Tempur Sealy Results

Tempur Sealy Reports Third Quarter 2015 Results

Published: Oct 29, 2015 8:05 a.m. ET

— Net Sales Increase 6%; Margins Expand; Adjusted EPS Increases 26%

LEXINGTON, Ky., Oct. 29, 2015 /PRNewswire/ — Tempur Sealy International, Inc. TPX, +1.99% today announced financial results for the third quarter ended September 30, 2015. The Company also revised financial guidance for the full year 2015.

THIRD QUARTER 2015 FINANCIAL SUMMARY

Total net sales increased 6.4% to $880.0 million from $827.4 million in the third quarter of 2014. 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 2014. Adjusted gross margin [(1)] was 41.3% as compared to 38.8% in the third quarter of 2014.
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 2014. Adjusted EBITDA [(1)] increased 19.1% to $142.3 million as compared to $119.5 million for the third quarter of 2014.
GAAP operating income was $110.9 million as compared to $87.1 million in the third quarter of 2014. 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 2014.
GAAP Earnings per diluted share ("EPS") increased to $0.64 as compared to $0.60 in the third quarter of 2014. Adjusted EPS [(1)] increased 26.1% to $1.11 as compared to adjusted EPS of $0.88 in the third quarter of 2014. 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 2014. 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 2014. GAAP operating margin was 16.0% as compared to 12.6% in the third quarter of 2014.

North America adjusted operating margin [(1)] was 16.4% as compared to 13.8% in the third quarter of 2014. 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 2014.

International net sales decreased 2.3% to $138.8 million from $142.1 million in the third quarter of 2014. 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 2014. GAAP operating margin was 16.6% as compared to 18.4% in the third quarter 2014.

International adjusted operating margin [(1) ] was 18.5% as compared to 18.9% in the third quarter of 2014. 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 2014.

Corporate GAAP operating expense increased 20.1% to $30.5 million from $25.4 million in the third quarter of 2014. 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 2014. The decrease in Corporate adjusted operating expense was primarily related to a decrease in legal and professional fees.

Balance Sheet

As of September 30, 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, 2014. 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 2015. 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 non-recurring items, including income from the partial settlement of a legal dispute.

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