form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM
10-Q
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended June 30, 2008
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from
to
Commission
file number 001-31922
TEMPUR-PEDIC
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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33-1022198
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1713
Jaggie Fox Way
Lexington,
Kentucky 40511
(Address,
including zip code, of principal executive offices)
Registrant’s
telephone number, including area code: (800) 878-8889
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
(Do not
check if a smaller reporting company) Smaller reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨ No x
The
number of shares outstanding of the registrant’s common stock as of July 31,
2008 was 74,833,091 shares.
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Page
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3
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ITEM 1.
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4
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5
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6
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7
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ITEM 2.
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20
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ITEM 3.
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32
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ITEM 4.
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33
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ITEM 1.
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34
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ITEM 1A.
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35
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ITEM 2.
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37
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ITEM 3.
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37
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ITEM 4.
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37
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ITEM 5.
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38
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ITEM 6.
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38
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39
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This
quarterly report on Form 10-Q, including the information incorporated by
reference herein, contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include information
concerning our plans, objectives, goals, strategies, future events, future
revenues or performance, capital expenditures, the impact of the adoption of
recently issued accounting pronouncements, the antitrust class action lawsuit
and other lawsuits and pending tax assessments, statements relating to the
impact of initiatives to accelerate growth, expand market share and attract
sales from the standard mattress market, expand business within established
accounts and into under-penetrated markets, reduce costs and improve
manufacturing productivity, the impact of net operating losses, the vertical
integration of our business, our ability to source raw materials effectively,
the development, rollout and market acceptance of new products, our ability to
further invest in the business and in brand awareness, growth in our Healthcare
segment, the impact of the macroeconomic environment in both the U.S. and
internationally on sales, expected sources of cash flow, our ability to
effectively manage cash and our debt/leverage ratio and other information that
is not historical information. Many of these statements appear, in particular,
under the heading “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in ITEM 2 of Part I of this report. When used in this
report, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,”
“intends,” “believes” and variations of such words or similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are based upon our current expectations and various assumptions.
There can be no assurance that we will realize our expectations or that our
beliefs will prove correct.
There are a
number of risks and uncertainties that could cause our actual results to differ
materially from the forward-looking statements contained in this report.
Important factors that could cause our actual results to differ materially from
those expressed as forward-looking statements are set forth in this report,
including under the heading “Risk Factors” under ITEM IA of Part II of this
report and under the heading “Risk Factors” under ITEM 1A of Part 1 of our Form
10-K for the year ended December 31, 2007. There may be other factors that may
cause our actual results to differ materially from the forward-looking
statements.
All
forward-looking statements attributable to us apply only as of the date of this
report and are expressly qualified in their entirety by the cautionary
statements included in this report. Except as may be required by law, we
undertake no obligation to publicly update or revise any of the forward-looking
statements, whether as a result of new information, future events, or
otherwise.
When used in
this report, except as specifically noted otherwise, the term “Tempur-Pedic
International” refers to Tempur-Pedic International Inc. only, and the terms
“Company,” “we,” “our,” “ours” and “us” refer to Tempur-Pedic International Inc.
and its consolidated subsidiaries.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share amounts)
(Unaudited)
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Three
Months Ended
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Six
Months Ended
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June
30,
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June
30,
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2008
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2007
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2008
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2007
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Net
sales
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$
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238,661
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$
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257,642
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$
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485,883
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$
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523,674
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Cost
of sales
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132,645
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133,073
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271,786
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271,446
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Gross
profit
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106,016
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124,569
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214,097
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252,228
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Selling
and marketing expenses
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44,787
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47,320
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97,950
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95,800
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General,
administrative and other expenses
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24,910
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22,119
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50,495
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47,544
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Operating
income
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36,319
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|
55,130
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65,652
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108,884
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Other
expense, net:
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Interest
expense, net
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(5,645
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)
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(6,272
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)
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(13,336
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)
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(13,133
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)
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Other
expense, net
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(72
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)
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(214
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)
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(1,091
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)
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(503
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)
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Total
other expense
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(5,717
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)
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(6,486
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)
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(14,427
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)
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(13,636
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)
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Income
before income taxes
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30,602
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48,644
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51,225
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95,248
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Income
tax provision
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10,374
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15,713
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17,483
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32,537
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Net
income
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$
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20,228
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$
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32,931
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$
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33,742
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$
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62,711
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Earnings
per common share:
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Basic
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$
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0.27
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$
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0.40
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$
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0.45
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$
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0.75
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Diluted
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$
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0.27
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$
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0.39
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$
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0.45
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$
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0.74
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Cash
dividend per common share
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$
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0.08
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$
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0.08
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$
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0.16
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0.14
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Weighted
average common shares outstanding:
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Basic
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74,740
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82,963
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74,665
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83,452
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Diluted
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74,931
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84,222
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74,872
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|
|
|
85,041
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|
See
accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share amounts)
|
|
June
30,
2008
|
|
December
31,
2007
|
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(Unaudited)
|
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|
ASSETS
|
|
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Current
Assets:
|
|
|
|
|
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Cash
and cash equivalents
|
$
|
68,353
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|
|
$
|
33,315
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|
Accounts
receivable, net
|
|
132,555
|
|
|
|
163,730
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|
Inventories
|
|
93,520
|
|
|
|
106,533
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|
|
Prepaid
expenses and other current assets
|
|
14,320
|
|
|
|
11,133
|
|
|
Deferred
income taxes
|
|
13,978
|
|
|
|
11,924
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|
|
Total
Current Assets
|
|
322,726
|
|
|
|
326,635
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
203,709
|
|
|
|
208,370
|
|
|
Goodwill
|
|
198,877
|
|
|
|
198,286
|
|
|
Other
intangible assets, net
|
|
67,774
|
|
|
|
68,755
|
|
|
Deferred
financing costs and other non-current assets
|
|
5,104
|
|
|
|
4,386
|
|
|
Total
Assets
|
$
|
798,190
|
|
|
$
|
806,432
|
|
|
|
|
|
|
|
|
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|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
53,019
|
|
|
$
|
56,206
|
|
|
Accrued
expenses and other
|
|
65,148
|
|
|
|
66,080
|
|
|
Income
taxes payable
|
|
6,318
|
|
|
|
4,060
|
|
|
Current
portion of long-term debt
|
|
—
|
|
|
|
288
|
|
|
Total
Current Liabilities
|
|
124,485
|
|
|
|
126,634
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
556,500
|
|
|
|
601,756
|
|
|
Deferred
income taxes
|
|
30,059
|
|
|
|
29,645
|
|
|
Other
non-current liabilities
|
|
1,436
|
|
|
|
259
|
|
|
Total
Liabilities
|
|
712,480
|
|
|
|
758,294
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies—see Note 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock—$.01 par value; 300,000 shares authorized; 99,215
shares issued as of June 30, 2008 and December 31, 2007
|
|
992
|
|
|
|
992
|
|
|
Additional
paid in capital
|
|
287,146
|
|
|
|
283,564
|
|
|
Retained
earnings
|
|
262,283
|
|
|
|
241,812
|
|
|
Accumulated
other comprehensive income
|
|
24,294
|
|
|
|
13,550
|
|
|
Treasury
stock, at cost; 24,436 and 24,681 shares as of June 30, 2008 and December
31, 2007, respectively
|
|
(489,005
|
)
|
|
|
(491,780
|
)
|
|
Total
Stockholders’ Equity
|
|
85,710
|
|
|
|
48,138
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
$
|
798,190
|
|
|
$
|
806,432
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
Months Ended
June
30,
|
|
|
|
2008 |
|
|
|
2007
|
|
| CASH
FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net
income
|
$
|
33,742
|
|
|
$
|
62,711
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
16,685
|
|
|
|
16,870
|
|
|
Amortization
of deferred financing costs
|
|
714
|
|
|
|
667
|
|
|
Amortization
of stock-based compensation
|
|
4,041
|
|
|
|
3,380
|
|
|
Allowance
for doubtful accounts
|
|
3,439
|
|
|
|
3,508
|
|
|
Deferred
income taxes
|
|
(958
|
)
|
|
|
(1,426
|
)
|
|
Foreign
currency adjustments
|
|
524
|
|
|
|
535
|
|
|
Loss
(gain) on sale of equipment and other
|
|
345
|
|
|
|
(37
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
32,642
|
|
|
|
(1,298
|
)
|
|
Inventories
|
|
15,866
|
|
|
|
(14,509
|
)
|
|
Prepaid
expenses and other current assets
|
|
(4,724
|
)
|
|
|
(4,582
|
)
|
|
Accounts
payable
|
|
(5,389
|
)
|
|
|
(3,445
|
)
|
|
Accrued
expenses and other
|
|
(2,560
|
)
|
|
|
6,243
|
|
|
Income
taxes
|
|
1,941
|
|
|
|
5,567
|
|
|
Net
cash provided by operating activities
|
|
96,308
|
|
|
|
74,184
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments
for trademarks and other intellectual property
|
|
(463
|
)
|
|
|
(461
|
)
|
|
Purchases
of property, plant and equipment
|
|
(6,328
|
)
|
|
|
(4,833
|
)
|
|
Acquisition
of businesses
|
|
(1,522
|
)
|
|
|
(969
|
)
|
|
Proceeds
from sale of equipment
|
|
52
|
|
|
|
52
|
|
|
Net
cash used by investing activities
|
|
(8,261
|
)
|
|
|
(6,211
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term revolving credit facility
|
|
70,732
|
|
|
|
148,102
|
|
|
Repayments
of long-term revolving credit facility
|
|
(57,244
|
)
|
|
|
(75,806
|
)
|
|
Repayments
of long-term debt
|
|
(1,359
|
)
|
|
|
(45,637
|
)
|
|
Proceeds
from Series A Industrial Revenue Bonds
|
|
—
|
|
|
|
15,380
|
|
|
Repayments
of Series A Industrial Revenue Bonds
|
|
(57,785
|
)
|
|
|
(3,840
|
)
|
|
Common
stock issued, including reissuances of Treasury stock
|
|
695
|
|
|
|
5,573
|
|
|
Excess
tax benefit from stock based compensation
|
|
366
|
|
|
|
9,333
|
|
|
Treasury
stock repurchased
|
|
—
|
|
|
|
(100,000
|
)
|
|
Dividends
paid to stockholders
|
|
(11,946
|
)
|
|
|
(11,753
|
)
|
|
Payments
for deferred financing costs
|
|
(14
|
)
|
|
|
(1,269
|
)
|
|
Net
cash used by financing activities
|
|
(56,555
|
)
|
|
|
(59,917
|
)
|
|
|
|
|
|
|
|
|
|
|
NET
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
3,546
|
|
|
|
988
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
35,038
|
|
|
|
9,044
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
33,315
|
|
|
|
15,788
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
68,353
|
|
|
$
|
24,832
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
$
|
12,595
|
|
|
$
|
11,935
|
|
|
Income
taxes, net of refunds
|
$
|
15,872
|
|
|
$
|
19,197
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In
thousands, except per share amounts)
(1)
Summary of Significant Accounting Policies
(a) Basis of Presentation and
Description of Business—Tempur-Pedic International Inc., a Delaware
corporation, together with its subsidiaries is a U.S.-based, multinational
company. The term “Tempur-Pedic International” refers to Tempur-Pedic
International Inc. only, and the term “Company” refers to Tempur-Pedic
International Inc. and its consolidated subsidiaries.
The Company
manufactures, markets, and sells mattresses, pillows and other related products.
The Company manufactures essentially all its pressure-relieving TEMPUR® products
at three manufacturing facilities, with one located in Denmark and two in the
U.S. The Company has sales distribution subsidiaries operating in the U.S.,
Europe, and Asia Pacific and has third party distribution arrangements in
certain other countries where it does not have subsidiaries. The Company sells
its products through four sales channels: Retail, Direct, Healthcare, and Third
party.
The
accompanying unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and include all of the information and disclosures required by
generally accepted accounting principles in the United States (U.S. GAAP) for
interim financial reporting. These unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the consolidated financial
statements of the Company and related footnotes for the year ended December 31,
2007, included in the Company’s Annual Report on Form 10-K.
The results
of operations for the interim periods are not necessarily indicative of results
of operations for a full year. It is the opinion of management that all
necessary adjustments for a fair presentation of the results of operations for
the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein.
(b)
Reclassifications—Certain prior period amounts have been reclassified to
conform to the 2008 presentation including the presentation
of General, administrative and other expenses which includes research
and development expenses previously disclosed separately in the Condensed
Consolidated Statements of Income. These changes do not materially affect
previously reported subtotals within the Condensed Consolidated Financial
Statements for any previous period presented.
(c) Basis of Consolidation—The
accompanying financial statements include the accounts of Tempur-Pedic
International and its subsidiaries. All subsidiaries are wholly owned.
Intercompany balances and transactions have been eliminated.
(d) Use of Estimates—The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(e) Foreign Currency
Translation—Assets and liabilities of non-U.S. subsidiaries, whose
functional currency is the local currency, are translated at period-end exchange
rates. Income and expense items are translated at the average rates of exchange
prevailing during the period. The adjustment resulting from translating the
financial statements of foreign subsidiaries is included in Accumulated other
comprehensive income, a component of Stockholders’ Equity.
