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Form 8-K SELECT COMFORT CORP For: Feb 11

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February 11, 2015 4:43 PM EST
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 11, 2015


SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of incorporation or organization)
0-25121
41-1597886
(Commission File No.)
(IRS Employer Identification No.)


9800 59th Avenue North, Minneapolis, Minnesota 55442
(Address of principal executive offices)    (Zip Code)


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

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 


ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On February 11, 2015, Select Comfort Corporation issued a press release announcing results for the fiscal fourth quarter ended January 3, 2015. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(c)    Exhibits.
Exhibit 99.1    Press Release, dated February 11, 2015

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


 
 
SELECT COMFORT CORPORATION
 
 
(Registrant)
 
 
 
 
Dated:
February 11, 2015
By:
/s/ Mark A. Kimball
 
 
 
Mark A. Kimball
 
 
Title:
Senior Vice President


INDEX TO EXHIBITS

The exhibit listed in this index is being furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed “filed” for purposes of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any document filed under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except as otherwise expressly stated in any such filing.

Exhibit No.
Description of Exhibit
99.1
Press Release, dated February 11, 2015



Exhibit 99.1

FOR IMMEDIATE RELEASE

SELECT COMFORT ANNOUNCES FOURTH-QUARTER AND FULL-YEAR 2014 RESULTS
Provides 2015 and long-term outlook

•
Fourth-quarter net sales increased 40% to $322 million, including a 22% company-controlled comparable sales gain
•
Fourth-quarter EPS increased 192% to $0.35 and full-year EPS increased 16% to $1.25
•
2015 outlook of $1.30 per diluted share and 2019 outlook of $2.75 per diluted share

MINNEAPOLIS - (Feb. 11, 2015) - Select Comfort Corporation (NASDAQ: SCSS) today reported fourth-quarter and full-year 2014 results for the period ended Jan. 3, 2015. Net sales increased 40% in the quarter, with 22% comparable sales growth and 10 percentage points (ppt.) of growth from the extra week in the fourth quarter. Fourth-quarter earnings of $0.35 per diluted share increased 192% compared to the prior year, including $0.06 related to the additional week in the quarter.

“Our fourth-quarter and full-year 2014 results reflect a strong consumer response to the combination of proprietary sleep innovations, effective marketing and exclusive distribution,” said Shelly Ibach, president and CEO of Select Comfort.  “Our consumer-driven innovation strategy, advantaged business model and capital discipline position the company to deliver sustainable profitable growth and more than double earnings per share to $2.75 by fiscal 2019.”
 
Fourth Quarter Statement of Operations Overview
•
Net sales increased 40% to $322 million, compared to $231 million in the fourth quarter of 2013. Comparable sales increased 22%, new stores added 9 ppt. of growth, and the additional week in the fourth quarter added 10 ppt. of growth.
•
Gross profit increased 38% to $194 million. Gross margin was 60.4% compared to 60.9% last year, reflecting a higher mix of our new FlexFit™ adjustable bases and demand-driven logistics costs.
•
Operating expenses totaled $167 million, or 51.7% of net sales, compared to $131 million, or 56.7% of net sales, for the same period last year. The year-over-year expense increase included variable expenses on higher sales, spending to support growth initiatives, and expenses related to the additional week in the fourth quarter, partly offset by a $3.5 million legal settlement benefit.
•
Operating income totaled $28 million, compared to $10 million in the prior year.
•
Earnings per diluted share were $0.35, a 192% increase over the prior year. Excluding the benefit of $0.06 related to the additional week in the quarter and $0.04 related to a favorable legal settlement, earnings per diluted share grew 108%.
 
Full-year Statement of Operations Review
•
Net sales in 2014 were $1.16 billion, an increase of 20%, including 12% from comparable stores, compared to $960 million in 2013.
•
Earnings per diluted share increased 16% to $1.25, compared to $1.08 in 2013.
 
