Table of this 2017 Annual Report on Form 10-K, adjustments to previously reported net income were identified by management to record additional non-income tax obligations related to a Latin American subsidiary. As revised, the charges for 2017 are $25.7 million and for the prior years 2016, 2015, 2014 and 2013 are approximately $47.7 million in the aggregate. All the incremental charges since the Company’s press release are recorded as general, administrative and other expenses in the Company’s Consolidated Statement of Income, and the cumulative impact in each period is recorded in accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets. These adjustments are appropriately reflected in the audited financial statements included in this 2017 Annual Report on Form 10-K. These errors are immaterial to each of the prior reporting periods affected.Contents
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (the “Report”"Report"), including the information incorporated by reference herein, contains “forward-looking statements”"forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"), which includes information concerning one or more of our plans; objectives; goals; strategies and key strategic growth initiatives; future revenuesother information that is not historical information. Many of these statements appear, in particular, under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, ITEM 7 of this Report. When used in this Report, the words "assumes," "estimates," "expects," "guidance," "anticipates," "might," "projects," "predicts," "plans," "proposed," "targets," "intends," "believes," “will,” "may," "could," and variations of such words or performance;similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations and beliefs and various assumptions. There can be no assurance that we will realize our expectations or that our beliefs will prove correct.
Numerous factors, many of which are beyond the anticipated impact on our business and financial performance resultingCompany's control, could cause actual results to differ materially from the termination of our relationship with Mattress Firm, Inc. ("Mattress Firm");any that may be expressed herein as forward-looking statements in this Report. These risk factors include the impact of the macroeconomic environment in both the U.S. and internationally on our business segments and expectations regarding growth of the mattress industry; uncertainties arising from global events;events, natural disasters or pandemics; risks associated with the duration, scope and severity of COVID-19 and its effects on our international operations; general economic, financialbusiness and industry conditions, particularly inoperations, 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 abilityeffects of strategic investments on our operations, including our efforts to expand brand awareness; the ability to expand distribution both through third parties and through direct sales;our global market share; the ability to develop and successfully launch new products; the efficiency and effectiveness of our advertising campaigns and other marketing programs; the ability to increase sales productivity within existing retail accounts and to further penetrate the retail channel, including the timing of opening or expanding within large retail accounts and the timing and success of product launches;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; competition in our industry; consumer acceptance of our products; general economic, financial and industry conditions, particularly conditions relating to liquidity, the financial performance and related credit issues present in the retail sector; financial distress among our business partners, customers and competitors, and financial solvency and related problems experienced by other market participants, any of which may be amplified by the effects of strategic investmentsCOVID-19; 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;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 carryforwards; effects of changes in foreign exchange rates on our reported earnings; changing commodity costs; disruptions in the outcomesupply of pending tax auditsraw materials, or other tax proceedings; the effectloss of future legislative or regulatory changes, including implementation of the European General Data Protection Regulation in May 2018; the outcome of regulatory and investigation proceedings, and outstanding litigation; financial flexibility; our expected sources of cash flow; changes in capital expenditures; our ability to effectively manage cash; andsuppliers; expectations regarding our target leverage and our share repurchase program. Manyprogram; our ability to protect our intellectual property; and disruptions to the implementation of these statements appear,our strategic priorities and business plan caused by changes in particular,our executive management team.
Other potential risk factors include the risk factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, ITEM 7 of this Report. When used in this Report, the words "assumes," "estimates," "expects," “guidance,” “anticipates,” “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.
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"Tempur Sealy International”International" refers to Tempur Sealy International, Inc. only, and the terms “Company,” “we,” “our,” “ours”"Tempur Sealy," "Company," "we," "our," "ours" and “us”"us" refer to Tempur Sealy International, Inc. and its consolidated subsidiaries. When used in this Report, the term “Sealy” refers"Tempur" may refer to Tempur-branded products and the term "Sealy" may refer to Sealy-branded products or to Sealy Corporation and its historical subsidiaries.subsidiaries, in all cases as the context requires. In addition, when used in this Report, “2016"2019 Credit Agreement”Agreement" refers to the Company’sCompany's senior credit facility entered into in the first quarter of 2016; “20122019; "2016 Credit Agreement”Agreement" refers to the Company’sCompany's prior senior credit facility entered into in 2016; "2012 Credit Agreement" refers to the Company's prior senior credit facility entered into in 2012; “2026"2023 Senior Notes”Notes" refers to the 5.625% senior notes due 2023 issued in 2015; "2026 Senior Notes" refers to the 5.50% senior notes due 2026 issued in 2016; “2023and "2020 Senior Notes” refers to the 5.625% senior notes due 2023 issued in 2015; ”2020 Senior Notes”Notes" refers to the 6.875% senior notes due 2020 retired in 2016; and "8.0% Sealy Notes” refers to Sealy’s 8.0% Senior Secured Third Lien Convertible Notes retired in 2016.
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PART I
ITEM 1. BUSINESS
General
We develop,are committed to improving the sleep of more people, every night, all around the world. As a global leader in the design, manufacture and marketdistribution of bedding products, which we sell globally.know how crucial a good night of sleep is to overall health and wellness. Utilizing over a century of knowledge and industry-leading innovation, we deliver award-winning products that provide breakthrough sleep solutions to consumers in over 100 countries.
Tempur Sealy has strong brands across a portfolio of bedding products serving a wide range of price points. Our brand portfolio includes many highly recognized brands in the industry, including TEMPUR®,include Tempur-Pedic®, Sealy® featuring Posturepedic® Technology and Stearns & Foster®. and our non-branded offerings include private label and original equipment manufacturer ("OEM") products. Our comprehensive suite ofdistinct brands allow for complementary merchandising strategies.
Our powerful distribution model operates through an omni-channel strategy. Our products are sold across wholesale and direct channels through brick and mortar retail stores and e-commerce platforms. We have a global manufacturing footprint with approximately 9,000 employees around the world. Tempur Sealy has a strong competitive presence in the bedding marketplace with a leadership position that comes from product and service quality, culture, strategy and people, backed with financial strength and a disciplined approach to returning value to shareholders.
Our long-term strategy is to drive earnings growth with high return on invested capital and strong free cash flow, which is a non-GAAP financial measure. In order to achieve our long-term strategy while managing the current economic and competitive environments, we focus on developing the most innovative bedding products offers a variety of productsin all the markets we serve, making significant investments in our iconic global brands and optimizing our worldwide omni-channel distribution. We also intend to consumers across a broad range of channels.generate earnings growth through ongoing investments in research and development and productivity initiatives, which will improve our profitability and create long-term stockholder value.
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. In the fourth quarter of 2020, we realigned our business segment reporting to include Mexico within the North America segment, which was previously included in the International segment. The change in segment reporting aligned with changes in how our global operations are managed. Our North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Canada.Mexico. 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. Financial information about our segments and geographic areas is included elsewhereAmerica (other than Mexico).
On January 31, 2020, we acquired an 80% ownership interest in this Report in Part II, ITEM 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 16, "Business Segment Information,"a newly formed limited liability company containing substantially all of the Notes toassets of the Consolidated Financial Statements, included in Part II, ITEM 8, "Financial Statements and Supplementary Data."
Our principal executive office is located at 1000 Tempur Way, Lexington, Kentucky 40511 and our telephone number is (800) 878-8889. Tempur Sealy International, Inc. was incorporated under the laws of the State of Delaware in September 2002. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission (“SEC”("SEC") pursuant to Sections 13(a) or 15(d) of the Exchange Act, are available free of charge on our website at www.tempursealy.com as soon as reasonably practicable after such reports are electronically filed with the SEC. Our website and its contents are not deemed incorporated by reference into this Report.
Our long-term strategy is to drive earnings growth. Our goal is to improve the sleep of more people, every night, all around the world. In order to achieve our long-term strategy while managing the current economic and competitive environments, we will focus on developing the most innovative bedding products in all the markets we serve, investing in our brands, expanding our North America margins while executing our sales growth strategy, and optimizing our worldwide distribution. Through our strategy, we intend to generate earnings growth and strong cash flow that will be used to reduce debt to the extent appropriate and return value to stockholders.
We have a comprehensive offering of products that appeal to a broad range of consumers, some of which are covered by one or more patents and/or patent applications. We also routinely introduce new mattress models, launch new products and update our existing mattress products in each of our segments.
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In order to achieve our goal to improve the sleep of more people, every night, all around the world, one of our strategic initiatives is to leverage and strengthen our comprehensive portfolio of iconic brands and products. Our brand portfolio of product brands includes many highly recognized brands, including TEMPUR®Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, and Stearns & Foster® and Comfort Revolution®, which are described below:
•Tempur-Pedic® - Founded in 1991, the Tempur brand is our specialty innovation category leader designed to provide life changing sleep for our wellness-seeking consumers. Our proprietary Tempur material precisely adapts to the shape, weight and temperature of the consumer and creates fewer pressure points, reduces motion transfer and provides personalized comfort and support.
Tempur-Pedic was awarded #1 in Customer Satisfaction for the retail mattress segment in the J.D. Power 2020 Mattress Satisfaction Report. In addition to earning the highest score for overall customer satisfaction, Tempur-Pedic was ranked highest for support, durability, comfort, value, warranty and contact with customer service.•Stearns & Foster® - The Stearns & Foster brand offers our consumers high quality mattresses built by certified craftsmen who have been specially trained. Founded in 1846, the brand is designed and built with precise engineering and relentless attention to detail and fuses new innovative technologies with time-honored techniques, creating supremely comfortable beds.
•Sealy® featuring Posturepedic® Technology - The Sealy brand originated in 1881 in Sealy, Texas, and for over a century has focused on offering trusted comfort, durability and excellent value while maintaining contemporary styles and great support. The Sealy PosturepedicPosturepedic™ brand, introduced in 1950, was engineered to provide all-over support and body alignment to allow full relaxation and deliver a comfortable night's sleep. In 2017, Sealy Posturepedic no longer represented its own separate brand as we united all of our Sealy products under one masterbrand, which features the Posturepedic Technology™ in the Sealy Performance™, Sealy Posturepedic Plus and Sealy Premium™ collections.
•Cocoon by SealyTM - The Cocoon by Sealy brand, introduced in 2016, is our offering in the below $1,000 e-commerce space, made with the high quality materials that consumers expect from Sealy, sold onlineat www.cocoonbysealy.com and delivered in a box directly to consumers' doorsteps.
•Comfort Revolution® - Comfort Revolution originated in 1986 in West Long Beach, New Jersey. The brand develops, produces, markets and distributes bedding products.
•Non-Branded - Our non-branded product offerings include private label and OEM products, including mattresses, pillows and other bedding products and components at a wide range of price points. The addition of non-branded offerings expands our capabilities to service third-party retailers to capture manufacturing profits from bedding brands outside our own.
Our portfolio of retail brands includes Tempur-Pedic® retail stores, Sleep Outfitters®, Sleep Solutions OutletTM, SOVA and a variety of other retail brands internationally, which operate in various countries. The retail brands named above are described below:
•Tempur-Pedic® retail stores - Tempur-Pedic® retail stores are designed for the approximately one in five of U.S. consumers, based on our research, that prefer to purchase directly from the manufacturer, and for those seeking a more personalized and educational sales experience. These retail boutiques are strategically located in high traffic, premium retail centers with customer demographics that closely align to the Tempur-Pedic customer profile.
•Sleep Outfitters® - Sleep Outfitters is a regional bedding retailer with locations across five states in the U.S. Sleep Outfitters is a specialty mattress retailer that serves consumers across a wide range of price points with its extensive selection of Tempur-Pedic®, Sealy® and Stearns & Foster® products.
•Sleep Solutions OutletTM - Sleep Solutions Outlet stores serve as a channel of high-quality comfort returns, as well as discontinued or factory close-out mattresses and bases. There are a limited number of stores across the U.S. that sell these products, which reduces our disposal costs, and helps reduce the volume of products disposed of via landfill, thereby favorably impacting the environment.
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•SOVA - SOVA is a highly respected and well established premium bedding chain in Sweden. Our stores are connected to the urban areas of Stockholm, Gothenburg and Malmö. The assortment primarily focuses on premium to ultra premium brands and well trained sales staff targeting to sell quality beds with a very high average selling price.
In 2021, we are planning to launch a complete refresh of our North American Sealy portfolio. The updated Sealy portfolio features new models in our Posturepedic PlusTM, Posturepedic® and Essentials product lines. These models offer superior support and feature Sealy ChillTMand Surface-GuardTechnologyTM, making this product the ideal choice for the consumer searching for high quality sleep.
In 2017,2020, we introduced new products in our North America and International segments. In North America, we united all of our Sealy products under one masterbrand. Product introductions included new Sealy products in two distinct lines: Response and Conform. The new Sealy Essentials™, Sealy Performance™, and Sealy Premium™ Collections combine smart innovation, precise engineering and industry-leading testing to ensure quality and durability. Sealy's exclusive Posturepedic Technology™ is featured incompleted the Performance and Premium Collections, offering the highest quality materials to target the right level of support for each areanational launch of the body. In addition, we relaunchedinnovative Tempur-Ergo® Smart Base Collection with Sleeptracker® technology. The smart base collection is our flagship line of Tempur mattresses in Internationalsolution for those that want to feature the iconic aesthetics similar to Tempur-Pedic mattresses available in North America.
Omni-Channel Distribution
Our Channels
One of Tempur Sealy's long-term initiatives is to be wherever the consumer wants to shop, and our wholesale business strategy brings this key business initiative to life by growing our share with existing customers, gaining new business and expanding into new channels of distribution. In 2019, we reported our net salesannounced three new or expanded third-party retail relationships in the RetailU.S. and OtherEurope. This resulted in the largest expansion of stores in our history. In 2020, we successfully completed product rollout to our expanded distribution relationships, realizing robust wholesale channel growth as a result. We also invested in our direct business, generating triple-digit growth in North American web sales channels. Retail included furniturewhile supporting our company-owned stores and beddingthird-party retailers department stores, specialty retailersthroughout difficulties resulting from the global COVID-19 pandemic.
We are continuing to expand our Direct channel to strengthen our distribution footprint and warehouse clubs. Other included direct-to-consumer, third party distributors, hospitality and healthcare customers.
provide alternatives to allow the customer to shop on their preferred terms - whether online or in-store. Our Direct channel includes company-owned stores, e-commerceonline and call centers and represented 8.3%13.4% of net sales in 2017.2020. The Direct channel growth rate has surpassed the Wholesale growth rate over the last few years, and we anticipate the Direct channel to continue to grow as a percentage of net sales in future years. Our expanded direct channel distribution complements our wholesale business, and we believe this balanced approach enhances the overall sales potential and profitability of Tempur Sealy.
For consumers that prefer to purchase directly from the manufacturer and for those seeking a more personalized and educational sales experience, we appeal to this consumer through our Tempur-Pedic retail stores. As of December 31, 2020, we had 76 stores throughout the U.S. that provide a low-pressure environment to explore the comprehensive line up of our Tempur-Pedic products. Each showroom features knowledgeable, non-commissioned Brand Ambassadors who educate potential customers on Tempur-Pedic products in a relaxed, comfortable environment. Going forward, our strategy for opening additional locations of Tempur-Pedic retail stores will remain consistent with our previous expansion approach.
In addition to our high-end Tempur-Pedic retail stores, we operate Sleep Outfitters, a regional bedding retailer that had 99 stores across Kentucky, Tennessee, Ohio, West Virginia and Alabama in 2020. Sleep Outfitters is a specialty mattress retailer that serves consumers across all price points with its extensive selection of Tempur-Pedic®, Sealy® and Stearns & Foster® products.
Our third-party retailers, Tempur-Pedic and Sleep Outfitters retail stores reach the vast majority of consumers who still prefer to touch and feel a mattress and speak to a retail sales associate, prior to making a purchase decision. However, our consumer insights also demonstrate that there is a growing segment of the population that prefers to purchase products online and, to a lesser degree, via a call center. As such, having an omni-channel presence is more important than ever, with most customers completing research and shopping both online and in-stores before making their purchase decision.
For customers that prefer the convenience of making purchases online and having their bedding products delivered right to their front door, we have evolved our distribution model to include multiple online options to reach those that want to purchase our products without the need to go into a brick-and-mortar store.
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Marketing
Our overall marketing strategy is to drive consumer demand through the use of effective marketing. We invest across multiple media platforms to build brand awareness and drive consumer interest in our products. Our strategy varies by segment; however, theThe majority of our advertising programs are created on a centralized basis through our in-house advertising organization. In 2018, wemarketing team. We plan to drive net sales through continued investments in new products, marketing and other initiatives.
Seasonality
We believe that sales of products to furniture and bedding stores are typically subject to modest seasonality inherent in the bedding industry, with sales expected to be generally lower in the second and fourth quarters. We did not experience our typical seasonality in 2017 as we pursued our strategy to recapture market share in the U.S. following the termination of our relationship with Mattress Firm. Our salesSales in a particular quarter can also be impacted by new product launches.competitive industry dynamics. Additionally, the U.S. bedding industry generally experiences increases in sales around holidays and promotional periods.
Operations
Manufacturing and Distribution
Our products are currently manufactured and distributed through our global network of facilities. For a list of our principal manufacturing and distribution facilities, please refer to ItemITEM 2, "Properties".
Suppliers
We obtain the raw materials used to produce our pressure-relieving TEMPUR®Tempur® material and components used in the manufacture of Tempur products from outside sources. We currently acquire chemicals and proprietary additives for Tempur products as well as other components such as textiles from a number of suppliers with manufacturing locations around the world. These supplier relationships may be modified in order to maintain quality, cost, and delivery expectations. We do not consider ourselves dependent upon any single outside vendor as a source of raw materials for Tempur products and believe that sufficient alternativealternate sources of supply for the same or similar raw materials are available. Additionally, we source a portion of the manufacturing of our adjustable bed bases and foundations from third party manufacturers. We do not consider ourselves dependent upon any single outside manufacturer as a source of these products.
Raw materials for Sealy, product raw materialsSherwood and Comfort Revolution products consist mainly of polyurethane foam, polyester, polyethylene foam, textiles and steel innerspring components that we purchase from various suppliers. In the U.S. and Canada, we source the majority of our requirements for polyurethane foam components and spring components for our Sealy and Stearns & Foster mattress units and adjustable bed bases from a key supplier for each component. These components are purchased under supply agreements. We also purchase a significant portion of our Sealy foundation parts from third party sourcessources. All critical components are purchased under supply agreements. We do not consider ourselves to be dependent in the long term upon any single outside vendor as a source of supply to our bedding business, and we believe over time that sufficient alternativealternate sources of supply for the same, similar or alternativealternate components are available. However if aBeginning in the second quarter of 2020, one key supplier for an applicable component failedsupplier's inability to supply components in the amount we require, this could significantly interruptrequired, as well as industry supply constraints generally, limited our production levels. Additionally, the U.S. government has mandated that domestic suppliers of certain materials used in the production of ourbedding products redirect such materials towards the production of personal protective equipment. This has constrained production for certain products and increasehas increased our production costs in the near term.
Research and Development
We have four research and development centers, three in the U.S. and one in Denmark, that conduct technology and product development. Additionally, we have a product testing facility that conducts hundreds of consumer tests annually. We believe our consumer-research driven approach to innovation results in best-in-class products that benefit the consumer. Research and development expenses were $21.7 million, $26.7 million and $28.7 million in 2017, 2016 and 2015, respectively.
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Industry and Competition
We compete in the global bedding industry, where we are the only truly global participant.industry. The bedding industry is comprised of mattresses and foundations, pillows and accessories. The mattress market category is comprised of traditional innerspring mattresses and non-innerspring mattresses, which includes visco-elastic and foam mattresses, innerspring/foam hybrid mattresses, airbeds and latex mattresses. The foundation category is comprised of traditional foundations and adjustable foundations. Additionally, the pillow market is comprised of traditional foam and feather pillows, as well as pillows made of visco-elastic, latex, foam, sponge, rubber and down. The primary distribution channels for mattresses and foundationsbedding products are retail furniture and bedding stores, department stores, wholesale clubs and warehouse clubs.online.
We encounter competition from a number of bedding manufacturers in both the highly concentrated domestic and highly fragmented international markets. Participants in each of these markets compete primarily on price, quality, brand name recognition, product availability and product performance. Mattress and pillow manufacturers and retailers are seeking to increase their channels of distribution and are looking for new ways to reach the consumer, including the recent expansion in the number of U.S. and international companies pursuing online direct-to-consumer models for foam mattresses. In addition, retailers in both the U.S. and internationally are increasingly seeking to integrate vertically in the furniture and bedding industries, including by offering their own brands of mattresses and pillows.
The international market is served by a large number of manufacturers, primarily operating on a regional and local basis. These manufacturers offer a broad range of mattress and pillow products.
Entry-level bedding imports from Asia began to significantly increase during 2018 and are competing against certain of our products in the U.S. market. In September 2018 and again in December 2019, petitions were filed with the U.S. International Trade Commission and the U.S. Department of Commerce, alleging that many of these imports were being dumped into the U.S. market at prices less than fair value. The highly competitive natureU.S. Department of Commerce issued an anti-dumping duty order regarding the 2018 petition on December 16, 2019 and the U.S. International Trade Commission affirmed a range of tariffs on these imports from 57% to 1,731%. Regarding the 2019 petition, the U.S. International Trade Commission reached an affirmative preliminary determination in May 2020 that there was a reasonable indication that imports of mattresses from some of the countries at issue negatively impact, or threaten to negatively impact, the domestic mattress and pillow industries means we are continually subject toindustry. The U.S. Department of Commerce reached an affirmative preliminary determination in October 2020 regarding the risk2019 petition. The U.S. Department of loss of market share, loss of significant customers, reductions in margins,Commerce and the inabilityU.S. International Trade Commission are scheduled to acquire new customers.announce final determinations on the 2019 petition in 2021.
Intellectual Property
Patents, Trademarks and Licensing
We hold various U.S. and foreign patents and patent applications regarding certain elements of the design and function of many of our mattress and pillow products.
As of December 31, 2017,2020, we held trademark registrations worldwide, which we believe have significant value and are important to the marketing of our products to retailers. TEMPUR®Tempur® and Tempur-Pedic® are trademarks registered with the U.S. Patent and Trademark Office. In addition, we have U.S. applications pending for additional trademarks. Several of our trademarks have been registered, or are the subject of pending applications, in various foreign countries. Each U.S. trademark registration is renewable indefinitely as long as the trademark remains in use. We also own numerous trademarks, trade names, service marks, logos and design marks, including Sealy®, Stearns & Foster® and Sealy Posturepedic®. We alsoIn addition, we license the Bassett® trade name in various territories under a long-term agreement.
We derive income from royalties by licensing Sealy® brands,and Tempur brands®, technology and trademarks to other manufacturers. Our licenses include rights forUnder the license arrangements, licensees have the right to use certain trademarks as well asand current proprietary and/or patented technology that we utilize.technology. We also provide our licensees with product specifications, research and development, statistical services and marketing programs. For the year ended December 31, 2017,2020, our licensing activities as a whole generated unaffiliated net royalties of approximately $20.8$21.9 million.
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Governmental Regulation
Our operations are subject to international, federal, state, and local consumer protection and other regulations, primarily relating to the mattress and pillow industry. These regulations vary among the states, countries, and localities in which we do business. The regulations generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as “new” or otherwise, controls as to hygiene and other aspects of product handling and sale and penalties for violations. The U.S. Consumer Product Safety Commission ("CPSC") has adopted rules relating to fire retardancy standards for the mattress industry. Many foreign jurisdictions also regulate fire retardancy standards. Future changes to these standards may require modifications to our products to comply with such changes. We are also subject to environmental and health and safety requirements with regard to the manufacture of our products and the conduct of our operations and facilities. We have made and will continue to make capital and other expenditures necessary to comply with these requirements. Currently these expenditures are immaterial to our financial results. For a discussion of the risks associated with our compliance programs in connection with these regulations, please refer to "Risk Factors" under Part I, Item 1A of this Report.
Our principal waste products are foam and fabric scraps, wood, cardboard and other non-hazardous materials derived from product component supplies and packaging. We also periodically dispose of small amounts of used machine lubricating oil and air compressor waste oil, primarily by recycling. In the U.S., we are subject to federal, state and local laws and regulations relating to environmental health and safety, including the Federal Water Pollution Control Act and the Comprehensive Environmental Response, Compensation and Liability Act. We believe that we are in compliance with all applicable international, federal, state and local environmental statutes and regulations. We do not expect that compliance with international, federal, state or local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material effect upon our capital expenditures, earnings or competitive position. We are not aware of any pending federal environmental legislation that would have a material impact on our operations, and have not been required to make, and do not expect to make, any material capital expenditures for environmental control facilities in the foreseeable future.
In connection with sales of our products, we often collect and process personal data from our customers. As such, we are subject to certain regulations relating to information technology security and personal data protection and privacy. For example, in 2018, the European Union recently adopted the General Data Protection Regulation (“GDPR”("GDPR"), which is scheduled to taketook effect in May 2018. The GDPR will imposeimposed a new and expanded set of ongoing compliance requirements on companies, including us, that collect or process personal data from citizens living in the European Union.Union ("EU"). In addition, there are country-specific data privacy laws in Europe which tend to follow the principles laid out in the GDPR, but in some cases, impose additional requirements on data controllers. In addition, several U.S. states have recently introduced legislation that mirror some of the protections provided by the GDPR. California’s Consumer Privacy Act ("CCPA") came into effect on January 1, 2020 and granted consumers in California certain rights related to the access to, deletion of, and sharing of their personal information that is collected by businesses, including us. We have implemented a global compliance system and have put reasonable measures in orderplace to ensurefacilitate adherence to the continuing compliance requirements of data privacy laws such as the GDPR and CCPA.
Environmental, Social and Corporate Governance (“ESG”)
We recognize that as a corporate citizen we have a responsibility to protect our communities and environment. Our executive leadership and board members believe that our success as an organization must be inclusive of our impact on our communities and environment.
We delivered significant progress on our environmental initiatives in 2020. We transitioned to sourcing renewable energy from wind farms to fully power our wholly-owned U.S. and European manufacturing operations and began the installation of solar panels to partially power our largest manufacturing operations. In 2020, we also improved the percent of waste recycled from our North American wholly-owned manufacturing operations to 91.0% and achieved a 28.0% reduction in greenhouse gas emissions per unit produced at our wholly-owned manufacturing and logistics operations.
Our progress in 2020 represents a significant step towards achieving our new, long-term sustainability goal. We expect to achieve carbon neutrality by fully reducing or offsetting our greenhouse gas emissions from our wholly-owned manufacturing, logistics and retail operations by 2040. This will reduce both Scope 1 emissions (direct emissions from sources we own or control) and Scope 2 emissions (emissions attributable to the May 2018 deadline.electricity we consume). We plan to achieve this long-term goal through absolute emission reductions from the continued use of renewable energy and operational efficiency improvements, as well as the funding of carbon offsets.
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In 2020, we also delivered on our social and corporate governance initiatives. We established a qualitative ESG performance metric in executive leadership's compensation beginning in 2021. We also increased the wages of U.S. salaried employees and created new jobs in an uncertain economy, increasing our global employee headcount by 21%.
Amid the global pandemic, keeping our employees and consumers safe and healthy was and continues to be our top priority. In addition to many employee safety initiatives, we also developed and launched our Clean Shop PromiseTM protocol which focused on providing customers a comfortable and hygienic experience as they returned to shopping in stores. These industry-leading cleanliness guidelines were implemented at all of our own stores and offered to retailers.
Throughout the year, we also utilized our extensive operations and expertise to manufacture medical grade mattresses and other products for use by medical facilities and professionals on the frontline of the global COVID-19 pandemic. We actively engaged with numerous government and healthcare organizations to assess product need and timing, donating a significant amount of product to COVID-19 workers, healthcare facilities, field hospitals and homeless shelters. These donations marked a continuation of our legacy of charitable giving, with the Company donating over $100 million in products, cash and stock over the last ten years.
Human Capital Management
As a global organization, our workforce is important to us. We believe a key driver of long-term success is the strength of our workforce and we are committed to investing in our workforce. As part of our commitment to our workforce, we focus on the following key areas noted below:
Global Workforce and Diversity. As of December 31, 2017,2020, we had approximately 7,0009,000 Tempur Sealy employees, approximately 4,6006,300 of which are located in North Americathe U.S. and 2,4002,700 in the rest of the world. We are committed to continuing our efforts to ensure that we have a diverse workforce in terms of demographic, thought and experience. To realize our commitment to equal opportunity employment we promote a diverse slate of qualified candidates during the hiring process; outreach with organizations in each of our local communities to increase the flow of minority, female, veteran and disabled applicants for employment; conduct an annual gender and minority pay equity analysis; and attend external, community-based activities sponsored by local organizations assisting women, minorities, veterans and other demographic groups. Women represent 25% of our Board of Directors and minorities represent 13% of our Board of Directors.
Freedom of Association and Collective Bargaining.Approximately 34.5%26% of our employees are represented by various labor unions with separate collective bargaining agreements. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We consider our overall relations with our workforce to be satisfactory. Our current collective bargaining agreements, which are typically one to three years in length, expire at various times beginning in 2021 through 2019.2023. As of December 31, 2017,2020, our North America segment employed approximately 300 individuals covered under collective bargaining agreements expiring in 20182021 and our International segment employed approximately 500 individuals covered under collective bargaining agreements expiring in 2018.2021.
ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Report should be carefully considered. Please also see “Special Note Regarding Forward-Looking Statements” on page 3.
Set forth below are descriptions of certain risks relating to our business.
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Risks related to our sales and profitability and as a result, our operating results may be adversely affected.
The outbreak of COVID-19 has significantly impacted the global economy which could have an impact on future demand for our products. The global economy remains unstable, and we expect the economic environment to continue to be challenging. Economic uncertainty may give households less confidence to make discretionary purchases.
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 consumer demand for products; insolvencyoperating hours in the U.S. and around the world, which has decreased retail traffic and which also, in turn, decreased sales of our customers, resultingproducts in increased provisionsMarch 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. Our e-commerce operations remain open globally, as do the e-commerce operations for credit losses; insolvencymany of our key suppliersthird-party retailers.
The effects of the COVID-19 crisis could be aggravated if the crisis continues, and we could see additional impacts such as the following:
•a continuing global recession, a decline in consumer confidence and spending, or a further increase in unemployment could continue to impact consumers' disposable income and, in turn, decreased sales of our products;
•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 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 product delays; inabilityconsumer spending behaviors due to COVID-19 may continue to impact retail demand after the resumption of retailersmore normalized operations and consumerssuch actions could result in a loss of sales and profit;
•the failure of our Wholesale channel customers to obtainwhom we extend credit to finance purchasespay amounts owed to us on time, or at all, particularly if such customers are significantly impacted by COVID-19;
•we have experienced and may continue to experience disruptions in our supply chain, as the outbreak has disrupted travel, manufacturing and distribution throughout the world;
•staffing shortages;
•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 products; decreased consumer confidence; decreased retail demand,financial position and results of operations; and
•our success in attempting to reduce operating costs and conserve cash, which could require further actions to improve our cash position, including order delays or cancellations; counterparty failures negatively impactingbut not limited to, implementing expanded employee furloughs and foregoing capital expenditures and other discretionary expenses.
