Sleep Number Corp - Quarter Report: 2022 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended April 2, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File Number: 000-25121
_______________________________________________________________________
SLEEP NUMBER CORPORATION
(Exact name of registrant as specified in its charter)
| Minnesota | 41-1597886 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 1001 Third Avenue South | ||||||||||||||
| Minneapolis, | Minnesota | 55404 | ||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code: (763) 551-7000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 per share | SNBR | Nasdaq Global Select Market | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 2, 2022, 22,232,000 shares of the registrant’s Common Stock were outstanding.
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
INDEX
| Page | ||||||||
i | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited - in thousands, except per share amounts)
| April 2, 2022 | January 1, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,556 | $ | 2,389 | |||||||
Accounts receivable, net of allowances of $1,047 and $924, respectively | 24,502 | 25,718 | |||||||||
| Inventories | 103,212 | 105,644 | |||||||||
| Prepaid expenses | 22,001 | 18,953 | |||||||||
| Other current assets | 40,624 | 54,917 | |||||||||
| Total current assets | 191,895 | 207,621 | |||||||||
| Non-current assets: | |||||||||||
| Property and equipment, net | 197,644 | 195,128 | |||||||||
| Operating lease right-of-use assets | 374,650 | 371,133 | |||||||||
| Goodwill and intangible assets, net | 69,867 | 70,468 | |||||||||
| Other non-current assets | 78,529 | 75,190 | |||||||||
| Total assets | $ | 912,585 | $ | 919,540 | |||||||
| Liabilities and Shareholders’ Deficit | |||||||||||
| Current liabilities: | |||||||||||
| Borrowings under revolving credit facility | $ | 413,200 | $ | 382,500 | |||||||
| Accounts payable | 177,025 | 162,547 | |||||||||
| Customer prepayments | 142,005 | 129,499 | |||||||||
| Accrued sales returns | 20,277 | 22,368 | |||||||||
| Compensation and benefits | 25,702 | 51,240 | |||||||||
| Taxes and withholding | 26,293 | 22,087 | |||||||||
| Operating lease liabilities | 74,046 | 72,360 | |||||||||
| Other current liabilities | 59,390 | 64,177 | |||||||||
| Total current liabilities | 937,938 | 906,778 | |||||||||
| Non-current liabilities: | |||||||||||
| Deferred income taxes | 312 | 688 | |||||||||
| Operating lease liabilities | 338,528 | 336,192 | |||||||||
| Other non-current liabilities | 105,020 | 100,835 | |||||||||
| Total liabilities | 1,381,798 | 1,344,493 | |||||||||
| Shareholders’ deficit: | |||||||||||
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding | — | — | |||||||||
Common stock, $0.01 par value; 142,500 shares authorized, 22,232 and 22,683 shares issued and outstanding, respectively | 222 | 227 | |||||||||
| Additional paid-in capital | — | 3,971 | |||||||||
| Accumulated deficit | (469,435) | (429,151) | |||||||||
| Total shareholders’ deficit | (469,213) | (424,953) | |||||||||
| Total liabilities and shareholders’ deficit | $ | 912,585 | $ | 919,540 | |||||||
See accompanying notes to condensed consolidated financial statements.
1 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited - in thousands, except per share amounts)
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Net sales | $ | 527,130 | $ | 568,256 | |||||||
| Cost of sales | 224,832 | 212,338 | |||||||||
| Gross profit | 302,298 | 355,918 | |||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 240,259 | 223,617 | |||||||||
| General and administrative | 41,319 | 42,592 | |||||||||
| Research and development | 16,305 | 13,286 | |||||||||
| Total operating expenses | 297,883 | 279,495 | |||||||||
| Operating income | 4,415 | 76,423 | |||||||||
| Interest expense, net | 2,127 | 977 | |||||||||
| Income before income taxes | 2,288 | 75,446 | |||||||||
| Income tax expense | 214 | 8,812 | |||||||||
| Net income | $ | 2,074 | $ | 66,634 | |||||||
| Basic net income per share: | |||||||||||
| Net income per share – basic | $ | 0.09 | $ | 2.63 | |||||||
| Weighted-average shares – basic | 22,760 | 25,377 | |||||||||
| Diluted net income per share: | |||||||||||
| Net income per share – diluted | $ | 0.09 | $ | 2.51 | |||||||
| Weighted-average shares – diluted | 23,591 | 26,544 | |||||||||
See accompanying notes to condensed consolidated financial statements.
