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TPX > SEC Filings for TPX > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for TEMPUR PEDIC INTERNATIONAL INC

Form 10-Q for TEMPUR PEDIC INTERNATIONAL INC


30-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included in this Form 10-Q. Unless otherwise noted, all of the financial information in this report is condensed consolidated information for the Company. 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 include numerous risks and uncertainties, as described under "Special Note Regarding Forward-Looking Statements" and "Risk Factors" elsewhere in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011. Our actual results may differ materially from those contained in any forward-looking statements. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements contained herein.

In this discussion and analysis, we discuss and explain the financial condition and results of our operations for the three and nine month periods ended September 30, 2012 and 2011, including the following points:

? An overview of our business strategy; ? An overview of the proposed acquisition of Sealy Corporation ("Sealy"); Our Net sales and costs in the periods presented as well as changes ? between periods;
Discussion of new initiatives that may affect our future results of ? operations and financial condition; Expected future expenditures for capital projects and sources of ? liquidity for future operations; and ? The effect of the foregoing on our overall financial performance and condition, as well as factors that could affect our future performance.

Executive Overview

General. We are the leading manufacturer, marketer and distributor of premium mattresses and pillows, which we sell in approximately 80 countries under the TEMPURŪ and Tempur-PedicŪ brands. We believe our premium mattresses and pillows are more comfortable than standard bedding products because our proprietary pressure-relieving TEMPURŪ material is temperature sensitive, has a high density and conforms to the body.

We sell our premium mattresses and pillows through four distribution channels in each operating business segment: Retail (furniture and bedding, non-spring and department stores); Direct (direct response, internet and company-owned stores); Healthcare (hospitals, nursing homes, healthcare professionals and medical retailers); and Third party distributors in countries where we do not sell directly through our own subsidiaries.

Business Segments. We have two reportable business segments: North America and International. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their geographies. The North American operating segment consists of two U.S. manufacturing facilities and our North American distribution subsidiaries. The International segment consists of our manufacturing facility in Denmark, whose customers include all of our distribution subsidiaries and third party distributors outside the North American operating segment. We evaluate segment performance based on Net sales and Operating income.


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Strategy

Our goal is to become the world's favorite mattress and pillow brand. In order to achieve this long-term goal while managing through the current economic and competitive environment, we plan to complete the proposed acquisition of Sealy, and to continue to pursue certain key Tempur-PedicŪ strategic goals using the related strategies discussed below.

? Make sure everyone knows that they would sleep better on a Tempur-PedicŪ mattress - we plan to continue to invest in our global brand awareness through advertising campaigns that further associate our brand name with overall sleep and premium quality products.
? Make sure there is a Tempur-PedicŪ bed and pillow that appeals to everyone - we plan to continue to maintain our focus on premium products at the high end of the category price range that are preferred by consumers.
? Make sure that Tempur-PedicŪ products are available to everyone - we plan to expand our points of distribution and the effectiveness of our distribution channels by ensuring our retailers are provided attractive incentives to sell our products.
? Make sure that Tempur-PedicŪ bedding products continue to deliver the best sleep - we plan to continue to invest in product research and development to systematically innovate and improve our products in consumer relevant ways

In pursuing these strategic goals, we expect to continue to optimize our cost structure in order to enable these marketing and product development investments.

