Tempur Sealy International, Inc. — 2015 Form 10-K
Filing identity: The supplied filing is for Tempur Sealy International, Inc. (NYSE: TPX), not SOMNIGROUP INTERNATIONAL INC. It covers the fiscal year ended December 31, 2015; quarterly data are also provided.
Business context
The company develops, manufactures, markets and sells bedding products globally, including Tempur-Pedic, Sealy and Stearns & Foster brands. Effective January 1, 2015, it reported two geographic segments: North America and International. Bedding accounted for 91.6% of 2015 sales; retail accounted for 91.2%.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $3,151.2 million | $2,989.8 million |
| Gross profit / margin | $1,248.9 million / 39.6% | $1,150.4 million / 38.5% |
| Operating income / margin | $309.1 million / 9.8% | $276.3 million / 9.2% |
| Net income attributable to Tempur Sealy | $73.5 million | $108.9 million |
| Diluted EPS | $1.17 | $1.75 |
| Cash from operating activities | $234.2 million | $225.2 million |
| Cash and cash equivalents at year-end | $153.9 million | $62.5 million |
| Total debt | $1,479.6 million | $1,602.3 million |
Reported net income fell despite higher sales and operating income, chiefly because the company recorded a $60.7 million increase in its uncertain tax liability for the Danish tax matter; the 2015 effective tax rate was 62.7%, versus 37.1% in 2014. Adjusted net income, a non-GAAP measure, was $199.9 million, up 21.4%; adjusted diluted EPS was $3.19, up 20.4%.
Cash used in investing activities was $59.7 million and cash used in financing activities was $90.7 million. Capital expenditures were $65.9 million. Working capital was $96.1 million, down from $183.9 million, partly because $115.2 million due on the 8.0% Sealy Notes in July 2016 was classified as current. The company reported $330.2 million of revolver availability after letters of credit and compliance with debt covenants. Its covenant leverage ratio was 3.21x against a 4.50x limit.
Material changes and segment performance
- Consolidated sales rose 5.4%; on a constant-currency basis, a non-GAAP measure, they rose 9.4%. Gross margin improved 110 basis points, principally from sourcing and supply-chain improvements, fewer discounts and pricing actions, partly offset by unfavorable product mix.
- North America sales increased 7.2% to $2,577.2 million; operating income rose 31.6% to $335.6 million, with segment margin increasing to 13.0%.
- International sales declined 1.9% to $574.0 million as reported, but increased 13.2% on a constant-currency basis. Operating income fell 16.8% to $98.9 million, and segment margin decreased to 17.2%, reflecting product and channel mix, manufacturing costs and currency effects.
- Top five customers represented 39.4% of sales, up from 34.9%. Mattress Firm and Sleepy’s together represented approximately 25% of 2015 sales; Mattress Firm acquired Sleepy’s in February 2016.
- The company issued $450 million of 5.625% senior notes due 2023 and used the proceeds largely to repay term loans, shifting part of its debt to fixed-rate financing.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures of approximately $75 million, about $3 million of integration expense, and approximately $80 million of cash interest payments. It planned to seek refinancing of its senior credit facility in the first half of 2016. No clear consolidated 2016 revenue or earnings guidance is provided in the filing text.
- Management expected North America gross margin to benefit from sourcing improvements, operational efficiencies and pricing, partly offset by lower International margins from Sealy mix and foreign exchange. It also anticipated significant new-product costs and possible continued foreign-exchange pressure.
- The Danish tax assessments for 2001–2008 totaled approximately $199.6 million including interest and penalties. The recorded uncertain tax liability was $79.6 million; the matter remained unresolved, and management expected later-year assessments to exceed the earlier assessed amount. SKAT had withheld approximately $26 million of VAT refunds. An adverse resolution or settlement could materially affect earnings and liquidity.
- The company paid $17.4 million to settle a German antitrust investigation in 2015. Certain consumer-class claims remained pending; the company could not estimate a possible loss range. Environmental remediation matters were ongoing, with management stating recorded accruals were adequate while noting adverse outcomes could be material.
- Other notable items included $13.5 million of restructuring expense, $16.2 million of executive transition and retention expense, and $6.3 million of costs related to the 2015 annual meeting and related matters. A $200 million share-repurchase authorization was approved in February 2016, but repurchases were not required.
- Key business risks include significant customer concentration, competition and pricing pressure, raw-material costs, foreign-exchange exposure, variable-rate debt and covenant restrictions, supplier dependencies, labor relations, product warranties and execution of ERP implementation and product launches.
Most important facts for investors to verify
- Resolve the mismatch between the requested company name and the actual registrant, Tempur Sealy International, Inc.
- Track developments in the Danish tax dispute, potential assessments for later years, the $79.6 million recorded liability and withheld VAT refunds.
- Assess the July 2016 Sealy Notes repayment and the company’s refinancing plans, liquidity and covenant headroom.
- Monitor the Mattress Firm–Sleepy’s relationship and the resulting concentration of sales with the combined retailer.
- Compare reported GAAP results with management’s adjusted, non-GAAP measures and review the adjustments and reconciliation tables.