UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 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 (§232.905 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 October 23,
2009 was 74,977,377 shares.
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This
quarterly report on Form 10-Q, including the information incorporated by
reference herein, contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include information
concerning our plans, objectives, goals, strategies, future events, future
revenues or performance, the impact of the macroeconomic environment in both the
U.S. and internationally on sales and our business segments, investments in
operating infrastructure, our expected capital expenditures, the impact of
consumer confidence, the antitrust class action lawsuit and similar issues,
pending tax assessments, our financial flexibility and changes to our operating
cash flow, the impact of initiatives to accelerate growth, expand market share
and attract sales from the standard mattress market, the initiatives to expand
business within established accounts, the initiatives to reduce costs and
operating expenses and improve manufacturing productivity, the initiatives to
improve retail account productivity, our expectations regarding our gross
margins, the impact of internet leads, our ability to source raw materials
effectively, the development, rollout and market acceptance of new products,
changes in our inventory levels, our ability to further invest in the business
and in brand awareness, our ability to meet financial obligations and continue
to comply with the terms of our credit facility, the effects of our business
model, the effects of changes in foreign exchange rates on our reported
earnings, our expected sources of cash flow, the effect of foreign tax credits
on U.S. income tax liability, our ability to effectively manage cash and our
debt/leverage ratio, our ability to align costs with sales expectations 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 1.
|
|
ITEM 1.
|
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
(In
thousands, except per common share amounts)
(Unaudited)
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||||
|
September
30,
|
September
30,
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Net
sales
|
$
|
224,082
|
$
|
252,814
|
$
|
586,362
|
$
|
738,697
|
|||||||
|
Cost
of sales
|
117,373
|
147,323
|
311,461
|
419,109
|
|||||||||||
|
Gross
profit
|
106,709
|
105,491
|
274,901
|
319,588
|
|||||||||||
|
Selling
and marketing expenses
|
39,272
|
39,956
|
108,335
|
137,906
|
|||||||||||
|
General,
administrative and other expenses
|
24,761
|
22,644
|
68,847
|
73,139
|
|||||||||||
|
Operating
income
|
42,676
|
42,891
|
97,719
|
108,543
|
|||||||||||
|
Other
expense, net:
|
|||||||||||||||
|
Interest
expense, net
|
(4,311
|
)
|
(6,294
|
)
|
(13,359
|
)
|
(19,630
|
)
|
|||||||
|
Other
(expense) income, net
|
(214
|
)
|
96
|
404
|
(995
|
)
|
|||||||||
|
Total
other expense
|
(4,525
|
)
|
(6,198
|
)
|
(12,955
|
)
|
(20,625
|
)
|
|||||||
|
Income
before income taxes
|
38,151
|
36,693
|
84,764
|
87,918
|
|||||||||||
|
Income
tax provision
|
12,467
|
12,622
|
28,885
|
30,105
|
|||||||||||
|
Net
income
|
$
|
25,684
|
$
|
24,071
|
$
|
55,879
|
$
|
57,813
|
|||||||
|
Earnings
per common share:
|
|||||||||||||||
|
Basic
|
$
|
0.34
|
$
|
0.32
|
$
|
0.75
|
$
|
0.77
|
|||||||
|
Diluted
|
$
|
0.34
|
$
|
0.32
|
$
|
0.74
|
$
|
0.77
|
|||||||
|
Cash
dividend per common share
|
$
|
—
|
$
|
0.08
|
$
|
—
|
0.24
|
||||||||
|
Weighted
average common shares outstanding:
|
|||||||||||||||
|
Basic
|
74,938
|
74,815
|
74,902
|
74,704
|
|||||||||||
|
Diluted
|
76,166
|
74,992
|
75,396
|
74,944
|
|||||||||||
(In
thousands)
|
September
30,
2009
|
December
31,
2008
|
|||||
|
(Unaudited)
|
||||||
|
ASSETS
|
||||||
|
Current
Assets:
|
||||||
|
Cash
and cash equivalents
|
$
|
20,003
|
$
|
15,385
|
||
|
Accounts
receivable, net
|
105,397
|
99,811
|
||||
|
Inventories
|
48,456
|
60,497
|
||||
|
Prepaid
expenses and other current assets
|
11,456
|
9,233
|
||||
|
Deferred
income taxes
|
19,839
|
11,888
|
||||
|
Total
Current Assets
|
205,151
|
196,814
|
||||
|
Property,
plant and equipment, net
|
175,817
|
185,843
|
||||
|
Goodwill
|
193,456
|
192,569
|
||||
|
Other
intangible assets, net
|
65,318
|
66,823
|
||||
|
Other
non-current assets
|
2,919
|
4,482
|
||||
|
Total
Assets
|
$
|
642,661
|
$
|
646,531
|
||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||
|
Current
Liabilities:
|
||||||
|
Accounts
payable
|
$
|
46,625
|
$
|
41,355
|
||
|
Accrued
expenses and other current liabilities
|
87,824
|
65,316
|
||||
|
Income
taxes payable
|
14,533
|
7,783
|
||||
|
Total
Current Liabilities
|
148,982
|
114,454
|
||||
|
Long-term
debt
|
315,000
|
419,341
|
||||
|
Deferred
income taxes
|
29,142
|
28,371
|
||||
|
Other
non-current liabilities
|
8,952
|
11,922
|
||||
|
Total
Liabilities
|
502,076
|
574,088
|
||||
|
Commitments
and contingencies—see Note 9
|
||||||
|
Total
Stockholders’ Equity
|
140,585
|
72,443
|
||||
|
Total
Liabilities and Stockholders’ Equity
|
$
|
642,661
|
$
|
646,531
|
||
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
(In
thousands)
(Unaudited)
|
Nine
Months Ended
September
30,
|
|||||||
|
2009
|
2008
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
income
|
$
|
55,879
|
$
|
57,813
|
|||
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|||||||
|
Depreciation
and amortization
|
23,526
|
24,847
|
|||||
|
Amortization
of stock-based compensation
|
6,448
|
6,101
|
|||||
|
Amortization
of deferred financing costs
|
518
|
888
|
|||||
|
Bad
debt expense
|
4,659
|
5,859
|
|||||
|
Deferred
income taxes
|
(8,006
|
)
|
(1,634
|
)
|
|||
|
Foreign
currency adjustments
|
53
|
74
|
|||||
|
(Gain)
Loss on sale of equipment and other
|
(19
|
)
|
679
|
||||
|
Changes
in operating assets and liabilities:
|
37,345
|
74,287
|
|||||
|
Net
cash provided by operating activities
|
120,403
|
168,914
|
|||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of property, plant and equipment
|
(8,961
|
)
|
(7,844
|
)
|
|||
|
Acquisition
of businesses, net of cash acquired
|
—
|
(1,529
|
)
|
||||
|
Other
|
(87
|
)
|
(428
|
)
|
|||
|
Net
cash used by investing activities
|
(9,048
|
)
|
(9,801
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Proceeds
from long-term revolving credit facility
|
85,797
|
65,429
|
|||||
|
Repayments
of long-term revolving credit facility
|
(189,036
|
)
|
(89,691
|
)
|
|||
|
Repayments
of long-term debt
|
—
|
(1,359
|
)
|
||||
|
Repayments
of Series A Industrial Revenue Bonds
|
—
|
(57,785
|
)
|
||||
|
Proceeds
from issuance of common stock
|
129
|
695
|
|||||
|
Excess
tax benefit from stock based compensation
|
—
|
301
|
|||||
|
Dividend
paid to stockholders
|
—
|
(17,933
|
)
|
||||
|
Other
|
—
|
(14
|
)
|
||||
|
Net
cash used by financing activities
|
(103,110
|
)
|
(100,357
|
)
|
|||
|
NET
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
(3,627
|
)
|
(4,394
|
)
|
|||
|
Increase
in cash and cash equivalents
|
4,618
|
54,362
|
|||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
15,385
|
33,315
|
|||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
20,003
|
$
|
87,677
|
|||
|
Supplemental
cash flow information:
|
|||||||
|
Cash
paid during the period for:
|
|||||||
|
Interest
|
$
|
13,187
|
$
|
18,960
|
|||
|
Income
taxes, net of refunds
|
$
|
28,672
|
$
|
17,884
|
|||
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 (US 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) Accounting Standards Codification—In June
2009, the Financial Accounting Standards Board (FASB) confirmed that the FASB
Accounting Standards Codification (FASB ASC) will become the single official
source of authoritative US GAAP (other than guidance issued by the Securities
and Exchange Commission (SEC)), superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and
related literature. After the FASB ASC became effective (interim and annual
periods ending on or after September 15, 2009), only one level of authoritative
US GAAP exists. All other literature will be considered non-authoritative. FASB
ASC does not change US GAAP; it introduces a new structure that is organized in
an easily accessible online research system. The Company adopted FASB ASC
beginning in the third quarter of fiscal 2009.
(c) Basis of Consolidation—The
accompanying financial statements include the accounts of Tempur-Pedic
International and its subsidiaries. All subsidiaries are wholly owned.
Intercompany balances and transactions have been eliminated. The Company does
not hold any interest in variable-interest entities.
(d) Use of Estimates—The
preparation of financial statements in conformity with US 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.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(e) Inventories—Inventories are
stated at the lower of cost or market, determined by the first-in, first-out
method, and consist of the following:
|
September
30,
2009
|
December
31,
2008
|
|||||||
|
Finished
goods
|
$ | 32,572 | $ | 41,385 | ||||
|
Work-in-process
|
6,920 | 5,706 | ||||||
|
Raw
materials and supplies
|
8,964 | 13,406 | ||||||
| $ | 48,456 | $ | 60,497 | |||||
(f) 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 September
30, 2009:
|
Balance
as of December 31, 2008
|
$ | 3,804 | ||
|
Amounts
accrued
|
23,665 | |||
|
Returns
charged to accrual
|
(23,132 | ) | ||
|
Balance
as of September 30, 2009
|
$ | 4,337 |
(g) 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 September
30, 2009:
|
Balance
as of December 31, 2008
|
$ | 3,903 | ||
|
Amounts
accrued
|
2,432 | |||
|
Warranties
charged to accrual
|
(2,438 | ) | ||
|
Balance
as of September 30, 2009
|
$ | 3,897 |
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(h) 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 $9,168 and $6,726
as of September 30, 2009 and December 31, 2008, respectively.
(i) 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.
(j) Research and Development
Expenses—Research and development expenses for new products are expensed
as they are incurred and are included in General, administrative and other
expenses. Research and development costs charged to expense were $1,481 and
$1,330 for the three months ended September, 2009 and 2008,
respectively. For the nine months ended September 30, 2009 and 2008,
research and development costs charged to expense were $4,580 and $4,621,
respectively.
(k) Subsequent Events—During
the third quarter of fiscal 2009, the Company has evaluated all events or
transactions that occurred after September 30, 2009 up through October 26,
2009, the date these condensed consolidated financial statements were issued.
During this period, there were no material recognizable or non-recognizable
subsequent events.
(2)
Goodwill and Other intangible assets
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
|
— | 887 | 887 | |||||||||
|
Balance
as of September 30, 2009
|
$ | 89,929 | $ | 103,527 | $ | 193,456 | ||||||
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 information relating to the Company’s Other intangible
assets:
|
September
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 | $ | 11,067 | $ | 4,933 | $ | 16,000 | $ | 9,866 | $ | 6,134 | |||||||||||||||
|
Patents
& other
trademarks
|
5-20 | 11,874 | 7,932 | 3,942 | 11,655 | 7,767 | 3,888 | |||||||||||||||||||||
|
Customer
database
|
5 | 4,870 | 4,568 | 302 | 4,838 | 4,455 | 383 | |||||||||||||||||||||
|
Foam
formula
|
10 | 3,700 | 2,559 | 1,141 | 3,700 | 2,282 | 1,418 | |||||||||||||||||||||
| $ | 91,444 | $ | 26,126 | $ | 65,318 | $ | 91,193 | $ | 24,370 | $ | 66,823 | |||||||||||||||||
Amortization
expense relating to intangible assets for the Company was $600 and $603 for the
three months ended September 30, 2009 and 2008, respectively. For the
nine months ended September 30, 2009 and September 30, 2008 amortization expense
relating to intangible assets was $1,810 and $1,810, respectively.
(3)
Long-term Debt
(a) Long-term Debt—Long-term debt
for the Company consists of the following:
|
September
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 (4.59% and 4.44% as of September 30,
2009 and
December 31, 2008,
respectively), commitment through and due June 8, 2012
|
$ | 315,000 | $ | 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 | ||||||
| $ | 315,000 | $ | 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 (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 $3,748 at September 30, 2009. After giving effect to letters of credit and $315,000 in borrowings under the Domestic Revolver, total availability under the Revolvers was $321,252 as of September 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%.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In
thousands, except per common share amounts)
The 2005
Senior Credit Facility is guaranteed by Tempur-Pedic International, as well as
certain other subsidiaries of Tempur-Pedic International, and is secured by
certain fixed and intangible assets of Dan-Foam ApS and substantially all the
Company’s U.S. assets. The 2005 Senior Credit Facility contains certain
financial covenants and requirements affecting the Company, including a
consolidated interest coverage ratio and a consolidated leverage ratio. The
Company was in compliance with all covenants as of September 30,
2009.
In May 2008,
the Company entered into a three year interest rate swap agreement to manage
interest costs and changing interest rates associated with the 2005 Senior
Credit Facility. Refer to Note 5, “Derivative Financial Instruments” for
additional information regarding the Company’s derivative instruments, including
this interest rate swap.
(4)
Fair Value Measurements
Fair Value is
defined 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. The Company estimates fair value of its
financial instruments utilizing an established three-level hierarchy. 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
September 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 September 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 September 30, 2009 using:
|
||||||||||||||||
|
September
30, 2009
|
Quoted
Prices in Active
Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Foreign
currency forward contracts
|
$ | 3,688 | $ | — | $ | 3,688 | $ | — | ||||||||
|
Interest
rate swap
|
$ | 8,598 | $ | — | $ | 8,598 | $ | — | ||||||||
|
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:
|
||||||||||||||||
|
Foreign
currency forward contracts
|
$ | 96 | $ | — | $ | 96 | $ | — | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Interest
rate swap
|
$ | 11,610 | $ | — | $ | 11,610 | $ | — | ||||||||
Borrowings
under the 2005 Senior Credit Facility (as defined in Note 3(b)) are at variable
interest rates and accordingly their carrying amounts approximate fair
value.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(5)
Derivative Financial Instruments
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.
The Company
is required 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 4, “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
September 30, 2009, the total notional amount of the Company’s interest rate
swap agreement is $300,000. Over the next 12 months, the Company
expects to reclassify $6,889 of deferred losses on derivative instruments from
Accumulated OCL to earnings due to the payment of variable interest associated
with the 2005 Senior Credit Facility.
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, however, the Company considers the contracts as economic
hedges. Accordingly, changes in the fair value of these instruments effect
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 4, “Fair Value
Measurements” taking into consideration foreign currency rates and the
current creditworthiness of the counterparties or the Company, as
applicable.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In
thousands, except per common share amounts)
As of
September 30, 2009, the Company had foreign currency forward contracts with
expiration dates ranging from October 5, 2009 through October 26, 2010. The
changes in fair value of these foreign currency hedges are included as a
component of Other (expense) income, net. As of September 30, 2009 the Company
had the following outstanding foreign currency forward contracts:
|
Foreign
Currency
|
Currency
Denomination
|
|||
|
Great
Britain Pound
|
£ |
7,326
|
||
|
Euros
|
€ |
16,274
|
||
|
Japanese
Yen
|
¥ |
441,826
|
||
|
Swiss
Franc
|
fr. |
11,092
|
||
|
Swedish
Krona
|
kr. |
29,493
|
||
|
Norwegian
Krona
|
kr. |
4,275
|
||
|
Australian
Dollar
|
$ |
1,189
|
||
|
New
Zealand Dollar
|
$ |
2,067
|
||
|
United
States Dollar
|
$ |
6,354
|
||
As of
September 30, 2009 and December 31, 2008, the fair value carrying amount of the
Company’s derivative instruments were recorded as follows:
|
Asset
Derivatives
|
||||||||||
|
September
30, 2009
|
December
31, 2008
|
|||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
Derivatives
not designated as hedging instruments
|
||||||||||
|
Foreign
exchange forward contracts
|
Prepaid
expenses and other current assets
|
$
|
—
|
Prepaid
expenses and other current assets
|
$
|
96
|
||||
|
$
|
—
|
$
|
96
|
|||||||
|
Liability
Derivatives
|
||||||||||
|
September
30, 2009
|
December
31, 2008
|
|||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
Derivatives
designated as hedging instruments
|
||||||||||
|
Interest
rate swap
|
Other
non-current liabilities
|
$
|
8,598
|
Other
non-current liabilities
|
$
|
11,610
|
||||
|
$
|
8,598
|
$
|
11,610
|
|||||||
|
Derivatives
not designated as hedging instruments
|
||||||||||
|
Foreign
exchange forward contracts
|
Accrued
expenses and other current liabilities
|
$
|
3,688
|
Accrued
expenses and other current liabilities
|
$
|
—
|
||||
|
$
|
12,286
|
$
|
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 September 30, 2009 was as follows:
|
Derivatives
Designated as Cash Flow Hedging Relationships
|
Amount
of (Gain)/Loss
Recognized
in Other Comprehensive Income on
Derivative
(Effective
Portion)
|
Location
of Loss
Reclassified
from
Accumulated
OCL into
Income
(Effective
Portion)
|
Amount
of Loss
Reclassified
from
Accumulated
OCL
into
Income
(Effective
Portion)
|
Location
of Loss
Recognized
in Income on
Derivative
(Ineffective
Portion
and Amount
Excluded
from
Effectiveness
Testing)
|
Amount
of Loss
Recognized
in Income
on
Derivative
(Ineffective
Portion
and
Amount Excluded
from
Effectiveness Testing)
|
|||||||||
|
Interest
rate swap
|
$
|
(794)
|
Interest
expense, net
|
$
|
2,445
|
Interest
expense, net
|
$
|
—
|
||||||
|
$
|
(794)
|
$
|
2,445
|
$
|
—
|
|||||||||
|
Derivatives
Not Designated as Hedging Instruments
|
Location
of (Loss)/Gain
Recognized
in Income on
Derivative
|
Amount
of (Loss)/Gain
Recognized
in Income
on
Derivative
|
||||
|
Foreign
exchange forward contracts
|
Other
(expense) income, net
|
$
|
(222)
|
|||
|
$
|
(222)
|
|||||
For the nine months
ended September 30, 2009:
|
Derivatives
Designated as Cash Flow Hedging Relationships
|
Amount
of (Gain)/Loss
Recognized
in Other Comprehensive Income on
Derivative
(Effective
Portion)
|
Location
of Loss
Reclassified
from
Accumulated
OCL into
Income
(Effective
Portion)
|
Amount
of Loss
Reclassified
from
Accumulated
OCL
into
Income
(Effective
Portion)
|
Location
of Loss
Recognized
in Income on
Derivative
(Ineffective
Portion
and Amount
Excluded
from
Effectiveness
Testing)
|
Amount
of Loss
Recognized
in Income
on
Derivative
(Ineffective
Portion
and
Amount Excluded
from
Effectiveness Testing)
|
|||||||||
|
Interest
rate swap
|
$
|
(3,012)
|
Interest
expense, net
|
$
|
5,991
|
Interest
expense, net
|
$
|
—
|
||||||
|
$
|
(3,012)
|
$
|
5,991
|
$
|
—
|
|||||||||
|
Derivatives
Not Designated as Hedging Instruments
|
Location
of (Loss)/Gain
Recognized
in Income on
Derivative
|
Amount
of (Loss)/Gain
Recognized
in Income
on
Derivative
|
||||
|
Foreign
exchange forward contracts
|
Other
(expense) income, net
|
$
|
(2,367)
|
|||
|
$
|
(2,367)
|
|||||
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(6)
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 September 30, 2009. No shares were repurchased during the three or
nine months ended September 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.
(7)
Other Balance Sheet Items
(a) Property, Plant and
Equipment—
Property,
plant and equipment, net consists of the following:
|
|
September
30, 2009
|
December
31, 2008
|
|||||
|
Land
and buildings
|
|
$
|
124,829
|
$
|
122,256
|
||
|
Machinery
and equipment, furniture and fixtures, and other
|
|
203,257
|
192,029
|
||||
|
Construction
in progress
|
|
6,359
|
5,321
|
||||
|
|
334,445
|
319,606
|
|||||
|
Accumulated
depreciation
|
|
(158,628
|
) |
(133,763
|
) | ||
|
|
$
|
175,817
|
$
|
185,843
|
|||
(b) Accrued expenses and other current
liabilities—
Accrued
expenses and other current liabilities consisted of the following:
|
September
30, 2009
|
December
31, 2008
|
||||||
|
|
|||||||
|
Salary
and related expenses
|
$
|
15,489
|
$
|
11,226
|
|||
|
Accrued
sales and value added taxes
|
14,546
|
10,768
|
|||||
|
Accrued
unrecognized tax benefits
|
13,589
|
11,012
|
|||||
|
Sales
returns
|
|
4,337
|
3,804
|
||||
|
Warranty
accrual
|
|
3,897
|
3,903
|
||||
|
Other
|
|
35,966
|
24,603
|
||||
|
|
$
|
87,824
|
$
|
65,316
|
|||
(c) Accumulated other comprehensive
loss—
Accumulated
OCL consisted of the following:
|
September
30, 2009
|
December
31, 2008
|
|||||
|
Derivative
instruments accounted for as hedges,
net
of tax of $3,353 and $4,528, respectively
|
$
|
(5,245
|
)
|
$
|
(7,082
|
)
|
|
Foreign
currency translation
|
(2,355
|
)
|
(5,508
|
)
|
||
|
Accumulated
other comprehensive loss
|
$
|
(7,600
|
)
|
$
|
(12,590
|
)
|
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(d) Comprehensive
income
The
components of comprehensive income consisted of the following:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
income
|
$ | 25,684 | $ | 24,071 | $ | 55,879 | $ | 57,813 | ||||||||
|
Derivative
instruments accounted for as hedges, net of taxes of $(310), $385,
$(1,175) and $832, respectively
|
484 | (602 | ) | 1,837 | (1,301 | ) | ||||||||||
|
Cumulative
translation adjustment
|
2,423 | (21,249 | ) | 3,152 | (9,807 | ) | ||||||||||
|
Comprehensive
income
|
$ | 28,591 | $ | 2,220 | $ | 60,868 | $ | 46,705 | ||||||||
(8)
Stock-Based Compensation
The Company
currently has three stock-based compensation plans: the 2002 Option Plan (2002
Plan), the Amended and Restated 2003 Equity Incentive Plan (2003 Plan) and the
2003 Employee Stock Purchase Plan (ESPP), which are described 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 36 and 1,730 shares of common stock during the
three and nine months ended September 30, 2009, respectively. The Company
recognized compensation expense of $559 and $1,036 associated with the 2009
grants during the three and nine months ended September 30, 2009, respectively.
The Company granted new options to purchase 9 and 2,132 shares of common stock
during the three and nine months ended September 30, 2008. The Company
recognized compensation expense of $677 and $1,100 associated with the 2008
grants during the three and nine months ended September 30, 2008, respectively.
As of September 30, 2009, there was $3,894 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 3.1 years. The options
granted in the three months ended September 30, 2009 had a weighted average
grant-date fair value of $7.00 per option, as determined by the Black-Scholes
option pricing model using the following assumptions:
|
Expected
volatility of stock
|
62.6
– 68.1
|
%
|
|
|
Expected
life of options, in years
|
5.0
|
||
|
Risk-free
interest rate
|
2.4
– 2.5
|
%
|
|
|
Expected
dividend yield on stock
|
2.2
|
%
|
The Company
granted 18 new restricted stock units (RSUs) during the three months ended
September 30, 2009. There were no RSUs granted in the six months ended June 30,
2009 or the twelve months ended December 31, 2008. The Company recognized
compensation expense of $77 with the 2009 RSUs during the three months ended
September 30, 2009. As of September 30, 2009, there was $181 of unrecognized
compensation expense associated with the RSUs granted in 2009, which is expected
to be recorded over the weighted average remaining vesting period of 1.3
years.
The Company
recorded $2,355 and $2,060 of total stock-based compensation expense for the
three months ended September 30, 2009 and September 30, 2008,
respectively. The Company recorded $6,448 and $6,101 of total
stock-based compensation expense for the nine months ended September 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)
(9)
Commitments and Contingencies
(a) Purchase Commitments—The
Company will, from time to time, enter into limited purchase commitments for the
purchase of certain raw materials. Amounts committed under these programs are
not significant as of September 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.
(10)
Income Taxes
The Company’s
effective tax rate for the nine months ended September 30, 2009 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, 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
34.2% 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, 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 certain 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 $112.6 million of undistributed earnings from non-U.S. operations
as of September 30, 2009 because the Company intends to reinvest such earnings
indefinitely outside of the U. S. 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.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
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 or second 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 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 2006,
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 nine months ended September 30, 2009, there were no significant
changes to the liability for unrecognized tax benefits.
(11)
Earnings Per Common Share
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net
income
|
$ | 25,684 | $ | 24,071 | $ | 55,879 | $ | 57,813 | ||||||||
|
Denominator:
|
||||||||||||||||
|
Denominator
for basic earnings per common share-weighted average
shares
|
74,938 | 74,815 | 74,902 | 74,704 | ||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||
|
Employee
stock options
|
1,228 | 178 | 494 | 240 | ||||||||||||
|
Denominator
for basic earnings per common share-adjusted weighted average
shares
|
76,166 | 74,992 | 75,396 | 74,944 | ||||||||||||
|
Basic
earnings per common share
|
$ | 0.34 | $ | 0.32 | $ | 0.75 | $ | 0.77 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.34 | $ | 0.32 | $ | 0.74 | $ | 0.77 | ||||||||
The Company
excluded 2,039 and 4,932 shares issuable upon exercise of outstanding stock
options for the three months ended September 30, 2009 and 2008, respectively,
and 4,372 and 3,606 shares issuable upon exercise of outstanding stock options
for the nine month periods ended September 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)
(12)
Business Segment Information
The Company
operates in two business segments: Domestic and International. These reportable
segments are strategic business units that are managed separately based on the
fundamental differences in their operations. The Domestic segment consists of
the two U.S. manufacturing facilities, whose customers include the U.S.
distribution subsidiary and certain third party distributors in 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:
|
September
30, 2009
|
December
31, 2008
|
|||||||
|
Domestic
|
$ | 475,746 | $ | 474,824 | ||||
|
International
|
282,702 | 282,884 | ||||||
|
Inter-segment
eliminations
|
(115,787 | ) | (111,177 | ) | ||||
| $ | 642,661 | $ | 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
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
sales from external customers:
|
||||||||||||||||
|
Domestic
|
||||||||||||||||
|
Mattresses
|
$ | 103,122 | $ | 121,356 | $ | 265,133 | $ | 336,598 | ||||||||
|
Pillows
|
13,216 | 14,476 | 34,090 | 40,181 | ||||||||||||
|
Other
|
29,939 | 30,056 | 74,232 | 85,529 | ||||||||||||
| $ | 146,277 | $ | 165,888 | $ | 373,455 | $ | 462,308 | |||||||||
|
International
|
||||||||||||||||
|
Mattresses
|
$ | 46,688 | $ | 53,513 | $ | 128,149 | $ | 169,955 | ||||||||
|
Pillows
|
15,170 | 16,938 | 41,363 | 51,728 | ||||||||||||
|
Other
|
15,947 | 16,475 | 43,395 | 54,706 | ||||||||||||
| $ | 77,805 | $ | 86,926 | $ | 212,907 | $ | 276,389 | |||||||||
| $ | 224,082 | $ | 252,814 | $ | 586,362 | $ | 738,697 | |||||||||
|
Inter-segment
sales:
|
||||||||||||||||
|
Domestic
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
International
|
686 | 1,237 | 1,255 | 2,347 | ||||||||||||
|
Inter-segment
eliminations
|
(686 | ) | (1,237 | ) | (1,255 | ) | (2,347 | ) | ||||||||
| $ | — | $ | — | $ | — | $ | — | |||||||||
|
Operating
income:
|
||||||||||||||||
|
Domestic
|
$ | 21,710 | $ | 21,607 | $ | 43,737 | $ | 43,613 | ||||||||
|
International
|
20,966 | 21,284 | 53,982 | 64,930 | ||||||||||||
| $ | 42,676 | $ | 42,891 | $ | 97,719 | $ | 108,543 | |||||||||
|
Depreciation
and amortization
(including
stock-based compensation
amortization):
|
||||||||||||||||
|
Domestic
|
$ | 7,979 | $ | 6,954 | $ | 22,855 | $ | 22,785 | ||||||||
|
International
|
2,388 | 2,782 | 7,119 | 8,163 | ||||||||||||
| $ | 10,367 | $ | 9,736 | $ | 29,974 | $ | 30,948 | |||||||||
|
Capital
expenditures:
|
||||||||||||||||
|
Domestic
|
$ | 2,548 | $ | 1,068 | $ | 4,636 | $ | 5,003 | ||||||||
|
International
|
1,685 | 448 | 4,325 | 2,841 | ||||||||||||
|
|
$ | 4,233 | $ | 1,516 | $ | 8,961 | $ | 7,844 | ||||||||
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 nine months ended September 30, 2009 includes the
following:
|
•
|
Earnings
per common share (EPS) was $0.34 per diluted common share for the three
months ended September 30, 2009 as compared to $0.32 per diluted common
share for the three months ended September 30,
2008.
|
|
•
|
Gross
profit margin was 47.6% for the three months ended September 30, 2009
compared to 41.7% for the three months ended September 30,
2008.
|
|
•
|
We
reduced total debt by $104.3 million to $315.0 million as of September 30,
2009 from $419.3 million at December 31,
2008.
|
|
(In
thousands, except per common share amounts)
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
|
Net
sales
|
$ | 224,082 | 100.0 | % | $ | 252,814 | 100.0 | % | $ | 586,362 | 100.0 | % | $ | 738,697 | 100.0 | % | ||||||||||||||||
|
Cost
of sales
|
117,373 | 52.4 | 147,323 | 58.3 | 311,461 | 53.1 | 419,109 | 56.7 | ||||||||||||||||||||||||
|
Gross
profit
|
106,709 | 47.6 | 105,491 | 41.7 | 274,901 | 46.9 | 319,588 | 43.3 | ||||||||||||||||||||||||
|
Selling
and marketing expenses
|
39,272 | 17.5 | 39,956 | 15.8 | 108,335 | 18.5 | 137,906 | 18.7 | ||||||||||||||||||||||||
|
General,
administrative and other expenses
|
24,761 | 11.0 | 22,644 | 9.0 | 68,847 | 11.7 | 73,139 | 9.9 | ||||||||||||||||||||||||
|
Operating
income
|
42,676 | 19.1 | 42,891 | 17.0 | 97,719 | 16.7 | 108,543 | 14.7 | ||||||||||||||||||||||||
|
Interest
expense, net
|
(4,311 | ) | (1.9 | ) | (6,294 | ) | (2.5 | ) | (13,359 | ) | (2.3 | ) | (19,630 | ) | (2.7 | ) | ||||||||||||||||
|
Other
(expense) income, net
|
(214 | ) | (0.1 | ) | 96 | — | 404 | 0.1 | (995 | ) | (0.1 | ) | ||||||||||||||||||||
|
Income
before income taxes
|
38,151 | 17.1 | 36,693 | 14.5 | 84,764 | 14.5 | 87,918 | 11.9 | ||||||||||||||||||||||||
|
Income
tax provision
|
12,467 | 5.6 | 12,622 | 5.0 | 28,885 | 4.9 | 30,105 | 4.1 | ||||||||||||||||||||||||
|
Net
income
|
$ | 25,684 | 11.5 | % | $ | 24,071 | 9.5 | % | $ | 55,879 | 9.6 | % | $ | 57,813 | 7.8 | % | ||||||||||||||||
|
Earnings
per common share:
|
||||||||||||||||||||||||||||||||
|
Basic
|
$ | 0.34 | $ | 0.32 | $ | 0.75 | $ | 0.77 | ||||||||||||||||||||||||
|
Diluted
|
$ | 0.34 | $ | 0.32 | $ | 0.74 | $ | 0.77 | ||||||||||||||||||||||||
|
Cash
dividend per common share:
|
$ | — | $ | 0.08 | $ | — | $ | 0.24 | ||||||||||||||||||||||||
|
Weighted
average common shares outstanding:
|
||||||||||||||||||||||||||||||||
|
Basic
|
74,938 | 74,815 | 74,902 | 74,704 | ||||||||||||||||||||||||||||
|
Diluted
|
76,166 | 74,992 | 75,396 | 74,944 | ||||||||||||||||||||||||||||
Three
Months Ended September 30, 2009 Compared with Three Months Ended September 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
|
|||||||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||
|
Retail
|
$ | 191,012 | $ | 216,226 | $ | 129,883 | $ | 147,992 | $ | 61,129 | $ | 68,234 | |||||||||
|
Direct
|
12,245 | 11,230 | 10,600 | 9,169 | 1,645 | 2,061 | |||||||||||||||
|
Healthcare
|
8,942 | 11,636 | 2,804 | 3,727 | 6,138 | 7,909 | |||||||||||||||
|
Third
party
|
11,883 | 13,722 | 2,990 | 5,000 | 8,893 | 8,722 | |||||||||||||||
| $ | 224,082 | $ | 252,814 | $ | 146,277 | $ | 165,888 | $ | 77,805 | $ | 86,926 | ||||||||||
A summary of
Net sales by product is below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
|||||||||||||||||||
|
Three
Months Ended
|
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||
|
Mattresses
|
$ | 149,810 | $ | 174,869 | $ | 103,122 | $ | 121,356 | $ | 46,688 | $ | 53,513 | |||||||||
|
Pillows
|
28,386 | 31,414 | 13,216 | 14,476 | 15,170 | 16,938 | |||||||||||||||
|
Other
|
45,886 | 46,531 | 29,939 | 30,056 | 15,947 | 16,475 | |||||||||||||||
| $ | 224,082 | $ | 252,814 | $ | 146,277 | $ | 165,888 | $ | 77,805 | $ | 86,926 | ||||||||||
Net sales—Net sales for the three
months ended September 30, 2009 decreased to $224.1 million from $252.8 million
for the same period in 2008, a decrease of $28.7 million, or 11.4%, primarily a
result of our industry continuing to be affected by the macroeconomic
environment, resulting in lower consumer traffic and decreased consumer demand.
Consolidated Mattress sales decreased $25.1 million, or 14.3% compared to the
third quarter of 2008. For the three months ended September 30, 2009,
our Retail channel Net sales decreased to $191.0 million from $216.2 million for
the same period in 2008, a decrease of $25.2 million, or
11.7%. Consolidated pillow sales decreased approximately $3.0
million, or 9.6%, from the third quarter of 2008. Consolidated Other, which
includes adjustable bed bases, foundations and other related products, decreased
$0.6 million, or 1.4%.
Domestic—Domestic Net sales for the
three months ended September 30, 2009 decreased to $146.3 million from $165.9
million for the same period in 2008, a decrease of $19.6 million, or
11.8%. Our Domestic Retail channel contributed $129.9 million in Net
sales for the three months ended September 30, 2009 for a decrease of $18.1
million, or 12.2%, for the same period in 2008. We believe that the
macroeconomic environment and slower consumer traffic impacted our Domestic
Retail channel during the third quarter. As a result, Domestic mattress sales in
the third quarter of 2009 decreased $18.2 million, or 15.0%, over the same
period in 2008. Pillow sales decreased $1.3 million, or 8.7%. 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
increased by $1.4 million, or 15.6%. We believe our focus on
generating internet leads has helped improve our Direct channel. Our Healthcare
channel Net sales decreased by $0.9 million, or 24.8%, which we believe is
primarily related to the decreased availability of spending in the healthcare
industry. Net sales in the Third party channel decreased $2.0 million, or 40.2%,
due to macroeconomic conditions in our Third party regions.
International—International Net sales for
the three months ended September 30, 2009 decreased to $77.8 million from $86.9
million for the same period in 2008, a decrease of $9.1 million, or 10.5%. On a
constant currency basis, our International Net sales declined approximately
7.2%. Our International segment was primarily impacted by the global economic
slowdown, which continues to impact our International segment. The International
Retail channel decreased $7.1 million, or 10.4%, for the three months ended
September 30, 2009. Our Direct channel decreased 20.2% and Third party channel
increased 2.0%. Healthcare channel Net sales decreased $1.8 million or
22.4%. International mattress sales in the third quarter of 2009
decreased $6.8 million, or 12.8%, over the third quarter of 2008. Pillow sales
for the third quarter of 2009 decreased $1.8 million, or 10.4%, as compared to
the third quarter of 2008.
Gross
profit—Gross
profit for the three months ended September 30, 2009 increased to $106.7 million
from $105.5 million for the same period in 2008, an increase of $1.2 million, or
1.2%. The Gross profit margin for the three months ended September 30, 2009 was
47.6% as compared to 41.7% 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. During 2009 we have been
implementing projects to expand our margins, including improving utilization
rates, a redesign of our transportation network and maximizing vendor
sourcing opportunities.
Domestic—Domestic Gross profit for
the three months ended September 30, 2009 increased to $63.8 million
from $58.8 million for the same period in 2008, an increase of $5.0 million, or
8.6%. The Gross profit margin in our Domestic segment was 43.6% and
35.4% for the three months ended September 30, 2009 and September 30, 2008,
respectively. Improvements in our Domestic Gross profit margin were primarily
driven by our focus on improving manufacturing efficiencies, lower
commodity pricing including raw material and transportation costs 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
September 30, 2009 as compared to the same period in 2008. Domestic
Cost of sales for the three months ended September 30, 2009 decreased to $82.5
million from $107.1 million for the same period in 2008, a decrease of $24.6
million, or 23.0%.
International—International Gross profit
for the three months ended September 30, 2009 decreased to $42.9 million from
$46.7 million for the same period in 2008, a decrease of $3.8 million, or 8.1%.
The Gross profit margin in our International segment was 55.2% and 53.8% for the
three months ended September 30, 2009 and September 30, 2008, respectively.
Improvements in our International Gross profit margin were primarily driven by
our focus on improving manufacturing efficiencies, lower commodity pricing
including raw materials 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 September 30, 2009 as compared to the
same period in 2008. Our International Cost of sales for the three months ended
September 30, 2009 decreased to $34.9 million from $40.2 million for the same
period in 2008, a decrease of $5.3 million, or 13.2%.
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 third quarter of 2009, Selling and marketing expenses
decreased to $39.3 million for the three months ended September 30, 2009 as
compared to $40.0 million for the three months ended September 30, 2008. Selling
and marketing expenses as a percentage of Net sales were 17.5% and 15.8% for the
three months ended September 30, 2009 and September 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 took actions to better align our advertising spend with our
sales expectations and implemented initiatives to reduce costs in other selling
activities. In the third quarter of 2009 we made investments in advertising to
support future growth. Our new marketing and advertising campaign which began in
the third quarter of 2009 will continue to roll out in the fourth quarter of
2009.
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 increased to $24.8
million for the three months ended September 30, 2009 as compared to $22.6
million for the three months ended September 30, 2008, an increase of $2.1
million, or 9.3%. General, administrative and other expenses as a
percentage of Net sales was 11.0% and 9.0% for the three months ended September
30, 2009 and September 30, 2008, respectively. The increase in general,
administrative and other expenses as a percentage of Net sales in the third
quarter of 2009 as compared to the third quarter of 2008 is primarily
attributable to increasing the bonus pool related to our results through the
third quarter of 2009 and our expectations for the remainder of the
year. Additionally, we incurred incremental legal expenses during the
third quarter of 2009.
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 $4.3 million for the three months ended
September 30, 2009, as compared to $6.3 million for the three months ended
September 30, 2008, a decrease of $2.0 million, or 31.5%. 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 third 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 foreign operations.
Our effective
tax rate for the three months ended September 30, 2009 was 32.7%. For
the same period in 2008, the effective tax rate was 34.4%. The
decrease in the effective tax rate is due to the tax charge of an unrecognized
tax benefit included in the effective tax rate for the three months ended
September 30, 2008, with no charge occurring during the same period in
2009.
Our effective
income tax rates for the three months ended September 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 or second
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 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.
Nine
Months Ended September 30, 2009 Compared with Nine Months Ended September 30,
2008
A summary of
Net sales by channel is below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
|||||||||||||||||||
|
Nine
Months Ended
|
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||
|
Retail
|
$ | 497,109 | $ | 623,453 | $ | 328,870 | $ | 407,181 | $ | 168,239 | $ | 216,272 | |||||||||
|
Direct
|
32,759 | 37,499 | 28,506 | 31,171 | 4,253 | 6,328 | |||||||||||||||
|
Healthcare
|
26,105 | 36,449 | 8,184 | 12,050 | 17,921 | 24,399 | |||||||||||||||
|
Third
party
|
30,389 | 41,296 | 7,895 | 11,906 | 22,494 | 29,390 | |||||||||||||||
| $ | 586,362 | $ | 738,697 | $ | 373,455 | $ | 462,308 | $ | 212,907 | $ | 276,389 | ||||||||||
A summary of
Net sales by product is below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
|||||||||||||||||||
|
Nine
Months Ended
|
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||
|
Mattresses
|
$ | 393,282 | $ | 506,553 | $ | 265,133 | $ | 336,598 | $ | 128,149 | $ | 169,955 | |||||||||
|
Pillows
|
75,453 | 91,909 | 34,090 | 40,181 | 41,363 | 51,728 | |||||||||||||||
|
Other
|
117,627 | 140,235 | 74,232 | 85,529 | 43,395 | 54,706 | |||||||||||||||
| $ | 586,362 | $ | 738,697 | $ | 373,455 | $ | 462,308 | $ | 212,907 | $ | 276,389 | ||||||||||
Net sales—Net sales for the nine
months ended September 30, 2009 decreased to $586.4 million from $738.7 million
for the same period in 2008, a decrease of $152.3 million, or 20.6%, primarily a
result of our industry continuing to be affected by the macroeconomic
environment, resulting in lower consumer traffic and decreased consumer demand.
For the nine months ended September 30, 2009, our Retail channel Net sales
decreased to $497.1 million from $623.5 million for the same period in 2008, a
decrease of $126.3 million, or 20.3%. The factors that impacted Net sales for
each segment are discussed below, in the respective segment
discussion.
Domestic—Domestic Net sales for the
nine months ended September 30, 2009 decreased to $373.5 million from $462.3
million for the same period in 2008, a decrease of $88.9 million, or 19.2%. Our
Domestic Retail channel contributed $328.9 million in Net sales for the nine
months ended September 30, 2009. This is a decrease of $78.3 million, or 19.2%,
over the prior year same period in the prior year. This decrease is
due primarily to the ongoing challenging U.S. macroeconomic environment during
2009, which resulted in lower consumer traffic. The Healthcare channel Net sales
decreased $3.9 million, or 32.1%. Our Third party channel Net sales decreased
$4.0 million, or 33.7%, as the second quarter increase in our Third party
channel was offset by decreases in the first and third quarters of 2009. Our
Direct channel Net sales decreased 8.5%, which is also directly correlated to
the changes in the U.S. macroeconomic environment. Domestic mattress
sales decreased $71.5 million, or 21.2%, over the same period in 2008, driven by
the decrease in our Retail channel. Pillow sales decreased $6.1 million, or
15.2%. 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 nine months ended September 30, 2009 decreased to $212.9 million from $276.4
million for the same period in 2008, a decrease of $63.5 million, or 23.0%. On a
constant currency basis, our International sales declined by approximately
14.7%. 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 $48.0 million, or 22.2%, for
the nine months ended September 30, 2009. Our Direct channel Net sales decreased
32.8%. Our Third party sales decreased 23.5%. Additionally, our
Healthcare channel Net sales decreased $6.5 million, or
26.6%. International mattress sales decreased $41.8 million, or
24.6%, as compared to 2008. Pillow sales for the nine months ended September 30,
2009 decreased $10.4 million, or 20.0%, as compared to the same period in 2008.
Many of our pillow products are sold with mattress purchases. Therefore, when
mattress sales decline, pillow sales are also impacted.
Gross
profit—Gross
profit for the nine months ended September 30, 2009 decreased to $274.9 million
from $319.6 million for the same period in 2008, a decrease of $44.7 million, or
14.0%. The Gross profit margin for the nine months ended September
30, 2009 was 46.9% as compared to 43.3% 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. During 2009 we have been implementing projects to expand
our margins, including improving utilization rates, a redesign of our
transportation network and maximizing vendor sourcing
opportunities.
Domestic—Domestic Gross profit for
the nine months ended September 30, 2009 decreased to $157.0 million from $170.0
million for the same period in 2008, a decrease of $12.9 million, or
7.6%. The Gross profit margin in our Domestic segment was 42.0% and
36.8% for the nine months ended September 30, 2009 and September 30, 2008,
respectively. The increase in our Gross profit margin for the Domestic segment
was driven by improved manufacturing efficiencies, lower commodity prices
including raw material and transportation costs and pricing actions taken early
in 2009, partially offset by fixed cost de-leverage related to lower production
volumes. Our Domestic segment Cost of sales decreased to $216.4 million for the
nine months ended September 30, 2009 as compared to $292.3 million for the nine
months ended September 30, 2008, a decrease of $75.9 million, or
26.0%.
International—International Gross profit
for the nine months ended September 30, 2009 decreased to $117.9 million from
$149.6 million for the same period in 2008, a decrease of $31.8 million, or
21.2%. The Gross profit margin in our International segment was 55.4% and 54.1%
for the nine months ended September 30, 2009 and September 30, 2008,
respectively. For the nine months ended September 30, 2009, the improvement in
our Gross Profit margin for the International segment was driven by our focus on
improving manufacturing efficiencies, lower commodity prices, and pricing
actions taken early in 2009, partially offset by fixed cost de-leverage related
to lower production volumes. Our International segment Cost of sales for the
nine months ended September 30, 2009 decreased to $95.0 million from $126.8
million for the same period in 2008, a decrease of $31.7 million, or
25.0%.
Selling and marketing
expenses—Selling
and marketing expenses decreased to $108.3 million for the nine months ended
September 30, 2009 as compared to $137.9 million for the nine months ended
September 30, 2008. Selling and marketing expenses as a percentage of Net sales
decreased to 18.5% for the nine months ended September 30, 2009 from 18.7% for
the same period for 2008. Our objective is to align advertising costs to reflect
our sales expectations. In the third quarter of 2009 we made investments in
advertising to support future growth, including our new marketing and
advertising campaign which began in the third quarter of 2009 and will continue
to roll out in the fourth quarter of 2009.
General,
administrative and other expenses—General, administrative and
other expenses decreased to $68.8 million for the nine months ended September
30, 2009 as compared to $73.1 million for the nine months ended September 30,
2008, a decrease of $4.3 million. General, administrative and other expenses as
a percentage of Net sales was 11.7% and 9.9% for the nine months ended September
30, 2009 and September 30, 2008, respectively. The increase in
General, administrative and other expenses as a percentage of Net sales for the
nine months ended September 30, 2009 compared to the same period in 2008 is
primarily attributable to increasing the bonus pool related to our results
through the third quarter of 2009 and our expectations for the remainder of the
year. Additionally, we incurred incremental legal expenses during the third
quarter of 2009.
Interest expense,
net—Interest
expense, net, decreased to $13.4 million for the nine months ended September 30,
2009, as compared to $19.6 million for the nine months ended September 30, 2008,
a decrease of $6.3 million, or 31.9%. 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 through September 30, 2009, as compared to the same time
period in 2008.
Income tax
provision—Our
effective tax rate for the nine months ended September 30, 2009 was
34.1%. For the same period in 2008, the effective tax rate was
34.2%.
Our effective
income tax rates for the nine months ended September 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 September 30, 2009, we had working
capital of $56.2 million including Cash and cash equivalents of $20.0 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 to improve operating cash flow.
During the twelve month period ended December 31, 2008 and nine month period
ended September 30, 2009, there were no repurchases of our common
stock.
Our cash flow from operations decreased to $120.4 million for the nine months ended September 30, 2009 as compared to $168.9 million for the nine months ended September 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 nine month period ending September 30, 2009 compared to the nine month period ending September 30, 2008 was primarily the result of the changes in operating assets and liabilities and deferred income taxes. During the third quarter of 2009, we continued to effectively manage our working capital levels by reducing inventory levels, taking advantage of vendor payment terms, and the timing of tax payments. In order to support retailers and respond to consumer demand we expect our inventory levels to increase by approximately $10.0 million by the end of 2009.
Net cash used
in investing activities decreased to $9.0 million for the nine months ended
September 30, 2009 as compared to $9.8 million for the nine months ended
September 30, 2008, a decrease of $0.8 million. The decrease is primarily
related to the purchase of our former third party distributor in New Zealand
during 2008, whereas no purchases have occurred in 2009, this was partially
offset by increased capital expenditures during the nine months ended September
30, 2009.
Cash flow
used by financing activities was $103.1 million for the nine months ended
September 30, 2009 as compared to $100.4 million for the nine months ended
September 30, 2008, representing an increase in cash flow used of $2.8
million. Cash used in financing activities is primarily related to
our continued focus to reduce our level of outstanding debt. For the nine months
ended September 30, 2009, we reduced our debt by $104.3 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 $9.0 million for the nine months ended September 30, 2009
and $7.8 million for the nine months ended September 30, 2008. We currently
expect our 2009 capital expenditures to be approximately $15.0
million.
Debt
Service
Our long-term
debt decreased to $315.0 million as of September 30, 2009 from $419.3 million as
of December 31, 2008. After giving effect to $315.0
million in borrowings under the 2005 Senior Credit Facility and letters of
credit outstanding, total availability under the Revolvers was $321.3 million as
of September 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 September 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, we have $280.1 million available for repurchase
as of September 30, 2009. No shares were repurchased during the year
ended December 31, 2008 and nine months ended September 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
quarters 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 remains 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 third 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;
maintain a reasonable cushion for the covenants in our credit facility; improve
cost structures and taking actions to further improve our financial flexibility
and strengthen our business.
Managing
Growth—Over the last eight years, we have had to manage our business both
through periods of rapid growth and the current challenging economic
environment. Our Net sales increased 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 nine months ended September 30, 2009, our
Net sales were $586.4 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 types of
challenges, management has continued to enhance operating and financial
infrastructure, as appropriate. In addition, since 2007, we have had to manage a
decline in sales as a result of the macroeconomic environment. During this
period, we had to manage our cost structure to contain costs. Going forward, we
expect our expenditures to enhance our operating and financial infrastructure,
as well as expenditures for advertising and other marketing-related activities,
will continue to be 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. We expect that gross margins in the fourth quarter
of 2009 will remain consistent with or slightly improve compared to the
gross margins in the third quarter of 2009. We expect that productivity and
fixed cost leverage will have a positive impact on our margins in the fourth
quarter. However, we expect that the effects of these improvements will be
offset by commodity pricing and discounts offered to retailers.
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. However,
our business may be affected by general business and economic conditions that
could have an impact on demand for our products. In addition, by expanding
distribution within our existing accounts, we believe we have the opportunity to
grow our business. By extending our product line and our new
segmentation of products, 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 continue to be
affected by general business and economic conditions that could have an impact
on demand for our products, which could limit our market share and decrease
sales. Our products are currently sold in approximately 6,400
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 4,900 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 September 30, 2009, we had $315.0 million of total
Long-term debt outstanding, and our Stockholders’ Equity was $140.6 million.
Higher financial leverage makes us more vulnerable to general adverse
competitive, economic and industry conditions. Our recent repatriation of
foreign earnings, suspending our quarterly cash dividend, and modest debt
rebalancing between our Domestic and International segments, together with
productivity improvements and cost containment initiatives has enabled us to
decrease our financial leverage and increase our financial flexibility during
the first nine months of 2009. 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.
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 September 30, 2009, would be approximately $2.3 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 re-measured 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 September 30, 2009, we had
variable-rate debt of approximately $15.0 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
$0.2 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 September 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 SEC’s rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
During our
last fiscal quarter, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
|
PART
II
|
OTHER INFORMATION
|
|
ITEM 1.
|
See
Note 9 to the Notes to the Condensed Consolidated Financial Statements in
ITEM 1 under Part I of this report for a full description of our legal
proceedings.
We are
involved in various other legal proceedings incidental to the operations
of our business. We believe that the outcome of all such pending legal
proceedings in the aggregate will not have a materially adverse affect on our
business, financial condition, liquidity, or operating results.
|
ITEM 1A.
|
In addition to the
other information set forth in this quarterly report, you should carefully
consider the factors discussed under the heading, “Risk Factors” in Item IA of
Part I of our annual report on Form 10-K 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 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 the 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 or second 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 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 October
23, 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.
(a) Not
applicable.
(b) Not
applicable.
(c) Not
applicable
None
None
(a) Not
applicable.
(b) Not
applicable.
The following
is an index of the exhibits included in this report:
|
*
|
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:
October 26, 2009
|
By:
|
/s/ DALE
E.
WILLIAMS
|
||||||
|
Dale
E. Williams
|
||||||||
|
Executive
Vice President, Chief Financial Officer,
|
||||||||
|
and
Secretary
|
||||||||
33
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:
October 26, 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:
October 26, 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
September 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:
October 26, 2009
|
By:
|
/s/ MARK
SARVARY
|
||||||
|
Mark
Sarvary
|
||||||||
|
President
and Chief Executive Officer
|
||||||||
|
Date:
October 26, 2009
|
By:
|
/s/ DALE
E.
WILLIAMS
|
||||||
|
Dale
E. Williams
|
||||||||
|
Executive
Vice President, Chief Financial Officer,
and
Secretary
|
||||||||