Tempur-Pedic International Inc. — Form 10-Q summary
Entity note: The supplied filing is for Tempur-Pedic International Inc., not SOMNIGROUP INTERNATIONAL INC. It covers the quarter and six months ended June 30, 2010; financial amounts below are in millions of dollars unless noted.
Business context and reporting period
The company manufactures and sells premium mattresses, pillows and related products through Retail, Direct, Healthcare and third-party channels. It reports North America and International segments and sells in approximately 80 countries. Results are unaudited.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $263.0 | $185.2 | $516.9 | $362.3 |
| Gross profit | $128.0 | $86.3 | $252.9 | $168.2 |
| Gross margin | 48.7% | 46.6% | 48.9% | 46.4% |
| Operating income | $53.9 | $29.2 | $106.1 | $55.0 |
| Net income attributable to common stockholders | $33.5 | $16.9 | $66.7 | $30.2 |
| Diluted EPS | $0.46 | $0.22 | $0.90 | $0.40 |
- Q2 sales rose 42.1%; six-month sales rose 42.7%. North America was the main growth driver: segment sales increased 59.2% in Q2 and 57.9% for the first half. International sales increased 9.9% in Q2 and 17.1% for the first half, or 14.4% and 14.8% respectively on a constant-currency basis.
- Management attributed growth to marketing, new products—including the TEMPUR-Cloud collection and International Sensation line—improved retail performance, and signs of economic stabilization. Mattress sales led growth; higher sales also lifted pillows and other products.
- Gross margin improved mainly through production-volume leverage and manufacturing efficiencies, partly offset by new-product costs and higher commodity costs. Selling and marketing expense increased in dollars but declined as a share of sales; general and administrative expense also increased in dollars but declined as a share of sales.
- Interest expense was $3.8 million in Q2 and $7.0 million for the first half, down from $4.5 million and $9.0 million, respectively, in 2009. The company cautioned that additional unhedged variable-rate borrowing could increase interest expense if rates rise.
Cash flow, debt and liquidity
- First-half operating cash flow was $67.8 million, versus $65.5 million in 2009. Investing cash outflow was $25.6 million, including $18.7 million for the Canadian distributor acquisition; capital expenditures were $6.7 million. Financing cash outflow was $38.9 million, including $200.0 million of share repurchases.
- Cash was $15.4 million at June 30, 2010, versus $14.0 million at year-end 2009. Working capital was $84.9 million, compared with $72.5 million at year-end.
- Long-term debt increased to $435.0 million from $297.5 million at year-end, primarily to fund repurchases. Revolver availability, after borrowings and letters of credit, was $193.2 million. The company reported compliance with all credit covenants; funded debt to adjusted EBITDA was 1.88 times against a maximum covenant of 3.0 times.
- The company repurchased 6.7 million shares for $200.0 million during the first half. On July 15, after quarter-end, the board authorized an additional repurchase program of up to $100.0 million.
Outlook, risks and unusual items
- Management expected 2010 capital expenditures of $20–$22 million and said it expected full-year gross margin to improve through sales leverage, productivity programs and selective price increases. It provided no specific revenue or EPS guidance in the supplied text.
- Management described the U.S. and international economic outlook as challenging. Key risks include demand sensitivity to economic conditions, competition, raw-material cost inflation, foreign-exchange movements, execution of growth and infrastructure investments, and financial leverage.
- Variable-rate debt was approximately $235.0 million; management estimated a 100-basis-point rate increase would reduce next-year pretax income by about $2.4 million, all else equal. A $200.0 million portion was covered by an interest-rate swap, with the hedged balance scheduled to decline.
- A Danish tax assessment relating to intercompany royalties totaled approximately $69.3 million, including interest and penalties, and could apply to later years. The company disputes the assessment; proceedings were on hold pending a U.S.-Denmark bilateral pricing agreement. The filing says the company could not estimate the possible change in unrecognized tax benefits.
- The company faced a pending New York Attorney General action concerning its unilateral retail pricing policy and an appealed antitrust class action. It stated that it intended to defend both matters and could not estimate possible losses.
- The Canadian distributor acquisition closed April 1 for $18.7 million cash plus contingent consideration valued at $6.2 million; purchase-price allocation remained provisional. The company also suspended its employee stock purchase plan indefinitely from February 1, 2010.
Most important facts for investors to verify
- Whether sales momentum and margin improvement continue, particularly in North America, and how much growth reflects underlying demand versus new products, channels or the acquisition.
- Debt, revolver availability, covenant compliance and the effect of additional repurchases on leverage and liquidity.
- Progress and potential financial exposure from the Danish tax assessment and the New York and antitrust proceedings.
- Whether commodity costs, foreign exchange and interest rates affect margins, earnings or cash flow as management’s hedges and pricing actions evolve.
- Actual capital spending compared with the $20–$22 million estimate and the results of the Canadian acquisition.