Tempur Sealy Reports First Quarter 2016 Results

Furniture World News Desk on 5/2/2016

Tempur Sealy International, Inc. (NYSE: TPX) recently announced their financial results for the first quarter ended March 31, 2016. The Company also reaffirmed financial guidance for the full year 2016.

• Total net sales decreased 2.5% to $721.0 million from $739.5 million in the first quarter of 2016 . On a constant currency basis(1), total net sales were flat, with a decrease of 1.6% in the North America business segment and an increase of 5.9% in the International business segment.
  
  
• Gross margin under U.S. generally accepted accounting principles ("GAAP") was 40.4% as compared to 37.7% in the first quarter of 2015. Adjusted gross margin(1) was 40.4% as compared to 38.5% in the first quarter of 2015.
  
  
• GAAP operating income increased 41.0% to $76.7 million as compared to $54.4 million in the first quarter of 2015. Operating income included $3.0 million of additional costs related to executive management transition and $0.9 million of integration costs. Operating income in the first quarter of 2015 included $11.7 million of integration costs and $2.1 million of additional costs related to the Company's 2015 Annual Meeting. Adjusted operating income(1) increased 18.2% to $80.6 million, or 11.2% of net sales, as compared to $68.2 million, or 9.2% of net sales, in the first quarter of 2015.
  
  
• Earnings before interest, tax, depreciation and amortization ("EBITDA")(1) increased 34.4% to $102.0 million as compared to $75.9 million for the first quarter of 2015. Adjusted EBITDA(1) increased 14.9% to $104.0 million as compared to $90.5 million in the first quarter of 2015.
  
  
• Adjustments to EBITDA totaled $2 million, as compared to $15 million in the first quarter of 2015.
  
  
• GAAP net income increased 69.2% to $39.6 million as compared to $23.4 million in the first quarter of 2015. Adjusted net income(1) increased 24.0% to $42.3 million as compared to $34.1 million in the first quarter of 2015.
  
  
• GAAP earnings per diluted share ("EPS") was $0.63 as compared to $0.38 in the first quarter of 2015. Adjusted EPS(1) increased 23.6% to $0.68 as compared to adjusted EPS of $0.55 in the first quarter of 2015. On a constant currency basis, adjusted EPS increased 25.5%.
  
  
• The Company ended the first quarter of 2016 with consolidated funded debt less qualified cash(1) of $1.5 billion. Leverage based on the ratio of consolidated funded debt less qualified cash to Adjusted EBITDA(1) was 3.18 times for the trailing twelve months ended March 31, 2016 as compared to 3.93 times for the trailing twelve months ended March 31, 2015.
  
  
• During the first quarter of 2016, the Company purchased 1.7 million shares of its common stock for a total cost of $100 million. As of March 31, 2016, the Company had $100 million available under its existing share repurchase authorization.

Tempur Sealy International, Inc. Chairman and CEO Scott Thompson commented, "We are very pleased with our results as we grew adjusted EBITDA 15% and adjusted EPS 24% while increasing direct advertising and marketing investments, and launching new industry leading products worldwide. Overall, plant operations improved and adjusted operating margin expanded 200 basis points. The Team is focused on continuing to improve operations, and we are all striving to achieve our targets."

(1) This is a non-GAAP financial measure. Please refer to "Non-GAAP Financial Measures and Constant Currency Information" below.


Business Segment Highlights

The Company's business segments include North America and International. Corporate operating expenses are not included in either of the business segments and are presented separately as a reconciling item to consolidated results.

North America net sales decreased 2.4% to $580.0 million from $594.1 million in the first quarter. On a constant currency basis, North America net sales decreased 1.6%. GAAP gross margin was 37.0% as compared to 34.2% in the first quarter of 2015. GAAP operating margin was 13.3% as compared to 9.7% in the first quarter of 2015. In the first quarter, net sales declined as the North American bedding market performed below expectations and the scope of our product launch transitions impacted sales.

North America adjusted gross margin(1) improved 190 basis points to 37.0% as compared to 35.1% in the first quarter, primarily driven by improved operations, pricing actions, and a decrease in commodity costs, partially offset by product mix and new product launches. The increase in North America adjusted gross margin(1) as well as an improvement in the Company's selling and marketing leverage drove a 220 basis point increase in the Company's North America adjusted operating margin(1) to 13.4% as compared to 11.2% in the first quarter of 2015.

International net sales decreased 3.0% to $141.0 million from $145.4 million in the first quarter. On a constant currency basis, International net sales increased 5.9%. GAAP gross margin was 54.3% as compared to 52.0% in the first quarter of 2015. GAAP operating margin was 19.4% as compared to 17.4% in the first quarter 2015. In the first quarter, net sales declined due to the negative effects of foreign exchange on a year over year basis.

International adjusted gross margin(1) improved 190 basis points to 54.3% as compared to 52.4% in the first quarter, primarily driven by channel mix, improvements in plant efficiency and a decrease in commodity costs, partially offset by an increase in sales of Sealy products relative to sales of Tempur products. The increase in International adjusted gross margin(1) drove a 110 basis point increase in the Company's International adjusted operating margin(1) to 19.4% as compared to 18.3% in the first quarter of 2015.

Corporate GAAP operating expense decreased 3.1% to $27.9 million from $28.8 million in the first quarter. The decrease in operating expense was primarily driven by a $3.0 million reduction in Corporate legal and professional fees in the first quarter of 2016 as compared to the same period in 2015 (which included $2.1 million of additional 2015 Annual Meeting expenses), as well as a reduction in Corporate overhead expenses in the first quarter of 2016. These decreases were partially offset by $3.0 million of executive transition costs incurred in the first quarter of 2016, and increases in employee-related compensation.

Corporate adjusted operating expense(1) decreased 2.0% to $24.3 million from $24.8 million in the first quarter. The decrease in Corporate adjusted operating expense was primarily related to a reduction in Corporate overhead expenses, partially offset by increases in employee-related compensation.

(1) This is a non-GAAP financial measure. Please refer to "Non-GAAP Financial Measures and Constant Currency Information" below.

 
Balance Sheet

As of March 31, 2016, the Company reported $37.1 million in cash and cash equivalents and $1.5 billion in total debt, as compared to $153.9 million in cash and cash equivalents and $1.5 billion in total debt as of December 31, 2015.

Financial Guidance

The Company also today reaffirmed its financial guidance for 2016. For the full year 2016, the Company currently expects Adjusted EBITDA to range from $500 million to $550 million. The Company noted its expectations are based on information available at the time of this release, and are subject to changing conditions, many of which are outside the Company's control.

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More about Tempur Sealy International, Inc: Tempur Sealy International, Inc. (NYSE: TPX) is the world's largest bedding provider. Tempur Sealy International, Inc. develops, manufactures and markets mattresses, foundations, pillows and other products. The Company's brand portfolio includes many highly recognized brands, including TEMPUR®, Tempur-Pedic®, Sealy®, Sealy Posturepedic® and Stearns & Foster®. World headquarters for Tempur Sealy International, Inc. is in Lexington, KY. For more information, visit http://www.tempursealy.com.


Footnotes:

(1) Integration costs represents costs, including legal fees, professional fees, compensation costs and other charges related to the transition of manufacturing facilities, and other costs related to the continued alignment of the North America business segment related to the Sealy acquisition. Excluding the tax effect, total integration costs are $1.0 million and $11.7 million for the first quarter of 2016 and 2015, respectively.

(2) Executive management transition represents certain costs associated with the transition of certain of the Company's executive officers. Excluding the tax effect, total executive management transition costs are $3.0 million for the first quarter of 2016.

(3) 2015 Annual Meeting costs represent additional costs related to the Company's 2015 Annual Meeting and related issues. Excluding the tax effect, total 2015 Annual Meeting costs are $2.1 million for the first quarter of 2015.

(4) Redemption value adjustment on redeemable non-controlling interest represents a $1.0 million adjustment, net of tax, to increase the carrying value of the redeemable non-controlling interest as of March 31, 2015.

(5) Adjustment of income taxes to normalized rate represents adjustments associated with the aforementioned items and other discrete income tax events.

(6) Adjustments for the North America business segment represent integration costs, which include compensation costs, professional fees and other charges related to the transition of manufacturing facilities, and other costs to support the continued alignment of the North America business segment related to the Sealy acquisition.

(7) Adjustments for Corporate represent executive management transition costs and integration costs which include professional fees and other charges to align the business related to the Sealy acquisition.

(8) Adjustments for the International business segment represent integration costs incurred in connection with the introduction of Sealy products in certain international markets.

(9) Adjustments for Corporate represent integration costs which include legal fees, professional fees and other charges to align the business related to the Sealy acquisition, as well as 2015 Annual Meeting costs.

(10) Integration costs represents costs, including legal fees, professional fees, compensation costs and other charges related to the transition of manufacturing facilities, and other costs related to the continued alignment of the North America business segment related to the Sealy acquisition.

(11) German legal settlement represents the previously announced €15.5 million ($17.6 million) settlement the Company reached in 2015 with the German Foreign Cartel Office ("FCO") to fully resolve the FCO's antitrust investigation, and related legal fees.

(12) Restructuring costs represents costs associated with headcount reduction and store closures.

(13) Executive management transition and retention compensation represents certain costs associated with the transition of certain of the Company's executive officers.

(14) Other income includes income from a partial settlement of a legal dispute.

(15) 2015 Annual Meeting costs represent additional costs related to the Company's 2015 Annual Meeting and related issues.

(16) Pension settlement represents pension expense recorded in conjunction with a settlement offered to terminated, vested participants in a defined benefit pension plan.

(17) Loss on disposal of business represents costs associated with the disposition of the three Sealy U.S. innerspring component production facilities and related equipment.

(18) Financing costs represent costs incurred in connection with the amendment of the 2012 Credit Facility.

(19) Redemption value adjustment on redeemable non-controlling interest represents a $(1.0) million and $1.0 million adjustment, net of tax, to adjust the carrying value of the redeemable non-controlling interest for the trailing twelve month period ended March 31, 2016 and 2015, respectively, to its redemption value.

(20) The Company presents deferred financing costs as a direct reduction from the carrying amount of the related debt in the Condensed Consolidated Balance Sheets. For purposes of determining total debt for financial covenants, the Company has added these costs back to total debt, net as calculated per the Condensed Consolidated Balance Sheets.

(21) Qualified cash as defined in the 2016 Credit Agreement and 2012 Credit Agreement equals 100.0% of unrestricted domestic cash plus 60.0% of unrestricted foreign cash. For purposes of calculating leverage ratios, qualified cash is capped at $150.0 million.