ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The discussion in this Annual 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:
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Current and future general and industry economic trends and consumer confidence;
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The effectiveness of our marketing messages;
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The efficiency of our advertising and promotional efforts;
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Our ability to execute our Company-Controlled distribution strategy;
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Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;
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Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;
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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;
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Availability of attractive and cost-effective consumer credit options, including the impact of recent changes in federal law that restricts various forms of consumer credit promotional offerings;
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Our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;
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Our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers;
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Rising commodity costs and other inflationary pressures;
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Risks inherent in global sourcing activities;
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Risks of disruption in the operation of either of our two main manufacturing facilities;
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Increasing government regulation;
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Pending or unforeseen litigation and the potential for adverse publicity associated with litigation;
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The adequacy of our management information systems to meet the evolving needs of our business and existing and evolving regulatory standards applicable to data privacy and security;
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The costs and potential disruptions to our business related to upgrading our management information systems;
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The vulnerability of our management information systems to attacks by hackers or other cyber threats that could compromise the security of our systems or disrupt our business;
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Our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and
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Uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.
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Additional information concerning these and other risks and uncertainties is contained under the caption "Risk Factors" in this Annual Report on Form 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections:
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Liquidity and Capital Resources
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Off-Balance-Sheet Arrangements and Contractual Obligations
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Critical Accounting Policies and Estimates
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Recent Accounting Pronouncements
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Overview
Business Overview
We offer consumers high-quality, individualized sleep solutions and services, which include a complete line of Sleep Number beds, bases and bedding accessories. Our business has three significant competitive advantages: proprietary sleep innovations, ongoing customer relationships and exclusive retail distribution.
We have a vertically integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds. We are the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ technology - proprietary sensor technology that works directly with the bed’s DualAir system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Select Comfort also offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products. As a specialty mattress retailer with stores across the nation, we offer consumers a unique, value-added retail experience at one of the more than
540
Sleep Number stores across the country, online at SleepNumber.com or via phone.
We are committed to delivering superior shareholder value through three primary drivers of earnings per share growth: increasing demand, leveraging our business model and deploying our capital efficiently. We are the sleep innovation leader and drive growth through effective brand marketing and a differentiated retail experience.
We generate revenue by marketing our innovations to new and existing customers, and selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Online and Phone, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States and the QVC shopping channel.
We are also the only vertically integrated manufacturer/retailer in the U.S. We have two manufacturing plants that distribute Sleep Number products. We also offer mattress home delivery and installation, and maintain an in-house customer service department. This integration enables operational synergies and efficiencies, and a strong working capital position. Vertical integration allows us to build a long-term loyal customer relationship as we service the consumer through the full purchase and ownership cycle. This relationship with our customer creates a productive cycle of repeat and referral business.
Mission and Vision
Our mission is to improve lives by individualizing sleep experiences.
Our vision is to become one of the world's most beloved brands by delivering an unparalleled sleep experience. We plan to achieve this by offering benefit-driven, innovative sleep solutions to our customers through an unmatched retail experience and a carefree ownership experience.
Results of Operations
Fiscal
2016
Summary
Financial highlights for
fiscal 2016
were as follows:
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In the fourth of quarter 2015, we replaced our nearly 20-year-old legacy computer systems with a new vertically integrated Enterprise Resource Planning (ERP) system. We completed our ERP implementation by the end of the first quarter of 2016. Implementation issues negatively affected fourth-quarter 2015 net sales and profits, and to a lesser degree, first-quarter and second-quarter 2016 net sales and profits. The new operating platform enables operational efficiencies, improved customer convenience and supports the growth of our business.
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Net sales for
2016
increased
8%
to
$1.31 billion
, compared with
$1.21 billion
in the prior year. Company-Controlled comparable sales increased
1%
and sales from
52
net new stores opened in the past 12 months added 7 percentage points (ppt.) of growth in 2016.
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On a trailing twelve-month basis, sales per store (for stores open at least one year) of
$2.4 million
were consistent with the prior-year comparable period.
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Operating income for
2016
increased
2%
to
$77 million
, or
5.8%
of net sales, compared with
$75 million
, or
6.2%
of net sales, for the same period one year ago. The increase in operating income was attributable to: (i) the
8% increase in net sales and a 0.8
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ppt. improvement in our gross profit rate; partially offset by (ii) $12 million of additional research and development expenses to support the advancement of our product innovation pipeline, including expenses related to SleepIQ LABS' operations (acquired on September 15, 2015); (iii) an increase in expenses associated with operating
52
net new stores; and (iv) an increase in general and administrative expenses to support the growth of the business, including depreciation on our new ERP system that was launched in the fourth-quarter of 2015.
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Net income
increased
2%
to
$51.4 million
, or
$1.10
per diluted share, compared with net income of
$50.5 million
, or
$0.97
per diluted share in
2015
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We achieved a return on invested capital (ROIC) of
12.2%
in
2016
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Cash provided by operating activities in
2016
totaled
$152 million
, compared with
$108 million
for the prior year. With the completion of our ERP implementation, investing activities for 2016 decreased to $58 million of property and equipment purchases, compared with $86 million in 2015.
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At
December 31, 2016
, cash, cash equivalents and marketable debt securities totaled
$12 million
compared with
$36 million
at
January 2, 2016
, and we had no borrowings under our $150 million revolving credit facility.
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In
2016
, we repurchased
5.9 million
shares of our common stock under our Board-approved share repurchase program at a cost of
$125 million
(
$21.02
per share). Effective as of July 3, 2016, our Board approved an increase in our total remaining share repurchase authorization to
$300 million
. As of
December 31, 2016
, the remaining authorization under our Board-approved share repurchase program was
$245 million
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The following table sets forth our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.
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2016
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2015
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2014
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$
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% of
Net Sales
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$
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% of
Net Sales
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$
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% of
Net Sales
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Net sales
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$
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1,311.3
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100.0
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%
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$
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1,213.7
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100.0
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%
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$
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1,156.8
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100.0
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%
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Cost of sales
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501.1
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38.2
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472.9
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39.0
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449.9
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38.9
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Gross profit
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810.2
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61.8
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740.8
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61.0
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706.9
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61.1
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Operating expenses:
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Sales and marketing
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595.8
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45.4
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550.5
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45.4
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512.0
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44.3
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General and administrative
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109.7
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8.4
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99.2
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8.2
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84.9
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7.3
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Research and development
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28.0
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2.1
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16.0
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1.3
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8.2
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0.7
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Total operating expenses
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733.5
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55.9
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665.7
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54.8
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605.1
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52.3
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Operating income
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76.7
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5.8
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75.1
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6.2
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101.7
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8.8
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Other (expense) income, net
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(0.7
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)
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(0.1
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)
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0.3
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0.0
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0.4
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0.0
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Income before income taxes
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75.9
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5.8
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75.4
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6.2
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102.1
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8.8
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Income tax expense
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24.5
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1.9
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24.9
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2.1
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34.1
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3.0
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Net income
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$
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51.4
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3.9
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%
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$
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50.5
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4.2
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%
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$
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68.0
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5.9
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%
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Net income per share:
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Basic
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$
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1.11
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$
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0.99
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$
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1.27
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Diluted
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$
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1.10
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$
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0.97
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$
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1.25
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Weighted-average number of common shares:
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Basic
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46.2
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51.3
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53.5
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Diluted
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46.9
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52.1
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54.2
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The percentage of our total net sales, by dollar volume, from each of our channels was as follows:
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2016
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2015
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2014
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Company-Controlled channel
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97.7
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%
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97.6
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%
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97.3
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%
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Wholesale/Other channel
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2.3
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%
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2.4
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%
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2.7
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%
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Total
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100.0
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%
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100.0
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%
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100.0
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%
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The components of total net sales growth, including comparable net sales changes, were as follows:
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Net Sales Increase/(Decrease)
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2016
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2015
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2014
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Retail comparable-store sales
(1)
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0
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%
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3
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%
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12
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%
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Online and Phone
(1)
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25
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%
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(4
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%)
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9
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%
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Company-Controlled comparable sales change
(1)
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1
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%
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3
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%
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12
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%
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Net opened/closed stores and 53
rd
week in 2014
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7
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%
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2
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%
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10
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%
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Total Company-Controlled channel
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8
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%
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5
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%
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22
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%
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Wholesale/Other channel
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5
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%
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(9
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%)
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(13
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%)
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Total net sales change
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8
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%
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5
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%
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20
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%
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(1)
Stores are included in the comparable-store calculation 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. Fiscal 2014 included 53 weeks, as compared to 52 weeks in fiscal 2016 and 2015. Comparable-store sales have been adjusted to remove the estimated impact of the additional week for fiscal 2014.
Other sales metrics were as follows:
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2016
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2015
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2014
(3)
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Average sales per store
(1)
($ in thousands)
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$
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2,364
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$
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2,377
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$
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2,327
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Average sales per square foot
(1)
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$
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937
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$
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980
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$
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1,025
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Stores > $1 million in net sales
(1)
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98
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%
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99
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%
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98
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%
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Stores > $2 million in net sales
(1)
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61
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%
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62
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%
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59
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%
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Average revenue per mattress unit – Company-Controlled channel
(2)
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$
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4,046
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$
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4,028
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$
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3,671
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(1)
Trailing twelve months for stores included in our comparable store sales calculation.
(2)
Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.
(3)
Fiscal 2014 included 53 weeks, as compared to 52 weeks in fiscal 2016 and 2015. Company-Controlled comparable sales metrics have been adjusted to remove the estimated impact of the additional week on those metrics.
The number of retail stores operating during the last three years was as follows:
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2016
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2015
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2014
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Beginning of period
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488
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463
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440
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Opened
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72
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38
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57
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Closed
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(20
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)
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(13
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(34
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End of period
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540
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488
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463
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Comparison of
2016
and
2015
Enterprise Resource Planning (ERP) system implementation
In the fourth of quarter 2015, we replaced our nearly 20-year-old legacy computer systems with a new vertically integrated Enterprise Resource Planning (ERP) system. We completed our ERP implementation by the end of the first quarter of 2016. Implementation issues negatively affected fourth-quarter 2015 net sales and profits, and to a lesser degree, first-quarter and second-quarter 2016 net sales and profits. The new operating platform enables operational efficiencies, improved customer convenience and supports the growth of our business.
Net sales
Net sales in
2016
increased
8%
to
$1.31 billion
, compared with
$1.21 billion
for the same period one year ago. The sales increase was driven by a
1%
comparable sales
increase
in our Company-Controlled channel, 7 percentage points (ppt.) of growth from sales generated by
52
net new retail stores opened in the past 12 months and an increase in Wholesale/Other channel sales.
The
$98 million
net sales increase compared with the same period one year ago was primarily comprised of an $83 million increase resulting from net store openings and a $14 million sales increase from Company-Controlled comparable sales. Company-Controlled mattress units increased 8% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel was consistent with the prior year.
