TPX Tempur Sealy International Inc

LEXINGTON, Ky., Nov. 2, 2017 /PRNewswire/ -- Tempur Sealy International, Inc. (NYSE: TPX) today announced financial results for the third quarter ended September 30, 2017. The Company also increased its financial guidance for the full year 2017.

THIRD QUARTER 2017 FINANCIAL SUMMARY

• Total net sales decreased 12.9% to $724.8 million from $832.4 million in the third quarter of 2016. On a constant currency basis⁽¹⁾, total net sales decreased 13.3%, with a decrease of 17.2% in the North America business segment and an increase of 7.0% in the International business segment.
• Gross margin under U.S. generally accepted accounting principles ("GAAP") was 43.1% as compared to 43.5% in the third quarter of 2016.
• GAAP operating income decreased 27.8% to $94.6 million as compared to $131.1 million in the third quarter of 2016. Adjusted operating income⁽¹⁾ decreased 23.6% to $100.1 million as compared to $131.1 million in the third quarter of 2016.
• GAAP net income decreased 42.7% to $44.6 million as compared to $77.8 million in the third quarter of 2016. Adjusted net income⁽¹⁾ decreased 29.4% to $54.9 million as compared to $77.8 million in the third quarter of 2016.
• Earnings before interest, tax, depreciation and amortization ("EBITDA")⁽¹⁾ decreased 20.1% to $123.8 million as compared to $155.0 million for the third quarter of 2016. Adjusted EBITDA⁽¹⁾ decreased 16.6% to $129.3 million as compared to $155.0 million in the third quarter of 2016.
• GAAP earnings per diluted share ("EPS") decreased 38.6% to $0.81 as compared to $1.32 in the third quarter of 2016. Adjusted EPS⁽¹⁾ decreased 24.2% to $1.00 as compared to $1.32 in the third quarter of 2016.
• Net cash provided by operating activities was $127.3 million as compared to $57.9 million in the third quarter of 2016. The Company generated $109.8 million of free cash flow⁽¹⁾ in the third quarter as compared to $40.3 million in the third quarter of 2016.
• The Company ended the third quarter of 2017 with total debt and consolidated funded debt less qualified cash⁽¹⁾ of $1.8 billion. Leverage based on the ratio of consolidated funded debt less qualified cash to adjusted EBITDA⁽¹⁾ was 3.70 times for the trailing twelve months ended September 30, 2017.

KEY HIGHLIGHTS

Tempur Sealy International, Inc. Chairman and CEO Scott Thompson commented, "The team generated one of the highest cash flow quarters in our company's history despite several challenges including a significant change in our distribution network, three hurricanes, and commodity inflation. Looking ahead, our robust pipeline of innovation provides the foundation for new products next year, especially an exciting new Tempur-Pedic line in North America. These products, combined with our new multi-channel advertising campaigns will reinforce our leadership position in premium bedding, provide our retailer partners with a competitive advantage to grow their revenue and earnings, and simplify the consumers' retail experience."

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 16.9% to $580.6 million from $698.5 million in the third quarter of 2016. On a constant currency basis⁽¹⁾, North America net sales decreased 17.2% compared to the third quarter of 2016. Gross margin was 41.1% as compared to 41.5% in the third quarter of 2016. Operating margin was 17.2% as compared to 18.4% in the third quarter of 2016.

During the third quarter, hurricanes impacted operations in two of the Company's largest markets, Texas and Florida. The Company estimates that the hurricanes impacted our sales in the quarter by approximately $10 to $15 million, and the flow-through of those sales to EBITDA would be in the range of $3 to $5 million. The Company noted that its adjusted EBITDA does not include this impact from lost sales related to hurricanes.

At the beginning of the second quarter, the Company terminated its contract with Mattress Firm, Inc. ("Mattress Firm"). In the third quarter of 2016, net sales to Mattress Firm were $171.5 million. Excluding Mattress Firm sales in the prior year, North America net sales increased 10% in the third quarter of 2017 driven by growth by Tempur-Pedic which increased 26% in the period.

North America net sales through the wholesale channel decreased $137.8 million or 20.1% to $547.3 million and excluding Mattress Firm sales in the prior year, the wholesale channel increased 7% as compared to the third quarter of 2016. North America net sales through the direct channel increased $19.9 million or 148.5% to $33.3 million, primarily driven by increased web sales of over 200%, as compared to the third quarter of 2016.

North America adjusted gross margin⁽¹⁾ declined 30 basis points as compared to the third quarter of 2016. The decline was driven primarily by fixed cost deleverage on lower unit volume, significant commodity cost inflation and unfavorable brand mix. This was offset by operational improvements, channel mix and product mix. North America adjusted operating margin⁽¹⁾ declined 100 basis points as compared to the third quarter of 2016. The decline in adjusted operating margin was driven by the gross margin decline, as well as unfavorable operating expense leverage.

International net sales increased 7.7% to $144.2 million from $133.9 million in the third quarter of 2016. On a constant currency basis⁽¹⁾, International net sales increased 7.0% compared to the third quarter of 2016. Gross margin was 51.2% as compared to 53.8% in the third quarter of 2016. Operating margin was 14.4% as compared to 19.1% in the third quarter of 2016.

International net sales through the wholesale channel increased $10.5 million or 9.9% to $116.7 million and sales through the direct channel decreased $0.2 million or 0.7% to $27.5 million as compared to the third quarter of 2016.

International adjusted gross margin⁽¹⁾ declined 260 basis points as compared to the third quarter of 2016. The decline was primarily driven by product launch costs, as well as unfavorable channel and brand mix. International adjusted operating margin⁽¹⁾ declined 160 basis points as compared to the third quarter of 2016, primarily driven by gross margin.

Corporate operating expense increased to $25.9 million from $22.8 million in the third quarter of 2016.

Balance Sheet

As of September 30, 2017, the Company reported $41.8 million in cash and cash equivalents and $1.8 billion in total debt, as compared to $65.7 million in cash and cash equivalents and $1.9 billion in total debt as of December 31, 2016.

Financial Guidance

The Company also today increased its financial guidance for 2017. For the full year 2017, the Company currently expects adjusted EBITDA⁽¹⁾ to range from $435 million to $450 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.

The Company also noted that its 2017 outlook for adjusted EBITDA is a non-GAAP financial measure that excludes or has otherwise been adjusted for items impacting comparability.  The Company further noted that it is unable to reconcile this forward-looking non-GAAP financial measure to GAAP net income, its most directly comparable forward-looking GAAP financial measure, without unreasonable efforts, because the Company is currently unable to predict with a reasonable degree of certainty the type and extent of certain items that would be expected to impact GAAP net income in 2017 but would not impact adjusted EBITDA. These items that impact comparability may include restructuring activities, the impact of the termination of contracts with Mattress Firm, foreign currency exchange rates, income taxes, and other items. The unavailable information could have a significant impact on the Company's full year 2017 GAAP financial results.

Conference Call Information

Tempur Sealy International, Inc. will host a live conference call to discuss financial results today, November 2, 2017, at 8:00 a.m. Eastern Time. The dial-in number for the conference call is 800-850-2903. The dial-in number for international callers is 224-357-2399. The call is also being webcast and can be accessed on the investor relations section of the Company's website, http://www.tempursealy.com. After the conference call, a webcast replay will remain available on the investor relations section of the Company's website for 30 days. 

Non-GAAP Financial Measures and Constant Currency Information

For additional information regarding EBITDA, adjusted EBITDA, adjusted EPS, adjusted net income, adjusted operating income, adjusted gross margin, adjusted operating margin, free cash flow, 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" included in the attached schedules.

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 adjusted EBITDA for 2017 and performance generally for 2017 and subsequent periods and the Company's expectations for product launches in 2018 and multi-channel advertising campaigns. 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 termination of the Company's relationship with Mattress Firm; risks associated with the Company's capital structure and debt level; 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; changes in demand for the Company's products by significant retailer customers; 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 and pending litigation; 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.

Other potential risk factors include the risk factors discussed under the heading "Risk Factors" under ITEM 1A of Part 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2016. 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) develops, manufactures and markets mattresses, foundations, pillows and other products.  The Company's brand portfolio includes many highly recognized brands in the industry, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, and Stearns & Foster®. World headquarters for Tempur Sealy International is in Lexington, KY. For more information, visit http://www.tempursealy.com or call 800-805-3635.

Investor Relations Contact:

Aubrey Moore
Investor Relations
Tempur Sealy International, Inc.
800-805-3635
Investor.relations@tempursealy.com

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

Please refer to Footnotes at the end of this release.

Summary of Channel Sales

The following table highlights net sales information, by channel and by segment, for the three months ended September 30, 2017 and 2016:

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, adjusted EBITDA, consolidated funded debt and consolidated funded debt less qualified cash, and free cash flow, which are not recognized terms under GAAP and do not purport to be alternatives to net income and earnings per share as a measure of operating performance or an alternative to total debt. The Company believes these non-GAAP measures provide investors with performance measures that better reflect the Company's underlying operations and trends, providing a perspective not immediately apparent from net income and operating income. The adjustments management makes to derive the non-GAAP measures include adjustments to exclude items that may cause short-term fluctuations in the nearest GAAP measure, but which management does not consider to be the fundamental attributes or primary drivers of the Company's business, including the exclusion of charges associated with the Mattress Firm termination in the first quarter of 2017 and other costs.

