SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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



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

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common Stock, $0.01 par value	TPX	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

☐o

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ý

The number of shares outstanding of the registrant’s common stock as of ~~July 29, 2019~~August 3, 2020 was ~~54,811,534~~51,566,272 shares.

This Quarterly Report on Form 10-Q, (this "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"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which includes information concerning one or more of our plans; objectives; goals; strategies and other information that is not historical information. Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, ITEM 2 of this Report. When used in this Report, the words "assumes," "estimates," "expects," “guidance,” “anticipates,” "might," “projects,” "predicts," “plans,” “proposed,” “targets,” “intends,” “believes,” ~~“will”~~“will,” "may," "could," "is likely to" and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements ~~are based upon our current~~include, without limitation, statements relating to the Company's expectations regarding sales and ~~various assumptions.~~demand trends, performance generally for 2020 and subsequent periods, the potential vesting of the Company’s long-term aspirational plan, the expected impacts of COVID-19 and the Company's expectations for emerging from the market downturn. There can be no assurance that we will realize our expectations or that our beliefs will prove correct.

Numerous factors, many of which are beyond the Company's control, could cause actual results to differ materially from ~~those~~any that may be expressed herein as forward-looking statements in this ~~Report, including risks associated with~~Report. These risk factors include the impact of the macroeconomic environment in both the U.S. and internationally ~~(including the impact of our highly inflationary economies)~~ 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 business and operations, including the disruption or delay of production and delivery of materials and products in our supply chain; the impact of travel bans, work-from-home policies, or shelter-in-place orders; a temporary or prolonged shutdown of manufacturing facilities or retail stores and decreased retail traffic; the effects of strategic investments on our operations, including our efforts to expand 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 ability to maintain efficient, timely and cost-effective production and delivery of products, and manage growth generally and in connection with the new or expanded supply agreements with Mattress Firm, Inc., Big Lots, Inc. and Beter Bed Holding N.V.; the effects of consolidation of retailers on revenues and costs; competition in our industry; consumer acceptance of our products; ~~the effects of discontinued operations on our operating results and future performance;~~ general economic, financial and industry conditions, particularly conditions relating to ~~the~~liquidity, financial performance and related credit issues present in the retail sector; financial distress among our business partners, customers and ~~competitors;~~competitors, and financial solvency and related problems experienced by other market ~~participants;~~participants, any of which may be amplified by the effects of COVID-19; risks associated with our ~~ability to execute on our strategy to optimize and integrate~~acquisition of 80% ownership of Sherwood Acquisition Holdings, LLC, including the ~~assets~~possibility that the expected benefits of ~~Innovative Mattress Solutions, LLC acquired by our affiliate;~~the acquisition are not realized when expected or at all; our reliance on 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 foreign tax rates and changes in tax laws generally, including the ability to utilize tax loss carryforwards; market disruptions related to COVID-19 which may frustrate our ability to access financing on acceptable terms or at all; our capital structure and debt level, including our ability to meet financial obligations and continue to comply with the terms and financial ratio covenants of our credit facilities; changes in interest rates; effects of changes in foreign exchange rates on our reported earnings; changing commodity costs; ~~disruptions in the supply of raw materials, or loss of suppliers;~~ expectations regarding our target leverage and our share repurchase program; sales fluctuations due to seasonality; the effect of future legislative or regulatory changes, including changes in international trade duties, tariffs and other aspects of international trade policy; our ability to protect our intellectual property; and disruptions to the implementation of our strategic priorities and business plan caused by ~~abrupt~~ changes in our executive management team.

Other potential risk factors include the risk factors discussed under the heading "Risk Factors" ~~under~~in Part I, ITEM 1A ~~of Part I~~ of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 (the ~~"2018~~"2019 Annual Report")., and in Part II, ITEM 1A, Risk Factors, of this Report. In addition, there may be other factors that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us apply only as of the date of this Report and are expressly qualified in their entirety by the cautionary statements included in this Report. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements, whether as a result of new information, future events, or otherwise.

When used in this Report, except as specifically noted otherwise, the term "Tempur Sealy International" refers to Tempur Sealy International, Inc. only, and the terms "Company," "we," "our," "ours" and "us" refer to Tempur Sealy International, Inc. and its consolidated subsidiaries. When used in this Report, the term "Tempur" may refer to Tempur-branded products and the term "Sealy" may refer to Sealy-branded products or to Sealy Corporation and its historical subsidiaries, in all cases as the context requires. In addition, when used in this Report, ~~"2016~~"2019 Credit Agreement" refers to the Company's senior credit facility entered into in ~~2016, as amended;~~2019; "2023 Senior Notes" refers to the 5.625% senior notes due 2023 issued in 2015; and "2026 Senior Notes" refers to the 5.50% senior notes due 2026 issued in ~~2016; and "2020 Senior Notes" refers to the 6.875% senior notes due 2020 retired in~~ 2016.

TABLE OF CONTENTS


			Page

				~~Page~~

Special Note Regarding Forward-Looking Statements		2

PART I. FINANCIAL INFORMATION

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

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3326

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		5146

ITEM 4.	Controls and Procedures		5246

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings		5346

ITEM 1A.	Risk Factors		5347

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		5348

ITEM 3.	Defaults upon Senior Securities		5348

ITEM 4.	Mine Safety Disclosures		5349

ITEM 5.	Other Information		5349

ITEM 6.	Exhibits		5450

Signatures					5551

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

($ in millions, except per common share amounts)

(unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
Net sales	$	665.2	$	722.8	$	1,487.6	$	1,413.7
Cost of sales	399.3		409.4		864.6		818.5
Gross profit	265.9		313.4		623.0		595.2
Selling and marketing expenses	135.1		163.3		306.1		316.8
General, administrative and other expenses	82.4		72.7		163.0		143.4

Equity income in earnings of unconsolidated affiliates	(5.0)		(3.6)		(4.8)		(6.5)
Operating income	53.4		81.0		158.7		141.5

Other expense, net:
Interest expense, net	20.6		22.5		40.9		44.9
Other expense (income), net	0.3		—		0.8		(7.8)
Total other expense, net	20.9		22.5		41.7		37.1

Income from continuing operations before income taxes	32.5		58.5		117.0		104.4
Income tax provision	(9.4)		(15.8)		(32.9)		(32.7)
Income from continuing operations	23.1		42.7		84.1		71.7
Income (loss) from discontinued operations, net of tax	0.1		(1.2)		(1.1)		(1.6)
Net income before non-controlling interests	23.2		41.5		83.0		70.1
Less: Net income (loss) attributable to non-controlling interests	0.2		(0.1)		0.3		0.1
Net income attributable to Tempur Sealy International, Inc.	$	23.0	$	41.6	$	82.7	$	70.0

Earnings per common share:

Basic
Earnings per share for continuing operations	$	0.44	$	0.78	$	1.60	$	1.31
Loss per share for discontinued operations	—		(0.02)		(0.02)		(0.03)
Earnings per share	$	0.44	$	0.76	$	1.58	$	1.28

Diluted
Earnings per share for continuing operations	$	0.44	$	0.76	$	1.58	$	1.29
Loss per share for discontinued operations	—		(0.02)		(0.02)		(0.03)
Earnings per share	$	0.44	$	0.74	$	1.56	$	1.26

Weighted average common shares outstanding:
Basic	51.6		54.7		52.5		54.7
Diluted	52.0		56.0		53.0		55.6

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
Net sales $ 722.8
$ 659.9
$ 1,413.7
$ 1,297.3
Cost of sales 409.4
387.1
818.5
759.8
Gross profit 313.4
272.8
595.2
537.5
Selling and marketing expenses 163.3
153.3
316.8
298.7
General, administrative and other expenses 72.7
65.3
143.4
132.8
Equity income in earnings of unconsolidated affiliates (3.6 ) (3.8 ) (6.5 ) (7.7 )
Operating income 81.0
58.0
141.5
113.7

Other expense, net:
Interest expense, net 22.5
23.2
44.9
45.9
Other income, net —
(0.6 ) (7.8 ) (3.2 )
Total other expense, net 22.5
22.6
37.1
42.7

Income from continuing operations before income taxes 58.5
35.4
104.4
71.0
Income tax provision (15.8 ) (8.8 ) (32.7 ) (18.8 )
Income from continuing operations 42.7
26.6
71.7
52.2
Loss from discontinued operations, net of tax (1.2 ) (5.4 ) (1.6 ) (8.2 )
Net income before non-controlling interest 41.5
21.2
70.1
44.0
Less: Net (loss) income attributable to non-controlling interest (0.1 ) (1.6 ) 0.1
(1.9 )
Net income attributable to Tempur Sealy International, Inc. $ 41.6
$ 22.8
$ 70.0
$ 45.9

Earnings per common share:

Basic
Earnings per share for continuing operations $ 0.78
$ 0.52
$ 1.31
$ 0.99
Loss per share for discontinued operations (0.02 ) (0.10 ) (0.03 ) (0.15 )
Earnings per share $ 0.76
$ 0.42
$ 1.28
$ 0.84

Diluted
Earnings per share for continuing operations $ 0.76
$ 0.52
$ 1.29
$ 0.98
Loss per share for discontinued operations (0.02 ) (0.10 ) (0.03 ) (0.15 )
Earnings per share $ 0.74
$ 0.42
$ 1.26
$ 0.83

Weighted average common shares outstanding:
Basic 54.7
54.4
54.7
54.4
Diluted 56.0
54.9
55.6
55.0

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in millions)

(unaudited)

Three Months Ended
June 30, Six Months Ended June 30,
2019 2018 2019 2018
Net income before non-controlling interest $ 41.5
$ 21.2
$ 70.1
$ 44.0
Other comprehensive income, net of tax
Foreign currency translation adjustments 3.0
(16.1 ) 7.0
(11.1 )
Pension benefits loss, net of tax —
—
—
(0.6 )
Other comprehensive income, net of tax 3.0
(16.1 ) 7.0
(11.7 )
Comprehensive income 44.5
5.1
77.1
32.3
Less: Comprehensive (loss) income attributable to non-controlling interest (0.1 ) (1.6 ) 0.1
(1.9 )
Comprehensive income attributable to Tempur Sealy International, Inc. $ 44.6
$ 6.7
$ 77.0
$ 34.2


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
Net income before non-controlling interests	$	23.2	$	41.5	$	83.0	$	70.1
Other comprehensive income, net of tax:
Foreign currency translation adjustments	10.7		3.0		(12.3)		7.0

Other comprehensive income (loss), net of tax	10.7		3.0		(12.3)		7.0
Comprehensive income	33.9		44.5		70.7		77.1
Less: Comprehensive income (loss) attributable to non-controlling interests	0.2		(0.1)		0.3		0.1
Comprehensive income attributable to Tempur Sealy International, Inc.	$	33.7	$	44.6	$	70.4	$	77.0

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)


	June 30, 2019		December 31, 2018			June 30, 2020		December 31, 2019
ASSETS	(Unaudited)				ASSETS	(Unaudited)

Current Assets:					Current Assets:
Cash and cash equivalents	$	38.3	$	45.8	Cash and cash equivalents	$	146.8	$	64.9
Accounts receivable, net	386.3		321.5		Accounts receivable, net	341.8		372.0
Inventories	243.1		222.3		Inventories	258.8		260.5
Prepaid expenses and other current assets	224.0		215.8		Prepaid expenses and other current assets	198.1		202.8
Total Current Assets	891.7		805.4		Total Current Assets	945.5		900.2
Property, plant and equipment, net	430.0		420.8		Property, plant and equipment, net	462.8		435.8
Goodwill	732.3		723.0		Goodwill	757.5		732.3
Other intangible assets, net	650.6		649.3		Other intangible assets, net	633.5		641.4
Operating lease right-of-use assets	228.1		—		Operating lease right-of-use assets	281.6		245.4
Deferred income taxes	12.5		22.6		Deferred income taxes	13.6		14.1
Other non-current assets	101.5		94.3		Other non-current assets	107.4		92.6
Total Assets	$	3,046.7	$	2,715.4	Total Assets	$	3,201.9	$	3,061.8

LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:					Current Liabilities:
Accounts payable	$	235.5	$	253.0	Accounts payable	$	247.1	$	251.7
Accrued expenses and other current liabilities	436.4		359.2		Accrued expenses and other current liabilities	455.2		473.2
Current portion of long-term debt	60.1		47.1		Current portion of long-term debt	256.4		37.4
Income taxes payable	6.7		9.7		Income taxes payable	43.0		11.0
Total Current Liabilities	738.7		669.0		Total Current Liabilities	1,001.7		773.3
Long-term debt, net	1,585.5		1,599.1		Long-term debt, net	1,497.2		1,502.6
Long-term operating lease obligations	186.7		—		Long-term operating lease obligations	239.3		205.4
Deferred income taxes	117.0		117.5		Deferred income taxes	93.0		102.1
Other non-current liabilities	112.9		112.3		Other non-current liabilities	121.0		118.0
Total Liabilities	2,740.8		2,497.9		Total Liabilities	2,952.2		2,701.4

Commitments and contingencies—see Note 12


Total Stockholders' Equity	305.9		217.5		Total Stockholders' Equity	249.7		360.4
Total Liabilities and Stockholders' Equity	$	3,046.7	$	2,715.4	Total Liabilities and Stockholders' Equity	$	3,201.9	$	3,061.8

See accompanying Notes to Condensed Consolidated Financial Statements.

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

See accompanying Notes to Condensed Consolidated Financial Statements.

Tempur Sealy International, Inc. Stockholders' Equity

Redeemable
Non-controlling Interest
Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest in Subsidiaries Total Stockholders' Equity
Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings
Balance as of March 31, 2019 $ —
99.2
$ 1.0
44.5
$ (1,736.7 ) $ 537.1
$ 1,542.2
$ (91.3 ) $ 1.2
$ 253.5
Net income 41.6
41.6
Net loss attributable to non-controlling interest (0.1 ) (0.1 )
Foreign currency adjustments 3.0
3.0
Exercise of stock options (0.1 ) 0.9
2.2
3.1
Issuances of PRSUs, RSUs, and DSUs —
0.3
(0.3 ) —
Treasury stock repurchased —
(1.8 ) (1.8 )
Amortization of unearned stock-based compensation 6.6
6.6
Balance, June 30, 2019 $ —
99.2
$ 1.0
44.4
$ (1,737.3 ) $ 545.6
$ 1,583.8
$ (88.3 ) $ 1.1
$ 305.9

~~Three Months Ended June 30, 2018~~

Tempur Sealy International, Inc. Stockholders' Equity

Redeemable
Non-controlling Interest
Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest in Subsidiaries Total Stockholders' Equity
Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings
Balance as of March 31, 2018 $ 1.9
99.2
$ 1.0
45.0
$ (1,737.5 ) $ 513.6
$ 1,436.4
$ (71.1 ) $ —
$ 142.4
Net income 22.8
22.8
Net loss attributable to non-controlling interest (1.5 ) (0.1 ) (0.1 )
Acquisition of non-controlling interest in subsidiary 1.3
1.3
Foreign currency adjustments (16.1 ) (16.1 )
Exercise of stock options (0.1 ) 0.4
0.3
0.7
Issuances of PRSUs, RSUs, and DSUs —
0.3
(0.3 ) —
Treasury stock repurchased —
(0.1 ) (0.1 )
Amortization of unearned stock-based compensation 6.8
6.8
Balance, June 30, 2018 $ 0.4
99.2
$ 1.0
44.9
$ (1,736.9 ) $ 520.4
$ 1,459.2
$ (87.2 ) $ 1.2
$ 157.7

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

Tempur Sealy International, Inc. Stockholders' Equity

Redeemable
Non-controlling Interest
Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest in Subsidiaries Total Stockholders' Equity
Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings
Balance as of December 31, 2018 $ —
99.2
$ 1.0
44.7
$ (1,737.0 ) $ 532.1
$ 1,513.8
$ (95.3 ) $ 2.9
$ 217.5
Net income 70.0
70.0
Net income attributable to non-controlling interest 0.1
0.1
Repurchase of interest in subsidiary (1.9 ) (1.9 )
Foreign currency adjustments 7.0
7.0
Exercise of stock options (0.2 ) 1.7
3.8
5.5
Issuances of PRSUs, RSUs, and DSUs (0.2 ) 3.5
(3.5 ) —
Treasury stock repurchased 0.1
(5.5 ) (5.5 )
Amortization of unearned stock-based compensation 13.2
13.2
Balance, June 30, 2019 $ —
99.2
$ 1.0
44.4
$ (1,737.3 ) $ 545.6
$ 1,583.8
$ (88.3 ) $ 1.1
$ 305.9

~~Six Months Ended June 30, 2018~~

Tempur Sealy International, Inc. Stockholders' Equity

Redeemable
Non-controlling Interest
Common Stock Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest in Subsidiaries Total Stockholders' Equity
Shares Issued At Par Shares Issued At Cost Additional Paid in Capital Retained Earnings
Balance as of December 31, 2017 $ 2.2
99.2
$ 1.0
45.0
$ (1,737.2 ) $ 508.0
$ 1,416.2
$ (75.5 ) $ —
$ 112.5
Adoption of accounting standards effective January 1, 2018 (2.9 ) (0.5 ) (3.4 )
Net income 45.9
45.9
Net loss attributable to non-controlling interest (1.8 ) (0.1 ) (0.1 )
Acquisition of non-controlling interest in subsidiary 1.3
1.3
Adjustment to pension liability, net of tax (0.1 ) (0.1 )
Foreign currency adjustments (11.1 ) (11.1 )
Exercise of stock options (0.1 ) 1.0
1.6
2.6
Issuances of PRSUs, RSUs, and DSUs (0.1 ) 2.3
(2.3 ) —
Treasury stock repurchased 0.1
(3.0 ) (3.0 )
Amortization of unearned stock-based compensation 13.1
13.1
Balance, June 30, 2018 $ 0.4
99.2
$ 1.0
44.9
$ (1,736.9 ) $ 520.4
$ 1,459.2
$ (87.2 ) $ 1.2
$ 157.7

~~The~~See accompanying Notes to ~~the~~Condensed Consolidated Financial Statements ~~are an integral part~~.

Table of ~~these statements.~~Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions) (unaudited)


	Six Months Ended
	June 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net income before non-controlling interests	$	83.0	$	70.1
Loss from discontinued operations, net of tax	1.1		1.6
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	47.5		43.5
Amortization of stock-based compensation	14.8		13.2
Amortization of deferred financing costs	1.7		1.2
Bad debt expense	26.5		4.6
Deferred income taxes	(6.6)		8.8
Dividends received from unconsolidated affiliates	1.5		2.3
Equity income in earnings of unconsolidated affiliates	(4.8)		(6.5)

Foreign currency adjustments and other	1.0		(6.3)
Changes in operating assets and liabilities, net of effect of business acquisitions	4.7		(86.6)
Net cash provided by operating activities from continuing operations	170.4		45.9

CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:
Purchases of property, plant and equipment	(49.4)		(39.9)
Acquisitions, net of cash acquired	(37.9)		(17.1)

Other	0.1		10.3
Net cash used in investing activities from continuing operations	(87.2)		(46.7)

CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:
Proceeds from borrowings under long-term debt obligations	1,073.9		509.2
Repayments of borrowings under long-term debt obligations	(866.9)		(509.8)
Proceeds from exercise of stock options	1.5		5.5
Treasury stock repurchased	(199.5)		(5.5)
Payments of deferred financing costs	(1.6)		(0.1)
Repayments of finance lease obligations and other	(6.0)		(3.3)
Net cash provided by (used in) financing activities from continuing operations	1.4		(4.0)

Net cash provided by (used in) continuing operations	84.6		(4.8)

CASH USED IN DISCONTINUED OPERATIONS
Operating cash flows	(1.0)		(2.0)
Investing cash flows	—		—
Financing cash flows	—		—
Net cash used in discontinued operations	(1.0)		(2.0)

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(1.7)		(0.7)
Increase (decrease) in cash and cash equivalents	81.9		(7.5)
CASH AND CASH EQUIVALENTS, beginning of period	64.9		45.8
CASH AND CASH EQUIVALENTS, end of period	146.8		38.3
LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS	—		—
CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS	$	146.8	$	38.3

Supplemental cash flow information:
Cash paid during the period for:
Interest	$	41.1	$	45.9
Income taxes, net of refunds	$	7.2	$	35.2

Six Months Ended
June 30,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net income before non-controlling interest $ 70.1
$ 44.0
Loss from discontinued operations, net of tax 1.6
8.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 43.5
41.8
Amortization of stock-based compensation 13.2
13.1
Non-cash lease expense 2.4
—
Amortization of deferred financing costs 1.2
1.2
Bad debt expense 4.6
1.7
Deferred income taxes 8.8
(2.4 )
Dividends received from unconsolidated affiliates 2.3
3.7
Equity income in earnings of unconsolidated affiliates (6.5 ) (7.7 )
Foreign currency adjustments and other (6.3 ) (2.9 )
Changes in operating assets and liabilities (89.0 ) (83.3 )
Net cash provided by operating activities from continuing operations 45.9
17.4

CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:

Purchases of property, plant and equipment (39.9 ) (40.5 )
Acquisitions, net of cash acquired (17.1 )
—
Other 10.3
0.6
Net cash used in investing activities from continuing operations (46.7 ) (39.9 )

CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:

Proceeds from borrowings under long-term debt obligations 509.2
732.2
Repayments of borrowings under long-term debt obligations (509.8 ) (697.8 )
Proceeds from exercise of stock options 5.5
2.6
Treasury stock repurchased (5.5 ) (3.0 )
Other (3.4 ) (3.4 )
Net cash (used in) provided by financing activities from continuing operations (4.0 ) 30.6

Net cash (used in) provided by continuing operations (4.8 ) 8.1

CASH USED IN DISCONTINUED OPERATIONS
Operating cash flows (2.0 ) (15.8 )
Investing cash flows —
(0.1 )
Financing cash flows —
—
Net cash used in discontinued operations (2.0 ) (15.9 )

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (0.7 ) (1.5 )
Decrease in cash and cash equivalents (7.5 ) (9.3 )
CASH AND CASH EQUIVALENTS, beginning of period 45.8
41.9
CASH AND CASH EQUIVALENTS, end of period 38.3
32.6
LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS —
1.6
CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS $ 38.3
$ 31.0

Supplemental cash flow information:

Cash paid during the period for:

Interest $ 45.9
$ 45.3
Income taxes, net of refunds 35.2
17.9

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited)

(1) Summary of Significant Accounting Policies

(a) Basis of Presentation and Description of Business. Tempur Sealy International, Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term "Tempur Sealy International" refers to Tempur Sealy International, Inc. only, and the term "Company" refers to Tempur Sealy International, Inc. and its consolidated subsidiaries.

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

The Company has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions. The Company’s ownership interest in these joint ventures is 50.0%. The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have control, and consolidation is not otherwise required. The Company's carrying value in its equity method investments of ~~$24.6~~$24.8 million and $22.5 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, is recorded in other non-current assets within the accompanying Condensed Consolidated Balance Sheets. The Company’s equity in the net income and losses of these investments is ~~recorded as~~reported in equity income in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States ("GAAP") for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, ~~2018~~,2019, included in the ~~2018~~2019 Annual Report filed with the Securities and Exchange Commission on February ~~25, 2019.~~21, 2020.

The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein.

(b) Adoption of New Accounting Standards.