Gross profit
Gross profit of
$810 million
increased by
$69 million
, or
9%
, compared with the same period one year ago. The gross profit rate increased to
61.8%
of net sales for
2016
, compared with
61.0%
for the prior-year period. The 0.8 ppt. increase in the gross profit rate was primarily due to material cost reductions, operating efficiencies, and lower sales return and exchange costs. In addition, our gross profit rate can fluctuate from year-to-year due to a variety of other factors, including warranty expenses, product mix changes and performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses in
2016
increased
8%
to
$596 million
, compared with
$550 million
last year. The marketing expense rate of
45.4%
of net sales was consistent with the same period one year ago due to: (i) leveraging our media spending, which increased by 5% compared with the prior year, while net sales increased by 8%; partially offset by (ii) higher customer service costs; and (iii) an increase in customer financing expenses, as a larger percentage of our customers took advantage of promotional financing offers.
General and administrative expenses
General and administrative (G&A) expenses
increased
$10.5 million
to
$110 million
in
2016
, compared with
$99 million
in the prior year and increased to
8.4%
of net sales, compared with
8.2%
of net sales one year ago. The
$10.5 million
increase in G&A expenses consisted of the following major components: (i) a $10.4 million increase in employee compensation, including headcount increases to support business growth initiatives, and salary and wage rate increases that were in line with inflation; (ii) $6.5 million of additional
depreciation expense resulting from the increase in capital expenditures to support the growth of the business, including our new ERP system that was launched in the fourth quarter of 2015; (iii) a $3.5 million gain (net of acquisition-related expenses) in 2015 related to our previously held minority equity investment in BAM Labs, Inc.; and (iv) a
$1.5 million increase in miscellaneous other expenses. These increases were partially offset by $11.6 million of data conversion and training expenses incurred in 2015 to support the launch of our ERP system. The G&A expense rate increased by 0.2 ppt. in 2016 compared with the same period one year ago due to the increase in expenses discussed above, partially offset by the leveraging impact of the
8%
net sales increase.
Research and development expenses
Research and development expenses for the
year ended
December 31, 2016
were
$28 million
, or
2.1%
of net sales, compared with
$16 million
, or
1.3%
of net sales, for the same period one year ago. The
$12 million
increase in R&D expenses was due to increased investments to support product innovations, including a $9.7 million increase in expenses related to SleepIQ LABS' operations (post acquisition; acquired on September 15, 2015). The
$12 million
increase is consistent with our long-term consumer innovation strategy.
Income tax expense
Income tax expense was
$25 million
for the
year ended
December 31, 2016
, compared with
$25 million
for the same period one year ago. The effective tax rate for the
year ended
December 31, 2016
was
32.3%
compared with
33.0%
for the prior-year period. The effective tax rates for 2016 and 2015 include tax benefits associated with our acquisition of BAM Labs, including higher research and development tax credits.
Comparison of 2015 and 2014
Enterprise Resource Planning (ERP) system implementation
In the fourth quarter 2015, we replaced our nearly 20-year-old legacy computer systems with a new vertically-integrated Enterprise Resource Planning (ERP) system. We experienced technical and operational issues in our plants and supply chain as we ramped up the new system, which led to delivery delays and inconveniences for our customers. The lost sales and increases in cost of sales and operating expenses negatively impacted 2015 results by approximately $0.40 per diluted share ($0.43 per diluted share for the fourth quarter).
Net sales
Net sales in 2015 increased 5% to $1.21 billion, compared with $1.16 billion for the same period one year ago. The sales increase was driven by a 3% comparable sales increase in our Company-Controlled channel and sales from 25 net new retail stores opened in the past 12 months. During the first nine months of 2015, demand for our latest product innovations and more effective marketing drove traffic to our stores and contributed to a 20% year-to-date net sales increase. However, net sales decreased 33% in the fourth quarter compared to the prior year, reflecting approximately $84 million in sales disruptions from our ERP system implementation. In addition, 2015 included 52 weeks compared with 53 weeks in 2014, with the extra week benefiting 2014 net sales growth by approximately $24 million.
The $57 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $52 million increase resulting from net store openings; and (ii) a $31 million sales increase from Company-Controlled comparable sales; partially offset by (iii) an approximately $24 million sales decrease as the prior year included an extra week of net sales (52-week year 2015 vs. 53-week year 2014); and (iv) a $2 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units decreased 4% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by 10%.
Gross profit
Gross profit of $741 million increased by $34 million, or 5%, compared with the same period one year ago. The gross profit rate decreased to 61.0% of net sales for 2015, compared with 61.1% for the prior-year period. The 0.1 percentage points (ppt.) decrease in the gross profit rate was primarily due to: (i) appeasements, labor inefficiencies, material costs and excess freight from actions taken to manage our fourth-quarter 2015 ERP issues; partially offset by (ii) favorable product mix changes resulting from advancements in our selling process and product innovations over the last 12 months. In addition, our gross profit rate can fluctuate from year-to-year due to a variety of other factors, including return and exchange costs, raw materials price fluctuations, warranty expenses and performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses in 2015 increased 8% to $550 million, or 45.4% of net sales, compared with $512 million, or 44.3% of net sales, for the same period one year ago. The 1.1 ppt. increase in the sales and marketing expense rate in the current period was mainly due to the deleveraging impact resulting from the approximately $84 million in sales disruptions associated with our fourth-quarter 2015 ERP system implementation.
General and administrative expenses
General and administrative (G&A) expenses increased $14 million to $99 million in 2015, compared with $85 million in the prior year, and increased to 8.2% of net sales, compared with 7.3% of net sales one year ago. G&A expenses for 2015 included 52 weeks of expenses compared with 53 weeks in 2014. The $14 million increase in G&A expenses consisted of the following major components: (i) $11.6 million of ERP launch costs in 2015, including data conversion and training expenses; (ii) $4.5 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the business, including our new digital website that was launched in the second quarter of 2014 and our new ERP system that was launched in the fourth quarter of
2015; (iii) $4.1 million of higher professional fees, including additional costs associated with proxy preparation, filing and consulting services; and (iv) a $2.2 million increase in miscellaneous other expenses. These increases were partially offset by: (i) a $4.9 million decrease in employee compensation, including a year-over-year reduction in company-wide performance-based incentive compensation; and (ii) a $3.5 million gain (net of acquisition-related expenses) related to our previously held minority equity investment in BAM Labs, Inc. The G&A expense rate increased by 0.9 ppt. in the current period compared with the same period one year ago due to the increase in expenses discussed above, partially offset by the leveraging impact of the 5% net sales increase.
Research and development expenses
Research and development expenses for the year ended January 2, 2016 were $16 million, or 1.3% of net sales, compared with $8 million, or 0.7% of net sales, for the same period one year ago. The $8 million increase in R&D expenses was due to increased investments to support product innovations, including $3.3 million of expenses related to SleepIQ LABS' operations (post acquisition; acquired on September 15, 2015). The $8 million increase is consistent with our long-term consumer innovation strategy.
Income tax expense
Income tax expense was $25 million for the year ended January 2, 2016, compared with $34 million for the same period one year ago. The effective tax rate for the year ended January 2, 2016 was 33.0% compared with 33.4% for the prior-year period. The decrease in the effective tax rate primarily resulted from tax planning benefits associated with the BAM Labs, Inc. acquisition gain, partially offset by a reduction in our manufacturing deduction driven by increased year-over-year bonus tax depreciation.
Liquidity and Capital Resources
Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value. Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $150 million revolving credit facility. The cash generated from ongoing operations, and cash available under our revolving credit facility are expected to be adequate to maintain operations and fund anticipated expansion and strategic initiatives for the foreseeable future.
As of
December 31, 2016
, cash, cash equivalents and marketable debt securities totaled
$12 million
compared with
$36 million
as of
January 2, 2016
. The
$25 million
decrease was primarily due to
$152 million
of cash provided by operating activities, which was more than offset by
$58 million
of cash used to purchase property and equipment and
$127 million
of cash used to repurchase our common stock (
$125 million
under our Board-approved share repurchase program and
$1.7 million
in connection with the vesting of employee restricted stock grants).
The following table summarizes our cash flows (dollars in millions). Amounts may not add due to rounding differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Total cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
|
$
|
151.6
|
|
|
$
|
107.9
|
|
|
Investing activities
|
|
(42.7
|
)
|
|
(44.3
|
)
|
|
Financing activities
|
|
(118.4
|
)
|
|
(94.7
|
)
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(9.4
|
)
|
|
$
|
(31.0
|
)
|
Cash provided by operating activities for the fiscal year ended
December 31, 2016
was
$152 million
compared with
$108 million
for the fiscal year ended
January 2, 2016
. Significant components of the
$44 million
year-over-year
increase
in cash from operating activities included: (i) a $39 million fluctuation in income taxes based on a $15 million income taxes receivable at the end of 2015 compared with income tax liabilities at the end of 2016 and 2014; (ii) a $20 million fluctuation in accrued compensation and benefits which primarily resulted from year-over-year changes in company-wide performance-based incentive compensation that was earned in 2014 and paid in the first quarter of 2015, compared with no company-wide incentive compensation accrued at the end of 2015 and paid in 2016; and (iii) the ERP implementation issues we experienced in our plants and supply chain during the fourth quarter of 2015 that resulted in higher inventory levels, increased accounts receivables, increased accounts payables and higher customer prepayments at the end of 2015.
Net cash used in investing activities was
$43 million
for the fiscal year ended
December 31, 2016
, compared with
$44 million
for the same period one year ago. With the completion of our ERP implementation, investing activities for the current-year period decreased
to $58 million of property and equipment purchases, compared with $86 million for the same period last year. We
decreased
our net investments in marketable debt securities by
$15 million
during the fiscal year ended
December 31, 2016
, compared with a net decrease of
$98 million
during the comparable period one year ago. In September 2015, we completed the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS). We previously held a $6.0 million minority equity investment in BAM Labs, Inc. based on the cost method. In connection with the acquisition, our equity investment was remeasured to a fair value of $12.9 million and we acquired the remaining capital stock in BAM Labs, Inc. for $57.1 million for a total enterprise value of $70.0 million. See Note 2,
Acquisition of BAM Labs, Inc.,
and Note 4,
Investments,
of the Notes to Consolidated Financial Statements for additional details.
Net cash
used in
financing activities was
$118 million
for the fiscal year ended
December 31, 2016
, compared with net cash
used in
financing activities of
$95 million
for the same period one year ago. During the fiscal year ended
December 31, 2016
, we repurchased
$127 million
of our common stock ($125 million under our Board-approved share repurchase program and $1.7 million in connection with the vesting of employee restricted stock grants) compared with
$100 million
during the same period one year ago. Changes in book overdrafts are included in the net change in short-term borrowings. Financing activities for both periods reflect the cash proceeds from the exercise of employee stock options along with the excess tax benefits related to stock-based compensation.
Under our Board-approved share repurchase program, we repurchased
5.9 million
shares at a cost of
$125 million
(
$21.02
per share) during the fiscal year ended
December 31, 2016
. During 2015, we repurchased
3.6 million
shares at a cost of
$98 million
(
$27.46
per share). As of
December 31, 2016
, the remaining authorization under our Board-approved share repurchase program was
$245 million
. There is no expiration date governing the period over which we can repurchase shares.
