Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TPX > SEC Filings for TPX > Form 10-Q on 8-Nov-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.


8-Nov-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 reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 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 nine months ended September 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 are the world's largest bedding provider. We develop, manufacture, market, and distribute bedding products, which we sell globally. Our brand portfolio includes many of the most highly recognized brands in the industry, including TEMPUR®, Tempur-Pedic®, Sealy®, Sealy Posturepedic®, Optimum™, and Stearns & Foster®. 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. Our Tempur North America segment consists of two U.S. manufacturing facilities and our Tempur North America distribution subsidiaries. Our Tempur International segment consists of our manufacturing facility in Denmark, whose customers include all of our distribution subsidiaries and third party distributors outside our Tempur North America and Sealy segments. Our 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.


Table of Contents

Strategy

We are the world's largest bedding provider and the only provider with global
scale. We believe our future growth potential is significant in our existing
markets and through expansion into new markets. In order to achieve our
long-term growth potential while managing the current economic and competitive
environment, we will focus on the key strategic growth initiatives discussed
below:

•         Product Innovation: We will continue to invest in research and
          development to leverage the combined technologies of our comprehensive
          portfolio of products to deliver a stream of innovative products. Our
          goal is to provide consumers the best bed and best sleep of their life
          and to provide our retailers a complete and optimal offering across
          brands, products, and prices to drive growth. We will also pursue
          opportunities to enter or develop new product categories.


•         Marketing: We will increase our investment in advertising to increase
          consumer awareness, preference and loyalty for each of our key brands.
          We will also invest in in-store marketing and direct sales to maximize
          our sales opportunity driven from national brand and retailer
          advertising.


•         New Market Expansion: We will pursue opportunities to expand into new
          international markets and over time into non-consolidated markets where
          our brands are currently represented under licensee, joint venture or
          third party distributor agreements.


•         Supply Chain ("Easier To Do Business With"): We are committed to
          building a world-class supply chain that is "easier to do business
          with." Our goal is to significantly improve efficiencies related to
          purchasing and delivery, as well as inventory management to drive sales
          growth.

Our strategic growth initiatives will be supported by cost synergies realized from the Sealy acquisition as well as through our ongoing cost productivity initiatives.
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 of this report 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, "Debt", in our Condensed Consolidated Financial Statements included in Part I, ITEM I of this report 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.


Table of Contents

(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®, OptimumTM, and Stearns & Foster® brands. Sealy's results of operations are reported within the our 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. We believe the shared know-how and improved efficiencies of the combined company will result in tremendous value for its consumers, retailers and stockholders. Results of Operations

A summary of our results for the three and nine months ended September 30, 2013, which include the Sealy segment results of operations for the period from March 18, 2013 through September 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 September 30, 2013 increased to
          $735.5 million from $347.9 million for the same period in 2012. Net
          sales for the nine months ended September 30, 2013 increased to
          $1,786.2 million from $1,061.8 million for the same period in 2012.


•         Earnings per diluted common share (EPS) was $0.65 for the three months
          ended September 30, 2013 compared to loss per diluted common share of
          $0.03 for the three months ended September 30, 2012. For the nine
          months ended September 30, 2013 EPS were $0.83 compared to $1.31 for
          the same period in 2012.


Table of Contents

(In millions, except
per common share                   Three Months Ended                              Nine Months Ended
amounts)                              September 30,                                   September 30,
                         2013                   2012                    2013                     2012
Net sales              $ 735.5     100.0  %   $ 347.9     100.0  %   $ 1,786.2     100.0  %   $ 1,061.8     100.0  %
Cost of sales            436.8      59.4  %     176.8      50.8  %     1,044.2      58.5  %       517.8      48.8  %
Gross profit             298.7      40.6  %     171.1      49.2  %       742.0      41.5  %       544.0      51.2  %
Selling and marketing
expenses                 150.9      20.5  %      76.2      21.9  %       377.1      21.1  %       243.2      22.9  %
General,
administrative and
other expenses            71.9       9.9  %      31.5       9.1  %       206.9      11.5  %       103.8       9.8  %
Equity income in
earnings of
unconsolidated
affiliates                (1.2 )    (0.2 )%         -         -  %        (2.5 )    (0.1 )%           -         -  %
Royalty income, net of
royalty expense           (4.1 )    (0.6 )%         -         -  %        (9.2 )    (0.5 )%           -         -  %
Operating income          81.2      11.0  %      63.4      18.2  %       169.7       9.5  %       197.0      18.5  %
Interest expense, net     24.6       3.3  %       4.8       1.4  %        88.2       4.9  %        13.0       1.1  %
Other expense
(income), net              0.9       0.1  %      (0.4 )    (0.1 )%         4.0       0.2  %        (0.4 )       -  %
Income before income
taxes                     55.7       7.6  %      59.0      16.9  %        77.5       4.4  %       184.4      17.4  %
Income tax provision     (15.5 )    (2.1 )%     (61.0 )   (17.5 )%       (26.9 )    (1.5 )%      (101.1 )    (9.5 )%
Net income (loss)
before non-
controlling interest      40.2       5.5  %      (2.0 )    (0.6 )%        50.6       2.9  %        83.3       7.9  %
Less: Net (loss)
attributable to non-
controlling interest         -         -  %         -         -  %        (0.5 )       -  %           -         -  %
Net income (loss)
attributable to common
stockholders           $  40.2       5.5  %   $  (2.0 )    (0.6 )%   $    51.1       2.9  %   $    83.3       7.9  %

