Quarterly Report (10-q)

Date : 08/01/2019 @ 8:24PM
Source : Edgar (US Regulatory)
Stock : Tempur Sealy International Inc (TPX)
Quote : 86.17  -0.42 (-0.49%) @ 12:29AM
After Hours
Last Trade
Last $ 86.17 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 001-31922
TEMPUR SEALY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
33-1022198
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
  1000 Tempur Way
Lexington , Kentucky 40511
(Address, including zip code, of principal executive offices)
Registrant’s telephone number, including area code: ( 800 ) 878-8889

  Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Common Stock, $0.01 par value
TPX
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes    ý  No   o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ý   Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth Company
x

  o

  o


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes   No ý


The number of shares outstanding of the registrant’s common stock as of July 29, 2019 was  54,811,534 shares.



Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, (this "Report"), including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which includes information concerning one or more of our plans; objectives; goals; strategies and other information that is not historical information. Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, ITEM 2 of this Report. When used in this Report, the words "assumes," "estimates," "expects," “guidance,” “anticipates,” “projects,” “plans,” “proposed,” “targets,” “intends,” “believes,” “will” and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations and various assumptions. There can be no assurance that we will realize our expectations or that our beliefs will prove correct.

Numerous factors, many of which are beyond the Company's control, could cause actual results to differ materially from those expressed as forward-looking statements in this Report, including risks associated with the impact of the macroeconomic environment in both the U.S. and internationally (including the impact of our highly inflationary economies) on our business segments and expectations regarding growth of the mattress industry; uncertainties arising from global events; the effects of strategic investments on our operations, including our efforts to expand our global market share; the ability to develop and successfully launch new products; the efficiency and effectiveness of our advertising campaigns and other marketing programs; the ability to increase sales productivity within existing retail accounts and to further penetrate the retail channel, including the timing of opening or expanding within large retail accounts and the timing and success of product launches; the ability to continuously improve and expand our product line; the ability to maintain efficient, timely and cost-effective production and delivery of products, and manage growth generally and in connection with the new or expanded supply agreements with Mattress Firm, Inc., Big Lots, Inc. and Beter Bed Holding N.V.; the effects of consolidation of retailers on revenues and costs; competition in our industry; consumer acceptance of our products; the effects of discontinued operations on our operating results and future performance; general economic, financial and industry conditions, particularly conditions relating to the financial performance and related credit issues present in the retail sector; financial distress among our business partners, customers and competitors; financial solvency and related problems experienced by other market participants; our ability to execute on our strategy to optimize and integrate the assets of Innovative Mattress Solutions, LLC acquired by our affiliate; our reliance on information technology and the associated risks involving potential security lapses and/or cyber-based attacks; the outcome of pending tax audits or other tax, regulatory or investigation proceedings and pending litigation; changes in foreign tax rates and changes in tax laws generally, including the ability to utilize tax loss carryforwards; our capital structure and debt level, including our ability to meet financial obligations and continue to comply with the terms and financial ratio covenants of our credit facilities; changes in interest rates; effects of changes in foreign exchange rates on our reported earnings; changing commodity costs; disruptions in the supply of raw materials, or loss of suppliers; expectations regarding our target leverage and our share repurchase program; sales fluctuations due to seasonality; the effect of future legislative or regulatory changes, including changes in international trade duties, tariffs and other aspects of international trade policy; our ability to protect our intellectual property; and disruptions to the implementation of our strategic priorities and business plan caused by abrupt changes in our executive management team.

Other potential risk factors include the risk factors discussed under the heading "Risk Factors" under ITEM 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Annual Report"). In addition, there may be other factors that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us apply only as of the date of this Report and are expressly qualified in their entirety by the cautionary statements included in this Report. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements, whether as a result of new information, future events, or otherwise.

When used in this Report, except as specifically noted otherwise, the term "Tempur Sealy International" refers to Tempur Sealy International, Inc. only, and the terms "Company," "we," "our," "ours" and "us" refer to Tempur Sealy International, Inc. and its consolidated subsidiaries. When used in this Report, the term "Tempur" may refer to Tempur-branded products and the term "Sealy" may refer to Sealy-branded products or to Sealy Corporation and its historical subsidiaries, in all cases as the context requires. In addition, when used in this Report "2016 Credit Agreement" refers to the Company's senior credit facility entered into in 2016, as amended; "2023 Senior Notes" refers to the 5.625% senior notes due 2023 issued in 2015; "2026 Senior Notes" refers to the 5.50% senior notes due 2026 issued in 2016; and "2020 Senior Notes" refers to the 6.875% senior notes due 2020 retired in 2016.

