Tempur Sealy Reports Fourth Quarter and Full Year 2015 results

LEXINGTON, Ky., Feb. 4, 2016 /PRNewswire/ -- Tempur Sealy International, Inc. (NYSE: TPX) today announced financial results for the fourth quarter and year ended December 31, 2015. The Company also announced a $200 million share repurchase program and issued financial guidance for the full year 2016.

FOURTH QUARTER 2015 FINANCIAL SUMMARY

• Total net sales increased 2.9% to $767.3 million from $745.5 million in the fourth quarter of 2014. On a constant currency basis⁽¹⁾, total net sales increased 6.7%, with growth in both the North America and International business segments.
• Gross margin under U.S. generally accepted accounting principles ("GAAP") was 40.8% as compared to 39.5% in the fourth quarter of 2014. Adjusted gross margin⁽¹⁾ was 41.1% as compared to 40.3% in the fourth quarter of 2014.
• Earnings before interest, tax, depreciation and amortization ("EBITDA")⁽¹⁾ increased 2.8% to $115.1 million as compared to $112.0 million for the fourth quarter of 2014. Adjusted EBITDA⁽¹⁾ increased 14.4% to $132.7 million as compared to $116.0 million for the fourth quarter of 2014.
• GAAP operating income was $91.8 million as compared to $76.5 million in the fourth quarter of 2014. Operating income was negatively impacted by $10.7 million of restructuring costs, $3.5 million of additional costs related to executive management transition and related retention compensation, $3.9 million of integration costs and $1.3 million of pension settlement costs. Operating income in the fourth quarter of 2014 included $19.9 million of integration and financing costs. Adjusted operating income⁽¹⁾ was $111.2 million, or 14.5% of net sales, as compared to $96.4 million, or 12.9% of net sales, in the fourth quarter of 2014.
• GAAP net loss was $(11.3) million as compared to net income of $46.6 million in the fourth quarter of 2014. As a result of certain events that occurred during the fourth quarter of 2015, the Company recorded a change in estimate of its uncertain tax position regarding the previously disclosed Danish tax matter of approximately $60.7 million. Adjusted net income⁽¹⁾ increased 17.9% to $62.7 million as compared to $53.2 million in the fourth quarter of 2014.
• GAAP (Loss) earnings per diluted share ("EPS") was $(0.18) as compared to $0.75 in the fourth quarter of 2014. Adjusted EPS⁽¹⁾ increased 15.1% to $0.99 as compared to adjusted EPS of $0.86 in the fourth quarter of 2014. On a constant currency basis, adjusted EPS increased 25.6%.
• The Company ended the fourth quarter of 2015 with consolidated funded debt less qualified cash⁽¹⁾ of $1.4 billion. In addition, leverage based on the ratio of consolidated funded debt less qualified cash to Adjusted EBITDA⁽¹⁾ was 2.98 times, with no significant off balance sheet liability.

Tempur Sealy International, Inc. Chairman and CEO Scott Thompson commented, "Overall the worldwide markets for our products feel solid and the Team has made progress towards our goals. Fourth quarter adjusted EBITDA growth of 14% in a relatively low octane economic environment is more evidence of the positive attributes of the bedding industry in general and the strength of Company's business model specifically."

Key Highlights

FULL YEAR 2015 FINANCIAL SUMMARY

• Total net sales increased 5.4% to $3,151.2 million from $2,989.8 million in 2014. On a constant currency basis⁽¹⁾, total net sales increased 9.4%, with growth in both the North America and International business segments.
• GAAP gross margin was 39.6% as compared to 38.5% in 2014. Adjusted gross margin⁽¹⁾ was 40.1% as compared to 38.9% in 2014.
• EBITDA⁽¹⁾ increased 9.4% to $388.9 million as compared to $355.4 million in 2014. Adjusted EBITDA⁽¹⁾ increased 12.7% to $455.8 million as compared to $404.6 million in 2014.
• GAAP operating income was $309.1 million as compared to $276.3 million in 2014. Adjusted operating income⁽¹⁾ was $373.8 million, or 11.9% of net sales, as compared to $320.1 million, or 10.7% of net sales in 2014.
• GAAP EPS was $1.17 as compared to $1.75 in 2014. Adjusted EPS⁽¹⁾ increased 20.4% to $3.19 as compared to adjusted EPS of $2.65 in 2014. On a constant currency basis, adjusted EPS increased 31.7%.
• Operating cash flow for the full year 2015 was $234.2 million.

