As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, Mr. Barry Hytinen, Chief Financial Officer. Sir, please begin.
Thanks, Vince. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters is Scott Thompson, Chairman, President, and CEO. After prepared remarks, we will open the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements, including the company's expectations regarding sales, earnings or adjusted net income and anticipated fourth quarter performance involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating, and other factors discussed in the press release issued today.
These factors are also discussed in the company's SEC filings, including, but not limited to, annual reports on Form 10-K and the company's quarterly reports on Form 10-Q under the headings "Special Note Regarding Forward-Looking Statements" and/or "Risk Factors," as well as the company's press releases. Any forward-looking statement speaks only as of the date on which it is made, and the company undertakes no obligation to update any forward-looking statements. This morning's commentary will include non-GAAP financial measures. The press release contains reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures, as well as information regarding the methodology used for constant currency presentation. We have posted the press release on the company's website at tempursealy.com and have also filed it with the SEC.
Also, in connection with the conference call, the company has prepared an investor presentation, which has been filed with the SEC and is also available on the investor relations section of the company's website. Our comments will supplement the detailed information provided in both the press release and the investor presentation. With that introduction, it's my pleasure to turn the call over to Scott.
Thank you, Barry Hytinen. Since this is my first earnings call since joining Tempur Sealy , let me take just a minute to speak to why I joined the company. First, I was impressed with the knowledge and passion of each member of the board of directors of the company. They truly are engaged and committed to the long-term success of the company. In doing my due diligence on the bedding industry, I was impressed with the following: the industry's consistent history of unit and pricing growth, the importance of bedding products in people's lives, the worth of the industry's brands, marketing, and services to retailers, the healthy margins both for the manufacturers and the retailers. Lastly, the great free cash flow attributes of the industry.
In looking specifically at Tempur Sealy , I was influenced by Tempur Sealy 's well-established brands that truly have global reach, the balance of the company's product offerings, which cover the full range of bedding needs, the strength and diversity of the company's worldwide distribution channels, the company's history of nurturing win-win relationships with retail partners and key suppliers, the company's long history of innovative products and world-class marketing. Lastly, the company's diverse worldwide platform, which it certainly appears to be ripe for long-term growth. Next, let me take a minute or two and discuss what I found when I joined the company. Thanks to the previous leadership of the company, I found a solid long-term strategic plan, and many aspects of this plan will continue to serve as a foundation for moving forward. I found a very talented senior management team driving towards their goals.
I found a product pipeline in very good shape. Lastly, I found a passionate workforce that deeply cares about its customers, products, and long-term success of the company. I could not be more pleased with my findings. In my career, I've seen companies underperform, even with great strategies. What's critical now is how we execute. With a strong foundation in place, it is now the team's responsibility to execute. We have to find problems, communicate problems, and jointly fix problems, all as quickly as possible. Execution is where most value creation takes place. Now to the third quarter results. The reported numbers have several one-time items, both gains and losses, that create a little noise in the numbers. Barry Hytinen will walk through the items in detail in just a minute.
All of my comments are based on adjusting the GAAP results for these one-time items, as I think that is the best indication of the company's operating performance. Overall, the company had a solid quarter, with net sales up 6.4% on a reported basis and 10.6% on a constant currency. You should note that it's on top of a 12.5% net sales increase in the third quarter of 2014. The increase in net sales combined with 180 basis point increase in adjusted EBITDA margin to produce adjusted EBITDA of $142 million for the quarter. North America slightly outperformed our expectations, offsetting a slight disappointing international performance. Barry Hytinen will drill down on the details in just a minute. Major highlights for the quarter that I'd like to call out include solid growth throughout the world on a constant currency basis.
