Business context and reporting period
This is Tempur Sealy International, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2016, filed November 4, 2016. The filing does not identify Somnigroup International Inc. as the registrant; investors should verify the company and filing match. Tempur Sealy develops, manufactures and sells bedding and related products worldwide through North America and International segments and Retail and Other channels.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $832.4 million | $880.0 million | $2,357.8 million | $2,383.9 million |
| Gross margin | 43.5% | 40.9% | 42.0% | 39.3% |
| Operating income | $131.1 million | $110.9 million | $308.0 million | $217.3 million |
| Net income attributable to Tempur Sealy | $77.8 million | $40.2 million | $138.7 million | $84.8 million |
| Diluted EPS | $1.32 | $0.64 | $2.28 | $1.36 |
| Operating cash flow | Not separately stated | Not separately stated | $109.8 million | $133.2 million |
- Q3 sales declined 5.4% year over year (4.6% on a constant-currency basis); North America sales fell 5.8%, while International sales fell 3.5% reported but rose about 1.8% constant currency.
- Q3 gross margin improved 260 basis points, attributed mainly to operating efficiencies, sourcing and commodity costs, pricing and product mix. Operating margin rose to 15.7% from 12.6%.
- At September 30, cash was $89.0 million, working capital was $157.1 million, current assets were $769.3 million and current liabilities were $612.2 million.
- Total debt was $1,696.0 million, versus $1,479.6 million at December 31, 2015. Revolver availability was $480.2 million after letters of credit. The company reported compliance with debt covenants; its covenant leverage ratio was 3.19x against a 5.00x maximum.
- Nine-month capital expenditures were $41.9 million. Cash fell $64.9 million to $89.0 million during the period.
Material changes versus prior comparable periods
- Despite lower sales, nine-month gross profit rose to $990.0 million from $935.8 million and operating income rose to $308.0 million from $217.3 million, reflecting higher margins and lower operating expenses.
- Q3 net income increased 93.5%; the comparison benefited from prior-year German antitrust settlement costs and other unusual items, as well as lower Q3 2016 interest expense. Nine-month earnings included a $47.2 million loss on extinguishment of debt, associated with refinancing.
- Operating cash flow declined $23.4 million year over year, principally due to working-capital movements, including a $92.0 million deposit with the Danish tax authority.
- The company repurchased approximately 5.2 million shares for about $317.7 million during the first nine months. Weighted-average diluted shares fell to 60.8 million from 62.5 million year to date.
Outlook, commentary and risks
- Management said the U.S. retail environment weakened and expected Q4 2016 sales to decline year over year, including sales to Mattress Firm. It anticipated Q4 profitability pressure from product-launch costs and incremental floor-model discounts.
- October 2016 restructuring actions included centralizing operations and closing stores, primarily internationally. The company expected about $7.0 million of costs in Q4 and a similar amount of annual operating-cost reduction.
- Management expected 2016 capital expenditures of approximately $65.0 million and cash interest payments of approximately $85.0 million. It stated operating cash flow and available credit were expected to meet foreseeable needs, while cautioning that future cash generation and borrowing availability were not assured.
- Customer concentration is significant: Mattress Firm and Sleepy’s together represented 20.6% of Q3 sales and 21.8% of nine-month sales. The top five customers accounted for 38.9% and 39.5%, respectively. Mattress Firm had been acquired by Steinhoff in September 2016.
- The Danish tax authority’s assessments for 2001–2008 totaled about $229.6 million, including interest and penalties. The balance sheet included approximately $84.7 million for the combined U.S. and Danish tax impact and a tax deposit; the filing warns an adverse resolution could require payment above reserves or deposits and materially affect earnings and liquidity. Danish VAT refunds withheld were about $36.0 million.
- Other matters include a consumer class-action case in which class certification was denied September 30, 2016, with plaintiffs indicating an appeal; environmental remediation matters; and foreign-exchange and variable-interest-rate exposure. Management said environmental accruals were adequate but could not predict ultimate timing or costs.
Important facts for investors to verify
- Confirm the filing is for Tempur Sealy International, Inc., as the provided request metadata names a different company.
- Track Q4 sales and margins, especially North America and Mattress Firm, and whether the Stearns & Foster launch affects customer orders.
- Review subsequent developments in the Danish tax dispute, deposits, withheld refunds and potential exposure beyond recorded amounts.
- Assess debt, covenant headroom, interest costs and the effect of share repurchases on liquidity and leverage.
- Evaluate whether restructuring achieves the anticipated annual savings and whether product-launch costs or discounts exceed expectations.