# SOMNIGROUP INTERNATIONAL INC. (SGI) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from SOMNIGROUP INTERNATIONAL INC.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1206264/000120626422000057/tpx-20211231.htm Accession: 0001206264-22-000057 Filing date: 2022-02-22 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/SGI/ All MD&A years: /company/SGI/mda/ Next year: /company/SGI/mda/fy2022/ (FY 2022) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Report. Unless otherwise noted, all of the financial information in this Report is consolidated financial information for the Company. The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" and Part I, ITEM 1A of this Report. Our actual results may differ materially from those contained in any forward-looking statements. For results of operations comparisons relating to years ending December 31, 2020 and 2019, refer to our annual report on Form 10-K, Part II, ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations filed with the Securities and Exchange Commission on February 19, 2021. In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the years ended December 31, 2021 and 2020, including the following topics: •an overview of our business and strategy; •results of operations, including our net sales and costs in the periods presented as well as changes between periods; •expected sources of liquidity for future operations; and •our use of certain non-GAAP financial measures. Business Overview General We are committed to improving the sleep of more people, every night, all around the world. As a leading designer, manufacturer, distributor and retailer of bedding products worldwide, we know how crucial a good night of sleep is to overall health and wellness. Utilizing over a century of knowledge and industry-leading innovation, we deliver award-winning products that provide breakthrough sleep solutions to consumers in over 100 countries. We operate in two segments: North America and International. These segments are strategic business units that are managed separately based on geography. Our North America segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S., Canada and Mexico. Our International segment consists of manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America (other than Mexico). On August 2, 2021, we acquired Dreams Topco Limited and its direct and indirect subsidiaries ("Dreams"). Dreams 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. We evaluate segment performance based on net sales, gross profit and operating income. For additional information refer to Note 15, "Business Segment Information," included in Part II, ITEM 8 "Financial Statements and Supplementary Data", of this Report. Our highly recognized brands include Tempur-Pedic®, Sealy® and Stearns & Foster® and our non-branded offerings consist of value-focused private label and OEM products. Our products allow for complementary merchandising strategies and are sold through third-party retailers, our more than 650 company-owned and joint venture operated retail stores worldwide and our e-commerce channel. Our distribution model operates through an omni-channel strategy. We distribute through two channels in each operating business segment: Wholesale and Direct. Our Wholesale channel consists of third-party retailers, including third-party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, online and call centers. 15 Table of Contents Full year net income for 2021 increased 79.0% and full year diluted earnings per share ("EPS") increased 86.6% to $3.06. We also maintain a strong competitive position within the industry. We believe the investments that we have made over the past several years have strengthened the long-term foundation of our company and enhanced our competitive position. The combination of our product superiority, brand strength, manufacturing efficiency and quality, powerful omni-channel distribution platform, substantial cash flow and fortified balance sheet continue to drive market share gains and solid financial performance. General Business and Economic Conditions We believe the bedding industry is structured for sustained growth, driven by product innovation, sleep technology advancements, consumer confidence, housing formations and population growth. The industry is no longer engaged in uneconomical retail store expansion, startups have shifted from uneconomical strategies to becoming profitable and legacy retailers and manufacturers have become skilled in producing profitable online sales. Over the past several years and accelerating during the COVID-19 global pandemic, consumers have shifted their spending habits towards in-home products, including bedding products. We believe this may be a long-term shift in consumer spending habits, which could continue to favorably impact our industry. The rapid increase in demand for bedding products has challenged the entire bedding industry and supply chain, including our U.S. business. As a result, the U.S. sales growth in 2021 was unfavorably impacted as we could not fulfill the entire domestic demand for these products. These supply chain constraints were largely resolved by the end of 2021. We expect to be better positioned to meet consumer demand in 2022. During 2021, commodity costs unfavorably impacted our gross margin. Throughout 2021, we implemented pricing actions to mitigate the dollar impact of these known commodity headwinds. In January 2022, we implemented further pricing actions designed to offset the dollar impact of these inflationary headwinds. Product Launches In 2022, we plan to complete the rollout of a complete refresh of our North American Sealy portfolio that began in 2021. The updated Sealy portfolio features new models in our Posturepedic PlusTM, Posturepedic® and Essentials product lines. We also expect to launch a complete refresh of our North American Stearns & Foster portfolio in 2022. In the U.S., we plan to launch a Sealy-branded, eco-friendly mattress collection, as well as a Sealy mattress with a best-in-class pressure-relieving gel grid layer at a consumer-appealing, mid-market price point, in 2022. In our international segment, we expect to begin the launch an all-new line of Tempur® products in Europe and Asia-Pacific in 2022 with the objective of reaching a new segment of international consumers. This new line of products will broaden Tempur®'s price range with the super-premium average selling price ceiling maintained and the floor expanded into the premium category. Our global 2022 marketing plan is to aggressively support our innovative bedding products through investing significant marketing dollars to promote our worldwide brands and product launches. Omni-Channel Distribution Expansion We have a diversified group of strong retail partners and a rapidly growing direct business. Due to supply chain constraints, we were not able to fulfill the entire domestic demand for our products in 2021. As a result, we focused on our existing third-party retailer relationships and did not meaningfully expand domestic distribution through new or existing retail partners during the year. In 2022, we expect to be better positioned to meet consumer demand and able to reengage with opportunities to expand our distribution through our domestic wholesale channel. We have been focused on building our direct channel, both online and company-owned retail stores in recent years. The development of our online business has been particularly important as consumers have grown more comfortable shopping for bedding products online. Online purchases accelerated during the pandemic and we expect that consumers will continue to lean into this channel in the future. The direct channel growth rate has surpassed the wholesale growth rate over the last few years, and we anticipate the direct channel to continue to grow as a percentage of net sales in future years. 16 Table of Contents We currently operate over 650 retail stores globally through our wholly-owned and joint venture operations. We expect to continue to increase our store count organically through opening an average of 60 new stores per year over the next several years. As of December 31, 2021, we had 88 Tempur-Pedic retail stores throughout the U.S. We plan to expand our network to 125 to 150 new retail stores in the long-term. We expect these retail stores to complement our existing third-party retail partners by increasing our products' brand awareness in the local markets. In addition to our high-end Tempur-Pedic retail stores, we operate Sleep Outfitters, a regional bedding retailer that had 104 stores in 2021. Additionally, in 2021, we expanded our retail presence in the International segment through our acquisition of Dreams. Dreams has a successful multi-channel sales strategy, with over 200 brick and mortar retail locations in the U.K., an industry-leading online channel, as well as manufacturing and delivery assets. In 2020, we expanded our presence into the OEM market by offering non-branded products, including mattresses, pillows, and other bedding products and components at a wide range of price points. The addition of non-branded offerings expands our capabilities to service third-party retailers and creates opportunity to capture manufacturing profits from bedding brands outside our own. Acquisition of Dreams On August 2, 2021, we completed the acquisition of Dreams, for a cash purchase price of $476.7 million, which included $49.5 million of cash acquired. The transaction was funded using cash on hand and bank financing. As a multi-branded retailer, Dreams sells a variety of products across a range of price points with a margin profile lower than our historical International segment margins. 2021 Results of Operations A summary of our results for the year ended December 31, 2021 include: •Total net sales increased 34.1% to $4,930.8 million as compared to $3,676.9 million in 2020. •Gross margin was 43.8% in 2021 as compared to 44.6% in 2020. •Operating income was $912.3 million as compared to $532.1 million in 2020. Adjusted operating income, which is a non-GAAP financial measure, was $918.5 million as compared to $617.7 million in 2020. •Net income was $624.5 million as compared to $348.8 million in 2020. Adjusted net income, which is a non-GAAP financial measure, was $651.7 million as compared to $405.7 million in 2020. •EPS increased to $3.06 as compared to $1.64 in 2020. Adjusted EPS, which is a non-GAAP financial measure, increased 67.0% to $3.19 as compared to $1.91 in 2020. For a discussion and reconciliation of non-GAAP financial measures as discussed above to the corresponding GAAP financial results, refer to the non-GAAP financial information set forth below under the heading "Non-GAAP Financial Information." We may refer to net sales or earnings or other historical financial information on a "constant currency basis," which is a non-GAAP financial measure. These references to constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates. To provide information on a constant currency basis, the applicable financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior corresponding period’s currency conversion rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under GAAP, and it is not intended as an alternative to GAAP measures. Refer to Part II, ITEM 7A of this Report for a discussion of our foreign currency exchange rate risk. 17 Table of Contents The following table sets forth the various components of our Consolidated Statements of Income and expresses each component as a percentage of net sales: [[GREPCENT_TABLE]] [["(in millions, except percentages and","Year Ended December 31,"],["per common share amounts)","2021","","2020"],["Net sales","$","4,930.8","","","100.0","%","","$","3,676.9","","","100.0","%"],["Cost of sales","2,772.1","","","56.2","","","2,038.5","","","55.4"],["Gross profit","2,158.7","","","43.8","","","1,638.4","","","44.6"],["Selling and marketing expenses","923.1","","","18.7","","","740.2","","","20.1"],["General, administrative and other expenses","353.9","","","7.2","","","382.5","","","10.4"],["Equity income in earnings of unconsolidated affiliates","(30.6)","","","(0.6)","","","(16.4)","","","(0.4)"],["Operating income","912.3","","","18.5","","","532.1","","","14.5"],["Other expense, net:"],["Interest expense, net","66.3","","","1.3","","","77.0","","","2.1"],["Loss on extinguishment of debt","23.0","","","0.5","","","5.1","","","0.1"],["Other income, net","(1.0)","","","\u2014","","","(2.4)","","","(0.1)"],["Total other expense, net","88.3","","","1.8","","","79.7","","","2.2"],["Income from continuing operations before income taxes","824.0","","","16.7","","","452.4","","","12.3"],["Income tax provision","(198.3)","","","(4.0)","","","(102.6)","","","(2.8)"],["Income from continuing operations","625.7","","","12.7","","","349.8","","","9.5"],["Loss from discontinued operations, net of tax","(0.7)","","","\u2014","","","\u2014","","","\u2014"],["Net income before non-controlling interests","625.0","","","12.7","","","349.8","","","9.5"],["Less: Net income attributable to non-controlling interests","0.5","","","\u2014","","","1.0","","","\u2014"],["Net income attributable to Tempur Sealy International, Inc.","$","624.5","","","12.7","%","","$","348.8","","","9.5","%"],["Earnings per common share:"],["Basic"],["Earnings per share for continuing operations","$","3.17","","","","","$","1.68"],["Loss per share for discontinued operations","\u2014","","","","","\u2014"],["Earnings per share","$","3.17","","","","","$","1.68"],["Diluted"],["Earnings per share for continuing operations","$","3.06","","","","","$","1.64"],["Loss per share for discontinued operations","\u2014","","","","","\u2014"],["Earnings per share","$","3.06","","","","","$","1.64"],["Weighted average common shares outstanding:"],["Basic","197.0","","","","","207.9"],["Diluted","204.3","","","","","212.3"]] [[/GREPCENT_TABLE]] 18 Table of Contents NET SALES [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","Consolidated","","North America","","International"],["(in millions)","2021","","2020","","","","2021","","2020","","","","2021","","2020"],["Net sales by channel"],["Wholesale","$","4,034.4","","","$","3,185.8","","","","","$","3,584.1","","","$","2,806.7","","","","","$","450.3","","","$","379.1"],["Direct","896.4","","","491.1","","","","","495.1","","","352.5","","","","","401.3","","","138.6"],["Total net sales","$","4,930.8","","","$","3,676.9","","","","","$","4,079.2","","","$","3,159.2","","","","","$","851.6","","","$","517.7"]] [[/GREPCENT_TABLE]]     Net sales increased 34.1%, and on a constant currency basis increased 33.0%. The change in net sales was driven by the following: •North America net sales increased $920 million, or 29.1%. Net sales in the Wholesale channel increased $777.4 million, or 27.7%, primarily driven by broad-based demand across our retail partners. Net sales in our Direct channel increased $142.6 million, or 40.5%, primarily driven by strong company-owned sales growth and higher retail sales volume compared to the prior year period, which was impacted by COVID-19. •International net sales increased $333.9 million, or 64.5%. On a constant currency basis, our International net sales increased 60.1%. Net sales in the Wholesale channel increased 14.1% on a constant currency basis. Net sales in the Direct channel increased 186.1% on a constant currency basis, driven by the acquisition of Dreams. The increase in net sales across all channels was driven by higher sales volume compared to the prior year period, which was impacted by COVID-19. GROSS PROFIT [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020","","","","Margin Change"],["(in millions, except percentages)","Gross Profit","","Gross Margin","","Gross Profit","","Gross Margin","","","","","","2021 vs 2020"],["North America","$","1,678.0","","","41.1","%","","$","1,332.0","","","42.2","%","","","","","","(1.1)","%"],["International","480.7","","","56.4","%","","306.4","","","59.2","%","","","","","","(2.8)","%"],["Consolidated gross margin","$","2,158.7","","","43.8","%","","$","1,638.4","","","44.6","%","","","","","","(0.8)","%"]] [[/GREPCENT_TABLE]]     Costs associated with net sales are recorded in cost of sales and include the costs of producing, shipping, warehousing, receiving and inspecting goods during the period, as well as depreciation and amortization of long-lived assets used in the manufacturing process.     Our gross margin is primarily impacted by the relative amount of net sales contributed by our Tempur and Sealy products. Our Sealy products have a significantly lower gross margin than our Tempur products. Our Sealy mattress products range from value to premium priced offerings, and gross margins are typically higher on premium products compared to value priced offerings. Our Tempur products are exclusively premium priced products. If sales of our Sealy products increase relative to sales of our Tempur products, our gross margins will be negatively impacted in both our North America and International segments.     Our gross margin is also impacted by fixed cost leverage based on manufacturing unit volumes; the cost of raw materials; operational productivity due to the utilization in our manufacturing facilities; product, channel and geographic mix; the margin profile of acquired subsidiaries; foreign exchange fluctuations; volume incentives offered to certain retail accounts; participation in our retail cooperative advertising programs; and costs associated with new product introductions. Future changes in raw material prices could have a significant impact on our gross margin. In 2021, commodity cost inflation negatively impacted gross margin. Our margins are also impacted by the growth in our Wholesale channel as sales in our Wholesale channel are at wholesale prices whereas sales in our Direct channel are at retail prices.     Gross margin declined 80 basis points. The principal factors impacting gross margin for each segment are discussed below. 19 Table of Contents •North America gross margin declined 110 basis points. The decline in gross margin was primarily driven by price increases to customers without a margin benefit of 120 basis points. Our gross margin was impacted as sales increased with no change in gross profit dollars, as our pricing actions have been offset the dollar impact of commodities. •International gross margin declined 280 basis points. The decline in gross margin was primarily driven by the acquisition of Dreams of 210 basis points and price increases to customers without a margin benefit of 100 basis points. Dreams' margin profile is lower than our historical international margins as they sell a variety of products across a range of price points. OPERATING EXPENSES Selling and marketing expenses include advertising and media production associated with the promotion of our brands, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials, and sales force compensation. We also include in selling and marketing expense certain new product development costs, including market research and new product testing. General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020","","2021","","2020","","2021","","2020","","2021","","2020"],["(in millions)","Consolidated","","North America","","International","","Corporate"],["Operating expenses:"],["Advertising","$","432.8","","","$","332.5","","","$","368.6","","","$","297.7","","","$","64.2","","","$","34.8","","","$","\u2014","","","$","\u2014"],["Other selling and marketing","490.3","","","407.7","","","289.6","","","251.0","","","174.8","","","112.2","","","25.9","","","44.5"],["General, administrative and other","353.9","","","382.5","","","163.1","","","191.9","","","72.3","","","48.2","","","118.5","","","142.4"],["Total operating expense","$","1,277.0","","","$","1,122.7","","","$","821.3","","","$","740.6","","","$","311.3","","","$","195.2","","","$","144.4","","","$","186.9"]] [[/GREPCENT_TABLE]]     Operating expenses increased $154.3 million, or 13.7%, and decreased 460 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are discussed below. •North America operating expenses increased $80.7 million, or 10.9%, and decreased 330 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by increases in advertising and other selling and marketing investments, offset by incremental bad debt expense primarily related to the bankruptcy of one department store in the U.S. in 2020. Additionally, in 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account and $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the macro-economic environment, which were not repeated in 2021. •International operating expenses increased $116.1 million and decreased 110 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by increases in advertising and other selling and marketing investments, as well as the acquisition of Dreams. •Corporate operating expenses decreased $42.5 million, or 22.7%. The decrease in operating expenses was primarily driven by increased amortization for the Company's aspirational plan and other stock-based compensation in 2020. This decrease was offset by $3.9 million of acquisition-related costs, primarily legal and professional fees associated with the acquisition of Dreams in 2021.     Research and development expenses for the year ended December 31, 2021 were $27.3 million compared to $23.1 million for the year ended December 31, 2020, an increase of $4.2 million, or 18.2%. 20 Table of Contents OPERATING INCOME [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020","","","","Margin Change"],["(in millions, except percentages)","Operating Income","","Operating Margin","","Operating Income","","Operating Margin","","","","","","2021 vs 2020"],["North America","$","856.7","","","21.0","%","","$","591.4","","","18.7","%","","","","","","2.3","%"],["International","200.0","","","23.5","%","","127.6","","","24.6","%","","","","","","(1.1)","%"],["","1,056.7","","","","","719.0"],["Corporate expenses","(144.4)","","","","","(186.9)"],["Total operating income","$","912.3","","","18.5","%","","$","532.1","","","14.5","%","","","","","","4.0","%"]] [[/GREPCENT_TABLE]]     Operating income increased $380.2 million and operating margin improved 400 basis points. The increase was driven by the following: •North America operating income increased $265.3 million and operating margin improved 230 basis points. The improvement in operating margin was primarily driven by improved operating expense leverage of 240 basis points and decreased customer-related charges, offset by the decline in gross margin of 110 basis points. In 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates. Additionally, in 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets driven by the macro-economic environment, which were not repeated in 2021. •International operating income increased $72.4 million and operating margin declined 110 basis points. The decline in operating margin was primarily driven by the decline in gross margin of 280 basis points, offset by operating expense leverage. •Corporate operating expenses decreased $42.5 million, which positively impacted our consolidated operating margin by 90 basis points. The decrease in operating expenses was primarily driven by increased amortization for the Company's aspirational plan and other stock-based compensation in 2020. This decrease was offset by $3.9 million of acquisition-related costs, primarily related to legal and professional fees associated with the acquisition of Dreams recognized in 2021. INTEREST EXPENSE, NET [[GREPCENT_TABLE]] [["","Year Ended December 31,","","","","Percent change"],["(in millions, except percentages)","2021","","2020","","","","2021 vs 2020"],["Interest expense, net","$","66.3","","","$","77.0","","","","","(13.9)","%"]] [[/GREPCENT_TABLE]] Interest expense, net, decreased $10.7 million, or 13.9%. The decrease in interest expense, net, was primarily driven by reduced average levels of outstanding debt and lower interest rates on our debt, primarily offset by $5.2 million of overlapping interest expense for the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes incurred in 2021. LOSS ON EXTINGUISHMENT OF DEBT On March 25, 2021, we issued our 2029 Senior Notes. During the second quarter of 2021, we used the net proceeds from the 2029 Senior Notes primarily to redeem in full our $600.0 million 2026 Senior Notes, at 102.75% of their principal amount, plus the accrued and unpaid interest. As a result of the redemption, we recognized $18.0 million of loss on extinguishment of debt, which included a prepayment premium of $16.5 million and the write-off of $1.5 million of deferred financing costs. Additionally, in the first quarter of 2021, we recognized $5.0 million of loss on extinguishment of debt, which includes a prepayment premium of $3.5 million and the write-off of $1.5 million of deferred financing costs, associated with the redemption of the remaining amount outstanding of the 2023 Senior Notes. Refer to Note 6, "Debt," in our Notes to Condensed Consolidated Financial Statements included in ITEM 8 under Part II for additional information. 21 Table of Contents INCOME TAX PROVISION [[GREPCENT_TABLE]] [["","Year Ended December 31,","","Percent change"],["(in millions, except percentages)","2021","","2020","","2021 vs 2020"],["Income tax provision","$","198.3","","","$","102.6","","","93.3","%"],["Effective tax rate","24.1","%","","22.7","%","","1.4","%"]] [[/GREPCENT_TABLE]] Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and includes the impact of net operating losses for certain of our foreign operations. Our income tax provision increased $95.7 million due to an increase in income before income taxes, net of the favorable impact of discrete items. Our 2021 effective tax rate increased as compared to 2020 by 140 basis points. The effective tax rate as compared to the U.S. federal statutory tax rate for the year ending December 31, 2021 included a net favorable impact of discrete items, primarily related to excess tax benefits from the vesting of certain stock awards under our incentive stock compensation plan. The effective tax rate as compared to the U.S. federal statutory tax rate for the year ended December 31, 2020 included the impact of net favorable discrete items primarily related to the implementation of income tax regulations in 2020 that favorably impacted our global intangible low-taxed income ("GILTI") starting from the year ending December 31, 2018 onward and the excess tax benefits from the vesting of certain stock awards under our incentive stock compensation plan. Refer to Note 13, "Income Taxes," in our Consolidated Financial Statements included in Part II, ITEM 8 of this Report for further information. Liquidity and Capital Resources Liquidity Our principal sources of funds are cash flows from operations, supplemented with borrowings made pursuant to our credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, share repurchases, capital expenditures and working capital needs. As of December 31, 2021, we had net working capital of $222.2 million, including cash and cash equivalents of $300.7 million, as compared to working capital deficit of $6.4 million, including cash and cash equivalents of $65.0 million, as of December 31, 2020. At December 31, 2021, total cash and cash equivalents were $300.7 million, of which $188.2 million was held in the U.S. and $112.5 million was held by subsidiaries outside of the U.S. The amount of cash and cash equivalents held by subsidiaries outside of the U.S. and not readily convertible into the U.S. Dollar or other major foreign currencies is not material to our overall liquidity or financial position. Cash Provided by (Used in) Continuing Operations The table below presents net cash provided by (used in) operating, investing and financing activities from continuing operations for the years ended December 31, 2021 and 2020. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(in millions)","","2021","","2020"],["Net cash provided by (used in) continuing operations:"],["Operating activities","","$","723.1","","","$","654.7"],["Investing activities","","(554.8)","","","(146.6)"],["Financing activities","","76.5","","","(522.6)"]] [[/GREPCENT_TABLE]] Cash provided by operating activities from continuing operations increased $68.4 million in 2021 as compared to 2020. The increase in cash provided by operating activities was driven by strong operational performance in the period. Cash used in investing activities from continuing operations increased $408.2 million in 2021 as compared to 2020. The increase in cash used in investing activities was due to the acquisition of Dreams in the third quarter of 2021. 22 Table of Contents Cash provided by financing activities from continuing operations increased $599.1 million in 2021 as compared to 2020. In 2021, we had net funding of $979.3 million as compared to net repayments of $184.5 million in 2020 on our credit facilities. This increase included proceeds of $1.6 billion from the issuance of our 2029 and 2031 Senior Notes, offset by repayments of $250.0 million of our 2023 Senior Notes and $600.0 million of our 2026 Senior Notes and net borrowings of $229.3 million on our credit facilities. In 2021, we repurchased $816.3 million of our common stock, as compared to $331.8 million in 2020. Cash provided by financing activities also decreased due to dividends paid to shareholders of $63.1 million and payments of deferred financing costs of $24.9 million in 2021. Cash Provided by (Used in) Discontinued Operations Net cash provided by (used in) operating, investing and financing activities from discontinued operations for the years ended December 31, 2021 and 2020 was not material. Capital Expenditures Capital expenditures totaled $123.3 million and $111.3 million for the year ended December 31, 2021 and 2020, respectively. We currently expect our 2022 capital expenditures to be approximately $250 million to $280 million, which includes investments in manufacturing capacity expansion and investments in our other growth initiatives. We expect to generate operating cash flows sufficient to fully fund our anticipated capital expenditures in 2022. Indebtedness Our total debt increased to $2,353.2 million as of December 31, 2021 from $1,370.3 million as of December 31, 2020. Total availability under our revolving senior secured credit facility was $724.3 million as of December 31, 2021, which matures in 2024. On February 2, 2021 we entered into an amendment to our 2019 Credit Agreement, which increased our revolving credit facility from $425.0 million to $725.0 million. On March 25, 2021, we issued the 2029 Senior Notes. The 2029 Senior Notes mature on April 15, 2029 and 4.00% interest is payable semi-annually in arrears on each April 15 and October 15, beginning on October 15, 2021. On June 15, 2021, we redeemed our $600.0 million 2026 Senior Notes, in full, using net proceeds from our 2029 Senior Notes. Additionally, on May 26, 2021, we entered into an amendment to our 2019 Credit Agreement. The amendment provides for a $300.0 million delayed draw term loan. On July 30, 2021 we drew down the full $300.0 million available under the delayed draw term loan to fund, in part, the Dreams acquisition. On September 21, 2021, we 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. On September 24, 2021, we issued the 2031 Senior Notes. The 2031 Senior Notes mature on October 15, 2031 and 3.875% interest is payable semi-annually in arrears on each April 15 and October 15, beginning on April 15, 2022. Refer to Note 6, "Debt," in our Consolidated Financial Statements included in Part II, ITEM 8 for further discussion of our debt. As of December 31, 2021, our ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure defined in the 2019 Credit Agreement, was 1.81 times. This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio as set forth in the 2019 Credit Agreement, which limits this ratio to 5.00 times. As of December 31, 2021, we were in compliance with all of the financial covenants in our debt agreements, and we do not anticipate material issues under any debt agreements based on current facts and circumstances. Our debt agreements contain certain covenants that limit restricted payments, including share repurchases and dividends. The 2019 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes contain similar limitations which, subject to other conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA remains below 3.5 times. In addition, these agreements permit limited restricted payments under certain conditions when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA is above 3.5 times. The limit on restricted payments under the 2019 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes is in part determined by a basket that grows at 50% of adjusted net income each quarter, reduced by restricted payments that are not otherwise permitted.  23 Table of Contents For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated indebtedness less netted cash to adjusted EBITDA calculated in accordance with our 2019 Credit Agreement. Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 2019 Credit Agreement are terms that are not recognized under GAAP and do not purport to be alternatives to net income as a measure of operating performance or total debt. Share Repurchase Program Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock. The Board of Directors authorized increases to our share repurchase authorization of $211.4 million, $325.3 million, $431.5 million and $1,032.3 million during February, April, October and December 2021, respectively. For the year ended December 31, 2021, we repurchased 19.5 million shares under our share repurchase program for approximately $801.4 million and had approximately $1,400.7 million remaining under our share repurchase program. Subsequent to year-end, we repurchased an additional 7.7 million shares for approximately $305.0 million. Share repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate. These repurchases may be funded by operating cash flows and/or borrowings under our debt arrangements. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program is subject to certain limitations under our debt agreements. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws.     In 2022, subject to market conditions, we expect to repurchase at least 10.0% of common shares outstanding. We will manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," of this Report. Future Liquidity Sources and Uses As of December 31, 2021, we had $1.2 billion of liquidity, including $300.7 million of cash on hand and $724.3 million available under our revolving senior secured credit facility and $160.0 million available under our securitization facility. We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for our foreseeable working capital needs, necessary capital expenditures, share repurchases and debt service obligations. Our capital allocation strategy follows a balanced approach focused on supporting the business, returning shareholder value through share repurchases and quarterly dividends as well as opportunistic and strategic acquisition opportunities that enhance our global competitiveness. Throughout 2021, we took capital structure actions to optimize our balance sheet, through extending the maturities of our long-term debt and lowering our fixed interest rates. The Board of Directors declared a dividend of 10 cents per share for the first quarter of 2022. The dividend is payable on March 22, 2022 to shareholders of record as of March 8, 2022. As of December 31, 2021, we had $2,353.2 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $2,053.7 million. Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 1.81 times for the year ended December 31, 2021. Our target range for our ratio of consolidated indebtedness less netted cash, which is a non-GAAP financial measure, is 2.0 to 3.0 times. Our debt service obligations could, under certain circumstances, have material consequences to our stockholders. Similarly, our cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements and debt service obligations. For information regarding the impact of COVID-19 on our business, including our liquidity and capital resources, please refer to "Risk Factors" in ITEM 1A of Part I of this Report. 24 Table of Contents Material Cash Requirements Our material cash requirements as of December 31, 2021 are summarized below: [[GREPCENT_TABLE]] [["(in millions)","","Payment Due By Period"],["Contractual Obligations","","2022","","2023","","2024","","2025","","2026","","Thereafter","","Total Obligations"],["Debt (1)","","$","39.3","","","$","54.4","","","$","584.3","","","$","\u2014","","","$","\u2014","","","$","1,600.0","","","$","2,278.0"],["Letters of credit","","25.0","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","25.0"],["Interest payments (2)","","87.0","","","79.7","","","69.8","","","63.0","","","63.0","","","221.9","","","584.4"],["Operating lease obligations","","118.5","","","106.5","","","88.9","","","73.5","","","58.9","","","155.1","","","601.4"],["Finance lease obligations (3)","","13.8","","","11.3","","","8.8","","","7.4","","","8.0","","","25.9","","","75.2"],["Pension obligations","","1.1","","","1.2","","","1.3","","","1.4","","","1.4","","","35.7","","","42.1"],["Total (4)","","$","284.7","","","$","253.1","","","$","753.1","","","$","145.3","","","$","131.3","","","$","2,038.6","","","$","3,606.1"]] [[/GREPCENT_TABLE]] (1)Debt excludes finance lease obligations and deferred financing costs. (2)Interest payments represent obligations under our debt outstanding as of December 31, 2021, applying December 31, 2021 interest rates and assuming scheduled payments are paid as contractually required through maturity. (3)The payments due for finance lease obligations excludes $15.8 million in future payments for interest. (4)Uncertain tax positions are excluded from this table given the timing of payments cannot be reasonably estimated. Non-GAAP Financial Information We provide information regarding adjusted net income, adjusted EPS, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA, consolidated indebtedness and consolidated indebtedness less netted cash, which are not recognized terms under GAAP and do not purport to be alternatives to net income, earnings per share, gross profit, gross margin, operating income (expense) and operating margin as a measure of operating performance or an alternative to total debt as a measure of liquidity. We believe these non-GAAP financial measures provide investors with performance measures that better reflect our underlying operations and trends, providing a perspective not immediately apparent from net income, gross profit, gross margin, operating income (expense) and operating margin. The adjustments we make to derive the non-GAAP financial measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP financial measure, but which we do not consider to be the fundamental attributes or primary drivers of our business. We believe that exclusion of these items assists in providing a more complete understanding of our underlying results from continuing operations and trends, and we use these measures along with the corresponding GAAP financial measures to manage our business, to evaluate our consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP financial measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. These non-GAAP financial measures should be considered supplemental in nature and should not be construed as more significant than comparable financial measures defined by GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. For more information about these non-GAAP financial measures and a reconciliation to the nearest GAAP financial measure, please refer to the reconciliations on the following pages. Key Highlights [[GREPCENT_TABLE]] [["","","","Year Ended December 31,"],["(in millions, except percentages and per common share amounts)","","","","","","","","","2021","","2020","","% Change"],["Net sales","","","","","","","","","$","4,930.8","","","$","3,676.9","","","34.1","%"],["Net income","","","","","","","","","$","624.5","","","$","348.8","","","79.0","%"],["Adjusted net income (1)","","","","","","","","","$","651.7","","","$","405.7","","","60.6","%"],["EBITDA (1)","","","","","","","","","$","1,088.7","","","$","737.8","","","47.6","%"],["Adjusted EBITDA(1)","","","","","","","","","$","1,135.9","","","$","779.9","","","45.6","%"],["EPS","","","","","","","","","$","3.06","","","$","1.64","","","86.6","%"],["Adjusted EPS (1)","","","","","","","","","$","3.19","","","$","1.91","","","67.0","%"]] [[/GREPCENT_TABLE]] 25 Table of Contents [[GREPCENT_TABLE]] [["(1)","","Non-GAAP financial measure. Please refer to the reconciliations in the following tables."]] [[/GREPCENT_TABLE]] Adjusted Net Income and Adjusted EPS A reconciliation of net income to adjusted net income and the calculation of adjusted EPS is provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the years ended December 31, 2021 and 2020. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(in millions, except per common share amounts)","2021","","2020"],["Net income","$","624.5","","","$","348.8"],["Loss from discontinued operations, net of tax (1)","0.7","","","\u2014"],["Loss on extinguishment of debt (2)","23.0","","","5.1"],["Acquisition-related costs (3)","6.2","","","\u2014"],["Overlapping interest expense (4)","5.2","","","\u2014"],["Aspirational plan amortization (5)","\u2014","","","49.4"],["Customer-related charges (6)","\u2014","","","11.7"],["Incremental operating costs (7)","\u2014","","","7.2"],["Asset impairments (8)","\u2014","","","7.0"],["Restructuring costs (9)","\u2014","","","3.8"],["Accounting standard adoption (10)","\u2014","","","3.6"],["Aspirational plan employer costs (11)","\u2014","","","2.3"],["Facility expansion costs (12)","\u2014","","","0.6"],["Other income (13)","\u2014","","","(2.3)"],["Tax adjustments (14)","(7.9)","","","(31.5)"],["Adjusted net income","$","651.7","","","$","405.7"],["Adjusted earnings per share, diluted","$","3.19","","","$","1.91"],["Diluted shares outstanding","204.3","","","212.3"]] [[/GREPCENT_TABLE]] 26 Table of Contents [[GREPCENT_TABLE]] [["(1)","Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the 2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes."],["(2)","In the year ended December 31, 2021, we recognized $23.0 million of loss on extinguishment of debt associated with the redemption of the 2026 and 2023 senior notes. In the year ended December 31, 2020, we recognized $5.1 million of loss on extinguishment of debt associated with the redemption of the 2023 senior notes and the early repayment of the 364-day term loan."],["(3)","In the year ended December 31, 2021, we recognized $6.2 million of acquisition-related costs, primarily related to legal and professional fees and stamp taxes associated with the acquisition of Dreams."],["(4)","In the year ended December 31, 2021, we incurred $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes."],["(5)","In the year ended December 31, 2020, we recognized $49.4 million which represented the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020 and the remaining requisite service period in the fourth quarter of 2020."],["(6)","In the year ended December 31, 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account."],["(7)","In the year ended December 31, 2020, we recorded $7.2 million of incremental operating costs and charges associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $2.7 million of charges related to increased sanitation supplies and services."],["(8)","In the year ended December 31, 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets."],["(9)","In the year ended December 31, 2020, we incurred $3.8 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment."],["(10)","In the year ended December 31, 2020, we recorded $3.6 million of charges related to the adoption of ASU No. 2016-13, \"Financial Instruments - Credit Losses (Topic 326)\". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within its covenant compliance calculation."],["(11)","In the fourth quarter of 2020, we recognized $2.3 million of employer-related tax costs related to the aspirational plan compensation."],["(12)","In the year ended December 31, 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility."],["(13)","In the fourth quarter of 2020, we recorded $2.3 million of other income related to the sale of a manufacturing facility."],["(14)","Adjusted income tax provision represents the tax effects associated with the aforementioned items and discrete income tax events. In the fourth quarter of 2020, we recorded a $9.5 million discrete income tax benefit upon the vesting of our long-term aspirational plan awards."]] [[/GREPCENT_TABLE]] Adjusted Gross Profit and Gross Margin and Adjusted Operating Income (Expense) and Operating Margin A reconciliation of gross profit and gross margin to adjusted gross profit and adjusted gross margin, respectively, and operating income (expense) and operating margin to adjusted operating income (expense) and adjusted operating margin, respectively, are provided below. We believe that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes below. The following table sets forth our reported gross profit and the reconciliation of our operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the year ended December 31, 2021. We had no adjustments to gross profit for the year ended December 31, 2021. [[GREPCENT_TABLE]] [["","FULL YEAR 2021"],["(in millions, except percentages)","Consolidated","","Margin","","North America","","Margin","","International","","Margin","","Corporate"],["Net sales","$","4,930.8","","","","","$","4,079.2","","","","","$","851.6","","","","","$","\u2014"],["Gross profit","$","2,158.7","","","43.8","%","","$","1,678.0","","","41.1","%","","$","480.7","","","56.4","%","","$","\u2014"],["Operating income (expense)","$","912.3","","","18.5","%","","$","856.7","","","21.0","%","","$","200.0","","","23.5","%","","$","(144.4)"],["Adjustments:"],["Acquisition-related costs (1)","6.2","","","","","\u2014","","","","","2.3","","","","","3.9"],["Total adjustments","6.2","","","","","\u2014","","","","","2.3","","","","","3.9"],["Adjusted operating income (expense)","$","918.5","","","18.6","%","","$","856.7","","","21.0","%","","$","202.3","","","23.8","%","","$","(140.5)"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","In the year ended December 31, 2021, we recognized $6.2 million of acquisition-related costs, primarily related to legal and professional fees and stamp taxes associated with the acquisition of Dreams."]] [[/GREPCENT_TABLE]] 27 Table of Contents The following table sets forth the reconciliation of our operating income (expense) and operating margin to the calculation of adjusted operating income (expense) and adjusted operating margin for the year ended December 31, 2020: [[GREPCENT_TABLE]] [["","FULL YEAR 2020"],["(in millions, except percentages)","Consolidated","","Margin","","North America","","Margin","","International","","Margin","","Corporate"],["Net sales","$","3,676.9","","","","","$","3,159.2","","","","","$","517.7","","","","","$","\u2014"],["Gross profit","$","1,638.4","","","44.6","%","","$","1,332.0","","","42.2","%","","$","306.4","","","59.2","%","","$","\u2014"],["Adjustments:"],["Incremental operating costs (1)","4.5","","","","","4.0","","","","","0.5","","","","","\u2014"],["Facility expansion costs (2)","0.6","","","","","0.6","","","","","\u2014","","","","","\u2014"],["Total adjustments","5.1","","","","","4.6","","","","","0.5","","","","","\u2014"],["Adjusted gross profit","$","1,643.5","","","44.7","%","","$","1,336.6","","","42.3","%","","$","306.9","","","59.3","%","","$","\u2014"],["Operating income (expense)","$","532.1","","","14.5","%","","$","591.4","","","18.7","%","","$","127.6","","","24.6","%","","$","(186.9)"],["Adjustments:"],["Aspirational plan amortization (3)","49.4","","","","","\u2014","","","","","\u2014","","","","","49.4"],["Customer-related charges (4)","11.7","","","","","11.7","","","","","\u2014","","","","","\u2014"],["Incremental operating costs (1)","7.2","","","","","4.3","","","","","2.9","","","","","\u2014"],["Asset impairments (5)","7.0","","","","","7.0","","","","","\u2014","","","","","\u2014"],["Restructuring costs (6)","3.8","","","","","\u2014","","","","","3.8","","","","","\u2014"],["Accounting standard adoption (7)","3.6","","","","","3.6","","","","","\u2014","","","","","\u2014"],["Aspirational plan employer costs (8)","2.3","","","","","\u2014","","","","","\u2014","","","","","2.3"],["Facility expansion costs (2)","0.6","","","","","0.6","","","","","\u2014","","","","","\u2014"],["Total adjustments","85.6","","","","","27.2","","","","","6.7","","","","","51.7"],["Adjusted operating income (expense)","$","617.7","","","16.8","%","","$","618.6","","","19.6","%","","$","134.3","","","25.9","%","","$","(135.2)"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","In the year ended December 31, 2020, we recorded $7.2 million of incremental operating costs and charges associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $2.7 million of charges related to increased sanitation supplies and services."],["(2)","In the year ended December 31, 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility."],["(3)","In the year ended December 31, 2020, we recognized $49.4 million which represented the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020 and the remaining requisite service period in the fourth quarter of 2020."],["(4)","In the year ended December 31, 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account."],["(5)","In the year ended December 31, 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets."],["(6)","In the year ended December 31, 2020, we incurred $3.8 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment."],["(7)","In the year ended December 31, 2020, we recorded $3.6 million of charges related to the adoption of ASU No. 2016-13, \"Financial Instruments - Credit Losses (Topic 326)\". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within its covenant compliance calculation."],["(8)","In the fourth quarter of 2020, we recognized $2.3 million of employer-related tax costs related to the aspirational plan compensation."]] [[/GREPCENT_TABLE]] EBITDA, Adjusted EBITDA and Consolidated Indebtedness Less Netted Cash     The following reconciliations are provided below: •Net income to EBITDA and adjusted EBITDA •Ratio of consolidated indebtedness less netted cash to adjusted EBITDA 28 Table of Contents •Total debt, net to consolidated indebtedness less netted cash     We believe that presenting these non-GAAP measures provides investors with useful information with respect to our operating performance, cash flow generation and comparisons from period to period, as well as general information about our progress in reducing our leverage. The 2019 Credit Agreement provides the definition of adjusted EBITDA. Accordingly, we present adjusted EBITDA to provide information regarding our compliance with requirements under the 2019 Credit Agreement. The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the years ended December 31, 2021 and 2020: [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions)","December 31, 2021","","December 31, 2020"],["Net income","$","624.5","","","$","348.8"],["Interest expense, net","61.1","","","77.0"],["Overlapping interest expense (1)","5.2","","","\u2014"],["Loss on extinguishment of debt (2)","23.0","","","5.1"],["Income tax provision","198.3","","","102.6"],["Depreciation and amortization","176.6","","","154.9"],["Aspirational plan amortization (3)","\u2014","","","49.4"],["EBITDA","$","1,088.7","","","$","737.8"],["Adjustments:"],["Loss from discontinued operations, net of tax (4)","0.7","","","\u2014"],["Acquisition-related costs (5)","6.2","","","\u2014"],["Earnings from Dreams/Sherwood prior to acquisition (6)","40.3","","","0.3"],["Customer-related charges (7)","\u2014","","","11.7"],["COVID-19 charges (8)","\u2014","","","7.9"],["Incremental operating costs (9)","\u2014","","","7.2"],["Asset impairments (10)","\u2014","","","7.0"],["Restructuring costs (11)","\u2014","","","3.8"],["Accounting standard adoption (12)","\u2014","","","3.6"],["Aspirational plan employer costs (13)","\u2014","","","2.3"],["Facility expansion costs (14)","\u2014","","","0.6"],["Other income (15)","\u2014","","","(2.3)"],["Adjusted EBITDA","$","1,135.9","","","$","779.9"],["Consolidated indebtedness less netted cash","$","2,053.7","","","$","1,306.7"],["Ratio of consolidated indebtedness less netted cash to adjusted EBITDA","1.81","times","","1.68","times"]] [[/GREPCENT_TABLE]] 29 Table of Contents [[GREPCENT_TABLE]] [["(1)","In the year ended December 31, 2021, we incurred $5.2 million of overlapping interest expense during the period between the issuance of the 2029 Senior Notes and the redemption of the 2026 Senior Notes."],["(2)","In the year ended December 31, 2021, we recognized $23.0 million of loss on extinguishment of debt associated with the redemption of the 2026 and 2023 senior notes. In the year ended December 31, 2020, we recognized $5.1 million of loss on extinguishment of debt associated with the redemption of the 2023 senior notes and the early repayment of the 364-day term loan."],["(3)","In the year ended December 31, 2020, we recognized $49.4 million which represented the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020 and the remaining requisite service period in the fourth quarter of 2020."],["(4)","Certain subsidiaries in the International business segment are accounted for as discontinued operations and have been designated as unrestricted subsidiaries in the 2019 Credit Agreement. Therefore, these subsidiaries are excluded from our adjusted financial measures for covenant compliance purposes."],["(5)","In the year ended December 31, 2021, we recognized $6.2 million of acquisition-related costs, primarily related to legal and professional fees and stamp taxes associated with the acquisition of Dreams."],["(6)","We completed the acquisition of Dreams on August 2, 2021 and designated this subsidiary as restricted under the 2019 Credit Agreement. For covenant compliance purposes, we included $40.3 million of EBITDA from this subsidiary for the seven months prior to acquisition in our calculation of adjusted EBITDA for the year ended December 31, 2021. We completed the acquisition of Sherwood Bedding on January 31, 2020 and designated this subsidiary as restricted under the 2019 Credit Agreement. For covenant compliance purposes, we included $0.3 million of EBITDA from this subsidiary for the one month prior to acquisition in our calculation of adjusted EBITDA for the trailing twelve months ended December 31, 2020."],["(7)","In the year ended December 31, 2020, we recorded $11.7 million of customer-related charges in connection with the bankruptcy of Art Van Furniture, LLC and affiliates to fully reserve trade receivables and other assets associated with this account."],["(8)","In the year ended December 31, 2020, adjusted EBITDA excluded $7.9 million of COVID-19 charges associated with temporarily closed company-owned retail stores and sales force retention costs."],["(9)","In the year ended December 31, 2020, we recorded $7.2 million of incremental operating costs and charges associated with the global pandemic. Cost of sales included $4.5 million of costs for relief efforts, increased sanitation supplies and services and other items. Operating expenses included $2.7 million of charges related to increased sanitation supplies and services."],["(10)","In the year ended December 31, 2020, we recorded $7.0 million of asset impairment charges related to the write-off of certain sales and marketing assets."],["(11)","In the year ended December 31, 2020, we incurred $3.8 million of restructuring costs associated with International headcount reductions driven by the macro-economic environment."],["(12)","In the year ended December 31, 2020, we recorded $3.6 million of charges related to the adoption of ASU No. 2016-13, \"Financial Instruments - Credit Losses (Topic 326)\". As permitted by the 2019 Credit Agreement, we elected to eliminate the effect of this accounting change within its covenant compliance calculation."],["(13)","In the fourth quarter of 2020, we recognized $2.3 million of employer-related tax costs related to the aspirational plan compensation."],["(14)","In the year ended December 31, 2020, we recorded $0.6 million of costs related to the opening of a Sealy manufacturing facility."],["(15)","In the fourth quarter of 2020, we recorded $2.3 million of other income related to the sale of a manufacturing facility."]] [[/GREPCENT_TABLE]] Under the 2019 Credit Agreement, the definition of adjusted EBITDA contains certain restrictions that limit adjustments to net income when calculating adjusted EBITDA. For the year ended December 31, 2021, our adjustments to net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2019 Credit Agreement. The ratio of consolidated indebtedness less netted cash to adjusted EBITDA was 1.81 times for the trailing twelve months ended December 31, 2021. The 2019 Credit Agreement requires us to maintain a ratio of consolidated indebtedness less netted cash to adjusted EBITDA of less than 5.00:1.00 times. The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of December 31, 2021 and 2020. "Consolidated Indebtedness" and "Netted Cash" are terms used in the 2019 Credit Agreement for purposes of certain financial covenants. [[GREPCENT_TABLE]] [["(in millions)","December 31, 2021","","December 31, 2020"],["Total debt, net","$","2,331.5","","","$","1,366.9"],["Plus: Deferred financing costs (1)","21.7","","","3.4"],["Consolidated indebtedness","2,353.2","","","1,370.3"],["Less: Netted cash (2)","299.5","","","63.6"],["Consolidated indebtedness less netted cash","$","2,053.7","","","$","1,306.7"]] [[/GREPCENT_TABLE]] 30 Table of Contents [[GREPCENT_TABLE]] [["(1)","We present deferred financing costs as a direct reduction from the carrying amount of the related debt in the Consolidated Balance Sheets. For purposes of determining total debt for financial covenant purposes, we added these costs back to total debt, net as calculated per the Consolidated Balance Sheets."],["(2)","Netted cash includes cash and cash equivalents for domestic and foreign subsidiaries designated as restricted subsidiaries in the 2019 Credit Agreement."]] [[/GREPCENT_TABLE]] Critical Accounting Estimates Our management is responsible for our financial statements and has evaluated the accounting policies to be used in their preparation. Our management believes these policies are reasonable and appropriate. The following discussion identifies those accounting policies that we believe are critical in the preparation of our financial statements, the judgments and uncertainties affecting the application of those policies and the possibility that materially different amounts will be reported under different conditions or using different assumptions. The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates. Revenue Recognition. Sales of product are recognized when the obligations under the terms of the contract with the customer are satisfied, which is generally when control of the product has transferred to the customer. Transferring control of each product sold is considered a separate performance obligation. We transfer control and recognize a sale when the product ships to the customer or when the customer receives the product based upon agreed shipping terms. Each unit sold is considered an independent, unbundled performance obligation. We do not have any additional performance obligations other than product sales that are material in the context of the contract. We extend volume discounts to certain customers and reflect these amounts as a reduction of net sales. We allow product returns through certain sales channels and on certain products. The accrued sales returns in the accompanying Consolidated Balance Sheet, which include a current balance in accrued expenses and other current liabilities and a non-current balance in other non-current liabilities, was $49.8 million and $44.9 million as of December 31, 2021 and 2020, respectively. 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. We considered the impact of recoverable salvage value on sales returns by product in determining its estimate of future sales returns. We recognized 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 our Consolidated Balance Sheets. Our level of sales returns differs by channel, with our Direct channel typically experiencing the higher rate of returns. In the event future sales returns claims are higher than our historical experiences, such as a 50 basis point increase, the impacts would not be material to the Consolidated Financial Statements. The allowance for credit losses is our best estimate of the amount of estimated lifetime credit losses in our accounts receivable. The allowance for credit losses included in accounts receivable, net in the accompanying Consolidated Balance Sheets was $62.1 million and $71.6 million as of December 31, 2021 and 2020, respectively. We regularly review the adequacy of its allowance for credit losses. We estimate 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, our 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 credit environment in which our customers operate has been relatively stable over the past few years. Historically, less than 1.0% of net sales ultimately prove to be uncollectible. However, there have been signs of deterioration in the U.S. retail sector, with certain key retailer bankruptcies over the last few years. Total bad debt expense was $2.7 million in 2021, $35.8 million in 2020 and $29.3 million in 2019 which were predominantly related to customer bankruptcies which were current on payments at the time proceedings began. If circumstances change, for example, due to the occurrence of higher-than-expected defaults or a significant adverse change in a major customer’s ability to meet our financial obligations such as bankruptcies, estimates of the recoverability of receivable amounts due could be reduced. We have not made any material changes in the accounting methodology we use to measure the estimated liability for sales returns or allowance for credit losses during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to establish the liability for sales returns and credit losses. However, if actual results are not consistent with our estimates or assumptions which are based on our historical experiences, we may be exposed to losses or gains that could be material. Income Taxes. Accounting for income taxes requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. We recognize deferred tax assets in our Consolidated Balance Sheets, and these deferred tax assets typically represent items deducted currently from operating income in the financial statements that will be deducted in future periods in tax returns. A valuation allowance is recorded against certain deferred tax assets to reduce the consolidated deferred tax asset to an amount that will, more likely than not, be realized in future periods. At December 31, 2021 the valuation allowance of $42.6 million was primarily related to certain tax attributes both domestically and in various foreign jurisdictions. The valuation allowance is based, in part, on our estimate of future taxable income, the expected utilization of foreign and state tax loss carryforwards, and credits and the expiration dates of such tax loss carryforwards. We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At December 31, 2021, our estimated gross unrecognized tax benefits were $45.3 million of which $29.1 million, if recognized, would favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. We have been involved in a dispute with SKAT regarding the Danish Tax Matter for tax years 2001 through current. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production process. During 2018, we negotiated a settlement with SKAT (the "Settlement") for the tax years 2001 through 2011 (the "Settlement Years"). During 2021, the Company resolved in all material respects the calculation of interest payable to SKAT related to the Settlement Years. As such, the Danish Tax Matter for the Settlement Years is considered closed in all material respects. In addition, we have entered into the APA Program for the tax years 2012 through 2022 in which the IRS, on our behalf, will negotiate directly with SKAT the royalty to be paid by the U.S. subsidiary to the Danish Subsidiary. We maintain an uncertain income tax liability for the tax years 2012 through 2021 that are included in the APA Program. If we are required to further increase the uncertain tax liability for any year after the Settlement Years based on a change in facts and circumstances, it could have a material impact on our reported earnings. Further, if the IRS and SKAT are unable to reach a mutually acceptable agreement with respect to the tax years included in the APA Program, we could be required to make a significant payment to SKAT for Danish tax related to such years, which could have a material adverse effect on our results of operations and liquidity.     Our liability for the Danish Tax Matter uncertain tax position is derived using a cumulative probability analysis with possible outcomes based on an evaluation of the facts and circumstances and applying the technical requirements applicable to U.S., Danish, and the international transfer pricing standards, taking into account both the U.S. and Danish income tax implications of such outcomes. The key assumption in these outcomes relates to the underlying royalty rate which the U.S. subsidiary would be required to pay to the Danish subsidiary. Assuming the U.S. IRS and SKAT conclude the APA with a mutually acceptable royalty rate, an increase in that royalty rate (over the rate used in our calculation of both the uncertain tax position and the correlative deferred tax asset associated with the U.S. tax benefit of the additional royalty expense) will increase the Danish income tax liability resulting from such agreement but also decrease the U.S. income tax liability associated with the correlative deduction for such additional royalty. For example, if the royalty rate agreed upon by the IRS and SKAT is 10% more per year than the rate used in our calculations of both the uncertain tax liability and correlative deferred tax asset, our uncertain tax position would increase approximately $8.0 million while the associated deferred tax asset for the U.S. correlative benefit would increase by approximately $2.2 million. Thus, the net impact on the income tax provision would be approximately $5.8 million. For a description of these matters and additional information please refer to Note 13, "Income Taxes," to the accompanying Consolidated Financial Statements. Goodwill and Indefinite-Lived Intangible Assets. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually as of October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred or when required by accounting standards. We test goodwill for impairment at the reporting unit level. Our reporting units are our North America segment, our International segment excluding Dreams and Dreams. Dreams was added as a separate reporting unit upon acquisition of the business on August 2, 2021. We test individual indefinite-lived intangible assets at the brand level. These assessments may be performed quantitatively or qualitatively. Using the quantitative approach, we make various estimates and assumptions in determining the estimated fair value of each reporting unit using a combination of discounted cash flow models and valuations based on earnings multiples for guideline public companies in each reporting unit’s industry peer group, when externally quoted market prices are not readily available. Discounted cash flow models are reliant on various assumptions, including projected business results, long-term growth factors and weighted-average cost of capital. Management judgement is involved in estimating these variables, and they include inherent uncertainties as they are forecasting future events. We perform sensitivity analyses by using a range of inputs to confirm the reasonableness of the long-term growth rate and weighted average cost of capital. Additionally, we compare the indicated equity value to our market capitalization and evaluate the resulting implied control premium/discount to determine if the estimated enterprise value is reasonable compared to external market indicators. Under the qualitative approach, we review macroeconomic conditions, industry and market conditions and entity specific factors, including strategies and financial performance for potential indicators of impairment. With the exception of the addition of the Dreams reporting unit, we have not made any changes in 2021 to our reporting units. Prior to 2021, Management performed an assessment of the impairment of goodwill for our reporting units and indefinite-lived intangible assets using a quantitative approach, which indicated that the fair values of each of our reporting units and indefinite-lived intangible assets were substantially in excess of their carrying values. In 2021, we elected to qualitatively perform our annual impairment analysis for all reporting units and indefinite-lived intangible assets. Subsequent to our October 1, 2021 annual impairment test, no indications of impairment were identified. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill and indefinite-lived intangible assets. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material. Business Combinations. Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of the purchase price over the acquisition date fair values of the assets acquired and the liabilities assumed. Management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. We make various estimates and assumptions in determining the estimated fair value of intangible assets acquired, which include assumptions about the period of time the acquired tradenames will continue to be valuable, projected business results, long-term growth factors, discount rates and royalty rates. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. If actual results are materially different than the assumptions used to determine fair value of the assets acquired and liabilities assumed through a business combination, or the useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations. Furthermore, if actual results are not consistent with estimates or assumptions, the Company may be exposed to an impairment charge that could materially adversely impact its consolidated financial position and results of operations. For additional information of our recent acquisitions, please refer to Note 3, "Acquisitions and Divestitures," to the accompanying Consolidated Financial Statements in Part II, ITEM 8 of this report. 31 Table of Contents