10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 001-31922
TEMPUR SEALY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
33-1022198
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 1000 Tempur Way
Lexington, Kentucky 40511
(Address, including zip code, of principal executive offices)
 
Registrant’s telephone number, including area code: (800) 878-8889
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o 
Smaller reporting company o
 
 
(Do not check if a smaller reporting company) 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨  No ý
 
The number of shares outstanding of the registrant’s common stock as of November 3, 2015 was 62,236,325 shares. 

Table of Contents


Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which includes information concerning one or more of our plans; objectives; goals; strategies; future events; future revenues or performance; our implementation of our key strategic priorities and anticipated resulting growth in our sales, earnings and cash flow; our ability to successfully integrate Sealy Corporation into the Company’s operations and realize cost and revenue synergies and other benefits from the transaction and the anticipated level of our integration costs; our ability to realize the anticipated benefits from our asset dispositions in 2014 and the acquisition in 2014 of brand rights in certain international markets; the impact of the macroeconomic environment in both the U.S. and internationally on our business segments; uncertainties arising from global events; general economic, financial and industry conditions, particularly in the retail sector, as well as consumer confidence and the availability of consumer financing; competition in our industry; consumer acceptance of our products; the ability to continuously improve and expand our product line, maintain efficient, timely and cost-effective production and delivery of products, and manage growth; the ability to expand brand awareness, distribution and new products; the efficiency and effectiveness of our advertising campaigns and other marketing programs; the ability to increase sales productivity within existing retail accounts and to further penetrate the retail channel, including the timing of opening or expanding within large retail accounts and the timing and success of product launches; the effects of consolidation of retailers on revenues and costs; the effects of strategic investments on our operations, including our efforts to expand our global market share; changing commodity costs; changes in product and channel mix and the impact on the Company's gross margin; initiatives to improve gross margin and operating margin; our capital structure and increased debt level, including our ability to meet financial obligations and continue to comply with the terms and financial ratio covenants of our credit facilities; changes in interest rates; changes in foreign tax rates and changes in tax laws generally, including the ability to utilize tax loss carry forwards; effects of changes in foreign exchange rates on our reported earnings; the outcome of pending tax audits or other tax, regulatory or litigation proceedings and similar issues; the effect of future legislative or regulatory changes; financial flexibility; our expected sources of cash flow; changes in capital expenditures; and our ability to effectively manage cash. Many of these statements appear, in particular, under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in ITEM 2 of Part I of this Report. When used in this report, the words "estimates," "expects," "guidance", "anticipates," "proposed," "projects," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations and various assumptions. There can be no assurance that we will realize our expectations or that our beliefs will prove correct.

There are a number of risks, uncertainties and other important factors, many of which are beyond the Company’s control, that could cause our actual results to differ materially from those expressed as forward-looking statements in this report, including the risk factors discussed under the heading "Risk Factors" under ITEM 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014 and the risks identified in ITEM 1A of this Report. There may be other factors that may cause our actual results to differ materially from the forward looking statements.

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

When used in this Report, except as specifically noted otherwise, the term "Tempur Sealy International" refers to Tempur
Sealy International, Inc. only, and the terms "Company," "we," "our," "ours" and "us" refer to Tempur Sealy International, Inc. and its consolidated subsidiaries. When used in this Report, the term "Sealy" refers to Sealy Corporation and its historical subsidiaries.


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Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per common share amounts)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
880.0

 
$
827.4

 
$
2,383.9

 
$
2,244.3

Cost of sales
520.4

 
508.9

 
1,448.1

 
1,388.0

Gross profit
359.6

 
318.5

 
935.8

 
856.3

Selling and marketing expenses
175.6

 
166.8

 
498.0

 
465.0

General, administrative and other expenses
79.8

 
70.8

 
242.6

 
210.6

Equity income in earnings of unconsolidated affiliates
(2.0
)
 
(1.8
)
 
(8.4
)
 
(5.6
)
Royalty income, net of royalty expense
(4.7
)
 
(4.4
)
 
(13.7
)
 
(13.5
)
Operating income
110.9

 
87.1

 
217.3

 
199.8

 
 
 
 
 
 
 
 
Other expense, net:
 
 
 
 
 
 
 
Interest expense, net
33.2

 
25.3

 
74.1

 
70.5

Loss on disposal, net
—

 
2.8

 
—

 
23.2

Other expense (income), net
11.8

 
(0.9
)
 
12.7

 
(0.4
)
Total other expense, net
45.0

 
27.2

 
86.8

 
93.3

 
 
 
 
 
 
 
 
Income before income taxes
65.9

 
59.9

 
130.5

 
106.5

Income tax provision
(25.0
)
 
(22.4
)
 
(43.6
)
 
(43.7
)
Net income before non-controlling interest
40.9

 
37.5

 
86.9

 
62.8

Less: Net income attributable to non-controlling interest(1),(2)
0.7

 
0.4

 
2.1

 
0.5

Net income attributable to Tempur Sealy International, Inc.
$
40.2

 
$
37.1

 
$
84.8

 
$
62.3

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.65

 
$
0.61

 
$
1.38

 
$
1.02

Diluted
$
0.64

 
$
0.60

 
$
1.36

 
$
1.00

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
62.1

 
60.9

 
61.4

 
60.8

Diluted
62.9

 
62.1

 
62.5

 
62.0

 
(1)
Income attributable to the Company's redeemable non-controlling interest in Comfort Revolution, LLC for the three months ended September 30, 2015 and 2014 represented $0.5 million and $0.4 million, respectively. Income attributable to the Company's redeemable non-controlling interest in Comfort Revolution, LLC for the nine months ended September 30, 2015 and 2014 represented $1.0 million and $0.5 million, respectively.
(2)
The Company recorded a $0.2 million and $1.1 million redemption value adjustment, net of tax, for the three and nine months ended September 30, 2015, respectively, to adjust the carrying value of the redeemable non-controlling interest as of September 30, 2015 to its redemption value. As of September 30, 2014, the accumulated earnings exceeded the redemption value and, accordingly, a redemption value adjustment was not necessary for the three and nine months ended September 30, 2014.

See accompanying Notes to Condensed Consolidated Financial Statements. 



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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Net income before non-controlling interest
$
40.9

 
$
37.5

 
$
86.9

 
$
62.8

Other comprehensive (loss) income before tax, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(19.0
)
 
(24.4
)
 
(49.4
)
 
(20.2
)
Net change in unrecognized gain on interest rate swap, net of tax
0.2

 
0.3

 
0.5

 
0.5

Pension (expense) benefit, net of tax
—

 
—

 
(0.1
)
 
0.3

Unrealized gain on cash flow hedging derivatives, net of tax
3.2

 
1.5

 
4.4

 
0.7

Other comprehensive loss, net of tax
(15.6
)
 
(22.6
)
 
(44.6
)
 
(18.7
)
Comprehensive income
25.3

 
14.9

 
42.3

 
44.1

Less: Comprehensive income attributable to non-controlling interest (1),(2)
0.7

 
0.4

 
2.1

 
0.5

Comprehensive income attributable to Tempur Sealy International, Inc.
$
24.6

 
$
14.5

 
$
40.2

 
$
43.6


(1)
Income attributable to the Company's redeemable non-controlling interest in Comfort Revolution, LLC for the three months ended September 30, 2015 and 2014 represented $0.5 million and $0.4 million, respectively. Income attributable to the Company's redeemable non-controlling interest in Comfort Revolution, LLC for the nine months ended September 30, 2015 and 2014 represented $1.0 million and $0.5 million, respectively.
(2)
The Company recorded a $0.2 million and $1.1 million redemption value adjustment, net of tax, for the three and nine months ended September 30, 2015, respectively, to adjust the carrying value of the redeemable non-controlling interest as of September 30, 2015 to its redemption value. As of September 30, 2014, the accumulated earnings exceeded the redemption value and, accordingly, a redemption value adjustment was not necessary for the three and nine months ended September 30, 2014.
 
See accompanying Notes to Condensed Consolidated Financial Statements.



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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
 
 
September 30, 
 2015
 
December 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
71.8

 
$
62.5

Accounts receivable, net
454.7

 
385.8

Inventories, net
213.1

 
217.2

Prepaid expenses and other current assets
63.5

 
56.5

Deferred income taxes
51.2

 
44.4

Total Current Assets
854.3

 
766.4

Property, plant and equipment, net
360.5

 
355.6

Goodwill
712.7

 
736.5

Other intangible assets, net
702.3

 
727.1

Deferred income taxes
9.3

 
8.6

Other non-current assets
100.3

 
68.4

Total Assets
$
2,739.4

 
$
2,662.6

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current Liabilities:
 

 
 

Accounts payable
$
272.3

 
$
226.4

Accrued expenses and other current liabilities
291.3

 
233.3

Deferred income taxes
0.2

 
0.2

Income taxes payable
17.7

 
12.0

Current portion of long-term debt
173.8

 
66.4

Total Current Liabilities
755.3

 
538.3

Long-term debt
1,312.5

 
1,535.9

Deferred income taxes
242.4

 
258.8

Other non-current liabilities
115.6

 
114.3

Total Liabilities
2,425.8

 
2,447.3

 
 
 
 
Commitments and contingencies—see Note 11


 


 
 
 
 
Redeemable non-controlling interest
14.3

 
12.6

 
 
 
 
Total Stockholders’ Equity
299.3

 
202.7

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity
$
2,739.4

 
$
2,662.6

 
See accompanying Notes to Condensed Consolidated Financial Statements. 