The rapid development and uncertainty 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 treasury operations; inability for us, our customers and our suppliers to accurately forecast future product demand trends; and adverse movements in foreign currency exchange rates. If such conditions are experienced in future periods, our industry, business, operations, liquidity, financial condition and results of operations remain uncertain at this time but could be material.
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We operate in a highly competitive industry and if we are unable to compete successfully, we may lose customers and our sales may decline.
Participants in the mattress and pillow industries compete primarily on price, quality, brand name recognition, product availability and product performance across a range of distribution channels.
A number of our significant competitors offer mattress and pillow products that compete directly with our products. The effectiveness of our competition relative to our performance, including by established manufacturers or new entrants into the market, could have a material adverse effect on our business, financial condition and/or operating results. For example, market participants continue to improve their channels of distribution to optimize their reach to the consumer, including by pursuing online direct-to-consumer models. In addition, retailers in the U.S. and internationally have integrated vertically in the furniture and bedding industries, and it is possible that such vertical integration may provide conditions that would negatively impact our net sales and results of operations. The pillow industry in particular is characterized by a large number of competitors, none of which is dominant. As such, conditions that substantially increase a single participant's market share could be severely impacted.detrimental to our financial performance. The highly competitive nature of the mattress and pillow industries means we are continually subject to the risk of loss of market share, loss of significant customers, reductions in margins, and the inability to acquire new customers.
We acquire raw materials and certain components from a number of suppliers with manufacturing locations around the world. If we were unable to obtain raw materials and certain components from these suppliers for any reason, we would have to find replacement suppliers. Any substitute arrangements for raw materials and certain components might not be on terms as favorable to us. In addition, we outsource the procurement of certain goods and services from suppliers in foreign countries. If we were no longer able to outsource through these suppliers, we would need to source them elsewhere, potentially at a higher cost. We maintain relatively small supplies of our raw materials and outsourced goods at our manufacturing facilities, and any disruption in the on-going shipment of supplies could interrupt production of our products, which in turn could result in a decrease of our sales or could cause an increase in our cost of sales, either of which could decrease our liquidity and profitability.
Raw materials for Sealy, Sherwood Bedding and Comfort Revolution products consist mainly of polyethylene foam, textiles and steel innerspring components that we purchase from various suppliers. In the U.S. and Canada, we source the majority of our requirements for polyurethane foam components and spring components for our Sealy and Stearns & Foster mattress units and adjustable bed bases from a key supplier for each component. We also purchase a significant portion of our Sealy foundation parts from third party sources under supply agreements. All critical components are purchased under supply agreements. We do not consider ourselves to be dependent in the long term upon any single outside vendor as a source of supply to our bedding business, and we believe over time that sufficient alternate sources of supply for the same, similar or alternate components are available. However, if a key supplier for an applicable component failed to supply components in the amount we require this could significantly interrupt production of our products and increase our production costs in the near term. Such a disruption could occur for a variety of reasons, including changes in international trade duties and other aspects of international trade policy, natural disasters, pandemics and political events. Beginning in the second quarter of 2020, one key supplier's inability to supply components in the amount we required, as well as industry supply constraints generally, limited our production levels. This has constrained production for certain products and has increased our production costs in the near term as further discussed herein.
We are subject to fluctuations in the cost of raw materials, and increases in these costs could reduce our liquidity and profitability.
The bedding industry is dependent uponsubject to volatility in the price of petroleum-based and steel products, which affects the cost of polyurethane foam, polyester, polyethylene foam and steel innerspring component parts. The price and availability of these raw materials are subject to market conditions affecting supply and demand. Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities can significantly affect profitability. We currently expect commodity costs and inflation to increase into 2021. During the fourth quarter of 2020, we implemented pricing actions that fully mitigated the anticipated commodity costs increases expected for 2021. In the first quarter of 2021, commodity costs have increased greater than expected and we will consider additional pricing actions as needed. To the extent we are unable to absorb higher costs, or pass any such higher costs to our customers, our gross margin could be negatively affected, which could result in a decrease in our liquidity and profitability.
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Risks related to operating our business
The performance of our business depends on our ability to implement strategic initiatives and actions taken to increase sales growth may not be effective.
•our ability to continuously improve our products to offer new and enhanced consumer benefits and better quality;
•the ability of our current and future product launches to increase net sales;
•the effectiveness of our advertising campaigns and other marketing programs in buildingto build product and brand awareness, driving traffic to our distribution channels and increasing sales;
•our ability to successfully launch new products;
•our ability to compete in the mattress and pillow industry;
•our ability to continue to expand into new distribution channels and growoptimize our existing channels;
•our ability to continue to successfully execute our strategic initiatives;
•our ability to manage growth and limit cannibalization associated with new or expanded supply agreements;
•our ability to reduce costs, including the level of consumer acceptance of our products; andproducts at optimal price points;
•our ability to successfully mitigate the impact of headwinds facing our business, including increased commodity prices and the influx of low-end, imported beds that compete with certain of our products;
•our ability to successfully integrate potential acquisition opportunities; and
•general economic factors that impact consumer confidence, disposable income or the availability of consumer financing.
Our new product launches may not be successful due to development delays, failure of new products to achieve anticipated levels of market acceptance and significant costs associated with failed product introductions, which could adversely affect our revenues and profitability.
Each year we invest significant time and resources in research and development to improve our product offerings and launch new products. WeIn 2020, we introduced the Tempur-Ergo Smart Base Collection with Sleeptracker® technology in our North America segment. In 2021, we are planning a majorrefreshing our Sealy portfolio with the launch of new models in our Posturepedic PlusTM, Posturepedic® and Essentials product launch for our Tempur products in the U.S. in 2018, and our financial performance for 2018 is substantially dependent on the success of this launch.lines. There are a number of risks that are inherent in our new product line introductions, including that the anticipated level of market acceptance may not be realized, which could negatively impact our sales. Also,Further, introduction costs, the speed of the rollout of the product and manufacturing inefficiencies may be greater than anticipated, each of which could impact profitability.
Because we depend on ourcertain significant customers, a decrease or interruption in their business with us would reduce our sales and results of operations.
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Table of large purchases by these customers could have an increasingly significant impact on our quarterly net sales and earnings.Contents
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including cyber-based attacks, could harm our ability to effectively operate our business.
Consistent with other manufacturing and retail operations, we are increasingly dependent on information technology, including the Internet, for the storage, processing, and transmission of our electronic, business-related information assets. We leverage our internal information technology, infrastructures, and those of our service providers, to enable, sustain and support our global business interests. As such, our ability to effectively manage our business depends significantly on our information systems. The failure of our current systems, or future upgrades, to operate effectively or to integrate with other systems, or a breach in security of these systems could cause reduced efficiency of our operations, and remediation of any such failure, problem or breach could reduce our liquidity and profitability. Any disruptions caused by the failure of these systems could adversely impact our day-to-day business and decision making and could have a material adverse effect on our performance.
We are subject to laws and regulations relating to information technology security.security and personal data protection and privacy. For example, the GDPR, which is scheduled to taketook effect in May 2018, will impose aand the CCPA, which took effect in January 2020, have imposed new and expanded set of compliance requirements on companies, including us, that collect or process personal data from citizens living in the European Union. While we have implemented a systemEU and California. In addition, there are country-specific data privacy laws in orderEurope and elsewhere in the world, and state-specific data privacy laws forthcoming in the U.S., which broadly follow the principles laid out in the GDPR and the CCPA, but in some cases, impose additional requirements on businesses like ours. We are actively working to ensure ongoing compliance bywith all data privacy regulations to which we are subject, which involves substantial costs. Despite our ongoing efforts to maintain compliance with the May 2018 deadline, that systemGDPR and the CCPA, we may not be successful.successful due to various factors within or outside of our control. Failure to comply with the GDPR, CCPA, country-specific or U.S. state-specific laws could result in costly investigations and litigation, expose us to potentially significant liabilities.penalties, and result in negative publicity that could damage our reputation and credibility.
We rely on third party technology service providers in the ordinary course of our Direct channel. The services provided include website infrastructure and hosting services, digital advertising platforms, private label credit card financing program and credit card payment authorization and capture services in support of our business, all of which are customarily provided by third party technology service providers for similarly-situated retail business operations. Like others in the industry, we experience cyber-based attacks and incidents from time to time. In the event that we or our service providers are unable to prevent or detect and remediate cyber-based attacks or other security incidents in a timely manner, our operations could be disrupted or we may incur financial or reputational losses arising from the theft, misuse, unauthorized disclosure or destruction of our information assets.
As of default.
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We cannot guarantee that we will repurchasemay face exposure to product liability claims and premises liability claims, which could reduce our common stock pursuantliquidity and profitability and reduce consumer confidence in our products.
We face an inherent business risk of exposure to our stock repurchase program or that our stock repurchase program will enhance long-term stockholder value. Stock repurchases could also increaseproduct liability claims if the volatilityuse of the priceany of our common stock and could diminish our cash reserves.
We also face inherent business risks by operating physical stores that are a global company, sellingopen to the public. By opening retail stores, we have increased our exposure to premises liability claims. We maintain insurance against premises liability claims, but such coverage may not continue to be available on terms acceptable to us or be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage could impair our liquidity and profitability, and any claim or product recall that results in significant adverse publicity against us could adversely affect our reputation or result in consumers purchasing fewer of our products, in approximately 100 countries worldwide. We generated approximately 29% ofwhich would also impair our net sales outside of the U.S. in 2017, including in geographic areas where corruption has historically been a problem,liquidity and we continue to pursue additional international opportunities. We also participate in international license and joint venture arrangements with independent third parties. Our international operations are subject to the customary risks of operating in an international environment, including complying with U.S. laws affecting operations outside of the U.S. such as the Foreign Corrupt Practices Act; complying with foreign laws and regulations, including disparate anti-corruption laws and regulations; risks associated with varying local business customs; and the potential imposition of trade or foreign exchange restrictions, tariffs and other tax increases, fluctuations in exchange rates, inflation and unstable political situations and labor issues. We are also limited in our ability to independently expand in certain international markets where we have granted licenses to manufacture and sell Sealy® bedding products. Fluctuations in the rate of exchange between currencies in which we do business may affect our financial condition or results of operations.profitability.
If we are not able to protect our trade secrets or maintain our trademarks, patents and other intellectual property, we may not be able to prevent competitors from developing similar products or from marketing in a manner that capitalizes on our trademarks,intellectual property rights, and this loss of a competitive advantage could decrease our profitability and liquidity.
We rely on patents and trade secrets to protect the design, technology and function of our products. To date, we have not sought U.S. or international patent protection for our principal product formula for TEMPUR®Tempur® material and certain of our manufacturing processes. Accordingly, we may not be able to prevent others from developing certain visco-elastic material and products that are similar to or competitive with our products. Our ability to compete effectively with other companies also depends, to a significant extent, on our ability to maintain the proprietary nature of our owned and licensed intellectual property. We own a significant number of patents or have patent applications pending on some aspects of our products and certain manufacturing processes. However, the principal product formula and manufacturing processes for our TEMPUR®Tempur® material are not patented and we must maintain these as trade secrets in order to protect this intellectual property. We own U.S. and foreign registered trademarks and service marks and have applications for the registration of trademarks and service marks pending domestically and abroad. We also license certain intellectual property rights from third parties.
Certain of our trademarks are currently registered in the U.S. and are registered or pending in foreign jurisdictions. Certain other trademarks are the subject of protection under common law. However, those rights could be circumvented, or violate the proprietary rights of others, or we could be prevented from using them if challenged. A challenge to our use of our trademarks could result in a negative ruling regarding our use of our trademarks, their validity or their enforceability, or could prove expensive and time consuming in terms of legal costs and time spent defending against such a challenge. Any loss of trademark protection could result in a decrease in sales or cause us to spend additional amounts on marketing, either of which could decrease our liquidity and profitability. In addition, if we incur significant costs defending our trademarks, that could also decrease our liquidity and profitability. In addition, we may not have the financial resources necessary to enforce or defend our trademarks. Furthermore, our patents may not provide meaningful protection and patents may never issue from pending applications. It is also possible that others could bring claims of infringement against us, as our principal product formula and manufacturing processes are not patented, and that any licenses protecting our intellectual property could be terminated. If we were unable to maintain the proprietary nature of our intellectual property and our significant current or proposed products, this loss of a competitive advantage could result in decreased sales or increased operating costs, either of which would decrease our liquidity and profitability.
In addition, the laws of certain foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the U.S. or the European Union.EU. Third parties, including competitors, may assert intellectual property infringement or invalidity claims against us that could be upheld. Intellectual property litigation, which could result in substantial cost to and diversion of effort by us, may be necessary to protect our trade secrets or proprietary technology, or for us to defend against claimed infringement of the rights of others and to determine the scope and validity of others’ proprietary rights. We may not prevail in any such litigation, and if we are unsuccessful, we may not be able to obtain any necessary licenses on reasonable terms or at all.
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Table of suppliers and disruptions in the supply of our raw materials could increase our costs of sales and reduce our ability to compete effectively.Contents
The loss of the services of any members of our executive management team could impair our ability to execute our business strategy and as a result, reduce our sales and profitability.
We depend on the continued services of our executive management team. The loss of key personnel could have a material adverse effect on our ability to execute our business strategy and on our financial condition and results of operations. We do not maintain key-person insurance for members of our executive management team.
We entered into the Advance Pricing Agreement Program to resolve a tax matter in labor relationsDenmark, and a failure to resolve the matter or a change in factors or circumstances could disruptadversely impact our business operationsincome tax expense, effective tax rate and increasecash flows.
We are a participant in the Advance Pricing Agreement Program (the "APA Program") for the tax years 2012 through 2022, under which the U.S. Internal Revenue Service ("IRS"), on our costs, which could decrease our liquidity and profitability.
We may be adversely affected by fluctuations in exchange rates, which could affect our results of operations, the costs of our products and our ability to sell our products in foreign markets.
Approximately 21.5% of our net sales were generated outside of the U.S. in 2020. We conduct our business in a wide variety of currencies and are therefore subject to market risk relating to changes in foreign exchange rates. If the U.S. dollar strengthens relative to the Euro or other foreign currencies where we have operations, for example, there will be a negative impact on our operating results upon translation of those products. foreign operating results into the U.S. dollar. In 2020, foreign currency exchange rate changes positively impacted our net income by approximately 0.3% and positively impacted adjusted EBITDA per credit facility, which is a non-U.S. GAAP financial measure, by approximately 0.2%. In 2021, we expect that foreign exchange translation may provide a small benefit to our results of operations. Changes in foreign currency exchange rates could have an adverse impact on our financial condition, results of operations and cash flows. Except for the use of foreign exchange forwards contracts described immediately below, we do not hedge the translation of foreign currency operating results into the U.S. dollar.
We maintain insurance against product liability claims, but such coverageuse foreign exchange forward contracts to manage a portion of the exposure to the risk of the eventual net cash inflows and outflows resulting from foreign currency denominated transactions among certain subsidiaries. These hedging transactions may not continuesucceed or may be only partially successful in managing our foreign currency exchange rate risk.
Refer to "Management's Discussion and Analysis" included in Part II, ITEM 7 of this Report and "Quantitative and Qualitative Disclosures About Market Risk" included in Part II, ITEM 7A of this Report for further discussion on the impact of foreign exchange rates on our operations.
Our leverage affects how we manage our business and may limit our flexibility.
We operate in the ordinary course of our business with a certain amount of leverage. Our degree of leverage could have important consequences, such as:
•increasing our vulnerability to adverse economic, industry or competitive developments;
•requiring a substantial portion of our cash flow from operations to be availablededicated to the payment of principal and interest on terms acceptableour indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and other business opportunities;
•making it more difficult for us to satisfy the obligations related to our indebtedness;
•restricting us from making strategic acquisitions or investments or causing us to make non-strategic divestitures;
•limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;
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•exposing us to variability in interest rates, as a substantial portion of our indebtedness is and will be adequate for liabilities actually incurred. A successful claim brought againstat variable rates; and
•limiting our ability to return capital to our stockholders, including through share repurchases and dividends.
In addition, the instruments governing our debt contain customary financial and other restrictive covenants, which limit our operating flexibility and could prevent us from taking advantage of business opportunities and reduce our flexibility to respond to changing business and economic conditions. Failure to comply with our debt covenants may result in excessa default or event of available insurance coveragedefault under the related credit document. If such default or event of default is not cured or waived, as applicable, we may suffer adverse effects on our operations, business or financial condition, including acceleration of the maturity date of all amounts outstanding under our debt facilities. For further discussion regarding our debt covenants and compliance, refer to "Management’s Discussion and Analysis" included in Part II, ITEM 7 of this Report and Note 5, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.
Our variable rate debt agreements, including our 2019 Credit Agreement, use LIBOR, which is subject to uncertainty. If LIBOR ceases to exist or is no longer representative of the underlying market at some point in the future, our variable rate debt agreements with interest rates that are indexed to LIBOR will use various alternative methods to calculate the applicable interest rate, which could result in increases in interest rates on such debt and adversely impact our interest expense, results of operations and cash flows. Further, we may need to amend our variable rate debt agreements to replace LIBOR with a new reference rate. As of December 31, 2020, we do not utilize any derivatives or hedging strategies that have a LIBOR component. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. Dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (SOFR). Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain. Because of this uncertainty, we cannot reasonably estimate the expected impact of a transition away from LIBOR to our business. For information regarding our sensitivity to changes in interest rates, refer to "Quantitative and Qualitative Disclosures About Market Risk" included in Part II, ITEM 7A of this Report.
We are subject to risks from our international operations, such as complying with U.S. and foreign laws, foreign exchange exposure, tariffs, increased costs, political risks and our ability to expand in certain international markets, which could impair our liquidityability to compete and profitability,our profitability.
We are a global company, selling our products in approximately 100 countries worldwide. We generated approximately 21.5% of our net sales outside of the U.S. in the year ended December 31, 2020. We operate through multiple wholly owned subsidiaries and any claimwe also participate in international license and joint venture arrangements with independent third parties.
Our international operations are subject to the customary risks of operating in an international environment, including complying with U.S. laws affecting operations outside of the U.S. such as the Foreign Corrupt Practices Act; complying with foreign laws and regulations, including disparate anti-corruption laws and regulations; and the potential imposition of trade or product recall thatforeign exchange restrictions, tariffs and other tax increases, inflation and unstable political situations and labor issues. We are also limited in our ability to independently expand in certain international markets where we have granted licenses to manufacture and sell Sealy® bedding products. Fluctuations in the rate of exchange between currencies in which we do business may affect our financial condition or results of operations. Additionally, changes in significant adverse publicity against usinternational trade duties and other aspects of international trade policy, both in the U.S. and abroad, could materially impact our business.
Our business operations and financial results may be impacted by the United Kingdom’s ("UK") departure from the EU, on January 31, 2020, commonly referred to as "Brexit". The full effect of Brexit is uncertain and may, among other things, result in consumers purchasing fewershort term supply chain disruption and certain adverse tax consequences for us relating to the movement of our products which would also impair our liquidity and profitability.related matters between the UK and EU.
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Regulatory requirements, including, but not limited to, trade, environmental, health and safety requirements, may require costly expenditures and expose us to liability.
Our products and our marketing and advertising programs are subject to regulation in the U.S. by various federal, state and local regulatory authorities, including the Federal Trade Commission and the U.S. Food and Drug Administration. In addition, other governments and agencies in other jurisdictions regulate the sale and distribution of our products. These rules and regulations may change from time to time, or may conflict. There may be continuing costs of regulatory compliance including continuous testing, additional quality control processes and appropriate auditing of design and process compliance. For example, the U.S. Consumer Product Safety Commission (“CPSC”)CPSC and many foreign jurisdictions have adopted rules relating to fire retardancy standards for the mattress industry. Further, some states and the U.S. Congress continue to consider fire retardancy regulations that may be different or more stringent than the CPSC standard. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business. We are also subject to various health and environmental provisions, such as California Proposition 65 (the Safe Drinking Water and Toxic Enforcement Act of 1986) and 16 CFR Part 1633 (Standard for the Flammability (Open Flame) of Mattress Sets).
Our marketing and advertising practices could also become the subject of proceedings before regulatory authorities or the subject of claims by other parties and could require us to alter or end these practices or adopt new practices that are not as effective or are more expensive.
In addition, we are subject to federal, state and local laws and regulations relating to pollution, environmental protection and occupational health and safety. We may not be in complete compliance with all such requirements at all times. We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. If a release of hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material.
As a manufacturer of bedding and related products, we use and dispose of a number of substances, such as glue, lubricating oil, solvents and other petroleum products, as well as certain foam ingredients, that may subject us to regulation under numerous foreign, federal and state laws and regulations governing the environment. Among other laws and regulations, we are subject in the U.S. to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Clean Air Act and related state and local statutes and regulations.
Our operations could also be impacted by a number of pending legislative and regulatory proposals to address greenhouse gas emissions in the U.S. and other countries. Certain countries have adopted the Kyoto Protocol. New greenhouse gas reduction targets have been established under the Kyoto Protocol, as amended, and certain countries, including Denmark, have adopted the new reduction targets. This and other international initiatives under consideration could affect our International operations. These actions could increase costs associated with our operations, including costs for raw materials, pollution control equipment and transportation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future consolidated financial condition, results of operations, or cash flows.
We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. In the event contamination is discovered with respect to one or more of our current or former properties, government authorities or third parties may bring claims related to these properties, which could have a material effect on our profitability.
Our pension plans are currently underfunded and we may be required to make cash payments to the plans, reducing our available cash.
We maintain certain single employer defined benefit pension plans. In addition, hourly employees workingplans at certain of Sealy’s domesticour manufacturing facilities are covered by union sponsored retirement and health and welfare plans.facilities. These plans cover both active employees and retirees. The plans are currently underfunded, and under certain circumstances, including the decision to close or sell a facility, we could be required to pay amounts with respect to this underfunding. Such events may significantly impair our profitability and liquidity and the possibility of having to make these payments could affect our decision on whether to close or sell a particular facility.
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We also contribute to multi-employer pension plans according to collective bargaining agreements that cover certain union-represented employees. Participating in these multi-employer plans exposes us to potential liabilities if the multi-employer plan is unable to pay its underfunded obligations or we trigger a withdrawal event. The withdrawal liability is an exit fee for employers who cease contributions to multi-employer defined benefit pension plans with unfunded vested benefits. We participate in several plans which are in the Red Zone for 2020. A plan is in the Red Zone (Critical) if it has a current funded percentage of less than 65.0%. The following risks of participating in these multi-employer plans differ from single employer pension plan risks:
•Employer contributions to a multi-employer plan may be used to provide benefits to employees of other participating employers.
•If a participating employer stops contributing to a multi-employer plan, the remaining participating employers assume the unfunded obligations of the plan.
•If the multi-employer plan becomes significantly underfunded or is unable to pay its benefits, we may be required to contribute additional amounts in excess of the rate required by the collective bargaining agreements.
For more information, refer to Note 8, “Retirement7, "Retirement Plans,”" in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.
Challenges to our pricing or promotional allowance policies or practices could adversely affect our operations.
Certain of our retail pricing and promotional allowance policies or practices are subject to antitrust regulations in the U.S. and abroad. If antitrust regulators or private parties in any jurisdiction in which we do business initiate investigations or claims that challenge our pricing or promotional allowance policies or practices, our efforts to respond could force us to divert management resources and we could incur significant unanticipated costs. If such an investigation or claim were to result in a charge that our practices or policies were in violation of applicable antitrust or other laws or regulations, we could be subject to significant additional costs of defending such charges in a variety of venues and, ultimately, if there were a finding that we were in violation of antitrust or other laws or regulations, there could be an imposition of fines, and damages for persons injured, as well as injunctive or other relief. Any requirement that we pay fines or damages (which, under the laws of certain jurisdictions, may be trebled) could decrease our liquidity and profitability, and any investigation or claim that requires significant management attention or causes us to change our business practices could disrupt our operations or increase our costs, also resulting in a decrease in our liquidity and profitability. An antitrust class action or individual suit against us could result in potential liabilities, substantial costs, treble damages, and the diversion of our management’s attention and resources, regardless of the outcome.
Risks related to ownership of our common stock
Although we recently announced a quarterly cash dividend, there can be no assurance as to the declaration or amount of future dividends.
We recently declared a dividend of $0.07 per share for the first quarter of 2021 and announced our intention to begin paying a quarterly cash dividend beginning in 2021. Any decision to declare and pay dividends, and the amount of any such dividends, will be dependent on a variety of factors, including compliance with Section 170 of the Delaware General Corporation Law; changes to our capital allocation policies; our results of operation, liquidity and cash flows; contractual restrictions in our debt agreements; economic conditions, including the impact of COVID-19 on our business and financial condition; and other factors the Board of Directors may deem relevant. There can be no assurance that we will declare dividends in any particular amounts or at all, and changes in our dividend policy could adversely affect the market price for our stock.
Our stock price is likelyshare repurchase program could be suspended or terminated, and may not enhance long-term stockholder value.
Our Board of Directors has authorized a share repurchase program in 2016 pursuant to continuewhich we are authorized to repurchase shares of our common stock. Since 2016 and through December 31, 2020, we had repurchased an aggregate of 17.0 million shares for approximately $961.3 million under our share repurchase program. As of December 31, 2020, we had approximately $201.6 million remaining under the share repurchase authorization. The share repurchase program may be volatile, your investment could declinesuspended or terminated at any time. Shares may be repurchased from time to time, in value,the open market or through private transactions, subject to market conditions, in compliance with applicable state and we may incur significant costs from class action litigation.
federal securities laws. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, restrictions in our debt agreements, the trading price of our common stock is likely to continue to be volatile and subject to wide price fluctuations. The trading pricethe nature of other investment opportunities. Repurchases of our
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common stock may fluctuate significantly in responsepursuant to various factors, including but not limited to:
Delaware law and our certificate of incorporation and bylaws contain anti-takeover provisions, and our Board of Directors has adopted a limited duration stockholder 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 and our certificate of incorporation and by-laws could hamper a third party’sparty's acquisition of us, or discourage a third party from attempting to acquire control of us. You may not have the opportunity to participate in these transactions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:
•our ability to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of our common stock;
•the requirements that our stockholders provide advance notice and certain disclosures when nominating our directors; and
•the inability of our stockholders to convene a stockholders’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 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding our principal facilities by segment, which have been aggregated by principal manufacturing and distribution entity, at December 31, 2017.
2020.
| Name | Location | Approximate Square Footage | Type of Facility | ||||||||||||||||||||||||||||||||||||||
| North America | |||||||||||||||||||||||||||||||||||||||||
| Sealy Mattress Manufacturing Co., LLC | United States | 4,255,265 | Manufacturing | ||||||||||||||||||||||||||||||||||||||
| Tempur Production USA, LLC | United States | 1,591,000 | Manufacturing | ||||||||||||||||||||||||||||||||||||||
| Sherwood Bedding | United States | 690,700 | Manufacturing | ||||||||||||||||||||||||||||||||||||||
| Comfort Revolution, LLC | United States | 432,000 | Manufacturing | ||||||||||||||||||||||||||||||||||||||
| Sealy Canada, Ltd | Canada | 352,325 | Manufacturing | ||||||||||||||||||||||||||||||||||||||
| Sealy Mattress Company Mexico, S. de R.L. de C.V. | Mexico | 130,500 | Manufacturing | ||||||||||||||||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||||||||||||||
| Dan-Foam ApS | Denmark | 523,000 | Manufacturing | ||||||||||||||||||||||||||||||||||||||
In addition to the properties listed above, we have other facilities in the U.S. and other countries, the majority under leases with one to ten year terms. TheWe lease the land that our manufacturing facility in Albuquerque, New Mexico is leasedlocated, as part of the related industrial revenue bond financing. We have an option to repurchase the propertyland for one dollar upon termination of the lease.
We believe that our existing properties are suitable for the conduct of our business, are adequate for our present needs and will be adequate to meet our future needs.
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ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant’s Common Equity
Our sole class of common equity is our $0.01 par value common stock, which trades on the New York Stock Exchange ("NYSE") under the symbol “TPX.”"TPX." Trading of our common stock commenced on the NYSE on December 18, 2003. Prior to that time, there was no public trading market for our common stock.
| Price Range | |||||||
| High | Low | ||||||
| Fiscal 2017 | |||||||
| First Quarter | $ | 69.50 | $ | 42.20 | |||
| Second Quarter | 53.39 | 40.58 | |||||
| Third Quarter | 64.52 | 50.11 | |||||
| Fourth Quarter | 67.63 | 51.32 | |||||
| Fiscal 2016 | |||||||
| First Quarter | $ | 69.32 | $ | 52.51 | |||
| Second Quarter | 62.76 | 53.95 | |||||
| Third Quarter | 82.04 | 53.95 | |||||
| Fourth Quarter | 68.99 | 50.94 | |||||
As of February 26, 2018,15, 2021, we had approximately 8167 stockholders of record of our common stock.
Dividends
In February 2021, our Board of Directors declared a cash dividend of $0.07 per share on a periodic basis.our common stock. The dividend is payable on March 12, 2021 to shareholders of record on the close of business February 25, 2021. However, payment of future dividends, and the timing and amount thereof, will be at the discretion of our Board of Directors and will depend on our earnings, operating and financial condition, capital requirements, legal requirements and other factors that our Board of Directors deems relevant. Further, we are subject to certain customary restrictions on dividends under our 20162019 Credit Agreement and Indentures. See Note 7,5, "Debt,"in our Consolidated Financial Statements, included in Part II, ITEM 8 of this Report, for a discussion of the 20162019 Credit Agreement and Indentures.
Issuer Purchases of Equity Securities
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The following table shows that we made nosets forth purchases of our common stock for the three months ended December 31, 2017:2020:
| Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans or programs | (d) Maximum number of shares (or approximate dollar value of shares) that may yet be purchased under the plans or programs (in millions) | ||||||||||||||||||||||
| October 1, 2020 - October 31, 2020 | 1,395 | (1) | $93.06 | — | $300.0 | |||||||||||||||||||||
| November 1, 2020 - November 30, 2020 | 1,793,250 | (1) | $24.43 | (2) | 1,791,447 | $256.3 | ||||||||||||||||||||
| December 1, 2020 - December 31, 2020 | 3,309,673 | (1) | $26.67 | 2,083,732 | $201.6 | |||||||||||||||||||||
| Total | 5,104,318 | 3,875,179 | ||||||||||||||||||||||||
| Includes shares withheld upon the vesting of certain equity awards to satisfy tax withholding obligations. The shares withheld were valued at the closing price of the common stock on the New York Stock Exchange on the vesting date or prior business day. | |||||||||||
| (2) | |||||||||||
| date. | |||||||||||
Equity Compensation Plan Information
Equity compensation plan information required by this Item is incorporated by reference from Part III, ITEM 12 of this Report.
Performance Graph
The following Performance Graph and related information shall not be deemed to be “soliciting material”"soliciting material" or to be “filed”"filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
The following table compares cumulative stockholder returns for us over the last five years to the Standard & Poor’s ("S&P") 500 Stock Composite Index and a peer group. The S&P 500 Composite Index is a capitalization weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. TheWe selected these stocks are chosen forbased on market size, liquidity and industry group representation. We believe the peer group discussed below closely reflects our business and, as a result, provides a meaningful comparison of stock performance.
