Business context and reporting period
This is Tempur Sealy International, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017; the filing does not identify Somnigroup International Inc. as the registrant. The company develops, manufactures and sells bedding products through Wholesale and Direct channels, reporting North America and International segments.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $659.3 million | $804.4 million | $1,381.4 million | $1,525.4 million |
| Gross margin | 40.7% | 41.9% | 40.2% | 41.2% |
| Operating income | $56.6 million | $100.2 million | $116.1 million | $176.9 million |
| Net income attributable to company | $24.5 million | $21.3 million | $58.4 million | $60.9 million |
| Diluted EPS | $0.45 | $0.35 | $1.07 | $0.99 |
- Q2 net sales fell 18.0% (17.2% on a constant-currency basis); operating income declined 43.5%. Q2 net income and EPS rose versus 2016, when results included a $47.2 million debt-extinguishment loss. Against 2016 adjusted net income of $55.7 million and adjusted EPS of $0.92, Q2 2017 GAAP net income and EPS were lower.
- North America Q2 sales decreased 21.4%; excluding Mattress Firm, they increased 10%. International sales decreased 1.7% reported but increased 1.6% on a constant-currency basis. North America gross margin fell 2.1 percentage points in Q2; International margin rose 1.0 point.
- Six-month operating cash flow was $75.2 million, versus $51.9 million; capital expenditures were $25.9 million, versus $24.3 million. Reported free cash flow, a non-GAAP measure, was $49.3 million, versus $27.6 million. Operating cash flow included $9.3 million of Mattress Firm transition payments.
- At June 30, cash was $38.5 million, working capital $110.0 million, and total debt $1,873.8 million. The current portion of debt was $68.4 million. Revolver availability was $391.1 million after letters of credit. Covenant leverage was 3.74x against a 5.00x maximum; the company reported compliance with its debt covenants.
- Six-month net cash used in financing was $72.3 million, including $44.1 million of treasury-stock purchases and net debt repayments of $27.0 million. Total stockholders’ equity was $21.8 million, versus a deficit of $12.2 million at year-end 2016.
Material changes, outlook and risks
- Mattress Firm, the company’s largest customer in 2016, ended its supply relationship effective April 3, 2017. It represented 6.9% of first-half 2017 sales versus 22.4% in the prior-year period; first-half sales to Mattress Firm fell 72.0%. The company recorded $25.9 million of net termination-related charges in Q1.
- Management expects 2017 sales to decline from 2016 and profitability to be lower, with a short-term negative effect on cash flow. It intends to regain sales through existing and new retail and distribution partners, while maintaining brand investment; management said this may further pressure near-term profitability. No specific full-year sales or earnings forecast was provided.
- Expected 2017 capital expenditures are $60–$70 million; expected cash interest payments are $85–$90 million. Management believes operating cash flow and available credit should fund foreseeable needs, while cautioning that cash generation and future borrowing availability are not assured.
- Debt totaled $1.87 billion. The company also had $717.1 million of variable-rate debt; a 100-basis-point rate increase was estimated to reduce pretax income by about $7.2 million. Foreign exchange changes negatively affected adjusted EBITDA by approximately 2.1% in Q2 and 2.2% in the first half.
- The Danish tax dispute is significant: assessments for 2001–2008 totaled about $244.4 million including interest and penalties, while the company accrued about $131.0 million. Management warned that an adverse resolution could require payments above the reserve and materially affect earnings and liquidity. SKAT had withheld VAT refunds of about $45.5 million.
- Pending matters include a securities class action, shareholder derivative suits, and litigation between the company and Mattress Firm; loss estimates were not available. A consumer class action was decertified, and the court granted the company’s motion to sever claims. The company reported no impairment in its Q1 review following the Mattress Firm termination, but said future impairment could arise if recovery assumptions are not met.
- The filing reports a non-binding proposed Danish tax resolution for certain years, not a final settlement. Management stated it was in compliance with debt covenants and expected to remain compliant through year-end 2017 and beyond.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Tempur Sealy International, Inc., not Somnigroup International Inc.
- Track how quickly the company replaces Mattress Firm sales, particularly North America wholesale performance, margins and market share.
- Monitor debt, cash generation, revolver availability and covenant leverage as sales and profitability adjust.
- Follow the Danish tax matter, including any revised assessments, reserve changes, settlement developments and withheld VAT refunds.
- Review developments in Mattress Firm litigation and shareholder suits, and test the assumptions underlying goodwill and intangible-asset valuations.
- Assess whether planned marketing investment and $60–$70 million of capital spending can support recovery without adding undue pressure to liquidity or earnings.