Filing and reporting period
Entity mismatch: The supplied filing is Tempur Sealy International, Inc.’s Form 10-Q, not a filing for SOMNIGROUP INTERNATIONAL INC. It reports the quarter and nine months ended September 30, 2020; financial amounts are in USD millions unless stated otherwise.
Tempur Sealy develops, manufactures and sells bedding products through Wholesale and Direct channels. Its operating segments are North America and International.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,132.3 | $821.0 | $2,619.9 | $2,234.7 |
| Gross profit / margin | $530.2 / 46.8% | $360.6 / 43.9% | $1,153.2 / 44.0% | $955.8 / 42.8% |
| Operating income | $180.2 | $120.6 | $338.9 | $262.1 |
| Net income attributable to Tempur Sealy | $121.4 | $73.3 | $204.1 | $143.3 |
| Diluted EPS | $2.29 | $1.31 | $3.86 | $2.56 |
- Q3 sales rose 37.9% year over year; North America sales increased 43.2% and International sales increased 12.1% (10.1% on a constant-currency basis). Nine-month sales rose 17.2%; North America increased 22.6%, while International declined 5.9%.
- Q3 operating margin increased to 15.9% from 14.7%. Nine-month operating margin increased to 12.9% from 11.7%.
- Q3 adjusted EBITDA per credit facility, a non-GAAP measure, was $279.3 million versus $149.9 million. Adjusted diluted EPS was $2.94 versus $1.30. These adjusted figures exclude specified items and are not GAAP results.
- Operating cash flow from continuing operations for the first nine months was $497.9 million, compared with $201.7 million. Investing cash use was $111.4 million; financing cash use was $228.5 million. Cash increased to $229.2 million from $64.9 million at year-end 2019.
Balance sheet, debt and liquidity
- At September 30, 2020, total debt was $1,535.3 million, down from $1,547.0 million at December 31, 2019. Cash was $229.2 million; net debt under the company’s credit-agreement measure was $1,335.3 million.
- Revolving facility availability was $424.9 million, with another $83.6 million available under the receivables securitization. The company reported total liquidity of $737.7 million, including cash.
- Trailing-twelve-month net leverage was 1.92 times adjusted EBITDA per credit facility; the credit agreement’s maximum ratio was 5.00 times. The company reported compliance with debt covenants.
- Working capital was $121.4 million. Current assets were $1,148.1 million and current liabilities were $1,026.7 million.
Material changes and unusual items
- Q3 demand rebounded following the pandemic-related sales decline in March and April. Management cited reopening stores, e-commerce growth and increased consumer spending on in-home products. Sealy and Sherwood sales were constrained by shortages of an encased innerspring component.
- Gross-margin improvement reflected higher production volumes, productivity, favorable mix and lower commodity costs. Management said commodity inflation was expected to continue into 2021.
- Q3 operating expenses included $45.2 million of cumulative catch-up stock-compensation expense for long-term aspirational awards after vesting became probable. The company expected additional compensation expense in Q4. Reported Q3 GAAP earnings therefore differ materially from adjusted measures.
- Other notable nine-month items included $11.7 million of customer-related charges tied to Art Van Furniture’s bankruptcy, $7.0 million of asset impairments and $3.8 million of International restructuring costs.
- The January 2020 acquisition of an 80% interest in Sherwood Bedding cost approximately $39.1 million in cash, including acquired cash.
Outlook, capital allocation and risks
- Management targeted Q4 2020 net-sales growth in the low double digits and adjusted EBITDA per credit facility growth in the high teens, compared with Q4 2019. It cautioned that renewed COVID-19 restrictions in some international markets and prior-year distribution shipments could affect comparisons.
- Management expected supply-chain constraints to continue for the next few quarters and planned a Q4 U.S. price increase across its brands to mitigate anticipated commodity-cost inflation.
- 2020 capital expenditures were projected at approximately $110–$115 million. The longer-term capital plan described approximately $70 million in annual capital expenditures, a targeted quarterly dividend beginning in early 2021 (subject to Board approval), and near-term share repurchases of at least 3% of shares outstanding annually, depending on market conditions.
- In October 2020, the Board increased the share-repurchase authorization to $300 million. A four-for-one stock split was approved, with split-adjusted trading expected to begin November 24, 2020.
- The company announced a conditional redemption of $200 million of its 2023 Senior Notes, at 101.406% of principal plus accrued interest, expected November 9, 2020. Completion depended on a liquidity and financing review immediately before redemption.
- Risks include COVID-19-related demand, store closures and supply disruption; customer credit losses and retail-sector distress; commodity and foreign-exchange movements; competition; and debt, covenant and financing risks. The Danish tax dispute remained contested: a $177.4 million liability was recorded, while $186.0 million was on deposit with the tax authority. Management stated pending legal matters were not expected, in aggregate, to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Tempur Sealy International, Inc., not SOMNIGROUP INTERNATIONAL INC.
- Track whether Q4 sales and adjusted EBITDA targets were achieved, and whether supply constraints and commodity inflation affected results.
- Review the size and timing of Q4 stock-compensation expense and distinguish GAAP results from management’s non-GAAP adjustments.
- Confirm whether the conditional $200 million note redemption closed and assess resulting cash, debt and interest costs.
- Monitor the Danish tax dispute and deposits, customer credit exposure, liquidity, and the Board’s decisions on the proposed dividend and share repurchases.