Business context and reporting period
The supplied filing is Tempur Sealy International, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017—not a filing for SOMNIGROUP INTERNATIONAL INC. Tempur Sealy develops, manufactures and sells bedding products under brands including Tempur-Pedic, Sealy and Stearns & Foster. It reports North America and International segments and Wholesale and Direct channels.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $724.8 | $832.4 | $2,106.2 | $2,357.8 |
| Gross profit / margin | $312.2 / 43.1% | $362.1 / 43.5% | $867.4 / 41.2% | $990.0 / 42.0% |
| Operating income / margin | $94.6 / 13.1% | $131.1 / 15.7% | $210.7 / 10.0% | $308.0 / 13.1% |
| Net income attributable to Tempur Sealy | $44.6 | $77.8 | $103.0 | $138.7 |
| Diluted EPS | $0.81 | $1.32 | $1.89 | $2.28 |
| Net cash from operating activities | $127.3 | $57.9 | $202.5 | $109.8 |
Q3 sales fell 12.9%; management reported a 13.3% decline on a constant-currency basis. Q3 adjusted EBITDA, a non-GAAP measure, was $129.3 versus $155.0; adjusted net income was $54.9 versus $77.8 and adjusted diluted EPS was $1.00 versus $1.32. For the first nine months, capital expenditures were $43.4, and free cash flow, as defined by the company, was $159.1.
Balance sheet, debt and liquidity
At September 30, 2017, cash was $41.8, current assets were $657.3 and current liabilities were $610.6, for reported working capital of $46.7. At December 31, 2016, cash was $65.7 and working capital was $126.0. Total debt was $1,762.9, including $66.3 current; debt net of deferred financing costs was $1,753.0. Debt declined from $1,901.0 at year-end 2016. The company reported $478.1 of availability under its revolving facility, after letters of credit, and $46.5 outstanding under its accounts-receivable securitization facility. It was in compliance with debt covenants; the covenant leverage ratio was 3.70x against a maximum of 5.00x.
Material changes and management commentary
- Mattress Firm contract termination: Mattress Firm was the company’s largest customer in 2016. Its relationship ended April 3, 2017. It accounted for 4.5% of sales in the first nine months of 2017 versus 21.8% in the comparable 2016 period. Excluding Mattress Firm, nine-month sales increased 9.0%, according to management.
- Regional performance: Q3 North America sales declined 16.9%, while International sales rose 7.7% (7.0% constant currency). For nine months, North America sales fell 13.3% and International sales rose 1.7% (3.8% constant currency).
- Margin pressure: Q3 gross margin fell 40 basis points. Management cited Mattress Firm-related fixed-cost deleverage and brand mix, commodity costs, and international product-launch and mix effects. Nine-month gross margin declined 80 basis points.
- Unusual items and costs: The company recorded $25.9 of net charges associated with the Mattress Firm termination in Q1. Q3 included $11.7 of Latin American subsidiary charges, including $9.2 of interest expense related to tax obligations and financing arrangements, plus hurricane-related costs and a European customer bankruptcy-related bad-debt charge. Management said it was unwinding the Latin American arrangements and did not expect that type of interest expense to recur.
- Cash generation and uses: Nine-month operating cash flow improved from $109.8 to $202.5, substantially reflecting working-capital movements and the prior-year Danish tax deposit. Financing activities used $180.6, including net debt repayments and $44.9 of treasury-stock repurchases and withholding-related purchases.
Outlook, risks and contingencies
Management expected 2017 sales to decline from 2016 and profitability to be lower, primarily due to Mattress Firm’s departure; recovery depended on recapturing sales and market share through existing and new channels. It expected approximately $10 of commodity inflation in Q4 2017 and continued inflation in 2018, and projected 2017 capital expenditures of $60–$70. The company targeted leverage of 3.5x and said it expected to use excess operating cash to repay debt; subject to market conditions, it might resume repurchases in 2018. It expected cash and available credit to cover anticipated needs but cautioned that operating cash flow or future borrowing availability could be insufficient. It estimated 2017 cash interest payments of $85–$90.
The Danish tax matter is a significant uncertainty: assessed amounts for 2001–2008 totaled approximately $256.4 including interest and penalties, while the company accrued approximately $135.2. SKAT also withheld VAT refunds, and the company had made a tax deposit and applied refunds against the potential liability. An adverse resolution could require payments beyond reserves and materially affect earnings or liquidity. The company also disclosed unresolved shareholder securities and derivative suits and litigation with Mattress Firm; it could not estimate possible losses in these matters. Management’s interim impairment review found no impairment, but future impairment could arise if sales and market-share recovery assumptions are not met. Other stated risks include leverage, covenant compliance, interest and foreign-exchange exposure, commodity inflation, retailer concentration, competition and economic conditions.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied 10-Q is for Tempur Sealy International, Inc., not SOMNIGROUP INTERNATIONAL INC.
- Track post-Mattress Firm sales recovery, especially North America wholesale performance and the pace of Direct-channel growth.
- Review the Danish tax dispute, accrued reserve, withheld VAT refunds and potential exposure beyond the reserve.
- Monitor debt, liquidity, covenant headroom, cash interest costs and the repayment of Latin American obligations.
- Assess whether projected capital spending, commodity inflation and stated outlook assumptions remain current, and review developments in pending litigation.