Annual Report (10-k)

Date : 02/24/2020 @ 11:04AM
Source : Edgar (US Regulatory)
Stock : Tempur Sealy International Inc (TPX)
Quote : 36.8  0.0 (0.00%) @ 1:00AM

Annual Report (10-k)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 12/31/2019
or
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 of registrant’s principal executive offices) (Zip Code)
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 Each Exchange on Which Registered
Common Stock, $0.01 par value
TPX
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
 None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No 
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. x Yes o No
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 (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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 x Accelerated filer o Non-Accelerated filer o Smaller Reporting Company Emerging Growth Company
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 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes x No
The aggregate market value of the common equity held by non-affiliates of the registrant on June 30, 2019, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter was approximately $3,360,947,634.
The number of shares outstanding of the registrant’s common stock as of February 17, 2020 was 53,863,131 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2020 Annual Meeting of Stockholders, which is to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K.



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2


Special Note Regarding Forward-Looking Statements
 
This Annual Report on Form 10-K (the “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 II, ITEM 7 of this Report. When used in this Report, the words “assumes,” “estimates,” “expects,” “guidance,” “anticipates,” “might,” “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 beliefs 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 any that may be expressed herein as forward-looking statements in this Report. These risk factors include the impact of the macroeconomic environment in both the U.S. and internationally on our business segments and expectations regarding growth of the mattress industry; uncertainties arising from global events, natural disasters or pandemics; 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, and the related expenses and life cycles of such products; 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; 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; the Company’s ability to execute on its strategy to optimize and integrate assets of Innovative Mattress Solutions, LLC acquired by an affiliate of the Company (Sleep Outfitters); risks associated with the Company's acquisition of 80% ownership of Sherwood Acquisition Holdings, LLC, including the possibility that the expected benefits of the acquisition are not realized when expected or at all; our reliance on information technology and 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 changes in our executive management team.
Other potential risk factors include the risk factors discussed under the heading “Risk Factors” under Part I, ITEM 1A of this Report. 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 “Tempur Sealy,” “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, “2019 Credit Agreement” refers to the Company’s senior credit facility entered into in 2019; “2016 Credit Agreement” refers to the Company’s prior senior credit facility entered into in 2016; “2012 Credit Agreement” refers to the Company’s prior senior credit facility entered into in 2012; “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.

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PART I
 
ITEM 1. BUSINESS    
 
General
 
We are a vertically integrated global bedding company that develops, manufactures and markets bedding products. Tempur Sealy’s stated purpose is “to improve the sleep of more people, every night, all around the world.” This commitment manifests itself in everything we do, including a company-wide decision to undertake global efforts to improve our communities and environment. To that end, we have enlisted the same innovative spirit that has guided our world-class bedding business to the top of the industry in our drive to achieve industry-leading sustainability and environmental initiatives.

Our long-term strategy is to drive earnings growth with high return on invested capital and robust free cash flow, which is a non-GAAP financial measure. In order to achieve our long-term strategy while managing the current economic and competitive environments, we focus on developing the most innovative bedding products in all the markets we serve, making significant investments in our iconic global brands and optimizing our worldwide omni-channel distribution. We also intend to generate earnings growth through ongoing investments in research and development and productivity initiatives, which will improve our profitability and create long-term stockholder value.

Tempur Sealy has strong brands across a portfolio of bedding products serving all price points. Our powerful distribution model operates through an omni-channel strategy across both wholesale and direct, with both channels growing worldwide. We have a global manufacturing footprint with approximately 7,400 employees around the world. Tempur Sealy has a strong competitive presence in the bedding marketplace with a leadership position that comes from product and service quality, culture, strategy, and people, backed with financial strength and a disciplined approach to returning value to shareholders.

Our principal executive office is located at 1000 Tempur Way, Lexington, Kentucky 40511 and our telephone number is (800) 878-8889. Tempur Sealy International, Inc. was incorporated under the laws of the State of Delaware in September 2002. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d) of the Exchange Act, are available free of charge on our website at www.tempursealy.com as soon as reasonably practicable after such reports are electronically filed with the SEC. Our website and its contents are not deemed incorporated by reference into this Report.

The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The website of the SEC is www.sec.gov.
 
Our Products and Brands

We have a comprehensive offering of products that appeal to a broad range of consumers, some of which are covered by one or more patents and/or patent applications. We also routinely introduce new mattress models, launch new products and update our existing mattress products in each of our segments.

In order to achieve our goal to improve the sleep of more people, every night, all around the world, one of our strategic initiatives is to leverage and strengthen our comprehensive portfolio of iconic brands and products. Our portfolio of product brands includes many highly recognized brands, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, Stearns & Foster® and Comfort Revolution®, which are described below:

Tempur-Pedic® - Founded in 1991, the Tempur brand is our specialty innovation category leader designed to provide life changing sleep for our wellness-seeking consumers. Our proprietary Tempur material precisely adapts to the shape, weight and temperature of the consumer and creates fewer pressure points, reduces motion transfer and provides personalized comfort and support. Tempur-Pedic was awarded #1 in Customer Satisfaction for the retail mattress segment in the J.D. Power 2019 Mattress Satisfaction Report. In addition to earning the highest score for overall customer satisfaction, Tempur-Pedic was ranked highest for support, durability, comfort, value, warranty, and contact with customer service.


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Stearns & Foster® - The Stearns & Foster brand offers our consumers high quality mattresses built by certified craftsmen who have been specially trained. Founded in 1846, the brand is designed and built with precise engineering and relentless attention to detail and fuses new innovative technologies with time-honored techniques, creating supremely comfortable beds.

Sealy® featuring Posturepedic® Technology - The Sealy brand originated in 1881 in Sealy, Texas, and for over a century has focused on offering trusted comfort, durability and excellent value while maintaining contemporary styles and great support. The Sealy Posturepedic brand, introduced in 1950, was engineered to provide all-over support and body alignment to allow full relaxation and deliver a comfortable night's sleep. In 2017, we united all of our Sealy products under one masterbrand, which features the Posturepedic Technology™ in the Sealy Performance™, Sealy Posturepedic Plus and Sealy Premium™ collections.

Cocoon by SealyTM - The Cocoon by Sealy brand, introduced in 2016, is our offering in the below $1,000 e-commerce space, made with the high quality materials that consumers expect from Sealy, sold online at www.cocoonbysealy.com and delivered in a box directly to consumers' doorsteps.

Comfort Revolution® - Comfort Revolution originated in 1986 in West Long Beach, New Jersey. The brand develops, produces, markets and distributes foam and gel bedding products, which we sell through both our Wholesale and Direct channels.

Our portfolio of retail brands includes Tempur-Pedic® retail stores, Sleep Outfitters®, Sleep Solutions OutletTM, SOVA and a variety of other retail brands internationally, which operate in various countries. The retail brands named above are described below:

Tempur-Pedic® retail stores - Tempur-Pedic® retail stores are designed for the approximately 20% of U.S. consumers, based on our research, that prefer to purchase directly from the manufacturer, and for those seeking a more personalized and educational sales experience. These retail boutiques are strategically located in high traffic, premium retail centers with customer demographics that closely align to the Tempur-Pedic customer profile. As of December 31, 2019 we had 56 retail stores. We expect to open approximately 20 stores in 2020.

Sleep Outfitters® - Sleep Outfitters is a regional bedding retailer with 97 stores across five states in the U.S. Sleep Outfitters is a specialty mattress retailer that serves consumers across all price points with its extensive selection of Tempur-Pedic®, Sealy® and Stearns & Foster® products.

Sleep Solutions OutletTM - Sleep Solutions Outlet stores serve as a channel of high quality comfort returns, as well as discontinued or factory close-out mattresses and bases. There are a limited number of stores across the U.S. that sell these products, which reduces our disposal costs, and helps reduce the volume of products disposed of via landfill, thereby favorably impacting the environment.

SOVA - SOVA is a highly respected and well established premium bedding chain in Sweden. Our stores are connected to the urban areas of Stockholm, Gothenburg and Malmoe. The assortment primarily focuses on premium to super premium brands and well trained sales staff targeting to sell quality beds with a very high average selling price.

In addition to our highly recognized product and retail brands, in January 2020 we acquired a majority ownership in Sherwood Acquisition Holdings, LLC (“Sherwood Bedding”), a major manufacturer in the U.S. private label and original equipment manufacturer (“OEM”) bedding market. Sherwood Bedding operates four domestic manufacturing facilities and is a Top 10 U.S. bedding producer. With our majority ownership in Sherwood Bedding, we have a complete suite of product offerings, from Sherwood Bedding's non-branded private label products to our well-known branded products from Tempur-Pedic, Stearns & Foster, Sealy featuring Posturepedic Technology and Cocoon by Sealy.

In 2019, we launched the all-new Tempur-Breeze® products as well as a new Stearns & Foster lineup in North America. The new Breeze line includes ProBreezeTM and LuxeBreezeTM models offering the most innovative cooling system in the market, re-designed to deliver all night cooling comfort. The new Breeze products complete the largest Tempur rollout in our history. The new Stearns & Foster design utilizes the finest materials and legendary craftsmanship, featuring a premium, timeless look. Our all new IntelliCoil® HD innerspring incorporates 20% more coils, allowing sleepers to find their perfect level of support. This lineup, also features for the first time, the proprietary memory foam engineered exclusively for Stearns & Foster by Tempur-Pedic.


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In 2020, we are completing the national launch of the innovative Tempur-Ergo® Smart Base Collection with Sleeptracker® technology and we are launching the all-new Sealy Posturepedic Plus mattress lineup. The smart base collection is our solution for those that want to improve their health and wellness by sleeping more soundly. The Tempur-Ergo Smart Base with Sleeptracker® technology is a completely integrated sleep system that features automatic snore detection and response, personalized sleep analytics and coaching and smart home connectivity and voice control. The new Sealy Posturepedic Plus mattress line features the impressive all-new Posturepedic Plus technology which offers improved comfort, best-in-class cooling capabilities and increased support.

Omni-Channel Distribution

Our primary selling channels are Wholesale and Direct. These channels align to the margin characteristics of our business and our marketplace.

One of Tempur Sealy's long-term initiatives is to be wherever the consumer wants to shop and our wholesale business strategy brings this key business initiative to life by growing our share with existing customers, gaining new business and expanding into new channels of distribution. In 2018, we focused on growing our relationships with existing third-party retailers. The resulting growth has been broad-based, spanning multiple channels of bedding retail including furniture, big-box, specialty and online-only. Our Wholesale channel includes all third party retailers, including third party distribution, hospitality and healthcare, and represented 87.5% of net sales in 2019. We have also identified new business opportunities. In 2019, we announced three new or expanded third-party retail relationships in the U.S. and Europe. This resulted in the largest expansion of stores in our history.

In 2019, we entered into a supply agreement with Mattress Firm, Inc. ("Mattress Firm"), the largest specialty mattress retailer in North America, to reintroduce Tempur-Pedic, Stearns & Foster, and Sealy branded products into approximately 2,500 Mattress Firm stores across the U.S. This agreement reunites some of the strongest bedding brands with more than three million people a year that find their right sleep solution at Mattress Firm. The reintroduction of products into Mattress Firm stores commenced in the fourth quarter of 2019 and is expected to be completed early in the first quarter of 2020.

In 2019, we also announced the recent expansion of our long-term supply agreement with Big Lots, Inc. (“Big Lots”), a 1,400-store retailer in the U.S. This agreement is expected to grow the sales of entry-level Sealy products and to drive unit volume, primarily in the below $1,000 retail price point. Our launch of Sealy products with Big Lots was completed in 2019.

We also recently extended our European retail distribution network by reaching a supply agreement with Beter Bed Holding, one of Europe’s leading bedding retailers. The launch of new products with Beter Bed Holding was completed in 2019 in over 100 stores.
    
In addition, in 2020 we are expanding our Direct channel to strengthen our distribution footprint to provide alternatives to allow the customer to shop on their preferred terms - whether online, in company-owned stores or through our thousands of third-party retailers. Our Direct channel includes company-owned stores, e-commerce and call centers and represented 12.5% of net sales in 2019. The Direct channel growth rate has surpassed the Wholesale growth rate over the last few years, and we anticipate the Direct channel to continue to grow as a percentage of net sales in future years.

For consumers that prefer to purchase directly from the manufacturer (our research indicates approximately 20%), and for those seeking a more personalized and educational sales experience, we appeal to this consumer through our Tempur-Pedic retail stores. As of December 31, 2019 we had 56 stores throughout the U.S. that provide a low-pressure environment to explore the comprehensive line up of our Tempur-Pedic products. Our retail boutiques are strategically located in high traffic, premium retail centers with customer demographics that closely align to the Tempur-Pedic customer profile. Each showroom features knowledgeable, non-commissioned Brand Ambassadors who educate potential customers on Tempur-Pedic products in a relaxed, comfortable environment.

