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Tempur Sealy Reports First Quarter 2017 Results

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Tempur Sealy International, Inc. (NYSE: TPX) recently announced financial results for the first quarter ended March 31, 2017. The Company also reaffirmed its financial guidance for the full year 2017.


First Quarter 2017 Financial Summary

  • Total net sales increased 0.2% to $722.1 million from $721.0 million in the first quarter of 2016. On a constant currency basis1, total net sales increased 0.7%, with an increase of 0.1% in the North America business segment and an increase of 3.2% in the International business segment.
  • Gross margin under U.S. generally accepted accounting principles ("GAAP") was 39.7% as compared to 40.4% in the first quarter of 2016. Gross margin in the first quarter of 2017 included $11.5 million of charges associated with the termination of the relationship with Mattress Firm Inc. ("Mattress Firm"). Adjusted gross margin1 was 41.3% as compared to 40.4% in the first quarter of 2016.
  • GAAP operating income decreased 22.4% to $59.5 million as compared to $76.7 million in the first quarter of 2016. Operating income in the first quarter of 2017 included $25.9 million of net charges associated with the Mattress Firm termination. Adjusted operating income1 increased $4.8 million to $85.4 million as compared to adjusted operating income of $80.6 million in the first quarter of 2016.
  • GAAP net income decreased 14.4% to $33.9 million as compared to $39.6 million in the first quarter of 2016. Adjusted net income1 increased 23.4% to $52.2 million as compared to adjusted net income of $42.3 million in the first quarter of 2016.
  • Earnings before interest, tax, depreciation and amortization ("EBITDA")(1) decreased 14.9% to $86.8 million as compared to $102.0 million for the first quarter of 2016. Adjusted EBITDA(1) increased 16.4% to $121.1 million as compared to adjusted EBITDA of $104.0 million in the first quarter of 2016. Adjusted EBITDA1 excludes $34.3 million of charges related to the Mattress Firm termination. Please refer to additional discussion in the Business Segment Highlights below.
  • GAAP earnings per diluted share ("EPS") decreased 1.6% to $0.62 as compared to $0.63 in the first quarter of 2016. Adjusted EPS(1) increased 41.2% to $0.96 as compared to adjusted EPS of $0.68 in the first quarter of 2016.
  • The Company ended the first quarter of 2017 with total debt of $1.9 billion and consolidated funded debt less qualified cash(1) of $1.9 billion. Leverage based on the ratio of consolidated funded debt less qualified cash to adjusted EBITDA(1) was 3.46 times for the trailing twelve months ended March 31, 2017 as compared to 3.18 times for the trailing twelve months ended March 31, 2016.

Tempur Sealy International, Inc. Chairman and CEO Scott Thompson commented, "This represents the eighth consecutive quarter of double-digit adjusted EPS growth. These solid first quarter results are a byproduct of the team's focus on our long-term initiatives and the overall positive worldwide economy underlying the bedding industry. We are pleased with the progress of our new product launches around the world and the positive early market reactions."

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


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 0.4% to $582.3 million from $580.0 million in the first quarter of 2016. On a constant currency basis(1), North America net sales increased 0.1%. GAAP gross margin was 36.8% as compared to 37.0% in the first quarter of 2016. GAAP operating margin was 8.8% as compared to 13.3% in the first quarter of 2016.

North America adjusted gross margin(1) improved 180 basis points to 38.8% as compared to adjusted gross margin of 37.0% in the first quarter of 2016. Gross margin improvements were primarily driven by productivity across our operations, lower floor model discounts, and channel mix, which were offset by brand mix. The increase in North America gross margin drove a 100 basis point increase in the Company's North America adjusted operating margin(1) to 14.4% as compared to adjusted operating margin of 13.4% in the first quarter of 2016.

Charges associated with the Mattress Firm termination reflected in operating income were $32.4 million. Cost of sales included $11.5 million of charges related to the write-off of customer-unique inventory and product obligations. Operating expenses included $20.9 million of charges related to the write-off of customer incentives and marketing assets, as well as employee-related expenses.

International net sales decreased 0.9% to $139.8 million from $141.0 million in the first quarter of 2016. On a constant currency basis(1), International net sales increased 3.2%. GAAP gross margin was 51.6% as compared to 54.3% in the first quarter of 2016. GAAP operating margin was 18.5% as compared to 19.4% in the first quarter 2016, driven by the decrease in gross margin offset by lower advertising costs.

The decrease in International gross margin was primarily driven by increased floor model discounts due to new product introductions and unfavorable foreign exchange impact, which were partially offset by favorable channel mix. International adjusted operating margin(1) decreased to 19.1% as compared to 19.4% in the first quarter of 2016.

Corporate GAAP operating expense decreased to $17.8 million from $27.9 million in the first quarter of 2016. In the first quarter of 2017, the Company recorded a benefit of $9.3 million related to a change in estimate for performance-based stock compensation. Corporate adjusted operating expense(1) increased to $25.1 million as compared to adjusted operating expense of $24.3 million in the first quarter of 2016.

Other Income, Net

Other income included $9.3 million of payments received pursuant to the transition agreements with Mattress Firm, which were entered into during the first quarter of 2017. This amount is not included as an adjustment to adjusted net income(1). In the fourth quarter of 2016, the Company spent approximately $13 million to support Mattress Firm with store transitions and product launches. The $9.3 million of payments from Mattress Firm were intended to partially offset that prior investment.

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


Balance Sheet

As of March 31, 2017, the Company reported $42.5 million in cash and cash equivalents and $1.9 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. During the first quarter of 2017, the Company repurchased 0.6 million shares of its common stock for a total cost of $40.1 million. As of March 31, 2017, the Company had approximately $226.9 million available under its existing share repurchase authorization.

Financial Guidance

The Company also today reaffirmed its financial guidance for 2017. For the full year 2017, the Company currently expects adjusted EBITDA(1) to range from $400 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.

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


Non-GAAP Financial Measures and Constant Currency Information

For additional information regarding adjusted net income, adjusted EPS, adjusted gross profit, adjusted gross margin, adjusted operating income (expense), adjusted operating margin, EBITDA, adjusted EBITDA, 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.


More 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

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