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TPX > SEC Filings for TPX > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for TEMPUR SEALY INTERNATIONAL, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for TEMPUR SEALY INTERNATIONAL, INC.


2-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and accompanying notes included in this Form 10-Q. Unless otherwise noted, all of the financial information in this report is condensed consolidated information for the Company. The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements include numerous risks and uncertainties, as described under "Special Note Regarding Forward-Looking Statements" and "Risk Factors" elsewhere in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012 and our quarterly report on Form 10-Q for the quarter ended March 31, 2013. Our actual results may differ materially from those contained in any forward-looking statements. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements contained herein.

In this discussion and analysis, we discuss and explain the financial condition and results of our operations for the three and six months ended June 30, 2013 and 2012, including the following points:

· An overview of our business, including the acquisition of Sealy Corporation and its historical subsidiaries ("Sealy");

· Our net sales and costs in the periods presented as well as changes between periods;

· Expected sources of liquidity for future operations; and

· The effect of the foregoing on our overall financial performance and condition.

Executive Overview

General. We have the strongest brand portfolio with the most highly recognized brands in the bedding industry and are the world's largest bedding provider. We manufacture, market and distribute bedding products, which we sell globally under the TEMPUR®, Tempur-Pedic®, Sealy®, Sealy Posturepedic®, Stearns & Foster® and other brands. Our comprehensive suite of bedding products offers a variety of products to consumers across a broad range of channels.

We sell our products through three distribution channels in each operating business segment: Retail (furniture and bedding retailers, department stores, specialty retailers and warehouse clubs); Direct (e-commerce platform, company-owned stores, and call center); and Other (third party distributors, hospitality and healthcare customers).

Business Segments. We have three reportable business segments: Tempur North America, Tempur International and Sealy. As a result of the Sealy Acquisition, we now have a new reportable business segment based on the Sealy domestic and international business. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their operations. The Tempur North American segment consists of two U.S. manufacturing facilities and our Tempur North American distribution subsidiaries. The Tempur International segment consists of our manufacturing facility in Denmark, whose customers include all of our distribution subsidiaries and third party distributors outside the Tempur North American and Sealy segments. The Sealy segment consists of company-owned and operated bedding and component manufacturing facilities located around the world, along with distribution subsidiaries and joint ventures. We evaluate segment performance based on net sales and operating income.


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Sealy Acquisition

On March 18, 2013, we completed the acquisition of Sealy ("Sealy Acquisition"). Refer to Note 2, "Business Combinations", in our Condensed Consolidated Financial Statements included in Part I, ITEM I for a discussion of the Sealy Acquisition. Pursuant to the merger agreement, each share of common stock of Sealy issued and outstanding immediately prior to the effective time of the Sealy Acquisition was cancelled and (other than shares held by Sealy or Tempur-Pedic or their subsidiaries or Sealy stockholders who properly exercised their appraisal rights) converted into the right to receive $2.20 in cash. The total purchase price was $1,172.9 million, which was funded using available cash and financing consisting of our 2012 Credit Agreement and Senior Notes. Refer to Note 4, "Long-Term Debt", in our Condensed Consolidated Financial Statements included in Part I, ITEM I for the definition of these terms and further discussion. The purchase price of Sealy, including debt assumed, consisted of the following items:

(in millions)
Cash consideration for stock                             $   231.2   (1)
Cash consideration for share-based awards                     14.2   (2)
Cash consideration for 8.0% Sealy Notes                      442.1   (3)
Cash consideration for repayment of Sealy Senior Notes       260.7   (4)
Cash consideration for repayment of Sealy 2014 Notes         276.9   (5)
Total consideration                                        1,225.1
Cash acquired                                                (52.2 ) (6)
Net consideration given                                  $ 1,172.9

(1) The cash consideration for outstanding shares of Sealy common stock is the product of the agreed-upon cash per share price of $2.20 and total Sealy shares of 105.1 million.

(2) The cash consideration for share-based awards is the product of the agreed-upon cash per share price of $2.20 and the total number of restricted stock units and deferred stock units outstanding and the "in the money" stock options net of the weighted average exercise price.