Going forward, our strategy for opening additional locations of Tempur-Pedic retail stores will remain consistent with our previous expansion approach. We plan to open approximately 20 Tempur-Pedic retail stores in 2020.

In addition to our high-end Tempur-Pedic retail stores, we operate Sleep Outfitters, a regional bedding retailer that had 97 stores across Kentucky, Tennessee, Ohio, West Virginia and Alabama in 2019. Sleep Outfitters is a specialty mattress retailer that serves consumers across all price points with its extensive selection of Tempur-Pedic®, Sealy® and Stearns & Foster® products.


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Our third-party retailers, Tempur-Pedic and Sleep Outfitters retail stores reach the vast majority of consumers who still prefer to touch and feel a mattress and speak to a retail sales associate, prior to making a purchase decision. However, our consumer insights also demonstrate that there is a growing segment of the population that prefers to purchase products online and, to a lesser degree, via a call center. As such, having an omni-channel presence is more important than ever, with most customers completing research and shopping both online and in-stores before making their purchase decision.

For customers that prefer the convenience of making purchases online and having their bedding products delivered right to their front door, we have evolved our distribution model to include multiple online options to reach those that want to purchase our products without the need to go into a brick-and-mortar store.

Tempur Sealy’s Direct channel expansion has evolved over the past two years, increasing our presence to be within reach of consumers no matter how they choose to shop. Our expanded direct channel distribution complements our wholesale business, and we believe this balanced approach enhances the overall sales potential and profitability of Tempur Sealy.

Marketing

Our overall marketing strategy is to drive consumer demand through the use of effective marketing. We invest across multiple media platforms to build brand awareness and drive consumer interest in our products. The majority of our advertising programs are created on a centralized basis through our in-house advertising organization. We plan to drive net sales through continued investments in new products, marketing and other initiatives.

We advertise nationally on television, digitally and through consumer and trade print. In addition, we participate in cooperative advertising on a shared basis with some of our retail customers. Throughout the year, we invested in a series of strategic marketing initiatives, which included new product introductions, advertising and in-store marketing investments.

Seasonality

We believe that sales of products to furniture and bedding stores are typically subject to modest seasonality inherent in the bedding industry, with sales expected to be generally lower in the second and fourth quarters. Sales in a particular quarter can also be impacted by competitive industry dynamics. Additionally, the U.S. bedding industry generally experiences increases in sales around holidays and promotional periods.

Operations
 
Manufacturing and Distribution

Our products are currently manufactured and distributed through our global network of facilities. For a list of our principal manufacturing and distribution facilities, please refer to ITEM 2, "Properties".
    
Suppliers

We obtain the raw materials used to produce our pressure-relieving Tempur® material and components used in the manufacture of Tempur products from outside sources. We currently acquire chemicals and proprietary additives for Tempur products as well as other components such as textiles from a number of suppliers with manufacturing locations around the world. These supplier relationships may be modified in order to maintain quality, cost, and delivery expectations. We do not consider ourselves dependent upon any single outside vendor as a source of raw materials for Tempur products and believe that sufficient alternate sources of supply for the same or similar raw materials are available. Additionally, we source our adjustable bed bases and foundations from third party manufacturers. We do not consider ourselves dependent upon any single outside manufacturer as a source of these products.


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Sealy product raw materials consist mainly of polyethylene foam, textiles and steel innerspring components that we purchase from various suppliers. In the U.S. and Canada, we source the majority of our requirements for polyurethane foam components and spring components for our Sealy and Stearns & Foster mattress units and adjustable bed bases from a key supplier for each component.  We also purchase a significant portion of our Sealy foundation parts from third party sources. All critical components are purchased under supply agreements. We do not consider ourselves to be dependent in the long term upon any single outside vendor as a source of supply to our bedding business, and we believe over time that sufficient alternate sources of supply for the same, similar or alternate components are available. However, if a key supplier for an applicable component failed to supply components in the amount we require, this could significantly interrupt production of our products and increase our production costs in the near term.
    
Research and Development

We have four research and development centers, three in the U.S. and one in Denmark, that conduct technology and product development. Additionally, we have a product testing facility that conducts hundred of consumer tests annually. We believe our consumer-research driven approach to innovation results in best-in-class products that benefit the consumer.

Industry and Competition

We compete in the global bedding industry. The bedding industry is comprised of mattresses and foundations, pillows and accessories. The mattress market category is comprised of traditional innerspring mattresses and non-innerspring mattresses, which includes visco-elastic and foam mattresses, innerspring/foam hybrid mattresses, airbeds and latex mattresses. The foundation category is comprised of traditional foundations and adjustable foundations. Additionally, the pillow market is comprised of traditional foam and feather pillows, as well as pillows made of visco-elastic, latex, foam, sponge, rubber and down. The primary distribution channels for mattresses and foundations are retail furniture and bedding stores, department stores, wholesale clubs and the internet.

We operate in two segments: North America and International. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. Our North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries and licensees located in the U.S. and Canada. Our International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America.
    
We encounter competition from a number of bedding manufacturers in both the highly concentrated domestic and highly fragmented international markets. Participants in each of these markets compete primarily on price, quality, brand name recognition, product availability and product performance. Mattress and pillow manufacturers and retailers are seeking to increase their channels of distribution and are looking for new ways to reach the consumer, including the recent expansion in the number of U.S. and international companies pursuing online direct-to-consumer models for foam mattresses. In addition, retailers in both the U.S. and internationally are increasingly seeking to integrate vertically in the furniture and bedding industries, including by offering their own brands of mattresses and pillows.

Entry-level bedding imports from China significantly increased during 2018 and are competing against our value priced Sealy products in the U.S. market. We believe these imports are being sold below cost. In September 2018, we and other industry participants filed petitions with the U.S. International Trade Commission and the U.S. Department of Commerce, alleging that many of these Chinese imports are being dumped into the U.S. market at prices below cost. As a result of these petitions, the U.S. International Trade Commission and the U.S. Department of Commerce commenced investigations. A final determination was reached by the U.S. Department of Commerce in October 2019, imposing a range of tariffs on these imports from 57% to 1,731%, subject to an affirmative determination by the U.S. International Trade Commission. On December 9, 2019, the U.S. International Trade Commission affirmatively determined that the imports of mattresses from China materially injured an industry in the U.S. Overall, we view the outcome of the case as a positive to the industry as it puts the domestic manufacturers on the same level as the Chinese imports.  However, low-priced imports into the U.S. from other countries in Asia have risen dramatically during the progression of the case. Nevertheless, we believe our focus on internal initiatives to deliver the highest quality product and highest levels of manufacturing reliability and customer service continue to be the reason that existing retailers lean into our portfolio of products.

The international market is served by a large number of manufacturers, primarily operating on a regional and local basis. These manufacturers offer a broad range of mattress and pillow products.
The highly competitive nature of the mattress and pillow industries means we are continually subject to the risk of loss of market share, loss of significant customers, reductions in margins, and the inability to acquire new customers.

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Intellectual Property

Patents, Trademarks and Licensing
 
We hold U.S. and foreign patents and patent applications regarding certain elements of the design and function of many of our mattress and pillow products.
 
As of December 31, 2019, we held trademark registrations worldwide, which we believe have significant value and are important to the marketing of our products to retailers. Tempur® and Tempur-Pedic® are trademarks registered with the U.S. Patent and Trademark Office. In addition, we have U.S. applications pending for additional trademarks. Several of our trademarks have been registered, or are the subject of pending applications, in various foreign countries. Each U.S. trademark registration is renewable indefinitely as long as the trademark remains in use. We also own numerous trademarks, trade names, service marks, logos and design marks, including Sealy®, Stearns & Foster® and Sealy Posturepedic®. In addition, we license the Bassett® trade name in various territories under a long-term agreement.
    
We derive income from royalties by licensing Sealy® brands, technology and trademarks to other manufacturers. Under the license arrangements, licensees have the right to use certain trademarks and current proprietary and/or patented technology that we utilize. We also provide our licensees with product specifications, research and development, statistical services and marketing programs. For the year ended December 31, 2019, our licensing activities as a whole generated unaffiliated net royalties of approximately $22.6 million.

Governmental Regulation
 
Our operations are subject to international, federal, state, and local consumer protection and other regulations, primarily relating to the mattress and pillow industry. These regulations vary among the states, countries, and localities in which we do business. The regulations generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as “new” or otherwise, controls as to hygiene and other aspects of product handling and sale and penalties for violations. The U.S. Consumer Product Safety Commission ("CPSC") has adopted rules relating to fire retardancy standards for the mattress industry. Many foreign jurisdictions also regulate fire retardancy standards. Future changes to these standards may require modifications to our products to comply with such changes. We are also subject to environmental and health and safety requirements with regard to the manufacture of our products and the conduct of our operations and facilities. We have made and will continue to make capital and other expenditures necessary to comply with these requirements. Currently these expenditures are immaterial to our financial results. For a discussion of the risks associated with our compliance programs in connection with these regulations, please refer to "Risk Factors" under Part I, Item 1A of this Report.

Our principal waste products are foam and fabric scraps, wood, cardboard and other non-hazardous materials derived from product component supplies and packaging. We also periodically dispose of small amounts of used machine lubricating oil and air compressor waste oil, primarily by recycling. In the U.S., we are subject to federal, state and local laws and regulations relating to environmental health and safety, including the Federal Water Pollution Control Act and the Comprehensive Environmental Response, Compensation and Liability Act. We believe that we are in compliance with all applicable international, federal, state and local environmental statutes and regulations. We do not expect that compliance with international, federal, state or local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material effect upon our capital expenditures, earnings or competitive position. We are not aware of any pending federal environmental legislation that would have a material impact on our operations, and have not been required to make, and do not expect to make, any material capital expenditures for environmental control facilities in the foreseeable future.

In connection with sales of our products, we often collect and process personal data from our customers. As such, we are subject to certain regulations relating to information technology security and personal data protection and privacy. For example, in 2018, the European Union adopted the General Data Protection Regulation (“GDPR”), which took effect in May 2018. The GDPR imposed a new and expanded set of ongoing compliance requirements on companies, including us, that process personal data from citizens living in the European Union ("EU"). In addition, there are country-specific data privacy laws in Europe which tend to follow the principles laid out in the GDPR, but in some cases, impose additional requirements on data controllers. In addition, several U.S. states have recently introduced legislation that mirror some of the protections provided by the GDPR. California’s Consumer Privacy Act (“CCPA”) came into effect on January 1, 2020 and granted consumers in California certain rights related to the access to, deletion of, and sharing of their personal information that is collected by businesses, including us.

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We have implemented a global compliance system and have put reasonable measures in place to facilitate adherence to the continuing compliance requirements of data privacy laws such as the GDPR and CCPA.
 
Employees
 
As of December 31, 2019, we had approximately 7,400 Tempur Sealy employees, approximately 5,400 of which are located in North America and 2,000 in the rest of the world. We increased headcount in 2019 to handle our unit volume increases. Approximately 28.0% of our employees are represented by various labor unions with separate collective bargaining agreements. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We consider our overall relations with our workforce to be satisfactory. Our current collective bargaining agreements, which are typically one to three years in length, expire at various times beginning in 2020 through 2022. As of December 31, 2019, our North America segment employed approximately 400 individuals covered under collective bargaining agreements expiring in 2020 and our International segment employed approximately 400 individuals covered under collective bargaining agreements expiring in 2020.

ITEM 1A. RISK FACTORS
 
The following risk factors and other information included in this Report should be carefully considered. Please also see “Special Note Regarding Forward-Looking Statements” on page 3.

Set forth below are descriptions of certain risks relating to our business.

Unfavorable economic and market conditions could reduce our sales and profitability and as a result, our operating results may be adversely affected.

Our business is affected by general business and economic conditions, and these conditions could have an impact on future demand for our products. The global economy has stabilized somewhat since the financial crisis, but we expect economic conditions specific to our markets to remain challenging. Further, economic and market conditions are inherently complex and subject to change, and any deterioration in those conditions may give households less confidence to make discretionary purchases.

There could be a number of other effects from these economic developments on our business, some of which we have already experienced, including reduced consumer demand for products; liquidity problems among our customers and related market participants; insolvency of and bankruptcy filings by our customers and related market participants resulting in increased provisions for credit losses and/or write downs of existing assets; liquidity problems and/or insolvency of our key suppliers resulting in product delays; inability of retailers and consumers to obtain credit to finance purchases of our products; decreased consumer confidence; decreased retail demand, including order delays or cancellations; counterparty failures negatively impacting our treasury operations; inability for us, our customers and our suppliers to accurately forecast future product demand trends; and adverse movements in foreign currency exchange rates. If such conditions are experienced in future periods, our industry, business and results of operations may be severely impacted.

