Tempur Sealy Reports Third Quarter 2015 Results - PDF

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October 29, 2015 Tempur Sealy Reports Third Quarter 2015 Results -- Net Sales Increase 6%; Margins Expand; Adjusted EPS Increases 26% LEXINGTON, Ky., Oct. 29, 2015 /PRNewswire/ -- Tempur Sealy International,
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October 29, 2015 Tempur Sealy Reports Third Quarter 2015 Results -- Net Sales Increase 6%; Margins Expand; Adjusted EPS Increases 26% LEXINGTON, Ky., Oct. 29, 2015 /PRNewswire/ -- Tempur Sealy International, Inc. (NYSE: TPX) today announced financial results for the third quarter ended The Company also revised financial guidance for the full year THIRD QUARTER 2015 FINANCIAL SUMMARY Total net sales increased 6.4% to $880.0 million from $827.4 million in the third quarter of On a constant currency basis (1), total net sales increased 10.6%, with growth in both the North America and International business segments. Gross margin under U.S. generally accepted accounting principles ( GAAP ) was 40.9% as compared to 38.5% in the third quarter of Adjusted gross margin (1) was 41.3% as compared to 38.8% in the third quarter of Earnings before interest, tax, depreciation and amortization ( EBITDA ) (1) increased 14.3% to $121.4 million as compared to $106.2 million for the third quarter of Adjusted EBITDA (1) increased 19.1% to $142.3 million as compared to $119.5 million for the third quarter of GAAP operating income was $110.9 million as compared to $87.1 million in the third quarter of Operating income included $5.5 million of integration costs, $5.2 million of additional costs related to executive management transition and related retention compensation and $2.4 million of restructuring costs. Operating income in the third quarter of 2014 included $10.9 million of integration and financing costs. Adjusted operating income (1) was $124.0 million, or 14.1% of net sales, as compared to $98.0 million, or 11.8% of net sales in the third quarter of GAAP Earnings per diluted share ( EPS ) increased to $0.64 as compared to $0.60 in the third quarter of Adjusted EPS (1) increased 26.1% to $1.11 as compared to adjusted EPS of $0.88 in the third quarter of On a constant currency basis, adjusted EPS increased 36.4%. The Company ended the third quarter of 2015 with consolidated funded debt less qualified cash (1) of $1.4 billion. The ratio of consolidated funded debt less qualified cash to EBITDA, calculated in accordance with the Company's senior secured credit facility, (1) was 3.53 times. In addition, leverage based on the ratio of consolidated funded debt less qualified cash to Adjusted EBITDA (1) was 3.30 times. Tempur Sealy International, Inc. Chairman and CEO Scott Thompson commented, The Company's iconic brands and products continue to perform well throughout the world resulting in solid revenue growth and EBITDA margin expansion. The North American operation was a highlight in the quarter driven by Tempur Flex, Tempur Breeze and Sealy Posturepedic. The International operations dealt with unfavorable foreign exchange headwinds but still managed to deliver stable operating results. The Company continues to demonstrate the free cash flow attributes of the business, resulting in consistent deleveraging of the balance sheet and enhancing the Company's future capital structuring alternatives. 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 increased 8.2% to $741.2 million from $685.3 million in the third quarter of On a constant currency basis, North America net sales increased 9.8%. GAAP gross margin was 38.8% as compared to 35.6% in the third quarter of GAAP operating margin was 16.0% as compared to 12.6% in the third quarter of North America adjusted operating margin (1) was 16.4% as compared to 13.8% in the third quarter of The improvement in North America adjusted operating margin during the third quarter of 2015 was the result of an improvement in adjusted gross margin (1) of 310 basis points, offset partially by higher advertising expenses as compared to the same period in International net sales decreased 2.3% to $138.8 million from $142.1 million in the third quarter of On a constant currency basis, International net sales increased 14.1%. GAAP gross margin was 51.8% as compared to 52.5% in the third quarter of GAAP operating margin was 16.6% as compared to 18.4% in the third quarter International adjusted operating margin (1) was 18.5% as compared to 18.9% in the third quarter of The decline in International adjusted operating margin was primarily the result of incremental costs incurred in connection with distributing Sealy products in international markets. International adjusted gross margin (1) was 52.7% as compared to 52.6% in the third quarter of Corporate GAAP operating expense increased 20.1% to $30.5 million from $25.4 million in the third quarter of During the third quarter of 2015, the Company incurred $5.2 million of additional costs related to executive management transition and related retention compensation. Corporate incurred $4.8 million of these costs and $0.4 million were included in the North America and International results. Corporate adjusted operating expense (1) decreased 2.1% to $23.1 million from $23.6 million in the third quarter of The decrease in Corporate adjusted operating expense was primarily related to a decrease in legal and professional fees. Balance Sheet As of 2015, the Company reported $71.8 million in cash and cash equivalents and $1.5 billion in total debt, as compared to $62.5 million in cash and cash equivalents and $1.6 billion in total debt as of December 31, During the third quarter, the Company completed a $450.0 million senior notes offering, and used the proceeds to reduce term loan debt outstanding under the Company's senior secured credit facility. In addition, the Company made a $50.0 million voluntary prepayment on the senior secured credit facility in the third quarter of These actions improved the Company's capital structure by extending debt maturities, increasing capacity under the senior secured credit facility and shifting more debt to fixed rate debt. Financial Guidance Thompson further commented, The strength of the Company's operations was able to