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Oct 16, 2008

Tempur-Pedic Reports Third Quarter Earnings

LEXINGTON, Ky., Oct 16, 2008 /PRNewswire-FirstCall via COMTEX News Network/ -- Tempur-Pedic International Inc. (NYSE: TPX), the leading manufacturer, marketer and distributor of premium mattresses and pillows worldwide, today announced financial results for the third quarter ended September 30, 2008. The Company also announced a series of initiatives to further strengthen its industry-leading financial flexibility, including a repatriation of foreign earnings and a suspension of its cash dividend, with such funds redirected to reduce debt. The Company also announced revised financial guidance for 2008.


-- Earnings per share (EPS) were $0.32 per diluted share in the third quarter of 2008 as compared to $0.49 per diluted share in the third quarter of 2007. The Company reported net income of $24.1 million for the third quarter of 2008 as compared to $38.8 million in the third quarter of 2007.

-- Net sales declined 14% to $252.8 million in the third quarter of 2008 from $294.1 million in the third quarter of 2007. Net sales in the domestic segment declined 17%, while international segment net sales declined 7%. On a constant currency basis, international segment net sales decreased 13%.

-- Mattress units declined 15% globally. Mattress units declined 18% domestically and 10% internationally. Pillow units declined 10% globally. Pillow units declined 18% domestically and were relatively unchanged internationally.

-- Gross profit margin was 41.7% as compared to 48.2% in the third quarter of 2007. The gross profit margin declined as a result of significant weakness in the high margin Direct channel, increased commodity costs and fixed cost de-leverage related to lower volumes, partially offset by improved manufacturing productivity.

-- Operating profit margin was 17.0% as compared to 23.0% in the third quarter of 2007. Operating profit margin decline resulted from gross profit margin declines partially offset by reductions in operating expenses. The Company recorded an incremental $1.0 million of bad debt expense related to a specific customer bankruptcy.

-- Reflecting the Company's focus on improving working capital, operating cash flow increased 30% to $72.6 million in the third quarter of 2008 from $55.7 million in the third quarter of 2007. During the quarter, the Company reduced inventories by $23.8 million to $69.7 million.

-- During the quarter, the Company reduced Total Debt by $37.8 million to $518.8 million. In addition, the Company increased its cash balance by $19.3 million to $87.7 million. As of September 30, 2008, the Company's ratio of total Funded Debt to EBITDA was 2.45 times, well within the covenant in its credit facility that this ratio will not exceed 3.00 times. For additional information about EBITDA and Funded Debt (which are non-GAAP measures), please refer to the reconciliation and other information included in the attached schedule.

Chief Executive Officer Mark Sarvary commented, "During the third quarter we executed well. The economic climate worsened and we responded quickly to improve earnings. We reduced our operating expenses and improved our balance sheet by substantially reducing debt.

"Having said that, we are facing the most challenging economic environment in memory, and we see no reason to assume the economic climate will recover in the short term. Therefore, we are taking actions now to further improve our financial flexibility and strengthen the business. I am confident that when the economic climate improves, this great company will be exceptionally well positioned."

Initiatives to Further Strengthen Financial Flexibility

The Company announced it plans to repatriate approximately $140 million of foreign earnings. This will enable the Company to immediately utilize its $75 million cash held abroad to reduce its outstanding debt. It will also shift some of its domestic segment leverage to the international segment, thereby allowing for more rapid overall debt reduction going forward from cash flow in both its domestic and international segments. The Company anticipates recording a tax charge of approximately $13 million in the fourth quarter related to the repatriation, with the final tax effect to be based on the timing and amount of the actual distribution.

The Company also announced it will suspend its cash dividend and redirect those funds to reduce debt. The Company further announced it will continue to reduce capital expenditures, drive working capital efficiencies and minimize discretionary spending.

Chief Financial Officer Dale Williams commented, "We are pleased with our cash flows and I would like to credit our operating teams around the world for their efforts in this area. Through a repatriation of foreign earnings, suspending the dividend, and modest debt rebalancing between our domestic and international segments, we will reduce debt faster.

Williams continued, "These actions coupled with working capital and expense management should give us the flexibility to operate without risk of breaching our credit facility covenants even if the market continues to deteriorate, while ensuring our ability to invest in marketing and R&D. Although we believe de-leveraging is the prudent course in this environment, we will continue to have access to substantial incremental borrowing capacity under our existing revolving credit facility and will be able to access this liquidity in the future as appropriate to invest in such activities as growth initiatives and stock buybacks."

2008 Financial Guidance

Given the extraordinary macro economic events of recent weeks, the Company now believes fourth quarter sales will fall below prior expectations and has revised full year 2008 guidance for net sales and earnings per share. It currently expects net sales for 2008 to range from $930 million to $950 million. It currently expects EPS for 2008 to range from $0.90 to $1.00 per diluted share. This guidance does not take into account a potential tax charge related to the proposed repatriation of foreign earnings discussed above. The Company noted its expectations are based on information available at the time of this release, and are subject to changing conditions, many of which are outside the Company's control.

Conference Call Information

Tempur-Pedic International will host a live conference call to discuss financial results today, October 16, 2008 at 5:00 p.m. Eastern Time. The dial-in number for the conference call is 888-438-5525. The call is also being webcast and can be accessed on the investor relations section of the Company's website, www.tempurpedic.com .

For those who cannot listen to the live broadcast, a telephone replay of the call will be available from October 16, 2008 at 8:00 p.m. Eastern Time through October 23, 2008. To listen to the replay, dial 888-203-1112, participant code 7441183.

Forward-looking Statements

This release contains "forward-looking statements," within the meaning of federal securities laws, which include information concerning one or more of the Company's plans, objectives, goals, strategies, and other information that is not historical information. When used in this release, 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 include without limitation statements relating to the Company's plans to further improve financial flexibility and the business, including plans to repatriate earnings, suspend its dividend, increase leverage internationally and pay down domestic debt, improve working capital and manage its capital expenditures and discretionary spending; the Company's strength and positioning in the future; the Company's ability to remain in compliance with its credit facility covenants and access borrowings in the future; and the Company's expectations regarding net sales and earnings per share for 2008. All forward-looking statements are based upon current expectations and beliefs and various assumptions. There can be no assurance that the Company will realize these expectations or that these beliefs will prove correct.

There are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements contained in this release. Numerous factors, many of which are beyond the Company's control, could cause actual results to differ materially from those expressed as forward-looking statements. These risk factors include general economic, financial and industry conditions, particularly in the retail sector, as well as consumer confidence; the Company's ability to reduce expenses to align with reduced sales levels; uncertainties arising from global events; the effects of changes in foreign exchange rates on the Company's reported earnings; consumer acceptance of the Company's products; industry competition; the efficiency and effectiveness of the Company's advertising campaigns and other marketing programs; the Company's ability to increase sales productivity within existing retail accounts and to further penetrate the US retail channel, including the timing of opening or expanding within large retail accounts; the Company's ability to address issues in certain underperforming international markets; the Company's ability to continuously improve and expand its product line, maintain efficient, timely and cost-effective production and delivery of its products, and manage its growth; changes in foreign tax rates, including the ability to utilize tax loss carry forwards; and rising commodity costs. Additional information concerning these and other risks and uncertainties are discussed in the Company's filings with the Securities and Exchange Commission, including without limitation the Company's annual report on Form 10-K under the headings "Special Note Regarding Forward-Looking Statements" and "Risk Factors." Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statements for any reason, including to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

About the Company

Tempur-Pedic International Inc. (NYSE: TPX) manufactures and distributes mattresses and pillows made from its proprietary TEMPUR(R) pressure-relieving material. It is the worldwide leader in premium sleep, the fastest growing segment of the estimated $13 billion global mattress market. The Company is focused on developing, manufacturing and marketing advanced sleep surfaces that help improve the quality of life for people around the world. The Company's products are currently sold in over 70 countries under the TEMPUR(R) and Tempur-Pedic(R) brand names. World headquarters for Tempur-Pedic International is in Lexington, KY. For more information, visit http://www.tempurpedic.com or call 800-805-3635.

                      Consolidated Statements of Income
                   (In thousands, except per share amounts)

                              Three Months Ended      Nine Months Ended
                                 September 30,           September 30,
                                 2008     2007   Chg %   2008     2007   Chg %
    Net sales                  $252,814 $294,094 (14)% $738,697 $817,768 (10)%
    Cost of sales               147,323  152,484        419,109  423,930

    Gross profit                105,491  141,610 (26)%  319,588  393,838 (19)%

    Selling and marketing
     expenses                    39,956   48,830        137,906  144,630
    General and administrative
     expenses and other          22,644   25,231         73,139   72,775

    Operating income             42,891   67,549 (37)%  108,543  176,433 (39)%

    Other income (expense), net:
      Interest expense, net      (6,294)  (8,261)       (19,630) (21,394)
      Other income (expense), net    96      (33)          (995)    (536)
        Total other expense      (6,198)  (8,294)       (20,625) (21,930)

    Income before income taxes   36,693   59,255 (38)%   87,918  154,503 (43)%
    Income tax provision         12,622   20,437         30,105   52,974
        Net income              $24,071  $38,818 (38)%  $57,813 $101,529 (43)%

    Earnings per common share:
      Basic                        $0.32   $0.50          $0.77    $1.25
      Diluted                      $0.32   $0.49          $0.77    $1.22

    Weighted average per common
     share outstanding:
      Basic                       74,815  77,725         74,704   81,522
      Diluted                     74,992  79,173         74,944   83,069

                         Consolidated Balance Sheets
                   (In thousands, except per share amounts)

                                            September 30, December 31,
                                                2008         2007      Chg %

    Current Assets:
         Cash and cash equivalents          $   87,677    $  33,315
         Accounts receivable, net              137,112      163,730
         Inventories                            69,703      106,533
         Prepaid expenses and other current
          assets                                10,922       11,133
         Deferred income taxes                  14,725       11,924
    Total Current Assets                       320,139      326,635    (2)%

         Property, plant and equipment, net    190,714      208,370
         Goodwill                              199,523      198,286
         Other intangible assets, net           67,157       68,755
         Deferred financing costs and other
          non-current assets                     4,785        4,386
    Total Assets                            $  782,318    $ 806,432    (3)%


    Current Liabilities:
         Accounts payable                   $   56,159    $  56,206
         Accrued expenses and other             74,184       66,080
         Income taxes payable                   15,997        4,060
         Current portion of long-term debt           -          288
    Total Current Liabilities                  146,340      126,634    16 %

         Long-term debt                        518,750      601,756
         Deferred income taxes                  30,404       29,645
         Other non-current liabilities           2,410          259
    Total Liabilities                          697,904      758,294    (8)%

    Stockholders' Equity:
         Common stock, $.01 par value; 300,000
          shares authorized; 99,215 shares
          issued as of September 30, 2008 and
          December 31, 2007                        992          992
         Additional paid in capital            289,011      283,564
         Retained earnings                     280,367      241,812
         Accumulated other comprehensive income  2,443       13,550
         Treasury stock, at cost; 24,382 and
          24,681 shares as of September 30,
          2008 and December 31, 2007,
          respectively                        (488,399)    (491,780)
    Total Stockholders' Equity                  84,414       48,138    75 %

    Total Liabilities and Stockholders'
     Equity                                 $  782,318    $ 806,432    (3)%

                     Consolidated Statement of Cash Flows
                                (In thousands)

                                                Nine Months Ended
                                                   September 30,
                                                 2008         2007      Chg %
      Net income                               $ 57,813     $101,529
      Adjustments to reconcile net income
       to net cash provided by operating
          Depreciation and amortization          24,847       25,326
          Amortization of deferred financing
           costs                                    888          845
          Amortization of stock-based
           compensation                           6,101        5,081
          Allowance for doubtful accounts         5,859        4,541
          Deferred income taxes                  (1,634)      (3,101)
          Foreign currency adjustments               74          661
          Loss on sale of equipment and other       679          101
          Changes in operating assets and
              Accounts receivable                18,600      (22,585)
              Inventories                        36,680      (14,228)
              Prepaid expenses and other
               current assets                    (1,287)      (5,035)
              Accounts payable                     (149)      10,250
              Accrued expenses and other          8,301       10,636
              Income taxes                       12,142       15,839
    Net cash provided by operating activities   168,914      129,860     30 %

          Payments for trademarks and other
           intellectual property                   (600)        (636)
          Purchases of property, plant and
           equipment                             (7,844)      (8,181)
          Acquisition of businesses              (1,529)      (5,756)
          Proceeds from sale of equipment           172          135
    Net cash used by investing activities        (9,801)     (14,438)    32 %

          Proceeds from long-term revolving
           credit facility                       65,429      347,547
          Repayments of long-term revolving
           credit facility                      (89,691)    (119,293)
          Repayments of long-term debt           (1,359)     (45,416)
          Proceeds from Series A Industrial
           Revenue Bonds                              -       15,385
          Repayments of Series A Industrial
           Revenue Bonds                        (57,785)      (5,765)
          Common stock issued, including
           reissuances of treasury stock            695        8,078
          Excess tax benefit from stock based
           compensation                             301       10,025
          Treasury stock repurchased                  -     (299,998)
          Dividends paid to stockholders        (17,933)     (17,895)
          Payments for deferred financing costs     (14)      (1,530)
    Net cash used by financing activities      (100,357)    (108,862)     8 %


    Increase in cash and cash equivalents        54,362        7,792

     period                                      33,315       15,788

    CASH AND CASH EQUIVALENTS, end of period   $ 87,677      $23,580    272 %

Summary of Channel Sales

The Company generates sales through four distribution channels: retail, direct, healthcare and third party. The retail channel sells to furniture, specialty and department stores globally. 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 Tempur-Pedic International does not operate its own distribution company.

The following table highlights net sales information, by channel and by segment, for the third quarter of 2008 compared to 2007:

    ($ in thousands)
                    CONSOLIDATED           DOMESTIC          INTERNATIONAL
                 Three Months Ended   Three Months Ended   Three Months Ended
                    September 30,        September 30,        September 30,
                  2008        2007      2008       2007      2008      2007
    By Sales
    Retail     $ 216,226  $  251,452 $ 147,992  $ 177,372  $ 68,234  $ 74,080
    Direct        11,230      18,009     9,169     15,140     2,061     2,869
    Healthcare    11,636      12,384     3,727      4,222     7,909     8,162
    Third Party   13,722      12,249     5,000      3,717     8,722     8,532
    Total      $ 252,814  $  294,094 $ 165,888  $ 200,451  $ 86,926  $ 93,643

    Summary of Product Sales
    A summary of net sales by product is reported below:

    ($ in thousands)
                    CONSOLIDATED            DOMESTIC          INTERNATIONAL
                 Three Months Ended    Three Months Ended   Three Months Ended
                    September 30,         September 30,        September 30,
                  2008        2007      2008       2007      2008      2007
    Net Sales
    Mattresses $ 174,869   $ 207,341 $ 121,356  $ 149,221  $ 53,513  $ 58,120
    Pillows       31,414      34,418    14,476     17,960    16,938    16,458
    Other         46,531      52,335    30,056     33,270    16,475    19,065
    Total      $ 252,814   $ 294,094 $ 165,888  $ 200,451  $ 86,926  $ 93,643

     Reconciliation of EBITDA to Net Income and Funded Debt to Total Debt
                              Non-GAAP Measures
                                (In thousands)

The Company provides information regarding EBITDA and Funded Debt which are not recognized terms under GAAP (Generally Accepted Accounting Principles) and do not purport to be alternatives to net income as a measure of operating performance or Total Debt. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. A reconciliation of EBITDA to the Company's Net income and Funded Debt to Total Debt are provided below. Management believes that the use of these non-GAAP financial measures provides investors with additional useful information with respect to the terms of the Company's credit facility.

Reconciliation of EBITDA to Net Income

The following table sets forth the reconciliation of the Company's reported Net Income for the three months ended December 31, 2007 and the nine months ended September 30, 2008 to the calculation of EBITDA for the twelve months ended September 30, 2008:

                      Three Months Ended Nine Months Ended Twelve Months Ended
                          December 31,      September 30,     September 30,
                             2007              2008               2008

    Net Income           $    39,930       $    57,813        $    97,743
       Interest Expense        9,090            19,630             28,720
       Income taxes           18,441            30,105             48,546
       Depreciation &
        Amortization           9,736            30,948             40,684
    EBITDA               $    77,197       $   138,496        $   215,693

                 Reconciliation of Funded Debt to Total Debt

The following table sets forth the reconciliation of the Company's reported Total Debt to the calculation of Funded Debt:

                                             September 30, 2008

    Total Debt                               $           518,750
    Letters of Credit outstanding                          9,898
    Funded Debt                              $           528,648

                     Calculation of Funded Debt to EBITDA

                                        For the twelve months ended
                                              September 30, 2008

    Funded Debt                              $           528,648
    EBITDA                                               215,693
                                                      2.45 times

SOURCE Tempur-Pedic International Inc.


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