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 June 30, 2009
|
|
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
The number of shares outstanding of the registrant’s common stock as of July 24, 2009 was 74,903,122 shares.
|
|
Page | ||||
|
|
|
3 | |||
|
|
|||||
|
|
|||||
|
|
4 | ||||
|
|
5 | ||||
|
|
6 | ||||
|
|
7 | ||||
|
|
21 | ||||
|
|
30 | ||||
|
|
30 | ||||
|
|
|||||
|
|
31 | ||||
|
|
31 | ||||
|
|
32 | ||||
|
|
32 | ||||
|
|
32 | ||||
|
|
33 | ||||
|
|
33 | ||||
|
|
34 | ||||
|
|
|||||
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 products, plans, objectives, goals, strategies, future events, future revenues or performance, the impact of the macroeconomic environment in both the U.S. and internationally on sales, our business segments, and our channels, investments in operating infrastructure, decrease in capital expenditures, the impact of consumer confidence, the antitrust class action lawsuit and similar issues, pending tax assessments, statements regarding our financial
flexibility, statements relating to the impact of initiatives to accelerate growth, expand market share and attract sales from the standard mattress market, the effect of competitors on our market share, expand business within established accounts, reduce costs and operating expenses and improve manufacturing productivity, the initiatives to improve and expand gross margin, our ability to source raw materials effectively, the decline in spending in certain channels, the impact of lower commodity costs, the development,
rollout and market acceptance of new products, our ability to broaden brand awareness and the effect of our investment in marketing-related activities, our ability to reduce accounts receivables and inventory, our ability to meet financial obligations and continue to comply with the terms of our credit facility, the effect of interest rates, the effects of changes in foreign exchange rates on our reported earnings, our expected sources of cash flow, our ability to effectively manage cash and our debt/leverage
ratio, our ability to pay down debt, ability to align costs with sales expectations, and the impact of projects to improve utilization rates, redesign our transportation network and sourcing opportunities, and other information that is not historical information. Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ITEM 2 of Part I of this report. When used in this report, the words “estimates,”
“expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations and various assumptions. There can be no assurance that we will realize our expectations or that our beliefs will prove correct.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking
statements are set forth in this report, including under the heading “Risk Factors” under ITEM IA of Part II of this report and under the heading “Risk Factors” under ITEM 1A of Part 1 of our annual report on Form 10-K for the year ended December 31, 2008. 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.
|
PART I. |
|
ITEM 1. |
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
(In thousands, except per common share amounts)
(Unaudited)
|
Three Months Ended |
Six Months Ended | |||||||||||
|
June 30 |
June 30 |
|||||||||||
|
2009 |
2008 |
2009 |
2008 |
|||||||||
|
Net sales |
$ |
185,176 |
$ |
238,661 |
$ |
362,280 |
$ |
485,883 |
||||
|
Cost of sales |
98,845 |
132,645 |
194,088 |
271,786 |
||||||||
|
Gross profit |
86,331 |
106,016 |
168,192 |
214,097 |
||||||||
|
Selling and marketing expenses |
35,191 |
44,787 |
69,063 |
97,950 |
||||||||
|
General, administrative and other expenses |
21,978 |
24,910 |
44,086 |
50,495 |
||||||||
|
Operating income |
29,162 |
36,319 |
55,043 |
65,652 |
||||||||
|
Other income (expense), net: |
||||||||||||
|
Interest expense, net |
(4,477 |
) |
(5,645 |
) |
(9,048 |
) |
(13,336 |
) | ||||
|
Other income (expense), net |
270 |
(72 |
) |
618 |
(1,091 |
) | ||||||
|
Total other expense |
(4,207 |
) |
(5,717 |
) |
(8,430 |
) |
(14,427 |
) | ||||
|
Income before income taxes |
24,955 |
30,602 |
46,613 |
51,225 |
||||||||
|
Income tax provision |
8,098 |
10,374 |
16,418 |
17,483 |
||||||||
|
Net income |
$ |
16,857 |
$ |
20,228 |
$ |
30,195 |
$ |
33,742 |
||||
|
Earnings per common share: |
||||||||||||
|
Basic |
$ |
0.23 |
$ |
0.27 |
$ |
0.40 |
$ |
0.45 |
||||
|
Diluted |
$ |
0.22 |
$ |
0.27 |
$ |
0.40 |
$ |
0.45 |
||||
|
Cash dividend per common share |
$ |
— |
$ |
0.08 |
$ |
— |
0.16 |
|||||
|
Weighted average common shares outstanding: |
||||||||||||
|
Basic |
74,894 |
74,740 |
74,884 |
74,665 |
||||||||
|
Diluted |
75,493 |
74,931 |
75,036 |
74,872 |
||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
(In thousands)
|
June 30,
2009 |
December 31,
2008 | |||||
|
(Unaudited) |
||||||
|
ASSETS |
||||||
|
Current Assets: |
||||||
|
Cash and cash equivalents |
$ |
24,974 |
$ |
15,385 |
||
|
Accounts receivable, net |
91,002 |
99,811 |
||||
|
Inventories |
51,570 |
60,497 |
||||
|
Prepaid expenses and other current assets |
11,675 |
9,233 |
||||
|
Deferred income taxes |
18,043 |
11,888 |
||||
|
Total Current Assets |
197,264 |
196,814 |
||||
|
Property, plant and equipment, net |
176,867 |
185,843 |
||||
|
Goodwill |
192,998 |
192,569 |
||||
|
Other intangible assets, net |
65,820 |
66,823 |
||||
|
Other non-current assets |
3,758 |
4,482 |
||||
|
Total Assets |
$ |
636,707 |
$ |
646,531 |
||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||
|
Current Liabilities: |
||||||
|
Accounts payable |
$ |
38,496 |
$ |
41,355 |
||
|
Accrued expenses and other current liabilities |
78,365 |
65,316 |
||||
|
Income taxes payable |
3,061 |
7,783 |
||||
|
Total Current Liabilities |
119,922 |
114,454 |
||||
|
Long-term debt |
369,000 |
419,341 |
||||
|
Deferred income taxes |
28,888 |
28,371 |
||||
|
Other non-current liabilities |
9,711 |
11,922 |
||||
|
Total Liabilities |
527,521 |
574,088 |
||||
|
Commitments and contingencies—see Note 10 |
||||||
|
Total Stockholders’ Equity |
109,186 |
72,443 |
||||
|
Total Liabilities and Stockholders’ Equity |
$ |
636,707 |
$ |
646,531 |
||
See accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
|
Six Months Ended
June 30, | |||||||
|
2009 |
2008 | ||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||
|
Net income |
$ |
30,195 |
$ |
33,742 |
|||
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|||||||
|
Depreciation and amortization |
15,514 |
16,685 |
|||||
|
Amortization of stock-based compensation |
4,093 |
4,041 |
|||||
|
Amortization of deferred financing costs |
345 |
714 |
|||||
|
Bad debt expense |
3,864 |
3,439 |
|||||
|
Deferred income taxes |
(6,148 |
) |
(958 |
) | |||
|
Foreign currency adjustments |
193 |
524 |
|||||
|
(Gain) Loss on sale of equipment and other |
(45 |
) |
345 |
||||
|
Changes in operating assets and liabilities |
17,439 |
37,776 |
|||||
|
Net cash provided by operating activities |
65,450 |
96,308 |
|||||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||
|
Purchases of property, plant and equipment |
(4,728 |
) |
(6,328 |
) | |||
|
Acquisition of businesses, net of cash acquired |
— |
(1,522 |
) | ||||
|
Other |
(155 |
) |
(411 |
) | |||
|
Net cash used by investing activities |
(4,883 |
) |
(8,261 |
) | |||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||
|
Proceeds from long-term revolving credit facility |
83,797 |
70,732 |
|||||
|
Repayments of long-term revolving credit facility |
(133,036 |
) |
(57,244 |
) | |||
|
Repayments of long-term debt |
— |
(1,359 |
) | ||||
|
Repayments of Series A Industrial Revenue Bonds |
— |
(57,785 |
) | ||||
|
Proceeds from issuance of common stock |
— |
695 |
|||||
|
Excess tax benefit from stock based compensation |
— |
366 |
|||||
|
Dividends paid to stockholders |
— |
(11,946 |
) | ||||
|
Other |
— |
(14 |
) | ||||
|
Net cash used by financing activities |
(49,239 |
) |
(56,555 |
) | |||
|
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH |
(1,739 |
) |
3,546 |
||||
|
Increase in cash and cash equivalents |
9,589 |
35,038 |
|||||
|
CASH AND CASH EQUIVALENTS, beginning of period |
15,385 |
33,315 |
|||||
|
CASH AND CASH EQUIVALENTS, end of period |
$ |
24,974 |
$ |
68,353 |
|||
|
Supplemental cash flow information: |
|||||||
|
Cash paid during the period for: |
|||||||
|
Interest |
$ |
8,987 |
$ |
12,595 |
|||
|
Income taxes, net of refunds |
$ |
25,385 |
$ |
15,872 |
|||
See accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
(In thousands, except per common share amounts)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Description of Business—Tempur-Pedic International Inc., a Delaware corporation, together with its subsidiaries, is a U.S. based, multinational company. The term “Tempur-Pedic
International” refers to Tempur-Pedic International Inc. only, and the term “Company” refers to Tempur-Pedic International Inc. and its consolidated subsidiaries. Tempur World, Inc. was formed on January 1, 2000 to combine the manufacturing facilities and the global distribution capabilities of all TEMPUR® products, and Tempur-Pedic International Inc. was formed in 2002 to acquire Tempur World, Inc. This acquisition
(Tempur Acquisition) was effective as of November 1, 2002.
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 include all of the information and disclosures required by generally accepted accounting principles
in the United States (U.S. GAAP) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements of the Company and related footnotes for the year ended December 31, 2008, included in the Company’s Annual Report on Form 10-K.
The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have
been made and are of a recurring nature unless otherwise disclosed herein.
(b) 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. The Company does not
hold any interest in variable-interest entities.
(c) 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. The Company’s results are affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of raw materials, can have a significant
effect on operations. While the Company maintains reserves for anticipated liabilities and carries various levels of insurance, the Company could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings.
(d) Inventories—Inventories are stated at the lower of cost or market, determined by the first-in, first-out method, and consist of the following:
|
June 30,
2009 |
December 31,
2008 |
|||||||
|
Finished goods |
$ | 36,152 | $ | 41,385 | ||||
|
Work-in-process |
5,507 | 5,706 | ||||||
|
Raw materials and supplies |
9,911 | 13,406 | ||||||
| $ | 51,570 | $ | 60,497 | |||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
(e) Accrued Sales Returns—Estimated sales returns are provided at the time of sale based on historical sales channel return rates. The level of sales returns differs by channel with the Direct channel typically experiencing the highest rate of return. Estimated future
obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized. The Company allows product returns up to 120 days following a sale through certain sales channels and on certain products. Accrued sales returns are included in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
The Company had the following activity for sales returns from December 31, 2008 to June 30, 2009:
|
Balance as of December 31, 2008 |
$ | 3,804 | ||
|
Amounts accrued |
14,868 | |||
|
Returns charged to accrual |
(15,023 | ) | ||
|
Balance as of June 30, 2009 |
$ | 3,649 |
(f) 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 two year to
three year warranty on pillows. Estimated future obligations related to these products are charged to operations in the period in which the related sale is recognized. Estimates of warranty expenses are based primarily on historical claims experience and product testing. Warranties are included in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
The Company had the following activity for warranties from December 31, 2008 to June 30, 2009:
|
Balance as of December 31, 2008 |
$ | 3,903 | ||
|
Amounts accrued |
1,593 | |||
|
Warranties charged to accrual |
(1,735 | ) | ||
|
Balance as of June 30, 2009 |
$ | 3,761 |
(g) Revenue Recognition—Sales of products are recognized when persuasive evidence of an arrangement exists, products are shipped and title passes to customers and the risks and rewards of ownership are transferred, the sale price is fixed or determinable
and collectability is reasonably assured. The Company extends volume discounts to certain customers and reflects these amounts as a reduction of sales. The Company also reports sales net of tax assessed by qualifying governmental authorities. 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 regularly reviews the adequacy of its allowance for doubtful accounts. The Company determines the allowance based on historical write-off
experience and current economic conditions and also considers factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a receivable is reasonably assured. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts included in Accounts receivable, net in the accompanying Condensed
Consolidated Balance Sheets was $8,786 and $6,726 as of June 30, 2009 and December 31, 2008, respectively.
(h) 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.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
(i) Research and Development Expenses—Research and development expenses for new products are expensed as they are incurred and are included General, administrative and other expenses. Research and development costs charged to expense were $1,640 and $1,458 for the three months
ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, research and development costs charged to expense were $3,099 and $3,291, respectively.
(j) Subsequent Events—During the second quarter of fiscal 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 165 (SFAS 165), “Subsequent Events”. This standard establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of SFAS 165 did not impact the Company’s financial position or results of operations. Management has evaluated all events or transactions that occurred after June 30, 2009 up through July 27, 2009, the date these condensed consolidated financial statements were issued. During this period, there were no material recognizable or nonrecognizable subsequent events.
(2) Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) confirmed that the FASB Accounting Standards Codification (Codification) will become the single official source of authoritative US GAAP (other than guidance issued by the Securities and Exchange Commission), superseding existing FASB, American Institute
of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related literature. After the Codification becomes effective (interim and annual periods ending on or after September 15, 2009), only one level of authoritative US GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change US GAAP; it introduces a new structure that is organized in an easily accessible online research system. The Company will apply the Codification beginning in the
third quarter of fiscal 2009.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140” (SFAS 166), which amends the derecognition guidance in FASB Statement No. 140 and eliminates the exemption from consideration for qualifying special-purpose entities. The Company
will adopt SFAS 166 on January 1, 2010 and is currently assessing the potential impact the adoption will have on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167), which amends the consolidation guidance applicable to variable interest entities. The amendments significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R) (FIN 46R). The
Company will adopt SFAS 167 on January 1, 2010 and is currently assessing the potential impact the adoption will have on its consolidated financial statements.
(3) Goodwill and Other intangible assets
The following table summarizes information relating to the Company’s Other intangible assets:
|
June 30, 2009 |
December 31, 2008 |
|||||||||||||||||||||||||||
|
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 | $ | 10,667 | $ | 5,333 | $ | 16,000 | $ | 9,866 | $ | 6,134 | |||||||||||||||
|
Patents & other
trademarks |
5-20 | 11,779 | 7,846 | 3,933 | 11,655 | 7,767 | 3,888 | |||||||||||||||||||||
|
Customer database |
5 | 4,842 | 4,521 | 321 | 4,838 | 4,455 | 383 | |||||||||||||||||||||
|
Foam formula |
10 | 3,700 | 2,467 | 1,233 | 3,700 | 2,282 | 1,418 | |||||||||||||||||||||
| $ | 91,321 | $ | 25,501 | $ | 65,820 | $ | 91,193 | $ | 24,370 | $ | 66,823 | |||||||||||||||||
Amortization expense relating to intangible assets for the Company was $604 and $596 for the three months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and June 30, 2008 amortization expense relating to intangible assets was $1,210 and $1,207, respectively.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
The following summarizes changes to the Company’s Goodwill, by reportable business segment:
|
Domestic |
International |
Total |
||||||||||
|
Balance as of December 31, 2008 |
$ | 89,929 | $ | 102,640 | $ | 192,569 | ||||||
|
Foreign currency translation adjustments |
— | 429 | 429 | |||||||||
|
Balance as of June 30, 2009 |
$ | 89,929 | $ | 103,069 | $ | 192,998 | ||||||
(4) Long-term Debt
(a) Long-term Debt—Long-term debt for the Company consists of the following:
|
June 30, 2009 |
December 31, 2008 |
|||||||
|
2005 Senior Credit Facility: |
||||||||
|
Domestic Long-Term Revolving Credit Facility payable to lenders, interest at Index Rate or LIBOR plus applicable margin (4.13% and 4.44% as of June 30, 2009 and
December 31, 2008, respctively), commitment through and due June 8, 2012 |
$ | 369,000 | $ | 403,500 | ||||
|
Foreign Long-Term Revolving Credit Facility payable to lenders, interest at Index Rate or LIBOR plus applicable margin (2.59% as of December 31, 2008), commitment through and due June 8, 2012 |
— | 15,841 | ||||||
| $ | 369,000 | $ | 419,341 | |||||
(b) Secured Credit Financing—On October 18, 2005, the Company entered into a credit agreement (2005 Senior Credit Facility) with a syndicate of banks. The 2005 Senior Credit Facility, as
amended, consists of domestic and foreign credit facilities (the Revolvers) that provide for the incurrence of indebtedness up to an aggregate principal amount of $640,000 and matures in 2012. The domestic credit facility is a five year, $615,000 revolving credit facility (Domestic Revolver). The foreign credit facility is a five year $25,000 revolving credit facility (Foreign Revolver). 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 $4,995 at June 30, 2009. After giving effect to letters of credit and $369,000 in borrowings under the Domestic Revolver, total availability under the Revolvers was $266,005 as of June 30, 2009. 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: London Inter-Bank Offering Rate (LIBOR) and for U.S. dollar-denominated loans only, a base rate. The base rate of U.S. dollar-denominated loans is defined as the higher of 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%.
In May 2008, the Company entered into a three year interest rate swap agreement to manage interest costs and the risk associated with changing interest rates associated with the 2005 Senior Credit Facility. Refer to Note 6, “Derivative Financial Instruments” for additional information regarding the Company’s
derivative instruments, including this interest rate swap.
The 2005 Senior Credit Facility is guaranteed by Tempur-Pedic International, as well as certain other subsidiaries of Tempur-Pedic International, and is secured by certain fixed and intangible assets of Dan-Foam ApS and substantially all the Company’s U.S. assets. The 2005 Senior Credit Facility contains certain
financial covenants and requirements affecting the Company, including a consolidated interest coverage ratio and a consolidated leverage ratio. The Company was in compliance with all covenants as of June 30, 2009.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
(5) Fair Value Measurements
The Company applies the provisions of SFAS 157, “Fair Value Measurements” (SFAS 157), which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly
transaction between market participants at the measurement date. SFAS 157 also establishes a three-level hierarchy for fair value measurements. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:
|
· |
Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets. |
|
· |
Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
|
· |
Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurements. |
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. At June 30, 2009, the Company had an interest rate swap and foreign currency forward contracts recorded at fair value. The fair values of these instruments were
measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts. As of June 30, 2009, the Company had no assets or liabilities measured at fair value on a nonrecurring basis. The following tables provide a summary by level of the fair value of assets and liabilities measured on a recurring basis:
|
Fair Value Measurements at June 30, 2009 Using: | ||||||||||||
|
June 30, 2009 |
Quoted Prices in Active
Markets for Identical
Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs
(Level 3) | |||||||||
|
Assets: |
||||||||||||
|
Short-term foreign currency forward contracts |
$ |
142 |
$ |
— |
$ |
142 |
$ |
— | ||||
|
Liabilities: |
||||||||||||
|
Short-term foreign currency forward contracts |
$ |
3,574 |
$ |
— |
$ |
3,574 |
$ |
— | ||||
|
Interest rate swap |
9,392 |
— |
9,392 |
— | ||||||||
|
Fair Value Measurements at December 31, 2008 Using: | ||||||||||||
|
December 31, 2008 |
Quoted Prices in Active
Markets for Identical
Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs
(Level 3) | |||||||||
|
Assets: |
||||||||||||
|
Short-term Foreign currency forward contracts |
$ | 96 | $ | — | $ | 96 | $ | — | ||||
|
Liabilities: |
||||||||||||
|
Interest rate swap |
$ | 11,610 | $ | — | $ | 11,610 | $ | — | ||||
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
During the second quarter of fiscal 2009, the Company also implemented FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 107-1. FSP FAS 107-1 amended Statement of Financial Accounting Standards
No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments in interim as well as in annual financial statements. The adoption of this standard has resulted in the disclosure of the fair values attributable to the Company’s debt instruments within this interim
report. Since this FSP addresses disclosure requirements, the adoption of this FSP did not impact the Company’s financial position or results of operations. Borrowings under the 2005 Senior Credit Facility (as defined in Note 4(b)) are at variable interest rates and accordingly their carrying amounts approximate fair value.
(6) Derivative Financial Instruments
In the first quarter of 2009, the Company adopted SFAS 161, “Disclosure about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 provides for enhanced disclosures of how derivative and hedging activities affect an entity’s financial position,
financial performance and cash flows. The adoption of SFAS 161 had no effect on the Company’s results of operations or consolidated financial position.
In the normal course of business, the Company is exposed to certain risks related to fluctuations in interest rates and foreign currency exchange rates. The Company uses various derivative contracts, primarily interest rate swaps and foreign currency exchange forward contracts to manage risks from these market fluctuations.
The financial instruments used by the Company are straight-forward, non-leveraged instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit ratings of these institutions.
SFAS 133R, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133R), requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains
or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
Interest Rate Risk
The Company is exposed to changes in interest rates on its 2005 Senior Credit Facility. In order to manage this risk, in May 2008, the Company entered into a three year interest rate swap agreement to manage interest costs and the risk associated with changing interest rates. The Company designated this interest rate
swap as a cash flow hedge of floating rate borrowings and expects the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The gains and losses on the designated swap agreement will offset losses and gains on the transactions being hedged. The Company formally documented the effectiveness of this qualifying hedge instrument (both at the inception of the swap and on an ongoing basis) in offsetting changes in cash flows
of the hedged transaction. The fair value of the interest rate swap is calculated as described in Note 5, “Fair Value Measurements” taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable.
As a result of this swap, the Company pays at a fixed rate and receives payment at a variable rate. The swap effectively fixed the floating LIBOR-based interest rate to 3.755% on $350,000 of the outstanding balance under the 2005 Senior Credit Facility, with the outstanding balance subject to the swap declining over
time. The amount of the outstanding balance subject to the swap declines as follows: to $300,000 on November 28, 2008 (through November, 2009); to $200,000 on November 28, 2009 (through November, 2010); and to $100,000 on November 28, 2010 (through November 28, 2011). The Company will select the LIBOR-based rate on the hedged portion of the 2005 Senior Credit Facility during the term of the swap. The effective portion of the change in value of the swap is reflected as a component of Accumulated other comprehensive
loss (OCL) and recognized as Interest expense, net as payments are paid or accrued. The remaining gain or loss in excess of the cumulative change in the present value of the future cash flows of the hedged item, if any (i.e., the ineffectiveness portion) or hedge components excluded from the assessment of effectiveness are recognized as Interest expense, net during the current period.
As of June 30, 2009 the total notional amount of the Company’s interest rate swap agreement was $300,000. Over the next 12 months, the Company expects to reclassify $7,069 of deferred losses on derivative instruments from Accumulated other comprehensive loss to earnings due to the payment of variable
interest associated with the 2005 Senior Credit Facility.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
Foreign Currency Exposures
The Company is exposed to foreign currency risk related to intercompany debt and associated interest payments. To manage the risk associated with fluctuations in foreign currencies, the Company enters into foreign currency forward contracts. The Company does not designate any of these foreign currency forward contracts
as hedging instruments under SFAS 133R, however considers the contracts as economic hedges. Accordingly, changes in the fair value of these instruments effects earnings during the current period. These foreign currency forward contracts protect against the reduction in value of forecasted foreign currency cash flows resulting from payments in foreign currencies. The fair value of foreign currency agreements are estimated as described in Note 5, “Fair Value Measurements” taking into consideration current
interest rates and the current creditworthiness of the counterparties or the Company, as applicable.
As of June 30, 2009, the Company had foreign currency forward contracts with expiration dates ranging from July 2, 2009 through June 18, 2010. The changes in fair value of these foreign currency hedges are included as a component of Other income (expense), net. As of June 30, 2009 the Company had the following outstanding
foreign currency forward contracts:
|
Foreign Currency |
Currency Denomination |
|||
| Euros | € 31,701 | |||
|
British Pounds |
£ 4,375 |
|||
|
Japanese Yen |
¥ 349.404 |
|||
|
Swiss Francs |
Fr. 2,461 |
|||
|
United States Dollars |
$ 3,144 |
|||
As of June 30, 2009 and December 31, 2008, the fair value carrying amount of the Company’s derivative instruments were recorded as follows:
|
Asset Derivatives |
||||||||||
|
June 30, 2009 |
December 31, 2008 |
|||||||||
|
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
|||||||
|
Derivatives not designated as hedging instruments under SFAS 133R |
||||||||||
|
Foreign exchange forward contracts |
Other current assets |
$ |
142 |
Other current assets |
$ |
96 |
||||
|
$ |
142 |
$ |
96 |
|||||||
|
Liability Derivatives |
||||||||||
|
June 30, 2009 |
December 31, 2008 |
|||||||||
|
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
|||||||
|
Derivatives designated as hedging instruments under SFAS 133R |
||||||||||
|
Interest rate swap |
Other non-current liabilities |
$ |
9,392 |
Other non-current liabilities |
$ |
11,610 |
||||
|
$ |
9,392 |
$ |
11,610 |
|||||||
|
Derivatives not designated as hedging instruments under SFAS 133R |
||||||||||
|
Foreign exchange forward contracts |
Other current liabilities |
$ |
3,574 |
Other current liabilities |
$ |
— |
||||
|
$ |
12,966 |
$ |
11,610 |
|||||||
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
The effect of derivative instruments on the Condensed Consolidated Statement of Income for the three months ended June 30, 2009 was as follows:
|
Derivatives Designated as Cash Flow Hedging Relationships Under SFAS 133R |
Amount of
Gain/(Loss)
Recognized in Other Comprehensive Income on
Derivative
(Effective Portion) |
Location of Gain/(Loss)
Reclassified from
Accumulated OCL into
Income
(Effective Portion) |
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCL
into Income
(Effective Portion) |
Location of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing) |
Amount of Gain/(Loss)
Recognized in Income
on Derivative
(Ineffective Portion
and Amount Excluded From Excluded
from Effectiveness Testing) |
|||||||||
|
Interest rate swap |
$ |
1,398 |
Interest expense |
$ |
2,059 |
Interest income (expense) |
$ |
— |
||||||
|
$ |
1,398 |
$ |
2,059 |
$ |
— |
|||||||||
|
Derivatives Not Designated as Hedging Instruments under SFAS 133R |
Location of Gain/(Loss) Recognized in Income on Derivative |
Amount of Gain/(Loss) Recognized in Income on Derivative |
||||
|
Foreign exchange forward contracts |
Other expense, net |
(1,405) |
||||
|
$ |
(1,405) |
|||||
For the six months ended June 30, 2009:
|
Derivatives Designated as Cash Flow Hedging Relationships Under SFAS 133R |
Amount of
Gain/(Loss)
Recognized in Other Comprehensive Income on
Derivative
(Effective Portion) |
Location of Gain/(Loss)
Reclassified from
Accumulated OCL into
Income
(Effective Portion) |
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCL
into Income
(Effective Portion) |
Location of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing) |
Amount of Gain/(Loss)
Recognized in Income
on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness Testing) |
|||||||||
|
Interest rate swap |
$ |
2,218 |
Interest expense |
$ |
3,470 |
Interest income (expense) |
$ |
— |
||||||
|
$ |
2,218 |
$ |
3,470 |
$ |
— |
|||||||||
|
Derivatives Not Designated as Hedging Instruments under SFAS 133R |
Location of Gain/(Loss) Recognized in Income on Derivative |
Amount of Gain/(Loss) Recognized in Income on Derivative |
||||
|
Foreign exchange forward contracts |
Other expense, net |
(2,146) |
||||
|
$ |
(2,146) |
|||||
As of June 30, 2009 and December 31, 2008, Accumulated other comprehensive loss associated with the interest rate swap qualifying for hedge accounting treatment was $5,729, net of taxes of $3,663 and $7,082, net of taxes of $4,528, respectively.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
(7) Stockholders’ Equity
(a) Capital Stock—Tempur-Pedic International’s 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 October 16, 2007, the Board of Directors authorized a repurchase authorization of up to $300,000 of the Company’s common stock. Under the existing share repurchase authorization, the Company has $280,100 available
for repurchase as of June 30, 2009. No shares were repurchased during the six months ended June 30, 2009. 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 of Directors deem appropriate. This share repurchase authorization may be suspended, limited or terminated at any time without notice.
