Somnigroup International Inc.: Form 10-Q for the period ended Jun 30, 2025

The following discussion and analysis should be read in conjunction with the 2024 Annual Report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in ITEM 7 of Part II of the 2024 Annual Report, and the accompanying Condensed Consolidated Financial Statements and notes thereto included in this Report. Unless otherwise noted, all of the financial information in this Report is consolidated financial information for the Company. The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" elsewhere in this Report and in the 2024 Annual Report, the section titled "Risk Factors" contained in ITEM 1A of Part I of the 2024 Annual Report. Our actual results may differ materially from those contained in any forward-looking statements.

In this discussion and analysis, we discuss and explain the consolidated financial condition and results of operations for the three and six months ended June 30, 2025, 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 the world's largest bedding company, dedicated to improving people's lives through better sleep. With superior capabilities in design, manufacturing, distribution and retail, we deliver breakthrough sleep solutions and serve the evolving needs of consumers in more than 100 countries worldwide through our fully-owned businesses, Tempur Sealy, Mattress Firm and Dreams.

We operate in three segments: Tempur Sealy North America, Tempur Sealy International and Mattress Firm. These segments are strategic business units that are managed separately. Our Tempur Sealy North America segment consists of manufacturing, distribution and retail subsidiaries and licensees located in the U.S., Canada and Mexico (other than Mattress Firm retail and distribution locations). Our Tempur Sealy International segment consists of manufacturing, distribution and retail subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America (other than Mexico). The Mattress Firm segment consists of retail stores and distribution centers located in the U.S. Corporate operating expenses are not included in any 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 12, "Business Segment Information," included in Part I, ITEM 1 of this Report.

Our portfolio includes the most highly recognized brands in the industry, including Tempur-Pedic®, Sealy®, Stearns & Foster®, and Sleepy's® and our global omni-channel platform enables us to meet consumers wherever they shop, offering a personal connection and innovation to provide a unique retail experience and tailored sleep solutions. Our products allow for complementary merchandising strategies and are sold through third-party retailers, our 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 the Tempur Sealy North America and Tempur Sealy International operating business segments: Wholesale and Direct. We distribute through one channel in the Mattress Firm operating business segment: Direct. Our Wholesale channel consists of third-party retailers, including third-party distribution, hospitality and healthcare. Our Direct channel includes company-owned stores, online and call centers.

General Business and Economic Conditions

We believe the bedding industry is structured for sustained growth, driven by product innovation, 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 last decade, consumers have made the connection between a good night's sleep and overall health and wellness. As consumers make this connection, they are willing to invest more in their bedding purchases, which positions us well for long-term growth.

The global bedding industry was challenged in 2024 due to certain macroeconomic pressures on the consumer, and we expect these pressures to continue throughout 2025. Ongoing geopolitical conflicts, including trade disputes and the imposition of tariffs, may also introduce further uncertainty for the consumer. We have taken actions to mitigate the impact of proposed tariffs, and we implemented pricing actions to mitigate the remaining impact. The majority of our products sold are also manufactured in the U.S. Accordingly, we believe proposed tariffs will not have a material impact on our results of operations in 2025. However, the duration and extent of tariffs remain uncertain, and we are continuing to evaluate the potential future impacts of the imposition of tariffs. We expect to outperform the bedding industry as a result of our investments in new product launches and continued investments in innovation, quality, advertising and customer service.

Acquisition of Mattress Firm

On February 5, 2025, we completed the Mattress Firm Acquisition for an aggregate purchase price of approximately $5.1 billion, net of cash acquired of $0.3 billion. The aggregate purchase price consisted of $3.1 billion in cash and approximately 34.2 million shares of common stock valued at $65.65 per share, which represents the simple average of the opening and closing price per share of our common stock on the NYSE on the trading day immediately prior to the date of acquisition, with the value of any fractional shares paid in cash.

In connection with the consummation of the merger, we borrowed $625.0 million on the Delayed Draw Term A Loan and $679.5 million of revolving commitments under our senior credit facility. In addition, approximately $1,592.0 million of proceeds in respect of the Term B Loan were released from escrow. The proceeds of this financing were collectively used to fund a portion of the cash consideration, for the repayment of Mattress Firm's debt and for the payment of certain fees and expenses related to the merger.

Mattress Firm operates as a separate business segment. Mattress Firm's financial results for the periods from April 1, 2025 through June 30, 2025 and February 5, 2025 through June 30, 2025 (the "stub period") are included in the Company's Condensed Consolidated Financial Statements for the three and six months ended June 30, 2025, respectively.

On May 1, 2025, we completed the previously announced divestiture of 73 Mattress Firm retail locations and our Sleep Outfitters subsidiary, which includes 103 specialty mattress retail locations and seven distribution centers, to MW SO Holdings Company, LLC ("Mattress Warehouse"). In the three months ended June 30, 2025, the Company recorded a $13.9 million loss on disposal of business associated with the divestiture, net of proceeds of $9.0 million. We do not expect the divestiture to have a material impact on our results of operations for the twelve months ended December 31, 2025.

Product Launches

In 2025, we launched an all-new collection of Sealy Posturepedic products in North America. This reinvention of the Sealy Posturepedic® brand is strategically aimed at reigniting growth in the mid-to-entry level market, which has experienced outsized pressures relative to other price points in recent years. The new collection incorporates innovative technologies, including our proprietary PrecisionFit™ coils which were expertly designed to provide superior support.

Results of Operations

A summary of our results for the three months ended June 30, 2025 include:

• Total net sales increased 52.5% to $1,880.8 million as compared to $1,233.6 million in the second quarter of 2024, primarily driven by the inclusion of $948.8 million of Mattress Firm sales for the quarter, offset by the elimination of $263.5 million of sales from the Tempur Sealy North America segment to the Mattress Firm segment.
• Gross margin was 44.0% as compared to 42.0% in the second quarter of 2024. Adjusted gross margin, which is a non-GAAP financial measure, was 44.2% as compared to 42.0% in the second quarter of 2024.
• Operating income increased 3.8% to $179.9 million as compared to $173.3 million in the second quarter of 2024. Adjusted operating income, which is a non-GAAP financial measure, increased 24.3% to $224.4 million as compared to $180.6 million in the second quarter of 2024, primarily driven by the inclusion of Mattress Firm.
• Net income decreased 6.7% to $99.0 million as compared to $106.1 million in the second quarter of 2024. Adjusted net income, which is a non-GAAP financial measure, increased 1.3% to $113.1 million as compared to $111.7 million in the second quarter of 2024.
• Earnings per diluted share ("EPS") decreased 21.7% to $0.47 as compared to $0.60 in the second quarter of 2024. Adjusted EPS, which is a non-GAAP financial measure, decreased 15.9% to $0.53 as compared to $0.63 in the second quarter of 2024.

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

THREE MONTHS ENDED JUNE 30, 2025 COMPARED TO THE

THREE MONTHS ENDED JUNE 30, 2024

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

(in millions, except percentages and per share amounts)

29

NET SALES

(in millions)

Net sales increased 52.5%, and on a constant currency basis increased 51.7%. The change in net sales was driven by the following:

• Tempur Sealy North America net sales decreased $340.0 million, or 34.8%. Net sales in the Wholesale channel decreased $320.8 million, primarily driven by a 30.8% decline from the elimination of intercompany sales to Mattress Firm of $263.5 million, and a 6.7% decrease in sales of $57.3 million, primarily driven by a customer's acquisition which foreclosed distribution to this customer. Net sales in the Direct channel decreased $19.2 million, or 15.5%, primarily driven by a decrease in sales due to the divestiture of Sleep Outfitters.
• Tempur Sealy International net sales increased $38.4 million, or 15.0%, primarily driven by the success of new product launches. On a constant currency basis, International net sales increased 10.0%. Net sales in the Wholesale channel increased 10.2% on a constant currency basis. Net sales in the Direct channel increased 9.8% on a constant currency basis.
• Mattress Firm net sales were $948.8 million for the three months ended June 30, 2025.

GROSS PROFIT

(in millions, except percentages)

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. Cost of sales also includes retail store occupancy costs such as rent, common area maintenance charges, real estate and other asset-based taxes, general maintenance, utilities, depreciation and certain insurance expenses.

Our gross margin is primarily impacted by the relative amount of net sales contributed by our premium or value products. Our value products have a significantly lower gross margin than our premium products. If sales of our value priced products increase relative to sales of our premium priced products, our gross margins will be negatively impacted across all segments.