Earnings (loss) per
common share:
Basic                  $  0.66                $ (0.03 )              $    0.85                $    1.34
Diluted                $  0.65                $ (0.03 )              $    0.83                $    1.31
Weighted average
common shares
outstanding:
Basic                     60.5                   59.6                     60.3                     62.1
Diluted                   61.6                   59.6                     61.6                     63.6


Table of Contents

Three Months Ended September 30, 2013 Compared with Three Months Ended
September 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
                          September 30,                    September 30,                    September 30,                 September 30,
(in millions)           2013            2012             2013            2012             2013            2012         2013          2012
Retail           $     669.7          $ 306.4     $     226.5          $ 221.2     $      79.7          $  85.2     $   363.5     $      -
Direct                  31.5             27.1            11.6             16.7            12.5             10.4           7.4            -
Other                   34.3             14.4             4.3              3.0            11.0             11.4          19.0            -
                 $     735.5          $ 347.9     $     242.4          $ 240.9     $     103.2          $ 107.0     $   389.9     $      -

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
                          September 30,                    September 30,                    September 30,                 September 30,
(in millions)           2013            2012             2013            2012             2013            2012         2013          2012
Bedding          $     662.3          $ 300.4     $     220.6          $ 220.1     $      76.5          $  80.3     $   365.2     $      -
Other products          73.2             47.5            21.8             20.8            26.7             26.7          24.7            -
                 $     735.5          $ 347.9     $     242.4          $ 240.9     $     103.2          $ 107.0     $   389.9     $      -

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 September 30, 2013 increased to $735.5 million from $347.9 million for the same period in 2012, an increase of $387.6 million, or 111.4%. Net sales for the three months ended September 30, 2013 increased across all product and channel categories over the same period in 2012, due primarily to the Sealy Acquisition. For the three months ended September 30, 2013, Bedding net sales increased 120.5%, Retail channel net sales increased 118.6% and Other channel net sales increased 138.2%. 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 September 30, 2013 increased to $242.4 million from $240.9 million for the same period in 2012. Our Tempur North America Retail channel net sales increased 2.4%, compared to the same period in 2012. Tempur North America Retail channel net sales increased primarily due to various strategic initiatives implemented to drive growth in the Retail channel. These initiatives included new product introductions, increased advertising investments and improving how we serve our Retail channel customers. Each of these initiatives contributed to the improved Retail channel performance during the third quarter of 2013. We will continue to focus on these strategic initiatives to drive future growth in our Tempur North America segment. Tempur North America Direct net sales decreased $5.1 million, or 30.5% compared to the same period in 2012. Tempur North American Direct channel net sales continue to be impacted by the advertising spend decreases in the first and second quarters of 2013 as compared to the prior year.


Table of Contents

Tempur International. Tempur International net sales for the three months ended September 30, 2013 decreased to $103.2 million from $107.0 million for the same period in 2012, a decrease of $3.8 million, or 3.6%. On a constant currency basis1, our Tempur International net sales decreased approximately 3.1%. Tempur International net sales decreased primarily due to macroeconomic pressure in Europe which was partially offset by growth in our Asia-Pacific and Latin American businesses. Tempur International bedding net sales decreased 4.7% compared to the third quarter of 2012, consistent with the decrease in net sales in our Tempur International Retail channel. The Tempur International Direct channel net sales increased $2.1 million, or 20.2% compared to the same period in 2012, due to our 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 September 30, 2013 were $389.9 million, with $363.5 million in the Retail channel. Net sales for our Sealy Other channel were $19.0 million, and Direct channel net sales were $7.4 million for the three months ended September 30, 2013. For the three months ended September 30, 2013, Sealy bedding net sales were $365.2 million and other products net sales were $24.7 million.

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.


Table of Contents

Gross profit. Gross profit for the three months ended September 30, 2013 increased to $298.7 million from $171.1 million for the same period in 2012, an increase of $127.6 million, or 74.6%. The increase in gross profit for the three months ended September 30, 2013 as compared to the same period in 2012 was due primarily to the Sealy Acquisition. The gross profit margin for the three months ended September 30, 2013 was 40.6% as compared to 49.2% for the same period in 2012. The decrease in our gross profit margin for the three months ended September 30, 2013 as compared to the same period in 2012 was due primarily to the Sealy Acquisition.

Our gross profit margin is impacted by the relative amount of net sales between our three business segments. Our Sealy segment operates at a lower gross profit margin than our 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 $1.6 million and $3.0 million for the three months ended September 30, 2013 and 2012, respectively. These changes in segment mix and other factors related to each business segment resulted in an 8.6% decrease in our gross profit margin for the three months ended September 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 producing, shipping, warehousing, receiving and inspecting 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 September 30, 2013 decreased to $102.1 million from $105.1 million for the same period in 2012, a decrease of $3.0 million, or 2.9%. The gross profit margin in our Tempur North America segment was 42.1% and 43.6% for the three months ended September 30, 2013 and 2012, respectively. Our Tempur North America segment gross profit margin was impacted by a 2.8% decrease due to unfavorable product and channel mix. Additionally, gross profit margin was impacted by a manufacturing change associated with our new Tempur-Up adjustable base, which accounted for a decrease of 1.5% in the gross profit margin for the period. These items were partially offset by a 2.0% increase due to reduced sourcing costs, and a 1.1% increase due to lower floor model discounts related to new product introductions.

Tempur International. Tempur International gross profit for the three months ended September 30, 2013 decreased to $61.9 million from $66.0 million for the same period in 2012, a decrease of $4.1 million, or 6.2%. The gross profit margin in our International segment was 60.0% and 61.7% for the three months ended September 30, 2013 and 2012, respectively. Our Tempur International gross profit margin was impacted by a 1.5% decrease related to floor model discounts for new product introductions in our Tempur International segment, and a 1.1% decrease related to manufacturing inefficiencies. These items were partially offset due to favorable product and channel mix and reduced sourcing costs.

Sealy. Sealy gross profit for the three months ended September 30, 2013 was $134.7 million. Sealy gross profit margin was 34.5% for the three months ended September 30, 2013.

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 $150.9 million for the three months ended September 30, 2013 as compared to $76.2 million for the three months ended September 30, 2012, an increase of $74.7 million, or 98.0%. The increase in selling and marketing expenses was primarily due to the Sealy Acquisition. Sealy's selling and marketing expenses were $65.5 million for the three months ended September 30, 2013. Selling and marketing expenses as a percentage of net sales were 20.5% and 21.9% for the three months ended September 30, 2013 and 2012, respectively. The principal factors that impacted selling and marketing expenses during the period are identified and discussed below.


Table of Contents

Our advertising expenses for the three months ended September 30, 2013 were $88.4 million compared to $38.4 million in 2012, an increase of $50.0 million, or 130.2%. Advertising expenses as a percentage of net sales were 12.0% and 11.0% for the three months ended September 30, 2013 and 2012, respectively. The primary driver of the increase in advertising expenses was due to the inclusion of Sealy's advertising expenses of $45.5 million for the three months ended September 30, 2013. During the second quarter of 2013, we completed a review of the effectiveness of the new Tempur North America advertising campaign and made certain adjustments. During the third quarter of 2013, we reintroduced the "Ask Me" campaign, along with making certain media mix adjustments, which resulted in a $5.0 million increase in our Tempur North America advertising expense for the period. We expect to continue to increase advertising as a percentage of net sales in the fourth quarter of 2013.

All other selling and marketing expenses as a percentage of net sales were approximately 8.5% and 10.9% for the three months ended September 30, 2013 and 2012, respectively. All other selling and marketing expenses increased $24.7 million, or 65.3%. The increase is primarily related to the addition of $20.0 million in expenses related to our Sealy segment.

General, administrative and other expenses. General, administrative and other expenses include salaries and related expenses, information technology, professional fees, depreciation of buildings, furniture and fixtures, machinery, 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 9.9% and 9.1% for the three months ended September 30, 2013 and 2012, respectively. General, administrative and other expenses increased to $71.9 . . .

  Add TPX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TPX - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.