Filing summary
Entity and period: The supplied filing is Tempur Sealy International, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2019—not a filing by Somnigroup International Inc. It covers the three and nine months ended September 30, 2019. Tempur Sealy develops, manufactures, markets and sells bedding products through Wholesale and Direct channels in North America and International segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $821.0 million | $729.5 million | $2,234.7 million | $2,026.8 million |
| Gross profit / margin | $360.6 million / 43.9% | $300.0 million / 41.1% | $955.8 million / 42.8% | $837.5 million / 41.3% |
| Operating income / margin | $120.6 million / 14.7% | $84.7 million / 11.6% | $262.1 million / 11.7% | $198.4 million / 9.8% |
| Net income attributable to Tempur Sealy | $73.3 million | $42.3 million | $143.3 million | $88.2 million |
| Diluted EPS | $1.31 | $0.77 | $2.56 | $1.60 |
| Operating cash flow from continuing operations | Not presented quarterly | Not presented quarterly | $201.7 million | $130.6 million |
- Q3 sales rose 12.5% reported and 13.4% on a constant-currency basis. North America sales increased 14.5%; International sales rose 4.0% reported and 8.0% constant currency.
- Nine-month sales grew 10.3% reported and 11.6% constant currency. North America rose 12.8%; International rose 0.6% reported and 5.8% constant currency.
- Q3 gross margin expanded 280 basis points. Management cited favorable product mix, pricing and commodity costs in North America; operating income also benefited from the absence of certain 2018 restructuring and supply-chain charges.
- Q3 diluted EPS was $1.31; adjusted diluted EPS was $1.30, versus $1.02 a year earlier. Adjusted EBITDA was $149.9 million, up 17.4% from $127.7 million. These are non-GAAP measures.
- Nine-month net income from continuing operations was $144.1 million, versus $96.3 million. Nine-month interest expense declined to $65.7 million from $69.5 million; the effective tax rate increased to 29.0% from 26.3%.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $52.9 million; current assets were $960.5 million and current liabilities $848.0 million, with reported working capital of $112.5 million.
- Total debt was $1,576.1 million, down from $1,653.8 million at December 31, 2018. The company reported $1,569.6 million of debt net of deferred financing costs. Operating lease obligations totaled $235.9 million after adoption of the new lease standard.
- Trailing-twelve-month Adjusted EBITDA was $473.6 million; consolidated indebtedness less netted cash was $1,524.9 million, or 3.22 times Adjusted EBITDA. The company said it was in compliance with debt covenants at quarter-end.
- Cash from continuing operations was $12.9 million for the nine-month period after $201.7 million of operating cash flow, $64.0 million of investing outflows and $124.8 million of financing outflows. Capital expenditures were $61.9 million.
- On October 16, 2019, after quarter-end, the company refinanced its 2016 credit agreement with a new facility including a $425 million revolving facility and $425 million term loan, maturing October 2024. The new agreement includes an incremental borrowing feature and financial covenants.
Material developments, outlook and risks
- Management expected significantly higher North America volumes from 2020 under new supply agreements with Mattress Firm, covering an approximately 2,500-store product relaunch beginning in Q4 2019, and Big Lots, where the Sealy rollout was completed in Q3. It expected the agreements to provide significant incremental annual Adjusted EBITDA beginning in 2020; their 2019 Adjusted EBITDA impact was not expected to be material. Approximately $5 million of Q3 costs related to expanded personnel and quality controls were not offset by incremental revenue.
- The Beter Bed product launch across more than 100 European stores was completed in Q3. Management said International market conditions had challenged sales in Q2 and Q3 and expected challenges to continue in Q4.
- Management expected approximately $80 million of 2019 capital expenditures and $80–$85 million of 2019 cash interest payments. It targeted near-term quarterly share repurchases of approximately $50 million, subject to market conditions, cash flows and other considerations. The company repurchased $50.0 million of shares in Q3 and reported $174.6 million remaining under its authorization at quarter-end.
- Management expected approximately 60 company-owned Tempur-Pedic stores by year-end 2019, with a longer-term target of 125–150. It expected Sleep Outfitters’ store operations to incur $5–$8 million of 2019 losses on an Adjusted EBITDA basis. The company also expected $15 million of incremental product-innovation spending in 2019.
- The company reported a Danish tax dispute. A 2001–2011 settlement liability was approximately $123.7 million at September 30, with a $141.6 million deposit held by SKAT. For later tax years, the company accrued approximately $37.5 million of Danish tax and interest and recognized a $6.7 million related U.S. deferred tax asset. Management said an adverse resolution or changed circumstances could materially affect earnings; the related APA negotiations were not expected to conclude soon.
- In October 2019, the U.S. Department of Commerce imposed tariffs ranging from 57% to 1,731% on certain Chinese mattress imports following an antidumping investigation. A final determination by the U.S. International Trade Commission was pending at the filing date. Other identified risks include economic and retail-sector weakness, customer and supplier financial distress, competition, commodity costs, foreign exchange and execution of product launches and supply agreements.
- The filing states that ordinary-course legal and administrative proceedings were not expected, in aggregate, to have a material adverse effect. Management reported effective disclosure controls. The filing reported no material change in risk factors.
Most important facts to verify
- Confirm the issuer identity: the document is for Tempur Sealy International, Inc., despite the request metadata naming Somnigroup International Inc.
- Track execution and economics of the Mattress Firm and Big Lots arrangements, including launch timing, incremental costs, volume and margins.
- Monitor the Danish tax matter, including the status of the APA process, potential additional liability and treatment of the SKAT deposit.
- Review the new credit agreement’s covenant headroom, debt levels, refinancing terms and the company’s ability to sustain planned share repurchases while funding investment and debt service.
- Assess whether North America’s margin gains persist and whether International market challenges, currency impacts and retail-sector risks worsen.