TEMPUR SEALY INTERNATIONAL, INC. The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes thereto included elsewhere 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" and Part I, ITEM 1A of this Report. Our actual results may differ materially from those contained in any forward-looking statements. For results of operations comparisons relating to years endingDecember 31, 2019 and 2018, refer to our annual report on Form 10-K, Part II, ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations filed with theSecurities and Exchange Commission onFebruary 21, 2020 .
In this discussion and analysis, we discuss and explain the consolidated
financial condition and results of operations for the years 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.
24
--------------------------------------------------------------------------------Table of Co ntents 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. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. In the fourth quarter of 2020, we realigned our business segment reporting to includeMexico within ourNorth America segment, which was previously included in our International segment. The change in segment reporting aligned with changes in how our global operations are managed. OurNorth America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in theU.S. ,Canada andMexico . In 2020, we acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business, which is included in theNorth America segment. Our International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located inEurope ,Asia-Pacific andLatin America (other thanMexico ). We evaluate segment performance based on net sales, gross profit and operating income. For additional information refer to Note 14, "Business Segment Information," included in Part II, ITEM 8 "Financial Statements and Supplementary Data", of this Report. Our product brand portfolio includes many highly recognized and iconic brands in the industry, including 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. We have a global manufacturing footprint with approximately 9,000 employees worldwide. Full year net income for 2020 increased 84.1% and full year diluted earnings per share ("EPS") increased 90.7% to$1.64 . Our growth has been driven by strong demand during the COVID-19 global pandemic as more people are investing in their homes and overall wellness. We also maintain a strong competitive position within the industry. We believe the investments that we have made over the past five years have strengthened the long-term foundation of our company and enhanced our competitive position. The combination of our product superiority, brand strength, manufacturing efficiency and quality, powerful omni-channel distribution platform and substantial cash flow and balance sheet continue to drive market share gains and solid financial performance.
General Business and Economic Conditions
We believe the bedding industry is now structured for sustained 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.
In 2020, we began rapidly expanding organically with new distribution partners
through our direct channel and the initiation of our OEM business. We
experienced a reduction in total net sales at the outset of the COVID-19 global
pandemic within our International business segment in the first quarter. Order
trends reached their lowest point in early April 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 the year. This improvement was primarily due to the
reopening of brick-and-mortar stores on a reduced or appointment only basis as
restrictions were lifted; the acceleration of e-commerce business trends; and a
shift in consumer spending habits towards in-home products, including bedding
products. We believe this may be a long-term shift in consumer spending habits,
which could continue to favorably impact our industry.
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The rapid increase in demand for bedding products has challenged the entire
bedding industry and supply chain, including our business. Additionally, the
U.S. government has mandated that domestic suppliers of certain materials used
in the production of bedding products redirect such materials towards the
production of personal protective equipment. The broad-based increase in demand
coupled with supply chain constraints, primarily related to an encased
innerspring component, has created operational challenges in the production of
Sealy and Sherwood products in the U.S. As a result, the sales growth of Sealy
and Sherwood in the second half of 2020 was unfavorably impacted by these supply
chain constraints, as we could not fulfill the entire domestic demand for these
products. We expect these supply chain constraints to mitigate significantly by
early second quarter of 2021. The Tempur-Pedic manufacturing process has not
been as impacted by supply chain constraints.
Sales trends for early 2021 indicate that growth in the U.S. and Asia-Pacific
has accelerated from the fourth quarter of 2020. However, sales within certain
of our European markets have decelerated from the fourth quarter of 2020 as a
result of significant restrictions on retail activity due to renewed government
restrictions related to the global COVID-19 pandemic.
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. 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 the Company stands
today, how our response to COVID-19 is progressing and how our operations and
financial condition may change as the fight against COVID-19 progresses. For
further information regarding the potential impacts of COVID-19 on the Company,
please refer to "Risk Factors" in ITEM 1A of Part I of this Report.
Product Launches
In ourNorth America segment in 2020, we introduced the Tempur-Ergo Smart Base Collection with Sleeptracker® technology. In 2021, we are refreshing our Sealy portfolio and launching new models in our Posturepedic Plus™, Posturepedic® and Essentials product lines. We expect to complete the launch of our Essentials and Posturepedic lines in the second quarter of 2021. Additionally, we expect to complete the launch of the higher margin Posturepedic Plus line in the second half of the year. Our global 2021 marketing plan is to aggressively support our innovative bedding products through investing significant marketing dollars to promote our worldwide brands. We expect to spend a record amount of marketing dollars in 2021 for Tempur-Pedic, Sealy and Stearns & Foster.
Omni-Channel Distribution Expansion
We have a diversified group of strong retail partners and a rapidly growing direct business. In 2019, we announced three new or expanded third-party retail relationships in theU.S. andEurope . This resulted in the largest expansion of stores in our history. In 2020, we successfully completed the product rollout to our expanded distribution relationships, realizing robust wholesale channel growth as a result. We continue to increase our network of third-party retail partners and recently added new distribution at several established retail chains. We have been focused on building our direct channel, both online and company-owned retail stores. The development of our online business has been particularly important as consumers have grown more comfortable shopping for bedding products online. Online purchases accelerated during the pandemic and we expect that consumers will continue to lean into this channel in the future. In 2020, we estimate that 20% of ourU.S. sales occurred online, either through our own website in our direct channel or through our third-party retailer websites in our wholesale channel. The direct channel growth rate has surpassed the wholesale growth rate over the last few years, and we anticipate the direct channel to continue to grow as a percentage of net sales in future years. OurNorth America distribution network expanded in 2020 as we opened 21 new Tempur-Pedic retail stores. As ofDecember 31, 2020 , we had 76 Tempur-Pedic retail stores in operation. We plan to expand our network to 125 to 150 new retail stores in the long-term. We expect these retail stores to complement our existing third-party retail partners by increasing our products' brand awareness in the local markets. 26
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In 2020, we expanded our presence into the OEM market by offering non-branded products, including mattresses, pillows, and other bedding products and components at a wide range of price points. The addition of non-branded offerings expands our capabilities to service third-party retailers and creates opportunity to capture manufacturing profits from bedding brands outside our own. In 2020, we sold approximately$150 million of OEM bedding products. In 2021, we plan to grow our sales in the North American OEM business.
Commodities
Future changes in raw material prices could have an unfavorable impact on our gross margin. For the year endedDecember 31, 2020 , commodity costs were flat as compared to the same period in the prior year, but were higher than expected for the second half of 2020. We currently expect commodity costs and inflation to increase into 2021. During the fourth quarter of 2020, we implemented pricing actions that fully mitigated the anticipated commodity costs increases expected for 2021. In the first quarter of 2021, commodity costs have increased greater than expected and we will consider additional pricing actions as needed.
Acquisition of Sherwood Bedding
OnJanuary 31, 2020 , we acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of$39.1 million . Sherwood Bedding is a major manufacturer in theU.S. private label and OEM bedding market, and this acquisition of a majority interest marks our entrance into the private label category. During the first quarter of 2020, we completed the integration of Sherwood Bedding into our portfolio of product brands. Since the acquisition, we have leveraged our overall brand portfolio to gain additional distribution for Sherwood products.
Acquisition of
OnApril 1, 2019 , we acquired substantially all of the net assets of iMS in a transaction valued at approximately$24.0 million , including assumed liabilities of$11.0 million as ofMarch 31, 2019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of this regional bedding retailer furthers our North American retail strategy, which is focused on meeting customer demand through geographic representation and sales expertise. During the second quarter of 2019, we completed the integration of Sleep Outfitters into theNorth America segment. Sleep Outfitters, previously a third party retailer, had historically been part of our Wholesale channel. Sleep Outfitters' sales have been reclassified into our Direct channel beginning in the second quarter of 2019. 2020 Results of Operations
A summary of our results for the year ended
•Total net sales increased 18.4% to
•Gross margin was 44.6% in 2020 as compared to 43.2% in 2019. Adjusted gross margin, which is a non-GAAP financial measure, was 44.7% in 2020. There were no adjustments to gross margin in 2019. •Operating income was$532.1 million , or 14.5% of net sales, as compared to$346.7 million , or 11.2% of net sales, in 2019. Adjusted operating income, which is a non-GAAP financial measure, was$617.7 million , or 16.8% of net sales, as compared to$392.2 million , or 12.6% of net sales, in 2019. Operating income and adjusted operating income, which is a non-GAAP financial measure, included$7.9 million of costs associated with temporarily closed company-owned retail stores and sales force retention costs as a result of the novel coronavirus ("COVID-19 charges").
•Net income was
•EBITDA, which is a non-GAAP financial measure, increased 57.5% to
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Table of Co ntents
•EPS increased to$1.64 as compared to$0.86 in 2019. Adjusted EPS, which is a non-GAAP financial measure, increased 91.0% to$1.91 as compared to$1.00 in 2019. Adjusted EPS, which is a non-GAAP financial measure, included$0.03 of COVID-19 charges.
For a discussion and reconciliation of non-GAAP financial measures as discussed above to the corresponding GAAP financial results, refer to the non-GAAP financial information set forth below under the heading "Non-GAAP Financial Information."
We may refer to net sales or earnings or other historical financial information
on a "constant currency basis," which is a non-GAAP financial measure. These
references to constant currency basis do not include operational impacts that
could result from fluctuations in foreign currency rates. To provide information
on a constant currency basis, the applicable financial results are adjusted
based on a simple mathematical model that translates current period results in
local currency using the comparable prior 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
II, ITEM 7A of this Report for a discussion of our foreign currency exchange
rate risk.
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The following table sets forth the various components of our Consolidated
Statements of Income and expresses each component as a percentage of net sales:
(in millions, except percentages and Year Ended December 31,
per common share amounts) 2020 2019
Net sales $ 3,676.9 100.0 % $ 3,106.0 100.0 %
Cost of sales 2,038.5 55.4 1,763.8 56.8
Gross profit 1,638.4 44.6 1,342.2 43.2
Selling and marketing expenses 740.2 20.1 666.3 21.5
General, administrative and other expenses 382.5 10.4 345.1 11.1
Equity income in earnings of unconsolidated
affiliates (16.4) (0.4) (15.9) (0.5)
Operating income 532.1 14.5 346.7 11.2
Other expense, net:
Interest expense, net 77.0 2.1 85.7 2.8
Loss on extinguishment of debt 5.1 0.1 - -
Other income, net (2.4) (0.1) (4.5) (0.1)
Total other expense, net 79.7 2.2 81.2 2.6
Income from continuing operations before income
taxes 452.4 12.3 265.5 8.5
Income tax provision (102.6) (2.8) (74.7) (2.4)
Income from continuing operations 349.8 9.5 190.8 6.1
Loss from discontinued operations, net of tax - - (1.4) -
Net income before non-controlling interests 349.8 9.5 189.4 6.1
Less: Net income (loss) attributable to
non-controlling interests 1.0 - (0.1) -
Net income attributable to Tempur Sealy
International, Inc. $ 348.8 9.5 % $ 189.5 6.1 %
Earnings per common share:
Basic
Earnings per share for continuing operations $ 1.68 $ 0.87
Loss per share for discontinued operations - -
Earnings per share $ 1.68 $ 0.87
Diluted
Earnings per share for continuing operations $ 1.64 $ 0.86
Loss per share for discontinued operations - -
Earnings per share $ 1.64 $ 0.86
Weighted average common shares outstanding:
Basic 207.9 218.0
Diluted 212.3 221.6
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NET SALES
Year Ended December 31,
Consolidated North America International
(in millions) 2020 2019 2020 2019 2020 2019
Net sales by channel
Wholesale $ 3,185.8 $ 2,717.1 $ 2,806.7 $ 2,343.5 $ 379.1 $ 373.6
Direct 491.1 388.9 352.5 260.0 138.6 128.9
Total net sales $ 3,676.9 $ 3,106.0 $ 3,159.2 $ 2,603.5 $ 517.7 $ 502.5 Year ended
Net sales increased 18.4%, and on a constant currency basis increased 18.3%. The change in net sales was driven by the following:
•North America net sales increased$555.7 million , or 21.3%. Net sales in the Wholesale channel increased$463.2 million , or 19.8%, primarily driven by broad-based demand across our retail partners and new distribution. Net sales in our Direct channel increased$92.5 million , or 35.6%, primarily driven by growth from our e-commerce business. On a constant currency basis,North America net sales increased 21.6%. •International net sales increased$15.2 million , or 3.0%. On a constant currency basis, our International net sales increased 1.4%. Net sales in the Wholesale channel were flat on a constant currency basis, which reflects the uneven re-opening of retail in many jurisdictions. Net sales in the Direct channel increased 5.6% on a constant currency basis, driven by growth from our e-commerce business. GROSS PROFIT Year Ended December 31, 2020 2019 Margin Change
(in millions, except percentages) Gross Profit Gross Margin
Gross Profit Gross Margin 2020 vs 2019
North America $ 1,332.0 42.2 % $ 1,055.2 40.5 % 1.7 %
International 306.4 59.2 % 287.0 57.1 % 2.1 %
Consolidated gross margin $ 1,638.4 44.6 % $ 1,342.2 43.2 % 1.4 %
Costs associated with net sales are recorded in cost of sales and include the
costs of producing, shipping, warehousing, receiving and inspecting goods during
the period, as well as depreciation and amortization of long-lived assets used
in the manufacturing process.
Our gross margin is primarily impacted by the relative amount of net sales
contributed by our Tempur and Sealy products. Our Sealy products have a
significantly lower gross margin than our Tempur products. Our Sealy mattress
products range from value to premium priced offerings, and gross margins are
typically higher on premium products compared to value priced offerings. Our
Tempur products are exclusively premium priced products. As sales of our Sealy
products increase relative to sales of our Tempur products, our gross margins
will be negatively impacted in both our North America and International
segments.
Our gross margin is also impacted by fixed cost leverage based on
manufacturing unit volumes; the cost of raw materials; operational efficiencies
due to the utilization in our manufacturing facilities; product, channel and
geographic mix; foreign exchange fluctuations; volume incentives offered to
certain retail accounts; participation in our retail cooperative advertising
programs; and costs associated with new product introductions. Future changes in
raw material prices could have a significant impact on our gross margin. In
2021, we expect commodity cost inflation to negatively impact gross margin. Our
margins are also impacted by the growth in our Wholesale channel as sales in our
Wholesale channel are at wholesale prices whereas sales in our Direct channel
are at retail prices.
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Year ended December 31, 2020 compared to year ended December 31, 2019 Gross margin improved 140 basis points. The principal factors impacting gross margin for each segment are discussed below.
•North America gross margin improved 170 basis points. The improvement in gross margin was primarily driven by improved fixed cost leverage and productivity on higher unit volumes of 160 basis points and favorable floor model costs of 90 basis points. These improvements were partially offset by unfavorable product and brand mix of 100 basis points. Additionally, we incurred$4.0 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items and$0.6 million of operational expansion costs related to the opening of a Sealy manufacturing facility, which partially offset the improvement in gross margin •International gross margin improved 210 basis points. The improvement in gross margin was primarily driven by improved fixed cost leverage and productivity on higher unit volumes of 120 basis points and favorable mix of 80 basis points. Additionally, we incurred$0.5 million of incremental costs related to the global pandemic relief efforts, sanitation supplies and services and other items, which partially offset the improvement in gross margin. OPERATING EXPENSES Selling and marketing expenses include advertising and media production associated with the promotion of our brands, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials, and sales force compensation. We also include in selling and marketing expense certain new product development costs, including market research and new product testing. General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.
Year ended
Year Ended
2020 2019 2020 2019 2020 2019 2020 2019
(in millions) Consolidated North America International Corporate
Operating expenses:
Advertising $ 332.5 $ 280.5 $ 297.7 $ 246.6 $ 34.8 $ 33.9 $ - $ -
Other selling and
marketing 407.7 385.8 251.0 258.9 112.2 115.7 44.5 11.2
General, administrative
and other 382.5 345.1 191.9 199.8 48.2 43.0 142.4 102.3
Total operating expense
$ 705.3 $ 195.2 $ 192.6 $ 186.9 $ 113.5 Operating expenses increased$111.3 million , or 11.0%, and decreased 210 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are discussed below. •North America operating expenses increased$35.3 million , or 5.0%, and decreased 370 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by higher advertising investments, partially offset by decreased customer-related charges. In 2020, we recorded$11.7 million of customer-related charges in connection with the bankruptcy ofArt Van Furniture, LLC and affiliates, whereas in the same prior year period, we recorded$29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting liquidity issues of Mattress PAL's affiliates. •International operating expenses increased$2.6 million and decreased 60 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by$3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and$2.9 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items. These incremental costs were offset by decreased other selling and marketing investments. 31 -------------------------------------------------------------------------------- Table of Co ntents •Corporate operating expenses increased$73.4 million , or 64.7%. The increase in operating expenses was primarily driven by$49.4 million of non-recurring amortization for our long-term aspirational plan stock-based compensation. The amount recognized represents the third quarter 2020 cumulative catch-up adjustment and fourth quarter 2020 expense for the long-term aspirational awards, which became probable of vesting during the third quarter of 2020 and vested in the fourth quarter of 2020. Additionally, we reached the maximum payout for our 2020 performance-based stock compensation and annual incentive compensation plans. Research and development expenses for the year endedDecember 31, 2020 were$23.1 million compared to$23.0 million for the year endedDecember 31, 2019 , an increase of$0.1 million , or 0.4%. OPERATING INCOME Year Ended December 31, 2020 2019 Margin Change Operating Operating (in millions, except percentages) Income Operating Margin Income Operating Margin 2020 vs 2019 North America$ 591.4 18.7 %$ 349.9 13.4 % 5.3 % International 127.6 24.6 % 110.3 22.0 % 2.6 % 719.0 460.2 Corporate expenses (186.9) (113.5) Total operating income$ 532.1 14.5 %$ 346.7 11.2 % 3.3 %
Year ended
Operating income increased
•North America operating income increased$241.5 million and operating margin improved 530 basis points. The improvement in operating margin was primarily driven by improved operating expense leverage of 310 basis points, the improvement in gross margin of 170 basis points and lower customer-related charges. In 2020, we recorded$11.7 million of customer-related charges in connection with the bankruptcy ofArt Van Furniture, LLC and affiliates, whereas in the same prior year period, we recorded$29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting liquidity issues of Mattress PAL's affiliates. •International operating income increased$17.3 million and operating margin improved 260 basis points. The improvement in operating margin was primarily driven by the improvement in gross margin of 210 basis points and improved operating expense leverage of 180 basis points. These improvements were offset by$3.8 million of restructuring costs associated with headcount reductions driven by the macro-economic environment and$2.9 million of incremental costs related to global pandemic relief efforts, sanitation supplies and services and other items. •Corporate operating expenses increased$73.4 million , which negatively impacted our consolidated operating margin by 200 basis points. The increase in operating expenses was primarily driven by$49.4 million of non-recurring amortization for our long-term aspirational plan stock-based compensation. Additionally, we reached the maximum payout for our 2020 performance-based stock compensation and annual incentive compensation plans. INTEREST EXPENSE, NET Year Ended December 31, Percent change (in millions, except percentages) 2020 2019 2020 vs 2019 Interest expense, net$ 77.0 $ 85.7 (10.2) %
Year ended
Interest expense, net, decreased
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INCOME TAX PROVISION
Year Ended December 31, Percent change
(in millions, except percentages) 2020 2019 2020 vs 2019
Income tax provision $ 102.6 $ 74.7 37.3 %
Effective tax rate 22.7 % 28.1 % (5.4) %
Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and includes the impact of net operating losses for certain of our foreign operations.
Year ended
Our income tax provision increased$27.9 million due to an increase in income before income taxes, net of the favorable impact of discrete items. Our 2020 effective tax rate decreased as compared to 2019 by 540 basis points. The effective tax rate as compared to theU.S. federal statutory tax rate for the year endingDecember 31, 2020 included a net favorable impact of discrete items, primarily related to the implementation of income tax regulations in 2020 that favorably impacted our taxable global intangible low-taxed income ("GILTI") starting from the year endingDecember 31, 2018 onward and the vesting of certain stock compensation under our incentive stock compensation plan. The effective tax rate as compared to theU.S. federal statutory tax rate for the year endedDecember 31, 2019 included net unfavorable discrete items primarily related to the sale of a certain interest in ourAsia-Pacific joint venture and the impact of certain stock compensation.
Refer to Note 12, "Income Taxes," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report for further information.
Liquidity and Capital Resources
Liquidity
Our principal sources of funds are cash flows from operations, supplemented with borrowings made pursuant to our credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, capital expenditures and working capital needs. AtDecember 31, 2020 , total cash and cash equivalents were$65.0 million , of which$32.1 million was held in theU.S. and$32.9 million was held by subsidiaries outside of theU.S. The amount of cash and cash equivalents held by subsidiaries outside of theU.S. and not readily convertible into theU.S. Dollar or other major foreign currencies is not material to our overall liquidity or financial position.
Cash Provided by (Used in) Continuing Operations
The table below presents net cash provided by (used in) operating, investing and financing activities from continuing operations for the years endedDecember 31, 2020 and 2019. Year Ended December 31, (in millions) 2020 2019 Net cash provided by (used in) continuing operations: Operating activities$ 654.7 $ 314.8 Investing activities (146.6) (90.2) Financing activities (522.6) (203.2)
Cash provided by operating activities from continuing operations increased
Cash used in investing activities from continuing operations increased
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Cash used in financing activities from continuing operations increased $319.4
million in 2020 as compared to 2019. In 2020, we repurchased $331.8 million of
our common stock, which included repurchases of $285.9 million under our share
repurchase program and $45.9 million which was withheld to satisfy tax
withholding obligations related to stock compensation. In 2019, we repurchased
$105.7 million of our common stock, which included repurchases of $102.3 million
under our share repurchase program and $3.4 million which was withheld to
satisfy tax withholding obligations related to stock compensation. In 2020, we
had net repayments of $184.5 million on our credit facilities, as compared to
net repayments of $104.3 million in 2019.
Cash Used in Discontinued Operations
Net cash provided by (used in) operating, investing and financing activities
from discontinued operations for the years ended December 31, 2020 and 2019 was
not material.
Capital Expenditures
Capital expenditures totaled $111.3 million and $88.2 million for the year ended
December 31, 2020 and 2019, respectively. We currently expect our 2021 capital
expenditures to be approximately $125 million to $140 million , which includes
investments in our OEM business and other growth initiatives and maintenance
capital expenditures of $75 million .
Indebtedness
Our total debt decreased to$1,370.3 million as ofDecember 31, 2020 from$1,547.0 million as ofDecember 31, 2019 . Total availability under our revolving senior secured credit facility was$424.9 million as ofDecember 31, 2020 , which matures in 2024. Refer to Note 5, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 for further discussion of our debt. As ofDecember 31, 2020 , our ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure defined in the 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 ofDecember 31, 2020 , 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, 2023 Senior Notes and 2026 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 per credit facility remains below 3.5 times. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility is above 3.5 times. The limit on restricted payments under the 2019 Credit Agreement, 2023 Senior Notes and 2026 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted. 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 our 2019 Credit Agreement. Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 2019 Credit Agreement are terms that are not recognized under GAAP and do not purport to be alternatives to net income as a measure of operating performance or total debt.
Debt Securities Guaranteed by Subsidiaries
The$450.0 million and$600.0 million aggregate principal amount of 2023 Senior Notes and 2026 Senior Notes (collectively the "Senior Notes"), respectively, are general unsecured senior obligations ofTempur Sealy International and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by all ofTempur Sealy International's 100% directly or indirectly owned domestic subsidiaries (together, the "Obligor Group "). The foreign subsidiaries represent the foreign operations of the Company and do not guarantee the Senior Notes. 34 -------------------------------------------------------------------------------- Table of Co ntents The Senior Notes rank equally with or senior to all debt ofTempur Sealy International and theObligor Group , but are effectively junior to all secured debt, including obligations under the 2019 Credit Agreement, to the extent of the value of the assets securing such debt. Subject to certain restrictions,Tempur Sealy International and the restricted subsidiaries under the applicable indenture may incur additional secured debt. Claims of creditors of non-guarantor subsidiaries, including trade creditors, and creditors holding debt and guarantees issued by those subsidiaries, and claims of preferred stockholders (if any) of those subsidiaries generally will have priority with respect to the assets and earnings of those subsidiaries over the claims of creditors of the holders of the Senior Notes. The Senior Notes and each guarantee are therefore effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of non-guarantor subsidiaries. Under the applicable indenture, each guarantee is limited to the maximum amount that would not render the subsidiary guarantor's obligations subject to avoidance under the applicable fraudulent conveyance provisions of the United States Bankruptcy Code or any comparable provision of state law. By virtue of this limitation, a subsidiary guarantor's obligation under its guarantee could be significantly less than amounts payable with respect to the Senior Notes, or could be reduced to zero, depending upon the amount of other obligations of such guarantor. A subsidiary guarantor will be released from its obligations under the applicable indenture governing the Senior Notes when: (a) the subsidiary guarantor is sold or sells all or substantially all of its assets; (b) the subsidiary is declared "unrestricted" under the applicable indenture; (c) the subsidiary's guarantee of indebtedness under the 2019 Credit Agreement (as it may be amended, refinanced or replaced) is released (other than a discharge through repayment); (d) the requirements for legal or covenant defeasance or discharge of the applicable indenture have been satisfied; (e) the subsidiary is liquidated or dissolved in accordance with the applicable indenture; or (f) the occurrence of any covenant suspension. The Company has accounted for its investments in its subsidiaries under the equity method.
The summarized financial information for the
Year Ended
December 31, 2020
Obligor Group
(in millions)
Net sales to unrelated parties $ 2,902.6
Net sales to non-obligor subsidiaries
67.0
Gross profit
1,274.4
Income from continuing operations
253.6
Net income attributable toTempur Sealy International, Inc.
252.6
35--------------------------------------------------------------------------------
Table of Co ntents
Obligor Group
December 31, 2020
(in millions)
ASSETS
Receivables due from non-obligor subsidiaries $ 13.8
Other current assets 418.4
Total current assets 432.2
Loan receivable from non-obligor subsidiaries 184.8
Goodwill and other intangible assets, net 1,092.5
Other non-current assets 741.5
Total non-current assets 2,018.8
LIABILITIES
Payables due to non-obligor subsidiaries 15.2
Other current liabilities 618.5
Total current liabilities 633.7
Loan payable to non-obligor subsidiaries 14.5
Other non-current liabilities 1,689.2
Total non-current liabilities $ 1,703.7
Share Repurchase Program
Our Board of Directors authorized a share repurchase program in 2016 pursuant to
which we were authorized to repurchase shares of our common stock. The Board of
Directors authorized increases to our share repurchase authorization of $194.2
million and $168.7 million during February and October 2020 , respectively. For
the year ended December 31, 2020 , we had repurchased 6.5 million shares under
our share repurchase program for approximately $285.9 million and had
approximately $201.6 million remaining under our share repurchase program. In
February 2021 , the Board of Directors authorized an increase to our share
repurchase authorization to bring the total authorization to $400.0 million .
Share repurchases under this program may be made through open market
transactions, negotiated purchases or otherwise, at times and in such amounts as
management deems appropriate. These repurchases may be funded by operating cash
flows and/or borrowings under our debt arrangements. The timing and actual
number of shares repurchased will depend on a variety of factors including
price, financing and regulatory requirements and other market conditions. The
program is subject to certain limitations under our debt agreements. The program
does not require the purchase of any minimum number of shares and may be
suspended, modified or discontinued at any time without prior notice.
Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to
be repurchased when we might otherwise be precluded from doing so under federal
securities laws.
In 2021, subject to market conditions, we expect to repurchase 6.0% of common
shares outstanding. We will manage our share repurchase program based on current
and expected cash flows, share price and alternative investment opportunities.
For a complete description of our share repurchase program, please refer to ITEM
5 under Part II, "Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ," of this Report.
Future Liquidity Sources and Uses
As ofDecember 31, 2020 , we had$519.2 million of liquidity, including$65.0 million of cash on hand and$424.9 million available under our revolving senior secured credit facility. We also had availability of$29.3 million under our securitization facility. We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for our foreseeable working capital needs, necessary capital expenditures and debt service obligations. 36 -------------------------------------------------------------------------------- Table of Co ntents Our capital allocation plan is focused on the following to drive shareholder value: •Invest an incremental$150 million of capital expenditures by 2023 to support our OEM business; •Initiate a quarterly cash dividend beginning in early 2021, subject to approval by the Board of Directors. For the first quarter of 2021, the Board of Directors has declared a dividend of$0.07 per share. The dividend is payable onMarch 12, 2021 to shareholders of record as ofFebruary 25, 2021 ; •Repurchase 6.0% of our common stock outstanding per year in the near-term, depending on market conditions; and •Evaluate acquisition opportunities with a focus on strategic acquisitions similar to those we have completed over the past few years. As ofDecember 31, 2020 , we had$1,370.3 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of$1,306.7 million . Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility, which is a non-GAAP financial measure, was 1.68 times for the year endedDecember 31, 2020 , the lowest in our history. Our target range for our ratio of consolidated indebtedness less netted cash, which is a non-GAAP financial measure, is 2.0 to 3.0 times. Total cash interest payments related to our borrowings are expected to be between approximately$55 million to$60 million in 2021. OnNovember 9, 2020 , we redeemed$200.0 million of our$450.0 million issued and outstanding 2023 Senior Notes at 101.406% of their principal amount, plus the accrued and unpaid interest. Additionally, we redeemed the remaining$250.0 million at 101.406% of their principal amount, plus the accrued and unpaid interest in the first quarter of 2021. The 2019 Credit Agreement provides for a$425.0 million revolving credit facility, a$425.0 million term loan facility, and an incremental facility in an aggregate amount of up to$550.0 million plus the amount of certain prepayments plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a$60.0 million sub-facility for the issuance of letters of credit. OnFebruary 2, 2021 we entered into an amendment to our 2019 Credit Agreement, which provides for an increase in the aggregate commitments under our revolving credit facility from$425.0 million to$725.0 million . We expect to use the revolving credit facility from time to time to finance working capital needs and for general corporate purposes. Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Similarly, our cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements and debt service obligations. For information regarding the impact of COVID-19 on our business, including our liquidity and capital resources, please refer to "Risk Factors" in ITEM 1A of Part I of this Report. Contractual Obligations Our contractual obligations and other commercial commitments as ofDecember 31, 2020 are summarized below: (in millions) Payment Due By Period Total Contractual Obligations 2021 2022 2023 2024 2025 Thereafter Obligations Debt (1)$ 66.4 $ 21.3 $ 31.9 $ 579.3 $ -$ 600.0 $ 1,298.9 Letters of credit 23.4 - - - - - 23.4 Interest payments (2) 42.4 40.0 39.1 38.0 31.6 15.1 206.2 Operating lease obligations 74.1 67.9 55.5 46.0 39.3 112.3 395.1 Finance lease obligations (3) 11.4 10.2 8.1 6.4 5.8 29.5 71.4 Pension obligations 1.0 1.1 1.2 1.2 1.3 36.7 42.5 Total (4)$ 218.7 $ 140.5 $ 135.8 $ 670.9 $ 78.0 $ 793.6 $ 2,037.5 (1)Debt excludes finance lease obligations and deferred financing costs. In the first quarter of 2021, we redeemed the remaining$250.0 million of the 2023 Notes, principally funded by our revolving credit facility. Accordingly, we have re-characterized the outstanding balance of the 2023 Notes as maturing in 2024, consistent with the maturity date of our revolving credit facility. (2)Interest payments represent obligations under our debt outstanding as ofDecember 31, 2020 , applyingDecember 31, 2020 interest rates and assuming scheduled payments are paid as contractually required through maturity. (3)The payments due for finance lease obligations excludes$18.5 million in future payments for interest. (4)Uncertain tax positions are excluded from this table given the timing of payments cannot be reasonably estimated. 37 -------------------------------------------------------------------------------- Table of Co ntents We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Non-GAAP Financial Information
We provide information regarding adjusted net income, adjusted EPS, adjusted
gross profit, adjusted gross margin, adjusted operating income (expense),
adjusted operating margin, EBITDA, adjusted EBITDA per credit facility,
consolidated indebtedness and consolidated indebtedness less netted cash, which
are not recognized terms under GAAP and do not purport to be alternatives to net
income, earnings per share, gross profit, gross margin, operating income
(expense) and operating margin as a measure of operating performance or an
alternative to total debt as a measure of liquidity. We believe these non-GAAP
financial measures provide investors with performance measures that better
reflect our underlying operations and trends, providing a perspective not
immediately apparent from net income, gross profit, gross margin, operating
income (expense) and operating margin. The adjustments we make to derive the
non-GAAP financial measures include adjustments to exclude items that may cause
short-term fluctuations in the nearest GAAP financial measure, but which we do
not consider to be the fundamental attributes or primary drivers of our
business.
We believe that exclusion of these items assists in providing a more complete
understanding of our underlying results from continuing operations and trends,
and we use these measures along with the corresponding GAAP financial measures
to manage our business, to evaluate our consolidated and business segment
performance compared to prior periods and the marketplace, to establish
operational goals and to provide continuity to investors for comparability
purposes. Limitations associated with the use of these non-GAAP financial
measures include that these measures do not present all of the amounts
associated with our results as determined in accordance with GAAP. These
non-GAAP financial measures should be considered supplemental in nature and
should not be construed as more significant than comparable financial measures
defined by GAAP. Because not all companies use identical calculations, these
presentations may not be comparable to other similarly titled measures of other
companies. For more information about these non-GAAP financial measures and a
reconciliation to the nearest GAAP financial measure, please refer to the
reconciliations on the following pages.
Key Highlights
Year Ended December 31,
% Change
(in millions, except percentages and per common Constant
share amounts) 2020 2019 % Change Currency (1)
Net sales $ 3,676.9 $ 3,106.0 18.4 % 18.3 %
Net income $ 348.8 $ 189.5 84.1 % 83.5 %
Adjusted EBITDA per credit facility (1) $ 779.9 $ 508.1 53.5 % 53.2 %
EPS $ 1.64 $ 0.86 90.7 % 90.7 %
Adjusted EPS (1) $ 1.91 $ 1.00 91.0 % 91.0 %
Non-GAAP financial measure. Please refer to the reconciliations in the following
(1) tables.
Adjusted Net Income and Adjusted EPS
A reconciliation of net income to adjusted net income and the calculation of adjusted EPS is provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the years endedDecember 31, 2020 and 2019. 38
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Table of Co ntents
Year Ended (in millions, except per common share amounts) 2020
2019
Net income$ 348.8
Loss from discontinued operations, net of tax (1) -
1.4
Aspirational plan amortization (2) 49.4
-
Customer-related charges (3) 11.7
29.8
Incremental operating costs (4) 7.2
-
Asset impairments (5) 7.0
-
Loss on extinguishment of debt (6) 5.1
-
Restructuring costs (7) 3.8
-
Accounting standard adoption (8) 3.6
-
Aspirational plan employer costs (9) 2.3
-
Facility expansion costs (10) 0.6
-
Charitable stock donation (11) -
8.9
Acquisition-related costs and other (12) -
6.1
Credit facility amendment (13) - 0.7 Other income (14) (2.3) (7.2) Tax adjustments (15) (31.5) (7.3) Adjusted net income$ 405.7 $ 221.9 Adjusted earnings per share, diluted$ 1.91
Diluted shares outstanding 212.3
221.6
Adjusted net income included COVID-19 charges of
39--------------------------------------------------------------------------------
Table of Co ntents (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 2020, we recognized
compensation amortization related to our long-term aspirational awards. The amount
recognized represents the cumulative catch-up adjustment for the long-term aspirational
awards that became probable of vesting during the third quarter of 2020. We recognized
an additional
requisite service period.
