UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2008
Commission
file number 001-31922
TEMPUR-PEDIC
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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33-1022198
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1713
Jaggie Fox Way
Lexington,
Kentucky 40511
(Address
of registrant’s principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (800) 878-8889
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, $0.01 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨
Nox
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
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
Smaller Reporting
Company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨ No
ý
The
aggregate market value of the common equity held by nonaffiliates of the
registrant on June 30, 2008, computed by reference to the closing price for such
stock on the New York Stock Exchange on such date, was approximately
$535,805,581.
The
number of shares outstanding of the registrant’s common stock as of February 11,
2009 was 74,894,372 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy
statement for the 2009 Annual Meeting of Stockholders, which is to be filed
subsequent to the date hereof, are incorporated by reference into Part III of
this Form 10-K.
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Page
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PART I.
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PART II.
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ITEM
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ITEM
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ITEM
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ITEM
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PART III.
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ITEM
10.
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40
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ITEM
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40
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ITEM
12.
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ITEM
13.
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ITEM
14.
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PART IV.
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ITEM
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Special
Note Regarding Forward-Looking Statements
This
annual report on Form 10-K, 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, investments in operating infrastructure, decrease in
capital expenditures, the impact of consumer confidence and the current credit
market, the impact of the adoption of recently issued accounting pronouncements,
the antitrust class action lawsuit and similar issues, and 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, expand business within
established accounts, reduce costs and operating expenses and improve
manufacturing productivity, the impact of net operating losses, the initiatives
to improve gross margin, the vertical integration of our business, our ability
to source raw materials effectively, the development, rollout and market
acceptance of new products, our ability to further invest in the business and in
brand awareness, ability to meet financial obligations, the effects of changes
in foreign exchange rates on our reported earnings, our expected sources of cash
flow, our ability to effectively manage cash and our debt/leverage ratio,
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 7 of Part II 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 I of this
report. 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.
TEMPUR®
and
Tempur-Pedic® are the Company’s trademarks, trade
names and service marks. All other trademarks, trade names and service marks
used in this annual report on Form 10-K are the property of their respective
owners.
PART
I
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 conforms to the body to therapeutically align the neck and spine,
thus reducing neck and lower back pain, two of the most common complaints about
other sleep surfaces.
We
have two reportable operating segments: Domestic and International. These
reportable segments are strategic business units that are managed separately
based on the fundamental differences in their geographies. The Domestic
operating segment consists of our U.S. manufacturing facilities, whose customers
include our U.S. distribution subsidiary and certain third party distributors in
the Americas. The International segment consists of our manufacturing facility
in Denmark, whose customers include all of our distribution subsidiaries and
third party distributors outside the Domestic segment. We evaluate segment
performance based on Net sales and Operating income. For the results of our
business segments, see ITEM 15. Exhibits and Financial Statement Schedules Note
14, “Business Segment Information”, under Part IV of this report.
We
sell our premium mattresses and pillows through four distribution channels in
each operating business segment: Retail (furniture and bedding, and specialty
stores, as well as 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.
Our
principal executive office is located at 1713 Jaggie Fox Way, Lexington,
Kentucky 40511 and our telephone number is (800) 878-8889. We were incorporated
under the laws of the State of Delaware in September 2002. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and any amendments to such reports filed with or furnished to the Securities
and Exchange Commission (SEC) pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (Exchange Act), are available free
of charge on our website at www.tempurpedic.com as soon as reasonably
practicable after such reports are electronically filed with the
SEC.
You
may read and copy any materials the Company files with the SEC at the SEC’s
public reference room at 100 F Street NE, Washington, DC 20549. The
public may obtain information about the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The website
of the SEC is www.sec.gov.
Global
Market
Most
standard mattresses are made using innersprings, and primarily sold through
retail furniture and bedding stores. Alternatives to innerspring mattresses
include viscoelastic and foam mattresses, airbeds and waterbeds (collectively
called specialty or non-innerspring mattresses).
The
U.S. pillow market has a traditional and a specialty segment. Traditional
pillows are generally made of low cost foam or feathers, other than down.
Specialty pillows are comprised of all alternatives to traditional pillows,
including viscoelastic, foam, sponge, rubber and down.
Our
Market Position
We
are the worldwide leader in specialty sleep. We are focused on developing,
manufacturing and marketing advanced sleep surfaces that help improve the
quality of life for people around the world. We believe demand for our products
is being driven by significant growth in our core demographic market, increased
awareness of the health benefits of a better quality mattress and the shift in
consumer preference from firmness to comfort. As consumers continue to prefer
alternatives to standard innerspring mattresses, our products become more widely
available and as our brand gains broader consumer recognition, we expect that
our premium products will continue to attract sales from the standard mattress
market.
Superior
Product Offerings
Our
high-quality, high-density, temperature-sensitive TEMPUR® material distinguishes
our products from other products in the marketplace. Viscoelastic
pressure-relieving material was originally developed by the U.S. National
Aeronautics and Space Administration (NASA) in 1971 in an effort to relieve
astronauts of the G–force experienced during lift-off, and NASA subsequently
made this formula publicly available. The NASA viscoelastic pressure-relieving
material originally proved unstable for commercial use. However, after several
years of research and development, we succeeded in developing a proprietary
formulation and proprietary process to manufacture a stable, durable and
commercially viable product. The key feature of our pressure-relieving TEMPUR®
material is its temperature sensitivity. It conforms to the body, becoming
softer in warmer areas where the body is making the most contact with the
pressure-relieving TEMPUR® material and remaining firmer in cooler areas where
less body contact is being made. As the material molds to the body’s shape, the
body is supported in the correct anatomical position with the neck and spine in
complete therapeutic alignment. Our pressure-relieving TEMPUR® material also has
higher density than other viscoelastic materials, resulting in improved
durability and enhanced comfort. In addition, clinical evidence indicates that
our products are both effective and cost efficient for the prevention and
treatment of pressure ulcers or bed sores, a major problem for elderly and
bed-ridden patients.
Increasing
Global Brand Awareness
We sell our products
in approximately 80 countries primarily under the TEMPUR® and
Tempur-Pedic® brands.
We believe consumers in the U.S. and internationally increasingly associate our
brand name with premium quality products that enable better overall sleep. Our
TEMPUR®
brand has been in existence since 1991 and its global awareness is
reinforced by our high level of customer satisfaction, as demonstrated by:
recognition received by the Arthritis Foundation, the NASA Space Foundation,
Good Housekeeping and Consumers Digest. In addition, our products are
recommended by more than 25,000 healthcare professionals worldwide and an
independent study reported 92% of our customers surveyed have recommended
Tempur-Pedic products to others.
Vertically
Integrated Manufacturing and Supply Chain
We
produce all of our proprietary TEMPUR® material in our own manufacturing
facilities in the U.S. and Europe in order to precisely maintain the
specifications of our products. We believe that our vertical integration, from
the manufacture of the TEMPUR® material and fabrication and construction of our
products through the marketing, sale and delivery of our products, ensures a
high level of quality and performance that is not matched by our
competition.
Strong
Financial Performance
Our
business generates significant cash flow due to the combination of our sales,
gross and operating margins, low maintenance capital expenditures and limited
working capital requirements. Further, our vertically-integrated operations
generated an average of approximately $0.8 million in Net sales per employee in
2008. For the year ended December 31, 2008, our Gross profit margin and Net
income margin were 43.2% and 6.4%, respectively, on Net sales of $927.8 million.
Although Net income margin declined in 2008, our business model continues to
allow us flexibility to invest in our manufacturing operations, enhance our
sales force and marketing, invest in information systems and recruit experienced
management and other personnel.
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. Additionally, by expanding distribution
within our existing accounts, we believe we have the opportunity to grow our
business. By extending our product line, we should be able to continue to expand
the number of Tempur-Pedic models offered at the retail store level which should
lead to increased sales. Based on this strategy we believe a focus on expanding
distribution within our existing accounts provides for continued growth
opportunities and market shares gains. As of December 31, 2008, our products
were sold in approximately 6,700 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 the long-term.
Internationally, our products are available in approximately 5,100 furniture
retail and department stores, out of a total of approximately 7,000 stores we
have identified as appropriate targets. As consumers continue their shift toward
the purchase of non-innerspring mattress products and sleep surfaces we believe
we are well positioned to capitalize on this growth opportunity.
Mattresses
Our
mattresses represented 68.0% of our Net sales in 2008 and are our leading
product category in recent years. Our mattresses are composed of proprietary
multi-layer, temperature sensitive, pressure-relieving TEMPUR ®
material. We offer several mattress models, some of which are covered by one or
more patents and/or patent applications. We routinely introduce new mattress
models, launch new products and update our existing mattress products in the
U.S. and internationally.
Pillows
Our premium
pillow offerings include a variety of styles and represented 12.7% of Net sales
in 2008. Our pillows provide plush and pressure-relieving comfort as the
temperature sensitive material molds to the body.
Other
Products
Our other
products represented 19.3% of our Net sales in 2008. This category includes
foundations used to support our mattress products, adjustable beds, and many
other types of offerings including a variety of cushions and other comfort
products.
We
primarily sell at wholesale through three distinct channels: Retail, Healthcare
and Third Party. Our top five customers for the years ended December 31,
2008, 2007 and 2006 accounted for approximately 19%, 18% and 15% of our Net
sales, respectively. The loss of one or more of these customers could negatively
impact our profitability. We market directly to consumers in the U.S. and the
United Kingdom through our Direct channel. Our marketing strategy is to increase
consumer awareness of the benefits of our products and to further associate our
brand name with better overall sleep and premium quality products. In 2007, we
launched a new media campaign across all of our U.S. sales channels. This
campaign was implemented in the U.S. and rolled out to many of our international
markets throughout 2008.
Retail
The
Retail channel sells to furniture and bedding retailers, specialty stores, and
department stores, among others. Our Retail channel represented 84.2% of
Net sales in 2008.
Direct
The
Direct channel sells directly to consumers through our call center operations
and the internet in the U.S. and the United Kingdom. Our direct response program
targets customers in these markets through television, radio, magazine and
newspaper product offering advertisements. Our Direct channel represented 5.1%
of Net sales in 2008.
Healthcare
The
Healthcare channel sells to hospitals, nursing homes, healthcare professionals
and medical retailers that utilize our products to treat patients, or may
recommend or sell them to their clients. In addition, in the U.S. we are
partnering with healthcare vendors in a sales method whereby the vendor
integrates our TEMPUR® material into their products to improve patient comfort
and wellness. These healthcare partners market our joint product offerings
through established distribution channels. This channel represented 5.1% of Net
sales in 2008.
Third
Party
Third party sales represented 5.6% of Net sales in 2008. We utilize
third party distributors to serve markets that are currently outside the range
of our wholly-owned subsidiaries. Our approach to these developing markets has
allowed us to build sales, marketing and brand awareness with minimal capital
risk. We have entered into written and verbal arrangements with third party
distributors located in approximately 65
countries.
A
significant portion of our Net sales is attributable to sales in our Domestic
Retail channel, particularly sales to furniture and bedding stores. We believe
that our sales of mattresses and pillows to furniture and bedding stores are
subject to modest seasonality inherent in the bedding industry with sales
expected to be generally lower in the second and fourth quarters and higher in
the first and third quarters. Internationally, specifically in Europe, we are
subject to seasonality with Net sales lower in the third quarter as compared to
the other quarters during the year.
Operations
Manufacturing
and Related Technology
Our
products are currently manufactured in our 517,000 square-foot facility located
in Aarup, Denmark, our 540,000 square-foot facility in Duffield, Virginia and
our 800,000 square-foot facility in Albuquerque, New Mexico. Most of the sewing
and production of mattress and pillow covers is outsourced to third party
suppliers.
Suppliers
We
obtain the raw materials used to produce our pressure-relieving TEMPUR® material
from outside sources. We currently acquire chemicals and proprietary additives
from a number of suppliers with manufacturing locations around the world. We
expect to continue these supplier relationships for the foreseeable future. We
do not consider ourselves dependent upon any single outside vendor as a source
of raw materials and believe that sufficient alternative sources of supply for
the same or similar raw materials are available.
Research and Development
Our
research and development center located in Duffield, Virginia is designed to
facilitate detailed product testing and analysis utilizing state-of-the-art
technology. In addition to our research and development efforts, we also devote
significant efforts to product development as part of our sales and marketing
operations. Research and development expenses, excluding product development,
were $6.0 million, $5.9 million and $3.7 million in 2008, 2007 and 2006,
respectively.
The
mattress and pillow industries are highly competitive. Participants in the
mattress and pillow industries have traditionally competed primarily based on
price. Our premium mattresses compete with a number of different types of
premium and standard mattress alternatives, including innerspring mattresses,
foam mattresses, waterbeds, futons, air beds and other air-supported mattresses
that 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. The pillow
industry is characterized by a large number of competitors, none of which is
dominant.
The
standard mattress market in the U.S. is dominated by three large manufacturers
of innerspring mattresses with nationally recognized brand names: Sealy, Serta,
and Simmons. These three competitors also offer premium innerspring mattresses
and collectively have a significant share of the premium mattress market in the
U.S. Select Comfort Corporation competes in the specialty mattress market and
focuses on the air mattress market segment. The balance of the mattress market
in the U.S. is served by a large number of other manufacturers, primarily
operating on a regional basis. Many of these competitors and, in particular, the
three largest manufacturers of innerspring mattresses named above, have
significant financial, marketing and manufacturing resources, strong brand name
recognition, and sell their products through broader and more established
distribution channels. During the past several years, a number of our
competitors, including Sealy, Serta and Simmons, have offered viscoelastic
mattress and pillow products.
The
international market for mattresses and pillows is generally served by a large
number of manufacturers, primarily operating on a regional basis. Some of these
manufacturers also offer viscoelastic mattress and pillow products.
We
hold various U.S. and foreign patents and patent applications regarding certain
elements of the design and function of many of our mattress and pillow products.
As of December 31, 2008, we held 19 U.S. patents, expiring at various points
between 2013 and 2025, and had 26 U.S. patent applications pending. We also held
62 foreign patents and had 41 foreign patent applications pending.
As
of December 31, 2008, we held 532 trademark registrations worldwide, which we
believe have significant value and are important to the marketing of our
products to retailers. TEMPUR® and Tempur-Pedic® are trademarks registered with
the United States Patent and Trademark Office. In addition, we have U.S.
applications pending for additional marks. Several of our trademarks have been
registered, or are the subject of pending applications, in various foreign
countries. Each U.S. trademark registration is renewable indefinitely as long as
the mark remains in use.
Our
operations are subject to state, local and foreign consumer protection and other
regulations relating to the mattress and pillow industry. These regulations vary
among the states and countries in which we do business. The regulations
generally impose requirements as to the proper labeling of bedding merchandise,
restrictions regarding the identification of merchandise as “new” or otherwise,
controls as to hygiene and other aspects of product handling and sale and
penalties for violations. The U.S. Consumer Product Safety Commission has
adopted rules relating to fire retardancy standards for the mattress and pillow
industry. Many foreign jurisdictions also regulate fire retardancy standards.
Future changes to these standards may require modifications to our products to
comply with these additional standards. We are also subject to environmental and
health and safety requirements with regard to the manufacture of our products.
We have made and will continue to make capital and other expenditures necessary
to comply with all these requirements. We believe that we are in substantial
compliance with the applicable federal, state, local, and foreign rules and
regulations governing our business.
As
of December 31, 2008, we had approximately 1,200 employees, with approximately
550 in the U.S., 250 in Denmark and 400 in the rest of the world. Certain of our
employees in Denmark are covered by a government labor union contract as
required by Danish law. None of our U.S. employees are covered by a collective
bargaining agreement. We believe our relations with our employees are generally
good.
Certain
information concerning our executive officers as of the date of this report are
set forth below. There are no family relationships between any of the persons
listed below, or between any of such persons and any of our directors or any
persons nominated or chosen by us to become a director or executive
officer.
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Name
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Age
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Position
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Mark
Sarvary
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49 |
President
and Chief Executive Officer
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Matthew D. Clift
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49 |
Executive
Vice President of Global Operations
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David Montgomery
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48 |
Executive
Vice President and President of International
Operations
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Rick
Anderson
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48 |
Executive
Vice President and President, North America
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Dale E. Williams
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46 |
Executive
Vice President, Chief Financial Officer, and Secretary
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Bhaskar
Rao
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43 |
Chief
Accounting Officer and Vice President of Strategic
Planning
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Mark Sarvary
joined Tempur-Pedic International in June 2008 and serves as President
and Chief Executive Officer of Tempur-Pedic International Inc. Prior to joining
Tempur-Pedic, Mr. Sarvary served as an Industrial Partner with CVC Capital
Partners, a global private equity firm. Prior to CVC, from 2004 to 2007, Mr.
Sarvary was the President of Campbell Soup Company’s North America division,
including Campbell Soup, Pepperidge Farm, Pace, Prego and V8 as well as Godiva’s
global business. From 2002 until 2004, Mr. Sarvary was the President of
Campbell’s Pepperidge Farm division. Prior to joining Campbell’s, from 1999 to
2002, Mr. Sarvary was the CEO of J. Crew Group, Inc., and from 1993 to 1999 he
worked for Nestle, most recently as the President of the Stouffer’s Frozen Food
division. Earlier in his career, Mr. Sarvary worked as a strategy consultant
with Bain & Company and in sales and marketing roles with IBM in Europe. Mr.
Sarvary received his BSc in Physics from Kent University in the United Kingdom
and an MBA from INSEAD Business School in France.
Matthew D.
Clift joined Tempur-Pedic International in December 2004 and serves as
Executive Vice President of Global Operations, with responsibilities including
manufacturing and research and development. From 1991 to December 2004, Mr.
Clift was employed by Lexmark International where he most recently served as
Vice President and General Manager of the consumer printer division. From 1981
to 1991, Mr. Clift was employed by IBM Corporation and held several management
positions in research and development and manufacturing. Mr. Clift obtained his
B.S. degree in chemical engineering from the University of
Kentucky.
David
Montgomery joined Tempur-Pedic International in February 2003 and serves
as Executive Vice President and President of International Operations, with
responsibilities including marketing and sales. From 2001 to November 2002, Mr.
Montgomery was employed by Rubbermaid, Inc., where he served as President of
Rubbermaid Europe. From 1988 to 2001, Mr. Montgomery held various management
positions at Black & Decker Corporation, most recently as Vice President of
Black & Decker Europe, Middle East and Africa. Mr. Montgomery received his
B.A. degree, with honors, from L’ Ecole Superieure de Commerce de Reims, France
and Middlesex Polytechnic, London.
Rick Anderson
joined Tempur-Pedic International in July 2006 and serves as Executive
Vice President and President, North America. From 1983 to 2006, Mr.
Anderson was employed by The Gillette Company, which became a part of Proctor
& Gamble in 2005. Mr. Anderson most recently served as a Vice President of
Marketing for Oral-B and Braun in North America. Previously, Mr. Anderson
was Vice President of Global Business Management for Duracell. Mr.
Anderson has held several management positions in marketing and sales as well as
overseeing branding, product development and strategic planning. Mr. Anderson
obtained B.S. and M.B.A. degrees from Virginia
Tech.
Dale E.
Williams joined Tempur-Pedic International in July 2003 and serves as
Executive Vice President, Chief Financial Officer and Secretary. From 2001
through 2002, Mr. Williams served as Vice President and Chief Financial
Officer of Honeywell Control Products, a division of Honeywell International,
Inc. From 2000 to 2001, Mr. Williams served as Vice President and Chief
Financial Officer of Saga Systems, Inc./Software AG, Inc. Prior to that, Mr.
Williams spent 15 years in various management positions at General Electric
Company, most recently as Vice President and Chief Financial Officer of GE
Information Services, Inc. Mr. Williams received his B.A. degree in finance from
Indiana University.
Bhaskar Rao
joined Tempur-Pedic International in January 2004 as Director of
Financial Planning and Analysis. In October 2005, Mr. Rao was promoted to Vice
President of Strategic Planning. In May 2006, Mr. Rao was promoted to the
position of Chief Accounting Officer and continues to serve as Vice President of
Strategic Planning. From 2002 until December 2003, Mr. Rao was employed by Ernst
& Young as a Senior Manager in the assurance and business advisory
group. Mr. Rao was employed by Arthur Anderson from 1994 until
2002. Mr. Rao graduated from Bellarmine University with B.A. degrees
in Accounting and Economics. Mr. Rao is also a Certified Public
Accountant.
The
following risk factors and other information included in this report should be
carefully considered. Please also see “Special Note Regarding Forward-Looking
Statements” on page i.
Unfavorable
economic and market conditions could reduce our sales and profitability and as a
result, our operating results may be adversely affected.
Economic conditions have recently deteriorated
significantly in the U. S. and many of the countries and regions in which we do
business, and may remain challenging for the foreseeable future. The
recent downturns in the economy in the U.S. and in international markets have
had, and may continue to have, a significant adverse impact on demand for our
products. General business and economic conditions that could affect us include
short-term and long-term interest rates, unemployment, inflation, fluctuations
in debt and equity capital markets, limited availability of consumer financing
and weak credit markets, and the strength of the U.S. economy and the local
economies in which we operate.
In
particular, the recent financial crisis affecting the banking system and
financial markets and the current uncertainty in global economic conditions have
resulted in a tightening in the credit markets, a low level of liquidity in many
financial markets, and volatility in credit, equity and fixed income markets.
There could be a number of other effects from these economic developments on our
business, including reduced consumer demand for products; insolvency of our
retail customers, resulting in increased provisions for credit losses;
insolvency of our key suppliers resulting in product delays; inability
of customers to obtain credit to finance purchases of our products;
increased impairments from the inability of our retail consumers to obtain
financing; decreased customer confidence; decreased customer demand, including
order delays or cancellations and counterparty failures negatively impacting our
treasury operations.
In
addition, the current negative worldwide economic conditions and market
instability makes it increasingly difficult for us, our customers and our
suppliers to accurately forecast future product demand trends, which could cause
us to produce excess products that can increase our inventory carrying
costs. Alternatively, this forecasting difficulty could cause a
shortage of products, or materials used in our products, that could result in an
inability to satisfy demand for our products and a loss of market
share.
We operate in the
highly competitive mattress and pillow industries, and if we are unable to
compete successfully, we may lose customers and our sales may
decline.
Participants
in the mattress and pillow industries compete primarily on price, quality, brand
name recognition, product availability and product performance. Our premium
mattresses compete with a number of different types of mattress alternatives,
including standard innerspring mattresses, viscoelastic mattresses, 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. They enjoy strong brand name recognition, and sell their products
through broad and well established distribution channels. Additionally, a number
of our significant competitors now offer mattress products claimed to be similar
to our viscoelastic mattresses and pillows. These competitors or other mattress
manufacturers may aggressively pursue the viscoelastic mattress market or may
pursue the specialty sleep segment with other products, including latex and air
mattresses. Any such competition by established manufacturers or new entrants
into the market could have a material adverse effect on our business, financial
condition and operating results by causing our products to lose market
share. The pillow industry is characterized by a large number of
competitors, none of which are dominant, but many of which have greater
resources than us.
Our leverage limits our flexibility and increases our
risk of default.
As
of December 31, 2008, we had $419.3 million in total Long-term debt outstanding.
In addition, as of December 31, 2008, our Stockholders’ Equity was $72.4
million. Between October 2005 and November 30, 2007, we repurchased a total of
$540.0 million in common stock pursuant to stock repurchase authorizations
authorized by our Board of Directors. We funded the repurchases in part through
borrowings under the credit agreement we entered into in 2005 (2005 Senior
Credit Facility), which substantially increased our leverage. On October 16,
2007, our Board of Directors authorized an additional stock repurchase of up to
$300.0 million of our common stock, of which $280.1 million remains available to
repurchase our common stock. Our Board of Directors may authorize additional
share repurchases in the future and we may fund these repurchases with debt. In
the fourth quarter of 2008, our Board of Directors announced the suspension of
our dividend in order to redirect funds to reduce our outstanding
debt. This dividend has previously been paid in quarterly
installments.
Our
degree of leverage could have important consequences to our investors, such
as:
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limiting
our ability to obtain additional financing we may need to fund future
working capital, capital expenditures, product development, acquisitions
or other corporate requirements;
and
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requiring
the dedication of a substantial portion of our cash flow from operations
to the payment of principal and interest on our debt, which will reduce
the availability of cash flow to fund working capital, capital
expenditures, product development, acquisitions and other corporate
requirements.
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In
addition, the instruments governing our debt contain financial and other
restrictive covenants, which limit our operating flexibility and could prevent
us from taking advantage of business opportunities. Our failure to comply with
these covenants may result in an event of default. If such event of default is
not cured or waived, we may suffer adverse effects on our operations, business
or financial condition, including acceleration of our debt.
We may be
unable to sustain our profitability, which could impair our ability to service
our indebtedness and make investments in our business and could adversely affect
the market price for our stock.
Our ability to
service our indebtedness depends on our ability to maintain our profitability.
We may not be able to maintain our profitability on a quarterly or annual basis
in future periods. Further, our profitability will depend upon a number of
factors, including without limitation:
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general
economic conditions in the markets in which we sell our products and the
impact on consumers and retailers;
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the
level of competition in the mattress and pillow
industry;
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our
ability to align our cost structure with a reduced level of sales in the
current economic environment;
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our
ability to effectively sell our products through our distribution channels
in volumes sufficient to drive growth and leverage our cost structure and
advertising spending;
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our
ability to continuously improve our products to offer new and enhanced
consumer benefits, better quality and reduced
costs;
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our
ability to maintain efficient, timely and cost-effective production and
utilization of our manufacturing
capacity;
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the
efficiency and effectiveness of our advertising campaigns and other
marketing programs in building product and brand awareness, driving
traffic to our distribution channels and increasing
sales;
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our
ability to continue to successfully execute our strategic
initiatives;
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our
ability to successfully identify and respond to emerging trends in the
mattress and pillow industry;
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our
ability to maintain public association of our brand with premium products,
including overcoming any impact on our brand caused by some of our
customers seeking to sell our products at a discount to our recommended
price; and
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the
level of consumer acceptance of our
products.
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Our
sales growth is increasingly dependent on our ability to increase product sales
in our existing retail accounts and actions taken to increase sales growth may
not be effective.
A source of our
growth over the last few years has been through expanding distribution of our
products into new stores, principally furniture and bedding retail stores in the
U.S. Our products are currently sold in approximately 6,700 furniture and
bedding retail stores in the United States, and our plan is to increase our
total penetration to a total of 7,000 to 8,000 over the long term. Our products
are sold in approximately 5,100 retail stores internationally, out of a total of
7,000 that have been targeted as appropriate targets. Some of these retail
stores may undergo restructurings, experience financial difficulty or realign
their affiliations, which could decrease the number of stores that carry our
products. Our sales growth will increasingly depend on our ability to generate
additional sales in our existing accounts in the Retail channel. If we are
unable to increase product sales in our existing retail accounts at a sufficient
rate overall, our Net sales growth could slow, which could adversely affect the
price of our common stock.In
addition, we may seek to acquire an additional business or businesses in order
to increase sales growth, and any acquisition could be disruptive to our ongoing
business, create integration issues, require additional borrowings or share
issuances, or create other risks for our business.
Our
operating results are increasingly subject to fluctuations, which could
adversely affect the market price of our common stock.
A significant
portion of our growth in Net sales is attributable to growth in sales in our
Domestic Retail channel, particularly Net sales to furniture and bedding stores.
We believe that our sales of mattresses and pillows to furniture and bedding
stores are subject to seasonality inherent in the bedding industry, with sales
expected to be generally lower in the second and fourth quarters and higher in
the first and third quarters, and in Europe, lower in the third quarter. Our Net
sales may be affected increasingly by this seasonality, particularly as our
Domestic Retail sales channel continues to grow as a percentage of our overall
Net sales and, to a lesser extent, by seasonality outside the Domestic
segment.
In
addition to seasonal fluctuations, the demand for our premium products can
fluctuate significantly based on a number of other factors, including general
economic conditions, consumer confidence, and the timing of price increases
announced by us or our competitors. As our consumer base continues to expand
across a wider demographics group, our consumer base may be comprised of a
greater percentage of middle income consumers. As a result, our
consumer base may be more susceptible to general economic factors impacted by
decreased disposable income, consumer confidence or availability of consumer
financing.
Our advertising
expenditures may not result in increased sales or generate the levels of product
and brand name awareness we desire and we may not be able to manage our
advertising expenditures on a cost-effective
basis.
A
significant component of our marketing strategy involves the use of direct
marketing to generate sales. Future growth and profitability will depend in part
on the effectiveness and efficiency of our advertising expenditures, including
our ability to create greater awareness of our products and brand name and
determine the appropriate creative message and media mix for future advertising
expenditures.
We
are subject to fluctuations in the cost of raw materials, and increases in these
costs would reduce our liquidity and profitability.
The
major raw materials that we purchase for production are chemicals and
proprietary additives. The price and availability of these raw materials are
subject to market conditions affecting supply and demand, and prices have risen
substantially on certain materials since August 2005, and although we
experienced a modest decrease in the price of certain raw materials toward the
end of the fourth quarter of 2008, the overall level of the same raw materials
remained significantly higher when compared to the same period in 2007. Our
financial condition and results of operations may be materially and adversely
affected by increases in raw material costs to the extent we are unable to
absorb those increases and/or pass those higher costs to our
customers.
Loss
of suppliers and disruptions in the supply of our raw materials could increase
our costs of production and reduce our ability to compete
effectively.
We
acquire chemicals and proprietary additives from a number of suppliers with
manufacturing locations around the world. If we were unable to obtain chemicals
and proprietary additives from these suppliers, we would have to find
replacement suppliers. Any substitute arrangements for chemicals and proprietary
additives might not be on terms as favorable to us. We maintain relatively small
supplies of our raw materials at our manufacturing facilities, and any
disruption in the on-going shipment of supplies to us could interrupt production
of our products, which could result in a decrease of our sales or could cause an
increase in our cost of sales, either of which could decrease our liquidity and
profitability. In addition, we continue to outsource the procurement of certain
goods and services, particularly mattress and pillow covers, from suppliers in
foreign countries. If we were no longer able to outsource through
suppliers, we could source it elsewhere, perhaps at a higher cost. In
addition, if one of our major suppliers, or several of our suppliers, declare
bankruptcy or otherwise cease operations, our supply chain could be materially
disrupted. To the extent we are unable to absorb those higher costs,
or pass any such higher costs to our customers, our gross profit margin could be
negatively affected, which could result in a decrease in our liquidity and
profitability.
10
We may face
exposure to product liability claims, which could reduce our liquidity and
profitability and reduce consumer confidence in our
products.
We face an
inherent business risk of exposure to product liability claims if the use of any
of our products results in personal injury or property damage. In the event that
any of our products prove to be defective, we may be required to recall,
redesign or even discontinue those products. We maintain insurance against
product liability claims, but such coverage may not continue to be available on
terms acceptable to us or be adequate for liabilities actually incurred. A
successful claim brought against us in excess of available insurance coverage
could impair our liquidity and profitability, and any claim or product recall
that results in significant adverse publicity against us could result in
consumers purchasing fewer of our products, which would also impair our
liquidity and profitability.
We may be
adversely affected by fluctuations in exchange rates, which could affect our
results of operations, the costs of our products and our ability to sell our
products in foreign markets.
Approximately
38.5% of our Net sales were generated by non-U.S. operations for the year ended
December 31, 2008. As a multinational company, we conduct our business in a wide
variety of currencies and are therefore subject to market risk for changes in
foreign exchange rates. We use foreign exchange forward contracts to
manage a portion of the exposure to the risk of the eventual net cash inflows
and outflows resulting from foreign currency denominated transactions between
Tempur-Pedic International subsidiaries and their customers and suppliers, as
well as among certain Tempur-Pedic International subsidiaries from time to
time. The hedging transactions may not succeed in managing our
foreign currency exchange rate risk. See “ITEM 7A. Quantitative and Qualitative
Disclosures About Market Risk—Foreign Currency Exposures” in Part II of this
report.
Foreign
currency exchange rate movements also create a degree of risk by affecting the
U.S. dollar value of sales made and costs incurred in foreign
currencies. We do not enter into hedging transactions to hedge this
risk. Consequently, our reported earnings and financial position
could fluctuate materially as a result of foreign exchange gains or
losses. Our outlook for 2009 assumes no significant variance from the
2008 currency exchange rates experienced over the course of the fourth quarter.
However, our 2009 outlook assumes a negative foreign currency impact
compared to the full year 2008. Should currency rates change sharply, our
results could be negatively impacted. See “ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency
Exposures” in Part II of this report.
Regulatory
requirements may require costly expenditures and expose us to
liability.
Our
products and our marketing and advertising programs are and will continue to be
subject to regulation in the U.S. by various federal, state and local regulatory
authorities, including the Federal Trade Commission and the U.S. Food and Drug
Administration. In addition, other governments and agencies in other
jurisdictions regulate the sale and distribution of our products. Compliance
with these regulations may have an adverse effect on our business. For example,
the U.S. Consumer Product Safety Commission has adopted rules relating to fire
retardancy standards for the mattress and pillow industry. We developed product
modifications that allow us to meet these standards. Required product
modifications have added cost to our products. Many foreign jurisdictions also
regulate fire retardancy standards, and changes to these standards and changes
in our products that require compliance with additional standards would raise
similar risks.
Our
marketing and advertising practices could also become the subject of proceedings
before regulatory authorities or the subject of claims by other parties. In
addition, we are subject to federal, state and local laws and regulations
relating to pollution, environmental protection and occupational health and
safety. We may not be in complete compliance with all such requirements at all
times. We have made and will continue to make capital and other expenditures to
comply with environmental and health and safety requirements. If a release of
hazardous substances occurs on or from our properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any of our properties, we may be held liable and the amount of such liability
could be material.
We
are subject to risks from our international operations, such as increased costs,
which could impair our ability to compete and our profitability.
We
currently conduct international operations in approximately 80 countries, and we
continue to pursue additional international opportunities. We generated
approximately 38.5% of our Net sales from non-U.S. operations during the year
ended December 31, 2008. Our international operations are subject to the
customary risks of operating in an international environment, including
complying with foreign laws and regulations and the potential imposition of
trade or foreign exchange restrictions, tariff and other tax increases,
fluctuations in exchange rates, inflation and unstable political situations, and
labor issues.
11
We
are subject to a pending tax proceeding in Denmark, and an adverse decision
would reduce our liquidity and profitability.
On October
24, 2007, we received an income tax assessment from the Danish Tax
Authority with respect to the 2001, 2002 and 2003 tax years. The
tax assessment relates to the royalty paid by one of Tempur-Pedic
International’s U.S. subsidiaries to a Danish subsidiary and the position taken
by the Danish Tax Authority could apply to subsequent years. The total tax
assessment is $39.3 million including interest and underpayment penalties. On
January 23, 2008 we filed timely complaints with the Danish National Tax
Tribunal denying the tax assessments. The National Tax Tribunal formally
agreed to place the Danish tax litigation on hold pending the outcome of a
Bilateral Advance Pricing Agreement (Bilateral APA) between the United States
and the Danish Tax Authority. A Bilateral APA involves an agreement
between the IRS and the taxpayer, as well as a negotiated agreement with one or
more foreign competent authorities under applicable income tax treaties.
On August 8, 2008, we filed the Bilateral APA with the IRS and the Danish Tax
Authority. The IRS has communicated to the Company their intent to begin
analyzing the Bilateral APA in the first quarter of 2009. We believe we have
meritorious defenses to the proposed adjustment and will oppose the assessment
in the Danish courts, as necessary. During 2008, the gross amount of
unrecognized tax benefits relating to this matter was increased by $2.2 million,
of which $0.8 million impacted the effective tax rate and $1.6 million was
recorded as a component of Goodwill as it related to periods prior to the
acquisition of Tempur World, Inc. on November 1, 2002 (Tempur Acquisition). In
addition to the impact this matter may have on the gross amount of the Company’s
unrecognized tax benefits, it is reasonably possible under FIN 48 that the
amount of the total unrecognized tax benefits may change in the next twelve
months. An estimate of the amount of such change cannot be made at
this time.
If
we are not able to protect our trade secrets or maintain our trademarks, patents
and other intellectual property, we may not be able to prevent competitors from
developing similar products or from marketing in a manner that capitalizes on
our trademarks, and this loss of a competitive advantage could decrease our
profitability and liquidity.
We
rely on trade secrets to protect the design, technology and function of our
TEMPUR® material and our products. To date, we have not sought U.S. or
international patent protection for our principal product formula and
manufacturing processes. Accordingly, we may not be able to prevent others from
developing viscoelastic material and products that are similar to or competitive
with our products. Our ability to compete effectively with other companies also
depends, to a significant extent, on our ability to maintain the proprietary
nature of our owned and licensed intellectual property. We own several patents
on aspects of our products and have patent applications pending on aspects of
our products and manufacturing processes. However, the principal product formula
and manufacturing processes for our TEMPUR® material and our products are not
patented and we must maintain these as trade secrets in order to protect this
intellectual property. We own 19 U.S. patents, and we have 26 U.S. patent
applications pending. Further, we own 62 foreign patents, and we have 41 foreign
patent applications pending. In addition, we hold 532 trademark registrations
worldwide. We own U.S. and foreign registered trade names and service marks and
have applications for the registration of trade names and service marks pending
domestically and abroad. We also license certain intellectual property rights
from third parties.
Our
trademarks are currently registered in the U.S. and registered or pending in 208
foreign jurisdictions. However, those rights could be circumvented, or violate
the proprietary rights of others, or we could be prevented from using them if
challenged. A challenge to our use of our trademarks could result in a negative
ruling regarding our use of our trademarks, their validity or their
enforceability, or could prove expensive and time consuming in terms of legal
costs and time spent defending against such a challenge. Any loss of trademark
protection could result in a decrease in sales or cause us to spend additional
amounts on marketing, either of which could decrease our liquidity and
profitability. In addition, if we incur significant costs defending our
trademarks, that could also decrease our liquidity and profitability. In
addition, we may not have the financial resources necessary to enforce or defend
our trademarks. Furthermore, our patents may not provide meaningful protection
and patents may never issue from pending applications. It is also possible that
others could bring claims of infringement against us, as our principal product
formula and manufacturing processes are not patented, and that any licenses
protecting our intellectual property could be terminated. If we were unable to
maintain the proprietary nature of our intellectual property and our significant
current or proposed products, this loss of a competitive advantage could result
in decreased sales or increased operating costs, either of which would decrease
our liquidity and profitability.
In
addition, the laws of certain foreign countries may not protect our intellectual
property rights and confidential information to the same extent as the laws of
the U.S. or the European Union. Third parties, including competitors, may assert
intellectual property infringement or invalidity claims against us that could be
upheld. Intellectual property litigation, which could result in substantial cost
to and diversion of effort by us, may be necessary to protect our trade secrets
or proprietary technology, or for us to defend against claimed infringement of
the rights of others and to determine the scope and validity of others’
proprietary rights. We may not prevail in any such litigation, and if we are
unsuccessful, we may not be able to obtain any necessary licenses on reasonable
terms or at all.
Because we depend on our significant customers, a
decrease or interruption in their business with us would reduce our sales and
profitability.
Our
top five customers, collectively, accounted for 19.2% of our Net sales for the
year ended December 31, 2008. Many of our customer arrangements are by purchase
order or are terminable at will at the option of either party. We expect that
some of our retailers may consolidate, undergo restructurings or
reorganizations, experience financial difficulty, or realign their affiliations,
any of which could decrease the number of stores that carry our products or
increase the ownership concentration in the retail industry. Some of these
retailers may decide to carry only a limited number of brands of mattress
products, which could affect our ability to sell our products to them on
favorable terms, if at all. A substantial decrease or interruption in business
from our significant customers could result in the loss of future business and
could reduce our liquidity and profitability.
We
produce our products in three manufacturing facilities, and unexpected equipment
failures, delays in deliveries, catastrophic loss delays may lead to production
curtailments or shutdowns.
We
manufacture our products at our three facilities in Aarup, Denmark, in Duffield,
Virginia and in Albuquerque, New Mexico. An interruption in production
capabilities at these plants as a result of equipment failure could result in
our inability to produce our products, which would reduce our sales and earnings
for the affected period. For example, we produce pillows for our Domestic
segment only at our Duffield, Virginia facility. An interruption in pillow
production capabilities at this plant could result in a disruption of pillow
distribution to the market. In addition, we generally deliver our
products only after receiving the order from the customer or the retailer and
thus do not hold large inventories. In the event of a disruption in production
at any of our manufacturing facilities, even if only temporary, or if we
experience delays as a result of events that are beyond our control, delivery
times could be severely affected. For example, a third party carrier could
potentially be unable to deliver our products within acceptable time periods due
to a labor strike or other disturbance in its business. Any significant delay in
deliveries to our customers could lead to increased returns or cancellations and
cause us to lose future sales. Any increase in freight charges could increase
our costs of doing business and affect our profitability. We have introduced new
distribution programs to increase our ability to deliver products on a timely
basis, but if we fail to deliver products on a timely basis, we may lose sales
which could decrease our liquidity and profitability. Our manufacturing
facilities are also subject to the risk of catastrophic loss due to
unanticipated events such as fires, explosions or violent weather conditions. We
may in the future experience material plant shutdowns or periods of reduced
production as a result of equipment failure, delays in deliveries or
catastrophic loss.
Deterioration
in labor relations could disrupt our business operations and increase our costs,
which could decrease our liquidity and profitability.
As
of December 31, 2008, we had approximately 1,200 full-time employees, with
approximately 550 in the U.S., 250 in Denmark and 400 in the rest of the world.
Certain of our employees in Denmark are under a government labor union contract,
but those in the U.S. are not. Any significant increase in our labor costs could
decrease our liquidity and profitability and any deterioration of employee
relations, slowdowns or work stoppages at any of our locations, whether due to
union activities, employee turnover or otherwise, could result in a decrease in
our Net sales or an increase in our costs, either of which could decrease our
liquidity and profitability.
The loss of the
services of any members of our senior management team could impair our ability
to execute our business strategy and as a result, reduce our sales and
profitability.
We
depend on the continued services of our senior management team. The loss of key
personnel could have a material adverse effect on our ability to execute our
business strategy and on our financial condition and results of operations. We
do not maintain key-person insurance for members of our senior management
team.
13
Allegations of
price fixing in the mattress industry could adversely affect our
operations.
Our
retail pricing policies are subject to antitrust regulations in the U.S. and
abroad. If antitrust regulators in any jurisdiction in which we do business
initiate investigations into or challenge our pricing or advertising policies,
our efforts to respond could force us to divert management resources and we
could incur significant unanticipated costs. If such an investigation were to
result in a charge that our practices or policies were in violation of
applicable antitrust or other laws or regulations, we could be subject to
significant additional costs of defending such charges in a variety of venues
and, ultimately, if there were a finding that we were in violation of antitrust
or other laws or regulations, there could be an imposition of fines, damages for
persons injured, as well as injunctive or other relief. Any requirement that we
pay fines or damages could decrease our liquidity and profitability, and any
investigation that requires significant management attention or causes us to
change our business practices could disrupt our operations, also resulting in a
decrease in our liquidity and profitability. An antitrust class action suit
against us could result in potential liabilities, substantial costs and the
diversion of our management’s attention and resources, regardless of the
outcome. See ITEM 3, “Legal Proceedings” in Part I of this report.
We
are vulnerable to interest rate risk with respect to our debt, which could lead
to an increase in interest expense.
We
are subject to interest rate risk in connection with our issuance of variable
rate debt under our 2005 Senior Credit Facility. Interest rate changes could
increase the amount of our interest payments and thus, negatively impact our
future earnings and cash flows. We estimate that our annual interest expense on
our floating rate indebtedness would increase by $1.2 million for each 1.0%
increase in interest rates. See “ITEM 7A. Quantitative and Qualitative
Disclosures About Market Risk—Interest Rate Risk” in Part II of this report.
Additionally, if we are required to amend our 2005 Senior Credit Facility, it
may result in an increase in the amount of interest payments we make on our
outstanding debt and thus, negatively impact our future earnings and cash
flows.
Our stock price
is likely to continue to be volatile, your investment could decline in value,
and we may incur significant costs from class action
litigation.
The
trading price of our common stock is likely to continue to be volatile and
subject to wide price fluctuations. The trading price of our common stock may
fluctuate significantly in response to various factors, including:
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actual
or anticipated variations in our quarterly operating results, including
those resulting from seasonal variations in our
business;
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•
|
general
economic conditions, such as unemployment changes in short-term and
long-term interest rates and fluctuations in both debt and equity capital
markets;
|
|
|
•
|
introductions
or announcements of technological innovations or new products by us or our
competitors;
|
|
|
•
|
disputes
or other developments relating to proprietary rights, including patents,
litigation matters, and our ability to patent our products and
technologies;
|
|
|
•
|
changes
in estimates by securities analysts of our financial
performance;
|
|
|
•
|
the
suspension of our declaration of a cash dividend and stock repurchase
program;
|
|
|
•
|
bankruptcies
of any of our major customers;
|
|
|
•
|
conditions
or trends in the specialty bedding industry, or the mattress industry
generally;
|
|
|
•
|
additions
or departures of key personnel;
|
|
|
•
|
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
|
•
|
announcements
by our competitors of their quarterly operating results or announcements
by our competitors of their views on trends in the bedding
industry;
|
|
|
•
|
regulatory
developments in the U.S. and
abroad;
|
|
|
•
|
economic
and political factors; and
|
|
|
•
|
public
announcements or filings with the SEC indicating that significant
stockholders, directors or officers are selling shares of our common
stock.
|
In
addition, the stock market in general has experienced significant price and
volume fluctuations that have often been unrelated or disproportionate to
operating performance. These broad market factors may seriously harm the market
price of our common stock, regardless of our operating performance.
In
the past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in potential liabilities,
substantial costs, and the diversion of our management’s attention and
resources, regardless of the outcome.
An increase in our product return rates or an
inadequacy in our warranty reserves could reduce our liquidity and
profitability.
Part
of our Domestic marketing and advertising strategy in certain Domestic channels
focuses on providing up to a 120-day money back guarantee under which customers
may return their mattress and obtain a refund of the purchase price. For the
year ended December 31, 2008, we had approximately $37.9 million in returns for
a return rate of approximately 6.6% of our Net sales in the U.S. As we expand
our sales, our return rates may not remain within our historical levels. The
downturn in general economic conditions may also increase our product return
rates. An increase in return rates could significantly impair our liquidity and
profitability. We also currently provide our customers with a limited, pro-rata
20-year warranty on mattresses sold in the U.S. and a limited 15-year warranty
on mattresses sold outside of the U.S. However, as we have only been selling
mattresses in significant quantities since 1992, and have released new products
in recent years, many are fairly early in their product life cycles. We also
provide 2-year to 3-year warranties on pillows.
Because our
products have not been in use by our customers for the full warranty period, we
rely on the combination of historical experience and product testing for the
development of our estimate for warranty claims. However, our actual level of
warranty claims could prove to be greater than the level of warranty claims we
estimated based on our products’ performance during product testing. If our
warranty reserves are not adequate to cover future warranty claims, their
inadequacy could have a material adverse effect on our liquidity and
profitability.
Future
sales of our common stock may depress our stock
price.
The
market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that these sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of common stock. As of
February 11, 2009, there were 74.9 million shares of our common stock
outstanding. All of our shares of our common stock are freely transferable
without restriction or further registration under the Securities Act of 1933,
except for certain shares of our common stock which were purchased by our
executive officers, directors, principal stockholders, and some related
parties.
In
addition, we have registered up to 15,983,532 shares of our common stock
reserved for issuance upon the exercise of options granted or reserved for grant
under our 2002 Stock Option Plan, our amended and restated 2003 Equity Incentive
Plan and our 2003 Employee Stock Purchase Plan. Stockholders can sell these
shares in the public market upon issuance, subject to restrictions under the
securities laws and any applicable lock-up agreements.
We
have several stockholders who presently beneficially own more than 5% of our
outstanding capital stock, including one stockholder affiliated with one of our
directors. Sales or other dispositions of our shares by these major stockholders
may depress our stock price.
Our
current directors, officers and their affiliates and certain stockholders own a
large percentage of our common stock and could limit you from influencing
corporate decisions.
As
of February 11, 2009, our executive officers, directors, and their respective
affiliates, including one of our larger stockholders, own, in the aggregate,
approximately 6% of our outstanding common stock on a fully diluted basis, after
giving effect to the vesting of all unvested options. These
stockholders, as a group, are able to influence all matters requiring approval
by our stockholders, including mergers, sales of assets, the election of all
directors, and approval of other significant corporate transactions, in a manner
with which you may not agree or that may not be in your best
interest. In addition, we have several stockholders who presently own
more than 5% of our outstanding common stock, and as a result, may be able to
influence all matters requiring the approval of stockholders and the approval of
other significant corporate transactions.
15
Provisions of Delaware law and our charter documents
could delay or prevent an acquisition of us, even if the acquisition would be
beneficial to you.
Provisions of
Delaware law and our certificate of incorporation and by-laws could hamper a
third party’s acquisition of us, or discourage a third party from attempting to
acquire control of us. You may not have the opportunity to participate in these
transactions. These provisions could also limit the price that investors might
be willing to pay in the future for shares of our common
stock.
These
provisions include:
|
|
•
|
our
ability to issue preferred stock with rights senior to those of the common
stock without any further vote or action by the holders of our common
stock;
|
|
|
•
|
the
requirements that our stockholders provide advance notice when nominating
our directors; and
|
|
|
•
|
the
inability of our stockholders to convene a stockholders’ meeting without
the chairperson of the board, the president, or a majority of the board of
directors first calling the
meeting.
|
None.
We
operate in approximately 80 countries and have wholly-owned subsidiaries in 19
countries, including our wholly-owned subsidiaries that own our manufacturing
facilities in Denmark and the U.S. The following table sets forth certain
information regarding our principal facilities at December 31,
2008.
|
Name/Location
|
Approximate
Square
Footage
|
Title
|
Type
of Facility
|
|||
|
Tempur
Production USA, LLC
Duffield,
Virginia
|
540,000 |
Owned
|
Manufacturing
|
|||
|
Tempur
Production USA, LLC
Albuquerque,
New Mexico
|
800,000 |
Leased
(until 2035)
|
Manufacturing
|
|||
|
Dan-Foam
ApS
Aarup,
Denmark
|
517,000 |
Owned
|
Manufacturing
|
|||
|
Tempur-Pedic
North America, LLC
Lexington,
Kentucky
|
72,000 |
Leased (until 2012)
|
Office
|
|||
|
Tempur
Deutschland GmbH
Steinhagen,
Germany
|
121,000 |
Owned
|
Office and Warehouse
|
|||
In
addition to the properties listed above, we have 20 facilities in 10 countries
under leases with one to ten year terms. The manufacturing facility in
Albuquerque, New Mexico is leased as part of the related industrial revenue bond
financing. We have an option to repurchase the property for one dollar upon
repayment of the financing.
We
believe that our existing properties are suitable for the conduct of our
business, are adequate for our present needs and will be adequate to meet our
future needs. As described in ITEM 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, we operate in two business
segments, Domestic and International. Our Domestic operating segment consists of
our U.S. manufacturing facilities and our Corporate office operating expenses.
Our International operating segment consists of our manufacturing facility in
Denmark.
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, we 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, the court denied
the Jacobs’ motion for reconsideration of the court’s orders dismissing their
claims. 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. We continue to strongly believe that the Antitrust Action lacks merit,
and intend to defend against the claims vigorously. However, due to the inherent
uncertainties of litigation, we cannot predict the outcome of the Antitrust
Action at this time, and can give no assurance that these claims will not have a
material adverse affect on our financial position or results of operation.
Accordingly, we cannot make an estimate of the possible ranges of
loss.
New
York Attorney
General - In December 2008, the Office of the Attorney General of
the State of New York, Antitrust Bureau (OAG) requested that we consider
discontinuing our unilateral retail price policy (UPPL) in the State of New
York, and informed us that it may bring an enforcement action against the
Company under New York law if we chose not to do so. We believe that our
UPPL complies with state and federal law, and, should the OAG challenge the
UPPL, we intend to vigorously defend it. However, due to the inherent
uncertainties of litigation, we cannot at this time predict the outcome of any
such enforcement action, if brought, and can give no assurance that these claims
will not have a material adverse affect on our financial position or results of
operation. Accordingly, we cannot make an estimate of the possible ranges of
loss.
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 effect on our business,
financial condition, liquidity, or operating results.
No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.
PART
II
Market
for Registrant’s Common Equity
Our
sole class of common equity is our $0.01 par value common stock, which trades on
the New York Stock Exchange (NYSE) under the symbol “TPX.” Trading in our common
stock commenced on the NYSE on December 18, 2003. Prior to that time, there was
no public trading market for our common stock.
The
following table sets forth the high and low sales prices per common share, at
closing, of our common stock as reported by the NYSE and cash dividends paid per
common share for the fiscal periods indicated.
|
Price
Range
|
||||||||||||
|
High
|
Low
|
Cash
Dividend Per Common Share
|
||||||||||
|
Fiscal
2007
|
||||||||||||
|
First
Quarter
|
$ | 27.11 | $ | 20.29 | $ | 0.06 | ||||||
|
Second
Quarter
|
$ | 28.41 | $ | 24.34 | $ | 0.08 | ||||||
|
Third
Quarter
|
$ | 36.86 | $ | 26.68 | $ | 0.08 | ||||||
|
Fourth
Quarter
|
$ | 37.38 | $ | 25.97 | $ | 0.08 | ||||||
|
Fiscal
2008
|
||||||||||||
|
First
Quarter
|
$ | 25.95 | $ | 10.50 | $ | 0.08 | ||||||
|
Second
Quarter
|
$ | 12.62 | $ | 7.81 | $ | 0.08 | ||||||
|
Third
Quarter
|
$ | 14.04 | $ | 7.26 | $ | 0.08 | ||||||
|
Fourth
Quarter
|
$ | 11.37 | $ | 5.44 | $ | — | ||||||
As of
December 31, 2008, we had approximately 191 shareholders of record of our common
stock.
Dividends
Our
Board of Directors declared dividends in the first three quarters of 2008 of
$0.08 per common share. On October 16, 2008, we announced that we would suspend
the payment of the quarterly cash dividend. The decision to pay a dividend is
reviewed quarterly and requires declaration by our Board of
Directors.
In
the first quarter of 2007, our Board of Directors approved an annual cash
dividend of $0.24 per common share annually, to be paid in quarterly
installments to the owners of our common stock. In the second quarter of 2007,
our Board of Directors increased the quarterly dividend to $0.08 per common
share from $0.06 per common share.
Equity
Compensation Plan Information
The following
table sets forth equity compensation plan information as of December 31,
2008:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding
options
|
Weighted-average
exercise price of outstanding options
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
compensation plans approved by security holders
|
||||||||||||
|
2002
Stock Option Plan
|
139,031 | $ | 1.66 | — | (1) | |||||||
|
2003
Equity Incentive Plan
|
5,256,233 | $ | 16.16 | 3,142,950 | ||||||||
|
2003
Employee Stock Purchase Plan
|
— | — | 289,896 | (2) | ||||||||
|
Equity
compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
5,395,264 | $ | 15.50 | 3,432,846 | ||||||||
(1) In
December 2003, our Board of Directors adopted a resolution that prohibited
further grants under the 2002 Stock Option Plan.
(2) Shares under the 2003 Employee Stock Purchase Plan allows
eligible employees to purchase our common stock annually over the course of two
semi-annual offering periods at a price of no less than 85% of the price per
share of our common stock. Thsi plan is an open market purchase plan and does
not have a dilutive effect.
See
Note 8 to the Consolidated Financial Statements for information regarding the
material features of each of the above plans.
Issuer
Purchases of Equity Securities
During
the twelve month period ending December 31, 2008, we did not repurchase any
shares of our own common stock.
On
January 25, 2007, our Board of Directors authorized the repurchase of up to
$100.0 million of our common stock. We repurchased 3.8 million shares of our
common stock for a total of $100.0 million from the January 2007 authorization,
and completed purchases from this authorization in June 2007. On July 19, 2007,
our Board of Directors authorized an additional share repurchase authorization
to repurchase up to $200.0 million of our common stock. We repurchased 6.6
million shares of our common stock for a total of $200.0 million from the July
2007 authorization and completed purchases from this authorization in September
2007. On October 16, 2007, our Board of Directors authorized an additional share
repurchase authorization of up to $300.0 million of our common stock. The share
repurchases were funded from borrowings under the 2005 Senior Credit Facility
and funds from operations. Share repurchases under these authorizations may be
made through open market transactions, negotiated purchases or otherwise, at
times and in such amounts as we, and a committee of the Board, deem appropriate.
This share repurchase program may be suspended, limited or terminated at any
time without notice. As of February 11, 2009, we have repurchased 0.7 million
shares for a total of $19.9 million under the October 2007
authorization.
Performance Graph
The
following Performance Graph and related information shall not be deemed to be
“soliciting material” or to be “filed” with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities Exchange Act of
1934, each as amended, except to the extent that the Company specifically
incorporates it by reference into such filing.
The
following table compares cumulative shareholder returns for the Company over the
last five years to the Standard & Poor’s (S&P) 500 Stock Composite
Index, and a peer group. The S&P 500 Composite Index is a capitalization
weighted index of 500 stocks intended to be a representative sample of leading
companies in leading industries within the U.S. economy, and are chosen for
market size, liquidity and industry group representation.
The
peer issuers included in this graph are set forth below:
|
Callaway
Golf Company
|
Herman
Miller Inc
|
Steelcase
Inc
|
|
Coach
Inc
|
Krispy
Kreme Doughnuts Inc
|
Tempur-Pedic
International Inc
|
|
Columbia
Sportswear Company
|
Nautilus
Inc
|
Tiffany
& Co
|
|
Ethan
Allen Interiors Corp
|
Polo
Ralph Lauren Corp
|
Timberland
Company
|
|
Fossil
Inc
|
Quiksilver
Inc
|
Tupperware
Brands Corp
|
|
Harman
International Industries Inc
|
Select
Comfort Corp
|
The
comparison for each of the periods assumes that $100 was invested on December
31, 2003 in our common stock, the stocks included in the S&P 500 Composite
Index and the stocks included in each peer group index and that all dividends
were reinvested. The stock performance shown on the graph below is not
necessarily indicative of future price performance.
| 12/2003 | 12/2004 | 12/2005 | 12/2006 | 12/2007 | 12/2008 | |||||||||||||||||||
|
Tempur-Pedic
International Inc.
|
$ | 100.00 | $ | 136.77 | $ | 74.19 | $ | 132.00 | $ | 169.43 | $ | 47.19 | ||||||||||||
|
S&P
500
|
100.00 | 110.88 | 116.33 | 134.70 | 142.10 | 89.53 | ||||||||||||||||||
|
Peer
Group
|
100.00 | 118.67 | 118.77 | 139.71 | 119.66 | 63.81 |
The
following table sets forth our selected historical consolidated financial and
operating data for the periods indicated. We have derived our statements of
income and balance sheet data as of and for the years ended December 31, 2008,
2007, 2006, 2005 and 2004 from our audited financial statements. Our financial
statements as of December 31, 2008 and 2007 and for each of the three years in
the period ended December 31, 2008 are included in ITEM 15, “Exhibits and
Financial Statement Schedules” in Part IV of this report.
|
(In
thousands, except per share amounts)
|
Tempur-Pedic International, Inc.
|
|||||||||||||||
| Statement of Income Data: |
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||
|
Net
sales
|
$
|
927,818
|
$
|
1,106,722
|
$
|
945,045
|
$
|
836,732
|
$
|
684,866
|
||||||
|
Cost
of sales
|
526,861
|
571,896
|
484,507
|
412,790
|
323,852
|
|||||||||||
|
Gross
profit
|
400,957
|
534,826
|
460,538
|
423,942
|
361,014
|
|||||||||||
|
Operating
expenses(1)
|
267,093
|
290,712
|
251,233
|
233,327
|
210,023
|
|||||||||||
|
Operating
income
|
133,864
|
244,114
|
209,305
|
190,615
|
150,991
|
|||||||||||
|
Interest
expense, net
|
(25,123
|
)
|
(30,484
|
)
|
(23,920
|
)
|
(20,264
|
)
|
(23,550
|
)
|
||||||
|
Other
expense, net(2)
|
(1,319
|
)
|
(756
|
)
|
(10,620
|
)
|
(3,879
|
)
|
(5,254
|
)
|
||||||
|
Income
before income taxes
|
107,422
|
212,874
|
174,765
|
166,472
|
122,187
|
|||||||||||
|
Income
tax provision
|
48,554
|
71,415
|
62,443
|
67,143
|
47,180
|
|||||||||||
|
Net
income
|
$
|
58,868
|
$
|
141,459
|
$
|
112,322
|
$
|
99,329
|
$
|
75,007
|
||||||
|
Balance
Sheet Data (at end of period):
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
15,385
|
$
|
33,315
|
$
|
15,788
|
$
|
17,855
|
$
|
28,368
|
||||||
|
Total
Assets
|
646,531
|
806,432
|
725,666
|
702,311
|
639,623
|
|||||||||||
|
Total
senior debt
|
419,341
|
543,000
|
312,966
|
193,056
|
192,171
|
|||||||||||
|
Total
debt
|
419,341
|
602,044
|
361,132
|
344,481
|
289,671
|
|||||||||||
|
Total
Stockholders’ Equity
|
72,443
|
48,138
|
213,348
|
226,329
|
213,621
|
|||||||||||
|
Other
Financial and Operating Data (GAAP):
|
||||||||||||||||
|
Dividends
per common share
|
$
|
0.24
|
$
|
0.30
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Depreciation
and amortization(3)
|
40,797
|
40,142
|
28,676
|
27,882
|
28,519
|
|||||||||||
|
Net
cash provided by operating activities
|
198,394
|
126,361
|
165,815
|
102,249
|
76,966
|
|||||||||||
|
Net
cash used by investing activities
|
(5,368
|
)
|
(22,871
|
)
|
(37,861
|
)
|
(86,584
|
)
|
(38,351
|
)
|
||||||
|
Net
cash used by financing activities
|
(200,150
|
)
|
(87,642
|
)
|
(132,476
|
)
|
(19,955
|
)
|
(28,507
|
)
|
||||||
|
Basic
earnings per common share
|
0.79
|
1.77
|
1.32
|
1.01
|
0.77
|
|||||||||||
|
Diluted
earnings per common share
|
0.79
|
1.74
|
1.28
|
0.97
|
0.73
|
|||||||||||
|
Capital
expenditures
|
10,494
|
16,149
|
37,211
|
84,881
|
38,419
|
|||||||||||
|
(1)
|
Includes
$10.4 million, $10.7 million, $7.9 million, $6.9 million, and $9.4 million
in non-cash charges for the years ended December 31, 2008, 2007, 2006,
2005, and 2004, respectively. These amounts are comprised of $2.4 million,
$3.9 million $4.1 million, $4.0 million, and $4.2 million in amortization
of definite-lived intangible assets in 2008, 2007, 2006, 2005, and 2004,
respectively; and $8.0 million, $6.7 million, $3.8 million, $2.9 million,
and $5.2 million in stock-based compensation expense relating to
restricted stock units and stock option grants in 2008, 2007, 2006, 2005,
and 2004, respectively.
|
|
(2)
|
Includes
$10.7 million in debt extinguishment charges for the redemption premium
and write-off of deferred financing fees related to the redemption of
$97.5 million of senior subordinated notes for the year ended December 31,
2006; $4.2 million in debt extinguishment charges relating to the
write-off of deferred financing fees in connection with the Senior Credit
Facility refinancing for the year ended December 31, 2005, and $5.4
million in debt extinguishment charges for the redemption premium related
to the redemption of $52.5 million of senior subordinated notes for the
year ended December 31, 2004.
|
|
(3)
|
Includes
$8.0 million, $6.7 million, $3.8 million, $2.9 million, and $5.2 million
in non-cash stock-based compensation expense related to restricted stock
units, stock option grants, and acceleration (2005 only) in 2008, 2007,
2006, 2005, and 2004, respectively.
|
The
following discussion and analysis should be read in conjunction with “ITEM 6.
Selected Financial Data” in Part I of this report and the audited consolidated
financial statements and accompanying notes thereto included elsewhere in this
report. Unless otherwise noted, all of the financial information in this report
is consolidated financial 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 are subject to numerous risks and uncertainties. See “Special
Note Regarding Forward-Looking Statements” on page i and “ITEM 1A. Risk Factors”
in Part I of this report. Our actual results may differ materially from those
contained in any forward-looking statements.
General—We are the leading
manufacturer, marketer and distributor of premium mattresses and pillows, which
we sell in approximately 80 countries under the TEMPUR® and Tempur-Pedic®
brands. We believe our premium mattresses and pillows are more comfortable than
standard bedding products because our proprietary pressure-relieving TEMPUR®
material is temperature sensitive, has a high density and therapeutically
conforms to the body.
Business Segment
Information—We have two reportable business segments: Domestic and
International. These reportable segments are strategic business units that are
managed separately based on the fundamental differences in their geographies.
The Domestic operating segment consists of two U.S. manufacturing facilities,
whose customers include our U.S. distribution subsidiary and certain third party
distributors in the Americas. The International segment consists of our
manufacturing facility in Denmark, whose customers include all of our
distribution subsidiaries and third party distributors outside the Domestic
operating segment. We evaluate segment performance based on Net sales and
Operating income.
For a
further discussion of factors that could impact operating results, including the
current economic environment and the steps we are taking to address this
environment, see the section entitled “Factors That May Affect Future
Performance” included within this section and "Risk Factors" in ITEM 1A,
which are incorporated herein by reference.
We
believe we are the industry leader in terms of profitability. Our long-term goal
is to become the world’s largest bedding company in terms of revenue. To achieve
our long-term goals while also addressing 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 Retail account productivity in both the
Domestic and International
segments.
|
|
·
|
Invest
in our operating infrastructure to meet the requirements of our business,
including investments in our research and
development.
|
|
·
|
Take
actions to further improve our financial flexibility and strengthen the
business.
|
Key
financial highlights for the year ended December 31, 2008 include:
|
·
|
Earnings
per share (EPS) was $0.79 for the twelve-months ended December 31,
2008.
|
|
·
|
As
of December 31, 2008, we have reduced Inventories by approximately $46.0
million to $60.5 million, compared to $106.5 million as of December 31,
2007.
|
|
·
|
We
reduced Total debt by $182.7 million to $419.3 million as of December 31,
2008 from $602.0 million at December 31,
2007.
|
|
·
|
Operating
cash flow increased 57.0% to $198.4 million for the twelve-months ended
December 31, 2008 from $126.4 million for the same twelve-month period in
2007.
|
The
following table sets forth the various components of our Consolidated Statements
of Income, and expresses each component as a percentage of Net
sales:
|
(In
millions, except earnings per share)
|
Year
Ended December 31,
|
||||||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||||||
|
Net
sales
|
$
|
927.8
|
100.0
|
%
|
$
|
1,106.7
|
100.0
|
%
|
$
|
945.0
|
100.0
|
%
|
|||||
|
Cost
of sales
|
526.8
|
56.8
|
571.9
|
51.7
|
484.5
|
51.3
|
|||||||||||
|
Gross
Profit
|
401.0
|
43.2
|
534.8
|
48.3
|
460.5
|
48.7
|
|||||||||||
|
Selling
and marketing expenses
|
172.3
|
18.6
|
193.5
|
17.5
|
171.8
|
18.2
|
|||||||||||
|
General,
administrative and other
|
94.8
|
10.2
|
97.2
|
8.7
|
79.4
|
8.4
|
|||||||||||
|
Operating
income
|
133.9
|
14.4
|
244.1
|
22.1
|
209.3
|
22.1
|
|||||||||||
|
Interest
expense, net
|
(25.1
|
)
|
(2.7
|
)
|
(30.5
|
)
|
(2.8
|
)
|
(23.9
|
)
|
(2.5
|
)
|
|||||
|
Other
expense, net
|
(1.3
|
)
|
(0.1
|
)
|
(0.7
|
)
|
—
|
(10.6
|
)
|
(1.1
|
)
|
||||||
|
Income
before income taxes
|
107.5
|
11.6
|
212.9
|
19.3
|
174.8
|
18.5
|
|||||||||||
|
Income
tax provision
|
48.6
|
5.2
|
71.4
|
6.5
|
62.5
|
6.6
|
|||||||||||
|
Net
income
|
$
|
58.9
|
6.4
|
%
|
$
|
141.5
|
12.8
|
%
|
$
|
112.3
|
11.9
|
%
|
|||||
|
Earnings
per common share:
|
|||||||||||||||||
|
Diluted
|
$
|
0.79
|
$
|
1.74
|
$
|
1.28
|
|||||||||||
|
Weighted
average common shares outstanding:
|
|||||||||||||||||
|
Diluted
|
74.9
|
81.3
|
87.5
|
||||||||||||||
Year
Ended December 31, 2008 Compared with Year Ended December 31, 2007
We sell
our premium mattresses and pillows through four distribution channels: Retail,
Direct, Healthcare, and Third party. The Retail channel sells to furniture and
bedding, specialty and department stores. The Direct channel sells directly to
consumers. The Healthcare channel sells to hospitals, nursing homes, healthcare
professionals and medical retailers. The Third party channel sells to
distributors in countries where we do not operate our own wholly-owned
subsidiaries. A summary of Net sales by channel is set forth
below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||
|
(in
millions)
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Retail
|
$ | 781.1 | $ | 920.0 | $ | 500.5 | $ | 625.9 | $ | 280.6 | $ | 294.1 | ||||||
|
Direct
|
47.6 | 79.7 | 39.7 | 68.8 | 7.9 | 10.9 | ||||||||||||
|
Healthcare
|
47.1 | 50.8 | 15.3 | 15.7 | 31.8 | 35.1 | ||||||||||||
|
Third
Party
|
52.0 | 56.2 | 15.2 | 14.9 | 36.8 | 41.3 | ||||||||||||
| $ | 927.8 | $ | 1,106.7 | $ | 570.7 | $ | 725.3 | $ | 357.1 | $ | 381.4 |
|
||||||
A summary
of Net sales by product is set forth below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||
|
(in
millions)
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Mattresses
|
$ | 631.4 | $ | 768.6 | $ | 412.3 | $ | 535.8 | $ | 219.1 | $ | 232.8 | ||||||
|
Pillows
|
117.9 | 142.1 | 50.8 | 68.3 | 67.1 | 73.8 | ||||||||||||
|
Other
|
178.5 | 196.0 | 107.6 | 121.2 | 70.9 | 74.8 | ||||||||||||
| $ | 927.8 | $ | 1,106.7 | $ | 570.7 | $ | 725.3 | $ | 357.1 | $ | 381.4 | |||||||
Net sales. Net
sales for the year ended December 31, 2008 decreased to $927.8 million from
$1,106.7 million, a decrease of $178.9 million, or 16.2%. The primary area of
sales weakness was in the U.S., coupled with a slowdown in certain European and
Asia-Pacific markets. For the twelve months ended December 31, 2008, our Retail
channel Net sales decreased to $781.1 million from $920.0 million in the same
period in 2007, a decrease of $138.8 million, or 15.1%. Our Direct channel Net
sales decreased to $47.6 million from $79.7 million for the same period in 2007,
a decrease of $32.2 million, or 40.3%. Our Healthcare channel Net sales
decreased to $47.1 million from $50.8 million for the same period in 2007, a
decrease of $3.8 million, or 7.4%. Our Third Party Net sales decreased to $52.0
million from $56.2 million for the same period in 2007, a decrease of $4.2
million, or 7.4%. The factors that impacted Net sales for each segment are
discussed below, in the respective segment discussion. We believe we are facing
a challenging economic environment, and are not assuming the economic climate
will recover in the short term.
Domestic.
Domestic Net sales for the year ended December 31, 2008 decreased to
$570.7 million from $725.3 million for the same period in 2007, a decrease of
$154.6 million, or 21.3%. Our Domestic Retail channel contributed $500.5 million
in Net sales for the twelve months ended December 31, 2008, a decrease of $125.4
million, or 20.0%, as compared to the same period in 2007. The macroeconomic
environment adversely impacted our Domestic Retail channel. Net sales in the
Direct channel decreased by $29.2 million, or 42.4%. The macroeconomic
environment also negatively impacted Net sales in the Direct channel. This
channel attracts customers more likely to have been adversely affected by the
economic environment, including decreased availability of consumer financing and
decreased consumer confidence. The Domestic Healthcare and Third Party channel
Net sales remained relatively flat, with a slight decrease of $0.4 million, or
2.9 %, to $15.3 million in the Healthcare channel and a slight increase of $0.4
million, or 2.7%, to $15.2 million in the Third Party channel. Our relationships
with healthcare companies who market joint product offerings through established
distribution channels have grown, offset by the elimination of certain small
Healthcare distributors.
As a
result of the macroeconomic environment, mattress sales decreased to $412.3
million for the twelve months ended December 31, 2008, a decrease of $123.4
million, or 23.0%, over the same period in 2007. This decline in Net sales is
due primarily to the deteriorating macroeconomic environment. Pillow sales also
decreased to $50.8 million, a decline of $17.6 million or 25.7%. As many of our
pillows are sold along with a mattress, when mattress sales decline, pillow
sales also are traditionally impacted. Other sales, which include adjustable
bedbases, foundations and other related products, decreased by $13.7 million, or
11.3%. This decrease is primarily related to the decrease in mattress sales, the
effects of which have been offset by the emphasized sales of adjustable
bedbases.
International. International
Net sales for the year ended December 31, 2008 decreased to $357.1 million from
$381.4 million for the same period in 2007, a decrease of $24.3 million, or
6.4%. On a constant currency basis, our International sales declined
approximately 11.4%. Our International segment was impacted by macroeconomic
factors, including decreased availability of consumer financing and decreased
consumer confidence, in certain European and Asia-Pacific markets, beginning
late in the second quarter and continuing into the remainder of the year. The
International Retail channel decreased $13.4 million, or 4.6%, for the twelve
months ended December 31, 2008. International mattress sales in 2008 decreased
$13.8 million, or 5.9%, compared to 2007. Pillow sales in 2008 decreased $6.6
million, or 9.0%, as compared to 2007.
Gross
profit. Gross profit for the year ended December 31, 2008 decreased to
$401.0 million from $534.8 million for the same period in 2007, a decrease of
$133.9 million, or 25.0%. Gross margin for the year ended December 31, 2008 was
43.2%, as compared to 48.3% in the same period of 2007. Several factors that
impacted our Gross profit margin during 2008 are identified and discussed below
in the respective segment discussion.
Domestic. Domestic Gross
profit for the year ended December 31, 2008 decreased to $207.7 million from
$316.4 million, a decrease of $108.7 million, or 34.4%. The Gross profit margin
in our Domestic segment was 36.4% and 43.6% for the year ended 2008 and 2007,
respectively. For the year ended December 31, 2008, the Gross profit margin in
the Domestic segment declined resulting from a combination of raw material cost
inflation, fixed cost de-leverage as a result of lower production volumes
related to the decrease in Net sales and our efforts to reduce inventories and
the impact of channel mix as there was a lower level of Direct channel Net sales
in 2008, which typically sells at a higher price than our Retail channel Net
sales at wholesale price. Toward the end of the fourth quarter of 2008, we
experienced a reduction in certain raw material pricing; however, the pricing at
the end of 2008 was still substantially higher when compared to same period in
2007. Our Domestic Cost of sales decreased to $363.0 million for the year ended
December 31, 2008 as compared to $408.9 million for the year ended December 31,
2007, a decrease of $45.9 million, or 11.2%.
International. International
Gross profit for the year ended December 31, 2008 decreased to $193.3 million
from $218.4 million, a decrease of $25.1 million, or 11.5%. The Gross profit
margin in our International segment was 54.1% and 57.3% for the years ended
December 31, 2008 and 2007, respectively. The Gross profit margin for our
International segment was impacted by raw material cost inflation and lower
production volumes related to the decrease in Net sales and our efforts to
reduce inventories. Toward the end of the fourth quarter of 2008, we experienced
a reduction in certain raw material pricing; however, the pricing at the end of
2008 was still substantially higher when compared to same period in 2007. Our
International Cost of sales increased to $163.8 million for the year ended
December 31, 2008, as compared to $163.0 million for the year ended December 31,
2007, an increase of $0.9 million, or 0.5%.
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 certain new product development costs,
including market research and testing for new products. Selling and marketing
expenses decreased to $172.3 million for the year ended December 31, 2008 as
compared to $193.5 million for the year ended December 31, 2007, a decrease of
$21.2 million, or 11.0%. Selling and marketing expenses as a percentage of Net
sales increased to 18.6% during 2008 from 17.5% for 2007. Our objective is
to align advertising costs to reflect our sales expectations. However during the
first quarter of 2008, much of our cost structure was in place and we were
limited in our ability to take actions to reduce our selling and marketing costs
to match our reduced sales levels. During the remainder of the year, we were
able to better align Selling and marketing expenses with our revised sales
expectations through leveraging advertising and cost control initiatives put in
place earlier in the year.
General,
administrative and other expenses. General and administrative expenses
include management salaries, information technology, professional fees,
depreciation of furniture and fixtures, leasehold improvements and computer
equipment, expenses for administrative functions and research and development
costs. General, administrative and other expenses decreased to $94.8 million for
the year ended December 31, 2008 as compared to $97.2 million for the year ended
December 31, 2007, a decrease of $2.4 million, or 2.5%. General, administrative
and other expenses as a percentage of Net sales increased to 10.2% for the year
ended December 31, 2008 as compared to 8.7% for the same period in 2007. For the
first quarter of 2008, with much of our cost structure in place, we were limited
in our ability to take action to reduce our General, administrative and other
expenses to match our reduced sales levels. During the remainder of the year, we
were able to decrease General, administrative and other expenses through cost
control initiatives to better align with our revised sales expectations. The
effects of these initiatives were offset by an increase in our bad debt expense
and stock-based compensation expense. Research and development expenses,
excluding product development, were $6.0 million and $5.9 million for 2008 and
2007, 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 $25.1 million for the year ended
December 31, 2008 as compared to $30.5 million for the year ended December 31,
2007, a decrease of $5.4 million, or 17.6%. This decrease in interest expense is
primarily attributable to a $182.7 million decrease in overall debt as well as a
decrease in interest rates. 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 $300.0 million of the outstanding balance as of December 31, 2008
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 will decline 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).
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 was 45.2% and 33.6% for the years ended December 31, 2008 and
2007, respectively. The increase primarily relates to an expense of $11.6
million incurred in connection with the repatriation of foreign earnings not
previously taxed in the U.S. In the fourth quarter of 2008, we completed the
first phase of a $150.0 million repatriation of foreign earnings and used a
portion of the proceeds to reduce our level of outstanding debt. We expect to
complete this repatriation program in 2009 and pay down additional
debt.
Our
effective income tax rate for the year ended December 31, 2008 differed from the
federal statutory rate principally due to the effect of the charge for the
repatriation, an increase to the reserve for uncertain tax benefits, certain
foreign tax rate differentials, state and local income taxes, deemed dividends
from foreign operations and the manufacturing activity deduction. Our
effective income tax rate for the year ended December 31, 2007 differed from the
federal statutory rate principally because of the elimination of certain
valuation allowances for net operating loss carry forwards, certain foreign tax
rate differentials, state and local income taxes, deemed dividends from foreign
operations and the manufacturing activity deduction.
On
October 24, 2007, we received an income tax assessment from the Danish Tax
Authority with respect to the 2001, 2002 and 2003 tax years. The
tax assessment relates to the royalty paid by one of Tempur-Pedic
International’s U.S. subsidiaries to a Danish subsidiary and the position taken
by the Danish Tax Authority could apply to subsequent years. The total tax
assessment is $39.3 million including interest and underpayment penalties. On
January 23, 2008 we filed timely complaints with the Danish National Tax
Tribunal denying the tax assessments. The National Tax Tribunal formally
agreed to place the Danish tax litigation on hold pending the outcome of
a Bilateral APA between the United States and the Danish Tax
Authority. A Bilateral APA involves an agreement between the IRS and the
taxpayer, as well as a negotiated agreement with one or more foreign competent
authorities under applicable income tax treaties. On August 8, 2008, we
filed the Bilateral APA with the IRS and the Danish Tax Authority. The IRS has
communicated to the Company their intent to begin analyzing the Bilateral APA in
the first quarter of 2009. We believe we have meritorious defenses to
the proposed adjustment and will oppose the assessment in the Danish courts, as
necessary. During 2008, the gross amount of unrecognized tax benefits
relating to this matter was increased by $2.2 million, of which $0.8 million
impacted the effective tax rate and $1.6 million was recorded as a component of
Goodwill as it related to periods prior to the acquisition of Tempur World, Inc.
on November 1, 2002 (Tempur Acquisition). In addition to the impact this matter
may have on the gross amount of the Company’s unrecognized tax benefits, it is
reasonably possible under FIN 48 that the amount of the total unrecognized tax
benefits may change in the next twelve months. An estimate of the
amount of such change cannot be made at this time.
Year
Ended December 31, 2007 Compared with Year Ended December 31, 2006
A summary
of Net sales by channel is set forth below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||
|
(in
millions)
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
|
Retail
|
$ | 920.0 | $ | 759.8 | $ | 625.9 | $ | 518.0 | $ | 294.1 | $ | 241.8 | ||||||
|
Direct
|
79.7 | 85.5 | 68.8 | 75.2 | 10.9 | 10.3 | ||||||||||||
|
Healthcare
|
50.8 | 45.2 | 15.7 | 12.6 | 35.1 | 32.6 | ||||||||||||
|
Third
Party
|
56.2 | 54.5 | 14.9 | 16.0 | 41.3 | 38.5 | ||||||||||||
| $ | 1,106.7 | $ | 945.0 | $ | 725.3 | $ | 621.8 | $ | 381.4 | $ | 323.2 | |||||||
A summary
of Net sales by product is set forth below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||
|
(in
millions)
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
|
Mattresses
|
$ | 768.6 | $ | 651.9 | $ | 535.8 | $ | 455.7 | $ | 232.8 | $ | 196.2 | ||||||
|
Pillows
|
142.1 | 126.5 | 68.3 | 60.1 | 73.8 | 66.4 | ||||||||||||
|
Other
|
196.0 | 166.6 | 121.2 | 106.0 | 74.8 | 60.6 | ||||||||||||
| $ | 1,106.7 | $ | 945.0 | $ | 725.3 | $ | 621.8 | $ | 381.4 | $ | 323.2 | |||||||
Net sales.
Net sales for the year ended December 31, 2007
increased to $1,106.7 million from $945.0 million, an increase of $161.7
million, or 17.1%. This increase in Net sales was primarily attributable to an
increase in mattress sales in our Retail channel. Mattress sales increased
$116.6 million or 17.9%. The growth in our Retail channel reflected our focus on
targeted penetration of furniture and bedding retail stores in both our Domestic
and International markets. We also added new product offerings to our existing
line in both our Domestic and International segments in 2007. Our Third party
and Healthcare channels increased 3.0% and 12.5%, respectively, while our
Direct channel decreased 6.7%.
Consolidated
pillow sales increased approximately $15.8 million or 12.5% for the year ended
December 31, 2007 as compared to the year ended December 31, 2006. Consolidated
other, which includes adjustable bedbases, foundations and other related
products, increased $29.3 million or 17.5%.
Domestic.
Domestic Net sales for the year ended December 31, 2007 increased to
$725.3 million from $621.8 million for the same period in 2006, an increase of
$103.6 million, or 16.7%. Our Domestic Retail channel delivered $625.9 million
in Net sales for 2007. This is an increase of $108.0 million, or 20.9% over the
prior year. The increase is primarily due to our efforts to increase
productivity in established accounts and selectively extend our distribution.
Domestic mattress sales increased $80.0 million, or 17.6%, in 2007 as compared
to 2006, as a result of growth in the Retail channel, in conjunction with the
successful launch of new products. In 2007, we introduced two new mattress
products, ‘The BellaSonnaBed by
Tempur-PedicTM’ and
‘The SymphonyBed by
Tempur-PedicTM’. Our
Direct channel decreased 8.5% primarily as a result of our Retail channel
expansion. Healthcare increased $3.1 million, or 24.7%, resulting from strategic
relationships with healthcare companies who market joint product offerings
through their established distribution networks. In addition, pillow sales
increased $8.2 million, or 13.7%, as a result of our continued focus on pillow
attach rates, emphasizing the benefits of a complete Tempur-Pedic sleep system,
as well as stand-alone pillow sales. The increase in our Other products is
generally in line with the growth of our mattress
business.
International.
International Net sales for the year ended December 31, 2007 increased to $381.4
million from $323.2 million for the same period in 2006, an increase of $58.1
million, or 18.0%. The International Retail channel Net sales increased $52.1
million, or 21.6%, for the year ended December 31, 2007 as a result of the
success of new products launched early in 2007 and improved productivity within
existing accounts. Net sales in our Third party channel increased
$2.8 million, an increase of 7.3%. Our Direct and Healthcare channels had Net
sales increases of 6.2% and 7.7%, respectively. International mattress sales
increased $36.6 million, or 18.6%, for 2007, related to growth of our Retail
channel. Pillow sales increased $7.5 million, or 11.4%, as compared to 2006,
attributable to the successful execution of our strategy to focus on pillow
sales. Other product sales increased $14.0 million, or 23.0%, attributable to
increased mattress sales and the success of our Scandinavian bed system. The
Scandinavian bed system is a product offering that is available in multiple
configurations, which include a mattress, a foundation and in some cases, an
adjustable bedbase.
Gross
profit. Gross profit for the year ended
December 31, 2007 increased to $534.8 million from $460.5 million for the same
period in 2006, an increase of $74.3 million, or 16.1%. Gross margin for the
year ended December 31, 2007 was 48.3%, as compared to 48.7% in the same period
of 2006.
Domestic.
Domestic Gross profit for the year ended December 31, 2007 increased to $316.4
million from $274.8 million, an increase of $41.6 million, or 15.1%. The Gross
profit margin in our Domestic segment was 43.6% and 44.2% for the year ended
2007 and 2006, respectively. For the year ended December 31, 2007, the Gross
profit margin for the Domestic segment was impacted by depreciation and start-up
costs associated with the opening of our Albuquerque, New Mexico production
facility and the expediting costs of certain raw materials related to product
shortages late in 2007, offset by productivity improvements at our manufacturing
facilities. Our Domestic Cost of sales increased to $408.9 million for the year
ended December 31, 2007 as compared to $347.0 million for the year ended
December 31, 2006, an increase of $62.0 million, or
17.9%.
International.
International Gross profit for the year ended December 31, 2007 increased
to $218.4 million from $185.7 million, an increase of $32.7 million, or 17.6%.
The Gross profit margin in our International segment was 57.3% and 57.4% for the
year ended 2007 and 2006, respectively. Our International Cost of sales
increased to $163.0 million for the year ended December 31, 2007, as compared to
$137.6 million for the year ended December 31, 2006, an increase of $25.4
million, or 18.5%.
Selling and
marketing expenses. Selling
and marketing expenses increased to $193.5 million for the year ended December
31, 2007 as compared to $171.8 million for the year ended December 31, 2006, an
increase of $21.8 million, or 12.7%. Selling and marketing expenses as a
percentage of Net sales decreased to 17.5% during 2007 from 18.2% for 2006. Our
objective is to increase advertising consistent with the growth rate of our Net
sales. However during 2007, our selling and marketing spend grew slower than our
Net sales growth as we were able to leverage the fixed cost component of our
selling and marketing expenses. We launched our new media campaign in the U.S.
during 2007. This campaign continued to be implemented in the U.S. during 2008.
Based on our analysis of the best ways to reach our target U.S. demographic
market, we have begun advertising on national network television. In
addition, we rolled out a similar new media campaign across many of our
international markets during 2008. For the year ended December 31, 2007, we
recognized $1.4 million of stock based compensation expense as compared to $0.4
million for the same period in 2006.
General,
administrative and other expenses. General,
administrative and other expenses increased to $97.2 million for the year ended
December 31, 2007 as compared to $79.4 million for the year ended December 31,
2006, an increase of 17.7 million, or 22.3%. General, administrative and other
expenses as a percentage of Net sales increased to 8.7% for the year ended
December 31, 2007 as compared to 8.4% for the same period in 2006. The increase
was primarily attributable to incremental stock-based compensation charges of
$4.5 million and bad debt expenses related to a U.S. customer seeking to
reorganize its operations under Chapter 11 of the Bankruptcy code. Included in
General, administrative and other expenses, research and development expenses
increased $2.2 million, or 59.0% for the same time period, related to our
continued investment in research and development
capabilities.
Interest expense,
net. Interest
expense, net, increased to $30.5 million for the year ended December 31, 2007 as
compared to $23.9 million for the year ended December 31, 2006, an increase of
$6.6 million, or 27.4%. This increase in interest expense is
primarily attributable to higher Long-term debt levels that are directly related
to our share repurchase program. During 2006 we also capitalized
interest costs of $5.2 million related to the construction of our new
manufacturing facility.
Income
tax provision. For the year ended
December 31, 2007, our Income tax provision included a benefit of $3.8 million
related to the elimination of certain valuation allowances for net operating
loss carry forwards in two foreign tax jurisdictions. Our effective tax rate was
33.6% and 35.7% for the years ended December 31, 2007 and 2006, respectively.
This decrease was primarily related to the elimination of certain valuation
allowances for net operating loss carry forwards in 2007. Our effective income
tax rate for the year ended December 31, 2007 differed from the federal
statutory rate principally due to the elimination of certain valuation
allowances for net operating loss carry forwards, certain foreign tax rate
differentials, state and local income taxes, deemed dividends from foreign
operations and the manufacturing activity deduction. Our effective
income tax rate for the year ended December 31, 2006 differed from the federal
statutory rate principally because of the benefit from the elimination of
certain tax reserves, certain foreign tax rate differentials, state and local
income taxes, valuation allowances on certain foreign net operating losses, and
compensation expense associated with certain stock options granted prior to the
initial public offering.
Liquidity
Our
principal sources of funds are cash flows from operations and
borrowings. Our principal uses of funds consist of payments of
principal and interest on our debt facilities, capital expenditures, payments of
dividends and share repurchases made from time to time pursuant to a share
repurchase program. At December 31, 2008, we had working capital of $82.4
million, including Cash and cash equivalents of $15.4 million as compared to
working capital of $200.0 million including $33.3 million in Cash and cash
equivalents as of December 31, 2007. Working capital decreased 58.8%
for the year ended December 31, 2008 compared to the same period in 2007,
primarily related to the decrease in Inventories and Accounts
receivable.
Our
cash flow from operations increased to $198.4 million for the year ended
December 31, 2008 as compared to $126.4 million for the year ended December 31,
2007. During 2008, we focused on driving working capital improvements to
maximize operating cash flow and increase our financial flexibility. The
increase in operating cash flow for the year ended December 31, 2008 was
primarily a result of reductions in Inventory and Accounts receivable. The
decrease in Inventory levels resulted in a cash inflow of approximately $45.8
million while the decrease in Accounts receivable resulted in a cash inflow of
approximately $51.2 million, the effects of which were offset by lower net
income and decreases in our Accounts payable.
Net
cash used in investing activities decreased to $5.4 million for the year ended
December 31, 2008 as compared to $22.9 million for the year ended December 31,
2007, a decrease of $17.5 million. Investing activities in the year ended
December 31, 2008 were significantly less than the year ended December 31, 2007,
as we completed the conversion of one third-party distributor to a wholly-owned
subsidiary in 2008 compared to two conversions in 2007 as well as cost control
initiatives that were implemented throughout 2008, which included lower levels
of spending on property, plant and equipment. Additionally, on December 24,
2008, we received cash of $7.1 million from the release of the escrow account
related to the acquisition of Tempur World, Inc. in November 2002, reflecting
final settlement of all amounts initially paid to escrow.
Cash
flow used by financing activities was $200.2 million for the year ended December
31, 2008 as compared to $87.6 million for the year ended December 31, 2007,
representing an increase in cash flow used of $112.5 million. The increase is
primarily related to our focus in 2008 to reduce our level of outstanding debt.
In the fourth quarter of 2008, we completed the first phase of a $150.0 million
repatriation of foreign earnings and used a portion of the proceeds to reduce
our level of outstanding debt. We expect to complete this repatriation program
in 2009 and pay down additional debt. In 2007, we utilized proceeds from our
revolving credit facility in order to repurchase shares of our own stock.
Additionally, in the fourth quarter of 2008, we suspended our quarterly dividend
payment in order to redirect the use of these funds in order to pay down
outstanding debt.
Capital
Expenditures
Reflecting
our continued focus on cash and initiatives to further strengthen financial
flexibility, capital expenditures totaled $10.5 million for year ended December
31, 2008 as compared to our initial 2008 capital expenditure budget of
$20.0 million. Capital expenditures totaled $16.1 million for the year ended
December 31, 2007. We currently expect our 2009 capital expenditures to be in
line with 2008, ranging from $10 to $15 million.
Debt
Service
On October 18,
2005, we entered into the 2005 Senior Credit Facility. The 2005 Senior
Credit Facility, as amended, consists of domestic and foreign credit facilities
that provide for the incurrence of debt up to an aggregate principal amount
of $640.0 million. Both the domestic and foreign credit facilities bear interest
at a rate equal to the 2005 Senior Credit Facility's applicable margin, in
accordance with a performance pricing grid, set forth in Amendment No. 3. We
also pay an annual facility fee on the total amount of the 2005 Senior
Credit Facility. The 2005 Senior Credit Facility contains certain financial
covenants and requirements, all of which we are in compliance with as of
December 31, 2008.
Our long-term debt
decreased to $419.3 million as of December 31, 2008 from $601.8 million as of
December 31, 2007. After giving
effect to $419.3 million in borrowings under the 2005 Senior Credit Facility and
letters of credit outstanding, total availability under the 2005 Senior Credit
Facility was $217.8 million as of December 31, 2008. In the fourth quarter of
2008, we completed the first phase of a $150.0 million repatriation of foreign
earnings and used a portion of the proceeds to reduce our level of outstanding
debt. We expect to complete this repatriation program in 2009 and pay down
additional debt. In connection with this repatriation program, we recognized
income tax expense of $11.6 million. Our repatriation program, one of several
initiatives to further strengthen our financial flexibility, has enabled us to
reduce debt and shift some of our Domestic segment leverage to the International
segment, thereby allowing for more rapid overall debt reduction going forward
from both Domestic and International segment operating cash
flows.
On
April 1, 2008, Tempur Production redeemed all outstanding Series 2005A Taxable
Variable Rate Industrial Revenue Bonds (Series A Bonds) in the amount of $57.8
million. The redemption price plus accrued interest was funded by a
$58.0 million borrowing under our domestic revolving credit facility. In
connection with the redemption, the letter of credit supporting the Series A
Bonds was retired, resulting in no additional indebtedness outstanding under the
2005 Senior Credit Facility.
The
interest rate and certain fees that we pay in connection with the 2005 Senior
Credit Facility are subject to periodic adjustment based on changes in our
consolidated leverage ratio. In May 2008, we entered into an interest rate
swap agreement to manage interest costs and the risk associated with changing
interest rates. Under this swap, we pay at a fixed rate and receive payments at
a variable rate. The swap effectively fixes the floating LIBOR-based interest
rate to 3.755% on $300.0 million of the outstanding balance as of December 31,
2008 under the 2005 Senior Credit Facility, with the outstanding balance subject
to the swap declining over time. The amount of the outstanding balance subject
to the swap declines as follows: to $300,000 on November 28, 2008 (through
November, 2009); to $200,000 on November 28, 2009 (through November, 2010) and
to $100,000 on November 28, 2010 (through November 28, 2011).
Stockholders’
Equity
Share
Repurchase Program. On January 25, 2007, our Board of Directors
authorized the repurchase of up to $100.0 million of our common stock. We
repurchased 3.8 million shares of our common stock for a total of $100.0 million
from the January 2007 authorization and completed purchases from this
authorization in June 2007. On July 19, 2007, our Board of Directors approved an
additional share repurchase authorization, to repurchase up to $200.0 million of
our common stock. We repurchased 6.6 million shares of our common stock for
approximately $200.0 million from the July 2007 authorization and have completed
purchases from this authorization. On October 16, 2007, our Board of Directors
authorized an additional share repurchase authorization of up to $300.0 million
of our common stock. Under the existing share repurchase authorization, we have
repurchased 0.7 million shares for a total of $19.9 million and have $280.1
million available for repurchase. No shares were repurchased during the year
ended December 31, 2008. Share repurchases under this program may be made
through open market transactions, negotiated purchases or otherwise, at times
and in such amounts as we deemed appropriate.
Dividend
Program. Our Board of Directors declared dividends in the first three
quarters of 2008 of $0.08 per common share. On October 16, 2008, we announced
that we would suspend the payment of the quarterly cash dividend and redirect
the use of those funds to reduce debt. The decision to pay a dividend is
reviewed quarterly and requires declaration by our Board of
Directors.
In
the first quarter of 2007, our Board of Directors approved an annual cash
dividend of $0.24 per common share annually, to be paid in quarterly
installments to the owners of our common stock. In the second quarter of 2007,
our Board of Directors increased the quarterly dividend to $0.08 per common
share.
Future
Liquidity Sources
Our
primary sources of liquidity are cash flow from operations and borrowings under
our Revolvers. We expect that ongoing requirements for debt service and capital
expenditures will be funded from these sources. As of December 31, 2008, we had
$419.3 million in total Long-term debt outstanding, and our Stockholders’ Equity
was $72.4 million. Our debt service obligations could, under certain
circumstances, have material consequences to our security holders. Total cash
interest payments related to our borrowings are expected to be approximately
$19.2 million in 2009.
Based
upon the current level of operations and anticipated growth, we believe that
cash generated from operations and amounts available under our Revolvers will be
adequate to meet our anticipated debt service requirements, capital
expenditures, share repurchases, dividend payments and working capital needs for
the foreseeable future. There can be no assurance, however, that our business
will generate sufficient cash flow from operations or that future borrowings
will be available under our 2005 Senior Credit Facility or otherwise enable us
to service our indebtedness or to make anticipated capital
expenditures.
Contractual
Obligations
Our
contractual obligations and other commercial commitments as of December 31, 2008
are summarized below:
|
Payment
Due By Period
|
||||||||||||||||||||||||||||
|
Contractual
Obligations
($
in millions)
|
2009
|
2010
|
2011
|
2012
|
2013
|
After
2013
|
Total
Obligations
|
|||||||||||||||||||||
|
Long-term
debt
|
$ | — | $ | — | $ | 419.3 | $ | — | $ | — | $ | 419.3 | ||||||||||||||||
|
Letters
of credit
|
2.9 | — | — | — | — | — | 2.9 | |||||||||||||||||||||
|
Interest
payments (1)
|
19.2 | 17.0 | 14.6 | 10.5 | — | — | 61.3 | |||||||||||||||||||||
|
Operating
leases
|
3.8 | 3.5 | 2.6 | 2.2 | 1.6 | 1.3 | 15.0 | |||||||||||||||||||||
|
Total
|
$ | 25.9 | $ | 20.5 | $ | 17.2 | $ | 432.0 | $ | 1.6 | $ | 1.3 | $ | 498.5 | ||||||||||||||
|
|
(1) Represents
interest payments under our debt agreements outstanding as of December 31,
2008, assuming debt outstanding as of the end of 2008 is not repaid until
debt matures in June 2012. Interest payments are calculated based on LIBOR
plus applicable margin in effect at December 31, 2008, after giving effect
to the interest rate swap agreement that was entered into in May 2008. The
interest rate swap converted a declining balance of our outstanding 2005
Senior Credit facility from a variable rate to a fixed rate. The actual
interest rates on the variable indebtedness incurred and the amount of our
indebtedness could vary from those used to compute the above interest
payment.
|
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 during 2008 and was the primary factor in a slowdown in the mattress
industry. In addition, our international segment experienced further weakening
as a result of certain consumer trends in several European markets. We expect
the economic environment in the U.S. and Europe to continue to be
challenging.
In
light of the macroeconomic environment, we took steps to further align our cost
structure with our anticipated level of Net sales as maintaining financial
flexibility is our primary short-term focus, and we made substantial progress
during 2008 in reducing our inventory, improving collections, lowering expenses
and paying down debt. During 2009, we expect to continue to pursue certain key
strategies including: maintain focus on premium mattresses and pillows and
regularly introduce new products; invest in increasing our global brand
awareness; extend our presence and improve our Retail account productivity;
invest in our operating infrastructure to meet the requirements of our business;
and take actions to further improve our financial flexibility and strengthen our
business.
Managing
Growth—We have grown rapidly, with our Net sales increasing from $221.5
million in 2001 to $1,106.7 million in 2007 and our Net sales were $927.8
million for the twelve months ended December 31, 2008. In the past, our growth
has placed, and will continue to place, a strain on our management, production,
product distribution network, information systems and other resources. In
response to these challenges, management has continued to enhance operating and
financial infrastructure. These expenditures, as well as expenditures for
advertising and other marketing-related activities, are made as the continued
growth in the business allows us the ability to invest. However, these
expenditures may be limited by lower than planned sales or an inflationary cost
environment.
Gross
Margins—Our gross margin is primarily impacted by the cost of raw
materials, operational efficiency, product and channel mix and volume incentives
offered to certain retail accounts. Future increases in raw material prices
could have a negative impact on our gross margin if we do not raise prices to
cover increased cost. Our gross margin can also be impacted by our operational
efficiencies, including the particular levels of utilization at our three
manufacturing facilities. Our margins are also impacted by the growth in our
Retail channel as sales in our Retail channel are at wholesale prices whereas
sales in our Direct channel are at retail prices. Additionally, our overall
product mix has shifted to mattresses and other products over the last several
years, which has impacted our gross margins because mattresses generally carry
lower margins than our pillows and are sold with lower margin products such as
foundations and bed frames.
Competition—Participants
in the mattress and pillow industries compete primarily on price, quality, brand
name recognition, product availability and product performance. We compete with
a number of different types of mattress alternatives, including standard
innerspring mattresses, other foam mattresses, waterbeds, futons, air beds and
other air-supported mattresses. These alternative products are sold through a
variety of channels, including furniture and bedding stores, specialty bedding
stores, department stores, mass merchants, wholesale clubs, telemarketing
programs, television infomercials, television advertising 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. Our
business may be affected by general business and economic conditions that could
have an impact on demand for our products. In addition, by expanding
distribution within our existing accounts, we believe we have the opportunity to
grow our business. By extending our product line, 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. Our products are currently sold in
approximately 6,700 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 December 31, 2008, we had $419.3 million of Long-term debt
outstanding, and our Stockholders’ Equity was $72.4 million. Higher financial
leverage makes us more vulnerable to general adverse competitive, economic and
industry conditions. Our recent repatriation of foreign earnings, suspending our
quarterly cash dividend, and modest debt rebalancing between our domestic and
international segments, together with productivity improvements and cost
containment initiatives should enable us to decrease our financial leverage and
increase our financial flexibility. There can be no assurance, however, that our
business will generate sufficient cash flow from operations or that future
borrowing will be available under our 2005 Senior Credit
Facility.
Exchange
Rates—As a multinational company, we conduct our business in a wide
variety of currencies and are therefore subject to market risk for changes in
foreign exchange rates. We use foreign exchange forward contracts to manage a
portion of the 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 7A. Quantitative and Qualitative
Disclosures About Market Risk—Foreign Currency Exposures” under Part II of this
report.
Foreign
currency exchange rate movements also create a degree of risk by affecting the
U.S. dollar value of sales made and costs incurred in foreign currencies.
Consequently, our reported earnings and financial position could fluctuate
materially as a result of foreign exchange gains or losses. Our outlook for 2009
assumes no significant variances to the currency exchange rates experienced
over the course of the fourth quarter of 2008. However, our 2009 outlook assumes
a a negative foreign currency impact compared to the full year 2008. Should
currency rates change sharply, our results could be negatively impacted. See
“ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk—Foreign
Currency Exposures” under Part II of this report.
Our
management is responsible for our financial statements and has evaluated the
accounting policies to be used in their preparation. Our management believes
these policies are reasonable and appropriate. The following discussion
identifies those accounting policies that we believe are critical in the
preparation of our financial statements, the judgments and uncertainties
affecting the application of those policies and the possibility that materially
different amounts will be reported under different conditions or using different
assumptions.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires that management make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
commitments and contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Our
actual results could differ from those estimates.
Revenue
Recognition—Sales of product are recognized when persuasive evidence of
an arrangement exists, products are shipped and title passes to customers and
the risks and awards of ownership are transferred, the sales price is fixed or
determinable and collectability is reasonably assured. We extend volume
discounts to certain customers and reflect these amounts as a reduction of Net
sales.
Our
estimates of sales returns are a critical component of our revenue recognition.
We recognize sales, net of estimated returns, when we ship our products to
customers and the risks and rewards of ownership are transferred to them.
Estimated sales returns are provided at the time of sale, based on our level of
historical sales returns. We allow returns for up to 120 days following a sale,
depending on the channel and promotion. Our level of sales returns differs by
channel, with our Direct channel typically experiencing the highest rate of
returns. Our level of returns has been consistent with our estimates and has
been improving steadily over the last year as our Retail channel, which
experiences lower returns than other sales channels, continues to grow as a
percentage of overall Net sales.
We
do not recognize revenue unless collectability is reasonably assured at the time
of sale. We extend credit based on the creditworthiness of our
customers, and generally no collateral is required at the time of
sale. Our allowance for doubtful accounts is our best estimate of the
amount of probable credit losses in our existing accounts
receivable. We regularly review the adequacy of our allowance for
doubtful accounts. We determine the allowance based on historical
write-off experience and current economic conditions and also consider 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. Historically, less than 1% of Net sales
ultimately prove to be uncollectible. Account balances are charged
off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote.
Warranties—Cost
of sales includes estimated costs to service warranty claims of our customers.
Our estimate is based on our historical claims experience and extensive product
testing that we perform from time to time. We provide 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. Because our products have not been in use by our
customers for the full warranty period, we rely on the combination of historical
experience and product testing for the development of our estimate for warranty
claims. Our estimate of warranty claims could be adversely affected if our
historical experience differs materially from the performance of the product in
our product testing. We also provide 2-year to 3-year warranties on pillows.
Estimated future obligations related to these products are provided by charges
to operations in the period in which the related revenue is
recognized.
Long-Lived Assets –
The cost of plant and equipment is depreciated principally by the
straight-line method over the estimated useful lives of the
assets. Useful lives are based on historical experience and are
adjusted when changes in planned use, technological advances or other factors
show that a different life would be more appropriate. Such costs are
periodically reviewed for recoverability when impairment indicators are
present. Such indicators include, among other factors, operating
losses, unused capacity, market value declines and technological
obsolescence. Recorded values of property, plant and equipment that
are not expected to be recovered through undiscounted future net cash flows are
written down to current fair value, which generally is determined from estimated
discounted future net cash flows (assets held for use) or net realizable value
(assets held for sale).
Goodwill and
intangible assets with indefinite lives are subject to annual impairment test as
of October 1 and whenever events or circumstances make it more likely than not
that impairment may have occurred. Such tests are completed
separately with respect to the goodwill of each of our reporting
units. Because market prices of our reporting units are not readily
available, we make various estimates and assumptions in determining the
estimated fair values of those units. Fair value is based on an
income approach with an appropriate risk adjusted discount rate and a market
approach. Significant assumptions inherent in the methodologies are employed and
include such estimates as royalty and discount rates. The use of alternative
estimates or adjusting the discount rate could affect the estimated fair value
of the assets and potentially result in impairment.
The
most recent annual impairment tests indicated that the fair values of each of
our reporting units were in excess of their carrying values. Despite that
excess, however, impairment charges could still be required if a divestiture
decision were made or other significant economic event were made or occurred
with respect to one of our reporting units. Subsequent to our October
1, 2008 annual impairment test, no indications of an impairment were
identified.
Income Taxes
— Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”
(SFAS 109). SFAS 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities. These deferred taxes are
measured by applying the provisions of tax laws in effect at the balance sheet
date.
We
recognize deferred tax assets in our Consolidated Balance Sheets, and these
deferred tax assets typically represent items deducted currently from operating
income in the financial statements that will be deducted in future periods in
tax returns. In accordance with SFAS 109, a valuation allowance is recorded
against these deferred tax assets to reduce the total deferred tax assets to an
amount that will, more likely than not, be realized in future periods. The
valuation allowance is based, in part, on our estimate of future taxable income,
the expected utilization of tax loss carryforwards, both domestic and foreign,
and the expiration dates of tax loss carryforwards. Significant assumptions are
used in developing the analysis of future taxable income for purposes of
determining the valuation allowance for deferred tax assets which, in our
opinion, are reasonable under the circumstances. At December 31, 2008, we have
provided valuation allowances for all subsidiaries in a cumulative three year
loss position.
Our
consolidated effective income tax rate and related tax reserves are subject to
uncertainties in the application of complex tax regulations from numerous tax
jurisdictions around the world. We recognize liabilities for anticipated
taxes in the U.S. and other tax jurisdictions based on our estimate of whether,
and the extent to which, taxes are and could be due as required by FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).
FIN 48 prescribes a recognition threshold and measurement attributes for the
financial statement recognition and measurements of a tax position taken or
expected to be taken in a tax return. The resolution of tax matters for an
amount that is different than the amount reserved would be recognized in our
effective income tax rate during the period in which such resolution
occurs.
Stock-Based
Compensation—We follow SFAS No. 123R, “Share-Based Payment” (SFAS 123R),
which is a revision of SFAS 123, “Accounting for Stock Based Compensation” (SFAS
123). SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their grant date fair values. Pro forma disclosure is no longer an
alternative to financial statement recognition. See “ITEM 8. Financial
Statements and Supplementary Data - Note 8 in the Notes to Consolidated
Financial Statements” in Part II of this report for further discussion of
stock-based compensation.
Derivative
instruments—We follow SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities (as amended)” (SFAS 133). In accordance with
this standard, derivative instruments are recorded on the balance sheet as
either an asset or liability measured at its fair value. Changes in the fair
value of derivative instruments are either recognized in income immediately to
offset the gain or loss on the hedged item, or deferred and recorded in
Stockholders’ Equity as a component of Accumulated other comprehensive income.
The ineffective portion of the change in fair value of a hedge is recognized in
income immediately. The Company has designated an interest rate swap that
effectively fixes the floating LIBOR-based interest rate on a declining balance
of the 2005 Senior Credit Facility as a cash flow hedge. See Note 4 of the Notes
to the Consolidated Financial Statements for more information on the
Company’s interest rate swap.
See
“ITEM 8. Financial Statements and Supplementary Data - Note 2 of the Notes to
Consolidated Financial Statements” in Part II of this report for a full
description of recent accounting pronouncements, including the expected dates of
adoption and estimated effects on results of operations and financial condition,
which is incorporated herein by reference.
Our
earnings, as a result of our global operating and financing activities, are
exposed to changes in foreign currency exchange rates, which may adversely
affect our results of operations and financial position. Our outlook for
2009 assumes no significant variance from the foreign currency exchange
rates experienced over the course of the fourth quarter of 2008.
However, our 2009 outlook assumes a negative foreign currency impact compared to
the full year 2008. 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 December 31, 2008,
resulting from a hypothetical 10% adverse change in all foreign currency
exchange rates against the U.S. dollar, is approximately $0.01
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.
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 December 31, 2008, after
giving effect to our interest rate swap agreement, we had variable-rate debt of
approximately $119.3 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 $1.2 million.
The
financial statements required by this item are included in Part IV, ITEM 15 of
this report and are presented beginning on page 41.
None.
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 December 31, 2008 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 rules and forms of the SEC 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.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance of achieving
their control objectives.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in
Internal Control—Integrated Framework. Based on our assessment and those
criteria, management believes that we maintained effective internal control over
financial reporting as of December 31, 2008.
Our
independent registered public accounting firm, Ernst & Young LLP, has issued
a report on our internal controls over financial reporting as of December
31, 2008. That report appears on page 39 of this report.
There
have not been any changes in our internal control over financial reporting
during the quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
The
Board of Directors and Shareholders of Tempur-Pedic International Inc. and
Subsidiaries
We
have audited Tempur-Pedic International Inc. and Subsidiaries’ internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Tempur-Pedic
International Inc. and Subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying “Management’s Annual Report on Internal Control Over Financial
Reporting.” Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed 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. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Tempur-Pedic International Inc. and
Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on the COSO criteria.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Tempur-Pedic International Inc. and Subsidiaries as of December 31, 2008 and
2007, and the related consolidated statements of income, stockholders’ equity,
and cash flows for each of the three years in the period ended December 31,
2008, and our report dated February 11, 2009, expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Louisville,
Kentucky
February
11, 2009
None.
PART
III
We
have adopted a Code of Business Conduct and Ethics within the meaning of Item
406(b) of Regulation S-K. The Code applies to our employees, executive officers
and directors. Our Code of Business Conduct and Ethics is publicly available on
our website at http://tpx.client.shareholder.com. If
we make substantive amendments to our Code of Business Conduct and Ethics or
grant any waiver, including any implicit waiver, we will disclose the nature of
such amendment or waiver on our website or in a report on Form 8-K within four
business days of such amendment or waiver.
As
required by Section 303A.12(a) of the New York Stock Exchange Listed Company
Manual, we have filed our 2007 Domestic Company Section 303A Annual CEO
Certification with the NYSE and there were no qualifications. This
certifies that our Chief Executive Officer is not aware of any violation by the
Company of the NYSE corporate governance listing standards. We also filed
our Sarbanes-Oxley Section 302 Certifications regarding the quality of the
Company's public disclosure with this Form 10-K and with our Form 10-K for the
period ended December 31, 2007.
Except
for the information set forth above, the information required by this Item is
incorporated herein by reference from our definitive proxy statement for the
2009 Annual Meeting of Stockholders (Proxy Statement) under the sections
entitled “Proposal One—Election of Directors,” and “Board of Directors’
Meetings, Committees of the Board and Related Matters—Committees of the Board” —
“Corporate Governance,” —“Policies
Governing Director Nominations,” and “Executive Compensation and Related
Information” and — Section 16(a) Beneficial Ownership Reporting
Compliance.”
Information
relating to executive officers is set forth in Part I of this report following
ITEM 1 under the caption “Executive Officers of the Registrant.”
The
information required by this Item is incorporated by reference from the Proxy
Statement under the sections entitled “Executive Compensation and Related
Information.”
The
information required by this Item is incorporated by reference from the Proxy
Statement under the section entitled “Principal Security Ownership and Certain
Beneficial Owners” and “Equity Compensation Plan Information.”
The
information required by this Item is incorporated by reference from the Proxy
Statement under the section entitled “Executive Compensation and Related
Information—Certain Relationships and Related Transactions” and – “Directors’
Independence.”
The
information required by this Item is incorporated by reference from the Proxy
Statement under the sections entitled “Proposal Two— Ratification of Independent
Auditors —Fees for Independent Auditors During Fiscal Year Ended December 31,
2008” and “—Policy on Audit Committee Pre-Approval of Audit and Non-Audit
Services of Independent Auditor.”
PART
IV
(a)
|
1.
|
Financial
statements:
|
|
| Report of Ernst & Young LLP, Independent Registered Public Accounting Firm | ||
| Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006 | ||
| Consolidated Balance Sheets as of December 31, 2008 and 2007 | ||
| Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007, and 2006 | ||
| Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006 | ||
| Notes to Consolidated Financial Statements | ||
|
2.
|
Financial
Statement Schedule:
|
|
| Schedule II - Valuation of Qualifying Accounts and Reserves | ||
All other
schedules have been omitted because they are inapplicable, not required, or the
information is included elsewhere in the consolidated financial statements or
notes thereto.
| 3. |
Exhbits:
|
|
The
following is an index of the exhibits included in this report or incorporated
herein by reference.
EXHIBIT
INDEX
|
2.1
|
Agreement
and Plan of Merger dated as of October 4, 2002, among Fagerdala Holding
B.V., Fagerdala Industri A.B., Chesterfield Properties Limited, Viking
Investments S.a.r.l., Robert B. Trussell, Jr., David C. Fogg, Jeffrey
P. Heath, H. Thomas Bryant, Tempur-Pedic International Inc., TWI
Acquisition Corp. and Tempur World, Inc. (1)
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of Tempur-Pedic International
Inc. (2)
|
|
|
3.2
|
Amended
and Restated By-laws of Tempur-Pedic International Inc. (2)
Second Amended and Restated By-laws of
Tempur-Pedic International Inc. (13)
Third Amended and Restated By-laws of Tempur-Pedic
International Inc. (21)
|
|
|
4.1
|
Specimen
certificate for shares of common stock. (2)
|
|
|
10.1
|
Credit
Agreement, dated as of October 18, 2005, among Tempur-Pedic, Inc., Tempur
Production USA, Inc., Dan-Foam ApS, certain other subsidiaries of
Tempur-Pedic International, Inc., Banc of America, N.A., as administrative
agent, Nordea Bank Denmark A/S, Suntrust Bank, and Fifth Third Bank.(8)
|
|
|
10.2
|
Amendment
No 1 to Credit Agreement, dated as of February 8, 2006, among
Tempur-Pedic, Inc., Tempur Production USA, Inc., Dan-Foam ApS, certain
other subsidiaries of Tempur-Pedic International, Inc., Banc of America,
N.A., as administrative agent, Nordea Bank Denmark A/S, Suntrust Bank, and
Fifth Third Bank.(9)
|
|
|
10.3
|
Amendment
No. 2 to Credit Agreement dated as of December 13, 2006, among
Tempur-Pedic, Inc., Tempur Production USA, Inc., Dan-Foam ApS,
Tempur-Pedic International, Inc., Tempur World LLC, and Tempur World
Holdings, LLC and certain other subsidiaries as guarantors, Bank of
America, N.A., Nordea Bank Danmark A/S, Fifth Third Bank, SunTrust Bank,
JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (12)
|
|
|
10.4
|
Trust
Indenture, dated September 1, 2005, by and between Bernalillo County and
The Bank of New York Trust Company, N.A., as Trustee.(8)
|
|
|
10.5
|
Lease
Agreement, dated September 1, 2005, by and between Bernalillo County and
Tempur Production USA, Inc.(8)
|
|
|
10.6
|
Bond
Purchase Agreement, dated October 26, 2005, by and among Banc of America
Securities LLC, Tempur Production USA, Inc. and Bernalillo County.(8)
|
|
|
10.7
|
Bond
Purchase Agreement, dated October 26, 2005, by and among Tempur World LLC,
Tempur Production USA, Inc. and Bernalillo County.(8)
|
| 10.8 |
Remarketing
and Interest Services Agreement, dated September 1, 2005, by and between
Tempur Production USA, Inc. and Banc of America Securities LLC.(8)
|
|
|
10.9
|
Mortgage,
Assignment, Security Agreement and Fixture Filing, dated as of October 27,
2005, by and between Bernalillo County and Tempur Production USA,
Inc.(8)
|
|
|
10.10
|
Registration
Rights Agreement dated as of November 1, 2002, among Tempur-Pedic
International Inc., Friedman Fleischer & Lowe Capital Partners, LP,
FFL Executive Partners, LP, TA IX, L.P., TA/Atlantic and Pacific IV, L.P.,
TA Strategic Partners Fund A L.P., TA Strategic Partners Fund B L.P.,
TA/Advent VIII L.P., TA Investors LLC, TA Subordinated Debt Fund, L.P.,
Gleacher Mezzanine Fund I, L.P., Gleacher Mezzanine Fund P, L.P. and the
investors listed on Schedule I thereto. (1)
|
|
|
10.11
|
Tempur-Pedic
International Inc. 2002 Stock Option Plan. (1)(23)
|
|
|
10.12
|
Amended
and Restated Tempur-Pedic International Inc. 2003 Equity Incentive Plan.
(18)(23)
|
|
|
10.13
|
Tempur-Pedic
International Inc. 2003 Employee Stock Purchase Plan. (2)(23)
|
|
|
10.14
|
Employment
Agreement dated September 12, 2003, between Tempur International Limited
and David Montgomery. (3)(23)
|
|
|
10.15
|
Stock
Option Agreement dated as of July 13, 2004 between Tempur-Pedic
International Inc. and Sir Paul Judge. (4)(23)
|
|
|
10.16
|
Stock
Option Agreement dated as of March 12, 2004 between Tempur-Pedic
International Inc. and Nancy F. Koehn. (5)(23)
|
|
|
10.17
|
Stock
Option Agreement dated as of September 30, 2003 between Tempur-Pedic
International Inc. and Robert B. Trussell, Jr. (6)(23)
|
|
|
10.18
|
Stock
Option Agreement dated as of February 24, 2003 between Tempur-Pedic
International Inc. and David Montgomery. (6)(23)
|
|
|
10.19
|
Employment
and Noncompetition Agreement dated as of December 1, 2004, between
Tempur-Pedic International Inc. and Matthew D. Clift. (7)(23)
|
|
|
10.20
|
Option
Agreement dated as of December 1, 2004 between Tempur-Pedic International
Inc. and Matthew D. Clift. (7)(23)
|
|
|
10.21
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Matthew D. Clift.(12)(23)
|
|
|
10.22
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Sir Paul Judge. (12)(23)
|
|
|
10.23
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Nancy F. Koehn.(12)(23)
|
|
10.24
|
Stock Option Agreement dated May 2, 2005 between Tempur-Pedic International Inc. and Bhaskar Rao.(10)(23) |
|
10.25
|
Stock Option Agreement dated October 25, 2005 between Tempur-Pedic International Inc. and Bhaskar Rao.(10)(23) | |
|
10.26
|
Stock Option Agreement dated February 16, 2006 between Tempur-Pedic International Inc. and Bhaskar Rao.(10)(23) |
|
10.27
|
Stock Option Agreement dated May 11, 2006 between Tempur-Pedic International Inc. and Bhaskar Rao.(10)(23) |
|
10.28
|
Stock
Option Agreement dated June 28, 2006 between Tempur-Pedic International
Inc. and David Montgomery.(10)(23)
|
|
|
10.29
|
Stock Option Agreement dated June 28, 2006 between Tempur-Pedic International Inc. and Dale E. Williams.(10)(23) | |
|
10.30
|
Form of Stock Option Agreement under the 2003 Equity Incentive Plan.(10)(23) | |
|
10.31
|
Employment Agreement dated as of July 18, 2006 between Tempur-Pedic International Inc. and Richard Anderson.(11)(23) | |
|
10.32
|
Amendment
No. 3 to Credit Agreement dated as of June 8, 2007 by and among Tempur
World LLC, Tempur Production USA,Inc., Dan-Foam Aps, Tempur-Pedic
International Inc. and certain other subsidiaries as guarantors, Bank of
America, N.A., Nordea Bank, Danmark A/S, Fifth Third Bank, Sun Trust Bank,
JD Morgan Chase Bank, N.A., Wells Fargo Bank, N.A., National City Bank and
Regions Bank .(14)
|
|
|
10.33
|
Modification Agreement dated as of November 30, 2007, among Tempur World LLC, Tempur Production USA, Inc., Dan-Foam Aps, Tempur-Pedic International Inc., Tempur World Holdings, LLC and Tempur Danmark A/S and certain other subsidiaries as guarantors, Bank of America, N.A. and Nordea Bank Danmark A/S. (15) | |
| 10.34 | Amended and Restated Employment Agreement dated March 5, 2008 by and among Tempur-Pedic International Inc., Tempur World, LLC and Dale E. Williams.(16)(23) | |
| 10.35 |
Stock
Option Agreement dated February 5, 2008 between Tempur-Pedic
International, Inc. and Richard Anderson. (17)(23)
|
|
| 10.36 |
Employment
and Noncompetition Agreement dated as June 30, 2008, between Tempur-Pedic
International Inc. and Mark Sarvary. (20)(23)
|
|
| 10.37 |
Stock
Option Agreement dated June 30, 2008 between Tempur-Pedic International
Inc. and Mark Sarvary. (20)(23)
|
|
| 10.38 |
Form
of Stock Option Agreement under the 2003 Equity Incentive Plan
(Optionee).(10)(23)
|
|
| 10.39 |
Form
of Stock Option Agreement under the 2003 Equity Incentive Plan (EVP).
(19)(23)
|
|
| 10.40 |
Form
of Stock Option Agreement under the Amended and Restated 2003 Equity
Incentive Plan (Director). (23)
|
|
|
21.1
|
Subsidiaries
of Tempur-Pedic International Inc.
|
|
|
23.1
|
Consent
of Ernst & Young LLP.
|
|
|
24.1
|
Power of Attorney of Tempur-Pedic International Inc. (included on the signature pages hereof). | |
|
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. | |
|
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.
|
|
|
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.
|
|
(1)
|
Incorporated
by reference from the Registrant’s registration statement on Form S-4
(File No. 333-109054-02) filed with the Commission on September 23,
2003.
|
|
|
(2)
|
Incorporated
by reference from Amendment No. 3 to the Registrant’s registration
statement on Form S-1 (File No. 333-109798) filed with the Commission on
December 12, 2003.
|
|
|
(3)
|
Incorporated
by reference from Amendment No. 1 to the Registrant’s registration
statement on Form S-4 (File No. 333-109054-02) filed with the Commission
on October 30, 2003.
|
|
|
(4)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on November 2, 2004.
|
|
|
(5)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on May 17, 2004.
|
|
|
(6)
|
Incorporated
by reference from Amendment No. 1 to the Registrant’s registration
statement on Form S-4 (File No. 333-120151) filed with the Commission on
November 9, 2004.
|
|
|
(7)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on December 2, 2004.
|
|
|
(8)
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-K filed with
the Commission on March 14, 2006.
|
|
|
(9)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on May 8, 2006.
|
|
|
(10)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on August 8, 2006.
|
|
|
(11)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on November 7, 2006.
|
|
|
(12)
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-K filed with
the Commission on February 28, 2007.
|
|
|
(13)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on October 18, 2007.
|
|
|
(14)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on June 11, 2007.
|
|
|
(15)
|
Incorporated
by reference from the Registrant’s Current Report on Form 10-K filed with
the Commission on February 29, 2008.
|
|
|
(16)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on March 7, 2008.
|
|
|
(17)
|
Incorporated
by reference from Registrant’s Quarterly Report on Form 10-Q filed with
the Commission on May 6, 2008.
|
|
|
(18)
|
Incorporated
by reference from the Registrant’s Definitive Proxy Statement on Schedule
14(a) filed with the Commission on March 24, 2008.
|
|
|
(19)
|
Incorporated
by reference from the Registrant’s Current Report on From 8-K filed with
the Commission on May 19, 2008.
|
|
|
(20)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on June 30, 2008.
|
|
|
(21)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on October 27, 2008.
|
|
|
(22)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on October 29, 2008.
|
|
|
(23)
|
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 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 or the Securities Exchange Act of
1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any filings.
|
|
Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
TEMPUR-PEDIC
INTERNATIONAL INC.
(Registrant)
|
||||
|
Date:
February 12, 2009
|
By:
|
/s/ MARK
SARVARY
|
||
|
Mark
Sarvary
Chief
Executive Officer and
President
|
||||
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on the 12th of
February, 2009, on behalf of the registrant and in the capacities
indicated.
|
Signature
|
|
Capacity
|
|
/S/
MARK SARVARY
|
President,
Chief Executive Officer (Principal Executive Officer) and
Director
|
|
|
Mark
Sarvary
|
|
|
|
/S/
DALE E. WILLIAMS
|
Executive
Vice President, Chief Financial Officer and
Secretary (Principal Financial Officer)
|
|
|
Dale
E. Williams
|
|
|
|
/S/
BHASKAR RAO
|
Chief
Accounting Officer and Vice President of Strategic
Planning (Principal Accounting Officer)
|
|
|
Bhaskar
Rao
|
|
|
|
/S/
H. THOMAS BRYANT
|
Director
|
|
|
H.
Thomas Bryant
|
||
|
/S/
FRANCIS A. DOYLE
|
Director
|
|
|
Francis
A. Doyle
|
|
|
|
/S/
PETER K. HOFFMAN
|
Director
|
|
|
Peter
K. Hoffman
|
|
|
|
/S/
JOHN A. HEIL
|
Director
|
|
|
John
A. Heil
|
||
|
/S/
NANCY F. KOEHN
|
Director
|
|
|
Nancy
F. Koehn
|
|
|
|
/S/
SIR PAUL JUDGE
|
Director
|
|
|
Sir
Paul Judge
|
|
|
|
/S/
CHRISTOPHER A. MASTO
|
Director
|
|
|
Christopher
A. Masto
|
|
|
|
/S/
P. ANDREWS MCLANE
|
Director
|
|
|
P.
Andrews McLane
|
|
|
|
/S/
ROBERT B. TRUSSELL, JR.
|
Director
|
|
|
Robert
B. Trussell, Jr.
|
|
|
INDEX TO HISTORICAL
FINANCIAL STATEMENTS
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7
|
|
The
Board of Directors and Shareholders of Tempur-Pedic International Inc. and
Subsidiaries
We have
audited the accompanying consolidated balance sheets of Tempur-Pedic
International Inc. and Subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2008.
Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Tempur-Pedic
International Inc. and Subsidiaries at December 31, 2008 and 2007, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As
discussed in Note 10 to the consolidated financial statements, effective January
1, 2007, Tempur-Pedic International Inc. and Subsidiaries adopted Financial
Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No.
109.” Also as discussed in Note 1 to the consolidated
financial statements, effective January 1, 2006, Tempur-Pedic International Inc.
and Subsidiaries adopted Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payments”
using the modified-prospective transition method.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Tempur-Pedic International Inc. and
Subsidiaries’ internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 11, 2009, expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Louisville,
Kentucky
February
11, 2009
|
Year
Ended December 31,
|
|||||||||
|
2008
|
2007
|
2006
|
|||||||
|
Net
sales
|
$
|
927,818
|
$
|
1,106,722
|
$
|
945,045
|
|||
|
Cost
of sales
|
526,861
|
571,896
|
484,507
|
||||||
|
Gross
profit
|
400,957
|
534,826
|
460,538
|
||||||
|
Selling
and marketing expenses
|
172,350
|
193,574
|
171,787
|
||||||
|
General,
administrative and other expenses
|
94,743
|
97,138
|
79,446
|
||||||
|
Operating
income
|
133,864
|
244,114
|
209,305
|
||||||
| Other expense, net: | |||||||||
| Interest expense, net |
(25,123
|
) |
(30,484
|
) |
(23,920
|
) | |||
| Loss on extinguishment of debt |
—
|
—
|
(10,722
|
) | |||||
| Other (expense) income, net |
(1,319
|
) |
(756
|
) |
102
|
||||
| Total other expense |
(26,442
|
) |
(31,240
|
) |
(34,540
|
) | |||
|
Income
before income taxes
|
107,422
|
212,874
|
174,765
|
||||||
|
Income
tax provision
|
48,554
|
71,415
|
62,443
|
||||||
|
Net
income
|
$
|
58,868
|
$
|
141,459
|
$
|
112,322
|
|||
|
Earnings
per common share:
|
|||||||||
|
Basic
|
$
|
0.79
|
$
|
1.77
|
$
|
1.32
|
|||
|
Diluted
|
$
|
0.79
|
$
|
1.74
|
$
|
1.28
|
|||
|
Cash
dividend per common share
|
$
|
0.24
|
$
|
0.30
|
$
|
—
|
|||
|
Weighted
average common shares outstanding:
|
|||||||||
|
Basic
|
74,737
|
79,831
|
84,922
|
||||||
|
Diluted
|
74,909
|
81,256
|
87,530
|
||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
|
|||||||
|
Current
Assets:
|
|
|||||||
|
Cash
and cash equivalents
|
|
$
|
15,385
|
$
|
33,315
|
|||
|
Accounts
receivable, net
|
|
99,811
|
163,730
|
|||||
|
Inventories
|
|
60,497
|
106,533
|
|||||
|
Prepaid
expenses and other current assets
|
|
9,233
|
11,133
|
|||||
|
Deferred
income taxes
|
|
11,888
|
11,924
|
|||||
|
Total
Current Assets
|
|
196,814
|
326,635
|
|||||
|
Property,
plant and equipment, net
|
|
185,843
|
208,370
|
|||||
|
Goodwill
|
|
192,569
|
198,286
|
|||||
|
Other
intangible assets, net
|
|
66,823
|
68,755
|
|||||
|
Deferred
financing costs and other non-current assets
|
|
4,482
|
4,386
|
|||||
|
Total
Assets
|
|
$
|
646,531
|
$
|
806,432
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|||||||
|
Current
Liabilities:
|
|
|||||||
|
Accounts
payable
|
|
$
|
41,355
|
$
|
56,206
|
|||
|
Accrued
expenses and other current liabilities
|
|
65,316
|
66,080
|
|||||
|
Income
taxes payable
|
7,783
|
4,060
|
||||||
|
Current
portion of long-term debt
|
|
—
|
288
|
|||||
|
Total
Current Liabilities
|
|
114,454
|
126,634
|
|||||
| Long-term debt |
419,341
|
601,756
|
||||||
| Deferred income taxes |
28,371
|
29,645
|
||||||
| Other non-current liabilities |
11,922
|
259
|
||||||
|
Total
Liabilities
|
|
574,088
|
758,294
|
|||||
|
Commitments
and Contingencies (see Note 9)
|
|
|||||||
|
Stockholders’
Equity:
|
|
|||||||
|
Common
stock, $0.01 par value, 300,000 shares authorized; 99,215
shares issued
as of December 31, 2008 and 2007
|
|
992
|
992
|
|||||
|
Additional
paid in capital
|
|
291,018
|
283,564
|
|||||
|
Retained
earnings
|
|
281,422
|
241,812
|
|||||
|
Accumulated
other comprehensive (loss) income
|
|
(12,590
|
)
|
13,550
|
||||
|
Treasury
stock, at cost; 24,382 and 24,681 shares as of December 31, 2008 and 2007,
respectively
|
|
(488,399
|
)
|
(491,780
|
)
|
|||
|
Total
Stockholders’ Equity
|
|
72,443
|
48,138
|
|||||
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
646,531
|
$
|
806,432
|
|||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements
| Common Shares |
Treasury
Shares
|
Accumulated
|
|||||||||||||||||||||||||
|
|
Additional
|
Deferred
|
|
Other
|
|||||||||||||||||||||||
|
Shares
|
At
|
Shares |
At
|
Paid
in
|
Stock
|
Retained
|
Comprehensive | ||||||||||||||||||||
| Issued |
Par
|
Issued |
Cost
|
Capital
|
Compensation
|
Earnings
|
(Loss)
Income
|
Total
|
|||||||||||||||||||
|
Balance,
December 31, 2005
|
99,215
|
$
|
992
|
6,767
|
$
|
(75,218
|
) |
$
|
255,369
|
$
|
(2,196
|
)
|
$
|
46,245
|
|
$
|
1,137
|
$
|
226,329
|
||||||||
|
Comprehensive
Income:
|
|
|
|
|
|||||||||||||||||||||||
|
Net income
|
|
|
|
|
112,322
|
112,322
|
|||||||||||||||||||||
|
Foreign currency translation
|
|
|
|
|
2,855
|
|
2,855
|
|
|||||||||||||||||||
|
Total Comprehensive Income
|
112,322
|
2,855
|
|
115,177
|
|||||||||||||||||||||||
|
Exercise
of stock options
|
|
|
(2,049
|
)
|
22,265
|
|
57
|
|
(17,959
|
)
|
4,363
|
||||||||||||||||
|
Tax
adjustments related to stock compensation
|
|
|
|
7,631
|
|
7,631
|
|||||||||||||||||||||
|
Treasury
stock repurchased
|
|
11,275
|
(144,000
|
) |
|
|
(144,000
|
)
|
|||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
|
|
|
1,652
|
|
2,196
|
3,848
|
||||||||||||||||||||
|
Balance,
December 31, 2006
|
99,215
|
$
|
992
|
15,993
|
$
|
(196,953
|
) |
$
|
264,709
|
$
|
—
|
|
$
|
140,608
|
$
|
3,992
|
$
|
213,348
|
|||||||||
|
Comprehensive
Income:
|
|
|
|
|
|||||||||||||||||||||||
|
Net
income
|
|
|
|
|
$
|
141,459
|
141,459
|
||||||||||||||||||||
|
Foreign currency translation
|
|
|
|
|
9,558
|
9,558
|
|||||||||||||||||||||
|
Total Comprehensive Income
|
141,459
|
9,558
|
151,017
|
||||||||||||||||||||||||
|
Exercise
of stock options
|
|
(2,372
|
)
|
25,057
|
|
1,294
|
|
(16,444
|
)
|
9,907
|
|||||||||||||||||
|
Tax
adjustments related to stock compensation
|
|
|
|
11,073
|
|
11,073
|
|||||||||||||||||||||
|
Treasury
stock repurchased
|
|
11,060
|
(319,884
|
) |
|
|
(319,884
|
)
|
|||||||||||||||||||
| Dividend paid to stockholders |
(23,811
|
) | |||||||||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
|
|
|
6,488
|
|
|
6,488
|
||||||||||||||||||||
|
Balance,
December 31, 2007
|
99,215
|
$
|
992
|
24,681
|
$
|
(491,780
|
) |
$
|
283,564
|
$
|
—
|
$
|
241,812
|
$
|
13,550
|
$
|
48,138
|
||||||||||
|
Comprehensive
Income:
|
|
|
|
|
|||||||||||||||||||||||
|
Net income
|
|
|
|
|
58,868
|
58,868
|
|||||||||||||||||||||
| Derivative instruments accounted for as hedges, net of tax of $4,528 | (7,082 | ) | (7,082 |
)
|
|||||||||||||||||||||||
|
Foreign currency translation
|
|
|
|
|
(19,058
|
) |
(19,058
|
) | |||||||||||||||||||
|
Total Comprehensive Income
|
58,868
|
(26,140
|
) |
32,728
|
|||||||||||||||||||||||
|
Exercise
of stock options
|
|
(299
|
) |
3,381
|
(854
|
) |
(1,325
|
)
|
1,202
|
||||||||||||||||||
|
Tax
adjustments related to stock compensation
|
|
399
|
399
|
||||||||||||||||||||||||
|
Dividend
paid to stockholders
|
(17,933
|
)
|
(17,933
|
)
|
|||||||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
|
7,909
|
7,909
|
||||||||||||||||||||||||
|
Balance,
December 31, 2008
|
99,215
|
$
|
992
|
24,382
|
$
|
(488,399
|
) |
$
|
291,018
|
$
|
—
|
$
|
281,422
|
$
|
(12,590
|
) |
$
|
72,443
|
|||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||
|
Net
income
|
$
|
58,868
|
$
|
141,459
|
$
|
112,322
|
|||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||
|
Depreciation
and amortization
|
32,756
|
33,414
|
24,828
|
||||||||
|
Amortization
of deferred financing costs
|
1,060
|
1,029
|
1,868
|
||||||||
|
Loss
on extinguishment of debt
|
—
|
—
|
10,722
|
||||||||
|
Amortization
of stock-based compensation
|
8,041
|
6,728
|
3,848
|
||||||||
|
Bad
debt expense
|
8,110
|
5,997
|
3,464
|
||||||||
|
Deferred
income taxes
|
2,423
|
(8,961
|
)
|
(3,828
|
)
|
||||||
|
Foreign
currency adjustments
|
(1,183
|
)
|
423
|
40
|
|||||||
|
Loss
on sale of equipment
|
666
|
324
|
488
|
||||||||
|
Changes
in operating assets and liabilities:
|
|||||||||||
|
Accounts
receivable
|
51,231
|
(20,536
|
)
|
(27,608
|
)
|
||||||
|
Inventories
|
45,758
|
(38,216
|
)
|
21,284
|
|||||||
|
Prepaid
expenses and other current assets
|
1,695
|
(3,226
|
)
|
3,327
|
|||||||
|
Accounts
payable
|
(15,676
|
)
|
1,861
|
12,253
|
|||||||
|
Accrued
expenses and other current liabilities
|
535
|
3,532
|
4,066
|
||||||||
|
Income
taxes
|
4,110
|
2,533
|
(1,259
|
)
|
|||||||
|
Net
cash provided by operating activities
|
198,394
|
126,361
|
165,815
|
||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||
|
Payments
for trademarks and other intellectual property
|
(870
|
)
|
(1,057
|
)
|
(936
|
)
|
|||||
|
Purchases
of property, plant and equipment
|
(10,494
|
)
|
(16,149
|
)
|
(37,211
|
)
|
|||||
|
Acquisition
of businesses, net cash acquired
|
(1,529
|
)
|
(5,805
|
)
|
—
|
||||||
|
Proceeds
from sale of equipment
|
384
|
140
|
286
|
||||||||
|
Proceeds
from escrow settlement
|
7,141
|
—
|
—
|
||||||||
|
Net
cash used by investing activities
|
(5,368
|
)
|
(22,871
|
)
|
(37,861
|
)
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||||
|
Proceeds
from long-term revolving credit facility
|
127,383
|
420,547
|
277,772
|
||||||||
|
Repayments
of long-term revolving credit facility
|
(251,536
|
)
|
(146,293
|
)
|
(92,500
|
)
|
|||||
|
Repayments
of long-term debt
|
(1,359
|
)
|
(45,488
|
)
|
(73,329
|
)
|
|||||
|
Proceeds
from issuance of Series A Industrial Revenue Bonds
|
—
|
15,380
|
—
|
||||||||
|
Repayments
of Series A Industrial Revenue Bonds
|
(57,785
|
)
|
(5,760
|
)
|
(5,760
|
)
|
|||||
|
Repayments
of Senior Subordinated Notes
|
—
|
—
|
(97,500
|
)
|
|||||||
|
Redemption
premium on Senior Subordinated Notes
|
—
|
—
|
(7,620
|
)
|
|||||||
|
Proceeds
from issuance of Common stock
|
695
|
8,175
|
4,045
|
||||||||
|
Excess
tax benefit from stock based compensation
|
399
|
11,073
|
7,693
|
||||||||
|
Treasury
stock repurchased
|
—
|
(319,884
|
)
|
(144,000
|
)
|
||||||
|
Dividend
paid to stockholders
|
(17,933
|
)
|
(23,811
|
)
|
—
|
||||||
|
Payments
for deferred financing costs and other
|
(14
|
)
|
(1,581
|
)
|
(1,277
|
)
|
|||||
|
Net
cash used by financing activities
|
(200,150
|
)
|
(87,642
|
)
|
(132,476
|
)
|
|||||
|
NET
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
(10,806
|
)
|
1,679
|
2,455
|
|||||||
|
(Decrease)
increase in cash and cash equivalents
|
(17,930
|
)
|
17,527
|
(2,067
|
)
|
||||||
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
33,315
|
15,788
|
17,855
|
||||||||
|
CASH
AND CASH EQUIVALENTS, end of year
|
$
|
15,385
|
$
|
33,315
|
$
|
15,788
|
|||||
|
Supplemental
cash flow information:
|
|||||||||||
|
Cash
paid during the period for:
|
|||||||||||
|
Interest
|
$
|
24,978
|
$
|
30,176
|
$
|
28,794
|
|||||
|
Income
taxes, net of refunds
|
38,346
|
68,271
|
58,451
|
||||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share amounts)
(a) Basis of Presentation and
Description of Business— Tempur-Pedic International Inc., a Delaware
corporation, together with its subsidiaries is a U.S. based, multinational
company. The term “Tempur-Pedic International” refers to Tempur-Pedic
International Inc. only, and the term “Company” refers to Tempur-Pedic
International Inc. and its consolidated subsidiaries. Tempur World, Inc. was
formed on January 1, 2000 to combine the manufacturing facilities and the global
distribution capabilities of all TEMPUR® products, and Tempur-Pedic
International Inc. was formed in 2002 to acquire Tempur World, Inc. This
acquisition (Tempur Acquisition) was effective as of November 1,
2002.
The
Company manufactures, markets and sells 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.
(b) Reclassifications—Certain
prior period amounts have been reclassified to conform to the 2008 presentation
including the presentation of General, administrative and other expenses which
includes research and development expenses previously disclosed separately in
the Consolidated Statements of Income. These changes do not materially affect
previously reported subtotals within the Consolidated Financial Statements for
any previous period presented.
(c) Basis of Consolidation—The
accompanying financial statements include the accounts of Tempur-Pedic
International and its subsidiaries. All subsidiaries are wholly-owned.
Intercompany balances and transactions have been eliminated. The Company does
not hold any interest in variable-interest entities.
(d) Use of Estimates—The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. 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.
(e) Foreign Currency—Assets and
liabilities of non-U.S. subsidiaries, whose functional currency is the local
currency, are translated into U.S. dollars at period-end exchange rates. Income
and expense items are translated at the average rates of exchange prevailing
during the period. The adjustment resulting from translating the financial
statements of foreign subsidiaries are included in Accumulated other
comprehensive income, a component of Stockholders’ Equity and are included in
net earnings only upon sale or liquidation of the underlying foreign subsidiary
or affiliated company. Foreign currency transaction gains and losses are
recognized in net earnings based on differences between foreign exchanges rates
on the transaction date and on the settlement date.
(f) Derivative Financial
Instruments—The Company accounts for derivative financial instruments and
hedging activities in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging
Activities (as amended)” (SFAS 133). In accordance with this standard,
derivative instruments are recorded on the balance sheet as either an asset or
liability measured at its fair value. Changes in the fair value of derivative
instruments are either recognized in income immediately to offset the gain or
loss on the hedged item, or deferred and recorded in Stockholders’ Equity as a
component of Accumulated other comprehensive (loss) income. The ineffective
portion of the change in fair value of a hedge is recognized in income
immediately. The Company has designated an interest rate swap that effectively
fixes the floating LIBOR-based interest rate on a declining balance of the 2005
senior credit facility as a cash flow hedge. See Note 4 for more information on
the Company’s interest rate swap.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
Derivative
financial instruments are used in the normal course of business to manage
interest rate and foreign currency exchange risks. Credit risk is managed
through the selection of sound financial institutions as counterparties. The
Company does 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.
(g) Cash and Cash
Equivalents—Cash and cash equivalents consist of all highly liquid
investments with initial maturities of three months or less.
(h) Inventories—Inventories are
stated at the lower of cost or market, determined by the first-in, first-out
method and consist of the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Finished
goods
|
$ | 41,385 | $ | 75,692 | ||||
|
Work-in-process
|
5,706 | 11,135 | ||||||
|
Raw
materials and supplies
|
13,406 | 19,706 | ||||||
| $ | 60,497 | $ | 106,533 | |||||
(i) Property, Plant and
Equipment—Property, plant and equipment are carried at cost at
acquisition date and are depreciated using the straight-line method over their
estimated useful lives as follows:
|
Estimated
Useful
Lives
|
|
|
Buildings
|
25-30 years
|
|
Computer
equipment
|
3-5
years
|
|
Leasehold
improvements
|
4-7
years
|
|
Machinery
equipment
|
3-7
years
|
|
Office
furniture and fixtures
|
5-7
years
|
Leasehold
improvements are amortized over the shorter of the life of the lease or seven
years.
(j) Long-Lived Assets—In
accordance with SFAS 144, “Accounting for the Impairment or Disposal of
Long-lived Assets” (SFAS 144), long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of long-lived assets is assessed
by a comparison of the carrying amount of the asset to the estimated future
undiscounted net cash flows expected to be generated by the asset or group of
assets. If estimated future undiscounted net cash flows are less than the
carrying amount of the asset or group of assets, the asset is considered
impaired and an expense is recorded in an amount required to reduce the carrying
amount of the asset to its then fair value. Fair value generally is determined
from estimated discounted future net cash flows (for assets held for use) or net
realizable value (for assets held for sale).
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
(k) Goodwill and Other Intangible
Assets—Intangible assets with finite useful lives are amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment whenever events or changes in circumstances indicate an
impairment may have occurred. In accordance with SFAS No. 142 “Goodwill and
Other Intangible Assets” (SFAS 142), the Company performs an annual impairment
test on all existing goodwill and other indefinite lived assets on October 1 of
each year and whenever events or circumstances make it more likely than not that
an impairment may have occurred. The Company reviewed goodwill for impairment
based on its identified reporting units, which include its domestic and
international operations. In conducting the impairment test, the fair value of
each of the Company’s reporting units is compared to its respective carrying
amount including goodwill. If the fair value exceeds the carrying amount, then
no impairment exists. If the carrying amount exceeds the fair value, further
analysis is performed to assess impairment. The Company’s determination of
fair value of the reporting units is based on an income approach with an
appropriate risk adjusted discount rate and a market approach. Any identified
impairment would result in an adjustment to the Company’s results of operations.
The Company also tests its indefinite-lived intangible assets, principally
trademarks, for impairment using a “relief-from-royalty” method. Significant
assumptions inherent in the methodologies are employed and include such
estimates as royalty and discount rates. The Company performed its annual
impairment test of goodwill and indefinite-lived intangible assets in fiscal
2008, 2007 and 2006, none of which resulted in the recognition of impairment
charges. For further information on Goodwill and Other intangible assets see
Note 3.
(l) Accrued Sales
Returns—Estimated sales returns are provided at the time of sale based on
historical sales channel return rates. The level of sales returns differs by
channel with the Direct channel typically experiencing the highest rate of
return. Estimated future obligations related to these products are
provided by a reduction of sales in the period in which the revenue is
recognized. The Company allows product returns up to 120 days following a sale
through certain sales channels and on certain products. Accrued sales returns
are included in Accrued expenses and other in the accompanying Consolidated
Balance Sheets.
The
Company had the following activity for sales returns from December 31, 2006 to
December 31, 2008:
|
Balance
as of December 31, 2006
|
|
$
|
5,883
|
|
|
Amounts
accrued
|
|
45,159
|
||
|
Returns
charged to accrual
|
|
(45,579
|
)
|
|
|
Balance
as of December 31, 2007
|
|
5,463
|
||
|
Amounts
accrued
|
|
41,255
|
||
|
Returns
charged to accrual
|
|
(42,914
|
)
|
|
|
Balance
as of December 31, 2008
|
|
$
|
3,804
|
(m) Warranties—The Company
provides a 20-year warranty for U.S. sales and a 15-year warranty for non-U.S.
sales on mattresses, each prorated for the last 10 years. The Company also
provides a 2-year to 3-year warranty on pillows. Estimated future obligations
related to these products are provided by charges to operations in the period in
which the related revenue is recognized. Estimates of warranty expenses are
based primarily on historical claim experience and product testing. Warranties
are included in Accrued expenses and other in the Consolidated Balance
Sheets.
The
Company had the following activity for warranties from December 31, 2006 to
December 31, 2008:
|
Balance
as of December 31, 2006
|
|
$
|
2,903
|
|
|
Amounts
accrued
|
|
3,408
|
||
|
Warranties
charged to accrual
|
|
(2,886
|
)
|
|
|
Balance
as of December 31, 2007
|
|
3,425
|
||
|
Amounts
accrued
|
|
3,708
|
||
|
Warranties
charged to accrual
|
|
(3,230
|
)
|
|
|
Balance
as of December 31, 2008
|
|
$
|
3,903
|
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
(n) Income Taxes—Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets are also recognized for the
estimated future effects of tax loss carry forwards. The effect of
changes in tax rates on deferred taxes is recognized in the period in which the
enactment dates change. Valuation allowances are established when
necessary on a jurisdictional basis to reduce deferred tax assets to the amounts
expected to be realized. The Company accounts for uncertain foreign and domestic
tax positions as required by Financial Accounting Standards Board (FASB)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).
FIN 48 prescribes a recognition threshold and measurement attributes for the
financial statement recognition and measure of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, and disclosure.
(o) Revenue Recognition—Sales of product are
recognized when persuasive evidence of an arrangement exists, products are
shipped and title passes to customers and the risks and awards 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 Net sales. The Company also reports
Net 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
Consolidated Balance Sheets was $6,726 and $8,056 as of December 31, 2008 and
2007, respectively.
The
Company reflects all amounts billed to customers for shipping and handling in
Net sales and the costs incurred from shipping and handling product in Cost of
sales. Amounts included in Net sales for shipping and handling were
approximately $8,838, $10,919, and $10,604 for the years ended
December 31, 2008, 2007 and 2006, respectively. Amounts included in Cost of
sales for shipping and handling were $78,065, $84,819, and $73,316 for the years
ended December 31, 2008, 2007, and 2006, respectively.
(p) Advertising Costs—The
Company expenses advertising costs as incurred except for production costs and
advance payments, which are deferred and expensed when advertisements run for
the first time. Direct response advance payments are deferred and amortized over
the life of the program. Advertising costs are included in Selling and marketing
expenses in the accompanying Consolidated Statements of Income. Advertising
costs charged to expense were $85,326, $104,548, and $97,214 for the years ended
December 31, 2008, 2007 and 2006, respectively. Advertising costs
deferred and included in Prepaid expenses and other current assets in the
accompanying Consolidated Balance Sheets were $4,419 and $4,709 as of December
31, 2008 and 2007, respectively.
(q) 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 Consolidated Statements of Income. Research and development
costs charged to expense were approximately $5,983, $5,926 and $3,728 for the
years ended December 31, 2008, 2007 and 2006, respectively.
(r) Stock-Based Compensation—The
Company adopted SFAS No. 123R, “Share-Based Payment” (SFAS 123R) on
January 1, 2006 using the modified prospective method for the
transition. SFAS 123R requires compensation expense relating to
share-based payments be recognized in the financial statements. The cost is
measured at the grant date, based on the calculated fair value of the award, and
is recognized as an expense over the requisite service period. The impact of
adopting SFAS 123R was $2,304, for the year ended December 31, 2006. Deferred
stock compensation amounts in the Stockholders’ Equity section of the
Consolidated Balance Sheets are included in Additional paid in capital as of
December 31, 2008 and 2007.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
(s) Treasury Stock—The Board of
Directors may authorize share repurchases of the Company’s common stock (Share
Repurchase Authorizations). Share repurchases under these authorizations may be
made through open market transactions, negotiated purchase or otherwise, at
times and in such amounts as the Company, and a committee of the Board, deem
appropriate. Shares repurchased under Share Repurchase Authorizations are held
in treasury for general corporate purposes, including issuances under various
employee stock option plans. Treasury shares are accounted for under the cost
method and reported as a reduction of Stockholders’ equity. Share Repurchase
Authorization may be suspended, limited or terminated at any time without
notice.
(t) Fair Value Measurements— In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”
(SFAS 157), which defines fair value, establishes a framework for measuring fair
value in U.S. GAAP, and expands disclosure about fair value measurements to
include the methods and assumptions used to measure fair value and the effect of
fair value measures on earnings. SFAS 157 requires the fair value of
an asset or liability to be based on market-based measures which will reflect
the credit risk of the company. In February 2008, the FASB released FASB Staff
Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” (FSP 157-2) which delays the
effective date of SFAS 157 for nonfinancial assets and liabilities until January
2009. The Company does not believe the adoption of FSP 157-2 will have a
material impact on the Company’s financial position or operating results upon
adoption on January 1, 2009. Additionally, in October 2008, the FASB issued FASB
Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the
adoption of SFAS 157 in a market that is not active. Effective January 1, 2008,
the Company adopted the provisions of SFAS 157 related to financial assets and
liabilities. SFAS 157 does not require new fair value measurements. The adoption
of SFAS 157 did not have a material impact on the Company’s financial position
or operating results. See Note 5 for additional information.
(2)
Recently Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS
141(R)), which establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquired business. The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The Company will
apply the provisions of SFAS 141(R) to business combinations for which the
acquisition date is on or after January 1, 2009.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133” (SFAS 161). The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
results of operations and cash flows. The new standard also improves
transparency about how and why a company uses derivative instruments and how
derivative instruments and related hedged items are accounted for under SFAS
133. The adoption of SFAS 161 on January 1, 2009 is not expected to have a
material impact on the Company’s financial position or operating
results.
In April
2008, the FASB issued Staff Position No. FAS 142-3 (FSP 142-3), “Determination
of the Useful Life of Intangible Assets”, which amends the list of factors an
entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under SFAS 142. The
new guidance applies to (1) intangible assets that are acquired individually or
with a group of other assets and (2) intangible assets acquired in both business
combinations and asset acquisitions. The adoption of FSP 142-3 on January 1,
2009 is not expected to have a material impact on the Company’s financial
position or operating results.
(3) Goodwill and Other intangible
assets
The
following table summarizes information relating to the Company’s Other
intangible assets:
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||||||||||||||
|
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 | $ | 9,866 | $ | 6,134 | $ | 16,000 | $ | 8,267 | $ | 7,733 | |||||||||||||||
|
Patents
& other trademarks
|
5-20 | 11,655 | 7,767 | 3,888 | 11,233 | 7,533 | 3,700 | |||||||||||||||||||||
|
Customer
database
|
5 | 4,838 | 4,455 | 383 | 4,868 | 4,334 | 534 | |||||||||||||||||||||
|
Foam
formula
|
10 | 3,700 | 2,282 | 1,418 | 3,700 | 1,912 | 1,788 | |||||||||||||||||||||
|
Total
|
$ | 91,193 | $ | 24,370 | $ | 66,823 | $ | 90,801 | $ | 22,046 | $ | 68,755 | ||||||||||||||||
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
Amortization
expense relating to intangible assets for the Company was $2,412, $3,876, and
$3,987 for the years ended December 31, 2008, 2007 and 2006,
respectively.
Annual
amortization of intangible assets is expected to be as follows:
|
Year
Ending December 31,
|
||||
|
2009
|
$ | 2,417 | ||
|
2010
|
2,400 | |||
|
2011
|
2,394 | |||
|
2012
|
1,756 | |||
|
2013
|
76 | |||
The
following summarizes changes to the Company’s Goodwill, by reportable business
segment:
|
Domestic
|
International
|
Total
|
||||||||||
|
Balance
as of December 31, 2006
|
$ | 89,929 | $ | 108,278 | $ | 198,207 | ||||||
|
Goodwill
acquired during the period
|
— | 2,245 | 2,245 | |||||||||
|
Foreign
currency translation adjustments
|
— | (491 | ) | (491 | ) | |||||||
|
Pre-Tempur
Acquisition tax adjustment
|
— | (1,675 | ) | (1,675 | ) | |||||||
|
Balance
as of December 31, 2007
|
$ | 89,929 | $ | 108,357 | $ | 198,286 | ||||||
|
Goodwill
acquired during the period
|
— | 895 | 895 | |||||||||
|
Foreign
currency translation adjustments
|
— | (1,594 | ) | (1,594 | ) | |||||||
|
Pre-Tempur
Acquisition tax adjustment
|
— | 1,449 | 1,449 | |||||||||
|
Escrow
settlement
|
— | (6,467 | ) | (6,467 | ) | |||||||
|
Balance
as of December 31, 2008
|
$ | 89,929 | $ | 102,640 | $ | 192,569 | ||||||
On February
1, 2008, the Company acquired its third party distributor in New Zealand. The
total purchase price was approximately $1,438. The assets purchased were
initially valued at approximately $948 and primarily include inventory and fixed
assets. The remainder of the purchase price was allocated to Goodwill. During
the year ended December 31, 2008, the Company recorded an adjustment to
unrecognized tax benefits related to the Tempur Acquisition as further described
in Note 10. On December 24, 2008, the Company received cash from the release of
the escrow account related to the Tempur Acquisition, reflecting final
settlement of all amounts initially paid to escrow, resulting in a reduction to
Goodwill.
During
the year ended December 31, 2007, the Company acquired the rights to sell its
products and certain other assets in the Austrian and Australian markets for a
total purchase price of $5,805. Net assets purchased were initially valued
at $3,560 and include inventory, fixed assets, among other assets. The remainder
of the purchase price was allocated to Goodwill. During the year ended December
31, 2007, the Company recorded other changes to the carrying amount of Goodwill
related to changes in amounts for foreign currency translation and tax
adjustments related to the Tempur Acquisition, including the utilization of
pre-acquisition net operating losses and adjustments to pre-acquisition income
tax contingencies.
(4)
Long-term Debt
(a) Long-term Debt—Long-term
debt for the Company consisted of the following:
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
|
December
31,
2008
|
December 31,
2007
|
|||||||
|
2005
Senior Credit Facility:
|
||||||||
|
Domestic
Long-Term Revolving Credit Facility payable to lenders, interest at
Index
Rate or LIBOR plus applicable margin (4.44% and 5.86% as of December 31,
2008 and December
31, 2007, respectively), commitment through and due June 8,
2012
|
$ | 403,500 | $ | 543,000 | ||||
|
Foreign
Long-Term Revolving Credit Facility payable to lenders, interest at
Index
Rate or LIBOR plus applicable margin (2.59% at December 31, 2008)
commitment through and due June 8, 2012
|
15,841 | — | ||||||
|
2005
Industrial Revenue Bonds:
|
||||||||
|
Variable
Rate Industrial Revenue Bonds Series 2005A, interest rate determined by
remarketing agent
|
— | 57,785 | ||||||
|
Other:
|
||||||||
|
Mortgages
payable to a bank (bearing fixed interest at 4.7% to 5.2% as of December
31, 2007)
|
— | 1,259 | ||||||
| 419,341 | 602,044 | |||||||
|
Less:
Current portion
|
— | (288 | ) | |||||
|
Long-term
debt
|
$ | 419,341 | $ | 601,756 | ||||
The
long-term debt of the Company is scheduled to mature in 2012.
(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 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). 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 are defined as the higher of either the
Bank of America prime rate or the Federal Funds rate plus .50%. The Company also
pays an annual facility fee on the total amount of the 2005 Senior Credit
Facility. The facility fee is calculated based on the consolidated
leverage ratio and ranges from .125% to .25%.
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. Under the
interest rate swap, the Company pays at a fixed rate and receives payments at a
variable rate. This swap effectively fixes the floating LIBOR-based interest
rate to 3.755% on $350,000 of the outstanding principal balance under the 2005
Senior Credit Facility. The amount of the outstanding balance subject to the
swap will decline over time 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 has designated this swap agreement as a cash flow hedge 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
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) income and recognized as Interest expense, net as debt
payments are paid or accrued. The ineffective portion is recognized as Other
expense, net. The fair value of this swap was a liability of $11,610 at December
31, 2008, and was included in Other non-current liabilities in the accompanying
Consolidated Balance Sheets. As of December 31, 2008, the Company has recognized
Other comprehensive loss of $7,082 related to the effectively hedged portion of
the swap, net of tax. There was no hedge ineffectiveness over this period. Over
the next 12 months, the Company expects to reclassify $7,046 of deferred losses
on derivative instruments from Accumulated other comprehensive (loss) income to
earnings due to the payment of variable interest associated with the floating
2005 Senior Credit Facility.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
The 2005 Senior
Credit Facility is guaranteed by Tempur-Pedic International, as well as certain
other subsidiaries of Tempur-Pedic International, and is secured by certain
fixed and intangible assets of Dan Foam ApS and substantially all the Company’s
U.S. assets. The 2005 Senior Credit Facility contains certain financial
covenants and requirements affecting the Company, including a consolidated
interest coverage ratio and a consolidated leverage ratio. The Company was in
compliance with all covenants as of December 31, 2008.
The 2005
Senior Credit Facility provides 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 $2,871
at December 31, 2008. After giving effect to
letters of credit and $419,341 in borrowings under the Domestic and Foreign
Revolvers, total availability under the Revolvers was $217,788 at December 31,
2008.
(c) Industrial Revenue Bonds—On
October 27, 2005, Tempur Production USA, Inc., a subsidiary of Tempur-Pedic
International Inc. (Tempur Production), completed an industrial revenue bond
financing for the construction and equipping of Tempur Production’s new
manufacturing facility (the Project) located in Bernalillo County, New Mexico.
On April 1, 2008, Tempur Production redeemed all outstanding Series A Bonds in
the amount of $57,785. The redemption price plus accrued interest was
funded by a $58,000 borrowing under the Domestic Revolver.
.
Bernalillo
County also agreed to issue Series 2005B Taxable Fixed Rate Industrial Revenue
Bonds (Series B Bonds, and collectively with Series A Bonds, the Bonds). The
Series B Bonds were sold to Tempur World LLC (Tempur World), and will be held by
Tempur World representing the Company’s equity in the Project. In connection
with issuance of the Series B Bonds, the Company made an investment in Series B
bonds in a like amount. The Company has the right to offset the Series B Bonds
against its investment in the Series B Bonds, and accordingly, the amounts have
been recorded net in the accompanying Condensed Consolidated Balance Sheets. On
September 1, 2008, Tempur World redeemed the majority of the outstanding Series
B Bonds in the amount of $23,002. The remaining $100 of the outstanding Series B
Bonds have a final maturity date of September 1, 2030. The interest rate on
the Series B Bonds is fixed at 7.75%.
(d) Senior Subordinated Notes—In
2003, certain wholly-owned subsidiaries of the Company issued $150,000 aggregate
principal amount of 10.25% Senior Subordinated Notes due 2010 (Senior
Subordinated Notes).
On
January 23, 2004, the Company redeemed an aggregate principal amount of $52,500
of outstanding Senior Subordinated Notes. The redemption price was 110.25% of
the principal amount plus accrued interest, and the redemption was funded with a
portion of the net proceeds from the initial public offering of Tempur-Pedic
International Inc.
On
December 29, 2006, the Company redeemed in full the outstanding aggregate
principal amount of $97,500 of Senior Subordinated Notes. The redemption price
was 107.815% of the principal amount. The Company reflected the $7,620
redemption premium and the $3,102 related to the non-cash write-off of deferred
financing fees as a Loss on extinguishment of debt for the year ended December
31, 2006.
(5)
Fair Value of Financial Instruments
The Company
adopted SFAS 157 as of January 1, 2008, as related to financial instruments.
SFAS 157 establishes a three-level hierarchy for fair value measurements. The
hierarchy is based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date.
|
·
|
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.
|
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
The
classification of fair value measurements within the hierarchy is based upon the
lowest level of input that is significant to the measurement. At
December 31, 2008, 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 December 31, 2008 Using:
|
||||||||||||||||
|
December
31, 2008
|
Quoted
Prices in Active
Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Foreign
currency forward contracts
|
$ | 96 | $ | — | $ | 96 | $ | — | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Interest
rate swap
|
$ | 11,610 | $ | — | $ | 11,610 | $ | — | ||||||||
The
carrying value of Cash and cash equivalents, Accounts receivable, and Accounts
payable approximate fair value because of the short-term maturity of those
instruments. Borrowings under the 2005 Senior Credit Facility (as defined in
Note (4)(b)) are at variable interest rates and accordingly their carrying
amounts approximate fair value.
(6)
Stockholders’ Equity
(a) Capital stock—The Company has
300,000 authorized shares of common stock with $0.01 per share par value and
10,000 authorized shares of preferred stock. The holders of the common stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of shareholders. Subject to preferences that may be applicable to any
outstanding preferred stock, holders of common stock are entitled to receive
ratable 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 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.
Tempur-Pedic
International Inc. is authorized to issue up to 10,000 shares of preferred
stock, $0.01 par value per share. The Board of Directors is authorized, subject
to any limitations prescribed by law, without further vote or action by the
stockholders, to issue from time to time shares of preferred stock in one or
more series. Each such series of preferred stock will have such number of
shares, designations, preferences, voting powers, qualifications, and special or
relative rights or privileges as determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights.
(b) Registration Rights—Under
the terms of a registration rights agreement entered into in 2002 in connection
with the Tempur Acquisition, holders of 10% of Tempur-Pedic International Inc.’s
registrable securities, as defined in the Registration Rights Agreement, have
the right, subject to certain conditions, to require Tempur-Pedic International
Inc. to register any or all of their shares of common stock under the Securities
Act of 1933, as amended (Securities Act), at the Company’s expense. The 15,313
shares of common stock sold in the initial public offering by selling
shareholders and the 14,950 shares sold in the 2004 secondary offering were sold
by selling stockholders that were parties to the Registration Rights Agreement.
As of December 31, 2008, the Company estimates that 469 outstanding shares of
registrable common stock are held by parties to the registration rights
agreement. Certain of these holders have demand registration rights under the
registration rights agreement as described above.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
(d) Dividend Program—The Company’s Board
of Directors declared dividends in the first three quarters of 2008 of $0.08 per
common share. On October 16, 2008, the Company announced that it would suspend
the payment of its quarterly cash dividend. The decision to pay a dividend in
future periods will be reviewed by the Board of Directors on a periodic
basis.
In the
first quarter of 2007, the Company’s Board of Directors initiated a cash
dividend of $0.24, paid in quarterly installments of $0.06. In the second
quarter of 2007, the Company’s Board of Directors increased the quarterly
dividend payments to $0.08. The same dividend was declared in the third and
fourth quarters of 2007. Prior to 2007, the Company had never previously
declared a cash dividend for its common stock.
(7)
Other Balance Sheet Items
(a) Property, Plant and
Equipment—
Property,
plant and equipment, net consisted of the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Land
and buildings
|
|
$
|
122,256
|
$
|
123,973
|
|||
|
Machinery
and equipment, furniture and fixtures, and other
|
|
192,029
|
186,175
|
|||||
|
Construction
in progress
|
|
5,321
|
7,210
|
|||||
|
|
319,606
|
317,358
|
||||||
|
Accumulated
depreciation and amortization
|
|
(133,763
|
)
|
(108,988
|
)
|
|||
|
|
$
|
185,843
|
$
|
208,370
|
||||
Depreciation
expense for the Company was $30,343, $29,538, and $20,841 for the years ended
December 31, 2008, 2007 and 2006, respectively.
(b) Foreign Currency Contracts—The Company’s
earnings, as a result of its global operating and financing activities, are
exposed to changes in foreign currency exchange rates, which may adversely
affect its results of operations and financial position. The Company protects a
portion of its currency exchange exposure with foreign currency forward
contracts.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
The
Company does 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 in the accompanying Consolidated
Statements of Income. The contracts had notional values of $29,973 and $10,775
as of December 31, 2008 and 2007, respectively. The contracts had fair values of
$96 included in Prepaids and other current assets as of December 31, 2008 and
$58 included in Accrued expenses and other current liabilities as of December
31, 2007, in the accompanying Consolidated Balance Sheets. Tempur-Pedic
International also had foreign exchange (losses) gains on derivative financial
instruments of $(1,689), $353, and $1,155 for the years ended December 31, 2008,
2007 and 2006, respectively, included in the accompanying Consolidated
Statements of Income.
(c) Accrued expenses and
other—
Accrued
expenses and other consisted of the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Salary
and related expenses
|
$
|
11,226
|
$
|
14,512
|
||||
|
Accrued
unrecognized tax benefits
|
11,012
|
7,030
|
||||||
|
Accrued
sales and value added taxes
|
10,768
|
11,460
|
||||||
|
Warranty
accrual
|
|
3,903
|
3,425
|
|||||
|
Sales
returns
|
|
3,804
|
5,463
|
|||||
|
Other
|
|
24,603
|
24,190
|
|||||
|
|
$
|
65,316
|
$
|
66,080
|
||||
(d) Accumulated other comprehensive income—
Accumulated
other comprehensive (loss) income consisted of the following:
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
Derivative
instruments accounted for as hedges, net of tax of $4,528
|
$
|
(7,082
|
)
|
$
|
—
|
||
|
Foreign
currency translation
|
(5,508
|
)
|
13,550
|
||||
|
Accumulated
other comprehensive (loss) income
|
$
|
(12,590
|
)
|
$
|
13,550
|
||
(8)
Stock-based Compensation
Tempur-Pedic
International has two stock-based compensation plans which provide for grants of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and stock unit awards, performance shares, stock grants and performance
based awards to employees, non-employee directors, consultants and Company
advisors. The plans under which equity awards may be granted are the 2002 Option
Plan and the Amended and Restated 2003 Equity Incentive Plan, (the 2003
Plan). Tempur-Pedic International also has a stock-based compensation
plan which permits eligible employees to purchase its shares at a discounted
price, subject to certain guidelines set forth by its 2003 Employee Stock
Purchase Plan, as amended (ESPP). It is the policy of the Company to issue stock
out of Treasury shares upon exercise of options. The Company believes that
awards and purchases made under these plans better align the interests of the
plan participants with those of its stockholders.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
The 2002
Option Plan was adopted on November 1, 2002 and provides for grants of
options to purchase shares of common stock to employees and directors of the
Company. Options granted under the 2002 Option Plan that qualify as incentive
stock options, as defined by the Internal Revenue Code of 1986, as amended (the
Code), must have an exercise price of not less than the fair market value of
Tempur-Pedic International’s common stock at the date of grant. Options granted
under the 2002 Option Plan provided for vesting terms as determined by the Board
of Directors at the time of grant, which are generally based on 4 years of
continuous service. Options can be exercised up to 10 years from the grant date
and up to 5 years from the grant date for any stockholders who own 10% or more
of the total combined voting power of all shares of stock of Tempur-Pedic
International. Upon the exercise of all outstanding options under the
2002 Option Plan, Tempur-Pedic International will issue a maximum of 6,534
shares of common stock under the 2002 Option Plan, subject to certain adjustment
provisions. The Company currently anticipates there will be no additional
options issued under this plan.
The 2003
Plan is administered by the Compensation Committee of the Board of Directors,
which, together with the Board of Directors, has the exclusive authority to
administer the 2003 Plan, including the power to determine eligibility to
receive awards, the types and number of shares of stock subject to the awards,
the price and timing of awards and the acceleration or waiver of any vesting and
performance of forfeiture restrictions, in each case subject to the terms of the
2003 Plan. Any of the Company’s employees, non-employee directors, consultants
and Company advisors, as determined by the Compensation Committee, may be
selected to participate in the 2003 Plan. The awards generally vest based on 4
years of continuous service and have 10-year contractual terms. Tempur-Pedic
International may issue a maximum of 9,000 shares of its common stock under the
2003 Plan.
The
ESPP permits eligible employees to purchase up to certain limits, as set forth
in the ESPP, of Tempur-Pedic International’s common stock annually over the
course of two semi-annual offering periods at a price of no less than 85% of the
price per share of Tempur-Pedic International’s common stock either at the
beginning or the end of each six-month offering period, whichever is less. The
Compensation Committee of the Board of Directors administers the ESPP. The Board
of Directors may amend or terminate the ESPP. The ESPP is intended to comply
with the requirements of Section 423 of the Code. The Company may issue a
maximum of 500 shares of its common stock under the ESPP.
The
Company uses the Black-Scholes option pricing model to calculate the fair value
of options granted which are subject to SFAS 123R. The assumptions used in
the Black-Scholes pricing model for the years ended December 31, 2008, 2007 and
2006 are set forth in the following table. Expected volatility is based on the
unbiased standard deviation of Tempur-Pedic International’s common stock over
the option term. The expected life of the options represents the period of time
that the Company expects the options granted to be outstanding. The risk-free
rate is based on the U.S. Treasury yield curve in effect at the time of the
grant of the option for the expected term of the instrument. The dividend yield
reflects the assumption that the dividend payout in place at the time of
stock-based award grant would continue with no anticipated
increases.
|
Year
Ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
volatility range of stock
|
41 – 60 | % | 40 – 41 | % | 40 – 43 | % | ||||||
|
Expected
life of option, range in years
|
1.0 – 5.0 | 2.0 – 5.0 | 1.5 – 6.1 | |||||||||
|
Risk-free
interest rate range
|
1.5 – 3.4 | % | 3.2 – 5.1 | % | 3 – 4.8 | % | ||||||
|
Expected
dividend yield on stock
|
1.4 – 4.2 | % | 1.0 – 1.1 | % | 0 | % | ||||||
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
subjective assumptions, including the expected stock price volatility.
Tempur-Pedic International’s options have had characteristics significantly
different from those of similar traded options, and changes in the subjective
input can materially affect the fair value estimate.
A summary
of Tempur-Pedic International’s unvested shares as of December 31, 2008 and
changes during the years-ended December 31, 2008 and 2007 are presented
below:
|
Shares
|
Weighted
Average
Grant
Date Fair Value
|
|||||||
|
Options
unvested at December 31, 2006
|
3,111 | $ | 6.35 | |||||
|
Granted
|
1,090 | 10.02 | ||||||
|
Vested
|
(1,108 | ) | 5.99 | |||||
|
Forfeited
|
(111 | ) | 7.33 | |||||
|
Options
unvested at December 31, 2007
|
2,982 | $ | 7.67 | |||||
|
Granted
|
2,132 | 3.74 | ||||||
|
Vested
|
(1,004 | ) | 6.94 | |||||
|
Forfeited
|
(659 | ) | 6.12 | |||||
|
Options
unvested at December 31, 2008
|
3,451 | $ | 5.66 | |||||
A summary
of stock options activity under the 2002 Option Plan and 2003 Plan is presented
below:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Options
outstanding at December 31, 2006
|
5,954 | $ | 10.03 | |||||||||||||
|
Granted
|
1,090 | 26.71 | ||||||||||||||
|
Exercised
|
(2,331 | ) | 3.80 | |||||||||||||
|
Terminated
|
(111 | ) | 16.29 | |||||||||||||
|
Options
outstanding at December 31, 2007
|
4,602 | $ | 17.10 | |||||||||||||
|
Granted
|
2,132 | 10.54 | ||||||||||||||
|
Exercised
|
(245 | ) | 2.82 | |||||||||||||
|
Terminated
|
(1,094 | ) | 15.39 | |||||||||||||
|
Options outstanding at December
31, 2008
|
5,395 | $ | 15.50 | 8.25 | $ | 622 | ||||||||||
|
Options
exercisable at December 31, 2008
|
1,944 | $ | 17.09 | 7.15 | $ | 285 | ||||||||||
The total
intrinsic value of options exercised for the years ended December 31, 2008, 2007
and 2006 was $2,973, $48,845 and $26,140, respectively.
The
Black-Scholes pricing model amortizes compensation expense on a straight-line
basis, and the expense is expected to be recognized over a weighted-average
remaining period of 2.5 years as of December 31, 2008. The total Black-Scholes
value of shares vested during the years ended December 31, 2008, 2007 and 2006
was $6,915, $4,996 and $4,675, respectively. For the years ended December 31,
2008, 2007 and 2006 the Company recognized $7,909, $5,881 and $2,034,
respectively, of stock-based compensation expense in General and administrative
expenses and Selling and marketing expenses related to stock options granted
under the 2003 Plan which were subject to SFAS 123R. As of December 31, 2008,
there was $23,101 of unearned stock-based compensation expense related to these
options. The future amortization of these unearned stock-based compensation
costs will be $7,166 in 2009; $5,323 in 2010; $5,045 in 2011 and $5,567 in
2012.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
For the
years ended December 31, 2007 and 2006, the Company recognized $438 and $438 of
stock-based compensation expense related to restricted stock units (RSUs). As of
December 31, 2007, stock-based compensation expense related to RSUs was fully
amortized to compensation expense.
Cash
received from options exercised under all stock-based compensation plans,
including cash received from options issued from treasury shares, for the years
ended December 31, 2008, 2007 and 2006 was $695, $8,175 and $4,045,
respectively.
(9)
Commitments and Contingencies
(a) Lease Commitments—The
Company has various operating leases that call for annual rental payments due in
equal monthly installments and a lease with a rent free occupancy period. The
Company’s policy is to recognize expense for lease payment, including those with
escalating provisions and rent free periods, on a straight-line basis over the
lease term. Operating lease expenses were $4,430, $4,726, and $4,926 for the
years ended December 31, 2008, 2007 and 2006, respectively.
Future
minimum lease payments at December 31, 2008 under these non-cancelable leases
are as follows:
|
Year
Ended December 31,
|
||||
|
2009
|
$ | 3,843 | ||
|
2010
|
3,470 | |||
|
2011
|
2,550 | |||
|
2012
|
2,197 | |||
|
2013
|
1,630 | |||
|
Thereafter
|
1,340 | |||
| $ | 15,030 | |||
(b) Purchase Commitments—The
Company will, from time to time, enter into limited purchase commitments for the
purchase of certain raw materials. Amounts committed under these programs are
not significant as of December 31, 2008 and 2007.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
(d) 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. The Company believes
that its UPPL complies with state and federal law, and, should the OAG challenge
the UPPL, intends to vigorously defend it. However, due to the inherent
uncertainties of litigation, the Company cannot at this time predict the outcome
of any such enforcement action, if brought, and can give no assurance that these
claims will not have a material adverse affect on its financial position or
results of operation. Accordingly, the Company cannot make an estimate of the
possible ranges of loss.
The Company
is involved in various other legal proceedings incidental to the operations of
its business. The Company believes that the outcome of all such pending legal
proceedings in the aggregate will not have a materially adverse affect on its
business, financial condition, liquidity, or operating results.
(10)
Income Taxes
Repatriation of Foreign
Earnings – In the fourth quarter of 2008, the Company completed the first
phase of a $150,000 repatriation of foreign earnings and used a portion of
the proceeds to reduce our level of outstanding debt. The Company expects to
complete this repatriation program in 2009 and pay down additional debt. In
connection with this repatriation, the Company recognized tax expense of
$11,631.
The
Company has not provided for U.S. federal, state income and foreign withholding
taxes on $118,372 of undistributed earnings from non-U.S. operations as December
31, 2008 because the Company intends to reinvest such earnings indefinitely
outside of the United States. If Tempur-Pedic International were to
distribute these earnings, foreign tax credits may become available under
current law to reduce the resulting U.S. income tax liability. These
undistributed earnings have been reduced by the announced repatriation plan of
$150,000.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
Provision for Income
Taxes—The Company’s effective income tax provision differs from the
amount calculated using the statutory U.S. federal income tax rate, principally
due to the following:
|
Year Ended
December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Amount
|
Percentage
of Income
Before
Taxes
|
Amount
|
Percentage
of Income
Before
Taxes
|
Amount
|
Percentage
of Income
Before
Taxes
|
|||||||||||||||||||
|
Statutory
U.S. federal income tax
|
$ | 37,598 | 35.0 | % | $ | 74,506 | 35.0 | % | $ | 61,168 | 35.0 | % | ||||||||||||
|
State
income taxes, net of federal
benefit
|
2,122 | 2.0 | 6,777 | 3.2 | 3,034 | 1.7 | ||||||||||||||||||
|
Foreign
tax differential
|
(5,724 | ) | (5.3 | ) | (9,109 | ) | (4.3 | ) | (6,443 | ) | (3.7 | ) | ||||||||||||
|
Change
in valuation allowance
|
843 | 0.8 | (2,474 | ) | (1.1 | ) | 2,075 | 1.2 | ||||||||||||||||
|
Foreign
repatriation, net of Foreign
tax credits
|
11,400 | 10.6 | — | — | — | — | ||||||||||||||||||
|
Incentive
stock options
|
— | — | — | — | (892 | ) | (0.5 | ) | ||||||||||||||||
|
Subpart
F income and Section 956
|
2,373 | 2.2 | 3,211 | 1.5 | 2,250 | 1.3 | ||||||||||||||||||
|
Manufacturing
deduction
|
(587 | ) | (0.6 | ) | (2,069 | ) | (1.0 | ) | (503 | ) | (0.3 | ) | ||||||||||||
|
Permanent
and other
|
529 | 0.5 | 573 | 0.3 | 1,754 | 1.0 | ||||||||||||||||||
|
Effective
income tax provision
|
$ | 48,554 | 45.2 | % | $ | 71,415 | 33.6 | % | $ | 62,443 | 35.7 | % | ||||||||||||
Subpart F
income represents interest and royalties earned by a foreign subsidiary as well
as sales made by certain foreign subsidiaries outside of their country of
incorporation. Under the Internal Revenue Code, such income is taxable to
Tempur-Pedic International as if earned directly by Tempur-Pedic
International.
The
following sets forth the amount of pre-tax income attributable to each of the
Company’s operating segments for the years ended December 31, 2008, 2007 and
2006:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Pre-tax
income
|
||||||||||||
|
Domestic
|
$ | 20,715 | $ | 104,640 | $ | 83,665 | ||||||
|
International
|
86,707 | 108,234 | 91,100 | |||||||||
|
Consolidated
|
$ | 107,422 | $ | 212,874 | $ | 174,765 | ||||||
The
Company adopted the provisions of FIN 48 on January 1, 2007. FIN 48
prescribes a recognition threshold and measurement attribute for the accounting
and financial statement disclosure of tax positions taken or expected to be
taken in a tax return. The evaluation of a tax position is a two-step process.
The first step requires the Company to determine whether it is more likely than
not that a tax position will be sustained upon examination based on the
technical merits of the position. The second step requires the Company to
recognize in the financial statements each tax position that meets the more
likely than not criteria, measured at the largest amount of benefit that has a
greater than 50-percent likelihood of being realized. The Company did not record
any cumulative effect adjustment to retained earnings as a result of adopting
FIN 48. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
| Balance as of December 31, 2006 | $ | 8,432 | ||
| Additions based on tax positions related to 2007 | 453 | |||
| Additions for tax positions of prior years | 167 | |||
| Reductions for tax positions of prior years | (2,022 | ) | ||
| Settlements of uncertain tax positions with tax authorities | ||||
|
Balance
as of December 31, 2007
|
|
$
|
7,030
|
|
|
Additions
based on tax positions related to 2008
|
|
460
|
||
|
Additions
for tax positions of prior years
|
|
3,807
|
||
|
Reductions
for tax positions as a result of a lapse of applicable statute of
limitations
|
|
(285
|
)
|
|
|
Settlements
of uncertain tax positions with tax authorities
|
|
—
|
||
|
|
||||
|
Balance
as of December 31, 2008
|
|
$
|
11,012
|
The
entire amount of unrecognized tax benefits would impact the effective income tax
rate if recognized. Interest and penalties, if any, related to unrecognized
tax benefits are recorded in income tax expense. During the years ended December
31, 2008, 2007 and 2006, the Company recognized approximately $881, $197 and
$764 in interest and penalties, respectively. The Company had
approximately $1,896 and $1,015 of accrued interest and penalties at December
31, 2008 and 2007, respectively.
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 $39,300 including interest
and underpayment 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 Advanced Pricing Agreement
(Bilateral APA) between the United States and the Danish Tax Authority. A
Bilateral APA involves an agreement between the IRS and the taxpayer, as well as
a negotiated agreement with one or more foreign competent authorities under
applicable income tax treaties. On August 8, 2008, the Company filed the
Bilateral APA with the IRS and the Danish Tax Authority. The IRS has
communicated to the Company their intent to begin analyzing the Bilateral APA in
the first quarter of 2009. During 2008, the gross amount of unrecognized tax
benefits relating to this matter was increased by approximately $2,200, of which
approximately $800 impacted the effective tax rate and approximately $1,600 was
recorded as a component of Goodwill as it related to periods prior to the Tempur
Acquisition on November 1, 2002. The Company believes it has meritorious
defenses to the proposed adjustment and will oppose the assessment in the Danish
courts, as necessary. In addition to the impact this matter may have on the
gross amount of the Company’s unrecognized tax benefits, it is reasonably
possible under FIN 48 that the amount of the total unrecognized tax benefits may
change in the next twelve months. An estimate of the amount of such
change cannot be made at this time.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to tax examinations by tax
authorities in the U.S. for periods prior to 2005, U.S. state and local
municipalities for periods prior to 2004, and in non-U.S. jurisdictions for
periods prior to 2001. Additionally, the Company is currently under
examination by various tax authorities around the world. The Company
anticipates it is reasonably possible an increase or decrease in the amount of
unrecognized tax benefits could be made in the next twelve months as a result of
the statute of limitations expiring and/or the examinations being concluded on
these returns. However, the Company does not presently anticipate
that any increase or decrease in unrecognized tax benefits will be material to
the consolidated financial statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
The
Income tax provision includes federal, state, and foreign income taxes currently
payable and those deferred or prepaid because of temporary differences between
financial statement and tax bases of assets and liabilities. The Company records
income taxes under the liability method. Under this method, deferred income
taxes are recognized for the estimated future tax effects of differences between
the tax bases of assets and liabilities and their financial reporting amounts
based on enacted tax laws.
The
Income tax provision consisted of the following:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Current
provision
|
||||||||||||
|
Federal
|
$ | 20,029 | $ | 42,589 | $ | 37,818 | ||||||
|
State
|
3,518 | 10,511 | 3,525 | |||||||||
|
Foreign
|
22,584 | 27,276 | 24,928 | |||||||||
|
Total
current
|
46,131 | 80,376 | 66,271 | |||||||||
|
Deferred
provision
|
||||||||||||
|
Federal
|
1,844 | (4,469 | ) | (6,680 | ) | |||||||
|
State
|
(124 | ) | (308 | ) | 605 | |||||||
|
Foreign
|
703 | (4,184 | ) | 2,247 | ||||||||
|
Total
deferred
|
2,423 | (8,961 | ) | (3,828 | ) | |||||||
|
Total
Income tax provision
|
$ | 48,554 | $ | 71,415 | $ | 62,443 | ||||||
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
|
|||||||
|
Inventories
|
|
$
|
4,169
|
$
|
4,192
|
|||
|
Net
operating losses
|
|
9,734
|
11,708
|
|||||
|
Property,
plant and equipment
|
|
7,534
|
3,333
|
|||||
|
Accrued
expenses and other
|
|
13,380
|
10,537
|
|||||
|
Total
deferred tax assets
|
|
34,817
|
29,770
|
|||||
|
Valuation
allowances
|
|
(8,736)
|
(8,779)
|
|||||
|
Total
net deferred tax assets
|
|
26,081
|
20,991
|
|||||
|
Deferred
tax liabilities:
|
|
|||||||
|
Property,
plant and equipment
|
|
(12,198)
|
(10,584)
|
|||||
|
U.S.
tax on unrepatriated earnings
|
(3,356)
|
—
|
||||||
|
Intangible
assets
|
|
(24,565)
|
(25,265)
|
|||||
|
Accrued
expenses and other
|
|
(2,445)
|
(2,863)
|
|||||
|
Total
deferred tax liabilities
|
|
(42,564)
|
(38,712)
|
|||||
|
Net
deferred tax liabilities
|
|
$
|
(16,483)
|
$
|
(17,721)
|
|||
(11) Major
Customers
The top
five customers in the applicable period accounted for approximately 19%, 18% and
15% of the Company’s Net sales for the years ended December 31, 2008, 2007 and
2006, respectively. The top five customers in the applicable period also
accounted for approximately 21% and 23% of accounts receivable as of December
31, 2008 and 2007, respectively. The loss of one or more of these customers
could negatively impact the Company.
(12)
Benefit Plan
A
subsidiary of the Company has a defined contribution plan (the Plan) whereby
eligible employees may contribute up to 15% of their pay subject to certain
limitations as defined by the Plan. Employees are eligible to participate in the
Plan after 90 days and are eligible to receive matching contributions upon one
year of employment with the Company. The Plan provides a 100% match of the first
3% and 50% of the next 2% of eligible employee contributions. All matching
contributions vest immediately. The Company incurred $1,084, $813 and $772 of
expenses associated with the Plan for the years ended December 31, 2008, 2007
and 2006, respectively.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
(13)
Earnings Per Common Share
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income
|
$ | 58,868 | $ | 141,459 | $ | 112,322 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic earnings per common share—weighted average
shares
|
74,737 | 79,831 | 84,922 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Employee
stock options and RSUs
|
172 | 1,425 | 2,608 | |||||||||
|
Denominator
for diluted earnings per common share—adjusted weighted average
shares
|
74,909 | 81,256 | 87,530 | |||||||||
|
Basic
earnings per common share
|
$ | 0.79 | $ | 1.77 | $ | 1.32 | ||||||
|
Diluted
earnings per common share
|
$ | 0.79 | $ | 1.74 | $ | 1.28 | ||||||
The
Company excluded 4,514 and 9 and 515 shares issuable upon exercise of
outstanding stock options for the years ended December 31, 2008, 2007 and 2006,
respectively, from the Diluted earnings per common share computation because
their exercise price was greater than the average market price of our common
stock or they were otherwise anti-dilutive.
(14)
Business Segment Information
The
Company operates in two business segments: Domestic and International. These
reportable segments are strategic business units that are managed separately
based on the fundamental differences in their operations. The Domestic segment
consists of the two U.S. manufacturing facilities, whose customers include the
U.S. distribution subsidiary and in certain third party distributors in the
Americas. The International segment consists of the manufacturing facility in
Denmark, whose customers include all of the distribution subsidiaries and third
party distributors outside the Domestic segment. The Company evaluates segment
performance based on Net sales and Operating income.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
The following
table summarizes segment information:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales from external customers:
|
|
|||||||||||
|
Domestic
|
|
|||||||||||
|
Mattresses
|
$
|
412,295
|
$
|
535,706
|
$
|
455,666
|
||||||
|
Pillows
|
50,772
|
68,342
|
60,111
|
|||||||||
|
Other
|
107,637
|
121,301
|
106,004
|
|||||||||
|
$
|
570,704
|
$
|
725,349
|
$
|
621,781
|
|||||||
|
International
|
|
|||||||||||
|
Mattresses
|
$
|
219,013
|
$
|
232,824
|
$
|
196,235
|
||||||
|
Pillows
|
67,128
|
73,772
|
66,224
|
|||||||||
|
Other
|
70,973
|
74,777
|
60,805
|
|||||||||
|
$
|
357,114
|
$
|
381,373
|
$
|
323,264
|
|||||||
|
|
$
|
927,818
|
$
|
1,106,722
|
$
|
945,045
|
||||||
|
Inter-segment
sales:
|
|
|||||||||||
|
Domestic
|
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
International
|
|
3,097
|
2,994
|
4,785
|
||||||||
|
Intercompany
eliminations
|
|
(3,097
|
)
|
(2,994
|
)
|
(4,785
|
)
|
|||||
|
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Operating
income:
|
|
|||||||||||
|
Domestic
|
|
$
|
47,238
|
$
|
135,202
|
$
|
116,063
|
|||||
|
International
|
|
86,626
|
108,912
|
93,242
|
||||||||
|
|
$
|
133,864
|
$
|
244,114
|
$
|
209,305
|
||||||
|
Depreciation
and amortization (including stock-based compensation
amortization):
|
|
|||||||||||
|
Domestic
|
|
$
|
30,267
|
29,054
|
17,092
|
|||||||
|
International
|
|
10,530
|
11,088
|
11,583
|
||||||||
|
|
$
|
40,797
|
40,142
|
24,675
|
||||||||
|
Total
assets:
|
|
|||||||||||
|
Domestic
|
|
$
|
474,824
|
$
|
608,346
|
$
|
485,958
|
|||||
|
International
|
|
282,884
|
339,757
|
322,816
|
||||||||
|
Intercompany
eliminations
|
|
(111,177
|
)
|
(141,671
|
)
|
(83,108
|
)
|
|||||
|
|
$
|
646,531
|
$
|
806,432
|
$
|
725,666
|
||||||
|
Capital
expenditures:
|
|
|||||||||||
|
Domestic
|
|
$
|
6,733
|
$
|
11,053
|
$
|
32,053
|
|||||
|
International
|
|
3,761
|
5,096
|
5,158
|
||||||||
|
|
$
|
10,494
|
$
|
16,149
|
$
|
37,211
|
||||||
During
the course of normal operations, the Domestic segment purchases inventory from
the Danish manufacturing facility. These purchases are included in the
International segment as Intercompany sales. The Intercompany profits on these
sales are eliminated from the International segment when the manufacturing profit in ending finished
goods inventory is eliminated during the consolidation of the Company’s results.
These manufacturing profits were $546, $607,
and $1,310 for the years ended December 31, 2008, 2007 and 2006,
respectively.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In
thousands, except per share amounts)
(15)
Quarterly Financial Data (unaudited)
Our quarterly
operating results fluctuate as a result of seasonal variations in our business.
A significant portion of our growth in Net sales is attributable to growth in
sales in our Domestic retail channel, particularly sales to furniture and
bedding stores, which we believe are subject to seasonality inherent in the
bedding industry with sales expected to be generally lower in the second and
fourth quarters and higher in the first and third quarters. Accordingly, our Net
sales may be affected by this seasonality as our Domestic retail sales channel
continues to grow as a percentage of our overall Net sales.
Quarterly
results of operations for the years ended December 31, 2008 and 2007 are
summarized below:
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Net
sales
|
$ | 247,222 | $ | 238,661 | $ | 252,814 | $ | 189,121 | ||||||||
|
Gross
profit
|
108,081 | 106,016 | 105,491 | 81,369 | ||||||||||||
|
Operating
income
|
29,333 | 36,319 | 42,891 | 25,321 | ||||||||||||
|
Net
income
|
13,514 | 20,228 | 24,071 | 1,055 | ||||||||||||
|
Basic
earnings per common share
|
$ | 0.18 | $ | 0.27 | $ | 0.32 | $ | 0.01 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.18 | $ | 0.27 | $ | 0.32 | $ | 0.01 | ||||||||
|
2007
|
||||||||||||||||
|
Net
sales
|
$ | 266,032 | $ | 257,642 | $ | 294,094 | $ | 288,954 | ||||||||
|
Gross
profit
|
127,659 | 124,569 | 141,610 | 140,988 | ||||||||||||
|
Operating
income
|
53,754 | 55,130 | 67,549 | 67,681 | ||||||||||||
|
Net
income
|
29,780 | 32,931 | 38,818 | 39,930 | ||||||||||||
|
Basic
earnings per common share
|
$ | 0.35 | $ | 0.40 | $ | 0.50 | $ | 0.53 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.35 | $ | 0.39 | $ | 0.49 | $ | 0.52 | ||||||||
The sum
of the quarterly earnings per common share amounts may not equal the annual
amount reported because per share amounts are computed independently for each
quarter and for the full year based on respective weighted-average common shares
outstanding and other dilutive potential common shares. Our quarterly operating
results fluctuate as a result of seasonal variations in our
business.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
SCHEDULE
II
|
Description
|
Balance
at
Beginning
of
Period
|
Additions
Charges
to
Costs
and
Expenses
|
Charged
to Other
Accounts
|
Deductions
|
Balance
at
End
of
Period
|
|||||||||||||||
|
Allowance
for Doubtful Accounts:
|
||||||||||||||||||||
|
Year
Ended December 31, 2006
|
$ | 5,436 | $ | 3,464 | $ | — | $ | (2,786 | ) | $ | 6,114 | |||||||||
|
Year
Ended December 31, 2007
|
$ | 6,114 | $ | 5,997 | $ | — | $ | (4,055 | ) | $ | 8,056 | |||||||||
|
Year
Ended December 31, 2008
|
$ | 8,056 | $ | 8,110 | $ | — | $ | (9,440 | ) | $ | 6,726 | |||||||||