Tempur Sealy International, Inc. — 2017 Form 10-K
Entity note: The filing identifies Tempur Sealy International, Inc. as the registrant; this differs from the company name in the request metadata. Fiscal year ended December 31, 2017. Unless noted, amounts are U.S. dollars.
Business context and reporting period
The company develops, manufactures and sells bedding products under brands including Tempur-Pedic, Sealy and Stearns & Foster. It reports North America and International segments, and sells through Wholesale and Direct channels. Wholesale represented 91.7% of 2017 sales. The filing is an annual report; it also provides unaudited fourth-quarter results.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $2,754.4 million | $3,128.9 million |
| Gross profit / margin | $1,140.7 million / 41.4% | $1,307.5 million / 41.8% |
| Operating income / margin | $288.4 million / 10.5% | $410.4 million / 13.1% |
| Net income attributable to Tempur Sealy | $151.4 million | $190.6 million |
| Diluted EPS | $2.77 | $3.19 |
| Operating cash flow | $222.9 million | $165.5 million |
| Cash and cash equivalents at year-end | $41.9 million | $65.7 million |
| Total debt, including capital leases and other debt | $1,762.5 million | $1,901.0 million |
2017 adjusted EBITDA, a non-GAAP measure, was $448.5 million, down 14.0%; adjusted EPS was $3.20, down 21.0%. Adjusted operating income was $326.5 million, or 11.9% of sales, versus $425.0 million, or 13.6%, in 2016. These measures exclude specified items and are not GAAP results.
Working capital was $30.5 million, down from $106.6 million. The company had no borrowings under its revolving credit facility and reported $477.4 million of availability after letters of credit; it had $49.0 million outstanding under a separate receivables securitization facility. Its covenant leverage ratio was 3.91 times, below the 5.00-times maximum. No dividend was paid.
Fourth quarter: Net sales were $648.2 million versus $771.1 million in Q4 2016; gross profit was $273.3 million versus $317.5 million; operating income was $77.7 million versus $102.4 million; net income was $48.4 million versus $51.9 million; and diluted EPS was $0.88 versus $0.92.
Material changes versus the prior comparable period
- Sales declined 12.0% year over year. The principal driver was the termination of the Mattress Firm relationship, which ended April 3, 2017. Sales to Mattress Firm fell to $95.7 million from $668.6 million. Excluding Mattress Firm, company sales increased 8.1%.
- North America sales fell 15.4%, while International sales rose 3.9% (4.6% on a constant-currency basis). North America sales excluding Mattress Firm increased 9.3%; Direct sales grew substantially, led by e-commerce.
- Gross margin declined 40 basis points. Management cited Mattress Firm-related fixed-cost deleverage and product mix, commodity costs, and launch costs, partly offset by channel mix and productivity.
- Operating income fell $122.0 million, reflecting lower North America sales and margin, Mattress Firm termination charges, and Latin American subsidiary charges. Net income and adjusted EBITDA also declined.
- Operating cash flow increased $57.4 million, partly reflecting the absence of the $92.0 million Danish tax deposit paid in 2016. Cash declined by $23.8 million during 2017.
- Debt declined $138.5 million. The company made $138.6 million of net repayments on credit facilities in 2017, compared with net borrowings of $365.6 million in 2016.
Outlook, commentary, risks and unusual items
- Management planned major 2018 North America launches, including new Tempur-Pedic mattresses and pillows, Sealy Hybrid mattresses and adjustable bases. It expected higher North America launch costs and retailer inventory reductions ahead of new floor-model shipments.
- Management expected significant commodity inflation in 2018, partly offset by planned price increases and operational initiatives. It also warned that foreign exchange could adversely affect results.
- Management expected 2018 capital expenditures of approximately $65–$75 million and cash interest payments of approximately $90–$95 million. It targeted leverage of 3.5 times, typically within a 3.0-to-4.0-times range, and expected to prioritize debt repayment; it said leverage could be slightly above that range in Q1 2018. It might resume repurchases during 2018, subject to market conditions.
- In 2017, the company identified accounting and operational irregularities at a Latin American subsidiary. It recorded $25.7 million of 2017 charges and revised prior periods for additional charges totaling approximately $47.7 million. Management said the prior-period errors were individually immaterial; associated personnel were terminated. The filing states that these revisions are reflected in the audited statements. Management and the auditor reported effective internal control over financial reporting as of year-end.
- The 2017 tax provision included a provisional $23.8 million net benefit from U.S. tax reform, comprising a deferred-tax benefit partly offset by transition tax expense. Management said estimates could change as guidance and information become available.
- The Danish tax matter remains significant: the company reported approximately $264.3 million of assessments, including interest and penalties, for assessed years 2001–2008, and a recorded uncertain tax liability of approximately $137.8 million. It had deposited approximately $98.9 million with the Danish authority and applied approximately $36.1 million of VAT refunds to the matter. An adverse resolution or settlement could require substantial additional cash payments; timing and ultimate exposure remain uncertain.
- Pending litigation includes shareholder class and derivative actions concerning disclosures and Mattress Firm, plus disputes between Mattress Firm and company subsidiaries over contracts, trademarks and related matters. The company said outcomes and potential losses could not be reasonably estimated. A preliminary injunction restricted certain Mattress Firm use of company marks.
- Other key exposures include customer concentration and retailer consolidation, competitive and pricing pressure, variable-rate debt, raw-material supply and costs, pension underfunding, labor relations, cybersecurity and ERP implementation, and compliance with the EU GDPR scheduled to take effect in May 2018.
Most important facts for investors to verify
- Track sales, margins and cash flow excluding the discontinued Mattress Firm business, and assess whether growth with other wholesale customers offsets the lost account.
- Monitor the success, retailer uptake, launch costs and inventory effects of the 2018 product introductions, alongside commodity-price pass-through.
- Review the Latin American subsidiary corrections and ongoing controls, and reconcile the filing’s detailed tax and charge disclosures.
- Assess the Danish tax matter’s potential cash impact, settlement progress and uncertainty beyond the recorded reserve.
- Monitor debt reduction, covenant headroom, interest costs and the balance between repayment and any renewed share repurchases.
- Follow the Mattress Firm and shareholder litigation, including any developments that clarify potential financial exposure.