TEMPUR SEALY INTERNATIONAL, INC. The following discussion and analysis should be read in conjunction with the 2021 Annual Report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in ITEM 7 of Part II of the 2021 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 2021 Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2021 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 leading designer, manufacturer, distributor and retailer of bedding products worldwide, 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 manufacturing and distribution subsidiaries, joint ventures and licensees located in theU.S. ,Canada andMexico . Our International segment consists of manufacturing and 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"). Dreams is also 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 12, "Business Segment Information," included in Part I, ITEM 1 of this Report. Our highly recognized brands include Tempur-Pedic®, Sealy® and Stearns & Foster® and our non-branded offerings consist of value-focused private label and OEM products. Our products allow for complementary merchandising strategies and are sold through third-party retailers, our more than 650 company-owned and joint venture operated retail stores worldwide and our e-commerce channel. 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, sleep technology advancements, 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.
Over the last decade, consumers have made the connection between a good night's
sleep and overall health and wellness. As consumers make this connection they
are willing to invest more in their bedding purchases, which positions us well
for long-term growth.
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In the near term, we continue to see impacts on global consumer behavior from macroeconomic pressures, particularly from strong inflation and a sense of economic uncertainty. While we do not have any operations inUkraine orRussia , the war inUkraine has affected both international and domestic markets. The war has introduced elements of risk into the supply chain and is affecting global consumer confidence. While we have taken actions that we believe have largely mitigated our broader supply chain risk, the decline in consumer confidence has impacted our order trends, which we expect to continue. In the second quarter of 2022, we implemented our global enterprise resource planning ("ERP") system at all Sealy domestic manufacturing facilities. This transition unfavorably impacted our results for the Sealy business in ourNorth America segment for the first nine months of 2022, which we expect to improve in the fourth quarter. The implementation of our common ERP system is expected to drive long-term efficiencies for our global operations, enhance cybersecurity, facilitate customer communications regarding order status and improve our direct-to-consumer capabilities. The COVID-19 global pandemic continues to impact our global operations as variants appear in the markets in which we operate. COVID-19 variants in our Asian markets and the resulting government mandated lockdowns may negatively impact our wholly-owned and joint-venture operations in the region. Our recent actions to expand capacity, diversify our supplier base, increase our safety stock and improve vendor and customer communications have strengthened our supply chain, putting us in a more favorable position to meet consumer demand. Though geopolitical and pandemic-related disruptions continue to create challenges, we believe the many actions we have taken to further insulate our supply chain have largely mitigated their impact.
Product Launches
In the second quarter of 2022, we completed the rollout of our North American Sealy portfolio featuring new models in our Posturepedic PlusTM, Posturepedic® and Essentials product lines. We also launched our Sealy Naturals eco-friendly mattress collection designed with sustainability and environmental preservation in mind. In the fourth quarter of 2022, we began a rollout of a complete refresh of our North American Stearns & Foster® portfolio, and launched the Sealy FlexGrid™ mattress line with a best-in-class pressure-relieving gel grid layer at a consumer-appealing, mid-market price point. In 2023, we plan to introduce a new line of Tempur® Breeze products, along with a new line of adjustable bases with incremental consumer-focused features and benefits in ourNorth America segment. In our International segment, we plan to launch an all-new line of Tempur® products inEurope andAsia-Pacific with the objective of reaching a new segment of international consumers. This new line of products will broaden Tempur®'s price range with the super-premium average selling price ceiling maintained and the floor expanded into the premium category. Our global 2022 marketing plan is to support our innovative bedding products through investing significant marketing dollars to promote our worldwide brands and product launches. Acquisition of Dreams OnAugust 2, 2021 , we completed the acquisition of Dreams, for a cash purchase price of$476.7 million , which included$49.5 million of cash acquired. The transaction was funded using cash on hand and bank financing. 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. 22 -------------------------------------------------------------------------------- Table of Contents Results of Operations
A summary of our results for the three months ended
•Total net sales decreased 5.5% to$1,283.3 million as compared to$1,358.3 million in the third quarter of 2021. On a constant currency basis, which is a non-GAAP financial measure, total net sales decreased 3.1%, with a decrease of 5.4% in theNorth America business segment and an increase of 7.4% in the International business segment. •Gross margin was 42.2% as compared to 42.5% in the third quarter of 2021. Adjusted gross margin, which is a non-GAAP financial measure, was 42.5% in the third quarter of 2022. There were no adjustments to gross margin in the third quarter of 2021. •Operating income decreased 19.5% to$201.0 million as compared to$249.8 million in the third quarter of 2021. Adjusted operating income, which is a non-GAAP financial measure, was$206.7 million as compared to$252.1 million in the third quarter of 2021. •Net income decreased 25.2% to$132.7 million as compared to$177.4 million in the third quarter of 2021. Adjusted net income, which is a non-GAAP financial measure, decreased 23.3% to$137.8 million as compared to$179.6 million in the third quarter of 2021. •EBITDA, which is a non-GAAP financial measure, decreased 16.9% to$245.4 million as compared to$295.2 million in the third quarter of 2021. Adjusted EBITDA, which is a non-GAAP financial measure, decreased 15.4% to$251.9 million as compared to$297.6 million in the third quarter of 2021. •Earnings per diluted share ("EPS") decreased 13.8% to$0.75 as compared to$0.87 in the third quarter of 2021. Adjusted EPS, which is a non-GAAP financial measure, decreased 11.4% to$0.78 as compared to$0.88 in the third quarter of 2021.
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, 2022 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2021 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) 2022 2021
Net sales $ 1,283.3 100.0 % $ 1,358.3 100.0 %
Cost of sales 742.2 57.8 781.2 57.5
Gross profit 541.1 42.2 577.1 42.5
Selling and marketing expenses 248.3 19.3 243.8 17.9
General, administrative and other expenses 96.7 7.5 90.3 6.6
Equity income in earnings of unconsolidated
affiliates (4.9) (0.4) (6.8) (0.5)
Operating income 201.0 15.7 249.8 18.4
Other expense, net:
Interest expense, net 26.8 2.1 13.5 1.0
Other (income) expense, net (0.9) (0.1) 0.1 -
Total other expense, net 25.9 2.0 13.6 1.0
Income from continuing operations before
income taxes 175.1 13.6 236.2 17.4
Income tax provision (41.1) (3.2) (58.7) (4.3)
Income from continuing operations 134.0 10.4 177.5 13.1
Loss from discontinued operations, net of tax (0.8) (0.1) (0.1) -
Net income before non-controlling interests 133.2 10.3 177.4 13.1
Less: Net income attributable to
non-controlling interests 0.5 - - -
Net income attributable to Tempur Sealy
International, Inc. $ 132.7 10.3 % $ 177.4 13.1 %
Earnings per common share:
Basic
Earnings per share for continuing operations $ 0.78 $ 0.91
Loss per share for discontinued operations (0.01) -
Earnings per share $ 0.77 $ 0.91
Diluted
Earnings per share for continuing operations $ 0.75 $ 0.87
Loss per share for discontinued operations - -
Earnings per share $ 0.75 $ 0.87
Weighted average common shares outstanding:
Basic 171.9 195.8
Diluted 177.0 203.4
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NET SALES
Three Months Ended September 30,
2022 2021 2022 2021 2022 2021
(in millions) Consolidated North America InternationalNet sales by channel
Wholesale $ 1,003.2 $ 1,099.2 $ 918.1 $ 991.2 $ 85.1 $ 108.0
Direct 280.1 259.1 139.6 128.8 140.5 130.3
Total net sales $ 1,283.3 $ 1,358.3 $ 1,057.7 $ 1,120.0 $ 225.6 $ 238.3 Net sales decreased 5.5%, and on a constant currency basis decreased 3.1%. The change in net sales was driven by the following:
•North America net sales decreased
•International net sales decreased$12.7 million , or 5.3%, primarily due to unfavorable foreign exchange. On a constant currency basis, International net sales increased 7.4%. Net sales in the Wholesale channel decreased 9.3% on a constant currency basis. Net sales in the Direct channel increased 21.3% on a constant currency basis, primarily driven by the acquisition of Dreams inAugust 2021 . GROSS PROFIT Three Months Ended September 30, 2022 2021 Gross (in millions, except percentages) Profit Gross Margin Gross Profit Gross Margin Margin Change North America$ 420.7 39.8 %$ 447.1 39.9 % (0.1) % International 120.4 53.4 % 130.0 54.6 % (1.2) % Consolidated gross margin$ 541.1 42.2 %$ 577.1 42.5 % (0.3) % 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 premium or value products. Our value products have a
significantly lower gross margin than our premium 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 our
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 30 basis points. The primary drivers of changes in gross margin by segment are discussed below:
•North America gross margin declined 10 basis points. The decline in gross margin was primarily driven by operational investments to service our customers of 200 basis points. Additionally, we incurred$2.3 million of manufacturing facility ERP system transition costs and$1.7 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in theU.S. , which contributed to the decline in gross margin. These declines were partially offset by pricing actions to offset commodity inflation of 130 basis points and favorable brand mix of 110 basis points. •International gross margin declined 120 basis points. The decline in gross margin was primarily driven by unfavorable mix of 120 basis points and unfavorable foreign exchange. 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
2022 2021 2022 2021 2022 2021 2022 2021
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising expenses $ 115.1 $ 111.4 $ 99.7 $ 95.3 $ 15.4 $ 16.1 $ - $ -
Other selling and marketing
expenses 133.2 132.4 71.3 75.4 56.8 50.5 5.1 6.5
General, administrative and other expenses 96.7 90.3 44.7 39.4 20.5 19.9 31.5 31.0 Total operating expenses$ 345.0 $ 334.1 $ 215.7 $ 210.1 $ 92.7 $ 86.5 $ 36.6 $ 37.5 Operating expenses increased$10.9 million , or 3.3%, and increased 230 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$5.6 million , or 2.7%, and increased 160 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by investments in advertising and expansion of our company-owned store strategy. Additionally, we incurred$0.4 million of professional fees related to the manufacturing facility ERP system transition. These investments were partially offset by decreased variable compensation expense. •International operating expenses increased$6.2 million , or 7.2%, and increased 480 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by the acquisition of Dreams inAugust 2021 . Additionally, we incurred$0.6 million of restructuring costs associated with headcount reductions.
•Corporate operating expenses decreased
Research and development expenses for the three months ended
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OPERATING INCOME
Three Months Ended
2022 2021
Operating
(in millions, except percentages) Operating Income Operating Margin Income Operating Margin Margin Change
North America $ 205.0 19.4 % $ 237.0 21.2 % (1.8) %
International 32.6 14.5 % 50.3 21.1 % (6.6) %
237.6 287.3
Corporate expenses (36.6) (37.5)
Total operating income $ 201.0 15.7 % $ 249.8 18.4 % (2.7) %
Operating income decreased $48.8 million and operating margin declined 270 basis
points. The primary drivers of changes in operating income and operating margin
by segment are discussed below:
•North America operating income decreased $32.0 million and operating margin
declined 180 basis points. The decline in operating margin was primarily driven
by operating expense deleverage of 160 basis points and the decline in gross
margin.
•International operating income decreased $17.7 million and operating margin
declined 660 basis points. The decline in operating margin was driven by
operating expense deleverage of 480 basis points, the decline in gross margin of
120 basis points, and the decline in Asia joint venture performance due to
COVID-19 related shutdowns.
•Corporate operating expenses decreased
INTEREST EXPENSE, NET
Three Months Ended September 30,
(in millions, except percentages) 2022 2021 % Change
Interest expense, net $ 26.8 $ 13.5 98.5 %
Interest expense, net, increased
INCOME TAX PROVISION
Three Months Ended September 30,
(in millions, except percentages) 2022 2021 % Change
Income tax provision $ 41.1 $ 58.7 (30.0) %
Effective tax rate 23.5 % 24.9 %
Our income tax provision includes income taxes associated with taxes currently
payable and deferred taxes and includes the impact of net operating losses for
certain of our foreign operations.
Our income tax provision decreased $17.6 million due to a decrease in income
before income taxes. Our effective tax rate for the three months ended
September 30, 2022 as compared to the same prior year period declined by 140
basis points. The effective tax rate as compared to the U.S. federal statutory
rate for the three months ended September 30, 2022 included the net favorable
impact of discrete items. The effective tax rate as compared to the U.S. federal
statutory tax rate for the three months ended 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.
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NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2021 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) 2022 2021
Net sales $ 3,733.8 100.0 % $ 3,571.2 100.0 %
Cost of sales 2,173.4 58.2 2,017.0 56.5
Gross profit 1,560.4 41.8 1,554.2 43.5
Selling and marketing expenses 744.7 19.9 658.3 18.4
General, administrative and other expenses 296.6 7.9 254.9 7.1
Equity income in earnings of unconsolidated
affiliates (14.4) (0.4) (20.5) (0.6)
Operating income 533.5 14.3 661.5 18.5
Other expense, net:
Interest expense, net 71.4 1.9 45.8 1.3
Loss on extinguishment of debt - - 23.0 0.6
Other income, net (1.5) - (0.3) -
Total other expense, net 69.9 1.9 68.5 1.9
Income from continuing operations before income
taxes 463.6 12.4 593.0 16.6
Income tax provision (107.5) (2.9) (143.9) (4.0)
Income from continuing operations 356.1 9.5 449.1 12.6
Loss from discontinued operations, net of tax (0.8) - (0.6) -
Net income before non-controlling interests 355.3 9.5 448.5 12.6
Less: Net income (loss) attributable to
non-controlling interests 1.3 - (0.2) -
Net income attributable to Tempur Sealy
International, Inc. $ 354.0 9.5 % $ 448.7 12.6 %
Earnings per common share:
Basic
Earnings per share for continuing operations $ 2.01 $ 2.26
Loss per share for discontinued operations - -
Earnings per share $ 2.01 $ 2.26
Diluted
Earnings per share for continuing operations $ 1.95 $ 2.18
Loss per share for discontinued operations - -
Earnings per share $ 1.95 $ 2.18
Weighted average common shares outstanding:
Basic 176.2 198.9
Diluted 181.5 205.9
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NET SALES
Nine Months Ended September 30,
2022 2021 2022 2021 2022 2021
(in millions) Consolidated North America International
Net sales by channel
Wholesale $ 2,866.4 $ 2,986.0 $ 2,577.2 $ 2,647.5 $ 289.2 $ 338.5
Direct 867.4 585.2 376.6 369.6 490.8 215.6
Total net sales $ 3,733.8 $ 3,571.2 $ 2,953.8 $ 3,017.1 $ 780.0 $ 554.1 Net sales increased 4.6%, and on a constant currency basis increased 6.3%. The change in net sales was driven by the following:
•North America net sales decreased$63.3 million , or 2.1%. Net sales in the Wholesale channel decreased$70.3 million , or 2.7%, primarily driven by macroeconomic pressures impactingU.S. consumer behavior and the unfavorable impact of our ERP system transition. Net sales in the Direct channel increased$7.0 million , or 1.9%. •International net sales increased$225.9 million , or 40.8%. On a constant currency basis, International net sales increased 50.9%. Net sales in the Wholesale channel decreased 5.4% on a constant currency basis. Net sales in the Direct channel increased 139.2% on a constant currency basis, primarily driven by the acquisition of Dreams inAugust 2021 . GROSS PROFIT Nine Months Ended September 30, 2022 2021 (in millions, except percentages) Gross Profit Gross Margin Gross Profit Gross Margin Margin Change North America$ 1,138.9 38.6 %$ 1,236.4 41.0 % (2.4) % International 421.5 54.0 % 317.8 57.4 % (3.4) % Consolidated gross margin$ 1,560.4 41.8 %$ 1,554.2 43.5 % (1.7) % 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 170 basis points. The primary drivers of changes in gross margin by segment are discussed below:
•North America gross margin declined 240 basis points. The decline in gross margin was primarily driven by operational investments to service our customers of 160 basis points and price increases to customers without a benefit to margin of 160 basis points. Additionally, we incurred$7.7 million of manufacturing facility ERP system transition costs and$4.2 million of operational start-up costs related to the capacity expansion of our manufacturing and distribution facilities in theU.S. , which contributed to the decline in gross margin. These declines were partially offset by favorable mix of 140 basis points. •International gross margin declined 340 basis points. The decline in gross margin was driven by unfavorable mix of 160 basis points, price increases to customers without a benefit to margin of 150 basis points and the acquisition of Dreams inAugust 2021 . Dreams' margin profile is lower than our historical international margins as they sell a variety of products across a range of price points. These declines were partially offset by increased royalties of 110 basis points. 28
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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 September 30,
2022 2021 2022 2021 2022 2021 2022 2021
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising expenses $ 337.4 $ 310.3 $ 285.3 $ 271.8 $ 52.1 $ 38.5 $ - $ -
Other selling and marketing
expenses 407.3 348.0 212.5 214.2 179.7 114.5 15.1 19.3
General, administrative and other expenses 296.6 254.9 134.6 122.6 68.9 45.4 93.1
86.9
Total operating expenses
$ 608.6 $ 300.7 $ 198.4 $ 108.2 $ 106.2 Operating expenses increased$128.1 million , or 14.0%, and increased 230 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$23.8 million , or 3.9%, and increased 120 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising investments and expansion of our company-owned store strategy. Additionally, we incurred$3.2 million of professional fees related to the manufacturing facility ERP system transition and$1.8 million of restructuring costs associated with headcount reductions. These investments were partially offset by decreased variable compensation expense. •International operating expenses increased$102.3 million , or 51.6%, and increased 280 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by the acquisition of Dreams and other selling and marketing investments. Additionally, we incurred$0.6 million of restructuring costs associated with headcount reductions. •Corporate operating expenses increased$2.0 million , or 1.9%. The increase in operating expenses was primarily driven by$2.7 million of restructuring costs associated with headcount reductions and$1.2 million of expenses related to manufacturing facility ERP system transition, offset by decreased variable compensation expense.
Research and development expenses were
OPERATING INCOME
Nine Months Ended September 30,
2022 2021
(in millions, except Operating
percentages) Operating Income Operating Margin Income Operating Margin Margin Change
North America $ 506.5 17.1 % $ 627.8 20.8 % (3.7) %
International 135.2 17.3 % 139.9 25.2 % (7.9) %
641.7 767.7
Corporate expenses (108.2) (106.2)
Total operating income $ 533.5 14.3 % $ 661.5 18.5 % (4.2) %
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Operating income decreased
•North America operating income decreased$121.3 million and operating margin declined 370 basis points. The decline in operating margin was primarily driven by the decline in gross margin of 240 basis points and operating expense deleverage of 120 basis points. •International operating income decreased$4.7 million and operating margin declined 790 basis points. The decline in operating margin was primarily driven by the decline in gross margin of 340 basis points, operating expense deleverage of 280 basis points and the decline inAsia joint venture performance due to COVID-19 related shutdowns performance of 190 basis points.
•Corporate operating expenses increased
INTEREST EXPENSE, NET
Nine Months Ended September 30,
(in millions, except percentages) 2022 2021 % Change
Interest expense, net $ 71.4 $ 45.8 55.9 %
Interest expense, net, increased
LOSS ON EXTINGUISHMENT OF DEBT
In the first half of 2021, we issued our 2029 Senior Notes and we redeemed our
2023 Senior Notes and our 2026 Senior Notes. Accordingly, we incurred
INCOME TAX PROVISION
Nine Months Ended (in millions, except percentages) 2022 2021 % Change Income tax provision$ 107.5 $ 143.9 (25.3) % Effective tax rate 23.2 % 24.3 % Our income tax provision decreased$36.4 million due to a decrease in income before income taxes. Our effective tax rate for the nine months endedSeptember 30, 2022 as compared to the same prior year period declined 110 basis points. The effective tax rate as compared to theU.S. federal statutory rate for the nine months endedSeptember 30, 2022 included the net favorable impact of the deductibility of stock compensation in theU.S. , which were offset by the unfavorable impact of other discrete items. The effective tax rate as compared to theU.S. federal statutory rate for the for the nine months endedSeptember 30, 2021 included the favorable impact of the deductibility of stock compensation in theU.S. , which were offset by the net unfavorable impact of other discrete items.
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 of
AtSeptember 30, 2022 , total cash and cash equivalents were$94.1 million , of which$23.9 million was held in theU.S. and$70.2 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) 2022 2021Net cash provided by (used in) continuing operations: Operating activities
$ 283.5 $ 597.5
Investing activities (224.8) (508.0)
Financing activities (234.1) 356.4
Cash provided by operating activities from continuing operations decreased
$314.0 million in the nine months ended September 30, 2022 as compared to the
same period in 2021. The decrease in cash provided by operating activities was
driven by increased inventory investments, as well as the reduction of net
income. Our inventory increased significantly in the first nine months of 2022
as we increased our safety stock of Tempur-Pedic® finished goods, adjustable
bases and raw materials to better support our customers.
Cash used in investing activities from continuing operations decreased $283.2
million in the nine months ended September 30, 2022 as compared to the same
period in 2021. The decrease in cash used in investing activities was driven by
the Dreams acquisition in August 2021 , which is partially offset by increased
capital expenditures in 2022.
Cash used in financing activities from continuing operations increased $590.5
million in the nine months ended September 30, 2022 as compared to the same
period in 2021. For the nine months ended September 30, 2022 , we had net
borrowings of $468.8 million on our credit facilities as compared to net
borrowings of $988.4 million in the same period in 2021, which included proceeds
of $1.6 billion from the issuance of our 2029 and 2031 Senior Notes, partially
offset by repayments of $250.0 million of our 2023 Senior Notes and $600.0
million of our 2026 Senior Notes in 2021. During the nine months ended
September 30, 2022 and 2021, we repurchased $637.2 million and $565.8 million ,
respectively, of our common stock.
Cash Used in Discontinued Operations
Net cash used in operating, investing and financing activities from discontinued
operations for the periods ended
Capital Expenditures
Capital expenditures totaled$216.0 million and$82.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. We currently expect our 2022 capital expenditures to be over$275 million , which includes spend for our new foam-pouring plant inCrawfordsville, Indiana , and other manufacturing and distribution capacity expansion and growth initiatives. We expect our capital expenditures to decrease significantly in 2023 and return to normal levels of spend thereafter. Indebtedness Our total debt increased to$2,824.7 million as ofSeptember 30, 2022 from$2,353.2 million as ofDecember 31, 2021 . Total availability under our revolving senior secured credit facility was$425.4 million as ofSeptember 30, 2022 , which matures in 2024. Refer to Note 5, "Debt" in the "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1 for further discussion of our debt. As ofSeptember 30, 2022 , 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 2.77 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, 2022 , 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. During the nine months endedSeptember 30, 2022 , we repurchased 17.6 million shares under our share repurchase program for$591.2 million . As ofSeptember 30, 2022 , we had$809.5 million remaining under our share repurchase authorization. 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 2021 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, 2022 , we had$519.5 million of liquidity, including$94.1 million of cash on hand and$425.4 million available under our revolving senior secured credit facility. In addition, we expect to generate cash flow from operations in the full year 2022. 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. The Board of Directors declared a dividend of$0.10 per share for the fourth quarter of 2022. The dividend is payable onDecember 1, 2022 to shareholders of record as ofNovember 17, 2022 . As ofSeptember 30, 2022 , we had$2,824.7 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of$2,731.9 million . Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 2.77 times for the trailing twelve months endedSeptember 30, 2022 . 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. 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 2021 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, 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.
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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, 2022 and 2021: Three Months Ended (in millions, except per share amounts) September 30, 2022 September 30, 2021 Net income$ 132.7 $ 177.4 Loss from discontinued operations, net of tax (1) 0.8 0.1 ERP system transition (2) 2.7 - Operational start-up costs (3) 1.8 - Restructuring costs (4) 1.2 - Acquisition-related costs (5) - 2.3 Adjusted income tax provision (6) (1.4) (0.2) Adjusted net income$ 137.8 $ 179.6 Adjusted earnings per common share, diluted $ 0.78 $ 0.88 Diluted shares outstanding 177.0 203.4
(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 2022, we recorded
transition of our ERP system. Cost of sales included
facility ERP system transition costs, including labor, logistics, training and travel.
Operating expenses included
related to the capacity expansion of our manufacturing and distribution facilities in
the
costs of
associated with headcount reductions.
(5) In the third quarter of 2021, we recorded
taxes associated with the acquisition of Dreams. (6) Adjusted income tax provision represents the tax effects associated with the
aforementioned items.
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