Tempur Sealy Results

FOURTH QUARTER 2017 FINANCIAL SUMMARY⁽¹⁾

• Total net sales decreased 15.9% to $648.2 million from $771.1 million in the fourth quarter of 2016. On a constant currency basis⁽²⁾, total net sales decreased 17.0%, with a decrease of 22.6% in the North America business segment and an increase of 6.5% in the International business segment.
• Gross margin under U.S. generally accepted accounting principles (“GAAP”) increased to 42.2% as compared to 41.2% in the fourth quarter of 2016.
• GAAP operating income was $79.0 million as compared to $103.4 million in the fourth quarter of 2016. Adjusted operating income⁽²⁾ was $84.5 million as compared to $112.0 million in the fourth quarter of 2016.
• GAAP net income was $49.7 million as compared to $52.9 million in the fourth quarter of 2016. Adjusted net income⁽²⁾ was $43.4 million as compared to $66.5 million in the fourth quarter of 2016.
• Earnings before interest, tax, depreciation and amortization (“EBITDA”)⁽²⁾ was $106.6 million as compared to $126.0 million for the fourth quarter of 2016. Adjusted EBITDA⁽²⁾ was $112.3 million as compared to $137.9 million in the fourth quarter of 2016.
• GAAP earnings per diluted share (“EPS”) was $0.91 as compared to $0.94 in the fourth quarter of 2016. Adjusted EPS⁽²⁾ was $0.79 as compared to $1.18 in the fourth quarter of 2016.
• The Company recorded a net income tax benefit of $23.8 million related to the enactment of the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). This is comprised of a $69.7 million deferred tax benefit related to the reduction in the U.S. income tax rate, net of a one-time tax charge for transition tax on foreign subsidiary earnings of $45.9 million.
• The Company ended the fourth quarter of 2017 with total debt and consolidated funded debt less qualified cash⁽²⁾ of $1.8 billion. Leverage based on the ratio of consolidated funded debt less qualified cash to adjusted EBITDA⁽²⁾ was 3.91 times for the trailing twelve months ended December 31, 2017.

FULL YEAR 2017 FINANCIAL SUMMARY⁽¹⁾

• Total net sales decreased 12.0% to $2,754.4 million from $3,128.9 million in 2016.
• GAAP gross margin was 41.4% as compared to 41.8% in 2016. Adjusted gross margin⁽²⁾ was 42.0% as compared to 41.9% in 2016.
• GAAP operating income was $289.7 million as compared to $411.4 million in 2016. Adjusted operating income⁽²⁾ was $326.5 million, or 11.9% of net sales, as compared to $425.0 million, or 13.6% of net sales, in 2016.
• GAAP net income was $152.7 million as compared to $191.6 million in 2016. Adjusted net income⁽²⁾ was $175.2 million as compared to $242.4 million in 2016.
• EBITDA⁽²⁾ was $403.0 million as compared to $506.7 million in 2016. Adjusted EBITDA⁽²⁾ was $448.5 million as compared to $521.6 million in 2016.
• GAAP EPS was $2.79 as compared to $3.20 in 2016. Adjusted EPS⁽²⁾ was $3.20 as compared to $4.05 in 2016.
• Operating cash flow for the full year 2017 was $222.9 million as compared to $165.5 million in 2016.

Tempur Sealy International, Inc. Chairman and CEO Scott Thompson commented, “The team is pleased to report our 2017 adjusted EBITDA was at the high end of our guidance despite rising commodity costs.  Tempur-Pedic sales in North America grew 19 percent in the quarter excluding Mattress Firm, demonstrating brand strength even as the current Tempur-Pedic products reach the fourth year of their lifecycle.  In addition, our North American direct to customer channel grew 56 percent, demonstrating our ability to change with consumers’ purchasing habits.”

“We enter 2018 as a much stronger company, supported by a diversified base of retail partners and a growing direct to consumer business.  Our manufacturing operations have never been stronger, and we are incredibly excited about our innovative new product lineup, which will enable our retail partners to succeed by driving higher average selling prices.”

Fourth Quarter Business Segment Highlights⁽¹⁾

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 22.1% to $485.5 million from $623.4 million in the fourth quarter of 2016. On a constant currency basis⁽²⁾, North America net sales decreased 22.6% compared to the fourth quarter of 2016. Gross margin increased to 39.8% as compared to 39.4% in the fourth quarter of 2016. Operating margin was 13.7% as compared to 16.5% in the fourth quarter of 2016.

At the beginning of the second quarter of 2017, the Company terminated its contracts with Mattress Firm, Inc. (“Mattress Firm”), a wholly owned subsidiary of Steinhoff International Holdings N.V. (“Steinhoff”). In the fourth quarter of 2016, net sales to Mattress Firm were $155.7 million. Excluding Mattress Firm sales in the prior year, North America net sales increased 4% in the fourth quarter of 2017 driven by growth of Tempur-Pedic product sales, which increased approximately 19% in the period.

North America net sales through the wholesale channel decreased $150.2 million or 25.0% to $451.1 million. Excluding Mattress Firm sales in the prior year, the wholesale channel increased 1% as compared to the fourth quarter of 2016. North America net sales through the direct channel increased $12.3 million or 55.7% to $34.4 million, primarily driven by an increase of more than 90% in web sales as compared to the fourth quarter of 2016.

North America adjusted gross margin⁽²⁾ improved 30 basis points as compared to the fourth quarter of 2016. The increase was driven primarily by operational improvements, lower floor model discounts and favorable product and channel mix. This was partially offset by significant commodity cost inflation and fixed cost deleverage on lower unit volume. North America adjusted operating margin⁽²⁾ declined 290 basis points as compared to the fourth quarter of 2016. The decline in adjusted operating margin was driven by unfavorable operating expense leverage.

International net sales increased 10.2% to $162.7 million from $147.7 million in the fourth quarter of 2016. On a constant currency basis⁽²⁾, International net sales increased 6.5% compared to the fourth quarter of 2016. Gross margin was 49.2% as compared to 48.7% in the fourth quarter of 2016. Operating margin increased to 20.3% as compared to 15.2% in the fourth quarter of 2016.

International net sales through the wholesale channel increased $12.2 million or 10.1% to $132.7 million and sales through the direct channel increased $2.8 million or 10.3% to $30.0 million as compared to the fourth quarter of 2016.

International adjusted gross margin⁽²⁾ improved 40 basis points as compared to the fourth quarter of 2016. The increase was primarily driven by operational improvements and favorable channel mix, partially offset by commodity cost inflation. International adjusted operating margin⁽²⁾ improved 130 basis points as compared to the fourth quarter of 2016, driven primarily by improved operating expense leverage.

In 2017, International operating income includes $4.6 million of restructuring costs, primarily related to the wind down of certain Latin American operations and leadership termination charges. As discussed below under “Revisions of Previously Issued Financial Statements”, the Company has revised its prior year financial statements to correct certain immaterial errors relating to its Latin American operations. In 2016, International operating income includes $4.1 million of charges associated with this issue.

Corporate operating expense decreased 6.8% to $20.5 million from $22.0 million in the fourth quarter of 2016.

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