TEMPUR SEALY INTERNATIONAL, INC. The following discussion and analysis should be read in conjunction with the 2020 Annual Report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in ITEM 7 of Part II of the 2020 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 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 2020 Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2020 Annual Report. Our actual results may differ materially from those contained in any forward-looking statements.
In this discussion and analysis, we discuss and explain the consolidated
financial condition and results of operations for the three and nine months
ended
•an overview of our business and strategy, •results of operations, including our net sales and costs in the periods presented as well as changes between periods; •expected sources of liquidity for future operations; and •our use of certain non-GAAP financial measures.
Business Overview
General
We are committed to improving the sleep of more people, every night, all around the world. As a global leader in the design, manufacture and distribution of bedding products, we know how crucial a good night of sleep is to overall health and wellness. Utilizing over a century of knowledge and industry-leading innovation, we deliver award-winning products that provide breakthrough sleep solutions to consumers in over 100 countries. We operate in two segments:North America and International. These segments are strategic business units that are managed separately based on geography. OurNorth America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in theU.S. ,Canada andMexico . Our International segment consists of Tempur manufacturing and distribution subsidiaries, Sealy distribution subsidiaries, joint ventures and licensees located inEurope ,Asia-Pacific andLatin America (other thanMexico ). OnAugust 2, 2021 , we acquiredDreams Topco Limited and its direct and indirect subsidiaries ("Dreams"), which is included in the International segment. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. We evaluate segment performance based on net sales, gross profit and operating income. For additional information refer to Note 13, "Business Segment Information," included in Part I, ITEM 1 of this Report. 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 our non-branded offerings include value-focused private label OEM products. Our distinct brands allow for complementary merchandising strategies. Our distribution model operates through an omni-channel strategy. We distribute through two channels in each operating business segment: Wholesale and Direct. Our Wholesale channel consists of third-party retailers, including third-party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, online and call centers.
General Business and Economic Conditions
We believe the bedding industry is structured for sustained growth driven by product innovation, consumer confidence, housing formations and population growth. The industry is no longer engaged in uneconomical retail store expansion, startups have shifted from uneconomical strategies to becoming profitable and legacy retailers and manufacturers have become skilled in producing profitable online sales.
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At the outset of the COVID-19 global pandemic we experienced a reduction in
total net sales across both of our business segments in the first quarter of
2020. Our North America business began experiencing sharp declines in total net
sales and orders in mid-March. Order trends reached their lowest point in early
April 2020 when they had declined approximately 80% as compared to the prior
year. North American order trends significantly improved beginning in late May,
and this improvement continued throughout the remainder of 2020. This momentum
has continued as the negative impacts of the COVID-19 pandemic largely subsided
in the first nine months of 2021, as compared to the significant global
disruption experienced throughout early 2020. Our consolidated year-to-date net
sales increased 36.3% as compared to the same period in 2020, which was impacted
by COVID-19. Current order trends continue to indicate growth. As a result, we
expect consolidated net sales growth to exceed 35% for the full year 2021.
Over the past several years and accelerating during the COVID-19 global
pandemic, consumers have shifted their spending habits towards in-home products,
including bedding products. We believe this may be a long-term shift in consumer
spending habits, which could continue to favorably impact our industry. The
rapid increase in demand for bedding products has challenged the entire bedding
industry and supply chain, including our business. In the U.S. , the broad-based
increase in demand coupled with supply chain constraints has created operational
challenges for U.S. production. The availability of certain commodities improved
throughout the third quarter of 2021. However, other key components, as well as
inbound and outbound freight, remain challenged. As a result, the U.S. sales
growth in the first three quarters of 2021 was unfavorably impacted as we could
not fulfill the entire domestic demand for these products. We expect these
constraints to continue to impact sales growth into the fourth quarter of 2021.
We estimate sales would have been approximately $200 million higher in the third
quarter of 2021 had we not experienced supply chain constraints. We expect these
supply chain constraints will be largely resolved by the end of 2021 and expect
to be better positioned to meet consumer demand heading into 2022.
During the first three quarters of 2021, commodity costs unfavorably impacted
our gross margin. We implemented pricing actions in the fourth quarter of 2020
and in the second and third quarters of 2021 to mitigate these known commodity
headwinds. Since then, we have continued to manage through a highly inflationary
commodity environment and we expect to take additional pricing actions to offset
these headwinds in 2022.
While we are unable to determine or predict the nature, duration or scope of the
overall impact the COVID-19 pandemic will have on our business, results of
operations, 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. We will continue to actively monitor the
situation and may take further actions that alter our business operations as may
be required by federal, state or local authorities or that we determine are in
the best interests of our employees, customers, suppliers and stockholders. For
further information regarding the impact of COVID-19 on the Company, please
refer to "Risk Factors" in ITEM 1A of Part I of the 2020 Annual Report.
Acquisition of Dreams
OnAugust 2, 2021 , we completed the acquisition of Dreams, for a cash purchase price of$476.7 million , which included$49.7 million of cash acquired and a working capital adjustment payable of$6.6 million . The transaction was funded using cash on hand and bank financing. Dreams has developed a successful multi-channel sales strategy, with over 200 brick and mortar retail locations in theUnited Kingdom , an industry-leading online channel, as well as manufacturing and delivery assets. As a multi-branded retailer, Dreams sells a variety of products across a range of price points with a margin profile lower than our historical International segment margins. Dreams generated sales of approximately$400 million and earnings before interest, tax, depreciation and amortization ("EBITDA") of approximately$75 million for the year endingDecember 31, 2020 .
Product Launches
During the first quarter of 2021, we completed the launch of our Tempur-Ergo Smart Base Collection with Sleeptracker® technology inNorth America . In 2021, we began the largest rollout inSealy North America's history with the introduction of new Posturepedic Plus™, Posturepedic® and Essentials product lines. The rollout will be split between two phases with Posturepedic® and Essentials product lines successfully launched in the first half of 2021 and the new higher end Posturepedic Plus™ line planned for 2022. We expect to launch a new Tempur product line in our International segment in 2022.
Our global 2021 marketing plan is to aggressively support our innovative bedding products through investing significant marketing dollars to promote our worldwide brands.
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Results of Operations
A summary of our results for the three months ended
•Total net sales increased 20.0% to$1,358.3 million as compared to$1,132.3 million in the third quarter of 2020. On a constant currency basis, which is a non-GAAP financial measure, total net sales increased 19.2%, with an increase of 11.9% in theNorth America business segment and an increase of 71.6% in the International business segment. •Gross margin was 42.5% as compared to 46.8% in the third quarter of 2020. Adjusted gross margin, which is a non-GAAP financial measure, was 46.9% in the third quarter of 2020. There were no adjustments to gross margin in the third quarter of 2021. •Operating income increased 38.6% to$249.8 million as compared to$180.2 million in the third quarter of 2020. Adjusted operating income, which is a non-GAAP financial measure, increased 11.0% to$252.1 million as compared to$227.2 million in the third quarter of 2020. •Net income increased 46.1% to$177.4 million as compared to$121.4 million in the third quarter of 2020. Adjusted net income, which is a non-GAAP financial measure, increased 15.6% to$179.6 million as compared to$155.4 million in the third quarter of 2020. •EBITDA which is a non-GAAP financial measure, increased 5.5% to$295.2 million as compared to$279.9 million in the third quarter of 2020. Adjusted EBITDA, which is a non-GAAP financial measure, increased 6.6% to$297.6 million as compared to$279.3 million in the third quarter of 2020. •Earnings per diluted share ("EPS") increased 52.6% to$0.87 as compared to$0.57 in the third quarter of 2020. Adjusted EPS, which is a non-GAAP financial measure, increased 18.9% to$0.88 as compared to$0.74 in the third quarter of 2020.
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 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 of this Report for a discussion of our foreign currency exchange rate
risk.
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THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2020 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 September 30,
(in millions, except percentages and per share
amounts) 2021 2020
Net sales $ 1,358.3 100.0 % $ 1,132.3 100.0 %
Cost of sales 781.2 57.5 602.1 53.2
Gross profit 577.1 42.5 530.2 46.8
Selling and marketing expenses 243.8 17.9 229.7 20.3
General, administrative and other expenses 90.3 6.6 125.1 11.0
Equity income in earnings of unconsolidated
affiliates (6.8) (0.5) (4.8) (0.4)
Operating income 249.8 18.4 180.2 15.9
Other expense, net:
Interest expense, net 13.5 1.0 20.1 1.8
Loss on extinguishment of debt - - 0.9 0.1
Other expense (income), net 0.1 - (0.5) -
Total other expense, net 13.6 1.0 20.5 1.8
Income from continuing operations before
income taxes 236.2 17.4 159.7 14.1
Income tax provision (58.7) (4.3) (40.3) (3.6)
Income from continuing operations 177.5 13.1 119.4 10.5
(Loss) income from discontinued operations,
net of tax (0.1) - 2.4 0.2
Net income before non-controlling interests 177.4 13.1 121.8 10.8
Less: Net income attributable to
non-controlling interests - - 0.4 -
Net income attributable to Tempur Sealy
International, Inc. $ 177.4 13.1 % $ 121.4 10.7 %
Earnings per common share:
Basic
Earnings per share for continuing operations $ 0.91 $ 0.58
Earnings per share for discontinued operations - 0.01
Earnings per share $ 0.91 $ 0.59
Diluted
Earnings per share for continuing operations $ 0.87 $ 0.56
Earnings per share for discontinued operations - 0.01
Earnings per share $ 0.87 $ 0.57
Weighted average common shares outstanding:
Basic 195.8 206.4
Diluted 203.4 211.6
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NET SALES
Three Months Ended September 30,
2021 2020 2021 2020 2021 2020
(in millions) Consolidated North America InternationalNet sales by channel
Wholesale $ 1,099.2 $ 987.2 $ 991.2 $ 887.1 $ 108.0 $ 100.1
Direct 259.1 145.1 128.8 107.6 130.3 37.5
Total net sales $ 1,358.3 $ 1,132.3 $ 1,120.0 $ 994.7 $ 238.3 $ 137.6 Net sales increased 20.0%, and on a constant currency basis increased 19.2%. The change in net sales was driven by the following:
•North America net sales increased$125.3 million , or 12.6%. On a constant currency basis,North America net sales increased 11.9%. Net sales in the Wholesale channel increased$104.1 million , or 11.7%, primarily driven by broad-based demand across our retail partners. Net sales in the Direct channel increased$21.2 million , or 19.7%, primarily driven by strong company-owned stores sales growth. •International net sales increased$100.7 million , or 73.2%. On a constant currency basis, International net sales increased 71.6%. Net sales in the Wholesale channel increased 6.1% on a constant currency basis. Net sales in the Direct channel increased 246.4% on a constant currency basis, primarily driven by the acquisition of Dreams. GROSS PROFIT Three Months Ended September 30, 2021 2020 Gross (in millions, except percentages) Profit Gross Margin Gross Profit Gross Margin Margin Change North America$ 447.1 39.9 %$ 445.0 44.7 % (4.8) % International 130.0 54.6 % 85.2 61.9 % (7.3) % Consolidated gross margin$ 577.1 42.5 %$ 530.2 46.8 % (4.3) % 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. If sales of our value priced products increase relative to sales of our premium priced products, our gross margins will be negatively impacted in both ourNorth America and International segments. Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes; the cost of raw materials; operational efficiencies due to the utilization in our manufacturing facilities; product, brand, channel and country mix; foreign exchange fluctuations; volume incentives offered to certain retail accounts; participation in our retail cooperative advertising programs; and costs associated with new product introductions. Future changes in raw material prices could have a significant impact on our gross margin. Our margins are also impacted by the growth in our Wholesale channel as sales in our Wholesale channel are at wholesale prices whereas sales in our Direct channel are at retail prices.
Gross margin declined 430 basis points. The primary drivers of changes in gross margin by segment are discussed below:
•North America gross margin declined 480 basis points. The decline in gross
margin was driven by price increases to customers without a margin benefit of
360 basis points, operational inefficiencies of 90 basis points and unfavorable
brand mix of 70 basis points. Our gross margin was impacted as sales increased
with no change in gross profit dollars, as our pricing actions have been
neutralizing the dollar impact of commodities.
•International gross margin declined 730 basis points. The decline in gross
margin was primarily driven by the acquisition of Dreams of 400 basis points and
price increases to customers without a margin benefit of 180 basis points.
Dreams' margin profile is lower than our historical international margins as
they sell a variety of products across a range of price points.
OPERATING EXPENSES
Selling and marketing expenses include advertising and media production
associated with the promotion of our brands, other marketing materials such as
catalogs, brochures, videos, product samples, direct customer mailings and point
of purchase materials and sales force compensation. We also include in selling
and marketing expense certain new product development costs, including market
research and new product testing.
General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.
Three Months Ended
2021 2020 2021 2020 2021 2020 2021 2020
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising expenses $ 111.4 $ 101.2 $ 95.3 $ 91.9 $ 16.1 $ 9.3 $ - $ -
Other selling and marketing
expenses 132.4 128.5 75.4 69.1 50.5 28.7 6.5 30.7
General, administrative and other expenses 90.3 125.1 39.4 48.9 19.9 10.8 31.0 65.4 Total operating expenses$ 334.1 $ 354.8 $ 210.1 $ 209.9 $ 86.5 $ 48.8 $ 37.5 $ 96.1 Operating expenses decreased$20.7 million , or 5.8%, and decreased 670 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained below: •North America operating expenses increased$0.2 million , or 0.1%, and decreased 230 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising and other selling and marketing investments offset by decreased bad debt expense. •International operating expenses increased$37.7 million , or 77.3%, and increased 80 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising and other selling and marketing investments, as well as the acquisition of Dreams. Additionally, we recorded$2.3 million of stamp taxes associated with the acquisition of Dreams.
•Corporate operating expenses decreased
Research and development expenses for the three months ended
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OPERATING INCOME
Three Months Ended
2021 2020
Operating
(in millions, except percentages) Operating Income Operating Margin Income Operating Margin Margin Change
North America $ 237.0 21.2 % $ 235.1 23.6 % (2.4) %
International 50.3 21.1 % 41.2 29.9 % (8.8) %
287.3 276.3
Corporate expenses (37.5) (96.1)
Total operating income $ 249.8 18.4 % $ 180.2 15.9 % 2.5 %
Operating income increased $69.6 million and operating margin improved 250 basis
points. The primary drivers of changes in operating income and operating margin
by segment are discussed below:
•North America operating income increased $1.9 million and operating margin
declined 240 basis points. The decline in operating margin was primarily driven
by the decline in gross margin of 480 basis points offset by favorable operating
expense leverage of 220 basis points.
•International operating income increased $9.1 million and operating margin
declined 880 basis points. The decline in operating margin was primarily driven
by the decline in gross margin of 730 basis points and unfavorable operating
expense leverage. Additionally, we recorded $2.3 million of stamp taxes
associated with the acquisition of Dreams.
•Corporate operating expenses decreased $58.6 million , which positively impacted
our consolidated operating margin by 430 basis points. The decrease in operating
expenses was primarily driven by decreased amortization for the Company's
aspirational plan and other stock-based compensation.
INTEREST EXPENSE, NET
Three Months Ended September 30,
(in millions, except percentages) 2021 2020 % Change
Interest expense, net $ 13.5 $ 20.1 (32.8) %
Interest expense, net, decreased $6.6 million , or 32.8%. The decrease in
interest expense, net, was primarily driven by lower interest rates on our debt.
INCOME TAX PROVISION
Three Months Ended September 30,
(in millions, except percentages) 2021 2020 % Change
Income tax provision $ 58.7 $ 40.3 45.7 %
Effective tax rate 24.9 % 25.2 %
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 increased $18.4 million due to an increase in income
before income taxes. Our effective tax rate for the three months ended
September 30, 2021 as compared to the same prior year period decreased by 30
basis points. The effective tax rate as compared to the U.S. federal statutory
rate for the three months ended September 30, 2021 included the favorable impact
of the deductibility of stock compensation in the U.S. and included a net
unfavorable impact of other discrete items. The effective tax rate as compared
to the U.S. federal statutory tax rate for the three months ended September 30,
2020 also included a net favorable impact of discrete items.
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NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2020 The following table sets forth the various components of our Condensed Consolidated Statements of Income, and expresses each component as a percentage of net sales:
Nine Months Ended September 30,
(in millions, except percentages and per share
amounts) 2021 2020
Net sales $ 3,571.2 100.0 % $ 2,619.9 100.0 %
Cost of sales 2,017.0 56.5 1,466.7 56.0
Gross profit 1,554.2 43.5 1,153.2 44.0
Selling and marketing expenses 658.3 18.4 535.8 20.5
General, administrative and other expenses 254.9 7.1 288.1 11.0
Equity income in earnings of unconsolidated
affiliates (20.5) (0.6) (9.6) (0.4)
Operating income 661.5 18.5 338.9 12.9
Other expense, net:
Interest expense, net 45.8 1.3 61.0 2.3
Loss on extinguishment of debt 23.0 0.6 0.9 -
Other (income) expense, net (0.3) - 0.3 -
Total other expense, net 68.5 1.9 62.2 2.4
Income from continuing operations before income
taxes 593.0 16.6 276.7 10.6
Income tax provision (143.9) (4.0) (73.2) (2.8)
Income from continuing operations 449.1 12.6 203.5 7.8
(Loss) income from discontinued operations, net
of tax (0.6) - 1.3 -
Net income before non-controlling interests 448.5 12.6 204.8 7.8
Less: Net (loss) income attributable to
non-controlling interests (0.2) - 0.7 -
Net income attributable to Tempur Sealy
International, Inc. $ 448.7 12.6 % $ 204.1 7.8 %
Earnings per common share:
Basic
Earnings per share for continuing operations $ 2.26 $ 0.97
Earnings per share for discontinued operations - 0.01
Earnings per share $ 2.26 $ 0.98
Diluted
Earnings per share for continuing operations $ 2.18 $ 0.96
Earnings per share for discontinued operations - 0.01
Earnings per share $ 2.18 $ 0.97
Weighted average common shares outstanding:
Basic 198.9 208.8
Diluted 205.9 211.6
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NET SALES
Nine Months Ended September 30,
2021 2020 2021 2020 2021 2020
(in millions) Consolidated North America International
Net sales by channel
Wholesale $ 2,986.0 $ 2,273.3 $ 2,647.5 $ 2,014.6 $ 338.5 $ 258.7
Direct 585.2 346.6 369.6 251.0 215.6 95.6
Total net sales $ 3,571.2 $ 2,619.9 $ 3,017.1 $ 2,265.6 $ 554.1 $ 354.3 Net sales increased 36.3%, and on a constant currency basis increased 34.6%. The change in net sales was driven by the following:
•North America net sales increased$751.5 million , or 33.2%. Net sales in the Wholesale channel increased$632.9 million , or 31.4%, primarily driven by broad-based demand across our retail partners. Net sales in the Direct channel increased$118.6 million , or 47.3%, primarily driven by strong company-owned sales growth and higher retail sales volume compared to the prior year period, which was impacted by COVID-19. •International net sales increased$199.8 million , or 56.4%. On a constant currency basis, International net sales increased 48.6%. Net sales in the Wholesale channel increased 22.7% on a constant currency basis. Net sales in the Direct channel increased 118.9% on a constant currency basis, primarily driven by the acquisition of Dreams. The increase in net sales across all channels was driven by higher sales volume compared to the prior year period, which was impacted by COVID-19. GROSS PROFIT Nine Months Ended September 30, 2021 2020 (in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change North America$ 1,236.4 41.0 %$ 944.6 41.7 % (0.7) % International 317.8 57.4 % 208.6 58.9 % (1.5) % Consolidated gross margin$ 1,554.2 43.5 %$ 1,153.2 44.0 % (0.5) % Costs associated with net sales are recorded in cost of sales and include the costs of producing, shipping, warehousing, receiving and inspecting goods during the period, as well as depreciation and amortization of long-lived assets used in the manufacturing process.
Gross margin declined 50 basis points. The primary drivers of changes in gross margin by segment are discussed below:
•North America gross margin declined 70 basis points. The decline in gross margin was primarily driven by price increases to customers without a margin benefit of 210 basis points offset by fixed cost leverage on higher sales volumes of 110 basis points. Our gross margin was impacted as sales increased with no change in gross profit dollars, as our pricing actions have been neutralizing the dollar impact of commodities. Additionally, in 2020, we incurred$4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which was not repeated in 2021. •International gross margin declined 150 basis points. The decline in gross margin was primarily driven by the acquisition of Dreams of 180 basis points. Dreams' margin profile is lower than our historical international margins as they sell a variety of products across a range of price points. 31
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OPERATING EXPENSES
Selling and marketing expenses include advertising and media production
associated with the promotion of our brands, other marketing materials such as
catalogs, brochures, videos, product samples, direct customer mailings and point
of purchase materials and sales force compensation. We also include in selling
and marketing expense certain new product development costs, including market
research and new product testing.
General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.
Nine Months Ended
2021 2020 2021 2020 2021 2020 2021 2020
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising expenses $ 310.3 $ 229.8 $ 271.8 $ 205.7 $ 38.5 $ 24.1 $ - $ -
Other selling and marketing
expenses 348.0 306.0 214.2 187.8 114.5 81.4 19.3 36.8
General, administrative and other expenses 254.9 288.1 122.6 146.7 45.4 33.8 86.9
107.6
Total operating expenses
$ 540.2 $ 198.4 $ 139.3 $ 106.2 $ 144.4 Operating expenses increased$89.3 million , or 10.8%, and decreased 580 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained below: •North America operating expenses increased$68.4 million , or 12.7%, and decreased 360 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising and other selling and marketing investments, offset by incremental bad debt expense primarily related to the bankruptcy of one department store in theU.S. in 2020. Additionally, in 2020, we recorded$11.7 million of customer-related charges in connection with the bankruptcy ofArt Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account and$7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the macro-economic environment, which were not repeated in 2021. •International operating expenses increased$59.1 million , or 42.4%, and decreased 350 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising and other selling and marketing investments, as well as the acquisition of Dreams. We also recorded$2.3 million of stamp taxes associated with the acquisition of Dreams. Additionally, in 2020, we incurred$3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and$2.6 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items, which were not repeated in 2021. •Corporate operating expenses decreased$38.2 million , or 26.5%. The decrease in operating expenses was primarily driven by amortization for the Company's aspirational plan and other stock-based compensation. Additionally, we recorded$3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams.
Research and development expenses were
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OPERATING INCOME
Nine Months Ended September 30,
2021 2020
(in millions, except Operating
percentages) Operating Income Operating Margin Income Operating Margin Margin Change
North America $ 627.8 20.8 % $ 404.4 17.8 % 3.0 %
International 139.9 25.2 % 78.9 22.3 % 2.9 %
767.7 483.3
Corporate expenses (106.2) (144.4)
Total operating income $ 661.5 18.5 % $ 338.9 12.9 % 5.6 %
Operating income increased $322.6 million and operating margin improved 560
basis points. The primary drivers of changes in operating income and operating
margin by segment are discussed below:
•North America operating income increased $223.4 million and operating margin
improved 300 basis points. The improvement in operating margin was primarily
driven by improved operating expense leverage of 240 basis points and decreased
customer-related charges, offset by the decline in gross margin of 70 basis
points. In 2020, we recorded $11.7 million of customer-related charges in
connection with the bankruptcy of Art Van Furniture, LLC and affiliates.
Additionally, in 2020, we recorded $7.0 million of asset impairment charges
related to the write-off of certain sales and marketing assets driven by the
macro-economic environment and incurred $4.1 million of incremental costs
related to global pandemic relief efforts, sanitation supplies and services and
other items, which were not repeated in 2021.
•International operating income increased $61.0 million and operating margin
improved 290 basis points. The improvement in operating margin was primarily
driven by improved operating expense leverage of 210 basis points, the decline
in gross margin of 150 basis points. Additionally, in 2020, we incurred
$3.8 million of restructuring costs associated with headcount reductions driven
by the macro-economic environment and $3.1 million of incremental costs related
to global pandemic relief efforts, sanitation supplies and services and other
items, which were not repeated in 2021.
•Corporate operating expenses decreased $38.2 million , which positively impacted
our consolidated operating margin by 110 basis points. The decrease in operating
expenses was primarily driven by amortization for the Company's aspirational
plan and other stock-based compensation. Additionally, we recorded $3.9 million
of acquisition-related costs, primarily related to legal and professional fees
associated with the acquisition of Dreams.
INTEREST EXPENSE, NET
Nine Months Ended September 30,
(in millions, except percentages) 2021 2020 % Change
Interest expense, net $ 45.8 $ 61.0 (24.9) %
Interest expense, net, decreased
LOSS ON EXTINGUISHMENT OF DEBT
On March 25, 2021 , we issued our 2029 Senior Notes. During the second quarter of
2021, we used the net proceeds from the 2029 Senior Notes primarily to redeem in
full our $600.0 million 2026 Senior Notes, at 102.75% of their principal amount,
plus the accrued and unpaid interest. As a result of the redemption, we
recognized $18.0 million of loss on extinguishment of debt, which included a
prepayment premium of $16.5 million and the write-off of $1.5 million of
deferred financing costs. Additionally, in the first quarter of 2021, we
recognized $5.0 million of loss on extinguishment of debt, which includes a
prepayment premium of $3.5 million and the write-off of $1.5 million of deferred
financing costs, associated with the redemption of the remaining amount
outstanding of the 2023 Senior Notes. Refer to Note 5, "Debt," in our Notes to
Condensed Consolidated Financial Statements included in ITEM 1 under Part I for
additional information.
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INCOME TAX PROVISION
Nine Months Ended September 30,
(in millions, except percentages) 2021 2020 % Change
Income tax provision $ 143.9 $ 73.2 96.6 %
Effective tax rate 24.3 % 26.5 %
Our income tax provision increased $70.7 million due to an increase in income
before income taxes. Our effective tax rate for the nine months ended September
30, 2021 as compared to the same prior year period decreased 220 basis points.
The effective tax rate as compared to the U.S. federal statutory rate for the
nine months ended September 30, 2021 included the favorable impact of the
deductibility of stock compensation in the U.S. and included a net unfavorable
impact of other discrete items. The effective tax rate as compared to the U.S.
federal statutory rate for the for the nine months ended September 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.
Liquidity and Capital Resources
Liquidity
Our principal sources of funds are cash flows from operations, supplemented with borrowings in the capital markets and made pursuant to our credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, acquisitions, payments of dividends to our shareholders, capital expenditures and working capital needs. As ofSeptember 30, 2021 , we had net working capital of$323.4 million , including cash and cash equivalents of$503.3 million , as compared to a working capital deficit of$6.4 million , including cash and cash equivalents of$65.0 million , as ofDecember 31, 2020 . AtSeptember 30, 2021 , total cash and cash equivalents were$503.3 million , of which$369.8 million was held in theU.S. and$133.5 million was held by subsidiaries outside of theU.S. The amount of cash and cash equivalents held by subsidiaries outside of theU.S. and not readily convertible into theU.S. Dollar or other major foreign currencies is not material to our overall liquidity or financial position.
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:
Nine Months Ended September 30,
(in millions) 2021 2020Net cash provided by (used in) continuing operations: Operating activities
$ 597.5 $ 497.9
Investing activities (508.0) (111.4)
Financing activities 356.4 (228.5)
Cash provided by operating activities from continuing operations increased $99.6
million in the nine months ended September 30, 2021 as compared to the same
period in 2020. The increase in cash provided by operating activities was driven
by strong operational performance in the period.
Cash used in investing activities from continuing operations increased $396.6
million in the nine months ended September 30, 2021 as compared to the same
period in 2020. The increase in cash used in investing activities was due to the
acquisition of Dreams, which occurred in the third quarter of 2021.
Cash provided by financing activities from continuing operations increased
$584.9 million in the nine months ended September 30, 2021 as compared to the
same period in 2020. For the nine months ended September 30, 2021 , we had net
funding of $988.4 million as compared to net borrowings of $21.0 million in 2020
on our credit facilities. This increase included proceeds of $1.6 billion from
the issuance of our 2029 and 2031 Senior Notes, offset by repayments of $250.0
million of our 2023 Senior Notes and $600.0 million of our 2026 Senior Notes and
net borrowings of $238.4 million on our credit facilities. During the nine
months ended September 30, 2021 and 2020, we repurchased $565.8 million and
$199.6 million , respectively, of our common stock. Cash provided by financing
activities also decreased due to dividends paid to shareholders of $45.8 million
and payment of deferred financing costs of $25.3 million during the nine months
ended September 30, 2021 .
Cash Provided by (Used in) Discontinued Operations
Net cash provided by (used in) operating, investing and financing activities from discontinued operations for the periods endedSeptember 30, 2021 and 2020 was not material. Capital Expenditures Capital expenditures totaled$82.1 million and$73.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. We currently expect our 2021 capital expenditures to be approximately$140 million to$150 million , which includes manufacturing capacity expansion and investments in our other growth initiatives. Indebtedness Our total debt increased to$2,361.7 million as ofSeptember 30, 2021 from$1,370.3 million as ofDecember 31, 2020 . OnNovember 9, 2020 , we redeemed$200.0 million of our issued and outstanding 2023 Senior Notes at 101.406% of their principal amount, plus the accrued and unpaid interest. During the first quarter of 2021, we redeemed the remaining$250.0 million of our 2023 Senior Notes, principally funded by our revolving credit facility, at 101.406% of the principal amount, plus the accrued and unpaid interest. OnFebruary 2, 2021 we entered into an amendment to our 2019 Credit Agreement, which increased our revolving credit facility from$425.0 million to$725.0 million . Total availability under our revolving senior secured credit facility was$724.9 million as ofSeptember 30, 2021 , which matures in 2024. OnMarch 25, 2021 , we issued the 2029 Senior Notes. The 2029 Senior Notes mature onApril 15, 2029 and 4.00% interest is payable semi-annually in arrears on eachApril 15 andOctober 15 , beginning onOctober 15, 2021 . OnJune 15, 2021 , we redeemed our$600.0 million 2026 Senior Notes, in full, using net proceeds from our 2029 Senior Notes. Additionally, onMay 26, 2021 , we entered into an amendment to our 2019 Credit Agreement. The amendment provides for a$300.0 million delayed draw term loan. OnJuly 30, 2021 we drew down the full$300.0 million available under the delayed draw term loan to fund, in part, the Dreams acquisition.
On
OnSeptember 24, 2021 , we issued the 2031 Senior Notes. The 2031 Senior Notes mature onOctober 15, 2031 and 3.875% interest is payable semi-annually in arrears on eachApril 15 andOctober 15 , beginning onApril 15, 2022 . Refer to Note 5, "Debt" in our "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1 for further discussion of our debt. As ofSeptember 30, 2021 , our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 1.68 times. This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio as set forth in the 2019 Credit Agreement, which limits this ratio to 5.00 times. As ofSeptember 30, 2021 , we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances. Our debt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends. The 2019 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, remains below 3.50 times. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.50 times. The limit on restricted payments under the 2019 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted. For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated indebtedness less netted cash to adjusted EBITDA calculated in accordance with the 2019 Credit Agreement. Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 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.
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. OnFebruary 11, 2021 , the Board of Directors authorized an increase of$211.4 million , to the existing share repurchase authorization ofTempur Sealy International's common stock. OnApril 29, 2021 , the Board of Directors authorized an additional increase, of$325.3 million , to the share repurchase authorization. During the nine months endedSeptember 30, 2021 , we repurchased 14.1 million shares under our share repurchase program for$551.4 million . As ofSeptember 30, 2021 , we had$186.9 million remaining under our share repurchase authorization. OnOctober 28, 2021 , the Board of Directors authorized an additional increase to the share repurchase authorization bringing the total authorization to$600.0 million . Share repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate. These repurchases may be funded by operating cash flows and/or borrowings under our debt arrangements. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program is subject to certain limitations under our debt agreements. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities ," in the 2020 Annual Report. Please also refer to "Issuer Purchases ofEquity Securities " in ITEM 2(c) of Part II of this Report. Future Liquidity Sources and Uses As ofSeptember 30, 2021 , we had$1,397.3 million of liquidity, including$503.3 million of cash on hand,$724.9 million available under our revolving senior secured credit facility and$169.1 million available under our accounts receivable securitization. In addition, we expect to generate significant cash flow from operations in the full year 2021. We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for our foreseeable working capital needs, necessary capital expenditures and debt service obligations. Our capital allocation strategy follows a balanced approach focused on supporting the business, returning shareholder value through share repurchases and quarterly dividends as well as opportunistic and strategic acquisition opportunities that enhance our global competitiveness. Additionally, we have taken capital structure actions to optimize our balance sheet, through extending the maturities of our long-term debt and lowering our annualized interest expense. For the third quarter of 2021, the Board of Directors has declared a dividend of$0.09 per share. The dividend is payable onNovember 23, 2021 to shareholders of record as ofNovember 11, 2021 . As ofSeptember 30, 2021 , we had$2,361.7 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of$1,859.7 million . Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 1.68 times for the trailing twelve months endedSeptember 30, 2021 . Our target range for our ratio of consolidated indebtedness less netted cash, which is a non-GAAP financial measure, is 2.0 to 3.0 times. Total cash interest payments related to our borrowings are expected to be approximately$55 million in 2021. 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" contained in ITEM 1A of Part I of the 2020 Annual 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 EBITDA, consolidated indebtedness and consolidated indebtedness less netted cash, which are not recognized terms under GAAP and do not purport to be alternatives to net income, earnings per share, gross profit, gross margin, operating income (expense), operating margin or an alternative to total debt as a measure of liquidity. We believe these non-GAAP financial measures provide investors with performance measures that better reflect our underlying operations and trends, providing a perspective not immediately apparent from net income, gross profit, gross margin, operating income (expense) and operating margin. The adjustments we make to derive the non-GAAP financial measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP financial measure, but which we do not consider to be the fundamental attributes or primary drivers of our business. We believe that exclusion of these items assists in providing a more complete understanding of our underlying results from continuing operations and trends, and we use these measures along with the corresponding GAAP financial measures to manage our business, to evaluate our consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP 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 reported net income to adjusted net income and the calculation of adjusted EPS is provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months endedSeptember 30, 2021 and 2020: Three Months Ended (in millions, except per share amounts) September 30, 2021 September 30, 2020 Net income$ 177.4 $ 121.4 Loss (income) from discontinued operations, net of tax (1) 0.1 (2.4) Acquisition-related costs (2) 2.3 - Aspirational plan amortization (3) - 45.2 Loss on extinguishment of debt (4) - 0.9 Accounting standard adoption (5) - 0.8 Facility expansion costs (6) - 0.6 Restructuring costs (7) - 0.4 Tax adjustments (8) (0.2) (11.5) Adjusted net income$ 179.6 $ 155.4 Adjusted earnings per share, diluted $ 0.88 $ 0.74 Diluted shares outstanding 203.4 211.6 34
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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
2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted
financial measures for covenant compliance purposes.
(2) In the third quarter of 2021, we recorded
(3) In the third quarter of 2020, we recognized
compensation amortization related to our long-term aspirational awards.
(4) In the third quarter of 2020, we recognized
debt associated with the early repayment of the 364-day term loan.
(5) In the third quarter of 2020, we recorded
adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)".
(6) In the third quarter of 2020, we recorded
of a Sealy manufacturing facility.
(7) In the third quarter of 2020, we incurred
with International headcount reductions driven by the macro-economic environment.
(8) Adjusted income tax provision represents the tax effects associated with the
aforementioned items.
Adjusted Gross Profit, Adjusted Gross Margin, Adjusted Operating Income (Expense) and Adjusted Operating Margin
A reconciliation of gross profit and gross margin to adjusted gross profit and adjusted gross margin, respectively, and operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth our reported gross profit and the reconciliation of the Company's operating income (expense) to the calculation of adjusted operating (income) expense for the three months endedSeptember 30, 2021 . We had no adjustments to gross profit for the three months endedSeptember 30, 2021 .
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