2


TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.     FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per common share amounts)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
722.8

 
$
659.9

 
$
1,413.7

 
$
1,297.3

Cost of sales
409.4

 
387.1

 
818.5

 
759.8

Gross profit
313.4

 
272.8

 
595.2

 
537.5

Selling and marketing expenses
163.3

 
153.3

 
316.8

 
298.7

General, administrative and other expenses
72.7

 
65.3

 
143.4

 
132.8

Equity income in earnings of unconsolidated affiliates
(3.6
)
 
(3.8
)
 
(6.5
)
 
(7.7
)
Operating income
81.0

 
58.0

 
141.5

 
113.7

 
 
 
 
 
 
 
 
Other expense, net:
 
 
 
 
 
 
 
Interest expense, net
22.5

 
23.2

 
44.9

 
45.9

Other income, net

 
(0.6
)
 
(7.8
)
 
(3.2
)
Total other expense, net
22.5

 
22.6

 
37.1

 
42.7

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
58.5

 
35.4

 
104.4

 
71.0

Income tax provision
(15.8
)
 
(8.8
)
 
(32.7
)
 
(18.8
)
Income from continuing operations
42.7

 
26.6

 
71.7

 
52.2

Loss from discontinued operations, net of tax
(1.2
)
 
(5.4
)
 
(1.6
)
 
(8.2
)
Net income before non-controlling interest
41.5

 
21.2

 
70.1

 
44.0

Less: Net (loss) income attributable to non-controlling interest
(0.1
)
 
(1.6
)
 
0.1

 
(1.9
)
Net income attributable to Tempur Sealy International, Inc.
$
41.6

 
$
22.8

 
$
70.0

 
$
45.9

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Earnings per share for continuing operations
$
0.78

 
$
0.52

 
$
1.31

 
$
0.99

Loss per share for discontinued operations
(0.02
)
 
(0.10
)
 
(0.03
)
 
(0.15
)
Earnings per share
$
0.76

 
$
0.42

 
$
1.28

 
$
0.84

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Earnings per share for continuing operations
$
0.76

 
$
0.52

 
$
1.29

 
$
0.98

Loss per share for discontinued operations
(0.02
)
 
(0.10
)
 
(0.03
)
 
(0.15
)
Earnings per share
$
0.74

 
$
0.42

 
$
1.26

 
$
0.83

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
54.7

 
54.4

 
54.7

 
54.4

Diluted
56.0

 
54.9

 
55.6

 
55.0


See accompanying Notes to Condensed Consolidated Financial Statements. 

4


TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income before non-controlling interest
$
41.5

 
$
21.2

 
$
70.1

 
$
44.0

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
3.0

 
(16.1
)
 
7.0

 
(11.1
)
Pension benefits loss, net of tax

 

 

 
(0.6
)
Other comprehensive income, net of tax
3.0

 
(16.1
)
 
7.0

 
(11.7
)
Comprehensive income
44.5

 
5.1

 
77.1

 
32.3

Less: Comprehensive (loss) income attributable to non-controlling interest
(0.1
)
 
(1.6
)
 
0.1

 
(1.9
)
Comprehensive income attributable to Tempur Sealy International, Inc.
$
44.6

 
$
6.7

 
$
77.0

 
$
34.2

 
See accompanying Notes to Condensed Consolidated Financial Statements .



5


TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
 
June 30, 2019
 
December 31, 2018
ASSETS
(Unaudited)
 
 
 
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
38.3

 
$
45.8

Accounts receivable, net
386.3

 
321.5

Inventories
243.1

 
222.3

Prepaid expenses and other current assets
224.0

 
215.8

Total Current Assets
891.7

 
805.4

Property, plant and equipment, net
430.0

 
420.8

Goodwill
732.3

 
723.0

Other intangible assets, net
650.6

 
649.3

Operating lease right-of-use assets
228.1

 

Deferred income taxes
12.5

 
22.6

Other non-current assets
101.5

 
94.3

Total Assets
$
3,046.7

 
$
2,715.4

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current Liabilities:
 

 
 

Accounts payable
$
235.5

 
$
253.0

Accrued expenses and other current liabilities
436.4

 
359.2

Current portion of long-term debt
60.1

 
47.1

Income taxes payable
6.7

 
9.7

Total Current Liabilities
738.7

 
669.0

Long-term debt, net
1,585.5

 
1,599.1

Long-term operating lease obligations
186.7



Deferred income taxes
117.0

 
117.5

Other non-current liabilities
112.9

 
112.3

Total Liabilities
2,740.8

 
2,497.9

 
 
 
 
Commitments and contingencies—see Note 12


 


 
 
 
 
Total Stockholders' Equity
305.9

 
217.5

Total Liabilities and Stockholders' Equity
$
3,046.7

 
$
2,715.4

 
See accompanying Notes to Condensed Consolidated Financial Statements. 



6


TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)

Three Months Ended June 30, 2019
 
 
 
Tempur Sealy International, Inc. Stockholders' Equity
 
 
 
 
 
Redeemable
Non-controlling Interest
 
Common Stock
 
Treasury Stock
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Non-controlling Interest in Subsidiaries
 
Total Stockholders' Equity
 
 
Shares Issued
 
At Par
 
Shares Issued
 
At Cost
 
Additional Paid in Capital
 
Retained Earnings
 
 
 
Balance as of March 31, 2019
$

 
99.2

 
$
1.0

 
44.5

 
$
(1,736.7
)
 
$
537.1

 
$
1,542.2

 
$
(91.3
)
 
$
1.2

 
$
253.5

Net income
 
 
 
 
 
 
 
 
 
 
 
 
41.6

 
 
 
 
 
41.6

Net loss attributable to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.1
)
 
(0.1
)
Foreign currency adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.0

 
 
 
3.0

Exercise of stock options
 
 
 
 
 
 
(0.1
)
 
0.9

 
2.2

 
 
 
 
 
 
 
3.1

Issuances of PRSUs, RSUs, and DSUs
 
 
 
 
 
 

 
0.3

 
(0.3
)
 
 
 
 
 
 
 

Treasury stock repurchased
 
 
 
 
 
 

 
(1.8
)
 
 
 
 
 
 
 
 
 
(1.8
)
Amortization of unearned stock-based compensation
 
 
 
 
 
 
 
 
 
 
6.6

 
 
 
 
 
 
 
6.6

Balance, June 30, 2019
$

 
99.2

 
$
1.0

 
44.4

 
$
(1,737.3
)
 
$
545.6

 
$
1,583.8

 
$
(88.3
)
 
$
1.1

 
$
305.9


Three Months Ended June 30, 2018
 
 
 
Tempur Sealy International, Inc. Stockholders' Equity
 
 
 
 
 
Redeemable
Non-controlling Interest
 
Common Stock
 
Treasury Stock
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Non-controlling Interest in Subsidiaries
 
Total Stockholders' Equity
 
 
Shares Issued
 
At Par
 
Shares Issued
 
At Cost
 
Additional Paid in Capital
 
Retained Earnings
 
 
 
Balance as of March 31, 2018
$
1.9

 
99.2

 
$
1.0

 
45.0

 
$
(1,737.5
)
 
$
513.6

 
$
1,436.4

 
$
(71.1
)
 
$

 
$
142.4

Net income
 
 
 
 
 
 
 
 
 
 
 
 
22.8

 
 
 
 
 
22.8

Net loss attributable to non-controlling interest
(1.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.1
)
 
(0.1
)
Acquisition of non-controlling interest in subsidiary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.3

 
1.3

Foreign currency adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(16.1
)
 
 
 
(16.1
)
Exercise of stock options
 
 
 
 
 
 
(0.1
)
 
0.4

 
0.3

 
 
 
 
 
 
 
0.7

Issuances of PRSUs, RSUs, and DSUs
 
 
 
 
 
 

 
0.3

 
(0.3
)
 
 
 
 
 
 
 

Treasury stock repurchased
 
 
 
 
 
 

 
(0.1
)
 
 
 
 
 
 
 
 
 
(0.1
)
Amortization of unearned stock-based compensation
 
 
 
 
 
 
 
 
 
 
6.8

 
 
 
 
 
 
 
6.8

Balance, June 30, 2018
$
0.4

 
99.2

 
$
1.0

 
44.9

 
$
(1,736.9
)
 
$
520.4

 
$
1,459.2

 
$
(87.2
)
 
$
1.2

 
$
157.7











7


TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
(in millions)
(unaudited)

Six Months Ended June 30, 2019
 
 
 
Tempur Sealy International, Inc. Stockholders' Equity
 
 
 
 
 
Redeemable
Non-controlling Interest
 
Common Stock
 
Treasury Stock
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Non-controlling Interest in Subsidiaries
 
Total Stockholders' Equity
 
 
Shares Issued
 
At Par
 
Shares Issued
 
At Cost
 
Additional Paid in Capital
 
Retained Earnings
 
 
 
Balance as of December 31, 2018
$

 
99.2

 
$
1.0

 
44.7

 
$
(1,737.0
)
 
$
532.1

 
$
1,513.8

 
$
(95.3
)
 
$
2.9

 
$
217.5

Net income
 
 
 
 
 
 
 
 
 
 
 
 
70.0

 
 
 
 
 
70.0

Net income attributable to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.1

 
0.1

Repurchase of interest in subsidiary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1.9
)
 
(1.9
)
Foreign currency adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7.0

 
 
 
7.0

Exercise of stock options
 
 
 
 
 
 
(0.2
)
 
1.7

 
3.8

 
 
 
 
 
 
 
5.5

Issuances of PRSUs, RSUs, and DSUs
 
 
 
 
 
 
(0.2
)
 
3.5

 
(3.5
)
 
 
 
 
 
 
 

Treasury stock repurchased
 
 
 
 
 
 
0.1

 
(5.5
)
 
 
 
 
 
 
 
 
 
(5.5
)
Amortization of unearned stock-based compensation
 
 
 
 
 
 
 
 
 
 
13.2

 
 
 
 
 
 
 
13.2

Balance, June 30, 2019
$

 
99.2

 
$
1.0

 
44.4

 
$
(1,737.3
)
 
$
545.6

 
$
1,583.8

 
$
(88.3
)
 
$
1.1

 
$
305.9


Six Months Ended June 30, 2018
 
 
 
Tempur Sealy International, Inc. Stockholders' Equity
 
 
 
 
 
Redeemable
Non-controlling Interest
 
Common Stock
 
Treasury Stock
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Non-controlling Interest in Subsidiaries
 
Total Stockholders' Equity
 
 
Shares Issued
 
At Par
 
Shares Issued
 
At Cost
 
Additional Paid in Capital
 
Retained Earnings
 
 
 
Balance as of December 31, 2017
$
2.2

 
99.2

 
$
1.0

 
45.0

 
$
(1,737.2
)
 
$
508.0

 
$
1,416.2

 
$
(75.5
)
 
$

 
$
112.5

Adoption of accounting standards effective January 1, 2018
 
 
 
 
 
 
 
 
 
 
 
 
(2.9
)
 
(0.5
)
 
 
 
(3.4
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
45.9

 
 
 
 
 
45.9

Net loss attributable to non-controlling interest
(1.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.1
)
 
(0.1
)
Acquisition of non-controlling interest in subsidiary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.3

 
1.3

Adjustment to pension liability, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.1
)
 
 
 
(0.1
)
Foreign currency adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(11.1
)
 
 
 
(11.1
)
Exercise of stock options
 
 
 
 
 
 
(0.1
)
 
1.0

 
1.6

 
 
 
 
 
 
 
2.6

Issuances of PRSUs, RSUs, and DSUs
 
 
 
 
 
 
(0.1
)
 
2.3

 
(2.3
)
 
 
 
 
 
 
 

Treasury stock repurchased
 
 
 
 
 
 
0.1

 
(3.0
)
 
 
 
 
 
 
 
 
 
(3.0
)
Amortization of unearned stock-based compensation
 
 
 
 
 
 
 
 
 
 
13.1

 
 
 
 
 
 
 
13.1

Balance, June 30, 2018
$
0.4

 
99.2

 
$
1.0

 
44.9

 
$
(1,736.9
)
 
$
520.4

 
$
1,459.2

 
$
(87.2
)
 
$
1.2

 
$
157.7



The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.


8


TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions) (unaudited)
 
Six Months Ended
 
June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
 
 
 
Net income before non-controlling interest
$
70.1

 
$
44.0

Loss from discontinued operations, net of tax
1.6

 
8.2

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
43.5

 
41.8

Amortization of stock-based compensation
13.2

 
13.1

Non-cash lease expense
2.4

 

Amortization of deferred financing costs
1.2

 
1.2

Bad debt expense
4.6

 
1.7

Deferred income taxes
8.8

 
(2.4
)
Dividends received from unconsolidated affiliates
2.3

 
3.7

Equity income in earnings of unconsolidated affiliates
(6.5
)
 
(7.7
)
Foreign currency adjustments and other
(6.3
)
 
(2.9
)
Changes in operating assets and liabilities
(89.0
)
 
(83.3
)
Net cash provided by operating activities from continuing operations
45.9

 
17.4

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:
 

 
 

Purchases of property, plant and equipment
(39.9
)
 
(40.5
)
Acquisitions, net of cash acquired
(17.1
)


Other
10.3

 
0.6

Net cash used in investing activities from continuing operations
(46.7
)
 
(39.9
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:
 

 
 

Proceeds from borrowings under long-term debt obligations
509.2

 
732.2

Repayments of borrowings under long-term debt obligations
(509.8
)
 
(697.8
)
Proceeds from exercise of stock options
5.5

 
2.6

Treasury stock repurchased
(5.5
)
 
(3.0
)
Other
(3.4
)
 
(3.4
)
Net cash (used in) provided by financing activities from continuing operations
(4.0
)
 
30.6

 
 
 
 
Net cash (used in) provided by continuing operations
(4.8
)
 
8.1

 
 
 
 
CASH USED IN DISCONTINUED OPERATIONS
 
 
 
Operating cash flows
(2.0
)
 
(15.8
)
Investing cash flows

 
(0.1
)
Financing cash flows

 

Net cash used in discontinued operations
(2.0
)
 
(15.9
)
 
 
 
 
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(0.7
)
 
(1.5
)
Decrease in cash and cash equivalents
(7.5
)
 
(9.3
)
CASH AND CASH EQUIVALENTS, beginning of period
45.8

 
41.9

CASH AND CASH EQUIVALENTS, end of period
38.3

 
32.6

LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS

 
1.6

CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
$
38.3

 
$
31.0

 
 
 
 
Supplemental cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
45.9

 
$
45.3

Income taxes, net of refunds
35.2

 
17.9

See accompanying Notes to Condensed Consolidated Financial Statements.

9


TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited)

(1) Summary of Significant Accounting Policies
 
(a) Basis of Presentation and Description of Business. Tempur Sealy International, Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term "Tempur Sealy International" refers to Tempur Sealy International, Inc. only, and the term "Company" refers to Tempur Sealy International, Inc. and its consolidated subsidiaries.

The Company develops, manufactures, markets and sells bedding products, which include mattresses, foundations and adjustable bases, and other products, which include pillows and other accessories. The Company also derives income from royalties by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The Company sells its products through two sales channels: Wholesale and Direct.

The Company has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions. The Company’s ownership interest in these joint ventures is 50.0% . The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have control, and consolidation is not otherwise required. The Company's carrying value in its equity method investments of $24.6 million and $22.5 million at June 30, 2019 and December 31, 2018 , respectively, is recorded in other non-current assets within the accompanying Condensed Consolidated Balance Sheets. The Company’s equity in the net income and losses of these investments is recorded as equity income in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States ("GAAP") for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2018 , included in the 2018 Annual Report filed with the Securities and Exchange Commission on February 25, 2019.
 
The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein.

(b) Adoption of New Accounting Standards.

Leases. Effective January 1, 2019, the Company adopted Accounting Standards Codification 842, Leases ("ASC 842"). ASC 842 consists of a comprehensive lease accounting standard requiring most leases to be recognized on the Condensed Consolidated Balance Sheet and significant new disclosures. The Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed it to carry forward the historical lease classification.

Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded within the Condensed Consolidated Balance Sheet and are expensed on a straight-line basis over the lease term within the Condensed Consolidated Statement of Income. The lease term is determined by assuming the exercise of renewal options that are reasonably certain. As most leases do not provide an implicit interest rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. When contracts contain lease and non-lease components, the Company generally accounts for both components as a single lease component.

The adoption of ASC 842 resulted in the recognition of right-of-use assets of $ 197.2 million and operating lease liabilities of  $203.3 million as of January 1, 2019. Results for reporting periods beginning prior to January 1, 2019 continue to be reported in accordance with our historical accounting treatment. The adoption of ASC 842 did not have a material impact on the Company's results of operations, cash flows or debt covenants. For additional information, see Note 8 , " Leases " of the Condensed Consolidated Financial Statements.
(c) Inventories . Inventories are stated at the lower of cost and net realizable value, determined by the first-in, first-out method, and consist of the following:

10

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

 
June 30,
 
December 31,
(in millions)
2019
 
2018
Finished goods
$
143.4

 
$
148.9

Work-in-process
11.0

 
11.8

Raw materials and supplies
88.7

 
61.6

 
$
243.1

 
$
222.3



(d)  Accrued Sales Returns . The Company allows product returns through certain sales channels and on certain products. Estimated sales returns are provided at the time of sale based on historical sales channel return rates. Estimated future obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized. Accrued sales returns are included in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.

The Company had the following activity for sales returns from December 31, 2018 to June 30, 2019 :
(in millions)
 
Balance as of December 31, 2018
$
34.3

Amounts accrued
52.0

Returns charged to accrual
(49.4
)
Balance as of June 30, 2019
$
36.9



As of June 30, 2019 and December 31, 2018 , $24.6 million and $22.0 million of accrued sales returns are included as a component of accrued expenses and other current liabilities and $12.3 million and $12.3 million , of accrued sales returns are included in other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.

(e) Warranties . The Company provides warranties on certain products, which vary by segment, product and brand. Estimates of warranty expenses are based primarily on historical claims experience and product testing. Estimated future obligations related to these products are charged to cost of sales in the period in which the related revenue is recognized. The Company considers the impact of recoverable salvage value on warranty costs in determining its estimate of future warranty obligations.

The Company provides warranties on mattresses with varying warranty terms. Tempur-Pedic mattresses sold in the North America segment and all Sealy mattresses have warranty terms ranging from 10 to 25 years, generally non-prorated for the first 10 to 15 years and then prorated for the balance of the warranty term. Tempur-Pedic mattresses sold in the International segment have warranty terms ranging from 5 to 15 years, non-prorated for the first 5 years and then prorated on a straight-line basis for the last 10 years of the warranty term. Tempur-Pedic pillows have a warranty term of 3 years, non-prorated.

The Company had the following activity for its accrued warranty expense from December 31, 2018 to June 30, 2019 :
(in millions)
 
Balance as of December 31, 2018
$
36.4

Amounts accrued
14.3

Warranties charged to accrual
(13.1
)
Balance as of June 30, 2019
$
37.6



As of June 30, 2019 and December 31, 2018 , $15.5 million and $14.9 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $22.1 million and $21.5 million of accrued warranty expense is included in other non-current liabilities in the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.


11

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(f) Allowance for Doubtful Accounts . The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s accounts receivable. The Company regularly reviews the adequacy of its allowance for doubtful accounts. The Company determines the allowance based on historical write-off experience and current economic conditions and also considers factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a customer receivable is reasonably assured. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets was $50.9 million and $47.6 million as of June 30, 2019 and December 31, 2018 , respectively.

(2) Recently Issued Accounting Pronouncements

Credit Losses

In June 2016, the FASB issued ("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. This ASU is effective on January 1, 2020. In transition, entities are required to use a modified retrospective approach for the adoption of the new standard. The ASU replaces the incurred loss impairment methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company is currently evaluating this ASU to determine the impact it will have on the Company's Condensed Consolidated Financial Statements.    

(3) Revenue Recognition

Disaggregation of Revenue

The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the three and six months ended June 30, 2019 :
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
(in millions)
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Channel
 
 
 
 
 
 
 
 
 
 
 
Wholesale
$
528.5

 
$
103.7

 
$
632.2

 
$
1,030.3

 
$
217.8

 
$
1,248.1

Direct
59.6

 
31.0

 
90.6

 
101.8

 
63.8

 
165.6

Net sales
$
588.1

 
$
134.7

 
$
722.8

 
$
1,132.1

 
$
281.6

 
$
1,413.7

 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Product
 
 
 
 
 
 
 
 
 
 
 
Bedding products
$
554.2

 
$
108.4

 
$
662.6

 
$
1,068.6

 
$
223.8

 
$
1,292.4

Other products
33.9

 
26.3

 
60.2

 
63.5

 
57.8

 
121.3

Net sales
$
588.1

 
$
134.7

 
$
722.8

 
$
1,132.1

 
$
281.6

 
$
1,413.7

 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Geographical region
 
 
 
 
 
 
 
 
 
 
 
United States
$
533.7

 
$

 
$
533.7

 
$
1,030.9

 
$

 
$
1,030.9

Canada
54.4

 

 
54.4

 
101.2

 

 
101.2

International

 
134.7

 
134.7

 

 
281.6

 
281.6

Net sales
$
588.1

 
$
134.7

 
$
722.8

 
$
1,132.1

 
$
281.6

 
$
1,413.7



12

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the three and six months ended June 30, 2018 :
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
(in millions)
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Channel
 
 
 
 
 
 
 
 
 
 
 
Wholesale
$
494.3

 
$
107.3

 
$
601.6

 
$
948.3

 
$
236.4

 
$
1,184.7

Direct
33.5

 
24.8

 
58.3

 
64.5

 
48.1

 
112.6

Net sales
$
527.8

 
$
132.1

 
$
659.9

 
$
1,012.8

 
$
284.5

 
$
1,297.3

 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Product
 
 
 
 
 
 
 
 
 
 
 
Bedding products
$
497.4

 
$
103.9

 
$
601.3

 
$
949.7

 
$
227.6

 
$
1,177.3

Other products
30.4

 
28.2

 
58.6

 
63.1

 
56.9

 
120.0

Net sales
$
527.8

 
$
132.1

 
$
659.9

 
$
1,012.8

 
$
284.5

 
$
1,297.3

 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
International
 
Consolidated
 
North America
 
International
 
Consolidated
Geographical region
 
 
 
 
 
 
 
 
 
 
 
United States
$
477.7

 
$

 
$
477.7

 
$
917.9

 
$

 
$
917.9

Canada
50.1

 

 
50.1

 
94.9

 

 
94.9

International

 
132.1

 
132.1

 

 
284.5

 
284.5

Net sales
$
527.8

 
$
132.1

 
$
659.9

 
$
1,012.8

 
$
284.5

 
$
1,297.3



The North America and International segments sell product through two channels: Wholesale and Direct. The Wholesale channel includes all product sales to third party retailers, including third party distribution, hospitality and healthcare. The Direct channel includes product sales through company-owned stores, e-commerce and call centers. The North America and International segments classify products into two major categories: Bedding and Other. Bedding products include mattresses, foundations and adjustable foundations. Other products include pillows, mattress covers, sheets, cushions and various other comfort products.

The Wholesale channel also includes income from royalties derived by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The licenses include rights for the licensees to use trademarks as well as current proprietary or patented technology that the Company utilizes. The Company also provides its licensees with product specifications, research and development, statistical services and marketing programs. The Company recognizes royalty income based on the occurrence of sales of Sealy® and Stearns & Foster® branded products by various licensees.

For product sales in each of the Company's channels, the Company recognizes a sale when the obligations under the terms of the contract with the customer is 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. The Company transfers control and recognizes a sale when the customer receives the product. Each unit sold is considered an independent, unbundled performance obligation. The Company does not have any additional performance obligations other than product sales that are material in the context of the contract. The Company also offers assurance type warranties on certain of its products, which is not accounted for as separate performance obligations under the revenue model.

The transaction price is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives, and correspondingly, the revenue that is recognized, varies due to sales incentives and returns the Company offers to its Wholesale and Direct channel customers. Specifically, the Company extends volume discounts, as well as promotional allowances, floor sample discounts, commissions paid to retail associates and slotting fees to its Wholesale channel customers and reflects these amounts as a reduction of sales at the time revenue is recognized based on historical experience. The Company allows returns following a sale, depending on the channel and promotion. The Company reduces revenue and cost of sales for its estimate of the expected returns, which is primarily based on the level of historical sales returns. The Company does not offer extended payment terms beyond one year to customers. As such, the Company does not adjust its consideration for financing arrangements.


13

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

In certain jurisdictions, the Company is subject to certain non-income taxes including, but not limited to, sales tax, value added tax, excise tax and other taxes. These taxes are excluded from the transaction price, and therefore, excluded from revenue.    The Company has elected to account for shipping and handling activities as a fulfillment cost as permitted by Topic 606. Accordingly, the Company reflects all amounts billed to customers for shipping and handling in revenue and the costs of fulfillment in cost of sales.
    
(4) Discontinued Operations

The Company presents the financial position and results of operations of certain businesses in the Latin American region as discontinued operations in the accompanying Condensed Consolidated Financial Statements. In December 2018, the Company divested of the net assets of certain subsidiaries in the Latin American region.


14

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

Components of amounts reflected in the Condensed Consolidated Statements of Income related to discontinued operations are presented in the following table for each of the periods ended June 30 .

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$

 
$
9.8

 
$
0.2

 
$
20.4

Cost of sales

 
6.5

 
0.2

 
13.9

Gross profit

 
3.3

 

 
6.5

Selling and marketing expenses

 
4.1

 
0.1

 
7.6

General, administrative and other expenses
1.2

 
1.7

 
1.8

 
3.2

Operating loss
(1.2
)
 
(2.5
)
 
(1.9
)
 
(4.3
)
 
 
 
 
 
 
 
 
Interest expense (income), net and other

 
3.1

 
(0.3
)
 
4.1

 
 
 
 
 
 
 
 
Loss from discontinued operations before income taxes
(1.2
)
 
(5.6
)
 
(1.6
)
 
(8.4
)
Income tax provision

 
0.2

 

 
0.2

Net loss from discontinued operations, net of tax
$
(1.2
)
 
$
(5.4
)
 
$
(1.6
)
 
$
(8.2
)

(5) Acquisitions

Acquisition of Innovative Mattress Solutions, LLC ("iMS")

On January 11, 2019, iMS filed for bankruptcy and the Company provided debtor-in-possession financing in connection with the iMS Chapter 11 proceedings. On April 1, 2019, the Company acquired substantially all of the net assets of iMS in a transaction valued at approximately $24 million , including assumed liabilities of approximately $11 million as of March 31, 2019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of this regional bedding retailer furthers the Company’s North American retail strategy, which is focused on meeting customer demand through geographic representation and sales expertise.

The Company accounted for this transaction as a business combination. Total cash consideration was $13.2 million , less cash acquired of $5.1 million , resulting in a purchase price of $8.1 million . The preliminary allocation of the purchase price is based on estimates of the fair values of the assets acquired and liabilities assumed as of April 1, 2019, which primarily includes the following:

(in millions)
 
Working capital (accounts receivable and inventory, net of accounts payable and accrued liabilities)
$
(2.3
)
Property and equipment
5.0

Goodwill
2.1

Other intangible assets
3.3

Operating lease right-of-use assets
28.5

Long-term operating lease liabilities
(28.5
)
Net purchase price
$
8.1



Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the growth opportunities and synergistic benefits to be realized from the acquisition.  The goodwill is deductible for income tax purposes and will be included within the North American reporting unit for goodwill impairment assessments. 
As a result of the acquisition, the Company acquired trade names and customer database of $3.3 million .
Acquisition in the International segment

On April 1, 2019, the Company acquired the net assets of an entity in the International segment. The acquisition was valued at  $7.1 million , and the purchase price allocation primarily included working capital, property, plant and equipment and inventory. Additionally, the Company recognized goodwill of $2.9 million and other intangible assets of $2.9 million .
(6) Goodwill
The following summarizes changes to the Company’s goodwill, by segment:
(in millions) 
North America
 
International
 
Consolidated
Balance as of December 31, 2018
$
571.1

 
151.9

 
$
723.0

Goodwill resulting from acquisitions
2.1

 
5.4

 
7.5

Foreign currency translation and other
2.5

 
(0.7
)
 
1.8

Balance as of June 30, 2019
$
575.7

 
$
156.6

 
$
732.3



(7) Debt

Debt for the Company consists of the following:
 
June 30, 2019
 
December 31, 2018
 
 
(in millions, except percentages)
Amount
 
Rate
 
Amount
 
Rate
 
Maturity Date
2016 Credit Agreement
 
 
 
 
 
 
 
 
 
Term A Facility
$
435.0

 
(1)
 
$
525.0

 
(2)
 
April 6, 2021
Revolver

 
(1)
 

 
(2)
 
April 6, 2021
2026 Senior Notes
600.0

 
5.500%
 
600.0

 
5.500%
 
June 15, 2026
2023 Senior Notes
450.0

 
5.625%
 
450.0

 
5.625%
 
October 15, 2023
Securitized debt
93.9

 
(3)
 
9.1

 
(3)
 
April 6, 2021
Finance/capital lease obligations (4)
65.9

 
 
 
66.7

 
 
 
Various
Other
7.7

 
 
 
3.0

 
 
 
Various
Total debt
1,652.5

 
 
 
1,653.8

 
 
 
 
Less: deferred financing costs
6.9

 
 
 
7.6

 
 
 
 
Total debt, net
1,645.6

 
 
 
1,646.2