Business context and reporting period
This unaudited Form 10-Q is for Tempur-Pedic International Inc. and subsidiaries, for the quarter and nine months ended September 30, 2012. The company makes and sells mattresses, pillows, and related products through North America and International segments. The filing registrant does not match the request metadata, which identifies SOMNIGROUP INTERNATIONAL INC.; verify the intended company.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $347.9 | $383.1 | $1,061.8 | $1,051.1 |
| Gross profit / margin | $171.2 / 49.2% | $200.6 / 52.4% | $544.1 / 51.2% | $551.9 / 52.5% |
| Operating income / margin | $63.4 / 18.2% | $96.6 / 25.2% | $197.1 / 18.5% | $254.7 / 24.2% |
| Net income (loss) | $(2.0) | $61.9 | $83.3 | $163.3 |
| Diluted EPS | $(0.03) | $0.90 | $1.31 | $2.34 |
| Operating cash flow | Not presented separately | Not presented separately | $153.7 | $179.0 |
Q3 sales fell 9.2%, while nine-month sales rose 1.0%. Q3 gross margin declined 3.2 percentage points and operating income fell 34.3%. For the first nine months, gross margin declined 1.3 points and operating income fell 22.6%. Reported Q3 diluted EPS was $(0.03), versus adjusted diluted EPS of $0.70; nine-month adjusted diluted EPS was $2.01. Adjusted EPS is a non-GAAP measure, adjusted principally for the repatriation tax charge and Sealy transaction costs.
Balance sheet, cash flow, and debt
At September 30, 2012, cash was $151.7 million (up from $111.4 million at December 31, 2011); working capital was $207.0 million. Total assets were $913.5 million, total liabilities $926.0 million, and stockholders’ deficit $12.5 million. Long-term debt was $649.5 million, up from $585.0 million at year-end. Revolver availability was $119.5 million after borrowings and letters of credit; the company reported compliance with its debt covenants and a funded-debt-to-EBITDA ratio of 1.98, against a maximum of 3.0.
Nine-month investing cash outflow was $42.3 million, including $38.4 million of capital expenditures; financing cash outflow was $70.4 million, including $150.0 million of share repurchases. Cash increased by $40.4 million over the period. Management expected 2012 capital expenditures of approximately $50 million and cash interest payments of approximately $17 million, assuming the Sealy acquisition did not close in 2012.
Drivers, outlook, and material items
- North America was the principal weakness: Q3 sales declined 13.8%, with retail sales down 14.0%. Management attributed the decline to intensified competition, product launches, aggressive marketing, and incentives. North American gross margin fell to 43.6% from 50.0%, reflecting promotions, unfavorable product mix, and lower-volume fixed-cost deleverage.
- International Q3 sales rose 3.2% as reported and approximately 11.1% on a constant-currency basis; nine-month sales rose 10.0% as reported and approximately 16.5% constant currency. Management cited expanded distribution, brand investment, and company-owned stores.
- Management expected competitive pressure to continue and gross margins to decrease for full-year 2012. Planned responses included product innovation, consumer advertising, and cost optimization. The filing gives no specific full-year sales or earnings guidance.
- On September 26, 2012, the company agreed to acquire Sealy for $2.20 per share; expected total consideration, including assumed debt less cash acquired, was approximately $1.3 billion. Closing was expected in the first half of 2013, subject to antitrust clearance and other conditions. Financing commitments included $1.77 billion of secured facilities and up to $350 million of bridge financing if a proposed notes offering was not completed. The company anticipated approximately $1.9 billion of total debt after the transaction.
- The change in plans for foreign earnings repatriation triggered a $41.9 million tax expense in Q3, contributing to the quarterly loss and a 103.4% effective tax rate. Management expected to repatriate non-U.S. cash upon closing of the proposed acquisition.
- A Danish tax assessment covering 2001–2006 was approximately $144.3 million including interest and penalties. The matter was in bilateral tax-agreement discussions; the company disputed the assessment, and authorities could require security up to the claim amount if the case proceeded to litigation.
- Shareholder securities lawsuits and six Sealy merger-related class actions were pending. The company said it intended to defend them; outcomes and potential losses could not be estimated clearly. The merger agreement includes potential termination fees, including up to $90 million payable by the company in specified antitrust-related circumstances.
Most important facts to verify
- Confirm the intended issuer: the supplied filing is for Tempur-Pedic International Inc., not SOMNIGROUP INTERNATIONAL INC.
- Review the basis and cash implications of the $41.9 million repatriation-related tax charge and the plan to repatriate foreign cash.
- Assess the proposed Sealy acquisition’s financing, closing conditions, potential debt burden, termination fees, litigation, and integration risks.
- Track North American sales, promotional intensity, gross-margin trends, and whether management’s stabilization initiatives are effective.
- Monitor the Danish tax dispute and potential security or payment exposure, as well as the pending shareholder and merger litigation.
- Verify liquidity and covenant headroom against capital spending, debt service, and the company’s reduced expectation for further share repurchases.