Tempur Sealy(TPX) - 2021 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section provides a cautionary note on forward-looking statements, highlighting potential material differences from actual results due to various risks Forward-Looking Statements Disclosure This section outlines the nature of forward-looking statements within the report, emphasizing that actual results may differ materially due to various risk factors, including macroeconomic conditions, global events, supply chain disruptions, and the impact of COVID-19. The company disclaims any obligation to publicly update these statements - The report contains forward-looking statements based on expectations and beliefs, subject to numerous factors beyond the Company's control that could cause actual results to differ materially[8][9] - Key risk factors include macroeconomic environment, global events, natural disasters or pandemics (especially COVID-19's impact on supply chain, production, and retail traffic), strategic investments, product launches, competition, and financial distress among partners[9] - The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law[11] PART I. FINANCIAL INFORMATION This section presents the Company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including statements of income, comprehensive income, balance sheets, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, disaggregated revenue, acquisitions, debt, leases, and segment information Condensed Consolidated Statements of Income The condensed consolidated statements of income show significant growth in net sales, gross profit, operating income, and net income for both the three and nine months ended September 30, 2021, compared to the prior year, with corresponding increases in basic and diluted earnings per share | Metric | Three Months Ended Sep 30, 2021 ($M) | Three Months Ended Sep 30, 2020 ($M) | Nine Months Ended Sep 30, 2021 ($M) | Nine Months Ended Sep 30, 2020 ($M) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Net sales | 1,358.3 | 1,132.3 | 3,571.2 | 2,619.9 | | Gross profit | 577.1 | 530.2 | 1,554.2 | 1,153.2 | | Operating income | 249.8 | 180.2 | 661.5 | 338.9 | | Net income attributable to Tempur Sealy International, Inc. | 177.4 | 121.4 | 448.7 | 204.1 | | Basic EPS | 0.91 | 0.59 | 2.26 | 0.98 | | Diluted EPS | 0.87 | 0.57 | 2.18 | 0.97 | Condensed Consolidated Statements of Comprehensive Income The comprehensive income for Tempur Sealy International, Inc. increased significantly for both the three and nine months ended September 30, 2021, primarily driven by higher net income, despite negative foreign currency translation adjustments in 2021 | Metric | Three Months Ended Sep 30, 2021 ($M) | Three Months Ended Sep 30, 2020 ($M) | Nine Months Ended Sep 30, 2021 ($M) | Nine Months Ended Sep 30, 2020 ($M) | | :------------------------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Net income before non-controlling interests | 177.4 | 121.8 | 448.5 | 204.8 | | Foreign currency translation adjustments | (29.9) | 12.1 | (34.0) | (0.2) | | Comprehensive income attributable to Tempur Sealy International, Inc. | 147.5 | 133.5 | 414.7 | 203.9 | Condensed Consolidated Balance Sheets The balance sheet shows a substantial increase in total assets, driven by higher cash and cash equivalents, accounts receivable, inventories, and goodwill, primarily due to the Dreams acquisition. Total liabilities also increased significantly, mainly from long-term debt | Metric | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :----------------------------------------- | :---------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | 503.3 | 65.0 | | Accounts receivable, net | 510.2 | 383.7 | | Inventories | 384.9 | 312.1 | | Total Current Assets | 1,482.8 | 968.4 | | Goodwill | 1,082.1 | 766.3 | | Total Assets | 4,467.3 | 3,308.6 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total Current Liabilities | 1,159.4 | 974.8 | | Long-term debt, net | 2,285.8 | 1,323.0 | | Total Liabilities | 4,096.3 | 2,795.1 | | Total Stockholders' Equity | 362.5 | 504.6 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from December 31, 2020, to September 30, 2021, primarily due to significant treasury stock repurchases and negative foreign currency adjustments, partially offset by net income | Metric | Nine Months Ended Sep 30, 2021 ($M) | Nine Months Ended Sep 30, 2020 ($M) | | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Balance as of Dec 31, 2020 | 504.6 | 360.4 (Dec 31, 2019) | | Net income | 448.7 | 204.1 | | Foreign currency adjustments, net of tax | (34.0) | (0.2) | | Dividends declared on common stock | (47.3) | — | | Treasury stock repurchased | (551.4) | (187.5) | | Balance as of Sep 30, 2021 | 362.5 | 447.3 | Condensed Consolidated Statements of Cash Flows Cash flows from operating activities increased significantly, while cash used in investing activities rose sharply due to acquisitions. Financing activities shifted from a net use to a net provision of cash, driven by new debt issuances and share repurchases | Metric | Nine Months Ended Sep 30, 2021 ($M) | Nine Months Ended Sep 30, 2020 ($M) | | :---------------------------------------------------- | :---------------------------------- | :---------------------------------- | | Net cash provided by operating activities from continuing operations | 597.5 | 497.9 | | Net cash used in investing activities from continuing operations | (508.0) | (111.4) | | Net cash provided by (used in) financing activities from continuing operations | 356.4 | (228.5) | | Increase in cash and cash equivalents | 438.3 | 164.3 | | Cash and cash equivalents, end of period | 503.3 | 229.2 | Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosures on the company's accounting policies, financial instruments, acquisitions, debt structure, lease obligations, equity changes, and segment performance, offering crucial context to the condensed financial statements (1) Summary of Significant Accounting Policies This section outlines the Company's business, segments, and key accounting policies for inventories, sales returns, warranties, and credit losses, including their valuation methods and activity for the period - Tempur Sealy International designs, manufactures, and distributes bedding products (mattresses, foundations, adjustable bases, pillows, accessories) and licenses Sealy® and Stearns & Foster® brands. Products are sold through Wholesale and Direct channels[35] Inventory by Type | Inventory Type | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :--------------- | :---------------- | :---------------- | | Finished goods | 211.2 | 170.2 | | Work-in-process | 11.0 | 12.6 | | Raw materials and supplies | 162.7 | 129.3 | | Total Inventories | 384.9 | 312.1 | Sales Returns Activity | Sales Returns Activity | Amount ($M) | | :--------------------- | :---------- | | Balance as of Dec 31, 2020 | 44.9 | | Amounts accrued | 105.2 | | Returns charged to accrual | (101.8) | | Balance as of Sep 30, 2021 | 48.3 | Accrued Warranty Expense Activity | Accrued Warranty Expense Activity | Amount ($M) | | :-------------------------------- | :---------- | | Balance as of Dec 31, 2020 | 44.2 | | Amounts accrued | 19.4 | | Warranties charged to accrual | (16.5) | | Balance as of Sep 30, 2021 | 47.1 | Allowance for Credit Losses Activity | Allowance for Credit Losses Activity | Amount ($M) | | :----------------------------------- | :---------- | | Balance as of Dec 31, 2020 | 71.6 | | Amounts accrued | 2.4 | | Write-offs charged against the allowance | (4.5) | | Balance as of Sep 30, 2021 | 69.5 | (2) Net Sales Net sales are disaggregated by channel (Wholesale, Direct), product (Bedding, Other), and geographical region (United States, All Other) for both the three and nine months ended September 30, 2021 and 2020, showing growth across most categories and regions Net Sales Disaggregation Three Months Ended September 30: | Category | 2021 ($M) | 2020 ($M) | | :------------------ | :-------- | :-------- | | Channel | | | | Wholesale | 1,099.2 | 987.2 | | Direct | 259.1 | 145.1 | | Product | | | | Bedding | 1,244.5 | 1,035.2 | | Other | 113.8 | 97.1 | | Geographical region | | | | United States | 1,018.8 | 904.3 | | All Other | 339.5 | 228.0 | | Total Net Sales | 1,358.3 | 1,132.3 | Nine Months Ended September 30: | Category | 2021 ($M) | 2020 ($M) | | :------------------ | :-------- | :-------- | | Channel | | | | Wholesale | 2,986.0 | 2,273.3 | | Direct | 585.2 | 346.6 | | Product | | | | Bedding | 3,277.9 | 2,397.5 | | Other | 293.3 | 222.4 | | Geographical region | | | | United States | 2,783.6 | 2,078.8 | | All Other | 787.6 | 541.1 | | Total Net Sales | 3,571.2 | 2,619.9 | (3) Acquisitions The Company completed the acquisition of Dreams Topco Limited on August 2, 2021, for $476.7 million, expanding its multi-channel sales strategy in the United Kingdom. The preliminary purchase price allocation includes significant goodwill and an indefinite-lived intangible asset for trade names - Acquired Dreams Topco Limited on August 2, 2021, for a cash purchase price of $476.7 million, funded by cash on hand and bank financing[48] - Dreams brings over 200 brick-and-mortar retail locations in the UK, an industry-leading online channel, and manufacturing/delivery assets[48] Preliminary Purchase Price Allocation (as of Aug 2, 2021) | Preliminary Purchase Price Allocation (as of Aug 2, 2021) | Amount ($M) | | :------------------------------------------------------- | :---------- | | Accounts receivable, net | 3.5 | | Inventory | 51.1 | | Property, plant and equipment | 30.4 | | Goodwill | 331.3 | | Indefinite-lived intangible asset (trade names) | 143.1 | | Operating lease right-of-use assets | 158.2 | | Other current and non-current assets | 7.1 | | Accounts payable | (55.6) | | Accrued expenses and other current liabilities | (68.5) | | Operating lease liabilities | (165.1) | | Debt | (6.1) | | Other liabilities | (2.4) | | Purchase price, net of cash acquired | 427.0 | - Goodwill primarily represents the expansion of retail competency, online capabilities, and expected synergistic manufacturing and distribution benefits, and is included within the International business segment[50] (4) Goodwill Goodwill increased significantly from December 31, 2020, to September 30, 2021, primarily due to the Dreams acquisition, which added $331.3 million to the International segment Goodwill Changes | Goodwill Changes | North America ($M) | International ($M) | Consolidated ($M) | | :----------------------------- | :----------------- | :----------------- | :---------------- | | Balance as of Dec 31, 2020 | 610.3 | 156.0 | 766.3 | | Goodwill resulting from acquisitions | — | 331.3 | 331.3 | | Foreign currency translation and other | 1.0 | (16.5) | (15.5) | | Balance as of Sep 30, 2021 | 611.3 | 470.8 | 1,082.1 | (5) Debt The Company's total debt increased significantly, driven by the issuance of new 2029 and 2031 Senior Notes and amendments to the 2019 Credit Agreement, while older senior notes were redeemed. The Company remains in compliance with all debt covenants Debt by Type | Debt Type | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :-------------------- | :---------------- | :---------------- | | 2019 Credit Agreement: Term A Facility | 684.1 | 409.1 | | 2031 Senior Notes | 800.0 | — | | 2029 Senior Notes | 800.0 | — | | 2026 Senior Notes | — | 600.0 | | 2023 Senior Notes | — | 250.0 | | Total debt | 2,361.7 | 1,370.3 | | Total long-term debt, net | 2,285.8 | 1,323.0 | - The 2019 Credit Agreement was amended to increase the revolving credit facility from $425.0 million to $725.0 million and to provide a $300.0 million delayed draw term loan, which was fully drawn to fund the Dreams acquisition[56][57] - Issued $800.0 million of 3.875% senior notes due 2031 (2031 Senior Notes) and $800.0 million of 4.00% senior notes due 2029 (2029 Senior Notes)[60][64] - Redeemed the $600.0 million 2026 Senior Notes and the remaining $250.0 million of 2023 Senior Notes, incurring $18.0 million and $5.0 million in losses on extinguishment of debt, respectively[68][69] - As of September 30, 2021, the Company was in compliance with all applicable debt covenants[54] (6) Leases The Company's lease assets and obligations, including both operating and finance leases, increased from December 31, 2020, to September 30, 2021. Total lease expense also increased for both the three and nine months ended September 30, 2021 Lease Metrics | Lease Metric | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :-------------------------------- | :---------------- | :---------------- | | Operating lease right-of-use assets | 464.5 | 304.3 | | Finance lease assets | 64.2 | 61.2 | | Total leased assets | 528.7 | 365.5 | | Operating lease obligations (short-term) | 98.2 | 61.0 | | Finance lease obligations (short-term) | 13.6 | 11.4 | | Operating lease obligations (long-term) | 413.5 | 275.1 | | Finance lease obligations (long-term) | 60.9 | 60.0 | | Total lease obligations | 586.2 | 407.5 | Lease Expense | Lease Expense | Three Months Ended Sep 30, 2021 ($M) | Three Months Ended Sep 30, 2020 ($M) | Nine Months Ended Sep 30, 2021 ($M) | Nine Months Ended Sep 30, 2020 ($M) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Operating lease expense | 27.6 | 19.1 | 68.4 | 55.8 | | Short-term lease expense | 3.2 | 2.6 | 9.9 | 8.3 | | Variable lease expense | 7.3 | 6.0 | 20.0 | 15.7 | | Amortization of right-of-use assets | 3.3 | 2.5 | 9.2 | 6.9 | | Interest on lease obligations | 1.1 | 1.2 | 3.3 | 3.5 | | Total lease expense | 42.5 | 31.4 | 110.8 | 90.2 | Scheduled Maturities of Lease Obligations (as of Sep 30, 2021) | Scheduled Maturities of Lease Obligations (as of Sep 30, 2021) | Operating Leases ($M) | Finance Leases ($M) | Total ($M) | | :----------------------------------------------------- | :-------------------- | :------------------ | :--------- | | 2021 (excluding 9 months ended Sep 30, 2021) | 29.1 | 4.6 | 33.7 | | 2022 | 112.9 | 16.6 | 129.5 | | 2023 | 99.2 | 13.4 | 112.6 | | 2024 | 82.2 | 10.7 | 92.9 | | 2025 | 66.9 | 8.9 | 75.8 | | Thereafter | 193.9 | 36.6 | 230.5 | | Total lease payments | 584.2 | 90.8 | 675.0 | | Less: Interest | 72.5 | 16.3 | 88.8 | | Present value of lease obligations | 511.7 | 74.5 | 586.2 | (7) Stockholders' Equity The Company's Board of Directors authorized significant increases to the share repurchase program in 2021, leading to substantial repurchases during the period. Accumulated Other Comprehensive Loss (AOCL) primarily consists of foreign currency translation adjustments - Board of Directors authorized increases of $211.4 million and $325.3 million to the share repurchase authorization in February and April 2021, respectively[73] - Repurchased 4.1 million shares for approximately $190.0 million during the three months ended September 30, 2021, and 14.1 million shares for approximately $551.4 million during the nine months ended September 30, 2021[73] - As of September 30, 2021, $186.9 million remained under the share repurchase authorization, which was further increased to $600.0 million on October 28, 2021[73][182] AOCL Component | AOCL Component | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :----------------------- | :---------------- | :---------------- | | Foreign Currency Translation | (92.6) | (58.6) | | Pensions | (6.9) | (6.9) | | Total AOCL | (99.5) | (65.5) | (8) Other Items Accrued expenses and other current liabilities saw a slight increase from December 31, 2020, to September 30, 2021, with a notable decrease in taxes due to the release of certain uncertain income tax liabilities Accrued Expenses and Other Current Liabilities | Accrued Expenses and Other Current Liabilities | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :--------------------------------------------- | :---------------- | :---------------- | | Wages and benefits | 101.1 | 102.5 | | Operating lease obligations | 98.2 | 61.0 | | Advertising | 79.5 | 74.4 | | Taxes | 26.7 | 150.4 | | Other | 297.2 | 196.8 | | Total | 602.7 | 585.1 | - The decrease in taxes was due to the release of certain uncertain income tax liabilities[77] (9) Stock-Based Compensation Total stock-based compensation expense decreased for both the three and nine months ended September 30, 2021, primarily due to a significant reduction in PRSU expense compared to the prior year Stock-Based Compensation Expense | Stock-Based Compensation Expense | Three Months Ended Sep 30, 2021 ($M) | Three Months Ended Sep 30, 2020 ($M) | Nine Months Ended Sep 30, 2021 ($M) | Nine Months Ended Sep 30, 2020 ($M) | | :------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | PRSU expense | 10.3 | 65.0 | 29.6 | 66.2 | | Option expense | 0.4 | 1.3 | 1.2 | 3.7 | | RSU/DSU expense | 5.4 | 5.5 | 15.5 | 16.7 | | Total stock-based compensation expense | 16.1 | 71.8 | 46.3 | 86.6 | (10) Commitments and Contingencies The Company is involved in various legal and administrative proceedings but believes their aggregate outcome will not materially adversely affect its business, financial condition, liquidity, or operating results - The Company believes the outcome of all pending legal and administrative proceedings will not have a material adverse effect on its business, financial condition, liquidity, or operating results[79] (11) Income Taxes The Company's effective tax rate for both the three and nine months ended September 30, 2021, decreased compared to the prior year. The Danish Tax Matter for 2001-2011 has been materially resolved, but disputes for 2012-2021 are ongoing, with associated uncertain income tax liabilities and cash deposits Effective Tax Rate | Effective Tax Rate | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Effective Tax Rate | 24.9% | 25.2% | 24.3% | 26.5% | - The Danish Tax Matter for tax years 2001-2011 (Settlement Years) is considered materially closed, with SKAT refunding excess tax deposits[83] Uncertain Income Tax Liabilities (Danish Tax Matter) | Uncertain Income Tax Liabilities (Danish Tax Matter) | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :--------------------------------------------------- | :---------------- | :---------------- | | Settlement Years (Accrued expenses and other current liabilities) | — | 139.1 | | 2012 to Current Period (Other non-current liabilities) | 48.6 | 48.4 | | Total | 48.6 | 187.5 | Cash on Deposit with SKAT | Cash on Deposit with SKAT | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :------------------------ | :---------------- | :---------------- | | Prepaid expenses and other current assets | — | 139.1 | | Other non-current assets | 49.5 | 54.8 | | Total | 49.5 | 193.9 | (12) Earnings Per Common Share Basic and diluted earnings per common share for continuing operations increased significantly for both the three and nine months ended September 30, 2021, reflecting improved profitability and a lower weighted average common shares outstanding EPS Metrics | EPS Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic earnings per common share for continuing operations | $0.91 | $0.58 | $2.26 | $0.97 | | Diluted earnings per common share for continuing operations | $0.87 | $0.56 | $2.18 | $0.96 | | Weighted average common shares outstanding (Basic) | 195.8 | 206.4 | 198.9 | 208.8 | | Weighted average common shares outstanding (Diluted) | 203.4 | 211.6 | 205.9 | 211.6 | (13) Business Segment Information The Company operates in two segments, North America and International, with segment performance evaluated based on net sales, gross profit, and operating income. Both segments showed growth in net sales and operating income for the periods presented, with the International segment significantly impacted by the Dreams acquisition - The Company operates in two segments: North America (U.S., Canada, Mexico) and International (Europe, Asia-Pacific, Latin America excluding Mexico). Dreams acquisition is included in the International