TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
(in millions) | Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS: | | | | | |
Net income before non-controlling interests | $ | 625.0 | | | $ | 349.8 | | | $ | 189.4 | |
Loss from discontinued operations, net of tax | 0.7 | | | — | | | 1.4 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 113.2 | | | 98.0 | | | 89.7 | |
Amortization of stock-based compensation | 61.4 | | | 104.5 | | | 26.8 | |
| | | | | |
Amortization of deferred financing costs | 2.8 | | | 3.2 | | | 2.4 | |
| | | | | |
Bad debt expense | 2.7 | | | 35.8 | | | 29.3 | |
Charitable stock donation | — | | | — | | | 8.9 | |
Deferred income taxes | 11.1 | | | (8.6) | | | (7.1) | |
Dividends received from unconsolidated affiliates | 22.9 | | | 19.3 | | | 13.4 | |
Equity income in earnings of unconsolidated affiliates | (30.6) | | | (16.4) | | | (15.9) | |
| | | | | |
Loss on extinguishment of debt | 3.0 | | | 2.3 | | | — | |
Loss (gain) on sale of assets | 0.5 | | | (1.7) | | | 1.0 | |
Foreign currency adjustments and other | 1.0 | | | (0.5) | | | (5.2) | |
Changes in operating assets and liabilities, net of effect of business acquisitions: | | | | | |
Accounts receivable | (40.4) | | | (55.7) | | | (76.0) | |
Inventories | (106.4) | | | (42.5) | | | (28.2) | |
Prepaid expenses and other assets | 125.1 | | | (19.4) | | | 11.3 | |
Operating leases, net | 9.2 | | | 21.9 | | | 8.6 | |
| | | | | |
| | | | | |
Accounts payable | 50.5 | | | 63.0 | | | (4.8) | |
Accrued expenses and other liabilities | (113.8) | | | 90.5 | | | 67.3 | |
Income taxes, net | (14.8) | | | 11.2 | | | 2.5 | |
Net cash provided by operating activities from continuing operations | 723.1 | | | 654.7 | | | 314.8 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS: | | | | | |
Purchases of property, plant and equipment | (123.3) | | | (111.3) | | | (88.2) | |
Acquisitions, net of cash acquired | (432.8) | | | (41.2) | | | (17.1) | |
Other | 1.3 | | | 5.9 | | | 15.1 | |
Net cash used in investing activities from continuing operations | (554.8) | | | (146.6) | | | (90.2) | |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS: | | | | | |
Proceeds from borrowings under long-term debt obligations | 3,664.2 | | | 1,175.8 | | | 1,242.8 | |
Repayments of borrowings under long-term debt obligations | (2,684.9) | | | (1,360.3) | | | (1,347.1) | |
| | | | | |
Proceeds from exercise of stock options | 14.9 | | | 6.9 | | | 17.8 | |
| | | | | |
Treasury stock repurchased | (816.3) | | | (331.8) | | | (105.7) | |
Dividends paid | (63.1) | | | — | | | — | |
Payment of deferred financing costs | (24.9) | | | (1.3) | | | (3.2) | |
| | | | | |
| | | | | |
Repayments of finance lease obligations and other | (13.4) | | | (11.9) | | | (7.8) | |
Net cash provided by (used in) financing activities from continuing operations | 76.5 | | | (522.6) | | | (203.2) | |
| | | | | |
Net cash provided by (used in) continuing operations | 244.8 | | | (14.5) | | | 21.4 | |
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Net operating cash flows (used in) provided by discontinued operations | (0.9) | | | 0.3 | | | (2.0) | |
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NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (8.2) | | | 14.3 | | | (0.3) | |
Increase in cash and cash equivalents | 235.7 | | | 0.1 | | | 19.1 | |
CASH AND CASH EQUIVALENTS, beginning of period | 65.0 | | | 64.9 | | | 45.8 | |
CASH AND CASH EQUIVALENTS, end of period | $ | 300.7 | | | $ | 65.0 | | | $ | 64.9 | |
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| | | | | |
| | | | | |
Supplemental cash flow information: | | | | | |
Cash paid during the period for: | | | | | |
Interest | $ | 55.2 | | | $ | 79.0 | | | $ | 89.0 | |
Income taxes, net of refunds | $ | 184.8 | | | $ | 93.8 | | | $ | 73.8 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Description of Business. Tempur Sealy International, Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term "Tempur Sealy International" refers to Tempur Sealy International, Inc. only, and the term "Company" refers to Tempur Sealy International, Inc. and its consolidated subsidiaries.
The Company designs, manufactures and distributes bedding products, which include mattresses, foundations and adjustable bases, and other products, which include pillows and other accessories. The Company also derives income from royalties by licensing Sealy® and Stearns & Foster® brands, technology and trademarks to other manufacturers. The Company sells its products through two sales channels: Wholesale and Direct.
(b) Basis of Consolidation. The accompanying financial statements include the accounts of Tempur Sealy International and its controlled subsidiaries. Intercompany balances and transactions have been eliminated.
The Company has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions. The Company's ownership interest in these joint ventures is 50.0%. Additionally, in October 2020, the Company entered into a 50.0% ownership joint venture to reacquire the rights and acquire the assets to manufacture, market and distribute Sealy® and Stearns & Foster® branded products in the U.K. The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have effective control, and consolidation is not otherwise required. The Company's equity in the net income and losses of these investments is reported in equity income in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income.
(c) Use of Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company's results are affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of raw materials, can have a significant effect on operations.
(d) Foreign Currency. Assets and liabilities of non-U.S. subsidiaries, whose functional currency is the local currency, are translated into U.S. Dollars at period-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the period. The adjustments resulting from translating the financial statements of foreign subsidiaries are included in accumulated other comprehensive loss ("AOCL"), a component of stockholders' equity, and included in net earnings only upon sale or liquidation of the underlying foreign subsidiary or affiliated company. Foreign currency transaction gains and losses are recognized in net earnings based on differences between foreign exchange rates on the transaction date and on the settlement date. These amounts are not considered material to the Consolidated Financial Statements.
(e) Derivative Financial Instruments. Derivative financial instruments are used in the normal course of business to manage interest rate and foreign currency exchange risks. The financial instruments used by the Company are straight-forward, non-leveraged instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit ratings of these institutions. For all transactions designated as hedges, the hedging relationships are formally documented at the inception and on an ongoing basis in offsetting changes in cash flows of the hedged transaction.
The Company records derivative financial instruments on the Consolidated Balance Sheets as either an asset or liability measured at its fair value. The effectiveness of the cash flow hedge contracts, including time value, is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as other timing and probability criteria to test whether the hedge continues to be effective. Changes in a derivative's fair value (i.e. unrealized gains or losses) related to an effective hedge are deferred and recorded in the stockholders' equity section of the Consolidated Balance Sheets as a component of AOCL and subsequently recognized in the Consolidated Statements of Comprehensive Income when the hedged item affects net income. The ineffective portion, if any, of the change in fair value of a hedge is recognized in income immediately in the same line item as the hedged risk.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value (i.e. unrealized gains or losses) is also recorded in net income immediately in the same line item as the hedged risk.
The Company's derivative instruments are limited to forward exchange contract assets and liabilities which were not designated as hedges as of December 31, 2021 and 2020 and were not material in any period presented.
(f) Cash and Cash Equivalents. Cash and cash equivalents consist of all highly liquid investments with initial maturities of three months or less. The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments.
(g) Inventories. Inventories are stated at the lower of cost and net realizable value, determined by the first-in, first-out method and consist of the following:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Finished goods | $ | 297.8 | | | $ | 170.2 | |
Work-in-process | 11.4 | | | 12.6 | |
Raw materials and supplies | 154.7 | | | 129.3 | |
| $ | 463.9 | | | $ | 312.1 | |
(h) Property, Plant and Equipment. Property, plant and equipment are carried at cost at acquisition date and are depreciated using the straight-line method over their estimated useful lives as follows:
| | | | | |
| Estimated Useful Lives (in years) |
Buildings | 25-30 |
Computer equipment and software | 3-7 |
Leasehold improvements | 4-7 |
Machinery and equipment | 3-7 |
Office furniture and fixtures | 5-7 |
The Company records depreciation and amortization in cost of sales for long-lived assets used in the manufacturing process, and within each line item of operating expenses for all other long-lived assets. Leasehold improvements are amortized over the shorter of the life of the lease or seven years. Assets under finance leases are included within property, plant and equipment and represent non-cash investing activities.
Property, plant and equipment, net consisted of the following:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Machinery and equipment | $ | 481.8 | | | $ | 419.6 | |
Land and buildings | 386.1 | | | 359.7 | |
Computer equipment and software | 209.3 | | | 182.0 | |
Furniture and fixtures | 75.5 | | | 57.6 | |
Construction in progress | 88.2 | | | 72.0 | |
Total property, plant and equipment | 1,240.9 | | | 1,090.9 | |
Accumulated depreciation | (657.4) | | | (583.0) | |
Total property, plant and equipment, net | $ | 583.5 | | | $ | 507.9 | |
Depreciation expense, which includes depreciation expense for finance lease assets, for the Company was $94.7 million, $80.5 million and $73.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(i) Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. If estimated future undiscounted net cash flows are less than the carrying amount of the asset or group of assets, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset to its then fair value. Fair value generally is determined from estimated discounted future net cash flows (for assets held for use) or net realizable value (for assets held for sale). The Company did not identify any impairments for the years ended December 31, 2021, 2020 and 2019.
(j) Goodwill and Other Intangible Assets. Intangible assets with finite useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate impairment may have occurred. The Company performs an annual impairment test on goodwill and indefinite-lived intangible assets on October 1 of each year and whenever events or circumstances make it more likely than not that impairment may have occurred. This assessment may be performed quantitatively or qualitatively. In conducting the impairment test for the North America, International and Dreams reporting units, the fair value of each of the Company's reporting units is compared to its respective carrying amount including goodwill. If the fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, the goodwill is written down for the amount by which the carrying amount exceeds the fair value. However, the loss recognized cannot exceed the carrying amount of goodwill.
Using the quantitative approach, the Company makes various estimates and assumptions in determining the estimated fair value of each reporting unit using a combination of discounted cash flow models and valuations based on earnings multiples for guideline public companies in each reporting unit’s industry peer group, when externally quoted market prices are not readily available. Discounted cash flow models are reliant on various assumptions, including projected business results, long-term growth factors and weighted-average cost of capital. Management judgement is involved in estimating these variables, and they include inherent uncertainties as they are forecasting future events. The Company performs sensitivity analyses by using a range of inputs to confirm the reasonableness of the long-term growth rate and weighted average cost of capital. Additionally, the Company compares the indicated equity value to its market capitalization and evaluates the resulting implied control premium/discount to determine if the estimated enterprise value is reasonable compared to external market indicators.
Using the qualitative approach, the Company reviews macroeconomic conditions, industry and market conditions and entity specific factors, including strategies and financial performance for potential indicators of impairment.
The Company also tests its indefinite-lived intangible assets for impairment, principally the Tempur, Sealy and Dreams trade names. Under a quantitative approach, the Company uses a "relief-from-royalty" method. Significant assumptions inherent in the methodologies are employed and include such estimates as royalty and discount rates.
The Company performed its annual impairment test of goodwill and indefinite-lived intangible assets qualitatively in 2021 and quantitatively in 2020 and 2019, none of which resulted in the recognition of impairment charges. For further information on goodwill and other intangible assets, refer to Note 4, "Goodwill and Other Intangible Assets."
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(k) Accrued Sales Returns. The Company allows product returns through certain sales channels and on certain products. Estimated sales returns are provided at the time of sale based on historical sales channel return rates. Estimated future obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized. The Company considers the impact of recoverable salvage value on sales returns by product in determining its estimate of future sales returns. The Company recognizes a return asset for the right to recover the goods returned by the customer. The right of return asset is recognized on a gross basis outside of the accrued sales returns and is not material to the Company's Consolidated Balance Sheets.