fully absorb unfavorable foreign exchange in the quarter. The Company's new guidance reflects the solid third quarter performance, an increase in interest expense related to the recently completed debt offering and a slight increase to share count. For the full year 2015, the Company currently expects: Net sales to range from $3.150 billion to $3.175 billion Adjusted EPS to range from $3.10 to $3.20 per diluted share 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. The Company noted its adjusted EPS guidance does not include integration costs related to the Sealy acquisition, redemption value adjustments on the Company's redeemable non-controlling interest, additional costs related to the Company's 2015 Annual Meeting and related issues, executive management transition and related retention compensation, certain restructuring costs, interest expense related to the accelerated amortization of deferred financing costs associated with voluntary prepayments of the Company's term loans, legal fees and the settlement the Company will pay to the German Federal Cartel Office ( FCO ) to fully resolve the FCO's antitrust investigation, and other nonrecurring items, including income from the partial settlement of a legal dispute. Conference Call Information Tempur Sealy International, Inc. will host a live conference call to discuss financial results today, October 29, 2015 at 10:00 a.m. Eastern Time. The dial-in number for the conference call is The dial-in number for international callers is The call is also being webcast and can be accessed on the investor relations section of the Company's website, After the conference call, a webcast replay will remain available on the investor relations section of the Company's website for 30 days. In connection with the conference call, the Company has prepared an investor presentation which has been filed with the Securities and Exchange Commission and is also available on the investor relations section of the Company's website. Non-GAAP Financial Measures and Constant Currency Information. For additional information regarding adjusted EPS, adjusted net income, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA, EBITDA calculated in accordance with the Company's senior secured credit facility, consolidated funded debt, and consolidated funded debt less qualified cash (all of which are non-gaap financial measures), please refer to the reconciliations and other information included in the attached schedules. For information on the methodology used to present information on a constant currency basis, please refer to Constant Currency Information at the end of this press release. Forward-looking Statements This press release contains forward-looking statements, within the meaning of the federal securities laws, which include information concerning one or more of the Company's plans, objectives, goals, strategies, and other information that is not historical information. When used in this release, the words estimates, expects, guidance, anticipates, projects, plans, proposed, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to the Company's expectations regarding net sales and adjusted EPS for 2015 and performance generally for 2015 and subsequent years. All forward looking statements are based upon current expectations and beliefs and various assumptions. There can be no assurance that the Company will realize these expectations or that these beliefs will prove correct. Numerous factors, many of which are beyond the Company's control, could cause actual results to differ materially from those expressed as forward-looking statements. These risk factors include risks associated with the Company's capital structure and increased debt level; the ability to successfully integrate Sealy Corporation into the Company's operations and realize cost and revenue synergies and other benefits from the transaction; whether the Company will realize the anticipated benefits from its asset dispositions in 2014 and the acquisition of brand rights in certain international markets in 2014; general economic, financial and industry conditions, particularly in the retail sector, as well as consumer confidence and the availability of consumer financing; changes in product and channel mix and the impact on the Company's gross margin; changes in interest rates; the impact of the macroeconomic environment in both the U.S. and internationally on the Company's business segments; uncertainties arising from global events; the effects of changes in foreign exchange rates on the Company's reported earnings; consumer acceptance of the Company's products; industry competition; the efficiency and effectiveness of the Company's advertising campaigns and other marketing programs; the Company's ability to increase sales productivity within existing retail accounts and to further penetrate the Company's retail channel, including the timing of opening or expanding within large retail accounts and the timing and success of product launches; the effects of consolidation of retailers on revenues and costs; the Company's ability to expand brand awareness, distribution and new products; the Company's ability to continuously improve and expand its product line, maintain efficient, timely and cost-effective production and delivery of its products, and manage its growth; the effects of strategic investments on the Company's operations; changes in foreign tax rates and changes in tax laws generally, including the ability to utilize tax loss carry forwards; the outcome of various pending tax audits or other tax, regulatory or investigation proceedings; changing commodity costs; the effect of future legislative or regulatory changes; and disruptions to the implementation of the Company's strategic priorities and business plan caused by abrupt changes in the Company's senior management team and Board of Directors. There are a number of risks, uncertainties and other important factors, many of which are beyond the Company's control, that could cause its actual results to differ materially from those expressed as forward-looking statements in this press release, including the risk factors discussed under the heading Risk Factors under ITEM 1A of Part 1 of our Annual Report on Form 10- K for the year ended December 31, 2014 and under ITEM 1A of Part 2 of our Quarterly Report on Form 10-Q for the quarter ended June 30, There may be other factors that may cause the Company's actual results to differ materially from the forward-looking statements. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. 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 or call (1) This is a non-gaap financial measure. Please refer to Non-GAAP Financial Measures and Constant Currency Information below. TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (in millions, except per common share amounts) (unaudited) Nine Months Ended Chg % Chg % Net sales $ $ % $ 2,383.9 $ 2, % Cost of sales , ,388.0 Gross profit % % Selling and marketing expenses General, administrative and other expenses Equity income in earnings of unconsolidated affiliates (2.0) (1.8) (8.4) (5.6) Royalty income, net of royalty expense (4.7) (4.4) (13.7) (13.5) Operating income % % Other expense, net: Interest expense, net Loss on disposal, net Other expense (income), net 11.8 (0.9) 12.7 (0.4) Total other expense Income before income taxes % % Income tax provision (25.0) (22.4) (43.6) (43.7) Net income before non-controlling interest % % Less: Net income attributable to non-controlling interest (1),(2) Net income attributable to Tempur Sealy International, Inc. $ 40.2 $ % $ 84.8 $ % Earnings per common share: Basic $ 0.65 $ 0.61 $ 1.38 $ 1.02 Diluted $ 0.64 $ % $ 1.36 $ % Weighted average common shares outstanding: Basic Diluted (1) Income attributable to the Company's redeemable non-controlling interest in Comfort Revolution, LLC for the three months ended 2015 and 2014 represented $0.5 million and $0.4 million, respectively. Income attributable to the Company's redeemable non-controlling interest in Comfort Revolution, LLC for the nine months ended 2015 and 2014 represented $1.0 million and $0.5 million, respectively. (2) The Company recorded a $0.2 million and $1.1 million redemption value adjustment, net of tax, for the three and nine months ended 2015, respectively, to adjust the carrying value of the redeemable non-controlling interest as of 2015 to its redemption value. As of 2014, the accumulated earnings exceeded the redemption value and, accordingly, a redemption value adjustment was not necessary for the three and nine months ended TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheet (in millions) ASSETS 2015 December 31, 2014 (unaudited) Current Assets: Cash and cash equivalents $ 71.8 $ 62.5 Accounts receivable, net Inventories, net Prepaid expenses and other current assets Deferred income taxes Total Current Assets Property, plant and equipment, net Goodwill Other intangible assets, net Deferred income taxes Other non-current assets Total Assets $ 2,739.4 $ 2,662.6 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ $ Accrued expenses and other current liabilities Deferred income taxes Income taxes payable Current portion of long-term debt Total Current Liabilities Long-term debt 1, ,535.9 Deferred income taxes Other non-current liabilities Total Liabilities 2, ,447.3 Redeemable Non-Controlling Interest Total Stockholders' Equity Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity $ 2,739.4 $ 2,662.6 TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in millions) (unaudited) Nine Months Ended CASH FLOWS FROM OPERATING ACTIVITIES: Net income before non-controlling interest $ 86.9 $ 62.8 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of stock-based compensation Amortization of deferred financing costs Bad debt expense Deferred income taxes (21.4) (23.9) Dividends received from unconsolidated affiliates 3.0 Equity income in earnings of unconsolidated affiliates (8.4) (5.6) Non-cash interest expense on 8.0% Sealy Notes Loss on sale of assets Foreign currency adjustments and other Loss on disposal of business 23.2 Changes in operating assets and liabilities (31.7) 37.0 Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of business, net of cash acquired (8.5) Proceeds from disposition of business and other Purchases of property, plant and equipment (51.1) (30.3) Other (0.3) 2.0 Net cash (used in) provided by investing activities (44.2) 6.7 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of senior notes Proceeds from borrowings under long-term debt obligations Repayments of borrowings under long-term debt obligations (974.4) (432.7) Proceeds from exercise of stock options Excess tax benefit from stock-based compensation Proceeds from issuance of treasury shares 5.0 Treasury shares repurchased (1.3) (2.2) Payments of deferred financing cost (6.4) Other (2.1) 0.4 Net cash used in financing activities (87.4) (189.5) NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS Increase in cash and cash equivalents CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period $ 71.8 $ 81.8 Summary of Channel Sales The following table highlights net sales information, by channel and by segment, for the three months ended 2015 and 2014: (in millions) Consolidated North America International Retail (1) $ $ $ $ $ 97.0 $ Other (2) $ $ $ $ $ $ (1) The Retail channel includes furniture and bedding retailers, department stores, specialty retailers and warehouse clubs. (2) The Other channel includes direct-to-consumer, third party distributors, hospitality and healthcare customers. Summary of Product Sales The following table highlights net sales information, by product and by segment, for the three months ended 2015 and 2014: (in millions) Consolidated North America International Bedding (1) $ $ $ $ $ $ Other (2) $ $ $ $ $ $ (1) Bedding products include mattresses, foundations, and adjustable foundations. (2) Other products include pillows and various other comfort products. TEMPUR SEALY INTERNATIONAL, INC. AND SUBSIDIARIES Reconciliation of Non-GAAP Measures (in millions, except percentages, ratios and per common share amounts) The Company provides information regarding adjusted net income, adjusted EPS, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, EBITDA, EBITDA in accordance with the Company's senior secured credit facility, adjusted EBITDA, consolidated funded debt and consolidated funded debt less qualified cash, which are not
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