form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended September 30, 2007
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from
to
Commission
file number 001-31922
TEMPUR-PEDIC
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
|
|
|
Delaware
|
|
33-1022198
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
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 o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer 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 October 31,
2007 was 75,140,352 shares.
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Page
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3
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PART
I. FINANCIAL INFORMATION
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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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PART
II. OTHER INFORMATION
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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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37
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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 putative securities class
action lawsuits, related and other lawsuits and pending tax assessments,
statements relating to the impact of initiatives to accelerate growth, expand
market share, maintain costs and improve manufacturing productivity, the rollout
and market acceptance of new products, increase in brand awareness, growth
in
international sales, the renewal of our advertising campaign, the conversion
of
our operations in Austria and Australia to wholly-owned subsidiaries, our new
manufacturing facility in New Mexico, our growth in stand-alone pillow sales,
the existence and realization of our net operating losses, and the impact of
the
cash dividend and stock repurchase program 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 1A of Part II of this
report and under the heading “Risk Factors” under Item IA of Part I of our
annual report on Form 10-K. 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.
ITEM 1.
|
FINANCIAL
STATEMENTS
|
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
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|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
sales
|
|
$ |
294,094
|
|
|
$ |
240,917
|
|
|
$ |
817,768
|
|
|
$ |
688,465
|
|
Cost
of sales
|
|
|
152,484
|
|
|
|
124,894
|
|
|
|
423,930
|
|
|
|
354,672
|
|
Gross
profit
|
|
|
141,610
|
|
|
|
116,023
|
|
|
|
393,838
|
|
|
|
333,793
|
|
Selling
and marketing expenses
|
|
|
48,830
|
|
|
|
41,827
|
|
|
|
144,630
|
|
|
|
127,230
|
|
General
and administrative expenses
|
|
|
23,628
|
|
|
|
19,235
|
|
|
|
68,497
|
|
|
|
55,521
|
|
Research
and development expenses
|
|
|
1,603
|
|
|
|
1,240
|
|
|
|
4,278
|
|
|
|
3,031
|
|
Operating
income
|
|
|
67,549
|
|
|
|
53,721
|
|
|
|
176,433
|
|
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|
148,011
|
|
|
|
|
|
|
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|
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|
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Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Interest
expense, net
|
|
|
(8,261 |
) |
|
|
(6,728 |
) |
|
|
(21,394 |
) |
|
|
(17,402 |
) |
Loss
on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(126 |
) |
|
|
—
|
|
Other
expense, net
|
|
|
(33 |
) |
|
|
(183 |
) |
|
|
(410 |
) |
|
|
(142 |
) |
Total
other expense
|
|
|
(8,294 |
) |
|
|
(6,911 |
) |
|
|
(21,930 |
) |
|
|
(17,544 |
) |
Income
before income taxes
|
|
|
59,255
|
|
|
|
46,810
|
|
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|
154,503
|
|
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|
130,467
|
|
Income
tax provision
|
|
|
20,437
|
|
|
|
17,947
|
|
|
|
52,974
|
|
|
|
48,599
|
|
Net
income
|
|
$ |
38,818
|
|
|
$ |
28,863
|
|
|
$ |
101,529
|
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|
$ |
81,868
|
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|
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Earnings
per common share:
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Basic
|
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$ |
0.50
|
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$ |
0.35
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$ |
1.25
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$ |
0.96
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Diluted
|
|
$ |
0.49
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$ |
0.34
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|
$ |
1.22
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$ |
0.92
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|
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Cash
dividend per common share
|
|
$ |
0.08
|
|
|
|
—
|
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$ |
0.22
|
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|
|
—
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|
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Weighted
average common shares outstanding:
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|
|
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|
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Basic
|
|
|
77,725
|
|
|
|
82,946
|
|
|
|
81,522
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|
|
|
85,533
|
|
Diluted
|
|
|
79,173
|
|
|
|
85,681
|
|
|
|
83,069
|
|
|
|
88,666
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share amounts)
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
23,580
|
|
|
$ |
15,788
|
|
Accounts
receivable, net
|
|
|
165,735
|
|
|
|
142,059
|
|
Inventories
|
|
|
82,065
|
|
|
|
61,736
|
|
Prepaid
expenses and other current assets
|
|
|
13,053
|
|
|
|
8,002
|
|
Income
taxes receivable
|
|
|
—
|
|
|
|
588
|
|
Deferred
income taxes
|
|
|
9,566
|
|
|
|
9,383
|
|
Total
Current Assets
|
|
|
293,999
|
|
|
|
237,556
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
208,140
|
|
|
|
215,428
|
|
Goodwill
|
|
|
198,623
|
|
|
|
198,207
|
|
Other
intangible assets, net
|
|
|
69,014
|
|
|
|
70,826
|
|
Deferred
financing costs and other non-current assets, net
|
|
|
4,044
|
|
|
|
3,649
|
|
Total
Assets
|
|
$ |
773,820
|
|
|
$ |
725,666
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
64,880
|
|
|
$ |
51,220
|
|
Accrued
expenses and other
|
|
|
74,364
|
|
|
|
61,050
|
|
Income
taxes payable
|
|
|
15,751
|
|
|
|
—
|
|
Current
portion of long-term debt
|
|
|
282
|
|
|
|
19,497
|
|
Total
Current Liabilities
|
|
|
155,277
|
|
|
|
131,767
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
555,805
|
|
|
|
341,635
|
|
Deferred
income taxes
|
|
|
34,294
|
|
|
|
38,536
|
|
Other
non-current liabilities
|
|
|
330
|
|
|
|
380
|
|
Total
Liabilities
|
|
|
745,706
|
|
|
|
512,318
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies—see Note 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock—$.01 par value; 300,000 shares authorized; 99,215
shares issued as of September 30, 2007 and December
31, 2006
|
|
|
992
|
|
|
|
992
|
|
Additional
paid in capital
|
|
|
280,638
|
|
|
|
264,709
|
|
Retained
earnings
|
|
|
207,797
|
|
|
|
140,608
|
|
Accumulated
other comprehensive income
|
|
|
11,586
|
|
|
|
3,992
|
|
Treasury
stock, at cost; 24,110 and 15,993 shares as of September 30, 2007
and
December 31, 2006, respectively
|
|
|
(472,899 |
) |
|
|
(196,953 |
) |
Total
Stockholders’ Equity
|
|
|
28,114
|
|
|
|
213,348
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
773,820
|
|
|
$ |
725,666
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TEMPUR-PEDIC
INTE RNATIONAL INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
101,529
|
|
|
$ |
81,868
|
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
25,326
|
|
|
|
18,640
|
|
Amortization
of deferred financing costs
|
|
|
719
|
|
|
|
1,479
|
|
Loss
on extinguishment of debt
|
|
|
126
|
|
|
|
—
|
|
Amortization
of stock-based compensation
|
|
|
5,081
|
|
|
|
2,672
|
|
Provision
for doubtful accounts
|
|
|
4,541
|
|
|
|
2,813
|
|
Deferred
income taxes
|
|
|
(3,101 |
) |
|
|
(2,479 |
) |
Foreign
currency adjustments
|
|
|
661
|
|
|
|
243
|
|
Loss
on sale of equipment
|
|
|
101
|
|
|
|
207
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(22,585 |
) |
|
|
(23,696 |
) |
Inventories
|
|
|
(14,228 |
) |
|
|
18,545
|
|
Prepaid
expenses and other current assets
|
|
|
(5,035 |
) |
|
|
725
|
|
Accounts
payable
|
|
|
10,250
|
|
|
|
5,351
|
|
Accrued
expenses and other
|
|
|
10,636
|
|
|
|
3,986
|
|
Income
taxes
|
|
|
25,864
|
|
|
|
28,926
|
|
Excess
tax benefit from stock-based compensation
|
|
|
(10,025 |
) |
|
|
(6,189 |
) |
Net
cash provided by operating activities
|
|
|
129,860
|
|
|
|
133,091
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments
for trademarks and other intellectual property
|
|
|
(636 |
) |
|
|
(699 |
) |
Purchases
of property, plant and equipment
|
|
|
(8,181 |
) |
|
|
(24,159 |
) |
Acquisition
of businesses, net of cash
|
|
|
(5,756 |
) |
|
|
—
|
|
Proceeds
from sale of equipment
|
|
|
135
|
|
|
|
83
|
|
Net
cash used by investing activities
|
|
|
(14,438 |
) |
|
|
(24,775 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term revolving credit facility
|
|
|
347,547
|
|
|
|
152,000
|
|
Repayments
of long-term revolving credit facility
|
|
|
(119,293 |
) |
|
|
(55,000 |
) |
Repayments
of long-term debt
|
|
|
(45,416 |
) |
|
|
(70,622 |
) |
Proceeds
from issuance of Series A Industrial Revenue Bonds
|
|
|
15,385
|
|
|
|
—
|
|
Repayments
of Series A Industrial Revenue Bonds
|
|
|
(5,765 |
) |
|
|
(3,840 |
) |
Proceeds
from exercise of stock options
|
|
|
8,078
|
|
|
|
3,401
|
|
Excess
tax benefit from stock based compensation
|
|
|
10,025
|
|
|
|
6,189
|
|
Treasury
stock repurchased
|
|
|
(299,998 |
) |
|
|
(144,000 |
) |
Dividends
paid to stockholders
|
|
|
(17,895 |
) |
|
|
—
|
|
Payments
for deferred financing costs
|
|
|
(1,530 |
) |
|
|
(698 |
) |
Net
cash used by financing activities
|
|
|
(108,862 |
) |
|
|
(112,570 |
) |
|
|
|
|
|
|
|
|
|
NET
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
1,232
|
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
in cash and cash equivalents
|
|
|
7,792
|
|
|
|
(2,602 |
) |
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
15,788
|
|
|
|
17,855
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$ |
23,580
|
|
|
$ |
15,253
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
19,243
|
|
|
$ |
23,560
|
|
Income
taxes, net of refunds
|
|
$ |
30,946
|
|
|
$ |
22,663
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In
thousands, except per share amounts)
(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 pillows, mattresses, 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 do not include all of the information and disclosures
required by generally accepted accounting principles in the United States (U.S.