The Company had the following activity for accrued sales returns from December 31, 2019 to December 31, 2021:
| | | | | |
(in millions) | |
Balance as of December 31, 2019 | $ | 39.3 | |
Amounts accrued | 111.9 | |
Returns charged to accrual | (106.3) | |
Balance as of December 31, 2020 | 44.9 | |
Amounts accrued | 142.2 | |
Returns charged to accrual | (137.3) | |
Balance as of December 31, 2021 | $ | 49.8 | |
As of December 31, 2021 and 2020, $33.7 million and $31.6 million of accrued sales returns is included as a component of accrued expenses and other current liabilities and $16.1 million and $13.3 million of accrued sales returns is included in other non-current liabilities on the Company’s accompanying Consolidated Balance Sheets, respectively.
(l) Warranties. The Company provides warranties on certain products, which vary by segment, product and brand. Estimates of warranty expenses are based primarily on historical claims experience and product testing. Estimated future obligations related to these products are charged to cost of sales in the period in which the related revenue is recognized. The Company considers the impact of recoverable salvage value on warranty costs in determining its estimate of future warranty obligations.
The Company provides warranties on mattresses with varying warranty terms. Tempur-Pedic mattresses sold in the North America segment and all Sealy mattresses have warranty terms ranging from 10 to 25 years, generally non-prorated for the first 10 to 15 years and then prorated for the balance of the warranty term. Tempur-Pedic mattresses sold in the International segment have warranty terms ranging from 5 to 15 years, non-prorated for the first 5 years and then prorated on a straight-line basis for the last 10 years of the warranty term. Tempur-Pedic pillows have a warranty term of 3 years, non-prorated.
The Company had the following activity for its accrued warranty expense from December 31, 2019 to December 31, 2021:
| | | | | |
(in millions) | |
Balance as of December 31, 2019 | $ | 41.6 | |
| |
| |
Amounts accrued | 24.3 | |
Warranties charged to accrual | (21.7) | |
Balance as of December 31, 2020 | 44.2 | |
Amounts accrued | 21.4 | |
Warranties charged to accrual | (21.7) | |
Balance as of December 31, 2021 | $ | 43.9 | |
As of December 31, 2021 and 2020, $20.2 million and $20.3 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $23.7 million and $23.9 million of accrued warranty expense is included in other non-current liabilities on the Company’s accompanying Consolidated Balance Sheets, respectively.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(m) Allowance for Credit Losses. The allowance for credit losses is the Company's best estimate of the amount of estimated lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses. The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2021, the Company's accounts receivable were substantially current. Other factors considered include historical write-off experience, current economic conditions and also factors such as customer credit, past transaction history with the customer and changes in customer payment terms. The allowance for credit losses is included in accounts receivable, net in the accompanying Consolidated Balance Sheets.
The Company had the following activity for its allowance for credit losses from December 31, 2019 to December 31, 2021.
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(in millions) | |
| |
| |
| |
Balance as of December 31, 2019 | $ | 71.9 | |
ASU 2016-13 adoption impact (before tax) | 8.9 | |
Balance as of January 1, 2020 | 80.8 | |
Amounts accrued | 35.8 | |
Write-offs charged against the allowance | (45.0) | |
Balance as of December 31, 2020 | 71.6 | |
Amounts accrued | 2.7 | |
Write-offs charged against the allowance | (12.2) | |
Balance as of December 31, 2021 | $ | 62.1 | |
(n) Fair Value. Financial instruments, although not recorded at fair value on a recurring basis, include cash and cash equivalents, accounts receivable, accounts payable and the Company's debt obligations. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those instruments. Borrowings under the 2019 Credit Agreement and the securitized debt are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the following material financial instruments were based on Level 2 inputs, which include observable inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of debt instruments. The fair values of these material financial instruments are as follows:
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| | Fair Value |
(in millions) | | December 31, 2021 | | December 31, 2020 |
2023 Senior Notes | | $ | — | | | $ | 255.1 | |
2026 Senior Notes | | — | | | 625.4 | |
2029 Senior Notes | | 816.9 | | | — | |
2031 Senior Notes | | 803.7 | | | — | |
(o) Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are also recognized for the estimated future effects of tax loss carry forwards. The effect of changes in tax rates on deferred taxes is recognized in the period in which the enactment dates change. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized. The Company accounts for uncertain foreign and domestic tax positions utilizing a proscribed recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interest and penalties related to uncertain tax positions are recognized as part of the income tax provision and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law and until such time that the related tax benefits are recognized.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(p) Cost of Sales. Costs associated with net sales are recorded in cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring, and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in these processes. Cost of sales also includes shipping and handling costs associated with the delivery of goods to customers and costs associated with internal transfers between plant locations. Amounts included in cost of sales for shipping and handling were $294.8 million, $223.1 million and $192.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. Additionally, cost of sales include royalties that the Company pays to other entities for the use of their names on products produced by the Company. For additional information, please refer to Note 2, "Net Sales." Royalty expense is not material to the Company's Consolidated Statements of Income.
(q) Cooperative Advertising, Rebate and Other Promotional Programs. The Company enters into programs with customers to provide funds for advertising and promotions. The Company also enters into volume and other rebate programs with customers. When sales are made to these customers, the Company records liabilities pursuant to these programs. The Company periodically assesses these liabilities based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer or whether the customer will meet the requirements to receive rebate funds. The Company generally negotiates these programs on a customer-by-customer basis. Some of these agreements extend over several years. Significant estimates are required at any point in time with regard to the ultimate reimbursement to be claimed by the customers. Subsequent revisions to the estimates are recorded and charged to earnings in the period in which they are identified. Rebates and cooperative advertising are classified as a reduction of revenue and presented within net sales in the accompanying Consolidated Statements of Income. Certain cooperative advertising expenses are reported as components of selling and marketing expenses in the accompanying Consolidated Statements of Income because the Company receives an identifiable benefit and the fair value of the advertising benefit can be reasonably estimated.
(r) Advertising Costs. The Company expenses advertising costs as incurred except for production costs and advance payments, which are deferred and expensed when advertisements run for the first time. Direct response advance payments are deferred and amortized over the life of the program. Advertising costs are included in selling and marketing expenses in the accompanying Consolidated Statements of Income. Advertising costs charged to expense were $432.8 million, $332.5 million and $280.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. Advertising costs include expenditures for shared advertising costs that the Company reimburses to customers under its integrated and cooperative advertising programs. Advertising costs deferred and included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets were $9.0 million and $4.7 million as of December 31, 2021 and 2020, respectively.
(s) Research and Development Expenses. Research and development expenses for new products are expensed as they are incurred and are included in general, administrative and other expenses in the accompanying Consolidated Statements of Income. Research and development costs charged to expense were $27.3 million, $23.1 million and $23.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
(t) Stock-based Compensation. The Company accounts for stock-based payment transactions in which the Company receives employee services in exchange for equity instruments of the Company. Stock-based compensation cost for restricted stock units ("RSUs"), performance restricted stock units ("PRSUs") and deferred stock units ("DSUs") is measured based on the closing fair market value of the Company's common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option's fair value as calculated by the Black-Scholes option-pricing model. Stock-based compensation cost for equity instruments that include a market performance condition are determined using a Monte Carlo simulation valuation model. The Company recognizes stock-based compensation cost as expense for awards other than its PRSUs ratably on a straight-line basis over the requisite service period. The Company recognizes stock-based compensation cost associated with its PRSUs over the requisite service period if it is probable that the performance conditions will be satisfied. The Company recognizes forfeitures of awards as they occur. Further information regarding stock-based compensation can be found in Note 11, "Stock-based Compensation."
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(u) Treasury Stock. Subject to Delaware law, and the limitations in the 2019 Credit Agreement (as defined in Note 6, "Debt") and the Company's other debt agreements, the Board of Directors may authorize share repurchases of the Company’s common stock. Purchases made pursuant to these authorizations may be carried out through open market transactions, negotiated purchases or otherwise, at times and in such amounts as the Company deems appropriate. Shares repurchased under such authorizations are held in treasury for general corporate purposes, including issuances under various employee stock-based award plans. On February 1, 2016, the Board of Directors authorized a share repurchase program pursuant to which the Company was permitted to repurchase shares of Tempur Sealy International's common stock. Treasury stock is accounted for under the cost method and reported as a reduction of stockholders’ equity. The authority provided under the share repurchase program may be suspended, limited or terminated at any time without notice. Please refer to Note 9, "Stockholders' Equity", for additional information.
(v) Pension Obligations. The Company has a noncontributory, defined benefit pension plan covering current and former hourly employees at two of its active Sealy plants and ten previously-closed Sealy U.S. facilities. Sealy Canada, Ltd. (a 100.0% owned subsidiary of the Company) also sponsors a noncontributory, defined benefit pension plan covering hourly employees at one of its facilities. Both plans provide retirement and survivorship benefits based on the employees' credited years of service. The Company's funding policy provides for contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date. The benefit obligation is the projected benefit obligation ("PBO"). The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. The measurement of the PBO is based on the Company's estimates and actuarial valuations. The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. The Company's PBO and fair value of plan assets were $42.1 million and $34.3 million as of December 31, 2021, respectively, and $42.5 million and $31.3 million as of December 31, 2020, respectively. The Company recognizes the funded status of each applicable plan within the Consolidated Balance Sheets as either an asset or liability based on its funded status measured as the difference between the fair value of plan assets and the PBO, which was not material as of December 31, 2021 or 2020.
(2) Net Sales
The following table presents the Company's disaggregated revenue by channel, product and geographical region, including a reconciliation of disaggregated revenue by segment, for the years ended December 31.
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| | | Twelve Months Ended December 31, 2021 | | |
(in millions) | | | | | | | North America | | International | | Consolidated | | | | | | |
Channel | | | | | | | | | | | | | | | | | |
Wholesale | | | | | | | $ | 3,584.1 | | | $ | 450.3 | | | $ | 4,034.4 | | | | | | | |
Direct | | | | | | | 495.1 | | | 401.3 | | | 896.4 | | | | | | | |
Net sales | | | | | | | $ | 4,079.2 | | | $ | 851.6 | | | $ | 4,930.8 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | North America | | International | | Consolidated | | | | | | |
Product | | | | | | | | | | | | | | | | | |
Bedding | | | | | | | $ | 3,825.9 | | | $ | 687.0 | | | $ | 4,512.9 | | | | | | | |
Other | | | | | | | 253.3 | | | 164.6 | | | 417.9 | | | | | | | |
Net sales | | | | | | | $ | 4,079.2 | | | $ | 851.6 | | | $ | 4,930.8 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | North America | | International | | Consolidated | | | | | | |
Geographical region | | | | | | | | | | | | | | | | | |
United States | | | | | | | $ | 3,751.3 | | | $ | — | | | $ | 3,751.3 | | | | | | | |
All other | | | | | | | 327.9 | | | 851.6 | | | 1,179.5 | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net sales | | | | | | | $ | 4,079.2 | | | $ | 851.6 | | | $ | 4,930.8 | | | | | | | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, 2020 |
(in millions) | | | | | | | North America | | International | | Consolidated |
Channel | | | | | | | | | | | |
Wholesale | | | | | | | $ | 2,806.7 | | | $ | 379.1 | | | $ | 3,185.8 | |
Direct | | | | | | | 352.5 | | | 138.6 | | | 491.1 | |
Net sales | | | | | | | $ | 3,159.2 | | | $ | 517.7 | | | $ | 3,676.9 | |
| | | | | | | | | | | |
| | | | | | | North America | | International | | Consolidated |
Product | | | | | | | | | | | |
Bedding | | | | | | | $ | 2,956.3 | | | $ | 397.5 | | | $ | 3,353.8 | |
Other | | | | | | | 202.9 | | | 120.2 | | | 323.1 | |
Net sales | | | | | | | $ | 3,159.2 | | | $ | 517.7 | | | $ | 3,676.9 | |
| | | | | | | | | | | |
| | | | | | | North America | | International | | Consolidated |
Geographical region | | | | | | | | | | | |
United States | | | | | | | $ | 2,886.6 | | | $ | — | | | $ | 2,886.6 | |
All other | | | | | | | 272.6 | | | 517.7 | | | 790.3 | |
| | | | | | | | | | | |
Net sales | | | | | | | $ | 3,159.2 | | | $ | 517.7 | | | $ | 3,676.9 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, 2019 |
(in millions) | | | | | | | North America | | International | | Consolidated |
Channel | | | | | | | | | | | |
Wholesale | | | | | | | $ | 2,343.5 | | | $ | 373.6 | | | $ | 2,717.1 | |
Direct | | | | | | | 260.0 | | | 128.9 | | | 388.9 | |
Net sales | | | | | | | $ | 2,603.5 | | | $ | 502.5 | | | $ | 3,106.0 | |
| | | | | | | | | | | |
| | | | | | | North America | | International | | Consolidated |
Product | | | | | | | | | | | |
Bedding | | | | | | | $ | 2,448.8 | | | $ | 388.2 | | | $ | 2,837.0 | |
Other | | | | | | | 154.7 | | | 114.3 | | | 269.0 | |
Net sales | | | | | | | $ | 2,603.5 | | | $ | 502.5 | | | $ | 3,106.0 | |
| | | | | | | | | | | |
| | | | | | | North America | | International | | Consolidated |
Geographical region | | | | | | | | | | | |
United States | | | | | | | $ | 2,312.1 | | | $ | — | | | $ | 2,312.1 | |
All Other | | | | | | | 291.4 | | | 502.5 | | | 793.9 | |
| | | | | | | | | | | |
Net sales | | | | | | | $ | 2,603.5 | | | $ | 502.5 | | | $ | 3,106.0 | |
The North America and International segments sell product through two channels: Wholesale and Direct. The Wholesale channel includes all product sales to third party retailers, including third party distribution, hospitality and healthcare. The Direct channel includes product sales through company-owned stores, e-commerce and call centers. The North America and International segments classify products into two major categories: Bedding and Other. Bedding products include mattresses, foundations and adjustable foundations. Other products include pillows, mattress covers, sheets, cushions and various other comfort products.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Wholesale channel also includes income from royalties derived by licensing Sealy®, Stearns & Foster® and Tempur® brands, technology and trademarks to other manufacturers. The licenses include rights for the licensees to use trademarks as well as current proprietary or patented technology that the Company utilizes. The Company also provides its licensees with product specifications, research and development, statistical services and marketing programs. The Company recognizes royalty income based on the occurrence of sales of Sealy®, Stearns & Foster® and Tempur® branded products by various licensees. Royalty income was $29.1 million, $21.9 million and $22.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
For product sales in each of the Company's channels, the Company recognizes a sale when the obligations under the terms of the contract with the customer are satisfied, which is generally when control of the product has transferred to the customer. Transferring control of each product sold is considered a separate performance obligation. The Company transfers control and recognizes a sale when the customer receives the product. Each unit sold is considered an independent, unbundled performance obligation. The Company does not have any additional performance obligations other than product sales that are material in the context of the contract. The Company also offers assurance type warranties on certain of its products, which is not accounted for as separate performance obligations under the revenue model.
The transaction price is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives, and correspondingly, the revenue that is recognized, varies due to sales incentives and returns the Company offers to its Wholesale and Direct channel customers. Specifically, the Company extends volume discounts, as well as promotional allowances, floor sample discounts, commissions paid to retail associates and slotting fees to its Wholesale channel customers and reflects these amounts as a reduction of sales at the time revenue is recognized based on historical experience. The Company allows returns following a sale, depending on the channel and promotion. The Company reduces revenue and cost of sales for its estimate of the expected returns, which is primarily based on the level of historical sales returns. The Company does not offer extended payment terms beyond one year to customers. As such, the Company does not adjust its consideration for financing arrangements.
In certain jurisdictions, the Company is subject to certain non-income taxes including, but not limited to, sales tax, value added tax, excise tax and other taxes. These taxes are excluded from the transaction price, and therefore, excluded from revenue. The Company has elected to account for shipping and handling activities as a fulfillment cost. Accordingly, the Company reflects all amounts billed to customers for shipping and handling in revenue and the costs of fulfillment in cost of sales. Amounts included in net sales for shipping and handling were $7.4 million, $14.4 million and $19.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
(3) Acquisitions and Divestitures
Acquisition of Dreams Topco Limited
On August 2, 2021, the Company completed the acquisition of Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams"), for a cash purchase price of $476.7 million, which includes $49.5 million of cash acquired. The transaction was funded using cash on hand and bank financing. Dreams has developed a successful multi-channel sales strategy, with over 200 brick and mortar retail locations in the United Kingdom, an industry-leading online channel, as well as manufacturing and delivery assets.
The financial results of Dreams subsequent to the date of acquisition are included in the consolidated financial statements of the Company. The Company accounted for this transaction as a business combination. The preliminary allocation of the purchase price is based on the fair values of the assets acquired and liabilities assumed as of August 2, 2021. The Company continues to obtain information to determine the fair value of acquired assets and liabilities. The components of the preliminary purchase price allocation are as follows:
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | |
(in millions) | |
Accounts receivable, net | $ | 3.5 | |
Inventory | 51.2 | |
Property, plant and equipment | 33.9 | |
Goodwill | 357.1 | |
Indefinite-lived intangible asset | 141.9 | |
Operating lease right-of-use assets | 158.2 | |
Other current and non-current assets | 4.4 | |
Accounts payable | (55.2) | |
Accrued expenses and other current liabilities | (69.7) | |
Operating lease liabilities | (165.1) | |
Debt | (6.1) | |
Other liabilities | (26.9) | |
Purchase price, net of cash acquired | $ | 427.2 | |
The indefinite-lived intangible asset represents Dreams' portfolio of trade names as marketed through Dreams. The Company applied the income approach through a relief from royalty method to fair value the trade name asset using level 2 inputs. The indefinite-lived intangible asset is not deductible for income tax purposes.
Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the expansion of retail competency and online capabilities, and expected synergistic manufacturing and distribution benefits to be realized from the acquisition. The goodwill is not deductible for income tax purposes and is included within the International business segment.
Acquisition of Sherwood Bedding
On January 31, 2020, the Company acquired an 80% ownership interest in a newly formed limited liability company containing substantially all of the assets of the Sherwood Bedding business for a cash purchase price of $39.1 million, which included $1.2 million of cash acquired. Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the private label product growth opportunities and expected synergistic manufacturing benefits to be realized from the acquisition. The goodwill is deductible for income tax purposes and is included within the North American reporting unit for goodwill impairment assessments.
Acquisition of Innovative Mattress Solutions, LLC ("iMS")
On January 11, 2019, iMS filed for bankruptcy and the Company provided debtor-in-possession financing in connection with the iMS Chapter 11 proceedings. On April 1, 2019, the Company acquired substantially all of the net assets of iMS in a transaction valued at approximately $24.0 million, including assumed liabilities of approximately $11.0 million as of March 31, 2019 (referred to as the "Sleep Outfitters Acquisition"). The acquisition of this regional bedding retailer furthers the Company’s North American retail strategy, which is focused on meeting customer demand through geographic representation and sales expertise.
The Company accounted for this transaction as a business combination. Total cash consideration was $13.2 million, which included $5.1 million of cash acquired. Goodwill is calculated as the excess of the purchase price over the net assets acquired and primarily represents the growth opportunities and expected retail synergistic benefits to be realized from the acquisition. The goodwill is deductible for income tax purposes and is included within the North American reporting unit for goodwill impairment assessments.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) Goodwill and Other Intangible Assets
The following summarizes the Company's goodwill by segment: | | | | | | | | | | | | | | | | | |
(in millions) | North America | | International | | Consolidated |
Balance as of December 31, 2019 | $ | 581.9 | | | $ | 150.4 | | | $ | 732.3 | |
Goodwill resulting from acquisitions | 26.7 | | | — | | | 26.7 | |
Foreign currency translation adjustments and other | 1.7 | | | 5.6 | | | 7.3 | |
Balance as of December 31, 2020 | $ | 610.3 | | | $ | 156.0 | | | $ | 766.3 | |
Goodwill resulting from acquisition | — | | | 357.1 | | | 357.1 | |
Foreign currency translation adjustments and other | 1.2 | | | (17.2) | | | (16.0) | |
Balance as of December 31, 2021 | $ | 611.5 | | | $ | 495.9 | | | $ | 1,107.4 | |
The following table summarizes information relating to the Company’s other intangible assets, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | | December 31, 2021 | | December 31, 2020 |
Useful Lives (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Unamortized indefinite life intangible assets: | | | | | | | | | | | | | |
Trade names | | | $ | 698.0 | | | | | $ | 698.0 | | | $ | 560.7 | | | | | $ | 560.7 | |
Amortized intangible assets: | | | | | | | | | | | | | |
Contractual distributor relationships | 15 | | 85.8 | | | 50.3 | | | 35.5 | | | 85.7 | | | 44.5 | | | 41.2 | |
Technology and other | 4-10 | | 91.2 | | | 82.7 | | | 8.5 | | | 91.3 | | | 75.9 | | | 15.4 | |
Patents, other trademarks and other trade names | 5-20 | | 28.1 | | | 22.8 | | | 5.3 | | | 28.7 | | | 21.3 | | | 7.4 | |
Customer databases, relationships and reacquired rights | 2-5 | | 34.6 | | | 31.0 | | | 3.6 | | | 35.1 | | | 29.7 | | | 5.4 | |
Total | | | $ | 937.7 | | | $ | 186.8 | | | $ | 750.9 | | | $ | 801.5 | | | $ | 171.4 | | | $ | 630.1 | |
Amortization expense relating to intangible assets for the Company was $16.3 million, $16.5 million and $15.9 million for the years ended December 31, 2021, 2020 and 2019, respectively, and is recorded in general, administrative and other expenses in the Company's Consolidated Statements of Income. No impairments of goodwill or other intangible assets have adjusted the gross carrying amount of these assets in any period.
Estimated annual amortization of intangible assets is expected to be as follows for the years ending December 31:
| | | | | |
(in millions) | |
2022 | $ | 16.2 | |
2023 | 10.3 | |
2024 | 6.7 | |
2025 | 6.0 | |
2026 | 6.0 | |
Thereafter | 7.7 | |
Total | $ | 52.9 | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Unconsolidated Affiliate Companies
The Company has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions. The Company’s ownership interest in each of these joint ventures is 50.0% and is accounted for under the equity method. Additionally, in October 2020, the Company entered into a 50.0% ownership joint venture to reacquire the rights and acquire the assets to manufacture, market and distribute Sealy® and Stearns & Foster® branded products in the United Kingdom. The Company’s investment of $27.0 million and $23.6 million at December 31, 2021 and 2020, respectively, is recorded in other non-current assets in the accompanying Consolidated Balance Sheets. The Company’s share of earnings for the years ended December 31, 2021, 2020 and 2019 respectively, is recorded in equity income in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income.
The table below presents summarized financial information for the joint ventures as of and for the years ended December 31:
| | | | | | | | | | | | | | | | | |
(in millions) | 2021 | | 2020 | | 2019 |
Net sales | $ | 339.7 | | | $ | 225.0 | | | $ | 212.6 | |
| | | | | |
Income from operations | 70.9 | | | 46.9 | | | 44.6 | |
| | | | | |
(6) Debt
Debt for the Company consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | December 31, 2021 | | December 31, 2020 | | |
Debt: | Amount | | Rate | | Amount | | Rate | | Maturity Date |
2019 Credit Agreement: | | | | | | | | | |
Term A Facility | $ | 675.0 | | | (1) | | $ | 409.1 | | | (2) | | October 16, 2024 |
Revolver | — | | | (1) | | — | | | (2) | | October 16, 2024 |
2031 Senior Notes | 800.0 | | | 3.875% | | — | | | N/A | | October 15, 2031 |
2029 Senior Notes | 800.0 | | | 4.000% | | — | | | N/A | | April 15, 2029 |
2026 Senior Notes | — | | | N/A | | 600.0 | | | 5.500% | | June 15, 2026 |
2023 Senior Notes | — | | | N/A | | 250.0 | | | 5.625% | | October 15, 2023 |
Securitized debt | — | | | (3) | | 33.9 | | | (4) | | April 6, 2023 |
Finance lease obligations (5) | 75.2 | | | | | 71.4 | | | | | Various |
Other | 3.0 | | | | | 5.9 | | | | | Various |
Total debt | 2,353.2 | | | | | 1,370.3 | | | | | |
Less: Deferred financing costs | 21.7 | | | | | 3.4 | | | | | |
Total debt, net | 2,331.5 | | | | | 1,366.9 | | | | | |
Less: Current portion | 53.0 | | | | | 43.9 | | | | | |
Total long-term debt, net | $ | 2,278.5 | | | | | $ | 1,323.0 | | | | | |
| | | | | |
(1) | Interest at LIBOR plus applicable margin of 1.250% as of December 31, 2021. |
(2) | Interest at LIBOR plus applicable margin of 1.250% as of December 31, 2020. |
(3) | Interest at one month LIBOR index plus 70 basis points. |
(4) | Interest at one month LIBOR index plus 80 basis points. |
(5) | Finance lease obligations are a non-cash financing activity. Refer to Note 7, "Leases." |
2019 Credit Agreement
On October 16, 2019, the Company entered into the 2019 Credit Agreement with a syndicate of banks. The 2019 Credit Agreement replaced the Company's 2016 Credit Agreement. 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.
On February 2, 2021, the Company entered into an amendment to the 2019 Credit Agreement. The amendment increased the revolving credit facility from $425.0 million to $725.0 million.
On May 26, 2021, the Company entered into an additional amendment to the 2019 Credit Agreement. The amendment provides for a $300.0 million delayed draw term loan. On July 30, 2021 the Company drew down the full $300.0 million available under the delayed draw term loan to fund, in part, the Dreams acquisition. The delayed draw term loan has the same terms and conditions as the Company's existing term loans under the 2019 Credit Agreement. Total availability under the revolving facility was $724.3 million, after a $0.7 million reduction for outstanding letters of credit, as of December 31, 2021.
On September 21, 2021, the Company entered into an additional amendment to the 2019 Credit Agreement to remove the limit to the amount of netted cash that may be deducted from indebtedness for purposes of calculating certain leverage ratios.
Borrowings under the 2019 Credit Agreement will generally bear interest, at the election of Tempur Sealy International and the other subsidiary borrowers, at either Base Rate or LIBOR plus the applicable margin. For the revolving credit facility and the term loan facility (a) the initial applicable margin for Base Rate advances was 0.625% per annum and the initial applicable margin for LIBOR advances was 1.625% per annum, and (b) following the delivery of financial statements for the fiscal quarter ending December 31, 2019, such applicable margins that are determined by a pricing grid based on the consolidated total net leverage ratio of the Company.
Obligations under the 2019 Credit Agreement are guaranteed by the Company’s existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions and are secured by a security interest in substantially all of Tempur Sealy International’s and the other subsidiary borrowers’ domestic assets and the domestic assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0% of the equity interests of each subsidiary owned by the Company or a subsidiary guarantor that is a domestic entity (subject to certain limited exceptions) and 65.0% of the voting equity interests of any direct first tier foreign entity owned by the Company or a subsidiary guarantor.
The 2019 Credit Agreement requires compliance with certain financial covenants providing for maintenance of a minimum consolidated interest coverage ratio, maintenance of a maximum consolidated total net leverage ratio, and maintenance of a maximum consolidated secured net leverage ratio. The consolidated total net leverage ratio is calculated using consolidated indebtedness less netted cash (as defined below). Consolidated indebtedness includes debt recorded on the Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding in excess of $40.0 million and other short-term debt. The Company is allowed to subtract from consolidated indebtedness an amount equal to 100.0% of the domestic and foreign unrestricted cash ("netted cash"). As of December 31, 2021, the Company's consolidated total net leverage ratio was 1.81 times, which complies with the covenant in the 2019 Credit Agreement that limits this ratio to 5.00 times.
The 2019 Credit Agreement contains certain customary negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, transactions with affiliates, use of proceeds, prepayments of certain indebtedness, entry into burdensome agreements and changes to governing documents. The 2019 Credit Agreement also contains certain customary affirmative covenants and events of default, including upon a change of control.
The Company was in compliance with all applicable covenants in the 2019 Credit Agreement at December 31, 2021.
The maturity date of the 2019 Credit Agreement is October 16, 2024. Amounts under the revolving credit facility may be borrowed, repaid and re-borrowed from time to time until the maturity date. The term loan facility is subject to quarterly amortization as set forth in the 2019 Credit Agreement. In addition, the term loan facility is subject to mandatory prepayment in connection with certain debt issuances, asset sales and casualty events, subject to certain reinvestment rights. Voluntary
prepayments and commitment reductions under the 2019 Credit Agreement are permitted at any time without payment of any prepayment premiums.
Securitized Debt
On April 12, 2017, the Company and certain of its subsidiaries entered into a securitization transaction with respect to certain accounts receivable due to the Company and certain of its subsidiaries (as amended the "Accounts Receivable Securitization"). In connection with this transaction, Tempur Sealy International and its wholly-owned special purpose subsidiary, Tempur Sealy Receivables, LLC, entered into a credit agreement that provides for revolving loans to be made from time to time in a maximum amount that varies over the course of the year based on the seasonality of the Company's accounts receivable and is subject to an overall limit of $120.0 million.
On April 6, 2021, the Company and certain of its subsidiaries entered into a new amendment to the Accounts Receivable Securitization. The amendment, among other things, extended the maturity date of the Accounts Receivable Securitization to April 6, 2023 and increased the overall limit from $120.0 million to $200.0 million. While subject to a $200.0 million overall limit, the availability of revolving loans varies over the course of the year based on the seasonality of the Company's accounts receivable. As of December 31, 2021, total availability under the Accounts Receivable Securitization was $160.0 million.
The obligations of the Company and its relevant subsidiaries under the Accounts Receivable Securitization are secured by the accounts receivable and certain related rights and the facility agreements contain customary events of default. The accounts receivable continue to be owned by the Company and its subsidiaries and continue to be reflected as assets on the Company's Consolidated Balance Sheets and represent collateral up to the amount of the borrowings under this facility.
2031 Senior Notes
On September 24, 2021, Tempur Sealy International issued $800.0 million in aggregate principal amount of 3.875% senior notes due 2031 (the "2031 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2031 Senior Notes were issued pursuant to an indenture, dated as of September 24, 2021 (the "2031 Indenture"), among Tempur Sealy International, certain subsidiaries of Tempur Sealy International as guarantors (the "Guarantors"), and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2031 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Guarantors. The 2031 Senior Notes mature on October 15, 2031, and interest is payable semi-annually in arrears on each April 15 and October 15, beginning on April 15, 2022.
Tempur Sealy International has the option to redeem all or a portion of the 2031 Senior Notes at any time on or after October 15, 2026. The initial redemption price is 101.938% of the principal amount, plus accrued and unpaid interest, if any. The redemption price will decline each year after 2026 until it becomes 100.0% of the principal amount beginning on October 15, 2029. In addition, Tempur Sealy International has the option at any time prior to October 15, 2026 to redeem some or all of the 2031 Senior Notes at 100.0% of the original principal amount plus a "make-whole" premium and accrued and unpaid interest, if any. Tempur Sealy International may also redeem up to 40.0% of the 2031 Senior Notes prior to October 15, 2024, under certain circumstances with the net cash proceeds from certain equity offerings, at 103.875% of the principal amount plus accrued and unpaid interest, if any. Tempur Sealy International may make such redemptions as described in the preceding sentence only if, after any such redemption, at least 60.0% of the original aggregate principal amount of the 2031 Senior Notes issued remains outstanding.
The 2031 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things: (i) incur, directly or indirectly, debt; (ii) make, directly or indirectly, certain investments and restricted payments; (iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets; (iv) sell or otherwise dispose of, directly or indirectly, assets; (v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock; and (vi) enter into transactions with affiliates. These covenants are subject to a number of exceptions and qualifications.
2029 Senior Notes
On March 25, 2021, Tempur Sealy International issued $800.0 million in aggregate principal amount of 4.00% senior notes due 2029 (the "2029 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2029 Senior Notes were issued pursuant to an indenture, dated as of March 25, 2021 (the "2029 Indenture"), among Tempur Sealy International, the Guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2029 Senior Notes are general unsecured senior obligations of Tempur Sealy International and are guaranteed on a senior unsecured basis by the Guarantors. The 2029 Senior Notes mature on April 15, 2029, and interest is payable semi-annually in arrears on each April 15 and October 15, beginning on October 15, 2021.
Tempur Sealy International has the option to redeem all or a portion of the 2029 Senior Notes at any time on or after April 15, 2024. The initial redemption price is 102.00% of the principal amount, plus accrued and unpaid interest, if any. The
redemption price will decline each year after 2024 until it becomes 100.0% of the principal amount beginning on April 15, 2026. In addition, Tempur Sealy International has the option at any time prior to April 15, 2024 to redeem some or all of the 2029 Senior Notes at 100.0% of the original principal amount plus a "make-whole" premium and accrued and unpaid interest, if any. Tempur Sealy International may also redeem up to 40.0% of the 2029 Senior Notes prior to April 15, 2024, under certain circumstances with the net cash proceeds from certain equity offerings, at 104.00% of the principal amount plus accrued and unpaid interest, if any. Tempur Sealy International may make such redemptions as described in the preceding sentence only if, after any such redemption, at least 60.0% of the original aggregate principal amount of the 2029 Senior Notes issued remains outstanding.
The 2029 Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things: (i) incur, directly or indirectly, debt; (ii) make, directly or indirectly, certain investments and restricted payments; (iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets; (iv) sell or otherwise dispose of, directly or indirectly, assets; (v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock; and (vi) enter into transactions with affiliates. These covenants are subject to a number of exceptions and qualifications.
2026 Senior Notes
On June 15, 2021, the Company redeemed its $600.0 million issued and outstanding 2026 Senior Notes, in full, at 102.75% of their principal amount, plus the accrued and unpaid interest. The Company used net proceeds from the 2029 Senior Notes primarily to fund the redemption. As a result of the Company's redemption of the 2026 Senior Notes, the Company incurred $18.0 million of loss on extinguishment of debt which includes a prepayment premium of $16.5 million and the write-off of $1.5 million of unamortized deferred financing costs. Additionally, the Company incurred $5.2 million of overlapping interest expense for the final 83 day period between the issuance of the 2029 Senior Notes and redemption of the 2026 Senior Notes.