(3) In the first quarter of 2020, we recorded
connection with the bankruptcy of
trade receivables and other assets associated with this account. In the fourth quarter
of 2019, we recorded
bankruptcy of
with Mattress PAL's affiliates.
(4) In the second quarter of 2020, we recorded
associated with the global pandemic. In the first quarter of 2020, we recorded
million of charges related to the global pandemic.
(5) In the second quarter of 2020, we recorded
related to the write-off of certain sales and marketing assets.
(6) In the fourth quarter of 2020, we recognized
debt associated with the redemption of the 2023 senior notes. In the third quarter of
2020, we recognized
early repayment of the 364-day term loan.
(7) We incurred
International headcount reductions driven by the macro-economic environment, in the
third and second quarter of 2020, respectively.
(8) In 2020, we recorded
"Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019 Credit
Agreement, we elected to eliminate the effect of this accounting change within our
covenant compliance calculation.
(9) In the fourth quarter of 2020, we recognized
related to the aspirational plan compensation.
(10) In the third quarter of 2020, we recorded
of a Sealy manufacturing facility.
(11) In the fourth quarter of 2019, we recorded an
donation of common stock at fair market value to certain public charities.
(12) In the first half of 2019, we recorded
costs, primarily related to post acquisition restructuring charges and professional fees
incurred in connection with the acquisition of substantially all of the net assets of
iMS by an affiliate of ours.
(13) In 2019, we recorded
of the 2019 Credit Agreement.
(14) In the fourth quarter of 2020, we recorded
sale of a manufacturing facility. In the first quarter of 2019, we recorded
of other income related to the sale of our interest in a subsidiary of the
joint venture. (15) Adjusted income tax provision represents the tax effects associated with the
aforementioned items and discrete income tax events. In 2020, we recorded a
discrete income tax benefit upon the vesting of our long-term aspirational plan awards.
Adjusted Gross Profit and Gross Margin and Adjusted Operating Income (Expense) and Operating Margin
A reconciliation of gross profit and gross margin to adjusted gross profit and adjusted gross margin, respectively, and operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the year endedDecember 31, 2020 . 40
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Table of Co ntents
FULL YEAR 2020
(in millions, except
percentages) Consolidated Margin North America Margin International Margin Corporate
Net sales $ 3,676.9 $ 3,159.2 $ 517.7 $ -
Gross profit $ 1,638.4 44.6 % $ 1,332.0 42.2 % $ 306.4 59.2 % $ -
Adjustments:
Incremental operating costs (1) 4.5 4.0 0.5 -
Facility expansion costs (2) 0.6 0.6 - -
Total adjustments 5.1 4.6 0.5 -
Adjusted gross profit $ 1,643.5 44.7 % $ 1,336.6 42.3 % $ 306.9 59.3 % $ -
Operating income (expense) $ 532.1 14.5 % $ 591.4 18.7 % $ 127.6 24.6 % $ (186.9)
Adjustments:
Aspirational plan amortization
(3) 49.4 - - 49.4
Customer-related charges (4) 11.7 11.7 - -
Incremental operating costs (1) 7.2 4.3 2.9 -
Asset impairments (5) 7.0 7.0 - -
Restructuring costs (6) 3.8 - 3.8 -
Accounting standard adoption
(7) 3.6 3.6 - -
Aspirational plan employer
costs (8) 2.3 - - 2.3
Facility expansion costs (2) 0.6 0.6 - -
Total adjustments 85.6 27.2 6.7 51.7
Adjusted operating income
(expense) $ 617.7 16.8 % $ 618.6 19.6 % $ 134.3 25.9 % $ (135.2) Operating income and adjusted operating income included
associated with the global pandemic. Cost of sales included
relief efforts, increased sanitation supplies and services and other items. Operating
expenses included
services. In the first quarter of 2020, we recorded
the global pandemic.
(2) In the third quarter of 2020, we recorded
of a Sealy manufacturing facility.
(3) In the third quarter of 2020, we recognized
compensation amortization related to our long-term aspirational awards. The amount
recognized represents the cumulative catch-up adjustment for the long-term aspirational
awards that became probable of vesting during the third quarter of 2020. We recognized
an additional
requisite service period.
(4) In the first quarter of 2020, we recorded
connection with the bankruptcy of
reserve trade receivables and other assets associated with this account.
(5) In the second quarter of 2020, we recorded
related to the write-off of certain sales and marketing assets.
(6) In 2020, we incurred
headcount reductions driven by the macro-economic environment.
(7) In 2020, we recorded
2016-13, "Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019
Credit Agreement, we elected to eliminate the effect of this accounting change within
our covenant compliance calculation.
(8) In the fourth quarter of 2020, we recognized
related to the aspirational plan compensation.
41
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Table of Co ntents
The following table sets forth the reconciliation of our operating income
(expense) and operating margin to the calculation of adjusted operating income
(expense) and adjusted operating margin for the year ended December 31, 2019 :
FULL YEAR 2019
(in millions, except percentages) Consolidated Margin North America Margin International Margin Corporate
Net sales $ 3,106.0 $ 2,603.5 $ 502.5 $ -
Gross profit $ 1,342.2 43.2 % $ 1,055.2 40.5 % $ 287.0 57.1 % $ -
Operating income (expense) $ 346.7 11.2 % $ 349.9 13.4 % $ 110.3 22.0 % $ (113.5)
Adjustments:
Customer-related charges (1) 29.8 29.8 - -
Charitable stock donation (2) 8.9 8.9 - -
Acquisition-related costs and other (3) 6.1 1.7 0.3 4.1
Credit facility amendment (4) 0.7 - - 0.7
Total adjustments 45.5 40.4 0.3 4.8
Adjusted operating income (expense) $ 392.2 12.6 % $ 390.3 15.0 % $ 110.6 22.0 % $ (108.7) (1) In the fourth quarter of 2019, we recorded
connection with the bankruptcy of Mattress PAL and resulting liquidity issues of Mattress
PAL's affiliates to fully reserve trade receivables and other assets associated with this
account.
(2) In the fourth quarter of 2019, we recorded an
of common stock at fair market value to certain public charities.
(3) In the first half of 2019, we recorded
costs, primarily related to post acquisition restructuring charges and professional fees
incurred in connection with the acquisition of substantially all of the net assets of iMS
by an affiliate of ours.
(4) In the fourth quarter of 2019, we incurred
connection with the amendment of the senior secured credit facility.
EBITDA, Adjusted EBITDA per Credit Facility and Consolidated Indebtedness Less Netted Cash
The following reconciliations are provided below:
•Net income to EBITDA and adjusted EBITDA per credit facility
•Ratio of consolidated indebtedness less netted cash to adjusted EBITDA per
credit facility
•Total debt, net to consolidated indebtedness less netted cash
We believe that presenting these non-GAAP measures provides investors with
useful information with respect to our operating performance, cash flow
generation and comparisons from period to period, as well as general information
about our progress in reducing our leverage.
The 2019 Credit Agreement provides the definition of adjusted EBITDA ("adjusted
EBITDA per credit facility"). Accordingly, we present adjusted EBITDA per credit
facility to provide information regarding our compliance with requirements under
the 2019 Credit Agreement.
The following table sets forth the reconciliation of our reported net income to
the calculations of EBITDA and adjusted EBITDA per credit facility for the years
ended December 31, 2020 and 2019:
42--------------------------------------------------------------------------------
Table of Co ntents
Year Ended
(in millions) December 31, 2020 December 31, 2019
Net income $ 348.8 $ 189.5
Interest expense, net 77.0 85.7
Loss on extinguishment of debt (1) 5.1 -
Income tax provision 102.6 74.7
Depreciation and amortization 154.9 118.5
Aspirational plan amortization (2) 49.4 -
EBITDA $ 737.8 $ 468.4
Adjustments:
Loss from discontinued operations, net of tax (3) - 1.4 Customer-related charges (4) 11.7 29.8 COVID-19 charges (5) 7.9 - Incremental operating costs (6) 7.2 - Asset impairments (7) 7.0 - Restructuring costs (8) 3.8 - Accounting standard adoption (9) 3.6 - Aspirational plan employer costs (10) 2.3 - Facility expansion costs (11) 0.6 - Earnings from Sherwood prior to acquisition (12) 0.3 - Charitable stock donation (13) - 8.9 Acquisition-related costs and other (14) - 6.1 Credit facility amendment (15) - 0.7 Other income (16) (2.3) (7.2) Adjusted EBITDA per credit facility $ 779.9 $ 508.1 Consolidated indebtedness less netted cash $
1,306.7 $ 1,483.6
Ratio of consolidated indebtedness less netted cash to adjusted EBITDA per credit facility 1.68 times 2.92 times 43
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Table of Co ntents
(1) In the fourth quarter of 2020, we recognized
debt associated with the redemption of the 2023 senior notes. In the third quarter of
2020, we recognized
early repayment of the 364-day term loan.
(2) In the third quarter of 2020, we recognized
compensation amortization related to our long-term aspirational awards. The amount
recognized represents the cumulative catch-up adjustment for the long-term aspirational
awards that became probable of vesting during the third quarter of 2020. We recognized
an additional
requisite service period. (3) Certain subsidiaries in the International business segment are accounted for as
discontinued operations and have been designated as unrestricted subsidiaries in the
2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted
financial measures for covenant compliance purposes.
(4) In the first quarter of 2020, we recorded
connection with the bankruptcy of
trade receivables and other assets associated with this account. In the fourth quarter
of 2019, we recorded
bankruptcy of Mattress PAL and resulting liquidity issues with Mattress PAL's
affiliates.
(5) In the second quarter of 2020, adjusted EBITDA per credit facility excluded
of COVID-19 charges associated with temporarily closed company-owned retail stores and
sales force retention costs.
(6) In the second quarter of 2020, we recorded
associated with the global pandemic. In the first quarter of 2020, we recorded
million of charges related to the global pandemic.
(7) In the second quarter of 2020, we recorded
related to the write-off of certain sales and marketing assets.
(8) In 2020, we incurred
headcount reductions driven by the macro-economic environment.
(9) In 2020, we recorded
"Financial Instruments - Credit Losses (Topic 326)". As permitted by the 2019 Credit
Agreement, we elected to eliminate the effect of this accounting change within our
covenant compliance calculation.
(10) In the fourth quarter of 2020, we recognized
related to the aspirational plan compensation.
(11) In the third quarter of 2020, we recorded
of a Sealy manufacturing facility.
(12) We completed the acquisition of Sherwood Bedding on
subsidiary as restricted under the 2019 Credit Agreement. For covenant compliance
purposes, the Company included
month prior to acquisition in our calculation of adjusted EBITDA per credit facility for
the trailing twelve months ended
donation of common stock at fair market value to certain public charities.
(14) In the first half of 2019, we recorded
costs, primarily related to post acquisition restructuring charges and professional fees
incurred in connection with the acquisition of substantially all of the net assets of
iMS by an affiliate of ours.
(15) In the fourth quarter of 2019, we incurred
connection with the amendment of the senior secured credit facility.
(16) In the fourth quarter of 2020, we recorded
sale of a manufacturing facility. In the first quarter of 2019, we recorded
of other income related to the sale of our interest in a subsidiary of the
joint venture.
Under the 2019 Credit Agreement, the definition of adjusted EBITDA (which we
refer to as "adjusted EBITDA per credit facility") contains certain restrictions
that limit adjustments to net income when calculating adjusted EBITDA. For the
year ended December 31, 2020 , our adjustments to net income when calculating
adjusted EBITDA did not exceed the allowable amount under the 2019 Credit
Agreement.
The ratio of consolidated indebtedness less netted cash to adjusted EBITDA per
credit facility was 1.68 times for the trailing twelve months ended December 31,
2020 . The 2019 Credit Agreement requires us to maintain a ratio of consolidated
indebtedness less netted cash to adjusted EBITDA of less than 5.00:1.00 times.
The following table sets forth the reconciliation of our reported total debt to
the calculation of consolidated indebtedness less netted cash as of December 31,
2020 and 2019. "Consolidated Indebtedness" and "Netted Cash" are terms used in
the 2019 Credit Agreement for purposes of certain financial covenants.
(in millions) December 31, 2020 Total debt, net $ 1,366.9 $
1,540.0
Plus: Deferred financing costs (1) 3.4 7.0 Consolidated indebtedness 1,370.3 1,547.0 Less: Netted cash (2) 63.6 63.4
Consolidated indebtedness less netted cash $ 1,306.7 $
1,483.6
44--------------------------------------------------------------------------------
Table of Co ntents (1) We present deferred financing costs as a direct reduction from the carrying amount
of the related debt in the Consolidated Balance Sheets. For purposes of determining
total debt for financial covenant purposes, we added these costs back to total debt,
net as calculated per the Consolidated Balance Sheets. (2) Netted cash includes cash and cash equivalents for domestic and foreign subsidiaries
designated as restricted subsidiaries in the 2019 Credit Agreement.
Critical Accounting Policies and Estimates
Our management is responsible for our financial statements and has evaluated the
accounting policies to be used in their preparation. Our management believes
these policies are reasonable and appropriate. The following discussion
identifies those accounting policies that we believe are critical in the
preparation of our financial statements, the judgments and uncertainties
affecting the application of those policies and the possibility that materially
different amounts will be reported under different conditions or using different
assumptions.
The preparation of financial statements in conformity with GAAP requires that
management make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of commitments and contingencies at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our actual results could differ from those
estimates.
Revenue Recognition. Sales of product are recognized when the obligations under
the terms of the contract with the customer are satisfied, which is generally
when control of the product has transferred to the customer. Transferring
control of each product sold is considered a separate performance obligation. We
transfer control and recognize a sale when the product ships to the customer or
when the customer receives the product based upon agreed shipping terms. Each
unit sold is considered an independent, unbundled performance obligation. We do
not have any additional performance obligations other than product sales that
are material in the context of the contract. We extend volume discounts to
certain customers and reflect these amounts as a reduction of net sales.
We estimate the liability for sales returns at the time of sale, based on our
level of historical sales returns. We allow returns following a sale, depending
on the channel and promotion. Our level of sales returns differs by channel,
with our Direct channel typically experiencing the higher rate of returns.
We record an allowance for credit losses for amounts due from third parties that
we do not expect to collect. We estimate the losses over the contractual life
using assumptions to capture the risk of loss, even if remote, based principally
on how long a receivable has been outstanding. Other factors considered included
historical write-off experience, current and projected economic conditions and
also factors such as customer credit, past transaction history with the customer
and changes in customer payment terms.
The credit environment in which our customers operate has been relatively stable
over the past few years. Historically, less than 1.0% of net sales ultimately
prove to be uncollectible. However, there have been signs of deterioration in
the U.S. retail sector, with certain key retailer bankruptcies over the last few
years. Total bad debt expense was $35.8 million in 2020, $29.3 million in 2019
and $31.3 million in 2018.
We regularly review the adequacy of our allowance for credit losses based on the
latest information available and accrue losses from uncollectible receivables
when such losses can reasonably be estimated. The allowance for credit losses is
our best estimate of the amount of probable credit losses in our existing
accounts receivable. Our accounts receivable are substantially current and there
were no significant changes to the aging of receivables as a result of the
impact of the global pandemic. The allowance for credit losses included in
accounts receivable, net in the accompanying Consolidated Balance Sheets was
$71.6 million and $71.9 million as of December 31, 2020 and 2019, respectively.
If circumstances change, for example, due to the occurrence of
higher-than-expected defaults or a significant adverse change in a major
customer's ability to meet our financial obligations, estimates of the
recoverability of receivable amounts due could be reduced.
Our revenue recognition accounting methodology contains uncertainties because it
requires management to make assumptions and to apply judgment to estimate the
amount and timing of future sales returns and uncollectible accounts. Our
estimate of the amount and timing of sales returns and uncollectible accounts is
based primarily on historical transaction experience.
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We have not made any material changes in the accounting methodology we use to
measure the estimated liability for sales returns and exchanges or credit losses
during the past three fiscal years. On January 1, 2020 , we adopted ASU No.
2016-13, "Financial Instruments - Credit Losses (Topic 326)," which requires
entities to estimate expected lifetime credit losses on financial assets and
provide expanded disclosures. The adoption of this standard did not have a
material impact on our consolidated financial statements.
We do not believe there is a reasonable likelihood that there will be a material
change in the future estimates or assumptions we use to establish the liability
for sales returns and exchanges and credit losses. However, if actual results
are not consistent with our estimates or assumptions, we may be exposed to
losses or gains that could be material.
Income Taxes. Accounting for income taxes requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities.
We recognize deferred tax assets in our Consolidated Balance Sheets, and these
deferred tax assets typically represent items deducted currently from operating
income in the financial statements that will be deducted in future periods in
tax returns. A valuation allowance is recorded against certain deferred tax
assets to reduce the consolidated deferred tax asset to an amount that will,
more likely than not, be realized in future periods. At December 31, 2020 the
valuation allowance of $33.5 million was primarily related to certain tax
attributes and various foreign jurisdictions. The valuation allowance is based,
in part, on our estimate of future taxable income, the expected utilization of
foreign and state tax loss carryforwards, and credits and the expiration dates
of such tax loss carryforwards.
We did not recognize certain tax benefits from uncertain tax positions within
the provision for income taxes. We may recognize a tax benefit only if it is
more likely than not the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon settlement. At December 31, 2020 , our estimated gross
unrecognized tax benefits were $118.6 million of which $106.0 million , if
recognized, would favorably impact our future earnings. Due to uncertainties in
any tax audit outcome, our estimates of the ultimate settlement of our
unrecognized tax positions may change and the actual tax benefits may differ
significantly from the estimates.
We have been involved in a dispute with SKAT regarding the Danish Tax Matter for
tax years 2001 through current. The royalty is paid by the U.S. subsidiary for
the right to utilize certain intangible assets owned by the Danish subsidiary in
the U.S. production process.
During 2018, we negotiated a settlement with SKAT (the "Settlement") for the tax
years 2001 through 2011 (the "Settlement Years"). The Company and SKAT are
currently discussing the appropriate administrative process required to
implement the Settlement as it relates to the computation of interest. During
this process, the Company continues to maintain an uncertain income tax
liability on its balance sheet for tax and interest under the terms of the
Settlement. In addition, we have entered into the APA Program for the tax years
2012 through 2022 in which the IRS , on our behalf, will negotiate directly with
SKAT the royalty to be paid by the U.S. subsidiary to the Danish Subsidiary. We
maintain an uncertain income tax liability the tax years 2012 through 2020 that
are included in the APA Program. If we are required to further increase the
uncertain tax liability for either or both periods based on a change in facts
and circumstances, it could have a material impact on our reported earnings.
Further, if the IRS and SKAT are unable to reach a mutually acceptable agreement
with respect to the tax years included in the APA Program, we could be required
to make a significant payment to SKAT for Danish tax related to such years,
which could have a material adverse effect on our results of operations and
liquidity.
Our liability for the Danish Tax Matter uncertain tax position is derived using
a cumulative probability analysis with possible outcomes based on an evaluation
of the facts and circumstances and applying the technical requirements
applicable to U.S. , Danish, and the international transfer pricing standards,
taking into account both the U.S. and Danish income tax implications of such
outcomes. For a description of these matters and additional information please
refer to Note 12, "Income Taxes," to the accompanying Consolidated Financial
Statements.
Goodwill and Indefinite-Lived Intangible Assets. Goodwill and indefinite-lived
intangible assets are evaluated for impairment annually as of October 1 and
whenever events or circumstances make it more likely than not that impairment
may have occurred or when required by accounting standards.
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We test goodwill for impairment by comparing the book values to the fair value
at the reporting unit level. Our reporting units are equivalent to our North
America and International segments. We test individual indefinite-lived
intangible assets by comparing the book values of each asset to the estimated
fair value. If the fair value exceeds the carrying amount, then no impairment
exists.
Using the quantitative approach, we make various estimates and assumptions in
determining the estimated fair value of each reporting unit using a combination
of discounted cash flow models and valuations based on earnings multiples for
guideline public companies in each reporting unit's industry peer group, when
externally quoted market prices are not readily available. Discounted cash flow
models are reliant on various assumptions, including projected business results,
long-term growth factors and weighted-average cost of capital. Management
judgement is involved in estimating these variables, and they include inherent
uncertainties as they are forecasting future events. We perform sensitivity
analyses by using a range of inputs to confirm the reasonableness of the
long-term growth rate and weighted average cost of capital. Additionally, we
compare the indicated equity value to our market capitalization and evaluate the
resulting implied control premium/discount to determine if the estimated
enterprise value is reasonable compared to external market indicators.
We have not made any material changes in 2020 to our reporting units or the accounting methodology we use to assess impairment loss on goodwill and indefinite-lived intangible assets.
The most recent annual impairment tests performed as ofOctober 1, 2020 indicated that the fair values of each of our reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values. Despite that excess, however, impairment charges could still be required if a divestiture decision were made or other significant economic event were made or occurred with respect to one of our reporting units. Subsequent to ourOctober 1, 2020 annual impairment test, no indications of impairment were identified. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill and indefinite-lived intangible assets. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
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