(8) Other Items
(a) Property, Plant and Equipment—
Property, plant and equipment, net consists of the following:
|
|
June 30, 2009 |
December 31, 2008 |
||||||
|
Land and buildings |
|
$ |
122,714 |
$ |
122,256 |
|||
|
Machinery and equipment, furniture and fixtures, and other |
|
197,658 |
192,029 |
|||||
|
Construction in progress |
|
4,994 |
5,321 |
|||||
|
|
325,366 |
319,606 |
||||||
|
Accumulated depreciation |
|
(148,499) |
(133,763) |
|||||
|
|
$ |
176,867 |
$ |
185,843 |
||||
(b) Accrued expenses and other—
Accrued expenses and other consisted of the following:
|
June 30, 2009 |
December 31, 2008 |
|||||||
|
|
||||||||
|
Salary and related expenses |
$ |
12,303 |
$ |
11,226 |
||||
|
Accrued unrecognized tax benefits |
13,273 |
11,012 |
||||||
|
Accrued sales and value added taxes |
12,531 |
10,768 |
||||||
|
Warranty accrual |
|
3,761 |
3,903 |
|||||
|
Sales returns |
|
3,649 |
3,804 |
|||||
|
Other |
|
32,848 |
24,603 |
|||||
|
|
$ |
78,365 |
$ |
65,316 |
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
(c) Accumulated other comprehensive loss—
Accumulated other comprehensive loss consisted of the following:
|
June 30, 2009 |
December 31, 2008 |
||||||
|
Derivative instruments accounted for as hedges, net of tax of $3,663 and $4,528, respectively |
$ |
(5,729 |
) |
$ |
(7,082 |
) | |
|
Foreign currency translation |
(4,779 |
) |
(5,508 |
) | |||
|
Accumulated other comprehensive loss |
$ |
(10,508 |
) |
$ |
(12,590 |
) |
(d) Comprehensive income
The components of comprehensive income consisted of the following:
|
Three Months Ended |
Six Months Ended |
||||||||||||||
|
June 30, |
June 30, |
||||||||||||||
|
2009 |
2008 |
2009 |
2008 |
||||||||||||
|
Net income |
$ | 16,857 | $ | 20,228 | $ | 30,195 | $ | 33,742 | |||||||
|
Derivative instruments accounted for as hedges, net of taxes of $545, $(447), $865 and $(447), respectively |
853 | (699 | ) | 1,353 | (699 | ) | |||||||||
|
Cumulative translation adjustment |
5,003 | (347 | ) | 729 | 11,442 | ||||||||||
|
Comprehensive income |
$ | 22,713 | $ | 19,182 | $ | 32,277 | $ | 44,485 | |||||||
(9) Stock-Based Compensation
The Company applies the provisions of SFAS 123R “Share-based Payment” (SFAS 123R) which establishes the accounting for stock-based compensation. The Company currently has three stock-based compensation plans: the 2002 Option Plan (the 2002 Plan), the Amended and Restated 2003 Equity Incentive Plan, as amended
(the 2003 Plan) and the 2003 Employee Stock Purchase Plan (the ESPP), which are described further under the caption “Stock-based Compensation” in the notes to the Consolidated Financial Statements of the Company’s annual report on Form 10-K for the year ended December 31, 2008.
The Company granted new options to purchase 278 and 1,694 shares of common stock during the three and six months ended June 30, 2009, respectively. The Company recognized compensation expense of $406 and $477 associated with the 2009 grants during the three and six
months ended June 30, 2009, respectively. The Company granted new options to purchase 1,996 and 2,123 shares of common stock during the three and six months ended June 30, 2008, respectively. The Company recognized compensation expense of $353 and $434 associated with the 2008 grants during the three and six months ended June 30, 2008, respectively. As of June 30, 2009, there was $4,367 of unrecognized compensation expense associated with the options granted in 2009, which is expected to be recorded over the
weighted average remaining vesting period of 3.4 years. The options granted in the three months ended June 30, 2009 had a weighted average grant-date fair value of $6.37 per option, as determined by the Black-Scholes option pricing model using the following assumptions:
|
Expected volatility of stock |
67.0 - 91.7 |
% | |
|
Expected life of options, in years |
2.0 - 5.0 |
||
|
Risk-free interest rate |
1.0 - 2.8 |
% | |
|
Expected dividend yield on stock |
0 - 2.8 |
% |
The Company recorded $2,190 and $2,062 of total stock-based compensation expense for the three months ended June 30, 2009 and 2008, respectively. The Company recorded $4,093 and $4,041 of total stock-based compensation expense for the six months ended June 30, 2009 and 2008, respectively.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
(10) Commitments and Contingencies
(a) Purchase Commitments—The Company will, from time to time, enter into limited purchase commitments for the purchase of certain raw materials.
Amounts committed under these programs are not significant as of June 30, 2009.
(b) Antitrust Action—On January 5, 2007, a purported class action was filed against the Company in the United States District Court for the Northern District of Georgia, Rome Division (Jacobs v. Tempur-Pedic International, Inc. and Tempur-Pedic North America,
Inc., or the Antitrust Action). The Antitrust Action alleges violations of federal antitrust law arising from the pricing of Tempur-Pedic mattress products by Tempur-Pedic North America and certain distributors. The action alleges a class of all purchasers of Tempur-Pedic mattresses in the United States since January 5, 2003, and seeks damages and injunctive relief. Count Two of the complaint was dismissed by the court on June 25, 2007, based on a motion filed by the Company. Following a decision
issued by the United States Supreme Court in Leegin Creative Leather Prods., Inc. v. PSKS, Inc. on June 28, 2007, the Company filed a motion to dismiss the remaining two counts of the Antitrust Action on July 10, 2007. On December 11, 2007, that motion was granted and, as a result, judgment was entered in favor of the Company and the plaintiffs’ complaint was dismissed with prejudice. On December 21, 2007, the plaintiffs filed a “Motion to Alter
or Amend Judgment,” which has been fully briefed. On May 1, 2008, that motion was denied. The Jacobs appealed the dismissal of their claims, and the parties argued the appeal before the United States Circuit Court for the Eleventh Circuit on December 11, 2008. The matter has been taken under advisement by the court. The Company continues to strongly believe that the Antitrust Action lacks merit, and intends to defend against the claims vigorously. However, due to the inherent
uncertainties of litigation, 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 the Company’s financial position or results of operation. Accordingly, the Company cannot make an estimate of the possible ranges of loss.
(c) New York Attorney General—In December 2008, the Office of the Attorney General of the State of New York, Antitrust Bureau (OAG) requested that the Company consider discontinuing its unilateral retail price policy (UPPL)
in the State of New York, and informed them that it may bring an enforcement action against the Company under New York law if they chose not to do so. The Office of the Attorney General has made information and document requests of the Company and the Company is cooperating with these requests. The Company believes that its UPPL complies with state and federal law and, should the OAG challenge the UPPL, intends to vigorously defend it. However, due to the inherent uncertainties of this matter, the Company
cannot at this time predict the outcome of any such enforcement action, if brought, and can give no assurance that these claims will not have a material adverse affect on its financial position or results of operation.
The Company is involved in various other legal proceedings incidental to the operations of its business. The Company believes that the outcome of all such pending legal proceedings in the aggregate will not have a materially adverse affect on its business, financial condition, liquidity, or operating results.
(11) Income Taxes
The Company’s effective tax rate for the six months ended June 30, 2009 was 35.2%, with reconciling items between the effective tax rate and the federal statutory income tax rate of 35.0% including certain foreign tax rate differentials, state and local income taxes, foreign income currently taxable in the U.S.,
the production activities deduction, and certain other permanent differences. For the same period in 2008, the effective tax rate was 34.1%, with reconciling items between the effective tax rate and the federal statutory income tax rate of 35.0% including 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.
The Company completed the repatriation of foreign earnings in the first quarter of 2009. This repatriation was initiated in the fourth quarter of 2008 and the associated income tax expense was recognized at that time. The Company has not provided for U.S. federal and/or
state income and foreign withholding taxes on the remaining $126.5 million of undistributed earnings from non-U.S. operations as of June 30, 2009 because the Company intends to reinvest such earnings indefinitely outside of the United States. If these earnings were to be distributed, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
On October 24, 2007, the Company received an income tax assessment from the Danish Tax Authority with respect to the 2001, 2002 and 2003 tax years. The tax assessment relates to the royalty paid by one of Tempur-Pedic International’s U.S. subsidiaries to a Danish subsidiary and the position taken by the Danish Tax
Authority could apply to subsequent years. The total tax assessment is approximately $39.3 million including interest and underpayment premium. On January 23, 2008 the Company filed timely complaints with the Danish National Tax Tribunal denying the tax assessments. The National Tax Tribunal formally agreed to place the Danish tax litigation on hold pending the outcome of a Bilateral Advance Pricing Agreement (Bilateral APA) between the United States and the Danish Tax Authority. A Bilateral
APA involves an agreement between the Internal Revenue Service (IRS) and the taxpayer, as well as a negotiated agreement with one or more foreign competent authorities under applicable income tax treaties. On August 8, 2008 the Company filed the Bilateral APA with the IRS and the Danish Tax Authority. The IRS began analyzing the Bilateral APA in the first quarter of 2009 and expects to finalize its position by the first quarter of 2010. The Company believes it has meritorious defenses to the proposed
adjustment and will oppose the assessment in the Danish courts, as necessary. It is reasonably possible under FIN 48 that the amount of the total unrecognized tax benefits may change in the next twelve months. An estimate of the amount of such change cannot be made at this time.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and income tax returns in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to tax examinations by tax authorities in the U.S. for periods prior to 2005, U.S. state
and local municipalities for periods prior to 2004, and in non-U.S. jurisdictions for periods prior to 2001. Additionally, the Company is currently under examination by various tax authorities around the world. The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months as a result of the statute of limitations expiring and/or the examinations being concluded on these returns. However,
the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the consolidated financial statements. During the three and six months ended June 30, 2009, there were no significant changes to the liability for unrecognized tax benefits.
(12) Earnings Per Common Share
|
Three Months Ended |
Six Months Ended |
|||||||||||||||
|
June 30, |
June 30, |
|||||||||||||||
|
2009 |
2008 |
2009 |
2008 |
|||||||||||||
|
Numerator: |
||||||||||||||||
|
Net income |
$ | 16,857 | $ | 20,228 | $ | 30,195 | $ | 33,742 | ||||||||
|
Denominator: |
||||||||||||||||
|
Denominator for basic earnings per common share-weighted average shares |
74,894 | 74,740 | 74,884 | 74,665 | ||||||||||||
|
Effect of dilutive securities: |
||||||||||||||||
|
Employee stock options |
599 | 191 | 152 | 207 | ||||||||||||
|
Denominator for basic earnings per common share-adjusted weighted average shares |
75,493 | 74,931 | 75,036 | 74,872 | ||||||||||||
|
Basic earnings per common share |
$ | 0.23 | $ | 0.27 | $ | 0.40 | $ | 0.45 | ||||||||
|
Diluted earnings per common share |
$ | 0.22 | $ | 0.27 | $ | 0.40 | $ | 0.45 | ||||||||
The Company excluded 4,508 and 4,804 shares issuable upon exercise of outstanding stock options for the three months ended June 30, 2009 and 2008, respectively, and 4,783 and 2,322 shares issuable upon exercise of outstanding stock options for the six month period ended
June 30, 2009 and 2008, respectively, from the Diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur-Pedic International’s common stock or they were otherwise anti-dilutive.
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
(13) Business Segment Information
The Company operates in two business segments: Domestic and International. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their operations. The Domestic segment consists of the two U.S. manufacturing
facilities, whose customers include the U.S. distribution subsidiary and certain third party distributors in 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.
The following table summarizes Total assets by segment:
|
June 30, 2009 |
December 31, 2008 |
|||||||
|
Domestic |
$ | 484,810 | $ | 474,824 | ||||
|
International |
272,701 | 282,884 | ||||||
|
Intercompany eliminations |
(120,804 | ) | (111,177 | ) | ||||
| $ | 636,707 | $ | 646,531 | |||||
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In thousands, except per common share amounts)
The following table summarizes other segment information:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||
|
June 30, |
June 30, |
|||||||||||||||
|
2009 |
2008 |
2009 |
2008 |
|||||||||||||
|
Net sales from external customers: |
||||||||||||||||
|
Domestic |
||||||||||||||||
|
Mattresses |
$ | 86,300 | $ | 108,369 | $ | 162,011 | $ | 215,241 | ||||||||
|
Pillows |
11,029 | 12,583 | 20,874 | 25,705 | ||||||||||||
|
Other |
23,415 | 27,549 | 44,293 | 55,473 | ||||||||||||
| $ | 120,744 | $ | 148,501 | $ | 227,178 | $ | 296,419 | |||||||||
|
International |
||||||||||||||||
|
Mattresses |
$ | 38,044 | $ | 55,265 | $ | 81,461 | $ | 116,442 | ||||||||
|
Pillows |
12,977 | 16,294 | 26,193 | 34,790 | ||||||||||||
|
Other |
13,411 | 18,601 | 27,448 | 38,232 | ||||||||||||
| $ | 64,432 | $ | 90,160 | $ | 135,102 | $ | 189,464 | |||||||||
| $ | 185,176 | $ | 238,661 | $ | 362,280 | $ | 485,883 | |||||||||
|
Inter-segment sales: |
||||||||||||||||
|
Domestic |
— | — | — | — | ||||||||||||
|
International |
$ | 346 | $ | 451 | $ | 569 | $ | 1,110 | ||||||||
|
Intercompany eliminations |
(346 | ) | (451 | ) | (569 | ) | (1,110 | ) | ||||||||
| $ | — | $ | — | $ | — | $ | — | |||||||||
|
Operating income: |
||||||||||||||||
|
Domestic |
$ | 14,223 | $ | 18,269 | $ | 22,027 | $ | 22,006 | ||||||||
|
International |
14,939 | 18,050 | 33,016 | 43,646 | ||||||||||||
| $ | 29,162 | $ | 36,319 | $ | 55,043 | $ | 65,652 | |||||||||
|
Depreciation and amortization
(including stock-based compensation amortization): |
||||||||||||||||
|
Domestic |
$ | 7,554 | $ | 7,759 | $ | 14,876 | $ | 15,345 | ||||||||
|
International |
2,423 | 2,654 | 4,731 | 5,381 | ||||||||||||
| $ | 9,977 | $ | 10,413 | $ | 19,607 | $ | 20,726 | |||||||||
|
Capital expenditures: |
||||||||||||||||
|
Domestic |
$ | 1,698 | $ | 1,901 | $ | 2,088 | $ | 3,934 | ||||||||
|
International |
1,607 | 1,634 | 2,640 | 2,394 | ||||||||||||
|
|
$ | 3,305 | $ | 3,535 | $ | 4,728 | $ | 6,328 | ||||||||
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. Unless otherwise noted, all of the financial information in this report is
condensed consolidated information for Tempur-Pedic International Inc. or its predecessor. 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 for the year ended December 31, 2008. Our actual results may differ materially from those contained in any forward-looking statements. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements contained herein.
Executive Overview
General—We are the leading manufacturer, marketer and distributor of premium mattresses and pillows which we sell in approximately 80 countries 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 therapeutically conforms to the body.
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 operations. 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.
Strategy and Outlook
We believe we are the industry leader in terms of profitability. Our long-term goal is also to become the world’s largest bedding company in terms of revenue. To achieve our long-term goals while managing through the current economic environment, we expect to
continue to pursue certain key strategies:
|
• |
Maintain our focus on premium mattresses and pillows and to regularly introduce new products. |
|
• |
Invest in increasing our global brand awareness through advertising campaigns that further associate our brand name with better overall sleep and premium quality products. |
|
• |
Extend our presence and improve our account productivity in both the Domestic and International Retail segments. |
|
• |
Invest in our operating infrastructure to meet the requirements of our business, including investments in our research and development capabilities. |
|
• |
Take actions to further improve our financial flexibility and strengthen the business. |
Results of Operations
A summary of our results for the three and six months ended June 30, 2009 includes the following:
|
• |
We reduced total debt by $50.3 million to $369.0 million as of June 30, 2009 from $419.3 million as of December 31, 2008. |
|
• |
We generated $39.5 million of cash from operating activities for the three month period ended June 30, 2009 as compared to $71.7 million for the three month period ended June 30, 2008. |
|
• |
Earnings per common share (EPS) was $0.22 per diluted common share for the three month period ended June 30, 2009 as compared to $0.27 per diluted common share for the three month period ended June 30, 2008. |
|
(In thousands, except per common share amounts) |
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||||||||||||||||
|
2009 |
2008 |
2009 |
2008 |
||||||||||||||||||||||||||||
|
Net sales |
$ | 185,176 | 100.0 | % | $ | 238,661 | 100.0 | % | $ | 362,280 | 100.0 | % | $ | 485,883 | 100.0 | % | |||||||||||||||
|
Cost of sales |
98,845 | 53.4 | 132,645 | 55.6 | 194,088 | 53.6 | 271,786 | 55.9 | |||||||||||||||||||||||
|
Gross profit |
86,331 | 46.6 | 106,016 | 44.4 | 168,192 | 46.4 | 214,097 | 44.1 | |||||||||||||||||||||||
|
Selling and marketing expenses |
35,191 | 19.0 | 44,787 | 18.8 | 69,063 | 19.1 | 97,950 | 20.2 | |||||||||||||||||||||||
|
General, administrative and other expenses |
21,978 | 11.9 | 24,910 | 10.4 | 44,086 | 12.1 | 50,495 | 10.4 | |||||||||||||||||||||||
|
Operating income |
29,162 | 15.7 | 36,319 | 15.2 | 55,043 | 15.2 | 65,652 | 13.5 | |||||||||||||||||||||||
|
Interest expense, net |
(4,477 | ) | (2.3 | ) | (5,645 | ) | (2.4 | ) | (9,048 | ) | (2.5 | ) | (13,336 | ) | (2.8 | ) | |||||||||||||||
|
Other income (expense), net |
270 | 0.1 | (72 | ) | — | 618 | 0.2 | (1,091 | ) | (0.2 | ) | ||||||||||||||||||||
|
Income before income taxes |
24,955 | 13.5 | 30,602 | 12.8 | 46,613 | 12.9 | 51,225 | 10.5 | |||||||||||||||||||||||
|
Income tax provision |
8,098 | 4.4 | 10,374 | 4.3 | 16,418 | 4.6 | 17,483 | 3.6 | |||||||||||||||||||||||
|
Net income |
$ | 16,857 | 9.1 | % | $ | 20,228 | 8.5 | % | $ | 30,195 | 8.3 | $ | 33,742 | 6.9 | % | ||||||||||||||||
|
Earnings per common share: |
|||||||||||||||||||||||||||||||
|
Basic |
$ | 0.23 | $ | 0.27 | $ | 0.40 | $ | 0.45 | |||||||||||||||||||||||
|
Diluted |
$ | 0.22 | $ | 0.27 | $ | 0.40 | $ | 0.45 | |||||||||||||||||||||||
|
Cash dividend per common share: |
$ | — | $ | 0.08 | $ | — | $ | 0.16 | |||||||||||||||||||||||
|
Weighted average common shares outstanding: |
|||||||||||||||||||||||||||||||
|
Basic |
74,894 | 74,740 | 74,884 | 74,665 | |||||||||||||||||||||||||||
|
Diluted |
75,493 | 74,931 | 75,036 | 74,872 | |||||||||||||||||||||||||||
Three Months Ended June 30, 2009 Compared with Three Months Ended June 30, 2008
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. A summary of Net sales by channel is below:
|
CONSOLIDATED |
DOMESTIC |
INTERNATIONAL |
||||||||||||||||
|
Three Months Ended |
Three Months Ended |
Three Months Ended |
||||||||||||||||
|
June 30, |
June 30, |
June 30, |
||||||||||||||||
|
(In thousands) |
2009 |
2008 |
2009 |
2008 |
2009 |
2008 |
||||||||||||
|
Retail |
$ | 155,575 | $ | 199,323 | $ | 105,576 | $ | 130,069 | $ | 49,999 | $ | 69,254 | ||||||
|
Direct |
10,785 | 13,527 | 9,428 | 11,328 | 1,357 | 2,199 | ||||||||||||
|
Healthcare |
8,261 | 12,556 | 2,686 | 4,501 | 5,575 | 8,055 | ||||||||||||
|
Third Party |
10,555 | 13,255 | 3,054 | 2,603 | 7,501 | 10,652 | ||||||||||||
| $ | 185,176 | $ | 238,661 | $ | 120,744 | $ | 148,501 | $ | 64,432 | $ | 90,160 | |||||||
A summary of Net sales by product is below:
|
CONSOLIDATED |
DOMESTIC |
INTERNATIONAL |
||||||||||||||||
|
Three Months Ended |
Three Months Ended |
Three Months Ended |
||||||||||||||||
|
June 30, |
June 30, |
June 30, |
||||||||||||||||
|
(In thousands) |
2009 |
2008 |
2009 |
2008 |
2009 |
2008 |
||||||||||||
|
Mattresses |
$ | 124,344 | $ | 163,634 | $ | 86,300 | $ | 108,369 | $ | 38,044 | $ | 55,265 | ||||||
|
Pillows |
24,006 | 28,877 | 11,029 | 12,583 | 12,977 | 16,294 | ||||||||||||
|
Other |
36,826 | 46,150 | 23,415 | 27,549 | 13,411 | 18,601 | ||||||||||||
| $ | 185,176 | $ | 238,661 | $ | 120,744 | $ | 148,501 | $ | 64,432 | $ | 90,160 | |||||||
Net sales—Net sales for the three months ended June 30, 2009 decreased to $185.2 million from $238.7 million for the same period in 2008, a decrease of $53.5 million, or 22.4%,
caused primarily by the continued effects of the macroeconomic environment, which has resulted in lower consumer traffic and decreased consumer demand. Consolidated Mattress sales decreased $39.3 million, or 24.0% compared to the second quarter of 2008. For the three months ended June 30, 2009, our Retail channel Net sales decreased to $155.6 million from $199.3 million for the same period in 2008, a decrease of $43.7 million, or 21.9%. Consolidated pillow sales decreased approximately $4.9
million, or 16.9%, from the second quarter of 2008. Consolidated Other, which includes adjustable bed bases, foundations and other related products, decreased $9.3 million, or 20.2%.
Domestic—Domestic Net sales for the three months ended June 30, 2009 decreased to $120.7 million from $148.5 million for the same period in 2008,
a decrease of $27.8 million, or 18.7%. Our Domestic Retail channel contributed $105.6 million in Net sales for the three months ended June 30, 2009 for a decrease of $24.5 million, or 18.8%, for the same period in 2008. We believe that the macroeconomic environment and slower consumer traffic impacted our Domestic Retail channel during the second quarter. As a result, Domestic mattress sales in the second quarter of 2009 decreased $22.1 million, or 20.4%, over the same period in 2008. Pillow sales
decreased $1.6 million, or 12.3%. Many of our pillow products are sold with mattress purchases. Therefore, when mattress sales decline, pillow sales are also impacted. Net sales in the Direct channel decreased by $1.9 million, or 16.8%. We believe that the macroeconomic environment also negatively impacted Net sales in the Direct channel. Our Healthcare channel Net sales decreased by $1.8 million, or 40.3%, which we believe is primarily related to the decreased availability of spending in the healthcare industry.
Net sales in the Third Party channel increased $0.5 million, or 17.3%.
International—International Net sales for the three months ended June 30, 2009 decreased to $64.4 million from $90.2 million for the same period in
2008, a decrease of $25.7 million, or 28.5%. On a constant currency basis, our International Net sales declined approximately 18.8%. Our International segment was primarily impacted by macroeconomic factors, as the global economic slowdown continues to impact our International segment. The International Retail channel decreased $19.3 million, or 27.8%, for the three months ended June 30, 2009. Our Direct and Third Party channels decreased 38.3% and 29.6%, respectively, also a reflection of the global economic
slowdown. Healthcare channel Net sales decreased $2.5 million or 30.8%. International mattress sales in the second quarter of 2009 decreased $17.2 million, or 31.2%, over the second quarter of 2008. Pillow sales for the second quarter of 2009 decreased $3.3 million, or 20.4%, as compared to the second quarter of 2008.
Gross profit—Gross profit for the three months ended June 30, 2009 decreased to $86.3 million from $106.0 million for the same
period in 2008, a decrease of $19.7 million, or 18.6%. The Gross profit margin for the three months ended June 30, 2009 was 46.6% as compared to 44.4% for the same period in 2008. The factors that impacted Gross profit margin during the quarter are identified and discussed below in the respective segment discussions. We currently have plans underway to expand margins for the remainder of 2009, including projects to improve utilization rates, a redesign of our transportation network and a range of sourcing opportunities.
Domestic—Domestic Gross profit for the three months ended June 30, 2009 decreased to $50.5 million from $57.6 million for the same period in 2008, a decrease of $7.1 million, or 12.3%. The
Gross profit margin in our Domestic segment was 41.8% and 38.8% for the three months ended June 30, 2009 and June 30, 2008, respectively. Improvements in our Domestic Gross profit margin were primarily driven by lower commodity pricing including raw materials, our focus on driving manufacturing efficiencies and pricing actions taken earlier in 2009. These factors were partially offset by fixed cost de-leverage as production volumes were down during the three months ended June 30, 2009 as compared to the same
period in 2008. Domestic Cost of sales for the three months ended June 30, 2009 decreased to $70.3 million from $91.0 million for the same period in 2008, a decrease of $20.7 million, or 22.7%.
International—International Gross profit for the three months ended June 30, 2009 decreased to $35.9 million from $48.4 million for the same period
in 2008, a decrease of $12.6 million, or 26.0%. The Gross profit margin in our International segment was 55.6% and 53.7% for the three months ended June 30, 2009 and June 30, 2008, respectively. Improvements in our International Gross profit margin were primarily driven by lower commodity pricing including raw material costs, our focus on driving manufacturing efficiencies and pricing actions taken early in 2009. These factors were partially offset by fixed cost de-leverage as production volumes were down during
the three months ended June 30, 2009 as compared to the same period in 2008. Our International Cost of sales for the three months ended June 30, 2009 decreased to $28.6 million from $41.7 million for the same period in 2008, a decrease of $13.1 million, or 31.5%.
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. We also include in Selling and marketing expenses certain new product development costs, including market research and testing for new products. In the second quarter of 2009, Selling and marketing expenses decreased to $35.2 million for the three months ended June 30, 2009 as compared to $44.8 million for the three months ended June 30, 2008. Selling and marketing expenses as a percentage of Net sales were 19.0%
and 18.8% for the three months ended June 30, 2009 and June 30, 2008, respectively. Our objective is to align advertising costs to reflect our sales expectations. During the last three quarters of 2008 and the first half of 2009, we have taken actions to better align our advertising spend with our sales expectations. In addition, we have implemented initiatives to reduce costs in other selling activities.
General, administrative and other expenses—General, administrative and other expenses include management salaries, information
technology, professional fees, depreciation of furniture and fixtures, leasehold improvements and computer equipment, expenses for administrative functions and research and development costs. General, administrative and other expenses decreased to $22.0 million for the three months ended June 30, 2009 as compared to $24.9 million for the three months ended June 30, 2008, a decrease of $2.9 million, or 11.8%. General, administrative and other expenses as a percentage of Net sales was 11.9% and 10.4%
for the three months ended June 30, 2009 and June 30, 2008, respectively. The increase in general, administrative and other expenses as a percentage of Net sales in the second quarter of 2009 as compared to the second quarter of 2008 is primarily related to de-leveraging of fixed costs caused by a decline in sales volume.
Interest expense, net—Interest expense, net, includes the interest costs associated with our borrowings and the amortization of deferred financing costs related to those borrowings.
Interest expense, net, decreased to $4.5 million for the three months ended June 30, 2009, as compared to $5.6 million for the three months ended June 30, 2008, a decrease of $1.2 million, or 20.7%. The decrease in interest expense is primarily attributable to the decrease in our total Long-term debt levels and a lower interest rate on our variable rate debt compared to the second quarter of 2008.
Income tax provision—Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and it includes the impact of net operating losses for
certain of our domestic and foreign operations.
Our effective tax rate for the three months ended June 30, 2009 was 32.5%. For the same period in 2008, the effective tax rate was 33.9%. The decrease in the effective tax rate is due to a shift in the mix of pre-tax income between the U.S. and International segments.
Our effective income tax rates for the three months ended June 30, 2009 and 2008 differed from the federal statutory rate of 35.0% principally because of certain foreign tax rate differentials, state and local income taxes, foreign income currently taxable in the U.S., the production activities deduction and certain
other permanent differences.
On October 24, 2007, we received an income tax assessment from the Danish Tax Authority with respect to the 2001, 2002 and 2003 tax years. The tax assessment relates to the royalty paid by one of Tempur-Pedic International’s U.S. subsidiaries to a Danish subsidiary and the position taken by the
Danish Tax Authority could apply to subsequent years. The total tax assessment is approximately $39.3 million including interest and penalties. On January 23, 2008 we filed timely complaints with the Danish National Tax Tribunal denying the tax assessments. The National Tax Tribunal formally agreed to place the Danish tax litigation on hold pending the outcome of a Bilateral Advance Pricing Agreement (Bilateral APA) between the United States and the Danish Tax Authority. A Bilateral APA
involves an agreement between the IRS and the taxpayer, as well as a negotiated agreement with one or more foreign competent authorities under applicable income tax treaties. On August 8, 2008 we filed the Bilateral APA with the IRS and the Danish Tax Authority. The IRS began analyzing the Bilateral APA in the first quarter of 2009 and expects to finalize its position by the first quarter of 2010. We believe we have meritorious defenses to the proposed adjustment and will oppose the assessment in the
Danish courts, as necessary. It is reasonably possible under FIN 48 that the amount of the total unrecognized tax benefits may change in the next twelve months. An estimate of the amount of such change cannot be made at this time.
Six Months Ended June 30, 2009 Compared with Six Months Ended June 30, 2008
A summary of Net sales by channel is below:
|
CONSOLIDATED |
DOMESTIC |
INTERNATIONAL |
||||||||||||||||
|
Six Months Ended |
Six Months Ended |
Six Months Ended |
||||||||||||||||
|
June 30, |
June 30, |
June 30, |
||||||||||||||||
|
(In thousands) |
2009 |
2008 |
2009 |
2008 |
2009 |
2008 |
||||||||||||
|
Retail |
$ | 306,097 | $ | 407,226 | $ | 198,987 | $ | 259,189 | $ | 107,110 | $ | 148,037 | ||||||
|
Direct |
20,514 | 26,269 | 17,906 | 22,001 | 2,608 | 4,268 | ||||||||||||
|
Healthcare |
17,163 | 24,813 | 5,380 | 8,323 | 11,783 | 16,490 | ||||||||||||
|
Third Party |
18,506 | 27,575 | 4,905 | 6,906 | 13,601 | 20,669 | ||||||||||||
| $ | 362,280 | $ | 485,883 | $ | 227,178 | $ | 296,419 | $ | 135,102 | $ | 189,464 | |||||||
A summary of Net sales by product is below:
|
CONSOLIDATED |
DOMESTIC |
INTERNATIONAL |
||||||||||||||||
|
Six Months Ended |
Six Months Ended |
Six Months Ended |
||||||||||||||||
|
June 30, |
June 30, |
June 30, |
||||||||||||||||
|
(In thousands) |
2009 |
2008 |
2009 |
2008 |
2009 |
2008 |
||||||||||||
|
Mattresses |
243,472 | $ | 331,683 | $ | 162,011 | $ | 215,241 | $ | 81,461 | $ | 116,442 | |||||||
|
Pillows |
47,067 | 60,495 | 20,874 | 25,705 | 26,193 | 34,790 | ||||||||||||
|
Other |
71,741 | 93,705 | 44,293 | 55,473 | 27,448 | 38,232 | ||||||||||||
| $ | 362,280 | $ | 485,883 | $ | 227,178 | $ | 296,419 | $ | 135,102 | $ | 189,464 | |||||||
Net sales—Net sales for the six months ended June 30, 2009 decreased to $362.3 million from $485.9 million for the same period in 2008, a decrease of $123.6 million, or 25.4%, caused
primarily by the continued effects of the macroeconomic environment, resulting in lower consumer traffic and decreased consumer demand. For the six months ended June 30, 2009, our Retail channel Net sales decreased to $306.1 million from $407.2 million for the same period in 2008, a decrease of $101.1 million, or 24.8%. The factors that impacted Net sales for each segment are discussed below, in the respective segment discussion.
Domestic—Domestic Net sales for the six months ended June 30, 2009 decreased to $227.2 million from $296.4 million for the same period in 2008, a decrease of $69.2 million, or 23.4%. Our Domestic
Retail channel contributed $199.0 million in Net sales for the six months ended June 30, 2009. This is a decrease of $60.2 million, or 23.2%, over the prior year same period. This decrease is caused primarily by the continued effects of the challenging U.S. macroeconomic environment during 2009. The Healthcare channel Net sales decreased $2.9 million, or 35.4%, which we believe is primarily related to the decreased availability of spending in the healthcare industry. Our Third Party channel Net sales
decreased $2.0 million, or 29.0%, as the second quarter increase in our Third Party channel was offset by a decrease in the first quarter of 2009. Our Direct channel Net sales decreased 18.6%, which is also directly correlated to the challenges in the U.S. macroeconomic environment. Domestic mattress sales decreased $53.2 million, or 24.7%, over the same period in 2008, driven by the decrease in our Retail channel. Pillow sales decreased $4.8 million, or 18.8%. Many of our pillow products are sold
with mattress purchases. Therefore, when mattress sales decline, pillow sales are also impacted.
International—International Net sales for the six months ended June 30, 2009 decreased to $135.1 million from $189.5 million for the same period in 2008, a decrease of $54.4 million, or 28.7%. Our
International segment continues to be affected by the global economic slowdown. On a constant currency basis, our International sales declined by approximately 18.2%. Our International segment was primarily impacted by macroeconomic factors, as the global economic slowdown continues to impact our International segment. The International Retail channel decreased $40.9 million, or 27.6%, for the six months ended June 30, 2009. Our Direct channel Net sales decreased 38.9%. Our Third
party sales decreased 34.2%. Additionally, our Healthcare channel Net sales decreased $4.7 million, or 28.5%. International mattress sales decreased $35.0 million, or 30.0%, as compared to 2008. Pillow sales for the six months ended June 30, 2009 decreased $8.6 million, or 24.7%, as compared to the same period in 2008.
Gross profit—Gross profit for the six months ended June 30, 2009 decreased to $168.2 million from $214.1 million for the same period
in 2008, a decrease of $45.9 million, or 21.4%. The Gross profit margin for the six months ended June 30, 2009 was 46.4% as compared to 44.1% for the same period in 2008. Several factors impacted our Gross profit margin during the period. These factors are identified and discussed below in the respective segment discussions.
Domestic—Domestic Gross profit for the six months ended June 30, 2009 decreased to $93.2 million from $111.2 million for the same period in 2008, a decrease of $18.0 million, or 16.1%. The
Gross profit margin in our Domestic segment was 41.0% and 37.5% for the six months ended June 30, 2009 and June 30, 2008, respectively. The increase in our Gross profit margin for the Domestic segment was driven by lower commodity prices, improved manufacturing efficiencies and pricing actions taken early in 2009, partially offset by fixed cost de-leverage related to lower production volumes. Our Domestic cost of sales decreased to $133.9 million for the six months ended June 30, 2009 as compared to $185.2 million
for the six months ended June 30, 2008, a decrease of $51.3 million, or 27.7%.
International—International Gross profit for the six months ended June 30, 2009 decreased to $74.9 million from $102.9 million for the same period in 2008, a decrease of $28.0 million, or 27.2%. The
Gross profit margin in our International segment was 55.5% and 54.3% for the six months ended June 30, 2009 and June 30, 2008, respectively. For the six months ended June 30, 2009, the improvement in our Gross Profit margin for the International segment was driven by lower commodity prices, our focus on improving manufacturing efficiencies and pricing actions taken early in 2009. Our International Cost of sales for the six months ended June 30, 2009 decreased to $60.2 million from $86.6 million for the same period
in 2008, a decrease of $26.4 million, or 30.5%.
Selling and marketing expenses—Selling and marketing expenses decreased to $69.1 million for the six months ended June 30, 2009 as compared to $98.0 million for the six months ended
June 30, 2008. Selling and marketing expenses as a percentage of Net sales decreased to 19.1% for the six months ended June 30, 2009 from 20.2% for the same period for 2008. Our objective is to align advertising costs to reflect our sales expectations. In addition, we have implemented initiatives to reduce costs in other selling activities.
General, administrative and other expenses—General, administrative and other expenses decreased to $44.1 million for the six months ended June 30, 2009 as compared to $50.5 million
for the six months ended June 30, 2008, a decrease of $6.4 million. General, administrative and other expenses as a percentage of Net sales was 12.1% and 10.4% for the six months ended June 30, 2009 and June 30, 2008, respectively. The increase in General, administrative and other expenses as a percentage of Net sales for the six months ended June 30, 2009 compared to the same period in 2008 is primarily related to de-leveraging fixed costs caused by a decline in sales volume.
Interest expense, net—Interest expense, net, decreased to $9.0 million for the six months ended June 30, 2009, as compared to $13.3 million for the six months ended June 30, 2008,
a decrease of $4.3 million, or 32.2%. The decrease in our interest expense is related to lower levels of long-term debt and a decrease in the interest rate on our variable rate debt as of June 30, 2009, as compared to the same time period in 2008.
Income tax provision—Our effective tax rate for the six months ended June 30, 2009 was 35.2%. For the same period in 2008, the effective tax rate was 34.1%. The
increase in the effective tax rate is due to the tax charge on a previously recognized foreign tax benefit.
Our effective income tax rates for the three months ended June 30, 2009 and 2008 differed from the federal statutory rate of 35.0% principally because of certain foreign tax rate differentials, state and local income taxes, foreign income currently taxable in the U.S., the production activities deduction and certain
other permanent differences.
Liquidity and Capital Resources
Liquidity
Our principal sources of funds are cash flows from operations. Our principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures, payments of dividends and share repurchases from time to time pursuant to a share repurchase program. At June 30, 2009, we had working capital of $77.3 million including Cash and cash equivalents of $25.0 million as compared to working capital of $82.4 million including $15.4 million in Cash and cash equivalents as of December 31, 2008. The increase in Cash and cash equivalents was primarily related to the timing of certain payments to third-party vendors and our continued focus on improving operating cash flow. During the twelve month period ended December 31, 2008 and six month period ended June 30, 2009, there were no repurchases of our common stock.
Our cash flow from operations decreased to $65.5 million for the six months ended June 30, 2009 as compared to $96.3 million for the six months ended June 30, 2008. During the remainder of 2009, we plan to maintain our focus on driving working capital improvements to maximize operating cash flow and increase
our financial flexibility. The decrease in operating cash flow for the six month period ending June 30, 2009 compared to the six month period ending June 30, 2008 was primarily the result of the changes in operating assets and liabilities and deferred income taxes. During the second quarter of 2009, we continued to effectively manage our working capital levels by reducing accounts receivables and inventory levels and taking advantage of vendor payment terms.
Net cash used in investing activities decreased to $4.9 million for the six months ended June 30, 2009 as compared to $8.3 million for the six months ended June 30, 2008, a decrease of $3.4 million. The decrease was primarily related to reduction in capital expenditures in 2009. During the six month period ended June
30, 2008 we acquired our former third party distributor in New Zealand, whereas no acquisitions occurred in 2009.
Cash flow used by financing activities was $49.2 million for the six months ended June 30, 2009 as compared to $56.6 million for the six months ended June 30, 2008, representing a decrease in cash flow used of $7.3 million. Cash used in financing activities is primarily related to our continued focus on
reducing our level of outstanding debt, for the six months ended June 30, 2009, we reduced our debt by $50.3 million. In the first quarter of 2009, we completed our repatriation of foreign earnings which was initiated during the fourth quarter of 2008 and used a portion of the proceeds to reduce our level of outstanding debt. Additionally, in the fourth quarter of 2008, we suspended our quarterly dividend payment in order to redirect the use of these funds to pay down outstanding debt.
Capital Expenditures
Capital expenditures totaled $4.7 million for the six months ended June 30, 2009 and $6.3 million for the six months ended June 30, 2008. We currently expect our 2009 capital expenditures to be in line with 2008, ranging from $10 to $12 million.
Debt Service
Our long-term debt decreased to $369.0 million as of June 30, 2009 from $419.3 million as of December 31, 2008. After giving effect to $369.0 million in borrowings under the credit agreement entered into on October 18, 2005 (2005 Senior Credit
Facility) and letters of credit outstanding, total availability under the 2005 Senior Credit Facility was $266.0 million as of June 30, 2009.
The interest rate and certain fees that we pay in connection with the 2005 Senior Credit Facility are subject to periodic adjustment based on changes in our consolidated leverage ratio. In May 2008, we entered into an interest rate swap agreement to manage interest costs and the risk associated with changing interest
rates. Under this swap, we pay at a fixed rate and receive payments at a variable rate. The swap effectively fixes the floating LIBOR-based interest rate to 3.755% on $300.0 million of the outstanding balance as of June 30, 2009 under the 2005 Senior Credit Facility, with the outstanding balance subject to the swap declining over time. The amount of the outstanding balance subject to the swap declines as follows: to $300.0 million on November 28, 2008 (through November, 2009); to $200.0 million on November 28,
2009 (through November, 2010) and to $100.0 million on November 28, 2010 (through November 28, 2011).
Stockholders’ Equity
Share Repurchase Program—On October 16, 2007, our Board of Directors authorized a share repurchase authorization of up to $300.0 million of our common stock. Under the existing share repurchase authorization,
$280.1 million was available for repurchase as of June 30, 2009. No shares were repurchased during the year ended December 31, 2008 and six months ended June 30, 2009. Share repurchases under this authorization may be made through open market transactions, negotiated purchase or otherwise, at times and in such amounts as we deem appropriate. This share repurchase authorization may be suspended, limited or terminated at any time without notice.
Dividend Program—Our Board of Directors declared dividends in the first three quarter of 2008 of $0.08 per common share. On October 16, 2008, we announced that we would suspend the payment of the quarterly cash dividend and redirect the use of those funds
to reduce debt. The decision to pay a dividend is reviewed quarterly and requires declaration by our Board of Directors.
Factors That May Affect Future Performance
General Business and Economic Conditions–Our business has been affected by general business and economic conditions, and these conditions could have an impact on future demand for our products. The U.S.
macroeconomic environment continues to be challenging and was the primary factor in a slowdown in the mattress industry. In addition, our International segment experienced further weakening as a result of certain consumer trends in several European and Asian markets. We expect the economic environment in the U.S., Europe and Asia to continue to be challenging.
Maintaining financial flexibility is our primary short-term focus. In light of the macroeconomic environment, we took steps to further align our cost structure with our anticipated level of Net sales. During the second quarter of 2009, we have continued to increase our financial flexibility by reducing our inventory,
improving collections, lowering expenses and paying down debt. During the remainder of 2009, we expect to continue to pursue certain key strategies including: maintaining focus on premium mattresses and pillows and regularly introducing new products; investing in increasing our global brand awareness; extending our presence and improving our Retail account productivity; investing in our operating infrastructure to meet the requirements of our business; and taking actions to further improve our financial flexibility
and strengthen our business.
Managing Growth—We have grown rapidly, with our Net sales increasing from $221.5 million in 2001 to $1,106.7 million in 2007 and our Net sales were $927.8 million for the year ended December 31, 2008. For the six months ended June 30, 2009, our
net sales were $362.3 million. In the past, our growth has placed, and may continue to place, a strain on our management, production, product distribution network, information systems and other resources. In response to these challenges, management has continued to enhance operating and financial infrastructure. These expenditures, as well as expenditures for advertising and other marketing-related activities are made as the continued growth in the business allows us the ability to invest. However,
these expenditures may be limited by lower than planned sales or an inflationary cost environment.
Gross Margins—Our gross margin is primarily impacted by the cost of raw materials, operational efficiency, product and channel mix and volume incentives offered to certain retail accounts. Future increases in raw material prices could have a negative impact
on our gross margin if we do not raise prices to cover increased cost. Our gross margin can also be impacted by our operational efficiencies, including the particular levels of utilization at our three manufacturing facilities. Our margins are also impacted by the growth in our Retail channel as sales in our Retail channel are at wholesale prices whereas sales in our Direct channel are at retail prices. Additionally, our overall product mix has shifted to mattresses and other products over the last several years,
which has impacted our gross margins because mattresses generally carry lower margins than pillows and are sold with lower margin products such as foundations and bed frames.
Competition—Participants in the mattress and pillow industries compete primarily on price, quality, brand name recognition, product availability and product performance. We compete with a number of different types of mattress alternatives, including standard
innerspring mattresses, other foam mattresses, waterbeds, futons, air beds and other air-supported mattresses. These alternative products are sold through a variety of channels, including furniture and bedding stores, specialty bedding stores, department stores, mass merchants, wholesale clubs, telemarketing programs, television infomercials and catalogs.
Our largest competitors have significant financial, marketing and manufacturing resources and strong brand name recognition, and sell their products through broad and well established distribution channels. Additionally, we believe that a number of our significant competitors offer mattress products claimed to be similar
to our TEMPUR® mattresses and pillows. We provide strong channel profits to our retailers and distributors which management believes will continue to provide an attractive business model for our retailers and discourage them from carrying competing lower-priced products.
Significant Growth Opportunities—We believe there are significant opportunities to take market share from the innerspring mattress industry as well as other sleep surfaces. Our market share of the overall mattress industry is relatively small in terms of
both dollars and units, which we believe provides us with a significant opportunity for growth. By broadening our brand awareness and offering superior sleep surfaces, we believe consumers will over time adopt our products at an increasing rate, which should expand our market share. In addition, by expanding distribution within our existing accounts, we believe we have the opportunity to grow our business. By extending our product line, we should be able to continue to expand the number of Tempur-Pedic
models offered at the retail store level, which should lead to increased sales. Based on this strategy we believe a focus on expanding distribution within our existing accounts provides for continued growth opportunities and market share gains. However, our business may be affected by general business and economic conditions that could have an impact on demand for our products. Our products are currently sold in approximately 6,600 furniture and bedding retail stores in the U.S., out of a total of approximately
10,000 stores we have identified as appropriate targets. Within this addressable market, our plan is to increase our total penetration to a total of 7,000 to 8,000 over time. Our products are also sold in approximately 5,000 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.
Financial Leverage—As of June 30, 2009, we had $369.0 million of total Long-term debt outstanding, and our Stockholders’ Equity was $109.2 million. Higher financial leverage makes us more vulnerable to general adverse competitive, economic and industry
conditions. Our repatriation of foreign earnings that was completed in the first quarter of 2009, suspending our quarterly cash dividend, and modest debt rebalancing between our Domestic and International segments, together with productivity improvements and cost containment initiatives should enable us to decrease our financial leverage and increase our financial flexibility. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will
be available under our 2005 Senior Credit Facility.
Exchange Rates—As a multinational company, we conduct our business in a wide variety of currencies and are therefore subject to market risk for changes in foreign exchange rates. Foreign currency exchange rate movements 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 movements. Should currency rates change sharply, our results could be negatively impacted.
We use foreign exchange forward contracts to manage a portion of the exposure to the risk related to intercompany debt and interest payments. These hedging transactions may not succeed in effectively managing our foreign currency exchange rate risk related to these transactions. 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 annual report on Form 10-K for the year ended December 31, 2008. There have been no material changes to our critical accounting
policies and estimates in 2009.
Impact of Recently Issued Accounting Pronouncements
See Note 2 in the Notes to Condensed Consolidated Financial Statements in ITEM 1 under Part I of this report for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein
by reference.
Foreign Currency Exposures
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. Foreign currency exchange rate movements 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 movements. Should currency rates change sharply, our results could be negatively impacted.
We use foreign exchange forward contracts to manage a portion of the exposure to the risk related to intercompany debt and interest payments. These hedging transactions may not succeed in effectively managing our foreign currency exchange rate risk related to these transactions. A sensitivity analysis indicates the
potential loss in fair value on foreign currency forward contracts outstanding as of June 30, 2009, would be approximately $4.6 million if an adverse 10% change in foreign currencies subject to these contracts occurred. 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 has a variable rate. In May 2008, we entered into a three year interest rate swap agreement to manage interest costs and the risk associated with changing interest rates. Under this swap, we
pay at a fixed rate and receive payments at a variable rate. The swap effectively fixes the floating LIBOR-based interest rate to 3.755% on $350.0 million of the outstanding balance under the 2005 Senior Credit Facility, with the outstanding balance subject to the swap declining over time. The amount of the outstanding balance subject to the swap declines as follows: to $300.0 million on November 28, 2008 (through November, 2009); to $200.0 million on November 28, 2009 (through November, 2010) and to $100.0 million
on November 28, 2010 (through November 28, 2011).
Interest rate changes generally do not affect the market value of such debt, but do impact the amount of our interest payments and therefore, our future earnings and cash flows, assuming other factors are held constant. On June 30, 2009, we had variable-rate debt of approximately $69.0 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 $0.7 million.
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (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 Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2009 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 Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During our last fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
|
ITEM 1. |
New York Attorney General—In December 2008, the Office of the Attorney General of the State of New York, Antitrust Bureau (OAG) requested that the Company consider discontinuing its unilateral retail price policy (UPPL)
in the State of New York, and informed them that it may bring an enforcement action against the Company under New York law if they chose not to do so. The Office of the Attorney General has made information and document requests of the Company and the Company is cooperating with these requests. The Company believes that its UPPL complies with state and federal law and, should the OAG challenge the UPPL, intends to vigorously defend it. However, due to the inherent uncertainties of this matter, the Company
cannot at this time predict the outcome of any such enforcement action, if brought, and can give no assurance that these claims will not have a material adverse affect on its financial position or results of operation.
We are involved in various other legal proceedings incidental to the operations of its business. We believe that the outcome of all such pending legal proceedings in the aggregate will not have a materially adverse affect on our business, financial condition, liquidity, or operating results.
|
ITEM 1A. |
In addition to the other information set forth in this 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
for the year ended December 31, 2008, 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 a pending tax proceeding in Denmark, and an adverse decision would reduce our liquidity and profitability.
On October 24, 2007, we received an income tax assessment from the Danish Tax Authority with respect to the 2001, 2002 and 2003 tax years. The tax assessment relates to the royalty paid by one of Tempur-Pedic International’s U.S. subsidiaries to a Danish subsidiary and the position taken by the Danish Tax Authority could
apply to subsequent years. The total tax assessment is $39.3 million including interest and underpayment penalties. On January 23, 2008 we filed timely complaints with the Danish National Tax Tribunal denying the tax assessments. The National Tax Tribunal formally agreed to place the Danish tax litigation on hold pending the outcome of a Bilateral APA between the United States and the Danish Tax Authority. A Bilateral APA involves an agreement between the IRS and the taxpayer, as well as a negotiated
agreement with one or more foreign competent authorities under applicable income tax treaties. On August 8, 2008, we filed the Bilateral APA with the IRS and the Danish Tax Authority. The IRS began analyzing the Bilateral APA in the first quarter of 2009 and expects to finalize its position by the first quarter of 2010. We believe we have meritorious defenses to the proposed adjustment and will oppose the assessment in the Danish courts, as necessary. It is reasonably possible under FIN
48 that the amount of the total unrecognized tax benefits may change in the next twelve months. An estimate of the amount of such change cannot be made at this time.
Our current executive officers, directors and their affiliates own a large percentage of our common stock and could limit you from influencing corporate decisions.
As of July 24, 2009, our executive officers, directors, and their respective affiliates own, in the aggregate, approximately 12% of our outstanding common stock on a fully diluted basis, after giving effect to the vesting of all unvested options. These stockholders,
as a group, are able to influence all matters requiring approval by our stockholders, including mergers, sales of assets, the election of all directors, and approval of other significant corporate transactions, in a manner with which you may not agree or that may not be in your best interest. In addition, we have several stockholders who presently own more than 5% of our outstanding common stock, and as a result, may be able to influence all matters requiring the approval of other significant corporate transactions.
Allegations of resale price maintenance by the Company could adversely affect our operations.
Our retail pricing and advertising policies may be challenged under antitrust laws in the U.S. and abroad. In addition, the State of Maryland recently adopted legislation purporting to prohibit manufacturers from entering into contracts, combinations or conspiracies with retailers to charge minimum resale prices for
their goods, and other states and Congress may adopt similar legislation. If antitrust regulators in any jurisdiction in which we do business initiate investigations into or challenge our pricing or advertising policies, our efforts to respond could force us to divert management resources and we could incur significant unanticipated costs. If such an investigation were to result in a charge that our practices or policies were in violation of applicable antitrust or other laws or regulations, we could be subject
to significant additional costs of defending such charges in a variety of venues and, ultimately, if there were a finding that we were in violation of antitrust or other laws or regulations, there could be an imposition of fines, damages for persons injured, as well as injunctive or other relief. Any requirement that we pay fines or damages could decrease our liquidity and profitability, and any investigation that requires significant management attention or causes us to change our business practices could disrupt
our operations, also resulting in a decrease in our liquidity and profitability. An antitrust class action suit against us could result in potential liabilities, substantial costs and the diversion of our management’s attention and resources, regardless of the outcome. See ITEM 3, “Legal Proceedings” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2008.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable
None
Tempur-Pedic International’s annual meeting of stockholders was held on May 5, 2009. Proposals 1, 2 and 3, the only Proposals presented for a vote at the meeting, were approved. The results are as follows:
Proposal 1
Election of the following nominees for director to serve a one-year term until the next annual meeting of stockholders:
|
For |
Authority Withheld |
|||||||
|
H. Thomas Bryant |
68,020,864 | 572,514 | ||||||
|
Francis A. Doyle |
67,980,835 | 612,544 | ||||||
|
John Heil |
67,993,373 | 600,005 | ||||||
|
Peter K. Hoffman |
67,983,057 | 610,322 | ||||||
|
Sir Paul Judge |
67,977,443 | 615,936 | ||||||
|
Nancy F. Koehn |
68,019,898 | 573,481 | ||||||
|
Christopher A. Masto |
68,018,970 | 574,408 | ||||||
|
P. Andrews McLane |
68,011,042 | 582,337 | ||||||
|
Mark Sarvary |
68,020,779 | 572,599 | ||||||
|
Robert Trussell, Jr. |
68,015,162 | 578,216 | ||||||
Proposal 2
Approval of the First Amendment to Amended and Restated 2003 Equity Incentive Plan.
|
For |
Against |
Abstained |
Broker Non-Votes | ||||||
| 39,792,340 | 20,179,220 | 17,244 | 8,604,574 | ||||||
Proposal 3
Ratification of appointment of Ernst & Young LLP as the Company’s independent auditors for fiscal year 2009.
|
For |
Against |
Abstained | |||||
| 68,470,649 | 110,209 | 12,520 | |||||
Proposals 1, 2 and 3 are described in detail in Tempur-Pedic International’s definitive proxy statement dated March 25, 2009, for the Annual Meeting of Stockholders held on May 5, 2009.
(a) Not applicable.
(b) Not applicable.
The following is an index of the exhibits included in this report:
|
10.1 |
||
|
10.2 |
||
|
31.1 |
||
|
31.2 |
||
|
32.1 |
* | |
| (1) | Incorporated by reference from Appendix A to the Registrant’s Registration Proxy Statement on Schedule 14A (File No. 001-31922) filed with the Commission on March 3, 2009. | |
| (2) | Indicates management contract or compensatory plan or arrangement. | |
|
* |
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 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.
|
TEMPUR-PEDIC INTERNATIONAL INC. | ||||||||
|
(Registrant) | ||||||||
|
Date: July 27, 2009 |
By: |
/s/ DALE E. WILLIAMS | ||||||
|
Dale E. Williams | ||||||||
|
Executive Vice President, Chief Financial Officer, | ||||||||
|
and Secretary | ||||||||
34
EMPLOYMENT AND NON-COMPETITION AGREEMENT
(Lou Hedrick Jones)
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the “Agreement”) is executed as of this first day of June, 2009, and effective as of June 15, 2009 (the “Date
of Hire”), by and between Tempur-Pedic International Inc., a Delaware corporation (the “Company”), and Lou Hedrick Jones, an individual (“Employee”).
In consideration of the premises and the mutual agreements and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Company and Employee,
IT IS HEREBY AGREED AS FOLLOWS:
ARTICLE I
EMPLOYMENT
1.1 Term of Employment. Effective as of the Date of Hire, the Company agrees to employ Employee, and Employee accepts employment by the Company, for the period commencing on the Date of Hire and ending
on the first anniversary of the Date of Hire (the “Initial Term”), subject to earlier termination as hereinafter set forth in Article III. Unless earlier terminated in accordance with Article III, following the expiration of the Initial Term, this Agreement shall be automatically renewed for successive one-year periods (collectively, the “Renewal Terms”;
individually, a “Renewal Term”) unless, at least ninety (90) days prior to the expiration of the Initial Term or the then current Renewal Term, either party provides the other with a written notice of intention not to renew, in which case the Employee’s employment with the Company, and the Company’s obligations hereunder, shall terminate as of the end of the Initial Term or said Renewal Term, as applicable. Except
as otherwise expressly provided herein, the terms of this Agreement during any Renewal Term shall be the same as the terms in effect immediately prior to such renewal, subject to any such changes or modifications as mutually may be agreed between the parties as evidenced in a written instrument signed by both the Company and Employee.
1.2 Position and Duties. Employee shall be employed in the position of Executive Vice President, General Counsel or such other executive position as may be assigned from time to time by the Company’s
Chief Executive Officer; provided that any executive position that does not also include continuing in the role of General Counsel will require the consent of the Employee. In such capacity, Employee shall be subject to the authority of, and shall report to, the Company’s Chief Executive Officer. Employee’s duties and responsibilities shall include those customarily attendant to Employee’s position and such
other duties and responsibilities as may be assigned from time to time by the Chief Executive Officer. Employee shall devote Employee’s entire business time, loyalty, attention and energies exclusively to the business interests of the Company while employed by the Company, and shall perform her duties and responsibilities diligently and to the best of her ability.
1.3 Other Documents. On or prior to the Date of Hire the Employee will execute and deliver to the Company the following: Relocation Assistance Payback Agreement and Corporate Governance Handbook
Acknowledgement, each in the form previously furnished by the Company.
ARTICLE II
COMPENSATION AND OTHER BENEFITS
2.1 Base Salary. The Company shall pay Employee an initial annual salary of $330,000.00 (“Base Salary”), payable in accordance
with the normal payroll practices of the Company. The Employee’s Base Salary will be reviewed and be subject to adjustment from time to time by the Board of Directors or its Compensation Committee at their discretion in accordance with the Company’s annual review policy. Based on the Company’s current policy, the Company expects Employee’s first annual review would be April 1, 2010.
2.2 Performance Bonus.
(a) Employee will be eligible to earn an annual performance-based bonus based on performance criteria approved by the Company’s Board of Directors or its Compensation Committee for each full or pro
rata portion of any fiscal year during which Employee is employed by the Company (each, a “Bonus Year”), the terms and conditions of which as well as Employee’s entitlement thereto being determined annually in the sole discretion of the Company’s Board of Directors or its Compensation Committee (the “Performance Bonus”). The amount
of the Performance Bonus will vary based on the achievement of Company and individual performance criteria established by the Company’s Board of Directors or its Compensation Committee, but the performance criteria will be set to target a Performance Bonus equal to a designated percentage of Base Salary as of December 31st of the applicable Bonus Year if the performance criteria are met (the “Target Bonus”).
(b) For 2009, Employee will be entitled to a Performance Bonus that will be pro rated for 2009 based on the Date of Hire. The performance criteria for Employee’s 2009 Performance Bonus will be determined by
the Compensation Committee promptly after the date of this Agreement, in accordance with the Company’s Annual Incentive Bonus Plan For Senior Executives, and the performance criteria will be set to target a Performance Bonus equal to 55% of Employee’s Base Salary for 2009.
2.3 Grant of Stock Option.
(a) Pursuant to the Tempur-Pedic International Inc. 2003 Equity Incentive Plan, as amended, effective as of the Date of Hire the Employee shall be granted an option to purchase eighty thousand (80,000) shares of the common stock
of the Company (the “Optioned Shares”) at a purchase price per Optioned Share equal to the closing price on the New York Stock Exchange of the Company’s common stock on the Date of Hire. This grant shall vest in four installments over four years and shall be made pursuant to a stock option agreement between the Company and Employee in the form attached hereto as Exhibit
A.
(b) The Company expects that Employee will be considered for an additional stock option grant in April 2011, and annually thereafter, but the timing, amount and terms of any future grants will be subject to the discretion of
the Board of Directors or the Compensation Committee.
2.4 Hiring Bonus. As additional consideration for Employee’s agreement to accept employment with the Company, the Company will pay to Employee a one-time bonus of $50,000. This bonus is payable ninety (90) days after the Date of Hire, provided
that, as of the date payment would otherwise be made, the Employee is considered an employee of the Company in good standing; and provided further that in the event that, within twelve months of the Date of Hire, Employee is terminated For Cause pursuant to paragraph 3(c) below, or resigns her employment with the Company other than for Good Reason, Employee shall repay to the Company the entire amount of the bonus described above within thirty
(30) days of the termination of Employee's employment.
2.5 Benefit Plans. Employee will be eligible to participate in the Company’s retirement plans that are qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”),
and in the Company’s welfare benefit plans that are generally applicable to all executive employees of the Company (the “Plans”), in accordance with the terms and conditions thereof. A brief description of the Company’s current benefits is contained in Exhibit B hereto.
2.6 Automobile Allowance. The Company shall pay to Employee an automobile allowance of $600.00 per month.
2.7 Vacation. Employee shall be entitled to three weeks (fifteen (15) days) vacation days in the calendar year after the Date of Hire and three weeks (fifteen days) at Employee’s one-year anniversary
and each year thereafter, subject to and to be taken in accordance with the Company’s general vacation policies for similarly situated executive employees.
2.8 Relocation Benefits. The Company will provide Employee with relocation assistance in accordance with the policy and other provisions set forth in Exhibit
C.
2.9 Expenses. The Company shall reimburse Employee for all authorized and approved expenses incurred in the course of the performance of Employee’s duties and responsibilities pursuant to this Agreement
and consistent with the Company’s policies with respect to travel, entertainment and miscellaneous expenses, and the requirements with respect to the reporting of such expenses.
2.10 Withholdings. All payments to be made by the Company hereunder will be subject to any withholding requirements.
ARTICLE III
TERMINATION
3.1 Right to Terminate; Automatic Termination.
(a) Termination by Company Without Cause. Subject to Section 3.2, the Company may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time and for
any reason.
(b) Termination by Employee for Good Reason. Subject to Section 3.2, Employee may terminate her employment obligation hereunder (but not her obligations under Article IV hereof) for “Good Reason”
(as hereinafter defined) if Employee gives written notice thereof to the Company within thirty (30) days of the event she deems to constitute Good Reason (which notice shall specify the grounds upon which such notice is given) and the Company fails, within thirty (30) days of receipt of such notice, to cure or rectify the grounds for such Good Reason termination set forth in such notice. “Good Reason” shall mean any of the following: (i) relocation of Employee’s principal
workplace over sixty (60) miles from the Company’s existing workplaces without the consent of Employee (which consent shall not be unreasonably withheld, delayed or conditioned), or (ii) the Company’s material breach of this Agreement or any other written agreement between Employee and the Company which is not cured within thirty (30) days after receipt by the Company from Employee of written notice of such breach.
(c) Termination by Company For Cause. Subject to Section 3.2, the Company may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time “For
Cause” (as defined below) by giving notice to Employee stating the basis for such termination, effective immediately upon giving such notice or at such other time thereafter as the Company may designate. “For Cause” shall mean any of the following: (i) Employee’s willful and continued failure to substantially perform the reasonably assigned duties with the Company which are consistent with Employee’s position and job description referred to in this Agreement,
other than any such failure resulting from incapacity due to physical or mental illness, after a written notice is delivered to Employee by the Board of Directors of the Company which specifically identifies the manner in which Employee has not substantially performed the assigned duties and allowing Employee thirty (30) days after receipt by Employee of such notice to cure such failure to perform, (ii) material breach of this or any other written agreement between Employee and the Company which is not cured
within thirty (30) days after receipt by the Employee from the Company of written notice of such breach, (iii) any material violation of any written policy of the Company which is not cured within thirty (30) days after receipt by Employee from the Company of written notice of such violation, (iv) Employee’s willful misconduct which is materially and demonstrably injurious to the Company, (v) Employee’s conviction by a court of competent jurisdiction of, or her pleading guilty or nolo
contendere to, any felony, or (vi) Employee’s commission of an act of fraud, embezzlement, or misappropriation against the Company or any breach of fiduciary duty or breach of the duty of loyalty, including, but not limited to, the offer, payment, solicitation or acceptance of any unlawful bribe or kickback with respect to the Company’s business. For purposes of this paragraph, no act, or failure to act, on Employee’s part shall be considered “willful” unless done,
or omitted to be done, in knowing bad faith and without reasonable belief that the action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, expressly authorized by a resolution duly adopted by the Board of Directors or based upon the written advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, in good faith and in the best interests of the Company. Notwithstanding the foregoing, Employee shall
not be deemed to have been terminated For Cause unless and until there shall have been delivered to Employee a copy of a resolution, duly adopted by the Board of Directors at a meeting of the Board called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee’s counsel, to be heard before the Board), finding that in the good faith opinion of the Board of Directors Employee committed the conduct set forth above in (i), (ii), (iii), (iv), (v)
or (vi) of this Section and specifying the particulars thereof in detail.
(d) Termination Upon Death or Disability. Subject to Section 3.2, Employee’s employment and the Company’s obligations under this Agreement shall terminate: (i) automatically,
effective immediately and without any notice being necessary, upon Employee’s death; and (ii) in the event of the disability of Employee, by the Company giving notice of termination to Employee. For purposes of this Agreement, “disability” means the inability of Employee, due to a physical or mental impairment, for ninety (90) days (whether or not consecutive) during any period of 360 days, to perform, with reasonable accommodation, the essential functions of the work contemplated
by this Agreement. In the event of any dispute as to whether Employee is disabled, the matter shall be determined by the Company’s Board of Directors in consultation with a physician selected by the Company’s health or disability insurer or another physician mutually satisfactory to the Company and the Employee. The Employee shall cooperate with the efforts to make such determination or be subject to immediate discharge. Any such determination shall be conclusive and
binding on the parties. Any determination of disability under this Section 3.1 is not intended to alter any benefits any party may be entitled to receive under any long-term disability insurance policy carried by either the Company or Employee with respect to Employee, which benefits shall be governed solely by the terms of any such insurance policy. Nothing in this subsection shall be construed as limiting or altering any of Employee’s rights under State workers compensation laws
or State or federal Family and Medical Leave laws.
3.2 Rights Upon Termination.
(a) Section 3.1(a) and 3.1(b) Termination. If Employee’s employment terminates pursuant to Section 3.1(a) or 3.1(b) hereof, Employee shall have no further rights against the Company hereunder, except
for the right to receive, following execution of a release and waiver in form satisfactory to the Company in the case of clauses (ii), (iii) and (v) below, (i) any unpaid Base Salary and the value of any accrued but unused vacation, (ii) a pro-rata portion of any Performance Bonus that would be payable with respect to the Bonus Year in which the termination occurs (based on the number of days of the Bonus Year prior to the effective date of termination and the amount of the Target Bonus set by the Board
of Directors or Compensation Committee for the Employee for such Bonus Year) and whatever rights as to stock options as Employee may have pursuant to any stock option agreement with the Company, (iii) payment of Base Salary for twelve (12) months (the “Severance Period”), payable in accordance with the normal payroll practices of the Company, (iv) reimbursement of expenses to which Employee is entitled under Section 2.9 hereof,
and (v) continuation of the welfare plans of the Company as detailed in Section 2.5 hereof for the duration of the Severance Period.
(b) Section 3.1(c) and 3.1(d) Termination. If Employee’s employment is terminated pursuant to Sections 3.1(c) or 3.1(d) hereof, or if Employee quits employment (other than for Good Reason) notwithstanding
the terms of this Agreement, Employee or Employee’s estate shall have no further rights against the Company hereunder, except for the right to receive, following execution of a release and waiver in form satisfactory to the Company in the case of clause (iii) below, (i) any unpaid Base Salary, (ii) in the case of Section 3.1(d) hereof, the value of any accrued but unused vacation, (iii) in the case of Section 3.1(d) hereof, a pro-rata portion (based on the number of days of the Bonus Year
prior to the effective date of termination) of any Performance Bonus that would be payable with respect to the Bonus Year in which the termination occurs, and whatever rights as to stock options as Employee may have pursuant to the any stock option agreement with the Company and (iv) reimbursement of expenses to which Employee is entitled under Section 2.9 hereof.
ARTICLE IV
CONFIDENTIALITY; NON-COMPETITION; NON-SOLICITATION
4.1 Covenants Regarding Confidential Information, Trade Secrets and Other Matters. Employee covenants and agrees as follows:
(a) Definitions. For purposes of this Agreement, the following terms are defined as follows:
(1) “Trade Secret” means all information possessed by or developed for the Company or any of its subsidiaries, including, without limitation, a compilation, program, device, method, system, technique
or process, to which all of the following apply: (i) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and (ii) the information is the subject of efforts to maintain its secrecy that are reasonable under the circumstances.
(2) “Confidential Information” means information, to the extent it is not a Trade Secret, which is possessed by or developed for the Company or any of its subsidiaries and which relates to the Company’s
or any of its subsidiaries’ existing or potential business or technology, which information is generally not known to the public and which information the Company or any of its subsidiaries seeks to protect from disclosure to its existing or potential competitors or others, including, without limitation, for example: business plans, strategies, existing or proposed bids, costs, technical developments, existing or proposed research projects, financial or business projections, investments, marketing
plans, negotiation strategies, training information and materials, information generated for client engagements and information stored or developed for use in or with computers. Confidential Information also includes information received by the Company or any of its subsidiaries from others which the Company or any of its subsidiaries has an obligation to treat as confidential.
(b) Nondisclosure of Confidential Information. Except as required in the conduct of the Company’s or any of its subsidiaries’ business or as expressly authorized in writing on behalf of the
Company or any of its subsidiaries, Employee shall not use or disclose, directly or indirectly, any Confidential Information during the period of her employment with the Company. In addition, following the termination for any reason of Employee’s employment with the Company, Employee shall not use or disclose, directly or indirectly, any Confidential Information. This prohibition does not apply to Confidential Information after it has become generally known in the industry in which
the Company conducts its business. This prohibition also does not prohibit Employee’s use of general skills and know-how acquired during and prior to employment by the Company, as long as such use does not involve the use or disclosure of Confidential Information or Trade Secrets.
(c) Trade Secrets. During Employee’s employment by the Company, Employee shall do what is reasonably necessary to prevent unauthorized misappropriation or disclosure and threatened misappropriation
or disclosure of the Company’s or any of its subsidiaries’ Trade Secrets and, after termination of employment, Employee shall not use or disclose the Company’s or any of its subsidiaries’ Trade Secrets as long as they remain, without misappropriation, Trade Secrets.
(d) Copyright. All copyrightable work by the Employee relating to the Company’s business or the business of any subsidiary or affiliate of the Company during the term of the Employee’s employment
by the Company is intended to be “work made for hire” as defined in Section 101 of the Copyright Act of 1976, and shall be the property of the Company. If the copyright to any such copyrightable work is not the property of the Company by operation of law, the Employee will, without further consideration, assign to the Company all right, title and interest in such copyrightable work and will assist the Company and its nominees in every way, at the Company’s expense, to secure, maintain
and defend for the Company’s benefit, copyrights and any extensions and renewals thereof on any and all such work including translations thereof in any and all countries, such work to be and remain the property of the Company whether copyrighted or not.
(e) Exceptions. The provisions of paragraphs (b) and (c) above will not be deemed to prohibit any disclosure that is required by law or court order, provided that Employee has not intentionally taken actions
to trigger such required disclosure and, so long as not prohibited by any applicable law or regulation, the Company is given reasonable prior notice and an opportunity to contest or minimize such disclosure.
4.2 Non-Competition.
(a) During Employment. Except as described in paragraph (c) below, during Employee’s employment hereunder, Employee shall not engage, directly or indirectly, as an employee, officer, director, partner,
manager, consultant, agent, owner (other than a minority shareholder or other equity interest of not more than 1% of a company whose equity interests are publicly traded on a nationally recognized stock exchange or over-the-counter) or in any other capacity, in any competition with the Company or any of its subsidiaries.
(b) Subsequent to Employment. Except as described in paragraph (c) below, for a two year period following the termination of Employee’s employment for any reason or without reason, Employee shall
not in any capacity (whether in the capacity as an employee, officer, director, partner, manager, consultant, agent or owner (other than a minority shareholder or other equity interest of not more than 1% of a company whose equity interests are publicly traded on a nationally recognized stock exchange or over-the-counter), directly or indirectly advise, manage, render or perform services to or for any person or entity which is engaged in a business competitive to that of the Company or any of its subsidiaries
(including without limitation those businesses listed in Appendix A to the form of stock option agreement attached hereto as Exhibit A) within any geographical location wherein the Company or any of its subsidiaries produces, sells or markets its goods and services at the time of such termination or within a one-year period prior to such termination.
(c) Notwithstanding paragraphs (a) and (b) above, the Company acknowledges that the activities included in Exhibit D hereto will not be prohibited by paragraphs (a) and (b) above. In addition, the Company
agrees that any future stock option agreement will include a similar exception from the non-competition provisions in the same form as set forth in the form of stock option agreement attached hereto as Exhibit A.
4.3 Non-solicitation. For a two year period following the termination of Employee’s employment for any reason or without reason, Employee shall not solicit or induce any person who was an employee
of the Company or any of its subsidiaries on the date of Employee’s termination or within three months prior to leaving her employment with the Company or any of its subsidiaries to leave their employment with the Company.
4.4 Return of Documents. Immediately upon termination of employment, Employee will return to the Company, and so certify in writing to the Company, all the Company’s or any of its subsidiaries’
papers, documents and things, including information stored for use in or with computers and software applicable to the Company’s and its subsidiaries’ business (and all copies thereof), which are in Employee’s possession or under Employee’s control, regardless whether such papers, documents or things contain Confidential Information or Trade Secrets.
4.5 No Conflicts. To the extent that they exist, Employee will not disclose to the Company or any of its subsidiaries any of Employee’s previous employer’s confidential information or trade
secrets. Further, Employee represents and warrants that Employee has not previously assumed any obligations inconsistent with those of this Agreement and that employment by the Company does not conflict with any prior obligations to third parties. In addition, Employee and the Company agree that it is important for any prospective employer to be aware of this Agreement, so that disputes concerning this Agreement can be avoided in the future. Therefore, the Employee agrees that,
following termination of employment with the Company, the Company may forward a copy of Article IV of this Agreement (and any related Exhibits hereto) to any future prospective or actual employer, and the Employee releases the Company from any claimed liability or damage caused to the Employee by virtue of the Company’s act in making that prospective or actual employer aware of Article IV of this Agreement (and any related Exhibits hereto).
4.6 Agreement on Fairness. Employee acknowledges that: (i) this Agreement has been specifically bargained between the parties and reviewed by Employee, (ii) Employee has had an opportunity to
obtain legal counsel to review this Agreement, and (iii) the covenants made by and duties imposed upon Employee hereby are fair, reasonable and minimally necessary to protect the legitimate business interests of the Company, and such covenants and duties will not place an undue burden upon Employee’s livelihood in the event of termination of Employee’s employment by the Company and the strict enforcement of the covenants contained herein.
4.7 Equitable Relief and Remedies. Employee acknowledges that any breach of this Agreement will cause substantial and irreparable harm to the Company for which money damages would be an inadequate remedy. Accordingly,
notwithstanding the provisions of Article V below, the Company shall in any such event be entitled to seek injunctive and other forms of equitable relief to prevent such breach and the prevailing party shall be entitled to recover from the other, the prevailing party’s costs (including, without limitation, reasonable attorneys’ fees) incurred in connection with enforcing this Agreement, in addition to any other rights or remedies available at law, in equity, by statute or pursuant to Article V below.
ARTICLE V
AGREEMENT TO SUBMIT ALL EXISTING OR FUTURE DISPUTES
TO BINDING ARBITRATION
The Company and Employee agree that any controversy or claim arising out of or related to this Agreement or Employee’s employment with or termination by the Company that is not resolved by the parties shall be settled by arbitration administered by the American Arbitration Association
under its National Rules for the Resolution of Employment Disputes. Said arbitration shall be conducted in Lexington, Kentucky. The parties further agree that the arbitrator may resolve issues of contract interpretation as well as law and award damages, if any, to the extent provided by the Agreement or applicable law. The parties agree that the costs of the arbitrator’s services shall be borne by the Company. The parties further agree that the arbitrator’s
decision will be final and binding and enforceable in any court of competent jurisdiction. In addition to the A.A.A.’s Arbitration Rules and unless otherwise agreed to by the parties, the following rules shall apply:
(a) Each party shall be entitled to discovery exclusively by the following means: (i) requests for admission, (ii) requests for production of documents, (iii) up to fifteen (15) written interrogatories (with any subpart to be counted as a separate interrogatory), and
(iv) depositions of no more than six individuals.
(b) Unless the arbitrator finds that delay is reasonably justified or as otherwise agreed to by the parties, all discovery shall be completed, and the arbitration hearing shall commence within five months after the appointment of the arbitrator.
(c) Unless the arbitrator finds that delay is reasonably justified, the hearing will be completed, and an award rendered within thirty (30) days of commencement of the hearing.
The arbitrator’s authority shall include the ability to render equitable types of relief and, in such event, any aforesaid court may enter an order enjoining and/or compelling such actions or relief ordered or as found by the arbitrator. The arbitrator also shall
make a determination regarding which party’s legal position in any such controversy or claim is the more substantially correct (the “Prevailing Party”) and the arbitrator shall require the other party to pay the legal and other professional fees and costs incurred by the Prevailing Party in connection with such arbitration proceeding and any necessary court action.
Notwithstanding the foregoing provisions of this Article V, the parties expressly agree that a court of competent jurisdiction may enter a temporary restraining order or an order enjoining a breach of Article IV of this Agreement without submission of the underlying dispute to an arbitrator. Such
remedy shall be cumulative and nonexclusive, and shall be in addition to any other remedy to which the parties may be entitled.
ARTICLE VI
GENERAL PROVISIONS
6.1 Notices. Any and all notices provided for in this Agreement shall be given in writing and shall be deemed given to a party at the earlier of (i) when actually delivered to such party, or (ii) when mailed
to such party by registered or certified mail (return receipt requested) or sent to such party by courier, confirmed by receipt, and addressed to such party at the address designated below for such party as follows (or to such other address for such party as such party may have substituted by notice pursuant to this Section 6.1):
(a) If to the Company: Tempur-Pedic International
Inc.
1713 Jaggie Fox Way
Lexington, KY 40511
Attention: Chief Executive Officer
(b) If to Employee:
Lou Hedrick Jones
6724 Frankford Road
Dallas, TX 75252
6.2 Entire Agreement. This Agreement, together with the exhibits hereto, contains the entire understanding and the full and complete agreement of the parties and supersedes and replaces any prior understandings
and agreements among the parties with respect to the subject matter hereof (including, without limitation, the offer letter, dated May 6, 2009, between the Company and Employee).
6.3 Amendment. This Agreement may be altered, amended or modified only in a writing, signed by both of the parties hereto. Headings included in this Agreement are for convenience only and are
not intended to limit or expand the rights of the parties hereto. References to Sections herein shall mean sections of the text of this Agreement, unless otherwise indicated.
6.4 Assignability. This Agreement and the rights and duties set forth herein may not be assigned by either of the parties without the express written consent of the other party. This Agreement
shall be binding on and inure to the benefit of each party and such party’s respective heirs, legal representatives, successors and assigns.
6.5 Severability. If any court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then such invalidity or unenforceability shall have no effect on the
other provisions hereof, which shall remain valid, binding and enforceable and in full force and effect, and such invalid or unenforceable provision shall be construed in a manner so as to give the maximum valid and enforceable effect to the intent of the parties expressed therein.
6.6 Waiver of Breach. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party.
6.7 Governing Law; Jurisdiction; Construction. This Agreement shall be governed by the internal laws of the State of Kentucky, without regard to any rules of construction that would require application
of the laws of another jurisdiction. Any legal proceeding related to this Agreement and permitted under Section 4.7 and Article V hereof must be litigated in an appropriate Kentucky state or federal court, and both the Company and the Employee hereby consent to the exclusive jurisdiction of the Commonwealth of Kentucky for this purpose. The parties agree that they have been represented by counsel during the negotiation and execution of this Agreement, and accordingly each party waives the
application of any law, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party responsible for the drafting thereof.
6.8. Effective Date. The terms and conditions of this Agreement shall be effective as of the Date of Hire. In the event of the failure of Employee to commence her employment with the Company
(or at such other date as the Employee and the Company may mutually agree), this Agreement shall be null and void and of no force or effect.
6.9. Tax Compliance.
(a) The Company may withhold from any amounts payable hereunder any amounts required to be withheld under federal, state or local law and any other deductions authorized by Employee. The Company and the Employee agree that they will execute any and all amendments to this
Agreement as they mutually agree in good faith may be necessary to ensure compliance with the provisions of Section 409A (together with any implementing regulations, “Section 409A”) of the Code while preserving insofar as possible the economic intent of the respective provisions, so that Employee will not be subject to any tax (including interest and penalties) under Section 409A.
(b) For purposes of Section 409A, the right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments.
(c) With respect to any reimbursement of expenses of, or any provision of in-kind benefits to, the Employee, as specified under this Agreement, such reimbursement of expenses or provision of in-kind benefits shall be subject to the following conditions: (1) the expenses eligible
for reimbursement or the amount of in-kind benefits provided in one taxable year shall not affect the expenses eligible for reimbursement or the amount of in-kind benefits provided in any other taxable year, except for any medical reimbursement arrangement providing for the reimbursement of expenses referred to in Section 105(b) of the Code; (2) the reimbursement of an eligible expense shall be made no later than the end of the year after the year in which such expense was incurred; and (3) the right to reimbursement
or in-kind benefits shall not be subject to liquidation or exchange for another benefit.
(d) Notwithstanding anything to the contrary in this Agreement, if Employee is a “specified employee” as determined pursuant to Section 409A as of the date of Employee’s “separation from service” as defined in Treasury Regulation Section 1.409A-1(h) (or
any successor regulation) and if any payments or entitlements provided for in this Agreement constitute a “deferral of compensation” within the meaning of Section 409A and cannot be paid or provided in the manner provided herein without subjecting Employee to additional tax, interest or penalties under Section 409A, then any such payment or entitlement which is payable during the first six months following Employee’s “separation from service” shall be paid or provided to Employee
in a cash lump-sum on the first business day of the seventh calendar month immediately following the month in which Employee’s “separation from service” occurs or, if earlier, upon the Employee’s death. In addition, any payments or benefits due hereunder upon a termination of Employee’s employment which are a “deferral of compensation” within the meaning of Section 409A shall only be payable or provided to Employee (or Employee’s estate) upon a “separation
from service” as defined in Section 409A. Finally, for the purposes of this Agreement, amounts payable under Section 3.2 shall be deemed not to be a “deferral of compensation” subject to Section 409A to the extent provided in the exceptions in Treasury Regulation Sections 1.409A-1(b)(4) (“short-term deferrals”) and (b)(9) (“separation pay plans,” including the exception under subparagraph (iii)) and other applicable provisions of Treasury Regulation Section
1.409A-1 – A-6.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written above.
COMPANY:
TEMPUR-PEDIC INTERNATIONAL INC.
By: /s/ Mark Sarvary
Title: President and CEO
EMPLOYEE:
/s/ Lou Hedrick Jones
Lou Hedrick Jones
WITNESSED BY:
/s/Kristie Johns
Kristie Johns
Date: June 2, 2009
Exhibits:
Exhibit A Form of Stock Option Agreement
Exhibit B Summary of Welfare Benefit Plans
Exhibit C Relocation Benefits
Exhibit D Exception to Non-Competition Provisions
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark Sarvary, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tempur-Pedic International Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: July 27, 2009 |
/s/ MARK SARVARY | |||
|
Mark Sarvary | ||||
|
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dale E. Williams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tempur-Pedic International Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: July 27, 2009 |
/s/ DALE E. WILLIAMS | |||
|
Dale E. Williams | ||||
|
Executive Vice President, Chief Financial Officer, | ||||
|
and Secretary |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Tempur-Pedic International Inc. (the “Company”), that, to his knowledge,
the Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2009, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-Q. A signed original of this
statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
|
Date: July 27, 2009 |
By: |
/s/ MARK SARVARY | ||||||
|
Mark Sarvary | ||||||||
|
President and Chief Executive Officer | ||||||||
|
Date: July 27, 2009 |
By: |
/s/ DALE E. WILLIAMS | ||||||
|
Dale E. Williams | ||||||||
|
Executive Vice President, Chief Financial Officer,
and Secretary | ||||||||