10-Q 1 form10q.htm FORM 10-Q form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended September 30, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   

to

 Commission file number 001-31922
                          
TEMPUR-PEDIC INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
33-1022198
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

 1000 Tempur Way
Lexington, Kentucky 40511
(Address, including zip code, of principal executive offices)
 
Registrant’s telephone number, including area code: (800) 878-8889
  
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  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
 Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨  No x
 
The number of shares outstanding of the registrant’s common stock as of October 29, 2012 was 59,587,499 shares. 
 


 

 
 
         
     
  
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    This quarterly report on Form 10-Q, including the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which includes information concerning our plans; objectives; goals; strategies; future events; future revenues or performance; the impact of the macroeconomic environment in both the U.S. and internationally on sales and our business segments; strategic long-term investments; changes in capital expenditures; the impact of consumer confidence; litigation and similar issues; pending tax assessments; financial flexibility; the impact of initiatives to respond to increased levels of competition in our industry; the impact of initiatives to accelerate growth, expand market share and attract sales from the standard mattress market; efforts to expand business within established accounts, improve account productivity, reduce costs and operating expenses and improve manufacturing productivity;  initiatives to improve gross margin; the vertical integration of our business; the development, rollout and market acceptance of new products; our ability to further invest in the business and in brand awareness; our ability to meet financial obligations and continue to comply with the terms of our Senior Credit Facility, including its financial ratio covenants; effects of changes in foreign exchange rates on our reported earnings; our expected sources of cash flow; our ability to effectively manage cash; our ability to align costs with sales expectations; the proposed merger with Sealy Corporation ("Sealy"), including the opportunities and strengths of the combined company, anticipated cost and revenue synergies, the strategic rationale for the combination, including expectations regarding product offerings, growth opportunities, value creation, and financial strength, and the timing of the closing and other information that is not historical information. Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ITEM 2 of Part I of this report. When used in this report, the words “estimates,” “expects,” “anticipates,” “projects,” “proposed,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations and various assumptions. There can be no assurance that we will realize our expectations or that our beliefs will prove correct.
 
    There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. There are important factors, many of which are beyond the Company’s control, that could cause our actual results to differ materially from those expressed as forward-looking statements are set forth in this report, including under the heading “Risk Factors” under ITEM IA of Part II of this report and under the heading “Risk Factors” under ITEM 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2011. In addition, the proposed merger presents risk factors including the ability of the parties to complete the proposed merger in a timely manner or at all; satisfaction of the conditions precedent to the proposed merger, including the ability to secure regulatory approvals; the possibility of litigation (including relating to the merger itself); successful completion of acquisition financing arrangements; the ability to successfully integrate Sealy into Tempur-Pedic’s operations and realize synergies from the proposed transaction. Certain of these risk factors are discussed under ITEM 1A of Part II of this report. There may be other factors that may cause our actual results to differ materially from the forward-looking statements.
 
    All forward-looking statements attributable to us apply only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements, whether as a result of new information, future events, or otherwise.
 
    When used in this report, except as specifically noted otherwise, the term “Tempur-Pedic International” refers to Tempur-Pedic International Inc. only, and the terms “Company,” “we,” “our,” “ours” and “us” refer to Tempur-Pedic International Inc. and its consolidated subsidiaries.
 
 
 

TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per common share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
 
Net sales
$
347,944
 
$
383,085
 
$
1,061,798
 
$
1,051,135
 
Cost of sales
 
176,709
   
182,491
   
517,694
   
499,213
 
Gross profit
 
171,235
   
200,594
   
544,104
   
551,922
 
Selling and marketing expenses
 
76,232
   
72,439
   
243,203
   
204,789
 
General, administrative and other expenses
 
31,556
   
31,548
   
103,840
   
92,416
 
Operating income
 
63,447
   
96,607
   
197,061
   
254,717
 
                         
Other expense, net:
                       
    Interest expense, net
 
(4,793
)
 
(3,265
)
 
(13,026
)
 
(8,450
)
    Other income (expense), net
 
383
   
(229
)
 
428
   
(950
)
       Total other expense
 
(4,410
)
 
(3,494
)
 
(12,598
)
 
(9,400
)
                         
Income before income taxes
 
59,037
   
93,113
   
184,463
   
245,317
 
Income tax provision
 
61,054
   
31,164
   
101,139
   
82,024
 
    Net (loss) income
$
(2,017
)
$
61,949
 
$
83,324
 
$
163,293
 
                         
(Loss) earnings per common share:
                       
    Basic
$
(0.03
)
$
0.93
 
$
1.34
 
$
2.41
 
    Diluted
$
(0.03
)
$
0.90
 
$
1.31
 
$
2.34
 
Weighted average common shares outstanding:
                       
    Basic
 
59,558
   
66,655
   
62,087
   
67,722
 
    Diluted
 
59,558
   
68,571
   
63,624
   
69,847
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements. 
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
 
Net (loss) income
$
(2,017
)
$
61,949
 
$
83,324
 
$
163,293
 
    Other comprehensive income (loss) before tax:
                       
       Foreign currency translation adjustments
 
5,496
   
(14,344
)
 
949
   
(2,858
)
       Derivative instruments accounted for as
          hedges, net of reclassification
          adjustments
 
(830
)
 
(2,318
)
 
(2,304
)
 
(888
)
    Other comprehensive income (loss), before tax:
 
 4,666
   
(16,662
)
 
(1,355
)
 
(3,746
)
       Income tax benefit related to other
          comprehensive income (loss) items
 
324
   
904
   
899
   
346
 
    Other comprehensive income (loss), net of tax
 
4,990
   
(15,758
)
 
(456
)
 
(3,400
)
Comprehensive income
$
2,973
 
$
46,191
 
$
82,868
 
$
159,893
 





See accompanying Notes to Condensed Consolidated Financial Statements.

TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
September 30, 2012
 
December 31, 2011
 
   
 
(Unaudited)
     
ASSETS
           
             
Current Assets:
           
     Cash and cash equivalents
$
151,743
 
$
111,367
 
     Accounts receivable, net
 
161,521
   
142,412
 
     Inventories
 
87,123
   
91,212
 
     Prepaid expenses and other current assets
 
26,143
   
20,088
 
     Deferred income taxes
 
14,682
   
14,391
 
Total Current Assets
 
441,212
   
379,470
 
     Property, plant and equipment, net
 
176,807
   
160,502
 
     Goodwill
 
216,126
   
213,273
 
     Other intangible assets, net
 
63,820
   
66,491
 
     Other non-current assets
 
15,555
   
8,904
 
Total Assets
$
913,520
 
$
828,640
 
             
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
           
             
Current Liabilities:
           
     Accounts payable
$
85,781
 
$
69,936
 
     Accrued expenses and other current liabilities
 
88,487
   
76,636
 
     Deferred income taxes
 
41,863
   
 
     Income taxes payable
 
18,109
   
20,506
 
Total Current Liabilities
 
234,240
   
167,078
 
     Long-term debt
 
649,500
   
585,000
 
     Deferred income taxes
 
18,360
   
24,227
 
     Other non-current liabilities
 
23,873
   
21,544
 
Total Liabilities
 
925,973
   
797,849
 
             
Commitments and contingencies—see Note 10
           
             
Total Stockholders’ (Deficit) Equity
 
(12,453
)
 
30,791
 
Total Liabilities and Stockholders’ (Deficit) Equity
$
913,520
 
$
828,640
 
 




See accompanying Notes to Condensed Consolidated Financial Statements. 

TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Nine Months Ended
 
 
September 30,
 
 
2012
 
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
     Net income
$
83,324
 
$
163,293
 
     Adjustments to reconcile net income to net cash provided by operating activities:
           
          Depreciation and amortization
 
26,877
   
25,340
 
          Amortization of stock-based compensation
 
3,661
   
11,135
 
          Amortization of deferred financing costs
 
1,045
   
689
 
          Bad debt expense
 
1,742
   
1,285
 
          Deferred income taxes
 
36,639
   
(480
)
          Foreign currency adjustments and other
 
1,618
   
911
 
          Changes in operating assets and liabilities
 
(1,201
)
 
(23,194
)
Net cash provided by operating activities
 
153,705
   
178,979
 
             
CASH FLOWS FROM INVESTING ACTIVITIES:
           
     Purchases of property, plant and equipment
 
(38,394
)
 
(18,841
)
     Acquisition of business, net of cash acquired
 
(3,879
)
 
(4,566
)
     Other
 
(23
)
 
(1,980
)
Net cash used in investing activities
 
(42,296
)
 
(25,387
)
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
     Proceeds from long-term revolving credit facility
 
284,500
   
682,000
 
     Repayments of long-term revolving credit facility
 
(220,000
)
 
(580,500
)
     Proceeds from issuance of common stock
 
10,553
   
24,419
 
     Excess tax benefit from stock based compensation
 
9,666
   
17,956
 
     Treasury shares repurchased
 
(152,565
)
 
(240,000
)
     Payments of deferred financing costs
 
   
(6,192
)
     Other
 
(2,586
)
 
 
Net cash used in financing activities
 
(70,432
)
 
(102,317
)
             
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(601
)
 
(1,883
)
Increase in cash and cash equivalents
 
40,376
   
49,392
 
CASH AND CASH EQUIVALENTS, beginning of period
 
111,367
   
53,623
 
CASH AND CASH EQUIVALENTS, end of period
$
151,743
 
$
103,015
 
             
Supplemental cash flow information:
           
     Cash paid during the period for:
           
          Interest
$
11,931
 
$
7,939
 
          Income taxes, net of refunds
$
56,620
 
$
49,266
 





See accompanying Notes to Condensed Consolidated Financial Statements.
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
 
    (a) Basis of Presentation and Description of Business. Tempur-Pedic International Inc., a Delaware corporation, together with its subsidiaries is a U.S. based, multinational company. The term “Tempur-Pedic International” refers to Tempur-Pedic International Inc. only, and the term “Company” refers to Tempur-Pedic International Inc. and its consolidated subsidiaries.
 
    The Company manufactures, markets and sells products including pillows, mattresses and other related products. The Company manufactures essentially all its pressure-relieving TEMPUR® products at three manufacturing facilities, with one located in Denmark and two in the U.S. The Company has sales distribution subsidiaries operating in North America, Europe, Asia Pacific, and South America, and has third party distribution arrangements in certain other countries where it does not have subsidiaries. The Company sells its products through four sales channels: Retail, Direct, Healthcare and Third party.
 
    The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements of the Company and related footnotes for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K.
 
    The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein.
 
    (b) Reclassifications. The Company reclassified certain Accrued expenses and other current liabilities to Other non-current liabilities to conform to the 2012 presentation of Condensed Consolidated Financial Statements. This change does not materially impact previously reported subtotals within the Condensed Consolidated Financial Statements for any previous period presented.
 
    (c) Inventories. Inventories are stated at the lower of cost or market, determined by the first-in, first-out method, and consist of the following:

 
September 30,
 
December 31,
 
 
2012
2011
 
Finished goods
$
61,605
 
$
65,391
 
Work-in-process
 
8,977
   
9,088
 
Raw materials and supplies
 
16,541
   
16,733
 
 
$
87,123
 
$
91,212
 
 
    (d) Accrued Sales Returns. The Company allows product returns up to 90 days following a sale through certain sales channels and on certain products. Estimated sales returns are provided at the time of sale based on historical sales channel return rates. The level of sales returns differs by channel with the Direct channel typically experiencing the highest rate of return. Estimated future obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized. Accrued sales returns are included in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.

    The Company had the following activity for sales returns from December 31, 2011 to September 30, 2012:

Balance as of December 31, 2011
     
$
5,285
 
    Amounts accrued
       
35,415
 
    Returns charged to accrual
       
(35,108
)
Balance as of September 30, 2012
     
$
5,592
 
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
    (e) Warranties. The Company provides a 25-year warranty for North American sales and a 15-year warranty for International sales on mattresses, each prorated. The Company also provides a 2-year to 3-year warranty on pillows. Estimated future obligations related to these products are charged to cost of sales in the period in which the related revenue is recognized. Estimates of warranty expenses are based primarily on historical claim experience and product testing. Warranties are included in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
 
    The Company had the following activity for warranties from December 31, 2011 to September 30, 2012:

Balance as of December 31, 2011
     
$
4,280
 
    Amounts accrued
       
4,639
 
    Warranties charged to accrual
       
(4,242
)
Balance as of September 30, 2012
     
$
4,677
 
 
    (f) Revenue Recognition. Sales of products are recognized when persuasive evidence of an arrangement exists, products are shipped and title passes to customers and the risks and rewards of ownership are transferred, the sales price is fixed or determinable and collectability is reasonably assured. The Company extends volume discounts to certain customers and reflects these amounts as a reduction of sales. The Company also reports sales net of tax assessed by qualifying governmental authorities. The Company extends credit based on the creditworthiness of its customers. No collateral is required on sales made in the normal course of business.
 
    The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company regularly reviews the adequacy of its allowance for doubtful accounts. The Company determines the allowance based on historical write-off experience and current economic conditions. It also considers factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a receivable is reasonably assured. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts included in Accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets was $7,774 and $6,801 as of September 30, 2012 and December 31, 2011, respectively.
 
    (g) Research and Development Expenses. Research and development expenses for new products are expensed as they are incurred and included in General, administrative and other expenses in the accompanying Condensed Consolidated Statements of Operations. Research and development costs charged to expense were $3,867 and $2,373 for the three months ended September 30, 2012 and 2011, respectively. Research and development costs charged to expense were $11,114 and $7,273 for the nine months ended September 30, 2012 and 2011, respectively.
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
(2) Acquisitions
 
    Sealy Corporation
 
On September 26, 2012, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) to acquire Sealy Corporation (“Sealy”), by merging Sealy with a newly-formed subsidiary of the Company (the “Merger”). Sealy, headquartered in Trinity, North Carolina, owns one of the largest bedding brands in the world, and manufactures and markets a complete line of bedding products. Subject to the terms and conditions of the Merger Agreement, at the effective time and as a result of the Merger, each share of common stock of Sealy issued and outstanding immediately prior to the effective time of the Merger will be cancelled and (other than shares held by Sealy or Tempur-Pedic or their subsidiaries or Sealy stockholders who properly exercise appraisal rights) converted into the right to receive $2.20 in cash. The Company anticipates that the total consideration to be paid, including the assumption of outstanding indebtedness of Sealy less cash assumed, will be approximately $1,300,000. The Company also entered into a firm debt commitment letter with Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith, dated September 26, 2012, providing for a total of $2,100,000 in debt financing. The transaction is expected to be completed in the first half of calendar 2013 and is subject to regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary conditions. The Merger Agreement contains certain termination rights for both the Company and Sealy and further provides that, upon termination of the Merger Agreement under certain circumstances, Sealy may be obligated to pay the Company a termination fee of $25,000. In addition, if antitrust enforcement agencies either commence or inform the parties that they intend to commence an action to enjoin the Merger, (i) the Company may be required to pay Sealy a termination fee of $90,000 if both parties elect to terminate the Merger Agreement or (ii) a termination fee of $90,000 (or $40,000 if the Company elects to terminate the Merger Agreement but Sealy does not so elect to terminate) if the Merger does not close due to a failure to receive antitrust approval in the nine months following the execution of the Merger Agreement, subject to certain extensions.
 
    Third Party Distributors
 
On July 5, 2012, the Company acquired its third party distributor in Brazil. The Company paid $2,200 in cash to acquire this entity, with future payments due to the former owners if certain operational targets are met. Assets acquired and liabilities assumed include Accounts receivables, Inventories, Prepaid expenses and other current assets, Property, plant and equipment, Accounts payable, and Accrued expenses and other current liabilities.
   
    On April 2, 2012, the Company acquired its third party distributor in Poland. The Company paid $1,669 in cash to acquire this entity, with future payments due to the former owners if certain operational targets are met. Assets acquired include certain Intangible assets, Inventories and Prepaid expenses and other current assets.
 
(3) Goodwill and Other intangible assets
 
    The following summarizes changes to the Company’s Goodwill, by reportable business segment:
 
    North America   International  
Total
 
Balance as of December 31, 2011   $ 108,504   $ 104,769   $ 213,273  
    Foreign currency translation adjustments     629     78     707  
    Goodwill resulting from acquisitions    
    2,146     2,146  
Balance as of September 30, 2012   $ 109,133   $ 106,993   $ 216,126  
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
   
    The following table summarizes information relating to the Company’s Other intangible assets, net:

     
September 30, 2012
 
December 31, 2011
 
 
Useful
 
Gross
     
Net
 
Gross
     
Net
 
 
Lives
 
Carrying
 
Accumulated
 
Carrying
 
Carrying
 
Accumulated
 
Carrying
 
 
(Years)
 
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
 
Unamortized
   indefinite
   life intangible
   assets:
                                       
   Trademarks
   
$
55,000
 
$
 
$
55,000
 
$
55,000
 
$
 
$
55,000
 
Amortized intangible
   assets:
                                       
   Technology
10
 
$
16,000
 
$
15,867
 
$
133
 
$
16,000
 
$
14,667
 
$
1,333
 
   Patents & other
      Trademarks
5-20
   
12,605
   
9,671
   
2,934
   
12,546
   
9,180
   
3,366
 
   Customer database
5
   
5,350
   
5,350
   
   
4,928
   
4,928
   
 
   Foam formula
10
   
3,700
   
3,669
   
31
   
3,700
   
3,392
   
308
 
   Reacquired rights
3
   
5,829
   
4,857
   
972
   
5,638
   
3,289
   
2,349
 
   Customer
      relationships
5
   
6,088
   
1,338
   
4,750
   
4,989
   
854
   
4,135
 
         Total
   
$
104,572
 
$
40,752
 
$
63,820
 
$
102,801
 
$
36,310
 
$
66,491
 
 
    Amortization expense relating to intangible assets for the Company was $1,447 and $1,429 for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, amortization expense relating to intangible assets for the Company was $4,262 and $3,978, respectively. No impairments of goodwill or other intangible assets have adjusted the gross carrying amount of these assets in any historical period.

(4) Long-term Debt
 
   (a) Long-term Debt. Long-term debt for the Company consists of the following:
 
 
September 30,
 
December 31,
 
 
2012
 
2011
 
Senior Credit Facility:
           
Domestic Long-Term Revolving Credit Facility payable to lenders, interest
    at Base Rate or LIBOR plus applicable margin (2.22% and 2.05%  as
    of September 30, 2012 and December 31, 2011, respectively),
    commitment through and due June 28, 2016.
$
649,500
 
$
585,000
 
Long-term Debt
$
649,500
 
$
585,000
 
 
    (b) Secured Credit Financing. On October 18, 2005, the Company entered into a credit agreement (“Senior Credit Facility”) with a syndicate of banks. On June 28, 2011, the Company amended and restated its Senior Credit Facility, as amended, which increased the total availability under the Senior Credit Facility to an aggregate of $770,000, added an option to increase domestic availability by an additional $250,000, extended the maturity date to June 28, 2016, and increased the applicable margins and certain fees to current market conditions.
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
    The Senior Credit Facility consists of domestic and foreign credit facilities (“Revolvers”) that provide for the incurrence of indebtedness up to an aggregate principal amount of $770,000. The domestic credit facility is a five-year, $745,000 revolving credit facility. The foreign credit facility is a five-year, $25,000 revolving credit facility. The Revolvers provide for the issuance of letters of credit and bank guarantees (“Contingent Liabilities”) which, when issued, constitute usage and reduce availability under the Revolvers. The aggregate amount of Contingent Liabilities outstanding under the Revolvers was $1,025 at September 30, 2012. After giving effect to Contingent Liabilities and $649,500 in borrowings under the Revolvers, total availability under the Revolvers was $119,475 as of September 30, 2012. Both credit facilities bear interest at a rate equal to the applicable margin, as determined in accordance with a performance pricing grid set forth in the Senior Credit Facility, plus one of the following indexes: London Inter-Bank Offering Rate (LIBOR) and for U.S. dollar-denominated loans only, a base rate. The base rate of U.S. dollar-denominated loans is defined as the higher of the Bank of America prime rate or the Federal Funds rate plus .50%. The Company also pays an annual commitment fee on the unused amount of the Senior Credit Facility. The commitment fee is calculated based on the consolidated leverage ratio and ranges from .375% to .50%.
 
    The Senior Credit Facility is guaranteed by Tempur-Pedic International, as well as certain other subsidiaries of Tempur-Pedic International, and is secured by certain fixed and intangible assets of Dan-Foam ApS and substantially all of the Company’s U.S. assets. The Senior Credit Facility contains certain financial covenants and requirements affecting the Company, including a consolidated interest coverage ratio and a consolidated leverage ratio. The Company was in compliance with all covenants as of September 30, 2012.
 
    On August 8, 2011, the Company entered into a four-year interest rate swap agreement to manage interest costs and the risk associated with changing interest rates associated with the Senior Credit Facility. Refer to Note 6, “Derivative Financial Instruments” for additional information regarding the Company’s derivative instruments, including this interest rate swap.

(5) Fair Value Measurements
 
    The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurement. There were no transfers between levels for the three or nine months ended September 30, 2012. At September 30, 2012, the Company had an interest rate swap and foreign exchange forward contracts recorded at fair value. Estimates of the fair value of foreign currency derivative instruments are determined using exchange traded prices and rates. The fair value of the interest rate swap is calculated using standard industry models based on observable forward yield curves. The fair values of all derivative instruments are adjusted for credit risk and restrictions and other terms specific to the contracts.
 
    The following table provides a summary by level of the fair value of financial instruments that are measured on a recurring basis:

         
Fair Value Measurements at September 30, 2012 Using:
 
   
September 30, 2012
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Assets:
                         
Foreign exchange forward contracts
 
$
489
 
$
 
$
489
 
$
 
                           
Liabilities:
                         
Interest rate swap
 
$
4,920
 
$
 
$
4,920
 
$
 
 
12

TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
         
Fair Value Measurements at December 31, 2011 Using:
 
   
December 31, 2011
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Liabilities:
                         
Interest rate swap
 
$
2,616
 
$
 
$
2,616
 
$
 
Foreign exchange forward contracts
 
$
935
 
$
 
$
935
 
$
 
 
    The carrying value of Cash and cash equivalents, Accounts receivable and Accounts payable approximate fair value because of the short-term maturity of those instruments. Borrowings under the Senior Credit Facility (as defined in Note 4(b)) are at variable interest rates and accordingly their carrying amounts approximate fair value.

(6) Derivative Financial Instruments
 
    In the normal course of business, the Company is exposed to certain risks related to fluctuations in interest rates and foreign currency exchange rates. The Company uses various derivative contracts, primarily interest rate swaps and foreign exchange forward contracts, to manage risks from these market fluctuations. The financial instruments used by the Company are straight-forward, non-leveraged instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit ratings of these institutions.

Interest Rate Risk
   
    The Company is exposed to changes in interest rates on its Senior Credit Facility. In order to manage this risk, on August 8, 2011, the Company entered into a four-year interest rate swap agreement to manage interest costs and the risk associated with changing interest rates. The Company designated this interest rate swap as a cash flow hedge of floating rate borrowings and expects the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The gains and losses on the designated swap agreement will offset losses and gains on the transactions being hedged. The Company formally documented the effectiveness of this qualifying hedge instrument (both at the inception of the swap and on an ongoing basis) in offsetting changes in cash flows of the hedged transaction. The fair value of the interest rate swap is calculated as described in Note 5, “Fair Value Measurements,” taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable.
 
    As a result of this swap, the Company pays interest at a fixed rate and receives payments at a variable rate which began on December 30, 2011. The swap effectively fixes the floating LIBOR-based interest rate to 1.25% on $250,000 of the outstanding balance under the Senior Credit Facility, with the outstanding balance subject to the swap declining over time. The interest rate swap expires on December 30, 2015. The Company has selected the LIBOR-based rate on the hedged portion of the Senior Credit Facility during the term of the swap. The effective portion of the change in value of the swap is reflected as a component of comprehensive income and recognized as Interest expense, net as payments are paid or accrued. The remaining gain or loss in excess of the cumulative change in the present value of the future cash flows of the hedged item, if any (i.e., the ineffective portion) or hedge components excluded from the assessment of effectiveness are recognized as Interest expense, net during the current period.
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
Foreign Currency Exposures
 
    The Company is exposed to foreign currency risk related to intercompany debt and associated interest payments. To manage the risk associated with fluctuations in foreign currencies, the Company enters into foreign exchange forward contracts. The Company does not designate any of these foreign currency forward contracts as hedging instruments; however, the Company considers the contracts as economic hedges. Accordingly, changes in the fair value of these instruments affect earnings during the current period. These foreign exchange forward contracts protect against the reduction in value of forecasted foreign currency cash flows resulting from payments in foreign currencies. The fair value of foreign currency agreements are estimated as described in Note 5, “Fair Value Measurements,” taking into consideration foreign currency rates and the current creditworthiness of the counterparties or the Company, as applicable.
 
    As of September 30, 2012, the Company had foreign exchange forward contracts with expiration dates ranging from October 31, 2012 to December 28, 2012. The changes in fair value of these foreign currency hedges are included as a component of Other income (expense), net in the accompanying Condensed Consolidated Statements of Operations. As of September 30, 2012, the Company had the following outstanding foreign exchange forward contracts:

Foreign Currency Denomination
 
Notional Amount
 
Japanese Yen
 
¥
195,632
 
Swedish Krone
 
kr.
14,636
 
United States Dollar
 
$
11,379
 
Norwegian Krone
 
kr.
4,105
 
Australian Dollar
 
$
2,685
 
New Zealand Dollar
 
$
917
 
 
    As of September 30, 2012 and December 31, 2011, the fair value carrying amount of the Company’s derivative instruments included in the accompanying Condensed Consolidated Balance Sheets were recorded as follows:
 
 
Liability Derivatives
 
 
Balance Sheet Location
 
Fair Value
 
     
September 30,
 
December 31,
 
   
2012
 
2011
 
Derivatives designated as hedging instruments
               
    Interest rate swap - current
Accrued expenses and other current liabilities
 
$
2,281
 
$
1,471
 
    Interest rate swap - non-current
Other non-current liabilities
   
2,639
   
1,145
 
     
$
4,920
 
$
2,616
 
                 
Derivatives not designated as hedging instruments
               
    Foreign exchange forward contracts
Accrued expenses and other current liabilities
 
$
 
$
935
 
     
$
4,920
 
$
3,551
 

   
Asset Derivatives
 
   
Balance Sheet Location
 
Fair Value
 
       
September 30,
 
December 31,
 
     
2012
 
2011
 
Derivatives not designated as hedging instruments
                 
    Foreign exchange forward contracts
 
Prepaid expenses and other current assets
 
$
489
 
$
 
       
$
489
 
$
 
 
14

TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
    The effect of derivative instruments on the accompanying Condensed Consolidated Statements of Operations for the three months ended September 30, 2012 was as follows:

Derivatives Designated as Cash Flow Hedging Relationships
 
Amount of Gain/(Loss) Recognized in Accumulated OCL on Derivative (Effective Portion)
 
Location of Gain/(Loss) Reclassified from Accumulated OCL into Income (Effective Portion)
 
Amount of Gain/(Loss) Reclassified from Accumulated OCL into Income (Effective Portion)
 
Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Interest rate swap
 
$
(830
Interest expense, net
 
$
(799
)
Interest expense, net
 
$
 

Derivatives Not  Designated as Hedging Instruments
 
Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
Foreign exchange forward contracts
 
Other income (expense), net
 
$
1,212
 
 
    For the three months ended September 30, 2011:

Derivatives Not  Designated as Hedging Instruments
 
Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(1,266
)
 
    The effect of derivative instruments on the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2012 was as follows:

Derivatives Designated as Cash Flow Hedging Relationships
 
Amount of Gain/(Loss) Recognized in Accumulated OCL on Derivative (Effective Portion)
 
Location of Gain/(Loss) Reclassified from Accumulated OCL into Income (Effective Portion)
 
Amount of Gain/(Loss) Reclassified from Accumulated OCL into Income (Effective Portion)
 
Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Interest rate swap
 
$
(2,304
)
Interest expense, net
 
$
(2,378
)
Interest expense, net
 
$
 
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
Derivatives Not  Designated as Hedging Instruments
 
Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
Foreign exchange forward contracts
 
Other income (expense), net
 
$
1,942
 
 
    For the nine months ended September 30, 2011:

Derivatives Designated as Cash Flow Hedging Relationships
 
Amount of Gain/(Loss) Recognized in Accumulated OCL on Derivative (Effective Portion)
 
Location of Gain/(Loss) Reclassified from Accumulated OCL into Income (Effective Portion)
 
Amount of Gain/(Loss) Reclassified from Accumulated OCL into Income (Effective Portion)
 
Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Interest rate swap
 
$
(582
)
Interest expense, net
 
$
(582
)
Interest expense, net
 
$
 

Derivatives Not  Designated as Hedging Instruments
 
Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(228
)

(7) Stockholders’ (Deficit) Equity
 
    (a) Capital Stock. Tempur-Pedic International’s authorized shares of capital stock are 300,000 shares of common stock and 10,000 shares of preferred stock. Subject to preferences that may be applicable to any outstanding preferred stock, holders of the common stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up, the holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.
 
    (b) Share Repurchase Programs. During the nine months ended September 30, 2012, the Company purchased 5,023 shares of the Company’s common stock for a total of $149,999 pursuant to the authorization approved by the Company’s Board of Directors in January 2012. As of September 30, 2012, the Company has $100,001 remaining under the January 2012 authorization. Share repurchases under this authorization may be made through open market transactions, negotiated purchases or otherwise, at times and in such amounts as management and a committee of the Board deem appropriate; these repurchases may be funded by operating cash flows and/or borrowings under the Senior Credit Facility.
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)

(8) Other Items
 
    (a) Property, plant and equipment. Property, plant and equipment, net consisted of the following:
 
 
September 30,
 
December 31,
 
 
2012
2011
 
Land and buildings
$
122,915
 
$
121,794
 
Machinery and equipment, furniture and fixtures and other
 
243,562
   
225,521
 
Construction in progress
 
32,395
   
14,777
 
   
398,872
   
362,092
 
Accumulated depreciation
 
(222,065
)
 
(201,590
)
 
$
176,807
 
$
160,502
 
 
    (b) Accrued expenses and other current liabilities. Accrued expenses and other current liabilities consisted of the following:

 
September 30,
 
December 31,
 
 
2012
2011
 
Salary and related expenses
$
15,872
 
$
24,265
 
Advertising accrual
 
13,880
   
6,988
 
Accrued sales and value added taxes
 
9,030
   
8,497
 
Professional fees
 
7,579
   
3,259
 
Sales returns
 
5,592
   
5,285
 
Warranty accrual
 
4,677
   
4,280
 
Other
 
31,857
   
24,062
 
 
$
88,487
 
$
76,636
 
 
    (c) Accumulated other comprehensive loss. Accumulated other comprehensive loss consisted of the following:

 
September 30,
 
December 31,
 
 
2012
2011
 
Derivative instruments accounted for as hedges, net of taxes of $1,919 and $1,020,
    respectively
$
(3,001
)
$
(1,596
)
Foreign currency adjustments
 
(12,141
)
 
(13,090
)
Accumulated other comprehensive loss
$
(15,142
)
$
(14,686
)
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
(9) Stock-Based Compensation
 
    The Company’s stock-based compensation (benefit) expense for the three and nine months ended September 30, 2012 included performance-based restricted stock units (“PRSUs”), non-qualified stock options, restricted stock units (“RSUs”) and deferred stock units (“DSUs”). A summary of the Company’s stock-based compensation (benefit) expense is presented below:
 
  Three Months Ended   Nine Months Ended  
  September 30,   September 30,  
  2012   2011   2012   2011  
PRSU (benefit) expense $ (5,207 ) $ 1,708   $ (1,126 ) $ 5,719  
Option expense   911     1,237     3,169     3,931  
RSU/DSU expense
  547     471     1,618     1,485  
    Total stock-based compensation (benefit)
       expense
$ (3,749 ) $ 3,416   $ 3,661   $ 11,135  
 
    A summary of the Company’s PRSU activity and related information for the nine months ended September 30, 2012 is presented below:

   
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
Aggregate Intrinsic Value
 
Awards outstanding at December 31, 2011
 
285
 
$
37.93
       
    Granted
 
134
   
71.52
       
    Vested
 
   
       
    Forfeited
 
   
       
Awards outstanding at September 30, 2012
 
419
 
$
48.69
 
$
9,793
 
 
    The maximum number of shares to be awarded under the PRSUs granted during the nine months ended September 30, 2012 and 2011 will be 403 and 443 shares, and will vest, if earned, at the end of the three-year performance periods ending on December 31, 2014 and 2013, respectively. The Company recorded a benefit in the Condensed Consolidated Statement of Operations of $7,974 and $9,536, respectively, for the three and nine months ended September 30, 2012, related to the PRSUs granted during the nine months ended September 30, 2012 and 2011, after re-evaluation of the probability of meeting certain required financial metrics.
 
    A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2012 is presented below:

   
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
Weighted-Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value
 
Options outstanding December 31, 2011
 
3,408
 
$
11.15
           
    Granted
 
98
   
70.24
           
    Forfeited
 
   
           
    Exercised
 
840
   
12.56
           
Options outstanding at September 30, 2012
 
2,666
 
$
15.98
 
5.91
 
$
18,975
 
Options exercisable at September 30, 2012
 
2,090
 
$
13.88
 
5.55
 
$
19,868
 
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
    The aggregate intrinsic value of options exercised during the three months ended September 30, 2012 and 2011 was $770 and $10,961 respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2012 and 2011 was $32,206 and $70,276, respectively.
 
    The Company granted 10 DSUs during the nine months ended September 30, 2012. No RSUs were granted during the nine months ended September 30, 2012.
 
    A summary of total unrecognized stock-based compensation expense based on current performance estimates related to the options and DSUs granted during the nine months ended September 30, 2012 is presented below:

 
September 30, 2012
 
Weighted Average Remaining Vesting Period (Years)
 
Unrecognized stock option expense
 
2,526
   
2.26
 
Unrecognized DSU expense
 
360
   
0.58
 
    Total unrecognized stock-based compensation expense
$
2,886
   
2.05
 

(10) Commitments and Contingencies
 
    (a)   Purchase Commitments.
 
    The Company enters into limited purchase commitments for the purchase of certain raw materials. Amounts committed under these programs were not significant as of September 30, 2012.
 
    As of September 30, 2012, the Company had outstanding commitments of approximately $8,057 for capital expenditures related to the construction of the Company’s headquarters in Lexington, Kentucky.
 
    (b)   Norfolk County Retirement System, Individually and on behalf of all others similarly situated, Plaintiff v. Tempur-
    Pedic International Inc., Mark A. Sarvary and Dale E. Williams; filed June 20, 2012
 
    Arthur Benning, Jr., Individually and on behalf of all others similarly situated, Plaintiff v. Tempur-Pedic International
    Inc., Mark A. Sarvary and Dale E. Williams; filed June 22, 2012
 
    Following a drop in the Company’s stock price, on June 20 and 22, 2012, the above suits were filed against the Company and two named executive officers in the United States District Court for the Eastern District of Kentucky (Lexington Division), purportedly on behalf of a class of shareholders who purchased the Company’s stock between January 25, 2012 and June 5, 2012. The complaints assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging, among other things, false and misleading statements and concealment of material information relating to the Company’s deteriorating competitive position and projected net sales, earnings per diluted share and related financial performance. The plaintiffs seek damages, interest, costs, attorney’s fees, expert fees and unspecified equitable/injunctive relief. The Company strongly believes that the shareholder suits lack merit and intends to defend against the claims vigorously. This litigation is at a preliminary stage, and the outcome is uncertain, however, and although we do not currently expect to incur a loss with respect to these matters, we cannot currently predict the manner and timing of the resolution of the suits, an estimate of a range of losses or any minimum loss that could result in the event of an adverse verdict in these suits, or whether our applicable insurance policies will provide sufficient coverage for these claims. Accordingly, the Company can give no assurance that these matters will not have a material adverse effect on the Company's financial position or results of operations.  
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
     (c) Benjamin B. Clarke, Individually and On Behalf of All Others Similarly Situated v. Lawrence J.
    Rogers, Richard W. Roedel, John B. Replogle, Paul J. Norris, Dean B. Nelson, Gary E. Morin, James
    W. Johnson, Deborah G. Ellinger, Simon E. Brown, Sealy Corporation, Tempur-Pedic International
    Inc. and Silver Lightning Merger Company, filed October 2, 2012
 
     Robert A. Justewicz, Individually and On Behalf of All Others Similarly Situated v. Sealy Corporation,
    Lawrence J. Rogers, Paul J. Norris, James W. Johnson, Simon E. Brown, Gary E. Morin, Dean B.
    Nelson, Richard W. Roedel, Deborah G. Ellinger, John B. Replogle, Silver Lightning Merger Company
    and Tempur-Pedic International Inc., filed Oct. 3, 2012 
 
    Deno Singh, On Behalf of Himself and All Others Similarly Situated v. Lawrence J. Rogers, Richard
    W. Roedel, John B. Replogle, Paul J. Norris, Dean B. Nelson, Gary E. Morin, James W. Johnston,
    Deborah G. Ellinger, Simon E. Brown, Sealy Corporation, Tempur-Pedic International Inc. and Silver
    Lightning Merger Company, filed October 15, 2012
 
    Jay M. Plourde, On Behalf of Himself and All Others Similarly Situated v. Sealy Corporation,
    Lawrence J. Rogers, Paul Norris, James W. Johnston, Simon E. Brown, Gary E. Morin, Dean B.
    Nelson, Richard Roedel, Deborah G. Ellinger, John B. Replogel, Tempur-Pedic International Inc.,
    Kohlberg Kravis Roberts & Co. L.P. and Silver Lightning Merger Company, filed October 15, 2012
 
    Keith Gamble, Individually and On Behalf of All Others Similarly Situated v. Lawrence J. Rogers,
    Richard W. Roedel, John B. Replogle, Paul J. Norris, Dean B. Nelson, Gary E. Morin, James W.
    Johnston, Deborah G. Ellinger, Simon E. Brown, Sealy Corporation, Tempur-Pedic  International Inc.
    and Silver Lightning Merger Company, filed October 16, 2012
 
    Curtis Nall, On Behalf of Himself and All Others Similarly Situated Shareholders of Sealy Corporation
     v. Lawrence C. Rogers, James W. Johnston, Simon E. Brown, Gary E. Morin, Dean B. Nelson, Richard
    Roedel, Deborah G. Ellinger, John B. Replogle, Paul J. Norris, Sealy Corporation, Tempur-Pedic,
    International Inc., KKR Millennium GP LLC, KKR & Co. L.P., and Silver Lightning Merger Company,
    filed October 17, 2012
 
 
    Following the Company’s announcement of its expected acquisition of Sealy, shareholders of Sealy filed the six (6) putative class action lawsuits named above (collectively, the “Merger Lawsuits”) against Sealy, its board of directors, the Company and its subsidiary, Silver Lightning Merger Company (“Silver”). The Merger Lawsuits generally allege breach of fiduciary duty against Sealy and its board of directors and allege aiding and abetting breach of fiduciary duties against the Company and Silver. The Merger Lawsuits generally claim that the  consideration to be paid to Sealy stockholders under the Merger Agreement is inadequate, that the Merger Agreement contains unfair deal protection provisions and that the Sealy directors are subject to conflicts of interest. The Merger Lawsuits generally seek damages, attorneys’ fees and injunctive relief to enjoin the completion of the Merger. The Company believes that the Merger Lawsuits lack merit and intends to defend against the claims vigorously. The litigation is at a preliminary stage and the outcome is uncertain, however, and although the Company does not currently expect to incur a loss with respect to these matters, the Company cannot currently predict the manner and timing of the resolution of the Merger Lawsuits, an estimate of a range or losses or any minimum loss that could result in the event of an adverse verdict in these suits, or whether the Company’s or Sealy’s applicable insurance policies will provide sufficient coverage for these claims. Accordingly, the Company can give no assurance that these matters will not have a material adverse effect on the Company’s financial position or results of operations.
 
    The Company is involved in various other legal proceedings incidental to the operations of its business. The Company believes that the outcome of all such pending legal proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity, or operating results.

TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
(11) Income Taxes
 
    The Company’s effective tax rate for the three months ended September 30, 2012 and 2011 was 103.4% and 33.5%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2012 and 2011 was 54.8% and 33.4%, respectively. The Company’s effective income tax rate for the three and nine months ended September 30, 2012 and 2011 differed from the U.S. federal statutory rate of 35.0% principally due to the effect of the taxes provided on unremitted foreign earnings discussed in the paragraph below, certain foreign tax rate differentials, state and local income taxes, the release of valuation allowances against deferred tax assets of certain foreign entities, foreign income currently taxable in the U.S., the production activities deduction, and certain other permanent differences.
 
    At July 1, 2012, the Company had $352,748 of undistributed earnings from non-U.S. operations on which no provision for U.S. federal and/or state income tax and foreign withholdings had been provided because Tempur-Pedic International intended to reinvest such earnings indefinitely outside of the United States. During the three months ended September 30, 2012, the Company changed the classification of those earnings to reflect a change in management’s strategic objective that could require the repatriation of foreign earnings. As a result of this change, the Company recognized $41,863 of additional income tax expense during the three months ended September 30, 2012 to record the applicable U.S. deferred income tax liability. As of September 30, 2012, the Company no longer has any undistributed earnings of foreign subsidiaries that are classified as permanently reinvested. The Company expects to repatriate non-U.S. cash holdings upon the closing of the proposed Sealy acquisition.
 
    The Company has received income tax assessments from the Danish Tax Authority ("SKAT") with respect to the 2001-2006 tax years, relating to the royalty paid by one of Tempur-Pedic International’s U.S. subsidiaries to a Danish subsidiary and the position taken by SKAT could apply to subsequent years. The total tax assessment is approximately $144,275 including interest and penalties. The Company filed timely protests with the Danish National Tax Tribunal challenging the tax assessments. The National Tax Tribunal formally agreed to place the Danish tax litigation on hold pending the outcome of a Bilateral Advance Pricing Agreement (“Bilateral APA”) between the United States and SKAT. A Bilateral APA involves an agreement between the Internal Revenue Service (IRS) and the taxpayer, as well as a negotiated agreement with one or more foreign competent authorities under applicable income tax treaties. During the third quarter of 2008, the Company filed the Bilateral APA with the IRS and SKAT. U.S. and Danish competent authorities have met to discuss the Company’s Bilateral APA, and additional meetings are expected. SKAT and the IRS met several times since 2011, most recently in September 2012, to negotiate the matter and have agreed to meet again in the spring of 2013 to continue the negotiation process.  In the event the discussions and negotiations from that meeting do not yield a satisfactory result for the Company the next step for the Company to resolve the matter would be to seek resolution of this issue through an administrative proceeding before the Danish National Tax Tribunal (the “Tribunal”). The Tribunal is a branch of SKAT that is independent of the discussions and negotiations that have taken place to date. If the Tribunal does not rule to the satisfaction of one or both parties, the party seeking redress may choose to litigate the issue in the Danish court system. If the Company moves from the Bilateral APA process to the Tribunal or a proceeding in the Danish court system, SKAT could require the Company to post a cash deposit or other security for taxes it has assessed in an amount to be negotiated, up to the full amount of the claim. The Company believes it has meritorious defenses to the proposed adjustments and will oppose the assessments before the Tribunal and in the Danish courts, as necessary. It is reasonably possible the amount of unrecognized tax benefits may change in the next twelve months. An estimate of the amount of such change cannot be made at this time.
 
    The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is under examination in the U.S. by the Internal Revenue Service for the years 2008 and 2009. With few exceptions, the Company is no longer subject to tax examinations by tax authorities in the U.S. for periods prior to 2008, U.S. state and local municipalities for periods prior to 2006, and in non-U.S. jurisdictions for periods prior to 2001. Additionally, the Company is currently under examination by various tax authorities around the world. The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months as a result of the statute of limitations expiring and/or the examinations being concluded on these returns. However, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the consolidated financial statements. During the nine months ended September 30, 2012, there were no significant changes to the liability for unrecognized tax benefits.
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
(12) Major Customers
 
    The top five customers accounted for approximately 26% and 20% of the Company’s Net sales for the three months ended September 30, 2012 and 2011, respectively, and 23% and 21% of the Company’s Net sales for the nine months ended September 30, 2012 and 2011, respectively. Net sales from one customer in the Company’s North American segment represented approximately 12% and 11% for the three and nine months ended September 30, 2012, respectively. The top five customers also accounted for approximately 25% and 20% of accounts receivable as of September 30, 2012 and 2011, respectively.

(13) (Loss) Earnings Per Common Share

 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
 
Numerator:
                       
Net (loss) income
$
(2,017
)
$
61,949
 
$
83,324
 
$
163,293
 
                         
Denominator:
                       
Denominator for basic earnings per common share-
   weighted average shares
 
59,558
   
66,655
   
62,087
   
67,722
 
Effect of dilutive securities:
                       
    Employee stock-based compensation
 
   
1,916
   
1,537
   
2,125
 
Denominator for diluted earnings per common share-
   adjusted weighted average shares
 
59,558
   
68,571
   
63,624
   
69,847
 
                         
Basic (loss) earnings per common share
$
(0.03
)
$
0.93
 
$
1.34
 
$
2.41
 
                         
Diluted (loss) earnings per common share
$
(0.03
)
$
0.90
 
$
1.31
 
$
2.34
 
 
    The Company excluded 8 shares issuable upon exercise of outstanding stock options for the three months ended September 30, 2011, and 103 and 4 shares for the nine months ended September 30, 2012 and 2011, respectively, from the Diluted earnings per common share computation because their exercise price was greater than the average market price of Tempur-Pedic International’s common stock or they were otherwise anti-dilutive. Holders of non-vested stock-based compensation awards do not have voting rights or rights to receive any dividends on the shares covered by the awards.

TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
(14) Business Segment Information
 
    The Company operates in two business segments: North America and International. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their operations. The North American segment consists of the two U.S. manufacturing facilities and the Company’s North American distribution subsidiaries. Substantially all of the net sales from external customers and long-lived assets included in the tables below for the North American segment relate to the Company’s U.S. operations. The International segment consists of the manufacturing facility in Denmark, whose customers include all of the distribution subsidiaries and third party distributors outside the North American segment. The Company evaluates segment performance based on Net sales and Operating income.
 
    The following table summarizes Total assets by segment:

 
September 30,
 
December 31,
 
 
2012
2011
 
Total assets:
           
    North America
$
766,923
 
$
688,001
 
    International
 
480,647
   
422,246
 
    Intercompany eliminations
 
(334,050
)
 
(281,607
)
 
$
913,520
 
$
828,640
 
 
    The following table summarizes Long-lived assets by segment:

 
September 30,
 
December 31,
 
 
2012
2011
 
Long-lived assets:
           
    North America
$
388,917
 
$
378,267
 
    International
 
67,836
   
61,999
 
 
$
456,753
 
$
440,266
 
 
TEMPUR-PEDIC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per common share amounts)
 
    The following table summarizes segment information:
 
   
Three Months Ended
 
Nine Months Ended
   
September 30,
 
September 30,
 
   
2012
 
2011
 
2012
 
2011
 
Net sales from external customers:
                         
    North America
                         
       Mattresses
 
$
164,293
 
$
192,683
 
$
508,583
 
$
527,398
 
       Pillows
   
20,182
   
19,182
   
56,672
   
53,502
 
       Other
   
56,392
   
67,462
   
171,192
   
174,542
 
   
$
240,867
 
$
279,327
 
$
736,447
 
$
755,442
 
                           
    International
                         
       Mattresses
 
$
64,046
 
$
63,122
 
$
200,228
 
$
178,361
 
       Pillows
   
21,958
   
18,937
   
61,063
   
54,215
 
       Other
   
21,073
   
21,699
   
64,060
   
63,117
 
   
$
107,077
 
$
103,758
 
$
325,351
 
$
295,693
 
   
$
347,944
 
$
383,085
 
$
1,061,798
 
$
1,051,135
 
                           
Inter-segment sales:
                         
    North America
 
$
381
 
$
2,465
 
$
756
 
$
2,778
 
    International
   
910
   
864
   
1,382
   
2,092
 
    Intercompany eliminations
   
(1,291
)
 
(3,329
)
 
(2,138
)
 
(4,870
)
   
$
 
$
 
$
 
$
 
                           
Gross profit:
                         
    North America
 
$
105,024
 
$
139,744
 
$
348,468
 
$
375,760
 
    International
   
66,211
   
60,850
   
195,636
   
176,162
 
   
$
171,235
 
$
200,594
 
$
544,104
 
$
551,922
 
                           
Operating income:
                         
    North America
 
$
34,832
 
$
69,390
 
$
120,299
 
$
179,789
 
    International
   
28,615
   
27,217
   
76,762
   
74,928
 
   
$
63,447
 
$
96,607
 
$
197,061
 
$
254,717
 
                           
Income before income taxes:
                         
    North America
 
$
30,278
 
$
65,827
 
$
107,807
 
$
170,882
 
    International
   
28,759
   
27,286
   
76,656
   
74,435
 
   
$
59,037
 
$
93,113
 
$
184,463
 
$
245,317
 
                           
Depreciation and amortization (including stock-based compensation amortization):
                         
    North America
 
$
2,647
 
$
9,255
 
$
22,312
 
$
28,516
 
    International
   
2,833
   
2,911
   
8,226
   
7,959
 
   
$
5,480
 
$
12,166
 
$
30,538
 
$
36,475
 
                           
Capital expenditures:
                         
    North America
 
$
14,625
 
$
4,434
 
$
27,701
 
$
11,392
 
    International
   
3,105
   
2,309
   
10,693
   
7,449
 
 
 
$
17,730
 
$
6,743
 
$
38,394
 
$
18,841
 
 
 
    The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included in this Form 10-Q. Unless otherwise noted, all of the financial information in this report is condensed consolidated information for the Company. The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements include numerous risks and uncertainties, as described under “Special Note Regarding Forward-Looking Statements” and “Risk Factors” elsewhere in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011. Our actual results may differ materially from those contained in any forward-looking statements. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements contained herein.
 
    In this discussion and analysis, we discuss and explain the financial condition and results of our operations for the three and nine month periods ended September 30, 2012 and 2011, including the following points:
 
    An overview of our business strategy;
    An overview of the proposed acquisition of Sealy Corporation ("Sealy");
    Our Net sales and costs in the periods presented as well as changes between periods;
    Discussion of new initiatives that may affect our future results of operations and financial condition;
    Expected future expenditures for capital projects and sources of liquidity for future operations; and
    The effect of the foregoing on our overall financial performance and condition, as well as factors that could affect our future performance.
 
Executive Overview
 
    General. We are the leading manufacturer, marketer and distributor of premium mattresses and pillows, which we sell in approximately 80 countries under the TEMPUR® and Tempur-Pedic® brands. We believe our premium mattresses and pillows are more comfortable than standard bedding products because our proprietary pressure-relieving TEMPUR® material is temperature sensitive, has a high density and conforms to the body.
 
    We sell our premium mattresses and pillows through four distribution channels in each operating business segment: Retail (furniture and bedding, non-spring and department stores); Direct (direct response, internet and company-owned stores); Healthcare (hospitals, nursing homes, healthcare professionals and medical retailers); and Third party distributors in countries where we do not sell directly through our own subsidiaries.
 
    Business Segments. We have two reportable business segments: North America and International. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their geographies. The North American operating segment consists of two U.S. manufacturing facilities and our North American distribution subsidiaries. The International segment consists of our manufacturing facility in Denmark, whose customers include all of our distribution subsidiaries and third party distributors outside the North American operating segment. We evaluate segment performance based on Net sales and Operating income.

 
Strategy
 
    Our goal is to become the world’s favorite mattress and pillow brand. In order to achieve this long-term goal while managing through the current economic and competitive environment, we plan to complete the proposed acquisition of Sealy, and to continue to pursue certain key Tempur-Pedic® strategic goals using the related strategies discussed below.
 
    Make sure everyone knows that they would sleep better on a Tempur-Pedic® mattress – we plan to continue to invest in our global brand awareness through advertising campaigns that further associate our brand name with overall sleep and premium quality products.
    Make sure there is a Tempur-Pedic® bed and pillow that appeals to everyone – we plan to continue to maintain our focus on premium products at the high end of the category price range that are preferred by consumers.
    Make sure that Tempur-Pedic® products are available to everyone – we plan to expand our points of distribution and the effectiveness of our distribution channels by ensuring our retailers are provided attractive incentives to sell our products.
    Make sure that Tempur-Pedic® bedding products continue to deliver the best sleep – we plan to continue to invest in product research and development to systematically innovate and improve our products in consumer relevant ways
 
    In pursuing these strategic goals, we expect to continue to optimize our cost structure in order to enable these marketing and product development investments.

Acquisition
 
    On September 26, 2012, we entered into an Agreement and Plan of Merger (“Merger Agreement”) to acquire Sealy by merging Sealy with a newly-formed subsidiary of the Company (the “Merger”). Sealy, headquartered in Trinity, North Carolina, owns one of the largest bedding brands in the world, and manufactures and markets a complete line of bedding products. Subject to the terms and conditions of the Merger Agreement, at the effective time and as a result of the Merger, each share of common stock of Sealy issued and outstanding immediately prior to the effective time of the Merger will be cancelled and (other than shares held by Sealy or the Company or their subsidiaries or Sealy stockholders who properly exercise appraisal rights) converted into the right to receive $2.20 in cash. We anticipate that the total consideration to be paid, including the assumption or repayment of outstanding indebtedness of Sealy less cash assumed, will be approximately $1.3 billion. Concurrently, and in connection with entering into the Merger Agreement, we entered into a firm debt commitment letter with Bank of America, N.A. (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith, pursuant to which, subject to the conditions set forth therein, Bank of America has committed to provide to the Company (a) $1.77 billion in senior secured credit facilities (collectively, the “Senior Credit Facilities”), comprised of (i) a term loan A facility of $650.0 million, (ii) a term loan B facility of $770.0 million and (iii) a revolving credit facility of $350.0 million; and (b) $350.0 million in senior unsecured bridge loans (the “Bridge Loans”) to be made available to us as interim financing in the event that our proposed issuance of $350.0 million in senior unsecured notes (the “Notes”) is not completed on or prior to the date of consummation of the Merger. The proceeds of the Senior Credit Facilities and either Bridge Loans or the Notes (collectively, the “Facilities”) will be used to finance the Merger, for the repayment, defeasance or redemption of substantially all existing indebtedness of the Company and Sealy, the costs and expenses related to the Merger and the closing of the Facilities and the ongoing working capital and other general corporate purposes of the Company after consummation of the Merger. The transaction is expected to be completed in the first half of calendar 2013 and is subject to regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other customary conditions. The Merger Agreement contains certain termination rights for both the Company and Sealy and further provides that, upon termination of the Merger Agreement under certain circumstances, Sealy may be obligated to pay us a termination fee of $25.0 million. In addition, if antitrust enforcement agencies either commence or inform the parties that they intend to commence an action to enjoin the Merger, we may be required to pay Sealy (i) a termination fee of $90.0 million if both parties elect to terminate the Merger Agreement or (ii) a termination fee of $90.0 million (or $40.0 million if we elect to terminate the Merger Agreement but Sealy does not so elect to terminate) if the Merger does not close due to a failure to receive antitrust approval in the nine months following the execution of the Merger Agreement, subject to certain extensions.

 
Results of Operations
 
    A summary of our results for the three and nine months ended September 30, 2012 include the following:
 
    (Loss) earnings per diluted common share (EPS) were $(0.03) for the three months ended September 30, 2012 compared to $0.90 for the three months ended September 30, 2011. For the nine months ended September 30, 2012 EPS were $1.31 compared to $2.34 for the same period in 2011.
    Adjusted EPS were $0.70 for the three months ended September 30, 2012 compared to $0.90 for the three months ended September 30, 2011. For the nine months ended September 30, 2012 Adjusted EPS were $2.01 compared to $2.34 for the same period in 2011. For a discussion and reconciliation of Adjusted EPS to GAAP EPS refer to the non-GAAP financial information set forth below under the heading “Non-GAAP Financial Information”.
    Net sales for the three months ended September 30, 2012 decreased to $348.0 million from $383.1 million for the same period in 2011. Net sales for the nine months ended September 30, 2012 increased to $1,061.8 million from $1,051.1 million for the same period in 2011.
 
(In thousands, except per Three Months Ended   Nine Months Ended  
common share amounts) September 30,   September 30,  
  2012       2011       2012       2011      
Net sales $ 347,944   100.0 % $ 383,085   100.0 % $ 1,061,798   100.0 % $ 1,051,135   100.0 %
Cost of sales
  176,709    50.8      182,491   47.6      517,694    48.8      499,213    47.5  
Gross profit   171,235    49.2      200,594    52.4      544,104    51.2      551,922    52.5  
Selling and marketing 
   expenses
  76,232    21.9      72,439    18.9      243,203    22.9      204,789    19.5  
General administrative 
   and other expenses
  31,556    9.1      31,548    8.3      103,840    9.8      92,416    8.8  
Operating income   63,447    18.2      96,607    25.2      197,061    18.5      254,717    24.2  
Interest expense, net   (4,793 )  (1.4 )    (3,265  (0.9    (13,026 )  (1.1 )    (8,450  (0.8
Other income (expense),
   net
  383    0.1      (229      428        (950  (0.1
Income before income 
  taxes
  59,037    16.9      93,113   24.3      184,463   17.4      245,317    23.3  
Income tax provision   61,054    17.5      31,164    8.1      101,139    9.5      82,024    7.8  
Net (loss) income $ (2,017 ) (0.6 )% $  61,949    16.2 % $  83,324    7.8 % $  163,293    15.5 %
                                         
(Loss) earnings per
   common share:
                                       
    Basic $ (0.03 )     $ 0.93       $ 1.34       $ 2.41      
    Diluted $ (0.03 )     $  0.90       $  1.31       $ 2.34      
Weighted average
   common shares
   outstanding:
                                       
    Basic   59,558         66,655          62,087          67,722      
    Diluted   59,558          68,571          63,624         69,847      
 
 
Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011
 
    A summary of Net sales, by channel and by segment, is set forth below:

 
CONSOLIDATED
 
NORTH AMERICA
 
INTERNATIONAL
 
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
 
September 30,
 
September 30,
 
September 30,
 
(in thousands)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
Retail
$
306,486
 
$
342,804
 
$
221,186
 
$
257,049
 
$
85,300
 
$
85,755
 
Direct
 
27,093
   
25,405
   
16,729
   
19,588
   
10,364
   
5,817
 
Healthcare
 
7,407
   
8,076
   
2,952
   
2,690
   
4,455
   
5,386
 
Third Party
 
6,958
   
6,800
   
   
   
6,958
   
6,800
 
 
$
347,944
 
$
383,085
 
$
240,867
 
$
279,327
 
$
107,077
 
$
103,758
 
 
    A summary of Net sales, by product and by segment, is set forth below:

 
CONSOLIDATED
 
NORTH AMERICA
 
INTERNATIONAL
 
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
 
September 30,
 
September 30,
 
September 30,
 
(in thousands)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
Mattresses
$
228,339
 
$
255,805
 
$
164,293
 
$
192,683
 
$
64,046
 
$
63,122
 
Pillows
 
42,140
   
38,119
   
20,182
   
19,182
   
21,958
   
18,937
 
Other
 
77,465
   
89,161
   
56,392
   
67,462
   
21,073
   
21,699
 
 
$
347,944
 
$
383,085
 
$
240,867
 
$
279,327
 
$
107,077
 
$
103,758
 
 
    Net sales. Net sales for the three months ended September 30, 2012 decreased to $347.9 million from $383.1 million for the same period in 2011, a decrease of $35.1 million, or 9.2%. We believe our decreased revenues are primarily the result of an increased competitive environment in our North American segment. Consolidated Mattress sales decreased $27.5 million, or 10.7%, compared to the third quarter of 2011. The decrease in Mattress sales occurred primarily in our Retail channel with Net sales decreasing to $306.5 million from $342.8 million for the same period in 2011, a decrease of $36.3 million, or 10.6%. Consolidated Other, which primarily includes adjustable bed bases and foundations, decreased $11.7 million, or 13.1%. Many of our Other products are sold with mattress purchases. Therefore, when Mattress sales decrease, Other products are also negatively impacted. Pillow sales increased $4.0 million, or 10.5%, from the same period in 2011. Direct sales increased $1.7 million, or 6.6%, from the same period in 2011. The principal factors that impacted Net sales for each segment are discussed below, in the respective segment discussion.
 
    North America. North American Net sales for the three months ended September 30, 2012 decreased to $240.9 million from $279.3 million for the same period in 2011, a decrease of $38.5 million, or 13.8%. Our North American Retail channel contributed $221.2 million in Net sales for the three months ended September 30, 2012 for a decrease of $35.9 million, or 14.0%, compared to the same period in 2011. During 2012, there has been a significant increase in the number of competitive product introductions, supported by aggressive marketing and incentives. We believe this change in our competitive environment was the primary driver of our decreased Net sales. North American Mattress sales decreased $28.4 million, or 14.7%, over the same period in 2011. North American Direct sales decreased $2.9 million, or 14.6%, over the same period in 2011. Other Net sales decreased $11.1 million, or 16.4%, compared to the same period in 2011, consistent with the decrease in Mattress sales.
 
    We expect our current competitive environment to continue into the foreseeable future. During the third quarter of 2012, we undertook several initiatives to stabilize North American sales. These initiatives include continued innovation to create premium differentiated products that are preferred by consumers, which will ensure our retailers are motivated to support our products, and continuing our commitment to consumer advertising.
 
 
    International. International Net sales for the three months ended September 30, 2012 increased to $107.1 million from $103.8 million for the same period in 2011, an increase of $3.3 million, or 3.2%. On a constant currency basis, our International Net sales increased approximately 11.1%. International Net sales increased primarily due to expanding points of distribution and investments in our brand awareness. The International Direct channel increased $4.5 million, or 78.2% compared to the same period in 2011, due to an increase in the number of company-owned stores. International Pillow sales in the third quarter of 2012 increased $3.0 million, or 16.0%, over the same period in 2011.
 
    Gross profit. Gross profit for the three months ended September 30, 2012 decreased to $171.2 million from $200.6 million for the same period in 2011, a decrease of $29.4 million, or 14.6%. The Gross profit margin for the three months ended September 30, 2012 was 49.2% as compared to 52.4% for the same period in 2011. Our Gross profit margin is impacted by, among other factors, geographic mix between segments. Additionally, our Gross profit margin includes a royalty paid by the North American segment to our International segment based on production volume, which has the effect of lowering the North American segment’s reported Gross profit margin, and increasing the International segment’s reported Gross profit margin. Costs associated with Net sales are recorded in Cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in this process. The principal factors that impacted Gross profit margin during the year are identified and discussed below in the respective segment discussions.
 
    North America. North American Gross profit for the three months ended September 30, 2012 decreased to $105.0 million from $139.7 million for the same period in 2011, a decrease of $34.7 million, or 24.8%.  The Gross profit margin in our North American segment was 43.6% and 50.0% for the three months ended September 30, 2012 and 2011, respectively. The decrease in our North American Gross profit margin was primarily driven by unfavorable product mix and increased promotions and discounts related to new product introductions. Our North American Cost of sales for the three months ended September 30, 2012 decreased to $135.8 million from $139.6 million for the same period in 2011, a decrease of $3.7 million, or 2.7%.
 
    International. International Gross profit for the three months ended September 30, 2012 increased to $66.2 million from $60.9 million for the same period in 2011, an increase of $5.4 million, or 8.8%. The Gross profit margin in our International segment was 61.8% and 58.6% for the three months ended September 30, 2012 and 2011, respectively. The increase in our International Gross profit margin was primarily driven by efficiencies in manufacturing and fixed cost leverage related to higher production volumes. In addition, we incurred costs related to strategic investments during the three months ended September 30, 2011, including an information technology upgrade at our manufacturing facility in Denmark, and floor model discounts related to new product introductions. Our International Cost of sales for the three months ended September 30, 2012 decreased to $40.9 million from $42.9 million for the same period in 2011, a decrease of $2.0 million, or 4.8%.
 
    Selling and marketing expenses. Selling and marketing expenses include advertising and media production associated with our Direct channel, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings, point of purchase materials and sales force compensation. We also include in Selling and marketing expenses certain new product development costs, including market research and new product testing. Selling and marketing expenses increased to $76.2 million for the three months ended September 30, 2012 as compared to $72.4 million for the three months ended September 30, 2011, an increase of $3.8 million, or 5.2%. Selling and marketing expenses as a percentage of Net sales were 21.9% and 18.9% for the three months ended September 30, 2012 and 2011, respectively. Our advertising expenses for the three months ended September 30, 2012 were $38.4 million compared to $39.6 million in 2011, a decrease of $1.2 million, or 3.1%. Advertising expenses as a percentage of Net sales were 11.0% and 10.3% for the three months ended September 30, 2012 and 2011, respectively. All other selling and marketing expenses as a percentage of Net sales were approximately 10.9% and 8.6% for the three months ended September 30, 2012 and 2011, respectively. All other selling and marketing expenses increased $5.0 million, or 15.3%, due to increases in promotional related expenses of $2.8 million and costs associated with our increase in company-owned stores of $2.5 million, partially offset by a benefit recorded for the performance restricted share units (“PRSUs”) granted in 2011 and 2012 of $1.8 million following our re-evaluation of the probability of meeting certain required financial metrics related to the grants.
 
 
    General, administrative and other expenses. General, administrative and other expenses include management salaries, information technology, professional fees, depreciation of furniture and fixtures, leasehold improvements and computer equipment, expenses for administrative functions and research and development costs. General, administrative and other expenses as a percentage of Net sales were 9.1% and 8.3% for the three months ended September 30, 2012 and 2011, respectively. General, administrative and other expenses increased to $31.6 million for the three months ended September 30, 2012 as compared to $31.5 million for the same period in 2011. General, administrative and other expenses were flat compared to the three months ended September 30, 2011 due to increased legal and professional fees of $4.4 million, primarily related to transaction costs related to the proposed acquisition of Sealy and increased litigation costs. These increases were offset by a $6.1 million benefit recorded for the PRSUs granted in 2011 and 2012 following our re-evaluation of the probability of meeting certain required financial metrics related to the grants. We expect General, administrative and other expenses to continue to be impacted by transaction and integration costs related to the proposed acquisition of Sealy.
 
    Research and development expenses for the three months ended September 30, 2012 were $3.9 million compared to $2.4 million for the same period in 2011, an increase of $1.5 million, or 63.0%. Consistent with our strategy, we continue to invest in research and development in order to improve our existing product lines and continue to create new and differentiated products.
 
    Interest expense, net. Interest expense, net, includes the interest costs associated with our borrowings and the amortization of deferred financing costs. Interest expense, net, increased to $4.8 million for the three months ended September 30, 2012 as compared to $3.3 million for the same period in 2011, an increase of $1.5 million, or 46.8%. The increase in interest expense is primarily attributable to an increase in our debt outstanding at September 30, 2012 compared to our debt outstanding at September 30, 2011 and an increase in our effective interest rate.
 
    Income before income taxes. Income before income taxes for the quarter ended September 30, 2012 decreased to $59.0 million from $93.1 million for the same period in 2011, a decrease of $34.1 million, or 36.6%. North America Income before income taxes for the quarter ended September 30, 2012 decreased to $30.3 million from $65.8 million for the same period in 2011, a decrease of $35.5 million, or 54.0%. International Income before income taxes for the quarter ended September 30, 2012 increased to $28.8 million from $27.3 million for the same period in 2011, an increase of $1.5 million, or 5.4%. The decrease in Income before income taxes was a result of the items discussed above.
 
    Income tax provision. Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and includes the impact of net operating losses for certain of our foreign operations. Our effective tax rate for the three months ended September 30, 2012 and 2011 was 103.4% and 33.5%, respectively. During the three months ended September 30, 2012, we changed the classification of our undistributed earnings from non-U.S. operations on which no provision for U.S. federal and/or state income tax and foreign withholdings had been provided because Tempur-Pedic International intended to reinvest such earnings indefinitely outside of the United States to reflect a change in management’s strategic objectives that could require the repatriation of foreign earnings. As a result of this change, we recognized $41,863 of additional income tax expense during the three months ended September 30, 2012 to record the applicable U.S. deferred income tax liability. We expect to repatriate non-U.S. cash holdings upon the closing of the proposed Sealy acquisition.
 
 
Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011
 
    A summary of Net sales, by channel and by segment, is set forth below:

 
CONSOLIDATED
 
NORTH AMERICA
 
INTERNATIONAL
 
 
Nine Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
September 30,
 
(in thousands)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
Retail
$
932,301
 
$
926,258
 
$
668,657
 
$
692,383
 
$
263,644
 
$
233,875
 
Direct
 
83,400
   
71,479
   
58,713
   
54,844
   
24,687
   
16,635
 
Healthcare
 
23,039
   
25,073
   
9,077
   
8,215
   
13,962
   
16,858
 
Third Party
 
23,058
   
28,325
   
   
   
23,058
   
28,325
 
 
$
1,061,798
 
$
1,051,135
 
$
736,447
 
$
755,442
 
$
325,351
 
$
295,693
 
 
    A summary of Net sales, by product and by segment, is set forth below:

 
CONSOLIDATED
 
NORTH AMERICA
 
INTERNATIONAL
 
 
Nine Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
September 30,
 
(in thousands)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
Mattresses
$
708,811
 
$
705,759
 
$
508,583
 
$
527,398
 
$
200,228
 
$
178,361
 
Pillows
 
117,735
   
107,717
   
56,672
   
53,502
   
61,063
   
54,215
 
Other
 
235,252
   
237,659
   
171,192
   
174,542
   
64,060
   
63,117
 
 
$
1,061,798
 
$
1,051,135
 
$
736,447
 
$
755,442
 
$
325,351
 
$
295,693
 
 
    Net sales. Net sales for the nine months ended September 30, 2012 increased to $1,061.8 million from $1,051.1 million for the same period in 2011, an increase of $10.7 million, or 1.0%.  During the three months ended March 31, 2012, we experienced an increase of 18.0% in our Net sales; however, this was offset by a decline in our Net sales during the three months ended June 30, 2012 and September 30, 2012 of 3.7% and 9.2%, respectively. During the first quarter of 2012, we believe our increased revenues were primarily a result of investments made in marketing and expanding points of distribution. Throughout the second and third quarters of 2012, we believe our decreased revenues were driven by increased competition in our North American segment. Consolidated Pillow sales increased $10.0 million, or 9.3%, compared to the same period in 2011. Direct sales increased $11.9 million, or 16.7%, from the same period in 2011 due to an increase in company-owned stores. The principal factors that impacted Net sales for each segment are discussed below, in the respective segment discussion.
 
    North America. North American Net sales for the nine months ended September 30, 2012 decreased to $736.4 million from $755.4 million for the same period in 2011, a decrease of $19.0 million, or 2.5%.  During the three months ended March 31, 2012, we experienced an increase in North American Net sales of 17.5%; however, this was offset by a decline in North American Net sales during the three months ended June 30, 2012 and September 30, 2012 of 8.3% and 13.8%, respectively. During the first quarter of 2012, we believe that our increased advertising investments had a positive impact on our performance. Throughout the second and third quarters of 2012, we believe the significant increase in the number of competitive product introductions supported by aggressive marketing and incentives was the primary cause of our decreased Net sales. Our North American Retail channel contributed $668.7 million in Net sales for the nine months ended September 30, 2012, a decrease of $23.7 million, or 3.4%. As a result, North American Mattress sales decreased $18.8 million, or 3.6% over the same period in 2011. Net sales in the Direct channel increased by $3.9 million, or 7.1%. We believe increased sales in the Direct channel are a result of our focus on building our brand awareness and encouraging consumers to visit our enhanced website through our advertisements. Other Net sales decreased $3.4 million, or 1.9%, compared to the same period in 2011, consistent with the decrease in Mattress sales. The decline in Other Net sales was caused by a decrease in Mattress sales, partially offset by continued improvement in attach rates on adjustable bed bases, which are sold at a higher price point than traditional foundations.
 
 
    We expect our current competitive environment to continue into the foreseeable future. During the second and third quarters of 2012, we undertook several initiatives to stabilize North American sales. These initiatives include continued innovation to create premium differentiated products that are preferred by consumers, which will ensure our retailers are motivated to support our products, and continued our commitment to consumer advertising.
 
    International. International Net sales for the nine months ended September 30, 2012 increased to $325.4 million from $295.7 million for the same period in 2011, an increase of $29.7 million, or 10.0%. On a constant currency basis, our International Net sales increased approximately 16.5%. The International Retail channel increased $29.8 million, or 12.7%, compared to the same period in 2011. International Retail Net sales increased primarily due to expanding points of distribution and investments in our brand awareness. As a result, International Mattress sales in the nine months ended September 30, 2012 increased $21.9 million, or 12.3%, over the same period in 2011. Pillow sales for the nine months ended September 30, 2012 increased $6.8 million, or 12.6%, compared to the same period in 2011. The International Direct channel increased $8.1 million, or 48.4% compared to the same period in 2011, due to an increase in the number of company-owned stores.
 
    Gross profit. Gross profit for the nine months ended September 30, 2012 decreased to $544.1 million from $551.9 million for the same period in 2011, a decrease of $7.8 million, or 1.4%. The Gross profit margin for the nine months ended September 30, 2012 was 51.2% as compared to 52.5% for the same period in 2011. Gross profit margins increased 1.3% during the first quarter of 2012, offset by decreases in the second and third quarters of 2012 of 2.2% and 3.2%, respectively. Our Gross profit margin is impacted by, among other factors, geographic mix between segments and product mix. Additionally, our Gross profit margin includes a royalty paid by the North American segment to our International segment based on production volume, which has the effect of lowering the North American segment’s reported Gross profit margin, and increasing the International segment’s reported Gross profit margin. Costs associated with Net sales are recorded in Cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in this process. The principal factors that impacted Gross profit margin during the year are identified and discussed below in the respective segment discussions.
 
    North America. North American Gross profit for the nine months ended September 30, 2012 decreased to $348.5 million from $375.8 million for the same period in 2011, a decrease of $27.3 million, or 7.3%.  The Gross profit margin in our North American segment was 47.3% and 49.7% for the nine months ended September 30, 2012 and 2011, respectively.  Our North American Gross profit increased 2.2% during the first quarter of 2012, offset by decreases in the second and third quarters of 3.4% and 6.4%, respectively. The increase in North American Gross profit margin for the first quarter of 2012 was primarily driven by our productivity programs, which generated improved efficiencies in manufacturing and distribution, and fixed cost leverage related to higher production volumes, partially offset by higher costs associated with new product launches. The decrease in our North American Gross profit margin for the second and third quarters of 2012 was primarily driven by increased promotions and discounts, new product introductions, fixed cost de-leverage related to lower production volumes, and unfavorable product mix.  Our North American Cost of sales for the nine months ended September 30, 2012 increased to $388.0 million from $379.7 million for the same period in 2011, an increase of $8.3 million, or 2.2%.
 
    International. International Gross profit for the nine months ended September 30, 2012 increased to $195.6 million from $176.2 million for the same period in 2011, an increase of $19.5 million, or 11.1%. The Gross profit margin in our International segment was 60.1% and 59.6% for the nine months ended September 30, 2012 and 2011, respectively. The increase in our International Gross profit margin was primarily driven by efficiencies in manufacturing and fixed cost leverage related to higher production volumes. In addition, we incurred costs related to strategic investments during the three months ended September 30, 2011, including an information technology upgrade at our manufacturing facility in Denmark, and floor model discounts related to new product introductions. Our International Cost of sales for the nine months ended September 30, 2012 increased to $129.7 million from $119.5 million for the same period in 2011, an increase of $10.2 million, or 8.5%.
 
 
    Selling and marketing expenses. Selling and marketing expenses include advertising and media production associated with our Direct channel, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings, point of purchase materials and sales force compensation. We also include in Selling and marketing expenses certain new product development costs, including market research and new product testing. Selling and marketing expenses increased to $243.2 million for the nine months ended September 30, 2012 as compared to $204.8 million for the nine months ended September 30, 2011, an increase of $38.4 million, or 18.8%. Selling and marketing expenses as a percentage of Net sales were 22.9% and 19.5% for the nine months ended September 30, 2012 and 2011, respectively. Our advertising expenses for the nine months ended September 30, 2012 were $131.3 million compared to $109.8 million during 2011, an increase of $21.4 million, or 19.5%. Advertising expenses as a percentage of Net sales were 12.4% and 10.4% for the nine months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012, consistent with our strategy, we made additional investments to increase our brand awareness in North America and certain International markets. All other selling and marketing expenses increased $17.0 million, or 17.9%, primarily due to increases in promotional and related expenses of $6.8 million and costs associated with our increase in company-owned stores of $5.1 million, partially offset by a benefit recorded for PRSUs granted in 2011 and 2012 of $2.3 million following our re-evaluation of the probability of meeting certain required financial metrics related to the grants. All other selling and marketing expenses as a percentage of Net sales were approximately 10.5% and 9.0% for the nine months ended September 30, 2012 and 2011, respectively.
 
    General, administrative and other expenses. General, administrative and other expenses include management salaries, information technology, professional fees, depreciation of furniture and fixtures, leasehold improvements and computer equipment, expenses for administrative functions and research and development costs. General, administrative and other expenses as a percentage of Net sales were 9.8% and 8.8% for the nine months ended September 30, 2012 and 2011, respectively. General, administrative and other expenses increased to $103.8 million for the nine months ended September 30, 2012 as compared to $92.4 million for the same period in 2011, an increase of $11.4 million, or 12.4%. The increase in General, administrative and other expenses is primarily due to an increase in professional fees of $8.0 million associated with strategic research initiatives, the proposed acquisition of Sealy and increased litigation costs, as well as incremental investments in information technology and associated depreciation expense of $4.5 million. Also, in 2011, we recorded a benefit for favorable settlements of indirect taxes with certain regulatory authorities of $3.5 million that did not recur in 2012. These increases in 2012 were offset by a $7.3 million benefit recorded for PRSUs granted in 2011 and 2012 following our re-evaluation of the probability of meeting certain required financial metrics related to the grants. We expect General, administrative and other expenses to continue to be impacted by transaction and integration costs related to the proposed acquisition of Sealy.
 
    Research and development expenses for the nine months ended September 30, 2012 were $11.1 million compared to $7.3 million for the same period in 2011, an increase of $3.8 million, or 52.8%. Consistent with our strategy, we continue to invest in research and development in order to improve our existing product line and continue to introduce new and differentiated products.
 
    Interest expense, net. Interest expense, net, includes the interest costs associated with our borrowings and the amortization of deferred financing costs. Interest expense, net, increased to $13.0 million for the nine months ended September 30, 2012 as compared to $8.5 million for the same period in 2011, an increase of $4.6 million, or 54.2%. The increase in interest expense is primarily attributable to an increase in our debt outstanding at September 30, 2012 compared to September 30, 2011 and an increase in our effective interest rate.
 
    Income before income taxes. Income before income taxes for the nine months ended September 30, 2012 decreased to $184.5 million from $245.3 million for the same period in 2011, a decrease of $60.9 million, or 24.8%. North America Income before income taxes for the nine months ended September 30, 2012 decreased to $107.8 million from $170.9 million for the same period in 2011, a decrease of $63.1 million, or 36.9%. International Income before income taxes for the nine months ended September 30, 2012 increased to $76.7 million from $74.4 million for the same period in 2011, an increase of $2.2 million, or 3.0%. The decrease in Income before income taxes was a result of the items discussed above.
 
 
    Income tax provision. Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and includes the impact of net operating losses for certain of our foreign operations. Our effective tax rate for the nine months ended September 30, 2012 and 2011 was 54.8% and 33.4%, respectively. During the three months ended September 30, 2012, we changed the classification of our undistributed earnings from non-U.S. operations on which no provision for U.S. federal and/or state income tax and foreign withholdings had been provided because Tempur-Pedic International intended to reinvest such earnings indefinitely outside of the United States to reflect a change in management’s strategic objectives that could require the repatriation of foreign earnings. As a result of this change, we recognized $41,863 of additional income tax expense during the three months ended September 30, 2012 to record the applicable U.S. deferred income tax liability. We expect to repatriate non-U.S. cash holdings upon the closing of the proposed Sealy acquisition.

Liquidity and Capital Resources
 
Liquidity
 
    Our principal sources of funds are cash flows from operations, borrowings made pursuant to our Senior Credit Facility and Cash and cash equivalents on hand. Principal uses of funds consist of share repurchases made from time to time pursuant to share repurchase authorizations, payments of principal and interest on our Senior Credit Facility, acquisitions of certain former third party distributors, capital expenditures and working capital needs. At September 30, 2012, we had working capital of $207.0 million including Cash and cash equivalents of $151.7 million compared to working capital of $212.4 million including $111.4 million in Cash and cash equivalents as of December 31, 2011.
 
    Our cash flow from operations decreased to $153.7 million for the nine months ended September 30, 2012 from $179.0 million for the nine months ended September 30, 2011. The decrease in operating cash flow for the nine months ended September 30, 2012 compared to nine months ended September 30, 2011 was primarily due to decreased Net income, partially offset by increased deferred income taxes related to the repatriation of foreign cash strategy and an increase in changes in operating assets and liabilities.
 
    Net cash used by investing activities increased to $42.3 million for the nine months ended September 30, 2012 as compared to $25.4 million for the nine months ended September 30, 2011, due to an increase in capital expenditures as described below.
 
    Cash flow used by financing activities was $70.4 million for the nine months ended September 30, 2012 compared to cash flow used of $102.3 million for the same period in 2011, representing a decrease of $31.9 million. This decrease is primarily related to a decrease in share repurchases, partially offset by decreased net borrowings under the Senior Credit Facility.

Capital Expenditures
 
    Capital expenditures totaled $38.4 million for the nine months ended September 30, 2012 and $18.8 million for the nine months ended September 30, 2011, respectively. We currently expect our 2012 capital expenditures to be approximately $50.0 million. This expected increase in capital expenditures in 2012 is attributable to continued strategic investments that we believe will support our plans for continued growth in future periods, including information technology upgrades and a new corporate headquarters in Lexington, Kentucky.

Non-GAAP Financial Information
 
    We provide information regarding EBITDA, Funded debt and Adjusted earnings per share, which are not recognized terms under U.S. GAAP and do not purport to be alternatives to Net income as a measure of operating performance or Total debt. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. A reconciliation of our Net income to EBITDA and a reconciliation of Total debt to Funded debt are provided below. We believe the use of these non-GAAP financial measures provides investors with additional useful information with respect to our Senior Credit Facility and our compliance with the related debt covenants. A reconciliation of our Adjusted earnings per share is provided below. We believe that the use of this non-GAAP financial measure provides investors with additional useful information with respect to the impact of the repatriation of foreign earnings and transaction costs incurred related to the proposed acquisition of Sealy.

 
Debt Service
 
    Our long-term debt increased to $649.5 million as of September 30, 2012 from $585.0 million as of December 31, 2011. After giving effect to $649.5 million in borrowings under the Senior Credit Facility and letters of credit outstanding of $1.0 million, total availability under the Revolvers was $119.5 million as of September 30, 2012.
 
    As of September 30, 2012, we are in compliance with our debt covenants. The table below sets forth the calculation of our compliance with the Funded debt to Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) covenant. Both Funded debt and EBITDA are terms that are not recognized under U.S. GAAP and do not purport to be alternatives to Net income as a measure of operating performance or Total debt.

Reconciliation of Net income to EBITDA
 
    The following table sets forth the reconciliation of the Company’s reported Net income (loss) to the calculation of EBITDA for each of the quarters ended December 31, 2012, March 31, 2012, June 30, 2012 and September 30, 2012, as well as the twelve months ended September 30, 2012:

   
Three Months Ended
 
Twelve Months Ended
 
   
December 31,
 
March 31,
 
June 30,
 
September 30,
 
September 30,
 
(in thousands)
 
2011
 
2012
 
2012
 
2012
 
2012
 
GAAP Net income (loss)
 
$
56,315
 
$
56,218
 
$
29,123
 
$
(2,017
)
$
139,639
 
Plus:
                               
   Interest expense
   
3,498
   
4,066