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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income before non-controlling interest
$
86.9

 
$
62.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
54.9

 
57.7

Amortization of stock-based compensation
16.4

 
9.4

Amortization of deferred financing costs
18.7

 
10.2

Bad debt expense
4.4

 
4.8

Deferred income taxes
(21.4
)
 
(23.9
)
Dividends received from unconsolidated affiliates
3.0

 
—

Equity income in earnings of unconsolidated affiliates
(8.4
)
 
(5.6
)
Non-cash interest expense on convertible notes
4.5

 
3.8

Loss on sale of assets
1.2

 
1.4

Foreign currency adjustments and other
4.7

 
0.1

Loss on disposal of business
—

 
23.2

Changes in operating assets and liabilities
(31.7
)
 
37.0

Net cash provided by operating activities
133.2

 
180.9

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Acquisition of business, net of cash acquired
—

 
(8.5
)
Proceeds from disposition of business and other
7.2

 
43.5

Purchases of property, plant and equipment
(51.1
)
 
(30.3
)
Other
(0.3
)
 
2.0

Net cash (used in) provided by investing activities
(44.2
)
 
6.7

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from issuance of 2023 Senior Notes
450.0

 
—

Proceeds from borrowings under long-term debt obligations
405.4

 
239.5

Repayments of borrowings under long-term debt obligations
(974.4
)
 
(432.7
)
Proceeds from exercise of stock options
16.7

 
3.9

Excess tax benefit from stock-based compensation
19.7

 
1.6

Proceeds from issuance of treasury shares
5.0

 
—

Treasury shares repurchased
(1.3
)
 
(2.2
)
Payments of deferred financing costs
(6.4
)
 
—

Other
(2.1
)
 
0.4

Net cash used in financing activities
(87.4
)
 
(189.5
)
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
7.7

 
2.7

Increase in cash and cash equivalents
9.3

 
0.8

CASH AND CASH EQUIVALENTS, beginning of period
62.5

 
81.0

CASH AND CASH EQUIVALENTS, end of period
$
71.8

 
$
81.8

 
 
 
 
Supplemental cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
41.6

 
$
49.9

Income taxes, net of refunds
64.6

 
31.1


See accompanying Notes to Condensed Consolidated Financial Statements.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited)

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

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

The Company’s Condensed Consolidated Financial Statements include the results of Comfort Revolution, LLC ("Comfort Revolution"), a 45.0% owned joint venture. Comfort Revolution constitutes a variable interest entity ("VIE") for which the Company is considered to be the primary beneficiary due to the Company's disproportionate share of the economic risk associated with its equity contribution, debt financing and other factors that were considered in the related-party analysis surrounding the identification of the primary beneficiary. The operations of Comfort Revolution are not material to the Company's Condensed Consolidated Financial Statements.

The Company also has ownership interests in a group of Asia-Pacific joint ventures to develop markets for Sealy® branded products in those regions. The equity method of accounting is used for these joint ventures, over which the Company has significant influence but does not have effective control, and consolidation is not otherwise required. The Company’s Asia-Pacific joint ventures are more fully described in Note 6, "Unconsolidated Affiliate Companies".

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States ("U.S. GAAP" or "GAAP") for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2014, included in the Company’s Annual Report on Form 10-K filed on February 13, 2015.
 
The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein.

(b) Inventories. Inventories are stated at the lower of cost or market, determined by the first-in, first-out method, and consist of the following:
 
September 30,
 
December 31,
(in millions)
2015
 
2014
Finished goods
$
132.3

 
$
134.0

Work-in-process
11.7

 
11.4

Raw materials and supplies
69.1

 
71.8

 
$
213.1

 
$
217.2


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

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)


The Company had the following activity for sales returns from December 31, 2014 to September 30, 2015:
(in millions)
 
Balance as of December 31, 2014
$
32.3

Amounts accrued
87.7

Returns charged to accrual
(89.5
)
Balance as of September 30, 2015
$
30.5


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

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

The Company had the following activity for its warranty accruals from December 31, 2014 to September 30, 2015:
(in millions)
Balance as of December 31, 2014
$
31.3

Amounts accrued
22.5

Warranties charged to accrual
(22.4
)
Balance as of September 30, 2015
$
31.4


As of September 30, 2015 and December 31, 2014, $16.0 million and $16.1 million of accrued warranty expense is included as a component of accrued expenses and other current liabilities and $15.4 million and $15.2 million of accrued warranty expense is included in Other non-current liabilities on the Company’s accompanying Condensed Consolidated Balance Sheets, respectively.

(e) Revenue Recognition. Sales of products are recognized when persuasive evidence of an arrangement exists, title passes to customers and the risks and rewards of ownership are transferred, the sales price is fixed or determinable and collectability is reasonably assured. The Company extends volume discounts to certain customers, as well as promotional allowances, floor sample discounts, commissions paid to retail associates and slotting fees, and reflects these amounts as a reduction of sales at the time revenue is recognized based on historical experience. The Company also reports sales net of tax assessed by qualifying governmental authorities. The Company extends credit based on the creditworthiness of its customers. No collateral is required on sales made in the normal course of business.

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s accounts receivable. The Company regularly reviews the adequacy of its allowance for doubtful accounts. The Company determines the allowance based on historical write-off experience and current economic conditions and also considers factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a customer receivable is reasonably assured. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets was $22.0 million and $19.5 million as of September 30, 2015 and December 31, 2014, respectively.

During the period ended September 30, 2015, the Company recognized other income, net of expense, of $9.5 million from the partial settlement of a legal dispute, which is presented within other expense (income), net on the accompanying Condensed Consolidated Statements of Income.


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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)


(f) Cooperative Advertising, Rebate and Other Promotional Programs. The Company enters into agreements with customers to provide funds for advertising and promotions. The Company also enters into volume and other rebate programs with customers. When sales are made to these customers, the Company records liabilities pursuant to these agreements. The Company periodically assesses these liabilities based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer or whether the customer will meet the requirements to receive rebate funds. The Company generally negotiates these agreements on a customer-by-customer basis. Some of these agreements extend over several years. Significant estimates are required at any point in time with regard to the ultimate reimbursement to be claimed by the customers. Subsequent revisions to these estimates are recorded and charged to earnings in the period in which they are identified. Rebates and cooperative advertising are classified as a reduction of revenue and presented within net sales on the accompanying Condensed Consolidated Statements of Income. Certain cooperative advertising expenses are reported as components of selling and marketing expenses in the accompanying Condensed Consolidated Statements of Income because the Company receives an identifiable benefit and the fair value of the advertising benefit can be reasonably estimated.

(g) Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are also recognized for the estimated future effects of tax loss carry forwards. The effect of changes in tax rates on deferred taxes is recognized in the period in which the enactment dates change. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized. The Company accounts for uncertain foreign and domestic tax positions utilizing a proscribed recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

(h) Redeemable Non-controlling Interest. The Company is party to a put and call arrangement with respect to the common securities that represent the 55.0% non-controlling interest in Comfort Revolution. The call arrangement may be exercised by the Company on or after June 12, 2017. The put arrangement may be exercised by Comfort Revolution on or after June 12, 2018. The redemption value for both the put and the call arrangement is equal to 7.5 times earnings before interest, tax, depreciation and amortization ("EBITDA"), as defined in the related LLC agreement, of Comfort Revolution for the preceding 12 months, adjusted for net debt outstanding and multiplied by the 55.0% ownership interest not held by the Company. Due to the existing put and call arrangements, the non-controlling interest is considered to be redeemable and is recorded on the Condensed Consolidated Balance Sheet as a redeemable non-controlling interest outside of permanent equity. The redeemable non-controlling interest is recognized at the higher of 1) the accumulated earnings associated with the non-controlling interest or 2) the contractually-defined redemption value as of the balance sheet date.

Income attributable to the Company's redeemable non-controlling interest in Comfort Revolution for the three months ended September 30, 2015 and 2014 represented $0.5 million and $0.4 million, respectively. Income attributable to the Company's non-controlling interest in Comfort Revolution for the nine months ended September 30, 2015 and 2014 represented $1.0 million and $0.5 million, respectively. As of September 30, 2015, the redemption value exceeded the accumulated earnings associated with the redeemable non-controlling interest. Therefore, the Company recorded a $0.2 million and $1.1 million redemption value adjustment, net of tax, for the three and nine months ended September 30, 2015, respectively, to adjust the redeemable non-controlling interest as of September 30, 2015 to its redemption value. As of December 31, 2014, the accumulated earnings exceeded the redemption value and accordingly, a redemption value adjustment was not necessary.

(j) Subsequent Events. In the three months ended September 30, 2015, the Company initiated certain restructuring activities, which included headcount reductions and store closures. As a result, the Company recognized $2.4 million of restructuring expenses consisting primarily of severance benefits and costs associated with store closures, which are recorded in cost of sales; selling and marketing expenses; and general, administrative and other expenses. In the three months ended December 31, 2015, we expect to incur an incremental charge of approximately $8.0 million related to these restructuring actions, which will include additional severance benefits and lease termination costs.


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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)


(2) Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. This ASU is effective for fiscal years beginning after December 15, 2017 including interim periods within that reporting period. The Company is currently evaluating the guidance to determine the Company's adoption method and the effect it will have on the Company's Condensed Consolidated Financial Statements. 