The peer issuers included in this graph are set forth below in the table. In 2017, the peer group was changed to remove Lexmark International, Inc., which was acquired in 2016 by Ninestar Holdings Company Limited, and to remove Harman International Industries, Inc., which was acquired in 2016 by Samsung Electronics Co., Ltd. In addition, in 2017 Dorel Industries Inc., Fossil Group, Inc., and Mohawk Industries, Inc. were removed due to no longer meeting our revenue criteria and RH was added to the peer group.
| Brunswick Corporation (BC) | Hasbro, Inc. (HAS) | RH (RH) | ||||||
| Carter's, Inc. (CRI) | HNI Corporation (HNI) | Sleep Number Corporation (SNBR) | ||||||
| Columbia Sportswear Company (COLM) | La-Z-Boy Incorporated (LZB) | Steelcase Inc. (SCS) | ||||||
| Leggett & Platt, Incorporated (LEG) | ||||||||
| Under Armour, Inc. (UA) | ||||||||
| Herman Miller, Inc. (MLHR) | Williams-Sonoma, Inc. (WSM) | |||||||
| Polaris Industries Inc. (PII) | Wolverine World Wide, Inc. (WWW) | |||||||
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| 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | |||||||||||||||||||||||||||||||||
| Tempur Sealy International, Inc. | $ | 100.00 | $ | 96.91 | $ | 88.97 | $ | 58.76 | $ | 123.56 | $ | 153.28 | ||||||||||||||||||||||||||
| S&P 500 | 100.00 | 111.96 | 136.40 | 130.42 | 171.49 | 203.04 | ||||||||||||||||||||||||||||||||
| Peer Group | 100.00 | 100.26 | 115.98 | 104.32 | 135.67 | 146.84 | ||||||||||||||||||||||||||||||||
| 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | |||||||||||||||||||
| Tempur Sealy International, Inc. | $ | 100.00 | $ | 171.36 | $ | 174.37 | $ | 223.75 | $ | 216.83 | $ | 199.08 | ||||||||||||
| S&P 500 | 100.00 | 132.39 | 150.51 | 152.59 | 170.84 | 208.14 | ||||||||||||||||||
| 2016 Peer Group | 100.00 | 142.09 | 155.93 | 143.10 | 148.25 | 174.21 | ||||||||||||||||||
| 2017 Peer Group | 100.00 | 142.76 | 161.75 | 148.06 | 149.64 | 176.40 | ||||||||||||||||||
| (in millions, except per common share amounts) | |||||||||||||||||||
| Statement of Income Data: | 2017 | 2016 | 2015 | 2014 | 2013 (1) | ||||||||||||||
| Net sales | $ | 2,754.4 | $ | 3,128.9 | $ | 3,154.6 | $ | 2,986.0 | $ | 2,456.8 | |||||||||
| Cost of sales | 1,613.7 | 1,821.4 | 1,905.4 | 1,840.4 | 1,457.7 | ||||||||||||||
| Gross profit | 1,140.7 | 1,307.5 | 1,249.2 | 1,145.6 | 999.1 | ||||||||||||||
| Operating expense, net | 852.3 | 897.1 | 942.7 | 875.5 | 775.4 | ||||||||||||||
| Operating income | 288.4 | 410.4 | 306.5 | 270.1 | 223.7 | ||||||||||||||
| Interest expense, net | 108.0 | 91.6 | 102.5 | 92.8 | 110.8 | ||||||||||||||
| Loss on extinguishment of debt | — | 47.2 | — | — | — | ||||||||||||||
| Loss on disposal, net | — | — | — | 23.2 | — | ||||||||||||||
| Other (income) expense, net | (8.0 | ) | (0.2 | ) | 12.9 | (13.7 | ) | 5.0 | |||||||||||
| Income before income taxes | 188.4 | 271.8 | 191.1 | 167.8 | 107.9 | ||||||||||||||
Income tax provision (2) | (47.7 | ) | (86.8 | ) | (125.4 | ) | (64.9 | ) | (49.1 | ) | |||||||||
| Net income before non-controlling interests | 140.7 | 185.0 | 65.7 | 102.9 | 58.8 | ||||||||||||||
| Less: net (loss) income attributable to non-controlling interests | (10.7 | ) | (5.6 | ) | 1.2 | 1.1 | 0.3 | ||||||||||||
| Net income attributable to Tempur Sealy International, Inc. | $ | 151.4 | $ | 190.6 | $ | 64.5 | $ | 101.8 | $ | 58.5 | |||||||||
| Balance Sheet Data (at end of period): | |||||||||||||||||||
| Cash and cash equivalents | $ | 41.9 | $ | 65.7 | $ | 153.9 | $ | 62.5 | $ | 81.0 | |||||||||
| Total assets | 2,694.0 | 2,698.8 | 2,652.0 | 2,573.2 | 2,722.6 | ||||||||||||||
| Total debt, net | 1,644.6 | 1,779.0 | 1,420.8 | 1,537.0 | 1,808.9 | ||||||||||||||
| Capital leases and other debt | 108.5 | 109.1 | 34.0 | 27.7 | 27.6 | ||||||||||||||
| Redeemable non-controlling interest | 2.2 | 7.6 | 12.4 | 12.6 | 11.5 | ||||||||||||||
| Total stockholders' equity (deficit) | 112.5 | (41.9 | ) | 267.8 | 180.6 | 99.1 | |||||||||||||
| Other Financial and Operating Data: | |||||||||||||||||||
| Dividends per common share | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Depreciation and amortization (3) | 94.6 | 89.5 | 93.9 | 89.7 | 91.5 | ||||||||||||||
| Net cash provided by operating activities | 222.9 | 165.5 | 234.2 | 225.2 | 98.5 | ||||||||||||||
| Net cash used in investing activities | (62.1 | ) | (62.4 | ) | (59.7 | ) | (10.4 | ) | (1,213.0 | ) | |||||||||
| Net cash (used in) provided by financing activities | (175.2 | ) | (185.1 | ) | (90.7 | ) | (238.1 | ) | 1,013.4 | ||||||||||
| Basic earnings per common share | 2.80 | 3.23 | 1.05 | 1.67 | 0.97 | ||||||||||||||
| Diluted earnings per common share | 2.77 | 3.19 | 1.03 | 1.64 | 0.95 | ||||||||||||||
| Capital expenditures | 67.0 | 62.4 | 65.9 | 47.5 | 40.0 | ||||||||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Part II, ITEM 6 of this Report and the audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Report. In addition, certain prior period amounts have been revised to correct for errors related to those prior periods. Refer to Note 2, Revisions of Previously-Issued Financial Statements, of the Notes to the Consolidated Financial Statements included in Part II, ITEM 8 of this 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 future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties. See “Special"Special Note Regarding Forward-Looking Statements”Statements" and Part I, ITEM 1A of this Report. Our actual results may differ materially from those contained in any forward-looking statements. For results of operations comparisons relating to years ending December 31, 2019 and 2018, refer to our annual report on Form 10-K, Part II, ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations filed with the Securities and Exchange Commission on February 21, 2020.
In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the years ended December 31, 2017, 20162020 and 2015,2019, including the following topics:
•an overview of our business and strategy;
•results of operations, including our net sales and costs in the periods presented as well as changes between periods;
•expected sources of liquidity for future operations; and
•our use of certain non-GAAP financial measures.
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Business Overview
General
We develop,are committed to improving the sleep of more people, every night, all around the world. As a global leader in the design, manufacture and market bedding products, which we sell globally. Our brand portfolio includes many highly recognized brands in the industry, including TEMPUR®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, and Stearns & Foster®. Our comprehensive suitedistribution of bedding products, offerswe know how crucial a varietygood night of sleep is to overall health and wellness. Utilizing over a century of knowledge and industry-leading innovation, we deliver award-winning products that provide breakthrough sleep solutions to consumers across a broad range of channels.in over 100 countries.
We operate underin two reportable 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. In the fourth quarter of 2020, we realigned our business segment reporting to include Mexico within our North America segment, which was previously included in our International segment. The change in segment reporting aligned with changes in how our global operations are managed. Our North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Canada.Mexico. In 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, which is included in the North America segment. Our International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America.America (other than Mexico). We evaluate segment performance based on net sales, gross profit and operating income. For additional information refer to Note 14, "Business Segment Information," included in Part II, ITEM 8 "Financial Statements and Supplementary Data", of this Report.
Our distribution model operates through an omni-channel strategy. We distribute through two channels in each operating business segment: Wholesale and Direct. Our Wholesale channel consists of Mattress Firm Relationshipthird-party retailers, including third-party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, online and call centers. We have a global manufacturing footprint with approximately 9,000 employees worldwide.
General Business and Economic Conditions
We believe the bedding industry is now structured for the year ended December 31, 2017 and 2016, respectively. During the week of January 23, 2017, we were unexpectedly notified by the senior management of Mattress Firm and representatives of Steinhoff International Holdings Ltd., its parent company, of Mattress Firm's intent to terminate its business relationship with us if we did not agree to considerable changes to our agreements with Mattress Firm, including significant economic concessions. Wesustained growth. The industry is no longer engaged in discussionsuneconomical retail store expansion, startups have shifted from uneconomical strategies to facilitatebecoming profitable and legacy retailers and manufacturers have become skilled in producing profitable online sales.
In 2020, we began rapidly expanding organically with new distribution partners through our direct channel and the initiation of our OEM business. We experienced a mutually agreeable supply arrangement with Mattress Firm. However, we 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 Firmreduction in which they agreed, among other things, to continue supplying Mattress Firm until April 3, 2017,total net sales at which time the parties’ business relationship ended.
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The rapid increase in demand for bedding products has challenged the entire bedding industry and supply chain, including our business. Additionally, the U.S. government has mandated that domestic suppliers of certain materials used in the production of bedding products redirect such materials towards the production of personal protective equipment. The broad-based increase in demand coupled with supply chain constraints, primarily related to an encased innerspring component, has created operational challenges in the production of Sealy and Sherwood products in the U.S. As a result, the sales growth of Sealy and Sherwood in the second half of 2020 was unfavorably impacted by these supply chain constraints, as we could not fulfill the entire domestic demand for these products. We expect these supply chain constraints to Mattress Firm,mitigate significantly by early second quarter of 2021. The Tempur-Pedic manufacturing process has not been as impacted by supply chain constraints.
Sales trends for early 2021 indicate that growth in the U.S. and Asia-Pacific has accelerated from the fourth quarter of 2020. However, sales within certain of our net sales increased 8.1% in 2017 as compared to 2016.
In our North America segment in 2020, we introduced the Tempur-Ergo Smart Base Collection with Sleeptracker® technology. In 2021, we are refreshing our Sealy portfolio and Economic Conditionslaunching new models in our Posturepedic Plus™, Posturepedic® and Essentials product lines. We expect to complete the launch of our Essentials and Posturepedic lines in the second quarter of 2021. Additionally, we expect to complete the launch of the higher margin Posturepedic Plus line in the second half of the year.
Our global 2021 marketing plan is to aggressively support our innovative bedding products through investing significant marketing dollars to promote our worldwide brands. We expect to spend a record amount of marketing dollars in 2021 for Tempur-Pedic, Sealy and Stearns & Foster.
Omni-Channel Distribution Expansion
We have a diversified group of strong retail partners and a rapidly growing direct business. In 2019, we announced three new or expanded third-party retail relationships in the U.S. and Europe. This resulted in the largest expansion of stores in our history. In 2020, we successfully completed the product rollout to our expanded distribution relationships, realizing robust wholesale channel growth as a result. We continue to increase our network of third-party retail partners and recently added new distribution at several established retail chains.
We have been focused on building our direct channel, both online and company-owned retail stores. The development of our online business is affected by general business and economic conditions, and these conditions couldhas been particularly important as consumers have an impact on future demandgrown more comfortable shopping for our products. The global economic environment continues to be challenging,bedding products online. Online purchases accelerated during the pandemic and we expect the uncertainty to continue. Wethat consumers will continue to make strategic investments, including: introducing new products; investinglean into this channel in increasingthe future. In 2020, we estimate that 20% of our global brand awareness; expandingU.S. sales occurred online, either through our North America margins while executing our sales growth strategy; investingown website in our operating infrastructure to meetdirect channel or through our third-party retailer websites in our wholesale channel. The direct channel growth rate has surpassed the requirements of our business; and taking other actions to further strengthen our business.
Our North America segment competesdistribution network expanded in various mattress categories, and contributed 78.9%2020 as we opened 21 new Tempur-Pedic retail stores. As of our net sales for the year ended December 31, 2017. These mattress categories are highly competitive, with many competitor2020, we had 76 Tempur-Pedic retail stores in operation. We plan to expand our network to 125 to 150 new retail stores in the long-term. We expect these retail stores to complement our existing third-party retail partners by increasing our products' brand awareness in the local markets.
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In 2020, we expanded our presence into the OEM market by offering non-branded products, supported by aggressive marketing campaignsincluding mattresses, pillows, and promotions.other bedding products and components at a wide range of price points. The addition of non-branded offerings expands our capabilities to service third-party retailers and creates opportunity to capture manufacturing profits from bedding brands outside our own. In 2020, we sold approximately $150 million of OEM bedding products. In 2021, we plan to grow our sales in the North American bedding market is also changing rapidly, becoming more focused on the consumer, rationalizing store count, evolving media spend and investing in online capabilities. The international market for mattresses and pillows is generally served by a large number of manufacturers, primarily operating on a regional and local basis. These manufacturers offer a broad range of mattress and pillow products. In addition, mattress and pillow manufacturers and retailers are seeking to increase their channels of distribution and are looking for new ways to reach the consumer, including the recent expansion in the number of companies pursuing online direct-to-consumer models for foam mattresses. Additionally, retailers in both the U.S. and internationally are increasingly seeking to integrate vertically in the furniture and bedding industries, including offering their own brands of mattresses and pillows. These factors, along with increased competition, may negatively impact our results.OEM business.
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 U.S. Tax Reform Act and will record adjustments throughassets of the income tax provisionSherwood Bedding business for a cash purchase price of $39.1 million. Sherwood Bedding is a major manufacturer in the relevant period as authoritative guidance is made availableU.S. private label and OEM bedding market, and this acquisition of a majority interest marks our entrance into the private label category. During the first quarter of 2020, we completed the integration of Sherwood Bedding into our portfolio of product brands. Since the acquisition, we have leveraged our overall brand portfolio to the public. In addition, in reflecting the impactgain additional distribution for Sherwood products.
Acquisition of Innovative Mattress Solutions, LLC ("iMS")
On April 1, 2019, we acquired substantially all of the U.S. Tax Reform Actnet assets of iMS in a transaction valued at approximately $24.0 million, including assumed liabilities of $11.0 million as of March 31, 2019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of this regional bedding retailer furthers our 2017 financial statements it was necessary to, in some cases, make estimates of one or more items to calculate such impact during the measurement period. Accordingly, the impact of the U.S. Tax Reform Act may differ from our provisional estimates due to and among other factors, information currently not available, changes in interpretations and the issuance of additional guidance, as well as changes in assumptions we have currently made, including actions we may take in future periods as a result of the U.S. Tax Reform Act.
2020 Results of Operations
A summary of our results for the year ended December 31, 20172020 include:
•Total net sales decreased 12.0%increased 18.4% to $2,754.4$3,676.9 million from $3,128.9as compared to $3,106.0 million in 2016.2019.
•Gross margin was 41.4%44.6% in 2020 as compared to 41.8%43.2% in 2016.2019. Adjusted gross margin, which is a non-GAAP financial measure, was 42.0%44.7% in 2020. There were no adjustments to gross margin in 2019.
•Operating income was $532.1 million, or 14.5% of net sales, as compared to 41.9%$346.7 million, or 11.2% of net sales, in 2016.
•Net income was $151.4$348.8 million as compared to $190.6$189.5 million in 2016.2019. Adjusted net income, which is a non-GAAP financial measure, was $175.2$405.7 million as compared to $242.4$221.9 million in 2016.2019.
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•EPS increased to $1.64 as compared to $0.86 in 2019. Adjusted EPS, which is a non-GAAP financial measure, was $3.20increased 91.0% to $1.91 as compared to $4.05$1.00 in 2016.2019. Adjusted EPS, which is a non-GAAP financial measure, included $0.03 of COVID-19 charges.
For a discussion and reconciliation of non-GAAP financial measures as discussed above to the corresponding GAAP financial results, refer to the non-GAAP financial information set forth below under the heading "Non-GAAP Financial Information."
We may refer to net sales or earnings or other historical financial information on a “constant currency basis,” which is a non-GAAP financial measure. These references to constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates. To provide information on a constant currency basis, the applicable financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior 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 II, ITEM 7A of this Report for a discussion of our foreign currency exchange rate risk.
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The following table sets forth the various components of our Consolidated Statements of Income and expresses each component as a percentage of net sales:
| (in millions, except percentages and | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| per common share amounts) | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 3,676.9 | 100.0 | % | $ | 3,106.0 | 100.0 | % | |||||||||||||||||||||||||||
| Cost of sales | 2,038.5 | 55.4 | 1,763.8 | 56.8 | |||||||||||||||||||||||||||||||
| Gross profit | 1,638.4 | 44.6 | 1,342.2 | 43.2 | |||||||||||||||||||||||||||||||
| Selling and marketing expenses | 740.2 | 20.1 | 666.3 | 21.5 | |||||||||||||||||||||||||||||||
| General, administrative and other expenses | 382.5 | 10.4 | 345.1 | 11.1 | |||||||||||||||||||||||||||||||
| Equity income in earnings of unconsolidated affiliates | (16.4) | (0.4) | (15.9) | (0.5) | |||||||||||||||||||||||||||||||
| Operating income | 532.1 | 14.5 | 346.7 | 11.2 | |||||||||||||||||||||||||||||||
| Other expense, net: | |||||||||||||||||||||||||||||||||||
| Interest expense, net | 77.0 | 2.1 | 85.7 | 2.8 | |||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | 5.1 | 0.1 | — | — | |||||||||||||||||||||||||||||||
| Other income, net | (2.4) | (0.1) | (4.5) | (0.1) | |||||||||||||||||||||||||||||||
| Total other expense, net | 79.7 | 2.2 | 81.2 | 2.6 | |||||||||||||||||||||||||||||||
| Income from continuing operations before income taxes | 452.4 | 12.3 | 265.5 | 8.5 | |||||||||||||||||||||||||||||||
| Income tax provision | (102.6) | (2.8) | (74.7) | (2.4) | |||||||||||||||||||||||||||||||
| Income from continuing operations | 349.8 | 9.5 | 190.8 | 6.1 | |||||||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax | — | — | (1.4) | — | |||||||||||||||||||||||||||||||
| Net income before non-controlling interests | 349.8 | 9.5 | 189.4 | 6.1 | |||||||||||||||||||||||||||||||
| Less: Net income (loss) attributable to non-controlling interests | 1.0 | — | (0.1) | — | |||||||||||||||||||||||||||||||
| Net income attributable to Tempur Sealy International, Inc. | $ | 348.8 | 9.5 | % | $ | 189.5 | 6.1 | % | |||||||||||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||||||||
| Earnings per share for continuing operations | $ | 1.68 | $ | 0.87 | |||||||||||||||||||||||||||||||
| Loss per share for discontinued operations | — | — | |||||||||||||||||||||||||||||||||
| Earnings per share | $ | 1.68 | $ | 0.87 | |||||||||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||||||||
| Earnings per share for continuing operations | $ | 1.64 | $ | 0.86 | |||||||||||||||||||||||||||||||
| Loss per share for discontinued operations | — | — | |||||||||||||||||||||||||||||||||
| Earnings per share | $ | 1.64 | $ | 0.86 | |||||||||||||||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||||||||||||||
| Basic | 207.9 | 218.0 | |||||||||||||||||||||||||||||||||
| Diluted | 212.3 | 221.6 | |||||||||||||||||||||||||||||||||
| (in millions, except percentages and | Year Ended December 31, | |||||||||||||||||||
| per common share amounts) | 2017 | 2016 | 2015 | |||||||||||||||||
| Net sales | $ | 2,754.4 | 100.0 | % | $ | 3,128.9 | 100.0 | % | $ | 3,154.6 | 100.0 | % | ||||||||
| Cost of sales | 1,613.7 | 58.6 | 1,821.4 | 58.2 | 1,905.4 | 60.4 | ||||||||||||||
| Gross profit | 1,140.7 | 41.4 | 1,307.5 | 41.8 | 1,249.2 | 39.6 | ||||||||||||||
| Selling and marketing expenses | 601.3 | 21.8 | 648.5 | 20.7 | 648.0 | 20.5 | ||||||||||||||
| General, administrative and other expenses | 273.0 | 9.9 | 281.4 | 9.0 | 324.9 | 10.3 | ||||||||||||||
| Customer termination charges, net | 14.4 | 0.5 | — | — | — | — | ||||||||||||||
| Equity income in earnings of unconsolidated affiliates | (15.6 | ) | (0.6 | ) | (13.3 | ) | (0.4 | ) | (11.9 | ) | (0.4 | ) | ||||||||
| Royalty income, net of royalty expense | (20.8 | ) | (0.8 | ) | (19.5 | ) | (0.6 | ) | (18.3 | ) | (0.6 | ) | ||||||||
| Operating income | 288.4 | 10.5 | 410.4 | 13.1 | 306.5 | 9.7 | ||||||||||||||
| Other expense, net: | ||||||||||||||||||||
| Interest expense, net | 108.0 | 3.9 | 91.6 | 2.9 | 102.5 | 3.3 | ||||||||||||||
| Loss on extinguishment of debt | — | — | 47.2 | 1.5 | — | — | ||||||||||||||
| Other (income) expense, net | (8.0 | ) | (0.3 | ) | (0.2 | ) | — | 12.9 | 0.4 | |||||||||||
| Total other expense. net | 100.0 | 3.6 | 138.6 | 4.4 | 115.4 | 3.7 | ||||||||||||||
| Income before income taxes | 188.4 | 6.8 | 271.8 | 8.7 | 191.1 | 6.1 | ||||||||||||||
| Income tax provision | (47.7 | ) | (1.7 | ) | (86.8 | ) | (2.8 | ) | (125.4 | ) | (4.0 | ) | ||||||||
| Net income before non-controlling interests | 140.7 | 5.1 | 185.0 | 5.9 | 65.7 | 2.1 | ||||||||||||||
| Less: Net (loss) income attributable to non-controlling interests | (10.7 | ) | (0.4 | ) | (5.6 | ) | (0.2 | ) | 1.2 | — | ||||||||||
| Net income attributable to Tempur Sealy International, Inc. | $ | 151.4 | 5.5 | % | $ | 190.6 | 6.1 | % | $ | 64.5 | 2.0 | % | ||||||||
| Earnings per common share: | ||||||||||||||||||||
| Diluted | $ | 2.77 | $ | 3.19 | $ | 1.03 | ||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||
| Diluted | 54.7 | 59.8 | 62.6 | |||||||||||||||||
29
NET SALES
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | North America | International | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net sales by channel | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wholesale | $ | 3,185.8 | $ | 2,717.1 | $ | 2,806.7 | $ | 2,343.5 | $ | 379.1 | $ | 373.6 | |||||||||||||||||||||||||||||||||||||||||
| Direct | 491.1 | 388.9 | 352.5 | 260.0 | 138.6 | 128.9 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 3,676.9 | $ | 3,106.0 | $ | 3,159.2 | $ | 2,603.5 | $ | 517.7 | $ | 502.5 | |||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| Consolidated | North America | International | |||||||||||||||||||||||||||||||||
| (in millions) | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||
| Net sales by channel | |||||||||||||||||||||||||||||||||||
| Wholesale | $ | 2,524.5 | $ | 2,964.2 | $ | 3,004.1 | $ | 2,052.6 | $ | 2,511.7 | $ | 2,531.4 | $ | 471.9 | $ | 452.5 | $ | 472.7 | |||||||||||||||||
| Direct | 229.9 | 164.7 | 150.5 | 121.2 | 58.4 | 45.8 | 108.7 | 106.3 | 104.7 | ||||||||||||||||||||||||||
| Total net sales | $ | 2,754.4 | $ | 3,128.9 | $ | 3,154.6 | $ | 2,173.8 | $ | 2,570.1 | $ | 2,577.2 | $ | 580.6 | $ | 558.8 | $ | 577.4 | |||||||||||||||||
Year ended December 31, 20172020 compared to year ended December 31, 20162019
Net sales decreased 12.0%increased 18.4%, and on a constant currency basis decreased 12.0%increased 18.3%. The decreasechange in net sales was driven by the following:
•North America net sales decreased $396.3 million, or 15.4%. 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 $668.6 million for 2016, which resulted in a net sales decrease of $572.9 million. Excluding Mattress Firm, North America net sales increased $176.6$555.7 million, or 9.3%, driven by growth across all of our brands.21.3%. Net sales in the Wholesale channel decreased $459.1increased $463.2 million, or 18.3%19.8%, primarily driven primarily by the termination ofbroad-based demand across our contract with Mattress Firm. Excluding sales to Mattress Firm, Wholesale net sales increased 6.2%. Additionally, sales to a national department store retailer in the Wholesale channel significantly declined in 2017 as compared to 2016.retail partners and new distribution. Net sales in our Direct channel increased $62.8$92.5 million, or 107.5%35.6%, primarily driven primarily by growth in e-commerce. Canadafrom our e-commerce business. On a constant currency basis, North America net sales increased 3.4% on a constant currency basis.
21.6%.•International net sales increased $21.8$15.2 million, or 3.9%3.0%. On a constant currency basis, our International net sales increased 4.6%, driven primarily by growth in Asia-Pacific and Latin America. Net sales in the Wholesale channel increased 4.4% on a constant currency basis. Net sales in the Direct channel increased 5.4% on a constant currency basis.
GROSS PROFIT
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Margin Change | |||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | Gross Profit | Gross Margin | Gross Profit | Gross Margin | 2020 vs 2019 | ||||||||||||||||||||||||||||||||||||||||||
| North America | $ | 1,332.0 | 42.2 | % | $ | 1,055.2 | 40.5 | % | 1.7 | % | |||||||||||||||||||||||||||||||||||||
| International | 306.4 | 59.2 | % | 287.0 | 57.1 | % | 2.1 | % | |||||||||||||||||||||||||||||||||||||||
| Consolidated gross margin | $ | 1,638.4 | 44.6 | % | $ | 1,342.2 | 43.2 | % | 1.4 | % | |||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | Margin Change | |||||||||||||||||||||||
| (in millions, except percentages) | Gross Profit | Gross Margin | Gross Profit | Gross Margin | Gross Profit | Gross Margin | 2017 vs 2016 | 2016 vs 2015 | ||||||||||||||||||
| North America | $ | 844.7 | 38.9 | % | $ | 1,017.4 | 39.6 | % | $ | 954.6 | 37.0 | % | (0.7 | )% | 2.6 | % | ||||||||||
| International | 296.0 | 51.0 | % | 290.1 | 51.9 | % | 294.6 | 51.0 | % | (0.9 | )% | 0.9 | % | |||||||||||||
| Consolidated | $ | 1,140.7 | 41.4 | % | $ | 1,307.5 | 41.8 | % | $ | 1,249.2 | 39.6 | % | (0.4 | )% | 2.2 | % | ||||||||||
Costs associated with net sales are recorded in cost of sales and include the costs of producing, shipping, warehousing, receiving and inspecting goods during the period, as well as depreciation and amortization of long-lived assets used in the manufacturing process.
Our gross margin is primarily impacted by the relative amount of net sales contributed by our Tempur and Sealy products. Our Sealy products have a significantly lower gross margin than our Tempur products. Our Sealy mattress products range from value to premium priced offerings, and gross margins are typically higher on premium products compared to value priced offerings. Our Tempur products are exclusively premium priced products. As sales of our Sealy products increase relative to sales of our Tempur products, our gross margins will be negatively impacted in both our North America and International segments.
Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes; the cost of raw materials; operational efficiencies due to the utilization in our manufacturing facilities; product, channel and geographic mix; foreign exchange fluctuations; volume incentives offered to certain retail accounts; participation in our retail cooperative advertising programs; and costs associated with new product introductions. Future changes in raw material prices could have a significant impact on our gross margin. In 2021, we expect commodity cost inflation to negatively impact 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.
30
Year ended December 31, 20172020 compared to year ended December 31, 20162019
Gross margin declined 40improved 140 basis points. The principal factors impacting gross margin for each segment are discussed below.
•North America gross margin declined 70improved 170 basis points. The declineimprovement in gross margin was primarily driven primarily by the termination of the Mattress Firm relationship, which resulted inimproved fixed cost deleverageleverage and productivity on higher unit volumes of 160 basis points and favorable floor model costs of 90 basis points. These improvements were partially offset by unfavorable product and brand mix of 100 basis points. Additionally, we incurred $4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items and $0.6 million of operational expansion costs related to the opening of a Sealy manufacturing facility, which partially offset the improvement in gross margin
•International gross margin improved 210 basis points. The improvement in gross margin was primarily driven by improved fixed cost leverage and productivity on higher unit volumes of 120 basis points and unfavorable brandfavorable mix of 9080 basis points. In 2017,Additionally, we also recorded charges associated with the Mattress Firm termination for an unfavorable impact of 60 basis points. These charges included a $5.4 million write-off of customer-unique inventory and $6.1incurred $0.5 million of increased product obligations. The declineincremental costs related to the global pandemic relief efforts, sanitation supplies and services and other items, which partially offset the improvement in gross margin was also due to unfavorable commodity costs of 100 basis points, offset by favorable channel mix of 130 basis points, operational productivity of 100 basis points and lower floor model discounts of 60 basis points.
margin.OPERATING EXPENSES
Selling and marketing expenses include advertising and media production associated with the promotion of our brands, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials, and sales force compensation. We also include in selling and marketing expense certain new product development costs, including market research and new product testing.
General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.
Year ended December 31, 20172020 compared to year ended December 31, 20162019
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| (in millions) | Consolidated | North America | International | Corporate | |||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Advertising | $ | 332.5 | $ | 280.5 | $ | 297.7 | $ | 246.6 | $ | 34.8 | $ | 33.9 | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Other selling and marketing | 407.7 | 385.8 | 251.0 | 258.9 | 112.2 | 115.7 | 44.5 | 11.2 | |||||||||||||||||||||||||||||||||||||||
| General, administrative and other | 382.5 | 345.1 | 191.9 | 199.8 | 48.2 | 43.0 | 142.4 | 102.3 | |||||||||||||||||||||||||||||||||||||||
| Total operating expense | $ | 1,122.7 | $ | 1,011.4 | $ | 740.6 | $ | 705.3 | $ | 195.2 | $ | 192.6 | $ | 186.9 | $ | 113.5 | |||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||
| (in millions) | Consolidated | North America | International | Corporate | |||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||
| Advertising | $ | 284.1 | $ | 352.7 | $ | 248.7 | $ | 316.5 | $ | 35.4 | $ | 36.2 | $ | — | $ | — | |||||||||||||||
| Other selling and marketing | 317.2 | 295.8 | 186.7 | 169.5 | 124.8 | 123.4 | 5.7 | 2.9 | |||||||||||||||||||||||
| General, administrative and other | 273.0 | 281.4 | 124.0 | 127.3 | 57.7 | 57.8 | 91.3 | 96.3 | |||||||||||||||||||||||
| Customer termination charges, net | 14.4 | — | 20.9 | — | 0.8 | — | (7.3 | ) | — | ||||||||||||||||||||||
| Total operating expense | $ | 888.7 | $ | 929.9 | $ | 580.3 | $ | 613.3 | $ | 218.7 | $ | 217.4 | $ | 89.7 | $ | 99.2 | |||||||||||||||
Operating expenses increased $111.3 million, or 11.0%, and decreased $41.2 million, and increased 260210 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are discussed below.
•North America operating expenses increased $35.3 million, or 5.0%, and decreased $33.0 million and increased 280370 basis points as a percentage of net sales. In the first quarter of 2017, we recorded $20.9 million of charges related to the Mattress Firm termination, which included $17.2 million write-off of customer incentives and marketing assetsThe increase in the first quarter and $3.7 million of employee-related and professional fees. Additionally, we had unfavorable operating expense leverage, includingexpenses was primarily driven by higher advertising investments, in marketing. These werepartially offset by decreased participationcustomer-related charges. In 2020, we recorded $11.7 million of customer-related charges in our wholesale cooperative advertising programs.
connection with the bankruptcy of Art Van Furniture, LLC and affiliates, whereas in the same prior year period, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting liquidity issues of Mattress PAL's affiliates.•International operating expenses increased $1.3$2.6 million and decreased 12060 basis points as a percentage of net sales, primarily driven by improved operating expense leverage. During 2017, we recognized $4.6 million of restructuring charges, which relate to the wind down of certain operations, leadership termination charges and professional fees, as well as $3.8 million of non-income tax charges related to a subsidiary in Latin America. We also recognized $2.7 million of charges for a European customer's bankruptcy and other employee-related expenses. During 2016, we recognized $3.2 million of charges related to a subsidiary in Latin America.
31
•Corporate operating expenses increased $73.4 million, or 64.7%. The increase in operating expenses was primarily driven by $49.4 million of non-recurring amortization for our long-term aspirational plan stock-based compensation. The amount recognized represents the third quarter 2020 cumulative catch-up adjustment and fourth quarter 2020 expense for the long-term aspirational awards, which became probable of vesting during the third quarter of 2020 and vested in the firstfourth quarter of 20172020. Additionally, we reached the maximum payout for the change in estimate associated withour 2020 performance-based stock compensation that is no longer probable of payout following the Mattress Firm termination.
and annual incentive compensation plans.Research and development expenses for the year ended December 31, 20172020 were $21.7$23.1 million compared to $26.7$23.0 million for the year ended December 31, 2016, a decrease2019, an increase of $5.0$0.1 million, or 18.7%0.4%.
| Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||
| (in millions) | Consolidated | North America | International | Corporate | |||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||
| Advertising | $ | 352.7 | $ | 360.5 | $ | 316.5 | $ | 323.0 | $ | 36.2 | $ | 37.5 | $ | — | $ | — | |||||||||||||||
| Other selling and marketing | 295.8 | 287.5 | 169.5 | 161.1 | 123.4 | 122.3 | 2.9 | 4.1 | |||||||||||||||||||||||
| General, administrative and other | 281.4 | 324.9 | 127.3 | 143.6 | 57.8 | 59.9 | 96.3 | 121.4 | |||||||||||||||||||||||
| Total operating expense | $ | 929.9 | $ | 972.9 | $ | 613.3 | $ | 627.7 | $ | 217.4 | $ | 219.7 | $ | 99.2 | $ | 125.5 | |||||||||||||||
OPERATING INCOME
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Margin Change | |||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | Operating Income | Operating Margin | Operating Income | Operating Margin | 2020 vs 2019 | ||||||||||||||||||||||||||||||||||||||||||
| North America | $ | 591.4 | 18.7 | % | $ | 349.9 | 13.4 | % | 5.3 | % | |||||||||||||||||||||||||||||||||||||
| International | 127.6 | 24.6 | % | 110.3 | 22.0 | % | 2.6 | % | |||||||||||||||||||||||||||||||||||||||
| 719.0 | 460.2 | ||||||||||||||||||||||||||||||||||||||||||||||
| Corporate expenses | (186.9) | (113.5) | |||||||||||||||||||||||||||||||||||||||||||||
| Total operating income | $ | 532.1 | 14.5 | % | $ | 346.7 | 11.2 | % | 3.3 | % | |||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | Margin Change | |||||||||||||||||||||||
| (in millions, except percentages) | Operating Income | Operating Margin | Operating Income | Operating Margin | Operating Income | Operating Margin | 2017 vs 2016 | 2016 vs 2015 | ||||||||||||||||||
| North America | $ | 273.2 | 12.6 | % | $ | 411.8 | 16.0 | % | $ | 335.6 | 13.0 | % | (3.4 | )% | 3.0 | % | ||||||||||
| International | 104.9 | 18.1 | % | 97.6 | 17.5 | % | 96.3 | 16.7 | % | 0.6 | % | 0.8 | % | |||||||||||||
| 378.1 | 509.4 | 431.9 | ||||||||||||||||||||||||
| Corporate expenses | (89.7 | ) | (99.0 | ) | (125.4 | ) | ||||||||||||||||||||
| Total operating income | $ | 288.4 | 10.5 | % | $ | 410.4 | 13.1 | % | $ | 306.5 | 9.7 | % | (2.6 | )% | 3.4 | % | ||||||||||
Year ended December 31, 20172020 compared to year ended December 31, 20162019
Operating income decreased $122.0 million and operating margin declined 260 basis points. The decrease was driven by the following:
•North America operating income increased $76.2$241.5 million and operating margin improved 300530 basis points. The improvement in operating margin was primarily driven by improved gross margin of 230 basis points and an improvement in operating expense leverage of 50310 basis points.
points, the improvement in gross margin of 170 basis points and lower customer-related charges. In 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates, whereas in the same prior year period, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting liquidity issues of Mattress PAL's affiliates.•International operating income increased $1.3$17.3 million and operating margin improved 80260 basis points. The improvement in operating margin was primarily driven by improvedthe improvement in gross margin of 90210 basis points and improved operating expense leverage of 180 basis points.
These improvements were offset by $3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and $2.9 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.•Corporate operating expenses decreased $26.3increased $73.4 million, as discussed above, which improvednegatively impacted our consolidated operating margin by 80200 basis points.
The increase in operating expenses was primarily driven by $49.4 million of non-recurring amortization for our long-term aspirational plan stock-based compensation. Additionally, we reached the maximum payout for our 2020 performance-based stock compensation and annual incentive compensation plans.INTEREST EXPENSE, NET
| Year Ended December 31, | Percent change | ||||||||||||||||||||||||||||
| (in millions, except percentages) | 2020 | 2019 | 2020 vs 2019 | ||||||||||||||||||||||||||
| Interest expense, net | $ | 77.0 | $ | 85.7 | (10.2) | % | |||||||||||||||||||||||
| Year Ended December 31, | Percent change | ||||||||||||||||
| (in millions, except percentages) | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | ||||||||||||
| Interest expense, net | $ | 108.0 | $ | 91.6 | $ | 102.5 | 17.9 | % | (10.6 | )% | |||||||
Year ended December 31, 20172020 compared to year ended December 31, 20162019
Interest expense, net, decreased $10.9$8.7 million, or 10.6%10.2%. During 2015, we recorded $12.0 millionThe decrease in interest expense, net, was primarily driven by reduced average levels of accelerated amortization of deferred financing costs associated with the $493.8 million voluntary prepaymentsoutstanding debt and lower interest rates on our 2012 Credit Agreement, subsequent to the issuancevariable rate debt.
32
Table of $450 million aggregate principal amount of 2023 Senior Notes. Refer to Note 7, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 for additional information. During 2016, we incurred approximately $6.4 million of interest expense related to non-income tax obligations and accelerated customer collections in a Latin American subsidiary. During 2015, we incurred approximately $6.4 million of interest expense related to non-income tax obligations and accelerated customer collections in a Latin American subsidiary.Contents
| Year Ended December 31, | Percent change | ||||||||||||||||
| (in millions, except percentages) | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | ||||||||||||
| Other (income) expense, net | $ | (8.0 | ) | $ | (0.2 | ) | $ | 12.9 | 3,900.0 | % | (101.6 | )% | |||||
INCOME TAXESTAX PROVISION
| Year Ended December 31, | Percent change | ||||||||||||||||
| (in millions, except percentages) | 2020 | 2019 | 2020 vs 2019 | ||||||||||||||
| Income tax provision | $ | 102.6 | $ | 74.7 | 37.3 | % | |||||||||||
| Effective tax rate | 22.7 | % | 28.1 | % | (5.4) | % | |||||||||||
| Year Ended December 31, | Percent change | ||||||||||||||||
| (in millions, except percentages) | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | ||||||||||||
| Income tax | $ | 47.7 | $ | 86.8 | $ | 125.4 | (45.0 | )% | (30.8 | )% | |||||||
| Effective tax rate | 25.3 | % | 31.9 | % | 65.6 | % | (6.6 | )% | (33.7 | )% | |||||||
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.
Year ended December 31, 20172020 compared to year ended December 31, 20162019
Our income tax provision decreased $39.1increased $27.9 million and ourdue to an increase in income before income taxes, net of the favorable impact of discrete items. Our 2020 effective tax rate decreased 660as compared to 2019 by 540 basis points. The decrease in effective tax rate from 2016as compared to 2017 is primarily the result ofU.S. federal statutory tax rate for the year ending December 31, 2020 included a net favorable effectimpact of discrete items, primarily related to the implementation of income tax regulations in 2020 that favorably impacted our taxable global intangible low-taxed income ("GILTI") starting from the enactment of U.S. Tax Reform Actyear ending December 31, 2018 onward and the associated revaluationvesting of deferred incomecertain stock compensation under our incentive stock compensation plan. The effective tax assetsrate as compared to the U.S. federal statutory tax rate for the year ended December 31, 2019 included net unfavorable discrete items primarily related to the sale of a certain interest in our Asia-Pacific joint venture and liabilities, net of the unfavorable impact of the Transition Tax. The 2017 income tax provision also included an unfavorable impact of charges at a Latin American subsidiary. certain stock compensation.
Refer to Note 13,12, “Income Taxes,” in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report for further information.
Liquidity and Capital Resources
Liquidity
Our principal sources of funds are cash flows from operations, supplemented with borrowings made pursuant to our credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, capital expenditures and working capital needs.
At December 31, 2017, we had working capital of $30.5 million, including2020, total cash and cash equivalents were $65.0 million, of $41.9which $32.1 million as compared to working capitalwas held in the U.S. and $32.9 million was held by subsidiaries outside of $106.6 million including $65.7 million inthe U.S. The amount of cash and cash equivalents as of December 31, 2016.
Cash Provided by the timing of payments to vendors. Accrued expenses and other current liabilities decreases are primarily driven by the funding of employee compensation programs.(Used in) Continuing Operations
The table below presents net cash provided by (used in) operating, investing and financing activities from continuing operations for the years ended December 31, 2017, 20162020 and 2015.2019.
| Year Ended December 31, | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | ||||||||||||||||||
| Net cash provided by (used in) continuing operations: | ||||||||||||||||||||
| Operating activities | $ | 654.7 | $ | 314.8 | ||||||||||||||||
| Investing activities | (146.6) | (90.2) | ||||||||||||||||||
| Financing activities | (522.6) | (203.2) | ||||||||||||||||||
| (in millions) | 2017 | 2016 | 2015 | |||||||||
| Net cash provided by (used in): | ||||||||||||
| Operating activities | $ | 222.9 | $ | 165.5 | $ | 234.2 | ||||||
| Investing activities | (62.1 | ) | (62.4 | ) | (59.7 | ) | ||||||
| Financing activities | (175.2 | ) | (185.1 | ) | (90.7 | ) | ||||||
Cash provided by operating activities from continuing operations increased $57.4$339.9 million in 20172020 as compared to 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. During 2016, we paid a $92.0 million deposit to the Danish Tax Authority ("SKAT"), related to the Danish Tax Matter. The remaining increase in cash provided by operating assets and liabilities was primarily due to changes in accounts payable, inventories, and deferred income taxes. During 2017, we used operating cash of $35.3 million to fund the working capital needs of a Latin American subsidiary, including the repayment of non-income tax obligations and local financing arrangements. Cash provided by operating activities includes $9.3 million for payments received pursuant to the transition agreements with Mattress Firm. In 2016, we recorded a loss on extinguishment of debt of $47.2 million associated with financing activities. period.
Cash used in investing activities decreased $0.3from continuing operations increased $56.4 million in 20172020 as compared to 2016.2019. The decreaseincrease in cash used in investing activities is due to an increase in capital expenditures, which iswas primarily due to cash used to acquire the phasing ofSherwood Bedding business and planned capital projects, offset by $4.9 million in proceeds related to the saleexpenditures.
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Cash used in financing activities decreased $9.9from continuing operations increased $319.4 million in 20172020 as compared to 2016.2019. In 2017,2020, we maderepurchased $331.8 million of our common stock, which included repurchases of $285.9 million under our share repurchase program and $45.9 million which was withheld to satisfy tax withholding obligations related to stock compensation. In 2019, we repurchased $105.7 million of our common stock, which included repurchases of $102.3 million under our share repurchase program and $3.4 million which was withheld to satisfy tax withholding obligations related to stock compensation. In 2020, we had net repayments of $138.6$184.5 million on our credit facilities, as compared to net borrowingsrepayments of $365.6$104.3 million in 2016. This decrease was primarily offset2019.
Cash Used in Discontinued Operations
Net cash provided by a decrease in share repurchases of $490.1 million in 2017 as compared to 2016. Additionally, we incurred other costs associated with the(used in) operating, investing and financing activities in 2016. Refer to Note 7, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8from discontinued operations for additional information.the years ended December 31, 2020 and 2019 was not material.
Capital Expenditures
Capital expenditures totaled $67.0$111.3 million and $88.2 million for the year ended December 31, 20172020 and $62.4 million for the year ended December 31, 2016.2019, respectively. We currently expect our 20182021 capital expenditures to be approximately $65$125 million to $75$140 million, which includes investments in our Canadian ERP project, investments in our domestic manufacturing facilitiesOEM business and investments in other information technology.
Indebtedness
Our total debt decreased to $1,762.5$1,370.3 million as of December 31, 20172020 from $1,901.0$1,547.0 million as of December 31, 2016. As2019. Total availability under our revolving senior secured credit facility was $424.9 million as of December 31, 2017, we had no borrowings outstanding under our revolving credit facility, and total availability under the revolver was $477.4 million after giving effect to letters of credit outstanding of $22.6 million.2020, which matures in 2024. Refer to Note 7,5, “Debt,” in our Consolidated Financial Statements included in Part II, ITEM 8 for further discussion of our debt.
As of December 31, 2017,2020, our ratio of consolidated funded debtindebtedness less qualifiednetted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure defined in accordance with our 2016the 2019 Credit Agreement was 3.91 times,1.68 times. This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio as set forth in the 20162019 Credit Agreement, which limits this ratio to 5.00 times. As of December 31, 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 debt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends. The 20162019 Credit Agreement, 20262023 Senior Notes and 20232026 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 adjusted EBITDA per credit facility remains below 3.5 times. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated funded debtindebtedness less qualifiednetted cash to adjusted EBITDA per credit facility is above 3.5 times. The limit on restricted payments under the 20162019 Credit Agreement, 2023 Senior Notes and 2026 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted.
For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated funded debtindebtedness less qualifiednetted cash to adjusted EBITDA calculated in accordance with our 20162019 Credit Agreement. Both consolidated funded debtindebtedness and adjusted EBITDA as used in accordance withdiscussion of the our 20162019 Credit Agreement are terms that are not recognized under GAAP and do not purport to be alternatives to net income as a measure of operating performance or total debt.
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.
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The Senior Notes rank equally with or senior to all debt of Tempur Sealy International and the Obligor Group, but are effectively junior to all secured debt, including obligations under the 2019 Credit Agreement, to the extent of the value of the assets securing such debt. Subject to certain restrictions, Tempur Sealy International and the restricted subsidiaries under the applicable indenture may incur additional secured debt. Claims of creditors of non-guarantor subsidiaries, including trade creditors, and creditors holding debt and guarantees issued by those subsidiaries, and claims of preferred stockholders (if any) of those subsidiaries generally will have priority with respect to the assets and earnings of those subsidiaries over the claims of creditors of the holders of the Senior Notes. The Senior Notes and each guarantee are therefore effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of non-guarantor subsidiaries.
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 Company has accounted for its investments in its subsidiaries under the equity method.
The summarized financial information for the Obligor Group follows.
| Year Ended | |||||
| December 31, 2020 | |||||
| Obligor Group | |||||
| (in millions) | |||||
| Net sales to unrelated parties | $ | 2,902.6 | |||
| Net sales to non-obligor subsidiaries | 67.0 | ||||
| Gross profit | 1,274.4 | ||||
| Income from continuing operations | 253.6 | ||||
| Net income attributable to Tempur Sealy International, Inc. | 252.6 | ||||
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| Obligor Group | |||||
| December 31, 2020 | |||||
| (in millions) | |||||
| ASSETS | |||||
| Receivables due from non-obligor subsidiaries | $ | 13.8 | |||
| Other current assets | 418.4 | ||||
| Total current assets | 432.2 | ||||
| Loan receivable from non-obligor subsidiaries | 184.8 | ||||
| Goodwill and other intangible assets, net | 1,092.5 | ||||
| Other non-current assets | 741.5 | ||||
| Total non-current assets | 2,018.8 | ||||
| LIABILITIES | |||||
| Payables due to non-obligor subsidiaries | 15.2 | ||||
| Other current liabilities | 618.5 | ||||
| Total current liabilities | 633.7 | ||||
| Loan payable to non-obligor subsidiaries | 14.5 | ||||
| Other non-current liabilities | 1,689.2 | ||||
| Total non-current liabilities | $ | 1,703.7 | |||
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. The Board of Directors authorized increases to our share repurchase authorization of $194.2 million and $168.7 million during February and October 2020, respectively. For the year ended December 31, 2020, we had repurchased 6.5 million shares under our share repurchase program for approximately $285.9 million and had approximately $201.6 million remaining under our share repurchase program. In February 2021, the Board of Directors authorized an increase to our share repurchase authorization to bring the total authorization to $400.0 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.
In 2021, subject to market conditions, we expect to repurchase 6.0% of common shares outstanding. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," of this Report.
Future Liquidity Sources and Uses
As of December 31, 2020, we had $519.2 million of liquidity, including $65.0 million of cash on hand and $424.9 million available under our revolving senior secured credit facility. We also had availability of $29.3 million under our securitization facility. 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.
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Our capital allocation plan is focused on the following to drive shareholder value:
•Invest an incremental $150 million of capital expenditures by 2023 to support our OEM business;
•Initiate a quarterly cash dividend beginning in early 2021, subject to approval by the Board of Directors. For the first quarter of 2021, the Board of Directors has declared a dividend of $0.07 per share. The dividend is payable on March 12, 2021 to shareholders of record as of February 25, 2021;
•Repurchase 6.0% of our common stock outstanding per year in the near-term, depending on market conditions; and
•Evaluate acquisition opportunities with a focus on strategic acquisitions similar to those we have completed over the past few years.
As of December 31, 2020, we had $1,370.3 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $1,306.7 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 1.68 times for the year ended December 31, 2020, the lowest in our history. Our target range for our ratio of consolidated indebtedness less netted cash, which is a non-GAAP financial measure, is 2.0 to 3.0 times. Total cash interest payments related to our borrowings are expected to be between approximately $55 million to $60 million in 2021.
On November 9, 2020, we redeemed $200.0 million of our $450.0 million issued and outstanding 2023 Senior Notes at 101.406% of their principal amount, plus the accrued and unpaid interest. Additionally, we redeemed the remaining $250.0 million at 101.406% of their principal amount, plus the accrued and unpaid interest in the first quarter of 2021.
The 2019 Credit Agreement provides for a $425.0 million revolving credit facility, a $425.0 million term loan facility, and an incremental facility in an aggregate amount of up to $550.0 million plus the amount of certain prepayments plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $60.0 million sub-facility for the issuance of letters of credit. On February 2, 2021 we entered into an amendment to our 2019 Credit Agreement, which provides for an increase in the aggregate commitments under our revolving credit facility from $425.0 million to $725.0 million. We expect to use the revolving credit facility from time to time to finance working capital needs and for general corporate purposes.
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 I of this Report.
Contractual Obligations
Our contractual obligations and other commercial commitments as of December 31, 2020 are summarized below:
| (in millions) | Payment Due By Period | |||||||||||||||||||||||||||||||||||||||||||
| Contractual Obligations | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total Obligations | |||||||||||||||||||||||||||||||||||||
Debt (1) | $ | 66.4 | $ | 21.3 | $ | 31.9 | $ | 579.3 | $ | — | $ | 600.0 | $ | 1,298.9 | ||||||||||||||||||||||||||||||
| Letters of credit | 23.4 | — | — | — | — | — | 23.4 | |||||||||||||||||||||||||||||||||||||
Interest payments (2) | 42.4 | 40.0 | 39.1 | 38.0 | 31.6 | 15.1 | 206.2 | |||||||||||||||||||||||||||||||||||||
| Operating lease obligations | 74.1 | 67.9 | 55.5 | 46.0 | 39.3 | 112.3 | 395.1 | |||||||||||||||||||||||||||||||||||||
Finance lease obligations (3) | 11.4 | 10.2 | 8.1 | 6.4 | 5.8 | 29.5 | 71.4 | |||||||||||||||||||||||||||||||||||||
| Pension obligations | 1.0 | 1.1 | 1.2 | 1.2 | 1.3 | 36.7 | 42.5 | |||||||||||||||||||||||||||||||||||||
Total (4) | $ | 218.7 | $ | 140.5 | $ | 135.8 | $ | 670.9 | $ | 78.0 | $ | 793.6 | $ | 2,037.5 | ||||||||||||||||||||||||||||||
(1)Debt excludes finance lease obligations and deferred financing costs. In the first quarter of 2021, we redeemed the remaining $250.0 million of the 2023 Notes, principally funded by our revolving credit facility. Accordingly, we have re-characterized the outstanding balance of the 2023 Notes as maturing in 2024, consistent with the maturity date of our revolving credit facility.
(2)Interest payments represent obligations under our debt outstanding as of December 31, 2020, applying December 31, 2020 interest rates and assuming scheduled payments are paid as contractually required through maturity.
(3)The payments due for finance lease obligations excludes $18.5 million in future payments for interest.
(4)Uncertain tax positions are excluded from this table given the timing of payments cannot be reasonably estimated.
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We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
As of December 31, 2020, we had $519.2 million of liquidity, including $65.0 million of cash on hand and $424.9 million available under our revolving senior secured credit facility. We provide information regarding adjusted net income, adjusted EPS, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA, consolidated funded debt and consolidated funded debt less qualified cash, which are not recognized termsalso had availability of $29.3 million under GAAP and do not purport to be alternatives to net income and earnings per share as a measure of operating performance or an alternative to total debt.our securitization facility. We believe these non-GAAP measuresthat 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 investors with performance measures that better reflectadequate cash funds for our underlying operationsforeseeable working capital needs, necessary capital expenditures and trends, providingdebt service obligations.
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Our capital allocation plan is focused on the following to drive shareholder value:
•Invest an incremental $150 million of capital expenditures by 2023 to support our OEM business;
•Initiate a perspective not immediately apparent from net income and operating income. The adjustments we makequarterly cash dividend beginning in early 2021, subject to deriveapproval by the non-GAAP measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP measure, but which we do not consider to be the fundamental attributes or primary driversBoard of our business, including the exclusion of charges associated with the Mattress Firm termination inDirectors. For the first quarter of 2017, charges related2021, the Board of Directors has declared a dividend of $0.07 per share. The dividend is payable on March 12, 2021 to our Latin American operations and other costs.shareholders of record as of February 25, 2021;
•Evaluate acquisition opportunities with a focus on strategic acquisitions similar to those we have completed over the past few years.
As of December 31, 2020, we had $1,370.3 million in total debt outstanding and we use these measures along with the corresponding GAAPconsolidated indebtedness less netted cash, which is a non-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 usemeasure, of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP and these non-GAAP measures should be considered supplemental in nature and should not be construed as more significant than comparable 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 measures and a reconciliation to the nearest GAAP measure, please refer to the reconciliations$1,306.7 million. Leverage based on the following pages.
| Year Ended December 31, | |||||||||||||
| (in millions, except percentages and per common share amounts) | 2017 | 2016 | % Change | % Change Constant Currency (1) | |||||||||
| Net sales | $ | 2,754.4 | $ | 3,128.9 | (12.0 | )% | (12.0 | )% | |||||
| Net income | 151.4 | 190.6 | (20.6 | )% | (19.5 | )% | |||||||
Adjusted net income (1) | 175.2 | 242.4 | (27.7 | )% | (26.9 | )% | |||||||
| EPS | 2.77 | 3.19 | (13.2 | )% | (11.9 | )% | |||||||
Adjusted EPS (1) | 3.20 | 4.05 | (21.0 | )% | (20.0 | )% | |||||||
EBITDA (1) | 401.7 | 505.7 | (20.6 | )% | (20.8 | )% | |||||||
Adjusted EBITDA (1) | 448.5 | 521.6 | (14.0 | )% | (14.2 | )% | |||||||
| Year Ended | |||||||
| (in millions, except per common share amounts) | December 31, 2017 | December 31, 2016 | |||||
| GAAP net income | $ | 151.4 | $ | 190.6 | |||
Latin American subsidiary charges (1) | 25.7 | 11.5 | |||||
Customer termination charges (2) | 25.9 | — | |||||
Other costs (3) | 3.4 | — | |||||
Restructuring costs (4) | — | 8.3 | |||||
Loss on extinguishment of debt (5) | — | 47.2 | |||||
Executive management transition and retention compensation (6) | — | 3.0 | |||||
Interest expense (7) | — | 2.1 | |||||
Integration costs (8) | — | 2.0 | |||||
Stock compensation benefit (9) | — | (3.8 | ) | ||||
Tax adjustments (10) | (31.2 | ) | (18.5 | ) | |||
| Adjusted net income | $ | 175.2 | $ | 242.4 | |||
| Adjusted earnings per share, diluted | $ | 3.20 | $ | 4.05 | |||
| Diluted shares outstanding | 54.7 | 59.8 | |||||
On November 9, 2020, we redeemed $200.0 million of our $450.0 million issued and outstanding 2023 Senior Notes at 101.406% of their principal amount, plus the accrued and unpaid interest. Additionally, we redeemed the remaining $250.0 million at 101.406% of their principal amount, plus the accrued and unpaid interest in the first quarter of 2021.
| FULL YEAR 2017 | ||||||||||||||||||||||||
| (in millions, except percentages) | Consolidated | Margin | North America (1) | Margin | International (2) | Margin | Corporate (3) | |||||||||||||||||
| Net sales | $ | 2,754.4 | $ | 2,173.8 | $ | 580.6 | $ | — | ||||||||||||||||
| Gross profit | $ | 1,140.7 | 41.4 | % | $ | 844.7 | 38.9 | % | $ | 296.0 | 51.0 | % | $ | — | ||||||||||
| Adjustments | 15.6 | 12.4 | 3.2 | — | ||||||||||||||||||||
| Adjusted gross profit | $ | 1,156.3 | 42.0 | % | $ | 857.1 | 39.4 | % | $ | 299.2 | 51.5 | % | $ | — | ||||||||||
| Operating income (expense) | $ | 288.4 | 10.5 | % | $ | 273.2 | 12.6 | % | $ | 104.9 | 18.1 | % | $ | (89.7 | ) | |||||||||
| Adjustments | 38.1 | 33.7 | 11.2 | (6.8 | ) | |||||||||||||||||||
| Adjusted operating income (expense) | $ | 326.5 | 11.9 | % | $ | 306.9 | 14.1 | % | $ | 116.1 | 20.0 | % | $ | (96.5 | ) | |||||||||
The following table sets forth2019 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 reconciliationamount of the Company's reported GAAP gross profit and operating income (expense)certain prepayments plus an additional unlimited amount subject to the calculation of adjusted gross profit and operating income (expense)compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $60.0 million sub-facility for the year ended December 31, 2016:
| FULL YEAR 2016 | ||||||||||||||||||||||||
| (in millions, except percentages) | Consolidated | Margin | North America (1) | Margin | International (2) | Margin | Corporate (3) | |||||||||||||||||
| Net sales | $ | 3,128.9 | $ | 2,570.1 | $ | 558.8 | $ | — | ||||||||||||||||
| Gross profit | $ | 1,307.5 | 41.8 | % | $ | 1,017.4 | 39.6 | % | $ | 290.1 | 51.9 | % | $ | — | ||||||||||
| Adjustments | 4.0 | 1.0 | 3.0 | — | ||||||||||||||||||||
| Adjusted gross profit | $ | 1,311.5 | 41.9 | % | $ | 1,018.4 | 39.6 | % | $ | 293.1 | 52.5 | % | $ | — | ||||||||||
| Operating income (expense) | $ | 410.4 | 13.1 | % | $ | 411.8 | 16.0 | % | $ | 97.6 | 17.5 | % | $ | (99.0 | ) | |||||||||
| Adjustments | 14.6 | 1.6 | 10.9 | 2.1 | ||||||||||||||||||||
| Adjusted operating income (expense) | $ | 425.0 | 13.6 | % | $ | 413.4 | 16.1 | % | $ | 108.5 | 19.4 | % | $ | (96.9 | ) | |||||||||
| Year Ended | ||||||||
| (in millions) | December 31, 2017 | December 31, 2016 | ||||||
| GAAP net income | $ | 151.4 | $ | 190.6 | ||||
| Interest expense, net | 108.0 | 91.6 | ||||||
Loss on extinguishment of debt (1) | — | 47.2 | ||||||
| Income taxes | 47.7 | 86.8 | ||||||
| Depreciation and amortization | 94.6 | 89.5 | ||||||
| EBITDA | $ | 401.7 | $ | 505.7 | ||||
| Adjustments: | ||||||||
Customer termination charges (2) | 34.3 | — | ||||||
Latin American subsidiary charges (3) | 9.1 | 5.1 | ||||||
Other costs (4) | 3.4 | — | ||||||
Restructuring costs (5) | — | 7.8 | ||||||
Integration costs (6) | — | 2.0 | ||||||
Executive management transition and retention compensation (7) | — | 1.0 | ||||||
| Adjusted EBITDA | $ | 448.5 | $ | 521.6 | ||||
| Consolidated funded debt less qualified cash | $ | 1,753.1 | $ | 1,879.5 | ||||
| Ratio of consolidated funded debt less qualified cash to Adjusted EBITDA | 3.91 times | 3.60 times | ||||||
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 adjusted EBITDA contains certain restrictionsany new business ventures or acquisitions that limit adjustmentswe 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 GAAP net income when calculating adjusted EBITDA. For the years ended December 31, 2017"Risk Factors" in ITEM 1A of Part I of this Report.
Contractual Obligations
Our contractual obligations and 2016, respectively, adjustments to GAAP net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2016 Credit Agreement.
| (in millions) | Payment Due By Period | |||||||||||||||||||||||||||||||||||||||||||
| Contractual Obligations | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total Obligations | |||||||||||||||||||||||||||||||||||||
Debt (1) | $ | 66.4 | $ | 21.3 | $ | 31.9 | $ | 579.3 | $ | — | $ | 600.0 | $ | 1,298.9 | ||||||||||||||||||||||||||||||
| Letters of credit | 23.4 | — | — | — | — | — | 23.4 | |||||||||||||||||||||||||||||||||||||
Interest payments (2) | 42.4 | 40.0 | 39.1 | 38.0 | 31.6 | 15.1 | 206.2 | |||||||||||||||||||||||||||||||||||||
| Operating lease obligations | 74.1 | 67.9 | 55.5 | 46.0 | 39.3 | 112.3 | 395.1 | |||||||||||||||||||||||||||||||||||||
Finance lease obligations (3) | 11.4 | 10.2 | 8.1 | 6.4 | 5.8 | 29.5 | 71.4 | |||||||||||||||||||||||||||||||||||||
| Pension obligations | 1.0 | 1.1 | 1.2 | 1.2 | 1.3 | 36.7 | 42.5 | |||||||||||||||||||||||||||||||||||||
Total (4) | $ | 218.7 | $ | 140.5 | $ | 135.8 | $ | 670.9 | $ | 78.0 | $ | 793.6 | $ | 2,037.5 | ||||||||||||||||||||||||||||||
(1)Debt excludes finance lease obligations and 2016. "Consolidateddeferred financing costs. In the first quarter of 2021, we redeemed the remaining $250.0 million of the 2023 Notes, principally funded debt" and "qualified cash" are terms usedby our revolving credit facility. Accordingly, we have re-characterized the outstanding balance of the 2023 Notes as maturing in our 2016 Credit Agreement for purposes of certain financial covenants.
| (in millions) | December 31, 2017 | December 31, 2016 | |||||
| Total debt, net | $ | 1,753.1 | $ | 1,888.1 | |||
Plus: Deferred financing costs (1) | 9.4 | 12.9 | |||||
| Total debt | 1,762.5 | 1,901.0 | |||||
| Plus: Letters of credit outstanding | 23.1 | 23.0 | |||||
| Consolidated funded debt | $ | 1,785.6 | $ | 1,924.0 | |||
| Less: | |||||||
Domestic qualified cash (2) | 18.4 | 12.7 | |||||
Foreign qualified cash (2) | 14.1 | 31.8 | |||||
| Consolidated funded debt less qualified cash | $ | 1,753.1 | $ | 1,879.5 | |||
(2)Interest payments represent obligations under our debt outstanding as of December 31, 2017, we had approximately $226.92020, applying December 31, 2020 interest rates and assuming scheduled payments are paid as contractually required through maturity.
(3)The payments due for finance lease obligations excludes $18.5 million remaining underin future payments for interest.
(4)Uncertain tax positions are excluded from this table given the existing share repurchase authorization. Stock repurchases under this program maytiming of payments cannot be made through open market transactions, negotiated purchasesreasonably estimated.
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We have no off-balance sheet arrangements that have or otherwise, at times andare reasonably likely to have a current or future effect on our financial condition, changes in such amounts as management deems appropriate. These repurchases may be funded by operating cash flows and/financial condition, revenues or borrowings under our debt arrangements. The timing and actual numberexpenses, results 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, modifiedoperations, liquidity, capital expenditures 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. capital resources.
Future Liquidity Sources and Uses
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Our capital allocation plan is focused on the following to drive shareholder value:
•Invest an incremental $150 million of capital expenditures by 2023 to support our OEM business;
•Initiate a quarterly cash dividend beginning in early 2021, subject to approval by the Board of Directors. For the first quarter of 2021, the Board of Directors has declared a dividend of $0.07 per share. The dividend is payable on March 12, 2021 to shareholders of record as of February 25, 2021;
•Repurchase 6.0% of our common stock outstanding per year in the near-term, depending on market conditions; and
•Evaluate acquisition opportunities with a focus on strategic acquisitions similar to those we have completed over the past few years.
As of December 31, 2020, we had $1,370.3 million in total debt outstanding and ourconsolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $1,306.7 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 $448.5 million1.68 times for the year ended December 31, 2017.2020, the lowest in our history. Our debt service obligations could, under certain circumstances, have material consequencestarget range for our ratio of consolidated indebtedness less netted cash, which is a non-GAAP financial measure, is 2.0 to our security holders. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, capital expenditures and working capital needs.3.0 times. Total cash interest payments related to our borrowings are expected to be between approximately $90$55 million to $95$60 million in 2018. Interest expense2021.
On November 9, 2020, we redeemed $200.0 million of our $450.0 million issued and outstanding 2023 Senior Notes at 101.406% of their principal amount, plus the accrued and unpaid interest. Additionally, we redeemed the remaining $250.0 million at 101.406% of their principal amount, plus the accrued and unpaid interest in the periods presented also includes non-cash amortizationfirst quarter of deferred financing costs and accretion on the 8.0% Sealy Notes that were retired in July 2016.2021.
Contractual Obligations
Our contractual obligations and other commercial commitments as of December 31, 20172020 are summarized below:
| (in millions) | Payment Due By Period | |||||||||||||||||||||||||||||||||||||||||||
| Contractual Obligations | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total Obligations | |||||||||||||||||||||||||||||||||||||
Debt (1) | $ | 66.4 | $ | 21.3 | $ | 31.9 | $ | 579.3 | $ | — | $ | 600.0 | $ | 1,298.9 | ||||||||||||||||||||||||||||||
| Letters of credit | 23.4 | — | — | — | — | — | 23.4 | |||||||||||||||||||||||||||||||||||||
Interest payments (2) | 42.4 | 40.0 | 39.1 | 38.0 | 31.6 | 15.1 | 206.2 | |||||||||||||||||||||||||||||||||||||
| Operating lease obligations | 74.1 | 67.9 | 55.5 | 46.0 | 39.3 | 112.3 | 395.1 | |||||||||||||||||||||||||||||||||||||
Finance lease obligations (3) | 11.4 | 10.2 | 8.1 | 6.4 | 5.8 | 29.5 | 71.4 | |||||||||||||||||||||||||||||||||||||
| Pension obligations | 1.0 | 1.1 | 1.2 | 1.2 | 1.3 | 36.7 | 42.5 | |||||||||||||||||||||||||||||||||||||
Total (4) | $ | 218.7 | $ | 140.5 | $ | 135.8 | $ | 670.9 | $ | 78.0 | $ | 793.6 | $ | 2,037.5 | ||||||||||||||||||||||||||||||
(1)Debt excludes finance lease obligations and deferred financing costs. In the first quarter of 2021, we redeemed the remaining $250.0 million of the 2023 Notes, principally funded by our revolving credit facility. Accordingly, we have re-characterized the outstanding balance of the 2023 Notes as maturing in 2024, consistent with the maturity date of our revolving credit facility.
(2)Interest payments represent obligations under our debt outstanding as of December 31, 2020, applying December 31, 2020 interest rates and assuming scheduled payments are paid as contractually required through maturity.
(3)The payments due for finance lease obligations excludes $18.5 million in future payments for interest.
(4)Uncertain tax positions are excluded from this table given the timing of payments cannot be reasonably estimated.
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| (in millions) | Payment Due By Period | ||||||||||||||||||||||||||||
| Contractual Obligations | 2018 | 2019 | 2020 | 2021 | 2022 | After 2022 | Total Obligations | ||||||||||||||||||||||
Debt (1) | $ | 30.0 | $ | 86.5 | $ | 52.5 | $ | 435.0 | $ | — | $ | 1,050.0 | $ | 1,654.0 | |||||||||||||||
| Letters of credit | 22.6 | — | — | — | — | — | 22.6 | ||||||||||||||||||||||
Interest payments (2) | 74.4 | 72.8 | 71.3 | 58.8 | 55.6 | 130.7 | 463.6 | ||||||||||||||||||||||
| Operating leases | 39.5 | — | 29.6 | 22.5 | 20.1 | 15.5 | 40.1 | 167.3 | |||||||||||||||||||||
| Capital lease obligations and other | 42.4 | 6.4 | 6.8 | 7.1 | 5.7 | 40.1 | 108.5 | ||||||||||||||||||||||
| Pension obligations | 1.0 | 1.0 | 1.1 | 1.1 | 1.2 | 26.7 | 32.1 | ||||||||||||||||||||||
Transition Tax (4) | 3.4 | 3.4 | 3.4 | 3.4 | 3.5 | 25.0 | 42.1 | ||||||||||||||||||||||
Total (3) | $ | 213.3 | $ | 199.7 | $ | 157.6 | $ | 525.5 | $ | 81.5 | $ | 1,312.6 | $ | 2,490.2 | |||||||||||||||
Non-GAAP Financial Information
We provide information regarding adjusted net income, adjusted EPS, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA per credit facility, consolidated indebtedness and consolidated indebtedness less netted cash, which are not recognized terms under GAAP and do not purport to be alternatives to net income, earnings per share, gross profit, gross margin, operating income (expense) and operating margin as a measure of operating performance or an alternative to total debt as a measure of liquidity. We believe these non-GAAP financial measures provide investors with performance measures that better reflect our underlying operations and trends, providing a perspective not immediately apparent from net income, gross profit, gross margin, operating income (expense) and operating margin. The adjustments we make to derive the non-GAAP financial measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP financial measure, but which we do not consider to be the fundamental attributes or primary drivers of our business.
We believe that exclusion of these items assists in providing a more complete understanding of our underlying results from continuing operations and trends, and we use these measures along with the corresponding GAAP financial measures to manage our business, to evaluate our consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP financial measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. These non-GAAP financial measures should be considered supplemental in nature and should not be construed as more significant than comparable financial measures defined by GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. For more information about these non-GAAP financial measures and a reconciliation to the nearest GAAP financial measure, please refer to the reconciliations on the following pages.
Key Highlights
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages and per common share amounts) | 2020 | 2019 | % Change | % Change Constant Currency (1) | |||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,676.9 | $ | 3,106.0 | 18.4 | % | 18.3 | % | |||||||||||||||||||||||||||||||||||||||
| Net income | $ | 348.8 | $ | 189.5 | 84.1 | % | 83.5 | % | |||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA per credit facility (1) | $ | 779.9 | $ | 508.1 | 53.5 | % | 53.2 | % | |||||||||||||||||||||||||||||||||||||||
| EPS | $ | 1.64 | $ | 0.86 | 90.7 | % | 90.7 | % | |||||||||||||||||||||||||||||||||||||||
Adjusted EPS (1) | $ | 1.91 | $ | 1.00 | 91.0 | % | 91.0 | % | |||||||||||||||||||||||||||||||||||||||
| (1) | Non-GAAP financial measure. Please refer to the reconciliations in the following tables. | |||||||
Adjusted Net Income and Adjusted EPS
A reconciliation of net income to adjusted net income and the calculation of adjusted EPS is provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the years ended December 31, 2020 and 2019.
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| Year Ended December 31, | |||||||||||
| (in millions, except per common share amounts) | 2020 | 2019 | |||||||||
| Net income | $ | 348.8 | $ | 189.5 | |||||||
Loss from discontinued operations, net of tax (1) | — | 1.4 | |||||||||
Aspirational plan amortization (2) | 49.4 | — | |||||||||
Customer-related charges (3) | 11.7 | 29.8 | |||||||||
Incremental operating costs (4) | 7.2 | — | |||||||||
Asset impairments (5) | 7.0 | — | |||||||||
Loss on extinguishment of debt (6) | 5.1 | — | |||||||||
Restructuring costs (7) | 3.8 | — | |||||||||
Accounting standard adoption (8) | 3.6 | — | |||||||||
Aspirational plan employer costs (9) | 2.3 | — | |||||||||
Facility expansion costs (10) | 0.6 | — | |||||||||
Charitable stock donation (11) | — | 8.9 | |||||||||
Acquisition-related costs and other (12) | — | 6.1 | |||||||||
Credit facility amendment (13) | — | 0.7 | |||||||||
Other income (14) | (2.3) | (7.2) | |||||||||
Tax adjustments (15) | (31.5) | (7.3) | |||||||||
| Adjusted net income | $ | 405.7 | $ | 221.9 | |||||||
| Adjusted earnings per share, diluted | $ | 1.91 | $ | 1.00 | |||||||
| Diluted shares outstanding | 212.3 | 221.6 | |||||||||
Adjusted net income included COVID-19 charges of $5.8 million, net of tax, and adjusted earnings per share of $0.03.
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| (2) | In the third quarter of 2020, we recognized $45.2 million of performance-based stock compensation amortization related to our long-term aspirational awards. The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020. We recognized an additional $4.2 million in the fourth quarter commensurate with the remaining requisite service period. | ||||
| (3) | 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 liquidity issues with Mattress PAL's affiliates. | ||||
| (4) | In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic. In the first quarter of 2020, we recorded $2.3 million of charges related to the global pandemic. | ||||
| (5) | 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. | ||||
| (6) | In the fourth quarter of 2020, we recognized $4.2 million of loss on extinguishment of debt | ||||
| (7) | We incurred $0.4 million and $3.4 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment, in the third and second quarter of 2020, respectively. | ||||
| (8) | In 2020, we recorded $3.6 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation. | ||||
| (9) | In the fourth quarter of 2020, we recognized $2.3 million of employer-related tax costs related to the aspirational plan compensation. | ||||
| (10) | In the third quarter of 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility. | ||||
| (11) | In the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities. | ||||
| (12) | In the first half of 2019, we recorded $6.1 million of acquisition-related and other costs, primarily related to post acquisition restructuring charges and professional fees incurred in connection with the acquisition of substantially all of the net assets of iMS by an affiliate of ours. | ||||
| (13) | In 2019, we recorded $0.7 million of professional fees in connection with the amendment of the 2019 Credit Agreement. | ||||
| (14) | In the fourth quarter of 2020, we recorded $2.3 million of other income related to the sale of a manufacturing facility. In the first quarter of 2019, we recorded $7.2 million of other income related to the sale of our interest | ||||
| (15) | Adjusted income tax provision represents the tax effects associated with the aforementioned items and | ||||
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 year ended December 31, 2020.
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| FULL YEAR 2020 | |||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | Consolidated | Margin | North America | Margin | International | Margin | Corporate | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,676.9 | $ | 3,159.2 | $ | 517.7 | $ | — | |||||||||||||||||||||||||||||||||
| Gross profit | $ | 1,638.4 | 44.6 | % | $ | 1,332.0 | 42.2 | % | $ | 306.4 | 59.2 | % | $ | — | |||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||||||||
Incremental operating costs (1) | 4.5 | 4.0 | 0.5 | — | |||||||||||||||||||||||||||||||||||||
Facility expansion costs (2) | 0.6 | 0.6 | — | — | |||||||||||||||||||||||||||||||||||||
| Total adjustments | 5.1 | 4.6 | 0.5 | — | |||||||||||||||||||||||||||||||||||||
| Adjusted gross profit | $ | 1,643.5 | 44.7 | % | $ | 1,336.6 | 42.3 | % | $ | 306.9 | 59.3 | % | $ | — | |||||||||||||||||||||||||||
| Operating income (expense) | $ | 532.1 | 14.5 | % | $ | 591.4 | 18.7 | % | $ | 127.6 | 24.6 | % | $ | (186.9) | |||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||||||||
Aspirational plan amortization (3) | 49.4 | — | — | 49.4 | |||||||||||||||||||||||||||||||||||||
Customer-related charges (4) | 11.7 | 11.7 | — | — | |||||||||||||||||||||||||||||||||||||
Incremental operating costs (1) | 7.2 | 4.3 | 2.9 | — | |||||||||||||||||||||||||||||||||||||
Asset impairments (5) | 7.0 | 7.0 | — | — | |||||||||||||||||||||||||||||||||||||
Restructuring costs (6) | 3.8 | — | 3.8 | — | |||||||||||||||||||||||||||||||||||||
Accounting standard adoption (7) | 3.6 | 3.6 | — | — | |||||||||||||||||||||||||||||||||||||
Aspirational plan employer costs (8) | 2.3 | — | — | 2.3 | |||||||||||||||||||||||||||||||||||||
Facility expansion costs (2) | 0.6 | 0.6 | — | — | |||||||||||||||||||||||||||||||||||||
| Total adjustments | 85.6 | 27.2 | 6.7 | 51.7 | |||||||||||||||||||||||||||||||||||||
| Adjusted operating income (expense) | $ | 617.7 | 16.8 | % | $ | 618.6 | 19.6 | % | $ | 134.3 | 25.9 | % | $ | (135.2) | |||||||||||||||||||||||||||
Operating income and adjusted operating income included $7.9 million of COVID-19 charges. The North America and International business segments included $6.3 million and $1.6 million of these charges, respectively.
| (2) | In the third quarter of 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility. | ||||
| (3) | In the third quarter of 2020, we recognized $45.2 million of performance-based stock compensation amortization related to our long-term aspirational awards. The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020. We recognized an additional $4.2 million in the fourth quarter commensurate with the remaining requisite service period. | ||||
| (4) | 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. | ||||
| (5) | 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. | ||||
| (6) | In 2020, we incurred $3.8 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment. | ||||
| (7) | In 2020, we recorded $3.6 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation. | ||||
| (8) | In the fourth quarter of 2020, we recognized $2.3 million of employer-related tax | ||||
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The following table sets forth the reconciliation of our operating income (expense) and operating margin to the calculation of adjusted operating income (expense) and adjusted operating margin for the year ended December 31, 2019:
| FULL YEAR 2019 | |||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | Consolidated | Margin | North America | Margin | International | Margin | Corporate | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,106.0 | $ | 2,603.5 | $ | 502.5 | $ | — | |||||||||||||||||||||||||||||||||
| Gross profit | $ | 1,342.2 | 43.2 | % | $ | 1,055.2 | 40.5 | % | $ | 287.0 | 57.1 | % | $ | — | |||||||||||||||||||||||||||
| Operating income (expense) | $ | 346.7 | 11.2 | % | $ | 349.9 | 13.4 | % | $ | 110.3 | 22.0 | % | $ | (113.5) | |||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||||||||
Customer-related charges (1) | 29.8 | 29.8 | — | — | |||||||||||||||||||||||||||||||||||||
Charitable stock donation (2) | 8.9 | 8.9 | — | — | |||||||||||||||||||||||||||||||||||||
Acquisition-related costs and other (3) | 6.1 | 1.7 | 0.3 | 4.1 | |||||||||||||||||||||||||||||||||||||
Credit facility amendment (4) | 0.7 | — | — | 0.7 | |||||||||||||||||||||||||||||||||||||
| Total adjustments | 45.5 | 40.4 | 0.3 | 4.8 | |||||||||||||||||||||||||||||||||||||
| Adjusted operating income (expense) | $ | 392.2 | 12.6 | % | $ | 390.3 | 15.0 | % | $ | 110.6 | 22.0 | % | $ | (108.7) | |||||||||||||||||||||||||||
| (1) | In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. | ||||
| (2) | In the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities. | ||||
| (3) | In the first half of 2019, we recorded $6.1 million of acquisition-related and other costs, primarily related to post acquisition restructuring charges and professional fees incurred in connection with the acquisition of substantially all of the net assets of iMS by an affiliate of ours. | ||||
| (4) | In the fourth quarter of 2019, we incurred $0.7 million of professional fees in connection with the amendment of the senior secured credit facility. | ||||
EBITDA, Adjusted EBITDA per Credit Facility and Consolidated Indebtedness Less Netted Cash
The following reconciliations are provided below:
•Net income to EBITDA and adjusted EBITDA per credit facility
•Ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility
•Total debt, net to consolidated indebtedness less netted cash
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"). 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 net income to the calculations of EBITDA and adjusted EBITDA per credit facility for the years ended December 31, 2020 and 2019:
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| Year Ended | |||||||||||
| (in millions) | December 31, 2020 | December 31, 2019 | |||||||||
| Net income | $ | 348.8 | $ | 189.5 | |||||||
| Interest expense, net | 77.0 | 85.7 | |||||||||
Loss on extinguishment of debt (1) | 5.1 | — | |||||||||
| Income tax provision | 102.6 | 74.7 | |||||||||
| Depreciation and amortization | 154.9 | 118.5 | |||||||||
Aspirational plan amortization (2) | 49.4 | — | |||||||||
| EBITDA | $ | 737.8 | $ | 468.4 | |||||||
| Adjustments: | |||||||||||
Loss from discontinued operations, net of tax (3) | — | 1.4 | |||||||||
Customer-related charges (4) | 11.7 | 29.8 | |||||||||
COVID-19 charges (5) | 7.9 | — | |||||||||
Incremental operating costs (6) | 7.2 | — | |||||||||
Asset impairments (7) | 7.0 | — | |||||||||
Restructuring costs (8) | 3.8 | — | |||||||||
Accounting standard adoption (9) | 3.6 | — | |||||||||
Aspirational plan employer costs (10) | 2.3 | — | |||||||||
Facility expansion costs (11) | 0.6 | — | |||||||||
Earnings from Sherwood prior to acquisition (12) | 0.3 | — | |||||||||
Charitable stock donation (13) | — | 8.9 | |||||||||
Acquisition-related costs and other (14) | — | 6.1 | |||||||||
Credit facility amendment (15) | — | 0.7 | |||||||||
Other income (16) | (2.3) | (7.2) | |||||||||
| Adjusted EBITDA per credit facility | $ | 779.9 | $ | 508.1 | |||||||
| Consolidated indebtedness less netted cash | $ | 1,306.7 | $ | 1,483.6 | |||||||
| Ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility | 1.68 times | 2.92 times | |||||||||
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| (1) | In the fourth quarter of 2020, we recognized $4.2 million of loss on extinguishment of debt associated with the redemption of the 2023 senior notes. In the third quarter of 2020, we recognized $0.9 million of loss on extinguishment of debt associated with the early repayment of the 364-day term loan. | ||||
| (2) | In the third quarter of 2020, we recognized $45.2 million of performance-based stock compensation amortization related to our long-term aspirational awards. The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020. We recognized an additional $4.2 million in the fourth quarter commensurate with the remaining requisite service period. | ||||
| (3) | 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. | ||||
| (4) | 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 | ||||
| (5) | In the second quarter of 2020, adjusted EBITDA per credit facility excluded $7.9 million of COVID-19 charges associated with temporarily closed company-owned retail stores and sales force retention costs. | ||||
| (6) | In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic. In the first quarter of 2020, we recorded $2.3 million of charges related to the global pandemic. | ||||
| (7) | 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. | ||||
| (8) | In 2020, we incurred $3.8 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment. | ||||
| (9) | In 2020, we recorded $3.6 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation. | ||||
| (10) | In the fourth quarter of 2020, we recognized $2.3 million of employer-related tax costs related to the aspirational plan compensation. | ||||
| (11) | In the third quarter of 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility. | ||||
| (12) | We completed the acquisition of Sherwood Bedding on January 31, 2020 and designated this subsidiary as restricted under the 2019 Credit Agreement. For covenant compliance purposes, the Company included $0.3 million of EBITDA from this subsidiary for the one month prior to acquisition in our calculation of adjusted EBITDA per credit facility for the trailing twelve months ended December 31, 2020. | ||||
| (13) | In the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities. | ||||
| (14) | In the first half of 2019, we recorded $6.1 million of acquisition-related and other costs, primarily related to post acquisition restructuring charges and professional fees incurred in connection with the acquisition of substantially all of the net assets of iMS by an affiliate of ours. | ||||
| (15) | In the fourth quarter of 2019, we incurred $0.7 million of professional fees in connection with the amendment of the senior secured credit facility. | ||||
| (16) | In the fourth quarter of 2020, we recorded $2.3 million of other income related to the sale of a manufacturing facility. In the first quarter of 2019, we recorded $7.2 million of other income related to the sale of our interest in a subsidiary of the Asia-Pacific joint venture. | ||||
Under the 2019 Credit Agreement, the definition of adjusted EBITDA (which we refer to as "adjusted EBITDA per credit facility") contains certain restrictions that limit adjustments to net income when calculating adjusted EBITDA. For the year ended December 31, 2020, our adjustments to net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2019 Credit Agreement.
The ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility was 1.68 times for the trailing twelve months ended December 31, 2020. The 2019 Credit Agreement requires us to maintain a ratio of consolidated indebtedness less netted cash to adjusted EBITDA of less than 5.00:1.00 times.
The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of December 31, 2020 and 2019. "Consolidated Indebtedness" and "Netted Cash" are terms used in the 2019 Credit Agreement for purposes of certain financial covenants.
| (in millions) | December 31, 2020 | December 31, 2019 | |||||||||
| Total debt, net | $ | 1,366.9 | $ | 1,540.0 | |||||||
Plus: Deferred financing costs (1) | 3.4 | 7.0 | |||||||||
| Consolidated indebtedness | 1,370.3 | 1,547.0 | |||||||||
Less: Netted cash (2) | 63.6 | 63.4 | |||||||||
| Consolidated indebtedness less netted cash | $ | 1,306.7 | $ | 1,483.6 | |||||||
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| (2) | Netted cash includes cash and cash equivalents for domestic and foreign subsidiaries designated as | ||||
Critical Accounting Policies and Estimates
Our management is responsible for our financial statements and has evaluated the accounting policies to be used in their preparation. Our management believes these policies are reasonable and appropriate. The following discussion identifies those accounting policies that we believe are critical in the preparation of our financial statements, the judgments and uncertainties affecting the application of those policies and the possibility that materially different amounts will be reported under different conditions or using different assumptions.
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates.
Revenue Recognition. See Note 1, "Summary of Significant Accounting Policies," in our Consolidated Financial Statements, included in Part II, ITEM 8 of this Report, for a complete discussion of our revenue recognition policies. Sales of product are recognized when persuasive evidencethe obligations under the terms of the contract with the customer are satisfied, which is generally when control of the product has transferred to the customer. Transferring control of each product sold is considered a separate performance obligation. We transfer control and recognize a sale when the product ships to the customer or when the customer receives the product based upon agreed shipping terms. Each unit sold is considered an arrangement exists, title passes to customers andindependent, unbundled performance obligation. We do not have any additional performance obligations other than product sales that are material in the risks and rewardscontext of ownership are transferred, the sales price is fixed or determinable, and collectability is reasonably assured.contract. We extend volume discounts to certain customers and reflect these amounts as a reduction of net sales.
We record an allowance for doubtful accounts receivablecredit losses for amounts due from third parties that we do not expect to collect. We estimate the allowancelosses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. Other factors considered included historical write-off experience, current and currentprojected economic conditions and also consider factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whetherterms.
The credit environment in which our customers operate has been relatively stable over the collection of a receivable is reasonably assured.past few years. Historically, less than 1.0% of net sales ultimately prove to be uncollectible. However, there have been signs of deterioration in the U.S. retail sector, with certain key retailer bankruptcies over the last few years. Total bad debt expense was $35.8 million in 2020, $29.3 million in 2019 and $31.3 million in 2018.
We regularly review the adequacy of our allowance for credit losses based on the latest information available and accrue losses from uncollectible receivables when such losses can reasonably be estimated. The allowance for credit losses is our best estimate of the amount of probable credit losses in our existing accounts receivable. Our accounts receivable are substantially current and there were no significant changes to the aging of receivables as a result of the impact of the global pandemic. The allowance for credit losses included in accounts receivable, net in the accompanying Consolidated Balance Sheets was $71.6 million and $71.9 million as of December 31, 2020 and 2019, respectively. If circumstances change, for example, due to the occurrence of higher-than-expected defaults or a significant adverse change in a major customer’s ability to meet our financial obligations, estimates of the recoverability of receivable amounts due could be reduced.
Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the amount and timing of future sales returns and uncollectible accounts. Our estimate of the amount and timing of sales returns and uncollectible accounts is based primarily on historical transaction experience.
45
We have not made any material changes in the accounting methodology we use to measure the estimated liability for sales returns and exchanges or doubtful accountscredit losses during the past three fiscal years. On January 1, 2020, we 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 adoption of this standard did not have a material impact on our consolidated financial statements.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to establish the liability for sales returns and exchanges and doubtful accounts.credit losses. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Income Taxes. Accounting for income taxes requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. These deferred taxes are measured by applying the provisions of tax laws in effect at the balance sheet date, including the impact of the U.S. Tax Reform Act.
We recognize deferred tax assets in our Consolidated Balance Sheets, and these deferred tax assets typically represent items deducted currently from operating income in the financial statements that will be deducted in future periods in tax returns. A valuation allowance is recorded against certain deferred tax assets to reduce the consolidated deferred tax asset to an amount that will, more likely than not, be realized in future periods. At December 31, 2020 the valuation allowance of $33.5 million was primarily related to certain tax attributes and various foreign jurisdictions. The valuation allowance is based, in part, on our estimate of future taxable income, the expected utilization of foreign and state tax loss carryforwards, and credits and the expiration dates of such tax loss carryforwards. Significant assumptions
We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are used in developingthen measured based on the analysislargest benefit that has a greater than 50% likelihood of being realized upon settlement. At December 31, 2020, our estimated gross unrecognized tax benefits were $118.6 million of which $106.0 million, if recognized, would favorably impact our future taxable income for purposes of determining the valuation allowance for deferred tax assets which, in our opinion, are reasonable under the circumstances.
We have been involved in a dispute with SKAT regarding the Danish Tax Matter for tax jurisdictions aroundyears 2001 through current. The royalty is paid by the world. We recognize liabilitiesU.S. subsidiary for anticipated taxesthe right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, taxes are and could be due. This liability is estimated based onproduction process.
During 2018, we negotiated a prescribed recognition threshold and measurement attributessettlement with SKAT (the "Settlement") for the financial statement recognition and measurements of a tax position taken or expected to be taken in a tax return. The resolution of tax matters for an amount that is different than the amount reserved would be recognized in our effective tax rate during the period in which such resolution occurs.
Our liability for the Danish Tax Matter uncertain tax position is incorporated hereinderived using a cumulative probability analysis with possible outcomes based on an evaluation of the facts and circumstances and applying the technical requirements applicable to U.S., Danish, and the international transfer pricing standards, taking into account both the U.S. and Danish income tax implications of such outcomes. For a description of these matters and additional information please refer to Note 12, "Income Taxes," to the accompanying Consolidated Financial Statements.
Goodwill and Indefinite-Lived Intangible Assets. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually as of October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred or when required by reference.accounting standards.
46
We test goodwill for impairment by comparing the book values to the fair value at the reporting unit level. Our reporting units are equivalent to our North America and International segments. We test individual indefinite-lived intangible assets by comparing the book values of each asset to the estimated fair value. If the fair value exceeds the carrying amount, then no impairment exists.
Using the quantitative approach, we make various estimates and assumptions in determining the estimated fair value of each reporting unit using a combination of discounted cash flow models and valuations based on earnings multiples for guideline public companies in each reporting unit’s industry peer group, when externally quoted market prices are not readily available. Discounted cash flow models are reliant on various assumptions, including projected business results, long-term growth factors and weighted-average cost of capital. Management judgement is involved in estimating these variables, and they include inherent uncertainties as they are forecasting future events. We perform sensitivity analyses by using a range of inputs to confirm the reasonableness of the long-term growth rate and weighted average cost of capital. Additionally, we compare the indicated equity value to our market capitalization and evaluate the resulting implied control premium/discount to determine if the estimated enterprise value is reasonable compared to external market indicators.
We have not made any material changes in 2020 to our reporting units or the accounting methodology we use to assess impairment loss on goodwill and indefinite-lived intangible assets.
The most recent annual impairment tests performed as of October 1, 2020 indicated that the fair values of each of our reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values. Despite that excess, however, impairment charges could still be required if a divestiture decision were made or other significant economic event were made or occurred with respect to one of our reporting units. Subsequent to our October 1, 2020 annual impairment test, no indications of impairment were identified.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill and indefinite-lived intangible assets. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate RiskExposures
We manage a portion of our exposure in foreign currency transactions through the use of foreign exchange forward contracts. Refer to Note 1(f), "Derivative Financial Instruments," to the accompanying Consolidated Financial Statements for a summary of our foreign exchange forward contracts as of December 31, 2017.2020.
As a result of our global operations, our earnings are exposed to changes in foreign currency exchange rates. Many of our foreign businesses operate in functional currencies other than the U.S. dollar. As the U.S. dollar strengthens relative to the Euro or other foreign currencies where we have operations, there will be a negative impact on our operating results upon translation of those foreign operating results into the U.S. dollar. Foreign currency exchange rate changes negativelypositively impacted our adjusted EBITDA per credit facility, which is a non-GAAP financial measure, by approximately 0.6%0.2% in the year ended December 31, 2017.2020. We do not hedge the translation of foreign currency operating results into the U.S. dollar.
We hedge a portion of our currency exchange exposure relating to foreign currency transactions with foreign exchange forward contracts. A sensitivity analysis indicates the potential loss in fair value on foreign exchange forward contracts outstanding at December 31, 2017,2020, resulting from a hypothetical 10.0% adverse change in all foreign currency exchange rates against the U.S. dollar, is approximately $3.5$8.0 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.
Effective June 30, 2018, we determined that the economy in Argentina is highly inflationary. Beginning July 1, 2018, the U.S. Dollar is the functional currency for our subsidiaries in Argentina. Remeasurement adjustments in a highly inflationary economy and other transactional gains and losses are reflected in net earnings and were not material for the year ended December 31, 2020. These subsidiaries are included in loss from discontinued operations, net of tax, on our Consolidated Statements of Income and are not material as of December 31, 2020.
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Interest Rate Risk
On December 31, 2017,2020, we had variable-rate debt of $639.6$448.9 million. Holding other variables constant, including levels of indebtedness,A sensitivity analysis using a one hundred basis point increase in interest rates on our variable-rate debt as of December 31, 2020, and holding other variables consistent, would cause an estimated reduction in income before income taxes of $6.4$4.5 million. In light ofWe continue to evaluate the continued favorable interest rate environment we will evaluateand look for opportunities to improve our debt structure and minimize our interest rate risk. We do not have interest rate swap agreements in effect to hedge interest rate risk in our variable rate debt.and expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| INDEX TO HISTORICAL FINANCIAL STATEMENTS | |||||
48
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Tempur Sealy International, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tempur Sealy International, Inc. and Subsidiaries (the Company) as of December 31, 20172020 and 2016, and2019, the related consolidated statements of income, comprehensive income, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated March 1, 2018,February 19, 2021, expressed an unqualified opinion thereon.
Adoption of Accounting Standards
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.
49
| Danish Tax Matter Uncertain Tax Position | |||||
| Description of the Matter | As described in Note 12 to the consolidated financial statements, the Company’s liability for the Danish Tax Matter uncertain tax position, including interest and penalties, was approximately $187.5 million as of December 31, 2020. The Company's liability for the Danish Tax Matter uncertain tax position is derived using the cumulative probability analysis with possible outcomes based on an evaluation of the facts and circumstances and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standards, taking into account both the U.S. and Danish income tax implications of such outcomes. Auditing the measurement of the liability for the Danish Tax Matter uncertain tax position was complex and highly judgmental due to the significant judgment to measure the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to measure the liability for the Danish Tax Matter uncertain tax position. For example, we tested management's review of inputs and calculations of the liability for the Danish Tax Matter uncertain tax position. To test the Company’s measurement of the liability for the Danish Tax Matter uncertain tax position, we involved our tax professionals to evaluate the pricing conclusions reached by the Company. For example, we compared the transfer pricing methodology utilized by management to alternative methodologies. We also reviewed the Company’s correspondence with the relevant tax authorities and any third-party professional and legal advice obtained by the Company. In addition, we used our knowledge of international, domestic and local income tax laws, as well as settlement activity from the relevant income tax authorities, to evaluate the Company’s measurement of the liability for the Danish Tax Matter uncertain tax position. | ||||
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2002.
Louisville, Kentucky
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per common share amounts)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net sales | $ | 3,676.9 | $ | 3,106.0 | $ | 2,702.9 | |||||||||||
| Cost of sales | 2,038.5 | 1,763.8 | 1,582.2 | ||||||||||||||
| Gross profit | 1,638.4 | 1,342.2 | 1,120.7 | ||||||||||||||
| Selling and marketing expenses | 740.2 | 666.3 | 587.8 | ||||||||||||||
| General, administrative and other expenses | 382.5 | 345.1 | 294.2 | ||||||||||||||
| Equity income in earnings of unconsolidated affiliates | (16.4) | (15.9) | (17.6) | ||||||||||||||
| Operating income | 532.1 | 346.7 | 256.3 | ||||||||||||||
| Other expense, net: | |||||||||||||||||
| Interest expense, net | 77.0 | 85.7 | 92.3 | ||||||||||||||
| Loss on extinguishment of debt | 5.1 | 0 | 0 | ||||||||||||||
| Other income, net | (2.4) | (4.5) | (1.0) | ||||||||||||||
| Total other expense, net | 79.7 | 81.2 | 91.3 | ||||||||||||||
| Income from continuing operations before income taxes | 452.4 | 265.5 | 165.0 | ||||||||||||||
| Income tax provision | (102.6) | (74.7) | (49.6) | ||||||||||||||
| Income from continuing operations | 349.8 | 190.8 | 115.4 | ||||||||||||||
| Loss from discontinued operations, net of tax | 0 | (1.4) | (17.8) | ||||||||||||||
| Net income before non-controlling interests | 349.8 | 189.4 | 97.6 | ||||||||||||||
| Less: Net income (loss) attributable to non-controlling interests | 1.0 | (0.1) | (2.9) | ||||||||||||||
| Net income attributable to Tempur Sealy International, Inc. | $ | 348.8 | $ | 189.5 | $ | 100.5 | |||||||||||
| Earnings per common share: | |||||||||||||||||
| Basic | |||||||||||||||||
| Earnings per share for continuing operations | $ | 1.68 | $ | 0.87 | $ | 0.54 | |||||||||||
| Loss per share for discontinued operations | 0 | 0 | (0.08) | ||||||||||||||
| Earnings per share | $ | 1.68 | $ | 0.87 | $ | 0.46 | |||||||||||
| Diluted | |||||||||||||||||
| Earnings per share for continuing operations | $ | 1.64 | $ | 0.86 | $ | 0.54 | |||||||||||
| Loss per share for discontinued operations | 0 | 0 | (0.08) | ||||||||||||||
| Earnings per share | $ | 1.64 | $ | 0.86 | $ | 0.46 | |||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 207.9 | 218.0 | 217.6 | ||||||||||||||
| Diluted | 212.3 | 221.6 | 220.4 | ||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net sales | $ | 2,754.4 | $ | 3,128.9 | $ | 3,154.6 | |||||
| Cost of sales | 1,613.7 | 1,821.4 | 1,905.4 | ||||||||
| Gross profit | 1,140.7 | 1,307.5 | 1,249.2 | ||||||||
| Selling and marketing expenses | 601.3 | 648.5 | 648.0 | ||||||||
| General, administrative and other expenses | 273.0 | 281.4 | 324.9 | ||||||||
| Customer termination charges, net | 14.4 | — | — | ||||||||
| Equity income in earnings of unconsolidated affiliates | (15.6 | ) | (13.3 | ) | (11.9 | ) | |||||
| Royalty income, net of royalty expense | (20.8 | ) | (19.5 | ) | (18.3 | ) | |||||
| Operating income | 288.4 | 410.4 | 306.5 | ||||||||
| Other expense, net: | |||||||||||
| Interest expense, net | 108.0 | 91.6 | 102.5 | ||||||||
| Loss on extinguishment of debt | — | 47.2 | — | ||||||||
| Other (income) expense, net | (8.0 | ) | (0.2 | ) | 12.9 | ||||||
| Total other expense, net | 100.0 | 138.6 | 115.4 | ||||||||
| Income before income taxes | 188.4 | 271.8 | 191.1 | ||||||||
| Income tax provision | (47.7 | ) | (86.8 | ) | (125.4 | ) | |||||
| Net income before non-controlling interests | 140.7 | 185.0 | 65.7 | ||||||||
| Less: Net (loss) income attributable to non-controlling interests | (10.7 | ) | (5.6 | ) | 1.2 | ||||||
| Net income attributable to Tempur Sealy International, Inc. | $ | 151.4 | $ | 190.6 | $ | 64.5 | |||||
| Earnings per common share: | |||||||||||
| Basic | $ | 2.80 | $ | 3.23 | $ | 1.05 | |||||
| Diluted | $ | 2.77 | $ | 3.19 | $ | 1.03 | |||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 54.0 | 59.0 | 61.7 | ||||||||
| Diluted | 54.7 | 59.8 | 62.6 | ||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net income before non-controlling interests | $ | 349.8 | $ | 189.4 | $ | 97.6 | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Foreign currency translation adjustments | 23.6 | 9.5 | (18.9) | ||||||||||||||
| Net change in pension benefits, net of tax | (1.4) | (1.9) | (0.9) | ||||||||||||||
| Other comprehensive income (loss), net of tax | 22.2 | 7.6 | (19.8) | ||||||||||||||
| Comprehensive income | 372.0 | 197.0 | 77.8 | ||||||||||||||
| Less: Comprehensive income (loss) attributable to non-controlling interests | 1.0 | (0.1) | (2.9) | ||||||||||||||
| Comprehensive income attributable to Tempur Sealy International, Inc. | $ | 371.0 | $ | 197.1 | $ | 80.7 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income before non-controlling interests | $ | 140.7 | $ | 185.0 | $ | 65.7 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | 29.1 | (0.3 | ) | (52.7 | ) | ||||||
| Net change in unrecognized gain on interest rate swap, net of tax | — | — | 0.7 | ||||||||
| Net change in pension benefits, net of tax | (0.5 | ) | (0.8 | ) | 1.0 | ||||||
| Unrealized (loss) income on cash flow hedging derivatives, net of tax | (0.6 | ) | (6.0 | ) | 5.3 | ||||||
| Other comprehensive income (loss), net of tax | 28.0 | (7.1 | ) | (45.7 | ) | ||||||
| Comprehensive income | 168.7 | 177.9 | 20.0 | ||||||||
| Less: Comprehensive (loss) income attributable to non-controlling interests | (10.7 | ) | (5.6 | ) | 1.2 | ||||||
| Comprehensive income attributable to Tempur Sealy International, Inc. | $ | 179.4 | $ | 183.5 | $ | 18.8 | |||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
| December 31, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 65.0 | $ | 64.9 | |||||||
| Accounts receivable, net | 383.7 | 372.0 | |||||||||
| Inventories | 312.1 | 260.5 | |||||||||
| Prepaid expenses and other current assets | 207.6 | 202.8 | |||||||||
| Total Current Assets | 968.4 | 900.2 | |||||||||
| Property, plant and equipment, net | 507.9 | 435.8 | |||||||||
| Goodwill | 766.3 | 732.3 | |||||||||
| Other intangible assets, net | 630.1 | 641.4 | |||||||||
| Operating lease right-of-use assets | 304.3 | 245.4 | |||||||||
| Deferred income taxes | 13.5 | 14.1 | |||||||||
| Other non-current assets | 118.1 | 92.6 | |||||||||
| Total Assets | $ | 3,308.6 | $ | 3,061.8 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 324.1 | $ | 251.7 | |||||||
| Accrued expenses and other current liabilities | 585.1 | 473.2 | |||||||||
| Income taxes payable | 21.7 | 11.0 | |||||||||
| Current portion of long-term debt | 43.9 | 37.4 | |||||||||
| Total Current Liabilities | 974.8 | 773.3 | |||||||||
| Long-term debt, net | 1,323.0 | 1,502.6 | |||||||||
| Long-term operating lease obligations | 275.1 | 205.4 | |||||||||
| Deferred income taxes | 90.4 | 102.1 | |||||||||
| Other non-current liabilities | 131.8 | 118.0 | |||||||||
| Total Liabilities | 2,795.1 | 2,701.4 | |||||||||
| Redeemable non-controlling interest | 8.9 | 0 | |||||||||
| Stockholders' Equity: | |||||||||||
| Common stock, $0.01 par value, 300.0 million shares authorized; 283.8 million shares issued as of December 31, 2020 and 2019 | 2.8 | 2.8 | |||||||||
| Additional paid in capital | 617.5 | 573.9 | |||||||||
| Retained earnings | 2,045.6 | 1,703.3 | |||||||||
| Accumulated other comprehensive loss | (65.5) | (87.7) | |||||||||
| Treasury stock at cost; 78.9 million and 75.1 million shares as of December 31, 2020 and 2019, respectively | (2,096.8) | (1,832.8) | |||||||||
| Total stockholders' equity, net of non-controlling interests in subsidiaries | 503.6 | 359.5 | |||||||||
| Non-controlling interests in subsidiaries | 1.0 | 0.9 | |||||||||
| Total Stockholders' Equity | 504.6 | 360.4 | |||||||||
| Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity | $ | 3,308.6 | $ | 3,061.8 | |||||||
| December 31, 2017 | December 31, 2016 | ||||||
| ASSETS | |||||||
| Current Assets: | |||||||
| Cash and cash equivalents | $ | 41.9 | $ | 65.7 | |||
| Accounts receivable, net | 317.7 | 341.6 | |||||
| Inventories | 183.0 | 196.5 | |||||
| Prepaid expenses and other current assets | 64.8 | 63.9 | |||||
| Total Current Assets | 607.4 | 667.7 | |||||
| Property, plant and equipment, net | 435.1 | 422.2 | |||||
| Goodwill | 733.1 | 722.5 | |||||
| Other intangible assets, net | 667.4 | 678.7 | |||||
| Deferred income taxes | 23.6 | 22.5 | |||||
| Other non-current assets | 227.4 | 185.2 | |||||
| Total Assets | $ | 2,694.0 | $ | 2,698.8 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||
| Current Liabilities: | |||||||
| Accounts payable | $ | 241.2 | $ | 235.0 | |||
| Accrued expenses and other current liabilities | 234.2 | 250.0 | |||||
| Income taxes payable | 29.1 | 5.8 | |||||
| Current portion of long-term debt | 72.4 | 70.3 | |||||
| Total Current Liabilities | 576.9 | 561.1 | |||||
| Long-term debt, net | 1,680.7 | 1,817.8 | |||||
| Deferred income taxes | 114.3 | 174.6 | |||||
| Other non-current liabilities | 207.4 | 179.6 | |||||
| Total Liabilities | 2,579.3 | 2,733.1 | |||||
| Redeemable non-controlling interest | 2.2 | 7.6 | |||||
| Stockholders' Equity (Deficit): | |||||||
| Common stock, $0.01 par value, 300.0 million shares authorized; 99.2 million shares issued as of December 31, 2017 and 2016 | 1.0 | 1.0 | |||||
| Additional paid in capital | 508.0 | 492.8 | |||||
| Retained earnings | 1,416.2 | 1,264.8 | |||||
| Accumulated other comprehensive loss | (75.5 | ) | (103.5 | ) | |||
| Treasury stock at cost; 45.0 million and 44.8 million shares as of December 31, 2017 and 2016, respectively | (1,737.2 | ) | (1,700.0 | ) | |||
| Total stockholders' equity (deficit), net of non-controlling interests in subsidiaries | 112.5 | (44.9 | ) | ||||
| Non-controlling interest in subsidiaries | — | 3.0 | |||||
| Total Stockholders' Equity (Deficit) | 112.5 | (41.9 | ) | ||||
| Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity (Deficit) | $ | 2,694.0 | $ | 2,698.8 | |||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
53
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in millions)
| Tempur Sealy International, Inc. Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Non-controlling Interest | Common Stock | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Non-controlling Interests in Subsidiaries | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Issued | At Par | Shares Issued | At Cost | Additional Paid in Capital | Retained Earnings | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | $ | 2.2 | 283.8 | $ | 2.8 | 74.7 | $ | (1,737.2) | $ | 506.2 | $ | 1,416.2 | $ | (75.5) | $ | 0 | $ | 112.5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of accounting standards effective January 1, 2018 | (2.9) | (0.5) | (3.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 100.5 | 100.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interests | (2.7) | (0.2) | (0.2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of non-controlling interest in subsidiary | — | 3.1 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment to pension liability, net of tax of $(0.1) | (0.4) | (0.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (18.9) | (18.9) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | (0.2) | 2.1 | 2.5 | 4.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuances of PRSUs, RSUs, and DSUs | (0.2) | 2.7 | (2.7) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchased - PRSU/RSU/DSU releases | 0.1 | (4.6) | (4.6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned stock-based compensation | 24.8 | 24.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of non-controlling interest | 0.5 | (0.5) | (0.5) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | 0 | 283.8 | $ | 2.8 | 74.4 | $ | (1,737.0) | $ | 530.3 | $ | 1,513.8 | $ | (95.3) | $ | 2.9 | $ | 217.5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 189.5 | 189.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interests | (0.1) | (0.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of interest in subsidiary | (1.9) | (1.9) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment to pension liability, net of tax of $(0.7) | (1.9) | (1.9) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 9.5 | 9.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | (0.3) | 4.8 | 13.0 | 17.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuances of PRSUs, RSUs, and DSUs | (0.3) | 3.7 | (3.7) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchased | 1.3 | (102.3) | (102.3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchased - PRSU/RSU/DSU releases | 0.1 | (3.4) | (3.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned stock-based compensation | 26.8 | 26.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charitable stock donation | (0.1) | 1.4 | 7.5 | 8.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 0 | 283.8 | $ | 2.8 | 75.1 | $ | (1,832.8) | $ | 573.9 | $ | 1,703.3 | $ | (87.7) | $ | 0.9 | $ | 360.4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of accounting standard effective January 1, 2020, net of tax | (6.5) | (6.5) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 348.8 | 348.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to non-controlling interests | 0.9 | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of non-controlling interest in subsidiary | 8.4 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend paid to non-controlling interest in subsidiary | (0.4) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment to pension liability, net of tax of $(0.4) | (1.4) | (1.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 23.6 | 23.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | (0.5) | 9.6 | (2.7) | 6.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuances of PRSUs, RSUs, and DSUs | (3.6) | 58.2 | (58.2) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchased | 6.5 | (285.9) | (285.9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchased - PRSU/RSU/DSU releases | 1.4 | (45.9) | (45.9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned stock-based compensation | 104.5 | 104.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 8.9 | 283.8 | $ | 2.8 | 78.9 | $ | (2,096.8) | $ | 617.5 | $ | 2,045.6 | $ | (65.5) | $ | 1.0 | $ | 504.6 | |||||||||||||||||||||||||||||||||||||||||||||||
| Tempur Sealy International, Inc. Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
Redeemable Non-controlling Interest | Common Stock | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Non-controlling Interest in Subsidiaries | Total Stockholders' Equity (Deficit) | ||||||||||||||||||||||||||||||||
| Shares Issued | At Par | Shares Issued | At Cost | Additional Paid in Capital | Retained Earnings | ||||||||||||||||||||||||||||||||
| Balance, January 1, 2015 | $ | 12.6 | 99.2 | $ | 1.0 | 38.3 | $ | (1,191.3 | ) | $ | 411.9 | $ | 1,009.7 | $ | (50.7 | ) | $ | — | $ | 180.6 | |||||||||||||||||
| Net income | 64.5 | 64.5 | |||||||||||||||||||||||||||||||||||
| Net income attributable to non-controlling interest | 1.2 | ||||||||||||||||||||||||||||||||||||
| Distributions paid to non-controlling interest | (1.4 | ) | |||||||||||||||||||||||||||||||||||
| Adjustment to pension liability, net of tax of $0.5 | 1.0 | 1.0 | |||||||||||||||||||||||||||||||||||
| Derivative instruments accounted for as hedges, net of tax of $(2.4) | 6.0 | 6.0 | |||||||||||||||||||||||||||||||||||
| Foreign currency adjustments | (52.7 | ) | (52.7 | ) | |||||||||||||||||||||||||||||||||
| Exercise of stock options | (1.3 | ) | 16.5 | 3.9 | 20.4 | ||||||||||||||||||||||||||||||||
| Treasury stock issued to CEO | (0.1 | ) | 0.9 | 4.1 | 5.0 | ||||||||||||||||||||||||||||||||
| Issuances of PRSUs, RSUs, and DSUs | (0.1 | ) | 0.8 | (0.8 | ) | — | |||||||||||||||||||||||||||||||
| Tax adjustments related to stock compensation | 21.8 | 21.8 | |||||||||||||||||||||||||||||||||||
| Treasury stock repurchased | (1.3 | ) | (1.3 | ) | |||||||||||||||||||||||||||||||||
| Amortization of unearned stock-based compensation | 22.5 | 22.5 | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2015 | $ | 12.4 | 99.2 | $ | 1.0 | 36.8 | $ | (1,174.4 | ) | $ | 463.4 | $ | 1,074.2 | $ | (96.4 | ) | $ | — | $ | 267.8 | |||||||||||||||||
| Net income | 190.6 | 190.6 | |||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interests | (4.8 | ) | (0.8 | ) | (0.8 | ) | |||||||||||||||||||||||||||||||
| Acquisition of non-controlling interest in subsidiary | 3.8 | 3.8 | |||||||||||||||||||||||||||||||||||
| Adjustment to pension liability, net of tax of $(0.5) | (0.8 | ) | (0.8 | ) | |||||||||||||||||||||||||||||||||
| Derivative instruments accounted for as hedges, net of tax of $(2.2) | (6.0 | ) | (6.0 | ) | |||||||||||||||||||||||||||||||||
| Foreign currency adjustments | (0.3 | ) | (0.3 | ) | |||||||||||||||||||||||||||||||||
| Exercise of stock options | (0.6 | ) | 7.9 | 7.8 | 15.7 | ||||||||||||||||||||||||||||||||
| Issuances of PRSUs, RSUs, and DSUs | (0.1 | ) | 1.5 | (1.6 | ) | (0.1 | ) | ||||||||||||||||||||||||||||||
| Tax adjustments related to stock compensation | 7.0 | 7.0 | |||||||||||||||||||||||||||||||||||
| Treasury stock repurchased | 8.7 | (533.0 | ) | (533.0 | ) | ||||||||||||||||||||||||||||||||
| Treasury stock repurchased - PRSU/RSU/DSU releases | — | (2.0 | ) | (2.0 | ) | ||||||||||||||||||||||||||||||||
| Amortization of unearned stock-based compensation | 16.2 | 16.2 | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | $ | 7.6 | 99.2 | $ | 1.0 | 44.8 | $ | (1,700.0 | ) | $ | 492.8 | $ | 1,264.8 | $ | (103.5 | ) | $ | 3.0 | $ | (41.9 | ) | ||||||||||||||||
| Net income | 151.4 | 151.4 | |||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interests | (5.4 | ) | (5.3 | ) | (5.3 | ) | |||||||||||||||||||||||||||||||
| Adjustment to pension liability, net of tax of $(0.3) | (0.5 | ) | (0.5 | ) | |||||||||||||||||||||||||||||||||
| Derivative instruments accounted for as hedges, net of tax of $(0.1) | (0.6 | ) | (0.6 | ) | |||||||||||||||||||||||||||||||||
| Foreign currency adjustments | 29.1 | 29.1 | |||||||||||||||||||||||||||||||||||
| Exercise of stock options | (0.3 | ) | 4.5 | 8.3 | 12.8 | ||||||||||||||||||||||||||||||||
| Issuances of PRSUs, RSUs, and DSUs | (0.2 | ) | 3.2 | (3.2 | ) | — | |||||||||||||||||||||||||||||||
| Treasury stock repurchased | 0.6 | (40.1 | ) | (40.1 | ) | ||||||||||||||||||||||||||||||||
| Treasury stock repurchased - PRSU/RSU/DSU releases | 0.1 | (4.8 | ) | (4.8 | ) | ||||||||||||||||||||||||||||||||
| Amortization of unearned stock-based compensation | 13.3 | 13.3 | |||||||||||||||||||||||||||||||||||
| Acquisition of non-controlling interest | (3.2 | ) | 2.3 | (0.9 | ) | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | $ | 2.2 | 99.2 | $ | 1.0 | 45.0 | $ | (1,737.2 | ) | $ | 508.0 | $ | 1,416.2 | $ | (75.5 | ) | $ | — | $ | 112.5 | |||||||||||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
54
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| (in millions) | (in millions) | Year Ended December 31, | ||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS: | CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS: | |||||||||||||||||||||||||||
| Net income before non-controlling interests | $ | 140.7 | $ | 185.0 | $ | 65.7 | Net income before non-controlling interests | $ | 349.8 | $ | 189.4 | $ | 97.6 | |||||||||||||||
| Loss from discontinued operations, net of tax | Loss from discontinued operations, net of tax | 0 | 1.4 | 17.8 | ||||||||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||||||
| Depreciation and amortization | 81.3 | 73.3 | 71.4 | Depreciation and amortization | 98.0 | 89.7 | 87.1 | |||||||||||||||||||||
| Amortization of stock-based compensation | 13.3 | 16.2 | 22.5 | Amortization of stock-based compensation | 104.5 | 26.8 | 24.8 | |||||||||||||||||||||
| Amortization of deferred financing costs | 2.2 | 3.5 | 20.3 | Amortization of deferred financing costs | 3.2 | 2.4 | 2.3 | |||||||||||||||||||||
| Bad debt expense | 10.4 | 4.6 | 6.9 | Bad debt expense | 35.8 | 29.3 | 31.3 | |||||||||||||||||||||
| Charitable stock donation | Charitable stock donation | 0 | 8.9 | 0 | ||||||||||||||||||||||||
| Deferred income taxes | (60.2 | ) | (31.1 | ) | (21.3 | ) | Deferred income taxes | (8.6) | (7.1) | 6.0 | ||||||||||||||||||
| Dividends received from unconsolidated affiliates | 11.3 | 10.8 | 9.1 | Dividends received from unconsolidated affiliates | 19.3 | 13.4 | 14.8 | |||||||||||||||||||||
| Equity income in earnings of unconsolidated affiliates | (15.6 | ) | (13.3 | ) | (11.9 | ) | Equity income in earnings of unconsolidated affiliates | (16.4) | (15.9) | (17.6) | ||||||||||||||||||
| Non-cash interest expense on 8.0% Sealy Notes | — | 4.0 | 6.3 | |||||||||||||||||||||||||
| Loss on extinguishment of debt | — | 47.2 | — | Loss on extinguishment of debt | 2.3 | 0 | 0 | |||||||||||||||||||||
| Loss on sale of assets | 0.3 | 1.3 | 1.5 | Loss on sale of assets | (1.7) | 1.0 | 3.3 | |||||||||||||||||||||
| Foreign currency adjustments and other | (3.2 | ) | (0.5 | ) | 5.5 | Foreign currency adjustments and other | (0.5) | (5.2) | (2.1) | |||||||||||||||||||
| Changes in operating assets and liabilities, net of effect of business acquisitions: | Changes in operating assets and liabilities, net of effect of business acquisitions: | |||||||||||||||||||||||||||
| Accounts receivable | 22.3 | 17.6 | (38.4 | ) | Accounts receivable | (55.7) | (76.0) | (46.3) | ||||||||||||||||||||
| Inventories | 17.1 | 1.8 | 10.7 | Inventories | (42.5) | (28.2) | (44.6) | |||||||||||||||||||||
| Prepaid expenses and other assets | (16.2 | ) | (124.4 | ) | (58.7 | ) | Prepaid expenses and other assets | (19.4) | 11.3 | (14.4) | ||||||||||||||||||
| Operating leases, net | Operating leases, net | 21.9 | 8.6 | 0 | ||||||||||||||||||||||||
| Accounts payable | (1.6 | ) | (40.6 | ) | 52.8 | Accounts payable | 63.0 | (4.8) | 28.7 | |||||||||||||||||||
| Accrued expenses and other | (4.1 | ) | 6.8 | 95.7 | ||||||||||||||||||||||||
| Income taxes | 24.9 | 3.3 | (3.9 | ) | ||||||||||||||||||||||||
| Net cash provided by operating activities | 222.9 | 165.5 | 234.2 | |||||||||||||||||||||||||
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | 90.5 | 67.3 | 43.2 | ||||||||||||||||||||||||
| Income taxes, net | Income taxes, net | 11.2 | 2.5 | (24.4) | ||||||||||||||||||||||||
| Net cash provided by operating activities from continuing operations | Net cash provided by operating activities from continuing operations | 654.7 | 314.8 | 207.5 | ||||||||||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||||||||||
| Proceeds from disposition of business | — | — | 7.2 | |||||||||||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS: | CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS: | |||||||||||||||||||||||||||
| Purchases of property, plant and equipment | (67.0 | ) | (62.4 | ) | (65.9 | ) | Purchases of property, plant and equipment | (111.3) | (88.2) | (73.6) | ||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 4.9 | 0.2 | — | |||||||||||||||||||||||||
| Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | (41.2) | (17.1) | 0 | ||||||||||||||||||||||||
| Other | — | (0.2 | ) | (1.0 | ) | Other | 5.9 | 15.1 | 2.4 | |||||||||||||||||||
| Net cash used in investing activities | (62.1 | ) | (62.4 | ) | (59.7 | ) | ||||||||||||||||||||||
| Net cash used in investing activities from continuing operations | Net cash used in investing activities from continuing operations | (146.6) | (90.2) | (71.2) | ||||||||||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS: | CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS: | |||||||||||||||||||||||||||
| Proceeds from borrowings under long-term debt obligations | 1,332.9 | 2,233.3 | 863.5 | Proceeds from borrowings under long-term debt obligations | 1,175.8 | 1,242.8 | 1,094.9 | |||||||||||||||||||||
| Repayments of borrowings under long-term debt obligations | (1,471.5 | ) | (1,867.7 | ) | (988.3 | ) | Repayments of borrowings under long-term debt obligations | (1,360.3) | (1,347.1) | (1,195.8) | ||||||||||||||||||
| Proceeds from exercise of stock options | 12.8 | 15.7 | 20.4 | Proceeds from exercise of stock options | 6.9 | 17.8 | 4.6 | |||||||||||||||||||||
| Excess tax benefit from stock-based compensation | — | 7.0 | 21.8 | |||||||||||||||||||||||||
| Treasury stock repurchased | (44.9 | ) | (535.0 | ) | (1.3 | ) | Treasury stock repurchased | (331.8) | (105.7) | (4.6) | ||||||||||||||||||
| Payment of deferred financing costs | (0.5 | ) | (6.9 | ) | (8.0 | ) | Payment of deferred financing costs | (1.3) | (3.2) | 0 | ||||||||||||||||||
| Fees paid to lenders | — | (7.8 | ) | — | ||||||||||||||||||||||||
| Call premium on 2020 Senior Notes | — | (23.6 | ) | — | ||||||||||||||||||||||||
| Proceeds from purchase of treasury shares by CEO | — | — | 5.0 | |||||||||||||||||||||||||
| Other | (4.0 | ) | (0.1 | ) | (3.8 | ) | ||||||||||||||||||||||
| Net cash used in financing activities | (175.2 | ) | (185.1 | ) | (90.7 | ) | ||||||||||||||||||||||
| Repayments of finance lease obligations and other | Repayments of finance lease obligations and other | (11.9) | (7.8) | (6.1) | ||||||||||||||||||||||||
| Net cash used in financing activities from continuing operations | Net cash used in financing activities from continuing operations | (522.6) | (203.2) | (107.0) | ||||||||||||||||||||||||
| Net cash (used in) provided by continuing operations | Net cash (used in) provided by continuing operations | (14.5) | 21.4 | 29.3 | ||||||||||||||||||||||||
| CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS | CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS | |||||||||||||||||||||||||||
| Operating cash flows | Operating cash flows | 0.3 | (2.0) | (24.4) | ||||||||||||||||||||||||
| Investing cash flows | Investing cash flows | 0 | 0 | 2.1 | ||||||||||||||||||||||||
| Net cash provided by (used in) discontinued operations | Net cash provided by (used in) discontinued operations | 0.3 | (2.0) | (22.3) | ||||||||||||||||||||||||
| NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (9.4 | ) | (6.2 | ) | 7.6 | NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | 14.3 | (0.3) | (3.1) | |||||||||||||||||||
| (Decrease) increase in cash and cash equivalents | (23.8 | ) | (88.2 | ) | 91.4 | |||||||||||||||||||||||
| Increase in cash and cash equivalents | Increase in cash and cash equivalents | 0.1 | 19.1 | 3.9 | ||||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 65.7 | 153.9 | 62.5 | CASH AND CASH EQUIVALENTS, beginning of period | 64.9 | 45.8 | 41.9 | |||||||||||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 41.9 | $ | 65.7 | $ | 153.9 | CASH AND CASH EQUIVALENTS, end of period | 65.0 | 64.9 | 45.8 | ||||||||||||||||||
| Supplemental cash flow information: | Supplemental cash flow information: | |||||||||||||||||||||||||||
| Cash paid during the period for: | Cash paid during the period for: | |||||||||||||||||||||||||||
| Interest | $ | 106.3 | $ | 83.2 | $ | 66.5 | Interest | $ | 79.0 | $ | 89.0 | $ | 91.8 | |||||||||||||||
| Income taxes, net of refunds | $ | 81.2 | $ | 81.3 | $ | 94.9 | Income taxes, net of refunds | $ | 93.8 | $ | 73.8 | $ | 32.5 | |||||||||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
55
TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Description of Business. Tempur Sealy International, Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term “Tempur"Tempur Sealy International”International" refers to Tempur Sealy International, Inc. only, and the term “Company”"Company" refers to Tempur Sealy International, Inc. and its consolidated subsidiaries.
The Company develops,designs, manufactures markets and sellsdistributes 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.
On November 24, 2020, the Company effected a 4-for-one stock split to shareholders of record on November 10, 2020. All share and per share information (including share and per share information related to share-based compensation) has been retroactively adjusted to reflect the stock split, except for certain shares held as treasury stock that were not subject to the split.
(b) Basis of Consolidation. The accompanying financial statements include the accounts of Tempur Sealy International and its controlled subsidiaries and the results of Comfort Revolution, LLC ("Comfort Revolution").subsidiaries. Intercompany balances and transactions have been eliminated.
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 equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have effective control, and consolidation is not otherwise required. The Company’sCompany's equity in the net income and losses of these investments is reported in equity income in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income. The Company’s Asia-PacificAdditionally, in October 2020, the Company entered into a 50.0% ownership joint ventures are more fully describedventure to reacquire the rights and acquire the assets to manufacture, market and distribute Sealy® and Stearns & Foster® branded products in Note 6, "Unconsolidated Affiliate Companies."the United Kingdom.
(c) Use of Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’sCompany's results are affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of raw materials, can have a significant effect on operations.
(d) Fair Value Measurements. Adoption of New Accounting Standards.
Leases. Effective January 1, 2019, the Company adopted Accounting Standards Codification 842, Leases ("ASC 842"). ASC 842 consists of a comprehensive lease accounting standard requiring most leases to be recognized on the Consolidated Balance Sheet and significant new disclosures. The Company applies fairdetermines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed it to carry forward the historical lease classification.
Operating lease right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease, both of which are recognized based on the present value accounting for all financial assetsof the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded within the Consolidated Balance Sheet and liabilities and non-financial assets and liabilitiesare expensed on a straight-line basis over the lease term within the Consolidated Statement of Income. The lease term is determined by assuming the exercise of renewal options that are recognized or disclosedreasonably certain. As most leases do not provide an implicit interest rate, the Company used its incremental borrowing rate based on the information available at fair valuecommencement date in the Consolidated Financial Statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fairpresent value measurements for assetsof future payments. When contracts contain lease and liabilities,non-lease components, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, suchgenerally accounts for both components as inherent risk, transfer restrictions and credit risk.a single lease component.
56
TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The classificationadoption of fair value measurements withinASC 842 resulted in the established three-level hierarchy is based uponrecognition of right-of-use assets, net of prepaid lease payments and lease incentives, of $197.2 million and operating lease liabilities of $203.3 million as of January 1, 2019. Results for reporting periods beginning prior to January 1, 2019 continue to be reported in accordance with our historical accounting treatment. The adoption of ASC 842 did not have a material impact on the lowest levelCompany's results of input that is significant to the measurements. There were no transfers between levels for the years ended December 31, 2017operations, cash flows or 2016. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value becausedebt covenants. For additional information, see Note 6, "Leases" of the short-term maturityConsolidated Financial Statements
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 those instruments. Thethe 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 instrumentsstatements.
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 recorded on a recurring basis at fair value is not material.its trade accounts receivable, which are short-term financings under industry standard credit and trade terms.
(e) Foreign Currency. Assets and liabilities of non-U.S. subsidiaries, whose functional currency is the local currency, are translated into U.S. dollarsDollars at period-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the period. The adjustments resulting from translating the financial statements of foreign subsidiaries are included in accumulated other comprehensive loss (“AOCL”("AOCL"), a component of stockholders’ equity/(deficit),stockholders' equity, and included in net earnings only upon sale or liquidation of the underlying foreign subsidiary or affiliated company. Foreign currency transaction gains and losses are recognized in net earnings based on differences between foreign exchange rates on the transaction date and on the settlement date. These amounts are not considered material to the Consolidated Financial Statements.
(f) Derivative Financial Instruments. Derivative financial instruments are used in the normal course of business to manage interest rate and foreign currency exchange risks. The financial instruments used by the Company are straight-forward, non-leveraged instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit ratings of these institutions. For all transactions designated as hedges, the hedging relationships are formally documented at the inception and on an ongoing basis in offsetting changes in cash flows of the hedged transaction.
The Company records derivative financial instruments on the Consolidated Balance Sheets as either an asset or liability measured at its fair value. Changes in a derivative's fair value (i.e. unrealized gains or losses) are recorded each period in earnings or other comprehensive income ("OCI"), depending on whetherunless the derivative is designated and is effectivequalifies as a hedged transaction,hedge on future cash flows or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the typehedged item, or deferred and recorded in the stockholders' equity section of hedging relationship.the Consolidated Balance Sheets as a component of AOCL and subsequently recognized in the Consolidated Statements of Comprehensive Income when the hedged item affects net income. The ineffective portion of the change in fair value of a hedge is recognized in income immediately.
For derivative financial instruments that are designated as a hedge, unrealized gains and losses related to the effective portion are either recognized in income immediately to offset the realized gain or loss on the hedged item, or are deferred and reported as a component of AOCL in stockholders' equity/(deficit)equity and subsequently recognized in net income when the hedged item affects net income. The change in fair value of the ineffective portion of a derivative financial instrument is recognized in net income immediately. For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded to net income immediately. The effectiveness of the cash flow hedge contracts, including time value, is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as other timing and probability criteria. For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded in net income immediately.
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(g) Cash and Cash Equivalents. Cash and cash equivalents consist of all highly liquid investments with initial maturities of three months or less. The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments.
(h) Inventories. Inventories are stated at the lower of cost or market,and net realizable value, determined by the first-in, first-out method and consist of the following:
| December 31, | |||||||||||
| (in millions) | 2020 | 2019 | |||||||||
| Finished goods | $ | 170.2 | $ | 157.4 | |||||||
| Work-in-process | 12.6 | 10.8 | |||||||||
| Raw materials and supplies | 129.3 | 92.3 | |||||||||
| $ | 312.1 | $ | 260.5 | ||||||||
| December 31, | |||||||
| (in millions) | 2017 | 2016 | |||||
| Finished goods | $ | 121.8 | $ | 130.1 | |||
| Work-in-process | 11.5 | 10.7 | |||||
| Raw materials and supplies | 49.7 | 55.7 | |||||
| $ | 183.0 | $ | 196.5 | ||||
(i) Property, Plant and Equipment. Property, plant and equipment are carried at cost at acquisition date and are depreciated using the straight-line method over their estimated useful lives as follows:
| Estimated Useful Lives (in years) | |||||
| Buildings | 25-30 | ||||
| Computer equipment and software | |||||
| Leasehold improvements | 4-7 | ||||
| Machinery and equipment | 3-7 | ||||
| Office furniture and fixtures | 5-7 | ||||
The Company records depreciation and amortization in cost of sales for long-lived assets used in the manufacturing process, and within each line item of operating expenses for all other long-lived assets. Leasehold improvements are amortized over the shorter of the life of the lease or seven years. Assets under capital leasefinance leases are included within property, plant and equipment and represent non-cash investing activities.
Property, plant and equipment, net consisted of the following:
| December 31, | December 31, | |||||||||||||||||
| (in millions) | 2017 | 2016 | (in millions) | 2020 | 2019 | |||||||||||||
| Machinery and equipment | $ | 315.0 | $ | 283.9 | Machinery and equipment | $ | 419.6 | $ | 350.7 | |||||||||
| Land and buildings | 316.2 | 302.6 | Land and buildings | 359.7 | 317.8 | |||||||||||||
| Computer equipment and software | 114.0 | 97.2 | Computer equipment and software | 182.0 | 155.2 | |||||||||||||
| Furniture and fixtures | 57.4 | 50.4 | Furniture and fixtures | 57.6 | 52.5 | |||||||||||||
| Construction in progress | 63.2 | 52.9 | Construction in progress | 72.0 | 65.0 | |||||||||||||
| Total property, plant, and equipment | 865.8 | 787.0 | ||||||||||||||||
| Total property, plant and equipment | Total property, plant and equipment | 1,090.9 | 941.2 | |||||||||||||||
| Accumulated depreciation | (430.7 | ) | (364.8 | ) | Accumulated depreciation | (583.0) | (505.4) | |||||||||||
| Total property, plant and equipment, net | $ | 435.1 | $ | 422.2 | Total property, plant and equipment, net | $ | 507.9 | $ | 435.8 | |||||||||
Depreciation expense, which includes depreciation expense for finance and capital lease assets, for the Company was $65.3$80.5 million, $56.1$73.8 million and $53.5$71.8 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
58
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. If estimated future undiscounted net cash flows are less than the carrying amount of the asset or group of assets, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset to its then fair value. Fair value generally is determined from estimated discounted future net cash flows (for assets held for use) or net realizable value (for assets held for sale). The Company did not identify any impairments for the years ended December 31, 2017, 20162020, 2019 and 2015.2018.
(k) Goodwill and Other Intangible Assets. Intangible assets with finite useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate impairment may have occurred. The Company performs an annual impairment test on goodwill and indefinite-lived intangible assets on October 1 of each year and whenever events or circumstances make it more likely than not that impairment may have occurred. In conducting the impairment test for the North America and International reporting units, the fair value of each of the Company's reporting units is compared to its respective carrying amount including goodwill. If the fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, further analysisthe goodwill is performed to assess impairment. The Company’s determinationwritten down for the amount by which the carrying amount exceeds the fair value. However, the loss recognized cannot exceed the carrying amount of goodwill.
Using the quantitative approach, the Company makes various estimates and assumptions in determining the estimated fair value of theeach reporting units is based onunit using a combination of discounted cash flow approach, with an appropriate risk-adjusted discountmodels and valuations based on earnings multiples for guideline public companies in each reporting unit’s industry peer group, when externally quoted market prices are not readily available. Discounted cash flow models are reliant on various assumptions, including projected business results, long-term growth factors and weighted-average cost of capital. Management judgement is involved in estimating these variables, and they include inherent uncertainties as they are forecasting future events. The Company performs sensitivity analyses by using a range of inputs to confirm the reasonableness of the long-term growth rate and aweighted average cost of capital. Additionally, the Company compares the indicated equity value to its market approach. Any identified impairment would result in an adjustmentcapitalization and evaluates the resulting implied control premium/discount to determine if the Company’s results of operations.estimated enterprise value is reasonable compared to external market indicators.
The Company also tests its indefinite-lived intangible assets, principally the Tempur and Sealy trade names. The Company tested both trade names for impairment using a “relief-from-royalty” method. Significant assumptions inherent in the methodologies are employed and include such estimates as royalty and discount rates.
The Company performed its annual impairment test of goodwill and indefinite-lived intangible assets in 2017, 20162020, 2019 and 2015, and an interim impairment test for its North America reporting unit in March 2017,2018, none of which resulted in the recognition of impairment charges. The most recent annual impairment tests performed as of October 1, 2017,2020, indicated that the fair values of each of the Company's reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values. For further information on goodwill and other intangible assets, refer to Note 5, “Goodwill4, "Goodwill and Other Intangible Assets.”"
59
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(l) Accrued Sales Returns. The Company allows product returns through certain sales channels and on certain products. Estimated sales returns are provided at the time of sale based on historical sales channel return rates. Estimated future obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized. The Company considers the impact of recoverable salvage value on sales returns by segmentproduct in determining its estimate of future sales returns. The Company recognizes a return asset for the right to recover the goods returned by the customer. The right of return asset is recognized on a gross basis outside of the accrued sales returns and is not material to the Company's Consolidated Balance Sheets.
The Company had the following activity for accrued sales returns from December 31, 20152018 to December 31, 2017:2020:
| (in millions) | |||||
| Balance as of December 31, 2018 | $ | 34.3 | |||
| Amounts accrued | 112.4 | ||||
| Returns charged to accrual | (107.4) | ||||
| Balance as of December 31, 2019 | 39.3 | ||||
| Amounts accrued | 111.9 | ||||
| Returns charged to accrual | (106.3) | ||||
| Balance as of December 31, 2020 | $ | 44.9 | |||
| (in millions) | |||
| Balance as of December 31, 2015 | $ | 28.5 | |
| Amounts accrued | 130.6 | ||
| Returns charged to accrual | (128.8 | ) | |
| Balance as of December 31, 2016 | $ | 30.3 | |
| Amounts accrued | 102.1 | ||
| Returns charged to accrual | (102.4 | ) | |
| Balance as of December 31, 2017 | $ | 30.0 | |
As of December 31, 20172020 and 2016, $19.62019, $31.6 million and $20.0$26.2 million of accrued sales returns is included as a component of accrued expenses and other current liabilities and $10.4$13.3 million and $10.3$13.1 million of accrued sales returns is included in other non-current liabilities on the Company’s accompanying Consolidated Balance Sheets, respectively.
(m) Warranties. The Company provides warranties on certain products, which vary based 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. In estimating its warranty obligations, theThe Company considers the impact of recoverable salvage value on warranty costs by segment in determining its estimate of future warranty obligations.
The Company provides warranties on mattresses with varying warranty terms. TempurTempur-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. TempurTempur-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. TempurTempur-Pedic pillows have a warranty term of 3 years, non-prorated.
The Company had the following activity for warrantiesits accrued warranty expense from December 31, 20152018 to December 31, 2017:2020:
| (in millions) | |||||
| Balance as of December 31, 2018 | $ | 36.4 | |||
| Amounts accrued | 29.4 | ||||
| Warranties charged to accrual | (24.2) | ||||
| Balance as of December 31, 2019 | 41.6 | ||||
| Amounts accrued | 24.3 | ||||
| Warranties charged to accrual | (21.7) | ||||
| Balance as of December 31, 2020 | $ | 44.2 | |||
| (in millions) | |||
| Balance as of December 31, 2015 | $ | 29.6 | |
| Amounts accrued | 50.0 | ||
| Warranties charged to accrual | (49.7 | ) | |
| Balance as of December 31, 2016 | $ | 29.9 | |
| Amounts accrued | 50.3 | ||
| Warranties charged to accrual | (43.5 | ) | |
| Balance as of December 31, 2017 | $ | 36.7 | |
As of December 31, 20172020 and 2016, $16.72019, $20.3 million and $14.3$19.4 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $20.0$23.9 million and $15.6$22.2 million of accrued warranty expense is included in other non-current liabilities on the Company’s accompanying Consolidated Balance Sheets, respectively.
60
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(n) Allowance for Credit Losses. The allowance for credit losses is the Company's best estimate of the amount of estimated lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses. The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2020, the Company's accounts receivable were substantially current, and there were no significant changes to the aging of receivables as a result of the impact of the global pandemic. Other factors considered include historical write-off experience, current economic conditions and also factors such as customer credit, past transaction history with the customer and changes in customer payment terms. The allowance for credit losses is included in accounts receivable, net in the accompanying Consolidated Balance Sheets.
The Company had the following activity for its allowance for credit losses from December 31, 2018 to December 31, 2020.
| (in millions) | |||||
| Balance as of December 31, 2018 | $ | 47.6 | |||
| Amounts accrued | 29.3 | ||||
| Write-offs charged against the allowance | (5.0) | ||||
| Balance as of December 31, 2019 | 71.9 | ||||
| ASU 2016-13 adoption impact (before tax) | 8.9 | ||||
| Balance as of January 1, 2020 | 80.8 | ||||
| Amounts accrued | 35.8 | ||||
| Write-offs charged against the allowance | (45.0) | ||||
| Balance as of December 31, 2020 | $ | 71.6 | |||
(o) Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are also recognized for the estimated future effects of tax loss carry forwards. The effect of changes in tax rates on deferred taxes is recognized in the period in which the enactment dates change. The deferred tax assets and liabilities have been re-valued pursuant to the U.S. Tax Reform Act as discussed in Note 13 - Income Taxes. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized. The Company accounts for uncertain foreign and domestic tax positions utilizing a proscribed recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
(p) Cost of Sales. Costs associated with net sales are recorded in cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring, and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in these processes. Cost of sales also includes shipping and handling costs associated with the delivery of goods to customers and costs associated with internal transfers between plant locations. Amounts included in cost of sales for shipping and handling were $223.1 million, $192.2 million and $169.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. Additionally, cost of sales include royalties that the Company pays to other entities for the use of their names on products produced by the Company. For additional information, please refer to Note 2, "Net Sales." Royalty expense is not material to the Company's Consolidated Statements of Income.
61
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(q) Cooperative Advertising, Rebate and Other Promotional Programs. The Company enters into programs with customers to provide funds for advertising and promotions. The Company also enters into volume and other rebate programs with customers. When sales are made to these customers, the Company records liabilities pursuant to these programs. The Company periodically assesses these liabilities based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer or whether the customer will meet the requirements to receive rebate funds. The Company generally negotiates these programs on a customer-by-customer basis. Some of these agreements extend over several years. Significant estimates are required at any point in time with regard to the ultimate reimbursement to be claimed by the customers. Subsequent revisions to the estimates are recorded and charged to earnings in the period in which they are identified. Rebates and cooperative advertising are classified as a reduction of revenue and presented within net sales in the accompanying Consolidated Statements of Income. Certain cooperative advertising expenses are reported as components of selling and marketing expenses in the accompanying Consolidated Statements of Income because the Company receives an identifiable benefit and the fair value of the advertising benefit can be reasonably estimated.
(r) Advertising Costs. The Company expenses advertising costs as incurred except for production costs and advance payments, which are deferred and expensed when advertisements run for the first time. Direct response advance payments are deferred and amortized over the life of the program. Advertising costs are included in selling and marketing expenses in the accompanying Consolidated Statements of Income. Advertising costs charged to expense were $284.1$332.5 million, $352.7$280.5 million and $360.5$259.3 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. Advertising costs include expenditures for shared advertising costs that the Company reimburses to customers under its integrated and cooperative advertising programs. Cooperative advertising costs paid to customers are recorded as a component of selling and marketing expenses within the Consolidated Statements of Income to the extent of the estimated fair value of the customer's underlying advertisement when the customer provides proof of advertising. The Company periodically assesses the liabilities recorded for cooperative advertising based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer. Advertising costs deferred and included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets were $3.8$4.7 million and $7.4$3.6 million as of December 31, 20172020 and 2016,2019, respectively.
(s) Research and Development Expenses. Research and development expenses for new products are expensed as they are incurred and are included in general, administrative and other expenses in the accompanying Consolidated Statements of Income. Research and development costs charged to expense were $21.7$23.1 million, $26.7$23.0 million and $28.7$21.9 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
(t)Royalty Income and Expense. The Company recognizes royalty income based on sales of Sealy® and Stearns & Foster® branded products by various licensees. The Company also pays royalties to other entities for the use of their names on products produced by the Company. Royalty income, net of royalty expense, was $20.8 million, $19.5 million and $18.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Treasury stock is accounted for under the cost method and reported as a reduction of stockholders’ equity/(deficit). Stock Repurchase Authorizationsequity. The authority provided under the share repurchase program may be suspended, limited or terminated at any time without notice. Please refer to Note 8, "Stockholders' Equity", for additional information.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
retirement based on estimated future compensation levels. The measurement of the PBO is based on the Company’sCompany's estimates and actuarial valuations. The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, that require significant judgment, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates.
(2) Net Sales
The following table presents the yearCompany's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the years ended December 31, 2016, the Company initiated certain restructuring activities, which included headcount reductions and store closures. As a result, the Company recognized $8.3 million of restructuring expenses consisting primarily of severance benefits and costs associated with store closures, which are recorded in cost of sales, selling and marketing expenses, and general, administrative and other expenses.31.
| Twelve Months Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | North America | International | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Channel | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wholesale | $ | 2,806.7 | $ | 379.1 | $ | 3,185.8 | |||||||||||||||||||||||||||||||||||||||||||||||
| Direct | 352.5 | 138.6 | 491.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,159.2 | $ | 517.7 | $ | 3,676.9 | |||||||||||||||||||||||||||||||||||||||||||||||
| North America | International | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Product | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bedding | $ | 2,956.3 | $ | 397.5 | $ | 3,353.8 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | 202.9 | 120.2 | 323.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,159.2 | $ | 517.7 | $ | 3,676.9 | |||||||||||||||||||||||||||||||||||||||||||||||
| North America | International | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Geographical region | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 2,886.6 | $ | 0 | $ | 2,886.6 | |||||||||||||||||||||||||||||||||||||||||||||||
| All other | 272.6 | 517.7 | 790.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,159.2 | $ | 517.7 | $ | 3,676.9 | |||||||||||||||||||||||||||||||||||||||||||||||
| Twelve Months Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||
| (in millions) | North America | International | Consolidated | ||||||||||||||||||||||||||||||||
| Channel | |||||||||||||||||||||||||||||||||||
| Wholesale | $ | 2,343.5 | $ | 373.6 | $ | 2,717.1 | |||||||||||||||||||||||||||||
| Direct | 260.0 | 128.9 | 388.9 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 2,603.5 | $ | 502.5 | $ | 3,106.0 | |||||||||||||||||||||||||||||
| North America | International | Consolidated | |||||||||||||||||||||||||||||||||
| Product | |||||||||||||||||||||||||||||||||||
| Bedding | $ | 2,448.8 | $ | 388.2 | $ | 2,837.0 | |||||||||||||||||||||||||||||
| Other | 154.7 | 114.3 | 269.0 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 2,603.5 | $ | 502.5 | $ | 3,106.0 | |||||||||||||||||||||||||||||
| North America | International | Consolidated | |||||||||||||||||||||||||||||||||
| Geographical region | |||||||||||||||||||||||||||||||||||
| United States | $ | 2,312.1 | $ | 0 | $ | 2,312.1 | |||||||||||||||||||||||||||||
| All other | 291.4 | 502.5 | 793.9 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 2,603.5 | $ | 502.5 | $ | 3,106.0 | |||||||||||||||||||||||||||||
63
TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| Twelve Months Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||
| (in millions) | North America | International | Consolidated | ||||||||||||||||||||||||||||||||
| Channel | |||||||||||||||||||||||||||||||||||
| Wholesale | $ | 2,059.5 | $ | 392.6 | $ | 2,452.1 | |||||||||||||||||||||||||||||
| Direct | 147.5 | 103.3 | 250.8 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 2,207.0 | $ | 495.9 | $ | 2,702.9 | |||||||||||||||||||||||||||||
| North America | International | Consolidated | |||||||||||||||||||||||||||||||||
| Product | |||||||||||||||||||||||||||||||||||
| Bedding | $ | 2,069.5 | $ | 385.8 | $ | 2,455.3 | |||||||||||||||||||||||||||||
| Other | 137.5 | 110.1 | 247.6 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 2,207.0 | $ | 495.9 | $ | 2,702.9 | |||||||||||||||||||||||||||||
| North America | International | Consolidated | |||||||||||||||||||||||||||||||||
| Geographical region | |||||||||||||||||||||||||||||||||||
| United States | $ | 1,928.8 | $ | 0 | $ | 1,928.8 | |||||||||||||||||||||||||||||
| All Other | 278.2 | 495.9 | 774.1 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 2,207.0 | $ | 495.9 | $ | 2,702.9 | |||||||||||||||||||||||||||||
The North America and International segments sell product through 2 channels: Wholesale and Direct. The Wholesale channel includes all product sales to third party retailers, including third party distribution, hospitality and healthcare. The Direct channel includes product sales to company-owned stores, e-commerce and call centers. The North America and International segments classify products into 2 major categories: Bedding and Other. Bedding products include mattresses, foundations and adjustable foundations. Other products include pillows, mattress covers, sheets, cushions and various other comfort products.
The Wholesale channel also includes income from royalties derived by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The licenses include rights for the week of January 23, 2017,licensees to use trademarks as well as current proprietary or patented technology that the Company utilizes. The Company also provides its licensees with product specifications, research and development, statistical services and marketing programs. The Company recognizes royalty income based on the occurrence of sales of Sealy® and Stearns & Foster® branded products by various licensees. Royalty income was unexpectedly notified by$21.9 million, $22.6 million and $20.9 million for the senior managementyears ended December 31, 2020, 2019 and 2018, respectively.
For product sales in each of Mattress Firm, Inc. ("Mattress Firm") and representativesthe Company's channels, the Company recognizes a sale when the obligations under the terms of Steinhoff International Holdings Ltd., its parent company, of Mattress Firm's intent to terminate its business relationshipthe contract with the customer are satisfied, which is generally when control of the product has transferred to the customer. Transferring control of each product sold is considered a separate performance obligation. The Company iftransfers control and recognizes a sale when the customer receives the product. Each unit sold is considered an independent, unbundled performance obligation. The Company does not have any additional performance obligations other than product sales that are material in the context of the contract. The Company also offers assurance type warranties on certain of its products, which is not accounted for as separate performance obligations under the revenue model.
The transaction price is measured as the amount of consideration the Company did not agreeexpects to considerable changesreceive in exchange for transferring goods. The amount of consideration the Company receives, and correspondingly, the revenue that is recognized, varies due to sales incentives and returns the Company offers to its agreements with Mattress Firm, including significant economic concessions.Wholesale and Direct channel customers. Specifically, the Company extends volume discounts, as well as promotional allowances, floor sample discounts, commissions paid to retail associates and slotting fees to its Wholesale channel customers and reflects these amounts as a reduction of sales at the time revenue is recognized based on historical experience. The Company engaged in discussions to facilitateallows returns following a mutually agreeable supply arrangement with Mattress Firm. However,sale, depending on the parties were unable to reach an agreement,channel and on January 27, 2017, Tempur-Pedic North America, LLCpromotion. The Company reduces revenue and Sealy Mattress Company 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.
64
| Year Ended December 31, 2016 | Year Ended December 31, 2015 | ||||||||||||||||||||||
| Previously Reported | Correction | As Revised | Previously Reported | Correction | As Revised | ||||||||||||||||||
| Net sales | $ | 3,127.3 | $ | 1.6 | $ | 3,128.9 | $ | 3,151.2 | $ | 3.4 | $ | 3,154.6 | |||||||||||
| Gross profit | 1,309.4 | (1.9 | ) | 1,307.5 | 1,248.9 | 0.3 | 1,249.2 | ||||||||||||||||
| Operating income | 415.5 | (5.1 | ) | 410.4 | 309.1 | (2.6 | ) | 306.5 | |||||||||||||||
| Income before income taxes | 283.3 | (11.5 | ) | 271.8 | 200.1 | (9.0 | ) | 191.1 | |||||||||||||||
| Income tax provision | (86.8 | ) | — | (86.8 | ) | (125.4 | ) | — | (125.4 | ) | |||||||||||||
| Net income before non-controlling interests | 196.5 | (11.5 | ) | 185.0 | 74.7 | (9.0 | ) | 65.7 | |||||||||||||||
| Net income attributable to Tempur Sealy International, Inc. | $ | 202.1 | $ | (11.5 | ) | $ | 190.6 | $ | 73.5 | $ | (9.0 | ) | $ | 64.5 | |||||||||
TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In certain jurisdictions, the Company is subject to certain non-income taxes including, but not limited to, sales tax, value added tax, excise tax and other taxes. These taxes are excluded from the transaction price, and therefore, excluded from revenue. The Company has elected to account for shipping and handling activities as a fulfillment cost as permitted by Topic 606. Accordingly, the Company reflects all amounts billed to customers for shipping and handling in revenue and the costs of fulfillment in cost of sales. Amounts included in net sales for shipping and handling were $14.4 million, $19.3 million and $13.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(3) Acquisitions and Divestitures
| December 31, 2016 | |||||||||||
| Previously Reported | Correction | As Revised | |||||||||
| Total assets | $ | 2,702.6 | $ | (3.8 | ) | $ | 2,698.8 | ||||
| Total liabilities | 2,707.2 | 25.9 | 2,733.1 | ||||||||
| Retained earnings | 1,312.4 | (47.6 | ) | 1,264.8 | |||||||
| Total stockholders' deficit | (12.2 | ) | (29.7 | ) | (41.9 | ) | |||||
| Total liabilities, redeemable non-controlling interest and stockholders' deficit | $ | 2,702.6 | $ | (3.8 | ) | $ | 2,698.8 | ||||
Acquisition of Sherwood Bedding
| (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 | ||||
| Operating lease liabilities | (19.9) | ||||
| Non-controlling interest | (8.4) | ||||
| Purchase price, net of cash acquired | $ | 37.9 | |||
Goodwill is calculated as the entity expectsexcess of the purchase price over the net assets acquired and primarily represents the private label product growth opportunities and expected synergistic manufacturing benefits to be 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 costsacquisition. The goodwill is deductible for income tax purposes and is included within the North American reporting unit for goodwill impairment assessments.
Acquisition of Innovative Mattress Solutions, LLC ("iMS")
On January 11, 2019, iMS filed for bankruptcy and the Company provided debtor-in-possession financing in connection with the iMS Chapter 11 proceedings. On April 1, 2019, the Company acquired substantially all of the net assets of iMS in a transaction valued at approximately $24.0 million, including assumed liabilities of approximately $11.0 million as of March 31, 2019 (referred to obtain or fulfill a contract.as the "Sleep Outfitters Acquisition"). The acquisition of this regional bedding retailer furthers the Company’s North American retail strategy, which is focused on meeting customer demand through geographic representation and sales expertise.
The Company conductedaccounted for this transaction as a risk assessment and had developed a transition plan that enabledbusiness combination. Total cash consideration was $13.2 million, which included $5.1 million of cash acquired. The final allocation of 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. Basedpurchase price is based on the evaluationfair values of the Company's current contractsassets acquired and liabilities assumed as of April 1, 2019, which included 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 accounted for under industry-specific guidance that will be superseded by Topic 606 and generally consist of a single performance obligation to transfer promised goods.
following:
65
TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| (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 | |||
The following summarizes the Company's goodwill by reportable segment:
| (in millions) | North America | International | Consolidated | (in millions) | North America | International | Consolidated | |||||||||||||||||||||
| Balance as of January 1, 2016 | $ | 562.8 | $ | 146.6 | $ | 709.4 | ||||||||||||||||||||||
| Balance as of December 31, 2018 | Balance as of December 31, 2018 | $ | 576.7 | $ | 146.3 | $ | 723.0 | |||||||||||||||||||||
| Goodwill resulting from acquisitions | Goodwill resulting from acquisitions | 2.4 | 5.4 | 7.8 | ||||||||||||||||||||||||
| Foreign currency translation adjustments and other | Foreign currency translation adjustments and other | 2.8 | (1.3) | 1.5 | ||||||||||||||||||||||||
| Balance as of December 31, 2019 | Balance as of December 31, 2019 | $ | 581.9 | $ | 150.4 | $ | 732.3 | |||||||||||||||||||||
Goodwill resulting from acquisition | 7.4 | — | 7.4 | Goodwill resulting from acquisition | 26.7 | 0 | 26.7 | |||||||||||||||||||||
| Foreign currency translation adjustments and other | 1.8 | 3.9 | 5.7 | Foreign currency translation adjustments and other | 1.7 | 5.6 | 7.3 | |||||||||||||||||||||
| Balance as of December 31, 2016 | $ | 572.0 | $ | 150.5 | $ | 722.5 | ||||||||||||||||||||||
| Foreign currency translation adjustments and other | 4.6 | 6.0 | 10.6 | |||||||||||||||||||||||||
| Balance as of December 31, 2017 | $ | 576.6 | $ | 156.5 | $ | 733.1 | ||||||||||||||||||||||
| Balance as of December 31, 2020 | Balance as of December 31, 2020 | $ | 610.3 | $ | 156.0 | $ | 766.3 | |||||||||||||||||||||
The following table summarizes information relating to the Company’s other intangible assets, net:
| ($ in millions) | December 31, 2017 | December 31, 2016 | ($ in millions) | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unamortized indefinite life intangible assets: | Unamortized indefinite life intangible assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Trade names | $ | 561.7 | $ | — | $ | 561.7 | $ | 559.8 | $ | — | $ | 559.8 | Trade names | $ | 560.7 | $ | 560.7 | $ | 559.5 | $ | 559.5 | |||||||||||||||||||||||||||||||||||||||||||||
| Amortized intangible assets: | Amortized intangible assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contractual distributor relationships | 15 | $ | 86.0 | $ | 27.5 | $ | 58.5 | $ | 85.0 | $ | 21.5 | $ | 63.5 | Contractual distributor relationships | 15 | 85.7 | 44.5 | 41.2 | 85.5 | 38.7 | 46.8 | |||||||||||||||||||||||||||||||||||||||||||||
| Technology and other | 4-10 | 91.4 | 54.3 | 37.1 | 90.4 | 46.5 | 43.9 | Technology and other | 4-10 | 91.3 | 75.9 | 15.4 | 91.1 | 68.7 | 22.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Patents, other trademarks and other trade names | 5-20 | 27.3 | 19.0 | 8.3 | 27.1 | 19.2 | 7.9 | Patents, other trademarks and other trade names | 5-20 | 28.7 | 21.3 | 7.4 | 27.9 | 18.6 | 9.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer databases, relationships and reacquired rights | 2-5 | 23.9 | 22.1 | 1.8 | 24.2 | 20.6 | 3.6 | Customer databases, relationships and reacquired rights | 2-5 | 35.1 | 29.7 | 5.4 | 30.9 | 27.5 | 3.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 790.3 | $ | 122.9 | $ | 667.4 | $ | 786.5 | $ | 107.8 | $ | 678.7 | Total | $ | 801.5 | $ | 171.4 | $ | 630.1 | $ | 794.9 | $ | 153.5 | $ | 641.4 | |||||||||||||||||||||||||||||||||||||||||
Amortization expense relating to intangible assets for the Company was $16.1$17.5 million, $17.2$15.9 million and $17.9$15.3 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively, and is recorded in general, administrative and other expenses in the Company's Consolidated Statements of Income. No impairments of goodwill or other intangible assets have adjusted the gross carrying amount of these assets in any period.
66
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Estimated annual amortization of intangible assets is expected to be as follows for the years ending December 31:
| (in millions) | |||||
| 2021 | $ | 20.0 | |||
| 2022 | 14.2 | ||||
| 2023 | 8.2 | ||||
| 2024 | 6.6 | ||||
| 2025 | 6.5 | ||||
| Thereafter | 13.9 | ||||
| Total | $ | 69.4 | |||
67
| (in millions) | |||
| 2018 | $ | 16.1 | |
| 2019 | 15.1 | ||
| 2020 | 14.6 | ||
| 2021 | 14.5 | ||
| 2022 | 13.3 | ||
TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Debt
| (in millions) | 2017 | 2016 | |||||
| Current assets | $ | 73.7 | $ | 58.6 | |||
| Non-current assets | 17.8 | 14.2 | |||||
| Current liabilities | 52.3 | 41.8 | |||||
| Equity | 39.2 | 31.0 | |||||
| (in millions) | 2017 | 2016 | 2015 | ||||||||
| Net sales | $ | 195.1 | $ | 155.2 | $ | 131.6 | |||||
| Gross profit | 129.9 | 101.7 | 85.0 | ||||||||
| Income from operations | 43.3 | 32.2 | 26.2 | ||||||||
| Net income | 31.7 | 24.8 | 20.1 | ||||||||
Debt for the Company consists of the following:
| (in millions) | December 31, 2017 | December 31, 2016 | |||||||||||
| Debt: | Amount | Rate | Amount | Rate | Maturity Date | ||||||||
| 2016 Credit Agreement: | |||||||||||||
| Term A Facility | $ | 555.0 | (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 | 49.0 | (3) | — | N/A | April 12, 2019 | ||||||||
Capital lease obligations (4) | 71.8 | 73.3 | Various | ||||||||||
| Other | 36.7 | 35.8 | Various | ||||||||||
| Total debt | 1,762.5 | 1,901.0 | |||||||||||
| Less: deferred financing costs | (9.4 | ) | (12.9 | ) | |||||||||
| Total debt, net | 1,753.1 | 1,888.1 | |||||||||||
| Less: current portion | (72.4 | ) | (70.3 | ) | |||||||||
| Total long-term debt, net | $ | 1,680.7 | $ | 1,817.8 | |||||||||
| (in millions) | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||
| Debt: | Amount | Rate | Amount | Rate | Maturity Date | ||||||||||||||||||||||||
| 2019 Credit Agreement: | |||||||||||||||||||||||||||||
| Term A Facility | $ | 409.1 | (1) | $ | 425.0 | (2) | October 16, 2024 | ||||||||||||||||||||||
| Revolver | 0 | (1) | 0 | (2) | October 16, 2024 | ||||||||||||||||||||||||
| 2026 Senior Notes | 600.0 | 5.500% | 600.0 | 5.500% | June 15, 2026 | ||||||||||||||||||||||||
| 2023 Senior Notes | 250.0 | 5.625% | 450.0 | 5.625% | October 15, 2023 | ||||||||||||||||||||||||
| Securitized debt | 33.9 | (3) | 0 | (3) | April 6, 2021 | ||||||||||||||||||||||||
Finance lease obligations (4) | 71.4 | 64.1 | Various | ||||||||||||||||||||||||||
| Other | 5.9 | 7.9 | Various | ||||||||||||||||||||||||||
| Total debt | 1,370.3 | 1,547.0 | |||||||||||||||||||||||||||
| Less: Deferred financing costs | 3.4 | 7.0 | |||||||||||||||||||||||||||
| Total debt, net | 1,366.9 | 1,540.0 | |||||||||||||||||||||||||||
| Less: Current portion | 43.9 | 37.4 | |||||||||||||||||||||||||||
| Total long-term debt, net | $ | 1,323.0 | $ | 1,502.6 | |||||||||||||||||||||||||
| (1) | Interest at LIBOR plus applicable margin of | ||||
| (2) | Interest at LIBOR plus applicable margin of | ||||
| (3) | Interest at one month LIBOR index plus 80 basis points. | ||||
| (4) | |||||
On April 6, 2016,October 16, 2019, the Company entered into a senior secured credit agreement ("2016the 2019 Credit Agreement")Agreement with a syndicate of banks. The 20162019 Credit Agreement replaced the Company’s 2012 Senior SecuredCompany's 2016 Credit Agreement ("2012 Credit Agreement").Agreement. The 20162019 Credit Agreement provides for a $500.0$425.0 million revolving credit facility, a $500.0$425.0 million initial term loan facility and a $100.0 million delayed draw term loan facility. At any time, the Company may also elect to request the establishment of one or morean incremental term loan facilities and/or increase commitments under the revolving credit facility in an aggregate amount of up to $500.0 million. A portion$550.0 million plus the amount of the revolving credit facility of upcertain prepayments plus an additional unlimited amount subject to $250.0compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $60.0 million is available in Canadian Dollars, Pounds Sterling, the Euro and any additional currencies determined by mutual agreement of the Company, the administrative agent and the lenders under the revolving credit facility. A portion of the revolving credit facility of up to $100.0 million is availablesub-facility for the issuance of letters of credit for the account of the Company and a portion ofcredit. Total availability under the revolving credit facility was $424.9 million, after a $0.1 million reduction for outstanding letters of up to $50.0 million is available for swing line loans to the Company.credit.
Borrowings under the 20162019 Credit Agreement will generally bear interest, at the election of Tempur Sealy International and the other subsidiary borrowers, at either (i)Base Rate or LIBOR plus the applicable margin. For the revolving credit facility and the term loan facility (a) the initial applicable margin or (ii)for Base Rate plusadvances was 0.625% per annum and the initial applicable margin. Themargin for LIBOR advances was 1.625% per annum, and (b) following the delivery of financial statements for the fiscal quarter ending December 31, 2020, such applicable margins that are determined by a pricing grid based on the consolidated total net leverage ratio of the Company following the delivery of the Consolidated Financial Statements of the Company for the most recent quarter. The delayed draw term loan facility has identical pricing to the revolving credit facility and initial term loan facility. For the period ended December 31, 2017, the margin was either (i) LIBOR plus 1.75% per annum, or (ii) Base Rate plus 0.75%.Company.
Obligations under the 20162019 Credit Agreement are guaranteed by the Company’s existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions. The 2016 Credit Agreement isexceptions and are secured by a security interest in substantially all of Tempur Sealy International’s and the other subsidiary borrowers’ domestic assets and the domestic assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0% of the equity interests of each subsidiary owned by the Company or a subsidiary guarantor that is a domestic entity (subject to certain limited exceptions) and 65.0% of the voting equity interests of any direct first tier foreign entity owned by the Company or a subsidiary guarantor.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 20162019 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 debtindebtedness less qualified cash.netted cash (as defined below). Consolidated funded debtindebtedness includes debt recorded on the Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding in excess of $40.0 million and other short-term debt. The Company is allowed to subtract from consolidated funded debtindebtedness an amount equal to 100.0% of the domestic qualifiedand foreign unrestricted cash and 60.0% of foreign qualified cash,("netted cash"), the aggregate of which cannot exceed $150.0$200.0 million at the end of the reporting period. As of December 31, 2017, domestic qualified2020, netted cash was $18.4 million and foreign qualified cash was $14.1$63.6 million. As of December 31, 2017,2020, the Company's consolidated total net leverage ratio was 3.911.68 times, within the covenant in the Company's debt agreements which limits this ratio to 5.00 times for the year ended December 31, 2017.times.
The 20162019 Credit Agreement contains certain customary negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, transactions with affiliates, use of proceeds, prepayments of certain indebtedness, entry into burdensome agreements and changes to governing documents and other junior financing documents. The 20162019 Credit Agreement also contains certain customary affirmative covenants and events of default, including upon a change of control.
The Company was in compliance with all applicable covenants in the 20162019 Credit Agreement at December 31, 2017.2020.
The maturity date of the 2019 Credit Agreement is October 16, 2024. On February 2, 2021 the Company is requiredentered into an amendment to pay a commitment fee on the unused portion of2019 Credit Agreement. The amendment provides for an increase to the revolving credit facility. The commitment fee rate is determined by a pricing grid based on the consolidated total net leverage ratio of the Company. The commitment fee is payable quarterly in arrears following the delivery of Consolidated Financial Statements for the most recent quarter and on the date of termination or expiration of the commitmentsfacility from $425.0 million to $725.0 million. Amounts under the revolving credit facility.facility may be borrowed, repaid and re-borrowed from time to time until the maturity date. The Company and the other borrowers also pay customary letter of credit issuance and other fees under the 2016 Credit Agreement. For the period ended December 31, 2017, the Company's commitment fee rate was 0.30%.
Senior Notes
2026 Senior Notes
On May 24, 2016, Tempur Sealy International issued $600.0 million aggregate principal amount of 5.500% 2026 Senior Notes in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2026 Senior Notes were issued pursuant to an indenture, dated as of May 24, 2016 (the "2026 Indenture"), among Tempur Sealy International, certain subsidiaries of Tempur Sealy International as guarantors (the "Combined Guarantor Subsidiaries"), and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2026 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Combined Guarantor Subsidiaries. The 2026 Senior Notes mature on June 15, 2026, and interest is payable semi-annually in arrears on each June 15 and December 15, which began on December 15, 2016. The gross proceeds from the 2026 Senior Notes were used to refinance the $375.0 million aggregate principal amount of 6.875% 2020 Senior Notes and to pay related fees and expenses, and the remaining funds were used for share repurchases and general corporate purposes.
Tempur Sealy International has the option to redeem all or a portion of the 2026 Senior Notes at any time on or after June 15, 2021. The initial redemption price is 102.750% of the principal amount, plus accrued and unpaid interest, if any. The redemption price will decline each year after 2021 until it becomes 100.0% of the principal amount beginning on June 15, 2024. In addition, Tempur Sealy International has the option at any time prior to June 15, 2021 to redeem some or all of the 2026 Senior Notes at 100.0% of the original principal amount plus a “make-whole” premium and accrued and unpaid interest, if any. Tempur Sealy International may alsohad the option to redeem up to 35.0% of the 2026 Senior Notes prior to June 15, 2019, under certain circumstances with the net cash proceeds from certain equity offerings, at 105.500% of the principal amount plus accrued and unpaid interest, if any. Tempur Sealy International may makecould have made such redemptions as described in the preceding sentence only if, after any such redemption, at least 65.0% of the original aggregate principal amount of the 2026 Senior Notes issued remains outstanding.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 2026 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things: (i) incur, directly or indirectly, debt; (ii) make, directly or indirectly, certain investments and restricted payments; (iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets; (iv) sell or otherwise dispose of assets, directly or indirectly; (v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock; (vi) enter into transactions with affiliates; (vii) engage in sale-leaseback transactions; (viii) purchase or redeem capital stock or subordinated indebtedness; (ix) issue or sell stock of restricted subsidiaries; and (x) effect a consolidation or merger. These covenants are subject to a number of exceptions and qualifications.
In conjunction with the issuance and sale of the 2026 Senior Notes, Tempur Sealy International and the Combined Guarantor Subsidiaries agreed through a Registration Rights Agreement to exchange the 2026 Senior Notes for a new issue of substantially identical senior notes registered under the Securities Act (the "Exchange Offer"). On October 18, 2016, Tempur Sealy International completed the Exchange Offer, with 100% of the outstanding notes tendered and received for new 2026 Senior Notes registered under the Securities Act.
2023 Senior Notes
On September 24, 2015, Tempur Sealy International issued $450.0 million aggregate principal amount of 5.625% 2023 Senior Notes in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2023 Senior Notes were issued pursuant to an indenture, dated as of September 24, 2015 (the “2023 Indenture”"2023 Indenture"), among Tempur Sealy International, the Combined Guarantor Subsidiaries (the Combined Guarantor Subsidiaries are the same under the 2026 Indenture, the 2023 Indenture and the 2020 Indenture), and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2023 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Combined Guarantor Subsidiaries. The 2023 Senior Notes mature on October 15, 2023, and interest is payable semi-annually in arrears on each April 15 and October 15, which began on April 15, 2016. The gross proceeds from the 2023 Senior Notes were used to refinance a portion of the term loan debt under the 2012 Credit Agreement and to pay related fees and expenses.
Since October 15, 2018, Tempur Sealy International has had the option to redeem all or a portion of the 2023 Senior Notes at any time on or after October 15, 2018.time. The initial redemption price is 104.219% of the principal amount, plus accrued and unpaid interest, if any. The redemption price will decline each year after 2018 until it becomes 100.0% of the principal amount beginning on October 15, 2021. In addition, Tempur Sealy International hasOn November 9, 2020, the option at any time prior to October 15, 2018 to redeem some or allCompany redeemed the first $200.0 million of the issued and outstanding 2023 Senior Notes at 100.0% of the original principal amount plus a “make-whole” premium and accrued and unpaid interest, if any. Tempur Sealy International may also redeem up to 35.0% of the 2023 Senior Notes prior to October 15, 2018, under certain circumstances with the net cash proceeds from certain equity offerings, at 105.625%101.406% of the principal amount, plus the accrued and unpaid interest, if any. Tempur Sealy International may make such redemptions as described ininterest. On January 13, 2021, the preceding sentence only if, after any such redemption, at least 65.0%Company redeemed $125.0 million of the original aggregate principal amount of theremaining $250.0 million issued and outstanding 2023 Senior Notes issued remains outstanding.at 101.406% of the principal amount, plus the accrued and unpaid interest. On February 8, 2021 the Company redeemed the remaining $125.0 million of its 2023 Senior Notes at 101.406% of the principal amount, plus the accrued and unpaid interest.
The 2023 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things: (i) incur, directly or indirectly, debt; (ii) make, directly or indirectly, certain investments and restricted payments; (iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets; (iv) sell or otherwise dispose of, directly or indirectly, assets; (v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock; (vi) enter into transactions with affiliates; (vii) engage in sale-leaseback transactions; (viii) purchase or redeem capital stock or subordinated indebtedness; (ix) issue or sell stock of restricted subsidiaries; and (x) effect a consolidation or merger. These covenants are subject to a number of exceptions and qualifications.
Securitized Debt
On April 12, 2017, Tempur Sealy Internationalthe Company and certain of its subsidiaries entered into a securitization transaction with respect to certain accounts receivable due to the Company and certain of the Company'sits subsidiaries (the(as amended the "Accounts Receivable Securitization"). In connection with this transaction, Tempur Sealy International and its wholly-owned special purpose subsidiary, Tempur Sealy Receivables, LLC, entered into a credit agreement that provides for revolving loans to be made from time to time in a maximum amount that varies over the course of the year based on the seasonality of the Company's accounts receivable and is subject to an overall limit of $120.0 million. The Accounts Receivable Securitization matures April 6, 2021. The Company is in the process of refinancing this facility. Borrowings under this facility are classified as long-term debt within
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TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Consolidated Balance Sheets at December 31, 2020, based on the Company's ability and intent to refinance on a long-term basis.
The obligations of the Company and its relevant subsidiaries under the Accounts Receivable Securitization are secured by the accounts receivable and certain related rights and the facility agreements contain customary events of default. The accounts receivable continue to be owned by the Company and its subsidiaries and continue to be reflected as assets on the Company’sCompany's Consolidated Balance Sheets and represent collateral up to the amount of the borrowings under this facility. Borrowings under this facility are classified as long-term debt within the Consolidated Balance Sheets.
Fair Value
Financial instruments, although not recorded at fair value on a recurring basis, include cash and cash equivalents, accounts receivable, accounts payable and the Company's debt obligations. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value 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) | December 31, 2020 | December 31, 2019 | ||||||||||||
| 2023 Senior Notes | $ | 255.1 | $ | 464.2 | ||||||||||
| 2026 Senior Notes | 625.4 | 634.9 | ||||||||||||
| Fair Value | ||||||||
| (in millions) | December 31, 2017 | December 31, 2016 | ||||||
| 2023 Senior Notes | $ | 470.9 | $ | 468.5 | ||||
| 2026 Senior Notes | 618.1 | 606.8 | ||||||
Deferred Financing Costs
The Company capitalizes costs associated with the issuance of debt and amortizes these costs as additional interest expense over the lives of the debt instruments using the effective interest method. These costs are recorded as deferred financing costs as a direct reduction from the carrying amount of the corresponding debt liability in the accompanying Consolidated Balance Sheets and the related amortization is included in interest expense, net in the accompanying Consolidated Statements of Income. Upon the prepayment of the related debt, the Company accelerates the recognition of an appropriate amount of the costs. As a result of the redemption of $200.0 million of the 2023 Senior Notes, the Company expensed $2.3 million of deferred financing costs, which are included within loss on extinguishment of debt in the Consolidated Statement of Income for the twelve months ended December 31, 2020.
Future Obligations
As of December 31, 2017,2020, the scheduled maturities of long-term debt outstanding, including capitalexcluding finance lease obligations, for each of the next five years and thereafter are as follows:
| (in millions) | ||||||||
| 2021 | $ | 66.4 | ||||||
| 2022 | 21.3 | |||||||
| 2023 | 281.9 | |||||||
| 2024 | 329.3 | |||||||
| 2025 | 0 | |||||||
| Thereafter | 600.0 | |||||||
| Total | $ | 1,298.9 | ||||||
| (in millions) | ||||
| 2018 | $ | 72.4 | ||
| 2019 | 92.9 | |||
| 2020 | 59.3 | |||
| 2021 | 442.1 | |||
| 2022 | 5.7 | |||
| Thereafter | 1,090.1 | |||
| Total | $ | 1,762.5 | ||
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TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) Leases
The Company leases retail stores, manufacturing and distribution facilities, office space and equipment under operating and finance lease agreements. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to several years, with the longest renewal period extending through 2034. The exercise of lease renewal options are at the Company's sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Consolidated Balance Sheet as of December 31, 2020 and 2019:
| (in millions) | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Operating lease assets | Operating lease right-of-use assets | $ | 304.3 | $ | 245.4 | |||||||||||||||||||||
| Finance lease assets | Property, plant and equipment, net | 61.2 | 54.4 | |||||||||||||||||||||||
| Total leased assets | $ | 365.5 | $ | 299.8 | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Short-term: | ||||||||||||||||||||||||||
| Operating lease obligations | Accrued expenses and other current liabilities | $ | 61.0 | $ | 50.8 | |||||||||||||||||||||
| Finance lease obligations | Current portion of long-term debt | 11.4 | 8.2 | |||||||||||||||||||||||
| Long-term: | ||||||||||||||||||||||||||
| Operating lease obligations | Long-term operating lease obligations | 275.1 | 205.4 | |||||||||||||||||||||||
| Finance lease obligations | Long-term debt, net | 60.0 | 55.9 | |||||||||||||||||||||||
| Total lease obligations | $ | 407.5 | $ | 320.3 | ||||||||||||||||||||||
The following table summarizes the classification of lease expense in the Company's Consolidated Statements of Income for the years ended December 31, 2020 and 2019:
| Twelve Months Ended | ||||||||||||||
| (in millions) | December 31, 2020 | December 31, 2019 | ||||||||||||
| Operating lease expense: | ||||||||||||||
| Operating lease expense | $ | 75.4 | $ | 63.8 | ||||||||||
| Short-term lease expense | 11.1 | 9.0 | ||||||||||||
| Variable lease expense | 22.2 | 18.8 | ||||||||||||
| Finance lease expense: | ||||||||||||||
| Amortization of right-of-use assets | 9.3 | 8.5 | ||||||||||||
| Interest on lease obligations | 4.7 | 4.7 | ||||||||||||
| Total lease expense | $ | 122.7 | $ | 104.8 | ||||||||||
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the scheduled maturities of lease obligations as of December 31, 2020:
| (in millions) | Operating Leases | Finance Leases | Total | |||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | $ | 74.1 | $ | 15.3 | $ | 89.4 | ||||||||||||||
| 2022 | 67.9 | 13.4 | 81.3 | |||||||||||||||||
| 2023 | 55.5 | 10.7 | 66.2 | |||||||||||||||||
| 2024 | 46.0 | 8.6 | 54.6 | |||||||||||||||||
| 2025 | 39.3 | 7.7 | 47.0 | |||||||||||||||||
| Thereafter | 112.3 | 34.2 | 146.5 | |||||||||||||||||
| Total lease payments | 395.1 | 89.9 | 485.0 | |||||||||||||||||
| Less: Interest | (59.0) | (18.5) | (77.5) | |||||||||||||||||
| Present value of lease obligations | $ | 336.1 | $ | 71.4 | $ | 407.5 | ||||||||||||||
The following table provides lease term and discount rate information related to operating and finance leases as of December 31, 2020:
| December 31, 2020 | ||||||||
| Weighted average remaining lease term (years): | ||||||||
| Operating leases | 6.66 | |||||||
| Finance leases | 7.91 | |||||||
| Weighted average discount rate: | ||||||||
| Operating leases | 4.90 | % | ||||||
| Finance leases | 5.80 | % | ||||||
The following table provides supplemental information related to the Company's Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019:
| Twelve Months Ended | ||||||||||||||||||||
| (in millions) | December 31, 2020 | December 31, 2019 | ||||||||||||||||||
| Cash paid for amounts included in the measurement of lease obligations: | ||||||||||||||||||||
Operating cash flows paid for operating leases (a) | $ | 70.1 | $ | 62.7 | ||||||||||||||||
| Operating cash flows paid for finance leases | $ | 4.7 | $ | 3.7 | ||||||||||||||||
| Financing cash flows paid for finance leases | $ | 10.2 | $ | 7.7 | ||||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | $ | 109.4 | $ | 60.9 | ||||||||||||||||
| Right-of-use assets obtained in exchange for new finance lease obligations | $ | 17.6 | $ | 4.1 | ||||||||||||||||
(a)Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Consolidated Statement of Cash Flows offset by non-cash right-of-use asset amortization and lease liability accretion.
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7)Retirement Plans
401(k) Plan
The Company has a defined contribution plan ("the 401(k) Plan") whereby eligible employees may contribute up to 85.0% of their pay subject to certain limitations as defined by the 401(k) Plan. Employees are eligible to participate in the 401(k) Plan upon hire and are eligible to receive matching contributions upon six months of continuous employment with the Company. The 401(k) Plan provides a 100.0% match of the first 3.0% and 50.0% of the next 2.0% of eligible employee contributions. The match for union employees is based on the applicable collective bargaining arrangement. All matching contributions vest immediately. The Company incurred $4.0$5.8 million, $6.7$6.0 million and $7.3$5.8 million of expenses associated with the 401(k) Plan for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively, which are included in the Consolidated Statements of Income.
The Company has a noncontributory, defined benefit pension plan covering current and former hourly employees at only two2 of its active Sealy plants and ten10 previously closed Sealy U.S. facilities. Sealy Canada, Ltd. (a 100.0% ownedwholly-owned subsidiary of the Company) also sponsors a noncontributory, defined benefit pension plan covering hourly employees at one1 of its facilities (collectively, referred to as the "Plans"). The Plans provide retirement and survivorship benefits based on the employees’ credited years of service. The Company’s funding policy provides for contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes.
The Plans' assets consist of investments in various common/collective trusts with equity investment strategies diversified across multiple industry sectors and company market capitalization within specific geographical investment strategies, fixed income common/collective trusts, which invest primarily in investment-grade and high-yield corporate bonds and U.S. treasury securities, as well as money market mutual funds. The fixed income investments are diversified as to ratings, maturities, industries and other factors. The Plans' assets contain no significant concentrations of risk related to individual securities or industry sectors. The Plans have no direct investment in the Company's common stock.
The long-term rate of return for the Plans is based on the weighted average of the Plans’ investment allocation and the historical returns for those asset categories. Because future compensation levels are not a factor in these Plans’Plans' benefit formulas, the accumulated benefit obligation is equal to the projected benefit obligation as reported below. The discount rate is based on the returns on long-term bonds in the private sector and incorporates a long-term inflation rate. Summarized information for the Plans follows:
Expenses and Status
| (in millions) | 2020 | 2019 | 2018 | ||||||||||||||
| Service cost | $ | 1.1 | $ | 0.9 | $ | 1.0 | |||||||||||
| Interest cost | 1.1 | 1.2 | 1.1 | ||||||||||||||
| Expected return on assets | (1.5) | (1.3) | (1.5) | ||||||||||||||
| Amortization of prior service cost | 0.1 | 0.1 | 0.1 | ||||||||||||||
| Amortization of net gain | 0.1 | 0.1 | 0 | ||||||||||||||
| Net periodic pension cost | $ | 0.9 | $ | 1.0 | $ | 0.7 | |||||||||||
| (in millions) | 2017 | 2016 | 2015 | ||||||||
| Service cost | $ | 0.9 | $ | 0.8 | $ | 0.8 | |||||
| Interest cost | 1.2 | 1.2 | 1.9 | ||||||||
| Expected return on assets | (1.5 | ) | (1.3 | ) | (2.2 | ) | |||||
| Amortization of prior service cost | 0.1 | — | — | ||||||||
| Settlement loss | — | 0.2 | 1.3 | ||||||||
| Net periodic pension cost | $ | 0.7 | $ | 0.9 | $ | 1.8 | |||||
The other changes in plan assets and benefit obligations recognized in other comprehensive loss, (income)before tax effects, for the years ended December 31 were: