Washington, D.C. 20549
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELECT COMFORTSLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited - in thousands, except per share amounts)
|
| | | | | | | |
| September 30, 2017 |
| December 31, 2016 |
Assets | |
| |
Current assets: | |
| |
Cash and cash equivalents | $ | 29,914 |
|
| $ | 11,609 |
|
Accounts receivable, net of allowance for doubtful accounts of $694 and $884, respectively | 21,107 |
|
| 19,705 |
|
Inventories | 79,217 |
|
| 75,026 |
|
Prepaid expenses | 10,208 |
|
| 8,705 |
|
Other current assets | 23,803 |
|
| 23,282 |
|
Total current assets | 164,249 |
|
| 138,327 |
|
|
|
|
|
|
Non-current assets: | |
|
| |
Property and equipment, net | 206,690 |
|
| 208,367 |
|
Goodwill and intangible assets, net | 78,133 |
|
| 80,817 |
|
Deferred income taxes | 938 |
| | 4,667 |
|
Other non-current assets | 28,898 |
|
| 24,988 |
|
Total assets | $ | 478,908 |
|
| $ | 457,166 |
|
|
|
|
|
|
Liabilities and Shareholders’ Equity | |
|
| |
Current liabilities: | |
|
| |
Accounts payable | $ | 136,628 |
|
| $ | 105,375 |
|
Customer prepayments | 39,929 |
|
| 26,207 |
|
Accrued sales returns | 18,448 |
| | 15,222 |
|
Compensation and benefits | 34,683 |
|
| 19,455 |
|
Taxes and withholding | 24,041 |
|
| 23,430 |
|
Other current liabilities | 44,708 |
|
| 35,628 |
|
Total current liabilities | 298,437 |
|
| 225,317 |
|
|
|
|
|
|
Non-current liabilities: | |
|
| |
Other non-current liabilities | 76,174 |
|
| 71,529 |
|
Total liabilities | 374,611 |
|
| 296,846 |
|
|
|
|
|
|
Shareholders’ equity: | |
|
| |
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding | — |
|
| — |
|
Common stock, $0.01 par value; 142,500 shares authorized, 39,819 and 43,569 shares issued and outstanding, respectively | 398 |
|
| 436 |
|
Additional paid-in capital | — |
|
| — |
|
Retained earnings | 103,899 |
|
| 159,884 |
|
Total shareholders’ equity | 104,297 |
|
| 160,320 |
|
Total liabilities and shareholders’ equity | $ | 478,908 |
|
| $ | 457,166 |
|
| | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,556 | | | $ | 2,389 | |
Accounts receivable, net of allowances of $1,047 and $924, respectively | 24,502 | | | 25,718 | |
Inventories | 103,212 | | | 105,644 | |
| | | |
Prepaid expenses | 22,001 | | | 18,953 | |
Other current assets | 40,624 | | | 54,917 | |
Total current assets | 191,895 | | | 207,621 | |
| | | |
Non-current assets: | | | |
Property and equipment, net | 197,644 | | | 195,128 | |
Operating lease right-of-use assets | 374,650 | | | 371,133 | |
Goodwill and intangible assets, net | 69,867 | | | 70,468 | |
Other non-current assets | 78,529 | | | 75,190 | |
Total assets | $ | 912,585 | | | $ | 919,540 | |
| | | |
Liabilities and Shareholders’ Deficit | | | |
Current liabilities: | | | |
Borrowings under revolving credit facility | $ | 413,200 | | | $ | 382,500 | |
Accounts payable | 177,025 | | | 162,547 | |
Customer prepayments | 142,005 | | | 129,499 | |
Accrued sales returns | 20,277 | | | 22,368 | |
Compensation and benefits | 25,702 | | | 51,240 | |
Taxes and withholding | 26,293 | | | 22,087 | |
Operating lease liabilities | 74,046 | | | 72,360 | |
Other current liabilities | 59,390 | | | 64,177 | |
Total current liabilities | 937,938 | | | 906,778 | |
| | | |
Non-current liabilities: | | | |
Deferred income taxes | 312 | | | 688 | |
Operating lease liabilities | 338,528 | | | 336,192 | |
Other non-current liabilities | 105,020 | | | 100,835 | |
Total liabilities | 1,381,798 | | | 1,344,493 | |
| | | |
Shareholders’ deficit: | | | |
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding | — | | | — | |
Common stock, $0.01 par value; 142,500 shares authorized, 22,232 and 22,683 shares issued and outstanding, respectively | 222 | | | 227 | |
Additional paid-in capital | — | | | 3,971 | |
Accumulated deficit | (469,435) | | | (429,151) | |
Total shareholders’ deficit | (469,213) | | | (424,953) | |
Total liabilities and shareholders’ deficit | $ | 912,585 | | | $ | 919,540 | |
See accompanying notes to condensed consolidated financial statements.
| | | | | | | | |
1 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
SELECT COMFORT
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited - in thousands, except per share amounts)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 2, 2022 | | April 3, 2021 | | | | |
Net sales | $ | 527,130 | | | $ | 568,256 | | | | | |
Cost of sales | 224,832 | | | 212,338 | | | | | |
Gross profit | 302,298 | | | 355,918 | | | | | |
| | | | | | | |
Operating expenses: | | | | | | | |
Sales and marketing | 240,259 | | | 223,617 | | | | | |
General and administrative | 41,319 | | | 42,592 | | | | | |
Research and development | 16,305 | | | 13,286 | | | | | |
Total operating expenses | 297,883 | | | 279,495 | | | | | |
Operating income | 4,415 | | | 76,423 | | | | | |
Interest expense, net | 2,127 | | | 977 | | | | | |
Income before income taxes | 2,288 | | | 75,446 | | | | | |
Income tax expense | 214 | | | 8,812 | | | | | |
Net income | $ | 2,074 | | | $ | 66,634 | | | | | |
| | | | | | | |
Basic net income per share: | | | | | | | |
Net income per share – basic | $ | 0.09 | | | $ | 2.63 | | | | | |
Weighted-average shares – basic | 22,760 | | | 25,377 | | | | | |
| | | | | | | |
Diluted net income per share: | | | | | | | |
Net income per share – diluted | $ | 0.09 | | | $ | 2.51 | | | | | |
Weighted-average shares – diluted | 23,591 | | | 26,544 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net sales | $ | 402,646 |
| | $ | 367,988 |
| | $ | 1,081,218 |
| | $ | 997,846 |
|
Cost of sales | 149,181 |
| | 135,645 |
| | 404,675 |
| | 385,168 |
|
Gross profit | 253,465 |
| | 232,343 |
| | 676,543 |
| | 612,678 |
|
| | | |
| | |
| | |
|
Operating expenses: | |
| | | | | | |
Sales and marketing | 174,800 |
| | 158,024 |
| | 488,564 |
| | 443,477 |
|
General and administrative | 32,645 |
| | 28,278 |
| | 95,233 |
| | 86,202 |
|
Research and development | 6,991 |
| | 6,997 |
| | 20,950 |
| | 21,661 |
|
Total operating expenses | 214,436 |
| | 193,299 |
| | 604,747 |
| | 551,340 |
|
Operating income | 39,029 |
| | 39,044 |
| | 71,796 |
| | 61,338 |
|
Other expense, net | (248 | ) | | (255 | ) | | (668 | ) | | (581 | ) |
Income before income taxes | 38,781 |
| | 38,789 |
| | 71,128 |
| | 60,757 |
|
Income tax expense | 13,178 |
| | 13,044 |
| | 21,842 |
| | 20,627 |
|
Net income | $ | 25,603 |
| | $ | 25,745 |
| | $ | 49,286 |
| | $ | 40,130 |
|
| | | | | | | |
Basic net income per share: | |
| | |
| | | | |
Net income per share – basic | $ | 0.63 |
| | $ | 0.56 |
| | $ | 1.18 |
| | $ | 0.86 |
|
Weighted-average shares – basic | 40,755 |
| | 45,621 |
| | 41,740 |
| | 46,705 |
|
Diluted net income per share: | |
| | |
| | | | |
Net income per share – diluted | $ | 0.62 |
| | $ | 0.56 |
| | $ | 1.16 |
| | $ | 0.85 |
|
Weighted-average shares – diluted | 41,515 |
| | 46,350 |
| | 42,559 |
| | 47,413 |
|
See accompanying notes to condensed consolidated financial statements.
| | | | | | | | |
2 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
SELECT COMFORT
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive IncomeShareholders’ Deficit
(unaudited - in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total |
| Shares | | Amount | | | |
Balance at January 1, 2022 | 22,683 | | | $ | 227 | | | $ | 3,971 | | | $ | (429,151) | | | $ | (424,953) | |
Net income | — | | | — | | | — | | | 2,074 | | | 2,074 | |
Exercise of common stock options | 21 | | | — | | | 531 | | | — | | | 531 | |
Stock-based compensation | 341 | | | 3 | | | 4,130 | | | — | | | 4,133 | |
Repurchases of common stock | (813) | | | (8) | | | (8,632) | | | (42,358) | | | (50,998) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Balance at April 2, 2022 | 22,232 | | | $ | 222 | | | $ | — | | | $ | (469,435) | | | $ | (469,213) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net income | $ | 25,603 |
| | $ | 25,745 |
| | $ | 49,286 |
| | $ | 40,130 |
|
Other comprehensive income – unrealized gain on available-for-sale marketable debt securities, net of income tax | — |
| | — |
| | — |
| | 14 |
|
Comprehensive income | $ | 25,603 |
| | $ | 25,745 |
| | $ | 49,286 |
| | $ | 40,144 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total |
| Shares | | Amount | | | |
Balance at January 2, 2021 | 25,390 | | | $ | 254 | | | $ | — | | | $ | (224,232) | | | $ | (223,978) | |
Net income | — | | | — | | | — | | | 66,634 | | | 66,634 | |
Exercise of common stock options | 106 | | | 1 | | | 2,459 | | | — | | | 2,460 | |
Stock-based compensation | 314 | | | 3 | | | 6,413 | | | — | | | 6,416 | |
Repurchases of common stock | (1,346) | | | (13) | | | (8,872) | | | (175,297) | | | (184,182) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Balance at April 3, 2021 | 24,464 | | | $ | 245 | | | $ | — | | | $ | (332,895) | | | $ | (332,650) | |
See accompanying notes to condensed consolidated financial statements.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders’ Equity
(unaudited - in thousands)
|
| | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total |
| Shares | | Amount | | | |
Balance at December 31, 2016 | 43,569 |
| | $ | 436 |
| | $ | — |
| | $ | 159,884 |
| | $ | 160,320 |
|
Net income | — |
| | — |
| | — |
| | 49,286 |
| | 49,286 |
|
Exercise of common stock options | 212 |
| | 2 |
| | 3,038 |
| | — |
| | 3,040 |
|
Stock-based compensation | 587 |
| | 6 |
| | 11,803 |
| | — |
| | 11,809 |
|
Repurchases of common stock | (4,549 | ) | | (46 | ) | | (14,841 | ) | | (105,271 | ) | | (120,158 | ) |
Balance at September 30, 2017 | 39,819 |
| | $ | 398 |
| | $ | — |
| | $ | 103,899 |
| | $ | 104,297 |
|
| | | | | | | | |
3 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
See accompanying notes to condensed consolidated financial statements.
SELECT COMFORTSLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
| | | | | | | | | | | |
| Three Months Ended |
| April 2, 2022 | | April 3, 2021 |
Cash flows from operating activities: | | | |
Net income | $ | 2,074 | | | $ | 66,634 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 15,870 | | | 14,638 | |
Stock-based compensation | 4,133 | | | 6,416 | |
Net loss on disposals and impairments of assets | 93 | | | 78 | |
Deferred income taxes | (376) | | | 1,515 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 1,216 | | | 5,948 | |
Inventories | 2,432 | | | (946) | |
Income taxes | 1,102 | | | 6,847 | |
Prepaid expenses and other assets | 10,877 | | | (3,113) | |
Accounts payable | 2,073 | | | 12,390 | |
Customer prepayments | 12,506 | | | 20,552 | |
Accrued compensation and benefits | (25,348) | | | (34,605) | |
Other taxes and withholding | 3,104 | | | 8,912 | |
Other accruals and liabilities | (5,198) | | | 6,332 | |
Net cash provided by operating activities | 24,558 | | | 111,598 | |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (19,604) | | | (11,546) | |
Proceeds from sales of property and equipment | 10 | | | 12 | |
| | | |
Net cash used in investing activities | (19,594) | | | (11,534) | |
| | | |
Cash flows from financing activities: | | | |
Repurchases of common stock | (50,998) | | | (178,613) | |
Net increase in short-term borrowings | 44,712 | | | 74,087 | |
Proceeds from issuance of common stock | 531 | | | 2,460 | |
Debt issuance costs | (42) | | | (3) | |
Net cash used in financing activities | (5,797) | | | (102,069) | |
| | | |
Net decrease in cash and cash equivalents | (833) | | | (2,005) | |
Cash and cash equivalents, at beginning of period | 2,389 | | | 4,243 | |
Cash and cash equivalents, at end of period | $ | 1,556 | | | $ | 2,238 | |
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | October 1, 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 49,286 |
| | $ | 40,130 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
| |
|
|
Depreciation and amortization | 46,000 |
| | 42,555 |
|
Stock-based compensation | 11,809 |
| | 9,272 |
|
Net loss on disposals and impairments of assets | 229 |
| | 9 |
|
Excess tax benefits from stock-based compensation | — |
| | (516 | ) |
Deferred income taxes | 3,729 |
| | (673 | ) |
Changes in operating assets and liabilities: |
| |
|
|
Accounts receivable | (1,402 | ) | | 5,271 |
|
Inventories | (4,191 | ) | | 15,991 |
|
Income taxes | (147 | ) | | 30,386 |
|
Prepaid expenses and other assets | (1,713 | ) | | (3,458 | ) |
Accounts payable | 33,325 |
| | (1,043 | ) |
Customer prepayments | 13,722 |
| | (23,125 | ) |
Accrued compensation and benefits | 15,277 |
| | 12,441 |
|
Other taxes and withholding | 758 |
| | 7,494 |
|
Other accruals and liabilities | 9,372 |
| | 10,527 |
|
Net cash provided by operating activities | 176,054 |
| | 145,261 |
|
| | | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (37,613 | ) | | (38,769 | ) |
Decrease in restricted cash | 3,150 |
| | — |
|
Proceeds from sales of property and equipment | 36 |
| | 67 |
|
Proceeds from marketable debt securities | — |
| | 15,090 |
|
Investments in marketable debt securities | — |
| | (5,968 | ) |
Net cash used in investing activities | (34,427 | ) | | (29,580 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Repurchases of common stock | (120,158 | ) | | (96,410 | ) |
Net (decrease) increase in short-term borrowings | (6,194 | ) | | 3,062 |
|
Proceeds from issuance of common stock | 3,040 |
| | 1,949 |
|
Debt issuance costs | (10 | ) | | (409 | ) |
Excess tax benefits from stock-based compensation | — |
| | 516 |
|
Net cash used in financing activities | (123,322 | ) | | (91,292 | ) |
| | | |
Net increase in cash and cash equivalents | 18,305 |
| | 24,389 |
|
Cash and cash equivalents, at beginning of period | 11,609 |
| | 20,994 |
|
Cash and cash equivalents, at end of period | $ | 29,914 |
| | $ | 45,383 |
|
See accompanying notes to condensed consolidated financial statements.
| | | | | | | | |
4 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
SELECT COMFORT
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business and Summary of Significant Accounting Policies
Business & Basis of Presentation
We prepared the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2017April 2, 2022 of Select ComfortSleep Number Corporation and our 100%-owned subsidiaries (Select Comfort(Sleep Number 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 September 30, 2017April 2, 2022 and December 31, 2016,January 1, 2022, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the war in Ukraine and other external factors, including but not limited to general economic conditions, inflation, consumer confidence, store restrictions mandated by federal, state or local authorities and global supply chain disruptions, the extent to which these external factors will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted.
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 31, 2016January 1, 2022 and other recent filings with the SEC.
The preparation of condensed 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 condensed 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. In addition, during the current environment involving external factors such as COVID-19 and the war in Ukraine, predicting future events will be especially challenging for management. Changes in these estimates will be reflected in the consolidated financial statements in future periods.periods and could be material. Our critical accounting policies consist of stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.
The condensed consolidated financial statements include the accounts of Select ComfortSleep Number Corporation and our 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.
Revenue Recognition
At September 30, 2017 and December 31, 2016, we had deferred revenue totaling $71 million and $61 million, of which $28 million and $21 million are included in other current liabilities, respectively, and $43 million and $40 million are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also have related deferred costs totaling $41 million and $33 million, of which $16 million and $11 million are included in other current assets, respectively, and $25 million and $22 million are included in other non-current assets, respectively, in our consolidated balance sheets. The deferred revenue and costs are recognized over the product’s estimated life of four years.
New Accounting Pronouncements
Adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued new guidance on the accounting for, and disclosure of, stock-based compensation which we adopted effective January 1, 2017. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, forfeitures and classification on the statement of cash flows. Under the previous guidance, excess tax benefits and deficiencies were recognized in additional paid-in capital in the consolidated balance sheets. Upon adoption of the new guidance, these excess tax benefits or deficiencies are required to be recognized as discrete adjustments to income tax expense in the consolidated statements of operations on a prospective basis. During the three and nine months ended September 30, 2017, excess tax benefits of $0.2 million and $1.4 million, respectively, were recognized as a reduction of income tax expense, rather than in additional paid-in capital.
In addition, under the new guidance, excess income tax benefits from stock-based compensation arrangements are classified as an operating activity in the statement of cash flows rather than as a financing activity. This resulted in an increase to operating cash flows of $0.2 million and $2.3 million for the three and nine months ended September 30, 2017, respectively. We elected to apply the new cash flow classification guidance prospectively. The prior-year statement of cash flows has not been adjusted.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
We have also elected to continue to estimate the number of stock-based awards expected to vest, as permitted by the new guidance, rather than electing to account for forfeitures as they occur.
Not Yet Adopted
In May 2014, the FASB issued a comprehensive new revenue recognition model that requires a company to recognize revenue in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance will be effective for us beginning January 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. When we adopt this new guidance, we expect to use the modified retrospective approach which will result in an adjustment to opening retained earnings, but would not restate prior periods' financial statements. Based on our analysis thus far, we believe the impact of adopting the new guidance will not be material to our consolidated financial statements. As interpretations of the new rules continue to evolve in the fourth quarter of fiscal 2017, we will monitor developments and will finalize our conclusions on our revenue recognition policy, disclosure requirements and changes that may be necessary to our internal controls over financial reporting.
In February 2016, the FASB issued new guidance on accounting for leases that generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures. This new guidance is effective for us beginning December 30, 2018.
2. Fair Value Measurements
At September 30, 2017April 2, 2022 and December 31, 2016,January 1, 2022, we had $3.4$18 million and $2.3$19 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $3.4$18 million and $2.3$19 million at September 30, 2017April 2, 2022 and December 31, 2016,January 1, 2022, respectively, which are included in other non-current 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. Inventories
Inventories consisted of the following (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 4,292 |
| | $ | 7,973 |
|
Work in progress | 223 |
| | 72 |
|
Finished goods | 74,702 |
| | 66,981 |
|
| $ | 79,217 |
| | $ | 75,026 |
|
| | | | | | | | |
5 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
4. Goodwill and Intangible Assets, Net
Goodwill and Indefinite-Lived Intangible Assets
Goodwill was $64.0 million at September 30, 2017 and December 31, 2016. Indefinite-lived trade name/trademarks totaled $1.4 million at September 30, 2017 and December 31, 2016.
SELECT COMFORTSLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
3. Inventories
Definite-Lived
Inventories consisted of the following (in thousands): | | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
Raw materials | $ | 11,257 | | | $ | 11,752 | |
Work in progress | 68 | | | 83 | |
Finished goods | 91,887 | | | 93,809 | |
| $ | 103,212 | | | $ | 105,644 | |
4. Goodwill and Intangible Assets, Net
Goodwill and Indefinite-lived Intangible Assets
Goodwill was $64 million at April 2, 2022 and January 1, 2022. Indefinite-lived trade name/trademarks totaled $1.4 million at April 2, 2022 and January 1, 2022.
Definite-lived Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Developed technologies | $ | 18,851 |
| | $ | 6,160 |
| | $ | 18,851 |
| | $ | 4,524 |
|
Customer relationships | 2,413 |
| | 2,413 |
| | 2,413 |
| | 1,365 |
|
Trade names/trademarks | 101 |
| | 101 |
| | 101 |
| | 101 |
|
| $ | 21,365 |
| | $ | 8,674 |
| | $ | 21,365 |
| | $ | 5,990 |
|
developed technologies was $19 million at April 2, 2022 and January 1, 2022. Accumulated amortization was $16 million at April 2, 2022 and January 1, 2022. Amortization expense for both the three months ended September 30, 2017April 2, 2022 and October 1, 2016,April 3, 2021, was $0.5 million.
The gross carrying amount of our patents was $2 million at April 2, 2022 and January 1, 2022. Accumulated amortization was $0.4 million and $0.6$0.3 million at April 2, 2022 and January 1, 2022, respectively. Amortization expense for both the ninethree months ended September 30, 2017April 2, 2022 and October 1, 2016,April 3, 2021, was $2.7 million and $1.9 million, respectively.$55 thousand.
Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands): | | | | | | | | |
2022 (excluding the three months ended April 2, 2022) | | $ | 1,802 | |
2023 | | 1,431 | |
2024 | | 222 | |
2025 | | 226 | |
2026 | | 222 | |
2027 | | 222 | |
Thereafter | | 300 | |
Total future amortization for definite-lived intangible assets | | $ | 4,425 | |
5. Credit Agreement
In March 2017, we amendedAs of April 2, 2022, our revolving credit facility had a total commitment amount of $825 million. The credit facility is for general corporate purposes, to increasemeet our net aggregate availability from $150 millionseasonal working capital requirements and to $153 million. We maintained therepurchase our stock. The credit agreement includes an accordion feature which allows us to increase the amount of the credit facility from $153$825 million to $200 million,$1.2 billion, subject to lenders'lenders’ approval. There were no other changes to the credit agreement's terms and conditions.
The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility matures in February 2021. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio.ratio (3.0x). Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio.
As of September 30, 2017, we had no outstanding borrowings and $3.15 million The credit agreement matures in outstanding letters of credit. Our borrowing capacity was $150 million.December 2026. We were in compliance with all financial covenants.covenants as of April 2, 2022.
6. Repurchase of Common Stock
Repurchases of our common stock were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Amount repurchased under Board-approved share repurchase program | | $ | 40,000 |
| | $ | 25,000 |
| | $ | 115,000 |
| | $ | 95,000 |
|
Amount repurchased in connection with the vesting of employee restricted stock grants | | 64 |
| | 259 |
| | 5,158 |
| | 1,410 |
|
Total amount repurchased | | $ | 40,064 |
| | $ | 25,259 |
| | $ | 120,158 |
| | $ | 96,410 |
|
| | | | | | | | |
6 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
Effective as of October 1, 2017, our Board approved an increase in our total remaining share repurchase authorization to $500 million. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.The cost of stock repurchases is first charged to additional paid-in capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.
SELECT COMFORTSLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes our borrowings under the credit facility ($ in thousands): | | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
Outstanding borrowings | $ | 413,200 | | | $ | 382,500 | |
Outstanding letters of credit | $ | 5,947 | | | $ | 3,997 | |
Additional borrowing capacity | $ | 405,853 | | | $ | 438,503 | |
Weighted-average interest rate | 2.2 | % | | 1.6 | % |
6. Leases
We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While our local market development approach generally results in long-term participation in given markets, our retail store leases generally provide for an initial lease term of five to 10 years. Our office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, our mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at our sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. Our lease agreements do not contain any material residual value guarantees. We also lease vehicles and certain equipment under operating leases with an initial lease term of three to five years.
Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in operating lease costs.
At April 2, 2022, our finance right-of-use assets and lease liabilities were not significant.
Lease costs were as follows (in thousands): | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 2, 2022 | | April 3, 2021 | | | | |
Operating lease costs(1) | $ | 27,078 | | | $ | 23,638 | | | | | |
Variable lease costs | $ | 330 | | | $ | 515 | | | | | |
___________________________
(1)Includes short-term lease costs which are not significant.
| | | | | | | | |
7 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The maturities of operating lease liabilities as of April 2, 2022, were as follows(1) (in thousands): | | | | | |
2022 (excluding the three months ended April 2, 2022) | $ | 72,962 | |
2023 | 89,790 | |
2024 | 77,978 | |
2025 | 68,001 | |
2026 | 56,694 | |
2027 | 41,517 | |
Thereafter | 86,958 | |
Total operating lease payments(2) | 493,900 | |
Less: Interest | 81,326 | |
Present value of operating lease liabilities | $ | 412,574 | |
___________________________
(1)Total operating lease payments exclude $102 million of legally binding minimum lease payments for leases signed but not yet commenced.
(2)Includes the current portion of $74 million for operating lease liabilities.
Other information related to operating leases was as follows: | | | | | | | | | | | | | | |
| | April 2, 2022 | | January 1, 2022 |
Weighted-average remaining lease term (years) | | 6.3 | | 6.4 |
Weighted-average discount rate | | 6.0 | % | | 6.1 | % |
| | | | | | | | | | | | | | |
| | Three Months Ended |
(in thousands) | | April 2, 2022 | | April 3, 2021 |
Cash paid for amounts included in present value of operating lease liabilities | | $ | 24,209 | | | $ | 21,386 | |
Right-of-use assets obtained in exchange for operating lease liabilities | | $ | 17,564 | | | $ | 29,454 | |
7. Stock-BasedRepurchases of Common Stock
Repurchases of our common stock were as follows (in thousands): | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 2, 2022 | | April 3, 2021 | | | | |
Amount repurchased under Board-approved share repurchase program | $ | 42,308 | | | $ | 167,418 | | | | | |
Amount repurchased in connection with the vesting of employee restricted stock grants | 8,690 | | | 16,764 | | | | | |
Total amount repurchased (based on trade dates) | $ | 50,998 | | | $ | 184,182 | | | | | |
As of April 2, 2022, the remaining authorization under the $600 million share repurchase program was $361 million.
| | | | | | | | |
8 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Revenue Recognition
Deferred contract assets and deferred contract liabilities are included in our condensed consolidated balance sheets as follows (in thousands): | | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
Deferred contract assets included in: | | | |
Other current assets | $ | 26,926 | | | $ | 28,048 | |
Other non-current assets | 53,244 | | | 49,343 | |
| $ | 80,170 | | | $ | 77,391 | |
| | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
Deferred contract liabilities included in: | | | |
Other current liabilities | $ | 34,999 | | | $ | 36,490 | |
Other non-current liabilities | 68,657 | | | 63,680 | |
| $ | 103,656 | | | $ | 100,170 | |
The deferred revenue and costs related to SleepIQ® technology are currently recognized on a straight-line basis over the product's estimated life of 4.5 to 5.0 years because our inputs are generally expended evenly throughout the performance period. During the three months ended April 2, 2022 and April 3, 2021, we recognized revenue of $9 million and $7 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods.
Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of our revenues for the three months ended April 2, 2022 and 99% of our revenues for the three months ended April 3, 2021.
Net sales were as follows (in thousands): | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 2, 2022 | | April 3, 2021 | | | | |
Retail stores | $ | 444,336 | | | $ | 489,188 | | | | | |
Online, phone, chat and other | 82,794 | | | 79,068 | | | | | |
Total Company | $ | 527,130 | | | $ | 568,256 | | | | | |
Obligation for Sales Returns
The activity in the sales returns liability account was as follows (in thousands): | | | | | | | | | | | |
| Three Months Ended |
| April 2, 2022 | | April 3, 2021 |
Balance at beginning of year | $ | 22,368 | | | $ | 24,765 | |
Additions that reduce net sales | 26,667 | | | 23,711 | |
Deductions from reserves | (28,758) | | | (23,866) | |
Balance at end of period | $ | 20,277 | | | $ | 24,610 | |
| | | | | | | | |
9 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
9. Stock-based Compensation Expense
Total stock-based compensation expense was as follows (in thousands): | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 2, 2022 | | April 3, 2021 | | | | |
Stock awards | $ | 3,274 | | | $ | 5,808 | | | | | |
Stock options | 859 | | | 608 | | | | | |
Total stock-based compensation expense (1) | 4,133 | | | 6,416 | | | | | |
Income tax benefit | 1,033 | | | 1,598 | | | | | |
Total stock-based compensation expense, net of tax | $ | 3,100 | | | $ | 4,818 | | | | | |
___________________________ |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Stock awards | | $ | 3,339 |
| | $ | 1,121 |
| | $ | 10,059 |
| | $ | 7,533 |
|
Stock options | | 594 |
| | 545 |
| | 1,750 |
| | 1,739 |
|
Total stock-based compensation expense | | 3,933 |
| | 1,666 |
| | 11,809 |
| | 9,272 |
|
Income tax benefit | | 1,314 |
| | 556 |
| | 3,968 |
| | 3,180 |
|
Total stock-based compensation expense, net of tax | | $ | 2,619 |
| | $ | 1,110 |
| | $ | 7,841 |
| | $ | 6,092 |
|
In addition to the income tax benefit related to(1) Changes in stock-based compensation expense reflect the cumulative impact of the change in the table above, excess tax benefitsexpected achievements of $0.2 million and $1.4 million were recognized as reductions of income tax expense during the three and nine months ended September 30, 2017, respectively. There were no excess tax benefits recognized in income tax expense during the three and nine months ended October 1, 2016. See Note 1, New Accounting Pronouncements, for additional discussion of new guidance on the accounting for, and disclosure of, stock-based compensation which we adopted effective January 1, 2017.certain performance targets.
8.10. Profit Sharing and 401(k) Plan
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 pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months endedSeptember 30, 2017 April 2, 2022 and October 1, 2016,April 3, 2021, our contributions, net of forfeitures, were $1.4 million and $1.1 million, respectively. During the nine months ended September 30, 2017 and October 1, 2016, our contributions, net of forfeitures, were $3.9$2.8 million and $3.4$1.9 million, respectively.
9. Other Expense, Net
Other expense, net, consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Interest expense | $ | (278 | ) | | $ | (267 | ) | | $ | (748 | ) | | $ | (624 | ) |
Interest income | 30 |
| | 12 |
| | 80 |
| | 43 |
|
Other expense, net | $ | (248 | ) | | $ | (255 | ) | | $ | (668 | ) | | $ | (581 | ) |
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
10.11. Net Income per Common Share
The components of basic and diluted net income per share were as follows (in thousands, except per share amounts): | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 2, 2022 | | April 3, 2021 | | | | |
Net income | $ | 2,074 | | | $ | 66,634 | | | | | |
Reconciliation of weighted-average shares outstanding: | | | | | | | |
Basic weighted-average shares outstanding | 22,760 | | | 25,377 | | | | | |
Dilutive effect of stock-based awards | 831 | | | 1,167 | | | | | |
Diluted weighted-average shares outstanding | 23,591 | | | 26,544 | | | | | |
Net income per share – basic | $ | 0.09 | | | $ | 2.63 | | | | | |
Net income per share – diluted | $ | 0.09 | | | $ | 2.51 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net income | $ | 25,603 |
| | $ | 25,745 |
| | $ | 49,286 |
| | $ | 40,130 |
|
| | | | | | | |
Reconciliation of weighted-average shares outstanding: | | | |
| | | | |
Basic weighted-average shares outstanding | 40,755 |
| | 45,621 |
| | 41,740 |
| | 46,705 |
|
Dilutive effect of stock-based awards | 760 |
| | 729 |
| | 819 |
| | 708 |
|
Diluted weighted-average shares outstanding | 41,515 |
| | 46,350 |
| | 42,559 |
| | 47,413 |
|
| | | | | | | |
Net income per share – basic | $ | 0.63 |
| | $ | 0.56 |
| | $ | 1.18 |
| | $ | 0.86 |
|
Net income per share – diluted | $ | 0.62 |
| | $ | 0.56 |
| | $ | 1.16 |
| | $ | 0.85 |
|
For the three and nine months ended September 30, 2017April 2, 2022 and October 1, 2016,April 3, 2021, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial.
11. | | | | | | | | |
10 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
12. Commitments and Contingencies
Sales Returns
The activity in the sales returns liability account was as follows (in thousands): |
| | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | October 1, 2016 |
Balance at beginning of year | $ | 15,222 |
| | $ | 20,562 |
|
Additions that reduce net sales | 55,720 |
| | 54,588 |
|
Deductions from reserves | (52,494 | ) | | (57,112 | ) |
Balance at end of period | $ | 18,448 |
| | $ | 18,038 |
|
Warranty Liabilities
The activity in the accrued warranty liabilities account was as follows (in thousands): | | | | | | | | | | | |
| Three Months Ended |
| April 2, 2022 | | April 3, 2021 |
Balance at beginning of year | $ | 10,069 | | | $ | 12,152 | |
Additions charged to costs and expenses for current-year sales | 4,447 | | | 4,330 | |
Deductions from reserves | (4,750) | | | (4,717) | |
Changes in liability for pre-existing warranties during the current year, including expirations | (31) | | | (156) | |
Balance at end of period | $ | 9,735 | | | $ | 11,609 | |
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | October 1, 2016 |
Balance at beginning of year | $ | 8,633 |
| | $ | 10,028 |
|
Additions charged to costs and expenses for current-year sales | 8,627 |
| | 7,014 |
|
Deductions from reserves | (6,625 | ) | | (7,976 | ) |
Changes in liability for pre-existing warranties during the current year, including expirations | (708 | ) | | (976 | ) |
Balance at end of period | $ | 9,927 |
| | $ | 8,090 |
|
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 U.S. 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. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additionalmaterial 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.estimate, or the potential loss is not material. We currently do not expect the outcome of these matterspending legal proceedings 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 consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.
On January 12, 2015, Plaintiffs David and Katina Spade commencedDecember 14, 2021, Steamfitters Local 449 Pension & Retirement Security Funds filed a purportedputative class action lawsuitcomplaint in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed toMinnesota on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021, inclusive, against Sleep Number, Shelly Ibach and David Callen. Plaintiff alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the United States Courtpurported class period, in violation of Appeals forSection 10(b) and 20(a) of the Third Circuit, which has certified two questionsSecurities Exchange Act of law to1934, as amended. The complaint seeks, among other things, unspecified monetary damages, reasonable costs and expenses and equitable/injunctive or other relief as deemed appropriate by the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has accepted the certified questions and oral argumentsCourt. We believe these claims are expected to be heard in the near future. As the United States District Court for the District of New Jersey determined, we believe that the case is without merit and intend to vigorously defend the ordermatter.
13. COVID-19 Pandemic
The COVID-19 pandemic impacted our 2021 and 2022 financial performance. In the first quarter of dismissal should be affirmed.2021, even with the COVID-19 challenges, we generated strong demand and financial performance. In the first quarter of 2022, our financial performance was impacted by: (i) the disruptive flow of semiconductor chips which affected our ability to deliver products to our customers and suppressed consumer confidence; (ii) incremental costs from labor and material inflation, and expediting costs resulting from current-period global supply chain shortages; and (iii) increased investments in our long- and near-term innovations and demand drivers, partly offset by cost containment actions. The pandemic's future effects on our global supply chain and the potential for supply disruption (e.g., the lack or slowing of critical components caused by labor shortages or government-mandated work closures), effects on consumer demand and effects on our ongoing financial performance remains uncertain. See Part II, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II: Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our business.
| | | | | | | | |
11 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
|
| |
ITEM 2. | 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 condensed consolidated 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 seveneight sections:
•Forward-Looking Statements and Risk Factors
Company•Business Overview
•COVID-19 Pandemic - Impact on our Business
•Results of Operations
•Liquidity and Capital Resources
•Non-GAAP Data Reconciliations
•Off-Balance-Sheet Arrangements and Contractual Obligations
•Critical Accounting Policies
Forward-looking Statements and 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-Qthis Quarterly Report 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;
•Risks inherent in outbreaks of pandemics or contagious disease, including the COVID-19 pandemic;
•Risks inherent in global-sourcing activities, including tariffs, outbreaks of pandemics or contagious diseases, such as the COVID-19 pandemic, geo-political turmoil, acts of terrorism, global conflicts or war (such as the current war in Ukraine), strikes, labor shortages, government-mandated work closures, and the potential for shortages in supply or disruption or delay of production and delivery of materials and products in our global supply chain;
•Risks of disruption in the operation of any of our main manufacturing, distribution, logistics, home delivery, product development, or customer service facilities or operations;
•Our manufacturing processes operate with minimal levels of inventory, which may leave us vulnerable to shortages in supply;
•Our dependence on significant suppliers and third parties and our ability to maintain relationships with key suppliers or third parties, including several sole-source suppliers or service providers;
•Rising commodity costs and other inflationary pressures;
•The effectiveness of our marketing messages;
•The efficiency of our advertising and promotional efforts;
•Our ability to execute our Company-ControlledTotal Retail 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 propertyintellectual-property rights to protect our products and brand from competitive or infringing activities;
The potential for claims•Claims that our products, processes, advertising or trademarks infringe the intellectual propertyintellectual-property rights of others;
•Availability of attractive and cost-effective consumer credit options;
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, including the potential for shortages in supply;
Risks of disruption in the operation of either of our two main manufacturing facilities;
•Increasing government regulation;
•Pending or unforeseen litigation and the potential for adverse publicity associated with litigation;
| | | | | | | | |
12 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
•The adequacy of our managementand third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and security;cybersecurity;
•The costs and potential disruptions to our business related to upgrading or maintaining our management information systems;
•The vulnerability of our managementand third-party information systems to attacks by hackers or other cyber threats that could compromise the security of our systems, result in a data breach or disrupt our business;
•Environmental risks, including increasing environmental regulation and the broader impacts of climate change such as from weather-related events; and
•Our ability, and the ability of our suppliers and vendors, to attract, retain and motivate qualified management, executive and other key employees,team members, including qualified retail sales professionals and managers; andmanagers.
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” below in Part II: Item 1A of this Quarterly Report on Form 10-Q and under the same caption in our Annual Report on Form 10-K.
We have no obligation to publicly update or revise any of the forward-looking statements contained in this quarterly reportQuarterly Report on Form 10-Q.
CompanyBusiness Overview
At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. We are executing
committed to leveraging the power of sleep, and sleep science, to improve lives and create a consumer innovation strategy with three significant competitive advantageshealthier, kinder, more
inclusive world. And because our more than 5,500 team members are dedicated to our mission as we work towardwell as the disciplined
execution of our ambitious vision to become one of the world's most beloved brands by delivering an unparalleled sleep experience. We offer consumers high-quality, individualized sleep solutions and services, which include a complete line of Sleep Number® beds, bases and bedding accessories. Our competitive advantages are: proprietary sleep innovations, exclusive distribution and lifelong customer relationships.
We are a vertically integrated brandbusiness model and differentiated strategy, Sleep Number is at the developer,forefront of
sleep innovation. As the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number 360 smart
beds and related technology. We are also the pioneer in biometric sleep tracking and adjustability. Only theSleepIQ® technology, Sleep Number bed offers SleepIQ®is uniquely equipped to offer the life-changing benefit of high-quality,
individualized sleep solutions and services. To date, we have improved over 14 million lives.
With our enterprise-wide investments in innovation, technology, - proprietary sensor technologylogistics, marketing and customer service, Sleep
Number has created a highly relevant, competitively advantaged strategy and has become a beloved brand built on a
foundation of individuality and wellbeing. Together with our expertise in sleep research, commitment to data science
and analytics, and deep understanding of consumers – including structural shifts in their behavior that works directly withwe have
anticipated since the bed’s DualAir™ system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Our bed assortment is complemented with proprietary FlextFit™ adjustable bases, and Sleep Number® pillows, sheets and other bedding products. In May 2017, we began selling certain models2012 inception of our Sleep Number 360™ smart bed line.consumer innovation strategy and which were accelerated by the global
pandemic – we are driving profitable growth and delivering superior value for all our stakeholders.
Our differentiated products are sold exclusively at more than 550 Sleep Number® stores located in 49 states, online at SleepNumber.com or via phone. We offer consumers a unique, value-added store and digital experience through our team of over 3,800 individuals who are dedicated to our mission of improving lives by individualizing sleep experiences. This experience, combined with the advantages of our vertical business model and SleepIQ technology, enable a lifelong relationship with our customers.
We generate revenue by marketing and selling productsour innovations directly to new and existing customers.customers, and selling products through our Stores, Online, Phone, Chat (Total Retail) and Other.
We expect our business transformation over the past five years to result in improved profitability through the productivity and service advancements associated with our integrated ERP platform, smart bed design, more efficient manufacturing and supply chain network. In 2017, we began evolving our supply chain including the transition of more than 20 suppliers with whom we are partnering with to support our innovations and profitability goals. Changes to the supply chain also include in-hub assembly of our new 360 smart beds and optimization of our outbound logistics network. These multi-year initiatives, coupled with our innovations, are expected to drive accelerated profits and cash flows over time.
We are committed to delivering superior shareholder value through three primary drivers of earnings per share growth:by: (1) increasing consumer demand,demand; (2) leveraging theour business modelmodel; and (3) deploying capital efficiently.
COVID-19 Pandemic - Impact on our Business
The COVID-19 pandemic impacted our 2021 and 2022 financial performance. In the first quarter of 2021, even with the COVID-19 challenges, we generated strong demand and financial performance. In the first quarter of 2022, our financial performance was impacted by: (i) the disruptive flow of semiconductor chips which affected our ability to deliver products to our customers and suppressed consumer confidence; (ii) incremental costs from labor and material inflation, and expediting costs resulting from current-period global supply chain shortages; and (iii) increased investments we have made in R&D, technology, digitalour long- and near-term innovations and demand drivers, partly offset by cost containment actions. The pandemic's future effects on our store experience have strengthenedglobal supply chain and the potential for supply disruption (e.g., the lack or slowing of critical components caused by labor shortages or government-mandated work closures), effects on consumer demand and effects on our competitive advantagesongoing financial performance remains uncertain. See Part II, Item 2. Management's Discussion and establishedAnalysis of Financial Condition and Results of Operations and Part II: Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our innovation leadership. We have a long-term orientation and are focused on delivering sustainable, profitable growth.business.
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13 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
Results of Operations
Quarterly and Year-to-Date Results
Quarterly and year-to-date 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, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, the timing of new product introductions theand related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, any disruptions in global supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer confidence and general economic conditions. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the war in Ukraine and other external factors, including but not limited to general economic conditions, inflation, consumer confidence, store restrictions mandated by federal, state or local authorities and global supply chain disruptions, the extent to which these external factors will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted. 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 periodthree months ended September 30, 2017April 2, 2022 were as follows:
•Net sales for the three months ended September 30, 2017 increased 9%April 2, 2022 decreased 7% to $403$527 million, compared with $368$568 million for the three months ended April 3, 2021. Demand was negatively impacted by acute macro factors including the COVID-19 variant in January and the war in Ukraine in March. Global supply constraints continued to impact our delivered net sales for the three months ended April 2, 2022.
•The 7% net sales decrease consisted of an 11% comparable sales decline in Total Retail offset by sales from 46 net new stores opened in the past 12 months that added 4 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15. •Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing twelve-month basis for the period ended April 2, 2022 totaled $3.5 million, 9% higher than the same period last year.
•Operating income for the three months ended April 2, 2022 was $4 million, compared with $76 million in the prior-year period. The $72 million decrease in operating income was driven by the 7% decrease in net sales constrained by semiconductor chip supply, a 7.3 ppt. increase in our operating expenses rate, and a 5.3 ppt. decrease in our gross profit rate that was negatively affected by cost pressures and an unfavorable mix of smart bed deliveries as constrained by semiconductor chip supply.
•The 5.3 ppt. gross profit rate decrease was primarily due to incremental costs from labor and material inflation, and inefficiencies resulting from current-period global supply chain shortages, in addition to the deleveraging impact of the 7% net sales decline and a less favorable sales mix of lower-margin products. See the Gross profit discussion on page 17 for additional details. •The 7.3 ppt. increase in our operating expenses rate was partially due to the deleveraging impact of the 7% net sales decline. In addition, we continued to prioritize investments in near- and long-term growth drivers, including $16 million of R&D expenses during the three months ended April 2, 2022, 23% more than the same period one year ago.
•Net income for the three months ended April 2, 2022 decreased to $2 million, compared with $67 million for the same period one year ago. Net sales for the three months ended September 30, 2017 were affected by: (i) an approximately $25 million shift in sales from our second quarter to our third quarter asincome per diluted share was $0.09, compared with $2.51 last year.
•We achieved a resultreturn on invested capital (ROIC) of a delay in deliveries and shipments related to an inventory shortage from one of our new suppliers (this delay has been resolved and we don't expect a shortage in the future), and (ii) temporary disruptions from hurricanes during our Labor Day sales event that reduced third quarter net sales by an estimated $12 to $15 million.
The 9% sales increase was driven by 6 percentage points (ppt.) of growth from sales generated by 26 net new stores opened in the past 12 months and a 5% comparable sales increase in our Company-Controlled channel, partially offset by a decrease in our Wholesale/Other channel sales.
Sales per store (for stores open at least one year)20.5% on a trailing twelve-month basis for the period ended September 30, 2017 were $2.4 million, up 5% from $2.2 million in the prior-year comparable period.
In May 2017, we began selling our Sleep Number 360™ i7 and i10 smart beds. The Sleep Number 360 smart bed won 13 awards at CES, including being named the Best of Innovation Honoree in the Home Appliance category. We plan to launch a third smart bed model (the p6) in the fourth quarter, and remain on track to complete the phased implementation of our 360 smart bed line by the first half of next year.
Operating incomeApril 2, 2022, compared with 27.6% for the quarter totaled $39 million, consistent with the samecomparable period one year ago. Our operating income rate decreased to 9.7% of net sales, compared with 10.6% of net sales for the same period last year. The decrease in operating income rate primarily resulted from transition costs associated with the launch of our Sleep Number 360 smart beds and the evolution of our supply chain.
Net income for the quarter was $25.6 million, or $0.62 per diluted share, compared with $25.7 million, or $0.56 per diluted share, for the same period one year ago.
•Cash provided by operating activities totaled $176 million for the ninethree months ended September 30, 2017,April 2, 2022 decreased to $25 million, compared with $145$112 million for the same period one year ago. Investing activities for the current-year period included $38
•As of April 2, 2022, we had $413 million of property and equipment purchases, compared with $39 million for the same period last year.
At September 30, 2017, cash and cash equivalents totaled $30 million and we ended the quarter with no borrowings under our $153 million revolving credit facility. We utilize our credit facility to meet our seasonal working capital requirements.and available net liquidity of $406 million.
In the third quarter of 2017, we repurchased 1.3 million shares of our common stock under our Board-approved share repurchase program at a cost of $40 million (an average of $31.18 per share). Effective as of October 1, 2017, our Board approved an increase in our total remaining share repurchase authorization to $500 million.
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14 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
The following table sets forth 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 | | |
| April 2, 2022 | | April 3, 2021 | | | | |
Net sales | $ | 527.1 | | | 100.0 | % | | $ | 568.3 | | | 100.0 | % | | | | | | | | |
Cost of sales | 224.8 | | | 42.7 | % | | 212.3 | | | 37.4 | % | | | | | | | | |
Gross profit | 302.3 | | | 57.3 | % | | 355.9 | | | 62.6 | % | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | |
Sales and marketing | 240.3 | | | 45.6 | % | | 223.6 | | | 39.4 | % | | | | | | | | |
General and administrative | 41.3 | | | 7.8 | % | | 42.6 | | | 7.5 | % | | | | | | | | |
Research and development | 16.3 | | | 3.1 | % | | 13.3 | | | 2.3 | % | | | | | | | | |
Total operating expenses | 297.9 | | | 56.5 | % | | 279.5 | | | 49.2 | % | | | | | | | | |
Operating income | 4.4 | | | 0.8 | % | | 76.4 | | | 13.4 | % | | | | | | | | |
Interest expense, net | 2.1 | | | 0.4 | % | | 1.0 | | | 0.2 | % | | | | | | | | |
Income before income taxes | 2.3 | | | 0.4 | % | | 75.4 | | | 13.3 | % | | | | | | | | |
Income tax expense | 0.2 | | | — | % | | 8.8 | | | 1.6 | % | | | | | | | | |
Net income | $ | 2.1 | | | 0.4 | % | | $ | 66.6 | | | 11.7 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | | |
Basic | $ | 0.09 | | | | | $ | 2.63 | | | | | | | | | | | |
Diluted | $ | 0.09 | | | | | $ | 2.51 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Weighted-average number of common shares: | | | | | | | | | | | | |
Basic | 22.8 | | | | | 25.4 | | | | | | | | | | | |
Diluted | 23.6 | | | | | 26.5 | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Beginning of period | | 549 |
| | 506 |
| | 540 |
| | 488 |
|
Opened | | 6 |
| | 24 |
| | 30 |
| | 57 |
|
Closed | | (2 | ) | | (3 | ) | | (17 | ) | | (18 | ) |
End of period | | 553 |
| | 527 |
| | 553 |
| | 527 |
|
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16 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
Comparison of Three Months Ended September 30, 2017April 2, 2022 with Three Months Ended October 1, 2016April 3, 2021
Net sales
Net sales increased 9% to $403 million for the three months ended September 30, 2017,April 2, 2022 decreased by $41 million, or 7%, to $527 million, compared with $368$568 million for the same period one year ago. NetDemand was negatively impacted by acute macro factors including the COVID-19 variant in January and war in Ukraine in March. Global supply constraints negatively impacted our delivered net sales for the three months ended September 30, 2017 were affected by: (i)April 2, 2022.
The 7% net sales decrease consisted primarily of an approximately $25 million shift11% comparable sales decline in Total Retail offset by sales from our second quarter to our third quarter as a result of a delay in deliveries and shipments related to an inventory shortage from one of our new suppliers (this delay has been resolved and we don't expect a shortage in the future); and (ii) temporary disruptions from hurricanes during our Labor Day sales event that reduced third quarter net sales by an estimated $12 to $15 million. The 9% sales increase was driven by 6 percentage points (ppt.) of growth from sales generated by 2646 net new stores opened in the past 12 months and a 5% comparablethat added 4 percentage points (ppt.) of growth. For additional details, see the components of total net sales increase in our Company-Controlled channel; partially offset by a decrease in our Wholesale/Other channel sales.change on page 15.
The $35$41 million net sales increasedecline compared with the same period one year ago was comprised of the following: (i) a $23$59 million decrease in our Total Retail comparable net sales; and (ii) an $18 million increase resulting from net store openings; and (ii) a $17 million increase in sales from our Company-Controlled comparable sales; partially offset by (iii) a $5 million decrease in Wholesale/Other channel sales. Company-Controlled mattressopenings. Total Retail smart bed unit sales were in linedecreased 5% compared with the prior year. AverageTotal Retail average revenue per mattresssmart bed unit decreased by 2% to $4,905, compared with $5,030 in the prior-year period and was negatively impacted by a less favorable sales mix due to supply constraints impacting smart bed deliveries at the higher end of our Company-Controlled channel increased by 11% to $4,385.product line.
Gross profit
Gross profit of $253$302 million increasedfor the three months ended April 2, 2022 decreased by $21$54 million, or 9%15%, compared with $232$356 million for the same period one year ago. The gross profit rate was 62.9%declined to 57.3% of net sales for the three months ended September 30, 2017,April 2, 2022, compared with 63.1%62.6% for the prior-year comparable period.
The current-year gross profit rate declinedecrease of 0.25.3 ppt. was primarilymainly due to: (i) incremental costs from labor and material inflation and inefficiencies resulting from current-period global supply chain shortages (4.2 ppt.); (ii) the deleverage from the 7% net sales decrease; and (iii) a less favorable sales mix of lower-margin products due to marginsupply constraints impacting smart bed deliveries at the higher end of our product line. These pressures from weather-related excess freight and handling costs, and supplier transition costs,were partially offset by a favorable product mix of Sleep Number 360™ smart beds and operating lean initiatives.pricing actions taken over the past twelve months (1.7 ppt.). In addition, our gross profit rate canwill fluctuate from quarter to quarter due to a variety of other factors, including warranty expenses, return and exchange costs, and changes in performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses for the three months ended September 30, 2017 increased to $175April 2, 2022 were $240 million, or 43.4%45.6% of net sales, compared with $158$224 million, or 42.9%39.4% of net sales, for the same period one year ago. The 0.5 ppt. increase in thecurrent-year sales and marketing expenseexpenses rate increase of 6.2 ppt. was mainlyprimarily due to anto: (i) the deleveraging impact of the 7% net sales decrease as constrained by semiconductor chip supply; (ii) addition of 46 net new stores; and (iii) increased marketing expenses resulting from a 9% increase in customer financing expenses, as a larger percentage of our customers took advantage of promotional financing offers, partially offset by 0.6 ppt. of leverage from media spending, which increased by 5% compared with the prior year, while net sales increased by 9%.expenses.
General and administrative expenses
General and administrative (G&A) expenses totaled $33$41 million, or 8.1%7.8% of net sales, for the three months ended September 30, 2017,April 2, 2022, compared with $28$43 million, or 7.7%7.5% of net sales, in the prior-year period. The $4.4$1.3 million increasedecrease in G&A expenses consisted primarily of the following:mainly of: (i) a $3.1$6.7 million decrease in employee compensation primarily resulting from a year-over-year decrease in Company-wide performance-based incentive compensation; offset by (ii) a $5.4 million increase in employee compensation,other miscellaneous expenses, including a year-over-year increasetechnology investments and travel expenses (minimal travel in performance-based incentive compensation, enhanced digital marketing capabilities, and salary and wage rate increases that were in line with inflation; and (ii) a $1.3 million net increase in miscellaneous other expenses.the prior year due to the pandemic). The G&A expenseexpenses rate increased by 0.40.3 ppt. in the current-year period, compared with the same period one year ago due to the increase in expenses discussed above, partially offset by the leveragingdeleveraging impact of the 9%7% net sales increase.decrease, in addition to the items discussed above.
Research and development expenses
Research and development (R&D) expenses increased by 23% to $16 million for the three months ended September 30, 2017 were $7 million consistent with the same period one year ago, but decreased to 1.7% of net sales from 1.9% of net sales, for the same period one year ago due to the leveraging effect of the 9% net sales increase. For the three months ended September 30, 2017, the investment in product innovations is consistent with our current-year and long-term consumer innovation strategy.
Comparison of Nine Months Ended September 30, 2017 with Nine Months Ended October 1, 2016
Net sales
Net sales increased 8% to $1.08 billion for the nine months ended September 30, 2017,April 2, 2022, compared with $998$13 million for the same period onelast year ago. The sales change was comprised of 8 percentage points (ppt.) of growth from sales generated by 26as we continued to prioritize our long-term innovation initiatives.
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17 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
Interest expense
Interest expense, net new stores opened in the past 12 months and a 2% comparable sales increase in our Company-Controlled channel, partially offset by a decrease in Wholesale/Other channel sales.
The $83 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $76 million increase resulting from net store openings; and (ii) a $17 million increase in sales from our Company-Controlled comparable sales; partially offset by (iii) a $10 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units increased 4% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by 5%.
Gross profit
Gross profit of $677$2 million for the ninethree months ended September 30, 2017 increased by $64 million, or 10%,April 2, 2022, compared with the same period one year ago. The gross profit rate increased to 62.6% of net sales for the first nine months of 2017, compared with 61.4% for the prior-year period. The prior-year gross profit rate was negatively impacted by actions taken to manage operating issues associated with our ERP implementation during the first six months of 2016. The current-year gross profit rate improvement of 1.2 ppt. was primarily due to manufacturing and supply chain efficiencies, including lean initiatives, and lower sales return and exchange costs compared with the same period one year ago. In addition, our gross profit rate can fluctuate from quarter to quarter due to a variety of other factors, including warranty expenses, product mix changes and performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses for the nine months ended September 30, 2017 increased to $489$1 million compared with $443 million for the same period one year ago, and increased to 45.2% of net sales compared with 44.4% of net sales last year. The 0.8 ppt. increase in the sales and marketing expense rate was mainly due to an increase in customer financing expenses, as a larger percentage of our customers took advantage of promotional financing offers, and an increase in selling compensation expense, including performance-based incentive compensation. These increases were partially offset by leverage from media spending, which increased by 4% compared with the prior year, while net sales increased by 8%.
General and administrative expenses
General and administrative (G&A) expenses totaled $95 million, or 8.8% of net sales, for the nine months ended September 30, 2017, compared with $86 million, or 8.6% of net sales, in the prior-year period. The $9 million increase in G&A expenses consisted primarily of the following: (i) a $4.0 million increase in employee compensation, including a year-over-year increase in company-wide performance-based incentive compensation, enhanced digital marketing capabilities, and salary and wage rate increases that were in line with inflation; (ii) $2.3 million of additional depreciation and amortization expense, including incremental depreciation expense from capital expenditures that support the growth of our business; and (iii) a $2.7 million net increase in miscellaneous other expenses. The G&A expense rate increased by 0.2 ppt. in the current-year period compared with the same period one year ago due to the increase in expenses discussed above, partially offset by the leveraging impact of the 8% sales increase.
Research and development expenses
Research and development (R&D) expenses for the nine months ended September 30, 2017 were $21 million, or 1.9% of net sales, compared with $22 million, or 2.2% of net sales, for the same period one year ago. The $1 million decrease in R&D expensesincrease was due tomainly driven by a higher level of outstanding borrowings during the timing of our investments to support product innovations. The investment spending year-to-date is consistent with our current-year and long-term consumer innovation strategy.
Income tax expense
Income tax expense was $22 million for the ninethree months ended September 30, 2017,April 2, 2022 compared with $21 million forthe same period in 2021, and a higher weighted-average interest rate compared with the same period one year ago.
Income tax expense
Income tax expense totaled $0.2 million for the three months ended April 2, 2022, compared with $8.8 million last year. The effective income tax rate for the ninethree months ended September 30, 2017April 2, 2022 was 30.7%9.4%, compared with 33.9%11.7% for the prior-year period. The effectivecomparable period last year. Discrete tax rate for the current-year period benefited from: (i)benefits, primarily stock-based compensation excess tax benefits, were $0.4 million for the three months ended April 2, 2022, compared with $10.0 million in accordance with new Financial Accounting Standards Board (FASB) guidance effective for us beginning in 2017; and (ii) the recognition of additional tax credits. Under previous FASB guidance, excess tax benefits or deficiencies were recognized in additional paid-in capital in our consolidated balance sheet. See Note 1, New Accounting Pronouncements, in the Notes to the Condensed Consolidated Financial Statements for additional details.last year’s first quarter.
Liquidity and Capital Resources
Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value. Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth.value over time. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $153$825 million revolving credit facility. As of April 2, 2022, we do not have any off-balance sheet financing other than our $6 million in outstanding letters of credit. The 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 and contractual obligations such as lease payments and capital commitments for new retail stores for the foreseeable future.
As of September 30, 2017,Changes in cash and cash equivalents totaled $30 million compared with $12 million asduring the three months ended April 2, 2022 primarily consisted of December 31, 2016. The $18 millionincrease was primarily due to $176$25 million of cash provided by operating activities which was partiallyand a $45 million net increase in short-term borrowings, offset by $38$20 million of cash used to purchase property and equipment, and $120$51 million of cash used to repurchase our common stock ($115(based on settlement, $42 million under our Board-approved share repurchase program and $5$9 million in connection with the vesting of employee restricted stock grants).
The following table summarizes our cash flows (dollars in(in millions). Amounts may not add due to rounding differences: | | | | | | | | | | | |
| Three Months Ended |
| April 2, 2022 | | April 3, 2021 |
Total cash provided by (used in): | | | |
Operating activities | $ | 24.6 | | | $ | 111.6 | |
Investing activities | (19.6) | | | (11.5) | |
Financing activities | (5.8) | | | (102.1) | |
Net decrease in cash and cash equivalents | $ | (0.8) | | | $ | (2.0) | |
|
| | | | | | | | |
| | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 |
Total cash provided by (used in): | | | | |
Operating activities | | $ | 176.1 |
| | $ | 145.3 |
|
Investing activities | | (34.4 | ) | | (29.6 | ) |
Financing activities | | (123.3 | ) | | (91.3 | ) |
Net increase in cash and cash equivalents | | $ | 18.3 |
| | $ | 24.4 |
|
Cash provided by operating activities for the ninethree months ended September 30, 2017April 2, 2022 was $176$25 million, compared with $145$112 million for the ninethree months ended October 1, 2016.April 3, 2021. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $9$65 million increasedecrease in net income for the ninethree months ended September 30, 2017,April 2, 2022, compared with the same period one year ago; (ii) a $37$14 million fluctuation in customer prepayments resulting from higher than normal customer prepayments at January 2, 2016 (dueprepaid expenses and other assets due to ERP implementation issues);both periods being impacted by the timing of rent payments and a reduction in business activities due to the pandemic; (iii) a $31$12 million change in other accruals and liabilities due to the timing of payments; (iv) a $10 million fluctuation in income taxes based on a $15 million income taxes receivable at January 2, 2016 (income taxes payable for comparable period); and (iv) the ERP implementation issues we experienced in our plants and supply chain during the fourth quarter of 2015 that resulted in increased accounts receivables, higher inventories, higher accounts payable with both periods impacted by business changes and lower other taxestiming of payments; and withholding at(v) a $9 million fluctuation in the endamount of 2015.compensation and benefits accrued and timing of the related payments resulting from year-over-year changes in Company-wide performance-based incentive compensation.
Net cash used in investing activities to purchase property and equipment was $34$20 million for the ninethree months ended September 30, 2017,April 2, 2022, compared with $30$12 million of net cash used in investing activities for the same period one year ago. Investing activities forThe year-over-year increase was primarily due to the current-year period included $38 milliontiming of cash flows associated with new and remodeled stores’ property and equipment, purchases, compared with $39 million for the same period last year. We decreased ourand investments in marketable debt securities by $9 million during the nine months ended October 1, 2016. We did not hold any investments in marketable debt securities as of December 31, 2016 or during the nine months ended September 30, 2017.information technology.
Net cash used in financing activities was $123$6 million for the ninethree months ended September 30, 2017,April 2, 2022, compared with $91$102 million for the same period one year ago.last year. During the ninethree months ended September 30, 2017,April 2, 2022, we repurchased $120$51 million of
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18 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
our stock ($115(based on settlement dates, $42 million under our Board-approved share repurchase program and $5$9 million in connection with the vesting of employee restricted stock awards), compared with $96$179 million ($95 million under our Board-approved share repurchase program and $1.4 million in connection with the vesting of employee restricted stock awards) during the same period one year ago. Short-term borrowings declinedincreased by $6$45 million during the current-year period primarily due to a decrease$31 million increase in borrowings under our revolving credit facility to $413 million and a $14 million increase in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings increased by $74 million during the prior-year period due to a $71 million increase in borrowings under our credit facility to $315 million and a $3 million increase in book overdrafts.
Under our Board-approved share repurchase program, we repurchased 4.30.7 million shares at a cost of $115$42 million (an(based on trade dates, an average of $26.52$63.95 per share) during the ninethree months ended September 30, 2017.April 2, 2022. During the ninethree months ended October 1, 2016,April 3, 2021, we repurchased 4.61.2 million shares at a cost of $95$167 million (an(based on trade dates, an average of $20.78$136.27 per share). Effective as of October 1, 2017, our Board approved an increase in our total remaining share repurchase authorization to $500 million. There is no expiration date governing the period over which we can repurchase shares. At April 2, 2022, there is $361 million remaining authorization under our Board-approved $600 million share repurchase program.
In March 2017,As of April 2, 2022, we amendedhad $413 million of borrowings under our revolving credit facility to increasefacility. We also had $6 million in outstanding letters of credit. Net liquidity available under our net aggregate availability from $150 million to $153 million. We maintained the accordion feature which allows us to increase the amount of the credit facility from $153was $406 million to $200 million, subject to lenders' approval. There were no other changes to the credit agreement's terms and conditions.
The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility matures in February 2021.at April 2, 2022. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio.ratio (3.0x). Our leverage ratio as defined in our credit agreement was 3.4x as of April 2, 2022. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio.
The credit agreement is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. As of September 30, 2017, we had $3.15 million in outstanding letters of credit and noApril 2, 2022, the weighted-average interest rate on borrowings under the credit facility. Our available borrowing capacityfacility was $150 million. We2.2% and we were in compliance with all financial covenants.
We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance their purchases from us (Synchrony Agreement). The Synchrony Agreement contains certain financial covenants consistent with our credit facility, including a maximum leverage ratio and a minimum interest coverage ratio. As of September 30, 2017,April 2, 2022, we were in compliance with all financial covenants.
Under the terms of the Synchrony Agreement, Synchrony 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. As the accounts are owned by Synchrony Bank, at no time are the accounts purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults.
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19 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
Non-GAAP Data Reconciliations
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. 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 are as follows (dollars in(in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Trailing-Twelve Months Ended |
| April 2, 2022 | | April 3, 2021 | | April 2, 2022 | | April 3, 2021 |
Net income | $ | 2,074 | | | $ | 66,634 | | | $ | 89,186 | | | $ | 166,683 | |
Income tax expense | 214 | | | 8,812 | | | 24,947 | | | 34,265 | |
Interest expense | 2,127 | | | 978 | | | 7,394 | | | 7,642 | |
Depreciation and amortization | 15,683 | | | 14,519 | | | 60,943 | | | 60,049 | |
Stock-based compensation | 4,133 | | | 6,417 | | | 20,930 | | | 26,179 | |
Asset impairments | 103 | | | 89 | | | 186 | | | 388 | |
Adjusted EBITDA | $ | 24,334 | | | $ | 97,449 | | | $ | 203,586 | | | $ | 295,206 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Trailing-Twelve Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net income | | $ | 25,603 |
| | $ | 25,745 |
| | $ | 60,573 |
| | $ | 18,958 |
|
Income tax expense | | 13,178 |
| | 13,044 |
| | 25,731 |
| | 11,112 |
|
Interest expense | | 278 |
| | 267 |
| | 935 |
| | 721 |
|
Depreciation and amortization | | 14,770 |
| | 14,536 |
| | 60,404 |
| | 56,154 |
|
Stock-based compensation | | 3,933 |
| | 1,666 |
| | 14,498 |
| | 10,609 |
|
Asset impairments | | 222 |
| | 2 |
| | 267 |
| | 51 |
|
Adjusted EBITDA | | $ | 57,984 |
| | $ | 55,260 |
| | $ | 162,408 |
| | $ | 97,605 |
|
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 operating activities,” 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 (dollars in(in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Trailing-Twelve Months Ended |
| April 2, 2022 | | April 3, 2021 | | April 2, 2022 | | April 3, 2021 |
Net cash provided by operating activities | $ | 24,558 | | | $ | 111,598 | | | $ | 212,970 | | | $ | 306,318 | |
Subtract: Purchases of property and equipment | 19,604 | | | 11,546 | | | 74,958 | | | 38,295 | |
Free cash flow | $ | 4,954 | | | $ | 100,052 | | | $ | 138,012 | | | $ | 268,023 | |
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended | | Trailing-Twelve Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net cash provided by operating activities | | $ | 176,054 |
| | $ | 145,261 |
| | $ | 182,438 |
| | $ | 121,616 |
|
Subtract: Purchases of property and equipment | | 37,613 |
| | 38,769 |
| | 56,696 |
| | 62,920 |
|
Free cash flow | | $ | 138,441 |
| | $ | 106,492 |
| | $ | 125,742 |
| | $ | 58,696 |
|
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20 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
Non-GAAP Data Reconciliations (continued)
Return on Invested Capital (ROIC)
(dollars in thousands)
ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures: | | | | | | | | | | | |
| Trailing-Twelve Months Ended |
| April 2, 2022 | | April 3, 2021 |
Net operating profit after taxes (NOPAT) | | | |
Operating income | $ | 121,527 | | | $ | 208,506 | |
Add: Rent expense (1) | 104,937 | | | 92,650 | |
Add: Interest income | — | | | 84 | |
Less: Depreciation on capitalized operating leases (2) | (26,311) | | | (24,258) | |
Less: Income taxes (3) | (47,503) | | | (66,118) | |
NOPAT | $ | 152,650 | | | $ | 210,864 | |
| | | |
Average invested capital | | | |
Total deficit | $ | (469,213) | | | $ | (332,650) | |
| | | |
Add: Long-term debt (4) | 413,709 | | | 315,522 | |
Add: Capitalized operating lease obligations (5) | 839,496 | | | 741,200 | |
Total invested capital at end of period | $ | 783,992 | | | $ | 724,072 | |
| | | |
Average invested capital (6) | $ | 746,167 | | | $ | 763,227 | |
| | | |
Return on invested capital (ROIC) (7) | 20.5 | % | | 27.6 | % |
___________________________ |
| | | | | | | | |
| | Trailing-Twelve Months Ended |
| | September 30, 2017 | | October 1, 2016 |
Net operating profit after taxes (NOPAT) | | | | |
Operating income | | $ | 87,108 |
| | $ | 30,681 |
|
Add: Rent expense(1) | | 72,260 |
| | 64,994 |
|
Add: Interest income | | 129 |
| | 109 |
|
Less: Depreciation on capitalized operating leases(2) | | (18,384 | ) | | (16,953 | ) |
Less: Income taxes(3) | | (46,004 | ) | | (29,805 | ) |
NOPAT | | $ | 95,109 |
| | $ | 49,026 |
|
| | | | |
Average invested capital | | | | |
Total equity | | $ | 104,297 |
| | $ | 176,512 |
|
Less: Cash greater than target(4) | | — |
| | — |
|
Add: Long-term debt(5) | | — |
| | — |
|
Add: Capitalized operating lease obligations(6) | | 578,080 |
| | 519,952 |
|
Total invested capital at end of period | | $ | 682,377 |
| | $ | 696,464 |
|
Average invested capital(7) | | $ | 689,467 |
| | $ | 714,956 |
|
Return on invested capital (ROIC)(8) | | 13.8 | % | | 6.9 | % |
___________________
(1)Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.
(2)Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6)5) for the respective reporting periods with an assumed thirty-year useful life. This life assumption is based on our long-term participation in given markets though specific retail location lease commitments are generally 5 to 10 years at inception. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.
(3)Reflects annual effective income tax rates, before discrete adjustments, of 32.6%23.7% and 37.8%23.9% for 20172022 and 2016,2021, respectively.
(4) Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.
(5)Long-term debt includes existing capitalfinance lease obligations, if applicable.liabilities.
(6)(5)A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.
(7)(6)Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.
(8)(7)ROIC equals NOPAT divided by average invested capital.
Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.
GAAP - generally accepted accounting principles in the U.S.
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21 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
Off-Balance-Sheet Arrangements and Contractual Obligations
As of September 30, 2017,April 2, 2022, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating leases and a $3.15$6 million in outstanding letterletters of credit, we do not have any off-balance-sheet financing.
There hashave been no material changes in our contractual obligations other than in the ordinary course of business, since the end of fiscal 2016.2021. See Note 5, Credit Agreement,, 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 31, 2016January 1, 2022 for additional information regarding our other contractual obligations.
Critical Accounting Policies
We discuss our critical accounting policies and estimates inManagement’s Discussion and Analysis of Financial Condition and Results of Operationsin our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.January 1, 2022. There were no significant changes in our critical accounting policies since the end of fiscal 2016.2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ChangesWe are exposed to changes in the overall level ofmarket-based short-term interest rates affectthat will impact our net interest income generated from cash and cash equivalents.expense. If overall interest rates were one percentage point lowerhigher than current rates, our annual interestnet income would not changedecrease by a significant amount$3.1 million based on the $413 million of borrowings under our cash and cash equivalents as of September 30, 2017, and the current low interest-rate environment.credit facility at April 2, 2022. We do not manage our investmentthe interest-rate volatility risk of borrowings under our credit facility through the use of derivative instruments.
As of September 30, 2017, we had no borrowings under our revolving credit facility.
ITEM 4. CONTROLS AND PROCEDURES
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 principal executive officer and principal 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 ControlsControl
There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2017,April 2, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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22 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION |
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in variousOur legal proceedings arisingare discussed in Note 12,Commitments and Contingencies, Legal Proceedings, in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with generally accepted accounting principlesNotes to Condensed Consolidated Financial Statements 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 effectthis Quarterly Report 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 consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.Form 10-Q.
On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which has certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has accepted the certified questions and oral arguments are expected to be heard in the near future. As the United States District Court for the District of New Jersey determined, we believe that the case is without merit and the order of dismissal should be affirmed.
ITEM 1A. RISK FACTORS
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) – (b) Not applicable.
(c) Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased(1)(2) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3) |
January 2, 2022 through January 29, 2022 | | 396 | | | $ | 86.60 | | | — | | | $ | 402,939,000 | |
January 30, 2022 through February 26, 2022 | | 59,272 | | | $ | 81.41 | | | 58,487 | | | $ | 399,093,000 | |
February 27, 2022 through April 2, 2022 | | 753,687 | | | $ | 77.47 | | | 603,053 | | | $ | 360,631,000 | |
Total | | 813,355 | | | $ | 82.82 | | | 661,540 | | | $ | 360,631,000 | |
___________________________
(1)Under our Board-approved $600 million share repurchase program (effective April 4, 2021), we repurchased 0.7 million shares of our common stock at a cost of $42 million (based on trade dates) during the three months ended April 2, 2022.
(2)In connection with the vesting of employee restricted stock grants, we repurchased 151,815 shares of our common stock at a cost of $8.7 million during the three months ended April 2, 2022.
(3)There is no expiration date governing the period over which we can repurchase shares under our Board-approved share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS