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Article by DailyStocks_admin    (06-02-08 09:23 AM)

The Daily Magic Formula Stock for 06/01/2008 is Tempur-Pedic International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 18% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General

We are the leading manufacturer, marketer and distributor of premium mattresses and pillows which we sell in approximately 80 countries under the TEMPUR ® and Tempur-Pedic ® brands. We believe our premium mattresses and pillows are more comfortable than standard bedding products because our proprietary, pressure-relieving TEMPUR ® material is temperature sensitive, has a high density, and conforms to the body to therapeutically align the neck and spine, thus reducing neck and lower back pain, two of the most common complaints about other sleep surfaces.

We have two reportable operating segments: Domestic and International. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their geographies. The Domestic operating segment consists of our U.S. manufacturing facilities, whose customers include our U.S. distribution subsidiary and certain third party distributors in the Americas. The International segment consists of our manufacturing facility in Denmark, whose customers include all of our distribution subsidiaries and third party distributors outside the Domestic segment. We evaluate segment performance based on Net sales and Operating income. For the results of our business segments, see “ITEM 15. Exhibits and Financial Statement Schedules Note 13, “Business Segment Information”, under Part IV of this report.

We sell our premium mattresses and pillows through four distribution channels in each operating business segment: Retail (furniture and bedding, and specialty stores, as well as department stores); Direct (direct response and internet); Healthcare (chiropractors, medical retailers, hospitals and other healthcare markets); and Third party distributors in countries where we do not sell directly through our own subsidiaries.

Our principal executive office is located at 1713 Jaggie Fox Way, Lexington, Kentucky 40511 and our telephone number is (800) 878-8889. We were incorporated under the laws of the State of Delaware in September 2002. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission (SEC) pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.tempurpedic.com as soon as reasonably practicable after such reports are electronically filed with the SEC.

You may read and copy any materials the Company files with the SEC at the SEC’s public reference room at 100 F Street NE, Washington, DC 20549. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The website of the SEC is www.sec.gov.

Market Opportunity and Competitive Strengths

Global Market

Most standard mattresses are made using innersprings, and primarily sold through retail furniture and bedding stores. Alternatives to innerspring mattresses include viscoelastic and foam mattresses, airbeds and waterbeds (collectively called specialty or non-innerspring mattress). According to the International Sleep Products Association (ISPA), mattress unit sales were approximately 22.1 million in the U.S. in 2007. We believe a similar number of mattress units were sold outside the U.S. in 2007. We believe over the last four years the specialty mattress category grew at a notably higher rate than the industry as a whole.

The U.S. pillow market has a traditional and a specialty segment. Traditional pillows are generally made of low cost foam or feathers, other than down. Specialty pillows are comprised of all alternatives to traditional pillows, including viscoelastic, foam, sponge rubber and down. We believe the international pillow market is generally the same size as the domestic pillow market, which we estimate to be approximately $1.1 billion, annually.

Our Market Position

We are the worldwide leader in specialty sleep, the fastest growing segment of the estimated $13.0 billion global mattress market. We are focused on developing, manufacturing and marketing advanced sleep surfaces that help improve the quality of life for people around the world. We believe demand for our products is being driven by significant growth in our core demographic market, increased awareness of the health benefits of a better quality mattress and the shift in consumer preference from firmness to comfort. As consumers continue to prefer alternatives to standard innerspring mattresses, our products become more widely available and as our brand gains broader consumer recognition, we expect that our premium products will continue to attract sales from the standard mattress market.

Superior Product Offerings

Our high-quality, high-density, temperature-sensitive TEMPUR ® material distinguishes our products from other products in the marketplace. Viscoelastic pressure-relieving material was originally developed by NASA in 1971 in an effort to relieve astronauts of the G–force experienced during lift-off, and NASA subsequently made this formula publicly available. The NASA viscoelastic pressure-relieving material originally proved unstable for commercial use. However, after several years of research and development, we succeeded in developing a proprietary formulation and proprietary process to manufacture a stable, durable and commercially viable product. The key feature of our pressure-relieving TEMPUR ® material is its temperature sensitivity. It conforms to the body, becoming softer in warmer areas where the body is making the most contact with the pressure-relieving TEMPUR ® material and remaining firmer in cooler areas where less body contact is being made. As the material molds to the body’s shape, the body is supported in the correct anatomical position with the neck and spine in complete therapeutic alignment. Our pressure-relieving TEMPUR ® material also has higher density than other viscoelastic materials, resulting in improved durability and enhanced comfort. In addition, clinical evidence indicates that our products are both effective and cost efficient for the prevention and treatment of pressure ulcers or bed sores, a major problem for elderly and bed-ridden patients.

Increasing Global Brand Awareness

We sell our products in approximately 80 countries primarily under the TEMPUR ® and Tempur-Pedic ® brands. We believe consumers in the U.S. and internationally increasingly associate our brand name with premium quality products that enable better overall sleep. Our TEMPUR ® brand has been in existence since 1991 and its global awareness is reinforced by our high level of customer satisfaction, as demonstrated by: recognition received by the Arthritis Foundation, the NASA Space Foundation, Good Housekeeping and Consumers Digest. In addition, our products are recommended by more than 25,000 healthcare professionals worldwide and an independent study reported 95% of our customers surveyed have recommended Tempur-Pedic products to others.

Vertically Integrated Manufacturing and Supply Chain

We produce all of our proprietary TEMPUR ® material in our own manufacturing facilities in the U.S. and Europe in order to precisely maintain the specifications of our products. We believe that our vertical integration, from the manufacture of the TEMPUR ® material and fabrication and construction of our products through the marketing, sale and delivery of our products, ensures a high level of quality and performance that is not matched by our competition.

Strong Financial Performance

Our business generates significant cash flow due to the combination of our growing revenues, strong gross and operating margins, low maintenance capital expenditures and limited working capital requirements. Further, our vertically-integrated operations generated an average of approximately $0.8 million in Net sales per employee in 2007. For the year ended December 31, 2007, our Gross profit margin and Net income margin were 48.3% and 12.8%, respectively, on Net sales of $1.1 billion. Our strong financial performance gives us the flexibility to invest in our manufacturing operations, enhance our sales force and marketing, invest in information systems and recruit experienced management and other personnel .

Significant Growth Opportunities

We believe there are significant opportunities to take market share from the innerspring mattress industry as well as other sleep surfaces. Our market share of the overall mattress industry is relatively small in terms of both dollars and units, which we believe provides us with a significant opportunity for growth. By expanding our brand awareness and offering superior sleep surfaces, we believe consumers will continue to adopt our products at an increasing rate, which should expand our market share. As of December 31, 2007, our products were sold in approximately 6,350 furniture and bedding retail stores in the U.S. Within the available market of approximately 10,000 stores, our plan is to increase our total door count to 7,000 to 8,000 over time. As we deepen our penetration of the furniture and bedding market, our growth strategy is increasingly directed to the expansion of business within our established accounts by increasing slots per store, expanding our sales force and trainers as needed and introducing new products. In addition, in the U.S. we have focused the expansion of our distribution into regions where demographic and buying power metrics indicate that we are under penetrated. Internationally, our products are available in approximately 4,990 furniture retail and department stores, out of a total of approximately 7,000 stores we have identified as appropriate targets. As consumers continue their shift toward the purchase of non-innerspring mattress products and sleep surfaces we believe we are well positioned to capitalize on this growth opportunity.

Our Products

Mattresses

Our mattresses represented 69.4% of our worldwide Net sales in 2007 and are our leading product category in growth in recent years. Our mattresses are composed of proprietary multi-layer, temperature sensitive, pressure-relieving TEMPUR ® material. We offer several mattress models, some of which are covered by one or more patents and/or patent applications.

In the U.S. our newest mattress offering, ‘The AlluraBed by Tempur-Pedic™’ was introduced at The World Market in Las Vegas in January 2008 and will be shipping to retailers in the first half of 2008.

Internationally, during the first quarter of 2008, our high end mattress model, the TEMPUR Royale™, and the TEMPUR Scandinavian Supreme™ will be expanded into other international markets. These products were well received in their initial market launches during 2007.

Pillows

Our premium pillow offerings include a variety of styles and represented 12.9% of worldwide Net sales in 2007. Our pillows provide plush and pressure-relieving comfort as the temperature sensitive material molds to the body.

Other Products

Our other products represented 17.7% of our worldwide sales in 2007. This category includes foundations used to support our mattress products, adjustable beds, and many other types of offerings including a variety of cushions and other comfort products. In the U.S. a new adjustable base offering, the ‘TEMPUR Advanced Ergo System™’, was introduced at The World Market in Las Vegas in January 2008 and will be shipping to retailers in the first half of 2008.

Marketing and Sales

We primarily sell at wholesale through three distinct channels: Retail, Healthcare and Third Party. We market directly to consumers in the U.S. and the United Kingdom through our Direct channel. Our marketing strategy is to increase consumer awareness of the benefits of our products and to further associate our brand name with better overall sleep and premium quality products. We launched our new media campaign in the Domestic segment during 2007. This campaign will continue to be implemented in the U.S. and rolled out across many of our international markets during 2008. Based on our analysis of the best ways to reach our target demographic market, we have begun advertising on national network television in the U.S.

Retail

This is our fastest growing channel and is driven by a sales team dedicated to introducing our products to retailers. We work with and target furniture and bedding retailers, specialty stores, and department stores, among others. Our Retail channel represented 83.1% of Net sales in 2007.

CEO BACKGROUND

H. Thomas Bryant joined Tempur-Pedic International in July 2001. In April 2006, Mr. Bryant was promoted to the role of Chief Executive Officer and elected a member of the board of directors. From July 2001 to December 2004, Mr. Bryant served as Executive Vice President and President of North American Operations. From December 2004 to April 2006, Mr. Bryant served as President of Tempur-Pedic International. Prior to joining Tempur-Pedic International, from 1998 to 2001, Mr. Bryant was the President and Chief Executive Officer of Stairmaster Sports & Medical Products, Inc. From 1989 to 1997, Mr. Bryant served in various senior management positions at Dunlop Maxfli Sports Corporation, most recently as President. Prior to that, Mr. Bryant spent 15 years in various management positions at Johnson & Johnson. Mr. Bryant received his B.S. degree from Georgia Southern University. In February 2008, Mr. Bryant announced his plan to retire as President and Chief Executive Officer effective mid-year 2008. The Company anticipates that Mr. Bryant will continue to serve as a director and stand for re-election at the annual meeting of stockholders in May 2008.
Matthew D. Clift joined Tempur-Pedic International in December 2004 and serves as Executive Vice President of Global Operations, with responsibilities including manufacturing and research and development. From 1991 to December 2004, Mr. Clift was employed by Lexmark International where he most recently served as Vice President and General Manager of the consumer printer division. From 1981 to 1991, Mr. Clift was employed by IBM Corporation and held several management positions in research and development and manufacturing. Mr. Clift obtained his B.S. degree in chemical engineering from the University of Kentucky.

David Montgomery joined Tempur-Pedic International in February 2003 and serves as Executive Vice President and President of International Operations, with responsibilities including marketing and sales. From 2001 to November 2002, Mr. Montgomery was employed by Rubbermaid, Inc., where he served as President of Rubbermaid Europe. From 1988 to 2001, Mr. Montgomery held various management positions at Black & Decker Corporation, most recently as Vice President of Black & Decker Europe, Middle East and Africa. Mr. Montgomery received his B.A. degree, with honors, from L’ Ecole Superieure de Commerce de Reims, France and Middlesex Polytechnic, London.

Richard W. Anderson joined Tempur-Pedic International in July 2006 and serves as Executive Vice President and President, North America. From 1983 to 2006, Mr. Anderson was employed by The Gillette Company, which became a part of Proctor & Gamble in 2005. Mr. Anderson most recently served as a Vice President of Marketing for Oral-B and Braun in North America. Previously, Mr. Anderson was Vice President of Global Business Management for Duracell. Mr. Anderson has held several management positions in marketing and sales as well as overseeing branding, product development and strategic planning. Mr. Anderson obtained B.S. and M.B.A. degrees from Virginia Tech.

Dale E. Williams joined Tempur-Pedic International in July 2003 and serves as Executive Vice President, Chief Financial Officer and Secretary. From 2001 to September 2002, Mr. Williams served as Vice President and Chief Financial Officer of Honeywell Control Products, a division of Honeywell International, Inc. From September 2002, when he left Honeywell in connection with a reorganization, to July 2003, Mr. Williams received severance from Honeywell and was not employed. From 2000 to 2001, Mr. Williams served as Vice President and Chief Financial Officer of Saga Systems, Inc./Software AG, Inc. Prior to that, Mr. Williams spent 15 years in various management positions at General Electric Company, most recently as Vice President and Chief Financial Officer of GE Information Services, Inc. Mr. Williams received his B.A. degree in finance from Indiana University.

Bhaskar Rao joined Tempur-Pedic International in January 2004 as Director of Financial Planning and Analysis. In October 2005, Mr. Rao was promoted to Vice President of Strategic Planning. In May 2006, Mr. Rao was promoted to the position of Chief Accounting Officer and continues to serve as Vice President of Strategic Planning. From 2002 until December 2003, Mr. Rao was employed by Ernst & Young as a Senior Manager in the assurance and business advisory group. Mr. Rao was employed by Arthur Anderson from 1994 until 2002. Mr. Rao graduated from Bellarmine University with B.A. degrees in Accounting and Economics. Mr. Rao is also a Certified Public Accountant.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

General— We are the leading manufacturer, marketer and distributor of premium mattresses and pillows which we sell in approximately 80 countries under the TEMPUR ® and Tempur-Pedic ® brands. We believe our premium mattresses and pillows are more comfortable than standard bedding products because our proprietary pressure-relieving TEMPUR ® material is temperature sensitive, has a high density and conforms to the body to therapeutically align the neck and spine, thus reducing neck and lower back pain, two of the most common complaints about other sleep surfaces.

Business Segment Information— We have two reportable business segments: Domestic and International. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their geographies. The Domestic operating segment consists of two U.S. manufacturing facilities, whose customers include our U.S. distribution subsidiary and certain third party distributors in the Americas. The International segment consists of our manufacturing facility in Denmark, whose customers include all of our distribution subsidiaries and third party distributors outside the Domestic operating segment. We evaluate segment performance based on Net sales and Operating income. For the purpose of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, our Corporate office operating expenses and certain amounts for goodwill and other assets that are carried at the holding company level are included in the Domestic operating segment.

For a further discussion of factors that could impact operating results, see the section entitled “Factors That May Affect Future Performance” included within this section and "Risk Factors" in ITEM 1A, which are incorporated herein by reference.

Strategy and Outlook

Our long-term goal is to become the world’s largest and most profitable bedding company. To achieve this goal, we expect to continue to pursue certain key strategies in 2008:



Maintain our focus on premium mattresses and pillows and to regularly introduce new products.



Invest in increasing our global brand awareness through targeted marketing and advertising campaigns that further associate our brand name with better overall sleep and premium quality products.



Extend our presence and improve our account productivity in both the Domestic and International Retail segments.



Invest in our operating infrastructure to meet the requirements of our growing business, including investments in our research and development capabilities.

Results of Operations

Key financial highlights for 2007 include:



Our consolidated Net sales rose 17.1% to $1,106.7 million in 2007 from $945.0 million in 2006. Retail channel sales worldwide increased 21.1%. Sales in the Domestic Retail channel increased 20.9%. Sales in the International Retail channel increased 21.6%. Our Retail channel continues to be our largest and fastest growing channel and the principal driver of our growth in recent years.



Our operating income increased $34.8 million or 16.6% to $244.1 million in 2007. Operating income as a percentage of Net sales was 22.1% for both 2007 and 2006.



We repurchased 11,060,874 shares of our common stock at a total cost of $319.9 million. These purchases were funded primarily by increased borrowings under our domestic revolving credit facility.

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

We sell our premium mattresses and pillows through four distribution channels: Retail, Direct, Healthcare, and Third party. The Retail channel sells to furniture and bedding, specialty and department stores. The Direct channel sells directly to consumers. The Healthcare channel sells to hospitals, nursing homes, healthcare professionals and medical retailers. The Third party channel sells to distributors in countries where we do not operate our own wholly-owned subsidiaries.

Net sales. Net sales for the year ended December 31, 2007 increased to $1,106.7 million from $945.0 million, an increase of $161.7 million, or 17.1%. This increase in Net sales was primarily attributable to an increase in mattress sales in our Retail channel. Mattress sales increased $116.6 million or 17.9%. The growth in our Retail channel reflects our focus on targeted penetration of furniture and bedding retail stores in both our Domestic and International markets. We also added new product offerings to our existing line in both our Domestic and International segments in 2007. In 2008, we plan to introduce several new mattress and pillow offerings around the world. Our Third party and Healthcare channels increased 3.0% and 12.5%, respectively, while our Direct channel decreased 6.7%.

Consolidated pillow sales increased approximately $15.8 million or 12.5% for the year ended December 31, 2007 as compared to the year ended December 31, 2006. Consolidated Other, which includes adjustable bedbases, foundations and other related products, increased $29.3 million or 17.5%.

Domestic. Domestic Net sales for the year ended December 31, 2007 increased to $725.3 million from $621.8 million for the same period in 2006, an increase of $103.6 million, or 16.7%. Our Domestic Retail channel delivered $625.9 million in Net sales for 2007. This is an increase of $108.0 million, or 20.9% over the prior year. The increase is primarily due to our efforts to increase productivity in established accounts and selectively extend our distribution. Domestic mattress sales increased $80.0 million, or 17.6%, in 2007 as compared to 2006, as a result of growth in the Retail channel, in conjunction with the successful launch of new products. In 2007, we introduced two new mattress products, ‘The BellaSonnaBed by Tempur-Pedic TM’ and ‘The SymphonyBed by Tempur-Pedic TM’ . Our Direct channel decreased 8.5% primarily as a result of our Retail channel expansion. Healthcare increased $3.1 million, or 24.7%, as a result of strategic relationships with healthcare companies who market joint product offerings through their established distribution networks. In addition, pillow sales increased $8.2 million, or 13.7%, as a result of our continued focus on pillow attach rates, emphasizing the benefits of a complete Tempur-Pedic sleep system, as well as stand-alone pillow sales. The increase in our Other products is generally in line with the growth of our mattress business.

International. International Net sales for the year ended December 31, 2007 increased to $381.4 million from $323.2 million for the same period in 2006, an increase of $58.1 million, or 18.0%. The International Retail channel Net sales increased $52.1 million, or 21.6%, for the year ended December 31, 2007 as a result of the success of new products launched early in 2007 and improved productivity within existing accounts. Net sales in our Third party channel increased $2.8 million, an increase of 7.3%. Our Direct and Healthcare channels had Net sales increases of 6.2% and 7.7%, respectively. International mattress sales increased $36.6 million, or 18.6%, for 2007, related to growth of our Retail channel. Pillow sales increased $7.5 million, or 11.4%, as compared to 2006, attributable to the successful execution of our strategy to focus on pillow sales. Other product sales increased $14.0 million, or 23.0%, attributable to increased mattress sales and the success of our Scandinavian bed system. The Scandinavian bed system is a product offering that is available in multiple configurations, which include a mattress, a foundation and in some cases, an adjustable bedbase.

Gross profit. Gross profit for the year ended December 31, 2007 increased to $534.8 million from $460.5 million for the same period in 2006, an increase of $74.3 million, or 16.1%. Gross margin for the year ended December 31, 2007 was 48.3%, as compared to 48.7% in the same period of 2006.

Domestic. Domestic Gross profit for the year ended December 31, 2007 increased to $316.4 million from $274.8 million, an increase of $41.6 million, or 15.1%. The Gross profit margin in our Domestic segment was 43.6% and 44.2% for the years ended 2007 and 2006, respectively. For the year ended December 31, 2007, the Gross profit margin for the Domestic segment was impacted by depreciation and start-up costs associated with the opening of our Albuquerque, New Mexico production facility and the expediting costs of certain raw materials related to product shortages late in 2007, offset by productivity improvements at our manufacturing facilities. Our Domestic Cost of sales increased to $408.9 million for the year ended December 31, 2007 as compared to $347.0 million for the year ended December 31, 2006, an increase of $62.0 million, or 17.9%.

International. International Gross profit for the year ended December 31, 2007 increased to $218.4 million from $185.7 million, an increase of $32.7 million, or 17.6%. The Gross profit margin in our International segment was 57.3% and 57.4% for the years ended 2007 and 2006, respectively. Our International Cost of sales increased to $163.0 million for the year ended December 31, 2007, as compared to $137.6 million for the year ended December 31, 2006, an increase of $25.4 million, or 18.5%.

Selling and marketing expenses. Selling and marketing expenses include advertising and media production associated with our Direct channel, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials, television and cable advertising and sales force compensation and customer service. We also include in Selling and marketing expenses certain new product development costs, including market research and testing for new products. Selling and marketing expenses increased to $193.5 million for the year ended December 31, 2007 as compared to $171.8 million for the year ended December 31, 2006, an increase of $21.8 million, or 12.7%. Selling and marketing expenses as a percentage of Net sales decreased to 17.5% during 2007 from 18.2% for 2006. Our objective is to increase advertising consistent with the growth rate of our Net sales. However during 2007, our selling and marketing spend grew slower than our Net sales growth as we were able to leverage the fixed cost component of our selling and marketing expenses. We launched our new media campaign in the U.S. during 2007. This campaign will continue to be implemented in the U.S. during 2008. Based on our analysis of the best ways to reach our target U.S. demographic market, we have begun advertising on national network television. In addition, we plan to roll out a similar new media campaign across many of our international markets during 2008. For the year ended December 31, 2007, we recognized $1.4 million of stock-based compensation expense as compared to $0.4 million for the same period in 2006.

General and administrative and Research and development expenses. General and administrative expenses include management salaries, information technology, professional fees, depreciation of furniture and fixtures, leasehold improvements and computer equipment, expenses for finance, accounting, human resources and other administrative functions. Research and development expenses include research and development associated with our new product developments. General and administrative expenses increased to $91.2 million for the year ended December 31, 2007 as compared to $75.7 million for the year ended December 31, 2006, an increase of $15.5 million, or 20.5%. General and administrative expenses as a percentage of Net sales increased to 8.2% for the year ended December 31, 2007 as compared to 8.0% for the same period in 2006. The increase was primarily attributable to incremental stock-based compensation charges of $4.5 million and bad debt expenses related to a U.S. customer seeking to reorganize its operations under Chapter 11 of the Bankruptcy code. In addition, Research and development expenses increased $2.2 million, or 59.0% for the same time period, related to our continued investment in research and development capabilities.

Interest expense, net. Interest expense, net includes the interest costs associated with our borrowings and the amortization of deferred financing costs related to those borrowings. Interest expense, net, increased to $30.5 million for the year ended December 31, 2007 as compared to $23.9 million for the year ended December 31, 2006, an increase of $6.6 million, or 27.4%. This increase in interest expense is primarily attributable to higher Long-term debt levels that are directly related to our share repurchase program. During 2006 we also capitalized interest costs of $5.2 million related to the construction of our new manufacturing facility.

Income tax provision. Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and it includes the impact of net operating losses for certain of our domestic and foreign operations. For the year ended December 31, 2007, our Income tax provision included a benefit of $3.8 million related to the elimination of certain valuation allowances for net operating loss carry forwards in two foreign tax jurisdictions. Our effective tax rate was 33.6% and 35.7% for the years ended December 31, 2007 and 2006, respectively. This decrease was primarily related to the elimination of certain valuation allowances for net operating loss carry forwards in 2007. Our effective income tax rate for the year ended December 31, 2007 differed from the federal statutory rate principally due to the elimination of certain valuation allowances for net operating loss carry forwards, certain foreign tax rate differentials, state and local income taxes, deemed dividends from foreign operations and the manufacturing activity deduction. Our effective income tax rate for the year ended December 31, 2006 differed from the federal statutory rate principally because of the benefit from the elimination of certain tax reserves, certain foreign tax rate differentials, state and local income taxes, valuation allowances on certain foreign net operating losses, and compensation expense associated with certain stock options granted prior to the initial public offering.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

A summary of our results for the three months ended March 31, 2008 includes the following:




Earnings per share (EPS) decreased to $0.18 per diluted common share in the first quarter of 2008 as compared to $0.35 per diluted common share in the first quarter of 2007.




Net sales declined 7.1% to $247.2 million in the first quarter of 2008 from $266.0 million in the first quarter of 2007. Net sales in the Domestic segment declined 15.7%, while International segment Net sales increased 9.7%. On a constant currency basis, International segment Net sales decreased 2.6%.

Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007

We sell our premium mattresses and pillows through four distribution channels: Retail, Direct, Healthcare, and Third party. The Retail channel sells to furniture and bedding, specialty and department stores. The Direct channel sells directly to consumers. The Healthcare channel sells to hospitals, nursing homes, healthcare professionals and medical retailers. The Third party channel sells to distributors in countries where we do not operate our own wholly-owned subsidiaries.

Net sales. Net sales for the three months ended March 31, 2008 decreased to $247.2 million from $266.0 million for the same period in 2007, a decrease of $18.8 million, or 7.1%. The primary area of sales weakness was in the U.S. The U.S. macroeconomic environment deteriorated during the quarter, which contributed to what we believe to be a slowdown in the mattress industry. Consolidated Mattress sales decreased $17.0 million, or 9.2%. For the three months ended March 31, 2008, our Retail channel Net sales decreased to $207.9 million from $219.0 million for the same period in 2007, a decrease of $11.1 million, or 5.1%.

Consolidated pillow sales decreased approximately $3.3 million, or 9.4%, from the first quarter of 2007, primarily in the Domestic segment. This decrease was primarily related to the slowdown in the U.S. economy. Consolidated Other, which includes adjustable bedbases, foundations and other related products, increased $1.4 million, or 3.1%. This increase was driven by our increased focus on adjustable bed base attach rates across the world, which are improving despite the economic environment.

Domestic. Domestic Net sales for the three months ended March 31, 2008 decreased to $147.9 million from $175.5 million for the same period in 2007, a decrease of $27.6 million, or 15.7%. Our Domestic Retail channel contributed $129.1 million in Net sales for the three months ended March 31, 2008 for a decrease of $20.9 million, or 13.9%, for the same period in 2007. We believe that the macroeconomic environment impacted our Domestic Retail channel during the first quarter. We believe that traffic in our Domestic Retail channel was slower, and that many consumers are deferring high-end product purchases. As a result, domestic mattress sales in the first quarter of 2008 decreased $23.6 million, or 18.1%, over the same period in 2007. Pillow sales decreased $2.7 million, or 16.9%. Net sales in the Direct channel decreased by $8.6 million, or 44.7%. We believe that the macroeconomic environment also negatively impacted Net sales in the Direct channel. Our Healthcare channel Net sales increased by $0.7 million, or 20.5%, related to strategic relationships with healthcare companies who market joint product offerings through their established distribution networks.

International. International Net sales for the three months ended March 31, 2008 increased to $99.3 million from $90.5 million for the same period in 2007, an increase of $8.8 million, or 9.7%. The increase was driven by favorable foreign exchange rates. On a constant currency basis, our International sales declined approximately 2.6%. Our International segment was primarily impacted by macroeconomic factors in certain key European markets. The International Retail channel increased $9.8 million, or 14.2%, for the three months ended March 31, 2008. Our Direct channel sales decreased 15.9%. Additionally, Third party Net sales decreased 5.3% and the Healthcare channel Net sales decreased 1.3%. International mattress sales in the first quarter of 2008 increased $6.6 million, or 12.2%, over the first quarter of 2007. Pillow sales for the first quarter of 2008 decreased $0.6 million, or 3.1%, as compared to the first quarter of 2007.

Gross profit. Gross profit for the three months ended March 31, 2008 decreased to $108.1 million from $127.7 million for the same period in 2007, a decrease of $19.6 million, or 15.3%. Several factors impacted our Gross profit margin during the quarter. These factors are identified and discussed below in the respective segment discussions.

Domestic . Domestic Gross profit for the three months ended March 31, 2008 decreased to $53.6 million from $75.5 million for the same period in 2007, a decrease of $21.8 million, or 28.9%. The Gross profit margin in our Domestic segment was 36.3% and 43.0% for the three months ended March 31, 2008 and March 31, 2007, respectively. For the three months ended March 31, 2008, the Gross profit margin for our Domestic segment was impacted by lower than anticipated sales, an inflationary cost environment and higher sales returns. The combination of declines in the Direct channel, raw material cost inflation and lower volumes resulted in a lower gross profit margin. Domestic Cost of sales for the three months ended March 31, 2008 decreased to $94.3 million from $100.0 million for the same period in 2007, a decrease of $5.7 million, or 5.7%.

International. International Gross profit for the three months ended March 31, 2008 increased to $54.5 million from $52.2 million for the same period in 2007, an increase of $2.3 million, or 4.3%. The Gross profit margin in our International segment was 54.8% and 57.6% for the three months ended March 31, 2008 and March 31, 2007, respectively. The Gross profit margin for our International segment was primarily impacted by an inflationary cost environment. Our International Cost of sales for the three months ended March 31, 2008 increased to $44.9 million from $38.3 million for the same period in 2007, an increase of $6.5 million, or 16.9%.

Selling and marketing expenses. Selling and marketing expenses include advertising and media production; other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials; and sales force compensation and customer service. We also include in Selling and marketing expenses certain new product development costs, including market research and testing for new products. In the first quarter of 2008, Selling and marketing expenses increased to $53.1 million for the three months ended March 31, 2008 as compared to $48.5 million for the three months ended March 31, 2007. Selling and marketing expenses as a percentage of Net sales were 21.5% and 18.2% for the three months ended March 31, 2008 and March 31, 2007, respectively. When sales trends deteriorated during the three months ended March 31, 2008, much of our cost structure was in place and we were unable to take actions to reduce our selling and marketing costs to match our reduced sales levels. We have taken actions to align Selling and marketing expenses with the revised sales expectations.

General and administrative and other expenses. General and administrative expenses include management salaries, information technology, professional fees, depreciation of furniture and fixtures, leasehold improvements and computer equipment, expenses for finance, accounting, human resources and other administrative functions, and research and development costs associated with our new product developments. General and administrative and other expenses increased to $25.7 million for the three months ended March 31, 2008 as compared to $25.4 million for the three months ended March 31, 2007, an increase of $0.2 million, or 0.6%. General and administrative and other expenses included a one time charge for restructuring related to headcount reductions for the three months ended March 31, 2008. General and administrative and other expenses as a percentage of Net sales was 10.3% and 9.6% for the three months ended March 31, 2008 and March 31, 2007, respectively. When sales trends deteriorated during the quarter ended March 31, 2008, much of our cost structure was in place and we were unable to take actions to reduce our General and administrative and other expenses to reflect our revised sales levels. We have taken actions to align General and administrative and other expenses with revised sales expectations.

Interest expense, net. Interest expense, net, includes the interest costs associated with our borrowings and the amortization of deferred financing costs related to those borrowings. Interest expense, net, increased to $7.7 million for the three months ended March 31, 2008, as compared to $6.9 million for the three months ended March 31, 2007, an increase of $0.8 million, or 12.1%. The increase in interest expense is primarily attributable to the increase in our total Long-term debt levels partially offset by a decreases in our interest rates.

Income tax provision. Our Income tax provision includes income taxes associated with taxes currently payable and deferred taxes and includes the impact of net operating losses for certain of our foreign operations. Our effective income tax rates for the three months ended March 31, 2008 and for the three months ended March 31, 2007 differed from the federal statutory rate principally because of certain foreign tax rate differentials, state and local income taxes, valuation allowances on certain net operating losses and the production activities deduction.

Our effective tax rate for the three months ended March 31, 2008 was 34.5%. For the same period in 2007, the effective tax rate was 36.1%. The decrease in the effective tax rate is primarily attributable to recent reductions in statutory tax rates in certain taxing jurisdictions.

On October 24, 2007, we received income tax assessments from the Danish Tax Authority with respect to 2001, 2002 and 2003 tax years. The tax assessments relate to the royalty paid by one of our U.S. companies to our Danish subsidiary. The Danish Tax Authority believes the amount of the royalty should have been at a higher rate than was actually paid and this position could apply to all subsequent years. On January 23, 2008 we filed timely complaints with the Danish National Tax Tribunal denying the tax assessments. The National Tax Tribunal formally agreed to place the Danish tax litigation on hold pending the outcome of a Bilateral Advance Pricing Agreement (Bilateral APA) between the United States and the Danish Tax Authority. A Bilateral APA involves an agreement between the Internal Revenue Service (IRS) and the taxpayer, as well as a negotiated agreement with one or more foreign competent authorities under applicable income tax treaties. We are preparing a formal Bilateral APA application and supporting analyses for filing with the IRS and the Danish Tax Authority. We currently believe that we have meritorious defenses to the assessments and will reactivate our litigation regarding the assessments in the Danish courts if an agreement cannot be reached through the Bilateral APA process. However, there is a reasonable possibility that the amount of unrecognized tax benefits relating to this matter may change during the next 12 months. An estimate of the amount of such change cannot be made at this time. There have been no significant changes to the status of any other unrecognized tax benefits during the quarter ended March 31, 2008.

Liquidity and Capital Resources

Liquidity

Our principal sources of funds are cash flows from operations and borrowings. Our principal uses of funds consist of capital expenditures, payments of principal and interest on our debt facilities, payments of dividends to our shareholders and share repurchases from time to time pursuant to a share repurchase program. At March 31, 2008, we had working capital of $217.1 million including Cash and cash equivalents of $46.6 million as compared to working capital of $200.0 million including $33.3 million in Cash and cash equivalents as of December 31, 2007. Working capital increased 8.6% as of March 31, 2008 compared to December 31, 2007, primarily related to the increase in Inventories .

Our cash flow from operations decreased to $24.6 million for the three months ended March 31, 2008 as compared to $28.6 million for the three months ended March 31, 2007. The decrease in operating cash flow for the period ending March 31, 2008, was primarily a result of decreased Net income offset by favorable changes in certain working capital accounts, primarily Accounts receivable. For the three months ended March 31, 2008 inventory levels resulted in cash outflow of $2.3 million. The increase inventory levels are a result of lower than expected sales. Inventories are expected to be a source of cash in the second quarter assuming our expectations for sales trends are correct. We also plan to improve Accounts receivable days outstanding and Accounts payable days outstanding.

Net cash used in investing activities increased to $4.4 million for the three months ended March 31, 2008 as compared to $3.7 million for the three months ended March 31, 2007, an increase of $0.8 million. The increase is primarily related to increased capital expenditures and the acquisition of our former third party distributor in New Zealand.

Cash flow used by financing activities was $10.2 million for the three months ended March 31, 2008 as compared to $24.6 million for the three months ended March 31, 2007, representing a decrease in cash flow used of $14.4 million. The decrease is primarily related to a decrease in shares purchased under our share repurchase program offset by $10.4 million in repayments, net of borrowings, in 2008.

Capital Expenditures

Capital expenditures totaled $2.8 million for the three months ended March 31, 2008 and $2.4 million for the three months ended March 31, 2007. We currently expect our 2008 capital expenditures to be $14 million versus our prior forecast of $20 million. As part of our actions to align operating expenses with revised sales expectations, we also evaluated our capital expenditure budget and deferred or eliminated certain non-critical projects.

Debt Service

Our long-term debt decreased to $596.8 million as of March 31, 2008 from $601.8 million as of December 31, 2007.

On April 1, 2008, Tempur Production redeemed all outstanding Series A Bonds in the amount of $57.8 million. The redemption price plus accrued interest was funded by a $58.0 million borrowing under the Domestic Revolver. In connection with the redemption, the letter of credit supporting the Bonds was retired, resulting in no additional indebtedness outstanding under the 2005 Senior Credit Facility. We will record a pretax charge of $0.3 million as a Loss on extinguishment of debt during the quarter ended June 30, 2008 related to the write-off of non-cash deferred financing fees.

The interest rate and certain fees that we pay in connection with the 2005 Senior Credit Facility are subject to periodic adjustment based on changes in our consolidated leverage ratio.

Stockholders’ Equity

Share Repurchase Program — On January 25, 2007, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock. We repurchased 3,840,485 shares of our common stock for a total of $100.0 million from the January 2007 authorization and completed purchases from this authorization in June 2007. On July 19, 2007, our Board of Directors approved an additional share repurchase authorization to repurchase up to $200.0 million of our common stock. We repurchased 6,561,489 shares of our common stock for approximately $200.0 million from the July 2007 authorization and completed purchases from the July 2007 authorization in September 2007. On October 16, 2007, our Board of Directors authorized an additional share repurchase authorization of up to $300.0 million of our common stock. Under the existing share repurchase authorization, we have $280.1 million available for repurchase as of March 31, 2008. No shares were repurchased during the first quarter of 2008. Share repurchases under this authorization may be made through open market transactions, negotiated purchase or otherwise, at times and in such amounts as we deem appropriate. This share repurchase authorization may be suspended, limited or terminated at any time without notice.

Dividend Program— In the first quarter of 2007, our Board of Directors approved an annual cash dividend of $0.24 per common share annually, to be paid in quarterly installments to the owners of our common stock. In the second quarter of 2007, our Board of Directors increased the quarterly dividend to $0.08 per common share. Our Board declared a first quarter 2008 dividend of $0.08 per common share that was distributed on March 14, 2008 to stockholders of record as of February 27, 2008. This annual cash dividend program may be limited, suspended, or terminated at any time without prior notice.

Factors That May Affect Future Performance

General Business and Economic Conditions – Our business may be affected by general business and economic conditions that could have an impact on demand for our products. The U.S. macroeconomic environment deteriorated during the quarter and contributed to what we believe is a slowdown in the mattress industry. In addition, our international segment experienced weakening consumer trends in several European markets.

Managing Growth —We have grown rapidly, with our Net sales increasing from $221.5 million in 2001 to $1,106.7 million in 2007 and $247.2 million for the three months ended March 31, 2008. In the past, our growth has placed, and may continue to place, a strain on our management, production, product distribution network, information systems and other resources. In response to these challenges, management has continued to invest in increased production capacity, enhanced operating and financial infrastructure and information systems and continued expansion of the human resources in our operations. Our expenditures for advertising and other marketing-related activities are made as advertising rates are favorable to us, as the continued growth in the business allows us the ability to invest in building our brand, but may be affected by lower than planned sales or an inflationary cost environment.

Gross Margins —Our gross margin is primarily impacted by product and channel mix, volume incentives offered to certain retail accounts, operational efficiency and the cost of raw material. Overall product mix impacts our gross margins because mattresses generally carry lower margins than our pillows and are sold with lower margin products such as foundations and bed frames, and our overall product mix has shifted to mattresses and other products over the last several years. Our margins are also impacted by the growth in our Retail channel as sales in our Retail channel are at wholesale prices whereas sales in our direct channel are at retail prices. Our gross margin can also be impacted by our operational efficiencies, including the particular levels of utilization at our three manufacturing facilities. Future increases in raw material prices could have a negative impact on our gross margin if we do not raise prices to cover increased cost.

Competition— Participants in the mattress and pillow industries compete primarily on price, quality, brand name recognition, product availability and product performance. We compete with a number of different types of mattress alternatives, including standard innerspring mattresses, other foam mattresses, waterbeds, futons, air beds and other air-supported mattresses. These alternative products are sold through a variety of channels, including furniture and bedding stores, specialty bedding stores, department stores, mass merchants, wholesale clubs, telemarketing programs, television infomercials and catalogs.

Our largest competitors have significant financial, marketing and manufacturing resources and strong brand name recognition, and sell their products through broad and well established distribution channels. Additionally, we believe that a number of our significant competitors offer mattress products claimed to be similar to our TEMPUR ® mattresses and pillows.

we provide strong channel profits to our retailers and distributors which management believes will continue to provide an attractive business model for our retailers and discourage them from carrying competing lower-priced products.

Significant Growth Opportunities —We believe there are significant opportunities to take market share from the innerspring mattress industry as well as other sleep surfaces. Our market share of the overall mattress industry is relatively small in terms of both dollars and units, which we believe provides us with a significant opportunity for growth. By expanding our brand awareness and offering superior sleep surfaces, we believe consumers will continue to adopt our products at an increasing rate, which should expand our market share. Our business may be affected by general business and economic conditions that could have an impact on demand for our products. We believe that the premium and specialty bedding categories that we target will continue to grow at a faster rate than the overall mattress industry and we believe we will continue to experience the benefits of this consumer adoption.

Our ability to take market share also depends on our ability to successfully launch new products. In the past, we have seen retailers and consumers respond well to our new product development and technological superiority. Over the next few quarters, we will begin the most extensive new product launch in our history. This launch will include new mattress models, advanced technological innovations and new pillow concepts as well as an upgrade to the most widely distributed mattress model in our lineup.

In addition, by expanding distribution within our existing accounts, we believe we have the opportunity to grow our business by expanding our sales force as necessary and extending our product line. Expansion gives our salespeople fewer stores to call on, resulting in more time spent with each retail location so they can work with each retailer on merchandising, training and educating retail associates about the benefits of our products. Additionally, by extending our product line, we should be able to continue to expand the number of Tempur-Pedic models offered at the retail store level which should lead to increased sales. Based on this strategy we believe a focus on expanding distribution within our existing accounts provides for continued growth opportunities and market share gains.

Expanding distribution into new stores is also a source of growth opportunities. Our products are currently sold in approximately 6,450 furniture and bedding retail stores in the U.S., out of a total of approximately 10,000 stores we have identified as appropriate targets. Within this addressable market, our plan is to increase our total penetration to a total of 7,000 to 8,000 over time. Our products are also sold in approximately 5,060 furniture retail and department stores outside the U.S., out of a total of approximately 7,000 stores that we have identified as appropriate targets. We are continuing to develop products that are responsive to consumer demand in our markets internationally.

In addition to these growth opportunities, management believes that we currently supply only a small percentage of approximately 15,400 nursing homes and 5,000 hospitals in the U.S., with a collective bed count in excess of 2.7 million. Clinical evidence indicates that our products are both effective and cost efficient for the prevention and treatment of pressure ulcers, or bed sores, a major problem for elderly and bed-ridden patients. We have recently begun partnering with healthcare vendors in an indirect sales method whereby the vendor integrates our product into their products, in order to improve patient comfort and wellness.

Financial Leverage— As of March 31, 2008, we had $597.1 million of total Long-term debt outstanding, and our Stockholders’ Equity was $70.2 million. Higher financial leverage makes us more vulnerable to general adverse competitive, economic and industry conditions. We believe that operating margins driven by Net sales resulting from volume and price, productivity improvements and cost containment activities will enable us to continue to de-leverage. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under our 2005 Senior Credit Facility.

Exchange Rates —As a multinational company, we conduct our business in a wide variety of currencies and are therefore subject to market risk for changes in foreign exchange rates. We use foreign exchange forward contracts to manage a portion of the exposure to the risk of the eventual net cash inflows and outflows resulting from foreign currency denominated transactions between Tempur-Pedic subsidiaries and their customers and suppliers, as well as between the Tempur-Pedic subsidiaries themselves. These hedging transactions may not succeed in effectively managing our foreign currency exchange rate risk. See “ITEM 3. Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exposures” under Part I of this report.


CONF CALLS

Barry Hytinen

Joining me in our Lexington headquarters are Tom Bryant, President and CEO; and Dale Williams, CFO. After prepared remarks, we will open the call for Q&A.

Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements, including the company’s expectations regarding sales and earnings, involve uncertainties.

Actual results may differ due to a variety of factors that could adversely affect the company’s business. The factors that could cause actual results to differ materially from those identified include economic, competitive, operating and other factors discussed in the press release issued today.

These factors are also discussed in the company’s SEC filings, including the company’s annual report on Form 10-K under the headings, Special Note Regarding Forward-Looking Statements and Risk Factors. Any forward-looking statements speak only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. The press release is posted on the company’s website at tempurpedic.com and filed with the SEC.

Now with that introduction, I will turn the call over to Tom.

H. Thomas Bryant

In total, Tempur-Pedic net sales declined 7% to $247 million. As we previously announced, our production plans and operating expenses were incurred assuming a much higher sales level. As a result, earnings were substantially pressured and resulted in earnings per share of $0.18.

The primary area of sales weakness was in the U.S. The U.S. microeconomic environment deteriorated during the quarter and contributed to what we believe is the slow down in the mattress industry. Additionally, based on industry data and retailer feedback, we believe average selling prices in the industry are trending lower as many premium buyers prefer high-end mattress purchases. We believe these factors are the primary reason our domestic net sales were below prior expectations.

Our U.S. direct business was more severely impacted, down 45% to $10.7 million. As we have mentioned before, the U.S. direct channel generally serves a lower consumer demographic than our core retail customer. Therefore, we believe that it is likely that this sharp drop off in sales is caused by weakening consumer confidence and corresponding lower spending by DR consumers. While we planned for this channel to be down, it was worse than expected, resulting in gross margin deterioration, which Dale will speak to shortly.

The U.S. retail channel, while down less than direct, was also much weaker than planned. It was a decline of 14% to $129 million. Retailers reported much slower traffic trends throughout the quarter as consumer confidence weakened. In the U.S. we opened approximately 100 net new furniture and bedding doors in the quarter. This brings the U.S. furniture and bedding door count to 6,450 versus our long-term goal of 7,000-8,000.

Our medical business was up, reflecting continued progress with our partners, especially Hillrock.

Lastly, our U.S. third party channel delivered $4.3 million of net sales, an increase of $1.3 million, but that was coming off of a weak comparison in the first quarter of 2007. At this point it appears U.S. sales trends may have stabilized. However, we are mindful that the environment is unstable and we are not planning for a near-term improvement.

Turning to the international business, we saw weakening trends in many of our key European markets. While reported results reflect a 10% increase in sales to $99 million. This is driven by favorable foreign exchange rates.

On a constant currency basis our international sales actually declined about 3%. International retail sales were up 14% to $79 million. We added approximately 70 net new retail doors during the quarter, bringing the international door count to 5,060. International [inaudible] plans worsened in the second half of the quarter, which we believe is consistent with weakening consumer confidence throughout many of our markets.

With lower than planned sales and inflationary cost pressures, profitability was considerably impacted. A combination of large declines in the direct business, raw material cost inflation, and lower volumes resulted in lower gross profit margin.

In addition, first quarter operating expenses were planned and incurred to support a much higher sales level, which negatively impacted operating income. I will let Dale provide an explanation in a few moments.

Going forward, we are not assuming the sales environment will improve in the near term, therefore we have taken decisive action for allaying operating expenses and production plans with revised sales expectations. We have reduced our operating expenses, allaying variable costs with sales and reduced our headcount. The headcount reductions were approximately 10% of our total U.S. workforce, which we expect will result in about $2.5 million of annualized salary and benefit savings.

We are currently committed to our business model, our advertising strategy, and our premium product focus. Our new advertising campaign is helping to drive brand awareness. Our annual study of brand awareness indicates that our U.S. total awareness has risen to 89%, reflecting success of the new ad campaign. As our brand awareness continues to grow, we plan to offer consumers more product choices.

Over the next few quarters we will begin the most extensive new product launch in the company’s history. This launch will include new mattress models, advanced technology, and new pillow concepts, as well as an upgrade to the most widely-distributed mattress model in our line up. We anticipate this launch will well received by retailers and consumers.

For competitive reasons much of the lines will remain proprietary until the July Las Vegas trade show. However, we can tell you today as part of this initiative we are adjusting our entry-level strategy, while staying well above the $1,000 price point. Leading into the formal launch, this will result in close-out activity on the Deluxe and Symphony models, as well as selected sizes of the Original. Our new models will be available in July.

In summary, while we are very disappointed in the first quarter results, we generated position cash flow and reduced our net debt position. We are right-sizing the company to see us through the current head wind and importantly, be in the right position when the market turns.

We note that independent third-party research leads us to believe that high-end U.S. mattress shoppers are more likely to defer purchases as opposed to trading down in these economic times. Therefore, we are positioning the company to capitalize on this demand as consumers return to the market when the environment improves.

At this point I will turn the call over to Dale to review the financial results in more detail.

Dale E. Williams

Let’s take a look at the quarter in a bit more detail. As Tom focused his commentary on the channels, let’s start with products. Turning to sales results by product, mattresses were down by 9% driven by a 12% decline in units. Domestic mattress sales declined 18%, on a 20% decline in units, reflecting modest ASP improvement, despite the weakness in direct, which negatively effected ASP.

International segment mattress sales were up 12% on flat units. In a weak consumer spending environment, reduced levels of retail traffic pillows were impacted. In total pillows were down 9%, driven by a 17% decline in units. We experienced pillow volumes in both segments, with a 19% decline domestically and a 15% decline internationally.

Other products, which typically go along with the pillows and mattresses, declined less than mattresses and pillows. Other products declined 4% domestically and grew 16% internationally. These results were primarily driven by our increased focus on adjustable [inaudible] and tax rates across the world, which we are improving despite the economic head wind. We are please to see progress in this area as we focus on a complete fleet system.

Gross margin for the quarter was 43.7%, well below prior year and our expectations. The gross margin was impacted by several factors. Direct sales were much weaker than planned. Sales returns increased modestly about one point. Cost for raw materials were up sharply and with lower volumes, fixed costs in our plants were spread across a smaller sales base.

Operating income was $29.3 million, or 11.9% of net sales. Operating income was negatively impacted by de-leverage of SG&A expenses. As Tom discussed, our SG&A expenses were planned under the assumption of a much higher sales level. When sales trends deteriorated much of our cost structure was in place and we were unable to take action to mitigate de-leverage in the first quarter. For example, advertising spend is typically committed for at least two months in advance. Despite this we still managed to reduce some of our advertising expense in the quarter and in total ad spending was about 12% of sales, or 200 basis points higher than we had planned. Operating expenses also include a $600,000 charge for restructuring the latest in the headcount reduction on the staff.

As a result of the de-leveraging in P&L, diluted earnings per share was $0.18 compared to $0.35 for the first quarter of 2007.

Turning to the balance sheet, we are very focused on improving cash flow and working capital. We generated $25 million of cash flow from operations and reduced debt, net of cash, by $18 million from year end. I would like to point out that our revolving credit facility matures in 2012 and requires no mandatory principle payments until that time. We are executing on a comprehensive plan to improve cash flow and substantially reduce inventories.

Inventories were high at year end, as we noted on our last call. Our plan was to reduce them in the first quarter, however, with sales trends deteriorating, inventories grew modestly. Going forward, our operating plan anticipates a large reduction in inventory levels.

We have reduced labor in our plants and have decreased the manufacturing plans. We are also working to improve day sales outstanding and payable days to drive working capital. In addition, we have reduced our capital expenditure plan to approximately $14 million for the year versus our $20 million prior forecast. In the first quarter we spent $2.8 million on capex.

Now I would like to address our revised guidance for the full year 2008. For sales the company currently expects full year net sales to range from $1,010,000,000-$1,000,000 ,079, a decrease of between 9% and 3% from 2007. For earnings the company currently expects diluted earnings per share for 2008 to range from $1.20-$1.45, a decrease of 31%-17% compared to 2007. From a net sales perspective, at the low end, we are assuming U.S. sales trends to not materially change from what we experienced in the first quarter, while allowing for the potential that the international segment deteriorates modestly.

I would like to take this opportunity to note that based on our model, even at the low end of our guidance, we expect to be in full compliance with our debt covenant for the entire year. We are using a share count of 76 million shares and a full year tax rate of 34.5%. As has been our custom, this guidance does not assume the benefit of share repurchases. We remain focused on improving operating performance and maximizing share holder value. We are carefully monitoring business conditions and will be prepared to take additional action to protect profitability if necessary. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside of the company’s control

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