2 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Deficit
(unaudited - in thousands)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 22,683 | $ | 227 | $ | 3,971 | $ | (429,151) | $ | (424,953) | ||||||||||||||||||||
| Net income | — | — | — | 2,074 | 2,074 | ||||||||||||||||||||||||
| Exercise of common stock options | 21 | — | 531 | — | 531 | ||||||||||||||||||||||||
| Stock-based compensation | 341 | 3 | 4,130 | — | 4,133 | ||||||||||||||||||||||||
| Repurchases of common stock | (813) | (8) | (8,632) | (42,358) | (50,998) | ||||||||||||||||||||||||
| Balance at April 2, 2022 | 22,232 | $ | 222 | $ | — | $ | (469,435) | $ | (469,213) | ||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at January 2, 2021 | 25,390 | $ | 254 | $ | — | $ | (224,232) | $ | (223,978) | ||||||||||||||||||||
| Net income | — | — | — | 66,634 | 66,634 | ||||||||||||||||||||||||
| Exercise of common stock options | 106 | 1 | 2,459 | — | 2,460 | ||||||||||||||||||||||||
| Stock-based compensation | 314 | 3 | 6,413 | — | 6,416 | ||||||||||||||||||||||||
| Repurchases of common stock | (1,346) | (13) | (8,872) | (175,297) | (184,182) | ||||||||||||||||||||||||
| Balance at April 3, 2021 | 24,464 | $ | 245 | $ | — | $ | (332,895) | $ | (332,650) | ||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 2,074 | $ | 66,634 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 15,870 | 14,638 | |||||||||
| Stock-based compensation | 4,133 | 6,416 | |||||||||
| Net loss on disposals and impairments of assets | 93 | 78 | |||||||||
| Deferred income taxes | (376) | 1,515 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 1,216 | 5,948 | |||||||||
| Inventories | 2,432 | (946) | |||||||||
| Income taxes | 1,102 | 6,847 | |||||||||
| Prepaid expenses and other assets | 10,877 | (3,113) | |||||||||
| Accounts payable | 2,073 | 12,390 | |||||||||
| Customer prepayments | 12,506 | 20,552 | |||||||||
| Accrued compensation and benefits | (25,348) | (34,605) | |||||||||
| Other taxes and withholding | 3,104 | 8,912 | |||||||||
| Other accruals and liabilities | (5,198) | 6,332 | |||||||||
| Net cash provided by operating activities | 24,558 | 111,598 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (19,604) | (11,546) | |||||||||
| Proceeds from sales of property and equipment | 10 | 12 | |||||||||
| Net cash used in investing activities | (19,594) | (11,534) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repurchases of common stock | (50,998) | (178,613) | |||||||||
| Net increase in short-term borrowings | 44,712 | 74,087 | |||||||||
| Proceeds from issuance of common stock | 531 | 2,460 | |||||||||
| Debt issuance costs | (42) | (3) | |||||||||
| Net cash used in financing activities | (5,797) | (102,069) | |||||||||
| Net decrease in cash and cash equivalents | (833) | (2,005) | |||||||||
| Cash and cash equivalents, at beginning of period | 2,389 | 4,243 | |||||||||
| Cash and cash equivalents, at end of period | $ | 1,556 | $ | 2,238 | |||||||
See accompanying notes to condensed consolidated financial statements.
4 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business and Summary of Significant Accounting Policies
Business & Basis of Presentation
We prepared the condensed consolidated financial statements as of and for the three months ended April 2, 2022 of Sleep Number Corporation and our 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of April 2, 2022 and January 1, 2022, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the war in Ukraine and other external factors, including but not limited to general economic conditions, inflation, consumer confidence, store restrictions mandated by federal, state or local authorities and global supply chain disruptions, the extent to which these external factors will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 and other recent filings with the SEC.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. In addition, during the current environment involving external factors such as COVID-19 and the war in Ukraine, predicting future events will be especially challenging for management. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. Our critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.
The condensed consolidated financial statements include the accounts of Sleep Number Corporation and our 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.
2. Fair Value Measurements
At April 2, 2022 and January 1, 2022, we had $18 million and $19 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $18 million and $19 million at April 2, 2022 and January 1, 2022, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.
5 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
3. Inventories
Inventories consisted of the following (in thousands):
| April 2, 2022 | January 1, 2022 | ||||||||||
| Raw materials | $ | 11,257 | $ | 11,752 | |||||||
| Work in progress | 68 | 83 | |||||||||
| Finished goods | 91,887 | 93,809 | |||||||||
| $ | 103,212 | $ | 105,644 | ||||||||
4. Goodwill and Intangible Assets, Net
Goodwill and Indefinite-lived Intangible Assets
Goodwill was $64 million at April 2, 2022 and January 1, 2022. Indefinite-lived trade name/trademarks totaled $1.4 million at April 2, 2022 and January 1, 2022.
Definite-lived Intangible Assets
The gross carrying amount of our developed technologies was $19 million at April 2, 2022 and January 1, 2022. Accumulated amortization was $16 million at April 2, 2022 and January 1, 2022. Amortization expense for both the three months ended April 2, 2022 and April 3, 2021, was $0.5 million.
The gross carrying amount of our patents was $2 million at April 2, 2022 and January 1, 2022. Accumulated amortization was $0.4 million and $0.3 million at April 2, 2022 and January 1, 2022, respectively. Amortization expense for both the three months ended April 2, 2022 and April 3, 2021, was $55 thousand.
Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):
| 2022 (excluding the three months ended April 2, 2022) | $ | 1,802 | ||||||
| 2023 | 1,431 | |||||||
| 2024 | 222 | |||||||
| 2025 | 226 | |||||||
| 2026 | 222 | |||||||
| 2027 | 222 | |||||||
| Thereafter | 300 | |||||||
| Total future amortization for definite-lived intangible assets | $ | 4,425 | ||||||
5. Credit Agreement
As of April 2, 2022, our credit facility had a total commitment amount of $825 million. The credit facility is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. The credit agreement includes an accordion feature which allows us to increase the amount of the credit facility from $825 million to $1.2 billion, subject to lenders’ approval. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. The credit agreement matures in December 2026. We were in compliance with all financial covenants as of April 2, 2022.
6 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes our borrowings under the credit facility ($ in thousands):
| April 2, 2022 | January 1, 2022 | ||||||||||
| Outstanding borrowings | $ | 413,200 | $ | 382,500 | |||||||
| Outstanding letters of credit | $ | 5,947 | $ | 3,997 | |||||||
| Additional borrowing capacity | $ | 405,853 | $ | 438,503 | |||||||
| Weighted-average interest rate | 2.2 | % | 1.6 | % | |||||||
6. Leases
We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While our local market development approach generally results in long-term participation in given markets, our retail store leases generally provide for an initial lease term of to 10 years. Our office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, our mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at our sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. Our lease agreements do not contain any material residual value guarantees. We also lease vehicles and certain equipment under operating leases with an initial lease term of to five years.
Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in operating lease costs.
At April 2, 2022, our finance right-of-use assets and lease liabilities were not significant.
Lease costs were as follows (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
Operating lease costs(1) | $ | 27,078 | $ | 23,638 | |||||||
| Variable lease costs | $ | 330 | $ | 515 | |||||||
___________________________
(1)Includes short-term lease costs which are not significant.
7 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The maturities of operating lease liabilities as of April 2, 2022, were as follows(1) (in thousands):
| 2022 (excluding the three months ended April 2, 2022) | $ | 72,962 | |||
| 2023 | 89,790 | ||||
| 2024 | 77,978 | ||||
| 2025 | 68,001 | ||||
| 2026 | 56,694 | ||||
| 2027 | 41,517 | ||||
| Thereafter | 86,958 | ||||
Total operating lease payments(2) | 493,900 | ||||
| Less: Interest | 81,326 | ||||
| Present value of operating lease liabilities | $ | 412,574 | |||
___________________________
(1)Total operating lease payments exclude $102 million of legally binding minimum lease payments for leases signed but not yet commenced.
(2)Includes the current portion of $74 million for operating lease liabilities.
Other information related to operating leases was as follows:
| April 2, 2022 | January 1, 2022 | |||||||||||||
| Weighted-average remaining lease term (years) | 6.3 | 6.4 | ||||||||||||
| Weighted-average discount rate | 6.0 | % | 6.1 | % | ||||||||||
| Three Months Ended | ||||||||||||||
| (in thousands) | April 2, 2022 | April 3, 2021 | ||||||||||||
| Cash paid for amounts included in present value of operating lease liabilities | $ | 24,209 | $ | 21,386 | ||||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | 17,564 | $ | 29,454 | ||||||||||
7. Repurchases of Common Stock
Repurchases of our common stock were as follows (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Amount repurchased under Board-approved share repurchase program | $ | 42,308 | $ | 167,418 | |||||||
| Amount repurchased in connection with the vesting of employee restricted stock grants | 8,690 | 16,764 | |||||||||
| Total amount repurchased (based on trade dates) | $ | 50,998 | $ | 184,182 | |||||||
As of April 2, 2022, the remaining authorization under the $600 million share repurchase program was $361 million.
8 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Revenue Recognition
Deferred contract assets and deferred contract liabilities are included in our condensed consolidated balance sheets as follows (in thousands):
| April 2, 2022 | January 1, 2022 | ||||||||||
| Deferred contract assets included in: | |||||||||||
| Other current assets | $ | 26,926 | $ | 28,048 | |||||||
| Other non-current assets | 53,244 | 49,343 | |||||||||
| $ | 80,170 | $ | 77,391 | ||||||||
| April 2, 2022 | January 1, 2022 | ||||||||||
| Deferred contract liabilities included in: | |||||||||||
| Other current liabilities | $ | 34,999 | $ | 36,490 | |||||||
| Other non-current liabilities | 68,657 | 63,680 | |||||||||
| $ | 103,656 | $ | 100,170 | ||||||||
The deferred revenue and costs related to SleepIQ® technology are currently recognized on a straight-line basis over the product's estimated life of 4.5 to 5.0 years because our inputs are generally expended evenly throughout the performance period. During the three months ended April 2, 2022 and April 3, 2021, we recognized revenue of $9 million and $7 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods.
Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of our revenues for the three months ended April 2, 2022 and 99% of our revenues for the three months ended April 3, 2021.
Net sales were as follows (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Retail stores | $ | 444,336 | $ | 489,188 | |||||||
| Online, phone, chat and other | 82,794 | 79,068 | |||||||||
| Total Company | $ | 527,130 | $ | 568,256 | |||||||
Obligation for Sales Returns
The activity in the sales returns liability account was as follows (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Balance at beginning of year | $ | 22,368 | $ | 24,765 | |||||||
| Additions that reduce net sales | 26,667 | 23,711 | |||||||||
| Deductions from reserves | (28,758) | (23,866) | |||||||||
| Balance at end of period | $ | 20,277 | $ | 24,610 | |||||||
9 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
9. Stock-based Compensation Expense
Total stock-based compensation expense was as follows (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Stock awards | $ | 3,274 | $ | 5,808 | |||||||
| Stock options | 859 | 608 | |||||||||
Total stock-based compensation expense (1) | 4,133 | 6,416 | |||||||||
| Income tax benefit | 1,033 | 1,598 | |||||||||
| Total stock-based compensation expense, net of tax | $ | 3,100 | $ | 4,818 | |||||||
___________________________
(1) Changes in stock-based compensation expense reflect the cumulative impact of the change in the expected achievements of certain performance targets.
10. Profit Sharing and 401(k) Plan
Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended April 2, 2022 and April 3, 2021, our contributions, net of forfeitures, were $2.8 million and $1.9 million, respectively.
11. Net Income per Common Share
The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Net income | $ | 2,074 | $ | 66,634 | |||||||
| Reconciliation of weighted-average shares outstanding: | |||||||||||
| Basic weighted-average shares outstanding | 22,760 | 25,377 | |||||||||
| Dilutive effect of stock-based awards | 831 | 1,167 | |||||||||
| Diluted weighted-average shares outstanding | 23,591 | 26,544 | |||||||||
| Net income per share – basic | $ | 0.09 | $ | 2.63 | |||||||
| Net income per share – diluted | $ | 0.09 | $ | 2.51 | |||||||
For the three months ended April 2, 2022 and April 3, 2021, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial.
10 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
12. Commitments and Contingencies
Warranty Liabilities
The activity in the accrued warranty liabilities account was as follows (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Balance at beginning of year | $ | 10,069 | $ | 12,152 | |||||||
| Additions charged to costs and expenses for current-year sales | 4,447 | 4,330 | |||||||||
| Deductions from reserves | (4,750) | (4,717) | |||||||||
| Changes in liability for pre-existing warranties during the current year, including expirations | (31) | (156) | |||||||||
| Balance at end of period | $ | 9,735 | $ | 11,609 | |||||||
Legal Proceedings
We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible material losses either because we believe that we have valid defenses to claims asserted against us, the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate, or the potential loss is not material. We currently do not expect the outcome of pending legal proceedings to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.
On December 14, 2021, Steamfitters Local 449 Pension & Retirement Security Funds filed a putative class action complaint in the United States District Court for the District of Minnesota on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021, inclusive, against Sleep Number, Shelly Ibach and David Callen. Plaintiff alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the purported class period, in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaint seeks, among other things, unspecified monetary damages, reasonable costs and expenses and equitable/injunctive or other relief as deemed appropriate by the Court. We believe these claims are without merit and intend to vigorously defend the matter.
13. COVID-19 Pandemic
The COVID-19 pandemic impacted our 2021 and 2022 financial performance. In the first quarter of 2021, even with the COVID-19 challenges, we generated strong demand and financial performance. In the first quarter of 2022, our financial performance was impacted by: (i) the disruptive flow of semiconductor chips which affected our ability to deliver products to our customers and suppressed consumer confidence; (ii) incremental costs from labor and material inflation, and expediting costs resulting from current-period global supply chain shortages; and (iii) increased investments in our long- and near-term innovations and demand drivers, partly offset by cost containment actions. The pandemic's future effects on our global supply chain and the potential for supply disruption (e.g., the lack or slowing of critical components caused by labor shortages or government-mandated work closures), effects on consumer demand and effects on our ongoing financial performance remains uncertain. See Part II, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II: Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our business.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our condensed consolidated financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in eight sections:
•Forward-Looking Statements and Risk Factors
•Business Overview
•COVID-19 Pandemic - Impact on our Business
•Results of Operations
•Liquidity and Capital Resources
•Non-GAAP Data Reconciliations
•Off-Balance-Sheet Arrangements and Contractual Obligations
•Critical Accounting Policies
Forward-looking Statements and Risk Factors
The discussion in this Quarterly Report contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, among others:
•Current and future general and industry economic trends and consumer confidence;
•Risks inherent in outbreaks of pandemics or contagious disease, including the COVID-19 pandemic;
•Risks inherent in global-sourcing activities, including tariffs, outbreaks of pandemics or contagious diseases, such as the COVID-19 pandemic, geo-political turmoil, acts of terrorism, global conflicts or war (such as the current war in Ukraine), strikes, labor shortages, government-mandated work closures, and the potential for shortages in supply or disruption or delay of production and delivery of materials and products in our global supply chain;
•Risks of disruption in the operation of any of our main manufacturing, distribution, logistics, home delivery, product development, or customer service facilities or operations;
•Our manufacturing processes operate with minimal levels of inventory, which may leave us vulnerable to shortages in supply;
•Our dependence on significant suppliers and third parties and our ability to maintain relationships with key suppliers or third parties, including several sole-source suppliers or service providers;
•Rising commodity costs and other inflationary pressures;
•The effectiveness of our marketing messages;
•The efficiency of our advertising and promotional efforts;
•Our ability to execute our Total Retail distribution strategy;
•Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;
•Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;
•Industry competition, the emergence of additional competitive products and the adequacy of our intellectual-property rights to protect our products and brand from competitive or infringing activities;
•Claims that our products, processes, advertising or trademarks infringe the intellectual-property rights of others;
•Availability of attractive and cost-effective consumer credit options;
•Increasing government regulation;
•Pending or unforeseen litigation and the potential for adverse publicity associated with litigation;
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•The adequacy of our and third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and cybersecurity;
•The costs and potential disruptions to our business related to upgrading or maintaining our information systems;
•The vulnerability of our and third-party information systems to attacks by hackers or other cyber threats that could compromise the security of our systems, result in a data breach or disrupt our business;
•Environmental risks, including increasing environmental regulation and the broader impacts of climate change such as from weather-related events; and
•Our ability, and the ability of our suppliers and vendors, to attract, retain and motivate qualified management, executive and other key team members, including qualified retail sales professionals and managers.
Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” below in Part II: Item 1A of this Quarterly Report on Form 10-Q and under the same caption in our Annual Report on Form 10-K.
We have no obligation to publicly update or revise any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.
Business Overview
At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. We are
committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder, more
inclusive world. And because our more than 5,500 team members are dedicated to our mission as well as the disciplined
execution of our vertically integrated business model and differentiated strategy, Sleep Number is at the forefront of
sleep innovation. As the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number 360 smart
beds and SleepIQ® technology, Sleep Number is uniquely equipped to offer the life-changing benefit of high-quality,
individualized sleep solutions and services. To date, we have improved over 14 million lives.
