Tempur-Pedic International Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited consolidated results. The filing identifies the registrant as Tempur-Pedic International Inc., not SOMNIGROUP INTERNATIONAL INC.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $342.2m | $263.0m | $668.1m | $516.9m |
| Gross profit | $181.0m | $128.0m | $351.3m | $252.9m |
| Gross margin | 52.9% | 48.7% | 52.6% | 48.9% |
| Operating income | $82.8m | $53.9m | $158.1m | $106.1m |
| Net income | $53.1m | $33.5m | $101.3m | $66.7m |
| Diluted EPS | $0.76 | $0.46 | $1.44 | $0.90 |
- Sales rose 30.1% in Q2 and 29.2% for the first half. Q2 growth included North America up 28.6% and International up 34.3% reported, or approximately 17.7% on a constant-currency basis.
- For the first half, operating cash flow was $104.0m, versus $67.8m a year earlier. Investing cash flow was $(14.1)m and financing cash flow $(61.6)m; cash increased to $86.7m from $53.6m at year-end 2010.
- At June 30, cash was $86.7m, current assets $350.0m, current liabilities $167.8m and working capital $182.2m. Long-term debt was $475.0m, up from $407.0m at December 31, 2010.
- First-half capital expenditures were $12.1m. Management expected approximately $25.0m for full-year 2011.
Changes, outlook and management commentary
- Higher volume, favorable product mix, manufacturing efficiencies and fixed-cost leverage supported margin expansion. Higher commodity costs and new product launches partly offset the improvement.
- Marketing and selling expense increased 45.2% in Q2 to $68.0m; advertising expense was $35.7m, or 10.4% of sales. Management attributed sales momentum to marketing investment, new products including TEMPUR-Cloud, and retail-channel growth.
- Management expected full-year 2011 gross margin to increase, with productivity and volume leverage partly offset by rising commodity costs. It described the global economic environment as likely to remain challenging and planned continued brand, product, distribution and infrastructure investment. No specific full-year revenue or earnings guidance was stated.
- On June 28, the company amended and restated its credit facility: aggregate availability increased to $770.0m, maturity extended to June 28, 2016, and pricing and fees reset to current market conditions. Availability at quarter-end was approximately $294.0m; the company reported covenant compliance and a funded-debt-to-EBITDA ratio of 1.38x against a maximum of 3.0x.
- The interest-rate swap covering $100.0m of debt expired May 31, 2011. Debt is variable-rate; management estimated a 100-basis-point rate increase would reduce next-year pretax income by approximately $4.8m, assuming other factors unchanged.
- During the first half, the company repurchased 2.9m shares for $160.0m. On July 25, the board authorized a new repurchase program of up to $200.0m, which may be funded with operating cash or borrowings. Subsequent to quarter-end, the company acquired its South Korean distributor for approximately $4.5m plus potential target-based payments.
Risks, contingencies and notable items
- A Danish tax assessment covering 2001–2005 totaled approximately $103.1m, including interest and penalties, relating to intercompany royalties. The matter was on hold pending a U.S.-Denmark bilateral advance pricing agreement; management disputed the assessment. The filing states that potential changes in unrecognized tax benefits could not be estimated.
- The antitrust class action and New York Attorney General proceeding remained subject to further developments. The company said it believed losses were remote, while cautioning that litigation outcomes could not be predicted. The New York court dismissed the Attorney General’s petition; an appeal was pending.
- Foreign-exchange movements, commodity inflation, competition, economic conditions, growth-related operating demands and increased leverage were identified as risks. The company’s foreign-exchange forwards were economic hedges, not designated for hedge accounting.
- The effective tax rate was 33.7% for Q2 and 33.4% for the first half, compared with 33.0% and 32.7%, respectively, in 2010.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Tempur-Pedic International Inc.; the supplied company metadata names SOMNIGROUP INTERNATIONAL INC.
- Review subsequent sales, gross-margin performance and commodity-cost trends against management’s stated outlook.
- Track the Danish tax assessment, related tax exposures and the status or outcome of the bilateral agreement and proceedings.
- Monitor debt, covenant headroom, variable-rate exposure and whether the new buyback is funded by cash flow or additional borrowing.
- Assess the results and contingent consideration associated with the South Korean distributor acquisition.