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 3.8% to $611.6 million from $589.1 million in the fourth quarter of 2014. On a constant currency basis, North America net sales increased 5.3%. GAAP gross margin was 38.7% as compared to 35.6% in the fourth quarter of 2014. GAAP operating margin was 15.5% as compared to 11.3% in the fourth quarter of 2014.

North America adjusted operating margin⁽¹⁾ was 16.8% as compared to 13.6% in the fourth quarter of 2014. The improvement in North America adjusted operating margin during the fourth quarter of 2015 was the result of an improvement in adjusted gross margin⁽¹⁾ of 230 basis points as well as increased selling and marketing leverage as compared to the same period in 2014.

International net sales decreased 0.4% to $155.7 million from $156.4 million in the fourth quarter of 2014. On a constant currency basis, International net sales increased 12.1%. GAAP gross margin was 49.3% as compared to 53.8% in the fourth quarter of 2014. GAAP operating margin was 17.3% as compared to 22.3% in the fourth quarter 2014.

International adjusted operating margin⁽¹⁾ was 20.0% as compared to 24.0% in the fourth quarter of 2014. The decline in International adjusted operating margin was primarily the result of a decline in adjusted gross margin⁽¹⁾ of 410 basis points, driven by incremental costs incurred in connection with distributing Sealy products in international markets.

Corporate GAAP operating expense increased 18.7% to $29.8 million from $25.1 million in the fourth quarter of 2014. The increase in operating expense was primarily driven by $3.2 million of restructuring costs  as well as $2.3 million of costs related to executive management transition and related retention compensation.

Corporate adjusted operating expense⁽¹⁾ increased 6.0% to $22.9 million from $21.6 million in the fourth quarter of 2014. The increase in Corporate adjusted operating expense was primarily related to an increase in legal and professional fees.

Income Tax Adjustment

As a result of certain events that occurred during the fourth quarter of 2015, the Company recorded a change in estimate of its uncertain tax position regarding the previously disclosed Danish tax matter of approximately $60.7 million. The Company will continue discussions with both U.S. and Danish tax authorities in an attempt to resolve this matter.

Thompson further commented, "The Danish Tax issue has been disclosed for seven years and, although painful, we believe it is the right thing to do to take actions to put the issue behind us."

Balance Sheet

As of December 31, 2015, the Company reported $153.9 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 2015, the Company reduced total debt by $122.7 million and, through growth of adjusted EBITDA, reduced leverage to 3.0 times in 2015 as compared to 3.9 times in 2014.

Share Repurchase Program and Target Leverage Update

During the fourth quarter of 2015, the Company completed an evaluation of its capital allocation strategy and established a target leverage of 3.5 times net debt to EBITDA. The Company announced that the Board of Directors has authorized a new share repurchase program of up to $200 million. Stock repurchases under this program may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, financing and regulatory requirements and other market conditions. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under federal securities laws.

Thompson continued, "The Company's business model, which generates both high and stable free cash flow, leans itself to a continuing program of stock repurchase. We see the current authorization as simply the initial step of implementing our long term strategy to maintain both a healthy and efficient capital structure. At the current stock price, it appears to be a compelling use of excess capital."

Financial Guidance

For the full year 2016, the Company currently expects Adjusted EBITDA to range from $500 million to $550 million, which includes approximately $10 million of unfavorable foreign currency impact based on forecasted exchange rates.

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.

Conference Call Information

Tempur Sealy International, Inc. will host a live conference call to discuss financial results today, February 4, 2016 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 adjusted net income, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA, EBITDA calculated in accordance with the Company's senior secured credit facility, 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 2016 and performance generally for 2016 and subsequent years, expectations regarding a resolution of the Danish tax issue and expectations regarding the share repurchase program and the capital allocation strategy. 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 Company's capital structure and debt level; the ability to successfully integrate Sealy Corporation into the Company's operations and realize cost and revenue synergies and other benefits from the transaction; whether the Company will realize the anticipated benefits from its asset dispositions in 2014 and the acquisition of brand rights in certain international markets in 2014; 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; 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; 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.

There are a number of risks, uncertainties and other important factors, many of which are beyond the Company's control, that could cause its actual results to differ materially from those expressed as forward-looking statements in this press release, including the risk factors discussed under the heading "Risk Factors" under ITEM 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2014 and under ITEM 1A of Part 2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015. 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) is the world's largest bedding provider. Tempur Sealy International, Inc. develops, manufactures and markets mattresses, foundations, pillows and other products. The Company's brand portfolio includes many highly recognized brands, including TEMPUR®, Tempur-Pedic®, Sealy®, Sealy Posturepedic® and Stearns & Foster®. World headquarters for Tempur Sealy International, Inc. is in Lexington, KY. For more information, visit http://www.tempursealy.com or call 800-805-3635.

Summary of Channel Sales

The following table highlights net sales information, by channel and by segment, for the three months ended December 31, 2015 and 2014:

Summary of Product Sales

The following table highlights net sales information, by product and by segment, for the three months ended December 31, 2015 and 2014:

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, EBITDA in accordance with the Company's senior secured credit facility, adjusted EBITDA, consolidated funded debt and consolidated funded debt less qualified cash, 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 total debt. 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 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.

Adjusted Net Income and Adjusted EPS

A reconciliation of GAAP net (loss) income to adjusted net income and GAAP EPS to 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 (loss) income and EPS for the three months ended December 31, 2015 and 2014 to the calculation of adjusted net income and adjusted EPS for the three months ended December 31, 2015 and 2014:

The following table sets forth the reconciliation of the Company's GAAP net income and EPS for the year ended December 31, 2015 and 2014 to the calculation of adjusted net income and adjusted EPS for the year ended December 31, 2015 and 2014:

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 December 31, 2015:

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 December 31, 2014:

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 year ended December 31, 2015:

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 year ended December 31, 2014:

EBITDA, Adjusted EBITDA, EBITDA in accordance with the Company's senior secured credit facility, Funded debt and Funded debt less qualified cash

A reconciliation of the Company's GAAP net income to EBITDA in accordance with the Company's senior secured credit facility (which the Company may refer to as "EBITDA for covenant compliance purposes") and a reconciliation of total debt to consolidated funded debt and consolidated funded debt less qualified cash are provided below. In addition, a calculation of the ratio of consolidated funded debt less qualified cash to EBITDA determined in accordance with the Company's senior secured credit facility is provided below. Management believes that presenting these non-GAAP measures provides investors with useful information with respect to the terms of the Company's senior secured credit facility and the Company's compliance with key financial covenants.

In addition to providing the ratio calculation in accordance with the Company's senior secured credit facility as described above, the Company also provides below a calculation of the ratio of consolidated funded debt less qualified cash to Adjusted EBITDA. Although not relevant for purposes of assessing compliance with the Company's current financial covenants, the Company provides this as supplemental information to investors to provide more general information about the Company's progress in reducing its leverage.

The following table sets forth the reconciliation of the Company's reported GAAP net (loss) income to the calculation of EBITDA, EBITDA in accordance with the Company's senior secured credit facility and adjusted EBITDA for the three months ended December 31, 2015 and 2014: