form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM
10-Q
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended September 30, 2008
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from
to
Commission
file number 001-31922
TEMPUR-PEDIC
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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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,
including zip code, of principal executive offices)
Registrant’s
telephone number, including area code: (800) 878-8889
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
(Do not
check if a smaller reporting company) Smaller reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨ No x
The
number of shares outstanding of the registrant’s common stock as of October 29,
2008 was 74,832,873 shares.
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This
quarterly report on Form 10-Q, including the information incorporated by
reference herein, contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include information
concerning our plans, objectives, goals, strategies, future events, future
revenues or performance, capital expenditures, the impact of the adoption of
recently issued accounting pronouncements, the antitrust class action lawsuit
and pending tax assessments, statements regarding our financial flexibility,
statements relating to the impact of initiatives to accelerate growth, expand
market share and attract sales from the standard mattress market, expand
business within established accounts and into under-penetrated markets, reduce
costs and improve manufacturing productivity, the impact of net operating
losses, the vertical integration of our business, our ability to source raw
materials effectively, the development, rollout and market acceptance of new
products, our ability to further invest in the business and in brand awareness,
growth in our Healthcare segment, the impact of the macroeconomic environment in
both the U.S. and internationally on sales, the effects of changes in foreign
exchange rates on our reported earnings, expected sources of cash flow, our
ability to effectively manage cash and our debt/leverage ratio and other
information that is not historical information. Many of these statements appear,
in particular, under the heading “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in ITEM 2 of Part I of this
report. When used in this report, the words “estimates,” “expects,”
“anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such
words or similar expressions are intended to identify forward-looking
statements. These forward-looking statements are based upon our current
expectations and various assumptions. There can be no assurance that we will
realize our expectations or that our beliefs will prove correct.
There are a
number of risks and uncertainties that could cause our actual results to differ
materially from the forward-looking statements contained in this report.
Important factors that could cause our actual results to differ materially from
those expressed as forward-looking statements are set forth in this report,
including under the heading “Risk Factors” under ITEM 1A of Part II of this
report and under the heading “Risk Factors” under ITEM 1A of Part 1 of our
annual report on Form 10-K for the year ended December 31, 2007. There may be
other factors that may cause our actual results to differ materially from the
forward-looking statements.
All
forward-looking statements attributable to us apply only as of the date of this
report and are expressly qualified in their entirety by the cautionary
statements included in this report. Except as may be required by law, we
undertake no obligation to publicly update or revise any of the forward-looking
statements, whether as a result of new information, future events, or
otherwise.
When used in
this report, except as specifically noted otherwise, the term “Tempur-Pedic
International” refers to Tempur-Pedic International Inc. only, and the terms
“Company,” “we,” “our,” “ours” and “us” refer to Tempur-Pedic International Inc.
and its consolidated subsidiaries.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
Months Ended
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Nine
Months Ended
|
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September
30,
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September
30,
|
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|
|
|
2008
|
|
|
|
2007
|
|
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|
2008
|
|
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|
2007
|
|
|
Net
sales
|
$
|
252,814
|
|
|
$
|
294,094
|
|
|
$
|
738,697
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|
|
$
|
817,768
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Cost
of sales
|
|
147,323
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|
|
|
152,484
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|
|
|
419,109
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|
|
|
423,930
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|
Gross
profit
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105,491
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|
|
|
141,610
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|
|
|
319,588
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|
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|
393,838
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Selling
and marketing expenses
|
|
39,956
|
|
|
|
48,830
|
|
|
|
137,906
|
|
|
|
144,630
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|
|
General,
administrative and other expenses
|
|
22,644
|
|
|
|
25,231
|
|
|
|
73,139
|
|
|
|
72,775
|
|
|
Operating
income
|
|
42,891
|
|
|
|
67,549
|
|
|
|
108,543
|
|
|
|
176,433
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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Other
income (expense), net:
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|
|
|
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Interest
expense, net
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|
(6,294
|
)
|
|
|
(8,261
|
)
|
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|
(19,630
|
)
|
|
|
(21,394
|
)
|
|
Other
income (expense), net
|
|
96
|
|
|
|
(33
|
)
|
|
|
(995
|
)
|
|
|
(536
|
)
|
|
Total
other expense
|
|
(6,198
|
)
|
|
|
(8,294
|
)
|
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|
(20,625
|
)
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|
(21,930
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)
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|
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Income
before income taxes
|
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36,693
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59,255
|
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87,918
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154,503
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Income
tax provision
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12,622
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20,437
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30,105
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52,974
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|
Net
income
|
$
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24,071
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$
|
38,818
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$
|
57,813
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$
|
101,529
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Earnings
per common share:
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Basic
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$
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0.32
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$
|
0.50
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$
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0.77
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$
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1.25
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Diluted
|
$
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0.32
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$
|
0.49
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$
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0.77
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$
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1.22
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Cash
dividend per common share
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$
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0.08
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$
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0.08
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$
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0.24
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0.22
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Weighted
average common shares outstanding:
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Basic
|
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74,815
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77,725
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74,704
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81,522
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Diluted
|
|
74,992
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|
|
79,173
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|
|
|
74,944
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|
|
|
83,069
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|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share amounts)
|
|
September
30,
2008
|
|
December
31,
2007
|
|
|
(Unaudited)
|
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|
|
ASSETS
|
|
|
|
|
|
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|
|
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Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
87,677
|
|
|
$
|
33,315
|
|
|
Accounts
receivable, net
|
|
137,112
|
|
|
|
163,730
|
|
|
Inventories
|
|
69,703
|
|
|
|
106,533
|
|
|
Prepaid
expenses and other current assets
|
|
10,922
|
|
|
|
11,133
|
|
|
Deferred
income taxes
|
|
14,725
|
|
|
|
11,924
|
|
|
Total
Current Assets
|
|
320,139
|
|
|
|
326,635
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
190,714
|
|
|
|
208,370
|
|
|
Goodwill
|
|
199,523
|
|
|
|
198,286
|
|
|
Other
intangible assets, net
|
|
67,157
|
|
|
|
68,755
|
|
|
Other
non-current assets
|
|
4,785
|
|
|
|
4,386
|
|
|
Total
Assets
|
$
|
782,318
|
|
|
$
|
806,432
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
56,159
|
|
|
$
|
56,206
|
|
|
Accrued
expenses and other
|
|
74,184
|
|
|
|
66,080
|
|
|
Income
taxes payable
|
|
15,997
|
|
|
|
4,060
|
|
|
Current
portion of long-term debt
|
|
—
|
|
|
|
288
|
|
|
Total
Current Liabilities
|
|
146,340
|
|
|
|
126,634
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
518,750
|
|
|
|
601,756
|
|
|
Deferred
income taxes
|
|
30,404
|
|
|
|
29,645
|
|
|
Other
non-current liabilities
|
|
2,410
|
|
|
|
259
|
|
|
Total
Liabilities
|
|
697,904
|
|
|
|
758,294
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies—see Note 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock—$.01 par value; 300,000 shares authorized; 99,215
shares issued as of September 30, 2008 and December
31, 2007
|
|
992
|
|
|
|
992
|
|
|
Additional
paid in capital
|
|
289,011
|
|
|
|
283,564
|
|
|
Retained
earnings
|
|
280,367
|
|
|
|
241,812
|
|
|
Accumulated
other comprehensive income
|
|
2,443
|
|
|
|
13,550
|
|
|
Treasury
stock, at cost; 24,382 and 24,681 shares as of September 30, 2008 and
December 31, 2007, respectively
|
|
(488,399
|
)
|
|
|
(491,780
|
)
|
|
Total
Stockholders’ Equity
|
|
84,414
|
|
|
|
48,138
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
$
|
782,318
|
|
|
$
|
806,432
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended
September
30,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
57,813
|
|
|
$
|
101,529
|
|
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
888
|
|
|
|
845
|
|
|
Depreciation
and amortization
|
|
24,847
|
|
|
|
25,326
|
|
|
Amortization
of stock-based compensation
|
|
6,101
|
|
|
|
5,081
|
|
|
Allowance
for doubtful accounts
|
|
5,859
|
|
|
|
4,541
|
|
|
Deferred
income taxes
|
|
(1,634
|
)
|
|
|
(3,101
|
)
|
|
Foreign
currency adjustments
|
|
74
|
|
|
|
661
|
|
|
Loss
on sale of equipment
|
|
679
|
|
|
|
101
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
18,600
|
|
|
|
(22,585
|
)
|
|
Inventories
|
|
36,680
|
|
|
|
(14,228
|
)
|
|
Prepaid
expenses and other current assets
|
|
(1,287
|
)
|
|
|
(5,035
|
)
|
|
Accounts
payable
|
|
(149
|
)
|
|
|
10,250
|
|
|
Accrued
expenses and other
|
|
8,301
|
|
|
|
10,636
|
|
|
Income
taxes
|
|
12,142
|
|
|
|
15,839
|
|
|
Net
cash provided by operating activities
|
|
168,914
|
|
|
|
129,860
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments
for trademarks and other intellectual property
|
|
(600
|
)
|
|
|
(636
|
)
|
|
Purchases
of property, plant and equipment
|
|
(7,844
|
)
|
|
|
(8,181
|
)
|
|
Acquisition
of businesses
|
|
(1,529
|
)
|
|
|
(5,756
|
)
|
|
Proceeds
from sale of equipment
|
|
172
|
|
|
|
135
|
|
|
Net
cash used by investing activities
|
|
(9,801
|
)
|
|
|
(14,438
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term revolving credit facility
|
|
65,429
|
|
|
|
347,547
|
|
|
Repayments
of long-term revolving credit facility
|
|
(89,691
|
)
|
|
|
(119,293
|
)
|
|
Repayments
of long-term debt
|
|
(1,359
|
)
|
|
|
(45,416
|
)
|
|
Proceeds
from Series A Industrial Revenue Bonds
|
|
—
|
|
|
|
15,385
|
|
|
Repayments
of Series A Industrial Revenue Bonds
|
|
(57,785
|
)
|
|
|
(5,765
|
)
|
|
Common
stock issued, including reissuances of treasury stock
|
|
695
|
|
|
|
8,078
|
|
|
Excess
tax benefit from stock based compensation
|
|
301
|
|
|
|
10,025
|
|
|
Treasury
stock repurchased
|
|
—
|
|
|
|
(299,998
|
)
|
|
Dividends
paid to stockholders
|
|
(17,933
|
)
|
|
|
(17,895
|
)
|
|
Payments
for other
|
|
(14
|
)
|
|
|
(1,530
|
)
|
|
Net
cash used by financing activities
|
|
(100,357
|
)
|
|
|
(108,862
|
)
|
|
|
|
|
|
|
|
|
|
|
NET
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
(4,394
|
)
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
54,362
|
|
|
|
7,792
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
33,315
|
|
|
|
15,788
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
87,677
|
|
|
$
|
23,580
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
$
|
18,960
|
|
|
$
|
19,243
|
|
|
Income
taxes, net of refunds
|
$
|
17,884
|
|
|
$
|
30,946
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(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. Tempur-Pedic
International 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 mattresses, pillows and other related products.
The Company manufactures essentially all its pressure-relieving TEMPUR® products
at three manufacturing facilities, with one located in Denmark and two in the
U.S. The Company has sales distribution subsidiaries operating in the U.S.,
Europe, and Asia Pacific and has third party distribution arrangements in
certain other countries where it does not have subsidiaries. The Company sells
its products through four sales channels: Retail, Direct, Healthcare, and Third
party.
The
accompanying unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and include all of the information and disclosures required by
generally accepted accounting principles in the United States (U.S. GAAP) for
interim financial reporting. These unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the consolidated financial
statements of the Company and related footnotes for the year ended December 31,
2007, included in the Company’s Annual Report on Form 10-K.
The results
of operations for the interim periods are not necessarily indicative of results
of operations for a full year. It is the opinion of management that all
necessary adjustments for a fair presentation of the results of operations for
the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein.
(b) Reclassifications—Certain
prior period amounts have been reclassified to conform to the 2008 presentation
including the presentation of General, administrative and other expenses
which includes research and development expenses previously disclosed separately
in the Condensed Consolidated Statements of Income. These changes do not
materially affect previously reported subtotals within the Condensed
Consolidated Financial Statements for any previous period
presented.
(c) Basis of Consolidation—The
accompanying financial statements include the accounts of Tempur-Pedic
International and its subsidiaries. All subsidiaries are wholly owned.
Intercompany balances and transactions have been eliminated.
(d) Use of Estimates—The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(e) Foreign Currency
Translation—Assets and liabilities of non-U.S. subsidiaries, whose
functional currency is the local currency, are translated at period-end exchange
rates. Income and expense items are translated at the average rates of exchange
prevailing during the period. The adjustment resulting from translating the
financial statements of foreign subsidiaries is included in Accumulated other
comprehensive income, a component of Stockholders’ Equity.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
(f) Financial Instruments and
Hedging—The Company accounts for derivative instruments and hedging
activities in accordance with Statement of Financial Accounting Standards (SFAS)
No. 133, “Accounting for Derivative Instruments and Hedging Activities (as
amended)” (SFAS 133). In accordance with this standard, derivative
instruments are recorded on the balance sheet as either an asset or liability
measured at its fair value. Changes in the fair value of derivative instruments
are either recognized in income immediately to offset the gain or loss on the
hedged item, or deferred and recorded in Stockholders’ Equity as a component of
Accumulated other comprehensive income. The ineffective portion of the change in
fair value of a hedge is recognized in income immediately. Derivative financial
instruments are used in the normal course of business to manage interest rate
and foreign currency exchange risks.
(g) Cash and Cash
Equivalents—Cash and cash equivalents consist of all 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:
|
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
Finished
goods
|
|
$ |
44,301 |
|
|
$ |
75,692 |
|
|
Work-in-process
|
|
|
7,861 |
|
|
|
11,135 |
|
|
Raw
materials and supplies
|
|
|
17,541 |
|
|
|
19,706 |
|
|
|
|
$ |
69,703 |
|
|
$ |
106,533 |
|
(i) Long-Lived Assets—In
accordance with SFAS 144, “Accounting for the Impairment or Disposal of
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 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 to the 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).
(j) Goodwill and Other Intangible
Assets—Intangible assets with estimable useful lives are amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment. The Company performs an annual impairment test on all
existing goodwill and other indefinite lived assets in the fourth quarter of
each year. The Company performed the annual impairment test in the fourth
quarter of 2007 and determined that no impairment exists. If facts and
circumstances lead the Company’s management to believe goodwill or other
indefinite lived assets may be impaired, the Company will evaluate the extent to
which the related cost is recoverable by comparing the future estimated
discounted cash flows to the carrying amount and write-down that carrying amount
to fair value to the extent necessary.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
The following
table summarizes information relating to the Company’s Other intangible assets,
net:
|
|
|
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
Useful
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
Lives
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Unamortized
indefinite life
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
$ |
55,000 |
|
|
$ |
— |
|
|
$ |
55,000 |
|
|
$ |
55,000 |
|
|
$ |
— |
|
|
$ |
55,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
10 |
|
|
$ |
16,000 |
|
|
$ |
9,467 |
|
|
$ |
6,533 |
|
|
$ |
16,000 |
|
|
$ |
8,267 |
|
|
$ |
7,733 |
|
|
Patents
& Other Trademarks
|
|
|
5-20 |
|
|
|
11,374 |
|
|
|
7,680 |
|
|
|
3,694 |
|
|
|
11,233 |
|
|
|
7,533 |
|
|
|
3,700 |
|
|
Customer
database
|
|
|
5 |
|
|
|
4,845 |
|
|
|
4,426 |
|
|
|
419 |
|
|
|
4,868 |
|
|
|
4,334 |
|
|
|
534 |
|
|
Foam
formula
|
|
|
10 |
|
|
|
3,700 |
|
|
|
2,189 |
|
|
|
1,511 |
|
|
|
3,700 |
|
|
|
1,912 |
|
|
|
1,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$ |
90,919 |
|
|
$ |
23,762 |
|
|
$ |
67,157 |
|
|
$ |
90,801 |
|
|
$ |
22,046 |
|
|
$ |
68,755 |
|
Amortization
expense relating to intangible assets for the Company was $603 and $1,063 for
the three months ended September 30, 2008 and 2007,
respectively. For the nine months ended September 30, 2008 and 2007
amortization expense relating to intangible assets was $1,810 and $3,140,
respectively.
The
changes in the carrying amount of Goodwill for the nine months ended September
30, 2008 are as follows:
|
Balance
as of December 31, 2007
|
|
$ |
198,286 |
|
|
Goodwill
resulting from acquisitions during the period
|
|
|
895 |
|
|
Purchase
price adjustment
|
|
|
1,622 |
|
|
Foreign
currency translation adjustments and other
|
|
|
(1,280 |
) |
|
Balance
as of September 30, 2008
|
|
$ |
199,523 |
|
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 include inventory and fixed assets,
among other assets. The remainder of the purchase price was allocated to
Goodwill. During the quarter ended September 30, 2008, the Company recorded an
adjustment to unrecognized tax benefits related to the Tempur Acquisition as
further described in Note 10.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
Goodwill as
of September 30, 2008 and December 31, 2007 has been allocated to the Domestic
and International segments as follows:
|
|
|
September 30,
2008
|
|
|
December
31,
2007
|
|
|
Domestic
|
|
$ |
91,551 |
|
|
$ |
89,929 |
|
|
International
|
|
|
107,972 |
|
|
|
108,357 |
|
|
|
|
$ |
199,523 |
|
|
$ |
198,286 |
|
(k) Accrued Sales
Returns—Estimated sales returns are provided at the time of sale based on
historical sales channel return rates. The level of sales returns differs by
channel with the Direct channel typically experiencing the highest return
rate. 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 in
the accompanying Condensed Consolidated Balance Sheets.
The Company
had the following activity for sales returns from December 31, 2007 to September
30, 2008:
|
Balance
as of December 31, 2007
|
|
$ |
5,463 |
|
|
Amounts
accrued
|
|
|
32,531 |
|
|
Returns
charged to accrual
|
|
|
(32,615 |
) |
|
Balance
as of September 30, 2008
|
|
$ |
5,379 |
|
(l) Warranties—The Company
provides a 20-year warranty for U.S. sales and a 15-year warranty for non-U.S.
sales on mattresses, each prorated for the last 10 years. The Company also
provides a 2-year to 3-year warranty on pillows. Estimated future obligations
related to these products are charged to operations in the period in which the
related revenue is recognized. Warranties are included in Accrued expenses and
other in the accompanying Condensed Consolidated Balance Sheets.
The Company
had the following activity for warranties from December 31, 2007 to September
30, 2008:
|
Balance
as of December 31, 2007
|
|
$ |
3,425 |
|
|
Amounts
accrued
|
|
|
3,152 |
|
|
Warranties
charged to accrual
|
|
|
(2,453 |
) |
|
Balance
as of September 30, 2008
|
|
$ |
4,124 |
|
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
(m) 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. The Company is regularly
under audit by tax authorities around the world. The Company accounts for
uncertain foreign and domestic tax positions as required by Financial Accounting
Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48) according to the facts and circumstances in the various
regulatory environments.
(n) Revenue Recognition—Sales of
products are recognized when the products are shipped to customers and the risks
and rewards of ownership are transferred. The Company extends volume discounts
to certain customers and reflects these amounts as a reduction of Net sales. 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 determines the allowance based on historical write-off experience and
current economic and market conditions, and regularly reviews the adequacy of
its allowance for doubtful accounts. Account balances are charged off against
the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. The allowance for doubtful accounts
included in Accounts receivable, net in the accompanying Condensed Consolidated
Balance Sheets was $9,436 and $8,056 as of September 30, 2008 and December 31,
2007, respectively.
(o) Advertising Costs—The
Company expenses advertising costs as incurred except for production costs and
advance payments, which are deferred and expensed when advertisements run for
the first time. Direct response advance payments are deferred and are amortized
over the life of the program.
(p) Research and Development
Expenses—Research and development expenses for new products are expensed
as they are incurred. Research and development costs charged to expense were
approximately $1,330 and $1,603 for the three months ended September 30, 2008
and 2007, respectively. For the nine months ended September 30, 2008
and 2007 research and development costs charged to expense were approximately
$4,621 and $4,278, respectively. Research and development expenses are included
in General, administrative and other expenses in the accompanying Condensed
Consolidated Statements of Income.
(q) Treasury Stock—The Board of
Directors may authorize share repurchases of the Company’s common stock (Share
Repurchase Authorizations). Share repurchases under these authorizations may be
made through open market transactions, negotiated purchase or otherwise, at
times and in such amounts as the Company, and a committee of the Board, deem
appropriate. Shares repurchased under Share Repurchase Authorizations are held
in treasury for general corporate purposes, including issuances under various
employee stock option plans. Treasury shares are accounted for under the cost
method and reported as a reduction of Stockholders’ Equity. Share Repurchase
Authorizations may be suspended, limited or terminated at any time without
notice.
(r) Stock-Based Compensation—The
Company accounts for share-based payments as required by SFAS 123(R)
“Share-Based Payment” (SFAS 123(R)). SFAS 123(R) requires compensation expense
relating to share-based payments be recognized in the financial statements. The
cost is measured at the grant date, based on the calculated fair value of the
award, and is recognized as an expense over the vesting period of the equity
award.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
(2)
Recently Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”
(SFAS 157), which defines fair value, establishes a framework for measuring fair
value in U.S. GAAP, and expands disclosure about fair value measurements to
include the methods and assumptions used to measure fair value and the effect of
fair value measures on earnings. SFAS 157 requires the fair value of
an asset or liability to be based on market-based measures which will reflect
the credit risk of the company. In February 2008, the FASB released FASB Staff
Position No. SFAS 157-2, “Effective Date of FASB
Statement No. 157,”
which delays the effective date of SFAS 157 for nonfinancial assets and
liabilities until January 2009. Effective January 1, 2008, the Company
adopted the provisions of SFAS 157 related to financial assets and
liabilities. SFAS 157 does not require new fair value
measurements. The adoption of SFAS 157 did not have a material impact
on the Company’s financial position or operating results. Additionally, in
October 2008, the FASB issued FASB Staff Position No. 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active”
(FSP 157-3). FSP 157-3 clarifies the adoption of SFAS 157 in a market that is
not active.
In December
2007, the FASB issued SFAS 141(R), “Business Combinations” (SFAS 141(R)), which
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquired business. The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The Company will
apply the provisions of SFAS 141(R) to business combinations for which the
acquisition date is on or after January 1, 2009.
In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities-an amendment of FASB Statement No. 133” (SFAS 161). The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, results of
operations and cash flows. The new standard also improves
transparency about how and why a company uses derivative instruments and how
derivative instruments and related hedged items are accounted for under
SFAS 133. The Company is evaluating the potential impact of adopting SFAS
161, which is effective January 1, 2009.
