Tempur Sealy Reports Record Third Quarter Results

Tempur Sealy International, Inc. (“Sealy” or the “Company”) announced financial results for the third quarter ended September 30, 2020.

Third Quarter 2020 Financial Summary

– Total net sales increased 37.9% to $1,132.3 million as compared to $821.0 million in the third quarter of 2019. On a constant currency basis(1), total net sales increased 37.7%, with an increase of 43.3% in the North America business segment and an increase of 10.1% in the International business segment.

– Gross margin was 46.8% as compared to 43.9% in the third quarter of 2019. Adjusted gross margin(1) was 46.9% in the third quarter of 2020. There were no adjustments to gross margin in the third quarter of 2019.

– Operating income increased 49.4% to $180.2 million as compared to $120.6 million in the third quarter of 2019. Operating income in the third quarter of 2020 included $45.2 million of amortization for aspirational plan stock-based compensation. Adjusted operating income(1) was $227.2 million in the third quarter of 2020. There were no adjustments to operating income in the third quarter of 2019.

– Net income increased 65.6% to $121.4 million as compared to $73.3 million in the third quarter of 2019. Adjusted net income(1) increased 114.3% to $155.4 million as compared to $72.5 million in the third quarter of 2019.

– Earnings before interest, tax, depreciation and amortization (“EBITDA”)(1) increased 85.7% to $279.9 million as compared to $150.7 million in the third quarter of 2019. Adjusted EBITDA per credit facility(1) increased 86.3% to $279.3 million as compared to $149.9 million in the third quarter of 2019.

– Earnings per diluted share (“EPS”) increased 74.8% to $2.29 as compared to $1.31 in the third quarter of 2019. Adjusted EPS(1) increased 126.2% to $2.94 as compared to $1.30 in the third quarter of 2019.

– For the trailing twelve months ended September 30, 2020, leverage based on the ratio of consolidated indebtedness less netted cash(1) to adjusted EBITDA per credit facility(1) was 1.92 times as compared to 3.22 times in the corresponding prior year period.

– Net cash provided by operating activities increased to a record $327.5 million as compared to $155.8 million in the third quarter of 2019.

Company Chairman and CEO Scott Thompson commented, “Our results reflect strong industry demand, our worldwide leadership position in the industry, and the success of our omni-channel distribution strategy. As expected, our net sales growth rate was reduced by about 10% from customer orders that were either cancelled or reduced due to allocations in the quarter due to supplier issues impacting Sealy and Sherwood in the U.S. Despite the supply issues, this quarter marks our seventh consecutive quarter of trailing twelve month adjusted EBITDA growth. The significant investments we have made in our people, products, customer service and manufacturing operations over the last few years are clearly paying off.

“The Company has grown adjusted EBITDA over the last five-years at a compounded annual growth rate of 12% resulting in $694 million of adjusted EBITDA on a trailing twelve month basis ending September 30, 2020. The Company’s long-term strategies and recent investments position Tempur Sealy as a growth company with a fortified balance sheet and a capital allocation plan that is designed to drive shareholder value, mitigate volatility and increase diversity of its shareholder base.”

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 43.2% to $976.5 million as compared to $682.0 million in the third quarter of 2019. On a constant currency basis(1), North America net sales increased 43.3% as compared to the third quarter of 2019. Gross margin was 44.9% as compared to 42.1% in the third quarter of 2019. Adjusted gross margin(1) was 45.0% as compared to 42.1% in the third quarter of 2019. Operating margin was 23.7% as compared to 17.6% in the third quarter of 2019. Adjusted operating margin(1) was 23.9% as compared to 17.6% in the third quarter of 2019.

North America net sales through the wholesale channel increased $266.9 million, or 44.3%, to $869.1 million, as compared to the third quarter of 2019, driven by broad-based demand across both existing and new distribution networks. North America net sales through the direct channel increased $27.6 million, or 34.6%, to $107.4 million, primarily driven by an increase of more than 100% in web sales as compared to the third quarter of 2019.

North America adjusted gross margin(1) improved 290 basis points as compared to the third quarter of 2019. The improvement was primarily driven by fixed cost leverage and productivity on higher unit volumes, brand mix and lower commodity costs. North America adjusted operating margin(1) improved 630 basis points as compared to the third quarter of 2019. The improvement was primarily driven by operating expense leverage and the improvement in gross margin.

In the U.S., Sealy’s third quarter sales growth was unfavorably impacted by supply chain constraints, primarily related to encased innerspring components. As a result, the Company could not fulfill the domestic demand for Sealy mattresses and exited the quarter with a record amount of orders to fulfill. The Company expects these supply chain constraints to continue in the short-term.

International net sales increased 12.1% to $155.8 million as compared to $139.0 million in the third quarter of 2019. On a constant currency basis(1), International net sales increased 10.1% as compared to the third quarter of 2019. Gross margin was 58.8% as compared to 53.1% in the third quarter of 2019. Operating margin was 28.8% as compared to 19.6% in the third quarter of 2019. Adjusted operating margin(1) was 29.0% as compared to 19.6% in the third quarter of 2019.

International net sales through the wholesale channel increased $10.2 million, or 9.5%, to $118.1 million as compared to the third quarter of 2019. International net sales through the direct channel increased $6.6 million, or 21.2%, to $37.7 million as compared to the third quarter of 2019.