In April 2015, the FASB issued ASU No. 2015-03, Interest- Imputation of Interest- Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This ASU is effective on a retrospective basis for annual reporting periods beginning after December 15, 2015, however early adoption is permitted. The adoption of this ASU is not expected to have an effect on the Company's Condensed Consolidated Statements of Income or Cash Flows; however, the unamortized balance of debt issuance costs will be reclassified from other long-term assets to an offset against long-term debt on the Condensed Consolidated Balance Sheets.

(3) Acquisitions and Divestitures
Sale of Portland Manufacturing Facility
Effective May 6, 2015, the Company sold its Sealy manufacturing facility in Portland, Oregon, which was previously held for sale and recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The Company received $7.2 million in proceeds on the sale and recorded a gain of $0.4 million, which is included in other expense (income), net in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2015.
Acquisition of Certain Assets and License Rights in Japan
Effective July 1, 2014, the Company acquired certain assets from a third party licensee in Japan. The total purchase price was $8.5 million. The Company accounted for this acquisition using the acquisition method. The preliminary allocation of the purchase price was based on estimates of the fair value of assets acquired as of July 1, 2014. The excess of the purchase price over the estimated fair value of the assets and identifiable intangible assets acquired was recorded as goodwill, which is non-deductible for income tax purposes. The Company finalized the allocation of the purchase price during the first quarter of 2015, which did not result in any material measurement period adjustments.
Disposal of Innerspring Component Production Facilities and Associated Equipment
Effective June 30, 2014, the Company completed the sale of its three U.S. innerspring component production facilities and equipment, along with associated working capital, to Leggett & Platt (“L&P”) for total consideration of approximately $47.8 million, which included $1.5 million of other non-cash consideration. The working capital adjustment period ended during the quarter ended September 30, 2014 and resulted in a cash payment to L&P of $2.8 million, which reduced the total consideration received to $45.0 million. The carrying amount of the net assets sold in this transaction was approximately $66.8 million, including an allocation of goodwill within the historical Sealy segment which was determined using the relative fair value method. As a result, a loss on disposal of business was recorded of $23.2 million for the nine months ended September 30, 2014, which included $1.4 million of transaction costs and the $2.8 million working capital adjustment discussed above.



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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(4) Goodwill

Effective January 1, 2015, the Company realigned its organizational structure and updated its segments in light of the progress made in 2013 and 2014 integrating Sealy into its historical business. The Company's updated reportable segments are North America and International. For additional information regarding the Company's realignment and reportable segment determination, see Note 16, "Segment Information".

As a result of the Company's segment realignment, the composition of the Company's reporting units for the evaluation of goodwill impairment also changed. Historically, the Company's reporting units were the same as the reportable segments: Tempur North America, Tempur International, and Sealy. Effective January 1, 2015, the Company identified three reporting units for purposes of evaluating goodwill impairment: Tempur Sealy U.S. and Tempur Sealy Canada reporting units within the North America segment and one reporting unit comprising the International segment.

As the composition of the reporting units changed, the Company reassigned historical goodwill to the new reporting units based on a relative fair value allocation approach. The relative fair value allocation approach yielded the reassignment of total Sealy goodwill as of December 31, 2014 of $521.9 million. The following summarizes the reassignment of goodwill from the historical segments to the new segments:
(in millions) 
Reassigned Goodwill by Segment
North America segment:
 
Tempur North America segment goodwill as of January 1, 2015
$
106.2

Sealy segment goodwill as of January 1, 2015 reassigned to the North America segment
468.3

Total North America segment goodwill as of January 1, 2015
$
574.5

 
 
International segment:
 
Tempur International segment goodwill as of January 1, 2015
$
108.4

Sealy segment goodwill as of January 1, 2015 reassigned to the International segment
53.6

Total International segment goodwill as of January 1, 2015
$
162.0


The following summarizes changes to the Company’s goodwill, by segment:
(in millions) 
North America
 
International
 
Consolidated
Balance as of January 1, 2015
$
574.5

 
$
162.0

 
$
736.5

Foreign currency translation adjustments and other
(9.5
)
 
(14.3
)
 
(23.8
)
Balance as of September 30, 2015
$
565.0

 
$
147.7

 
$
712.7

 

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(5) Debt

Debt for the Company consists of the following:
(in millions)
September 30, 2015
 
December 31, 2014
 
 
Debt:
Amount
 
Rate
 
Amount
 
Rate
 
Maturity Date
Revolving credit facility
$
—

 
(1)
 
$
16.0

 
(1)
 
March 18, 2018
Term A Facility
422.2

 
(2)
 
484.5

 
(2)
 
March 18, 2018
Term B Facility
101.1

 
(3)
 
594.4

 
(3)
 
March 18, 2020
2020 Senior Notes
375.0

 
6.875%
 
375.0

 
6.875%
 
December 15, 2020
2023 Senior Notes
450.0

 
5.625%
 
—

 
—%
 
October 15, 2023
8.0% Sealy Notes
109.3

 
8.0%
 
104.7

 
8.0%
 
July 15, 2016
Capital lease obligations and other
28.7

 
 
 
27.7

 
 
 
Various
 
$
1,486.3

 
 
 
$
1,602.3

 
 
 
 
Less: current portion
(173.8
)
 
 
 
(66.4
)
 
 
 
 
Long-term debt
$
1,312.5

 
 
 
$
1,535.9

 
 
 
 
(1)
Interest at Base Rate plus applicable margin of 1.75% or LIBOR plus applicable margin of 2.75% as of September 30, 2015 and Base Rate plus applicable margin of 2.00% or LIBOR plus applicable margin of 3.00% as of December 31, 2014.
(2)
Interest at LIBOR plus applicable margin of 2.00% as of September 30, 2015 and 2.25% as of December 31, 2014.
(3)
Interest at LIBOR, subject to a 0.75% floor plus applicable margin of 2.75% as of September 30, 2015 and December 31, 2014.

2012 Credit Agreement

On December 12, 2012, Tempur Sealy International and certain subsidiaries of Tempur Sealy International as borrowers and guarantors, entered into a credit agreement (as amended, the "2012 Credit Agreement") with a syndicate of banks. The 2012 Credit Agreement requires compliance with certain financial covenants providing for maintenance of a minimum consolidated interest coverage ratio and maintenance of a maximum consolidated total net leverage ratio. The consolidated total net leverage ratio is calculated using consolidated funded debt less qualified cash (as defined in the 2012 Credit Agreement). Consolidated funded debt includes debt recorded on the Condensed Consolidated Balance Sheets as of the reporting date, plus letters of credit outstanding and certain other debt and obligations. The Company is allowed to exclude 100.0% of the domestic qualified cash and 60.0% of foreign qualified cash, the aggregate of which cannot exceed $150.0 million at the end of the reporting period for purposes of calculating consolidated funded debt less qualified cash. As of September 30, 2015, domestic qualified cash was $40.0 million and foreign qualified cash was $19.1 million.

The Company is in compliance with all applicable covenants as of September 30, 2015.

2023 Senior Notes

On September 24, 2015, Tempur Sealy International issued $450.0 million aggregate principal amount of 5.625% senior notes due 2023 (the "2023 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2023 Senior Notes were issued pursuant to an indenture, dated as of September 24, 2015 (the “Indenture”), among the Company, certain subsidiaries of Tempur Sealy International as guarantors (the “Guarantors”), and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The 2023 Senior Notes are general unsecured senior obligations of the Company and are guaranteed on a senior unsecured basis by the Guarantors. The 2023 Senior Notes mature on October 15, 2023, and interest is payable semi-annually in arrears on each April 15 and October 15, beginning on April 15, 2016. The gross proceeds from the 2023 Senior Notes were used to refinance a portion of the term loan debt under the 2012 Credit Agreement and to pay related fees and expenses.


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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

Tempur Sealy International has the option to redeem all or a portion of the 2023 Senior Notes at any time on or after October 15, 2018. The initial redemption price is 104.219% of the principal amount, plus accrued and unpaid interest, if any. The redemption price will decline each year after 2018 until it becomes 100.0% of the principal amount beginning on October 15, 2021. In addition, Tempur Sealy International has the option at any time prior to October 15, 2018 to redeem some or all of the 2023 Senior Notes at 100.0% of the original principal amount plus a “make-whole” premium and accrued and unpaid interest, if any. Tempur Sealy International may also redeem up to 35.0% of the 2023 Senior Notes prior to October 15, 2018, under certain circumstances with the net cash proceeds from certain equity offerings, at 105.625% of the principal amount plus accrued and unpaid interest, if any. Tempur Sealy International may make such redemptions as described in the preceding sentence only if, after any such redemption, at least 65.0% of the original aggregate principal amount of the 2023 Senior Notes issued remains outstanding.

The Indenture restricts the ability of Tempur Sealy International and the ability of certain of its subsidiaries to, among other things: (i) incur, directly or indirectly, debt; (ii) make, directly or indirectly, certain investments and restricted payments; (iii) incur or suffer to exist, directly or indirectly, liens on its properties or assets; (iv) sell or otherwise dispose of, directly or indirectly, assets; (v) create or otherwise cause or suffer to exist any consensual restriction on the right of certain of the subsidiaries of Tempur Sealy International to pay dividends or make any other distributions on or in respect of their capital stock; (vi) enter into transactions with affiliates; (vii) engage in sale-leaseback transactions; (viii) purchase or redeem capital stock or subordinated indebtedness; (ix) issue or sell stock of restricted subsidiaries; and (x) effect a consolidation or merger. These covenants are subject to a number of exceptions and qualifications.