2023 Senior Notes
On November 9, 2020, the Company redeemed the first $200.0 million of the issued and outstanding 2023 Senior Notes at 101.406% of the principal amount, plus the accrued and unpaid interest. During the first quarter of 2021, the Company redeemed the remaining $250.0 million of the issued and outstanding 2023 Senior Notes at 101.406% of the principal amount, plus the accrued and unpaid interest. In 2021, the Company recognized $5.0 million of loss on extinguishment of debt, which includes a prepayment premium of $3.5 million and the write-off of $1.5 million of unamortized deferred financing costs, associated with the redemption of the remaining amount outstanding of the 2023 Senior Notes.
Deferred Financing Costs
The Company capitalizes costs associated with the issuance of debt and amortizes these costs as additional interest expense over the lives of the debt instruments using the effective interest method. These costs are recorded as deferred financing costs as a direct reduction from the carrying amount of the corresponding debt liability in the accompanying Consolidated Balance Sheets and the related amortization is included in interest expense, net in the accompanying Consolidated Statements of Income. Upon the prepayment of the related debt, the Company accelerates the recognition of an appropriate amount of the costs. As a result of the issuance of the 2031 Senior Notes, $11.4 million of deferred financing costs were capitalized in 2021 and will be amortized as interest expense over the respective debt instrument period, 10 years, using the effective interest method. As a result of the issuance of the 2029 Senior Notes, $11.4 million of deferred financing costs were capitalized in 2021 and will be amortized as interest expense over the respective debt instrument period, 8 years, using the effective interest method.
Future Obligations
As of December 31, 2021, the scheduled maturities of long-term debt outstanding, excluding finance lease obligations, for each of the next five years and thereafter are as follows:
| | | | | | | | |
(in millions) | | |
2022 | | $ | 39.3 | |
2023 | | 54.4 | |
2024 | | 584.3 | |
2025 | | — | |
2026 | | — | |
Thereafter | | 1,600.0 | |
Total | | $ | 2,278.0 | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) Leases
The Company leases retail stores, manufacturing and distribution facilities, office space and equipment under operating and finance lease agreements. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to several years, with the longest renewal period extending through 2034. The exercise of lease renewal options are at the Company's sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Consolidated Balance Sheet as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | December 31, 2021 | | December 31, 2020 | | |
Assets | | | | | | | | |
Operating lease assets | | Operating lease right-of-use assets | | $ | 480.6 | | | $ | 304.3 | | | |
Finance lease assets | | Property, plant and equipment, net | | 64.8 | | | 61.2 | | | |
Total leased assets | | | | $ | 545.4 | | | $ | 365.5 | | | |
| | | | | | | | |
Liabilities | | | | | | | | |
Short-term: | | | | | | | | |
Operating lease obligations | | Accrued expenses and other current liabilities | | $ | 101.7 | | | $ | 61.0 | | | |
Finance lease obligations | | Current portion of long-term debt | | 13.7 | | | 11.4 | | | |
Long-term: | | | | | | | | |
Operating lease obligations | | Long-term operating lease obligations | | 427.0 | | | 275.1 | | | |
Finance lease obligations | | Long-term debt, net | | 61.5 | | | 60.0 | | | |
Total lease obligations | | | | $ | 603.9 | | | $ | 407.5 | | | |
The following table summarizes the classification of lease expense in the Company's Consolidated Statements of Income for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
(in millions) | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
Operating lease expense: | | | | | | |
Operating lease expense | | $ | 99.8 | | | $ | 75.4 | | | $ | 63.8 | |
Short-term lease expense | | 13.1 | | | 11.1 | | | 9.0 | |
Variable lease expense | | 26.9 | | | 22.2 | | | 18.8 | |
Finance lease expense: | | | | | | |
Amortization of right-of-use assets | | 12.6 | | | 9.3 | | | 8.5 | |
Interest on lease obligations | | 4.5 | | | 4.7 | | | 4.7 | |
Total lease expense | | $ | 156.9 | | | $ | 122.7 | | | $ | 104.8 | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the scheduled maturities of lease obligations as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Operating Leases | | Finance Leases | | Total |
Year Ended December 31, | | | | | | |
2022 | | $ | 118.5 | | | $ | 17.3 | | | $ | 135.8 | |
2023 | | 106.5 | | | 14.2 | | | 120.7 | |
2024 | | 88.9 | | | 11.2 | | | 100.1 | |
2025 | | 73.5 | | | 9.5 | | | 83.0 | |
2026 | | 58.9 | | | 9.7 | | | 68.6 | |
Thereafter | | 155.1 | | | 29.1 | | | 184.2 | |
Total lease payments | | 601.4 | | | 91.0 | | | 692.4 | |
Less: Interest | | (72.7) | | | (15.8) | | | (88.5) | |
Present value of lease obligations | | $ | 528.7 | | | $ | 75.2 | | | $ | 603.9 | |
The following table provides lease term and discount rate information related to operating and finance leases as of December 31, 2021:
| | | | | | | | |
| | December 31, 2021 |
Weighted average remaining lease term (years): | | |
Operating leases | | 6.38 |
Finance leases | | 7.07 |
| | |
Weighted average discount rate: | | |
Operating leases | | 4.00 | % |
Finance leases | | 5.22 | % |
The following table provides supplemental information related to the Company's Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 | | |
Cash paid for amounts included in the measurement of lease obligations: | | | | | | | | |
Operating cash flows paid for operating leases (a) | | $ | 89.6 | | | $ | 70.1 | | | $ | 62.7 | | | |
Operating cash flows paid for finance leases | | $ | 4.5 | | | $ | 4.7 | | | $ | 3.7 | | | |
Financing cash flows paid for finance leases | | $ | 13.4 | | | $ | 10.2 | | | $ | 7.7 | | | |
| | | | | | | | |
Right-of-use assets obtained in exchange for new operating lease obligations | | $ | 101.6 | | | $ | 109.4 | | | $ | 60.9 | | | |
Right-of-use assets obtained in exchange for new finance lease obligations | | $ | 10.8 | | | $ | 17.6 | | | $ | 4.1 | | | |
| | | | | | | | |
(a)Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Consolidated Statement of Cash Flows offset by non-cash right-of-use asset amortization and lease liability accretion.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) Retirement Plans
401(k) Plan
The Company has a defined contribution plan ("the 401(k) Plan") whereby eligible employees may contribute up to 85.0% of their pay subject to certain limitations as defined by the 401(k) Plan. Employees are eligible to participate in the 401(k) Plan upon hire and are eligible to receive matching contributions upon six months of continuous employment with the Company. The 401(k) Plan provides a 100.0% match of the first 3.0% and 50.0% of the next 2.0% of eligible employee contributions. The match for union employees is based on the applicable collective bargaining arrangement. All matching contributions vest immediately. The Company incurred $7.6 million, $5.8 million and $6.0 million of expenses associated with the 401(k) Plan for the years ended December 31, 2021, 2020 and 2019, respectively, which are included in the Consolidated Statements of Income.
Multi‑Employer Benefit Plans
Approximately 21.4% of the Company's domestic employees are represented by various labor unions with separate collective bargaining agreements. Hourly employees working at six of the Company's domestic manufacturing facilities are covered by union sponsored retirement plans. Further, employees working at three of the Company's domestic manufacturing facilities are covered by union sponsored health and welfare plans. These plans cover both active employees and retirees. Through the health and welfare plans, employees receive medical, dental, vision, prescription and disability coverage. The Company's cost associated with these plans consists of periodic contributions to these plans based upon employee participation. The expense recognized by the Company for such contributions for the years ended December 31 was follows:
| | | | | | | | | | | | | | | | | |
(in millions) | 2021 | | 2020 | | 2019 |
Multi‑employer retirement plan expense | $ | 4.1 | | | $ | 4.6 | | | $ | 4.3 | |
Multi‑employer health and welfare plan expense | 3.8 | | | 3.4 | | | 3.8 | |
The risks of participating in multi‑employer pension plans are different from the risks of sponsoring single‑employer pension plans in the following respects: 1) contributions to the multi‑employer plan by one employer may be used to provide benefits to employees of other participating employers; 2) if a participating employer ceases its contributions to the plan, the unfunded obligations of the plan allocable to the withdrawing employer may be borne by the remaining participating employers; and 3) if the Company withdraws from the multi‑employer pension plans in which it participates, the Company may be required to pay those plans an amount based on its allocable share of the underfunded status of the plan.
The following table presents information regarding the multi‑employer pension plans that are significant to the Company for the years ended December 31, 2021 and 2020, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pension Fund | | EIN/Pension Plan Number | | Date of Plan Year-End | | Pension Protection Act Zone Status(1) 2021 | | FIP/RP Status Pending/Implemented(2) | | Contributions of the Company in 2021 | | Surcharge Imposed(3) | | Expiration Date of Collective Bargaining Agreement | | Year Contributions to Plan Exceeded More than 5 Percent of Total Contributions |
|
(in millions) | | | | | | | | | | | | | | | | |
United Furniture Workers Pension Fund A(4) | | 13-5511877-001 | | 2/28/21 | | Red | | Implemented | | $ | 1.8 | | | No | | 2022, 2023 | | 2019, 2020, 2021 |
Pension Plan of the National Retirement Fund | | 13-6130178-001 | | 12/31/20 | | Red | | Implemented | | $ | 1.1 | | | Yes, 10.0% | | 2022 | | N/A |
Central States, Southeast & Southwest Areas Pension Plan | | 36-6044243-001 | | 12/31/20 | | Red | | Implemented | | $ | 1.2 | | | Yes, 10.0% | | 2022, 2024 | | N/A |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pension Fund | | EIN/Pension Plan Number | | Date of Plan Year-End | | Pension Protection Act Zone Status(1) 2020 | | FIP/RP Status Pending/Implemented(2) | | Contributions of the Company in 2020 | | Surcharge Imposed(3) | | Expiration Date of Collective Bargaining Agreement | | Year Contributions to Plan Exceeded More than 5 Percent of Total Contributions |
|
(in millions) | | | | | | | | | | | | | | | | |
United Furniture Workers Pension Fund A(4) | | 13-5511877-001 | | 2/28/20 | | Red | | Implemented | | $ | 1.5 | | | No | | 2022, 2023 | | 2018, 2019, 2020 |
Pension Plan of the National Retirement Fund | | 13-6130178-001 | | 12/31/19 | | Red | | Implemented | | $ | 1.1 | | | Yes, 10.0% | | 2022 | | N/A |
Central States, Southeast & Southwest Areas Pension Plan | | 36-6044243-001 | | 12/31/19 | | Red | | Implemented | | $ | 1.0 | | | Yes, 10.0% | | 2021, 2022 | | N/A |
(1) The Pension Protection Act of 2006 ranks the funded status of multi-employer pension plans depending upon a plan's current and projected funding. A plan is in the Red Zone (Critical) if it has a current funded percentage of less than 65.0%. A plan is in the Yellow Zone (Endangered) if it has a current funded percentage of less than 80.0%, or projects a credit balance deficit within seven years. A plan is in the Green Zone (Healthy) if it has a current funded percentage greater than 80.0% and does not have a projected credit balance deficit within seven years. The zone status is based on the plan’s year end rather than the Company's. The zone status listed for each plan is based on information that the Company received from that plan and is certified by that plan’s actuary for the most recent year available.
(2) Funding Improvement Plan or Rehabilitation Plan as defined in the Employee Retirement Income Security Act of 1974 has been implemented or is pending.
(3) Indicates whether the Company paid a surcharge to the plan in the most current year due to funding shortfalls and the amount of the surcharge.
(4) The Company represented more than 5.0% of the total contributions for the most recent plan year available. For year ended December 31, 2019, the Company contributed $1.1 million to the plan.
(9) Stockholders' Equity
(a) Common and Preferred Stock. Tempur Sealy International has 500.0 million authorized shares of common stock with $0.01 per share par value and 10.0 million authorized shares of preferred stock with $0.01 per share par value. The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.