International gross margin improved 570 basis points as compared to the third quarter of 2019. The improvement was primarily driven by favorable mix, fixed cost leverage and productivity on higher unit volumes and lower commodity costs. International adjusted operating margin(1) improved 940 basis points as compared to the third quarter of 2019. The improvement was primarily driven by the improvement in gross margin and operating expense leverage.

Corporate operating expense increased to $96.1 million as compared to $26.5 million in the third quarter of 2019, primarily driven by $45.2 million of amortization for the Company’s aspirational plan stock-based compensation, which was established five years ago. The amount recognized represents the cumulative catch-up adjustment for the long-term aspirational awards that became probable of vesting during the third quarter of 2020. The awards are subject to a remaining service vesting condition which will lapse in December 2020. Additionally, the Company expects to reach the maximum payout for its 2020 annual incentive and performance-based stock compensation plans, which increased operating expense in the third quarter of 2020. The Company will record additional amortization related to these compensation plans and the aspirational plan in the fourth quarter of 2020. Corporate adjusted operating expense(1) was $50.9 million in the third quarter of 2020. There were no adjustments to operating expense in the third quarter of 2019.

Consolidated net income increased 65.6% to $121.4 million as compared to $73.3 million in the third quarter of 2019. Net income in the third quarter of 2020 included $34.0 million, net of tax, of charges primarily consisting of amortization for the Company’s aspirational plan stock-based compensation. Adjusted net income(1) increased 114.3% to $155.4 million as compared to $72.5 million in the third quarter of 2019. EPS increased 74.8% to $2.29 as compared to $1.31 in the third quarter of 2019. Adjusted EPS(1) increased 126.2% to $2.94 as compared to $1.30 in the third quarter of 2019.

The Company ended the third quarter of 2020 with total debt of $1.5 billion and consolidated indebtedness less netted cash(1) of $1.3 billion, which is the lowest level of debt in Tempur Sealy’s history. Leverage based on the ratio of consolidated indebtedness less netted cash(1) to adjusted EBITDA per credit facility(1) was 1.92 times for the trailing twelve months ended September 30, 2020.

As of September 30, 2020, the Company had approximately $131.3 million available under its existing share repurchase authorization. In a separate press release issued today, the Company announced that its Board of Directors increased the authorization under the Company’s share repurchase program to approximately $300.0 million. Additionally, the Company announced its intent to initiate a quarterly cash dividend in early 2021 and approved a four-for-one stock split, effected via a stock dividend, in the fourth quarter of 2020.

Company Chairman and CEO Scott Thompson commented, “The Company is in the strongest financial position in its history as it has a fortified balance sheet within a thinly capitalized industry and a record amount of liquidity. Our new long-term capital allocation strategy includes the intent to initiate a new quarterly cash dividend beginning in early 2021 that targets an annual dividend to our stockholders of approximately 15% of net income, an annual share repurchase target of at least 3% of shares outstanding, and further investments in the Company either through capital expenditures or acquisitions. This strategy reflects our continued confidence in the long-term growth outlook of the Company. We believe over time these actions will drive shareholder value while also providing for growth capital as we continue investing in expanding operations and opportunistic acquisitions.”

For additional information, please refer to Exhibit 99.2 to the Current Report on Form 8-K.

Environmental, Social and Corporate Governance Initiatives

The Company previously announced multiple initiatives to further reduce its global environmental footprint. In 2020, the Company began sourcing 100% renewable electricity for its U.S. and European Tempur-Pedic and Sealy manufacturing operations. Additionally, the Company remains committed to its investment in solar power technology and expects to complete the installation of the solar panel technology at its Albuquerque, New Mexico manufacturing facility in the first half of 2021. Finally, the Company announced a commitment to achieving zero landfill waste for its U.S. and European manufacturing operations by the end of 2022.

Tempur Sealy Chairman and CEO Scott Thompson commented, “It is our belief that as good corporate citizens, we must serve all of our stakeholders, including our people, our community, and our environment. The actions we are taking to drive increased renewable energy usage and reduce our waste across our global organization are furthering our long-term commitment of reducing our environmental footprint. Socially, we are creating jobs around the world while continuing to support the Tempur Sealy Foundation which supports charities assisting children and their development. I’m proud our team remains committed to improving the environment and being socially responsible.”

Financial Guidance

As previously announced, the Company has withdrawn its previously-issued full-year financial guidance for 2020 and will not provide updated full-year adjusted EBITDA guidance until there is more visibility into the worldwide operating environment. Management is targeting fourth quarter 2020 net sales to increase by low double digits and adjusted EBITDA per credit facility to grow by the high teens as compared to the same period last year.

For the full third quarter results, click here.

About Tempur Sealy International

Tempur Sealy International, Inc. (NYSE: TPX) is the world’s largest bedding manufacturer. Tempur Sealy International, Inc. develops, manufactures, and markets mattresses, foundations, pillows and other products. The Company’s products are sold worldwide through third party retailers, its own stores, and online. 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 or call 800-805-3635.

Contact:

Aubrey Moore – Investor Relations – investor.relations@tempursealy.com – (800) 805-3635

Source: Tempur Sealy International, Inc.