With our enterprise-wide investments in innovation, technology, logistics, marketing and customer service, Sleep
Number has created a highly relevant, competitively advantaged strategy and has become a beloved brand built on a
foundation of individuality and wellbeing. Together with our expertise in sleep research, commitment to data science
and analytics, and deep understanding of consumers – including structural shifts in their behavior that we have
anticipated since the 2012 inception of our consumer innovation strategy and which were accelerated by the global
pandemic – we are driving profitable growth and delivering superior value for all our stakeholders.
We generate revenue by marketing our innovations directly to new and existing customers, and selling products through our Stores, Online, Phone, Chat (Total Retail) and Other.
We are committed to delivering superior shareholder value by: (1) increasing consumer demand; (2) leveraging our business model; and (3) deploying capital efficiently.
COVID-19 Pandemic - Impact on our Business
The COVID-19 pandemic impacted our 2021 and 2022 financial performance. In the first quarter of 2021, even with the COVID-19 challenges, we generated strong demand and financial performance. In the first quarter of 2022, our financial performance was impacted by: (i) the disruptive flow of semiconductor chips which affected our ability to deliver products to our customers and suppressed consumer confidence; (ii) incremental costs from labor and material inflation, and expediting costs resulting from current-period global supply chain shortages; and (iii) increased investments in our long- and near-term innovations and demand drivers, partly offset by cost containment actions. The pandemic's future effects on our global supply chain and the potential for supply disruption (e.g., the lack or slowing of critical components caused by labor shortages or government-mandated work closures), effects on consumer demand and effects on our ongoing financial performance remains uncertain. See Part II, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II: Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our business.
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Results of Operations
Quarterly and Year-to-Date Results
Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, timing of new product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, disruptions in global supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer confidence and general economic conditions. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the war in Ukraine and other external factors, including but not limited to general economic conditions, inflation, consumer confidence, store restrictions mandated by federal, state or local authorities and global supply chain disruptions, the extent to which these external factors will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.
Highlights
Financial highlights for the three months ended April 2, 2022 were as follows:
•Net sales for the three months ended April 2, 2022 decreased 7% to $527 million, compared with $568 million for the three months ended April 3, 2021. Demand was negatively impacted by acute macro factors including the COVID-19 variant in January and the war in Ukraine in March. Global supply constraints continued to impact our delivered net sales for the three months ended April 2, 2022.
•The 7% net sales decrease consisted of an 11% comparable sales decline in Total Retail offset by sales from 46 net new stores opened in the past 12 months that added 4 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15.
•Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing twelve-month basis for the period ended April 2, 2022 totaled $3.5 million, 9% higher than the same period last year.
•Operating income for the three months ended April 2, 2022 was $4 million, compared with $76 million in the prior-year period. The $72 million decrease in operating income was driven by the 7% decrease in net sales constrained by semiconductor chip supply, a 7.3 ppt. increase in our operating expenses rate, and a 5.3 ppt. decrease in our gross profit rate that was negatively affected by cost pressures and an unfavorable mix of smart bed deliveries as constrained by semiconductor chip supply.
•The 5.3 ppt. gross profit rate decrease was primarily due to incremental costs from labor and material inflation, and inefficiencies resulting from current-period global supply chain shortages, in addition to the deleveraging impact of the 7% net sales decline and a less favorable sales mix of lower-margin products. See the Gross profit discussion on page 17 for additional details.
•The 7.3 ppt. increase in our operating expenses rate was partially due to the deleveraging impact of the 7% net sales decline. In addition, we continued to prioritize investments in near- and long-term growth drivers, including $16 million of R&D expenses during the three months ended April 2, 2022, 23% more than the same period one year ago.
•Net income for the three months ended April 2, 2022 decreased to $2 million, compared with $67 million for the same period one year ago. Net income per diluted share was $0.09, compared with $2.51 last year.
•We achieved a return on invested capital (ROIC) of 20.5% on a trailing twelve-month basis for the period ended April 2, 2022, compared with 27.6% for the comparable period one year ago.
•Cash provided by operating activities for the three months ended April 2, 2022 decreased to $25 million, compared with $112 million for the same period one year ago.
•As of April 2, 2022, we had $413 million of borrowings under our revolving credit facility and available net liquidity of $406 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.
| Three Months Ended | |||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||||||||||||||
| Net sales | $ | 527.1 | 100.0 | % | $ | 568.3 | 100.0 | % | |||||||||||||||
| Cost of sales | 224.8 | 42.7 | % | 212.3 | 37.4 | % | |||||||||||||||||
| Gross profit | 302.3 | 57.3 | % | 355.9 | 62.6 | % | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 240.3 | 45.6 | % | 223.6 | 39.4 | % | |||||||||||||||||
| General and administrative | 41.3 | 7.8 | % | 42.6 | 7.5 | % | |||||||||||||||||
| Research and development | 16.3 | 3.1 | % | 13.3 | 2.3 | % | |||||||||||||||||
| Total operating expenses | 297.9 | 56.5 | % | 279.5 | 49.2 | % | |||||||||||||||||
| Operating income | 4.4 | 0.8 | % | 76.4 | 13.4 | % | |||||||||||||||||
| Interest expense, net | 2.1 | 0.4 | % | 1.0 | 0.2 | % | |||||||||||||||||
| Income before income taxes | 2.3 | 0.4 | % | 75.4 | 13.3 | % | |||||||||||||||||
| Income tax expense | 0.2 | — | % | 8.8 | 1.6 | % | |||||||||||||||||
| Net income | $ | 2.1 | 0.4 | % | $ | 66.6 | 11.7 | % | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 0.09 | $ | 2.63 | |||||||||||||||||||
| Diluted | $ | 0.09 | $ | 2.51 | |||||||||||||||||||
| Weighted-average number of common shares: | |||||||||||||||||||||||
| Basic | 22.8 | 25.4 | |||||||||||||||||||||
| Diluted | 23.6 | 26.5 | |||||||||||||||||||||
The percentage of our total net sales, by dollar volume, was as follows:
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Retail stores | 84.3 | % | 86.1 | % | |||||||
| Online, phone, chat and other | 15.7 | % | 13.9 | % | |||||||
| Total Company | 100.0 | % | 100.0 | % | |||||||
The components of total net sales change, including comparable net sales changes, were as follows:
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Sales change rates: | |||||||||||
Retail comparable-store sales (1) | (14 | %) | 12 | % | |||||||
| Online, phone and chat | 5 | % | 116 | % | |||||||
Total Retail comparable sales change (1) | (11 | %) | 20 | % | |||||||
| Net opened/closed stores and other | 4 | % | — | % | |||||||
| Total Company | (7 | %) | 20 | % | |||||||
___________________________
(1)Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.
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Other sales metrics were as follows:
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
Average sales per store (1) (in thousands) | $ | 3,487 | $ | 3,196 | |||||||
Average sales per square foot (1) | $ | 1,167 | $ | 1,095 | |||||||
Stores > $2 million in net sales (2) | 82 | % | 71 | % | |||||||
Stores > $3 million in net sales (2) | 46 | % | 33 | % | |||||||
Average revenue per smart bed unit (3) | $ | 4,905 | $ | 5,030 | |||||||
___________________________
(1)Trailing-twelve months Total Retail comparable sales per store open at least one year.
(2)Trailing-twelve months for stores open at least one year (excludes online, phone and chat sales).
(3)Represents Total Retail net sales divided by Total Retail smart bed units.
The number of retail stores operating was as follows:
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Beginning of period | 648 | 602 | |||||||||
| Opened | 13 | 11 | |||||||||
| Closed | (8) | (6) | |||||||||
| End of period | 653 | 607 | |||||||||
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Comparison of Three Months Ended April 2, 2022 with Three Months Ended April 3, 2021
Net sales
Net sales for the three months ended April 2, 2022 decreased by $41 million, or 7%, to $527 million, compared with $568 million for the same period one year ago. Demand was negatively impacted by acute macro factors including the COVID-19 variant in January and war in Ukraine in March. Global supply constraints negatively impacted our delivered net sales for the three months ended April 2, 2022.
The 7% net sales decrease consisted primarily of an 11% comparable sales decline in Total Retail offset by sales from 46 net new stores opened in the past 12 months that added 4 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15.
The $41 million net sales decline compared with the same period one year ago was comprised of the following: (i) a $59 million decrease in our Total Retail comparable net sales; and (ii) an $18 million increase from net store openings. Total Retail smart bed unit sales decreased 5% compared with the prior year. Total Retail average revenue per smart bed unit decreased by 2% to $4,905, compared with $5,030 in the prior-year period and was negatively impacted by a less favorable sales mix due to supply constraints impacting smart bed deliveries at the higher end of our product line.
Gross profit
Gross profit of $302 million for the three months ended April 2, 2022 decreased by $54 million, or 15%, compared with $356 million for the same period one year ago. The gross profit rate declined to 57.3% of net sales for the three months ended April 2, 2022, compared with 62.6% for the prior-year comparable period.
The current-year gross profit rate decrease of 5.3 ppt. was mainly due to: (i) incremental costs from labor and material inflation and inefficiencies resulting from current-period global supply chain shortages (4.2 ppt.); (ii) the deleverage from the 7% net sales decrease; and (iii) a less favorable sales mix of lower-margin products due to supply constraints impacting smart bed deliveries at the higher end of our product line. These pressures were partially offset by pricing actions taken over the past twelve months (1.7 ppt.). In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, and changes in performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses for the three months ended April 2, 2022 were $240 million, or 45.6% of net sales, compared with $224 million, or 39.4% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate increase of 6.2 ppt. was primarily due to: (i) the deleveraging impact of the 7% net sales decrease as constrained by semiconductor chip supply; (ii) addition of 46 net new stores; and (iii) increased marketing expenses resulting from a 9% increase in media expenses.
General and administrative expenses
General and administrative (G&A) expenses totaled $41 million, or 7.8% of net sales, for the three months ended April 2, 2022, compared with $43 million, or 7.5% of net sales, in the prior-year period. The $1.3 million decrease in G&A expenses consisted mainly of: (i) a $6.7 million decrease in employee compensation primarily resulting from a year-over-year decrease in Company-wide performance-based incentive compensation; offset by (ii) a $5.4 million increase in other miscellaneous expenses, including technology investments and travel expenses (minimal travel in the prior year due to the pandemic). The G&A expenses rate increased by 0.3 ppt. in the current-year period, compared with the same period one year ago due to the deleveraging impact of the 7% net sales decrease, in addition to the items discussed above.
Research and development expenses
Research and development (R&D) expenses increased by 23% to $16 million for the three months ended April 2, 2022, compared with $13 million for the same period last year as we continued to prioritize our long-term innovation initiatives.
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Interest expense
Interest expense, net increased to $2 million for the three months ended April 2, 2022, compared with $1 million for the same period one year ago. The $1 million increase was mainly driven by a higher level of outstanding borrowings during the three months ended April 2, 2022 compared with the same period in 2021, and a higher weighted-average interest rate compared with the same period one year ago.
Income tax expense
Income tax expense totaled $0.2 million for the three months ended April 2, 2022, compared with $8.8 million last year. The effective income tax rate for the three months ended April 2, 2022 was 9.4%, compared with 11.7% for the comparable period last year. Discrete tax benefits, primarily stock-based compensation excess tax benefits, were $0.4 million for the three months ended April 2, 2022, compared with $10.0 million in last year’s first quarter.
Liquidity and Capital Resources
Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value over time. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $825 million revolving credit facility. As of April 2, 2022, we do not have any off-balance sheet financing other than our $6 million in outstanding letters of credit. The cash generated from ongoing operations and cash available under our revolving credit facility are expected to be adequate to maintain operations, and fund anticipated expansion, strategic initiatives and contractual obligations such as lease payments and capital commitments for new retail stores for the foreseeable future.
Changes in cash and cash equivalents during the three months ended April 2, 2022 primarily consisted of $25 million of cash provided by operating activities and a $45 million net increase in short-term borrowings, offset by $20 million of cash used to purchase property and equipment, and $51 million of cash used to repurchase our common stock (based on settlement, $42 million under our Board-approved share repurchase program and $9 million in connection with the vesting of employee restricted stock grants).
The following table summarizes our cash flows (in millions). Amounts may not add due to rounding differences:
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Total cash provided by (used in): | |||||||||||
| Operating activities | $ | 24.6 | $ | 111.6 | |||||||
| Investing activities | (19.6) | (11.5) | |||||||||
| Financing activities | (5.8) | (102.1) | |||||||||
| Net decrease in cash and cash equivalents | $ | (0.8) | $ | (2.0) | |||||||
Cash provided by operating activities for the three months ended April 2, 2022 was $25 million, compared with $112 million for the three months ended April 3, 2021. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $65 million decrease in net income for the three months ended April 2, 2022, compared with the same period one year ago; (ii) a $14 million fluctuation in prepaid expenses and other assets due to both periods being impacted by the timing of rent payments and a reduction in business activities due to the pandemic; (iii) a $12 million change in other accruals and liabilities due to the timing of payments; (iv) a $10 million fluctuation in accounts payable with both periods impacted by business changes and timing of payments; and (v) a $9 million fluctuation in the amount of compensation and benefits accrued and timing of the related payments resulting from year-over-year changes in Company-wide performance-based incentive compensation.
Net cash used in investing activities to purchase property and equipment was $20 million for the three months ended April 2, 2022, compared with $12 million for the same period one year ago. The year-over-year increase was primarily due to the timing of cash flows associated with new and remodeled stores’ property and equipment, and investments in information technology.
Net cash used in financing activities was $6 million for the three months ended April 2, 2022, compared with $102 million for the same period last year. During the three months ended April 2, 2022, we repurchased $51 million of
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our stock (based on settlement dates, $42 million under our Board-approved share repurchase program and $9 million in connection with the vesting of employee restricted stock awards), compared with $179 million during the same period one year ago. Short-term borrowings increased by $45 million during the current-year period due to a $31 million increase in borrowings under our revolving credit facility to $413 million and a $14 million increase in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings increased by $74 million during the prior-year period due to a $71 million increase in borrowings under our credit facility to $315 million and a $3 million increase in book overdrafts.
Under our Board-approved share repurchase program, we repurchased 0.7 million shares at a cost of $42 million (based on trade dates, an average of $63.95 per share) during the three months ended April 2, 2022. During the three months ended April 3, 2021, we repurchased 1.2 million shares at a cost of $167 million (based on trade dates, an average of $136.27 per share). There is no expiration date governing the period over which we can repurchase shares. At April 2, 2022, there is $361 million remaining authorization under our Board-approved $600 million share repurchase program.
As of April 2, 2022, we had $413 million of borrowings under our revolving credit facility. We also had $6 million in outstanding letters of credit. Net liquidity available under our credit facility was $406 million at April 2, 2022. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). Our leverage ratio as defined in our credit agreement was 3.4x as of April 2, 2022. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. The credit agreement is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. As of April 2, 2022, the weighted-average interest rate on borrowings under the credit facility was 2.2% and we were in compliance with all financial covenants.
We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance their purchases from us (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with our credit facility, including a maximum leverage ratio and a minimum interest coverage ratio. As of April 2, 2022, we were in compliance with all financial covenants.
Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts. As the accounts are owned by Synchrony Bank, at no time are the accounts purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults.
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Non-GAAP Data Reconciliations
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure.
Our Adjusted EBITDA calculations are as follows (in thousands):
| Three Months Ended | Trailing-Twelve Months Ended | ||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | April 2, 2022 | April 3, 2021 | ||||||||||||||||||||
| Net income | $ | 2,074 | $ | 66,634 | $ | 89,186 | $ | 166,683 | |||||||||||||||
| Income tax expense | 214 | 8,812 | 24,947 | 34,265 | |||||||||||||||||||
| Interest expense | 2,127 | 978 | 7,394 | 7,642 | |||||||||||||||||||
| Depreciation and amortization | 15,683 | 14,519 | 60,943 | 60,049 | |||||||||||||||||||
| Stock-based compensation | 4,133 | 6,417 | 20,930 | 26,179 | |||||||||||||||||||
| Asset impairments | 103 | 89 | 186 | 388 | |||||||||||||||||||
| Adjusted EBITDA | $ | 24,334 | $ | 97,449 | $ | 203,586 | $ | 295,206 | |||||||||||||||
Free Cash Flow
Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operating activities,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.
The following table summarizes our free cash flow calculations (in thousands):
| Three Months Ended | Trailing-Twelve Months Ended | ||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | April 2, 2022 | April 3, 2021 | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 24,558 | $ | 111,598 | $ | 212,970 | $ | 306,318 | |||||||||||||||
| Subtract: Purchases of property and equipment | 19,604 | 11,546 | 74,958 | 38,295 | |||||||||||||||||||
| Free cash flow | $ | 4,954 | $ | 100,052 | $ | 138,012 | $ | 268,023 | |||||||||||||||
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Non-GAAP Data Reconciliations (continued)
Return on Invested Capital (ROIC)
(dollars in thousands)
ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:
| Trailing-Twelve Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Net operating profit after taxes (NOPAT) | |||||||||||
| Operating income | $ | 121,527 | $ | 208,506 | |||||||
Add: Rent expense (1) | 104,937 | 92,650 | |||||||||
| Add: Interest income | — | 84 | |||||||||
Less: Depreciation on capitalized operating leases (2) | (26,311) | (24,258) | |||||||||
Less: Income taxes (3) | (47,503) | (66,118) | |||||||||
| NOPAT | $ | 152,650 | $ | 210,864 | |||||||
| Average invested capital | |||||||||||
| Total deficit | $ | (469,213) | $ | (332,650) | |||||||
Add: Long-term debt (4) | 413,709 | 315,522 | |||||||||
Add: Capitalized operating lease obligations (5) | 839,496 | 741,200 | |||||||||
| Total invested capital at end of period | $ | 783,992 | $ | 724,072 | |||||||
Average invested capital (6) | $ | 746,167 | $ | 763,227 | |||||||
Return on invested capital (ROIC) (7) | 20.5 | % | 27.6 | % | |||||||
___________________________
(1)Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.
(2)Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 5) for the respective reporting periods with an assumed thirty-year useful life. This life assumption is based on our long-term participation in given markets though specific retail location lease commitments are generally 5 to 10 years at inception. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.
(3)Reflects annual effective income tax rates, before discrete adjustments, of 23.7% and 23.9% for 2022 and 2021, respectively.
(4)Long-term debt includes existing finance lease liabilities.
(5)A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.
(6)Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.
(7)ROIC equals NOPAT divided by average invested capital.
Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.
GAAP - generally accepted accounting principles in the U.S.
21 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
Off-Balance-Sheet Arrangements
As of April 2, 2022, we were not involved in any unconsolidated special purpose entity transactions. Other than our $6 million in outstanding letters of credit, we do not have any off-balance-sheet financing.
There have been no material changes in our contractual obligations since the end of fiscal 2021. See Note 5, Credit Agreement, of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 for additional information regarding our other contractual obligations.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. There were no significant changes in our critical accounting policies since the end of fiscal 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in market-based short-term interest rates that will impact our net interest expense. If overall interest rates were one percentage point higher than current rates, our annual net income would decrease by $3.1 million based on the $413 million of borrowings under our credit facility at April 2, 2022. We do not manage the interest-rate volatility risk of borrowings under our credit facility through the use of derivative instruments.
ITEM 4. CONTROLS AND PROCEDURES
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
Changes in Internal Control
There were no changes in our internal control over financial reporting during the fiscal quarter ended April 2, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
22 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our legal proceedings are discussed in Note 12, Commitments and Contingencies, Legal Proceedings, in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Our business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to our business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and also the information under the heading, Risk Factors, in our most recent Annual Report on Form 10-K. The risk factors discussed in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that we face because our business operations could also be affected by additional risk factors that are not presently known to us or that we currently consider to be immaterial to our operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) – (b) Not applicable.
(c) Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased(1)(2) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3) | ||||||||||||||||||||||
| January 2, 2022 through January 29, 2022 | 396 | $ | 86.60 | — | $ | 402,939,000 | ||||||||||||||||||||
| January 30, 2022 through February 26, 2022 | 59,272 | $ | 81.41 | 58,487 | $ | 399,093,000 | ||||||||||||||||||||
| February 27, 2022 through April 2, 2022 | 753,687 | $ | 77.47 | 603,053 | $ | 360,631,000 | ||||||||||||||||||||
| Total | 813,355 | $ | 82.82 | 661,540 | $ | 360,631,000 | ||||||||||||||||||||
___________________________
(1)Under our Board-approved $600 million share repurchase program (effective April 4, 2021), we repurchased 0.7 million shares of our common stock at a cost of $42 million (based on trade dates) during the three months ended April 2, 2022.
(2)In connection with the vesting of employee restricted stock grants, we repurchased 151,815 shares of our common stock at a cost of $8.7 million during the three months ended April 2, 2022.
(3)There is no expiration date governing the period over which we can repurchase shares under our Board-approved share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
23 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
ITEM 6. EXHIBITS
| Exhibit Number | Description | |||||||
| 10.1 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 101.INS* | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
* Filed Herewith
24 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SLEEP NUMBER CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| Dated: | April 29, 2022 | By: | /s/ Shelly R. Ibach | ||||||||
| Shelly R. Ibach | |||||||||||
| Chief Executive Officer | |||||||||||
| (principal executive officer) | |||||||||||
| By: | /s/ Joel J. Laing | ||||||||||
| Joel J. Laing | |||||||||||
| Chief Accounting Officer | |||||||||||
| (principal accounting officer) | |||||||||||
25 | 1Q 2022 FORM 10-Q | SLEEP NUMBER CORPORATION | |||||||