Tempur Sealy Mails Letter To Shareholders
A Message from
Dear Fellow Tempur Sealy Shareholder:
Over my nearly seven years as Chief Executive Officer of
This perspective is especially important as we continue to make the strong case in favor of our Board's director nominees in advance of the Annual Meeting. The discussions we have had at these meetings have reinforced our belief that the Company's Board and management team are on the right track to achieve the superior levels of success and value creation that our shareholders expect.
With this letter I would like to take the opportunity to share my perspectives with all of our shareholders and, in so doing, answer the questions we have heard most frequently from investors during our recent meetings.
Deliberate Actions to Sustain Value
Since joining the Company in 2008, my objective has been to drive growth and create shareholder value. During my tenure, supported by our terrific team and experienced Board, we have delivered significant value for shareholders, including an industry-leading total shareholder return of 511%, more than five times that of the S&P 5001.
However,
In 1992, Tempur-Pedic created an entirely new consumer category: premium visco-elastic mattresses. For the next 20 years, the Company was essentially the only manufacturer, distributor and marketer of this innovative and pioneering product line. A unique formulation of polyurethane foam enabled Tempur-Pedic to present to consumers a highly functional alternative to conventional spring coil mattresses, and its powerful marketing created a well-known and highly desired brand. Tempur-Pedic maintained its leadership with investments in innovation and technology, including the 2009 introduction of a new product variant, the TEMPUR Cloud. This broadened product line was dramatically successful and grew
While over the years several competitors had introduced products that attempted to compete with Tempur-Pedic, none had been broadly successful. However, in 2012, three competitors gained distribution in the largest retailers, offering cheaper products that claimed to be technologically superior to Tempur-Pedic's proprietary formulation. These products were successful in taking market share from Tempur-Pedic, and the effects were dramatic on our business. After growing 17% in the first quarter of 2012, compared to 2011, and achieving an all-time first quarter sales record, Tempur-Pedic's
A Call to Action and Record of Results
I, together with the management team and the Board, recognized that we needed to take swift and decisive action - and we did. In the third quarter of 2012, we announced that we would reinvent our entire range of mattress and adjustable base products, improve the economics for our retail partners and revamp our marketing efforts. We also announced the transformative acquisition of
We were pleased to report that these decisive actions led to our recovery from the competitive shift in our industry. Today,
Tempur-Pedic is now one of a family of iconic brands in a broad product line, and the brand and the Company are in stronger positions than ever before.
While I am proud of the progress that has already been made, there is still much to be accomplished. Notably, the margins of the Company are not where we know they can, and should, be. However, we have laid out, and are executing on, a clear plan to improve our operating margins by 300 basis points by 20184- and we are confident we will achieve solid progress against this objective in 2015.
Clear Strategy Driving Profitability and Value
As leaders of the Company, we share a common, overarching goal with all of our shareholders - enhancing profitability and driving value creation.
To that end, the entire organization is focused on executing five strategic priorities that we believe will position
- Leverage and strengthen our comprehensive portfolio of iconic brands and products;
- Expand distribution and seek highest dealer advocacy;
- Expand margins with a focus on driving significant cost improvement;
- Leverage global scale for competitive advantage;
- Make accretive acquisitions of licensees and joint ventures; and in so doing,
Create value for ALL shareholders.
The execution of our objectives will be reflected in our strengthened business and in improved financial and operating performance. As a reminder, our annual base growth targets for 2015-2018, or what we refer to as our "evergreen" targets5, are:
- 6% net sales growth;
- 50 basis points of operating margin improvement;
- 15% growth in adjusted EPS6; and
- 3x leverage7, with strong cash flow to return value to shareholders.
In particular, we have implemented a comprehensive plan to drive profitability through operating margin improvement. As I mentioned, we expect to generate approximately
We have a strong foundation in place, the right strategies to move us forward, and an experienced Board and leadership team to guide us ahead. I am proud of our progress and will continue to work to capitalize on the enormous potential of our Company to drive value for all of our shareholders.
Accountability and Performance Over Risk and Rhetoric
As I have outlined, our Board and management team acknowledged and adapted to changing competitive dynamics, and today are executing on a well-developed strategy to drive enhanced returns for all
"Dear Mark,
Happy New Year!
Thanks for your outstanding contributions to the company. Tempur has made incredible progress over the past two years and we know how much work went into that. While the stock may not reflect this progress, we believe it's only a matter of time and that 2015 will be a great year. I hope you enjoy our annual letter and look forward to seeing you in
Regards,
Arik [Ruchim, H Partners Principal]
[
I was therefore very surprised when, on
Not only do we believe that these changes would be highly risky and value-destructive, but
Make no mistake, however; we believe
I urge
Committed to Serving the Interests of All Shareholders
Our Board and management team have shown commitment to addressing market challenges head-on, and we strongly believe that the actions underway have already and will continue to enable us to move the Company forward with great success. We have the platform, strategy and resources to maintain our competitive advantage and continue to enhance shareholder value.
Accordingly, the entire Board urges you to vote "FOR" ALL of
We also encourage you to visit the special Annual Meeting section of the
I am confident that, no matter the outcome at this year's Annual Meeting, we have taken the right steps to position
On behalf of the Board of Directors and management team, we thank you for your investment in
Sincerely,
President and Chief Executive Officer
INVESTOR CONTACT INFORMATION
If you need assistance voting your shares, please contact our proxy solicitor D.F. King & Co., Inc. toll free at (877) 283-0319, toll at (212) 269-5550 or email at tpx@dfking.com
ABOUT
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 press release, the words, "assumes," "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 its strategic growth initiatives, cost synergies, delivering shareholder value, its base growth targets and internal operating margin improvement targets, its plan to reduce expenses and improve Sealy's operating margins, its growth opportunities internationally and abroad and its plans to grow sales and profitability faster than its industry. 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 increased debt level; the ability to successfully integrate
There are a number of risks and uncertainties that could cause the Company's actual results to differ materially from the forward-looking statements contained in this press release. There are 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
------------------------------
1Represents performance from
2References to "
3Adjusted operating margin (operating margin less corporate expense) is a non-GAAP financial measure. GAAP operating margin improved by 320 basis points in the second half of 2014 compared to the second half of 2013. For information on
4Represents initiatives to be achieved by 2018. Our expectation is that they will ramp through the period. Approximately 30% of the total
5Targets are provided on a constant currency basis. For information on the methodology used to present information on a constant currency basis, please refer to "Constant Currency Information" at the end of this press release.
6For more information on adjusted EPS (a non-GAAP financial measure), including a reconciliation of GAAP EPS, please refer to "Use of Non-GAAP Financial Measures" at the end of this press release.
7Represents the ratio of consolidated
funded debt less qualified cash to adjusted EBITDA, non-GAAP financial measures, calculated in accordance with our 2012 senior secured credit facility. For a calculation of this ratio as of
8Represents initiatives to be achieved by 2018. Our expectation is that they will ramp through the period. Approximately 30% of the total
9
Adjusted operating expense is a non-GAAP financial measure. For information on adjusted operating expense, including a reconciliation of GAAP operating expense, please refer to "Use of Non-GAAP Financial Measures" at the end of this press release.
10As referenced,
USE OF NON-GAAP FINANCIAL MEASURES
The Company provides information regarding earnings before interest, taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA, consolidated funded debt, consolidated funded debt less qualified cash, adjusted operating expense, adjusted earnings per share ("EPS"), and adjusted operating margin for the
Management believes that the use of EBITDA and adjusted EBITDA provide 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.
Management believes that the use of adjusted EPS provides investors with additional useful information with respect to the impact of various costs associated with the Sealy acquisition and the disposal of the three U.S. innerspring component facilities and financing costs incurred in connection with the amendment and refinancing of our senior secured credit facility in 2014 and 2013, other income related to certain other non-recurring items, including income from a partial settlement of a legal dispute, and adjustment of taxes to a normalized rate related to the aforementioned items and other discrete income tax events.
Management believes that the use of adjusted operating expense provides investors with additional useful information with respect to the Company's operating performance and initiative to deleverage operating expenses during 2015-2018. The reconciliation provides information on the methodology used to present operating expenses, including the exclusion of integration and financing costs related to the Sealy acquisition.
Management believes that the use of adjusted operating margin provides investors with useful information with respect to the operating performance of the
Tempur North America Adjusted Operating Income and Margin Reconciliation
A reconciliation of Tempur North America GAAP operating income and operating margin to adjusted operating income and operating margin, which are GAAP operating income and GAAP operating margin less certain corporate expenses, is below. Management believes that the use of these non-GAAP financial measures provides investors with additional useful information with respect to
|
Six Months Ended |
Six Months | |
(in millions, except percentage amounts) |
|
| |
Operating Income, |
|
| |
Tempur North America Net Sales |
468.6 |
542.9 | |
Operating Margin (GAAP) |
8.9% |
12.1% | |
Corporate expenses included in |
32.7 |
40.2 | |
Adjusted Operating Income less corporate expenses |
|
| |
Tempur North America Net Sales |
468.6 |
542.9 | |
Adjusted Operating Margin |
15.8% |
19.5% |
Reconciliation of GAAP net income to EBITDA and adjusted EBITDA
The following table sets forth the reconciliation of the Company's reported GAAP net income to the calculations of EBITDA and adjusted EBITDA for the twelve months ended
Twelve Months Ended | |||
(in millions) |
| ||
Net income attributable to |
|
||
Interest expense |
91.9 |
||
Income taxes |
64.9 |
||
Depreciation and amortization |
89.7 |
||
EBITDA |
|
||
Adjustments for financial covenant purposes: |
|||
Loss on disposal of business(1) |
23.2 |
||
Integration costs(2) |
40.3 |
||
Financing costs(3) |
1.3 |
||
Other income(4) |
(15.6) |
||
Adjusted EBITDA |
|
(1) |
Loss on disposal of business represents costs associated with the disposition of the three U.S. innerspring component production facilities and related equipment. |
(2) |
Integration costs represent costs, including legal fees, professional fees and other charges to align the businesses related to the Sealy acquisition. |
(3) |
Financing costs represent costs incurred in connection with the amendment of our senior secured credit facility. |
(4) |
Other income includes certain other non-recurring items, including income from a partial settlement of a legal dispute. |
This information is presented solely for the purpose of providing information to investors regarding the Company's compliance with certain financial covenants in its senior secured credit facility that are based on adjusted EBITDA, which is a non-GAAP financial measure.
Reconciliation of total debt to consolidated funded debt less qualified cash
The following table sets forth the reconciliation of the Company's reported total debt to the calculation of consolidated funded debt less qualified cash as of
(in millions) |
As of | ||
Total debt |
|
||
Plus: |
|||
Letters of credit outstanding |
18.2 | ||
Consolidated funded debt |
1,620.5 |
||
Less: |
|||
Domestic qualified cash(1) |
25.9 |
||
Foreign qualified cash(1) |
21.9 | ||
Consolidated funded debt less qualified cash |
|
(1) |
Qualified cash as defined in the Company's senior secured credit facility equals 100.0% of unrestricted domestic cash plus 60.0% of unrestricted foreign cash. For purposes of calculating leverage ratios, qualified cash is capped at |
Calculation of consolidated funded debt less qualified cash to Adjusted EBITDA
(in millions, except ratio) |
As of | |
Consolidated funded debt less qualified cash |
1,572.7 |
|
Adjusted EBITDA |
404.6 |
|
3.89 times(1) |
(1) |
The ratio of consolidated debt less qualified cash to adjusted EBITDA was 3.89 times, within the Company's covenant, which requires this ratio to be less than 4.75 times at |
Reconciliation of GAAP EPS to adjusted EPS
The following table sets forth the reconciliation of the Company's reported GAAP EPS for the year ended
Year Ended | |||
Earnings per share, diluted |
$ |
1.75 | |
Loss on disposal of business, net of tax(1) |
0.27 | ||
Integration costs, net of tax(2) |
0.49 | ||
Financing costs, net of tax(3) |
0.05 | ||
Other income, net of tax(4) |
(0.18) | ||
Adjustment of taxes to normalized rate(5) |
0.27 | ||
Tax provision related to repatriation of foreign earnings |
— | ||
Adjusted earnings per share, diluted |
$ |
2.65 | |
Diluted shares outstanding (in millions) |
62.1 |
(1) |
Loss on disposal of business represents costs associated with the disposition of the three U.S. innerspring component facilities and related equipment. |
(2) |
Integration represents costs, including legal fees, professional fees and other charges to align the businesses related to the Sealy acquisition. |
(3) |
Financing costs represent costs incurred in connection with the amendment and refinancing of our senior secured credit facility in 2014. |
(4) |
Other income includes certain other non-recurring items, including income from a partial settlement of a legal dispute. |
(5) |
Adjustment of taxes to normalized rate represents adjustments associated with the aforementioned items and other discrete income tax events. |
Reconciliation of GAAP Operating Expense to Adjusted Operating Expense
The following table sets forth the reconciliation of the Company's reported operating expenses to adjusted operating expenses, which is GAAP operating expenses less integration and financing costs for the year ended
|
Year Ended | ||||||||
(in millions, except percentage amounts) |
| ||||||||
Consolidated net sales |
| ||||||||
Selling and marketing expenses |
619.9 | ||||||||
General, administrative and other expenses |
280.6 | ||||||||
Operating Expenses |
900.5 | ||||||||
Operating Expenses as a % of Consolidated Net Sales |
30% | ||||||||
Operating Expenses |
| ||||||||
Less: Integration and financing costs |
43.8 | ||||||||
Operating Expenses less Integration and financing costs |
| ||||||||
Adjusted Operating Expenses as a % of Consolidated Net Sales |
29% |
CONSTANT CURRENCY INFORMATION
In this press release the Company refers to, and in other press releases and 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.
NOTE REGARDING TRADEMARKS, TRADE NAMES AND SERVICE MARKS
TEMPUR, Tempur-Pedic, TEMPUR-Cloud, TEMPUR-Choice, TEMPUR-Weightless, TEMPUR-Contour, TEMPUR-Rhapsody, TEMPUR-Flex, GrandBed, TEMPUR-Simplicity, TEMPUR-Ergo, TEMPUR-UP, TEMPUR-Neck, TEMPUR-Symphony, TEMPUR-Comfort, TEMPUR-Traditional, TEMPUR-Home, Sealy, Sealy Posturepedic, Stearns & Foster, and Optimum are trademarks, trade names or service marks of
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