Business context and reporting period
Filing identity: The supplied filing is Tempur Sealy International, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017; it does not identify Somnigroup International Inc. as the registrant. Confirm the filing matches the intended company.
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. Results are for the three months ended March 31, 2017, compared with the same 2016 quarter.
Key financial metrics
Amounts are in millions except per-share data and ratios.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $722.1 | $721.0 |
| Gross profit / margin | $286.6 / 39.7% | $291.0 / 40.4% |
| Operating income / margin | $59.5 / 8.2% | $76.7 / 10.6% |
| Net income attributable to Tempur Sealy | $33.9 | $39.6 |
| Diluted EPS | $0.62 | $0.63 |
| Operating cash flow | $67.2 | $(18.8) |
| Capital expenditures | $12.9 | $12.6 |
| Free cash flow, company-defined | $54.3 | $(31.4) |
Net sales rose 0.2% reported and 0.7% on a constant-currency basis. Adjusted gross margin was 41.3% versus 40.4%; adjusted operating income was $85.4 versus $80.6; adjusted net income was $52.2 versus $42.3; and adjusted diluted EPS was $0.96 versus $0.68. These are non-GAAP measures and exclude specified items.
Mattress Firm sales fell 37.0% to $94.5 and represented 13.1% of company sales, compared with 20.8% a year earlier. Excluding Mattress Firm, sales increased 9.9%. North America sales rose 0.4%; International sales declined 0.9% reported but increased 3.2% at constant currency. Direct-channel sales increased to $49.8 from $35.9, primarily on e-commerce growth.
At March 31, 2017, cash was $42.5, working capital was $90.1, and total debt was $1,869.1; balance-sheet debt net of financing costs was $1,856.7. Current assets were $640.8 and current liabilities $550.7. The company reported $341.2 of revolver availability after letters of credit. Its covenant leverage ratio was 3.46x against a 5.00x maximum, and it reported compliance with all debt covenants.
Quarterly operating cash flow improved by $86.0 year over year, primarily due to working-capital changes; it included $9.3 of Mattress Firm transition payments. Financing cash outflow was $76.0, including $43.8 of treasury-stock repurchases. Cash declined $23.2 during the quarter.
Material changes versus the prior comparable period
- Reported sales were nearly flat, but gross margin fell 70 basis points and operating income declined 22.4%; net income fell 14.4%.
- The termination of Mattress Firm drove $25.9 of net GAAP charges in Q1, including $11.5 in cost of sales and $14.4 in customer termination charges. The company also received $9.3 under transition agreements, recorded in other income.
- Despite the reported earnings decline, management’s adjusted results increased, reflecting exclusions including Mattress Firm-related charges. The adjusted EBITDA reconciliation excludes $34.3, not $25.9, because it also adjusts for the stock-compensation benefit.
- Operating cash flow turned positive from a year-earlier outflow, while cash and working capital declined from December 31, 2016. Debt decreased from $1,901.0 at year-end.
- Weighted-average diluted shares fell to 54.6 million from 62.6 million. The company repurchased 0.6 million shares for approximately $40.1 and increased its repurchase authorization by $200.0.
Outlook, management commentary, risks and unusual items
- Mattress Firm: The supply relationship ended April 3, 2017. Management expects near-term disruption into Q2, lower U.S. market share, 2017 sales below 2016, and lower 2017 profitability than 2016. It is seeking to replace lost sales through existing and new retailers. It expects to preserve manufacturing capability and increase marketing investment, which may weigh on near-term profit.
- Liquidity and spending: Management expects 2017 capital expenditures of $60–$70 and cash interest payments of approximately $85. It expects operating cash and credit facilities to meet foreseeable needs, while prioritizing debt repayment; it may continue share repurchases subject to market conditions. Its stated leverage target is 3.5x, with a typical range of 3.0x–4.0x. No specific full-year revenue or earnings target is provided.
- Additional financing: On April 12, 2017, the company entered an accounts-receivable securitization facility with a seasonal borrowing capacity subject to a $120.0 maximum, at one-month LIBOR plus 80 basis points, maturing April 12, 2019.
- Tax contingency: Danish tax assessments for 2001–2008 totaled approximately $225.5 including interest and penalties; the company accrued about $122.7. A proposed resolution for 2001–2011 was non-binding. VAT refunds of about $39.9 were being withheld. An adverse outcome or reserve increase could materially affect earnings and liquidity.
- Litigation: Disputes include a consumer class action whose class-certification denial was reopened for reconsideration, a shareholder securities class action, and litigation between the company’s subsidiaries and Mattress Firm. Outcomes and potential losses were not estimable; the company intends to defend the claims.
- Other risks and items: Foreign-exchange movements negatively affected adjusted EBITDA by about 2.3%; a 100-basis-point rate increase on variable-rate debt was estimated to reduce pretax income by about $7.0 annually, all else equal. The company reported no impairment in its Q1 review following the Mattress Firm termination, but future impairment remains possible if recovery assumptions are not achieved. It also adopted new share-based compensation accounting in 2017, recording a $1.0 tax deficiency.
- Governance: A shareholder rights agreement generally becomes exercisable if a person or group acquires 20% or more of common shares without board approval; it was scheduled to expire February 7, 2018, absent earlier redemption or exchange.
Most important facts for investors to verify
- Confirm the issuer identity: this filing names Tempur Sealy International, Inc., not Somnigroup International Inc.
- Track sales replacement after Mattress Firm’s exit, including Q2 disruption, new distribution, market share, and marketing spending.
- Reconcile reported results with management’s non-GAAP adjustments, especially termination charges and the $9.3 transition payment.
- Monitor cash generation, debt, revolver use, leverage covenant headroom, and whether planned capex and repurchases remain consistent with debt-repayment priorities.
- Follow developments in the Danish tax matter and the consumer, shareholder, and Mattress Firm litigation, including any reserve changes or cash impacts.
- Assess whether the assumptions supporting the no-impairment conclusion remain valid as the company attempts to recapture sales.