Tempur Sealy International Inc. (TPX, Financial) is the world's largest bedding provider. It develops, manufactures and markets mattresses, adjustable bases, pillows and other sleep and relaxation products. The company sells its products globally in approximately 100 countries.
Tempur Sealy operates in three segments: Tempur North America (comprises of two U.S. manufacturing facilities in Virginia and New Mexico and its Tempur North America distribution subsidiaries), Tempur International and Sealy. The company's brand portfolio includes Tempur, Tempur-Pedic, Sealy, Sealy Posturepedic, Optimum and Stearns & Foster.
Tempur Sealy reported strong third-quarter results. The company's iconic brands and products continue to perform well throughout the world resulting in solid revenue growth and EBITDA margin expansion. The International operations dealt with unfavorable foreign exchange headwinds but still managed to deliver stable operating results. The company continues to demonstrate the free cash flow attributes of the business, resulting in consistent deleveraging of the balance sheet and enhancing the company's future capital structuring alternatives.
Strong third quarter
Total net sales increased by 6.4% and were $880.0 million ($827.4 million in the prior year quarter). On a constant currency basis, total net sales increased by 10.6%.
Gross margin under U.S. generally accepted accounting principles (GAAP) was 40.9 (which was 38.5% in the prior year quarter). Adjusted gross margin was 41.3% (38.8% in the prior year quarter).
Earnings before interest, tax, depreciation and amortization (EBITDA) increased by 14.3% and was $121.4 million (which was $106.2 million during the prior year quarter). Adjusted EBITDA increased by 19.1% and was $142.3 million ($119.5 million during the prior year quarter).
GAAP operating income was $110.9 million ($87.1 million in the prior year quarter). Adjusted operating income was $124.0 million, or 14.1% of net sales, (which was $98.0 million, or 11.8% of net sales in the prior year quarter).
GAAP Earnings per diluted share (EPS) increased to 64 cents (60 cents in the prior year quarter). Adjusted EPS increased by 26.1% and was $1.11 (88 cents in the prior year quarter). On a constant currency basis, adjusted EPS increased 36.4%.
The company ended the third quarter of 2015 with consolidated funded debt less qualified cash of $1.4 billion. The ratio of consolidated funded debt less qualified cash to EBITDA, calculated in accordance with the company's senior secured credit facility, was 3.53 times. In addition, leverage based on the ratio of consolidated funded debt less qualified cash to Adjusted EBITDA was 3.30 times.
During the third quarter, the company completed a $450.0 million senior notes offering and used the proceeds to reduce term loan debt outstanding under the company's senior secured credit facility. In addition, the company made a $50.0 million voluntary prepayment on the senior secured credit facility in the third quarter of 2015. These actions improved the company's capital structure by extending debt maturities, increasing capacity under the senior secured credit facility and shifting more debt to fixed rate debt.
(Source: Company’s website)
Growth opportunities
Tempur Sealy has enough growth opportunities in North America as well as in the international arena. In the U.S., the $9 billion market is growing by the mid-single digits annually, with significant unit growth potential. Additionally, U.S. bedding specialty stores are consolidating, and new channels of distribution are emerging. The company has introduced two new products: Tempur-Flex and Posturepedic. Further, Tempur Sealy is continuously building awareness of brands and driving sales through effective marketing. The following are the Sealy U.S. gross margin improvement initiatives:
- Product design.
- Procurement.
- Price-Margin-Realization (PMR).
- Factory productivity.
To strengthen its position, Tempur Sealy is taking the following steps:
- Introducing new products that will expand addressable opportunity.
- Expanding third party retail distribution and company-owned stores.
- Making opportunistic accretive acquisitions of licensees and joint ventures.
A peek into the bedding industry
Until 2007, the global mattress industry has achieved positive results; during 2008 to 2009, it experienced a decrease in overall sales. The main reasons behind the decrease were economic pressures, decline in consumers' wealth and a weak housing market. Then, in 2010, the industry started to show signs of recovering and is now expected to experience healthy growth in the future. As per Global Industry Analysts, the global mattress market will reach $24.65 billion by 2017. People are now ready to spend more for mattresses as sound sleep is one of the most important necessities of life. Therefore, Tempur Sealy has enough room to strengthen its position.
On a concluding note
Overall, Tempur Sealy is a rock solid company with strong and improving financial characteristics, improving capital structure, and significant operating cash flow with a commitment to enhance stockholder value. Further, the company is leveraging and strengthening its comprehensive portfolio of iconic brands and products, expanding distribution and seeking best dealer support, expanding margins with focus on driving significant cost improvement and leveraging global scale for competitive advantage. This leading bedding provider will deliver exceptional returns in the near future.
Disclosure: I do not hold any position in the company.