Acquisition

On September 26, 2012, we entered into an Agreement and Plan of Merger ("Merger Agreement") to acquire Sealy by merging Sealy with a newly-formed subsidiary of the Company (the "Merger"). Sealy, headquartered in Trinity, North Carolina, owns one of the largest bedding brands in the world, and manufactures and markets a complete line of bedding products. Subject to the terms and conditions of the Merger Agreement, at the effective time and as a result of the Merger, each share of common stock of Sealy issued and outstanding immediately prior to the effective time of the Merger will be cancelled and (other than shares held by Sealy or the Company or their subsidiaries or Sealy stockholders who properly exercise appraisal rights) converted into the right to receive $2.20 in cash. We anticipate that the total consideration to be paid, including the assumption or repayment of outstanding indebtedness of Sealy less cash assumed, will be approximately $1.3 billion. Concurrently, and in connection with entering into the Merger Agreement, we entered into a firm debt commitment letter with Bank of America, N.A. ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith, pursuant to which, subject to the conditions set forth therein, Bank of America has committed to provide to the Company (a) $1.77 billion in senior secured credit facilities (collectively, the "Senior Credit Facilities"), comprised of (i) a term loan A facility of $650.0 million, (ii) a term loan B facility of $770.0 million and (iii) a revolving credit facility of $350.0 million; and (b) $350.0 million in senior unsecured bridge loans (the "Bridge Loans") to be made available to us as interim financing in the event that our proposed issuance of $350.0 million in senior unsecured notes (the "Notes") is not completed on or prior to the date of consummation of the Merger. The proceeds of the Senior Credit Facilities and either Bridge Loans or the Notes (collectively, the "Facilities") will be used to finance the Merger, for the repayment, defeasance or redemption of substantially all existing indebtedness of the Company and Sealy, the costs and expenses related to the Merger and the closing of the Facilities and the ongoing working capital and other general corporate purposes of the Company after consummation of the Merger. The transaction is expected to be completed in the first half of calendar 2013 and is subject to regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other customary conditions. The Merger Agreement contains certain termination rights for both the Company and Sealy and further provides that, upon termination of the Merger Agreement under certain circumstances, Sealy may be obligated to pay us a termination fee of $25.0 million. In addition, if antitrust enforcement agencies either commence or inform the parties that they intend to commence an action to enjoin the Merger, we may be required to pay Sealy (i) a termination fee of $90.0 million if both parties elect to terminate the Merger Agreement or (ii) a termination fee of $90.0 million (or $40.0 million if we elect to terminate the Merger Agreement but Sealy does not so elect to terminate) if the Merger does not close due to a failure to receive antitrust approval in the nine months following the execution of the Merger Agreement, subject to certain extensions.


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Results of Operations

A summary of our results for the three and nine months ended September 30, 2012 include the following:

? (Loss) earnings per diluted common share (EPS) were $(0.03) for the three months ended September 30, 2012 compared to $0.90 for the three months ended September 30, 2011. For the nine months ended September 30, 2012 EPS were $1.31 compared to $2.34 for the same period in 2011. ? Adjusted EPS were $0.70 for the three months ended September 30, 2012 compared to $0.90 for the three months ended September 30, 2011. For the nine months ended September 30, 2012 Adjusted EPS were $2.01 compared to $2.34 for the same period in 2011. For a discussion and reconciliation of Adjusted EPS to GAAP EPS refer to the non-GAAP financial information set forth below under the heading "Non-GAAP Financial Information". ? Net sales for the three months ended September 30, 2012 decreased to $348.0 million from $383.1 million for the same period in 2011. Net sales for the nine months ended September 30, 2012 increased to $1,061.8 million from $1,051.1 million for the same period in 2011.

 (In thousands,
   except per                Three Months Ended                           Nine Months Ended
  common share
    amounts)                   September 30,                                September 30,
                    2012                  2011                   2012                  2011
Net sales         $ 347,944   100.0 %  $  383,085    100.0 %  $ 1,061,798   100.0 % $ 1,051,135    100.0  %
Cost of sales       176,709    50.8       182,491     47.6        517,694    48.8       499,213     47.5
Gross profit        171,235    49.2       200,594     52.4        544,104    51.2       551,922     52.5
Selling and
marketing
  expenses           76,232    21.9        72,439     18.9        243,203    22.9       204,789     19.5
General
administrative
  and other
expenses             31,556     9.1        31,548      8.3        103,840     9.8        92,416      8.8
Operating income     63,447    18.2        96,607     25.2        197,061    18.5       254,717     24.2
Interest expense,
net                  (4,793 )  (1.4 )      (3,265 )   (0.9 )      (13,026 )  (1.1 )      (8,450 )   (0.8 )
Other income
(expense),
  net                   383     0.1          (229 )      -            428       -          (950 )   (0.1 )
Income before
income
  taxes              59,037    16.9        93,113     24.3        184,463    17.4       245,317     23.3
Income tax
provision            61,054    17.5        31,164      8.1        101,139     9.5        82,024      7.8
Net (loss) income $  (2,017 )  (0.6 )% $   61,949     16.2 %  $    83,324     7.8 % $   163,293     15.5  %

(Loss) earnings
per
  common share:
  Basic           $   (0.03 )          $     0.93             $      1.34           $      2.41
  Diluted         $   (0.03 )          $     0.90             $      1.31           $      2.34
Weighted average
  common shares
  outstanding:
  Basic              59,558                66,655                  62,087                67,722
  Diluted            59,558                68,571                  63,624                69,847


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Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

A summary of Net sales, by channel and by segment, is set forth below:

                    CONSOLIDATED            NORTH AMERICA            INTERNATIONAL
                 Three Months Ended       Three Months Ended       Three Months Ended
                   September 30,            September 30,            September 30,
(in thousands)    2012        2011         2012        2011         2012        2011
Retail         $  306,486   $ 342,804   $  221,186   $ 257,049   $   85,300   $  85,755
Direct             27,093      25,405       16,729      19,588       10,364       5,817
Healthcare          7,407       8,076        2,952       2,690        4,455       5,386
Third Party         6,958       6,800            -           -        6,958       6,800
               $  347,944   $ 383,085   $  240,867   $ 279,327   $  107,077   $ 103,758

A summary of Net sales, by product and by segment, is set forth below:

                    CONSOLIDATED            NORTH AMERICA            INTERNATIONAL
                 Three Months Ended       Three Months Ended       Three Months Ended
                   September 30,            September 30,            September 30,
(in thousands)    2012        2011         2012        2011         2012        2011
Mattresses     $  228,339   $ 255,805   $  164,293   $ 192,683   $   64,046   $  63,122
Pillows            42,140      38,119       20,182      19,182       21,958      18,937
Other              77,465      89,161       56,392      67,462       21,073      21,699
               $  347,944   $ 383,085   $  240,867   $ 279,327   $  107,077   $ 103,758

Net sales. Net sales for the three months ended September 30, 2012 decreased to $347.9 million from $383.1 million for the same period in 2011, a decrease of $35.1 million, or 9.2%. We believe our decreased revenues are primarily the result of an increased competitive environment in our North American segment. Consolidated Mattress sales decreased $27.5 million, or 10.7%, compared to the third quarter of 2011. The decrease in Mattress sales occurred primarily in our Retail channel with Net sales decreasing to $306.5 million from $342.8 million for the same period in 2011, a decrease of $36.3 million, or 10.6%. Consolidated Other, which primarily includes adjustable bed bases and foundations, decreased $11.7 million, or 13.1%. Many of our Other products are sold with mattress purchases. Therefore, when Mattress sales decrease, Other products are also negatively impacted. Pillow sales increased $4.0 million, or 10.5%, from the same period in 2011. Direct sales increased $1.7 million, or 6.6%, from the same period in 2011. The principal factors that impacted Net sales for each segment are discussed below, in the respective segment discussion.

North America. North American Net sales for the three months ended September 30, 2012 decreased to $240.9 million from $279.3 million for the same period in 2011, a decrease of $38.5 million, or 13.8%. Our North American Retail channel contributed $221.2 million in Net sales for the three months ended September 30, 2012 for a decrease of $35.9 million, or 14.0%, compared to the same period in 2011. During 2012, there has been a significant increase in the number of competitive product introductions, supported by aggressive marketing and incentives. We believe this change in our competitive environment was the primary driver of our decreased Net sales. North American Mattress sales decreased $28.4 million, or 14.7%, over the same period in 2011. North American Direct sales decreased $2.9 million, or 14.6%, over the same period in 2011. Other Net sales decreased $11.1 million, or 16.4%, compared to the same period in 2011, consistent with the decrease in Mattress sales.

We expect our current competitive environment to continue into the foreseeable future. During the third quarter of 2012, we undertook several initiatives to stabilize North American sales. These initiatives include continued innovation to create premium differentiated products that are preferred by consumers, which will ensure our retailers are motivated to support our products, and continuing our commitment to consumer advertising.


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International. International Net sales for the three months ended September 30, 2012 increased to $107.1 million from $103.8 million for the same period in 2011, an increase of $3.3 million, or 3.2%. On a constant currency basis, our International Net sales increased approximately 11.1%. International Net sales increased primarily due to expanding points of distribution and investments in our brand awareness. The International Direct channel increased $4.5 million, or 78.2% compared to the same period in 2011, due to an increase in the number of company-owned stores. International Pillow sales in the third quarter of 2012 increased $3.0 million, or 16.0%, over the same period in 2011.

Gross profit. Gross profit for the three months ended September 30, 2012 decreased to $171.2 million from $200.6 million for the same period in 2011, a decrease of $29.4 million, or 14.6%. The Gross profit margin for the three months ended September 30, 2012 was 49.2% as compared to 52.4% for the same period in 2011. Our Gross profit margin is impacted by, among other factors, geographic mix between segments. Additionally, our Gross profit margin includes a royalty paid by the North American segment to our International segment based on production volume, which has the effect of lowering the North American segment's reported Gross profit margin, and increasing the International segment's reported Gross profit margin. Costs associated with Net sales are recorded in Cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in this process. The principal factors that impacted Gross profit margin during the year are identified and discussed below in the respective segment discussions.

North America. North American Gross profit for the three months ended September 30, 2012 decreased to $105.0 million from $139.7 million for the same period in 2011, a decrease of $34.7 million, or 24.8%. The Gross profit margin in our North American segment was 43.6% and 50.0% for the three months ended September 30, 2012 and 2011, respectively. The decrease in our North American Gross profit margin was primarily driven by unfavorable product mix and increased promotions and discounts related to new product introductions. Our North American Cost of sales for the three months ended September 30, 2012 decreased to $135.8 million from $139.6 million for the same period in 2011, a decrease of $3.7 million, or 2.7%.

International. International Gross profit for the three months ended September 30, 2012 increased to $66.2 million from $60.9 million for the same period in 2011, an increase of $5.4 million, or 8.8%. The Gross profit margin in our International segment was 61.8% and 58.6% for the three months ended September 30, 2012 and 2011, respectively. The increase in our International Gross profit margin was primarily driven by efficiencies in manufacturing and fixed cost leverage related to higher production volumes. In addition, we incurred costs related to strategic investments during the three months ended September 30, 2011, including an information technology upgrade at our manufacturing facility in Denmark, and floor model discounts related to new product introductions. Our International Cost of sales for the three months ended September 30, 2012 decreased to $40.9 million from $42.9 million for the same period in 2011, a decrease of $2.0 million, or 4.8%.

Selling and marketing expenses. Selling and marketing expenses include advertising and media production associated with our Direct channel, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings, point of purchase materials and sales force compensation. We also include in Selling and marketing expenses certain new product development costs, including market research and new product testing. Selling and marketing expenses increased to $76.2 million for the three months ended September 30, 2012 as compared to $72.4 million for the three months ended September 30, 2011, an increase of $3.8 million, or 5.2%. Selling and marketing expenses as a percentage of Net sales were 21.9% and 18.9% for the three months ended September 30, 2012 and 2011, respectively. Our advertising expenses for the three months ended September 30, 2012 were $38.4 million compared to $39.6 million in 2011, a decrease of $1.2 million, or 3.1%. Advertising expenses as a percentage of Net sales were 11.0% and 10.3% for the three months ended September 30, 2012 and 2011, respectively. All other selling and marketing expenses as a percentage of Net sales were approximately 10.9% and 8.6% for the three months ended September 30, 2012 and 2011, respectively. All other selling and marketing expenses increased $5.0 million, or 15.3%, due to increases in promotional related expenses of $2.8 million and costs associated with our increase in company-owned stores of $2.5 million, partially offset by a benefit recorded for the performance restricted share units ("PRSUs") granted in 2011 and 2012 of $1.8 million following our re-evaluation of the probability of meeting certain required financial metrics related to the grants.


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General, administrative and other expenses. General, administrative and other expenses include management salaries, information technology, professional fees, depreciation of furniture and fixtures, leasehold improvements and computer equipment, expenses for administrative functions and research and development costs. General, administrative and other expenses as a percentage of Net sales were 9.1% and 8.3% for the three months ended September 30, 2012 and 2011, respectively. General, administrative and other expenses increased to $31.6 million for the three months ended September 30, 2012 as compared to $31.5 million for the same period in 2011. General, administrative and other expenses were flat compared to the three months ended September 30, 2011 due to increased legal and professional fees of $4.4 million, primarily related to transaction costs related to the proposed acquisition of Sealy and increased litigation costs. These increases were offset by a $6.1 million benefit recorded for the PRSUs granted in 2011 and 2012 following our re-evaluation of the probability of meeting certain required financial metrics related to the grants. We expect General, administrative and other expenses to continue to be impacted by transaction and integration costs related to the proposed acquisition of Sealy.