(f) Financial Instruments and
Hedging— The Company accounts for derivative instruments and hedging
activities in accordance with Statement of Financial Accounting Standards (SFAS)
No 133, “Accounting for Derivative Instruments and Hedging Activities (as
amended)” (SFAS 133). In accordance with this standard, derivative
instruments are recorded on the balance sheet as either an asset or liability
measured at its fair value. Changes in the fair value of derivative instruments
are either recognized in income immediately to offset the gain or loss on the
hedged item, or deferred and recorded in Stockholders’ Equity as a component of
Accumulated other comprehensive income. The ineffective portion of the change in
fair value of a hedge is recognized in income immediately. Derivative financial
instruments are used in the normal course of business to manage interest rate
and foreign currency exchange risks.
During
the second quarter of 2008, the Company entered into an interest rate swap
agreement that effectively converts a portion of the floating-rate Domestic
Long-Term Revolving Credit Facility to a fixed-rate basis through 2011, thus
reducing the impact of interest-rate changes on future interest
expense (see Note 4 (b)). The Company manages the foreign currency risk
associated with foreign currency denominated assets and liabilities using
foreign exchange forward contracts with maturities of less than 12
months.
The
carrying value of Cash and cash equivalents, Accounts receivable, and Accounts
payable approximate fair value because of the short-term maturity of those
instruments. Borrowings under the 2005 Senior Credit Facility (as defined in
Note (4)(b)) are at variable interest rates and accordingly their carrying
amounts approximate fair value.
(g) Cash and Cash
Equivalents—Cash and cash equivalents consist of all investments with
initial maturities of three months or less.
(h) Inventories—Inventories are
stated at the lower of cost or market, determined by the first-in, first-out
method, and consist of the following:
|
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
|
Finished
goods
|
|
$ |
66,137 |
|
|
$ |
75,692 |
|
|
Work-in-process
|
|
|
7,464 |
|
|
|
11,135 |
|
|
Raw
materials and supplies
|
|
|
19,919 |
|
|
|
19,706 |
|
|
|
|
$ |
93,520 |
|
|
$ |
106,533 |
|
(i) Long-Lived Assets—In
accordance with SFAS 144, “Accounting for the Impairment or Disposal of
Long-lived Assets,” long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of long-lived assets is assessed by a
comparison of the carrying amount of the asset to the estimated future
undiscounted net cash flows expected to be generated by the asset. If estimated
future undiscounted net cash flows are less than the carrying amount of the
asset or group of assets, the asset is considered impaired and an expense is
recorded in an amount required to reduce the carrying amount of the asset to its
fair value.
(j) Goodwill and Other Intangible
Assets—Intangible assets with estimable useful lives are amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment. The Company performs an annual impairment test on all
existing goodwill and other indefinite lived assets in the fourth quarter of
each year. The Company performed the annual impairment test in the fourth
quarter of 2007 and determined that no impairment exists. If facts and
circumstances lead the Company’s management to believe goodwill or other
indefinite lived assets may be impaired, the Company will evaluate the extent to
which the related cost is recoverable by comparing the future discounted
cash flows estimated to be associated with that asset to the asset’s carrying
amount and write-down that carrying amount to fair value to the extent
necessary.
The
following table summarizes information relating to the Company’s Other
intangible assets:
|
|
|
|
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
Useful
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
Lives
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Unamortized
indefinite life
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
$ |
55,000 |
|
|
$ |
— |
|
|
$ |
55,000 |
|
|
$ |
55,000 |
|
|
$ |
— |
|
|
$ |
55,000 |
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
10 |
|
|
$ |
16,000 |
|
|
$ |
9,067 |
|
|
$ |
6,933 |
|
|
$ |
16,000 |
|
|
$ |
8,267 |
|
|
$ |
7,733 |
|
|
Patents
& Other Trademarks
|
|
|
5-20 |
|
|
|
11,362 |
|
|
|
7,629 |
|
|
|
3,733 |
|
|
|
11,233 |
|
|
|
7,533 |
|
|
|
3,700 |
|
|
Customer
database
|
|
|
5 |
|
|
|
4,921 |
|
|
|
4,416 |
|
|
|
505 |
|
|
|
4,868 |
|
|
|
4,334 |
|
|
|
534 |
|
|
Foam
formula
|
|
|
10 |
|
|
|
3,700 |
|
|
|
2,097 |
|
|
|
1,603 |
|
|
|
3,700 |
|
|
|
1,912 |
|
|
|
1,788 |
|
|
Total
|
|
|
|
|
|
$ |
90,983 |
|
|
$ |
23,209 |
|
|
$ |
67,774 |
|
|
$ |
90,801 |
|
|
$ |
22,046 |
|
|
$ |
68,755 |
|
Amortization
expense relating to intangible assets for the Company was $596 and $1,043 for
the three months ended June 30, 2008 and June 30, 2007,
respectively. For the six months ended June 30, 2008 and June 30,
2007 amortization expense relating to intangible assets was $1,207 and $2,077,
respectively.
The changes in the carrying amount of
Goodwill for the six months ended June 30, 2008 are as
follows:
|
Balance
as of December 31, 2007
|
|
$ |
198,286 |
|
|
Goodwill
resulting from acquisitions during the period
|
|
|
848 |
|
|
Foreign
currency translation adjustments and other
|
|
|
(257 |
) |
|
Balance
as of June 30, 2008
|
|
$ |
198,877 |
|
Goodwill as of June 30, 2008 and
December 31, 2007 has been allocated to the Domestic and International segments
as follows:
|
|
|
June 30,
2008
|
|
|
December
31,
2007
|
|
|
Domestic
|
|
$ |
89,929 |
|
|
$ |
89,929 |
|
|
International
|
|
|
108,948 |
|
|
|
108,357 |
|
|
|
|
$ |
198,877 |
|
|
$ |
198,286 |
|
On February 1, 2008, the Company
acquired its third party distributor in New Zealand. The total purchase price
was approximately $1,438. The assets purchased were initially valued at
approximately $948 and include inventory and fixed assets, among other assets.
The remainder of the purchase price was allocated to Goodwill.
(k) Accrued Sales
Returns—Estimated sales returns are provided at the time of sale based on
historical sales channel return rates. The level of sales returns differs by
channel with the Direct channel typically experiencing the highest rate of
return. Estimated future obligations related to these products are
provided by a reduction of sales in the period in which the revenue is
recognized. The Company allows product returns up to 120 days following a sale
through certain sales channels and on certain products. Accrued sales returns
are included in Accrued expenses and other in the accompanying Condensed
Consolidated Balance Sheets.
The
Company had the following activity for sales returns from December 31, 2007 to
June 30, 2008:
|
Balance
as of December 31, 2007
|
|
$ |
5,463 |
|
|
Amounts
accrued
|
|
|
22,729 |
|
|
Returns
charged to accrual
|
|
|
(23,446 |
) |
|
Balance
as of June 30, 2008
|
|
$ |
4,746 |
|
(l) Warranties—The Company
provides a 20-year warranty for U.S. sales and a 15-year warranty for non-U.S.
sales on mattresses, each prorated for the last 10 years. The Company also
provides a 2-year to 3-year warranty on pillows. Estimated future obligations
related to these products are charged to operations in the period in which the
related revenue is recognized. Warranties are included in Accrued expenses and
other in the accompanying Condensed Consolidated Balance Sheets.
The
Company had the following activity for warranties from December 31, 2007 to June
30, 2008:
|
Balance
as of December 31, 2007
|
|
$ |
3,425 |
|
|
Amounts
accrued
|
|
|
2,087 |
|
|
Warranties
charged to accrual
|
|
|
(1,661 |
) |
|
Balance
as of June 30, 2008
|
|
$ |
3,851 |
|
(m) Income Taxes—Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company is regularly
under audit by tax authorities around the world. The Company accounts for
uncertain foreign and domestic tax positions as required by Financial Accounting
Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48) according to the facts and circumstances in the various
regulatory environments.
(n) Revenue Recognition—Sales of
products are recognized when the products are shipped to customers and the risks
and rewards of ownership are transferred. The Company extends volume discounts
to certain customers and reflects these amounts as a reduction of Net sales. No
collateral is required on sales made in the normal course of business. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company determines the allowance based on historical write-off experience. The
Company regularly reviews the adequacy of its allowance for doubtful accounts.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The allowance for doubtful accounts included in Accounts receivable, net
in the accompanying Condensed Consolidated Balance Sheets was $9,794 and $8,056
as of June 30, 2008 and December 31, 2007, respectively.
(o) Advertising Costs—The
Company expenses advertising costs as incurred except for production costs and
advance payments, which are deferred and expensed when advertisements run for
the first time. Direct response advance payments are deferred and are amortized
over the life of the program. Advertising costs charged to expense were
approximately $21,939 and $24,537 for the three months ended June 30, 2008 and
June 30, 2007, respectively. For the six months ended June 30, 2008
and June 30, 2007, advertising costs charged to expense were approximately
$51,266 and $52,056, respectively. Advertising costs deferred and included in
Prepaid expenses and other current assets in the accompanying Condensed
Consolidated Balance Sheets were approximately $6,362 and $4,709 as of June 30,
2008 and December 31, 2007, respectively.
(p) Research and Development
Expenses—Research and development expenses for new products are expensed
as they are incurred. Research and development costs charged to expense were
approximately $1,458 and $1,560 for the three months ended June 30, 2008 and
June 30, 2007, respectively. For the six months ended June 30, 2008
and June 30, 2007, research and development costs charged to expense were
approximately $3,291 and $2,675, respectively.
(q) Treasury Stock—The Board of
Directors may authorize share repurchases of the Company’s common stock (Share
Repurchase Authorizations). Share repurchases under these authorizations may be
made through open market transactions, negotiated purchase or otherwise, at
times and in such amounts as the Company, and a committee of the Board, deem
appropriate. Shares repurchased under Share Repurchase Authorizations are held
in treasury for general corporate purposes, including issuances under various
employee stock option plans. Treasury shares are accounted for under the cost
method and reported as a reduction of Stockholders’ Equity. Share Repurchase
Authorizations may be suspended, limited or terminated at any time without
notice.
(r) Stock-Based Compensation—The
Company accounts for share-based payments as required by SFAS 123R “Share-Based
Payment” (SFAS 123R). SFAS 123R requires compensation expense relating to
share-based payments be recognized in the financial statements. The cost is
measured at the grant date, based on the calculated fair value of the award, and
is recognized as an expense over the vesting period of the equity
award.
(2)
Recently Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”
(SFAS 157), which defines fair value, establishes a framework for measuring fair
value in U.S. GAAP, and expands disclosure about fair value measurements to
include the methods and assumptions used to measure fair value and the effect of
fair value measures on earnings. SFAS 157 requires the fair value of
an asset or liability to be based on market-based measures which will reflect
the credit risk of the company. In February 2008, the FASB released FASB Staff
Position No. SFAS 157-2, “Effective Date of FASB Statement
No. 157,” which delays the effective date of SFAS 157 for nonfinancial
assets and liabilities until January 2009. Effective January 1, 2008, the
Company adopted the provisions of SFAS 157 related to financial assets and
liabilities. SFAS 157 does not require new fair value
measurements. The adoption of SFAS 157 did not have a material impact
on the Company’s financial position or operating results.
In December
2007, the FASB issued SFAS 141(R), “Business Combinations” (SFAS 141R), which
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquired business. The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The Company will
apply the provisions of SFAS 141R to business combinations for which the
acquisition date is on or after January 1, 2009.
In March 2008, the FASB issued SFAS
161, “Disclosures about Derivative Instruments and Hedging Activities-an
amendment of FASB Statement No. 133” (SFAS 161). The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, results of operations and cash
flows. The new standard also improves transparency about how and why
a company uses derivative instruments and how derivative instruments and related
hedged items are accounted for under SFAS 133. The Company is evaluating
the potential impact of adopting SFAS 161, which is effective January 1,
2009.
(3)
Property, Plant and Equipment
Property,
plant and equipment, net consists of the following:
|
|
|
June
30, 2008
|
|
|
December 31, 2007
|
|
|
Land
and buildings
|
|
$
|
127,775
|
|
|
$
|
123,973
|
|
|
Machinery
and equipment, furniture and fixtures, and other
|
|
|
196,416
|
|
|
|
186,175
|
|
|
Construction
in progress
|
|
|
7,002
|
|
|
|
7,210
|
|
|
|
|
|
331,193
|
|
|
|
317,358
|
|
|
Total
accumulated depreciation
|
|
|
(127,484
|
) |
|
|
(108,988
|
)
|
|
|
|
$
|
203,709
|
|
|
$
|
208,370
|
|
(4)
Long-term Debt
(a) Long-term Debt—Long-term debt
for the Company consists of the following:
| |
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
2005
Senior Credit Facility:
|
|
|
|
|
|
|
|
Domestic
Long-Term Revolving Credit Facility payable to lenders, interest at
Index
Rate or LIBOR plus applicable margin (3.65% and 5.86% as of June 30, 2008
and
December 31, 2007,
respectively), commitment through and due June 8, 2012
|
|
$ |
556,500 |
|
|
$ |
543,000 |
|
|
|
|
|
|
|
|
|
|
|
|
2005
Industrial Revenue Bonds:
|
|
|
|
|
|
|
|
|
|
Variable
Rate Industrial Revenue Bonds Series 2005A, interest rate determined
by remarketing agent not to exceed the lesser of (a) the highest rate
under state law or
(b) 12% per annum (5.10% as of December 31, 2007), interest due monthly
through and due September 1, 2030
|
|
|
— |
|
|
|
57,785 |
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
Mortgage
payable to a bank, secured by certain property, plant and equipment
and other assets, bearing fixed interest at 4.0% to 5.1%
|
|
|
— |
|
|
|
1,259 |
|
|
|
|
|
556,500 |
|
|
|
602,044 |
|
|
Less:
Current portion
|
|
|
— |
|
|
|
(288
|
) |
|
Long-term
debt
|
|
$ |
556,500 |
|
|
$ |
601,756 |
|
(b) Secured Credit Financing—On
October 18, 2005, the Company entered into a credit agreement (2005 Senior
Credit Facility) with a syndicate of banks. On June 8, 2007, the Company entered
into an amendment to its 2005 Senior Credit Facility (Amendment No. 3), which
increased availability, extinguished the foreign term loan, eliminated the
requirement to reduce the Domestic Revolver commitment by $3,000 each quarter,
added an option to increase the Domestic Revolver by an additional $100,000, and
adjusted certain covenants. In addition, the maturity date of the 2005 Senior
Credit Facility was extended from October 18, 2010 to June 8, 2012. On August 6,
2007, the Company exercised the option to increase the Domestic Revolver by an
additional $100,000.
The 2005 Senior Credit Facility, as
amended, consists of domestic and foreign credit facilities that provide for the
incurrence of indebtedness up to an aggregate principal amount of $640,000. The
domestic credit facility is a five-year, $615,000 revolving credit facility
(Domestic Revolver). The foreign credit facility is a five-year $25,000
revolving credit facility (Foreign Revolver). Both credit facilities bear
interest at a rate equal to the 2005 Senior Credit Facility’s applicable margin,
as determined in accordance with a performance pricing grid set forth in
Amendment No. 3, plus one of the following indexes: LIBOR and for U.S.
dollar-denominated loans only, a base rate. The base rate of U.S.
dollar-denominated loans are defined as the higher of either the Bank of America
prime rate or the Federal Funds rate plus .50%. The Company also pays an annual
facility fee on the total amount of the 2005 Senior Credit Facility. The
facility fee is calculated based on the consolidated leverage ratio and ranges
from .125% to .25%.
On May 29, 2008, the Company entered
into an interest rate swap agreement effective May 30, 2008, to manage interest
costs and the risk associated with changing interest rates. Under the interest
rate swap, the Company pays at a fixed rate and receives payments at a variable
rate. This swap effectively fixes the floating LIBOR-based interest rate to
3.755% on $350,000 of the outstanding principal balance under the 2005 Senior
Credit Facility. The amount of the outstanding balance subject to the swap will
decline over time. The Company has designated this swap agreement as a cash flow
hedge and expects the hedge to be highly effective in offsetting fluctuations in
the designated interest payments resulting from changes in the benchmark
interest rate. The Company will select the LIBOR-based rate on the hedged
portion of the 2005 Senior Credit Facility during the term of the swap. The
effective portion of the change in value of the swap is reflected as a component
of other comprehensive income and released to interest expense as debt payments
are paid or accrued. The ineffective portion is recognized as Other income
(expense). The fair value of this swap was recorded in the Condensed
Consolidated Balance Sheets as a liability of $1,146 at June 30, 2008, included
in Other non-current liabilities. As of June 30, 2008, the Company has
Accumulated other comprehensive income of $1,146 related to the effectively
hedged portion of the swap. There was no hedge ineffectiveness over this period.
Over the next 12 months, the Company expects to reclassify $2,244 of deferred
losses on derivative instruments from Accumulated other comprehensive income to
earnings due to the payment of variable interest associated with the floating
2005 Senior Credit Facility.
The 2005
Senior Credit Facility is guaranteed by Tempur-Pedic International, as well as
certain other subsidiaries of Tempur-Pedic International, and is secured by
certain fixed and intangible assets of Dan Foam ApS and substantially all the
Company’s U.S. assets. The 2005 Senior Credit Facility contains certain
financial covenants and requirements affecting the Company, including a
consolidated interest coverage ratio and a consolidated leverage ratio. The
Company was in compliance with all covenants as of June 30, 2008.
The 2005
Senior Credit Facility provides for the issuance of letters of credit which,
when issued, constitute usage and reduce availability under the Revolvers. The
aggregate amount of letters of credit outstanding under the Revolvers was $6,680
at June 30, 2008. After giving effect to
letters of credit and $556,500 in borrowings under the Domestic Revolver, total
availability under the Revolvers was $76,820 at June 30, 2008.
(c) Industrial Revenue Bonds—On
October 27, 2005, Tempur Production USA, Inc., a subsidiary of Tempur-Pedic
International Inc. (Tempur Production), completed an industrial revenue bond
financing for the construction and equipping of Tempur Production’s new
manufacturing facility (the Project) located in Bernalillo County, New
Mexico. Under the terms of the financing, Bernalillo County was to
issue up to $75,000 of Series 2005A Taxable Variable Rate Industrial Revenue
Bonds (the Series A Bonds). On April 1, 2008, Tempur Production redeemed all
outstanding Series A Bonds in the amount of $57,785. The redemption
price plus accrued interest was funded by a $58,000 borrowing under the Domestic
Revolver. In connection with the redemption, the letter of credit supporting the
Bonds was retired, resulting in no additional indebtedness outstanding under the
2005 Senior Credit Facility.
Bernalillo
County also agreed to issue up to $25,000 of Series 2005B Taxable Fixed Rate
Industrial Revenue Bonds (the Series B Bonds, and collectively with the Series A
Bonds, the Bonds). The Series B Bonds were sold to Tempur World LLC, are not
secured by the letter of credit described above, and will be held by Tempur
World, LLC, representing the Company’s equity in the Project. The Series B Bonds
have a final maturity date of September 1, 2030. The interest rate on the
Series B Bonds is fixed at 7.75%. In connection with issuance of the Series B
Bonds, the Company made an investment in Series B bonds in a like amount. The
Company has the right to offset the Series B Bonds against its investment in the
Series B Bonds, and accordingly, the amounts have been recorded net in the
accompanying Condensed Consolidated Balance Sheets.
On
October 27, 2005, Tempur Production transferred its interest in the Project to
Bernalillo County, and Bernalillo County leased the Project back to Tempur
Production on a long-term basis with the right to purchase the Project for one
dollar when the Bonds are retired. The substance of the transaction is that
Bernalillo County issued the Bonds on behalf of Tempur Production.
(5)
Fair Value of Financial Instruments
The
Company adopted SFAS 157 as of January 1, 2008, as related to financial
instruments. SFAS 157 establishes a three-level hierarchy for fair value
measurements. The hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date.
|
·
|
Level
1 – Valuation is based upon unadjusted quoted prices for identical assets
or liabilities in active markets.
|
|
·
|
Level
2 – Valuation is based upon quoted prices for similar assets and
liabilities in active markets, or other inputs that are observable for the
asset or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
·
|
Level
3 – Valuation is based upon other unobservable inputs that are significant
to the fair value measurements.
|
The
classification of fair value measurements within the hierarchy is based upon the
lowest level of input that is significant to the measurement. At June
30, 2008, the Company had only an interest rate swap and foreign currency
forward contracts recorded at fair value. The fair values of these instruments
were measured using valuations based upon quoted prices for similar assets and
liabilities in active markets (Level 2) and are valued by reference to similar
financial instruments, adjusted for restrictions and other terms specific to the
contracts. The following table provides a summary of the fair value of
measurements by level for assets and liabilities measured at fair value on a
recurring basis:
|
|
|
|
|
|
Fair
Value Measurements at June 30, 2008 Using:
|
|
|
|
|
June 30,
2008
|
|
|
Quoted
Prices in Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Interest
rate swap
|
|
$ |
(1,146 |
) |
|
$ |
— |
|
|
$ |
(1,146 |
) |
|
$ |
— |
|
The fair
value of the Company’s foreign currency forward contracts was not material at
June 30, 2008.
(6)
Stockholders’ Equity
(a)
Capital
Stock—Tempur-Pedic International authorized shares of capital stock are
300,000 shares of common stock and 10,000 shares of preferred stock. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of the common stock are entitled to receive ratably such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available for that purpose. In the event of liquidation, dissolution, or winding
up, the holders of the common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding.
(b) Share Repurchase Programs—On
January 25, 2007, the Board of Directors authorized the repurchase of up to
$100,000 of the Company’s common stock. The Company repurchased 3,840 shares of
the Company’s common stock for a total of $100,000 from the January 2007
authorization and completed purchases from this authorization in June 2007. On
July 19, 2007, the Board of Directors approved an additional share repurchase
authorization to repurchase up to $200,000 of the Company’s common stock. The
Company repurchased 6,561 shares of the Company’s common stock for approximately
$200,000 from the July 2007 authorization and completed purchases from the July
2007 authorization in September 2007. On October 16, 2007, the Board of
Directors authorized an additional share repurchase authorization of up to
$300,000 of the Company’s common stock. Under the existing share repurchase
authorization, the Company has $280,100 available for repurchase. No
shares were repurchased during the six months ended June 30, 2008. Share
repurchases under this authorization may be made through open market
transactions, negotiated purchase or otherwise, at times and in such amounts as
the Company and a committee of the Board deem appropriate. This share repurchase
authorization may be suspended, limited or terminated at any time without
notice.
(7)
Stock-Based Compensation
The
Company applies the provisions of SFAS 123R, which establishes the accounting
for employee stock-based awards. The Company currently has three stock-based
compensation plans: the 2002 Option Plan (the 2002 Plan), the 2003 Equity
Incentive Plan (the 2003 Plan) and the 2003 Employee Stock Purchase Plan (the
ESPP) which are described under the caption “Stock-based Compensation” in the
notes to the Consolidated Financial Statements of the Company’s Form 10-K for
the year ended December 31, 2007.
The Company
granted new options to purchase 1,996 and 2,123 shares of common stock during
the three and six months ending June 30, 2008, respectively, and recognized
compensation expense associated with these grants of approximately $353 and $434
during the three and six months ended June 30, 2008, respectively. The Company
granted new options to purchase 115 and 370 shares of common stock during the
three and six months ended June 30, 2007, respectively, and recognized
compensation expense associated with these grants of approximately $223 and $295
during the three and six months ended June 30, 2007, respectively. As of June
30, 2008, there was $7,731 of unrecognized compensation expense associated with
the options granted in 2008, which is expected to be recorded over the weighted
average remaining vesting period of 3.7 years. The options granted in the three
months ended June 30, 2008 had a weighted average grant-date fair value of $3.73
per option, as determined by the Black-Scholes option pricing model using the
following assumptions:
|
Expected
volatility of stock
|
|
|
50
– 51 |
% |
|
Expected
life of options, in years
|
|
|
2.0
– 5.0 |
|
|
Risk-free
interest rate
|
|
|
2.6
– 3.4 |
% |
|
Expected
dividend yield on stock
|
|
|
2.7
– 4.1 |
% |
The Company
recorded approximately $2,062 and $1,589 of total stock-based compensation
expense for the three months ended June 30, 2008 and June 30, 2007,
respectively. The Company recorded $4,041 and $3,380 of total stock-based
compensation expense for the six months ended June 30, 2008 and 2007,
respectively.
(8) Accumulated Other Comprehensive
Income
The
components of Accumulated other comprehensive income are as
follows:
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Derivative
instruments accounted for as hedges, net of tax of $447
|
$
|
(699
|
)
|
|
$
|
—
|
|
|
Foreign
currency translation
|
|
24,993
|
|
|
|
13,550
|
|
|
Accumulated
other comprehensive income
|
$
|
24,294
|
|
|
$
|
13,550
|
|
(9) Commitments and
Contingencies
(a) Purchase Commitments—The
Company will, from time to time, enter into limited purchase commitments for the
purchase of certain raw materials. Amounts committed under these programs are
not significant as of June 30, 2008.
(b) Securities Litigation—Between
October 7, 2005 and November 21, 2005, five complaints were filed against
Tempur-Pedic International and certain of its directors and officers in the
United States District Court for the Eastern District of Kentucky (Lexington
Division) purportedly on behalf of a class of shareholders who purchased
Tempur-Pedic International’s stock between April 22, 2005 and September 19, 2005
(the Securities Law Action). These actions were consolidated, and a
consolidated complaint was filed on February 27, 2006 asserting claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Lead plaintiffs
alleged that certain of Tempur-Pedic International’s public disclosures
regarding its financial performance between April 22, 2005 and September 19,
2005 were false and/or misleading. On December 7, 2006 lead plaintiffs were
permitted to file an amended complaint. The Company filed a Motion to Dismiss
the Securities Law Action and on March 28, 2008, the Court granted that motion,
dismissing all claims in the case with prejudice. The Court also entered final
judgment in favor of the Company and all other defendants on March 28, 2008. The
plaintiffs filed a notice of appeal from that judgment on April 24, 2008. Since
filing the notice of appeal, the plaintiffs agreed to a stipulation to dismiss
appeal with prejudice, which was entered on June 19, 2008, which fully and
finally resolved the Securities Law Action in favor of the Company and all other
defendants.
Derivative Complaints—On
November 10, 2005 and December 15, 2005, complaints were filed in the state
courts of Delaware and Kentucky, respectively, against certain officers and
directors of Tempur-Pedic International, purportedly derivatively on behalf of
the Company (the Derivative Complaints). The Derivative Complaints
assert that the named officers and directors breached their fiduciary duties
when they allegedly sold Tempur-Pedic International’s securities on the basis of
material non-public information in 2005. In addition, the Delaware
Derivative Complaint asserts a claim for breach of fiduciary duty with respect
to the disclosures that also are the subject of the Securities Law Action
described above. On December 14, 2005 and January 26, 2006,
respectively, the Delaware court and Kentucky court stayed these derivative
actions. Although the Kentucky court action remains stayed, the Delaware court
action stay was lifted by the Court and the plaintiffs filed an amended
complaint on April 5, 2007. The Company responded by filing a motion to dismiss
or stay the Delaware court action on April 19, 2007. The Delaware
court again stayed the Delaware action on February 6, 2008. Tempur-Pedic
International is also named as a nominal defendant in the Derivative Complaints,
although the actions are derivative in nature and purportedly asserted on behalf
of Tempur-Pedic International. Tempur-Pedic International is in the
process of evaluating these claims. Accordingly, the Company cannot make an
estimate of the possible range of loss.
Antitrust Action—On January
5, 2007, a purported class action was filed against the Company in the United
States District Court for the Northern District of Georgia, Rome Division
(Jacobs v. Tempur-Pedic International, Inc. and Tempur-Pedic North America,
Inc., or the Antitrust Action). The Antitrust Action alleges violations of
federal antitrust law arising from the pricing of Tempur-Pedic mattress products
by Tempur-Pedic North America and certain distributors. The action alleges
a class of all purchasers of Tempur-Pedic mattresses in the United States since
January 5, 2003, and seeks damages and injunctive relief. Count Two of the
complaint was dismissed by the court on June 25, 2007, based on a motion filed
by the Company. Following a decision issued by the United States Supreme Court
in Leegin Creative Leather
Prods., Inc. v. PSKS, Inc. on June 28, 2007, the Company filed a motion
to dismiss the remaining two counts of the Antitrust Action on July 10, 2007. On
December 11, 2007, that motion was granted and, as a result, judgment was
entered in favor of the Company and the plaintiffs’ complaint was dismissed with
prejudice. On December 21, 2007, the Plaintiffs filed a “Motion to Alter or
Amend Judgment.” On May 1, 2008, that motion was denied. The plaintiffs filed a
Notice of Appeal of these decisions on May 14, 2008, and the parties are
briefing the matter. The Company continues to strongly believe that the
Antitrust Action lacks merit, and intends to defend against the claims
vigorously. However, due to the inherent uncertainties of litigation, the
Company cannot predict the outcome of the Antitrust Action at this time, and can
give no assurance that these claims will not have a material adverse affect on
the Company’s financial position or results of operation. Accordingly, the
Company cannot make an estimate of the possible range of loss.
The
Company is involved in various other legal proceedings incidental to the
operations of its business. The Company believes that the outcome of all such
pending legal proceedings in the aggregate will not have a materially adverse
affect on its business, financial condition, liquidity, or operating
results.
(10)
Income Taxes
The
Company’s effective tax rate for the six months ended June 30, 2008 was
34.1%. For the same period in 2007, the effective tax rate was
34.2%.
Reconciling
items between the federal statutory income tax rate of 35.0% and the effective
tax rate include certain foreign tax rate differentials, state and local income
taxes, valuation allowances on certain net operating losses, foreign income
currently taxable in the U.S., the production activities deduction, and certain
other permanent differences.
At June 30,
2008, Tempur-Pedic International had undistributed earnings of approximately
$9,820 from its foreign subsidiaries determined under U.S. tax principles as of
November 1, 2002 related to the period prior to the acquisition of Tempur World,
Inc. by Tempur-Pedic International translated into U.S. dollars at the
applicable exchange rate on June 30, 2008. No provisions have been made for U.S.
income taxes or foreign withholding taxes on the remaining $9,820 of
undistributed earnings, as these earnings are considered indefinitely
reinvested. In addition, Tempur-Pedic International had remaining undistributed
earnings from its foreign subsidiaries determined under U.S. GAAP for the period
from November 1, 2002 through June 30, 2008 of $230,403. No
provisions have been made for U.S. income taxes or foreign withholding taxes on
the remaining $230,403 of undistributed earnings, as these earnings are
considered indefinitely reinvested.
During the three and six months ended
June 30, 2008, there were no significant changes to the liability for
unrecognized tax benefits or potential interest and penalties recorded as a
component of income tax expense.
On
October 24, 2007, the Company received an income tax assessment from the Danish
Tax Authority with respect to the 2001, 2002 and 2003 tax
years. The tax assessment relates to the royalty paid by one of
Tempur-Pedic International’s U.S. subsidiaries to a Danish subsidiary and the
position taken by the Danish Tax Authority could apply to subsequent
years. The total tax assessment is approximately $39.3 million including
interest and underpayment premium. On January 23, 2008 the Company filed
timely complaints with the Danish National Tax Tribunal denying the tax
assessments. The National Tax Tribunal formally agreed to place the Danish
tax litigation on hold pending the outcome of a Bilateral Advance Pricing
Agreement (“Bilateral APA”) between the United States and the Danish Tax
Authority. A Bilateral APA involves an agreement between the IRS and the
taxpayer, as well as a negotiated agreement with one or more foreign competent
authorities under applicable income tax treaties. The Company is preparing
a formal Bilateral APA application and supporting analyses, which the Company
anticipates will be filed with the IRS and the Danish Tax Authority during the
third quarter of 2008. The Company believes it has meritorious
defenses to the proposed adjustment and will oppose the assessment in the Danish
courts, as necessary. However, there is a reasonable possibility
under FIN 48 that the amount of unrecognized tax benefits relating to this
matter may change in the next twelve months. An estimate of the
amount of such change cannot be made at this time.
During
the second quarter the Company concluded an income tax audit of its Japanese
subsidiary, which included tax years 2005, 2006 and 2007. The
Japanese tax authority made no significant adjustments to taxable income. There
have been no significant changes to the status of any other tax examinations
during the quarter ended June 30, 2008.
With a few exceptions, the Company is
no longer subject to U.S. federal, state/local, or non-U.S. income tax
examinations by tax authorities for years prior to 2004, 2003 and 2000,
respectively.
(11)
Earnings Per Common Share
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
20,228 |
|
|
$ |
32,931 |
|
|
$ |
33,742 |
|
|
$ |
62,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per common share-weighted average
shares
|
|
|
74,740 |
|
|
|
82,963 |
|
|
|
74,665 |
|
|
|
83,452 |
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
191 |
|
|
|
1,259 |
|
|
|
207 |
|
|
|
1,589 |
|
|
Denominator
for basic earnings per common share-adjusted weighted average
shares
|
|
|
74,931 |
|
|
|
84,222 |
|
|
|
74,872 |
|
|
|
85,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.27 |
|
|
$ |
0.40 |
|
|
$ |
0.45 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
0.27 |
|
|
$ |
0.39 |
|
|
$ |
0.45 |
|
|
$ |
0.74 |
|
The
Company excluded 4,804 and 15 shares issuable upon exercise of outstanding stock
options for the three months ended June 30, 2008 and 2007, respectively, from
the diluted earnings per common share computation since their exercise price was
greater than the average market price of Tempur-Pedic International’s common
stock or if they were otherwise anti-dilutive. The Company excluded 2,322 and
149 shares issuable upon exercise of outstanding stock options for the six
months ended June 30, 2008 and 2007, respectively.
(12)
Business Segment Information
The
Company operates in two business segments: Domestic and International. These
reportable segments are strategic business units that are managed separately
based on the fundamental differences in their operations. The Domestic segment
consists of the two U.S. manufacturing facilities, whose customers include the
U.S. distribution subsidiary and certain third party distributors in North
America. The International segment consists of the manufacturing facility in
Denmark, whose customers include all of the distribution subsidiaries and third
party distributors outside the Domestic segment. The Company evaluates segment
performance based on Net sales and Operating income.
The
following table summarizes Total assets by segment:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
586,336 |
|
|
$ |
608,346 |
|
|
International
|
|
|
386,649 |
|
|
|
339,757 |
|
|
Intercompany
eliminations
|
|
|
(174,795 |
) |
|
|
(141,671 |
) |
|
|
|
$ |
798,190 |
|
|
$ |
806,432 |
|
The
following tables summarize other segment information:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net
sales from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
148,501 |
|
|
$ |
170,646 |
|
|
$ |
296,419 |
|
|
$ |
346,124 |
|
|
International
|
|
|
90,160 |
|
|
|
86,996 |
|
|
|
189,464 |
|
|
|
177,550 |
|
|
|
|
$ |
238,661 |
|
|
$ |
257,642 |
|
|
$ |
485,883 |
|
|
$ |
523,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$ |
451 |
|
|
$ |
723 |
|
|
$ |
1,110 |
|
|
$ |
1,687 |
|
|
Intercompany
eliminations
|
|
|
(451 |
) |
|
|
(723 |
) |
|
|
(1,110 |
) |
|
|
(1,687 |
) |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
18,269 |
|
|
$ |
29,896 |
|
|
$ |
22,006 |
|
|
$ |
59,270 |
|
|
International
|
|
|
18,050 |
|
|
|
25,234 |
|
|
|
43,646 |
|
|
|
49,614 |
|
|
|
|
$ |
36,319 |
|
|
$ |
55,130 |
|
|
$ |
65,652 |
|
|
$ |
108,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
(excluding
stock-based compensation
amortization):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
5,698 |
|
|
$ |
5,544 |
|
|
$ |
11,304 |
|
|
$ |
11,225 |
|
|
International
|
|
|
2,653 |
|
|
|
2,681 |
|
|
|
5,381 |
|
|
|
5,645 |
|
|
|
|
$ |
8,351 |
|
|
$ |
8,225 |
|
|
$ |
16,685 |
|
|
$ |
16,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth Net sales by significant product group:
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Mattresses
|
$
|
163,634
|
|
$
|
179,568
|
|
$
|
331,683
|
|
$
|
364,575
|
|
|
Pillows
|
|
28,877
|
|
|
31,799
|
|
|
60,495
|
|
|
66,676
|
|
|
All
other
|
|
46,150
|
|
|
46,275
|
|
|
93,705
|
|
|
92,423
|
|
|
|
$
|
238,661
|
|
$
|
257,642
|
|
$
|
485,883
|
|
$
|
523,674
|
|
The following
discussion and analysis should be read in conjunction with the Condensed
Consolidated Financial Statements and accompanying notes included in this Form
10-Q. The forward-looking statements in this discussion regarding the mattress
and pillow industries, our expectations regarding our future performance,
liquidity and capital resources and other non-historical statements in this
discussion include numerous risks and uncertainties, as described under “Special
Note Regarding Forward-Looking Statements” and “Risk Factors” elsewhere in
this quarterly report on Form 10-Q and in our annual report on Form 10-K. Our
actual results may differ materially from those contained in any forward-looking
statements. Except as may be required by law, we undertake no obligation to
publicly update or revise any of the forward-looking statements contained
herein.
Executive
Overview
General—We are the leading
manufacturer, marketer and distributor of premium mattresses and pillows which
we sell in approximately 80 countries globally under the TEMPUR® and
Tempur-Pedic® brands.
We believe our premium mattresses and pillows are more comfortable than standard
bedding products because our proprietary pressure-relieving TEMPUR® material is
temperature sensitive, has a high density and conforms to the body to
therapeutically align the neck and spine, thus reducing neck and lower back
pain, two of the most common complaints about other sleep surfaces.
Business Segment
Information—We have two reportable business segments: Domestic and
International. These reportable segments are strategic business units that are
managed separately based on the fundamental differences in their geographies.
The Domestic operating segment consists of our U.S. manufacturing facilities,
whose customers include our U.S. distribution subsidiary and certain third party
distributors in North America. The International segment consists of our
manufacturing facility in Denmark, whose customers include all of our
distribution subsidiaries and third party distributors outside the Domestic
operating segment. We evaluate segment performance based on Net sales and
Operating income.
Strategy
We
believe we are the industry leader in terms of profitability. Our long-term goal
is also to become the world’s largest bedding company in terms of revenue. In
order to achieve this goal, we expect to continue to pursue certain key
strategies in 2008:
|
|
•
|
|
Maintain
our focus on premium mattresses and pillows and to regularly introduce new
products.
|
|
|
•
|
|
Invest
in increasing our global brand awareness through targeted marketing and
advertising campaigns that further associate our brand name with better
overall sleep and premium quality
products.
|
|
|
•
|
|
Extend
our presence and improve our account productivity in both the Domestic and
International Retail segments.
|
|
|
•
|
|
Invest
in our operating infrastructure to meet the requirements of our growing
business, including investments in our research and development
capabilities.
|
Results
of Operations
A summary of our results for the
three months ended June 30, 2008 includes the following:
|
|
•
|
|
Earnings
per share (EPS) declined 30.8% to $0.27 per diluted common share in the
second quarter of 2008 as compared to $0.39 per diluted common share in
the second quarter of 2007.
|
|
|
•
|
|
As
of June 30, 2007, we reduced Inventories by approximately $13.0 million to
$93.5 million, compared to $106.5 million as of December 31,
2007.
|
|
|
•
|
|
We
generated $71.7 million of cash from operating activities, compared to
$45.6 million for the second quarter of
2007.
|
|
(Millions,
except earnings per share)
|
|
Three
Months Ended June
30,
|
|
|
Six
Months Ended June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net
sales
|
|
$ |
238.7 |
|
|
|
100.0 |
% |
|
$ |
257.6 |
|
|
|
100.0 |
% |
|
$ |
485.9 |
|
|
|
100.0 |
% |
|
$ |
523.7 |
|
|
|
100.0 |
% |
|
Cost
of sales
|
|
|
132.7 |
|
|
|
55.6 |
|
|
|
133.0 |
|
|
|
51.7 |
|
|
|
271.8 |
|
|
|
55.9 |
|
|
|
271.5 |
|
|
|
51.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
106.0 |
|
|
|
44.4 |
|
|
|
124.6 |
|
|
|
48.3 |
|
|
|
214.1 |
|
|
|
44.1 |
|
|
|
252.2 |
|
|
|
48.2 |
|
|
Selling
and marketing expenses
|
|
|
44.8 |
|
|
|
18.8 |
|
|
|
47.4 |
|
|
|
18.3 |
|
|
|
97.9 |
|
|
|
20.2 |
|
|
|
95.8 |
|
|
|
18.3 |
|
|
General,
administrative and other expenses
|
|
|
24.9 |
|
|
|
10.4 |
|
|
|
22.1 |
|
|
|
8.6 |
|
|
|
50.5 |
|
|
|
10.4 |
|
|
|
47.5 |
|
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
36.3 |
|
|
|
15.2 |
|
|
|
55.1 |
|
|
|
21.4 |
|
|
|
65.7 |
|
|
|
13.5 |
|
|
|
108.9 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(5.6
|
) |
|
|
(2.4 |
) |
|
|
(6.3
|
) |
|
|
(2.5 |
) |
|
|
(13.4
|
) |
|
|
(2.8 |
) |
|
|
(13.1
|
) |
|
|
(2.5 |
) |
|
Other
expense, net
|
|
|
(0.1
|
) |
|
|
— |
|
|
|
(0.2
|
) |
|
|
— |
|
|
|
(1.1
|
) |
|
|
(0.2 |
) |
|
|
(0.6
|
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
30.6 |
|
|
|
12.8 |
|
|
|
48.6 |
|
|
|
18.9 |
|
|
|
51.2 |
|
|
|
10.5 |
|
|
|
95.2 |
|
|
|
18.2 |
|
|
Income
tax provision
|
|
|
10.4 |
|
|
|
4.3 |
|
|
|
15.7 |
|
|
|
6.1 |
|
|
|
17.5 |
|
|
|
3.6 |
|
|
|
32.5 |
|
|
|
6.2 |
|
|
Net
income
|
|
$ |
20.2 |
|
|
|
8.5 |
% |
|
$ |
32.9 |
|
|
|
12.8 |
% |
|
$ |
33.7 |
|
|
|
6.9 |
% |
|
$ |
62.7 |
|
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.27 |
|
|
|
|
|
|
$ |
0.40 |
|
|
|
|
|
|
$ |
0.45 |
|
|
|
|
|
|
$ |
0.75 |
|
|
|
|
|
|
Diluted
|
|
$ |
0.27 |
|
|
|
|
|
|
$ |
0.39 |
|
|
|
|
|
|
$ |
0.45 |
|
|
|
|
|
|
$ |
0.74 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend per share:
|
|
$ |
0.08 |
|
|
|
|
|
|
$ |
0.08 |
|
|
|
|
|
|
$ |
0.16 |
|
|
|
|
|
|
$ |
0.14 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
74,740 |
|
|
|
|
|
|
|
82,963 |
|
|
|
|
|
|
|
74,665 |
|
|
|
|
|
|
|
83,452 |
|
|
|
|
|
|
Diluted
|
|
|
74,931 |
|
|
|
|
|
|
|
84,222 |
|
|
|
|
|
|
|
74,872 |
|
|
|
|
|
|
|
85,041 |
|
|
|
|
|
Three
Months Ended June 30, 2008 Compared with Three Months Ended June 30,
2007
We sell
our premium mattresses and pillows through four distribution channels: Retail,
Direct, Healthcare, and Third party. The Retail channel sells to furniture and
bedding, specialty and department stores. The Direct channel sells directly to
consumers. The Healthcare channel sells to hospitals, nursing homes, healthcare
professionals and medical retailers. The Third party channel sells to
distributors in countries where we do not operate our own wholly-owned
subsidiaries. The following table sets forth Net sales information, by
channel:
|
|
CONSOLIDATED
|
|
DOMESTIC
|
|
INTERNATIONAL
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
(Millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Retail
|
$ |
199.3 |
|
$ |
210.9 |
|
$ |
130.0 |
|
$ |
145.0 |
|
$ |
69.3 |
|
$ |
65.9 |
|
|
Direct
|
|
13.5 |
|
|
20.9 |
|
|
11.3 |
|
|
18.3 |
|
|
2.2 |
|
|
2.6 |
|
|
Healthcare
|
|
12.6 |
|
|
11.3 |
|
|
4.5 |
|
|
3.4 |
|
|
8.1 |
|
|
7.9 |
|
|
Third
Party
|
|
13.3 |
|
|
14.5 |
|
|
2.6 |
|
|
3.9 |
|
|
10.7 |
|
|
10.6 |
|
|
|
$ |
238.7 |
|
$ |
257.6 |
|
$ |
148.4 |
|
$ |
170.6 |
|
$ |
90.3 |
|
$ |
87.0 |
|
A summary
of Net sales by product is set forth below:
|
|
CONSOLIDATED
|
|
DOMESTIC
|
|
INTERNATIONAL
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
(Millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattresses
|
$ |
163.7 |
|
$ |
179.6 |
|
$ |
108.2 |
|
$ |
127.0 |
|
$ |
55.5 |
|
$ |
52.6 |
|
|
Pillows
|
|
28.9 |
|
|
31.7 |
|
|
12.6 |
|
|
14.6 |
|
|
16.3 |
|
|
17.1 |
|
|
Other
|
|
46.1 |
|
|
46.3 |
|
|
27.6 |
|
|
29.0 |
|
|
18.5 |
|
|
17.3 |
|
|
|
$ |
238.7 |
|
$ |
257.6 |
|
$ |
148.4 |
|
$ |
170.6 |
|
$ |
90.3 |
|
$ |
87.0 |
|
Net sales.
Net sales for the three months ended June 30, 2008 decreased to $238.7 million
from $257.6 million for the same period in 2007, a decrease of $19.0 million, or
7.4%. The primary area of sales weakness was in the U.S. with a slowdown in many
of our international markets, specifically toward the end of the
quarter. For the three months ended June 30, 2008, our Retail channel
Net sales decreased to $199.3 million from $210.9 million for the same period in
2007, a decrease of $11.6 million, or 5.5%. The factors that impacted Net sales
for each segment are discussed below, in the respective segment
discussion.
Domestic. Domestic Net sales
for the three months ended June 30, 2008 decreased to $148.4 million from $170.6
million for the same period in 2007, a decrease of $22.1 million, or 13.0%. Our
Domestic Retail channel contributed $130.0 million in Net sales for the three
months ended June 30, 2008, a decrease of $15.0 million, or 10.3%, as compared
to the same period in 2007. We believe that the macroeconomic environment
impacted our Domestic Retail channel during the second quarter, with many
consumers deferring high-end product purchases. Net sales in the Direct channel
decreased by $7.0 million, or 38.3%. We believe that the macroeconomic
environment also negatively impacted Net sales in the Direct channel. Our
Domestic Healthcare channel Net sales increased by $1.1 million, or 31.1%,
related to continued progress with our distribution partners and strategic
relationships with healthcare companies who market joint product offerings
through their established distribution networks. The Domestic Third Party
channel Net sales decreased $1.2 million, or 32.0%, to $2.6 million, reflecting
a slowdown in the Canadian mattress market.
As a
result of the macroeconomic environment, mattress sales in the second quarter of
2008 decreased $18.6 million, or 14.6%, over the same period in 2007. Pillow
sales decreased $2.0 million, or 13.8%. Many of our pillows are sold along with
a mattress. Accordingly, when mattress sales decline, pillow sales are impacted.
Other sales, which include adjustable bedbases, foundations and other related
products, decreased by $1.5 million, or 5.3%. This decrease is primarily related
to the decrease in Mattress sales, the effects of which have been offset by the
emphasized sales of adjustable bedbases.
International. International
Net sales for the three months ended June 30, 2008 increased to $90.3 million
from $87.0 million for the same period in 2007, an increase of $3.2 million, or
3.6%. The increase was driven by favorable foreign exchange rates. On a constant
currency basis, our International sales declined approximately 9.1%. Our
International segment was primarily impacted by macroeconomic factors in certain
key European markets. The International Retail channel increased $3.4 million,
or 5.1%, for the three months ended June 30, 2008. Our Direct channel sales
decreased 16.8%. Additionally, the Healthcare channel Net sales increased 2.3%
and Third party Net sales remained flat. International mattress sales in the
second quarter of 2008 increased $2.7 million, or 5.1%, over the second quarter
of 2007. Pillow sales for the second quarter of 2008 decreased $0.9 million, or
5.3%, as compared to the second quarter of 2007.
Gross
profit. Gross profit for the three months ended June 30, 2008 decreased
to $106.0 million from $124.6 million for the same period in 2007, a decrease of
$18.6 million, or 14.9%. Several factors impacted our Gross profit margin during
the quarter. These factors are identified and discussed below in the respective
segment discussions.
Domestic. Domestic Gross
profit for the three months ended June 30, 2008 decreased to $57.6 million from
$74.4 million for the same period in 2007, a decrease of $16.8 million, or
22.6%. The Gross profit margin in our Domestic segment was 38.8% and
43.6% for the three months ended June 30, 2008 and June 30, 2007, respectively.
For the three months ended June 30, 2008, the combination of declines in the
Direct channel sales, raw material cost inflation and lower production volumes
resulted in a lower gross profit margin. Domestic Cost of sales for
the three months ended June 30, 2008 decreased to $91.0 million from $96.2
million for the same period in 2007, a decrease of $5.3 million, or
5.5%.
International. International
Gross profit for the three months ended June 30, 2008 decreased to $48.4 million
from $50.2 million for the same period in 2007, a decrease of $1.7 million, or
3.5%. The Gross profit margin in our International segment was 53.7% and 57.7%
for the three months ended June 30, 2008 and June 30, 2007, respectively. The
Gross profit margin for our International segment was impacted by an
inflationary cost environment. Our International Cost of sales for the three
months ended June 30, 2008 increased to $41.7 million from $36.8 million for the
same period in 2007, an increase of $4.9 million, or 13.3%.
Selling and
marketing expenses. Selling and marketing expenses include advertising
and media production; other marketing materials such as catalogs, brochures,
videos, product samples, direct customer mailings and point of purchase
materials; and sales force and customer service compensation. We also include in
Selling and marketing expenses certain new product development costs, including
market research and testing for new products. Selling and marketing expenses
decreased to $44.8 million for the three months ended June 30, 2008 as compared
to $47.4 million for the three months ended June 30, 2007. Selling and marketing
expenses as a percentage of Net sales were 18.8% and 18.4% for the three months
ended June 30, 2008 and June 30, 2007, respectively. During the second quarter
of 2008, we were able to better align Selling and marketing expenses with our
revised sales expectations.
General,
administrative and other expenses. General, administrative and other
expenses include management salaries, information technology, professional fees,
depreciation of furniture and fixtures, leasehold improvements and computer
equipment, expenses for finance, accounting, human resources and other
administrative functions, and research and development costs associated with our
new product development. General, administrative and other expenses increased to
$24.9 million for the three months ended June 30, 2008 as compared to $22.1
million for the three months ended June 30, 2007, an increase of $2.8 million,
or 12.6%. General, administrative and other expenses as a percentage of Net
sales was 10.4% and 8.6% for the three months ended June 30, 2008 and June 30,
2007, respectively. During the second quarter of 2008, we increased our bad debt
reserves by approximately $1.1 million after further evaluating the impact the
current economic environment could have on our accounts receivable
portfolio.
Interest expense,
net. Interest expense, net, includes the interest costs associated with
our borrowings and the amortization of deferred financing costs related to those
borrowings. Interest expense, net, decreased to $5.6 million for the three
months ended June 30, 2008, as compared to $6.3 million for the three months
ended June 30, 2007, a decrease of $0.6 million, or 10.0%. The decrease in
interest expense is primarily attributable to decreases in interest rates,
offset by the increase in overall debt. The interest rate and certain fees that
we pay in connection with the 2005 Senior Credit Facility are subject to
periodic adjustment based on changes in our consolidated leverage ratio. On
May 29, 2008, we entered into an interest rate swap agreement effective May 30,
2008, to manage interest costs and the risk associated with changing interest
rates. Under this swap, the Company pays at a fixed rate and receives payments
at a variable rate. The swap effectively fixes the floating LIBOR-based interest
rate to 3.755% on $350.0 million of the outstanding balance under the 2005
Senior Credit Facility, with the outstanding balance subject to the swap
declining over time.
Income tax
provision. Our Income tax provision includes income taxes associated with
taxes currently payable and deferred taxes and includes the impact of net
operating losses for certain of our foreign operations. Our effective income tax
rates for the three months ended June 30, 2008 and for the three months ended
June 30, 2007 differed from the federal statutory rate principally because of
certain foreign tax rate differentials, state and local income taxes, valuation
allowances on certain net operating losses and the production activities
deduction.
Our
effective tax rate for the three months ended June 30, 2008 was
33.9%. For the same period in 2007, the effective tax rate was
32.3%. The increase in the effective tax rate is primarily
attributable to the revaluation of net deferred tax liabilities in jurisdictions
subjected to a reduced statutory tax rate during the three months ended June 30,
2007.
On October
24, 2007, we received an income tax assessment from the Danish Tax
Authority with respect to the 2001, 2002 and 2003 tax years. The
tax assessment relates to the royalty paid by one of Tempur-Pedic
International’s U.S. subsidiaries to a Danish subsidiary and the position taken
by the Danish Tax Authority could apply to subsequent years. The total tax
assessment is approximately $39.3 million including interest and underpayment
premium. On January 23, 2008 we filed timely complaints with the Danish
National Tax Tribunal denying the tax assessments. The National Tax
Tribunal formally agreed to place the Danish tax litigation on hold pending the
outcome of a Bilateral Advance Pricing Agreement (Bilateral APA) between the
United States and the Danish Tax Authority. A Bilateral APA involves an
agreement between the IRS and the taxpayer, as well as a negotiated agreement
with one or more foreign competent authorities under applicable income tax
treaties. We are preparing a formal Bilateral APA application and
supporting analyses, which we anticipate will be filed with the IRS and the
Danish Tax Authority during the third quarter of 2008. We believe we
have meritorious defenses to the proposed adjustment and will oppose the
assessment in the Danish courts, as necessary. However, there is a
reasonable possibility under FIN 48 that the amount of unrecognized tax benefits
relating to this matter may change in the next twelve months. An
estimate of the amount of such change cannot be made at this time. There
have been no significant changes to the status of any other unrecognized tax
benefits during the quarter ended June 30, 2008.
Six
Months Ended June 30, 2008 Compared with Six Months Ended June 30,
2007
The following table sets forth Net
sales information, by channel, for the periods indicated:
|
|
CONSOLIDATED
|
|
DOMESTIC
|
|
INTERNATIONAL
|
|
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
(Millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Retail
|
$ |
407.2 |
|
$ |
429.9 |
|
$ |
259.2 |
|
$ |
295.0 |
|
$ |
148.0 |
|
$ |
134.9 |
|
|
Direct
|
|
26.3 |
|
|
42.7 |
|
|
22.0 |
|
|
37.6 |
|
|
4.3 |
|
|
5.1 |
|
|
Healthcare
|
|
24.8 |
|
|
23.0 |
|
|
8.3 |
|
|
6.6 |
|
|
16.5 |
|
|
16.4 |
|
|
Third
Party
|
|
27.6 |
|
|
28.1 |
|
|
6.9 |
|
|
6.9 |
|
|
20.7 |
|
|
21.2 |
|
|
|
$ |
485.9 |
|
$ |
523.7 |
|
$ |
296.4 |
|
$ |
346.1 |
|
$ |
189.5 |
|
$ |
177.6 |
|
A summary
of Net sales by product is below:
|
|
CONSOLIDATED
|
|
DOMESTIC
|
|
INTERNATIONAL
|
|
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
(Millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattresses
|
$ |
331.6 |
|
$ |
364.7 |
|
$ |
215.2 |
|
$ |
257.5 |
|
$ |
116.4 |
|
$ |
107.2 |
|
|
Pillows
|
|
60.6 |
|
|
66.7 |
|
|
25.8 |
|
|
30.3 |
|
|
34.8 |
|
|
36.4 |
|
|
Other
|
|
93.7 |
|
|
92.3 |
|
|
55.4 |
|
|
58.3 |
|
|
38.3 |
|
|
34.0 |
|
|
|
$ |
485.9 |
|
$ |
523.7 |
|
$ |
296.4 |
|
$ |
346.1 |
|
$ |
189.5 |
|
$ |
177.6 |
|
Net sales.
Net sales for the six months ended June 30, 2008 decreased to $485.9 million
from $523.7 million for the same period in 2007, a decrease of $37.8 million, or
7.2%. We believe the macroeconomic environment in the U.S. negatively impacted
Net sales in the U.S. with a slowdown in markets outside the U.S. as well. For
the six months ended June 30, 2008, our Retail channel Net sales decreased to
$407.2 million from $429.9 million for the same period in 2007, a decrease of
$22.7 million, or 5.3%. The factors that impacted Net sales for each segment are
discussed below, in the respective segment discussion.
Domestic. Domestic Net sales
for the six months ended June 30, 2008 decreased to $296.4 million from $346.1
million for the same period in 2007, a decrease of $49.7 million, or 14.4%. Our
Domestic Retail channel contributed $259.2 million in Net sales for the six
months ended June 30, 2008. This is a decrease of $35.8 million, or 12.1%, over
the prior year same period. This decrease is due primarily to a
challenging U.S. macroeconomic environment during 2008. The Healthcare channel
Net sales increased $1.7 million, or 26.0%, as a result of continued progress
with our distribution partners. Our Third Party channel Net sales remained
relatively flat, as sales in the first quarter of 2008 to our Third Party
distributor in Canada increased but was offset by a second quarter decrease. Our
Direct channel Net sales decreased 41.6%, which is also directly correlated to
the changes in the U.S. macroeconomic environment. Domestic mattress
sales decreased $42.2 million, or 16.4%, over the same period in 2007, driven by
the decreases in our Retail channel. Pillow sales decreased $4.7 million, or
15.4%. Many of our pillow products are sold with mattress purchases. Therefore,
when mattress sales decline, pillow sales are also impacted.
International. International
Net sales for the six months ended June 30, 2008 increased to $189.5 million
from $177.6 million for the same period in 2007, an increase of $11.9 million,
or 6.7%. The increase was driven by favorable foreign exchange rates. On a
constant currency basis, our International sales declined by approximately
5.8%. Our International segment was primarily impacted by
macroeconomic factors in certain key European markets. The International Retail
channel increased $13.2 million, or 9.8%, for the six months ended June 30,
2008. Our Direct channel Net sales decreased 16.3%. Our Third party
sales decreased 2.3%. Additionally, our Healthcare channel Net sales increased
$0.1 million, or 0.4%. International mattress sales increased $9.3
million, or 8.7%, as compared to 2007. Pillow sales for the six months ended
June 30, 2008 decreased $1.5 million, or 4.1%, as compared to the same period in
2007.
Gross
profit. Gross profit for the six months ended June 30, 2008 decreased to
$214.1 million from $252.2 million for the same period in 2007, a decrease of
$38.1 million, or 15.1%. Several factors impacted our Gross profit margin during
the quarter. These factors are identified and discussed below in the respective
segment discussions.
Domestic. Domestic Gross
profit for the six months ended June 30, 2008 decreased to $111.2 million from
$149.9 million for the same period in 2007, a decrease of $38.7 million, or
25.8%. The Gross profit margin in our Domestic segment was 37.5% and
43.3% for the six months ended June 30, 2008 and June 30, 2007, respectively.
The decrease in our Gross profit margin for the Domestic segment was impacted by
decreased production levels related to lower than anticipated sales, an
inflationary cost environment, declines in the Direct channel and higher sales
returns in the first quarter of 2008. Our Domestic cost of sales decreased to
$185.2 million for the six months ended June 30, 2008 as compared to $196.2
million for the six months ended June 30, 2007, a decrease of $11.0 million, or
5.6%.
International. International
Gross profit for the six months ended June 30, 2008 increased to $102.9 million
from $102.3 million for the same period in 2007, an increase of $0.5 million, or
0.5%. The Gross profit margin in our International segment was 54.3% and 57.7%
for the six months ended June 30, 2008 and June 30, 2007, respectively. For the
six months ended June 30, 2008, the Gross profit margin for our International
segment was primarily impacted by an inflationary cost environment. Our
International Cost of sales for the six months ended June 30, 2008 increased to
$86.6 million from $75.3 million for the same period in 2007, an increase of
$11.4 million, or 15.1%.
Selling and
marketing expenses. Selling and marketing expenses increased to $98.0
million for the six months ended June 30, 2008 as compared to $95.8 million for
the six months ended June 30, 2007. Selling and marketing expenses as a
percentage of Net sales increased to 20.2% for the six months ended June 30,
2008 from 18.3% for the same period for 2007. For the first quarter of 2008,
much of our cost structure was in place and we were limited in our ability to
take actions to reduce our selling and marketing costs to match our reduced
sales levels. In the second quarter we were able to better align Selling and
marketing expenses with our revised sales expectations.
General,
administrative and other expenses. General, administrative and other
expenses increased to $50.5 million for the six months ended June 30, 2008 as
compared to $47.5 million for the six months ended June 30, 2007, an increase of
$3.0 million. General, administrative and other expenses as a percentage of Net
sales was 10.4% and 9.1% for the six months ended June 30, 2008 and June 30,
2007, respectively. For the first quarter of 2008, much of our cost structure
was in place and we were limited in our ability to take actions to reduce our
General, administrative and other expenses to match our reduced sales levels. In
the second quarter, we were able to better align General, administrative and
other expenses with our revised sales expectations. General, administrative and
other expenses included a charge for restructuring related to headcount
reductions in the first quarter of 2008.
Interest expense,
net. Interest expense, net, increased to $13.3 million for the six months
ended June 30, 2008, as compared to $13.1 million for the six months ended June
30, 2007, an increase of $0.2 million, or 1.5%. The increase is related to
higher levels of long-term debt as of June 30, 2008, as compared to the same
time period in 2007 and is offset by lower interest rates on our 2005 Senior
Credit Facility. The interest rate and certain fees that we pay in connection
with the 2005 Senior Credit Facility are subject to periodic adjustment based on
changes in our consolidated leverage ratio. On May 29, 2008, we entered
into an interest rate swap agreement effective May 30, 2008, to manage interest
costs and the risk associated with changing interest rates. Under this swap, the
Company pays at a fixed rate and receives payments at a variable rate. The swap
effectively fixes the floating LIBOR-based interest rate to 3.755% on $350.0
million of the outstanding balance under the 2005 Senior Credit Facility, with
the outstanding balance subject to the swap declining over time.
Income tax
provision. Our effective income tax rates for the six months ended June
30, 2008 and 2007 differed from the federal statutory rate principally because
of certain foreign tax rate differentials, state and local income taxes,
valuation allowances on certain net operating losses, compensation expense
associated with certain options granted prior to the initial public offering,
and the production activities deduction.
Our
effective tax rate for the six months ended June 30, 2008 was
34.1%. For the same period in 2007, the effective tax rate was
34.2%.
Liquidity
and Capital Resources
Liquidity
Our
principal sources of funds are cash flows from operations and borrowings. Our
principal uses of funds consist of capital expenditures, payments of principal
and interest on our debt facilities, payments of dividends to our shareholders
and share repurchases from time to time pursuant to a share repurchase program.
At June 30, 2008, we had working capital of $198.2 million including Cash and
cash equivalents of $68.4 million as compared to working capital of $200.0
million including $33.3 million in Cash and cash equivalents as of
December 31, 2007. Working capital was relatively flat as of June 30, 2008
compared to December 31, 2007. The increase in cash was attributable to the
focus on improving cash flow during the six months ended June 30,
2008.
Our cash
flow from operations increased to $96.3 million for the six months ended June
30, 2008 as compared to $74.2 million for the six months ended June 30, 2007.
The increase in operating cash flow for the period ending June 30, 2008, was
primarily a result of improvements in working capital items, Inventories and
Accounts receivable. The decrease in inventory levels resulted in a cash inflow
of approximately $15.9 million while Accounts receivable resulted in
a cash inflow of approximately $32.6 million, the effects of which were offset
by lower Net income.
Net cash
used in investing activities increased to $8.3 million for the six months ended
June 30, 2008 as compared to $6.2 million for the six months ended
June 30, 2008, an increase of $2.1 million. The increase is primarily related to
increased capital expenditures and the acquisition of our former third party
distributor in New Zealand.
Cash flow
used by financing activities was $56.6 million for the six months ended June 30,
2008 as compared to $59.9 million for the six months ended June 30, 2007,
representing a decrease in cash flow used of $3.3 million. The decrease is
attributable to decreases in borrowings under our 2005 Senior Credit Facility,
lower levels of long-term debt repayments in 2008 and that we did not repurchase
any of our shares in 2008, which is offset by the borrowings used to fund the
redemption of the Series A Industrial Revenue Bonds on April 1,
2008.
Capital
Expenditures
Capital expenditures totaled $6.3
million for the six months ended June 30, 2008 and $4.8 million for the six
months ended June 30, 2007. We currently expect our 2008 capital expenditures to
be $14.0 million.
Debt
Service
Our
long-term debt decreased to $556.5 million as of June 30, 2008 from $601.8
million as of December 31, 2007.
On April
1, 2008, Tempur Production redeemed all outstanding Series A Bonds in the amount
of $57.8 million. The redemption price plus accrued interest was
funded by a $58.0 million borrowing under the Domestic Revolver. In connection
with the redemption, the letter of credit supporting the Bonds was retired,
resulting in no additional indebtedness outstanding under the 2005 Senior Credit
Facility.
The
interest rate and certain fees that we pay in connection with the 2005 Senior
Credit Facility are subject to periodic adjustment based on changes in our
consolidated leverage ratio. On May 29, 2008, we entered into an interest
rate swap agreement effective May 30, 2008, to manage interest costs and the
risk associated with changing interest rates. Under this swap, we pay at a fixed
rate and receive payments at a variable rate. The swap effectively fixes the
floating LIBOR-based interest rate to 3.755% on $350.0 million of the
outstanding balance under the 2005 Senior Credit Facility, with the outstanding
balance subject to the swap declining over time.
Stockholders’
Equity
Share Repurchase Program—On January 25, 2007, our
Board of Directors authorized the repurchase of up to $100.0 million of our
common stock. We repurchased 3,840,485 shares of our common stock for a total of
$100.0 million from the January 2007 authorization and completed purchases from
this authorization in June 2007. On July 19, 2007, our Board of Directors
approved an additional share repurchase authorization to repurchase up to $200.0
million of our common stock. We repurchased 6,561,489 shares of our common stock
for approximately $200.0 million from the July 2007 authorization and completed
purchases from the July authorization in September 2007. On October 16, 2007,
our Board of Directors authorized an additional share repurchase authorization
of up to $300.0 million of our common stock. Under the existing share repurchase
authorization, we have $280.1 million available for repurchase. No
shares were repurchased during the six months ended June 30, 2008. Share
repurchases under this authorization may be made through open market
transactions, negotiated purchase or otherwise, at times and in such amounts as
we deem appropriate. This share repurchase authorization may be suspended,
limited or terminated at any time without notice.
Dividend Program—In the first
quarter of 2007, our Board of Directors approved an annual cash dividend of
$0.24 per common share annually, to be paid in quarterly installments to the
owners of our common stock. In the second quarter of 2007, our Board of
Directors increased the quarterly dividend to $0.08 per common share. Our Board
declared a first quarter 2008 dividend of $0.08 per common share, which was paid
on March 14, 2008 to stockholders of record as of February 27, 2008. Our Board
of Directors declared a second quarter 2008 dividend of $0.08 per common share
which was paid on June 16, 2008 to stockholders of record as of May 31, 2008.
This annual cash dividend program may be limited, suspended, or terminated at
any time without prior notice.
Factors
That May Affect Future Performance
General Business and
Economic Conditions—Our business may be affected by general business and
economic conditions that could have an impact on demand for our products. The
U.S. macroeconomic environment remained challenging during the second quarter
and contributed to what we believe is a slowdown in the mattress industry. Based
on industry data and retailer feedback, we believe average selling prices in the
industry are trending lower as many consumers defer high-end mattress purchases.
In addition, our international segment experienced further weakening in consumer
trends in several European markets.
In light of the macroeconomic environment, during the first six months of 2008
we took steps to better align our cost structure with our anticipated level of
Net sales. In addition, maintaining financial flexible is our primary short-term
focus, and we made substantial progress during the second quarter of 2008 in
reducing our inventory, improving collections, lowering expenses and paying down
debt. In the second half of this year, we will begin an extensive new product
rollout across the globe, and we remain firmly committed to our business model,
advertising strategy and premium product focus.
Managing Growth—We have grown rapidly, with our Net sales increasing from
$221.5 million in 2001 to $1,106.7 million in 2007 and $485.9 million for the
six months ended June 30, 2008. In the past, our growth has placed, and may
continue to place, a strain on our management, production, product distribution
network, information systems and other resources. In response to these
challenges, management has continued to invest in production, enhanced operating
and financial infrastructure and information systems and continued expansion of
the human resources in our operations. These expenditures, as well as
expenditures for advertising and other marketing-related activities, are made as
the continued growth in the business allows us the ability to invest. However,
these expenditures may be affected by lower than planned sales or an
inflationary cost environment.
Gross Margins—Our gross margin is primarily impacted by product and
channel mix, volume incentives offered to certain retail accounts, operational
efficiency and the cost of raw material. Overall product mix impacts our gross
margins because mattresses generally carry lower margins than our pillows and
are sold with lower margin products such as foundations and bed frames, and our
overall product mix has shifted to mattresses and other products over the last
several years. Our margins are also impacted by the growth in our Retail channel
as sales in our Retail channel are at wholesale prices whereas sales in our
direct channel are at retail prices. Our gross margin can also be impacted by
our operational efficiencies, including the particular levels of utilization at
our three manufacturing facilities. Future increases in raw material prices
could have a negative impact on our gross margin if we do not raise prices to
cover increased cost.
Competition—Participants in the mattress and pillow industries compete
primarily on price, quality, brand name recognition, product availability and
product performance. We compete with a number of different types of mattress
alternatives, including standard innerspring mattresses, other foam mattresses,
waterbeds, futons, air beds and other air-supported mattresses. These
alternative products are sold through a variety of channels, including furniture
and bedding stores, specialty bedding stores, department stores, mass merchants,
wholesale clubs, telemarketing programs, television infomercials and
catalogs.
Our largest competitors have significant financial, marketing and manufacturing
resources and strong brand name recognition, and sell their products through
broad and well established distribution channels. Additionally, we believe that
a number of our significant competitors offer mattress products claimed to be
similar to our TEMPUR®
mattresses and pillows. We provide strong channel profits to our retailers and
distributors which management believes will continue to provide an attractive
business model for our retailers and discourage them from carrying competing
lower-priced products.
Significant
Growth Opportunities—We believe there are significant opportunities to
take market share from the innerspring mattress industry as well as other sleep
surfaces. Our market share of the overall mattress industry is relatively small
in terms of both dollars and units, which we believe provides us with a
significant opportunity for growth. By expanding our brand awareness and
offering superior sleep surfaces, we believe consumers will continue to adopt
our products at an increasing rate, which should expand our market share. Our
business may be affected by general business and economic conditions that could
have an impact on demand for our products. We believe that the premium and
specialty bedding categories that we target will continue to grow at a faster
rate than the overall mattress industry and we believe we will continue to
experience the benefits of this consumer adoption.
Our
ability to take market share also depends on our ability to successfully launch
new products. In the past, we have seen retailers and consumers respond well to
our new product development and technological superiority. Over the next few
quarters, we will begin the most extensive new product launch in our history.
This launch will include new mattress models, advanced technological innovations
and new pillow concepts as well as an upgrade to the most widely distributed
mattress model in our lineup.
In addition, by expanding distribution within our existing accounts, we believe
we have the opportunity to grow our business by expanding our sales force as
necessary and extending our product line. Expansion gives our salespeople fewer
stores to call on, resulting in more time spent with each retail location so
they can work with each retailer on merchandising, training and educating retail
associates about the benefits of our products. Additionally, by extending our
product line, we should be able to continue to expand the number of Tempur-Pedic
models offered at the retail store level which should lead to increased sales.
Based on this strategy we believe a focus on expanding distribution within our
existing accounts provides for continued growth opportunities and market share
gains.
Expanding
distribution into new stores is also a source of growth opportunities. Our
products are currently sold in approximately 6,650 furniture and bedding retail
stores in the U.S., out of a total of approximately 10,000 stores we have
identified as appropriate targets. Within this addressable market, our plan is
to increase our total penetration to a total of 7,000 to 8,000 over time. Our
products are also sold in approximately 5,100 furniture retail and department
stores outside the U.S., out of a total of approximately 7,000 stores that we
have identified as appropriate targets. We are continuing to develop products
that are responsive to consumer demand in our markets
internationally.
In addition to these growth opportunities, management believes that we currently
supply only a small percentage of approximately 15,400 nursing homes and 5,000
hospitals in the U.S., with a collective bed count in excess of 2.7 million.
Clinical evidence indicates that our products are both effective and cost
efficient for the prevention and treatment of pressure ulcers, or bed sores, a
major problem for elderly and bed-ridden patients. We have been partnering with
healthcare vendors in an indirect sales method whereby the vendor integrates our
product into their products, in order to improve patient comfort and
wellness.
Financial Leverage—As of June 30, 2008, we had $556.5 million of
total Long-term debt outstanding, and our Stockholders’ Equity was $85.7
million. Higher financial leverage makes us more vulnerable to general adverse
competitive, economic and industry conditions. We believe that operating margins
driven by Net sales resulting from volume and price, productivity improvements
and cost containment activities will enable us to continue to de-leverage. There
can be no assurance, however, that our business will generate sufficient cash
flow from operations or that future borrowings will be available under our 2005
Senior Credit Facility.
Exchange Rates—As a
multinational company, we conduct our business in a wide variety of currencies
and are therefore subject to market risk for changes in foreign exchange rates.
We use foreign exchange forward contracts to manage a portion of the exposure to
the risk of the eventual net cash inflows and outflows resulting from foreign
currency denominated transactions between Tempur-Pedic subsidiaries and their
customers and suppliers, as well as between the Tempur-Pedic subsidiaries
themselves. These hedging transactions may not succeed in effectively managing
our foreign currency exchange rate risk. See “ITEM 3. Quantitative and
Qualitative Disclosures About Market Risk—Foreign Currency Exposures” under Part
I of this report.
Foreign
currency exchange rate movements also create a degree of risk by affecting the
U.S. dollar value of sales made and costs incurred in foreign currencies. We do
not enter into hedging transactions to hedge this risk. Consequently,
our reported earnings and financial position could fluctuate materially as a
result of foreign exchange gains or losses. Our outlook assumes no significant
changes in currency values from current rates. Should currency rates change
sharply, our results could be negatively impacted. See “ITEM 3. Quantitative and
Qualitative Disclosures About Market Risk—Foreign Currency Exposures” under Part
I of this report.
Critical
Accounting Policies and Estimates
For a
discussion of our critical accounting policies and estimates, see “ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Form 10-K for the year ended December 31, 2007. There have
been no material changes to our critical accounting policies and estimates in
2008.
Impact
of Recently Issued Accounting Pronouncements
See Note
2 in the Notes to Condensed Consolidated Financial Statements in ITEM 1
under Part I of this report for a full description of recent accounting
pronouncements, including the expected dates of adoption and estimated effects
on results of operations and financial condition, which is incorporated herein
by reference.
Foreign
Currency Exposures
Our
earnings, as a result of our global operating and financing activities, are
exposed to changes in foreign currency exchange rates, which may adversely
affect our results of operations and financial position. Our current outlook
assumes no significant changes in currency values from current rates. Should
currency rates change sharply, our results could be negatively
impacted.
We
protect a portion of our currency exchange exposure with foreign currency
forward contracts. A sensitivity analysis indicates the potential loss in fair
value on foreign currency forward contracts outstanding at June 30, 2008,
resulting from a hypothetical 10% adverse change in all foreign currency
exchange rates against the U.S. Dollar, is $0.3 million. Such losses would be
largely offset by gains from the revaluation or settlement of the underlying
assets and liabilities that are being protected by the foreign currency forward
contracts.
We do not apply hedge accounting to the
foreign currency forward contracts used to offset currency-related changes in
the fair value of foreign currency denominated assets and liabilities. These
contracts are marked-to-market through earnings at the same time that the
exposed assets and liabilities are remeasured through earnings.
Interest
Rate Risk
We
are exposed to changes in interest rates. Our 2005 Senior Credit Facility is
variable-rate debt. On May 30, 2008, we entered into an interest rate swap
agreement effective May 30, 2008, to manage interest costs and the risk
associated with changing interest rates. Under this swap, we pay at a fixed rate
and receive payments at a variable rate. The swap effectively fixes the floating
LIBOR-based interest rate to 3.755% on $350.0 million of the outstanding balance
under the 2005 Senior Credit Facility, with the outstanding balance subject to
the swap declining over time.
Interest rate changes generally do not affect the market value of such debt but
do impact the amount of our interest payments and therefore, our future earnings
and cash flows, assuming other factors are held constant. On June 30, 2008, we
had variable-rate debt of approximately $206.5 million. Holding other variables
constant, including levels of indebtedness, a one hundred basis point increase
in interest rates on our variable-rate debt would cause an estimated
reduction in income before income taxes for the next year of approximately
$2.1 million.
An
evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, as of the end of the period covered by this report. Based on that
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures were
effective as of June 30, 2008 and designed to ensure that information required
to be disclosed by us in reports that we file or submit under the Exchange Act,
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
During
our last fiscal quarter, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
Securities Law Action—Between
October 7, 2005 and November 21, 2005, five complaints were filed against
Tempur-Pedic International and certain of its directors and officers in the
United States District Court for the Eastern District of Kentucky (Lexington
Division) purportedly on behalf of a class of shareholders who purchased
Tempur-Pedic International’s stock between April 22, 2005 and September 19, 2005
(the Securities Law Action). These actions were consolidated, and a
consolidated complaint was filed on February 27, 2006 asserting claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Lead plaintiffs
alleged that certain of Tempur-Pedic International’s public disclosures
regarding its financial performance between April 22, 2005 and September 19,
2005 were false and/or misleading. On December 7, 2006 lead plaintiffs were
permitted to file an amended complaint. The Company filed a Motion to Dismiss
the Securities Law Action and on March 28, 2008, the Court granted that motion,
dismissing all claims in the case with prejudice. The Court also entered final
judgment in favor of the Company and all other defendants on March 28, 2008. The
plaintiffs filed a notice of appeal from that judgment on April 24, 2008. Since
filing the notice of appeal, the plaintiffs agreed to a stipulation to Dismiss
Appeal with prejudice, which was entered on June 19, 2008, which fully and
finally resolved the Securities Law Action in favor of the Company and all other
defendants.
Derivative Complaints – On November 10, 2005 and December 15, 2005,
complaints were filed in the state courts of Delaware and Kentucky,
respectively, against certain officers and directors of Tempur-Pedic
International, purportedly derivatively on behalf of the Company (the Derivative
Complaints). The Derivative Complaints assert that the named officers
and directors breached their fiduciary duties when they allegedly sold
Tempur-Pedic International’s securities on the basis of material non-public
information in 2005. In addition, the Delaware Derivative Complaint
asserts a claim for breach of fiduciary duty with respect to the disclosures
that also are the subject of the Securities Law Action described
above. On December 14, 2005 and January 26, 2006, respectively, the
Delaware court and Kentucky court stayed these derivative actions. Although the
Kentucky court action remains stayed, the Delaware court action stay was lifted
by the Court and the plaintiffs filed an amended complaint on April 5, 2007. We
responded by filing a motion to stay or dismiss the Delaware court action on
April 19, 2007. The Delaware court again stayed the Delaware action
on February 6, 2008. Tempur-Pedic International is also named as a nominal
defendant in the Derivative Complaints, although the actions are derivative in
nature and purportedly asserted on behalf of Tempur-Pedic
International. Accordingly, we cannot make an estimate of the
possible ranges of loss.
Antitrust Action – On January 5, 2007, a purported class action was
filed against the Company in the United States District Court for the Northern
District of Georgia, Rome Division (Jacobs v. Tempur-Pedic International, Inc.
and Tempur-Pedic North America, Inc., or the Antitrust Action). The
Antitrust Action alleges violations of federal antitrust law arising from the
pricing of Tempur-Pedic mattress products by Tempur-Pedic North America and
certain distributors. The action alleges a class of all purchasers of
Tempur-Pedic mattresses in the United States since January 5, 2003, and seeks
damages and injunctive relief. Count Two of the complaint was dismissed by the
court on June 25, 2007, based on a motion filed by the Company. Following a
decision issued by the United States Supreme Court in Leegin Creative Leather Prods., Inc.
v. PSKS, Inc. on June 28, 2007, we filed a motion to dismiss the
remaining two counts of the Antitrust Action on July 10, 2007. On December 11,
2007, that motion was granted and, as a result, judgment was entered in favor of
the Company and the plaintiffs’ complaint was dismissed with prejudice. On
December 21, 2007, the Plaintiffs filed a “Motion to Alter or Amend Judgment,”
On May 1, 2008, that motion was denied. The plaintiffs filed a Notice of Appeal
of these decisions on May 14, 2008, and the parties are briefing the matter. We
continue to strongly believe that the Antitrust Action lacks merit, and intend
to defend against the claims vigorously. However, due to the inherent
uncertainties of litigation, we cannot predict the outcome of the Antitrust
Action at this time, and can give no assurance that these claims will not have a
material adverse affect on our financial position or results of operation.
Accordingly, we cannot make an estimate of the possible ranges of
loss.
We
are involved in various other legal proceedings incidental to the operations of
our business. We believe that the outcome of all such pending legal proceedings
in the aggregate will not have a materially adverse effect on our business,
financial condition, liquidity, or operating results.
In addition to the other information
set forth in this quarterly report, you should carefully consider the factors
discussed under the heading, “Risk Factors” in Item IA of Part I of our annual
report on Form 10-K, some of which are updated below. These risks are not the
only ones facing the Company. Please also see “Special Note Regarding
Forward-Looking Statements” on page 3.
We
are subject to risks from our international operations, such as increased costs
and the potential absence of intellectual property protection, which could
impair our ability to compete and our profitability.
We
currently conduct international operations in approximately 80 countries,
and we continue to pursue additional international opportunities. We generated
approximately 39.0% of our Net sales from non-U.S. operations during the six
months ended June 30, 2008. Our international operations are subject to the
customary risks of operating in an international environment, including
complying with foreign laws and regulations and the potential imposition of
trade or foreign exchange restrictions, tariff and other tax increases,
fluctuations in exchange rates, inflation and unstable political situations, and
labor issues.
As
a multinational company, we are subject to risks relating to income tax
treatment that could affect our liquidity and/or our profitability.
On
October 24, 2007, we received an income tax assessment from the Danish Tax
Authority with respect to the 2001, 2002 and 2003 tax years. The
tax assessment relates to the royalty paid by one of Tempur-Pedic
International’s U.S. subsidiaries to a Danish subsidiary and the position taken
by the Danish Tax Authority could apply to subsequent years. The total tax
assessment is approximately $39.3 million including interest and underpayment
premium. On January 23, 2008 we filed timely complaints with the Danish
National Tax Tribunal denying the tax assessments. The National Tax
Tribunal formally agreed to place the Danish tax litigation on hold pending the
outcome of a Bilateral Advance Pricing Agreement (Bilateral APA) between the
United States and the Danish Tax Authority. A Bilateral APA involves an
agreement between the IRS and the taxpayer, as well as a negotiated agreement
with one or more foreign competent authorities under applicable income tax
treaties. We are preparing a formal Bilateral APA application and
supporting analyses, which we anticipate will be filed with the IRS and the
Danish Tax Authority during the third quarter of 2008. We believe we
have meritorious defenses to the proposed adjustment and will oppose the
assessment in the Danish courts, as necessary. However, there is a
reasonable possibility under FIN 48 that the amount of unrecognized tax benefits
relating to this matter may change in the next twelve months.
An
increase in our product return rates or an inadequacy in our warranty reserves
could reduce our liquidity and profitability.
Part of our Domestic marketing and advertising strategy in certain Domestic
channels focuses on providing up to a 120-day money back guarantee under which
customers may return their mattress and obtain a refund of the purchase price.
For the three and six months ended June 30, 2008, we had approximately $9.5
million and $20.9 million in returns for a return rate of approximately 6.3% and
7.0% of our Net sales in the U.S., for the two periods. As we expand our sales,
our return rates may not remain within our historical levels. An increase in
return rates could significantly impair our liquidity and profitability. We also
currently provide our customers with a limited, pro-rata 20-year warranty on
mattresses sold in the U.S. and a limited 15-year warranty on mattresses sold
outside of the U.S. However, as we have only been selling mattresses in
significant quantities since 1992, and have released new products in recent
years, many are fairly early in their product life cycles. We also provide
2-year to 3-year warranties on pillows.
Because our products have not been in use by our customers for the full warranty
period, we rely on the combination of historical experience and product testing
for the development of our estimate for warranty claims. However, our actual
level of warranty claims could prove to be greater than the level of warranty
claims we estimated based on our products’ performance during product testing.
If our warranty reserves are not adequate to cover future warranty claims, their
inadequacy could have a material adverse effect on our liquidity and
profitability.
Our
leverage limits our flexibility and increases our risk of default.
As
of June 30, 2008, we had $556.5 million in total Long-term debt outstanding. In
addition, as of June 30, 2008, our Stockholders’ Equity was $85.7 million.
Between October 2005 and June 30, 2008, we repurchased a total of $540.0 million
in common stock pursuant to stock repurchase authorizations authorized by our
Board of Directors. We funded the repurchase in part through borrowings under
our 2005 Senior Credit Facility, which has substantially increased our
leverage.
Our Board
of Directors may authorize additional share repurchases in the future and we may
fund these repurchases with debt. On February 19, 2008 our Board of Directors
declared a first quarter 2008 dividend to stockholders of record as of February
27, 2008. On June 16, 2008 our Board of Directors declared a second quarter 2008
dividend to stockholders of record as of May 31, 2008.
Our
degree of leverage could have important consequences to our investors, such
as:
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limiting
our ability to obtain in the future additional financing we may need to
fund future working capital, capital expenditures, product development,
acquisitions or other corporate requirements;
and
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requiring
the dedication of a substantial portion of our cash flow from operations
to the payment of principal and interest on our debt, which will reduce
the availability of cash flow to fund working capital, capital
expenditures, product development, acquisitions and other corporate
requirements.
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In addition, the instruments governing our debt contain financial and other
restrictive covenants, which limit our operating flexibility and could prevent
us from taking advantage of business opportunities. In addition, our failure to
comply with these covenants may result in an event of default. If such event of
default is not cured or waived, we may suffer adverse effects on our operations,
business or financial condition, including acceleration of our
debt.
Our
current executive officers, directors and their affiliates own a large
percentage of our common stock and could limit you from influencing corporate
decisions.
As of
July 31, 2008, our executive officers, directors, and their respective
affiliates own, in the aggregate, approximately 12% of our outstanding
common stock on a fully diluted basis, after giving effect to the vesting of all
unvested options. These stockholders, as a group, are able to influence all
matters requiring approval by our stockholders, including mergers, sales of
assets, the election of all directors, and approval of other significant
corporate transactions, in a manner with which you may not agree or that may not
be in your best interest.
The
loss of the services of any members of our senior management team could impair
our ability to execute our business strategy and as a result, reduce our sales
and profitability.
We
depend on the continued services of our senior management team. The loss of key
personnel could have a material adverse effect on our ability to execute our
business strategy and on our financial condition and results of operations. We
do not maintain key-person insurance for members of our senior management team.
In addition, we recently appointed a new President and Chief Executive Officer,
effective August 4, 2008, which may have an impact on our ability to execute our
business strategy.
We
are vulnerable to interest rate risk with respect to our debt, which could lead
to an increase in interest expense.
We
are subject to interest rate risk in connection with our issuance of variable
rate debt under our 2005 senior credit facility. Interest rate changes could
increase the amount of our interest payments and thus, negatively impact our
future earnings and cash flows. We estimate that our annual interest expense on
our floating rate indebtedness would increase by $2.1 million for each 1.0%
increase in interest rates. See “ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk—Interest Rate Risk” in Part I of this
report.
On
May 29, 2008, we entered into an interest rate swap agreement effective May 30,
2008, to manage interest costs and the risk associated with changing interest
rates. Under this swap, we pay at a fixed rate and receive payments
at a variable rate. The swap effectively fixes the floating LIBOR-based interest
rate to 3.755% on $350.0 million of the outstanding balance under the 2005
Senior Credit Facility, with the outstanding balance subject to the swap
declining over time.
(a) Not
applicable.
(b) Not
applicable.
(c) Not
applicable.
None.
Tempur-Pedic International’s annual meeting of stockholders was held on May 6,
2008. Proposals 1, 2 and 3, the only Proposals presented for a vote at the
meeting, were approved. The results are as follows:
Proposal
1
Election of the following nominees for
director to serve a one-year term until the next annual meeting of
stockholders:
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For
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Authority
Withheld
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H.
Thomas Bryant
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66,090,420 |
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839,416 |
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Francis
A. Doyle
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65,795,925 |
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1,133,912 |
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John
Heil
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66,087,467 |
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842,370 |
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Peter
K. Hoffman
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65,789,803 |
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1,140,034 |
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Sir
Paul Judge
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42,243,733 |
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24,686,104 |
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Nancy
F. Koehn
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66,146,561 |
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783,276 |
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Christopher
A. Masto
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66,096,302 |
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833,535 |
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P.
Andrews McLane
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66,091,734 |
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838,103 |
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Robert
Trussell, Jr.
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66,099,473 |
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830,364 |
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Proposal
2
Approval of the Amended and Restated
2003 Equity Incentive Plan.
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For
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Against
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Abstained
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47,825,244 |
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7,904,629 |
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26,925 |
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Proposal
3
Ratification of appointment of Ernst
& Young LLP as the Company’s independent auditors for fiscal year
2008.
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For
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Against
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Abstained
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66,850,680 |
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45,547 |
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33,609 |
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Proposals 1, 2 and 3 are described in
detail in Tempur-Pedic International’s definitive proxy statement dated March
24, 2008, for the Annual Meeting of Stockholders held on May 6,
2008.
(a) Not
applicable.
(b) Not
applicable.
The
following is an index of the exhibits included in this report:
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*
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This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwise
subject to the liabilities of that Section, nor shall it be deemed
incorporated by reference in any filings under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date hereof and irrespective of any general
incorporation language in any filings.
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Incorporated
by reference from the registrant's Definitive Proxy Statement on Schedule
14(a) filed with the Commission on March 24, 2008. |
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Incorporated
by reference from teh registrant's Current Report on Form 8-K filed with
the Commission on June 30, 2008. |
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| (3 |
) |
Indicates
management contract or compensatory plan or arrangement. |
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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TEMPUR-PEDIC
INTERNATIONAL INC.
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(Registrant)
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Date:
August 1, 2008
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By:
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/s/ DALE
E.
WILLIAMS
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Dale
E. Williams
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Executive
Vice President, Chief Financial Officer,
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and
Secretary
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