The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by the stockholders, to issue from time to time shares of preferred stock in one or more series. Each such series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights.
(b) Treasury Stock. As of December 31, 2021, the Company had approximately $1,400.7 million remaining under an existing share repurchase program initially authorized by the Board of Directors in 2016. The Company repurchased 19.5 million shares, 6.5 million shares and 1.3 million shares under the program, for approximately $801.4 million, $285.9 million and $102.3 million during the years ended December 31, 2021, 2020 and 2019, respectively. Subsequent to year-end, the Company repurchased an additional 7.7 million shares for approximately $305.0 million.
In addition, the Company acquired shares upon the vesting of certain restricted stock units ("RSUs") and performance restricted stock units ("PRSUs"), which were withheld to satisfy tax withholding obligations during the years ended December 31, 2021, 2020 and 2019, respectively. The shares withheld were valued at the closing price of the stock on the New York Stock Exchange on the vesting date or first business day prior to vesting, resulting in approximately $14.9 million, $45.9 million and $3.4 million in treasury stock acquired during the years ended December 31, 2021, 2020 and 2019, respectively.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Charitable Stock Donation. In the fourth quarter of 2019, the Company recorded an $8.9 million charge, recorded in General, administrative and other expenses, related to the donation of 100,000 shares of its common stock at fair market value to certain public charities.
(d) AOCL. AOCL consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Foreign Currency Translation | | | | | |
Balance at beginning of period | $ | (58.6) | | | $ | (82.2) | | | $ | (91.7) | |
Other comprehensive (loss) income: | | | | | |
Foreign currency translation adjustments (1) | (36.6) | | | 23.6 | | | 9.5 | |
| | | | | |
Balance at end of period | $ | (95.2) | | | $ | (58.6) | | | $ | (82.2) | |
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Pension Benefits | | | | | |
Balance at beginning of period | $ | (6.9) | | | $ | (5.5) | | | $ | (3.6) | |
Other comprehensive income (loss): | | | | | |
Net change from period revaluation | 3.8 | | | (1.8) | | | (2.6) | |
Tax (expense) benefit (2) | (0.9) | | | 0.4 | | | 0.7 | |
| | | | | |
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| | | | | |
Total other comprehensive income (loss) | 2.9 | | | (1.4) | | | (1.9) | |
Balance at end of period | $ | (4.0) | | | $ | (6.9) | | | $ | (5.5) | |
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(1)In 2021, 2020 and 2019, there were no tax impacts related to foreign currency translation adjustments and no amounts were reclassified to earnings.
(2)These amounts were included in the income tax provision in the accompanying Consolidated Statements of Income.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) Other Items
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | |
| December 31, | | December 31, |
(in millions) | 2021 | | 2020 |
Wages and benefits | 112.2 | | | 102.5 | |
Operating leases obligations | 101.7 | | | 61.0 | |
Advertising | 72.3 | | | 74.4 | |
| | | |
| | | |
| | | |
Taxes | 15.0 | | | 150.4 | |
Other | 257.3 | | | 196.8 | |
| $ | 558.5 | | | $ | 585.1 | |
(11) Stock-based Compensation
Tempur Sealy International has two stock-based compensation plans which provide for grants of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock unit awards, performance shares, stock grants and performance based awards to employees, non-employee directors, consultants and Company advisors. The plan under which equity awards may be granted in the future is the Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan"). It is the policy of the Company to issue stock out of treasury shares upon issuance or exercise of share-based awards. The Company believes that awards and purchases made under these plans better align the interests of the plan participants with those of its stockholders.
On May 11, 2017, the Company's stockholders approved the amendment and restatement of the original 2013 Plan. The 2013 Plan provides for grants of stock options to purchase shares of common stock to employees and directors of the Company. The 2013 Plan may be administered by the Compensation Committee of the Board of Directors, by the Board of Directors directly, or, in certain cases, by an executive officer or officers of the Company designated by the Compensation Committee. The shares issued or to be issued under the 2013 Plan may be either authorized but unissued shares of the Company's common stock or shares held by the Company in its treasury. Tempur Sealy International may issue a maximum of 34.8 million shares of common stock under the 2013 Plan, subject to certain adjustment provisions.
The Amended and Restated 2003 Equity Incentive Plan, as amended (the "2003 Plan"), was administered by the Compensation Committee of the Board of Directors, which, together with the Board of Directors, had the exclusive authority to administer the 2003 Plan, including the power to determine eligibility to receive awards, the types and number of shares of stock subject to the awards, the price and timing of awards and the acceleration or waiver of any vesting and performance of forfeiture restrictions, in each case subject to the terms of the 2003 Plan. Any of the Company's employees, non-employee directors, consultants and Company advisors, as determined by the Compensation Committee, were eligible to be selected to participate in the 2003 Plan. Tempur Sealy International allowed a maximum of 46.0 million shares of its common stock under the 2003 Plan to be issued. In May 2013, the Company's Board of Directors adopted a resolution that prohibited further grants under the 2003 Plan.
In 2010, the Board of Directors approved the terms of a Long-Term Incentive Plan established under the 2003 Plan. In 2013, the Board of Directors approved the terms of another Long-Term Incentive Plan established under the 2013 Plan. Awards under both Long-Term Incentive Plans have typically consisted primarily of a mix of stock options, RSUs and PRSUs. Shares with respect to the PRSUs will be granted and vest following the end of the applicable performance period and achievement of applicable performance metrics, market and environmental, social and corporate governance ("ESG") conditions as determined by the Compensation Committee of the Board of Directors.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's stock-based compensation expense for the year ended December 31, 2021, 2020 and 2019 included PRSUs, stock options, RSUs and DSUs. A summary of the Company’s stock-based compensation expense is presented below:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
PRSU expense | $ | 39.4 | | | $ | 77.4 | | | $ | 1.4 | |
Stock option expense | 1.5 | | | 4.9 | | | 4.9 | |
RSU/DSU expense | 20.5 | | | 22.2 | | | 20.5 | |
Total stock-based compensation expense | $ | 61.4 | | | $ | 104.5 | | | $ | 26.8 | |
Performance Restricted Stock Units
A summary of the Company's PRSU activity and related information for the years ended December 31, 2021 and 2020 is presented below:
| | | | | | | | | | | |
(shares in millions) | Shares | | Weighted Average Grant Date Fair Value |
Awards unvested at December 31, 2019 | 3.5 | | | $ | 15.02 | |
Granted | 3.5 | | | 21.39 | |
Vested | (3.4) | | | 15.03 | |
Forfeited | — | | | — | |
Awards unvested at December 31, 2020 | 3.6 | | | 21.18 | |
Granted | 1.5 | | | 28.92 | |
Vested | (0.1) | | | 15.07 | |
Forfeited | (0.1) | | | — | |
Awards unvested at December 31, 2021 | 4.9 | | | $ | 22.99 | |
The Company grants PRSUs to executive officers and certain members of management. The Company granted PRSUs during the years ended December 31, 2021, 2020 and 2019. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals.
During the first quarter of 2021, the Company granted 0.5 million PRSUs at target at a weighted average grant date fair value of $28.92 per share with a performance period of January 1, 2021 through December 31, 2021 as a component of the long-term incentive plan ("2021 PRSUs"). For the year ended December 31, 2021, the Company recognized stock-based compensation expense related to the 2021 PRSUs, as the Company achieved the maximum specified performance target for the performance period.
During the first quarter of 2020, the Company granted 0.6 million PRSUs at target at a weighted average grant date fair value of $21.39 per share with a performance period of January 1, 2020 through December 31, 2020 as a component of the long-term incentive plan ("2020 PRSUs"). For the year ended December 31, 2020, the Company recognized stock-based compensation expense related to the 2020 PRSUs, as the Company achieved the maximum specified performance target for the performance period.
During 2017, the Company granted executive officers and certain members of management PRSUs if the Company achieved a certain level of adjusted earnings before interest, tax, depreciation and amortization ("Adjusted EBITDA") during four consecutive fiscal quarter period ending between (and including) March 31, 2020 and December 31, 2020 (the "Aspirational Plan PRSUs"). On November 16, 2020, the Compensation Committee of the Board of Directors determined that the maximum performance condition was achieved. The Aspirational Plan PRSUs vested on December 15, 2020. The Company recorded $49.4 million of stock-based compensation expense related to the Aspirational Plan PRSUs for the year ended December 31, 2020.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Options
A summary of the Company's stock option activity under the 2003 Plan and 2013 Plan for the years ended December 31, 2021 and 2020 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share amounts and years) | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Options outstanding at December 31, 2019 | 5.2 | | | $ | 16.30 | | | | | |
Granted | — | | | — | | | | | |
Exercised | (0.5) | | | 13.03 | | | | | |
Forfeited | — | | | — | | | | | |
Options outstanding at December 31, 2020 | 4.7 | | | $ | 16.69 | | | | | |
Granted | — | | | — | | | | | |
Exercised | (0.9) | | | 15.40 | | | | | |
Forfeited | — | | | — | | | | | |
Options outstanding at December 31, 2021 | 3.8 | | | $ | 17.03 | | | 5.94 | | $ | 109.6 | |
| | | | | | | |
Options exercisable at December 31, 2021 | 3.5 | | | $ | 17.15 | | | 5.94 | | $ | 101.5 | |
The aggregate intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 was $22.3 million, $6.0 million and $5.9 million, respectively.
A summary of the Company's unvested shares relating to stock options as of December 31, 2021 and 2020, and changes during the years ended December 31, 2021 and 2020, are presented below:
| | | | | | | | | | | |
(shares in millions) | Shares | | Weighted Average Grant Date Fair Value |
Options unvested at December 31, 2019 | 2.0 | | | $ | 16.50 | |
Granted | — | | | — | |
Vested | (0.9) | | | 16.67 | |
Forfeited | — | | | — | |
Options unvested at December 31, 2020 | 1.1 | | | $ | 16.38 | |
Granted | — | | | — | |
Vested | (0.8) | | | 15.40 | |
Forfeited | — | | | — | |
Options unvested at December 31, 2021 | 0.3 | | | $ | 15.45 | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restricted/Deferred Stock Units
A summary of the Company's RSU and DSU activity and related information for the years ended December 31, 2021 and 2020 is presented below:
| | | | | | | | | | | | | | | | | |
(in millions, except per share amounts) | Shares | | Weighted Average Grant Date Fair Value | | Aggregate Intrinsic Value |
Awards outstanding at December 31, 2019 | 5.1 | | | $ | 13.24 | | | |
Granted | 0.8 | | | 20.81 | | | |
Vested | (1.6) | | | 13.43 | | | |
Terminated | (0.1) | | | 13.99 | | | |
Awards outstanding at December 31, 2020 | 4.2 | | | $ | 14.57 | | | $ | 113.6 | |
Granted | 0.7 | | | 28.68 | | | |
Vested | (1.5) | | | 14.32 | | | |
Terminated | (0.1) | | | 25.54 | | | |
Awards outstanding at December 31, 2021 | 3.3 | | | $ | 17.37 | | | $ | 154.0 | |
The aggregate intrinsic value of RSUs and DSUs vested during the year ended December 31, 2021 was $42.5 million.
A summary of total unrecognized stock-based compensation expense based on current performance estimates related to stock options, DSUs, RSUs and PRSUs for the year ended December 31, 2021 is presented below:
| | | | | | | | | | | |
(in millions, except years) | December 31, 2021 | | Weighted Average Remaining Vesting Period (Years) |
| | | |
Unrecognized DSU/RSU expense | 27.6 | | | 2.27 |
Unrecognized PRSU expense | 42.8 | | | 1.88 |
Total unrecognized stock-based compensation expense | $ | 70.4 | | | 2.03 |
(12) Commitments and Contingencies
The Company is involved in various legal and administrative proceedings incidental to the operations of its business. The Company believes that the outcome of all pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity, or operating results.
(13) Income Taxes
Pre-tax Income by Jurisdiction
The following sets forth the amount of income before income taxes attributable to each of the Company's geographies for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Income before income taxes: | | | | | |
United States | $ | 602.5 | | | $ | 319.5 | | | $ | 150.9 | |
Rest of the world | 221.5 | | | 132.9 | | | 114.6 | |
| $ | 824.0 | | | $ | 452.4 | | | $ | 265.5 | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of Statutory Tax Rate to Effective Tax Rate
The Company's effective income tax provision differs from the amount calculated using the statutory U.S. federal income tax rate, principally due to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
(dollars in millions) | Amount | | Percentage of Income Before Income Taxes | | Amount | | Percentage of Income Before Income Taxes | | Amount | | Percentage of Income Before Income Taxes |
Statutory U.S. federal income tax | $ | 172.9 | | | 21.0 | % | | $ | 95.0 | | | 21.0 | % | | $ | 55.8 | | | 21.0 | % |
State income taxes, net of federal benefit | 21.0 | | | 2.6 | % | | 9.9 | | | 2.2 | % | | 8.7 | | | 3.3 | % |
| | | | | | | | | | | |
Foreign tax differential | 4.6 | | | 0.6 | % | | 2.8 | | | 0.6 | % | | 2.1 | | | 0.8 | % |
Change in valuation allowances | 4.9 | | | 0.6 | % | | 5.5 | | | 1.2 | % | | (8.6) | | | (3.2) | % |
Uncertain tax positions and interest | 6.5 | | | 0.8 | % | | 0.5 | | | 0.1 | % | | 2.4 | | | 0.9 | % |
Subpart F income | — | | | — | % | | 3.3 | | | 0.7 | % | | 1.8 | | | 0.7 | % |
Global Intangible Low-Taxed Income ("GILTI") | 1.5 | | | 0.2 | % | | — | | | — | | | 9.2 | | | 3.4 | % |
GILTI High-Taxed Exception | — | | | — | % | | (8.6) | | | (1.9) | % | | — | | | — | |
Stock compensation | (8.1) | | | (1.0) | % | | (10.9) | | | (2.4) | % | | 0.9 | | | 0.3 | % |
| | | | | | | | | | | |
Permanent and other | (5.0) | | | (0.7) | % | | 5.1 | | | 1.2 | % | | 2.4 | | | 0.9 | % |
Effective income tax provision | $ | 198.3 | | | 24.1 | % | | $ | 102.6 | | | 22.7 | % | | $ | 74.7 | | | 28.1 | % |
Income Tax Provision
The income tax provision consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Current provision | | | | | |
Federal | $ | 109.9 | | | $ | 55.1 | | | $ | 50.4 | |
State | 24.5 | | | 17.3 | | | 11.9 | |
Foreign | 52.8 | | | 38.8 | | | 19.5 | |
Total current | $ | 187.2 | | | $ | 111.2 | | | $ | 81.8 | |
Deferred provision | | | | | |
Federal | $ | 11.6 | | | $ | (3.4) | | | $ | (10.8) | |
State | 0.4 | | | (3.4) | | | (8.0) | |
Foreign | (0.9) | | | (1.8) | | | 11.7 | |
Total deferred | 11.1 | | | (8.6) | | | (7.1) | |
Total income tax provision | $ | 198.3 | | | $ | 102.6 | | | $ | 74.7 | |
The income tax provision includes federal, state and foreign income taxes currently payable and those deferred or prepaid because of temporary differences between financial statement and tax bases of assets and liabilities.
Deferred Income Tax Assets and Liabilities
The net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets, determined using the income tax rate applicable to each period in which those items will reverse, consist of the following:
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Deferred tax assets: | | | |
Stock-based compensation | $ | 30.1 | | | $ | 21.6 | |
Operating lease obligations | 137.6 | | | 92.9 | |
Accrued expenses and other | 41.8 | | | 55.1 | |
Net operating losses, foreign tax credits and other tax attribute carryforwards | 49.6 | | | 50.6 | |
Inventories | 9.0 | | | 11.1 | |
Transaction costs | 3.9 | | | 6.0 | |
Property, plant and equipment | 12.9 | | | 2.5 | |
Total deferred tax assets | 284.9 | | | 239.8 | |
Valuation allowances | (42.6) | | | (33.5) | |
Total net deferred tax assets | $ | 242.3 | | | $ | 206.3 | |
Deferred tax liabilities: | | | |
Intangible assets | $ | (181.7) | | | $ | (150.7) | |
Operating lease right-of-use assets | (122.8) | | | (82.3) | |
Property, plant and equipment | (37.1) | | | (34.3) | |
Accrued expenses and other | (16.3) | | | (15.9) | |
Total deferred tax liabilities | (357.9) | | | (283.2) | |
Net deferred tax liabilities | $ | (115.6) | | | $ | (76.9) | |
Tax Attributes Included in Deferred Tax Assets
Included in the calculation of the Company's deferred tax assets are the following gross income tax attributes available at December 31, 2021 and 2020, respectively:
| | | | | | | | | | | |
(in millions) | 2021 | | 2020 |
State net operating losses ("SNOLs") | $ | 114.9 | | | $ | 157.0 | |
U.S. federal foreign tax credits ("FTCs") | 12.2 | | | 12.2 | |
U.S. state income tax credits ("SITCs") | 3.2 | | | 4.9 | |
Foreign net operating losses ("FNOLs") | 50.6 | | | 54.1 | |
Charitable contribution carryover ("CCCs") | 1.2 | | | 23.6 | |
| | | |
The SNOLs, FTCs, SITCs, FNOLs and CCCs generally expire in 2022, 2023, 2031, 2023 and 2022, respectively.
Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of certain of the SNOLs, FTCs, SITCs, FNOLs, the CCCs and certain other deferred tax assets related to certain foreign operations (together, the "Tax Attributes"). The Company has established a valuation allowance for certain deferred tax assets (including the Tax Attributes) where it is more-likely-than-not such deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible or creditable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making its assessment regarding the recoverability of its deferred tax assets. The Company has recorded valuation allowances against $49.7 million of the SNOLs and $12.2 million of the FTCs. With respect to all other Tax Attributes above, based upon the level of historical taxable income and projections for future taxable income, management believes it is more likely than not the Company will realize the benefits of the underlying deferred tax assets. However, there can be no assurance that such assets will be realized if circumstances change.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred Tax Liability for Undistributed Foreign Earnings
As it relates to stock of the Company's top tier foreign subsidiaries in the hands of each such subsidiary's U.S. shareholder, at December 31, 2021, the book basis of each such subsidiary exceeds the tax basis in each such subsidiary. No income taxes have been provided for the book to tax basis differences (including undistributed foreign earnings) inherent in these entities except to the extent of certain earnings that have been previously subject to U.S. income tax ("PTEP"). During the three month period ended December 31, 2021, the Company recorded a deferred income tax liability associated with the PTEP. Such amount is not material.
As it relates to the book to tax basis difference with respect to the stock of each of the Company's second and lower tier foreign subsidiaries, as a general matter, the book basis exceeds the tax basis in the hands of such foreign subsidiaries' shareholders. By operation of the tax laws of the various countries in which these subsidiaries are domiciled, earnings of lower tier foreign subsidiaries are not subject to tax, in all material respects, when distributed to a foreign shareholder. It is the Company's intent that the earnings of each lower tier foreign subsidiary, with the exception of its Danish subsidiary and its two Canadian subsidiaries, will be permanently reinvested in each such foreign subsidiaries' own operations. As it relates to the Danish subsidiary, its earnings may be distributed without any income tax impact. With respect to the Canadian subsidiaries, Canadian income tax withholding applies to any distribution each subsidiary makes to its foreign parent company. The Company concluded that at December 31, 2021 each Canadian subsidiary has accumulated earnings in excess of its operating needs and as such Canadian withholding tax has been accrued on such excess. The amount accrued is not material.
Uncertain Income Tax Positions
GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured at the largest amount of benefit that has a greater than 50.0% likelihood of being realized. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. Uncertain income tax liabilities reflect the Company's best judgement of the facts, circumstances and information available through December 31, 2021. Uncertain income tax liabilities are derived using the cumulative probability approach and applying the tax technical requirements applicable to U.S. and other international tax and transfer pricing requirements.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | |
(in millions) | |
Balance as of December 31, 2019 | $ | 104.5 | |
Additions based on tax positions related to 2020 | — | |
Additions for tax positions of prior years | 14.1 | |
Expiration of statutes of limitations | — | |
Settlements of uncertain tax positions with tax authorities | — | |
Balance as of December 31, 2020 | $ | 118.6 | |
Additions based on tax positions related to 2021 | 1.4 | |
Additions for tax positions of prior years | 2.5 | |
Expiration of statutes of limitations | — | |
Settlements of uncertain tax positions with tax authorities | (77.2) | |
Balance as of December 31, 2021 | $ | 45.3 | |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized at December 31, 2021 and 2020 would be $29.1 million and $106.0 million, respectively. During the years ended December 31, 2021 and 2020, the Company recognized $3.2 million and $1.0 million in interest and penalties, respectively, in income tax expense. The Company had $15.7 million and $74.9 million of accrued interest and penalties at December 31, 2021 and 2020. As discussed below, during the quarter ended June 30, 2021 the Company resolved in all material respects the calculation of interest payable to SKAT related to the settlement of the Danish Tax Matters for the years 2001 through 2011 (the "Settlement Years"). As such,
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Danish Tax Matter for the Settlement Years is considered in all material respects, closed. Consequently, the tax deposits previously with SKAT were offset against the uncertain income tax liability for the Settlement Years as reflected in the table above.
The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months as a result of the statute of limitations expiring and/or the examinations being concluded on these returns. However, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the Consolidated Financial Statements, other than the Danish Tax Matter discussed below which the Company believes will be settled commensurate with the amount previously accrued. With few exceptions, the Company is no longer subject to tax examinations by the U.S., state and local municipalities or non-U.S. jurisdictions for periods prior to 2012. The Company is currently under examination by various tax authorities around the world.
The Danish Tax Matter
The Company has been involved in a dispute with the Danish Tax Authority ("SKAT") regarding the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary (the "Danish Tax Matter") for tax years 2012 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process.
During 2018, the Company reached agreements with both SKAT and the U.S. Internal Revenue Service ("IRS") with respect to the adjusted amount of royalties (the "Settlement") for the Settlement Years. During the quarter ended June 30, 2021 the Company and SKAT resolved in all material respects the calculation of interest payable to SKAT (which had previously been under discussion with SKAT) related to the settlement of the Danish Tax Matters for Settlement Years. This resolution resulted in SKAT refunding substantially all of the excess tax deposits it was holding for the Settlement Years (all other aspects of the settlement of the Settlement Years had previously been agreed upon). As such, the Danish Tax Matter for the Settlement Years is considered in all material respects, closed. Consequently, the tax deposits previously with SKAT were applied to offset the uncertain income tax liability for the Settlement Years.
The tax years 2012 through 2021 (the "2012 to Current Period") are currently the subject of the Advance Pricing Agreement procedure ("APA") request filed by the Company with SKAT and the IRS in the third quarter of 2018. As part of the APA, the IRS is negotiating on the Company’s behalf directly with SKAT for a mutually agreeable royalty due from the U.S. subsidiary to the Danish Subsidiary. The APA negotiation is ongoing and is not expected to conclude in the near term. The Company anticipates such negotiations will result in additional income tax in Denmark and a reduction of income tax in the U.S. Consequently, the Company maintains both an uncertain income tax liability for its estimate of the potential Danish income tax and a deferred tax asset for the associated United States tax benefit for the 2012 to Current Period.
The uncertain income tax liabilities for the Danish Tax Matter Settlement Years and for the 2012 to Current Period are reflected in the Company Consolidated Balance Sheet as per below:
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | December 31, 2020 |
Period | | Balance Sheet Presentation | | USD | | USD |
Settlement Years | | Accrued expenses and other current liabilities | | $ | — | | | $ | 139.1 | |
2012 to Current Period | | Other non-current liabilities | | 50.1 | | 48.4 |
| | Total | | $ | 50.1 | | | $ | 187.5 | |
The deferred tax asset for the U.S. correlative benefit associated with the accrual of Danish tax for the 2012 to Current Period at December 31, 2021 and 2020 is approximately $15.5 million and $12.0 million, respectively.
If the IRS and SKAT are unable to reach a mutually acceptable agreement with respect to the years included in the APA Program, the Company could be required to make a significant payment to SKAT for Danish tax related to such years, which could have a material adverse effect on the Company’s results of operations and liquidity.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SKAT has issued income tax assessments for the years 2012 through 2015. The Company is contesting all four assessments. Further, SKAT has proposed assessments for the years 2016 through 2017. For each of the years 2012 through 2017, SKAT is asserting an increase in the royalty earned by the Danish subsidiary. The Company expects to continue to receive income tax assessments from SKAT for the tax years 2018 and forward, asserting the royalties paid by the U.S. to the Danish subsidiary were too low, which the Company disputes.
From June 2012 through December 31, 2018, SKAT withheld Value Added Tax ("VAT") refunds otherwise owed to the Company, pending resolution of the Danish Tax Matter. After application of the VAT refunds to the liability associated with the Settlement Years, the remaining VAT on deposit with SKAT is approximately $1.5 million. As of December 31, 2021, the Company made the following tax deposits with SKAT related to the Danish Tax Matter for the years 2012 through 2015:
| | | | | |
| USD |
VAT deposits remaining with SKAT | $ | 1.5 | |
The three months ended March 31, 2020 | 20.5 |
The three months ended September 30, 2020 | 11.7 | |
The three months ended September 30, 2021 | 14.9 | |
Total | $ | 48.6 | |
The above VAT refunds withheld and the tax deposits made are reflected in the Company's Consolidated Balance Sheet, as per below:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| USD | | USD |
Prepaid expenses and other current assets | $ | — | | | $ | 139.1 | |
Other non-current assets | 48.6 | | | 54.8 | |
Total | $ | 48.6 | | | $ | 193.9 | |
If the Company is not successful in resolving the Danish Tax Matter for the 2012 to Current Period or there is a change in facts and circumstances, the Company may be required to further increase its uncertain income tax position associated with this matter, or decrease its deferred tax asset, also related to this matter, which could have a material impact on the Company's reported earnings.
TEMPUR SEALY INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) Earnings Per Common Share
The following table sets forth the components of the numerator and denominator for the computation of basic and diluted earnings per share for net income attributable to Tempur Sealy International.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions, except per common share amounts) | 2021 | | 2020 | | 2019 |
Numerator: | | | | | |
Net income from continuing operations, net of income attributable to non-controlling interests | $ | 625.2 | | | $ | 348.8 | | | $ | 190.9 | |
| | | | | |
Denominator: | | | | | |
Denominator for basic earnings per common share—weighted average shares | 197.0 | | | 207.9 | | | 218.0 | |
Effect of dilutive securities: | | | | | |
Employee stock-based compensation | 7.3 | | | 4.4 | | | 3.6 | |
Denominator for diluted earnings per common share—adjusted weighted average shares | 204.3 | | | 212.3 | | | 221.6 | |
| | | | | |
Basic earnings per common share for continuing operations | $ | 3.17 | | | $ | 1.68 | | | $ | 0.87 | |
| | | | | |
Diluted earnings per common share for continuing operations | $ | 3.06 | | | $ | 1.64 | | | $ | 0.86 | |
For the years ended December 31, 2021 and December 31, 2020, the Company excluded an insignificant number of shares from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive. For the year ended December 31, 2019, the Company excluded 4.4 million shares issuable upon exercise of outstanding stock options from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International's common stock or they were otherwise anti-dilutive. Holders of non-vested stock-based compensation awards do not have voting rights.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) Business Segment Information
The Company operates in two segments: North America and International. These segments are strategic business units that are managed separately based on geography. The North America segment consists manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Mexico. The International segment consists manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America (other than Mexico). On August 2, 2021, the Company acquired Dreams, which is also included in the International segment. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. The Company evaluates segment performance based on net sales, gross profit and operating income.
The Company sells its products in over 100 countries to over 10,000 wholesale customers. The Company’s Direct channel represents 18.2% of the Company’s consolidated net sales in 2021. One wholesale customer contributed approximately 15% of the Company’s consolidated net sales in the years ended 2021 and 2020.
The Company’s North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company’s accompanying Consolidated Financial Statements. The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payable.
The following table summarizes total assets by segment:
| | | | | | | | | | | |
| December 31, | | December 31, |
(in millions) | 2021 | | 2020 |
North America | $ | 4,360.6 | | | $ | 3,740.3 | |
International | 1,305.9 | | | 639.8 | |
Corporate | 730.9 | | | 490.3 | |
Inter-segment eliminations | (2,074.0) | | | (1,561.8) | |
| | | |
Total assets | $ | 4,323.4 | | | $ | 3,308.6 | |
The following table summarizes property, plant and equipment, net, by segment:
| | | | | | | | | | | |
| December 31, | | December 31, |
(in millions) | 2021 | | 2020 |
North America | $ | 449.9 | | | $ | 415.3 | |
International | 82.3 | | | 49.8 | |
Corporate | 51.3 | | | 42.8 | |
Total property, plant and equipment, net | $ | 583.5 | | | $ | 507.9 | |
The following table summarizes operating lease right-of-use assets by segment:
| | | | | | | | | | | |
| December 31, | | December 31, |
(in millions) | 2021 | | 2020 |
North America | $ | 280.6 | | | $ | 256.6 | |
International | 199.0 | | | 45.7 | |
Corporate | 1.0 | | | 2.0 | |
Total operating lease right-of-use assets | $ | 480.6 | | | $ | 304.3 | |
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes segment information for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | North America | | International | | Corporate | | Eliminations | | Consolidated |
Bedding sales | $ | 3,825.9 | | | $ | 687.0 | | | $ | — | | | $ | — | | | $ | 4,512.9 | |
Other sales | 253.3 | | | 164.6 | | | — | | | — | | | 417.9 | |
Net sales | $ | 4,079.2 | | | $ | 851.6 | | | $ | — | | | $ | — | | | $ | 4,930.8 | |
| | | | | | | | | |
Inter-segment sales | $ | 1.8 | | | $ | 1.2 | | | $ | — | | | $ | (3.0) | | | $ | — | |
Inter-segment royalty expense (income) | 8.7 | | | (8.7) | | | — | | | — | | | — | |
Gross profit | 1,678.0 | | | 480.7 | | | — | | | — | | | 2,158.7 | |
Operating income (loss) | 856.7 | | | 200.0 | | | (144.4) | | | — | | | 912.3 | |
Income (loss) from continuing operations before income taxes | 853.2 | | | 198.9 | | | (228.1) | | | — | | | 824.0 | |
| | | | | | | | | |
Depreciation and amortization (1) | $ | 87.7 | | | $ | 18.1 | | | $ | 68.8 | | | $ | — | | | $ | 174.6 | |
Capital expenditures | 89.7 | | | 18.0 | | | 15.6 | | | — | | | 123.3 | |
(1)Depreciation and amortization includes stock-based compensation amortization expense.
The following table summarizes segment information for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | North America | | International | | Corporate | | Eliminations | | Consolidated |
Bedding sales | $ | 2,956.3 | | | $ | 397.5 | | | $ | — | | | $ | — | | | $ | 3,353.8 | |
Other sales | 202.9 | | | 120.2 | | | — | | | — | | | 323.1 | |
Net sales | $ | 3,159.2 | | | $ | 517.7 | | | $ | — | | | $ | — | | | $ | 3,676.9 | |
| | | | | | | | | |
Inter-segment sales | $ | 1.2 | | | $ | 0.7 | | | $ | — | | | $ | (1.9) | | | $ | — | |
Inter-segment royalty expense (income) | 9.4 | | | (9.4) | | | — | | | — | | | — | |
Gross profit | 1,332.0 | | | 306.4 | | | — | | | — | | | 1,638.4 | |
Operating income (loss) | 591.4 | | | 127.6 | | | (186.9) | | | — | | | 532.1 | |
Income (loss) from continuing operations before income taxes | 590.1 | | | 120.2 | | | (257.9) | | | — | | | 452.4 | |
| | | | | | | | | |
Depreciation and amortization (1) | $ | 76.3 | | | $ | 13.6 | | | $ | 112.6 | | | $ | — | | | $ | 202.5 | |
Capital expenditures | 92.6 | | | 11.0 | | | 7.7 | | | — | | | 111.3 | |
(1)Depreciation and amortization includes stock-based compensation amortization expense.
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes segment information for the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | North America | | International | | Corporate | | Eliminations | | Consolidated |
Bedding sales | 2,448.8 | | | $ | 388.2 | | | $ | — | | | $ | — | | | $ | 2,837.0 | |
Other sales | 154.7 | | | 114.3 | | | — | | | — | | | 269.0 | |
Net sales | $ | 2,603.5 | | | $ | 502.5 | | | $ | — | | | $ | — | | | $ | 3,106.0 | |
| | | | | | | | | |
Inter-segment sales | $ | 1.2 | | | $ | 1.1 | | | $ | — | | | $ | (2.3) | | | $ | — | |
Inter-segment royalty expense (income) | 7.6 | | | (7.6) | | | — | | | — | | | — | |
Gross profit | 1,055.2 | | | 287.0 | | | — | | | — | | | 1,342.2 | |
Operating income (loss) | 349.9 | | | 110.3 | | | (113.5) | | | — | | | 346.7 | |
Income (loss) from continuing operations before income taxes | 342.9 | | | 103.8 | | | (181.2) | | | — | | | 265.5 | |
| | | | | | | | | |
Depreciation and amortization (1) | $ | 65.1 | | | $ | 13.0 | | | $ | 38.4 | | | $ | — | | | $ | 116.5 | |
Capital expenditures | 63.0 | | | 10.7 | | | 14.5 | | | — | | | 88.2 | |
(1)Depreciation and amortization includes stock-based compensation amortization expense.
The following table summarizes property, plant and equipment, net, by geographic region:
| | | | | | | | | | | |
| December 31, | | December 31, |
(in millions) | 2021 | | 2020 |
United States | $ | 481.1 | | | $ | 436.2 | |
All other | 102.4 | | | 71.7 | |
| | | |
| | | |
Total property, plant and equipment, net | $ | 583.5 | | | $ | 507.9 | |
| | | |
The following table summarizes operating lease right-of-use assets by geographic region:
| | | | | | | | | | | |
| December 31, | | December 31, |
(in millions) | 2021 | | 2020 |
United States | $ | 278.3 | | | $ | 255.0 | |
United Kingdom | 162.8 | | | 4.7 | |
All Other | 39.5 | | | 44.6 | |
| | | |
Total operating lease right-of-use assets | $ | 480.6 | | | $ | 304.3 | |
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The following table summarizes net sales by geographic region:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
United States | $ | 3,751.3 | | | $ | 2,886.6 | | | $ | 2,312.1 | |
All other | 1,179.5 | | | 790.3 | | | 793.9 | |
Total net sales | $ | 4,930.8 | | | $ | 3,676.9 | | | $ | 3,106.0 | |
| | | | | |