In conjunction with the issuance and sale of the 2023 Senior Notes, Tempur Sealy International and the Guarantors have agreed through a Registration Rights Agreement to exchange the 2023 Senior Notes for a new issue of substantially identical senior notes registered under the Securities Act. Tempur Sealy International and the Guarantors are required to pay additional interest if the 2023 Senior Notes are not registered within the time periods specified within the Registration Rights Agreement.

The Company used the proceeds from the issuance of the 2023 Senior Notes and an additional $50.0 million of available cash to voluntarily prepay $479.9 on the Term B Facility and $13.9 million on the Term A Facility. In conjunction with the voluntary prepayment, the Company recognized accelerated amortization of $12.0 million of the associated deferred financing costs, which is presented within interest expense, net in the accompanying Condensed Consolidated Statements of Income.

(6) Unconsolidated Affiliate Companies

The Company has ownership interests in a group of Asia-Pacific joint ventures, to develop markets for Sealy® branded products in those regions. The Company’s ownership interest in these joint ventures is 50.0% and is accounted for under the equity method. The Company's investment of $16.1 million and $12.9 million at September 30, 2015 and December 31, 2014, respectively, are recorded in other non-current assets within the accompanying Condensed Consolidated Balance Sheets. The Company’s share of earnings is recorded in equity income in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income.

(7) Derivative Financial Instruments

Derivative financial instruments are used in the normal course of business to manage interest rate and foreign currency exchange risks. The financial instruments used by the Company are straight-forward, non-leveraged, instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit ratings of these institutions. For all transactions designated as hedges, the hedging relationships are formally documented at the inception and an ongoing basis in offsetting changes in cash flows of the hedged transaction.

The Company records derivative financial instruments on the Condensed Consolidated Balance Sheets as either an asset or liability measured at its fair value. Changes in a derivative's fair value (i.e., unrealized gains or losses) are recorded each period in earnings or other comprehensive loss ("OCL"), depending on whether the derivative is designated and is effective as a hedged transaction, and on the type of hedging relationship.


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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

For derivative financial instruments that are designated as a hedge, unrealized gains and losses related to the effective portion are either recognized in income immediately to offset the realized gain or loss on the hedged item, or are deferred and reported as a component of accumulated OCL in stockholders' equity and subsequently recognized in net income when the hedged item affects net income. The change in fair value of the ineffective portion of a derivative financial instrument is recognized in net income immediately. For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded to net income immediately.

The Company manages the changes in interest rates on its variable rate debt through a four-year interest rate swap agreement that was entered into on August 8, 2011. The Company designated this interest rate swap agreement as a cash flow hedge of floating rate borrowings and expects the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The gains and losses on the designated interest rate swap agreement will offset losses and gains on the transactions being hedged. As a result of this interest rate swap agreement, the Company pays interest at a fixed rate and receives payments at a variable rate which began on December 30, 2011. As of December 30, 2011, the interest rate swap agreement effectively fixed the floating LIBOR-based interest rate to 1.25% plus the applicable margin on $250.0 million of the outstanding balance under the Company's variable rate debt. On December 30, 2013, the outstanding notional principal amount of the interest rate swap agreement was reduced to $150.0 million. The interest rate swap agreement expires on December 30, 2015. The Company has selected the LIBOR-based portion of the hedged portion of the Company's variable rate debt during the term of the interest rate swap agreement. The effective portion of the change in value of the interest rate swap agreement is reflected as a component of comprehensive income (loss) and recognized as interest expense, net as payments are paid or accrued. The remaining gain or loss in excess of the cumulative change in the present value of the future cash flows of the hedged item, if any (i.e., the ineffective portion) or hedge components excluded from the assessment of effectiveness are recognized as interest expense, net during the current period. The fair value of the interest rate swap agreement is calculated as described in Note 8, "Fair Value Measurements". These amounts are immaterial to the Condensed Consolidated Financial Statements.

The Company manages a portion of the risk associated with fluctuations in foreign currencies related to intercompany and third party inventory purchases denominated in foreign currencies through foreign exchange forward contracts designated as cash flow hedges. As of September 30, 2015, the Company had foreign exchange forward contracts designated as cash flow hedges to buy U.S dollars and to sell Canadian dollars with a notional amount outstanding of $82.9 million. These foreign exchange forward contracts have maturities ranging from October 2015 to June 2017. The effectiveness of the cash flow hedge contracts, including time value, is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as using other timing and probability criteria. The effective portion of the cash flow hedge contracts' gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated OCL until the underlying hedged item is reflected in the Company's accompanying Condensed Consolidated Statements of Income, at which time the effective amount in accumulated OCL is reclassified to cost of sales in the accompanying Condensed Consolidated Statements of Income. The Company expects to reclassify a gain of approximately $4.7 million, net of tax (over the next 12 months based on September 30, 2015 exchange rates).

The Company is also exposed to foreign currency risk related to intercompany debt and associated interest payments and certain intercompany accounts receivable and accounts payable. To manage the risk associated with fluctuations in foreign currencies related to these assets and liabilities, the Company enters into foreign exchange forward contracts. The Company considers these contracts to be economic hedges. Accordingly, changes in the fair value of these instruments affect earnings during the current period. These foreign exchange forward contracts protect against the reduction in value of forecasted foreign currency cash flows resulting from payments in foreign currencies. The fair value of the foreign exchange forward contracts are estimated as described in Note 8, "Fair Value Measurements".


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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

As of September 30, 2015 and December 31, 2014, the fair value of the Company's derivative financial instruments included in the accompanying condensed consolidated balance sheets was recorded as follows:

 
Asset Derivatives
 
Balance Sheet Location
 
Fair Value
(in millions)
 
 
September 30, 2015
 
December 31, 2014
Derivatives designated as hedging instruments
 
 
 
 
 
Foreign exchange forward contracts - current
Prepaid expenses and other current assets
 
$
6.3

 
$
1.8

Foreign exchange forward contracts - non-current
Other non-current assets
 
1.3

 
—

Derivatives not designated as hedging instruments
 
 
 
 
 
Foreign exchange forward contracts - current
Prepaid expenses and other current assets
 
2.1

 
—

 
  
 
$
9.7

 
$
1.8


 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
(in millions)
 
 
September 30, 2015
 
December 31, 2014
Derivatives not designated as hedging instruments
 
 
 
 
 
Foreign exchange forward contracts - current
Accrued expenses and other current liabilities
 
$
0.6

 
$
0.1

 
 
 
$
0.6

 
$
0.1



(8) Fair Value Measurements

The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurement. There were no transfers between levels for the three and nine months ended September 30, 2015 or 2014, or year ended December 31, 2014. At September 30, 2015 and December 31, 2014, the Company had an interest rate swap agreement and foreign exchange forward contracts recorded at fair value. The fair value of the interest rate swap agreement is calculated using standard industry models based on observable forward yield curves and takes into consideration current interest rates and the current creditworthiness of the counterparties of the Company, as applicable. The fair value of the foreign exchange forward contracts is calculated using standard industry models based on observable forward points and discount curves. The fair values of all derivative instruments are adjusted for credit risk and restrictions and other terms specific to the contracts. The fair value of the interest rate swap agreement was based on Level 2 inputs and was not material to the Company at September 30, 2015 or December 31, 2014.


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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table provides a summary by level of the fair value of foreign exchange forward contracts, which are measured on a recurring basis:

 
 
 
Fair Value Measurements at
September 30, 2015 Using:
(in millions)
September 30, 2015
 
Quoted Prices in
 Active Markets
for Identical
 Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
 Unobservable
Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
9.7

 
 
 
$
9.7

 
—

 
$
9.7

 
$
—

 
$
9.7

 
$
—

Liabilities:
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
0.6

 
$
—

 
$
0.6

 
$
—

 
$
0.6

 
$
—

 
$
0.6

 
$
—


 
 
 
Fair Value Measurements at
December 31, 2014 Using:
(in millions)
December 31, 2014
 
Quoted Prices in
 Active Markets
 for Identical
 Assets (Level 1)
 
Significant
Other
Observable
 Inputs (Level 2)
 
Significant
Unobservable
 Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
1.8

 
$
—

 
$
1.8

 
$
—

 
$
1.8

 
$
—

 
$
1.8

 
$
—

Liabilities:
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
0.1

 
$
—

 
$
0.1

 
$
—

 
$
0.1

 
$
—

 
$
0.1

 
$
—


The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those instruments. Borrowings under the 2012 Credit Agreement are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the $450.0 million aggregate principal amount of 2023 Senior Notes was approximately $450.6 million at September 30, 2015. The fair value of the $375.0 million aggregate principal amount of 6.875% senior notes due 2020 (the "2020 Senior Notes") was approximately $397.5 million and $398.4 million at September 30, 2015 and December 31, 2014, respectively. The fair value of Sealy's 8.0% Senior Secured Third Lien Convertible Notes due 2016 ("Sealy 8.0% Notes") was approximately $114.1 million and $110.7 million at September 30, 2015 and December 31, 2014, respectively. The fair value of the 2023 Senior Notes, 2020 Senior Notes and the 8.0% Sealy Notes were based on Level 2 inputs estimated using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt instruments.

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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(9) Stockholders' Equity
 
(a) Common Stock. Tempur Sealy International has 300.0 million authorized shares of common stock with $0.01 per share par value and 0.01 million shares of preferred stock. Subject to preferences that may be applicable to any outstanding preferred stock, holders of the common stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up, the holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.

(b) Treasury Stock. Tempur Sealy International sold 69,686 shares of Common Stock pursuant to a subscription agreement entered into with the Company's Chief Executive Officer ("CEO") in connection with his hiring by the Company. These shares were issued through treasury stock and the Company received $5.0 million as proceeds from the issuance of the treasury shares. Please refer to "Unregistered Sales of Equity Securities and Use of Proceeds" included in Part II, ITEM 2 for additional information.


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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(c) Accumulated Other Comprehensive Loss ("OCL"). Accumulated OCL consisted of the following:
(in millions)
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Foreign Currency Translation
 
 
 
 
 
 
 
Balance at beginning of period
$
(84.4
)
 
$
(11.4
)
 
$
(54.0
)
 
$
(15.6
)
Other loss:


 


 


 


Foreign currency translation adjustments (1)
(19.0
)
 
(24.4
)
 
(49.4
)
 
(20.2
)
Balance at end of period
$
(103.4
)
 
$
(35.8
)
 
$
(103.4
)
 
$
(35.8
)
 
 
 
 
 
 
 
 
Interest Rate Swap Agreement


 


 


 


Balance at beginning of period
$
(0.4
)
 
$
(1.2
)
 
$
(0.7
)
 
$
(1.4
)
Other comprehensive income:


 


 


 


Net change from period revaluations:
0.8

 
0.9

 
2.3

 
2.3

Tax expense(2)
(0.3
)
 
(0.3
)
 
(0.9
)
 
(0.9
)
Total other comprehensive income before reclassifications, net of tax
$
0.5

 
$
0.6

 
$
1.4

 
$
1.4

Net amount reclassified to earnings (3)
(0.5
)
 
(0.5
)
 
(1.5
)
 
(1.5
)
Tax benefit (2)
0.2

 
0.2

 
0.6

 
0.6

Total amount reclassified from accumulated other comprehensive loss, net of tax
$
(0.3
)
 
$
(0.3
)
 
$
(0.9
)
 
$
(0.9
)
Total other comprehensive income
0.2

 
0.3

 
0.5

 
0.5

Balance at end of period
$
(0.2
)
 
$
(0.9
)
 
$
(0.2
)
 
$
(0.9
)
 
 
 
 
 
 
 
 
Pensions
 
 
 
 
 
 
 
Balance at beginning of period
$
(2.5
)
 
$
3.5

 
$
(2.4
)
 
$
3.2

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net change from period revaluations:
—

 
—

 
(0.1
)
 
0.5

Tax expense(2)
—

 
—

 
—

 
(0.2
)
Total other comprehensive (loss) income before reclassifications, net of tax
$
—

 
$
—

 
$
(0.1
)
 
$
0.3

Net amount reclassified to earnings (1)
—

 
—

 
—

 
—

Tax benefit
—

 
—

 
—

 
—

Total amount reclassified from accumulated other comprehensive loss, net of tax
$
—

 
$
—

 
$
—

 
$
—

Total other comprehensive (loss) income
—

 
—

 
(0.1
)
 
0.3

Balance at end of period
$
(2.5
)
 
$
3.5

 
$
(2.5
)
 
$
3.5

 
 
 
 
 
 
 
 
Foreign Exchange Forward Contracts
 
 
 
 
 
 
 
Balance at beginning of period
$
2.5

 
$
(0.8
)
 
$
1.3

 
$
—

Other comprehensive income:
 
 
 
 
 
 
 
Net change from period revaluations:
6.6

 
2.2

 
11.4

 
1.8

Tax expense(2)
(1.7
)
 
(0.6
)
 
(2.9
)
 
(0.5
)
Total other comprehensive income before reclassifications, net of tax
$
4.9

 
$
1.6

 
$
8.5

 
$
1.3

Net amount reclassified to earnings(4)
(2.3
)
 
(0.1
)
 
(5.5
)
 
(0.8
)
Tax benefit(2)
0.6

 
—

 
1.4

 
0.2

Total amount reclassified from accumulated other comprehensive loss, net of tax
$
(1.7
)
 
$
(0.1
)
 
$
(4.1
)
 
$
(0.6
)
Total other comprehensive income
3.2

 
1.5

 
4.4

 
0.7

Balance at end of period
$
5.7

 
$
0.7

 
$
5.7

 
$
0.7

(1)    In 2015 and 2014, no amounts were reclassified to earnings.
(2)    These amounts were included in the income tax provision on the accompanying Condensed Consolidated Statements of Income.
(3)    This amount was included in interest expense, net on the accompanying Condensed Consolidated Statements of Income.
(4)    This amount was included in cost of sales, net on the accompanying Condensed Consolidated Statements of Income.


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(10) Defined Benefit Pension Plans

The following table represents amounts recorded in the Condensed Consolidated Balance Sheets for the Company's defined benefit plans:
 
September 30,
 
December 31,
(in millions)
2015
 
2014
Non-current benefit liability
$
14.0

 
$
14.9

Non-current benefit asset
0.2

 
0.3

(11) Stock-Based Compensation

The Company’s stock-based compensation expense for the three and nine months ended September 30, 2015 and 2014 included performance-based restricted stock units ("PRSUs"), non-qualified stock options, restricted stock units ("RSUs") and deferred stock units ("DSUs"). A summary of the Company’s stock-based compensation expense is presented below:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in millions)
2015
 
2014
 
2015
 
2014
PRSU expense
$
3.0

 
$
1.6

 
$
10.4

 
$
1.8

Option expense
1.4

 
1.8

 
4.8

 
5.2

RSU/DSU expense
0.5

 
0.6

 
1.2

 
2.4

Total stock-based compensation expense
$
4.9

 
$
4.0

 
$
16.4

 
$
9.4


The Company recorded $0.9 million and $4.9 million of accelerated amortization associated with the transition of certain of the Company's former executive officers for the three and nine months ended September 30, 2015, respectively.

The Company recorded a $3.0 million benefit in the accompanying Condensed Consolidated Statements of Income for the nine months ended September 30, 2014, after re-evaluation of the probability of achieving certain financial goals related to PRSUs granted in 2013.

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock options granted. The fair value of stock options granted was estimated using the Black-Scholes option pricing model with the following assumptions during the three and nine months ended September 30, 2015 and 2014:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Expected volatility range of stock
34.1% - 34.6%
 
N/A
 
34.1% - 36.2%
 
58.3% - 66.5%
Expected life of option, range in years
3 - 5
 
N/A
 
3 - 5
 
2 - 4
Risk-free interest range rate
1.0% - 1.5%
 
N/A
 
1.0% - 1.5%
 
0.4% - 1.2%
Expected dividend yield on stock
0.0% - 0.0%
 
N/A
 
0.0% -0.0%
 
0.6% - 0.7%
    

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A summary of the Company’s PRSU activity and related information for the nine months ended September 30, 2015 is presented below:
 
 
 
 
 
 
(shares and aggregate intrinsic value in millions)
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Aggregate
Intrinsic Value
Awards outstanding at December 31, 2014
0.28

 
$
53.45

 
 
Granted
0.95

 
67.86

 
 
Vested
—

 
—

 
 
Forfeited
(0.05
)
 
56.90

 
 
Awards outstanding at September 30, 2015
1.18

 
$
64.55

 
$
84.0

 
On September 4, 2015, in connection with the hiring of Scott L. Thompson as the new CEO, the Company and Mr. Thompson entered into an agreement by which the Company granted Mr. Thompson 620,000 PRSUs that vest if the Company achieves more than $650 million Adjusted EBITDA by 2017 (the "2017 Aspirational Plan PRSUs"). All of the 2017 Aspirational Plan PRSUs will vest in full if the Company achieves Adjusted EBITDA in 2017 greater than $650 million. In addition, if this target is not met in 2017 but the Company achieves more than $650 million in Adjusted EBITDA for 2018, then one-third of the total 2017 Aspirational Plan PRSUs will vest, and the remaining 2017 Aspirational Plan PRSUs will be forfeited. If the Company does not achieve more than $650 million of Adjusted EBITDA in either 2017 or 2018, then all of the 2017 Aspirational Plan PRSUs will be forfeited. Adjusted EBITDA is defined as the Company’s “Consolidated EBITDA” as such term is defined in the Company’s 2012 Credit Agreement.

The Company did not record any stock-based compensation expense related to the 2017 Aspirational Plan PRSUs during the three months ended September 30, 2015, as it is not considered probable as of this date that the Company will achieve the specified performance target as of December 31, 2017 or December 31, 2018. Based on the price of the Company’s common stock on the grant date, the total unrecognized compensation expense related to this award if the performance target is met for 2017 is $44.5 million, which would be expensed over the service period if it becomes probable of achieving the performance condition. The Company will continue to evaluate the probability of achieving the performance condition going forward and record the appropriate expense if necessary.

On October 26, 2015, the Company granted other certain senior executives a total of 720,000 2017 Aspirational Plan PRSUs with substantially the same terms as the 2017 Aspirational Plan PRSUs issued to the CEO as described above. The Company will evaluate the probability of achieving the performance condition going forward and record the appropriate expense if necessary.

The maximum number of shares to be awarded under the PRSUs granted during the nine months ended September 30, 2015 is as follows:
(shares in millions)
 
 
 
 
Number of Shares Granted
 
Maximum Number of Shares to be Awarded
 
Performance Date
 
Vesting Schedule
0.26

 
0.78

 
December 31, 2017
 
December 31, 2017
0.62

 
0.62

 
December 31, 2017(1)
 
December 31, 2017(1)
0.07

 
0.07

 
December 31, 2016
 
Three annual installments beginning on September 4, 2016
(1)
These shares will vest in full if the Company achieves the performance metric per the award agreement in 2017. In addition, if this target is not met in 2017 but the Company achieves the performance metric in 2018, then one-third, or 0.21 million, of the PRSUs will vest, and the remaining PRSUs shall be forfeited.

During the nine months ended September 30, 2015, there was no common stock issued from treasury stock as a result of PRSUs being earned.


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A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2015 is presented below:
 
 
 
 
 
 
 
 
(shares and aggregate intrinsic value in millions)
Number
of Shares
 
Weighted-
Average Grant
Date Fair Value
 
Weighted-
Average
 Remaining
Contractual
Term (Years)
 
Aggregate
 Intrinsic Value
Options outstanding December 31, 2014
2.84

 
$
24.18

 
 
 
 
Granted
0.76

 
62.80

 
 
 
 
Exercised
(1.20
)
 
13.98

 
 
 
 
Forfeited
(0.09
)
 
57.21

 
 
 
 
Options outstanding at September 30, 2015
2.31

 
$
40.72

 
6.53
 
$
67.5

Options exercisable at September 30, 2015
1.50

 
$
29.57

 
4.95
 
$
62.8

 
The aggregate intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $17.3 million and $59.2 million, respectively.

A summary of the Company’s RSU and DSU activity and related information for the nine months ended September 30, 2015 is presented below:
 
 
 
 
 
 
(shares and aggregate intrinsic value in millions)
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Aggregate
Intrinsic Value
Awards outstanding at December 31, 2014
0.11

 
$
50.41

 
 
Granted
0.13

 
70.43

 
 
Released
(0.07
)
 
58.73

 
 
Forfeited
0.00

 
49.63

 
 
Awards outstanding at September 30, 2015
0.17

 
$
66.38

 
$
12.0

 
RSUs granted during the nine months ended September 30, 2015 will vest over three years. DSUs granted during the nine months ended September 30, 2015 will vest over one year.

The aggregate intrinsic value of common stock underlying RSUs issued from treasury stock during the three and nine months ended September 30, 2015 was $0.3 million and $4.0 million, respectively.

A summary of total unrecognized stock-based compensation expense based on current performance estimates related to the PRSUs, options, RSUs and DSUs granted during the nine months ended September 30, 2015 is presented below:
 
 
 
 
($ in millions)
September 30, 2015
 
Weighted
 Average
 Remaining
 Vesting Period
(Years)
Unrecognized stock option expense
$
10.4

 
2.70 years
Unrecognized PRSU expense
12.9

 
2.51 years
Unrecognized RSU/DSU expense
8.8

 
2.80 years
Total unrecognized stock-based compensation expense
$
32.1

 
2.65 years

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(12) Commitments and Contingencies
 
(a) Purchase Commitments. The Company will, from time to time, enter into limited purchase commitments for the purchase of certain raw materials and components. Amounts committed under these programs are not significant as of September 30, 2015 and December 31, 2014.

(b) Norfolk County Retirement System, Individually and on behalf of all others similarly situated, Plaintiff v. Tempur-Pedic International Inc., Mark A. Sarvary and Dale E. Williams; filed June 20, 2012

Arthur Benning, Jr., Individually and on behalf of all others similarly situated, Plaintiff v. Tempur-Pedic International Inc., Mark A. Sarvary and Dale E. Williams; filed June 25, 2012

On June 20 and 25, 2012, the above suits were filed against the Company and two named executive officers in the United States District Court for the Eastern District of Kentucky, purportedly on behalf of a proposed class of stockholders who purchased the Company’s stock between January 25, 2012 and June 5, 2012. The complaints asserted claims under Sections 10(b) and 20(a) of the Exchange Act, alleging, among other things, false and misleading statements and concealment of material information concerning the Company’s competitive position, projected net sales, earnings per diluted share and related financial performance for the Company’s 2012 fiscal year. The plaintiffs sought damages, interest, costs, attorney’s fees, expert fees and unspecified equitable/injunctive relief. On November 2, 2012, the Court consolidated the two lawsuits and on March 6, 2013, plaintiffs filed a consolidated complaint. On March 31, 2014, the Court issued an Order granting the Company’s motion to dismiss with prejudice the consolidated complaint. The Court issued its memorandum of opinion and entered final judgment on May 23, 2014. On June 6, 2014, the plaintiffs filed a notice of appeal in the U.S. Court of Appeals for the Sixth Circuit ("Appeals Court"). Following oral argument, the Appeals Court issued an order on June 4, 2015, ruling in favor of the Company. The Plaintiff had until September 2, 2015 to file a petition seeking review by the United States Supreme Court. The Plaintiff did not file for review, therefore this matter has now been resolved in the Company's favor. 
 
(c) Alvin Todd, and Henry and Mary Thompson, individually and on behalf of all others similarly situated, Plaintiffs v. Tempur Sealy International, Inc., formerly known as Tempur-Pedic International, Inc. and Tempur-Pedic North America, LLC, Defendants; filed October 25, 2013

On October 25, 2013, a suit was filed against Tempur Sealy International and one of its domestic subsidiaries in the United States District Court for the Northern District of California, purportedly on behalf of a proposed class of “consumers” as defined by Cal. Civ. Code § 1761(d) who purchased, not for resale, a Tempur-Pedic mattress or pillow in the State of California. On November 19, 2013, the Company was served for the first time in the case but with an amended petition adding additional class representatives for additional states. The purported classes seek certification of claims under applicable state laws.

The complaint alleges that the Company engaged in unfair business practices, false advertising, and misrepresentations or omissions related to the sale of certain products. The plaintiffs seek restitution, injunctive relief and all other relief allowed under applicable state laws, interest, attorneys’ fees and costs. The purported classes do not seek damages for physical injuries. The Company believes the case lacks merit and intends to defend against the claims vigorously. The Court is scheduled to consider class certification motions in the fourth quarter of 2015 and the outcome is uncertain. As a result, the Company is unable to reasonably estimate the possible loss or range of losses, if any, arising from this litigation, or whether the Company’s applicable insurance policies will provide sufficient coverage for these claims. Accordingly, the Company can give no assurance that this matter will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

(d) German Regulatory Investigation. The German Federal Cartel Office ("FCO") has conducted unannounced inspections of the premises of several mattress wholesaler/manufacturers including the Company's German subsidiary. The order permitting the inspection and collection of records alleged “vertical price fixing”. Representatives of the Company met with the FCO in February 2015 but no resolution was reached. The parties met again in August 2015 and began negotiating a tentative settlement of the issues and claims asserted by the FCO, which was finalized in October 2015, with the Company agreeing to make a €15.5 million payment to resolve all matters between the parties. The Company recognized expense of $17.4 million (€15.5 million),which is presented within other expense (income), net in the accompanying Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2015. The Company recorded a corresponding liability for this settlement, which is included within accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2015.

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(e) Environmental. The Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. Sealy and one of its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, Sealy and its subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the property in 1997. The Company retained primary responsibility for the required remediation. Previously, the Company removed and disposed of contaminated soil from the site with the New Jersey Department of Environmental Protection approval, and the Company has installed a groundwater remediation system on the site. During 2005, with the approval of the New Jersey Department of Environmental Protection, the Company removed and disposed of sediment in Oakeys Brook adjoining the site. The Company continues to monitor ground water at the site. During 2012, with the approval of the New Jersey Department of Environmental Protection, the Company commenced the removal and disposal of additional contaminated soil from the site. The Company has recorded a reserve as a component of accrued expenses and other current liabilities and other non-current liabilities in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 for  $2.4 million and $2.5 million, respectively, associated with this remediation project.

The Company has also undertaken a remediation of soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation voluntarily, it obtained Connecticut Department of Energy and Environmental Protection (“DEEP”) approval of the remediation plan. In 2012, the Company submitted separate closure reports to the Connecticut DEEP for the lower portion of the site and the upper portion of the site.  The Connecticut DEEP approved the Company’s closure report for the upper portion of the site and also gave conditional approval to the Company’s closure report for the lower portion of the site.  The Company is continuing to work with the Connecticut DEEP and is performing additional testing to obtain closure for the lower portion of the site. The Company has recorded a liability in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 for approximately $0.1 million associated with the completion of the closure of its remediation efforts at the site. The Company does not believe the contamination on this site is attributable to the Company’s operations.

In 1998, the Company sold an inactive facility located in Putnam, Connecticut. In 2012, the Company received a letter from the attorney for the current owner of that property claiming that the Company may have some responsibility for an environmental condition on the property. The Company continues to investigate this matter, but intends to vigorously defend the claim of the current owner against the Company.

The Company cannot predict the ultimate timing or costs of the South Brunswick, Oakville and Putnam environmental matters. Based on facts currently known, the Company believes that the accruals recorded are adequate and does not believe the resolution of these matters will have a material effect on the financial position or future operations of the Company. However, in the event of an adverse decision by the agencies involved, or an unfavorable result in the New Jersey natural resources damages matter, these matters could have a material effect on the Company’s consolidated financial position or results of operations.
 