(3) The cash consideration for Sealy's 8.0% Senior Secured Third Lien Convertible Notes due 2016 ("8.0% Sealy Notes") is the result of applying the adjusted equity conversion rate to the 8.0% Sealy Notes tendered for conversion and multiplying the result by the agreed-upon cash per share price of $2.20. The 8.0% Sealy Notes that were converted represented the right to receive the same merger consideration that would have been payable to a holder of 201.0 million shares of Sealy common stock, subject to adjustment in accordance with the terms of the supplemental indenture governing the 8.0% Sealy Notes.

(4) The cash consideration for Sealy's 10.875% Senior Notes due 2016 ("Sealy Senior Notes") reflects the repayment of the outstanding obligation.

(5) The cash consideration for Sealy's 8.25% Senior Subordinated Notes due 2014 ("Sealy 2014 Notes") reflects the repayment of the outstanding obligation.

(6) Represents the Sealy cash balance acquired at acquisition.

Sealy, headquartered in Trinity, North Carolina, owns one of the largest portfolios of bedding brands in the world, and manufactures and markets a complete line of bedding products under the Sealy®, Sealy Posturepedic®, and Stearns & Foster® brands. Sealy's results of operations are reported within the Company's Sealy reportable segment. The combination brings together two highly complementary companies with iconic brands and significant opportunities for global innovation and growth. We will have products for almost every consumer preference and price point, distribution through all key channels, in-house expertise on most key bedding technologies, and a world-class research and development team. In addition, the combined operations have a global footprint that includes over 80 countries. The Company believes the shared know-how and improved efficiencies of the combined company will result in tremendous value for its consumers, retailers and stockholders.


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Results of Operations

A summary of our results for the three and six months ended June 30, 2013, which include the Sealy segment results of operations for the period from March 18, 2013 through June 30, 2013, but do not include the Sealy segment results of operations for the 2012 periods, include the following:

· Net sales for the three months ended June 30, 2013 increased to $660.6 million from $329.5 million for the same period in 2012. Net sales for the six months ended June 30, 2013 increased to $1,050.7 million from $713.9 million for the same period in 2012.

· Loss per diluted common share was $0.03 for the three months ended June 30, 2013 compared to earnings per diluted common share (EPS) of $0.45 for the three months ended June 30, 2012. For the six months ended June 30, 2013 EPS were $0.18 compared to $1.31 for the same period in 2012.

(In millions,
except per                      Three Months Ended                                Six Months Ended
common share
amounts)                             June 30,                                         June, 30
                    2013                     2012                     2013                     2012
Net sales          $ 660.6       100.0 %    $ 329.5       100.0 %   $ 1,050.7       100.0 %   $ 713.9       100.0 %
Cost of sales        405.7        61.4        162.6        49.3         607.4        57.8       341.0        47.8
Gross profit         254.9        38.6        166.9        50.7         443.3        42.2       372.9        52.2
Selling and
marketing
expenses             139.8        21.2         83.7        25.4         226.2        21.5       167.0        23.4
General,
administrative
and other
expenses              76.3        11.5         35.7        10.9         135.0        12.9        72.3        10.1
Equity in
earnings of
unconsolidated
affiliates            (1.1 )      (0.2 )          ?           ?          (1.3 )      (0.1 )         ?           ?
Royalty income,
net of royalty
expense               (4.1 )      (0.6 )          -           -          (5.1 )      (0.5 )         -           -
Operating income      44.0         6.7         47.5        14.4          88.5         8.4       133.6        18.7
Interest
expense, net          35.7         5.4          4.1         1.2          63.6         6.0         8.2         1.1
Other expense
(income), net          1.6         0.2         (0.5 )      (0.1 )         3.1         0.3           -           -
Income before
income taxes           6.7         1.1         43.9        13.3          21.8         2.1       125.4        17.6
Income tax
provision             (8.8 )      (1.3 )      (14.8 )      (4.5 )       (11.4 )      (1.1 )     (40.1 )      (5.6 )
Net (loss)
income before
non- controlling
interest              (2.1 )      (0.2 )    $  29.1         8.8          10.4         1.0        85.3        12.0
Less: Net (loss)
attributable to
non- controlling
interest              (0.5 )         ?            ?           ?          (0.5 )         ?           ?           ?
Net  (loss)
income
attributable to
common
stockholders       $  (1.6 )      (0.2 )%      29.1         8.8 %   $    10.9         1.0 %      85.3        12.0 %

(Loss) earnings
per common
share:
Basic              $ (0.03 )                $  0.46                 $    0.18                    1.35
Diluted            $ (0.03 )                $  0.45                 $    0.18                    1.31
Weighted average
common shares
outstanding:
Basic                 60.4                     62.9                      60.2                    63.4
Diluted               60.4                     64.3                      61.5                    65.0


Table of Contents
Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

A summary of net sales, by channel and by segment, is set forth below:

                                                    TEMPUR                     TEMPUR
                       CONSOLIDATED              NORTH AMERICA             INTERNATIONAL                     SEALY
                    Three Months Ended        Three Months Ended         Three Months Ended           Three Months Ended
                         June 30,                  June 30,                   June 30,                     June 30,
(in millions)        2013         2012         2013         2012          2013         2012           2013             2012
Retail            $    602.1      $ 288.1   $    201.7      $ 205.9      $    78.6     $  82.2      $      321.8       $     -
Direct                  30.3         25.4         10.6         17.7           11.4         7.7               8.3             -
Other                   28.2         16.0          3.2          3.0           10.5        13.0              14.5             -
                  $    660.6      $ 329.5   $    215.5      $ 226.6      $   100.5     $ 102.9      $      344.6       $     -

Retail includes sales to furniture, bedding and department stores. Direct includes direct response and e-commerce sales as well as sales through company-owned stores. Other includes sales to third party distributors, health care and hospitality institutions.

A summary of net sales, by product and by segment, is set forth below:

                                                     TEMPUR                    TEMPUR
                       CONSOLIDATED              NORTH AMERICA              INTERNATIONAL                    SEALY
                    Three Months Ended         Three Months Ended        Three Months Ended           Three Months Ended
                         June 30,                   June 30,                  June 30,                     June 30,
(in millions)        2013         2012          2013         2012         2013         2012           2013             2012
Bedding           $    598.5      $ 289.2      $   199.5     $ 210.5   $     73.9      $  78.7      $      325.1       $     -
Other products          62.1         40.3           16.0        16.1         26.6         24.2              19.5             -
                  $    660.6      $ 329.5      $   215.5     $ 226.6   $    100.5      $ 102.9      $      344.6       $     -

Bedding includes mattresses, foundations and adjustable foundations and Other products includes pillows and various other comfort products and components.

Net sales. Net sales for the three months ended June 30, 2013 increased to $660.6 million from $329.5 million for the same period in 2012, an increase of $331.1 million, or 100.5%. Bedding net sales increased $309.3 million, or 107.0%. Other product net sales increased $21.8 million, or 54.1%. Retail net sales increased $314.0 million, or 109.0%. Direct net sales increased $4.9 million, or 19.3%. Other channel net sales increased $12.2 million, or 76.3%. Net sales for the three months ended June 30, 2013 increased across all product and channel categories over the same period in 2012, due primarily to the Sealy Acquisition. The increase in net sales was partially offset by decreases in our Tempur North America segment in bedding sales, driven by decreases in our Retail and Direct channels. The principal factors impacting net sales for each segment are discussed below.

Tempur North America. Tempur North America net sales for the three months ended June 30, 2013 decreased to $215.5 million from $226.6 million for the same period in 2012, a decrease of $11.1 million, or 4.9%. Tempur North America bedding net sales decreased $11.0 million, or 5.2%, over the same period in 2012, primarily due to decreases in net sales in the Retail and Direct channels. Our Tempur North America Retail channel net sales decreased $4.2 million, or 2.0%, compared to the same period in 2012. Tempur North America Direct net sales decreased $7.1 million, or 40.1% compared to the same period in 2012.

As of a result of a change in the competitive environment, which began in the second quarter of 2012 and continues into 2013, our Tempur North America Retail channel net sales have been adversely impacted. To drive growth in our Retail channel, we plan to focus on product innovations, increase demand through investments in advertising, and improve how we serve our Retail customers. During 2013, Tempur North America has decreased advertising expenses to better align with net sales expectations. However, this reduction in advertising has negatively impacted Retail and Direct channels net sales.


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In addition, the TEMPUR®-Choice product introduction has been slower than anticipated due to initial startup delays that are now resolved. As a result, the TEMPUR-Choice product introduction will continue into the third quarter of 2013.

Tempur International. Tempur International net sales for the three months ended June 30, 2013 decreased to $100.5 million from $102.9 million for the same period in 2012, a decrease of $2.4 million, or 2.3%. On a constant currency basis1, our Tempur International net sales decreased approximately 0.6%. Tempur International net sales decreased primarily due to macroeconomic pressure in Europe which was partially offset by growth in our Asia-Pacific business. Tempur International bedding net sales decreased $4.8 million, or 6.1% compared to the second quarter of 2012. The Tempur International Direct channel net sales increased $3.7 million, or 48.1% compared to the same period in 2012, due to expanding our points of distribution through an increase in the number of company-owned stores and e-commerce.

Sealy. Sealy net sales for the three months ended June 30, 2013 were $344.6 million, with $321.8 million in the Retail channel. Net sales for our Sealy Other channel were $14.5 million, and Direct channel net sales were $8.3 million for the three months ended June 30, 2013. For the three months ended June 30, 2013, Sealy other products net sales were $19.5 million.

Gross profit. Gross profit for the three months ended June 30, 2013 increased to $254.9 million from $166.9 million for the same period in 2012, an increase of $88.0 million, or 52.7%. The gross profit margin for the three months ended June 30, 2013 was 38.6% as compared to 50.7% for the same period in 2012.

Our gross profit margin is impacted by the relative amount of net sales between our three business segments. The Sealy segment operates at a lower gross profit margin than the Tempur North America and Tempur International segments. As Sealy's net sales have increased as a percentage of Consolidated net sales, our gross profit margin has been negatively impacted. Additionally, our Tempur North America gross profit margin has been lower than that of our Tempur International segment, due in part to the royalty paid by the Tempur North America segment. This intercompany royalty expense was $1.4 million and $2.9 million for the three months ended June 30, 2013 and 2012, respectively. These changes in segment mix and other factors related to each business segment resulted in a 12.1% decrease in our gross profit margin for the three months ended June 30, 2013. The principal factors that impacted gross profit margin during the year are identified and discussed below in the respective segment discussions.

Costs associated with net sales are recorded in cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in this process.

Tempur North America. Tempur North America gross profit for the three months ended June 30, 2013 decreased to $88.5 million from $106.3 million for the same period in 2012, a decrease of $17.8 million, or 16.7%. The gross profit margin in our Tempur North America segment was 41.1% and 46.9% for the three months ended June 30, 2013 and 2012, respectively. Our Tempur North America segment gross profit margin was impacted by an 8.0% decrease due to unfavorable product and channel mix, along with a 3.3% decrease associated with floor model discounts related to new product introductions partially offset by a 5.5% increase due to efficiencies in manufacturing, distribution, and reduced sourcing costs.


1 The references to "constant currency basis" in this Management's Discussion & Analysis section do not include operational impacts that could result from fluctuations in foreign currency rates. Certain financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior year 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. Refer to ITEM 3 under Part I of this report.


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Tempur International. Tempur International gross profit for the three months ended June 30, 2013 increased to $62.5 million from $60.6 million for the same period in 2012, an increase of $1.9 million, or 3.1%. The gross profit margin in our International segment was 62.2% and 58.9% for the three months ended June 30, 2013 and 2012, respectively. Our Tempur International gross profit margin was impacted by a 3.1% increase related to favorable geography and channel mix.

Sealy. Sealy gross profit for the three months ended June 30, 2013 was $103.9 million. Sealy gross profit margin was 30.2% for the three months ended June 30, 2013. The Sealy gross profit margin includes incremental costs of $4.5 million associated with the revaluation of finished goods inventory related to the purchase price allocation of the Sealy Acquisition, which had an unfavorable gross profit margin impact of 1.3%.

Selling and marketing expenses. Selling and marketing expenses include advertising and other selling and marketing expenses. Advertising expenses include national and cooperative advertising. Other selling and marketing expenses include media production, marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings, point of purchase materials, sales force compensation, and new product development costs, such as market research and new product testing.

