UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended March 31, 2010
|
|
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)
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Delaware
|
33-1022198
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|
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(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 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 April 23,
2010 was 72,391,498 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, decrease in capital expenditures, the impact of
consumer confidence, the antitrust class action lawsuit and similar issues,
pending tax assessments, statements regarding our financial flexibility,
statements relating to the impact of initiatives to accelerate growth, expand
market share and attract sales from the standard mattress market, the
improvements in our Net sales, expand business within established accounts,
reduce costs and operating expenses and improve manufacturing productivity, the
initiatives to improve gross margin, the vertical integration of our business,
improvements in account productivity, the development, rollout and
market acceptance of new products, including the success of the TEMPUR-Cloud™
Supreme, our ability to further invest in the business and in brand awareness,
ability to meet financial obligations and continue to comply with the terms of
our credit facility, including its financial ratio covenants, the effects of
changes in foreign exchange rates on our reported earnings, our expected sources
of cash flow, our ability to effectively manage cash, 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, 2009. 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
|
||||||
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March
31,
|
||||||
|
2010
|
2009
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|||||
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Net
sales
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$
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253,889
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$
|
177,104
|
||
|
Cost
of sales
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129,080
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95,243
|
||||
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Gross
profit
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124,809
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81,861
|
||||
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Selling
and marketing expenses
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46,231
|
33,872
|
||||
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General,
administrative and other expenses
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26,288
|
22,108
|
||||
|
Operating
income
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52,290
|
25,881
|
||||
|
Other
expense, net:
|
||||||
|
Interest
expense, net
|
(3,189
|
)
|
(4,571
|
)
|
||
|
Other
income, net
|
163
|
348
|
||||
|
Total
other expense
|
(3,026
|
)
|
(4,223
|
)
|
||
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Income
before income taxes
|
49,264
|
21,658
|
||||
|
Income
tax provision
|
16,021
|
8,320
|
||||
|
Net
income
|
33,243
|
13,338
|
||||
|
Less:
Net income attributable to the noncontrolling interest
|
95
|
—
|
||||
|
Net
income attributable to common stockholders
|
$
|
33,148
|
$
|
13,338
|
||
|
Earnings
per common share:
|
||||||
|
Basic
|
$
|
0.45
|
$
|
0.18
|
||
|
Diluted
|
$
|
0.44
|
$
|
0.18
|
||
|
Weighted
average common shares outstanding:
|
||||||
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Basic
|
73,313
|
74,874
|
||||
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Diluted
|
75,678
|
74,959
|
||||
(In
thousands)
|
March
31,
2010
|
December
31,
2009
|
|||||
|
(Unaudited)
|
||||||
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ASSETS
|
||||||
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Current
Assets:
|
||||||
|
Cash
and cash equivalents
|
$
|
38,422
|
$
|
14,042
|
||
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Accounts
receivable, net
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118,997
|
105,576
|
||||
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Inventories
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68,111
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57,686
|
||||
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Prepaid
expenses and other current assets
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15,888
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11,268
|
||||
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Deferred
income taxes
|
20,276
|
20,411
|
||||
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Total
Current Assets
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261,694
|
208,983
|
||||
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Property,
plant and equipment, net
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165,880
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172,497
|
||||
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Goodwill
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193,155
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193,391
|
||||
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Other
intangible assets, net
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64,067
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64,717
|
||||
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Other
non-current assets
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4,392
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3,791
|
||||
|
Total
Assets
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$
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689,188
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$
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643,379
|
||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||
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Current
Liabilities:
|
||||||
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Accounts
payable
|
$
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52,647
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$
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47,761
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||
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Accrued
expenses and other current liabilities
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81,256
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81,452
|
||||
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Income
taxes payable
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14,362
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7,312
|
||||
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Total
Current Liabilities
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148,265
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136,525
|
||||
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Long-term
debt
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392,695
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297,470
|
||||
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Deferred
income taxes
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28,827
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29,865
|
||||
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Other
non-current liabilities
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6,222
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7,226
|
||||
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Total
Liabilities
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576,009
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471,086
|
||||
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Commitments
and contingencies—see Note 9
|
||||||
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Equity
attributable to common stockholders
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111,859
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172,293
|
||||
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Equity
attributable to the noncontrolling interest
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1,320
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—
|
||||
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Total
Stockholders’ Equity
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113,179
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172,293
|
||||
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Total
Liabilities and Stockholders’ Equity
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$
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689,188
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$
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643,379
|
||
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
(In
thousands)
(Unaudited)
|
Three
Months Ended
March
31,
|
|||||||
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2010
|
2009
|
||||||
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CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
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Net
income
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$
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33,243
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$
|
13,338
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||
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Depreciation
and amortization
|
7,585
|
7,727
|
|||||
|
Amortization
of stock-based compensation
|
2,411
|
1,903
|
|||||
|
Amortization
of deferred financing costs
|
173
|
172
|
|||||
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Bad
debt expense
|
576
|
2,233
|
|||||
|
Deferred
income taxes
|
(1,534
|
)
|
(4,742
|
)
|
|||
|
Foreign
currency adjustments and other
|
(844
|
)
|
(311
|
)
|
|||
|
Changes
in operating assets and liabilities
|
(18,290
|
)
|
5,679
|
||||
|
Net
cash provided by operating activities
|
23,320
|
25,999
|
|||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of property, plant and equipment
|
(2,671
|
)
|
(1,423
|
)
|
|||
|
Payments
for other
|
(87
|
)
|
(218
|
)
|
|||
|
Net
cash used by investing activities
|
(2,758
|
)
|
(1,641
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Proceeds
from long-term revolving credit facility
|
129,336
|
61,500
|
|||||
|
Repayments
of long-term revolving credit facility
|
(33,749
|
)
|
(79,721
|
)
|
|||
|
Proceeds
from issuance of common stock
|
8,308
|
—
|
|||||
|
Excess
tax benefit from stock based compensation
|
1,289
|
—
|
|||||
|
Treasury
shares repurchased
|
(100,000
|
)
|
—
|
||||
|
Net
cash provided (used) by financing activities
|
5,184
|
(18,221
|
)
|
||||
|
NET
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
(1,366
|
)
|
(395
|
)
|
|||
|
Increase
in cash and cash equivalents
|
24,380
|
5,742
|
|||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
14,042
|
15,385
|
|||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
38,422
|
$
|
21,127
|
|||
|
Supplemental
cash flow information:
|
|||||||
|
Cash
paid during the period for:
|
|||||||
|
Interest
|
$
|
3,042
|
$
|
4,550
|
|||
|
Income
taxes, net of refunds
|
$
|
8,911
|
$
|
11,375
|
|||
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.
The Company
manufactures, markets and sells products including pillows, mattresses and other
related products. The Company manufactures essentially all its
pressure-relieving TEMPUR® products at three manufacturing facilities, with one
located in Denmark and two in the U.S. The Company has sales distribution
subsidiaries operating in the U.S., Europe and Asia Pacific and has third party
distribution arrangements in certain other countries where it does not have
subsidiaries. The Company sells its products through four sales channels:
Retail, Direct, Healthcare and Third party.
The
accompanying unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and include all of the information and disclosures required by
generally accepted accounting principles in the United States (U.S. GAAP) for
interim financial reporting. These unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the consolidated financial
statements of the Company and related footnotes for the year ended December 31,
2009, included in the Company’s annual report on Form 10-K.
The results
of operations for the interim periods are not necessarily indicative of results
of operations for a full year. It is the opinion of management that all
necessary adjustments for a fair presentation of the results of operations for
the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein.
(b) Basis of Consolidation—The
accompanying condensed consolidated financial statements include the accounts of
Tempur-Pedic International, its wholly-owned subsidiaries and its majority-owned
subsidiaries in which a controlling interest is held. Intercompany balances and
transactions have been eliminated. The noncontrolling interest represents the
portion of equity interests of consolidated affiliates not owned by the Company.
On January 29, 2010, the Company established a 51% interest in Tempur Shanghai
Holding Ltd (a Hong Kong company).
(c) Use of Estimates—The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company’s results are affected by economic, political,
legislative, regulatory and legal actions. Economic conditions, such as
recessionary trends, inflation, interest and monetary exchange rates, government
fiscal policies and changes in the prices of raw materials, can have a
significant effect on operations. While the Company maintains reserves for
anticipated liabilities and carries various levels of insurance, the Company
could be affected by civil, criminal, regulatory or administrative actions,
claims or proceedings.
(d) Inventories—Inventories are
stated at the lower of cost or market, determined by the first-in, first-out
method, and consist of the following:
|
March
31,
2010
|
December
31,
2009
|
|||||||
|
Finished
goods
|
$ | 48,189 | $ | 41,805 | ||||
|
Work-in-process
|
7,754 | 6,654 | ||||||
|
Raw
materials and supplies
|
12,168 | 9,227 | ||||||
| $ | 68,111 | $ | 57,686 | |||||
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(e) Accrued Sales Returns—The
Company allows product returns up to 120 days following a sale through certain
sales channels and on certain products. 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. 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, 2009 to March 31,
2010:
|
Balance
as of December 31, 2009
|
$ | 4,233 | ||
|
Amounts
accrued
|
11,321 | |||
|
Returns
charged to accrual
|
(11,025 | ) | ||
|
Balance
as of March 31, 2010
|
$ | 4,529 |
(f) Warranties—The Company
provides a 20-year warranty for U.S. sales and a 15-year warranty for non-U.S.
sales on mattresses, each prorated for the last 10 years. The Company also
provides a 2-year to 3-year warranty on pillows. Estimated future obligations
related to these products are charged to operations in the period in which the
related revenue is recognized. Estimates of warranty expenses are based
primarily on historical claim 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, 2009 to March 31,
2010:
|
Balance
as of December 31, 2009
|
$ | 4,052 | ||
|
Amounts
accrued
|
1,014 | |||
|
Warranties
charged to accrual
|
(1,013 | ) | ||
|
Balance
as of March 31, 2010
|
$ | 4,053 |
(g) Revenue Recognition—Sales of
products are recognized when persuasive evidence of an arrangement exists,
products are shipped and title passes to customers and the risks and rewards of
ownership are transferred, the sales price is fixed or determinable and
collectability is reasonably assured. The Company extends volume discounts to
certain customers and reflects these amounts as a reduction of sales. The
Company also reports sales net of tax assessed by qualifying governmental
authorities. The Company extends credit based on the creditworthiness of its
customers. No collateral is required on sales made in the normal course of
business.
The allowance
for doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable. The Company
regularly reviews the adequacy of its allowance for doubtful accounts. The
Company determines the allowance based on historical write-off experience and
current economic conditions and also considers factors such as customer credit,
past transaction history with the customer and changes in customer payment terms
when determining whether the collection of a receivable is reasonably assured.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The allowance for doubtful accounts included in Accounts receivable, net
in the accompanying Condensed Consolidated Balance Sheets was $8,353 and $9,030
as of March 31, 2010 and December 31, 2009, respectively.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(h) Advertising Costs—The
Company expenses advertising costs as incurred except for production costs and
advance payments, which are deferred and expensed when advertisements run for
the first time. Direct response advance payments are deferred and are amortized
over the life of the program.
(i) Research and Development
Expenses—Research and development expenses for new products are expensed
as they are incurred and included in General, administrative and other expenses
in the accompanying Condensed Consolidated Statements of Income. Research and
development costs charged to expense were approximately $1,850 and $1,459 for
the three months ended March 31, 2010 and March 31, 2009,
respectively.
(j) Subsequent Events—During the
first quarter of fiscal 2010, the Company has evaluated all events or
transactions that occurred after March 31, 2010 through the issuance of
these condensed consolidated financial statements.
On April 1,
2010, the Company acquired its third party distributor in Canada. Approximately
$18,500 in cash was paid in order to acquire this entity. Additional payments
may be made to the former owners if certain financial targets are achieved.
During 2009, the third party distributor contributed $8,800 to the Company’s Net
sales.
On April 15,
2010, the Board of Directors authorized a repurchase authorization of up to
$100,000 of the Company’s common stock. Share repurchases under this
authorization may be made through open market transactions, negotiated purchases
or otherwise, at times and in such amounts as the Company and a committee of the
Board deem appropriate. This share repurchase program may be limited, suspended
or terminated at any time without prior notice.
(2)
Goodwill and Other intangible assets
The following
table summarizes information relating to the Company’s Other intangible
assets:
|
March
31, 2010
|
December
31, 2009
|
|||||||||||||||||||||||||||
|
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 | $ | 11,867 | $ | 4,133 | $ | 16,000 | $ | 11,467 | $ | 4,533 | |||||||||||||||
|
Patents
& other trademarks
|
5-20 | 11,896 | 8,134 | 3,762 | 11,876 | 8,002 | 3,874 | |||||||||||||||||||||
|
Customer
database
|
5 | 4,818 | 4,602 | 216 | 4,855 | 4,593 | 262 | |||||||||||||||||||||
|
Foam
formula
|
10 | 3,700 | 2,744 | 956 | 3,700 | 2,652 | 1,048 | |||||||||||||||||||||
|
Total
|
$ | 91,414 | $ | 27,347 | $ | 64,067 | $ | 91,431 | $ | 26,714 | $ | 64,717 | ||||||||||||||||
Amortization
expense relating to intangible assets for the Company was $671 and $606 for the
three months ended March 31, 2010 and March 31, 2009, respectively. No
impairments of goodwill or other intangible assets have adjusted the gross
carrying amount of these assets in any historical period.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
The following
summarizes changes to the Company’s Goodwill, by reportable business
segment:
|
Domestic
|
International
|
Total
|
||||||||||
|
Balance
as of December 31, 2009
|
$ | 89,929 | $ | 103,462 | $ | 193,391 | ||||||
|
Foreign
currency translation adjustments
|
— | (236 | ) | (236 | ) | |||||||
|
Balance
as of March 31, 2010
|
$ | 89,929 | $ | 103,226 | $ | 193,155 | ||||||
(3)
Long-term Debt
(a) Long-term Debt—Long-term debt
for the Company consists of the following:
| March 31, 2010 | December 31, 2009 | |||||||
|
2005
Senior Credit Facility:
|
||||||||
|
Domestic
Long-Term Revolving Credit Facility payable to lenders, interest at
Index
Rate or LIBOR plus applicable margin (2.85% and 3.72% as of March 31, 2010
and December 31, 2009, respectively),
commitment through and due June 8,
2012
|
$ | 377,000 | $ | 294,000 | ||||
|
Foreign
Long-Term Revolving Credit Facility payable to lenders, interest
at Index Rate or LIBOR plus applicable margin (2.23% and 2.06% as of
March 31, 2010 and December 31, 2009, respectively), commitment through
and due June 8, 2012
|
15,695 | 3,470 | ||||||
|
Long-term
debt
|
$ | 392,695 | $ | 297,470 | ||||
(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 $11,262 at March
31, 2010. After giving effect to
letters of credit and $392,695 in borrowings under the Revolvers, total
availability under the Revolvers was $236,043 as of March 31, 2010. 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%.
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 March 31, 2010.
In May 2008,
the Company entered into a three year interest rate swap agreement to manage
interest costs and the risk associated with changing interest rates associated
with the 2005 Senior Credit Facility. Refer to Note 5, “Derivative Financial
Instruments” for additional information regarding the Company’s derivative
instruments, including this interest rate swap.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(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
March 31, 2010, 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. The following table provides a summary by level of
the fair value of financial instruments that are measured on a recurring
basis:
|
Fair
Value Measurements at March 31, 2010 Using:
|
||||||||||||
|
March
31, 2010
|
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
|
$ | 464 | $ | — | $ | 464 | $ | — | ||||
|
Interest
rate swap
|
$ | 5,930 | $ | — | $ | 5,930 | $ | — | ||||
|
Fair
Value Measurements at December 31, 2009 Using:
|
||||||||||||
|
December
31, 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
|
$ | 438 | $ | — | $ | 438 | $ | — | ||||
|
Interest
rate swap
|
$ | 6,865 | $ | — | $ | 6,865 | $ | — | ||||
The carrying
value of Cash and cash equivalents, Accounts receivable and Accounts payable
approximate fair value because of the short-term maturity of those instruments.
Borrowings under the 2005 Senior Credit Facility (as defined in Note 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.
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 amortizes 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 ineffective portion) or hedge
components excluded from the assessment of effectiveness are recognized as
Interest expense, net during the current period.
As of March
31, 2010 the total notional amount of the Company’s interest rate swap agreement
is $200,000. Over the next 12 months, the Company expects to reclassify $5,522
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 affect
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 March
31, 2010, the Company had foreign currency forward contracts with expiration
dates ranging from April 6, 2010 through October 26, 2010. The changes in fair
value of these foreign currency hedges are included as a component of Other
income, net. As of March 31, 2010 the Company had the following outstanding
foreign currency forward contracts:
|
Foreign
Currency
|
Currency
Denomination
|
|||
|
Great
Britain Pound
|
£ | 5,364 | ||
|
Japanese
Yen
|
¥ | 469,136 | ||
|
Swiss
Franc
|
Fr. | 5,389 | ||
|
Swedish
Krona
|
kr. | 30,389 | ||
|
Norwegian
Krone
|
kr. | 941 | ||
|
Australian
Dollar
|
$ | 2,060 | ||
|
New
Zealand Dollar
|
$ | 2,180 | ||
|
Singapore
Dollar
|
$ | 630 | ||
|
United
States Dollar
|
$ | 3,427 | ||
As of March
31, 2010 and December 31, 2009, the fair value carrying amount of the Company’s
derivative instruments were recorded as follows:
|
Liability
Derivatives
|
||||||||||
|
March
31, 2010
|
December
31, 2009
|
|||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
Derivatives
designated as hedging instruments
|
||||||||||
|
Interest
rate swap
|
Other
non-current liabilities
|
$
|
5,930
|
Other
non-current liabilities
|
$
|
6,865
|
||||
|
Derivatives
not designated as hedging instruments
|
||||||||||
|
Foreign
exchange forward contracts
|
Accrued
expenses and other current liabilities
|
$
|
464
|
Accrued
expenses and other current liabilities
|
$
|
438
|
||||
|
$
|
6,394
|
$
|
7,303
|
|||||||
The effect of derivative instruments on the accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2010 was as follows:
|
Derivatives
Designated as Cash Flow Hedging Relationships
|
Amount
of (Gain)/Loss
Recognized
in Accumulated OCL 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
|
$
|
(935)
|
Interest
expense, net
|
$
|
1,731
|
Interest
expense, net
|
$
|
—
|
||||||
|
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
income, net
|
$
|
(966
|
)
|
||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
The effect of
derivative instruments on the accompanying Condensed Consolidated Statements of
Income for the three months ended March 31, 2009 was as follows:
|
Derivatives
Designated as Cash Flow Hedging Relationships
|
Amount
of (Gain)/Loss
Recognized
in Accumulated OCL 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
|
$
|
(820)
|
Interest
expense, net
|
$
|
1,411
|
Interest
expense, net
|
$
|
—
|
||||||
|
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
income, net
|
$
|
(740
|
)
|
||
(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. On January 13, 2010 the Board
of Directors approved a share repurchase program of up to $100,000 of the
Company’s common stock, which replaced the October 2007 authorization. During
the three months ended March 31, 2010, the Company repurchased 3,694 shares of
the Company’s common stock for $100,000 and completed the January 2010
authorization. Share repurchases under authorizations may be made through open
market transactions, negotiated purchase or otherwise, at times and in such
amounts as the Company and a committee of the Board deem
appropriate.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(7)
Other Items
(a) Property, plant and
equipment—
Property,
plant and equipment, net consisted of the following:
|
|
March
31, 2010
|
December
31, 2009
|
|||||
|
Land
and buildings
|
|
$
|
120,990
|
$
|
123,743
|
||
|
Machinery
and equipment, furniture and fixtures and other
|
|
201,143
|
202,474
|
||||
|
Construction
in progress
|
|
8,608
|
8,107
|
||||
|
|
330,741
|
334,324
|
|||||
|
Accumulated
depreciation
|
|
(164,861)
|
(161,827)
|
||||
|
|
$
|
165,880
|
$
|
172,497
|
|||
(b) Accrued expenses and other current
liabilities—
Accrued
expenses and other current liabilities consisted of the following:
|
March
31, 2010
|
December
31, 2009
|
||||||
|
Salary
and related expenses
|
$
|
14,273
|
$
|
18,131
|
|||
|
Accrued
unrecognized tax benefits
|
12,544
|
12,544
|
|||||
|
Accrued
sales and value added taxes
|
11,568
|
11,472
|
|||||
|
Warranty
accrual
|
|
4,053
|
4,052
|
||||
|
Sales
returns
|
|
4,529
|
4,233
|
||||
|
Other
|
|
34,289
|
31,020
|
||||
|
|
$
|
81,256
|
$
|
81,452
|
|||
|
|
(c) Accumulated other comprehensive
loss—
Accumulated
other comprehensive loss consisted of the following:
|
March
31, 2010
|
December
31, 2009
|
|||||
| Derivative instruments accounted for as hedges, net of tax of $2,313 and $2,678, respectively | (3,617 | ) | (4,187 | ) | ||
|
Foreign
currency translation
|
(9,245
|
) |
(3,817
|
) | ||
|
Accumulated
other comprehensive loss
|
$
|
(12,862
|
) |
$
|
(8,004
|
) |
(d) Comprehensive
income
The
components of comprehensive income consisted of the following:
|
March
31, 2010
|
March
31, 2009
|
|||||
|
Net
income attributable to common stockholders
|
$
|
33,148
|
$
|
13,338
|
||
|
Derivative
instruments accounted for as hedges, net of taxes of $365 and $320,
respectively
|
570 | 500 | ||||
|
Cumulative
translation adjustment
|
(5,428
|
) |
(4,275
|
) | ||
|
Comprehensive
income attributable to common stockholders
|
$
|
28,290
|
$
|
9,563
|
||
Comprehensive
income attributable to the noncontrolling interest was $95 and $0 and Total
comprehensive income was $28,385 and $9,563 for the three month periods ended
March 31, 2010 and 2009, respectively.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
(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,
2009. Effective February 1, 2010, the Company suspended offerings under the ESPP
indefinitely.
In the first
quarter of 2010, the Compensation Committee of the Board of Directors approved
the terms of a Long-Term Incentive Program (LTIP), established under the 2003
Plan. For 2010, the LTIP awards consist of a mix of stock options and
performance-based restricted stock units (PRSUs). Shares with respect to the
PRSUs will be granted and vest following the end of the applicable performance
period and achievement of applicable performance metrics as determined by the
Compensation Committee of the Board of Directors.
The Company
granted PRSUs during the three months ended March 31, 2010. The maximum number
of shares to be awarded under the 2010 PRSUs will be 406 shares and will vest,
if earned, at the end of the three-year performance period ending on December
31, 2012. Actual payout under the PRSUs granted in 2010 is dependent upon the
achievement of certain financial goals, based on Net sales and Earnings Before
Interest and Taxes (EBIT) margin targets. The Company recognized compensation
expense of $107 associated with the 2010 PRSUs during the three months ended
March 31, 2010. Based on current estimates of the performance metrics,
unrecognized compensation expense with respect to the PRSUs was $3,738, which is
expected to be recorded over the weighted average remaining life of 2.76 years.
No PRSUs were granted during the three months ended March 31, 2009.
The Company
granted options to purchase 129 shares of common stock during the three months
ending March 31, 2010. The Company recognized compensation expense of $59
associated with the 2010 grants during the three months ended March 31, 2010.
The Company granted new options to purchase 1,416 shares of common stock during
the three months ending March 31, 2009. The Company recognized compensation
expense of $71 associated with the 2009 grants during the three months ended
March 31, 2009. As of March 31, 2010, there was $1,909 of unrecognized
compensation expense associated with the options granted in 2010, which is
expected to be recorded over the weighted average remaining vesting period of
2.96 years. The options granted in the three months ended March 31, 2010 had a
weighted average grant-date fair value of $15.29 per option, as determined by
the Black-Scholes option pricing model using the following
assumptions:
|
Expected
volatility of stock
|
68.7
– 71.9
|
%
|
|
|
Expected
life of options, in years
|
4.0
– 5.0
|
||
|
Risk-free
interest rate
|
2.0
– 2.7
|
%
|
|
|
Expected
dividend yield on stock
|
1.1
– 1.4
|
%
|
The Company
granted 176 restricted stock units (RSUs) during the three months ended March
31, 2010. The Company recognized compensation expense of $139 associated with
the 2010 RSUs during the three months ended March 31, 2010. As of March 31,
2010, there was $4,861 of unrecognized compensation expense associated with the
RSUs granted in 2010, which is expected to be recorded over the weighted average
remaining vesting period of 2.9 years. No RSUs were granted during the three
months ended March 31, 2009.
The Company
recorded $2,411 and $1,903 of total stock-based compensation expense for the
three months ended March 31, 2010 and March 31, 2009, 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 were
not significant as of March 31, 2010 or December 31, 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 the Company that it may bring an enforcement action against
the Company under New York law if the Company chose not to do so. On March
29, 2010, the Office of the Attorney General filed suit in New York state court
against the Company with respect to this matter, seeking injunctive relief,
restitution and disgorgement of profits in unspecified amounts. The
complaint does not charge the Company with any violation of state or federal
antitrust law; instead it claims the Company violated a 1975 New York state law
which declares certain contractual provisions to be
unenforceable. The Company believes that its UPPL complies with state
and federal law and intends to vigorously defend it. However, due to
the inherent uncertainties of this matter, the Company cannot at this time
predict the outcome of the enforcement action and can give no assurance that
these claims will not have a material adverse affect on its financial position
or results of operation. Accordingly, the Company cannot make an estimate of the
possible range of loss.
(10)
Income Taxes
The Company’s
effective tax rate for the three months ended March 31, 2010 and March 31, 2009
was 32.5% and 38.4% respectively. Reconciling items between the March 31,
2010 and March 31, 2009 rates include a tax charge on a previously recognized
foreign tax benefit taken in the first quarter of 2009 and the scheduled
increase in the production activities deduction from 6% in 2009 to 9% in
2010.
The Company
has not provided for U.S. federal and/or state income and foreign withholding
taxes on $179.8 million of undistributed earnings from non-U.S. operations as of
March 31, 2010 because Tempur-Pedic International intends to reinvest such
earnings indefinitely outside of the United States. If these earnings
were to be distributed, foreign tax credits may become available under current
law to reduce the resulting U.S. income tax liability.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
On October
24, 2007, the Company received an income tax assessment from the Danish Tax
Authority with respect to the 2001, 2002 and 2003 tax years. The
tax assessment relates to the royalty paid by one of Tempur-Pedic
International’s U.S. subsidiaries to a Danish subsidiary and the position taken
by the Danish Tax Authority could apply to subsequent years. The total tax
assessment is approximately $39.3 million including interest and
penalties. 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 during 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 the amount of 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 months ended March 31, 2010, there were no significant changes to the
liability for unrecognized tax benefits.
(11)
Earnings Per Common Share
|
Three
Months Ended
|
|||||||
|
March
31,
|
|||||||
|
2010
|
2009
|
||||||
|
Numerator:
|
|||||||
|
Net
income attributable to common stockholders
|
$ | 33,148 | $ | 13,338 | |||
|
Denominator:
|
|||||||
|
Denominator
for basic earnings per common share-weighted
average shares
|
73,313 | 74,874 | |||||
|
Effect
of dilutive securities:
|
|||||||
|
Employee
stock options
|
2,365 | 85 | |||||
|
Denominator
for diluted earnings per common share-adjusted
weighted average shares
|
75,678 | 74,959 | |||||
|
Basic
earnings per common share
|
$ | 0.45 | $ | 0.18 | |||
|
Diluted
earnings per common share
|
$ | 0.44 | $ | 0.18 | |||
The Company
excluded 141 and 5,675 shares issuable upon exercise of outstanding stock
options for the three months ended March 31, 2010 and 2009, 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 North American
distribution subsidiaries 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:
|
March
31,
|
December
31,
|
||||||
|
2010
|
2009
|
||||||
|
Total
assets:
|
|||||||
|
Domestic
|
$ | 540,504 | $ | 481,942 | |||
|
International
|
298,414 | 274,112 | |||||
|
Intercompany
eliminations
|
(149,730 | ) | (112,675 | ) | |||
| $ | 689,188 | $ | 643,379 | ||||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)–(Continued)
(In
thousands, except per common share amounts)
The following
table summarizes segment information:
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
sales from external customers:
|
||||||||
|
Domestic
|
||||||||
|
Mattresses
|
$ | 117,386 | $ | 75,711 | ||||
|
Pillows
|
14,129 | 9,845 | ||||||
|
Other
|
35,038 | 20,878 | ||||||
| $ | 166,553 | $ | 106,434 | |||||
| International | ||||||||
|
Mattresses
|
$ | 51,687 | $ | 43,417 | ||||
|
Pillows
|
16,617 | 13,216 | ||||||
|
Other
|
19,032 | 14,037 | ||||||
| $ | 87,336 | $ | 70,670 | |||||
| $ | 253,889 | $ | 177,104 | |||||
|
Inter-segment
sales:
|
||||||||
|
Domestic
|
$ | — | $ | — | ||||
|
International
|
205 | 224 | ||||||
|
Intercompany
eliminations
|
(205 | ) | (224 | ) | ||||
| $ | — | $ | — | |||||
|
Operating
income:
|
||||||||
|
Domestic
|
$ | 27,048 | $ | 7,805 | ||||
|
International
|
25,242 | 18,076 | ||||||
| $ | 52,290 | $ | 25,881 | |||||
|
Depreciation
and amortization (including
stock-based compensation
amortization):
|
||||||||
|
Domestic
|
$ | 7,731 | $ | 7,321 | ||||
|
International
|
2,265 | 2,309 | ||||||
| $ | 9,996 | $ | 9,630 | |||||
|
Capital
expenditures:
|
||||||||
|
Domestic
|
$ | 1,349 | $ | 390 | ||||
|
International
|
1,322 | 1,033 | ||||||
| $ | 2,671 | $ | 1,423 | |||||
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, 2009. 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.
In this
discussion and analysis, the Company discusses and explains the financial
condition and results of operations for Tempur-Pedic International Inc. for the
periods ended March 31, 2010 and 2009 that includes the following
points:
|
·
|
Our
Net sales and costs in the periods presented as well as changes between
periods;
|
|
·
|
Discussion
of new initiatives that may affect our future results of operations and
financial condition;
|
|
·
|
Expected
future expenditures for capital projects and sources of liquidity for
future operations;
and
|
|
·
|
The
effect of the foregoing on our overall financial performance and
condition, as well as factors that could affect our future
performance.
|
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.
We sell
our premium mattresses and pillows through four distribution channels in each
operating business segment: Retail (furniture and bedding, specialty and
department stores); Direct (direct response and internet); Healthcare
(chiropractors, medical retailers, hospitals and other healthcare markets); and
Third party distributors in countries where we do not sell directly through our
own subsidiaries.
Business Segment
Information—We have two reportable business segments: Domestic and
International. These reportable segments are strategic business units that are
managed separately based on the fundamental differences in their geographies.
The Domestic operating segment consists of two U.S. manufacturing facilities,
whose customers include our North American distribution subsidiaries 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 maintain our financial flexibility and strengthen the
business.
|
Results
of Operations
Key financial
highlights for the three months ended March 31, 2010 include the
following:
|
·
|
Earnings
per common share (EPS) were $0.44 per diluted common share compared to
$0.18 in the first quarter of 2009.
|
|
·
|
Net
sales rose to $253.9 million from $177.1 million for the three months
ended March 31, 2009.
|
|
·
|
Our
Gross Profit margin was 49.2% compared to 46.2% for the three months ended
March 31, 2009.
|
|
·
|
During
the first quarter of 2010, we repurchased 3.7 million shares of our common
stock at a total cost of $100.0 million. These purchases were funded
primarily by increased borrowings under our domestic revolving credit
facility.
|
|
(In
thousands, except earnings per common share amounts)
|
Three
Months Ended
March
31,
|
|||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
Net
sales
|
$ | 253,889 | 100.0 | % | $ | 177,104 | 100.0 | % | ||||||||
|
Cost
of sales
|
129,080 | 50.8 | 95,243 | 53.8 | ||||||||||||
|
Gross
profit
|
124,809 | 49.2 | 81,861 | 46.2 | ||||||||||||
|
Selling
and marketing expenses
|
46,231 | 18.2 | 33,872 | 19.1 | ||||||||||||
|
General,
administrative and other expenses
|
26,288 | 10.4 | 22,108 | 12.5 | ||||||||||||
|
Operating
income
|
52,290 | 20.6 | 25,881 | 14.6 | ||||||||||||
|
Interest
expense, net
|
(3,189 | ) | (1.3 | ) | (4,571 | ) | (2.6 | ) | ||||||||
|
Other
income, net
|
163 | 0.1 | 348 | 0.2 | ||||||||||||
|
Income
before income taxes
|
49,264 | 19.4 | 21,658 | 12.2 | ||||||||||||
|
Income
tax provision
|
16,021 | 6.3 | 8,320 | 4.7 | ||||||||||||
|
Net
income
|
33,243 | 13.1 | % | 13,338 | 7.5 | % | ||||||||||
|
Less:
Net income attributable to the noncontrolling interest
|
95 | — | — | — | ||||||||||||
|
Net
income attributable to common stockholders
|
$ | 33,148 | 13.1 | % | $ | 13,338 | 7.5 | % | ||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.45 | $ | 0.18 | ||||||||||||
|
Diluted
|
$ | 0.44 | $ | 0.18 | ||||||||||||
|
Weighted
average common shares outstanding:
|
||||||||||||||||
|
Basic
|
73,313 | 74,874 | ||||||||||||||
|
Diluted
|
75,678 | 74,959 | ||||||||||||||
Three
Months Ended March 31, 2010 Compared with Three Months Ended March 31,
2009
A summary of
Net sales, by channel and by segment, is set forth below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||
|
Three
Months Ended
|
Three
Months Ended
|
Three
Months Ended
|
||||||||||||||||
|
March
31,
|
March
31,
|
March
31,
|
||||||||||||||||
|
(in
thousands)
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Retail
|
$ | 212,740 | $ | 150,522 | $ | 143,217 | $ | 93,411 | $ | 69,523 | $ | 57,111 | ||||||
|
Direct
|
16,614 | 9,729 | 14,555 | 8,478 | 2,059 | 1,251 | ||||||||||||
|
Healthcare
|
9,898 | 8,902 | 3,438 | 2,694 | 6,460 | 6,208 | ||||||||||||
|
Third
Party
|
14,637 | 7,951 | 5,343 | 1,851 | 9,294 | 6,100 | ||||||||||||
| $ | 253,889 | $ | 177,104 | $ | 166,553 | $ | 106,434 | $ | 87,336 | $ | 70,670 | |||||||
A summary of
Net sales, by product and by segment, is set forth below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||
|
Three
Months Ended
|
Three
Months Ended
|
Three
Months Ended
|
||||||||||||||||
|
March
31,
|
March
31,
|
March
31,
|
||||||||||||||||
|
(in
thousands)
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Mattresses
|
$ | 169,073 | $ | 119,128 | $ | 117,386 | $ | 75,711 | $ | 51,687 | $ | 43,417 | ||||||
|
Pillows
|
30,746 | 23,061 | 14,129 | 9,845 | 16,617 | 13,216 | ||||||||||||
|
Other
|
54,070 | 34,915 | 35,038 | 20,878 | 19,032 | 14,037 | ||||||||||||
| $ | 253,889 | $ | 177,104 | $ | 166,553 | $ | 106,434 | $ | 87,336 | $ | 70,670 | |||||||
Net sales. Net
sales for the three months ended March 31, 2010 increased to $253.9 million from
$177.1 million for the same period in 2009, an increase of $76.8 million, or
43.4%. During the first quarter of 2010, we experienced a significant
improvement in Net sales, which we believe are gaining momentum
primarily as a result of investments made in marketing, research and
development and product introductions. We were well positioned to
make these investments because we maintained our financial flexibility
during the economic downturn. In 2009 our industry was adversely affected
by an unstable macroeconomic environment which had an adverse impact on our Net
sales, however, at the end of 2009 we experienced modest signs of improvement.
Consolidated Mattress sales increased $49.9 million, or 41.9% compared to the
first quarter of 2009. The increase in Mattress sales occurred in our Retail
channel, with Net sales increasing to $212.7 million from $150.5 million for the
same period in 2009, an increase of $62.2 million, or 41.3%. Consolidated Pillow
sales increased approximately $7.7 million, or 33.3%, from the first quarter of
2009. Consolidated Other, which includes adjustable bed bases, foundations and
other related products, increased $19.2 million, or 54.9%. Many of our Pillows
and Other products are sold with mattress purchases. Therefore, when Mattress
sales increase, Pillows and Other products are also impacted. The principal
factors that impacted Net sales for each segment are discussed below, in the
respective segment discussion.
Domestic.
Domestic Net sales for the three months ended March 31, 2010 increased to $166.6
million from $106.4 million for the same period in 2009, an increase of $60.1
million, or 56.5%. Our Domestic Retail channel contributed $143.2 million in Net
sales for the three months ended March 31, 2010 for an increase of $49.8
million, or 53.3%, for the same period in 2009. The introduction of our new
product line, the TEMPUR-CloudTM
collection, in the third quarter of 2009 has been well received by
retailers and consumers. We believe this product appeals to a new consumer
segment. In January 2010, we launched the second mattress in this line, the
TEMPUR-CloudTM.
Domestic mattress sales in the first quarter of 2010 increased $41.7 million, or
55.0%, over the same period in 2009. Pillow sales increased $4.3 million, or
43.5%. Net sales in the Direct channel increased by $6.1 million, or 71.7%. We
believe increased sales in the Direct channel are a result of our focus on
generating internet leads and investing in internet and direct mail advertising.
Our Healthcare channel Net sales increased by $0.7 million, or 27.6%. The
healthcare industry was also affected by an unstable economy in 2009, resulting
in decreased availability of discretionary spending, which began to improve in
2010.
International.
International Net sales for the three months ended March 31, 2010 increased to
$87.3 million from $70.7 million for the same period in 2009, an increase of
$16.7 million, or 23.6%. On a constant currency basis, our International Net
sales increased approximately 15.1%. We have experienced some stabilization of
the global economic slowdown in our international market, which also impacted
Net sales in the first quarter of 2009. The International Retail channel
increased $12.4 million, or 21.7%, for the three months ended March 31, 2010.
Third party Net sales increased $3.2 million or 52.4%. Our introduction of the
Sensation mattress line in the International segment has continued to be well
accepted. As a result, International Mattress sales in the first quarter of 2010
increased $8.3 million, or 19.0%, over the first quarter of 2009. Pillow sales
for the first quarter of 2010 increased $3.4 million, or 25.7%, as compared to
the first quarter of 2009. Pillow sales in the International segment also
correlate with mattress sales; often pillow sales accompany mattress product
sales.
Gross profit.
Gross profit for the three months ended March 31, 2010 increased to $124.8
million from $81.9 million for the same period in 2009, an increase of $42.9
million, or 52.5%. The Gross profit margin for the three months ended March 31,
2010 was 49.2% as compared to 46.2% for the same period in 2009. The principal
factors that impacted Gross profit margin during the quarter are identified and
discussed below in the respective segment discussions.
Domestic.
Domestic Gross profit for the three months ended March 31, 2010 increased to
$74.0 million, an improvement of $31.2 million, or 72.9%. The Gross
profit margin in our Domestic segment was 44.4% and 40.2% for the three months
ended March 31, 2010 and March 31, 2009, respectively. Improvements in our
Domestic Gross profit margin were primarily driven by fixed cost leverage
related to higher production volumes and improved efficiencies in manufacturing.
These factors were partially offset by new product introductions and higher
commodity costs. Domestic Cost of sales for the three months ended March 31,
2010 increased to $92.6 million from $63.6 million for the same period in 2009,
an increase of $28.9 million, or 45.4%.
International.
International Gross profit for the three months ended March 31, 2010 increased
to $50.8 million, an improvement of $11.8 million, or 30.1%. The Gross profit
margin in our International segment was 58.2% and 55.3% for the three months
ended March 31, 2010 and March 31, 2009, respectively. Improvements in our
International Gross profit margin were primarily driven by fixed cost leverage
related to higher production volumes and improved efficiencies in manufacturing.
These factors were partially offset by geographic mix, new product introductions
and higher commodity costs. Our International Cost of sales for the three months
ended March 31, 2010 increased to $36.5 million from $31.6 million for the same
period in 2009, an increase of $4.9 million, or 15.6%.
Selling and marketing
expenses. Selling and marketing expenses include advertising and media
production associated with our Direct channel, 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 for certain new product development costs, including
market research and new product testing. In the first quarter of 2010, Selling
and marketing expenses increased to $46.2 million as compared to $33.9 million
for the three months ended March 31, 2009. Selling and marketing expenses as a
percentage of Net sales were 18.2% and 19.1% for the three months ended March
31, 2010 and March 31, 2009, respectively. Our objective is to align advertising
costs to reflect our sales expectations. During the first quarter of 2010 we
made investments in advertising to support future growth. For example, our new
marketing and advertising campaign “Ask Me,” which launched in 2009, focuses on
increasing awareness of our products and the benefits they offer through
word-of-mouth and social networking outlets.
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 $26.3 million for
the three months ended March 31, 2010 as compared to $22.1 million for the three
months ended March 31, 2009. The increase in General, administrative and other
expenses are primarily a result of a larger bonus pool in the first quarter of
2010 compared to 2009 and an increase in legal fees incurred in the same period.
The effects of these items have been partially offset by a lower level of bad
debt expense in 2010 compared to 2009. Additionally, in 2010 we have increased
our investment in research and development in order to improve our existing
product lines and continue to introduce new and differentiated products.
General, administrative and other expenses as a percentage of Net sales were
10.4% and 12.5% in the first quarter of 2010 and 2009,
respectively.
Interest expense,
net. Interest expense, net, includes the interest costs associated with
our borrowings and the amortization of deferred financing costs related to those
borrowings. Interest expense, net, decreased to $3.2 million for the three
months ended March 31, 2010, as compared to $4.6 million for the three months
ended March 31, 2009, a decrease of $1.4 million, or 30.2%. The
decrease in interest expense is primarily attributable to a decrease in the
amount of fixed rate debt as well as a decrease in interest rates on our
variable rate debt. The variable 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, the Company pays
at a fixed rate and receives payments at a variable rate. The swap effectively
fixes the floating London Inter-bank Offering Rate (LIBOR) based interest rate
to 3.755% on $200.0 million of the outstanding balance as of March 31, 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 amortizes as follows: to $300.0 million on November 28, 2008 (through
November 2009); to $200.0 million on November 28, 2009 (through November 28,
2010); and to $100.0 million on November 28, 2010 (through November 28,
2011).
Income tax provision. Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and it includes the impact of net operating losses for certain of our domestic and foreign operations. Our effective tax rate for the three months ended March 31, 2010 and March 31, 2009 was 32.5% and 38.4% respectively. Reconciling items between the March 31, 2010 and March 31, 2009 rates include a tax charge on a previously recognized foreign tax benefit taken in the first quarter of 2009 and the scheduled increase in the production activities deduction from 6% in 2009 to 9% in 2010.
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 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 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
during 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 the amount of unrecognized tax benefits may change in the
next twelve months. An estimate of the amount of such change cannot
be made at this time.
Liquidity
and Capital Resources
Liquidity
Our principal
sources of funds are cash flows from operations and borrowings made pursuant to
our credit facility. Principal uses of funds consist of capital expenditures,
payments of principal and interest on our debt facilities and share repurchases
made from time to time pursuant to share repurchase authorizations. At March 31,
2010, we had working capital of $113.4 million including Cash and cash
equivalents of $38.4 million compared to working capital of $72.5 million
including $14.0 million in Cash and cash equivalents as of December 31,
2009. Working capital increased in the first quarter of 2010
primarily as a result of increased levels of both accounts receivable and
inventory, slightly offset by increases in both accounts and income taxes
payable. The increase in Cash and cash equivalents was primarily related to the
timing of certain cash requirements leading into the second quarter of 2010
related to the acquisition of our third party distributor in
Canada.
Our cash flow
from operations decreased to $23.3 million for the three months ended March 31,
2010 from $26.0 million for the three months ended March 31, 2009. The decrease
in operating cash flow for the first quarter of 2010 compared to the first
quarter of 2009 was primarily driven by changes in operating assets and
liabilities, offset by Net income growth. The increases in both accounts
receivable and inventories are related to increased sales.
Net cash used
in investing activities increased to $2.8 million for the three months ended
March 31, 2010 as compared to $1.6 million for the three months ended March 31,
2009, primarily related to an increase in capital expenditures. In 2010 we are
investing in capital projects that we believe will create operational
efficiencies and support future growth.
Cash flow
provided by financing activities was $5.2 million for the three months ended
March 31, 2010 as compared to $18.2 million used for the three months ended
March 31, 2009, representing an increase in cash flow provided of $23.4 million,
primarily related to current borrowings under our credit facility. These
borrowings were utilized to complete $100.0 million in share repurchases of our
common stock. Additionally, we received $8.3 million in proceeds from
stock option exercises in the first quarter of 2010 as compared to no proceeds
in the first quarter of 2009.
Capital
Expenditures
Capital
expenditures totaled $2.7 million for the three months ended March 31, 2010 and
$1.4 million for the three months ended March 31, 2009. We currently expect our
2010 capital expenditures to range from $20 to 22 million. This
expected increase in capital expenditures in 2010 is attributable to projects
that we believe will create operational efficiencies and support future
growth.
Debt
Service
Our long-term
debt increased to $392.7 million as of March 31, 2010 from $297.5 million as of
December 31, 2009 due primarily to the share repurchase program. After giving effect to $404.0
million in borrowings under the 2005 Senior Credit Facility and letters of
credit outstanding, total availability under the Revolvers was $236.0 million as
of March 31, 2010.
As of March
31, 2010, we are in compliance with our debt covenants. The table below sets
forth the calculation of our compliance with the Funded debt to Adjusted
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) covenant.
Both Funded debt and Adjusted EBITDA are terms that are not recognized under
U.S. GAAP and do not purport to be alternatives to Net income as a measure of
operating performance or Total debt.
Reconciliation
of Adjusted EBITDA to Net Income
The following
table sets forth the reconciliation of the Company’s reported Net income to the
calculation of Adjusted EBITDA for the trailing twelve months ended March 31,
2010:
|
Three
Months Ended
|
Twelve
Months Ended
|
|||||||||||||||
|
June
30, 2009
|
September
30, 2009
|
December
31, 2009
|
March
31, 2010
|
March
31, 2010
|
||||||||||||
| (in thousands) | ||||||||||||||||
|
GAAP
Net income attributable to common stockholders
|
$ | 16,857 | $ | 25,684 | $ | 29,114 | $ | 33,148 | $ | 104,803 | ||||||
|
Plus:
|
||||||||||||||||
|
Interest
expense
|
4,477 | 4,311 | 3,990 | 3,189 | 15,967 | |||||||||||
|
Income
taxes
|
8,098 | 12,467 | 14,159 | 16,021 | 50,745 | |||||||||||
|
Depreciation &
Amortization
|
9,977 | 10,367 | 10,239 | 9,996 | 40,579 | |||||||||||
|
Other
(1)
|
— | — | — | 361 | 361 | |||||||||||
|
Adjusted
EBITDA
|
$ | 39,409 | $ | 52,829 | $ | 57,502 | $ | 62,715 | $ | 212,455 | ||||||
(1)
Includes professional costs incurred in connection with the acquisition of our
Canadian distributor, which closed on April 1, 2010. In accordance with our 2005
Senior Credit Facility, this amount is excluded from the calculation of Adjusted
EBITDA for purposes of calculating compliance with the ratio of Funded debt to
Adjusted EBITDA.
Reconciliation
of Funded debt to Total debt
The following
table sets forth the reconciliation of the Company’s reported Total debt to the
calculation of Funded debt and Funded debt to Adjusted EBITDA ratio as of March
31, 2010:
|
As
of
|
||||
| (in thousands, except ratio of Funded debt to Adjusted EBITDA) |
March
31, 2010
|
|||
|
GAAP
basis Total debt
|
$ | 392,695 | ||
|
Plus:
|
||||
|
Letters
of credit outstanding
|
11,262 | |||
|
Funded
debt
|
$ | 403,957 | ||
|
Adjusted
EBITDA
|
$ | 212,455 | ||
|
Funded
debt to Adjusted EBITDA
|
1.90
times
|
|||
The ratio of
Funded debt to Adjusted EBITDA was 1.90 times, within the covenant in the 2005
Senior Credit Facility, which requires this ratio not exceed 3.0
times.
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 $200.0 million of the outstanding balance as of March 31, 2010
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. On January 13, 2010
our Board of Directors approved a share repurchase program of up to $100.0
million of the Company’s common stock which replaced the October 2007
authorization. During the three months ended March 31, 2010, we repurchased 3.7
million shares of our common stock for $100.0 million and completed the January
2010 authorization. Share repurchases under authorizations may be made through
open market transactions, negotiated purchase or otherwise, at times and in such
amounts as the Company and a committee of the Board deem
appropriate.
Use of Non-GAAP Measures
We provide
information regarding Adjusted EBITDA and Funded debt which are not recognized
terms under U.S. GAAP and do not purport to be alternatives to Net income as a
measure of operating performance or Total debt. Because not all companies use
identical calculations, these presentations may not be comparable to other
similarly titled measures of other companies. A reconciliation of Adjusted
EBITDA to our Net income and a reconciliation of Funded debt to Total debt have
been provided in this Management’s Discussion and Analysis and we believe the
use of these non-GAAP financial measures provide investors with additional
useful information with respect to our 2005 Senior Credit Facility.
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 was challenging in
2009 and was the primary factor in a slowdown in the mattress industry. In
addition, our International segment experienced weakening as a result of general
business and economic conditions in several European and Asian markets. We
expect the economic environment in the U.S. and Europe to continue to be
challenging as continued economic uncertainty has generally given households
less confidence to spend on discretionary purchases and credit availability to
our retailers and consumers remains limited.
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 remainder of 2010, we expect
to continue to pursue certain key strategies including: maintaining focus on
premium mattresses and pillows and regularly introducing new products; investing
in increasing our global brand awareness; extending our presence and improving
our Retail account productivity; investing in our operating infrastructure to
meet the requirements of our business; and taking actions to further improve our
financial flexibility and strengthen our business.
Managing
Growth—Over the last few 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 decreased to $927.8 million in 2008 and $831.2 million for
December 31, 2009. For the three months ended March 31, 2010, our Net sales were
$253.9 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, during 2007 through 2009, we 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. At the end of 2009 and into the first
quarter of 2010 we experienced increases in our raw material pricing. 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. We have made
significant investments in our manufacturing infrastructure and have significant
available manufacturing capacity. If we increase our Net sales significantly the
effect of this operating leverage could have a significant positive impact on
our gross margin. 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 our gross margins to be up for the full year 2010 through
sales leverage, our productivity programs and selective price
increases.
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. Additionally, 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 6,450 furniture and
bedding retail stores in the U.S., out of a total of approximately 10,000 stores
we have identified as appropriate targets. Within this addressable market, our
plan is to increase our total penetration to a total of 7,000 to 8,000 over
time. Our products are also sold in approximately 5,100 furniture retail and
department stores outside the U.S., out of a total of approximately 7,000 stores
that we have identified as appropriate targets. We are continuing to develop
products that are responsive to consumer demand in our markets
internationally.
Financial
Leverage—As of March 31, 2010, we had $392.7 million of total Long-term
debt outstanding, and our Equity attributable to common stockholders was $111.9
million. Higher financial leverage makes us more vulnerable to general adverse
competitive, economic and industry conditions. Since December 31, 2007, we have
reduced our total debt outstanding by $209.3 million. Our repatriation of
foreign earnings in 2008 and 2009, suspension of our quarterly cash dividend and
modest debt rebalancing between our domestic and international segments,
together with productivity improvements and cost containment initiatives enabled
us to decrease our financial leverage and increase our financial flexibility. As
described in Note 1(j) “Summary of Significant Accounting Policies” in the
Condensed Consolidated Financial Statements in ITEM 1 under Part 1 of this
report, our Board of Directors authorized the repurchase of up to $100.0 million
of our common stock. Share repurchases under this authorization may be made
through open market transactions, negotiated purchases or otherwise, at times
and in such amounts as the Company and a committee of the Board deem
appropriate. Historically we have funded share repurchases with borrowings
against our 2005 Senior Credit facility. We currently
are targeting a Funded debt to Adjusted EBITDA ratio between 1.5
to 2.0 times although we may exceed this range on a temporary basis or change
the target range. 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. In May 2008, we entered into an
interest rate swap to manage interest costs and the risk associated with
changing interest rates. See “ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk—Interest Rate Risk” under Part I of this report.
Exchange
Rates—As a multinational company, we conduct our business in a wide
variety of currencies and are therefore subject to market risk for changes in
foreign exchange rates. We use foreign exchange forward contracts to manage a
portion of the risk of the eventual net cash inflows and outflows resulting from
foreign currency denominated transactions between Tempur-Pedic subsidiaries and
their customers and suppliers, as well as between the Tempur-Pedic subsidiaries
themselves. These hedging transactions may not succeed in effectively managing
our foreign currency exchange rate risk. We typically do not apply hedge
accounting to these contracts. 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,
2009. There have been no material changes to our critical accounting policies
and estimates in 2010.
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 protect a
portion of our currency exchange exposure with foreign currency forward
contracts. A sensitivity analysis indicates the potential loss in fair value on
foreign currency forward contracts outstanding at March 31, 2010, resulting from
a hypothetical 10% adverse change in all foreign currency exchange rates against
the U.S. dollar, is approximately $0.04 million. Such losses would be
largely offset by gains from the revaluation or settlement of the underlying
assets and liabilities that are being protected by the foreign currency forward
contracts.
We do not apply hedge accounting to the foreign currency forward contracts used to offset currency-related changes in the fair value of foreign currency denominated assets and liabilities. These contracts are marked-to-market through earnings at the same time that the exposed assets and liabilities are remeasured through earnings.
Interest
Rate Risk
We are
exposed to changes in interest rates. Our 2005 Senior Credit Facility 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 March 31, 2010, we had
variable-rate debt of approximately $192.7 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
$1.9 million.
|
CONTROLS AND PROCEDURES
|
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 March 31, 2010 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.
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 report, you should carefully consider
the factors discussed in Part I, “ITEM 1A. Risk Factors” in our annual report on
Form 10-K for the year ended December 31, 2009, which could materially affect
our business, financial condition or future results. The risks described in our
annual report on Form 10-K are not the only risks facing our Company. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial
condition and operating results.
(a) Not
applicable.
(b) Not
applicable.
(c)
Issuer Purchases of Equity Securities
The
following table sets forth purchases of our common stock for the three months
ended March 31, 2010:
|
Period
|
(a) Total
number
of
shares
purchased
|
(b)
Average Price Paid per Share
|
(c) Total number of
shares purchased as
part
of publicly
announced
plans or
programs
|
(d) Maximum number of
shares
(or
approximate dollar value)
of
shares that may yet be
purchased
under the plans or
programs
(in millions)
|
||||||||
|
January
1, 2010 – January 31, 2010
|
412,000 | $ | 25.43 | 412,000 | $ | 89.5 | ||||||
|
February
1, 2010 – February 28, 2010
|
3,281,596 | $ | 27.25 | 3,281,596 | — | |||||||
|
Total
|
3,693,596 | 3,693,596 | ||||||||||
On January
13, 2010, the Board of Directors authorized the repurchase of up to $100.0
million of our common stock. This January 2010 authorization was completed in
February 2010.
(a) Not
applicable.
(b) Not
applicable.
The
following is an index of the exhibits included in this report:
|
3.1
|
|||||||
|
10.1
|
|||||||
|
10.2
|
|||||||
|
10.3
|
|||||||
|
10.4
|
|||||||
|
10.5
|
|||||||
|
31.1
|
|
||||||
|
31.2
|
|
||||||
|
32.1
|
*
|
|
|||||
|
(1)
|
Incorporated
by reference.
|
||||||
|
(2)
|
Indicates
management contract or compensatory plan or arrangement.
|
||||||
|
*
|
This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwise
subject to the liabilities of that Section, nor shall it be deemed
incorporated by reference in any filings under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date hereof and irrespective of any general
incorporation language in any
filings.
|
||||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
TEMPUR-PEDIC
INTERNATIONAL INC.
|
||||
|
(Registrant)
|
||||
|
Date:
April 27, 2010
|
By:
|
/s/ DALE
E.
WILLIAMS
|
||
|
Dale
E. Williams
|
||||
|
Executive
Vice President, Chief Financial Officer
|
||||
|
and
Secretary
|
||||
34
TEMPUR-PEDIC
INTERNATIONAL INC.
Amended
and Restated Annual Incentive Bonus Plan for Senior Executives
Terms and
Conditions
Adopted:
February 22, 2010
I. Compensation
Philosophy
The
intent of this Amended and Restated Annual Incentive Bonus Plan (the “Incentive Plan”) of
Tempur-Pedic International Inc. (“Tempur-Pedic” or the
“Company”) is
to provide highly competitive total cash compensation through an annual variable
pay program that reflects the Company’s performance and the participant’s
performance against goals and objectives.
Tempur-Pedic’s
compensation philosophy is to attract, motivate, retain and reward its
management talent with base salary, annual incentive bonuses and equity
compensation that competitively targets its market. Tempur-Pedic’s
compensation programs are designed to reward its management for strong company
performance and successful execution of key business plans and strategies, based
on Tempur-Pedic’s and the senior manager’s achievement of pre-established
performance targets. Tempur-Pedic believes that its
compensation philosophy aligns management incentives with the long-term
interests of Tempur-Pedic’s stockholders.
This
Incentive Plan is an important variable component of the total compensation
package for the Chief Executive Officer (“CEO”), Executive Vice
Presidents (“EVPs”) and other
senior managers who may be designated from time to time for participation in
this Incentive Plan (collectively, the “Senior Executives”).
Tempur-Pedic believes that senior management who hold positions affording them
the authority to make critical decisions affecting Tempur-Pedic’s overall
performance should have a material percentage of their annual compensation
contingent upon Tempur-Pedic’s performance.
1
II. Plan
Overview
This
Incentive Plan is a cash bonus plan for Senior Executives, designed to reward
them for their roles in the achievement of Tempur-Pedic’s annual goals, as
established by the Board of Directors or Compensation
Committee. Incentive Plan awards are determined on an annual basis,
based on whether and to what extent Tempur-Pedic achieves any applicable Company
Goals and each participant achieves any applicable Individual Goals for the
relevant Performance Period. The annual incentive bonus is a lump-sum cash
payment for each Senior Executive (the “Bonus”).
Administration. This Incentive
Plan shall be administered by the Compensation Committee (“Compensation
Committee”) of the Board of Directors of the Company; provided, however, that at
any time and on any one or more occasions the Board may itself exercise any of
the powers and responsibilities assigned the Compensation Committee under this
Incentive Plan and when so acting shall have the benefit of all of the
provisions of this Incentive Plan pertaining to the Compensation Committee’s
exercise of its authorities hereunder. The Compensation Committee
shall have the full power and authority to administer this Incentive
Plan. In applying and interpreting the provision, of this Incentive
Plan, the decision of the Compensation Committee shall be final.
As used
in this Incentive Plan, the term “Administrator” refers
to either the Board or the Compensation Committee exercising its authority under
this Incentive Plan as described above.
Performance
Period. Unless otherwise
determined by the Administrator with respect to any Target Bonus, the Incentive
Plan year runs from January 1 – December 31 (the “Performance
Period”).
Participants. The CEO, the
EVPs and other Senior Executives designated from time to time by the
Administrator shall be entitled to participate in this Incentive
Plan.
Target
Bonus. With
respect to any Performance Period and any Senior Executive, the Administrator
shall create a target Bonus for such Senior Executive, expressed as a percentage
of such Senior Executive’s base salary as in effect at the end of the
Performance Period (the “Target
Bonus”).
Within
ninety (90) days of the commencement of each Performance Period, but in any event prior to
the expiration of twenty-five percent (25%) of the applicable Performance
Period, the Administrator shall set the targeted annual Bonus for each
Senior Executive.
2
Components
of Bonus. Unless otherwise
determined by the Administrator with respect to any Performance Period, each
participant’s Target Bonus shall be comprised of two or more
components: one or more components based on the achievement of
Company-wide goals (the “Company Goals”) and
one or more components based on the achievement of individual goals created for
any particular Senior Executive (the “Individual
Goals”).
If any of
the Company Goals components of a Target Bonus or any of the Individual Goals
components of a Target Bonus for any Senior Executive for any Performance Period
is intended to constitute “qualified performance-based compensation” within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the
“Code”, with
any such compensation referred to as “Qualified Performance-Based
Compensation”) then (i) such component of the Company Goals or Individual
Goals, as applicable, selected by the Administrator shall be limited to the
specific otherwise illustrative goals identified below, (ii) each component of
the Bonus must be assessed separately to determine whether the Senior Executive
has achieved the Company Goals or Individual Goals applicable to that component,
and (iii) the Company Goals and Individual Goals shall be selected and evaluated
in such a manner that in no event shall the achievement or failure to achieve
any level of any of the selected Company Goals or Individual Goals in any
component shall have any bearing or effect on whether the Company Goals or
Individual Goals in any other component have been achieved.
The
Administrator shall have the discretion to include or exclude extraordinary
items, restructuring charges, accounting changes or any other unusual or
nonrecurring items in its determination of whether a Company Goal or Individual
Goal has been satisfied; provided, that in the case of any Qualified
Performance-Based Compensation, the extent, if any, to which any such
adjustments shall be made shall be determined by the Administrator at the time
of establishing the relevant Company Goal or Individual Goal. At the time any Company
Goals or Individual Goals are established, the outcome as to whether the
Performance Measures will be met must be substantially uncertain with respect to
any component of a Bonus intended to qualify as Qualified Performance-Based
Compensation.
The
purpose of any Company Goals component, represented by financial targets and
other Company-wide performance metrics, and the purpose of the Individual Goals
component, represented by the achievement of targets based on a specific
segment, division or business unit or individual targets, are designed to focus
the Senior Executives on behaviors that support the overall performance and
success of the Company.
3
Company
Goals. The Company
Goals component will be tied to Tempur-Pedic’s achievement of specific financial
targets and other Company-wide performance metrics. The Company Goals component
metrics may include, but are not limited to, one or more of the following, any
of which may be measured either in absolute terms or as compared to any
incremental increase or as compared to results of a peer group:
|
• debt
reduction
|
• pre-
or after-tax net earnings
|
|
• earnings
before interest and taxes (EBIT) or EBIT margin
|
• price
per share of stock
|
|
• earnings
before interest and taxes, depreciation and amortization (EBITDA) or
EBITDA margin
|
• return
on assets
|
|
• earnings
per share
|
• return
on capital
|
|
• gross
or net profit margin
|
• return
on net assetss
|
|
• market
share
|
• return
on stockholders' equity
|
|
• net
sales
|
• sales
or net sales growth
|
|
• operating
cash flow
|
• stock
price growth
|
|
• operating
earnings
|
• stockholder
returns
|
These metrics are referred to as the
“Specific Company
Metrics.”
Any
Company Goals component of the Bonus may be established using a matrix to allow
for maximum and minimum payments of the Target Bonus, depending on the level of
specified factors for the applicable Performance Period. A failure to
meet the minimum requirement may result in no Bonus payment with respect to the
applicable Company Goals component of the Incentive Plan.
Individual
Goals. Each year,
individual incentive performance metrics and targets may be established as
Individual Goals for one or more of the Senior Executives. Any Individual Goals
component of a Target Bonus for a Senior Executive may be based on the
performance of a segment, division or business unit or goals unique to the
particular Senior Executive. The Individual Goals are expected to
have a significant component based on the successful completion of individual
objectives.
An
Individual Goals component will target 100% payout of the applicable portion of
the Target Bonus for the achievement of a Senior Executive’s Individual Goal or
Goals. Payments can range from no bonus payment to more than 100% of
the targeted Individual Goals component, based on individual performance. Except
as required in the case of Qualified Performance-Based Compensation, the
determination of whether an Individual Goals component of the Bonus has been met
and to what degree will be based on the subjective determination of the
Administrator, and in exercising this discretion the Administrator will review
each Senior Executive’s performance against individual objectives and the
overall performance of the applicable Senior Executive within his or her
specific area of responsibility.
4
Individual Goals may be based on any of
the Specific Company Metrics, as applied to any specific segment, division or
business unit, and may also include any one or more of following, as applicable
to a specific segment, division or business unit or an individual:
|
•
Cost reduction initiatives
|
• H.R.
management metrics
|
|
•
Enhance financial planning process
|
• Improve
customer service metrics
|
|
• Execution
of Investor Relations plan
|
• New
product launches
|
|
• Expanding
slots per stores
|
• Sales
targets
|
|
• Expand
brand awareness
|
• Strategic
planning and growth initiatives
|
If the Individual Goals component of a
Target Bonus for any Senior Executive for any Performance Period is intended to
constitute Qualified Performance-Based Compensation, then the Individual Goals
component metrics shall be based on one or more objectively determinable
measures of performance, from which an independent third party with knowledge of
the facts could determine whether the performance goal or range of goals is met
and from that determination could calculate the Bonus to be paid.
III. Designation
of Participants
For any
Performance Period, not later than the end of February of such Performance
Period, the Administrator shall determine whether any senior managers other than
the CEO and EVPs will participate in this Incentive Plan for that Performance
Period, in which case any of these other senior managers will constitute “Senior
Executives” under this Incentive Plan for that Performance
Period. With respect to any other senior managers hired during the
course of a fiscal year, the Administrator shall determine within thirty (30)
days after the employment of such senior manager whether or not such senior
manager shall participate in this Incentive Plan for such year. In
the event that the Administrator does not decide that such newly-hired senior
manager will participate in this Incentive Plan, such senior manager will not
participate in the Incentive Plan for such Performance Period. In the
event that the Administrator determines that a newly-hired senior manager will
participate in this Incentive Plan for the remainder of the current Performance
Period, the Administrator will promptly determine the terms of the Bonus for
such Senior Executive, including with respect to the matters referred to in
Section IV below.
Participation
in this Incentive Plan in one year does not automatically guarantee
participation in a future year. Compliance with all Tempur-Pedic
policies, guidelines and applicable laws is a prerequisite to receiving an award
pursuant to this Incentive Plan.
5
IV. Creation
of Bonus Terms for Any Fiscal Year
For any
Performance Period, within ninety (90) days after the commencement of that
Performance Period, but in any event prior to
the expiration of twenty-five percent (25%) of the applicable Performance
Period, the Administrator shall determine the following for the Senior
Executives participating in the Incentive Plan for that Performance
Period:
|
• the
Target Bonus for such Senior Executive, expressed as a percentage of his
or her base salary as of the end of the Performance
Period;
|
|
• whether
there will be Company Goals for the Performance Period, and the type of
Company Goals that will
apply;
|
|
• for
each Senior Executive, whether there will be Individual Goals for that
Senior Executive;
|
|
• the
relative weighting between Company Goals and Individual Goals for any
Senior
Executive;
|
|
• any
maximum or minimum payout with respect to any of the Company Goals or
Individual
Goals;
|
|
• whether
any component of the Bonus is intended to qualify as Qualified
Performance-Based Compensation;
and
|
|
• any
other terms applicable to the Bonuses for any Senior Executives for that
Performance
Period.
|
If the Bonus
is intended to constitute Qualified Performance-Based Compensation, then the
maximum amount payable under this Incentive Plan in respective of any one person
for any one Performance Period as Bonuses shall not exceed an amount equal to 1%
of the Company’s net sales for the fiscal year in which the Performance Period
ends.
V. Payment
Criteria
Unless
otherwise provided in any employment agreement between the Senior Executive and
the Company or otherwise determined by the Administrator, a participant must be
employed by Tempur-Pedic on the Bonus payment date with respect to the
applicable Performance Period to be eligible to receive payment of an Award
pursuant to this Incentive Plan.
6
Except as
noted above, all Bonus payments will be based on a participant’s base salary as
in effect at the end of the Performance Period, subject to the maximum amount
that may paid for awards intended to constitute Qualified Performance-Based
Compensation as set forth above. Bonus payments will be made by March
15 of the year following the Performance Period. Bonus payments will
be subject to all withholding required by applicable law.
Nothing
in this Incentive Plan guarantees any Bonus payment will be made to any
individual. Receipt of a Bonus payment in one year does not guarantee
eligibility in any future year.
VI. Termination,
Suspension or Modification and Interpretation of this Incentive
Plan
Tempur-Pedic
may terminate, suspend or modify and if suspended, may reinstate with or without
modification all or part of this Incentive Plan at any time, with or without
notice to the participant. Tempur-Pedic reserves the exclusive right
to determine eligibility to participate in this Incentive Plan and to interpret
all applicable terms and conditions, including eligibility
criteria.
VII. Other
This
document sets forth the terms of this Incentive Plan and is not intended to be a
contract or employment agreement between the participant and
Tempur-Pedic. As applicable, it is understood that both any
participant and Tempur-Pedic have the right to terminate the participant’s
employment with Tempur-Pedic at any time, with or without cause and with or
without notice, in acknowledgement of the fact that their employment
relationship is “at will.”
This
Amended and Restated Incentive Plan amends and restates the Annual Incentive
Bonus Plan for Senior Executives originally adopted on February 18, 2009 (the
“Original
Plan”). Any Target Bonuses created prior to the approval by
the stockholders of the Company of this Incentive Plan will be governed by the
Original Plan.
7
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:
April 27, 2010
|
/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:
April 27, 2010
|
/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
March 31, 2010, 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:
April 27, 2010
|
By:
|
/s/ MARK
SARVARY
|
||
|
Mark
Sarvary
|
||||
|
President
and Chief Executive Officer
|
||||
|
Date:
April 27, 2010
|
By:
|
/s/ DALE
E.
WILLIAMS
|
||
|
Dale
E. Williams
|
||||
|
Executive
Vice President, Chief Financial Officer
and
Secretary
|
||||