Our sales growth is dependent upon our ability to implement strategic initiatives and actions taken to increase sales growth may not be effective.

Our ability to generate sales growth is dependent upon a number of factors, including the following:

our ability to continuously improve our products to offer new and enhanced consumer benefits and better quality;
the ability of our current and future product launches to increase net sales;
the effectiveness of our advertising campaigns and other marketing programs to build product and brand awareness, driving traffic to our distribution channels and increasing sales;
our ability to continue to expand into new distribution channels and optimize our existing channels;
our ability to continue to successfully execute our strategic initiatives;
our ability to manage growth and limit cannibalization associated with new or expanded supply agreements;
the level of consumer acceptance of our products at optimal price points;
our ability to successfully mitigate the impact of headwinds facing our business, including increased commodity prices and the influx of low-end, imported beds that compete with certain of our products;
our ability to successfully integrate potential acquisition opportunities; and
general economic factors that impact consumer confidence, disposable income or the availability of consumer financing.


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Our new product launches may not be successful due to development delays, failure of new products to achieve anticipated levels of market acceptance and significant costs associated with failed product introductions, which could adversely affect our revenues and profitability.

Each year we invest significant time and resources in research and development to improve our product offerings and launch new products. In 2019, we launched several new products including Tempur-Breeze®, new Stearns & Foster product lines and new compressed bedding products. There are a number of risks that are inherent in our new product line introductions, including that the anticipated level of market acceptance may not be realized, which could negatively impact our sales. Further, introduction costs, the speed of the rollout of the product and manufacturing inefficiencies may be greater than anticipated, each of which could impact profitability.

We operate in a highly competitive industry and if we are unable to compete successfully, we may lose customers and our sales may decline.

Participants in the mattress and pillow industries compete primarily on price, quality, brand name recognition, product availability and product performance across a range of distribution channels.

A number of our significant competitors offer mattress and pillow products that compete directly with our products. The effectiveness of our competition relative to our performance, including by established manufacturers or new entrants into the market, could have a material adverse effect on our business, financial condition and/or operating results. For example, market participants continue to improve their channels of distribution to optimize their reach to the consumer, including by pursuing online direct-to-consumer models for foam mattresses and offering their own lines of mattresses. In addition, retailers in the U.S. and internationally have integrated vertically in the furniture and bedding industries, and it is possible that such vertical integration may provide conditions that would negatively impact our net sales and results of operations. The pillow industry in particular is characterized by a large number of competitors, none of which is dominant. As such, conditions that substantially increase a single participant's market share would likely be detrimental to our financial performance. The highly competitive nature of the mattress and pillow industries means we are continually subject to the risk of loss of market share, loss of significant customers, reductions in margins, and the inability to acquire new customers.

Because we depend on certain significant customers, a decrease or interruption in their business with us would reduce our sales and results of operations.

No customer represented 10.0% or more of our net sales for 2019.
    
The credit environment in which our customers operate has been relatively stable over the past few years. However, there have been signs of deterioration in the U.S. retail sector, both nationally and regionally. Regional retail customers in the U.S. continue to file for bankruptcy protection. We expect that some additional retailers that carry our products may consolidate, undergo restructurings or reorganizations, experience financial difficulty, or realign their affiliations, any of which could decrease the number of stores that carry our products or increase the ownership concentration in the retail industry. An increase in the concentration of our sales to large customers may negatively affect our profitability due to the impact of volume and other incentive programs related to these customers. Furthermore, if sales to our large customers grow, our credit exposure to these customers may also increase. Some of these retailers may decide to carry only a limited number of brands of mattress products, which could affect our ability to sell products to them on favorable terms, if at all. A substantial decrease or interruption in business from these significant customers could result in the loss of future business and could reduce revenue, liquidity and profitability. In addition, the timing of large purchases by these customers could have an increasingly significant impact on our quarterly net sales and earnings.

We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including cyber-based attacks, could harm our ability to effectively operate our business.
Consistent with other manufacturing and retail operations, we are increasingly dependent on information technology, including the Internet, for the storage, processing, and transmission of our electronic, business-related information assets. We leverage our internal information technology, infrastructures, and those of our service providers, to enable, sustain and support our global business interests. As such, our ability to effectively manage our business depends significantly on our information systems. The failure of our current systems, or future upgrades, to operate effectively or to integrate with other systems, or a breach in security of these systems could cause reduced efficiency of our operations, and remediation of any such failure, problem or breach could reduce our liquidity and profitability. Any disruptions caused by the failure of these systems could adversely impact our day-to-day business and decision making and could have a material adverse effect on our performance.


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We are subject to laws and regulations relating to information technology security and personal data protection and privacy. For example, the GDPR, which took effect in May 2018, and the CCPA, which took effect in January 2020, have imposed new and expanded compliance requirements on companies, including us, that process personal data from citizens living in the EU and California. In addition, there are country-specific data privacy laws in Europe and elsewhere in the world, and state-specific data privacy laws forthcoming in the U.S., which broadly follow the principles laid out in the GDPR and the CCPA, but in some cases, impose additional requirements on businesses like ours. We are actively working to ensure ongoing compliance with all data privacy regulations to which we are subject, which involves substantial costs. Despite our ongoing efforts to bring our practices into compliance with the GDPR and the CCPA, we may not be successful due to various factors within or outside of our control. Failure to comply with GDPR, CCPA, country-specific or U.S. state-specific laws could result in costly investigations and litigation, expose us to potentially significant penalties, and result in negative publicity that could damage our reputation and credibility.

Historically, we have successfully implemented a new enterprise resource planning, or “ERP,” system across several of our global subsidiaries. We are currently implementing the new ERP in certain significant U.S. subsidiaries with key go-live dates in 2020 and 2021. This new system replaces a substantial portion of our legacy systems that have supported our operations in the past. If we are unable to successfully continue the implementation of the replacement system, it could lead to a disruption in our business and unanticipated additional use of capital and other resources, which may adversely impact our results of operations. In addition, if the cost of implementing this ERP system increases above our estimates, this could have a significant adverse effect on our profitability.

We rely on third party technology service providers in the ordinary course of our Direct channel. The services provided include website infrastructure and hosting services, digital advertising platforms, private label credit card financing program and credit card payment authorization and capture services in support of our business, all of which are customarily provided by third party technology service providers for similarly-situated retail business operations. Like others in the industry, we experience cyber-based attacks and incidents from time to time. In the event that we or our service providers are unable to prevent or detect and remediate cyber-based attacks or other security incidents in a timely manner, our operations could be disrupted or we may incur financial or reputational losses arising from the theft, misuse, unauthorized disclosure or destruction of our information assets.

We entered into the Advance Pricing Agreement Program to resolve a tax matter in Denmark, and a failure to resolve the matter or a change in factors or circumstances could adversely impact our income tax expense, effective tax rate and cash flows.
In the third quarter of 2018, we entered into the Advance Pricing Agreement Program (the "APA Program") for the tax years 2012 through 2022. In the APA Program the U.S. Internal Revenue Service ("IRS"), on our behalf, will negotiate directly with the Danish Tax Authority ("SKAT") with respect to the royalty to be paid by a U.S. subsidiary of the Company to the Company's Danish subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary. The objective of the APA Program is for the two tax authorities to reach a mutual agreement regarding the royalty to be paid for such years. We expect the outcome of the APA Program to result in an increase in the royalty resulting in additional taxable income in Denmark for the Danish subsidiary and a decrease in U.S. taxable income for the U.S. subsidiary. As it relates to the Danish tax position, we have accrued Danish tax and interest for this matter as an uncertain income tax position. Conversely, as it relates to the U.S. position we have recorded a deferred tax asset for the associated correlative U.S. tax benefit. However, if this matter is not resolved successfully or there is a change in facts or circumstances, we may be required to further increase our uncertain income tax provision or decrease our deferred tax asset related to this matter, which could have a material impact on the Company’s reported earnings. For a description of these matters and additional information please refer to Note 15, "Income Taxes," to the accompanying Consolidated Financial Statements.


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Changes in tax laws and regulations or other factors could cause our income tax rate to increase, potentially reducing net income and adversely affecting cash flows, and fluctuations in our tax obligations and effective tax rate may result in volatility of our financial results and stock price.
We are subject to taxation in various jurisdictions around the world and at any one time multiple tax years are subject to audit by various taxing jurisdictions. In preparing financial statements, we calculate our annual effective income tax rate based on current tax laws and regulations and the estimated taxable income within each of these jurisdictions. Our effective income tax rate, however, may be higher due to numerous factors, including, but not limited to, changes in accounting methods or policies, tax laws or regulations, the tax litigation environment in each such jurisdiction, and the outcome of pending or future audits, whether the result of litigation or negotiations with taxing authorities. Each such item may result in a tax liability that differs from our original estimate. An effective income tax rate that is significantly higher than currently anticipated could have an adverse effect on our net income and cash flows. In addition, there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated, which could adversely affect our quarterly results of operations and stock price.

Additionally, the global tax environment is becoming more complex, with government tax authorities becoming increasingly more aggressive in asserting claims for taxes. Any resulting changes in tax laws or regulations could increase our effective income tax rate or impose new restrictions, costs or prohibitions on our current practices and reduce our net income and adversely affect our cash flows.

In addition to the increased activity of taxing authorities with respect to income tax, taxing authorities are also becoming more aggressive in asserting claims for indirect taxes such as import duties and value added tax. These types of claims present risks and uncertainties similar to those discussed above. We believe we are in compliance with all tax laws and regulations that govern such indirect taxes in each of the jurisdictions in which we do business. However, because the claims taxing authorities assert often involve the question of internal product pricing, which is inherently subjective in nature, any such claim may require us to litigate the matter to defend our position or to negotiate a settlement on the matter with the taxing authorities that differs from the amount of potential exposure recorded in the financial statements.

Our leverage may limit our flexibility and increase our risk of default.

We operate in the ordinary course of our business with a certain amount of leverage. Our degree of leverage could have important consequences to our investors, such as:

increasing our vulnerability to adverse economic, industry or competitive developments;
requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and other business opportunities;
making it more difficult for us to satisfy the obligations related to our indebtedness;
restricting us from making strategic acquisitions or investments or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate, placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting;
exposing us to variability in interest rates, as a substantial portion of our indebtedness is and will be at variable rates; and
limiting our ability to return capital to our stockholders, including through share repurchases.

In addition, the instruments governing our debt contain customary financial and other restrictive covenants, which limit our operating flexibility and could prevent us from taking advantage of business opportunities and reduce our flexibility to respond to changing business and economic conditions. These covenants could put us at a competitive disadvantage. Failure to comply with our debt covenants may result in a default or event of default under the related credit document. If such default or event of default is not cured or waived, as applicable, we may suffer adverse effects on our operations, business or financial condition, including acceleration of the maturity date of all amounts outstanding under our debt facilities. For further discussion regarding our debt covenants and compliance, refer to “Management’s Discussion and Analysis” included in Part II, ITEM 7 of this Report and Note 8, “Debt,” in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.


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We may be unable to sustain our profitability, which could impair our ability to service our indebtedness and make investments in our business and could adversely affect the market price for our stock and increase our leverage.

Our ability to service our indebtedness depends on our ability to maintain our profitability. We may not be able to maintain our profitability on a quarterly or annual basis in future periods. Further, our profitability will depend upon a number of factors, including without limitation:

general economic conditions in the markets in which we sell our products and the related impacts on consumers and retailers;
the level of competition in the mattress and pillow industry;
our ability to successfully identify and respond to emerging trends in the mattress and pillow industry;
our ability to successfully launch new products;
our ability to effectively sell our products through our distribution channels, including our new distribution channels, in volumes sufficient to drive growth and leverage our cost structure and advertising spending;
our ability to reduce costs, including our ability to align our cost structure with sales in the existing economic environment;
our ability to successfully manage our relationships with our major customers and navigate any financial difficulties those customers may experience from time to time;
our ability to absorb fluctuations in commodity costs;
our ability to maintain efficient, timely and cost-effective production and utilization of our manufacturing capacity;
our ability to maintain efficient, timely and cost-effective delivery of our products; and
our ability to maintain public recognition of our brands.

We are vulnerable to interest rate risk with respect to our debt, which could lead to an increase in interest expense.

Our variable rate debt agreements, including our 2019 Credit Agreement, use the London Interbank Offered Rate (LIBOR) as a reference rate. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist or is no longer representative of the underlying market after 2021, our variable rate debt agreements with interest rates that are indexed to LIBOR will use various alternative methods to calculate the applicable interest rate, which could result in increases in interest rates on such debt and adversely impact our interest expense, results of operations and cash flows. Further, we may need to amend our variable rate debt agreements to replace LIBOR with a new reference rate. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (SOFR). At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement. Furthermore, it is not possible to predict the effect of these changes, the discontinuation of LIBOR, other reforms, or the establishment of alternative reference rates on our borrowing costs, the availability of variable rate financing or the capital markets generally. For information regarding our sensitivity to changes in interest rates, refer to “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, ITEM 7A of this Report.

We may be adversely affected by fluctuations in exchange rates, which could affect our results of operations, the costs of our products and our ability to sell our products in foreign markets.

Approximately 25.6% of our net sales were generated outside of the U.S. in 2019. We conduct our business in a wide variety of currencies and are therefore subject to market risk relating to changes in foreign exchange rates. If the U.S. dollar strengthens relative to the Euro or other foreign currencies where we have operations, for example, there will be a negative impact on our operating results upon translation of those foreign operating results into the U.S. dollar. In 2019, foreign currency exchange rate changes negatively impacted our net income by approximately 1.9% and negatively impacted adjusted EBITDA, which is a non-U.S. GAAP financial measure, by approximately 1.1%. In 2020, we expect that foreign exchange translation may negatively impact our results of operations. Changes in foreign currency exchange rates could have an adverse impact on our financial condition, results of operations and cash flows. Except for the use of foreign exchange forwards contracts described immediately below, we do not hedge the translation of foreign currency operating results into the U.S. dollar.

We use foreign exchange forward contracts to manage a portion of the exposure to the risk of the eventual net cash inflows and outflows resulting from foreign currency denominated transactions among certain subsidiaries. These hedging transactions may not succeed or may be only partially successful in managing our foreign currency exchange rate risk.


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Refer to “Management's Discussion and Analysis” included in Part II, ITEM 7 of this Report and “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, ITEM 7A of this Report for further discussion on the impact of foreign exchange rates on our operations.

We are subject to fluctuations in the cost of raw materials, and increases in these costs would reduce our liquidity and profitability.

The bedding industry has been challenged by volatility in the price of petroleum-based and steel products, which affects the cost of polyurethane foam, polyester, polyethylene foam and steel innerspring component parts. The price and availability of these raw materials are subject to market conditions affecting supply and demand. Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities can significantly affect profitability. To the extent we are unable to absorb higher costs, or pass any such higher costs to our customers, our gross margin could be negatively affected, which could result in a decrease in our liquidity and profitability.

Loss of suppliers and disruptions in the supply of our raw materials could increase our costs of sales and reduce our ability to compete effectively.

We acquire raw materials and certain components from a number of suppliers with manufacturing locations around the world. If we were unable to obtain raw materials and certain components from these suppliers for any reason, we would have to find replacement suppliers. Any substitute arrangements for raw materials and certain components might not be on terms as favorable to us. In addition, we outsource the procurement of certain goods and services from suppliers in foreign countries. If we were no longer able to outsource through these suppliers, we could source them elsewhere, which may be at a higher cost. We maintain relatively small supplies of our raw materials and outsourced goods at our manufacturing facilities, and any disruption in the on-going shipment of supplies to us could interrupt production of our products, which could result in a decrease of our sales or could cause an increase in our cost of sales, either of which could decrease our liquidity and profitability.

Sealy product raw materials consist mainly of polyurethane foam, polyester, polyethylene foam and steel innerspring components that we purchase from various suppliers. In the U.S. and Canada, we source the majority of our requirements for polyurethane foam components and spring components for our Sealy and Stearns & Foster mattress units from a key supplier for each component. All critical components are purchased under supply agreements. We also purchase a significant portion of our Sealy foundation parts from third party sources under supply agreements. We do not consider ourselves to be dependent in the long term upon any single outside vendor as a source of supply to our bedding business, and we believe over time that sufficient alternative sources of supply for the same, similar or alternative components are available. However, if a key supplier for an applicable component failed to supply components in the amount we require this could significantly interrupt production of our products and increase our production costs in the near term. Such a disruption could occur for a variety of reasons, including changes in international trade duties and other aspects of international trade policy, natural disasters, pandemics and political events. For further information relating to this risk in particular, please refer to the discussion under the heading “We are subject to risks from our international operations, such as complying with U.S. and foreign laws, foreign exchange exposure, tariffs, increased costs, political risks and our ability to expand in certain international markets, which could impair our ability to compete and our profitability.”

Our ability to expand and effectively manage our Tempur-Pedic® retail stores could affect our sales and results of operations.

As of December 31, 2019, we had opened 56 Tempur-Pedic® retail stores. Our ability to continue to open new Tempur-Pedic® retail stores in a timely and efficient manner, and effectively operate all of these retail stores, depends upon numerous factors. Some of these factors are beyond our control, including, but not limited to our ability to identify suitable locations, our ability to negotiate favorable lease terms, our ability to hire, train and retain skilled retail store personnel, and economic factors that impact consumer confidence, disposable income or the availability of consumer financing. There is no assurance that our retail store expansion strategy will continue to be profitable. If we are unable to open additional Tempur-Pedic® retail stores, or if our existing retail stores are not profitable, this could adversely affect our sales and results of operations.
  

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We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.

Our Board of Directors has authorized a share repurchase program pursuant to which we are authorized to repurchase shares of our common stock. We did not repurchase any shares under our share repurchase program during the year ended December 31, 2018. As of December 31, 2019, we had repurchased an aggregate of 1.3 million shares for approximately $102.3 million under our share repurchase program and had approximately $124.6 million remaining under our share repurchase program. In February 2020, our Board of Directors authorized an increase, of over $190.0 million, to our share repurchase authorization of our common stock to $300.0 million. Although our Board of Directors has authorized the share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares and may be suspended or terminated at any time. Shares may be repurchased from time to time, in the open market or through private transactions, subject to market conditions, in compliance with applicable state and federal securities laws. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, restrictions in our debt agreements, the trading price of our common stock and the nature of other investment opportunities. In addition, repurchases of our common stock pursuant to our share repurchase program could affect the market price of our common stock or increase its volatility. For example, the existence of a share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we determine to repurchase our stock. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.

Our operating results are subject to fluctuations, including as a result of seasonality, which could make sequential quarter-to-quarter comparisons an unreliable indication of our performance and adversely affect the market price of our common stock.

A significant portion of our net sales are attributable to our Wholesale channel, particularly net sales to furniture and bedding stores. We believe that our sales of products to furniture and bedding stores are typically subject to modest seasonality inherent in the bedding industry, with sales expected to be generally lower in the second and fourth quarters. Our sales in a particular quarter can be impacted by new product launches. Additionally, the U.S. bedding industry generally experiences increases in sales around holidays and promotional periods. This seasonality means that a sequential quarter-to-quarter comparison may not be a good indication of our performance or of how we will perform in the future.

We are subject to risks from our international operations, such as complying with U.S. and foreign laws, foreign exchange exposure, tariffs, increased costs, political risks and our ability to expand in certain international markets, which could impair our ability to compete and our profitability.

We are a global company, selling our products in approximately 100 countries worldwide. We generated approximately 25.6% of our net sales outside of the U.S. in the year ended December 31, 2019.

We also participate in international license and joint venture arrangements with independent third parties. Our international operations are subject to the customary risks of operating in an international environment, including complying with U.S. laws affecting operations outside of the U.S. such as the Foreign Corrupt Practices Act; complying with foreign laws and regulations, including disparate anti-corruption laws and regulations; risks associated with varying local business customs; and the potential imposition of trade or foreign exchange restrictions, tariffs and other tax increases, fluctuations in exchange rates, inflation and unstable political situations and labor issues. We are also limited in our ability to independently expand in certain international markets where we have granted licenses to manufacture and sell Sealy® bedding products. Fluctuations in the rate of exchange between currencies in which we do business may affect our financial condition or results of operations. Additionally, changes in international trade duties and other aspects of international trade policy, both in the U.S. and abroad, could materially impact our business.

Our business operations and financial results may be impacted by the United Kingdom’s (“UK”) departure from the EU, commonly referred to as Brexit. Brexit may, among other things, result in certain adverse tax consequences for us relating to the movement of products and related matters between the UK and EU.


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If we are not able to protect our trade secrets or maintain our trademarks, patents and other intellectual property, we may not be able to prevent competitors from developing similar products or from marketing in a manner that capitalizes on our trademarks, and this loss of a competitive advantage could decrease our profitability and liquidity.

We rely on patents and trade secrets to protect the design, technology and function of our products. To date, we have not sought U.S. or international patent protection for our principal product formula for Tempur® material and certain of our manufacturing processes. Accordingly, we may not be able to prevent others from developing certain visco-elastic material and products that are similar to or competitive with our products. Our ability to compete effectively with other companies also depends, to a significant extent, on our ability to maintain the proprietary nature of our owned and licensed intellectual property. We own a significant number of patents or have patent applications pending on some aspects of our products and certain manufacturing processes. However, the principal product formula and manufacturing processes for our Tempur® material are not patented and we must maintain these as trade secrets in order to protect this intellectual property. We own U.S. and foreign registered trademarks and service marks and have applications for the registration of trademarks and service marks pending domestically and abroad. We also license certain intellectual property rights from third parties.

Certain of our trademarks are currently registered in the U.S. and are registered or pending in foreign jurisdictions. Certain other trademarks are the subject of protection under common law. However, those rights could be circumvented, or violate the proprietary rights of others, or we could be prevented from using them if challenged. A challenge to our use of our trademarks could result in a negative ruling regarding our use of our trademarks, their validity or their enforceability, or could prove expensive and time consuming in terms of legal costs and time spent defending against such a challenge. Any loss of trademark protection could result in a decrease in sales or cause us to spend additional amounts on marketing, either of which could decrease our liquidity and profitability. In addition, if we incur significant costs defending our trademarks, that could also decrease our liquidity and profitability. In addition, we may not have the financial resources necessary to enforce or defend our trademarks. Furthermore, our patents may not provide meaningful protection and patents may never issue from pending applications. It is also possible that others could bring claims of infringement against us, as our principal product formula and manufacturing processes are not patented, and that any licenses protecting our intellectual property could be terminated. If we were unable to maintain the proprietary nature of our intellectual property and our significant current or proposed products, this loss of a competitive advantage could result in decreased sales or increased operating costs, either of which would decrease our liquidity and profitability.

In addition, the laws of certain foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the U.S. or the EU. Third parties, including competitors, may assert intellectual property infringement or invalidity claims against us that could be upheld. Intellectual property litigation, which could result in substantial cost to and diversion of effort by us, may be necessary to protect our trade secrets or proprietary technology, or for us to defend against claimed infringement of the rights of others and to determine the scope and validity of others’ proprietary rights. We may not prevail in any such litigation, and if we are unsuccessful, we may not be able to obtain any necessary licenses on reasonable terms or at all.

The loss of the services of any members of our executive management team could impair our ability to execute our business strategy and as a result, reduce our sales and profitability.

We depend on the continued services of our executive management team. The loss of key personnel could have a material adverse effect on our ability to execute our business strategy and on our financial condition and results of operations. We do not maintain key-person insurance for members of our executive management team.

Deterioration in labor relations could disrupt our business operations and increase our costs, which could decrease our liquidity and profitability.

As of December 31, 2019, we had approximately 7,400 full-time employees. Our Asia joint venture also employs approximately 1,200 full-time employees. Approximately 28.0% of our employees are represented by various labor unions with separate collective bargaining agreements or government labor union contracts for certain international locations. Our North American collective bargaining agreements, which are typically three years in length, expire at various times during any given three year period. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We may at some point be subject to work stoppages by some of our employees and, if such events were to occur, there may be a material adverse effect on our operations and profitability. Further, we may not be able to renew our various collective bargaining agreements on a timely basis or on favorable terms, or at all. Any significant increase in our labor costs could decrease our liquidity and profitability and any deterioration of employee relations, slowdowns or work stoppages at any of our locations, whether due to union activities, employee turnover or otherwise, could result in a decrease in our net sales or an increase in our costs, either of which could decrease our liquidity and profitability.

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We may face exposure to product liability claims and premises liability claims, which could reduce our liquidity and profitability and reduce consumer confidence in our products.

We face an inherent business risk of exposure to product liability claims if the use of any of our products results in personal injury or property damage. In the event that any of our products prove to be defective, we may be required to recall, redesign or even discontinue those products. We maintain insurance against product liability claims, but such coverage may not continue to be available on terms acceptable to us or be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage could impair our liquidity and profitability, and any claim or product recall that results in significant adverse publicity against us could result in consumers purchasing fewer of our products, which would also impair our liquidity and profitability.

We also face inherent business risks by operating physical stores that are open to the public. By opening retail stores, we have increased our exposure to premises liability claims. We maintain insurance against premises liability claims, but such coverage may not continue to be available on terms acceptable to us or be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage could impair our liquidity and profitability, and any claim or product recall that results in significant adverse publicity against us could adversely affect our reputation or result in consumers purchasing fewer of our products, which would also impair our liquidity and profitability.

Regulatory requirements, including, but not limited to, trade, environmental, health and safety requirements, may require costly expenditures and expose us to liability.

Our products and our marketing and advertising programs are subject to regulation in the U.S. by various federal, state and local regulatory authorities, including the Federal Trade Commission and the U.S. Food and Drug Administration. In addition, other governments and agencies in other jurisdictions regulate the sale and distribution of our products. These rules and regulations may change from time to time, or may conflict. There may be continuing costs of regulatory compliance including continuous testing, additional quality control processes and appropriate auditing of design and process compliance. For example, the CPSC and many foreign jurisdictions have adopted rules relating to fire retardancy standards for the mattress industry. Further, some states and the U.S. Congress continue to consider fire retardancy regulations that may be different or more stringent than the CPSC standard. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business. We are also subject to various health and environmental provisions, such as California Proposition 65 (the Safe Drinking Water and Toxic Enforcement Act of 1986) and 16 CFR Part 1633 (Standard for the Flammability (Open Flame) of Mattress Sets).

Our marketing and advertising practices could also become the subject of proceedings before regulatory authorities or the subject of claims by other parties and could require us to alter or end these practices or adopt new practices that are not as effective or are more expensive.

In addition, we are subject to federal, state and local laws and regulations relating to pollution, environmental protection and occupational health and safety. We may not be in complete compliance with all such requirements at all times. We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. If a release of hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material. As a manufacturer of bedding and related products, we use and dispose of a number of substances, such as glue, lubricating oil, solvents and other petroleum products, as well as certain foam ingredients, that may subject us to regulation under numerous foreign, federal and state laws and regulations governing the environment. Among other laws and regulations, we are subject in the U.S. to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Clean Air Act and related state and local statutes and regulations.

Our operations could also be impacted by a number of pending legislative and regulatory proposals to address greenhouse gas emissions in the U.S. and other countries. Certain countries have adopted the Kyoto Protocol. New greenhouse gas reduction targets have been established under the Kyoto Protocol, as amended, and certain countries, including Denmark, have adopted the new reduction targets. This and other international initiatives under consideration could affect our International operations. These actions could increase costs associated with our operations, including costs for raw materials, pollution control equipment and transportation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future consolidated financial condition, results of operations, or cash flows.


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We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. In the event contamination is discovered with respect to one or more of our current or former properties, government authorities or third parties may bring claims related to these properties, which could have a material effect on our profitability.

Our pension plans are currently underfunded and we may be required to make cash payments to the plans, reducing our available cash.

We maintain certain defined benefit pension plans. In addition, hourly employees working at certain of Sealy’s domestic manufacturing facilities are covered by union sponsored retirement and health and welfare plans. These plans cover both active employees and retirees. The plans are currently underfunded, and under certain circumstances, including the decision to close or sell a facility, we could be required to pay amounts with respect to this underfunding. Such events may significantly impair our profitability and liquidity and the possibility of having to make these payments could affect our decision on whether to close or sell a particular facility. For more information, refer to Note 10, “Retirement Plans,” in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report.

Challenges to our pricing or promotional allowance policies or practices could adversely affect our operations.

Certain of our retail pricing and promotional allowance policies or practices are subject to antitrust regulations in the U.S. and abroad. If antitrust regulators or private parties in any jurisdiction in which we do business initiate investigations or claims that challenge our pricing or promotional allowance policies or practices, our efforts to respond could force us to divert management resources and we could incur significant unanticipated costs. If such an investigation or claim were to result in a charge that our practices or policies were in violation of applicable antitrust or other laws or regulations, we could be subject to significant additional costs of defending such charges in a variety of venues and, ultimately, if there were a finding that we were in violation of antitrust or other laws or regulations, there could be an imposition of fines, and damages for persons injured, as well as injunctive or other relief. Any requirement that we pay fines or damages (which, under the laws of certain jurisdictions, may be trebled) could decrease our liquidity and profitability, and any investigation or claim that requires significant management attention or causes us to change our business practices could disrupt our operations or increase our costs, also resulting in a decrease in our liquidity and profitability. An antitrust class action or individual suit against us could result in potential liabilities, substantial costs, treble damages, and the diversion of our management’s attention and resources, regardless of the outcome.

Our stock price is likely to continue to be volatile, your investment could decline in value, and we may incur significant costs from class action litigation.

The trading price of our common stock is likely to continue to be volatile and subject to wide price fluctuations. The trading price of our common stock may fluctuate significantly in response to various factors, including but not limited to:

actual or anticipated variations in our quarterly and annual operating results, including those resulting from seasonal variations in our business;
general economic conditions, such as unemployment, changes in short-term and long-term interest rates and fluctuations in both debt and equity capital markets;
terrorist attacks in the U.S. or against U.S. targets, actual or threated acts of war (declared or undeclared) or the escalation of current hostilities involving the U.S. or its allies;
natural disasters or pandemics disrupting our businesses or suppliers;
introductions or announcements of technological innovations or new products by us or our competitors;
disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to patent, or otherwise protect, our products and technologies;
changes in estimates by securities analysts of our financial performance or the financial performance of our competitors or major customers or statements by others in the investment community relating to such performance;
the use or non-use of our share repurchase program;
bankruptcies of any of our nationally or regionally-significant customers;
loss of any of our major customers;
conditions or trends in the mattress industry generally;
additions or departures of key personnel;
announcements by us or our competitors or significant retailer customers of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
announcements by our competitors or our major customers of their quarterly operating results or announcements by our competitors or our major customers of their views on trends in the bedding industry;

19


regulatory developments in the U.S. and abroad;
changes in international trade policy and economic and political factors in the U.S. and abroad;
public announcements or filings with the SEC indicating that significant stockholders, directors or officers are buying or selling shares of our common stock; and
the declaration or suspension of a cash dividend.

In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market factors may seriously harm the market price of our common stock, regardless of our operating performance.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in potential liabilities, substantial costs, and the diversion of our management’s attention and resources, regardless of the outcome. See “Legal Proceedings” included in Part I, ITEM 3 of this Report.

Future sales of our common stock may depress our stock price.

The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. All shares of our common stock are freely transferable without restriction or further registration under the Securities Act, except for certain shares of our common stock which were purchased by our executive officers, directors, principal stockholders, and some related parties.

We have stockholders who presently beneficially own more than 5.0% of our outstanding capital stock. Sales or other dispositions of our shares by these major stockholders may depress our stock price.

Delaware law and our certificate of incorporation and bylaws contain anti-takeover provisions, any of which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors that some stockholders may consider favorable.

Provisions of Delaware law and our certificate of incorporation and by-laws could hamper a third party’s acquisition of us, or discourage a third party from attempting to acquire control of us. You may not have the opportunity to participate in these transactions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:

our ability to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of our common stock;
the requirements that our stockholders provide advance notice and certain disclosures when nominating our directors; and
the inability of our stockholders to convene a stockholders’ meeting without the chairperson of the Board of Directors, the president, or a majority of the Board of Directors first calling the meeting.

Our Board of Directors could determine in the future that adoption of a stockholder rights agreement is in the best interest of our stockholders and any such stockholder rights agreement, if adopted, could render more difficult, or discourage, a merger, tender offer, or assumption of control of the Company that is not approved by our Board of Directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.


20


ITEM 2. PROPERTIES

The following table sets forth certain information regarding our principal facilities by segment at December 31, 2019.
Name
 
Location
 
Approximate Square Footage
 


Title
 


Type of Facility
North America
 
 
 
 
 
 
 
 
Tempur Production USA, LLC
 
Albuquerque, New Mexico
 
800,000
 
Leased (a)
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Hagerstown, Maryland
 
615,600
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Plainfield, Indiana
 
614,000
 
Leased
 
Manufacturing
Tempur Production USA, LLC
 
Duffield, Virginia
 
581,000
 
Owned
 
Manufacturing
Comfort Revolution, LLC
 
Belmont, MS
 
432,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
City of Industry, California
 
430,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Conyers, Georgia
 
300,000
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Green Island, New York
 
257,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Richmond, California
 
241,000
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Orlando, Florida
 
225,050
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Brenham, Texas
 
220,500
 
Owned
 
Manufacturing
Tempur Production USA, LLC
 
Mountain Top, Pennsylvania
 
210,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Trinity, North Carolina
 
180,000
 
Owned
 
Manufacturing
Sealy Canada, Ltd
 
Alberta, Canada
 
144,500
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Medina, Ohio
 
140,000
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Lacey, Washington
 
134,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Kansas City, Kansas
 
122,000
 
Leased
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Phoenix, Arizona
 
120,000
 
Leased
 
Manufacturing
Sealy Canada, Ltd
 
Toronto, Canada
 
120,000
 
Leased
 
Manufacturing
Sealy Canada, Ltd
 
Quebec, Canada
 
88,000
 
Owned
 
Manufacturing
Sealy Mattress Manufacturing Co., LLC
 
Denver, Colorado
 
82,000
 
Owned
 
Manufacturing
 
 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
 
Dan-Foam ApS
 
Aarup, Denmark
 
523,000
 
Owned (a)
 
Manufacturing
Sealy Mattress Company Mexico, S. de R.L. de C.V.
 
Toluca, Mexico
 
130,500
 
Owned
 
Manufacturing
(a)
 
We have granted a mortgage or otherwise encumbered our interest in this facility as collateral for secured indebtedness.

 In addition to the properties listed above, we have other facilities in the U.S. and other countries, the majority under leases with one to ten year terms. The manufacturing facility in Albuquerque, New Mexico is leased as part of the related industrial revenue bond financing. We have an option to repurchase the property for one dollar upon termination of the lease.

We believe that our existing properties are suitable for the conduct of our business, are adequate for our present needs and will be adequate to meet our future needs.

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings can be found in Note 14, “Commitments and Contingencies,” of the Notes to the Consolidated Financial Statements, included in Part II, ITEM 8 of this Report, “Financial Statements and Supplementary Data,” and is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES
 
None.


21


PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity

Our sole class of common equity is our $0.01 par value common stock, which trades on the New York Stock Exchange ("NYSE") under the symbol “TPX.” Trading of our common stock commenced on the NYSE on December 18, 2003. Prior to that time, there was no public trading market for our common stock.
 
As of February 17, 2020, we had approximately 73 stockholders of record of our common stock.

Dividends

We do not pay a dividend. The decision to pay a dividend in future periods is reviewed by our Board of Directors on a periodic basis. Further, we are subject to certain customary restrictions on dividends under our 2019 Credit Agreement and Indentures. See Note 8, "Debt," in our Consolidated Financial Statements, included in Part II, ITEM 8 of this Report, for a discussion of the 2019 Credit Agreement and Indentures.

Issuer Purchases of Equity Securities

Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock for a total repurchase price of not more than $800.0 million. We did not repurchase any shares under our share repurchase program during the year ended December 31, 2018. As of December 31, 2019, we had repurchased under the share repurchase program an aggregate of 1.3 million shares for approximately $102.3 million and had approximately $124.6 million remaining under the program. In February 2020, the Board of Directors authorized an increase, of over $190.0 million, to our share repurchase authorization of Tempur Sealy International's common stock to $300.0 million.

Share repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing, regulatory requirements and other market conditions. The program does not require the repurchase 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.


22


The following table sets forth purchases of our common stock for the three months ended December 31, 2019:

Period
 
(a) Total number of shares purchased
 
(b) Average price paid per share
 
(c) Total number of shares purchased as part of publicly announced plans or programs
 
(d) Maximum number of shares (or approximate dollar value of shares) that may yet be purchased under the plans or programs
(in millions)
October 1, 2019 - October 31, 2019
 
218,360
(1) 
$78.61
 
217,065
 
$157.6
November 1, 2019 - November 30, 2019
 
206,308
(1) 
$85.69
 
205,337
 
$140.0
December 1, 2019 - December 31, 2019
 
177,464
(1) 
$86.44
 
177,464
 
$124.6
 Total
 
602,132
 
 
 
599,866
 
 
(1)
Includes shares withheld upon the vesting of certain equity awards to satisfy tax withholding obligations. The shares withheld were valued at the closing price of the common stock on the New York Stock Exchange on the vesting date or prior business day.