Cash Flows and Balance Sheet Review
•
Net cash provided by operating activities was $144 million for full-year 2014, compared to $88 million for the prior year.
•
Capital expenditures for 2014 were $77 million, consistent with the prior year.
•
The company repurchased $15 million, or 0.6 million shares, of its common stock in the fourth quarter. Since reinitiating share repurchases in April 2012, the company has repurchased 5.1 million shares at an average cost of $22.40 per share, returning $115 million or 124% of free cash flows to shareholders.
•
As of the end of the quarter, the company had cash, cash equivalents and marketable debt securities, less customer prepayments, of $137 million.


Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 2 of 10


Financial Outlook
The company expects full-year 2015 earnings per diluted share of $1.30 on a GAAP basis. This outlook includes $11 million (pre-tax), or $0.13 per diluted share, of estimated launch costs related to the company’s ERP (Enterprise Resource Planning) system planned for implementation in the fourth quarter of 2015. The outlook implies earnings per share growth of 20% excluding the impacts of the extra week in 2014 and the 2015 ERP launch costs. The outlook assumes high-single-digit total net sales growth and a 6% increase in store count in 2015. The company anticipates 2015 capital expenditures will be approximately $80 million, including investments in information technology and new, relocated and remodeled stores.

The company has also established a long-range target of $2.75 earnings per diluted share for 2019, with returns on invested capital expected in the mid-teens.

Conference Call Information
Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. EST (4 p.m. CST; 2 p.m. PST) today. To listen to the call, please dial (800) 593-9959 (international participants dial (517) 308-9340) and reference the passcode “Sleep.” To access the webcast, please visit the investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm. The webcast replay will remain available for approximately 60 days.

Investor Presentation
The company has posted its updated Investor Presentation on the investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm.

About Select Comfort Corporation
SLEEP NUMBER, a sleep innovation leader, delivers unparalleled sleep experiences by offering high-quality, innovative sleep products and services. The company is the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number® beds. Only the Sleep Number bed offers SleepIQ® technology - proprietary sensor technology that works directly with the bed’s DualAir™ feature to track and monitor 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. Sleep Number also offers a full line of exclusive sleep products including FlextFit™ adjustable bases and Sleep Number® pillows, sheets and other bedding products. Consumers also benefit from a unique, value-added retail experience at one of the more than 460 Sleep Number® stores across the country, online at SleepNumber.com, or via phone at (800) Sleep Number or (800) 753-3768.

Forward-looking Statements
Statements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future general and industry economic trends and consumer confidence; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; our ability to execute our company-controlled distribution strategy; our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates; our ability to continue to improve and expand our product line; 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; availability of attractive and cost-effective consumer credit options; pending and unforeseen litigation and the potential for adverse publicity associated with litigation; our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply; our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; risks inherent in global sourcing activities; risks of disruption in the operation of either of our two primary manufacturing facilities; increasing government regulations, which have added or will add cost pressures and process changes to ensure compliance; the adequacy of our


Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 3 of 10


management information systems to meet the evolving needs of our business and to protect sensitive data from potential cyber threats; the costs, distractions and potential disruptions to our business related to upgrading our management information systems; our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events. Additional information concerning these and other risks and uncertainties is contained in the company’s filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.
# # #

Investor Contact: Dave Schwantes; (763) 551-7498; [email protected]
Media Contact: Becky Dvorak; (763) 551-6862; [email protected]










Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 4 of 10


SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)

 
Three Months Ended
 
January 3,
2015
 
% of
Net Sales
 
December 28,
2013
 
% of
Net Sales
 
 
 
 
 
 
 
 
Net sales
$
322,216

 
100.0
%
 
$
230,854

 
100.0
%
Cost of sales
127,730

 
39.6
%
 
90,333

 
39.1
%
Gross profit
194,486

 
60.4
%
 
140,521

 
60.9
%
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 

 
 
Sales and marketing
142,410

 
44.2
%
 
112,679

 
48.8
%
General and administrative
21,681

 
6.7
%
 
16,184

 
7.0
%
Research and development
2,508

 
0.8
%
 
2,003

 
0.9
%
Total operating expenses
166,599

 
51.7
%
 
130,866

 
56.7
%
Operating income
27,887

 
8.7
%
 
9,655

 
4.2
%
Other income, net
86

 
0.0
%
 
80

 
0.0
%
Income before income taxes
27,973

 
8.7
%
 
9,735

 
4.2
%
Income tax expense
9,026

 
2.8
%
 
3,310

 
1.4
%
Net income
$
18,947

 
5.9
%
 
$
6,425

 
2.8
%
 
 
 
 
 
 
 
 
Net income per share – basic
$
0.36

 
 
 
$
0.12

 
 
 
 
 
 
 
 
 
 
Net income per share – diluted
$
0.35

 
 
 
$
0.12

 
 
 
 
 
 
 
 
 
 
Reconciliation of weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
52,825

 
 
 
54,497

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
     Options
420

 
 
 
452

 
 
     Restricted shares
426

 
 
 
371

 
 
Diluted weighted-average shares outstanding
53,671

 
 
 
55,320

 
 





Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 5 of 10


SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)

 
Twelve Months Ended
 
January 3,
2015
 
% of
Net Sales
 
December 28,
2013
 
% of
Net Sales
 
 
 
 
 
 
 
 
Net sales
$
1,156,757

 
100.0
%
 
$
960,171

 
100.0
%
Cost of sales
449,907

 
38.9
%
 
358,416

 
37.3
%
Gross profit
706,850

 
61.1
%
 
601,755

 
62.7
%
 
 
 
 
 
 
 
 
Operating expenses:
 

 
 
 
 

 
 
Sales and marketing
512,007

 
44.3
%
 
439,156

 
45.7
%
General and administrative
84,864

 
7.3
%
 
62,433

 
6.5
%
Research and development
8,233

 
0.7
%
 
9,478

 
1.0
%
Total operating expenses
605,104

 
52.3
%
 
511,067

 
53.2
%
Operating income
101,746

 
8.8
%
 
90,688

 
9.4
%
Other income, net
362

 
0.0
%
 
323

 
0.0
%
Income before income taxes
102,108

 
8.8
%
 
91,011

 
9.5
%
Income tax expense
34,134

 
3.0
%
 
30,930

 
3.2
%
Net income
$
67,974

 
5.9
%
 
$
60,081

 
6.3
%
 
 
 
 
 
 
 
 
Net income per share – basic
$
1.27

 
 
 
$
1.10

 
 
 
 
 
 
 
 
 
 
Net income per share – diluted
$
1.25

 
 
 
$
1.08

 
 
 
 
 
 
 
 
 
 
Reconciliation of weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
53,452

 
 
 
54,866

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
     Options
387

 
 
 
554

 
 
     Restricted shares
354

 
 
 
383

 
 
Diluted weighted-average shares outstanding
54,193

 
 
 
55,803

 
 





Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 6 of 10


SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
subject to reclassification
 
January 3,
2015
 
December 28,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
51,995

 
$
58,223

Marketable debt securities – current
69,609

 
52,159

Accounts receivable, net of allowance for doubtful accounts of $739 and $425, respectively
19,693

 
14,979

Inventories
53,535

 
40,152

Prepaid expenses
17,792

 
9,216

Deferred income taxes
8,786

 
6,936

Other current assets
11,185

 
7,874

Total current assets
232,595

 
189,539

 
 
 
 
Non-current assets:
 

 
 
Marketable debt securities – non-current
44,441

 
34,632

Property and equipment, net
165,453

 
129,542

Goodwill and intangible assets, net
15,986

 
16,823

Deferred income taxes
3,433

 
4,943

Other assets
12,279

 
6,286

Total assets
$
474,187

 
$
381,765

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
84,197

 
$
73,391

Customer prepayments
28,726

 
15,392

Accrued sales returns
15,262

 
9,433

Compensation and benefits
33,066

 
15,242

Taxes and withholding
10,207

 
12,517

Other current liabilities
15,594

 
11,207

Total current liabilities
187,052

 
137,182

 
 
 
 
Non-current liabilities:
 

 
 
Warranty liabilities
2,722

 
1,567

Other long-term liabilities
27,506

 
17,796

Total non-current liabilities
30,228

 
19,363

Total liabilities
217,280

 
156,545

 
 
 
 
Shareholders’ equity:
 

 
 
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding
—

 
—

Common stock, $0.01 par value; 142,500 shares authorized, 52,798 and 54,901 shares issued and outstanding, respectively
528

 
549

Additional paid-in capital
—

 
5,382

Retained earnings
256,413

 
219,276

Accumulated other comprehensive (loss) income
(34
)
 
13

Total shareholders’ equity
256,907

 
225,220

Total liabilities and shareholders’ equity
$
474,187

 
$
381,765





Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 7 of 10


SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
subject to reclassification
 
Twelve Months Ended
 
January 3,
2015
 
December 28,
2013
Cash flows from operating activities:
 
 
 
Net income
$
67,974

 
$
60,081

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,809

 
30,811

Stock-based compensation
6,798

 
4,232

Net loss on disposals and impairments of assets
492

 
24

Excess tax benefits from stock-based compensation
(1,163
)
 
(3,831
)
Deferred income taxes
(311
)
 
2,037

Changes in operating assets and liabilities, net of effect of acquisition:

 


Accounts receivable
(4,717
)
 
1,993

Inventories
(13,383
)
 
(3,910
)
Income taxes
(4,314
)
 
4,395

Prepaid expenses and other assets
(9,973
)
 
(3,169
)
Accounts payable
14,340

 
(3,477
)
Customer prepayments
13,334

 
198

Accrued compensation and benefits
17,735

 
(5,202
)
Other taxes and withholding
2,584

 
(153
)
Warranty liabilities
1,671

 
(1,236
)
Other accruals and liabilities
13,592

 
5,312

Net cash provided by operating activities
144,468

 
88,105

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(76,594
)
 
(76,811
)
Proceeds from sales of property and equipment
5

 
117

Investments in marketable debt securities
(90,349
)
 
(44,170
)
Proceeds from maturities of marketable debt securities
54,506

 
53,565

Acquisition of business
—

 
(15,500
)
Investment in non-marketable equity securities
(1,500
)
 
(4,500
)
Increase in restricted cash
(500
)
 
—

Net cash used in investing activities
(114,432
)
 
(87,299
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net increase (decrease) in short-term borrowings
6,192

 
(223
)
Repurchases of common stock
(46,492
)
 
(42,072
)
Proceeds from issuance of common stock
2,873

 
7,966

Excess tax benefits from stock-based compensation
1,163

 
3,831

Net cash used in financing activities
(36,264
)
 
(30,498
)
Net decrease in cash and cash equivalents
(6,228
)
 
(29,692
)
Cash and cash equivalents, at beginning of period
58,223

 
87,915

Cash and cash equivalents, at end of period
$
51,995

 
$
58,223



Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 8 of 10


SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)

 
Three Months Ended
 
Twelve Months Ended
 
January 3,
2015
 
December 28,
2013
 
January 3,
2015
 
December 28,
2013
Percent of sales:
 
 
 
 
 
 
 
Retail
91.1
%
 
89.5
%
 
90.8
%
 
89.2
%
Direct and E-Commerce
7.1
%
 
7.8
%
 
6.5
%
 
7.0
%
Wholesale/other
1.8
%
 
2.7
%
 
2.7
%
 
3.8
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
Sales change rates:
 
 
 
 
 
 
 
Retail comparable-store sales3
23
%
 
0
%
 
12
%
 
(4
%)
Direct and E-Commerce3
19
%
 
6
%
 
9
%
 
(5
%)
Company-Controlled comparable sales change3
22
%
 
0
%
 
12
%
 
(4
%)
Net opened/closed stores and 53rd week
19
%
 
6
%
 
10
%
 
6
%
Total Company-Controlled Channel
41
%
 
6
%
 
22
%
 
2
%
Wholesale/other
(7
%)
 
(20
%)
 
(13
%)
 
18
%
Total
40
%
 
5
%
 
20
%
 
3
%
 
 
 
 
 
 
 
 
Stores open:
 
 
 
 
 
 
 
Beginning of period
460

 
423

 
440

 
410

Opened
11

 
28

 
57

 
71

Closed
(8
)
 
(11
)
 
(34
)
 
(41
)
End of period
463

 
440

 
463

 
440

 
 
 
 
 
 
 
 
Other metrics:
 
 
 
 
 
 
 
Average sales per store ($ in 000's)1, 3
$
2,327

 
$
2,093

 
 
 
 
Average sales per square foot1, 3
$
1,025

 
$
1,077

 
 
 
 
Stores > $1 million net sales1, 3
98
%
 
96
%
 
 
 
 
Stores > $2 million net sales1, 3
59
%
 
46
%
 
 
 
 
Average revenue per mattress unit2
$
3,866

 
$
3,369

 
$
3,671

 
$
3,245

 
 
 
 
 
 
 
 
1 Trailing twelve months for stores open at least one year.
 
 
 
 
 
 
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 2013. The additional week in 2014 was in the fiscal fourth quarter. Company-Controlled comparable sales have been adjusted to remove the estimated impact of the additional week on the three and twelve months ended January 3, 2015.




Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 9 of 10



SELECT COMFORT CORPORATION AND SUBSIDIARIES
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
(in thousands)

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:
 
Three Months Ended
 
Trailing-Twelve Months Ended
 
January 3,
2015
 
December 28,
2013
 
January 3,
2015
 
December 28,
2013
Net income
$
18,947

 
$
6,425

 
$
67,974

 
$
60,081

Income tax expense
9,026

 
3,310

 
34,134

 
30,930

Interest expense
23

 
10

 
53

 
51

Depreciation and amortization
9,992

 
8,320

 
38,767

 
29,599

Stock-based compensation
2,504

 
1,173

 
6,798

 
4,232

Asset impairments
378

 
34

 
497

 
127

Adjusted EBITDA
$
40,870

 
$
19,272

 
$
148,223

 
$
125,020




Free Cash Flow
(in thousands)

 
Three Months Ended
 
Trailing-Twelve Months Ended
 
January 3,
2015
 
December 28,
2013
 
January 3,
2015
 
December 28,
2013
Net cash provided by operating activities
$
8,633

 
$
(1,977
)
 
$
144,468

 
$
88,105

Subtract: Purchases of property and equipment
18,217

 
18,991

 
76,594

 
76,811

Free cash flow
$
(9,584
)
 
$
(20,968
)
 
$
67,874

 
$
11,294



Note - Our Adjusted EBITDA calculation and our "free cash flow" data are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or 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



Select Comfort Announces Fourth-quarter and Full-year 2014 Results – Page 10 of 10


SELECT COMFORT CORPORATION AND SUBSIDIARIES
Calculation of Return on Invested Capital (ROIC)
(in thousands)

ROIC is a financial measure that we use which quantifies the return we earn on our invested capital. We compute ROIC as outlined below. Management believes ROIC is a useful metric for investors and financial analysts. Our definition of ROIC may not be comparable to similarly titled definitions 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
 
 
January 3,
2015
 
December 28,
2013
Net operating profit after taxes (NOPAT)
 
 
 
 
Operating income
 
$
101,746

 
$
90,688

Add: Net rent expense1
 
57,605

 
50,289

Add: Interest income
 
415

 
375

Less: Depreciation on capitalized operating leases2
 
(14,265
)
 
(13,095
)
Less: Income taxes3
 
(48,900
)
 
(43,827
)
NOPAT
 
$
96,601

 
$
84,430

 
 
 
 
 
Average invested capital
 
 
 
 
Total equity
 
$
256,907

 
$
225,220

Less: Cash great than target4
 
(37,319
)
 
(29,622
)
Add: Long-term debt5
 
—

 
2

Add: Capitalized operating lease obligations6
 
460,840

 
402,312

Total invested capital at end of period
 
$
680,428

 
$
597,912

Average invested capital7
 
$
639,118

 
$
560,133

Return on invested capital (ROIC)8
 
15.1
%
 
15.1
%

1 Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.

2 Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) for the respective reporting periods with an assumed thirty-year useful life. 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 33.6% and 34.2% for 2014 and 2013, respectively.

4 Cash greater than target is defined as cash, cash equivalents and marketable debt securities, less customer prepayments, in excess of $100 million.

5 Long-term debt includes existing capital lease obligations.

6 A multiple of eight times annual rent expense is used as an estimate of capitalizing our operating lease obligations.The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.

7 Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.

8 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



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