The Company believes that exclusion of these items assists in providing a more complete understanding of the Company's underlying results from continuing operations and trends, and management uses these measures along with the corresponding GAAP financial measures to manage the Company's business, to evaluate its consolidated and business segment performance compared to prior periods and the marketplace, to establish operational goals and to provide continuity to investors for comparability purposes. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP and these non-GAAP measures should be considered supplemental in nature and should not be construed as more significant than comparable measures defined by GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. For more information about these non-GAAP measures and a reconciliation to the nearest GAAP measure, please refer to the reconciliations on the following pages.

Constant Currency Information

In this press release the Company refers to, and in other press releases and other communications with investors the Company may refer to, net sales or earnings or other historical financial information on a "constant currency basis," which is a non-GAAP financial measure. These references to constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates. To provide information on a constant currency basis, the applicable financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior corresponding period's currency conversion rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance.

Adjusted Net Income and Adjusted EPS

A reconciliation of GAAP net income to adjusted net income and a calculation of adjusted EPS is provided below. Management believes that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes at the end of this release.

The following table sets forth the reconciliation of the Company's GAAP net income to adjusted net income and a calculation of adjusted EPS for the three months ended September 30, 2017 and 2016:

Please refer to Footnotes at the end of this release.

Please refer to Footnotes at the end of this release.

Adjusted Gross Profit and Gross Margin and Adjusted Operating Income (Expense) and Operating Margin

A reconciliation of GAAP gross profit and gross margin to adjusted gross profit and gross margin, respectively, and GAAP operating income (expense) and operating margin to adjusted operating income (expense) and operating margin, respectively, is provided below. Management believes that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the impact of various adjustments as described in the footnotes at the end of this release.

The following table sets forth the reconciliation of the Company's reported GAAP gross profit and operating income (expense) to the calculation of adjusted gross profit and operating income (expense) for the three months ended September 30, 2017:

The following table sets forth the Company's reported GAAP gross profit and operating income (expense) for the three months ended September 30, 2016. The Company had no adjustments to GAAP gross profit and operating income (expense) for the three months ended September 30, 2016:

EBITDA, Adjusted EBITDA, Consolidated Funded Debt Less Qualified Cash and Free Cash Flow

The following reconciliations are provided below:

• GAAP net income to EBITDA and adjusted EBITDA
• Total debt to consolidated funded debt less qualified cash
• Ratio of consolidated funded debt less qualified cash to adjusted EBITDA
• Net cash provided by operating activities to free cash flow

Management believes that presenting these non-GAAP measures provides investors with useful information with respect to the Company's operating performance, cash flow generation, and comparisons from period to period, as well as general information about the Company's progress in reducing its leverage.

Please refer to Footnotes at the end of this release.

The following table sets forth the reconciliation of the Company's reported GAAP net income to the calculations of EBITDA and adjusted EBITDA for the three months ended September 30, 2017 and 2016:

The following table sets forth the reconciliation of the Company's net income to the calculations of EBITDA and adjusted EBITDA for the trailing twelve months ended September 30, 2017:

Under the Company's senior secured credit agreement entered into during 2016 ("2016 Credit Agreement"), adjusted EBITDA contains certain restrictions that limit adjustments to GAAP net income when calculating adjusted EBITDA. For the twelve months ended September 30, 2017, the Company's adjustments to GAAP net income when calculating adjusted EBITDA did not exceed the allowable amount under the 2016 Credit Agreement.

The ratio of adjusted EBITDA under the Company's 2016 Credit Agreement to consolidated funded debt less qualified cash is 3.70 times for the trailing twelve months ended September 30, 2017. The Company's 2016 Credit Agreement requires the Company to maintain a ratio of consolidated funded debt less qualified cash to adjusted EBITDA of less than 5.00:1.00 times.

Please refer to Footnotes at the end of this release.

The following table sets forth the reconciliation of the Company's reported total debt to the calculation of consolidated funded debt less qualified cash as of September 30, 2017. "Consolidated funded debt" and "qualified cash" are terms used in the Company's 2016 Credit Agreement for purposes of certain financial covenants.

The following table sets forth the reconciliation of the Company's net cash from operating activities to free cash flow for the three  and nine months ended September 30, 2017 and 2016:

Please refer to Footnotes at the end of this release.

Footnotes:

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SOURCE Tempur Sealy International, Inc.