Equity Compensation Plan Information

Equity compensation plan information required by this Item is incorporated by reference from Part III, ITEM 12 of this Report.

Performance Graph

The following Performance Graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.

The following table compares cumulative stockholder returns for us over the last five years to the Standard & Poor’s ("S&P") 500 Stock Composite Index, and a peer group. The S&P 500 Composite Index is a capitalization weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. We selected these stocks based on market size, liquidity and industry group representation. We believe the peer group discussed below closely reflects our business and, as a result, provides a meaningful comparison of stock performance.
 
The peer issuers included in this graph are set forth below in the table. In 2018, HNI Corporation was added to the peer group. In 2019, lululemon athletica inc. and Tupperware Brands Corporation were removed from the peer group due to no longer meeting our market capitalization criteria.

2019 Peer Group
Brunswick Corporation (BC)
Hasbro, Inc. (HAS)
RH (RH)
Carter's, Inc. (CRI)
HNI Corporation (HNI)
Sleep Number Corporation (SNBR)
Columbia Sportswear Company (COLM)
La-Z-Boy Incorporated (LZB)
Steelcase Inc. (SCS)
Deckers Outdoor Corporation (DECK)
Leggett & Platt, Incorporated (LEG)
Under Armour, Inc. (UA)
Gildan Activewear Inc. (GIL)
Herman Miller, Inc. (MLHR)
Williams-Sonoma, Inc. (WSM)
Hanesbrands Inc. (HBI)
Polaris Industries Inc. (PII)
Wolverine World Wide, Inc. (WWW)

2018 Peer Group
Brunswick Corporation (BC)
HNI Corporation (HNI)
Sleep Number Corporation (SNBR)
Carter's, Inc. (CRI)
La-Z-Boy Incorporated (LZB)
Steelcase Inc. (SCS)
Columbia Sportswear Company (COLM)
Leggett & Platt, Incorporated (LEG)
Tupperware Brands Corporation (TUP)
Deckers Outdoor Corporation (DECK)
lululemon athletica inc. (LULU)
Under Armour, Inc. (UA)
Gildan Activewear Inc. (GIL)
Herman Miller, Inc. (MLHR)
Williams-Sonoma, Inc. (WSM)
Hanesbrands Inc. (HBI)
Polaris Industries Inc. (PII)
Wolverine World Wide, Inc. (WWW)
Hasbro, Inc. (HAS)
RH (RH)
 

23




     CHART-3E94EF4717775455813.JPG
 
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
 
12/31/2019
Tempur Sealy International, Inc.
 
$
100.00

 
$
128.32

 
$
124.35

 
$
114.17

 
$
75.40

 
$
158.55

S&P 500
 
100.00

 
101.38

 
113.51

 
138.29

 
132.23

 
173.86

2018 Peer Group
 
100.00

 
91.04

 
93.08

 
108.42

 
103.73

 
144.04

2019 Peer Group
 
100.00

 
90.71

 
90.94

 
105.21

 
94.63

 
123.06



24


ITEM 6. SELECTED FINANCIAL DATA
 
The following table sets forth our selected historical consolidated financial and operating data for the periods indicated. Our Consolidated Financial Statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019 are included in Part II, ITEM 8 of this Report.

(in millions, except per common share amounts)
 
 
 
 
 
 
 
 
 
Statement of Income Data:
2019
 
2018
 
2017
 
2016
 
2015
Net sales
$
3,106.0

 
$
2,702.9

 
$
2,700.6

 
$
3,079.7

 
$
3,089.3

Cost of sales
1,763.8

 
1,582.2

 
1,579.6

 
1,790.2

 
1,864.4

Gross profit
1,342.2

 
1,120.7

 
1,121.0

 
1,289.5

 
1,224.9

Operating expense, net (1)
995.5

 
864.4

 
825.5

 
876.1

 
918.3

Operating income
346.7

 
256.3

 
295.5

 
413.4

 
306.6

Interest expense, net
85.7

 
92.3

 
87.3

 
82.9

 
94.0

Loss on extinguishment of debt

 

 

 
47.2

 

Other (income) expense, net
(4.5
)
 
(1.0
)
 
(7.2
)
 
(0.3
)
 
9.7

Income before income taxes from continuing operations
265.5

 
165.0

 
215.4

 
283.6

 
202.9

Income tax provision (2)
(74.7
)
 
(49.6
)
 
(43.8
)
 
(86.3
)
 
(125.2
)
Income from continuing operations
190.8

 
115.4

 
171.6

 
197.3

 
77.7

Loss from discontinued operations, net of tax
(1.4
)
 
(17.8
)
 
(30.9
)
 
(12.3
)
 
(12.0
)
Net income before non-controlling interests
189.4

 
97.6

 
140.7

 
185.0

 
65.7

Less: net (loss) income attributable to non-controlling interests
(0.1
)
 
(2.9
)
 
(10.7
)
 
(5.6
)
 
1.2

Net income attributable to Tempur Sealy International, Inc.
$
189.5

 
$
100.5

 
$
151.4

 
$
190.6

 
$
64.5

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at end of period):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
64.9

 
$
45.8

 
$
41.1

 
$
64.6

 
$
153.0

Total assets
3,061.8

 
2,715.4

 
2,694.0

 
2,698.8

 
2,652.0

Total debt, net
1,468.0

 
1,576.5

 
1,644.6

 
1,779.0

 
1,420.8

Finance leases and other debt
72.0

 
69.7

 
108.5

 
109.1

 
34.0

Redeemable non-controlling interest

 

 
2.2

 
7.6

 
12.4

Total stockholders' equity (deficit)
360.4

 
217.5

 
112.5

 
(41.9
)
 
267.8

 
 
 
 
 
 
 
 
 
 
Other Financial and Operating Data:
 
 
 
 
 
 
 
 
 
Dividends per common share
$

 
$

 
$

 
$

 
$

Depreciation and amortization (3)
116.5

 
111.9

 
94.0

 
88.6

 
92.6

Net cash provided by operating activities from continuing operations
314.8

 
207.5

 
256.5

 
168.1

 
231.6

Net cash used in investing activities from continuing operations
(90.2
)
 
(71.2
)
 
(65.7
)
 
(61.9
)
 
(58.9
)
Net cash used in financing activities from continuing operations
(203.2
)
 
(107.0
)
 
(175.2
)
 
(185.1
)
 
(90.7
)
Basic earnings per common share for continuing operations
3.50

 
2.17

 
3.37

 
3.44

 
1.24

Diluted earnings per common share for continuing operations
3.45

 
2.15

 
3.33

 
3.39

 
1.22

Capital expenditures
88.2

 
73.6

 
66.6

 
61.9

 
65.1


(1)
Operating expense, net includes $29.8 million and $21.2 million of customer-related charges in connection with certain customer bankruptcies in 2019 and 2018, respectively, and $14.4 million associated with the termination of our relationship with Mattress Firm in 2017.
(2)
Income tax provision for 2015 includes approximately $60.7 million related to changes in estimate related to the uncertain tax position regarding the Danish Tax Matter, as defined in Note 15, "Income Taxes," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report. The income tax provision for 2017 includes the provisional impact of the U.S. Tax Reform Act.
(3)
Includes $26.8 million, $24.8 million, $13.3 million, $16.2 million, $22.5 million in non-cash, stock-based compensation expense related to restricted stock units, performance restricted stock units, deferred stock units and stock options in 2019, 2018, 2017, 2016, and 2015, respectively.


25


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with Part II, ITEM 6 of this Report and the audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Report. In addition, prior period amounts have been revised to reflect certain Latin American subsidiaries as discontinued operations. Unless otherwise noted, all of the financial information in this Report is consolidated financial information for the Company. The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” and Part I, ITEM 1A of this Report. Our actual results may differ materially from those contained in any forward-looking statements. For results of operations comparisons relating to years ending December 31, 2018 and 2017, refer to our annual report on Form 10-K, Part II, ITEM 7: Management's Discussion and Analysis of Financial Conditions and Results of Operations filed with the Securities and Exchange Commission on February 25, 2019.

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the years ended December 31, 2019 and 2018, 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 develop, manufacture and market bedding products, which we sell globally. Our product brand portfolio includes many highly recognized and iconic brands in the industry, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, Stearns & Foster® and Comfort Revolution®. Our comprehensive suite of bedding products offers a variety of products to consumers across a broad range of channels and price points.

Our distribution model operates through an omni-channel strategy across two distribution 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, e-commerce and call centers.

We continue to make strategic investments, including the introduction of new products; investments to increase our global brand awareness; investments in research and development and productivity initiatives; and various other actions aimed at further strengthening our business. In 2020, we expect to increase our investments in research and development, as well as to spend a record amount of advertising dollars to promote our worldwide brands.

Full year net income for 2019 increased 89% and full year earnings per share ("EPS") increased 88% to $3.42. We believe investments we have made over the past four years strengthening the long-term foundation of our company investments have enhanced our competitive position. The combination of our powerful omni-channel distribution platform coupled with our market leading brands and products continues to drive market share gains and solid financial performance.
    
Our results for 2019 included the following significant accomplishments:

Completed the launch of the all-new line of Tempur-Pedic products
Announced that we were expanding our distribution with new supply agreements
Executed the largest expansion of new stores in our history.


26


Business Segments

We operate in two segments: North America and International. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. Our North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries and licensees located in the U.S. and Canada. Our International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America. We evaluate segment performance based on net sales, gross profit and operating income.

Product Launches
        
During the first half of 2019, we completed the rollout of our higher-end Tempur-Breeze, which completed the largest Tempur-Pedic rollout in our history. Additionally, we completed the launch of our Stearns & Foster products. In our North America segment in 2020, we will introduce the Tempur-Ergo Smart Base Collection with Sleeptracker technology and a new Sealy Posturepedic Plus line.We have successfully extended our product life cycle and therefore expect to have favorable launch costs in 2020.

Expanded Distribution Channels

In 2019, we announced three new or expanded third-party retail relationships in the U.S. and Europe. This resulted in the largest expansion of stores in our history.

We announced that we entered into a supply agreement with Mattress Firm, the largest specialty mattress retailer in North America, to reintroduce Tempur-Pedic, Stearns & Foster and Sealy branded products into approximately 2,500 Mattress Firm stores across the U.S. The reintroduction of products into Mattress Firm stores commenced in the fourth quarter of 2019 and is expected to be completed in the first quarter of 2020.

We also announced the recent expansion of our long-term supply agreement with Big Lots, a 1,400-store retailer in the U.S. This agreement is expected to grow the sales of entry-level Sealy products and to drive unit volume, primarily in the below $1,000 retail price point. Our launch of Sealy products with Big Lots was completed in 2019.

In 2019, we also expanded our European retail distribution network by reaching a supply agreement with Beter Bed Holding, one of Europe’s leading bedding retailers. The launch of new products with Beter Bed Holding was completed in 2019 in over 100 stores.

As a result of these new and expanded agreements, we expect significantly higher volume in our North America segment operations in 2020.

Expanding Retail Footprint
 
We are focused on developing our North America distribution network by opening more Tempur-Pedic retail stores and expanding our online availability. As of December 31, 2019, we had 56 Tempur-Pedic retail stores in operation. We plan to open approximately 20 new retail stores in 2020. We expect to recover our initial cash investment on each store after twelve months. We expect these retail stores to complement our existing third-party retail partners by increasing our products' brand awareness in the local markets. We also plan to expand our offerings in our own e-commerce platform and with third-party online retailers where our market share is still very low. Online bedding sales have increased significantly, as a growing segment of consumers prefer to purchase bedding products in this way. During 2019, we have experienced strong growth in both our e-commerce business and our company-owned stores. In 2020, we expect to continue to expand our Direct channel through new stores and by capturing share online.

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

On April 1, 2019, we 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 our North American retail strategy, which is focused on meeting customer demand through geographic representation and sales expertise. During the second quarter of 2019, we completed the integration of Sleep Outfitters into the North America segment. Sleep Outfitters, previously a third party retailer, had historically been part of our Wholesale channel. Sleep Outfitters' sales have been reclassified into our Direct channel beginning in the second quarter of 2019.

27



Acquisition of Sherwood Bedding

On January 31, 2020, we acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of approximately $40 million. Sherwood Bedding is a major manufacturer in the U.S. private label and OEM bedding market and this acquisition of a majority interest marks our entrance into the private label category. In 2020, we expect this acquisition to contribute to our cash flow and profits.

Customer-Related Charges

The global economic environment continues to be challenging, and there have been signs of deterioration in the U.S. retail sector. Over the past two years, a national department store retail customer and various regional retail customers have filed for U.S. bankruptcy protection. In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL Holding, LLC ("Mattress PAL") and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. This customer represented less than 1% of our global net sales in 2019. Similarly, in the fourth quarter of 2018, prior to the Sleep Outfitters Acquisition, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account.