Selling and marketing expenses increased to $139.8 million for the three months ended June 30, 2013 as compared to $83.7 million for the three months ended June 30, 2012, an increase of $56.1 million, or 67.0%. The increase in selling and marketing expenses was due to the inclusion of Sealy's expenses for the three months ended June 30, 2013. Selling and marketing expenses as a percentage of net sales were 21.2% and 25.4% for the three months ended June 30, 2013 and 2012, respectively. The principal factors that impacted selling and marketing expenses during the period are identified and discussed below.

Our advertising expenses for the three months ended June 30, 2013 were $73.1 million compared to $45.7 million in 2012, an increase of $27.4 million, or 60.0%. Advertising expenses as a percentage of net sales were 11.1% and 13.9% for the three months ended June 30, 2013 and 2012, respectively. The primary driver of the increase in advertising expenses was Sealy's advertising expenses of $40.6 million for the three months ended June 30, 2013. However, this increase was offset by decreased advertising expenses in our Tempur North America and Tempur International segments. During the second quarter of 2012, we experienced a decline in Tempur North America net sales. However, most of our advertising expenses were committed for the quarter. As a result, we were unable to align our 2012 advertising expenses with our net sales. In the second quarter of 2013, we were better able to manage our advertising expenses. During the second quarter, we launched advertising campaigns in our Tempur North America and Sealy segments. After a review of the effectiveness of the Tempur North America advertising campaign, we are making certain adjustments. In addition, we expect to increase advertising as a percentage of net sales in the second half of 2013.

All other selling and marketing expenses as a percentage of net sales were approximately 10.1% and 11.5% for the three months ended June 30, 2013 and 2012, respectively. All other selling and marketing expenses increased $28.7 million, or 75.5%. The increase is primarily related to the inclusion of $23.4 million in expenses related to Sealy.

General, administrative and other expenses. General, administrative and other expenses include management salaries, information technology, professional fees, depreciation of buildings, furniture and fixtures, leasehold improvements and computer equipment, expenses for administrative functions and research and development costs.

General, administrative and other expenses as a percentage of net sales were 11.6% and 10.9% for the three months ended June 30, 2013 and 2012, respectively. General, administrative and other expenses increased to $76.3 million for the three months ended June 30, 2013 as compared to $35.7 million for the same period in 2012 for an increase of $40.6 million or 113.7%. The primary driver of the increase was $35.3 million in general, administrative and other expenses related to the inclusion of our Sealy segment for the three months ended June 30, 2013.

Research and development expenses, a component of general, administrative and other expenses, for the three months ended June 30, 2013 were $4.6 million compared to $3.8 million for the same period in 2012, an increase of $0.8 million, or 21.1%. We will continue to invest in research and development to leverage the combined technologies of our portfolio to deliver innovative products.


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Interest expense, net. Interest expense, net, includes the interest costs associated with our borrowings and the amortization of deferred financing costs. Interest expense, net, increased to $35.7 million for the three months ended June 30, 2013 as compared to $4.1 million for the same period in 2012, an increase of $31.6 million, or 770.7%. The increase in interest expense is primarily a result of interest on our Senior Notes, increased debt under our credit facilities and related to the funding of the Sealy Acquisition. In addition, we incurred $8.7 million in prepayment fees related to the refinancing of our Term B Facility.

Income before income taxes. Income before income taxes for the quarter ended June 30, 2013 decreased to $6.7 million from $43.9 million for the same period in 2012, a decrease of $37.2 million, or 84.7%. Tempur North America loss before income taxes for the quarter ended June 30, 2013 was $22.9 million, compared to income before income taxes of $23.0 million for the same period in 2012, a decrease of $45.9 million, or 199.6%. Tempur International income before income taxes for the quarter ended June 30, 2013 increased to $22.5 million from $20.9 million for the same period in 2012, an increase of $1.6 million, or 7.7%. Sealy income before income taxes for the quarter ended June 30, 2013 was $7.1 million. The decrease in income before income taxes was a result of the items discussed above.

Income tax provision. Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and includes the impact of net operating losses for certain of our foreign operations. Our tax rate for the three months ended June 30, 2013 and 2012 was 131.3% and 33.6%, respectively. We had previously tax affected our undistributed earnings from non-U.S. operations based on estimates of 2013 earnings and our preliminary estimate of the value of Sealy's foreign subsidiaries used in the preliminary purchase price allocation. The income tax provision for the three months ended June 30, 2013 was unfavorably impacted by a $5.5 million increase as a result of adjustments to . . .

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