10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

ACT OF 1934

For the Quarterly Period Ended July 1, 2017

Commission File Number: 0-25121

SELECT COMFORT CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota	41-1597886
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES ý NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	ý		Accelerated filer o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company o
			Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

As of July 1, 2017, 41,066,000 shares of the Registrant’s Common Stock were outstanding.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

INDEX

		Page
PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statement of Shareholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II: OTHER INFORMATION		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
SIGNATURES		26

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except per share amounts)

	July 1, 2017		December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	2,082	$	11,609
Accounts receivable, net of allowance for doubtful accounts of $856 and $884, respectively	24,486		19,705
Inventories	69,856		75,026
Income taxes receivable	3,681		—
Prepaid expenses	10,686		8,705
Other current assets	18,397		23,282
Total current assets	129,188		138,327
Non-current assets:
Property and equipment, net	205,621		208,367
Goodwill and intangible assets, net	78,678		80,817
Deferred income taxes	—		4,667
Other non-current assets	27,243		24,988
Total assets	$	440,730	$	457,166
Liabilities and Shareholders’ Equity
Current liabilities:
Borrowings under revolving credit facility	$	13,950	$	—
Accounts payable	105,593		105,375
Customer prepayments	45,725		26,207
Accrued sales returns	12,602		15,222
Compensation and benefits	29,051		19,455
Taxes and withholding	6,547		23,430
Other current liabilities	39,195		35,628
Total current liabilities	252,663		225,317
Non-current liabilities:
Deferred income taxes	307		—
Other non-current liabilities	73,321		71,529
Total liabilities	326,291		296,846
Shareholders’ equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value; 142,500 shares authorized, 41,066 and 43,569 shares issued and outstanding, respectively	411		436
Additional paid-in capital	—		—
Retained earnings	114,028		159,884
Total shareholders’ equity	114,439		160,320
Total liabilities and shareholders’ equity	$	440,730	$	457,166

See accompanying notes to condensed consolidated financial statements.

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Net sales	$	284,673		$	276,878		$	678,572		$	629,858
Cost of sales	108,054			105,617			255,494			249,523
Gross profit	176,619			171,261			423,078			380,335
Operating expenses:
Sales and marketing	144,498			134,785			313,764			285,453
General and administrative	28,819			27,018			62,588			57,924
Research and development	6,363			7,062			13,959			14,664
Total operating expenses	179,680			168,865			390,311			358,041
Operating (loss) income	(3,061		)	2,396			32,767			22,294
Other expense, net	(282		)	(229		)	(420		)	(326		)
(Loss) income before income taxes	(3,343		)	2,167			32,347			21,968
Income tax (benefit) expense	(2,565		)	751			8,664			7,583
Net (loss) income	$	(778	)	$	1,416		$	23,683		$	14,385
Basic net (loss) income per share:
Net (loss) income per share – basic	$	(0.02	)	$	0.03		$	0.56		$	0.30
Weighted-average shares – basic	41,716			46,394			42,233			47,247
Diluted net (loss) income per share:
Net (loss) income per share – diluted	$	(0.02	)	$	0.03		$	0.55		$	0.30
Weighted-average shares – diluted	41,716			47,044			43,080			47,945

See accompanying notes to condensed consolidated financial statements.

3

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(unaudited - in thousands)

	Three Months Ended					Six Months Ended
	July 1, 2017			July 2, 2016		July 1, 2017		July 2, 2016
Net (loss) income	$	(778	)	$	1,416	$	23,683	$	14,385
Other comprehensive income – unrealized gain on available-for-sale marketable debt securities, net of income tax	—			—		—		14
Comprehensive (loss) income	$	(778	)	$	1,416	$	23,683	$	14,399

See accompanying notes to condensed consolidated financial statements.

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited - in thousands)

	Common Stock					Additional Paid-in Capital			Retained Earnings			Total
	Shares		Amount
Balance at December 31, 2016	43,569		$	436		$	—		$	159,884		$	160,320
Net income	—		—			—			23,683			23,683
Exercise of common stock options	180		2			2,652			—			2,654
Stock-based compensation	581		6			7,870			—			7,876
Repurchases of common stock	(3,264	)	(33		)	(10,522		)	(69,539		)	(80,094		)
Balance at July 1, 2017	41,066		$	411		$	—		$	114,028		$	114,439

See accompanying notes to condensed consolidated financial statements.

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

	Six Months Ended
	July 1, 2017			July 2, 2016
Cash flows from operating activities:
Net income	$	23,683		$	14,385
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	31,177			27,960
Stock-based compensation	7,876			7,606
Net loss on disposals and impairments of assets	2			7
Excess tax benefits from stock-based compensation	—			(472		)
Deferred income taxes	4,974			985
Changes in operating assets and liabilities:
Accounts receivable	(4,781		)	5,489
Inventories	5,170			12,904
Income taxes	(14,532		)	15,324
Prepaid expenses and other assets	2,110			(6,838		)
Accounts payable	11,858			(15,282		)
Customer prepayments	19,518			(26,885		)
Accrued compensation and benefits	9,834			9,249
Other taxes and withholding	(6,032		)	1,654
Other accruals and liabilities	(2,050		)	1,034
Net cash provided by operating activities	88,807			47,120
Cash flows from investing activities:
Purchases of property and equipment	(27,132		)	(23,764		)
Proceeds from marketable debt securities	—			15,090
Proceeds from sales of property and equipment	—			67
Decrease in restricted cash	3,150			—
Net cash used in investing activities	(23,982		)	(8,607		)
Cash flows from financing activities:
Repurchases of common stock	(80,094		)	(71,366		)
Net increase in short-term borrowings	3,098			12,574
Proceeds from issuance of common stock	2,654			1,623
Excess tax benefits from stock-based compensation	—			472
Debt issuance costs	(10		)	(409		)
Net cash used in financing activities	(74,352		)	(57,106		)
Net decrease in cash and cash equivalents	(9,527		)	(18,593		)
Cash and cash equivalents, at beginning of period	11,609			20,994
Cash and cash equivalents, at end of period	$	2,082		$	2,401

See accompanying notes to condensed consolidated financial statements.

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and six months endedJuly 1, 2017 of Select Comfort Corporation and 100%-owned subsidiaries (Select Comfort or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of July 1, 2017 and December 31, 2016, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and other recent filings with the SEC.

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

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

Revenue Recognition

At July 1, 2017 and December 31, 2016, we had deferred revenue totaling $67 million and $61 million, of which $25 million and $21 million are included in other current liabilities, respectively, and $42 million and $40 million are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also have related deferred costs totaling $38 million and $33 million, of which $14 million and $11 million are included in other current assets, respectively, and $24 million and $22 million are included in other non-current assets, respectively, in our consolidated balance sheets. The deferred revenue and costs are recognized over the product’s estimated life of four years.

New Accounting Pronouncements

Adopted

In March 2016, the Financial Accounting Standards Board (FASB) issued new guidance on the accounting for, and disclosure of, stock-based compensation which we adopted effective January 1, 2017. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, forfeitures and classification on the statement of cash flows. Under the previous guidance, excess tax benefits and deficiencies were recognized in additional paid-in capital in the consolidated balance sheets. Upon adoption of the new guidance, these excess tax benefits or deficiencies are required to be recognized as discrete adjustments to income tax expense in the consolidated statements of operations on a prospective basis. During the three and six months endedJuly 1, 2017, excess tax benefits of $0.4 million and $1.2 million, respectively, were recognized as a reduction of income tax expense, rather than in additional paid-in capital.

In addition, under the new guidance, excess income tax benefits from stock-based compensation arrangements are classified as an operating activity in the statement of cash flows rather than as a financing activity. This resulted in an increase to operating cash flows of $0.9 million and $2.1 million for the three and six months endedJuly 1, 2017. We elected to apply the new cash flow classification guidance prospectively. The prior-year statement of cash flows has not been adjusted.

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

We have also elected to continue to estimate the number of stock-based awards expected to vest, as permitted by the new guidance, rather than electing to account for forfeitures as they occur.

Not Yet Adopted

In May 2014, the FASB issued a comprehensive new revenue recognition model that requires a company to recognize revenue in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance was originally effective for fiscal years beginning after December 15, 2016 and early adoption was not permitted. In July 2015, the FASB deferred the effective date from fiscal years beginning after December 15, 2016 to fiscal years beginning after December 15, 2017 (including interim reporting periods within those fiscal years). Early adoption is permitted to the original effective date of fiscal years beginning after December 15, 2016 (including interim reporting periods within those fiscal years). Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. When we adopt this new guidance, we expect to use the modified retrospective approach which will result in an adjustment to opening retained earnings, but would not restate prior periods' financial statements. We are continuing to evaluate the effect on our revenue recognition, disclosure requirements and changes that may be necessary to our internal controls over financial reporting.

In February 2016, the FASB issued new guidance on accounting for leases that generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

2. Fair Value Measurements

At July 1, 2017 and December 31, 2016, we had $2.9 million and $2.3 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $2.9 million and $2.3 million at July 1, 2017 and December 31, 2016, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

3. Inventories

Inventories consisted of the following (in thousands):

	July 1, 2017		December 31, 2016
Raw materials	$	5,740	$	7,973
Work in progress	95		72
Finished goods	64,021		66,981
	$	69,856	$	75,026

4. Goodwill and Intangible Assets, Net    

Goodwill and Indefinite-Lived Intangible Assets

Goodwill was $64.0 million at July 1, 2017 and December 31, 2016. Indefinite-lived trade name/trademarks totaled $1.4 million at July 1, 2017 and December 31, 2016.

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):

	July 1, 2017				December 31, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	18,851	$	5,615	$	18,851	$	4,524
Customer relationships	2,413		2,413		2,413		1,365
Trade names/trademarks	101		101		101		101
	$	21,365	$	8,129	$	21,365	$	5,990

Amortization expense for the three months endedJuly 1, 2017 and July 2, 2016, was $0.5 million and $0.6 million, respectively. Amortization expense for the six months endedJuly 1, 2017 and July 2, 2016, was $2.1 million and $1.3 million, respectively.

5. Credit Agreement

In March 2017, we amended our revolving credit facility to increase our net aggregate availability from $150 million to $153.15 million. We maintained the accordion feature which allows us to increase the amount of the credit facility from $153.15 million to $200 million, subject to lenders' approval. There were no other changes to the credit agreement's terms and conditions.

The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility matures in February 2021. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio.

As of July 1, 2017, we had $14 million in outstanding borrowings and $3.15 million in outstanding letters of credit. We had additional borrowing capacity of $136 million. As of July 1, 2017, the weighted-average interest rate on borrowings outstanding under the credit facility was 3.3%. We were in compliance with all financial covenants.

6. Repurchase of Common Stock

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

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Amount repurchased under Board-approved share repurchase program	$	25,000	$	20,000	$	75,000	$	70,000
Amount repurchased in connection with the vesting of employee restricted stock grants	300		125		5,094		1,366
Total amount repurchased	$	25,300	$	20,125	$	80,094	$	71,366

As of July 1, 2017, the remaining authorization under our Board-approved share repurchase program was $170 million. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.The cost of stock repurchases is first charged to additional paid-in capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

7. Stock-Based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Stock awards	$	3,584	$	3,261	$	6,720	$	6,412
Stock options	588		579		1,156		1,194
Total stock-based compensation expense	4,172		3,840		7,876		7,606
Income tax benefit	1,406		1,325		2,654		2,624
Total stock-based compensation expense, net of tax	$	2,766	$	2,515	$	5,222	$	4,982

In addition to the income tax benefit related to stock-based compensation expense in the table above, excess tax benefits of $0.4 million and $1.2 million were recognized as reductions of income tax expense during the three and six months endedJuly 1, 2017, respectively. There were no excess tax benefits recognized in income tax expense during the three and six months endedJuly 2, 2016. See Note 1, New Accounting Pronouncements, for additional discussion of new guidance on the accounting for, and disclosure of, stock-based compensation which we adopted effective January 1, 2017.

8. Profit Sharing and 401(k) Plan

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months endedJuly 1, 2017 and July 2, 2016, our contributions, net of forfeitures, were $1.2 million and $1.0 million, respectively. During the six months endedJuly 1, 2017 and July 2, 2016, our contributions, net of forfeitures, were $2.5 million and $2.3 million, respectively.

9. Other Expense, Net

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

	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Interest expense	$	(288	)	$	(251	)	$	(470	)	$	(357	)
Interest income	6			22			50			31
Other expense, net	$	(282	)	$	(229	)	$	(420	)	$	(326	)

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

10. Net (Loss) Income per Common Share

The components of basic and diluted net (loss) income per share were as follows (in thousands, except per share amounts):

	Three Months Ended					Six Months Ended
	July 1, 2017			July 2, 2016		July 1, 2017		July 2, 2016
Net (loss) income	$	(778	)	$	1,416	$	23,683	$	14,385
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	41,716			46,394		42,233		47,247
Dilutive effect of stock-based awards	—			650		847		698
Diluted weighted-average shares outstanding	41,716			47,044		43,080		47,945
Net (loss) income per share – basic	$	(0.02	)	$	0.03	$	0.56	$	0.30
Net (loss) income per share – diluted	$	(0.02	)	$	0.03	$	0.55	$	0.30

For the three months ended July 1, 2017, potentially dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share. For the six months ended July 1, 2017 and the three and six months ended July 2, 2016, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial.

11. Commitments and Contingencies

Sales Returns

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

	Six Months Ended
	July 1, 2017			July 2, 2016
Balance at beginning of year	$	15,222		$	20,562
Additions that reduce net sales	32,434			35,419
Deductions from reserves	(35,054		)	(40,226		)
Balance at end of period	$	12,602		$	15,755

Warranty Liabilities

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

	Six Months Ended
	July 1, 2017			July 2, 2016
Balance at beginning of year	$	8,633		$	10,028
Additions charged to costs and expenses for current-year sales	4,243			6,601
Deductions from reserves	(3,665		)	(7,290		)
Changes in liability for pre-existing warranties during the current year, including expirations	(55		)	(1,515		)
Balance at end of period	$	9,156		$	7,824

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SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Legal Proceedings

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

On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which has certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has accepted the certified questions and the parties are in the process of preparing and submitting briefs. As the United States District Court for the District of New Jersey determined, we believe that the case is without merit and the order of dismissal should be affirmed.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our consolidated financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in seven sections:

• Risk Factors

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Non-GAAP Data

• Off-Balance-Sheet Arrangements and Contractual Obligations

• Critical Accounting Policies

Risk Factors

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto included herein. This quarterly report on Form 10-Q contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.

These risks and uncertainties include, among others:

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

• The effectiveness of our marketing messages;

• The efficiency of our advertising and promotional efforts;

• Our ability to execute our Company-Controlled distribution strategy;

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

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

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

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

• Availability of attractive and cost-effective consumer credit options;

• Our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;

• Our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers;

• Rising commodity costs and other inflationary pressures;

• Risks inherent in global sourcing activities;

• Risks of disruption in the operation of either of our two main manufacturing facilities;

• Increasing government regulation;

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

• The adequacy of our management information systems to meet the evolving needs of our business and existing and evolving regulatory standards applicable to data privacy and security;

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

• The vulnerability of our management information systems to attacks by hackers or other cyber threats that could compromise the security of our systems or disrupt our business;

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

• Uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.

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

13

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

Overview

Company Overview

We are executing a consumer innovation strategy with three significant competitive advantages as we work toward our ambitious vision to become one of the world's most beloved brands by delivering an unparalleled sleep experience. We offer consumers high-quality, individualized sleep solutions and services, which include a complete line of Sleep Number^® beds, bases and bedding accessories. Our competitive advantages are: proprietary sleep innovations, exclusive distribution and lifelong customer relationships.

We are a vertically integrated brand and the developer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds and related technology. We are also the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ^® technology - proprietary sensor technology that works directly with the bed’s DualAir™ system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Our bed assortment is complemented with proprietary FlextFit™ adjustable bases, and Sleep Number pillows, sheets and other bedding products.

Our differentiated products are sold exclusively at more than 540 Sleep Number^® stores located in 49 states, online at SleepNumber.com or via phone. We offer consumers a unique, value-added store and digital experience through our team of over 3,800 individuals who are dedicated to our mission of improving lives by individualizing sleep experiences. This experience, combined with the advantages of our vertical business model and SleepIQ technology, enable a lifelong relationship with our customers. We generate revenue by marketing and selling products directly to new and existing customers.

We expect our business transformation over the past five years to result in improved profitability through the productivity and service advancements associated with our integrated ERP platform, smart bed design, more efficient manufacturing and supply chain network evolution.

We are committed to delivering superior shareholder value through three primary drivers of earnings per share growth: increasing consumer demand, leveraging the business model and deploying capital efficiently. The investments we have made in R&D, technology, digital and our store experience have strengthened our competitive advantages and established our innovation leadership. We have a long-term orientation and are focused on delivering sustainable, profitable growth.

Results of Operations

Quarterly and Year-to-Date Results

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

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Highlights

Financial highlights for the period ended July 1, 2017 were as follows:

• Net sales for the three months endedJuly 1, 2017 increased 3% to $285 million, compared with $277 million for the same period one year ago. Net sales for the three months ended July 1, 2017 were affected by an approximately $25 million shift in sales from our second quarter to our third quarter (representing approximately 9 percentage points (ppt.) of additional growth over the prior year) as a result of a delay in deliveries and shipments related to an inventory shortage from one of our new suppliers. The issue has been resolved and we don't expect a shortage in the future. We now have the necessary inventory to fulfill our outstanding second-quarter orders and the new supplier's production output has been exceeding our forecasted demand for the third quarter and beyond.

• The 3% sales increase was driven by 8 ppt. of growth from sales generated by 43 net new stores opened in the past 12 months, partially offset by a 4% comparable sales decline in our Company-Controlled channel.

• Sales per store (for stores open at least one year), on a trailing twelve-month basis for the period ended July 1, 2017 were $2.3 million, consistent with the prior-year comparable period.

• In May 2017 we began selling our Sleep Number 360™ i7 and i10 smart beds. The Sleep Number 360 smart bed won 13 awards at CES, including being named the Best of Innovation Honoree in the Home Appliance category. We will continue the changeover of our entire product line to our Sleep Number 360 smart beds in a phased implementation over the next nine months.

• Operating loss for the quarter totaled $3.1 million, or (1.1%) of net sales, compared with operating income of $2.4 million, or 0.9% of net sales, for the same period one year ago. The decrease in operating income was attributable to the $25 million sales shift.

• Net loss for the quarter was $0.8 million, or $(0.02) per diluted share, compared with net income of $1.4 million, or $0.03 per diluted share, for the same period one year ago.

• Cash provided by operating activities totaled $89 million for the six months endedJuly 1, 2017, compared with $47 million for the same period one year ago. Investing activities for the current-year period included $27 million of property and equipment purchases, compared with $24 million for the same period last year.

• At July 1, 2017, cash and cash equivalents totaled $2 million and we ended the quarter with $14 million of borrowings under our $153 million revolving credit facility, as planned. We utilize our credit facility to meet our seasonal working capital requirements.

• In the second quarter of 2017, we repurchased 0.8 million shares of our common stock under our Board-approved share repurchase program at a cost of $25 million (an average of $30.13 per share). As of July 1, 2017, the remaining authorization was $170 million.

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

	Three Months Ended										Six Months Ended
	July 1, 2017					July 2, 2016					July 1, 2017					July 2, 2016
Net sales	$	284.7		100.0	%	$	276.9		100.0	%	$	678.6		100.0	%	$	629.9		100.0	%
Cost of sales	108.1			38.0	%	105.6			38.1	%	255.5			37.7	%	249.5			39.6	%
Gross profit	176.6			62.0	%	171.3			61.9	%	423.1			62.3	%	380.3			60.4	%
Operating expenses:
Sales and marketing	144.5			50.8	%	134.8			48.7	%	313.8			46.2	%	285.5			45.3	%
General and administrative	28.8			10.1	%	27.0			9.8	%	62.6			9.2	%	57.9			9.2	%
Research and development	6.4			2.2	%	7.1			2.6	%	14.0			2.1	%	14.7			2.3	%
Total operating expenses	179.7			63.1	%	168.9			61.0	%	390.3			57.5	%	358.0			56.8	%
Operating (loss) income	(3.1		)	(1.1	%)	2.4			0.9	%	32.8			4.8	%	22.3			3.5	%
Other expense, net	(0.3		)	(0.1	%)	(0.2		)	(0.1	%)	(0.4		)	(0.1	%)	(0.3		)	(0.1	%)
(Loss) income before income taxes	(3.3		)	(1.2	%)	2.2			0.8	%	32.3			4.8	%	22.0			3.5	%
Income tax (benefit) expense	(2.6		)	(0.9	%)	0.8			0.3	%	8.7			1.3	%	7.6			1.2	%
Net (loss) income	$	(0.8	)	(0.3	%)	$	1.4		0.5	%	$	23.7		3.5	%	$	14.4		2.3	%
Net (loss) income per share:
Basic	$	(0.02	)			$	0.03				$	0.56				$	0.30
Diluted	$	(0.02	)			$	0.03				$	0.55				$	0.30
Weighted-average number of common shares:
Basic	41.7					46.4					42.2					47.2
Diluted	41.7					47.0					43.1					47.9

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The percentage of our total net sales, by dollar volume, from each of our channels was as follows:

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Company-Controlled channel	97.7	%	96.6	%	98.0	%	97.0	%
Wholesale/Other channel	2.3	%	3.4	%	2.0	%	3.0	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

The components of total net sales change, including comparable net sales changes, were as follows: 

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Sales change rates:
Retail comparable-store sales(1)	(6	%)	(7	%)	(1	%)	(5	%)
Online and Phone	26	%	(2	%)	22	%	3	%
Company-Controlled comparable sales change	(4	%)	(6	%)	0	%	(5	%)
Net opened/closed stores	8	%	6	%	9	%	5	%
Total Company-Controlled channel	4	%	0	%	9	%	0	%
Wholesale/Other channel	(31	%)	21	%	(27	%)	15	%
Total net sales change	3	%	1	%	8	%	1	%

⁽¹⁾ Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.

Other sales metrics were as follows: 

	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017		July 2, 2016
Average sales per store(1) ($ in thousands)	$	2,335		$	2,333
Average sales per square foot(1)	$	906		$	937
Stores > $1 million in net sales(1)	97		%	98		%
Stores > $2 million in net sales(1)	58		%	59		%
Average revenue per mattress unit –    Company-Controlled channel(2)	$	4,306		$	4,206		$	4,155	$	4,074

⁽¹⁾ Trailing-twelve months for stores included in our comparable-store sales calculation.

⁽²⁾ Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.

The number of retail stores operating was as follows:

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Beginning of period	546		497		540		488
Opened	8		19		24		33
Closed	(5	)	(10	)	(15	)	(15	)
End of period	549		506		549		506

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Comparison of Three Months Ended July 1, 2017 with Three Months Ended July 2, 2016

Net sales

Net sales increased3% to $285 million for the three months ended July 1, 2017, compared with $277 million for the same period one year ago. Net sales for the three months ended July 1, 2017 were affected by an approximately $25 million shift in sales from our second quarter to our third quarter as a result of delay in deliveries and shipments related to an inventory shortage from one of our new suppliers. The issue has been resolved and we don't expect a shortage in the future. We now have the necessary inventory to fulfill our outstanding second-quarter orders and the new supplier's production output has been exceeding our forecasted demand for the third quarter and beyond. The 3% sales increase was driven by 8 percentage points (ppt.) of growth from sales generated by 43 net new stores opened in the past 12 months, partially offset by a 4% comparable sales decline in our Company-Controlled channel.

The $8 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $21 million increase resulting from net store openings; partially offset by (ii) a $10 million decrease in sales from our Company-Controlled comparable sales; and (iii) a $3 million decrease in Wholesale/Other channel sales. Company-Controlled mattress unit sales increased 2%. Average revenue per mattress unit in our Company-Controlled channel increased by 2% to $4,306.

Gross profit

Gross profit of $177 millionincreased by $5 million compared with the same period one year ago. The gross profit rate increased to 62.0% of net sales for the three months ended July 1, 2017, compared with 61.9% for the prior-year comparable period. The current-year gross profit rate improvement of 0.1 ppt. was primarily due to lower sales return and exchange costs compared with the same period one year ago and operating efficiencies which more than offset margin pressures from supply chain shipping inefficiencies related to the delayed deliveries in the second quarter. In addition, our gross profit rate can fluctuate from quarter to quarter due to a variety of other factors, including warranty expenses, product mix changes and performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the three months ended July 1, 2017 increased to $144 million, or 50.8% of net sales, compared with $135 million, or 48.7% of net sales, for the same period one year ago. The 2.1 ppt. increase in the sales and marketing expense rate was mainly due to the deleveraging impact resulting from the $25 million net sales shift from our second quarter to our third quarter.

General and administrative expenses

General and administrative (G&A) expenses totaled $29 million for the three months ended July 1, 2017, compared with $27 million in the prior-year period, and increased to 10.1% of net sales, compared with 9.8% of net sales last year. The $1.8 millionincrease in G&A expenses consisted primarily of the following: (i) $0.9 million increase in infrastructure expenses to support key business initiatives; (ii) $0.5 million of additional depreciation and amortization expense, including incremental depreciation expense from capital expenditures that support the growth of our business; and (iii) a $0.4 million net increase in miscellaneous other expenses. The G&A expense rate increased by 0.3 ppt. in the current-year period compared with the same period one year ago due to the deleveraging impact from the $25 million net sales shift from our second quarter to our third quarter.

Research and development expenses

Research and development (R&D) expenses for the three months endedJuly 1, 2017 were $6.4 million, or 2.2% of net sales, compared with $7.1 million, or 2.6% of net sales, for the same period one year ago. The $0.7 million decrease in R&D expenses was due to the timing of our investments to support product innovations. For the three months endedJuly 1, 2017, the investment spending is consistent with our current-year and long-term consumer innovation strategy.

Income tax (benefit) expense

Income tax benefit was $2.6 million for the three months endedJuly 1, 2017, compared with income tax expense of $0.8 million for the same period one year ago. The tax benefit for the current-year period primarily resulted from: (i) the recognition of additional tax credits; and (ii) stock-based compensation excess tax benefits in accordance with new Financial Accounting Standards Board (FASB) guidance effective for us beginning in 2017. Under previous FASB guidance, excess tax benefits or deficiencies were recognized in additional paid-in capital in our consolidated balance sheet. See Note 1, New Accounting Pronouncements, in the Notes to the Condensed Consolidated Financial Statements for additional details.

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Comparison of Six Months EndedJuly 1, 2017 with Six Months EndedJuly 2, 2016

Net sales

Net sales increased 8% to $679 million for the six months endedJuly 1, 2017, compared with $630 million for the same period one year ago. The sales change was comprised of 9 percentage points (ppt.) of growth from sales generated by 43 net new retail stores opened in the past 12 months, partially offset by a decrease in Wholesale/Other channel sales. Company-Controlled comparable sales were flat year-over-year. Net sales for the six months endedJuly 1, 2017 were affected by an approximately $25 million shift in sales from our second quarter to our third quarter as a result of a delay in deliveries and shipments related to an inventory shortage from one of our new suppliers. The issue has been resolved and we don't expect a shortage in the future. We now have the necessary inventory to fulfill our outstanding second-quarter orders and the new supplier's production output has been exceeding our forecasted demand for the third quarter and beyond.

The $49 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $53 million increase resulting from net store openings; and (ii) a $1 million increase in sales from our Company-Controlled comparable sales; partially offset by (iii) a $5 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units increased 7% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by 2%.

Gross profit

Gross profit of $423 million for the six months endedJuly 1, 2017 increased by $43 million, or 11%, compared with the same period one year ago. The gross profit rate increased to 62.3% of net sales for the first six months of 2017, compared with 60.4% for the prior-year period. The prior-year gross profit rate was negatively impacted by actions taken to manage operating issues associated with our ERP implementation. The current-year gross profit rate improvement of 1.9 ppt. was primarily due to manufacturing efficiencies and lower sales return and exchange costs compared with the same period one year ago. In addition, our gross profit rate can fluctuate from quarter to quarter due to a variety of other factors, including warranty expenses, product mix changes and performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the six months endedJuly 1, 2017increased to $314 million compared with $285 million for the same period one year ago, and increased to 46.2% of net sales compared with 45.3% of net sales last year. The 0.9 ppt. increase in the sales and marketing expense rate was mainly due to the deleveraging impact resulting from the $25 million net sales shift from our second quarter to our third quarter; partially offset by 0.5 ppt. of leverage from media spending, which increased by 4% compared with the prior year, while net sales increased by 8%.

General and administrative expenses

General and administrative (G&A) expenses totaled $63 million for the six months endedJuly 1, 2017, compared with $58 million in the prior-year period, but the expense rate remained consistent with the prior year at 9.2% of net sales. The $5 millionincrease in G&A expenses consisted primarily of the following: (i) a $1.0 million increase in employee compensation, including a year-over-year increase in company-wide performance-based incentive compensation, and wage rate increases that were in line with inflation; (ii) $2.1 million of additional depreciation and amortization expense, including incremental depreciation expense from capital expenditures that support the growth of our business; and (iii) a $1.6 million net increase in miscellaneous other expenses. The current year G&A expense rate, while consistent with the prior-year, was negatively impacted by the deleveraging impact from the $25 million net sales shift from our second quarter to our third quarter.

Research and development expenses

Research and development (R&D) expenses for the six months endedJuly 1, 2017 were $14 million, or 2.1% of net sales, compared with $15 million, or 2.3% of net sales, for the same period one year ago. The $1 million decrease in R&D expenses was due to the timing of our investments to support product innovations. The investment spending year-to-date is consistent with our current-year and long-term consumer innovation strategy.

Income tax expense

Income tax expense was $8.7 million for the six months endedJuly 1, 2017, compared with $7.6 million for the same period one year ago. The effective tax rate for the six months ended July 1, 2017 was 26.8% compared with 34.5% for the prior-year period. The effective tax rate for the current-year period benefited from: (i) stock-based compensation excess tax benefits in accordance with new Financial Accounting Standards Board (FASB) guidance effective for us beginning in 2017; and (ii) the recognition of additional tax credits. Under previous FASB guidance, excess tax benefits or deficiencies were recognized in additional paid-in capital in our consolidated balance sheet. See Note 1, New Accounting Pronouncements, in the Notes to the Condensed Consolidated Financial Statements for additional details.

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Liquidity and Capital Resources

Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value. Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $153 million revolving credit facility. The cash generated from ongoing operations, and cash available under our revolving credit facility are expected to be adequate to maintain operations and fund anticipated expansion and strategic initiatives for the foreseeable future.

As of July 1, 2017, cash and cash equivalents totaled $2 million compared with $12 million as of December 31, 2016. The $10 milliondecrease was primarily due to $89 million of cash provided by operating activities, which was more than offset by $27 million of cash used to purchase property and equipment and $80 million of cash used to repurchase our common stock ($75 million under our Board-approved share repurchase program and $5 million in connection with the vesting of employee restricted stock grants).

The following table summarizes our cash flows (dollars in millions). Amounts may not add due to rounding differences:

	Six Months Ended
	July 1, 2017			July 2, 2016
Total cash provided by (used in):
Operating activities	$	88.8		$	47.1
Investing activities	(24.0		)	(8.6		)
Financing activities	(74.4		)	(57.1		)
Net decrease in cash and cash equivalents	$	(9.5	)	$	(18.6	)

Cash provided by operating activities for the six months endedJuly 1, 2017 was $89 million compared with $47 million for the six months endedJuly 2, 2016. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $9 million increase in net income for the six months endedJuly 1, 2017, compared with the same period one year ago; (ii) a $46 million fluctuation in customer prepayments resulting from higher than normal customer prepayments at January 2, 2016 (due to ERP implementation issues) and July 1, 2017 (due to an inventory shortage from one of our new suppliers); (iii) a $30 million fluctuation in income taxes based on a $15 million income taxes receivable at January 2, 2016 and a $4 million income taxes receivable at July 1, 2017 (income taxes payable for comparable periods); and (iv) the ERP implementation issues we experienced in our plants and supply chain during the fourth quarter of 2015 that resulted in increased accounts receivables, higher inventories, higher accounts payable and lower other taxes and withholding at the end of 2015.

Net cash used in investing activities was $24 million for the six months endedJuly 1, 2017, compared with $9 million of net cash used in investing activities for the same period one year ago. Investing activities for the current-year period included $27 million of property and equipment purchases, compared with $24 million for the same period last year. We decreased our investments in marketable debt securities by $15 million during the six months endedJuly 2, 2016. We did not hold any investments in marketable debt securities as of December 31, 2016 or July 1, 2017.

Net cash used in financing activities was $74 million for the six months endedJuly 1, 2017, compared with $57 million for the same period one year ago. During the six months endedJuly 1, 2017, we repurchased $80 million of our stock ($75 million under our Board-approved share repurchase program and $5 million in connection with the vesting of employee restricted stock awards) compared with $71 million ($70 million under our Board-approved share repurchase program and $1 million in connection with the vesting of employee restricted stock awards) during the same period one year ago. Short-term borrowings increased by $3 million during the current-year period, reflecting $14 million of borrowings under our $153 million revolving credit facility as of July 1, 2017, partially offset by a decrease in book overdrafts which are included in the net change in short-term borrowings.

Under our Board-approved share repurchase program, we repurchased 3.1 million shares at a cost of $75 million (an average of $24.57 per share) during the six months endedJuly 1, 2017. During the six months endedJuly 2, 2016, we repurchased 3.6 million shares at a cost of $70 million (an average of $19.70 per share). At July 1, 2017, the remaining authorization under our Board-approved share repurchase program was $170 million. There is no expiration date governing the period over which we can repurchase shares.

In March 2017, we amended our revolving credit facility to increase our net aggregate availability from $150 million to $153 million. We maintained the accordion feature which allows us to increase the amount of the credit facility from $153 million to $200 million, subject to lenders' approval. There were no other changes to the credit agreement's terms and conditions.

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The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility matures in February 2021. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio.

As of July 1, 2017, we had $14 million in outstanding borrowings and $3.15 million in outstanding letters of credit. We had additional borrowing capacity of $136 million. As of July 1, 2017, the weighted-average interest rate on borrowings outstanding under the credit facility was 3.3%. We were in compliance with all financial covenants.

We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance purchases from us (Synchrony Agreement). The Synchrony Agreement contains certain financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio. As of July 1, 2017, we were in compliance with all financial covenants.

Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts.

Non-GAAP Data

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure.

Our Adjusted EBITDA calculations are as follows (dollars in thousands):

	Three Months Ended					Trailing-Twelve Months Ended
	July 1, 2017			July 2, 2016		July 1, 2017		July 2, 2016
Net (loss) income	$	(778	)	$	1,416	$	60,715	$	25,067
Income tax (benefit) expense	(2,565		)	751		25,597		11,691
Interest expense	288			251		924		497
Depreciation and amortization	14,918			14,053		60,170		53,261
Stock-based compensation	4,172			3,840		12,231		12,068
Asset impairments	2			14		47		66
Adjusted EBITDA	$	16,037		$	20,325	$	159,684	$	102,650

Free Cash Flow

Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operating activities,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.

The following table summarizes our free cash flow calculations (dollars in thousands): 

	Six Months Ended				Trailing-Twelve Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Net cash provided by operating activities	$	88,807	$	47,120	$	193,332	$	110,008
Subtract: Purchases of property and equipment	27,132		23,764		61,220		70,412
Free cash flow	$	61,675	$	23,356	$	132,112	$	39,596

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Non-GAAP Data(continued)

Return on Invested Capital (ROIC)

(dollars in thousands)

ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:

	Trailing-Twelve Months Ended
	July 1, 2017			July 2, 2016
Net operating profit after taxes (NOPAT)
Operating income	$	87,124		$	37,035
Add: Rent expense(1)	70,815			64,232
Add: Interest income	112			219
Less: Depreciation on capitalized operating leases(2)	(17,956		)	(16,749		)
Less: Income taxes(3)	(46,095		)	(27,055		)
NOPAT	$	94,000		$	57,682
Average invested capital
Total equity	$	114,439		$	173,807
Less: Cash greater than target(4)	—			—
Add: Long-term debt(5)	—			—
Add: Capitalized operating lease obligations(6)	566,520			513,856
Total invested capital at end of period	$	680,959		$	687,663
Average invested capital(7)	$	690,524		$	724,593
Return on invested capital (ROIC)(8)	13.6		%	8.0		%

___________________

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

⁽²⁾ Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) for the respective reporting periods with an assumed thirty-year useful life. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.

⁽³⁾ Reflects annual effective income tax rates, before discrete adjustments, of 32.9% and 31.9% for 2017 and 2016, respectively.

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

⁽⁵⁾ Long-term debt includes existing capital lease obligations, if applicable.

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

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

⁽⁸⁾ ROIC equals NOPAT divided by average invested capital.

Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

GAAP - generally accepted accounting principles in the U.S.

21

Off-Balance-Sheet Arrangements and Contractual Obligations

As of July 1, 2017, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating leases and a $3.15 million outstanding letter of credit, we do not have any off-balance-sheet financing.

There has been no material changes in our contractual obligations, other than in the ordinary course of business, since the end of fiscal 2016. See Note 5, Credit Agreement, of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for additional information regarding our other contractual obligations.

Critical Accounting Policies

We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There were no significant changes in our critical accounting policies since the end of fiscal 2016.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in short-term market interest rates that will impact our net interest expense. If overall interest rates were one percentage point higher than current rates, our net interest expense would not change by a significant amount based on the $14 million of borrowings under our revolving credit facility at July 1, 2017. We do not manage our interest-rate volatility risk through the use of derivative instruments.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the fiscal quarter ended July 1, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

22

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which has certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has accepted the certified questions and the parties are in the process of preparing and submitting briefs. As the United States District Court for the District of New Jersey determined, we believe that the case is without merit and the order of dismissal should be affirmed.

ITEM 1A. RISK FACTORS

Our business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to our business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and also the information under the heading, “Risk Factors” in our most recent Annual Report on Form 10-K. The risk factors discussed in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that we face because our business operations could also be affected by additional risk factors that are not presently known to us or that we currently consider to be immaterial to our operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) – (b)	Not applicable.
(c)	Issuer Purchases of Equity Securities

Fiscal Period	Total Number of Shares    Purchased(1)(2)	Average Price Paid per Share		Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms(1)	ApproximateDollar Valueof Shares thatMay Yet BePurchasedUnder thePlans orPrograms(3)
April 2, 2017 through April 29, 2017	198,182	$	27.82	188,257	$	189,756,000
April 30, 2017 through May 27, 2017	301,412	30.07		301,264	180,697,000
May 28, 2017 through July 1, 2017	341,114	31.44		340,290	170,000,000
Total	840,708	$	30.09	829,811	$	170,000,000

⁽¹⁾  Under our Board-approved $300 million share repurchase program, we repurchased 829,811 shares of our common stock at a cost of $25 million (based on trade dates) during the three months ended July 1, 2017.

⁽²⁾  In connection with the vesting of employee restricted stock grants, we also repurchased 10,897 shares of our common stock at a cost of $0.3 million during the three months ended July 1, 2017.

⁽³⁾  There is no expiration date governing the period over which we can repurchase shares under our Board-approved share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status.

23

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

24

ITEM 6. EXHIBITS

Exhibit Number	Description	Method of Filing
10.1	First Amendment, dated June 22, 2017, to Lease Agreement between DCI 1001 Minneapolis Venture, LLC, as Landlord, and Select Comfort Corporation, as Tenant, dated October 21, 2016	Filed herewith
10.2	Amended and Restated Executive Severance Pay Plan dated as of June 12, 2017	Filed herewith
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith
32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith
101	The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended July 1, 2017, filed with the SEC on July 28, 2017, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of July 1, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2017 and July 2, 2016; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 1, 2017 and July 2, 2016; (iv) Condensed Consolidated Statement of Shareholders' Equity for the six months ended July 1, 2017; (v) Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2017 and July 2, 2016; and (vi) Notes to Condensed Consolidated Financial Statements.	Filed herewith

25

SIGNATURES

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

		SELECT COMFORT CORPORATION
		(Registrant)
Dated:	July 28, 2017	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)
		By:	/s/ Robert J. Poirier
			Robert J. Poirier
			Chief Accounting Officer
			(principal accounting officer)

26

EXHIBIT INDEX

Exhibit Number	Description	Method of Filing
10.1	First Amendment, dated June 22, 2017, to Lease Agreement between DCI 1001 Minneapolis Venture, LLC, as Landlord, and Select Comfort Corporation, as Tenant, dated October 21, 2016	Filed herewith
10.2	Amended and Restated Executive Severance Pay Plan dated as of June 12, 2017	Filed herewith
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith
32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith
101	The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended July 1, 2017, filed with the SEC on July 28, 2017, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of July 1, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2017 and July 2, 2016; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 1, 2017 and July 2, 2016; (iv) Condensed Consolidated Statement of Shareholders' Equity for the six months ended July 1, 2017; (v) Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2017 and July 2, 2016; and (vi) Notes to Condensed Consolidated Financial Statements.	Filed herewith

27

EX-10.1

Exhibit 10.1

FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (this “First Amendment” or this “Amendment”) by and between DCI 1001 MINNEAPOLIS VENTURE, LLC, a Delaware limited liability company (“Landlord”), and SELECT COMFORT CORPORATION, a Minnesota corporation (“Tenant”), is executed as of this 1st day of June, 2017 (the “First Amendment Effective Date”).

WITNESSETH

WHEREAS, Landlord and Tenant have entered into that certain Lease dated as of October 21, 2016 (the “Lease”) for space in the building commonly known as 1001 3^rd Avenue South, Minneapolis, Minnesota 55404 (the “Building”); and,

WHEREAS, the Landlord and the Tenant have agreed to further amend the Lease as more particularly set forth in this First Amendment.

NOW, THEREFORE, for and in consideration of the mutual covenants contained herein and in the Lease, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby covenant and agree to amend and modify the Lease as follows:

1. DEFINED TERMS. Unless otherwise defined herein, terms used herein with initial capital letters shall have the same meanings assigned to such terms in the Lease.

2. PREMISES. Section 1.1 (n) is hereby replaced with:

(n) Premises shall mean the areas of the Building, as outlined on the floor plan of the Building which is attached as Exhibit “B-1” to this Lease of approximately 238,415 Rentable Square Feet.

Further, Exhibit B-1 of the Lease is replaced with Exhibit B-1 of this First Amendment.

Further, the Allowance (as defined in Exhibit “E”) shall apply to the newly stated Rentable Sqaure Feet figure listed above. Additionally, there are no changes to Exhibit “E” and all of the statements and provisions provided therein remain in full force and effect.

3. RENTABLE SQUARE FEET. Section 1.1 (r) is hereby replaced with:

(r) Rentable Square Feet shall mean the Usable Square Feet within the Premises, together with an additional amount representing a portion of the Common Areas, Service Areas and other non-tenant space on floors one (1) through six (6) in the Building. For purposes of this Lease, the parties have agreed that the Premises shall be deemed to consist of 238,415 Rentable Square Feet on floors one, two, three, and four and that floors one (1) through six (6) of the Building shall be deemed to consist of 327,844 Rentable Square Feet. However, both Landlord and Tenant acknowledge that neither of these figures was calculated by measuring the

1

Common Areas, Service Areas and other non-tenant spaces in the Building and that neither Landlord nor Tenant shall have a right to demand re-measurement or recalculation of the Rentable Square Feet applicable to the Premises or the Building.

4. TENANT’S PROPORTIONATE SHARE. Section 1.1 (v) of the Lease is hereby replaced with:

(v)Tenant's Proportionate Share shall mean a fraction, the numerator of which is the number of Rentable Square Feet within the Premises, and the denominator of which is the number of Rentable Square Feet on floors one (1) through six (6) of the Building. Accordingly, the parties acknowledge and agree that Tenant's Proportionate Share under this Lease is 72.7220 percent, as confirmed in Exhibit B-2.

Further, Exhibit B-2 of the Lease is replaced with Exhibit B-2 of this First Amendment.

Additionally, for the sake of clarity, Tenant’s Proportionate Share shall be increased 1.5640 percent to account for additional common areas for which tenant agreed to pay the Tenant Proportionate Share under Exhibit D (1) (c) of the Lease, making the total Tenant Proportionate Share 74.2860 percent, as confirmed in Exhibit B-2.

5. BASE RENT. Section 1.1 (b) is hereby replaced with the following:

6.PROJECTED DELIVERY DATE. Section 1.1 (p) (i) is hereby deleted from the lease.

2

Exhibit 10.1

Additionally, Tenant agrees that as of the date of this Amendment, there has been no Landlord Delay under Section 7 of Exhibit E.

7. FOOD SERVICE OPERATION. Landlord and Tenant hereby agree that Tenant will directly contract for a food service vendor to operate within the food service common area on Floor 5. Tenant shall be responsible for any and all costs, and may receive any incentives or income, generated from the operation of the food service business. Notwithstanding the foregoing, Landlord shall remain responsible for delivering the food service common area on Floor 5 in accordance with all applicable federal, state and local codes, including, but not limited to the Americans with Disabilities Act (“ADA”) as part of Improvements and under the Tenant Improvement Allowance (including the $1,100,000 additional contribution by Landlord). Landlord shall review and approve any food service operation contracts prior to execution by Tenant; such approval shall not be unreasonably withheld or delayed. However, food services vendor must meet insurance requirements, and other risk criteria, as required by Landlord or Landlord’s insurance company from time to time. Tenant further agrees that the food service area will be available to any other tenants of the Building and that the food service operation will operate normal business hours for a Downtown Minneapolis class-A office building, but not less than 7:30am-1:30pm (with break for lunch changeover) on regularly scheduled business days.

8. EFFECT OF AMENDMENT. Except as expressly amended by the provisions hereof, the terms and provisions contained in the Lease shall continue to govern the rights and obligations of the parties; and all provisions and covenants in the Lease shall remain in full force and effect as stated therein, except to the extent specifically modified by the provisions of this First Amendment. This First Amendment and the Lease shall be construed as one instrument.

9. SEVERABILITY OF PROVISIONS. A determination that any provision of this First Amendment is unenforceable or invalid shall not affect the enforceability or validity of any other provision hereof, and any determination that the application of any provision of this First Amendment to any person or circumstance is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to any other persons or circumstances.

10. COUNTERPARTS. This First Amendment may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart.

11. GOVERNING LAW. The terms and conditions of this First Amendment shall be governed by the applicable laws of the State of Minnesota.

12. INTERPRETATION. Within this First Amendment, words of any gender shall be held and construed to include any other gender, and words in the singular number shall be held and construed to include the plural, unless the context otherwise requires. The section headings used herein are intended for reference purposes only and shall not be considered

3

Exhibit 10.1

in the interpretation of the terms and conditions hereof. The parties acknowledge that the parties and their counsel have reviewed and revised this First Amendment and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this First Amendment or any exhibits or amendments hereto.

13. SUCCESSORS AND ASSIGNS. The terms and conditions of this First Amendment shall be binding upon and shall inure to the benefit of the parties hereto, their successors and permitted assigns.

14. TIME OF ESSENCE. Landlord and Tenant agree that time is of the essence of this First Amendment.

IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment as of the day and year first above written.

L A N D L O R D:

DCI 1001 Minneapolis Venture LLC,

a Delaware limited liability company

By: / s / Spencer E. Mullee

Spencer E. Mullee

Chief Operating Officer

Date of Execution: 6-22-17

T E N A N T:

SELECT COMFORT CORPORATION

By: / s / David F. Callen

Name: David F. Callen

Title: Chief Financial Officer

Date of Execution: 6-22-17

4

Exhibit 10.1

EXHIBIT B-1

To First Amendment to Lease Agreement

PREMISES

5

Exhibit 10.1

EXHIBIT B-2

To First Amendment to Lease Agreement

TENANT’S PROPORTIONATE SHARE

6

EX-10.2

Exhibit 10.2

SELECT COMFORT CORPORATION

EXECUTIVE SEVERANCE PAY PLAN

Amended and Restated Effective June 12, 2017

SELECT COMFORT CORPORATION
EXECUTIVE SEVERANCE PAY PLAN

TABLE OF CONTENTS

ARTICLE 1	Name and Purpose	1
ARTICLE 2	Definitions	2
2.1	Administrator	2
2.2	Affiliate	2
2.3	Base Pay	2
2.4	Cause	2
2.5	Change in Control	3
2.6	Change in Control Base Amount	3
2.7	Change in Control Protection Period	3
2.8	COBRA Reimbursement	3
2.9	Code	3
2.10	Committee	3
2.11	Company	3
2.12	Employee	3
2.13	Excluded Employee	4
2.14	Good Reason	4
2.15	Involuntary Termination	4
2.16	Outplacement Servicest	5
2.17	Participant	5
2.18	Participating Employer	5
2.19	Plan	5
2.2	Premium Reimbursement Period	5
2.21	Pro-Rata Incentive Bonus	5
2.22	Qualified Employee	5
2.23	Qualified Employee Category	5
2.24	Regular Base Amount	5
2.25	Release	5
2.26	Restricted Activities	6
2.27	Severance Pay	6
2.28	Termination of Employment	6
ARTICLE 3	Entitlement to Severance Pay	7
3.1	Eligible Terminations	7
3.2	Terminations Not Covered	7
3.3	Release Required	7
3.4	Restricted Activities	7
3.5	Return of Property	8
ARTICLE 4	Severance Pay Benefits	9
4.1	Regular Base Amount	9
4.2	Change in Control Base Amount	10
4.3	COBRA Reimbursement	10
4.4	Reductions	11
4.5	Period of Payment	11
4.6	Outplacement Services	12
4.7	Termination or Repayment of Severance Pay Benefits	13

i

4.8	Death of Particpant	13
4.9	Limitation on Change in Control Paymnts	13
ARTICLE 5	Administration	15
5.1	Administrator	15
5.2	Administrator's Discretion	15
ARTICLE 6	Amendment and Termination of Plan	16
6.1	Right to Amend or Terminate the Plan	16
6.2	Change in Control	16
ARTICLE 7	Miscellaneous Provisions	17
7.1	Participation by Affiliate	17
7.2	No Benefit Accrues	17
7.3	Indemnification	17
7.4	Specialist's Assistance	17
7.5	Benefits Claim Procedure	17
7.6	Disputes	18
7.7	Company Action	18
7.8	Status of Plan	18
7.9	No Assignment of Benefits	18
7.10	Withholding and Offsets	19
7.11	Other Benefits	19
7.12	No Employment Rights Created	19
7.13	Successors	19

ii

SELECT COMFORT CORPORATION
EXECUTIVE SEVERANCE PAY PLAN

Pursuant to the retained power of amendment contained in Section 6.1 of the Select Comfort Corporation Executive Severance Pay Plan (as previously amended and restated as of August 21, 2008 and as subsequently amended, effective December 12, 2008) (the “Plan”), the Plan is amended and restated pursuant to this instrument, effective June 12, 2017. The provisions of this instrument will apply to any Qualified Employee who terminates employment on or after June 12, 2017.

ARTICLE 1Name and Purpose

The name of this Plan is the “Select Comfort Corporation Executive Severance Pay Plan.” Its purpose is to provide severance benefits to certain Qualified Employees whose employment is involuntarily terminated without Cause. Severance Pay is in addition to regular earned pay and benefits for accrued paid time off, if any, payable to Qualified Employees upon separation from service.

ARTICLE 2

1

Definitions

The terms listed in this Article 2 shall have the meanings given below.

2.1    Administrator. The “Administrator” is the person designated under the Plan to perform administrative duties on behalf of the Company or, as the context may require, the individual to whom specific administrative duties have been delegated.

2.2    Affiliate. An “Affiliate” is the Company or another member of a controlled group of corporations, within the meaning of Code Section 414(b) or any trade or business that is under common control with the Company, within the meaning of Code Section 414(c).

2.3    Base Pay. “Base Pay” means the Qualified Employee’s base salary (and excludes any commissions, incentive pay, bonus or other addition to pay) in effect immediately prior to:

(A)    his or her Termination of Employment;

(B)    the first day of a Change in Control Protection Period; or

(C)    the Change in Control

whichever of the above is the highest rate of Base Pay.

Base Pay includes any amounts by which pay is voluntarily reduced under a Code Section 125 cafeteria plan, Code Section 401(k) cash or deferred arrangement or the Select Comfort Executive Investment Plan.

2.4    Cause. “Cause” means any reason for which a Qualified Employee may be subject to discipline under the Company’s or other Affiliate’s policies, practices and procedures including, but not limited to, the following:

(A)    dishonesty, fraud, misrepresentation, embezzlement or deliberate injury or attempted injury, in each case related to the Company or any other Affiliate,

(B)    commission of a felony crime, or commission of any criminal or unlawful activity of any nature or degree in the course of or in relation to Employee's employment,

(C)    substantial failure to perform the duties of the Employee's employment (other than failure resulting from the Employee’s incapacity due to physical or mental illness),

(D)    any material breach of the Employee Inventions, Confidentiality, Non-Compete and Mutual Arbitration Agreement or any other employment, non-compete, non-solicitation or confidentiality agreement entered into with the Company or any other Affiliate, or

(E)    violation of the Company's Code of Business Conduct.

2

2.5    Change in Control.

(A)    A "Change in Control" of the Company under this Executive Severance Pay Plan means a “Change in Control” as defined under the Select Comfort Corporation 2010 Omnibus Incentive Plan (as amended).

(B)    Notwithstanding the foregoing, to the extent there is a change in the amount or time of payment under this Executive Severance Pay Plan upon a Change in Control, then to the extent required to avoid the imposition of additional taxes under Section 409A of the Code, the transaction or event considered a “Change in Control” under the Select Comfort Corporation 2010 Omnibus Incentive Plan (as amended) with respect to such amount (or portion thereof) shall only constitute a Change in Control for purposes of the payment timing of such amount under this Executive Severance Pay Plan if such transaction also constitutes a “change in control event” (within the meaning of Section 409A of the Code). Consistent with the terms of this Section 2.5 and solely for purposes of this Executive Severance Pay Plan, the Administrator shall have full and final authority to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, the date of the occurrence of such Change in Control and any incidental matters relating thereto.

2.6    Change in Control Base Amount. The “Change in Control Base Amount” is the Severance Pay benefit described in Section 4.2.

2.7    Change in Control Protection Period. A “Change in Control Protection Period” means the period:

(A)    that begins on the later of (i) six months prior to the Change in Control event and (ii) the date on which the Company or any of its Affiliates began discussions with a third party about the transaction that resulted in the Change in Control and

(B)    that ends on the date that is twenty four (24) months after the Change in Control event.

2.8    COBRA Reimbursement. The “COBRA Reimbursement” is the Severance Pay benefit described in Section 4.3.

2.9    Code. The “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a specific provision of the Code includes any amendment of or successor to that provision.

2.10    Committee. The “Committee” means the “Committee” as defined under the Select Comfort Corporation 2010 Omnibus Incentive Plan (as amended).

2.11    Company. The “Company” is Select Comfort Corporation or its successor.

2.12    Employee. An “Employee” is any individual who performs services for a Participating Employer and is classified by the Participating Employer as a common-law employee. No reclassification of an individual as a common-law employee of a Participating Employer will be given retroactive effect for any purpose under this Plan.

2.13    Excluded Employee. An “Excluded Employee” is an Employee who:

(A)    resides in the United States but is not a United States citizen, unless he or she is classified as a permanent resident of the United States;

(B)    is classified by the Participating Employer as a part-time Employee;

3

(C)    is classified by the Participating Employer as a temporary Employee; or

(D)    is covered by a collective bargaining agreement that does not specifically provide for participation in this Plan.

2.14    Good Reason.

(A)    “Good Reason” under this Executive Severance Pay Plan means “Good Reason” as defined under the Select Comfort Corporation 2010 Omnibus Incentive Plan (as amended); provided, the event or change constituting Good Reason under this Executive Severance Pay Plan must constitute “good reason” as determined under Section 409A of the Code and consistent with the terms of this Section 2.14, and solely for purposes of this Executive Severance Pay Plan, the Administrator shall have full and final authority to determine conclusively whether Good Reason has occurred under this Executive Severance Pay Plan.

(B)    Notwithstanding the foregoing, the Qualified Employee will not be deemed to have resigned for Good Reason unless the Qualified Employee:

(1)    gives written notice to the Company of an event or change constituting Good Reason, and his or her intent to terminate employment with the Company on account of such Good Reason, within ninety (90) days after the date of the occurrence of any event or change that the Qualified Employee knows or should reasonably have known to constitute Good Reason and

(2)    actually has a Termination of Employment no later than six (6) months after the end of the thirty (30) day cure period referenced in paragraph (C) below..

(C)    If the Company remedies any event or change that constitutes Good Reason, within thirty (30) days of the notice from the Qualified Employee (pursuant to paragraph (B)(1) above), such event or change will not constitute Good Reason under this Plan.

(D)    The Qualified Employee’s continued employment (prior to the deadline stated in paragraph (B)(2) above) does not constitute consent to, or waiver of any rights arising in connection with, any circumstances constituting Good Reason.

(E)    The Qualified Employee’s Termination of Employment for Good Reason as defined above will constitute Good Reason for all purposes of this Plan notwithstanding that the Qualified Employee may also thereby be deemed to have retired under any applicable benefit plan, policy or practice of the Company.

2.15    Involuntary Termination of Employment. An “Involuntary Termination of Employment” means a Qualified Employee’s Termination of Employment by (A) a Participating Employer for any reason other than “Cause” or the Qualified Employee’s death or disability or (B) resignation by a Qualified Employee for “Good Reason.”

2.16    Outplacement Services. “Outplacement Services”are the Severance Pay benefits described in Section 4.6

2.17    Participant. A “Participant” is a former Qualified Employee who is entitled to Severance Pay benefits under this Plan.

2.18    Participating Employer. A “Participating Employer” is the Company and any other U.S. Affiliate that has adopted the Plan, or all of them collectively, as the context requires, and their respective

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successors. An Affiliate will cease to be a Participating Employer upon a termination of the Plan as to its Employees or upon its ceasing to be an Affiliate. The Participating Employer with respect to any individual is the Affiliate that is responsible for paying the individual’s wages or salary.

2.19    Plan. The “Plan” is the Select Comfort Corporation Executive Severance Pay Plan set forth in this instrument as it may be amended from time to time.

2.20    Premium Reimbursement Period. The “Premium Reimbursement Period” is the period of time during which the Participant is entitled to receive cash reimbursement payments for COBRA continuation coverage, as described in Section 4.3.

2.21    Pro-Rata Incentive Bonus. A Participant’s “Pro-Rata Incentive Bonus” is an amount equal to the product of (i) one-third (⅓) of the aggregate performance bonuses that the Participant actually received under the Select Comfort Corporation 2010 Omnibus Incentive Plan (as amended) for the three (3) most recent fiscal years preceding the fiscal year in which the Participant’s Termination of Employment occurs and (ii) a fraction, the numerator of which is the number of calendar days the Participant was employed by the Participating Employer during the fiscal year in which the Termination of Employment occurs and the denominator of which is the number of calendar days in such fiscal year.

2.22    Qualified Employee. A “Qualified Employee” is an Employee who -

(A)    is paid under a U.S. domestic payroll of the Participating Employer;

(B)    is classified by the Participating Employer in Qualified Employee Category grade 15, grade 14 or grade 13; and

(C)    is not an Excluded Employee.

2.23    Qualified Employee Category. A “Qualified Employee Category” is the employment grade or classification of a Qualified Employee as determined by the Participating Employer in its sole discretion.

2.24    Regular Base Amount. The “Regular Base Amount” is the Severance Pay benefit described in Section 4.1.

2.25    Release. A “Release” is a written instrument, prescribed by the Administrator and signed by the Qualified Employee, under which the Qualified Employee releases all Affiliates, and the directors, officers and employees of each of them, all employee benefit plans and all employee benefit plan fiduciaries from any and all claims the Qualified Employee may have against any of them. The Release will waive all claims the Qualified Employee may have under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Employee Retirement Income Security Act of 1974 (other than benefits payable following Termination of Employment), and such other statutes and rules of law as the Company may deem advisable.

2.26    Restricted Activities. In addition to compliance with all the other terms of this Plan, in order to be eligible to receive (and not required to repay) the Change in Control Base Amount Severance Pay benefit, the Qualified Employee or Participant may not engage in any of the following “Restricted Activities” for a period of two (2) yearsafter the Qualified Employee’s Termination of Employment. The term “Restricted Activities” means the Qualified Employee will not, directly or indirectly, alone or in any capacity with another person or entity:

(A)    engage in any commercial activity as described above that competes with the Company’s or any other Affiliate’s business as the Company or Affiliate has conducted it during the five years before the Qualified Employee's employment with the Participating Employer ends, within any state in the

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United States or within any country in which the Company or Affiliate directly or indirectly markets or services products or provides services;

(B)    interfere or attempt to interfere with the Company’s or any other Affiliate’s relationships with any of its current or prospective customers or vendors, by soliciting competing business from or having any competitive business-related contact with the customer or vendor or otherwise; or

(C)    employ, attempt to employ or otherwise contract for services with any person or entity who is then employed or engaged by the Company or any other Affiliate (whether as an employee or an independent contractor) on behalf of the Qualified Employee or any other person or entity, or take any action to induce any person or entity then employed or engaged by the Company or any other Affiliate (whether as an employee or independent contractor) to terminate their employment or engagement with the Company or any other Affiliate.

2.27    Severance Pay. “Severance Pay” means the benefits provided under the terms of this Plan. As described in Article 4, and subject to all the terms of this Plan, Severance Pay benefits may include the (a) Regular Base Amount, (b) Change in Control Base Amount, (c) COBRA Reimbursement and (d) Outplacement Services.

2.28    Termination of Employment. “Termination of Employment” means a termination of the Qualified Employee’s employment relationship (both as an employee and independent contractor) with the Company and all Affiliates or such other change in the Qualified Employee’s employment relationship with the Company and all Affiliates that would be considered a “separation from service” under Section 409A of the Code. The Qualified Employee’s employment relationship will be treated as remaining intact while the Qualified Employee is on a military leave, a sick leave or other bona fide leave of absence (pursuant to which there is a reasonable expectation that the Qualified Employee will return to perform services for the Company or an Affiliate) but only if the period of such leave does not exceed six (6) months, or if longer, so long as the Qualified Employee retains a right to reemployment by the Company or an Affiliate under applicable statute or by contract, provided, however, where the Qualified Employee’s leave is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six (6) months and such impairment causes the Qualified Employee to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a twenty-nine (29) month period of absence may be substituted for such six (6) month period of absence. In all cases, the Qualified Employee’s Termination of Employment must constitute a “separation from service” under Section 409A of the Code and any “separation from service” under Section 409A of the Code will be treated as a Termination of Employment.

ARTICLE 3

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Entitlement to Severance Pay

3.1    Eligible Terminations. Severance Pay will be paid, subject to the other provisions of this Plan, only to a Qualified Employee subject to an Involuntary Termination of Employment by a Participating Employer.

3.2    Terminations Not Covered. No Severance Pay will be paid to any person upon commencement of a leave of absence, including military service leave, or to any person whose employment is terminated by:

(A)    his or her resignation (other than Involuntary Termination of Employment for Good Reason), retirement or death;

(B)    discharge for Cause;

(C)    failure to be reinstated following a leave of absence; or

(D)    refusal to accept a new job position with a Participating Employer, a transfer to a new work location or a reduction in wages or salary, other than such events that would constitute Good Reason under this Plan.

3.3    Release Required.

(A)    Notwithstanding any other provision in this Plan, as a condition to becoming a Participant in this Plan who is entitled to receive Severance Pay, the Qualified Employee must timely execute and deliver to the Administrator, and not subsequently revoke, a Release of claims in the form provided by the Company within fifty (50) days of the date of the Qualified Employee’s Termination of Employment. The Qualified Employee will forfeit any right to Severance Pay if the Qualified Employee fails to comply with the requirements of the preceding sentence or is in violation of the Employee Inventions, Confidentiality, Non-Compete and Mutual Arbitration Agreement or any other employment, non-compete, non-solicitation or confidentiality agreement with the Company or any Affiliate. If the aggregate period during which the Qualified Employee is entitled to consider and/or revoke the Release spans two (2) calendar years, no Severance Pay will be paid prior to the beginning of the second such calendar year, and any payments otherwise payable prior thereto (if any) will instead be paid on the first regularly scheduled Company payroll date occurring in such second calendar year.

(B)    The requirement that the Qualified Employee not engage in any Restricted Activities in order to receive (and not be required to repay) the Change in Control Base Amount Severance Pay benefit (if any) does not prevent the Qualified Employee from seeking employment during such two-year period so long as such employment commences after the expiration of such two-year period and does not require, induce or result in the disclosure of any trade secrets or other confidential or proprietary information of the Company or any other Affiliate. In order to receive the Change in Control Base Amount Severance Pay benefit (if any is owed), in the Release the Qualified Employee must acknowledge and agree that complying with the Restricted Activities restrictions will not prevent the Qualified Employee from earning a living after his or her Termination of Employment.

3.4    Restricted Activities. As a condition to being a Participant entitled to receive Change in Control Base Amount Severance Pay benefits under this Plan, a Qualified Employee must not engage in any Restricted Activities or otherwise fail to comply with the provisions of this Plan including, but not limited to, Section 4.7. Pursuant to Section 4.7, a Participant who has received Change in Control Base Amount Severance Pay benefits under this Plan may be required to repay the Company or other Affiliate

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for such amounts if the Administrator determines that the Participant has engaged in Restricted Activities or the Participant otherwise fails to comply with the provisions of Section 4.7.

3.5    Return of Property. No Severance Pay will be paid to a Participant prior to the date on which the Participant returns to his or her employer all property of the Company and any Affiliate he or she has in his or her possession or control including, but not limited to, employee identification cards, credit cards, phone cards, vehicles, equipment, documents and electronic storage media.

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ARTICLE 4
Severance Pay Benefits

4.1    Regular Base Amount. Subject to the other provisions of this Plan, a Participant in the respective Qualified Employee Categorywill receive a cash Regular Base Amount Severance Pay benefit in the amount determined from the following table.

Qualified Employee Category	Regular Base Amount - Severance Pay
Grade 15	An amount equal to: (a) twotimes - (i) annual Base Pay and (ii) annual incentive plan target (in effect as of the date of Termination of Employment) plus (b) Pro-Rata Incentive Bonus
Grade 14	An amount equal to: (a)  onetimes - (i) annual Base Pay and (ii) annual incentive plan target (in effect as of the date of Termination of Employment) plus (b) Pro-Rata Incentive Bonus
Grade 13	An amount equal to: (a) fifty percent of - (i) annual Base Pay and (ii) annual incentive plan target (in effect as of the date of Termination of Employment) plus (b) Pro-Rata Incentive Bonus

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4.2    Change in Control Base Amount. In addition to receiving the Regular Base Amount described in Section 4.1, if the Participant’s Termination of Employment occurs during a Change in Control Protection Period and only if such Change in Control is consummated, then, subject to the other provisions of this Plan, the Participant in the respective Qualified Employee Category (Grade 15 or Grade 14) will receive a cash Change in Control Base Amount Severance Pay benefit determined from the following table.

Qualified Employee Category	Change in Control Base Amount - Severance Pay
Grade 15	An amount equal to: one times - (i) annual Base Pay and (ii) annual incentive plan target (in effect as of the date of Termination of Employment)
Grade 14	An amount equal to: one times - (i) annual Base Pay and (ii) annual incentive plan target (in effect as of the date of Termination of Employment)
Grade 13	[None - Change in Control Base Amount Severance Pay benefits do not apply to Grade 13]

4.3    COBRA Reimbursement. Subject to the other provisions of this Plan, if the Participant timely elects continued coverage (which may include coverage for the Participant, Participant’s spouse and/or Participant’s other eligible dependents) under the Participating Employer’s group medical plan and/or group dental plan pursuant to Section 4980B of the Code (“COBRA”), in accordance with ordinary plan practices and provides appropriate documentation of such payment as requested by the Administrator, the Participating Employer will reimburse the Participant each month during the Premium Reimbursement Period an amount equal to the difference between the amount the Participant pays for such COBRA continuation coverage each such month and the amount paid by a full-time active employee of the Participating Employer each such month for the same level of coverage elected by the Participant. Any such reimbursement or payment will be made on or before the tenth (10th) day of the calendar month following the calendar month in which any COBRA continuation coverage payment was incurred. For purposes of this Section 4.3, the Premium Reimbursement Period is the period that begins on the date of Termination of Employment and ends on the earlier of:

(A)    the last date of the Premium Reimbursement Period that applies to the Participant based on his or her Qualified Employee Category in the table below;

(B)    the date on which the Participant’s eligibility for COBRA continuation coverage under the Company’s group medical or group dental plan ends; or

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(C)    the date on which the Participant becomes eligible to participate in another group medical plan (that provides “major medical” coverage) or group dental plan, as the case may be, because of reemployment or otherwise, whether or not the Participant elects to participate in such plan.

Other than the Premium Reimbursement Period payments described in this Section 4.3, the Participant’s coverage under any Participating Employer employee benefit plan is subject to the terms of such employee benefit plan and applicable law.

Qualified Employee Category	Premium Reimbursement Period
Grade 15	Two Years after the date of Termination of Employment
Grade 14	One Year after the date of Termination of Employment
Grade 13	Six months after the date of Termination of Employment

4.4    Reductions. Notwithstanding the foregoing provisions, the total amount of Severance Pay (Regular Base Amount, Change in Control Base Amount, COBRA Reimbursement and Outplacement Services) to which a Participant would otherwise be entitled under this Plan will be reduced by each of the following:

(A)    the full amount of any severance, separation or similar types of payments the Company or any other Affiliate is required to make to the Participant on account of the termination of his or her employment under any individual severance, separation or employment agreement, any other severance plan or pursuant to the Worker Adjustment and Retraining Notification Act, 21 U.S.C. §2101 et seq. (or a similar law of any state);

(B)    the full amount of any indebtedness of the Participant to the Company or any other Affiliate including, but not limited to, unearned advances, credit card balances and paid time off in excess of time accrued; and

(C)    with respect to any Participant who terminated employment with the Company or an Affiliate and is rehired by the Company or any other Affiliate, the full amount of Severance Pay paid to the Participant under this Plan or any individual severance, separation or employment agreement or pursuant to the Worker Adjustment and Retraining Notification Act, 21 U.S.C. §2101 et seq. (or a similar law of any state) within the two year period following such previous Termination of Employment.

4.5    Period of Payment.

(A)        

(1)    With respect to a Qualified Employee who is classified by the Participating Employer as a Grade 14 or 15, the Regular Base Amount Severance Pay benefit pursuant to Section 4.1 and, if applicable, the Change in Control Base Amount Severance Pay benefit pursuant to Section 4.2, will be paid in a single lump sum within a reasonable time following the Participant’s Termination of Employment (subject to the provisions of Section 3.3 relating to execution and delivery of a Release within the required time period) and in no event later than March 1^st of the calendar year following the calendar year during which such Termination of Employment occurs; provided, if the Participant’s Termination of Employment is within a Change in Control Protection Period but before the Closing of the Change in Control, payment of

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the Change in Control Base Amount Severance Pay benefit pursuant to Section 4.2 will be paid within thirty (30) days after the Closing of the Change in Control.

(2)    With respect to a Qualified Employee who is classified by the Participating Employer as a Grade 13, the Regular Base Amount Severance Pay benefit pursuant to Section 4.1 will be paid in substantially equal installments at regular payroll intervals beginning no later than forty-five (45) days after the Participant’s Termination of Employment (subject to the provisions of Section 3.3 relating to execution and delivery of a Release within the required time period); provided, that any portion of the Severance Pay benefit pursuant to Section 4.1 would exceed the limitations of the separation pay exception to Code Section 409A (as described in Treasury Regulation Section 1.409A-1(b)(9)) will be paid in a single lump sum within a reasonable time following the Participant’s Termination of Employment (subject to the provisions of Section 3.3 relating to execution and delivery of a Release within the required time period) and in no event later than March 1^st of the calendar year following the calendar year during which such Termination of Employment occurs.

(B)    Payments of amounts under this Plan are intended to comply with one or more exemptions or exclusions under Section 409A of the Code and any final regulations and guidance promulgated thereunder (“Section 409A”), and to the extent Section 409A is applicable to any payments or benefits under this Plan, this Plan is intended to comply with Section 409A. This Plan shall be construed and administered in a manner consistent with such intentions.

(C)    It is intended that the Severance Pay amounts under this Plan are excluded from Section 409A of the Code either as short-term deferrals under Treasury Regulation Section 1.409A-1(b)(4) or as payments under a separation pay plan as described in Treasury Regulation Section 1.409A-1(b)(9).

(D)    Notwithstanding any other provision of this Plan if, at the time of the Qualified Employee’s Termination of Employment, the Qualified Employee is a Specified Employee (within the meaning of Section 409A of the Code) and the Company determines that paying any Severance Pay at the time or times indicated in this Plan would be a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code then, in addition to the conditions specified herein, no payment under this Plan will be made until the first day after the end of the six (6) month period following the date of the Qualified Employee’s Termination of Employment or, if earlier, upon the Qualified Employee’s death. If any such suspended payment is not made within ten (10) days of the end of such six (6) month period, the Company will pay the Qualified Employee interest, equal to the Applicable Federal Rate (“AFR”) determined under Section 1274(d) of the Code in effect for each month, from the date of Termination of Employment through the date of payment.

4.6    Outplacement Services. A Participant will be eligible to receive outplacement services through a provider selected by the Company and at the expense of the Company, subject to the limits set forth below and subject to all of the other terms and conditions of this Plan. A Participant at Grade 13 will be eligible to receive up to six (6) months of outplacement services at a cost to the Company of up to eight thousand dollars ($8,000); a Participant at Grade 14 will be eligible to receive up to twelve (12) months of outplacement services at a cost to the Company of up to ten thousand dollars ($10,000); and a Participant at Grade 15 will be eligible to receive up to eighteen (18) months of outplacement services at a cost to the Company of up to fifteen thousand dollars ($15,000). Eligibility for outplacement services under this Section 4.6 will terminate immediately upon the acceptance by the Participant of employment with another employer at a level of compensation and benefits reasonably comparable to the compensation and benefits that the Participant was entitled to immediately prior to the Participant’s Termination of Employment with the Company or any other Affiliate.

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4.7    Termination or Repayment of Severance Pay Benefits. A Participant’s right to receive Severance Pay benefits terminates upon the occurrence of any of the following events.

(A)    The Participant becomes re-employed by the Company or any other Affiliate. Upon the date of reemployment no further payments of Severance Pay (Regular Base Amount, Change in Control Base Amount, COBRA Reimbursement and/or Outplacement Services) will be owed to the Participant.

(B)    The Participant’s Release is declared invalid or the Participant revokes (or attempts to revoke) the Release or commences or is part of a legal or administrative action against the Company, any of its Affiliates, or the directors, officers or employees of any of them that is based on any claim waived under the Release. Upon the occurrence of any such event, the Participant shall, upon demand of the Administrator, repay to the Participating Employer the full amount of all Severance Pay benefits (Regular Base Amount, Change in Control Base Amount, COBRA Reimbursement and/or Outplacement Services) he or she received, to the extent such amount would not have been payable under this Plan if the Participant had not executed the Release.

(C)    The Senior Vice President, Chief Legal Risk Officer (or the office of the Company’s general counsel) informs the Administrator that the Participant is in violation of the Employee Inventions, Confidentiality, Non-Compete and Mutual Arbitration Agreement or any other employment, non-compete, non-solicitation, confidentiality, compensation, stock option or equity agreement with the Company or any other Affiliate. Upon the occurrence of any such violation, the Participant shall, upon demand of the Administrator, repay to the Participating Employer the full amount of all Severance Pay benefits (Regular Base Amount, Change in Control Base Amount, COBRA Reimbursement and/or Outplacement Services) he or she received pursuant to this Plan.

(D)    With respect only to the Change in Control Base Amount Severance Pay benefit, the Senior Vice President, Chief Legal Risk Officer (or the office of the Company’s general counsel) informs the Administrator that the Participant has engaged in any Restricted Activities. Upon the occurrence of any such violation, the Participant shall, upon demand of the Administrator, repay to the Participating Employer the full amount of Change in Control Base Amount Severance Pay benefits he or she received (if any) pursuant to this Plan.

4.8    Death of Participant. If a Participant dies prior to receiving all of the Severance Pay benefits to which he or she is entitled, any remaining payments will be made to the Participant’s estate. If the Participant dies during the COBRA reimbursement period pursuant to Section 4.3, COBRA premium reimbursement payments still owed (if any) will continue to be paid to the Participant’s estate.

4.9    Limitation on Change in Control Payments.

(A)    If all or any portion of the Severance Pay benefits described herein are determined to be “payments” contingent upon a Change of Control within the meaning of Section 280G(b)(2) of the Code, together with any other “payments” that the Participant has the right to receive from the Company or any corporation that is a member of an “affiliated group” (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, then the “payments” to such Participant from all such sources will be reduced to the largest amount as will result in no portion of such “payments” being subject to the excise tax imposed by Section 4999 of the Code; provided, that such reduction will be made only if the aggregate amount of the payments after such reduction exceeds the difference between (1) the amount of such payments absent such reduction minus (ii) the aggregate amount of the excise tax imposed under Section 4999 of the Code attributable to any such excess parachute payments. It is presumed that the payments will first be reduced in the order described in Section 17.5 of the Select Comfort Corporation 2010 Omnibus Incentive Plan(as amended) and that

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Severance Pay benefits under this Executive Severance Pay Plan will only be reduced as described herein to the extent that all “incentive payments” under theSelect Comfort Corporation 2010 Omnibus Incentive Plan have first been reduced; provided, that any Participant for whom any excess payment reduction is required shall have the right to elect to first waive all or part of the Severance Pay benefits otherwise owed to the Participant under this Executive Severance Pay Plan before application of the ordering rules set forth under the Select Comfort Corporation 2010 Omnibus Incentive Plan.

(B)    This paragraph applies only with respect to a Participant who is classified by the Participating Employer as a Grade 15 Qualified Employee (“Grade 15 Participant”). The determination of whether and the extent to which any payments must be reduced pursuant to paragraph (A) above, will be made by a national accounting firm selected (and paid for) by the Company. If the Grade 15 Participant disagrees with the Section 280G calculation performed by such national accounting firm, the Grade 15 Participant may submit a written request to the Company’s Board of Directors that a second calculation be completed by another national accounting firm selected by such Grade 15 Participant and the Company will pay for such second Section 280G calculation. The determination of such second national accounting firm shall be binding, final and conclusive upon the Grade 15 Participant and the Company.

(C)    This paragraph applies with respect to any Participant who is classified by the Participating Employer as a Grade 13 or Grade 14 Qualified Employee. The determination of whether and the extent to which any payments must be reduced pursuant to paragraph (A) above, will be made by a national accounting firm selected (and paid for) by the Company. If any such Participant disagrees with the Section 280G calculation performed by such national accounting firm, the Participant may submit a written request to the Company’s Board of Directors that a second calculation be completed by another national accounting firm mutually agreed upon by such Participant and the Company and the Company will pay for such second Section 280G calculation; provided, the Board of Directors in its sole discretion may grant or deny the Participant’s request for a second Section 280G calculation. The determination of such second national accounting firm (if any) shall be binding, final and conclusive upon the Participants and the Company.

ARTICLE 5

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Administration

5.1    Administrator. The Committee will be the Administrator of the Plan and will have overall responsibility for administration of the Plan. The Committee may delegate to the Senior Vice President, Chief Human Capital Officer of the Company or any other person to perform administrative duties on behalf of the Company and may revoke any such delegation at any time. Any delegation to a person who is not an Employee of an Affiliate will be in writing, and any delegation to an Employee of an Affiliate will terminate upon the termination of his or her employment. If the name of position of Senior Vice President, Chief Human Capital Officer of the Company changes or the duties of such position are transferred to another position, such other position will be substituted for the Senior Vice President, Chief Human Capital Officer of the Company in this provision.

5.2    Administrator’s Discretion. The Administrator will have the discretionary power and authority to establish, modify or terminate Plan policies, rules or procedures, to interpret, construe, apply and enforce the terms of the Plan or any such Plan rules, polices or procedures whenever he or she deems necessary in its administration. Such discretion will include, without limitation, the discretionary power and authority to (A) determine whether an individual is a Qualified Employee, the amount of a Qualified Employee’s benefit and whether a Qualified Employee has satisfied applicable conditions or is subject to limitations and (B) remedy ambiguities, inconsistencies, omissions and erroneous benefit calculations. All acts and decisions of the Administrator made in good faith are binding on all interested persons.

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ARTICLE 6Amendment and Termination of Plan

6.1    Right to Amend or Terminate the Plan. Subject to Section 6.2, the Company reserves the right to amend or terminate this Plan at any time by a written instrument approved in advance by the Committee and signed by the Senior Vice President, Chief Legal Risk Officer and Senior Vice President, Chief Human Capital Officerof the Company. If the name of position of Senior Vice President, Chief Legal Risk Officer and/or Senior Vice President, Chief Human Capital Officer of the Company changes or the duties of such position are transferred to another position, such other position will be substituted for the Senior Vice President, Chief Legal Risk Officer or Senior Vice President, Chief Human Capital Officer of the Company in this provision. Subject to Section 6.2, the amendment or termination of the Plan shall be effective as of the date specified in such instrument and may apply to any Qualified Employee or Participant, except that no amendment will be effective to reduce the total amount of Severance Pay payable to a Participant whose employment with all Affiliates terminated before the date the amendment is adopted. Any Employee whose employment terminates on or after the effective date of the termination of the Plan will be ineligible for Severance Pay.

6.2    Change in Control. Notwithstanding Section 6.1:

(A)    the Company (or on or following a Change in Control, the Company or any successor) may not amend or terminate this Plan during a Change in Control Protection Period in any way that would adversely affect the rights of any Qualified Employee under the Plan without the written consent of such affected Qualified Employee and

(B)    any Severance Pay payable to any individual who is a Qualified Employee in this Plan as of the day immediately prior to the first day of the Change in Control Protection Period and whose employment with all Affiliates terminates at any time during the Change in Control Protection Period, will be no less than the Severance Pay such Qualified Employee would have been entitled to receive under this Plan if he or she had become entitled to Severance Pay upon an Involuntary Termination of Employment with the Company on the date of the Change in Control.

ARTICLE 7

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Miscellaneous Provisions

7.1    Participation by Affiliate. An Affiliate may, when authorized by its board of directors, adopt this Plan for the benefit of its Employees, subject to the approval of the Administrator. Upon adoption of this Plan, the Participating Employer is subject to the terms of this Plan, as amended by the Company. Subject to Section 6.2, any Participating Employer may terminate this Plan with respect to its Employees at any time when authorized by its board of directors.

7.2    No Benefit Accrues. No Employee of any Affiliate will accrue any right to benefits under this Plan before satisfying all of the requirements for Plan benefits in effect at the termination of his or her employment. No Participant will accrue any right to continued benefits under this Plan unless he or she satisfies the conditions for eligibility as of the date each benefit installment becomes payable.

7.3    Indemnification. Each Affiliate will indemnify and hold harmless, to the extent permitted by law, each of its directors, officers and employees against any and all liabilities, losses, costs and expenses (including legal fees) of every kind and nature that may be imposed on, incurred by or asserted against such person at any time by reason of such individual’s services at the request of the Affiliate in connection with the Plan, but only if such individual did not act dishonestly or in bad faith or in willful violation of the law, regulation or Company by-law under which such liability, loss, cost or expense arises. An Affiliate has the right, but not the obligation, to select counsel and control the defense and settlement of any action for which an individual may be entitled to indemnification under this provision.

7.4    Specialist’s Assistance. The Administrator may retain such actuarial, accounting, legal, clerical and other services as may reasonably be required in the administration of the Plan, and may pay reasonable compensation for such services. All costs of administering the Plan will be paid by the Company.

7.5    Benefits Claim Procedure. The claim and appeal review procedures set forth below will apply to this Plan.

(A)    The Participant (“Claimant”), or the Participating Employer on the Participant’s behalf, must make a claim for benefits under the Plan with the Administrator. A claim for benefits must be made no later than 60 days following the Termination of Employment.

(1)    Within 30 days after receipt of a claim for benefits, the Administrator will render a written decision on the claim to the Claimant.

(2)    If the claim is denied, in whole or in part, the Administrator will send notification of the denial to the Claimant. Such notification will comply with the requirements set forth in Department of Labor regulation 2560.503-1(g).

(B)    Appeals of denied claims will be subject to the following procedures.

(1)    To appeal the denial, the Claimant or his or her representative must file a written request for review with the Administrator not later than 60 days after the Claimant receives the Administrator’s written decision on the claim.

(2)    The Claimant or his or her representative may submit written comments, documents, records, and other information relating to the claim for benefits to the Administrator for consideration by the Administrator without regard to whether such information was submitted or considered in the initial review determination.

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(3)    The Claimant will be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits.

(4)    The Administrator will make a decision on review within 60 days of the receipt of the request for review and will provide the decision on review in writing to the Claimant.

(5)    If the denial is upheld in whole or part, the Administrator will notify the Claimant. The notification will include the reasons for the denial, the reference to the Plan provisions on which the denial is based and the Plan’s response to any additional information provided by the Claimant following the initial review determination.

(C)    The 30- and 60-day periods during which the Administrator must respond to the Claimant, may be extended by up to an additional 30- or 60- days, respectively, if circumstances beyond the Administrator’s control so require and if notice of such extension is given to the Claimant. If the time for rendering a written decision on a claim is extended due to the Claimant’s failure to provide information necessary to decide the claim, the time period for making the determination will be tolled from the date on which the notification of the extension is sent to the Claimant until the date on which the Claimant responds to the request for additional information.

(D)    Any individual who fails to follow the claim and appeal procedure will be barred from asserting his or her claim in any judicial or administrative proceeding.

7.6    Disputes. The United States District Court for the District of Minnesota is the exclusive proper venue for any action involving a dispute between any individual and any Affiliate, the Administrator or any other person relating to or arising from the Plan, and such court will have personal jurisdiction over any Qualified Employee named in the action. The law as stated and applied by the United States Court of Appeals for the Eighth Circuit or the United States District Court for the District of Minnesota will apply to and control all actions relating to the Plan brought against the Plan. No action relating to or arising from the Plan may be commenced against the Plan, the Plan Administrator or the Company more than six months following termination of the involved individual’s employment with an Affiliate or, if later, 90 days after the issuance of the Administrator’s final decision on the request for review of a denied claim under the Plan’s benefit claim procedure.

7.7    Company Action. The Company’s decisions and actions pursuant to the Plan (other than those decisions which the Plan requires to be made by the Administrator when the Company is acting in that capacity) will be made or taken in the Company’s own interest, and the Company is not required to consider the interest of any Qualified Employee or other individual, it being intended that any such decision or action will be made or taken by the Company in its settlor capacity rather than in a fiduciary capacity.

7.8    Status of Plan. Nothing contained in the Plan is to be construed as providing for assets to be held for the benefit of any Qualified Employee or any other person to whom benefits are to be paid pursuant to the terms of this Plan, the Qualified Employee’s or other person’s only interest under the Plan being the right to receive the benefits specified in this instrument. To the extent the Qualified Employee or any other person acquires a right to receive benefits under this Plan, such right is no greater than the right of any unsecured general creditor of the Company.

7.9    No Assignment of Benefits. The benefits payable under the Plan and the right to receive future benefits under the Plan may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered or subjected to any charge or legal process.

18

7.10    Withholding and Offsets. The Company retains the right to withhold from any benefit payment pursuant to the Plan any and all income, employment, excise and other taxes as the Company deems necessary, and the Company may offset against amounts otherwise then distributable to any person under the Plan any amounts such person then owes the Company but only if and to the extent allowed under Section 409A of the Code.

7.11    Other Benefits. No amounts paid pursuant to the Plan constitute salary or compensation for the purpose of computing benefits under any other benefit plan, practice, policy or procedure of the Company that does not expressly provide otherwise.

7.12    No Employment Rights Created. Neither the maintenance of nor participation in the Plan gives any employee a right to continued employment or limits the right of the Company to discharge, transfer, demote or modify the terms and conditions of employment or otherwise deal with any employee without regard to the effect such action might have on him or her with respect to the Plan.

7.13    Successors. Except as otherwise expressly provided in the Plan, all obligations of the Company under the Plan are binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or other transfer of all or substantially all of the business or assets of the Company.

IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its authorized officers on the date written below.

	SELECT COMFORT CORPORATION
Dated: July 7, 2017	By: ___/s/ Mark A. Kimball___________________ Senior Vice President, Chief Legal & Risk Officer
Dated: July 6, 2017	By: ___/s/_Patricia Dirks________ _____________ Senior Vice President, Chief Human Capital Officer

19

EX-31.1

Exhibit 31.1

Certification by Chief Executive Officer

I, Shelly R. Ibach, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Select Comfort Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	July 28, 2017
		/s/ Shelly R. Ibach
		Shelly R. Ibach
		Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification by Chief Financial Officer

I, David R. Callen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Select Comfort Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	July 28, 2017
		/s/ David R. Callen
		David R. Callen
		Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Select Comfort Corporation (the “Company”) on Form 10-Q for the quarter ended July 1, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Shelly R. Ibach, Chief Executive Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to her knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	July 28, 2017
		/s/ Shelly R. Ibach
		Shelly R. Ibach
		Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Select Comfort Corporation (the “Company”) on Form 10-Q for the quarter ended July 1, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, David R. Callen, Senior Vice President and Chief Financial Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to his knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	July 28, 2017
		/s/ David R. Callen
		David R. Callen
		Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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Document and Entity Information shares in Thousands	6 Months Ended
	Jul. 01, 2017 shares
Document and Entity Information [Abstract]
Entity Registrant Name	SELECT COMFORT CORP
Entity Central Index Key	0000827187
Current Fiscal Year End Date	--12-30
Entity Filer Category	Large Accelerated Filer
Document Type	10-Q
Document Period End Date	Jul. 01, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding	41,066

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jul. 01, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 2,082	$ 11,609
Accounts receivable, net of allowance for doubtful accounts of $856 and $884, respectively	24,486	19,705
Inventories	69,856	75,026
Income taxes receivable	3,681	0
Prepaid expenses	10,686	8,705
Other current assets	18,397	23,282
Total current assets	129,188	138,327
Non-current assets:
Property and equipment, net	205,621	208,367
Goodwill and intangible assets, net	78,678	80,817
Deferred income taxes	0	4,667
Other non-current assets	27,243	24,988
Total assets	440,730	457,166
Current liabilities:
Borrowings under revolving credit facility	13,950	0
Accounts payable	105,593	105,375
Customer prepayments	45,725	26,207
Accrued sales returns	12,602	15,222
Compensation and benefits	29,051	19,455
Taxes and withholding	6,547	23,430
Other current liabilities	39,195	35,628
Total current liabilities	252,663	225,317
Non-current liabilities:
Deferred income taxes	307	0
Other non-current liabilities	73,321	71,529
Total liabilities	326,291	296,846
Shareholders’ equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	0	0
Common stock, $0.01 par value; 142,500 shares authorized, 41,066 and 43,569 shares issued and outstanding, respectively	411	436
Additional paid-in capital	0	0
Retained earnings	114,028	159,884
Total shareholders’ equity	114,439	160,320
Total liabilities and shareholders’ equity	$ 440,730	$ 457,166

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jul. 01, 2017	Dec. 31, 2016
Current assets:
Allowance for doubtful accounts	$ 856	$ 884
Shareholders’ equity:
Undesignated preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Undesignated preferred stock, shares issued (in shares)	0	0
Undesignated preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	142,500,000	142,500,000
Common stock, shares issued (in shares)	41,066,000	43,569,000
Common stock, shares outstanding (in shares)	41,066,000	43,569,000

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Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016	Jul. 01, 2017	Jul. 02, 2016
Income Statement [Abstract]
Net sales	$ 284,673	$ 276,878	$ 678,572	$ 629,858
Cost of sales	108,054	105,617	255,494	249,523
Gross profit	176,619	171,261	423,078	380,335
Operating expenses:
Sales and marketing	144,498	134,785	313,764	285,453
General and administrative	28,819	27,018	62,588	57,924
Research and development	6,363	7,062	13,959	14,664
Total operating expenses	179,680	168,865	390,311	358,041
Operating (loss) income	(3,061)	2,396	32,767	22,294
Other expense, net	(282)	(229)	(420)	(326)
(Loss) income before income taxes	(3,343)	2,167	32,347	21,968
Income tax (benefit) expense	(2,565)	751	8,664	7,583
Net (loss) income	$ (778)	$ 1,416	$ 23,683	$ 14,385
Basic net (loss) income per share:
Net (loss) income per share – basic	$ (0.02)	$ 0.03	$ 0.56	$ 0.30
Weighted-average shares – basic	41,716,000	46,394,000	42,233,000	47,247,000
Diluted net (loss) income per share:
Net (loss) income per share – diluted	$ (0.02)	$ 0.03	$ 0.55	$ 0.30
Weighted-average shares – diluted	41,716,000	47,044,000	43,080,000	47,945,000

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016	Jul. 01, 2017	Jul. 02, 2016
Statement of Comprehensive Income [Abstract]
Net (loss) income	$ (778)	$ 1,416	$ 23,683	$ 14,385
Other comprehensive income – unrealized gain on available-for-sale marketable debt securities, net of income tax	0	0	0	14
Comprehensive (loss) income	$ (778)	$ 1,416	$ 23,683	$ 14,399

XML

Consolidated Statement of Shareholders' Equity - 6 months ended Jul. 01, 2017 - USD ($) $ in Thousands	Total	Common Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings [Member]
Balance (in shares) at Dec. 31, 2016	43,569,000	43,569,000
Balance at Dec. 31, 2016	$ 160,320	$ 436	$ 0	$ 159,884
Net income	23,683			23,683
Exercise of common stock options (in shares)		180,000
Exercise of common stock options	2,654	$ 2	2,652	0
Stock-based compensation (in shares)		581,000
Stock-based compensation	7,876	$ 6	7,870	0
Repurchases of common stock (in shares)		(3,264,000)
Repurchases of common stock	$ (80,094)	$ (33)	(10,522)	(69,539)
Balance (in shares) at Jul. 01, 2017	41,066,000	41,066,000
Balance at Jul. 01, 2017	$ 114,439	$ 411	$ 0	$ 114,028

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016
Cash flows from operating activities:
Net income	$ 23,683	$ 14,385
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	31,177	27,960
Stock-based compensation	7,876	7,606
Net loss on disposals and impairments of assets	2	7
Excess tax benefits from stock-based compensation	0	(472)
Deferred income taxes	4,974	985
Changes in operating assets and liabilities:
Accounts receivable	(4,781)	5,489
Inventories	5,170	12,904
Income taxes	(14,532)	15,324
Prepaid expenses and other assets	2,110	(6,838)
Accounts payable	11,858	(15,282)
Customer prepayments	19,518	(26,885)
Accrued compensation and benefits	9,834	9,249
Other taxes and withholding	(6,032)	1,654
Other accruals and liabilities	(2,050)	1,034
Net cash provided by operating activities	88,807	47,120
Cash flows from investing activities:
Purchases of property and equipment	(27,132)	(23,764)
Proceeds from marketable debt securities	0	15,090
Proceeds from sales of property and equipment	0	67
Decrease in restricted cash	3,150	0
Net cash used in investing activities	(23,982)	(8,607)
Cash flows from financing activities:
Repurchases of common stock	(80,094)	(71,366)
Net increase in short-term borrowings	3,098	12,574
Proceeds from issuance of common stock	2,654	1,623
Excess tax benefits from stock-based compensation	0	472
Debt issuance costs	(10)	(409)
Net cash used in financing activities	(74,352)	(57,106)
Net decrease in cash and cash equivalents	(9,527)	(18,593)
Cash and cash equivalents, at beginning of period	11,609	20,994
Cash and cash equivalents, at end of period	$ 2,082	$ 2,401

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Basis of Presentation

6 Months Ended

Jul. 01, 2017

Accounting Policies [Abstract]

Basis of Presentation

Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and six months endedJuly 1, 2017 of Select Comfort Corporation and 100%-owned subsidiaries (Select Comfort or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of July 1, 2017 and December 31, 2016, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and other recent filings with the SEC.

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

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

Revenue Recognition

At July 1, 2017 and December 31, 2016, we had deferred revenue totaling $67 million and $61 million, of which $25 million and $21 million are included in other current liabilities, respectively, and $42 million and $40 million are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also have related deferred costs totaling $38 million and $33 million, of which $14 million and $11 million are included in other current assets, respectively, and $24 million and $22 million are included in other non-current assets, respectively, in our consolidated balance sheets. The deferred revenue and costs are recognized over the product’s estimated life of four years.

New Accounting Pronouncements

Adopted

In March 2016, the Financial Accounting Standards Board (FASB) issued new guidance on the accounting for, and disclosure of, stock-based compensation which we adopted effective January 1, 2017. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, forfeitures and classification on the statement of cash flows. Under the previous guidance, excess tax benefits and deficiencies were recognized in additional paid-in capital in the consolidated balance sheets. Upon adoption of the new guidance, these excess tax benefits or deficiencies are required to be recognized as discrete adjustments to income tax expense in the consolidated statements of operations on a prospective basis. During the three and six months endedJuly 1, 2017, excess tax benefits of $0.4 million and $1.2 million, respectively, were recognized as a reduction of income tax expense, rather than in additional paid-in capital.

In addition, under the new guidance, excess income tax benefits from stock-based compensation arrangements are classified as an operating activity in the statement of cash flows rather than as a financing activity. This resulted in an increase to operating cash flows of $0.9 million and $2.1 million for the three and six months endedJuly 1, 2017. We elected to apply the new cash flow classification guidance prospectively. The prior-year statement of cash flows has not been adjusted.

We have also elected to continue to estimate the number of stock-based awards expected to vest, as permitted by the new guidance, rather than electing to account for forfeitures as they occur.

Not Yet Adopted

In May 2014, the FASB issued a comprehensive new revenue recognition model that requires a company to recognize revenue in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance was originally effective for fiscal years beginning after December 15, 2016 and early adoption was not permitted. In July 2015, the FASB deferred the effective date from fiscal years beginning after December 15, 2016 to fiscal years beginning after December 15, 2017 (including interim reporting periods within those fiscal years). Early adoption is permitted to the original effective date of fiscal years beginning after December 15, 2016 (including interim reporting periods within those fiscal years). Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. When we adopt this new guidance, we expect to use the modified retrospective approach which will result in an adjustment to opening retained earnings, but would not restate prior periods' financial statements. We are continuing to evaluate the effect on our revenue recognition, disclosure requirements and changes that may be necessary to our internal controls over financial reporting.

In February 2016, the FASB issued new guidance on accounting for leases that generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

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Fair Value Measurements

6 Months Ended

Jul. 01, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

At July 1, 2017 and December 31, 2016, we had $2.9 million and $2.3 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $2.9 million and $2.3 million at July 1, 2017 and December 31, 2016, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

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Inventories

6 Months Ended

Jul. 01, 2017

Inventory Disclosure [Abstract]

Inventories

Inventories

Inventories consisted of the following (in thousands):

	July 1, 2017		December 31, 2016
Raw materials	$	5,740	$	7,973
Work in progress	95		72
Finished goods	64,021		66,981
	$	69,856	$	75,026

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Goodwill and Intangible Assets

6 Months Ended

Jul. 01, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

Goodwill and Intangible Assets, Net    

Goodwill and Indefinite-Lived Intangible Assets

Goodwill was $64.0 million at July 1, 2017 and December 31, 2016. Indefinite-lived trade name/trademarks totaled $1.4 million at July 1, 2017 and December 31, 2016.

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):

	July 1, 2017				December 31, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	18,851	$	5,615	$	18,851	$	4,524
Customer relationships	2,413		2,413		2,413		1,365
Trade names/trademarks	101		101		101		101
	$	21,365	$	8,129	$	21,365	$	5,990

Amortization expense for the three months endedJuly 1, 2017 and July 2, 2016, was $0.5 million and $0.6 million, respectively. Amortization expense for the six months endedJuly 1, 2017 and July 2, 2016, was $2.1 million and $1.3 million, respectively.

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Credit Agreement

6 Months Ended

Jul. 01, 2017

Debt Disclosure [Abstract]

Debt

Credit Agreement

In March 2017, we amended our revolving credit facility to increase our net aggregate availability from $150 million to $153.15 million. We maintained the accordion feature which allows us to increase the amount of the credit facility from $153.15 million to $200 million, subject to lenders' approval. There were no other changes to the credit agreement's terms and conditions.

The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility matures in February 2021. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio.

As of July 1, 2017, we had $14 million in outstanding borrowings and $3.15 million in outstanding letters of credit. We had additional borrowing capacity of $136 million. As of July 1, 2017, the weighted-average interest rate on borrowings outstanding under the credit facility was 3.3%. We were in compliance with all financial covenants.

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Repurchase of Common Stock

6 Months Ended

Jul. 01, 2017

Repurchase of Common Stock [Abstract]

Repurchase of Common Stock

Repurchase of Common Stock

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

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Amount repurchased under Board-approved share repurchase program	$	25,000	$	20,000	$	75,000	$	70,000
Amount repurchased in connection with the vesting of employee restricted stock grants	300		125		5,094		1,366
Total amount repurchased	$	25,300	$	20,125	$	80,094	$	71,366

As of July 1, 2017, the remaining authorization under our Board-approved share repurchase program was $170 million. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.The cost of stock repurchases is first charged to additional paid-in capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.

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Stock-Based Compensation

6 Months Ended

Jul. 01, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

Stock-Based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Stock awards	$	3,584	$	3,261	$	6,720	$	6,412
Stock options	588		579		1,156		1,194
Total stock-based compensation expense	4,172		3,840		7,876		7,606
Income tax benefit	1,406		1,325		2,654		2,624
Total stock-based compensation expense, net of tax	$	2,766	$	2,515	$	5,222	$	4,982

In addition to the income tax benefit related to stock-based compensation expense in the table above, excess tax benefits of $0.4 million and $1.2 million were recognized as reductions of income tax expense during the three and six months endedJuly 1, 2017, respectively. There were no excess tax benefits recognized in income tax expense during the three and six months endedJuly 2, 2016. See Note 1, New Accounting Pronouncements, for additional discussion of new guidance on the accounting for, and disclosure of, stock-based compensation which we adopted effective January 1, 2017.

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Profit Sharing and 401(k) Plan

6 Months Ended

Jul. 01, 2017

Profit Sharing and 401 (k) Plan [Abstract]

Profit Sharing and 401(k) Plan

Profit Sharing and 401(k) Plan

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months endedJuly 1, 2017 and July 2, 2016, our contributions, net of forfeitures, were $1.2 million and $1.0 million, respectively. During the six months endedJuly 1, 2017 and July 2, 2016, our contributions, net of forfeitures, were $2.5 million and $2.3 million, respectively.

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Other (Expense) Income, Net

6 Months Ended

Jul. 01, 2017

Other Income and Expenses [Abstract]

Other (Expense) Income, Net

Other Expense, Net

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

	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Interest expense	$	(288	)	$	(251	)	$	(470	)	$	(357	)
Interest income	6			22			50			31
Other expense, net	$	(282	)	$	(229	)	$	(420	)	$	(326	)

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Net Income Per Common Share

6 Months Ended

Jul. 01, 2017

Earnings Per Share [Abstract]

Net Income per Common Share

Net (Loss) Income per Common Share

The components of basic and diluted net (loss) income per share were as follows (in thousands, except per share amounts):

	Three Months Ended					Six Months Ended
	July 1, 2017			July 2, 2016		July 1, 2017		July 2, 2016
Net (loss) income	$	(778	)	$	1,416	$	23,683	$	14,385
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	41,716			46,394		42,233		47,247
Dilutive effect of stock-based awards	—			650		847		698
Diluted weighted-average shares outstanding	41,716			47,044		43,080		47,945
Net (loss) income per share – basic	$	(0.02	)	$	0.03	$	0.56	$	0.30
Net (loss) income per share – diluted	$	(0.02	)	$	0.03	$	0.55	$	0.30

For the three months ended July 1, 2017, potentially dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share. For the six months ended July 1, 2017 and the three and six months ended July 2, 2016, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial.

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Commitments and Contingencies

6 Months Ended

Jul. 01, 2017

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Sales Returns

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

	Six Months Ended
	July 1, 2017			July 2, 2016
Balance at beginning of year	$	15,222		$	20,562
Additions that reduce net sales	32,434			35,419
Deductions from reserves	(35,054		)	(40,226		)
Balance at end of period	$	12,602		$	15,755

Warranty Liabilities

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

	Six Months Ended
	July 1, 2017			July 2, 2016
Balance at beginning of year	$	8,633		$	10,028
Additions charged to costs and expenses for current-year sales	4,243			6,601
Deductions from reserves	(3,665		)	(7,290		)
Changes in liability for pre-existing warranties during the current year, including expirations	(55		)	(1,515		)
Balance at end of period	$	9,156		$	7,824

Legal Proceedings

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

On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which has certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has accepted the certified questions and the parties are in the process of preparing and submitting briefs. As the United States District Court for the District of New Jersey determined, we believe that the case is without merit and the order of dismissal should be affirmed.

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Basis of Presentation (Policies)

6 Months Ended

Jul. 01, 2017

Accounting Policies [Abstract]

Business and Basis of Presentation, Policy

We prepared the condensed consolidated financial statements as of and for the three and six months endedJuly 1, 2017 of Select Comfort Corporation and 100%-owned subsidiaries (Select Comfort or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of July 1, 2017 and December 31, 2016, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and other recent filings with the SEC.

Use of Estimates, Policy

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

Consolidation, Policy

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

Revenue Recognition, Deferred Revenue [Policy Text Block]

Revenue Recognition

At July 1, 2017 and December 31, 2016, we had deferred revenue totaling $67 million and $61 million, of which $25 million and $21 million are included in other current liabilities, respectively, and $42 million and $40 million are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also have related deferred costs totaling $38 million and $33 million, of which $14 million and $11 million are included in other current assets, respectively, and $24 million and $22 million are included in other non-current assets, respectively, in our consolidated balance sheets. The deferred revenue and costs are recognized over the product’s estimated life of four years.

New Accounting Pronouncements, Policy

New Accounting Pronouncements

Adopted

In March 2016, the Financial Accounting Standards Board (FASB) issued new guidance on the accounting for, and disclosure of, stock-based compensation which we adopted effective January 1, 2017. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, forfeitures and classification on the statement of cash flows. Under the previous guidance, excess tax benefits and deficiencies were recognized in additional paid-in capital in the consolidated balance sheets. Upon adoption of the new guidance, these excess tax benefits or deficiencies are required to be recognized as discrete adjustments to income tax expense in the consolidated statements of operations on a prospective basis. During the three and six months endedJuly 1, 2017, excess tax benefits of $0.4 million and $1.2 million, respectively, were recognized as a reduction of income tax expense, rather than in additional paid-in capital.

In addition, under the new guidance, excess income tax benefits from stock-based compensation arrangements are classified as an operating activity in the statement of cash flows rather than as a financing activity. This resulted in an increase to operating cash flows of $0.9 million and $2.1 million for the three and six months endedJuly 1, 2017. We elected to apply the new cash flow classification guidance prospectively. The prior-year statement of cash flows has not been adjusted.

We have also elected to continue to estimate the number of stock-based awards expected to vest, as permitted by the new guidance, rather than electing to account for forfeitures as they occur.

Not Yet Adopted

In May 2014, the FASB issued a comprehensive new revenue recognition model that requires a company to recognize revenue in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance was originally effective for fiscal years beginning after December 15, 2016 and early adoption was not permitted. In July 2015, the FASB deferred the effective date from fiscal years beginning after December 15, 2016 to fiscal years beginning after December 15, 2017 (including interim reporting periods within those fiscal years). Early adoption is permitted to the original effective date of fiscal years beginning after December 15, 2016 (including interim reporting periods within those fiscal years). Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. When we adopt this new guidance, we expect to use the modified retrospective approach which will result in an adjustment to opening retained earnings, but would not restate prior periods' financial statements. We are continuing to evaluate the effect on our revenue recognition, disclosure requirements and changes that may be necessary to our internal controls over financial reporting.

In February 2016, the FASB issued new guidance on accounting for leases that generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

Stockholders' Equity, Policy

There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.The cost of stock repurchases is first charged to additional paid-in capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.

Profit Sharing and 401(k) Plan Policy

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution.

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Inventories (Tables)

6 Months Ended

Jul. 01, 2017

Inventory Disclosure [Abstract]

Inventories

Inventories consisted of the following (in thousands):

	July 1, 2017		December 31, 2016
Raw materials	$	5,740	$	7,973
Work in progress	95		72
Finished goods	64,021		66,981
	$	69,856	$	75,026

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Goodwill and Intangible Assets (Tables)

6 Months Ended

Jul. 01, 2017

Finite-Lived Intangible Assets [Line Items]

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):

	July 1, 2017				December 31, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	18,851	$	5,615	$	18,851	$	4,524
Customer relationships	2,413		2,413		2,413		1,365
Trade names/trademarks	101		101		101		101
	$	21,365	$	8,129	$	21,365	$	5,990

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Repurchase of Common Stock (Tables)

6 Months Ended

Jul. 01, 2017

Repurchase of Common Stock [Abstract]

Repurchase of Common Stock

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

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Amount repurchased under Board-approved share repurchase program	$	25,000	$	20,000	$	75,000	$	70,000
Amount repurchased in connection with the vesting of employee restricted stock grants	300		125		5,094		1,366
Total amount repurchased	$	25,300	$	20,125	$	80,094	$	71,366

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Stock-Based Compensation (Tables)

6 Months Ended

Jul. 01, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

Total stock-based compensation expense was as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Stock awards	$	3,584	$	3,261	$	6,720	$	6,412
Stock options	588		579		1,156		1,194
Total stock-based compensation expense	4,172		3,840		7,876		7,606
Income tax benefit	1,406		1,325		2,654		2,624
Total stock-based compensation expense, net of tax	$	2,766	$	2,515	$	5,222	$	4,982

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Other (Expense) Income, Net (Tables)

6 Months Ended

Jul. 01, 2017

Other Income and Expenses [Abstract]

Other (Expense) Income, Net

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

	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Interest expense	$	(288	)	$	(251	)	$	(470	)	$	(357	)
Interest income	6			22			50			31
Other expense, net	$	(282	)	$	(229	)	$	(420	)	$	(326	)

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Net Income Per Common Share (Tables)

6 Months Ended

Jul. 01, 2017

Earnings Per Share [Abstract]

Net Income per Common Share

The components of basic and diluted net (loss) income per share were as follows (in thousands, except per share amounts):

	Three Months Ended					Six Months Ended
	July 1, 2017			July 2, 2016		July 1, 2017		July 2, 2016
Net (loss) income	$	(778	)	$	1,416	$	23,683	$	14,385
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	41,716			46,394		42,233		47,247
Dilutive effect of stock-based awards	—			650		847		698
Diluted weighted-average shares outstanding	41,716			47,044		43,080		47,945
Net (loss) income per share – basic	$	(0.02	)	$	0.03	$	0.56	$	0.30
Net (loss) income per share – diluted	$	(0.02	)	$	0.03	$	0.55	$	0.30

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Commitments and Contingencies (Tables)

6 Months Ended

Jul. 01, 2017

Commitments and Contingencies Disclosure [Abstract]

Sales Returns

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

	Six Months Ended
	July 1, 2017			July 2, 2016
Balance at beginning of year	$	15,222		$	20,562
Additions that reduce net sales	32,434			35,419
Deductions from reserves	(35,054		)	(40,226		)
Balance at end of period	$	12,602		$	15,755

Warranty Liabilities

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

	Six Months Ended
	July 1, 2017			July 2, 2016
Balance at beginning of year	$	8,633		$	10,028
Additions charged to costs and expenses for current-year sales	4,243			6,601
Deductions from reserves	(3,665		)	(7,290		)
Changes in liability for pre-existing warranties during the current year, including expirations	(55		)	(1,515		)
Balance at end of period	$	9,156		$	7,824

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Basis of Presentation Deferred Revenue (Details) - USD ($) $ in Millions	6 Months Ended
	Jul. 01, 2017	Dec. 31, 2016
Deferred Revenue Arrangement [Line Items]
Deferred Revenue	$ 67	$ 61
Deferred Costs	38	33
Other Current Liabilities [Member]
Deferred Revenue Arrangement [Line Items]
Deferred Revenue, Current	25	21
Other Noncurrent Liabilities [Member]
Deferred Revenue Arrangement [Line Items]
Deferred Revenue, Noncurrent	42	40
Other Current Assets [Member]
Deferred Revenue Arrangement [Line Items]
Deferred Costs, Current	14	11
Other Noncurrent Assets [Member]
Deferred Revenue Arrangement [Line Items]
Deferred Costs, Noncurrent	$ 24	$ 22
SleepIQ [Member]
Deferred Revenue Arrangement [Line Items]
Product's Estimated Life	4 years

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Basis of Presentation New Accounting Pronouncements (Details) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Jul. 01, 2017	Jul. 01, 2017	Jul. 02, 2016
New Accounting Pronouncements [Abstract]
Excess tax benefits, included in income tax expense	$ 0.4	$ 1.2	$ 0.0
Excess Tax Benefit from Share-based Compensation	$ 0.9	$ 2.1

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Fair Value Measurements (Details) - Recurring [Member] - Level 1 [Member] - USD ($) $ in Millions	Jul. 01, 2017	Dec. 31, 2016
Other Assets [Member] | Available-for-sale Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities assets funding the deferred compensation plan	$ 2.9	$ 2.3
Other Noncurrent Liabilities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Deferred compensation plan liability	$ 2.9	$ 2.3

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Inventories (Details) - USD ($) $ in Thousands	Jul. 01, 2017	Dec. 31, 2016
Inventory Disclosure [Abstract]
Raw materials	$ 5,740	$ 7,973
Work in progress	95	72
Finished goods	64,021	66,981
Inventories	$ 69,856	$ 75,026

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Goodwill and Indefinite-Lived Intangible Assets (Details) - USD ($) $ in Millions	Jul. 01, 2017	Dec. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill	$ 64.0	$ 64.0
Trade Names [Member]
Indefinite-lived Intangible Assets [Line Items]
Indefinite-lived trade name/trademarks	$ 1.4	$ 1.4

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Goodwill and Intangible Assets Finite-Lived Intangible Assets (Details) - USD ($) $ in Thousands	Jul. 01, 2017	Dec. 31, 2016
Finite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Assets	$ 21,365	$ 21,365
Finite-Lived Intangible Assets, Accumulated Amortization	8,129	5,990
Developed Technology Rights [Member]
Finite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Assets	18,851	18,851
Finite-Lived Intangible Assets, Accumulated Amortization	5,615	4,524
Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Assets	2,413	2,413
Finite-Lived Intangible Assets, Accumulated Amortization	2,413	1,365
Trademarks and Trade Names [Member]
Finite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Assets	101	101
Finite-Lived Intangible Assets, Accumulated Amortization	$ 101	$ 101

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Goodwill and Intangible Assets Amortization Expense (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016	Jul. 01, 2017	Jul. 02, 2016
Finite-Lived Intangible Assets [Line Items]
Amortization expense definite-lived intangible assets	$ 0.5	$ 0.6	$ 2.1	$ 1.3

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Credit Agreement (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 01, 2017	Mar. 31, 2017	Dec. 31, 2016
Line of Credit Facility [Line Items]
Current borrowing capacity	$ 153,150	$ 150,000
Line of Credit Facility, Maximum Borrowing Capacity	$ 200,000
Line of Credit Facility, Expiration Date	Feb. 24, 2021
Borrowings under revolving credit facility	$ 13,950		$ 0
Letters of Credit Outstanding, Amount	3,150
Line of Credit Facility, Remaining Borrowing Capacity	$ 136,000
Weighted-Average Interest Rate at Period End	3.30%

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Repurchase of Common Stock (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016	Jul. 01, 2017	Jul. 02, 2016
Repurchase of Common Stock [Abstract]
Amount repurchased under Board-approved share repurchase program	$ 25,000	$ 20,000	$ 75,000	$ 70,000
Amount repurchased in connection with the vesting of employee restricted stock grants	300	125	5,094	1,366
Total amount repurchased	25,300	$ 20,125	80,094	$ 71,366
Stock Repurchase Program, Remaining Authorized Repurchase Amount	$ 170,000		$ 170,000

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Stock-Based Compensation (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016	Jul. 01, 2017	Jul. 02, 2016
Total stock-based compensation expense	$ 4,172	$ 3,840	$ 7,876	$ 7,606
Income tax benefit	1,406	1,325	2,654	2,624
Total stock-based compensation expense, net of tax	2,766	2,515	5,222	4,982
Excess tax benefits, included in income tax expense	400		1,200	0
Time-Based, Performance-Based and Market-Based Stock Awards [Member]
Total stock-based compensation expense	3,584	3,261	6,720	6,412
Stock Options [Member]
Total stock-based compensation expense	$ 588	$ 579	$ 1,156	$ 1,194

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Profit Sharing and 401(k) Plan (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016	Jul. 01, 2017	Jul. 02, 2016
Defined Contribution Plan Disclosure [Line Items]
Employee compensation deferral (in hundredths)			50.00%
Employer contributions	$ 1.2	$ 1.0	$ 2.5	$ 2.3

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Other (Expense) Income, Net (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016	Jul. 01, 2017	Jul. 02, 2016
Other Income and Expenses [Abstract]
Interest expense	$ (288)	$ (251)	$ (470)	$ (357)
Interest income	6	22	50	31
Other expense, net	$ (282)	$ (229)	$ (420)	$ (326)

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Net Income per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016	Jul. 01, 2017	Jul. 02, 2016
Net Income per Common Share [Abstract]
Net (loss) income	$ (778)	$ 1,416	$ 23,683	$ 14,385
Basic weighted-average shares outstanding	41,716,000	46,394,000	42,233,000	47,247,000
Dilutive effect of stock-based awards	0	650,000	847,000	698,000
Diluted weighted-average shares outstanding	41,716,000	47,044,000	43,080,000	47,945,000
Net (loss) income per share – basic (in USD per share)	$ (0.02)	$ 0.03	$ 0.56	$ 0.30
Net (loss) income per share – diluted (in USD per share)	$ (0.02)	$ 0.03	$ 0.55	$ 0.30

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Commitments and Contingencies Sales Return Liability (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016
Sales return liability [Roll Forward]
Balance at beginning of year	$ 15,222	$ 20,562
Additions that reduce net sales	32,434	35,419
Deductions from reserves	(35,054)	(40,226)
Balance at end of period	$ 12,602	$ 15,755

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Commitments and Contingencies Warranty Liabilities (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 01, 2017	Jul. 02, 2016
Warranty Liabilities [Roll Forward]
Balance at beginning of year	$ 8,633	$ 10,028
Additions charged to costs and expenses for current-year sales	4,243	6,601
Deductions from reserves	(3,665)	(7,290)
Changes in liability for pre-existing warranties during the current year, including expirations	(55)	(1,515)
Balance at end of period	$ 9,156	$ 7,824