | | | | | | | | |
| Term A Facility | $ | 414.4 | | | (1) | | $ | 425.0 | | | (2) | | October 16, 2024 |
| 364-Day Term Loan | 200.0 | | | (3) | | — | | | (3) | | May 12, 2021 |
| Revolver | — | | | (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 | — | | | (4) | | — | | | (4) | | April 6, 2021 |
Finance lease obligations (5) | 71.2 | | | | | 64.1 | | | | | Various |
| Other | 25.2 | | | | | 7.9 | | | | | Various |
| Total debt | 1,760.8 | | | | | 1,547.0 | | | | | |
| Less: Deferred financing costs | 7.2 | | | | | 7.0 | | | | | |
| Total debt, net | 1,753.6 | | | | | 1,540.0 | | | | | |
| Less: Current portion | 256.4 | | | | | 37.4 | | | | | |
| Total long-term debt, net | $ | 1,497.2 | | | | | $ | 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%1.375% as of SeptemberJune 30, 2017.2020. |
| (2) | Interest at LIBOR plus applicable margin of 1.50%1.625% as of December 31, 2016.2019. |
| (3) | Interest at base rate plus applicable margin of 1.375% per annum or a eurocurrency rate (subject to a 1.0% floor) plus applicable margin of 2.375% per annum. |
| (4) | Interest at one month LIBOR index plus 80 basis points. |
(4)(5) | CapitalFinance lease obligations are a non-cash financing activity. Refer to Note 6, "Leases". |
As of June 30, 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 June 30, 2020, total availability under the revolving credit facility was $423.9 million after a $1.1 million reduction for outstanding letters of credit.
On May 13, 2020, the Company and certain of its subsidiaries entered into an amendment to the existing 2019 Credit Agreement. The amendment provided for a new 364-day $200.0 million term loan (the "364-Day Loan"). The Company used the proceeds of the 364-Day Loan to repay borrowings under the existing $425.0 million revolving credit facility and to pay fees and expenses in connection with the amendment. The 364-Day Loan bears interest, at the borrower’s option, at a base rate plus a margin of 1.375% per annum or a eurocurrency rate (subject to a 1.0% floor) plus a margin of 2.375% per annum. In addition, for so long as the 364-Day Loan remains outstanding, the Company is subject to certain additional restrictions under the covenants provided for in the Credit Agreement, including, but not limited to, the Company's ability to repurchase shares and make certain investments.
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 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 less qualified cash. Consolidated funded debt includes debt recorded in the Condensed Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding and other short-term debt. The Company is allowed to subtract from consolidated funded debt an amount equal to 100.0% of domestic qualified cash and 60.0% of foreign qualified cash, the aggregate of which cannot exceed $150.0 million at the end of the reporting period. As of September 30, 2017, domestic qualified cash was $17.2 million and foreign qualified cash was $14.7 million.
The Company is in compliance with all applicable covenants as of September 30, 2017.
Securitized Debt
On April 12, 2017, theThe Company and certain of its subsidiaries entered intoare party to 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,As of June 30, 2020, 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 coursehad availability 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$40.8 million 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 by the Company and its subsidiaries and will continue to be reflected as assets on the Company’s Condensed Consolidated Balance Sheets and represent collateral up to 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.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 20162019 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 2observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of debt instruments. The fair values of these material financial instruments are as follows:
| | | | | | | | | | | | | | |
| | Fair Value | | |
| (in millions) | | June 30, 2020 | | December 31, 2019 |
| 2023 Senior Notes | | $ | 457.5 | | | $ | 464.2 | |
| 2026 Senior Notes | | 614.2 | | | 634.9 | |
(6) Leases
|
| | | | | | | | |
| | | Fair Value |
| (in millions) | | September 30, 2017 | | December 31, 2016 |
| 2023 Senior Notes | | $ | 473.9 |
| | $ | 468.5 |
|
| 2026 Senior Notes | | 615.9 |
| | 606.8 |
|
The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Condensed Consolidated Balance Sheet as of June 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | June 30, 2020 | | December 31, 2019 |
| Assets | | | | | | |
| Operating lease assets | | Operating lease right-of-use assets | | $ | 281.6 | | | $ | 245.4 | |
| Finance lease assets | | Property, plant and equipment, net | | 61.3 | | | 54.4 | |
| Total leased assets | | | | $ | 342.9 | | | $ | 299.8 | |
| | | | | | |
| Liabilities | | | | | | |
| Short-term: | | | | | | |
| Operating lease obligations | | Accrued expenses and other current liabilities | | $ | 58.3 | | | $ | 50.8 | |
| Finance lease obligations | | Current portion of long-term debt | | 9.9 | | | 8.2 | |
| Long-term: | | | | | | |
| Operating lease obligations | | Long-term operating lease obligations | | 239.3 | | | 205.4 | |
| Finance lease obligations | | Long-term debt, net | | 61.3 | | | 55.9 | |
| Total lease obligations | | | | $ | 368.8 | | | $ | 320.3 | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The following table summarizes the classification of lease expense in the Company's Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019:
(5) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Six Months Ended | | |
| | June 30, | | | | June 30, | | |
| (in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| Operating lease expense: | | | | | | | | |
| Operating lease expense | | $ | 18.7 | | | $ | 15.9 | | | $ | 36.7 | | | $ | 30.1 | |
| Short-term lease expense | | 2.5 | | | 1.3 | | | 5.7 | | | 2.3 | |
| Variable lease expense | | 4.4 | | | 5.0 | | | 9.7 | | | 8.8 | |
| Finance lease expense: | | | | | | | | |
| Amortization of right-of-use assets | | 2.2 | | | 2.3 | | | 4.4 | | | 4.2 | |
| Interest on lease obligations | | 1.1 | | | 1.2 | | | 2.3 | | | 2.4 | |
| Total lease expense | | $ | 28.9 | | | $ | 25.7 | | | $ | 58.8 | | | $ | 47.8 | |
The following table sets forth the scheduled maturities of lease obligations as of June 30, 2020:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Operating Leases | | Finance Leases | | Total |
| Year Ended December 31, | | | | | | |
| 2020 (excluding the six months ended June 30, 2020) | | $ | 38.2 | | | $ | 6.9 | | | $ | 45.1 | |
| 2021 | | 66.8 | | | 14.1 | | | 80.9 | |
| 2022 | | 57.9 | | | 12.0 | | | 69.9 | |
| 2023 | | 45.5 | | | 9.8 | | | 55.3 | |
| 2024 | | 37.1 | | | 8.0 | | | 45.1 | |
| Thereafter | | 104.6 | | | 40.4 | | | 145.0 | |
| Total lease payments | | 350.1 | | | 91.2 | | | 441.3 | |
| Less: Interest | | 52.5 | | | 20.0 | | | 72.5 | |
| Present value of lease obligations | | $ | 297.6 | | | $ | 71.2 | | | $ | 368.8 | |
The following table provides lease term and discount rate information related to operating and finance leases as of June 30, 2020:
| | | | | | | | |
| | June 30, 2020 |
| Weighted average remaining lease term (years): | | |
| Operating leases | | 6.34 |
| Finance leases | | 8.33 |
| | |
| Weighted average discount rate: | | |
| Operating leases | | 5.16 | % |
| Finance leases | | 5.94 | % |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The following table provides supplemental information related to the Company's Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| (in millions) | | June 30, 2020 | | June 30, 2019 | | |
| Cash paid for amounts included in the measurement of lease obligations: | | | | | | |
| Operating cash flows paid for operating leases | | $ | 33.1 | | | $ | 27.8 | | | |
| Operating cash flows paid for finance leases | | $ | 2.3 | | | $ | 2.4 | | | |
| Financing cash flows paid for finance leases | | $ | 4.6 | | | $ | 3.3 | | | |
| | | | | | |
| Right-of-use assets obtained in exchange for new operating lease obligations | | $ | 48.7 | | | $ | 55.0 | | | |
| Right-of-use assets obtained in exchange for new finance lease obligations | | $ | 11.7 | | | $ | — | | | |
(7)Stockholders' Equity
(a) CommonTreasury Stock. Tempur Sealy International has 300.0 As of June 30, 2020, the Company had approximately $131.3 million authorized shares of common stock with $0.01 perremaining under the existing share par value and 0.01 millionrepurchase program initially authorized shares of preferred stock with $0.01 per share par value. The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of 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 2016. 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 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 byFebruary 2020, the Board which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights.
(b) Treasury Stock. In February 2017, the Boardof Directors authorized an increase, of $200.0$194.2 million, to its existing share repurchase authorization for repurchases of Tempur Sealy International's common stock. Forstock to $300.0 million. The Company did not repurchase shares under the nineprogram during the three months ended SeptemberJune 30, 2017, the2020. The Company repurchased 0.624,170 shares under the program for approximately $1.5 million during the three months ended June 30, 2019. The Company repurchased 2.6 million shares and 39,901 shares under the program for approximately $40.1 million. As of September$187.5 million and $2.3 million during the six months ended June 30, 2017, the Company had approximately $226.9 million remaining under the existing share repurchase authorization.2020 and 2019, respectively.
In addition, the Company acquired 0.1 millionan insignificant amount of shares upon the vesting of certain performance restricted stock units ("PRSUs"RSUs"), which were withheld to satisfy tax withholding obligations during each of the ninethree and six months ended SeptemberJune 30, 20172020 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$0.2 million and $2.0$0.3 million in treasury stock acquired during the ninethree months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The Company acquired approximately $12.0 million and $3.2 million in treasury stock during the six months ended June 30, 2020 and 2019, respectively.
(c) (b) Shareholder Rights Agreement. Agreement. On February 8, 2017,March 27, 2020, the Board of Directors authorized and declared a dividend distribution of one1 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, 2017April 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 (includingof 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 SharesCompany'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, 2017March 27, 2020 (the "Original Rights"Rights Agreement"), between the Company and American Stock Transfer & Trust Company, LLC, ("AST"), the Company'sas rights agent. TheseThe Rights expire February 7, 2018at 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.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(d) AOCL. (c) AOCL. AOCL consisted of the following: | | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | Six Months Ended | |
| | September 30, | | September 30, | | June 30, | | | June 30, | |
| (in millions) | 2017 | | 2016 | | 2017 | | 2016 | (in millions) | 2020 | | 2019 | | 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 | $ | (105.2) | | | $ | (87.7) | | | $ | (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) | 10.7 | | | 3.0 | | | (12.3) | | | 7.0 | |
| | Balance at end of period | $ | (92.2 | ) | | $ | (103.6 | ) | | $ | (92.2 | ) | | $ | (103.6 | ) | Balance at end of period | $ | (94.5) | | | $ | (84.7) | | | $ | (94.5) | | | $ | (84.7) | |
| | | | | | | | | | | |
| Pensions | | | | | | | | Pensions | |
| Balance at beginning of period | $ | (2.2 | ) | | $ | (1.4 | ) | | $ | (2.2 | ) | | $ | (1.4 | ) | Balance at beginning of period | $ | (5.5) | | | $ | (3.6) | | | $ | (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) | | | $ | (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 20172020 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. |
(6)
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(8)Other Items
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | |
| (in millions) | June 30, 2020 | | December 31, 2019 |
| Taxes | $ | 138.6 | | | $ | 136.0 | |
| | | |
| Wages and benefits | 59.4 | | | 79.5 | |
| Operating lease obligations | 58.3 | | | 50.8 | |
| Advertising | 42.5 | | | 56.9 | |
| Sales returns | 27.9 | | | 26.2 | |
| Warranty | 17.5 | | | 19.4 | |
| Rebates | 6.6 | | | 13.6 | |
| Other | 104.4 | | | 90.8 | |
| $ | 455.2 | | | $ | 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 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(7)(9)Stock-Based Compensation
The Company’s stock-based compensation expense for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 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 June 30, | | | | Six Months Ended June 30, | | |
| (in millions) | 2020 | | 2019 | | 2020 | | 2019 |
| PRSU expense | $ | 0.9 | | | $ | 0.4 | | | $ | 1.2 | | | $ | 0.7 | |
| Option expense | 1.2 | | | 1.2 | | | 2.4 | | | 2.4 | |
| RSU/DSU expense | 5.4 | | | 5.0 | | | 11.2 | | | 10.1 | |
| Total stock-based compensation expense | $ | 7.5 | | | $ | 6.6 | | | $ | 14.8 | | | $ | 13.2 | |
|
| | | | | | | | | | | | | | | |
| | 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 |
|
During the nine months ended September 30, 2017, the Company recorded a $9.3 million benefit in the Condensed Consolidated Statements 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.
The Company did not record any accelerated stock-based compensation expense during eachgrants PRSUs to executive officers and certain members of management. During the first quarter of 2020, the Company granted PRSUs as a component of the three months ended September 30, 2017 and 2016. Duringlong-term incentive plan. Actual payout under the nine months ended September 30, 2017 and 2016,PRSUs is dependent upon the Company recorded $0.9 million and $2.0 million of accelerated stock-based compensation expense associated with executive management transition, respectively.
The Company has 1.2 million PRSUs outstanding that will vest if the Company achieves more than $650.0 million of adjusted earnings before interest, tax, depreciation and amortization ("Adjusted EBITDA") for 2017 (the "2017 Aspirational Plan PRSUs"). All of the 2017 Aspirational Plan PRSUs will vest in full if the Company achieves Adjusted EBITDA in 2017 greater than $650.0 million. In addition, if this target is not met in 2017 but the Company achieves more than $650.0 million in Adjusted EBITDA for 2018, then one-third of the total 2017 Aspirational Plan PRSUs will vest, and the remaining 2017 Aspirational Plan PRSUs will be forfeited. If the Company does not achieve more than $650.0 million of Adjusted EBITDA in either 2017 or 2018, then all of the 2017 Aspirational Plan PRSUs will be forfeited. Adjusted EBITDA is defined as the Company’s "Consolidated EBITDA" as such term is defined in the Company’s 2012 Credit Agreement.
The Company did not record any stock-based compensation expense related to the 2017 Aspirational Plan PRSUs during the three and nine months ended September 30, 2017 and 2016, as it is not considered probable that the Company will achieve the specified performance target as of December 31, 2017 or December 31, 2018. 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 2017 is $83.9 million, which would be expensed over the remaining service period if achievement of the performance condition becomes probable.certain financial goals.
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 earnings before interest, tax, depreciation and amortization as defined in the Company’s Credit Agreement ("Adjusted EBITDA per Credit Facility") 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 per Credit Facility 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 inend 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 millionper Credit Facility 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 vestingvest based on the highest Adjusted EBITDA per Credit Facility 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 per Credit Facility in the Second Designated Period is $600.0 million then 66% of the remaining 2019 Aspirational Plan PRSUs will vest; if the Adjusted EBITDA per Credit Facility is $650.0 million or more 100% will vest; if Adjusted EBITDA per Credit Facility is between $600.0 million and $650.0 million then a pro rata portion will vest; and if Adjusted EBITDA per Credit Facility 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.
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 and six months ended SeptemberJune 30, 2017,2020, as it iswas not considered probable that the Company willwould 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 FirstSecond Designated Period is $90.0would range from $33.0 million to $49.5 million, which would be expenseda non-cash expense over the remaining service period if achievement of the performance condition becomes probable.
(8)(10)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.
On October 25, 2013, a suit was filed against Tempur Sealy International and one of its domestic subsidiaries in the United States District Court for the Northern District of California, purportedly on behalf of a proposed class of “consumers” as defined by Cal. Civ. Code § 1761(d) who purchased, not for resale, a Tempur-Pedic mattress or pillow in the State of California. On November 19, 2013, the Company was served for the first time in the case but with an amended petition adding additional class representatives for additional states. The purported classes seek certification of claims under applicable state laws.
The complaint alleged that the Company engaged in unfair business practices, false advertising, and misrepresentations or omissions related to the sale of certain products. The Plaintiffs sought restitution, injunctive relief and all other relief allowed under applicable state laws, interest, attorneys’ fees and costs. The purported classes did not seek damages for physical injuries. The Court was scheduled to consider class certification motions in the fourth quarter of 2015; however, the Plaintiffs filed a Motion to Amend the Complaint, at which time the Company filed a Motion to Dismiss the Amended Complaint. A hearing on the Motion to Dismiss was held January 28, 2016 and the Court denied in part and granted in part the Company’s Motion to Dismiss, allowing certain claims to proceed. The Court considered class certification motions on August 18, 2016, and on September 30, 2016, denied the Plaintiffs’ Motion for Class Certification. In December 2016, the Ninth Circuit Court of Appeals affirmed the lower court’s decision. The Company filed a Motion to Sever the Claims made by each of the Plaintiffs on March 22, 2017 following the denial of class certification by the District Court which was affirmed by the Ninth Circuit Court of Appeals. The Plaintiffs then filed a Motion for Reconsideration at the District Court with respect to the denial of class certification on April 12, 2017 based on a change in the law. That Motion was denied on June 30, 2017. The Court also granted the Company's Motion to Sever the claims on June 30, 2017, dissolving the potential class and requiring the Plaintiffs to file individual cases in their home states if they wished to proceed. In September 2017, the Company entered into settlement agreements with each of the Plaintiffs and their cases were then dismissed by the District Court. The settlement amounts were not material in nature.
(b) David Buehring, Individually and on Behalf of All Others Similarly Situated v. Tempur Sealy International, Inc., Scott L. Thompson, and Barry A. Hytinen, filed March 24, 2017.
On March 24, 2017, a suit was filed against Tempur Sealy International, Inc., and two of its officers in the U.S. District Court for the Southern District of New York, purportedly on behalf of a proposed class of stockholders who purchased Tempur Sealy common stock between July 28, 2016 and January 27, 2017. The complaint alleges that the Company made materially false and misleading statements regarding its then existing and future financial prospects, including those with one of its retailers, Mattress Firm, allegedly in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The Company does not believe the claims have merit and intends to vigorously defend against these claims. A Motion to Dismiss the case was filed by the Company on October 5, 2017. The case is in the early stages of litigation. As a result, the outcome of the case is unclear and the Company is unable to reasonably estimate the possible loss or range of loss, if any. Accordingly, the Company can give no assurance that this matter will not have a material adverse effect on the Company’s financial position or results of operations.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(c) Myla Gardner v. Scott L. Thompson, Barry A. Hytinen, Evelyn S. Dilsaver, John A. Heil, Jon L. Luther, Usman Nabi, Richard W. Neu, Robert B. Trussell, Jr. and Tempur Sealy International, Inc., filed July 10, 2017; Joseph L. Doherty v. Scott L. Thompson, Barry A. Hytinen, Evelyn S. Dilsaver, John A. Heil, Jon L. Luther, Usman Nabi, Richard W. Neu, Robert B. Trussell, Jr. and Tempur Sealy International, Inc., filed July 20, 2017; and Paul Onesti v. Scott L. Thompson, Barry A. Hytinen, Evelyn S. Dilsaver, John A. Heil, Jon L. Luther, Usman Nabi, Richard W. Neu, Robert B. Trussell, Jr. and Tempur Sealy International, Inc., filed July 21, 2017.
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.
(d) Mattress Firm, Inc. v. Tempur-Pedic North America, LLC and Sealy Mattress Company, filed March 30, 2017.
On March 30, 2017, a suit was filed against Tempur-Pedic and Sealy Mattress (two wholly-owned subsidiaries of the Company) in the District Court of Harris County, Texas by Mattress Firm. The complaint alleges breach of contract, tortious interference and seeks a declaratory judgment with respect to the interpretation of its agreements with the Company. On April 7, 2017, the Company's subsidiaries named above filed suit against Mattress Firm, Inc. in the U.S. District Court for the Southern District of Texas, Houston Division seeking injunctive relief and damages for trademark infringement, unfair competition and trademark dilution in violation of the Lanham Act, and breach of contract and other state law violations. The complaint alleges that Mattress Firm violated the parties' transition agreements dated January 30, 2017, and consequently, federal and state law, by its use of the Company’s trademarks after April 3, 2017. On April 28, 2017, the complaint was amended to add a claim by Sealy Mattress for nonpayment by Mattress Firm for products sold and delivered. On May 23, 2017, the complaint was further amended to add allegations that Mattress Firm continued to use the Company’s trade names and trademarks on its website and in advertising in an inappropriate manner. On July 11, 2017, the Court issued a preliminary injunction prohibiting Mattress Firm from using the Company’s names and marks in such manner. The Company does not believe the claims asserted by Mattress Firm have merit and intends to vigorously defend against them. Discovery is proceeding in the case. The cases are in the early stages of litigation. As a result, the outcome remains unclear and the Company is unable to reasonably estimate the possible loss or range of loss, if any. Accordingly, the Company can give no assurance that these matters will not have a material adverse effect on the Company’s financial position or results of operations.
(e) Other.The Company is involved in various other legal and administrative proceedings incidental to the operations of its business. The Company believes that the outcome of all such other pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity or operating results.
(9)(11)Income Taxes
The Company’s effective tax rate for the three months ended SeptemberJune 30, 20172020 and 20162019 was 33.0%28.9% and 30.6%27.0%, respectively. The Company’sCompany's effective tax rate for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 was 33.6%28.1% and 30.7%31.3%, respectively. The Company’s incomeCompany's effective tax rate for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 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 frombeen involved in a dispute with the Danish Tax Authority ("SKAT") with respect to the tax years 2001 through 2008 relating toregarding 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 June 30, 2020 and December 31, 2019, the Danish subsidiaryincome tax liability recorded in the Company’s balance sheet for the periods 2001 through June 30, 2020 and December 31, 2019, respectively, is not reflectiveDKK 1,121.1 million and DKK 1,110.6 million, respectively (approximately $169.1 million and $166.7 million using the applicable exchange rates at June 30, 2020 and December 31, 2019, respectively). The liability at June 30, 2020 and December 31, 2019 is included within the Company’s Condensed Consolidated Balance Sheet (translated at the exchange rate on June 30, 2020 and December 31, 2019) as per below:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| DKK | | USD | | DKK | | USD |
| Accrued expenses and other current liabilities | 847.3 | | | $ | 127.8 | | | 847.3 | | | $ | 127.2 | |
| Other non-current liabilities | 273.8 | | | 41.3 | | | 263.3 | | | 39.5 |
| Total | 1,121.1 | | | $ | 169.1 | | | 1,110.6 | | | $ | 166.7 | |
During the three months ended March 31, 2020 the Company made a tax deposit with SKAT of an arms-length transaction. Accordingly, theDKK 134.0 million applicable to a tax assessment received fromby SKAT for the years 2012 and 2013. The Company is based, in part,contesting such assessment. At June 30, 2020 and December 31, 2019, respectively, the Company held on a 20% royalty rate, whichdeposit with SKAT DKK 1,104.1 million and DKK 970.1 million (approximately $166.5 million and $145.6 million using the applicable exchange rates at June 30, 2020 and December 31, 2019, respectively). The deposit is substantially higher than that historically used or deemed appropriate byfor the Company.satisfaction of the anticipated liability for both tax and interest once these matters are concluded.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The cumulative total tax assessmentdeposit at SeptemberJune 30, 2017 for all years for which an assessment has been received (2001 - 2008) is approximately Danish Krone ("DKK") 1,615.6 million, including interest and penalties ($256.4 million, based on the DKK to USD exchange rate on September 30, 2017). The cumulative total tax assessment at December 31, 2016 for all years for which an assessment had been received up through that date (2001 - 2008) including interest and penalties was approximately DKK 1,547.3 million ($219.3 million, based on the DKK to USD exchange rate on December 31, 2016). If SKAT continues to issue assessments for each year not currently assessed, the Company expects the aggregate assessments for such years (2009 - 2016) to be 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").
At September 30, 20172020 and December 31, 20162019 is included within the Company had accrued Danish tax and interest forCompany’s Condensed Consolidated Balance Sheet (translated at the Danish Tax Matter of approximately DKK 852 million (approximately $135.2 million using the Septemberexchange rates on June 30, 2017 exchange rate) and DKK 850 million (approximately $120.6 million using the December 31, 2016 exchange rate), respectively, as an uncertain income tax liability. On both September 30, 20172020 and December 31, 2016 approximately DKK 835 million (approximately $132.6 million using the September 30, 2017 exchange rate and $118.5 million using the December 31, 2016 exchange rate) represents the amount that the Company and SKAT preliminarily agreed to2019) as per below:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| DKK | | USD | | DKK | | USD |
| Prepaid expenses and other current assets | 847.3 | | | $ | 127.8 | | | 847.3 | | | $ | 127.2 | |
| Other non-current assets | 256.8 | | | 38.7 | | | 122.8 | | | 18.4 | |
| Total | 1,104.1 | | | $ | 166.5 | | | 970.1 | | | $ | 145.6 | |
There were no significant changes in a non-binding proposed resolution for the years 2001 through 2011. The balance at September 30, 2017 and December 31, 2016, respectively, of approximately DKK 17 million (approximately $2.6 million using the September 30, 2017 exchange rate) and DKK 15 million (approximately $2.1 million using the December 31, 2016 exchange rate) may be subject to further negotiation in the future as part of an Advanced Pricing Agreement the Company may choose to pursue for years after 2011. The uncertain income tax liability accrued is included in other non-current liabilities in the Company's Condensed Consolidated Balance Sheets. In addition, at September 30, 2017 and December 31, 2016 the Company had recorded a deferred tax asset of approximately $44.3 million and $43.5 million, respectively, for the U.S. correlative benefit related to the Danish Tax Matter. The Company has recorded a valuation allowance with respect to this benefit of approximately $17.6 million for both periods related to years for which relief may not be realized.
The Company’s uncertain tax liability associated with the Danish Tax Matter is derived using the cumulative probability analysis with possible outcomes based on the Company's updated evaluation of the facts and circumstances regarding this matter and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standards as required by GAAP, taking into account both the U.S. and Danish income tax implications of such outcomes. Both the uncertain tax liability and the deferred tax asset discussed herein reflects the Company’s best judgment of the facts, circumstances and information available through September 30, 2017.
If the Company is not successful in defending its position before the Danish National Tax Tribunal (the "Tribunal"), the appeals division within SKAT, or in the Danish courts or in negotiating a mutually acceptable settlement, there is significant risk that the Company could be required to pay significant amounts to SKAT in excess of any related reserve. Such an outcome could have a material adverse impact on the Company’s profitability and liquidity. In addition, prior to any ultimate resolution of this issue before the Tribunal or the Danish courts, based on a change in facts and circumstances, the Company may be required to further increase its uncertain tax liability associated with this matter, which could have a material impact on the Company's reported earnings.
From June 2012 through September 30, 2017, SKAT withheld Value Added Tax refunds otherwise owed to the Company, pending resolution of the Danish Tax Matter. Total withheld refunds at September 30, 2017 and December 31, 2016 are approximately DKK 314.6 million (approximately $49.9 at the September 30, 2017 exchange rate) and DKK 258.0 million (approximately $36.6 million at the December 31, 2016 exchange rate), respectively. In July 2016, the Company paid a deposit to SKAT in the amount of approximately DKK 615.2 (approximately $97.6 million using the exchange rate at September 30, 2017) (the “Tax Deposit”) and applied approximately DKK 224.6 million (approximately $35.6 million using the exchange rate at September 30, 2017) of its Value Added Tax refund (the “VAT Refund Applied”) to the aforementioned potential Danish income tax liability, consistent with the Company’s reserve position for the Danish Tax Matter. The deposit was made to mitigate additional interest and foreign exchange exposure. The Tax Deposit and the VAT Refund Applied are included within other non-current assets on the Condensed Consolidated Balance Sheets.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at September 30, 2017 and December 31, 2016 would be $30.1 and $21.4 million (exclusive of interest and penalties), respectively. Interest and penalties related to unrecognized tax benefits are recorded in income tax provision. It is reasonably possible that there could be material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues, reassessment of existing uncertain tax positions, including the Danish Tax Matter or the expiration of applicable statute of limitations; however, the Company is not able to estimate the impact of these items at this time. There were no significant changes to the liability for unrecognizedother uncertain tax benefitspositions during the three or six months ended SeptemberJune 30, 2017. 2020.
(10)(12)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 | | Three Months Ended | | | Six Months Ended | |
| | September 30, | | September 30, | | June 30, | | | June 30, | |
| (in millions, except per common share amounts) | 2017 | | 2016 | | 2017 | | 2016 | (in millions, except per common share amounts) | 2020 | | 2019 | | 2020 | | 2019 |
| Numerator: | | | | | | | | Numerator: | | | | | | | |
| Net income attributable to Tempur Sealy International, Inc. | $ | 44.6 |
| | $ | 77.8 |
| | $ | 103.0 |
| | $ | 138.7 |
| |
| Income from continuing operations, net of income attributable to non-controlling interests | | Income from continuing operations, net of income attributable to non-controlling interests | $ | 22.9 | | | $ | 42.8 | | | $ | 83.8 | | | $ | 71.6 | |
| | | | | | | | | |
| Denominator: | |
| | | | |
| | |
| Denominator: | | | | | |
| Denominator for basic earnings per common share-weighted average shares | 54.0 |
| | 58.2 |
| | 54.0 |
| | 60.1 |
| Denominator for basic earnings per common share-weighted average shares | 51.6 | | | 54.7 | | | 52.5 | | | 54.7 | |
| Effect of dilutive securities: | | | | | |
| | |
| Effect of dilutive securities: | |
| Employee stock-based compensation | 0.9 |
| | 0.6 |
| | 0.6 |
| | 0.7 |
| Employee stock-based compensation | 0.4 | | | 1.3 | | | 0.5 | | | 0.9 | |
| Denominator for diluted earnings per common share-adjusted weighted average shares | 54.9 |
| | 58.8 |
| | 54.6 |
| | 60.8 |
| Denominator for diluted earnings per common share-adjusted weighted average shares | 52.0 | | | 56.0 | | | 53.0 | | | 55.6 | |
| | | | | | | | | | | | | | | | |
| Basic earnings per common share | $ | 0.83 |
| | $ | 1.34 |
| | $ | 1.91 |
| | $ | 2.31 |
| |
| Basic earnings per common share for continuing operations | | Basic earnings per common share for continuing operations | $ | 0.44 | | | $ | 0.78 | | | $ | 1.60 | | | $ | 1.31 | |
| | | | | | | | | | | | | | | | |
| Diluted earnings per common share | $ | 0.81 |
| | $ | 1.32 |
| | $ | 1.89 |
| | $ | 2.28 |
| |
| Diluted earnings per common share for continuing operations | | Diluted earnings per common share for continuing operations | $ | 0.44 | | | $ | 0.76 | | | $ | 1.58 | | | $ | 1.29 | |
The Company excluded 1.3 million and 1.1 million and 0.4 million shares issuable upon exercise of outstanding stock options for the three months ended SeptemberJune 30, 20172020 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’sInternational's common stock or they were otherwise anti-dilutive. The Company excluded 1.30.8 million and 0.41.1 million shares issuable upon exercise of outstanding stock options for the ninesix months ended SeptemberJune 30, 20172020 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’sInternational's common stock or they were otherwise anti-dilutive. Holders of non-vested stock-based compensation awards do not maintainhave voting rights or maintain rights to receive any dividends thereon.
(11)
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(13)Business Segment Information
The Company operates in two2 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.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
The following table summarizes total assets by segment:
| | | (in millions) | September 30, 2017 | | December 31, 2016 | (in millions) | June 30, 2020 | | December 31, 2019 |
| North America | $ | 2,731.7 |
| | $ | 2,581.4 |
| North America | $ | 3,299.5 | | | $ | 3,142.9 | |
| International | 613.6 |
| | 572.6 |
| International | 603.2 | | | 615.3 | |
| Corporate | 604.2 |
| | 658.7 |
| Corporate | 549.9 | | | 477.1 | |
| Inter-segment eliminations | (1,214.2 | ) | | (1,110.1 | ) | Inter-segment eliminations | (1,250.7) | | | (1,173.5) | |
| Total assets | $ | 2,735.3 |
| | $ | 2,702.6 |
| Total assets | $ | 3,201.9 | | | $ | 3,061.8 | |
The following table summarizes property, plant and equipment, net, by segment:
| | | | | | | | | | | |
| (in millions) | June 30, 2020 | | December 31, 2019 |
| North America | $ | 369.0 | | | $ | 328.9 | |
| International | 51.2 | | | 51.8 | |
| Corporate | 42.6 | | | 55.1 | |
| Total property, plant and equipment, net | $ | 462.8 | | | $ | 435.8 | |
The following table summarizes operating lease right-of-use assets by segment:
| | | | | | | | | | | |
| (in millions) | June 30, 2020 | | December 31, 2019 |
| North America | $ | 237.0 | | | $ | 202.0 | |
| International | 42.1 | | | 42.2 | |
| Corporate | 2.5 | | | 1.2 | |
| Total operating lease right-of-use assets | $ | 281.6 | | | $ | 245.4 | |
|
| | | | | | | |
| (in millions) | September 30, 2017 | | December 31, 2016 |
| North America | $ | 295.8 |
| | $ | 297.4 |
|
| International | 54.4 |
| | 54.9 |
|
| Corporate | 73.9 |
| | 69.9 |
|
| Total property, plant and equipment, net | $ | 424.1 |
| | $ | 422.2 |
|
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 SeptemberJune 30, 2017:2020:
| | | (in millions) | North America | | International | | Corporate | | Eliminations | | Consolidated | (in millions) | North America | | International | | Corporate | | Eliminations | | Consolidated |
| Net sales | $ | 580.6 |
| | $ | 144.2 |
| | $ | — |
| | $ | — |
| | $ | 724.8 |
| Net sales | $ | 570.5 | | | $ | 94.7 | | | $ | — | | | $ | — | | | $ | 665.2 | |
| | | | | | | | | | | |
| Inter-segment sales | $ | 0.9 |
| | $ | 0.4 |
| | $ | — |
| | $ | (1.3 | ) | | $ | — |
| Inter-segment sales | $ | 0.1 | | | $ | — | | | $ | — | | | $ | (0.1) | | | $ | — | |
| Inter-segment royalty expense (income) | 1.5 |
| | (1.5 | ) | | — |
| | — |
| | — |
| Inter-segment royalty expense (income) | 0.7 | | | (0.7) | | | — | | | — | | | — | |
| Gross profit | 238.4 |
| | 73.8 |
| | — |
| | — |
| | 312.2 |
| Gross profit | 216.2 | | | 49.7 | | | — | | | — | | | 265.9 | |
| Operating income (loss) | 99.7 |
| | 20.8 |
| | (25.9 | ) | | — |
| | 94.6 |
| Operating income (loss) | 69.4 | | | 9.6 | | | (25.6) | | | — | | | 53.4 | |
| Income (loss) before income taxes | 97.0 |
| | 9.3 |
| | (44.8 | ) | | — |
| | 61.5 |
| |
| Income (loss) from continuing operations before income taxes | | Income (loss) from continuing operations before income taxes | 68.0 | | | 7.6 | | | (43.1) | | | — | | | 32.5 | |
| | | | | | | | | | | |
Depreciation and amortization (1) | $ | 13.1 |
| | $ | 3.8 |
| | $ | 10.0 |
| | $ | — |
| | $ | 26.9 |
| Depreciation and amortization (1) | $ | 18.6 | | | $ | 3.4 | | | $ | 9.8 | | | $ | — | | | $ | 31.8 | |
| Capital expenditures | 9.3 |
| | 1.8 |
| | 6.4 |
| | — |
| | 17.5 |
| Capital expenditures | 18.1 | | | 3.1 | | | 2.0 | | | — | | | 23.2 | |
| |
(1) | Depreciation and amortization includes stock-based compensation amortization expense. |
(1)Depreciation and amortization includes stock-based compensation amortization expense.
The following table summarizes segment information for the three months ended SeptemberJune 30, 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | North America | | International | | Corporate | | Eliminations | | Consolidated |
| | | | | | | | | |
| | | | | | | | | |
| Net sales | $ | 588.1 | | | $ | 134.7 | | | $ | — | | | $ | — | | | $ | 722.8 | |
| | | | | | | | | |
| Inter-segment sales | $ | 0.9 | | | $ | 0.1 | | | $ | — | | | $ | (1.0) | | | $ | — | |
| Inter-segment royalty expense (income) | 1.0 | | | (1.0) | | | — | | | — | | | — | |
| Gross profit | 240.0 | | | 73.4 | | | — | | | — | | | 313.4 | |
| Operating income (loss) | 80.1 | | | 27.4 | | | (26.5) | | | — | | | 81.0 | |
| Income (loss) from continuing operations before income taxes | 78.6 | | | 23.2 | | | (43.3) | | | — | | | 58.5 | |
| | | | | | | | | |
Depreciation and amortization (1) | $ | 15.6 | | | $ | 3.5 | | | $ | 9.5 | | | $ | — | | | $ | 28.6 | |
| Capital expenditures | 14.4 | | | 3.1 | | | 3.3 | | | — | | | 20.8 | |
(1)Depreciation and amortization includes stock-based compensation amortization expense.
The following table summarizes segment information for the six months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | North America | | International | | Corporate | | Eliminations | | Consolidated |
| Net sales | $ | 1,247.7 | | | $ | 239.9 | | | $ | — | | | $ | — | | | $ | 1,487.6 | |
| | | | | | | | | |
| Inter-segment sales | $ | 0.9 | | | $ | 0.1 | | | $ | — | | | $ | (1.0) | | | $ | — | |
| Inter-segment royalty expense (income) | 2.1 | | | (2.1) | | | — | | | — | | | — | |
| Gross profit | 493.4 | | | 129.6 | | | — | | | — | | | 623.0 | |
| Operating income (loss) | 170.8 | | | 36.2 | | | (48.3) | | | — | | | 158.7 | |
| Income (loss) from continuing operations before income taxes | 167.6 | | | 32.1 | | | (82.7) | | | — | | | 117.0 | |
| | | | | | | | | |
Depreciation and amortization (1) | $ | 36.2 | | | $ | 6.7 | | | $ | 19.4 | | | $ | — | | | $ | 62.3 | |
| Capital expenditures | 39.4 | | | 5.5 | | | 4.5 | | | — | | | 49.4 | |
(1)Depreciation and amortization includes stock-based compensation amortization expense.
|
| | | | | | | | | | | | | | | | | | | |
| (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 |
|
| |
(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 ninesix months ended SeptemberJune 30, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | North America | | International | | Corporate | | Eliminations | | Consolidated |
| | | | | | | | | |
| | | | | | | | | |
| Net sales | $ | 1,132.1 | | | $ | 281.6 | | | $ | — | | | $ | — | | | $ | 1,413.7 | |
| | | | | | | | | |
| Inter-segment sales | $ | 1.9 | | | $ | 0.4 | | | $ | — | | | $ | (2.3) | | | $ | — | |
| Inter-segment royalty expense (income) | 2.0 | | | (2.0) | | | — | | | — | | | — | |
| Gross profit | 444.4 | | | 150.8 | | | — | | | — | | | 595.2 | |
| Operating income (loss) | 144.4 | | | 52.6 | | | (55.5) | | | — | | | 141.5 | |
| Income (loss) from continuing operations before income taxes | 141.0 | | | 53.0 | | | (89.6) | | | — | | | 104.4 | |
| | | | | | | | | |
Depreciation and amortization (1) | $ | 30.6 | | | $ | 6.8 | | | $ | 19.3 | | | $ | — | | | $ | 56.7 | |
| Capital expenditures | 27.3 | | | 6.0 | | | 6.6 | | | — | | | 39.9 | |
|
| | | | | | | | | | | | | | | | | | | |
| (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 |
|
| |
(1) | Depreciation and amortization includes stock-based compensation amortization expense. |
(1)Depreciation and amortization includes stock-based compensation amortization expense.
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 |
|
| |
(1) | Depreciation and amortization includes stock-based compensation amortization expense. |
The following table summarizes property, plant and equipment, net by geographic region:
| | | | | | | | | | | |
| (in millions) | June 30, 2020 | | December 31, 2019 |
| United States | $ | 395.7 | | | $ | 366.4 | |
| Canada | 15.9 | | | 17.5 | |
| Other International | 51.2 | | | 51.9 | |
| Total property, plant and equipment, net | $ | 462.8 | | | $ | 435.8 | |
| Total International | $ | 67.1 | | | $ | 69.4 | |
|
| | | | | | | |
| (in millions) | September 30, 2017 | | December 31, 2016 |
| United States | $ | 362.3 |
| | $ | 360.7 |
|
| Canada | 7.4 |
| | 6.6 |
|
| Other International | 54.4 |
| | 54.9 |
|
| Total property, plant and equipment, net | $ | 424.1 |
| | $ | 422.2 |
|
| Total International | $ | 61.8 |
| | $ | 61.5 |
|
The following table summarizes operating lease right-of-use assets by geographic region:
| | | | | | | | | | | |
| (in millions) | June 30, 2020 | | December 31, 2019 |
| United States | $ | 235.4 | | | $ | 198.3 | |
| Canada | 4.1 | | | 4.9 | |
| Other International | 42.1 | | | 42.2 | |
| Total operating lease right-of-use assets | $ | 281.6 | | | $ | 245.4 | |
| Total International | $ | 46.2 | | | $ | 47.1 | |
The following table summarizes net sales by geographic region:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| | June 30, | | | | June 30, | | |
| (in millions) | 2020 | | 2019 | | 2020 | | 2019 |
| United States | $ | 542.0 | | | $ | 533.7 | | | $ | 1,174.5 | | | $ | 1,030.9 | |
| Canada | 28.5 | | | 54.4 | | | 73.2 | | | 101.2 | |
| Other International | 94.7 | | | 134.7 | | | 239.9 | | | 281.6 | |
| Total net sales | $ | 665.2 | | | $ | 722.8 | | | $ | 1,487.6 | | | $ | 1,413.7 | |
| Total International | $ | 123.2 | | | $ | 189.1 | | | $ | 313.1 | | | $ | 382.8 | |
|
| | | | | | | | | | | | | | | |
| | 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 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
(12)Guarantor/Non-Guarantor Financial Information
The $450.0 million and $600.0 million aggregate principal amount of 2023 Senior Notes and 2026 Senior Notes (collectively the "Senior Notes"), respectively, are general unsecured senior obligations of Tempur Sealy International and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by all of Tempur Sealy International’s 100% directly or indirectly owned current and future domestic subsidiaries (the "Combined Guarantor Subsidiaries"). The foreign subsidiaries (the "Combined Non-Guarantor Subsidiaries") represent the foreign operations of the Company and do not guarantee the Senior Notes. A subsidiary guarantor will be released from its obligations under the applicable indenture governing the Senior Notes when: (a) the subsidiary guarantor is sold or sells all or substantially all of its assets; (b) the subsidiary is declared "unrestricted" under the applicable indenture governing the Senior Notes; (c) the subsidiary’s guarantee of indebtedness under the 2016 Credit Agreement (as it may be amended, refinanced or replaced) is released (other than a discharge through repayment); or (d) the requirements for legal or covenant defeasance or discharge of the applicable indenture have been satisfied. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Company’s wholly-owned subsidiary guarantors and non-guarantor subsidiaries. The Company has accounted for its investments in its subsidiaries under the equity method.
The following supplemental financial information presents the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 for Tempur Sealy International, Combined Guarantor Subsidiaries and Combined Non-Guarantor Subsidiaries.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Supplemental Condensed Consolidated Statements of Income and Comprehensive Income
Three Months Ended September 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Supplemental Condensed Consolidated Statements of Income and Comprehensive Income
Three Months Ended September 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Tempur Sealy International, Inc. (Ultimate Parent) | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 656.0 |
| | $ | 191.5 |
| | $ | (15.1 | ) | | $ | 832.4 |
|
| Cost of sales | — |
| | 381.1 |
| | 104.3 |
| | (15.1 | ) | | 470.3 |
|
| Gross profit | — |
| | 274.9 |
| | 87.2 |
| | — |
| | 362.1 |
|
| Selling and marketing expenses | 1.0 |
| | 129.6 |
| | 44.6 |
| | — |
| | 175.2 |
|
| General, administrative and other expenses | 4.0 |
| | 44.5 |
| | 15.5 |
| | — |
| | 64.0 |
|
| Equity income in earnings of unconsolidated affiliates | — |
| | — |
| | (2.4 | ) | | — |
| | (2.4 | ) |
| Royalty income, net of royalty expense | — |
| | (5.6 | ) | | (0.2 | ) | | — |
| | (5.8 | ) |
| Operating (loss) income | (5.0 | ) | | 106.4 |
| | 29.7 |
| | — |
| | 131.1 |
|
| | | | | | | | | | |
| Other expense, net: | |
| | |
| | |
| | |
| | |
|
| Third party interest expense, net | 15.0 |
| | 4.7 |
| | 0.8 |
| | — |
| | 20.5 |
|
| Intercompany interest (income) expense, net | (1.0 | ) | | — |
| | 1.0 |
| | — |
| | — |
|
| Interest expense, net | 14.0 |
| | 4.7 |
| | 1.8 |
| | — |
| | 20.5 |
|
| Other expense, net | — |
| | — |
| | 0.3 |
| | — |
| | 0.3 |
|
| Total other expense, net | 14.0 |
| | 4.7 |
| | 2.1 |
| | — |
| | 20.8 |
|
| | | | | | | | | | |
| Income from equity investees | 89.0 |
| | 21.1 |
| | — |
| | (110.1 | ) | | — |
|
| | | | | | | | | | |
| Income before income taxes | 70.0 |
| | 122.8 |
| | 27.6 |
| | (110.1 | ) | | 110.3 |
|
| Income tax benefit (provision) | 6.6 |
| | (33.8 | ) | | (6.5 | ) | | — |
| | (33.7 | ) |
| Net income before non-controlling interests | 76.6 |
| | 89.0 |
| | 21.1 |
| | (110.1 | ) | | 76.6 |
|
| Less: Net loss attributable to non-controlling interests | (1.2 | ) | | (1.2 | ) | | — |
| | 1.2 |
| | (1.2 | ) |
| Net income attributable to Tempur Sealy International, Inc. | $ | 77.8 |
| | $ | 90.2 |
| | $ | 21.1 |
| | $ | (111.3 | ) | | $ | 77.8 |
|
| | | | | | | | | | |
| Comprehensive income attributable to Tempur Sealy International, Inc. | $ | 72.6 |
| | $ | 90.5 |
| | $ | 15.8 |
| | $ | (106.3 | ) | | $ | 72.6 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Supplemental Condensed Consolidated Statements of Income and Comprehensive Income
Nine Months Ended September 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Tempur Sealy International, Inc. (Ultimate Parent) | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 1,522.4 |
| | $ | 641.2 |
| | $ | (57.4 | ) | | $ | 2,106.2 |
|
| Cost of sales | — |
| | 920.9 |
| | 375.3 |
| | (57.4 | ) | | 1,238.8 |
|
| Gross profit | — |
| | 601.5 |
| | 265.9 |
| | — |
| | 867.4 |
|
| Selling and marketing expenses | 4.2 |
| | 308.9 |
| | 148.3 |
| | — |
| | 461.4 |
|
| General, administrative and other expenses | 13.8 |
| | 132.2 |
| | 60.5 |
| | — |
| | 206.5 |
|
| Customer termination charges, net | (8.4 | ) | | 21.8 |
| | 1.0 |
| | — |
| | 14.4 |
|
| Equity income in earnings of unconsolidated affiliates | — |
| | — |
| | (10.6 | ) | | — |
| | (10.6 | ) |
| Royalty income, net of royalty expense | — |
| | (15.0 | ) | | — |
| | — |
| | (15.0 | ) |
| Operating (loss) income | (9.6 | ) | | 153.6 |
| | 66.7 |
| | — |
| | 210.7 |
|
| | | | | | | | | | |
| Other expense, net: | |
| | |
| | |
| | |
| | |
|
| Third party interest expense, net | 44.7 |
| | 19.4 |
| | 12.1 |
| | — |
| | 76.2 |
|
| Intercompany interest (income) expense, net | (3.6 | ) | | 5.6 |
| | (2.0 | ) | | — |
| | — |
|
| Interest expense, net | 41.1 |
| | 25.0 |
| | 10.1 |
| | — |
| | 76.2 |
|
| Other (income) expense, net | — |
| | (13.6 | ) | | 5.2 |
| | — |
| — |
| (8.4 | ) |
| Total other expense, net | 41.1 |
| | 11.4 |
| | 15.3 |
| | — |
| | 67.8 |
|
| | | | | | | | | | |
| Income from equity investees | 129.1 |
| | 33.6 |
| | — |
| | (162.7 | ) | | — |
|
| | | | | | | | | | |
| Income before income taxes | 78.4 |
| | 175.8 |
| | 51.4 |
| | (162.7 | ) | | 142.9 |
|
| Income tax benefit (provision) | 16.5 |
| | (46.7 | ) | | (17.8 | ) | | — |
| | (48.0 | ) |
| Net income before non-controlling interests | 94.9 |
| | 129.1 |
| | 33.6 |
| | (162.7 | ) | | 94.9 |
|
| Less: Net loss attributable to non-controlling interests | (8.1 | ) | | — |
| | (8.1 | ) | | 8.1 |
| | (8.1 | ) |
| Net income attributable to Tempur Sealy International, Inc. | $ | 103.0 |
| | $ | 129.1 |
| | $ | 41.7 |
| | $ | (170.8 | ) | | $ | 103.0 |
|
| | | | | | | | | | |
| Comprehensive income attributable to Tempur Sealy International, Inc. | $ | 130.1 |
| | $ | 124.6 |
| | $ | 73.4 |
| | $ | (198.0 | ) | | $ | 130.1 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Supplemental Condensed Consolidated Statements of Income and Comprehensive Income
Nine Months Ended September 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Tempur Sealy International, Inc. (Ultimate Parent) | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 1,835.0 |
| | $ | 566.4 |
| | $ | (43.6 | ) | | $ | 2,357.8 |
|
| Cost of sales | — |
| | 1,106.3 |
| | 305.1 |
| | (43.6 | ) | | 1,367.8 |
|
| Gross profit | — |
| | 728.7 |
| | 261.3 |
| | — |
| | 990.0 |
|
| Selling and marketing expenses | 3.7 |
| | 358.0 |
| | 136.4 |
| | — |
| | 498.1 |
|
| General, administrative and other expenses | 12.8 |
| | 146.3 |
| | 48.5 |
| | — |
| | 207.6 |
|
| Equity income in earnings of unconsolidated affiliates | — |
| | — |
| | (8.6 | ) | | — |
| | (8.6 | ) |
| Royalty income, net of royalty expense | — |
| | (15.1 | ) | | — |
| | — |
| | (15.1 | ) |
| Operating (loss) income | (16.5 | ) | | 239.5 |
| | 85.0 |
| | — |
| | 308.0 |
|
| | | | | | | | | | |
| Other expense, net: | |
| | |
| | |
| | |
| | |
|
| Third party interest expense, net | 51.1 |
| | 11.7 |
| | 2.2 |
| | — |
| | 65.0 |
|
| Intercompany interest (income) expense, net | (3.1 | ) | | (0.1 | ) | | 3.2 |
| | — |
| | — |
|
| Interest expense, net | 48.0 |
| | 11.6 |
| | 5.4 |
| | — |
| | 65.0 |
|
| Loss on extinguishment of debt | 34.3 |
| | 12.9 |
| | — |
| | — |
| | 47.2 |
|
| Other (income) expense, net | — |
| | (1.4 | ) | | 1.4 |
| | — |
| | — |
|
| Total other expense, net | 82.3 |
| | 23.1 |
| | 6.8 |
| | — |
| | 112.2 |
|
| | | | | | | | | | |
| Income from equity investees | 200.8 |
| | 62.3 |
| | — |
| | (263.1 | ) | | — |
|
| | | | | | | | | | |
| Income before income taxes | 102.0 |
| | 278.7 |
| | 78.2 |
| | (263.1 | ) | | 195.8 |
|
| Income tax benefit (provision) | 33.6 |
| | (77.9 | ) | | (15.9 | ) | | — |
| | (60.2 | ) |
| Net income before non-controlling interests | 135.6 |
| | 200.8 |
| | 62.3 |
| | (263.1 | ) | | 135.6 |
|
| Less: Net loss attributable to non-controlling interests | (3.1 | ) | | (3.1 | ) | | — |
| | 3.1 |
| | (3.1 | ) |
| Net income attributable to Tempur Sealy International, Inc. | $ | 138.7 |
| | $ | 203.9 |
| | $ | 62.3 |
| | $ | (266.2 | ) | | $ | 138.7 |
|
| | | | | | | | | | |
| Comprehensive income attributable to Tempur Sealy International, Inc. | $ | 144.4 |
| | $ | 204.9 |
| | $ | 67.2 |
| | $ | (272.1 | ) | | $ | 144.4 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Supplemental Condensed Consolidated Balance Sheets
September 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Supplemental Condensed Consolidated Balance Sheets
December 31, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Tempur Sealy International, Inc. (Ultimate Parent) | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| ASSETS | | | | | | | | | |
| | | | | | | | | | |
| Current Assets: | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 7.9 |
| | $ | 57.8 |
| | $ | — |
| | $ | 65.7 |
|
| Accounts receivable, net | — |
| | 197.7 |
| | 147.4 |
| | — |
| | 345.1 |
|
| Inventories | — |
| | 117.1 |
| | 79.7 |
| | — |
| | 196.8 |
|
| Income taxes receivable | 234.2 |
| | — |
| | — |
| | (234.2 | ) | | — |
|
| Prepaid expenses and other current assets | — |
| | 48.9 |
| | 15.0 |
| | — |
| | 63.9 |
|
| Total Current Assets | 234.2 |
| | 371.6 |
| | 299.9 |
| | (234.2 | ) | | 671.5 |
|
| Property, plant and equipment, net | — |
| | 346.9 |
| | 75.3 |
| | — |
| | 422.2 |
|
| Goodwill | — |
| | 500.2 |
| | 222.3 |
| | — |
| | 722.5 |
|
| Other intangible assets, net | — |
| | 589.8 |
| | 88.9 |
| | — |
| | 678.7 |
|
| Deferred income taxes | 20.6 |
| | — |
| | 22.5 |
| | (20.6 | ) | | 22.5 |
|
| Other non-current assets | — |
| | 41.7 |
| | 143.5 |
| | — |
| | 185.2 |
|
| Net investment in subsidiaries | 2,207.4 |
| | 77.7 |
| | — |
| | (2,285.1 | ) | | — |
|
| Due from affiliates | 168.4 |
| | 1,874.7 |
| | 14.3 |
| | (2,057.4 | ) | | — |
|
| Total Assets | $ | 2,630.6 |
| | $ | 3,802.6 |
| | $ | 866.7 |
| | $ | (4,597.3 | ) | | $ | 2,702.6 |
|
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | |
| | |
| | |
|
| | | | | | | | | | |
| Current Liabilities: | |
| | |
| | |
| | |
| | |
|
| Accounts payable | $ | 0.1 |
| | $ | 157.0 |
| | $ | 62.2 |
| | $ | — |
| | $ | 219.3 |
|
| Accrued expenses and other current liabilities | 6.8 |
| | 172.6 |
| | 70.7 |
| | — |
| | 250.1 |
|
| Income taxes payable | — |
| | 235.9 |
| | 4.1 |
| | (234.2 | ) | | 5.8 |
|
| Current portion of long-term debt | — |
| | 34.4 |
| | 35.9 |
| | — |
| | 70.3 |
|
| Total Current Liabilities | 6.9 |
| | 599.9 |
| | 172.9 |
| | (234.2 | ) | | 545.5 |
|
| Long-term debt, net | 1,040.4 |
| | 776.5 |
| | 0.9 |
| | — |
| | 1,817.8 |
|
| Deferred income taxes | — |
| | 174.9 |
| | 20.3 |
| | (20.6 | ) | | 174.6 |
|
| Other non-current liabilities | — |
| | 43.3 |
| | 126.0 |
| | — |
| | 169.3 |
|
| Due to affiliates | 1,587.9 |
| | 0.6 |
| | 468.9 |
| | (2,057.4 | ) | | — |
|
| Total Liabilities | 2,635.2 |
| | 1,595.2 |
| | 789.0 |
| | (2,312.2 | ) | | 2,707.2 |
|
| | | | | | | | | | |
| Redeemable non-controlling interest | 7.6 |
| | — |
| | 7.6 |
| | (7.6 | ) | | 7.6 |
|
| | | | | | | | | | |
| Total Stockholders' (Deficit) Equity | (12.2 | ) | | 2,207.4 |
| | 70.1 |
| | (2,277.5 | ) | | (12.2 | ) |
| Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity | $ | 2,630.6 |
| | $ | 3,802.6 |
| | $ | 866.7 |
| | $ | (4,597.3 | ) | | $ | 2,702.6 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Supplemental Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Tempur Sealy International, Inc. (Ultimate Parent) | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash (used in) provided by operating activities | $ | (27.0 | ) | | $ | 352.8 |
| | $ | (123.3 | ) | | $ | — |
| | $ | 202.5 |
|
| | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
| | |
| | |
| | |
|
| Purchases of property, plant and equipment | — |
| | (35.9 | ) | | (7.5 | ) | | — |
| | (43.4 | ) |
| Contributions (paid to) received from subsidiaries and affiliates | — |
| | (159.5 | ) | | 159.5 |
| | — |
| | — |
|
| Other | — |
| | 0.9 |
| | 4.0 |
| | — |
| | 4.9 |
|
| Net cash (used in) provided by investing activities | — |
| | (194.5 | ) | | 156.0 |
| | — |
| | (38.5 | ) |
| | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
| | |
| | |
| | |
|
| Proceeds from borrowings under long-term debt obligations | — |
| | 523.8 |
| | 462.1 |
| | — |
| | 985.9 |
|
| Repayments of borrowings under long-term debt obligations | — |
| | (703.2 | ) | | (421.5 | ) | | — |
| | (1,124.7 | ) |
| Net activity in investment in and advances from (to) subsidiaries and affiliates | 66.1 |
| | 21.4 |
| | (87.5 | ) | | — |
| | — |
|
| Proceeds from exercise of stock options | 6.5 |
| | — |
| | — |
| | — |
| | 6.5 |
|
| Treasury stock repurchased | (44.9 | ) | | — |
| | — |
| | — |
| | (44.9 | ) |
| Payments of deferred financing costs | — |
| | — |
| | (0.5 | ) | | — |
| | (0.5 | ) |
| Other | — |
| | (0.2 | ) | | (2.7 | ) | | — |
| | (2.9 | ) |
| Net cash provided by (used in) financing activities | 27.7 |
| | (158.2 | ) | | (50.1 | ) | | — |
| | (180.6 | ) |
| | | | | | | | | | |
| NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | — |
| | — |
| | (7.3 | ) | | — |
| | (7.3 | ) |
| Increase (decrease) in cash and cash equivalents | 0.7 |
| | 0.1 |
| | (24.7 | ) | | — |
| | (23.9 | ) |
| CASH AND CASH EQUIVALENTS, beginning of period | — |
| | 7.9 |
| | 57.8 |
| | — |
| | 65.7 |
|
| CASH AND CASH EQUIVALENTS, end of period | $ | 0.7 |
| | $ | 8.0 |
| | $ | 33.1 |
| | $ | — |
| | $ | 41.8 |
|
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)
Supplemental Condensed Consolidated Statements of Cash Flows
Nine Months EndedSeptember 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Tempur Sealy International, Inc. (Ultimate Parent) | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash (used in) provided by operating activities | $ | (30.4 | ) | | $ | 38.2 |
| | $ | 102.0 |
| | $ | — |
| | $ | 109.8 |
|
| | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
| |
|
| |
|
| |
|
| |
|
|
| Purchases of property, plant and equipment | — |
| | (33.2 | ) | | (8.7 | ) | | — |
| | (41.9 | ) |
| Contributions (paid to) received from subsidiaries and affiliates | — |
| | (76.8 | ) | | 76.8 |
| | — |
| | — |
|
| Net cash (used in) provided by investing activities | — |
| | (110.0 | ) | | 68.1 |
| | — |
| | (41.9 | ) |
| | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
| | |
| | |
| | |
|
| Proceeds from borrowings under long-term debt obligations | 600.0 |
| | 1,214.6 |
| | 56.9 |
| | — |
| | 1,871.5 |
|
| Repayments of borrowings under long-term debt obligations | (375.0 | ) | | (1,246.6 | ) | | (37.7 | ) | | — |
| | (1,659.3 | ) |
| Net activity in investment in and advances from (to) subsidiaries and affiliates | 136.5 |
| | 22.6 |
| | (159.1 | ) | | — |
| | — |
|
| Proceeds from exercise of stock options | 15.2 |
| | — |
| | — |
| | — |
| | 15.2 |
|
| Excess tax benefit from stock-based compensation | 6.0 |
| | — |
| | — |
| | — |
| | 6.0 |
|
| Treasury stock repurchased | (319.7 | ) | | — |
| | — |
| | — |
| | (319.7 | ) |
| Payments of deferred financing costs | (3.0 | ) | | (3.6 | ) | | — |
| | — |
| | (6.6 | ) |
| Fees paid to lenders | (6.0 | ) | | (1.8 | ) | | — |
| | — |
| | (7.8 | ) |
| Call premium on 2020 Senior Notes | (23.6 | ) | | — |
| | — |
| | — |
| | (23.6 | ) |
| Other | — |
| | (1.6 | ) | | 1.7 |
| | — |
| | 0.1 |
|
| Net cash provided by (used in) financing activities | 30.4 |
| | (16.4 | ) | | (138.2 | ) | | — |
| | (124.2 | ) |
| | | | | | | | | | |
| NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | — |
| | — |
| | (8.6 | ) | | — |
| | (8.6 | ) |
| (Decrease) increase in cash and cash equivalents | — |
| | (88.2 | ) | | 23.3 |
| | — |
| | (64.9 | ) |
| CASH AND CASH EQUIVALENTS, beginning of period | — |
| | 119.7 |
| | 34.2 |
| | — |
| | 153.9 |
|
| CASH AND CASH EQUIVALENTS, end of period | $ | — |
| | $ | 31.5 |
| | $ | 57.5 |
| | $ | — |
| | $ | 89.0 |
|
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 ourthe 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-QReport, 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 ninesix months ended SeptemberJune 30, 2017,2020, including the following topics:
•an overview of our business;business and strategy, including uncertainty relating to COVID-19;
factors impacting results of operations;
•results of operations, including our net sales and costs in the periods presented as well as changes between periods;
•expected sources of liquidity for future operations; and
•our use of certain non-GAAP financial measures.
Business Overview
General
We are the world's largest bedding manufacturer. 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.
Our Channels
In the first quarter of 2017, we updated our primary sellingdistribution model operates through an omni-channel strategy with two distribution channels toin each operating business segment: Wholesale and Direct. These channels better align to the margin characteristicsOur Wholesale channel consists of our business and our marketplace. Wholesale includes all third partythird-party retailers, including third partythird-party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, e-commerce and call centers. Historically, we reported our net sales in the Retail and Other sales channels. Retail included furniture and bedding retailers, department stores, specialty retailers and warehouse clubs. Other included direct-to-consumer, third party distributors, hospitality and healthcare customers.
Business Segments
We operate in two segments: North America and International. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. Our North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries 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 ResultsBusiness Update
We continue to study and optimize our operations in response to the challenges from the COVID-19 crisis. We have taken and continue to take precautionary measures to mitigate health risks during the evolving situation resulting from COVID-19.
We experienced a major reduction in total net sales when COVID-19 began materially impacting our North America business segment in mid-March. In the second quarter, order trends reached their lowest point in early April when they had declined approximately 80% as compared to prior year. Order trends began to improve thereafter, with orders down approximately 55% for the full month of OperationsApril as compared to the same period in 2019. During April and May, many stores of our third-party retailers within the Wholesale channel, as well as our company-owned stores within the Direct channel, were closed or operating under restricted conditions in the U.S. and around the world. We experienced significant and accelerating improvement in order trends in late May and throughout the remainder of the second quarter. This improvement was primarily due to the reopening of brick-and-mortar stores as restrictions were lifted, the acceleration of e-commerce business trends and a
shift in consumer spending habits towards in-home products, including bedding products. We believe this may be a long-term shift in consumer spending habits, which could be favorable to our business.
This unexpected and rapid increase in demand for bedding products has challenged the entire bedding industry and supply chain, including our business. The factors outlined belowbroad-based increase in demand coupled with labor and supply chain constraints has created operational challenges in the production of Sealy bedding products in the U.S. These operational challenges have resulted in longer order to delivery times. Sealy orders in the U.S. have exceeded our manufacturing capacity in the second quarter and through July. The Tempur-Pedic manufacturing process has not been as impacted by the current supply chain constraints as it is less labor-dependent and has fewer components than the Sealy manufacturing process. We are in the process of increasing U.S. production capabilities across our entire portfolio of products to meet this heightened demand, but expect to continue experiencing capacity constraints on Sealy bedding products through the third quarter of 2020.
Additionally, the U.S. government has mandated that domestic suppliers of certain materials used in the production of bedding products be redirected towards the production of personal protective equipment. Our supply chain remains constrained with respect to these materials and we have taken certain steps, including pricing actions, to attempt to mitigate this impact.
We are targeting third quarter 2020 sales to increase approximately 25% from the same period last year. If favorable order trends were to continue, and if there are no significant changes in supply chain or manufacturing capacity, or other unfavorable impacts due to the global pandemic, it is possible that our third quarter or fourth quarter financial performance could trigger vesting of our long-term aspirational plan. This would result in a non-cash stock-based compensation charge in the range of $33.0 million to $49.5 million in the quarter that the performance metric is probable of acheivement.
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. During the second quarter, we began offering our Clean Shop PromiseTM protocol to third-party retailers and our company-owned stores, which is being broadly adopted to provide customers with a sense of comfort as they return to shopping in stores. During the second quarter, we also worked with various government and healthcare organizations to provide products and services in this time of crisis.
Our business has a highly variable cost structure that can flex with changes in sales. Given the sudden and significant change in volume early in the second quarter of 2020, actions were quickly implemented to mitigate the financial impact. We primarily reduced advertising spend, temporarily furloughed employees and decreased variable compensation. As order trends improved throughout the quarter, we immediately reversed these actions and began making investments to ensure we could service our customers. Additionally, as liquidity improved, we began reinvesting in the business at similar levels prior to the impact of COVID-19.
Given the market uncertainty of the crisis, we entered into a new $200 million 364-day term loan (the "364-Day Loan") on May 13, 2020 to increase overall available liquidity and strengthen the balance sheet. We had $611.5 million of liquidity as of June 30, 2020, including $146.8 million of cash on hand and $423.9 million available under our futurerevolving senior secured credit facility.
We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that 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 have on our business, results of operations.operations, liquidity or capital resources, we believe that it is important to share where our 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 more extensive discussionfurther information regarding the potential impacts of these and other risk factors that could impact our future results of operations,COVID-19 on the Company, please refer to "Risk Factors," underFactors" in ITEM 1A of Part I and "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That Could Impact Results of Operations" included in ITEM 7 of Part II of our Annual Report on Form 10-Kthis Report.
Product Launches
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 a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for the year ended December 31, 2016.
General Business and Economic Conditions
Our businessa cash purchase price of approximately $39.1 million. Sherwood Bedding is affected by general business and economic conditions, and these conditions could have an impact on future demand for our products. The global economic environment continues to be challenging, and we expect the uncertainty to continue. We continue to make strategic investments, including: introducing new products; investing in increasing our global brand awareness; expanding our North American margins while maintaining market share; investing in our operating infrastructure to meet the requirements of our business; and taking other actions to further strengthen our business.
Termination of Mattress Firm Relationship
Mattress Firm, Inc. ("Mattress Firm") was a customer within the North America segment and was our largest customer in 2016. Mattress Firm represented 4.5% and 21.8% of our sales for the nine months ended September 30, 2017 and September 30, 2016, respectively. Our net sales to Mattress Firm declined 81.3%major manufacturer in the nine months ended September 30, 2017 as compared toU.S. private label and original equipment manufacturer bedding market, and this acquisition of a majority interest marks our entrance into the nine months ended September 30, 2016. Excluding net sales to Mattress Firm, our net sales increased 9.0% in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
private label category. During the week of January 23, 2017, 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 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 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.
In the second quarter of 2017, the wind down of our relationship with Mattress Firm disrupted the retail mattress market as Mattress Firm closed out its inventory of Tempur and Sealy products. We expect that the loss of Mattress Firm as a customer will cause a decrease in our market share in the United States in 2017 and will cause our net sales in 2017 to decline from our net sales in 2016, and as a result we expect to be less profitable in 2017 as compared to 2016. In order to address this issue and recapture market share and lost sales, we are working with our existing retailers to expand their offerings of our products and expand our distribution with new retailers and other distribution channels. Our ability to improve our net sales performance in 2017 as compared to current expectations will be driven primarily by how quickly we can recapture market share and net sales.
In the first quarter of 2017,2020, we took steps to managecompleted the integration of Sherwood Bedding into our cost structure as a resultportfolio of the termination of the business relationship with Mattress Firm. Accordingly, we incurred certain customer termination charges, including non-cash write-offs.product brands. We incurred $25.9 million in net charges associated with the termination of Mattress Firm. 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 $14.4 million of net charges associated with the termination of Mattress Firm, including $22.8 million of charges related to the write-off of the March 31, 2017 value of Mattress Firm incentives and marketing assets, employee-related expenses and professional fees, which were offset by $8.4 million of benefit primarily 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 Mattress Firm relationship.
We intend to manage our business and costs going forward with the primary goal of recapturing market share and net sales. Accordingly, our expense reductions in the areas of manufacturing and marketing are not expected to be significant. With respect to our manufacturing, we will expect to experience certain lower operating efficiencies in the short term in orderleverage our overall brand portfolio to retain our high-quality manufacturing capabilities, which we expect the market will need over time. We also expect to increase our marketing investment as a percentage of sales consistent with our long-term strategy of building and maintaining our brands to drive sales, and this may have an incremental negative impact on our profitability in the short-term.gain additional distribution for Sherwood products.
With respect to our cash flow and liquidity, we do not expect that the Mattress Firm termination will have an unfavorable impact in 2017 as compared to 2016. With respect to the financial covenants in our debt facilities, we expect to remain in compliance with our financial covenants through the end of 2017 and beyond, notwithstanding the decrease in net sales and other impacts referred to above.
For further discussion of the risks associated with large customers, refer to "Risk Factors," under ITEM 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016 and "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That Could Impact Results of Operations" included in ITEM 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2016.
Financial Leverage
As of September 30, 2017, we had $1,762.9 million of total debt outstanding, and our adjusted earnings before interest, tax, depreciation and amortization ("Adjusted EBITDA"), which is not accepted under U.S. generally accepted accounting principles ("GAAP") as a financial measure, was $474.1 million for the trailing twelve months ended September 30, 2017. Higher financial leverage makes us more vulnerable to general adverse competitive, economic and industry conditions. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowing will be available. As of September 30, 2017, our ratio of consolidated funded debt less qualified cash to Adjusted EBITDA calculated in accordance with our 2016 Credit Agreement was 3.70 times, within 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, please refer to “Non-GAAP Financial Information” below.
Commodities
Future changes in raw material prices could have a significant impact on our gross margin, and we expect commodity inflation of approximately $10 million in the fourth quarter of 2017. We also expect commodity inflation to continue in 2018.
Results of Operations
A summary of our results for the three months ended SeptemberJune 30, 20172020 include:
•Total net sales decreased 12.9%8.0% to $724.8$665.2 million from $832.4as compared to $722.8 million in the thirdsecond quarter of 2016.2019. On a constant currency basis, which is a non-GAAP financial measure, total net sales decreased 13.3%7.3%, with a decrease of 17.2%2.9% in the North America business segment and an increasea decrease of 7.0%26.9% in the International business segment.
•Gross margin was 43.1%40.0% as compared to 43.5%43.4% in the thirdsecond quarter of 2016.2019. Adjusted gross margin, which is a non-GAAP financial measure, was 40.6% in the second quarter of 2020. There were no adjustments to gross margin in the second quarter of 2019.
•Operating income decreased 27.8%34.1% to $94.6$53.4 million as compared to $131.1$81.0 million in the thirdsecond quarter of 2016.2019. Adjusted operating income, which is a non-GAAP financial measure, decreased 23.6%16.5% to $100.1$70.0 million as compared to $131.1$83.8 million in the thirdsecond quarter of 2016.2019. Operating income and adjusted operating income, which is a non-GAAP financial measure, in the second quarter of 2020 included $7.9 million of costs associated with temporarily closed company-owned retail stores and sales force retention costs as a result of the novel coronavirus ("COVID-19 charges").
•Net income decreased 42.7%44.7% to $44.6$23.0 million as compared to $77.8$41.6 million in the thirdsecond quarter of 2016.2019. Adjusted net income, which is a non-GAAP financial measure, decreased 29.4%20.8% to $54.9$35.1 million as compared to $77.8$44.3 million in the thirdsecond 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.
|
•Earnings before interest, tax, depreciation and amortization ("EBITDA"), which is a non-GAAP financial measure,decreased 21.8% to $85.2 million as compared to $109.0 million in the second quarter of 2019. Adjusted EBITDA (including COVID-19 charges), which is a non-GAAP financial measure, decreased 10.0% to $101.7 million and adjusted EBITDA per credit facility, which is a non-GAAP financial measure, decreased 3.0% to $109.6 million as compared to $113.0 million in the second quarter of 2019.
•Adjusted EBITDA per credit facility, which is a non-GAAP financial measure, excluded $24.5 million of asset impairments, incremental operating costs due to the global pandemic, COVID-19 charges and other items in the second quarter of 2020.
•Earnings per diluted share ("EPS") decreased 38.6%40.5% to $0.81$0.44 as compared to $1.32$0.74 in the thirdsecond quarter of 2016.2019. Adjusted EPS, which is a non-GAAP financial measure, decreased 24.2%13.9% to $1.00$0.68 as compared to $1.32$0.79 in the thirdsecond quarter of 2016.2019. Adjusted EPS, which is a non-GAAP financial measure, included $0.11 of COVID-19 charges in the second quarter of 2020.
•For the trailing twelve months ended June 30, 2020, leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, was 2.83 times as compared to 3.65 times in the corresponding prior year period.
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 yearcorresponding 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.
THREE MONTHS ENDED SEPTEMBERJUNE 30, 20172020 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBERJUNE 30, 20162019
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 June 30, | | | | | | |
| (in millions, except percentages and per share amounts) | 2020 | | | | 2019 | | |
| Net sales | $ | 665.2 | | | 100.0 | % | | $ | 722.8 | | | 100.0 | % |
| Cost of sales | 399.3 | | | 60.0 | | | 409.4 | | | 56.6 | |
| Gross profit | 265.9 | | | 40.0 | | | 313.4 | | | 43.4 | |
| Selling and marketing expenses | 135.1 | | | 20.3 | | | 163.3 | | | 22.6 | |
| General, administrative and other expenses | 82.4 | | | 12.4 | | | 72.7 | | | 10.1 | |
| | | | | | | |
| Equity income in earnings of unconsolidated affiliates | (5.0) | | | (0.7) | | | (3.6) | | | (0.5) | |
| Operating income | 53.4 | | | 8.0 | | | 81.0 | | | 11.2 | |
| | | | | | | |
| Other expense, net: | | | | | | | |
| Interest expense, net | 20.6 | | | 3.1 | | | 22.5 | | | 3.1 | |
| | | | | | | |
| | | | | | | |
| Other expense, net | 0.3 | | | — | | | — | | | — | |
| Total other expense, net | 20.9 | | | 3.1 | | | 22.5 | | | 3.1 | |
| | | | | | | |
| Income from continuing operations before income taxes | 32.5 | | | 4.9 | | | 58.5 | | | 8.1 | |
| Income tax provision | (9.4) | | | (1.4) | | | (15.8) | | | (2.2) | |
| Income from continuing operations | 23.1 | | | 3.5 | | | 42.7 | | | 5.9 | |
| Income (loss) from discontinued operations, net of tax | 0.1 | | | — | | | (1.2) | | | (0.2) | |
| Net income before non-controlling interests | 23.2 | | | 3.5 | | | 41.5 | | | 5.7 | |
| Less: Net income (loss) attributable to non-controlling interests | 0.2 | | | — | | | (0.1) | | | — | |
| Net income attributable to Tempur Sealy International, Inc. | $ | 23.0 | | | 3.5 | % | | $ | 41.6 | | | 5.8 | % |
| | | | | | | |
| Earnings per common share: | | | | | | | |
| | | | | | | |
| Basic | | | | | | | |
| Earnings per share for continuing operations | $ | 0.44 | | | | | $ | 0.78 | | | |
| Loss per share for discontinued operations | — | | | | | (0.02) | | | |
| Earnings per share | $ | 0.44 | | | | | $ | 0.76 | | | |
| | | | | | | |
| Diluted | | | | | | | |
| Earnings per share for continuing operations | $ | 0.44 | | | | | $ | 0.76 | | | |
| Loss per share for discontinued operations | — | | | | | (0.02) | | | |
| Earnings per share | $ | 0.44 | | | | | $ | 0.74 | | | |
| | | | | | | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 51.6 | | | | | 54.7 | | | |
| Diluted | 52.0 | | | | | 56.0 | | | |
|
| | | | | | | | | | | | | |
| | 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 |
| | |
NET SALES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | Consolidated | | | | North America | | | | International | | |
| Net sales by channel | | | | | | | | | | | |
| Wholesale | $ | 563.7 | | | $ | 632.2 | | | $ | 494.6 | | | $ | 528.5 | | | $ | 69.1 | | | $ | 103.7 | |
| Direct | 101.5 | | | 90.6 | | | 75.9 | | | 59.6 | | | 25.6 | | | 31.0 | |
| Total net sales | $ | 665.2 | | | $ | 722.8 | | | $ | 570.5 | | | $ | 588.1 | | | $ | 94.7 | | | $ | 134.7 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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%8.0%, and on a constant currency basis decreased 13.3%7.3%. The decreasechange in net sales was driven by:by the following:
•North America net sales decreased $117.9$17.6 million, or 16.9%3.0%. Excluding Mattress Firm, North America net sales increased $53.6 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. Net sales in the Wholesale channel decreased $137.8$33.9 million, or 20.1%6.4%, driven primarily byas a result of the termination 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 netglobal pandemic. Net sales in the third quarterDirect channel increased $16.3 million, or 27.3%, primarily driven 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. Netgrowth from our e-commerce business. This growth was partially offset by decreased sales in our Direct channel increased $19.9company-owned stores, which were closed or operating under restricted conditions as a result of the global pandemic.
•International net sales decreased $40.0 million, or 148.5%, driven primarily by growth in e-commerce. Canada net sales increased 5.8% on a constant currency basis.
International net sales increased $10.3 million, or 7.7%29.7%. On a constant currency basis, International net sales increased 7.0%decreased 26.9%, driven primarily by growth in Asia-Pacific and Latin America.as a result of the global pandemic. Net sales in the Wholesale channel increased 7.7%decreased 30.3% on a constant currency basis. Net sales in the Direct channel increased 4.3%decreased 15.5% on a constant currency basis.
GROSS PROFIT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | | | | | | | | |
| | 2020 | | | | 2019 | | | | | | | | | | |
| (in millions, except percentages) | | Gross Profit | | Gross Margin | | Gross Profit | | Gross Margin | | Margin Change | | | | | | |
| North America | | $ | 216.2 | | | 37.9 | % | | $ | 240.0 | | | 40.8 | % | | (2.9) | % | | | | | | |
| International | | 49.7 | | | 52.5 | % | | 73.4 | | | 54.5 | % | | (2.0) | % | | | | | | |
| Consolidated gross margin | | $ | 265.9 | | | 40.0 | % | | $ | 313.4 | | | 43.4 | % | | (3.4) | % | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | 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, brand, 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 40340 basis points. The principal factors impactingprimary drivers of changes in gross margin for eachby segment are discussed below.below:
•North America gross margin declined 40290 basis points. The decline in gross margin was primarily driven by the terminationproduct mix of the Mattress Firm relationship, which resulted in fixed cost deleverage of 160280 basis points on lower net sales and 80brand mix of 110 basis points, partially offset by decreased floor model expenses of unfavorable100 basis points and lower commodity costs. We expect product and brand mix. The loss of net sales had a disproportionate impact on highermix headwinds to gross margin Tempur products. We also recorded $1.0 million of hurricane-related manufacturing and logistics coststo lessen in the third quarter of 2017 due2020 as sales of our premium products have improved since the second quarter of 2020. Additionally,
we incurred $4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which contributed to the impact on certain manufacturing facilities and distribution centers. Additionally, thedecline in gross margin.
•International gross margin declined 200 basis points. The decline in gross margin was due to unfavorable commodity costsprimarily driven by fixed cost deleverage on lower unit volumes of 150 basis points, offset by operational improvements of 160 basis points, favorable channel mix of 100210 basis points and decreased royalties, partially offset by favorable productcountry mix of 60140 basis points.
Additionally, we incurred $0.5 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which contributed to the decline in gross margin.
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 June 30, | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | Consolidated | | | | North America | | | | International | | | | Corporate | | |
| Operating expenses: | | | | | | | | | | | | | | | |
| Advertising expenses | $ | 55.1 | | | $ | 65.4 | | | $ | 49.8 | | | $ | 58.3 | | | $ | 5.3 | | | $ | 7.1 | | | $ | — | | | $ | — | |
| Other selling and marketing expenses | 80.0 | | | 97.9 | | | 51.4 | | | 63.5 | | | 25.5 | | | 31.7 | | | 3.1 | | | 2.7 | |
| General, administrative and other expenses | 82.4 | | | 72.7 | | | 45.6 | | | 38.1 | | | 14.3 | | | 10.8 | | | 22.5 | | | 23.8 | |
| | | | | | | | | | | | | | | |
| Total operating expenses | $ | 217.5 | | | $ | 236.0 | | | $ | 146.8 | | | $ | 159.9 | | | $ | 45.1 | | | $ | 49.6 | | | $ | 25.6 | | | $ | 26.5 | |
Operating expenses decreased $12.8$18.5 million, or 5.4%7.8%, and improved 250 basis pointswere flat as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained below.below:
•North America operating expenses decreased $23.5$13.1 million, or 14.3%8.2%, and improved 70decreased 150 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreased participationdecreases in our wholesale cooperative advertising programs,and other selling and marketing investments as a result of cost reduction actions taken during the quarter. These decreases were offset by unfavorable operating$7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment and incremental bad debt expense leverage, which includes investmentsprimarily related to the bankruptcy of one department store in marketing.
the U.S.
•International operating expenses increased $7.6decreased $4.5 million, or 14.6%9.1%, and improved 250increased 1,080 basis points as a percentage of net sales. In the third quarter of 2017, we recognized $2.5 million of additional 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 European customer who initiated bankruptcy proceedings. The remaining changesdecrease in operating expenses werewas primarily driven by decreases in advertising and other selling and marketing investments, partially offset by increased investments in our advertising.
bad debt expense. Additionally, we incurred $3.4 million of restructuring costs associated with headcount reductions driven by the current macro-economic environment and $0.3 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.
•Corporate operating expenses increased $3.1decreased $0.9 million, or 13.6%3.4%. The increase is primarily due to professional fees incurred in 2017 as
Research and development expenses for the three months ended June 30, 2020 were $5.2 million compared to $5.9 million for the same period in 2016.three months ended June 30, 2019, a decrease of $0.7 million, or 11.9%.
OPERATING INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | | |
| | 2020 | | | | 2019 | | | | |
| (in millions, except percentages) | | Operating Income | | Operating Margin | | Operating Income | | Operating Margin | | Margin Change |
| North America | | $ | 69.4 | | | 12.2 | % | | $ | 80.1 | | | 13.6 | % | | (1.4) | % |
| International | | 9.6 | | | 10.1 | % | | 27.4 | | | 20.3 | % | | (10.2) | % |
| | 79.0 | | | | | 107.5 | | | | | |
| Corporate expenses | | (25.6) | | | | | (26.5) | | | | | |
| Total operating income | | $ | 53.4 | | | 8.0 | % | | $ | 81.0 | | | 11.2 | % | | (3.2) | % |
|
| | | | | | | | | | | | | | | | | |
| | | 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$27.6 million and operating margin declined 260320 basis points. The decreasesprimary drivers of changes in operating income and operating margin by segment are discussed below.below:
•North America operating income decreased $28.6$10.7 million and operating margin declined 120 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.
International operating income decreased $4.8 million and operating margin declined 470140 basis points. The decline in operating margin was primarily driven by the decline in gross margin of 290 basis points. Additionally, we recognized $7.0 million of asset impairment charges related to the write-off of certain sales and increasesmarketing assets driven by the current macro-economic environment and incurred $4.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items. These declines were partially offset by lower operating expenses as a result of cost actions in the quarter.
•International operating income decreased $17.8 million and operating margin declined 1,020 basis points. The decline in operating expenses. Operating expense increases include additional non-income tax obligations in onemargin was primarily driven by fixed cost deleverage on operating expenses of our Latin American subsidiaries, additional500 basis points, increased bad debt expense of 200 basis points and the decline in gross margin of 200 basis points. Additionally, we incurred $3.4 million of restructuring costs associated with headcount reductions driven by the bankruptcycurrent macro-economic environment and $0.8 million of a European customerincremental costs related to global pandemic relief efforts, sanitation supplies and increased investments in our advertising.
services and other items. These declines were partially offset by the performance of the Asia joint venture.
•Corporate operating expenses increased $3.1decreased $0.9 million, or 13.6%. The increase is primarily due to professional fees incurred in 2017 as compared to the same period in 2016.
which positively impacted our consolidated operating margin by 10 basis points.
INTEREST EXPENSE, NET
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| (in millions, except percentages) | 2020 | | 2019 | | % Change |
| Interest expense, net | $ | 20.6 | | | $ | 22.5 | | | (8.4) | % |
|
| | | | | | | | | | | |
| | | 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 $11.5decreased $1.9 million, or 56.1%8.4%. In the third quarter of 2017, we incurred approximately $9.2 million ofThe decrease in interest expense, related to deferred payment programsnet, was primarily driven by 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 June 30, | | | | |
| (in millions, except percentages) | 2020 | | 2019 | | % Change |
| Income tax provision | $ | 9.4 | | | $ | 15.8 | | | (40.5) | % |
| Effective tax rate | 28.9 | % | | 27.0 | % | | |
|
| | | | | | | | | | | |
| | | 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 | % | | |
IncomeOur 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 $13.4$6.4 million or 39.8%.however our effective tax rate increased, due to a decrease 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 SeptemberJune 30, 2017, which2020 as compared to the same prior year period increased by 190 basis points. The effective tax rate as compared to the U.S. federal statutory tax rate for the three months ended June 30, 2020 included a net favorable impact of discrete items. The effective tax rate as compared to the U.S. federal statutory tax rate for the three months ended June 30, 2019 included the net favorable impact of discrete items primarily related to the recognitionimpact of valuation allowances in onethe likelihood of our Latin American subsidiaries. There was no material net impact as the resultrealization of discrete items that impacted the effectivecertain deferred tax rate in the period ending September 30, 2016.assets.
NINE
SIX MONTHS ENDED SEPTEMBERJUNE 30, 20172020 COMPARED TO THE
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20162019
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| (in millions, except percentages and per share amounts) | 2020 | | | | 2019 | | |
| Net sales | $ | 1,487.6 | | | 100.0 | % | | $ | 1,413.7 | | | 100.0 | % |
| Cost of sales | 864.6 | | | 58.1 | | | 818.5 | | | 57.9 | |
| Gross profit | 623.0 | | | 41.9 | | | 595.2 | | | 42.1 | |
| Selling and marketing expenses | 306.1 | | | 20.6 | | | 316.8 | | | 22.4 | |
| General, administrative and other expenses | 163.0 | | | 10.9 | | | 143.4 | | | 10.1 | |
| | | | | | | |
| Equity income in earnings of unconsolidated affiliates | (4.8) | | | (0.3) | | | (6.5) | | | (0.5) | |
| | | | | | | |
| Operating income | 158.7 | | | 10.7 | | | 141.5 | | | 10.0 | |
| | | | | | | |
| Other expense, net: | | | | | | | |
| Interest expense, net | 40.9 | | | 2.7 | | | 44.9 | | | 3.2 | |
| | | | | | | |
| Other expense (income), net | 0.8 | | | 0.1 | | | (7.8) | | | (0.6) | |
| Total other expense, net | 41.7 | | | 2.8 | | | 37.1 | | | 2.6 | |
| | | | | | | |
| Income from continuing operations before income taxes | 117.0 | | | 7.9 | | | 104.4 | | | 7.4 | |
| Income tax provision | (32.9) | | | (2.2) | | | (32.7) | | | (2.3) | |
| Income from continuing operations | 84.1 | | | 5.7 | | | 71.7 | | | 5.1 | |
| Loss from discontinued operations, net of tax | (1.1) | | | (0.1) | | | (1.6) | | | (0.1) | |
| Net income before non-controlling interests | 83.0 | | | 5.6 | | | 70.1 | | | 5.0 | |
| Less: Net income attributable to non-controlling interests | 0.3 | | | — | | | 0.1 | | | — | |
| Net income attributable to Tempur Sealy International, Inc. | $ | 82.7 | | | 5.6 | % | | $ | 70.0 | | | 5.0 | % |
| | | | | | | |
| Earnings per common share: | | | | | | | |
| | | | | | | |
| Basic | | | | | | | |
| Earnings per share for continuing operations | $ | 1.60 | | | | | $ | 1.31 | | | |
| Loss per share for discontinued operations | (0.02) | | | | | (0.03) | | | |
| Earnings per share | $ | 1.58 | | | | | $ | 1.28 | | | |
| | | | | | | |
| Diluted | | | | | | | |
| Earnings per share for continuing operations | $ | 1.58 | | | | | $ | 1.29 | | | |
| Loss per share for discontinued operations | (0.02) | | | | | (0.03) | | | |
| Earnings per share | $ | 1.56 | | | | | $ | 1.26 | | | |
| | | | | | | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 52.5 | | | | | 54.7 | | | |
| Diluted | 53.0 | | | | | 55.6 | | | |
|
| | | | | | | | | | | | | |
| | 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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | Consolidated | | | | North America | | | | International | | |
| Net sales by channel | | | | | | | | | | | |
| Wholesale | $ | 1,286.1 | | | $ | 1,248.1 | | | $ | 1,104.2 | | | $ | 1,030.3 | | | $ | 181.9 | | | $ | 217.8 | |
| Direct | 201.5 | | | 165.6 | | | 143.5 | | | 101.8 | | | 58.0 | | | 63.8 | |
| Total net sales | $ | 1,487.6 | | | $ | 1,413.7 | | | $ | 1,247.7 | | | $ | 1,132.1 | | | $ | 239.9 | | | $ | 281.6 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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%increased 5.2%, and on a constant currency basis decreased 10.4%increased 5.9%. The decreasechange in net sales was driven by:by the following:
•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 for the nine 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$115.6 million, or 11.1%, driven by growth across all of our brands.10.2%. Net sales in the Wholesale channel decreased $308.9increased $73.9 million, or 16.2%,7.2%. Despite the impact of the global pandemic, the increase was primarily driven primarily by the terminationexpansion 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.retail distribution network. Net sales in our Direct channel increased $50.5$41.7 million, or 139.1%41.0%, primarily driven primarily by growth in e-commerce. Canadafrom our e-commerce business.
•International net sales increased 6.6% on a constant currency basis.
International net sales increased $6.8decreased $41.7 million, or 1.7%14.8%. 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.decreased 11.8% as a result of the global pandemic. Net sales in the Wholesale channel increased 4.0%decreased 13.2% on a constant currency basis. Net sales in the Direct channel increased 3.2%decreased 6.9% on a constant currency basis.
GROSS PROFIT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | | | | | | | | |
| | 2020 | | | | 2019 | | | | | | | | | | |
| (in millions, except percentages) | | Gross Profit | | Gross Margin | | Gross Profit | | Gross Margin | | Margin Change | | | | | | |
| North America | | $ | 493.4 | | | 39.5 | % | | $ | 444.4 | | | 39.3 | % | | 0.2 | % | | | | | | |
| International | | 129.6 | | | 54.0 | % | | 150.8 | | | 53.6 | % | | 0.4 | % | | | | | | |
| Consolidated gross margin | | $ | 623.0 | | | 41.9 | % | | $ | 595.2 | | | 42.1 | % | | (0.2) | % | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | 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 | )% |
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.
Gross margin declined 8020 basis points. The principal factors impactingprimary drivers of changes in gross margin for eachby segment are discussed below.below:
•North America gross margin declined 110improved 20 basis points. The declineimprovement in gross margin was primarily driven primarily by the terminationfavorable impact from fixed cost leverage on higher unit volume of the Mattress Firm relationship, which resulted in unfavorable brand mix110 basis points, decreased floor model expenses 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 unfavorablelower commodity costs of 90 basis points,points. These improvements were partially offset by favorable channelunfavorable product mix of 140 basis points and operational productivity of 90270 basis points. We recorded $1.0Additionally, we incurred $4.0 million of hurricane-related manufacturingincremental costs related to global pandemic relief efforts, sanitation supplies and logistics costsservices and other items, which partially offset the improvement in gross margin. We expect product and brand mix headwinds to gross margin to lessen in the third quarter of 2017 due to2020 as sales of our premium products have improved since the impact on certain manufacturing facilities and distribution centers.
second quarter of 2020.
•International gross margin declined 150improved 40 basis points. The declineimprovement in gross margin was primarily driven primarily by product launchfavorable country mix. Additionally, we incurred $0.5 million of incremental costs related to global pandemic relief efforts, sanitation supplies and mix.
services and other items, which partially offset the improvement in gross margin.
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 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | Consolidated | | | | North America | | | | International | | | | Corporate | | |
| Operating expenses: | | | | | | | | | | | | | | | |
| Advertising expenses | $ | 128.6 | | | $ | 128.0 | | | $ | 113.2 | | | $ | 108.8 | | | $ | 15.4 | | | $ | 19.2 | | | $ | — | | | $ | — | |
| Other selling and marketing expenses | 177.5 | | | 188.8 | | | 115.0 | | | 120.1 | | | 56.4 | | | 63.2 | | | 6.1 | | | 5.5 | |
| General, administrative and other expenses | 163.0 | | | 143.4 | | | 94.4 | | | 71.1 | | | 26.4 | | | 22.3 | | | 42.2 | | | 50.0 | |
| Total operating expenses | $ | 469.1 | | | $ | 460.2 | | | $ | 322.6 | | | $ | 300.0 | | | $ | 98.2 | | | $ | 104.7 | | | $ | 48.3 | | | $ | 55.5 | |
Operating expenses decreased $23.4increased $8.9 million, or 3.3%1.9%, and improved 250decreased 110 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 $22.6 million, or 7.5%, and decreased $18.0 million and improved 26060 basis points as a percentage of net sales. InThe increase in operating expenses was primarily driven by $11.7 million of customer-related charges in connection with the first quarterbankruptcy of 2017,Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account, as well as incremental bad debt expense primarily related to the bankruptcy of one department store in the U.S. Additionally, we recorded $20.9recognized $7.0 million of asset impairment charges related to the Mattress Firm termination, which included the $17.2 million write-off of the March 31, 2017 value of customer incentivescertain sales and marketing assets and $3.7 million of employee-related and professional fees. Additionally, we had unfavorable operating expense leverage, including investments in marketing.driven by the current macro-economic environment. These increases were offset by decreased participation in our wholesale cooperative advertising programs.
Internationallower operating expenses as a result of cost actions in the quarter.
•International operating expenses decreased $6.5 million, or 6.2% and increased $2.6 million and were flat370 basis points 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 recordeddecreases 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,advertising and other selling and marketing investments, partially offset by $0.9 million of accelerated stock-based compensation and $1.1 million of other employee-related expenses and professional fees.increased bad debt expense. Additionally, we incurred $3.0$3.4 million of executive management transitionrestructuring costs associated with headcount reductions driven by the current macro-economic environment and $0.3 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.
•Corporate operating expenses indecreased $7.2 million, or 13.0%. In the first quarterhalf of 2016.
2019, we recorded $4.1 million of professional fees related to the acquisition of Sleep Outfitters, which were not repeated in 2020.
Research and development expenses for the nine months ended September 30, 2017 were $16.9 million compared to $19.7$11.0 million for the ninesix months ended SeptemberJune 30, 2016, a decrease of $2.82020 as compared to $11.2 million or 14.2%.for the six months ended June 30, 2019.
OPERATING INCOME
| | | | | Nine Months Ended September 30, | | | | Six Months Ended June 30, | | |
| | | 2017 | | 2016 | | | | 2020 | | | 2019 | | |
| (in millions, except percentages) | | Operating Income | | Operating Margin | | Operating Income | | Operating Margin | | Margin Change | (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 | )% | North America | | $ | 170.8 | | | 13.7 | % | | $ | 144.4 | | | 12.8 | % | | 0.9 | % |
| International | | 73.0 |
| | 17.5 | % | | 76.1 |
| | 18.5 | % | | (1.0 | )% | International | | 36.2 | | | 15.1 | % | | 52.6 | | | 18.7 | % | | (3.6) | % |
| | | 279.9 |
| | | | 385.0 |
| | | | | | 207.0 | | | 197.0 | | |
| Corporate expenses | | (69.2 | ) | | | | (77.0 | ) | | | | | Corporate expenses | | (48.3) | | | (55.5) | | |
| Total operating income | | $ | 210.7 |
| | 10.0 | % | | $ | 308.0 |
| | 13.1 | % | | (3.1 | )% | Total operating income | | $ | 158.7 | | | 10.7 | % | | $ | 141.5 | | | 10.0 | % | | 0.7 | % |
Operating income decreased $97.3increased $17.2 million and operating margin declined 310improved 70 basis points. The decreasesprimary drivers of changes in operating income and operating margin by segment are discussed below.below:
•North America operating income increased $26.4 million and operating margin improved 90 basis points. The improvement in operating margin was primarily driven by favorable operating expense leverage of 280 basis points and the improvement in gross margin of 20 basis points. 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. Additionally, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment and incurred $4.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.
•Internationaloperating income decreased $102.0$16.4 million and operating margin declined 360 basis points. The decline in operating margin was primarily driven by the terminationfixed cost deleverage on operating expenses of our contract110 basis points and increased bad debt expense. Additionally, we incurred $3.4 million of restructuring costs associated with Mattress Firm atheadcount reductions driven by the beginningcurrent macro-economic environment and $0.8 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items. These declines were partially offset by the second quarter, which resultedimprovement 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.
40 basis points.
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$7.2 million, which improvedpositively impacted our consolidated operating margin by 4050 basis points. In the first quarterhalf of 2017,2019, we recorded $8.4$4.1 million of net stock-based compensation benefit.
professional fees related to the Sleep Outfitters Acquisition, which were not repeated in 2020.
INTEREST EXPENSE, NET
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| (in millions, except percentages) | | 2020 | | 2019 | | % Change |
| Interest expense, net | | $ | 40.9 | | | $ | 44.9 | | | (8.9) | % |
|
| | | | | | | | | | | |
| | | 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 $11.2decreased $4.0 million, or 17.2%8.9%. During the third quarter of 2017, we incurred approximately $9.2 million ofThe decrease in interest expense, related to deferred payment programsnet, was primarily driven by 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.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.variable rate debt.
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
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| (in millions, except percentages) | | 2020 | | 2019 | | % Change |
| Income tax provision | | $ | 32.9 | | | $ | 32.7 | | | 0.6 | % |
| Effective tax rate | | 28.1 | % | | 31.3 | % | | |
|
| | | | | | | | | | | |
| | | 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 $12.2increased $0.2 million or 20.3%.due to an increase in income before income taxes. Our effective tax rate increased 290for the six months ended June 30, 2020 as compared to the same prior year period decreased 320 basis pointspoints. The effective tax rate as compared to the result ofU.S. federal statutory rate for the six months ended June 30, 2020 included a net unfavorable impact of discrete items, for the nine months ended September 30, 2017, which primarily related to the recognitionimpact of valuation allowances in onethe likelihood of our Latin American subsidiaries, increases in uncertainrealization of certain deferred tax positions, andassets. The effective tax rate as compared to the repatriation of cash from our Canadian subsidiary. There was no materialU.S. federal statutory rate for the for the six months ended June 30, 2019 included a net unfavorable impact as the result of discrete items that impactedprimarily related to the effective tax ratesale of a certain interest in our Asia-Pacific joint venture and the period ending September 30, 2016.impact of 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 SeptemberJune 30, 2017,2020, we had a working capital deficit of $46.7$56.2 million includingdue to the 364-Day Loan of $200 million, which is classified as a current liability. It is our intent to repay that loan with current cash and funds generated from operations no later than its May 2021 maturity date. We maintain the financial flexibility to finance this loan on a long-term basis under our revolving senior secured credit facility if needed. Total availability under our revolving senior secured credit facility, which matures in 2024, was $423.9 million as of June 30, 2020.
At June 30, 2020, total cash and cash equivalents were $146.8 million, of $41.8which $122.6 million as compared to working capitalwas held in the U.S. and $24.2 million was held by subsidiaries outside of $126.0 million including $65.7 million inthe U.S. The amount of cash and cash equivalents asheld by subsidiaries outside of the U.S. and not readily convertible into the U.S. Dollar or other major foreign currencies is not material to our overall liquidity or financial position. The significant increase in our cash holdings since December 31, 2016.2019 reflects our decision to maintain on-hand liquidity to provide greater flexibility in response to the continued impact of COVID-19.
The decrease in working capital was primarily driven
Cash Provided by decreases in cash and cash equivalents, as well as increases in accounts payable, income taxes payable and accrued expenses and other current liabilities. These changes were offset by an increase in accounts receivable. The decrease in cash and cash equivalents was primarily due 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 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:
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| (in millions) | | 2020 | | 2019 |
| Net cash provided by (used in) continuing operations: | | | | |
| Operating activities | | $ | 170.4 | | | $ | 45.9 | |
| Investing activities | | (87.2) | | | (46.7) | |
| Financing activities | | 1.4 | | | (4.0) | |
|
| | | | | | | | |
| | | 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$124.5 million in the ninesix months ended SeptemberJune 30, 20172020, as compared to the same period in 2016.2019. The increase in cash provided by operating activities was primarilydriven by strong operational performance in the result of an increase in cash provided 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 cash provided by operating assets and liabilities was primarily due to changes 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.period.
Cash used in investing activities decreased $3.4from continuing operations increased $40.5 million in the ninesix months ended SeptemberJune 30, 20172020 as compared to the same period in 2016. In 2017, we received $4.9 million2019. The increase in proceeds relatedcash 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 inprovided by financing activities from continuing operations increased $56.4$5.4 million in the ninesix months ended SeptemberJune 30, 20172020 as compared to the same period in 2016. In 2017,2019. For the six months ended June 30, 2020, we madehad net repaymentsborrowings of $138.8$207.0 million on our credit facilities, including $200 million in additional financing provided under the new 364-Day Loan, as compared to net borrowingsrepayments of $212.2$0.6 million in 2016. This decrease was primarily offset by a decrease2019. During the six months ended June 30, 2020 and 2019, respectively, we repurchased $187.5 million and $2.3 million of our common stock under our share repurchase program. In 2020, these repurchases were largely made in share repurchasesthe first quarter prior to the impact of $274.8 million in 2017 as compared to 2016.COVID-19 on our business. Additionally, we incurred other costs associated withrepurchased $12.0 million and $3.2 million of our common stock which was withheld to satisfy tax withholding obligations related to stock compensation during the six months ended June 30, 2020 and 2019, respectively.
Cash Used in Discontinued Operations
Net cash used in operating, investing and financing activities in 2016.from discontinued operations for the periods ended June 30, 2020 and 2019 was not material.
Capital Expenditures
Capital expenditures totaled $43.4$49.4 million and $41.9$39.9 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. We currently expect our 20172020 capital expenditures to be approximately $60$100 to $70$110 million, which relate to continued strategicincludes investments that we believe will supportin our future plans.U.S. enterprise resource planning projects and domestic manufacturing facility.
Debt ServiceIndebtedness
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 decreasedincreased to $1,762.9$1,760.8 million as of SeptemberJune 30, 20172020 from $1,901.0$1,547.0 million as of December 31, 2016. After giving effect2019. During the first quarter of 2020, we took initial actions to lettersmitigate the impact of the material slowdown in business activity resulting from COVID-19 and to provide greater financial flexibility, which included a decision to borrow $300 million on our revolving senior secured credit outstanding of $21.9facility. During the three months ended June 30, 2020, we entered into a new $200 million under364-Day Loan. We used the 2016 Credit Agreement, totalproceeds from this new facility and cash on-hand to repay amounts previously drawn on our revolving senior secured credit facility. Total availability under theour revolving senior secured credit facility was $478.1$423.9 million as of SeptemberJune 30, 2017. Refer to Note 4, "Debt,"2020, which 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 SeptemberJune 30, 2017,2020, our ratio of consolidated funded debtindebtedness less qualifiednetted cash to Adjustedadjusted EBITDA, as calculatedwhich is a non-GAAP financial measure, in accordance with our 20162019 Credit Agreement was 3.70 times, which2.83 times. Our leverage ratio as of June 30, 2020 was the lowest in our history. This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio covenantas set forth in the 20162019 Credit Agreement, which limits this ratio to 5.00 times. As of SeptemberJune 30, 2017,2020, 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 continuesdebt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends. The 364-Day Loan did not amend financial covenants under the 2019 Credit Agreement. Under the amendment we agreed to generate significant cash flows from operations. Our targetcertain restrictive provisions, including limitations on our ability to repurchase shares and make certain investments for the duration of the 364-Day Loan. The 2019 Credit Agreement, 2023 Senior Notes and 2026 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated funded debtindebtedness less qualifiednetted cash to Adjustedadjusted 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 expect2026 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 debtindebtedness less qualifiednetted cash to Adjustedadjusted EBITDA calculated in accordance with our 2016the 2019 Credit Agreement. Both consolidated funded debtindebtedness and Adjustedadjusted EBITDA as used in discussion of our 2016the 2019 Credit Agreement are terms that are not recognized under GAAPnon-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 and the 364-Day Loan, 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.
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. We elected to early comply with this rule.
The summarized financial information for the Obligor Group follows.
| | | | | |
| Six Months Ended |
| June 30, 2020 |
| Obligor Group |
| (in millions) | |
| Net sales to unrelated parties | $ | 1,180.6 | |
| Net sales to non-obligor subsidiaries | $ | 22.3 | |
| Gross profit | $ | 479.9 | |
| Income from continuing operations | $ | 59.7 | |
| Net income attributable to Tempur Sealy International, Inc. | $ | 59.3 | |
| | | | | | | | | | | |
| Obligor Group | | Obligor Group |
| June 30, 2020 | | December 31, 2019 |
| (in millions) | | | |
| ASSETS | | | |
| | | |
| Receivables due from non-obligor subsidiaries | $ | 6.8 | | | $ | 9.6 | |
| Other current assets | 426.1 | | | 314.6 | |
| Total current assets | 432.9 | | | 324.2 | |
| Loan receivable from non-obligor subsidiaries | 271.1 | | | 310.1 | |
| Goodwill and other intangible assets, net | 1,099.3 | | | 1,075.5 | |
| Other non-current assets | 682.0 | | | 624.6 | |
| Total non-current assets | 2,052.4 | | | 2,010.2 | |
| | | |
| LIABILITIES | | | |
| | | |
| Payables due to non-obligor subsidiaries | 6.2 | | | 11.4 | |
| Other current liabilities | 633.9 | | | 490.5 | |
| Total current liabilities | 640.1 | | | 501.9 | |
| Loan payable to non-obligor subsidiaries | 22.9 | | | 8.3 | |
| Other non-current liabilities | 1,857.3 | | | 1,832.8 | |
| Total non-current liabilities | $ | 1,880.2 | | | $ | 1,841.1 | |
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 six months ended June 30, 2020, we repurchased 2.6 million shares for approximately $187.5 million. As of June 30, 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, though in connection with the 364-Day Loan, we agreed to certain limitations on our ability to repurchase shares and make investments while the 364-Day Loan is outstanding. 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
As of June 30, 2020, we had $611.5 million of liquidity, including $146.8 million of cash on hand and $423.9 million available under our revolving senior secured credit facility. We also had availability of $40.8 million under our securitization facility. In addition, we expect to generate significant cash flow from operations in the full year of 2020. 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.
We continue to take actions intended to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets. In addition to actions taken in the first quarter, additional actions taken in the second quarter of 2020 include:
•Entered into a new $200 million 364-Day Loan to enhance liquidity. We used the proceeds from this new facility and cash on-hand to repay amounts previously drawn on our revolving senior secured credit facility. Total availability on our revolving senior secured credit facility, which matures in 2024, is $423.9 million as of June 30, 2020.
•Continued the suspension of our share repurchase program. Our 364-Day Loan contains a restriction on share repurchases while the loan is outstanding.
As of June 30, 2020, we had $1,760.8 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $1,614.9 million. Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, was 2.83 times for the trailing twelve months ended June 30, 2020, the lowest in our history. We lowered our target leverage ratio for the second time in the last 12 months. Our new revised target range is 2.0 to 3.0 times. The reduction in our leverage target is not due to any market concerns; it is a strategic move to provide flexibility. As highlighted through the current environment, we have always seen our financial strength as a competitive advantage and part of our long-term strategy. Total cash interest payments related to our borrowings are expected to be approximately $80 to $85 million in 2020.
Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Similarly, our cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements and debt service obligations. 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.
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, Adjustedadjusted EBITDA (including COVID-19 charges), adjusted EBITDA per credit facility, consolidated funded debtindebtedness and consolidated funded debtindebtedness less qualifiednetted 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, as a measure ofgross profit, gross margin, operating performanceincome (expense), operating margin 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, gross profit, gross margin, operating income (expense) and operating income.margin. The adjustments management makeswe 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 doeswe do not consider to be the fundamental attributes or primary drivers of our business, including the exclusionbusiness.
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 useswe 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 theseGAAP. 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 GAAPreported 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 of the following table. below.
The following table sets forth the reconciliation of our reported GAAPnet income to adjusted net income and the calculation of adjusted EPS for the three months ended June 30, 2020 and 2019:
| | | | | | | | | | | |
| Three Months Ended | | |
| (in millions, except per share amounts) | June 30, 2020 | | June 30, 2019 |
| Net income | $ | 23.0 | | | $ | 41.6 | |
(Income) loss from discontinued operations, net of tax (1) | (0.1) | | | 1.2 | |
Incremental operating costs (2) | 4.9 | | | — | |
Asset impairments (3) | 7.0 | | | — | |
Restructuring costs (4) | 3.4 | | | — | |
Accounting standard adoption (5) | 1.3 | | | — | |
Acquisition-related costs and other (6) | — | | | 2.8 | |
| | | |
Tax adjustments (7) | (4.4) | | | (1.3) | |
| Adjusted net income | $ | 35.1 | | | $ | 44.3 | |
| | | |
| Adjusted earnings per share, diluted | $ | 0.68 | | | $ | 0.79 | |
| | | |
| Diluted shares outstanding | 52.0 | | | 56.0 | |
Adjusted net income included COVID-19 charges of $5.8 million, net of tax, and adjusted earnings per share of $0.11.
| | | | | |
| (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 second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $0.4 million of charges related to increased sanitation supplies and services. |
| (3) | | In the second quarter of 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment. |
| (4) | | In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the current macro-economic environment. |
| (5) | | We recorded $1.3 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)", in the second quarter of 2020. As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation. |
| (6) | | In the second quarter of 2019, we recorded $2.8 million of acquisition-related and other costs in operating expenses, primarily related to post acquisition restructuring charges and professional fees for the acquisition of Sleep Outfitters. |
| (7) | | Adjusted income tax provision represents the tax effects 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 gross profit and gross margin to adjusted gross profit and adjusted gross margin, respectively, and operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below.
The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended SeptemberJune 30, 2017:2020.
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| Three Months Ended June 30, 2020 | | | | | | | | | | | | |
| (in millions, except percentages) | Consolidated | | Margin | | North America | | Margin | | International | | Margin | | Corporate |
| Net sales | $ | 665.2 | | | | | $ | 570.5 | | | | | $ | 94.7 | | | | | $ | — | |
| | | | | | | | | | | | | |
| Gross profit | $ | 265.9 | | | 40.0 | % | | $ | 216.2 | | | 37.9 | % | | $ | 49.7 | | | 52.5 | % | | $ | — | |
| Adjustments: | | | | | | | | | | | | | |
Incremental operating costs (1) | 4.5 | | | | | 4.0 | | | | | 0.5 | | | | | — | |
| Adjusted gross profit | $ | 270.4 | | | 40.6 | % | | $ | 220.2 | | | 38.6 | % | | $ | 50.2 | | | 53.0 | % | | $ | — | |
| | | | | | | | | | | | | |
| Operating income (expense) | $ | 53.4 | | | 8.0 | % | | $ | 69.4 | | | 12.2 | % | | $ | 9.6 | | | 10.1 | % | | $ | (25.6) | |
| Adjustments: | | | | | | | | | | | | | |
Incremental operating costs (1) | 4.9 | | | | | 4.1 | | | | | 0.8 | | | | | — | |
Asset impairments (2) | 7.0 | | | | | 7.0 | | | | | — | | | | | — | |
Restructuring costs (3) | 3.4 | | | | | — | | | | | 3.4 | | | | | — | |
Accounting standard adoption (4) | 1.3 | | | | | 1.3 | | | | | — | | | | | — | |
| Total adjustments | 16.6 | | | | | 12.4 | | | | | 4.2 | | | | | — | |
| | | | | | | | | | | | | |
| Adjusted operating income (expense) | $ | 70.0 | | | 10.5 | % | | $ | 81.8 | | | 14.3 | % | | $ | 13.8 | | | 14.6 | % | | $ | (25.6) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | ) |
Operating income and adjusted operating income included $7.9 million of COVID-19 charges. The North America and International business segments included $6.0 million and $1.9 million of these charges, respectively. |
| |
(1) | Adjustments for the North America business segment represent $1.1 million of hurricane-related costs, which were recorded primarily in cost of sales. |
(2) | Adjustments for the International business segment represent $2.5 million of non-income tax charges in one of our Latin American subsidiaries and $1.9 million of bad debt expense associated with a customer's bankruptcy. |
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 SeptemberJune 30, 2016.2019. We had no adjustments to GAAP gross profit and operating income (expense) for the three months ended SeptemberJune 30, 2016:2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | | | | | | | | | | | |
| (in millions, except percentages) | Consolidated | | Margin | | North America | | Margin | | International | | Margin | | Corporate |
| Net sales | $ | 722.8 | | | | | $ | 588.1 | | | | | $ | 134.7 | | | | | $ | — | |
| | | | | | | | | | | | | |
| Gross profit | $ | 313.4 | | | 43.4 | % | | $ | 240.0 | | | 40.8 | % | | $ | 73.4 | | | 54.5 | % | | $ | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income (expense) | $ | 81.0 | | | 11.2 | % | | $ | 80.1 | | | 13.6 | % | | $ | 27.4 | | | 20.3 | % | | $ | (26.5) | |
| Adjustments: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Acquisition-related costs and other (5) | 2.8 | | | | | 1.7 | | | | | — | | | | | 1.1 | |
| | | | | | | | | | | | | |
| Adjusted operating income (expense) | $ | 83.8 | | | 11.6 | % | | $ | 81.8 | | | 13.9 | % | | $ | 27.4 | | | 20.3 | % | | $ | (25.4) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | ) |
| | | | | |
| (1) | | In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $0.4 million of charges related to increased sanitation supplies and services. |
| (2) | | In the second quarter of 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment. |
| (3) | | In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the current macro-economic environment. |
| (4) | | We recorded $1.3 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)", in the second quarter of 2020. As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation. |
| (5) | | In the second quarter of 2019, we recorded $2.8 million of acquisition-related and other costs in operating expenses, primarily related to post acquisition restructuring charges and professional fees for the acquisition of Sleep Outfitters. |
EBITDA, Adjusted EBITDA (including COVID-19 charges), Adjusted EBITDA per Credit Facility and Consolidated Funded DebtIndebtedness Less QualifiedNetted Cash and Free Cash Flow
The following reconciliations are provided below:
GAAP net•Net income to EBITDA, adjusted EBITDA (including COVID-19 charges) and Adjustedadjusted EBITDA per credit facility
Total debt to consolidated funded debt less qualified cash
•Ratio of consolidated funded debtindebtedness less qualifiednetted cash to Adjustedadjusted EBITDA per credit facility
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 2019 Credit Agreement provides the definition of adjusted EBITDA (“adjusted EBITDA per credit facility”). In the second quarter of 2020, in determining adjusted EBITDA per credit facility, we made an adjustment for COVID-19 charges that was not made to adjusted EBITDA (including COVID-19 charges). Accordingly, we present adjusted EBITDA per credit facility to provide information regarding our compliance with requirements under the 2019 Credit Agreement.
The following table sets forth the reconciliation of our reported GAAP net income to the calculations of EBITDA and Adjustedadjusted EBITDA (including COVID-19 charges) and adjusted EBITDA per credit facility for the three months ended SeptemberJune 30, 20172020 and 2016:2019:
| | | | | | | | | | | |
| Three Months Ended | | |
| (in millions) | June 30, 2020 | | June 30, 2019 |
| Net income | $ | 23.0 | | | $ | 41.6 | |
| Interest expense, net | 20.6 | | | 22.5 | |
| Income taxes | 9.4 | | | 15.8 | |
| Depreciation and amortization | 32.2 | | | 29.1 | |
| EBITDA | $ | 85.2 | | | $ | 109.0 | |
| Adjustments: | | | |
(Income) loss from discontinued operations, net of tax (1) | (0.1) | | | 1.2 | |
Incremental operating costs (2) | 4.9 | | | — | |
Asset impairments (3) | 7.0 | | | — | |
Restructuring costs (4) | 3.4 | | | — | |
Accounting standard adoption (5) | 1.3 | | | — | |
Acquisition-related costs and other (6) | — | | | 2.8 | |
| | | |
| Adjusted EBITDA (including COVID-19 charges) | $ | 101.7 | | | $ | 113.0 | |
| | | |
COVID-19 charges (7) | 7.9 | | | — | |
| Adjusted EBITDA per credit facility | $ | 109.6 | | | 113.0 | |
|
| | | | | | | |
| | 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 |
|
39
|
| | | | |
| (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 thirdsecond quarter of 2017,2020, we recorded $11.7$4.9 million of incremental operating costs associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $0.4 million of charges related to non-income taxesincreased sanitation supplies and financing arrangements in oneservices. |
| (3) | | In the second quarter of our Latin American subsidiaries. Interest expense includes $9.22020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment. |
| (4) | | In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the current macro-economic environment. |
| (5) | | We recorded $1.3 million of charges comprisedrelated to the adoption of $4.9ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)", in the second quarter of 2020. As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation. |
| (6) | | In the second quarter of 2019, we recorded $2.8 million of interest expense onacquisition-related and other costs in operating expenses, primarily related to post acquisition restructuring charges and professional fees for the non-income tax obligations and $4.3acquisition of Sleep Outfitters. |
| (7) | | Adjusted EBITDA per credit facility excluded $7.9 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 to the impact on certain manufacturing facilities and distribution centers. Operating expenses include $2.0 million of bad debt expenseCOVID-19 charges associated with a customer's bankruptcytemporarily closed company-owned retail stores and donations for hurricane relief efforts.sales force retention costs. |
The following table sets forth the reconciliation of our net income to the calculations of EBITDA and Adjustedadjusted EBITDA per credit facility for the trailing twelve months ended SeptemberJune 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 |
| | | | | | | | | | |
| | | | Trailing Twelve Months Ended |
| (in millions) | | | | June 30, 2020 |
| Net income | | | | $ | 202.2 | |
| Interest expense, net | | | | 81.7 | |
| Income tax provision | | | | 74.9 | |
| Depreciation and amortization | | | | 124.0 | |
| EBITDA | | | | $ | 482.8 | |
| Adjustments: | | | | |
Loss from discontinued operations, net of tax (1) | | | | 0.9 | |
Customer-related charges (2) | | | | 41.5 | |
Charitable stock donation (3) | | | | 8.9 | |
COVID-19 charges (4) | | | | 7.9 | |
Incremental operating costs (5) | | | | 7.2 | |
Asset impairments (6) | | | | 7.0 | |
Earnings from Sherwood prior to acquisition (7) | | | | 6.7 | |
Restructuring costs (8) | | | | 3.4 | |
| | | | |
Accounting standard adoption (9) | | | | 2.8 | |
Credit facility amendment (10) | | | | 0.7 | |
| | | | |
| | | | |
| Adjusted EBITDA per credit facility | | | | $ | 569.8 | |
| | | | |
| Consolidated indebtedness less netted cash | | | | $ | 1,614.9 | |
| | | | |
| Ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility | | | | 2.83 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) | | In 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities. |
| (4) | | Adjusted EBITDA excludes $34.3per credit facility excluded $7.9 million of COVID-19 charges associated with temporarily closed company-owned retail stores and sales force retention costs. |
| (5) | | In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $0.4 million of charges related to increased sanitation supplies and services. In the first quarter of 2020, we recorded $2.3 million of charges related to the terminationglobal pandemic. |
| (6) | | In the second quarter of the relationship with Mattress Firm. This amount represents the $25.92020, we recorded $7.0 million of netasset impairment charges related to the write-off of certain sales and addsmarketing assets driven by the net amortization impactcurrent macro-economic environment. |
| (7) | | We completed the acquisition of $8.4Sherwood Bedding on January 31, 2020 and designated this subsidiary as restricted under the 2019 Credit Agreement. For covenant compliance purposes, we included $6.7 million of stock-based compensation benefit incurredEBITDA from this subsidiary for the seven months prior to acquisition in our calculation of adjusted EBITDA per credit facility for the firsttrailing twelve months ended June 30, 2020. |
| (8) | | In the second quarter of 2017. |
(2) | Restructuring costs represents2020, we incurred $3.4 million of restructuring costs associated with International headcount reduction and store closures.reductions driven by the current macro-economic environment. |
(3)(9) | In the third quarter of 2017, we | We recorded $11.7$1.3 million and $1.5 million of charges related to non-income taxesthe adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)", in the second and financing arrangements in onefirst quarters of 2020, respectively. As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our Latin American subsidiaries. Interest expense includes $9.2covenant compliance calculation. |
| (10) | | In 2019, we recorded $0.7 million of charges, comprisedprofessional fees in connection with the amendment 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.2019 Credit Agreement. |
Under our 2016the 2019 Credit Agreement, Adjustedthe definition of adjusted EBITDA (which we refer to as "adjusted EBITDA per credit facility") contains certain restrictions that limit adjustments to GAAP net income when calculating Adjustedadjusted EBITDA. For the trailing twelve months ended SeptemberJune 30, 2017 and 2016,2020, our adjustments to GAAP net income when calculating Adjustedadjusted EBITDA did not exceed the allowable amount under the 20162019 Credit Agreement.
The ratio of Adjustedconsolidated indebtedness less netted cash to adjusted EBITDA under our 2016 Credit Agreement to consolidated funded debt less qualified cashper credit facility is 3.702.83 times for the trailing twelve months ended SeptemberJune 30, 2017. Our 20162020. The 2019 Credit Agreement requires us to maintain a ratio of consolidated funded debtindebtedness less qualifiednetted cash to Adjustedadjusted EBITDA of less than 5.00:1.00 times.
The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated funded debtindebtedness less qualifiednetted cash as of SeptemberJune 30, 2017.2020. "Consolidated funded debt"Indebtedness" and "qualified cash""Netted Cash" are terms used in our 2016the 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) | June 30, 2020 |
| Total debt, net | $ | 1,753.6 | |
Plus: Deferred financing costs (1) | 7.2 | |
| Consolidated indebtedness | 1,760.8 | |
Less: Netted cash (2) | 145.9 | |
| Consolidated indebtedness less netted cash | $ | 1,614.9 | |
| | | | | |
| (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 definedrestricted subsidiaries in the 20162019 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 ourthe 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 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 value 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, which indicated that the fair values of the North America reporting unit and indefinite-lived intangible assets remained substantially in excess of their carrying values. Despite that excess, however, impairment charges could still be required in the future if other significant economic events occur or our assumptions on how quickly we can recapture market share and net sales following the termination 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.
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 weakenedstrengthens relative to the euroEuro 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 Adjustedadjusted EBITDA, which is a non-GAAP financial measure, by approximately 1.1%0.4% in the ninethree and six months ended SeptemberJune 30, 2017. We do not hedge the translation of foreign currency operating results into the U.S. dollar.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 SeptemberJune 30, 2017,2020, resulting from a hypothetical 10.0% adverse change in all foreign currency exchange rates against the U.S. dollar, is approximately $5.2$0.2 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.
Interest Rate Risk
On SeptemberAs of June 30, 2017,2020, we had variable-rate debt of approximately $609.0$639.6 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$6.4 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 SeptemberJune 30, 2017,2020, 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
SeeInformation regarding legal proceedings can be found in Note 8, "Commitments10, "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 descriptionand 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 impact of the pandemic on the economies and financial markets of the regions in which we operate. "Shelter in place” and other similar mandated or suggested isolation protocols have disrupted third-party retail stores in our Wholesale channel and company-owned stores in our Direct channel, via store closures or reduced operating hours in the U.S. and around the world, which has decreased retail traffic and which also, in turn, decreased sales of our products in March and April when COVID-19 began materially impacting our North America business segment.
At this time, most third-party retail stores and our company-owned stores have reopened. However, we cannot reasonably estimate the length of time these stores will remain open, or if they will be mandated to close again as the COVID-19 crisis continues to evolve. The inability to sell our products through the Wholesale channel and within company-owned stores within the Direct channel has had and may continue to have a material adverse effect on our revenues and results of operations. Our e-commerce operations remain open globally, 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.
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 or reduction in government stimulus payments could continue to result in consumers having less disposable income and, in turn, decreased sales of our products;
•the continued disruption to third-party retail stores and company-owned stores resulting from "shelter in place" and similar protocols, which, even though largely 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 the persistence or reoccurrence of COVID-19 could cause customers to avoid public places where our stores and those of our Wholesale partners are located;
•we have experienced and may continue to experience disruptions in our supply chain, as the outbreak has disrupted travel, affected consumer demand and spending habits and impacted manufacturing and distribution throughout the world; and
•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.
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.
(c) Issuer Purchases of Equity Securities
The following table sets forth purchases of our common stock for the three months ended SeptemberJune 30, 2017:2020:
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| 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) |
| April 1, 2020 - April 30, 2020 | | — | (1) | $— | | — | | $131.3 |
| May 1, 2020 - May 31, 2020 | | 1,945 | (1) | $54.92 | | — | | $131.3 |
| June 1, 2020 - June 30, 2020 | | 635 | (1) | $71.87 | | — | | $131.3 |
| Total | | 2,580 | | | | — | | |
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| | | | | | | | |
| 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 | | | | — | | |
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| (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. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a) Not applicable.
(b) Not applicable.
ITEM 6. EXHIBITS
The following is an index of the exhibits included in this report:
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| 10.1 | | Amendment No. 1 dated as of May 13, 2020, by and among Tempur Sealy International, Inc. Long-Term Incentive Plan (incorporated by reference, as parent borrower, Tempur-Pedic Management, LLC, as additional borrower, the subsidiary guarantors party thereto, the several banks and other financial institutions party thereto, and JPMorgan Chase Bank, N.A., as administrative agent to the Amended and Restated Credit Agreement dated as of October 16, 2019 (filed as Exhibit 10.1 to the Company’sRegistrant’s Current Report on Form 8-K (File No. 001-31922)as filed on July 26, 2017)May 14, 2020).(1) |
| 10.2 | |
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10.3 | |
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10.4 | |
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10.5 | |
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10.6 | |
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10.7 | | |
10.8 | 22 |
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| 31.1 | |
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| 31.2 | |
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| 32.1* | |
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101.0101 | | The following materials from Tempur Sealy International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2020, 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 June 30, 2020, formatted in Inline XBRL. |
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| (1) | | Indicates management contract or compensatory plan or arrangement.
Incorporated by reference. |
| * | | 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. |
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.
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| TEMPUR SEALY INTERNATIONAL, INC. | |
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| Date: August 6, 2020 | TEMPUR SEALY INTERNATIONAL, INC. |
| By: | | |
Date: November 9, 2017 | By: | /s/ BHASKAR RAO |
| | Bhaskar Rao |
| | Executive Vice President and Chief Financial Officer |