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

Gross margin improved 200 basis points. The primary drivers of changes in gross margin by segment are discussed below:

• Tempur Sealy North America gross margin improved 1,430 basis points. The improvement in gross margin was primarily driven by the elimination of sales to Mattress Firm of 1,590 basis points and operational efficiencies of 60 basis points. These improvements were partially offset by expense deleverage of 130 basis points and product launch costs.
• Tempur Sealy International gross margin declined 40 basis points. The decline in gross margin was primarily driven by commodity cost inflation.
• Mattress Firm gross margin was 35.6% for the three months ended June 30, 2025.

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, IT, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing, distribution and retail store operations, expenses for administrative functions and research and development costs.

(in millions)

Operating expenses increased $289.0 million, or 83.2%, and increased 560 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained below:

• Tempur Sealy North America operating expenses decreased $5.0 million, or 2.3%, and increased 1,080 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreases in other selling and marketing and general, administrative and other expenses, partially offset by investments in advertising.
• Tempur Sealy International operating expenses increased $9.6 million, or 10.1%, and decreased 160 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by investments in growth initiatives.
• Mattress Firm operating expenses were $270.1 million for the three months ended June 30, 2025.
• Corporate operating expenses increased $14.3 million, or 36.8%. The increase in operating expenses was primarily driven by business combination charges related to the Mattress Firm Acquisition.

Research and development expenses for the three months ended June 30, 2025 were $7.8 million, compared to $7.7 million for the three months ended June 30, 2024.

OPERATING INCOME

(in millions, except percentages)

Operating income increased $6.6 million and operating margin declined 440 basis points. The primary drivers of changes in operating income and operating margin by segment are discussed below:

• Tempur Sealy North America operating income decreased $50.3 million and operating margin improved 200 basis points. The improvement in operating margin was primarily driven by the improvement in gross margin of 1,430 basis points, partially offset by operating expense deleverage of 1,080 basis points. Additionally, we incurred a $9.8 million loss on disposal of business associated with the divestiture of Sleep Outfitters.
• Tempur Sealy International operating income increased $8.0 million and operating margin improved 110 basis points. The improvement in operating margin was driven by operating expense leverage of 160 basis points, partially offset by the decline in gross margin of 40 basis points and Asia joint venture performance.
• Mattress Firm operating income was $63.2 million and operating margin was 6.7% for the three months ended June 30, 2025. Additionally, we incurred a $4.1 million loss on disposal of business associated with the divestiture of 73 retail stores.
• Corporate operating expenses increased $14.3 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

(in millions, except percentages)

Interest expense, net, increased $39.1 million, or 117.1%. The increase in interest expense, net, was primarily driven by increased average levels of outstanding variable rate debt.

INCOME TAX PROVISION

(in millions, except percentages)

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

Our income tax provision decreased $30.8 million driven by certain discrete items, as discussed below, and a decrease in income before income taxes. Our effective tax rate for the three months ended June 30, 2025 as compared to the prior year declined by 2,110 basis points. The effective tax rate as compared to the U.S. federal statutory rate for the three months ended June 30, 2025 included the favorable impact of the deductibility of stock compensation in the U.S. and a net unfavorable impact of other discrete items. The effective tax rate as compared to the U.S. federal statutory rate for the three months ended June 30, 2024 included a net favorable impact of other discrete items.

SIX MONTHS ENDED JUNE 30, 2025 COMPARED TO THE

SIX MONTHS ENDED JUNE 30, 2024

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

(in millions, except percentages and per share amounts)

32

NET SALES

(in millions)

Net sales increased 43.9%, and on a constant currency basis increased 44.0%. The change in net sales was driven by the following:

• Tempur Sealy North America net sales decreased $534.9 million, or 28.5%. Net sales in the Wholesale channel decreased $513.2 million, or 31.5%, primarily driven by a 24.2% decline from the elimination of intercompany sales to Mattress Firm of $393.6 million, and a 7.3% decrease in sales of $119.6 million, primarily driven by a customer's acquisition which foreclosed distribution to this customer. Net sales in the Direct channel decreased $21.7 million, or 8.8%, primarily driven by a decrease in sales from the divestiture of Sleep Outfitters.
• Tempur Sealy International net sales increased $54.9 million, or 10.1%, primarily driven by the success of new product launches. On a constant currency basis, International net sales increased $47.8 million, or 8.8%. Net sales in the Wholesale channel increased 9.3% on a constant currency basis. Net sales in the Direct channel increased 8.5% on a constant currency basis.
• Mattress Firm net sales were $1,542.5 million for the stub period.

GROSS PROFIT

(in millions, except percentages)

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. Cost of sales also includes retail store occupancy costs such as rent, common area maintenance charges, real estate and other asset-based taxes, general maintenance, utilities, depreciation and certain insurance expenses.

Gross margin declined 50 basis points. The primary drivers of changes in gross margin by segment are discussed below:

• Tempur Sealy North America gross margin improved 480 basis points. The improvement in gross margin was primarily driven by elimination of intercompany sales to Mattress Firm of 990 basis points, operational efficiencies of 90 basis points and favorable mix. These improvements were partially offset by expense deleverage of 130 basis points, commodity cost inflation and product launch costs. Additionally, we incurred $78.0 million of one-time business combination accounting adjustments related to the Mattress Firm Acquisition.
• Tempur Sealy International gross margin improved 50 basis points. The improvement in gross margin was primarily driven by decreased product launch costs.
• Mattress Firm gross margin was 34.3% for the stub period.

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, IT, professional fees, depreciation and amortization of long-lived assets not used in the manufacturing process, expenses for administrative functions and research and development costs.

(in millions)

Operating expenses increased $513.4 million, or 73.9%, and increased 600 basis points as a percentage of net sales. The primary drivers of changes in operating expenses by segment are explained below:

• Tempur Sealy North America operating expenses decreased $7.6 million, or 1.8%, and increased 820 basis points as a percentage of net sales. The decrease in operating expenses was primarily driven by decreases in other selling and marketing and general, administrative and other expenses, partially offset by investments in advertising.
• Tempur Sealy International operating expenses increased $14.9 million, or 7.7%, and decreased 80 basis points as a percentage of net sales. The increase in operating expenses was primarily driven by investments in growth initiatives.
• Mattress Firm operating expenses were $454.5 million for the stub period.
• Corporate operating expenses increased $51.6 million, or 59.6%. The increase in operating expenses was primarily driven by business combination charges related to the Mattress Firm Acquisition.

Research and development expenses were $15.9 million for the six months ended June 30, 2025 as compared to $15.8 million for the six months ended June 30, 2024, an increase of $0.1 million, or 0.6%.

OPERATING INCOME

(in millions, except percentages)

Operating income decreased $111.7 million and operating margin declined 710 basis points. The primary drivers of changes in operating income and operating margin by segment are discussed below:

• Tempur Sealy North America operating income decreased $144.4 million and operating margin declined 400 basis points. The decline in operating margin was primarily driven by operating expense deleverage of 820 basis points, offset by the improvement in gross margin of 480 basis points. Additionally, we incurred a $9.8 million loss on disposal of business associated with the divestiture of Sleep Outfitters.
• Tempur Sealy International operating income increased $14.3 million and operating margin improved 110 basis points. The improvement in operating margin was primarily driven by operating expense leverage of 80 basis points and the improvement in gross margin of 50 basis points, partially offset by Asia joint venture performance.
• Mattress Firm operating income was $70.0 million and operating margin was 4.5% for the stub period. Additionally, we incurred a $4.1 million loss on disposal of business associated with the divestiture of 73 retail stores.
• Corporate operating expenses increased $51.6 million, which negatively impacted our consolidated operating margin.

INTEREST EXPENSE, NET

(in millions, except percentages)

Interest expense, net, increased $66.1 million, or 97.6%. The increase in interest expense, net, was primarily driven by increased average levels of outstanding variable rate debt.

INCOME TAX PROVISION

(in millions, except percentages)

Our income tax provision decreased $68.0 million driven by a decrease in income before income taxes and certain discrete items, as discussed below. Our effective tax rate for the six months ended June 30, 2025 as compared to the prior year declined 4,790 basis points. The effective tax rate as compared to the U.S. federal statutory rate for the six months ended June 30, 2025 and 2024 included the net favorable impact of the deductibility of stock compensation in the U.S., which was offset by the unfavorable impact of discrete items.

Liquidity and Capital Resources

Liquidity

Our principal sources of funds are cash flows from operations, supplemented with borrowings in the capital markets and made pursuant to our credit facilities and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal and interest on our debt facilities, acquisitions, payments of dividends to our shareholders, capital expenditures and working capital needs.

Cash and Working Capital

Cash and cash equivalents were $98.1 million and $117.4 million as of June 30, 2025 and December 31, 2024, respectively. We had a working capital deficit of $294.5 million as of June 30, 2025, as compared to working capital of $105.1 million as of December 31, 2024. The reduction in our working capital to a deficit position in 2025 was primarily driven by a $250.5 million increase in our short-term operating lease obligations as a result of the Mattress Firm Acquisition, and we expect to operate with a working capital deficit in the future.

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) Operations

The table below presents net cash provided by (used in) operating, investing and financing activities from operations for the periods indicated below:

(in millions)

Cash provided by operating activities increased $11.7 million in the six months ended June 30, 2025 as compared to the same period in 2024. The increase in cash provided by operating activities was driven by a $70.6 million increase in cash provided by changes in operating assets and liabilities and a $36.5 million increase in non-cash depreciation expense, primarily associated with our new Tempur manufacturing facility, offset by a $116.6 million decrease in net income.

Cash used in investing activities increased $2,818.4 million in the six months ended June 30, 2025 as compared to the same period in 2024. The increase in cash used in investing activities was primarily driven by the Mattress Firm Acquisition.

Cash provided by financing activities increased $1,135.2 million in the six months ended June 30, 2025 as compared to the same period in 2024. For the six months ended June 30, 2025, we had net borrowings of $1,098.5 million on our credit facilities as compared to net repayments of $93.7 million in the same period in 2024. We paid dividends to shareholders of $64.4 million and $47.5 million, during the six months ended June 30, 2025 and 2024, respectively. Additionally, we repurchased $132.4 million and $43.8 million of our common stock to satisfy tax withholding obligations upon the vesting of our long-term incentive plans during the six months ended June 30, 2025 and 2024, respectively. Proceeds from exercise of stock options increased $48.8 million as compared to the same period in 2024.

Capital Expenditures

Capital expenditures totaled $60.7 million and $60.0 million for the six months ended June 30, 2025 and 2024, respectively. We currently expect our 2025 capital expenditures to be approximately $200 million, including $25 million of investments to refresh Mattress Firm stores.

Indebtedness

Our total debt increased to $4,951.6 million as of June 30, 2025 from $3,844.5 million as of December 31, 2024. Total availability under our revolving senior secured credit facility was $707.7 million as of June 30, 2025. Refer to Note 5, "Debt" in the "Notes to Condensed Consolidated Financial Statements," under Part I, ITEM 1 for further discussion of our debt.

As of June 30, 2025, our ratio of consolidated indebtedness less netted cash to adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA"), which is a non-GAAP financial measure, in accordance with our 2023 Credit Agreement was 3.56 times. This ratio is within the terms of the financial covenants for the maximum consolidated total net leverage ratio as set forth in the 2023 Credit Agreement, which limits this ratio to 5.00 times. As of June 30, 2025, 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 2023 Credit Agreement, 2029 Senior Notes and 2031 Senior Notes contain similar limitations which, subject to certain conditions, allow unlimited restricted payments at times when the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, remains below 3.75 times in the case of the 2023 Credit Agreement and remains below 3.50 times in the cases of the 2029 Senior Notes and 2031 Senior Notes. 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 3.75 times in the case of the 2023 Credit Agreement and above 3.50 times in the cases of the 2029 Senior Notes and 2031 Senior Notes. The limit on restricted payments under the 2023 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.

For additional information, refer to "Non-GAAP Financial Information" below for the calculation of the ratio of consolidated indebtedness less netted cash to adjusted EBITDA calculated in accordance with the 2023 Credit Agreement. Both consolidated indebtedness and adjusted EBITDA as used in discussion of the 2023 Credit Agreement are non-GAAP financial measures and do not purport to be alternatives to net income as a measure of operating performance or total debt.

Share Repurchase Program

Our Board of Directors authorized a share repurchase program in 2016 pursuant to which we were authorized to repurchase shares of our common stock, and the Board of Directors has authorized increases to this authorization from time to time. During the six months ended June 30, 2025, we did not repurchase shares under our share repurchase program. As of June 30, 2025, we had $774.5 million remaining under our share repurchase authorization.

Share repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate. These repurchases may be funded by operating cash flows and/or borrowings under our debt arrangements. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program is subject to certain limitations under our debt agreements. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under federal securities laws.

We manage our share repurchase program based on current and expected cash flows, share price and alternative investment opportunities. In 2025, we expect to engage in strategic share repurchases as we primarily focus on debt repayment to reduce leverage to our target ratio of 2.0 to 3.0 times. For a complete description of our share repurchase program, please refer to ITEM 5 under Part II, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," in the 2024 Annual Report. Please also refer to "Issuer Purchases of Equity Securities" in ITEM 2(c) of Part II of this Report.

Future Liquidity Sources and Uses

As of June 30, 2025, we had $805.8 million of liquidity, including $98.1 million of cash on hand and $707.7 million available under our 2023 Credit Agreement. In addition, we expect to generate cash flow from operations in the full year 2025. 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, debt service obligations and dividend payments.

Our capital allocation strategy follows a balanced approach focused on supporting the business, returning shareholder value through strategic acquisition opportunities that enhance our global competitiveness, as well as quarterly dividends and opportunistic share repurchases.

The Board of Directors declared a dividend of $0.15 per share for the third quarter of 2025. The dividend is payable on September 5, 2025 to shareholders of record as of August 21, 2025.

As of June 30, 2025, we had $4,951.6 million in total debt outstanding and consolidated indebtedness less netted cash, which is a non-GAAP financial measure, of $4,853.5 million. Leverage based on the ratio of consolidated indebtedness less netted cash to adjusted EBITDA, which is a non-GAAP financial measure, was 3.56 times for the trailing twelve months ended June 30, 2025. We currently expect our target leverage ratio to return to 2.0 to 3.0 times in 2026. Total cash interest payments related to our borrowings are expected to be between approximately $260 million to $265 million in 2025.

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.

Non-GAAP Financial Information

We provide information regarding adjusted net income, EBITDA, adjusted EBITDA, adjusted EPS, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, 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 operations and trends, and we use these measures along with the corresponding GAAP financial measures to manage our business, to evaluate our consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. These non-GAAP financial measures should be considered supplemental in nature and should not be construed as more significant than comparable financial measures defined by GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. For more information about these non-GAAP financial measures and a reconciliation to the nearest GAAP financial measure, please refer to the reconciliations on the following pages.

Adjusted Net Income and Adjusted EPS

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

The following table sets forth the reconciliation of our reported net income to adjusted net income and the calculation of adjusted EPS for the three months ended June 30, 2025 and 2024:

(in millions, except per share amounts)

(1) In the second quarter of 2025, we recorded $17.6 million of business combination charges, primarily related to the CEO transaction bonus, professional fees and restructuring costs.

(2) In the second quarter of 2025, we recorded a $13.9 million loss on disposal of business, net of proceeds of $9.0 million, associated with the divestiture of 73 Mattress Firm stores and our Sleep Outfitters subsidiary.

(3) In the second quarter of 2025, we recorded $9.2 million of disposition-related costs. Cost of sales included $3.7 million, primarily related to retail store transition costs incurred for the divestiture to Mattress Warehouse. Operating expenses included $3.7 million of merchandising, store personnel and other support costs related to the divestiture. Other expenses included a $1.8 million loss on disposal for assets not divested to Mattress Warehouse.

(4) In the second quarter of 2025, we recorded $4.9 million of transaction costs associated with the Term B Loan repricing and the divestiture of 73 Mattress Firm stores and our Sleep Outfitters subsidiary, which primarily included legal and professional fees. In the second quarter of 2024, we recorded $7.3 million of transaction costs primarily related to legal and professional fees associated with the Mattress Firm Acquisition.

(5) In the second quarter of 2025, we recorded $1.3 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $0.7 million recorded in cost of sales and $0.6 million recorded in other expenses.

(6) Adjusted income tax provision represents the tax effects associated with the aforementioned items.

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

The following table sets forth the reconciliation of our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended June 30, 2025.

(in millions, except percentages)

(1) In the second quarter of 2025, we recorded $9.2 million of disposition-related costs. Cost of sales included $3.7 million, primarily related to retail store transition costs incurred for the divestiture to Mattress Warehouse. Operating expenses included $3.7 million of merchandising, store personnel and other support costs related to the divestiture. Other expenses included a $1.8 million loss on disposal for assets not divested to Mattress Warehouse.

(2) In the second quarter of 2025, we recorded $1.3 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $0.7 million recorded in cost of sales and $0.6 million recorded in other expenses.

(3) In the second quarter of 2025, we recorded $17.6 million of business combination charges, primarily related to the CEO transaction bonus, professional fees and restructuring costs.

(4) In the second quarter of 2025, we recorded a $13.9 million loss on disposal of business, net of proceeds of $9.0 million, associated with the divestiture of 73 Mattress Firm stores and our Sleep Outfitters subsidiary.

(5) In the second quarter of 2025, we recorded $4.9 million of transaction costs associated with the Term B Loan repricing and the divestiture of 73 Mattress Firm stores and our Sleep Outfitters subsidiary, which primarily included legal and professional fees.

The following table sets forth our reported gross profit and operating income (expense) to the calculation of adjusted gross profit and adjusted operating income (expense) for the three months ended June 30, 2024.

(in millions, except percentages)

(1) In the second quarter of 2024, we recorded $7.3 million of transaction costs, primarily related to legal and professional fees associated with the Mattress Firm Acquisition.

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
• 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 leverage.

The 2023 Credit Agreement provides the definition of adjusted EBITDA. Accordingly, we present adjusted EBITDA to provide information regarding our compliance with requirements under the 2023 Credit Agreement.

The following table sets forth the reconciliation of our reported net income to the calculations of EBITDA and adjusted EBITDA for the three months ended June 30, 2025 and 2024:

(in millions)

(1) In the second quarter of 2025, we recorded $17.6 million of business combination charges, primarily related to the CEO transaction bonus, professional fees and restructuring costs.

(2) In the second quarter of 2025, we recorded a $13.9 million loss on disposal of business, net of proceeds of $9.0 million, associated with the divestiture of 73 Mattress Firm stores and our Sleep Outfitters subsidiary.

(3) In the second quarter of 2025, we recorded $9.2 million of disposition-related costs. Cost of sales included $3.7 million, primarily related to retail store transition costs incurred for the divestiture to Mattress Warehouse. Operating expenses included $3.7 million of merchandising, store personnel and other support costs related to the divestiture. Other expenses included a $1.8 million loss on disposal for assets not divested to Mattress Warehouse.

(4) In the second quarter of 2025, we recorded $4.9 million of transaction costs associated with the Term B Loan repricing and the divestiture of 73 Mattress Firm stores and our Sleep Outfitters subsidiary, which primarily included legal and professional fees. In the second quarter of 2024, we recorded $7.3 million of transaction costs primarily related to legal and professional fees associated with the Mattress Firm Acquisition.

(5) In the second quarter of 2025, we recorded $1.3 million of supply chain transition costs associated with the consolidation of certain manufacturing facilities, with $0.7 million recorded in cost of sales and $0.6 million recorded in other expenses.

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The following table sets forth the reconciliation of our net income to the calculations of EBITDA and adjusted EBITDA for the trailing twelve months ended June 30, 2025:

(in millions)

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(1) In the trailing twelve months ended June 30, 2025, we incurred $16.6 million of transaction-related interest expense, net of interest income, related to the Term B Loan drawn and held in escrow. The proceeds of the Term B Loan were released upon the closing of the Mattress Firm Acquisition on February 5, 2025.

(2) In the trailing twelve months ended June 30, 2025, we recognized $114.2 million of acquisition-related costs, primarily related to one-time business combination accounting and purchase price allocation adjustments.

(3) In the trailing twelve months ended June 30, 2025, we recognized $82.5 million of transaction costs associated with the Mattress Firm Acquisition.

(4) In the trailing twelve months ended June 30, 2025, we recorded $26.7 million of transition charges as a result of a customer's acquisition which foreclosed on our OEM distribution to this customer.

(5) In the trailing twelve months ended June 30, 2025, we recorded $17.6 million of business combination charges, primarily related to the CEO transaction bonus, professional fees and restructuring costs.

(6) In the trailing twelve months ended June 30, 2025, we recognized $14.3 million in supply chain transition costs associated with the consolidation of certain manufacturing facilities.

(7) In the second quarter of 2025, we recorded a $13.9 million loss on disposal of business, net of proceeds of $9.0 million, associated with the divestiture of 73 Mattress Firm stores and our Sleep Outfitters subsidiary.

(8) In the second quarter of 2025, we recorded $9.2 million of disposition-related costs.

(9) In the trailing twelve months ended June 30, 2025, we received proceeds of $4.9 million for an insurance claim related to the previously disclosed cybersecurity event identified on July 23, 2023.

(10) A subsidiary in the Tempur Sealy North America business segment was accounted for as held for sale and designated as an unrestricted subsidiary under the 2023 Credit Agreement. Therefore, this subsidiary's financial results were excluded from our adjusted financial measures for covenant compliance purposes.

(11) We completed the Mattress Firm Acquisition on February 5, 2025 and designated the Mattress Firm subsidiary as restricted under the 2023 Credit Agreement. For covenant compliance purposes, we included $223.4 million of Mattress Firm EBITDA for the period prior to acquisition in our calculation of adjusted EBITDA per the credit facility for the trailing twelve months ended June 30, 2025.

(12) For the trailing twelve months ended June 30, 2025, we are permitted to include $100.0 million of future cost synergies expected to be realized in connection with acquisitions for the purpose of calculating our adjusted EBITDA in accordance with the 2023 Credit Agreement.

Under the 2023 Credit Agreement, the ratio of adjusted EBITDA to consolidated indebtedness less netted cash was 3.56 times for the trailing twelve months ended June 30, 2025. The 2023 Credit Agreement requires us to maintain a ratio of consolidated indebtedness less netted cash to adjusted EBITDA of less than 5.00 times.

The following table sets forth the reconciliation of our reported total debt to the calculation of consolidated indebtedness less netted cash as of June 30, 2025. "Consolidated Indebtedness" and "Netted Cash" are terms used in the 2023 Credit Agreement for purposes of certain financial covenants.

(in millions)

(1) We present deferred financing costs as a direct reduction from the carrying amount of the related debt in the Condensed Consolidated Balance Sheets. For purposes of determining total debt for financial covenant purposes, we have added these costs back to total debt, net as calculated per the Condensed Consolidated Balance Sheets.

(2) Netted cash includes cash and cash equivalents for domestic and foreign subsidiaries designated as restricted subsidiaries in the 2023 Credit Agreement.

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Critical Accounting Policies and Estimates

During the six months ended June 30, 2025, there were no material changes to our critical accounting policies and estimates as described in our 2024 Annual Report, except as set forth below.

Business Combinations. We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques when fair value is not readily available and requires a significant amount of management judgment. For the valuation of intangible assets acquired in the Mattress Firm Acquisition, we applied the income approach through a relief from royalty method. Although we believe these estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair values of the intangible assets acquired.

The excess of the purchase price over fair values of identifiable assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill due to the use of preliminary information in our initial estimates. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

For additional discussion of our critical accounting policies and estimates, please refer to ITEM 7 under Part II, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in the 2024 Annual Report.

The Company's market risks are discussed in detail in ITEM 7A of Part II of our 2024 Annual Report. Management has reassessed the quantitative and qualitative market risk disclosures described in our 2024 Annual Report and determined there were no material changes to the Company's foreign currency exposure for the six months ended June 30, 2025.

Interest Rate Risk

Our primary exposure to interest rate risk is due to our variable-rate debt agreements, including our 2023 Credit Agreement. These variable-rate debt agreements use Secured Overnight Financing Rate ("SOFR"), which is subject to fluctuation and uncertainty. As of June 30, 2025, the value of our variable-rate debt was $3,255.4 million. A sensitivity analysis indicates that, holding other variables constant, including levels of indebtedness, a one hundred basis point increase in interest rates on our variable-rate debt would cause an estimated reduction in income before income taxes of approximately $32.6 million. We continue to evaluate the interest rate environment and look for opportunities to improve our debt structure and minimize interest rate risk and expense.

Foreign Currency Exchange Risk

During the second quarter of 2025, we converted $25.0 million of our 4.00% fixed-rate USD-denominated 2029 Senior Notes, including the semi-annual interest payments thereunder, to fixed-rate DKK denominated debt at rate of 1.9230%. We have designated these cross currency swap agreements as net investment hedges.

During July 2025, we converted an additional $75.0 million of our 4.00% fixed-rate USD-denominated 2029 Senior Notes, including the semi-annual interest payments thereunder, to fixed-rate DKK denominated debt at a rate of 1.8547%.

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2025, and were designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting:

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the Mattress Firm Acquisition. During the six months ended June 30, 2025, we completed the Mattress Firm Acquisition resulting in Mattress Firm's controls being included within our internal controls over financial reporting. Subsequent to the Mattress Firm Acquisition, we have begun integration and controls assessment activities. In accordance with the SEC's published guidance, because we acquired these operations during the fiscal year, these operations will be excluded from our assessment of internal control over financial reporting for the year ending December 31, 2025.