Tempur Sealy International, Inc. — FY2014 Form 10-K
Business context and reporting period. The filing is for the fiscal year ended December 31, 2014, with fourth-quarter results also presented. The company develops, manufactures and sells bedding products worldwide under brands including TEMPUR, Tempur-Pedic, Sealy and Stearns & Foster. In 2014 it reported three segments: Tempur North America, Tempur International and Sealy. Sealy was acquired in March 2013, so FY2014 includes a full year of Sealy operations while FY2013 includes results only from the acquisition date; annual comparisons are therefore not fully like-for-like.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $2,989.8 million | $2,464.3 million |
| Gross profit / margin | $1,150.4 million / 38.5% | $1,014.9 million / 41.2% |
| Operating income / margin | $276.3 million / approximately 9.2% | $243.8 million / approximately 9.9% |
| Net income attributable to Tempur Sealy | $108.9 million | $78.6 million |
| Diluted EPS | $1.75 | $1.28 |
| Operating cash flow | $225.2 million | $98.5 million |
| Capital expenditures | $47.5 million | $40.0 million |
- Sales rose 21.3% reported, or 23.0% on a constant-currency basis. Growth reflected a full year of Sealy results and increases in all three segments.
- Gross margin declined 270 basis points. Management attributed the pressure to Sealy’s lower margins, unfavorable product and channel mix, and foreign exchange; manufacturing and sourcing improvements partly offset the decline.
- Net income and diluted EPS improved, but FY2014 included a $23.2 million loss on the sale of U.S. innerspring facilities, $43.8 million of integration and financing costs, and $15.6 million of other income from non-recurring items, including a partial legal settlement. Adjusted EPS, a non-GAAP measure, was $2.65 versus $2.38.
- Fourth-quarter 2014 sales were $745.5 million, net income was $46.6 million and diluted EPS was $0.75; fourth-quarter 2013 figures were $678.1 million, $27.5 million and $0.45, respectively.
- Cash and cash equivalents were $62.5 million at year-end, down from $81.0 million. Working capital was $228.1 million, compared with $286.0 million.
- Year-end debt was $1,602.3 million, including capital leases and other obligations, versus $1,836.5 million a year earlier. The covenant leverage ratio—funded debt less qualified cash to adjusted EBITDA—was 3.89x, below the 4.75x limit then applicable. Revolver availability was $315.8 million.
- Cash used in investing was $10.4 million, compared with $1,213.0 million in 2013, primarily because the prior year included the Sealy acquisition. Cash used in financing was $238.1 million; 2013 financing provided $1,013.4 million, principally reflecting acquisition financing.
Material changes, outlook and risks
- Tempur North America sales increased 9.1% to $993.2 million; operating income rose to $84.9 million. Tempur International sales increased 7.4% to $472.0 million, but operating income fell 14.8% to $91.6 million. Sealy sales increased 36.8% to $1,524.6 million, primarily because FY2014 included a full year of results; its gross margin was 30.3%.
- The company sold its three U.S. innerspring component facilities to Leggett & Platt for approximately $45.0 million net consideration and recorded a $23.2 million loss. Leggett & Platt became the exclusive long-term U.S. and Canadian supplier of specified spring components.
- In 2014, the company acquired Sealy brand rights for continental Europe and Japan and began introducing products and integrating operations in those markets. Effective January 1, 2015, it reorganized reporting into North America and International segments, with corporate expenses shown separately.
- Management expected 2015 foreign-exchange impacts to be more adverse than in 2014. It forecast approximately $65 million in 2015 capital expenditures and approximately $70 million or more in cumulative Sealy cost synergies by 2016. These are expectations, not assurances; the filing provides no clear numerical 2015 revenue or EPS guidance.
- Other forward-looking priorities include product launches, brand and marketing investment, distribution expansion, cost productivity and continued Sealy integration. Integration costs were expected to continue through 2016, though at a declining level. Management stated that expected margin benefits from productivity, synergies, pricing and leverage could be offset by mix, new-product investment and foreign exchange.
- Key risks include substantial leverage and variable-rate exposure, retailer and customer concentration (the top five customers represented 34.9% of sales; Mattress Firm exceeded 10%), intense competition, commodity costs, foreign exchange, and execution risks in integration and new product launches. A 1 percentage-point increase in rates was estimated to reduce next-year pretax income by about $9.7 million.
- The Danish tax dispute concerns assessments of approximately $215.1 million, including interest and penalties, for 2001–2008; the company contests the assessments and had deferred security requirements to 2017 or 2018. Other disclosed matters include Sealy appraisal litigation, a consumer class action, an ongoing German cartel-office investigation, and environmental remediation reserves of $2.5 million for South Brunswick and approximately $0.1 million for Oakville.
- The company reported an underfunded pension position of $14.6 million at year-end and expected to contribute $1.6 million in 2015. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much reported sales and earnings growth reflects the full-year inclusion of Sealy, and how the businesses perform on a comparable basis.
- Whether gross-margin pressure stabilizes and whether management delivers the stated cost synergies while completing facility, distribution and systems integration.
- Debt repayment capacity, covenant headroom, cash generation, scheduled debt maturities and the impact of interest-rate and currency movements.
- Developments in the Danish tax assessments and other legal, regulatory and environmental matters, including potential cash exposure.
- Customer concentration and the sustainability of Tempur North America, Tempur International and Sealy segment trends, including the results of international Sealy brand-rights expansion.