segment[92][105] Segment Assets | Segment Assets | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | | :--------------- | :---------------- | :---------------- | | North America | 4,258.2 | 3,740.3 | | International | 1,257.8 | 639.8 | | Corporate | 860.4 | 490.3 | | Total assets | 4,467.3 | 3,308.6 | Segment Performance Three Months Ended September 30, 2021: | Metric | North America ($M) | International ($M) | Corporate ($M) | Consolidated ($M) | | :-------------------------- | :----------------- | :----------------- | :------------- | :---------------- | | Net sales | 1,120.0 | 238.3 | — | 1,358.3 | | Gross profit | 447.1 | 130.0 | — | 577.1 | | Operating income (loss) | 237.0 | 50.3 | (37.5) | 249.8 | Nine Months Ended September 30, 2021: | Metric | North America ($M) | International ($M) | Corporate ($M) | Consolidated ($M) | | :-------------------------- | :----------------- | :----------------- | :------------- | :---------------- | | Net sales | 3,017.1 | 554.1 | — | 3,571.2 | | Gross profit | 1,236.4 | 317.8 | — | 1,554.2 | | Operating income (loss) | 627.8 | 139.9 | (106.2) | 661.5 | Net Sales by Geographic Region | Net Sales by Geographic Region | Three Months Ended Sep 30, 2021 ($M) | Three Months Ended Sep 30, 2020 ($M) | Nine Months Ended Sep 30, 2021 ($M) | Nine Months Ended Sep 30, 2020 ($M) | | :----------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | United States | 1,018.8 | 904.3 | 2,783.6 | 2,078.8 | | All Other | 339.5 | 228.0 | 787.6 | 541.1 | | Total Net Sales | 1,358.3 | 1,132.3 | 3,571.2 | 2,619.9 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive overview of the Company's business, financial performance for the three and nine months ended September 30, 2021, compared to the prior year, and an analysis of its liquidity and capital resources, including the impact of acquisitions, market conditions, and non-GAAP financial measures Business Overview The Company, a global leader in bedding products, operates through North America and International segments with an omni-channel strategy. The bedding industry is poised for growth, though recent performance has been affected by COVID-19, supply chain constraints, and commodity inflation, while strategic acquisitions and product launches continue - The Company is a global leader in designing, manufacturing, and distributing bedding products, operating in North America and International segments with an omni-channel strategy (Wholesale and Direct)[104][105][107] - The bedding industry is structured for sustained growth, driven by product innovation, consumer confidence, housing formations, and population growth[108] - Consolidated year-to-date net sales increased 36.3% compared to 2020, with full-year 2021 net sales growth expected to exceed 35%[109] - Supply chain constraints unfavorably impacted Q3 2021 sales by an estimated $200 million, with expectations for resolution by the end of 2021[110] - The acquisition of Dreams Topco Limited on August 2, 2021, for $476.7 million, expanded the Company's multi-channel sales strategy in the United Kingdom[113] - New product launches include the Tempur-Ergo Smart Base Collection in North America (Q1 2021) and the largest Sealy North America rollout (Posturepedic Plus™, Posturepedic®, Essentials) in 2021-2022, with a new Tempur product line planned for International in 2022[114] Results of Operations The Company reported strong financial performance for both the three and nine months ended September 30, 2021, with significant increases in net sales, operating income, and EPS. Gross margins declined due to commodity costs and the Dreams acquisition, while operating expenses were managed, and interest expense decreased Summary of Three Months Ended September 30, 2021 For Q3 2021, total net sales increased 20.0% (19.2% constant currency), with significant growth in the International segment. Gross margin declined to 42.5%, while operating income rose 38.6%. Diluted EPS increased 52.6% to $0.87 Q3 2021 Financial Summary | Metric | Q3 2021 (Reported) | Q3 2020 (Reported) | Q3 2021 (Adjusted/Constant Currency) | Q3 2020 (Adjusted) | | :----------------------------------- | :----------------- | :----------------- | :----------------------------------- | :----------------- | | Total net sales | $1,358.3M | $1,132.3M | +19.2% (constant currency) | | | Gross margin | 42.5% | 46.8% | | 46.9% | | Operating income | $249.8M | $180.2M | | $227.2M (+11.0%) | | Net income | $177.4M | $121.4M | | $155.4M (+15.6%) | | EBITDA | $295.2M | $279.9M | | $279.3M (+6.6%) | | Diluted EPS | $0.87 | $0.57 | | $0.74 (+18.9%) | Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020 For the three months ended September 30, 2021, net sales increased across both segments, with International showing significant growth due to the Dreams acquisition. Gross margins declined due to pricing actions and acquisition impact, while operating expenses decreased overall, leading to improved operating income and a lower effective tax rate Income Statement Percentages | Metric | 2021 (% of Net Sales) | 2020 (% of Net Sales) | | :------------------------------------------ | :-------------------- | :-------------------- | | Net sales | 100.0% | 100.0% | | Cost of sales | 57.5% | 53.2% | | Gross profit | 42.5% | 46.8% | | Selling and marketing expenses | 17.9% | 20.3% | | General, administrative and other expenses | 6.6% | 11.0% | | Operating income | 18.4% | 15.9% | | Income from continuing operations before income taxes | 17.4% | 14.1% | | Net income attributable to Tempur Sealy International, Inc. | 13.1% | 10.7% | - Consolidated net sales increased 20.0% (19.2% on a constant currency basis). North America net sales increased 12.6%, driven by broad-based demand in Wholesale and strong company-owned store sales in Direct. International net sales increased 73.2% (71.6% on a constant currency basis), primarily driven by the Dreams acquisition[122][127] - Consolidated gross margin declined 430 basis points to 42.5%. North America gross margin declined 480 bps due to pricing actions, operational inefficiencies, and unfavorable brand mix. International gross margin declined 730 bps, primarily due to the Dreams acquisition's lower margin profile and pricing actions[123][126][128] - Consolidated operating expenses decreased $20.7 million (5.8%). Corporate operating expenses decreased $58.6 million due to lower stock-based compensation amortization, positively impacting consolidated operating margin by 430 bps[131][133][140] - Consolidated operating income increased $69.6 million, and operating margin improved 250 basis points[136] - Net interest expense decreased $6.6 million (32.8%) due to lower interest rates on debt. Income tax provision increased $18.4 million due to higher income, with the effective tax rate decreasing 30 bps to 24.9%[137][139] Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020 For the nine months ended September 30, 2021, the Company achieved substantial growth in net sales and operating income, with an improved operating margin. Gross margin saw a slight decline, while interest expense decreased, and significant losses on debt extinguishment were recognized due to refinancing activities Income Statement Percentages | Metric | 2021 (% of Net Sales) | 2020 (% of Net Sales) | | :------------------------------------------ | :-------------------- | :-------------------- | | Net sales | 100.0% | 100.0% | | Cost of sales | 56.5% | 56.0% | | Gross profit | 43.5% | 44.0% | | Selling and marketing expenses | 18.4% | 20.5% | | General, administrative and other expenses | 7.1% | 11.0% | | Operating income | 18.5% | 12.9% | | Income from continuing operations before income taxes | 16.6% | 10.6% | | Net income attributable to Tempur Sealy International, Inc. | 12.6% | 7.8% | - Consolidated net sales increased 36.3% (34.6% on a constant currency basis). North America net sales increased 33.2%, driven by broad-based demand in Wholesale and strong Direct channel growth. International net sales increased 56.4% (48.6% on a constant currency basis), primarily due to the Dreams acquisition and higher sales volume[145][147] - Consolidated gross margin declined 50 basis points to 43.5%. North America gross margin declined 70 bps due to pricing actions, partially offset by fixed cost leverage. International gross margin declined 150 bps, primarily due to the Dreams acquisition's lower margin profile[146][148] - Consolidated operating expenses increased $89.3 million (10.8%). Corporate operating expenses decreased $38.2 million due to lower stock-based compensation amortization, positively impacting consolidated operating margin by 110 bps[152][154][160] - Consolidated operating income increased $322.6 million, and operating margin improved 560 basis points[156] - Net interest expense decreased $15.2 million (24.9%) due to reduced average debt levels and lower interest rates, partially offset by $5.2 million of overlapping interest expense. The Company recognized $23.0 million in losses on extinguishment of debt from redeeming the 2026 and 2023 Senior Notes[158][160] - Income tax provision increased $70.7 million (96.6%) due to higher income, with the effective tax rate decreasing 220 bps to 24.3%[162] Liquidity and Capital Resources The Company's liquidity significantly improved, driven by strong operating cash flows and strategic financing activities, including new debt issuances and an expanded share repurchase program. Total debt increased due to acquisitions and refinancing, but the Company remains within its leverage targets and maintains a balanced capital allocation strategy - As of September 30, 2021, net working capital was $323.4 million, a significant improvement from a $6.4 million deficit at December 31, 2020. Cash and cash equivalents totaled $503.3 million[164][165] - Cash provided by operating activities from continuing operations increased $99.6 million for the nine months ended September 30, 2021. Cash used in investing activities increased $396.6 million, primarily due to the Dreams acquisition[166][167] - Cash provided by financing activities from continuing operations increased $584.9 million, driven by $1.6 billion from new senior notes, offset by $850.0 million in debt repayments and $565.8 million in share repurchases[168] - Total debt increased to $2,361.7 million as of September 30, 2021, from $1,370.3 million at December 31, 2020. The Company's revolving credit facility was increased to $725.0 million[172][173] - The ratio of consolidated indebtedness less netted cash to adjusted EBITDA was 1.68 times as of September 30, 2021, well within the 2019 Credit Agreement's covenant limit of 5.00 times. The target range for this ratio is 2.0 to 3.0 times[178][188] - The Board authorized additional share repurchases of $211.4 million and $325.3 million in 2021, with $551.4 million repurchased year-to-date. Total authorization was increased to $600.0 million on October 28, 2021[181][182] - Total liquidity as of September 30, 2021, was $1,397.3 million, including cash on hand and available credit facilities. The Company declared a quarterly dividend of $0.09 per share[185][187] Non-GAAP Financial Information This section provides reconciliations of various non-GAAP financial measures, including adjusted net income, adjusted EPS, adjusted gross profit, adjusted operating income, EBITDA, and adjusted EBITDA, to their most directly comparable GAAP measures. These non-GAAP measures are used to provide a clearer understanding of the Company's underlying operational performance and leverage - Non-GAAP financial measures (adjusted net income, EPS, gross profit, operating income, EBITDA, consolidated indebtedness less netted cash) are used to provide investors with performance measures that better reflect underlying operations and trends, excluding short-term fluctuations[190][191] Adjusted Net Income Reconciliation | Adjusted Net Income Reconciliation | Three Months Ended Sep 30, 2021 ($M) | Three Months Ended Sep 30, 2020 ($M) | | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | 177.4 | 121.4 | | Loss (income) from discontinued operations, net of tax | 0.1 | (2.4) | | Acquisition-related costs | 2.3 | — | | Aspirational plan amortization | — | 45.2 | | Loss on extinguishment of debt | — | 0.9 | | Accounting standard adoption | — | 0.8 | | Facility expansion costs | — | 0.6 | | Restructuring costs | — | 0.4 | | Tax adjustments | (0.2) | (11.5) | | Adjusted net income | 179.6 | 155.4 | | Adjusted earnings per share, diluted | 0.88 | 0.74 | Adjusted Operating Income Reconciliation (Q3 2021) | Adjusted Operating Income Reconciliation (Q3 2021) | Consolidated ($M) | North America ($M) | International ($M) | Corporate ($M) | | :------------------------------------------------- | :---------------- | :----------------- | :----------------- | :------------- | | Operating income (expense) | 249.8 | 237.0 | 50.3 | (37.5) | | Acquisition-related costs | 2.3 | — | 2.3 | — | | Adjusted operating income (expense) | 252.1 | 237.0 | 52.6 | (37.5) | Adjusted Operating Income Reconciliation (Q3 2020) | Adjusted Operating Income Reconciliation (Q3 2020) | Consolidated ($M) | North America ($M) | International ($M) | Corporate ($M) | | :------------------------------------------------- | :---------------- | :----------------- | :----------------- | :------------- | | Operating income (expense) | 180.2 | 235.1 | 41.2 | (96.1) | | Aspirational plan amortization | 45.2 | — | — | 45.2 | | Accounting standard adoption | 0.8 | 0.8 | — | — | | Facility expansion costs | 0.6 | 0.6 | — | — | | Restructuring costs | 0.4 | — | 0.4 | — | | Adjusted operating income (expense) | 227.2 | 236.5 | 41.6 | (50.9) | EBITDA and Adjusted EBITDA Reconciliation | EBITDA and Adjusted EBITDA Reconciliation | Three Months Ended Sep 30, 2021 ($M) | Three Months Ended Sep 30, 2020 ($M) | | :---------------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | 177.4 | 121.4 | | Interest expense, net | 13.5 | 20.1 | | Loss on extinguishment of debt | — | 0.9 | | Income taxes | 58.7 | 40.3 | | Depreciation and amortization | 45.6 | 52.0 | | Aspirational plan amortization | — | 45.2 | | EBITDA | 295.2 | 279.9 | | Loss (income) from discontinued operations, net of tax | 0.1 | (2.4) | | Acquisition-related costs | 2.3 | — | | Accounting standard adoption | — | 0.8 | | Facility expansion costs | — | 0.6 | | Restructuring costs | — | 0.4 | | Adjusted EBITDA | 297.6 | 279.3 | Consolidated Indebtedness less Netted Cash Reconciliation | Consolidated Indebtedness less Netted Cash Reconciliation | Sep 30, 2021 ($M) | | :------------------------------------------------------ | :---------------- | | Total debt, net | 2,338.8 | | Plus: Deferred financing costs | 22.9 | | Consolidated indebtedness | 2,361.7 | | Less: Netted cash | 502.0 | | Consolidated indebtedness less netted cash | 1,859.7 | - The ratio of consolidated indebtedness less netted cash to adjusted EBITDA was 1.68 times for the trailing twelve months ended September 30, 2021, which is within the 2019 Credit Agreement's covenant limit of 5.00:1.00 times[208][210] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to foreign currency exchange rate risk and interest rate risk, detailing the impact of fluctuations and the strategies employed to mitigate these risks Foreign Currency Exposures The Company's earnings are exposed to foreign currency exchange rate changes, which positively impacted net income and adjusted EBITDA in 2021. A portion of this exposure is hedged using foreign exchange forward contracts - Foreign currency exchange rate changes positively impacted net income by 1.4% in Q3 2021 and 2.5% in the nine months ended September 30, 2021[214] - Foreign currency exchange rate changes positively impacted adjusted EBITDA by 1.1% in Q3 2021 and 2.0% in the nine months ended September 30, 2021[214] - The Company hedges a portion of its foreign currency transaction exposure with foreign exchange forward contracts. A hypothetical 10.0% adverse change in exchange rates would result in an estimated $1.8 million potential loss in fair value on these contracts, largely offset by gains on underlying assets/liabilities[215] Interest Rate Risk The Company has significant variable-rate debt, making it sensitive to interest rate fluctuations. A 100 basis point increase in interest rates would lead to an estimated $6.8 million reduction in income before income taxes - As of September 30, 2021, the Company had approximately $687.2 million in variable-rate debt[216] - A hypothetical 100 basis point increase in interest rates on variable-rate debt would cause an estimated $6.8 million reduction in income before income taxes[216] ITEM 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021, and there were no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2021[217] - No changes in internal control over financial reporting were identified that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[218] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, debt defaults, and other required disclosures ITEM 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 10 of the Condensed Consolidated Financial Statements - Information regarding legal proceedings is incorporated by reference from Note 10, 'Commitments and Contingencies,' of the 'Notes to Condensed Consolidated Financial Statements'[219] ITEM 1A. Risk Factors There are no new material risk factors to report for the period - No new material risk factors are reported[220] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's common stock repurchase activity for the three months ended September 30, 2021, including the number of shares purchased, average price, and remaining authorization Common Stock Repurchase Activity | Period | Total number of shares purchased | Average Price Paid per Share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares (or approximate dollar value of shares) that may yet be purchased under the plans or programs ($M) | | :------------------------------ | :------------------------------- | :--------------------------- | :---------------------------------------------------------------- | :-------------------------------------------------------------------------------------------------------------------- | | July 1, 2021 - July 31, 2021 | 291,608 | $40.01 | 291,608 | $365.2 | | August 1, 2021 - August 31, 2021 | 540,747 | $43.67 | 540,747 | $341.5 | | September 1, 2021 - September 30, 2021 | 3,251,061 | $47.67 | 3,243,547 | $186.9 | | Total | 4,083,416 | | 4,075,902 | | - On October 28, 2021, the Board of Directors authorized an increase to the share repurchase program, bringing the total authorization to $600.0 million[222] ITEM 3. Defaults upon Senior Securities The Company reported no defaults upon senior securities - No defaults upon senior securities were reported[223] ITEM 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable[224] ITEM 5. Other Information This section indicates that there is no other information to report under this item, referring to Issuer Purchases of Equity Securities - No other information is applicable under this item[225][226] ITEM 6. Exhibits This section provides an index of exhibits filed with the report, including indentures, amendments to credit agreements, CEO/CFO certifications, and XBRL financial statements - Key exhibits include Indenture for 2031 Senior Notes, Amendment No. 5 to the 2019 Credit Agreement, CEO and CFO certifications (pursuant to Sarbanes-Oxley Act), and Inline XBRL formatted financial statements[227] SIGNATURES This section contains the official signatures certifying the accuracy and completeness of the report Report Signatures The report was duly signed on November 3, 2021, by Bhaskar Rao, Executive Vice President and Chief Financial Officer of Tempur Sealy International, Inc - The report was signed on November 3, 2021, by Bhaskar Rao, Executive Vice President and Chief Financial Officer[230]