GAAP) for complete financial statements. Accordingly, 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, 2006, included in the Company’s Annual Report on Form
10-K. The balance sheet as of December 31, 2006 has been derived from the
audited consolidated financial statements as of that date but does not include
all of the information and footnotes required by U.S. GAAP for complete
financial statements.
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 2007 presentation including the presentation of Selling and
marketing expenses and General and administrative expenses in the Condensed
Consolidated Statements of Income and the presentation of Accounts payable
and
Accrued expenses and other in the Condensed Consolidated Balance Sheets and
the
Condensed Consolidated Statements of Cash Flows. 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.
(f)
Financial Instruments and Hedging—Derivative financial instruments are used
within the normal course of business and are used to manage foreign currency
exchange rate risk. These instruments are short term in nature and are subject
to fluctuations in foreign exchange rates and credit risk. Credit risk is
managed through the selection of sound financial institutions as counterparties.
The changes in fair market value of foreign exchange derivatives are recognized
through earnings.
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))
and
under the Industrial Revenue Bonds (as defined in Note (4)(c)) 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:
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
Finished
goods
|
|
$ |
56,348
|
|
|
$ |
41,847
|
|
Work-in-process
|
|
|
7,739
|
|
|
|
6,395
|
|
Raw
materials and supplies
|
|
|
17,978
|
|
|
|
13,494
|
|
|
|
$ |
82,065
|
|
|
$ |
61,736
|
|
(i)
Long Lived Assets—In accordance with Statement of Financial Accounting
Standards (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 then fair
value.
(j)
Goodwill and Other Intangible Assets—SFAS 142, “Goodwill and Other
Intangible Assets” requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values and reviewed for impairment in accordance with SFAS 144. The
Company performs an annual impairment test on all existing goodwill and other
indefinite-life intangibles in the fourth quarter of each year. The Company
performed the annual impairment test in the fourth quarter of 2006 on all
existing goodwill and certain other intangible assets and no impairment existed
as of December 31, 2006. If facts and circumstances lead the Company’s
management to believe the existing goodwill or certain other intangible assets
may be impaired, the Company will evaluate the extent to which the related
cost
is recoverable by comparing the future undiscounted 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:
|
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
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
|
|
|
$ |
7,867
|
|
|
$ |
8,133
|
|
|
$ |
16,000
|
|
|
$ |
6,667
|
|
|
$ |
9,333
|
|
Patents
& Other Trademarks
|
|
|
5-20
|
|
|
|
10,780
|
|
|
|
7,405
|
|
|
|
3,375
|
|
|
|
10,105
|
|
|
|
6,470
|
|
|
|
3,635
|
|
Customer
database
|
|
|
5
|
|
|
|
4,853
|
|
|
|
4,228
|
|
|
|
625
|
|
|
|
4,200
|
|
|
|
3,500
|
|
|
|
700
|
|
Foam
formula
|
|
|
10
|
|
|
|
3,700
|
|
|
|
1,819
|
|
|
|
1,881
|
|
|
|
3,700
|
|
|
|
1,542
|
|
|
|
2,158
|
|
Total
|
|
|
|
|
|
$ |
90,333
|
|
|
$ |
21,319
|
|
|
$ |
69,014
|
|
|
$ |
89,005
|
|
|
$ |
18,179
|
|
|
$ |
70,826
|
|
Amortization
expense relating to intangible assets for the Company was $1,063 and $1,021
for
the three months ended September 30, 2007 and September 30, 2006, respectively.
For the nine months ended September 30, 2007 and September 30, 2006 amortization
expense relating to intangible assets was $3,140 and $3,049,
respectively.
The
changes in the carrying amount of
Goodwill for the nine months ended September 30, 2007 are as
follows:
Balance
as of December 31, 2006
|
|
$ |
198,207
|
|
Goodwill
acquired during the period
|
|
|
2,188
|
|
Foreign
currency translation adjustments and other
|
|
|
(1,772 |
) |
Balance
as of September 30, 2007
|
|
$ |
198,623
|
|
Goodwill
as of September 30, 2007 and
December 31, 2006 has been allocated to the Domestic and International segments
as follows:
|
|
September 30,
2007
|
|
|
December
31,
2006
|
|
Domestic
|
|
$ |
89,929
|
|
|
$ |
89,929
|
|
International
|
|
|
108,694
|
|
|
|
108,278
|
|
|
|
$ |
198,623
|
|
|
$ |
198,207
|
|
On
September 3, 2007, the Company
acquired the rights to sell its products in the Australian market as well as
certain assets of its Australian third party distributor. The total purchase
price was approximately $4,800. The assets purchased were initially valued
at
approximately $2,900 and include inventory and fixed assets, among other
assets. The remainder of the purchase price was allocated to Goodwill. As a
Third-party distributor, for the eight months ended August 31, 2007 Australia
contributed approximately $2,500 in Net sales and for the full year 2006,
Australia contributed approximately $3,500 in Net sales.
On
January 1, 2007, the Company acquired its third-party distributor in Austria
for
approximately $1,000.
(k)
Accrued Sales Returns—Estimated sales returns are provided at the time of
sale based on historical sales channel return rates. The return rates are
typically lower within the Retail channel as compared to the Direct channel.
Estimated future obligations related to these returns 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, 2006
to
September 30, 2007:
Balance
as of December 31, 2006
|
|
$ |
5,883
|
|
Amounts
accrued
|
|
|
33,935
|
|
Returns
charged to accrual
|
|
|
(33,676 |
) |
Balance
as of September 30, 2007
|
|
$ |
6,142
|
|
(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 provided by charges
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, 2006 to
September 30, 2007:
Balance
as of December 31, 2006
|
|
$ |
2,903
|
|
Amounts
accrued
|
|
|
2,546
|
|
Warranties
charged to accrual
|
|
|
(2,170 |
) |
Balance
as of September 30, 2007
|
|
$ |
3,279
|
|
The
New
Mexico manufacturing facility has successfully completed the start-up phase
of
production. During the start-up phase, the Company was accruing for potential
incremental warranty charges. As the start-up phase is complete and the
facility’s quality is meeting or exceeding the Company’s standards, the Company
has ceased accruing for potential start-up phase warranty matters.
(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)
Accumulated Other Comprehensive Income—The adjustment resulting from
translating the financial statements of foreign subsidiaries is included in
Accumulated other comprehensive income, a component of Stockholders’ Equity.
Foreign currency transaction gains and losses are reported in results of
operations. As of September 30, 2007, Accumulated other comprehensive income
consists solely of $11,586 in foreign currency translation adjustments. The
change in Accumulated other comprehensive income for the nine months ended
September 30, 2007 is $7,594.
(o)
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 credit based on the creditworthiness of its
customers. 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 were $7,672 and $6,114 as of September 30, 2007 and December 31, 2006,
respectively.
The
Company reflects all amounts billed to customers for shipping and handling
in
Net sales and the costs incurred from shipping and handling product in Cost
of
sales. Amounts included in Net sales for shipping and handling were
approximately $2,745 and $2,437 for the three months ended September 30, 2007
and September 30, 2006, respectively. For the nine months ended
September 30, 2007 and September 30, 2006 amounts included in Net sales for
shipping and handling were approximately $8,370 and $8,093, respectively.
Amounts included in Cost of sales for shipping and handling were approximately
$21,767 and $18,977 for the three months ended September 30, 2007 and September
30, 2006, respectively. Amounts included in Cost of sales for shipping and
handling were approximately $61,429 and $53,790 for the nine months ended
September 30, 2007 and September 30, 2006, respectively.
(p)
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.
(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 adopted SFAS 123R, “Share-Based
Payment” (SFAS 123R) on January 1, 2006 using the modified prospective
method for the transition. 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.
Prior
to the
adoption of SFAS 123R, the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the
Statement of Cash Flows. SFAS 123R requires the cash flows resulting from the
tax benefits resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits from stock-based compensation)
to be classified as financing cash flows.
(2)
Recently Issued Accounting Pronouncements
In
September 2006, the FASB issued
SFAS 157, “Fair Value Measurements,” which defines fair value, establishes
a framework for measuring fair value in U.S. GAAP, and expands disclosure about
fair value measurements. The Company is evaluating the potential impact of
adopting SFAS 157, which is effective for fiscal years beginning after November
15, 2007.
In
February
2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and
Financial Liabilities–including an amendment to FASB No. 115” (SFAS 159) which
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at
fair
value. The Company is evaluating the potential impact of adopting SFAS 159,
which is effective for fiscal years beginning after November 15,
2007.
(3)
Property, Plant and Equipment
Property,
plant and equipment, net consisted of the following:
|
|
September
30, 2007
|
|
|
December 31, 2006
|
|
Land
and buildings
|
|
$
|
122,659
|
|
|
$
|
75,005
|
|
Machinery
and equipment
|
|
|
179,513
|
|
|
|
111,024
|
|
Construction
in progress
|
|
|
6,869
|
|
|
|
104,824
|
|
|
|
|
309,041
|
|
|
|
290,853
|
|
Total
accumulated depreciation
|
|
|
(100,901)
|
|
|
|
(75,425)
|
|
|
|
$
|
208,140
|
|
|
$
|
215,428
|
|
Construction
in progress includes capitalized interest costs of $0 and $7,879 as of September
30, 2007 and December 31, 2006, respectively, in connection with the
construction of assets in 2006. Upon substantial completion of the construction
phase of the Albuquerque, New Mexico manufacturing facility in January, 2007
the
Company ceased capitalizing interest costs incurred for this project.
Additionally, Construction in progress includes $1,893 and $756 that is also
included in Accounts payable as of September 30, 2007 and December 31, 2006,
respectively. These amounts have been excluded from Cash flows from
investing activities in the Condensed Consolidated Statements of Cash Flows
in
their respective periods.
(4)
Long-term Debt
(a) Long-term
Debt—Long-term debt for the Company consisted of the
following:
|
|
September
30,
2007
|
|
|
December 31,
2006
|
|
2005
Senior Credit Facility:
|
|
|
|
|
|
|
Foreign
Term Loan , payable to lenders, interest at Index Rate
or LIBOR plus margin (4.78% as of December 31, 2006)
|
|
$ |
—
|
|
|
$ |
43,337
|
|
Foreign
Long-Term Revolving Credit Facility payable to lenders, interest
at
Index Rate or LIBOR plus applicable margin (5.57% and
5.82% at September 30, 2007 and December 31, 2006,
respectively) commitment through and due June 8, 2012
|
|
|
—
|
|
|
|
14,733
|
|
Domestic
Long-Term Revolving Credit Facility payable to lenders, interest
at
Index
Rate or LIBOR plus applicable margin (6.53% and 6.41% as of September
30,
2007 and December 31, 2006, respectively), commitment through and
due June
8, 2012
|
|
|
497,000
|
|
|
|
253,500
|
|
|
|
|
|
|
|
|
|
|
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 (5.61% and 5.53% as of September 30, 2007 and
December 31, 2006, respectively), interest due monthly through and
due
September 1, 2030
|
|
|
57,785
|
|
|
|
48,165
|
|
|
|
|
|
|
|
|
|
|
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%
|
|
|
1,302
|
|
|
|
1,397
|
|
|
|
|
556,087
|
|
|
|
361,132
|
|
Less:
Current portion
|
|
|
(282 |
) |
|
|
(19,497 |
) |
Long-term
debt
|
|
$ |
555,805
|
|
|
$ |
341,635
|
|
(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
February 8, 2006 and on December 13, 2006 the Company entered into amendments
to
its 2005 Senior Credit Facility, which increased availability, adjusted one
financial covenant and added an option to increase the Domestic Revolver by
an
additional $50,000 at the discretion of the Company. On February 22, 2007,
the
Company exercised the option to increase the Domestic Revolver by an additional
$50,000. 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, eliminated the quarterly
redemption of the Industrial Revenue Bonds (as defined below) 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. In conjunction
with
Amendment No. 3, the Company wrote-off $126 of deferred financing fees which
were previously capitalized. 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,
$590,000 revolving credit facility (Domestic Revolver). The foreign credit
facility is a five-year $50,000 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%.
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 September 30,
2007.
At
September 30, 2007, the Company had a total of $640,000 of long-term revolving
credit facilities under the 2005 Senior Credit Facility, which was comprised
of
the $590,000 Domestic Revolver and the $50,000 Foreign Revolver (collectively,
the Revolvers). The Revolvers provide 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 $67,541 at September 30, 2007. After giving effect
to letters of credit and $497,000 in borrowings under the Domestic Revolver,
total availability under the Revolvers was $75,459 at September 30,
2007.
(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). The Series A Bonds are marketed to third
party qualified investors by a remarketing agent and secured by a letter of
credit issued under the Company’s Domestic Revolver. The Series A Bonds have a
final maturity date of September 1, 2030. The interest rate on the
Series A Bonds is a weekly rate set by the remarketing agent, in its sole
discretion, though the interest rate may not exceed the lesser of the highest
rate allowed under New Mexico law or 12% per annum. On October 27,
2005, Tempur Production made an initial draw of $53,925 on the Series A
Bonds. On June 1, 2007, the Company executed an additional advance of
$15,380 on the Series A Bonds. Upon completion of this draw, the Company
had a total of $59,705 outstanding under the Series A Bonds. The Company
used proceeds from the Bonds to pay down the Domestic Revolver, among other
things. No further advances are expected by the Company under the Series A
Bonds.
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%. On October 27, 2005, Tempur Production
made an initial draw of $17,975 under the Series B Bonds, which was transferred
to and used by Tempur World LLC to purchase Series B Bonds. On June 1, 2007,
the
Company requested an additional advance of $5,127 on the Series B Bonds.
Proceeds of this draw were transferred to and used by Tempur World, LLC to
purchase the additional Series B Bonds. Upon completion of this draw, the
Company had a total of $23,103 outstanding under the Series B Bonds. No further
advances are expected by the Company under the Series B Bonds.
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. Pursuant to the lease agreement,
Tempur Production will pay rent to Bernalillo County in an amount sufficient
to
pay debt service on the Bonds and certain fees and expenses. The
Bonds are not general obligations of Bernalillo County, but are special, limited
obligations payable solely from bond proceeds, rent paid by Tempur Production
under the lease agreement, and other revenues. The substance of the
transaction is that Bernalillo County issued the Bonds on behalf of Tempur
Production. Therefore, the Company has recorded the obligation as
long-term debt of $57,785 in its Condensed Consolidated Balance Sheet as of
September 30, 2007.
(5)
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 authorized
an additional share repurchase authorization, to repurchase up to $200,000
of
the Company’s common stock. As of September 30, 2007, the Company has
repurchased 6,561 shares of the Company’s common stock for approximately
$200,000 from the July 2007 authorization and has completed purchases from
the
July authorization.
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. 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.
(6)
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 2006 Form
10-K.
The
Company
granted new options to purchase 18 and 402 shares of common stock during the
three and nine months ending September 30, 2007, respectively. The Company
recognized compensation expense of $453 and $752 associated with the 2007 grants
during the three and nine months ended September 30, 2007, respectively. The
Company granted new options to purchase 110 and 1,470 shares of common stock
during the three and nine months ending September 30, 2006, respectively. The
Company recognized compensation expense of $484 and $499 associated with the
2006 grants during the three and nine months ended September 30, 2006,
respectively. As of September 30, 2007, there was $3,069 of unrecognized
compensation expense associated with the options granted in 2007, which is
expected to be recorded over the weighted average remaining vesting period
of
2.7 years. The options granted in the three months ended September 30, 2007
had
a weighted average grant-date fair value of $10.92 per option, as determined
by
the Black-Scholes option pricing model using the following
assumptions:
Expected
volatility of stock
|
|
|
40–41 |
% |
Expected
life of options, in years
|
|
|
5.0
|
|
Risk-free
interest rate
|
|
|
4.4–5.0 |
% |
Expected
dividend yield on stock
|
|
|
1.1 |
% |
The
Company recorded $1,701 and $1,168 of total stock-based compensation expense
for
the three months ended September 30, 2007 and September 30, 2006, respectively.
The Company recorded $5,081 and $2,672 of total stock-based compensation expense
for the nine months ended September 30, 2007 and September 30, 2006,
respectively.
(7)
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 material as
of September 30, 2007.
(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 allege 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 has filed a motion to dismiss the Securities
Law Action which has been fully briefed, and is now awaiting a decision on
that
motion. The plaintiffs seek compensatory damages, costs, fees and other relief
within the Court’s discretion. The Company strongly believes that the Securities
Law 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 Securities Law 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 operations.
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 the Delaware court action on
April 19, 2007. That motion is fully briefed and is scheduled for
oral argument. 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.
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. That motion is fully briefed and the
Company is awaiting a decision on the motion. The Company strongly believes
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 operations.
The
Company
is involved in various other legal proceedings incident to the ordinary course
of its business. The Company believes that the outcome of all such pending
legal
proceedings in the aggregate will not have a materially adverse effect on its
business, financial condition, liquidity, or operating results.
(8)
Income Taxes
The
Company’s effective tax rate for the nine months ended September 30, 2007 was
34.3%. For the same period in 2006, the effective tax rate was 37.3%. The
decrease in the effective tax rate is primarily attributable to the increased
production activities deduction allowed to U.S. manufacturers under Section
199
of the Internal Revenue Code along with a reduction of the local statutory
tax
rate in various foreign jurisdictions.
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
September
30, 2007, Tempur-Pedic International had undistributed earnings of $8,901 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 September 30, 2007. No provisions have been made for U.S.
income taxes or foreign withholding taxes on the remaining $8,901 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 September 30, 2007 of $178,718. No
provisions have been made for U.S. income taxes or foreign withholding taxes
on
the remaining $178,718 of undistributed earnings, as these earnings are
considered indefinitely reinvested.
The
Company
adopted the provisions of FIN 48 on January 1, 2007. As of
January 1, 2007, the Company had unrecognized tax benefits of $8,432. The
Company did not record any cumulative effect adjustment to retained earnings
as
a result of adopting FIN 48. Of the $8,432 of unrecognized tax
benefits, the entire amount would impact the effective income tax rate if
recognized. Interest and penalties, if any, related to unrecognized tax
benefits are recorded in income tax expense. As of January 1, 2007, the Company
had $600 of accrued interest included in the $8,432 of unrecognized tax
benefits.
As
of
September 30, 2007, the Company’s unrecognized tax benefits increased by $1,893
as a result of tax positions taken during the current period and decreased
by
$1,557 as a result of tax positions taken during a prior period. The
decrease of $1,557 did not affect the effective tax rate as it related to a
position that was ultimately not taken on the applicable tax
return. Of the $8,768 of unrecognized tax benefits at September 30,
2007, the entire amount would impact the effective income tax rate if
recognized.
The
Company
is currently under audit by various Federal, State and foreign tax authorities
and some of these audits may be finalized in the foreseeable
future. However, based on the status of these examinations, and the
protocol of finalizing audits by the relevant tax authorities, which could
include formal legal proceedings, it is not possible to estimate the timing
or
the impact of any amount of such changes, if any, to previously recorded
uncertain tax positions. On October 24, 2007, the Company received an income
tax
assessment from the Danish tax authority with respect to 2001, 2002 and 2003
tax
years. The tax assessment relates to the royalty paid by our U.S.
companies to our Danish subsidiary, and the position taken by the Danish tax
authority could apply to subsequent years. Management is currently
evaluating the assessment. The Company believes it has meritorious
defenses to the proposed adjustment and will oppose the assessment in the Danish
courts. However, there is 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.
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 2003,
2003 and 2000, respectively.
(9)
Major Customers
Five
customers accounted for approximately 19% and 16% of the Company’s Net sales for
the three months ended September 30, 2007 and September 30, 2006, respectively.
The top five customers in each period accounted for approximately 21% and 18%
of
Accounts receivable, net as of September 30, 2007 and September 30, 2006. The
loss of one or more of these customers could negatively impact the
Company.
(10)
Earnings Per Share
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
38,818
|
|
|
$ |
28,863
|
|
|
$ |
101,529
|
|
|
$ |
81,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share-weighted
average shares
|
|
|
77,725
|
|
|
|
82,946
|
|
|
|
81,522
|
|
|
|
85,533
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
1,448
|
|
|
|
2,735
|
|
|
|
1,547
|
|
|
|
3,133
|
|
Denominator
for basic earnings per share-adjusted
weighted average shares
|
|
|
79,173
|
|
|
|
85,681
|
|
|
|
83,069
|
|
|
|
88,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.50
|
|
|
$ |
0.35
|
|
|
$ |
1.25
|
|
|
$ |
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
0.49
|
|
|
$ |
0.34
|
|
|
$ |
1.22
|
|
|
$ |
0.92
|
|
All
outstanding stock options are included in the Diluted earnings per common share
for the three months ended September 30, 2007. The Company excluded 475 shares
issuable upon exercise of outstanding stock options for the three months ended
September 30, 2006 because their exercise price was greater than the average
market price of the Company’s common stock or if they were otherwise
anti-dilutive. The Company excluded 4 and 625 shares issuable upon exercise
of
outstanding stock options for the nine months ended September 30, 2007 and
2006,
respectively.
(11)
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 in certain third party distributors in the
Americas. 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. Certain prior period
amounts have been reclassified to conform to the 2007 presentation. The
reclassifications relate to the Company’s Corporate office operating expenses
and certain amounts for goodwill and other assets that are carried at the
holding company level which are included in the Domestic operating
segment.
The
following table summarizes Total assets by segment:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Total
assets:
|
|
|
|
|
|
|
Domestic
|
|
$ |
561,864
|
|
|
$ |
485,958
|
|
International
|
|
|
326,204
|
|
|
|
322,816
|
|
Intercompany
eliminations
|
|
|
(114,248 |
) |
|
|
(83,108 |
) |
|
|
$ |
773,820
|
|
|
$ |
725,666
|
|
The
following tables summarize other segment information:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
200,451
|
|
|
$ |
164,446
|
|
|
$ |
546,575
|
|
|
$ |
458,627
|
|
International
|
|
|
93,643
|
|
|
|
76,471
|
|
|
|
271,193
|
|
|
|
229,838
|
|
|
|
$ |
294,094
|
|
|
$ |
240,917
|
|
|
$ |
817,768
|
|
|
$ |
688,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
—
|
|
|
$ |
4
|
|
|
$ |
—
|
|
|
$ |
4
|
|
International
|
|
|
921
|
|
|
|
1,407
|
|
|
|
2,608
|
|
|
|
2,821
|
|
Intercompany
eliminations
|
|
|
(921 |
) |
|
|
(1,411 |
) |
|
|
(2,608 |
) |
|
|
(2,825 |
) |
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
40,715
|
|
|
$ |
32,399
|
|
|
$ |
99,985
|
|
|
$ |
84,334
|
|
International
|
|
|
26,834
|
|
|
|
21,322
|
|
|
|
76,448
|
|
|
|
63,677
|
|
|
|
$ |
67,549
|
|
|
$ |
53,721
|
|
|
$ |
176,433
|
|
|
$ |
148,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization (excluding
stock-based compensation
amortization):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
5,694
|
|
|
$ |
3,350
|
|
|
$ |
16,919
|
|
|
$ |
9,992
|
|
International
|
|
|
2,762
|
|
|
|
2,917
|
|
|
|
8,407
|
|
|
|
8,648
|
|
|
|
$ |
8,456
|
|
|
$ |
6,267
|
|
|
$ |
25,326
|
|
|
$ |
18,640
|
|
During
the course of normal operations, the Domestic segment may purchase inventory
from the Danish manufacturing facility from time to time. These purchases are
included in the International segment as Intercompany sales. The Intercompany
profits on these sales are eliminated from the International segment when the
manufacturing profit
in ending finished goods inventory is eliminated during the consolidation of
the
Company’s results. These manufacturing profits were $212 and
$476
for the three months ended September 30, 2007 and September 30, 2006,
respectively, and $541 and $765 for the nine months ended September 30, 2007
and
September 30, 2006, respectively.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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 over 70 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 the Americas. 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. For the purpose of this Management’s Discussion and Analysis
of Financial Condition and Results of Operations, our Corporate office operating
expenses and certain amounts for goodwill and other assets that are carried
at
the holding company level are included in the Domestic operating
segment.
Strategy
and Outlook
We
believe we are the industry leader in term’s 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 2007:
•
|
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.
|
•
|
Selectively
extend our presence and improve our account productivity in both
the U.S.
and International furniture and bedding
stores.
|
•
|
Invest
in our operating infrastructure to meet the requirements of our growing
business, including investments in our research and development
capabilities.
|
Results
of Operations
Key
financial highlights for the three months ended September 30, 2007 include
the
following:
•
|
Net
sales rose 22% to $294.1 million from $240.9 million in the third
quarter
of 2006. Worldwide mattress revenue increased 22%.
Worldwide pillow sales rose
15%.
|
•
|
Earnings
per share (EPS) increased 44% to $0.49 per diluted share in the
third
quarter of 2007 from $0.34 per diluted common share in the third
quarter
of 2006
|
•
|
During
the third quarter, Tempur-Pedic International purchased 6.6
million shares
of its common stock at a total cost of approximately $200.0
million. These
purchases were funded primarily by increased borrowings under
our domestic
revolving credit
facility.
|
(In
millions, except earnings and
dividends
per
common
share)
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
Net
sales
|
|
$ |
294.1
|
|
|
|
100 |
% |
|
$ |
240.9
|
|
|
|
100 |
% |
|
$ |
817.8
|
|
|
|
100 |
% |
|
$ |
688.5
|
|
|
|
100 |
% |
Cost
of sales
|
|
|
152.5
|
|
|
|
52
|
|
|
|
124.9
|
|
|
|
52
|
|
|
|
424.0
|
|
|
|
52
|
|
|
|
354.7
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
141.6
|
|
|
|
48
|
|
|
|
116.0
|
|
|
|
48
|
|
|
|
393.8
|
|
|
|
48
|
|
|
|
333.8
|
|
|
|
48
|
|
Selling
and marketing expenses
|
|
|
48.9
|
|
|
|
16
|
|
|
|
41.9
|
|
|
|
17
|
|
|
|
144.6
|
|
|
|
17
|
|
|
|
127.2
|
|
|
|
18
|
|
General
and administrative expenses
|
|
|
23.6
|
|
|
|
8
|
|
|
|
19.1
|
|
|
|
8
|
|
|
|
68.5
|
|
|
|
8
|
|
|
|
55.6
|
|
|
|
8
|
|
Research
and development expenses
|
|
|
1.6
|
|
|
|
1
|
|
|
|
1.2
|
|
|
|
1
|
|
|
|
4.3
|
|
|
|
1
|
|
|
|
3.0
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
67.5
|
|
|
|
23
|
|
|
|
53.8
|
|
|
|
22
|
|
|
|
176.4
|
|
|
|
22
|
|
|
|
148.0
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(8.2 |
) |
|
|
(3 |
) |
|
|
(6.8 |
) |
|
|
(3 |
) |
|
|
(21.4 |
) |
|
|
(3 |
) |
|
|
(17.4 |
) |
|
|
(3 |
) |
Loss
on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.1 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
income (expense), net
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.2 |
) |
|
|
—
|
|
|
|
(0.4 |
) |
|
|
—
|
|
|
|
(0.1 |
) |
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
59.3
|
|
|
|
20
|
|
|
|
46.8
|
|
|
|
19
|
|
|
|
154.5
|
|
|
|
19
|
|
|
|
130.5
|
|
|
|
19
|
|
Income
tax provision
|
|
|
20.5
|
|
|
|
7
|
|
|
|
17.9
|
|
|
|
7
|
|
|
|
53.0
|
|
|
|
7
|
|
|
|
48.6
|
|
|
|
7
|
|
Net
income
|
|
$ |
38.8
|
|
|
|
13 |
% |
|
$ |
28.9
|
|
|
|
12 |
% |
|
$ |
101.5
|
|
|
|
12 |
% |
|
$ |
81.9
|
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.50
|
|
|
|
|
|
|
$ |
0.35
|
|
|
|
|
|
|
$ |
1.25
|
|
|
|
|
|
|
$ |
0.96
|
|
|
|
|
|
Diluted
|
|
$ |
0.49
|
|
|
|
|
|
|
$ |
0.34
|
|
|
|
|
|
|
$ |
1.22
|
|
|
|
|
|
|
$ |
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share:
|
|
$ |
0.08
|
|
|
|
|
|
|
$ |
—
|
|
|
|
|
|
|
$ |
0.22
|
|
|
|
|
|
|
$ |
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
77,725
|
|
|
|
|
|
|
|
82,946
|
|
|
|
|
|
|
|
81,522
|
|
|
|
|
|
|
|
85,533
|
|
|
|
|
|
Diluted
|
|
|
79,173
|
|
|
|
|
|
|
|
85,681
|
|
|
|
|
|
|
|
83,069
|
|
|
|
|
|
|
|
88,666
|
|
|
|
|
|
Three
Months Ended September 30, 2007 Compared with Three Months Ended September
30,
2006
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
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Retail
|
|
$ |
251.5
|
|
|
$ |
198.7
|
|
|
$ |
177.4
|
|
|
$ |
139.9
|
|
|
$ |
74.1
|
|
|
$ |
58.8
|
|
Direct
|
|
|
18.0
|
|
|
|
20.6
|
|
|
|
15.2
|
|
|
|
18.2
|
|
|
|
2.8
|
|
|
|
2.4
|
|
Healthcare
|
|
|
12.4
|
|
|
|
10.5
|
|
|
|
4.2
|
|
|
|
3.1
|
|
|
|
8.2
|
|
|
|
7.4
|
|
Third
Party
|
|
|
12.2
|
|
|
|
11.1
|
|
|
|
3.7
|
|
|
|
3.2
|
|
|
|
8.5
|
|
|
|
7.9
|
|
|
|
$ |
294.1
|
|
|
$ |
240.9
|
|
|
$ |
200.5
|
|
|
$ |
164.4
|
|
|
$ |
93.6
|
|
|
$ |
76.5
|
|
A
summary
of Net sales by product is below:
|
|
CONSOLIDATED
|
|
|
DOMESTIC
|
|
|
INTERNATIONAL
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattresses
|
|
$ |
207.3
|
|
|
$ |
169.4
|
|
|
$ |
149.2
|
|
|
$ |
122.0
|
|
|
$ |
58.1
|
|
|
$ |
47.4
|
|
Pillows
|
|
|
34.4
|
|
|
|
30.0
|
|
|
|
18.1
|
|
|
|
14.9
|
|
|
|
16.3
|
|
|
|
15.1
|
|
Other
|
|
|
52.4
|
|
|
|
41.5
|
|
|
|
33.2
|
|
|
|
27.5
|
|
|
|
19.2
|
|
|
|
14.0
|
|
|
|
$ |
294.1
|
|
|
$ |
240.9
|
|
|
$ |
200.5
|
|
|
$ |
164.4
|
|
|
$ |
93.6
|
|
|
$ |
76.5
|
|
Net
sales. Net sales for the three months ended September 30, 2007
increased to $294.1 million from $240.9 million for the same period in 2006,
an
increase of $53.2 million, or 22%. This increase was primarily attributable
to
an increase in mattress sales in our Retail channel. Mattress sales
increased $37.9 million, or 22%. For the three months ended September
30, 2007, our Retail channel Net sales increased to $251.5 million from $198.7
million for the same period in 2006, an increase of $52.8 million, or
27%.
Consolidated
pillow sales increased approximately $4.4 million or 15% from the third quarter
of 2006, primarily in the Domestic segment. Consolidated Other, which includes
adjustable bedbases, foundations and other related products, increased $10.9
million, or 26%, attributable to increased Mattress sales and the success of
our
Scandinavian bed system. The Scandinavian bed system is a product offering
that
is available in multiple configurations, which include a mattress, a foundation
and in some cases, an adjustable bedbase. Our Healthcare channel Net sales
increased 18% with growth in this channel in both the Domestic and International
segments. Our Direct channel Net sales decreased 13%.
Domestic.
Domestic Net sales for the three months ended September 30, 2007 increased
to
$200.5 million from $164.4 million for the same period in 2006, an increase
of
$36.1 million, or 22%. Our Domestic Retail channel contributed $177.4 million
in
Net sales for the three months ended September 30, 2007. This is an increase
of
$37.5 million, or 27% over the prior year quarter. This increase is primarily
due to our efforts to increase productivity in established accounts and
selectively extend our distribution. Domestic mattress sales in the third
quarter of 2007 increased $27.2 million, or 22%, over the same period in 2006,
related primarily to the growth of our Retail channel. Our Healthcare channel
Net sales increased by $1.1 million, or 35%, related to strategic relationships
with healthcare companies who market joint product offerings through their
established distribution networks. Net sales in the Direct channel decreased
by
$3.0 million, or 16%, primarily related to growth in our Retail channel. As
our
Retail channel distribution increases consumers are more likely to purchase
our
products from this channel compared to the Direct channel. We had growth across
our existing mattress line and sales of our newly launched mattresses are
meeting our expectations. In addition, pillow sales increased $3.2 million,
or
21%, as a result of our continued focus on pillow attach rates, emphasizing
the
benefits of a complete Tempur-Pedic sleep system, as well as stand-alone pillow
sales.
International.
International Net sales for the three months ended September 30, 2007 increased
to $93.6 million from $76.5 million for the same period in 2006, an increase
of
$17.1 million, or 22%. The International Retail channel increased $15.3 million,
or 26%, for the three months ended September 30, 2007 due to the continued
success of new products launched earlier in 2007 and improved productivity
of
existing accounts. Our Third party sales increased 8%, even though we converted
operations in Austrian and Australian third party distributors to wholly-owned
subsidiaries. Additionally, the Healthcare channel Net sales increased 11%
and
the Direct channel Net sales increased 17%. International mattress
sales in the third quarter of 2007 increased $10.7 million, or 23%, over the
third quarter of 2006, related primarily to the growth of our Retail channel.
Pillow sales for the third quarter of 2007 increased $1.2 million, or 8%, as
compared to the third quarter of 2006.
Gross
profit. Gross profit for the three months ended September 30, 2007
increased to $141.6 million from $116.0 million for the same period in 2006,
an
increase of $25.6 million, or 22%. Several factors have impacted Gross profit
margin in 2007. These factors are identified below in the respective segment
discussions; however, we currently expect the net impact of these items to
negatively impact our full year Gross profit margin by thirty to fifty basis
points, as compared to our 2006 full year gross margin.
Domestic.
Domestic Gross profit for the three months ended September 30, 2007 increased
to
$87.7 million from $71.7 million for the same period in 2006, an increase of
$16.0 million, or 22%. The Gross profit margin in our Domestic
segment was 44% for both the three months ended September 30, 2007 and September
30, 2006. For the three months ended September 30, 2007, the Gross profit margin
for our Domestic segment has been impacted by approximately $2.5 million of
depreciation expense associated with our new production facility in Albuquerque,
New Mexico and an incremental $1.0 million, compared to the prior year period,
in expediting costs of certain raw materials to address product shortages.
The
negative impact of these items was offset by improvements in our operations
primarily related to productivity improvements and cost savings through our
sourcing and distribution initiatives. Domestic Cost of sales for the three
months ended September 30, 2007 increased to $112.8 million from $92.7 million
for the same period in 2006, an increase of $20.1 million, or 22%.
International.
International Gross profit for the three months ended September 30, 2007
increased to $53.9 million from $44.3 million for the same period in 2006,
an
increase of $9.6 million, or 22%. The Gross profit margin in our International
segment was 58% for the three months ended September 30, 2007 and September
30,
2006. Our International Cost of sales for the three months ended September
30,
2007 increased to $39.7 million from $32.2 million for the same period in 2006,
an increase of $7.5 million, or 23%.