2019 Results of Operations
 
A summary of our results for the year ended December 31, 2019 include:

Total net sales increased 14.9% to $3,106.0 million from $2,702.9 million in 2018.

Gross margin was 43.2% in 2019 as compared to 41.5% in 2018. Adjusted gross margin, which is a non-GAAP financial measure, was 41.9% in 2018. There were no adjustments to gross margin in 2019.

Operating income was $346.7 million, or 11.2% of net sales, as compared to $256.3 million, or 9.5% of net sales, in 2018. Adjusted operating income, which is a non-GAAP financial measure was $392.2 million, or 12.6% of net sales, as compared to $307.6 million, or 11.4% of net sales, in 2018.
 
Net income was $189.5 million as compared to $100.5 million in 2018. Adjusted net income, which is a non-GAAP financial measure, was $221.9 million as compared to $163.0 million in 2018.

EBITDA, which is a non-GAAP financial measure, increased 31.5% to $468.4 million as compared to $356.1 million in 2018. Adjusted EBITDA, which is a non-GAAP financial measure, increased 19.6% to $508.1 million as compared to $424.7 million in 2018.

EPS was $3.42 as compared to $1.82 in 2018. Adjusted EPS, which is a non-GAAP financial measure, was $4.01 as compared to $2.96 in 2018.

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

We may refer to net sales or earnings or other historical financial information on a “constant currency basis,” which is a non-GAAP financial measure. These references to constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates. To provide information on a constant currency basis, the applicable financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior corresponding period’s currency conversion rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under GAAP, and it is not intended as an alternative to GAAP measures. Refer to Part II, ITEM 7A of this Report for a discussion of our foreign currency exchange rate risk.

28


The following table sets forth the various components of our Consolidated Statements of Income, and expresses each component as a percentage of net sales:
(in millions, except percentages and
Year Ended December 31,
per common share amounts)
2019
 
2018
Net sales
$
3,106.0


100.0
 %

$
2,702.9


100.0
 %
Cost of sales
1,763.8


56.8


1,582.2


58.5

Gross profit
1,342.2


43.2


1,120.7


41.5

Selling and marketing expenses
666.3


21.5


587.8


21.7

General, administrative and other expenses
315.3


10.2


273.0


10.1

Customer-related charges
29.8


1.0


21.2


0.8

Equity income in earnings of unconsolidated affiliates
(15.9
)

(0.5
)

(17.6
)

(0.7
)
Operating income
346.7


11.2


256.3


9.5

 











Other expense, net:











Interest expense, net
85.7


2.8


92.3


3.4

Other income, net
(4.5
)

(0.1
)

(1.0
)


Total other expense, net
81.2


2.6


91.3


3.4

 











Income from continuing operations before income taxes
265.5


8.5


165.0


6.1

Income tax provision
(74.7
)

(2.4
)

(49.6
)

(1.8
)
Income from continuing operations
190.8


6.1


115.4


4.3

Loss from discontinued operations, net of tax
(1.4
)



(17.8
)

(0.6
)
Net income before non-controlling interests
189.4


6.1


97.6


3.6

Less: Net loss attributable to non-controlling interests
(0.1
)



(2.9
)

(0.1
)
Net income attributable to Tempur Sealy International, Inc.
$
189.5


6.1
 %

$
100.5


3.7
 %
 









Earnings per common share:









 









Basic









Earnings per share for continuing operations
$
3.50




$
2.17



Loss per share for discontinued operations
(0.02
)



(0.32
)


Earnings per share
$
3.48




$
1.85



 







Diluted







Earnings per share for continuing operations
$
3.45




$
2.15



Loss per share for discontinued operations
(0.03
)



(0.33
)


Earnings per share
$
3.42




$
1.82



 







Weighted average common shares outstanding:
 
 
 
 
 


Basic
54.5




54.4



Diluted
55.4




55.1












29


NET SALES
 
Year Ended December 31,
 
Consolidated
North America
International
(in millions)
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net sales by channel
 
 
 
 
 
 
 
 
 
 
 
Wholesale
$
2,717.1

 
$
2,452.1

 
$
2,273.5

 
$
1,989.1

 
$
443.6

 
$
463.0

Direct
388.9

 
250.8

 
259.8

 
147.1

 
129.1

 
103.7

Total net sales
$
3,106.0

 
$
2,702.9

 
$
2,533.3

 
$
2,136.2

 
$
572.7

 
$
566.7


Year ended December 31, 2019 compared to year ended December 31, 2018

Net sales increased 14.9%, and on a constant currency basis increased 16.0%. The change in net sales was driven by the following:

North America net sales increased $397.1 million, or 18.6%. Net sales in the Wholesale channel increased $284.4 million, or 14.3%, primarily driven by new Tempur product introductions and the expansion of our retail distribution network. Net sales in our Direct channel increased $112.7 million, or 76.6%, primarily driven by growth from company-owned stores, including the Sleep Outfitters Acquisition, and our e-commerce business. Excluding Sleep Outfitters, the Wholesale channel increased approximately 17% and the Direct channel increased approximately 35%. On a constant currency basis, North America net sales increased 18.8%.

International net sales increased $6.0 million, or 1.1%. On a constant currency basis, our International net sales increased 5.3%, primarily driven by Direct channel growth. Net sales in the Wholesale channel decreased 0.1% on a constant currency basis, primarily driven by country specific conditions. Net sales in the Direct channel increased 29.5% on a constant currency basis, primarily driven by growth from company-owned stores.

GROSS PROFIT
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Margin Change
(in millions, except percentages)
Gross Profit
 
Gross Margin
 
Gross Profit
 
Gross Margin
 
2019 vs 2018
North America
$
1,035.2

 
40.9
%
 
$
823.4

 
38.5
%
 
2.4
%
International
307.0

 
53.6
%
 
297.3

 
52.5
%
 
1.1
%
Consolidated
$
1,342.2

 
43.2
%
 
$
1,120.7

 
41.5
%
 
1.7
%

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

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

Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes; the cost of raw materials; operational efficiencies due to the utilization in our manufacturing facilities; product, channel and geographic mix; foreign exchange fluctuations; volume incentives offered to certain retail accounts; participation in our retail cooperative advertising programs; and costs associated with new product introductions. Future changes in raw material prices could have a significant impact on our gross margin. In 2020, we expect a modest impact on gross margin due to lower commodity costs. 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.

30


Year ended December 31, 2019 compared to year ended December 31, 2018

Gross margin improved 170 basis points. The principal factors impacting gross margin for each segment are discussed below.

North America gross margin improved 240 basis points. The improvement in gross margin was primarily driven by favorable pricing of 130 basis points, favorable product and brand mix of 110 basis points and lower commodity costs. Additionally, in 2018, we also recorded $6.1 million of restructuring charges related to our acquisition of the remaining interest in a joint venture and $5.6 million of supply chain transition costs to consolidate certain manufacturing and distribution facilities, resulting in a favorable impact of 50 basis points in 2019. These improvements were partially offset by increased floor model expenses.

International gross margin improved 110 basis points. The improvement in gross margin was primarily driven by lower commodity costs and channel mix.

OPERATING EXPENSES

Selling and marketing expenses include advertising and media production associated with the promotion of our brands, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials, and sales force compensation. We also include in selling and marketing expense certain new product development costs, including market research and new product testing.
 
General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.

Year ended December 31, 2019 compared to year ended December 31, 2018
 
Year Ended December 31,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
(in millions)
Consolidated
 
North America
 
International
 
Corporate
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
280.5

 
$
259.3

 
$
244.1

 
$
220.5

 
$
36.4

 
$
38.8

 
$

 
$

Other selling and marketing
385.8

 
328.5

 
249.3

 
194.4

 
125.3

 
125.7

 
11.2

 
8.4

General, administrative and other
315.3

 
273.0

 
167.2

 
137.6

 
45.8

 
42.9

 
102.3

 
92.5

Customer-related charges
29.8

 
21.2

 
29.8

 
20.9

 

 

 

 
0.3

Total operating expense
$
1,011.4

 
$
882.0

 
$
690.4

 
$
573.4

 
$
207.5

 
$
207.4

 
$
113.5

 
$
101.2


Operating expenses increased $129.4 million, or 14.7%, and were flat as a percentage of net sales. The primary drivers of changes in operating expenses by segment are discussed below.

North America operating expenses increased $117.0 million, or 20.4%, and increased 50 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by advertising and other selling and marketing investments, variable compensation expense and incremental operating expense associated with a higher number of company-owned stores. In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. Additionally, in the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities. In the fourth quarter of 2018, prior to the Sleep Outfitters Acquisition, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account. Additionally, in 2018, we recorded $4.1 million of restructuring charges related to our acquisition of the remaining interest in a joint venture and $7.3 million of supply chain transition costs which represent charges incurred to consolidate certain manufacturing and distribution facilities.
 
International operating expenses increased $0.1 million and decreased 40 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by an increase in variable compensation expense, offset by $8.2 million of costs associated with our International simplification efforts, which were not repeated in 2019.


31


Corporate operating expenses increased $12.3 million, or 12.2%. The increase in operating expenses was primarily driven by increased variable compensation expense.

Research and development expenses for the year ended December 31, 2019 were $23.0 million compared to $21.9 million for the year ended December 31, 2018, an increase of $1.1 million, or 5.0%.

OPERATING INCOME
 
Year Ended December 31,
 
 
2019
 
2018
 
Margin Change
(in millions, except percentages)
Operating Income
 
Operating Margin
 
Operating Income
 
Operating Margin
 
2019 vs 2018
North America
$
344.8

 
13.6
%
 
$
250.0

 
11.7
%
 
1.9
%
International
115.4

 
20.2
%
 
107.5

 
19.0
%
 
1.2
%
 
460.2

 
 
 
357.5

 
 
 
 
Corporate expenses
(113.5
)
 
 
 
(101.2
)
 
 
 
 
Total operating income
$
346.7

 
11.2
%
 
$
256.3

 
9.5
%
 
1.7
%

Year ended December 31, 2019 compared to year ended December 31, 2018

Operating income increased $90.4 million and operating margin improved 170 basis points. The increase was driven by the following:

North America operating income increased $94.8 million and operating margin improved 190 basis points, primarily driven by the improvement in gross margin of 240 basis points. In 2018, we recorded $10.2 million of restructuring charges related to our acquisition of the remaining interest in a joint venture, as well as incremental bad debt expense related to the bankruptcy of a department store retailer, which were not repeated in 2019. These improvements were offset by increased advertising and other selling and marketing investments and variable compensation expense. In the fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. In the fourth quarter of 2018, prior to the Sleep Outfitters Acquisition, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account. Additionally, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.
International operating income increased $7.9 million and operating margin improved 120 basis points. The improvement in operating margin was driven by the improvement in gross margin of 110 basis points. In 2018, we recorded $8.5 million of costs associated with our International simplification efforts, including headcount reduction, professional fees and store closures, which were not repeated in 2019. These improvements were offset by an increase in variable compensation expense.

Corporate operating expenses increased $12.3 million, which negatively impacted our consolidated operating margin by 40 basis points. The increase in operating expenses was primarily driven by an increase in variable compensation expense.

INTEREST EXPENSE, NET
 
Year Ended December 31,
 
Percent change
(in millions, except percentages)
2019
 
2018
 
2019 vs 2018
Interest expense, net
$
85.7

 
$
92.3

 
(7.2
)%

Year ended December 31, 2019 compared to year ended December 31, 2018

Interest expense, net, decreased $6.6 million, or 7.2%. The decrease in interest expense, net, was driven by reduced average levels of outstanding debt and lower interest rates on our variable rate debt.


32


INCOME TAXES
 
Year Ended December 31,
 
Percent change
(in millions, except percentages)
2019
 
2018
 
2019 vs 2018
Income tax
$
74.7

 
$
49.6

 
50.6
 %
Effective tax rate
28.1
%
 
30.1
%
 
(2.0
)%

Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and includes the impact of net operating losses for certain of our foreign operations.

Year ended December 31, 2019 compared to year ended December 31, 2018

Our income tax provision increased $25.1 million due to an increase in income before income taxes and as the result of discrete items. Our 2019 effective tax rate decreased as compared to 2018 by 200 basis points. The effective tax rate as compared to the U.S. federal statutory tax rate for the year ending December 31, 2019 included a net unfavorable impact of discrete items primarily related to the sale of a certain interest in our Asia-Pacific joint venture and the impact of certain stock compensation. The effective tax rate as compared to the U.S. federal statutory tax rate for the year ended December 31, 2018 included a net favorable impact of the settlement of the previously-disclosed Danish Tax Matter for the years 2001 - 2011, the favorable impact of the U.S. Tax Reform Act as reflected on our 2017 U.S. income tax return filed in 2018 and the unfavorable impact of an increase in our uncertain tax position related to the Danish Tax Matter for years after 2011.

Refer to Note 15, “Income Taxes,” in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report for further information.

Liquidity and Capital Resources
 
Liquidity
Our principal sources of funds are cash flows from operations, borrowings made pursuant to our credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, capital expenditures and working capital needs. At December 31, 2019, we had working capital of $126.9 million, including cash and cash equivalents of $64.9 million, as compared to working capital of $136.4 million including $45.8 million in cash and cash equivalents as of December 31, 2018.

Cash Provided by (Used in) Continuing Operations

The table below presents net cash provided by (used in) operating, investing and financing activities from continuing operations for the years ended December 31, 2019 and 2018.
 
 
Year Ended December 31,
(in millions)
 
2019
 
2018
Net cash provided by (used in) continuing operations:
 
 
 
 
Operating activities
 
$
314.8

 
$
207.5

Investing activities
 
(90.2
)
 
(71.2
)
Financing activities
 
(203.2
)
 
(107.0
)
 
Cash provided by operating activities from continuing operations increased $107.3 million in 2019 as compared to 2018. The increase in cash provided by operating activities was primarily driven by the increase in cash earnings offset in part by a decrease in working capital. Accounts receivable and inventory were principal uses of cash, which reflect higher sales levels and volumes, the impact of the new and expanded retail relationships, and new product introductions. Accrued expenses and other liabilities were a source of cash in 2019 as a result of increased accruals for variable compensation and other expenses such as advertising given higher revenues and earnings.

Cash used in investing activities from continuing operations increased $19.0 million in 2019 as compared to 2018. The increase in cash used in investing activities was primarily due to cash used for the Sleep Outfitters Acquisition and planned capital expenditures.


33


Cash used in financing activities from continuing operations increased $96.2 million in 2019 as compared to 2018. In 2019, we repurchased $105.7 million of our common stock, which included repurchases of $102.3 million under our share repurchase program and $3.4 million which was withheld to satisfy tax withholding obligations related to stock compensation. In 2018, we repurchased $4.6 million of our common stock which was withheld to satisfy tax withholding obligations related to stock compensation. We did not repurchase any shares under our share repurchase program during 2018. Proceeds from exercise of stock options increased $13.2 million as compared to the same period in 2018. In 2019, we had net repayments of $104.3 million on our credit facilities, as compared to net repayments of $100.9 million in 2018.
 
Cash Used in Discontinued Operations

The table below presents net cash used in operating, investing and financing activities from discontinued operations for the years ended December 31, 2019 and 2018:

 
 
Year Ended December 31,
(in millions)
 
2019
 
2018
Net cash (used in) provided by discontinued operations:
 
 
 
 
Operating activities
 
$
(2.0
)
 
$
(24.4
)
Investing activities
 

 
2.1

Financing activities
 

 


Cash used in discontinued operations decreased $22.4 million in 2019 as compared to 2018, primarily due to the payment of non-income tax obligations and related interest expense in 2018.

Capital Expenditures

Capital expenditures totaled $88.2 million for the year ended December 31, 2019 and $73.6 million for the year ended December 31, 2018. We currently expect our 2020 capital expenditures to be approximately $100 to $110 million, which includes investments in our U.S. ERP projects, domestic manufacturing facilities and our Tempur-Pedic retail stores.

Indebtedness

Our total debt decreased to $1,547.0 million as of December 31, 2019 from $1,653.8 million as of December 31, 2018. In the first half of 2019, we prepaid $75.0 million on the Term A facility under the 2016 Credit Agreement. Refer to Note 8, “Debt,” in our Consolidated Financial Statements included in Part II, ITEM 8 for further discussion of our debt.

On October 16, 2019, we entered into the 2019 Credit Agreement, which provides for a $425.0 million revolving credit facility, a $425.0 million term loan facility and an accordion feature for additional borrowings. Refer to Note 8, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 for further discussion of the accordion feature of the 2019 Credit Agreement. We used the proceeds under the term loan facility to refinance outstanding borrowings under the 2016 Credit Agreement and terminated the existing revolving credit commitments. As of October 16, 2019, the terms of the 2019 Credit Agreement replaced the terms of the 2016 Credit Agreement.

As of December 31, 2019, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, in accordance with our 2019 Credit Agreement was 2.92 times, 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 December 31, 2019, we were in compliance with all of the financial covenants in our debt agreements.

Our debt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends.  The 2019 Credit Agreement, 2023 Senior Notes and 2026 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA remains below 3.5 times. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.5 times. The limit on restricted payments under the 2019 Credit Agreement, 2023 Senior Notes and 2026 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted. 
    

34


For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated indebtedness less netted cash to adjusted EBITDA calculated in accordance with our 2019 Credit Agreement. Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 2019 Credit Agreement are terms that are not recognized under GAAP and do not purport to be alternatives to net income as a measure of operating performance or total debt.

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 for a total repurchase price of not more than $800.0 million. We did not repurchase any shares under our share repurchase program during 2018. For the year ended 2019, we repurchased 1.3 million shares under our share repurchase program for approximately $102.3 million. As of December 31, 2019, we had approximately $124.6 million remaining under our share repurchase program. In February 2020, the Board of Directors authorized an increase, of over $190.0 million, to our share repurchase authorization of Tempur Sealy International's common stock to $300.0 million. Share repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate. These repurchases may be funded by operating cash flows and/or borrowings under our debt arrangements. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program is subject to certain limitations under our debt agreements. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws.    

Future Liquidity Sources and Uses

Our primary sources of liquidity are cash flows from operations and borrowings, as needed, under our debt facilities. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources. As of December 31, 2019, we had $1,547.0 million in total debt outstanding, and our adjusted EBITDA, which is a non-GAAP financial measure, was $508.1 million for the year ended December 31, 2019. Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Total cash interest payments related to our borrowings are expected to be approximately $80 to $85 million in 2020.

On October 16, 2019, we entered into the 2019 Credit Agreement with a syndicate of banks. The 2019 Credit Agreement provides for a $425.0 million revolving credit facility, a $425.0 million term loan facility, and an incremental facility in an aggregate amount of up to $550.0 million plus the amount of certain prepayments plus an additional unlimited amount subject to compliance with a maximum consolidated secured leverage ratio test. The 2019 Credit Agreement has a $60.0 million sub-facility for the issuance of letters of credit. We expect to use the revolving credit facility from time to time to finance working capital needs and for general corporate purposes.

Our business continues to generate significant cash flows from operations. Based upon the current level of operations, we believe that cash generated from operations and amounts available under our credit facilities will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the foreseeable future. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under our debt facilities or otherwise enable us to service our indebtedness or to make anticipated capital expenditures. In 2020, we expect to be within our target range for our ratio of consolidated indebtedness less netted cash of 2.5 times to 3.5 times. We expect to continue to use excess cash flows from operations for share repurchases and debt repayment. We may also consider other capital allocations, such as acquisitions or other investments.

At December 31, 2019, total cash and cash equivalents were $64.9 million, of which $28.9 million was held in the U.S. and $36.0 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.

Contractual Obligations
 
Our contractual obligations and other commercial commitments as of December 31, 2019 are summarized below:

35


(in millions)
 
Payment Due By Period
Contractual Obligations
 
2020
 
2021
 
2022
 
2023
 
2024
 
After
2024
 
Total
Obligations
Debt (1)
 
$
29.2

 
$
21.3

 
$
21.3

 
$
481.8

 
$
329.3

 
$
600.0

 
$
1,482.9

Letters of credit
 
23.6

 

 

 

 

 

 
23.6

Interest payments (2)
 
74.0

 
72.8

 
70.2

 
64.5

 
42.6

 
53.0

 
377.1

Operating leases
 
62.1

 
54.5

 
46.6

 
36.2

 
29.0

 
74.5

 
302.9

Finance lease obligations(3)
 
8.5

 
8.7

 
7.1

 
5.5

 
4.2

 
30.1

 
64.1

Pension obligations
 
1.1

 
1.1

 
1.2

 
1.2

 
1.3

 
31.0

 
36.9

Total (4)
 
$
198.5

 
$
158.4

 
$
146.4

 
$
589.2

 
$
406.4

 
$
788.6

 
$
2,287.5


(1)
Debt excludes finance lease obligations and deferred financing costs.
(2)
Interest payments represent obligations under our debt outstanding as of December 31, 2019, applying December 31, 2019 interest rates and assuming scheduled payments are paid as contractually required through maturity.
(3)
The payments due for finance lease obligations excludes $20.3 million in future payments for interest.
(4)
Uncertain tax positions are excluded from this table given the timing of payments cannot be reasonably estimated.

Non-GAAP Financial Information

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

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

Key Highlights
 
Year Ended December 31,
(in millions, except percentages)
2019
 
2018
 
% Change
 
% Change Constant Currency (1)
Net sales
$
3,106.0

 
$
2,702.9

 
14.9
%
 
16.0
%
Net income
$
189.5

 
$
100.5

 
88.6
%
 
92.1
%
EBITDA (1)
$
468.4

 
$
356.1

 
31.5
%
 
33.2
%
Adjusted EBITDA (1)
$
508.1

 
$
424.7

 
19.6
%
 
21.0
%
EPS
$
3.42

 
$
1.82

 
87.9
%
 
91.2
%
Adjusted EPS (1)
$
4.01

 
$
2.96

 
35.5
%
 
37.5
%
(1)
 
Non-GAAP financial measure. Please refer to the reconciliations in the following tables.


36


Adjusted Net Income and Adjusted EPS

A reconciliation of net income to adjusted net income and the calculation of adjusted EPS is provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the years ended December 31, 2019 and 2018.
 
Year Ended December 31,
(in millions, except per common share amounts)
2019
 
2018
Net income
$
189.5

 
$
100.5

Loss from discontinued operations, net of tax (1)
1.4

 
17.8

Customer-related charges (2)
29.8

 
21.2

Charitable stock donation (3)
8.9

 

Acquisition-related costs and other (4)
6.1

 

Credit facility amendment (5)
0.7

 

Other income (6)
(7.2
)
 

Restructuring costs (7)

 
24.9

Supply chain transition costs (8)

 
7.3

Tax adjustments (9)
(7.3
)
 
(8.7
)
Adjusted net income
$
221.9

 
$
163.0

 
 
 
 
Adjusted earnings per share, diluted
$
4.01

 
$
2.96

 
 
 
 
Diluted shares outstanding
55.4

 
55.1

(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 fourth quarter of 2019, we recorded $29.8 million of customer-related charges in connection with the bankruptcy of Mattress PAL and resulting significant liquidity issues of Mattress PAL's affiliates to fully reserve trade receivables and other assets associated with this account. In the fourth quarter of 2018, we recorded $21.2 million of customer-related charges in connection with the bankruptcy of iMS to fully reserve trade receivables and other assets associated with this account.

(3)
In the fourth quarter of 2019, we recorded an $8.9 million charge related to the donation of common stock at fair market value to certain public charities.
(4)
In the first half of 2019, we recorded $6.1 million of acquisition-related and other costs, primarily related to post acquisition restructuring charges and professional fees incurred in connection with the acquisition of substantially all of the net assets of iMS by an affiliate of ours.

(5)
In the fourth quarter of 2019, we incurred $0.7 million of professional fees in connection with the amendment of the senior secured credit facility.
(6)
In the first quarter of 2019, we recorded $7.2 million of other income related to the sale of our interest in a subsidiary of the Asia-Pacific joint venture.
(7)
In 2018, we recorded $24.9 million of restructuring costs, which included $1.3 million of other expense, net. These costs included $11.5 million of charges related to the operational alignment of a joint venture that was wholly owned in the North America business segment, which included $6.1 million in cost of sales and $1.3 million of other expense, net. Restructuring costs also included $8.5 million of expenses in the International business segment related to International simplification efforts, which included $0.3 million in cost of sales. Corporate recorded $4.9 million of professional fees related to restructuring activities.
(8)
In 2018, we recorded $7.3 million of supply chain transition costs which represent charges incurred to consolidate certain manufacturing and distribution facilities, including $5.6 million in cost of sales and $0.8 million of other expense.

(9)
Adjusted income tax provision represents the tax effects associated with the aforementioned items and other discrete income tax events.


37



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

A reconciliation of gross profit and gross margin to adjusted gross profit and adjusted gross margin, respectively, and operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted operating income (expense) for the year ended December 31, 2019. We had no adjustments to gross profit for the year ended December 31, 2019