Research and development expenses for the three months ended September 30, 2012 were $3.9 million compared to $2.4 million for the same period in 2011, an increase of $1.5 million, or 63.0%. Consistent with our strategy, we continue to invest in research and development in order to improve our existing product lines and continue to create new and differentiated products.

Interest expense, net. Interest expense, net, includes the interest costs associated with our borrowings and the amortization of deferred financing costs. Interest expense, net, increased to $4.8 million for the three months ended September 30, 2012 as compared to $3.3 million for the same period in 2011, an increase of $1.5 million, or 46.8%. The increase in interest expense is primarily attributable to an increase in our debt outstanding at September 30, 2012 compared to our debt outstanding at September 30, 2011 and an increase in our effective interest rate.

Income before income taxes. Income before income taxes for the quarter ended September 30, 2012 decreased to $59.0 million from $93.1 million for the same period in 2011, a decrease of $34.1 million, or 36.6%. North America Income before income taxes for the quarter ended September 30, 2012 decreased to $30.3 million from $65.8 million for the same period in 2011, a decrease of $35.5 million, or 54.0%. International Income before income taxes for the quarter ended September 30, 2012 increased to $28.8 million from $27.3 million for the same period in 2011, an increase of $1.5 million, or 5.4%. The decrease in Income before income taxes was a result of the items discussed above.

Income tax provision. Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and includes the impact of net operating losses for certain of our foreign operations. Our effective tax rate for the three months ended September 30, 2012 and 2011 was 103.4% and 33.5%, respectively. During the three months ended September 30, 2012, we changed the classification of our undistributed earnings from non-U.S. operations on which no provision for U.S. federal and/or state income tax and foreign withholdings had been provided because Tempur-Pedic International intended to reinvest such earnings indefinitely outside of the United States to reflect a change in management's strategic objectives that could require the repatriation of foreign earnings. As a result of this change, we recognized $41,863 of additional income tax expense during the three months ended September 30, 2012 to record the applicable U.S. deferred income tax liability. We expect to repatriate non-U.S. cash holdings upon the closing of the proposed Sealy acquisition.


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Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

A summary of Net sales, by channel and by segment, is set forth below:

                     CONSOLIDATED              NORTH AMERICA           INTERNATIONAL
                   Nine Months Ended         Nine Months Ended       Nine Months Ended
                     September 30,             September 30,           September 30,
(in thousands)    2012          2011         2012        2011        2012        2011
Retail         $   932,301   $   926,258   $ 668,657   $ 692,383   $ 263,644   $ 233,875
Direct              83,400        71,479      58,713      54,844      24,687      16,635
Healthcare          23,039        25,073       9,077       8,215      13,962      16,858
Third Party         23,058        28,325           -           -      23,058      28,325
               $ 1,061,798   $ 1,051,135   $ 736,447   $ 755,442   $ 325,351   $ 295,693

A summary of Net sales, by product and by segment, is set forth below:

                     CONSOLIDATED              NORTH AMERICA           INTERNATIONAL
                   Nine Months Ended         Nine Months Ended       Nine Months Ended
                     September 30,             September 30,           September 30,
(in thousands)    2012          2011         2012        2011        2012        2011
Mattresses     $   708,811   $   705,759   $ 508,583   $ 527,398   $ 200,228   $ 178,361
Pillows            117,735       107,717      56,672      53,502      61,063      54,215
Other              235,252       237,659     171,192     174,542      64,060      63,117
               $ 1,061,798   $ 1,051,135   $ 736,447   $ 755,442   $ 325,351   $ 295,693

Net sales. Net sales for the nine months ended September 30, 2012 increased to $1,061.8 million from $1,051.1 million for the same period in 2011, an increase of $10.7 million, or 1.0%. During the three months ended March 31, 2012, we experienced an increase of 18.0% in our Net sales; however, this was offset by a decline in our Net sales during the three months ended June 30, 2012 and September 30, 2012 of 3.7% and 9.2%, respectively. During the first quarter of 2012, we believe our increased revenues were primarily a result of investments made in marketing and expanding points of distribution. Throughout the second . . .

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