In North America, sales grew about 10%, including an all-time record for the Tempur-Pedic brand, driven by TEMPUR-Flex and TEMPUR-breeze products. Our Posturepedic launch has achieved record levels of distribution and improved our Sealy mix with considerable strength in our hybrid collection. Internationally, we grew 14% with solid growth across all regions of the globe, with particular strength in our Sealy business in Latin America. The next highlight is operating margin. Adjusted operating margin expanded 230 basis points to 14.1%. This was driven by an increase in Tempur-Pedic brand's contribution to our overall sales mix, improved operating efficiencies from sourcing, lower commodity costs, supply chain and plant improvements, higher product pricing. The team did a solid job in this area. You should note that the margin expansion occurred despite increases in advertising and R&D, demonstrating we are firmly committed to investing in brand, new product development, and innovation.
The last financial highlight I'd like to call out is that we had great flow-through of cash, with operating cash flow up over 20% in the third quarter. Manufacturing highlights. Our initiatives to build Sealy inventory ahead of major selling period continues to pay off, resulting in less overtime and better on-time deliveries during the key Labor Day shopping period. Also, we are experiencing lower product return as our investments in quality are paying off. Turning to marketing and product development. For Tempur-Pedic, we saw good conversion from our media buy and effective creative. Tempur-Pedic brand awareness is up, and consumer brand perception continues to rise. Additionally, retail locator searches for Tempur-Pedic were up over 20% from last year, indicating strong near-term purchasing interest. There's also good news around the Sealy brands. Our effort to grow awareness for Stearns & Foster brand is working.
Both aided and unaided awareness is up. Additionally, Stearns & Foster had a large increase in current owners' likelihood to buy again. We're seeing positive traction for Sealy as well, with increases in owner satisfaction and Net Promoter Score. We believe these metrics indicate that our increased investment in marketing and product is paying off. Lastly, across the entire worldwide brand portfolio, we made significant progress in the development of our product pipeline. We're expecting strong product launches in 2016. Although the quarter was solid, we have some areas that fell short of our internal expectations. As I mentioned, internationally is not where we want it to be. A good part of this is due to the less robust international market and FX headwinds, but that doesn't explain all the shortfall. The balance of the underperformance we own and the international team is hard at work.
I'll be overseas next week to visit with them. Additionally, North American Sealy margins represent an opportunity for the company, and the North American leadership team is focused on bringing them in line with our internal target. We'll be launching the new Stearns & Foster offering in early 2016 and expect that'll help drive the margin through favorable product mix. That said, we still have work to do in the basic blocking and tackling in Sealy manufacturing. Next, corporate overhead was not consistent with the kind of lean, streamlined company which we believe is necessary to be successful in this industry. General administrative expenses were 8.1% of net sales for the quarter versus 7.8% third quarter of 2014. This is after solid revenue growth in the quarter. We simply have to be structured to provide worldwide products at a competitive price. We've recently taken actions in this area.
We've reduced our run rate of worldwide overhead by $15 million. This was a painful process for the organization, as the people affected are quality individuals, but it was required to protect the company's competitive position in the industry. We expect a one-time charge in the fourth quarter of $8 million to reflect these actions. Lastly, we've underspent in Sealy brand advertising. Going forward, we will be more supportive of the Sealy brand. Now Barry will walk you through the quarter's details.
Thanks, Scott. As Scott mentioned, sales, margins and earnings growth were strong this quarter. Consolidated net sales for the third quarter were $880 million, up 6.4% versus the third quarter last year, and on a constant currency basis were up 10.6%. Adjusted gross margin improved 250 basis points to 41.3%, and adjusted operating margin improved 230 basis points to 14.1%. As a percent of sales, operating expenses were essentially unchanged, with higher advertising and R&D expense offset by lower other selling expenses. The additional advertising was generally weighted toward Tempur-Pedic, and the R&D was spread over all the brands. The team is committed to continuing to invest in products and related marketing. North America net sales increased 8.2% and were up 9.8% in constant currency. Strong growth of 9.6% in the U.S. was driven by high teens growth for the Tempur-Pedic brand and low single-digit growth for Sealy brands.
We also had strong growth in Canada, with sales increasing 12% on a constant currency basis. However, unfavorable foreign exchange translated sales into a reported decline of 7%. Bedding product sales increased 7% on a unit increase of approximately 4%, with positive price growth resulting from a higher mix of Tempur-Pedic sales during the period and the previously disclosed March and May 2015 Tempur-Pedic pricing actions. Our new TEMPUR-Flex and Sealy Posturepedic, together with TEMPUR-breeze products, were significant drivers of growth. Other products were up, driven by solid growth in pillow sales. North America adjusted operating margin improved 260 basis points to 16.4% as a result of a 310 basis point increase in adjusted operating margin to 39.1%.
The improvement was driven principally by Tempur-Pedic U.S. gross margins, which were strong in the quarter and benefited from improved efficiency in our operations, including sourcing and lower commodity costs, supply chain and plant improvement, as well as pricing. However, as Scott mentioned, our Sealy margin continues to be an opportunity. Sealy U.S. gross margin was down slightly year-over-year. This is not consistent with our expectations. We remain committed to Sealy margin improvement. During 2016 and beyond, we expect to improve margins through operational and procurement productivity and favorable product mix, as Scott alluded to. Turning to international, net sales declined 2.3%, yet on a constant currency basis, were up 14.1% with growth across all regions. Bedding product sales were flat on actual rates, though on a constant currency basis were up 18%.
Units increased 26%, reflecting very significant growth from our Sealy brand businesses in Latin America. Our international average selling price is down, but this is entirely due to this market mix. Other channel sales were up 30% on a constant currency basis, driven by strong Tempur-Pedic direct sales. International adjusted gross margin was essentially flat to prior year at 52.7%, and adjusted operating margin was down slightly to 18.5%. GAAP interest expense was $33.2 million, which includes a $12 million non-cash charge for the accelerated amortization of the associated deferred financing costs related to our recent debt offering. Therefore, our adjusted interest expense was $21.2 million. GAAP other expense was $11.8 million. The significant adjustments include $17 million of expense related to the German regulatory settlement and $9.5 million of income related to a partial legal settlement. Our adjusted other expense was $3 million.
This compares to other income of approximately $1 million last year. The year-over-year variance was due to currency impacts on foreign-denominated loans. Adjusted earnings per share increased 26% to $1.11 and on a constant currency basis increased 36% as foreign exchange rates negatively impacted adjusted EPS by $0.09. Adjusted EBITDA increased 19% to $142.3 million in the third quarter, and on a constant currency basis increased 26% as foreign exchange negatively impacted adjusted EBITDA by $8.5 million. Since we had a number of adjustments to the reported GAAP numbers this quarter, let me take a minute and bridge GAAP net income to adjusted net income. As outlined in the press release, there were approximately $30 million of after-tax adjustments. They include, first, as previously disclosed in our 2014 Form 10-K, our German subsidiary was subject to a regulatory investigation of the German mattress industry.
Last week, we reported that we had reached a settlement that fully resolves this matter. The total charge was $17.6 million. We want investors to know that we take this matter seriously. We have taken appropriate steps to address it and don't anticipate any lingering effects. Second, non-cash interest expense of $8.3 million related to the recent debt offering. Third, integration costs of $4.2 million related to the transitioning of manufacturing facilities and other costs related to the continued alignment of the North America business segment related to the Sealy acquisition. We are nearing completion of our integration efforts and currently expect about $3 million in the fourth quarter and only $1 or $2 million in the first half of 2016. Fourth, executive management transition and retention compensation of $3.9 million.
Fifth, the initial phase of streamlining costs of $1.7 million related to Scott's commentary on corporate headcount reductions, as well as certain international store closures. Lastly, netted against those was other income of approximately $6.6 million related to a partial settlement of a legal dispute with certain suppliers. I expect that going forward, the adjustments will generally decrease in both number and amount. Moving on to the key balance sheet and cash flow items. At the end of the third quarter, our total debt was $1.5 billion, and our total cash was $72 million, an improvement from year-end 2014 levels of $1.6 billion in total debt and $63 million in cash. Capital expenditures for the quarter were $17 million. For the full year, we are expecting $70 million.
As detailed in the press release, our leverage ratio as calculated based on our senior credit facility, which limits the level of adjustments to EBITDA, further improved, and as of the end of the third quarter, was 3.5 times. Which compares to 3.8 times at the end of the second quarter, and 4.1 times in the year-ago period. We continue to expect to approach three times leverage by early 2016 using our bank covenant EBITDA. In addition to the credit facility calculation, if you look at our leverage ratio based on the financial statements without the bank covenant limitations, our ratio of consolidated funded debt less qualified cash to adjusted EBITDA was 3.3 times as of the end of the third quarter. This ratio has also improved significantly over the past year. During the third quarter, we completed a $450 million senior notes offering.
We used the proceeds to reduce term loan outstanding under our senior secured credit facilities. We also made a $50 million voluntary prepayment. Together, these actions substantially improved our capital structure by extending our debt maturities, freeing up senior debt capacity, and moving more of our debt to a fixed rate. Operating cash flow in the third quarter was $132 million, up from $109 million last year. We expect strong cash flow in the fourth quarter. In addition, Scott's asked me to evaluate future cash flows and future leverage targets, and we are having discussions with our banking relationships as we evaluate capital allocation. We expect to update you on this work on the next earnings call. Now, turning to our financial guidance for 2015. We currently expect net sales to be in a range of $3,150 million-$3,175 million.
You should remember during the 2014 year-end earnings call, we called out $15 million-$20 million of forward buying that occurred in the fourth quarter of last year. We don't expect that type of year-end activity this year as we have changed our trade programs. This factor is reflected in our guidance. We currently expect adjusted earnings of $3.10-$3.20 per diluted share. At the midpoint of guidance, this reflects a 19% growth rate. Our new guidance reflects the solid third quarter, as well as an increase to interest expense related to the recently completed debt offering and a slight increase to share count. These two technical adjustments combine to be a $0.06 headwind for the full year, of which $0.05 are expected in the fourth quarter. By holding the top end of our EPS range unchanged, our new guidance reflects improved operating performance and outlook.
Our guidance is based on adjusted figures and dependent on the factors that I discussed at the beginning of the call. At this time, I would like to turn the call back to Scott.
Thank you, Barry. Great job. I'd like to add a little bit to Barry's guidance comments. Overall, our markets feel okay to stable. With North America and our largest market in the best shape. We continue to watch things like consumer confidence, housing turnover, traffic and conversion rates at our retail partners. As we sit here today, things feel pretty good. Key items you should be looking for in the fourth quarter: continued sales growth of our TEMPUR-Flex and Sealy Posturepedic products. Further margin expansion driven by expected improvement in North America. Strong cash flow generation resulting in some deleveraging. Lastly, increased focus on product innovation as we further strengthen our product pipeline. I've been on the job for about 50 days, and I'm really excited about all the opportunities that lie ahead of us.
One of my key commitments is to create transparency, not only within the organization but also with our shareholders. I'm committed to maintain an open dialogue with all of you. Lastly, before we open the call for questions, as most likely most of you saw this morning, we added Rick New to the company's board of directors. Rick is a seasoned public company board member who's also successfully held various senior executive officer positions. He will further enhance the board's financial and governance expertise, and the entire board is very pleased that he's agreed to join us. Operator, will you please open the call for questions?
Yes, sir. Thank you. Ladies and gentlemen, at this time, if you have a question, please press the star then the one key on your touch-tone phone. If your question has been answered or you wish to remove yourself from queue, you can do so by pressing the pound key. In light of strong interest, we ask that you limit yourself to one question and then re-queue for any additional. Again, that is star then one to ask a question. Our first question is from Bradley Thomas of KeyBanc Capital Markets. Your line is open, sir.
Yes. Hi, good morning, Scott, Barry, and Mark, and Scott, welcome to the company.
Thank you.
To ask my one question here, I wanted to follow up on a comment that you made, Scott, where you said that execution is where most of the value creation often occurs. You did reference how Sealy and the International segment didn't live up to your expectations this quarter. With 50 days under your belt, could you maybe talk about the main areas within the company that you see the biggest opportunity to improve execution?
You probably hit on a couple of them pretty quickly. As I mentioned before, the Sealy margins are not meeting our internal targets. The team's on it. It's a significant opportunity. It's also a journey that'll take more than a month, maybe more than a quarter or two. There is significant opportunity in the Sealy manufacturing. We're just not where we need to be from that standpoint. We've done some great work on the supplier side, we need to do some more work on the labor side, primarily. Turning to international. International had a solid quarter when you look at it on a constant currency basis. Were we expecting more? Yes, we were expecting more. The Sealy brands had growth in the quarter, the Sealy launch hasn't gone as well as we would have liked in Europe. Tempur-Pedic, primarily in Europe, underperformed our expectation.
I'd tell you that when you looked at the overhead both, it would be internationally or domestically, if we're calling out internationally, the overhead in international was a little heavy. The team has taken care of that issue. As far as opportunity long term, international looks like a very good opportunity long term. It won't be an easy road. That's a tough execution when you're working internationally. There'll be bumps in the road going forward. Long term, internationally is something I'm certainly very excited about.
Great. Thank you so much, Scott.
Thank you. Our next question is from Seth Basham of Wedbush Securities. Your line is open.
Good morning, and thank you. Congrats on a good quarter. My question really revolves around Sealy. It seems like you guys are facing some pretty easy comparisons on Sealy margins this quarter. I was expecting to see a little bit better improvement there as you started tackling some of the manufacturing issues.
So was I.
Can you talk to what fell short of expectations on your end and what the action plan is the near term to improve it?
Yeah, I think I've called that out. First of all, you're spot on. The Sealy margins did not perform the way we expected them to. Some of that's merchandising mix in that we certainly were affected from a merchandising mix standpoint, and that's fully explainable, and that will turn when we launch the new Stearns & Foster product. That doesn't explain it all. We still got work to do in the area. We've got a team on it. They're very engaged. In fact, I think they were here at 7:00 A.M. this morning, meeting. The action plan's in place, and we expect that we're going to be able to report progress in that area.
Thank you. Our next question is from Budd Bugatch of Raymond James. Your line is open.
Good morning. This is Bobby actually filling in for Budd. Thank you for taking my questions and congrats on another solid quarter.
Thank you, Bobby.
Thanks, Bobby.
My question's really around the Sealy rollout there in Europe. Just looking for maybe a little bit more detail. Has the strategy changed a little bit? Has the timing or the size changed? If so, what's changed? If not, you mentioned it earlier, but how is it progressing and what's the surprises and what's going better or worse than you originally communicated with us a year or so ago?
Good question, Bobby. From a standpoint of in the third quarter, our Sealy International, Europe, Japan, that piece, was about consistent from a sales and EBIT drag basis as we were seeing in the first and the second quarter. High single digit million and a very small drag on EBIT. From a standpoint of as we look at what's gone on, as you know, we had some supplier issues earlier in the year. Those are fully behind us. Going back in and essentially refocusing sales advocacy at the store level, that's an effort. As Scott mentioned, we see the international opportunity as being a very large one over time, but it's going to take some time.
I know the team is very focused, going forward into 2016, to increase both the distribution of our new Sealy and Stearns & Foster products there, and we've got a positive outlook, but it's going to take some time.
Thank you. Our next question is from John Baugh of Stifel. Your line is open.
Thank you. Good morning. Appreciate you taking my question. I was just curious, Scott, culturally, you've come in from the outside and only 30 days, I understand, but I'm just curious as to your observations of the Tempur-Pedic versus the Sealy, whether you still see that within the organization, whether that's a hindrance to maybe near term to getting some of the Sealy margin improvements you're talking about and whether you have the right people in place in the Sealy operations to execute the plan of improvement. Thank you.
Sure. Great question. First of all, I think you asked about a cultural question about Tempur and Sealy. From my perspective, there is only Tempur Sealy, and I don't feel any cultural issues related to what I'll call Sealy people or Tempur people. This is not dissimilar from when I joined Dollar Thrifty, and in case you're not familiar with the rental car industry, there was a Dollar and there was a Thrifty, and they put them together and called them Dollar Thrifty. When I got there, by the way I operate and the way I think about it, there really is only Tempur Sealy, and I got to tell you that I think the leadership team here thinks the same way.
We got some great people that came over in the Sealy acquisition that are key members of this organization. I think everybody's working together. All the goals are aligned. I don't think we have any cultural barriers to our future success. I think that would be the first part of your question. Second part of your question was, do I have the right horses or the right team in place to fix the Sealy margin issue and drive Sealy's performance? The answer to that is yes. I think we've got the right team. They probably underestimated the challenge from a guy dropping in for 50 days. They probably underestimated the challenge when they started the journey. Are they doing the right things? Without question, they're doing the right things. Are they the right people?
They're the right people. Are they working hard? They're working hard. I've got a lot of confidence in the team that we've got on the job.
Thank you. Our next question is from Peter Keith of Piper Jaffray. Your line is open.
Hi, thanks. Good morning, everyone. Scott, just following up on maybe some of the topics in the earlier questions. With regard to the Project 650 goal, it would be a bit above what the prior management team had outlined at the beginning of the year, looking at whether it be 50 basis points of annual EBIT improvement or I think the internal goal was 100 basis points. It seems like that goal would be above the 100 basis point target. With you coming in, where do you think you see the specific areas of opportunity relative to those original goals?
Okay, great question. First of all, I'm going to call it the aspirational plan because I don't really think of it as the 650 Plan. I think our job is to make as much money as we possibly can. Whether it's 650 or 750 or 350, I don't know what the numbers are. I don't really think of it necessarily as a 650 Plan. It's an aspirational plan designed to reward management for aspirational performance. Look, it's out there. It's a heavy lift. It's certainly a great plan that's got all the management team focused, and it's been very good for pulling together the team in a common goal. I did not spend a lot of time looking at what previous management had put together and presented to the street or their internal documents.
I started with a clean sheet of paper, and I've asked everybody to start with a clean sheet of paper and do zero budget going forward. The kind of meetings we're having isn't what did we tell people before. The kind of meetings we're having is what's possible. Think out of the box. What could we do? What could we do different? How could we do things better? I can't really reconcile you to whatever has been presented previous, because quite frankly, I didn't spend any time looking at it. I think there are a lot of opportunities in this business. We can do some things in areas better than we've done them before. I think we've got some pretty strong competitive advantages in the marketplace that we can take advantage of. I hope that helps address your question.
Thank you. Again, ladies and gentlemen, if you have a question at this time, please press star then the 1 key on your touch-tone phone. Our next question is from Keith Hughes of SunTrust. Your line is open, sir.
Thank you. You brought up when you were discussing Sealy and some of the potential changes, advertising more advertising dollars towards Sealy. It's always been a dynamic here where there's been national ads in the Tempur-Pedic brand and more of the co-op spend at the Sealy brand, Sealy Stearns & Foster brand. I guess my question, if you're committing more advertising dollars, which direction would that go in the future in your view?
I think you're asking me which bucket it would come out of. I think the answer is we want more effective advertising from the co-op dollars we spend, then we need to spend some more money from a direct advertising standpoint. I'd call it's going to come from both buckets.
Would that change I assume that wouldn't change your commitment to the Tempur-Pedic brand and its ad spend. Is that correct?
No. Without question. You spend advertising dollars investing in brand and product that you think you're going to have a high return on. We don't have a cap on advertising and then do trade-offs between the two brands. We'll spend the amount of money that we think we need to support the product, support our retailers, and drive our operations.
Thank you.
Thank you. Our next question is from Jason Smith of Cantor Fitzgerald. Your line is open.
How you doing, guys? Thank you for taking my question. Just kind of wanted to piggyback on some of the things we've discussed here as far as the margin expansion opportunity. I know you've kind of addressed the long-term opportunity, could you kind of discuss or give us a little more color around what you see as sort of the low-hanging fruit? Where can we see changes quickly here?
Well, good question. I would say that we continue to see very strong gross margin out of the Tempur-Pedic U.S. business, that has been driven off of operational improvements, sourcing, supply chain plan improvements, and pricing. We see those continuing and further opportunity. From a Sealy gross margin perspective, Scott's addressed that we are really getting after that and driving performance. Internationally, we've addressed that, I would say that there's continued opportunity as we leverage that portion of the business. To the earlier point of streamlining the overhead of the business is going to drive near-term performance.
Yeah. I'd only add one thing to the list that Barry just outlined. The other thing that we're doing, I think this happens in all businesses. Look, we're closely looking at all of our sales and making sure that we're doing profitable sales. We're doing deep dives into customer profitability. To the extent if we have business that's not profitable for us. We'll have to work with people in that area and make sure that we've got a good, healthy, long-term relationship for them and for us. There may be some opportunity in that area.
Thank you. We have a follow-up from Keith Hughes of SunTrust. Your line is open.
Thank you. Just going back to the Sealy question on the, from a cost perspective. It was highlighted at the last investor day, some of the cost initiatives around distribution, sales force consolidation, things like that between the Tempur-Pedic and Sealy. In your view, are those not complete, or are there things in addition to that that you think you could be doing?
The distribution is going well. Wouldn't you say, Barry?
Absolutely.
I'd say distribution's going well, but I'd also say, like always, you want more improvement every quarter. I'd say distribution is going well. In the consolidation of the sales force in our recent actions, there was quite a bit of activity in that area. I would say now we've pretty much got the sales force exactly where it needs to be, and we are through in the U.S. on activities when it comes to personnel.
Thank you.
Thank you. Our next question is from Curtis Nagle of Merrill Lynch. Your line is open.
Great. Thanks very much for taking the call. Scott, I'm just curious, I guess, how are you I know it's early, but how you're thinking about capital return over the coming years, particularly as leverage is set to go below 3 times.
Great question. I called it out when I originally looked at the business. One of the things I really liked about this business was its free cash flow attributes are very strong. In some of my previous lives, I've been in organizations where you had lots of GAAP earnings, but quite frankly, you didn't produce any cash because the CapEx requirements were so big to keep the engine running that there never really was some free cash. When I looked at this business, I was thrilled with the cash flow attributes. I then looked at the leverage to see kind of where the company was from a leverage standpoint before getting involved in it. It didn't take a rocket scientist to figure out that the company was de-leveraging very quickly.
Unless you do something else with the cash, that it was going to deleverage probably below any reasonable rate. As Barry Hytinen called out in his prepared remarks, I've asked him to go work with the senior bank group and see what we can do in that area relating to covenants. They're working on that. Let me just talk in general about the way I think about capital structure. I think what we need to do and what we are doing is the first thing you want to look at is what the enterprise risk you have in the organization, and stress test that. We're doing that. Because look, our long term, our responsibility is to protect the company in different business cycles.
Before we do anything in capital, we need to stress test the business model and make sure we fully understand how this company will perform, like I said, all throughout the cycles. That's being done currently. The next thing I think we have to do, and we're doing, is you look at the nature of the debt that you have. Clearly, if you have debt and it's a one-year duration from senior lenders, that's one kind of leverage. If you have long-term debt from the market and multiple lenders, that's a more stable debt, and you like that better, and it's a little less risky. You can clearly see in the last 50 days, we've put some long-term debt on the books, and that feels good.
From looking at the enterprise risk and kind of the nature of your debt and duration, I think from that process, you develop what I'll call a risk tolerance. After you have your risk tolerance, I think you look at your cost of capital, and we've asked some people from the outside to do some work for us on cost of capital. You combine that with your risk tolerance, and you have a discussion at the board level as to what do you think. We're going to do that. We're scheduled to do that. After you get that, it's really pretty easy. From that discussion, a capital structure should pop out, a leverage target should pop out, going forward, it's just a resource allocation question.
Do you want to invest the money in the business to get to that proper capital structure, or do you want to give it back to the shareholders? The way I look at that's just a return on invested capital kind of analysis and how can the business deploy the capital, and can it deploy it in a reasonable return? If you can't deploy it in a reasonable return for the risk associated, well you need to give it back to the shareholders. Having said all that, having not also done all the detailed work that's in process, I suspect that I will be comfortable with leverage greater than three terms. It's my expectation, I've not done the work, and I've got to talk to my fellow board members who are all financially astute and will have a strong opinion.
I think we owe the market a further discussion of that by the next earnings conference call, because you guys are smart, and if you run your pro formas, you're going to figure out real fast we're going to deleverage pretty quickly. We better have that discussion with you probably on the next earnings call.
Thank you. Our next question is from Seth Basham, Wedbush Securities. Your line is open.
Thanks. Just a couple housekeeping questions. For the quarter, what was your advertising dollar spend?
It was about $103 million.
Got you. You expect the run rate to persist in the fourth quarter?
Yeah, it'll be give or take, Seth. Yeah. On a % of sales.
Exactly. As it relates to FX, what is your FX outlook for the fourth quarter?
Well, for the full year, our prior guidance has been that we'd have about a rounded off $0.30 EPS hit. We've taken, I think, about 22 through the first three quarters, and so it'd be $0.05-$0.08, something in that vicinity.
Thank you.
Thanks. Our next question is from Bradley Thomas of KeyBanc Capital Markets. Your line is open, sir.
Hi, just circling back on a few housekeeping items myself. Was hoping that you could talk a little bit more about the cadence of business in North America in the quarter, and maybe anything in particular about Texas that you're able to say in light of some of the data points that we've gotten from other retailers. Perhaps, Barry, if you could give us an update on input costs, how much they benefit you, and directionally, should that be getting to be a bigger benefit as we move forward, or is that leveling off?
Let me take some of that, and then I'll give the hard stuff to Barry. Just in general, we'll report the fourth quarter when we report the fourth quarter. I can tell you whatever trends we're experiencing have been fully dialed into the guidance. I just generally don't comment too much about trends within a quarter. Just assume that it's been dialed into the guidance. On Texas, though, I think I do owe you some comments because clearly there's been some weather down there. There has been a little bit of chatter in the marketplace about Texas and how oil prices might impact that area.
I can tell you that when we look at the, what I'll call oil-concentrated states, Texas, Oklahoma, Louisiana, and we compare our performance in those states with the rest of the nation, those markets in the third quarter actually outperformed the rest of the nation. Through the third quarter, I would say not only are we not seeing no impact from falling oil prices, like I said, they actually outperformed. I'm from Texas, so I've been through at least three major downturns in the oil business. Look, you don't feel it immediately. It takes a while. Although the third quarter, that area came in strong, I would expect going forward that we would begin to feel some weakness in those marketplaces over the next few quarters.
I've also checked with several of my friends in the car business because the car business is pretty good to tell you what's really going on in the market. Their expectation, similar to mine, is that it will probably trail off slightly. Nobody's expecting it to be too bad in the oil markets from what I'm hearing.
Brad, I think what that leaves us is commodity costs and input costs. Just as a reminder, in the first quarter, we saw a level of unfavorable commodity impact in the results. In the second quarter, it was a slight benefit. I said on the last call that we expected to see several million of benefit from commodities in the back half based on what we could see. We did realize that. That was built into the guidance, and we did realize it. At this point, looking forward in light of where things are, we'd expect a couple of million of incremental benefit in the fourth quarter that's modeled into the guidance, and that's on a variety of commodities, whether it be steel input, foam, chemicals, et cetera. All in, it's been several million of benefit here in the back half, as expected.
Thank you. At this time, there's no other questions in queue. I'd like to turn it back to Mr. Thompson for any closing remarks.
Thank you, operator. To the 7,000 employees worldwide, thank you for what you do every day to make this company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur-Pedic Sealy, its leadership team, and the board of directors. Operator, this ends our call. Thank you.
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