Our revolving credit facility, as amended, has a net aggregate availability of
$150 million
. The credit facility is for general corporate purposes. The credit facility contains an accordion feature that allows us to increase the amount of the available credit from
$150 million
up to
$200 million
, subject to lenders' approval. The credit facility matures in
February 2021
.
The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio. As of
December 31, 2016
, we had no outstanding borrowings or letters of credit 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 purchases from us (Synchrony Agreement). The Synchrony Agreement contains certain financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio. As of
December 31, 2016
, 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.
Off-Balance-Sheet Arrangements and Contractual Obligations
As of
December 31, 2016
, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating leases, we do not have any off-balance-sheet financing. There were no outstanding letters of credit at
December 31, 2016
. A summary of our operating lease obligations is included in the “Contractual Obligations” section (as follows). Additional information regarding our operating leases is available in Item 2,
Properties
, and Note 8,
Leases
, of the Notes to Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data
, of this Annual Report on Form 10-K.
Contractual Obligations
The following table presents information regarding our contractual obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
(1)
|
|
|
|
Total
|
|
< 1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
> 5 Years
|
|
Operating leases
(2)
|
|
$
|
392,397
|
|
|
$
|
66,493
|
|
|
$
|
108,286
|
|
|
$
|
80,379
|
|
|
$
|
137,239
|
|
|
Purchase commitments
|
|
5,500
|
|
|
5,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
397,897
|
|
|
$
|
71,993
|
|
|
$
|
108,286
|
|
|
$
|
80,379
|
|
|
$
|
137,239
|
|
___________________
(1)
Our unrecognized tax benefits, including interest and penalties, of
$3 million
have not been included in the Contractual Obligations table as we are not able to determine a reasonable estimate of timing of the cash settlement with the respective taxing authorities.
(2)
These amounts include the payments related to
33
lease commitments for future retail store locations and a lease commitment for our corporate facilities. These lease commitments provide for minimum rentals over the next
five
to 15 years, which if consummated based on current cost estimates, would approximate
$96 million
over the initial lease term.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, sales, expenses and the related disclosure. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1,
Business and Summary of Significant Accounting
Policies
, of the Notes to Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data
, of this Annual Report on Form 10-K. Management believes the accounting policies discussed below are the most critical because they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and estimates, and related disclosures with the Audit Committee of our Board.
Our critical accounting policies and estimates relate to stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.
|
|
|
|
|
|
|
|
|
Description
|
|
Judgments and Uncertainties
|
|
Effect if Actual Results
Differ From Assumptions
|
|
Stock-Based Compensation
|
|
|
|
|
|
We have stock-based compensation plans, which includes non-qualified stock options and stock awards.
See Note 1,
Business and Summary of Significant Accounting Policies
, and Note 10,
Shareholders’ Equity
, to the Notes to Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data
, of this Annual Report on Form 10-K, for a complete discussion of our stock-based compensation programs.
|
|
Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, future employee forfeiture rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimates or future earnings adjustments.
Performance-based stock awards require management to make assumptions regarding the likelihood of achieving performance targets.
|
|
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material.
In addition, if actual results are not consistent with the assumptions used, the stock-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the stock-based compensation. Finally, if the actual forfeiture rates, or the actual achievement of performance targets, are not consistent with the assumptions used, we could experience future earnings adjustments.
A 10% change in our stock-based compensation expense for the year ended December 31, 2016, would have affected net income by approximately $801,000 in 2016.
|
|
|
|
|
|
|
|
|
|
Goodwill and Indefinite-Lived Intangible Assets
|
|
Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Our indefinite-lived intangible assets include trade names/trademarks.
See Note 1,
Business and Summary of Significant Accounting Policies
and Note 7,
Goodwill and Intangible Assets, Net
, to the Notes to Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data
, of this Annual Report on Form 10-K, for a complete discussion of our goodwill and indefinite-lived intangible assets.
|
|
The determination of fair value involves uncertainties because it requires management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. Management’s assumptions also include projected revenues, operating profit levels and discount rates, as well as consideration of any other factors that may indicate potential impairment.
|
|
In the fourth quarter of fiscal 2016, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests and determined there was no impairment. We believe our assumptions and judgments used in estimating cash flows and determining fair value were reasonable. However, unexpected changes to such assumptions and judgments could affect our impairment analyses and future results of operations, including an impairment charge that could be material.
|
|
|
|
|
|
|
|
|
|
Description
|
|
Judgments and Uncertainties
|
|
Effect if Actual Results
Differ From Assumptions
|
|
Warranty Liabilities
|
|
|
|
|
|
We provide a limited warranty on most of the products we sell.
See Note 1,
Business and Summary of Significant Accounting Policies
, to the Notes to Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data
, of this Annual Report on Form 10-K, for a complete discussion of our warranty program and liabilities.
|
|
The majority of our warranty claims are incurred within the first year. However, our warranty liability contains uncertainties because our warranty obligations cover an extended period of time. A revision of estimated claim rates or the projected cost of materials and freight associated with sending replacement parts to customers could have a material adverse effect on future results of operations.
|
|
We have not made any material changes in our warranty liability assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our warranty liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10% change in our warranty liability at December 31, 2016, would have affected net income by approximately $578,000 in 2016.
|
|
Revenue Recognition
|
|
Certain accounting estimates relating to revenue recognition contain uncertainty because they require management to make assumptions and to apply judgment regarding the effects of future events.
See Note 1,
Business and Summary of Significant Accounting Policies
,
to the Notes to Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data
, of this Annual Report on Form 10-K, for a complete discussion of our revenue recognition policies.
|
|
Our estimates of sales returns contain uncertainties as actual sales return rates may vary from expected rates, resulting in adjustments to net sales in future periods. These adjustments could have an adverse effect on future results of operations.
|
|
We have not made any material changes in the accounting methodology used to establish our sales returns allowance during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our sales returns allowance. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to additional losses or gains in future periods.
A 10% change in our sales returns allowance at December 31, 2016 would have affected net income by approximately $1.0 million in 2016.
|
Recent Accounting Pronouncements
See “Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1 – Business and Summary of Significant Accounting Policies - New Accounting Pronouncements” for recent accounting pronouncements that may affect our financial reporting.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Select Comfort Corporation
Minneapolis, Minnesota
We have audited the internal control over financial reporting of Select Comfort Corporation and subsidiaries (the “Company”) as of December 31, 2016, based on the criteria established in
Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in
Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended December 31, 2016, of the Company and our report dated February 24, 2017 expressed an unqualified opinion on those consolidated financial statements and the financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 24, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Select Comfort Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Select Comfort Corporation and subsidiaries (the “Company”) as of December 31, 2016 and January 2, 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016, and January 2, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in
Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 24, 2017
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2016
and
January 2, 2016
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
11,609
|
|
|
$
|
20,994
|
|
|
Marketable debt securities – current
|
—
|
|
|
6,567
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $884 and $1,039, respectively
|
19,705
|
|
|
29,002
|
|
|
Inventories
|
75,026
|
|
|
86,600
|
|
|
Income taxes receivable
|
—
|
|
|
15,284
|
|
|
Prepaid expenses
|
8,705
|
|
|
10,207
|
|
|
Other current assets
|
23,282
|
|
|
13,737
|
|
|
Total current assets
|
138,327
|
|
|
182,391
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
Marketable debt securities – non-current
|
—
|
|
|
8,553
|
|
|
Property and equipment, net
|
208,367
|
|
|
204,376
|
|
|
Goodwill and intangible assets, net
|
80,817
|
|
|
83,344
|
|
|
Deferred income taxes
|
4,667
|
|
|
3,036
|
|
|
Other non-current assets
|
24,988
|
|
|
19,197
|
|
|
Total assets
|
$
|
457,166
|
|
|
$
|
500,897
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
105,375
|
|
|
$
|
103,941
|
|
|
Customer prepayments
|
26,207
|
|
|
51,473
|
|
|
Accrued sales returns
|
15,222
|
|
|
20,562
|
|
|
Compensation and benefits
|
19,455
|
|
|
15,670
|
|
|
Taxes and withholding
|
23,430
|
|
|
9,856
|
|
|
Other current liabilities
|
35,628
|
|
|
23,447
|
|
|
Total current liabilities
|
225,317
|
|
|
224,949
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
Other non-current liabilities
|
71,529
|
|
|
53,609
|
|
|
Total liabilities
|
296,846
|
|
|
278,558
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding
|
—
|
|
|
—
|
|
|
Common stock, $0.01 par value; 142,500 shares authorized, 43,569 and 49,402 shares issued and outstanding, respectively
|
436
|
|
|
494
|
|
|
Additional paid-in capital
|
—
|
|
|
—
|
|
|
Retained earnings
|
159,884
|
|
|
221,859
|
|
|
Accumulated other comprehensive loss
|
—
|
|
|
(14
|
)
|
|
Total shareholders’ equity
|
160,320
|
|
|
222,339
|
|
|
Total liabilities and shareholders’ equity
|
$
|
457,166
|
|
|
$
|
500,897
|
|
See accompanying notes to consolidated financial statements.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended
December 31, 2016
,
January 2, 2016
and
January 3, 2015
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net sales
|
$
|
1,311,291
|
|
|
$
|
1,213,699
|
|
|
$
|
1,156,757
|
|
|
Cost of sales
