SLEEP NUMBER CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended
March 29, 2014
Commission File Number: 0-25121
SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
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Minnesota
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41-1597886
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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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9800 59th Avenue North
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Minneapolis, Minnesota
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55442
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
(763) 551-7000
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
ý
NO
o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES
ý
NO
o
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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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ý
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Accelerated filer
o
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Non-accelerated filer
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o
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(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
o
NO
ý
As of
March 29, 2014
,
54,273,000
shares of the Registrant’s Common Stock were outstanding.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
INDEX
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Page
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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ii
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
(in thousands, except per share amounts)
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(unaudited)
March 29, 2014 |
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December 28,
2013 |
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Assets
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Current assets:
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Cash and cash equivalents
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$
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60,409
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$
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58,223
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Marketable debt securities – current
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52,147
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52,159
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Accounts receivable, net of allowance for doubtful accounts of $418 and $425, respectively
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15,579
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14,979
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Inventories
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44,590
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40,152
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Prepaid expenses
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7,923
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9,216
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Deferred income taxes
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6,926
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6,936
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Other current assets
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8,613
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7,874
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Total current assets
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196,187
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189,539
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Non-current assets:
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Marketable debt securities – non-current
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30,469
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34,632
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Property and equipment, net
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137,567
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129,542
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Goodwill and intangible assets, net
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16,613
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16,823
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Deferred income taxes
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6,396
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4,943
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Other assets
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6,229
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6,286
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Total assets
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$
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393,461
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$
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381,765
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Liabilities and Shareholders’ Equity
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Current liabilities:
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Accounts payable
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$
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63,385
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$
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73,391
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Customer prepayments
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20,177
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15,392
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Accrued sales returns
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10,737
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9,433
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Compensation and benefits
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19,493
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15,242
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Taxes and withholding
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16,514
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12,517
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Other current liabilities
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10,410
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11,207
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Total current liabilities
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140,716
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137,182
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Non-current liabilities:
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Warranty liabilities
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1,897
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1,567
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Other long-term liabilities
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18,725
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17,796
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Total liabilities
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161,338
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156,545
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Shareholders’ equity:
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Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding
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—
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—
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Common stock, $0.01 par value; 142,500 shares authorized, 54,273 and 54,901 shares issued and outstanding, respectively
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543
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549
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Additional paid-in capital
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—
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5,382
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Retained earnings
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231,557
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219,276
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Accumulated other comprehensive income
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23
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13
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Total shareholders’ equity
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232,123
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225,220
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Total liabilities and shareholders’ equity
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$
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393,461
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$
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381,765
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See accompanying notes to condensed consolidated financial statements.
2
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
(unaudited - in thousands, except per share amounts)
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Three Months Ended
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March 29,
2014 |
March 30,
2013 |
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Net sales
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$
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276,412
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$
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258,237
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Cost of sales
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105,029
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94,821
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Gross profit
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171,383
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163,416
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Operating expenses:
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Sales and marketing
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125,022
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109,813
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General and administrative
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18,896
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15,820
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Research and development
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1,663
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2,556
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Total operating expenses
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145,581
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128,189
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Operating income
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25,802
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35,227
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Other income, net
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102
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91
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Income before income taxes
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25,904
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35,318
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Income tax expense
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8,912
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11,847
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Net income
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$
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16,992
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$
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23,471
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Basic net income per share:
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Net income per share – basic
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$
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0.31
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$
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0.43
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Weighted-average shares – basic
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54,113
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55,095
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Diluted net income per share:
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Net income per share – diluted
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$
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0.31
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$
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0.42
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Weighted-average shares – diluted
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54,844
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56,251
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See accompanying notes to condensed consolidated financial statements.
3
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(unaudited - in thousands)
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Three Months Ended
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March 29,
2014 |
March 30,
2013 |
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Net income
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$
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16,992
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$
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23,471
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Other comprehensive income (loss) – unrealized gain (loss) on available-for-sale marketable debt securities, net of income tax
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10
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(7
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)
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Comprehensive income
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$
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17,002
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$
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23,464
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See accompanying notes to condensed consolidated financial statements.
4
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders’ Equity
(unaudited - in thousands)
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Common Stock
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Additional
Paid-in
Capital
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Retained
Earnings
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Accumulated
Other
Comprehensive
Income
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Total
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Shares
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Amount
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Balance at December 28, 2013
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54,901
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$
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549
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$
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5,382
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$
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219,276
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$
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13
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$
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225,220
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Net income
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—
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—
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—
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16,992
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—
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16,992
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Other comprehensive income:
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Unrealized gain on available-for-sale marketable debt securities, net of tax
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—
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—
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—
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—
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10
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10
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Exercise of common stock options
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32
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—
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411
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—
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—
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411
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Tax effect from stock-based compensation
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—
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—
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(166
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)
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—
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—
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(166
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)
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Stock-based compensation
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(80
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)
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—
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(108
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)
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—
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—
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(108
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)
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Repurchases of common stock
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(580
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)
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(6
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)
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(5,519
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)
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(4,711
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)
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—
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(10,236
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)
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Balance at March 29, 2014
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54,273
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$
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543
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$
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—
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$
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231,557
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$
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23
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$
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232,123
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See accompanying notes to condensed consolidated financial statements.
5
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
(unaudited - in thousands)
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Three Months Ended
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March 29, 2014
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March 30, 2013
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Cash flows from operating activities:
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Net income
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$
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16,992
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$
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23,471
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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9,176
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6,661
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Stock-based compensation
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(108
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)
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432
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Net (gain) loss on disposals and impairments of assets
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(2
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)
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27
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Excess tax benefits from stock-based compensation
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(19
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)
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(2,401
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)
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Deferred income taxes
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(1,450
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)
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585
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Changes in operating assets and liabilities, net of effect of acquisition:
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Accounts receivable
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(552
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)
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2,454
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Inventories
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(4,438
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)
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5,269
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Income taxes
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3,795
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7,534
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Prepaid expenses and other assets
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1,030
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(889
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)
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Accounts payable
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3,600
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12,955
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Customer prepayments
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4,785
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2,302
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Accrued compensation and benefits
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4,080
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(9,165
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)
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Other taxes and withholding
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36
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(1,443
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)
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Warranty liabilities
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185
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(239
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)
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Other accruals and liabilities
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1,754
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(2,531
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)
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Net cash provided by operating activities
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38,864
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45,022
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Cash flows from investing activities:
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Purchases of property and equipment
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(16,660
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)
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(14,309
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)
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Proceeds from maturities of marketable debt securities
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10,000
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5,898
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Investments in marketable debt securities
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(13,623
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)
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(12,883
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)
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Increase in restricted cash
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(500
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)
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—
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Proceeds from sales of property and equipment
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5
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3
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Acquisition of business
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—
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(15,500
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)
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Investment in non-marketable equity securities
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—
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(1,500
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)
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Net cash used in investing activities
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(20,778
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)
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(38,291
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)
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Cash flows from financing activities:
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Repurchases of common stock
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(10,236
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)
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(10,144
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)
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Net decrease in short-term borrowings
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(6,094
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)
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(4,370
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)
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Proceeds from issuance of common stock
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411
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2,282
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Excess tax benefits from stock-based compensation
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19
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2,401
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Net cash used in financing activities
|
(15,900
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)
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(9,831
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)
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|||
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Net increase (decrease) in cash and cash equivalents
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2,186
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(3,100
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)
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Cash and cash equivalents, at beginning of period
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58,223
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|
87,915
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Cash and cash equivalents, at end of period
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$
|
60,409
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$
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84,815
|
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See accompanying notes to condensed consolidated financial statements.
6
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
We prepared the condensed consolidated financial statements as of and for the three months ended
March 29, 2014
of Select Comfort Corporation and 100%-owned subsidiaries (“Select Comfort” or the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of
March 29, 2014
, and
December 28, 2013
, and the results of operations and cash flows for the periods presented. Our historical and quarterly results of operations may not be indicative of the results that may be achieved for the full year or any future period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended
December 28, 2013
and other recent filings with the SEC.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods. Our critical accounting policies consist of stock-based compensation, asset impairment charges, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.
The consolidated financial statements include the accounts of Select Comfort Corporation and our subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.
2. Fair Value Measurements
The following tables set forth, by level within the fair value hierarchy, our financial assets that were accounted for at fair value on a recurring basis at
March 29, 2014
, and
December 28, 2013
, according to the valuation techniques we used to determine their fair value (in thousands):
|
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March 29, 2014
|
|||||||||||||||
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Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Marketable debt securities – current
|
|
|
|
|
||||||||||||
|
U.S. Treasury securities
|
$
|
15,009
|
|
$
|
—
|
|
$
|
—
|
|
$
|
15,009
|
|
||||
|
Corporate bonds
|
—
|
|
20,356
|
|
—
|
|
20,356
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|
||||||||
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U.S. Agency bonds
|
—
|
|
12,018
|
|
—
|
|
12,018
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|
||||||||
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Municipal bonds
|
—
|
|
4,764
|
|
—
|
|
4,764
|
|
||||||||
|
|
15,009
|
|
37,138
|
|
—
|
|
52,147
|
|
||||||||
|
Marketable debt securities – non-current
|
|
|
|
|
||||||||||||
|
U.S. Treasury securities
|
8,989
|
|
—
|
|
—
|
|
8,989
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|
||||||||
|
Corporate bonds
|
—
|
|
10,303
|
|
—
|
|
10,303
|
|
||||||||
|
U.S. Agency bonds
|
—
|
|
7,502
|
|
—
|
|
7,502
|
|
||||||||
|
Municipal bonds
|
—
|
|
3,675
|
|
—
|
|
3,675
|
|
||||||||
|
|
8,989
|
|
21,480
|
|
—
|
|
30,469
|
|
||||||||
|
|
$
|
23,998
|
|
$
|
58,618
|
|
$
|
—
|
|
$
|
82,616
|
|
||||
7
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
|
|
December 28, 2013
|
|||||||||||||||
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Marketable debt securities – current
|
|
|
|
|
||||||||||||
|
U.S. Treasury securities
|
$
|
15,011
|
|
$
|
—
|
|
$
|
—
|
|
$
|
15,011
|
|
||||
|
Corporate bonds
|
—
|
|
20,300
|
|
—
|
|
20,300
|
|
||||||||
|
U.S. Agency bonds
|
—
|
|
12,025
|
|
—
|
|
12,025
|
|
||||||||
|
Municipal bonds
|
—
|
|
4,823
|
|
—
|
|
4,823
|
|
||||||||
|
15,011
|
|
37,148
|
|
—
|
|
52,159
|
|
|||||||||
|
Marketable debt securities – non-current
|
|
|
|
|
||||||||||||
|
U.S. Treasury securities
|
8,978
|
|
—
|
|
—
|
|
8,978
|
|
||||||||
|
Corporate bonds
|
—
|
|
15,484
|
|
—
|
|
15,484
|
|
||||||||
|
U.S. Agency bonds
|
—
|
|
7,498
|
|
—
|
|
7,498
|
|
||||||||
|
Municipal bonds
|
—
|
|
2,672
|
|
—
|
|
2,672
|
|
||||||||
|
8,978
|
|
25,654
|
|
—
|
|
34,632
|
|
|||||||||
|
|
$
|
23,989
|
|
$
|
62,802
|
|
$
|
—
|
|
$
|
86,791
|
|
||||
We did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.
At
March 29, 2014
, and
December 28, 2013
, we had
$1.1 million
and
$1.1 million
, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other assets. We also had corresponding deferred compensation plan liabilities of
$1.1 million
and
$1.1 million
at
March 29, 2014
, and
December 28, 2013
, respectively, which are included in other long-term liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.
3. Investments
Marketable Debt Securities
Investments in marketable debt securities were comprised of the following (in thousands):
|
|
March 29, 2014
|
||||||||||||||
|
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||
|
U.S. Treasury securities
|
$
|
23,979
|
|
$
|
19
|
|
$
|
—
|
|
$
|
23,998
|
|
|||
|
Corporate bonds
|
30,669
|
|
5
|
|
(15
|
)
|
30,659
|
|
|||||||
|
U.S. Agency bonds
|
19,516
|
|
10
|
|
(6
|
)
|
19,520
|
|
|||||||
|
Municipal bonds
|
8,414
|
|
25
|
|
—
|
|
8,439
|
|
|||||||
|
|
$
|
82,578
|
|
$
|
59
|
|
$
|
(21
|
)
|
$
|
82,616
|
|
|||
|
|
December 28, 2013
|
||||||||||||||
|
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||
|
U.S. Treasury securities
|
$
|
23,975
|
|
$
|
15
|
|
$
|
(1
|
)
|
$
|
23,989
|
|
|||
|
Corporate bonds
|
35,804
|
|
3
|
|
(23
|
)
|
35,784
|
|
|||||||
|
U.S. Agency bonds
|
19,517
|
|
10
|
|
(4
|
)
|
19,523
|
|
|||||||
|
Municipal bonds
|
7,474
|
|
23
|
|
(2
|
)
|
7,495
|
|
|||||||
|
$
|
86,770
|
|
$
|
51
|
|
$
|
(30
|
)
|
$
|
86,791
|
|
||||
8
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Maturities of marketable debt securities were as follows (in thousands):
|
|
March 29, 2014
|
December 28, 2013
|
|||||||||||||
|
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||
|
Marketable debt securities – current (due in less than one year)
|
$
|
52,112
|
|
$
|
52,147
|
|
$
|
52,122
|
|
$
|
52,159
|
|
|||
|
Marketable debt securities – non-current (due in one to two years)
|
30,466
|
|
30,469
|
|
34,648
|
|
34,632
|
|
|||||||
|
|
$
|
82,578
|
|
$
|
82,616
|
|
$
|
86,770
|
|
$
|
86,791
|
|
|||
During the three months ended
March 29, 2014
and
March 30, 2013
, respectively,
$10.0 million
and
$5.8 million
of marketable debt securities matured and were redeemed at face value. During the
three months ended
March 29, 2014
, there were no other-than-temporary declines in market value.
Other Investments
During 2013, we made a minority equity investment in one of our strategic product-development partners. The carrying value of this investment at
March 29, 2014
and
December 28, 2013
using the cost method is
$4.5 million
and is included in other assets on our condensed consolidated balance sheets.
4. Inventories
Inventories consisted of the following (in thousands):
|
|
March 29,
2014 |
December 28,
2013 |
|||||
|
Raw materials
|
$
|
8,234
|
|
$
|
7,118
|
|
|
|
Work in progress
|
507
|
|
505
|
|
|||
|
Finished goods
|
35,849
|
|
32,529
|
|
|||
|
|
$
|
44,590
|
|
$
|
40,152
|
|
|
5. Goodwill and Intangible Assets
Goodwill and Indefinite-Lived Intangible Assets
The following is a roll forward of goodwill and indefinite-lived trade name/trademarks (in thousands):
|
Three Months Ended
|
Three Months Ended
|
||||||||||||||
|
March 29, 2014
|
March 30, 2013
|
||||||||||||||
|
Goodwill
|
Indefinite-Lived
Trade Name/ Trademarks |
Goodwill
|
Indefinite-Lived
Trade Name/ Trademarks |
||||||||||||
|
Beginning balance
|
$
|
8,963
|
|
$
|
1,396
|
|
$
|
2,850
|
|
$
|
—
|
|
|||
|
Comfortaire purchase
|
—
|
|
—
|
|
6,157
|
|
1,396
|
|
|||||||
|
Ending balance
|
$
|
8,963
|
|
$
|
1,396
|
|
$
|
9,007
|
|
$
|
1,396
|
|
|||
9
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Definite-Lived Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):
|
March 29, 2014
|
December 28, 2013
|
||||||||||||||
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
||||||||||||
|
Developed technologies
|
$
|
5,231
|
|
$
|
974
|
|
$
|
5,231
|
|
$
|
850
|
|
|||
|
Customer relationships
|
2,413
|
|
416
|
|
2,413
|
|
330
|
|
|||||||
|
Trade names/trademarks
|
101
|
|
101
|
|
101
|
|
101
|
|
|||||||
|
$
|
7,745
|
|
$
|
1,491
|
|
$
|
7,745
|
|
$
|
1,281
|
|
||||
Amortization expense for definite-lived intangible assets for the three months ended
March 29, 2014
and
March 30, 2013
was
$0.2 million
and
$0.1 million
, respectively.
Credit Agreement
Our
$20.0 million
Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as amended, is an unsecured revolving credit facility that matures on
August 31, 2016
. The Credit Agreement contains an accordion feature that allows us to increase the amount of the line from
$20.0 million
to up to
$50.0 million
in total availability, subject to lender approval.
Any borrowings under the Amendment will, at our request, be classified as either LIBOR Loans or Adjusted Base Rate (“ABR”) Loans (both as defined in the Credit Agreement). The rate of interest payable by us in respect of loans outstanding under the revolving credit facility is (i) with respect to LIBOR Loans, the Adjusted LIBO Rate (as defined in the Credit Agreement) for the interest period then in effect, plus
1.25%
; or (ii) with respect to ABR Loans, the ABR (as defined in the Credit Agreement) then in effect for the Daily One-Month LIBO Rate (as defined in the Credit Agreement), plus
1.50%
or the prime rate. We are subject to certain financial covenants under the Credit Agreement, including minimum tangible net worth, a requirement to maintain a minimum amount of cash, cash equivalents and marketable debt securities, and to maintain at the administrative agent cash, cash equivalents and marketable debt securities equal to the amount the lenders are committed to lend under the Credit Agreement.
At both
March 29, 2014
, and
December 28, 2013
,
$20.0 million
was available under the Credit Agreement, we had no borrowings and we were in compliance with all financial covenants. We had
no
outstanding letters of credit as of
March 29, 2014
or
December 28, 2013
.
7. Repurchase of Common Stock
Repurchases of our common stock for the three months ended
March 29, 2014
and
March 30, 2013
were as follows (in thousands):
|
Three Months Ended
|
||||||||
|
|
March 29, 2014
|
March 30, 2013
|
||||||
|
Amount repurchased under Board-approved share repurchase program
|
$
|
10,011
|
|
$
|
10,009
|
|
||
|
Amount repurchased in connection with the vesting of employee restricted stock grants
|
225
|
|
135
|
|
||||
|
Total amount repurchased
|
$
|
10,236
|
|
$
|
10,144
|
|
||
As of
March 29, 2014
, the remaining authorization under our Board of Directors ("Board") approved share repurchase program was
$126.7 million
. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.
The cost of stock repurchases is first charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.
10
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Stock-Based Compensation
We compensate officers, directors and key employees with stock-based compensation under
two
stock plans approved by our shareholders in 2004 and 2010 and administered under the supervision of our Board. Compensation expense, net of estimated forfeitures, is recognized ratably over the vesting period.
Stock-based compensation (benefit) expense for the three months ended
March 29, 2014
and
March 30, 2013
, was as follows (in thousands):
|
Three Months Ended
|
||||||||
|
|
March 29, 2014
|
March 30, 2013
|
||||||
|
Options
|
$
|
235
|
|
$
|
545
|
|
||
|
Restricted shares
|
(343
|
)
|
(113
|
)
|
||||
|
Total stock-based compensation (benefit) expense
(1)
|
(108
|
)
|
432
|
|
||||
|
Income tax expense (benefit)
|
37
|
|
(148
|
)
|
||||
|
Total stock-based compensation (benefit) expense, net of tax
|
$
|
(71
|
)
|
$
|
284
|
|
||
(1)
The three months ended March 29, 2014 includes a
$1.2 million
benefit related to a change in estimated forfeitures due to employee turnover during the quarter. The three months ended
March 30, 2013
includes
$0.4 million
of CEO transition benefit.
9. Employee Benefits
Under our profit sharing and 401(k) plan, eligible employees may defer up to
50%
of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each year, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the
three months ended
March 29, 2014
and
March 30, 2013
our contributions, net of forfeitures, were
$0.9 million
and
$0.7 million
, respectively.
10. Other Income, Net
Other income, net, consisted of the following (in thousands):
|
Three Months Ended
|
|||||||
|
|
March 29,
2014 |
March 30,
2013 |
|||||
|
Interest income
|
$
|
112
|
|
$
|
105
|
|
|
|
Interest expense
|
(10
|
)
|
(14
|
)
|
|||
|
Other income, net
|
$
|
102
|
|
$
|
91
|
|
|
11
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
11. Net Income per Common Share
The following computations reconcile net income per share – basic with net income per share – diluted (in thousands, except per share amounts):
|
Three Months Ended
|
|||||||
|
|
March 29,
2014 |
March 30,
2013 |
|||||
|
Net income
|
$
|
16,992
|
|
$
|
23,471
|
|
|
|
Reconciliation of weighted-average shares outstanding:
|
|
|
|
|
|||
|
Basic weighted-average shares outstanding
|
54,113
|
|
55,095
|
|
|||
|
Effect of dilutive securities:
|
|||||||
|
Options
|
353
|
|
690
|
|
|||
|
Restricted shares
|
378
|
|
466
|
|
|||
|
Diluted weighted-average shares outstanding
|
54,844
|
|
56,251
|
|
|||
|
Net income per share – basic
|
$
|
0.31
|
|
$
|
0.43
|
|
|
|
Net income per share – diluted
|
$
|
0.31
|
|
$
|
0.42
|
|
|
Additional potentially dilutive stock options totaling
0.7 million
and
1.0 million
for the three months ended
March 29, 2014
and
March 30, 2013
, respectively, have been excluded from our diluted net income per share calculations because these securities’ exercise prices were anti-dilutive (e.g., greater than the average market price of our common stock).
12. Commitments and Contingencies
Sales Returns
The accrued sales returns estimate is based on historical return rates, which are reasonably consistent from period to period, and is adjusted for any current trends as appropriate. If actual returns vary from expected rates, sales in future periods are adjusted.
The activity in the sales returns liability account was as follows (in thousands):
|
|
Three Months Ended
|
||||||
|
|
March 29,
2014 |
March 30,
2013 |
|||||
|
Balance at beginning of year
|
$
|
9,433
|
|
$
|
5,330
|
|
|
|
Additions that reduce net sales
|
19,021
|
|
12,963
|
|
|||
|
Deductions from reserves
|
(17,717
|
)
|
(13,230
|
)
|
|||
|
Acquired sales return reserve
(1)
|
—
|
|
50
|
|
|||
|
Balance at end of period
|
$
|
10,737
|
|
$
|
5,113
|
|
|
(1)
Acquired sales return reserve resulted from the acquisition of Comfortaire Corporation in the first quarter of fiscal 2013.
12
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Warranty Liabilities
We provide a
25
-year limited warranty on our beds. The customer participates over the last
23 years
of the warranty period by paying a portion of the retail value of replacement parts. The estimated warranty costs, which are expensed at the time of sale and included in cost of sales, are based on historical trends and warranty claims rates incurred by us and are adjusted for any current trends as appropriate. Actual warranty claim costs could differ from these estimates. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.
The activity in the accrued warranty liabilities account was as follows (in thousands):
|
|
Three Months Ended
|
||||||
|
|
March 29,
2014 |
March 30,
2013 |
|||||
|
Balance at beginning of year
|
$
|
4,153
|
|
$
|
4,858
|
|
|
|
Additions charged to costs and expenses for current-year sales
|
1,568
|
|
1,469
|
|
|||
|
Deductions from reserves
|
(1,536
|
)
|
(1,403
|
)
|
|||
|
Changes in liability for pre-existing warranties during the current year, including expirations
|
153
|
|
(306
|
)
|
|||
|
Acquired warranty reserve
(1)
|
—
|
|
658
|
|
|||
|
Balance at end of period
|
$
|
4,338
|
|
$
|
5,276
|
|
|
(1)
Acquired warranty reserve resulted from the acquisition of Comfortaire Corporation in the first quarter of fiscal 2013.
Legal Proceedings
We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with generally accepted accounting principles in the United States, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our results of operations, financial position or cash flows. We expense legal costs as incurred.
On August 23, 2013, we filed a complaint in U.S. District Court in the District of Minnesota against Gentherm, Inc. seeking a declaratory judgment that Select Comfort be named as an assignee of certain patents asserted against Select Comfort by Gentherm or in the alternative that the asserted patents are not enforceable or are invalid or that Select Comfort and its products do not infringe any valid claim of the asserted patents. This complaint was filed after Gentherm asserted in a letter that Select Comfort’s recently introduced DualTemp™ layer product infringed certain patents owned by Gentherm. Subsequently, Gentherm filed counterclaims alleging infringement of its patents and seeking various legal and equitable remedies, including injunctive relief, treble damages and attorney’s fees. We believe the claims asserted by Gentherm are without merit, and we intend to vigorously pursue our claims and defend the claims asserted by Gentherm.
13
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in seven sections:
|
•
|
Risk Factors
|
|
•
|
Overview
|
|
•
|
Results of Operations
|
|
•
|
Liquidity and Capital Resources
|
|
•
|
Non-GAAP Data Reconciliations
|
|
•
|
Off-Balance-Sheet Arrangements and Contractual Obligations
|
|
•
|
Critical Accounting Policies
|
Risk Factors
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto included herein. This quarterly report on Form 10-Q contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.
These risks and uncertainties include, among others:
|
•
|
Current and future general and industry economic trends and consumer confidence;
|
|
•
|
The effectiveness of our marketing messages;
|
|
•
|
The efficiency of our advertising and promotional efforts;
|
|
•
|
Our ability to execute our Company-Controlled distribution strategy;
|
|
•
|
Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;
|
|
•
|
Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;
|
|
•
|
Industry competition, the emergence of additional competitive products, and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities;
|
|
•
|
Availability of attractive and cost-effective consumer credit options;
|
|
•
|
Pending and unforeseen litigation and the potential for adverse publicity associated with litigation;
|
|
•
|
Our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;
|
|
•
|
Our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers;
|
|
•
|
Rising commodity costs and other inflationary pressures;
|
|
•
|
Risks inherent in global sourcing activities;
|
|
•
|
Risks of disruption in the operation of either of our two primary manufacturing facilities;
|
|
•
|
Increasing government regulation;
|
|
•
|
The adequacy of our management information systems to meet the evolving needs of our business and existing and evolving regulatory standards applicable to data privacy and security;
|
|
•
|
The costs and potential disruptions to our business related to upgrading our management information systems, including the digital platform supporting our website;
|
|
•
|
Our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and
|
|
•
|
Uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.
|
Additional information concerning these and other risks and uncertainties is contained under the caption “Risk Factors” in our Annual Report on Form 10-K.
14
We have no obligation to publicly update or revise any of the forward-looking statements contained in this quarterly report on Form 10-Q.
Overview
Business Overview
We believe we are leading the industry in delivering an unparalleled sleep experience by offering consumers high-quality, innovative and individualized sleep solutions and services, which include a complete line of Sleep Number® beds and bedding. We are the exclusive manufacturer, marketer, retailer and servicer of the revolutionary Sleep Number bed, which allows individuals to adjust the firmness and support of each side at the touch of a button. We offer further individualization through our new sleep tracking technology, SleepIQ
TM
, and a solutions-focused line of Sleep Number pillows, sheets, adjustable bases, and other bedding products, including the innovative DualTemp
TM
temperature-balancing layer.
As the only national specialty-mattress retailer, we generate revenue by selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Direct Marketing and E-Commerce, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States and Australia, and the QVC shopping channel.
Mission, Vision and Goals
Our mission is to improve lives by
Individualizing Sleep Experiences
.
Our vision is to become one of the world’s most beloved brands by delivering an
Unparalleled Sleep Experience
. We plan to achieve this by executing our consumer brand strategy to advance our long-term goals and strengthen our competitive advantages.
Our long-term goals are:
|
•
|
Everyone will know Sleep Number®;
|
|
•
|
Innovative Sleep Number® products will deliver meaningful benefits;
|
|
•
|
Customers will easily find and interact with Sleep Number;
|
|
•
|
Customers will enthusiastically recommend Sleep Number; and
|
|
•
|
We will leverage our business model to fund innovation and growth.
|
Results of Operations
Quarterly and Annual Results
Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, the timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, the timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, the timing of promotional offerings, competitive factors, changes in commodity costs, any disruptions in supplies or third-party service providers, seasonality of retail and bedding industry sales, timing and volume of QVC shows, consumer confidence and general economic conditions. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.
Highlights
Financial highlights for the
three months ended
March 29, 2014
were as follows:
|
•
|
Net sales
increased
7%
to
$276.4 million
, compared with
$258.2 million
for the same period one year ago. Company-Controlled comparable sales increased 2%. The net sales increase was primarily driven by sales from
32
net new stores opened in the past 12 months.
|
|
•
|
Retail sales-per-store (for stores open at least one year), on a trailing twelve-month basis, of
$2.1 million
were in line with sales-per-store in the comparable period one year ago.
|
|
•
|
Operating income decreased to
$25.8 million
, or
9.3%
of net sales, compared with
$35.2 million
, or
13.6%
of net sales, for the same period one year ago. The decline in operating income was primarily driven by a 1.3 percentage point (ppt.) decrease in our gross profit rate and a 2.7 ppt. increase in our sales and marketing expense rate. See page 18 for additional details.
|
15
|
•
|
Net income
decreased
28%
to
$17.0 million
, or
$0.31
per diluted share, compared with net income of
$23.5 million
, or
$0.42
per diluted share, for the same period one year ago.
|
|
•
|
Cash provided by operating activities totaled
$38.9 million
for the
three months ended
March 29, 2014
, compared with
$45.0 million
for the same period one year ago.
|
|
•
|
At
March 29, 2014
, cash, cash equivalents and marketable debt securities totaled
$143.0 million
and we had no borrowings under our revolving credit facility. In the
first
quarter of
2014
, we repurchased
566,543
shares of our common stock under our Board-approved share repurchase program at a cost of
$10.0 million
(
$17.67
per share). As of March 29, 2014, the remaining authorization under our Board-approved share repurchase program was $126.7 million.
|
The following table sets forth, for the periods indicated, our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.
|
|
Three Months Ended
|
|||||||||||||
|
|
March 29,
2014 |
March 30,
2013 |
||||||||||||
|
Net sales
|
$
|
276.4
|
|
100.0
|
%
|
$
|
258.2
|
|
100.0
|
%
|
||||
|
Cost of sales
|
105.0
|
|
38.0
|
%
|
94.8
|
|
36.7
|
%
|
||||||
|
Gross profit
|
171.4
|
|
62.0
|
%
|
163.4
|
|
63.3
|
%
|
||||||
|
Operating expenses:
|
||||||||||||||
|
Sales and marketing
|
125.0
|
|
45.2
|
%
|
109.8
|
|
42.5
|
%
|
||||||
|
General and administrative
|
18.9
|
|
6.8
|
%
|
15.8
|
|
6.1
|
%
|
||||||
|
Research and development
|
1.7
|
|
0.6
|
%
|
2.6
|
|
1.0
|
%
|
||||||
|
Total operating expenses
|
145.6
|
|
52.7
|
%
|
128.2
|
|
49.6
|
%
|
||||||
|
Operating income
|
25.8
|
|
9.3
|
%
|
35.2
|
|
13.6
|
%
|
||||||
|
Operating income – as adjusted
(1)
|
25.8
|
|
9.3
|
%
|
34.8
|
|
13.5
|
%
|
||||||
|
Other income, net
|
0.1
|
|
0.0
|
%
|
0.1
|
|
0.0
|
%
|
||||||
|
Income before income taxes
|
25.9
|
|
9.4
|
%
|
35.3
|
|
13.7
|
%
|
||||||
|
Income tax expense
|
8.9
|
|
3.2
|
%
|
11.8
|
|
4.6
|
%
|
||||||
|
Net income
|
$
|
17.0
|
|
6.1
|
%
|
$
|
23.5
|
|
9.1
|
%
|
||||
|
Net income – as adjusted
(1)
|
$
|
17.0
|
|
6.1
|
%
|
$
|
23.2
|
|
9.0
|
%
|
||||
|
Net income per share:
|
|
|
|
|
|
|
|
|
||||||
|
Basic
|
$
|
0.31
|
|
|
|
$
|
0.43
|
|
||||||
|
Diluted
|
$
|
0.31
|
|
|
|
$
|
0.42
|
|
||||||
|
Diluted – as adjusted
(1)
|
$
|
0.31
|
|
|
$
|
0.41
|
|
|||||||
|
Weighted-average number of common shares:
|
|
|
||||||||||||
|
Basic
|
54.1
|
|
|
|
55.1
|
|
||||||||
|
Diluted
|
54.8
|
|
|
|
56.3
|
|
||||||||
|
(1)
|
This non-GAAP measure is not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates annual and year-over-year comparisons for investors and financial analysts. See page 20 for a reconciliation of this non-GAAP measure to the appropriate GAAP measure.
|
GAAP – generally accepted accounting principles
The percentage of our total net sales, by dollar volume, from each of our channels was as follows:
|
|
Three Months Ended
|
|||||
|
|
March 29,
2014 |
March 30,
2013 |
||||
|
Company-Controlled channel
|
96.1
|
%
|
94.8
|
%
|
||
|
Wholesale/Other channel
|
3.9
|
%
|
5.2
|
%
|
||
|
Total
|
100.0
|
%
|
100.0
|
%
|
||
16
The components of total net sales change, including comparable net sales changes, were as follows:
|
|
Three Months Ended
|
|||||
|
|
March 29,
2014 |
March 30,
2013 |
||||
|
Sales change rates:
|
||||||
|
Retail comparable-store sales
(1)
|
2
|
%
|
(8
|
%)
|
||
|
Direct and E-Commerce
|
2
|
%
|
(18
|
%)
|
||
|
Company-Controlled comparable sales change
|
2
|
%
|
(9
|
%)
|
||
|
Net store openings/closings
|
7
|
%
|
6
|
%
|
||
|
Total Company-Controlled channel
|
9
|
%
|
(3
|
%)
|
||
|
Wholesale/Other channel
|
(21
|
%)
|
35
|
%
|
||
|
Total net sales change
|
7
|
%
|
(2
|
%)
|
||
(1)
Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.
Other sales metrics were as follows:
|
|
Three Months Ended
|
|||||||
|
|
March 29,
2014 |
March 30,
2013 |
||||||
|
Average sales per store
(1)
($ in thousands)
|
$
|
2,120
|
|
$
|
2,118
|
|
||
|
Average sales per square foot
(1)
|
$
|
1,042
|
|
$
|
1,256
|
|
||
|
Stores > $1 million in net sales
(1)
|
97
|
%
|
98
|
%
|
||||
|
Stores > $2 million in net sales
(1)
|
47
|
%
|
46
|
%
|
||||
|
Average net sales per mattress unit – Company-Controlled channel
(2)
|
$
|
3,373
|
|
$
|
3,132
|
|
||
(1)
Trailing twelve months for stores included in our comparable-store calculations.
(2)
Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.
The number of retail stores operating was as follows:
|
|
Three Months Ended
|
|||||
|
|
March 29,
2014 |
March 30,
2013 |
||||
|
Beginning of period
|
440
|
|
410
|
|
||
|
Opened
|
17
|
|
10
|
|
||
|
Closed
|
(14
|
)
|
(9
|
)
|
||
|
End of period
|
443
|
|
411
|
|
||
Comparison of Three Months Ended
March 29, 2014
with Three Months Ended
March 30, 2013
Net sales
Net sales
increased
7%
to
$276.4 million
for the three months ended
March 29, 2014
, compared with
$258.2 million
for the same period one year ago. The net sales increase was primarily driven by sales from
32
net stores opened in the past 12 months and a 2% increase in comparable sales in our Company-Controlled channel.
The
$18.2 million
net sales increase compared with the same period one year ago was comprised of the following: (i) a $16.4 million sales increase resulting from net store openings; (ii) a $4.3 million increase in sales from our Company-Controlled comparable retail stores; and (iii) a $0.3 million increase in Direct and E-Commerce sales; partially offset by (iv) a $2.8 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units increased 1% compared to the prior-year period. Average net sales per mattress unit in our Company-Controlled channel increased by
8%
.
17
Gross profit
The gross profit rate decreased to
62.0%
of net sales for the three months ended
March 29, 2014
, compared with
63.3%
for the prior-year period. Increased sales return and exchange costs, including the impact of the second quarter 2013 change in our 30-night trial policy to 100 nights, reduced the gross profit rate by 1.0 ppt. An increase in logistic costs resulting from the severe winter weather reduced the gross profit rate by 0.2 ppt. The remaining change was due to a variety of other factors that can fluctuate from quarter to quarter, including performance-based incentive compensation and warranty expenses.
Sales and marketing expenses
Sales and marketing expenses for the three months ended
March 29, 2014
increased
14%
to
$125.0 million
, or
45.2%
of net sales, compared with
$109.8 million
, or
42.5%
of net sales, for the same period one year ago. The
$15.2 million
increase mainly resulted from (i) $6.6 million of incremental fixed costs resulting from new, repositioned and remodeled stores; (ii) a $3.5 million increase in variable store compensation; (iii) a $2.1 million increase in financing costs, as a greater percentage of our customers utilized promotional financing to purchase our products; (iv) a $1.5 million increase in production expenses related to our new marketing campaign; and (v) a $1.3 million, or 3%, increase in media spending. The sales and marketing expense rate increased 2.7 ppt. compared with the same period one year ago due to the factors noted above.
General and administrative expenses
General and administrative (“G&A”) expenses
increased
$3.1 million
to
$18.9 million
for the three months ended
March 29, 2014
, compared with
$15.8 million
in the same period one year ago, and increased to
6.8%
of net sales, compared with
6.1%
of net sales last year. The
$3.1 million
increase in G&A expenses was primarily due to (i) a $2.5 million increase in performance-based incentive compensation; (ii) a $0.5 million increase in employee compensation to support business growth initiatives, and salary and wage rate increases that were in line with inflation; and (iii) $0.3 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the business. These increases were partially offset by a $0.2 million net decrease in miscellaneous other expenses, including a reduction in stock-based compensation. The G&A expense rate increased by 0.7 ppt. in the current period compared with the same period one year ago due to the net increase in expenses.
Research and development expenses
Research and development ("R&D") expenses for the three months ended
March 29, 2014
were
$1.7 million
, or
0.6%
of net sales, compared with
$2.6 million
, or
1.0%
of net sales, for the same period one year ago.
Other income, net
Other income, net was
$0.1 million
for the three months ended
March 29, 2014
, consistent with the comparable period one year ago.
Income tax expense
Income tax expense was
$8.9 million
for the three months ended
March 29, 2014
compared with
$11.8 million
for the same period one year ago. The effective tax rate for the three months ended
March 29, 2014
was
34.4%
, compared with the prior-year period rate of
33.5%
. The 2013 effective tax rate was positively impacted by the retroactive reinstatement of the 2012 R&D tax credit in the first quarter of 2013. In addition, the R&D tax credit expired at the end of 2013 and has not yet been extended by Congress. As a result, our 2014 effective tax rate does not include any benefit from the R&D tax credit.
18
Liquidity and Capital Resources
As of
March 29, 2014
, cash, cash equivalents and marketable debt securities totaled
$143.0 million
compared with
$145.0 million
as of
December 28, 2013
. The
$2.0 million
decrease
was primarily due to
$38.9 million
of cash provided by operating activities offset by
$16.7 million
of cash used to purchase property and equipment,
$10.2 million
of cash used to repurchase our common stock and a $6.1 million decrease in short-term borrowings. The
$82.6 million
of marketable debt securities held as of
March 29, 2014
are all highly liquid and include U.S. government and agency securities, corporate debt securities and municipal bonds.
The following table summarizes our cash flows for the
three months ended
March 29, 2014
, and
March 30, 2013
(dollars in millions). Amounts may not add due to rounding differences:
|
|
Three Months Ended
|
|||||||
|
|
March 29,
2014 |
March 30,
2013 |
||||||
|
Total cash provided by (used in):
|
|
|
||||||
|
Operating activities
|
$
|
38.9
|
|
$
|
45.0
|
|
||
|
Investing activities
|
(20.8
|
)
|
(38.3
|
)
|
||||
|
Financing activities
|
(15.9
|
)
|
(9.8
|
)
|
||||
|
Net increase (decrease) in cash and cash equivalents
|
$
|
2.2
|
|
$
|
(3.1
|
)
|
||
Cash provided by operating activities for the
three months ended
March 29, 2014
was
$38.9 million
compared with
$45.0 million
for the
three months ended
March 30, 2013
. The
$6.2 million
year-over-year
decrease
in cash from operating activities was comprised of a
$6.5 million
decrease
in net income for the
three months ended
March 29, 2014
compared with the same period one year ago and a
$2.0 million
decrease
in cash from changes in operating assets and liabilities, partially offset by a
$2.3 million
increase
in adjustments to reconcile net income to net cash provided by operating activities.
Net cash
used in
investing activities was
$20.8 million
for the
three months ended
March 29, 2014
, compared with
$38.3 million
for the same period one year ago. Investing activities for the current-year period included
$16.7 million
of property and equipment purchases, compared with
$14.3 million
for the same period one year ago. On a net basis, we increased our investment in marketable debt securities by
$3.6 million
during the
three months ended
March 29, 2014
compared with a net investment of
$7.0 million
during the comparable period one year ago.
Net cash
used in
financing activities was
$15.9 million
for the
three months ended
March 29, 2014
, compared with
$9.8 million
for the same period one year ago. During the
three months ended
March 29, 2014
, we repurchased
$10.2 million
of our stock (
$10.0 million
under our Board-approved share repurchase program and
$0.2 million
in connection with the vesting of employee restricted stock grants) compared with
$10.1 million
(
$10.0 million
under our Board-approved share repurchase program and
$0.1 million
in connection with the vesting of employee restricted stock grants) during the same period one year ago. Changes in book overdrafts are included in the net change in short-term borrowings. Financing activities for both periods reflect the vesting of employee restricted stock awards and exercise of employee stock options along with the associated excess tax benefits.
Under the Board-approved $290 million share repurchase program, we repurchased
566,543
shares at a cost of
$10.0 million
(
$17.67
per share) during the
three months ended
March 29, 2014
. During the
three months ended
March 30, 2013
, we repurchased
458,637
shares at a cost of
$10.0 million
(
$21.82
per share). As of
March 29, 2014
, the remaining authorization under our Board-approved share repurchase program was
$126.7 million
. There is no expiration date governing the period over which we can repurchase shares.
Our $20.0 million Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as amended, is an unsecured revolving credit facility that matures August 31, 2016. The Credit Agreement contains an accordion feature that allows us to increase the amount of the line from $20.0 million to up to $50.0 million in total availability, subject to lender approval. As of
March 29, 2014
we were in compliance with all financial covenants.
Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth. The
$143.0 million
of cash, cash equivalents and marketable debt securities, cash generated from ongoing operations, and cash available under our revolving credit facility are expected to be adequate to maintain operations and fund anticipated expansion and strategic initiatives for the foreseeable future.
We have an agreement with GE Capital Retail Bank to offer qualified customers revolving credit arrangements to finance purchases from us (“GE Agreement”). The GE Agreement contains certain financial covenants, including a minimum tangible net worth requirement and a minimum cash requirement. As of
March 29, 2014
we were in compliance with all financial covenants.
19
Under the terms of the GE Agreement, GE Capital Retail Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts.
Non-GAAP Data Reconciliations
Reported to Adjusted Statements of Operations Data (in thousands, except per share amounts)
In addition to disclosing results that are determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we also disclose non-GAAP results that exclude certain significant charges or credits. Our "as adjusted" data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we believe that the disclosure of results excluding certain significant charges or credits provides additional insights into underlying business performance and facilitates year-over-year comparisons. Below are our reconciliations of our non-GAAP financial measures to the most comparable GAAP financial measures.
|
Three Months Ended
|
|||||||||||||||
|
March 29, 2014
|
March 30, 2013
|
||||||||||||||
|
As Reported
|
As Reported
|
CEO
Transition Benefit (1) |
As Adjusted
|
||||||||||||
|
Operating income
|
$
|
25,802
|
|
$
|
35,227
|
|
$
|
(391
|
)
|
$
|
34,836
|
|
|||
|
Other income, net
|
102
|
|
91
|
|
—
|
|
91
|
|
|||||||
|
Income before income taxes
|
25,904
|
|
35,318
|
|
(391
|
)
|
34,927
|
|
|||||||
|
Income tax expense
(2)
|
8,912
|
|
11,847
|
|
(134
|
)
|
11,713
|
|
|||||||
|
Net income
|
$
|
16,992
|
|
$
|
23,471
|
|
$
|
(257
|
)
|
$
|
23,214
|
|
|||
|
Net income per share –
|
|||||||||||||||
|
Basic
|
$
|
0.31
|
|
$
|
0.43
|
|
$
|
0.00
|
|
$
|
0.42
|
|
|||
|
Diluted
|
$
|
0.31
|
|
$
|
0.42
|
|
$
|
0.00
|
|
$
|
0.41
|
|
|||
|
Basic Shares
|
54,113
|
|
55,095
|
|
55,095
|
|
55,095
|
|
|||||||
|
Diluted Shares
|
54,844
|
|
56,251
|
|
56,251
|
|
56,251
|
|
|||||||
(1)
In February 2012, we announced that William R. McLaughlin, then President and Chief Executive Officer would retire from the Company effective June 1, 2012. In recognition of Mr. McLaughlin’s contributions, the Compensation Committee approved the modification of Mr. McLaughlin’s currently unvested stock awards, including performance-based stock awards. The performance-based stock awards are subject to applicable performance adjustments through 2014 based on free cash flow and actual market share growth versus performance targets. During the
three months ended
March 30, 2013
, we incurred
$0.4 million
(
$0.3 million
, net of income tax) of non-recurring, non-cash expenses associated with these stock award modifications which is included in general and administrative expenses in the condensed consolidated statement of operations.
(2)
Reflects effective income tax rates, before discrete adjustments, of 34.3% for 2013.
GAAP - generally accepted accounting principles
20
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
We define earnings before interest, taxes, depreciation and amortization as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments (“Adjusted EBITDA”). Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure.
Our Adjusted EBITDA calculations for the three months and trailing-twelve months ended
March 29, 2014
and
March 30, 2013
are as follows (dollars in thousands):
|
|
Three Months Ended
|
Trailing-Twelve
Months Ended
|
||||||||||||||
|
|
March 29,
2014 |
March 30,
2013 |
March 29,
2014 |
March 30,
2013 |
||||||||||||
|
Net income
|
$
|
16,992
|
|
$
|
23,471
|
|
$
|
53,602
|
|
$
|
79,148
|
|
||||
|
Income tax expense
|
8,912
|
|
11,847
|
|
27,995
|
|
41,872
|
|
||||||||
|
Interest expense
|
10
|
|
14
|
|
47
|
|
62
|
|
||||||||
|
Depreciation and amortization
|
8,885
|
|
6,333
|
|
32,151
|
|
21,838
|
|
||||||||
|
Stock-based compensation
|
(108
|
)
|
432
|
|
3,692
|
|
3,774
|
|
||||||||
|
Asset impairments
|
3
|
|
30
|
|
100
|
|
174
|
|
||||||||
|
Adjusted EBITDA
|
$
|
34,694
|
|
$
|
42,127
|
|
$
|
117,587
|
|
$
|
146,868
|
|
||||
Free Cash Flow
Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operations,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.
The following table summarizes our free cash flow calculations for the
three months
and trailing-twelve months ended
March 29, 2014
, and
March 30, 2013
(dollars in thousands):
|
|
Three Months Ended
|
Trailing-Twelve
Months Ended
|
||||||||||||||
|
|
March 29,
2014 |
March 30,
2013 |
March 29,
2014 |
March 30,
2013 |
||||||||||||
|
Net cash provided by operating activities
|
$
|
38,864
|
|
$
|
45,022
|
|
$
|
81,947
|
|
$
|
101,130
|
|
||||
|
Subtract: Purchases of property and equipment
|
16,660
|
|
14,309
|
|
79,162
|
|
56,621
|
|
||||||||
|
Free cash flow
|
$
|
22,204
|
|
$
|
30,713
|
|
$
|
2,785
|
|
$
|
44,509
|
|
||||
Off-Balance-Sheet Arrangements and Contractual Obligations
As of
March 29, 2014
, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating leases, we do not have any off-balance-sheet financing. There were no outstanding letters of credit at
March 29, 2014
.
There has been no material change in our contractual obligations since the end of
fiscal 2013
. See Note 6,
Debt,
of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended
December 28, 2013
for additional information regarding our other contractual obligations.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the fiscal year ended
December 28, 2013
. There were no significant changes in our critical accounting policies since the end of
fiscal 2013
.
21
Changes in the overall level of interest rates affect interest income generated from our short-term and long-term investments in marketable debt securities. If overall interest rates were one percentage point lower than current rates, our annual interest income would not change by a significant amount based on our investments in marketable debt securities as of
March 29, 2014
and the current low interest-rate environment. We do not manage our investment interest-rate volatility risk through the use of derivative instruments.
As of
March 29, 2014
, we had no borrowings under our revolving credit facility.
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
Changes in Internal Controls
There were no changes in our internal control over financial reporting during the fiscal quarter ended
March 29, 2014
, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with generally accepted accounting principles in the United States, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our results of operations, financial position or cash flows. We expense legal costs as incurred.
On August 23, 2013, we filed a complaint in U.S. District Court in the District of Minnesota against Gentherm, Inc. seeking a declaratory judgment that Select Comfort be named as an assignee of certain patents asserted against Select Comfort by Gentherm or in the alternative that the asserted patents are not enforceable or are invalid or that Select Comfort and its products do not infringe any valid claim of the asserted patents. This complaint was filed after Gentherm asserted in a letter that Select Comfort’s recently introduced DualTemp™ layer product infringed certain patents owned by Gentherm. Subsequently, Gentherm filed counterclaims alleging infringement of its patents and seeking various legal and equitable remedies, including injunctive relief, treble damages and attorney’s fees. We believe the claims asserted by Gentherm are without merit, and we intend to vigorously pursue our claims and defend the claims asserted by Gentherm.
22
Our business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to our business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” and also the information under the heading, “
Risk Factors
” in our most recent Annual Report on Form 10-K. The risk factors discussed in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that we face because our business operations could also be affected by additional risk factors that are not presently known to us or that we currently consider to be immaterial to our operations.
|
(a) – (b)
|
Not applicable.
|
|
(c)
|
Issuer Purchases of Equity Securities
|
|
Fiscal Period
|
Total
Number of Shares
Purchased
(1)(2)
|
Average
Price Paid
per Share
|
Total Number
of Shares
Purchased as
|
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
|
||||||||||
|
December 29, 2013 through January 25, 2014
|
162,525
|
|
$
|
17.88
|
|
162,525
|
|
$
|
133,796,000
|
|
||||
|
January 26, 2014 through February 22, 2014
|
115,401
|
|
17.32
|
|
115,401
|
|
131,797,000
|
|
||||||
|
February 23, 2014 through March 29, 2014
|
301,797
|
|
17.66
|
|
288,617
|
|
126,691,000
|
|
||||||
|
Total
|
579,723
|
|
$
|
17.66
|
|
566,543
|
|
$
|
126,691,000
|
|
||||
|
(1)
|
Under the current Board-approved $290.0 million share repurchase program, we repurchased
566,543
shares of our common stock at a cost of
$10.0 million
(based on trade dates) during the three months ended
March 29, 2014
. As of
March 29, 2014
, the remaining authorization under our Board-approved share repurchase program was
$126.7 million
. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.
|
|
(2)
|
In connection with the vesting of employee restricted stock grants, we also repurchased
13,180
shares of our common stock at a cost of
$225 thousand
, during the three months ended
March 29, 2014
.
|
Not applicable.
Not applicable.
Not applicable.
23
|
Exhibit
Number
|
|
Description
|
|
Method of Filing
|
|
10.1
|
Twelfth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014
|
Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014
|
||
|
10.2
|
Thirteenth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014
|
Incorporated by reference to Exhibit 10.2 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014
|
||
|
10.3
|
Offer Letter dated March 14, 2014 from Select Comfort Corporation to David R. Callen
|
Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed March 20, 2014
|
||
|
31.1
|
|
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
|
|
31.2
|
|
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
|
|
32.1
|
|
Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
|
|
Furnished herewith
|
|
|
|
|
|
|
|
32.2
|
|
Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
|
|
Furnished herewith
|
|
101
|
|
The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended March 29, 2014, filed with the SEC on April 25, 2014, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of March 29, 2014 and December 28, 2013; (ii) Condensed Consolidated Statements of Operations for the three months ended March 29, 2014 and March 30, 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2014 and March 30, 2013; (iv) Condensed Consolidated Statement of Shareholders' Equity for the three months ended March 29, 2014; (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2014 and March 30, 2013; and (vi) Notes to Condensed Consolidated Financial Statements.
|
|
Filed herewith
|
24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
SELECT COMFORT CORPORATION
|
|
|||
|
|
(Registrant)
|
|
|||
|
|
|
|
|||
|
Dated:
|
April 25, 2014
|
By:
|
|
/s/ Shelly R. Ibach
|
|
|
|
|
|
Shelly R. Ibach
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
(principal executive officer)
|
|
|
|
|
By:
|
|
/s/ Robert J. Poirier
|
|
|
|
|
|
|
Robert J. Poirier
|
|
|
|
|
|
|
Chief Accounting Officer
|
|
|
|
|
|
|
(principal accounting officer)
|
|
|
25
EXHIBIT INDEX
|
Exhibit
Number
|
|
Description
|
|
Method of Filing
|
|
|
|
|
|
|
|
10.1
|
Twelfth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014
|
Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014
|
||
|
10.2
|
Thirteenth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014
|
Incorporated by reference to Exhibit 10.2 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014
|
||
|
10.3
|
Offer Letter dated March 14, 2014 from Select Comfort Corporation to David R. Callen
|
Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed March 20, 2014
|
||
|
31.1
|
|
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
|
|
31.2
|
|
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
|
|
32.1
|
|
Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
|
|
Furnished herewith
|
|
|
|
|
|
|
|
32.2
|
|
Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
|
|
Furnished herewith
|
|
|
|
|
|
|
|
101
|
|
The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended March 29, 2014, filed with the SEC on April 25, 2014, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of March 29, 2014 and December 28, 2013; (ii) Condensed Consolidated Statements of Operations for the three months ended March 29, 2014 and March 30, 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2014 and March 30, 2013; (iv) Condensed Consolidated Statement of Shareholders' Equity for the three months ended March 29, 2014; (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2014 and March 30, 2013; and (vi) Notes to Condensed Consolidated Financial Statements.
|
|
Filed herewith
|
26
TABLE OF CONTENTS
Part I: Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart Ii: Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsPart OfItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits