Filing Summary
Filing identity: The supplied filing is Tempur Sealy International, Inc. (NYSE: TPX), not SomniGroup International Inc. It is an unaudited Form 10-Q for the quarter and six months ended June 30, 2019.
Business Context and Reporting Period
Tempur Sealy develops, manufactures and sells bedding products, including Tempur, Sealy and Stearns & Foster brands, through Wholesale and Direct channels. It reports North America and International segments. Certain Latin American businesses divested in December 2018 are presented as discontinued operations.
Financial Performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $722.8m | $659.9m | $1,413.7m | $1,297.3m |
| Gross profit / margin | $313.4m / 43.4% | $272.8m / 41.3% | $595.2m / 42.1% | $537.5m / 41.4% |
| Operating income / margin | $81.0m / 11.2% | $58.0m / 8.8% | $141.5m / 10.0% | $113.7m / 8.8% |
| Net income attributable to Tempur Sealy | $41.6m | $22.8m | $70.0m | $45.9m |
| Diluted EPS | $0.74 | $0.42 | $1.26 | $0.83 |
| Net interest expense | $22.5m | $23.2m | $44.9m | $45.9m |
Q2 sales rose 9.5% reported and 10.8% on a constant-currency basis; six-month sales rose 9.0% reported and 10.6% constant currency. North America drove growth: Q2 segment sales increased 11.4%, while International sales increased 2.0% reported (6.9% constant currency). Direct-channel sales grew 77.9% in North America and 31.5% in International on a constant-currency basis for Q2. Q2 gross margin increased 210 basis points, with improved product mix and pricing among the principal drivers.
For the six months, continuing-operations income was $71.7m, compared with $52.2m a year earlier. The effective tax rate was 31.3%, up from 26.5%. Discontinued operations generated a net loss of $1.6m, versus $8.2m.
Cash Flow, Balance Sheet and Debt
- Six-month operating cash flow from continuing operations was $45.9m, versus $17.4m in 2018. Investing cash use was $46.7m, including $39.9m of capital expenditures and $17.1m for acquisitions. Financing cash use was $4.0m. Cash decreased $7.5m to $38.3m.
- At June 30, 2019, working capital was $153.0m; current assets were $891.7m and current liabilities $738.7m. Cash was $38.3m, and the revolving facility had $477.3m available after letters of credit.
- Total debt was $1,652.5m, compared with $1,653.8m at year-end 2018. The company prepaid $75m on its Term A Facility during the first half. Covenant leverage was 3.65 times trailing-twelve-month Adjusted EBITDA, below the 5.00-times maximum; the company reported compliance with all debt covenants.
- Trailing-twelve-month Adjusted EBITDA was $451.4m. Management stated a target leverage range of 3.0–4.0 times. Debt and Adjusted EBITDA are non-GAAP or covenant-defined measures as applicable.
Material Changes, Outlook and Risks
- Operating performance improved year over year, led by North America sales growth and margin expansion. Management attributed Q2 margin gains to product and brand mix, pricing, lower floor-model expenses and efficiency; higher Sealy demand also brought incremental manufacturing overtime.
- In Q2 the company agreed to reintroduce its brands in approximately 2,500 Mattress Firm stores, with rollout expected to begin in Q4 2019 and finish early Q1 2020. It also expanded a Big Lots supply agreement, with launch expected by year-end 2019. Management expects significant incremental annual Adjusted EBITDA from these agreements beginning in 2020; their 2019 Adjusted EBITDA impact was not expected to be material. Approximately $5m of launch-related costs were expected in Q3 2019.
- A Beter Bed European supply launch covering initially more than 100 stores was expected to be completed by year-end 2019. The company expected country-specific International challenges to continue in the second half of 2019.
- Management expected approximately 60 company-owned Tempur-Pedic stores by year-end 2019, with a longer-term target of 125–150. Expected 2019 capital expenditures were $70–75m, and incremental product innovation spending was expected to be $15m for the year. Expected 2019 cash interest was $80–85m.
- The Sleep Outfitters acquisition closed April 1, 2019. Management expected the acquired retail operation to incur $5–8m of Adjusted EBITDA losses in 2019, then approach break-even after its first year and become profitable thereafter. The acquisition followed iMS’s Chapter 11 filing.
- Management anticipated near-term share repurchases of approximately $50m per quarter, subject to market conditions, cash flows, share price and alternative uses of capital. At quarter-end, $224.6m remained under the authorization.
- Risks include macroeconomic and International market weakness, foreign-exchange movements, competition from Chinese bedding imports, commodity and tariff effects, product-launch execution, retailer and customer financial condition, leverage and interest-rate exposure, and litigation or tax uncertainty. The Department of Commerce had issued a preliminary determination imposing 69.30%–84.64% tariffs on certain Chinese imports; a final determination was expected in late 2019.
- The Danish transfer-pricing matter remained material: the company reported a $129.0m liability related to the 2001–2011 settlement and a $37.5m uncertain tax liability for later years, alongside a $147.8m deposit with SKAT. Negotiations for the later-year pricing agreement were at an early stage; an adverse change or outcome could materially affect earnings. The filing says the company cannot currently estimate potential changes to uncertain tax positions.
- ASC 842 lease adoption added $197.2m of right-of-use assets and $203.3m of operating lease liabilities on January 1, 2019, without material impact on results, cash flows or debt covenants. Q2 derivative sensitivity analysis estimated a $10.6m fair-value loss under a hypothetical 10% adverse currency move, largely offset by underlying exposures. A 100-basis-point rate increase on variable-rate debt was estimated to reduce pretax income by $5.4m.
Important Facts for Investors to Verify
- Confirm the issuer and ticker: this filing identifies Tempur Sealy International, Inc. (TPX), not SomniGroup International Inc.
- Check the final outcome and market effect of the Chinese-import trade case and the timing and economics of the Mattress Firm, Big Lots and Beter Bed launches.
- Track International sales trends, the expected second-half challenges, and the execution and losses of Sleep Outfitters.
- Monitor cash conversion and working-capital movements, leverage, covenant headroom, debt repayments and the planned pace of share repurchases.
- Review developments in the Danish tax matter, including the APA negotiations, deposits, accruals and potential earnings exposure.
- Compare reported GAAP results with management’s non-GAAP measures and their adjustments; the filing’s outlook is subject to the risks described above.