Tempur Sealy International, Inc. — Q2 2018 Form 10-Q
Filing identity: The supplied filing is for Tempur Sealy International, Inc., not Somnigroup International Inc. It covers the quarter and six months ended June 30, 2018; unaudited results are compared with the corresponding 2017 periods. The company develops, manufactures, markets and sells bedding products through North America and International segments, and Wholesale and Direct channels.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $669.7 million, up 1.6% (2017: $659.3 million) | $1,317.7 million, down 4.6% (2017: $1,381.4 million) |
| Gross profit and margin | $276.1 million; 41.2% (2017: $268.6 million; 40.7%) | $544.0 million; 41.3% (2017: $555.2 million; 40.2%) |
| Operating income | $55.5 million, down 1.9%; 8.3% margin (2017: $56.6 million; 8.6%) | $109.4 million, down 5.8%; 8.3% margin (2017: $116.1 million; 8.4%) |
| Net income attributable to company | $22.8 million (2017: $24.5 million) | $45.9 million (2017: $58.4 million) |
| Diluted EPS | $0.42 (2017: $0.45) | $0.83 (2017: $1.07) |
| Operating cash flow | $1.6 million for the six months (2017: $75.2 million) |
Second-quarter non-GAAP adjusted EBITDA was $90.7 million versus $85.8 million; reported EBITDA was $83.8 million versus $85.8 million. Adjusted net income was $28.5 million and adjusted diluted EPS was $0.52; these figures exclude $6.9 million of restructuring costs and related tax adjustments. The company reported trailing-12-month adjusted EBITDA of $415.5 million.
Second-quarter sales were nearly flat in North America, at $527.8 million, and rose 6.0% in International, to $141.9 million. For the first half, North America sales fell 8.6% to $1,012.8 million, while International sales increased 11.4% to $304.9 million. Direct-channel sales grew in both segments; North American Wholesale sales remained pressured.
Liquidity, debt and cash flow
- At June 30, cash was $32.6 million, working capital was $105.1 million, and current assets and current liabilities were $686.2 million and $581.1 million, respectively.
- Total debt was $1,792.6 million, up from $1,762.5 million at December 31, 2017. Balance-sheet long-term debt, net of current maturities, was $1,706.8 million. The company had $477.4 million of revolver availability after letters of credit.
- Leverage under the credit agreement was 4.31x consolidated funded debt less qualified cash to adjusted EBITDA, below the 5.00x covenant maximum but above management’s 3.0x–4.0x target range. The company said it expected to return to the target range by year-end 2018 using excess operating cash for debt repayment. It reported compliance with debt covenants.
- First-half investing cash outflow was $40.0 million, including $40.6 million of capital expenditures; financing cash inflow was $30.6 million. Cash declined by $9.3 million during the period.
Changes, outlook and management commentary
- First-half sales comparisons reflect the absence of Mattress Firm sales: the company had $95.7 million of sales to Mattress Firm in the first half of 2017 and none in 2018. Excluding Mattress Firm, North America sales were flat for the first half, according to management.
- Management cited increased low-priced bedding imports from China, online-channel growth, weaker traffic at traditional retailers and declines in certain department-store accounts. Mattress Firm discounting also affected demand for value-priced Sealy products.
- Commodity inflation reduced first-half gross margin by approximately $27 million. Management expected approximately $50 million of commodity cost inflation for full-year 2018 and said it raised prices in Q1 and planned another increase in Q4.
- New North American products launched during the first half included entry-level Tempur mattresses, Tempur pillows, Sealy Hybrid mattresses and adjustable bases. Higher-end Tempur mattresses were expected in the second half of 2018 and Q1 2019. Rollout sequencing, a delayed launch to meet quality standards, and retailer sell-through of existing inventory hurt Q2 results. Management expected $12 million of incremental 2018 product-launch costs versus 2017.
- The company recorded $6.9 million of Q2 restructuring costs for International segment simplification, including headcount, professional fees and store closures, and expected further costs in the second half. It planned to convert certain subsidiaries to licensing and third-party distribution arrangements.
- Management projected 2018 capital expenditures of approximately $70 million to $75 million and cash interest payments of approximately $90 million to $95 million. It said operating cash and available credit were expected to fund debt service, capital expenditures and working capital, while cautioning that future cash generation and borrowing availability were not assured.
- Topic 606 adoption changed royalty income classification into net sales, increased reported 2018 sales and gross margin relative to prior-year presentation, and reduced reported operating margin comparability; management said it did not change operating income, net income or EBITDA. The company recorded an approximately $3.0 million, net-of-tax, opening retained-earnings adjustment.
Risks, contingencies and unusual items
- Debt and interest-rate exposure are significant: approximately $673.3 million of debt was variable-rate; a 100-basis-point rate increase was estimated to reduce pretax income by about $6.7 million.
- Argentina was determined to be highly inflationary effective June 30, 2018; highly inflationary accounting was to begin for the subsidiary on July 1.
- The Danish tax matter involved assessments of approximately $263.7 million, including interest and penalties, for 2001–2008. The company accrued approximately $134.8 million and said further assessments for 2009–2017 could exceed the assessed amount for 2001–2008. It also disclosed approximately $58.8 million of VAT refunds withheld, a tax deposit of about $96.3 million, and potential material adverse effects if it does not prevail or reach settlement.
- Pending matters include securities and derivative shareholder suits and litigation with Mattress Firm. The company said outcomes and potential losses could not be reasonably estimated; it intended to defend the claims. It noted that the Mattress Firm federal case had summary-judgment orders in June and July 2018 and anticipated a trial date.
- Comfort Revolution acquired the remaining 55% interest on July 11, 2018; management said the acquisition was not expected to materially affect the financial statements.
- The company said it was still assessing the 2019 lease-accounting standard and expected a material increase in recognized balance-sheet assets and liabilities upon adoption.
Important facts for investors to verify
- Confirm the issuer identity: the filing is Tempur Sealy International, Inc., despite the request metadata naming Somnigroup International Inc.
- Track working-capital absorption and operating cash conversion, particularly inventory and receivables, which contributed to the sharp first-half operating-cash-flow decline.
- Monitor leverage against the 5.00x covenant ceiling and management’s year-end target range, as well as variable-rate interest exposure.
- Assess whether pricing actions offset commodity inflation and whether new-product launches recover sales and margins without further delays or significant launch costs.
- Follow the Danish tax dispute and Mattress Firm litigation for changes in exposure, reserve levels, timing or outcome.
- Separate GAAP performance from adjusted, non-GAAP measures and account for Topic 606’s effect on year-over-year sales and margin comparisons.