Company Quick10K Filing
Quick10K
Sleep Number
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$35.14 30 $1,060
10-Q 2019-03-30 Quarter: 2019-03-30
10-K 2018-12-29 Annual: 2018-12-29
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-01-02 Annual: 2016-01-02
10-Q 2015-10-03 Quarter: 2015-10-03
10-Q 2015-07-04 Quarter: 2015-07-04
10-Q 2015-04-04 Quarter: 2015-04-04
10-K 2015-01-03 Annual: 2015-01-03
10-Q 2014-09-27 Quarter: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-K 2013-12-28 Annual: 2013-12-28
8-K 2019-05-15 Shareholder Vote
8-K 2019-04-17 Earnings, Exhibits
8-K 2019-04-03 Regulation FD, Exhibits
8-K 2019-02-11 Enter Agreement, Earnings, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-01-30 Regulation FD, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-10-10 Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-07-03 Regulation FD, Exhibits
8-K 2018-06-26 Enter Agreement
8-K 2018-05-16 Shareholder Vote
8-K 2018-05-09 Officers, Exhibits
8-K 2018-04-18 Earnings, Exhibits
8-K 2018-04-04 Regulation FD, Exhibits
8-K 2018-02-15 Enter Agreement, Earnings, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-01-25 Regulation FD, Exhibits
RE Everest RE Group 10,020
BWA BorgWarner 8,000
HY Hyster-Yale Materials Handling 919
FBIZ First Business Financial Services 210
NBN Northeast Bancorp 194
GNC GNC Holdings 164
MAYS Mays 76
ONCY Oncolytics Biotech 36
SPHS Sophiris Bio 28
CHCI Comstock Holding Companies 10
SNBR 2019-03-30
Part I: Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 snbr-ex311_21.htm
EX-31.2 snbr-ex312_20.htm
EX-32.1 snbr-ex321_18.htm
EX-32.2 snbr-ex322_19.htm

Sleep Number Earnings 2019-03-30

SNBR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 snbr-10q_20190330.htm 10-Q snbr-10q_20190330.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

ACT OF 1934

 

For the Quarterly Period Ended March 30, 2019

 

Commission File Number: 0-25121

 

 

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

 

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 definition 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 March 30, 2019, 30,213,000 shares of the Registrant’s Common Stock were outstanding.

 

 

 


 

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

INDEX

 

 

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' Equity (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

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

Item 4.

Controls and Procedures

20

 

 

 

PART II: OTHER INFORMATION

21

 

 

 

Item 1.

Legal Proceedings

21

Item 1A.

Risk Factors

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.

Defaults Upon Senior Securities

22

Item 4.

Mine Safety Disclosures

22

Item 5.

Other Information

22

Item 6.

Exhibits

23

SIGNATURES

24

 

ii


 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except per share amounts)

 

 

 

March 30,

2019

 

 

December 29, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,696

 

 

$

1,612

 

Accounts receivable, net of allowance for doubtful accounts of $720 and

   $699, respectively

 

 

18,613

 

 

 

24,795

 

Inventories

 

 

83,314

 

 

 

84,882

 

Prepaid expenses

 

 

10,043

 

 

 

8,009

 

Other current assets

 

 

31,987

 

 

 

31,559

 

Total current assets

 

 

145,653

 

 

 

150,857

 

 

 

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

203,649

 

 

 

205,631

 

Operating lease right-of-use assets

 

 

303,820

 

 

 

 

Goodwill and intangible assets, net

 

 

74,862

 

 

 

75,407

 

Other non-current assets

 

 

42,716

 

 

 

38,243

 

Total assets

 

$

770,700

 

 

$

470,138

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

$

218,700

 

 

$

199,600

 

Accounts payable

 

 

121,146

 

 

 

144,781

 

Customer prepayments

 

 

30,518

 

 

 

27,066

 

Accrued sales returns

 

 

19,957

 

 

 

19,907

 

Compensation and benefits

 

 

29,349

 

 

 

27,700

 

Taxes and withholding

 

 

23,842

 

 

 

18,380

 

