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, 2009
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 x No¨
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 x
The
aggregate market value of the common equity held by nonaffiliates of the
registrant on June 30, 2009, computed by reference to the closing price for such
stock on the New York Stock Exchange on such date, was approximately
$899,417,487.
The
number of shares outstanding of the registrant’s common stock as of February 5,
2010 was 73,701,705
shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for the 2010 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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ITEM 1.
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ITEM
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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 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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ITEM
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ITEM
9.
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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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39
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ITEM
11.
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39
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ITEM
12.
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39
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ITEM
13.
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ITEM
14.
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39
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PART IV.
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ITEM
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40
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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 and our business segments, investments in operating
infrastructure, our expected capital expenditures, the impact of consumer
confidence and availability of consumer financing, ability to meet anticipated
share repurchases, dividend payments and working capital needs, the impact of
the adoption of recently issued accounting pronouncements, our ability to
service indebtedness and maintain our profitability, statements regarding
current supplier relationships, the antitrust class action lawsuit and similar
issues, pending tax assessments, our ability to improve our financial
flexibility and strengthen the business, statements relating to changes to our
operating cash flow, statements relating to the impact of initiatives to
accelerate growth, expand market share and attract sales from the standard
mattress market, the initiatives to expand business within established accounts
and to other furniture and bedding retail stores, the initiatives to reduce
costs and operating expenses and improve manufacturing productivity, the impact
of net operating losses, the initiatives to improve retail account productivity,
our expectations regarding our gross margins, the impact of internet leads, the
vertical integration of our business, our ability to source raw materials
effectively, the development, rollout and market acceptance of new products, the
continued acceptance of new products and the expansion of our product line,
changes in our inventory levels, expected growth of accounts receivable in
correlation with our sales levels, our ability to further invest in the business
and in brand awareness, our ability to meet financial obligations and continue
to comply with the terms of our credit facility, the effects of changes in
foreign exchange rates on our reported earnings, the effect of foreign tax
credits on U.S. income tax liability, our expected sources of cash flow, our
ability to effectively manage cash and our debt/leverage ratio, our ability to
align costs with sales expectations, and other information that is not
historical information. Many of these statements appear, in particular, under
the heading “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in ITEM 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.
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 15, “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, specialty and
department stores); Direct (direct response and internet); Healthcare
(chiropractors, medical retailers, hospitals and other healthcare markets); and
Third party distributors in countries where we do not sell directly through our
own subsidiaries.
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 are 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 broadening
appeal of our new products. 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 the recognition received
by Consumer Reports, 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 $0.7 million in Net sales per employee in
2009. For the year ended December 31, 2009, our Gross profit margin and Net
income margin were 47.4% and 10.2%, respectively, on Net sales of $831.2
million. Our Net income margin allows our business model the 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, subject to the effect of business and economic
conditions as discussed below. Additionally, by expanding distribution within
our existing accounts, we believe we have the opportunity to grow our business.
By extending our product line and our new segmentation of products, we should be
able to continue to expand the number of Tempur-Pedic models offered at the
retail store level, which should lead to increased sales. We believe this
strategy provides for continued growth opportunities and market shares gains.
However, our business may continue to be affected by general business and
economic conditions that could have an impact on demand for our products, which
could limit our market share and decrease sales. As of December 31, 2009 our
products were sold in approximately 6,400 furniture and bedding retail stores in
the U.S., out of a total of approximately 10,000 stores we have identified as
appropriate targets. Within this addressable market, our plan is to increase our
total penetration to a total of 7,000 to 8,000 over the long-term.
Internationally, our products are available in approximately 4,900 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 66.2% of our Net sales in 2009 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 also 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 12.9% of
Net sales in 2009. Our pillows provide plush and pressure-relieving comfort as
the temperature sensitive material molds to the body.
Other
Products
Our other
products represented 20.9% of our Net sales in 2009. 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, 2009,
2008 and 2007 accounted for approximately 18.9%, 19.2% and 18.2% 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 September
2009, we launched a new media campaign, titled “Ask Me,” in the U.S. across all
of our sales channels. In 2009, we also introduced a product segmentation
strategy, which groups our products into collections with multiple models and
price points, differentiated by functionality and specifications.
Retail
The
Retail channel sells to furniture and bedding retailers, specialty stores and
department stores, among others. Our Retail channel represented 84.5% of
Net sales in 2009.
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 6.0%
of Net sales in 2009.
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 vendors
integrate 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 4.3% of Net
sales in 2009.
Third
party
Third
party sales represented 5.2% of Net sales in 2009. 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 arrangements with third party distributors located in
approximately 60 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
typically 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.
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 certain new product
development, were $6.5 million, $6.0 million and $5.9 million in 2009, 2008 and
2007, 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. 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, 2009, we held 22 U.S. patents, expiring at various points
between 2013 and 2034, and had 16 U.S. patent applications pending. We also held
76 foreign patents and had 61 foreign patent applications pending.
As of
December 31, 2009, we held 584 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 and currently these expenditures are
immaterial to our financial results. We believe that we are in material
compliance with the applicable federal, state, local and foreign rules and
regulations governing our business.
As of
December 31, 2009, we had approximately 1,150 employees, with approximately 550
in the U.S., 250 in Denmark and 350 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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50 |
President
and Chief Executive Officer
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Dale E. Williams
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47 |
Executive
Vice President, Chief Financial Officer and Secretary
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Richard
W. Anderson
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49 |
Executive
Vice President and President, North America
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Matthew D. Clift
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50 |
Executive
Vice President of Global Operations
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Lou
H. Jones
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59 |
Executive
Vice President and General Counsel
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David Montgomery
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49 |
Executive
Vice President and President of International
Operations
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Bhaskar
Rao
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44 |
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, from January 2008, 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.
Dale E. Williams joined
Tempur-Pedic International in 2003 and serves as Executive Vice President, Chief
Financial Officer and Secretary. From 2001 through September 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.
Richard W. 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.
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.
Lou H. Jones joined
Tempur-Pedic International in June 2009 and serves as Executive Vice President
and General Counsel. From July 2007 to January 2009, Ms. Jones was employed by
Papa John’s International, where she served as General Counsel. From March 1998
to July 2007, Ms. Jones was employed by Blockbuster Inc., serving as Senior Vice
President, Corporate and International Law. From May 1984 to March
1998, Ms. Jones was a partner and shareholder at the law firm of Thompson &
Knight. Ms. Jones earned a B.A. degree from the University of Texas, a B.G.S.
degree from the University of Nebraska and a J.D. degree from Southern Methodist
University.
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.
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 Andersen 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.
Our business
has been affected by general business and economic conditions, and these
conditions could have an impact on future demand for our products. The U.S.
macroeconomic environment remains challenging and was the primary factor in a
slowdown in the mattress industry. In addition, our International segment has
experienced weakening as a result of general business and economic conditions in
several European and Asian markets. We expect the economic environment in the
U.S., Europe and Asia to continue to be challenging as continued economic
uncertainty has generally given households less confidence to make discretionary
purchases.
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
customers, resulting in increased provisions for credit losses; insolvency of
our key suppliers resulting in product delays; inability of retailers and
consumers to obtain credit to finance purchases of our products; decreased
consumer confidence; decreased retail demand, including order delays or
cancellations; and counterparty failures negatively impacting our treasury
operations.
In addition,
the 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.
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 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 reduce 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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our
ability to successfully identify and respond to emerging trends in the
mattress and pillow industry; and
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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.
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Our
sales growth is dependent upon our ability to implement strategic initiatives
and actions taken to increase sales growth may not be effective.
Our ability to generate sales growth is
dependent upon a number of factors, including the following:
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our
ability to continuously improve our products to offer new and enhanced
consumer benefits and better
quality;
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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;
and
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the
level of consumer acceptance of our
products.
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8
Over the last
few years, we have had to manage our business both through periods of rapid
growth and the current challenging economic environment. A source of our growth
within this time frame 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 6,400 furniture and bedding retail
stores in the U.S., 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
4,900 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 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.
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 demographic, 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.
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. We experienced decreases
in the price of certain raw materials toward the end of 2008 and beginning of
2009, however, we began experiencing modest price increases throughout the
second half of 2009. 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.
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
36.8% of our Net sales were generated by non-U.S. operations for the year ended
December 31, 2009. 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 2010 assumes no significant variance from the 2009 currency exchange
rates over the course of the fourth quarter. 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 36.8% of our Net sales from non-U.S. operations during the year
ended December 31, 2009. 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, tariffs and other tax increases,
fluctuations in exchange rates, inflation and unstable political situations, and
labor issues.
We
are subject to a pending tax proceeding in Denmark, and an adverse decision
would reduce our liquidity and profitability.
On
October 24, 2007, we received an income tax assessment from the Danish Tax
Authority with respect to the 2001, 2002 and 2003 tax years. The tax
assessment relates to the royalty paid by one of Tempur-Pedic International’s
U.S. subsidiaries to a Danish subsidiary and the position taken by the Danish
Tax Authority could apply to subsequent years. The total tax assessment is
approximately $39.3 million including interest and penalties. On
January 23, 2008 we filed timely complaints with the Danish National Tax
Tribunal denying the tax assessments. The National Tax Tribunal formally
agreed to place the Danish tax litigation on hold pending the outcome of a
Bilateral Advance Pricing Agreement (Bilateral APA) between the United States
and the Danish Tax Authority. A Bilateral APA involves an agreement
between the Internal Revenue Service (IRS) and the taxpayer, as well as a
negotiated agreement with one or more foreign competent authorities under
applicable income tax treaties. On August 8, 2008 we filed the
Bilateral APA with the IRS and the Danish Tax Authority. The IRS began analyzing
the Bilateral APA in the first quarter of 2009 and expects to finalize its
position by the second quarter of 2010. Although we believe we
have meritorious defenses to the proposed adjustment and will oppose the
assessment in the Danish courts, as necessary, an adverse decision could reduce
or impair our liquidity and profitability.
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 hold 22 U.S. patents, and we have 16 U.S. patent
applications pending. Further, we hold 76 foreign patents, and we have 61
foreign patent applications pending. In addition, we hold 584 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.
Challenges to our
pricing policies 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
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.
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 18.9% of our Net sales for the year ended
December 31, 2009. 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.
Deterioration
in labor relations could disrupt our business operations and increase our costs,
which could decrease our liquidity and profitability.
As of
December 31, 2009, we had approximately 1,150 full-time employees, with
approximately 550 in the U.S., 250 in Denmark and 350 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.
Our leverage
limits our flexibility and increases our risk of default.
As
of December 31, 2009, we had $297.5 million in total Long-term debt outstanding.
In addition, as of December 31, 2009, our Stockholders’ Equity was $172.3
million. Between October 2005 and November 30, 2007, we repurchased a total of
$540.0 million in common stock pursuant to stock repurchase authorizations
approved by our Board of Directors. We funded the repurchase in part through
borrowings under the credit agreement we entered into in 2005 (2005 Senior
Credit Facility), which substantially increased our leverage. On January 13,
2010 the Board of Directors approved a share repurchase program of up to $100.0
million of our common stock which replaced the October 2007 authorization. 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 had previously been paid in quarterly installments. The decision to pay
a dividend is periodically reviewed by the Board of Directors.
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 would 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
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 $1.0 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
amend our 2005 Senior Credit Facility, it may impact 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:
|
|
•
|
actual
or anticipated variations in our quarterly operating results, including
those resulting from seasonal variations in our
business;
|
|
|
•
|
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;
|
|
|
•
|
stock
repurchase programs;
|
|
|
•
|
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, 2009, we had approximately $31.8 million in returns for
a return rate of approximately 6.1% 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.
We
may be exposed to certain regulatory and financial risks related to climate
change.
Climate change is
receiving ever increasing attention worldwide. Many scientists, legislators and
others attribute global warming to increased levels of greenhouse gases,
including carbon dioxide, which has led to significant legislative and
regulatory efforts to limit greenhouse gas emissions.
There are a
number of pending legislative and regulatory proposals to address greenhouse gas
emissions. For example, in June 2009 the U.S. House of Representatives passed
the American Clean Energy and Security Act that would phase-in significant
reductions in greenhouse gas emissions if enacted into law. The U.S. Senate is
considering a different bill, and it is uncertain whether, when and in what form
a federal mandatory carbon dioxide emissions reduction program may be adopted.
Similarly, certain countries including Denmark, where our only plant outside the
United States is located, have adopted the Kyoto Protocol, and this and other
international initiatives under consideration could affect our international
operations. These actions could increase costs associated with our operations,
including costs for raw materials and transportation.
Because it is
uncertain what laws will be enacted, we cannot predict the potential impact of
such laws on our future consolidated financial condition, results of operations
or cash flows.
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
5, 2010, there were 73.7
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,
up to 18,483,532 shares of our common stock are 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, as amended and our
2003 Employee Stock Purchase Plan. The Company has filed registration statements
with the SEC with respect to these shares and 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 unaffiliated stockholders who presently beneficially each 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
unaffiliated stockholders own a large percentage of our common stock and
could limit you from influencing corporate decisions.
As of February
5, 2010, our executive officers, directors, and their respective
affiliates, including one of our larger stockholders, own, in the aggregate,
approximately 12% of our
outstanding common stock on a fully diluted basis, after giving effect to the
vesting of all unvested options. These stockholders, as a group, are
able to influence all matters requiring approval by our stockholders, including
mergers, sales of assets, the election of all directors and approval of other
significant corporate transactions, in a manner with which you may not agree or
that may not be in your best interest. In addition, we have several
unaffiliated stockholders who each 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.
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,
2009.
|
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 19 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 termination of the
lease.
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.
Antitrust
Action—On January 5, 2007, a purported class action was filed against the
Company in the United States District Court for the Northern District of
Georgia, Rome Division (Jacobs v. Tempur-Pedic International, Inc. and
Tempur-Pedic North America, Inc., or the Antitrust Action). The Antitrust
Action alleges violations of federal antitrust law arising from the pricing of
Tempur-Pedic mattress products by Tempur-Pedic North America and certain
distributors. The action alleges a class of all purchasers of Tempur-Pedic
mattresses in the United States since January 5, 2003, and seeks damages and
injunctive relief. Count Two of the complaint was dismissed by the court on June
25, 2007, based on a motion filed by the Company. Following a decision issued by
the United States Supreme Court in Leegin Creative Leather Prods., Inc.
v. PSKS, Inc. on June 28, 2007, the Company filed a motion to dismiss the
remaining two counts of the Antitrust Action on July 10, 2007. On December 11,
2007, that motion was granted and, as a result, judgment was entered in favor of
the Company and the plaintiffs’ complaint was dismissed with prejudice. On
December 21, 2007, the plaintiffs filed a “Motion to Alter or Amend Judgment,”
which has been fully briefed. On May 1, 2008, that motion was
denied. The Jacobs appealed the dismissal of their claims, and the
parties argued the appeal before the United States Circuit Court for the
Eleventh Circuit on December 11, 2008. The matter has been taken
under advisement by the court. The Company continues to strongly
believe that the Antitrust Action lacks merit, and intends to defend against the
claims vigorously. However, due to the inherent uncertainties of litigation, we
cannot predict the outcome of the Antitrust Action at this time, and can give no
assurance that these claims will not have a material adverse affect on the
Company’s financial position or results of operation. Accordingly, the Company
cannot make an estimate of the possible ranges of loss.
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 us
that it may bring an enforcement action against the Company under New York law
if we chose not to do so. The OAG has made information and document requests and
we are cooperating with these requests. The Company believes that its UPPL
complies with state and federal law and, should the OAG challenge the UPPL,
intends to vigorously defend it. However, due to the inherent uncertainties of
this matter, the Company cannot at this time predict the outcome of any such
enforcement action, if brought, and can give no assurance that these claims will
not have a material adverse affect on its financial position or results of
operation.
We are
involved in various other legal proceedings incidental to the operations of 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 2009.
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
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 | $ | — | ||||||
|
Fiscal
2009
|
||||||||||||
|
First
Quarter
|
$ | 8.26 | $ | 3.93 | $ | — | ||||||
|
Second
Quarter
|
$ | 13.74 | $ | 8.13 | $ | — | ||||||
|
Third
Quarter
|
$ | 19.10 | $ | 10.61 | $ | — | ||||||
|
Fourth
Quarter
|
$ | 24.28 | $ | 18.03 | $ | — | ||||||
As of
December 31, 2009 we had approximately 173 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 in future
periods will be reviewed by our Board of Directors on a periodic
basis.
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 of
$0.06. In the second quarter of 2007, our Board of Directors increased the
quarterly dividend to $0.08 per common share. The same dividend was declared in
the third and fourth quarters of 2007. Prior to 2007, we had never previously
declared a cash dividend for our common stock.
Equity
Compensation Plan Information
The following
table sets forth equity compensation plan information as of December 31,
2009:
|
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 (1)
|
108,597 | $ | 2.55 | — | ||||||||
|
2003
Equity Incentive Plan
|
6,719,674 | $ | 13.63 | 4,110,909 | ||||||||
|
2003
Employee Stock Purchase Plan (2)
|
— | — | 173,892 | |||||||||
|
Equity
compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
6,828,271 | $ | 13.46 | 4,284,801 | ||||||||
(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 eligibile 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. This plan is an open market purchase plan and does not have a dilutive
effect.
See Note
9 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 periods ending December 31, 2009 and 2008, respectively, we did
not repurchase any 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. We
repurchased 0.7 million shares for a total of $19.9 million under the October
2007 authorization. The share repurchases were funded from borrowings under the
2005 Senior Credit Facility and funds from operations. On January 13, 2010 our
Board of Directors authorized the repurchase of up to $100.0 million of our
common stock, which replaces the October 2007 authorization. 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.
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. We believe this peer group closely
reflects our business and, as a result, provides meaningful comparison of stock
performance.
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, 2004 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.
| 12/2004 | 12/2005 | 12/2006 | 12/2007 | 12/2008 | 12/2009 | |||||||||||||||||||
|
Tempur-Pedic
International Inc.
|
$ | 100.00 | $ | 54.25 | $ | 96.51 | $ | 123.87 | $ | 34.50 | $ | 114.98 | ||||||||||||
|
S&P
500
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
|
Peer
Group
|
100.00 | 100.08 | 117.73 | 100.84 | 53.77 | 94.93 |
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, 2009,
2008, 2007, 2006 and 2005 from our audited financial statements. Our financial
statements as of December 31, 2009 and 2008 and for each of the three years in
the period ended December 31, 2009 are included in ITEM 15, “Exhibits and
Financial Statement Schedules” in Part IV of this report.
|
(In
thousands, except per share amounts)
|
||||||||||||||||||||
|
Statement
of Income Data:
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Net
sales
|
$ | 831,156 | $ | 927,818 | $ | 1,106,722 | $ | 945,045 | $ | 836,732 | ||||||||||
|
Cost
of sales
|
437,414 | 526,861 | 571,896 | 484,507 | 412,790 | |||||||||||||||
|
Gross
profit
|
393,742 | 400,957 | 534,826 | 460,538 | 423,942 | |||||||||||||||
|
Operating
expenses(1)
|
248,797 | 267,093 | 290,712 | 251,233 | 233,327 | |||||||||||||||
|
Operating
income
|
144,945 | 133,864 | 244,114 | 209,305 | 190,615 | |||||||||||||||
|
Interest
expense, net
|
(17,349 | ) | (25,123 | ) | (30,484 | ) | (23,920 | ) | (20,264 | ) | ||||||||||
|
Other
income (expense), net(2)
|
441 | (1,319 | ) | (756 | ) | (10,620 | ) | (3,879 | ) | |||||||||||
|
Income
before income taxes
|
128,037 | 107,422 | 212,874 | 174,765 | 166,472 | |||||||||||||||
|
Income
tax provision
|
43,044 | 48,554 | 71,415 | 62,443 | 67,143 | |||||||||||||||
|
Net
income
|
$ | 84,993 | $ | 58,868 | $ | 141,459 | $ | 112,322 | $ | 99,329 | ||||||||||
|
Balance
Sheet Data (at end of period):
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 14,042 | $ | 15,385 | $ | 33,315 | $ | 15,788 | $ | 17,855 | ||||||||||
|
Total
assets
|
643,379 | 646,531 | 806,432 | 725,666 | 702,311 | |||||||||||||||
|
Total
debt
|
297,470 | 419,341 | 602,044 | 361,132 | 344,481 | |||||||||||||||
|
Total
Stockholders’ Equity
|
172,293 | 72,443 | 48,138 | 213,348 | 226,329 | |||||||||||||||
|
Other
Financial and Operating Data:
|
||||||||||||||||||||
|
Dividends
per common share
|
$ | — | $ | 0.24 | $ | 0.30 | $ | — | $ | — | ||||||||||
|
Depreciation
and amortization(3)
|
40,213 | 40,797 | 40,142 | 28,676 | 27,882 | |||||||||||||||
|
Net
cash provided by operating activities
|
134,986 | 198,394 | 126,361 | 165,815 | 102,249 | |||||||||||||||
|
Net
cash used by investing activities
|
(14,303 | ) | (5,368 | ) | (22,871 | ) | (37,861 | ) | (86,584 | ) | ||||||||||
|
Net
cash used by financing activities
|
(118,721 | ) | (200,150 | ) | (87,642 | ) | (132,476 | ) | (19,955 | ) | ||||||||||
|
Basic
earnings per common share
|
1.13 | 0.79 | 1.77 | 1.32 | 1.01 | |||||||||||||||
|
Diluted
earnings per common share
|
1.12 | 0.79 | 1.74 | 1.28 | 0.97 | |||||||||||||||
|
Capital
expenditures
|
14,303 | 10,494 | 16,149 | 37,211 | 84,881 | |||||||||||||||
|
(1)
|
Includes
$11.2 million, $10.4 million, $10.7 million, $7.9 million, and $6.9
million in non-cash charges for the years ended December 31, 2009, 2008,
2007, 2006, and 2005, respectively. These amounts are comprised of $2.4
million, $2.4 million, $3.9 million, $4.1 million and $4.0 million in
amortization of definite-lived intangible assets in 2009, 2008, 2007, 2006
and 2005, respectively; and $8.8 million, $8.0 million, $6.7 million, $3.8
million, and $2.9 million in stock-based compensation expense in 2009,
2008, 2007, 2006 and 2005, 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; and $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.
|
|
(3)
|
Includes
$8.8 million, $8.0 million, $6.7 million, $3.8 million and $2.9 million in
non-cash stock-based compensation expense related to restricted stock
units, stock option grants, and acceleration (2005 only) in 2009, 2008,
2007, 2006 and 2005, 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. 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” 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.
In this
discussion and analysis, we discuss and explain the financial condition and
results of operations for the years ended December 31, 2009, 2008 and 2007
that includes the following points:
|
·
|
Our Net
sales and costs in the periods presented as well as changes between
periods;
|
|
·
|
Discussion
of new initiatives that may affect our future results of operations
and financial condition;
|
|
·
|
Expected
future expenditures for capital projects and sources of liquidity for
future operations; and
|
|
·
|
The
effects of the foregoing on our overall financial performance and
condition, as well as certain other factors that could affect
our future performance.
|
General—We are the leading
manufacturer, marketer and distributor of premium mattresses and pillows, which
we sell in approximately 80 countries under the TEMPUR® and Tempur-Pedic®
brands. We believe our premium mattresses and pillows are more comfortable than
standard bedding products because our proprietary pressure-relieving TEMPUR®
material is temperature sensitive, has a high density and therapeutically
conforms to the body.
We sell
our premium mattresses and pillows through four distribution channels in each
operating business segment: Retail (furniture and bedding, specialty and
department stores); Direct (direct response and internet); Healthcare
(chiropractors, medical retailers, hospitals and other healthcare markets); and
Third party distributors in countries where we do not sell directly through our
own subsidiaries.
Business Segment
Information—We have two reportable business segments: Domestic and
International. These reportable segments are strategic business units that are
managed separately based on the fundamental differences in their geographies.
The Domestic operating segment consists of two U.S. manufacturing facilities,
whose customers include our 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 also to become the world’s largest bedding company in terms of revenue. To
achieve our long-term goals while managing through the current economic
environment, we expect to continue to pursue certain key
strategies:
|
·
|
Maintain
our focus on premium mattresses and pillows and to regularly introduce new
products.
|
|
·
|
Invest
in increasing our global brand awareness through advertising campaigns
that further associate our brand name with better overall sleep and
premium quality products.
|
|
·
|
Extend
our presence and improve our account productivity in both the Domestic and
International Retail segments.
|
|
·
|
Invest
in our operating infrastructure to meet the requirements of our business,
including investments in our research and development
capabilities.
|
|
·
|
Take
actions to further improve our financial flexibility and strengthen the
business.
|
Key
financial highlights for the year ended December 31, 2009 include:
|
·
|
Earnings
per share (EPS) were $1.12 per diluted share compared to $0.79 for the
full year 2008. Adjusted EPS was $0.94 per diluted share for the full year
2008 and excludes the $11.6 million tax provision related to the
repatriation of foreign earnings. For additional information about
adjusted EPS (which is a non-GAAP measure) please refer to the
reconciliation and other information included under the heading, “Income
tax provision.”
|
|
·
|
Our
Gross Profit margin was 47.4% compared to 43.2% for the year ended
December 31, 2008.
|
|
·
|
Our
Operating income margin was 17.4% compared to 14.4% for the year ended
December 31, 2008.
|
|
·
|
We
reduced Total debt by $121.9 million to $297.5 million as of December 31,
2009 from $419.3 million at December 31,
2008.
|
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
thousands, except earnings per share)
|
Year
Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||
|
Net
sales
|
$
|
831,156
|
100.0
|
%
|
$
|
927,818
|
100.0
|
%
|
$
|
1,106,722
|
100.0
|
%
|
|||||
|
Cost
of sales
|
437,414
|
52.6
|
526,861
|
56.8
|
571,896
|
51.7
|
|||||||||||
|
Gross
Profit
|
393,742
|
47.4
|
400,957
|
43.2
|
534,826
|
48.3
|
|||||||||||
|
Selling
and marketing expenses
|
153,440
|
18.5
|
172,350
|
18.6
|
193,574
|
17.5
|
|||||||||||
|
General,
administrative and other
|
95,357
|
11.5
|
94,743
|
10.2
|
97,138
|
8.7
|
|||||||||||
|
Operating
income
|
144,945
|
17.4
|
133,864
|
14.4
|
244,114
|
22.1
|
|||||||||||
|
Interest
expense, net
|
(17,349
|
)
|
(2.1
|
)
|
(25,123
|
)
|
(2.7
|
)
|
(30,484
|
)
|
(2.8
|
)
|
|||||
|
Other
income (expense), net
|
441
|
0.1
|
(1,319
|
)
|
(0.1
|
)
|
(756
|
)
|
—
|
||||||||
|
Income
before income taxes
|
128,037
|
15.4
|
107,422
|
11.6
|
212,874
|
19.3
|
|||||||||||
|
Income
tax provision
|
43,044
|
5.2
|
48,554
|
5.2
|
71,415
|
6.5
|
|||||||||||
|
Net
income
|
$
|
84,993
|
10.2
|
%
|
$
|
58,868
|
6.4
|
%
|
$
|
141,459
|
12.8
|
%
|
|||||
|
Earnings
per common share:
|
|||||||||||||||||
|
Diluted
|
$
|
1.12
|
$
|
0.79
|
$
|
1.74
|
|||||||||||
|
Weighted
average common shares outstanding:
|
|||||||||||||||||
|
Diluted
|
76,048
|
74,909
|
81,256
|
||||||||||||||
Year
Ended December 31, 2009 Compared with Year Ended December 31, 2008
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
thousands)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Retail
|
$ | 702,293 | $ | 781,105 | $ | 459,678 | $ | 500,513 | $ | 242,615 | $ | 280,592 | ||||||
|
Direct
|
49,478 | 47,597 | 43,283 | 39,666 | 6,195 | 7,931 | ||||||||||||
|
Healthcare
|
36,152 | 47,087 | 11,024 | 15,276 | 25,128 | 31,811 | ||||||||||||
|
Third
party
|
43,233 | 52,029 | 11,339 | 15,249 | 31,894 | 36,780 | ||||||||||||
| $ | 831,156 | $ | 927,818 | $ | 525,324 | $ | 570,704 | $ | 305,832 | $ | 357,114 | |||||||
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
thousands)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Mattresses
|
$ | 549,947 | $ | 631,308 | $ | 366,925 | $ | 412,295 | $ | 183,022 | $ | 219,013 | ||||||
|
Pillows
|
107,532 | 117,900 | 48,814 | 50,772 | 58,718 | 67,128 | ||||||||||||
|
Other
|
173,677 | 178,610 | 109,585 | 107,637 | 64,092 | 70,973 | ||||||||||||
| $ | 831,156 | $ | 927,818 | $ | 525,324 | $ | 570,704 | $ | 305,832 | $ | 357,114 | |||||||
Net
sales—Net sales for the year ended December 31, 2009 decreased to $831.2
million from $927.8 million, a decrease of $96.7 million, or 10.4%, primarily a
result of our industry continuing to be affected by the macroeconomic
environment, resulting in lower consumer traffic and decreased consumer demand.
Our industry has been adversely impacted by a depressed housing market, low
consumer confidence and rising unemployment trends. Consolidated Mattress sales
decreased $81.4 million, or 12.9%, compared to the full year 2008. This decrease
in Mattress sales is primarily related to the decrease in our Retail channel,
with Net sales decreasing to $702.3 million from $781.1 million in the same
period in 2008, a decrease of $78.8 million, or 10.1%. Consolidated Pillow sales
decreased approximately $10.4 million, or 8.8% compared to the twelve months
ended December 31, 2008. Many of our pillow products are sold with mattress
purchases. Therefore, when mattress sales decline, pillow sales are also
impacted. We believe we are facing a challenging economic environment, and are
not assuming the economic climate will recover in the short term as visibility
remains limited. The factors that impacted Net sales for each segment are
discussed below, in the respective segment discussion.
Domestic—Domestic Net sales
for the year ended December 31, 2009 decreased to $525.3 million from $570.7
million for the same period in 2008, a decrease of $45.4 million, or 8.0%. Our
Domestic Retail channel contributed $459.7 million in Net sales for the twelve
months ended December 31, 2009. We believe that the macroeconomic environment
adversely impacted our Domestic Retail channel. In the third quarter of 2009, we
introduced our new product, the TEMPUR-CloudTM
Supreme, which has been well received by retailers and consumers. We believe
this product appeals to a new consumer segment and will continue to be
successful in 2010. Additionally, in 2009, we offered promotions to drive
traffic to the Retail channel. Net sales in the Direct channel increased by $3.6
million, or 9.1%, which we believe is a result of our focus on generating
internet leads and investing in internet advertising. The Domestic Healthcare
and Third party channel Net sales both experienced declines, with a decrease of
$4.3 million, or 27.8%, to $11.0 million in the Healthcare channel and a
decrease of $3.9 million, or 25.6%, to $11.3 million in the Third party channel.
The Healthcare channel Net sales decrease is primarily related to the decreased
availability of discretionary spending in the healthcare industry. The Third
party channel Net Sales decrease is attributable to macroeconomic conditions in
our Third party regions.
As a
result of the macroeconomic environment, mattress sales decreased to $366.9
million for the twelve months ended December 31, 2009, a decrease of $45.4
million, or 11.0%, over the same period in 2008. The decline in mattress sales
is largely related to the deteriorating macroeconomic environment and its
effects on our Retail channel. Pillow sales were relatively flat in 2009,
decreasing to $48.8 million, a decline of $2.0 million or 3.9%. In the fourth
quarter of 2009, we offered promotions of our pillow products, which we believe
were successful during the holiday season. Other sales, which include adjustable
bedbases, foundations, other related products and a variety of comfort items,
increased by $1.9 million, or 1.8%. This increase is primarily driven by
emphasizing sales of adjustable bedbases alongside mattress offerings. In the
third quarter of 2009, we introduced a new domestic advertising campaign, “Ask
Me” which focuses on increasing awareness of our products and the benefits they
offer through word-of-mouth and social networking outlets, which we believe will
increase our brand awareness.
International—International
Net sales for the year ended December 31, 2009 decreased to $305.8 million from
$357.1 million for the same period in 2008, a decrease of $51.3 million, or
14.4%. On a constant currency basis, our International sales declined
approximately 10.7%. Our International segment was primarily impacted by the
global economic slowdown early in 2009, but experienced improvements at the end
of the year. The International Retail channel decreased $38.0 million, or 13.5%,
for the twelve months ended December 31, 2009, which we believe is attributable
to declines in consumer traffic and decreased demand. International mattress
sales in 2009 decreased $36.0 million, or 16.4%, compared to 2008. Pillow sales
in 2009 decreased $8.4 million, or 12.5%, as compared to 2008. Pillow sales in
the International segment also correlate with mattress sales; often pillow sales
accompany mattress product sales. Earlier in 2009, we introduced the Sensation
mattress line in our International segment, which we believe is a unique and
differentiated product and will appeal to a new group of consumers around the
world.
Gross
profit—Gross profit for the year ended December 31, 2009 decreased
slightly to $393.7 million from $401.0 million for the same period in 2008, a
decrease of $7.2 million, or 1.8%. Gross profit margin for the year ended
December 31, 2009 was 47.4%, as compared to 43.2% in the same period of 2008.
Several factors that impacted our Gross profit margin during 2009 are identified
and discussed below in the respective segment discussions.
Domestic—Domestic Gross
profit for the year ended December 31, 2009 increased to $222.6 million, an
improvement of $14.9 million, or 7.2%. The Gross profit margin in our Domestic
segment was 42.4% and 36.4% for the year ended 2009 and 2008, respectively. For
the year ended December 31, 2009, the Gross profit margin in this segment
increased due to a combination of improved efficiencies in manufacturing, lower
commodity costs and improved product pricing, the effects of which were
partially offset by fixed cost de-leverage related to lower production volumes
in our manufacturing facilities. Our Domestic Cost of sales decreased to $302.8
million for the year ended December 31, 2009 as compared to $363.0 million for
the year ended December 31, 2008, a decrease of $60.3 million, or
16.6%.
International—International
Gross profit for the year ended December 31, 2009 decreased to $171.2 million
from $193.3 million, a decrease of $22.1 million, or 11.4%. The Gross profit
margin in our International segment was 56.0% and 54.1% for the years ended
December 31, 2009 and 2008, respectively. For the year ended December 31, 2009,
the Gross profit margin in the International segment increased due to a
combination of improved efficiencies in manufacturing, lower commodity costs and
improved product pricing, the effects of which were partially offset by fixed
cost de-leverage related to lower production volumes in our manufacturing
facility. Our International Cost of sales decreased to $134.7 million for the
year ended December 31, 2009, as compared to $163.8 million for the year ended
December 31, 2008, a decrease of $29.2 million, or 17.8%.
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 $153.4 million for the year ended December 31, 2009 as compared to
$172.4 million for the year ended December 31, 2008, a decrease of $18.9
million, or 11.0%. Selling and marketing expenses as a percentage of Net sales
were essentially flat at 18.5% compared to 18.6% for 2008. Our objective is to
align advertising costs to reflect our sales expectations. During the last three
quarters of 2008 and the first half of 2009, we took actions to better align our
advertising spend with our sales expectations and implemented initiatives to
reduce costs in other selling activities. In the third and fourth quarters of
2009, we made investments in advertising to support future growth. Our new
marketing and advertising campaign “Ask Me,” which was introduced in the third
quarter of 2009, focuses on increasing awareness of our products and the
benefits they offer through word-of-mouth and social networking
outlets.
General,
administrative and other expenses—General, administrative and other
expenses include management salaries, information technology, professional fees,
depreciation of furniture and fixtures, leasehold improvements and computer
equipment, expenses for administrative functions and research and development
costs. General, administrative and other expenses increased as a percentage of
Net sales to 11.5% for the year ended December 31, 2009 as compared to 10.2% for
the same period in 2008. The increase in General, administrative and other
expenses as a percentage of Net sales is primarily attributable to increasing
the bonus pool related to our results through the end of 2009. Additionally, we
incurred incremental legal expenses in 2009 as well as experiencing fixed cost
de-leverage as a result in our decreased sales volume. The aforementioned
factors were offset by a reduced level of bad debt expense in 2009 compared to
2008. Our level of bad debt expense in 2008 was primarily attributable to the
onset of changes in the macroeconomic environment. Research and development
expenses, excluding certain new product development, were $6.5 million and $6.0
million for 2009 and 2008, respectively. We have plans to continue investing in
research and development in order to improve our existing product lines and
regularly introduce new products.
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 $17.3 million for the year ended
December 31, 2009 as compared to $25.1 million for the year ended December 31,
2008, a decrease of $7.8 million, or 30.9%. This decrease in interest expense is
primarily attributable to a $121.9 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 $200.0 million of the outstanding balance as of December 31, 2009
under the 2005 Senior Credit Facility, with the outstanding balance subject to
the swap declining over time. The amount of the outstanding balance subject to
the swap amortizes as follows: to $300.0 million on November 28, 2008 (through
November, 2009); to $200.0 million on November 28, 2009 (through November, 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 33.6% and 45.2% for the years ended December 31, 2009 and
2008, respectively. The decrease primarily relates to an expense of $11.6
million incurred in 2008 in connection with the decision to repatriate foreign
earnings not previously taxed in the U.S. In the first quarter of 2009, we
completed the final phase of a $150.0 million repatriation of foreign earnings
and used a portion of the proceeds to reduce our level of outstanding
debt.
The
following table sets forth the tax effect of the repatriation of foreign
earnings on our Net income and Earnings per share, as well as a reconciliation
of our reported Net income for the twelve months ended December 31, 2008 to the
calculation of Adjusted Net income and Adjusted Earnings per share for the
twelve months ended December 31, 2008. The adjustment to Net income reflects the
tax provision incurred in 2008 that relates to the repatriation of foreign
earnings, discussed above. Adjusted Net income and Adjusted Earnings per share
are not recognized terms under US Generally Accepted Accounting Principles (US
GAAP) and do not purport to be alternatives to Net income as a measure of
operating performance. We believe this presentation provides meaningful
information to investors about material items impacting the comparability of
financial information.
|
Twelve
Months Ended
|
||||
|
December
31, 2008
|
||||
|
GAAP
Net income
|
$ | 58,868 | ||
|
Plus:
|
||||
|
Tax
provision related to repatriation
of foreign earnings
|
11,631 | |||
|
Adjusted
Net income
|
$ | 70,499 | ||
|
GAAP
Earnings per share, diluted
|
$ | 0.79 | ||
|
Tax
provision related to repatriation
of foreign earnings
|
0.15 | |||
|
Adjusted
Earnings per share, diluted
|
$ | 0.94 | ||
Our
effective income tax rate for the year ended December 31, 2009 differed from the
federal statutory rate principally due to certain foreign tax rate
differentials, state and local income taxes, deemed dividends from foreign
operations, the manufacturing activity deduction and adjustments to unrecognized
tax benefits. Our effective income tax rate for the year ended December 31, 2008
differed from the federal statutory rate principally because 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.
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. See discussion of
this matter under “Year Ended December 31, 2008 Compared with Year Ended
December 31, 2007 – Income tax
provision.” During 2009, the gross amount of unrecognized tax benefits
relating to this matter was increased by $0.6 million for interest on prior
unrecognized tax benefits.
Year Ended
December 31, 2008 Compared with Year Ended December 31, 2007
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
thousands)
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Retail
|
$ | 781,105 | $ | 919,913 | $ | 500,513 | $ | 625,904 | $ | 280,592 | $ | 294,009 | ||||||
|
Direct
|
47,597 | 79,748 | 39,666 | 68,865 | 7,931 | 10,883 | ||||||||||||
|
Healthcare
|
47,087 | 50,846 | 15,276 | 15,725 | 31,811 | 35,121 | ||||||||||||
|
Third
party
|
52,029 | 56,215 | 15,249 | 14,855 | 36,780 | 41,360 | ||||||||||||
| $ | 927,818 | $ | 1,106,722 | $ | 570,704 | $ | 725,349 | $ | 357,114 | $ | 381,373 | |||||||
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
thousands)
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Mattresses
|
$ | 631,308 | $ | 768,530 | $ | 412,295 | $ | 535,706 | $ | 219,013 | $ | 232,824 | ||||||
|
Pillows
|
117,900 | 142,114 | 50,772 | 68,342 | 67,128 | 73,772 | ||||||||||||
|
Other
|
178,610 | 196,078 | 107,637 | 121,301 | 70,973 | 74,777 | ||||||||||||
| $ | 927,818 | $ | 1,106,722 | $ | 570,704 | $ | 725,349 | $ | 357,114 | $ | 381,373 | |||||||
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 $919.9
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
experienced decreases in Net sales based primarily on the challenging economic
environment.
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 due to decreased availability of
consumer financing and decreased consumer confidence. This channel attracts
customers also likely to have been adversely affected by the economic
environment. 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 profit 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 decreased to $172.4
million for the year ended December 31, 2008 as compared to $193.6 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, administrative and other
expenses decreased to $94.7 million for the year ended December 31, 2008 as
compared to $97.1 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, 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.
Income tax
provision—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
completed this repatriation program in 2009 and paid 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, adjustments to unrecognized 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 its 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).
Liquidity
Our
principal sources of funds are cash flows from operations and borrowings made
pursuant to our credit facility. Principal uses of funds consist of 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, 2009, we had working capital of $72.5
million, including Cash and cash equivalents of $14.0 million as compared to
working capital of $82.4 million including $15.4 million in Cash and cash
equivalents as of December 31, 2008. Working capital decreased 12.0% for the
year ended December 31, 2009 compared to the same period in 2008, primarily
related to the increase in Accounts payable and Accrued expenses and other, the
effects of which were partially offset by changes in Deferred income taxes.
During 2009, we focused on generating cash flow by monitoring our working
capital and utilizing the cash generated to pay down our debt outstanding.
During the twelve months ended December 31, 2009 and 2008, there were no
repurchases of our common stock. On January 13, 2010, our Board of Directors
authorized the repurchase of up to $100.0 million of our common stock, which
replaces a previous authorization. Repurchases under this authorization may
effect cash flows in future periods.
Our cash
flow from operations decreased to $135.0 million for the year ended December 31,
2009 as compared to $198.4 million for the same period in 2008. During 2009, we
continued our focus on driving working capital improvements to maximize
operating cash flow and increase our financial flexibility. During 2009, we
generated a lower level of operating cash flow from working capital, primarily
attributable to increased inventory needs in the third and fourth quarters of
2009, compared to the same periods in 2008, as well as accounts receivable
remaining relatively flat, despite higher sales.
Net cash
used in investing activities increased to $14.3 million for the year ended
December 31, 2009 as compared to $5.4 million for the year ended December 31,
2008, an increase of $8.9 million. Investments in capital projects during 2009
were higher than the year ended December 31, 2008, as we were able to make
investments in our infrastructure to create operational efficiencies and
support growth. 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. In 2010, we expect to increase our investment in
capital projects, to create operational efficiencies and support
future growth.
Cash flow
used by financing activities was $118.7 million for the year ended December 31,
2009 as compared to $200.2 million for the year ended December 31, 2008,
representing a decrease in cash flow used of $81.4 million. 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 completed this repatriation program in 2009, also using the
proceeds to pay down debt. 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. During 2009, we did not
pay dividends on our common stock outstanding. On January 13, 2010, our Board of
Directors authorized the repurchase of up to $100.0 million of our common stock,
which replaces a previous authorization. Repurchases under this authorization
may affect our financing cash flows in future periods, as we may be required to
borrow on our credit facility in order to repurchase shares under this
authorization.
Capital
Expenditures
Capital
expenditures totaled $14.3 million for the year ended December 31, 2009 and
$10.5 million for the year ended December 31, 2008. We currently expect our 2010
capital expenditures to range from $20 to $22 million. This expected increase in
capital expenditures in 2010 is attributable to projects that we believe will
create operational efficiencies and support future growth.
Debt
Service
On
October 18, 2005, we 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 $640.0
million. As of December 31, 2009, we are in compliance with our debt covenants.
The table below sets forth the calculation of our compliance with the Funded
debt to Earnings Before Interest Taxes Depreciation and Amortization (EBITDA)
covenant. Both Funded debt and EBITDA are terms that are not recognized under US
GAAP and do not purport to be alternatives to Net income as a measure of
operating performance or Total debt.
Reconciliation
of EBITDA to Net income
The
following table sets forth the reconciliation of the Company’s reported Net
income to the calculation of EBITDA for the twelve months ended December 31,
2009:
|
Twelve
Months Ended
|
||||
|
December
31, 2009
|
||||
|
GAAP
Net income
|
$ | 84,993 | ||
|
Plus:
|
||||
|
Interest
expense
|
17,349 | |||
|
Income
taxes
|
43,044 | |||
|
Depreciation
& amortization
|
40,213 | |||
|
EBITDA
|
$ | 185,599 | ||
Reconciliation
of Funded debt to Total debt
The
following table sets forth the reconciliation of the Company’s reported Total
debt to the calculation of Funded debt and Funded debt to EBITDA ratio as of
December 31, 2009:
|
As
of
|
||||
|
December
31, 2009
|
||||
|
GAAP
basis Total debt
|
$ | 297,470 | ||
|
Plus:
|
||||
|
Letters
of credit outstanding
|
14,048 | |||
|
Funded
debt
|
$ | 311,518 | ||
|
EBITDA
|
$ | 185,599 | ||
|
Funded
debt to EBITDA
|
1.68
times
|
|||
The ratio of
Funded debt to EBITDA was 1.68 times, within the covenant in the 2005 Senior
Credit Facility, which requires this ratio not exceed 3.0 times.
Our long-term
debt decreased to $297.5 million as of December 31, 2009 from $419.3 million as
of December 31, 2008. After giving effect to $311.5
million in borrowings under the 2005 Senior Credit Facility and letters of
credit outstanding, total availability under the 2005 Senior Credit Facility was
$328.5 million as of December 31, 2009. 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. In
connection with this repatriation program, we recognized income tax expense of
$11.6 million during the year ended December 31, 2008. Our now completed
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 January 13, 2010, our Board of
Directors authorized the repurchase of up to $100.0 million of our common stock,
which replaces a previous authorization. Repurchases under this authorization
may affect our financing cash flows in future periods, as we may be required to
borrow on our credit facility in order to repurchase shares under this
authorization.
On April
1, 2008, we 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 $200.0 million of the outstanding balance as of December 31,
2009 under the 2005 Senior Credit Facility, with the outstanding balance subject
to the swap declining over time. The amount of the outstanding balance subject
to the swap amortizes as follows: to $300,000 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 this share
repurchase authorization, we repurchased 0.7 million shares for a total of $19.9
million. On January 13, 2010 the Board of Directors approved a share repurchase
program of up to $100.0 million of common stock which replaces the October 2007
authorization. No shares were repurchased during the years ended December 31,
2009 and 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 deem 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, 2009, we had
$297.5 million in total Long-term debt outstanding and our Stockholders’ Equity
was $172.3 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
$11.4 million in 2010. Interest expense in the periods presented also includes
non-cash amortization of deferred financing costs.
Based
upon the current level of operations and anticipated growth, we believe that
cash generated from operations and amounts available under our Revolvers will be
adequate to meet our anticipated debt service requirements, capital
expenditures, share repurchases, dividend payments and working capital needs for
the foreseeable future. There can be no assurance, however, that our business
will generate sufficient cash flow from operations or that future borrowings
will be available under our 2005 Senior Credit Facility or otherwise enable us
to service our indebtedness or to make anticipated capital
expenditures.
Contractual
Obligations
Our
contractual obligations and other commercial commitments as of December 31, 2009
are summarized below:
|
Payment
Due By Period
|
|||||||||||||||||||||
|
Contractual
Obligations
($
in millions)
|
2010
|
2011
|
2012
|
2013
|
2014
|
After
2014
|
Total
Obligations
(2)
|
||||||||||||||
|
Long-term
debt
|
$
|
—
|
|
$
|
—
|
|
$
|
297.5
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
297.5
|
|
|
Letters
of credit
|
14.0
|
—
|
—
|
—
|
—
|
—
|
14.0
|
||||||||||||||
|
Interest
payments (1)
|
11.4
|
7.8
|
3.6
|
—
|
—
|
—
|
22.8
|
||||||||||||||
|
Operating
leases
|
5.6
|
4.6
|
3.3
|
2.7
|
|
1.5
|
1.3
|
19.0
|
|||||||||||||
|
Total
|
$
|
31.0
|
$
|
12.4
|
$
|
304.4
|
$
|
2.7
|
$
|
1.5
|
$
|
1.3
|
$
|
353.3
|
|||||||
|
|
|||||||||||||||||||||
|
(2)
|
Excludes
$12.5 million related to accrued unrecognized tax benefits, relating to
Tempur-Pedic International Inc.’s uncertain tax positions as the period of
payment cannot be reasonably
estimated.
|
Use
of Non-GAAP Measures
We provide
information regarding Adjusted Net income, Adjusted Earnings per share, EBITDA
and Funded debt which are not recognized terms under US GAAP and do not purport
to be alternatives to Net income as a measure of operating performance or Total
debt. Because not all companies use identical calculations, these presentations
may not be comparable to other similarly titled measures of other companies. A
reconciliation of Adjusted Net income, Adjusted Earnings per share and EBITDA to
our Net income and Earnings per share and a reconciliation of Funded debt to
Total debt have been provided in this Management’s Discussion and Analysis and
we believe the use of these non-GAAP financial measures provide investors with
additional useful information with respect to the impact of the repatriation of
foreign earnings. We also believe the use of EBITDA and Funded debt provides
investors with useful information with respect to the terms of our credit
facility.
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 2009 and was the primary factor in a slowdown in the mattress industry. Our
industry has been adversely impacted by a depressed housing market, low consumer
confidence and rising unemployment trends. In addition, our international
segment has experienced weakening as a result of general business and economic
conditions in several European and Asian markets. We expect the economic
environment in the U.S. and Europe to continue to be challenging as continued
economic uncertainty has generally given households less confidence to spend on
discretionary purchases and credit availability to our retailers and consumers
remains limited.
Maintaining
financial flexibility is our primary short-term focus. In light of the
macroeconomic environment, we took steps to further align our cost structure
with our anticipated level of Net sales. During 2009 we have continued to
increase our financial flexibility by reducing our inventory, improving
collections, lowering expenses and paying down debt. During 2010, 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; maintain a reasonable cushion for the covenants in
our credit facility; improve cost structures and taking actions to further
improve our financial flexibility and strengthen our business.
Managing Growth—Over the last
few years, we have had to manage our business both through periods of rapid
growth and the current challenging economic environment. Our Net sales increased
from $221.5 million in 2001 to $1,106.7 million in 2007 and decreased to $927.8
million in 2008 and $831.2 million for December 31, 2009. In the past, our
growth has placed, and may continue to place, a strain on our management,
production, product distribution network, information systems and other
resources. In response to these types of challenges, management has continued to
enhance operating and financial infrastructure, as appropriate. In addition,
since 2007, we have had to manage a decline in sales as a result of the
macroeconomic environment. During this period, we had to manage our cost
structure to contain costs. Going forward, we expect our expenditures to enhance
our operating and financial infrastructure, as well as expenditures for
advertising and other marketing-related activities, will continue to be made as
the continued growth in the business allows us the ability to invest. However,
these expenditures may be limited by lower than planned sales or an inflationary
cost environment.
Gross Margins—Our gross
margin is primarily impacted by the cost of raw materials, operational
efficiency, product and channel mix and volume incentives offered to certain
retail accounts. At the end of 2009, we began to experience increases in our raw
material pricing. Future increases in raw material prices could have a negative
impact on our gross margin if we do not raise prices to cover increased cost.
Our gross margin can also be impacted by our operational efficiencies, including
the particular levels of utilization at our three manufacturing facilities. We
have made significant investments in our manufacturing infrastructure and have
significant available manufacturing capacity. If we increase our Net sales
significantly the effect of this operating leverage could have a significant
positive impact on our gross margin. Our margins are also impacted by the growth
in our Retail channel as sales in our Retail channel are at wholesale prices
whereas sales in our Direct channel are at retail prices. Additionally, our
overall product mix has shifted to mattresses and other products over the last
several years, which has impacted our gross margins because mattresses generally
carry lower margins than our pillows and are sold with lower margin products
such as foundations and bed frames. We expect our gross margins to continue to
expand in 2010 through sales leverage, our productivity programs and selective
price increases.
Competition—Participants in
the mattress and pillow industries compete primarily on price, quality, brand
name recognition, product availability and product performance. We compete with
a number of different types of mattress alternatives, including standard
innerspring mattresses, other foam mattresses, waterbeds, futons, air beds and
other air-supported mattresses. These alternative products are sold through a
variety of channels, including furniture and bedding stores, specialty bedding
stores, department stores, mass merchants, wholesale clubs, telemarketing
programs, television infomercials, 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. However,
our business may be affected by general business and economic conditions that
could have an impact on demand for our products. Additionally, by expanding
distribution within our existing accounts, we believe we have the opportunity to
grow our business. By extending our product line and our new segmentation
of products, we should be able to continue to expand the number of
Tempur-Pedic models offered at the retail store level, which should lead to
increased sales. We believe this strategy provides for continued growth
opportunities and market share gains. However, our business may continue to be
affected by general business and economic conditions that could have an impact
on demand for our products, which could limit our market share and decrease
sales. Our products are currently sold in approximately 6,400 furniture and
bedding retail stores in the U.S., out of a total of approximately 10,000 stores
we have identified as appropriate targets. Within this addressable market, our
plan is to increase our total penetration to a total of 7,000 to 8,000 over
time. Our products are also sold in approximately 4,900 furniture retail and
department stores outside the U.S., out of a total of approximately 7,000 stores
that we have identified as appropriate targets. We are continuing to develop
products that are responsive to consumer demand in our markets
internationally.
Financial Leverage—As of
December 31, 2009, we had $297.5 million of Long-term debt outstanding, and our
Stockholders’ Equity was $172.3 million. Financial leverage makes us more
vulnerable to general adverse competitive, economic and industry conditions.
Since December 31, 2007 we have reduced our total debt outstanding by $304.6
million. 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 enabled 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. In May 2008, we entered into
an interest rate swap to manage interest costs and the risk associated with
changing interest rates. See “ITEM 7A. Quantitative and Qualitative Disclosures
About Market Risk—Interest Rate Risk” under Part II of this
report.
Exchange Rates—As a
multinational company, we conduct our business in a wide variety of currencies
and are therefore subject to market risk for changes in foreign exchange rates.
We use foreign exchange forward contracts to manage a portion of the risk of the
eventual net cash inflows and outflows resulting from foreign currency
denominated transactions between Tempur-Pedic subsidiaries and their customers
and suppliers, as well as between the Tempur-Pedic subsidiaries themselves.
These hedging transactions may not succeed in effectively managing our foreign
currency exchange rate risk. We typically do not apply hedge accounting to these
contracts. See “ITEM 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 2010 outlook
assumes no significant variances in the currency exchange rates experienced
during the fourth quarter of 2009. 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 US GAAP 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 discount rates, growth rates and the selection of peer
company multiples. 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 and tradename 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 annual impairment test, no indications of an impairment were
identified.
Income Taxes—Accounting for
income taxes require 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. 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 foreign
tax loss carryforwards 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, 2009, 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. This liability is estimated
based on a prescribed 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.
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 2010 budget assumes
no significant variances from the foreign currency exchange rates in effect over
the course of the fourth quarter of 2009. 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, 2009,
resulting from a hypothetical 10% adverse change in all foreign currency
exchange rates against the U.S. dollar, is approximately $0.04
million. Such losses would be largely offset by gains from the
revaluation or settlement of the underlying assets and liabilities that are
being protected by the foreign currency forward contracts.
We do not
apply hedge accounting to the foreign currency forward contracts used to offset
currency-related changes in the fair value of foreign currency denominated
assets and liabilities. These contracts are marked-to-market through earnings at
the same time that the exposed assets and liabilities are remeasured through
earnings.
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 $200.0 million of the outstanding balance as of December 31,
2009 under the 2005 Senior Credit Facility, with the outstanding balance subject
to the swap declining over time. The amount of the outstanding balance subject
to the swap amortizes as follows: to $300.0 million on November 28, 2008
(through November, 2009); to $200.0 million on November 28, 2009 (through
November, 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, 2009, after
giving effect to our interest rate swap agreement, we had variable-rate debt of
approximately $97.5 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 $1.0 million.
The
financial statements required by this item are included in Part IV, ITEM 15 of
this report and are presented beginning on page 40.
DISCLOSURE
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, 2009 and designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission 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 Securities Exchange Act of 1934, as amended. 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, 2009. 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, 2009.
Our
independent registered public accounting firm, Ernst & Young LLP, has issued
a report on the Company’s internal control over financial reporting as of
December 31, 2009. That report appears on page 38 of this
report.
There
have not been any changes in our internal control over financial reporting
during the quarter ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
The
Board of Directors and Stockholders 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, 2009, 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, 2009, 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, 2009 and 2008, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2009 and our report
dated February 8, 2010, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Louisville,
Kentucky
February
8, 2010
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 www.tempurpedic.com/ir.
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 2008 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, 2008.
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
2010 Annual Meeting of Stockholders (the 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,
2009” 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, 2009, 2008 and
2007
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
||
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2009,
2008, and 2007
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008, and
2007
|
|
|
|
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.
Exhibits:
|
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)(28)
|
|
|
10.12
|
Amended
and Restated Tempur-Pedic International Inc. 2003 Equity Incentive Plan.
(18)(28)
|
|
|
10.13
|
Tempur-Pedic
International Inc. 2003 Employee Stock Purchase Plan. (2)(28)
|
|
|
10.14
|
Employment
Agreement dated September 12, 2003, between Tempur International Limited
and David Montgomery. (3)(28)
|
|
|
10.15
|
Stock
Option Agreement dated as of July 13, 2004 between Tempur-Pedic
International Inc. and Sir Paul Judge. (4)(28)
|
|
|
10.16
|
Stock
Option Agreement dated as of March 12, 2004 between Tempur-Pedic
International Inc. and Nancy F. Koehn. (5)(28)
|
|
|
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 July 7, 2003 between Tempur-Pedic
International Inc. and Dale E. Williams. (6)(28)
|
|
|
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)(28)
|
|
|
10.21
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Matthew D. Clift. (12)(28)
|
|
|
10.22
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Sir Paul Judge. (12)(28)
|
|
|
10.23
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Nancy F. Koehn. (12)(8)
|
|
10.24
|
Stock
Option Agreement dated May 2, 2005 between Tempur-Pedic International Inc.
and Bhaskar Rao.(10)(28)
|
|
10.25
|
Stock
Option Agreement dated October 25, 2005 between Tempur-Pedic International
Inc. and Bhaskar Rao.(10)(28)
|
|
|
10.26
|
Stock
Option Agreement dated February 16, 2006 between Tempur-Pedic
International Inc. and Bhaskar Rao.(10)(28)
|
|
10.27
|
Stock
Option Agreement dated May 11, 2006 between Tempur-Pedic International
Inc. and Bhaskar Rao.(10)(28)
|
|
10.28
|
Stock
Option Agreement dated June 28, 2006 between Tempur-Pedic International
Inc. and David Montgomery.(10)(28)
|
|
|
10.29
|
Stock
Option Agreement dated June 28, 2006 between Tempur-Pedic International
Inc. and Dale E. Williams.(10)(28)
|
|
|
10.30
|
Form
of Stock Option Agreement under the 2003 Equity Incentive Plan.(10)(28)
|
|
|
10.31
|
Employment
Agreement dated as of July 18, 2006 between Tempur-Pedic International
Inc. and Richard Anderson.(11)(28)
|
|
|
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 November 30, 2007 of that certain Credit Agreement dated
October 18, 2005 by and among Tempur World LLC, Tempur Production USA,
Inc., Dan-Foam ApS, Tempur-Pedic International Inc., Tempur World
Holdings, S.L., Tempur Danmark A/S, 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)(28)
|
|
|
10.35
|
Stock
Option Agreement dated February 5, 2008 between Tempur-Pedic
International, Inc. and Richard Anderson. (17)(28)
|
|
|
10.36
|
Employment
and Noncompetition Agreement dated as June 30, 2008, between Tempur-Pedic
International Inc. and Mark Sarvary. (20)(28)
|
|
|
10.37
|
Stock
Option Agreement dated June 30, 2008 between Tempur-Pedic International
Inc. and Mark Sarvary. (20)(28)
|
|
|
10.38
|
Form
of Stock Option Agreement under the 2003 Equity Incentive Plan
(Optionee).(10)(28)
|
|
|
10.39
|
Form
of Stock Option Agreement under the Amended and Restated 2003 Equity
Incentive Plan (EVP). (19)(28)
|
|
|
10.40
|
Form
of Stock Option Agreement under the Amended and Restated 2003 Equity
Incentive Plan (Director). (23)(28)
|
|
|
10.41
|
Form
of Stock Option Agreement under the United Kingdom Approved Share Option
Sub Plan to the 2003 Equity Incentive Plan. (24)(28)
|
|
|
10.42
|
Annual
Incentive Bonus Plan for Senior Executives. (25)(28)
|
|
|
10.43
|
First
Amendment to the Amended and Restated 2003 Equity Incentive Plan. (26)(28)
|
|
| 10.44 | Employment and Non-Competition Agreement by and between Tempur-Pedic International Inc. and Lou Hedrick Jones dated as of June 1, 2009). (27)(28) | |
| 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)
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-K filed with
the Commission on February 12, 2009.
|
|
|
(24)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on April 30, 2009.
|
|
|
(25)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on February 19, 2009.
|
|
|
(26)
|
Incorporated
by reference from Appendix A to the Registrant’s Registration Proxy
Statement on Schedule 14A (File No. 001-31922) filed with the Commission
on March 3, 2009.
|
|
|
(27)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on July 27, 2009.
|
|
|
(28)
|
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 8, 2010
|
By:
|
/S/
MARK SARVARY
|
||
|
Mark
Sarvary
President
and Chief Executive Officer
|
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on the 8th of February, 2010, 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/
EVELYN S. DILSAVER
|
Director
|
|
|
Evelyn
S. Dilsaver
|
|
|
|
/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 Stockholders 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, 2009 and 2008, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2009.
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, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, 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 11 to the consolidated financial statements, effective January
1, 2007, Tempur-Pedic International Inc. and Subsidiaries adopted new Financial
Accounting Standards Board (FASB) authoritative guidance on accounting for
uncertainty in income taxes.
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, 2009,
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 8, 2010, expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Louisville,
Kentucky
February
8, 2010
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per common share amounts)
|
Year
Ended December 31,
|
|||||||||
|
2009
|
2008
|
2007
|
|||||||
|
Net
sales
|
$
|
831,156
|
$ |
927,818
|
$
|
1,106,722
|
|||
|
Cost
of sales
|
437,414
|
526,861
|
571,896
|
||||||
|
Gross
profit
|
393,742
|
400,957
|
534,826
|
||||||
|
Selling
and marketing expenses
|
153,440
|
172,350
|
193,574
|
||||||
|
General,
administrative and other expenses
|
95,357
|
94,743
|
97,138
|
||||||
|
Operating
income
|
144,945
|
133,864
|
244,114
|
||||||
| Other expense, net: | |||||||||
| Interest expense, net | (17,349 | ) | (25,123 | ) | (30,484 | ) | |||
| Other income (expense), net | 441 | (1,319 | ) | (756 | ) | ||||
|
Total
other expense
|
(16,908
|
) |
(26,442
|
) |
(31,240
|
) | |||
|
Income
before income taxes
|
128,037
|
107,422
|
212,874
|
||||||
|
Income
tax provision
|
43,044
|
48,554
|
71,415
|
||||||
|
Net
income
|
$
|
84,993
|
$ |
58,868
|
$
|
141,459
|
|||
|
Earnings
per common share:
|
|||||||||
|
Basic
|
$
|
1.13
|
$ |
0.79
|
$
|
1.77
|
|||
|
Diluted
|
$
|
1.12
|
$ |
0.79
|
$
|
1.74
|
|||
|
Cash
dividend per common share
|
$
|
—
|
$ |
0.24
|
$
|
0.30
|
|||
|
Weighted
average common shares outstanding:
|
|||||||||
|
Basic
|
74,934
|
74,737
|
79,831
|
||||||
|
Diluted
|
76,048
|
74,909
|
81,256
|
||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
December
31,
|
December
31,
|
||||||
|
2009
|
2008
|
||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
14,042
|
$
|
15,385
|
|||
|
Accounts
receivable, net
|
105,576
|
99,811
|
|||||
|
Inventories
|
57,686
|
60,497
|
|||||
|
Prepaid
expenses and other current assets
|
11,268
|
9,233
|
|||||
|
Deferred
income taxes
|
20,411
|
11,888
|
|||||
|
Total
Current Assets
|
208,983
|
196,814
|
|||||
|
Property,
plant and equipment, net
|
172,497
|
185,843
|
|||||
|
Goodwill
|
193,391
|
192,569
|
|||||
|
Other
intangible assets, net
|
64,717
|
66,823
|
|||||
|
Other
non-current assets
|
3,791
|
4,482
|
|||||
|
Total
Assets
|
$
|
643,379
|
$
|
646,531
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable
|
$
|
47,761
|
$
|
41,355
|
|||
|
Accrued
expenses and other current liabilities
|
81,452
|
65,316
|
|||||
|
Income
taxes payable
|
7,312
|
7,783
|
|||||
|
Total
Current Liabilities
|
136,525
|
114,454
|
|||||
|
Long-term
debt
|
297,470
|
419,341
|
|||||
|
Deferred
income taxes
|
29,865
|
28,371
|
|||||
|
Other
non-current liabilities
|
7,226
|
11,922
|
|||||
|
Total
Liabilities
|
471,086
|
574,088
|
|||||
| Commitments and Contingencies (see Note 10) | |||||||
|
Stockholders’
Equity:
|
|||||||
|
Common
stock, $0.01 par value; 300,000 shares authorized;
99,215 shares issued as of December 31, 2009 and 2008,
respectively
|
992
|
992
|
|||||
|
Additional
paid in capital
|
298,842
|
291,018
|
|||||
|
Retained
earnings
|
365,727
|
281,422
|
|||||
|
Accumulated
other comprehensive loss
|
(8,004
|
) |
(12,590
|
) | |||
|
Treasury
stock at cost; 24,103 and 24,382 shares as of December 31, 2009 and
2008, respectively
|
(485,264
|
) |
(488,399
|
) | |||
|
Total
Stockholders’ Equity
|
172,293
|
72,443
|
|||||
|
Total
Liabilities and Stockholders’ Equity
|
$
|
643,379
|
$
|
646,531
|
|||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands)
| Common Shares | Treasury Shares | Additional Paid in Capital | Retained Earnings |
Accumulated
Other Comprehensive Income/(Loss)
|
Total | |||||||||||||||||||
| Shares Issued | At Par | Shares Issued | At Par | |||||||||||||||||||||
|
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 adjustments
|
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 | ) | (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 adjustments
|
(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 | ||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net income
|
84,993 | 84,993 | ||||||||||||||||||||||
|
Derivative instruments accounted for as hedges, net of tax of
$2,678
|
2,895 | 2,895 | ||||||||||||||||||||||
|
Foreign currency adjustments
|
1,691 | 1,691 | ||||||||||||||||||||||
|
Total Comprehensive Income
|
84,993 | 4,586 | 89,579 | |||||||||||||||||||||
|
Exercise
of stock options
|
(279 | ) | 3,135 | 6 | (688 | ) | 2,453 | |||||||||||||||||
|
Tax
adjustments related to stock compensation (1)
|
(841 | ) | (841 | ) | ||||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
8,659 | 8,659 | ||||||||||||||||||||||
|
Balance,
December 31, 2009
|
99,215 | $ | 992 | 24,103 | $ | (485,264 | ) | $ | 298,842 | $ | 365,727 | $ | (8,004 | ) | $ | 172,293 | ||||||||
(1)
Includes $359 of Excess tax benefit from stock based compensation.
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||
|
Net
income
|
$
|
84,993
|
$
|
58,868
|
$
|
141,459
|
|||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||
|
Depreciation
and amortization
|
31,424
|
32,756
|
33,414
|
||||||||
|
Amortization
of stock-based compensation
|
8,789
|
8,041
|
6,728
|
||||||||
|
Amortization
of deferred financing costs
|
692
|
1,060
|
1,029
|
||||||||
|
Bad
debt expense
|
5,936
|
8,110
|
5,997
|
||||||||
|
Deferred
income taxes
|
(9,810
|
)
|
2,423
|
(8,961
|
)
|
||||||
|
Foreign
currency adjustments
|
(115
|
)
|
(1,183
|
)
|
423
|
||||||
|
Loss
on sale of equipment
|
564
|
666
|
324
|
||||||||
|
Changes
in operating assets and liabilities:
|
|||||||||||
|
Accounts
receivable
|
(10,542
|
)
|
51,231
|
(20,536
|
)
|
||||||
|
Inventories
|
3,738
|
45,758
|
(38,216
|
)
|
|||||||
|
Prepaid
expenses and other current assets
|
(1,884
|
)
|
1,695
|
(3,226
|
)
|
||||||
|
Accounts
payable
|
7,808
|
(15,676
|
)
|
1,861
|
|||||||
|
Accrued
expenses and other current liabilities
|
14,044
|
535
|
3,532
|
||||||||
|
Income
taxes
|
(651
|
)
|
4,110
|
2,533
|
|||||||
|
Net
cash provided by operating activities
|
134,986
|
198,394
|
126,361
|
||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||
|
Purchases
of property, plant and equipment
|
(14,303
|
)
|
(10,494
|
)
|
(16,149
|
)
|
|||||
|
Acquisition
of businesses, net cash acquired
|
—
|
(1,529
|
)
|
(5,805
|
)
|
||||||
|
Proceeds
from escrow settlement
|
—
|
7,141
|
—
|
||||||||
|
Other
|
—
|
(486
|
)
|
(917
|
)
|
||||||
|
Net
cash used by investing activities
|
(14,303
|
)
|
(5,368
|
)
|
(22,871
|
)
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||||
|
Proceeds
from long-term revolving credit facility
|
109,333
|
127,383
|
420,547
|
||||||||
|
Repayments
of long-term revolving credit facility
|
(230,036
|
)
|
(251,536
|
)
|
(146,293
|
)
|
|||||
|
Repayments
of long-term debt
|
—
|
(1,359
|
)
|
(45,488
|
)
|
||||||
|
Proceeds
from issuance of Series A Industrial Revenue Bonds
|
—
|
—
|
15,380
|
||||||||
|
Repayments
of Series A Industrial Revenue Bonds
|
—
|
(57,785
|
)
|
(5,760
|
)
|
||||||
|
Proceeds
from issuance of Common stock
|
1,623
|
695
|
8,175
|
||||||||
|
Excess
tax benefit from stock based compensation
|
359
|
399
|
11,073
|
||||||||
|
Treasury
stock repurchased
|
—
|
—
|
(319,884
|
)
|
|||||||
|
Dividend
paid to stockholders
|
—
|
(17,933
|
)
|
(23,811
|
)
|
||||||
|
Other
|
—
|
(14
|
)
|
(1,581
|
)
|
||||||
|
Net
cash used by financing activities
|
(118,721
|
)
|
(200,150
|
)
|
(87,642
|
)
|
|||||
|
NET
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
(3,305
|
)
|
(10,806
|
)
|
1,679
|
||||||
|
(Decrease)
increase in cash and cash equivalents
|
(1,343
|
)
|
(17,930
|
)
|
17,527
|
||||||
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
15,385
|
33,315
|
15,788
|
||||||||
|
CASH
AND CASH EQUIVALENTS, end of year
|
$
|
14,042
|
$
|
15,385
|
$
|
33,315
|
|||||
|
Supplemental
cash flow information:
|
|||||||||||
|
Cash
paid during the period for:
|
|||||||||||
|
Interest
|
$
|
17,521
|
$
|
24,978
|
$
|
30,176
|
|||||
|
Income
taxes, net of refunds
|
51,805
|
38,346
|
68,271
|
||||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share amounts)
(1)
Summary of Significant Accounting Policies
(a) Basis of Presentation and
Description of Business—Tempur-Pedic International Inc., a Delaware
corporation, together with its subsidiaries is a U.S. based, multinational
company. The term “Tempur-Pedic International” refers to Tempur-Pedic
International Inc. only, and the term “Company” refers to Tempur-Pedic
International Inc. and its consolidated subsidiaries. Tempur World, Inc. was
formed on January 1, 2000 to combine the manufacturing facilities and the global
distribution capabilities of all TEMPUR® products, and Tempur-Pedic
International Inc. was formed in 2002 to acquire Tempur World, Inc. This
acquisition (Tempur Acquisition) was effective as of November 1,
2002.
The
Company manufactures, markets and sells 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) Accounting Standards
Codification—In June 2009, the Financial Accounting Standards Board
(FASB) confirmed that the FASB Accounting Standards Codification (FASB ASC) will
become the single official source of authoritative US Generally Accepted
Accounting Principles (US GAAP) (other than guidance issued by the Securities
and Exchange Commission (SEC)), superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and
related literature. All other literature is considered non-authoritative. FASB
ASC does not change US GAAP; it introduces a new structure that is organized in
an easily accessible online research system. The FASB ASC became effective for
the Company on September 30, 2009.
(c) Basis of Consolidation—The
accompanying financial statements include the accounts of Tempur-Pedic
International and its subsidiaries. All subsidiaries are wholly-owned.
Intercompany balances and transactions have been eliminated. As of December 31,
2009 the Company does not hold any interest in variable-interest
entities.
(d) Use of Estimates—The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company’s results are affected by economic, political,
legislative, regulatory and legal actions. Economic conditions, such as
recessionary trends, inflation, interest and monetary exchange rates, government
fiscal policies, and changes in the prices of raw materials, can have a
significant effect on operations. While the Company maintains reserves for
anticipated liabilities and carries various levels of insurance, the Company
could be affected by civil, criminal, regulatory or administrative actions,
claims or proceedings.
(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 adjustments resulting from translating the financial
statements of foreign subsidiaries are included in Accumulated other
comprehensive loss (OCL), a component of Stockholders’ Equity, and 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 is required to recognize all of its derivative
instruments as either assets or liabilities in the statement of financial
position at fair value. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated, and is effective, as a hedge and further, on the type of hedging
relationship. For those derivative instruments that are designated and qualify
as hedging instruments, a company must designate the hedging instrument, based
upon the exposure being hedged, as a fair value hedge, cash flow hedge or a
hedge of a net investment in a foreign operation. Gains and losses related
to a hedge are either recognized in income immediately to offset the gain or
loss on the hedged item or are deferred and reported as a component of
Accumulated OCL in Stockholders' Equity and subsequently recognized in Net
income when the hedged item affects net income. The change in fair value of the
ineffective portion of a financial instrument is recognized in net income
immediately. The gain or loss related to financial instruments that are not
designated as hedges are recognized immediately in net income. 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 6 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,
|
||||||||
|
2009
|
2008
|
|||||||
|
Finished
goods
|
$ | 41,805 | $ | 41,385 | ||||
|
Work-in-process
|
6,654 | 5,706 | ||||||
|
Raw
materials and supplies
|
9,227 | 13,406 | ||||||
| $ | 57,686 | $ | 60,497 | |||||
(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—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. 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
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 2009, 2008
and 2007, 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—The
Company allows product returns up to 120 days following a sale through certain
sales channels and on certain products. Estimated sales returns are provided at
the time of sale based on historical sales channel return rates. The level of
sales returns differs by channel with the Direct channel typically experiencing
the highest rate of return. Estimated future obligations related to
these products are provided by a reduction of sales in the period in which the
revenue is recognized. Accrued sales returns are included in Accrued expenses
and other current liabilities in the accompanying Consolidated Balance
Sheets.
The
Company had the following activity for sales returns from December 31, 2007 to
December 31, 2009:
|
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
|
||
|
Amounts
accrued
|
|
34,478
|
||
|
Returns
charged to accrual
|
|
(34,049
|
)
|
|
|
Balance
as of December 31, 2009
|
|
$
|
4,233
|
(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 current liabilities in the
Consolidated Balance Sheets.
The
Company had the following activity for warranties from December 31, 2007 to
December 31, 2009:
|
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
|
||
|
Amounts
accrued
|
|
3,533
|
||
|
Warranties
charged to accrual
|
|
(3,384
|
)
|
|
|
Balance
as of December 31, 2009
|
|
$
|
4,052
|
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 utilizing a prescribed recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
(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 sales. The
Company also reports sales net of tax assessed by qualifying governmental
authorities. The Company extends credit based on the creditworthiness of its
customers. No collateral is required on sales made in the normal course of
business.
The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company regularly reviews the adequacy of its allowance for doubtful
accounts. The Company determines the allowance based on historical
write-off experience and current economic conditions and also considers factors
such as customer credit, past transaction history with the customer and changes
in customer payment terms when determining whether the collection of a
receivable is reasonably assured. Account balances are charged off against
the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. The allowance for doubtful accounts
included in Accounts receivable, net in the accompanying
Consolidated Balance Sheets was $9,030 and $6,726 as of December 31, 2009 and
2008, 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 $5,207, $8,838 and $10,919 for the years ended December 31, 2009,
2008 and 2007, respectively. Amounts included in Cost of sales for shipping and
handling were $68,152, $78,065 and $84,819 for the years ended December 31,
2009, 2008 and 2007, 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 $69,324, $85,326 and $104,548 for the years ended
December 31, 2009, 2008 and 2007, respectively. Advertising costs deferred
and included in Prepaid expenses and other current assets in the accompanying
Consolidated Balance Sheets were $5,879 and $4,419 as of December 31, 2009 and
2008, 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 $6,458, $5,983 and $5,926 for the
years ended December 31, 2009, 2008 and 2007, respectively.
(r) Stock-Based Compensation—The
Company accounts for stock-based payment transactions in which the Company
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such
equity instruments. Stock-based compensation cost for restricted stock units
(“RSUs”) is measured based on the closing fair market value of the Company’s
common stock on the date of grant. Stock-based compensation cost for stock
options is estimated at the grant date based on each option’s fair-value as
calculated by the Black-Scholes option-pricing model. The Company recognizes
stock-based compensation cost as expense ratably on a straight-line basis over
the requisite service period. The Company will recognize a benefit from
stock-based compensation in equity if an incremental tax benefit is realized by
following the ordering provisions of the tax law. In addition, the Company
accounts for the indirect effects of stock-based compensation on the research
tax credit, the foreign tax credit and the domestic manufacturing deduction
through the income statement. Further information regarding stock-based
compensation can be found in Note 9, “Stock-Based Compensation.”
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 share-based award plans. Treasury shares are accounted for under the
cost method and reported as a reduction of Stockholders’ Equity. Share
Repurchase Authorizations may be suspended, limited or terminated at any time
without notice.
(t) Fair Value
Measurements—During the first quarter of 2008, the Company adopted FASB
ASC 820 (ASC 820), Fair
Value Measurements and Disclosures (formerly referenced as FASB Statement
of Financial Accounting Standard No. 157, Fair Value Measurements),
which defines fair value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements with respect to the
Company’s financial assets and liabilities. During the first quarter
of 2009, the Company adopted ASC 820 with respect to its nonfinancial assets and
liabilities. This new accounting standard does not require any new fair value
measurements. The Company applies fair value accounting for all financial assets
and liabilities and non-financial assets and liabilities that are recognized or
disclosed at fair value in the financial statements. The Company defines fair
value as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. When determining the fair value measurements for assets
and liabilities, the Company considers the principal or most advantageous market
in which the Company would transact and the market-based risk measurements or
assumptions that market participants would use in pricing the asset or
liability, such as inherent risk, transfer restrictions and credit
risk.
(u) Subsequent Events—During the
year ending December 31, 2009, the Company has evaluated all events or
transactions that occurred after December 31, 2009 up through February 8,
2010, the date these consolidated financial statements were issued.
(2)
Recently Issued Accounting Pronouncements
In
June 2009, the FASB issued Statement of Accounting Standards (SFAS)
No. 167 (SFAS 167), Amendments to FASB Interpretation
No. 46(R). SFAS No. 167 has been deemed authoritative
literature even though the provisions of this standard have not yet been
integrated into the FASB ASC. The objective of SFAS No. 167 is to improve
the financial reporting of companies involved with variable interest entities
(VIEs). This Statement amends FIN 46(R) to replace the quantitative-based
risks and rewards calculation for determining which enterprise, if any, has a
controlling financial interest in the VIE with a qualitative approach focused on
identifying which company has the power to direct the activities of a VIE that
most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive
benefits from the entity. Additionally, this statement requires a company to
perform ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity. Prior to this statement, a company
was only required to reassess the status when specific events occurred. The
Company will adopt the provisions of SFAS No. 167 as required for the first
quarter of 2010. The Company does not anticipate the adoption of this statement
will have a material impact on the consolidated financial
statements.
(3)
Goodwill and Other intangible assets
The
following table summarizes information relating to the Company’s Other
intangible assets:
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||||||||||||||
|
Useful
|
Gross
|
Net
|
Gross
|
Net
|
||||||||||||||||||||||||
|
Lives
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
||||||||||||||||||||||
|
(Years)
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
||||||||||||||||||||||
|
Unamortized
indefinite life
intangible assets:
|
||||||||||||||||||||||||||||
|
Trademarks
|
$ | 55,000 | $ | — | $ | 55,000 | $ | 55,000 | $ | — | $ | 55,000 | ||||||||||||||||
|
Amortized
intangible assets:
|
||||||||||||||||||||||||||||
|
Technology
|
10 | $ | 16,000 | $ | 11,467 | $ | 4,533 | $ | 16,000 | $ | 9,866 | $ | 6,134 | |||||||||||||||
|
Patents
& other trademarks
|
5-20 | 11,876 | 8,002 | 3,874 | 11,655 | 7,767 | 3,888 | |||||||||||||||||||||
|
Customer
database
|
5 | 4,855 | 4,593 | 262 | 4,838 | 4,455 | 383 | |||||||||||||||||||||
|
Foam
formula
|
10 | 3,700 | 2,652 | 1,048 | 3,700 | 2,282 | 1,418 | |||||||||||||||||||||
|
Total
|
$ | 91,431 | $ | 26,714 | $ | 64,717 | $ | 91,193 | $ | 24,370 | $ | 66,823 | ||||||||||||||||
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 $2,414, $2,412 and $3,876 for the years ended December 31, 2009, 2008 and 2007, respectively. No impairments of goodwill or other intangible assets have adjusted the gross carrying amount these assets in any historical period.
Annual
amortization of intangible assets is expected to be as follows:
|
Year
Ending December 31,
|
|
||
|
2010
|
|
$
|
2,821
|
|
2011
|
|
2,819
|
|
|
2012
|
|
2,233
|
|
|
2013
|
|
463
|
|
|
2014
|
436
|
The
following summarizes changes to the Company’s Goodwill, by reportable business
segment:
|
Domestic
|
International
|
Total
|
||||||||||
|
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 | ||||||
|
Foreign
currency translation adjustments
|
— | 822 | 822 | |||||||||
|
Balance
as of December 31, 2009
|
$ | 89,929 | $ | 103,462 | $ | 193,391 | ||||||
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 included 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 11. 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.
(4)
Long-term Debt
(a) Long-term Debt—Long-term debt for the Company consisted of the
following:
|
December
31,
2009
|
December 31,
2008
|
|||||||
|
2005
Senior Credit Facility:
|
||||||||
|
Domestic
Long-Term Revolving Credit Facility payable to lenders, interest at
Index
Rate or LIBOR plus applicable margin (3.72% and 4.44% as of December 31,
2009 and
December
31, 2008, respectively), commitment through and due June 8,
2012
|
$ | 294,000 | $ | 403,500 | ||||
|
Foreign
Long-Term Revolving Credit Facility payable to lenders, interest at
Index
Rate or LIBOR plus applicable margin (2.06% and 2.59% at December
31,
2009
and December 31, 2008, respectively) commitment through and due June 8,
2012
|
3,470 | 15,841 | ||||||
|
Long-term
debt
|
$ | 297,470 | $ | 419,341 | ||||
The
long-term debt of the Company is scheduled to mature in 2012.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
(b) Secured Credit Financing—On
October 18, 2005, the Company entered into a credit agreement (2005 Senior
Credit Facility) with a syndicate of banks. The 2005 Senior Credit Facility, as
amended, consists of domestic and foreign credit facilities (Revolvers) that
provide for the incurrence of indebtedness up to an aggregate principal amount
of $640,000 and matures in 2012. The domestic credit facility is a five-year,
$615,000 revolving credit facility (Domestic Revolver). The foreign credit
facility is a five-year $25,000 revolving credit facility (Foreign Revolver).
The Revolvers provide for the issuance of letters of credit which, when issued,
constitute usage and reduce availability under the Revolvers. The aggregate
amount of letters of credit outstanding under the Revolvers was $14,048 at
December 31, 2009. After giving effect to
letters of credit and $297,470 in borrowings under the Domestic Revolver, total
availability under the Revolvers was $328,482 as of December 31, 2009. Both
credit facilities bear interest at a rate equal to the 2005 Senior Credit
Facility’s applicable margin, as determined in accordance with a performance
pricing grid set forth in Amendment No. 3, plus one of the following indexes:
London Inter-Bank Offering Rate (LIBOR) and for U.S. dollar-denominated loans
only, a base rate. The base rate of U.S. dollar-denominated loans is defined as
the higher of the Bank of America prime rate or the Federal Funds rate plus
..50%. The Company also pays an annual facility fee on the total amount of the
2005 Senior Credit Facility. The facility fee is calculated based on the
consolidated leverage ratio and ranges from .125% to .25%.
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,
2009.
In May 2008,
the Company entered into a three year interest rate swap agreement to manage
interest costs and changing interest rates associated with the 2005 Senior
Credit Facility. Refer to Note 6, “Derivative Financial Instruments” for
additional information regarding the Company’s derivative instruments, including
this interest rate swap.
(5)
Fair Value of Financial Instruments
Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset and liability in an orderly transaction
between market participants at the measurement date. The Company estimates fair
value of its financial instruments utilizing an established three-level
hierarchy. The hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date as
follows:
|
·
|
Level
1 – Valuation is based upon unadjusted quoted prices for identical assets
or liabilities in active markets.
|
|
·
|
Level
2 – Valuation is based upon quoted prices for similar assets and
liabilities in active markets, or other inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the
full term of the financial
instruments.
|
|
·
|
Level
3 – Valuation is based upon other unobservable inputs that are significant
to the fair value measurements.
|
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, 2009 and 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, 2009 Using:
|
||||||||||||||||
|
December
31, 2009
|
Quoted
Prices in Active
Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Foreign
currency forward contracts
|
$ | 438 | $ | — | $ | 438 | $ | — | ||||||||
|
Interest
rate swap
|
$ | 6,865 | $ | — | $ | 6,865 | $ | — | ||||||||
|
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) Derivative Financial
Instruments
In the
normal course of business, the Company is exposed to certain risks related to
fluctuations in interest rates and foreign currency exchange rates. The Company
uses various derivative contracts, primarily interest rate swaps and foreign
currency exchange forward contracts, to manage risks from these market
fluctuations. The financial instruments used by the Company are
straight-forward, non-leveraged instruments. The counterparties to these
financial instruments are financial institutions with strong credit ratings. The
Company maintains control over the size of positions entered into with any one
counterparty and regularly monitors the credit ratings of these
institutions.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
Interest
Rate Risk
The Company
is exposed to changes in interest rates on its 2005 Senior Credit Facility. In
order to manage this risk, in May 2008, the Company entered into a three year
interest rate swap agreement to manage interest costs and the risk associated
with changing interest rates. The Company designated this interest rate swap as
a cash flow hedge of floating rate borrowings and expects the hedge to be highly
effective in offsetting fluctuations in the designated interest payments
resulting from changes in the benchmark interest rate. The gains and losses on
the designated swap agreement will offset losses and gains on the transactions
being hedged. The Company formally documented the effectiveness of this
qualifying hedge instrument (both at the inception of the swap and on an ongoing
basis) in offsetting changes in cash flows of the hedged transaction. The fair
value of the interest rate swap is calculated as described in Note 5, “Fair
Value Measurements” taking into consideration current interest rates and the
current creditworthiness of the counterparties or the Company, as
applicable.
As a
result of this swap, the Company pays at a fixed rate and receives payment at a
variable rate. The swap effectively fixed the floating LIBOR-based interest rate
to 3.755% on $350,000 of the outstanding balance under the 2005 Senior Credit
Facility, with the outstanding balance subject to the swap declining over time.
The amount of the outstanding balance subject to the swap amortizes as follows:
to $300,000 on November 28, 2008 (through November, 2009); to $200,000 on
November 28, 2009 (through November, 2010); and to $100,000 on November 28, 2010
(through November 28, 2011). The Company will select the LIBOR-based rate on the
hedged portion of the 2005 Senior Credit Facility during the term of the swap.
The effective portion of the change in value of the swap is reflected as a
component of Accumulated OCL and recognized as Interest expense, net as payments
are paid or accrued. The remaining gain or loss in excess of the cumulative
change in the present value of the future cash flows of the hedged item, if any
(i.e., the ineffective portion) or hedge components excluded from the assessment
of effectiveness are recognized as Interest expense, net during the current
period.
As of
December 31, 2009, the total notional amount of the Company’s interest rate swap
agreement is $200,000. Over the next 12 months, the Company expects
to reclassify $6,057 of deferred losses on derivative instruments from
Accumulated OCL to earnings due to the payment of variable interest associated
with the 2005 Senior Credit Facility.
Foreign
Currency Exposures
The Company
is exposed to foreign currency risk related to intercompany debt and associated
interest payments. To manage the risk associated with fluctuations in foreign
currencies, the Company enters into foreign currency forward contracts. The
Company does not designate any of these foreign currency forward contracts as
hedging instruments, however, the Company considers the contracts as economic
hedges. Accordingly, changes in the fair value of these instruments effect
earnings during the current period. These foreign currency forward contracts
protect against the reduction in value of forecasted foreign currency cash flows
resulting from payments in foreign currencies. The fair value of foreign
currency agreements are estimated as described in Note 5, “Fair Value
Measurements” taking into consideration foreign currency rates and the current
creditworthiness of the counterparties or the Company, as
applicable.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
As of
December 31, 2009, the Company had foreign currency forward contracts with
expiration dates ranging from January 4, 2010 through October 26, 2010. The
changes in fair value of these foreign currency hedges are included as a
component of Other income (expense), net. As of December 31, 2009 the Company
had the following outstanding foreign currency forward contracts:
|
Foreign
Currency
|
Currency
Denomination
|
|||
|
Great
Britain Pound
|
£ | 6,735 | ||
|
Japanese
Yen
|
¥ | 332,587 | ||
|
Swiss
Franc
|
Fr. | 12,919 | ||
|
Swedish
Krona
|
kr. | . 44,912 | ||
|
Norwegian
Krone
|
kr. | 2,427 | ||
|
Australian
Dollar
|
$ | 2,650 | ||
|
New
Zealand Dollar
|
$ | 2,542 | ||
|
Singapore
Dollar
|
$ | 526 | ||
|
United
States Dollar
|
$ | 6,620 | ||
As of December 31, 2009 and December
31, 2008, the fair value carrying amount of the Company’s derivative instruments
were recorded as follows:
|
Asset
Derivatives
|
||||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
Derivatives
not designated as hedging instruments
|
||||||||||
|
Foreign
exchange forward contracts
|
Prepaid
expenses and other current assets
|
$
|
—
|
Prepaid
expenses and other current assets
|
$
|
96
|
||||
|
Liability
Derivatives
|
||||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
Derivatives
designated as hedging instruments
|
||||||||||
|
Interest
rate swap
|
Other
non-current liabilities
|
$
|
6,865
|
Other
non-current liabilities
|
$
|
11,610
|
||||
|
Derivatives
not designated as hedging instruments
|
||||||||||
|
Foreign
exchange forward contracts
|
Accrued
expenses and other current liabilities
|
$
|
438
|
Accrued
expenses and other current liabilities
|
$
|
—
|
||||
|
$
|
7,303
|
$
|
11,610
|
|||||||
F-16
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
The effect of
derivative instruments on the Consolidated Statement of Income for the twelve
months ended December 31, 2009 was as follows:
|
Derivatives
Designated as Cash Flow Hedging Relationships
|
Amount
of (Gain)/Loss
Recognized
in Accumulated OCL on
Derivative
(Effective
Portion)
|
Location
of Loss
Reclassified
from
Accumulated
OCL into
Income
(Effective
Portion)
|
Amount
of Loss
Reclassified
from
Accumulated
OCL
into
Income
(Effective
Portion)
|
Location
of Loss
Recognized
in Income on
Derivative
(Ineffective
Portion
and Amount
Excluded
from
Effectiveness
Testing)
|
Amount
of Loss
Recognized
in Income
on
Derivative
(Ineffective
Portion
and
Amount Excluded
from
Effectiveness Testing)
|
|||||||||
|
Interest
rate swap
|
$
|
(4,745)
|
Interest
expense, net
|
$
|
8,257
|
Interest
expense, net
|
$
|
—
|
||||||
|
Derivatives
Not Designated as Hedging Instruments
|
Location
of (Loss)/Gain
Recognized
in Income on
Derivative
|
Amount
of (Loss)/Gain
Recognized
in Income
on
Derivative
|
||||
|
Foreign
exchange forward contracts
|
Other
(expense) income, net
|
$ |
728
|
|||
(7)
Stockholders’ Equity
(a) Capital stock—Tempur-Pedic
International 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 stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared from time to time
by the Board of Directors out of funds legally available for that purpose. In
the event of liquidation, dissolution or winding up, the holders of 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 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’s
registrable securities, as defined in the Registration Rights Agreement, have
the right, subject to certain conditions, to require Tempur-Pedic International
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
stockholders and the 14,950 shares sold in the 2004 secondary offering were sold
by selling stockholders who were parties to the Registration Rights Agreement.
As of December 31, 2009, 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)
(c) Share Repurchase Programs—On January 25, 2007,
the Board of Directors authorized the repurchase of up to $100,000 of the
Company’s common stock. The Company repurchased 3,840 shares of the Company’s
common stock for a total of $100,000 and completed purchases from this
authorization in June 2007. On July 19, 2007, the Board of Directors approved an
additional share repurchase authorization to repurchase up to $200,000 of the
Company’s common stock. The Company repurchased 6,561 shares of the Company’s
common stock for approximately $200,000 and completed purchases from the July
2007 authorization in September 2007. On October 16, 2007, the Board of
Directors authorized an additional share repurchase of up to $300,000 of the
Company’s common stock. During the three months ended December 31, 2007, the
Company repurchased 659 shares of the Company’s common stock for approximately
$19,900. No shares were repurchased during the years ended December 31, 2008 and
December 31, 2009. Share repurchases under this authorization may be made
through open market transactions, negotiated purchase or otherwise, at times and
in such amounts as the Company and a committee of the Board deem appropriate.
This share repurchase authorization may be suspended, limited or terminated at
any time without notice. On January 13, 2010 the Board of Directors approved a
share repurchase program of up to $100,000 of the Company’s common stock which
replaces the October 2007 authorization.
(d) Dividend Program—Tempur-Pedic
International’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, Tempur-Pedic International’s Board of Directors initiated
a cash dividend of $0.24 per common share, paid in quarterly installments of
$0.06. In the second quarter of 2007, Tempur-Pedic International’s Board of
Directors increased the quarterly dividend payments to $0.08 per common share.
The same dividend was declared in the third and fourth quarters of 2007. Prior
to 2007, Tempur-Pedic International had not declared a cash dividend on its
common stock.
(8)
Other Balance Sheet Items
(a) Property, plant and
equipment—
Property,
plant and equipment, net consisted of the following:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Land
and buildings
|
|
$
|
123,743
|
$
|
122,256
|
|||
|
Machinery
and equipment, furniture and fixtures and other
|
|
202,474
|
192,029
|
|||||
|
Construction
in progress
|
|
8,107
|
5,321
|
|||||
|
|
334,324
|
319,606
|
||||||
|
Accumulated
depreciation and amortization
|
|
(161,827
|
)
|
(133,763
|
)
|
|||
|
|
$
|
172,497
|
$
|
185,843
|
||||
Depreciation
expense for the Company was $29,010, $30,343 and $29,538 for the years ended
December 31, 2009, 2008 and 2007, respectively.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
(b) Accrued expenses and other current
liabilities—
Accrued
expenses and other current liabilities consisted of the following:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Salary
and related expenses
|
$
|
18,131
|
$
|
11,226
|
||||
|
Accrued
unrecognized tax benefits
|
12,544
|
11,012
|
||||||
|
Accrued
sales and value added taxes
|
11,472
|
10,768
|
||||||
|
Warranty
accrual
|
|
4,052
|
3,903
|
|||||
|
Sales
returns
|
|
4,233
|
3,804
|
|||||
|
Other
|
|
31,020
|
24,603
|
|||||
|
|
$
|
81,452
|
$
|
65,316
|
||||
|
|
||||||||
(c) Accumulated other comprehensive
loss—
Accumulated
other comprehensive loss consisted of the following:
|
December
31,
|
|||||||
|
2009
|
2008
|
||||||
|
Derivative
instruments accounted for as hedges, net of tax of $2,678 and
$4,528
|
$
|
(4,187
|
)
|
$
|
(7,082
|
) | |
|
Foreign
currency translation
|
(3,817
|
)
|
(5,508
|
) | |||
|
Accumulated
other comprehensive loss
|
$
|
(8,004
|
)
|
$
|
(12,590
|
) | |
(9)
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, as amended, (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 issuance or exercise of share-based awards.
The Company believes that awards and purchases made under these plans better
align the interests of the plan participants with those of its
stockholders.
The 2002
Option Plan was adopted on November 1, 2002 and provides for grants of
stock 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.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
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. Awards granted under this plan through
December 31, 2009 have been in the form of stock options that generally vest
based on 4 years of continuous service and have 10-year contractual terms.
Tempur-Pedic International may issue a maximum of 11,500 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
500,000 shares of its common stock under the ESPP.
The
Company uses the Black-Scholes option pricing model to calculate the fair value
of stock options granted. The assumptions used in the Black-Scholes pricing
model for the years ended December 31, 2009, 2008 and 2007 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 an estimate of
dividend payouts ments over the term of the award.
|
Year
Ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
volatility range of stock
|
62 – 92 | % | 41 – 60 | % | 40 – 41 | % | ||||||
|
Expected
life of option, range in years
|
2.0 – 5.0 | 1.0 – 5.0 | 2.0 – 5.0 | |||||||||
|
Risk-free
interest rate range
|
1.0 – 2.8 | % | 1.5 – 3.4 | % | 3.2 – 5.1 | % | ||||||
|
Expected
dividend yield on stock
|
0.0 – 5.2 | % | 1.4 – 4.2 | % | 1.0 – 1.1 | % | ||||||
A summary
of Tempur-Pedic International’s unvested shares as of December 31, 2009 and
changes during the years-ended December 31, 2009 and 2008 are presented
below:
|
Shares
|
Weighted
Average
Grant
Date Fair Value
|
|||||||
|
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 | |||||
|
Granted
|
1,739 | 3.06 | ||||||
|
Vested
|
(1,339 | ) | 5.81 | |||||
|
Forfeited
|
(137 | ) | 7.49 | |||||
|
Options
unvested at December 31, 2009
|
3,714 | $ | 4.33 | |||||
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
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, 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 | ||||||||||||
|
Granted
|
1,739 | 7.52 | |||||||||||||
|
Exercised
|
(154 | ) | 10.55 | ||||||||||||
|
Terminated
|
(161 | ) | 18.95 | ||||||||||||
|
Options outstanding at December
31, 2009
|
6,819 | $ | 13.47 | 7.73 | 72,313 | ||||||||||
|
Options
exercisable at December 31, 2009
|
3,105 | $ | 16.26 | 6.79 | 22,905 | ||||||||||
The total
intrinsic value of options exercised for the years ended December 31, 2009, 2008
and 2007 was $1,604, $2,973 and $48,845, respectively.
The grant
date fair value of stock options is recognized as compensation expense on a
straight-line basis over the requisite service period, and the expense is
expected to be recognized over a weighted-average remaining period of 2.19 years
as of December 31, 2009. The total value of shares vested during the years ended
December 31, 2009, 2008 and 2007 was $7,910, $6,915 and $4,996, respectively.
For the years ended December 31, 2009, 2008 and 2007 the Company recognized
$8,513, $7,909 and $5,881, respectively, of stock-based compensation expense in
Selling and marketing expenses and General, administrative and other expenses
related to stock options granted under the 2003 Plan. As of December 31, 2009,
there was $11,909 of unearned stock-based compensation expense related to these
options. The future amortization of these unearned stock-based compensation
costs will be $6,403 in 2010; $3,803 in 2011; $1,470 in 2012 and $233 in
2013.
The
Company recorded $169 of stock-based compensation expense for the year ended
December 31, 2007, related to options granted under the 2002 Option Plan prior
to the initial public offering in 2003 that have exercise prices that are less
than the deemed market value of the underlying common stock at the date of
grant. The unearned stock-based compensation for these options has been
amortized to compensation expense over their respective vesting term based on
the “graded vesting” methodology and was fully amortized to compensation expense
as of December 31, 2007.
For the
years ended December 31, 2009, 2008 and 2007, the Company recognized $146, $0
and $438, respectively, of stock-based compensation expense related to
restricted stock units (RSUs). As of December 31, 2009 there was $112 of
unearned stock based compensation expense related to the RSUs. The remaining
unearned stock-based compensation will be fully amortized to compensation
expense in 2010.
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, 2009, 2008 and 2007 was $1,623, $695 and $8,175,
respectively.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
(10)
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 $6,148, $4,430, and $4,726 for the
years ended December 31, 2009, 2008 and 2007, respectively.
Future
minimum lease payments at December 31, 2009 under these non-cancelable leases
are as follows:
|
Year
Ended December 31,
|
||||
|
2010
|
$ | 5,620 | ||
|
2011
|
4,638 | |||
|
2012
|
3,303 | |||
|
2013
|
2,671 | |||
|
2014
|
1,435 | |||
|
Thereafter
|
1,275 | |||
| $ | 18,942 | |||
(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, 2009 and 2008.
(c) Antitrust Action—On January
5, 2007, a purported class action was filed against the Company in the United
States District Court for the Northern District of Georgia, Rome Division
(Jacobs v. Tempur-Pedic International, Inc. and Tempur-Pedic North America,
Inc., or the Antitrust Action). The Antitrust Action alleges violations of
federal antitrust law arising from the pricing of Tempur-Pedic mattress products
by Tempur-Pedic North America and certain distributors. The action alleges
a class of all purchasers of Tempur-Pedic mattresses in the United States since
January 5, 2003, and seeks damages and injunctive relief. Count Two of the
complaint was dismissed by the court on June 25, 2007, based on a motion filed
by the Company. Following a decision issued by the United States Supreme Court
in Leegin Creative Leather
Prods., Inc. v. PSKS, Inc. on June 28, 2007, the Company filed a motion
to dismiss the remaining two counts of the Antitrust Action on July 10, 2007. On
December 11, 2007, that motion was granted and, as a result, judgment was
entered in favor of the Company and the plaintiffs’ complaint was dismissed with
prejudice. On December 21, 2007, the plaintiffs filed a “Motion to Alter or
Amend Judgment,” which has been fully briefed. On May 1, 2008, that motion was
denied. The Jacobs appealed the dismissal of their claims, and the
parties argued the appeal before the United States Circuit Court for the
Eleventh Circuit on December 11, 2008. The matter has been taken
under advisement by the court. The Company continues to strongly
believe that the Antitrust Action lacks merit, and intends to defend against the
claims vigorously. However, due to the inherent uncertainties of litigation, we
cannot predict the outcome of the Antitrust Action at this time, and can give no
assurance that these claims will not have a material adverse affect on the
Company’s financial position or results of operation. Accordingly, the Company
cannot make an estimate of the possible ranges of loss.
(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 Office of the Attorney General
has made information and document requests of the Company and the Company is
cooperating with these requests. The Company believes that its UPPL
complies with state and federal law and, should the OAG challenge the UPPL,
intends to vigorously defend it. However, due to the inherent uncertainties of
this matter, the Company cannot at this time predict the outcome of any such
enforcement action, if brought, and can give no assurance that these claims will
not have a material adverse affect on its financial position or results of
operation.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
The Company
is involved in various other legal proceedings incidental to the operations of
its business. The Company believes that the outcome of all such pending legal
proceedings in the aggregate will not have a materially adverse affect on its
business, financial condition, liquidity, or operating results.
(11)
Income Taxes
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,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amount
|
Percentage
of Income
Before
Taxes
|
Amount
|
Percentage
of Income
Before
Taxes
|
Amount
|
Percentage
of Income
Before
Taxes
|
|||||||||||||||||||
|
Statutory
U.S. federal income tax
|
$ | 44,809 | 35.0 | % | $ | 37,598 | 35.0 | % | $ | 74,506 | 35.0 | % | ||||||||||||
|
State
income taxes, net of federal
benefit
|
2,146 | 1.7 | 2,122 | 2.0 | 6,777 | 3.2 | ||||||||||||||||||
|
Foreign
tax differential
|
(4,403 | ) | (3.4 | ) | (5,724 | ) | (5.3 | ) | (9,109 | ) | (4.3 | ) | ||||||||||||
|
Change
in valuation allowance
|
513 | 0.4 | 843 | 0.8 | (2,474 | ) | (1.1 | ) | ||||||||||||||||
|
Foreign
repatriation, net of Foreign
tax credits
|
— | — | 11,400 | 10.6 | — | — | ||||||||||||||||||
|
Subpart
F income and Section 956
|
2,082 | 1.6 | 2,373 | 2.2 | 3,211 | 1.5 | ||||||||||||||||||
|
Manufacturing
deduction
|
(975 | ) | (0.8 | ) | (587 | ) | (0.6 | ) | (2,069 | ) | (1.0 | ) | ||||||||||||
|
Permanent
and other
|
(1,128 | ) | (0.9 | ) | 529 | 0.5 | 573 | 0.3 | ||||||||||||||||
|
Effective
income tax provision
|
$ | 43,044 | 33.6 | % | $ | 48,554 | 45.2 | % | $ | 71,415 | 33.6 | % | ||||||||||||
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 Code, such income is taxable to Tempur-Pedic
International as if earned directly by Tempur-Pedic International.
The
Company completed the repatriation of $150,000 of foreign earnings in the first
quarter of 2009. This repatriation was initiated in the fourth quarter of 2008
and the associated income tax expense was recognized at that time. The Company
has not provided for U.S. federal, state income and foreign withholding taxes on
$168,207 of undistributed earnings from non-U.S. operations as of December 31,
2009 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.
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, 2009, 2008 and
2007:
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Domestic
|
$ | 49,703 | $ | 20,715 | $ | 104,640 | ||||||
|
International
|
78,334 | 86,707 | 108,234 | |||||||||
|
Consolidated
|
$ | 128,037 | $ | 107,422 | $ | 212,874 | ||||||
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
The Company adopted new FASB authoritative guidance on accounting for uncertain tax positions effective January 1, 2007. No cumulative effect adjustment to retained earnings was required as a result of the adoption of this guidance. The Company 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. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
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
|
|||
|
Settlements of
uncertain tax positions with tax authorities
|
(285
|
)
|
||
|
Balance
as of December 31, 2008
|
|
$
|
11,012
|
|
|
Additions
based on tax positions related to 2009
|
|
776
|
||
|
Additions
for tax positions of prior years
|
|
3,430
|
||
|
Reductions
for tax positions as a result of a lapse of applicable statute of
limitations
|
|
(608
|
)
|
|
|
Settlements
of uncertain tax positions with tax authorities
|
|
(2,066
|
)
|
|
|
Balance
as of December 31, 2009
|
|
$
|
12,544
|
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,
2009, 2008 and 2007, the Company recognized approximately $903, $881and $197 in
interest and penalties, respectively. The Company had approximately
$1,850 and $1,896 of accrued interest and penalties at December 31, 2009 and
2008, 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 $39.3 million including interest and
penalties. On January 23, 2008 the Company filed timely complaints
with the Danish National Tax Tribunal denying the tax assessments. The
National Tax Tribunal formally agreed to place the Danish tax litigation on hold
pending the outcome of a Bilateral Advance Pricing Agreement (Bilateral APA)
between the United States and the Danish Tax Authority. A Bilateral APA
involves an agreement between the Internal Revenue Service (IRS) and the
taxpayer, as well as a negotiated agreement with one or more foreign competent
authorities under applicable income tax treaties. On August 8, 2008 the
Company filed the Bilateral APA with the IRS and the Danish Tax Authority. The
IRS began analyzing the Bilateral APA in the first quarter of 2009 and expects
to finalize its position by the second quarter of 2010. The Company believes it
has meritorious defenses to the proposed adjustment and will oppose the
assessment in the Danish courts, as necessary. It is reasonably possible the
amount of unrecognized tax benefits may change in the next twelve
months. An estimate of the amount of such change cannot be made at
this time.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to tax examinations by tax
authorities in the U.S. for periods prior to 2006, U.S. state and local
municipalities for periods prior to 2005, and in non-U.S. jurisdictions for
periods prior to 2002. 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
Company’s foreign net operating losses (NOLs) were $31,313 and $30,591 as of
December 31, 2009 and 2008, respectively. These NOLs expire at various dates
through 2019. The Company has established a valuation allowance for net
operating loss carryforwards and certain other deferred tax assets related to
certain foreign operations. Management believes that, based on a
number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of these foreign NOLs and certain other
timing differences related to some of its foreign operations. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion of all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which the temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income, management
believes it is more likely than not the Company will realize the benefits of the
deferred tax assets, other than those related to some of its foreign operations
as discussed above. However, there can be no assurance that such assets will be
realized if circumstances change.
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,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Federal
|
$ | 27,666 | $ | 20,029 | $ | 42,589 | ||||||
|
State
|
4,144 | 3,518 | 10,511 | |||||||||
|
Foreign
|
21,044 | 22,584 | 27,276 | |||||||||
|
Total
current
|
52,854 | 46,131 | 80,376 | |||||||||
|
Deferred
provision
|
||||||||||||
|
Federal
|
(9,357 | ) | 1,844 | (4,469 | ) | |||||||
|
State
|
(738 | ) | (124 | ) | (308 | ) | ||||||
|
Foreign
|
285 | 703 | (4,184 | ) | ||||||||
|
Total
deferred
|
(9,810 | ) | 2,423 | (8,961 | ) | |||||||
|
Total
Income tax provision
|
$ | 43,044 | $ | 48,554 | $ | 71,415 | ||||||
The net
deferred tax assets and liabilities recognized in the Consolidated Balance
Sheets consisted of the following:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
|
|||||||
|
Inventories
|
|
$
|
6,732
|
$
|
4,169
|
|||
|
Net
operating losses
|
|
9,742
|
9,734
|
|||||
|
Property,
plant and equipment
|
|
6,093
|
7,534
|
|||||
|
Accrued
expenses and other
|
|
16,895
|
13,380
|
|||||
|
Total
deferred tax assets
|
|
39,462
|
34,817
|
|||||
|
Valuation
allowances
|
|
(9,773)
|
(8,736)
|
|||||
|
Total
net deferred tax assets
|
|
29,689
|
26,081
|
|||||
|
Deferred
tax liabilities:
|
|
|||||||
|
Property,
plant and equipment
|
|
|
(11,810)
|
(12,198)
|
||||
|
U.S.
tax on unrepatriated earnings
|
|
--
|
(3,356)
|
|||||
|
Intangible
assets
|
|
(23,987)
|
(24,565)
|
|||||
|
Accrued
expenses and other
|
|
(3,346)
|
(2,445)
|
|||||
|
Total
deferred tax liabilities
|
|
(39,143)
|
(42,564)
|
|||||
|
Net
deferred tax liabilities
|
|
$
|
(9,454)
|
$
|
(16,483)
|
|||
|
|
||||||||
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
(12) Major
Customers
The top
five customers in the applicable period accounted for approximately 19%, 19% and
18% of the Company’s Net sales for the years ended December 31, 2009, 2008 and
2007, respectively. The top five customers in the applicable period also
accounted for approximately 25% and 21% of accounts receivable as of December
31, 2009 and 2008, respectively. The loss of one or more of these customers
could negatively impact the Company.
(13)
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 $1,064, $1,084 and $813 of
expenses associated with the Plan for the years ended December 31, 2009, 2008
and 2007, respectively.
(14)
Earnings Per Common Share
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income
|
$ | 84,993 | $ | 58,868 | $ | 141,459 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic earnings per common share—weighted average
shares
|
74,934 | 74,737 | 79,831 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Employee
stock options and RSUs
|
1,114 | 172 | 1,425 | |||||||||
|
Denominator
for diluted earnings per common share—adjusted weighted average
shares
|
$ | 76,048 | $ | 74,909 | $ | 81,256 | ||||||
|
Basic
earnings per common share
|
$ | 1.13 | $ | 0.79 | $ | 1.77 | ||||||
|
Diluted
earnings per common share
|
$ | 1.12 | $ | 0.79 | $ | 1.74 | ||||||
The Company
excluded 2,331 and 4,514 and 9 shares issuable upon exercise of outstanding
stock options for the years ended December 31, 2009, 2008 and 2007,
respectively, from the Diluted earnings per common share computation because
their exercise price was greater than the average market price of the Company’s
common stock or they were otherwise anti-dilutive.
(15)
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.
The
following table summarizes Total assets by segment:
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Domestic
|
$ | 481,942 | $ | 474,824 | ||||
|
International
|
274,112 | 282,884 | ||||||
|
Inter-segment
eliminations
|
(112,675 | ) | (111,177 | ) | ||||
| $ | 643,379 | $ | 646,531 | |||||
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,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
sales from external customers:
|
|
|||||||||||
|
Domestic
|
|
|||||||||||
|
Mattresses
|
$
|
366,925
|
$
|
412,295
|
$
|
535,706
|
||||||
|
Pillows
|
48,814
|
50,772
|
68,342
|
|||||||||
|
Other
|
109,585
|
107,637
|
121,301
|
|||||||||
|
$
|
525,324
|
$
|
570,704
|
$
|
725,349
|
|||||||
|
International
|
|
|||||||||||
|
Mattresses
|
$
|
183,022
|
$
|
219,013
|
$
|
232,824
|
||||||
|
Pillows
|
58,718
|
67,128
|
73,772
|
|||||||||
|
Other
|
64,092
|
70,973
|
74,777
|
|||||||||
|
$
|
305,832
|
$
|
357,114
|
$
|
381,373
|
|||||||
|
|
||||||||||||
|
|
$
|
831,156
|
$
|
927,818
|
$
|
1,106,722
|
||||||
|
Inter-segment
sales:
|
|
|||||||||||
|
Domestic
|
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
International
|
|
2,502
|
3,097
|
2,994
|
||||||||
|
Inter-segment
eliminations
|
|
(2,502
|
)
|
(3,097
|
)
|
(2,994
|
)
|
|||||
|
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Operating
income:
|
|
|||||||||||
|
Domestic
|
|
$
|
64,487
|
$
|
47,238
|
$
|
135,202
|
|||||
|
International
|
|
80,458
|
86,626
|
108,912
|
||||||||
|
|
$
|
144,945
|
$
|
133,864
|
$
|
244,114
|
||||||
|
Depreciation
and amortization (including stock-based compensation
amortization):
|
|
|||||||||||
|
Domestic
|
|
$
|
30,331
|
$
|
30,267
|
$
|
29,054
|
|||||
|
International
|
|
9,882
|
10,530
|
11,088
|
||||||||
|
|
$
|
40,213
|
$
|
40,797
|
$
|
40,142
|
||||||
|
Capital
expenditures:
|
|
|||||||||||
|
Domestic
|
|
$
|
8,067
|
$
|
6,733
|
$
|
11,053
|
|||||
|
International
|
|
6,236
|
3,761
|
5,096
|
||||||||
|
|
$
|
14,303
|
$
|
10,494
|
$
|
16,149
|
||||||
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 $560, $546,
and $607 for the years ended December 31, 2009, 2008 and 2007,
respectively.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS―(Continued)
(In
thousands, except per share amounts)
(16)
Quarterly Financial Data (unaudited)
The
Company’s quarterly operating results fluctuate as a result of seasonal
variations in the Company’s business.
Quarterly
results of operations for the years ended December 31, 2009 and 2008 are
summarized below:
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
2009
|
||||||||||||||||
|
Net
sales
|
$ | 177,104 | $ | 185,176 | $ | 224,082 | $ | 244,794 | ||||||||
|
Gross
profit
|
81,861 | 86,331 | 106,709 | 118,841 | ||||||||||||
|
Operating
income
|
25,881 | 29,162 | 42,676 | 47,226 | ||||||||||||
|
Net
income
|
13,338 | 16,857 | 25,684 | 29,114 | ||||||||||||
|
Basic
earnings per common share
|
$ | 0.18 | $ | 0.23 | $ | 0.34 | $ | 0.39 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.18 | $ | 0.22 | $ | 0.34 | $ | 0.38 | ||||||||
|
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 | ||||||||
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. The Company’s quarterly
operating results fluctuate as a result of seasonal variations in the Company’s
business.
(17)
Subsequent Events
On
January 29, 2010, the Company established a 51% interest in Tempur
Shanghai Holding Ltd (a Hong Kong company). Tempur Shanghai Holding Ltd owns
100% interest in Tempur Pedic (Shanghai) Trading Co., Ltd (a Shanghai company).
Approximately $1.3 million in cash was paid in order to form this entity
with the Company’s former third party distributor. During 2009, the third party
distributor contributed $1.1 million to the Company’s Net sales.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
SCHEDULE
II
|
Additions
|
|||||||||||||||||
|
Description
|
Balance
at
Beginning
of
Period
|
Charges
to
Costs
and
Expenses
|
Charged
to Other
Accounts
|
Deductions
|
Balance
at
End
of
Period
|
||||||||||||
|
Allowance
for Doubtful Accounts:
|
|||||||||||||||||
|
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 | ||||||
|
Year
Ended December 31, 2009
|
$ | 6,726 | $ | 5,936 | $ | — | $ | (3,632 | ) | $ | 9,030 | ||||||
|
Additions
|
|||||||||||||||||
|
Description
|
Balance
at
Beginning
of
Period
|
Charges
to
Costs
and
Expenses
|
Charged
to Other
Accounts
|
Deductions
|
Balance
at
End
of
Period
|
||||||||||||
|
Valuation
allowance deferred tax assets:
|
|||||||||||||||||
|
Year
Ended December 31, 2007
|
$ | 12,662 | $ | (2,474 | ) | $ | (1,409 | ) | $ | — | $ | 8,779 | |||||
|
Year
Ended December 31, 2008
|
$ | 8,779 | $ | 843 | $ | (886 | ) | $ | — | $ | 8,736 | ||||||
|
Year
Ended December 31, 2009
|
$ | 8,736 | $ | 513 | $ | 524 | $ | — | $ | 9,773 | |||||||
F-29