(f) Income Tax Assessments. The Company has received income tax assessments from the Danish Tax Authority (“SKAT”). The Company believes it has meritorious defenses to the proposed adjustments and plans to oppose the assessments as necessary in the appropriate Danish venue. The Company believes the litigation process to reach a final resolution of this matter could potentially extend over the next five years. If the Company is not successful in defending its position before the Tribunal or in the Danish courts that the Company owes no additional taxes, or if the Company chooses to pursue a settlement with SKAT, the Company could be required to pay a significant amount to SKAT, which could impair or reduce the Company's liquidity and profitability. In addition, the Company could choose to pursue a settlement with SKAT, which could also require the Company to pay significant amounts to SKAT. For a description of these assessments and additional information with respect to these assessments and the various related legal proceedings, see Note 13, "Income Taxes".

(g) Other. The Company is involved in various other legal proceedings incidental to the operations of its business. The Company believes that the outcome of all such pending legal proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity, or operating results.

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(13) Income Taxes

The Company’s effective tax rate for the three months ended September 30, 2015 and 2014 was 37.9% and 37.4%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2015 and 2014 was 33.4% and 41.0%, respectively. The Company’s income tax rate for the three and nine months ended September 30, 2015 and 2014 differed from the U.S. federal statutory rate of 35.0% principally due to changes in the Company’s uncertain tax positions, certain foreign income tax rate differentials, state and local income taxes, the production activities deduction, the non-deductibility of the settlement costs related to the antitrust investigation by the German FCO, permanent differences on the goodwill write-off associated with the disposal of the component facilities, and certain other permanent differences.

At September 30, 2015, the Company's tax basis in its top tier foreign subsidiary exceeded the Company’s book basis. Accordingly, no deferred tax has been recorded related to this basis difference. It is reasonably possible that the difference may reverse in the foreseeable future. As it relates to the book to tax basis difference with respect to the stock of each of the Company’s lower tier foreign subsidiaries, as a general matter, the book basis exceeds the tax basis in the hands of the foreign subsidiary shareholder. By operation of the tax laws of the various countries in which such subsidiaries are domiciled, in all material respects the earnings of lower tier foreign subsidiaries are not subject to tax when distributed to the foreign shareholder. It is the Company’s intent that the earnings of each lower tier foreign subsidiary, with the exception of its Danish subsidiary, will be permanently reinvested in its own operations. As it relates to the Danish subsidiary, its earnings may be distributed without any income tax impact in any case. Accordingly, no tax is provided for with respect to the book to tax basis difference of its stock.

The Company has received income tax assessments from SKAT with respect to the tax years 2001 through 2008 relating to the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary. 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 processes. In its assessment, SKAT asserts that the amount of royalty rate paid by the U.S. subsidiary to the Danish subsidiary is not reflective of an arms-length transaction. Accordingly, the tax assessment received from SKAT is based, in part, on a 20% royalty rate, which is substantially higher than that historically used or deemed appropriate by the Company.

The cumulative total tax assessment at September 30, 2015 for all years for which an assessment has been received (2001 - 2008) is approximately Danish Krone ("DKK") 1,349.9 million, including interest and penalties ($203.5 million, based on the DKK to USD exchange rate on September 30, 2015). The cumulative total tax assessment at December 31, 2014 for all years for which an assessment had been received up through that date (2001 - 2008) including interest and penalties was approximately DKK 1,317.2 million ($215.1 million, based on the DKK to USD exchange rate on December 31, 2014). The increase of DKK 32.7 million is due to additional interest for the period between December 31, 2014 and September 30, 2015. In 2013, the Company was notified by SKAT that SKAT had granted the deferral to 2017 of the requirement to post a cash deposit or other form of security for taxes that have been assessed for the period 2001 through 2007. In addition, during the quarter ended June 30, 2014, the Company was granted a deferral to 2018 of the requirement to post a cash deposit or other form of security for taxes that have been assessed for 2008. SKAT has withheld refunds of VAT otherwise payable to the Company, pending resolution of this matter, and the total amount of withheld refunds at September 30, 2015 is approximately $23 million. This amount is included in other non-current assets on the condensed consolidated balance sheet. The Company filed timely protests with the Danish National Tax Tribunal (the "Tribunal") challenging the tax assessments. The Tribunal formally agreed to place the Danish tax litigation on hold pending the outcome of a Bilateral Advance Pricing Agreement ("Bilateral APA") between the United States and SKAT. A Bilateral APA involves an agreement between the Internal Revenue Service ("IRS") and the taxpayer, as well as a negotiated agreement with one or more foreign competent authorities under applicable income tax treaties. During the third quarter of 2008, the Company filed the Bilateral APA with the IRS and SKAT. U.S. and Danish competent authorities have met several times to discuss the Company’s Bilateral APA since 2011, most recently in February 2013. At the conclusion of the February 2013 meeting the IRS and SKAT concluded that a mutually acceptable agreement on the matter could not be reached and, as a result, the Bilateral APA process was terminated. The matter is now before the Tribunal. The Tribunal is a branch of SKAT that is independent of the discussions and negotiations that have taken place to date. If the Tribunal does not rule to the satisfaction of one or both parties, the party seeking redress may choose to litigate the issue in the Danish court system. The Company believes it has meritorious defenses to the proposed adjustments and plans to oppose the assessments before the Tribunal and in the Danish courts, as necessary. As part of the Tribunal process, the Company continues to collect and analyze additional information with the assistance of outside advisers to present before the Tribunal.

As part of the Tribunal process, the Tribunal assigned an individual to serve as a case manager on the matter.  It is the responsibility of the case manager to gather data from both SKAT and the Company and independently evaluate such data.  Beginning in April 2014, the Company provided information to the case manager.  The output of the case manager’s evaluation

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will be a non-binding recommendation made to the Tribunal on how the case manager believes the Tribunal should decide the issues.  In the first half of 2015 the case manager issued a preliminary, non-binding recommendation in favor of each of SKAT’s annual assessments.  In June 2015, at the request of the case manager, the Company submitted additional information to the case manager in response to the preliminary recommendation.  In the submission, the Company reiterated its strong objection to SKAT’s position and SKAT’s assessments and reiterated the merits of the Company’s position.  The Company expects the case manager will issue the non-binding recommendation to the Tribunal before the end of 2015 unless the issuance of the case manager's recommendation is postponed or deferred by the Tribunal. The Company will continue to monitor this matter closely and evaluate all options available to the Company to resolve this matter, including formal discussions with SKAT on a negotiated outcome or litigating the position until final resolution. In the fourth quarter of 2015, the Company expects to meet with SKAT to discuss this matter, including both the Company's and SKAT's evolving positions on this matter.

To date, the Company has received an assessment every year for the next year in the examination cycle. In this regard, the Company expects to receive an assessment for the year 2009 in the second half of 2015 (and the Company would expect to receive the 2010 assessment in 2016, and so forth). The Company expects the aggregate assessments for the years 2009 - 2015 to be in excess of the amounts described above as assessed for the years 2001 - 2008.

The Company maintains a liability for uncertain tax positions associated with this matter of approximately $19.4 million at September 30, 2015, which is based on a royalty methodology and royalty rates that the Company considers to be reflective of market transactions. This conclusion is based on the Company's evaluation of the facts and circumstances regarding this matter and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standards as required by GAAP. As the Company continues to evaluate the options available to resolve this matter, whether in litigation or otherwise, it is reasonably possible the amount of unrecognized tax benefits may change in the next twelve months. An estimate of the amount of such change cannot be made at this time.

In conjunction with this tax examination discussed above, during the year ended December 31, 2013 the Company received correspondence from SKAT requesting information regarding the royalty for the years 2009 through 2011. The correspondence indicated that SKAT would be evaluating the royalty paid for each of the years under examination. The Company has responded to SKAT’s request for information. During 2013, the Company and SKAT agreed that the examination of this issue for the years 2009 - 2011 would be placed on hold pending the outcome of the Tribunal process, although SKAT would continue to issue assessments as described above.

If the Company is not successful in defending its position before the Tribunal or in the Danish courts, the Company could be required to pay significant amounts to SKAT in excess of any related reserve. In addition, the Company could choose to pursue a settlement with SKAT, which could also require the Company to pay significant amounts to SKAT in excess of any related reserve. Either of these outcomes could have a material adverse impact on the Company’s profitability and liquidity. In addition, prior to any ultimate resolution of this issue before the Tribunal or the Danish courts, based on a change in facts and circumstances, the Company may be required to increase its uncertain tax liability associated with this matter, which could have a material impact on the Company's reported earnings.

As it relates to SKAT’s examination of other items, particularly transactions between the Company’s Danish subsidiary and its foreign distribution subsidiaries, during the quarter ended June 30, 2015, SKAT responded to the information provided to it by the Company. The Company and SKAT continue to discuss various matters. The Company believes it has meritorious defenses for all items reported in the Danish income tax returns.

The aggregate benefit of uncertain tax positions for all matters (including the Danish royalty matter discussed above) as of September 30, 2015 and December 31, 2014 was $45.9 million and $47.6 million (exclusive of interest and penalties), respectively. Unrecognized tax benefits of $43.3 million and $44.6 million as of September 30, 2015 and December 31, 2014, respectively, would impact the effective tax rate if recognized. The Company had approximately $11.1 million and $10.3 million of accrued interest and penalties at September 30, 2015 and December 31, 2014, respectively.

