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OFFON

TEMPUR SEALY INTERNATIONAL, INC.

(TPX)
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TEMPUR SEALY INTERNATIONAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/04/2021 | 06:55am EST
The following discussion and analysis should be read in conjunction with the
2020 Annual Report, including "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in ITEM 7 of Part II of the 2020
Annual Report, and the accompanying Condensed Consolidated Financial Statements
and notes thereto included in this Report. Unless otherwise noted, all of the
financial information in this Report is consolidated financial information for
the Company. The forward-looking statements in this discussion regarding the
mattress and pillow industries, our expectations regarding our future
performance, liquidity and capital resources and other non-historical statements
in this discussion are subject to numerous risks and uncertainties. See "Special
Note Regarding Forward-Looking Statements" elsewhere in this Report, in the 2020
Annual Report and the section titled "Risk Factors" contained in ITEM 1A of Part
I of the 2020 Annual Report. Our actual results may differ materially from those
contained in any forward-looking statements.

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and six months ended June 30, 2021, including the following topics:


•an overview of our business and strategy,
•results of operations, including our net sales and costs in the periods
presented as well as changes between periods;
•expected sources of liquidity for future operations; and
•our use of certain non-GAAP financial measures.

Business Overview

General


We are committed to improving the sleep of more people, every night, all around
the world. As a global leader in the design, manufacture and distribution of
bedding products, we know how crucial a good night of sleep is to overall health
and wellness. Utilizing over a century of knowledge and industry-leading
innovation, we deliver award-winning products that provide breakthrough sleep
solutions to consumers in over 100 countries.

We operate in two segments: North America and International. These segments are
strategic business units that are managed separately based on geography. Our
North America segment consists of Tempur and Sealy manufacturing and
distribution subsidiaries, joint ventures and licensees located in the U.S.,
Canada and Mexico. 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 the North America segment.
Our International segment consists of Tempur manufacturing and distribution
subsidiaries, Sealy distribution subsidiaries, joint ventures and licensees
located in Europe, Asia-Pacific and Latin America (other than Mexico). Corporate
operating expenses are not included in either of the segments and are presented
separately as a reconciling item to consolidated results. We evaluate segment
performance based on net sales, gross profit and operating income. For
additional information refer to Note 13, "Business Segment Information,"
included in Part I, ITEM 1 of this Report.

Our product brand portfolio includes many highly recognized and iconic brands in
the industry, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic®
Technology and Stearns & Foster® and our non-branded offerings include
value-focused private label OEM products. Our distinct brands allow for
complementary merchandising strategies.

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

General Business and Economic Conditions

We believe the bedding industry is structured for sustained growth driven by product innovation, consumer confidence, housing formations and population growth. The industry is no longer engaged in uneconomical retail store expansion, startups have shifted from uneconomical strategies to becoming profitable and legacy retailers and manufacturers have become skilled in producing profitable online sales.

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At the outset of the COVID-19 global pandemic we experienced a reduction in
total net sales across both of our business segments in the first quarter of
2020. Our North America business began experiencing sharp declines in total net
sales and orders in mid-March. Order trends reached their lowest point in early
April 2020 when they had declined approximately 80% as compared to the prior
year. North American order trends significantly improved beginning in late May,
and this improvement continued throughout the remainder of 2020. This momentum
has continued as the negative impacts of the COVID-19 pandemic largely subsided
in the first half of 2021, as compared to the significant global disruption
experienced throughout early 2020. Our consolidated net sales increased 75.8% as
compared to the second quarter of 2020, which was impacted by COVID-19. Current
order trends continue to indicate growth. As a result, we expect consolidated
net sales growth to exceed 35% for the full year 2021.

Over the past several years and accelerating during the COVID-19 global
pandemic, consumers have shifted their spending habits towards in-home products,
including bedding products. We believe this may be a long-term shift in consumer
spending habits, which could continue to favorably impact our industry. The
rapid increase in demand for bedding products has challenged the entire bedding
industry and supply chain, including our business. In the U.S., the broad-based
increase in demand coupled with supply chain constraints has created operational
challenges for U.S. production. The availability of certain commodities improved
throughout the second quarter of 2021. However, availability declined for other
key components as well as inbound and outbound freight. As a result, the U.S.
sales growth in the first half of 2021 was unfavorably impacted as we could not
fulfill the entire domestic demand for these products. We expect these
constraints to continue to impact sales growth into the third quarter of 2021
and now anticipate the demand for these products will likely exceed supply into
the fourth quarter of 2021. We estimate sales would have been approximately $150
million higher in the second quarter of 2021 had we not experienced supply chain
constraints. We expect these supply chain constraints will be largely resolved
by the end of 2021 and expect to be well-positioned to meet consumer demand
heading into 2022.

During the first half of 2021, commodity costs unfavorably impacted our gross
margin. We implemented pricing actions in the fourth quarter of 2020 and in the
second quarter of 2021 to mitigate these known commodity headwinds. Since then,
we have continued to manage through a highly inflationary commodity environment
and have taken additional pricing actions that will benefit the fourth quarter
of 2021. Based on our current commodity outlook, we expect gross margin will be
positively impacted by our pricing actions net of commodity cost inflation in
the first half of 2022.

While we are unable to determine or predict the nature, duration or scope of the
overall impact the COVID-19 pandemic will have on our business, results of
operations, liquidity or capital resources, we believe that it is important to
share where our Company stands today, how our response to COVID-19 is
progressing and how our operations and financial condition may change as the
fight against COVID-19 progresses. We will continue to actively monitor the
situation and may take further actions that alter our business operations as may
be required by federal, state or local authorities or that we determine are in
the best interests of our employees, customers, suppliers and stockholders. For
further information regarding the impact of COVID-19 on the Company, please
refer to "Risk Factors" in ITEM 1A of Part I of the 2020 Annual Report.

Acquisition of Dreams Topco Limited


On May 26, 2021, we entered into a share purchase agreement with Project Dream
S.à.r.l. and certain members of the management team and Dreams Topco Limited to
purchase the entire issued share capital of Dreams Topco Limited and its direct
and indirect subsidiaries ("Dreams"). Dreams has developed a successful
multi-channel sales strategy, with over 200 brick and mortar retail locations in
the United Kingdom, an industry-leading online channel, as well as manufacturing
and delivery assets. Dreams generated sales of approximately $400 million and
EBITDA of approximately $75 million for the year ending December 31, 2020. On
August 2, 2021, we completed the acquisition of Dreams. The purchase price was
approximately $475 million, less net debt and is subject to a customary working
capital adjustment period. The transaction is expected to be accretive to our
EPS by approximately $0.20 and generate annual sales of approximately $450
million in the first year post-acquisition.

Product Launches


During the first quarter of 2021, we completed the launch of our Tempur-Ergo
Smart Base Collection with Sleeptracker® technology in North America. In 2021,
we began the largest rollout in Sealy North America's history with the
introduction of new Posturepedic Plus™, Posturepedic® and Essentials product
lines. The rollout will be split between two phases with Posturepedic® and
Essentials product lines successfully launched in the first half of 2021 and the
new higher end Posturepedic Plus™ line planned for 2022. We expect to launch a
new Tempur product line in our International segment in 2022.

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Our global 2021 marketing plan is to aggressively support our innovative bedding
products through investing significant marketing dollars to promote our
worldwide brands.


Results of Operations

A summary of our results for the three months ended June 30, 2021 include:


•Total net sales increased 75.8% to $1,169.1 million as compared to $665.2
million in the second quarter of 2020. On a constant currency basis, which is a
non-GAAP financial measure, total net sales increased 72.6%, with an increase of
73.8% in the North America business segment and an increase of 64.5% in the
International business segment.
•Gross margin was 44.3% as compared to 40.0% in the second quarter of 2020.
Adjusted gross margin, which is a non-GAAP financial measure, was 40.6% in
the second quarter of 2020. There were no adjustments to gross margin in the
second quarter of 2021.
•Operating income increased 318.2% to $223.3 million as compared to $53.4
million in the second quarter of 2020. Adjusted operating income, which is a
non-GAAP financial measure, increased 191.7% to $227.2 million as compared to
$77.9 million in the second quarter of 2020.
•Net income increased 512.2% to $140.8 million as compared to $23.0 million in
the second quarter of 2020. Adjusted net income, which is a non-GAAP financial
measure, increased 294.9% to $161.5 million as compared to $40.9 million in the
second quarter of 2020.
•Earnings before interest, tax, depreciation and amortization ("EBITDA"), which
is a non-GAAP financial measure, increased 212.3% to $266.1 million as compared
to $85.2 million in the second quarter of 2020. Adjusted EBITDA per credit
facility, which is a non-GAAP financial measure, increased 146.6% to $270.3
million as compared to $109.6 million in the second quarter of 2020.
•Earnings per diluted share ("EPS") increased 527.3% to $0.69 as compared to
$0.11 in the second quarter of 2020. Adjusted EPS, which is a non-GAAP financial
measure, increased 295.0% to $0.79 as compared to $0.20 in the second quarter of
2020.

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


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

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                THREE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE
                        THREE MONTHS ENDED JUNE 30, 2020

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

                                                                       Three Months Ended June 30,
(in millions, except percentages and per share
amounts)                                                       2021                                     2020
Net sales                                      $      1,169.1               100.0  %       $  665.2               100.0  %
Cost of sales                                           650.9                55.7             399.3                60.0
Gross profit                                            518.2                44.3             265.9                40.0
Selling and marketing expenses                          216.8                18.5             135.1                20.3
General, administrative and other expenses               85.1                 7.3              82.4                12.4

Equity income in earnings of unconsolidated
affiliates                                               (7.0)               (0.6)             (5.0)               (0.7)
Operating income                                        223.3                19.1              53.4                 8.0

Other expense, net:
Interest expense, net                                    20.0                 1.7              20.6                 3.1

Loss on extinguishment of debt                           18.0                 1.5                 -                   -
Other (income) expense, net                              (0.1)                  -               0.3                   -
Total other expense, net                                 37.9                 3.2              20.9                 3.1

Income from continuing operations before
income taxes                                            185.4                15.9              32.5                 4.9
Income tax provision                                    (44.7)               (3.8)             (9.4)               (1.4)
Income from continuing operations                       140.7                12.0              23.1                 3.5
(Loss) income from discontinued operations,
net of tax                                               (0.3)                  -               0.1                   -
Net income before non-controlling interests             140.4                12.0              23.2                 3.5
Less: Net (loss) income attributable to
non-controlling interests                                (0.4)                  -               0.2                   -
Net income attributable to Tempur Sealy
International, Inc.                            $        140.8                12.0  %       $   23.0                 3.5  %

Earnings per common share:

Basic
Earnings per share for continuing operations   $         0.72                              $   0.11
Loss per share for discontinued operations                  -                                     -
Earnings per share                             $         0.72                              $   0.11

Diluted
Earnings per share for continuing operations   $         0.69                              $   0.11
Loss per share for discontinued operations                  -                                     -
Earnings per share                             $         0.69                              $   0.11

Weighted average common shares outstanding:
Basic                                                   197.0                                 206.4
Diluted                                                 204.1                                 208.0



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                                   NET SALES
                                                        Three Months Ended June 30,
                                  2021          2020          2021          2020         2021         2020
       (in millions)                 Consolidated               North America              International
       Net sales by channel
       Wholesale               $ 1,005.4      $ 563.7      $   890.8      $ 502.8      $ 114.6      $ 60.9
       Direct                      163.7        101.5          123.0         75.8         40.7        25.7
       Total net sales         $ 1,169.1      $ 665.2      $ 1,013.8      $ 578.6      $ 155.3      $ 86.6


Net sales increased 75.8%, and on a constant currency basis increased 72.6%. The change in net sales was driven by the following:


•North America net sales increased $435.2 million, or 75.2%. On a constant
currency basis, North America net sales increased 73.8%. Net sales in the
Wholesale channel increased $388.0 million, or 77.2%. Net sales in the Direct
channel increased $47.2 million, or 62.3%. The increase in net sales across all
channels was driven by higher sales volume compared to the prior year period,
which was impacted by COVID-19.

•International net sales increased $68.7 million, or 79.3%. On a constant
currency basis, International net sales increased 64.5%. Net sales in the
Wholesale channel increased 71.8% on a constant currency basis. Net sales in the
Direct channel increased 47.5% on a constant currency basis. The increase in net
sales across all channels was driven by higher sales volume compared to the
prior year period, which was impacted by COVID-19.


                                  GROSS PROFIT
                                                                       Three Months Ended June 30,
                                                            2021                                        2020
(in millions, except percentages)             Gross Profit          Gross Margin          Gross Profit          Gross Margin        Margin Change
North America                               $       425.4                 42.0  %       $       218.4                 37.7  %               4.3  %
International                                        92.8                 59.8  %                47.5                 54.8  %               5.0  %
Consolidated gross margin                   $       518.2                 44.3  %       $       265.9                 40.0  %               4.3  %



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

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

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

Gross margin improved 430 basis points. The primary drivers of changes in gross margin by segment are discussed below:


•North America gross margin improved 430 basis points. The improvement in gross
margin was driven by fixed cost leverage from higher sales volume, resulting in
an increase of 410 basis points, compared to the prior year period, which was
impacted by COVID-19. Additionally, in 2020, we incurred $4.0 million of
incremental costs related to global pandemic relief efforts, sanitation supplies
and services and other items, which was not repeated in 2021.

•International gross margin improved 500 basis points. The improvement in gross
margin was primarily driven by fixed cost leverage from higher sales volume
resulting in an increase of 470 basis points compared to the prior year, which
was impacted by COVID-19. Additionally, in 2020, we incurred $0.5 million of
incremental costs related to global pandemic relief efforts, sanitation supplies
and services and other items, which was not repeated in 2021.

                               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 June 30,

                                  2021             2020             2021             2020             2021            2020            2021            2020
(in millions)                         Consolidated                      North America                    International                      Corporate
Operating expenses:
Advertising expenses           $ 108.0          $  55.1          $  97.1          $  49.9          $  10.9          $  5.2          $    -          $    -
Other selling and marketing
expenses                         108.8             80.0             70.0             52.5             32.4            24.4             6.4             

3.1

General, administrative and
other expenses                    85.1             82.4             40.9             48.3             13.1            11.6            31.1            22.5

Total operating expenses       $ 301.9          $ 217.5          $ 208.0          $ 150.7          $  56.4          $ 41.2          $ 37.5          $ 25.6



Operating expenses increased $84.4 million, or 38.8%, and decreased 690 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 $57.3 million, or 38.0%, and
decreased 550 basis points as a percentage of net sales. The increase in
operating expenses was primarily driven by advertising investments and increased
variable compensation expense as compared to the prior year period, when the
full-year outlook included worldwide shutdowns and significant retailer door
closures due to COVID-19. Additionally, in 2020, we recognized $7.0 million of
asset impairment charges related to the write-off of certain sales and marketing
assets driven by the macro-economic environment, which were not repeated in
2021.

•International operating expenses increased $15.2 million, or 36.9%, and
decreased 1,130 basis points as a percentage of net sales. The increase in
operating expenses was primarily driven by advertising and other selling and
marketing investments as compared to the prior year period, when cost reduction
actions were taken due to COVID-19. These increases were partially offset by
decreased restructuring costs. In 2020, we recorded $3.4 million of
restructuring costs associated with headcount reductions driven by the
macro-economic environment, which were not repeated in 2021.

•Corporate operating expenses increased $11.9 million, or 46.5%. The increase in
operating expenses was primarily driven by the low level of variable
compensation expense in prior year when the full-year outlook included worldwide
shutdowns and significant retailer door closures due to COVID-19. Additionally,
we recorded $3.9 million of acquisition-related costs, primarily related to
legal and professional fees associated with the acquisition of Dreams.

Research and development expenses for the three months ended June 30, 2021 were $6.7 million compared to $5.2 million for the three months ended June 30, 2020, an increase of $1.5 million, or 28.8%.

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                                OPERATING INCOME
                                                                         Three Months Ended June 30,
                                                              2021                                          2020
                                                                                             Operating
(in millions, except percentages)           Operating Income       Operating Margin            Income           Operating Margin        Margin Change
North America                               $       217.4                    21.4  %       $      67.7                    11.7  %               9.7  %
International                                        43.4                    27.9  %              11.3                    13.0  %              14.9  %
                                                    260.8                                         79.0
Corporate expenses                                  (37.5)                                       (25.6)
Total operating income                      $       223.3                    19.1  %       $      53.4                     8.0  %              11.1  %



Operating income increased $169.9 million and operating margin improved 1,110
basis points. The primary drivers of changes in operating income and operating
margin by segment are discussed below:

•North America operating income increased $149.7 million and operating margin
improved 970 basis points. The improvement in operating margin was primarily
driven by improvement in gross margin of 430 basis points and favorable
operating expense leverage of 280 basis points. Additionally, in 2020, we
recognized $7.0 million of asset impairment charges related to the write-off of
certain sales and marketing assets driven by the macro-economic environment and
incurred $4.3 million of incremental costs related to global pandemic relief
efforts, sanitation supplies and services and other items, which were not
repeated in 2021.

•International operating income increased $32.1 million and operating margin
improved 1,490 basis points. The improvement in operating margin was primarily
driven by favorable operating expense leverage of 560 basis points and the
improvement in gross margin of 500 basis points. Additionally, in 2020, we
recorded $3.4 million of restructuring costs associated with headcount
reductions driven by the macro-economic environment and $0.6 million of
incremental costs related to the global pandemic, which were not repeated in
2021.

•Corporate operating expenses increased $11.9 million, which negatively impacted
our consolidated operating margin by 100 basis points. The increase in operating
expenses was primarily driven by the low level of variable compensation expense
in prior year when the full-year outlook included worldwide shutdowns and
significant retailer door closures due to COVID-19. Additionally, we recorded
$3.9 million of acquisition-related costs, primarily related to legal and
professional fees associated with the acquisition of Dreams.

                             INTEREST EXPENSE, NET
                                                    Three Months Ended June 

30,

  (in millions, except percentages)                2021                   2020       % Change
  Interest expense, net               $         20.0                    $ 20.6         (2.9) %



Interest expense, net, decreased $0.6 million, or 2.9%. The decrease in interest
expense, net, was primarily driven by lower interest rates on our variable rate
debt, partially offset by $5.2 million of overlapping interest expense during
the period between the issuance of the 2029 Senior Notes and the redemption of
the 2026 Senior Notes.

                         LOSS ON EXTINGUISHMENT OF DEBT

On March 25, 2021, we issued our 2029 Senior Notes. During the second quarter of
2021, we used the net proceeds from the 2029 Senior Notes to primarily redeem in
full our $600.0 million 2026 Senior Notes. As a result of the redemption, we
recognized $18.0 million of loss on extinguishment of debt, which includes a
prepayment premium of $16.5 million and the write-off of $1.5 million of
deferred financing costs. Refer to Note 5, "Debt," in our Notes to Condensed
Consolidated Financial Statements included in ITEM 1 under Part I for additional
information.

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                              INCOME TAX PROVISION
                                                     Three Months Ended 

June 30,

   (in millions, except percentages)         2021                         2020       % Change
   Income tax provision                $       44.7                     $ 9.4         375.5  %
   Effective tax rate                          24.1   %                  28.9  %


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 increased $35.3 million due to an increase in income
before income taxes. Our effective tax rate for the three months ended June 30,
2021 as compared to the same prior year period decreased by 480 basis points.
The effective tax rate as compared to the U.S. federal statutory rate for the
three months ended June 30, 2021 included the favorable impact of the
elimination of global intangible low-taxed income ("GILTI") from U.S. taxable
income, the favorable impact of the deductibility of stock compensation in the
U.S. and included a net unfavorable impact of other discrete items. The
effective tax rate as compared to the U.S. federal statutory tax rate for the
three months ended June 30, 2020 also included a net favorable impact of
discrete items.

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                 SIX MONTHS ENDED JUNE 30, 2021 COMPARED TO THE
                         SIX MONTHS ENDED JUNE 30, 2020

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

                                                                          Six Months Ended June 30,
(in millions, except percentages and per share
amounts)                                                         2021                                       2020
Net sales                                       $    2,212.9                   100.0  %       $ 1,487.6               100.0  %
Cost of sales                                        1,235.8                    55.8              864.6                58.1
Gross profit                                           977.1                    44.2              623.0                41.9
Selling and marketing expenses                         414.5                    18.7              306.1                20.6
General, administrative and other expenses             164.6                     7.4              163.0                10.9

Equity income in earnings of unconsolidated
affiliates                                             (13.7)                   (0.6)              (4.8)               (0.3)

Operating income                                       411.7                    18.6              158.7                10.7

Other expense, net:
Interest expense, net                                   32.3                     1.5               40.9                 2.7
Loss on extinguishment of debt                          23.0                     1.0                  -                   -
Other (income) expense, net                             (0.4)                      -                0.8                 0.1
Total other expense, net                                54.9                     2.5               41.7                 2.8

Income from continuing operations before income
taxes                                                  356.8                    16.1              117.0                 7.9
Income tax provision                                   (85.2)                   (3.9)             (32.9)               (2.2)
Income from continuing operations                      271.6                    12.3               84.1                 5.7
Loss from discontinued operations, net of tax           (0.5)                      -               (1.1)               (0.1)
Net income before non-controlling interests            271.1                    12.3               83.0                 5.6
Less: Net (loss) income attributable to
non-controlling interests                               (0.2)                      -                0.3                   -
Net income attributable to Tempur Sealy
International, Inc.                             $      271.3                    12.3  %       $    82.7                 5.6  %

Earnings per common share:

Basic
Earnings per share for continuing operations    $       1.36                                  $    0.39
Loss per share for discontinued operations                 -                                          -
Earnings per share                              $       1.36                                  $    0.39

Diluted
Earnings per share for continuing operations    $       1.32                                  $    0.40
Loss per share for discontinued operations                 -                                      (0.01)
Earnings per share                              $       1.32                                  $    0.39

Weighted average common shares outstanding:
Basic                                                  200.4                                      210.0
Diluted                                                204.9                                      212.0



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                                   NET SALES
                                                        Six Months Ended June 30,
                               2021           2020           2021           2020          2021         2020
    (in millions)                  Consolidated                 North America               International
    Net sales by channel
    Wholesale               $ 1,886.8      $ 1,286.1      $ 1,656.3      $ 1,127.5      $ 230.5      $ 158.6
    Direct                      326.1          201.5          240.8          143.4         85.3         58.1
    Total net sales         $ 2,212.9      $ 1,487.6      $ 1,897.1      $ 1,270.9      $ 315.8      $ 216.7


Net sales increased 48.8%, and on a constant currency basis increased 46.4%. The change in net sales was driven by the following:


•North America net sales increased $626.2 million, or 49.3%. Net sales in the
Wholesale channel increased $528.8 million, or 46.9%, primarily driven by
broad-based demand across our retail partners and higher sales volume compared
to the prior year period, which was impacted by COVID-19. Net sales in the
Direct channel increased $97.4 million, or 67.9%, primarily driven by growth
from web sales and higher retail sales volume compared to the prior year period,
which was impacted by COVID-19.

•International net sales increased $99.1 million, or 45.7%. On a constant
currency basis, International net sales increased 34.1%. Net sales in the
Wholesale channel increased 33.1% on a constant currency basis. Net sales in the
Direct channel increased 36.7% on a constant currency basis. The increase in net
sales across all channels was driven by higher sales volume compared to the
prior year period, which was impacted by COVID-19.

                                  GROSS PROFIT
                                                                       Six Months Ended June 30,
                                                            2021                                       2020
(in millions, except percentages)            Gross Profit          Gross Margin          Gross Profit          Gross Margin        Margin Change
North America                               $      789.3                 41.6  %       $       499.6                 39.3  %               2.3  %
International                                      187.8                 59.5  %               123.4                 56.9  %               2.6  %
Consolidated gross margin                   $      977.1                 44.2  %       $       623.0                 41.9  %               2.3  %



  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.

Gross margin improved 230 basis points. The primary drivers of changes in gross margin by segment are discussed below:


•North America gross margin improved 230 basis points. The improvement in gross
margin was primarily driven by fixed cost leverage on higher sales volume of 220
basis points, compared to the prior year period which was impacted by COVID-19.
Additionally, in 2020, we incurred $4.0 million of incremental costs related to
global pandemic relief efforts, sanitation supplies and services and other
items, which was not repeated in 2021.

•International gross margin improved 260 basis points. The improvement in gross
margin was primarily driven by favorable mix of 120 basis points and fixed cost
leverage on higher unit volumes of 110 basis points. Additionally, in 2020, we
incurred $0.5 million of incremental costs related to global pandemic relief
efforts, sanitation supplies and services and other items, which was not
repeated in 2021.

                               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.
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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.

Six Months Ended June 30,

                                  2021             2020             2021             2020             2021            2020            2021            2020
(in millions)                         Consolidated                      North America                    International                      Corporate
Operating expenses:
Advertising expenses           $ 198.9          $ 128.6          $ 176.5          $ 113.8          $  22.4          $ 14.8          $    -          $    -
Other selling and marketing
expenses                         215.6            177.5            138.8            118.7             64.0            52.7            12.8             

6.1

General, administrative and
other expenses                   164.6            163.0             83.2             97.8             25.5            23.0            55.9            

42.2

Total operating expenses $ 579.1 $ 469.1 $ 398.5

      $ 330.3          $ 111.9          $ 90.5          $ 68.7          $ 48.3



  Operating expenses increased $110.0 million, or 23.4%, and decreased 530 basis
points as a percentage of net sales. The primary drivers of changes in operating
expenses by segment are explained below:

•North America operating expenses increased $68.2 million, or 20.6%, and
decreased 500 basis points as a percentage of net sales. The increase in
operating expenses was primarily driven by advertising investments and increased
variable compensation expense as compared to the prior year period, when the
full-year outlook included worldwide shutdowns and significant retailer door
closures due to COVID-19. Additionally, in 2020, we recorded $11.7 million of
customer-related charges in connection with the bankruptcy of Art Van Furniture,
LLC and affiliates to fully reserve trade receivables and other assets
associated with this account and $7.0 million of asset impairment charges
related to the write-off of certain sales and marketing assets driven by the
macro-economic environment, which were not repeated in 2021.

•International operating expenses increased $21.4 million, or 23.6%, and
decreased 640 basis points as a percentage of net sales. The increase in
operating expenses was primarily driven by other selling and marketing
investments and increased advertising as compared to the prior year period, when
cost reduction actions were taken due to COVID-19. Additionally, in 2020, we
incurred $3.4 million of restructuring costs associated with headcount
reductions driven by the macro-economic environment and $2.4 million of
incremental costs related to global pandemic relief efforts, sanitation supplies
and services and other items, which were not repeated in 2021.

•Corporate operating expenses increased $20.4 million, or 42.2%. The increase in
operating expenses was primarily driven by amortization of our performance-based
stock compensation plans. Additionally, we recorded $3.9 million of
acquisition-related costs, primarily related to legal and professional fees
associated with the acquisition of Dreams.

  Research and development expenses were $13.2 million for the six months ended
June 30, 2021 as compared to $11.0 million for the six months ended June 30,
2020.

                                OPERATING INCOME
                                                                    Six Months Ended June 30,
                                                       2021                                            2020
(in millions, except                    Operating                                      Operating
percentages)                             Income             Operating Margin             Income            Operating Margin          Margin Change
North America                        $      390.8                      20.6  %       $     169.3                      13.3  %                 7.3  %
International                                89.6                      28.4  %              37.7                      17.4  %                11.0  %
                                            480.4                                          207.0
Corporate expenses                          (68.7)                                         (48.3)
Total operating income               $      411.7                      18.6  %       $     158.7                      10.7  %                 7.9  %



  Operating income increased $253.0 million and operating margin improved 790
basis points. The primary drivers of changes in operating income and operating
margin by segment are discussed below:

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•North America operating income increased $221.5 million and operating margin
improved 730 basis points. The improvement in operating margin was primarily
driven by improved operating expense leverage of 270 basis points, improvement
in gross margin of 230 basis points and decreased customer-related charges. In
2020, we recorded $11.7 million of customer-related charges in connection with
the bankruptcy of Art Van Furniture, LLC and affiliates. Additionally, in 2020,
we recorded $7.0 million of asset impairment charges related to the write-off of
certain sales and marketing assets driven by the macro-economic environment and
incurred $4.3 million of incremental costs related to global pandemic relief
efforts, sanitation supplies and services and other items, which were not
repeated in 2021.

•International operating income increased $51.9 million and operating margin
improved 1,100 basis points. The improvement in operating margin was primarily
driven by improved operating expense leverage of 360 basis points, improvement
in gross margin of 260 basis points and improved performance of the Asia-Pacific
joint ventures of 160 basis points. Additionally, in 2020, we incurred
$3.4 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, which were not repeated in 2021.

•Corporate operating expenses increased $20.4 million, which negatively impacted
our consolidated operating margin by 90 basis points. The increase in operating
expenses was primarily driven by amortization of our performance-based stock
compensation plans. Additionally, we recorded $3.9 million of
acquisition-related costs, primarily related to legal and professional fees
associated with the acquisition of Dreams.

                             INTEREST EXPENSE, NET
                                                        Six Months Ended 

June 30,

    (in millions, except percentages)                 2021                 2020       % Change
    Interest expense, net                  $       32.3                  $ 40.9        (21.0) %



Interest expense, net, decreased $8.6 million, or 21.0%. The decrease in
interest expense, net, was primarily driven by reduced average levels of
outstanding debt and lower interest rates on our variable rate debt, partially
offset by $5.2 million of overlapping interest expense for the period between
the issuance of the 2029 Senior Notes and redemption of the 2026 Senior Notes.

                         LOSS ON EXTINGUISHMENT OF DEBT

On March 25, 2021, we issued our 2029 Senior Notes. During the second quarter of
2021, we used the net proceeds from the 2029 Senior Notes primarily to redeem in
full our $600.0 million 2026 Senior Notes, at 102.75% of their principal amount,
plus the accrued and unpaid interest. As a result of the redemption, we
recognized $18.0 million of loss on extinguishment of debt, which included a
prepayment premium of $16.5 million and the write-off of $1.5 million of
deferred financing costs. Additionally, in the first quarter of 2021, we
recognized $5.0 million of loss on extinguishment of debt, which includes a
prepayment premium of $3.5 million and the write-off of $1.5 million of deferred
financing costs, associated with the redemption of the remaining amount
outstanding of the 2023 Senior Notes. Refer to Note 5, "Debt," in our Notes to
Condensed Consolidated Financial Statements included in ITEM 1 under Part I for
additional information.

                              INCOME TAX PROVISION
                                                        Six Months Ended June 30,
    (in millions, except percentages)           2021                      2020        % Change
    Income tax provision                   $      85.2                  $ 32.9         159.0  %
    Effective tax rate                            23.9   %                28.1  %



Our income tax provision increased $52.3 million due to an increase in income
before income taxes. Our effective tax rate for the six months ended June 30,
2021 as compared to the same prior year period decreased 420 basis points. The
effective tax rate as compared to the U.S. federal statutory rate for the six
months ended June 30, 2021 included the favorable impact of the elimination of
GILTI from U.S. taxable income, the favorable impact of the deductibility of
stock compensation in the U.S. and included a net unfavorable impact of other
discrete items. The effective tax rate as compared to the U.S. federal statutory
rate for the for the six months ended June 30, 2020 included a net unfavorable
impact of discrete items primarily related to the impact of the likelihood of
realization of certain deferred tax assets.

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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, payments of
dividends to our shareholders, capital expenditures and working capital needs.

As of June 30, 2021, we had net working capital of $67.4 million, including cash
and cash equivalents of $58.1 million, as compared to a working capital deficit
of $6.4 million, including cash and cash equivalents of $65.0 million, as of
December 31, 2020.

At June 30, 2021, total cash and cash equivalents were $58.1 million, of which
$25.5 million was held in the U.S. and $32.6 million was held by subsidiaries
outside of the U.S. The amount of cash and cash equivalents held by subsidiaries
outside of the U.S. and not readily convertible into the U.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:
                                                                        Six Months Ended June 30,
(in millions)                                                            2021                 2020
Net cash provided by (used in) continuing operations:
Operating activities                                               $       313.0          $    170.4
Investing activities                                                       (57.9)              (87.2)
Financing activities                                                      (260.5)                1.4



Cash provided by operating activities from continuing operations increased
$142.6 million in the six months ended June 30, 2021 as compared to the same
period in 2020. The increase in cash provided by operating activities was driven
by strong operational performance in the period.

Cash used in investing activities from continuing operations decreased $29.3
million in the six months ended June 30, 2021 as compared to the same period in
2020. The decrease in cash used in investing activities was due to the
acquisition of the Sherwood Bedding business, which occurred in the first
quarter of 2020.

Cash used in financing activities from continuing operations increased $261.9
million in the six months ended June 30, 2021 as compared to the same period in
2020. For the six months ended June 30, 2021, we had net funding of $153.8
million, which included proceeds of $800.0 million from the issuance of our 2029
Senior Notes, offset by repayments of $250.0 million of our 2023 Senior Notes
and $600.0 million of our 2026 Senior Notes and net borrowings of $203.8 million
on our credit facilities, as compared to net borrowings of $207.0 million in
2020 on our credit facilities. During the six months ended June 30, 2021 and
2020, we repurchased $374.4 million and $199.5 million, respectively, of our
common stock. Cash used in financing activities also decreased due to dividends
paid to shareholders of $28.1 million and payment of deferred financing costs of
$14.2 million during the six months ended June 30, 2021.

Cash Provided by (Used in) Discontinued Operations


Net cash provided by (used in) operating, investing and financing activities
from discontinued operations for the periods ended June 30, 2021 and 2020 was
not material.

Capital Expenditures

Capital expenditures totaled $52.6 million and $49.4 million for the six months
ended June 30, 2021 and 2020, respectively. We currently expect our 2021 capital
expenditures to be approximately $150 million to $165 million, which includes
investments in growth initiatives.

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Indebtedness

Our total debt increased to $1,523.6 million as of June 30, 2021 from $1,370.3
million as of December 31, 2020. On November 9, 2020, we redeemed $200.0 million
of our issued and outstanding 2023 Senior Notes at 101.406% of their principal
amount, plus the accrued and unpaid interest. During the first quarter of 2021,
we redeemed the remaining $250.0 million of our 2023 Senior Notes, principally
funded by our revolving credit facility, at 101.406% of the principal amount,
plus the accrued and unpaid interest.

On February 2, 2021 we entered into an amendment to our 2019 Credit Agreement,
which increased our revolving credit facility from $425.0 million to
$725.0 million. Total availability under our revolving senior secured credit
facility was $629.3 million as of June 30, 2021, which matures in 2024.

On March 25, 2021, we issued the 2029 Senior Notes. The 2029 Senior Notes mature
on April 15, 2029 and 4.00% interest is payable semi-annually in arrears on each
April 15 and October 15, beginning on October 15, 2021. On June 15, 2021, we
redeemed our $600.0 million 2026 Senior Notes, in full, using net proceeds from
our 2029 Senior Notes.

Additionally, on May 26, 2021, we entered into an amendment to our 2019 Credit
Agreement. The amendment provides for a $300.0 million delayed draw term loan.
On July 30, 2021 we drew down the full $300.0 million available under the
delayed draw term loan to fund, in part, the Dreams acquisition. Refer to Note
5, "Debt" in our "Notes to Condensed Consolidated Financial Statements," under
Part I, ITEM 1 for further discussion of our debt.

As of June 30, 2021, our ratio of consolidated indebtedness less netted cash to
adjusted EBITDA per credit facility, which is a non-GAAP financial measure, in
accordance with our 2019 Credit Agreement was 1.44 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 of June 30, 2021, we were in compliance with all of the
financial covenants in our debt agreements, and we do not anticipate material
issues under any debt agreements based on current facts and circumstances.

Our debt agreements contain certain covenants that limit restricted payments,
including share repurchases and dividends. The 2019 Credit Agreement and 2029
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, 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 per
credit facility is above 3.50 times. The limit on restricted payments under the
2019 Credit Agreement and 2029 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. On
February 11, 2021, the Board of Directors authorized an increase of $211.4
million, to the existing share repurchase authorization of Tempur Sealy
International's common stock. On April 29, 2021, the Board of Directors
authorized an additional increase, of $325.3 million, to the share repurchase
authorization. During the six months ended June 30, 2021, we repurchased 10.0
million shares under our share repurchase program for $361.4 million. As of
June 30, 2021, we had $376.8 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.
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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," in the 2020 Annual Report. Please also
refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this
Report.

Future Liquidity Sources and Uses


As of June 30, 2021, we had $987.4 million of liquidity, including $58.1 million
of cash on hand, $629.3 million available under our revolving senior secured
credit facility and $300.0 million available under our delayed draw term loan.
In addition, we expect to generate significant cash flow from operations in the
full year 2021. We believe that cash flow from operations, availability under
our existing credit facilities and arrangements, current cash balances and the
ability to obtain other financing, if necessary, will provide adequate cash
funds for our foreseeable working capital needs, necessary capital expenditures
and debt service obligations.

Our capital allocation strategy follows a balanced approach focused on
supporting the business, returning shareholder value through share repurchases
and quarterly dividends as well as opportunistic and strategic acquisition
opportunities that enhance our global competitiveness. Additionally, we have
taken capital structure actions to optimize our balance sheet, through extending
the maturities of our long-term debt and lowering our annualized interest
expense. We plan to take the following additional actions in 2021:

•For the third quarter of 2021, the Board of Directors has declared a dividend
of $0.09 per share. The dividend is payable on August 26, 2021 to shareholders
of record as of August 12, 2021. This represents a 29% increase over our
previous quarterly dividend of $0.07 per share.
•Repurchase at least 6% of shares outstanding over the course of 2021, subject
to market conditions.
•On July 30, 2021, we drew down the full $300.0 million available under the
delayed draw term loan to fund, in part, the Dreams acquisition.

As of June 30, 2021, we had $1,523.6 million in total debt outstanding and
consolidated indebtedness less netted cash, which is a non-GAAP financial
measure, of $1,466.6 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 1.44 times for the trailing twelve months ended
June 30, 2021. Our target range for our ratio of consolidated indebtedness less
netted cash, which is a non-GAAP financial measure, is 2.0 to 3.0 times. We
expect our ratio of consolidated indebtedness less netted cash to adjusted
EBITDA per credit facility, which is a non-GAAP financial measure, will be
approximately 1.80 times after the acquisition of Dreams. Total cash interest
payments related to our borrowings are expected to be approximately $55 million
in 2021.

Our debt service obligations could, under certain circumstances, have material
consequences to our stockholders. Similarly, our cash requirements are subject
to change as business conditions warrant and opportunities arise. The timing and
size of any new business ventures or acquisitions that we may complete may also
impact our cash requirements and debt service obligations. For information
regarding the impact of COVID-19 on our business, including our liquidity and
capital resources, please refer to "Risk Factors" contained in ITEM 1A of Part I
of the 2020 Annual Report.

Non-GAAP Financial Information


We provide information regarding adjusted net income, adjusted EPS, adjusted
gross profit, adjusted gross margin, adjusted operating income (expense),
adjusted operating margin, EBITDA, adjusted EBITDA 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), operating margin or an alternative to total debt as a measure of
liquidity. We believe these non-GAAP financial measures provide investors with
performance measures that better reflect our underlying operations and trends,
providing a perspective not immediately apparent from net income, gross profit,
gross margin, operating income (expense) and operating margin. The adjustments
we make to derive the non-GAAP financial measures include adjustments to exclude
items that may cause short-term fluctuations in the nearest GAAP financial
measure, but which we do not consider to be the fundamental attributes or
primary drivers of our business.

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We believe that exclusion of these items assists in providing a more complete
understanding of our underlying results from continuing operations and trends,
and we use these measures along with the corresponding GAAP financial measures
to manage our business, to evaluate our consolidated and business segment
performance compared to prior periods and the marketplace, to establish
operational goals and to provide continuity to investors for comparability
purposes. Limitations associated with the use of these non-GAAP measures include
that these measures do not present all of the amounts associated with our
results as determined in accordance with GAAP. These non-GAAP financial measures
should be considered supplemental in nature and should not be construed as more
significant than comparable financial measures defined by GAAP. Because not all
companies use identical calculations, these presentations may not be comparable
to other similarly titled measures of other companies. For more information
about these non-GAAP financial measures and a reconciliation to the nearest GAAP
financial measure, please refer to the reconciliations on the following pages.

Adjusted Net Income and Adjusted EPS


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

The following table sets forth the reconciliation of our reported net income to
adjusted net income and the calculation of adjusted EPS for the three months
ended June 30, 2021 and 2020:
                                                                              Three Months Ended
(in millions, except per share amounts)                             June 30, 2021             June 30, 2020
Net income                                                       $       140.8              $         23.0
Loss (income) from discontinued operations, net of tax (1)                 0.3                        (0.1)
Loss on extinguishment of debt (2)                                        18.0                           -

Overlapping interest expense (3)                                           5.2                           -
Acquisition-related costs (4)                                              3.9                           -
COVID-19 charges (5)                                                         -                         7.9
Asset impairments (6)                                                        -                         7.0
Incremental operating costs (7)                                              -                         4.9

Restructuring costs (8)                                                      -                         3.4
Accounting standard adoption (9)                                             -                         1.3

Tax adjustments (10)                                                      (6.7)                       (6.5)
Adjusted net income                                              $       161.5              $         40.9

Adjusted earnings per share, diluted                             $        0.79              $         0.20

Diluted shares outstanding                                               204.1                       208.0



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(1) Certain subsidiaries in the International business segment are accounted for as

discontinued operations and have been designated as unrestricted subsidiaries in the

2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted

financial measures for covenant compliance purposes.

(2) In the second quarter of 2021, we recognized $18.0 million of loss on extinguishment of

debt associated with the redemption of the 2026 Senior Notes.

(3) In the second quarter of 2021, we incurred $5.2 million of overlapping interest expense

during the period between the issuance of the 2029 Senior Notes and the redemption of

the 2026 Senior Notes.

(4) In the second quarter of 2021, we recorded $3.9 million of acquisition-related costs,

primarily related to legal and professional fees associated with the acquisition of

Dreams.

(5) In the second quarter of 2020, we recorded $7.9 million 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 $7.0 million of asset impairment charges

related to the write-off of certain sales and marketing assets.

(7) In the second quarter of 2020, we recorded $4.9 million of incremental operating costs

associated with the global pandemic.

(8) In the second quarter of 2020, we incurred $3.4 million of restructuring costs

associated with International headcount reductions driven by the macro-economic

environment.

(9) In the second quarter of 2020, we recorded $1.3 million of charges related to the

adoption of ASU No. 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.

(10) Adjusted income tax provision represents the tax effects associated with the

        aforementioned items.



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


A reconciliation of gross profit and gross margin to adjusted gross profit and
adjusted gross margin, respectively, and operating income (expense) and
operating margin to adjusted operating income (expense) and adjusted operating
margin, respectively, are provided below. We believe that the use of these
non-GAAP financial measures provides investors with additional useful
information with respect to the impact of various adjustments as described in
the footnotes below.

The following table sets forth our reported gross profit and the reconciliation
of the Company's operating income (expense) to the calculation of adjusted
operating (income) expense for the three months ended June 30, 2021. We had no
adjustments to gross profit for the three months ended June 30, 2021.

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