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 compensation and customer service. We also
include in Selling and marketing expenses certain new product development costs,
including market research and testing for new products. In the third quarter
of
2007, Selling and marketing expenses increased to $48.9 million for the three
months ended September 30, 2007 as compared to $41.9 million for the three
months ended September 30, 2006. Selling and marketing expenses as a percentage
of Net sales were 17% for both the three months ended September 30, 2007 and
September 30, 2006, which is consistent with our strategy to increase our
advertising spending at the same rate as our revenue growth in order to drive
growth in our brand awareness.
General
and administrative expenses and Research and development expenses.
General and administrative expenses include management salaries, information
technology, professional fees, depreciation of furniture and fixtures, leasehold
improvements and computer equipment, and expenses for finance, accounting,
human
resources and other administrative functions. General and administrative
expenses increased to $23.6 million for the three months ended September 30,
2007 as compared to $19.1 million for the three months ended September 30,
2006,
an increase of $4.5 million, or 24%. The increase was attributable to increased
incentive compensation, as many of our bonus plans being accrued at the maximum
potential payout given our year-to-date performance. Additionally, we recorded
incremental stock-based compensation expenses of $0.5 million in the quarter,
compared to the same period last year. Research and development expenses
increased $0.4 million, or 33%, for the three-months ended September 30, 2007,
primarily related to our continued investment in research and development
capabilities.
General
and administrative and Research and development expenses as a percentage of
Net
sales were 9%, and 8% for the three months ended September 30, 2007 and
September 30, 2006, respectively.
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, increased to $8.2 million
for the three months ended September 30, 2007, as compared to $6.8 million
for
the three months ended September 30, 2006, an increase of $1.4 million, or
21%.
The increase in interest expense is primarily attributable to the increase
in
our total Long-term debt levels, related to the repurchase of our common stock
under our previously announced share repurchase authorizations and
discontinuation of capitalized interest costs associated with the construction
of the Albuquerque, New Mexico facility.
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 September 30, 2007 and
for
the three months ended September 30, 2006 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 September 30, 2007 was
34%. For the same period in 2006, the effective tax rate was
38%. The decrease in the effective tax rate is primarily
attributable to recent reductions in statutory tax rates in certain foreign
taxing jurisdictions and the increased benefit from the production activities
deduction, allowed under Section 199 of the Internal Revenue Code.
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 our U.S. companies to our Danish
subsidiary and the position taken by the Danish tax authority could apply
to
subsequent years, Managment is currently evaluating the
assessment. The Company believes it has meritorious defenses to the
proposed adjustment and will oppose the assessment in the Danish courts.
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.
Nine
Months Ended September 30, 2007 Compared with Nine Months Ended September 30,
2006
The
following table sets forth Net
sales information, by channel, for the periods indicated:
|
|
CONSOLIDATED
|
|
|
DOMESTIC
|
|
|
INTERNATIONAL
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Retail
|
|
$ |
681.4
|
|
|
$ |
555.5
|
|
|
$ |
472.4
|
|
|
$ |
382.8
|
|
|
$ |
209.0
|
|
|
$ |
172.7
|
|
Direct
|
|
|
60.7
|
|
|
|
63.0
|
|
|
|
52.8
|
|
|
|
55.8
|
|
|
|
7.9
|
|
|
|
7.2
|
|
Healthcare
|
|
|
35.4
|
|
|
|
31.8
|
|
|
|
10.8
|
|
|
|
9.1
|
|
|
|
24.6
|
|
|
|
22.7
|
|
Third
Party
|
|
|
40.3
|
|
|
|
38.2
|
|
|
|
10.6
|
|
|
|
10.9
|
|
|
|
29.7
|
|
|
|
27.3
|
|
|
|
$ |
817.8
|
|
|
$ |
688.5
|
|
|
$ |
546.6
|
|
|
$ |
458.6
|
|
|
$ |
271.2
|
|
|
$ |
229.9
|
|
A
summary
of Net sales by product is below:
|
|
CONSOLIDATED
|
|
|
DOMESTIC
|
|
|
INTERNATIONAL
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattresses
|
|
$ |
572.0
|
|
|
$ |
479.2
|
|
|
$ |
406.7
|
|
|
$ |
339.9
|
|
|
$ |
165.3
|
|
|
$ |
139.3
|
|
Pillows
|
|
|
101.1
|
|
|
|
87.5
|
|
|
|
48.4
|
|
|
|
40.7
|
|
|
|
52.7
|
|
|
|
46.8
|
|
Other
|
|
|
144.7
|
|
|
|
121.8
|
|
|
|
91.5
|
|
|
|
78.0
|
|
|
|
53.2
|
|
|
|
43.8
|
|
|
|
$ |
817.8
|
|
|
$ |
688.5
|
|
|
$ |
546.6
|
|
|
$ |
458.6
|
|
|
$ |
271.2
|
|
|
$ |
229.9
|
|
Net
sales. Net sales for the nine months ended September 30, 2007
increased to $817.8 million from $688.5 million for the same period in 2006,
an
increase of $129.3 million, or 19%. This increase was primarily attributable
to
an increase in mattress sales in our Retail channel. Mattress sales
increased $92.8 million, or 19%. For the nine months ended September
30, 2007, our Retail channel Net sales increased to $681.4 million from $555.5
million for the same period in 2006, an increase of $125.9 million, or
23%.
Consolidated
pillow sales increased approximately $13.6 million from the first nine months
of
2006, primarily attributable to increased attach rates. Our Healthcare and
Third
Party channel Net sales increased by 11% and 5%, respectively. Our Direct
channel sales decreased 4%.
Domestic.
Domestic Net sales for the nine months ended September 30, 2007 increased to
$546.6 million from $458.6 million for the same period in 2006, an increase
of
$88.0 million, or 19%. Our Domestic Retail channel contributed $472.4 million
in
Net sales for the nine months ended September 30, 2007. This is an increase
of
$89.6 million, or 23% over the prior year same period. This increase is due
primarily to our efforts to increase productivity in established accounts and
selectively extend our distribution. Our Third Party channel Net sales decreased
3% due to decreased sales to our Third Party distributor in Canada. Net sales
in
our Direct channel decreased 5%, primarily as a result of growth in our Retail
channel. As our Retail channel distribution increases consumers are more likely
to purchase our products from this channel compared to the Direct channel.
Domestic mattress sales increased $66.8 million, or 20%, over the same period
in
2006, driven by our Retail channel growth. We had growth across our existing
mattress line and sales of our newly launched mattresses are meeting our
expectations. Pillow sales increased $7.7 million, or 19%, driven by pillow
attach rates, demonstrating the benefits of a complete Tempur-Pedic sleep
system. We have also recently seen growth in standalone pillow
sales.
International.
International Net sales for the nine months ended September 30, 2007 increased
to $271.2 million from $229.9 million for the same period in 2006, an increase
of $41.3 million, or 18%. The International Retail channel increased $36.3
million, or 21%, for the nine months ended September 30, 2007, due to the
continued success of new products launched in the first quarter of 2007 and
improved productivity of existing accounts. Our Direct channel and Third party
Net sales increased 10% and 9%, respectively, with Third party increasing even
though we converted our operations in Austria and Australia from third party
distributors to wholly-owned subsidiaries during 2007. Additionally, our
Healthcare channel Net sales increased $1.9 million, or
8%. International mattress sales increased $26.0 million, or 19%, as
compared to 2006, related to the growth of our Retail channel. Pillow sales
for
the nine-months ended September 30, 2007 increased $5.9 million, or 13%, as
compared to the same period in 2006, primarily attributable to the successful
execution of management initiatives set forth to strengthen the pillow
market.
Gross
profit. Gross profit for the nine months ended September 30, 2007
increased to $393.8 million from $333.8 million for the same period in 2006,
an
increase of $60.0 million, or 18%. Several factors have impacted Gross profit
margin in 2007. These factors are identified below in the respective segment
discussions.
Domestic.
Domestic Gross profit for the nine months ended September 30, 2007 increased
to
$237.5 million from $201.9 million for the same period in 2006, an increase
of
$35.6 million, or 18%. The Gross profit margin in our Domestic
segment was 43% and 44% for the nine months ended September 30, 2007 and
September 30, 2006, respectively. For the nine months ended September 30, 2007,
the Gross profit margin for our Domestic segment was impacted by depreciation
and start-up costs associated with the opening of our Albuquerque, New Mexico
production facility and expediting costs of certain raw materials related to
product shortages. Our Domestic cost of sales increased to $309.1 million for
the nine months ended September 30, 2007 as compared to $256.7 million for
the
nine months ended September 30, 2006, an increase of $52.4 million, or
20%.
International.
International Gross profit for the nine months ended September 30, 2007
increased to $156.3 million from $131.9 million for the same period in 2006,
an
increase of $24.4 million, or 18%. The Gross profit margin in our International
segment was 58% and 57% for the nine months ended September 30, 2007 and
September 30, 2006, respectively, primarily related to favorable product and
geographic mix. Our International Cost of sales for the nine months ended
September 30, 2007 increased to $114.9 million from $98.0 million for the same
period in 2006, an increase of $16.9 million, or 17%.
Selling
and marketing expenses. Selling and marketing expenses increased
to $144.6 million for the nine months ended September 30, 2007 as compared
to
$127.2 million for the nine months ended September 30, 2006. Selling and
marketing expenses as a percentage of Net sales was 17% and 18% for nine months
ended September 30, 2007 and September 30, 2006, respectively. In 2007, we
launched our new media campaign in the Domestic segment, with advertisements
airing in the third quarter. Our advertising spending has remained constant
as a
percentage of Net sales. This is consistent with our strategy to increase our
advertising spending at the same rate as our revenue growth in order to drive
growth in our brand awareness.
General
and administrative and Research and development expenses. General
and administrative expenses increased to $68.5 million for the nine months
ended
September 30, 2007 as compared to $55.6 million for the nine months ended
September 30, 2006, an increase of $12.9 million. General and administrative
and
research and development expenses as a percentage of Net sales was 8% for both
the nine months ended September 30, 2007 and September 30, 2006. The increase
was primarily attributable to incremental stock-based compensation charges
of
$1.7 million, charges related to bad debt expenses as a result of a U.S.
customer seeking to reorganize its operations under Chapter 11 of the Bankruptcy
Code and increased incentive compensation, with many of our bonus plans being
accrued at the maximum potential payout given our year-to-date performance.
In
addition, Research and development expenses increased $1.3 million, or 43%,
for
the nine months ended September 30, 2007, primarily related to our continued
investment in research and development capabilities.
Interest
expense, net. Interest expense, net, increased to $21.4 million
for the nine months ended September 30, 2007, as compared to $17.4 million
for
the nine months ended September 30, 2006, an increase of $4.0 million, or 23%,
increase in interest expense is primarily attributable to the increase in our
total Long-term debt levels, related to the repurchase of our common stock
under
the previously announced Share Repurchase Authorizations and the discontinuation
of capitalized interest costs associated with the construction of the
Albuquerque, New Mexico facility.
Income
tax provision. Our effective income tax rates for the nine months
ended September 30, 2007 and 2006 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, allowed under Section 199
of
the Internal Revenue Code.
Our
effective tax rate for the nine months ended September 30, 2007 was
34%. For the same period in 2006, the effective tax rate was
37%. The decrease in the effective tax rate is primarily
attributable to recent reductions in statutory tax rates in certain
foreign taxing jurisdictions, the effects of revaluing net deferred tax
liabilities in jurisdictions subjected to a reduced statutory tax rate and
the
increased benefit from the production activities deduction.
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 share repurchase
authorizations. At September 30, 2007, we had working capital of $138.7 million
including Cash and cash equivalents of $23.6 million as compared to working
capital of $105.8 million including $15.8 million in Cash and cash equivalents
as of December 31, 2006. This increase in working capital of
31% primarily attributable to changes in certain working capital items
resulting from increased Net sales and the timing of income tax payments, offset
by a decrease in the Current portion of Long-term debt resulting from Amendment
No. 3 to our 2005 Senior Credit Facility.
Our
cash
flow from operations decreased to $129.9 million for the nine months ended
September 30, 2007 as compared to $133.1 million for the nine months ended
September 30, 2006. The decrease in operating cash flow for the period ending
September 30, 2007, was primarily related to the increase in our inventory
levels offset by other working capital items and depreciation and amortization.
Increases in our inventory levels resulted in cash outflow of $14.2 million
for
the nine months ended September 30, 2007 as compared to cash inflow of $18.5
million for the nine months ended September 30, 2006. The increase in our
inventory levels are a result of ramping up to fulfill current order trends.
Increased depreciation and amortization was primarily attributable to the
opening of our Albuquerque, New Mexico manufacturing facility. Net income
increased $19.6 million for the nine months ended September 30, 2007 as compared
to the same period in 2006, which partially offset the items discussed
above.
Net
cash
used in investing activities decreased to $14.4 million for the nine months
ended September 30, 2007 as compared to $24.8 million for the nine
months ended September 30, 2006, a decrease of $10.4 million. The decrease
is
related to the decreased expenditures on our new manufacturing facility in
New
Mexico, which we opened in January 2007. In the same period in 2006, the
facility was incurring significant capital spending in the construction phase.
During 2007, we have spent $5.8 million on the acquisition of businesses related
to the purchases of third-party distributors in Austria and
Australia.
Cash
flow
used by financing activities was $108.9 million for the nine months ended
September 30, 2007 as compared to $112.6 million for the nine months ended
September 30, 2006, representing a decrease in cash flow used of $3.7 million.
During the nine-months ended September 30, 2007, we repurchased 10.4
million shares of treasury stock for $300.0 million as compared to
$144.0 in the same period in 2006 and had an additional draw on our Industrial
Revenue Bonds of $15.4 million. Additionally, we paid $17.9 million in dividends
to our shareholders through the nine-months ended September 30, 2007 and paid
no
dividends for the same period in 2006 and incurred a larger excess tax benefit
related to stock-based compensation in 2007 as compared to 2006.
Capital
Expenditures
Capital
expenditures totaled $8.2
million for the nine months ended September 30, 2007 and $24.2 million for
the
nine months ended September 30, 2006. We currently expect our 2007 capital
expenditures to be approximately $15.0 million as compared to $37.2 million
for
2006. This decrease in capital expenditures in 2007 is directly related to
the
completed construction of our Albuquerque, New Mexico production
facility.
Debt
Service
Our
long-term debt increased to $555.8 million as of September 30, 2007 from $341.6
million as of December 31, 2006. During the nine months ended September 30,
2007, we increased borrowings on our Domestic Revolver by $243.5 million in
order to fund our share repurchase authorization, through which we purchased
10.4 million shares at a total cost of $300.0 million. Additionally, on June
1,
2007, we increased the borrowings under the Bonds by an additional $15.4
million. Our total availability under the Revolvers was $75.5 million at
September 30, 2007.
On
June
8, 2007, we amended our 2005 Senior Credit Facility to increase our availability
under the Domestic Revolver. Additionally, this amendment provides for the
exercise of an accordion to increase our borrowing capacity by an additional
$100 million. As a result of this amendment, which extinguished the foreign
term
loan, we recorded $0.1 million as a loss on extinguishment of debt related
to
the write-off of deferred financing fees incurred at the inception of the
foreign term loan. On August 6, 2007, we exercised the accordion to increase
our
borrowing under the Domestic Revolver by an additional $100 million. The Company
currently expects that, if it borrows under the increased revolver, the funds
would be used for general corporate purposes, which could include funding share
repurchases.
The
interest rate and certain fees that we pay in connection with the 2005 Senior
Credit Facility and the Bonds are subject to periodic adjustment based on
changes in our consolidated leverage ratio.
Stockholders’
Equity
Share
Repurchase Authorization. On January 25, 2007, the Board of
Directors approved a share repurchase authorization of up to $100.0 million
of
common stock. We repurchased 3.8 million shares of our common stock under this
authorization for a total of $100.0 million and completed purchases from this
authorization in June 2007. On July 19, 2007, our Board of Directors approved
an
additional share repurchase authorization of up to $200.0 million of common
stock. As of September 30, 2007, we have repurchased 6.6 million shares of
our
common stock under this authorization for a total of approximately $200.0
million.
On
October 16, 2007, the Board of Directors approved an additional share repurchase
authorization of up to $300.0 million of our common stock. Share repurchases
under this authorization may be made through open market transactions,
negotiated purchases or otherwise, at times and in such amounts as we, and
a
committee of the Board, 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, the Board of Directors approved an
annual cash dividend of $0.24 per share annually, to be paid in quarterly
installments of $0.06 to the owners of our common stock. In the second quarter
of 2007, the Board of Directors increased the quarterly dividend to $0.08 per
share. Our Board of Directors has authorized the fourth quarter $0.08 cash
dividend per share to be paid on December 14, 2007 to shareholders of record
as
of November 30, 2007. This annual cash dividend program may be
limited, suspended, or terminated at any time without prior
notice. Prior to 2007, we had never previously declared a cash
dividend for our common stock.
Factors
That May Affect Future Performance
Managing
Growth—We have grown rapidly, with our Net sales increasing from $221.5
million in 2001 to $945.0 million for 2006 and $817.8 million for the nine
months ended September 30, 2007. Our growth has placed, and will 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 increased production capacity, enhanced
operating and financial infrastructure and systems and continued expansion
of
the human resources in our operations. Our expenditures for advertising and
other marketing-related activities are made as advertising rates are favorable
to us and as the continued growth in the business allows us the ability to
invest in building our brand.
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 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 are susceptible to competition
from lower priced product offerings. We provide strong channel profits to our
retailers and distributors, which management believes will continue to provide
an attractive business model for our retailers.
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. 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.
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. Salesforce expansion allows our
salespeople to focus on fewer stores, resulting in more time spent with each
retail location to work with each retailer individually on merchandising,
training and to educate 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.
Our
products are currently sold in approximately 6,270 furniture and bedding retail
stores in the U. S. Within the addressable market of approximately 10,000
stores, 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 4,920 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 developed strategic
relationships with healthcare companies who market joint product offerings
through their established distribution networks.
We
are
also focused on the hospitality industry. We believe there are growth
opportunities for our products through this channel as well as the opportunity
to increase consumer trial and brand awareness. We have approximately
20 independent sales representatives who are targeting certain hotel chains
and
attending hospitality trade shows. In addition, we have an
advertising campaign focused on this market segment.
Financial
Leverage—As of September 30, 2007, we had $555.8 million of total
Long-term debt outstanding, and our Stockholders’ Equity was $28.1 million.
Higher financial leverage makes us more vulnerable to adverse competitive,
economic and industry conditions. We believe we will be able to decrease our
Long-term debt in a manner consistent with historical experience. There can
be
no assurance, however, that our business will generate sufficient cash flow
from
operations to enable us to de-leverage the business 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, 2006. There have
been no material changes to our critical accounting policies and estimates
in
2007, except as follows:
Income
Taxes—In July 2006, the FASB issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (FIN 48), which is an interpretation of FASB
Statement No. 109. FIN 48 clarifies the accounting and disclosure requirements
for uncertainty in tax positions, as defined.
We
adopted FIN 48 on January 1, 2007. As of January 1, 2007, we had unrecognized
tax benefits of $8.4 million. The Company did not record any cumulative effect
adjustment to retained earnings as a result of adopting FIN 48.
Impact
of Recently Issued Accounting Pronouncements
See
Note
2 in the Notes to Condensed Consolidated Financial Statements in ITEM 1 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.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
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 September 30, 2007,
resulting from a hypothetical 10% adverse change in all foreign currency
exchange rates against the U.S. Dollar, is approximately $0.7 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 and the
Series A Bonds issued in connection with our New Mexico facility are
variable-rate debt. We currently do not expect to seek an amendment to the
2005 Senior Credit Facility that would have the effect of fixing the interest
rate of any variable-rate debt.
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 September 30, 2007, we
had
variable-rate debt of approximately $554.8 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 $5.5
million.
An
evaluation was performed under the supervision and with the participation of
our
management, including our principal executive officer and principal 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 (Exchange Act), as of the end of the period covered by this
report. Based on that evaluation, our management, including our principal
executive officer and principal financial officer, concluded that our disclosure
controls and procedures were effective as of September 30, 2007 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 principal executive and financial officers, 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.
PART
II
OTHER
INFORMATION
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
allege 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. We filed a motion to dismiss the Securities Law
Action which has been fully briefed, and are now awaiting a decision on that
motion. The plaintiffs seek compensatory damages, costs, fees and other relief
within the Court’s discretion. We strongly believe that the Securities Law
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 Securities Law 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 operations.
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 the Delaware court action on
April 19, 2007. That motion is fully briefed and is scheduled for
oral argument. 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.
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. That motion is fully briefed and
the Company is awaiting a decision on the motion. We 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.
We
are
involved in various other legal proceedings incident to the ordinary course
of
its 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 over 70 countries, and we may
pursue additional international opportunities. We generated
approximately 33% of our Net sales from non-U.S. operations during the nine
months ended September 30, 2007. 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, the potential assessment of duplicative taxes in multiple
jurisdictions, fluctuations in exchange rates, inflation and unstable political
situations, the potential unavailability of intellectual property protection
and
labor issues.
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 our U.S.
companies to our Danish subsidiary and the position taken by the Danish tax
authority could apply to subsequent years. Management is currently
evaluating the assessment. The Company believes it has meritorious
defenses to the proposed adjustment and will oppose the assessment in the
Danish
courts. 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.
Because
we depend on our significant customers, a decrease or interruption in their
business with us would reduce our sales and
profitability.
Our
top five customers, collectively, accounted for 19% and 18% of our Net sales
for
the three and nine months ended September 30, 2007, respectively. Many of our
customer arrangements are by purchase order or are terminable at will at the
option of either party. A substantial decrease or interruption in business
from
our significant customers could result in write-offs or in the loss of future
business and could reduce our liquidity and profitability.
In
the future, retailers may consolidate, undergo restructurings or
reorganizations, or realign their affiliations, any of which could decrease
the
number of stores that carry our products or increase the ownership concentration
in the retail industry. Some of these retailers may decide to carry only a
limited number of brands of mattress products, which could affect our ability
to
sell our products to them on favorable terms, if at all. Our loss of significant
customers would impair our sales and profitability and have a material adverse
effect on our business, financial condition and results of
operations.
We
produce all of our products in three manufacturing facilities and unexpected
equipment failures, delays in deliveries, catastrophic loss or construction
delays may lead to production curtailments or
shutdowns.
We manufacture all of our products at our three facilities in Aarup,
Denmark, Duffield, Virginia and Albuquerque, New Mexico. An interruption in
production capabilities at these plants as a result of equipment failure could
result in our inability to produce our products, which would reduce our sales
and earnings for the affected period. In addition, we generally deliver our
products only after receiving the order from the customer or the retailer and
thus do not hold large inventories. In the event of a disruption in production
at either of our manufacturing facilities, even if only temporary, or if we
experience delays as a result of events that are beyond our control, delivery
times could be severely affected. For example, a third party carrier could
potentially be unable to deliver our products within acceptable time periods
due
to a labor strike or other disturbance in its business. Any significant delay
in
deliveries to our customers could lead to increased returns or cancellations
and
cause us to lose future sales. Any increase in freight charges could increase
our costs of doing business and harm our profitability. We have introduced
new
distribution programs to increase our ability to deliver products on a timely
basis, but if we fail to deliver products on a timely basis, we may lose sales
which could decrease our liquidity and profitability. Our manufacturing
facilities are also subject to the risk of catastrophic loss due to
unanticipated events such as fires, explosions or violent weather conditions.
We
may in the future experience material plant shutdowns or periods of reduced
production as a result of equipment failure, delays in deliveries or
catastrophic loss.
Our
leverage limits our flexibility and increases our risk of
default.
As
of
September 30, 2007, we had $556.1 million in total Long-term debt outstanding.
In addition, as of September 30, 2007, our Stockholders’ Equity was $28.1
million. Between October 2005 and September 30, 2007, we repurchased a total
of
$520.0 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. On October 16, 2007, our Board of Directors authorized
an additional stock repurchase program for up to $300.0 million of our common
stock. Our Board of Directors may authorize additional share repurchases in
the
future and we may fund these repurchases with debt. In addition, in the first
quarter of 2007 our Board of Directors initiated an annual $0.24 cash dividend,
paid in quarterly installments of $0.06. In the second quarter of 2007, our
Board of Directors increased the quarterly dividend payment to $0.08. We expect
that payments of this dividend in 2007 will be approximately $23.8 million.
Our
degree of leverage could have important consequences to our investors, such
as:
•
|
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
|
•
|
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.
|
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
October 31, 2007, our executive officers, directors, and their respective
affiliates own, in the aggregate, approximately 11% 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.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
(a)
Not
applicable.
(b)
Not
applicable.
(c)
Issuer Purchases of Equity Securities
The
following table sets forth
purchases of our common stock for the three months ended September 30,
2007:
Period
|
|
(a) Total number
of
shares
purchased
|
|
|
(b)
Average Price Paid per Share
|
|
|
(c) Total number of
shares purchased as
part
of publicly
announced
plans or
programs
|
|
|
(d) Maximum number of shares
(or
approximate dollar value)
of
shares that may yet be
purchased
under the plans or
programs
(in millions)
|
|
July
1, 2007 – July 31, 2007
|
|
|
2,329,600
|
|
|
$ |
31.81
|
|
|
|
2,329,600
|
|
|
$ |
125.9
|
|
August
1, 2007 – August 31, 2007
|
|
|
3,867,800
|
|
|
|
29.73
|
|
|
|
3,867,800
|
|
|
|
10.9
|
|
September
1, 2007 – September 30, 2007
|
|
|
364,089
|
|
|
|
29.97
|
|
|
|
364,089
|
|
|
|
--
|
|
Total
|
|
|
6,561,489
|
|
|
|
|
|
|
|
6,561,489
|
|
|
|
|
|
On
January 25, 2007, the Board of
Directors authorized the repurchase of up to $100 million of our common stock.
This January 2007 authorization was completed in June 2007. On July 19, 2007,
the Board of Directors authorized the repurchase of up to $200 million of our
common stock. This July 2007 authorization was completed in September
2007.
On
October 16, 2007, the Board of
Directors authorized the repurchase of up to $300 million of our common stock.
Share repurchases under this authorization may be made through open market
transactions, negotiated purchases or otherwise, at times and in such amounts
as
we, and a committee of the Board, deem appropriate. This share repurchase
authorization may be suspended, limited or terminated at any time without
notice.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
ITEM 5.
|
OTHER
INFORMATION
|
(b)
Not
applicable.
|
|
10.1
|
|
|
Modification
Agreement, dated as of August 6, 2007,
among Tempur-Pedic, Inc., Tempur Production USA, Inc., Dan-Foam Aps,
Tempur-Pedic International, Inc., Tempur World LLC, and Tempur World
Holdings, LLC and certain other subsidiaries as guarantors, Bank
of
America, N.A., Nordea Bank Danmark A/S, Fifth Third Bank, Sun Trust
Bank,
JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A., Regions Bank,
and
National City Bank. |
|
|
|
|
31.1
|
|
|
|
|
|
31.2
|
|
|
|
|
|
32.1
|
*
|
|
|
*
|
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.
|
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
(Registrant)
|
|
|
|
|
Date: November
1, 2007
|
|
|
|
By:
|
|
/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
|