~~Leases.~~Goodwill. Effective January 1, ~~2019,~~2020, the Company adopted Accounting Standards ~~Codification 842, Leases~~Update ("~~ASC 842"~~ASU") No. 2017-04, "Intangibles - Goodwill and Other (Topic 350). ~~ASC 842 consists~~" The ASU simplifies the test for goodwill impairment, by eliminating Step 2 of the impairment test. Under ASU 2017-04, the goodwill impairment test is performed by comparing the fair value of a ~~comprehensive lease accounting standard requiring most leases to be~~reporting unit with its carrying amount. An impairment charge is recognized on the Condensed Consolidated Balance Sheet and significant new disclosures. The Company determines 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~~amount by which the ~~Company’s obligation~~carrying amount exceeds the reporting unit's fair value, not to ~~make lease payments arising from~~exceed the ~~lease, both~~total amount of ~~which are recognized based on~~goodwill for the ~~present value~~reporting unit. Adoption of 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 Condensed Consolidated Balance Sheet and are expensed on a straight-line basis over the lease term within the Condensed Consolidated Statement of Income. The lease term is determined by assuming the exercise of renewal options that are reasonably certain. As most leases do not provide an implicit interest rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. When contracts contain lease and non-lease components, the Company generally accounts for both components as a single lease component.

The adoption of ASC 842 resulted in the recognition of right-of-use assets 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 842this guidance did not have ~~a material~~an impact on the Company's ~~results~~financial statements.

Credit Losses. Effective January 1, 2020, the Company adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures. The ASU replaces the incurred loss impairment methodology with one that reflects expected credit losses and requires consideration of ~~operations, cash flows or debt covenants. For additional~~a broader range of reasonable and supportable information ~~see Note 8, "Leases~~"to inform credit loss estimates. The Company adopted the new credit losses standard using the modified retrospective approach. The cumulative effect of ~~the Condensed Consolidated Financial Statements.~~adoption at January 1, 2020 was $6.5 million, net of tax. The Company's primary financial assets are its trade accounts receivable, which are short-term financings under industry standard credit and trade terms.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

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


	June 30,		December 31,
(in millions)	2020		2019
Finished goods	$	136.4	$	157.4
Work-in-process	10.6		10.8
Raw materials and supplies	111.8		92.3
	$	258.8	$	260.5

~~Table of Contents~~

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

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

June 30, December 31,
(in millions) 2019 2018
Finished goods $ 143.4
$ 148.9
Work-in-process 11.0
11.8
Raw materials and supplies 88.7
61.6
$ 243.1
$ 222.3

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

The Company had the following activity for sales returns from December 31, ~~2018~~2019 to June 30, ~~2019:~~2020:


(in millions)
Balance as of December 31, 2019	$	39.3
Amounts accrued	51.3
Returns charged to accrual	(49.3)
Balance as of June 30, 2020	$	41.3

(in millions)
Balance as of December 31, 2018 $ 34.3
Amounts accrued 52.0
Returns charged to accrual (49.4 )
Balance as of June 30, 2019 $ 36.9

As of June 30, ~~2019~~2020 and December 31, ~~2018, $24.6~~2019, $27.9 million and ~~$22.0~~$26.2 million of accrued sales returns are included as a component of accrued expenses and other current liabilities and ~~$12.3~~$13.4 million and ~~$12.3~~$13.1 million of accrued sales returns are included in other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.

(e) Warranties. The Company provides warranties on certain products, which vary by segment, product and brand. Estimates of warranty expenses are based primarily on historical claims experience and product testing. Estimated future obligations related to these products are charged to cost of sales in the period in which the related revenue is recognized. The Company considers the impact of recoverable salvage value on warranty costs in determining its estimate of future warranty obligations.

The Company provides warranties on mattresses with varying warranty terms. Tempur-Pedic mattresses sold in the North America segment and all Sealy mattresses have warranty terms ranging from 10 to 25 years, generally non-prorated for the first 10 to 15 years and then prorated for the balance of the warranty term. Tempur-Pedic mattresses sold in the International segment have warranty terms ranging from 5 to 15 years, non-prorated for the first 5 years and then prorated on a straight-line basis for the last 10 years of the warranty term. Tempur-Pedic pillows have a warranty term of 3 years, non-prorated.

The Company had the following activity for its accrued warranty expense from December 31, ~~2018~~2019 to June 30, ~~2019:~~2020:


(in millions)
Balance as of December 31, 2019	$	41.6
Amounts accrued	9.4
Warranties charged to accrual	(10.6)
Balance as of June 30, 2020	$	40.4

(in millions)
Balance as of December 31, 2018 $ 36.4
Amounts accrued 14.3
Warranties charged to accrual (13.1 )
Balance as of June 30, 2019 $ 37.6

As of June 30, ~~2019~~2020 and December 31, ~~2018~~, ~~$15.5~~2019, $17.5 million and ~~$14.9~~$19.4 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and ~~$22.1~~$22.9 million and ~~$21.5~~$22.2 million of accrued warranty expense is included in other non-current liabilities inon the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

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

The Company had the ~~collection of a customer receivable is reasonably assured. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential~~following activity for ~~recovery is considered remote. The~~its allowance for ~~doubtful accounts included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets was~~ ~~$50.9 million~~ ~~and~~ ~~$47.6 million~~ ~~as of~~credit losses from December 31, 2019 to June 30, ~~2019 and~~ 2020:

~~December 31, 2018, respectively.~~


(in millions)
Balance as of December 31, 2019	$	71.9
ASU 2016-13 adoption impact	8.9
Amounts accrued	26.5
Write-offs charged against the allowance	(13.4)
Balance as of June 30, 2020	$	93.9

(2) Net Sales ~~Recently Issued Accounting Pronouncements~~

~~In June 2016,~~ The following table presents the ~~FASB issued ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires entities to estimate expected lifetime credit losses on financial assets~~Company's disaggregated revenue by channel, product and ~~provide expanded disclosures. This ASU is effective on January 1, 2020. In transition, entities are required to use~~geographical region, including a ~~modified retrospective approach~~reconciliation of disaggregated revenue by segment, for the ~~adoption~~three and six months ended June 30, 2020:

Table of the new standard. 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 is currently evaluating this ASU to determine the impact it will have on the Company's Condensed Consolidated Financial Statements.

Contents

~~(3)~~ ~~Revenue Recognition~~

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the three and six months ended June 30, 2019:

Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
(in millions) North America International Consolidated North America International Consolidated
Channel
Wholesale $ 528.5
$ 103.7
$ 632.2
$ 1,030.3
$ 217.8
$ 1,248.1
Direct 59.6
31.0
90.6
101.8
63.8
165.6
Net sales $ 588.1
$ 134.7
$ 722.8
$ 1,132.1
$ 281.6
$ 1,413.7

North America International Consolidated North America International Consolidated
Product
Bedding products $ 554.2
$ 108.4
$ 662.6
$ 1,068.6
$ 223.8
$ 1,292.4
Other products 33.9
26.3
60.2
63.5
57.8
121.3
Net sales $ 588.1
$ 134.7
$ 722.8
$ 1,132.1
$ 281.6
$ 1,413.7

North America International Consolidated North America International Consolidated
Geographical region
United States $ 533.7
$ —
$ 533.7
$ 1,030.9
$ —
$ 1,030.9
Canada 54.4
—
54.4
101.2
—
101.2
International —
134.7
134.7
—
281.6
281.6
Net sales $ 588.1
$ 134.7
$ 722.8
$ 1,132.1
$ 281.6
$ 1,413.7


	Three Months Ended June 30, 2019										Six Months Ended June 30, 2019
(in millions)	North America		International		Consolidated		North America		International		Consolidated
Channel
Wholesale	$	528.5	$	103.7	$	632.2	$	1,030.3	$	217.8	$	1,248.1
Direct	59.6		31.0		90.6		101.8		63.8		165.6
Net sales	$	588.1	$	134.7	$	722.8	$	1,132.1	$	281.6	$	1,413.7

	North America		International		Consolidated		North America		International		Consolidated
Product
Bedding	$	554.2	$	108.4	$	662.6	$	1,068.6	$	223.8	$	1,292.4
Other	33.9		26.3		60.2		63.5		57.8		121.3
Net sales	$	588.1	$	134.7	$	722.8	$	1,132.1	$	281.6	$	1,413.7








	North America		International		Consolidated		North America		International		Consolidated
Geographical region
United States	$	533.7	$	—	$	533.7	$	1,030.9	$	—	$	1,030.9
Canada	54.4		—		54.4		101.2		—		101.2
International	—		134.7		134.7		—		281.6		281.6
Net sales	$	588.1	$	134.7	$	722.8	$	1,132.1	$	281.6	$	1,413.7

(3) Acquisitions

Acquisition of Sherwood Bedding

On January 31, 2020, the Company acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of approximately $39.1 million, which included $1.2 million of cash acquired.

The Company accounted for this transaction as a business combination. The preliminary allocation of the purchase price is based on estimated fair values of the assets acquired and liabilities assumed as of January 31, 2020, which included the following:


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

Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the private label product growth opportunities and expected synergistic manufacturing benefits to be realized from the acquisition. The goodwill is deductible for income tax purposes and will be included within the North American reporting unit for goodwill impairment assessments.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

Three Months Ended June 30, 2018 Six Months Ended June 30, 2018
(in millions) North America International Consolidated North America International Consolidated
Channel
Wholesale $ 494.3
$ 107.3
$ 601.6
$ 948.3
$ 236.4
$ 1,184.7
Direct 33.5
24.8
58.3
64.5
48.1
112.6
Net sales $ 527.8
$ 132.1
$ 659.9
$ 1,012.8
$ 284.5
$ 1,297.3

North America International Consolidated North America International Consolidated
Product
Bedding products $ 497.4
$ 103.9
$ 601.3
$ 949.7
$ 227.6
$ 1,177.3
Other products 30.4
28.2
58.6
63.1
56.9
120.0
Net sales $ 527.8
$ 132.1
$ 659.9
$ 1,012.8
$ 284.5
$ 1,297.3

North America International Consolidated North America International Consolidated
Geographical region
United States $ 477.7
$ —
$ 477.7
$ 917.9
$ —
$ 917.9
Canada 50.1
—
50.1
94.9
—
94.9
International —
132.1
132.1
—
284.5
284.5
Net sales $ 527.8
$ 132.1
$ 659.9
$ 1,012.8
$ 284.5
$ 1,297.3

The North America and International segments sell product through two 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 through company-owned stores, e-commerce and call centers. The North America and International segments classify products into two 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 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.

For product sales in each of the Company's channels, the Company recognizes a sale when the obligations under the terms of the contract with the customer is 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 transfers 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 expects to receive 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 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 allows returns following a sale, depending on the channel and promotion. The Company reduces revenue and cost of sales for its estimate of the expected returns, which is primarily based on the level of historical sales returns. The Company does not offer extended payment terms beyond one year to customers. As such, the Company does not adjust its consideration for financing arrangements.

~~Table of Contents~~

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

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

~~(4) Discontinued Operations~~

The Company presents the financial position and results of operations of certain businesses in the Latin American region as discontinued operations in the accompanying Condensed Consolidated Financial Statements. In December 2018, the Company divested of the net assets of certain subsidiaries in the Latin American region.

~~Table of Contents~~

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

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

~~Components of amounts reflected in the Condensed Consolidated Statements of Income related to discontinued operations are presented in the following table for each of the periods ended June 30.~~

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
Net sales $ —
$ 9.8
$ 0.2
$ 20.4
Cost of sales —
6.5
0.2
13.9
Gross profit —
3.3
—
6.5
Selling and marketing expenses —
4.1
0.1
7.6
General, administrative and other expenses 1.2
1.7
1.8
3.2
Operating loss (1.2 ) (2.5 ) (1.9 ) (4.3 )

Interest expense (income), net and other —
3.1
(0.3 ) 4.1

Loss from discontinued operations before income taxes (1.2 ) (5.6 ) (1.6 ) (8.4 )
Income tax provision —
0.2
—
0.2
Net loss from discontinued operations, net of tax $ (1.2 ) $ (5.4 ) $ (1.6 ) $ (8.2 )

~~(5)~~ ~~Acquisitions~~

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~~$24.0 million, including assumed liabilities of approximately ~~$11~~$11.0 million as of March 31, 2019 (referred to 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 accounted for this transaction as a business combination. Total cash consideration was $13.2 million, ~~less cash acquired of~~which included $5.1 million ~~resulting in a purchase price~~ of ~~$8.1 million.~~cash acquired. The ~~preliminary~~final allocation of the purchase price is based on ~~estimates of~~ the fair values of the assets acquired and liabilities assumed as of April 1, 2019, which ~~primarily includes~~included the following:

(in millions)
Working capital (accounts receivable and inventory, net of accounts payable and accrued liabilities) $ (2.3 )
Property and equipment 5.0
Goodwill 2.1
Other intangible assets 3.3
Operating lease right-of-use assets 28.5
Long-term operating lease liabilities (28.5 )
Net purchase price $ 8.1


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

Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the growth opportunities and expected retail synergistic benefits to be realized from the acquisition. The goodwill is deductible for income tax purposes and will be included within the North American reporting unit for goodwill impairment assessments.

~~As a result of the acquisition, the Company acquired trade names and customer database of $3.3 million.~~

~~Acquisition in the International segment~~

On April 1, 2019, the Company acquired the net assets of an entity in the International segment. The acquisition was valued at $7.1 million, and the purchase price allocation primarily included working capital, property, plant and equipment and inventory. Additionally, the Company recognized goodwill of $2.9 million and other intangible assets of $2.9 million.

~~(6)~~ (4) Goodwill

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

(in millions) North America International Consolidated
Balance as of December 31, 2018 $ 571.1
151.9
$ 723.0
Goodwill resulting from acquisitions 2.1
5.4
7.5
Foreign currency translation and other 2.5
(0.7 ) 1.8
Balance as of June 30, 2019 $ 575.7
$ 156.6
$ 732.3


(in millions)	North America		International		Consolidated
Balance as of December 31, 2019	$	576.6	$	155.7	$	732.3
Goodwill resulting from acquisitions	26.7		—		26.7
Foreign currency translation and other	(2.8)		1.3		(1.5)
Balance as of June 30, 2020	$	600.5	$	157.0	$	757.5

~~(7)~~ ~~Debt~~

~~Debt for the Company consists of the following:~~

June 30, 2019 December 31, 2018
(in millions, except percentages) Amount Rate Amount Rate Maturity Date
2016 Credit Agreement
Term A Facility $ 435.0
(1) $ 525.0
(2) April 6, 2021
Revolver —
(1) —
(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 93.9
(3) 9.1
(3) April 6, 2021
Finance/capital lease obligations ⁽⁴⁾
65.9
66.7
Various
Other 7.7
3.0
Various
Total debt 1,652.5
1,653.8

Less: deferred financing costs 6.9
7.6

Total debt, net 1,645.6
1,646.2

Less: current portion 60.1
47.1

Total long-term debt, net $ 1,585.5
$ 1,599.1



~~(1)~~	~~Interest at LIBOR plus applicable margin of 1.75% as of June 30, 2019.~~
~~(2)~~	~~Interest at LIBOR plus applicable margin of 2.00% as of December 31, 2018.~~
~~(3)~~	~~Interest at one month LIBOR index plus 80 basis points.~~
~~(4)~~	~~Finance/capital lease obligations are a non-cash financing activity.~~

~~2016 Credit Agreement~~

On April 6, 2016, the Company entered into the 2016 Credit Agreement with a syndicate of banks. The 2016 Credit Agreement requires compliance with certain financial covenants providing for maintenance of a minimum consolidated interest coverage ratio, maintenance of a maximum consolidated total net leverage ratio, and maintenance of a maximum consolidated secured net leverage ratio. As of June 30, 2019, domestic qualified cash was $20.7 million and foreign qualified cash was $9.4 million. During the six months ended June 30, 2019, the Company prepaid $75.0 million on the Term A Facility.

~~The Company was in compliance with all applicable covenants as of June 30, 2019.~~

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

~~Securitized~~(5) Debt

Debt for the Company consists of the following:


	June 30, 2020					December 31, 2019
(in millions, except percentages)	Amount		Rate	Amount		Rate	Maturity Date
2019 Credit Agreement:
Term A Facility	$	414.4	(1)	$	425.0	(2)	October 16, 2024
364-Day Term Loan	200.0		(3)	—		(3)	May 12, 2021
Revolver	—		(1)	—		(2)	October 16, 2024
2026 Senior Notes	600.0		5.500%	600.0		5.500%	June 15, 2026
2023 Senior Notes	450.0		5.625%	450.0		5.625%	October 15, 2023
Securitized debt	—		(4)	—		(4)	April 6, 2021
Finance lease obligations ⁽⁵⁾	71.2			64.1			Various
Other	25.2			7.9			Various
Total debt	1,760.8			1,547.0
Less: Deferred financing costs	7.2			7.0
Total debt, net	1,753.6			1,540.0
Less: Current portion	256.4			37.4
Total long-term debt, net	$	1,497.2		$	1,502.6


(1)			Interest at LIBOR plus applicable margin of 1.375% as of June 30, 2020.
(2)			Interest at LIBOR plus applicable margin of 1.625% as of December 31, 2019.
(3)			Interest at base rate plus applicable margin of 1.375% per annum or a eurocurrency rate (subject to a 1.0% floor) plus applicable margin of 2.375% per annum.
(4)			Interest at one month LIBOR index plus 80 basis points.
(5)			Finance lease obligations are a non-cash financing activity. Refer to Note 6, "Leases".

As of June 30, 2020, the Company was in compliance with all applicable debt covenants.

2019 Credit Agreement

On ~~April 12, 2017,~~October 16, 2019, the Company entered into the 2019 Credit Agreement with a syndicate of banks. The 2019 Credit Agreement provides for a $425.0 million revolving credit facility, a $425.0 million term loan facility, and an incremental facility in an aggregate amount of up to $550.0 million plus the amount of certain prepayments plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $60.0 million sub-facility for the issuance of letters of credit. As of June 30, 2020, total availability under the revolving credit facility was $423.9 million after a $1.1 million reduction for outstanding letters of credit.

On May 13, 2020, the Company and certain of its subsidiaries entered into an amendment to the existing 2019 Credit Agreement. The amendment provided for a new 364-day $200.0 million term loan (the "364-Day Loan"). The Company used the proceeds of the 364-Day Loan to repay borrowings under the existing $425.0 million revolving credit facility and to pay fees and expenses in connection with the amendment. The 364-Day Loan bears interest, at the borrower’s option, at a base rate plus a margin of 1.375% per annum or a eurocurrency rate (subject to a 1.0% floor) plus a margin of 2.375% per annum. In addition, for so long as the 364-Day Loan remains outstanding, the Company is subject to certain additional restrictions under the covenants provided for in the Credit Agreement, including, but not limited to, the Company's ability to repurchase shares and make certain investments.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

Securitized Debt

The Company and certain of its subsidiaries are party to a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended, the "Accounts Receivable Securitization"). ~~On April 5, 2019,~~As of June 30, 2020, the Company ~~and its subsidiaries entered into a new amendment to~~had availability of $40.8 million under the Accounts Receivable Securitization. ~~The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2021.~~

Fair Value of Financial Instruments

Financial instruments, although not recorded at fair value on a recurring basis, include cash and cash equivalents, accounts receivable, accounts payable, and the Company's debt obligations. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value ~~using Level 1 inputs~~ because of the short-term maturity of those instruments. Borrowings under the ~~2016~~2019 Credit Agreement and the securitized debt are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the following material financial instruments were based on ~~Level 2~~observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of debt instruments. The fair values of these material financial instruments are as follows:


	Fair Value
(in millions)	June 30, 2020		December 31, 2019
2023 Senior Notes	$	457.5	$	464.2
2026 Senior Notes	614.2		634.9

Fair Value
(in millions) June 30, 2019 December 31, 2018
2023 Senior Notes $ 466.2
$ 435.6
2026 Senior Notes 623.4
549.3

The Company leases retail stores, manufacturing and distribution facilities, office space and equipment under operating 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 2043. 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 Condensed Consolidated Balance Sheet as of June 30, 2020 and December 31, 2019:

(in millions) June 30, 2019
Assets
Operating lease assets Operating lease right-of-use assets $ 228.1
Finance lease assets Property, plant and equipment, net 57.3
Total leased assets $ 285.4

Liabilities
Short-term:
Operating lease obligations Accrued expenses and other current liabilities $ 49.0
Finance lease obligations Current portion of long-term debt 7.5
Long-term:
Operating lease obligations Long-term operating lease obligations 186.7
Finance lease obligations Long-term debt, net 58.4
Total lease obligations $ 301.6


(in millions)		June 30, 2020		December 31, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	281.6	$	245.4
Finance lease assets	Property, plant and equipment, net	61.3		54.4
Total leased assets		$	342.9	$	299.8

Liabilities
Short-term:
Operating lease obligations	Accrued expenses and other current liabilities	$	58.3	$	50.8
Finance lease obligations	Current portion of long-term debt	9.9		8.2
Long-term:
Operating lease obligations	Long-term operating lease obligations	239.3		205.4
Finance lease obligations	Long-term debt, net	61.3		55.9
Total lease obligations		$	368.8	$	320.3

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

The following table summarizes the classification of lease expense in the Company's Condensed Consolidated ~~Statement~~Statements of Income for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2020		2019		2020		2019
Operating lease expense:
Operating lease expense	$	18.7	$	15.9	$	36.7	$	30.1
Short-term lease expense	2.5		1.3		5.7		2.3
Variable lease expense	4.4		5.0		9.7		8.8
Finance lease expense:
Amortization of right-of-use assets	2.2		2.3		4.4		4.2
Interest on lease obligations	1.1		1.2		2.3		2.4
Total lease expense	$	28.9	$	25.7	$	58.8	$	47.8

Three Months Ended Six Months Ended
(in millions) June 30, 2019 June 30, 2019
Operating lease expense ⁽¹⁾
$ 22.2
$ 41.2
Finance lease expense:
Amortization of right-of-use assets 2.3
4.2
Interest on lease obligations 1.2
2.4
Total lease expense $ 25.7
$ 47.8



~~(1)~~	~~Includes short-term leases and variable lease expenses, which are immaterial.~~

The following table sets forth the scheduled maturities of lease obligations as of June 30, ~~2019:~~2020:

(in millions) Operating Leases Finance Leases Total
Year Ended December 31,
2019 (excluding the six months ended June 30, 2019) $ 32.1
$ 5.8
$ 37.9
2020 56.0
11.7
67.7
2021 47.3
11.4
58.7
2022 39.9
9.5
49.4
2023 31.0
7.6
38.6
Thereafter 75.9
43.3
119.2
Total lease payments 282.2
89.3
371.5
Less: Interest 46.5
23.4
69.9
Present value of lease obligations $ 235.7
$ 65.9
$ 301.6


(in millions)	Operating Leases		Finance Leases		Total
Year Ended December 31,
2020 (excluding the six months ended June 30, 2020)	$	38.2	$	6.9	$	45.1
2021	66.8		14.1		80.9
2022	57.9		12.0		69.9
2023	45.5		9.8		55.3
2024	37.1		8.0		45.1
Thereafter	104.6		40.4		145.0
Total lease payments	350.1		91.2		441.3
Less: Interest	52.5		20.0		72.5
Present value of lease obligations	$	297.6	$	71.2	$	368.8

The following table provides lease term and discount rate information related to operating and finance leases as of June 30, ~~2019:~~2020:



	June 30, ~~2019~~2020
Weighted average remaining lease term (years):
Operating leases	~~6.29~~		6.34
Finance leases	~~9.63~~		8.33

Weighted average discount rate:
Operating leases	~~5.50~~5.16	%
Finance leases	~~6.32~~5.94	%

~~The following table provides supplemental information related to the Company's Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2019:~~

Six Months Ended
(in millions) June 30, 2019
Cash paid for amounts included in the measurement of lease obligations:
Operating cash flows paid for operating leases $ 27.8
Financing cash flows paid for finance leases 3.3

Right-of-use assets obtained in exchange for new operating lease obligations $ 55.0

~~(9)Stockholders' Equity~~

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

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

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

The following table provides supplemental information related to the Company's Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019:


	Six Months Ended
(in millions)	June 30, 2020		June 30, 2019
Cash paid for amounts included in the measurement of lease obligations:
Operating cash flows paid for operating leases	$	33.1	$	27.8
Operating cash flows paid for finance leases	$	2.3	$	2.4
Financing cash flows paid for finance leases	$	4.6	$	3.3

Right-of-use assets obtained in exchange for new operating lease obligations	$	48.7	$	55.0
Right-of-use assets obtained in exchange for new finance lease obligations	$	11.7	$	—

(7)Stockholders' Equity

(a) Treasury Stock. As of June 30, ~~2019,~~2020, the Company had approximately ~~$224.6~~$131.3 million remaining under the existing share repurchase program initially authorized by the Board of Directors in 2016. In February 2020, the Board of Directors authorized an increase, of $194.2 million, to its existing share repurchase authorization ~~for repurchases~~ of Tempur Sealy International's common ~~stock.~~stock to $300.0 million. The Company did not repurchase shares under the program during the three months ended June 30, 2020. The Company repurchased 24,170 shares under the program for approximately $1.5 million during the three months ended June 30, 2019. The Company repurchased 2.6 million shares and 39,901 shares under the program for approximately $187.5 million and $2.3 million during the ~~three and~~ six months ended June 30, 2020 and 2019, respectively. ~~The Company did not repurchase any shares during the three and six months ended June 30, 2018.~~

In addition, the Company acquired an insignificant amount of shares upon the vesting of certain restricted stock units ("RSUs"), which were withheld to satisfy tax withholding obligations during each of the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. The shares withheld were valued at the closing price of the stock on the New York Stock Exchange on the vesting date or first business day ~~thereafter,~~prior to vesting, resulting in approximately ~~$0.3~~$0.2 million and ~~$0.1~~$0.3 million in treasury stock acquired during the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The Company acquired approximately ~~$3.2~~$12.0 million and ~~$3.0~~$3.2 million in treasury stock during the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

~~(c)~~ ~~AOCL.~~ ~~AOCL consisted of the following:~~

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2019 2018 2019 2018
Foreign Currency Translation
Balance at beginning of period $ (87.7 ) $ (67.8 ) $ (91.7 ) $ (72.8 )
Other comprehensive loss:

Foreign currency translation adjustments ⁽¹⁾
3.0
(16.1 ) 7.0
(11.1 )
Balance at end of period $ (84.7 ) $ (83.9 ) $ (84.7 ) $ (83.9 )

Pensions
Balance at beginning of period $ (3.6 ) $ (3.3 ) $ (3.6 ) $ (2.7 )
Other comprehensive loss:
Net change from period revaluations, net of tax —
—
—
—
Tax expense ⁽²⁾
—
—
—
—
Total other comprehensive income before reclassifications, net of tax $ —
$ —
$ —
$ —
Net amount reclassified to earnings ⁽¹⁾
—
—
—
—
U.S. tax reform - reclassification to retained earnings upon adoption of ASU No. 2018-02 —
—
—
(0.5 )
Tax benefit ⁽²⁾
—
—
—
(0.1 )
Total amount reclassified from accumulated other comprehensive loss, net of tax $ —
$ —
$ —
$ (0.6 )
Total other comprehensive loss —
—
—
(0.6 )
Balance at end of period $ (3.6 ) $ (3.3 ) $ (3.6 ) $ (3.3 )



~~(1)~~	~~In 2019 and 2018, there were no tax impacts related to foreign currency translation adjustments and no amounts were reclassified to earnings.~~
~~(2)~~	~~These amounts were included in the income tax provision in the accompanying Condensed Consolidated Statements of Income.~~

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

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2020		2019		2020		2019
Foreign Currency Translation
Balance at beginning of period	$	(105.2)	$	(87.7)	$	(82.2)	$	(91.7)
Other comprehensive loss:
Foreign currency translation adjustments ⁽¹⁾	10.7		3.0		(12.3)		7.0

Balance at end of period	$	(94.5)	$	(84.7)	$	(94.5)	$	(84.7)













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

~~(10)~~


(1)			In 2020 and 2019, there were 0 tax impacts related to foreign currency translation adjustments and 0 amounts were reclassified to earnings.
(2)			These amounts were included in the income tax provision in the accompanying Condensed Consolidated Statements of Income.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

(8) Other Items

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following:

(in millions) June 30, 2019 December 31, 2018
Taxes $ 135.5
$ 136.8
Advertising 57.3
46.1
Wages and benefits 54.3
43.7
Operating lease obligations 49.0
—
Sales returns 24.6
22.0
Warranty 15.5
14.9
Rebates 9.2
11.6
Other 91.0
84.1
$ 436.4
$ 359.2


(in millions)	June 30, 2020		December 31, 2019
Taxes	$	138.6	$	136.0

Wages and benefits	59.4		79.5
Operating lease obligations	58.3		50.8
Advertising	42.5		56.9
Sales returns	27.9		26.2
Warranty	17.5		19.4
Rebates	6.6		13.6
Other	104.4		90.8
	$	455.2	$	473.2

~~(11)~~

(9) Stock-Based Compensation

The Company’s stock-based compensation expense for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 included performance restricted stock units ("PRSUs"), non-qualified stock options, ~~RSUs~~restricted stock units ("RSUs") and deferred stock units ("DSUs"). A summary of the Company’s stock-based compensation expense is presented in the following table:


	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2020		2019		2020		2019
PRSU expense	$	0.9	$	0.4	$	1.2	$	0.7
Option expense	1.2		1.2		2.4		2.4
RSU/DSU expense	5.4		5.0		11.2		10.1
Total stock-based compensation expense	$	7.5	$	6.6	$	14.8	$	13.2

Three Months Ended
June 30, Six Months Ended
June 30,
(in millions) 2019 2018 2019 2018
PRSU expense $ 0.4
$ 0.7
$ 0.7
$ 1.5
Option expense 1.2
1.9
2.4
3.8
RSU/DSU expense 5.0
4.2
10.1
7.8
Total stock-based compensation expense $ 6.6
$ 6.8
$ 13.2
$ 13.1

The Company grants PRSUs to executive officers and certain members of management. During the first quarter of 2020, the Company granted PRSUs as a component of the long-term incentive plan. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals.

~~In March 2019, the Compensation Committee of the Board formally determined that~~During 2017, the Company ~~did not meet~~granted executive officers and certain members of management PRSUs if the ~~performance metric of $650.0 million~~Company achieves a certain level of adjusted earnings before interest, tax, depreciation and amortization as defined in the Company’s Credit Agreement ("Adjusted ~~EBITDA"~~EBITDA per Credit Facility") for payout under the PRSUs granted in 2017 (the "2017 Aspirational Plan PRSUs"). As a result, the remaining one-third of the 2017 Aspirational Plan PRSUs previously granted with a performance period for 2018 were forfeited as of this date.

~~At June 30, 2019, the Company had 1.6 million PRSUs granted in 2018 outstanding that will vest if the Company achieves a certain level of Adjusted EBITDA~~ during four consecutive fiscal quarters as described below (the "2019 Aspirational Plan PRSUs").The 2019 Aspirational Plan PRSUs will vest based on the highest Adjusted EBITDA ~~for~~per Credit Facility in any four consecutive fiscal quarter period ending between (and including) March 31, 2018 and December 31, 2019 (the ~~"First~~“First Designated ~~Period"~~Period”). IfAt the ~~highest Adjusted EBITDA in~~end of the First Designated Period, ~~is $600.0 million, 66% will vest; if~~ the ~~highest~~ Adjusted EBITDA ~~equals or exceeds $650.0 million, then 100% will vest; if the highest Adjusted EBITDA is between $600.0 million~~per Credit Facility targets were not met and ~~$650.0 million then a pro rata portion will vest; and if the highest Adjusted EBITDA is less than $600.0 million then~~ one-half of the total 2019 Aspirational Plan PRSUs were forfeited.

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

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

The Company did not record any stock-based compensation expense related to the 2019 Aspirational Plan PRSUs during the three and six months ended June 30, ~~2019,~~2020, as it iswas not ~~considered~~ probable that the Company ~~will~~would achieve the specified performance target for ~~either~~ the ~~First Designated Period or~~ Second Designated Period. The Company will continue to evaluate the probability of achieving the performance condition in future periods and record the appropriate expense if necessary. Based on the price of the Company’s common stock on the grant date, the total unrecognized compensation expense related to this award if the performance target is met for the ~~First~~Second Designated Period ~~is $93.3~~would range from $33.0 million to $49.5 million, which would be a non-cash expense over the remaining service period if achievement of the performance condition becomes probable.

~~(12)~~(10) Commitments and Contingencies

(a) Myla Gardner v. Scott L. Thompson, Barry A. Hytinen, Evelyn S. Dilsaver, John A. Heil, Jon L. Luther, Usman Nabi, Richard W. Neu, Robert B. Trussell, Jr. and Tempur Sealy International, Inc., filed July 10, 2017; Joseph L. Doherty v. Scott L. Thompson, Barry A. Hytinen, Evelyn S. Dilsaver, John A. Heil, Jon L. Luther, Usman Nabi, Richard W. Neu, Robert B. Trussell, Jr. and Tempur Sealy International, Inc., filed July 20, 2017; and Paul Onesti v. Scott L. Thompson, Barry A. Hytinen, Evelyn S. Dilsaver, John A. Heil, Jon L. Luther, Usman Nabi, Richard W. Neu, Robert B. Trussell, Jr. and Tempur Sealy International, Inc., filed July 21, 2017.

During July 2017, three putative shareholder derivative suits were filed against the Company, each member of its Board and two of its officers. Each complaint alleges that the Board and officers caused the Company to make materially false and misleading statements regarding its business and financial prospects, including those with one of its retailers, Mattress Firm, which was a violation of the fiduciary duties they owed to the Company. The Plaintiffs in each of the cases agreed to stay their respective actions until after a decision was rendered on the Motion to Dismiss in a suit filed on March 24, 2017 against Tempur Sealy International, Inc. and two of its officers on behalf of a proposed class of stockholders (the "Buehring Case"). Following the Company's Motion to Dismiss in the Buehring Case being granted in March 2019, the plaintiffs in each of these cases voluntarily dismissed their lawsuits. As such, the cases are now closed.

~~(b)~~ ~~Other.~~The Company is involved in various ~~other~~ legal and administrative proceedings incidental to the operations of its business. The Company believes that the outcome of all such ~~other~~ pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity or operating results.

~~(13)~~(11) Income Taxes

The Company’s effective tax rate for the three months ended June 30, 2020 and 2019 was 28.9% and ~~2018 was~~ 27.0% ~~and 24.9%~~, respectively. The ~~Company’s income~~Company's effective tax rate for the six months ended June 30, 2020 and 2019 was 28.1% and ~~2018 was~~ 31.3% ~~and 26.5%~~, respectively. The Company's ~~income~~effective tax rate for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 differed from the U.S. federal statutory rate of 21.0% principally due to subpart F income (i.e., GILTI earned by the Company’s foreign subsidiaries), certain foreign income tax rate differentials, state and local taxes, changes in the Company’s uncertain tax positions, the excess tax deficiency (or benefit) related to stock-based compensation and certain other permanent items.

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

The Company has been involved in a dispute with the Danish Tax Authority ("SKAT") regarding the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish Tax Matter") for tax years 2001 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process.

~~During 2018,~~At June 30, 2020 and December 31, 2019, the ~~Company reached agreements with both SKAT and~~Danish income tax liability recorded in the U.S. Internal Revenue Service ("IRS") (the "Settlement") with respect to the adjusted amount of royalties for tax years 2001 through 2011. The Company and SKAT are currently discussing the appropriate administrative process required to implement the Settlement as it relates to both tax and interest. During this process, the Company continues to maintain a liability on itsCompany’s balance sheet for ~~tax and interest under~~ the ~~terms of the Settlement. At~~periods 2001 through June 30, ~~2019~~2020 and December 31, ~~2018, the Danish liability related to the Settlement~~2019, respectively, is DKK ~~847.3 million (approximately $129.0~~1,121.1 million and ~~$130.0~~DKK 1,110.6 million, respectively (approximately $169.1 million and $166.7 million using the applicable exchange rates at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively). The liability at June 30, 2020 and December 31, 2019 is included ~~in accrued expenses and other current liabilities~~ within the Company’s Condensed Consolidated Balance ~~Sheet.~~Sheet (translated at the exchange rate on June 30, 2020 and December 31, 2019) as per below:


	June 30, 2020				December 31, 2019
	DKK	USD		DKK	USD
Accrued expenses and other current liabilities	847.3	$	127.8	847.3	$	127.2
Other non-current liabilities	273.8	41.3		263.3	39.5
Total	1,121.1	$	169.1	1,110.6	$	166.7

During the three months ended March 31, 2020 the Company made a tax deposit with SKAT of DKK 134.0 million applicable to a tax assessment by SKAT for the years 2012 and 2013. The Company is contesting such assessment. At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, the Company ~~had~~held on deposit with SKAT DKK 1,104.1 million and DKK 970.1 million (approximately ~~$147.8~~$166.5 million and $145.6 million using the applicable exchange ~~rate~~rates at June 30, ~~2019)~~2020 and ~~DKK 962.3 million (approximately $147.7 million using the applicable exchange rate at~~ December 31, ~~2018)~~2019, respectively). The deposit is for the satisfaction of the anticipated liability for both tax and interest once ~~the administrative process is~~these matters are concluded. ~~The deposit held by SKAT is included in "Prepaid expenses and other current assets" within the Company's Condensed Consolidated Balance Sheet.~~

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

~~SKAT has issued preliminary income tax assessments for the years 2012 through 2017, asserting an increase in the royalty earned by the Danish subsidiary.~~ The Company expects to continue to receive preliminary income tax assessments from SKAT for the tax years 2018 and forward, asserting the royalties paid by the U.S. to the Danish subsidiary were too low, which the Company disputes.

The Company entered into the Advance Pricing Agreement program (the "APA Program") for the tax years 2012 through 2022 (the "Post-2011 Years") in which the IRS, on the Company’s behalf, will negotiate directly with SKAT for a mutually agreeable royalty due from the U.S. subsidiary to the Danish Subsidiary (the "APA"). That APA is in the early stages of negotiations. Such negotiations are not expected to be concluded in the near term. The Company anticipates such negotiations will result in an increase in the amount of royalties due from the U.S subsidiary to the Danish subsidiary (the "Post-2011 Years Adjustment") for the years 2012 - 2018 as well as the six month period endeddeposit at June 30, 2019 (the "2012 to Current Period"). It is expected that the Post-2011 Years Adjustment will result in additional income tax in Denmark and a reduction of tax in the United States for the 2012 to Current Period. Consequently, the Company maintains an uncertain income tax liability for its estimate of the potential Danish income tax liability and a deferred tax asset for the associated United States tax benefit for the Post-2011 Years Adjustment. As of June 30, 20192020 and December 31, 2018, the Company had accrued Danish tax and interest for Post-2011 Years of approximately DKK 246.2 million and DKK 230.3 million ($37.5 million and $35.3 million using the applicable exchange rates at June 30, 2019 ~~and December 31, 2018, respectively) as an uncertain income tax liability, which~~ is included ~~in other non-current liabilities on~~within the ~~Company's~~Company’s Condensed Consolidated Balance Sheet ~~as of~~(translated at the exchange rates on June 30, ~~2019~~2020 and December 31, ~~2018. The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish tax for the Post-2011 Years~~2019) as ~~of June 30, 2019 and December 31, 2018 is approximately $5.5 million and $4.2 million, respectively.~~per below:


	June 30, 2020				December 31, 2019
	DKK	USD		DKK	USD
Prepaid expenses and other current assets	847.3	$	127.8	847.3	$	127.2
Other non-current assets	256.8	38.7		122.8	18.4
Total	1,104.1	$	166.5	970.1	$	145.6

~~The Company’s uncertain income tax position associated with~~

There were no significant changes in the Danish Tax Matter is derived using the cumulative probability analysis with possible outcomes based on the Company's updated evaluation of the facts and circumstances regarding this matter and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standards as required by GAAP, taking into account both the U.S. and Danish income tax implications of such outcomes. Both the uncertain income tax position and the deferred tax asset discussed herein reflects the Company’s best judgment of the facts, circumstances and information available through June 30, 2019. If the Company is not successful in resolving the Danish Tax Matter for the Post-2011 Years or there is a change in facts and circumstances, the Company may be required to further increase its uncertain income tax position associated with this matter, or decrease its deferred tax asset, also related to this matter, which could have a material impact on the Company's reported earnings.

The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at June 30, 2019 and December 31, 2018 would be $98.5 million and $91.4 million (exclusive of interest and penalties and translated at the applicable exchange rates), respectively. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. It is reasonably possible that there could be material changes to the amount of uncertain income tax positions due to activities of the taxing authorities, settlement of audit issues, reassessment of existingother uncertain tax positions ~~including~~during the ~~Danish tax matter,~~three or ~~the expiration of applicable statute of limitations; however, the Company is not able to estimate the impact of these items at this time.~~

~~Table of Contents~~

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

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

six months ended June 30, 2020.

(12) Earnings Per Common Share

The following table sets forth the components of the numerator and denominator for the computation of basic and diluted earnings per share for net income attributable to Tempur Sealy International.

Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except per common share amounts) 2019 2018 2019 2018
Numerator:
Income from continuing operations, net of loss attributable to non-controlling interest $ 42.8
$ 28.2
$ 71.6
$ 54.1

Denominator:

Denominator for basic earnings per common share-weighted average shares 54.7
54.4
54.7
54.4
Effect of dilutive securities:
Employee stock-based compensation 1.3
0.5
0.9
0.6
Denominator for diluted earnings per common share-adjusted weighted average shares 56.0
54.9
55.6
55.0

Basic earnings per common share for continuing operations $ 0.78
$ 0.52
$ 1.31
$ 0.99

Diluted earnings per common share for continuing operations $ 0.76
$ 0.52
$ 1.29
$ 0.98

The Company excluded 1.3 million and 1.1 million ~~and 1.6 million~~ shares ~~issuable upon exercise of outstanding stock options~~ for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy ~~International’s~~International's common stock or they were otherwise anti-dilutive. The Company excluded ~~1.1~~0.8 million and ~~1.6~~1.1 million shares issuable upon exercise of outstanding stock options for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy ~~International’s~~International's common stock or they were otherwise anti-dilutive. Holders of non-vested stock-based compensation awards do not have voting rights or rights to receive any dividends thereon.

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

~~(15)~~(13) Business Segment Information

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

The Company’s North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company’s accompanying Condensed Consolidated Financial Statements. The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payable.

The following table summarizes total assets by segment:

(in millions) June 30, 2019 December 31, 2018
North America $ 3,129.5
$ 2,788.1
International 631.2
604.8
Corporate $ 525.7
$ 569.0
Inter-segment eliminations (1,239.7 ) (1,246.5 )
Total assets $ 3,046.7
$ 2,715.4


(in millions)	June 30, 2020		December 31, 2019
North America	$	3,299.5	$	3,142.9
International	603.2		615.3
Corporate	549.9		477.1
Inter-segment eliminations	(1,250.7)		(1,173.5)
Total assets	$	3,201.9	$	3,061.8

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

(in millions) June 30, 2019 December 31, 2018
North America $ 324.3
$ 317.5
International 52.9
51.1
Corporate 52.8
52.2
Total property, plant and equipment, net $ 430.0
$ 420.8


(in millions)	June 30, 2020		December 31, 2019
North America	$	369.0	$	328.9
International	51.2		51.8
Corporate	42.6		55.1
Total property, plant and equipment, net	$	462.8	$	435.8

The following table summarizes ~~segment information for the three months ended June 30, 2019:~~operating lease right-of-use assets by segment:


(in millions)	June 30, 2020		December 31, 2019
North America	$	237.0	$	202.0
International	42.1		42.2
Corporate	2.5		1.2
Total operating lease right-of-use assets	$	281.6	$	245.4

(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 588.1
$ 134.7
$ —
$ —
$ 722.8

Inter-segment sales $ 0.9
$ 0.1
$ —
$ (1.0 ) $ —
Inter-segment royalty expense (income) 1.0
(1.0 ) —
—
—
Gross profit 240.0
73.4
—
—
313.4
Operating income (loss) 80.1
27.4
(26.5 ) —
81.0
Income (loss) from continuing operations before income taxes 78.6
23.2
(43.3 ) —
58.5

Depreciation and amortization ⁽¹⁾
$ 15.6
$ 3.5
$ 9.5
$ —
$ 28.6
Capital expenditures 14.4
3.1
3.3
—
20.8

~~The following table summarizes segment information for the three months ended June 30, 2018:~~

(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 527.8
$ 132.1
$ —
$ —
$ 659.9

Inter-segment sales $ 0.6
$ —
$ —
$ (0.6 ) $ —
Inter-segment royalty expense (income) 0.8
(0.8 ) —
—
—
Gross profit 203.4
69.4
—
—
272.8
Operating income (loss) 64.2
20.9
(27.1 ) —
58.0
Income (loss) from continuing operations before income taxes 63.4
18.3
(46.3 ) —
35.4

Depreciation and amortization ⁽¹⁾
$ 13.8
$ 3.3
$ 10.7
$ —
$ 27.8
Capital expenditures 14.1
3.1
1.5
—
18.7

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

The following table summarizes segment information for the three months ended June 30, 2020:

Depreciation and amortization ⁽¹⁾

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

The following table summarizes segment information for the three months ended June 30, 2019:


(in millions)	North America		International		Corporate		Eliminations		Consolidated


Net sales	$	588.1	$	134.7	$	—	$	—	$	722.8

Inter-segment sales	$	0.9	$	0.1	$	—	$	(1.0)	$	—
Inter-segment royalty expense (income)	1.0		(1.0)		—		—		—
Gross profit	240.0		73.4		—		—		313.4
Operating income (loss)	80.1		27.4		(26.5)		—		81.0
Income (loss) from continuing operations before income taxes	78.6		23.2		(43.3)		—		58.5

Depreciation and amortization ⁽¹⁾	$	15.6	$	3.5	$	9.5	$	—	$	28.6
Capital expenditures	14.4		3.1		3.3		—		20.8

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

The following table summarizes segment information for the six months ended June 30, ~~2019:~~2020:

Depreciation and amortization ⁽¹⁾

(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 1,132.1
$ 281.6
$ —
$ —
$ 1,413.7

Inter-segment sales $ 1.9
$ 0.4
$ —
$ (2.3 ) $ —
Inter-segment royalty expense (income) 2.0
(2.0 ) —
—
—
Gross profit 444.4
150.8
—
—
595.2
Operating income (loss) 144.4
52.6
(55.5 ) —
141.5
Income (loss) from continuing operations before income taxes 141.0
53.0
(89.6 ) —
104.4

Depreciation and amortization ⁽¹⁾
$ 30.6
$ 6.8
$ 19.3
$ —
$ 56.7
Capital expenditures 27.3
6.0
6.6
—
39.9

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

~~The following table summarizes segment information for the six months ended June 30, 2018:~~

(in millions) North America International Corporate Eliminations Consolidated
Net sales $ 1,012.8
$ 284.5
$ —
$ —
$ 1,297.3

Inter-segment sales $ 1.2
$ 0.2
$ —
$ (1.4 ) $ —
Inter-segment royalty expense (income) 1.3
(1.3 ) —
—
—
Gross profit 387.4
150.1
—
—
537.5
Operating income (loss) 118.1
49.7
(54.1 ) —
113.7
Income (loss) from continuing operations before income taxes 115.2
47.6
(91.8 ) —
71.0

Depreciation and amortization ⁽¹⁾
$ 27.2
$ 6.9
$ 20.8
$ —
$ 54.9
Capital expenditures 30.9
6.0
3.6
—
40.5

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

(in millions) June 30, 2019 December 31, 2018
United States $ 358.4
$ 350.7
Canada 18.7
19.1
Other International 52.9
51.0
Total property, plant and equipment, net $ 430.0
$ 420.8
Total International $ 71.6
$ 70.1

~~The following table summarizes net sales by geographic region:~~

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2019 2018 2019 2018
United States $ 533.7
$ 477.7
$ 1,030.9
$ 917.9
Canada 54.4
50.1
101.2
94.9
Other International 134.7
132.1
281.6
284.5
Total net sales $ 722.8
$ 659.9
$ 1,413.7
$ 1,297.3
Total International $ 189.1
$ 182.2
$ 382.8
$ 379.4
24

Table of Contents

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

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

~~(16)Guarantor/Non-Guarantor Financial Information~~

The $450.0 million and $600.0 million aggregate principal amount of 2023 Senior Notes and 2026 Senior Notes (collectively the "Senior Notes"), respectively, are general unsecured senior obligations of Tempur Sealy International and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by all of Tempur Sealy International’s ~~100%~~ directly or indirectly owned current and future domestic subsidiaries (the "Combined Guarantor Subsidiaries"), subject to certain exceptions. The foreign subsidiaries (the "Combined Non-Guarantor Subsidiaries") represent the foreign operations of the Company and do not guarantee the Senior Notes. A subsidiary guarantor will be released from its obligations under the applicable indenture governing the Senior Notes when: (a) the subsidiary guarantor is sold or sells all or substantially all of its assets; (b) the subsidiary is declared "unrestricted" under the applicable indenture governing the Senior Notes; (c) the subsidiary’s guarantee of indebtedness under the 2016 Credit Agreement (as it may be amended, refinanced or replaced) is released (other than a discharge through repayment); or (d) the requirements for legal or covenant defeasance or discharge of the applicable indenture have been satisfied. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Company’s wholly-owned subsidiary guarantors and non-guarantor subsidiaries. The Company has accounted for its investments in its subsidiaries under the equity method.

The following ~~supplemental financial~~table summarizes segment information presents the Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2019 and 2018, the Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, ~~2018, and the Condensed Consolidated Statements of Cash Flows~~ for the six months ended June 30, ~~2019~~2019:


(in millions)	North America		International		Corporate		Eliminations		Consolidated


Net sales	$	1,132.1	$	281.6	$	—	$	—	$	1,413.7

Inter-segment sales	$	1.9	$	0.4	$	—	$	(2.3)	$	—
Inter-segment royalty expense (income)	2.0		(2.0)		—		—		—
Gross profit	444.4		150.8		—		—		595.2
Operating income (loss)	144.4		52.6		(55.5)		—		141.5
Income (loss) from continuing operations before income taxes	141.0		53.0		(89.6)		—		104.4

Depreciation and amortization ⁽¹⁾	$	30.6	$	6.8	$	19.3	$	—	$	56.7
Capital expenditures	27.3		6.0		6.6		—		39.9

(1)Depreciation and ~~2018 for Tempur Sealy International, Combined Guarantor Subsidiaries~~amortization includes stock-based compensation amortization expense.

The following table summarizes property, plant and ~~Combined Non-Guarantor Subsidiaries.~~equipment, net by geographic region:


(in millions)	June 30, 2020		December 31, 2019
United States	$	395.7	$	366.4
Canada	15.9		17.5
Other International	51.2		51.9
Total property, plant and equipment, net	$	462.8	$	435.8
Total International	$	67.1	$	69.4

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


(in millions)	June 30, 2020		December 31, 2019
United States	$	235.4	$	198.3
Canada	4.1		4.9
Other International	42.1		42.2
Total operating lease right-of-use assets	$	281.6	$	245.4
Total International	$	46.2	$	47.1

The following table summarizes net sales by geographic region:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2020		2019		2020		2019
United States	$	542.0	$	533.7	$	1,174.5	$	1,030.9
Canada	28.5		54.4		73.2		101.2
Other International	94.7		134.7		239.9		281.6
Total net sales	$	665.2	$	722.8	$	1,487.6	$	1,413.7
Total International	$	123.2	$	189.1	$	313.1	$	382.8

Table of Contents

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

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

~~Supplemental Condensed Consolidated Statements of Income and Comprehensive Income~~

~~Three Months Ended June 30, 2019~~

~~(in millions)~~

Tempur Sealy International, Inc. (Ultimate Parent) Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Reclassifications and Eliminations Consolidated
Net sales $ —
$ 550.3
$ 187.9
$ (15.4 ) $ 722.8
Cost of sales —
318.0
106.8
(15.4 ) 409.4
Gross profit —
232.3
81.1
—
313.4
Selling and marketing expenses 2.7
114.8
45.8
—
163.3
General, administrative and other expenses 4.2
55.8
13.9
(1.2 ) 72.7
Equity income in earnings of unconsolidated affiliates —
—
(3.6 ) —
(3.6 )
Operating (loss) income (6.9 ) 61.7
25.0
1.2
81.0

Other expense, net:

Third party interest expense, net 14.1
6.9
1.5
—
22.5
Intercompany interest (income) expense, net (2.5 ) 3.2
(0.7 ) —
—
Interest expense, net 11.6
10.1
0.8
—
22.5
Other (income) expense, net —
(3.7 ) 3.7
—
—
Total other expense, net 11.6
6.4
4.5
—
22.5

Income from equity investees 56.3
14.3
—
(70.6 ) —

Income from continuing operations before income taxes 37.8
69.6
20.5
(69.4 ) 58.5
Income tax benefit (provision) 3.7
(13.3 ) (6.2 ) —
(15.8 )
Income from continuing operations 41.5
56.3
14.3
(69.4 ) 42.7
Loss from discontinued operations, net of tax —
—
—
(1.2 ) (1.2 )
Net income before non-controlling interest 41.5
56.3
14.3
(70.6 ) 41.5
Less: Net income attributable to non-controlling interest (0.1 ) —
(0.1 ) 0.1
(0.1 )
Net income attributable to Tempur Sealy International, Inc. $ 41.6
$ 56.3
$ 14.4
$ (70.7 ) $ 41.6

Comprehensive income attributable to Tempur Sealy International, Inc. $ 44.6
$ 55.5
$ 18.2
$ (73.7 ) $ 44.6

~~Table of Contents~~

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

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

~~Supplemental Condensed Consolidated Statements of Income and Comprehensive Income~~

~~Three Months Ended~~ ~~June 30, 2018~~

~~(in millions)~~

Tempur Sealy International, Inc. (Ultimate Parent) Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Reclassifications and Eliminations Consolidated
Net sales $ —
$ 482.7
$ 202.9
$ (25.7 ) $ 659.9
Cost of sales —
289.4
120.1
(22.4 ) 387.1
Gross profit —
193.3
82.8
(3.3 ) 272.8
Selling and marketing expenses 2.1
103.5
51.8
(4.1 ) 153.3
General, administrative and other expenses 5.0
45.6
16.4
(1.7 ) 65.3
Equity income in earnings of unconsolidated affiliates —
—
(3.8 ) —
(3.8 )
Operating (loss) income (7.1 ) 44.2
18.4
2.5
58.0

Other expense, net:

Third party interest expense, net 14.9
7.5
2.1
(1.3 ) 23.2
Intercompany interest (income) expense, net (1.7 ) 2.1
(0.4 ) —
—
Interest expense, net 13.2
9.6
1.7
(1.3 ) 23.2
Other (income) expense, net —
(3.5 ) 4.7
(1.8 ) (0.6 )
Total other expense, net 13.2
6.1
6.4
(3.1 ) 22.6

Income from equity investees 37.2
7.8
—
(45.0 ) —

Income from continuing operations before income taxes 16.9
45.9
12.0
(39.4 ) 35.4
Income tax benefit (provision) 4.3
(8.7 ) (4.2 ) (0.2 ) (8.8 )
Income from continuing operations 21.2
37.2
7.8
(39.6 ) 26.6
Loss from discontinued operations, net of tax —
—
—
(5.4 ) (5.4 )
Net income before non-controlling interest 21.2
37.2
7.8
(45.0 ) 21.2
Less: Net loss attributable to non-controlling interest (1.6 ) —
(1.6 ) 1.6
(1.6 )
Net income attributable to Tempur Sealy International, Inc. $ 22.8
$ 37.2
$ 9.4
$ (46.6 ) $ 22.8

Comprehensive income attributable to Tempur Sealy International, Inc. $ 6.7
$ 36.9
$ (6.7 ) $ (30.2 ) $ 6.7

~~Table of Contents~~

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

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

~~Supplemental Condensed Consolidated Statements of Income and Comprehensive Income~~

~~Six Months Ended June 30, 2019~~

~~(in millions)~~

Tempur Sealy International, Inc. (Ultimate Parent) Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Reclassifications and Eliminations Consolidated
Net sales $ —
$ 1,064.2
$ 381.2
$ (31.7 ) $ 1,413.7
Cost of sales —
634.3
215.9
(31.7 ) 818.5
Gross profit —
429.9
165.3
—
595.2
Selling and marketing expenses 5.5
216.1
95.3
(0.1 ) 316.8
General, administrative and other expenses 8.5
108.5
28.2
(1.8 ) 143.4
Equity income in earnings of unconsolidated affiliates —
—
(6.5 ) —
(6.5 )
Operating (loss) income (14.0 ) 105.3
48.3
1.9
141.5
—
Other expense, net:
Third party interest expense, net 28.2
14.5
2.2
—
44.9
Intercompany interest (income) expense, net (5.1 ) 5.4
(0.3 ) —
—
Interest expense, net 23.1
19.9
1.9
—
44.9
Other income, net —
(6.6 ) (1.5 ) 0.3
—
(7.8 )
Total other expense, net 23.1
13.3
0.4
0.3
37.1

Income from equity investees 100.5
36.4
—
(136.9 ) —

Income from continuing operations before income taxes 63.4
128.4
47.9
(135.3 ) 104.4
Income tax benefit (provision) 6.7
(27.9 ) (11.5 ) —
(32.7 )
Income from continuing operations 70.1
100.5
36.4
(135.3 ) 71.7
Loss from discontinued operations, net of tax —
—
—
(1.6 ) (1.6 )
Net income before non-controlling interest 70.1
100.5
36.4
(136.9 ) 70.1
Less: Net income attributable to non-controlling interest 0.1
—
0.1
(0.1 ) 0.1
Net income attributable to Tempur Sealy International, Inc. $ 70.0
$ 100.5
$ 36.3
$ (136.8 ) $ 70.0

Comprehensive income attributable to Tempur Sealy International, Inc. $ 77.0
$ 102.0
$ 41.8
$ (143.8 ) $ 77.0

~~Table of Contents~~

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

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

~~Supplemental Condensed Consolidated Statements of Income and Comprehensive Income~~

~~Six Months Ended June 30, 2018~~

~~(in millions)~~

Tempur Sealy International, Inc. (Ultimate Parent) Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Reclassifications and Eliminations Consolidated
Net sales $ —
$ 923.3
$ 427.7
$ (53.7 ) $ 1,297.3
Cost of sales —
555.8
251.2
(47.2 ) 759.8
Gross profit —
367.5
176.5
(6.5 ) 537.5
Selling and marketing expenses 4.0
196.6
105.7
(7.6 ) 298.7
General, administrative and other expenses 9.7
93.0
33.3
(3.2 ) 132.8
Equity income in earnings of unconsolidated affiliates —
—
(7.7 ) —
(7.7 )
Operating (loss) income (13.7 ) 77.9
45.2
4.3
113.7

Other expense, net:

Third party interest expense, net 29.9
14.5
3.0
(1.5 ) 45.9
Intercompany interest (income) expense, net (3.6 ) 3.9
(0.3 ) —
—
Interest expense, net 26.3
18.4
2.7
(1.5 ) 45.9
Other (income) expense, net —
(5.8 ) 5.2
(2.6 ) (3.2 )
Total other expense, net 26.3
12.6
7.9
(4.1 ) 42.7

Income from equity investees 76.3
26.8
—
(103.1 ) —

Income from continuing operations before income taxes 36.3
92.1
37.3
(94.7 ) 71.0
Income tax benefit (provision) 7.7
(15.8 ) (10.5 ) (0.2 ) (18.8 )
Income from continuing operations 44.0
76.3
26.8
(94.9 ) 52.2
Loss from discontinued operations, net of tax —
—
—
(8.2 ) (8.2 )
Net income before non-controlling interest 44.0
76.3
26.8
(103.1 ) 44.0
Less: Net loss attributable to non-controlling interest (1.9 ) —
(1.9 ) 1.9
(1.9 )
Net income attributable to Tempur Sealy International, Inc. $ 45.9
$ 76.3
$ 28.7
$ (105.0 ) $ 45.9

Comprehensive income attributable to Tempur Sealy International, Inc. $ 34.2
$ 75.4
$ 17.6
$ (93.0 ) $ 34.2

~~Table of Contents~~

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

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

~~Supplemental Condensed Consolidated Balance Sheets~~

~~June 30, 2019~~

~~(in millions)~~

Tempur Sealy International, Inc. (Ultimate Parent) Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Reclassifications and Eliminations Consolidated
ASSETS
Current Assets:
Cash and cash equivalents $ —
$ 13.5
$ 24.8
$ —
$ 38.3
Accounts receivable, net 0.1
17.0
310.2
59.0
386.3
Inventories —
180.2
62.9
—
243.1
Prepaid expenses and other current assets 286.3
61.1
159.3
(282.7 ) 224.0
Total Current Assets 286.4
271.8
557.2
(223.7 ) 891.7
Property, plant and equipment, net —
358.4
71.6
—
430.0
Goodwill —
510.9
221.4
—
732.3
Other intangible assets, net —
570.8
79.8
—
650.6
Operating lease right-of-use assets —
179.7
48.4
—
228.1
Deferred income taxes 14.1
—
12.6
(14.2 ) 12.5
Other non-current assets —
53.9
47.6
—
101.5
Net investment in subsidiaries 752.7
184.2
—
(936.9 ) —
Due from affiliates 423.0
152.8
13.2
(589.0 ) —
Total Assets $ 1,476.2
$ 2,282.5
$ 1,051.8
$ (1,763.8 ) $ 3,046.7

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable $ —
$ 126.2
$ 50.3
$ 59.0
$ 235.5
Accrued expenses and other current liabilities 6.8
217.2
212.4
—
436.4
Current portion of long-term debt —
52.4
7.7
—
60.1
Income taxes payable —
279.9
9.5
(282.7 ) 6.7
Total Current Liabilities 6.8
675.7
279.9
(223.7 ) 738.7
Long-term debt, net 1,043.7
447.7
94.1
—
1,585.5
Long-term operating lease obligations —
153.3
33.4
—
186.7
Deferred income taxes —
115.2
16.0
(14.2 ) 117.0
Other non-current liabilities 1.3
56.5
55.1
—
112.9
Due to affiliates 118.5
81.4
389.1
(589.0 ) —
Total Liabilities 1,170.3
1,529.8
867.6
(826.9 ) 2,740.8

Total Stockholders' Equity 305.9
752.7
184.2
(936.9 ) 305.9
Total Liabilities and Stockholders’ Equity $ 1,476.2
$ 2,282.5
$ 1,051.8
$ (1,763.8 ) $ 3,046.7

~~Table of Contents~~

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

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

~~Supplemental Condensed Consolidated Balance Sheets~~

~~December 31, 2018~~

~~(in millions)~~

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

Current Assets:
Cash and cash equivalents $ 0.1
$ 6.2
$ 39.5
$ —
$ 45.8
Accounts receivable, net —
15.2
303.3
3.0
321.5
Inventories —
159.4
62.9
—
222.3
Prepaid expenses and other current assets 276.9
65.4
148.1
(274.6 ) 215.8
Total Current Assets 277.0
246.2
553.8
(271.6 ) 805.4
Property, plant and equipment, net —
350.7
70.1
—
420.8
Goodwill —
508.8
214.2
—
723.0
Other intangible assets, net —
572.7
76.6
—
649.3
Deferred income taxes 15.0
—
22.6
(15.0 ) 22.6
Other non-current assets —
49.2
45.1
—
94.3
Net investment in subsidiaries 661.7
210.0
—
(871.7 ) —
Due from affiliates 422.1
153.8
15.4
(591.3 ) —
Total Assets $ 1,375.8
$ 2,091.4
$ 997.8
$ (1,749.6 ) $ 2,715.4

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable $ —
$ 186.7
$ 63.3
$ 3.0
$ 253.0
Accrued expenses and other current liabilities 6.7
143.9
208.6
—
359.2
Current portion of long-term debt —
44.0
3.1
—
47.1
Income taxes payable —
274.7
9.6
(274.6 ) 9.7
Total Current Liabilities 6.7
649.3
284.6
(271.6 ) 669.0
Long-term debt, net 1,043.0
547.1
9.0
—
1,599.1
Deferred income taxes —
118.0
14.5
(15.0 ) 117.5
Other non-current liabilities 1.9
58.2
52.2
—
112.3
Due from affiliates 106.7
57.1
427.5
(591.3 ) —
Total Liabilities 1,158.3
1,429.7
787.8
(877.9 ) 2,497.9

Total Stockholders' Equity 217.5
661.7
210.0
(871.7 ) 217.5
Total Liabilities and Stockholders’ Equity $ 1,375.8
$ 2,091.4
$ 997.8
$ (1,749.6 ) $ 2,715.4

~~Table of Contents~~

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

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

~~Supplemental Condensed Consolidated Statements of Cash Flows~~

~~Six Months Ended~~ ~~June 30, 2019~~

~~(in millions)~~

Tempur Sealy International, Inc. (Ultimate Parent) Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Reclassifications and Eliminations Consolidated
Net cash (used in) provided by operating activities from continuing operations $ (24.3 ) $ 63.6
$ 4.6
$ 2.0
$ 45.9

CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:

Purchases of property, plant and equipment —
(33.5 ) (6.4 ) —
(39.9 )
Acquisition of business —
(9.0 ) (8.1 ) —
(17.1 )
Other —
0.1
10.2
—
10.3
Contributions received from (paid to) subsidiaries and affiliates —
65.8
(65.8 ) —
—
Net cash provided by (used in) investing activities from continuing operations —
23.4
(70.1 ) —
(46.7 )

CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:

Proceeds from borrowings under long-term debt obligations —
161.9
347.3
—
509.2
Repayments of borrowings under long-term debt obligations —
(251.9 ) (257.9 ) —
(509.8 )
Net activity in investment in and advances from (to) subsidiaries and affiliates 24.2
13.6
(37.8 ) —
—
Proceeds from issuance of stock options 5.5
—
—
—
5.5
Treasury stock repurchased (5.5 ) —
—
—
(5.5 )
Other —
(3.3 ) (0.1 ) —
(3.4 )
Net cash provided by (used in) financing activities from continuing operations 24.2
(79.7 ) 51.5
—
(4.0 )

Net cash (used in) provided by continuing operations (0.1 ) 7.3
(14.0 ) 2.0
(4.8 )

CASH USED IN DISCONTINUED OPERATIONS
Operating cash flows, net —
—
—
(2.0 ) (2.0 )
Investing cash flows, net —
—
—
—
—
Financing cash flows, net —
—
—
—
—
Net cash used in discontinued operations —
—
—
(2.0 ) (2.0 )

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS —
—
(0.7 ) —
(0.7 )
(Decrease)/increase in cash and cash equivalents (0.1 ) 7.3
(14.7 ) —
(7.5 )
CASH AND CASH EQUIVALENTS, beginning of period 0.1
6.2
39.5
—
45.8
CASH AND CASH EQUIVALENTS, end of period $ —
$ 13.5
$ 24.8
$ —
$ 38.3

~~Table of Contents~~

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

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

~~Supplemental Condensed Consolidated Statements of Cash Flows~~

~~Six Months EndedJune 30, 2018~~

~~(in millions)~~

Tempur Sealy International, Inc. (Ultimate Parent) Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Reclassifications and Eliminations Consolidated
Net cash (used in) provided by operating activities from continuing operations $ (30.0 ) $ 4.1
$ 27.5
$ 15.8
$ 17.4

CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:

Purchases of property, plant and equipment —
(34.1 ) (6.5 ) 0.1
(40.5 )
Other —
0.1
0.5
—
0.6
Contributions received from (paid to) subsidiaries and affiliates —
50.9
(50.9 ) —
—
Net cash provided by (used in) investing activities from continuing operations —
16.9
(56.9 ) 0.1
(39.9 )

CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:

Proceeds from borrowings under long-term debt obligations —
335.6
396.6
—
732.2
Repayments of borrowings under long-term debt obligations —
(350.6 ) (347.2 ) —
(697.8 )
Net activity in investment in and advances from (to) subsidiaries and affiliates 30.3
(4.3 ) (26.0 ) —
—
Proceeds from exercise of stock options 2.6
—
—
—
2.6
Treasury stock repurchased (3.0 ) —
—
—
(3.0 )
Other —
(2.7 ) (0.7 ) —
(3.4 )
Net cash provided by (used in) financing activities from continuing operations 29.9
(22.0 ) 22.7
—
30.6

Net cash (used in) provided by continuing operations (0.1 ) (1.0 ) (6.7 ) 15.9
8.1

CASH USED IN DISCONTINUED OPERATIONS
Operating cash flows, net —
—
—
(15.8 ) (15.8 )
Investing cash flows, net —
—
—
(0.1 ) (0.1 )
Financing cash flows, net —
—
—
—
—
Net cash used in discontinued operations —
—
—
(15.9 ) (15.9 )

NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS —
—
(1.5 ) —
(1.5 )
Decrease in cash and cash equivalents (0.1 ) (1.0 ) (8.2 ) —
(9.3 )
CASH AND CASH EQUIVALENTS, beginning of period 0.1
12.3
29.5
—
41.9
CASH AND CASH EQUIVALENTS, end of period —
11.3
21.3
—
32.6
LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS —
—
1.6
—
1.6
CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS $ —
$ 11.3
$ 19.7
$ —
$ 31.0

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

The following discussion and analysis should be read in conjunction with the ~~2018~~2019 Annual Report, including "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in ITEM 7 of Part II of the ~~2018~~2019 Annual Report, and the accompanying Condensed Consolidated Financial Statements and notes thereto included in 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 ~~strategy, our~~ future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" elsewhere in this Report, in the ~~2018~~2019 Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part I of the ~~2018~~2019 Annual Report and in ITEM 1A, Risk Factors, in this Report. Our actual results may differ materially from those contained in any forward-looking statements.

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and six months ended June 30, ~~2019,~~2020, including the following topics:

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

~~factors impacting results of operations;~~

•results of operations, including our net sales and costs in the periods presented as well as changes between periods;

•expected sources of liquidity for future operations; and

•our use of certain non-GAAP financial measures.

Business Overview

General

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

~~We sell our products~~Our distribution model operates through an omni-channel strategy with two distribution channels in each operating business segment: Wholesale and Direct. Our Wholesale channel consists of ~~third party~~third-party retailers, including ~~third party~~third-party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, e-commerce and call centers.

Business Segments

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

~~Factors That Could Impact Results~~Business Update

We continue to study and optimize our operations in response to the challenges from the COVID-19 crisis. We have taken and continue to take precautionary measures to mitigate health risks during the evolving situation resulting from COVID-19.

We experienced a major reduction in total net sales when COVID-19 began materially impacting our North America business segment in mid-March. In the second quarter, order trends reached their lowest point in early April when they had declined approximately 80% as compared to prior year. Order trends began to improve thereafter, with orders down approximately 55% for the full month of ~~Operations~~

~~The factors outlined below could impact~~April as compared to the same period in 2019. During April and May, many stores of our ~~future results of operations. For more extensive discussion of these~~third-party retailers within the Wholesale channel, as well as our company-owned stores within the Direct channel, were closed or operating under restricted conditions in the U.S. and ~~other risk factors that could impact our future results of operations, please refer to "Risk Factors," under ITEM 1A of Part I~~around the world. We experienced significant and ~~"Management’s Discussion~~accelerating improvement in order trends in late May and ~~Analysis of Financial Condition and Results of Operations - Factors That Could Impact Results of Operations" included in ITEM 7 of Part II~~throughout the remainder of the ~~2018 Annual Report.~~second quarter. This improvement was primarily due to the reopening of brick-and-mortar stores as restrictions were lifted, the acceleration of e-commerce business trends and a

shift in consumer spending habits towards in-home products, including bedding products. We believe this may be a long-term shift in consumer spending habits, which could be favorable to our business.

~~General Business~~This unexpected and ~~Economic Conditions~~

~~Our business is affected by general business and economic conditions, and these conditions could have an impact on future~~rapid increase in demand for bedding products has challenged the entire bedding industry and supply chain, including our ~~products.~~business. The ~~global economic environment continues to be challenging,~~broad-based increase in demand coupled with labor and ~~we expect~~supply chain constraints has created operational challenges in the ~~uncertainty to continue. Entry-level~~production of Sealy bedding ~~imports from China significantly increased during 2018 and are competing against our value priced Sealy~~ products in the U.S. ~~market. We believe these imports are being sold below cost. In September 2018, we and other industry participants filed petitions with~~These operational challenges have resulted in longer order to delivery times. Sealy orders in the U.S. ~~International Trade Commission~~have exceeded our manufacturing capacity in the second quarter and through July. The Tempur-Pedic manufacturing process has not been as impacted by the current supply chain constraints as it is less labor-dependent and has fewer components than the Sealy manufacturing process. We are in the process of increasing U.S. production capabilities across our entire portfolio of products to meet this heightened demand, but expect to continue experiencing capacity constraints on Sealy bedding products through the third quarter of 2020.

Additionally, the U.S. ~~Department~~government has mandated that domestic suppliers of Commerce, alleging that many of these Chinese imports are being dumped into the U.S. market at prices below cost. As a result of these petitions, the U.S. International Trade Commission and the U.S. Department of Commerce have commenced investigations. A preliminary determination was reached by the U.S. Department of Commerce in May 2019 imposing a range of tariffs on these imports from 69.30% to 84.64%. A final determinationcertain materials used in the ~~case is expected in late 2019.~~production of bedding products be redirected towards the production of personal protective equipment. Our supply chain remains constrained with respect to these materials and we have taken certain steps, including pricing actions, to attempt to mitigate this impact.

We are targeting third quarter 2020 sales to increase approximately 25% from the same period last year. If favorable order trends were to continue, and if there are no significant changes in supply chain or manufacturing capacity, or other unfavorable impacts due to the global pandemic, it is possible that our third quarter or fourth quarter financial performance could trigger vesting of our long-term aspirational plan. This would result in a non-cash stock-based compensation charge in the range of $33.0 million to $49.5 million in the quarter that the performance metric is probable of acheivement.

During this time of uncertainty, keeping our employees safe and healthy is a top priority. We have implemented precautionary measures to protect our employees, including restricting travel and face-to-face meetings, allowing employees to work from home where possible and adopting all region-specific public health protocols applicable to our global operations. While providing a healthy and safe work environment is a top priority during these unprecedented times, our entire organization is also focused on ~~developing~~ our ~~North America distribution network by opening more company-owned Tempur-Pedic stores~~commitments to our customers, suppliers and expanding our online availability. We currently expect to have approximately 60 company-owned Tempur-Pedic retail stores in operation by the end of 2019, with an ultimate target of 125 to 150 stores. We expect these stores to complement our existing third-party retail partners by increasing our products' brand awareness in the local markets. We also plan to expand our offerings in our own e-commerce platform and with third-party online retailers where our market share is still very low. Online bedding sales have increased significantly, as a growing segment of consumers prefer to purchase bedding products in this way.shareholders. During the second quarter, ~~of 2019,~~ we ~~experienced strong growth in both~~began offering our ~~e-commerce business~~Clean Shop Promise^TM protocol to third-party retailers and our company-owned stores, which is being broadly adopted to provide customers with a sense of comfort as they return to shopping in stores. During the second quarter, we also worked with various government and healthcare organizations to provide products and services in this time of crisis.

Our ~~International operations were impacted by country specific conditions~~business has a highly variable cost structure that ~~challenged net sales~~can flex with changes in sales. Given the sudden and significant change in volume early in the second quarter of ~~2019.~~2020, actions were quickly implemented to mitigate the financial impact. We ~~expect~~primarily reduced advertising spend, temporarily furloughed employees and decreased variable compensation. As order trends improved throughout the quarter, we immediately reversed these ~~challenges~~actions and began making investments to ~~continue~~ensure we could service our customers. Additionally, as liquidity improved, we began reinvesting in the ~~second half~~business at similar levels prior to the impact of ~~2019.~~COVID-19.

~~We continue to make strategic investments, which have recently included~~Given the ~~introduction~~market uncertainty of new products; investments to increase our global brand awareness; investments in research and development and productivity initiatives; and various other actions aimed at further strengthening our business.

~~Supply Agreements with Mattress Firm, Inc. ("Mattress Firm"), Big Lots, Inc. ("Big Lots"), and Beter Bed Holding N.V. ("Beter Bed")~~

~~During~~ the ~~second quarter of 2019,~~crisis, we entered into a ~~supply agreement with Mattress Firm~~new $200 million 364-day term loan (the "364-Day Loan") on May 13, 2020 to ~~reintroduce Tempur-Pedic, Stearns & Foster~~increase overall available liquidity and ~~Sealy branded products into approximately 2,500 Mattress Firm stores across~~strengthen the ~~United States.~~balance sheet. We ~~expect~~had $611.5 million of liquidity as of June 30, 2020, including $146.8 million of cash on hand and $423.9 million available under our revolving senior secured credit facility.

We will continue to ~~reintroduce~~actively monitor the situation and may take further actions that alter our ~~products into Mattress Firm stores beginning~~business operations as may be required by federal, state or local authorities or that we determine are in the ~~fourth quarter~~best interests of ~~2019~~our employees, customers, suppliers and stockholders. While we are unable to ~~complete~~determine or predict the ~~launch early~~nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe that it is important to share where our company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses. For further information regarding the potential impacts of COVID-19 on the Company, please refer to "Risk Factors" in ITEM 1A of Part II of this Report.

Product Launches

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

Acquisition of Sherwood Bedding

On January 31, 2020, we acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of approximately $39.1 million. Sherwood Bedding is a major manufacturer in the U.S. private label and original equipment manufacturer bedding market, and this acquisition of a majority interest marks our entrance into the private label category. During the first quarter of 2020. Additionally, we expanded our long-term supply agreement with Big Lots, a 1,400-store retailer, to primarily supply entry-level Sealy products. We expect to complete the launch of our Sealy products into Big Lots by the end of 2019.

As a result of these agreements, we expect significantly higher volume in our North America segment operations and anticipate certain investments during these launches, including hiring additional personnel. In the third quarter of 2019, we expect to incur additional costs of approximately $5 million associated with these investments, which will not be offset by incremental revenues in the period. The impact of these agreements to Adjusted EBITDA, which is a non-GAAP financial measure, for 2019 is not expected to be material; however, we expect significant incremental annual Adjusted EBITDA beginning in 2020.

Additionally, we recently extended our European retail distribution network by reaching a supply agreement with Beter Bed. The launch of new products with Beter Bed is expected to be complete by the end of 2019 and will initially include over 100 stores.

~~Exchange Rates~~

As a multi-national company, we conduct our business in a wide variety of currencies and are therefore subject to market risk for changes in foreign currency exchange rates. Foreign currency exchange rate movements also create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. We use 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 succeed in managing our foreign currency exchange rate risk. Consequently, our reported earnings and financial position could fluctuate materially as a result of foreign exchange gains or losses. Additionally, the operations of our foreign currency denominated subsidiaries result in foreign currency translation fluctuations in our consolidated operating results. These operations do not constitute transactions which qualify for hedge accounting treatment.

In the first half of 2019, foreign exchange rate fluctuations had a slightly unfavorable impact on our results of operations, which we expect to continue in the second half of 2019, as we expect the U.S. Dollar to remain strong relative to all major foreign currencies.

~~Gross Margins~~

During the second quarter of 2019, our gross margin was favorably impacted by improved merchandising mix due to the completion of our Tempur product launch, full realization of pricing actions implemented in 2018, continued efficiency efforts and expansion of our Direct channel. We expect merchandising mix will continue to be favorable. Demand for our Sealy products exceeded our expectations in North America during the second quarter of 2019, and we expect this to continue for the remainder of 2019.

In the first half of 2019, commodity cost inflation and tariffs unfavorably impacted our gross margin. As a result of these import tariffs, we implemented certain price increases on our adjustable bases imported from China. For the full year 2019, we expect the impact of commodities and tariffs to have a slightly favorable impact on our gross margin.

~~New Product Development and Introduction~~

Each year we invest significant time and resources in research and development to improve our product offerings. For the full year of 2019, we expect to incur an incremental $15 million on product innovation. There are a number of risks 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, product introduction costs, the speed and order of the product rollout and manufacturing inefficiencies may unfavorably impact our profitability.

In the first half of 2019, we completed the rollout of our higher-end Tempur Breeze and Stearns & Foster products in our North America segment. The Tempur Breeze rollout completed the largest Tempur rollout in our history. In 2018, we launched entry-level Tempur mattresses, Tempur pillows, Sealy Hybrid mattresses and adjustable bases. Launch costs for the Tempur Breeze and Stearns & Foster product introductions in the first half of 2019, were slightly unfavorable as compared to the first half of 2018. In 2018 and the first quarter of 2019, our profitability in North America was unfavorably impacted, as some consumers purchased our new entry-level mattresses instead of our existing higher-end mattresses. Our profitability in the second quarter of 2019 was favorably impacted by the completion of the rollout of our higher-end Tempur Breeze products and we expect this profitability to continue into the second half of 2019.

~~Acquisition of Innovative Mattress Solutions, LLC ("iMS")~~

On April 1, 2019, we acquired substantially all of the net assets of iMS in a transaction valued at approximately $24 million, including assumed liabilities of approximately $11 million as of March 31, 2019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of this regional bedding retailer furthers our North American retail strategy, which is focused on meeting customer demand through geographic representation and sales expertise. During the second quarter of 2019,2020, we completed the integration of Sleep Outfitters into the North America segment. Sleep Outfitters, previously a third party retailer, had historically been part of our Wholesale channel. Sleep Outfitters' sales have been reclassifiedSherwood Bedding into our ~~Direct channel beginning in the second quarter~~portfolio of ~~2019. In 2019, we~~product brands. We expect ~~the retail store operations of Sleep Outfitters~~ to ~~incur losses of $5 million~~leverage our overall brand portfolio to $8 million on an Adjusted EBITDA basis, which is a non-GAAP financial measure. After its first year of operations, we expect Sleep Outfitters results to begin to break even and become profitable thereafter.gain additional distribution for Sherwood products.

~~Financial Leverage~~

As of June 30, 2019, we had $1,652.5 million of total debt outstanding, net income was $41.6 million for the second quarter of 2019 and Adjusted EBITDA, which is a non-GAAP financial measure, was $451.4 million for the trailing twelve months ended June 30, 2019. Higher financial leverage makes us more vulnerable to general adverse competitive, economic and industry conditions. There can be no assurance that our business will generate sufficient cash flow from operations to service our current debt obligations or that future borrowing will be available. As of June 30, 2019, our ratio of consolidated funded debt less qualified cash to Adjusted EBITDA calculated in accordance with the 2016 Credit Agreement was 3.65 times, which was within the covenant in our debt agreements which limits this ratio to 5.00 times for the trailing twelve months ended June 30, 2019. For more information on this non-GAAP financial measure and compliance with the 2016 Credit Agreement, please refer to "Non-GAAP Financial Information" below.

Subject to market conditions, we are targeting quarterly share repurchases of approximately $50 million in the near-term. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities.

Results of Operations

A summary of our results for the three months ended June 30, ~~2019~~2020 include:

•Total net sales ~~increased 9.5%~~decreased 8.0% to ~~$722.8~~$665.2 million ~~from $659.9~~as compared to $722.8 million in the second quarter of ~~2018.~~2019. On a constant currency basis, which is a non-GAAP financial measure, total net sales ~~increased 10.8%~~decreased 7.3%, with ~~an increase~~a decrease of ~~11.8%~~2.9% in the North America business segment and ~~an increase~~a decrease of ~~6.9%~~26.9% in the International business segment.

•Gross margin was ~~43.4%~~40.0% as compared to ~~41.3%~~43.4% in the second quarter of ~~2018.~~2019. Adjusted gross margin, which is a non-GAAP financial measure, was 40.6% in the second quarter of 2020. There were no adjustments to gross margin in the second quarter of 2019.

•Operating income ~~increased 39.7%~~decreased 34.1% to ~~$81.0~~$53.4 million as compared to ~~$58.0~~$81.0 million in the second quarter of ~~2018.~~2019. Adjusted operating income, which is a non-GAAP financial measure, ~~increased 32.2%~~decreased 16.5% to ~~$83.8~~$70.0 million as compared to ~~$63.4~~$83.8 million in the second quarter of ~~2018.~~2019. Operating income and adjusted operating income, which is a non-GAAP financial measure, in the second quarter of 2020 included $7.9 million of costs associated with temporarily closed company-owned retail stores and sales force retention costs as a result of the novel coronavirus ("COVID-19 charges").

•Net income ~~increased 82.5%~~decreased 44.7% to ~~$41.6~~$23.0 million as compared to ~~$22.8~~$41.6 million in the second quarter of ~~2018.~~2019. Adjusted net income, which is a non-GAAP financial measure, ~~increased 41.1%~~decreased 20.8% to ~~$44.3~~$35.1 million as compared to ~~$31.4~~$44.3 million in the second quarter of ~~2018.~~2019.

•

•Earnings before interest, tax, depreciation and amortization ("EBITDA"), which is a non-GAAP financial measure,decreased 21.8% to $85.2 million as compared to $109.0 million in the second quarter of 2019. Adjusted EBITDA (including COVID-19 charges), which is a non-GAAP financial measure, decreased 10.0% to $101.7 million and adjusted EBITDA per credit facility, which is a non-GAAP financial measure, decreased 3.0% to $109.6 million as compared to $113.0 million in the second quarter of 2019.

•Adjusted EBITDA per credit facility, which is a non-GAAP financial measure, excluded $24.5 million of asset impairments, incremental operating costs due to the global pandemic, COVID-19 charges and other items in the second quarter of 2020.

•increased 32.0% to $109.0 million as compared to $82.6 million for the second quarter of 2018. Adjusted EBITDA, which is a non-GAAP financial measure, increased 21.0% to $113.0 million as compared to $93.4 million in the second quarter of 2018.

Earnings per diluted share ("EPS") ~~increased 76.2%~~decreased 40.5% to ~~$0.74~~$0.44 as compared to ~~$0.42~~$0.74 in the second quarter of ~~2018.~~2019. Adjusted EPS, which is a non-GAAP financial measure, ~~increased 38.6%~~decreased 13.9% to ~~$0.79~~$0.68 as compared to ~~$0.57~~$0.79 in the second quarter of ~~2018.~~2019. Adjusted EPS, which is a non-GAAP financial measure, included $0.11 of COVID-19 charges in the second quarter of 2020.

•For the trailing twelve months ended June 30, 2020, leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, was 2.83 times as compared to 3.65 times in the corresponding prior year period.

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

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

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THREE MONTHS ENDED JUNE 30, ~~2019~~2020 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, ~~2018~~2019

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


	Three Months Ended June 30,
(in millions, except percentages and per share amounts)	2020						2019
Net sales	$	665.2	100.0	%	$	722.8	100.0	%
Cost of sales	399.3		60.0		409.4		56.6
Gross profit	265.9		40.0		313.4		43.4
Selling and marketing expenses	135.1		20.3		163.3		22.6
General, administrative and other expenses	82.4		12.4		72.7		10.1

Equity income in earnings of unconsolidated affiliates	(5.0)		(0.7)		(3.6)		(0.5)
Operating income	53.4		8.0		81.0		11.2

Other expense, net:
Interest expense, net	20.6		3.1		22.5		3.1


Other expense, net	0.3		—		—		—
Total other expense, net	20.9		3.1		22.5		3.1

Income from continuing operations before income taxes	32.5		4.9		58.5		8.1
Income tax provision	(9.4)		(1.4)		(15.8)		(2.2)
Income from continuing operations	23.1		3.5		42.7		5.9
Income (loss) from discontinued operations, net of tax	0.1		—		(1.2)		(0.2)
Net income before non-controlling interests	23.2		3.5		41.5		5.7
Less: Net income (loss) attributable to non-controlling interests	0.2		—		(0.1)		—
Net income attributable to Tempur Sealy International, Inc.	$	23.0	3.5	%	$	41.6	5.8	%

Earnings per common share:

Basic
Earnings per share for continuing operations	$	0.44			$	0.78
Loss per share for discontinued operations	—				(0.02)
Earnings per share	$	0.44			$	0.76

Diluted
Earnings per share for continuing operations	$	0.44			$	0.76
Loss per share for discontinued operations	—				(0.02)
Earnings per share	$	0.44			$	0.74

Weighted average common shares outstanding:
Basic	51.6				54.7
Diluted	52.0				56.0

Three Months Ended June 30,
(in millions, except percentages and per share amounts) 2019 2018
Net sales $ 722.8
100.0 % $ 659.9
100.0 %
Cost of sales 409.4
56.6
387.1
58.7
Gross profit 313.4
43.4
272.8
41.3
Selling and marketing expenses 163.3
22.6
153.3
23.2
General, administrative and other expenses 72.7
10.1
65.3
9.9
Equity income in earnings of unconsolidated affiliates (3.6 ) (0.5 ) (3.8 ) (0.6 )
Operating income 81.0
11.2
58.0
8.8

Other expense, net:
Interest expense, net 22.5
3.1
23.2
3.5
Other income, net —
—
(0.6 ) (0.1 )
Total other expense, net 22.5
3.1
22.6
3.4

Income from continuing operations before income taxes 58.5
8.1
35.4
5.4
Income tax provision (15.8 ) (2.2 ) (8.8 ) (1.3 )
Income from continuing operations 42.7
5.9
26.6
4.0
Loss from discontinued operations, net of tax (1.2 ) (0.2 ) (5.4 ) (0.8 )
Net income before non-controlling interest 41.5
5.7
21.2
3.2
Less: Net loss attributable to non-controlling interest (0.1 ) —
(1.6 ) (0.2 )
Net income attributable to Tempur Sealy International, Inc. $ 41.6
5.8 % $ 22.8
3.5 %

Earnings per common share:

Basic
Earnings per share for continuing operations $ 0.78
$ 0.52

Loss per share for discontinued operations (0.02 ) (0.10 )
Earnings per share $ 0.76
$ 0.42

Diluted
Earnings per share for continuing operations $ 0.76
$ 0.52

Loss per share for discontinued operations (0.02 ) (0.10 )
Earnings per share $ 0.74
$ 0.42

Weighted average common shares outstanding:
Basic 54.7
54.4

Diluted 56.0
54.9

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NET SALES


	Three Months Ended June 30,
	2020		2019		2020		2019		2020		2019
(in millions)	Consolidated						North America						International
Net sales by channel
Wholesale	$	563.7	$	632.2	$	494.6	$	528.5	$	69.1	$	103.7
Direct	101.5		90.6		75.9		59.6		25.6		31.0
Total net sales	$	665.2	$	722.8	$	570.5	$	588.1	$	94.7	$	134.7

Three Months Ended June 30,
2019 2018 2019 2018 2019 2018
(in millions) Consolidated North America International
Net sales by channel
Wholesale channel $ 632.2
$ 601.6
$ 528.5
$ 494.3
$ 103.7
$ 107.3
Direct channel 90.6
58.3
59.6
33.5
31.0
24.8
Total net sales $ 722.8
$ 659.9
$ 588.1
$ 527.8
$ 134.7
$ 132.1

Net sales ~~increased 9.5%~~decreased 8.0%, and on a constant currency basis ~~increased 10.8%~~decreased 7.3%. The ~~increase~~change in net sales was driven ~~by:~~by the following:

•

~~North America~~ net sales increased $60.3 million, or 11.4%. Net sales in the Wholesale channel increased $34.2 million, or 6.9%, driven by new Tempur product introductions. Net sales in our Direct channel increased $26.1 million, or 77.9%, primarily driven by growth from our company-owned stores, including the Sleep Outfitters Acquisition, and our e-commerce business. On a constant currency basis, North America net sales increased 11.8%.


•	~~International~~ net sales increased $2.6 million, or 2.0%. On a constant currency basis, International net sales increased 6.9%, driven primarily by Direct channel growth. Net sales in the Wholesale channel increased 1.2% on a constant currency basis. Net sales in the Direct channel increased 31.5% on a constant currency basis, primarily driven by growth from company-owned stores.

•North America net sales decreased $17.6 million, or 3.0%. Net sales in the Wholesale channel decreased $33.9 million, or 6.4%, as a result of the global pandemic. Net sales in the Direct channel increased $16.3 million, or 27.3%, primarily driven by growth from our e-commerce business. This growth was partially offset by decreased sales in our company-owned stores, which were closed or operating under restricted conditions as a result of the global pandemic.

•International net sales decreased $40.0 million, or 29.7%. On a constant currency basis, International net sales decreased 26.9%, as a result of the global pandemic. Net sales in the Wholesale channel decreased 30.3% on a constant currency basis. Net sales in the Direct channel decreased 15.5% on a constant currency basis.

GROSS PROFIT


	Three Months Ended June 30,
	2020						2019
(in millions, except percentages)	Gross Profit		Gross Margin		Gross Profit		Gross Margin		Margin Change
North America	$	216.2	37.9	%	$	240.0	40.8	%	(2.9)	%
International	49.7		52.5	%	73.4		54.5	%	(2.0)	%
Consolidated gross margin	$	265.9	40.0	%	$	313.4	43.4	%	(3.4)	%

Three Months Ended June 30,
2019 2018
(in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change
North America $ 240.0
40.8 % $ 203.4
38.5 % 2.3 %
International 73.4
54.5 % 69.4
52.5 % 2.0 %
Consolidated gross margin $ 313.4
43.4 % $ 272.8
41.3 % 2.1 %

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

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

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

Gross margin ~~improved 210~~declined 340 basis points. The ~~principal factors impacting~~primary drivers of changes in gross margin ~~for each operating~~by segment are discussed below:


•	~~North America~~ gross margin improved 230 basis points. The improvement in gross margin was primarily driven by favorable product and brand mix of 140 basis points, favorable pricing of 120 basis points and decreased floor model expenses. These improvements were partially offset by incremental overtime costs at our manufacturing plants due to the higher than expected demand for Sealy products.


•	~~International~~ ~~gross margin improved 200 basis points. The improvement in gross margin was primarily driven by favorable foreign exchange country mix.~~

•North America gross margin declined 290 basis points. The decline in gross margin was primarily driven by product mix of 280 basis points and brand mix of 110 basis points, partially offset by decreased floor model expenses of 100 basis points and lower commodity costs. We expect product and brand mix headwinds to gross margin to lessen in the third quarter of 2020 as sales of our premium products have improved since the second quarter of 2020. Additionally,

we incurred $4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which contributed to the decline in gross margin.

•International gross margin declined 200 basis points. The decline in gross margin was primarily driven by fixed cost deleverage on lower unit volumes of 210 basis points and decreased royalties, partially offset by favorable country mix of 140 basis points. Additionally, we incurred $0.5 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which contributed to the decline in gross margin.

OPERATING EXPENSES

Three Months Ended June 30,
2019 2018 2019 2018 2019 2018 2019 2018
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising expenses $ 65.4
$ 66.8
$ 58.3
$ 58.4
$ 7.1
$ 8.4
$ —
$ —
Other selling and marketing expenses 97.9
86.5
63.5
51.5
31.7
32.8
2.7
2.2
General, administrative and other expenses 72.7
65.3
38.1
29.3
10.8
11.1
23.8
24.9
Total operating expenses $ 236.0
$ 218.6
$ 159.9
$ 139.2
$ 49.6
$ 52.3
$ 26.5
$ 27.1

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

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


	Three Months Ended June 30,
	2020		2019		2020		2019		2020		2019		2020		2019
(in millions)	Consolidated						North America						International				Corporate
Operating expenses:
Advertising expenses	$	55.1	$	65.4	$	49.8	$	58.3	$	5.3	$	7.1	$	—	$	—
Other selling and marketing expenses	80.0		97.9		51.4		63.5		25.5		31.7		3.1		2.7
General, administrative and other expenses	82.4		72.7		45.6		38.1		14.3		10.8		22.5		23.8

Total operating expenses	$	217.5	$	236.0	$	146.8	$	159.9	$	45.1	$	49.6	$	25.6	$	26.5

Operating expenses ~~increased $17.4~~decreased $18.5 million, or ~~8.0%~~7.8%, and ~~decreased 40 basis points~~were flat as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained ~~below.~~below:

•

•North America operating expenses decreased $13.1 million, or 8.2%, and decreased 150 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreases in advertising and other selling and marketing investments as a result of cost reduction actions taken during the quarter. These decreases were offset by $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment and incremental bad debt expense primarily related to the bankruptcy of one department store in the U.S.

•International operating expenses decreased $4.5 million, or 9.1%, and increased 1,080 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreases in advertising and other selling and marketing investments, partially offset by increased bad debt expense. Additionally, we incurred $3.4 million of restructuring costs associated with headcount reductions driven by the current macro-economic environment and $0.3 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.

•Corporate operating expenses decreased $0.9 million, or 3.4%.

operating expenses increased $20.7 million, or 14.9%, and increased 80 basis points as a percentage of net sales. Operating expenses increased primarily due to selling and marketing investments, variable compensation expense and incremental operating expense associated with a higher number of company-owned stores. Additionally, we recorded $1.7 million of acquisition-related and other costs primarily related to the Sleep Outfitters Acquisition. We expect advertising expenses to increase in subsequent quarters of 2019 now that the Tempur and Stearns & Foster product launches are complete.

•

~~International~~ operating expenses decreased $2.7 million, or 5.2%, and decreased 280 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreased advertising costs, offset by an increase in variable compensation expense. Additionally, in the second quarter of 2018, we recognized $3.4 million of costs associated with our International simplification efforts, including headcount reduction, professional fees and store closures, which was not repeated in the same period in 2019.


•	~~Corporate~~ ~~operating expenses decreased $0.6 million, or 2.2%.~~

Research and development expenses for the three months ended June 30, ~~2019~~2020 were ~~$5.9~~$5.2 million compared to ~~$5.6~~$5.9 million for the three months ended June 30, ~~2018, an increase~~2019, a decrease of ~~$0.3~~$0.7 million, or ~~5.4%~~11.9%.

Table of Contents

OPERATING INCOME


	Three Months Ended June 30,
	2020						2019
(in millions, except percentages)	Operating Income		Operating Margin		Operating Income		Operating Margin		Margin Change
North America	$	69.4	12.2	%	$	80.1	13.6	%	(1.4)	%
International	9.6		10.1	%	27.4		20.3	%	(10.2)	%
	79.0				107.5
Corporate expenses	(25.6)				(26.5)
Total operating income	$	53.4	8.0	%	$	81.0	11.2	%	(3.2)	%

Three Months Ended June 30,
2019 2018
(in millions, except percentages) Operating Income Operating Margin Operating Income Operating Margin Margin Change
North America $ 80.1
13.6 % $ 64.2
12.2 % 1.4 %
International 27.4
20.3 % 20.9
15.8 % 4.5 %
107.5
85.1

Corporate expenses (26.5 ) (27.1 )
Total operating income $ 81.0
11.2 % $ 58.0
8.8 % 2.4 %

Operating income ~~increased $23.0~~decreased $27.6 million and operating margin ~~improved 240~~declined 320 basis points. The primary drivers of changes in operating income and operating margin by segment are discussed ~~below.~~below:


•	~~North America~~ operating income increased $15.9 million and operating margin improved 140 basis points. The improvement in operating margin was primarily driven by the improvement in gross margin of 230 basis points, which was partially offset by incremental operating expense associated with a higher number of company-owned stores.

•

~~International~~ operating income increased $6.5 million and operating margin improved 450 basis points. The improvement in operating margin was primarily driven by the improvement in gross margin of 200 basis points and advertising expense leverage. Additionally, in the second quarter of 2018, we recognized $3.4 million of costs associated with our International simplification efforts, including headcount reduction, professional fees and store closures, which was not repeated in the same period in 2019.


•	~~Corporate~~ ~~operating expenses decreased $0.6 million, which positively impacted our consolidated operating margin by 10 basis points.~~

•North America operating income decreased $10.7 million and operating margin declined 140 basis points. The decline in operating margin was primarily driven by the decline in gross margin of 290 basis points. Additionally, we recognized $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment and incurred $4.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items. These declines were partially offset by lower operating expenses as a result of cost actions in the quarter.

•International operating income decreased $17.8 million and operating margin declined 1,020 basis points. The decline in operating margin was primarily driven by fixed cost deleverage on operating expenses of 500 basis points, increased bad debt expense of 200 basis points and the decline in gross margin of 200 basis points. Additionally, we incurred $3.4 million of restructuring costs associated with headcount reductions driven by the current macro-economic environment and $0.8 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items. These declines were partially offset by the performance of the Asia joint venture.

•Corporate operating expenses decreased $0.9 million, which positively impacted our consolidated operating margin by 10 basis points.

INTEREST EXPENSE, NET


	Three Months Ended June 30,
(in millions, except percentages)	2020		2019		% Change
Interest expense, net	$	20.6	$	22.5	(8.4)	%

Three Months Ended June 30,
(in millions, except percentages) 2019 2018 % Change
Interest expense, net $ 22.5
$ 23.2
(3.0 )%

Interest expense, net, decreased ~~$0.7~~$1.9 million, or ~~3.0%~~8.4%. The decrease in interest expense, net, was primarily driven by ~~reduced average levels of outstanding~~lower interest rates on our variable rate debt.

INCOME TAX PROVISION

Three Months Ended June 30,
(in millions, except percentages) 2019 2018 % Change
Income tax provision $ 15.8
$ 8.8
79.5 %
Effective tax rate 27.0 % 24.9 %


	Three Months Ended June 30,
(in millions, except percentages)	2020			2019			% Change
Income tax provision	$	9.4		$	15.8		(40.5)	%
Effective tax rate	28.9		%	27.0		%

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

Our income tax provision decreased $6.4 million however our effective tax rate increased, ~~$7.0 million~~ due to ~~an increase~~a decrease in income before income taxes. Our ~~effective tax rate increased 210 basis points. The~~ effective tax rate for the three months ended June 30, ~~2019~~2020 as compared to the same prior year period increased by 190 basis points. The effective tax rate as compared to the U.S. federal statutory tax rate for the three months ended June 30, 2020 included a net favorable impact of discrete items. The effective tax rate as compared to the U.S. federal statutory tax rate for the three months ended June 30, ~~2018~~2019 included the net ~~unfavorable~~favorable impact of discrete ~~items.~~items primarily related to the impact of the likelihood of realization of certain deferred tax assets.

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SIX MONTHS ENDED JUNE 30, ~~2019~~2020 COMPARED TO THE

SIX MONTHS ENDED JUNE 30, ~~2018~~2019

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


	Six Months Ended June 30,
(in millions, except percentages and per share amounts)	2020						2019
Net sales	$	1,487.6	100.0	%	$	1,413.7	100.0	%
Cost of sales	864.6		58.1		818.5		57.9
Gross profit	623.0		41.9		595.2		42.1
Selling and marketing expenses	306.1		20.6		316.8		22.4
General, administrative and other expenses	163.0		10.9		143.4		10.1

Equity income in earnings of unconsolidated affiliates	(4.8)		(0.3)		(6.5)		(0.5)

Operating income	158.7		10.7		141.5		10.0

Other expense, net:
Interest expense, net	40.9		2.7		44.9		3.2

Other expense (income), net	0.8		0.1		(7.8)		(0.6)
Total other expense, net	41.7		2.8		37.1		2.6

Income from continuing operations before income taxes	117.0		7.9		104.4		7.4
Income tax provision	(32.9)		(2.2)		(32.7)		(2.3)
Income from continuing operations	84.1		5.7		71.7		5.1
Loss from discontinued operations, net of tax	(1.1)		(0.1)		(1.6)		(0.1)
Net income before non-controlling interests	83.0		5.6		70.1		5.0
Less: Net income attributable to non-controlling interests	0.3		—		0.1		—
Net income attributable to Tempur Sealy International, Inc.	$	82.7	5.6	%	$	70.0	5.0	%

Earnings per common share:

Basic
Earnings per share for continuing operations	$	1.60			$	1.31
Loss per share for discontinued operations	(0.02)				(0.03)
Earnings per share	$	1.58			$	1.28

Diluted
Earnings per share for continuing operations	$	1.58			$	1.29
Loss per share for discontinued operations	(0.02)				(0.03)
Earnings per share	$	1.56			$	1.26

Weighted average common shares outstanding:
Basic	52.5				54.7
Diluted	53.0				55.6

Six Months Ended June 30,
(in millions, except percentages and per share amounts) 2019 2018
Net sales $ 1,413.7
100.0 % $ 1,297.3
100.0 %
Cost of sales 818.5
57.9
759.8
58.6
Gross profit 595.2
42.1
537.5
41.4
Selling and marketing expenses 316.8
22.4
298.7
23.0
General, administrative and other expenses 143.4
10.1
132.8
10.2
Equity income in earnings of unconsolidated affiliates (6.5 ) (0.5 ) (7.7 ) (0.6 )
Operating income 141.5
10.0
113.7
8.8

Other expense, net:
Interest expense, net 44.9
3.2
45.9
3.5
Other income, net (7.8 ) (0.6 ) (3.2 ) (0.2 )
Total other expense, net 37.1
2.6
42.7
3.3

Income from continuing operations before income taxes 104.4
7.4
71.0
5.5
Income tax provision (32.7 ) (2.3 ) (18.8 ) (1.4 )
Income from continuing operations 71.7
5.1
52.2
4.0
Loss from discontinued operations, net of tax (1.6 ) (0.1 ) (8.2 ) (0.6 )
Net income before non-controlling interest 70.1
5.0
44.0
3.4
Less: Net income (loss) attributable to non-controlling interest 0.1
—
(1.9 ) (0.1 )
Net income attributable to Tempur Sealy International, Inc. $ 70.0
5.0 % $ 45.9
3.5 %

Earnings per common share:

Basic
Earnings per share for continuing operations $ 1.31
$ 0.99

Loss per share for discontinued operations $ (0.03 ) $ (0.15 )
Earnings per share $ 1.28
$ 0.84

Diluted
Earnings per share for continuing operations $ 1.29
$ 0.98

Loss per share for discontinued operations $ (0.03 ) $ (0.15 )
Earnings per share $ 1.26
$ 0.83

Weighted average common shares outstanding:
Basic 54.7
54.4

Diluted 55.6
55.0

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NET SALES


	Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019
(in millions)	Consolidated						North America						International
Net sales by channel
Wholesale	$	1,286.1	$	1,248.1	$	1,104.2	$	1,030.3	$	181.9	$	217.8
Direct	201.5		165.6		143.5		101.8		58.0		63.8
Total net sales	$	1,487.6	$	1,413.7	$	1,247.7	$	1,132.1	$	239.9	$	281.6

Six Months Ended June 30,
2019 2018 2019 2018 2019 2018
(in millions) Consolidated North America International
Net sales by channel
Wholesale channel $ 1,248.1
$ 1,184.7
$ 1,030.3
$ 948.3
$ 217.8
$ 236.4
Direct channel 165.6
112.6
101.8
64.5
63.8
48.1
Total net sales $ 1,413.7
$ 1,297.3
$ 1,132.1
$ 1,012.8
$ 281.6
$ 284.5

Net sales increased ~~9.0%~~5.2%, and on a constant currency basis increased ~~10.6%~~5.9%. The ~~increase~~change in net sales was driven ~~by:~~by the following:

•

~~North America~~ net sales increased $119.3 million, or 11.8%. Net sales in the Wholesale channel increased $82.0 million, or 8.6%, driven primarily by new Tempur product introductions. Net sales in our Direct channel increased $37.3 million, or 57.8%, primarily driven by growth from a higher number of company-owned stores, including the Sleep Outfitters Acquisition, and our e-commerce business. On a constant currency basis, North America net sales increased 12.2%.

•

~~International~~ net sales decreased $2.9 million, or 1.0%. On a constant currency basis, International net sales increased 4.7%, driven primarily by Direct channel growth. Net sales in the Wholesale channel decreased 2.5% on a constant currency basis, primarily driven by macroeconomic slowdown in Europe. Net sales in the Direct channel increased 40.1% on a constant currency basis, primarily driven by growth from company-owned stores.

•North America net sales increased $115.6 million, or 10.2%. Net sales in the Wholesale channel increased $73.9 million, or 7.2%. Despite the impact of the global pandemic, the increase was primarily driven by the expansion of our retail distribution network. Net sales in our Direct channel increased $41.7 million, or 41.0%, primarily driven by growth from our e-commerce business.

•International net sales decreased $41.7 million, or 14.8%. On a constant currency basis, International net sales decreased 11.8% as a result of the global pandemic. Net sales in the Wholesale channel decreased 13.2% on a constant currency basis. Net sales in the Direct channel decreased 6.9% on a constant currency basis.

GROSS PROFIT


	Six Months Ended June 30,
	2020						2019
(in millions, except percentages)	Gross Profit		Gross Margin		Gross Profit		Gross Margin		Margin Change
North America	$	493.4	39.5	%	$	444.4	39.3	%	0.2	%
International	129.6		54.0	%	150.8		53.6	%	0.4	%
Consolidated gross margin	$	623.0	41.9	%	$	595.2	42.1	%	(0.2)	%

Six Months Ended June 30,
2019 2018
(in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change
North America $ 444.4
39.3 % $ 387.4
38.3 % 1.0 %
International 150.8
53.6 % 150.1
52.8 % 0.8 %
Consolidated gross margin $ 595.2
42.1 % $ 537.5
41.4 % 0.7 %

Gross margin ~~improved 70~~declined 20 basis points. The ~~principal factors impacting~~primary drivers of changes in gross margin ~~for each~~by segment are discussed ~~below.~~below:


•	~~North America~~ gross margin improved 100 basis points. The improvement in gross margin was primarily driven by favorable product and brand mix of 130 basis points and favorable pricing of 120 basis points. These improvements were partially offset by commodity cost inflation, unfavorable channel mix and increased floor model expenses.


•	~~International~~ ~~gross margin improved 80 basis points. The improvement in gross margin was primarily driven by lower commodity costs.~~

•North America gross margin improved 20 basis points. The improvement in gross margin was primarily driven by favorable impact from fixed cost leverage on higher unit volume of 110 basis points, decreased floor model expenses of 110 basis points and lower commodity costs of 90 basis points. These improvements were partially offset by unfavorable product mix of 270 basis points. Additionally, we incurred $4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which partially offset the improvement in gross margin. We expect product and brand mix headwinds to gross margin to lessen in the third quarter of 2020 as sales of our premium products have improved since the second quarter of 2020.

•International gross margin improved 40 basis points. The improvement in gross margin was primarily driven by favorable country mix. Additionally, we incurred $0.5 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which partially offset the improvement in gross margin.

OPERATING EXPENSES

Six Months Ended June 30,
2019 2018 2019 2018 2019 2018 2019 2018
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising expenses $ 128.0
$ 129.7
$ 108.8
$ 108.5
$ 19.2
$ 21.2
$ —
$ —
Other selling and marketing expenses 188.8
169.0
120.1
100.2
63.2
64.7
5.5
4.1
General, administrative and other expenses 143.4
132.8
71.1
60.6
22.3
22.2
50.0
50.0
Total operating expenses $ 460.2
$ 431.5
$ 300.0
$ 269.3
$ 104.7
$ 108.1
$ 55.5
$ 54.1

Table of Contents


	Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019		2020		2019
(in millions)	Consolidated						North America						International				Corporate
Operating expenses:
Advertising expenses	$	128.6	$	128.0	$	113.2	$	108.8	$	15.4	$	19.2	$	—	$	—
Other selling and marketing expenses	177.5		188.8		115.0		120.1		56.4		63.2		6.1		5.5
General, administrative and other expenses	163.0		143.4		94.4		71.1		26.4		22.3		42.2		50.0
Total operating expenses	$	469.1	$	460.2	$	322.6	$	300.0	$	98.2	$	104.7	$	48.3	$	55.5

Operating expenses increased ~~$28.7~~$8.9 million, or ~~6.7%~~1.9%, and decreased 70110 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained ~~below.~~below:

•

~~North America~~ operating expenses increased $30.7 million, or 11.4%, and decreased 10 basis points as a percentage of net sales. Operating expenses increased primarily due to selling and marketing investments, variable compensation expense and incremental operating expense associated with a higher number of company-owned stores. We expect advertising expenses to increase in subsequent quarters of 2019 now that the Tempur and Stearns & Foster product launches are complete.

•

~~International~~ operating expenses decreased $3.4 million, or 3.1% and decreased 80 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreased advertising costs, offset by an increase in variable compensation expense. Additionally, in the second quarter of 2018, we recognized $3.4 million of costs associated with our International simplification efforts, including headcount reduction, professional fees and store closures, which were not repeated in the same period in 2019.

•

~~Corporate~~ operating expenses increased $1.4 million, or 2.6%. The increase in operating expenses is primarily driven by $4.1 million of professional fees primarily related to the Sleep Outfitters Acquisition. Additionally, in the second quarter of 2018, we recorded $2.0 million of professional fees associated with our International simplification efforts, which were not repeated in the same period in 2019.

•North America operating expenses increased $22.6 million, or 7.5%, and decreased 60 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account, as well as incremental bad debt expense primarily related to the bankruptcy of one department store in the U.S. Additionally, we recognized $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment. These increases were offset by lower operating expenses as a result of cost actions in the quarter.

•International operating expenses decreased $6.5 million, or 6.2% and increased 370 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreases in advertising and other selling and marketing investments, partially offset by increased bad debt expense. Additionally, we incurred $3.4 million of restructuring costs associated with headcount reductions driven by the current macro-economic environment and $0.3 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.

•Corporate operating expenses decreased $7.2 million, or 13.0%. In the first half of 2019, we recorded $4.1 million of professional fees related to the acquisition of Sleep Outfitters, which were not repeated in 2020.

Research and development expenses were $11.0 million for the six months ended June 30, 2020 as compared to $11.2 million for the six months ended June 30, ~~2019 and June 30, 2018, respectively.~~2019.

OPERATING INCOME


	Six Months Ended June 30,													Six Months Ended June 30,
	2019					2018								2020						2019
(in millions, except percentages)	Operating Income			Operating Margin		Operating Income			Operating Margin		Margin Change		(in millions, except percentages)	Operating Income		Operating Margin		Operating Income		Operating Margin		Margin Change
North America	$	144.4		12.8	%	$	118.1		11.7	%	1.1	%	North America	$	170.8	13.7	%	$	144.4	12.8	%	0.9	%
International	52.6			18.7	%	49.7			17.5	%	1.2	%	International	36.2		15.1	%	52.6		18.7	%	(3.6)	%
	197.0					167.8								207.0				197.0
Corporate expenses	(55.5		)			(54.1		)					Corporate expenses	(48.3)				(55.5)
Total operating income	$	141.5		10.0	%	$	113.7		8.8	%	1.2	%	Total operating income	$	158.7	10.7	%	$	141.5	10.0	%	0.7	%

Operating income increased ~~$27.8~~$17.2 million and operating margin improved ~~120~~70 basis points. ~~We expect operating income will be unfavorably impacted by increased variable compensation expenses in the second half~~The primary drivers of ~~2019. The increases~~changes in operating income and operating margin by segment are discussed ~~below.~~below:

•

~~North America~~ ~~operating income increased $26.3 million and operating margin improved 110 basis points. The improvement in operating margin was primarily driven by the improvement in gross margin of 100~~

•North America operating income increased $26.4 million and operating margin improved 90 basis points. The improvement in operating margin was primarily driven by favorable operating expense leverage of 280 basis points and the improvement in gross margin of 20 basis points. These improvements were offset by $11.7 million of

customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account. Additionally, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment and incurred $4.1 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items.

•International operating income decreased $16.4 million and operating margin declined 360 basis points. The decline in operating margin was primarily driven by the fixed cost deleverage on operating expenses of 110 basis points and increased bad debt expense. Additionally, we incurred $3.4 million of restructuring costs associated with headcount reductions driven by the current macro-economic environment and $0.8 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items. These declines were partially offset by the improvement in gross margin of 40 basis points.

•Corporate operating expenses decreased $7.2 million, which positively impacted our consolidated operating margin by 50 basis points. In the first half of 2019, we recorded $4.1 million of professional fees related to the Sleep Outfitters Acquisition, which were not repeated in 2020.

•

~~International~~ operating income increased $2.9 million and operating margin improved 120 basis points. The improvement in operating margin was driven by the improvement in gross margin of 70 basis points. Additionally, in the second quarter of 2018, we recognized $3.4 million of costs associated with our International simplification efforts, including headcount reduction, professional fees and store closures, which were not repeated in the same period in 2019.


•	~~Corporate~~ ~~operating expenses increased $1.4 million, which negatively impacted our consolidated operating margin by 10 basis points.~~

INTEREST EXPENSE, NET


	Six Months Ended June 30,
(in millions, except percentages)	2020		2019		% Change
Interest expense, net	$	40.9	$	44.9	(8.9)	%

Six Months Ended June 30,
(in millions, except percentages) 2019 2018 % Change
Interest expense, net $ 44.9
$ 45.9
(2.2 )%

Interest expense, net, decreased $1$4.0 million, or ~~2.2%~~8.9%. The decrease in interest expense, net, was primarily driven by ~~reduced average levels of outstanding~~lower interest rates on our variable rate debt.

INCOME TAX PROVISION


	Six Months Ended June 30,
(in millions, except percentages)	2020			2019			% Change
Income tax provision	$	32.9		$	32.7		0.6	%
Effective tax rate	28.1		%	31.3		%

Six Months Ended June 30,
(in millions, except percentages) 2019 2018 % Change
Income tax provision $ 32.7
$ 18.8
73.9 %
Effective tax rate 31.3 % 26.5 %

Our income tax provision increased ~~$13.9~~$0.2 million due to an increase in income before income ~~taxes and as the result of discrete items.~~taxes. Our effective tax rate ~~increased 480~~for the six months ended June 30, 2020 as compared to the same prior year period decreased 320 basis points. The effective tax rate as compared to the U.S. federal statutory rate for the six months ended June 30, 2020 included a net unfavorable impact of discrete items, primarily related to the impact of the likelihood of realization of certain deferred tax assets. The effective tax rate as compared to the U.S. federal statutory rate for the for the six months ended June 30, 2019 included a net unfavorable impact of ~~the~~ discrete items primarily related to the sale of a certain interest in our Asia-Pacific joint venture and the impact of certain stock compensation. ~~The effective tax rate for the six months ended June 30, 2018 included a net unfavorable impact as the result of discrete items.~~

Liquidity and Capital Resources

Liquidity

Our principal sources of funds are cash flows from operations, borrowings made pursuant to our ~~debt~~credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, capital expenditures and working capital needs. As of June 30, ~~2019,~~2020, we had a working capital deficit of ~~$153.0~~$56.2 million ~~including~~due to the 364-Day Loan of $200 million, which is classified as a current liability. It is our intent to repay that loan with current cash and funds generated from operations no later than its May 2021 maturity date. We maintain the financial flexibility to finance this loan on a long-term basis under our revolving senior secured credit facility if needed. Total availability under our revolving senior secured credit facility, which matures in 2024, was $423.9 million as of June 30, 2020.

At June 30, 2020, total cash and cash equivalents were $146.8 million, of ~~$38.3~~which $122.6 million ~~as compared to working capital~~was held in the U.S. and $24.2 million was held by subsidiaries outside of ~~$136.4 million including $45.8 million in~~the U.S. The amount of cash and cash equivalents asheld by subsidiaries outside of the U.S. and not readily convertible into the U.S. Dollar or other major foreign currencies is not material to our overall liquidity or financial position. The significant increase in our cash holdings since December 31, ~~2018.~~2019 reflects our decision to maintain on-hand liquidity to provide greater flexibility in response to the continued impact of COVID-19.

Table of Contents

The increase in working capital was primarily driven by increases in accounts receivable and inventories and a decrease in accounts payable. These changes were offset by increases in accrued expenses and other current liabilities and current portion of long-term debt and a decrease in cash and cash equivalents. Accounts receivable increases were primarily driven by timing of customer collections. The increase in inventories were primarily due to new product introductions in 2019. Accounts payable changes were primarily driven by the timing of payments to vendors. The increase in accrued expenses and other current liabilities was primarily due to current operating lease obligations as a result of the adoption of ASC 842, "Leases" and funding of employee compensation. Current portion of long-term debt increases were primarily driven by International segment working capital debt obligations. The decrease in cash and cash equivalents was primarily due to operating capital needs.

Cash Provided by (Used in) Continuing Operations

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


	Six Months Ended June 30,
(in millions)	2020		2019
Net cash provided by (used in) continuing operations:
Operating activities	$	170.4	$	45.9
Investing activities	(87.2)		(46.7)
Financing activities	1.4		(4.0)

Six Months Ended June 30,
(in millions) 2019 2018
Net cash provided by (used in) continuing operations:
Operating activities $ 45.9
$ 17.4
Investing activities (46.7 ) (39.9 )
Financing activities (4.0 ) 30.6

Cash provided by operating activities from continuing operations increased ~~$28.5~~$124.5 million in the six months ended June 30, ~~2019,~~2020, as compared to the same period in ~~2018.~~2019. The increase in cash provided by operating activities was ~~primarily~~ driven by strong operational performance in the increase in net income, changes in inventories, accrued expenses and other current liabilities and deferred income taxes. These increases were partially offset by changes in accounts payable and accounts receivable.period.

Cash used in investing activities from continuing operations increased ~~$6.8~~$40.5 million in the six months ended June 30, ~~2019~~2020 as compared to the same period in ~~2018.~~2019. The increase in cash used in investing activities was primarily due to cash used to acquire the ~~Sleep Outfitters business.~~Sherwood Bedding business and planned capital expenditures.

Cash ~~used in~~provided by financing activities from continuing operations increased ~~$34.6~~$5.4 million in the six months ended June 30, ~~2019~~2020 as compared to the same period in ~~2018. In 2019,~~2019. For the six months ended June 30, 2020, we had net borrowings of $207.0 million on our credit facilities, including $200 million in additional financing provided under the new 364-Day Loan, as compared to net repayments of $0.6 million in 2019. During the six months ended June 30, 2020 and 2019, respectively, we repurchased $187.5 million and $2.3 million of our common stock under our share repurchase program. In 2020, these repurchases were largely made in the first quarter prior to the impact of COVID-19 on our ~~credit facilities, as compared~~business. Additionally, we repurchased $12.0 million and $3.2 million of our common stock which was withheld to ~~net borrowings of $34.4 million in 2018.~~satisfy tax withholding obligations related to stock compensation during the six months ended June 30, 2020 and 2019, respectively.

Cash Used in Discontinued Operations

~~The table below presents net~~Net cash used in operating, investing and financing activities from discontinued operations for the periods ~~indicated below:~~

Six Months Ended June 30,
(in millions) 2019 2018
Net cash used in discontinued operations:
Operating activities $ (2.0 ) $ (15.8 )
Investing activities —
(0.1 )
Financing activities —
—

~~Cash used in discontinued operations decreased $13.9 million in the six months~~ ended June 30, 2020 and 2019 ~~primarily due to the payment of non-income tax obligations and related interest expense in the prior period.~~was not material.

Capital Expenditures

Capital expenditures totaled ~~$39.9~~$49.4 million and ~~$40.5~~$39.9 million for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. We currently expect our ~~2019~~2020 capital expenditures to be approximately ~~$70~~$100 to ~~$75~~$110 million, which includes investments in our U.S. enterprise resource planning projects and domestic manufacturing ~~facilities, other information technology and our company-owned retail stores.~~

~~Debt Service~~

facility.

Indebtedness

Our total debt ~~decreased~~increased to ~~$1,652.5~~$1,760.8 million as of June 30, ~~2019~~2020 from ~~$1,653.8~~$1,547.0 million as of December 31, ~~2018. After giving effect~~2019. During the first quarter of 2020, we took initial actions to ~~letters~~mitigate the impact of the material slowdown in business activity resulting from COVID-19 and to provide greater financial flexibility, which included a decision to borrow $300 million on our revolving senior secured credit ~~outstanding of $22.7~~facility. During the three months ended June 30, 2020, we entered into a new $200 million ~~under~~364-Day Loan. We used the ~~2016 Credit Agreement, total~~proceeds from this new facility and cash on-hand to repay amounts previously drawn on our revolving senior secured credit facility. Total availability under ~~the~~our revolving senior secured credit facility was ~~$477.3~~$423.9 million as of June 30, ~~2019. In the first half of 2019, we prepaid $75.0 million on the Term A Facility under the 2016 Credit Agreement. Refer to Note 7, "Debt~~,"2020, which matures in ~~our Condensed Consolidated Financial Statements included in ITEM 1 under Part I of this Report for further discussion of our debt and applicable interest rates.~~2024.

As of June 30, ~~2019,~~2020, our ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA, which is a non-GAAP financial measure, ~~as calculated~~ in accordance with ~~the 2016~~our 2019 Credit Agreement was ~~3.65 times, which~~2.83 times. Our leverage ratio as of June 30, 2020 was the lowest in our history. This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio ~~covenant~~as set forth in the ~~2016~~2019 Credit Agreement, which limits this ratio to 5.00 times. As of June 30, ~~2019,~~2020, we were in compliance with all of the financial covenants in our debt ~~agreements. Certain subsidiaries in the International business segment are accounted for as discontinued operations~~agreements, and ~~have been designated as unrestricted subsidiaries in the 2016 Credit Agreement. These subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.~~we do not anticipate material issues under any debt agreements based on current facts and circumstances.

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Our debt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends. The ~~2016~~364-Day Loan did not amend financial covenants under the 2019 Credit Agreement. Under the amendment we agreed to certain restrictive provisions, including limitations on our ability to repurchase shares and make certain investments for the duration of the 364-Day Loan. The 2019 Credit Agreement, ~~2026~~2023 Senior Notes and ~~2023~~2026 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA, which is a non-GAAP financial measure, remains below 3.5 times. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA is above 3.5 times. The limit on restricted payments under the ~~2016~~2019 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.

Our business continues to generate significant cash flows from operations. Our ratio of consolidated funded debt less qualified cash to Adjusted EBITDA was 3.65 times as of June 30, 2019, which is within our target ratio of 3.0 times to 4.0 times. We expect to continue to use excess cash flows from operations for share repurchases and debt repayments. We may also consider other allocations of our capital.

During the six months ended June 30, 2019, we resumed our share repurchase program and repurchased 39,901 shares for approximately $2.3 million. As of June 30, 2019, we had approximately $224.6 million remaining under the existing share repurchase authorization. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. We anticipate accelerating our share repurchase program and expect to repurchase approximately $50 million in shares per quarter in the near-term, subject to market conditions. For a complete description of our Share Repurchase Program, please refer to ITEM 7 under Part II, "Stockholders' Equity," in the 2018 Annual Report. Please also refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this Report.

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

Debt Securities Guaranteed by Subsidiaries

The Senior Notes rank equally with or senior to all debt of Tempur Sealy International and the Obligor Group, but are effectively junior to all secured debt, including obligations under the 2019 Credit Agreement and the 364-Day Loan, to the extent of the value of the assets securing such debt. Subject to certain restrictions, Tempur Sealy International and the restricted subsidiaries under the applicable indenture may incur additional secured debt. Claims of creditors of non-guarantor subsidiaries, including trade creditors, and creditors holding debt and guarantees issued by those subsidiaries, and claims of preferred stockholders (if any) of those subsidiaries generally will have priority with respect to the assets and earnings of those subsidiaries over the claims of creditors of the holders of the Senior Notes. The Senior Notes and each guarantee are therefore effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of non-guarantor subsidiaries.

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

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

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

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The summarized financial information for the Obligor Group follows.


	Six Months Ended
	June 30, 2020
	Obligor Group
(in millions)
Net sales to unrelated parties	$	1,180.6
Net sales to non-obligor subsidiaries	$	22.3
Gross profit	$	479.9
Income from continuing operations	$	59.7
Net income attributable to Tempur Sealy International, Inc.	$	59.3


	Obligor Group		Obligor Group
	June 30, 2020		December 31, 2019
(in millions)
ASSETS

Receivables due from non-obligor subsidiaries	$	6.8	$	9.6
Other current assets	426.1		314.6
Total current assets	432.9		324.2
Loan receivable from non-obligor subsidiaries	271.1		310.1
Goodwill and other intangible assets, net	1,099.3		1,075.5
Other non-current assets	682.0		624.6
Total non-current assets	2,052.4		2,010.2

LIABILITIES

Payables due to non-obligor subsidiaries	6.2		11.4
Other current liabilities	633.9		490.5
Total current liabilities	640.1		501.9
Loan payable to non-obligor subsidiaries	22.9		8.3
Other non-current liabilities	1,857.3		1,832.8
Total non-current liabilities	$	1,880.2	$	1,841.1

Share Repurchase Program

Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock for a total repurchase price of not more than $800.0 million. During the six months ended June 30, 2020, we repurchased 2.6 million shares for approximately $187.5 million. As of June 30, 2020, we had approximately $131.3 million remaining under our existing share repurchase authorization. In February 2020, the Board of Directors authorized an increase, of $194.2 million, to our share repurchase authorization of Tempur Sealy International's common stock to $300.0 million. Share repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate. These repurchases may be funded by operating cash flows and/or borrowings under our debt arrangements. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program is subject to certain limitations under our debt agreements. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice.

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Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws.

We ceased all share repurchase activity in March 2020. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities, though in connection with the 364-Day Loan, we agreed to certain limitations on our ability to repurchase shares and make investments while the 364-Day Loan is outstanding. For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," in the 2019 Annual Report. Please also refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this Report.

Future Liquidity Sources and Uses

As of June 30, 2020, we had $611.5 million of liquidity, including $146.8 million of cash on hand and $423.9 million available under our revolving senior secured credit facility. We also had availability of $40.8 million under our securitization facility. In addition, we expect to generate significant cash flow from operations in the full year of 2020. We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for our foreseeable working capital needs, necessary capital expenditures, and debt service obligations.

We continue to take actions intended to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets. In addition to actions taken in the first quarter, additional actions taken in the second quarter of 2020 include:

•Entered into a new $200 million 364-Day Loan to enhance liquidity. We used the proceeds from this new facility and cash on-hand to repay amounts previously drawn on our revolving senior secured credit facility. Total availability on our revolving senior secured credit facility, which matures in 2024, is $423.9 million as of June 30, 2020.

•Continued the suspension of our share repurchase program. Our 364-Day Loan contains a restriction on share repurchases while the loan is outstanding.

As of June 30, 2020, we had $1,760.8 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $1,614.9 million. Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, was 2.83 times for the trailing twelve months ended June 30, 2020, the lowest in our history. We lowered our target leverage ratio for the second time in the last 12 months. Our new revised target range is 2.0 to 3.0 times. The reduction in our leverage target is not due to any market concerns; it is a strategic move to provide flexibility. As highlighted through the current environment, we have always seen our financial strength as a competitive advantage and part of our long-term strategy. Total cash interest payments related to our borrowings are expected to be approximately $80 to $85 million in 2020.

Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Similarly, our cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements and debt service obligations. For information regarding the impact of COVID-19 on our business, including our liquidity and capital resources, please refer to "Risk Factors" in ITEM 1A of Part II of this Report.

Non-GAAP Financial Information

We provide information regarding adjusted net income, adjusted EPS, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, EBITDA, ~~Adjusted~~adjusted EBITDA (including COVID-19 charges), adjusted EBITDA per credit facility, consolidated ~~funded debt~~indebtedness and consolidated ~~funded debt~~indebtedness less ~~qualified~~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 ~~management does~~we do not consider to be the fundamental attributes or primary drivers of our business.

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We believe that exclusion of these items assists in providing a more complete understanding of our underlying results from continuing operations and trends, and ~~management uses~~we use these measures along with the corresponding GAAP financial measures to manage our business, to evaluate our consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. 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.

Adjusted Net Income and Adjusted EPS

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

The following table sets forth the reconciliation of our ~~GAAP~~reported net income to adjusted net income and athe calculation of adjusted EPS for the three months ended June 30, ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended
(in millions, except per share amounts)	June 30, 2020		June 30, 2019
Net income	$	23.0	$	41.6
(Income) loss from discontinued operations, net of tax ⁽¹⁾	(0.1)		1.2
Incremental operating costs ⁽²⁾	4.9		—
Asset impairments ⁽³⁾	7.0		—
Restructuring costs ⁽⁴⁾	3.4		—
Accounting standard adoption ⁽⁵⁾	1.3		—
Acquisition-related costs and other ⁽⁶⁾	—		2.8

Tax adjustments ⁽⁷⁾	(4.4)		(1.3)
Adjusted net income	$	35.1	$	44.3

Adjusted earnings per share, diluted	$	0.68	$	0.79

Diluted shares outstanding	52.0		56.0

Three Months Ended
(in millions, except per share amounts) June 30, 2019 June 30, 2018
GAAP net income $ 41.6
$ 22.8
Loss from discontinued operations, net of tax ⁽¹⁾
1.2
5.4
Acquisition-related costs and other ⁽²⁾
2.8
—
Other income ⁽³⁾
—
5.4
Tax adjustments ⁽⁴⁾
(1.3 ) (2.2 )
Adjusted net income $ 44.3
$ 31.4

Adjusted earnings per common share, diluted $ 0.79
$ 0.57

Diluted shares outstanding 56.0
54.9

Adjusted net income included COVID-19 charges of $5.8 million, net of tax, and adjusted earnings per share of $0.11.



(1)			Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the ~~2016~~2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.
(2)			In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $0.4 million of charges related to increased sanitation supplies and services.
(3)			In the second quarter of 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment.
(4)			In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the current macro-economic environment.
(5)			We recorded $1.3 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)", in the second quarter of 2020. As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation.
(6)			In the second quarter of 2019, we recorded $2.8 million of acquisition-related and other costs in operating expenses, primarily related to post acquisition restructuring charges and professional fees ~~incurred in~~for the acquisition of Sleep ~~Outfitters Acquisition. In the first quarter of 2019, we recorded $3.3 million of costs, primarily related to professional fees associated with the Sleep Outfitters Acquisition.~~Outfitters.
~~(3)~~(7)		In	Adjusted income tax provision represents the second quarter of 2018, we incurred $5.4 million of restructuring costs associated with International business segment simplification efforts, including headcount reduction, professional fees and store closures.
~~(4)~~	~~Tax adjustments represent adjustments~~tax effects associated with the aforementioned items and other discrete income tax events.

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

A reconciliation of ~~GAAP~~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 atbelow.

The following table sets forth the ~~end~~reconciliation of our reported gross profit and operating income (expense) to the ~~following tables.~~calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended June 30, 2020.


	Three Months Ended June 30, 2020
(in millions, except percentages)	Consolidated		Margin		North America		Margin		International		Margin		Corporate
Net sales	$	665.2			$	570.5			$	94.7			$	—

Gross profit	$	265.9	40.0	%	$	216.2	37.9	%	$	49.7	52.5	%	$	—
Adjustments:
Incremental operating costs ⁽¹⁾	4.5				4.0				0.5				—
Adjusted gross profit	$	270.4	40.6	%	$	220.2	38.6	%	$	50.2	53.0	%	$	—

Operating income (expense)	$	53.4	8.0	%	$	69.4	12.2	%	$	9.6	10.1	%	$	(25.6)
Adjustments:
Incremental operating costs ⁽¹⁾	4.9				4.1				0.8				—
Asset impairments ⁽²⁾	7.0				7.0				—				—
Restructuring costs ⁽³⁾	3.4				—				3.4				—
Accounting standard adoption ⁽⁴⁾	1.3				1.3				—				—
Total adjustments	16.6				12.4				4.2				—

Adjusted operating income (expense)	$	70.0	10.5	%	$	81.8	14.3	%	$	13.8	14.6	%	$	(25.6)

Operating income and adjusted operating income included $7.9 million of COVID-19 charges. The North America and International business segments included $6.0 million and $1.9 million of these charges, respectively.

The following table sets forth our reported ~~GAAP~~ gross profit and the reconciliation of our ~~reported GAAP~~ operating income (expense) and operating margin to the calculation of adjusted operating income (expense) and adjusted operating margin for the three months ended June 30, 2019. We had no adjustments to ~~GAAP~~ gross profit for the three months ended June 30, 2019.


	Three Months Ended June 30, 2019																Three Months Ended June 30, 2019
(in millions, except percentages)	Consolidated		Margin		North America		Margin		International		Margin		Corporate			(in millions, except percentages)	Consolidated		Margin		North America		Margin		International		Margin		Corporate
Net sales	$	722.8			$	588.1			$	134.7			$	—		Net sales	$	722.8			$	588.1			$	134.7			$	—

Gross profit	$	313.4	43.4	%	$	240.0	40.8	%	$	73.4	54.5	%	$	—		Gross profit	$	313.4	43.4	%	$	240.0	40.8	%	$	73.4	54.5	%	$	—


Operating income (expense)	$	81.0	11.2	%	$	80.1	13.6	%	$	27.4	20.3	%	$	(26.5	)	Operating income (expense)	$	81.0	11.2	%	$	80.1	13.6	%	$	27.4	20.3	%	$	(26.5)
Adjustments:																Adjustments:
Acquisition-related costs and other⁽¹⁾	2.8				1.7				—				1.1

Acquisition-related costs and other ⁽⁵⁾																Acquisition-related costs and other ⁽⁵⁾	2.8				1.7				—				1.1

Adjusted operating income (expense)	$	83.8	11.6	%	$	81.8	13.9	%	$	27.4	20.3	%	$	(25.4	)	Adjusted operating income (expense)	$	83.8	11.6	%	$	81.8	13.9	%	$	27.4	20.3	%	$	(25.4)

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(1)			In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $0.4 million of charges related to increased sanitation supplies and services.
(2)			In the second quarter of 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment.
(3)			In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the current macro-economic environment.
(4)			We recorded $1.3 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)", in the second quarter of 2020. As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation.
(5)			In the second quarter of 2019, we recorded $2.8 million of acquisition-related and other costs in operating expenses, primarily related to post acquisition restructuring charges and professional fees ~~incurred in~~for the acquisition of Sleep ~~Outfitters Acquisition. In the first quarter of 2019, we recorded $3.3 million of costs, primarily related to professional fees associated with the Sleep Outfitters Acquisition.~~Outfitters.

The following table sets forth our reported GAAP gross profit and the reconciliation of our reported GAAP operating income (expense) and operating margin to the calculation of adjusted operating income (expense) and adjusted operating margin for the three months ended June 30, 2018. We had no adjustments to GAAP gross profit for the three months ended June 30, 2018.

Three Months Ended June 30, 2018
(in millions, except percentages) Consolidated Margin North America Margin International
Margin Corporate
Net sales $ 659.9
$ 527.8
$ 132.1
$ —

Gross profit $ 272.8
41.3 % $ 203.4
38.5 % $ 69.4
52.5 % $ —

Operating income (expense) $ 58.0
8.8 % $ 64.2
12.2 % $ 20.9
15.8 % $ (27.1 )
Adjustments:
Restructuring costs ⁽¹⁾
5.4
—
3.4
2.0
Adjusted operating income (expense) $ 63.4
9.6 % $ 64.2
12.2 % $ 24.3
18.4 % $ (25.1 )



~~(1)~~	In the second quarter of 2018, we incurred $5.4 million of restructuring costs associated with International business segment simplification efforts, including headcount reduction, professional fees and store closures.

EBITDA, Adjusted EBITDA (including COVID-19 charges), Adjusted EBITDA per Credit Facility and Consolidated ~~Funded Debt~~Indebtedness Less ~~Qualified~~Netted Cash

The following reconciliations are provided below:

~~GAAP net~~•Net income to EBITDA, adjusted EBITDA (including COVID-19 charges) and ~~Adjusted~~adjusted EBITDA per credit facility

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

•Total debt, net to consolidated ~~funded debt~~indebtedness less ~~qualified~~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”). In the second quarter of 2020, in determining adjusted EBITDA per credit facility, we made an adjustment for COVID-19 charges that was not made to adjusted EBITDA (including COVID-19 charges). Accordingly, we present adjusted EBITDA per credit facility to provide information regarding our compliance with requirements under the 2019 Credit Agreement.

The following table sets forth the reconciliation of our reported ~~GAAP~~ net income to the calculations of EBITDA and ~~Adjusted~~adjusted EBITDA (including COVID-19 charges) and adjusted EBITDA per credit facility for the three months ended June 30, ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended
(in millions)	June 30, 2020		June 30, 2019
Net income	$	23.0	$	41.6
Interest expense, net	20.6		22.5
Income taxes	9.4		15.8
Depreciation and amortization	32.2		29.1
EBITDA	$	85.2	$	109.0
Adjustments:
(Income) loss from discontinued operations, net of tax ⁽¹⁾	(0.1)		1.2
Incremental operating costs ⁽²⁾	4.9		—
Asset impairments ⁽³⁾	7.0		—
Restructuring costs ⁽⁴⁾	3.4		—
Accounting standard adoption ⁽⁵⁾	1.3		—
Acquisition-related costs and other ⁽⁶⁾	—		2.8

Adjusted EBITDA (including COVID-19 charges)	$	101.7	$	113.0

COVID-19 charges ⁽⁷⁾	7.9		—
Adjusted EBITDA per credit facility	$	109.6	113.0

Three Months Ended
(in millions) June 30, 2019 June 30, 2018
GAAP net income $ 41.6
$ 22.8
Interest expense, net 22.5
23.2
Income taxes 15.8
8.8
Depreciation and amortization 29.1
27.8
EBITDA $ 109.0
$ 82.6
Adjustments:
Loss from discontinued operations, net of tax ⁽¹⁾
$ 1.2
$ 5.4
Acquisition-related costs and other⁽²⁾

2.8
—
Restructuring costs ⁽³⁾
—
5.4
Adjusted EBITDA $ 113.0
$ 93.4

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(1)		Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the ~~2016~~2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.
(2)		In the second quarter of 2020, we recorded $4.9 million of incremental operating costs associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $0.4 million of charges related to increased sanitation supplies and services.
(3)		In the second quarter of 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the current macro-economic environment.
(4)		In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the current macro-economic environment.
(5)		We recorded $1.3 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)", in the second quarter of 2020. As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation.
(6)		In the second quarter of 2019, we recorded $2.8 million of acquisition-related and other costs in operating expenses, primarily related to post acquisition restructuring charges and professional fees ~~incurred in~~for the acquisition of Sleep ~~Outfitters Acquisition. In the first quarter of 2019, we recorded $3.3~~Outfitters.
(7)		Adjusted EBITDA per credit facility excluded $7.9 million of ~~costs, primarily related to professional fees~~COVID-19 charges associated with ~~the Sleep Outfitters Acquisition.~~
~~(3)~~	~~In the second quarter of 2018, we incurred $5.4 million of restructuring costs associated with International business segment simplification efforts, including headcount reduction, professional fees~~temporarily closed company-owned retail stores and ~~store closures.~~sales force retention costs.