|
501,131
|
|
|
472,948
|
|
|
449,907
|
|
|
Gross profit
|
810,160
|
|
|
740,751
|
|
|
706,850
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
595,845
|
|
|
550,475
|
|
|
512,007
|
|
|
General and administrative
|
109,674
|
|
|
99,209
|
|
|
84,864
|
|
|
Research and development
|
27,991
|
|
|
15,971
|
|
|
8,233
|
|
|
Total operating expenses
|
733,510
|
|
|
665,655
|
|
|
605,104
|
|
|
Operating income
|
76,650
|
|
|
75,096
|
|
|
101,746
|
|
|
Other (expense) income, net
|
(717
|
)
|
|
334
|
|
|
362
|
|
|
Income before income taxes
|
75,933
|
|
|
75,430
|
|
|
102,108
|
|
|
Income tax expense
|
24,516
|
|
|
24,911
|
|
|
34,134
|
|
|
Net income
|
$
|
51,417
|
|
|
$
|
50,519
|
|
|
$
|
67,974
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
Net income per share – basic
|
$
|
1.11
|
|
|
$
|
0.99
|
|
|
$
|
1.27
|
|
|
Weighted-average shares – basic
|
46,154
|
|
|
51,252
|
|
|
53,452
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
Net income per share – diluted
|
$
|
1.10
|
|
|
$
|
0.97
|
|
|
$
|
1.25
|
|
|
Weighted-average shares – diluted
|
46,902
|
|
|
52,101
|
|
|
54,193
|
|
See accompanying notes to consolidated financial statements.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended
December 31, 2016
,
January 2, 2016
and
January 3, 2015
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net income
|
|
$
|
51,417
|
|
|
$
|
50,519
|
|
|
$
|
67,974
|
|
|
Other comprehensive income (loss) – unrealized gain (loss) on available-for-sale marketable debt securities, net of income tax
|
|
14
|
|
|
20
|
|
|
(47
|
)
|
|
Comprehensive income
|
|
$
|
51,431
|
|
|
$
|
50,539
|
|
|
$
|
67,927
|
|
See accompanying notes to consolidated financial statements.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years ended
December 31, 2016
,
January 2, 2016
and
January 3, 2015
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
Total
|
|
Shares
|
|
Amount
|
|
Balance at December 28, 2013
|
54,901
|
|
|
$
|
549
|
|
|
$
|
5,382
|
|
|
$
|
219,276
|
|
|
$
|
13
|
|
|
$
|
225,220
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
67,974
|
|
|
—
|
|
|
67,974
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale marketable debt securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47
|
)
|
|
(47
|
)
|
|
Exercise of common stock options
|
239
|
|
|
2
|
|
|
2,871
|
|
|
—
|
|
|
—
|
|
|
2,873
|
|
|
Tax effect from stock-based compensation
|
—
|
|
|
—
|
|
|
581
|
|
|
—
|
|
|
—
|
|
|
581
|
|
|
Stock-based compensation
|
(96
|
)
|
|
(1
|
)
|
|
6,799
|
|
|
—
|
|
|
—
|
|
|
6,798
|
|
|
Repurchases of common stock
|
(2,246
|
)
|
|
(22
|
)
|
|
(15,633
|
)
|
|
(30,837
|
)
|
|
—
|
|
|
(46,492
|
)
|
|
Balance at January 3, 2015
|
52,798
|
|
|
$
|
528
|
|
|
$
|
—
|
|
|
$
|
256,413
|
|
|
$
|
(34
|
)
|
|
$
|
256,907
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
50,519
|
|
|
—
|
|
|
50,519
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale marketable debt securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
20
|
|
|
Exercise of common stock options
|
253
|
|
|
3
|
|
|
2,973
|
|
|
—
|
|
|
—
|
|
|
2,976
|
|
|
Tax effect from stock-based compensation
|
—
|
|
|
—
|
|
|
1,828
|
|
|
—
|
|
|
—
|
|
|
1,828
|
|
|
Stock-based compensation
|
(7
|
)
|
|
—
|
|
|
10,290
|
|
|
—
|
|
|
—
|
|
|
10,290
|
|
|
Repurchases of common stock
|
(3,642
|
)
|
|
(37
|
)
|
|
(15,091
|
)
|
|
(85,073
|
)
|
|
—
|
|
|
(100,201
|
)
|
|
Balance at January 2, 2016
|
49,402
|
|
|
$
|
494
|
|
|
$
|
—
|
|
|
$
|
221,859
|
|
|
$
|
(14
|
)
|
|
$
|
222,339
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
51,417
|
|
|
—
|
|
|
51,417
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale marketable debt securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
14
|
|
|
Exercise of common stock options
|
188
|
|
|
2
|
|
|
2,296
|
|
|
—
|
|
|
—
|
|
|
2,298
|
|
|
Tax effect from stock-based compensation
|
—
|
|
|
—
|
|
|
(1,016
|
)
|
|
—
|
|
|
—
|
|
|
(1,016
|
)
|
|
Stock-based compensation
|
11
|
|
|
—
|
|
|
11,961
|
|
|
—
|
|
|
—
|
|
|
11,961
|
|
|
Repurchases of common stock
|
(6,032
|
)
|
|
(60
|
)
|
|
(13,241
|
)
|
|
(113,392
|
)
|
|
—
|
|
|
(126,693
|
)
|
|
Balance at December 31, 2016
|
43,569
|
|
|
$
|
436
|
|
|
$
|
—
|
|
|
$
|
159,884
|
|
|
$
|
—
|
|
|
$
|
160,320
|
|
See accompanying notes to consolidated financial statements.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended
December 31, 2016
,
January 2, 2016
and
January 3, 2015
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
$
|
51,417
|
|
|
$
|
50,519
|
|
|
$
|
67,974
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
57,172
|
|
|
47,630
|
|
|
39,809
|
|
|
Stock-based compensation
|
11,961
|
|
|
10,290
|
|
|
6,798
|
|
|
Net loss on disposals and impairments of assets
|
27
|
|
|
190
|
|
|
492
|
|
|
Excess tax benefits from stock-based compensation
|
(517
|
)
|
|
(2,182
|
)
|
|
(1,163
|
)
|
|
Deferred income taxes
|
(1,640
|
)
|
|
11,924
|
|
|
(311
|
)
|
|
Gain on sale of non-marketable equity securities
|
—
|
|
|
(6,891
|
)
|
|
—
|
|
|
Changes in operating assets and liabilities, net of effect of acquisition:
|
|
|
|
|
|
|
|
Accounts receivable
|
9,297
|
|
|
(9,259
|
)
|
|
(4,717
|
)
|
|
Inventories
|
11,574
|
|
|
(33,065
|
)
|
|
(13,383
|
)
|
|
Income taxes
|
25,119
|
|
|
(13,943
|
)
|
|
(4,314
|
)
|
|
Prepaid expenses and other assets
|
(2,195
|
)
|
|
8,680
|
|
|
(9,973
|
)
|
|
Accounts payable
|
(4,965
|
)
|
|
19,130
|
|
|
14,340
|
|
|
Customer prepayments
|
(25,266
|
)
|
|
22,735
|
|
|
13,334
|
|
|
Accrued compensation and benefits
|
2,808
|
|
|
(17,493
|
)
|
|
17,735
|
|
|
Other taxes and withholding
|
2,723
|
|
|
135
|
|
|
2,584
|
|
|
Other accruals and liabilities
|
14,130
|
|
|
19,542
|
|
|
15,263
|
|
|
Net cash provided by operating activities
|
151,645
|
|
|
107,942
|
|
|
144,468
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Purchases of property and equipment
|
(57,852
|
)
|
|
(85,586
|
)
|
|
(76,594
|
)
|
|
Proceeds from marketable debt securities
|
21,053
|
|
|
127,664
|
|
|
54,506
|
|
|
Investments in marketable debt securities
|
(5,968
|
)
|
|
(29,299
|
)
|
|
(90,349
|
)
|
|
Proceeds from sales of property and equipment
|
92
|
|
|
72
|
|
|
5
|
|
|
Acquisition of business
|
—
|
|
|
(70,018
|
)
|
|
—
|
|
|
Proceeds from (investment in) non-marketable equity securities
|
—
|
|
|
12,891
|
|
|
(1,500
|
)
|
|
Increase in restricted cash
|
—
|
|
|
—
|
|
|
(500
|
)
|
|
Net cash used in investing activities
|
(42,675
|
)
|
|
(44,276
|
)
|
|
(114,432
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
(126,693
|
)
|
|
(100,201
|
)
|
|
(46,492
|
)
|
|
Net increase in short-term borrowings
|
5,932
|
|
|
1,097
|
|
|
6,192
|
|
|
Proceeds from issuance of common stock
|
2,298
|
|
|
2,976
|
|
|
2,873
|
|
|
Excess tax benefits from stock-based compensation
|
517
|
|
|
2,182
|
|
|
1,163
|
|
|
Debt issuance costs
|
(409
|
)
|
|
(721
|
)
|
|
—
|
|
|
Net cash used in financing activities
|
(118,355
|
)
|
|
(94,667
|
)
|
|
(36,264
|
)
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(9,385
|
)
|
|
(31,001
|
)
|
|
(6,228
|
)
|
|
Cash and cash equivalents, at beginning of period
|
20,994
|
|
|
51,995
|
|
|
58,223
|
|
|
Cash and cash equivalents, at end of period
|
$
|
11,609
|
|
|
$
|
20,994
|
|
|
$
|
51,995
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
Income taxes (received) paid
|
$
|
(653
|
)
|
|
$
|
26,681
|
|
|
$
|
38,474
|
|
|
Interest paid
|
$
|
608
|
|
|
$
|
96
|
|
|
$
|
49
|
|
|
Purchases of property and equipment included in accounts payable
|
$
|
5,517
|
|
|
$
|
5,051
|
|
|
$
|
5,802
|
|
See accompanying notes to consolidated financial statements.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Business and Summary of Significant Accounting Policies
Business & Basis of Presentation
Select Comfort Corporation and our 100%-owned subsidiaries (Select Comfort or the Company) have a vertically integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds. We are the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ technology - proprietary sensor technology that works directly with the bed’s DualAir system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Select Comfort also offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products.
As the only national specialty-mattress retailer, we generate revenue by selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Online and Phone, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States and the QVC shopping channel. The consolidated financial statements include the accounts of Select Comfort Corporation and our subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.
Fiscal Year
Our fiscal year ends on the Saturday closest to December 31. Fiscal years and their respective fiscal year ends were as follows: fiscal
2016
ended
December 31, 2016
; fiscal
2015
ended
January 2, 2016
; and fiscal
2014
ended
January 3, 2015
. Fiscal years 2016 and 2015 each had 52 weeks and fiscal year 2014 had 53 weeks.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods. Our critical accounting policies consist of stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The carrying value of these investments approximates fair value due to their short-term maturity. Our banking arrangements allow us to fund outstanding checks when presented to the financial institution for payment, resulting in book overdrafts. Book overdrafts are included in accounts payable in our consolidated balance sheets and in net increase in short-term borrowings in the financing activities section of our consolidated statements of cash flows. Book overdrafts totaled
$26.6 million
and
$20.7 million
at
December 31, 2016
, and
January 2, 2016
, respectively.
Marketable Debt Securities
Our investment portfolio was comprised of U.S. agency securities, corporate debt securities and municipal bonds. The value of these securities was subject to market and credit volatility during the period these investments were held. We classify marketable debt securities as available-for-sale investments and these securities were stated at their estimated fair value. Our investments with original maturities of greater than three months, but current maturities of less than one year, are recorded as marketable debt securities – current. Our investments with current maturities of more than one year are recorded as marketable debt securities – non-current. Unrealized gains and losses, net of income tax, are reported as a component of accumulated other comprehensive income (loss) in our consolidated balance sheets. Other-than-temporary declines in market value, if any, from original cost are charged to other (expense) income, net in the consolidated statements of operations in the period in which the loss occurs, and a new cost basis for the security is
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
established. In determining whether an other-than-temporary decline in the market value has occurred, we consider the duration and extent that the fair value of the investment is below its cost. Realized gains and losses, if any, are calculated on the specific identification method and are measured and reclassified from accumulated other comprehensive income (loss) in our consolidated balance sheets to other (expense) income, net in our consolidated statements of operations.
Concentration of Credit Risk
Our investment policy’s primary focus is to preserve principal and maintain adequate liquidity. Our investment policy addresses the concentration of credit risk by limiting the concentration in certain investment types. Our exposure to a concentration of credit risk consists primarily of cash and cash equivalents. We place our cash with high-credit quality issuers and financial institutions. We previously held investments in U.S. agency securities, corporate debt securities and municipal bonds. We believe no significant concentration of credit risk exists with respect to our cash and cash equivalents.
Accounts Receivable
Accounts receivable are recorded net of an allowance for expected losses and consist primarily of receivables from wholesale customers and receivables from third-party financiers for customer credit card purchases. The allowance is recognized in an amount equal to anticipated future write-offs. We estimate future write-offs based on delinquencies, aging trends, industry risk trends, our historical experience and current trends. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered.
Inventories
Inventories include materials, labor and overhead and are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
Property and Equipment
Property and equipment, carried at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts with any resulting gain or loss included in net income in our consolidated statements of operations. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful life are capitalized.
Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the contractual term of the lease, with consideration of lease renewal options if renewal appears probable.
Estimated useful lives of our property and equipment by major asset category are as follows:
|
|
|
|
|
|
Leasehold improvements
|
5 to 11 years
|
|
Furniture and equipment
|
5 to 7 years
|
|
Production machinery
|
3 to 7 years
|
|
Computer equipment and software
|
3 to 12 years
|
Goodwill and Intangible Assets, Net
Goodwill is the difference between the purchase price of a company and the fair market value of the acquired company's net identifiable assets. Our intangible assets include developed technologies, trade names/trademarks and customer relationships. Definite-lived intangible assets are being amortized using the straight-line method over their estimated lives, ranging from
7
-
10
years.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Asset Impairment Charges
Long-lived Assets and Definite-lived Intangible Assets
- we review our long-lived assets and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the estimated future cash flows (undiscounted and without interest charges - plus proceeds expected from disposition, if any). If the estimated undiscounted cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value. When we recognize an impairment loss, the carrying amount of the asset is reduced to estimated fair value based on discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell. We review retail store assets for potential impairment based on historical cash flows, lease termination provisions and expected future retail store operating results. If we recognize an impairment loss for a depreciable long-lived asset, the adjusted carrying amount of the asset becomes its new cost basis and will be depreciated (amortized) over the remaining useful life of that asset.
Goodwill and Indefinite-lived Intangible Assets
- goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually or when there are indicators of impairment using a fair value approach. The Financial Accounting Standards Board's (FASB) guidance allows us to perform either a quantitative assessment or a qualitative assessment before calculating the fair value of a reporting unit. We have elected to perform the quantitative assessment. The quantitative goodwill impairment test is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of fair value of the reporting unit over the fair value of all identified assets and liabilities. Fair value is determined using a market-based approach utilizing widely accepted valuation techniques, including quoted market prices and our market capitalization. Indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of an asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. Based on our
2016
assessments, we determined there was no impairment.
Warranty Liabilities
We provide a limited warranty on most of the products we sell. The estimated warranty costs, which are expensed at the time of sale and included in cost of sales, are based on historical trends and warranty claim rates incurred by us and are adjusted for any current trends as appropriate. Actual warranty claim costs could differ from these estimates. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.
We classify as non-current those estimated warranty costs expected to be paid out in greater than one year. The activity in the accrued warranty liabilities account was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Balance at beginning of period
|
$
|
10,028
|
|
|
$
|
5,824
|
|
|
$
|
4,153
|
|
|
Additions charged to costs and expenses for current-year sales
|
9,034
|
|
|
9,368
|
|
|
9,437
|
|
|
Deductions from reserves
|
(10,016
|
)
|
|
(6,486
|
)
|
|
(8,118
|
)
|
|
Changes in liability for pre-existing warranties during the current year, including expirations
|
(413
|
)
|
|
1,322
|
|
|
352
|
|
|
Balance at end of period
|
$
|
8,633
|
|
|
$
|
10,028
|
|
|
$
|
5,824
|
|
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Fair Value Measurements
Fair value measurements are reported in one of three levels based on the lowest level of significant input used:
|
|
|
|
•
|
Level 1 – observable inputs such as quoted prices in active markets;
|
|
|
|
|
•
|
Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
|
|
•
|
Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Our Level 2 securities included U.S. Agency bonds, corporate bonds and municipal bonds whose value is determined by a third-party pricing service using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves and benchmark securities. We did not hold any Level 3 securities at December 31, 2016 or January 2, 2016.
We generally estimate fair value of long-lived assets, including our retail stores, using the income approach, which we base on estimated future cash flows (discounted and with interest charges). The inputs used to determine fair value relate primarily to future assumptions regarding sales volumes, gross profit rates, retail store operating expenses and applicable probability weightings regarding future alternative uses. These inputs are categorized as Level 3 inputs under the fair value measurements guidance. The inputs used represent management’s assumptions about what information market participants would use in pricing the assets and are based upon the best information available at the balance sheet date.
Dividends
We are not restricted from paying cash dividends under our credit agreement so long as we are not in default under the credit agreement and so long as the payment of such dividends would not create an event of default. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.
Revenue Recognition
Revenue is recognized when the sales price is fixed or determinable, collectability is reasonably assured and title passes. Amounts billed to customers for delivery and setup are included in net sales. Revenue is reported net of estimated sales returns and excludes sales taxes.
We accept sales returns after a 100-night trial period. The accrued sales returns estimate is based on historical return rates and is adjusted for any current trends as appropriate. If actual returns vary from expected rates, sales in future periods are adjusted.
Our SleepIQ system is a multiple-element arrangement with deliverables that include a bed, hardware and software. We analyze our multiple-element arrangement(s) to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting. We determined that the SleepIQ system has two units of accounting consisting of: (i) the bed; and (ii) the hardware/software. The hardware and software are not separable as the hardware and related software are not sold separately and the software is integral to the hardware’s functionality. We valued the two units of accounting based on their relative selling prices.
At
December 31, 2016
and
January 2, 2016
, we had deferred revenue totaling
$61.3 million
and
$33.6 million
, of which
$21.0 million
and
$7.7 million
are included in other current liabilities, respectively, and
$40.3 million
and
$25.9 million
are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also have related deferred costs totaling
$33.2 million
and
$21.6 million
, of which
$11.6 million
and
$5.0 million
are included in other current assets, respectively, and
$21.6 million
and
$16.6 million
are included in other non-current assets, respectively, in our consolidated balance sheets. The deferred revenue and costs are recognized over the product’s estimated life of
four years
.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Cost of Sales, Sales and Marketing, General and Administrative (G&A) and Research & Development (R&D) Expenses
The following tables summarize the primary costs classified in each major expense category (the classification of which may vary within our industry):
|
|
|
|
|
|
|
Cost of Sales
|
|
Sales & Marketing
|
|
• Costs associated with purchasing, manufacturing, shipping, handling and delivering our products to our retail stores and customers;
• Physical inventory losses, scrap and obsolescence;
• Related occupancy and depreciation expenses;
• Costs associated with returns and exchanges; and
• Estimated costs to service customer warranty claims.
|
|
• Advertising and media production;
• Marketing and selling materials such as brochures, videos, websites, customer mailings and in-store signage;
• Payroll and benefits for sales and customer service staff;
• Store occupancy costs;
• Store depreciation expense;
• Credit card processing fees; and
• Promotional financing costs.
|
|
G&A
|
|
R&D
(1)
|
|
• Payroll and benefit costs for corporate employees, including information technology, legal, human resources, finance, sales and marketing administration, investor relations and risk management;
• Occupancy costs of corporate facilities;
• Depreciation related to corporate assets;
• Information hardware, software and maintenance;
• Insurance;
• Investor relations costs; and
• Other overhead costs.
|
|
• Internal labor and benefits related to research and development activities;
• Outside consulting services related to research and development activities; and
• Testing equipment related to research and development activities.
(1)
Costs incurred in connection with R&D are charged to expense as incurred.
|
Operating 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. In addition, our mall-based retail store leases may require payment of contingent rent based on net sales in excess of certain thresholds. Certain retail store leases may contain options to extend the term of the original lease.
Minimum rent expense, which excludes contingent rents, is recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in other current liabilities or other non-current liabilities, as appropriate. 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. At
December 31, 2016
, and
January 2, 2016
, deferred rent included in other current liabilities in our consolidated balance sheets was
$0.2 million
and
$0.4 million
, respectively, and deferred rent included in other non-current liabilities in our consolidated balance sheets was
$9.6 million
and
$7.5 million
, respectively. Contingent rent expense is recorded when it is probable the expense 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 minimum lease payments.
Leasehold improvements that are funded by landlord incentives or allowances under an operating lease are recorded as deferred lease incentives, in other current liabilities or other non-current liabilities, as appropriate and amortized as reductions to rent expense over the lease term. At
December 31, 2016
, and
January 2, 2016
, deferred lease incentives included in other current liabilities in our consolidated balance sheets were
$2.9 million
and
$2.8 million
, respectively, and deferred lease incentives included in other non-current liabilities in our consolidated balance sheets were
$8.9 million
and
$7.9 million
, respectively.
Pre-Opening Costs
Costs associated with the start-up and promotion of new retail store openings are expensed as incurred.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Advertising Costs
We incur advertising costs associated with print, digital and broadcast advertisements. Advertising costs are charged to expense when the ad first runs. Advertising expense was
$189.8 million
,
$180.8 million
and
$158.5 million
in
2016
,
2015
and
2014
, respectively. Advertising costs deferred and included in prepaid expenses in our consolidated balance sheets were
$1.2 million
and
$4.5 million
as of
December 31, 2016
, and
January 2, 2016
, respectively.
Insurance
We are self-insured for certain losses related to health and workers’ compensation claims, although we obtain third-party insurance coverage to limit exposure to these claims. We estimate our self-insured liabilities using a number of factors including historical claims experience and analysis of incurred but not reported claims. Our self-insurance liability was
$6.2 million
and
$7.7 million
at
December 31, 2016
, and
January 2, 2016
, respectively. At
December 31, 2016
, and
January 2, 2016
,
$3.5 million
and
$4.0 million
, respectively, were included in compensation and benefits and
$2.7 million
and
$3.7 million
, respectively, were included in other non-current liabilities in our consolidated balance sheets. At
December 31, 2016
and
January 2, 2016
, we had a restricted deposit of
$3.2 million
with our insurer that serves as collateral for our workers’ compensation insurance obligations and was included in other current assets in our consolidated balance sheets.
Software Capitalization
For software developed or obtained for internal use, we capitalize direct external costs associated with developing or obtaining internal-use software. In addition, we capitalize certain payroll and payroll-related costs for employees who are directly involved with the development of such applications. Capitalized costs related to internal-use software under development are treated as construction-in-progress until the program, feature or functionality is ready for its intended use, at which time depreciation commences. We expense any data conversion or training costs as incurred.
Stock-Based Compensation
We compensate officers, directors and key employees with stock-based compensation under
two
stock plans approved by our shareholders in 2004 and 2010 and administered under the supervision of our Board of Directors (Board). At
December 31, 2016
, a total of
3.9 million
shares were available for future grant under the 2010 stock plan. These plans include non-qualified stock options and stock awards.
We record stock-based compensation expense based on the award’s fair value at the grant date and the awards that are expected to vest. We recognize stock-based compensation expense over the period during which an employee is required to provide services in exchange for the award. We reduce compensation expense by estimated forfeitures. Forfeitures are estimated using historical experience and projected employee turnover. We include, as part of cash flows from financing activities, the benefit of tax deductions in excess of recognized stock-based compensation expense. See "
New Accounting Pronouncements
" below regarding revised guidance for stock-based compensation in 2017.
Stock Options
- stock option awards are granted at exercise prices equal to the closing price of our stock on the grant date. Generally, options vest proportionally over
3 years
and expire after
10 years
. Compensation expense is recognized ratably over the vesting period.
We determine the fair value of stock options granted and the resulting compensation expense at the date-of-grant using the Black-Scholes-Merton option-pricing model and a single option award approach. Descriptions of significant assumptions used to estimate the expected volatility, risk-free interest rate and expected term are as follows:
Expected Volatility
– expected volatility was determined based on implied volatility of our traded options and historical volatility of our stock price.
Risk-Free Interest Rate
– the risk-free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues at the date of grant with a term equal to the expected term.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Expected Term –
expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience and anticipated future exercise patterns, giving consideration to the contractual terms of unexercised stock-based awards.
Stock Awards
- we issue stock awards to certain employees in conjunction with our stock-based compensation plan. The stock awards generally vest over three years based on continued employment (time based). Compensation expense related to stock awards, except for stock awards with a market condition, is determined on the grant date based on the publicly quoted closing price of our common stock and is charged to earnings on a straight-line basis over the vesting period. Stock awards with a market condition are valued using a Monte Carlo simulation model. The significant assumptions used to estimate the expected volatility and risk-free interest rate are similar to those described above in
Stock Options.
Certain time-based stock awards have either a performance condition (performance-based) or a market condition (market-based).
Performance-based Stock Awards – the final number of shares earned and the related compensation expense is adjusted up or down to the extent the performance target is met as of the last day of the performance period. The actual number of shares that will ultimately be awarded range from
0%
-
200%
of the targeted amount for the 2016, 2015 and 2014 awards. We evaluate the likelihood of meeting the performance targets at each reporting period and adjust compensation expense, on a cumulative basis, based on the expected achievement of each of the performance targets. For performance-based stock awards granted in 2016, 2015 and 2014, the performance targets are growth in net sales and in operating profit, and the performance periods are fiscal 2016 through 2018, fiscal 2015 through 2017, and 2014 through 2016, respectively.
Market-based Stock Awards – the related compensation expense is fixed, however, the final number of shares earned is adjusted to the extent that the market condition is achieved during the performance period. The actual number of shares that will ultimately be awarded range from
0%
to
100%
of the target amount for 2014 awards. There were no market-based stock awards granted in 2016 or 2015. For the market-based stock awards granted in 2014, the market condition was based on increases in our stock price for a specified number of sequential days and the performance period is three years beginning on the date of grant, which was March 28, 2014. As of
December 31, 2016
, the market condition had been achieved.
See Note 10,
Shareholders’ Equity
, for additional information on stock-based compensation.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. We evaluate all available positive and negative evidence, including our forecast of future taxable income, to assess the need for a valuation allowance on our deferred tax assets.
We record a liability for unrecognized tax benefits from uncertain tax positions taken, or expected to be taken, in our tax returns. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments, and may not accurately forecast actual outcomes.
We classify net interest and penalties on tax uncertainties as a component of income tax expense in our consolidated statements of operations.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Net Income Per Share
We calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the period. We calculate diluted net income per share based on the weighted-average number of common shares outstanding adjusted by the number of potentially dilutive common shares as determined by the treasury stock method. Potentially dilutive shares consist of stock options and stock awards.
Sources of Supply
We currently obtain materials and components used to produce our beds from outside sources. As a result, we are dependent upon suppliers that in some instances, are our sole source of supply. We are continuing our efforts to dual-source key components. The failure of one or more of our suppliers to provide us with materials or components on a timely basis could significantly impact our consolidated results of operations and net income per share. We believe we can obtain these raw materials and components from other sources of supply in the ordinary course of business, although an unexpected loss of supply over a short period of time may not allow us to replace these sources in the ordinary course of business.
New Accounting Pronouncements
Adopted
In November 2015, the FASB issued new guidance related to classification of deferred taxes. The new guidance requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. It is effective for interim and annual periods beginning after December 15, 2016, but early adoption is permitted. We elected to early adopt this guidance as of December 31, 2016 on a retrospective basis. The new guidance did not impact our consolidated results of operations or operating cash flows. Adoption of the new standard impacted our previously reported consolidated balance sheet as follows for the period ended January 2, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As Adjusted
|
|
|
As Reported
|
|
Current assets:
|
|
|
|
|
Deferred income taxes
|
$
|
—
|
|
|
$
|
15,535
|
|
|
Non-current assets:
|
|
|
|
|
Deferred income taxes
|
$
|
3,036
|
|
|
$
|
—
|
|
|
Non-current liabilities:
|
|
|
|
|
Deferred income taxes
|
$
|
—
|
|
|
$
|
12,499
|
|
Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition model that requires a company to recognize revenue in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance was originally effective for fiscal years beginning after December 15, 2016 and early adoption was not permitted. In July 2015, the FASB deferred the effective date from fiscal years beginning after December 15, 2016 to fiscal years beginning after December 15, 2017 (including interim reporting periods within those fiscal years). Early adoption is permitted to the original effective date of fiscal years beginning after December 15, 2016 (including interim reporting periods within those fiscal years). Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures, and have not yet selected a transition method.
In February 2016, the FASB issued new guidance on accounting for leases that generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
In March 2016, the FASB issued new guidance on the accounting for, and disclosure of, stock-based compensation which will be effective for us beginning in 2017. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, forfeitures and classification on the statement of cash flows. Under the current guidance, excess tax benefits and deficiencies have been recognized in additional paid-in capital in the consolidated balance sheets. Upon adoption of the new guidance, these excess tax benefits or deficiencies are required to be recognized as discrete adjustments to income tax expense in the consolidated statements of operations. We will adopt the new guidance on a prospective basis and these discrete adjustments could have a material impact on income tax expense and net income.
(2) Acquisition of BAM Labs, Inc.
In
September 2015
, we completed the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), the leading provider of biometric sensor and sleep monitoring for data-driven health and wellness. The addition of SleepIQ LABS strengthens Sleep Number’s leadership in sleep innovation, adjustability and individualization. The acquisition broadens and deepens electrical, biomedical, software and backend capabilities - API (application program interface) and bio-signal analysis. Our ownership and control of biometric data advances smart, connected products that empower our customers with the knowledge to adjust for their best sleep.
We previously held a
$6.0 million
minority equity investment in BAM Labs, Inc. based on the cost method (see Note 4,
Investments,
for further details). In connection with the acquisition, our equity investment was remeasured to a fair value of
$12.9 million
. We acquired the remaining capital stock of BAM Labs, Inc. for
$57.1 million
for a total enterprise value of
$70.0 million
. Our consolidated statement of operations included
$13.0 million
and
$3.3 million
of SleepIQ LABS research and development expenses for the years ended December 31, 2016 and January 2, 2016, respectively. The acquisition of SleepIQ LABS did not have a significant impact on our consolidated results of operations, operating cash flows or financial position for the years ended December 31, 2016 or January 2, 2016.
The following table summarizes the fair value of the net assets acquired as of the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
105
|
|
|
Prepaid expenses
|
98
|
|
|
Property and equipment
|
91
|
|
|
Deferred income taxes
|
2,754
|
|
|
Goodwill
|
55,083
|
|
|
Intangible assets
|
13,619
|
|
|
Total assets acquired
|
71,750
|
|
|
Accounts payable
|
269
|
|
|
Compensation and benefits
|
322
|
|
|
Other non-current liabilities
|
1,141
|
|
|
Total liabilities acquired
|
1,732
|
|
|
Net assets acquired
|
$
|
70,018
|
|
Intangible assets of
$13.6 million
consisted of developed technologies with an estimated useful life of
eight years
. The goodwill will not be deductible for income tax purposes.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(3) Fair Value Measurements
The following table sets forth by level within the fair value hierarchy, our financial assets at January 2, 2016, that were accounted for at fair value on a recurring basis, according to the valuation techniques we used to determine their fair value (in thousands). At December 31, 2016, we did not hold any financial assets that required a fair value measurement on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2016
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Marketable debt securities – current
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
—
|
|
|
$
|
4,055
|
|
|
$
|
—
|
|
|
$
|
4,055
|
|
|
Corporate bonds
|
|
—
|
|
|
2,512
|
|
|
—
|
|
|
2,512
|
|
|
|
|
—
|
|
|
6,567
|
|
|
—
|
|
|
6,567
|
|
|
Marketable debt securities – non-current
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
—
|
|
|
5,001
|
|
|
—
|
|
|
5,001
|
|
|
U.S. Agency bonds
|
|
—
|
|
|
2,496
|
|
|
—
|
|
|
2,496
|
|
|
Municipal bonds
|
|
—
|
|
|
1,056
|
|
|
—
|
|
|
1,056
|
|
|
|
|
—
|
|
|
8,553
|
|
|
—
|
|
|
8,553
|
|
|
|
|
$
|
—
|
|
|
$
|
15,120
|
|
|
$
|
—
|
|
|
$
|
15,120
|
|
At
December 31, 2016
and
January 2, 2016
, we had
$2.3 million
and
$1.6 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
$2.3 million
and
$1.6 million
at
December 31, 2016
and
January 2, 2016
, 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.
(4) Investments
Marketable Debt Securities
The following table sets forth our investments in marketable debt securities at January 2, 2016 (in thousands). We did not hold any marketable debt securities at December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2016
|
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Corporate bonds
|
$
|
7,532
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
7,513
|
|
|
U.S. Agency bonds
|
2,497
|
|
|
—
|
|
|
(1
|
)
|
|
2,496
|
|
|
Municipal bonds
|
5,114
|
|
|
—
|
|
|
(3
|
)
|
|
5,111
|
|
|
|
$
|
15,143
|
|
|
$
|
—
|
|
|
$
|
(23
|
)
|
|
$
|
15,120
|
|
Maturities of marketable debt securities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2016
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Marketable debt securities – current (due in less than one year)
|
|
|
|
|
$
|
6,575
|
|
|
$
|
6,567
|
|
|
Marketable debt securities – non-current (due in one to two years)
|
|
|
|
|
8,568
|
|
|
8,553
|
|
|
|
|
|
|
|
$
|
15,143
|
|
|
$
|
15,120
|
|
During
2016
,
2015
and
2014
, respectively, we received proceeds of
$21.1 million
,
$127.5 million
and
$54.2 million
, respectively, from marketable debt securities.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Other Investments
We previously held a minority equity investment in one of our strategic product-development partners, BAM Labs, Inc. In September 2015, we completed the acquisition of the remaining outstanding capital stock of BAM Labs, Inc. The carrying value of our equity investment in BAM Labs, Inc. prior to the acquisition was
$6.0 million
based on the cost method. In connection with the acquisition, our equity investment was remeasured to a fair value of
$12.9 million
, resulting in a
$3.5 million
gain net of expenses, including
$3.4 million
of acquisition-related expenses. The remeasured fair value of our equity investment was based on the fair value of BAM Labs, Inc. at the acquisition date. The net gain of
$3.5 million
is included in general and administrative expenses on our consolidated statement of operations for the fiscal year ended
January 2, 2016
. See Note 2,
Acquisition of BAM Labs, Inc.
, for details regarding this acquisition.
(5) Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
Raw materials
|
$
|
7,973
|
|
|
$
|
9,349
|
|
|
Work in progress
|
72
|
|
|
48
|
|
|
Finished goods
|
66,981
|
|
|
77,203
|
|
|
|
$
|
75,026
|
|
|
$
|
86,600
|
|
Our finished goods inventory, as of
December 31, 2016
, was comprised of
$20.7 million
of finished beds, including retail display beds and deliveries in-transit to those customers who have utilized home delivery services,
$29.2 million
of finished components that were ready for assembly for the completion of beds, and
$17.1 million
of retail accessories.
Our finished goods inventory, as of
January 2, 2016
, was comprised of
$22.5 million
of finished beds, including retail display beds and deliveries in-transit to those customers who have utilized home delivery services,
$40.3 million
of finished components that were ready for assembly for the completion of beds, and
$14.4 million
of retail accessories.
(6) Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
Land
|
|
$
|
1,999
|
|
|
$
|
1,999
|
|
|
Leasehold improvements
|
|
97,600
|
|
|
91,184
|
|
|
Furniture and equipment
|
|
81,541
|
|
|
68,276
|
|
|
Production machinery, computer equipment and software
|
|
209,900
|
|
|
191,482
|
|
|
Property under capital lease
|
|
—
|
|
|
1,077
|
|
|
Construction in progress
|
|
13,823
|
|
|
3,540
|
|
|
Less: Accumulated depreciation and amortization
|
|
(196,496
|
)
|
|
(153,182
|
)
|
|
|
|
$
|
208,367
|
|
|
$
|
204,376
|
|
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(7) Goodwill and Intangible Assets, Net
Goodwill and Indefinite-Lived Intangible Assets
The following is a roll forward of goodwill and indefinite-lived trade name/trademarks (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
Twelve Months Ended
|
|
|
|
December 31, 2016
|
|
January 2, 2016
|
|
|
|
Goodwill
|
|
Indefinite-Lived
Trade Name/
Trademarks
|
|
Goodwill
|
|
Indefinite-Lived
Trade Name/
Trademarks
|
|
|
|
|
Beginning balance
|
$
|
64,046
|
|
|
$
|
1,396
|
|
|
$
|
8,963
|
|
|
$
|
1,396
|
|
|
|
SleepIQ LABS
|
—
|
|
|
—
|
|
|
55,083
|
|
|
—
|
|
|
|
Ending balance
|
$
|
64,046
|
|
|
$
|
1,396
|
|
|
$
|
64,046
|
|
|
$
|
1,396
|
|
Definite-Lived Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
January 2, 2016
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Developed technologies
(1)
|
$
|
18,851
|
|
|
$
|
4,524
|
|
|
$
|
18,851
|
|
|
$
|
2,342
|
|
|
Customer relationships
|
2,413
|
|
|
1,365
|
|
|
2,413
|
|
|
1,020
|
|
|
Trade names/trademarks
|
101
|
|
|
101
|
|
|
101
|
|
|
101
|
|
|
|
$
|
21,365
|
|
|
$
|
5,990
|
|
|
$
|
21,365
|
|
|
$
|
3,463
|
|
___________________
(1)
In September 2015, in connection with the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), we acquired
$13.6 million
of definite-lived intangible assets consisting of developed technologies.
Amortization expense in
2016
,
2015
and
2014
for definite-lived intangible assets was
$2.5 million
,
$1.3 million
and
$0.8 million
, respectively. Annual amortization for definite-lived intangible assets is expected to be approximately
$2.5 million
for 2017 through 2019 and $
2.2 million
for 2020 and 2021.
See Note 2,
Acquisition of BAM Labs
,
Inc.,
for additional details.
8) Leases
Rent expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Rents:
|
|
2016
|
|
2015
|
|
2014
|
|
Minimum rents
|
|
$
|
59,002
|
|
|
$
|
52,650
|
|
|
$
|
47,754
|
|
|
Contingent rents
|
|
3,099
|
|
|
5,168
|
|
|
6,241
|
|
|
Total
|
|
$
|
62,101
|
|
|
$
|
57,818
|
|
|
$
|
53,995
|
|
|
|
|
|
|
|
|
|
|
Equipment Rents
|
|
$
|
5,316
|
|
|
$
|
4,362
|
|
|
$
|
3,609
|
|
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
The aggregate minimum rental commitments under operating leases for subsequent years are as follows (in thousands):
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
66,493
|
|
|
2018
|
|
58,964
|
|
|
2019
|
|
49,322
|
|
|
2020
|
|
42,862
|
|
|
2021
|
|
37,517
|
|
|
Thereafter
|
|
137,239
|
|
|
Total future minimum lease payments
|
|
$
|
392,397
|
|
(9) Credit Agreement
Our revolving credit facility, as amended, has a net aggregate availability of
$150 million
. The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility contains an accordion feature that allows us to increase the amount of the available credit from
$150 million
up to
$200 million
, subject to lenders' approval. The credit facility matures in
February 2021
.
The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio. As of December 31, 2016, we had no outstanding borrowings or letters of credit and we were in compliance with all financial covenants.
(10) Shareholders’ Equity
Stock-Based Compensation Expense
Total stock-based compensation expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Stock options
|
|
$
|
2,281
|
|
|
$
|
2,634
|
|
|
$
|
2,125
|
|
|
Stock awards
|
|
9,680
|
|
|
7,656
|
|
|
4,673
|
|
|
Total stock-based compensation expense
(1)
|
|
11,961
|
|
|
10,290
|
|
|
6,798
|
|
|
Income tax benefit
|
|
3,947
|
|
|
3,413
|
|
|
2,284
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
8,014
|
|
|
$
|
6,877
|
|
|
$
|
4,514
|
|
___________________
(1)
Reflects a
$1.2 million
benefit in 2014 related to a change in estimated forfeitures due to employee turnover.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Stock Options
A summary of our stock option activity was as follows (in thousands, except per share amounts and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Balance at January 2, 2016
|
|
1,388
|
|
|
$
|
18.44
|
|
|
5.3
|
|
$
|
7,366
|
|
|
Granted
|
|
299
|
|
|
19.19
|
|
|
|
|
|
|
|
Exercised
|
|
(188
|
)
|
|
12.21
|
|
|
|
|
|
|
|
Canceled/Forfeited
|
|
(145
|
)
|
|
25.71
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
1,354
|
|
|
$
|
18.70
|
|
|
5.9
|
|
$
|
7,541
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
927
|
|
|
$
|
17.40
|
|
|
4.6
|
|
$
|
6,264
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2016
|
|
1,315
|
|
|
$
|
18.61
|
|
|
5.9
|
|
$
|
7,442
|
|
___________________
|
|
|
|
(1)
|
Aggregate intrinsic value includes only those options where the current share price is equal to or greater than the share price on the date of grant.
|
Other information pertaining to options was as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Weighted-average grant date fair value of stock options granted
|
|
$
|
8.85
|
|
|
$
|
15.94
|
|
|
$
|
9.33
|
|
|
Total intrinsic value (at exercise) of stock options exercised
|
|
$
|
2,088
|
|
|
$
|
4,592
|
|
|
$
|
2,478
|
|
Cash received from the exercise of stock options for the fiscal year ended
December 31, 2016
was
$2.3 million
. Our tax benefit related to the exercise of stock options for the fiscal year ended
December 31, 2016
was
$0.8 million
.
At
December 31, 2016
, there was
$2.6 million
of total stock option compensation expense related to non-vested stock options not yet recognized, which is expected to be recognized over a weighted-average period of
1.8
years.
During fiscal 2016,
30,500
market-based stock options were granted and had a weighted-average grant date fair value of
$10.25
per option. These options are reflected in the stock option activity table above. There were no market-based stock options granted in 2015 or 2014. The assumptions used to calculate the fair value of market-based stock options granted using the
Monte Carlo simulation model
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Assumptions
|
|
2016
|
|
2015
|
|
2014
|
|
Expected dividend yield
|
|
0
|
%
|
|
NA
|
|
NA
|
|
Expected volatility
|
|
50
|
%
|
|
NA
|
|
NA
|
|
Risk-free interest rate
|
|
1.8
|
%
|
|
NA
|
|
NA
|
Except for the market-based stock options discussed above, the fair value of options granted was calculated using the Black-Scholes-Merton option-pricing model.
The assumptions used to calculate the fair value of options granted using the
Black-Scholes-Merton option-pricing model
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Assumptions
|
|
2016
|
|
2015
|
|
2014
|
|
Expected dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
Expected volatility
|
|
50
|
%
|
|
54
|
%
|
|
58
|
%
|
|
Risk-free interest rate
|
|
1.4
|
%
|
|
1.6
|
%
|
|
1.8
|
%
|
|
Expected term (in years)
|
|
5.2
|
|
|
5.2
|
|
|
5.3
|
|
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Stock Awards
Stock award activity was as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-
Based
Stock
Awards
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Performance- and
Market-Based
Stock Awards
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Outstanding at January 2, 2016
|
|
454
|
|
|
$23.14
|
|
710
|
|
|
$22.01
|
|
Granted
|
|
289
|
|
|
19.78
|
|
|
347
|
|
|
18.84
|
|
|
Vested
|
|
(189
|
)
|
|
24.55
|
|
|
(52
|
)
|
|
24.57
|
|
|
Canceled/Forfeited
|
|
(24
|
)
|
|
21.34
|
|
|
(106
|
)
|
|
20.24
|
|
|
Outstanding at December 31, 2016
|
|
530
|
|
|
$20.83
|
|
899
|
|
|
$20.87
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2016
, there was
$5.2 million
of unrecognized compensation expense related to non-vested time-based stock awards, which is expected to be recognized over a weighted-average period of
1.7 years
and
$7.8 million
of unrecognized compensation expense related to non-vested performance- and market-based stock awards, which is expected to be recognized over a weighted-average period of
1.9 years
.
During fiscal
2014
,
126,550
market-based stock awards were granted and had a weighted-average grant date fair value of
$14.90
per award. These stock awards are reflected in the "Performance- and Market-Based Stock Awards" column in the stock award activity table above. There were no market-based stock awards granted in 2016 or 2015. The assumptions used to calculate the fair value of market-based stock awards granted using the
Monte Carlo simulation model
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Valuation Assumptions
|
|
2016
|
|
2015
|
|
2014
|
|
Expected dividend yield
|
|
NA
|
|
NA
|
|
0%
|
|
Expected volatility
|
|
NA
|
|
NA
|
|
58%
|
|
Risk-free interest rate
|
|
NA
|
|
NA
|
|
0.9%
|
Repurchases of Common Stock
Repurchases of our common stock were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Amount repurchased under Board-approved share repurchase program
|
|
$
|
125,000
|
|
|
$
|
98,446
|
|
|
$
|
45,044
|
|
|
Amount repurchased in connection with the vesting of employee restricted stock grants
|
|
1,693
|
|
|
1,755
|
|
|
1,448
|
|
|
Total amount repurchased
|
|
$
|
126,693
|
|
|
$
|
100,201
|
|
|
$
|
46,492
|
|
As of
December 31, 2016
, the remaining authorization under our Board-approved share repurchase program was
$245 million
. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status. The cost of stock repurchases is first charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Net Income per Common Share
The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net income
|
$
|
51,417
|
|
|
$
|
50,519
|
|
|
$
|
67,974
|
|
|
|
|
|
|
|
|
|
Reconciliation of weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
46,154
|
|
|
51,252
|
|
|
53,452
|
|
|
Dilutive effect of stock-based awards
|
748
|
|
|
849
|
|
|
741
|
|
|
Diluted weighted-average shares outstanding
|
46,902
|
|
|
52,101
|
|
|
54,193
|
|
|
|
|
|
|
|
|
|
Net income per share – basic
|
$
|
1.11
|
|
|
$
|
0.99
|
|
|
$
|
1.27
|
|
|
Net income per share – diluted
|
$
|
1.10
|
|
|
$
|
0.97
|
|
|
$
|
1.25
|
|
Additional potential dilutive stock options totaling
0.6 million
,
0.4 million
and
0.8 million
for
2016
,
2015
and
2014
, respectively, have been excluded from our diluted net income per share calculations because these securities’ exercise prices were anti-dilutive (e.g., greater than the average market price of our common stock).
(11) Other (Expense) Income, Net
Other (expense) income, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Interest expense
|
(811
|
)
|
|
(160
|
)
|
|
(53
|
)
|
|
Interest income
|
$
|
94
|
|
|
$
|
494
|
|
|
415
|
|
|
Other (expense) income, net
|
$
|
(717
|
)
|
|
$
|
334
|
|
|
$
|
362
|
|
(12) Income Taxes
Income tax expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
21,634
|
|
|
$
|
7,272
|
|
|
$
|
29,484
|
|
|
State
|
|
5,289
|
|
|
3,870
|
|
|
4,161
|
|
|
|
|
26,923
|
|
|
11,142
|
|
|
33,645
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
(105
|
)
|
|
13,567
|
|
|
747
|
|
|
State
|
|
(2,302
|
)
|
|
202
|
|
|
(258
|
)
|
|
|
|
(2,407
|
)
|
|
13,769
|
|
|
489
|
|
|
Income tax expense
|
|
$
|
24,516
|
|
|
$
|
24,911
|
|
|
$
|
34,134
|
|
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
The following table provides a reconciliation between the statutory federal income tax rate and our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Statutory federal income tax
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
State income taxes, net of federal benefit
|
|
2.6
|
|
|
3.0
|
|
|
2.5
|
|
|
Manufacturing deduction
|
|
(3.3
|
)
|
|
(1.7
|
)
|
|
(3.3
|
)
|
|
Changes in unrecognized tax benefits
|
|
1.2
|
|
|
0.3
|
|
|
0.3
|
|
|
Non-taxable acquisition-related transactions
|
|
—
|
|
|
(2.6
|
)
|
|
—
|
|
|
Other
|
|
(3.2
|
)
|
|
(1.0
|
)
|
|
(1.1
|
)
|
|
Effective income tax rate
|
|
32.3
|
%
|
|
33.0
|
%
|
|
33.4
|
%
|
We file income tax returns with the U.S. federal government and various state jurisdictions. In the normal course of business, we are subject to examination by federal and state taxing authorities. We are no longer subject to federal income tax examinations for years prior to
2013
or state income tax examinations prior to
2012
.
Deferred Income Taxes
The tax effects of temporary differences that give rise to deferred income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
9,834
|
|
|
$
|
8,756
|
|
|
Deferred rent and lease incentives
|
|
8,388
|
|
|
6,977
|
|
|
Warranty and returns liabilities
|
|
7,948
|
|
|
10,817
|
|
|
Net operating loss carryforwards and credits
|
|
6,368
|
|
|
7,847
|
|
|
Compensation and benefits
|
|
4,115
|
|
|
3,788
|
|
|
Other
|
|
5,264
|
|
|
4,561
|
|
|
Total gross deferred tax assets
|
|
41,917
|
|
|
42,746
|
|
|
Valuation allowance
|
|
(620
|
)
|
|
(1,441
|
)
|
|
Total deferred tax assets after valuation allowance
|
|
41,297
|
|
|
41,305
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
|
27,049
|
|
|
26,330
|
|
|
Deferred revenue
|
|
3,279
|
|
|
5,598
|
|
|
Other
|
|
6,302
|
|
|
6,341
|
|
|
Total gross deferred tax liabilities
|
|
36,630
|
|
|
38,269
|
|
|
Net deferred tax assets
|
|
$
|
4,667
|
|
|
$
|
3,036
|
|
At
December 31, 2016
, we had net operating loss carryforwards for federal purposes of
$10.0 million
, which will expire between
2025
and
2034
, and for state income tax purposes of
$14.8 million
, which will expire between
2017
and
2036
.
We evaluate our deferred income taxes quarterly to determine if valuation allowances are required. As part of this evaluation, we assess whether valuation allowances should be established for any deferred tax assets that are not considered more likely than not to be realized, using all available evidence, both positive and negative. This assessment considers, among other matters, the nature, frequency, and severity of historical losses, forecasts of future profitability, taxable income in available carryback periods and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. We have provided a
$0.6 million
valuation allowance resulting primarily from our inability to utilize certain foreign net operating losses, and federal net operating losses associated with our acquisition of BAM Labs, Inc.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Unrecognized Tax Benefits
Reconciliations of the beginning and ending amounts of unrecognized tax benefits for
2016
,
2015
and
2014
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and State Tax
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Beginning balance
|
|
$
|
2,077
|
|
|
$
|
742
|
|
|
$
|
474
|
|
|
Increases related to current-year tax positions
|
|
326
|
|
|
1,277
|
|
|
172
|
|
|
Increases related to prior-year tax positions
|
|
1,594
|
|
|
113
|
|
|
110
|
|
|
Lapse of statute of limitations
|
|
(333
|
)
|
|
(55
|
)
|
|
(14
|
)
|
|
Settlements with taxing authorities
|
|
(204
|
)
|
|
—
|
|
|
—
|
|
|
Ending balance
|
|
$
|
3,460
|
|
|
$
|
2,077
|
|
|
$
|
742
|
|
As of
December 31, 2016
and
January 2, 2016
, we had
$3.5 million
and
$2.1 million
, respectively, of unrecognized tax benefits, which if recognized, would affect our effective tax rate. The amount of unrecognized tax benefits is not expected to change materially within the next 12 months.
(13) 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 year, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During
2016
,
2015
and
2014
, our contributions, net of forfeitures, were
$4.6 million
,
$4.2 million
and
$3.7 million
, respectively.
(14) Commitments and Contingencies
Legal Proceedings
We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with generally accepted accounting principles in the United States, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our 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 Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which has certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has not yet indicated whether it will accept the certification. As the United States District Court for the District of New Jersey agreed, we believe that the case is without merit and the order of dismissal should be affirmed.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
On December 4, 2015, Saeid Azimpour, a consumer, filed a purported class-action lawsuit in U.S. District Court in Minnesota alleging he was fraudulently induced to purchase a down alternative pillow at a Sleep Number store based on signage that indicated that the
pillow was 50% off. Plaintiff alleged that the price he paid for the pillow was not truly 50% off the price at which Sleep Number previously sold the pillow. Plaintiff asserted 10 causes of action including consumer fraud, unlawful trade practices, deceptive trade practices under Minnesota law, violation of the Minnesota false advertising law, unjust enrichment, violation of the California unfair competition law, violation of the California false advertising law and violation of the California remedies act. Plaintiff sought to represent all individuals who “purchased one or more items from the Company advertised or priced at a discount from the original retail price at any time between December 1, 2011 and present.” Plaintiff sought injunctive relief, damages, disgorgement and attorneys’ fees. On June 13, 2016, the Court dismissed the case without prejudice. On August 25, 2016, plaintiff filed a new complaint asserting claims and prayers for relief similar to those described above. On January 4, 2017, plaintiff agreed to dismissal of all claims including dismissal with prejudice of the class claims asserted in this case.
Consumer Credit Arrangements
We refer customers seeking extended financing to certain third party financiers (Card Servicers). The Card Servicers, if credit is granted, establish the interest rates, fees, and all other terms and conditions of the customer’s account based on their evaluation of the creditworthiness of the customer. As the receivables are owned by the Card Servicers, at no time are the receivables purchased or acquired from us. We are not liable to the Card Servicers for our customers’ credit defaults.
Commitments
As of
December 31, 2016
, we had
$5.5 million
of inventory purchase commitments. As part of the normal course of business, there are a limited number of inventory supply contracts that contain penalty provisions for failure to purchase contracted quantities. We do not currently expect any payments under these provisions. At
December 31, 2016
, we had entered into
33
lease commitments for future retail store locations and a lease commitment for our corporate facilities. These lease commitments provide for minimum rentals over the next
five
to
15
years, which if consummated based on current cost estimates, would approximate
$96 million
over the initial lease term. The minimum rentals for these lease commitments have been included in the future minimum lease payments in Note 8,
Leases
.
(15) Summary of Quarterly Financial Data (unaudited)
The following is a condensed summary of our quarterly results (in thousands, except net income per share amounts). Quarterly diluted net income per share amounts may not total to the respective annual amount due to changes in weighted-average shares outstanding during the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Fiscal
Year
|
|
Net sales
|
|
$
|
352,980
|
|
|
$
|
276,878
|
|
|
$
|
367,988
|
|
|
$
|
313,445
|
|
|
$
|
1,311,291
|
|
|
Gross profit
|
|
209,074
|
|
|
171,261
|
|
|
232,343
|
|
|
197,482
|
|
|
810,160
|
|
|
Operating income
|
|
19,898
|
|
|
2,396
|
|
|
39,044
|
|
|
15,312
|
|
|
76,650
|
|
|
Net income
|
|
12,969
|
|
|
1,416
|
|
|
25,745
|
|
|
11,287
|
|
|
51,417
|
|
|
Net income per share – diluted
|
|
$
|
0.27
|
|
|
$
|
0.03
|
|
|
$
|
0.56
|
|
|
$
|
0.25
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Fiscal
Year
|
|
Net sales
|
|
$
|
349,809
|
|
|
$
|
275,289
|
|
|
$
|
373,919
|
|
|
$
|
214,682
|
|
|
$
|
1,213,699
|
|
|
Gross profit
|
|
215,833
|
|
|
170,539
|
|
|
233,636
|
|
|
120,743
|
|
|
740,751
|
|
|
Operating income (loss)
|
|
43,725
|
|
|
16,629
|
|
|
45,399
|
|
|
(30,657
|
)
|
|
75,096
|
|
|
Net income (loss)
|
|
28,799
|
|
|
11,038
|
|
|
31,854
|
|
|
(21,172
|
)
|
|
50,519
|
|
|
Net income (loss) per share – diluted
|
|
$
|
0.54
|
|
|
$
|
0.21
|
|
|
$
|
0.62
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.97
|
|