(3)
Property, Plant and Equipment
Property,
plant and equipment, net consists of the following:
|
|
|
September
30, 2008
|
|
|
December 31, 2007
|
|
|
Land
and buildings
|
|
$
|
122,021
|
|
|
$
|
123,973
|
|
|
Machinery
and equipment, furniture and fixtures, and other
|
|
|
189,961
|
|
|
|
186,175
|
|
|
Construction
in progress
|
|
|
6,282
|
|
|
|
7,210
|
|
|
|
|
|
318,264
|
|
|
|
317,358
|
|
|
Total
accumulated depreciation
|
|
|
(127,550
|
) |
|
|
(108,988
|
)
|
|
|
|
$
|
190,714
|
|
|
$
|
208,370
|
|
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
(4)
Long-term Debt
(a) Long-term Debt—Long-term debt
for the Company consists of the following:
| |
|
September
30, 2008 |
|
|
December
31, 2007
|
|
|
2005
Senior Credit Facility:
|
|
|
|
|
|
|
|
Domestic
Long-Term Revolving Credit Facility payable to lenders, interest
at
Index
Rate or LIBOR plus applicable margin (4.61% and 5.86% as of September 30,
2008 and December 31, 2007, respectively), commitment through and due June
8, 2012
|
|
$ |
518,750 |
|
|
$ |
543,000 |
|
|
|
|
|
|
|
|
|
|
|
|
2005
Industrial Revenue Bonds:
|
|
|
|
|
|
|
|
|
|
Variable
Rate Industrial Revenue Bonds Series 2005A, interest rate
determined
by
remarketing agent
|
|
|
— |
|
|
|
57,785 |
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
Mortgage
payable to a bank (bearing fixed interest of 4.7% to 5.2% as of December
31, 2007)
|
|
|
— |
|
|
|
1,259 |
|
|
|
|
|
518,750 |
|
|
|
602,044 |
|
|
Less:
Current portion
|
|
|
— |
|
|
|
(288
|
) |
|
Long-term
debt
|
|
$ |
518,750 |
|
|
$ |
601,756 |
|
(b) Secured Credit Financing—On
October 18, 2005, the Company entered into a credit agreement (2005 Senior
Credit Facility) with a syndicate of banks. The 2005 Senior Credit Facility, as
amended, consists of domestic and foreign credit facilities that provide for the
incurrence of indebtedness up to an aggregate principal amount of $640,000. The
domestic credit facility is a five-year, $615,000 revolving credit facility
(Domestic Revolver). The foreign credit facility is a five-year $25,000
revolving credit facility (Foreign Revolver). Both credit facilities bear
interest at a rate equal to the 2005 Senior Credit Facility’s applicable margin,
as determined in accordance with a performance pricing grid set forth in
Amendment No. 3, plus one of the following indexes: LIBOR and for U.S.
dollar-denominated loans only, a Base rate. The Base rate of U.S.
dollar-denominated loans are defined as the higher of either the Bank of America
prime rate or the Federal Funds rate plus .50%. The Company also pays an annual
facility fee on the total amount of the 2005 Senior Credit Facility. The
facility fee is calculated based on the consolidated leverage ratio and ranges
from .125% to .25%.
On May 29,
2008, the Company entered into an interest rate swap agreement to manage
interest costs and the risk associated with changing interest rates. Under the
interest rate swap, the Company pays at a fixed rate and receives payments at a
variable rate. This swap effectively fixes the floating LIBOR-based interest
rate to 3.755% on $350,000 of the outstanding principal balance under the 2005
Senior Credit Facility. The amount of the outstanding balance subject to the
swap will decline over time. The Company has designated this swap agreement as a
cash flow hedge and expects the hedge to be highly effective in offsetting
fluctuations in the designated interest payments resulting from changes in the
benchmark interest rate. The Company will select the LIBOR-based rate on the
hedged portion of the 2005 Senior Credit Facility during the term of the swap.
The effective portion of the change in value of the swap is reflected as a
component of Accumulated other comprehensive income and released to Interest
expense. net as debt payments are paid or accrued. The ineffective portion is
recognized as Other income (expense). The fair value of this swap was $2,133 at
September 30, 2008, and was included in Other non-current liabilities in the
accompanying Condensed Consolidated Balance Sheets. As of September 30, 2008,
the Company has other comprehensive loss of $2,133 related to the effectively
hedged portion of the swap. There was no hedge ineffectiveness over this period.
Over the next 12 months, the Company expects to reclassify $1,889 of deferred
losses on derivative instruments from Accumulated other comprehensive income to
earnings due to the payment of variable interest associated with the floating
2005 Senior Credit Facility.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
The 2005
Senior Credit Facility is guaranteed by Tempur-Pedic International, as well as
certain other subsidiaries of Tempur-Pedic International, and is secured by
certain fixed and intangible assets of Dan Foam ApS and substantially all the
Company’s U.S. assets. The 2005 Senior Credit Facility contains certain
financial covenants and requirements affecting the Company, including a
consolidated interest coverage ratio and a consolidated leverage ratio. The
Company was in compliance with all covenants as of September 30,
2008.
The 2005
Senior Credit Facility provides for the issuance of letters of credit which,
when issued, constitute usage and reduce availability under the Revolvers. The
aggregate amount of letters of credit outstanding under the Revolvers was $9,898
at September 30, 2008. After giving effect to
letters of credit and $518,750 in borrowings under the Domestic Revolver, total
availability under the Revolvers was $111,352 at September 30,
2008.
(c) Industrial Revenue Bonds—On
October 27, 2005, Tempur Production USA, Inc., a subsidiary of Tempur-Pedic
International Inc. (Tempur Production), completed an industrial revenue bond
financing for the construction and equipping of Tempur Production’s new
manufacturing facility (the Project) located in Bernalillo County, New Mexico.
On April 1, 2008, Tempur Production redeemed all outstanding Series A Bonds in
the amount of $57,785. The redemption price plus accrued interest was
funded by a $58,000 borrowing under the Domestic Revolver.
Bernalillo
County also agreed to issue Series 2005B Taxable Fixed Rate Industrial Revenue
Bonds (the Series B Bonds, and collectively with the Series A Bonds, the Bonds).
The Series B Bonds were sold to Tempur World LLC, and will be held by Tempur
World, LLC representing the Company’s equity in the Project. In connection with
issuance of the Series B Bonds, the Company made an investment in Series B bonds
in a like amount. The Company has the right to offset the Series B Bonds against
its investment in the Series B Bonds, and accordingly, the amounts have been
recorded net in the accompanying Condensed Consolidated Balance Sheets. On
September 1, 2008, Tempur World, LLC redeemed the majority of the outstanding
Series B Bonds in the amount of $23,002. The remaining $100 of the outstanding
Series B Bonds have a final maturity date of September 1, 2030. The
interest rate on the Series B Bonds is fixed at 7.75%.
(5)
Fair Value of Financial Instruments
The Company
adopted SFAS 157 as of January 1, 2008, as related to financial instruments.
SFAS 157 establishes a three-level hierarchy for fair value measurements. The
hierarchy is based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date.
|
·
|
Level
1 – Valuation is based upon unadjusted quoted prices for identical assets
or liabilities in active markets.
|
|
·
|
Level
2 – Valuation is based upon quoted prices for similar assets and
liabilities in active markets, or other inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the
full term of the financial
instruments.
|
|
·
|
Level
3 – Valuation is based upon other unobservable inputs that are significant
to the fair value measurements.
|
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(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 September 30, 2008,
the Company had only 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 restrictions and other terms specific to the
contracts. The following table provides a summary of the fair value of
measurements by level for assets and liabilities measured at fair value on a
recurring basis:
|
|
|
|
Fair
Value Measurements at September 30, 2008 Using:
|
|
|
|
September 30,
2008
|
|
Quoted
Prices in Active
Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
$ |
2,133 |
|
|
$ |
— |
|
|
$ |
2,133 |
|
|
$ |
— |
|
|
Foreign
currency forward contracts
|
|
|
394 |
|
|
|
|
|
|
|
394 |
|
|
|
|
|
The carrying
value of Cash and cash equivalents, Accounts receivable, and Accounts payable
approximate fair value because of the short-term maturity of those instruments.
Borrowings under the 2005 Senior Credit Facility (as defined in Note (4)(b)) are
at variable interest rates and accordingly their carrying amounts approximate
fair value.
(6)
Stockholders’ Equity
(a) Capital Stock—Tempur-Pedic
International authorized shares of capital stock are 300,000 shares of common
stock and 10,000 shares of preferred stock. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of the common stock are
entitled to receive ratably such dividends as may be declared from time to time
by the Board of Directors out of funds legally available for that purpose. In
the event of liquidation, dissolution, or winding up, the holders of the common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding.
(b) Share Repurchase Programs—On
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 authorization 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. Under the existing share repurchase
authorization, the Company has $280,100 available for repurchase. No
shares were repurchased during the nine months ended September 30, 2008. 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.
TEMPUR-PEDIC INTERNATIONAL INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
(c) Dividend Program—The Company’s Board
of Director’s declared a first quarter 2008 dividend of $0.08 per common share,
which was paid on March 14, 2008 to stockholders of record as of February 27,
2008. The Company’s Board of Director’s declared a second quarter 2008 dividend
of $0.08 per common share which was paid on June 16, 2008 to stockholders of
record as of May 31, 2008. The Company’s Board of Director’s declared a third
quarter 2008 dividend of $0.08 per common share which was paid on September 12,
2008 to stockholders of record as of August 29, 2008. On October 16, 2008, the
Company announced that it would suspend the payment of its quarterly cash
dividend.
(7)
Stock-Based Compensation
The Company
applies the provisions of SFAS 123(R), which establishes the accounting for
employee stock-based awards. The Company currently has three stock-based
compensation plans: the 2002 Option Plan (the 2002 Plan), the 2003 Equity
Incentive Plan (the 2003 Plan) and the 2003 Employee Stock Purchase Plan (the
ESPP) which are described under the caption “Stock-based Compensation” in the
notes to the Consolidated Financial Statements of the Company’s Form 10-K for
the year ended December 31, 2007.
The Company
granted new options to purchase 9 and 2,132 shares of common stock during the
three and nine months ending September 30, 2008, respectively, and recognized
compensation expense associated with these grants of approximately $677 and
$1,100 during the three and nine months ended September 30, 2008, respectively.
The Company granted new options to purchase 18 and 402 shares of common stock
during the three and nine months ended September 30, 2007, respectively, and
recognized compensation expense associated with these grants of approximately
$453 and $752 during the three and nine months ended September 30, 2007,
respectively. As of September 30, 2008, there was $6,636 of unrecognized
compensation expense associated with the options granted in 2008, which is
expected to be recorded over the weighted average remaining vesting period of
3.3 years. The options granted in the three months ended September 30, 2008 had
a weighted average grant-date fair value of $2.44 per option, as determined by
the Black-Scholes option pricing model using the following
assumptions:
|
Expected
volatility of stock
|
|
|
59.5
|
% |
|
Expected
life of options, in years
|
|
|
2.0 |
|
|
Risk-free
interest rate
|
|
|
2.5
|
% |
|
Expected
dividend yield on stock
|
|
|
3.8
|
% |
The Company
recorded approximately $2,060 and $1,701 of total stock-based compensation
expense for the three months ended September 30, 2008 and 2007, respectively.
The Company recorded $6,101 and $5,081 of total stock-based compensation expense
for the nine months ended September 30, 2008 and 2007,
respectively.
(8) Accumulated Other Comprehensive
Income
The
components of Accumulated other comprehensive income are as
follows:
|
|
September
30,
|
|
December
31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Derivative
instruments accounted for as hedges, net of tax of $832
|
$
|
(1,301
|
)
|
|
$
|
—
|
|
|
Foreign
currency translation
|
|
3,744
|
|
|
|
13,550
|
|
|
Accumulated
other comprehensive income
|
$
|
2,443
|
|
|
$
|
13,550
|
|
Comprehensive
income for the three months ended September 30, 2008 and 2007 was
$2,220 and $44,496, respectively. Comprehensive income for the nine months
ended September 30, 2008 and 2007 was $46,705 and $109,123.
(9) Commitments and
Contingencies
(a) Purchase Commitments—The
Company will, from time to time, enter into limited purchase commitments for the
purchase of certain raw materials. Amounts committed under these programs are
not significant as of September 30, 2008.
TEMPUR-PEDIC INTERNATIONAL INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
(b) Securities Litigation—
Between October 7, 2005 and November 21, 2005, five complaints were filed
against Tempur-Pedic International and certain of its directors and officers in
the United States District Court for the Eastern District of Kentucky (Lexington
Division) purportedly on behalf of a class of shareholders who purchased
Tempur-Pedic International’s stock between April 22, 2005 and September 19, 2005
(the Securities Law Action). These actions were consolidated, and a
consolidated complaint was filed on February 27, 2006 asserting claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.
Lead plaintiffs alleged that certain of Tempur-Pedic International’s public
disclosures regarding its financial performance between April 22, 2005 and
September 19, 2005 were false and/or misleading. On December 7, 2006 lead
plaintiffs were permitted to file an amended complaint. The Company filed a
Motion to Dismiss the Securities Law Action and on March 28, 2008, the Court
granted that motion, dismissing all claims in the case with prejudice. The Court
also entered final judgment in favor of the Company and all other defendants on
March 28, 2008. The plaintiffs filed a notice of appeal from that judgment on
April 24, 2008. Since filing the notice of appeal, the plaintiffs agreed to a
stipulation to dismiss appeal with prejudice, which was entered on June 19,
2008, which fully and finally resolved the Securities Law Action in favor of the
Company and all other defendants.
Derivative
Complaints—On November 10, 2005 and December 15, 2005, complaints were
filed in the state courts of Delaware and Kentucky, respectively, against
certain officers and directors of Tempur-Pedic International, purportedly
derivatively on behalf of the Company (the Derivative
Complaints). The Derivative Complaints assert that the named officers
and directors breached their fiduciary duties when they allegedly sold
Tempur-Pedic International’s securities on the basis of material non-public
information in 2005. In addition, the Delaware Derivative Complaint
asserted a claim for breach of fiduciary duty with respect to the disclosures
that also were the subject of the Securities Law Action described above. After
the dismissal of the Securities Law Action, a Stipulation of Dismissal and
Agreed Order was entered in the Kentucky court action on April 28, 2008.
Similarly, a Stipulation and Order of Dismissal with prejudice was entered in
the Delaware court action on July 23, 2008.
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.”
On May 1, 2008, that motion was denied. The plaintiffs filed a Notice of Appeal
of these decisions on May 14, 2008, the parties have fully briefed the matter,
and oral argument is currently scheduled for the week of December 8, 2008. 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, the Company 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 range of loss.
The Company
is involved in various other legal proceedings incidental to the operations of
its business. The Company believes that the outcome of all such pending legal
proceedings in the aggregate will not have a materially adverse affect on its
business, financial condition, liquidity, or operating results.
TEMPUR-PEDIC INTERNATIONAL INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
(10)
Income Taxes
The Company’s
effective tax rate for the three months ended September 30, 2008 was
34.4%. For the same period in 2007, the effective tax rate was
34.5%. The Company’s effective tax rate for the nine months ended
September 30, 2008 was 34.2%. For the same period in 2007, the effective
tax rate was 34.3%. Reconciling items between the federal statutory income tax
rate of 35.0% and the effective tax rate include certain foreign tax rate
differentials, state and local income taxes, valuation allowances on certain net
operating losses, foreign income currently taxable in the U.S., the production
activities deduction, and certain other permanent differences.
The Company
has not provided for U.S. federal, state income and foreign withholding taxes on
$276.9 million of undistributed earnings from non-U.S. operations as of
September 30, 2008 because the Company intends to reinvest such earnings
indefinitely outside of the United States. If Tempur-Pedic
International were to distribute these earnings, foreign tax credits may become
available under current law to reduce the resulting U.S. income tax
liability.
On October
24, 2007, the Company received an income tax assessment from the Danish Tax
Authority with respect to the 2001, 2002 and 2003 tax years. The
tax assessment relates to the royalty paid by one of Tempur-Pedic
International’s U.S. subsidiaries to a Danish subsidiary and the position taken
by the Danish Tax Authority could apply to subsequent years. The total tax
assessment is approximately $39.3 million including interest and underpayment
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 Company
believes it has meritorious defenses to the proposed adjustment and will oppose
the assessment in the Danish courts, as necessary. During the third
quarter of 2008 the gross amount of unrecognized tax benefits relating to this
matter was increased by $2.5 million, of which $0.8 million impacted the
effective tax rate and $1.6 million was recorded as a component of Goodwill
within the accompanying Condensed Consolidated Balance Sheets as it related to
periods prior to the Tempur Acquisition.
In addition
to the impact of the above matter on the gross amount of the Company’s
unrecognized tax benefits, it is reasonably possible under FIN 48 that the
amount of the total unrecognized tax benefits may change in the next twelve
months. An estimate of the amount of such change cannot be made at this time.
There have been no significant changes to the status of any other unrecognized
tax benefits during the quarter ended September 30, 2008. As of September 30,
2008, the amount reserved for unrecognized tax benefits was $9.5 million. Of the
$9.5 million of unrecognized tax benefits, $7.9 would impact the effective rate
if recognized.
With a few
exceptions, the Company is no longer subject to U.S. federal, state/local, or
non-U.S. income tax examinations by tax authorities for years prior to 2005,
2003 and 2000, respectively.
TEMPUR-PEDIC INTERNATIONAL INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
(11)
Earnings Per Common Share
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
24,071 |
|
|
$ |
38,818 |
|
|
$ |
57,813 |
|
|
$ |
101,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per common share-weighted average
shares
|
|
|
74,815 |
|
|
|
77,725 |
|
|
|
74,704 |
|
|
|
81,522 |
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
178 |
|
|
|
1,448 |
|
|
|
240 |
|
|
|
1,547 |
|
|
Denominator
for basic earnings per common share-adjusted weighted average
shares
|
|
|
74,992 |
|
|
|
79,173 |
|
|
|
74,944 |
|
|
|
83,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.32 |
|
|
$ |
0.50 |
|
|
$ |
0.77 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
0.32 |
|
|
$ |
0.49 |
|
|
$ |
0.77 |
|
|
$ |
1.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
excluded 4,932 shares issuable upon exercise of outstanding stock options for
the three months ended September 30, 2008 from the Diluted earnings per common
share computation because their exercise price was greater than the average
market price of Tempur-Pedic International’s common stock or if they were
otherwise anti-dilutive. All outstanding stock options are included in the
Diluted earnings per common share for the three months ended September 30, 2007.
The Company excluded 3,606 and 4 shares issuable upon exercise of outstanding
stock options for the nine months ended September 30, 2008 and 2007,
respectively.
(12)
Business Segment Information
The Company
operates in two business segments: Domestic and International. These reportable
segments are strategic business units that are managed separately based on the
fundamental differences in their operations. The Domestic segment consists of
the two U.S. manufacturing facilities, whose customers include the U.S.
distribution subsidiary and certain third party distributors in North America.
The International segment consists of the manufacturing facility in Denmark,
whose customers include all of the distribution subsidiaries and third party
distributors outside the Domestic segment. The Company evaluates segment
performance based on Net sales and Operating income.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
The following
table summarizes Total assets by segment:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
607,316 |
|
|
$ |
608,346 |
|
|
International
|
|
|
365,546 |
|
|
|
339,757 |
|
|
Intercompany
eliminations
|
|
|
(190,544 |
) |
|
|
(141,671 |
) |
|
|
|
$ |
782,318 |
|
|
$ |
806,432 |
|
The following
tables summarize other segment information:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net
sales from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
165,889 |
|
|
$ |
200,451 |
|
|
$ |
462,308 |
|
|
$ |
546,575 |
|
|
International
|
|
|
86,925 |
|
|
|
93,643 |
|
|
|
276,389 |
|
|
|
271,193 |
|
|
|
|
$ |
252,814 |
|
|
$ |
294,094 |
|
|
$ |
738,697 |
|
|
$ |
817,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$ |
1,237 |
|
|
$ |
921 |
|
|
$ |
2,347 |
|
|
$ |
2,608 |
|
|
Intercompany
eliminations
|
|
|
(1,237 |
) |
|
|
(921 |
) |
|
|
(2,347 |
) |
|
|
(2,608 |
) |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
21,607 |
|
|
$ |
40,715 |
|
|
$ |
43,613 |
|
|
$ |
99,985 |
|
|
International
|
|
|
21,284 |
|
|
|
26,834 |
|
|
|
64,930 |
|
|
|
76,448 |
|
|
|
|
$ |
42,891 |
|
|
$ |
67,549 |
|
|
$ |
108,543 |
|
|
$ |
176,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization (including stock-based
compensation amortization):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
6,954 |
|
|
$ |
7,395 |
|
|
$ |
22,785 |
|
|
$ |
22,000 |
|
|
International
|
|
|
2,782 |
|
|
|
2,762 |
|
|
|
8,163 |
|
|
|
8,407 |
|
|
|
|
$ |
9,736 |
|
|
$ |
10,157 |
|
|
$ |
30,948 |
|
|
$ |
30,407 |
|
TEMPUR-PEDIC INTERNATIONAL INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
(In
thousands, except per share amounts)
The following table
sets forth Net sales by product group:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Mattresses
|
$
|
174,869
|
|
$
|
207,341
|
|
$
|
506,553
|
|
$
|
571,916
|
|
|
Pillows
|
|
31,414
|
|
|
34,418
|
|
|
91,909
|
|
|
101,094
|
|
|
All
other
|
|
46,531
|
|
|
52,335
|
|
|
140,235
|
|
|
144,758
|
|
|
|
$
|
252,814
|
|
$
|
294,094
|
|
$
|
738,697
|
|
$
|
817,768
|
|
(13)
Subsequent Events
On October
21, 2008, the Company’s Board of Directors approved the repatriation of $140.0
million in foreign earnings. The tax charge associated with the repatriation
will be approximately $13.0 million, with the final tax effect to be based on
the timing and amount of the actual distribution. After giving effect to the
repatriation, undistributed earnings from non-U.S. operations reinvested
indefinitely outside of the United States would be reduced to $136.9 million.
The Company intends to reinvest such earnings indefinitely outside of the United
States and has not provided for U.S. federal, state and foreign withholding
taxes on these amounts.
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following
discussion and analysis should be read in conjunction with the Condensed
Consolidated Financial Statements and accompanying notes included in this
quarterly report on Form 10-Q. The forward-looking statements in this discussion
regarding the mattress and pillow industries, our expectations regarding our
future performance, financial flexibility, liquidity and capital resources and
other non-historical statements in this discussion include numerous risks and
uncertainties, as described under “Special Note Regarding Forward-Looking
Statements” and “Risk Factors” elsewhere in this quarterly report on Form
10-Q and in our annual report on Form 10-K. Our actual results may differ
materially from those contained in any forward-looking statements. Except as may
be required by law, we undertake no obligation to publicly update or revise any
of the forward-looking statements contained herein.
Executive
Overview
General—We are
the leading manufacturer, marketer and distributor of premium mattresses and
pillows which we sell in approximately 80 countries globally under the
TEMPUR® and
Tempur-Pedic® brands.
We believe our premium mattresses and pillows are more comfortable than standard
bedding products because our proprietary pressure-relieving TEMPUR® material is
temperature sensitive, has a high density and therapeutically conforms to the
body.
Business Segment
Information—We have two reportable business segments: Domestic and
International. These reportable segments are strategic business units that are
managed separately based on the fundamental differences in their geographies.
The Domestic operating segment consists of our U.S. manufacturing facilities,
whose customers include our U.S. distribution subsidiary and certain third party
distributors in North America. The International segment consists of our
manufacturing facility in Denmark, whose customers include all of our
distribution subsidiaries and third party distributors outside the Domestic
operating segment. We evaluate segment performance based on Net sales and
Operating income.
Strategy
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. In order to
achieve this goal, 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 research and
development.
|
|
|
•
|
|
Take
actions to further improve our financial flexibility and strengthen the
business.
|
Results
of Operations
A summary of
our results for the period ended September 30, 2008 includes the
following:
|
|
•
|
|
Earnings
per share (EPS) was $0.32 per diluted common share in the third quarter of
2008.
|
|
|
•
|
|
As of September 30,
2008,
we have reduced Inventories by approximately $36.8 million to $69.7
million, compared to $106.5 million as of December 31,
2007.
|
|
|
•
|
|
We
reduced total debt by $83.3 million to $518.8 million as of September 30,
2008 from $602.0 from December 31,
2007.
|
|
|
•
|
|
Operating cash flow
increased 30.0% to $168.9 million for the nine-months ended September 30,
2008 from $129.9 million for the same nine-month period in
2007.
|
|
(Millions,
except earnings per share)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net
sales
|
|
$ |
252.8 |
|
|
|
100.0 |
% |
|
$ |
294.1 |
|
|
|
100.0 |
% |
|
$ |
738.7 |
|
|
|
100.0 |
% |
|
$ |
817.8 |
|
|
|
100.0 |
% |
|
Cost
of sales
|
|
|
147.3 |
|
|
|
58.3 |
|
|
|
152.5 |
|
|
|
51.8 |
|
|
|
419.1 |
|
|
|
56.7 |
|
|
|
424.0 |
|
|
|
51.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
105.5 |
|
|
|
41.7 |
|
|
|
141.6 |
|
|
|
48.2 |
|
|
|
319.6 |
|
|
|
43.3 |
|
|
|
393.8 |
|
|
|
48.2 |
|
|
Selling
and marketing expenses
|
|
|
40.0 |
|
|
|
15.8 |
|
|
|
48.9 |
|
|
|
16.6 |
|
|
|
137.8 |
|
|
|
18.7 |
|
|
|
144.6 |
|
|
|
17.7 |
|
|
General,
administrative and other expenses
|
|
|
22.6 |
|
|
|
9.0 |
|
|
|
25.2 |
|
|
|
8.6 |
|
|
|
73.2 |
|
|
|
9.9 |
|
|
|
72.8 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
42.9 |
|
|
|
17.0 |
|
|
|
67.5 |
|
|
|
23.0 |
|
|
|
108.6 |
|
|
|
14.7 |
|
|
|
176.4 |
|
|
|
21.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(6.3
|
) |
|
|
(2.5 |
) |
|
|
(8.2
|
) |
|
|
(2.8 |
) |
|
|
(19.6 |
) |
|
|
(2.7 |
) |
|
|
(21.4
|
) |
|
|
(2.6 |
) |
|
Other
income (expense), net
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.0 |
) |
|
|
(0.1 |
) |
|
|
(0.5
|
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
36.7 |
|
|
|
14.5 |
|
|
|
59.3 |
|
|
|
20.1 |
|
|
|
88.0 |
|
|
|
11.9 |
|
|
|
154.5 |
|
|
|
18.9 |
|
|
Income
tax provision
|
|
|
12.6 |
|
|
|
5.0 |
|
|
|
20.5 |
|
|
|
6.9 |
|
|
|
30.1 |
|
|
|
4.1 |
|
|
|
53.0 |
|
|
|
6.5 |
|
|
Net
income
|
|
$ |
24.1 |
|
|
|
9.5 |
% |
|
$ |
38.8 |
|
|
|
13.2 |
% |
|
$ |
57.9 |
|
|
|
7.8 |
% |
|
$ |
101.5 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.32 |
|
|
|
|
|
|
$ |
0.50 |
|
|
|
|
|
|
$ |
0.77 |
|
|
|
|
|
|
$ |
1.25 |
|
|
|
|
|
|
Diluted
|
|
$ |
0.32 |
|
|
|
|
|
|
$ |
0.49 |
|
|
|
|
|
|
$ |
0.77 |
|
|
|
|
|
|
$ |
1.22 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend per share:
|
|
$ |
0.08 |
|
|
|
|
|
|
$ |
0.08 |
|
|
|
|
|
|
$ |
0.24 |
|
|
|
|
|
|
$ |
0.22 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average per common share outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
74,815 |
|
|
|
|
|
|
|
77,725 |
|
|
|
|
|
|
|
74,704 |
|
|
|
|
|
|
|
81,522 |
|
|
|
|
|
|
Diluted
|
|
|
74,992 |
|
|
|
|
|
|
|
79,173 |
|
|
|
|
|
|
|
74,944 |
|
|
|
|
|
|
|
83,069 |
|
|
|
|
|
Three
Months Ended September 30, 2008 Compared with Three Months Ended September 30,
2007
We sell our
premium mattresses and pillows through four distribution channels: Retail,
Direct, Healthcare, and Third party. The Retail channel sells to furniture and
bedding, specialty and department stores. The Direct channel sells directly to
consumers. The Healthcare channel sells to hospitals, nursing homes, healthcare
professionals and medical retailers. The Third party channel sells to
distributors in countries where we do not operate our own wholly owned
subsidiaries. A summary of Net sales by channel is set forth below:
|
|
CONSOLIDATED
|
|
DOMESTIC
|
|
INTERNATIONAL
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
(Millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Retail
|
|
$ |
216.2 |
|
|
$ |
251.5 |
|
|
$ |
148.0 |
|
|
$ |
177.4 |
|
|
$ |
68.2 |
|
|
$ |
74.1 |
|
|
Direct
|
|
|
11.3 |
|
|
|
18.0 |
|
|
|
9.2 |
|
|
|
15.2 |
|
|
|
2.1 |
|
|
|
2.8 |
|
|
Healthcare
|
|
|
11.6 |
|
|
|
12.4 |
|
|
|
3.7 |
|
|
|
4.2 |
|
|
|
7.9 |
|
|
|
8.2 |
|
|
Third
Party
|
|
|
13.7 |
|
|
|
12.2 |
|
|
|
5.0 |
|
|
|
3.7 |
|
|
|
8.7 |
|
|
|
8.5 |
|
|
|
|
$ |
252.8 |
|
|
$ |
294.1 |
|
|
$ |
165.9 |
|
|
$ |
200.5 |
|
|
$ |
86.9 |
|
|
$ |
93.6 |
|
A summary of
Net sales by product is set forth below:
|
|
CONSOLIDATED
|
|
DOMESTIC
|
|
INTERNATIONAL
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
(Millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattresses
|
|
$ |
174.9 |
|
|
$ |
207.3 |
|
|
$ |
121.4 |
|
|
$ |
149.2 |
|
|
$ |
53.5 |
|
|
$ |
58.1 |
|
|
Pillows
|
|
|
31.4 |
|
|
|
34.4 |
|
|
|
14.5 |
|
|
|
18.1 |
|
|
|
16.9 |
|
|
|
16.3 |
|
|
Other
|
|
|
46.5 |
|
|
|
52.4 |
|
|
|
30.0 |
|
|
|
33.2 |
|
|
|
16.5 |
|
|
|
19.2 |
|
|
|
|
$ |
252.8 |
|
|
$ |
294.1 |
|
|
$ |
165.9 |
|
|
$ |
200.5 |
|
|
$ |
86.9 |
|
|
$ |
93.6 |
|
Net sales. Net
sales for the three months ended September 30, 2008 decreased to $252.8 million
from $294.1 million for the same period in 2007, a decrease of $41.3 million, or
14.0%. The primary area of sales weakness was in the U.S., coupled with a
slowdown in certain European markets. For the three months ended
September 30, 2008, our Retail channel Net sales decreased to $216.2 million
from $251.5 million for the same period in 2007, a decrease of $35.2 million, or
14.0%. Our Direct channel Net sales decreased to $11.3 million from $18.0
million for the same period in 2007, a decrease of $6.8 million, or
37.6%. Our Healthcare channel Net sales decreased to $11.6 million
from $12.4 million for the same period in 2007, a decrease of $0.7 million, or
6.0%. Our Third Party Net sales increased to $13.7 million from $12.2
million for the same period in 2007, an increase of $1.5 million, or 12.0%. The
factors that impacted Net sales for each segment are discussed below, in the
respective segment discussion. We believe we are facing a challenging economic
environment, and are not assuming the economic climate will recover in the short
term.
Domestic.
Domestic Net sales for the three months ended September 30, 2008 decreased to
$165.9 million from $200.5 million for the same period in 2007, a decrease of
$34.6 million, or 17.2%. Our Domestic Retail channel contributed $148.0 million
in Net sales for the three months ended September 30, 2008, a decrease of $29.4
million, or 16.6%, as compared to the same period in 2007. We believe that the
macroeconomic environment adversely impacted our Domestic Retail channel with
many consumers deferring high-end product purchases. Net sales in the Direct
channel decreased by $6.0 million, or 39.4%. We believe the macroeconomic
environment also negatively impacted Net sales in the Direct channel, as this
channel attracts a customers which have also been adversely affected by the
economic environment. The Domestic Third Party channel Net sales increased $1.3
million, or 34.5%, to $5.0 million, primarily related to the addition of new
customers and the introduction of new products by our North American third party
distributor.
As a result
of the macroeconomic environment, mattress sales in the third quarter of 2008
decreased $27.9 million, or 18.7%, over the same period in 2007. Pillow sales
decreased $3.5 million, or 19.4%. 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 $3.2 million, or 9.7%. 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 three months ended September 30, 2008 decreased
to $86.9 million from $93.6 million for the same period in 2007, a decrease of
$6.7 million, or 7.2%. On a constant currency basis, our International sales
declined approximately 12.8%. Our International segment was primarily impacted
by macroeconomic factors in certain European markets. The International Retail
channel decreased $5.8 million, or 7.9%, for the three months ended September
30, 2008. International mattress sales in the third quarter of 2008 decreased
$4.6 million, or 7.9%, over the third quarter of 2007. Pillow sales for the
third quarter of 2008 increased $0.5 million, or 2.9%, as compared to the third
quarter of 2007.
Gross profit.
Gross profit for the three months ended September 30, 2008 decreased to $105.5
million from $141.6 million for the same period in 2007, a decrease of $36.1
million, or 25.5%. Several factors impacted our Gross profit margin during the
quarter. These factors are identified and discussed below in the respective
segment discussions.
Domestic.
Domestic Gross profit for the three months ended September 30, 2008 decreased to
$58.8 million from $87.7 million for the same period in 2007, a decrease of
$28.9 million, or 33.0%. The Gross profit margin in our Domestic
segment was 35.4% and 43.7% for the three months ended September 30, 2008 and
September 30, 2007, respectively. For the three months ended September 30, 2008,
the gross margin declined resulting from a combination of lower Direct channel
Net sales, raw material cost inflation and lower production volumes related to
the decrease in Net sales and our efforts to reduce inventories. Domestic Cost
of sales for the three months ended September 30, 2008 decreased to $107.1
million from $112.8 million for the same period in 2007, a decrease of $5.6
million, or 5.0%.
International.
International Gross profit for the three months ended September 30, 2008
decreased to $46.7 million from $53.9 million for the same period in 2007, a
decrease of $7.2 million, or 13.4%. The Gross profit margin in our International
segment was 53.8% and 57.6% for the three months ended September 30, 2008 and
September 30, 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. Our
International Cost of sales for the three months ended September 30, 2008
increased to $40.2 million from $39.7 million for the same period in 2007, an
increase of $0.5 million, or 1.2%.
Selling and marketing
expenses. Selling and marketing expenses include advertising and media
production; other marketing materials such as catalogs, brochures, videos,
product samples, direct customer mailings and point of purchase materials; and
sales force and customer service 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 $40.0 million for the three months ended September 30, 2008 as compared to
$48.9 million for the three months ended September 30, 2007. Selling and
marketing expenses as a percentage of Net sales were 15.8% and 16.6% for the
three months ended September 30, 2008 and 2007, respectively. During the third
quarter of 2008, we aligned Selling and marketing expenses with our revised
full-year sales expectations primarily through leveraging advertising
expenditures and cost control initiatives put in place earlier in the
year.
General,
administrative and other expenses. General, administrative and other
expenses include management salaries, information technology, professional fees,
depreciation of furniture and fixtures, leasehold improvements and computer
equipment, expenses for administrative functions, and research and development
costs. General, administrative and other expenses decreased to $22.6 million for
the three months ended September 30, 2008 as compared to $25.2 million for the
three months ended September 30, 2007, a decrease of $2.6 million, or 10.3%.
General, administrative and other expenses as a percentage of Net sales was 9.0%
and 8.6% for the three months ended September 30, 2008 and 2007, respectively.
We decreased our expenditures consistent with the cost control initiatives that
were introduced earlier in the year. This effect was offset by an increase in
our bad debt expense associated with the accounts-receivable from a U.S.
customer seeking to reorganize its operations under Chapter 11 of the Bankruptcy
Code.
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 $6.3 million for the three
months ended September 30, 2008, as compared to $8.2 million for the three
months ended September 30, 2007, a decrease of $2.0 million, or 23.8%. The
decrease is primarily attributable to a decrease in overall debt as well as a
decrease in interest rates. 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. On May 29,
2008, we entered into an interest rate swap agreement effective May 30, 2008, 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 LIBOR-based interest rate
to 3.755% on $350.0 million of the outstanding balance under the 2005 Senior
Credit Facility, with the outstanding balance subject to the swap declining over
time.
Income tax
provision. Our Income tax provision includes income taxes associated with
taxes currently payable and deferred taxes and includes the impact of net
operating losses for certain of our foreign operations. Our effective income tax
rates for the three months ended September 30, 2008 and for the three months
ended September 30, 2007 differed from the federal statutory rate principally
because of certain foreign tax rate differentials, state and local income taxes,
valuation allowances on certain net operating losses, foreign income currently
taxable in the U.S., the production activities deduction and certain other
permanent differences.
Our effective
tax rate for the three months ended September 30, 2008 was 34.4%. For
the same period in 2007, the effective tax rate was 34.5%.
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 underpayment
penalties. On January 23, 2008 the Company filed timely complaints with the
Danish National Tax Tribunal denying the tax assessments. The National Tax
Tribunal formally agreed to place the Danish tax litigation on hold pending the
outcome of a Bilateral Advance Pricing Agreement (Bilateral APA) between the
United States and the Danish Tax Authority. A Bilateral APA involves an
agreement between the IRS and the taxpayer, as well as a negotiated agreement
with one or more foreign competent authorities under applicable income tax
treaties. On August 8, 2008 the Company filed the Bilateral APA with the
IRS and the Danish Tax Authority. We believe we have meritorious
defenses to the proposed adjustment and will oppose the assessment in the Danish
courts, as necessary. For the three months ended September 30, 2008,
the gross amount of tax reserves relating to this matter was increased by $2.5
million, of which $0.8 million impacted the effective tax rate with $1.6 million
was recorded as a component of Goodwill as it related to periods prior to the
acquisition of Tempur World, Inc. in November 2002.
In addition
to the impact of the above matter on the gross amount of the Company’s
unrecognized tax benefits, it is reasonably possible under FIN 48 that the
amount of the total unrecognized tax benefits may change in the next twelve
months. An estimate of the amount of such change cannot be made at
this time. There have been no significant changes to the status of
any other unrecognized tax benefits during the quarter ended September 30,
2008.
Nine
Months Ended September 30, 2008 Compared with Nine Months Ended September 30,
2007
A summary of
Net sales by channel is set forth below:
|
|
CONSOLIDATED
|
|
DOMESTIC
|
|
INTERNATIONAL
|
|
|
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
(Millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Retail
|
|
$ |
623.5 |
|
|
$ |
681.4 |
|
|
$ |
407.2 |
|
|
$ |
472.4 |
|
|
$ |
216.3 |
|
|
$ |
209.0 |
|
|
Direct
|
|
|
37.5 |
|
|
|
60.7 |
|
|
|
31.2 |
|
|
|
52.8 |
|
|
|
6.3 |
|
|
|
7.9 |
|
|
Healthcare
|
|
|
36.4 |
|
|
|
35.4 |
|
|
|
12.1 |
|
|
|
10.8 |
|
|
|
24.3 |
|
|
|
24.6 |
|
|
Third
Party
|
|
|
41.3 |
|
|
|
40.3 |
|
|
|
11.9 |
|
|
|
10.6 |
|
|
|
29.4 |
|
|
|
29.7 |
|
|
|
|
$ |
738.7 |
|
|
$ |
817.8 |
|
|
$ |
462.4 |
|
|
$ |
546.6 |
|
|
$ |
276.3 |
|
|
$ |
271.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of
Net sales by product is set forth below:
|
|
CONSOLIDATED
|
|
DOMESTIC
|
|
INTERNATIONAL
|
|
|
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
(Millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattresses
|
|
$ |
506.6 |
|
|
$ |
572.0 |
|
|
$ |
336.6 |
|
|
$ |
406.7 |
|
|
$ |
170.0 |
|
|
$ |
165.3 |
|
|
Pillows
|
|
|
91.8 |
|
|
|
101.1 |
|
|
|
40.1 |
|
|
|
48.4 |
|
|
|
51.7 |
|
|
|
52.7 |
|
|
Other
|
|
|
140.3 |
|
|
|
144.7 |
|
|
|
85.7 |
|
|
|
91.5 |
|
|
|
54.6 |
|
|
|
53.2 |
|
|
|
|
$ |
738.7 |
|
|
$ |
817.8 |
|
|
$ |
462.4 |
|
|
$ |
546.6 |
|
|
$ |
276.3 |
|
|
$ |
271.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales. Net
sales for the nine months ended September 30, 2008 decreased to $738.7 million
from $817.8 million for the same period in 2007, a decrease of $79.1 million, or
9.7%. The primary area of sales weakness was in the U.S., coupled with a
slowdown in certain European markets. For the nine months ended September 30,
2008, our Retail channel Net sales decreased to $623.5 million from $681.4
million for the same period in 2007, a decrease of $57.9 million, or 8.5%. Our
Direct channel Net sales decreased to $37.5 million from $60.7 million for the
same period in 2007, a decrease of $23.3 million, or 38.3%. Our
Healthcare channel Net sales increased to $36.4 million from $35.4 million for
the same period in 2007, an increase of $1.0 million, or 2.9%. Our Third Party
Net sales increased to $41.3 million from $40.3 million for the same period in
2007, an increase of $1.0 million, or 2.6%. The factors that impacted Net sales
for each segment are discussed below in the respective segment
discussion.
Domestic.
Domestic Net sales for the nine months ended September 30, 2008 decreased to
$462.4 million from $546.6 million for the same period in 2007, a decrease of
$84.3 million, or 15.4%. Our Domestic Retail channel contributed $407.2 million
in Net sales for the nine months ended September 30, 2008 for a decrease of
$65.2 million, or 13.8%, over the prior year same period. This
decrease is due primarily to a challenging U.S. macroeconomic environment. The
Healthcare channel Net sales increased $1.2 million, or 11.3%, as a result of
our distribution partnerships and strategic relationships with healthcare
companies who market joint product offerings through their established
distribution, offset by the elimination of certain small Healthcare partners.
Our Third Party channel Net sales increased $1.3 million, or 12.7%, as a result
of certain new customers and new product introductions by our North American
third party distributor. Our Direct channel Net sales decreased 40.9%, which was
a result of the challenges in the U.S. macroeconomic
environment. Domestic mattress sales decreased $70.1 million, or
17.2%, over the same period in 2007, driven by the decreases in our Retail
channel. Pillow sales decreased $8.2 million, or 16.9%. Many of our pillow
products are sold with mattress purchases. As a result, when mattress sales
decline, pillow sales are also traditionally impacted.
International.
International Net sales for the nine months ended September 30, 2008 increased
to $276.3 million from $271.2 million for the same period in 2007, an increase
of $5.2 million, or 1.9%. The increase was driven by favorable foreign exchange
rates in 2008. On a constant currency basis, our International sales declined by
approximately 8.2%. Our International segment was primarily impacted
by macroeconomic factors in certain key European markets, primarily late in the
second quarter and in the third quarter. The International Retail channel
increased $7.3 million, or 3.5%, for the nine months ended September 30, 2008.
Our Direct channel Net sales decreased 20.6%. Our Third party sales
decreased 1.0%. Additionally, our Healthcare channel Net sales decreased $0.2
million, or 0.8%. International mattress sales increased $4.7
million, or 2.8%, as compared to 2007. Pillow sales for the nine months ended
September 30, 2008 decreased $1.0 million, or 1.9% as compared to the same
period in 2007.
Gross profit.
Gross profit for the nine months ended September 30, 2008 decreased to
$319.6 million from $393.8 million for the same period in 2007, a
decrease of $74.3 million, or 18.9%. Several factors impacted our Gross profit
margin during the quarter. These factors are identified and discussed below in
the respective segment discussions.
Domestic.
Domestic Gross profit for the nine months ended September 30, 2008 decreased to
$170.0 million from $237.5 million for the same period in 2007, a decrease of
$67.6 million, or 28.4%. The Gross profit margin in our Domestic
segment was 36.8% and 43.5% for the nine months ended September 30, 2008 and
September 30, 2007, respectively. The decrease in our Gross profit margin for
the Domestic segment was impacted by declines in the Direct channel, an
inflationary raw material cost environment and reduced production levels
resulting from lower sales and our efforts to reduce inventories. Our Domestic
Cost of sales decreased to $292.3 million for the nine months ended September
30, 2008 as compared to $309.1 million for the nine months ended September 30,
2007, a decrease of $16.7 million, or 5.4%.
International.
International Gross profit for the nine months ended September 30, 2008
decreased to $149.6 million from $156.3 million for the same period in 2007, a
decrease of $6.7 million, or 4.3%. The Gross profit margin in our International
segment was 54.1% and 57.6% for the nine months ended September 30, 2008 and
September 30, 2007, respectively. For the nine months ended September 30, 2008,
the Gross profit margin for our International segment was primarily impacted by
an inflationary raw material cost environment and by decreased production levels
related to lower sales and our efforts to reduce inventories. Our International
Cost of sales for the nine months ended September 30, 2008 increased to $126.8
million from $114.9 million for the same period in 2007, an increase of $11.9
million, or 10.3%.
Selling and marketing
expenses. Selling and marketing expenses decreased to $137.8 million for
the nine months ended September 30, 2008 as compared to $144.6 million for the
nine months ended September 30, 2007. Selling and marketing expenses as a
percentage of Net sales increased to 18.7% for the nine months ended September
30, 2008 from 17.7% for the same period for 2007. For 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. In the second and third quarters 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 remained relatively even, at $73.2 million for the nine months ended
September 30, 2008, in comparison to $72.8 million for the nine months ended
September 30, 2007. General, administrative and other expenses as a percentage
of Net sales was 9.9% and 8.9% for the nine months ended September 30, 2008 and
2007, respectively. For 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
General, administrative and other expenses to match our reduced sales levels. In
the second and third quarters, we were able to decrease General, administrative
and other expenses through cost control initiatives to better align with our
revised sales expectations.
Interest expense,
net. Interest expense, net, decreased to $19.6 million for the nine
months ended September 30, 2008, as compared to $21.4 million for the nine
months ended September 30, 2007, a decrease of $1.8 million, or 8.2%. The
decrease is related to a lower level of long-term debt as of September 30, 2008,
as compared to the same time period in 2007 as well as lower interest rates on
our 2005 Senior Credit Facility.
Income tax
provision. Our effective income tax rates for the nine months ended
September 30, 2008 and 2007 differed from the federal statutory rate principally
because of certain foreign tax rate differentials, state and local income taxes,
valuation allowances on certain net operating losses, foreign income currently
taxable in the U.S., the production activities deduction and certain other
permanent differences.
Our effective
tax rate for the nine months ended September 30, 2008 was 34.2%. For
the same period in 2007, the effective tax rate was 34.3%.
Liquidity
and Capital Resources
Liquidity
Our principal
sources of funds are cash flows from operations and borrowings. Our principal
uses of funds consist of capital expenditures, payments of principal and
interest on our debt facilities, payments of dividends to our shareholders and
share repurchases from time to time pursuant to our share repurchase program. At
September 30, 2008, we had working capital of $173.8 million including Cash and
cash equivalents of $87.7 million as compared to working capital of $200.0
million including $33.3 million in Cash and cash equivalents as of
December 31, 2007. The increase in cash was primarily attributable to
the focus on improving cash flow during the nine months ended September 30,
2008.
Our cash flow
from operations increased to $168.9 million for the nine months ended September
30, 2008 as compared to $129.9 million for the nine months ended September 30,
2007. During 2008, we have been focused on driving our working capital
improvements to maximize operating cash flow to increase our financial
flexibility. The increase in operating cash flow for the period ending September
30, 2008, was primarily a result of reductions in Inventory and Accounts
receivable. The decrease in inventory levels resulted in a cash inflow of
approximately $36.7 million while Accounts receivable resulted in a cash inflow
of approximately $18.6 million, the effects of which were offset by lower Net
income.
Net cash used
in investing activities decreased to $9.8 million for the nine months ended
September 30, 2008 as compared to $14.4 million for the nine months
ended September 30, 2007, a decrease of $4.6 million. The decrease is primarily
related to decreased capital expenditures and acquisitions.
Cash flow
used by financing activities was $100.4 million for the nine months ended
September 30, 2008 as compared to $108.9 million for the nine months ended
September 30, 2007, representing a decrease in cash outflows of $8.5 million.
During 2008 we have focused on reducing our outstanding borrowings to improve
our financial flexibility. During 2008 we used excess cash flows to reduce our
outstanding borrowings and we did not make any repurchases under our stock
repurchase authorizations during 2008. In addition, on October 16, 2008, we
announced that we would suspend the payment of our quarterly cash dividend, and
as a result we expect to redirect the use of approximately $6.0 million in the
fourth quarter to debt repayment.
On October
21, 2008, our Board of Directors approved the repatriation of $140.0 million in
foreign earnings. The tax charge associated with the repatriation will be
approximately $13.0 million, with the final tax effect to be based on the timing
and amount of the actual distribution.
Capital
Expenditures
Capital
expenditures totaled $7.8 million for the nine months ended September 30, 2008
and $8.2 million for the nine months ended September 30, 2007. We currently
expect our 2008 capital expenditures to be $12.0 million.
Debt
Service
Our long-term
debt decreased to $518.8 million as of September 30, 2008 from $601.8 million as
of December 31, 2007. After giving effect to $518.8
million in borrowings under the 2005 Senior Credit Facility and letters of
credit outstanding, total availability under the Revolvers was $111.4 million as
of September 30, 2008.
On April 1,
2008, Tempur Production redeemed all outstanding Series 2005A Taxable Variable
Rate Industrial Revenue Bonds (Series A Bonds) in the amount of $57.8
million. The redemption price plus accrued interest was funded by a
$58.0 million borrowing under our domestic revolving credit facility. In
connection with the redemption, the letter of credit supporting the Series A
Bonds was retired, resulting in no additional indebtedness outstanding under the
2005 Senior Credit Facility.
The interest
rate and certain fees that we pay in connection with the 2005 Senior Credit
Facility are subject to periodic adjustment based on changes in our consolidated
leverage ratio. On May 29, 2008, we entered into an interest rate swap
agreement effective May 30, 2008, to manage interest costs and the risk
associated with changing interest rates. Under this swap, we pay at a fixed rate
and receive payments at a variable rate. The swap effectively fixes the floating
LIBOR-based interest rate to 3.755% on $350.0 million of the outstanding balance
under the 2005 Senior Credit Facility, with the outstanding balance subject to
the swap declining over time.
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 3,840 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 6,561 shares of our common stock for
approximately $200.0 million from the July 2007 authorization and completed
purchases from the July 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. Under the existing share repurchase
authorization, we have $280.1 million available for repurchase. No shares were
repurchased during the nine months ended September 30, 2008. Share repurchases
under this authorization may be made through open market transactions,
negotiated purchase or otherwise, at times and in such amounts as we deem
appropriate. This share repurchase authorization may be suspended, limited or
terminated at any time without notice.
Dividend
Program—Our Board declared a first quarter 2008 dividend of $0.08 per
common share, which was paid on March 14, 2008 to stockholders of record as of
February 27, 2008. Our Board declared a second quarter 2008 dividend of $0.08
per common share which was paid on June 16, 2008 to stockholders of record as of
May 31, 2008. Our Board declared a third quarter 2008 dividend of $0.08 per
common share which was paid on September 12, 2008 to stockholders of record as
of August 29, 2008. On October 16, 2008, we announced that we would suspend the
payment of our quarterly cash dividend.
Factors
That May Affect Future Performance
General Business and
Economic Conditions—Our business may be affected by general business and
economic conditions that could have an impact on demand for our products. The
U.S. macroeconomic environment remained challenging during the third quarter of
2008 and contributed to what we believe is a slowdown in the mattress industry.
Based on industry data and retailer feedback, we believe average selling prices
in the industry are trending lower as many consumers defer high-end mattress
purchases. In addition, our international segment experienced further weakening
as a result of certain consumer trends in several European markets. We expect
the economic environment in the U.S. and Europe to continue to be
challenging.
In light of
the macroeconomic environment, we took steps to further align our cost structure
with our anticipated level of Net sales. In addition, maintaining financial
flexibility is our primary short-term focus, and we made substantial progress
during the third quarter of 2008 in reducing our inventory, improving
collections, lowering expenses and paying down debt. During the fourth quarter
of 2008, we will continue our new product rollout across the globe, and we
remain firmly committed to our business model, advertising strategy and premium
product focus.
Managing Growth—We have grown
rapidly, with our Net sales increasing from $221.5 million in 2001 to $1,106.7
million in 2007 and $738.7 million for the nine months ended September 30, 2008.
In the past, our growth has placed, and may continue to place, a strain on our
management, production, product distribution network, information systems and
other resources. In response to these challenges, management has continued to
enhance operating and financial infrastructure. These expenditures, as well as
expenditures for advertising and other marketing-related activities, are made as
the continued growth in the business allows us the ability to invest. However,
these expenditures may be limited by lower than planned sales or an inflationary
cost environment.
Gross Margins—Our gross
margin is primarily impacted by product and channel mix, volume incentives
offered to certain retail accounts, operational efficiency and the cost of raw
material. 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, and our overall
product mix has shifted to mattresses and other products over the last several
years. 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. Our gross margin can also be impacted by our
operational efficiencies, including the particular levels of utilization at our
three manufacturing facilities. Future increases in raw material prices also
could have a negative impact on our gross margin if we do not raise prices to
cover increased cost.
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, 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 expanding our brand awareness and
offering superior sleep surfaces, we believe consumers will continue to adopt
our products at an increasing rate, which should expand our market share. Our
business may be affected by general business and economic conditions that could
have an impact on demand for our products. We believe that the premium and
specialty bedding categories that we target will continue to grow at a faster
rate over the long-term than the overall mattress industry and we believe we
will continue to experience the benefits of this consumer adoption.
Our
ability to take market share also depends on our ability to successfully launch
new products. In the past, we have seen retailers and consumers respond well to
our new product development and technological superiority.
In
addition, by expanding distribution within our existing accounts, we believe we
have the opportunity to grow our business. By extending our product line, we
should be able to continue to expand the number of Tempur-Pedic models offered
at the retail store level which should lead to increased sales. Based on this
strategy we believe a focus on expanding distribution within our existing
accounts provides for continued growth opportunities and market share gains. Our
products are currently sold in approximately 6,800 furniture and bedding retail
stores in the U.S., out of a total of approximately 10,000 stores we have
identified as appropriate targets. Within this addressable market, our plan is
to increase our total penetration to a total of 7,000 to 8,000 over time. Our
products are also sold in approximately 5,100 furniture retail and department
stores outside the U.S., out of a total of approximately 7,000 stores that we
have identified as appropriate targets. We are continuing to develop products
that are responsive to consumer demand in our markets
internationally.
In
addition to these growth opportunities, management believes that we currently
supply only a small percentage of approximately 15,400 nursing homes and 5,000
hospitals in the U.S., with a collective bed count in excess of 2.7 million.
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. We have been partnering with
healthcare vendors in an indirect sales method whereby the vendor integrates our
product into their products, in order to improve patient comfort and
wellness.
Financial Leverage—As of
September 30, 2008, we had $518.8 million of total Long-term debt
outstanding, and our Stockholders’ Equity was $84.4 million. Higher financial
leverage makes us more vulnerable to general adverse competitive, economic and
industry conditions. We believe that operating margins driven by Net sales
resulting from volume and price, productivity improvements and cost containment
activities will enable us to continue to decrease our financial leverage. 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.
Through a
repatriation of foreign earnings, suspending the dividend, and modest debt
rebalancing between our domestic and international segments, we should be able
to reduce debt faster. These actions, coupled with working capital and expense
management, should increase our financial flexibility.
Exchange Rates—As a
multinational company, we conduct our business in a wide variety of currencies
and are therefore subject to market risk for changes in foreign exchange rates.
We use foreign exchange forward contracts to manage a portion of the risk of the
eventual net cash inflows and outflows resulting from foreign currency
denominated transactions between Tempur-Pedic subsidiaries and their customers
and suppliers, as well as between the Tempur-Pedic subsidiaries themselves.
These hedging transactions may not succeed in effectively managing our foreign
currency exchange rate risk. We typically do not apply hedge accounting to these
contracts. See “ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk—Foreign Currency Exposures” under Part I of this report.
Foreign
currency exchange rate movements also create a degree of risk by affecting the
U.S. dollar value of sales made and costs incurred in foreign currencies.
Consequently, our reported earnings and financial position could fluctuate
materially as a result of foreign exchange gains or losses. Our outlook assumes
no significant changes in currency values from current rates. Should currency
rates change sharply, our results could be negatively impacted. See “ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency
Exposures” under Part I of this report.
Critical
Accounting Policies and Estimates
For a
discussion of our critical accounting policies and estimates, see “ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our annual report on Form 10-K for the year ended December 31,
2007. There have been no material changes to our critical accounting policies
and estimates in 2008.
Impact
of Recently Issued Accounting Pronouncements
See Note 2 in
the Notes to Condensed Consolidated Financial Statements in ITEM 1 under
Part I of this report for a full description of recent accounting
pronouncements, including the expected dates of adoption and estimated effects
on results of operations and financial condition, which is incorporated herein
by reference.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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Foreign
Currency Exposures
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 current outlook assumes no
significant changes in currency values from current rates. 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 that the potential loss in fair
value on foreign currency forward contracts outstanding at September 30, 2008,
resulting from a hypothetical 10% adverse change in all foreign currency
exchange rates against the U.S. Dollar, is $0.2 million. Such losses would be
largely offset by gains from the revaluation or settlement of the underlying
assets and liabilities that are being protected by the foreign currency forward
contracts.
We do not
apply hedge accounting to the foreign currency forward contracts used to offset
currency-related changes in the fair value of foreign currency denominated
assets and liabilities. These contracts are marked-to-market through earnings at
the same time that the exposed assets and liabilities are remeasured through
earnings.
Interest
Rate Risk
We are
exposed to changes in interest rates. Our 2005 Senior Credit Facility has a
variable rate. On May 30, 2008, we entered into an interest rate swap agreement
effective May 30, 2008, to manage interest costs and the risk associated with
changing interest rates. Under this swap, we pay at a fixed rate and receive
payments at a variable rate. The swap effectively fixes the floating LIBOR-based
interest rate to 3.755% on $350.0 million of the outstanding balance under the
2005 Senior Credit Facility, with the outstanding balance subject to the swap
declining over time.
Interest
rate changes generally do not affect the market value of such debt but do impact
the amount of our interest payments. As a result, our future earnings and cash
flows, assuming other factors are held constant. On September 30, 2008, we had
variable-rate debt of approximately $168.8 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
$1.7 million.
An evaluation
was performed under the supervision and with the participation of our
management, including our Chief Executive Officer (principal executive officer)
and Chief Financial Officer (principal financial officer), of the effectiveness
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act),
as of the end of the period covered by this report. Based on that evaluation,
our management, including our Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures were effective as
of September 30, 2008 and designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the 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.
During our
third quarter of 2008, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
OTHER
INFORMATION
Securities Law
Action—Between October 7, 2005 and November 21, 2005, five complaints
were filed against Tempur-Pedic International and certain of its directors and
officers in the United States District Court for the Eastern District of
Kentucky (Lexington Division) purportedly on behalf of a class of shareholders
who purchased Tempur-Pedic International’s stock between April 22, 2005 and
September 19, 2005 (the Securities Law Action). These actions were
consolidated, and a consolidated complaint was filed on February 27, 2006
asserting claims under Sections 10(b) and 20(a) of the Exchange Act. Lead
plaintiffs alleged that certain of Tempur-Pedic International’s public
disclosures regarding its financial performance between April 22, 2005 and
September 19, 2005 were false and/or misleading. On December 7, 2006 lead
plaintiffs were permitted to file an amended complaint. The Company filed a
Motion to Dismiss the Securities Law Action and on March 28, 2008, the Court
granted that motion, dismissing all claims in the case with prejudice. The Court
also entered final judgment in favor of the Company and all other defendants on
March 28, 2008. The plaintiffs filed a notice of appeal from that judgment on
April 24, 2008. Since filing the notice of appeal, the plaintiffs agreed to a
stipulation to dismiss appeal with prejudice, which was entered on June 19,
2008, which fully and finally resolved the Securities Law Action in favor of the
Company and all other defendants.
Derivative
Complaints—On November 10, 2005 and December 15, 2005, complaints were
filed in the state courts of Delaware and Kentucky, respectively, against
certain officers and directors of Tempur-Pedic International, purportedly
derivatively on behalf of the Company (the Derivative
Complaints). The Derivative Complaints assert that the named officers
and directors breached their fiduciary duties when they allegedly sold
Tempur-Pedic International’s securities on the basis of material non-public
information in 2005. In addition, the Delaware Derivative Complaints
asserted a claim for breach of fiduciary duty with respect to the disclosures
that also are the subject of the Securities Law Action described above. After
the dismissal of the Securities Law Action, the parties filed a Stipulation of
Dismissal and Agreed Order in the Kentucky court action which was entered on
April 28, 2008. Similarly, a Stipulation and Order of Dismissal with prejudice
was entered in the Delaware court action on July 23, 2008.
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 (the Antitrust Action). The Antitrust Action
alleges violations of federal antitrust law arising from the pricing of
Tempur-Pedic mattress products by Tempur-Pedic North America and certain
distributors. The action alleges a class of all purchasers of Tempur-Pedic
mattresses in the United States since January 5, 2003, and seeks damages and
injunctive relief. Count Two of the complaint was dismissed by the court on June
25, 2007, based on a motion filed by the Company. Following a decision issued by
the United States Supreme Court in Leegin Creative Leather Prods., Inc.
v. PSKS, Inc. on June 28, 2007,we filed a motion to dismiss the remaining
two counts of the Antitrust Action on July 10, 2007. On December 11, 2007, that
motion was granted and, as a result, judgment was entered in favor of the
Company and the plaintiffs’ complaint was dismissed with prejudice. On December
21, 2007, the Plaintiffs filed a “Motion to Alter or Amend Judgment.” On May 1,
2008, that motion was denied. The plaintiffs filed a Notice of Appeal of these
decisions on May 14, 2008, the parties have fully briefed the matter, and oral
argument is currently scheduled for the week of December 8, 2008. We continue to
strongly believe that the Antitrust Action lacks merit, and intend to defend
against the claims vigorously. However, due to the inherent uncertainties of
litigation, we cannot predict the outcome of the Antitrust Action at this time,
and can give no assurance that these claims will not have a material adverse
affect on our financial position or results of operation. Accordingly, we cannot
make an estimate of the possible range of loss.
We are
involved in various other legal proceedings incidental to the operations of its
business. We believe that the outcome of all such pending legal proceedings in
the aggregate will not have a materially adverse affect on its business,
financial condition, liquidity, or operating results.
In addition to the
other information set forth in this quarterly report on Form 10-Q, you should
carefully consider the factors discussed under the heading, “Risk Factors” in
Item IA of Part I of our annual report on Form 10-K, some of which are updated
below. These risks are not the only ones facing the Company. Please also see
“Special Note Regarding Forward-Looking Statements” on page
3.
General
business and economic conditions could reduce our sales and
profitability.
Our business
can be affected by general business and economic conditions, both in the United
States and abroad. Given the extent of our business in the United States, we
could be exposed to downturns in the United States economy which could have a
significant adverse impact on demand for our products. In addition in a poor
economic environment there is a greater likelihood that more of our customers or
retailers could become delinquent on their obligations to us or go bankrupt,
which, in turn, could result in a higher level of charge-offs and provision for
credit losses, all of which would adversely affect our earnings. General
business and economic conditions that could affect us include short-term and
long-term interest rates, inflation, fluctuations in both debt and equity
capital markets, and the strength of the U.S. economy and the local economies in
which we operate. In addition, if the general business and economic conditions
were to further decline, we could experience additional bad debt expenses,
related to our customers experiencing credit difficulties or who go
bankrupt.
We
are subject to risks from our international operations, such as increased costs
and the potential absence of intellectual property protection, 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 37.4% of our Net sales from non-U.S. operations during the nine
months ended September 30, 2008. Our international operations are subject to the
customary risks of operating in an international environment, including
complying with foreign laws and regulations and the potential imposition of
trade or foreign exchange restrictions, tariff and other tax increases,
fluctuations in exchange rates, inflation and unstable political situations, and
labor issues.
As
a multinational company, we are subject to risks relating to income tax
treatment that could affect our liquidity and/or our profitability.
On October
24, 2007, we received an income tax assessment from the Danish Tax
Authority with respect to the 2001, 2002 and 2003 tax years. The
tax assessment relates to the royalty paid by one of Tempur-Pedic
International’s U.S. subsidiaries to a Danish subsidiary and the position taken
by the Danish Tax Authority could apply to subsequent years. The total tax
assessment is $39.3 million including interest and underpayment penalties. On
January 23, 2008 we filed timely complaints with the Danish National Tax
Tribunal denying the tax assessments. The National Tax Tribunal formally
agreed to place the Danish tax litigation on hold pending the outcome of a
(Bilateral APA) between the United States and the Danish Tax Authority. A
Bilateral APA involves an agreement between the IRS and the taxpayer, as well as
a negotiated agreement with one or more foreign competent authorities under
applicable income tax treaties. On August 8, 2008, we filed the Bilateral
APA with the IRS and the Danish Tax Authority. We believe we have meritorious
defenses to the proposed adjustment and will oppose the assessment in the Danish
courts, as necessary. During the third quarter, the gross amount of
unrecognized tax benefits relating to this matter was increased by $2.5 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 November
1, 2002.
In addition
to the impact the matter described above may have on the gross amount of the
Company’s unrecognized tax benefits, it is reasonably possible under FIN 48 that
the amount of the total unrecognized tax benefits may change in the next twelve
months. An estimate of the amount of such change cannot be made at
this time. There have been no significant changes to the status of
any other unrecognized tax benefits during the quarter ended September 30,
2008.
Our
leverage limits our flexibility and increases our risk of default.
As of
September 30, 2008, we had $518.8 million in total Long-term debt outstanding.
In addition, as of September 30, 2008, our Stockholders’ Equity was $84.4
million. Between October 2005 and September 30, 2008, we repurchased a total of
$540.0 million in common stock pursuant to stock repurchase authorizations
authorized by our Board of Directors. We funded the repurchase in part through
borrowings under our 2005 Senior Credit Facility, which has substantially
increased our leverage.
Our Board of
Directors may authorize additional share repurchases in the future and we may
fund these repurchases with debt. On February 19, 2008 our Board of Directors
declared a first quarter 2008 dividend to stockholders of record as of February
27, 2008. On June 16, 2008 our Board of Directors declared a second quarter 2008
dividend to stockholders of record as of May 31, 2008. On August 15, 2008 our
Board of Directors declared a third quarter 2008 dividend to stockholders of
record as of August 29, 2008. On October 16, 2008, we announced that we would
suspend the payment of our quarterly cash dividend.
Our degree of
leverage could have important consequences to our investors, such
as:
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limiting
our ability to obtain in the future additional financing we may need to
fund future working capital, capital expenditures, product development,
acquisitions or other corporate requirements;
and
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requiring
the dedication of a substantial portion of our cash flow from operations
to the payment of principal and interest on our debt, which will reduce
the availability of cash flow to fund working capital, capital
expenditures, product development, acquisitions and other corporate
requirements.
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In addition,
the instruments governing our debt contain financial and other restrictive
covenants, which limit our operating flexibility and could prevent us from
taking advantage of business opportunities. In addition, 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.
Our
current executive officers, directors and their affiliates own a large
percentage of our common stock and could limit you from influencing corporate
decisions.
As of October
29, 2008, our executive officers, directors, and their respective
affiliates own, in the aggregate, approximately 12% of our outstanding
common stock on a fully diluted basis, after giving effect to the vesting of all
unvested options. These stockholders, as a group, are able to influence all
matters requiring approval by our stockholders, including mergers, sales of
assets, the election of all directors, and approval of other significant
corporate transactions, in a manner with which you may not agree or that may not
be in your best interest.
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. In
addition, we recently appointed a new President and Chief Executive Officer,
effective August 4, 2008, which may have an impact on our ability to execute our
business strategy.
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 $1.7 million for each 1.0% increase
in interest rates. See “ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk—Interest Rate Risk” in Part I of this report.
On May 29,
2008, we entered into an interest rate swap agreement effective May 30, 2008, to
manage interest costs and the risk associated with changing interest rates.
Under this swap, we pay at a fixed rate and receive payments at a variable rate.
The swap effectively fixes the floating LIBOR-based interest rate to 3.755% on
$350.0 million of the outstanding balance under the 2005 Senior Credit Facility,
with the outstanding balance subject to the swap declining over
time.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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(a) Not
applicable.
(b) Not
applicable.
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DEFAULTS
UPON SENIOR SECURITIES
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None.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
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None.
(a) Not
applicable.
(b) Not
applicable.
The
following is an index of the exhibits included in this report:
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(1)
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Indicates
management contract or compensatory plan or arrangement.
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*
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This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwise
subject to the liabilities of that Section, nor shall it be deemed
incorporated by reference in any filings under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date hereof and irrespective of any general
incorporation language in any filings.
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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TEMPUR-PEDIC
INTERNATIONAL INC.
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(Registrant)
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Date:
October 29, 2008
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By:
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/s/ DALE
E.
WILLIAMS
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Dale
E. Williams
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Executive
Vice President, Chief Financial Officer,
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and
Secretary
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