UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2007
Commission
file number 001-31922
TEMPUR-PEDIC
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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33-1022198
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1713
Jaggie Fox Way
Lexington,
Kentucky 40511
(Address
of registrant’s principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (800) 878-8889
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, $0.01 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x
No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer," "large accelerated
filer,” "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated filer x Accelerated
filer o Non-Accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨ No ý
The
aggregate market value of the common equity held by non-affiliates of the
registrant on June 29, 2007, computed by reference to the closing price for such
stock on the New York Stock Exchange on such date, was approximately
$1,937,627,148.
The
number of shares outstanding of the registrant’s common stock as of February 22,
2008 was 74,595,057 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for the 2008 Annual Meeting of
Stockholders, which is to be filed subsequent to the date hereof, are
incorporated by reference into Part III of this Form 10-K.
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Page
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PART I.
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ITEM 1.
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ITEM
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ITEM
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ITEM
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ITEM
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PART II.
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ITEM
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ITEM
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ITEM
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ITEM
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ITEM
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ITEM
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ITEM
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ITEM
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PART III.
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ITEM
10.
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39
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ITEM
11.
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40
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ITEM
12.
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ITEM
13.
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ITEM
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PART IV.
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ITEM
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Special
Note Regarding Forward-Looking Statements
This annual
report on Form 10-K, including the information incorporated by reference herein,
contains “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which include information concerning our plans,
objectives, goals, strategies, future events, future revenues or performance,
capital expenditures, the impact of the adoption of recently issued accounting
pronouncements, the putative securities and antitrust class action lawsuits,
related and other lawsuits and pending tax assessments, 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, maintain costs and improve
manufacturing productivity, the vertical integration of our business, our
ability to source raw materials effectively, the development, rollout and market
acceptance of new products, increase in brand awareness, growth in our
Healthcare segment, our ability to generate significant cash flow, and the
impact of the cash dividend and stock repurchase program and other information
that is not historical information. Many of these statements appear, in
particular, under the heading “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in ITEM 7 of Part II of this report. When
used in this report, the words “estimates,” “expects,” “anticipates,”
“projects,” “plans,” “intends,” “believes” and variations of such words or
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are based upon our current expectations and various
assumptions. There can be no assurance that we will realize our expectations or
that our beliefs will prove correct.
There are a
number of risks and uncertainties that could cause our actual results to differ
materially from the forward-looking statements contained in this report.
Important factors that could cause our actual results to differ materially from
those expressed as forward-looking statements are set forth in this report,
including under the heading “Risk Factors” under ITEM IA of Part I of this
report. There may be other factors that may cause our actual results to differ
materially from the forward-looking statements.
All
forward-looking statements attributable to us apply only as of the date of this
report and are expressly qualified in their entirety by the cautionary
statements included in this report. Except as may be required by law, we
undertake no obligation to publicly update or revise any of the forward-looking
statements, whether as a result of new information, future events, or
otherwise.
When used in
this report, except as specifically noted otherwise, the term “Tempur-Pedic
International” refers to Tempur-Pedic International Inc. only, and the terms
“Company,” “we,” “our,” “ours” and “us” refer to Tempur-Pedic International Inc.
and its consolidated subsidiaries.
PART
I
We are
the leading manufacturer, marketer and distributor of premium mattresses and
pillows which we sell in approximately 80 countries under the TEMPUR® and
Tempur-Pedic® brands.
We believe our premium mattresses and pillows are more comfortable than standard
bedding products because our proprietary, pressure-relieving TEMPUR® material
is temperature sensitive, has a high density, and conforms to the body to
therapeutically align the neck and spine, thus reducing neck and lower back
pain, two of the most common complaints about other sleep surfaces.
We have
two reportable operating segments: Domestic and International. These reportable
segments are strategic business units that are managed separately based on the
fundamental differences in their geographies. The Domestic operating segment
consists of our U.S. manufacturing facilities, whose customers include our U.S.
distribution subsidiary and certain third party distributors in the Americas.
The International segment consists of our manufacturing facility in Denmark,
whose customers include all of our distribution subsidiaries and third party
distributors outside the Domestic segment. We evaluate segment performance based
on Net sales and Operating income. For the results of our business segments, see
“ITEM 15. Exhibits and Financial Statement Schedules Note 13, “Business Segment
Information”, under Part IV of this report.
We sell
our premium mattresses and pillows through four distribution channels in each
operating business segment: Retail (furniture and bedding, and specialty stores,
as well as department stores); Direct (direct response and internet); Healthcare
(chiropractors, medical retailers, hospitals and other healthcare markets); and
Third party distributors in countries where we do not sell directly through our
own subsidiaries.
Our
principal executive office is located at 1713 Jaggie Fox Way, Lexington,
Kentucky 40511 and our telephone number is (800) 878-8889. We were incorporated
under the laws of the State of Delaware in September 2002. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and any amendments to such reports filed with or furnished to the Securities
and Exchange Commission (SEC) pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, are available free of charge on our
website at www.tempurpedic.com as soon as reasonably practicable after such
reports are electronically filed with the SEC.
You may
read and copy any materials the Company files with the SEC at the SEC’s public
reference room at 100 F Street NE, Washington, DC 20549. The
public may obtain information about the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The website
of the SEC is www.sec.gov.
Global
Market
Most
standard mattresses are made using innersprings, and primarily sold through
retail furniture and bedding stores. Alternatives to innerspring mattresses
include viscoelastic and foam mattresses, airbeds and waterbeds (collectively
called specialty or non-innerspring mattress). According to the
International Sleep Products Association (ISPA), mattress unit sales were
approximately 22.1 million in the U.S. in 2007. We believe a similar
number of mattress units were sold outside the U.S. in 2007. We believe over the
last four years the specialty mattress category grew at a notably higher rate
than the industry as a whole.
The U.S.
pillow market has a traditional and a specialty segment. Traditional pillows are
generally made of low cost foam or feathers, other than down. Specialty pillows
are comprised of all alternatives to traditional pillows, including
viscoelastic, foam, sponge rubber and down. We believe the international pillow
market is generally the same size as the domestic pillow market, which we
estimate to be approximately $1.1 billion, annually.
Our
Market Position
We are
the worldwide leader in specialty sleep, the fastest growing segment of the
estimated $13.0 billion global mattress market. We are focused on developing,
manufacturing and marketing advanced sleep surfaces that help improve the
quality of life for people around the world. We believe demand for our products
is being driven by significant growth in our core demographic market, increased
awareness of the health benefits of a better quality mattress and the shift in
consumer preference from firmness to comfort. As consumers continue to prefer
alternatives to standard innerspring mattresses, our products become more widely
available and as our brand gains broader consumer recognition, we expect that
our premium products will continue to attract sales from the standard mattress
market.
Superior
Product Offerings
Our
high-quality, high-density, temperature-sensitive TEMPUR® material
distinguishes our products from other products in the marketplace. Viscoelastic
pressure-relieving material was originally developed by NASA in 1971 in an
effort to relieve astronauts of the G–force experienced during lift-off, and
NASA subsequently made this formula publicly available. The NASA viscoelastic
pressure-relieving material originally proved unstable for commercial use.
However, after several years of research and development, we succeeded in
developing a proprietary formulation and proprietary process to manufacture a
stable, durable and commercially viable product. The key feature of our
pressure-relieving TEMPUR® material
is its temperature sensitivity. It conforms to the body, becoming softer in
warmer areas where the body is making the most contact with the
pressure-relieving TEMPUR® material
and remaining firmer in cooler areas where less body contact is being made. As
the material molds to the body’s shape, the body is supported in the correct
anatomical position with the neck and spine in complete therapeutic alignment.
Our pressure-relieving TEMPUR® material
also has higher density than other viscoelastic materials, resulting in improved
durability and enhanced comfort. In addition, clinical evidence indicates that
our products are both effective and cost efficient for the prevention and
treatment of pressure ulcers or bed sores, a major problem for elderly and
bed-ridden patients.
Increasing
Global Brand Awareness
We
sell our products in approximately 80 countries primarily under the TEMPUR® and
Tempur-Pedic ® brands.
We believe consumers in the U.S. and internationally increasingly associate our
brand name with premium quality products that enable better overall
sleep. Our TEMPUR® brand
has been in existence since 1991 and its global awareness is reinforced by our
high level of customer satisfaction, as demonstrated by: recognition received by
the Arthritis Foundation, the NASA Space Foundation, Good Housekeeping and
Consumers Digest. In addition, our products are recommended by more than 25,000
healthcare professionals worldwide and an independent study reported 95% of our
customers surveyed have recommended Tempur-Pedic products to
others.
Vertically
Integrated Manufacturing and Supply Chain
We
produce all of our proprietary TEMPUR® material
in our own manufacturing facilities in the U.S. and Europe in order to precisely
maintain the specifications of our products. We believe that our vertical
integration, from the manufacture of the TEMPUR® material
and fabrication and construction of our products through the marketing, sale and
delivery of our products, ensures a high level of quality and performance that
is not matched by our competition.
Strong
Financial Performance
Our
business generates significant cash flow due to the combination of our growing
revenues, strong gross and operating margins, low maintenance capital
expenditures and limited working capital requirements. Further, our
vertically-integrated operations generated an average of approximately $0.8
million in Net sales per employee in 2007. For the year ended December 31, 2007,
our Gross profit margin and Net income margin were 48.3% and 12.8%,
respectively, on Net sales of $1.1 billion. Our strong financial performance
gives us the flexibility to invest in our manufacturing operations, enhance our
sales force and marketing, invest in information systems and recruit experienced
management and other personnel.
Significant
Growth Opportunities
We
believe there are significant opportunities to take market share from the
innerspring mattress industry as well as other sleep surfaces. Our market share
of the overall mattress industry is relatively small in terms of both dollars
and units, which we believe provides us with a significant opportunity for
growth. By 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. As of December 31, 2007, our products were
sold in approximately 6,350 furniture and bedding retail stores in the U.S.
Within the available market of approximately 10,000 stores, our plan is to
increase our total door count to 7,000 to 8,000 over time. As we deepen our
penetration of the furniture and bedding market, our growth strategy is
increasingly directed to the expansion of business within our established
accounts by increasing slots per store, expanding our sales force and trainers
as needed and introducing new products. In addition, in the U.S. we
have focused the expansion of our distribution into regions where demographic
and buying power metrics indicate that we are under penetrated. Internationally,
our products are available in approximately 4,990 furniture retail and
department stores, out of a total of approximately 7,000 stores we have
identified as appropriate targets. As consumers continue their shift toward the
purchase of non-innerspring mattress products and sleep surfaces we believe we
are well positioned to capitalize on this growth opportunity.
Mattresses
Our
mattresses represented 69.4% of our worldwide Net sales in 2007 and are our
leading product category in growth in recent years. Our mattresses are composed
of proprietary multi-layer, temperature sensitive, pressure-relieving
TEMPUR® material.
We offer several mattress models, some of which are covered by one or more
patents and/or patent applications.
In the
U.S. our newest mattress offering, ‘The AlluraBed by Tempur-Pedic™’ was
introduced at The World Market in Las Vegas in January 2008 and will be shipping
to retailers in the first half of 2008.
Internationally,
during the first quarter of 2008, our high end mattress model, the TEMPUR
Royale™, and the TEMPUR Scandinavian Supreme™ will be expanded into other
international markets. These products were well received in their initial market
launches during 2007.
Pillows
Our
premium pillow offerings include a variety of styles and represented 12.9% of
worldwide Net sales in 2007. Our pillows provide plush and pressure-relieving
comfort as the temperature sensitive material molds to the body.
Other
Products
Our other products represented 17.7% of
our worldwide sales in 2007. This category includes foundations used to support
our mattress products, adjustable beds, and many other types of offerings
including a variety of cushions and other comfort products. In the U.S. a new
adjustable base offering, the ‘TEMPUR Advanced Ergo System™’, was introduced at
The World Market in Las Vegas in January 2008 and will be shipping to retailers
in the first half of 2008.
We
primarily sell at wholesale through three distinct channels: Retail, Healthcare
and Third Party. We market directly to consumers in the U.S. and the United
Kingdom through our Direct channel. Our marketing strategy is to increase
consumer awareness of the benefits of our products and to further associate our
brand name with better overall sleep and premium quality products. We launched
our new media campaign in the Domestic segment during 2007. This campaign will
continue to be implemented in the U.S. and rolled out across many of our
international markets during 2008. Based on our analysis of the best ways to
reach our target demographic market, we have begun advertising on national
network television in the U.S.
Retail
This is
our fastest growing channel and is driven by a sales team dedicated to
introducing our products to retailers. We work with and target furniture and
bedding retailers, specialty stores, and department stores, among
others. Our Retail channel represented 83.1% of Net sales in
2007.
Direct
This
channel sells products directly to consumers through our call center operations
and the internet in the U.S. and the United Kingdom. Our direct response program
targets customers in these markets through television, radio, magazine and
newspaper product offering advertisements. Our Direct channel represented 7.2%
of Net sales in 2007.
Healthcare
We sell
to hospitals, nursing homes, healthcare professionals and medical retailers that
utilize our products to treat patients, or may recommend or sell them to their
clients. In addition, in the U.S. we are partnering with healthcare vendors in a
sales method whereby the vendor integrates our TEMPUR® material
into their products to improve patient comfort and wellness. This channel
represented 4.6% of Net sales in 2007.
Third
Party
Third
party sales represented 5.1% of Net sales in 2007. We utilize third party
distributors to serve markets that are currently outside the range of our
wholly-owned subsidiaries. Our approach to these developing markets has allowed
us to build sales, marketing and brand awareness with minimal capital risk. We
have entered into written and verbal arrangements with third party distributors
located in approximately 65 countries.
A
significant portion of our growth in Net sales is attributable to growth in
sales in our Domestic retail channel, particularly sales to furniture and
bedding stores. We believe that our sales of mattresses and pillows to furniture
and bedding stores are subject to modest seasonality inherent in the bedding
industry with sales expected to be generally lower in the second and fourth
quarters and higher in the first and third quarters. Internationally,
specifically in Europe, we are subject to seasonality with Net sales lower in
the third quarter as compared to the other quarters during the
year.
Manufacturing and Related Technology
Our products
are currently manufactured in our 517,000 square-foot facility located in Aarup,
Denmark, our 540,000 square-foot facility in Duffield, Virginia and our 800,000
square-foot facility in Albuquerque, New Mexico. Most of the sewing and
production of mattress and pillow covers is outsourced to third party
suppliers.
Suppliers
We obtain the
raw materials used to produce our pressure-relieving TEMPUR® material
from outside sources. We currently acquire chemicals and proprietary additives
from a number of suppliers with manufacturing locations around the world. We
expect to continue these supplier relationships for the foreseeable future. We
do not consider ourselves dependent upon any single outside vendor as a source
of raw materials and believe that sufficient alternative sources of supply for
the same or similar raw materials are available.
Research
and Development
We opened
a new research and development center located in Duffield, Virginia. This
project was completed in January 2007. This facility is designed to facilitate
detailed product testing and analysis utilizing state-of-the-art technology. In
addition to our research and development efforts, we also devote significant
efforts to product development as part of our sales and marketing operations.
Research and development expenses, excluding product development, were $5.9
million, $3.7 million and $2.7 million in 2007, 2006 and 2005, respectively. In
2008, we plan to increase our spending on research and development efforts in
order to continue providing superior and innovative mattress and pillow products
to our target markets.
The
mattress and pillow industries are highly competitive. Participants in the
mattress and pillow industries have traditionally competed primarily based on
price. Our premium mattresses compete with a number of different types of
premium and standard mattress alternatives, including innerspring mattresses,
foam mattresses, waterbeds, futons, air beds and other air-supported mattresses
that are sold through a variety of channels, including furniture and bedding
stores, specialty bedding stores, department stores, mass merchants, wholesale
clubs, telemarketing programs, television infomercials and catalogs. The pillow
industry is characterized by a large number of competitors, none of which is
dominant.
The
standard mattress market in the U.S. is dominated by three large manufacturers
of innerspring mattresses with nationally recognized brand names, Sealy, Serta,
and Simmons. These three competitors also offer premium innerspring mattresses
and collectively have a significant share of the premium mattress market in the
U.S. Select Comfort Corporation competes in the specialty mattress market and
focuses on the air mattress market segment. The balance of the mattress market
in the U.S. is served by a large number of other manufacturers, primarily
operating on a regional basis. Many of these competitors and, in particular, the
three largest manufacturers of innerspring mattresses named above, have
significant financial, marketing and manufacturing resources, strong brand name
recognition, and sell their products through broader and more established
distribution channels. During the past several years, a number of our
competitors, including Sealy, Serta and Simmons, have offered viscoelastic
mattress and pillow products.
The
international market for mattresses and pillows is generally served by a large
number of manufacturers, primarily operating on a regional basis. Some of these
manufacturers also offer viscoelastic mattress and pillow products.
We hold
various U.S. and foreign patents and patent applications regarding certain
elements of the design and function of many of our mattress and pillow products.
As of December 31, 2007, we held 15 U.S. patents, expiring at various points
between 2013 and 2025, and had 15 U.S. patent applications pending. We also held
55 foreign patents and had 44 foreign patent applications pending.
As of
December 31, 2007, we held 411 trademark registrations worldwide, which we
believe have significant value and are important to the marketing of our
products to retailers. TEMPUR® and
Tempur-Pedic® are
trademarks registered with the United States Patent and Trademark Office. We
have a number of other U.S. applications pending or registrations existing for
our trademarks, including ‘The CelebrityBed by Tempur-Pedic™’ and
other key product models. Swedish Sleep System,®
Tempur-Med® and the
Tempur-Pedic logo are also registered in the U.S. and various countries
worldwide. In addition, we have U.S. applications pending for additional marks.
Several of our trademarks have been registered, or are the subject of pending
applications, in various foreign countries. Each U.S. trademark registration is
renewable indefinitely as long as the mark remains in use.
Our
operations are subject to state, local and foreign consumer protection and other
regulations relating to the mattress and pillow industry. These regulations vary
among the states and countries in which we do business. The regulations
generally impose requirements as to the proper labeling of bedding merchandise,
restrictions regarding the identification of merchandise as “new” or otherwise,
controls as to hygiene and other aspects of product handling and sale and
penalties for violations. The U.S. Consumer Product Safety Commission has
adopted new rules relating to fire retardancy standards for the mattress and
pillow industry. The State of California similarly adopted new fire retardancy
standards in 2005. We have developed and implemented product modifications that
allow us to meet these new standards. Many foreign jurisdictions also regulate
fire retardancy standards, and changes to these standards and changes in our
products that require compliance with additional standards would raise similar
risks. We are also subject to environmental and health and safety requirements
with regard to the manufacture of our products. We have made and will continue
to make capital and other expenditures necessary to comply with all these
requirements. We believe that we are in substantial compliance with the
applicable federal, state, local, and foreign rules and regulations governing
our business.
As of
December 31, 2007, we had approximately 1,400 employees, with approximately 700
in the U.S., 300 in Denmark and 400 in the rest of the world. Certain of our
employees in Denmark are covered by a government labor union contract as
required by Danish law. None of our U.S. employees are covered by a collective
bargaining agreement. We believe our relations with our employees are generally
good.
Certain
information concerning our executive officers as of the date of this report as
set forth below. There are no family relationships between any of the persons
listed below, or between any of such persons and any of our directors or any
persons nominated or chosen by us to become a director or executive
officer.
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Name
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Age
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Position
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H.
Thomas Bryant
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60
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President
and Chief Executive Officer
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Matthew D. Clift
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48
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Executive
Vice President of Global Operations
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David Montgomery
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47
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Executive
Vice President and President of International
Operations
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Richard
W. Anderson
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48
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Executive
Vice President and President, North America
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Dale E. Williams
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45
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Executive
Vice President, Chief Financial Officer, and Secretary
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Bhaskar
Rao
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42
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Chief
Accounting Officer and Vice President of Strategic
Planning
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H. Thomas
Bryant joined Tempur-Pedic International in July 2001. In April 2006, Mr.
Bryant was promoted to the role of Chief Executive Officer and elected a member
of the board of directors. From July 2001 to December 2004, Mr. Bryant served as
Executive Vice President and President of North American Operations. From
December 2004 to April 2006, Mr. Bryant served as President of Tempur-Pedic
International. Prior to joining Tempur-Pedic International, from 1998 to 2001,
Mr. Bryant was the President and Chief Executive Officer of Stairmaster Sports
& Medical Products, Inc. From 1989 to 1997, Mr. Bryant served in various
senior management positions at Dunlop Maxfli Sports Corporation, most recently
as President. Prior to that, Mr. Bryant spent 15 years in various management
positions at Johnson & Johnson. Mr. Bryant received his B.S. degree from
Georgia Southern University. In February 2008, Mr.
Bryant announced his plan to retire as President and Chief Executive
Officer effective mid-year 2008. The Company anticipates that Mr.
Bryant will continue to serve as a director and stand for re-election at the
annual meeting of stockholders in May 2008.
Matthew D. Clift joined
Tempur-Pedic International in December 2004 and serves as Executive Vice
President of Global Operations, with responsibilities including manufacturing
and research and development. From 1991 to December 2004, Mr. Clift was employed
by Lexmark International where he most recently served as Vice President and
General Manager of the consumer printer division. From 1981 to 1991, Mr. Clift
was employed by IBM Corporation and held several management positions in
research and development and manufacturing. Mr. Clift obtained his B.S. degree
in chemical engineering from the University of Kentucky.
David Montgomery joined
Tempur-Pedic International in February 2003 and serves as Executive Vice
President and President of International Operations, with responsibilities
including marketing and sales. From 2001 to November 2002, Mr. Montgomery was
employed by Rubbermaid, Inc., where he served as President of Rubbermaid Europe.
From 1988 to 2001, Mr. Montgomery held various management positions at Black
& Decker Corporation, most recently as Vice President of Black & Decker
Europe, Middle East and Africa. Mr. Montgomery received his B.A. degree, with
honors, from L’ Ecole Superieure de Commerce de Reims, France and Middlesex
Polytechnic, London.
Richard W. Anderson
joined Tempur-Pedic International in July 2006 and serves as Executive
Vice President and President, North America. From 1983 to 2006, Mr.
Anderson was employed by The Gillette Company, which became a part of Proctor
& Gamble in 2005. Mr. Anderson most recently served as a Vice President of
Marketing for Oral-B and Braun in North America. Previously, Mr. Anderson
was Vice President of Global Business Management for Duracell. Mr.
Anderson has held several management positions in marketing and sales as well as
overseeing branding, product development and strategic planning. Mr. Anderson
obtained B.S. and M.B.A. degrees from Virginia Tech.
Dale E. Williams joined
Tempur-Pedic International in July 2003 and serves as Executive Vice President,
Chief Financial Officer and Secretary. From 2001 to September 2002, Mr. Williams
served as Vice President and Chief Financial Officer of Honeywell Control
Products, a division of Honeywell International, Inc.
From September 2002, when he left Honeywell in connection with a
reorganization, to July 2003, Mr. Williams received severance from Honeywell and
was not employed. From 2000 to 2001, Mr. Williams served as Vice President and
Chief Financial Officer of Saga Systems, Inc./Software AG, Inc. Prior to that,
Mr. Williams spent 15 years in various management positions at General Electric
Company, most recently as Vice President and Chief Financial Officer of GE
Information Services, Inc. Mr. Williams received his B.A. degree in finance from
Indiana University.
Bhaskar Rao joined Tempur-Pedic
International in January 2004 as Director of Financial Planning and Analysis. In
October 2005, Mr. Rao was promoted to Vice President of Strategic Planning. In
May 2006, Mr. Rao was promoted to the position of Chief Accounting Officer and
continues to serve as Vice President of Strategic Planning. From 2002 until
December 2003, Mr. Rao was employed by Ernst & Young as a Senior Manager in
the assurance and business advisory group. Mr. Rao was employed by
Arthur Anderson from 1994 until 2002. Mr. Rao graduated from
Bellarmine University with B.A. degrees in Accounting and Economics. Mr.
Rao is also a Certified Public Accountant.
The
following risk factors and other information included in this report should be
carefully considered. Please also see “Special Note Regarding Forward-Looking
Statements” on page i.
We
operate in the highly competitive mattress and pillow industries, and if we are
unable to compete successfully, we may lose customers and our sales may
decline.
Participants
in the mattress and pillow industries compete primarily on price, quality, brand
name recognition, product availability and product performance. Our premium
mattresses compete with a number of different types of mattress alternatives,
including standard innerspring mattresses, viscoelastic mattresses, foam
mattresses, waterbeds, futons, air beds and other air-supported
mattresses. These alternative products are sold through a variety of
channels, including furniture and bedding stores, specialty bedding stores,
department stores, mass merchants, wholesale clubs, telemarketing programs,
television infomercials and catalogs.
Our
largest competitors have significant financial, marketing and manufacturing
resources. They enjoy strong brand name recognition, and sell their products
through broad and well established distribution channels. Additionally, a number
of our significant competitors now offer mattress products claimed to be similar
to our viscoelastic mattresses and pillows. These competitors or
other mattress manufacturers may aggressively pursue the viscoelastic mattress
market or may pursue the specialty sleep segment with other products, including
latex and air mattresses. Any such competition by established manufacturers or
new entrants into the market could have a material adverse effect on our
business, financial condition and operating results by causing our products to
lose market share. In addition, should any of our competitors reduce price on
premium mattress products, we may elect to implement price reductions in order
to remain competitive, which could significantly impair our liquidity and
profitability. The pillow industry is characterized by a large number of
competitors, none of which are dominant, but many of which have greater
resources than us and greater brand recognition than our brand.
We
may be unable to sustain our profitability, which could impair our ability to
service our indebtedness and make investments in our business and could
adversely affect the market price for our stock.
Our
ability to service our indebtedness depends on our ability to maintain our
profitability. We may not be able to maintain our profitability on a quarterly
or annual basis in future periods. Further, our profitability will depend upon a
number of factors, including without limitation:
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the
level of competition in the mattress and pillow
industry;
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our
ability to continue to successfully execute our strategic
initiatives;
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our
ability to effectively sell our products through our distribution channels
in volumes sufficient to drive growth and leverage our cost structure and
advertising spending;
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our
ability to continuously improve our products to offer new and enhanced
consumer benefits, better quality and reduced
costs;
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our
ability to maintain efficient, timely and cost-effective production and
utilization of our manufacturing
capacity;
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the
efficiency and effectiveness of our advertising campaigns and other
marketing programs in building product and brand awareness, driving
traffic to our distribution channels and increasing
sales;
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our
ability to successfully identify and respond to emerging trends in the
mattress and pillow industry;
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our
ability to maintain public association of our brand with premium products,
including overcoming any impact on our brand caused by some of our
customers seeking to sell our products at a discount to our recommended
price;
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the
level of consumer acceptance of our products;
and
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general
economic conditions and consumer
confidence.
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Our sales growth is increasingly
dependent on our ability to increase product sales in our existing retail
accounts.
A source of our growth over
the last few years has been through expanding distribution of our products into
new stores, principally furniture and bedding retail stores in the U.S. Our
products are sold in approximately 4,990 retail store internationally. Our
products are currently sold in approximately 6,350 furniture and bedding retail
stores in the U.S., and our plan is to increase our total penetration to a total
of 7,000 to 8,000 over time. As we approach this target, our sales growth will
increasingly depend on our ability to generate additional sales in our existing
accounts in the Retail channel. If we are unable to increase product sales in
our existing retail accounts at a sufficient rate overall, our Net sales growth
could slow, which could adversely affect the price of our common
stock.
Our
operating results are increasingly subject to fluctuations, which could
adversely affect the market price of our common stock.
A
significant portion of our growth in Net sales is attributable to growth in
sales in our Domestic Retail channel, particularly Net sales to furniture and
bedding stores. We believe that our sales of mattresses and pillows to furniture
and bedding stores are subject to seasonality inherent in the bedding industry
with sales expected to be generally lower in the second and fourth quarters and
higher in the first and third quarters, and in Europe, lower in the third
quarter. Accordingly, our Net sales may be affected by this seasonality,
particularly as our Domestic Retail sales channel continues to grow as a
percentage of our overall Net sales and, to a lesser extent, by seasonality
outside the Domestic segment.
In
addition to seasonal fluctuations, the demand for our premium products can
fluctuate significantly based on a number of other factors, including general
economic conditions and consumer confidence, and the timing of price increases
announced by us or our competitors. We believe that as our consumer base
continues to expand the average demographics of our consumer base will change,
and be comprised of a greater percentage of middle income
consumers. This change in our consumer base makes our business more
susceptible to general economic factors that impact disposable income or
consumer confidence.
Our
advertising expenditures may not result in increased sales or generate the
levels of product and brand name awareness we desire and we may not be able to
manage our advertising expenditures on a cost-effective basis.
A
significant component of our marketing strategy involves the use of direct
marketing to generate sales. Future growth and profitability will depend in part
on the effectiveness and efficiency of our advertising expenditures, including
our ability to create greater awareness of our products and brand name and
determine the appropriate creative message and media mix for future advertising
expenditures.
We
are subject to fluctuations in the cost of raw materials, and increases in these
costs would reduce our liquidity and profitability.
The major
raw materials that we purchase for production are chemicals and proprietary
additives. The price and availability of these raw materials are subject to
market conditions affecting supply and demand, and prices have risen
substantially on certain materials since August 2005. Our financial condition
and results of operations may be materially and adversely affected by increases
in raw material costs to the extent we are unable to absorb those increases
and/or pass those higher costs to our customers.
Loss
of suppliers and disruptions in the supply of our raw materials could increase
our costs of production and reduce our ability to compete
effectively.
We
acquire chemicals and proprietary additives from a number of suppliers with
manufacturing locations around the world. If we were unable to obtain chemicals
and proprietary additives from these suppliers, we would have to find
replacement suppliers. Any substitute arrangements for chemicals and proprietary
additives might not be on terms as favorable to us. We maintain relatively small
supplies of our raw materials at our manufacturing facilities, and any
disruption in the on-going shipment of supplies to us could interrupt production
of our products, which could result in a decrease of our sales, or could cause
an increase in our cost of sales, and either of which could decrease our
liquidity and profitability. In addition, we continue to outsource the
procurement of certain goods and services, particularly mattress and pillow
covers, from suppliers in foreign countries. If we were no longer
able to outsource through suppliers, we could source it elsewhere, perhaps at a
higher cost. To the extent we are unable to absorb those higher costs, or pass
any such higher costs to our customers, our gross profit margin could be
negatively affected, which could result in a decrease in our liquidity and
profitability.
We
may face exposure to product liability claims, which could reduce our liquidity
and profitability and reduce consumer confidence in our products.
We face
an inherent business risk of exposure to product liability claims if the use of
any of our products results in personal injury or property damage. In the event
that any of our products prove to be defective, we may be required to recall,
redesign or even discontinue those products. We maintain insurance against
product liability claims, but such coverage may not continue to be available on
terms acceptable to us or be adequate for liabilities actually incurred. A
successful claim brought against us in excess of available insurance coverage
could impair our liquidity and profitability, and any claim or product recall
that results in significant adverse publicity against us could result in
consumers purchasing fewer of our products, which would also impair our
liquidity and profitability.
We
may be adversely affected by fluctuations in exchange rates, which could affect
our results of operations, the costs of our products and our ability to sell our
products in foreign markets.
Approximately
34.5% of our Net sales were denominated in foreign currency for the year ended
December 31, 2007. As a multinational company, we conduct our business in a wide
variety of currencies and are therefore subject to market risk for changes in
foreign exchange rates. We use foreign exchange forward contracts to
manage a portion of the exposure to the risk of the eventual net cash inflows
and outflows resulting from foreign currency denominated transactions between
Tempur-Pedic International subsidiaries and their customers and suppliers, as
well as between Tempur-Pedic International subsidiaries themselves from time to
time. The hedging transactions may not succeed in managing our
foreign currency exchange rate risk. See “ITEM 7A. Quantitative and Qualitative
Disclosures About Market Risk—Foreign Currency Exposures” in Part II of this
report.
Foreign
currency exchange rate movements also create a degree of risk by affecting the
U.S. dollar value of sales made and costs incurred in foreign
currencies. We do not enter into hedging transactions to hedge this
risk. Consequently, our reported earnings and financial position
could fluctuate materially as a result of foreign exchange gains or
losses. Our outlook assumes no significant variance to 2007 currency
exchange rates over the course of the year. Should currency rates change
sharply, our results could be negatively impacted. See “ITEM
7A. Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency
Exposures” in Part II of this report.
Regulatory
requirements may require costly expenditures and expose us to
liability.
Our
products and our marketing and advertising programs are and will continue to be
subject to regulation in the U.S. by various federal, state and local regulatory
authorities, including the Federal Trade Commission and the U.S. Food and Drug
Administration. In addition, other governments and agencies in other
jurisdictions regulate the sale and distribution of our products. Compliance
with these regulations may have an adverse effect on our business. For example,
the U.S. Consumer Product Safety Commission has adopted new rules relating to
fire retardancy standards for the mattress and pillow industry. The State of
California similarly adopted new fire retardancy standards in 2005. We developed
product modifications that allow us to meet these new standards. Required
product modifications have added cost to our products. Many foreign
jurisdictions also regulate fire retardancy standards, and changes to these
standards and changes in our products that require compliance with additional
standards would raise similar risks.
Our
marketing and advertising practices could also become the subject of proceedings
before regulatory authorities or the subject of claims by other parties. In
addition, we are subject to federal, state and local laws and regulations
relating to pollution, environmental protection and occupational health and
safety. We may not be in complete compliance with all such requirements at all
times. We have made and will continue to make capital and other expenditures to
comply with environmental and health and safety requirements. If a release of
hazardous substances occurs on or from our properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any of our properties, we may be held liable and the amount of such liability
could be material.
An
increase in our product return rates or an inadequacy in our warranty reserves
could reduce our liquidity and profitability.
Part of
our Domestic marketing and advertising strategy in certain Domestic channels
focuses on providing up to a 120-day money back guarantee under which customers
may return their mattress and obtain a refund of the purchase price. For the
year ended December 31, 2007, we had approximately $41.1 million in returns for
a return rate of approximately 5.7% of our Net sales in the U.S. As we expand
our sales, our return rates may not remain within our historical levels. An
increase in return rates could significantly impair our liquidity and
profitability. We also currently provide our customers with a limited, pro-rata
20-year warranty on mattresses sold in the U.S. and a limited 15-year warranty
on mattresses sold outside of the U.S. However, as we have only been selling
mattresses in significant quantities since 1992, and have released new products
in recent years, many are fairly early in their product life cycles. We also
provide 2-year to 3-year warranties on pillows.
Because
our products have not been in use by our customers for the full warranty period,
we rely on the combination of historical experience and product testing for the
development of our estimate for warranty claims. However, our actual level of
warranty claims could prove to be greater than the level of warranty claims we
estimated based on our products’ performance during product testing. If our
warranty reserves are not adequate to cover future warranty claims, their
inadequacy could have a material adverse effect on our liquidity and
profitability.
We
are subject to risks from our international operations, such as increased costs,
which could impair our ability to compete and our profitability.
We
currently conduct international operations in approximately 80 countries,
and we continue to pursue additional international opportunities. We generated
approximately 34.5% of our Net sales from non-U.S. operations during the year
ended December 31, 2007. 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.
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 our U.S. companies to our Danish subsidiary and
the position taken by the Danish Tax Authority could apply to subsequent years.
Management is currently evaluating the assessment. We believe we have
meritorious defenses to the proposed adjustment and will oppose the assessment
in the Danish courts. However, there is a reasonable possibility that the amount
of unrecognized tax benefits relating to this matter may change in the next
twelve months. An estimate of the amount of such change cannot be made at this
time.
If
we are not able to protect our trade secrets or maintain our trademarks, patents
and other intellectual property, we may not be able to prevent competitors from
developing similar products or from marketing in a manner that capitalizes on
our trademarks, and this loss of a competitive advantage could decrease our
profitability and liquidity.
We rely
on trade secrets to protect the design, technology and function of our
TEMPUR® material
and our products. To date, we have not sought U.S. or international patent
protection for our principal product formula and manufacturing processes.
Accordingly, we may not be able to prevent others from developing viscoelastic
material and products that are similar to or competitive with our products. Our
ability to compete effectively with other companies also depends, to a
significant extent, on our ability to maintain the proprietary nature of our
owned and licensed intellectual property. We own several patents on aspects of
our products and have patent applications pending on aspects of our products and
manufacturing processes. However, the principal product formula and
manufacturing processes for our TEMPUR® material
and our products are not patented and we must maintain these as trade secrets in
order to protect this intellectual property. We own 15 U.S. patents, and we have
15 U.S. patent applications pending. Further, we own 55 foreign patents, and we
have 44 foreign patent applications pending. In addition, we hold 411 trademark
registrations worldwide. We own U.S. and foreign registered trade names and
service marks and have applications for the registration of trade names and
service marks pending domestically and abroad. We also license certain
intellectual property rights from third parties.
Our
trademarks are currently registered in the U.S. and registered or pending in 123
foreign jurisdictions. However, those rights could be circumvented, or violate
the proprietary rights of others, or we could be prevented from using them if
challenged. A challenge to our use of our trademarks could result in a negative
ruling regarding our use of our trademarks, their validity or their
enforceability, or could prove expensive and time consuming in terms of legal
costs and time spent defending against such a challenge. Any loss of trademark
protection could result in a decrease in sales or cause us to spend additional
amounts on marketing, either of which could decrease our liquidity and
profitability. In addition, if we incur significant costs defending our
trademarks, that could also decrease our liquidity and profitability. In
addition, we may not have the financial resources necessary to enforce or defend
our trademarks. Furthermore, our patents may not provide meaningful protection
and patents may never issue from pending applications. It is also possible that
others could bring claims of infringement against us, as our principal product
formula and manufacturing processes are not patented, and that any licenses
protecting our intellectual property could be terminated. If we were unable to
maintain the proprietary nature of our intellectual property and our significant
current or proposed products, this loss of a competitive advantage could result
in decreased sales or increased operating costs, either of which would decrease
our liquidity and profitability.
In
addition, the laws of certain foreign countries may not protect our intellectual
property rights and confidential information to the same extent as the laws of
the U.S. or the European Union. Third parties, including competitors, may assert
intellectual property infringement or invalidity claims against us that could be
upheld. Intellectual property litigation, which could result in substantial cost
to and diversion of effort by us, may be necessary to protect our trade secrets
or proprietary technology, or for us to defend against claimed infringement of
the rights of others and to determine the scope and validity of others’
proprietary rights. We may not prevail in any such litigation, and if we are
unsuccessful, we may not be able to obtain any necessary licenses on reasonable
terms or at all.
Because
we depend on our significant customers, a decrease or interruption in their
business with us would reduce our sales and profitability.
Our top
five customers, collectively, accounted for 18.2% of our Net sales for the year
ended December 31, 2007, and a portion of our growth in 2007 in our Retail
channel was due to the growth of Net sales to our largest accounts. Many of our
customer arrangements are by purchase order or are terminable at will at the
option of either party. A substantial decrease or interruption in business from
our significant customers could result in the loss of future business and could
reduce our liquidity and profitability.
In the
future, retailers may consolidate, undergo restructurings or reorganizations,
experience financial difficulty, or realign their affiliations, any of which
could decrease the number of stores that carry our products or increase the
ownership concentration in the retail industry. Some of these retailers may
decide to carry only a limited number of brands of mattress products, which
could affect our ability to sell our products to them on favorable terms, if at
all. Our loss of significant customers would impair our sales and profitability
and have a material adverse effect on our business, financial condition and
results of operations.
We
produce our products in three manufacturing facilities, and unexpected equipment
failures, delays in deliveries, catastrophic loss delays may lead to production
curtailments or shutdowns.
We
manufacture our products at our three facilities in Aarup, Denmark, in Duffield,
Virginia and in Albuquerque, New Mexico. An interruption in production
capabilities at these plants as a result of equipment failure could result in
our inability to produce our products, which would reduce our sales and earnings
for the affected period. For example, we produce pillows for our Domestic
segment only at our Duffield, VA facility. An interruption in pillow production
capabilities at this plant could result in a disruption of pillow distribution
to the market. In addition, we generally deliver our products only
after receiving the order from the customer or the retailer and thus do not hold
large inventories. In the event of a disruption in production at any of our
manufacturing facilities, even if only temporary, or if we experience delays as
a result of events that are beyond our control, delivery times could be severely
affected. For example, a third party carrier could potentially be unable to
deliver our products within acceptable time periods due to a labor strike or
other disturbance in its business. Any significant delay in deliveries to our
customers could lead to increased returns or cancellations and cause us to lose
future sales. Any increase in freight charges could increase our costs of doing
business and affect our profitability. We have introduced new distribution
programs to increase our ability to deliver products on a timely basis, but if
we fail to deliver products on a timely basis, we may lose sales which could
decrease our liquidity and profitability. Our manufacturing facilities are also
subject to the risk of catastrophic loss due to unanticipated events such as
fires, explosions or violent weather conditions. We may in the future experience
material plant shutdowns or periods of reduced production as a result of
equipment failure, delays in deliveries or catastrophic loss.
Deterioration
in labor relations could disrupt our business operations and increase our costs,
which could decrease our liquidity and profitability.
As of
December 31, 2007, we had approximately 1,400 full-time employees, with
approximately 700 in the U.S., 300 in Denmark and 400 in the rest of the world.
Certain of our employees in Denmark are under a government labor union contract,
but those in the U.S. are not. Any significant increase in our labor costs could
decrease our liquidity and profitability and any deterioration of employee
relations, slowdowns or work stoppages at any of our locations, whether due to
union activities, employee turnover or otherwise, could result in a decrease in
our Net sales or an increase in our costs, either of which could decrease our
liquidity and profitability.
The
loss of the services of any members of our senior management team could impair
our ability to execute our business strategy and as a result, reduce our sales
and profitability.
We depend
on the continued services of our senior management team. The loss of key
personnel could have a material adverse effect on our ability to execute our
business strategy and on our financial condition and results of operations. We
do not maintain key-person insurance for members of our senior management team.
In addition, the recent
announcement of our President and Chief Executive Officer’s decision to
retire effective mid-year 2008 may have an impact on our ability to execute our
business strategy. Our board of directors will be required to devote
time to conducting a search for a successor President and Chief Executive
Officer.
Our
leverage limits our flexibility and increases our risk of default.
As of
December 31, 2007, we had $602.0 million in total Long-term debt outstanding. In
addition, as of December 31, 2007, our Stockholders’ Equity was $48.1 million.
Between October 2005 and November 30, 2007, we repurchased a total of $540.0
million in common stock pursuant to stock repurchase authorizations authorized
by our Board of Directors. We funded the repurchase in part through borrowings
under our 2005 Senior Credit Facility, which has substantially increased our
leverage. On October 16, 2007, our Board of Directors authorized an additional
stock repurchase of up to $300.0 million of our common stock. Our Board of
Directors may authorize additional share repurchases in the future and we may
fund these repurchases with debt. In addition, in the first quarter of 2007 our
Board of Directors initiated a $0.24 cash dividend, paid in quarterly
installments of $0.06. In the second quarter of 2007, our Board of Directors
increased the quarterly dividend payment to $0.08. We paid a total of $23.8
million in dividends in 2007. Our Board has declared a dividend of
$0.08 for the first quarter of 2008.
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.
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 $6.0 million for each 1.0% increase
in interest rates. See “ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk—Interest Rate Risk” in Part II of this report.
Allegations of
price fixing in the mattress industry could adversely affect our
operations.
Our
retail pricing policies are subject to antitrust regulations in the U.S. and
abroad. If antitrust regulators in any jurisdiction in which we do business
initiate investigations into or challenge our pricing or advertising policies,
our efforts to respond could force us to divert management resources and we
could incur significant unanticipated costs. If such an investigation were to
result in a charge that our practices or policies were in violation of
applicable antitrust laws or regulations, we could be subject to significant
additional costs of defending such charges in a variety of venues and,
ultimately, if there were a finding that we were in violation of antitrust laws
or regulations, there could be an imposition of fines, damages for persons
injured, as well as injunctive or other relief. Any requirement that we pay
fines or damages could decrease our liquidity and profitability, and any
investigation that requires significant management attention or causes us to
change our business practices could disrupt our operations, also resulting in a
decrease in our liquidity and profitability. An antitrust class action suit
against us could result in potential liabilities, substantial costs and the
diversion of our management’s attention and resources, regardless of the
outcome. See ITEM 3, “Legal Proceedings” in Part I of this report.
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.
Our
stock price is likely to continue to be volatile, your investment could decline
in value, and we may incur significant costs from class action
litigation.
The
trading price of our common stock is likely to continue to be volatile and
subject to wide price fluctuations. The trading price of our common stock may
fluctuate significantly in response to various factors, including:
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actual
or anticipated variations in our quarterly operating results, including
those resulting from seasonal variations in our
business;
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introductions
or announcements of technological innovations or new products by us or our
competitors;
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disputes
or other developments relating to proprietary rights, including patents,
litigation matters, and our ability to patent our products and
technologies;
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|
changes
in estimates by securities analysts of our financial
performance;
|
|
•
|
the
declaration of a cash dividend and stock repurchase
program;
|
|
•
|
conditions
or trends in the specialty bedding industry, or the mattress industry
generally;
|
|
•
|
additions
or departures of key personnel;
|
|
•
|
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
•
|
announcements
by our competitors of their quarterly operating results or announcements
by our competitors of their views on trends in the bedding
industry;
|
|
•
|
regulatory
developments in the U.S. and
abroad;
|
|
•
|
economic
and political factors; and
|
|
•
|
public
announcements or filings with the SEC indicating that significant
stockholders, directors or officers are selling shares of our common
stock.
|
In
addition, the stock market in general has experienced significant price and
volume fluctuations that have often been unrelated or disproportionate to
operating performance. These broad market factors may seriously harm the market
price of our common stock, regardless of our operating performance.
In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in potential liabilities,
substantial costs, and the diversion of our management’s attention and
resources, regardless of the outcome. See ITEM 3, “Legal Proceedings”
in Part I of this report.
Future
sales of our common stock may depress our stock price.
The
market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that these sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of common stock. As of
February 22, 2008, there were 74,595,057 shares of our common stock
outstanding. All of our shares of our common stock are freely transferable
without restriction or further registration under the Securities Act of 1933,
except for certain shares of our common stock which were purchased by our
executive officers, directors, principal stockholders, and some related
parties.
In addition,
on December 24, 2003, we registered up to 14,983,532 shares of our common stock
reserved for issuance upon the exercise of options previously granted under our
2002 Stock Option Plan and the exercise of options granted or reserved for grant
under our 2003 Equity Incentive Plan and our 2003 Employee Stock Purchase Plan.
In December 2003, the Board adoted a resolution that prohibited furter being
made under the 2002 Stock Option Plan. Stockholders can sell these shares in the
public market upon issuance, subject to restrictions under the securities
laws.
In 2007,
one of our largest stockholders, a private equity fund that invested in our
Company in 2002 in connection with the acquisition of our predecessor, made a
distribution of our common stock to their investors totaling 5,275,000 shares.
This shareholder continues to hold 4,479,187 shares of common stock and may
choose to make additional distributions or sales of our common stock in the
future.
Our
current directors, officers and their affiliates own a large percentage of our
common stock and could limit you from influencing corporate
decisions.
As of
February 22, 2008, our executive officers, directors, and their respective
affiliates, including one of our largest stockholders, own, in the aggregate,
approximately 11% 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.
Provisions
of Delaware law and our charter documents could delay or prevent an acquisition
of us, even if the acquisition would be beneficial to you.
Provisions
of Delaware law and our certificate of incorporation and by-laws could hamper a
third party’s acquisition of us, or discourage a third party from attempting to
acquire control of us. You may not have the opportunity to participate in these
transactions. These provisions could also limit the price that investors might
be willing to pay in the future for shares of our common stock.
These
provisions include:
|
•
|
our
ability to issue preferred stock with rights senior to those of the common
stock without any further vote or action by the holders of our common
stock;
|
|
•
|
the
requirements that our stockholders provide advance notice when nominating
our directors; and
|
|
•
|
the
inability of our stockholders to convene a stockholders’ meeting without
the chairperson of the board, the president, or a majority of the board of
directors first calling the
meeting.
|
None.
We
operate in approximately 80 countries and have wholly-owned subsidiaries in
18 countries, including our wholly-owned subsidiaries that own our manufacturing
facilities in Denmark and the U.S. The following table sets forth certain
information regarding our principal facilities at December 31,
2007.
We
believe that our existing properties are suitable for the conduct of our
business, are adequate for our present needs and will be adequate to meet our
future needs. As described in ITEM 7., “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, we operate in two business
segments, Domestic and International. Our Domestic operating segment consists of
our U.S. manufacturing facilities and our Corporate office operating expenses.
Our International operating segment consists of our manufacturing facility in
Denmark.
|
Name/Location
|
Approximate
Square
Footage
|
Title
|
Type
of Facility
|
|||
|
Tempur
Production USA, Inc.
Duffield,
Virginia
|
540,000 |
Owned
|
Manufacturing
|
|||
|
Tempur
Production USA, Inc.
Albuquerque,
New Mexico
|
800,000 |
Leased
(until 2035)
|
Manufacturing
|
|||
|
Dan-Foam
ApS
Aarup,
Denmark
|
517,000 |
Owned
|
Manufacturing
|
|||
|
Tempur-Pedic
North America, Inc.
Lexington,
Kentucky
|
72,000 |
Leased (until 2009)
|
Office
|
|||
|
Tempur
Deutschland GmbH
Steinhagen,
Germany
|
121,000 |
Owned
|
Office and Warehouse
|
|||
In addition
to the properties listed above, we have 25 facilities in 15 countries under
leases with one to ten year terms. The manufacturing facility in Albuquerque,
New Mexico is leased as part of the related industrial revenue bond financing.
We have an option to repurchase the property for one dollar upon repayment of
the financing.
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 Securities Exchange Act of 1934. Lead plaintiffs allege 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. We filed a motion to dismiss the Securities Law Action which
has been fully briefed, and are now awaiting a decision on that motion. The
plaintiffs seek compensatory damages, costs, fees and other relief within the
Court’s discretion. We strongly believe that the Securities Law 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
Securities Law 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
operations or liquidity. Accordingly, we cannot make an estimate of the possible
ranges of loss.
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 asserts a claim for breach of fiduciary duty with respect
to the disclosures that also are the subject of the Securities Law Action
described above. On December 14, 2005 and January 26, 2006,
respectively, the Delaware court and Kentucky court stayed these derivative
actions. Although the Kentucky court action remains stayed, the Delaware court
action stay was lifted by the Court and the plaintiffs filed an amended
complaint on April 5, 2007. The Company responded by filing a motion to stay or
dismiss the Delaware court action on April 19, 2007. The Delaware
court again stayed the Delaware action on February 6, 2008. Tempur-Pedic
International is also named as a nominal defendant in the Derivative Complaints,
although the actions are derivative in nature and purportedly asserted on behalf
of Tempur-Pedic International. Accordingly, we cannot make an
estimate of the possible ranges of loss.
Antitrust Action – On January
5, 2007, a purported class action was filed against the Company in the United
States District Court for the Northern District of Georgia, Rome Division
(Jacobs v. Tempur-Pedic International, Inc. and Tempur-Pedic North America,
Inc., or the “Antitrust Action”). The Antitrust Action alleges violations
of federal antitrust law arising from the pricing of Tempur-Pedic mattress
products by Tempur-Pedic North America and certain distributors. The
action alleges a class of all purchasers of Tempur-Pedic mattresses in the
United States since January 5, 2003, and seeks damages and injunctive relief.
Count Two of the complaint was dismissed by the court on June 25, 2007, based on
a motion filed by the Company. Following a decision issued by the United States
Supreme Court in Leegin
Creative Leather Prods., Inc. v. PSKS, Inc. on June 28, 2007, we filed a
motion to dismiss the remaining two counts of the Antitrust Action on July 10,
2007. On December 11, 2007, that motion was granted and, as a result, judgment
was entered in favor of the Company and the plaintiffs’ complaint was dismissed
with prejudice. On December 21, 2007, the Plaintiffs filed a “Motion to Alter or
Amend Judgment,” which has been fully briefed. We continue to strongly believe
that the Antitrust Action lacks merit, and intend to defend against the claims
vigorously. However, due to the inherent uncertainties of litigation, we cannot
predict the outcome of the Antitrust Action at this time, and can give no
assurance that these claims will not have a material adverse affect on our
financial position or results of operation. Accordingly, we cannot make an
estimate of the possible ranges of loss.
