Tempur Sealy International, Inc. — Q3 2021 Form 10-Q
Filing identity: The supplied filing is for Tempur Sealy International, Inc. (NYSE: TPX), not SOMNIGROUP INTERNATIONAL INC. It covers the quarter and nine months ended September 30, 2021; the financial statements are unaudited.
Business context and reporting period
The company designs, manufactures and distributes bedding products through Wholesale and Direct channels, across North America and International segments. It completed its acquisition of UK retailer Dreams Topco Limited on August 2, 2021; results after that date are included in the International segment.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,358.3 million | $1,132.3 million | $3,571.2 million | $2,619.9 million |
| Gross profit / margin | $577.1 million / 42.5% | $530.2 million / 46.8% | $1,554.2 million / 43.5% | $1,153.2 million / 44.0% |
| Operating income | $249.8 million | $180.2 million | $661.5 million | $338.9 million |
| Net income attributable to Tempur Sealy | $177.4 million | $121.4 million | $448.7 million | $204.1 million |
| Diluted EPS | $0.87 | $0.57 | $2.18 | $0.97 |
Q3 adjusted operating income was $252.1 million, adjusted net income $179.6 million, adjusted diluted EPS $0.88 and adjusted EBITDA $297.6 million; these are non-GAAP measures. Q3 GAAP gross margin fell 430 basis points year over year, while operating margin rose from 15.9% to 18.4%. The company attributed the margin pressure mainly to commodity costs and pricing actions that had not yet produced a margin benefit, operational inefficiencies and product mix; the acquisition of Dreams also diluted International margins. Lower corporate expenses, particularly lower amortization of performance-based compensation, supported reported operating income.
For the first nine months, operating cash flow from continuing operations was $597.5 million, investing cash flow was negative $508.0 million, and financing cash flow was positive $356.4 million. Cash and cash equivalents were $503.3 million at September 30, 2021, versus $65.0 million at year-end 2020. Net working capital was $323.4 million. Total debt was $2,361.7 million, up from $1,370.3 million at year-end; covenant-defined debt less netted cash was $1,859.7 million, and the reported leverage ratio was 1.68x. The company reported $1,397.3 million of liquidity, including cash, revolver availability and receivables securitization availability, and stated it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Q3 sales increased 20.0% year over year; nine-month sales increased 36.3%. The company said prior-year comparisons reflected COVID-19 disruption, and Q3 sales growth was constrained by supply-chain limits.
- International sales growth included Dreams. The acquisition’s preliminary purchase-price allocation included $331.3 million of goodwill and a $143.1 million indefinite-lived trade-name asset; goodwill was not tax deductible.
- The company issued $800 million of 4.00% notes due 2029 and $800 million of 3.875% notes due 2031, and redeemed its 2026 and remaining 2023 notes. Nine-month loss on extinguishment of debt was $23.0 million.
- It repurchased 14.1 million shares for approximately $551.4 million during the first nine months and paid $45.8 million of dividends. Stockholders’ equity declined to $362.5 million from $504.6 million at year-end.
Outlook, commentary and risks
- Management expected full-year 2021 consolidated sales growth to exceed 35%. It estimated Q3 sales would have been about $200 million higher without supply-chain constraints, expected constraints to continue affecting Q4 growth, and anticipated substantial resolution by year-end with improved capacity to meet demand in 2022.
- Management expected 2021 capital expenditures of approximately $140–$150 million and cash interest payments of approximately $55 million. It planned further pricing actions in 2022 to address commodity inflation.
- Management described strong demand but ongoing constraints in components and inbound and outbound freight. It also cited inflationary commodity costs, COVID-19 uncertainty, foreign-exchange exposure and interest-rate risk. A 100-basis-point increase in rates on variable-rate debt was estimated to reduce pretax income by approximately $6.8 million.
- The Danish tax dispute remains a contingency for 2012 through 2021. The company reported a $48.6 million uncertain tax liability for that period and warned an unfavorable resolution or changed circumstances could materially affect earnings. The company stated pending legal and administrative proceedings were not expected, in aggregate, to have a material adverse effect.
- The board declared a Q3 dividend of $0.09 per share. On October 28, 2021, it increased the total share-repurchase authorization to $600 million. These plans remain subject to cash needs, market conditions and debt-agreement restrictions.
Important facts for investors to verify
- Confirm the issuer: this filing identifies Tempur Sealy International, Inc., despite the request metadata naming SOMNIGROUP INTERNATIONAL INC.
- Track supply-chain recovery, fulfillment constraints and the effect of further pricing actions on sales and gross margins.
- Assess Dreams’ integration, contribution to International growth, lower margin profile and final purchase-price allocation.
- Monitor debt, interest-rate exposure, covenant headroom, capital allocation and the execution of repurchases and dividends.
- Follow developments in the Danish tax matter and any resulting changes to tax liabilities, deposits or deferred tax assets.
- Compare reported GAAP results with management’s non-GAAP adjusted measures, including the impact of unusual compensation and debt-refinancing items.