During 2014, the Company was advised by the IRS that the tax years 2010 and 2011 would not be examined but that 2012 would be examined. That examination was finalized in the second quarter of 2015 with no material adjustments. In the quarter ended September 30, 2015, the Company was advised by the IRS that federal income tax return for 2013 would be examined. The examination had not yet begun. With few exceptions, the Company is no longer subject to tax examinations by the U.S. state and local municipalities for periods prior to 2006, and in non-U.S. jurisdictions for periods prior to 2001. As it relates to Sealy for years prior to the Sealy Acquisition, Sealy or one of its subsidiaries was required to file income tax returns in the U.S. federal

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jurisdiction, and various states and foreign jurisdictions. Sealy’s U.S. federal income tax returns and with few exceptions its foreign income tax returns are no longer subject to examination for years prior to 2006. Generally Sealy’s state and local jurisdiction income tax returns are no longer subject to examination for years prior to 2010.

In addition to the Danish tax matter described above, the Company is currently under examination by various tax authorities around the world. The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months as a result of the statute of limitations expiring and/or the examinations being concluded on these returns. However, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits related to these other returns will be material to the consolidated financial statements.
(14) Major Customers

The top five customers accounted for 40.6% and 35.1% of the Company’s net sales for the three months ended September 30, 2015 and 2014, respectively. The top five customers accounted for 39.6% and 33.6% of the Company's net sales for the nine months ended September 30, 2015 and 2014, respectively. Net sales from one customer (Mattress Firm Holding Corp.) represented more than 10.0% of net sales for the three and nine months ended September 30, 2015 and 2014, which is represented in the North America segment. The top five customers also accounted for 35.6% and 32.0% of accounts receivable as of September 30, 2015 and December 31, 2014, respectively.
(15) Earnings Per Common Share
The following table sets forth the components of the numerator and denominator for the computation of basic and diluted earnings per share for net income attributable to Tempur Sealy International. As presented on the Company's Condensed Consolidated Statement of Income, the Company has included the effect of the $0.2 million and $1.1 million Comfort Revolution redemption value adjustment, net of tax, for the three and nine months ended September 30, 2015 in Net income attributable to Tempur Sealy International, Inc. below. As of September 30, 2014, the accumulated earnings exceeded the redemption value and, accordingly, a redemption value adjustment was not necessary for the three and nine months ended September 30, 2014.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in millions, except per common share amounts)
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income attributable to Tempur Sealy International, Inc.
$
40.2

 
$
37.1

 
$
84.8

 
$
62.3

 
 
 
 
 
 
 
 
Denominator:
 

 
 
 
 

 
 

Denominator for basic earnings per common share-weighted average shares
62.1

 
60.9

 
61.4

 
60.8

Effect of dilutive securities:
 
 
 
 
 

 
 

Employee stock-based compensation
0.8

 
1.2

 
1.1

 
1.2

Denominator for diluted earnings per common share-adjusted weighted average shares
62.9

 
62.1

 
62.5

 
62.0

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.65

 
$
0.61

 
$
1.38

 
$
1.02

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.64

 
$
0.60

 
$
1.36

 
$
1.00

 
The Company excluded 0.0 million and 0.1 million shares issuable upon exercise of outstanding stock options for the three months ended September 30, 2015 and 2014, respectively, and excluded 0.1 million and 0.3 million shares issuable upon exercise of outstanding stock options for the nine months ended September 30, 2015 and 2014, respectively, from the diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur Sealy International’s common stock or they were otherwise anti-dilutive. Holders of non-vested stock-based compensation awards do not maintain voting rights or maintain rights to receive any dividends thereon.

27
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TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

(16) Segment Information
 
Effective January 1, 2015, the Company realigned its organizational structure in light of the progress made in 2013 and 2014 integrating Sealy into its business. As a result of these changes, information that the Company's chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed such that it is based on geography.

As a result of this realignment, the Company updated its segment reporting. Effective January 1, 2015, the Company operates in two segments: North America and International. Corporate operating expenses are not included in either of the segments and are presented separately as a reconciling item to consolidated results. These segments are strategic business units that are managed separately based on geography. The North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the U.S. and Canada. The International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America. The Company evaluates segment performance based on net sales, gross profit and operating income.

The Company’s North America and International segment assets include investments in subsidiaries that are appropriately eliminated in the Company’s accompanying Condensed Consolidated Financial Statements. The remaining inter-segment eliminations are comprised of intercompany accounts receivable and payables.
  
The historical information presented in the tables below has been restated for the change in the composition of the segments.

The following table summarizes total assets by segment:
 
September 30,
 
December 31,
(in millions)
2015
 
2014
North America
$
2,573.2

 
$
2,507.4

International
484.0

 
474.3

Corporate
709.2

 
858.5

Inter-segment eliminations
(1,027.0
)
 
(1,177.6
)
Total assets
$
2,739.4

 
$
2,662.6


     The following table summarizes property, plant and equipment, net by segment:
 
September 30,
 
December 31,
(in millions)
2015
 
2014
North America
$
239.0

 
$
240.5

International
55.3

 
60.3

Corporate
66.2

 
54.8

Total property, plant and equipment, net
$
360.5

 
$
355.6

 

28
Table of Contents
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table summarizes segment information for the three months ended September 30, 2015:
(in millions)
North America
 
International
 
Corporate
 
Eliminations
 
Consolidated
Bedding sales
$
690.8

 
$
110.2

 
$
—

 
$
—

 
$
801.0

Other sales
50.4

 
28.6

 
—

 
—

 
79.0

Net sales
741.2

 
138.8

 
—

 
—

 
880.0

 
 
 
 
 
 
 
 
 
 
Inter-segment sales
$
1.0

 
$
0.2

 
$
—

 
$
(1.2
)
 
$
—

Gross profit
287.7

 
71.9

 
—

 
—

 
359.6

Inter-segment royalty expense (income)
2.0

 
(2.0
)
 
—

 
—

 
—

Operating income (loss)
118.4

 
23.0

 
(30.5
)
 
—

 
110.9

Income (loss) before income taxes
114.4

 
1.7

 
(50.2
)
 
—

 
65.9

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization(1)
$
11.3

 
$
4.0

 
$
7.7

 
$
—

 
$
23.0

Capital expenditures
5.6

 
4.4

 
7.1

 
—

 
17.1

(1)
Depreciation and amortization includes stock-based compensation amortization expense.

The following table summarizes segment information for the three months ended September 30, 2014:
(in millions)
North America
 
International
 
Corporate
 
Eliminations
 
Consolidated
Bedding sales
$
645.8

 
$
109.5

 
$
—

 
$
—

 
$
755.3

Other sales
39.5

 
32.6

 
—

 
—

 
72.1

Net sales
685.3

 
142.1

 
—

 
—

 
827.4

 
 
 
 
 
 
 
 
 
 
Inter-segment sales
$
2.0

 
$
0.1

 
$
—

 
$
(2.1
)
 
$
—

Gross profit
243.9

 
74.6

 
—

 
—

 
318.5

Inter-segment royalty expense (income)
1.7

 
(1.7
)
 
—

 
—

 
—

Operating income (loss)
86.4

 
26.1

 
(25.4
)
 
—

 
87.1

Income (loss) before income taxes
83.2

 
25.3

 
(48.6
)
 
—

 
59.9

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization(1)
$
10.8

 
$
3.8

 
$
7.0

 
$
—

 
$
21.6

Capital expenditures
5.1

 
3.9

 
4.4

 
—

 
13.4

(1)
Depreciation and amortization includes stock-based compensation amortization expense.


29
Table of Contents
TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (unaudited) (continued)

The following table summarizes segment information for the nine months ended September 30, 2015:
(in millions)
North America
 
International
 
Corporate
 
Eliminations
 
Consolidated
Bedding sales
$
1,854.2

 
$
333.9

 
$
—

 
$
—

 
$
2,188.1

Other sales
111.4

 
84.4

 
—

 
—

 
195.8

Net sales
1,965.6

 
418.3

 
—

 
—

 
2,383.9

 
 
 
 
 
 
 
 
 
 
Inter-segment sales
$
4.5

 
$
0.5

 
$
—

 
$
(5.0
)
 
$
—

Gross profit
718.2

 
217.6

 
—

 
—

 
935.8

Inter-segment royalty expense (income)
5.3

 
(5.3
)
 
—

 
—

 
—

Operating income (loss)
240.9

 
72.0

 
(95.6
)
 
—

 
217.3

Income (loss) before income taxes
233.0

 
47.8

 
(150.3
)
 
—

 
130.5

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization(1)
$
33.5

 
$
12.1

 
$
25.7

 
$
—

 
$
71.3

Capital expenditures
23.7

 
9.8

 
17.6

 
—

 
51.1

(1)
Depreciation and amortization includes stock-based compensation amortization expense.

The following table summarizes segment information for the nine months ended September 30, 2014:
(in millions)
North America
 
International
 
Corporate
 
Eliminations
 
Consolidated
Bedding sales
$
1,710.8

 
$
337.9

 
$
—

 
$
—

 
$
2,048.7

Other sales
105.0

 
90.6

 
—

 
—

 
195.6

Net sales
1,815.8

 
428.5

 
—

 
—

 
2,244.3

 
 
 
 
 
 
 
 
 
 
Inter-segment sales
$
3.8

 
$
0.2

 
$
—

 
$
(4.0
)
 
$
—