We are
involved in various other legal proceedings incidental to the operations of our
business. We believe that the outcome of all such pending legal proceedings in
the aggregate will not have a materially adverse effect on our business,
financial condition, liquidity, or operating results.
No
matters were submitted to a vote of security holders during the fourth quarter
of 2007.
Market
for Registrant’s Common Equity
Our sole
class of common equity is our $0.01 par value common stock, which trades on the
New York Stock Exchange (NYSE) under the symbol “TPX.” Trading in our common
stock commenced on the NYSE on December 18, 2003. Prior to that time, there was
no public trading market for our common stock.
The
following table sets forth the high and low sales prices per common share, at
closing, of our common stock as reported by the NYSE and cash dividends paid per
common share for the fiscal periods indicated.
|
Price
Range
|
||||||||||||
|
High
|
Low
|
Cash
Dividend Per Common Share
|
||||||||||
|
Fiscal
2006
|
||||||||||||
|
First
Quarter
|
$ | 14.50 | $ | 11.19 | $ | — | ||||||
|
Second
Quarter
|
$ | 15.89 | $ | 13.47 | $ | — | ||||||
|
Third
Quarter
|
$ | 18.12 | $ | 13.11 | $ | — | ||||||
|
Fourth
Quarter
|
$ | 21.41 | $ | 17.45 | $ | — | ||||||
|
Fiscal
2007
|
||||||||||||
|
First
Quarter
|
$ | 27.11 | $ | 20.29 | $ | 0.06 | ||||||
|
Second
Quarter
|
$ | 28.41 | $ | 24.34 | $ | 0.08 | ||||||
|
Third
Quarter
|
$ | 36.86 | $ | 26.68 | $ | 0.08 | ||||||
|
Fourth
Quarter
|
$ | 37.38 | $ | 25.97 | $ | 0.08 | ||||||
As of December 31, 2007, we had
approximately 142 shareholders of record of our common stock.
Dividends
On
February 18, 2008, our Board of Directors declared a cash dividend of $0.32, and
the first quarter dividend of $0.08 will be distributed on March 14, 2008 to
stockholders of record as of February 27, 2008. This annual cash dividend
program may be limited, suspended, or terminated at any time without prior
notice.
In the
first quarter of 2007, our Board of Directors initiated a cash dividend of
$0.24, paid in quarterly installments of $0.06. In the second quarter of 2007,
our Board of Directors increased the quarterly dividend payment to $0.08. The
same dividend was declared in the third and fourth quarter of 2007. Prior to
2007, we had never previously declared a cash dividend for our common
stock.
Equity
Compensation Plan Information
The following table sets forth equity
compensation plan information as of December 31, 2007:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding
options
|
Weighted-average
exercise price of outstanding options
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
compensation plans approved by security holders
|
4,602,716 | $ | 17.10 | 3,653,642 | ||||||||
|
Equity
compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
4,602,716 | $ | 17.10 | 3,653,642 | ||||||||
See Note
6 to the Consolidated Financial Statements for information regarding the
material features of each of the above plans.
Related
Stockholder Matters
Issuer
Purchases of Equity Securities
The
following table sets forth our purchases of equity securities for the
three-months ended December 31, 2007:
|
Period
|
(a) Total number
of
shares
purchased
|
(b)
Average Price Paid per Common Share
|
(c) Total number of
shares purchased as
part
of publicly
announced
plans or
programs
|
(d) Maximum number of shares
(or
approximate dollar value)
of
shares that may yet be
purchased
under the plans or
programs
(in millions)
|
||||||||||||
|
October
1, 2007 – October 31, 2007
|
— | $ | — | — | $ | 300.0 | ||||||||||
|
November
1, 2007 – November 30, 2007
|
658,900 | 30.18 | 658,900 | 280.1 | ||||||||||||
|
December
1, 2007 – December 31, 2007
|
— | — | — | 280.1 | ||||||||||||
|
Total
|
658,900 | 658,900 | ||||||||||||||
On
January 25, 2007, our Board of Directors authorized the repurchase of up to
$100.0 million of our common stock. We repurchased 3,840,485 shares of our
common stock for a total of $100.0 million from the January 2007 authorization,
and completed purchases from this authorization in June 2007. On July 19, 2007,
our Board of Directors authorized an additional share repurchase authorization
to repurchase up to $200.0 million of our common stock. We repurchased 6,561,489
shares of our common stock for a total of $200.0 million from the July 2007
authorization and completed purchases from this authorization in September 2007.
On October 16, 2007, our Board of Directors authorized an additional share
repurchase authorization of up to $300.0 million of our common stock. The share
repurchases were funded from borrowings under the 2005 Senior Credit Facility
and funds from operations. Share repurchases under these authorizations may be
made through open market transactions, negotiated purchases or otherwise, at
times and in such amounts as we, and a committee of the Board, deem appropriate.
This share repurchase program may be suspended, limited or terminated at any
time without notice. As of February 22, 2008, we have repurchased 658,900 shares
for a total of $19.9 million under the October authorization.
On
October 18, 2005, our Board of Directors authorized the repurchase of up to
$80.0 million of our common stock. Share repurchases under this program were
made through open market transactions, negotiated purchases or otherwise, at
times and in such amounts as we, and a committee of the Board, deemed
appropriate. During 2005, we repurchased 6,839,900 shares, at a total cost
of $76.0 million. On January 25, 2006, our Board of Directors amended the share
repurchase program described above to increase the total authorization by an
additional $100.0 million. On May 22, 2006, our Board of Directors
further amended the share repurchase program to increase the total authorization
under the share repurchase program by an additional $40.0 million for a total
authorization to purchase up to $220.0 million of our common
stock. During the twelve-months ended December 31, 2006, we
repurchased 11,275,124 shares at a total cost of $144.0 million. As
of December 31, 2006, we had completed our existing share repurchase
authorization. The share repurchases were funded from borrowings
under the 2005 Senior Credit Facility and funds from operations.
The
following Performance Graph and related information shall not be deemed
“soliciting material” or to be “filed” with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities Exchange Act of
1934, each as amended, except to the extent that the Company specifically
incorporates it by reference into such filing.
The
following table compares cumulative shareholder returns for the Company over the
last four years to the S&P 500 Stock Composite Index, an old peer group, and
a new peer group. The S&P 500 Composite Index is a capitalization weighted
index of 500 stocks intended to be a representative sample of leading companies
in leading industries within the U.S. economy, and are chosen for market size,
liquidity and industry group representation.
The peer
issuers included in this graph are set forth below:
|
New Peer
Group
|
||
|
Callaway
Golf Company
|
Herman
Miller, Inc.
|
Steelcase
Inc.
|
|
Coach,
Inc.
|
Krispy
Kreme Doughnuts, Inc.
|
Tempur-Pedic
International Inc.
|
|
Columbia
Sportswear Company
|
Nautilus,
Inc.
|
Tiffany
& Co.
|
|
Ethan
Allen Interiors, Inc.
|
Polo
Ralph Lauren Corporation
|
The
Timberland Company
|
|
Fossil,
Inc.
|
Quiksilver,
Inc.
|
Tupperware
Brands Corporation
|
|
Harman
International Industries, Inc.
|
Select
Comfort Corporation
|
|
|
Old Peer
Group
|
||
|
Bassett
Furniture Industries, Incorporated
|
Furniture
Brands International, Inc.
|
Natuzzi
S.P.A
|
|
Chromcraft
Revington, Inc.
|
Hooker
Furniture Corporation
|
The
Rowe Companies
|
|
Color
Kinetics Incorporated
|
Hubbell
Inccorporated
|
Select
Comfort Corporation
|
|
Empire
Global Corp.
|
La-Z-Boy
Incorporated
|
Stanley
Furniture Company, Inc.
|
|
Ethan
Allen Interiors, Inc.
|
Leggett
& Platt, Incorporated
|
Tempur-Pedic
International Inc.
|
|
Flexsteel
Industries Inc.
|
Lighting
Science Group Corporation
|
Xenonics
Holdings, Inc.
|
We decided to use a new peer group for
the year ended December 31, 2007. We believe the new peer group more closely
reflects our business and, as a result, provides a more meaningful comparison of
stock performance. In accordance with Securities and Exchange Commission rules,
the graph includes both the old peer group and the new peer group. The
comparison for each of the periods assumes that $100 was invested on December
31, 2003 in our common stock, the stocks included in the S & P 500 Composite
Index and the stocks included in each peer group index and that all dividends
were reinvested. The stock performance shown on the graph below is not
necessarily indicative of future price performance.
| 12/31/2003 | 12/31/2004 | 12/31/2005 | 12/31/2006 | 12/31/2007 | ||||||||||||||||
|
Tempur-Pedic
International Inc.
|
$ | 100.00 | $ | 136.77 | $ | 74.19 | $ | 132.00 | $ | 169.43 | ||||||||||
|
S&P
500
|
100.00 | 110.88 | 116.33 | 134.70 | 142.10 | |||||||||||||||
|
New
Peer Group
|
100.00 | 118.67 | 118.77 | 139.71 | 119.66 | |||||||||||||||
|
Old
Peer Group
|
100.00 | 114.28 | 94.08 | 100.85 | 86.42 |
The stock
price performance included in this graph is not necessarily indicative of future
stock price performance.
The
following table sets forth our selected historical consolidated financial and
operating data for the periods indicated. We have derived our statements of
income and balance sheet data as of and for the years ended December 31, 2007,
2006, 2005, 2004 and 2003 from our audited financial statements. Our financial
statements as of December 31, 2007 and 2006 and for each of the three years in
the period ended December 31, 2007 are included elsewhere in this
report.
|
(In
thousands, except per share amounts)
|
|||||||||||||||
|
Tempur-Pedic
International Inc.
|
|||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||
|
Statement
of Income Data:
|
|||||||||||||||
|
Net
sales
|
$
|
1,106,722
|
$
|
945,045
|
$
|
836,732
|
$
|
684,866
|
$
|
479,135
|
|||||
|
Cost
of sales
|
571,896
|
484,507
|
412,790
|
323,852
|
223,865
|
||||||||||
|
Gross
profit
|
534,826
|
460,538
|
423,942
|
361,014
|
255,270
|
||||||||||
|
Operating
expenses(1)
|
290,712
|
251,233
|
233,327
|
210,023
|
157,885
|
||||||||||
|
Operating
income
|
244,114
|
209,305
|
190,615
|
150,991
|
97,385
|
||||||||||
|
Interest
expense, net
|
(30,484
|
)
|
(23,920
|
)
|
(20,264
|
) |
(23,550
|
)
|
(20,521
|
)
|
|||||
|
Other
expense, net(2)
|
(756
|
) |
(10,620
|
)
|
(3,879
|
) |
(5,254
|
)
|
(15,662
|
)
|
|||||
|
Income
before income taxes
|
212,874
|
174,765
|
166,472
|
122,187
|
61,202
|
||||||||||
|
Income
tax provision
|
71,415
|
62,443
|
67,143
|
47,180
|
23,627
|
||||||||||
|
Net
income available to common stockholders
|
$
|
141,459
|
$
|
112,322
|
$
|
99,329
|
$
|
75,007
|
$
|
37,575
|
|||||
|
Balance
Sheet Data (at end of period):
|
|||||||||||||||
|
Cash
and cash equivalents
|
$
|
33,315
|
$
|
15,788
|
$
|
17,855
|
$
|
28,368
|
$
|
14,230
|
|||||
|
Restricted
cash(3)
|
$
|
—
|
$
|
—
|
$
|
—
|
$ |
—
|
$
|
60,243
|
|||||
|
Total
Assets
|
$
|
806,432
|
$
|
725,666
|
$
|
702,311
|
$ |
639,623
|
$
|
620,349
|
|||||
|
Total
senior debt
|
$
|
543,000
|
$
|
312,966
|
$
|
193,056
|
$ |
192,171
|
$
|
226,522
|
|||||
|
Total
debt(4)
|
$
|
602,044
|
$
|
361,132
|
$
|
344,481
|
$ |
289,671
|
$
|
376,522
|
|||||
|
Total
Stockholders’ Equity
|
$
|
48,138
|
$
|
213,348
|
$
|
226,329
|
$
|
213,621
|
$
|
122,709
|
|||||
|
Other
Financial and Operating Data (GAAP):
|
|||||||||||||||
|
Dividends
per common share
|
$
|
0.30
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
Depreciation
and amortization(5)
|
$
|
40,142
|
$
|
28,676
|
$
|
27,882
|
$
|
28,519
|
$
|
23,975
|
|||||
|
Net
cash provided by operating activities
|
$
|
126,361
|
$
|
165,815
|
$
|
102,249
|
$
|
76,966
|
$
|
46,950
|
|||||
|
Net
cash used by investing activities
|
$
|
(22,871
|
)
|
$
|
(37,861
|
)
|
$
|
(86,584
|
)
|
$
|
(38,351
|
)
|
$
|
(71,107
|
)
|
|
Net
cash (used) provided by financing activities
|
$
|
(87,642
|
)
|
$
|
(132,476
|
)
|
$
|
(19,955
|
)
|
$
|
(28,507
|
)
|
$
|
26,574
|
|
|
Basic
earnings per common share
|
$
|
1.77
|
$
|
1.32
|
$
|
1.01
|
$
|
0.77
|
$
|
3.32
|
|||||
|
Diluted
earnings per common share
|
$
|
1.74
|
$
|
1.28
|
$
|
0.97
|
$
|
0.73
|
$
|
0.39
|
|||||
|
Capital
expenditures
|
$
|
16,149
|
$
|
37,211
|
$
|
84,881
|
$
|
38,419
|
$
|
32,597
|
|||||
|
(1)
|
Includes
$10.7 million, $7.9 million, $6.9 million, $9.4 million, and $9.3 million
in non-cash charges for the years ended December 31, 2007, 2006, 2005,
2004, and 2003, respectively. These amounts are comprised of $3.9 million,
$4.1 million $4.0 million, $4.2 million, and $5.1 million in amortization
of definite-lived intangibles in 2007, 2006, 2005, 2004, and 2003,
respectively; and $6.7 million, $3.8 million, $2.9 million, $5.2 million,
and $4.2 million in non-cash stock-based compensation expense relating to
restricted stock units and stock option grants in 2007, 2006, 2005, 2004,
and 2003, respectively.
|
|
(2)
|
Includes
$0.1 million in debt extinguishment charges for the write-off of deferred
financing fees related to the termination of the Foreign Term Loan for the
year ended December 31, 2007, and $10.7 million in debt extinguishment
charges for the redemption premium and write-off of deferred financing
fees related to the redemption of $97.5 million of Senior Subordinated
Notes (as defined below) for the year ended December 31, 2006, and $4.2
million in debt extinguishment charges relating to the write-off of
deferred financing fees in connection with the Senior Credit Facility
refinancing for the year ended December 31, 2005, and $5.4 million in debt
extinguishment charges for the redemption premium related to the
redemption of $52.5 million of Senior Subordinated Notes for the year
ended December 31, 2004. For the year ended December 31, 2003, includes
$13.7 million in debt extinguishment charges relating to the write-off of
deferred financing fees, the write-off of original issue discount and
prepayment penalties in connection with the recapitalization in August
2003.
|
|
(3)
|
As
of December 31, 2003, we had approximately $60.2 million in restricted
cash for the redemption of an aggregate principal amount of $52.5 million
of Senior Subordinated Notes, the payment of a redemption premium of
approximately $5.4 million and accrued interest expense of approximately
$2.4 million which was paid in January 2004.
|
|
(4)
|
Includes
$52.5 million in aggregate principal amount of Senior Subordinated Notes
redeemed on January 23, 2004 for the year ended December 31,
2003.
|
|
(5)
|
Includes
$6.7 million, $3.8 million, $2.9 million, $5.2 million, and $4.2 million
in non-cash stock-based compensation expense related to restricted stock
units, stock option grants, and acceleration in 2007, 2006, 2005, 2004,
and 2003, respectively.
|
The
following discussion and analysis should be read in conjunction with “ITEM 6.
Selected Financial Data” in Part I of this report and the audited consolidated
financial statements and accompanying notes thereto included elsewhere in this
report. Unless otherwise noted, all of the financial information in this report
is consolidated financial information for Tempur-Pedic International Inc. or its
predecessor. The forward-looking statements in this discussion regarding the
mattress and pillow industries, our expectations regarding our future
performance, liquidity and capital resources and other non-historical statements
in this discussion are subject to numerous risks and uncertainties. See “Special
Note Regarding Forward-Looking Statements” and “ITEM 1A. Risk Factors” in Part I
of this report. Our actual results may differ materially from those contained in
any forward-looking statements.
General—We are the leading
manufacturer, marketer and distributor of premium mattresses and pillows which
we sell in approximately 80 countries under the TEMPUR® and
Tempur-Pedic® brands.
We believe our premium mattresses and pillows are more comfortable than standard
bedding products because our proprietary pressure-relieving TEMPUR® material
is temperature sensitive, has a high density and conforms to the body to
therapeutically align the neck and spine, thus reducing neck and lower back
pain, two of the most common complaints about other sleep surfaces.
Business Segment
Information—We have two reportable business segments: Domestic and
International. These reportable segments are strategic business units that are
managed separately based on the fundamental differences in their geographies.
The Domestic operating segment consists of two U.S. manufacturing facilities,
whose customers include our U.S. distribution subsidiary and certain third party
distributors in the Americas. The International segment consists of our
manufacturing facility in Denmark, whose customers include all of our
distribution subsidiaries and third party distributors outside the Domestic
operating segment. We evaluate segment performance based on Net sales and
Operating income. For the purpose of this Management’s Discussion and Analysis
of Financial Condition and Results of Operations, our Corporate office operating
expenses and certain amounts for goodwill and other assets that are carried at
the holding company level are included in the Domestic operating
segment.
For a
further discussion of factors that could impact operating results, see the
section entitled “Factors That May Affect Future Performance” included within
this section and "Risk Factors" in ITEM 1A, which are incorporated herein
by reference.
Our
long-term goal is to become the world’s largest and most profitable bedding
company. To achieve this goal, we expect to continue to pursue certain key
strategies in 2008:
|
·
|
Maintain
our focus on premium mattresses and pillows and to regularly introduce new
products.
|
|
·
|
Invest
in increasing our global brand awareness through targeted marketing and
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 growing
business, including investments in our research and development
capabilities.
|
Key
financial highlights for 2007 include:
|
·
|
Our
consolidated Net sales rose 17.1% to $1,106.7 million in 2007 from $945.0
million in 2006. Retail channel sales worldwide increased
21.1%. Sales in the Domestic Retail channel increased 20.9%. Sales in the
International Retail channel increased 21.6%. Our Retail channel continues
to be our largest and fastest growing channel and the principal driver of
our growth in recent years.
|
|
·
|
Our
operating income increased $34.8 million or 16.6% to $244.1 million in
2007. Operating income as a percentage of Net sales was 22.1%
for both 2007 and 2006.
|
|
·
|
We
repurchased 11,060,874 shares of our common stock at a total cost of
$319.9 million. These purchases were funded primarily by
increased borrowings under our domestic revolving credit
facility.
|
The following table sets forth the various components of our Consolidated Statements of Income, and expresses each component as a percentage of Net sales:
|
(In
millions, except earnings per share)
|
Year
Ended December 31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Net
sales
|
$
|
1,106.7
|
100.0
|
%
|
$
|
945.0
|
100.0
|
%
|
$
|
836.7
|
100.0
|
%
|
|||||
|
Cost
of sales
|
571.9
|
51.7
|
484.5
|
51.3
|
412.8
|
49.3
|
|||||||||||
|
Gross
profit
|
534.8
|
48.3
|
460.5
|
48.7
|
423.9
|
50.7
|
|||||||||||
|
Selling
and marketing expenses
|
193.5
|
17.5
|
171.8
|
18.2
|
162.8
|
19.5
|
|||||||||||
|
General
and administrative expenses
|
91.2
|
8.2
|
75.7
|
8.0
|
67.8
|
8.1
|
|||||||||||
|
Research
and development expenses
|
6.0
|
0.5
|
3.7
|
0.4
|
2.7
|
0.3
|
|||||||||||
|
Operating
income
|
244.1
|
22.1
|
209.3
|
22.1
|
190.6
|
22.8
|
|||||||||||
|
Interest
expense, net
|
(30.5
|
)
|
(2.8
|
)
|
(23.9
|
)
|
(2.5
|
)
|
(20.3
|
)
|
(2.4
|
)
|
|||||
|
Loss
on extinguishment of debt
|
(0.1
|
)
|
—
|
(10.7
|
)
|
(1.1
|
)
|
(4.2
|
)
|
(0.5
|
)
|
||||||
|
Other
(expense) income, net
|
(0.6
|
)
|
—
|
0.1
|
—
|
0.4
|
—
|
||||||||||
|
Income
before income taxes
|
212.9
|
19.3
|
174.8
|
18.5
|
166.5
|
19.9
|
|||||||||||
|
Income
tax provision
|
71.4
|
6.5
|
62.5
|
6.6
|
67.2
|
8.0
|
|||||||||||
|
Net
income
|
$
|
141.5
|
12.8
|
%
|
$
|
112.3
|
11.9
|
%
|
$
|
99.3
|
11.9
|
%
|
|||||
|
Earnings
per common share:
|
|||||||||||||||||
|
Diluted
|
$
|
1.74
|
$
|
1.28
|
$
|
0.97
|
|||||||||||
|
Weighted
average common shares outstanding:
|
|||||||||||||||||
|
Diluted
|
81.3
|
87.5
|
102.1
|
||||||||||||||
Year
Ended December 31, 2007 Compared with Year Ended December 31, 2006
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. The following table sets forth Net sales information, by
channel:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||||||||
|
($
in millions)
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||
|
Retail
|
$ | 920.0 | $ | 759.8 | $ | 625.9 | $ | 518.0 | $ | 294.1 | $ | 241.8 | ||||||||||||
|
Direct
|
79.7 | 85.5 | 68.8 | 75.2 | 10.9 | 10.3 | ||||||||||||||||||
|
Healthcare
|
50.8 | 45.2 | 15.7 | 12.6 | 35.1 | 32.6 | ||||||||||||||||||
|
Third Party
|
56.2 | 54.5 | 14.9 | 16.0 | 41.3 | 38.5 | ||||||||||||||||||
| $ | 1,106.7 | $ | 945.0 | $ | 725.3 | $ | 621.8 | $ | 381.4 | $ | 323.2 | |||||||||||||
A summary
of Net sales by product is set forth below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||||||||
|
($
in millions)
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||||||||
|
Net
sales:
|
||||||||||||||||||||||||
|
Mattresses
|
$ | 768.6 | $ | 651.9 | $ | 535.8 | $ | 455.7 | $ | 232.8 | $ | 196.2 | ||||||||||||
|
Pillows
|
142.1 | 126.5 | 68.3 | 60.1 | 73.8 | 66.4 | ||||||||||||||||||
|
Other
|
196.0 | 166.6 | 121.2 | 106.0 | 74.8 | 60.6 | ||||||||||||||||||
| $ | 1,106.7 | $ | 945.0 | $ | 725.3 | $ | 621.8 | $ | 381.4 | $ | 323.2 | |||||||||||||
Net sales. Net
sales for the year ended December 31, 2007 increased to $1,106.7 million from
$945.0 million, an increase of $161.7 million, or 17.1%. This increase in Net
sales was primarily attributable to an increase in mattress sales in our Retail
channel. Mattress sales increased $116.6 million or 17.9%. The growth in our
Retail channel reflects our focus on targeted penetration of furniture and
bedding retail stores in both our Domestic and International markets. We also
added new product offerings to our existing line in both our Domestic and
International segments in 2007. In 2008, we plan to introduce several new
mattress and pillow offerings around the world. Our Third party and Healthcare
channels increased 3.0% and 12.5%, respectively, while our Direct channel
decreased 6.7%.
Consolidated
pillow sales increased approximately $15.8 million or 12.5% for the year ended
December 31, 2007 as compared to the year ended December 31, 2006. Consolidated
Other, which includes adjustable bedbases, foundations and other related
products, increased $29.3 million or 17.5%.
Domestic. Domestic Net sales
for the year ended December 31, 2007 increased to $725.3 million from $621.8
million for the same period in 2006, an increase of $103.6 million, or 16.7%.
Our Domestic Retail channel delivered $625.9 million in Net sales for 2007. This
is an increase of $108.0 million, or 20.9% over the prior year. The increase is
primarily due to our efforts to increase productivity in established accounts
and selectively extend our distribution. Domestic mattress sales
increased $80.0 million, or 17.6%, in 2007 as compared to 2006, as a result of
growth in the Retail channel, in conjunction with the successful launch of new
products. In 2007, we introduced two new mattress products, ‘The BellaSonnaBed
by Tempur-PedicTM’ and
‘The SymphonyBed by
Tempur-PedicTM’. Our
Direct channel decreased 8.5% primarily as a result of our Retail channel
expansion. Healthcare increased $3.1 million, or 24.7%, as a result of strategic
relationships with healthcare companies who market joint product offerings
through their established distribution networks. In addition, pillow
sales increased $8.2 million, or 13.7%, as a result of our continued focus on
pillow attach rates, emphasizing the benefits of a complete Tempur-Pedic sleep
system, as well as stand-alone pillow sales. The increase in our Other products
is generally in line with the growth of our mattress business.
International. International
Net sales for the year ended December 31, 2007 increased to $381.4 million from
$323.2 million for the same period in 2006, an increase of $58.1 million,
or 18.0%. The International Retail channel Net sales increased $52.1
million, or 21.6%, for the year ended December 31, 2007 as a result of the
success of new products launched early in 2007 and improved productivity within
existing accounts. Net sales in our Third party channel increased
$2.8 million, an increase of 7.3%. Our Direct and Healthcare channels had Net
sales increases of 6.2% and 7.7%, respectively. International mattress sales
increased $36.6 million, or 18.6%, for 2007, related to growth of our Retail
channel. Pillow sales increased $7.5 million, or 11.4%, as compared to 2006,
attributable to the successful execution of our strategy to focus on pillow
sales. Other product sales increased $14.0 million, or 23.0%, attributable to
increased mattress sales and the success of our Scandinavian bed system. The
Scandinavian bed system is a product offering that is available in multiple
configurations, which include a mattress, a foundation and in some cases, an
adjustable bedbase.
Gross
profit. Gross profit for the year ended December 31, 2007 increased to
$534.8 million from $460.5 million for the same period in 2006, an increase of
$74.3 million, or 16.1%. Gross margin for the year ended December 31, 2007 was
48.3%, as compared to 48.7% in the same period of 2006.
Domestic. Domestic Gross
profit for the year ended December 31, 2007 increased to $316.4 million from
$274.8 million, an increase of $41.6 million, or 15.1%. The Gross profit margin
in our Domestic segment was 43.6% and 44.2% for the years ended 2007 and 2006,
respectively. For the year ended December 31, 2007, the Gross profit margin for
the Domestic segment was impacted by depreciation and start-up costs associated
with the opening of our Albuquerque, New Mexico production facility and the
expediting costs of certain raw materials related to product shortages late in
2007, offset by productivity improvements at our manufacturing facilities. Our
Domestic Cost of sales increased to $408.9 million for the year ended December
31, 2007 as compared to $347.0 million for the year ended December 31, 2006, an
increase of $62.0 million, or 17.9%.
International. International
Gross profit for the year ended December 31, 2007 increased to $218.4 million
from $185.7 million, an increase of $32.7 million, or 17.6%. The Gross profit
margin in our International segment was 57.3% and 57.4% for the years ended 2007
and 2006, respectively. Our International Cost of sales increased to $163.0
million for the year ended December 31, 2007, as compared to $137.6 million for
the year ended December 31, 2006, an increase of $25.4 million, or
18.5%.
Selling and
marketing expenses. Selling and marketing expenses include advertising
and media production associated with our Direct channel, other marketing
materials such as catalogs, brochures, videos, product samples, direct customer
mailings and point of purchase materials, television and cable advertising and
sales force compensation and customer service. 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 increased
to $193.5 million for the year ended December 31, 2007 as compared to $171.8
million for the year ended December 31, 2006, an increase of $21.8 million, or
12.7%. Selling and marketing expenses as a percentage of Net sales decreased to
17.5% during 2007 from 18.2% for 2006. Our objective is to increase advertising
consistent with the growth rate of our Net sales. However during 2007, our
selling and marketing spend grew slower than our Net sales growth as we were
able to leverage the fixed cost component of our selling and marketing expenses.
We launched our new media campaign in the U.S. during 2007. This campaign will
continue to be implemented in the U.S. during 2008. Based on our analysis of the
best ways to reach our target U.S. demographic market, we have begun advertising
on national network television. In addition, we plan to roll out a
similar new media campaign across many of our international markets during 2008.
For the year ended December 31, 2007, we recognized $1.4 million of stock-based
compensation expense as compared to $0.4 million for the same period in
2006.
General and
administrative and Research and development expenses. General and
administrative expenses include management salaries, information technology,
professional fees, depreciation of furniture and fixtures, leasehold
improvements and computer equipment, expenses for finance, accounting, human
resources and other administrative functions. Research and development expenses
include research and development associated with our new product developments.
General and administrative expenses increased to $91.2 million for the year
ended December 31, 2007 as compared to $75.7 million for the year ended December
31, 2006, an increase of $15.5 million, or 20.5%. General and administrative
expenses as a percentage of Net sales increased to 8.2% for the year ended
December 31, 2007 as compared to 8.0% for the same period in 2006. The increase
was primarily attributable to incremental stock-based compensation charges of
$4.5 million and bad debt expenses related to a U.S. customer seeking to
reorganize its operations under Chapter 11 of the Bankruptcy code. In addition,
Research and development expenses increased $2.2 million, or 59.0% for the same
time period, related to our continued investment in research and development
capabilities.
Interest expense,
net. Interest expense, net includes the interest costs associated with
our borrowings and the amortization of deferred financing costs related to those
borrowings. Interest expense, net, increased to $30.5 million for the year ended
December 31, 2007 as compared to $23.9 million for the year ended December 31,
2006, an increase of $6.6 million, or 27.4%. This increase in
interest expense is primarily attributable to higher Long-term debt levels that
are directly related to our share repurchase program. During 2006 we
also capitalized interest costs of $5.2 million related to the construction of
our new manufacturing facility.
Income tax
provision. Income tax provision includes income taxes associated with
taxes currently payable and deferred taxes, and it includes the impact of net
operating losses for certain of our domestic and foreign operations. For the
year ended December 31, 2007, our Income tax provision included a benefit of
$3.8 million related to the elimination of certain valuation allowances for net
operating loss carry forwards in two foreign tax jurisdictions. Our effective
tax rate was 33.6% and 35.7% for the years ended December 31, 2007 and 2006,
respectively. This decrease was primarily related to the elimination of certain
valuation allowances for net operating loss carry forwards in 2007. Our
effective income tax rate for the year ended December 31, 2007 differed from the
federal statutory rate principally due to the elimination of certain valuation
allowances for net operating loss carry forwards, certain foreign tax rate
differentials, state and local income taxes, deemed dividends from foreign
operations and the manufacturing activity deduction. Our effective
income tax rate for the year ended December 31, 2006 differed from the federal
statutory rate principally because of the benefit from the elimination of
certain tax reserves, certain foreign tax rate differentials, state and local
income taxes, valuation allowances on certain foreign net operating losses, and
compensation expense associated with certain stock options granted prior to the
initial public offering.
Year
Ended December 31, 2006 Compared with Year Ended December 31, 2005
The
following table sets forth Net sales information, by channel:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||||||||
|
($
in millions)
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||
|
Retail
|
$ | 759.8 | $ | 639.0 | $ | 518.0 | $ | 426.0 | $ | 241.8 | $ | 213.0 | ||||||||||||
|
Direct
|
85.5 | 103.2 | 75.2 | 88.6 | 10.3 | 14.6 | ||||||||||||||||||
|
Healthcare
|
45.2 | 45.9 | 12.6 | 11.0 | 32.6 | 34.9 | ||||||||||||||||||
|
Third Party
|
54.5 | 48.6 | 16.0 | 10.7 | 38.5 | 37.9 | ||||||||||||||||||
| $ | 945.0 | $ | 836.7 | $ | 621.8 | $ | 536.3 | $ | 323.2 | $ | 300.4 | |||||||||||||
A summary
of Net sales by product is set forth below:
|
CONSOLIDATED
|
DOMESTIC
|
INTERNATIONAL
|
||||||||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||||||||
|
($
in millions)
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||||||
|
Net
sales:
|
||||||||||||||||||||||||
|
Mattresses
|
$ | 651.9 | $ | 566.4 | $ | 455.7 | $ | 392.0 | $ | 196.2 | $ | 174.4 | ||||||||||||
|
Pillows
|
126.5 | 126.2 | 60.1 | 54.0 | 66.4 | 72.2 | ||||||||||||||||||
|
Other
|
166.6 | 144.1 | 106.0 | 90.3 | 60.6 | 53.8 | ||||||||||||||||||
| $ | 945.0 | $ | 836.7 | $ | 621.8 | $ | 536.3 | $ | 323.2 | $ | 300.4 | |||||||||||||
Net sales.
Net sales for the year ended December 31, 2006 increased to $945.0 million from
$836.7 million, an increase of $108.3 million, or 13.0% over the period. This
increase in Net sales was primarily attributable to the continued progress on
several of the key initiatives we put in place to accelerate growth, expand
market share, and improve retail account productivity. The Retail channel
increased $120.8 million, or 18.9% in 2006. The growth in our Retail
channel reflected our focus on targeted penetration of furniture and bedding
retail stores in both our Domestic and International markets. We also added new
product offerings to our existing line in both our Domestic and International
markets in 2006. Our Third party channel increased 12.3% while the Direct and
Healthcare channels decreased 17.2%, and 1.6%, respectively.
The increase in our Third party channel was primarily due to growth in our
Canadian and other third party distributors in our Domestic
segment.
Domestic. Domestic Net sales
for the year ended December 31, 2006 increased to $621.8 million from $536.3
million for the same period in 2005, an increase of $85.5 million, or 15.9%. Our
Domestic Retail channel delivered $518.0 million in Net sales for 2006. This was
an increase of $91.8 million, or 21.6% over the prior year. The increase
represented progress on several of the key initiatives we put in place to
accelerate growth. We improved our account productivity by increasing
sales and average slots per store in our Retail channel in both established and
new accounts, expanded our Retail sales force and introduced new
products. In 2006, we introduced two new mattress products, ‘The
GrandBed by
Tempur-PedicTM’ and
‘The RhapsodyBed by
Tempur-PedicTM’.
Consistent with prior years, in 2006 we increased distribution into new stores,
including the addition of several new Retail accounts. As of December 31, 2006,
our products were sold in approximately 6,050 furniture and bedding retail
stores in the U.S., out of a total of approximately 10,000 stores we have
targeted. Our Third party channel increased 50.2% due to our continued market
share growth in Canada and in certain Central and South American
countries. Our Direct channel decreased 15.0% primarily as a result
of our Retail channel expansion. Healthcare increased $1.6 million, or 14.7%, as
a result of our successful arrangements with leading industry distributors.
Domestic mattress sales in 2006 increased $63.7 million, or 16.3%, over the same
period in 2005 and pillow sales increased $6.1 million, or 11.3%.
International. International
Net sales for the year ended December 31, 2006 increased to $323.2 million from
$300.4 million for the same period in 2005, an increase of $22.8 million,
or 7.6% over the year ended December 31, 2005. The International Retail
channel Net sales increased $29.0 million or 13.6%, for the year ended December
31, 2006. Net sales in our Third party channel increased $0.6
million, an increase of 1.6%. Our Direct and Healthcare channels had Net sales
decreases of 30.0% and 6.7%, respectively. The growth in Retail sales was due to
the addition of new stores to the channel and improved productivity of existing
accounts. The decrease in our Direct channel was primarily related to the
decision to change our Direct sales operation in several European markets in
favor of a modified version of the program that directs potential customers to
our Retail channel. Our Healthcare channel decreased primarily due to changes in
certain countries’ government reimbursement policies. International mattress
sales increased $21.7 million, or 12.4%, for 2006 and pillow sales decreased
$6.0 million, or 8.3%, as compared to 2005.
Gross
profit. Gross profit for the year ended December 31, 2006 increased to
$460.5 million from $423.9 million for the same period in 2005, an increase of
$36.6 million, or 8.6%. Gross margin for the year ended December 31, 2006 was
48.7%, as compared to 50.7% in the same period of 2005. Our margins were
negatively impacted by several factors during the year ended December 31, 2006.
First, our margins were impacted by the growth in our Retail channel because
sales in our Retail channel are generally at wholesale prices. Second, our
overall product mix shifted to mattresses and other products. Our mattresses
generally carry lower margins than our pillows and are sold with lower margin
products such as foundations and bed frames. Third, our gross margin was
negatively impacted by discounted floor models. Finally, increases in raw
material costs impacted our gross margin particularly in the first half of 2006.
However, our productivity and sourcing initiatives largely offset the impact of
these cost increases.
Domestic. Domestic Gross
profit for the year ended December 31, 2006 increased to $274.8 million from
$240.7 million, an increase of $34.1 million, or 14.2% from the year ended
December 31, 2005. The Gross profit margin in our Domestic segment was 44.2% and
44.9% for the years ended December 31, 2006 and 2005, respectively. For the year
ended December 31, 2006, the Gross profit margin for the Domestic segment was
impacted by the increase in our Retail channel sales and the discounting of
floor models related to the introduction of new and refreshed mattress products
and the addition of new Retail customers. These factors were offset by our
ongoing productivity and global sourcing initiatives. Our Domestic
Cost of sales increased to $347.0 million for the year ended December 31, 2006
as compared to $295.6 million for the year ended December 31, 2005, an increase
of $51.4 million, or 17.4%.
International. International
Gross profit for the year ended December 31, 2006 increased to $185.7 million
from $183.2 million, an increase of $2.5 million, or 1.4%. The Gross profit
margin in our International segment was 57.4% and 61.0% for the years ended
December 31, 2006 and 2005, respectively. For the year ended December 31, 2006,
the Gross profit margin for the International segment was impacted by product
and geographic mix. Our International Cost of sales increased to $137.5 million
for the year ended December 31, 2006, as compared to $117.2 million for the year
ended December 31, 2005, an increase of $20.3 million, or 17.3%.
Selling and
marketing expenses. Selling and marketing expenses increased to $171.8
million for the year ended December 31, 2006 as compared to $162.8 million for
the year ended December 31, 2005, an increase of $9.0 million, or 5.5%. Selling
and marketing expenses as a percentage of Net sales decreased to 18.2% during
2006 from 19.5% for 2005. For the year ended December 31, 2006, we recognized
$0.4 million of compensation expense in selling and marketing expenses
associated with the adoption of Statement of Financial Accounting Standards
(SFAS) 123R, “Accounting for Stock Based Compensation” (SFAS 123R). Both total
Selling and marketing expenses and advertising spending decreased as a
percentage of Net sales. Our objective was to increase our
advertising spending at the same rate as our revenue growth. However,
in the third and fourth quarters of 2006, our advertising spending
decreased. This decrease was attributable to the record campaign
spending for the mid-term elections and its impact on available TV advertising
space. Our Retail channel had lower selling expenses than our other channels on
a combined basis and, accordingly, our Selling and marketing expenses as a
percentage of our Net sales were affected by the level of our Retail sales as a
percentage of our Net sales.
General and
administrative and Research and development expenses. General and
administrative expenses increased to $75.7 million for the year ended December
31, 2006 as compared to $67.8 million for the year ended December 31, 2005, an
increase of $7.9 million, or 12.7%. The increase was primarily attributable to
increased investment in our information technology infrastructure, professional
services, share based compensation expense related to the adoption of SFAS 123R,
and research and development. For the year ended December 31, 2006, we
recognized $1.9 million of compensation expense in general and administrative
associated with the adoption of SFAS 123R. General and administrative and other
expenses as a percentage of Net sales remained relatively flat for the year
ended December 31, 2006 compared to the same period in 2005. General and
administrative and Research expenses as a percentage of Net sales decreased to
8.0% for the year ended December 31, 2006 as compared to 8.1% for the same
period in 2005. In addition, Research and development expenses increased $1.0
million, or 38.3% for the same time period, related to our continued investment
in research and development capabilities.
Interest expense,
net. Interest expense, net, increased to $23.9 million for the year ended
December 31, 2006 as compared to $20.3 million for the year ended December 31,
2005, an increase of $3.7 million, or 18.0%. This increase in interest expense
was primarily attributable to higher Long-term debt levels that were directly
related to our share repurchase program. During 2006 we also
capitalized interest costs of $5.2 million related to the construction of our
new manufacturing facility which offset our increased interest
expenses.
Loss on debt
extinguishment. Loss on debt extinguishment for the year ended December
31, 2006 was $10.7 million. Of that loss, $7.6 million relates to the
early retirement premium associated with the full redemption of our 2003 Senior
Subordinated Notes in December 2006 and non-cash write-off of $3.1 million in
deferred financing charges. Loss on debt extinguishment for the year
ended December 31, 2005 was $4.2 million and relates to recapitalization of
our Senior Secured Credit Facility.
Income tax
provision. Our Income tax provision includes income taxes associated with
taxes currently payable and deferred taxes, and it includes the impact of net
operating losses for certain of our domestic and foreign operations. For the
year ended December 31, 2006, our Income tax provision also included a benefit
of $3.1 million related to a favorable foreign tax ruling affecting certain tax
reserves. Our effective income tax rate for the year ended December
31, 2006 differed from the federal statutory rate principally because of the
benefit from the elimination of certain tax reserves, certain foreign tax rate
differentials, state and local income taxes, valuation allowances on certain
foreign net operating losses, and compensation expense associated with certain
stock options granted prior to the initial public offering. Our
effective income tax rate for the year ended December 31, 2005 differed from the
federal statutory rate principally because of the effect of the charge for the
foreign repatriation, the benefit from a favorable state tax ruling, certain
foreign tax rate differentials, state and local income taxes, valuation
allowances on certain foreign net operating losses, and compensation expense
associated with certain stock options granted prior to the initial public
offering.
28
Our effective
tax rate for the year ended December 31, 2006 was 35.7%. Excluding
the impact of the tax reserve benefit described above, our effective tax rate
would have been 37.5% for the year ended December 31, 2006. For the same period
in 2005, the effective tax rate was 40.3%. Excluding the effects of
the foreign repatriation and favorable state tax ruling our effective rate would
have been 37.3% for the year ended December 31, 2005.
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 and share repurchases made from time to time pursuant to a
share repurchase program. At December 31, 2007, we had working capital of $200.0
million including Cash and cash equivalents of $33.3 million as compared to
working capital of $105.8 million including $15.8 million in Cash and cash
equivalents as of December 31, 2006. Working capital increased 89.1%
for the year ended December 31, 2007 compared to the same period in 2006,
primarily related to the increase in Accounts receivable and
Inventories.
Our cash
flow from operations decreased to $126.4 million for the year ended December 31,
2007 as compared to $165.8 million for the year ended December 31, 2006. The
decrease in operating cash flows was primarily related to increases in our
inventory levels. The increase in our inventory levels resulted in a decrease in
operating cash flows of $59.5 million for the year ended December 31, 2007 as
compared to the same period in 2006. Inventory for the year ended December
31, 2007 was impacted by four primary factors. During the fourth quarter of 2006
we experienced product shortages of certain offerings which resulted in lower
than expected inventories. Secondly, during 2007 our New Mexico plant began
manufacturing, which resulted in incremental raw material and work in process at
this facility. In addition as we experienced product shortages during the third
quarter of 2007, we decided to carry more raw material inventories to limit the
possibilities of shortages for customer service reasons. Finally, we will
be launching the ‘TEMPUR Advanced Ergo System™’ in the first quarter of 2008.
With this launch we are carrying incremental inventories in advance of the new
product launch. For 2008 we expect inventory to decrease as compared to December
31, 2007. Accordingly, inventory will be a source of cash from operations in
2008.
Net cash
used in investing activities decreased to $22.9 million for the year ended
December 31, 2007 as compared to $37.9 million for the year ended December 31,
2006, a decrease of $15.0 million. Investing activities in the year ended
December 31, 2007 were significantly less than the year ended December 31, 2006,
as we completed the construction phase of the Albuquerque, New Mexico plant in
the fourth quarter of 2006. Cash flows related to capital expenditures decreased
$21.0 million between 2006 to 2007.
Cash flow
used by financing activities was $87.6 million for the year ended December 31,
2007 as compared to $132.5 million for the year ended December 31, 2006,
representing a decrease in cash flow used of $44.8 million. The decrease is
primarily related to three factors. We had increased borrowings, net of
repayments, in 2007 of $239.4 million as compared to 2006. This source of cash
was offset by $175.9 million in additional Treasury stock purchases in 2007 as
compared to 2006. In addition, we paid $23.8 million of dividends to our
shareholders under our new dividend program, which started in 2007. Our Board of
Directors has declared a first quarter dividend for 2008 of $0.08 per common
share and we currently expect our 2008 dividends to be paid quarterly at $0.08
per common share.
Capital
Expenditures
Capital
expenditures totaled $16.1 million for year ended December 31,
2007. Capital expenditures totaled $37.2 million for the year ended
December 31, 2006, including $5.2 million in capitalized interest costs related
to the construction of our Albuquerque, New Mexico manufacturing facility. We
currently expect our 2008 capital expenditures to be approximately $20.0
million.
In order
to meet anticipated future demands for our products, we built a third
manufacturing facility in Albuquerque, New Mexico. Construction on this
facility began in September 2004 and was completed in the fourth quarter of
2006. We successfully completed qualifying and testing on our new facility
during the fourth quarter of 2006. In January 2007, we began mattress
production. Our total capital expenditures related to this facility were
approximately $100.0 million. This facility allows us to meet the demand for our
products, primarily in the western U.S. but also with certain third party
distributors.
Debt
Service
Secured Credit Financing— On October 18, 2005,
we entered into a credit agreement (2005 Senior Credit Facility) with a
syndicate of banks. On February 8, 2006 and on December 13, 2006, we entered
into amendments to our 2005 Senior Credit Facility, which increased
availability, adjusted one financial covenant and added an option to increase
our Domestic Revolver by an additional $50.0 million at our discretion. On
February 22, 2007, we exercised the option to increase our Domestic Revolver by
an additional $50.0 million. On June 8, 2007, we entered into an amendment to
our 2005 Senior Credit Facility (Amendment No. 3), which increased availability,
extinguished our foreign term loan, eliminated the requirement to reduce our
domestic revolver commitment by $3.0 million each quarter, added an option to
increase our Domestic Revolver by an additional $100.0 million, eliminated the
quarterly redemption of our Industrial Revenue Bonds (as defined below) and
adjusted certain covenants. In addition, the maturity date of the 2005 Senior
Credit Facility was extended from October 18, 2010 to June 8, 2012. In
conjunction with Amendment No. 3, we wrote-off $0.1 million of deferred
financing fees which were previously capitalized. On August 6, 2007, we
exercised the option to increase our Domestic Revolver by an additional $100.0
million.
The 2005
Senior Credit Facility, as amended, consists of domestic and foreign credit
facilities that provide for the incurrence of indebtedness up to an aggregate
principal amount of $640.0 million. The domestic credit facility is a five-year,
$615.0 million revolving credit facility (Domestic Revolver). The foreign credit
facility is a five-year $25.0 million 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 is defined as the higher of either the
Bank of America prime rate or the Federal Funds rate plus .50%. We also pay an
annual facility fee on the total amount of the 2005 Senior Credit
Facility. The facility fee is calculated based on the consolidated
leverage ratio and ranges from .125% to .25%.
The 2005
Senior Credit Facility is guaranteed by Tempur-Pedic International, as well as
certain 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 us, including a consolidated interest
coverage ratio and a consolidated leverage ratio. We were in compliance with all
covenants as of December 31, 2007.
At December
31, 2007, we had a total of $640.0 million of long-term revolving credit
facilities under the 2005 Senior Credit Facility, which was comprised of the
$615.0 million Domestic Revolver and the $25.0 million Foreign Revolver
(collectively, the Revolvers). The Revolvers provide for the issuance of letters
of credit which, when issued, constitute usage and reduce availability under the
Revolvers. The aggregate amount of letters of credit outstanding under the
Revolvers was $66.0 million at December 31, 2007. After giving effect to
letters of credit and $543.0 million in borrowings under the Domestic Revolver,
total availability under the Revolvers was $31.0 million at December 31,
2007.
Industrial Revenue Bonds— On
October 27, 2005, Tempur Production USA, Inc., one of our subsidiaries,
completed an industrial revenue bond financing for the construction and
equipping of our new manufacturing facility (the Project) located in Bernalillo
County, New Mexico. Under the terms of the financing, Bernalillo
County was to issue up to $75.0 million of Series 2005A Taxable Variable Rate
Industrial Revenue Bonds (the Series A Bonds). The Series A Bonds are
marketed to third party qualified investors by a remarketing agent and secured
by a letter of credit issued under the Company’s Domestic Revolver. The Series A
Bonds have a final maturity date of September 1, 2030. The interest
rate on the Series A Bonds is a weekly rate set by the remarketing agent, in its
sole discretion, though the interest rate may not exceed the lesser of the
highest rate allowed under New Mexico law or 12% per annum. On
October 27, 2005, Tempur Production made an initial draw of $53.9 million on the
Series A Bonds. On June 1, 2007, we executed an additional advance of
$15.4 million on the Series A Bonds. Upon completion of this draw, we had a
total of $59.7 million outstanding under the Series A Bonds. We used proceeds
from the Bonds to pay down the Domestic Revolver, among other things. No further
advances are expected by us under the Series A Bonds.
30
Bernalillo
County also agreed to issue up to $25.0 million of 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,
are not secured by the letter of credit described above, and will be held by
Tempur World, LLC, representing our equity in the Project. The 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%. On October 27, 2005, Tempur Production
made an initial draw of $18.0 million under the Series B Bonds, which was
transferred to and used by Tempur World LLC to purchase Series B Bonds. On June
1, 2007, we requested an additional advance of $5.1 million on the Series B
Bonds. Proceeds of this draw were transferred to and used by Tempur World, LLC
to purchase the additional Series B Bonds. Upon completion of this draw, we had
a total of $23.1 million outstanding under the Series B Bond with an offsetting
investment in the Series B Bonds in the same amount. No further advances are
expected by us under the Series B Bonds. We have a legal right to offset the
Series B Bonds against our investment in the Series B Bonds, and accordingly,
the amounts have been recorded net in the accompanying Consolidated Balance
Sheets.
On October
27, 2005, Tempur Production transferred its interest in the Project to
Bernalillo County, and Bernalillo County leased the Project back to Tempur
Production on a long-term basis with the right to purchase the Project for one
dollar when the Bonds are retired. Pursuant to the lease agreement,
Tempur Production will pay rent to Bernalillo County in an amount sufficient to
pay debt service on the Bonds and certain fees and expenses. The
Bonds are not general obligations of Bernalillo County, but are special, limited
obligations payable solely from bond proceeds, rent paid by Tempur Production
under the lease agreement, and other revenues. The substance of the
transaction is that Bernalillo County issued the Bonds on behalf of Tempur
Production. Therefore, we have recorded the obligation as long-term
debt of $57.8 million in our Consolidated Balance Sheet as of December 31,
2007.
Stockholders’
Equity
Initial Public
Offering— In December 2003, we raised $87.5 million from the initial
public offering of 6,250,000 shares of common stock at a price to the public of
$14.00 per common share, all of which shares were issued and sold by us. Net
proceeds, after deducting underwriting discounts and commissions, of $79.0
million were received by us and invested in short-term, investment-grade,
interest-bearing instruments. In connection with the initial public offering,
certain of our stockholders also sold 15,312,500 shares of common stock,
including 2,812,500 shares pursuant to the underwriters’ exercise in full of
their over-allotment option, for net proceeds of $200.4 million. We did not
receive any proceeds from the sale of shares by the selling stockholders. We
used a portion of the proceeds from the initial public offering to redeem $52.5
million of Senior Subordinated Notes and to repay approximately $18.7 million of
indebtedness under our 2003 Senior Credit Facility. In conjunction with the
January 23, 2004 redemption of the Senior Subordinated Notes, we reflected the
$5.4 million redemption premium as a Loss on debt extinguishment in the first
quarter of 2004. Total offering expenses were approximately $8.6
million.
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 3,840,485
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. As of
September 30, 2007, we have repurchased 6,561,489 shares of our common stock for
approximately $200.0 million from the July 2007 authorization and have completed
purchases from the July authorization. On October 16, 2007, our Board of
Directors authorized an additional share repurchase authorization of up to
$300.0 million of our common stock. Share repurchases under this program may be
made through open market transactions, negotiated purchases or otherwise, at
times and in such amounts as we deemed appropriate. This share repurchase
program may be suspended, limited or terminated at any time without
notice. As of February 22, 2008, we have repurchased 658,900 shares
under this authorization for a total of $19.9 million.
On
October 18, 2005, our Board of Directors authorized the repurchase of up to
$80.0 million of our common stock. Share repurchases under this program were
made through open market transactions, negotiated purchases or otherwise, at
times and in such amounts as we deemed appropriate. During 2005, we
repurchased 6,839,900 shares, at a total cost of $76.0 million. We funded these
share repurchases from borrowings under the 2005 Senior Credit Facility and
funds from operations. On January 25, 2006, our Board of Directors amended the
share repurchase program described above to increase the total authorization by
an additional $100.0 million. On May 22, 2006, our Board of Directors
further amended the share repurchase program to increase the total authorization
under the share repurchase program by an additional $40.0 million for a total
authorization to purchase up to $220.0 million of Tempur-Pedic
International Inc.’s common stock. During 2006, we repurchased
11,275,124 shares at a total cost of $144.0 million. As of December
31, 2006, we had completed the existing share repurchase authorization. The
share repurchases were funded from borrowings under the 2005 Senior Credit
Facility and funds from operations.
Dividend Program— In the
first quarter of 2007, our Board of Directors approved an annual cash dividend
of $0.24 per common share annually, to be paid in quarterly installments to the
owners of our common stock. In the second quarter of 2007, our Board of
Directors increased the quarterly dividend to $0.08 per common share. Our Board
declared a first quarter dividend of $0.08 per common share that will be
distributed on March 14, 2008 to stockholders of record as of February 27, 2008.
This annual cash dividend program may be limited, suspended, or terminated at
any time without prior notice. We had never previously declared a
cash dividend for our common stock prior to the 2007 dividend.
Future
Liquidity Sources
Our
primary sources of liquidity are cash flow from operations and borrowings under
our Revolvers. We expect that ongoing requirements for debt service and capital
expenditures will be funded from these sources. As of December 31, 2007, we had
$601.8 million in total Long-term debt outstanding, and our Stockholders’ Equity
was $48.1 million. Our debt service obligations could, under certain
circumstances, have material consequences to our security holders. Total cash
interest payments related to our borrowings are expected to be approximately
$35.1 million in 2008.
Based
upon the current level of operations and anticipated growth, we believe that
cash generated from operations and amounts available under our Revolvers will be
adequate to meet our anticipated debt service requirements, capital
expenditures, share repurchases, dividend payments and working capital needs for
the foreseeable future. There can be no assurance, however, that our business
will generate sufficient cash flow from operations or that future borrowings
will be available under our 2005 Senior Credit Facility or otherwise enable us
to service our indebtedness or to make anticipated capital
expenditures.
Contractual
Obligations
Our
contractual obligations and other commercial commitments as of December 31, 2007
are summarized below:
|
Payment
Due By Period
|
||||||||||||||||||||||||||||
|
Contractual
Obligations
($
in millions)
|
2008
|
2009
|
2010
|
2011
|
2012
|
After
2012
|
Total
Obligations
|
|||||||||||||||||||||
|
Long-term
debt
|
$ | 0.3 | $ | 0.2 | $ | 0.2 | $ | 0.1 | $ | 543.1 | $ | 58.1, | $ | 602.0 | ||||||||||||||
|
Interest
payments (1)
|
35.1 | 35.1 | 35.1 | 35.1 | 29.8 | 9.7 | 179.9 | |||||||||||||||||||||
|
Operating
leases
|
4.7 | 4.4 | 4.2 | 4.0 | 3.4 | 5.1 | 25.8 | |||||||||||||||||||||
|
Total
|
$ | 40.1 | $ | 39.7 | $ | 39.5 | $ | 39.2 | $ | 576.3 | $ | 72.9 | $ | 807.7 | ||||||||||||||
|
|
(1) Represents
interest payments under our debt agreements outstanding as of December 31,
2007, all of which are subject to variable interest rates. Interest
payments were calculated using assumed variable interest rates ranging
from 5.61% to 5.86% (based on rates effective as of December 31, 2007).
Interest rates are based on LIBOR plus applicable margin, except for the
IRB debt which is a weekly rate set by the remarketing agent. The actual
interest rates on the variable indebtedness incurred and the amount of our
indebtedness could vary from those used to compute the above interest
payment.
|
Managing Growth—We have grown
rapidly, with our Net sales increasing from $221.5 million in 2001 to $1,106.7
million in 2007. Our growth has placed, and will continue to place, a strain on
our management, production, product distribution network, information systems
and other resources. In response to these challenges, management has continued
to invest in increased production capacity, enhanced operating and financial
infrastructure and information systems and continued expansion of the human
resources in our operations. Our expenditures for advertising and other
marketing-related activities are made as advertising rates are favorable to us
and as the continued growth in the business allows us the ability to invest in
building our brand.
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. Overall product mix impacts 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 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, television infomercials and catalogs.
Our
largest competitors have significant financial, marketing and manufacturing
resources and strong brand name recognition, and sell their products through
broad and well established distribution channels. Additionally, we believe that
a number of our significant competitors offer mattress products claimed to be
similar to our TEMPUR®
mattresses and pillows. We provide strong channel profits to our retailers and
distributors which management believes will continue to provide an attractive
business model for our retailers and discourage them from carrying competing
lower-priced products.
Significant Growth
Opportunities—We believe there are significant opportunities to take
market share from the innerspring mattress industry as well as other sleep
surfaces. Our market share of the overall mattress industry is relatively small
in terms of both dollars and units, which we believe provides us with a
significant opportunity for growth. By 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 than the overall mattress industry and we believe we will continue to
experience the benefits of this consumer adoption.
In
addition, by expanding distribution within our existing accounts, we believe we
have the opportunity to grow our business by expanding our sales force as
necessary and extending our product line. Expansion gives our salespeople fewer
stores to call on, resulting in more time spent with each retail location so
they can work with them on merchandising, training and educating retail
associates about the benefits of our products. Additionally, 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.
Expanding
distribution into new stores is also a source of growth opportunities. Our
products are currently sold in approximately 6,350 furniture and bedding retail
stores in the U.S., out of a total of approximately 10,000 stores we have
identified as appropriate targets. Within this addressable market, our plan is
to increase our total penetration to a total of 7,000 to 8,000 over time. Our
products are also sold in approximately 4,990 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 recently begun
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
December 31, 2007, we had $601.8 million of Long-term debt outstanding, and our
Stockholders’ Equity was $48.1 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 growth resulting from volume
and price, productivity improvements and cost containment activities will enable
us to continue to de-leverage. There can be no assurance, however, that our
business will generate sufficient cash flow from operations or that future
borrowings will be available under our 2005 Senior Credit Facility.
Exchange Rates—As a
multinational company, we conduct our business in a wide variety of currencies
and are therefore subject to market risk for changes in foreign exchange rates.
We use foreign exchange forward contracts to manage a portion of the exposure to
the risk of the eventual net cash inflows and outflows resulting from foreign
currency denominated transactions between Tempur-Pedic International
subsidiaries and their customers and suppliers, as well as between the
Tempur-Pedic International subsidiaries themselves. These hedging transactions
may not succeed in managing our foreign currency exchange rate
risk.
Foreign
currency exchange rate movements also create a degree of risk by affecting the
U.S. dollar value of sales made and costs incurred in foreign currencies. We do
not enter into hedging transactions to hedge this risk. Consequently,
our reported earnings and financial position could fluctuate materially as a
result of foreign exchange gains or losses. Our outlook assumes no significant
changes in currency values from current rates. Should currency rates change
sharply, our results could be negatively impacted. See “ITEM 7A. Quantitative
and Qualitative Disclosures About Market Risk—Foreign Currency Exposures” under
Part II of this report.
Our
management is responsible for our financial statements and has evaluated the
accounting policies to be used in their preparation. Our management believes
these policies are reasonable and appropriate. The following discussion
identifies those accounting policies that we believe are critical in the
preparation of our financial statements, the judgments and uncertainties
affecting the application of those policies and the possibility that materially
different amounts will be reported under different conditions or using different
assumptions.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires that management make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
commitments and contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Our
actual results could differ from those estimates.
Revenue Recognition—Our
estimates of sales returns are a critical component of our revenue recognition.
We recognize sales, net of estimated returns, when we ship our products to
customers and the risks and rewards of ownership are transferred to them.
Estimated sales returns are provided at the time of sale, based on our level of
historical sales returns. We allow returns for up to 120 days following a sale,
depending on the channel and promotion. Our level of sales returns differs by
channel, with our Direct channel typically experiencing the highest rate of
returns. Our level of returns has been consistent with our estimates and has
been improving steadily over the last year as our Retail channel, which
experiences lower returns than other sales channels, continues to grow as a
percentage of overall Net sales.
Warranties—Cost of sales
includes estimated costs to service warranty claims of our customers. Our
estimate is based on our historical claims experience and extensive product
testing that we perform from time to time. We provide a 20-year warranty for
U.S. sales and a 15-year warranty for non-U.S. sales on mattresses, each
prorated for the last 10 years. Because our products have not been in use by our
customers for the full warranty period, we rely on the combination of historical
experience and product testing for the development of our estimate for warranty
claims. Our estimate of warranty claims could be adversely affected if our
historical experience differs materially from the performance of the product in
our product testing. We also provide 2-year to 3-year warranties on pillows.
Estimated future obligations related to these products are provided by charges
to operations in the period in which the related revenue is
recognized.
Impairment of Goodwill, Intangibles
and Long-Lived
Assets— In accordance with Statement of Financial Accounting
Standards (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 of the asset to the estimated future
discounted net cash flows expected to be generated by the asset. If estimated
future discounted net cash flows are less than the carrying amount of the asset
or group of assets, the asset is considered impaired and an expense is recorded
in an amount required to reduce the carrying amount of the asset to its then
fair value. Although we believe that our estimates of cash flows in our
application of SFAS 144 are reasonable, and based upon all available
information, including historical cash flow data about the prior use of our
assets, such estimates nevertheless require substantial judgments and are based
upon material assumptions about future events.
Goodwill
reflected in our Consolidated Balance Sheets consists of the purchase price from
the acquisition of Tempur World, Inc. in November 2002 (the Tempur Acquisition)
in excess of the estimated fair values of identifiable net assets as of the date
of the Tempur Acquisition and subsequent acquisitions of certain Third party
distributors. Intangibles consist of trademarks for various brands under which
our products are sold. Other intangibles include our customer database for our
direct channel, process technology and the formulation of our pressure-relieving
TEMPUR®
material.
We follow
SFAS 142, “Goodwill and Other Intangible Assets”. SFAS 142 requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values and reviewed for
impairment in accordance with SFAS 144. If facts and circumstances lead our
management to believe that one of our other amortized intangible assets may
be impaired, we will evaluate the extent to which the related cost is
recoverable by comparing the future undiscounted cash flows estimated to be
associated with that asset to the asset’s carrying amount and write-down that
carrying amount to fair value to the extent necessary. We perform an annual
impairment test on all existing goodwill and other indefinite lived assets in
the fourth quarter of each year. We performed the annual impairment test in the
fourth quarter of 2007 and no indicators of impairment as of December 31, 2007.
If facts and circumstances lead us to believe goodwill or other indefinite lived
assets may be impaired, we will evaluate the extent to which the related
cost is recoverable by comparing the future undiscounted cash flows estimated to
be associated with that asset to the asset’s carrying amount and write-down that
carrying amount to fair value to the extent necessary. Although we believe
our estimates and judgments are reasonable, different assumptions and judgments
could result in different impairment, if any, of some or all of our recorded
Goodwill and indefinite-lived intangibles of $267.0 million as of December 31,
2007 and $269.0 million as of December 31, 2006.
Income Taxes — Income taxes
are accounted for in accordance with SFAS 109, “Accounting for Income Taxes.”
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities. These deferred taxes are
measured by applying the provisions of tax laws in effect at the balance sheet
date.
We
recognize deferred tax assets in our Consolidated Balance Sheets, and these
deferred tax assets typically represent items deducted currently from operating
income in the financial statements that will be deducted in future periods in
tax returns. In accordance with SFAS 109, a valuation allowance is recorded
against these deferred tax assets to reduce the total deferred tax assets to an
amount that will, more likely than not, be realized in future periods. The
valuation allowance is based, in part, on our estimate of future taxable income,
the expected utilization of tax loss carryforwards, both domestic and foreign,
and the expiration dates of tax loss carryforwards. Significant assumptions are
used in developing the analysis of future taxable income for purposes of
determining the valuation allowance for deferred tax assets which, in our
opinion, are reasonable under the circumstances.
In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of SFAS
No. 109” (FIN 48), which clarifies the accounting and disclosure requirements
for uncertainty in tax positions, as defined. The Company adopted the provisions
of FIN 48 effective January 1, 2007. See “ITEM 8. Financial Statements and
Supplementary Data – Note 9 in the Notes to the Consolidated Financial
Statements” in Part II of this report for further discussion of our adoption of
FIN 48.
Our
consolidated effective income tax rate and related tax reserves are subject to
uncertainties in the application of complex tax regulations from numerous tax
jurisdictions around the world. We recognize liabilities for anticipated
taxes in the U.S. and other tax jurisdictions based on our estimate of whether,
and the extent to which, taxes are and could be due as required by FIN 48,
Accounting for Uncertainty in Income Taxes. While it is often difficult to
predict the final outcome or the timing of the resolution of any particular tax
matter, we believe that our reserves reflect the likely outcome of known tax
contingencies. The resolution of tax matters for an amount that is
different than the amount reserved would be recognized in our effective income
tax rate during the period in which such resolution occurs.
Stock-Based
Compensation— In December 2004, the FASB issued SFAS 123R,
“Share-Based Payment” (SFAS 123R), which is a revision of SFAS 123, “Accounting
for Stock Based Compensation” (SFAS 123). SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. Pro
forma disclosure is no longer an alternative to financial statement recognition.
We adopted SFAS 123R on January 1, 2006 using the modified prospective
method for the transition. See “ITEM 8. Financial Statements and Supplementary
Data –
Note 1 in the Notes to Consolidated Financial Statements” in Part II of this
report for further discussion of our adoption of SFAS 123R.
See “ITEM
8. Financial Statements and Supplementary Data – Note 2 of the
Notes to Consolidated Financial Statements” in Part II of this report for a full
description of recent accounting pronouncements, including the expected dates of
adoption and estimated effects on results of operations and financial condition,
which is incorporated herein by reference.
Our
earnings, as a result of our global operating and financing activities, are
exposed to changes in foreign currency exchange rates, which may adversely
affect our results of operations and financial position. Our 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 the potential loss in fair
value on foreign currency forward contracts outstanding at December 31, 2007,
resulting from a hypothetical 10% adverse change in all foreign currency
exchange rates against the U.S. dollar, is approximately $0.5
million. Such losses would be largely offset by gains from the
revaluation or settlement of the underlying assets and liabilities that are
being protected by the foreign currency forward contracts.
We do not apply hedge accounting to the
foreign currency forward contracts used to offset currency-related changes in
the fair value of foreign currency denominated assets and liabilities. These
contracts are marked-to-market through earnings at the same time that the
exposed assets and liabilities are remeasured through earnings.
We are
exposed to changes in interest rates. Our 2005 Senior Credit Facility and the
Series A Bonds issued in connection with our New Mexico facility are
variable-rate debt.
Interest
rate changes generally do not affect the market value of such debt but do impact
the amount of our interest payments and therefore, our future earnings and cash
flows, assuming other factors are held constant. On December 31, 2007, we had
variable-rate debt of approximately $600.8 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
$6.0 million.
The
financial statements required by this item are included in Part IV, ITEM 15 of
this report and are presented beginning on page F-1.
None.
An
evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief 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, as of the end of the period covered by this report. Based on that
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures were
effective as of December 31, 2007 and designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended. Our internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance of achieving
their control objectives.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in
Internal Control—Integrated Framework. Based on our assessment and those
criteria, management believes that we maintained effective internal control over
financial reporting as of December 31, 2007.
Our
independent registered public accounting firm, Ernst & Young LLP, has issued
a report on the Company’s internal control over financial reporting as of
December 31, 2007. That report appears on page 38 of this
report.
There
have not been any changes in our internal control over financial reporting
during the quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
The
Board of Directors and Shareholders of Tempur-Pedic International Inc. and
Subsidiaries
We have
audited Tempur-Pedic International Inc. and Subsidiaries’ internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Tempur-Pedic
International Inc. and Subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying “Management’s Annual Report on Internal Control Over Financial
Reporting.” Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Tempur-Pedic International Inc. and Subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Tempur-Pedic
International Inc. and Subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2007 and our report
dated February 14, 2008 expressed an unqualified opinion thereon.
Louisville,
Kentucky
February
14, 2008
None.
PART
III
Code
of Ethics
We have
adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b)
of Regulation S-K. The Code applies to our employees, executive officers and
directors. Our Code of Business Conduct and Ethics is publicly available on our
website at investor.tempurpedic.com.
If we
make substantive amendments to our Code of Business Conduct and Ethics or grant
any waiver, including any implicit waiver, we will disclose the nature of such
amendment or waiver on our website or in a report on Form 8-K within four
business days of such amendment or waiver.
Audit
Committee Financial Expert
The
information required by this Item is incorporated herein by reference from our
definitive proxy statement for the 2008 Annual Meeting of Stockholders (the
Proxy Statement) under the sections entitled “Proposal One—Election of
Directors,” and “Board of Directors’ Meetings, Committees of the Board and
Related Matters—Committees of the Board.”
Information
relating to executive officers is set forth in Part I of this report following
ITEM 1 under the caption “Executive Officers of the Registrant.” The other
information required by this Item is incorporated herein by reference from the
Proxy Statement under the sections entitled “Proposal One—Election of
Directors,” “Board of Directors’ Meetings, Committees of the Board and Related
Matters—Committees of the Board,” “Corporate Governance” and “Executive
Compensation and Related Information.”
NYSE Certification
As
required by Section 303A.12(a) of the New York Stock Exchange Listed Company
Manual, we have filed our 2006 Domestic Company Section 303A Annual CEO
Certification with the New York Stock Exchange and there were no
qualifications. This certifies that our Chief Executive Officer is not
aware of any violation by the Company of the NYSE corporate governance listing
standards. We also filed our Sarbanes-Oxley Section 302 Certifications
regarding the quality of the Company's public disclosure with this Form 10-K and
with our Form 10-K for the period ended December 31, 2006.
Information appearing under the captions “Nominees to Board of
Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership
Reporting Compliance” contained in the 2008 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATIONThe
information required by this Item is incorporated by reference from the Proxy
Statement under the sections entitled “Executive Compensation and Related
Information.”
The
information required by this Item is incorporated by reference from the Proxy
Statement under the section entitled “Principal Security Ownership and Certain
Beneficial Owners” and “Equity Compensation Plan Information.”
The
information required by this Item is incorporated by reference from the Proxy
Statement under the section entitled “Executive Compensation and Related
Information—Certain Relationships and Related Transactions.”
The
information required by this Item is incorporated by reference from the Proxy
Statement under the sections entitled “Proposal Two— Ratification of Independent
Auditors —Fees for Independent Auditors During Fiscal Year Ended December 31,
2007” and “—Policy on Audit Committee Pre-Approval of Audit and Non-Audit
Services of Independent Auditor.”
PART
IV
(a)
|
1.
|
Financial
statements:
|
|
| Report of Ernst & Young LLP, Independent Registered Public Accounting Firm | ||
| Consolidated Statements of Income for the years ended December 31, 2007, 2006, and 2005 | ||
| Consolidated Balance Sheets as of December 31, 2007 and 2006 | ||
| Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006, and 2005 | ||
| Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005 | ||
| Notes to Consolidated Financial Statements | ||
|
2.
|
Financial
Statement Schedule:
|
|
| Schedule II - Valuation of Qualifying Accounts and Reserves | ||
|
|
|
|
All other
schedules have been omitted because they are inapplicable, not required, or the
information is included elsewhere in the consolidated financial statements or
notes thereto.
| 3. |
Exhbits:
|
|
The
following is an index of the exhibits included in this report or incorporated
herein by reference.
EXHIBIT
INDEX
|
2.1
|
Agreement
and Plan of Merger dated as of October 4, 2002, among Fagerdala Holding
B.V., Fagerdala Industri A.B., Chesterfield Properties Limited, Viking
Investments S.a.r.l., Robert B. Trussell, Jr., David C. Fogg, Jeffrey
P. Heath, H. Thomas Bryant, Tempur-Pedic International Inc., TWI
Acquisition Corp. and Tempur World, Inc. (13)
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of Tempur-Pedic International
Inc. (2)
|
|
|
3.2
|
Second
Amended and Restated By-laws of Tempur-Pedic International Inc. (16)
|
|
|
4.1
|
Specimen
certificate for shares of common stock. (2)
|
|
|
10.1
|
Credit
Agreement, dated as of October 18, 2005, among Tempur-Pedic, Inc., Tempur
Production USA, Inc., Dan-Foam ApS, certain other subsidiaries of
Tempur-Pedic International, Inc., Banc of America, N.A., as administrative
agent, Nordea Bank Denmark A/S, Suntrust Bank, and Fifth Third Bank.(11)
|
|
|
10.2
|
Amendment
No 1 to Credit Agreement, dated as of February 8, 2006, among
Tempur-Pedic, Inc., Tempur Production USA, Inc., Dan-Foam ApS, certain
other subsidiaries of Tempur-Pedic International, Inc., Banc of America,
N.A., as administrative agent, Nordea Bank Denmark A/S, Suntrust Bank, and
Fifth Third Bank.(12)
|
|
|
10.3
|
Amendment
No. 2 to Credit Agreement dated as of December 13, 2006, among
Tempur-Pedic, Inc., Tempur Production USA, Inc., Dan-Foam ApS,
Tempur-Pedic International, Inc., Tempur World LLC, and Tempur World
Holdings, LLC and certain other subsidiaries as guarantors, Bank of
America, N.A., Nordea Bank Danmark A/S, Fifth Third Bank, SunTrust Bank,
JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (15)
|
|
|
10.4
|
Trust
Indenture, dated September 1, 2005, by and between Bernalillo County and
The Bank of New York Trust Company, N.A., as Trustee.(11)
|
|
|
10.5
|
Lease
Agreement, dated September 1, 2005, by and between Bernalillo County and
Tempur Production USA, Inc.(11)
|
|
|
10.6
|
Bond
Purchase Agreement, dated October 26, 2005, by and among Banc of America
Securities LLC, Tempur Production USA, Inc. and Bernalillo County.(11)
|
|
|
10.7
|
Bond
Purchase Agreement, dated October 26, 2005, by and among Tempur World LLC,
Tempur Production USA, Inc. and Bernalillo County.(11)
|
| 10.8 |
Remarketing
and Interest Services Agreement, dated September 1, 2005, by and between
Tempur Production USA, Inc. and Banc of America Securities LLC.(11)
|
|
|
10.9
|
Mortgage,
Assignment, Security Agreement and Fixture Filing, dated as of October 27,
2005, by and between Bernalillo County and Tempur Production USA,
Inc.(11)
|
|
|
10.10
|
Registration
Rights Agreement dated as of November 1, 2002, among Tempur-Pedic
International Inc., Friedman Fleischer & Lowe Capital Partners, LP,
FFL Executive Partners, LP, TA IX, L.P., TA/Atlantic and Pacific IV, L.P.,
TA Strategic Partners Fund A L.P., TA Strategic Partners Fund B L.P.,
TA/Advent VIII L.P., TA Investors LLC, TA Subordinated Debt Fund, L.P.,
Gleacher Mezzanine Fund I, L.P., Gleacher Mezzanine Fund P, L.P. and the
investors listed on Schedule I thereto. (1)
|
|
|
10.11
|
Tempur-Pedic
International Inc. 2002 Stock Option Plan. (1)(20)
|
|
|
10.12
|
Tempur-Pedic
International Inc. 2003 Equity Incentive Plan. (2)(20)
|
|
|
10.13
|
Tempur-Pedic
International Inc. 2003 Employee Stock Purchase Plan. (2)(20)
|
|
|
10.14
|
Employment
and Noncompetition Agreement dated as of June 29, 2006 and effective as of
April 28, 2006, between Tempur-Pedic International Inc. and H.
Thomas Bryant. (1)(20)
|
|
|
10.15
|
Employment
and Noncompetition Agreement dated as of July 11, 2003, between Tempur
World, Inc. and Dale E. Williams. (1)(20)
|
|
|
10.16
|
Employment
Agreement dated September 12, 2003, between Tempur International Limited
and David Montgomery. (5)(20)
|
|
|
10.17
|
Stock
Option Agreement dated as of July 13, 2004 between Tempur-Pedic
International Inc. and Sir Paul Judge. (7)(20)
|
|
|
10.18
|
Stock
Option Agreement dated as of March 12, 2004 between Tempur-Pedic
International Inc. and Nancy F. Koehn. (8)(20)
|
|
|
10.19
|
Stock
Option Agreement dated as of September 30, 2003 between Tempur-Pedic
International Inc. and Robert B. Trussell, Jr. (9)(20)
|
|
|
10.20
|
Stock
Option Agreement dated as of February 24, 2003 between Tempur-Pedic
International Inc. and David Montgomery. (9)(20)
|
|
|
10.22
|
Stock
Option Agreement dated as of July 7, 2003 between Tempur-Pedic
International Inc. and Dale E. Williams. (9)(20)
|
|
|
10.23
|
Stock
Option Agreement dated as of September 30, 2003 between Tempur-Pedic
International Inc. and H. Thomas Bryant.
(9)(20)
|
|
|
10.24
|
Stock
Option Agreement dated as of March 26, 2003 between Tempur-Pedic
International Inc. and Francis A. Doyle. (9)(20)
|
|
|
10.25
|
Stock
Option Agreement dated as of September 30, 2003 between Tempur-Pedic
International Inc. and Francis A. Doyle. (9)(20)
|
|
|
10.26
|
Stock
Option Agreement dated as of September 30, 2003 between Tempur-Pedic
International Inc. and David Montgomery. (9)(20)
|
|
|
10.27
|
Employment
and Noncompetition Agreement dated as of December 1, 2004, between
Tempur-Pedic International Inc. and Matthew D. Clift. (10)(20)
|
|
|
10.28
|
Option
Agreement dated as of December 1, 2004 between Tempur-Pedic International
Inc. and Matthew D. Clift. (10)(20)
|
|
|
10.29
|
Restricted
Stock Unit Award Agreement dated as of December 1, 2004 between
Tempur-Pedic International Inc. and Matthew D. Clift. (10)(20)
|
|
|
10.30
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Matthew D. Clift.(20)
|
|
|
10.31
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Sir Paul Judge. (20)
|
|
|
10.33
|
Stock
Option Agreement dated as of February 23, 2006 between Tempur-Pedic
International Inc. and Nancy F. Koehn.(20)
|
|
|
10.34
|
Stock
Option Agreement dated as of June 26, 2006 between Tempur-Pedic
International Inc. and H. Thomas Bryant.(13)(20)
|
|
10.35
|
Stock Option Agreement dated May 2, 2005 between Tempur-Pedic International Inc. and Bhaskar Rao.(13)(20) |
|
10.36
|
Stock Option Agreement dated October 25, 2005 between Tempur-Pedic International Inc. and Bhaskar Rao.(13)(20) | |
|
10.37
|
Stock Option Agreement dated February 16, 2006 between Tempur-Pedic International Inc. and Bhaskar Rao.(13)(20) |
|
10.38
|
Stock Option Agreement dated May 11, 2006 between Tempur-Pedic International Inc. and Bhaskar Rao.(13)(20) |
|
10.39
|
Stock
Option Agreement dated June 28, 2006 between Tempur-Pedic International
Inc. and David Montgomery.(13)(20)
|
|
|
10.40
|
Stock Option Agreement dated June 28, 2006 between Tempur-Pedic International Inc. and Dale E. Williams.(13)(20) | |
|
10.41
|
Form of Stock Option Agreement under the 2003 Equity Incentive Plan.(13)(20) | |
|
10.42
|
Employment Agreement dated as of July 18, 2006 between Tempur-Pedic International Inc. and Richard Anderson.(14)(20) | |
|
10.43
|
Amendment
No. 3 to Credit Agreement dated as of June 8, 2007 by and among Tempur
World LLC, Tempur Production USA,Inc., Dan-Foam Aps, Tempur-Pedic
International Inc. and certain other subsidiaries as guarantors, Bank of
America, N.A., Nordea Bank, Danmark A/S, Fifth Third Bank, Sun Trust Bank,
JD Morgan Chase Bank, N.A., Wells Fargo Bank, N.A., National City Bank and
Regions Bank .(17)
|
|
|
10.44
|
Modification Agreement dated as of February 22, 2007, among Tempur-Pedic, Inc., Tempur Production USA, Inc., Dan-Foam Aps, Tempur-Pedic International Inc., Tempur World LLC, and Tempur World Holdings, LLC and certain subsidiaries as guarantors, Bank of America, N.A., Nordea Bank Danmark A/S, Fifth Third Bank, Sund Trust Bank, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (18) | |
|
10.45
|
Modification Agreement dated as of August 6, 2007, among Tempur-Pedic International Inc., Tempur Production USA, Inc., Dan-Foam Aps, Tempur-Pedic International, Inc., Tempur World LLC, and Tempur World Holdings, LLC and certain other subsidiaries as guarantors, Bank of America, N.A. and Wells Fargo Bank, N.A., Regions Bank, and National City Bank .(19) | |
|
10.46
|
Modification Agreement dated as of November 30, 2007, among Tempur World LLC, Tempur Production USA, Inc., Dan-Foam Aps, Tempur-Pedic International Inc., Tempur World Holdings, LLC and Tempur Danmark A/S and certain other subsidiaries as guarantors, Bank of America, N.A. and Nordea Bank Danmark A/S. | |
|
21.1
|
Subsidiaries
of Tempur-Pedic International Inc.
|
|
|
23.1
|
Consent
of Ernst & Young LLP.
|
|
|
24.1
|
Power of Attorney of Tempur-Pedic International Inc. (included on the signature pages hereof). | |
|
31.1
|
Certification of Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
31.2
|
Certification
of Chief Financial Officer, pursuant to Securities Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
*
|
Certification
of Chief Executive Officer and Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
(1)
|
Incorporated
by reference from the Registrant’s registration statement on Form S-4
(File No. 333-109054-02) filed with the Commission on September 23,
2003.
|
|
|
(2)
|
Incorporated
by reference from Amendment No. 3 to the Registrant’s registration
statement on Form S-1 (File No. 333-109798) filed with the Commission on
December 12, 2003.
|
|
|
(3)
|
Incorporated
by reference from Amendment No. 3 to the Registrant’s registration
statement on Form S-4 (File No. 333-109054-02) filed with the Commission
on February 27, 2004.
|
|
|
(4)
|
Incorporated
by reference from Amendment No. 4 to the Registrant’s registration
statement on Form S-4 (File No. 333-109054-02) filed with the Commission
on April 5, 2004.
|
|
|
(5)
|
Incorporated
by reference from Amendment No. 1 to the Registrant’s registration
statement on Form S-4 (File No. 333-109054-02) filed with the Commission
on October 30, 2003.
|
|
|
(6)
|
Incorporated
by reference from Amendment No. 2 to the Registrant’s registration
statement on Form S-4 (File No. 333-109054-02) filed with the Commission
on November 25, 2003.
|
|
|
(7)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on November 2, 2004.
|
|
|
(8)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on May 17, 2004.
|
|
(9)
|
Incorporated
by reference from Amendment No. 1 to the Registrant’s registration
statement on Form S-4 (File No. 333-120151) filed with the Commission on
November 9, 2004.
|
|
|
(10)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on December 2, 2004.
|
|
|
(11)
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-K filed with
the Commission on March 14,
2006.
|
|
|
(12)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on May 8, 2006.
|
|
|
(13)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on August 6, 2006.
|
|
|
(14)
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on November 7, 2006.
|
|
|
(15)
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-K filed with
the Commission on February 28, 2007.
|
|
|
(16)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on October 18, 2007.
|
|
|
(17)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed with
the Commission on June 9, 2007.
|
|
|
(18)
|
Incorporated
by reference from the Registrant's Current Report on Form 10-Q filed
with the Commission on May 7, 2007.
|
|
| (19) | Incorporated by reference from the Registrants's Current Report on Form 10-Q filed with the Commission on November 1, 2007. | |
| (20) |
Indicates
management contract or compensatory plan or
arrangement.
|
|
|
*
|
This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of
that Section, nor shall it be deemed incorporated by reference in any
filings under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any
filings.
|
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
|
TEMPUR-PEDIC
INTERNATIONAL INC.
(Registrant)
|
||||
|
Date:
February 29, 2008
|
By:
|
/s/ H.
THOMAS BRYANT
|
||
|
H.
Thomas Bryant
Chief
Executive Officer and President
|
||||
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on the 26th of
February, 2008, on behalf of the registrant and in the capacities
indicated.
|
Signature
|
|
Capacity
|
|
/S/
H. THOMAS BRYANT
|
President,
Chief Executive Officer (Principal Executive Officer) and
Director
|
|
|
H.
Thomas Bryant
|
|
|
|
/S/
DALE E. WILLIAMS
|
Executive
Vice President, Chief Financial Officer and
Secretary (Principal Financial Officer)
|
|
|
Dale
E. Williams
|
|
|
|
/S/
BHASKAR RAO
|
Chief
Accounting Officer and Vice President of Strategic
Planning (Principal Accounting Officer)
|
|
|
Bhaskar
Rao
|
|
|
|
/S/
FRANCIS A. DOYLE
|
Director
|
|
|
Francis
A. Doyle
|
|
|
|
/S/
NANCY F. KOEHN
|
Director
|
|
|
Nancy
F. Koehn
|
|
|
|
/S/
SIR PAUL JUDGE
|
Director
|
|
|
Sir
Paul Judge
|
|
|
|
/S/
CHRISTOPHER A. MASTO
|
Director
|
|
|
Christopher
A. Masto
|
|
|
|
/S/
P. ANDREWS MCLANE
|
Director
|
|
|
P.
Andrews McLane
|
|
|
|
/S/
ROBERT B. TRUSSELL, JR.
|
Director
|
|
|
Robert
B. Trussell, Jr.
|
|
|
|
/S/
PETER K. HOFFMAN
|
Director
|
|
|
Peter
K. Hoffman
|
|
|
INDEX TO HISTORICAL
FINANCIAL STATEMENTS
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7
|
|
The
Board of Directors and Shareholders of Tempur-Pedic International Inc. and
Subsidiaries
We have
audited the accompanying consolidated balance sheets of Tempur-Pedic
International Inc. and Subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2007. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a)2. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Tempur-Pedic
International Inc. and Subsidiaries at December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As
discussed in Note 9 to the consolidated financial statements, effective January
1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes.”
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123(R), “Share-Based Payments” using the
modified-prospective transition method.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Tempur-Pedic International Inc. and
Subsidiaries’ internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 14, 2008 expressed an unqualified opinion
thereon.
Louisville,
Kentucky
February
14, 2008
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
|
|||||||||||
|
Net
sales
|
$
|
1,106,722
|
|
$
|
945,045
|
$
|
836,732
|
||||
|
Cost
of sales
|
571,896
|
|
484,507
|
412,790
|
|||||||
|
Gross
profit
|
534,826
|
|
460,538
|
423,942
|
|||||||
|
Selling
and marketing expenses
|
193,574
|
|
171,787
|
162,808
|
|||||||
|
General
and administrative expenses
|
91,212
|
|
75,718
|
67,823
|
|||||||
|
Research
and development expenses
|
5,926
|
|
3,728
|
2,696
|
|||||||
|
Operating
income
|
244,114
|
|
209,305
|
190,615
|
|||||||
|
Other
expense, net:
|
|
||||||||||
| Interest expense, net |
(30,484
|
) |
(23,920
|
) |
(20,264
|
) | |||||
| Loss on extinguishment of debt |
(126
|
) |
(10,722
|
)
|
(4,245
|
) | |||||
| Other (expense) income, net |
(630
|
) |
(102
|
) |
366
|
||||||
|
Total
other expense
|
(31,240
|
) |
|
(34,540
|
)
|
(24,143
|
)
|
||||
|
Income
before income taxes
|
212,874
|
|
174,765
|
166,472
|
|||||||
|
Income
tax provision
|
71,415
|
|
62,443
|
67,143
|
|||||||
|
Net
income
|
$
|
141,459
|
|
$
|
112,322
|
$
|
99,329
|
||||
|
Earnings
per common share:
|
|||||||||||
|
Basic
|
$
|
1.77
|
|
$
|
1.32
|
$
|
1.01
|
||||
|
Diluted
|
$
|
1.74
|
|
$
|
1.28
|
$
|
0.97
|
||||
|
Cash
dividend per common share
|
$
|
0.30
|
$
|
—
|
$
|
—
|
|||||
|
Weighted
average common shares outstanding:
|
|||||||||||
|
Basic
|
79,831
|
|
84,922
|
98,012
|
|||||||
|
Diluted
|
81,256
|
|
87,530
|
102,144
|
|||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
TEMPUR-PEDIC INTERNATIONAL INC. AND
SUBSIDIARIES
(In
thousands, except per share amounts)
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
|
|||||||
|
Current
Assets:
|
|
|||||||
|
Cash
and cash equivalents
|
|
$
|
33,315
|
$
|
15,788
|
|||
|
Accounts
receivable, net
|
|
163,730
|
142,059
|
|||||
|
Inventories
|
|
106,533
|
61,736
|
|||||
|
Prepaid
expenses and other current assets
|
|
11,133
|
8,002
|
|||||
|
Income
taxes receivable
|
—
|
588
|
||||||
|
Deferred
income taxes
|
|
11,924
|
9,383
|
|||||
|
Total
Current Assets
|
|
326,635
|
237,556
|
|||||
|
Property,
plant and equipment, net
|
|
208,370
|
215,428
|
|||||
|
Goodwill
|
|
198,286
|
198,207
|
|||||
|
Other
intangible assets, net
|
|
68,755
|
70,826
|
|||||
|
Deferred
financing costs and other non-current assets, net
|
|
4,386
|
3,649
|
|||||
|
Total
Assets
|
|
$
|
806,432
|
$
|
725,666
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|||||||
|
Current
Liabilities:
|
|
|||||||
|
Accounts
payable
|
|
$
|
56,206
|
$
|
51,220
|
|||
|
Accrued
expenses and other
|
|
66,080
|
61,050
|
|||||
|
Income
taxes payable
|
4,060
|
—
|
||||||
|
Current
portion of long-term debt
|
|
288
|
19,497
|
|||||
|
Total
Current Liabilities
|
|
126,634
|
131,767
|
|||||
| Long-term debt |
601,756
|
341,635
|
||||||
| Deferred income taxes |
29,645
|
38,536
|
||||||
| Other non-current liabilities |
259
|
380
|
||||||
|
Total
Liabilities
|
|
758,294
|
512,318
|
|||||
|
Commitments
and Contingencies (see Note 7)
|
|
|||||||
|
Stockholders’
Equity:
|
|
|||||||
|
Common
stock, $0.01 par value, 300,000 shares authorized; 99,215
shares
issued
as of December 31, 2007 and December 31, 2006
|
|
992
|
992
|
|||||
|
Additional
paid in capital
|
|
283,564
|
264,709
|
|||||
|
Retained
earnings
|
|
241,812
|
140,608
|
|||||
|
Accumulated
other comprehensive income
|
|
13,550
|
3,992
|
|||||
|
Treasury
stock, at cost; 24,681 and 15,993 shares in 2007 and in 2006,
respectively
|
|
(491,780
|
)
|
(196,953
|
)
|
|||
|
Total
Stockholders’ Equity
|
|
48,138
|
213,348
|
|||||
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
806,432
|
$
|
725,666
|
|||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements
| Common Shares |
Treasury
Shares
|
Additional
|
Deferred
|
Retained
|
Other
|
|||||||||||||||||||||
| Shares |
At
|
Shares |
At
|
Paid
in
|
Stock
|
(Deficit)/
|
Comprehensive | |||||||||||||||||||
| Issued |
Par
|
Issued |
Cost
|
Capital
|
Compensation
|
Earnings
|
Income
|
Total
|
||||||||||||||||||
|
Balance,
December 31, 2004
|
98,194
|
$
|
982
|
—
|
$
|
—
|
$
|
253,134
|
$
|
(5,079
|
)
|
$
|
(52,623
|
)
|
$
|
17,207
|
$
|
213,621
|
||||||||
|
Comprehensive
Income:
|
|
|
|
|
||||||||||||||||||||||
|
Net income
|
|
|
|
|
99,329
|
99,329
|
||||||||||||||||||||
|
Foreign currency adjustments
|
|
|
|
|
(16,070
|
)
|
(16,070
|
)
|
||||||||||||||||||
|
Total Comprehensive Income
|
99,329
|
(16,070
|
)
|
83,259
|
||||||||||||||||||||||
|
Exercise
of stock options
|
1,021
|
10
|
(73
|
)
|
782
|
|
2,220
|
|
(461
|
)
|
2,551
|
|||||||||||||||
|
Tax
adjustments related to stock compensation
|
|
|
|
15
|
|
15
|
||||||||||||||||||||
|
Treasury
stock repurchased
|
|
6,840
|
(76,000
|
) |
|
|
(76,000
|
)
|
||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
|
|
|
|
2,883
|
2,883
|
||||||||||||||||||||
|
Balance,
December 31, 2005
|
99,215
|
$
|
992
|
6,767
|
$
|
(75,218
|
) |
$
|
255,369
|
$
|
(2,196
|
)
|
$
|
46,245
|
$
|
1,137
|
$
|
226,329
|
||||||||
|
Comprehensive
Income:
|
|
|
|
|
||||||||||||||||||||||
|
Net
income
|
|
|
|
|
$
|
112,322
|
112,322
|
|||||||||||||||||||
|
Foreign currency adjustments
|
|
|
|
|
2,855
|
2,855
|
||||||||||||||||||||
|
Total Comprehensive Income
|
112,322
|
2,855
|
115,177
|
|||||||||||||||||||||||
|
Exercise
of stock options
|
|
(2,049
|
)
|
22,265
|
|
57
|
|
(17,959
|
)
|
4,363
|
||||||||||||||||
|
Tax
adjustments related to stock compensation
|
|
|
|
7,631
|
|
7,631
|
||||||||||||||||||||
|
Treasury
stock repurchased
|
|
11,275
|
(144,000
|
) |
|
|
(144,000
|
)
|
||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
|
|
|
1,652
|
|
2,196
|
3,848
|
|||||||||||||||||||
|
Balance,
December 31, 2006
|
99,215
|
$
|
992
|
15,993
|
$
|
(196,953
|
) |
$
|
264,709
|
$
|
—
|
$
|
140,608
|
$
|
3,992
|
$
|
213,348
|
|||||||||
|
Comprehensive
Income:
|
|
|
|
|
||||||||||||||||||||||
|
Net income
|
|
|
|
|
141,459
|
141,459
|
||||||||||||||||||||
|
Foreign currency adjustments
|
|
|
|
|
9,558
|
9,558
|
||||||||||||||||||||
|
Total Comprehensive Income
|
141,459
|
9,558
|
151,017
|
|||||||||||||||||||||||
|
Exercise
of stock options
|
|
2,372
|
25,057
|
1,294
|
(16,444
|
)
|
9,907
|
|||||||||||||||||||
|
Tax
adjustments related to stock compensation
|
|
11,073
|
11,073
|
|||||||||||||||||||||||
|
Treasury
stock repurchased
|
|
11,060
|
(319,884
|
) |
(319,884
|
)
|
||||||||||||||||||||
|
Dividend
paid to stockholders
|
(23,811
|
)
|
(23,811
|
)
|
||||||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
|
6,488
|
6,488
|
|||||||||||||||||||||||
|
Balance,
December 31, 2007
|
99,215
|
$
|
992
|
24,681
|
$
|
(491,780
|
) |
$
|
283,564
|
$
|
—
|
$
|
241,812
|
$
|
13,550
|
$
|
48,138
|
|||||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
(In
thousands)
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||
|
Net
income
|
$
|
141,459
|
$
|
112,322
|
$
|
99,329
|
|||||
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|||||||||||
|
Depreciation
and amortization
|
33,414
|
24,828
|
24,999
|
||||||||
|
Amortization
of deferred financing costs
|
903
|
1,868
|
2,153
|
||||||||
|
Loss
on extinguishment of debt
|
126
|
10,722
|
4,245
|
||||||||
|
Amortization
of stock-based compensation
|
6,728
|
3,848
|
2,883
|
||||||||
|
Provision
for doubtful accounts
|
5,997
|
3,464
|
2,666
|
||||||||
|
Deferred
income taxes
|
(8,961
|
)
|
(3,828
|
)
|
4,657
|
||||||
|
Foreign
currency adjustments
|
423
|
40
|
1,022
|
||||||||
|
Loss
on sale of equipment and other
|
324
|
488
|
751
|
||||||||
|
Changes
in operating assets and liabilities
|
|||||||||||
|
Accounts
receivable
|
(20,536
|
)
|
(27,608
|
)
|
(27,273
|
)
|
|||||
|
Inventories
|
(38,216
|
)
|
21,284
|
(18,448
|
)
|
||||||
|
Prepaid
expenses and other current assets
|
(3,226
|
)
|
3,327
|
258
|
|||||||
|
Accounts
payable
|
1,861
|
12,253
|
3,587
|
||||||||
|
Accrued
expenses and other
|
3,532
|
4,066
|
(3,703
|
)
|
|||||||
|
Income
taxes
|
13,606
|
6,434
|
5,123
|
||||||||
|
Excess
tax benefit from stock based compensation
|
(11,073
|
)
|
(7,693
|
)
|
—
|
||||||
|
Net
cash provided by operating activities
|
126,361
|
165,815
|
102,249
|
||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||
|
Payments
for trademarks and other intellectual property
|
(1,057)
|
(936
|
)
|
(2,014
|
)
|
||||||
|
Purchases
of property, plant and equipment
|
(16,149
|
) |
(37,211
|
)
|
(84,881
|
)
|
|||||
|
Proceeds
from sale of equipment
|
140
|
286
|
311
|
||||||||
|
Acquisition
of businesses
|
(5,805
|
)
|
—
|
—
|
|||||||
|
Net
cash used by investing activities
|
(22,871
|
)
|
(37,861
|
)
|
(86,584
|
)
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||||
|
Proceeds
from long-term revolving credit facility
|
420,547
|
277,772
|
368,500
|
||||||||
|
Repayments
of long-term revolving credit facility
|
(146,293
|
)
|
(92,500
|
)
|
(302,500
|
)
|
|||||
|
Proceeds
from issuance of long-term debt
|
—
|
—
|
109,858
|
||||||||
|
Repayments
of long-term debt
|
(45,488
|
)
|
(73,329
|
)
|
(173,688
|
)
|
|||||
|
Proceeds
from issuance of Series A Industrial Revenue Bonds
|
15,380
|
—
|
53,925
|
||||||||
|
Repayments
of Series A Industrial Revenue Bonds
|
(5,760
|
)
|
(5,760
|
)
|
—
|
||||||
|
Repayments
of Senior Subordinated Notes
|
—
|
(97,500
|
)
|
—
|
|||||||
|
Redemption
premium on Senior Subordinated Notes
|
—
|
(7,620
|
)
|
—
|
|||||||
|
Common
stock issued, including reissuances of Treasury stock
|
8,175
|
4,045
|
2,551
|
||||||||
|
Excess
tax benefit from stock based compensation
|
11,073
|
7,693
|
—
|
||||||||
|
Treasury
stock purchased
|
(319,884
|
)
|
(144,000
|
)
|
(76,000
|
)
|
|||||
|
Dividend
paid to stockholders
|
(23,811
|
)
|
—
|
—
|
|||||||
|
Payments
for deferred financing costs
|
(1,581
|
)
|
(1,277
|
)
|
(2,601
|
)
|
|||||
|
Net
cash used by financing activities
|
(87,642
|
)
|
(132,476
|
)
|
(19,955
|
)
|
|||||
|
NET
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
1,679
|
2,455
|
(6,223
|
)
|
|||||||
|
Increase
/ decrease in cash and cash equivalents
|
17,527
|
(2,067)
|
(10,513
|
)
|
|||||||
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
15,788
|
17,855
|
28,368
|
||||||||
|
CASH
AND CASH EQUIVALENTS, end of year
|
$
|
33,315
|
$
|
15,788
|
$
|
17,855
|
|||||
|
Supplemental
cash flow information:
|
|||||||||||
|
Cash
paid during the period for:
|
|||||||||||
|
Interest
|
$
|
30,176
|
$
|
28,794
|
$
|
18,759
|
|||||
|
Income
taxes, net of refunds
|
68,271
|
58,451
|
57,445
|
||||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
(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.
The
Company manufactures, markets, and sells products including pillows, mattresses,
and other related products. The Company manufactures essentially all its
pressure-relieving TEMPUR® products
at three manufacturing facilities, with one located in Denmark and two in the
U.S. The Company has sales distribution subsidiaries operating in the U.S.,
Europe, and Asia Pacific and has third party distribution arrangements in
certain other countries where it does not have subsidiaries. The Company
sells its products through four sales channels: Retail, Direct, Healthcare, and
Third party.
(b) Reclassifications—Certain
prior period amounts have been reclassified to conform to the 2007 presentation
including the presentation of Accounts payable and Accrued expenses and other in
the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows.
These changes do not materially affect previously reported subtotals within the
Consolidated Financial Statements for any previous period
presented.
(c) Basis of Consolidation—The
accompanying financial statements include the accounts of Tempur-Pedic
International and its subsidiaries. All subsidiaries are wholly-owned.
Intercompany balances and transactions have been eliminated.
(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.
(f) Financial Instruments and
Hedging—Derivative financial instruments are used within the normal
course of business and are used to manage foreign currency exchange rate risk.
These instruments are short term in nature and are subject to fluctuations in
foreign exchange rates and credit risk. Credit risk is managed through the
selection of sound financial institutions as counterparties. The changes in fair
market value of foreign exchange derivatives are recognized currently through
earnings.
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)) and under the Industrial Revenue Bonds (as defined in Note (4)(c))
are at variable interest rates and accordingly their carrying amounts
approximate fair value.
The
estimated fair value of the Company’s other financial instruments is as
follows:
|
December
31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Carrying
Amount
|
Estimated
Fair
Market
Value
|
Carrying
Amount
|
Estimated
Fair
Market
Value
|
|||||||||||||
|
Foreign
currency contracts
|
$ | (58 | ) | $ | (58 | ) | $ | 27 | $ | 27 | ||||||
(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:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Finished
goods
|
$ | 75,692 | $ | 41,847 | ||||
|
Work-in-process
|
11,135 | 6,395 | ||||||
|
Raw
materials and supplies
|
19,706 | 13,494 | ||||||
| $ | 106,533 | $ | 61,736 | |||||
(i) Property, Plant and
Equipment—Property, plant and equipment are carried at cost at
acquisition date and are depreciated using the straight-line method over their
estimated useful lives as follows:
|
Estimated
Useful
Lives
|
|
|
Buildings
|
25-30 years
|
|
Computer
equipment
|
3-5
years
|
|
Leasehold
improvements
|
4-7
years
|
|
Machinery
equipment
|
3-7
years
|
|
Office
furniture and fixtures
|
5-7
years
|
Leasehold
improvements are amortized over the shorter of the life of the lease or seven
years. Depreciation expense for the Company was $29,538, $20,841 and $21,022 for
the years ended December 31, 2007, 2006, and 2005, respectively.
(j) Long-Lived Assets—In
accordance with Statement of Financial Accounting Standards (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 of the asset to the estimated future undiscounted net
cash flows expected to be generated by the asset. If estimated future
undiscounted net cash flows are less than the carrying amount of the asset or
group of assets, the asset is considered impaired and an expense is recorded in
an amount required to reduce the carrying amount of the asset to its then fair
value.
(k) 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 there were no indicators of impairment as of
December 31, 2007. 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 discounted cash flows estimated to be associated with that
asset to the asset’s carrying amount and write-down that carrying amount to fair
value to the extent necessary.
The
following table summarizes information relating to the Company’s Other
intangible assets:
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||||||||||||||
|
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 | $ | 8,267 | $ | 7,733 | $ | 16,000 | $ | 6,667 | $ | 9,333 | |||||||||||||||
|
Patents
& other trademarks
|
5-20 | 11,233 | 7,533 | 3,700 | 10,105 | 6,470 | 3,635 | |||||||||||||||||||||
|
Customer
database
|
5 | 4,868 | 4,334 | 534 | 4,200 | 3,500 | 700 | |||||||||||||||||||||
|
Foam
formula
|
10 | 3,700 | 1,912 | 1,788 | 3,700 | 1,542 | 2,158 | |||||||||||||||||||||
|
Total
|
$ | 90,801 | $ | 22,046 | $ | 68,755 | $ | 89,005 | $ | 18,179 | $ | 70,826 | ||||||||||||||||
Amortization expense relating to
intangible assets for Tempur-Pedic International was $3,876, $3,987, and $3,977
for the years ended December 31, 2007, 2006, and 2005,
respectively.
Annual
amortization of intangible assets is expected to be as follows:
|
Year
Ending December 31,
|
||||
|
2008
|
$ | 2,579 | ||
|
2009
|
2,523 | |||
|
2010
|
2,031 | |||
|
2011
|
2,031 | |||
|
2012
|
1,703 | |||
The
changes in the carrying amount of Goodwill for the year ended December 31, 2007
are related to Goodwill resulting from business acquisitions during the period,
changes in amounts for foreign currency translation and tax adjustments related
to the Tempur Acquisition, including the utilization of pre-acquisition net
operating losses and adjustments to pre-acquisition income tax contingencies.
The following summarizes changes to the Company’s Goodwill:
|
Balance
as of December 31, 2005
|
$
|
199,962
|
||
|
Foreign
currency translation adjustments
|
(640
|
)
|
||
|
Tax
adjustments related to the Tempur Acquisition
|
(1,115
|
)
|
||
|
Balance
as of December 31, 2006
|
|
|
198,207
|
|
|
Goodwill
acquired during the period
|
2,245
|
|||
|
Foreign
currency translation adjustments
|
|
(491
|
)
|
|
|
Pre-Tempur
Acquisition tax adjustment
|
|
(1,675
|
)
|
|
|
Balance
as of December 31, 2007
|
|
$
|
198,286
|
During the year ended December 31,
2007, the Company acquired the rights to sell its products and certain other
assets in the Austrian and Australian markets for a total purchase price of
$5,805. Net assets purchased were initially valued at $3,560 and include
inventory, fixed assets, among other assets. The remainder of the purchase price
was allocated to goodwill.
Goodwill
as of December 31, 2007 and 2006 has been allocated to the Domestic and
International segments as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Domestic
|
$ | 89,929 | $ | 89,929 | ||||
|
International
|
108,357 | 108,278 | ||||||
| $ | 198,286 | $ | 198,207 | |||||
(l) Software—Preliminary project
stage costs incurred are expensed and, thereafter, costs incurred in the
developing or obtaining of internal use software are capitalized. Certain costs,
such as maintenance and training, are expensed as incurred. Capitalized costs
are amortized over a period of not more than five years and are subject to
impairment evaluation in accordance with SFAS 144. Amounts capitalized for
software are included in Property, plant and equipment, net.
(m) Accrued Sales
Returns—Estimated sales returns are provided at the time of sale based on
historical sales channel return rates. The level of sales returns differs by
channel with the Direct channel typically experiencing the highest rate of
return. Estimated future obligations related to these products are
provided by a reduction of sales in the period in which the revenue is
recognized. The Company allows product returns up to 120 days following a sale
through certain sales channels and on certain products. Accrued sales returns
are included in Accrued expenses and other in the accompanying Consolidated
Balance Sheets.
The
Company had the following activity for sales returns from December 31, 2005 to
December 31, 2007:
|
Balance
as of December 31, 2005
|
|
$
|
6,304
|
|
|
Amounts
accrued
|
|
40,306
|
||
|
Returns
charged to accrual
|
|
(40,727
|
)
|
|
|
Balance
as of December 31, 2006
|
|
5,883
|
||
|
Amounts
accrued
|
|
45,159
|
||
|
Returns
charged to accrual
|
|
(45,579
|
)
|
|
|
Balance
as of December 31, 2007
|
|
$
|
5,463
|
(n) Warranties—The Company
provides a 20-year warranty for U.S. sales and a 15-year warranty for non-U.S.
sales on mattresses, each prorated for the last 10 years. The Company also
provides a 2-year to 3-year warranty on pillows. Estimated future obligations
related to these products are provided by charges to operations in the period in
which the related revenue is recognized. Warranties are included in Accrued
expenses and other in the Consolidated Balance Sheets.
The
Company had the following activity for warranties from December 31, 2005 to
December 31, 2007:
|
Balance
as of December 31, 2005
|
|
$
|
3,107
|
|
|
Amounts
accrued
|
|
3,054
|
||
|
Warranties
charged to accrual
|
|
(3,258
|
)
|
|
|
Balance
as of December 31, 2006
|
|
2,903
|
||
|
Amounts
accrued
|
|
3,408
|
||
|
Warranties
charged to accrual
|
|
(2,886
|
)
|
|
|
Balance
as of December 31, 2007
|
|
$
|
3,425
|
F-10
(o) 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 FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) according to the
facts and circumstances in the various regulatory environments.
(p) Accumulated Other Comprehensive
Income—The adjustment resulting from translating the financial statements
of foreign subsidiaries is included in Accumulated other comprehensive income, a
component of Stockholders’ Equity. As of December 31, 2007, Accumulated other
comprehensive income consists solely of foreign currency translation
adjustments.
(q) 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. The
Company extends credit based on the creditworthiness of its customers. No
collateral is required on sales made in the normal course of business. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company determines the allowance based on historical write-off experience. The
Company 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 Consolidated Balance Sheets was $8,056 and $6,114 as of
December 31, 2007 and 2006, respectively.
The Company
reflects all amounts billed to customers for shipping and handling in Net sales
and the costs incurred from shipping and handling product in Cost of sales. As
of 2006, the Company no longer bills customers in the Domestic Retail channel
for freight on large quantity orders. Amounts included in Net sales for shipping
and handling were approximately $10,919; $10,604; and $23,570 for the years
ended December 31, 2007, 2006, and 2005, respectively. Amounts included in Cost
of sales for shipping and handling were $84,819; $73,316; and $75,527 for the
years ended December 31, 2007, 2006, and 2005, respectively.
(r) Advertising Costs— The
Company expenses advertising costs as incurred except for production costs and
advance payments, which are deferred and expensed when advertisements run for
the first time. Direct response advance payments are deferred and amortized over
the life of the program. Advertising costs charged to expense were $104,548;
$97,214; and $91,229 for the years ended December 31, 2007, 2006, and 2005,
respectively. Advertising costs deferred and included in Prepaid
expenses and other current assets in the accompanying Consolidated Balance
Sheets were $4,709 and $4,287 as of December 31, 2007 and 2006,
respectively.
(s) Research and Development
Expenses—Research and development expenses for new products are expensed
as they are incurred.
(t) Stock-Based Compensation—The
Company adopted SFAS 123R, “Share-Based Payment” (SFAS 123R) on January 1,
2006 using the modified prospective method for the transition. SFAS
123R requires compensation expense relating to share-based payments be
recognized in the financial statements. The cost is measured at the grant date,
based on the calculated fair value of the award, and is recognized as an expense
over the estimable life of the equity award. The impact of adopting SFAS 123R
was $2,304 for the year ended December 31, 2006. Deferred stock compensation
amounts in the Stockholders’ Equity section of the Consolidated Balance Sheets
are included in Additional paid in capital as of December 31, 2007 and
2006.
The benefit
of tax deductions in excess of recognized compensation expense are reported as a
financing cash flow activity in the consolidated statements of cash
flows. The Company had excess tax benefits related to the exercise of
stock-options of $11,073 and $7,693 as of December 31, 2007 and 2006,
respectively. Financial results including cash flows from operating activities
for 2005 have not been restated for the adoption of SFAS 123R.
Pro forma
information in accordance with SFAS 123 for the Company for the year ended
December 31, 2005 as follows:
|
December
31,
|
||||
|
2005
|
||||
|
Net
income as reported
|
$
|
99,329
|
||
|
Add: Stock-based employee compensation expense included in
reported
net income
|
2,720
|
|||
|
Deduct: Total stock-based employee compensation expense
determined
under fair value based method for all awards
|
(9,990
|
)
|
||
|
Pro
forma net income
|
$
|
92,059
|
||
|
Earnings
per common share:
|
||||
|
Basic—as reported
|
$
|
1.01
|
||
|
Diluted—as reported
|
$
|
0.97
|
||
|
Basic—Pro forma
|
$
|
0.94
|
||
|
Diluted—Pro forma
|
$
|
0.90
|
Additionally,
in December 2005, the Company accelerated the vesting of certain unvested
incentive stock options which had exercise prices greater than the fair market
value of the stock on the date of acceleration. Options to purchase
approximately 467,189 shares of common stock, or approximately 18.6% of the
Company's outstanding unvested options, were subject to the acceleration.
Options subject to the acceleration had exercise prices ranging from $13.94 to
$24.40 per common share and a weighted average remaining life of 9 years. The
weighted average exercise price of the options subject to the acceleration was
$18.51. The purpose of the acceleration was to enable the Company to avoid
recognizing compensation expense associated with these options in future periods
in its Consolidated Statements of Income, upon adoption of SFAS 123R. The
acceleration resulted in an increase of $2,842 in the pro forma employee stock
option stock-based compensation expense shown above.
(u) Treasury Stock— The Board of
Directors may authorize share repurchases of the Company’s common stock (Share
Repurchase Authorizations). Share repurchases under these authorizations may be
made through open market transactions, negotiated purchase or otherwise, at
times and in such amounts as the Company, and a committee of the Board, deem
appropriate. Shares repurchased under Share Repurchase Authorizations are held
in treasury for general corporate purposes, including issuances under various
employee stock option plans. Treasury shares are accounted for under the cost
method and reported as a reduction of Stockholders’ equity. Share Repurchase
Authorization may be suspended, limited or terminated at any time without
notice.
(2)
Recently Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements,”
which defines fair value, establishes a framework for measuring fair value in
U.S. GAAP, and expands disclosure about fair value measurements. The
Company will adopt this pronouncement effective January 1, 2008. The adoption is
not expected to have a material impact on the Company’s Consolidated Financial
Statements.
F-12
In December
2007, the FASB issued SFAS 141(R), “Business Combinations”, 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 acquiree. 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 statement to evaluate the nature and financial
effects of the business combination. The Company is evaluating the potential
impact of adopting SFAS 141(R), which is effective for fiscal years beginning
after December 15, 2008.
(3) Property, Plant and
Equipment
Property,
plant and equipment, net consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Land
and buildings
|
|
$
|
123,973
|
$
|
75,005
|
|||
|
Machinery
and equipment, furniture and fixtures, and other
|
|
186,175
|
111,024
|
|||||
|
Construction
in progress
|
|
7,210
|
104,824
|
|||||
|
|
317,358
|
290,853
|
||||||
|
Accumulated
depreciation
|
|
(108,988
|
)
|
(75,425
|
)
|
|||
|
|
$
|
208,370
|
$
|
215,428
|
||||
Construction
in progress includes capitalized interest costs of $0 and $7,879 for the years
ended December 31, 2007 and 2006, respectively, in connection with the
construction of assets.
(4)
Long-term Debt
(a)
Long-term Debt—Long-term debt
for the Company consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
2005
Senior Credit Facility:
|
||||||||
|
Foreign
Term Loan, payable to lenders, interest at Index Rate or LIBOR plus margin
(4.78% as
of
December 31, 2006)
|
$ | — | $ | 43,337 | ||||
|
Foreign
Long-Term Revolving Credit Facility payable to lenders, interest at
Index Rate or LIBOR plus applicable margin
(5.82% at December 31, 2006) commitment through and due June
8, 2012
|
— | 14,733 | ||||||
|
Domestic
Long-Term Revolving Credit Facility payable to lenders, interest
at
Index
Rate or LIBOR plus applicable margin (5.86% and 6.41% as of December 31,
2007 and December 31, 2006, respectively), commitment through and due June
8, 2012
|
543,000 | 253,500 | ||||||
|
2005
Industrial Revenue Bonds:
|
||||||||
|
Variable
Rate Industrial Revenue Bonds Series 2005A, interest rate determined by
remarketing
agent
not to exceed the lesser of (a) the highest rate under state law or (b)
12% per annum (5.61% and 5.53% as of December 31, 2007 and 2006,
respectively), interest due monthly and principal payments due September
1, 2030
|
57,785 | 48,165 | ||||||
|
Other:
|
||||||||
|
Mortgage
payable to a bank, secured by certain property, plant and
equipment
and other assets, bearing fixed interest at 4.0% to 5.1%
|
1,259 | 1,397 | ||||||
|
Less:
Current portion
|
(288 | ) | (19,497 | ) | ||||
|
Long-term
debt
|
$ | 601,756 | $ | 341,635 | ||||
The
long-term debt of the Company is scheduled to mature as follows:
|
Year
Ending December 31,
|
||||
|
2008
|
$ | 288 | ||
|
2009
|
161 | |||
|
2010
|
161 | |||
|
2011
|
161 | |||
|
2012
|
543,161 | |||
|
Thereafter
|
58,112 | |||
|
Total
|
$ | 602,044 | ||
(b) Secured Credit Financing— On October 18, 2005,
the Company entered into a credit agreement (2005 Senior Credit Facility) with a
syndicate of banks. On February 8, 2006 and on December 13, 2006 the Company
entered into amendments to its 2005 Senior Credit Facility, which increased
availability, adjusted one financial covenant and added an option to increase
the Domestic Revolver by an additional $50,000 at the discretion of the Company.
On February 22, 2007, the Company exercised the option to increase the Domestic
Revolver by an additional $50,000. On June 8, 2007, the Company entered into an
amendment to its 2005 Senior Credit Facility (Amendment No. 3), which increased
availability, extinguished the foreign term loan, eliminated the requirement to
reduce the domestic revolver commitment by $3,000 each quarter, added an option
to increase the Domestic Revolver by an additional $100,000, eliminated the
quarterly redemption of the Industrial Revenue Bonds (as defined below) and
adjusted certain covenants. In addition, the maturity date of the 2005 Senior
Credit Facility was extended from October 18, 2010 to June 8, 2012. In
conjunction with Amendment No. 3, the Company wrote-off $126 of deferred
financing fees which were previously capitalized. On August 6, 2007, the Company
exercised the option to increase the Domestic Revolver by an additional
$100,000.
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%. LIBOR interest payments
are due periodically based on the underlying LIBOR contracts. Base Rate interest
payments are due quarterly. The Company also pays an annual facility fee on the
total amount of the 2005 Senior Credit Facility. The facility fee is
calculated based on the consolidated leverage ratio and ranges from .125% to
..25%.
The 2005
Senior Credit Facility is guaranteed by Tempur-Pedic International, as well as
certain other subsidiaries of Tempur-Pedic International, and is secured by
certain fixed and intangible assets of Dan Foam ApS and substantially all the
Company’s U.S. assets. The 2005 Senior Credit Facility contains certain
financial covenants and requirements affecting the Company, including a
consolidated interest coverage ratio and a consolidated leverage ratio. The
Company was in compliance with all covenants as of December 31,
2007.
At December
31, 2007, the Company had a total of $640,000 of long-term revolving credit
facilities under the 2005 Senior Credit Facility, which was comprised of the
$615,000 Domestic Revolver and the $25,000 Foreign Revolver (collectively, the
Revolvers). The Revolvers provide for the issuance of letters of credit which,
when issued, constitute usage and reduce availability under the Revolvers. The
aggregate amount of letters of credit outstanding under the Revolvers was
$66,049 at December 31, 2007. After giving effect to
letters of credit and $543,000 in borrowings under the Domestic Revolver, total
availability under the Revolvers was $30,951 at December 31, 2007.
(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. Under the terms of the financing, Bernalillo County was to
issue up to $75,000 of Series 2005A Taxable Variable Rate Industrial Revenue
Bonds (the Series A Bonds). The Series A Bonds are marketed to third
party qualified investors by a remarketing agent and secured by a letter of
credit issued under the Company’s Domestic Revolver. The Series A Bonds have a
final maturity date of September 1, 2030. The interest rate on the
Series A Bonds is a weekly rate set by the remarketing agent, in its sole
discretion, though the interest rate may not exceed the lesser of the highest
rate allowed under New Mexico law or 12% per annum. On October 27,
2005, Tempur Production made an initial draw of $53,925 on the Series A
Bonds. On June 1, 2007, the Company executed an additional advance of
$15,380 on the Series A Bonds. Upon completion of this draw, the Company
had a total of $59,705 outstanding under the Series A Bonds. The Company
used proceeds from the Bonds to pay down the Domestic Revolver, among other
things. No further advances are expected by the Company under the Series A
Bonds.
Bernalillo
County also agreed to issue up to $25,000 of 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, are not
secured by the letter of credit described above, and will be held by Tempur
World, LLC, representing the Company’s equity in the Project. The 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%. On October 27, 2005, Tempur Production
made an initial draw of $17,975 under the Series B Bonds, which was transferred
to and used by Tempur World LLC to purchase an investment in the Series B Bonds
issued by Bernalillo County. On June 1, 2007, the Company requested an
additional advance of $5,127 on the Series B Bonds. Proceeds of this draw were
transferred to and used by Tempur World, LLC to purchase an additional
investment in the Series B Bonds. Upon completion of this draw, the Company had
a total of $23,103 outstanding under the Series B Bonds with an offsetting
investment in the Series B Bonds in the same amount. No further advances are
expected by the Company under the Series B Bonds. The Company has the legal
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
Consolidated Balance Sheets.
On
October 27, 2005, Tempur Production transferred its interest in the Project to
Bernalillo County, and Bernalillo County leased the Project back to Tempur
Production on a long-term basis with the right to purchase the Project for one
dollar when the Bonds are retired. Pursuant to the lease agreement,
Tempur Production will pay rent to Bernalillo County in an amount sufficient to
pay debt service on the Bonds and certain fees and expenses. The
Bonds are not general obligations of Bernalillo County, but are special, limited
obligations payable solely from bond proceeds, rent paid by Tempur Production
under the lease agreement, and other revenues. The substance of the
transaction is that Bernalillo County issued the Bonds on behalf of Tempur
Production. Therefore, the Company has recorded the obligation as
long-term debt of $57,785 in its Consolidated Balance Sheet as of December 31,
2007.
(d) Senior Subordinated Notes—In
2003, certain wholly-owned subsidiaries of the Company issued $150,000 aggregate
principal amount of 10.25% Senior Subordinated Notes due 2010 (Senior
Subordinated Notes).
On
January 23, 2004, the Company redeemed an aggregate principal amount of $52,500
of outstanding Senior Subordinated Notes. The redemption price was 110.25% of
the principal amount plus accrued interest, and the redemption was funded with a
portion of the net proceeds from the initial public offering of Tempur-Pedic
International Inc. The Company reflected the $5,381 redemption premium as a Loss
on extinguishment of debt included in Other income (expense), net in the year
ended December 31, 2004.
On
December 29, 2006, the Company redeemed in full the outstanding aggregate
principal amount of $97,500 of Senior Subordinated Notes. The redemption price
was 107.815% of the principal amount. The Company reflected the $7,620
redemption premium and the $3,102 related to the non-cash write-off of deferred
financing fees as a Loss on extinguishment of debt included in Other (expense)
income, net in the year ended December 31, 2006.
(5)
Stockholders’ Equity
(a) Registration Rights—Under
the terms of a registration rights agreement entered into in 2002 in connection
with the Tempur Acquisition, holders of 10% of Tempur-Pedic International Inc.’s
registrable securities, as defined in the Registration Rights Agreement, have
the right, subject to certain conditions, to require Tempur-Pedic International
Inc. to register any or all of their shares of common stock under the Securities
Act of 1933, as amended (Securities Act), at the Company’s expense. The 15,313
shares of common stock sold in the initial public offering by selling
shareholders and the 14,950 shares sold in the 2004 secondary offering were sold
by selling stockholders that were parties to the Registration Rights Agreement.
As of December 31, 2007, the Company estimates that 4,907 outstanding shares of
registrable common stock are held by parties to the Registration Rights
Agreement. Certain of these holders have demand registration rights under the
Registration Rights Agreement as described above.
(b) Initial Public
Offering—Effective with Tempur-Pedic International Inc.’s initial public
offering on December 23, 2003, the authorized shares of capital stock were
increased to 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.
Tempur-Pedic
International Inc. is authorized to issue up to 10,000 shares of preferred
stock, $0.01 par value per share. The Board of Directors is authorized, subject
to any limitations prescribed by law, without further vote or action by the
stockholders, to issue from time to time shares of preferred stock in one or
more series. Each such series of preferred stock will have such number of
shares, designations, preferences, voting powers, qualifications, and special or
relative rights or privileges as determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights.
(c) Share Repurchase
Programs—On January 25, 2007, the
Board of Directors authorized the repurchase of up to $100,000 of the Company’s
common stock. The Company repurchased 3,840 shares of the Company’s common stock
for a total of $100,000 from the January 2007 authorization 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 from the July 2007
authorization and completed purchases from the July 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. 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. As of February 14, 2008, the Company has repurchased 659 shares of the
Company’s common stock for approximately $19,884 from the October 2007
authorization.
On
October 18, 2005, the Board of Directors authorized the repurchase of up to
$80,000 of the Company’s common stock. Share repurchases under this program were
made through open market transactions, negotiated purchases or otherwise, at
times and in such amounts as management and a committee of the Board deemed
appropriate. During 2005, the Company repurchased 6,840 shares at a total
cost of $76,000. The Company funded these share repurchases from borrowings
under the 2005 Senior Credit Facility and funds from operations. On
January 25, 2006, Tempur-Pedic International’s Board of Directors amended
the share repurchase program described above to increase the total authorization
by an additional $100,000. On May 22, 2006, Tempur-Pedic International’s
Board of Directors further amended the share repurchase program to increase the
total authorization under the share repurchase program by an additional $40,000
for a total authorization to purchase up to $220,000 of Tempur-Pedic
International’s common stock. During the six months ended June 30, 2006,
Tempur-Pedic International repurchased 11,275 shares at a total cost of
$144,000. The share repurchases were funded from borrowings under the 2005
Senior Credit Facility and funds from operations. As of June 30, 2006,
Tempur-Pedic International had completed shares purchases under this
authorization. The Company did not repurchase any stock in the last six months
of 2006.
(6)
Stock-based Compensation
Tempur-Pedic
International has two stock-based compensation plans which provide for grants of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and stock unit awards, performance shares, stock grants and performance
based awards to employees, non-employee directors, consultants and Company
advisors. The plans under which equity awards may be granted are the 2002 Option
Plan and the 2003 Equity Incentive Plan (the 2003 Plan). Tempur-Pedic
International also has a stock-based compensation plan which permits eligible
employees to purchase its shares at a discounted price, subject to certain
guidelines set forth by its 2003 Employee Stock Purchase Plan (ESPP). It is the
policy of the Company to issue stock out of Treasury shares upon exercise of
options. The Company believes that awards and purchases made under these plans
better align the interests of the plan participants with those of its
stockholders.
The 2002
Option Plan was adopted on November 1, 2002 and provides for grants of
options to purchase shares of common stock to employees and directors of the
Company. Options granted under the 2002 Option Plan that qualify as incentive
stock options, as defined by the Internal Revenue Code of 1986, as amended (the
Code), must have an exercise price of not less than the fair market value of
Tempur-Pedic International’s common stock at the date of grant. Options granted
under the 2002 Option Plan provided for vesting terms as determined by the Board
of Directors at the time of grant, which are generally based on 4 years of
continuous service. Options can be exercised up to 10 years from the grant date
and up to 5 years from the grant date for any stockholders who own 10% or more
of the total combined voting power of all shares of stock of Tempur-Pedic
International. Upon the exercise of all outstanding options under the
2002 Option Plan, Tempur-Pedic International will issue a maximum of 6,534
shares of common stock under the 2002 Option Plan, subject to certain adjustment
provisions. In
December 2003, the Board adopted a resolution that prohibited
further grants being made under the 2002 Plan.
The 2003
Plan is administered by the Compensation Committee of the Board of Directors,
which, together with the Board of Directors, has the exclusive authority to
administer the 2003 Plan, including the power to determine eligibility to
receive awards, the types and number of shares of stock subject to the awards,
the price and timing of awards and the acceleration or waiver of any vesting and
performance of forfeiture restrictions, in each case subject to the terms of the
2003 Plan. Any of the Company’s employees, non-employee directors, consultants
and Company advisors, as determined by the Compensation Committee, may be
selected to participate in the 2003 Plan. The awards generally vest based
on 4 years of continuous service and have 10-year contractual terms.
Tempur-Pedic International may issue a maximum of 8,000 shares of its common
stock under the 2003 Plan.
The
ESPP permits eligible employees to purchase up to certain limits, as set forth
in the ESPP, of Tempur-Pedic International’s common stock annually over the
course of two semi-annual offering periods at a price of no less than 85% of the
price per share of Tempur-Pedic International’s common stock either at the
beginning or the end of each six-month offering period, whichever is less. The
Compensation Committee of the Board of Directors administers the ESPP. The Board
of Directors may amend or terminate the ESPP. The ESPP is intended to comply
with the requirements of Section 423 of the Code. Tempur-Pedic International may
issue a maximum of 500 shares of its common stock under the ESPP.
The
Company uses the Black-Scholes option pricing model to calculate the fair value
of options granted which are subject to SFAS 123R. The Company also used this
pricing model for all periods prior to the adoption of SFAS 123R to disclose the
pro forma information regarding net income and earnings per common share as
required by SFAS 123.
The
assumptions used in the Black-Scholes pricing model for the year ended December
31, 2007 and December 31, 2006 are set forth in the following table. Expected
volatility is based on the historical volatility of Tempur-Pedic International’s
common stock. The expected life of the options represents the period of time
that the Company expects the options granted to be outstanding. The risk-free
rate is based on the expected yield of the option over the period during its
contractual life.
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Expected
volatility range of stock
|
40 – 41 | % | 40 – 43 | % | ||||
|
Expected
life of option, range in years
|
2.0 – 5.0 | 1.5 – 6.1 | ||||||
|
Risk-free
interest rate range
|
3.2 – 5.1 | % | 3 – 4.8 | % | ||||
|
Expected
dividend yield on stock
|
1.0 – 1.1 | % | 0 | % | ||||
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
subjective assumptions, including the expected stock price volatility.
Tempur-Pedic International’s options have had characteristics significantly
different from those of similar traded options, and changes in the subjective
input can materially affect the fair value estimate.
A summary
of Tempur-Pedic International’s unvested shares as of December 31, 2007, and
changes during the years-ended December 31, 2007 and 2006, are presented
below:
|
Shares
|
Weighted
Average
Grant
Date Fair Value
|
|||||||
|
Options
unvested at December 31, 2005
|
3,344 | $ | 2.96 | |||||
|
Granted
|
2,192 | 6.75 | ||||||
|
Vested
|
(2,205 | ) | 1.83 | |||||
|
Forfeited
|
(220 | ) | 6.83 | |||||
|
Options
unvested at December 31, 2006
|
3,111 | $ | 6.35 | |||||
|
Granted
|
1,090 | 10.02 | ||||||
|
Vested
|
(1,108 | ) | 5.99 | |||||
|
Forfeited
|
(111 | ) | 7.33 | |||||
|
Options
unvested at December 31, 2007
|
2,982 | $ | 7.67 | |||||
A summary
of stock options activity under the 2002 Option Plan and 2003 Plan for the year
ended December 31, 2007 is presented below:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Options
outstanding at December 31, 2005
|
5,979 | $ | 5.17 | |||||||||||||
|
Granted
|
2,192 | 15.67 | ||||||||||||||
|
Exercised
|
(1,997 | ) | 1.91 | |||||||||||||
|
Terminated
|
(220 | ) | 7.62 | |||||||||||||
|
Options
outstanding at December 31, 2006
|
5,954 | $ | 10.03 | |||||||||||||
|
Granted
|
1,090 | 26.71 | ||||||||||||||
|
Exercised
|
(2,331 | ) | 3.80 | |||||||||||||
|
Terminated
|
(111 | ) | 16.29 | |||||||||||||
|
Options outstanding at December
31, 2007
|
4,602 | $ | 17.10 | 8.37 | $ | 40,838 | ||||||||||
|
Options
exercisable at December 31, 2007
|
1,620 | $ | 13.75 | 7.36 | $ | 11,509 | ||||||||||
The total
intrinsic value of options exercised for the years ended December 31, 2007 and
December 31, 2006 was $48,845 and $26,140, respectively.
The
Black-Scholes pricing model amortizes compensation expense on a “straight-line”
basis, and the expense is expected to be recognized over a weighted-average
remaining period of 2.8 years. The total Black-Scholes value of shares vested
during the years ended December 31, 2007 and December 31, 2006 was $4,996 and
$4,675, respectively. For the years ended December 31, 2007 and 2006, the
Company recognized $5,881 and $2,304, respectively, of stock-based compensation
expense in General and administrative expenses and Selling and marketing
expenses related to stock options granted under the 2003 Plan which were subject
to SFAS 123R. As of December 31, 2007, there was $20,680 of unearned stock-based
compensation expense related to these options. The future amortization of these
unearned stock-based compensation costs will be $7,049 in 2008; $6,800 in 2009;
$4,959 in 2010 and $1,872 in 2011.
The
Company recorded $169, $1,106 and $2,883 of stock-based compensation expense for
the years ended December 31, 2007, 2006 and 2005, respectively, related to
options granted under the 2002 Option Plan prior to the initial public offering
in 2003 that have exercise prices that are less than the deemed market value of
the underlying common stock at the date of grant. The unearned stock-based
compensation for these options has been amortized to compensation expense over
their respective vesting term based on the “graded vesting” methodology and was
fully amortized to compensation expense as of December 31, 2007.
For the
years ended December 31, 2007 and 2006, the Company recognized $438 and $438 of
stock-based compensation expense related to restricted stock units (RSUs). As of
December 31, 2007, stock-based compensation expense related to RSU’s was fully
amortized to compensation expense.
Cash
received from options exercised under all stock-based compensation plans,
including cash received from options issued from treasury shares, for the years
ended December 31, 2007 and December 31, 2006, was $8,175 and $4,045,
respectively.
(7)
Commitments and Contingencies
(a) Lease Commitments—The
Company has various operating leases that call for annual rental payments due in
equal monthly installments and a lease with a rent free occupancy period. The
Company’s policy is to recognize expense for lease payment, including those with
escalating provisions and rent free periods on a straight-line basis over the
lease term. Operating lease expenses were $4,726; $4,926; and $3,578 for the
years ended December 31, 2007, 2006 and 2005, respectively.
Future
minimum lease payments at December 31, 2007 under these non-cancelable leases
are as follows:
|
Year
Ended December 31,
|
||||
|
2008
|
$ | 4,649 | ||
|
2009
|
4,436 | |||
|
2010
|
4,196 | |||
|
2011
|
3,974 | |||
|
2012
|
3,448 | |||
|
Thereafter
|
5,088 | |||
| $ | 25,791 | |||
(b) Purchase Commitments—The
Company will, from time to time, enter into limited purchase commitments for the
purchase of certain raw materials. Amounts committed under these programs are
not significant as of December 31, 2007.
(c) 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. Lead plaintiffs allege 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 which has been fully briefed, and are now awaiting a decision on that
motion. The plaintiffs seek compensatory damages, costs, fees and other relief
within the Court’s discretion. The Company strongly believes that the Securities
Law Action lacks merit, and intend to defend against the claims vigorously.
However, due to the inherent uncertainties of litigation, the Company cannot
predict the outcome of the Securities Law 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 operations or
liquidity. Accordingly, the Company cannot make an estimate of the
possible range of loss.
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 asserts a claim for breach of fiduciary duty with respect
to the disclosures that also are the subject of the Securities Law Action
described above. On December 14, 2005 and January 26, 2006,
respectively, the Delaware court and Kentucky court stayed these derivative
actions. Although the Kentucky court action remains stayed, the Delaware court
action stay was lifted by the Court and the plaintiffs filed an amended
complaint on April 5, 2007. The Company responded by filing a motion to dismiss
or stay the Delaware court action on April 19, 2007. The Delaware
court again stayed the Delaware action on February 6, 2008. Tempur-Pedic
International is also named as a nominal defendant in the Derivative Complaints,
although the actions are derivative in nature and purportedly asserted on behalf
of Tempur-Pedic International. Tempur-Pedic International is in the
process of evaluating these claims. Accordingly, the Company cannot make an
estimate of the possible range of loss.
Antitrust Action—On January
5, 2007, a purported class action was filed against the Company in the United
States District Court for the Northern District of Georgia, Rome Division
(Jacobs v. Tempur-Pedic International, Inc. and Tempur-Pedic North America,
Inc., or the “Antitrust Action”). The Antitrust Action alleges violations
of federal antitrust law arising from the pricing of Tempur-Pedic mattress
products by Tempur-Pedic North America and certain distributors. The
action alleges a class of all purchasers of Tempur-Pedic mattresses in the
United States since January 5, 2003, and seeks damages and injunctive relief.
Count Two of the complaint was dismissed by the court on June 25, 2007, based on
a motion filed by the Company. Following a decision issued by the United States
Supreme Court in Leegin
Creative Leather Prods., Inc. v. PSKS, Inc. on June 28, 2007, the Company
filed a motion to dismiss the remaining two counts of the Antitrust Action on
July 10, 2007. On December 11, 2007, that motion was granted and, as a result,
judgment was entered in favor of the Company and the plaintiffs’ complaint was
dismissed with prejudice. On December 21, 2007, the Plaintiffs filed a “Motion
to Alter or Amend Judgment,” which has been fully briefed. 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 our 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.
(8)
Derivative Financial Instruments
The
Company’s earnings, as a result of its global operating and financing
activities, are exposed to changes in foreign currency exchange rates, which may
adversely affect its results of operations and financial position. The Company
protects a portion of its currency exchange exposure with foreign currency
forward contracts.
The Company does not apply hedge
accounting to the foreign currency forward contracts used to offset
currency-related changes in the fair value of foreign currency denominated
assets and liabilities. These contracts are marked-to-market through earnings at
the same time that the exposed assets and liabilities are remeasured through
earnings. The contracts had notional values of $10,775 and $16,777 as of
December 31, 2007 and 2006, respectively. The contracts had fair values of $58
and $27 included in Other current assets and liabilities in the Consolidated
Balance Sheets as of December 31, 2007 and 2006, respectively. Tempur-Pedic
International also had foreign exchange (losses) gains on derivative financial
instruments of $353, $1,155, and $(3,439) for the years ended December 31, 2007,
2006, and 2005, respectively.
(9)
Income Taxes
Provision for Income
Taxes—The Company’s effective income tax provision differs from the
amount calculated using the statutory U.S. federal income tax rate, principally
due to the following:
|
Year Ended
December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Amount
|
Percentage
of Income
Before
Taxes
|
Amount
|
Percentage
of Income
Before
Taxes
|
Amount
|
Percentage
of Income
Before
Taxes
|
|||||||||||||||||||
|
Statutory
U.S. federal income tax
|
$ | 74,506 | 35.0 | % | $ | 61,168 | 35.0 | % | $ | 58,265 | 35.0 | % | ||||||||||||
|
State
income taxes, net of federal
benefit
|
6,777 | 3.2 | 3,034 | 1.7 | 2,029 | 1.2 | ||||||||||||||||||
|
Foreign
tax differential
|
(9,109 | ) | (4.3 | ) | (6,443 | ) | (3.7 | ) | (4,033 | ) | (2.4 | ) | ||||||||||||
|
Change
in valuation allowance
|
(2,474 | ) | (1.1 | ) | 2,075 | 1.2 | 1,153 | 0.7 | ||||||||||||||||
|
Foreign
repatriation, net of foreign
tax credits
|
— | — | — | — | 6,263 | 3.8 | ||||||||||||||||||
|
Incentive
stock options
|
— | — | (892 | ) | (0.5 | ) | (847 | ) | (0.5 | ) | ||||||||||||||
|
Subpart
F income and Section 956
|
3,211 | 1.5 | 2,250 | 1.3 | 2,644 | 1.6 | ||||||||||||||||||
|
Manufacturing
deduction
|
(2,069 | ) | (1.0 | ) | (503 | ) | (0.3 | ) | (1,030 | ) | (0.6 | ) | ||||||||||||
|
Permanent
and other
|
573 | 0.3 | 1,754 | 1.0 | 2,699 | 1.5 | ||||||||||||||||||
|
Effective
income tax provision
|
$ | 71,415 | 33.6 | % | $ | 62,443 | 35.7 | % | $ | 67,143 | 40.3 | % | ||||||||||||
Subpart F
income represents interest and royalties earned by a foreign subsidiary as well
as sales made by certain foreign subsidiaries outside of their country of
incorporation. Under the Internal Revenue Code, such income is taxable to
Tempur-Pedic International as if, in effect, earned directly by Tempur-Pedic
International.
The
following sets forth the amount of pre-tax income attributable to each of the
Company’s operating segments for the years ended December 31, 2007, 2006 and
2005:
|
Year
Ended December 31,
|
||||||||||||
|
Pre-tax
income
|
2007
|
2006
|
2005
|
|||||||||
|
Domestic
|
$ | 104,640 | $ | 83,665 | $ | 71,092 | ||||||
|
International
|
108,234 | 91,100 | 95,380 | |||||||||
|
Consolidated
|
$ | 212,874 | $ | 174,765 | $ | 166,472 | ||||||
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), on January 1, 2007. The
Company did not record any cumulative effect adjustment to retained earnings as
a result of adopting FIN 48. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:
|
Balance
as of December 31, 2006
|
|
$
|
8,432
|
|
|
Additions
based on tax positions related to the current year
|
|
453
|
||
|
Additions
for tax positions of prior years
|
|
167
|
||
|
Reductions
for tax positions of prior years
|
|
(2,022
|
)
|
|
|
Settlements
|
|
—
|
||
|
Balance
as of December 31, 2007
|
|
$
|
7,030
|
Of the
$7,030 of unrecognized tax benefits, the entire amount would impact the
effective income tax rate if recognized. Interest and penalties, if any,
related to unrecognized tax benefits are recorded in income tax expense. During
the years ended December 31, 2007, 2006 and 2005, the Company recognized
approximately $197, $764 and $53 in interest and penalties,
respectively. The Company had approximately $1,015 and $818 of
accrued interest and penalties at December 31, 2007 and 2006,
respectively.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state/local or
non-U.S. income tax examinations by tax authorities for years prior to 2003,
2003 and 2000, respectively. On October 24, 2007, the Company
received an income tax assessment from the Danish Tax Authority with respect to
the 2001, 2002 and 2003 tax years. The tax assessment relates to the royalty
paid by one of the Company’s U.S. subsidiaries to a subsidiary in Denmark, and
the position taken by the Danish Tax authority could apply to subsequent
years. Management believes it has meritorious defenses to the proposed
adjustment and will oppose the assessment in the Danish courts. However, there
is a reasonable possibility under FIN 48 that the amount of unrecognized tax
benefits relating to this matter may change in the next twelve months. An
estimate of the amount of such change cannot be made at this time. Additionally,
the statute of limitations will expire on various federal, state/local or
non-U.S, income tax returns by the end of 2008. The Company
anticipates it is reasonably possible a decrease in the amount of unrecognized
tax benefits will be made as a result of the statute of limitations expiring on
these returns. The amount of the decrease will be
immaterial.
At
December 31, 2007, Tempur-Pedic International had undistributed earnings of
$9,125 from its foreign subsidiaries determined under U.S. tax principles
related to the period prior to the Tempur Acquisition. No provisions have been
made for U.S. income taxes or foreign withholding taxes on the remaining $9,125
of undistributed earnings, as these earnings are considered indefinitely
reinvested.
In
addition, Tempur-Pedic International had undistributed earnings from its foreign
subsidiaries determined under U.S. generally accepted accounting principles for
the period from November 1, 2002 through December 31, 2007 of
$197,628. No provisions have been made for U.S. income taxes or
foreign withholding taxes on the $197,628 of undistributed earnings, as these
earnings are considered indefinitely reinvested. These undistributed earnings
could become subject to U.S. income taxes and foreign withholding taxes (subject
to a reduction for foreign tax credits) if these undistributed earnings were
remitted as dividends, loaned to the U.S. parent company or a U.S. subsidiary,
or if Tempur-Pedic International Inc. should sell its stock in the
subsidiaries.
The
Company’s foreign NOLs were $37,346 and $28,498 as of December 31, 2007 and
2006, respectively. These NOLs expire at various dates through 2017. The Company
has established a valuation allowance for net operating loss carryforwards
(NOLs) and certain other deferred tax assets related to certain foreign
operations. During 2007, valuation allowances were eliminated totaling $4,640
against net operating loss carry forwards. Of this amount, $2,166 was a charge
to goodwill as these valuation allowances related to periods prior to the
acquisition of the Company in November 2002. Management eliminated certain of
these valuation allowances in 2007 due to a history of earnings over the past
three years along with with earnings projected in future years for which it is
expected to be able to utilize these NOLs. Management believes that, based on a
number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of the remaining foreign NOLs and
certain other timing differences related to some of its foreign
operations. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion of all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which the temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income, management believes it is more likely than not the
Company will realize the benefits of the deferred tax assets, other than those
related to some of its foreign operations as discussed above. However, there can
be no assurance that such assets will be realized if circumstances
change.
The
Income tax provision includes federal, state, and foreign income taxes currently
payable and those deferred or prepaid because of temporary differences between
financial statement and tax bases of assets and liabilities. The Company records
income taxes under the liability method. Under this method, deferred income
taxes are recognized for the estimated future tax effects of differences between
the tax bases of assets and liabilities and their financial reporting amounts
based on enacted tax laws.
The
Income tax provision consisted of the following:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 42,589 | $ | 37,818 | $ | 34,532 | ||||||
|
State
|
10,511 | 3,525 | 4,003 | |||||||||
|
Foreign
|
27,276 | 24,928 | 29,438 | |||||||||
|
Total current
|
80,376 | 66,271 | 67,973 | |||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(4,469 | ) | (6,680 | ) | (1,565 | ) | ||||||
|
State
|
(308 | ) | 605 | 208 | ||||||||
|
Foreign
|
(4,184 | ) | 2,247 | 527 | ||||||||
|
Total deferred
|
(8,961 | ) | (3,828 | ) | (830 | ) | ||||||
|
Total
Income tax provision
|
$ | 71,415 | $ | 62,443 | $ | 67,143 | ||||||
The net
deferred tax asset and liability recognized in the Consolidated Balance Sheets
consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
|
|||||||
|
Inventories
|
|
$
|
4,192
|
$
|
4,862
|
|||
|
Net
operating losses
|
|
11,708
|
10,005
|
|||||
|
Property,
plant and equipment
|
|
3,333
|
2,399
|
|||||
|
Accrued
expenses and other
|
|
10,537
|
7,376
|
|||||
|
Total
deferred tax assets
|
|
29,770
|
24,642
|
|||||
|
Valuation
allowances
|
|
(8,779)
|
(12,662
|
)
|
||||
|
Total
net deferred tax assets
|
|
20,991
|
11,980
|
|||||
|
Deferred
tax liabilities:
|
|
|||||||
|
Property,
plant and equipment
|
|
(10,584)
|
(11,907
|
)
|
||||
|
Intangible
assets
|
|
(25,265)
|
(26,645
|
)
|
||||
|
Accrued
expenses and other
|
|
(2,602)
|
(2,440
|
)
|
||||
|
Inventories
|
|
(131)
|
(187
|
)
|
||||
|
Goodwill
|
|
(130)
|
46
|
|||||
|
Total
deferred tax liabilities
|
|
(38,712)
|
(41,133
|
)
|
||||
|
Net
deferred tax liabilities
|
|
$
|
(17,721)
|
$
|
(29,153
|
)
|
||
(10) Major
Customers
The top
five customers in the applicable period accounted for approximately 18%, 15% and
12% of the Company’s global sales for the years ended December 31, 2007, 2006
and 2005, respectively. The top five customers in the applicable period also
accounted for approximately 23% and 18% of accounts receivable as
of December 31, 2007 and 2006, respectively. The loss of one or more
of these customers could negatively impact the Company. The
composition of our top 5 customers varies between the periods ended December 31,
2007, 2006 and 2005.
(11)
Benefit Plan
A
subsidiary of the Company has a defined contribution plan (the Plan) whereby
eligible employees may contribute up to 15% of their pay subject to certain
limitations as defined by the Plan. Employees are eligible to participate in the
Plan after 90 days and are eligible to receive matching contributions upon one
year of employment with the Company. The Plan provides a 100% match of the first
3% and 50% of the next 2% of eligible employee contributions. All matching
contributions vest immediately. The Company incurred $813, $772, and $520 of
expenses associated with the Plan for the years ended December 31, 2007, 2006
and 2005, respectively.
(12)
Earnings Per Common Share
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income
|
$ | 141,459 | $ | 112,322 | $ | 99,329 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic earnings per common share—weighted
average shares
|
79,831 | 84,922 | 98,012 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Employee
stock options and RSUs
|
1,425 | 2,608 | 4,132 | |||||||||
|
Denominator
for diluted earnings per common share—adjusted weighted average
shares
|
81,256 | 87,530 | 102,144 | |||||||||
|
Basic
earnings per common share
|
$ | 1.77 | $ | 1.32 | $ | 1.01 | ||||||
|
Diluted
earnings per common share
|
$ | 1.74 | $ | 1.28 | $ | 0.97 | ||||||
The
Company excluded 9 and 515 and 395 shares issuable upon exercise of outstanding
stock options for the years ended December 31, 2007, 2006 and 2005,
respectively, from the Diluted earnings per common share computation since their
exercise price was greater than the average market price of our common stock or
if they were otherwise anti-dilutive.
(13)
Business Segment Information
The
Company operates in two business segments: Domestic and International. These
reportable segments are strategic business units that are managed separately
based on the fundamental differences in their operations. The Domestic segment
consists of the two U.S. manufacturing facilities, whose customers include the
U.S. distribution subsidiary and in certain third party distributors in the
Americas. The International segment consists of the manufacturing facility in
Denmark, whose customers include all of the distribution subsidiaries and third
party distributors outside the Domestic segment. The Company evaluates segment
performance based on Net sales and Operating income. Certain prior period
amounts have been reclassified to conform to the 2007 presentation. The
reclassifications relate to the Company’s Corporate office operating expenses
and certain amounts for goodwill and other assets that are carried at the
holding company level which are included in the Domestic operating
segment.
The
following table summarizes segment information:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
sales from external customers:
|
|
|||||||||||
|
Domestic
|
|
$
|
725,349
|
$
|
621,781
|
$
|
536,286
|
|||||
|
International
|
|
381,373
|
323,264
|
300,446
|
||||||||
|
|
$
|
1,106,722
|
$
|
945,045
|
$
|
836,732
|
||||||
|
Inter-segment
sales:
|
|
|||||||||||
|
Domestic
|
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
International
|
|
2,994
|
4,785
|
39,164
|
||||||||
|
Intercompany
eliminations
|
|
(2,994
|
)
|
(4,785
|
)
|
(39,164
|
)
|
|||||
|
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Operating
income:
|
|
|||||||||||
|
Domestic
|
|
$
|
135,202
|
$
|
116,063
|
$
|
95,084
|
|||||
|
International
|
|
108,912
|
93,242
|
95,531
|
||||||||
|
|
$
|
244,114
|
$
|
209,305
|
$
|
190,615
|
||||||
|
Depreciation
and amortization (excluding stock-based compensation
amortization):
|
|
|||||||||||
|
Domestic
|
|
$
|
22,326
|
$
|
13,245
|
$
|
12,377
|
|||||
|
International
|
|
11,088
|
11,583
|
12,622
|
||||||||
|
|
$
|
33,414
|
$
|
24,828
|
$
|
24,999
|
||||||
|
Total
assets:
|
|
|||||||||||
|
Domestic
|
|
$
|
608,346
|
$
|
485,958
|
$
|
407,304
|
|||||
|
International
|
|
339,757
|
322,816
|
301,465
|
||||||||
|
Intercompany
eliminations
|
|
(141,671
|
)
|
(83,108
|
)
|
(6,458
|
)
|
|||||
|
|
$
|
806,432
|
$
|
725,666
|
$
|
702,311
|
||||||
|
Capital
expenditures:
|
|
|||||||||||
|
Domestic
|
|
$
|
11,053
|
$
|
32,053
|
$
|
78,592
|
|||||
|
International
|
|
5,096
|
5,158
|
6,289
|
||||||||
|
|
$
|
16,149
|
$
|
37,211
|
$
|
84,881
|
||||||
During
the course of normal operations, the Domestic segment purchases inventory from
the Danish manufacturing facility. These purchases are included in the
International segment as Intercompany sales. The Intercompany profits on these
sales are eliminated from the International segment when the manufacturing profit in ending finished
goods inventory is eliminated during the consolidation of the Company’s results.
These manufacturing profits were $607, $1,310,
and $15,832 for the years ended December 31, 2007, 2006, and 2005,
respectively.
(14)
Quarterly Financial Data (unaudited)
Our
quarterly operating results fluctuate as a result of seasonal variations in our
business. A significant portion of our growth in Net sales is attributable to
growth in sales in our Domestic retail channel, particularly sales to furniture
and bedding stores, which we believe are subject to seasonality inherent in the
bedding industry with sales expected to be generally lower in the second and
fourth quarters and higher in the first and third quarters. Accordingly, our Net
sales may be affected by this seasonality as our Domestic retail sales channel
continues to grow as a percentage of our overall Net sales.
Quarterly
results of operations for the years ended December 31, 2007 and 2006 are
summarized below:
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
2007
|
||||||||||||||||
|
Net
sales
|
$ | 266,032 | $ | 257,642 | $ | 294,094 | $ | 288,954 | ||||||||
|
Gross
profit
|
127,659 | 124,569 | 141,610 | 140,988 | ||||||||||||
|
Operating
income
|
53,754 | 55,130 | 67,549 | 67,681 | ||||||||||||
|
Loss
on debt extinguishment
|
— | (126 | ) | — | — | |||||||||||
|
Net
income
|
29,780 | 32,931 | 38,818 | 39,930 | ||||||||||||
|
Basic
earnings per common share
|
$ | 0.35 | $ | 0.40 | $ | 0.50 | $ | 0.53 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.35 | $ | 0.39 | $ | 0.49 | $ | 0.52 | ||||||||
|
2006
|
||||||||||||||||
|
Net
sales
|
$ | 228,586 | $ | 218,962 | $ | 240,917 | $ | 256,580 | ||||||||
|
Gross
profit
|
111,254 | 106,516 | 116,023 | 126,745 | ||||||||||||
|
Operating
income
|
47,065 | 47,225 | 53,721 | 61,294 | ||||||||||||
|
Loss
on debt extinguishment
|
— | — | — | (10,722 | ) | |||||||||||
|
Net
income
|
26,893 | 26,112 | 28,863 | 30,454 | ||||||||||||
|
Basic
earnings per common share
|
$ | 0.30 | $ | 0.31 | $ | 0.35 | $ | 0.37 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.29 | $ | 0.30 | $ | 0.34 | $ | 0.36 | ||||||||
The sum
of the quarterly earnings per common share amounts may not equal the annual
amount reported because per share amounts are computed independently for each
quarter and for the full year based on respective weighted-average common shares
outstanding and other dilutive potential common shares. Our quarterly operating
results fluctuate as a result of seasonal variations in our
business
TEMPUR-PEDIC
INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
SCHEDULE
II
|
Description
|
Balance
at
Beginning
of
Period
|
Additions
Charges
to
Costs
and
Expenses
|
Charged
to Other
Accounts
|
Deductions
|
Balance
at
End
of
Period
|
|||||||||||||||
|
Allowance
for Doubtful Accounts:
|
||||||||||||||||||||
|
Year
Ended December 31, 2005
|
$ | 5,508 | $ | 2,666 | $ | — | $ | (2,738 | ) | $ | 5,436 | |||||||||
|
Year
Ended December 31, 2006
|
$ | 5,436 | $ | 3,464 | $ | — | $ | (2,786 | ) | $ | 6,114 | |||||||||
|
Year
Ended December 31, 2007
|
$ | 6,114 | $ | 5,997 | $ | — | $ | (4,055 | ) | $ | 8,056 | |||||||||