UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April ~~2, 2022~~1, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-25121

SLEEP NUMBER CORPORATION

(Exact name of registrant as specified in its charter)


Minnesota						41-1597886
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1001 Third Avenue South

Minneapolis,

Minnesota

55404

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (763) 551-7000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SNBR

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒☐

Accelerated filer

☐☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April ~~2, 2022, 22,232,000~~1, 2023, 22,184,000 shares of the registrant’s Common Stock were outstanding.

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

INDEX


i \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except per share amounts)

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


	April 1, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	1,459	$	1,792
Accounts receivable, net of allowances of $1,474 and $1,267, respectively	23,288		26,005
Inventories	116,781		114,034

Prepaid expenses	26,986		16,006
Other current assets	39,902		39,921
Total current assets	208,416		197,758

Non-current assets:
Property and equipment, net	194,802		200,605
Operating lease right-of-use assets	398,339		397,755
Goodwill and intangible assets, net	67,565		68,065
Deferred income taxes	11,210		7,958
Other non-current assets	82,477		81,795
Total assets	$	962,809	$	953,936

Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility	$	470,600	$	459,600
Accounts payable	160,304		176,207
Customer prepayments	68,542		73,181
Accrued sales returns	24,071		25,594
Compensation and benefits	30,706		31,291
Taxes and withholding	31,647		23,622
Operating lease liabilities	81,383		79,533
Other current liabilities	58,441		60,785
Total current liabilities	925,694		929,813

Non-current liabilities:

Operating lease liabilities	355,556		356,879
Other non-current liabilities	106,606		105,421
Total liabilities	1,387,856		1,392,113

Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value; 142,500 shares authorized, 22,184 and 22,014 shares issued and outstanding, respectively	222		220
Additional paid-in capital	6,845		5,182
Accumulated deficit	(432,114)		(443,579)
Total shareholders’ deficit	(425,047)		(438,177)
Total liabilities and shareholders’ deficit	$	962,809	$	953,936

See accompanying notes to condensed consolidated financial statements.


1 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)


		Three Months Ended				Three Months Ended
		April 2, 2022		April 3, 2021				April 1, 2023		April 2, 2022
Net sales	Net sales	$	527,130	$	568,256		Net sales	$	526,527	$	527,130
Cost of sales	Cost of sales	224,832		212,338			Cost of sales	216,262		224,832
Gross profit	Gross profit	302,298		355,918			Gross profit	310,265		302,298

Operating expenses:	Operating expenses:						Operating expenses:
Sales and marketing	Sales and marketing	240,259		223,617			Sales and marketing	230,488		240,259
General and administrative	General and administrative	41,319		42,592			General and administrative	39,401		41,319
Research and development	Research and development	16,305		13,286			Research and development	14,443		16,305
Total operating expenses	Total operating expenses	297,883		279,495			Total operating expenses	284,332		297,883
Operating income	Operating income	4,415		76,423			Operating income	25,933		4,415
Interest expense, net	Interest expense, net	2,127		977			Interest expense, net	9,102		2,127
Income before income taxes	Income before income taxes	2,288		75,446			Income before income taxes	16,831		2,288
Income tax expense	Income tax expense	214		8,812			Income tax expense	5,366		214
Net income	Net income	$	2,074	$	66,634		Net income	$	11,465	$	2,074

Basic net income per share:	Basic net income per share:						Basic net income per share:
Net income per share – basic	Net income per share – basic	$	0.09	$	2.63		Net income per share – basic	$	0.51	$	0.09
Weighted-average shares – basic	Weighted-average shares – basic	22,760		25,377			Weighted-average shares – basic	22,296		22,760

Diluted net income per share:	Diluted net income per share:						Diluted net income per share:
Net income per share – diluted	Net income per share – diluted	$	0.09	$	2.51		Net income per share – diluted	$	0.51	$	0.09
Weighted-average shares – diluted	Weighted-average shares – diluted	23,591		26,544			Weighted-average shares – diluted	22,583		23,591

See accompanying notes to condensed consolidated financial statements.


2 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited - in thousands)


		Common Stock			Additional Paid-in Capital				Accumulated Deficit					Total			Common Stock				Additional Paid-in Capital			Accumulated Deficit			Total
		Shares	Amount										Shares					Amount
Balance at January 1, 2022		22,683	$	227			$	3,971			$	(429,151)					$	(424,953)
Balance at December 31, 2022																Balance at December 31, 2022	22,014		$	220		$	5,182		$	(443,579)		$	(438,177)
Net income	Net income	—	—		—				2,074					2,074		Net income	—		—		—			11,465			11,465
Exercise of common stock options	Exercise of common stock options	21	—		531				—					531		Exercise of common stock options	17		—		389			—			389
Stock-based compensation	Stock-based compensation	341	3		4,130				—					4,133		Stock-based compensation	271		3		4,636			—			4,639
Repurchases of common stock	Repurchases of common stock	(813)	(8)		(8,632)				(42,358)					(50,998)		Repurchases of common stock	(118)		(1)		(3,362)			—			(3,363)
Balance at April 1, 2023																Balance at April 1, 2023	22,184		$	222	$	6,845		$	(432,114)		$	(425,047)

Balance at April 2, 2022		22,232	$	222	$	—			$	(469,435)				$	(469,213)

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)


	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)

See accompanying notes to condensed consolidated financial statements.


3 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)


		Three Months Ended					Three Months Ended
		April 2, 2022		April 3, 2021			April 1, 2023		April 2, 2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	2,074	$	66,634	Net income	$	11,465	$	2,074
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	15,870		14,638		Depreciation and amortization	18,218		15,870
Stock-based compensation	Stock-based compensation	4,133		6,416		Stock-based compensation	4,639		4,133
Net loss on disposals and impairments of assets	Net loss on disposals and impairments of assets	93		78		Net loss on disposals and impairments of assets	12		93
Deferred income taxes	Deferred income taxes	(376)		1,515		Deferred income taxes	(3,252)		(376)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	1,216		5,948		Accounts receivable	2,717		1,216
Inventories	Inventories	2,432		(946)		Inventories	(2,747)		2,432
Income taxes	Income taxes	1,102		6,847		Income taxes	8,736		1,102
Prepaid expenses and other assets	Prepaid expenses and other assets	10,877		(3,113)		Prepaid expenses and other assets	(11,056)		10,877
Accounts payable	Accounts payable	2,073		12,390		Accounts payable	(574)		2,073
Customer prepayments	Customer prepayments	12,506		20,552		Customer prepayments	(4,639)		12,506
Accrued compensation and benefits	Accrued compensation and benefits	(25,348)		(34,605)		Accrued compensation and benefits	(593)		(25,348)
Other taxes and withholding	Other taxes and withholding	3,104		8,912		Other taxes and withholding	(711)		3,104
Other accruals and liabilities	Other accruals and liabilities	(5,198)		6,332		Other accruals and liabilities	(3,634)		(5,198)
Net cash provided by operating activities	Net cash provided by operating activities	24,558		111,598		Net cash provided by operating activities	18,581		24,558

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of property and equipment	Purchases of property and equipment	(19,604)		(11,546)		Purchases of property and equipment	(15,556)		(19,604)
Proceeds from sales of property and equipment	Proceeds from sales of property and equipment	10		12		Proceeds from sales of property and equipment	—		10

Net cash used in investing activities	Net cash used in investing activities	(19,594)		(11,534)		Net cash used in investing activities	(15,556)		(19,594)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Repurchases of common stock	Repurchases of common stock	(50,998)		(178,613)		Repurchases of common stock	(3,363)		(50,998)
Net increase in short-term borrowings		44,712		74,087
Net (decrease) increase in short-term borrowings						Net (decrease) increase in short-term borrowings	(384)		44,712
Proceeds from issuance of common stock	Proceeds from issuance of common stock	531		2,460		Proceeds from issuance of common stock	389		531
Debt issuance costs	Debt issuance costs	(42)		(3)		Debt issuance costs	—		(42)
Net cash used in financing activities	Net cash used in financing activities	(5,797)		(102,069)		Net cash used in financing activities	(3,358)		(5,797)

Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	(833)		(2,005)		Net decrease in cash and cash equivalents	(333)		(833)
Cash and cash equivalents, at beginning of period	Cash and cash equivalents, at beginning of period	2,389		4,243		Cash and cash equivalents, at beginning of period	1,792		2,389
Cash and cash equivalents, at end of period	Cash and cash equivalents, at end of period	$	1,556	$	2,238	Cash and cash equivalents, at end of period	$	1,459	$	1,556

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

WeThe Company prepared the condensed consolidated financial statements as of and for the three months ended April ~~2, 2022~~1, 2023 of Sleep Number Corporation and ~~our~~its 100%-owned subsidiaries (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~~its financial position as of April ~~2, 2022~~1, 2023 and ~~January 1,~~December 31, 2022, and the consolidated results of operations and cash flows for the periods presented. ~~Our~~The 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~~the most recent audited consolidated financial statements and related notes included in ~~our~~the Company’s Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2022 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires usthe Company 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 and could be material. ~~Our~~The Company’s critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and ~~our~~its 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

2. Fair Value Measurements

At April 2,1, 2023 and December 31, 2022, ~~and January 1, 2022, we~~the Company had $18 million and ~~$19~~$17 million, respectively, of debt and equity securities that fund ~~our~~the deferred compensation plan and are classified in other non-current assets. WeThe Company also had corresponding deferred compensation plan liabilities of $18 million and ~~$19~~$17 million at April ~~2, 2022~~1, 2023 and ~~January 1,~~December 31, 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 usthe Company 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.


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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

3. Inventories

Inventories consisted of the following (in thousands):


		April 2, 2022		January 1, 2022			April 1, 2023		December 31, 2022
Raw materials	Raw materials	$	11,257	$	11,752	Raw materials	$	9,042	$	7,785
Work in progress	Work in progress	68		83		Work in progress	102		102
Finished goods	Finished goods	91,887		93,809		Finished goods	107,637		106,147
		$	103,212	$	105,644		$	116,781	$	114,034

4. Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at April ~~2, 2022~~1, 2023 and ~~January 1,~~December 31, 2022. Indefinite-lived trade name/trademarks totaled $1.4 million at April ~~2, 2022~~1, 2023 and ~~January 1,~~December 31, 2022.

Definite-lived Intangible Assets

~~The gross carrying amount of our developed~~


	April 1, 2023				December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	18,851	$	18,085	$	18,851	$	17,641
Patents	1,972		615		1,972		559
	$	20,823	$	18,700	$	20,823	$	18,200

Developed technologies ~~was $19 million at~~- amortization expense for the three months ended April 1, 2023 and April 2, 2022, was $0.4 million and ~~January 1, 2022. Accumulated~~$0.5 million, respectively.

Patents - amortization ~~was $16 million at April 2, 2022 and January 1, 2022. Amortization~~ expense for both the three months ended April ~~2, 2022~~1, 2023 and 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 $0.3 million at April 2, 2022 and January 1, 2022, respectively. Amortization expense for both the three months ended April 2, 2022 and April 3, 2021, was $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
2023 (excluding the three months ended April 1, 2023)				2023 (excluding the three months ended April 1, 2023)	$	931
2024	2024	222		2024	222
2025	2025	226		2025	226
2026	2026	222		2026	222
2027	2027	222		2027	222
2028				2028	156
Thereafter	Thereafter	300		Thereafter	144
Total future amortization for definite-lived intangible assets	Total future amortization for definite-lived intangible assets	$	4,425	Total future amortization for definite-lived intangible assets	$	2,123

5. Credit Agreement

As of April ~~2, 2022, our~~1, 2023, the Company’s credit facility had a total commitment amount of $825 million. The credit facility is for general corporate purposes, to meet ~~our~~ seasonal working capital requirements and to repurchase ~~our~~its stock. The ~~credit agreement~~Credit Agreement includes an accordion feature which allows usthe Company to increase the amount of the credit facility from $825 million to $1.2 billion, subject to lenders’ approval. The ~~credit agreement~~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 (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. The credit agreement matures in December 2026. We were in compliance with all financial covenants as of April 2, 2022.


6 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

security interest in substantially all of the Company’s assets and those of its subsidiaries and requires the Company to comply with, among other things, a maximum net leverage ratio (5.0x) and a minimum interest coverage ratio (3.0x).

The Company amended the Credit Agreement on October 26, 2022. The amendment, among other things, (a) provides relief from the requirement that the net leverage ratio not exceed 3.75x for certain corporate actions including Permitted Capital Distributions for Performance or Taxes (as defined in the Credit Agreement) and certain acquisition activity; (b) increases the permissible net leverage ratio to 5.0x for the three consecutive quarterly reporting periods ending July 1, 2023; (c) increases the commitment fee rate to 50 basis points and the margin applicable to interest rates for all borrowings by an additional 50 basis points, in each case if the net leverage ratio is greater than or equal to 4.5x; and (d) replaces the option to borrow at an interest rate based on London Interbank Offered Rate (LIBOR) to one based on a Term SOFR Rate. The Term SOFR Rate equals the sum of (x) the Term SOFR Screen Rate (as defined in the Credit Agreement) for the applicable interest period (but in no event less than zero), plus (y) 0.10%, plus (z) the margin based on Sleep Number’s net leverage ratio. For the quarterly reporting period ending September 30, 2023, and subsequent quarterly reporting periods, the maximum leverage ratio will be 4.5x.

Under the terms of the Credit Agreement, the Company pays a variable rate of interest and a commitment fee based on its leverage ratio. The Credit Agreement matures in December 2026. The Company was in compliance with all financial covenants as of April 1, 2023.

The following table summarizes ~~our~~the Company’s borrowings under the credit facility ($ in thousands):


		April 2, 2022			January 1, 2022				April 1, 2023			December 31, 2022
Outstanding borrowings	Outstanding borrowings	$	413,200		$	382,500		Outstanding borrowings	$	470,600		$	459,600
Outstanding letters of credit	Outstanding letters of credit	$	5,947		$	3,997		Outstanding letters of credit	$	7,147		$	5,947
Additional borrowing capacity	Additional borrowing capacity	$	405,853		$	438,503		Additional borrowing capacity	$	347,253		$	359,453
Weighted-average interest rate	Weighted-average interest rate	2.2		%	1.6		%	Weighted-average interest rate	7.1		%	6.7		%

6. Leases

~~We lease our~~The Company leases its 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~~the Company’s local market development approach generally results in long-term participation in given markets, ~~our~~the retail store leases generally provide for an initial lease term of five to 10 years. ~~Our~~The Company’s office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, ~~our~~the Company’s 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~~the Company’s sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. ~~Our~~The Company’s lease agreements do not contain any material residual value guarantees. WeThe Company also ~~lease~~leases vehicles and certain equipment under operating leases with an initial lease term of three to ~~five~~six years.

~~Our~~The Company’s 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~~the Company takes possession of the property. During lease renewal negotiations that extend beyond the original lease term, ~~we estimate~~the Company estimates 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~~1, 2023, the Company’s 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.~~


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Notes to Condensed Consolidated Financial Statements

(unaudited)

Lease costs were as follows (in thousands):


	Three Months Ended
	April 1, 2023		April 2, 2022
Operating lease costs(1)	$	28,289	$	27,078
Variable lease costs	$	56	$	330

___________________________

(1)Includes short-term lease costs which are not significant.

The maturities of operating lease liabilities as of April ~~2, 2022,~~1, 2023, were as follows(1) (in thousands):


2022 (excluding the three months ended April 2, 2022)		$	72,962
2023		89,790
2023 (excluding the three months ended April 1, 2023)				2023 (excluding the three months ended April 1, 2023)	$	80,072
2024	2024	77,978		2024	97,674
2025	2025	68,001		2025	86,081
2026	2026	56,694		2026	73,814
2027	2027	41,517		2027	58,468
2028				2028	46,420
Thereafter	Thereafter	86,958		Thereafter	80,899
Total operating lease payments(2)	Total operating lease payments(2)	493,900		Total operating lease payments(2)	523,428
Less: Interest	Less: Interest	81,326		Less: Interest	86,489
Present value of operating lease liabilities	Present value of operating lease liabilities	$	412,574	Present value of operating lease liabilities	$	436,939

___________________________

(1)Future payments for real estate taxes and certain building operating expenses for which the Company is obligated are not included in the operating lease liabilities. Total operating lease payments exclude ~~$102~~$70 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)Includes the current portion of ~~$74~~$81 million for operating lease liabilities.

Other information related to operating leases was as follows:


		April 2, 2022		January 1, 2022			April 1, 2023		December 31, 2022
Weighted-average remaining lease term (years)		6.3		6.4
Weighted-average remaining lease term (in years)						Weighted-average remaining lease term (in years)	6.1		6.2
Weighted-average discount rate	Weighted-average discount rate	6.0	%	6.1	%	Weighted-average discount rate	6.3	%	6.2	%

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. Repurchases 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.~~


	Three Months Ended
(in thousands)	April 1, 2023		April 2, 2022
Cash paid for amounts included in present value of operating lease liabilities	$	26,538	$	24,209
Right-of-use assets obtained in exchange for operating lease liabilities	$	14,717	$	17,564


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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

7. Repurchases of Common Stock

Repurchases of the Company’s common stock were as follows (in thousands):


	Three Months Ended
	April 1, 2023		April 2, 2022
Amount repurchased under Board-approved share repurchase program	$	—	$	42,308
Amount repurchased in connection with the vesting of employee restricted stock grants	3,363		8,690
Total amount repurchased (based on trade dates)	$	3,363	$	50,998

As of April 1, 2023, the remaining authorization under the Board-approved $600 million share repurchase program was $348 million.

8. Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in ~~our~~the condensed consolidated balance sheets as follows (in thousands):


		April 2, 2022		January 1, 2022			April 1, 2023		December 31, 2022
Deferred contract assets included in:	Deferred contract assets included in:					Deferred contract assets included in:
Other current assets	Other current assets	$	26,926	$	28,048	Other current assets	$	28,313	$	28,121
Other non-current assets	Other non-current assets	53,244		49,343		Other non-current assets	56,264		55,564
		$	80,170	$	77,391		$	84,577	$	83,685


		April 2, 2022		January 1, 2022			April 1, 2023		December 31, 2022
Deferred contract liabilities included in:	Deferred contract liabilities included in:					Deferred contract liabilities included in:
Other current liabilities	Other current liabilities	$	34,999	$	36,490	Other current liabilities	$	36,509	$	36,335
Other non-current liabilities	Other non-current liabilities	68,657		63,680		Other non-current liabilities	71,847		70,999
		$	103,656	$	100,170		$	108,356	$	107,334

~~The deferred~~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~~the Company’s inputs are generally expended evenly throughout the performance period. During the three months ended April 1, 2023 and April 2, 2022, ~~and April 3, 2021, we~~the Company recognized revenue of $9$10 million and $7$9 million, respectively, that ~~were~~was 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 both the three months ended April 1, 2023 and April 2, ~~2022 and 99% of our revenues for the three months ended April 3, 2021.~~2022.

Net sales were as follows (in thousands):


		Three Months Ended				Three Months Ended
		April 2, 2022		April 3, 2021				April 1, 2023		April 2, 2022
Retail stores	Retail stores	$	444,336	$	489,188		Retail stores	$	458,663	$	444,336
Online, phone, chat and other	Online, phone, chat and other	82,794		79,068			Online, phone, chat and other	67,864		82,794
Total Company	Total Company	$	527,130	$	568,256		Total Company	$	526,527	$	527,130


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AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):


		Three Months Ended					Three Months Ended
		April 2, 2022		April 3, 2021			April 1, 2023		April 2, 2022
Balance at beginning of year	Balance at beginning of year	$	22,368	$	24,765	Balance at beginning of year	$	25,594	$	22,368
Additions that reduce net sales	Additions that reduce net sales	26,667		23,711		Additions that reduce net sales	29,843		26,667
Deductions from reserves	Deductions from reserves	(28,758)		(23,866)		Deductions from reserves	(31,366)		(28,758)
Balance at end of period	Balance at end of period	$	20,277	$	24,610	Balance at end of period	$	24,071	$	20,277

9. Stock-based Compensation Expense

Total stock-based compensation expense (benefit) was as follows (in thousands):


	Three Months Ended
	April 1, 2023		April 2, 2022
Stock awards (1)	$	3,855	$	3,274
Stock options	784		859
Total stock-based compensation expense (1)	4,639		4,133
Income tax benefit	1,253		1,033
Total stock-based compensation expense, net of tax	$	3,386	$	3,100

___________________________

(1) Changes in stock-based compensation expense include the cumulative impact of the change in the expected achievements of certain performance targets.

10. Profit Sharing and 401(k) Plan

Under the Company’s 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, the Company may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended April 1, 2023 and April 2, 2022, the Company’s contributions, net of forfeitures, were $2.4 million and $2.8 million, respectively.


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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

~~___________________________~~

~~(1)~~ ~~Changes in stock-based compensation expense reflect the cumulative impact of the change in the expected achievements of certain performance targets.~~

~~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 ended April 2, 2022 and April 3, 2021, our contributions, net of forfeitures, were $2.8 million and $1.9 million, respectively.

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				Three Months Ended
		April 2, 2022		April 3, 2021				April 1, 2023		April 2, 2022
Net income	Net income	$	2,074	$	66,634		Net income	$	11,465	$	2,074
Reconciliation of weighted-average shares outstanding:	Reconciliation of weighted-average shares outstanding:						Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	Basic weighted-average shares outstanding	22,760		25,377			Basic weighted-average shares outstanding	22,296		22,760
Dilutive effect of stock-based awards	Dilutive effect of stock-based awards	831		1,167			Dilutive effect of stock-based awards	287		831
Diluted weighted-average shares outstanding	Diluted weighted-average shares outstanding	23,591		26,544			Diluted weighted-average shares outstanding	22,583		23,591
Net income per share – basic	Net income per share – basic	$	0.09	$	2.63		Net income per share – basic	$	0.51	$	0.09
Net income per share – diluted	Net income per share – diluted	$	0.09	$	2.51		Net income per share – diluted	$	0.51	$	0.09

~~For~~Additional potential dilutive stock-based awards totaling 1.1 million and 0.4 million for the three months ended April 1, 2023 and April 2, 2022, ~~and April 3, 2021, anti-dilutive stock-based awards~~respectively, have been excluded from the diluted net income per share calculations because these stock-based awards were ~~immaterial.~~anti-dilutive.


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~~Table of Contents~~

~~SLEEP NUMBER CORPORATION~~

~~AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

12. Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):


		Three Months Ended					Three Months Ended
		April 2, 2022		April 3, 2021			April 1, 2023		April 2, 2022
Balance at beginning of year	Balance at beginning of year	$	10,069	$	12,152	Balance at beginning of year	$	8,997	$	10,069
Additions charged to costs and expenses for current-year sales	Additions charged to costs and expenses for current-year sales	4,447		4,330		Additions charged to costs and expenses for current-year sales	4,371		4,447
Deductions from reserves	Deductions from reserves	(4,750)		(4,717)		Deductions from reserves	(4,325)		(4,750)
Changes in liability for pre-existing warranties during the current year, including expirations	Changes in liability for pre-existing warranties during the current year, including expirations	(31)		(156)		Changes in liability for pre-existing warranties during the current year, including expirations	(88)		(31)
Balance at end of period	Balance at end of period	$	9,735	$	11,609	Balance at end of period	$	8,955	$	9,735

Legal Proceedings

~~We are~~The Company is involved from time to time in various legal proceedings arising in the ordinary course of ~~our~~its business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, ~~we record~~the Company records a liability in ~~our~~its 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~~the Company has not established an estimated range of reasonably possible material losses either because ~~we believe~~it believes that ~~we have~~is has valid defenses to claims asserted against ~~us,~~it, the proceeding has not advanced to a stage of discovery that would enable usit to establish an estimate, or the potential loss is not material. WeThe Company currently dodoes not expect the outcome of pending legal proceedings to have a material effect on ~~our~~its 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 usthe Company could adversely impact ~~our~~its consolidated results of operations, financial position or cash flows. ~~We expense~~The Company expenses legal costs as incurred.


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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Shareholder Class Action Complaints

On December 14, 2021, purported Sleep Number shareholder, Steamfitters Local 449 Pension & Retirement Security Funds (Steamfitters), filed a putative class action complaint in the United States District Court for the District of Minnesota (the District of Minnesota) 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~~Callen, the Company’s former Executive Vice President and Chief Financial Officer. Steamfitters alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the purported class period, in violation of ~~Section~~Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as ~~amended.~~amended (the Exchange Act). The complaint seeks, among other things, unspecified monetary damages, reasonable costs and expenses and equitable/injunctive or other relief as deemed appropriate by the ~~Court. We believe these claims are without merit and intend to vigorously defend the matter.~~District of Minnesota.

On February 14, 2022, a second purported Sleep Number shareholder, Ricardo Dario Schammas, moved for appointment as lead plaintiff in the action. On March 24, 2022, the District of Minnesota heard argument on Schammas’s motion, and subsequently appointed Steamfitters and Schammas as Co-Lead Plaintiffs (together, Co-Lead Plaintiffs). On July 19, 2022, Co-Lead Plaintiffs filed a consolidated amended complaint, which, like the predecessor complaint, asserts claims against Sleep Number, Shelly Ibach, and David Callen under Sections 10(b) and 20(a) of the Exchange Act. Co- Lead Plaintiffs purport to assert these claims on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021. Defendants moved to dismiss the consolidated complaint on September 19, 2022, which motion was heard by the Court on January 17, 2023, and remains pending.

~~13. COVID-19 Pandemic~~

Shareholder Derivative Complaint

On May 12, 2022, Gwendolyn Calla Moore, as the appointed representative of purported Sleep Number shareholder Matthew Gelb, filed a derivative action (the Derivative Action) in the District of Minnesota against Jean-Michel Valette, Shelly Ibach, Barbara Matas, Brenda Lauderback, Daniel Alegre, Deborah Kilpatrick, Julie Howard, Kathleen Nedorostek, Michael Harrison, Stephen Gulis, Jr., David Callen, and Kevin Brown. Moore purports to assert claims on behalf of Sleep Number for breaches of fiduciary duty, waste, and contribution under Sections 10(b) and 21(d) of the Exchange Act. Moore’s allegations generally mirror those asserted in the securities complaint described above. The Moore complaint seeks damages in an unspecified amount, disgorgement, interest, and costs and expenses, including attorneys’ and experts’ fees.

On September 13, 2022, the District of Minnesota entered a joint stipulation staying all proceedings in the Derivative Action pending the outcome of any motion to dismiss the Steamfitters consolidated amended complaint.

Stockholder Demand

On March 25, 2022, Sleep Number received a shareholder litigation demand (the “Demand”), requesting that the Board investigate the allegations in the securities class action complaint and pursue claims on Sleep Number’s behalf based on those allegations. On May 12, 2022, the Board established a special litigation committee to investigate the demand.

On October 5 and October 12, 2022, Sleep Number received two additional shareholder litigation demands, which adopted and incorporated the allegations and requests in the Demand. Both of these additional litigation demands were referred to the special litigation committee.

The special litigation committee has concluded that it would not be in the best interests of Sleep Number and its shareholders to take any of the actions requested in the demands at this time.

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 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.~~


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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~~the Company’s condensed consolidated financial statements with a narrative from the perspective of management on ~~our~~its financial condition, results of operations, liquidity and certain other factors that may affect ~~our~~the Company’s future results. ~~Our~~ MD&A is presented in eight sections:

•Forward-Looking Statements and Risk Factors

•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 discussion in this 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~~the Company’s historical experience and ~~our~~its present expectations or projections. These risks and uncertainties include, among others:

•Current and future ~~general and industry~~ economic ~~trends~~conditions and consumer ~~confidence;~~sentiment;

•~~Risks inherent in outbreaks of pandemics~~Bank failures or ~~contagious disease, including the COVID-19 pandemic;~~other events affecting financial institutions;

•~~Risks inherent~~Increases in ~~global-sourcing activities, including tariffs, outbreaks~~interest rates, which have increased the cost of ~~pandemics or contagious diseases, such as~~servicing 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 Total 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-property rights to protect our products and brand from competitive or infringing activities;~~

•~~Claims that our products, processes, advertising or trademarks infringe the intellectual-property rights of others;~~Company’s indebtedness;

•Availability of attractive and cost-effective consumer credit options;

•~~Increasing~~Operating with minimal levels of inventory, which may leave the Company vulnerable to supply shortages;

•Sleep Number’s dependence on, and ability to maintain strong working relationships with, key suppliers and third parties;

•Rising commodity costs or third-party logistics costs and other inflationary pressures;

•Risks inherent in global-sourcing activities, including tariffs, geo-political turmoil, war, strikes, labor challenges, government-mandated work closures, outbreaks of pandemics or contagious diseases, and resulting supply shortages and production and delivery delays and disruptions;

•Risks of disruption due to health epidemics or pandemics, such as the COVID-19 pandemic;

•Regional risks related to having global operations and suppliers, including climate and other disasters;

•The effectiveness of the Company’s marketing strategy and promotional efforts;

•The execution of Sleep Number’s Total Retail distribution strategy;

•Ability to achieve and maintain high levels of product quality;

•Ability to improve and expand Sleep Number’s product line and execute successful new product introductions;

•Ability to prevent third parties from using the Company’s technology or trademarks, and the adequacy of its intellectual property rights to protect its products and brand;

•Ability to compete;

•Risks of disruption in the operation of any of the Company’s main manufacturing, distribution, logistics, home delivery, product development or customer service operations;

•The Company’s ability to comply with existing and changing government regulation;

•Pending or unforeseen litigation and the potential for associated adverse ~~publicity associated with litigation;~~publicity;

•The adequacy of the Company’s and third-party information systems and costs and disruptions related to upgrading or maintaining these systems;


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Index

•The ~~adequacy of our and third-party information systems~~Company’s ability to ~~meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and cybersecurity;~~

•~~The costs and potential disruptions to our business related to upgrading or maintaining our information systems;~~

•~~The vulnerability of our and third-party information systems to attacks by hackers or other~~withstand cyber threats that could compromise the security of ~~our~~its systems, result in a data breach or ~~disrupt our business;~~business disruption;

•~~Environmental risks, including increasing environmental regulation and the broader impacts of climate change such as from weather-related events; and~~

•~~Our~~Sleep Number’s ability, and the ability of ~~our~~its suppliers and vendors, to attract, retain and motivate qualified ~~management, executive~~personnel;

•The volatility of Sleep Number stock;

•Environmental, social and ~~other key team members,~~governance (ESG) risks, including ~~qualified retail sales professionals~~increasing regulation and ~~managers.~~stakeholder expectations; and

•The Company’s ability to adapt to climate change and readiness for legal or regulatory responses thereto.

Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” ~~below~~ in Part ~~II:~~I, Item ~~1A of this Quarterly Report on Form 10-Q and under~~1A. in the ~~same caption in our~~Company’s Annual Report on Form 10-K.

~~We have~~The Company has no obligation to publicly update or revise any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.

Business Overview

At Sleep Number ~~our~~is a wellness technology company. Over 14.5 million people have had their lives improved by the Company’s award-winning sleep innovations and are experiencing the physical, mental and emotional benefits of life-changing sleep performance. Sleep Number’s proprietary smart beds combine the physical and digital worlds, pairing exceptional sleep with a highly advanced digital technology platform. Only Sleep Number can provide a dynamic, adjustable and adaptive sleep experience that effortlessly responds to the needs of each sleeper helping them reach their full potential. More than two million Smart Sleepers benefit from the Company’s smart beds, which change with the sleeper over time and provide individualized sleep that is unique, like they are.

Sleep Number’s differentiated business model is guided by its purpose is to improve the health and wellbeing of society through higher quality sleep. ~~We are~~

~~committed~~The Company partners with world-leading sleep and health institutions to ~~leveraging~~bring the power of 19 billion hours of longitudinal sleep ~~and~~data to sleep science ~~to improve lives~~ and ~~create a healthier, kinder, more~~

~~inclusive world.~~research. The Company’s retail experience meets its consumers whenever and wherever they choose – through online and in-store touchpoints. And ~~because our more than 5,500~~Sleep Number’s 5,000 mission-driven team members ~~are dedicated to our mission as well as the disciplined~~passionately deliver individualized sleep experiences for everyone.

~~execution of our~~

Through investments in its consumer innovation strategy and vertically integrated business model, ~~and differentiated strategy,~~ Sleep Number ~~is at the forefront of~~

~~sleep innovation. As the exclusive designer, manufacturer, marketer, retailer~~strengthens its competitive advantages and ~~servicer of Sleep Number 360 smart~~

~~beds~~creates a digital flywheel for sustainable growth, driving consumer demand and ~~SleepIQ~~® ~~technology, Sleep Number 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, logistics, 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 we have~~

~~anticipated since the 2012 inception of our consumer innovation strategy and which were accelerated by the global~~

~~pandemic – we are driving profitable growth and delivering superior value for all our stakeholders.~~

~~We generate~~performance. It generates revenue by marketing ~~our~~and selling its innovations directly to new and existing customers ~~and selling products~~ through ~~our~~exclusive, direct-to-consumer retail touch points including Stores, Online, Phone, and Chat (Total Retail) ~~and Other.~~

~~We are~~. Sleep Number is committed to ~~delivering~~creating long-term superior ~~shareholder~~ value ~~by:~~for all stakeholders as it focuses on the Company’s three performance drivers: (1) increasing consumer demand; (2) leveraging ~~our~~its vertically integrated business model; and (3) deploying capital efficiently.

~~COVID-19 Pandemic - Impact on our Business~~


~~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, 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~~the Company’s store base, timing of new product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, disruptions in global supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer ~~confidence~~sentiment 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, theThe extent to which these external factors will impact ~~our~~the Company’s business and ~~our~~its consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, ~~our~~the historical results of operations may not be indicative of the results that may be achieved for any future period.


14 \| 1Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Highlights

Financial highlights for the three months ended April ~~2, 2022~~1, 2023 were as follows:

•Net sales for the three months ended April ~~2, 2022 decreased 7% to~~1, 2023 were consistent at $527 million ~~compared~~ with ~~$568 million for~~ the ~~three months ended April 3, 2021.~~prior-year period. 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.historically low consumer sentiment.

•The 7% net sales ~~decrease~~change consisted of ~~an 11%~~a 2% comparable sales ~~decline~~decrease in Total Retail offset by additional sales from 4618 net new stores opened in the past 12 months that added 42 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 1516.

•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~~1, 2023 totaled $3.2 million, compared with $3.5 million ~~9% higher than~~for the same period last year.

•Operating income for the three months ended April ~~2, 2022~~1, 2023 was $4$26 million, compared with ~~$76~~$4 million in the prior-year period. The ~~$72~~$22 million ~~decrease~~increase in operating income was driven by ~~the 7% decrease in net sales constrained by semiconductor chip supply,~~ a ~~7.3~~1.6 ppt. increase in ~~our operating expenses~~the gross profit rate and a ~~5.3 ppt. decrease~~$14 million reduction 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 operating expenses.

•The ~~5.3~~1.6 ppt. gross profit rate ~~decrease~~increase was primarily due to ~~incremental costs from labor and material inflation, and inefficiencies resulting from current-period global supply chain shortages, in addition to~~pricing actions take over the ~~deleveraging impact of the 7% net sales decline and a less favorable sales mix of lower-margin products.~~past twelve months. See the Gross profit discussion on page 1718 for additional details.

•The ~~7.3 ppt. increase~~$14 million reduction in ~~our~~the Company’s operating expenses ~~rate~~ was ~~partially~~mainly 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.lower marketing expenses.

•Net income for the three months ended April ~~2, 2022 decreased~~1, 2023 increased to $2$11 million, compared with ~~$67~~$2 million for the same period one year ago. Net income per diluted share was ~~$0.09,~~$0.51, compared with ~~$2.51~~$0.09 last year.

•WeThe Company achieved aan adjusted return on invested capital ~~(ROIC)~~(Adjusted ROIC) of ~~20.5%~~20.4% on a trailing twelve-month basis for the period ended April ~~2, 2022,~~1, 2023, compared with ~~27.6%~~32.0% for the comparable period one year ago.

•~~Cash provided by~~The Company generated $19 million in cash from operating activities for the three months ended April ~~2, 2022 decreased to $25 million,~~1, 2023, compared with ~~$112~~$25 million for the same period one year ago.

•As of April ~~2, 2022, we~~1, 2023, the Company had ~~$413~~$471 million of borrowings under ~~our~~its revolving credit facility and available net liquidity of ~~$406~~$347 million.


1415 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

The following table sets forth ~~our~~the Company’s 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								Three Months Ended
		April 2, 2022				April 3, 2021					April 1, 2023		April 2, 2022
Net sales	Net sales	$	527.1	100.0	%	$	568.3	100.0	%			Net sales	$	526.5	100.0	%	$	527.1	100.0	%
Cost of sales	Cost of sales	224.8		42.7	%	212.3		37.4	%			Cost of sales	216.3		41.1	%	224.8		42.7	%
Gross profit	Gross profit	302.3		57.3	%	355.9		62.6	%			Gross profit	310.3		58.9	%	302.3		57.3	%
Operating expenses:	Operating expenses:											Operating expenses:
Sales and marketing	Sales and marketing	240.3		45.6	%	223.6		39.4	%			Sales and marketing	230.5		43.8	%	240.3		45.6	%
General and administrative	General and administrative	41.3		7.8	%	42.6		7.5	%			General and administrative	39.4		7.5	%	41.3		7.8	%
Research and development	Research and development	16.3		3.1	%	13.3		2.3	%			Research and development	14.4		2.7	%	16.3		3.1	%
Total operating expenses	Total operating expenses	297.9		56.5	%	279.5		49.2	%			Total operating expenses	284.3		54.0	%	297.9		56.5	%
Operating income	Operating income	4.4		0.8	%	76.4		13.4	%			Operating income	25.9		4.9	%	4.4		0.8	%
Interest expense, net	Interest expense, net	2.1		0.4	%	1.0		0.2	%			Interest expense, net	9.1		1.7	%	2.1		0.4	%
Income before income taxes	Income before income taxes	2.3		0.4	%	75.4		13.3	%			Income before income taxes	16.8		3.2	%	2.3		0.4	%
Income tax expense	Income tax expense	0.2		—	%	8.8		1.6	%			Income tax expense	5.4		1.0	%	0.2		0.0	%
Net income	Net income	$	2.1	0.4	%	$	66.6	11.7	%			Net income	$	11.5	2.2	%	$	2.1	0.4	%

Net income per share:	Net income per share:											Net income per share:
Basic	Basic	$	0.09			$	2.63					Basic	$	0.51			$	0.09
Diluted	Diluted	$	0.09			$	2.51					Diluted	$	0.51			$	0.09

Weighted-average number of common shares:	Weighted-average number of common shares:											Weighted-average number of common shares:
Basic	Basic	22.8				25.4						Basic	22.3				22.8
Diluted	Diluted	23.6				26.5						Diluted	22.6				23.6

The percentage of ~~our~~ total net sales, by dollar volume, was as follows:


		Three Months Ended				Three Months Ended
		April 2, 2022		April 3, 2021				April 1, 2023		April 2, 2022
Retail stores	Retail stores	84.3	%	86.1	%		Retail stores	87.1	%	84.3	%
Online, phone, chat and other	Online, phone, chat and other	15.7	%	13.9	%		Online, phone, chat and other	12.9	%	15.7	%
Total Company	Total Company	100.0	%	100.0	%		Total Company	100.0	%	100.0	%

The components of total net sales change, including comparable net sales changes, were as follows:


		Three Months Ended				Three Months Ended
		April 2, 2022		April 3, 2021				April 1, 2023		April 2, 2022
Sales change rates:	Sales change rates:						Sales change rates:
Retail comparable-store sales (1)	Retail comparable-store sales (1)	(14	%)	12	%		Retail comparable-store sales (1)	1	%	(14	%)
Online, phone and chat	Online, phone and chat	5	%	116	%		Online, phone and chat	(18	%)	5	%
Total Retail comparable sales change (1)	Total Retail comparable sales change (1)	(11	%)	20	%		Total Retail comparable sales change (1)	(2	%)	(11	%)
Net opened/closed stores and other	Net opened/closed stores and other	4	%	—	%		Net opened/closed stores and other	2	%	4	%
Total Company	Total Company	(7	%)	20	%		Total Company	0	%	(7	%)

___________________________

(1)Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.


1516 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Other sales metrics were as follows:


		Three Months Ended						Three Months Ended
		April 2, 2022			April 3, 2021					April 1, 2023			April 2, 2022
Average sales per store (1) (in thousands)	Average sales per store (1) (in thousands)	$	3,487		$	3,196			Average sales per store (1) (in thousands)	$	3,239		$	3,487
Average sales per square foot (1)	Average sales per square foot (1)	$	1,167		$	1,095			Average sales per square foot (1)	$	1,060		$	1,167
Stores > $2 million in net sales (2)	Stores > $2 million in net sales (2)	82		%	71		%		Stores > $2 million in net sales (2)	75		%	82		%
Stores > $3 million in net sales (2)	Stores > $3 million in net sales (2)	46		%	33		%		Stores > $3 million in net sales (2)	36		%	46		%
Average revenue per smart bed unit (3)	Average revenue per smart bed unit (3)	$	4,905		$	5,030			Average revenue per smart bed unit (3)	$	5,848		$	4,905

___________________________

(1)Trailing-twelve months Total Retail comparable sales per store open at least one year.

(2)Trailing-twelve months for stores open at least one year (excludes online, phone and chat sales).

(3)Represents Total Retail net sales divided by Total Retail smart bed units.

The number of retail stores operating was as follows:


		Three Months Ended		Three Months Ended
		April 2, 2022	April 3, 2021			April 1, 2023	April 2, 2022
Beginning of period	Beginning of period	648	602		Beginning of period	670	648
Opened	Opened	13	11		Opened	12	13
Closed	Closed	(8)	(6)		Closed	(11)	(8)
End of period	End of period	653	607		End of period	671	653


1617 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Comparison of Three Months Ended April ~~2, 2022~~1, 2023 with Three Months Ended April ~~3, 2021~~2, 2022

Net sales

Net sales for the three months ended April ~~2, 2022 decreased by $41 million, or 7%, to~~1, 2023 of $527 million ~~compared~~were consistent with ~~$568 million for~~ the same period one year ago. Demand 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 April 2, 2022.historically low consumer sentiment.

The 7% net sales ~~decrease~~change consisted primarily of ~~an 11%~~a 2% comparable sales ~~decline~~decrease in Total Retail offset by additional sales from 4618 net new stores opened in the past 12 months that added 42 percentage points (ppt.) of growth. ~~For additional details, see the components of total net sales change on page~~ 15.

The ~~$41~~$0.6 million net sales ~~decline~~decrease compared with the same period one year ago was comprised of the following: (i) a ~~$59~~$10.6 million decrease in ~~our~~ Total Retail comparable net sales; ~~and~~offset by (ii) ~~an $18~~a $10.0 million increase from net store openings. Total Retail smart bed unit sales decreased 5%16% compared with the prior year. Total Retail average revenue per smart bed unit ~~decreased~~increased by 2%19% to ~~$4,905,~~$5,848, compared with ~~$5,030~~$4,905 in the prior-year ~~period and~~period. Prior year average revenue per smart bed unit was ~~negatively~~ impacted by a less favorable sales mix due to supply constraints impacting adjustable bases and smart bed deliveries at the higher end of ~~our~~the Company’s product line.

Gross profit

Gross profit of ~~$302~~$310 million for the three months ended April ~~2, 2022 decreased~~1, 2023 increased by ~~$54~~$8 million, or ~~15%~~3%, compared with ~~$356~~$302 million for the same period one year ago. The gross profit rate ~~declined~~increased to ~~57.3%~~58.9% of net sales for the three months ended April ~~2, 2022,~~1, 2023, compared with ~~62.6%~~57.3% for the prior-year comparable period.

The current-year gross profit rate ~~decrease~~increase of ~~5.3~~1.6 ppt. was mainly 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 supply constraints impacting smart bed deliveries at the higher end of our product line. These pressures were partially offset by pricing actions taken over the past twelve months ~~(1.7~~(1.8 ppt.); (ii) improvement in commodity prices and operating efficiencies (0.6 ppt.); and (iii) favorable product mix changes (0.6 ppt.); partially offset by (iv) incremental logistics and delivery costs including labor inflation and investments in our distribution network (0.5 ppt.); (v) 16% lower delivered smart bed volume (0.3 ppt.); and (vi) higher performance-based incentive compensation (0.2 ppt.). In addition, ~~our~~the gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including warranty expenses, and return and exchange ~~costs, and changes in performance-based incentive compensation.~~costs.

Sales and marketing expenses

Sales and marketing expenses for the three months ended April ~~2, 2022~~1, 2023 were ~~$240~~$230 million, or ~~45.6%~~43.8% of net sales, compared with ~~$224~~$240 million, or ~~39.4%~~45.6% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate ~~increase~~decrease of ~~6.2~~1.8 ppt. was primarily due ~~to: (i) the deleveraging impact~~to lower media expense with a decrease in spend 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 media expenses.~~11% year-over-year.

General and administrative expenses

General and administrative (G&A) expenses totaled ~~$41~~$39 million, or ~~7.8%~~7.5% of net sales, for the three months ended April ~~2, 2022,~~1, 2023, compared with ~~$43~~$41 million, or ~~7.5%~~7.8% of net sales, in the prior-year period. The ~~$1.3~~$1.9 million decrease in G&A expenses consisted mainly of: (i) $2.4 million reduction in employee compensation on lower headcount; (ii) a ~~$6.7~~$0.8 million reduction in professional and consulting fees; (iii) a $0.5 million decrease in ~~employee compensation primarily resulting from~~travel and training expenses; and (iv) a ~~year-over-year~~$1.9 million net decrease in ~~Company-wide performance-based incentive compensation;~~other miscellaneous expenses; partially offset by ~~(ii)~~(v) a ~~$5.4~~$3.7 million increase in ~~other miscellaneous expenses, including technology investments and travel expenses (minimal travel in the prior year due to the pandemic).~~company-wide performance-based incentive compensation. The G&A expenses rate ~~increased~~decreased by 0.3 ppt. in the current-year period, compared with the same period one year ago due ~~to the deleveraging impact of the 7% net sales decrease, in addition~~ to the items discussed above.

Research and development expenses

Research and development (R&D) expenses ~~increased by 23%~~decreased to ~~$16~~$14 million for the three months ended April ~~2, 2022,~~1, 2023, compared with ~~$13~~$16 million ~~for~~with the same period last year on lower headcount. The Company continues to maintain a flexible mindset, to capitalize on profitable opportunities as ~~we continued to prioritize our long-term innovation initiatives.~~the environment improves, and deliver tangible life-long health benefits for Smart Sleepers.


1718 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Interest expense

Interest expense, net increased to $2$9 million for the three months ended April ~~2, 2022,~~1, 2023, compared with $1$2 million for the same period one year ago. The $1$7 million increase was mainly driven by ~~a higher level of outstanding borrowings during the three months ended April 2, 2022 compared with the 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~~$5 million for the three months ended April ~~2, 2022,~~1, 2023, compared with ~~$8.8~~$0.2 million last year. The effective income tax rate for the three months ended April ~~2, 2022~~1, 2023 was ~~9.4%~~31.9%, compared with ~~11.7%~~9.4% for the comparable period last year. Discrete tax ~~benefits,~~expenses, primarily stock-based compensation excess tax ~~benefits,~~expense, were ~~$0.4~~$0.8 million for the three months ended April ~~2, 2022,~~1, 2023, compared with ~~$10.0~~discrete tax benefits of $0.4 million in last year’s first quarter.

Liquidity and Capital Resources

Managing ~~our~~ liquidity and capital resources is an important part of ~~our~~the Company’s commitment to deliver superior shareholder value over time. ~~Our~~The Company’s primary sources of liquidity are cash flows provided by operating activities and cash available under ~~our~~its $825 million revolving credit facility. As of April ~~2, 2022, we do~~1, 2023, the Company does not have any off-balance sheet financing other than ~~our $6~~its $7 million in outstanding letters of credit. The cash generated from ongoing operations and cash available under ~~our~~the revolving credit facility are expected to be adequate to maintain operations, and fund anticipated expansion, strategic initiatives and contractual obligations such as lease payments and capital commitments for new retail stores for the foreseeable future.

Changes in cash and cash equivalents during the three months ended April ~~2, 2022~~1, 2023 primarily consisted of ~~$25~~$19 million of cash provided by operating activities ~~and a $45 million net increase in short-term borrowings,~~ offset by ~~$20~~$16 million of cash used to purchase property and equipment, and ~~$51~~$3 million of cash used to repurchase ~~our~~its common stock (based on settlement, ~~$42 million under our Board-approved share repurchase program and $9 million~~ in connection with the vesting of employee restricted stock grants).

The following table summarizes ~~our~~ cash flows (in millions). Amounts may not add due to rounding differences:


		Three Months Ended					Three Months Ended
		April 2, 2022		April 3, 2021			April 1, 2023		April 2, 2022
Total cash provided by (used in):	Total cash provided by (used in):					Total cash provided by (used in):
Operating activities	Operating activities	$	24.6	$	111.6	Operating activities	$	18.6	$	24.6
Investing activities	Investing activities	(19.6)		(11.5)		Investing activities	(15.6)		(19.6)
Financing activities	Financing activities	(5.8)		(102.1)		Financing activities	(3.4)		(5.8)
Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	$	(0.8)	$	(2.0)	Net decrease in cash and cash equivalents	$	(0.3)	$	(0.8)

Cash provided by operating activities for the three months ended April ~~2, 2022~~1, 2023 was ~~$25~~$19 million, compared with ~~$112~~$25 million for the three months ended April ~~3, 2021.~~2, 2022. Significant components of the year-over-year change in cash provided by operating activities included: (i) a ~~$65~~$9 million ~~decrease~~increase in net income for the three months ended April ~~2, 2022,~~1, 2023, compared with the same period one year ago; (ii) a ~~$14~~$25 million fluctuation in accrued compensation and benefits primarily related to year-over-year changes in company-wide performance-based compensation that was earned in 2021 and paid in the first quarter of 2022, compared with no company-wide performance-based compensation earned in 2022 and paid in the first quarter of 2023; (iii) a $17 million fluctuation in customer prepayments due to timing of deliveries; and (iv) a $22 million fluctuation in prepaid expenses and other assets ~~due to both periods being impacted by the timing of rent payments and a reduction in business activities~~primarily due to the ~~pandemic; (iii) a $12 million change in other accruals and liabilities due to the timing of payments; (iv) a $10 million fluctuation in accounts payable with both periods impacted by business changes~~amount and timing of payments; and (v) a $9 million fluctuation in the amount of compensation and benefits accrued and timing of the related payments resulting from year-over-year changes in Company-wide performance-based incentive compensation.rebate payments.

Net cash used in investing activities to purchase property and equipment was ~~$20~~$16 million for the three months ended April ~~2, 2022,~~1, 2023, compared with ~~$12~~$20 million for the same period one year ago. The year-over-year ~~increase~~decrease was primarily due to the timing of cash flows associated with ~~new and remodeled stores’ property and equipment, and~~ investments in information technology.

Net cash used in financing activities was $6$3 million for the three months ended April ~~2, 2022,~~1, 2023, compared with ~~$102~~$6 million for the same period last year. During the three months ended April ~~2, 2022, we~~1, 2023, the Company repurchased ~~$51~~$3 million of


~~18 \| 1Q 2022 FORM 10-Q~~						~~SLEEP NUMBER CORPORATION~~

~~our~~ its stock (based on settlement dates, ~~$42 million under our Board-approved share repurchase program and $9 million~~ in connection with the vesting of employee restricted stock awards), compared with ~~$179~~$51 million ~~during~~(based on settlement dates, $42 million under the same period one year ago. Short-term borrowings increased by $45 million during the current-year period due to a $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 0.7~~and $9 million shares at a cost of $42 million (based on trade dates, an average of $63.95 per share) during the three months ended April 2, 2022. During the three months ended April 3, 2021, we repurchased 1.2 million shares at a cost of $167 million (based on trade dates, an average of $136.27 per share). 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.

As of April 2, 2022, we had $413 million of borrowings under our revolving credit facility. We also had $6 million in outstanding letters of credit. Net liquidity available under our credit facility was $406 million 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 (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 April 2, 2022, the weighted-average interest rate on borrowings under the credit facility was 2.2% 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 financial covenants consistent with our credit facility, including a maximum leverage ratio and a minimum interest coverage ratio. As of 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.


19 \| 1Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

in connection with the vesting of employee restricted stock awards) during the same period one year ago. Short-term borrowings decreased by $0.4 million during the current-year period due to an $11.0 million increase in borrowings under the revolving credit facility to $471 million offset by an $11.4 million decrease in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings increased by $45 million during the prior-year period due to a $31 million increase in borrowings under the credit facility to $413 million and a $14 million increase in book overdrafts.

With the incremental macroeconomic pressures, in the second quarter of fiscal 2022, the Company suspended share repurchases under its Board-approved share repurchase program. At April 1, 2023, there was $348 million remaining authorization under the Board-approved $600 million share repurchase program. There is no expiration date governing the period over which the Company can repurchase shares.

The Company has a credit facility (Credit Agreement) which is for general corporate purposes, to meet its seasonal working capital requirements and to repurchase its stock. The Company amended the Credit Agreement on October 26, 2022. The amendment, among other things, (a) provides relief from the requirement that the net leverage ratio not exceed 3.75x for certain corporate actions including Permitted Capital Distributions for Performance or Taxes (as defined in the Credit Agreement) and certain acquisition activity; (b) increases the permissible net leverage ratio to 5.0x for the three consecutive quarterly reporting periods ending July 1, 2023; (c) increases the commitment fee rate to 50 basis points and the margin applicable to interest rates for all borrowings by an additional 50 basis points, in each case if the net leverage ratio is greater than or equal to 4.5x; and (d) replaces the option to borrow at an interest rate based on London Interbank Offered Rate (LIBOR) to one based on a Term SOFR Rate. The Term SOFR Rate equals the sum of (x) the Term SOFR Screen Rate (as defined in the Credit Agreement) for the applicable interest period (but in no event less than zero), plus (y) 0.10%, plus (z) the margin based on Sleep Number’s net leverage ratio. Under the terms of the Credit agreement, the Company pays a variable rate of interest and a commitment fee based on its leverage ratio.

At April 1, 2023, the Company had $471 million of borrowings under its revolving credit facility, $7 million in outstanding letters of credit and net liquidity available under the credit facility of $347 million. At April 1, 2023, the Company’s leverage ratio as defined in the credit agreement was 4.0x, the weighted-average interest rate on borrowings under the credit facility was 7.1% and the Company was in compliance with all financial covenants.

Sleep Number has an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance their purchases from the Company (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with the credit facility, including a maximum net leverage ratio and a minimum interest coverage ratio. As of April 1, 2023, the Company was in compliance with all financial covenants.


20 \| 1Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

Non-GAAP Data Reconciliations

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

~~We define~~The Company defines 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~~its financial performance and ~~our~~its ability to generate cash from operating activities. ~~Our~~The Company’s 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 (in thousands):


		Three Months Ended				Trailing-Twelve Months Ended					Three Months Ended				Trailing-Twelve Months Ended
		April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021			April 1, 2023		April 2, 2022		April 1, 2023		April 2, 2022
Net income	Net income	$	2,074	$	66,634	$	89,186	$	166,683	Net income	$	11,465	$	2,074	$	46,001	$	89,186
Income tax expense	Income tax expense	214		8,812		24,947		34,265		Income tax expense	5,366		214		17,437		24,947
Interest expense	Interest expense	2,127		978		7,394		7,642		Interest expense	9,102		2,127		25,960		7,394
Depreciation and amortization	Depreciation and amortization	15,683		14,519		60,943		60,049		Depreciation and amortization	17,991		15,683		68,934		60,943
Stock-based compensation	Stock-based compensation	4,133		6,417		20,930		26,179		Stock-based compensation	4,639		4,133		13,729		20,930
Asset impairments	Asset impairments	103		89		186		388		Asset impairments	12		103		204		186
Adjusted EBITDA	Adjusted EBITDA	$	24,334	$	97,449	$	203,586	$	295,206	Adjusted EBITDA	$	48,575	$	24,334	$	172,265	$	203,586

Free Cash Flow

~~Our~~The Company’s “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~~the Company is providing this information as ~~we believe~~it believes it facilitates analysis for investors and financial analysts.

The following table summarizes ~~our~~ free cash flow calculations (in thousands):


		Three Months Ended				Trailing-Twelve Months Ended					Three Months Ended				Trailing-Twelve Months Ended
		April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021			April 1, 2023		April 2, 2022		April 1, 2023		April 2, 2022
Net cash provided by operating activities	Net cash provided by operating activities	$	24,558	$	111,598	$	212,970	$	306,318	Net cash provided by operating activities	$	18,581	$	24,558	$	30,161	$	212,970
Subtract: Purchases of property and equipment	Subtract: Purchases of property and equipment	19,604		11,546		74,958		38,295		Subtract: Purchases of property and equipment	15,556		19,604		65,406		74,958
Free cash flow	Free cash flow	$	4,954	$	100,052	$	138,012	$	268,023	Free cash flow	$	3,025	$	4,954	$	(35,245)	$	138,012


2021 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

Non-GAAP Data Reconciliations (continued)

Return on Invested Capital ~~(ROIC)~~(Adjusted ROIC)

(dollars in thousands)

Adjusted ROIC is a financial measure ~~we use~~the Company uses to determine how efficiently ~~we deploy our~~it deploys its capital. It quantifies the return ~~we earn~~the Company earns on ~~our~~its adjusted invested capital. Management believes Adjusted ROIC is also a useful metric for investors and financial analysts. ~~We compute~~The Company computes Adjusted ROIC as outlined below. ~~Our~~Its definition and calculation of Adjusted ROIC may not be comparable to similarly titled definitions and calculations used by other companies.

The tables below reconcile adjusted net operating profit after taxes ~~(NOPAT)~~(Adjusted NOPAT) and total adjusted invested capital, which are non-GAAP financial measures, to the comparable GAAP financial ~~measures:~~measures (in thousands):
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
	April 1, 2023			April 2, 2022
Adjusted net operating profit after taxes (Adjusted NOPAT)
Operating income	$	89,398		$	121,527
Add: Operating lease expense (1)	26,487			24,907


Less: Income taxes (2)	(29,674)			(34,753)
Adjusted NOPAT	$	86,211		$	111,681

Average adjusted invested capital
Total deficit	$	(425,047)		$	(469,213)
Add: Long-term debt (3)	470,991			413,709
Add: Operating lease obligations (4)	436,939			412,574
Total adjusted invested capital at end of period	$	482,883		$	357,070

Average adjusted invested capital (5)	$	423,287		$	348,804

Adjusted return on invested capital (Adjusted ROIC) (6)	20.4		%	32.0		%

___________________________

(1)~~Rent~~ Represents the interest expense ~~is added back to operating income to show~~component of lease expense included in the ~~impact of owning versus leasing the related assets.~~Company’s financial statements under ASC 842, Leases.

(2)Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 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 25.6% and 23.7% for April 1, 2023 and ~~23.9% for~~April 2, 2022, ~~and 2021,~~ respectively.

~~(4)~~(3)Long-term debt includes existing finance lease liabilities.

~~(5)~~(4)~~A multiple of eight times annual rent expense is used as an estimate for capitalizing our~~ Reflects operating lease ~~obligations. The methodology utilized aligns with~~liabilities included in the ~~methodology of a nationally recognized credit rating agency.~~Company’s financial statements under ASC 842.

~~(6)~~(5)Average adjusted invested capital represents the average of the last five fiscal ~~quarters'~~quarters’ ending adjusted invested capital balances.

~~(7)~~(6) Adjusted ROIC equals Adjusted NOPAT divided by average adjusted invested capital.

Note - ~~Our~~the Company’s 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~~the Company is providing this information as weit believe it facilitates analysis of the Company's financial performance by investors and financial analysts. The Company updated its Adjusted ROIC calculation effective beginning with the reporting period ended December 31, 2022, to reflect adjustments consistent with ASC 842. The prior period has been updated to reflect this calculation.

GAAP - generally accepted accounting principles in the U.S.


2122 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

Off-Balance-Sheet Arrangements

As of April ~~2, 2022, we were~~1, 2023, the Company was not involved in any unconsolidated special purpose entity transactions. Other than ~~our $6~~it’s $7 million in outstanding letters of credit, ~~we do~~the Company does not have any off-balance-sheet financing.

There have been no material changes in ~~our~~the Company’s contractual obligations since the end of fiscal ~~2021.~~2022. See Note 5, Credit Agreement, of the Notes to ~~our~~the Condensed Consolidated Financial Statements for information regarding ~~our~~the Company’s credit agreement. See ~~our~~the Company’s Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2022 for additional information regarding ~~our~~its other contractual obligations.

Critical Accounting Policies

~~We discuss our~~The Company discusses its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in ~~our~~the Company’s Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2022. There were no significant changes in ~~our~~the Company’s critical accounting policies since the end of fiscal ~~2021.~~2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~We are~~The Company is exposed to changes in market-based short-term interest rates that will impact ~~our~~ net interest expense. If overall interest rates were one percentage point higher than current rates, ~~our~~ annual net income would decrease by ~~$3.1~~$3.4 million based on the ~~$413~~$471 million of borrowings under ~~our~~the credit facility at April ~~2, 2022. We do~~1, 2023. The Company does not manage the interest-rate volatility risk of borrowings under ~~our~~the credit facility through the use of derivative instruments.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

~~We maintain~~The Company maintains 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~~The Company’s management, with the participation of ~~our~~its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of ~~our~~the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, ~~our~~its principal executive officer and principal financial officer concluded that ~~our~~the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control

There were no changes in ~~our~~the Company’s internal control over financial reporting during the fiscal quarter ended April ~~2, 2022,~~1, 2023, that have materially affected, or are reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.


2223 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~Our~~The Company’s legal proceedings are discussed in Note 12, Commitments and Contingencies, Legal Proceedings, in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

~~Our~~In addition to the risks discussed below and other information set forth in this Quarterly Report on Form 10-Q, the Company’s business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to ~~our~~the Company’s 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~~the Company’s 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~~the Company faces because ~~our~~its business operations could also be affected by additional risk factors that are not presently known to usthe Company or that weit currently ~~consider~~considers to be immaterial to ~~our~~its operations.

Bank failures or other events affecting financial institutions could adversely affect our liquidity and financial performance.

The recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures and banking industry instability could materially and adversely affect the Company’s liquidity, access to cash and credit, and the Company’s business, financial condition and results of operations, as well those of the Company’s third-party suppliers or vendors. The recent closures of Silicon Valley Bank (SVB) and Signature Bank and their placement into receivership with the Federal Deposit Insurance Company (FDIC) along with the FDIC’s seizure and sale of First Republic Bank created market disruption and uncertainty with respect to the financial condition of a number of other banking institutions in the United States. While the Company does not have any direct exposure to SVB, Signature Bank, or First Republic Bank, the Company does maintain its cash at financial institutions, occasionally in balances that exceed the current FDIC insurance limits.

If other banks and financial institutions enter receivership or become insolvent in the future due to financial conditions affecting the banking system and financial markets, the Company’s ability to access its cash and cash equivalents, including transferring funds, making payments or receiving funds, and the Company’s access to credit, as well as those of its third-party suppliers or vendors, may be threatened and could have a material adverse effect on the Company’s business and financial condition.


24 \| 1Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) – (b) Not applicable.

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


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 1, 2023 through January 28, 2023	131	$	34.13	—	$	348,071,000
January 29, 2023 through February 25, 2023	445	$	35.53	—	$	348,071,000
February 26, 2023 through April 1, 2023	117,662	$	28.42	—	$	348,071,000
Total	118,238	$	28.45	—	$	348,071,000

___________________________

(1)~~Under our~~The Company did not purchase any shares under its 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.~~1, 2023.

(2)In connection with the vesting of employee restricted stock grants, wethe Company repurchased ~~151,815~~118,238 shares of ~~our~~its common stock at a cost of ~~$8.7~~$3.4 million during the three months ended April ~~2, 2022.~~1, 2023.

(3)There is no expiration date governing the period over which wethe Company can repurchase shares under ~~our~~it’s 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.


2325 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

ITEM 6. EXHIBITS


Exhibit Number						Description
~~10.1~~10.1*†						Form of Performance Adjusted Restricted Stock Unit Award Agreement under the Sleep Number Corporation 2020 Equity Incentive Plan
10.2*†						Form of Performance Adjusted Restricted Stock Unit Award Agreement (CEO and Executive Team) under the Sleep Number Corporation 2020 Equity Incentive Plan
10.3*†						~~Seventh~~S leep Number Annual Incentive Plan (AIP) Effective January 2, 2 023(1)
10.4*						Sixth Amendment to ~~Amended~~Retailer Program Agreement, dated November 28, 2022, by and ~~Restated Credit~~between Synchrony Bank, Sleep Number Corporation and ~~Security Agreement~~ Select Comfort Retail Corporation ~~(incorporated by reference to Exhibit 10.36~~ ~~contained in Sleep Number’s Annual Report on Form 10-K filed March 1, 2022 (File No. 000-25121)~~)
31.1*						Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*						Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2*						Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS*						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*						Inline XBRL Taxonomy Extension Schema Document
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Filed ~~Herewith~~Herein.

† Management contract or compensatory plan or arrangement.

(1) Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).


2426 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SLEEP NUMBER CORPORATION
		(Registrant)

Dated:	~~April 29, 2022~~May 9, 2023	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)

		By:	/s/ Joel J. Laing
			Joel J. Laing
			Chief Accounting Officer
			(principal accounting officer)


2527 \| 1Q ~~2022~~2023 FORM 10-Q						SLEEP NUMBER CORPORATION


		Page
PART I: FINANCIAL INFORMATION		1

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Shareholders' Deficit	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1213
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2223
Item 4.	Controls and Procedures	2223

PART II: OTHER INFORMATION		2324

Item 1.	Legal Proceedings	2324
Item 1A.	Risk Factors	2324
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2325
Item 3.	Defaults Upon Senior Securities	2325
Item 4.	Mine Safety Disclosures	2325
Item 5.	Other Information	2325
Item 6.	Exhibits	2426
SIGNATURES		2527