The following table sets forth the reconciliation of our net income to the calculations of EBITDA and ~~Adjusted~~adjusted EBITDA per credit facility for the trailing twelve months ended June 30, ~~2019 and the ratio of consolidated funded debt less qualified cash to Adjusted EBITDA:~~

Trailing Twelve Months Ended
(in millions) June 30, 2019
GAAP net income $ 124.6
Interest expense, net 91.3
Income taxes 63.5
Depreciation and amortization 116.5
EBITDA $ 395.9
Adjustments:
Loss from discontinued operations, net of tax ⁽¹⁾
11.2
Customer-related charges ⁽²⁾
21.2
Restructuring costs ⁽³⁾
16.9
Supply chain transition costs ⁽⁴⁾
7.3
Acquisition-related costs and other ⁽⁵⁾
6.1
Other income ⁽⁶⁾
(7.2 )
Adjusted EBITDA $ 451.4

Consolidated funded debt less qualified cash $ 1,645.6

Ratio of consolidated funded debt less qualified cash to Adjusted EBITDA 3.65 times

Loss from discontinued operations, net of tax ⁽¹⁾

Customer-related charges ⁽²⁾

Charitable stock donation ⁽³⁾

COVID-19 charges ⁽⁴⁾

Incremental operating costs ⁽⁵⁾

Asset impairments ⁽⁶⁾

Earnings from Sherwood prior to acquisition ⁽⁷⁾

Restructuring costs ⁽⁸⁾

Accounting standard adoption ⁽⁹⁾

Credit facility amendment ⁽¹⁰⁾

Under the ~~2016~~2019 Credit Agreement, ~~Adjusted~~the definition of adjusted EBITDA (which we refer to as "adjusted EBITDA per credit facility") contains certain restrictions that limit adjustments to ~~GAAP~~ net income when calculating ~~Adjusted~~adjusted EBITDA. For the trailing twelve months ended June 30, ~~2019,~~2020, our adjustments to ~~GAAP~~ net income when calculating ~~Adjusted~~adjusted EBITDA did not exceed the allowable amount under the ~~2016~~2019 Credit Agreement.

The ratio of ~~Adjusted~~consolidated indebtedness less netted cash to adjusted EBITDA ~~under the 2016 Credit Agreement to consolidated funded debt less qualified cash was 3.65~~per credit facility is 2.83 times for the trailing twelve months ended June 30, ~~2019.~~2020. The ~~2016~~2019 Credit Agreement requires us to maintain a ratio of consolidated ~~funded debt~~indebtedness less ~~qualified~~netted cash to ~~Adjusted~~adjusted EBITDA of less than 5.00:1.00 times.

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

(in millions) June 30, 2019
Total debt, net $ 1,645.6
Plus: Deferred financing costs ⁽¹⁾
6.9
Total debt 1,652.5
Plus: Letters of credit outstanding 23.2
Consolidated funded debt $ 1,675.7
Less:
Domestic qualified cash⁽²⁾
20.7
Foreign qualified cash ⁽²⁾
9.4
Consolidated funded debt less qualified cash $ 1,645.6


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

~~Future Liquidity Sources and Uses~~

Our primary sources of liquidity are cash flows from operations and borrowings under our debt facilities. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources. As of June 30, 2019, we had $1,652.5 million in total debt outstanding, our net income was $41.6 million and our Adjusted EBITDA was $113.0 million for the three months ended June 30, 2019. Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Total cash interest payments related to our borrowings are expected to be approximately $80.0 to $85.0 million in 2019, of which we have already paid $45.9 million.

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

During the six months ended June 30, 2019, we resumed our share repurchase program and repurchased 39,901 shares for approximately $2.3 million. As of June 30, 2019, we had approximately $224.6 million remaining under the existing share repurchase authorization. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. We anticipate accelerating our share repurchase program and expect to repurchase approximately $50 million in shares per quarter in the near term, subject to market conditions. For a complete description of our Share Repurchase Program, please refer to "Stockholders' Equity" included in ITEM 7 of Part II of the 2018 Annual Report. Please also refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this Report.

At June 30, 2019, total cash and cash equivalents were $38.3 million, of which $20.7 million was held in the U.S. and $17.6 million was held by subsidiaries outside of the U.S. The amount of cash and cash equivalents held by subsidiaries outside of the U.S. and not readily convertible into other major foreign currencies, or the U.S. Dollar, is not material to our overall liquidity or financial position.

~~On April 5, 2019, we entered into a new amendment to our Accounts Receivable Securitization that, among other things, extended its maturity date to April 6, 2021.~~

Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and estimates, please refer to ITEM 7 under Part II, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in the ~~2018~~2019 Annual Report. There have been no material changes to our critical accounting policies and estimates in ~~2019.~~2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exposures

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 ~~weakens~~strengthens relative to the Euro or other foreign currencies where we have operations, there ~~would~~will be a ~~positive~~negative impact on our operating results upon translation of those foreign operating results into the U.S. dollar. Foreign currency exchange rate changes ~~did not impact~~negatively impacted our ~~Adjusted~~adjusted EBITDA, which is a non-GAAP financial measure, by 0.4% in the three ~~months ended June 30, 2019~~ and ~~negatively impacted our Adjusted EBITDA by 2.0% in the~~ six months ended June 30, ~~2019.~~2020.

We hedge a portion of our currency exchange exposure relating to foreign currency transactions with foreign exchange forward contracts. A sensitivity analysis indicates the potential loss in fair value on foreign exchange forward contracts outstanding at June 30, ~~2019,~~2020, resulting from a hypothetical 10.0% adverse change in all foreign currency exchange rates against the U.S. dollar, is approximately ~~$10.6~~$0.2 million. Such losses would be largely offset by gains from the revaluation or settlement of the underlying assets and liabilities that are being protected by the foreign exchange forward contracts.

In the fourth quarter of 2018, we converted $75 million of our 5.50% fixed-rate USD-denominated 2026 Senior Notes, including the semi-annual interest payments thereunder, to fixed-rate DKK denominated debt at an average rate of 2.1310%. During January 2019, we converted an additional $25 million of our 5.50% fixed-rate USD-denominated 2026 Senior Notes, including the semi-annual interest payments thereunder, to fixed-rate DKK denominated debt at a rate of 2.3160%. We have designated these cross currency swap agreements as qualifying hedging instruments and are accounting for these as net investment hedges.

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 six months ended June 30, 2019. These subsidiaries are included in loss from discontinued operations, net of tax in our Condensed Consolidated Statements of Income.

As of June 30, ~~2019,~~2020, we had variable-rate debt of approximately ~~$536.6~~$639.6 million. Holding other variables constant, including levels of indebtedness, a one hundred basis point increase in interest rates on our variable-rate debt would cause an estimated reduction in income before income taxes of approximately ~~$5.4~~$6.4 million. We continue to evaluate the interest rate environment and look for opportunities to improve our debt structure and minimize interest rate risk and expense.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the period covered by this Report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, ~~2019,~~2020, and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Company implemented an information technology system and developed processes and controls related to the recording of right-of-use assets and lease liabilities in connection with the adoption of ASC 842, "Leases." Otherwise, thereThere were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information regarding legal proceedings can be found in Note ~~12, "Commitments~~10, "Commitments and Contingencies,," inof the "Notes to Condensed Consolidated Financial Statements," ~~in ITEM 1~~ under Part I, ITEM 1, "Financial Statements" of this Report and is incorporated by reference herein.

~~We are involved in various other legal proceedings incidental to the operations~~

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

ITEM 1A. RISK FACTORS

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

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

The COVID-19 crisis has already had several significant effects on our business and our financial condition, including the impact of the pandemic on the economies and financial markets of the regions in which we operate. "Shelter in place” and other similar mandated or suggested isolation protocols have disrupted third-party retail stores in our Wholesale channel and company-owned stores in our Direct channel, via store closures or reduced operating hours in the U.S. and around the world, which has decreased retail traffic and which also, in turn, decreased sales of our products in March and April when COVID-19 began materially impacting our North America business segment.

At this time, most third-party retail stores and our company-owned stores have reopened. However, we cannot reasonably estimate the length of time these stores will remain open, or if they will be mandated to close again as the COVID-19 crisis continues to evolve. The inability to sell our products through the Wholesale channel and within company-owned stores within the Direct channel has had and may continue to have a material adverse effect on our revenues and results of operations. Our e-commerce operations remain open globally, as do the e-commerce operations for many of our third-party retailers. The COVID-19 pandemic is also shifting demand patterns to favor our lower-margin products, which is producing a reduction in our gross margins.

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

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

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

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

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

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

•the risk that the persistence or reoccurrence of COVID-19 could cause customers to avoid public places where our stores and those of our Wholesale partners are located;

•we have experienced and may continue to experience disruptions in our supply chain, as the outbreak has disrupted travel, affected consumer demand and spending habits and impacted manufacturing and distribution throughout the world; and

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

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

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

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

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

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

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

•staffing shortages;

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

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

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

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

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

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

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

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

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

(a) Not applicable.

(b) Not applicable.

The following table sets forth purchases of our common stock for the three months ended June 30, ~~2019:~~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)
April 1, 2020 - April 30, 2020	—	⁽¹⁾	$—	—	$131.3
May 1, 2020 - May 31, 2020	1,945	⁽¹⁾	$54.92	—	$131.3
June 1, 2020 - June 30, 2020	635	⁽¹⁾	$71.87	—	$131.3
Total	2,580			—

Period (a) Total number of shares purchased (b) Average Price Paid per Share (c) Total number of shares purchased as part of publicly announced plans or programs
(d) Maximum number of shares (or approximate dollar value of shares) that may yet be purchased under the plans or programs
(in millions)
April 1, 2019 - April 30, 2019 18,020
⁽¹⁾
$58.59 18,020 $225.0
May 1, 2019 - May 31, 2019 8,483
⁽¹⁾
$61.33 6,150 $224.6
June 1, 2019 - June 30, 2019 1,185
⁽¹⁾
$68.48 — $224.6
Total 27,688 24,170



(1)			Includes shares withheld upon the vesting of certain equity awards to satisfy tax withholding obligations. The shares withheld were valued at the closing price of the common stock on the New York Stock Exchange on the vesting date or prior business day.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

(a) Not applicable.

(b) Not applicable.

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ITEM 6. EXHIBITS

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



10.1			Amendment No. 3,1 dated ~~June 4, 2019,~~as of May 13, 2020, by and among Tempur Sealy International, Inc., as parent borrower, Tempur-Pedic Management, LLC, as additional borrower, the subsidiary guarantors party thereto, the several banks and other financial institutions party thereto, and JPMorgan Chase Bank, N.A., as administrative agent to the Amended and Restated Credit Agreement dated as of October 16, 2019 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K as filed on May 14, 2020).⁽¹⁾
10.2			Amendment No. 2 dated as of June 10, 2020, by and among Tempur Sealy International, Inc., as parent borrower, the several banks and other financial institutions party thereto, and JPMorgan Chase Bank, N.A., as ~~Administrative Agent.~~administrative agent, to the Amended and Restated Credit Amendment Agreement dated as of October 16, 2019, as amended by Amendment No. 1 dated May 13, 2020 .
~~31.1~~22			List of Subsidiary Guarantors
31.1			Certification of Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Chief Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*			Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
~~101.0~~101			The following materials from Tempur Sealy International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2019,~~2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and ~~(v)~~(vi) the Notes to Condensed Consolidated Financial ~~Statements~~ Statements.
~~104.0~~104			The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2019,~~2020, formatted in Inline XBRL.



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

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SIGNATURES

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


		TEMPUR SEALY INTERNATIONAL, INC.

		~~TEMPUR SEALY INTERNATIONAL, INC.~~

Date: August ~~1, 2019~~6, 2020	By:		/s/ BHASKAR RAO
				Bhaskar Rao
				Executive Vice President and Chief Financial Officer



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



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



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019		2018
Net income before non-controlling interest	$	41.5		$	21.2		$	70.1	$	44.0
Other comprehensive income, net of tax
Foreign currency translation adjustments	3.0			(16.1		)	7.0		(11.1		)
Pension benefits loss, net of tax	—			—			—		(0.6		)
Other comprehensive income, net of tax	3.0			(16.1		)	7.0		(11.7		)
Comprehensive income	44.5			5.1			77.1		32.3
Less: Comprehensive (loss) income attributable to non-controlling interest	(0.1		)	(1.6		)	0.1		(1.9		)
Comprehensive income attributable to Tempur Sealy International, Inc.	$	44.6		$	6.7		$	77.0	$	34.2


	Tempur Sealy International, Inc. Stockholders' Equity
	Common Stock				Treasury Stock										Accumulated Other Comprehensive Loss		Non-controlling Interests in Subsidiaries	Total Stockholders' Equity
	Shares Issued	At Par		Shares Issued	At Cost		Additional Paid in Capital		Retained Earnings
Balance as of March 31, 2020	99.2	$	1.0	47.7	$	(2,026.5)	$	578.7	$	1,756.5	$	(110.7)	$	9.4	$	208.4
Net income									23.0						23.0
Net income attributable to non-controlling interests													0.2		0.2
Dividend paid to non-controlling interest in subsidiary													(0.1)		(0.1)
Foreign currency adjustments											10.7				10.7

Exercise of stock options				—	—		0.2								0.2
Issuances of PRSUs, RSUs, and DSUs				—	0.4		(0.4)								—

Treasury stock repurchased - PRSU/RSU/DSU releases				—	(0.2)										(0.2)
Amortization of unearned stock-based compensation							7.5								7.5

Balance, June 30, 2020	99.2	$	1.0	47.7	$	(2,026.3)	$	586.0	$	1,779.5	$	(100.0)	$	9.5	$	249.7



			Tempur Sealy International, Inc. Stockholders' Equity
	Redeemable Non-controlling Interest		Common Stock			Treasury Stock										Accumulated Other Comprehensive Loss			Non-controlling Interest in Subsidiaries			Total Stockholders' Equity
	Redeemable Non-controlling Interest		Shares Issued	At Par		Shares Issued		At Cost			Additional Paid in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Non-controlling Interest in Subsidiaries			Total Stockholders' Equity
Balance as of March 31, 2019	$	—	99.2	$	1.0	44.5		$	(1,736.7	)	$	537.1		$	1,542.2	$	(91.3	)	$	1.2		$	253.5
Net income														41.6								41.6
Net loss attributable to non-controlling interest																			(0.1		)	(0.1		)
Foreign currency adjustments																3.0						3.0
Exercise of stock options						(0.1	)	0.9			2.2											3.1
Issuances of PRSUs, RSUs, and DSUs						—		0.3			(0.3		)									—
Treasury stock repurchased						—		(1.8		)												(1.8		)
Amortization of unearned stock-based compensation											6.6											6.6
Balance, June 30, 2019	$	—	99.2	$	1.0	44.4		$	(1,737.3	)	$	545.6		$	1,583.8	$	(88.3	)	$	1.1		$	305.9



(in millions)
Balance as of December 31, 2018	$	34.3
Amounts accrued	52.0
Returns charged to accrual	(49.4		)
Balance as of June 30, 2019	$	36.9



(in millions)
Balance as of December 31, 2018	$	36.4
Amounts accrued	14.3
Warranties charged to accrual	(13.1		)
Balance as of June 30, 2019	$	37.6



	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
(in millions)	North America		International		Consolidated		North America		International		Consolidated
Channel
Wholesale	$	494.3	$	107.3	$	601.6	$	948.3	$	236.4	$	1,184.7
Direct	33.5		24.8		58.3		64.5		48.1		112.6
Net sales	$	527.8	$	132.1	$	659.9	$	1,012.8	$	284.5	$	1,297.3

	North America		International		Consolidated		North America		International		Consolidated
Product
Bedding products	$	497.4	$	103.9	$	601.3	$	949.7	$	227.6	$	1,177.3
Other products	30.4		28.2		58.6		63.1		56.9		120.0
Net sales	$	527.8	$	132.1	$	659.9	$	1,012.8	$	284.5	$	1,297.3

	North America		International		Consolidated		North America		International		Consolidated
Geographical region
United States	$	477.7	$	—	$	477.7	$	917.9	$	—	$	917.9
Canada	50.1		—		50.1		94.9		—		94.9
International	—		132.1		132.1		—		284.5		284.5
Net sales	$	527.8	$	132.1	$	659.9	$	1,012.8	$	284.5	$	1,297.3



(in millions)
Working capital (accounts receivable and inventory, net of accounts payable and accrued liabilities)	$	(2.3	)
Property and equipment	5.0
Goodwill	2.1
Other intangible assets	3.3
Operating lease right-of-use assets	28.5
Long-term operating lease liabilities	(28.5		)
Net purchase price	$	8.1



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2019		2018		2019		2018
PRSU expense	$	0.4	$	0.7	$	0.7	$	1.5
Option expense	1.2		1.9		2.4		3.8
RSU/DSU expense	5.0		4.2		10.1		7.8
Total stock-based compensation expense	$	6.6	$	6.8	$	13.2	$	13.1


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



	Tempur Sealy International, Inc. (Ultimate Parent)			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Consolidated
Net sales	$	—		$	550.3		$	187.9		$	(15.4	)	$	722.8
Cost of sales	—			318.0			106.8			(15.4		)	409.4
Gross profit	—			232.3			81.1			—			313.4
Selling and marketing expenses	2.7			114.8			45.8			—			163.3
General, administrative and other expenses	4.2			55.8			13.9			(1.2		)	72.7
Equity income in earnings of unconsolidated affiliates	—			—			(3.6		)	—			(3.6		)
Operating (loss) income	(6.9		)	61.7			25.0			1.2			81.0

Other expense, net:
Third party interest expense, net	14.1			6.9			1.5			—			22.5
Intercompany interest (income) expense, net	(2.5		)	3.2			(0.7		)	—			—
Interest expense, net	11.6			10.1			0.8			—			22.5
Other (income) expense, net	—			(3.7		)	3.7			—			—
Total other expense, net	11.6			6.4			4.5			—			22.5

Income from equity investees	56.3			14.3			—			(70.6		)	—

Income from continuing operations before income taxes	37.8			69.6			20.5			(69.4		)	58.5
Income tax benefit (provision)	3.7			(13.3		)	(6.2		)	—			(15.8		)
Income from continuing operations	41.5			56.3			14.3			(69.4		)	42.7
Loss from discontinued operations, net of tax	—			—			—			(1.2		)	(1.2		)
Net income before non-controlling interest	41.5			56.3			14.3			(70.6		)	41.5
Less: Net income attributable to non-controlling interest	(0.1		)	—			(0.1		)	0.1			(0.1		)
Net income attributable to Tempur Sealy International, Inc.	$	41.6		$	56.3		$	14.4		$	(70.7	)	$	41.6

Comprehensive income attributable to Tempur Sealy International, Inc.	$	44.6		$	55.5		$	18.2		$	(73.7	)	$	44.6



	Trailing Twelve Months Ended
(in millions)	June 30, 2019
GAAP net income	$	124.6
Interest expense, net	91.3
Income taxes	63.5
Depreciation and amortization	116.5
EBITDA	$	395.9
Adjustments:
Loss from discontinued operations, net of tax ⁽¹⁾	11.2
Customer-related charges ⁽²⁾	21.2
Restructuring costs ⁽³⁾	16.9
Supply chain transition costs ⁽⁴⁾	7.3
Acquisition-related costs and other ⁽⁵⁾	6.1
Other income ⁽⁶⁾	(7.2		)
Adjusted EBITDA	$	451.4

Consolidated funded debt less qualified cash	$	1,645.6

Ratio of consolidated funded debt less qualified cash to Adjusted EBITDA	3.65 times


(1)			Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the ~~2016~~2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes.
(2)		~~On January 11, 2019, iMS, a customer, prior~~	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 ~~its April 1, 2019 acquisition, filed a voluntary petition in U.S. Bankruptcy Court for the Eastern District of Kentucky seeking relief under Chapter 11 of the U.S. Bankruptcy Code.~~fully reserve trade receivables and other assets associated with this account. In the fourth quarter of ~~2018,~~2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of ~~$21.2 million associated with certain iMS-related assets on our Consolidated Balance Sheet as~~Mattress PAL Holding, LLC ("Mattress PAL") and resulting significant liquidity issues of ~~December 31, 2018, primarily made up of trade and other receivables,~~Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this ~~account at that time.~~ account.
(3)			In 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.
(4)			Adjusted EBITDA per credit facility excluded $7.9 million of COVID-19 charges associated with temporarily closed company-owned retail stores and sales force retention costs.
(5)			In the second ~~half~~quarter of ~~2018,~~2020, we recorded ~~$19.5~~$4.9 million of ~~restructuring~~incremental operating costs ~~including $2.6~~associated with the global pandemic. Cost of sales included $4.5 million of ~~depreciation expense. These~~ costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included ~~$11.5~~$0.4 million of charges related to increased sanitation supplies and services. In the first quarter of 2020, we recorded $2.3 million of charges related to the ~~operational alignment~~global pandemic.
(6)			In the second quarter of ~~a joint venture that was wholly acquired in the North America business segment, including $2.6~~2020, we recorded $7.0 million of ~~depreciation expense~~asset impairment charges related to the write-off of certain sales and ~~$1.3~~marketing assets driven by the current macro-economic environment.
(7)			We completed the acquisition of Sherwood Bedding on January 31, 2020 and designated this subsidiary as restricted under the 2019 Credit Agreement. For covenant compliance purposes, we included $6.7 million of ~~other expense, net. Restructuring costs also included $3.1 million~~EBITDA from this subsidiary for the seven months prior to acquisition in our calculation of ~~expenses in~~adjusted EBITDA per credit facility for the International business segment related to International simplification efforts, including headcount reduction, professional fees and store closures, and $4.9 million of Corporate professional fees related to restructuring activities.trailing twelve months ended June 30, 2020.
~~(4)~~(8)		In 2018, we recorded $7.3 million of supply chain transition costs which represent charges incurred to consolidate certain manufacturing and distribution facilities, including $0.8 million of other expense.
~~(5)~~	In the second quarter of 2020, we incurred $3.4 million of restructuring costs associated with International headcount reductions driven by the current macro-economic environment.
(9)			We recorded $1.3 million and $1.5 million of charges related to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)", in the second and first quarters of 2020, respectively. As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within our covenant compliance calculation.
(10)			In 2019, we recorded ~~$2.8~~$0.7 million of ~~acquisition-related and other costs, primarily related to post acquisition restructuring charges and~~ professional fees ~~incurred~~ in ~~the Sleep Outfitters Acquisition. In the first quarter of 2019, we recorded $3.3 million of costs, primarily related to professional fees associated~~connection with the ~~Sleep Outfitters Acquisition.~~
~~(6)~~	~~We recorded $7.2 million of other income related to the sale of its interest in a subsidiary~~amendment of the ~~Asia-Pacific joint venture.~~2019 Credit Agreement.



~~(1)~~(in millions)	June 30, 2020
Total debt, net	$	1,753.6
Plus: Deferred financing costs ⁽¹⁾	7.2
Consolidated indebtedness	1,760.8
Less: Netted cash ⁽²⁾	145.9
Consolidated indebtedness less netted cash	$	1,614.9