Operating lease liabilities

 

 

54,197

 

 

 

 

Other current liabilities

 

 

47,768

 

 

 

51,234

 

Total current liabilities

 

 

545,477

 

 

 

488,668

 

 

 

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

5,646

 

 

 

4,822

 

Operating lease liabilities

 

 

278,446

 

 

 

 

Other non-current liabilities

 

 

65,771

 

 

 

86,198

 

Total liabilities

 

 

895,340

 

 

 

579,688

 

 

 

 

 

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

 

Undesignated preferred stock; 5,000 shares authorized, no

   shares issued and outstanding

 

 

 

 

 

 

Common stock, $0.01 par value; 142,500 shares authorized, 30,213 and

   30,868 shares issued and outstanding, respectively

 

 

302

 

 

 

309

 

Additional paid-in capital

 

 

 

 

 

 

Accumulated deficit

 

 

(124,942

)

 

 

(109,859

)

Total shareholders’ deficit

 

 

(124,640

)

 

 

(109,550

)

Total liabilities and shareholders’ deficit

 

$

770,700

 

 

$

470,138

 

 

 

See accompanying notes to condensed consolidated financial statements.

1


 

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Net sales

 

$

426,445

 

 

$

388,633

 

Cost of sales

 

 

164,212

 

 

 

151,156

 

Gross profit

 

 

262,233

 

 

 

237,477

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

186,827

 

 

 

171,917

 

General and administrative

 

 

34,323

 

 

 

31,734

 

Research and development

 

 

8,376

 

 

 

6,925

 

Total operating expenses

 

 

229,526

 

 

 

210,576

 

Operating income

 

 

32,707

 

 

 

26,901

 

Other expense, net

 

 

2,609

 

 

 

525

 

Income before income taxes

 

 

30,098

 

 

 

26,376

 

Income tax expense

 

 

4,680

 

 

 

5,828

 

Net income

 

$

25,418

 

 

$

20,548

 

 

 

 

 

 

 

 

 

 

Basic net income per share:

 

 

 

 

 

 

 

 

Net income per share – basic

 

$

0.83

 

 

$

0.54

 

Weighted-average shares – basic

 

 

30,620

 

 

 

38,244

 

 

 

 

 

 

 

 

 

 

Diluted net income per share:

 

 

 

 

 

 

 

 

Net income per share – diluted

 

$

0.80

 

 

$

0.52

 

Weighted-average shares – diluted

 

 

31,738

 

 

 

39,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Deficit)

(unaudited - in thousands)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance at December 29, 2018

 

 

30,868

 

 

$

309

 

 

$

 

 

$

(109,859

)

 

$

(109,550

)

Net income

 

 

 

 

 

 

 

 

 

 

 

25,418

 

 

 

25,418

 

Exercise of common stock options

 

 

151

 

 

 

2

 

 

 

2,834

 

 

 

 

 

 

2,836

 

Stock-based compensation

 

 

364

 

 

 

3

 

 

 

3,635

 

 

 

 

 

 

3,638

 

Repurchases of common stock

 

 

(1,170

)

 

 

(12

)

 

 

(6,469

)

 

 

(40,501

)

 

 

(46,982

)

Balance at March 30, 2019

 

 

30,213

 

 

$

302

 

 

$

 

 

$

(124,942

)

 

$

(124,640

)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at December 30, 2017

 

 

38,813

 

 

$

388

 

 

$

 

 

$

88,768

 

 

$

89,156

 

Net income

 

 

 

 

 

 

 

 

 

 

 

20,548

 

 

 

20,548

 

Exercise of common stock options

 

 

68

 

 

 

1

 

 

 

856

 

 

 

 

 

 

857

 

Stock-based compensation

 

 

211

 

 

 

2

 

 

 

3,082

 

 

 

 

 

 

3,084

 

Repurchases of common stock

 

 

(2,149

)

 

 

(22

)

 

 

(3,938

)

 

 

(73,688

)

 

 

(77,648

)

Balance at March 31, 2018

 

 

36,943

 

 

$

369

 

 

$

 

 

$

35,628

 

 

$

35,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

 

 

 

Three Months Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

25,418

 

 

$

20,548

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

15,743

 

 

 

15,680

 

Stock-based compensation

 

 

3,638

 

 

 

3,084

 

Net gain on disposals and impairments of assets

 

 

(433

)

 

 

(70

)

Deferred income taxes

 

 

824

 

 

 

1,184

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,182

 

 

 

(2,486

)

Inventories

 

 

1,568

 

 

 

(2,485

)

Income taxes

 

 

4,208

 

 

 

4,762

 

Prepaid expenses and other assets

 

 

(5,283

)

 

 

13,894

 

Accounts payable

 

 

5,857

 

 

 

123

 

Customer prepayments

 

 

3,452

 

 

 

2,412

 

Accrued compensation and benefits

 

 

1,750

 

 

 

(7,567

)

Other taxes and withholding

 

 

1,254

 

 

 

1,662

 

Other accruals and liabilities

 

 

3,958

 

 

 

(1,485

)

Net cash provided by operating activities

 

 

68,136

 

 

 

49,256

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(19,743

)

 

 

(8,805

)

Proceeds from sales of property and equipment

 

 

2,571

 

 

 

70

 

Net cash used in investing activities

 

 

(17,172

)

 

 

(8,735

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(55,656

)

 

 

(77,648

)

Net increase in short-term borrowings

 

 

2,955

 

 

 

35,963

 

Proceeds from issuance of common stock

 

 

2,836

 

 

 

857

 

Debt issuance costs

 

 

(1,015

)

 

 

(1,009

)

Net cash used in financing activities

 

 

(50,880

)

 

 

(41,837

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

84

 

 

 

(1,316

)

Cash and cash equivalents, at beginning of period

 

 

1,612

 

 

 

3,651

 

Cash and cash equivalents, at end of period

 

$

1,696

 

 

$

2,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Business and Summary of Significant Accounting Policies

 

Business & Basis of Presentation

 

We prepared the condensed consolidated financial statements as of and for the three months ended March 30, 2019 of Sleep Number Corporation and 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 financial position as of March 30, 2019 and December 29, 2018, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 and other recent filings with the SEC.

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods. Our critical accounting policies consist of stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

 

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

 

New Accounting Pronouncements

  

Recently Adopted Accounting Guidance

 

Effective December 30, 2018 (beginning of fiscal 2019), we adopted ASC Topic 842, Leases, using the modified-retrospective approach. We have chosen the effective date as the date of initial application and have applied the new guidance to all existing leases.

 

The new guidance establishes a right-of-use (ROU) model that requires us to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. We have elected the following practical expedients and accounting policies related to the adoption of the new lease standard:

 

 

We did not reassess our prior conclusions about lease identification, lease classification and initial direct costs;

 

We did not elect the use of hindsight;

 

We adopted an accounting policy for short-term leases allowing us to not recognize ROU assets and lease liabilities for leases with a term of 12 months or less; and

 

We elected the option to not separate lease and non-lease components for all of our leases.

 

In accordance with the new guidance on December 30, 2018, we recorded $299 million of net operating lease ROU assets and $327 million of operating lease liabilities ($52 million recorded in current operating lease liabilities and $275 million in non-current operating lease liabilities). Deferred rent and lease incentive liabilities associated with historical operating leases totaling $28 million were reclassified to the operating lease ROU assets as required by ASC Topic 842. The adoption of the new guidance had no impact on accumulated deficit, net income or net cash provided by operating activities. At December 30, 2018, our finance ROU assets and lease liabilities were not significant.

 

See Note 6, Leases, for further information.

 

 

5


SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

2. Fair Value Measurements

 

At March 30, 2019 and December 29, 2018, we had $7 million and $6 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $7 million and $6 million at March 30, 2019 and December 29, 2018, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

 

3. Inventories

 

Inventories consisted of the following (in thousands):

 

 

March 30,

2019

 

 

December 29, 2018

 

Raw materials

 

$

4,385

 

 

$

4,549

 

Work in progress

 

 

104

 

 

 

3

 

Finished goods

 

 

78,825

 

 

 

80,330

 

 

 

$

83,314

 

 

$

84,882

 

 

4. Goodwill and Intangible Assets, Net

 

Goodwill and Indefinite-Lived Intangible Assets

 

Goodwill was $64 million at March 30, 2019 and December 29, 2018. Indefinite-lived trade name/trademarks totaled $1.4 million at March 30, 2019 and December 29, 2018.

 

Definite-Lived Intangible Assets

 

The gross carrying amount of our developed technologies was $19 million at March 30, 2019 and December 29, 2018, and accumulated amortization was $9 million for both periods.

 

Amortization expense for both the three months ended March 30, 2019 and March 31, 2018, was $0.5 million.

 

5. Credit Agreement

 

Our $450 million credit facility is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. 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). 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 includes an accordion feature which allows us to increase the amount of the credit facility from $450 million to $600 million, subject to lenders' approval. The credit agreement matures in February 2024. We were in compliance with all financial covenants as of March 30, 2019.

 

The following tables summarizes our borrowings under the credit facility ($ in thousands):

 

 

March 30,

2019

 

 

December 29, 2018

 

Outstanding borrowings

 

$

218,700

 

 

$

199,600

 

Outstanding letters of credit

 

$

3,497

 

 

$

3,497

 

Additional borrowing capacity

 

$

227,803

 

 

$

96,903

 

Weighted-average interest rate

 

 

4.2

%

 

 

4.2

%

 

 


6


SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

6. Leases

 

We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. Our retail store leases generally provide for an initial lease term of five to 10 years. Our office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, our mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at our sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. Our lease agreements do not contain any material residual value guarantees. We also lease vehicles and certain equipment under operating leases with an initial lease term of three to five years.

 

We determine if an arrangement is a lease at inception. Beginning in 2019 in conjunction with our adoption of ASC Topic 842, Leases, right-of-use (ROU) assets and operating lease liabilities are recognized at the lease commencement date based on the estimated present value of future lease payments over the lease term. Most of our leases do not provide an implicit interest rate nor is it available to us from our lessors. As an alternative, we use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, including publicly available data, in determining the present value of lease payments.

 

Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount is reasonably estimable. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in operating lease costs. Leases with an initial term of 12 months or less are not recorded on the balance sheet as a ROU asset or operating lease liability. We recognize operating lease costs for these short-term leases, primarily small equipment leases, on a straight-line basis over the lease term. At March 30, 2019, our finance ROU assets and lease liabilities were not significant.

 

Operating lease costs were as follows (in thousands):

 

 

 

 

Three Months

Ended

 

 

 

 

 

March 30,

2019

 

Operating lease costs(1)

 

 

 

$

21,056

 

Variable lease cost

 

 

 

$

499

 

 

(1)

Includes short-term lease costs which are not significant.

7


SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

The maturities of operating lease liabilities as of March 30, 2019, are as follows (in thousands):

2019 (excluding the three months ended March 30, 2019)

 

$

58,730

 

2020

 

 

71,142

 

2021

 

 

63,969

 

2022

 

 

56,501

 

2023

 

 

48,089

 

2024

 

 

37,133

 

Thereafter

 

 

92,942

 

Total lease payments(1)

 

 

428,506

 

Less: Interest

 

 

95,863

 

Present value of operating lease liabilities(2)

 

$

332,643

 

 

(1)

Total lease payments exclude $53 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)

Includes the current portion of $54 million for operating lease liabilities.

 

The aggregate future commitments under operating leases as of December 30, 2018, were expected to be as follows (in thousands):

2019

 

$

78,337

 

2020

 

 

73,331

 

2021

 

 

66,491

 

2022

 

 

59,515

 

2023

 

 

51,076

 

Thereafter

 

 

149,318

 

Total lease payments(1)

 

 

478,068

 

 

(1)

Total lease payments include $62 million of legally binding minimum lease payments for leases signed but not yet commenced.

 

Other information related to operating leases was as follows:

 

 

March 30,

2019

 

Weighted-average remaining lease term (years)

 

 

6.8

 

Weighted-average discount rate

 

 

7.5

%

 

 

 

Three Months

Ended

 

(in thousands)

 

March 30,

2019

 

Cash paid for amounts included in present value of operating lease liabilities

 

$

19,757

 

Right-of-use assets obtained in exchange for operating lease liabilities(1)

 

$

16,153

 

 

(1)

See Note 1, Recently Adopted Accounting Guidance, for the impact of our initial adoption of the lease standard.

 

7. Repurchase of Common Stock

 

Repurchases of our common stock were as follows (in thousands):

 

 

Three Months Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Amount repurchased under Board-approved share repurchase program

 

$

40,900

 

 

$

75,000

 

Amount repurchased in connection with the vesting of employee restricted stock grants

 

 

6,082

 

 

 

2,648

 

Total amount repurchased

 

$

46,982

 

 

$

77,648

 

 

As of March 30, 2019, the remaining authorization under our Board-approved share repurchase program was $145 million.

8


SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

8. Revenue Recognition

 

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

 

 

March 30,

2019

 

 

December 29, 2018

 

Deferred Contract Assets included in:

 

 

 

 

 

 

 

 

Other current assets

 

$

21,342

 

 

$

20,553

 

Other non-current assets

 

 

30,829

 

 

 

29,456

 

 

 

$

52,171

 

 

$

50,009

 

 

 

 

March 30,

2019

 

 

December 29, 2018

 

Deferred Contract Liabilities included in:

 

 

 

 

 

 

 

 

Other current liabilities

 

$

33,023

 

 

$

32,395

 

Other non-current liabilities

 

 

43,044

 

 

 

42,194

 

 

 

$

76,067

 

 

$

74,589

 

 

During the three months ended March 30, 2019 and March 31, 2018, we recognized revenue of $9 million and $8 million, respectively, that was included in the deferred contract liability balance 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 March 30, 2019 and March 31, 2018.

 

Net sales from each of our channels was as follows (in thousands):

 

 

Three Months Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Retail

 

$

392,226

 

 

$

356,069

 

Online and phone

 

 

29,763

 

 

 

27,967

 

Company-Controlled channel

 

 

421,989

 

 

 

384,036

 

Wholesale/Other channel

 

 

4,456

 

 

 

4,597

 

Total

 

$

426,445

 

 

$

388,633

 

 

Obligation for Sales Returns

 

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

 

 

Three Months Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Balance at beginning of year

 

$

19,907

 

 

$

19,270

 

Additions that reduce net sales

 

 

21,726

 

 

 

20,651

 

Deduction from reserves

 

 

(21,676

)

 

 

(20,905

)

Balance at end of period

 

$

19,957

 

 

$

19,016

 

 


9


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

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Stock awards

 

$

3,033

 

 

$

2,493

 

Stock options

 

 

605

 

 

 

591

 

Total stock-based compensation expense

 

 

3,638

 

 

 

3,084

 

Income tax benefit

 

 

898

 

 

 

756

 

Total stock-based compensation expense, net of tax

 

$

2,740

 

 

$

2,328

 

 

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 March 30, 2019 and March 31, 2018, our contributions, net of forfeitures, were $1.5 million and $1.4 million, respectively.

 

11. Other Expense, Net

 

Other expense, net, consisted of the following (in thousands):

 

 

Three Months Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Interest expense

 

$

2,610

 

 

$

527

 

Interest income

 

 

(1

)

 

 

(2

)

Other expense, net

 

$

2,609

 

 

$

525

 

 

12. 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

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Net income

 

$

25,418

 

 

$

20,548

 

Reconciliation of weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

30,620

 

 

 

38,244

 

Dilutive effect of stock-based awards

 

 

1,118

 

 

 

1,103

 

Diluted weighted-average shares outstanding

 

 

31,738

 

 

 

39,347

 

Net income per share – basic

 

$

0.83

 

 

$

0.54

 

Net income per share – diluted

 

$

0.80

 

 

$

0.52

 

 

For the three months ended March 30, 2019 and March 31, 2018, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial.

 


10


SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

13. Commitments and Contingencies

 

 

Warranty Liabilities

 

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

 

 

Three Months Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Balance at beginning of year

 

$

10,389

 

 

$

9,320

 

Additions charged to costs and expenses for current-year sales

 

 

3,192

 

 

 

3,500

 

Deductions from reserves

 

 

(3,127

)

 

 

(3,271

)

Changes in liability for pre-existing warranties during the current year,

   including expirations

 

 

1,166

 

 

 

(77

)

Balance at end of period

 

$

11,620

 

 

$

9,472

 

 

Legal Proceedings

 

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of pending legal proceedings to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

 

On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against Sleep Number alleging that Sleep Number violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Sleep Number beds and bases, plaintiffs sought to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Sleep Number removed the case to the United States District Court for the District of New Jersey, which subsequently granted Sleep Number’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court accepted the certified questions and on April 16, 2018, ruled in our favor on one of the two questions, holding that a consumer only has standing to bring a claim under the relevant statute if the consumer has been harmed by the defendant’s conduct. The Third Circuit remanded the case to the federal district court, which dismissed the lawsuit on March 5, 2019. Plaintiffs’ deadline to appeal the dismissal has passed and the dismissal is final.

 

On September 18, 2018, former Home Delivery Technician, Donald Cassels, and former Field Services Delivery Assistant, Jose Cadenas, filed suit in Superior Court in San Francisco County, California alleging representative claims on a purported class action basis under the California Labor Code Private Attorney General Act. While the two representative plaintiffs were in the Home Delivery workforce, the Complaint does not limit the purported plaintiff class to that group. The plaintiffs allege that Sleep Number failed or refused to adopt adequate practices, policies and procedures relating to wage payments, record keeping, employment disclosures, meal and rest breaks, among other claims, under California law. The plaintiffs purport to represent all former and current Sleep Number employees in the State of California aggrieved by the alleged practices. The Complaint seeks damages in the form of civil penalties and plaintiffs’ attorneys’ fees, and expressly disclaims the recovery of any purported individual specific relief or underpaid wages. After Sleep Number raised issues with the plaintiffs’ choice of venue, the Court transferred venue from the Superior Court in San Francisco County to Superior Court in Fresno County. We intend to vigorously defend this matter.

 

 

11


Index

 

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

 

Risk Factors

Company Overview

Results of Operations

Liquidity and Capital Resources

Non-GAAP Data

Off-Balance-Sheet Arrangements and Contractual Obligations

Critical Accounting Policies

  

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 historical experience and our present expectations or projections. These risks and uncertainties include, among others:

 

Current and future general and industry economic trends and consumer confidence;

The effectiveness of our marketing messages;

The efficiency of our advertising and promotional efforts;

Our ability to execute our Company-Controlled distribution strategy;

Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;

Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;

Industry competition, the emergence of additional competitive products and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities;

The potential for claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others;

Availability of attractive and cost-effective consumer credit options;

Our manufacturing processes 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 providers of services;

Rising commodity costs and other inflationary pressures;

Risks inherent in global sourcing activities, including tariffs and the potential for shortages in supply;

Risks of disruption in the operation of any of our three main manufacturing facilities or three assembly facilities;

Increasing government regulation;

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

The adequacy of our and third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and security;

The costs and potential disruptions to our business related to upgrading our information systems;

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

Our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers.

  

Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” in our Annual Report on Form 10-K.

 

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

 


12


Index

 

Company Overview

 

Sleep Number Corporation, based in Minneapolis, Minnesota, was founded in 1987. We are listed on The Nasdaq Stock Market LLC (NASDAQ Global Select Market) under the symbol “SNBR.”

 

Sleep Number is the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number® beds and the leader in sleep innovation. We offer our customers high-quality, individualized sleep solutions and services, including a complete line of Sleep Number beds, bases and bedding accessories. We are also the pioneer and leader in biometric sleep innovation and tracking. Our proprietary SleepIQ® technology, the operating system of the 360® smart bed, works with our proprietary algorithms and artificial intelligence to track user’s sleep patterns and biometric changes. SleepIQ allows each bed to use the sleeper’s own data to automatically and effortlessly adjust the bed’s firmness, delivering proven quality sleep.

 

Our relentless focus on developing winning innovation for our customers is also helping us to deliver superior shareholder value, by: (i) increasing consumer demand; (ii) leveraging our business model; and (iii) deploying capital efficiently.

 

Results of Operations

 

Quarterly and Year-to-Date Results

 

Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, the timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, the timing of new product introductions and related expenses, the timing of promotional offerings, competitive factors, changes in commodity costs, any disruptions in supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer confidence and general economic conditions. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.

 

Highlights

 

Financial highlights for the period ended March 30, 2019 were as follows:

 

Net sales for the three months ended March 30, 2019 increased 10% to $426 million, compared with $389 million for the same period one year ago. The 10% net sales increase resulted from a 5% comparable sales increase in our Company-Controlled channel and a 5 percentage points (ppt.) increase in sales from 27 net new stores opened in the past 12 months.

Our revolutionary Sleep Number 360® smart beds have driven double-digit demand growth for three consecutive quarters (transition in July 2018), including the 10% net sales increase in the first quarter of 2019.

Sales per store (Company-Controlled channel sales for stores open at least one year, including online and phone sales) on a trailing twelve-month basis for the period ended March 30, 2019, totaled $2.7 million, 6% higher than the same period one year ago.

Operating income for the three months ended March 30, 2019 was $33 million, a 22% increase from $27 million in the prior-year period. Our operating income rate increased to 7.7% of net sales, compared with 6.9% of net sales for the same period last year. The current-period's operating income and operating income rate were positively impacted by: (i) the elimination of prior year’s transition costs and temporary inefficiencies associated with operating two supply chains to support the product line transition; (ii) current-period efficiency gains and pricing; and (iii) expense leverage resulting from the 10% net sales increase. These favorable items were partially offset by: (i) higher mix of sourced products; (ii) absorption of higher tariff costs; and (iii) delivery cost inflation.

Net income for the three months ended March 30, 2019 was $25 million, up 24% compared with $21 million for the prior-year period, and earnings per diluted share were $0.80, up 54% compared with $0.52 for the same period last year. Diluted earnings per share for the current-year period were positively impacted compared to the prior-year period by approximately $0.05, due to a reduction in the effective income tax rate as a result of increased stock-based compensation excess tax benefits.

Cash provided by operating activities for the three months ended March 30, 2019 increased by $19 million, or 38%, to $68 million, compared with $49 million for the comparable period one year ago.

At March 30, 2019, we ended the quarter with $219 million of borrowings under our $450 million revolving credit facility.

During the three months ended March 30, 2019, we repurchased 1.0 million shares of our common stock under our Board-approved share repurchase program at a cost of $41 million (based on trade date, at an average of $39.36 per share). As of March 30, 2019, the remaining authorization under our Board-approved share repurchase program was $145 million.

 

 

 

13


Index

 

 

The following table sets forth our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.

 

 

Three Months Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Net sales

 

$

426.4

 

 

 

100.0

%

 

$

388.6

 

 

 

100.0

%

Cost of sales

 

 

164.2

 

 

 

38.5

%

 

 

151.2

 

 

 

38.9

%

Gross profit

 

 

262.2

 

 

 

61.5

%

 

 

237.5

 

 

 

61.1

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

186.8

 

 

 

43.8

%

 

 

171.9

 

 

 

44.2

%

General and administrative

 

 

34.3

 

 

 

8.0

%

 

 

31.7

 

 

 

8.2

%

Research and development

 

 

8.4

 

 

 

2.0

%

 

 

6.9

 

 

 

1.8

%

Total operating expenses

 

 

229.5

 

 

 

53.8

%

 

 

210.6

 

 

 

54.2

%

Operating income

 

 

32.7

 

 

 

7.7

%

 

 

26.9

 

 

 

6.9

%

Other expense, net

 

 

2.6