Proxy Statement and Annual Report
Sleep Number Corporation
2019 Annual Meeting
Dear Shareholders,
Sleep Number’s mission of improving lives by individualizing sleep experiences is at the core of
our purpose-driven company. To date, we have improved the lives of more than eleven and a
half million people. Our consumer innovation strategy translates directly to increased
shareholder value. Over the past five years, our strategic consistency, profitable investments,
and sleep innovations have generated total shareholder returns of 144% through March 1st,
2019.
We have prioritized approximately $500 million in investments since 2012 to strengthen our
competitive advantages of proprietary sleep innovations, exclusive distribution, and lifelong
customer relationships. These strategic choices contributed to a 16% return on invested capital
for 2018, compared to our high single-digit weighted average cost of capital.
Our revolutionary Sleep Number 360® smart beds have disrupted the industry. With the only
bed that delivers proven quality sleep, Sleep Number is at the intersection of sleep, technology
and health trends. Consumer enthusiasm for our smart bed drove double-digit sales growth
since we completed the transition of our product line in the back half of 2018. Record full-year
results included:
Net sales increase of 6% to $1.53 billion, and
Earnings per diluted share increase of 24% to $1.92.
In 2019, we expect to generate earnings per diluted share of between $2.25 and $2.75, up 17%
to 43% versus prior year.
Sleep Number 360 smart bed
Five years ago, we saw the potential of connected technology and incorporated biometric
tracking into our Sleep Number® beds with SleepIQ® technology. Today, more than half of
consumer households are interested in purchasing sleep tracking technology. Our 360® smart
beds detect movement, sleep disturbances, and biometric changes, and then use that
information to automatically adjust the bed’s firmness for each individual sleeper.
We are communicating the vital role that this life-changing sleep plays in overall wellness
through our integrated marketing campaigns, storytelling, and social media. We are amplifying
our purpose-driven brand through groundbreaking partnerships with the NFL, the NFL Players
Association, and the Professional Football Athletic Trainers Society. Now, over 1,800 NFL
players are sleeping on our 360 smart beds and experiencing the powerful link between quality
sleep and their performance.
Lifelong customer relationships with our brand are another key competitive advantage that
drives sustainable, profitable growth. With digital at the core of our smart beds, customers
now interact with our brand daily. They can use their SleepIQ® score to understand how quality
sleep impacts their day. This deep engagement leads to increased customer loyalty, which
drives higher referrals and repeat sales.
Our integrated online and retail strategy highlights the science and value of our smart beds. Our
exclusive distribution is also an important competitive advantage. With award-winning store
design and interactive technology, our 580 Sleep Number® stores deliver a unique sales
experience across all 50 states.
The 360 smart bed is creating leverage across our business. With our full line of smart beds in
place, we expect the absence of transition costs to benefit 2019. The simpler bed design and
streamlined operational processes drive efficiencies in manufacturing, logistics, and supply
chain. The multi-year network evolution is improving assembly flow, reliability, and scale.
Looking Ahead
In many ways, we are just getting started with our 360 smart beds, which have tremendous
potential to add increasing value to consumers’ well-being. Today, our smart bed’s SleepIQ®
platform captures over 8.5 billion biometric data points every night and uses that data to
deliver proven quality sleep. In the future, SleepIQ technology will likely enable customers to
use their smart bed to better manage their health and wellness.
We are excited to be in a position of broader relevance in a changing consumer and
competitive landscape. We expect our purpose-driven company, which is delivering life-
changing sleep, to continue to generate top-tier shareholder returns over the long term.
Sleep well, dream big,
Shelly Ibach
Sleep Number® setting 40, average SleepIQ® score of 82
President and Chief Executive Officer
1001 Third Avenue South
Minneapolis, Minnesota 55404
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
May 15, 2019
TO THE SHAREHOLDERS OF SLEEP NUMBER CORPORATION:
Sleep Number Corporation will hold its Annual Meeting of Shareholders at 8:30 a.m.
Central Time on Wednesday, May 15, 2019. The meeting will be conducted completely as a
virtual meeting via the Internet at www.virtualshareholdermeeting.com/SNBR2019. The
purposes of the meeting are to:
1. Elect four persons to serve as Directors for three-year terms;
2. Cast an advisory vote to approve executive compensation; and
3. Cast an advisory vote to ratify the selection of Deloitte & Touche LLP as our
independent registered public accounting firm for the 2019 fiscal year ending
December 28, 2019.
Shareholders of record at the close of business on March 20, 2019 will be entitled to vote
at the meeting and any adjournments thereof. Your vote is important. Please be sure to vote
your shares in favor of the Board of Directors’ recommendations in time for our May 15, 2019
meeting date. Your attention is directed to the Proxy Statement for a more complete statement of
the matters to be considered at the meeting.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR THE SHAREHOLDERS’ MEETING TO BE HELD ON MAY 15,
2019: The Proxy Statement and Annual Report for the year ended December 29, 2018 and
related materials are available at www.sleepnumber.com/investor-relations.
These materials were first sent or made available to our shareholders on April 2, 2019.
By Order of the Board of Directors,
Samuel R. Hellfeld
Senior Vice President,
Chief Legal and Risk Officer and Secretary
Minneapolis, Minnesota April 2, 2019
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TABLE OF CONTENTS
Page
FREQUENTLY ASKED QUESTIONS ABOUT THE MEETING AND VOTING ............................ 1
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS................ 8
PROPOSAL 1 − ELECTION OF DIRECTORS .................................................................................. 10
EXECUTIVE COMPENSATION ........................................................................................................... 30
PROPOSAL 2 − ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION ............... 64
AUDIT COMMITTEE REPORT ........................................................................................................... 65
PROPOSAL 3 − RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ............................................................................... 67
OTHER MATTERS ................................................................................................................................. 69
As used in this Proxy Statement, the terms “we,” “us,” “our,” the “company” and “Sleep
Number” mean Sleep Number Corporation and its subsidiaries and the term “common stock”
means our common stock, par value $0.01 per share.
i
[This page intentionally left blank]
1001 Third Avenue South
Minneapolis, Minnesota 55404
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
May 15, 2019
FREQUENTLY ASKED QUESTIONS ABOUT THE MEETING AND VOTING
This Proxy Statement is furnished in connection with the solicitation of proxies by the
Board of Directors of Sleep Number Corporation for use at the 2019 Annual Meeting of
Shareholders.
When is the Annual Meeting and how can I attend?
The Annual Meeting will be held at 8:30 a.m. Central Time on May 15, 2019. The meeting
will be conducted completely as a virtual meeting via the Internet. Shareholders may attend the
meeting and submit questions electronically during the meeting via live webcast by visiting the
virtual meeting platform at www.virtualshareholdermeeting.com/SNBR2019. Shareholders will
need the 16-digit control number included in Notice of Internet Availability of Proxy Materials,
on the proxy card, or in the instructions that accompanied the proxy materials to enter the Annual
Meeting. Shareholders may log into the virtual meeting platform beginning at 8:15 a.m. Central
Time on May 15, 2019. The meeting will begin promptly at 8:30 a.m. Central Time on May 15,
2019.
Why is this Annual Meeting virtual?
We are utilizing technology to provide expanded access and participation, improved
communication, and cost savings to benefit our shareholders and the company. Shareholders will
be able to listen, vote, and submit questions from any remote location through the Internet. The
virtual format for the Annual Meeting is also environmentally friendly and sustainable over the
long-term.
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What if I have technical difficulties during the meeting or trouble accessing the virtual
Annual Meeting?
We will have technicians ready to assist you with any technical difficulties you may have
accessing the virtual meeting. If you encounter any difficulties accessing the virtual meeting
during check-in or the meeting, please call the technical support number that will be posted on the
virtual meeting platform log-in page.
Who is entitled to vote?
Shareholders of record at the close of business on March 20, 2019 (the “Record Date”) are
entitled to vote at the meeting. As of the Record Date, there were 30,127,273 shares of common
stock outstanding. Each share is entitled to one vote on each matter to be voted on at the Annual
Meeting. Shareholders are not entitled to cumulative voting rights.
What is the difference between “Shareholders of Record” and “Beneficial Owners”?
If your shares are registered in your name in the records maintained by our stock transfer
agent, you are a “Shareholder of Record.” If you are a Shareholder of Record, notice of the
meeting was sent directly to you.
If your shares are held in the name of your bank, broker, nominee or other holder of
record, your shares are held in “street name” and you are considered the “Beneficial Owner.”
Notice of the meeting has been forwarded to you by your bank, broker, nominee or other holder
of record, who is considered, with respect to those shares, the Shareholder of Record. As the
Beneficial Owner, you have the right to direct your bank, broker, nominee or other holder of
record how to vote your shares by using the voting instructions you received.
If you are a Beneficial Owner and you do not give instructions to the organization holding
your shares, then that organization cannot vote your shares and the shares held by that
organization will not be considered as present and will not be entitled to vote on any matter to be
considered at the Annual Meeting.
How can I receive proxy materials?
We are furnishing proxy materials to our shareholders primarily via the Internet. On or
about April 2, 2019, we will begin mailing to certain of our shareholders a Notice of Internet
Availability of Proxy Materials (the “Shareholder Notice”), which includes instructions on (i)
how to access our Proxy Statement and Annual Report on the Internet, (ii) how to request that a
printed copy of these proxy materials be forwarded to you, and (iii) how to vote your shares. If
you receive the Shareholder Notice, you will not receive a printed copy of the proxy materials
unless you request a printed copy by following the instructions in the Shareholder Notice. All
other shareholders will be sent the proxy materials by mail beginning on or about April 2, 2019.
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Requests for printed copies of the proxy materials can be made by Internet at
http://www.proxyvote.com, by telephone at 1-800-579-1639 or by email at
sendmaterial@proxyvote.com by sending a blank email with your control number in the subject
line.
What does it mean if I receive more than one proxy card or Shareholder Notice?
If you received more than one proxy card or Shareholder Notice, it generally means you
hold shares registered in more than one account. If you received a paper copy of the Proxy
Statement and you choose to vote by mail, sign and return each proxy card. If you choose to vote
by Internet or telephone, vote once for each proxy card and/or Shareholder Notice you receive. If
you have received more than one Shareholder Notice, vote once for each Shareholder Notice that
you receive.
What are shareholders being asked to vote on?
There are three items to be voted on at the meeting:
The election of four persons to serve as Directors for three-year terms;
An advisory vote to approve executive compensation; and
An advisory vote to ratify the selection of Deloitte & Touche LLP as our independent
registered public accounting firm for the fiscal year ending December 28, 2019.
What are my voting choices?
For proposal 1, the election of Directors, you may:
Vote in favor of all nominees;
Vote in favor of specific nominees and withhold a favorable vote for specific
nominees; or
Withhold authority to vote for all nominees.
For each of proposal 2 (the advisory vote to approve executive compensation) and
proposal 3 (the advisory vote to ratify the selection of independent auditors) you may:
Vote in favor of the proposal;
Vote against the proposal; or
Abstain from voting on the proposal.
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How does the Board recommend that I vote?
Sleep Number’s Board unanimously recommends that you vote your shares:
“For” the election of each of the nominees for Director nominated herein by the
Board of Sleep Number;
“For” the advisory vote to approve executive compensation; and
“For” the advisory vote to ratify the selection of Deloitte & Touche LLP as our
independent registered public accounting firm for the fiscal year ending December 28,
2019.
How are votes counted?
If you are a Shareholder of Record and grant a proxy by telephone or Internet without
voting instructions, or sign and submit your proxy card without voting instructions, your shares
will be voted “For” each Director nominee and “For” each of the other proposals outlined above
in accordance with the recommendations of the Board.
Proxies marked “Withhold” on proposal 1 (election of Directors), or “Abstain” on
proposal 2 (the advisory vote to approve executive compensation) or proposal 3 (the advisory
vote to ratify the selection of independent auditors), will be counted in determining the total
number of shares entitled to vote on such proposals and will have the effect of a vote “Against” a
Director or a proposal.
If you are a Beneficial Owner and hold your shares in “street name,” such as through a
bank, broker or other nominee, you generally cannot vote your shares directly and must instead
instruct the broker how to vote your shares using the voting instruction form provided by the
broker.
What is a Broker Non-Vote?
If a Beneficial Owner does not provide timely instructions, the broker will not have the
authority to vote on any non-routine proposals at the Annual Meeting, which includes proposals 1
and 2. Brokers will have discretionary authority to vote on proposal 3 because the ratification of
the appointment of independent auditors is considered a routine matter. If the broker votes on
proposal 3 (the advisory vote to ratify the selection of independent auditors) but does not vote on
another proposal because the broker does not have discretionary voting authority and has not
received instructions from the Beneficial Owner, this results in a “broker non-vote” with respect
to such other proposal(s).
Broker non-votes on a matter may be counted as present for purposes of establishing a
quorum for the meeting but are not considered entitled to vote on that particular matter.
Consequently, broker non-votes generally will have no effect on the outcome of the matter.
However, if and to the extent that broker non-votes are required to establish the presence of a
quorum at the Annual Meeting, then any broker non-votes will have the same effect as a vote
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“Withheld” or “Against” any matter that requires approval of a majority of the minimum number
of shares required to constitute a quorum for the transaction of business at the Annual Meeting.
What is the vote required to approve each proposal?
Assuming that a quorum is present to vote on each of the proposals, proposals 1, 2, and 3
will require the affirmative vote of holders of a majority of the shares represented and entitled to
vote in person or by proxy on such action.
Please note that each of proposals 2 and 3 are “advisory” votes, meaning that the
shareholder votes on these items are for purposes of enabling shareholders to express their point
of view or preference on these proposals, but are not binding on the company or its Board of
Directors and do not require the company or its Board of Directors to take any particular action in
response to the shareholder vote. The Board intends to consider fully the votes of our
shareholders in the context of any further action with respect to these proposals.
What constitutes a “quorum,” or how many shares are required to be present to conduct
business at the Annual Meeting?
The presence, in person or by proxy, of the holders of a majority of the outstanding shares
of common stock entitled to vote (i.e., at least 15,063,637 shares) will constitute a quorum for the
transaction of business at the Annual Meeting. In general, shares of common stock represented
by a properly signed and returned proxy card or properly voted by telephone or via the Internet
will be counted as shares represented and entitled to vote at the Annual Meeting for purposes of
determining a quorum, without regard to whether the card reflects abstentions and withhold votes
(or is left blank) or reflects a “broker non-vote” on a matter.
How do I vote my shares?
If you are a Shareholder of Record as of the record date, you can vote your shares in any
of the following ways:
Over the telephone by calling the toll-free number on the proxy card;
Over the Internet by following the instructions on the proxy card;
Through the mail – if you received a paper copy of the Proxy Statement, you may
vote by mail by signing, dating and mailing your proxy card in the envelope provided
to be received by no later than May 13, 2019; or
Over the Internet during the 2019 annual meeting by going to
www.virtualshareholdermeeting.com/SNBR2019 and using your 16-digit control
number (included on the Notice of Internet Availability of Proxy Materials, on your
proxy card or in the instructions that accompanied your proxy materials).
The telephone and Internet voting procedures have been set up for your convenience. We
encourage you to save corporate expense by submitting your vote by telephone or Internet. The
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procedures have been designed to authenticate your identity, to allow you to give voting
instructions, and to confirm that those instructions have been recorded properly.
If you are a Beneficial Owner of shares held in “street name,” you must vote your shares
in the manner prescribed by your bank, broker or other nominee. Your bank, broker or other
nominee has provided notice by email or a printed voting instruction card for you to use in
directing the bank, broker or nominee how to vote your shares. Telephone and Internet voting are
also encouraged for Beneficial Owners who hold their shares in street name.
Beneficial Owners should be aware that brokers are not permitted to vote shares on non-
routine matters, including the election of Directors or matters related to executive compensation,
without instructions from the Beneficial Owner. As a result, brokers are not permitted to vote
shares on proposal 1 (election of Directors) or proposal 2 (the advisory vote to approve executive
compensation) without instructions from the Beneficial Owner. Therefore, Beneficial Owners are
advised that if they do not timely provide instructions to their bank, broker or other holder of
record with respect to proposals 1 or 2, their shares will not be voted in connection with any such
proposal for which they do not provide instructions. Proposal 3 (the advisory vote to ratify the
selection of independent auditors) is considered a routine matter and, as such, brokers will still be
able to vote shares held in brokerage accounts with respect to proposal 3, even if they do not
receive instructions from the Beneficial Owner.
Your vote is important. Whether or not you plan to attend the meeting, we urge you to
vote your shares in time for our May 15, 2019 meeting date.
May I revoke a proxy and change my vote?
Yes. Any shareholder giving a proxy may revoke it at any time prior to its use at the
Annual Meeting by:
Delivering written notice of revocation to the Corporate Secretary before 6:00 p.m.,
Eastern Daylight Time, on May 13, 2019;
Submitting to the Corporate Secretary before 6:00 p.m., Eastern Daylight Time, on
May 13, 2019, a properly signed proxy card bearing a later date than the prior proxy
card;
Voting again by Internet or telephone before 11:59 p.m., Eastern Daylight Time, on
May 14, 2019; or
Participating in the Annual Meeting and voting your shares electronically during the
Annual Meeting. Participation in the Annual Meeting will not cause your previously
granted proxy to be revoked unless you specifically make that request.
Can I receive future proxy materials electronically?
Yes. If you are a Shareholder of Record and you received a paper copy of the proxy
materials, you may elect to receive future Proxy Statements and annual reports online as
described in the next paragraph. If you elect this feature, you will receive an email message
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notifying you when the materials are available, along with a web address for viewing the
materials. If you received this Proxy Statement electronically, you do not need to do anything to
continue receiving proxy materials electronically in the future.
Whether you are a Shareholder of Record or a Beneficial Owner holding shares through a
bank or broker, you can enroll for future electronic delivery of Proxy Statements and annual
reports by following these steps:
Go to our website at www.sleepnumber.com;
In the Investor Relations section, click on Electronic Fulfillment;
Click on the check-marked box next to the statement “Shareholders can register for
electronic delivery of proxy-related materials.”; and
Follow the prompts to submit your request to receive proxy materials electronically.
You may view this year’s proxy materials at www.proxyvote.com. Generally, banks and
brokers offering this choice require that shareholders vote through the Internet in order to enroll.
Beneficial Owners whose bank or broker is not included in this website are encouraged to contact
their bank or broker and ask about the availability of electronic delivery. As is customary with
Internet usage, the user must pay all access fees and telephone charges.
What are the costs and benefits of electronic delivery of Annual Meeting materials?
There is no cost to you for electronic delivery of annual meeting materials. You may
incur the usual expenses associated with Internet access as charged by your Internet service
provider. Electronic delivery ensures quicker delivery, allows you to view or print the materials
at your computer and makes it convenient to vote your shares online. Electronic delivery also
conserves natural resources and saves the company printing, postage and processing costs.
Who bears the proxy solicitation costs?
The proxies being solicited hereby are being solicited by the Board of Directors of the
company. The cost of preparing and mailing the notice of Annual Meeting, this Proxy Statement
and the accompanying proxy and the cost of solicitation of proxies on behalf of the Board of
Directors will be borne by the company. The company may solicit proxies by mail, Internet
(including by email, Twitter, the use of our investor relations website and other online channels of
communication), telephone, facsimile and other electronic channels of communication, town hall
meetings, personal interviews, press releases, and press interviews. Our Directors, officers and
regular team members may, without compensation other than their regular compensation and the
reimbursement of expenses, solicit proxies by telephone or personal conversation. In addition, we
may reimburse brokerage firms and others for their reasonable and documented expenses incurred
in connection with forwarding proxy materials to the Beneficial Owners of our common stock.
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STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table shows the beneficial ownership of Sleep Number common stock as of
February 23, 2019 (unless another date is indicated) by (a) each Director, each nominee for
Director recommended by our Board and each executive officer named in the Summary
Compensation Table on page 51 of this Proxy Statement, (b) all Directors and executive officers
as a group and (c) each person known by us to be the Beneficial Owner of more than 5% of Sleep
Number common stock.
Name and Address of Beneficial Owner (1)
Title of Class
Common Stock Daniel I. Alegre
Common Stock Andrea L. Bloomquist
Common Stock Kevin K. Brown
Common Stock David R. Callen
Common Stock Andrew P. Carlin
Common Stock Stephen L. Gulis, Jr. (4)
Common Stock Michael J. Harrison (4)
Common Stock Shelly R. Ibach
Common Stock Deborah L. Kilpatrick, Ph.D.
Common Stock Brenda J. Lauderback (4)
Common Stock Barbara R. Matas (4)
Common Stock Kathleen L. Nedorostek (4)
Common Stock Vicki A. O’Meara
Common Stock Michael A. Peel (4)
Common Stock
Common Stock All directors and executive officers as a group
Jean-Michel Valette
(20 persons) (5)
Common Stock BlackRock, Inc. (6)
55 East 52nd Street
New York, New York 10055
Amount and
Nature of
Beneficial
Ownership (2)(3)
24,965
121,580
47,482
75,792
75,303
89,118
47,435
449,880
1,376
47,490
16,766
43,965
9,845
112,898
281,486
Percent of
Class
*
*
*
*
*
*
*
1.5%
*
*
*
*
*
*
*
1,749,142
5.6%
4,772,079
15.7%
Common Stock Disciplined Growth Investors, Inc. (7)
3,603,954
11.9%
150 South Fifth Street, Suite 2550
Minneapolis, Minnesota 55402
Common Stock The Vanguard Group, Inc. (8)
3,394,508
11.2%
100 Vanguard Blvd.
Malvern, Pennsylvania 19355
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Common Stock Vulcan Value Partners, LLC (9)
2,716,036
9.0%
2801 Highway 280 South, Suite 300
Birmingham, Alabama 35223
Common Stock Dimensional Fund Advisors LP (10)
6300 Bee Cave Road, Building One
Austin, Texas 78746
______________________
* Less than 1% of the outstanding shares.
1,755,694
5.8%
(1) The business address for each of the Directors and executive officers of the company is c/o Sleep Number Corporation,
1001 Third Avenue South, Minneapolis, Minnesota 55404.
(2) The shares shown include the following shares that Directors and executive officers have the right to acquire within 60
days through the exercise of stock options: Mr. Alegre (11,357 shares); Ms. Bloomquist (57,425 shares); Mr. Brown
(26,750 shares); Mr. Callen (33,538 shares); Mr. Carlin (19,300 shares); Mr. Gulis (22,232 shares); Mr. Harrison (14,826
shares); Ms. Ibach (261,834 shares); Ms. Lauderback (17,232 shares); Ms. Matas (4,122 shares); Ms. Nedorostek (17,232
shares); Ms. O’Meara (4,122 shares); Mr. Peel (21,732 shares); and Mr. Valette (22,232 shares).
(3) The shares shown include the following shares that executive officers have the right to acquire within 60 days through the
vesting of restricted stock units: Mr. Carlin (18,880 shares); and through the vesting of performance restricted stock units:
Ms. Bloomquist (14,449); Mr. Brown (10,837); Mr. Callen (14,449); Mr. Carlin (14,449); and Ms. Ibach (75,862).
(4) The Amended and Restated 2010 Omnibus Plan (the Plan) permits non-employee Directors to receive Director fees in the
form of common stock in lieu of cash, and to defer receipt of such shares. In addition, the Plan permits non-employee
Directors to defer receipt of shares of the company’s common stock under an Incentive Award granted under the Plan
(referred to as Restricted Stock Units or RSUs). The Directors are entitled to the deferred shares and fully-vested RSUs
upon the earlier of an elected date or separation of service from the company. Mr. Gulis’s amount includes 49,746 shares
that were deferred in lieu of Director fees and 17,140 RSUs that were deferred. Mr. Harrison’s amount includes 2,345
shares that were deferred in lieu of Director fees and 6,719 RSUs that were deferred. Ms. Lauderback’s amount includes
9,255 RSUs that were deferred. Ms. Matas’ amount includes 6,921 shares that were deferred in lieu of Director fees and
3,852 RSUs that were deferred. Ms. Nedorostek’s amount includes 14,593 shares that were deferred in lieu of Director
fees. Mr. Peel’s amount includes 10,929 RSUs that were deferred.
(5)
Includes an aggregate of 640,305 shares that Directors and executive officers as a group have the right to acquire within 60
days through the exercise of stock options. Includes an aggregate of 184,776 shares held under performance restricted
stock units that have not vested and 19,090 shares that Directors and executive officers as a group have the right to acquire
within 60 days through the vesting of restricted stock units. Also includes 73,606 shares that were deferred by non-
employee Directors in lieu of Director fees and 121,470 RSUs that were deferred by executive officers and non-employee
Directors.
(6) BlackRock, Inc. reported in a Schedule 13G filed with the Securities and Exchange Commission on January 31, 2019 that
as of December 31, 2018 it beneficially owned 4,772,079 shares of Common Stock of Sleep Number Corporation, had sole
power to vote or to direct the vote with respect to 4,689,434 shares and sole dispositive power with respect to 4,772,079
shares.
(7) Disciplined Growth Investors, Inc. reported in a Schedule 13F filed with the Securities and Exchange Commission on
February 13, 2019 that as of December 31, 2018 it beneficially owned 3,603,954 shares of Common Stock of Sleep
Number Corporation, had sole dispositive power with respect to 3,603,954 shares, sole power to vote or to direct the vote
with respect to 2,994,791 shares and no voting power with respect to 609,163 shares.
(8) The Vanguard Group, Inc. reported in a Schedule 13G/A filed with the Securities and Exchange Commission on
February 11, 2019 that as of December 31, 2018 it beneficially owned 3,394,508 shares of Common Stock of Sleep
Number Corporation, had sole power to vote or to direct the vote with respect to 68,190 shares, shared power to vote or to
direct the vote with respect to 6,230 shares, shared dispositive power with respect to 70,650 shares and sole dispositive
power with respect to 3,323,858 shares.
(9) Vulcan Value Partners, LLC reported in a Schedule 13G/A filed with the Securities and Exchange Commission on
February 14, 2019 that as of December 31, 2018 it beneficially owned 2,716,036 shares of Common Stock of Sleep
Number Corporation, had sole power to vote or to direct the vote with respect to 2,675,030 shares and sole dispositive
power with respect to 2,716,036 shares.
(10) Dimensional Fund Advisors LP reported in a Schedule 13G filed with the Securities and Exchange Commission on
February 8, 2019 that as of December 31, 2018 it beneficially owned 1,755,694 shares of Common Stock of Sleep Number
Corporation, had sole power to vote or to direct the vote with respect to 1,627,375 shares and sole dispositive power with
respect to 1,755,694 shares.
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ELECTION OF DIRECTORS
(Proposal 1)
Nomination
Article XIV of our Third Restated Articles of Incorporation provides that the number of
Directors must be at least one but not more than 12 and must be divided into three classes as
nearly equal in number as possible. The exact number of Directors is determined from time-to-
time by the Board of Directors. The term of each class is three years and the term of one class
expires each year in rotation.
Immediately prior to the 2019 Annual Meeting, our Board will consist of 11 members,
four of which will be up for election at the 2019 Annual Meeting. The Board has nominated
Michael J. Harrison, Shelly R. Ibach, Deborah L. Kilpatrick, Ph.D., and Barbara R. Matas
for election to the Board, each for a term of three years expiring at the 2022 Annual Meeting, or
until their successors are elected and qualified. Mr. Harrison, Ms. Ibach, Ms. Kilpatrick and
Ms. Matas have each consented to being named as a nominee in this Proxy Statement and to serve
as a Director if elected. Mr. Harrison has served on our Board since 2011; Ms. Ibach has served
on our Board since 2012; Ms. Kilpatrick has served on our Board since 2018; and Ms. Matas has
served on our Board since 2016. As previously announced, in light of her increasing professional
commitments, Vicki O’Meara will be retiring from the Board following the Annual Meeting. The
Company thanks Ms. O’Meara for her service and dedication during her tenure as a member of
the Board.
Vote Required
The election of each nominee for Director requires the affirmative vote of a majority of
the shares represented and entitled to vote on the election of Directors at the Annual Meeting.
Any broker non-votes on the election of each nominee for Director will be treated as shares not
entitled to vote on that matter, and thus will not be counted in determining whether the Director
has been elected.
Board Recommendation
The Board recommends a vote “For” the election of each of Mr. Harrison, Ms. Ibach,
Ms. Kilpatrick and Ms. Matas. In the absence of other instructions, properly signed and delivered
proxies will be voted “For” the election of each of these nominees.
If prior to the Annual Meeting the Board should learn that any nominee will be unable to
serve for any reason, the proxies that otherwise would have been voted for such nominee will be
voted for such substitute nominee as selected by the Board. Alternatively, the proxies, at the
Board’s discretion, may be voted for such fewer number of nominees as results from the inability
of any such nominee to serve. The Board has no reason to believe that any of the nominees will
be unable to serve.
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Information about the Board’s Nominees and Other Directors
The following table provides information as of the date of this Proxy Statement about each
individual serving as a Director of our company and each individual nominated by the Board to
serve as a Director. Each Director or Nominee has furnished the information included below that
relates to his or her respective age, principal occupation and business experience, as well as the
names of other boards on which he or she currently serves as a Director or has served in the past.
In addition, the table below highlights the relevant experience, qualifications, attributes and skills
that led our Board to conclude that each Director or nominee is qualified to serve as a Director of
our company.
Name and Age of
Nominee and/or Director
Principal Occupation, Business Experience and
Directorships of Other Companies
Director
Since
Nominees for election this year to three-year terms expiring in 2022:
Michael J. Harrison
Age 58
2011
Occupation: Board Director since January 2016, and
previously interim CEO from March 2014 to May 2015, of
OOFOS, Inc., the pioneer in the emerging global category of
recovery footwear for athletes; President & Chief Operating
Officer of Grand Circle Corporation, a leading overseas
travel company serving U.S. travelers age 50+, from August
2016 through January 2017; Board Director of Totes
Isotoner Corporation, a leading global marketer of umbrellas,
gloves, rainwear, slippers and other weather-related
accessories from December 2014 to August 2016;
Previously Chief Brand Officer for The Timberland
Company, a leading brand of outdoor footwear, apparel and
gear from July 2009 through November 2012; Prior to 2009,
Mr. Harrison held various senior leadership roles at
Timberland and Procter & Gamble Co., including positions
with significant responsibility for international marketing,
global operations and business development.
Qualifications: Mr. Harrison brings 30 years of business
acumen to our Board from his senior executive experience in
marketing, product design and development, retailing and
international management with leading consumer brands.
Other Company Boards (privately held):
Current: OOFOS, Inc.
Prior: Totes/Isotoner Corporation
11
Name and Age of
Nominee and/or Director
Principal Occupation, Business Experience and
Directorships of Other Companies
Director
Since
Shelly R. Ibach
Age 59
Occupation: President and Chief Executive Officer of Sleep
Number Corporation since June 2012; Executive Vice
President and Chief Operating Officer from June 2011 to
June 2012; Executive Vice President, Sales & Merchandising
from October 2008 to June 2011; Previously held various
senior executive operations and merchandising roles at
Macy’s, Inc. and the Department Store Division at Target
Corporation for more than 25 years.
2012
Deborah L.
Kilpatrick, Ph.D.
Age 51
Qualifications: Ms. Ibach brings leadership, experience and
perspective as Sleep Number’s President and CEO along
with a dedication to sustainable, long-term growth and
shareholder value. Ms. Ibach brings an intimate knowledge
of our customer, culture, strategy, product, marketing,
operations and competitive environment gained during 12
years in executive management with the company. Ms. Ibach
also brings more than two decades of retail experience with
P&L oversight, brand and product development and
customer-focused leadership experience with prominent
national retailers.
2018
Occupation: Chief Executive Officer of Evidation Health,
Inc., a digital health company, since 2014; Vice President of
Market Development and Chief Commercial Officer of
CardioDx, a genomic diagnostics company from 2006 to
2014 with responsibility for sales, marketing, and
reimbursement from insurers; Held multiple leadership roles
at Guidant Corporation, a medical device company, from
1998 to 2006 (acquired by Boston Scientific), including
Research Fellow, Director of R&D, and Director of New
Ventures in the Vascular Intervention Division; Serves on the
College of Engineering Advisory Boards for Georgia Tech
and the California Polytechnic State University, and is a
Fellow of the American Institute of Medical and Biological
Engineering; Holds multiple patents in medical device
technologies and drug delivery devices; Advises multiple
venture capital funds and privately-held startup companies in
the digital health and health care sectors.
12
Name and Age of
Nominee and/or Director
Principal Occupation, Business Experience and
Directorships of Other Companies
Director
Since
Qualifications: Ms. Kilpatrick brings to our Board
substantial expertise and experience in the development and
commercialization of digital health products, and a track
record of successful product innovation to transform health
care with big data in the genomic and digital era. With her
deep understanding of digital health opportunities and
passion for our sleep innovations, Ms. Kilpatrick’s
appointment to our Board supports our strategy of improving
lives through individualizing sleep experiences and
advancement of our SleepIQ technology platform.
Other Company Boards (privately held):
Current: Evidation Health, Inc.; NextGen Jane, Inc.
Barbara R. Matas
Age 59
Occupation: Former Managing Director and Chairman,
Leveraged Finance, Citigroup Global Markets, Inc. from
2013 to 2016, and co-head from 2006 to 2013; From 1985 to
2006 Ms. Matas held various leadership positions in
leveraged finance and high yield capital markets at Citicorp,
Salomon Brothers and Citigroup; Ms. Matas began her career
as an auditor at Touche Ross & Co.
2016
Qualifications: Ms. Matas brings to our board substantial
expertise in capital structure and financial strategy gained
through more than 30 years of professional experience in
advising boards and management teams on capital markets,
capital structure and risk assessment and management.
Other Public Company Boards:
Current: Apollo Investment Corporation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS YOU VOTE
“FOR” THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE
13
Name and Age of
Nominee and/or Director
Principal Occupation, Business Experience and
Directorships of Other Companies
Director
Since
Directors not standing for election this year whose terms expire in 2020:
Kathleen L. Nedorostek
Age 66
Occupation: Former Global CEO of Nine West Group, a
division of Nine West Holdings, Inc., a leading global
designer, marketer and wholesaler of brands in apparel,
footwear and accessories from April 2014 to September
2014; Group President, Global Footwear and Accessories at
The Jones Group from October 2012 until April 2014;
President of the North American Wholesale and Global
Licensing divisions of Coach Inc. from 2003 to 2012.
2011
Vicki A. O’Meara
Age 61
2016
Qualifications: Ms. Nedorostek provides our Board with
significant experience leading high-end, multi-national
branded consumer products companies with both
manufacturing and retail operations. Her experience includes
strategic planning for global businesses, P&L oversight,
organizational strategy and change management, product
design, global licensing and distribution, brand marketing
and real estate.
Occupation: Executive Chairman and Board Chair,
AdSwerve, Inc., a marketing technology company, since
2018; Former Chief Executive Officer, Analytics Pros, Inc.,
a digital analytics consultancy, from 2014 to 2018;
Executive Vice President of Pitney Bowes, Inc. and President
of Pitney Bowes Service Solutions with responsibility for
global document management, marketing services and e-
commerce units from 2010 to 2013; Previously served for
over 10 years in various senior management positions at
Ryder Systems, Inc., including as head of Ryder’s U.S.
Supply Chain Solutions business from 2005 to 2007;
Ms. O’Meara’s career began as an attorney and Army
Captain, and she served in several senior federal government
positions.
Qualifications: Ms. O’Meara brings to our Board extensive
global leadership and operational experience in a variety of
functional areas relevant to our business and strategic
direction, including supply chain, digital analytics,
marketing, corporate governance, environmental health and
safety and government affairs. Ms. O’Meara also brings
experience from prior service on two public company boards.
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Name and Age of
Nominee and/or Director
Principal Occupation, Business Experience and
Directorships of Other Companies
Director
Since
Michael A. Peel
Age 69
2003
Other Company Boards:
Current: State Farm Mutual Automobile Insurance Company
(privately held mutual company)
Prior: Health Management Associates, Inc. and Laidlaw,
Inc.
Occupation: Currently serves as Senior Advisor to the
leadership advisory firm ghSMART and is Managing Partner
of Peel Global Advisory, LLC; Previously served as a Senior
Officer of Yale University from October 2008 until his
retirement in July 2017, including most recently as Chief
Human Resources and Administration Officer; Prior to
joining Yale, Mr. Peel spent 17 years as a member of the top
management team at General Mills, Inc., a manufacturer and
marketer of consumer food products, including serving as
Executive Vice President of Human Resources & Global
Business Services; Also, Mr. Peel had 14 years of
experience at PepsiCo, Inc., including serving as Chief
Human Resources Officer for two of its largest operating
divisions, PepsiCo Worldwide Foods and Pepsi-Cola
Bottling Group.
Qualifications: Mr. Peel is a widely recognized Human
Resources expert with extensive experience in large,
consumer-oriented and publicly traded companies. He has
extensive international operating and merger/acquisition/joint
venture experience. He provides our Board with senior level
perspective on organizational effectiveness, talent
development, change management, succession planning, and
executive compensation.
Other Public Company Boards:
Current: Pier 1 Imports, Inc.
15
Name and Age of
Nominee and/or Director
Principal Occupation, Business Experience and
Directorships of Other Companies
Director
Since
Jean-Michel Valette
Age 58
1994
Occupation: Chairman of our Board since May 2010;
Independent adviser to branded consumer companies;
Currently serves as Lead Director of The Boston Beer
Company and as a Director of Intertek Group plc; Served as
Chairman of the Board of Directors of Peet’s Coffee and Tea,
Inc. from January 2004 to October 2012; Also served as
non-executive Chairman of the Robert Mondavi Winery from
April 2005 to October 2006 and was its Managing Director
from October 2004 to April 2005; Head of Branded
Consumer Equity Research and Branded Consumer Venture
Capital Investments at Hambrecht & Quist LLC, an
investment banking firm, during the 1980s and 1990s.
Qualifications: Mr. Valette provides our Board with
significant, relevant leadership and a proven track record of
significant long-term shareholder value creation with
multiple successful branded consumer growth companies as
well as valuable perspective in guiding the company on
strategy, financial performance and corporate governance
practices.
Other Public Company Boards:
Current: Lead Director of The Boston Beer Company
Non-Executive Director, Intertek Group plc
Prior: Peet’s Coffee and Tea, Inc., Golden State Vintners
Directors not standing for election this year whose terms expire in 2021:
Daniel I. Alegre
Age 50
Occupation: President of Google Retail, Shopping and
Payments since August, 2017; Held various roles at Google,
Inc. since 2004, including President of Global Partnerships,
as well as President of Asia Pacific and Japan, overseeing all
regional operations, and Vice President of Latin American
and Asia Pacific Business Development; Previously,
Mr. Alegre was Vice President at Bertelsmann, responsible
for business development of its ecommerce division.
2013
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Name and Age of
Nominee and/or Director
Principal Occupation, Business Experience and
Directorships of Other Companies
Director
Since
Qualifications: Mr. Alegre provides our Board with
valuable insight into mobile and technology platforms,
digital brand building and advertising, and e-commerce
deployment and strategy, as well as extensive leadership in
global operations and expansion, partner management and
business development in technology and mass media
industries.
Stephen L. Gulis, Jr.
Age 61
Occupation: Retired Executive Vice President and President
of Global Operations for Wolverine World Wide, Inc.
(WWW), a global marketer of branded footwear, apparel and
accessories, a position he held from October 2007 until July
2008; Executive Vice President, CFO and Treasurer of
WWW from April 1996 until October 2007.
2005
Qualifications: Mr. Gulis provides our Board with extensive
experience as a senior executive of a publicly traded
consumer products company, including as a chief financial
officer and treasurer with responsibility for capital
stewardship and cash management, significant M&A activity
and broad oversight of financial reporting and controls.
Mr. Gulis also brings expertise in risk management,
implementation of enterprise technology platforms, global
operations, human resources and product sourcing and
quality directives.
Other Public Company Boards:
Current: Independent Bank Corporation
Prior: Meritage Hospitality
Brenda J. Lauderback
Age 68
Occupation: Former President of the Retail and Wholesale
Group for the Nine West Group, Inc., a designer and
marketer of women’s footwear and accessories, from May
1995 until January 1998; Previous roles include President of
Wholesale and Manufacturing for US Shoe Corporation and
more than 18 years in senior merchandising roles at the
Department Store Division of Target Corporation.
2004
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Name and Age of
Nominee and/or Director
Principal Occupation, Business Experience and
Directorships of Other Companies
Director
Since
Qualifications: Ms. Lauderback provides our Board
extensive leadership in merchandising, marketing, product
development and design and manufacturing at prominent
national wholesale and retail companies. Her breadth of
experience as a Director on several other publicly traded
company boards also provides our Board with significant
insight into leading practices in executive compensation and
corporate governance. Ms. Lauderback is a National
Association of Corporate Directors (NACD) Board
Leadership Fellow, having completed NACD’s
comprehensive program of study for Directors and corporate
governance professionals. She supplements her skill sets
through ongoing engagement with the Director community,
and access to leading practices. Ms. Lauderback was
selected as one of the top 100 Directors by NACD in 2017.
Other Public Company Boards:
Current: Denny’s Corporation and
Wolverine World Wide, Inc.
Prior: Big Lots, Inc., Louisiana-Pacific Corporation, Irwin
Financial Corporation, Jostens Corporation
Corporate Governance
Information about the Board of Directors and its Committees
The Board of Directors has determined that each of the following Directors who served as
a member of our Board during any part of fiscal 2018 is an “independent Director” as defined by
applicable rules of the Nasdaq Stock Market and the rules and regulations of the Securities and
Exchange Commission (“SEC”):
Daniel I. Alegre
Deborah L. Kilpatrick, Ph.D.
Kathleen L. Nedorostek
Jean-Michel Valette
Stephen L. Gulis, Jr.
Brenda J. Lauderback
Vicki A. O’Meara
Michael J. Harrison
Barbara R. Matas
Michael A. Peel
The Board maintains three standing committees, including an Audit Committee, a
Management Development and Compensation Committee and a Corporate Governance and
Nominating Committee. Each of the committees of the Board has a charter and each of these
charters is included in the investor relations section of the company’s website at
http://www.sleepnumber.com/sn/en/investor-relations. The information contained in or
connected to our website is not incorporated by reference into or considered a part of this Proxy
Statement.
18
The current members of each of the Board committees are identified in the table below.
Director
Audit
Committee
Management
Development and
Compensation
Committee
Corporate
Governance and
Nominating
Committee
Daniel I. Alegre
Stephen L. Gulis, Jr.
Michael J. Harrison
Deborah L. Kilpatrick, Ph.D.
Brenda J. Lauderback
Barbara R. Matas
Kathleen L. Nedorostek
Vicki A. O’Meara
Michael A. Peel
Jean-Michel Valette*
X
X
Chair
X
X
X
Chair
X
X
X
X
Chair
*In his capacity as non-executive Chairman of the Board, Mr. Valette generally attends all
committee meetings.
The Board has determined that each Director serving on a committee meets the
independence and other requirements applicable to such committee prescribed by applicable rules
and regulations of the Nasdaq Stock Market, the SEC and the Internal Revenue Service.
The Board of Directors has further determined that two current members of the Audit
Committee, Stephen L. Gulis, Jr. and Barbara R. Matas, meet the definition of “audit committee
financial expert” under rules and regulations of the SEC and meet the qualifications of “financial
sophistication” under the Marketplace Rules of the Nasdaq Stock Market. These designations
related to our Audit Committee members’ experience and understanding with respect to certain
accounting and auditing matters are disclosure requirements of the SEC and the Nasdaq Stock
Market and do not impose upon any of them any duties, obligations or liabilities that are greater
than those generally imposed on a member of our Audit Committee or of our Board of Directors.
The Board of Directors met in person or by telephone conference five times during 2018.
The Audit Committee met in person or by telephone conference eight times during 2018. The
Management Development and Compensation Committee met in person or by telephone
conference five times during 2018. The Corporate Governance and Nominating Committee met
in person or by telephone conference seven times during 2018. Each of the members of our
Board of Directors serving in 2018 attended 75% or more of all meetings of the Board and
committees on which they served during fiscal 2018.
19
Audit Committee. The Audit Committee is comprised entirely of independent Directors,
currently including Barbara R. Matas (Chair), Stephen L. Gulis, Jr., Deborah L. Kilpatrick, Ph.D. and
Vicki A. O’Meara. The Audit Committee provides assistance to the Board in satisfying its fiduciary
responsibilities relating to accounting, auditing, operating and reporting practices of our company.
The Audit Committee is responsible for providing independent, objective oversight with respect to
our company’s accounting and financial reporting functions, internal and external audit functions,
systems of internal controls regarding financial matters and legal, ethical and regulatory
compliance. The responsibilities and functions of the Audit Committee are further described in the
Audit Committee Report beginning on page 65 of this Proxy Statement.
Management Development and Compensation Committee. The Management
Development and Compensation Committee is comprised entirely of independent Directors,
currently including Brenda J. Lauderback (Chair), Daniel I. Alegre, Michael J. Harrison and
Kathleen L. Nedorostek. The principal function of the Committee is to discharge the
responsibilities of the Board relating to executive compensation and development of current and
future leadership resources.
The responsibilities and functions of the Management Development and Compensation
Committee, as well as its processes and procedures for consideration and determination of executive
and Director compensation, are further described in the Compensation Discussion and Analysis
beginning on page 30 of this Proxy Statement.
Corporate Governance and Nominating Committee. The Corporate Governance and
Nominating Committee is comprised entirely of independent Directors, currently including
Michael A. Peel (Chair), Stephen L. Gulis, Jr., Michael J. Harrison and Kathleen L. Nedorostek.
The primary functions of the Corporate Governance and Nominating Committee are to develop
and recommend to the Board corporate governance principles to govern the Board, its
committees, and our executive officers and team members in the conduct of the business and
affairs of our company; to identify and recommend to the Board individuals qualified to become
members of the Board and its committees; and to develop and oversee the annual Board and
Board committee evaluation process.
Board Leadership Structure
Our Board is currently comprised of 10 independent Directors and one executive Director,
Shelly R. Ibach, who has served as our President and Chief Executive Officer since June 2012.
Since February 2008, the Board has determined to separate the positions of Chairman of the
Board and Chief Executive Officer. Based on its ongoing review of best practices in corporate
governance, and to enable the President and Chief Executive Officer to focus all of her time and
energy in leadership of the day-to-day operations of the company and its growth and profitability
initiatives, the Board continues to believe it is best for the company to separate these positions.
Jean-Michel Valette, an independent Director, has served as Chairman of the Board since May
2010.
20
Consistent with the company’s Corporate Governance Principles, the Board retains the
right to review this determination and to either continue to maintain these positions as separated
positions or to combine the positions, as the Board determines to be in the best interests of the
company at the time. Under the company’s Corporate Governance Principles, during any period
in which the positions of Chairman of the Board and Chief Executive Officer are combined, the
Board would appoint a Lead Director from among the independent members of the Board, who
would have certain Board leadership responsibilities specified in our Corporate Governance
Principles.
Board Role in Risk Oversight
Our Board is responsible for overseeing the company’s policies and practices with respect
to risk assessment and risk management and has delegated to the Audit Committee the
responsibility of assisting the Board in fulfilling this role. Among its duties and processes, the
Audit Committee (a) reviews and discusses with management the company’s policies and
practices with respect to risk assessment and risk management; (b) oversees the company’s
internal audit function and processes; (c) establishes and oversees procedures for receiving and
addressing complaints regarding accounting, internal controls or auditing matters; (d) reviews
legal compliance and other legal matters with the company’s counsel; and (e) reports to the full
Board with respect to matters within its area of responsibility.
The Audit Committee oversees the company’s internal audit function, which is
responsible for undertaking an annual risk assessment process and reporting to the Audit
Committee with respect to this assessment and related risk management strategies. The Audit
Committee reviews and approves, at least annually, the company’s internal audit plan and
receives quarterly reports with respect to the results of internal audits. The leader of the
company’s internal audit function reports directly to the Audit Committee with respect to internal
audit matters, and the Audit Committee has authority to review and approve the appointment,
replacement or dismissal of the leader of this function. The leader of the internal audit function
meets regularly in executive session with the Audit Committee without any other members of the
company’s management team present.
In addition to the Audit Committee’s role, each of the other committees considers risks
within its respective areas of responsibility. We believe our current Board leadership structure
helps ensure proper risk oversight, based on the allocation of duties among committees and the
role of our independent Directors in risk oversight.
Director Nominations Process
The Corporate Governance and Nominating Committee (the “CGNC”) administers the
process for nominating candidates to serve on our Board of Directors. The CGNC recommends
candidates for consideration by the Board as a whole, which is responsible for appointing
candidates to fill any vacancy that may be created between meetings of the shareholders and for
nominating candidates to be considered for election by shareholders at our Annual Meeting.
Consistent with the company’s Corporate Governance Principles, the CGNC periodically
reviews with the Board the appropriate skills and characteristics required of Board members in
the context of the current membership of the Board and the strategic direction of the company.
21
The Board has established selection criteria to be applied by the CGNC and by the full
Board in evaluating candidates for election to the Board. These criteria include general
characteristics, areas of specific expertise and experience, and considerations of diversity. The
general characteristics include:
Independence;
Integrity;
A proven record of accomplishment and sound judgment in areas relevant to our
business;
Belief in and passion for our mission and vision;
The ability to bring strategic and innovative insights to the discussion and challenge
and stimulate management;
Willingness to both speak one’s mind and consider divergent ideas and opinions;
Understanding of, and ability to commit sufficient time to, Board responsibilities and
duties; and
Subject matter expertise.
The specific areas of expertise and experience sought by the CGNC and the Board from
time to time will vary depending on the composition of the Board and the strategic direction of
the company, but will generally include CEO experience, executive level experience with
analogous businesses and industries, and functional expertise relevant to the strategic direction of
the company or the needs of the committees of the Board.
The Director nomination process specifically includes consideration of diversity, such as
diversity of age, gender, race and national origin, educational and professional experience and
differences in viewpoints. The company does not have a formal policy with respect to diversity.
However, the CGNC considers Director candidates in the context of the Board’s overall
composition, including whether the Board has an appropriate combination of professional
experience, skills, knowledge and variety of viewpoints and backgrounds in light of the
company’s current and expected future needs. In addition, the CGNC also believes that it is
desirable for new candidates to contribute to a variety of viewpoints on the Board, which may be
enhanced by a mix of different professional and personal backgrounds and experiences.
Currently, six of our 11 Directors are women.
22
The CGNC reviews these selection criteria and the overall Director nomination process at
least annually in connection with the nomination of Directors for election at the company’s
annual meeting for consistency with best practices in corporate governance and effectiveness in
meeting the needs of the Board from time-to-time.
The CGNC may use a variety of methods for identifying potential nominees for election to
the Board, including consideration of candidates recommended by Directors, officers or
shareholders of the company. The CGNC also has the authority under its charter to engage
professional search firms or other advisors to assist the CGNC in identifying candidates for
election to the Board, or to otherwise assist the CGNC in fulfilling its responsibilities.
Shareholder nominations of candidates for membership on the Board submitted in
accordance with the terms of our Bylaws will be reviewed and evaluated by the CGNC in the
same manner as for any other nominations. Any shareholder who wishes the CGNC to consider a
candidate should submit a written request and related information to our Corporate Secretary.
Under our Bylaws, if a shareholder intends to nominate a person for election to the Board of
Directors at a shareholder meeting, the shareholder is required to give written notice of the
proposed nomination to the Corporate Secretary at least 120 days prior to the first anniversary of
the date that the company first released or mailed its proxy materials to shareholders in
connection with the preceding year’s regular or annual meeting. The shareholder’s notice must
include, for each nominee whom the shareholder proposes to nominate for election as a Director:
(i) the name, age, business address and residence address of the nominee, (ii) the principal
occupation or employment of the nominee, (iii) the class and number of shares of capital stock of
the company that are beneficially owned by the nominee, and (iv) any other information
concerning the nominee that would be required under the rules of the Securities and Exchange
Commission in a proxy statement soliciting proxies for the election of such nominee. The
shareholder’s notice must also include: (i) the name and address of the nominating shareholder, as
they appear on the company’s books, and (ii) the class and number of shares of the company that
are owned beneficially and of record by the shareholder. The shareholder’s notice must also be
accompanied by the proposed nominee’s signed consent to serve as a Director of the company.
Shareholder Engagement
Our Board of Directors and management team maintain a deep commitment to strong
corporate governance. Engagement with, and accountability to, our shareholders are cornerstones
of this commitment. Accordingly, we maintain an active shareholder engagement program that
facilitates channels of communication and aims to foster relationships with our shareholders to
drive sustainable, long-term growth and shareholder value. As part of our engagement program,
members of our management team and the Chairman of the Board of Directors regularly meet
with shareholders, in-person or by phone, to discuss strategy, governance, pay for performance
orientation, and other matters of shareholder interest. Our ongoing shareholder engagement and
commitment to long-term value creation will continue to inform the Board of Director’s
deliberations in 2019 and beyond.
23
Shareholders may communicate with the Board of Directors, its Committees or any
individual member of the Board of Directors by sending a written communication to our
Corporate Secretary at 1001 Third Avenue South, Minneapolis, MN 55404. The Corporate
Secretary will promptly forward any communication so received to the Board, any Committee of
the Board or any individual Board member specifically addressed in the communication. In
addition, if any shareholder or other person has a concern regarding any accounting, internal
control or auditing matter, the matter may be brought to the attention of the Audit Committee,
confidentially and anonymously, by calling 1-800-835-5870, inserting the I.D. Code of AUDIT
(28348) and following the prompts from the recorded message. The company reserves the right
to revise or make exceptions to this policy in the event that the process is abused, becomes
unworkable or otherwise does not efficiently serve the purposes of the policy.
Policy Regarding Director Attendance at Annual Meeting
Our policy is to require attendance by all of our Directors at our Annual Meeting of
Shareholders, except for absences due to causes beyond the reasonable control of the Director.
All of the Directors then serving on our Board were in attendance at our 2018 Annual Meeting of
Shareholders.
Corporate Governance Principles
Our Board of Directors has adopted Corporate Governance Principles that were originally
developed and recommended by the CGNC. These Corporate Governance Principles are
available in the investor relations section of the company’s website at
http://www.sleepnumber.com/sn/en/investor-relations. The information contained in or connected
to our website is not incorporated by reference into or considered a part of this Proxy Statement.
Among these Corporate Governance Principles are the following:
Independence. A substantial majority of the members of the Board should be
independent, non-employee Directors. It is the responsibility of the Board to establish the
standards for independence, and the Board has followed the independence standards for
companies listed on The Nasdaq Stock Market. All of our Directors are independent except our
Chief Executive Officer, Shelly R. Ibach. All Committees of the Board are composed entirely of
independent Directors.
Chairman and Chief Executive Officer Positions. At the present time, the Board believes
that it is in the best interests of the company and its shareholders for the positions of Chairman of
the Board and Chief Executive Officer to be separated, and for the position of Chairman of the
Board to be held by a non-executive, independent member of the Board. The Board retains the
right to review this determination and to either continue to maintain these positions as separated
positions or to combine the positions, as the Board determines to be in the best interests of the
company at the time. During any period in which the positions of Chairman of the Board and
Chief Executive Officer are combined, the Board will appoint a Lead Director from among the
independent members of the Board.
24
Classified Board Structure. Our Third Restated Articles of Incorporation provide for a
classified Board serving staggered terms of three years each. The Board will periodically review
its classified Board structure in the context of other provisions and measures applicable to
unsolicited takeover proposals with the objective of positioning the Board and the company to
maximize the long-term value of our company for all shareholders.
Majority Voting Standard with Resignation Policy for Board Elections. Our Third
Restated Articles of Incorporation provide for a majority voting standard in the case of
uncontested elections of Directors and a plurality voting standard in the case of contested
elections of Directors in order to reduce the risk of a “failed election” in a contested Director
election. If a nominee for Director who is an incumbent Director is not elected at a meeting of
shareholders and no successor to the incumbent Director is elected at the meeting of shareholders,
the incumbent Director shall promptly offer to tender his or her resignation to the Board. The
CGNC shall make a recommendation to the Board on whether to accept or reject the offer, or
whether other action should be taken. The Board shall act on whether to accept the Director’s
offer, taking into account the CGNC’s recommendation, and publicly disclose (by press release, a
filing with the SEC or other broadly disseminated means of communication) its decision and the
supporting rationale within 90 days after the date of the certification of the election results. The
CGNC, in making its recommendation, and the Board, in making its decision, may each consider
any factors or other recommendations that it considers relevant and appropriate. The incumbent
Director who offers to tender his or her resignation shall not participate in the Board’s decision.
If such incumbent Director’s offer to tender his or her resignation is not accepted by the Board,
such Director shall continue to serve until his or her successor is duly elected, or his or her earlier
death, resignation, retirement, disqualification or removal.
Board Diversity. The company does not have a formal policy with respect to diversity.
However, the CGNC considers Director candidates in the context of the Board’s overall
composition, including whether the Board has an appropriate combination of professional
experience, skills, knowledge and variety of viewpoints and backgrounds in light of the
company’s current and expected future needs. In addition, the CGNC believes that it is desirable
for new candidates to contribute to a variety of viewpoints on the Board, which may be enhanced
by a mix of different professional and personal backgrounds and experiences.
Approach to Term and Age Limits. We believe that specific or fixed term or age limits
could cause the company to arbitrarily lose important contributors to the Board. It is the sense of
the Board, however, that a Director who reaches the age of 72 should promptly tender his or her
resignation to the Chair of the CGNC, and the Board should have an opportunity to review the
qualifications of the Director for continued Board membership. The CGNC will review the
qualifications of the Director for continued Board membership annually and make a
recommendation to the Board each year, which will make a final determination with respect to the
tendered resignation.
25
Change in Responsibilities. Directors who retire or who have a change in their principal
employment or affiliation after joining the Board should not necessarily leave the Board. There
should, however, be an opportunity for the Board to review the qualifications of the Director for
continued Board membership. Any Director who undergoes a material change in principal
employment or affiliation will promptly tender his or her resignation to the Chair of the CGNC.
The CGNC will review the qualifications of the Director for continued Board membership and
make a recommendation to the Board, which will make a final determination with respect to the
tendered resignation.
Other Board or Audit Committee Service. The Board recognizes that service on other
boards can in some circumstances limit the time that Directors may have to devote to fulfilling
their responsibilities to the company. It is the Board’s guideline that no Director shall serve on
more than a total of six public company boards (including the Sleep Number Board), and that no
member of the company’s Audit Committee shall serve on more than a total of three public
company audit committees (including the Sleep Number Audit Committee). If any Director
exceeds or proposes to exceed these guidelines, the Director is required to promptly notify the
Chair of the CGNC and the committee will review the facts and circumstances and determine
whether such service would interfere with the Director’s ability to devote sufficient time to
fulfilling the Director’s responsibilities to the company. Currently, none of the Directors serve on
more than three public company boards, including the Sleep Number Board.
Chief Executive Officer Service on Other Boards. The Chief Executive Officer may not
serve on more than two public company boards other than the Sleep Number Board of Directors.
Board and Committee Evaluations. The Board believes that the company’s governance
and the Board’s effectiveness can be continually improved through evaluation of both the Board
as a whole and its committees. The CGNC is responsible for annually evaluating effectiveness in
these areas and reviewing the results and recommendations for improvement with the full Board.
Board Executive Sessions. Executive sessions or meetings of independent Directors
without management present will be held at least twice each year. At least one session will be to
review the performance criteria applicable to the Chief Executive Officer and other executive
officers, the performance of the Chief Executive Officer against such criteria, and the
compensation of the Chief Executive Officer and other executive officers. Additional executive
sessions or meetings of independent Directors may be held from time-to-time as required. The
Board’s practice has been to meet in executive session for a portion of each regularly scheduled
meeting of the Board. Any member of the Board may request at any time an executive session
without the presence of management. Executive sessions or meetings with the CEO shall be held
from time-to-time for a general discussion of relevant topics.
Paid Consulting Arrangements. The Board believes that the company should not enter
into paid consulting arrangements with independent Directors.
26
Board Compensation. Board compensation should encourage alignment with
shareholders’ interests and should be at a level equitable to comparable companies. The
Management Development and Compensation Committee is responsible for periodic assessments
to assure these standards are being met.
Share Ownership Guidelines for Executive Officers and Directors. The Board has
established the stock ownership guidelines for executive officers and Directors as further
described in the Compensation Discussion and Analysis beginning on page 30 of this Proxy
Statement and as summarized below.
Executive Officer Ownership Guidelines. The Chief Executive Officer is expected to
achieve and maintain stock ownership equal to five times the Chief Executive
Officer’s base salary and each of the other executive officers is expected to achieve
and maintain stock ownership equal to three times the executive officer’s base salary.
The executive officers are required to retain at least 50% of net shares after taxes from
any grant until such time as the guideline is met.
Board Ownership Guidelines. Within five years of joining the company’s Board of
Directors, each Director is expected to achieve and maintain stock ownership equal to
five times the Director’s annual cash retainer. Any Director who has not achieved the
foregoing ownership objective by the required time period will not be permitted to sell
any shares except to the extent required to pay the exercise price, transaction costs and
taxes applicable to the exercise of stock options or the vesting of restricted shares.
Exceptions to these restrictions on sale of shares may be granted by the Board in its
sole discretion for good cause shown by any Director.
Prohibition of Hedging or Pledging of Shares. Under our policy with respect to trading in
the company’s securities, Directors, officers and other team members whose duties regularly
bring them into contact with confidential or proprietary information (“insiders”) are prohibited
from engaging in any form of hedging or monetization transactions involving the company’s
securities. In addition, insiders are prohibited from engaging in short sales of the company’s
securities and from trading in any form of publicly traded options, puts, calls or other derivatives
of the company’s securities. Insiders are also prohibited from engaging in any form of pledging
of the company’s securities, including (i) purchasing company securities on margin; (ii) holding
company securities in any account which has a margin debt balance; (iii) borrowing against any
account in which company securities are held; or (iv) pledging company securities as collateral
for a loan.
Conflicts of Interest. Directors are expected to avoid any action, position or interest which
conflicts with an interest of the company, or that gives the appearance of a conflict. If any
member of the Board becomes aware of any such conflicting or potentially conflicting interest
involving any member of the Board, the Director should immediately bring such information to
the attention of the Chairman of the Board, the Chief Executive Officer and the General Counsel
of the company.
27
Performance Goals and Evaluation. The Management Development and Compensation
Committee is responsible for establishing the procedures for setting annual and long-term
performance goals for the Chief Executive Officer and for the evaluation by the full Board of his
or her performance against such goals. The Committee meets at least annually with the Chief
Executive Officer to receive his or her recommendations concerning such goals. Both the annual
goals and the annual performance evaluation of the Chief Executive Officer are reviewed and
discussed by the independent Directors at a meeting or executive session of that group. The
Committee is also responsible for setting annual and long-term performance goals and
compensation for the executive officers whom report directly to the Chief Executive Officer.
Compensation Philosophy. The Board supports and, through the Management
Development and Compensation Committee, oversees team member compensation programs that
are closely linked to business performance and emphasize equity ownership.
Senior Management Depth and Development. The Chief Executive Officer reports to the
Board, at least annually, on senior management depth and development, including a discussion of
assessments, leadership development plans and other relevant factors.
Provisions Applicable to Unsolicited Takeover Attempts or Proposals. The Board will
periodically review (not less often than every three years) the company’s Third Restated Articles
of Incorporation and Bylaws and various provisions that are designed to maximize shareholder
value in the event of an unsolicited takeover attempt or proposal. Such review includes
consideration of matters such as the company’s state of incorporation, whether the company
should opt in or out of applicable control share acquisition or business combination statutes, and
provisions such as the company’s classified Board structure. The objective of this review is to
maintain a proper balance of provisions that will not deter bona fide proposals from coming
before the Board, and that will position the Board and the company to maximize the long-term
value of our company for all shareholders.
Shareholder Approval of Equity-Based Compensation Plans. Shareholder approval will
be sought for all equity-based compensation plans.
Social Impact
Our mission is to improve lives by individualizing sleep experiences. Every day, we
educate consumers on the importance of sleep and its connection to their overall wellness. We
inspire them to make it a priority in their lives. In 2018, we announced our commitment to help
over one million young people achieve life-changing sleep through our products and sleep
expertise. We are partnering with leading national organizations focused on youth health and
wellness initiatives to achieve their commitment, including GENYOUth, Alliance for a Healthier
Generation and Good360. We believe excellent sleep is essential to a healthier and happier
society, strengthening our connections with one another, and expanding the frontier of what’s
possible. We strive to conduct our business in an ethical and socially responsible manner. In
addition to our Code of Business of Conduct detailed below, we maintain a Code of Conduct for
Business Partners that addresses labor and human rights, health and safety, environmental issues,
28
ethics, and compliance with related laws, rules and regulations. We also maintain Equal
Employment Opportunity standards to foster a culture of diversity, inclusion and respect.
Code of Conduct
We have developed and circulated to all of our team members a Code of Business
Conduct addressing legal and ethical issues that may be encountered by our team members in the
conduct of our business. Among other things, the Code of Business Conduct requires that our
team members comply with applicable laws, engage in ethical and safe conduct in our work
environment, avoid conflicts of interests, conduct our business with integrity and high ethical
standards, and safeguard our company’s assets. A copy of the Code of Business Conduct is
included in the investor relations section of our website at
http://www.sleepnumber.com/sn/en/investor-relations. We intend to disclose any amendments to
and any waivers from a provision of our Code of Business Conduct on our website. The
information contained in or connected to our website is not incorporated by reference into or
considered a part of this Proxy Statement.
Team members are required to report any conduct that they believe in good faith violates
our Code of Business Conduct. The Code of Business Conduct also sets forth procedures under
which team members or others may report through our management team and, ultimately, directly
to our Audit Committee (confidentially and anonymously, if so desired) any questions or
concerns regarding accounting, internal accounting controls or auditing matters.
All of our team members are required to periodically certify their commitment to abide by
our Code of Business Conduct. We regularly monitor compliance with the Code of Business
Conduct and report to our Audit Committee with respect to our findings. We also provide
training in key areas covered by the Code of Business Conduct to help our team members to
comply with their obligations.
Related Party Transactions Policy
The Board of Directors has adopted a written policy intended to ensure the proper
approval and reporting of transactions between the company and any of its Directors, nominees
for Director, executive officers or significant shareholders or entities or persons related to them
that would be required to be disclosed by the company pursuant to Item 404 or Regulation S-K of
the Federal securities laws. Under this policy, any proposed or existing related party transaction
is subject to the approval or ratification of the Corporate Governance and Nominating Committee.
A copy of the Related Party Transactions Policy can be accessed through our Investor Relations
website at http://www.sleepnumber.com/sn/en/investor-relations. The information contained in or
connected to our website is not incorporated by reference into or considered a part of this Proxy
Statement. There were no related party transactions during the year ended December 29, 2018
and there are none currently contemplated.
29
COMPENSATION COMMITTEE REPORT
The Management Development and Compensation Committee of the Board of Directors (the
“Committee”), consisting entirely of independent Directors, has reviewed and discussed the
following Compensation Discussion and Analysis with management, and based on this review
and discussion, the Committee recommended to the Board that the Compensation Discussion and
Analysis be included in this Proxy Statement.
The Management Development and Compensation Committee
Brenda J. Lauderback, Chair
Daniel I. Alegre
Michael J. Harrison
Kathleen L. Nedorostek
COMPENSATION DISCUSSION AND ANALYSIS
Table of Contents:
Compensation Philosophy and Approach
Progress as a Company
2018 Performance and Accomplishments
Compensation Program Overview
Pay and Performance Alignment
Compensation Framework and Actions
Base Salary
Annual Incentive Plan (AIP)
Long-Term Incentive Plan (LTI)
Other Elements of Compensation
Compensation Governance, Practices, and
Policies
Page
31
32
33
35
36
37
37
37
40
45
46
30
Introduction
The Compensation Discussion and Analysis (CD&A) describes our executive compensation
program, including the objectives and elements of compensation as well as determinations made
by the Committee regarding our named executive officers (NEOs).
For 2018, the following five current executive officers were determined to be NEOs as a result of
their position during the year as chief executive officer (CEO), or chief financial officer (CFO), or
their total compensation making them among the three other highest paid executives for the fiscal
year.
Name
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Andrea L. Bloomquist
Kevin K. Brown
Position Title
President and Chief Executive Officer (CEO)
Senior Vice President and Chief Financial Officer (CFO)
Executive Vice President and Chief Sales and Services Officer
Senior Vice President and Chief Product Officer
Senior Vice President and Chief Marketing Officer
Compensation Philosophy and Approach
The executive compensation program is designed to support our long-term strategic orientation.
It is competitive, heavily weighted toward performance-based incentive programs, and
encourages appropriate risk taking and investing in the business as we execute our consumer
innovation strategy. Our incentive programs reward our executive officers for superior
performance and strengthening competitive advantages to deliver sustainable, long-term
profitable growth. The incentive opportunities are tied to multiple financial metrics that support
our business strategy and are aligned with shareholder interests.
Our executive compensation program is designed to:
Motivate and retain a talented management team to achieve superior company
performance that is sustainable over time
Provide a market competitive total compensation opportunity that is predominantly
performance based and at risk
Reward executives for achieving financial performance goals and creating shareholder
value
Reinforce our pay for performance culture that requires above-median performance for
above-median compensation
Shareholders have expressed their support of our executive compensation program and its
alignment with company performance. Over the last six years (2013-2018), an average of 96% of
votes cast by shareholders were in support of our annual proposal to approve, on an advisory
basis, the compensation of the company’s NEOs including 93% of votes cast at our 2018 Annual
Meeting. We have maintained this strong support from our shareholders over time. We have
regular outreach discussions with shareholders to benefit from their interests. We regularly review
31
and update our executive compensation program to ensure alignment with our objectives. We
also adhere to many governance best practices and policies.
Progress as a Company
The U.S. retail bedding market is approximately $16 billion, fragmented, and competitive. Sleep
Number is breaking through the commodity-driven “sea of sameness” by executing our consumer
innovation strategy and delivering highly differentiated innovations. Consumers are engaged
with our purpose-driven brand and are responding strongly to our new revolutionary 360 smart
beds. The execution of our strategy has broadened our relevance, as individuals increasingly
understand the importance of quality sleep to their overall well-being. As the sleep innovation
leader, we are taking market share and realizing the benefits of our advantaged products and
integrated marketing and retail initiatives.
In 2012, we embarked on a transformational, consumer innovation strategy as the path to improve
lives and deliver sustainable, profitable long-term growth. Executing this strategy has required
significant capital investments, substantial buildout of vital performance capabilities, and time to
execute these plans. Since 2012, we have taken numerous transformative actions including:
Prioritized innovation by increasing nearly three-fold our R&D spend as a percent of net
sales
Invested approximately a half billion dollars of capital, including two strategic
acquisitions with critical intellectual property setting the stage for innovation leadership
Strengthened our direct-to-consumer (DTC) model with exclusive distribution and
optimized real estate operating in all 50 states
Elevated our customers’ in-store experience with award-winning design and technology
enhancements and approximately 50% larger average store size in more favorable
locations, shifting the majority of our stores to non-mall locations
Simplified and enhanced online experience resulting in an integrated, omni-channel retail
experience
Developed superior marketing capabilities to compete and win in an industry of nearly
200 brands (versus approximately 10 in 2012) and embraced important partnerships such
as the National Football League (NFL) to raise our brand profile and expand our consumer
reach
Built and launched two vital technology platforms with our vertically integrated ERP
system and the game-changing SleepIQ technology that automatically adjusts comfort for
improved sleep quality
Transitioned more than 20 suppliers to support our innovative new products and to
advance our margin enhancing initiatives.
In summary, we operate with a compensation program designed to reward achievement of
superior results and creation of long-term shareholder value.
32
2018 Performance and Accomplishments
We delivered superior performance in 2018 with net sales and earnings per share (EPS) exceeding
street consensus and the midpoint of our external guidance. With additional transition costs and
investments, we fell short of our aggressive internal business plan on adjusted EBITDA and net
operating profit (NOP) for the year. Consumers have responded strongly to our innovations,
driving accelerated sales growth in the back-half of the year. Highlights of our full year financial
results include:
Record net sales of more than $1.5 billion, up 6%,
with positive comp sales for the fifth consecutive year
EPS growth of 24% to $1.92
Net operating profit after taxes (NOP) of $92.4 million
(+1%) and adjusted EBITDA of $165.6 million (-2%),
while absorbing approximately $16 million of product
transition impacts
Operating cash flow of $132 million with $46 million
in capital expenditures and $279 million in share
repurchases
Return on invested capital (ROIC) of 16%, up 170
basis points and an 80% premium to our cost of capital
we employ
Performance metrics in
our compensation
program:
Annual incentive plan:
Adjusted EBITDA
Long-term incentive plan:
Net sales growth
NOP growth
ROIC
For additional information on our non-GAAP financial measures, such as adjusted EBTIDA and
ROIC, see “Non-GAAP Data Reconciliations” in our Annual Report on Form 10-K filed on
February 26, 2019.
In addition to these financial results, consumers again recognized Sleep Number with a J.D.
Power Award for #1 in Customer Satisfaction with Mattresses and #1 in the top six categories of
support, durability, comfort, variety of features, value and warranty. We took market share in
2018 as consumers choose the sleep benefits of our 360® smart beds, reaching more than 410
million sleep sessions for the year. While completing our transition to 360 smart beds, we
continued to evolve our outbound logistics network and execute continuous improvement
initiatives across the business.
33
We delivered a total shareholder return (TSR) for three and five years that was in the top quartile
of our peer companies (as described on page 49) when measured through the end of our fiscal
year 2018. Our one, three, and five-year TSR are in the top quartile when the measurement
period ends on March 1, 2019 to include the market reaction to our fourth quarter earnings release
issued on February 13, 2019.
5-YEAR TSR
(12/29/2013 – 12/29/2018)
3-YEAR TSR
(1/3/2016 – 12/29/2018)
1-YEAR TSR
(12/31/2017 – 12/29/2018)
TSR results when the measurement period ends on March 1, 2019:
5-YEAR TSR
(3/2/2014 – 3/1/2019)
3-YEAR TSR
(3/2/2016 – 3/1/2019)
1-YEAR TSR
(3/2/2018 – 3/1/2019)
= Sleep Number
= S&P 400 Specialty Stores Index
= Peer Companies
= Sleep Number
= S&P 400 Specialty Stores Index
= Peer Companies
Notes: TSR refers to the percent change in the value of a shareholder’s investment in the company over the
measurement period as determined by change in share price plus the value of any dividends paid. Peer companies are
described on page 49.
We are delivering life‐changing value to our customers, resulting in superior shareholder value
creation.
34
Compensation Program Overview
Our pay for performance compensation program has three main components that make up the
total direct compensation opportunity for our executive officers, as summarized in the table
below. With the effectiveness of the program, there were no changes to the design of these
elements of our compensation program for 2018.
Element
Form
Metrics
Performance
Period
Description
Base
Salary
Annual
Incentive
Plan
(AIP)
Long-
Term
Incentive
Plan
(LTI)
Cash
n/a
n/a
Cash
Adjusted EBITDA
(100% weighting)
One year
Performance
Restricted
Stock Units
(Performance RSUs)
(75% of LTI Grant
Value)
Net Sales Growth
(50% Weighting)
NOP Growth
(50% Weighting)
ROIC Modifier
Share Price Growth
Three-year
vesting and
performance
period
Fixed pay component, reviewed annually
and eligible for merit considering
individual performance and positioning
vs. external benchmarks
Target annual incentive opportunity
represents a percent of base salary.
Actual payout can range from 0 to
250% of target based on adjusted
EBITDA performance for the year
Annual equity grant opportunity. Payout
can range from 0 to 200% of target
RSUs granted based on net sales and NOP
annual growth over the three-year
performance period, subject to a potential
ROIC performance modifier. Value is
tied to share price
Non-Qualified Stock
Options (NQSOs)
(25% of LTI Grant
Value)
Share Price Growth
Three-year
vesting period and
ten-year term
Annual equity grant opportunity.
Options only have value if future share
price is higher than share price at time
of grant
By design, our executive compensation mix is heavily weighted toward performance-based
incentive programs that only have value if company performance meets or exceeds pre-
determined financial goals, or if shareholder value increases. As highlighted in the charts below,
over 80% of our CEO’s target total direct compensation opportunity is performance-based and
fully at-risk; for our other NEOs, this percentage is over 60%.
CEO
Other NEOs
Base
LTI
AIP
LTI
Base
Our AIP and LTI are
performance-based
incentive programs that
are tied to company
performance metrics
aligned with shareholder
interests
AIP: adjusted EBITDA
LTI: net sales, NOP,
ROIC and share price
AIP
35
Pay and Performance Alignment
The letter to shareholders from our CEO in this Proxy Statement and the section “2018
Performance and Accomplishments” provide a full description of our performance for the year.
The following is a summary of our company performance that determined the actual payouts
earned for our 2018 AIP and 2016 Performance RSUs. The performance and payouts for these
incentive programs are described in more detail later in this CD&A.
Element
Performance Achieved
Payout
2018 AIP
(-2.1% vs. 2017)
Adjusted EBITDA for 2018 was $165.6 million
This was 90% of the AIP goal for target payout
53.5% of target payout
(Compared to a payout of 121%
of target for 2017)
2016
Performance
RSUs
(performance
period of fiscal
years 2016 to
2018)
Annual revenue growth was above threshold in all
three years at 8.0%, 10.2%, and 6.0%
Annual NOP growth was above target for 2017 at
19.9%. Our below-threshold growth for 2016 and
2018 was primarily due to significant investments in
our business that were essential to our long-term
strategy
Average ROIC premium vs. weighted average cost
of capital (WACC) was 73%, well in excess of
threshold
Total shareholder return (TSR) was 50% for the
performance period
89.3% of target payout
(112% of target on net sales and
66% of target on NOP)
(Compared to a payout of 86.2%
of target for 2015 Performance
RSUs)
ROIC negative modifier
threshold was exceeded
Share price increased from
$21.41 to $32.13 during the
three-year performance period
Pay earned for 2018 demonstrates that when the company falls short of its internal goals, payouts
are reduced below target. The following chart illustrates the alignment between our incentive
payouts and shareholder outcomes for the three-year period from 2016 to 2018.
)
D
E
T
S
E
V
N
I
0
0
1
$
(
R
S
T
D
E
X
E
D
N
I
$200
$175
$150
$125
$100
$75
$50
$25
$0
2016
2017
2018
SNBR INDEXED TSR
2016 AIP
Performance: 91% of goal
Payout: 43.7% of target
2017 AIP
Performance: 107% of goal
Payout: 121.0% of target
2018 AIP
Performance: 90% of goal
Payout: 53.5% of target
2016 Performance RSUs
Net sales growth = 112% of target and NOP growth = 66% of target
Payout: 89.3% of target
36
Compensation Framework and Actions
Each March, the Committee considers both shareholder feedback and market data provided by its
independent consultant when setting the base pay and target incentive opportunities for our
executive officers. The Committee generally seeks to align the target direct compensation
opportunity with the median of the market (our approach to benchmarking is described in more
detail on page 49).
Given the significant weight the executive compensation program places on at-risk and
performance-based incentive opportunities, the compensation realized by our executive
officers will vary significantly depending on company performance against pre-determined
goals and changes in shareholder value—an important design objective of our executive
compensation program.
Base Salary
We set base salaries for our executive officers to be competitive and to allow us to attract and
retain top executive talent. Base salaries are the smallest component of our target 2018 pay mix,
comprising 19% of the CEO’s target total direct compensation and 37% on average for our other
NEOs.
Our Committee reviews base salaries annually, considering market data and both individual and
company performance when making base pay decisions. At its meeting on March 8, 2018, the
Committee approved the base salary adjustments for 2018 shown in the following table. Ms.
Ibach and Mr. Callen each received a combination of a merit increase based on performance and a
market adjustment since their respective salaries were both at least 10% below the market median
based on benchmarking data provided by the Committee’s independent compensation consultant.
Other NEOs each received merit increases that considered market position and their performance.
Name
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Andrea L. Bloomquist
Kevin K. Brown
Base Salary at
March 26, 2017
(Annualized)
$850,000
$435,882
$459,648
$419,796
$410,568
Base Salary at
March 25, 2018
(Annualized)
$950,000
$483,828
$482,630
$432,390
$426,991
Note: The base salary adjustments approved by the Committee in March 2018 were effective with
the pay period beginning March 25, 2018.
Annual Incentive Plan (AIP)
Performance Metric. Our AIP provides our executive officers with an annual incentive
opportunity contingent upon our adjusted EBITDA performance. Adjusted EBITDA is a useful
indicator of our annual financial performance and our ability to generate cash flow from operating
activities, an important source of our shareholder value creation. We define adjusted EBITDA as
37
net income plus: income tax expense, interest expense, depreciation and amortization, stock-
based compensation expense and asset impairments (as detailed in our quarterly and annual
financial filings). For additional information on adjusted EBTIDA, see “Non-GAAP Data
Reconciliations” in our Annual Report on Form 10-K filed on February 26, 2019.
Design Overview. The design of our AIP has two main components that determine the amount
of the payout earned by our NEOs for company performance. First is the executive officer’s
target incentive opportunity, which is set each year by the Committee considering market data and
their position within the company. The other component is the leverage curve with performance
goals for adjusted EBITDA that determine the percent of the target payout earned for the year. It
is the combination of these two components that results in the final AIP payout for our NEOs.
AIP Target
Incentive
Opportunity
% of Target Payout
(earned for adjusted EBITDA
performance vs. goals)
AIP Payout
for 2018
Our AIP includes an opportunity to receive a progress payment if a first half performance goal for
adjusted EBITDA is achieved or exceeded. The progress payment is equal to half of the AIP
target incentive for the first half of the year. If the progress payment is earned and paid out in
July of the fiscal year, it is subtracted from the annual payout earned and paid out following the
end of the fiscal year in February. By having this opportunity for a progress payment in our AIP,
it reinforces the importance of starting out the year with strong first half performance.
Individual Target Incentive. Each executive officer has a target incentive that is expressed as a
percent of the actual salary they receive for the fiscal year. The Committee reviews these targets
annually to ensure that they are aligned with the median target incentives and total cash
opportunities of our peers and the market (our peer group and approach to benchmarking is
described on page 49). The Committee approved the following target annual incentives for the
named executive officers for 2018. The Committee increased the target incentive for Ms. Ibach
from 115% to 120% of salary effective March 25, 2018 to more closely align with the market
median based on benchmarking data provided by the Committee’s independent compensation
consultant.
Name
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Andrea L. Bloomquist
Kevin K. Brown
AIP Target
Incentive for 2018
(% of salary received)
115%/120% *
55%
60%
55%
55%
* For Ms. Ibach, her target AIP for 2018 is prorated between the target incentive at the start of
the year of 115% and the new target incentive of 120% (effective March 25, 2018).
38
2018 Performance Goals. At its meeting on January 18, 2018, the Committee approved the
following performance goals and range of payout opportunity for the 2018 AIP. These goals and
payout opportunities were set to provide a strong motivation for achievement of stretch
performance objectives and a reasonable sharing rate of incremental adjusted EBITDA. The 2018
goal for target payout was set at adjusted EBITDA of $183.4 million, an 8% increase over 2017
actual of $169.1 million. When this goal was set, it represented top quartile performance
compared to the three-year historical growth rate in EBITDA of our peer companies. The payout
levels and performance goals for threshold and maximum were set for 2018 consistent with the
AIP methodology for 2017. This approach ensures that there is an appropriate sharing rate for
how the AIP payout cost changes with incremental adjusted EBITDA.
AIP Payout
(% of Target)
Threshold
Target
Maximum
20%
100%
250%
Annual
Adjusted
EBITDA Goals
(in millions)
$154.4
$183.4
$235.5
% Change
vs. 2017
Actual
-9%
+8%
+39%
For the progress payment opportunity, the Committee approved a first half goal for 2018 of $81.8
million in adjusted EBITDA. The first half goal for 2018 represented our first half operating plan
aligned with the annual AIP goal of $183.4 million.
2018 Performance. Although 2018 net sales were up 6% and we achieved our fifth straight year
of positive comp sales, we fell short of our internal adjusted EBITDA goal for 2018. Adjusted
EBITDA was $165.6 million for 2018, which was 90% of the AIP goal for target payout. This
represented a 2.1% decline over the prior year driven in part by approximately $16 million of
profit impacts to complete the replacement of our mattress and adjustable base product lines with
the 360 smart bed in 2018. For this level of 2018 adjusted EBITDA, we earned an AIP payout of
53.5% of target. The Committee approved this payout, as it is reflective of our pay for
performance alignment, while acknowledging the significant business improvements
accomplished to drive accelerated sales and profit growth in the back half of 2018.
Actual
AIP Payout
(% of Target)
53.5%
Adjusted
EBITDA
$165.6 M
% Change vs.
2017 Actual
-2.1%
Our first half adjusted EBITDA was $66.8 million, below our goal of $81.8 million in order to
earn a progress payment for the 2018 AIP. As a result, no progress payment was made in July
2018.
39
2018 Payout. The following table shows the actual AIP payout earned for 2018 based on the
target incentive opportunity for each NEO and approved payout of 53.5% of target. There was
no progress payment made for first half of 2018, so the full AIP payout amounts shown below
were paid out in February 2019.
Name
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Andrea L. Bloomquist
Kevin K. Brown
2018 AIP
Payout
$589,837
$139,111
$153,222
$126,376
$124,527
% Change in
AIP Payout
(2018 vs. 2017)
-48%
-51%
-53%
-54%
-54%
Long-Term Incentive Plan (LTI)
Design Overview. LTI is the largest component of the total direct compensation opportunity for
our executive officers and one of the most critical. It provides a reward opportunity that is
directly aligned with the long-term interest of our shareholders. As an incentive, there is only
payout value if we achieve certain long-term company performance goals or, for stock options,
positive stock price appreciation. The grants have multi-year vesting requirements which also
assist in the retention of our executive team; considered especially important to executing a long-
term oriented innovation strategy.
The design of our LTI includes two types of annual equity grants: Performance RSUs and Stock
Options. For 2018, our executive officers received an annual total LTI grant value that was split
75% in Performance RSUs and 25% in Stock Options (same mix as the 2017 LTI grants). This
combination appropriately rewards our executive officers for achieving long-term profitable
growth and the creation of shareholder value.
Total LTI
Grant
Value
75%
25%
Performance RSUs
(Target Grant Value)
Stock Options
(Grant Value)
These LTI grants only have payout
value if company performance goals
are achieved for RSUs or
shareholder value is created for stock
options
As a condition of accepting any LTI grant, our executive officers agree to reasonable restrictions
on their activities during and for a reasonable period of time after their respective termination of
employment, including, but not limited to, the assignment of inventions, non-competition, non-
solicitation, confidentiality, and an agreement to arbitrate disputes.
40
2018 Stock Option Grants. Stock options vest in three equal annual installments on each of the
anniversaries following the grant date. Their term expires 10 years after the grant date, provided
they have not been exercised or cancelled earlier due to certain events, and their exercise price is
equal to the closing trading price of the company’s common stock on the grant date.
The number of stock options granted in 2018 was determined by dividing the target option grant
value (25% of the executive officer’s total LTI grant value) by the calculated grant date fair value
per stock option. In this calculation of the grant date option value, we derive a Black-Scholes
value under generally accepted accounting principles, using a 20-day average stock price leading
up to grant date in order to mitigate short-term stock price volatility. See the footnotes to the
“Summary Compensation Table” and “Grants of Plan-Based Awards” for a description of how
grant date fair value is determined for purposes of the disclosure in these tables.
The grant date for stock options granted in 2018 was March 21, 2018, the 20-day average share
price was $35.80, estimated Black-Scholes value per option was 41% of share price, and the
option exercise price was $34.35.
2018 Performance RSU Grants. Performance RSUs become vested on the third anniversary of
the grant date, and a percent of target is earned and paid out based on company performance
against annual growth goals over a three-year performance period. The payout under the
Performance RSUs may be reduced based on an ROIC modifier. The performance metrics for
2018 Performance RSUs are annual growth in net sales and NOP over fiscal years 2018, 2019 and
2020. Prior to the grant date, the Committee established annual growth goals for each of the three
years, based on top-quartile peer performance which will determine the percent of target payout
earned for net sales and NOP for the entire performance period. The annual measurement for
either metric can range from 50% to 200% of target, with the threshold payout being 50% of
target if the threshold performance goal is achieved.
At the end of the three-year performance period, the payout for Performance RSUs is determined
based on the average of the payouts earned for each of the three years in the performance period,
with net sales and NOP equally weighted each year. By assessing growth achieved each year
relative to long-term growth goals, our executive officers are able to make the appropriate
investments in the business during ever-changing market and competitive environments while
prioritizing long-term profitable and sustainable growth.
The final payout of Performance RSUs is subject to a ROIC modifier that can reduce the payout
by up to 20%. The reduction occurs if the three-year average difference between ROIC and
weighted average cost of capital (WACC) for the 2018-2020 period is below a certain threshold
established by the Committee prior to the grant date. The ROIC modifier was added to the design
of the Performance RSUs in 2015 to reduce the payout if capital investments in the business do
not generate returns that are sufficiently above the WACC.
41
The following chart illustrates how the overall payout for 2018 Performance RSUs, covering the
2018-2020 period, will be determined.
Net Sales
NOP
2018
2019
2020
Net sales
annual growth
each year
% of target payout
earned for net sales
each year
2018
2019
2020
NOP
annual growth
each year
% of target payout
earned for NOP
each year
Three-year average
% of target earned
for net sales
Three -year average
% of target earned
for NOP
Overall payout: Average of the % of target earned for net sales and NOP (equal weighting)
times the target number of Performance RSUs granted; then subject to a
potential reduction of up to 20% if the difference between ROIC and WACC is
below a certain threshold
The target number of Performance RSUs for the 2018 award was determined by dividing the
grant value (equal to 75% of the executive officer’s total LTI grant value) by the estimated grant
date fair value per share, which is calculated using 20-day average stock price leading up to grant
date in order to mitigate short-term stock price volatility. See the footnotes to the “Summary
Compensation Table” and “Grants of Plan-Based Awards” for a description of how grant date fair
value is determined for purposes of the disclosure in these tables.
The grant date for Performance RSUs granted in 2018 was March 21, 2018 and the 20-day
average share price was $35.80.
2018 LTI Grant Values. The Committee approves a total LTI grant value for each executive
officer, considering the executive officer’s performance and level of responsibility, as well as the
competitive position of the officer’s targeted total direct compensation. The Committee seeks to
make LTI grants to provide a total direct compensation opportunity that is near the market
median.
The following table summarizes the LTI grants made to our NEOs in 2018, and the split in grant
value between Performance RSUs (75%) and Stock Options (25%). The LTI grant values for Ms.
Ibach and Messrs. Callen and Brown were increased for 2018 to have their target total direct
compensation opportunity be more aligned with the market median based on benchmarking data
provided by the Committee’s independent compensation consultant.
42
Actual LTI Grants for 2018 (Granted March 21, 2018) *
Name
Performance RSU
Grant Value at
Target
Stock Option
Grant Value
Total LTI
Grant Value
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Andrea L. Bloomquist
Kevin K. Brown
$2,250,000
$393,750
$450,000
$337,500
$337,500
$750,000
$131,250
$150,000
$122,500
$122,500
$3,000,000
$525,000
$600,000
$450,000
$450,000
Performance RSU
grants only have
payout value if
company performance
goals are achieved.
Stock options only
have value if
shareholder value is
created.
* The actual grant date fair value for these LTI grants as disclosed in the Summary Compensation Table will vary slightly from
the amounts shown above due to valuation assumptions as described in the footnotes to the “Grants of Plan-Based Awards” table
on page 53.
2016 Performance RSU Payout. The 2016 Performance RSUs covering the 2016-2018 period,
which are similar in design as the 2018 Performance RSUs, were granted on March 22, 2016 and
vested and paid out on March 22, 2019 in the form of shares of common stock, less tax
withholding settled in shares of common stock. Based on net sales and NOP annual growth over
the three fiscal years (2016, 2017, and 2018), the overall payout earned for this grant was 89.3%
of target. As described below, this was an average of the percent of target payout earned for
growth in net sales and NOP in each of the three years covered by the award. The ROIC
modifier, which could have reduced this payout, was surpassed and did not apply.
The following is a summary of how the 89.3% of target payout was determined for the 2016
Performance RSUs.
Annual net sales growth was above target at 8.0% for 2016 and 10.2% for 2017, and
slightly below target at 6.0% for 2018. The three-year average payout earned on net sales
growth was 112% of target.
Annual NOP growth was above maximum at 19.9% for 2017, but below threshold for
both 2016 and 2018 due to the impact of significant investments in our business during
this period that were essential to our long-term strategy. The three-year average payout
earned on NOP growth was 66% of target.
Total payout earned was 89.3% which is an average of what was earned for net sales and
NOP (weighted equally).
Average ROIC premium vs. WACC of 73% exceeded the 30% premium threshold, so the
ROIC modifier did not apply.
Total shareholder return (TSR) was 50% for the performance period, which increased the
value for shares that were earned and paid out.
43
The following are the annual growth goals that were established for this grant.
% of Target
Payout
Threshold
Target
Maximum
50%
100%
200%
Annual
Growth in
Net Sales
4%
7%
15%
Annual
Growth in
NOP
4%
9%
20%
Average % Difference
Between
ROIC and WACC
30.0% or greater
20.0% - 29.9%
10.0% - 19.9%
0.1% - 9.9%
0% or lower
% Reduction in
Target Number of
RSUs
No reduction
-5%
-10%
-15%
-20%
The following charts show the actual performance achieved for the performance period and how
the total payout of 89.3% of target was determined.
Net Sales
($M)
% Annual
Growth
2016
2017
2018
$1,311
$1,444
$1,532
8.0%
10.2%
6.0%
Three-year average:
% of
Target
Payout
113%
139%
84%
112%
NOP
($M)
$76.7
$91.9
$92.4
% Annual
Growth
-11.5%
19.9%
0.6%
Three-year average:
% of
Target
Payout
0%
199%
0%
66%
Total payout: 89.3% of target
(equal weighting of average payout earned
on Net Sales and NOP)
Return on
Invested
Capital (ROIC)
12.2%
14.3%
16.0%
Weighted
Average Cost of
Capital (WACC)
7.9%
7.7%
8.9%
Three-year average:
ROIC
Premium vs.
WACC
54%
86%
80%
73%
2016
2017
2018
ROIC modifier was not applied to this payout
(Three-year average premium of 73% was
above the threshold of 30%)
44
Other Elements of Compensation
Benefits. Our executive officers participate in the benefit programs provided to our benefit
eligible team members. This includes company provided medical, dental, basic life, short-term
disability, long-term disability, and a matched 401(k) savings plans. Our NEOs participate in the
401(k) on the same basis as all other team members. There is no supplemental matching
program, excess plan, or other retirement program. The value of the 401(k) matching
contribution made by the company for our NEOs is included in “All Other Compensation” as
disclosed in the “Summary Compensation Table” on page 51.
Non-Qualified Deferred Compensation Plan. As described in more detail on page 57, our
executive officers along with other leaders may elect to defer a portion of their salary, AIP
payout, and Performance RSU payout under this non-qualified deferred compensation plan. The
company does not make any contributions to this plan on behalf of participants. The plan offers a
range of investment options for the tracking of an investment return on the deferrals, and
participants can elect how their deferrals will be distributed in the future.
Executive Benefits and Perquisites. Consistent with our commitment to emphasize pay for
performance in our mix of total compensation, our executive officers receive very few executive
benefits and perquisites. The company has paid for a supplemental long-term disability that
provided a benefit of 60% of pay in excess of the limits under the group plan. The Committee has
approved the elimination of this executive benefit at the end of 2019. The company provides only
two perquisites to our executive officers: financial counseling and an annual executive physical
exam. The annual limit for financial counseling is $15,000 for our CEO and $8,000 for our other
NEOs. The company pays for the cost after insurance coverage of an annual executive physical
exam. Amounts reimbursed for financial counseling or the executive physical exam are fully
taxable to the executive and there is no “gross up” by the company to cover these taxes for the
executive.
Employment Agreements. We do not have employment agreements with any of our executive
officers that provide for continued employment for any period of time.
Severance Plan. Our executive officers and other key leaders of the company participate in the
Sleep Number Executive Severance Pay Plan. This plan provides for severance pay, prorated AIP
incentive, and other benefits such as outplacement and limited COBRA reimbursement in the
event of involuntary termination of employment not for cause or termination for good reason,
including for events following a change-in-control, as those terms are defined in the plan. This
plan is described in more detail in the section labeled “Potential Payments to Named Executive
Officers” found on page 58.
45
Compensation Governance, Practices, and Policies
In order to meet the key objectives of our executive compensation program, the Company has
adopted a strong corporate governance framework with the following practices and policies that
ensure alignment with shareholder interests.
Compensation Practice
Sleep Number Policy or Practice
Pay for performance
Yes A significant percentage of the total direct compensation package is performance-based.
Robust stock ownership
guidelines
Yes
Executive officers and members of the Board of Directors are subject to stock ownership
guidelines.
Annual shareholder “Say
on Pay”
Yes
We value our shareholders’ input on our executive compensation programs. Our Board of
Directors seeks an annual non-binding advisory vote from shareholders to approve the
executive compensation disclosed in our CD&A, tabular disclosures and related narrative of
this Proxy Statement.
Annual compensation risk
assessment
Yes A risk assessment of our compensation programs is performed on an annual basis.
Clawback provisions
Yes
We have clawback provisions that allows for recovery of cash incentive awards and earned
LTI payouts in the event of inaccurate financial statements or other actions that would
constitute “cause” or “adverse action.” In addition, certain participants are subject to
automatic forfeiture in connection with misconduct resulting in an accounting restatement.
Independent compensation
consultant
Yes
The Committee retains an independent compensation consultant to advise on the executive
compensation program and practices and assist in the benchmarking of compensation levels.
Double-trigger vesting
Yes
Hedging of Company stock
Pledging of Company
stock
Tax gross-ups
No
No
If outstanding LTI grants are assumed or substituted upon a change-in-control, the vesting of
the LTI grants will only be accelerated if the executive is terminated without cause or
terminates with good reason within two years of the change-in-control (i.e., “double trigger
vesting”)
Executive officers and members of the Board of Directors may not directly or indirectly
engage in transactions intended to hedge or offset the market value of Sleep Number common
stock owned by them.
Executive officers and members of the Board of Directors may not directly or indirectly
pledge Sleep Number common stock as collateral for any obligation.
No We do not provide tax gross-ups to our executive officers, other than for relocation benefits
that are applied consistently for all team members.
LTI Grant Practices and
Procedures Policy
Repricing of stock options
Employment contracts
Yes
No
No
We have a policy that documents the practices and procedures for making LTI grants to
eligible team members including executive officers. This policy specifies approval
procedures, timing of awards, and the award formulas that determine the number of options or
RSUs granted.
Our equity incentive plan does not permit repricing of stock options without shareholder
approval or the granting of stock options with an exercise price below fair market value.
None of our NEOs has an employment contract that provides for continued employment for
any period of time.
46
Stock Ownership. Encouraging stock ownership among our executive officers is critical in
aligning their interests with those of our shareholders. The company has in place stock ownership
guidelines for executive officers as well as for members of the Board of Directors. The following
is the value of share ownership that is expected at various levels under these guidelines:
5x base salary for CEO
3x base salary for executive officers (other than CEO), and
5x annual cash retainer for Board members
According to the guidelines, the stock ownership value includes: shares owned outright, shares
held in the 401(k) Plan or Deferred Compensation Plan, after tax intrinsic value of vested and
outstanding stock options, after tax value of outstanding Performance RSUs (prorated to the
extent that any year of the performance period has been completed and the payout for that year is
known). Until the guideline is met, executives are required to hold 50% of the net shares from the
vesting or payout of any LTI grant or from the exercise of stock options. Directors are expected
to achieve the guideline level of ownership within five years of their appointment to the Board.
Committee and Governance. The Committee is comprised entirely of independent, non-
employee Directors. The key responsibilities of the Committee as outlined in its charter include:
Review and approve the company’s compensation philosophy
Establish executive compensation structure and programs designed to motivate and reward
superior company performance
Lead the Board of Directors’ annual process to evaluate the performance of the CEO
Determine the composition and value of compensation for the CEO and other executive
officers including base salaries, annual cash incentive awards, long-term equity-based
awards, benefits, and perquisites
Establish, administer, amend and terminate executive compensation and major team
member benefit programs
Assess management development progress and talent depth, organizational strategy, and
succession planning for key leadership positions in the context of the company’s strategic,
operational and financial growth objectives
Establish structure and amount of non-employee Director compensation
The Committee usually meets four to six times per year, in person or by conference call. Our
CEO, other members of our management team, and the Committee’s independent compensation
consultant may be invited to attend all or a portion of a Committee meeting, depending on the
nature of the agenda. The Committee also typically meets in executive session without any
members of management present.
47
Neither our CEO nor any other member of our management team votes on any matters before the
Committee. The Committee, however, solicits the views of our CEO on compensation matters
generally, other than her own, and particularly with respect to the compensation of members of
the senior management team reporting to the CEO. The Committee also solicits the views of
other members of senior management and the company’s Human Resources department on topics
related to key compensation elements and broad-based team member benefit plans.
Role of Independent Compensation Consultant. Under its charter, the Committee has the
authority to retain and consult with independent advisors to assist in fulfilling their
responsibilities and duties. To maintain the independence of these advisors, use by the company
of any of these advisors for work other than that expressly commissioned by the Committee must
be approved in advance by the Committee.
Since fiscal 2013, the Committee has retained Frederic W. Cook & Co., Inc. (FW Cook) as its
independent compensation consultant. At the Committee’s request each year, FW Cook certifies
that it continues to be an independent advisor and discloses information in a letter to the
Committee that demonstrates this independence. The Committee assessed this certification and
disclosure information and concluded that no conflict of interest or independence concerns exist
in the engagement of FW Cook as the Committee’s independent compensation consultant. In the
course of its engagement, the independent compensation consultant:
Provides on-going assessment of each of the principal elements of the company’s
executive compensation program
Advises the Committee on the design of both the annual cash incentive plan and the long-
term equity incentive program
Works with the Committee and representatives of senior management to assess and refine
the company’s peer group for ongoing comparative analysis purposes
Provides the Committee with updates related to regulatory and legislative matters
Reviews market data, trends and analyses based on proxy data for our peers and other data
sources to inform executive compensation levels and design
Provides advice and guidance to the Committee on pay actions for executives
CEO Assessment Process. The Committee evaluates Ms. Ibach's performance by soliciting input
from all members of the Board. The Board also assesses Ms. Ibach's performance against
objectives incorporating key operational and strategic factors, including growth, profitability,
product innovation, advancement of strategic initiatives, organizational development and investor
relations. The CEO performance feedback from all independent Board members is consolidated
into a detailed performance review which is the basis of a full Board discussion in Executive
Session led by the Chair of the Committee. The Board's assessment of Ms. Ibach's performance is
a major consideration in determining any compensation adjustments for the coming year.
48
Compensation Risk Assessment. Based on an annual risk assessment, the company has
determined that none of its compensation policies, practices or programs is reasonably likely to
have a material adverse effect on the company. The results of this risk assessment were shared
with the Committee.
Peer Group. The Committee, in consultation with FW Cook, annually reviews the composition
of the industry peer group to ensure that the included companies are appropriate in terms of size
and business focus. The selected peer group consists of publicly traded industry competitors, as
well as a representative group of similarly sized companies involved in development,
manufacturing and/or retailing of home furnishings and other consumer durable products, with
which we compete for talent and for shareholder investments. To ensure that our peer group
includes companies of appropriate size and scope, we generally aim to select peers whose net
sales, EBITDA and market capitalization are within a range of one-half to two times our own
comparable metrics.
In September 2018, the Committee approved the addition of two new companies to the peer group
on the recommendation of FW Cook. The two companies added were Conn’s, Inc. and iRobot
Corporation, which increased the size of the peer group to 17 companies in total. Conn’s
operates in a business similar to our peers and considers our company as one its peers. iRobot is
aligned with our business model and focus on technology innovation for products in the home.
No companies were removed from the peer group. The following is the updated listing of our
peer group as of September 2018:
Aaron’s, Inc.
Columbia Sportswear Company
Conn’s, Inc. (new)
The Container Store Group, Inc.
Deckers Outdoor Corporation
Dolby Laboratories, Inc.
Ethan Allen Interiors Inc.
Express Inc.
Haverty Furniture Companies Inc.
iRobot Corporation (new)
La-Z-Boy Incorporated
Leggett & Platt, Incorporated
Pier 1 Imports Inc.
RH
Steven Madden, Ltd.
Tempur Sealy International, Inc.
Vitamin Shoppe, Inc.
The peer group prior to adding these two companies was used in the competitive analysis
considered for pay decisions made in March 2018.
Benchmarking. With the assistance of FW Cook, the Committee considers market data on base
salary, target total cash compensation, and target total direct compensation when establishing
compensation levels for executive officers. The sources for this market comparison are from peer
group pay data (most recent disclosures) and certain retail or general industry surveys from third
parties. For each executive, we attempt to match as closely as possible our position to what is
most comparable in our peers or the surveys. This competitive analysis is just one factor
considered when making pay decisions on base salary or incentive opportunities.
49
The Committee generally seeks to align target total direct compensation opportunities with the
median of the market, while providing opportunity for top quartile compensation for performance
above goal and below median compensation for performance below goal. Additionally,
performance goals are set with consideration for historical peer group growth levels, with the goal
of ensuring that above target payouts require performance above the median of the peer group.
Tax Considerations. We have historically considered the deductibility of executive
compensation under Section 162(m) of the Internal Revenue Code in our design and operation of
various incentive programs including AIP and LTI. The Tax Cut and Jobs Act, signed into law on
December 22, 2017 (the “Tax Act”), among other things, repealed the exemption from the $1
million compensation deduction limit under Section 162(m) for “performance-based”
compensation effective for the company’s taxable years beginning after December 31, 2017,
subject to transition relief for binding contracts entered into prior to November 2, 2017. Our AIP
and LTI programs are designed to permit the grant and payment of equity or cash incentive
awards that qualify as “performance-based” compensation, which, to the extent applicable, would
be exempt from the Section 162(m) deduction limitation. The Committee intends to administer
the existing AIP and LTI programs, to the extent covered under the transition rule, with a view
towards preserving their ability to qualify as exempt “performance-based” compensation for
purposes of Section 162(m). However, the Committee does not require all compensation
programs, including AIP and LTI, to be fully deductible under Section 162(m) as the Committee
believes it is important to preserve flexibility in maintaining compensation programs that are
aligned with our compensation philosophy. Given the Tax Act repeal of the performance-based
pay exception, the Committee may design future programs and administer the existing programs
in a manner that does not satisfy the requirements for an exemption from the Section 162(m)
deduction limit.
We currently expect that we will continue to structure our executive compensation program
consistent with our pay for performance philosophy so that a significant portion of total executive
compensation is linked to the performance of our company.
50
Summary Compensation Table
The following table contains compensation information for the last three fiscal years relating to
the named executive officers. Note that the AIP awards earned for each fiscal year are reported under the
heading “Non-Equity Incentive Plan Compensation.” The values shown under the headings “Stock
Awards” and “Option Awards” are the grant date fair values of the awards received in each fiscal year.
This does not represent what was earned or paid out for these awards due to performance. The details of
our named executive officers’ compensation are discussed in the Compensation Discussion and Analysis
beginning on page 30.
Name
And Principal
Position
Shelly R. Ibach
President and CEO
David R. Callen
SVP and CFO
Andrew P. Carlin
EVP, Chief Sales and
Services Officer
Andrea L. Bloomquist
SVP and Chief Product
Officer
Kevin K. Brown
SVP and Chief Marketing
Officer
Year
Salary
($)
Bonus
($)
Stock
Awards(1)(2)
($)
Option
Awards(1)
($)
Non-
Equity
Incentive
Plan
Compensa-
tion(3)
($)
All Other
Compensa-
tion(4)
($)
Total
($)
2018
$926,923
2017
$841,923
2016
$814,615
2018
$472,763
2017
$428,431
2016
$400,637
2018
$477,326
2017
$451,791
2016
$415,369
2018
$429,484
2017
$416,520
2016
$403,500
---
---
---
---
---
---
---
---
---
---
---
---
$2,158,898
$725,426
$ 589,837
$ 31,620
$4,432,704
$4,740,701
$540,042
$ 1,137,400
$ 30,363
$7,290,429
$1,597,928
$493,284
$ 354,998
$ 23,205
$3,284,030
$ 377,850
$ 126,927
$ 139,111
$ 18,075
$1,134,726
$ 682,486
$ 116,614
$ 285,120
$ 10,802
$1,523,453
$ 304,346
$ 93,979
$ 96,034
$ 9,327
$ 904,323
$ 431,780
$ 145,099
$ 153,222
$ 18,144
$1,225,571
$ 775,509
$ 147,275
$ 328,000
$ 11,050
$1,713,625
$ 670,240
$ 93,979
$ 106,385
$ 8,025
$1,293,998
$ 323,749
$ 108,825
$ 126,376
$ 20,061
$1,008,495
$ 682,486
$ 116,614
$ 277,194
$ 10,054
$1,502,868
$ 304,346
$ 93,979
$ 96,718
$ 11,960
$ 910,503
2018
$423,201
---
$ 323,749
$ 108,825
$ 124,527
$ 15,410
$ 995,712
(1) Reflects the aggregate grant date fair value of equity awards granted during fiscal years 2018, 2017 and 2016, computed in accordance
with FASB ASC Topic 718. See Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the
fiscal year ended December 29, 2018, for a discussion of the relevant assumptions used in calculating these amounts.
(2) The “Stock Awards” column includes Performance RSU awards granted during fiscal years 2018, 2017, and 2016 and a special
performance-vested RSU award granted during fiscal 2017. The amounts included for these awards represent the grant date fair value
assuming the achievement of the performance goals for a target payout. If the Performance RSU awards granted during fiscal year 2018
had been calculated assuming that the maximum payout had been earned, the grant date fair value of these Performance RSU awards
would have been as follows: for Ms. Ibach, $4,317,796; for Mr. Callen, $755,700; for Mr. Carlin, $863,560; for Ms. Bloomquist,
$647,498; and for Mr. Brown, $647,498. For further information on these awards, see the “Grants of Plan-Based Awards” table and the
discussion in the Compensation Discussion and Analysis under the heading “Long-Term Incentive Plan (LTI).”
51
(3) Represents annual incentive compensation earned under the AIP. See the discussion in the Compensation Discussion and Analysis
under the heading “Annual Incentive Plan (AIP).”
(4) All other compensation includes the costs of (i) reimbursement for personal financial planning and tax advice; (ii) company sponsored
physical exam; (iii) company matching contribution to the 401(k) Plan according to a matching formula and contribution limits that are
the same for all participants; and (iv) annual premium for supplemental long-term disability coverage, which will no longer be provided
by the company to executive officers after the end of fiscal year 2019.
52
Grants of Plan-Based Awards
The following table summarizes for each of the named executive officers the non-equity
incentive award opportunity under the AIP for fiscal year 2018 and the equity awards
(Performance RSUs and Options) made during the fiscal year 2018.
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards(1)
Estimated Future Payouts
Under Equity Incentive
Plan Awards
Name
Shelly R. Ibach
Thresh-
old
($)
$220,500
Target
($)
$1,102,500
Maxi-
mum
($)
$2,756,250
Thresh-
old
(#)
Target
(#)
Maxi-
mum
(#)
5,217
62,850
125,700
Grant
Date
3/21/18(2)
3/21/18(3)
All
Other
Option
Awards:
Number
of
Securities
Under-
lying
Options
(#)
All
Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)
Grant
Date
Fair
Value of
Stock and
Option
Awards
($)(4)
Exercise
or Base
Price of
Option
Awards
($/Sh)
51,095
$34.35
$2,158,898
$ 725,426
David R. Callen
$52,004 $260,020
$650,050
3/21/18(2)
3/21/18(3)
913
11,000
22,000
8,940
$34.35
$ 377,850
$ 126,927
Andrew P. Carlin
$57,279 $286,396
$715,990
3/21/18(2)
3/21/18(3)
1,044
12,570
25,140
10,220
$34.35
$ 431,780
$ 145,099
Andrea L. Bloomquist
$47,243 $236,216
$590,540
3/21/18(2)
3/21/18(3)
783
9,425
18,850
7,665
$34.35
$ 323,749
$ 108,825
Kevin K. Brown
$46,552 $232,761
$581,902
3/21/18(2)
3/21/18(3)
783
9,425
18,850
7,665
$34.35
$ 323,749
$ 108,825
(1) This represents the cash annual incentive opportunity for 2018 under the AIP. The actual amounts earned under this plan for 2018 are
reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. The threshold reflects the
amount that would be payable under the plan if the minimum performance level is achieved for annual company performance. If the
minimum performance level for payment of the threshold amount is not achieved, then no annual incentive would be payable under the
plan. See discussion in the Compensation Discussion and Analysis under the heading “Annual Incentive Plan (AIP).”
(2) This represents Performance RSU awards described in greater detail in the Compensation Discussion and Analysis under the heading,
“Long-Term Incentive Plan (LTI).” The target number of Performance RSUs will be adjusted based on company performance against
annual growth goals over a three-year performance period covering fiscal years 2018, 2019 and 2020. There can also be a reduction in
the target number of Performance RSUs for ROIC performance below a threshold. Performance RSUs are also subject to a three-year
vesting requirement from the grant date. If any dividends are paid on our common stock, the holders of the Performance RSUs would
receive dividends at the same rate as paid to other shareholders if and when the Performance RSU award is earned and becomes fully
vested.
(3) These awards represent stock options described in greater detail in the Compensation Discussion and Analysis under the heading,
“Long-Term Incentive Plan (LTI).” These stock options have an exercise price equal to the closing trading price of the company’s
common stock on the grant date. The options vest in three equal annual installments on each of the anniversaries following the grant
date. These options remain exercisable for up to 10 years from the grant date, subject to earlier termination upon certain events related
to termination of employment.
(4) Reflects the grant date fair value computed in accordance with FASB ASC Topic 718. The value for Performance RSU awards reflects
the target award value.
53
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the total outstanding equity awards for each of the named
executive officers as of December 29, 2018.
Option Awards
Stock Awards
Name
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)(9)
---
---
---
---
---
---
---
---
---
---
---
69,300(5)
138,595(6)
---
62,850(8)
---
---
---
---
---
14,960(5)
14,700(6)
---
11,000(8)
---
---
---
---
---
---
---
---
18,900(5)
14,700(6)
---
12,570(8)
---
---
---
---
---
---
---
---
---
---
---
$2,226,609
$4,453,057
---
$2,019,371
---
---
---
---
---
$ 480,665
$ 472,311
---
$ 353,430
---
---
---
---
---
---
---
---
$ 607,257
$ 472,311
---
$ 403,874
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(9)
---
---
---
---
---
---
---
---
---
$2,437,446
---
---
---
---
---
---
---
---
$464,246
---
---
---
---
---
---
---
---
---
---
$464,246
$606,614
---
---
---
---
---
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Exercise
Price
($)
Option
Expiration
Date
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
7,500
6,875
14,038
17,900
13,526
41,950
27,430
29,480
38,527
---
17,907
---
---
---
---
7,395
4,420
7,340
---
3,867
---
---
---
---
2,611
11,450
9,350
5,895
7,340
---
---
4,884
---
---
---
---
---
---
---
---
---
---
---
---
19,263(1)
---
35,813(4)
---
---
51,095(7)
---
---
---
3,670(1)
---
7,733(4)
---
---
8,940(7)
---
---
---
---
---
3,670(1)
---
---
9,766(4)
---
---
10,220(7)
---
6/18/2019
6/4/2020
5/11/2021
2/23/2022
6/1/2022
4/1/2023
3/28/2024
3/16/2025
3/22/2026
---
3/21/2027
---
---
3/21/2028
---
4/7/2024
3/16/2025
3/22/2026
---
3/21/2027
---
---
3/21/2028
---
6/1/2022
4/1/2023
3/28/2024
3/16/2025
3/22/2026
---
---
3/21/2027
---
---
3/21/2028
---
---
---
---
---
---
---
---
---
---
75,862(2)
---
---
---
---
---
---
---
---
14,449(2)
---
---
---
---
---
---
---
---
---
---
14,449(2)
18,880(3)
---
---
---
---
---
$ 0.79
$ 9.75
$17.34
$28.99
$25.99
$21.15
$17.77
$33.32
$18.81
---
$23.61
---
---
$34.35
---
$17.36
$33.32
$18.81
---
$23.61
---
---
$34.35
---
$25.99
$21.15
$17.77
$33.32
$18.81
---
---
$23.61
---
---
$34.35
---
54
Outstanding Equity Awards at Fiscal Year-End, continued
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
3,100
3,000
3,332
11,450
9,350
5,895
7,340
---
3,867
---
---
---
---
6,230
4,420
5,503
---
2,645
---
---
---
---
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
---
---
---
---
---
---
3,670(1)
---
7,733(4)
---
---
7,665(7)
---
---
---
2,752(1)
---
5,290(4)
---
---
7,665(7)
---
Option
Exercise
Price
($)
$17.34
$28.99
$25.99
$21.15
$17.77
$33.32
$18.81
---
$23.61
---
---
$34.35
---
$17.77
$33.32
$18.81
---
$23.61
---
---
$34.35
---
Option
Expiration
Date
5/11/2021
2/23/2022
6/1/2022
4/1/2023
3/28/2024
3/16/2025
3/22/2026
---
3/21/2027
---
---
3/21/2028
---
3/24/2024
3/16/2025
3/22/2026
---
3/21/2027
---
---
3/21/2028
---
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
---
---
---
---
---
---
14,449(2)
---
---
---
---
---
---
---
---
10,837(2)
---
---
---
---
---
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($) (9)
---
---
---
---
---
---
$ 464,246
---
---
---
---
---
---
---
---
$ 348,193
---
---
---
---
---
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
---
---
---
---
---
---
---
---
---
14,960(5)
14,700(6)
---
9,425(8)
---
---
---
---
---
10,235(5)
14,700(6)
---
9,425(8)
Equity
Incentive
Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($) (9)
---
---
---
---
---
---
---
---
---
$ 480,665
$ 472,311
---
$ 302,825
---
---
---
---
---
$ 328,851
$ 472,311
---
$ 302,825
Name
Andrea L. Bloomquist
Kevin K. Brown
(1)
(2)
(3)
(4)
(5)
(6)
These stock options were granted on March 22, 2016 and vest one-third each year on each of the first three
anniversaries of the date of grant, subject to continuing employment through the applicable vesting date.
These Performance RSU awards were granted on March 22, 2016 and will become vested on March 22, 2019,
subject to continuing employment through the applicable vesting date. The number of shares shown above reflects
the actual payout that was earned for the 2016 Performance RSUs based on the performance period that covers
fiscal years 2016, 2017 and 2018. The payout for the 2016 Performance RSU awards is described in greater detail
in the Compensation Discussion and Analysis under the heading, “Long-Term Incentive Plan (LTI).”
These restricted stock units were granted on April 11, 2016 and will become vested on April 11, 2019, subject to
continuing employment through the applicable vesting date.
These stock options were granted on March 21, 2017 and vest one-third each year on each of the first three
anniversaries of the date of grant, subject to continuing employment through the applicable vesting date.
These Performance RSU awards were granted on March 21, 2017 and will become vested on March 21, 2020,
subject to achieving performance criteria and continuing employment through the vesting date. The number of
shares shown above reflects the target award level. The performance period for this award covers fiscal years
2017, 2018 and 2019.
These special performance-vested restricted stock units were granted on March 21, 2017 and vest 50% on March
21, 2020 and 50% on March 21, 2021, subject to achieving a special EPS target for fiscal 2019 and continuing
55
employment through the vesting date. In addition, the restricted stock units that are earned for achievement of the
special EPS target can be reduced by 15% if the total shareholder return threshold for the performance period is
not met. The shares shown above are reflected at the target award level, which is the same as the maximum award
level. The performance period for this award is a special EPS target for fiscal 2019.
(7)
(8)
(9)
These stock options were granted on March 21, 2018 and vest one-third each year on each of the first three
anniversaries of the date of grant, subject to continuing employment through the applicable vesting date.
These Performance RSU awards were granted on March 21, 2018 and will become vested on March 21, 2021,
subject to achieving performance criteria and continuing employment through the vesting date. The number of
shares shown above reflects the target award level. The performance period for this award covers fiscal years
2018, 2019 and 2020.
Calculated by multiplying unvested stock awards by $32.13, the closing price of the company’s common stock on
the Nasdaq Stock Market on December 28, 2018, the last trading day of fiscal year 2018.
Option Exercises and Stock Vested
The following table summarizes the stock options that were exercised and the stock
awards that became vested for each of the named executive officers during the fiscal year ended
December 29, 2018.
Option Awards
Stock Awards
Number of
Shares
Acquired
on Exercise
(#)
27,110
---
14,599
17,875
---
Value
Realized
on Exercise
($)(1)
$ 596,820
---
$ 306,725
$ 403,515
---
Number of
Shares
Acquired
on Vesting
(#)(2)
40,407(4)
6,060(4)
8,082
8,082
6,060
Value
Realized on
Vesting
($)(3)
$1,447,783
$ 217,130
$ 289,578
$ 289,578
$ 217,130
Name
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Andrea L. Bloomquist
Kevin K. Brown
(1) The value realized on the exercise of stock options for purposes of this table is based on the difference between the fair market
value of our common stock on the date of exercise and the exercise price of the stock option.
(2) The amounts shown in these columns represented the number of shares that were earned and paid out for the 2015 Performance
RSU award that covered the performance period of fiscal years 2015, 2016, and 2017 and became vested on March 16, 2018.
(3) The value realized for purposes of this table is based on the fair market value of our common stock on the date of vesting of the
2015 Performance RSU award.
(4) Under the company’s Deferral Plan (described in the Nonqualified Deferred Compensation table below), Ms. Ibach deferred the
receipt of 39,083 shares until the earlier of March 16, 2021 or the termination of her employment and Mr. Callen deferred the
receipt of 5,862 shares until the earlier of March 16, 2020 or the termination of his employment. The value of these deferred shares
realized on vesting is based on the closing stock price on the vesting date, regardless of whether the payout had been deferred. The
actual value of the deferred shares when paid out in the future may be different than the value reflected in this table. The value
realized on vesting is also reflected in the “Executive Contributions in Last Fiscal Year” column in the Nonqualified Deferred
Compensation table below.
56
Nonqualified Deferred Compensation
Named executive officers are eligible to participate in the Sleep Number Executive
Deferral Plan (“Deferral Plan”), a non-qualified deferred compensation plan. The Deferral Plan
allows executives to defer payment of up to 50% of their base salary, 75% of their AIP payout,
and 100% of their payout from Performance RSUs or other stock awards. At the time that
executives make their deferral election, they choose whether their deferrals will be paid out in a
lump sum or up to ten annual installments following their termination of employment. For salary
or AIP deferrals, executives choose how to allocate their deferrals across a range of notional
investment alternatives that are similar to the investment fund options in the company’s 401(k)
Plan. The executive’s deferral account is credited with the earnings as if there was a deemed
investment in the notional investment alternatives offered for the Deferral Plan. For RSU
deferrals, the amounts deferred are tracked in deferred share units, and distributions are settled in
shares of common stock.
The following table summarizes for each named executive officer their contributions,
earnings, and balance for the Deferral Plan for the fiscal year ended December 29, 2018. Note that
the company does not make any contributions to the Deferral Plan on behalf of participants.
Executive
Contributions
in Last Fiscal
Year(1)
($)
$2,535,906
$210,035
$368,926
---
$474
Registrant
Contributions
in Last Fiscal
Year
($)
---
---
---
---
---
Aggregate
Earnings in
Last Fiscal
Year(2)
($)
($233,397)
($24,845)
$20,978
---
($2,384)
Aggregate
Withdrawals/
Distributions
($)
---
---
---
---
---
Aggregate
Balance
at Last
Fiscal
Year-End(3)
($)
$3,254,018
$223,594
$1,435,392
---
$53,324
Name
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Andrea L. Bloomquist
Kevin K. Brown
(1)
(2)
(3)
The amounts in this column represent deferred amounts credited to the executive’s deferral accounts during fiscal year 2018.
This included base salary deferrals that are included in the “Salary” column of the “Summary Compensation Table” for
2018 as follows: for Ms. Ibach, $451,730; for Mr. Carlin, $238,221; and for Mr. Brown, $474.
These amounts represent the total aggregate notional earnings for fiscal year 2018 for the executive’s deferral account under
the Deferral Plan. These are notional earnings based on how the executive has elected to direct their salary or AIP deferrals
to various investment alternatives, and the actual market return of that investment alternative for the year. For RSU
deferrals, earnings represent the change in market value of the deferred share units held in the executive’s deferral account.
This is the aggregate market value of the executive’s deferral account under the Deferral Plan as of the end of fiscal year
2018.
57
Potential Payments Upon Termination or Change in Control
This section describes the potential payments that would be made to the named executive
officers under various employment termination scenarios as if they occurred at the end of fiscal year
2018 (as of December 29, 2018). The values shown in the table are calculated as of this date based on
certain estimates or assumptions as described in the footnotes. The actual amounts received may
differ materially from those shown in the table. The table does not include amounts already vested
that the executive would receive if he or she left the company for any reason, such as the fully vested
balance of an executive’s deferral account, gains from outstanding options that are exercisable, or
payments and benefits that are provided on a non-discriminatory basis to salaried team members
generally upon termination.
All Sleep Number team members, including all executive officers, are “at will” team members,
meaning that the team member or the company may terminate the employment relationship with or
without cause and with or without notice, at any time at the option of either the team member or the
company. Executive officers do not have employment agreements, and do not have any contractual or
other right to employment for any term or period of time. In addition, executive officers are only
eligible for the severance pay and other benefits as provided under the company’s Executive
Severance Pay Plan as shown in the table and described in the footnotes.
The table below shows information about the acceleration of option or stock awards in the
event of a change in control as defined under the company’s Amended and Restated 2010 Omnibus
Incentive Plan (the “2010 Plan”). The 2010 Plan contains a “double-trigger” change in control
provision. Under this provision, if outstanding option or stock awards are assumed or substituted
following a change in control, vesting of the option or stock awards is only accelerated in the event of
involuntary termination not for cause or resignation for good reason of the team member, as those
terms are defined under the 2010 Plan. This is provided that the team member’s termination of
employment occurs within two years of the change in control.
Vesting of option or stock awards may also be accelerated in the event a named executive
officer qualifies for retirement treatment under the terms of the award agreements and the 2010 Plan.
If an executive is at least age fifty-five (55) and has five (5) or more years of service at retirement, the
vesting will be accelerated on a pro-rata portion of their option or stock award based on the portion of
the vesting period that was actually worked through the date of retirement. For option and stock
awards granted beginning in fiscal 2017, an additional retirement provision was added. If an executive
is at least age sixty (60) and has five (5) or more years of service at retirement, there is a full
acceleration of vesting of the option or stock award provided that the executive gives a one-year notice
of their intention to retire. This additional acceleration of vesting provision does not apply to any
option or stock award granted within less than a year of retirement. The special performance-vested
restricted stock units that were granted on March 21, 2017 have different retirement treatment than
other stock awards. If an executive is at least age sixty (60) and has five (5) or more years of service
at retirement, the vesting will be accelerated on a pro-rata portion of the award earned with
performance based on the number of full months in the performance period that were actually worked
through the date of retirement.
58
Name
Shelly R. Ibach
David R. Callen
Andrew P. Carlin
Type of Payment
Cash Severance (2)
Option Award Acceleration (3)
Stock Award Acceleration (4)
Benefit Reimbursement (5)
Executive Disability (6)
Total
Cash Severance (2)
Option Award Acceleration (3)
Stock Award Acceleration (4)
Benefit Reimbursement (5)
Executive Disability (6)
Total
Cash Severance (2)
Option Award Acceleration (3)
Stock Award Acceleration (4)
Benefit Reimbursement (5)
Executive Disability (6)
Total
Andrea L. Bloomquist Cash Severance (2)
Kevin K. Brown
Option Award Acceleration (3)
Stock Award Acceleration (4)
Benefit Reimbursement (5)
Executive Disability (6)
Total
Cash Severance (2)
Option Award Acceleration (3)
Stock Award Acceleration (4)
Benefit Reimbursement (5)
Executive Disability (6)
Total
Triggering Events
Involuntary
Termination
(No Change in
Control)
($)
$ 4,195,000
$ 316,264
$ 4,360,394
$ 9,671
---
$ 8,881,329
$ 759,933
---
---
$ 11,436
---
$ 771,369
$ 782,208
$ 69,942
$ 1,493,274
$ 11,189
---
$ 2,356,613
$ 680,205
---
---
---
---
$ 680,205
$ 671,836
---
---
$ 11,189
---
$ 683,025
Involuntary
Termination
(Following
Change in
Control) (1)
($)
$ 6,285,000
$ 561,710
$ 11,428,512
$ 9,671
---
$18,284,893
$ 1,509,867
$ 114,770
$ 1,826,269
$ 11,436
---
$ 3,462,342
$ 1,554,416
$ 132,091
$ 2,609,920
$ 11,189
---
$ 4,307,616
$ 1,350,409
$ 114,770
$ 1,775,664
---
---
$ 3,240,843
$ 1,333,672
$ 81,727
$ 1,493,884
$ 11,189
---
$ 2,920,472
For Cause
Termination
($)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Death or
Disability
($)
---
$ 561,710
$11,428,512
---
$ 3,847,529
$15,837,751
---
$ 114,770
$ 1,826,269
---
$ 2,312,752
$ 4,253,791
---
$ 132,091
$ 2,609,920
---
$ 2,003,872
$ 4,745,883
---
$ 114,770
$ 1,775,664
---
$ 2,784,440
$ 4,674,874
---
$ 81,727
$ 1,493,884
---
$ 2,735,137
$ 4,310,748
Voluntary
Termination
($)
---
$ 316,264
$ 4,360,394
---
---
$ 4,676,658
---
---
---
---
---
---
---
$ 69,942
$ 1,493,274
---
---
$ 1,563,216
---
---
---
---
---
---
---
---
---
---
---
---
(1) The amounts payable to the named executive officers upon a change in control may be subject to reduction under Sections 280G and
4999 of the Internal Revenue Code.
(2) Our named executive officers are participants in the company’s Executive Severance Pay Plan. Under this plan, a participant is eligible
for severance pay and other benefits in the event of involuntary termination not for cause or resignation for good reason (“qualifying
termination”), as those terms are defined under the plan. There is no severance pay benefit for voluntary termination or involuntary
termination for cause. As a condition of receiving any severance pay under the plan, the executive must agree to a general release of
claims against the company. The amount of the severance pay payable for a qualifying termination is a multiple of the sum of the
executive’s annual base salary plus the target annual incentive award under AIP, as of the date of termination. For Ms. Ibach, the
multiple is two times and for all other NEOs, the multiple is one times. If the qualifying termination occurs within a period starting six
months before a change in control event and ending two years after a change in control event, the multiple would be as follows: For Ms.
Ibach, three times; for all other NEOs, two times. In order to receive the additional severance pay for qualifying terminations after a
change in control, the executive must agree to refrain from certain restricted activities for an extended period of two years after
termination of employment. The plan defines restricted activities to include certain competitive and solicitation activities. Severance
pay benefits are paid in a lump sum following termination of employment. The cash severance amounts shown above were calculated
using annual base salary and target annual incentive for AIP in effect for each executive as of the end of fiscal 2018. Also under the
plan, participants are eligible for outplacement services. The maximum value of this benefit is included in the cash severance amounts
shown above. The plan does provide for a pro-rata annual incentive award under AIP for the period of the year that the participant was
actively employed. The calculations for this table are as of the end of the fiscal year, which is when participants in the AIP become
eligible for the full incentive award earned for that fiscal year. As a result, the table does not include any value for a pro-rata annual
incentive.
59
(3) The value of the acceleration of the vesting of unvested stock options held by a named executive officer is based on the difference
between: (i) the fair market value of our common stock as of December 28, 2018 ($32.13), and (ii) the per share exercise price of the
options held by the executive. The range of exercise prices of unvested stock options held by our named executive officers included in
the table as of December 29, 2018 was $18.81 to $34.35. For voluntary termination when an executive is eligible for retirement
treatment (age 55 and five or more years of service), the number of unvested stock options is prorated in valuing the acceleration of
vesting.
(4) The value of the acceleration of the vesting of stock awards held by a named executive officer is based on: (i) the number of unvested
stock awards or target Performance RSUs held by the executive as of December 29, 2018, multiplied by (ii) the fair market value of our
common stock on December 28, 2018 ($32.13). For voluntary termination when an executive is eligible for retirement treatment (age
55 and five or more years of service), the number of unvested stock awards or target Performance RSUs is prorated in valuing the
acceleration of vesting.
(5) For a qualifying termination under the Executive Severance Pay Plan, a named executive officer is eligible to receive a reimbursement
equal to the difference in cost between the monthly COBRA premium and the monthly cost for the medical plan coverage while an
active team member. The reimbursement is for as long as the executive is covered by COBRA but for a period not to exceed two years
for Ms. Ibach and one year for all other NEOs.
(6) Our named executive officers are eligible for supplemental long-term disability coverage that is paid for the company. This benefit
coverage is in addition to the long-term disability coverage provided under the company’s group plan that is provided to all benefit
eligible team members. The amounts shown above represent the estimated present value of the supplemental disability benefit for each
named executive officer assuming that the benefit payment had commenced on December 29, 2018 and had been paid until age 65. A
discount rate of 3% per year was used in the present value calculation. Note that the supplemental long-term disability coverage will no
longer be provided by the company to executive officers after the end of fiscal year 2019.
60
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, we are providing the following information about the relationship of the
annual total compensation of our team members and the annual total compensation of our CEO.
For fiscal year 2018 ending on December 29, 2018, we identified that the annual total
compensation of the team member identified as the median was $52,306, and the annual total
compensation of the CEO, as reported in the Summary Compensation Table, was $4,432,704.
Based on this information, the 2018 ratio of the annual total compensation of our CEO to the
median annual total compensation of all team members was estimated to be 85 to 1.
The following is a summary of the methodology and assumptions used in determining the
median annual total compensation of our team members for 2018:
We used our total active team member population as of the end of fiscal year 2018.
For measuring total compensation of our team members, we included base wages,
incentive compensation, commissions, over-time, paid time off, and holiday pay that was
actually paid to each team member during fiscal year 2018.
For team members included in the population that were hired during fiscal year 2018, we
annualized their actual total compensation to consider that they worked for only a portion
of the year.
It should be noted that under the SEC’s rules and guidance, there are numerous ways to
determine the compensation of a company’s median employee, including the employee
population sampled, the elements of total compensation included, any assumptions made and the
use of statistical sampling. In addition, no two companies have identical employee populations or
compensation programs. As such, our pay ratio may not be comparable to the pay ratio reported
by other companies.
61
The following table summarizes the total compensation paid or earned by each of the non-
employee members of our Board of Directors for the 2018 fiscal year ended December 29, 2018.
Director Compensation
Name
Fees
Earned
or
Paid in
Cash
($)
Daniel I. Alegre
$ 83,500
Stephen L. Gulis, Jr.(3)
$ 89,500
Michael J. Harrison
$ 85,000
Deborah L. Kilpatrick, Ph.D.(5) $ 62,500
Brenda J. Lauderback(3)
$ 96,000
Barbara R. Matas (3)(4)
$ 90,500
Kathleen L. Nedorostek (4)
$ 85,000
$ 83,000
Vicki A. O‘Meara
Michael A. Peel(3)
$ 97,000
$195,000
Jean-Michel Valette
Stock
Awards(1)
($)
$77,807
$77,807
$77,807
$77,807
$77,807
$77,807
$77,807
$77,807
$77,807
$77,807
Option
Awards(2)
($)
$26,077
$26,077
$26,077
$26,077
$26,077
$26,077
$26,077
$26,077
$26,077
$26,077
All Other
Compensation
($)
---
$ 222
---
---
---
$ 4,318
---
$ 2,818
---
---
Total
($)
$187,384
$193,606
$188,884
$166,384
$199,884
$198,702
$188,884
$189,702
$200,884
$298,884
(1)
(2)
(3)
Reflects the aggregate grant date fair value of 2,696 restricted stock awards granted during fiscal year 2018, computed in
accordance with FASB ASC Topic 718. See Note 8, Shareholders’ Equity, to the Consolidated Financial Statements
included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, for a discussion of the relevant
assumptions used in calculating these amounts. As of December 29, 2018, the aggregate number of shares outstanding under
stock awards, including restricted stock, restricted stock units and phantom stock, held by those who served as non-
employee Directors during fiscal year 2018 was as follows: Mr. Alegre, 2,696 shares; Mr. Gulis, 69,582 shares; Mr.
Harrison, 16,713 shares; Ms. Kilpatrick, 2,696 shares; Ms. Lauderback, 11,951 shares; Ms. Matas, 13,469 shares; Ms.
Nedorostek, 17,289 shares; Ms. O’Meara, 2,696 shares; Mr. Peel, 15,202 shares, and Mr. Valette, 2,696 shares.
Reflects the aggregate grant date fair value of 2,165 stock option awards granted during fiscal year 2018, computed in
accordance with FASB ASC Topic 718. See Note 8, Shareholders’ Equity, to the Consolidated Financial Statements
included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, for a discussion of the relevant
assumptions used in calculating these amounts. As of December 29, 2018, the aggregate number of stock options
outstanding held by those who served as non-employee Directors during fiscal 2018 was as follows: Mr. Alegre, 13,522;
Mr. Gulis, 24,397; Mr. Harrison, 16,991; Ms. Kilpatrick, 2,165; Ms. Lauderback, 24,397; Ms. Matas, 6,287; Ms.
Nedorostek, 19,397; Ms. O’Meara, 6,287; Mr. Peel 30,760; and Mr. Valette, 24,397.
Under the 2010 Omnibus Incentive Plan, non-employee Directors may elect to defer receipt of any shares of the company’s
common stock under an Incentive Award granted to non-employee Directors under the Plan. For fiscal 2018, the following
Directors have elected to defer receipt of their 2018 Incentive Award: Mr. Gulis, 2,696 shares; Ms. Lauderback, 2,696
shares; Ms. Matas, 1,348 shares; and Mr. Peel, 2,696 shares.
(4) Ms. Matas and Ms. Nedorostek elected to receive Director fees in the form of common stock under the company’s 2010
Omnibus Incentive Plan, and to defer receipt of such shares. The number of shares paid is determined by dividing the
amount of the Director’s fees to be deferred by the fair market value per share of our common stock on the date the fees
otherwise would have been payable in cash. The number of shares to be received by Ms. Matas in lieu of cash payments
during fiscal 2018 is 2,595 shares and the related grant date fair value was $90,500. The number of shares to be received by
Ms. Nedorostek in lieu of cash payments during fiscal 2018 is 2,501 shares and the related grant date fair value was
$87,000.
(5) Ms. Kilpatrick elected to receive a portion of Director fees in the form of common stock under the company’s 2010
Omnibus Incentive Plan. The number of shares paid is determined by dividing the amount of the Director’s fees to be
received in the form of common stock by the fair market value per share of our common stock on the date the fees otherwise
would have been payable in cash. The number of shares received by Ms. Kilpatrick in lieu of cash payments during fiscal
2018 was 1,376 shares and the related grant date fair value was $46,804.
62
Equity Compensation Plan Information
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights(1)
Weighted average
exercise price of
outstanding options,
warrants and rights(3)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in the first
column)(4)
2,841,781(2)
$22.64
None
2,841,781
Not applicable
$22.64
2,335,638
None
2,335,638
Plan Category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
(1)
(2)
(3)
(4)
Includes the Sleep Number Corporation 2004 Stock Incentive Plan and the Sleep Number Corporation 2010
Omnibus Incentive Plan.
This amount includes 383,181 restricted stock units, 784,881 performance-based stock units, 275,922 market-
based stock units, and 75,950 phantom shares. Performance-based stock units for which the performance
period has not yet been completed are shown at target. The actual number of shares to be issued under
performance-based stock unit awards depends on company performance against goals.
The weighted average exercise price does not take into account the unvested restricted stock units,
performance-based stock units, market-based stock units or phantom shares, which have no exercise price.
The number of shares of common stock available for issuance under the 2010 Plan is reduced by 1.15 shares
for each share issued pursuant to a “full value” award or potentially issuable pursuant to a “full value” award,
which are awards other than stock options or stock appreciation rights that are settled by the issuance of shares
of our common stock.
63
ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION (“Say-on-Pay”)
(Proposal 2)
Background
Consistent with the views expressed by shareholders at our 2017 Annual Meeting, the Board
of Directors has determined to hold an advisory vote to approve executive compensation annually.
This advisory resolution, commonly referred to as “say-on-pay,” is being provided to our
shareholders as required pursuant to Section 14A of the Securities Exchange Act and is non-binding
on the company and the Board of Directors. However, the Board and the Management
Development and Compensation Committee value the opinions of our shareholders and will
carefully consider the outcome of the vote when making future compensation decisions.
As described more fully in the Compensation Discussion and Analysis section of this Proxy
Statement, our compensation programs are structured to align the interests of our executive officers
with the interests of our shareholders. They are designed to attract, retain, and motivate a talented
management team to preserve the company’s competitive advantage in the marketplace and deliver
sustainable profitable growth. Shareholders are urged to read the CD&A, which discusses in-depth
how our executive compensation programs are aligned with our performance and the creation of
shareholder value.
Proposal
The Board of Directors recommends that shareholders vote “For” approval of the following
non-binding advisory resolution at the 2019 annual meeting:
RESOLVED, that the shareholders of Sleep Number Corporation approve, on an advisory
basis, the compensation of the company’s named executive officers as described in the
Compensation Discussion and Analysis, tabular disclosures and other executive
compensation narrative provided in this Proxy Statement for the company’s 2019 Annual
Meeting of Shareholders.
Vote Required
The affirmative vote of the holders of a majority of the shares of common stock present and
entitled to vote in person or by proxy on this matter at the Annual Meeting, and at least a majority
of the minimum number of shares necessary for a quorum, is necessary for approval of the
foregoing resolution. Unless a contrary choice is specified, proxies solicited by the Board of
Directors will be voted “For” approval of the foregoing resolution.
64
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is responsible for providing independent,
objective oversight with respect to our company’s accounting and financial reporting functions,
internal and external audit functions, systems of internal controls regarding financial matters and
legal, ethical and regulatory compliance. The Audit Committee operates under a written charter
approved by the Board of Directors. A copy of the charter is available at the investor relations
section of the company’s website at http://www.sleepnumber.com/sn/en/investor-relations.
The Audit Committee is currently composed of four directors, each of whom is
independent as defined by the Nasdaq listing standards and SEC Rule 10A-3. Barbara R. Matas
(Chair), Stephen L. Gulis, Jr. and Vicki A. O’Meara served on the Audit Committee throughout
2018 and through the date of this report. Brenda J. Lauderback served on the Audit Committee
from the beginning of 2018 and through the annual meeting of shareholders in May of 2018.
Deborah L. Kilpatrick, Ph.D., joined the Audit Committee upon her appointment to the Board in
May of 2018 and has continued to serve on the Audit Committee through the date of this report.
Management is responsible for our company’s financial reporting processes and internal
control over financial reporting. Deloitte & Touche LLP, our Independent Registered Public
Accounting Firm, is responsible for auditing our company’s consolidated financial statements for
the 2018 fiscal year. This audit is to be conducted in accordance with the standards of the Public
Company Accounting Oversight Board (United States). The Audit Committee’s responsibility is
to monitor and oversee these processes.
In connection with these responsibilities, the Audit Committee met in person or by
telephone conference eight times during 2018. These meetings involved representatives of
management, internal audit and the independent auditors. At each of its regularly scheduled
quarterly meetings, the Audit Committee meets in executive session and also meets in separate
executive sessions with representatives of the Independent Registered Public Accounting Firm
and with the executive who leads our internal audit function.
Management represented to the Audit Committee that our company’s consolidated
financial statements were prepared in accordance with accounting principles generally accepted in
the United States of America. The Audit Committee has reviewed and discussed the consolidated
financial statements, together with the results of management’s assessment of the company’s
internal control over financial reporting, with management and the Independent Registered Public
Accounting Firm. The Audit Committee discussed with the Independent Registered Public
Accounting Firm the matters required to be discussed with the auditors under Statement on
Auditing Standards No. 61 “Communication with Audit Committees” (Codification of Statements
on Auditing Standards, AU 380), as amended. The Independent Registered Public Accounting
Firm provided the Audit Committee with written disclosures and the letter required by applicable
requirements of the Public Company Accounting Oversight Board, and the Audit Committee
discussed with the Independent Registered Public Accounting Firm that firm’s independence.
65
Based upon the Audit Committee’s discussions with management, internal audit and the
Independent Registered Public Accounting Firm, and the Audit Committee’s review of the
representations of management and the Independent Registered Public Accounting Firm, the
Audit Committee recommended to the Board of Directors that the audited consolidated financial
statements be included in our company’s Annual Report on Form 10-K for the year ended
December 29, 2018, for filing with the Securities and Exchange Commission.
This Audit Committee Report shall not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the company
specifically incorporates this information by reference, and shall not otherwise be deemed filed
under such Acts.
The Audit Committee of the Board of Directors
Barbara R. Matas, Chair
Stephen L. Gulis, Jr.
Deborah L. Kilpatrick, Ph.D.
Vicki A. O’Meara
66
RATIFICATION OF SELECTION
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Proposal 3)
Selection of Independent Registered Public Accounting Firm
The Audit Committee of our Board of Directors selected Deloitte & Touche LLP
(“Deloitte”) as the company’s independent registered public accounting firm (“Independent
Auditors”) for the 2019 fiscal year ending December 28, 2019. Deloitte has served as our
Independent Auditors since the 2010 fiscal year.
Although the Board is not required to submit the selection of Independent Auditors to
shareholders for ratification, and the Board would not be bound by shareholder ratification or
failure to ratify the selection, the Board wishes to submit the selection of Deloitte to serve as our
Independent Auditors for the 2019 fiscal year to our shareholders for ratification consistent with
best practices in corporate governance.
If shareholders do not ratify the selection of Deloitte as our Independent Auditors, the
Audit Committee will reconsider whether to retain Deloitte and may determine to retain that firm
or another firm without resubmitting the matter to shareholders. Even if the selection of Deloitte
is ratified by shareholders, the Audit Committee may, in its discretion, direct the appointment of a
different firm of Independent Auditors at any time during the year if it determines that such a
change would be in the best interests of the company and our shareholders.
Representatives of Deloitte will be present at the Annual Meeting, will have an
opportunity to make a statement if they so desire and will be available to respond to questions
from shareholders.
Audit and Other Fees
The aggregate fees billed for professional services by the Independent Auditors in 2018 and
2017 were:
Audit fees (1) .................................
Audit-related fees (2) ......................
Audit and audit-related fees ......
Tax fees (3) .....................................
All other fees (4) .............................
Total ..................................................
2018
$651,000
1,895
652,895
145,697
-
$798,592
2017
$585,805
1,895
$587,700
98,182
33,673
$719,555
(1) Audit fees in 2018 and 2017 include fees incurred for the annual audit and quarterly reviews of the company’s
consolidated financial statements and the annual audit of the company’s internal control over financial reporting for
the years ended December 29, 2018 and December 30, 2017, respectively.
(2) These fees related to access to an online accounting research tool.
(3) These fees are primarily for tax compliance services based on time and materials.
(4) These fees relate to consulting services.
67
Under the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange
Commission regarding auditor independence, the engagement of the company’s Independent
Auditors to provide audit or non-audit services for the company must either be approved by the Audit
Committee before the engagement or entered into pursuant to pre-approval policies and procedures
established by the Audit Committee. Our Audit Committee has not established any pre-approval
policies or procedures and therefore all audit or non-audit services performed for the company by the
Independent Auditors must be approved in advance of the engagement by the Audit Committee.
Under limited circumstances, certain de minimus non-audit services may be approved by the Audit
Committee retroactively. All services provided to the company by the Independent Auditors in 2018
were approved in advance of the engagement by the Audit Committee and no non-audit services
were approved retroactively by the Audit Committee pursuant to the exception for certain de
minimus services described above.
Board Recommendation
The Board recommends a vote “For” ratification of the selection of Deloitte as our
Independent Auditors for the 2019 fiscal year ending December 28, 2019. Unless a contrary
choice is specified, proxies solicited by the Board will be voted “For” the ratification of the
selection of Deloitte as Independent Auditors.
Vote Required
Assuming a quorum is present, the affirmative vote of the holders of a majority of the
shares of common stock present and entitled to vote in person or by proxy on this matter at the
Annual Meeting is necessary for approval of this proposal. Unless a contrary choice is specified,
proxies solicited by the Board of Directors will be voted “For” approval of this proposal.
68
OTHER MATTERS
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our Directors and executive
officers and all persons who beneficially own more than 10% of the outstanding shares of our
common stock to file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of our common stock. Executive officers, Directors and
greater than 10% beneficial owners are also required to furnish us with copies of all Section 16(a)
forms they file. To our knowledge, based upon a review of the copies of such reports furnished to
us during the 2018 fiscal year ended December 29, 2018 and written representations by such
persons, all reports were filed on a timely basis.
Shareholder Proposals for 2019 Annual Meeting
Any shareholder proposal requested to be included in the proxy materials for the 2020
Annual Meeting of Shareholders must (i) be received by our Senior Vice President, Chief Legal
and Risk Officer and Secretary on or before December 4, 2019 and (ii) satisfy all of the
requirements of, and not otherwise be permitted to be excluded under, Rule 14a-8 promulgated by
the SEC and our Bylaws.
Our Bylaws require advance written notice to our company of shareholder-proposed
business or of a shareholder’s intention to make a nomination for Director at an annual meeting of
shareholders. They also limit the business which may be conducted at any special meeting of
shareholders to business brought by the Board.
Specifically, the Bylaws provide that business may be brought before an annual meeting
by a shareholder only if the shareholder provides written notice to the Secretary of our company
not less than 120 days prior to the first anniversary of the date that we first released or mailed our
proxy materials to shareholders in connection with the preceding year’s annual meeting. Under
these provisions, notice of a shareholder proposal to be presented at the 2020 Annual Meeting of
Shareholders (but that is not requested to be included in the proxy materials) must be provided to
the Secretary of our company on or before December 4, 2019. In the event, however, that the date
of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from
the anniversary of the preceding year’s annual meeting date, notice by the shareholder to be
timely must be so delivered not later than the close of business on the later of the 120th day prior
to such annual meeting or the 10th day following the day on which public announcement of the
date of such meeting is first made.
A shareholder’s notice must set forth:
A description of the proposed business and the reasons for it,
The name and address of the shareholder making the proposal,
69
The class and number of shares of common stock owned by the shareholder, and
A description of any material interest of the shareholder in the proposed business.
Our Bylaws also provide that a shareholder may nominate a Director at an annual meeting
only after providing advance written notice to the Secretary of our company within the time limits
described above. The shareholder’s notice must set forth all information about each nominee that
would be required under SEC rules in a proxy statement soliciting proxies for the election of such
nominee, as well as the nominee’s business and residence address. The notice must also set forth
the name and record address of the shareholder making the nomination and the class and number
of shares of common stock owned by that shareholder. The required procedures for a shareholder
to nominate a Director are described in more detail above under the heading “Corporate
Governance – Director Nominations Process.”
Other Business
Management of our company does not intend to present other items of business and knows
of no items of business that are likely to be brought before the Annual Meeting except those
described in this Proxy Statement. However, if any other matters should properly come before
the Annual Meeting, the persons named in the enclosed proxy will have discretionary authority to
vote such proxy in accordance with the best judgment on such matters.
Copies of 2018 Annual Report
We will furnish to our shareholders without charge a copy of our Annual Report on Form
10-K (without exhibits) for the 2018 fiscal year ended December 29, 2018. Any request for an
Annual Report should be sent to:
Sleep Number Corporation
Investor Relations Department
1001 Third Avenue South
Minneapolis, Minnesota 55404
Householding Information
“Householding” is a program, approved by the SEC, which allows companies and
intermediaries (e.g. banks and brokers or other nominees) to satisfy the delivery requirements for
proxy statements and annual reports by delivering only one package of shareholder proxy material to
any household at which two or more shareholders reside. If you and other residents at your mailing
address own shares of our common stock in a “street name,” your broker or bank may have notified
you that your household will receive only one copy of our proxy materials. Once you have received
notice from your broker that they will be “householding” materials to your address, “householding”
will continue until you are notified otherwise or until you revoke your consent. Any shareholder
who is receiving multiple copies of these documents and would like to receive only one copy per
household should contact the shareholder’s bank, broker or other nominee record holder. If you hold
shares of our common stock in your own name as a holder of record, “householding” will not apply
to your shares.
70
We will promptly deliver an additional copy of any of these documents to you if you call
us at (763) 551-7498 or write us at the following address:
Sleep Number Corporation
Investor Relations Department
1001 Third Avenue South
Minneapolis, Minnesota 55404
Instructions for Virtual Meeting Participation
Our Annual Meeting will again be a completely virtual meeting. There will be no physical
meeting location.
To participate in the virtual meeting, visit www.virtualshareholdermeeting.com/SNBR2019
and enter the 16-digit control number included on your Notice of Internet Availability of the
Proxy Materials, on your proxy card, or on the instructions that accompanied your proxy
materials. You may log into the meeting platform beginning at 8:15 a.m. Central Time on May
15, 2019. The meeting will begin promptly at 8:30 a.m. Central Time on May 15, 2019.
The virtual meeting platform is fully supported across browsers (Internet Explorer, Firefox,
Chrome, and Safari) and devices (desktops, laptops, tablets, and cell phones) running the most
updated version of applicable software and plugins. Participants should ensure that they have a
strong WiFi connection wherever they intend to participate in the meeting. Participants should
also give themselves plenty of time to log in and ensure that they can hear streaming audio prior
to the start of the meeting.
If you wish to submit a question, you may do so during the meeting at
www.virtualshareholdermeeting.com/SNBR2019.
Questions pertinent to meeting matters will be recognized and answered during the meeting,
subject to time constraints. We reserve the right to edit or reject questions that are profane or
otherwise inappropriate. Detailed guidelines for submitting written questions during the meeting
will be available at www.virtualshareholdermeeting.com/SNBR2019. Appropriate questions
pertinent to meeting matters that cannot be answered during the meeting due to time constraints
will be posted and answered online at www.ir.sleepnumber.com and be available as soon as
practical after the meeting.
If you encounter any technical difficulties accessing the virtual meeting platform during the
check-in process or during the meeting, please call the technical support number that will be
posted on the virtual meeting platform log-in page. An international technical support number
will also be listed.
71
Your vote is important. Whether or not you plan to attend the Annual Meeting, please vote
your shares of common stock “For” the Board’s nominees and “For” each of the other proposals
before you at the Annual Meeting promptly by mail, telephone, or Internet as instructed on your
proxy card.
By Order of the Board of Directors
Samuel R. Hellfeld
Senior Vice President,
Chief Legal and Risk Officer and Secretary
April 2, 2019
Minneapolis, Minnesota
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 29, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File No. 0-25121
SLEEP NUMBER CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of incorporation or organization)
41-1597886
(I.R.S. Employer Identification No.)
1001 Third Avenue South
Minneapolis, Minnesota
(Address of principal executive offices)
55404
(Zip Code)
Registrant's telephone number, including area code: (763) 551-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. YES NO
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO
The aggregate market value of the common stock held by non-affiliates of the Registrant as of June 30, 2018, was $604,888,000 (based on the
last reported sale price of the Registrant’s common stock on that date as reported by NASDAQ).
As of January 26, 2019, there were 30,522,000 shares of the Registrant’s Common Stock outstanding.
[This page intentionally left blank]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be furnished to shareholders in connection with its 2019 Annual Meeting of
Shareholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K.
As used in this Form 10-K, the terms “we,” “us,” “our,” the “Company,” and “Sleep Number” mean Sleep Number
Corporation and its subsidiaries and the term “common stock” means our common stock, par value $0.01 per share.
Sleep Number®, SleepIQ®, Sleep Number 360®, 360®, SleepIQ Kids®, the Double Arrow logo, Select Comfort®, AirFit®, BAM
Labs®, the “B” logo, Comfortaire®, ComfortFit®, Comfort.Individualized.®, Does Your Bed Do That?®, the DualTemp logo, the
DualAir Technology Inside logo, FlexTop®, IndividualFit®, Individualized Sleep Experiences®, It®, Know Better Sleep®,
Pillow[ology]®, PillowFit®, Probably the Best Bed in the World®, Responsive Air®, Sleep Number Inner Circle®, Sleep30®, Smart Bed
For Smart Kids®, Smart Bed Technology®, Tech-e®, The Only Bed That Grows With Them®, The Only Bed That Knows You®, Tonight
Bedtime. Tomorrow The World®, We Make Beds Smart®, What’s Your Sleep Number?®, SleepIQ LABS™, Auto Snore™, HealthIQ™,
HeartIQ™, RespiratoryIQ™, Sleep For The Future℠, Sleep Is Training™, This Is Not A Bed™, WellnessIQ™, ActiveComfort™,
Comfortable. Adjustable. Affordable.™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, Partner
Snore™, the SleepIQ LABS logo, The Bed Reborn™, The Bed That Moves You™, The Best Bed For Couples™, our bed model names,
and our other marks and stylized logos are trademarks and/or service marks of Sleep Number. This Form 10-K may also contain
trademarks, trade names and service marks that are owned by other persons or entities.
Our fiscal year ends on the Saturday closest to December 31, and, unless the context otherwise requires, all references to
years in this Form 10-K refer to our fiscal years. Our fiscal year is based on a 52- or 53-week year. All years presented in this Form
10-K are 52 weeks, except for the 2014 fiscal year ended January 3, 2015, which was a 53-week year.
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
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17
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
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PART I
This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in or incorporated by reference into this
Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements, including but
not limited to projections of revenues, results of operations, financial condition or other financial items; any statements of plans,
strategies and objectives of management for future operations; any statements regarding proposed new products, services or
developments; any statements regarding future economic conditions, prospects or performance; statements of belief and any statement
or assumptions underlying any of the foregoing. In addition, we or others on our behalf may make forward-looking statements from
time to time in oral presentations, including telephone conferences and/or Webcasts open to the public, in press releases or reports, on
our website or otherwise. We try to identify forward-looking statements in this report and elsewhere by using words such as “may,”
“will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,”
“continue” or the negative of these or similar terms.
Our forward-looking statements speak only as of the date made and by their nature involve substantial risks and uncertainties. Our
actual results may differ materially depending on a variety of factors, including the items discussed in greater detail below under the
caption “Risk Factors.” These risks and uncertainties are not exclusive and further information concerning the Company and our
business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time,
including factors that we may consider immaterial or do not anticipate at this time.
We wish to caution readers not to place undue reliance on any forward-looking statement and to recognize that forward-looking
statements are predictions of future results, which may not occur as anticipated. We assume no obligation to update forward-looking
statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you,
however, to review and consider any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and
current reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission.
ITEM 1. BUSINESS
Overview
Sleep Number Corporation, based in Minneapolis, Minnesota, was founded in 1987 and became publicly traded in 1998. We are listed
on the NASDAQ Stock Market LLC (NASDAQ Global Select Market) under the symbol “SNBR.” When used herein, the terms
“Sleep Number,” “Company,” “we,” “us” and “our” refer to Sleep Number Corporation, including consolidated subsidiaries.
Our mission is to improve lives by individualizing sleep experiences. Our vision is to become one of the world's most beloved brands
by delivering an unparalleled sleep experience. We expect to achieve our goals by executing our consumer innovation strategy with
three significant competitive advantages: proprietary sleep innovations, exclusive retail distribution and lifelong customer
relationships.
As a purpose-driven brand and the leader in sleep innovation, Sleep Number delivers proven quality sleep through effortless,
adjustable comfort and biometric sleep tracking. We are visionary leaders in sleep and wellness and are redefining what consumers
should expect from their bed. Our vertically integrated business model and role as the exclusive designer, manufacturer, marketer,
retailer and servicer of Sleep Number® beds allows us to offer consumers high-quality, individualized sleep solutions and services. As
a direct-to-consumer brand, we offer a cohesive experience across our Sleep Number® stores, online at SleepNumber.com and via
phone at (800)753-3768. We also offer mattress home-delivery/installation and maintain an in-house customer service department.
In 2018, we revolutionized sleep with our complete line of Sleep Number 360® smart beds. The 360® smart bed, at the forefront of the
digital health and wellness revolution, is rapidly becoming the “hub” for a healthy life by delivering proven quality sleep. It is the only
bed in the world that offers SleepIQ® technology, a proprietary sensor technology that tracks each sleeper’s individual data, including
movement, breathing rate, heartbeat and sleep habits. The SleepIQ technology platform captures over 8.5 billion biometric data points
every night, building one of the most comprehensive databases of biometric sleep data in the world. Today, the 360 smart bed uses this
data to automatically adjust the comfort of the bed for proven quality sleep. In the future, this high-quality data will likely enable
customers to use their smart bed to manage their health and wellness. Through daily digital interactions that build lifelong
relationships, SleepIQ technology also communicates how you slept and provides insight into what adjustments you can make,
including adjusting your Sleep Number® setting, to optimize your sleep and improve your daily life.
Our commitment to quality, value and service has been widely recognized, including being ranked #1 in Customer Satisfaction with
Mattresses by J.D. Power in 2018 and the best in six out of seven categories (support, durability, comfort, variety of features, value
and warranty). Sleep Number has received the highest score in the 2015, 2016 and 2018 Mattress Satisfaction Report. Sleep Number
ranked 27 points above the industry average in 2018.
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We are committed to delivering superior shareholder value by: (1) increasing consumer demand; (2) leveraging our business model;
and (3) deploying capital efficiently. Over the past six years, we have transformed the business with $481 million of capital
expenditures and acquisitions, while building vital new demand-driving capabilities. This effort has positioned us for accelerated
profits and cash generation. In 2018, we increased net sales by 6% to $1.53 billion and increased earnings per diluted share by 24% to
$1.92.
Social Impact Commitment
Because excellent sleep is essential to a healthier and happier society, we are committed to helping future generations achieve quality
sleep. In 2018, we announced a social impact commitment to help one million young people achieve life-changing sleep through our
products and sleep expertise by 2025. Since announcing this commitment, we have already donated more than $1 million and helped
to improve the lives of nearly 100,000 youth through our partnerships with Good360, GenYOUth and the Alliance for a Healthier
Generation.
Proprietary Sleep Innovations
As the creator and leader of the “sleep tech” category, Sleep Number introduced the revolutionary Sleep Number 360 smart bed at the
Consumer Electronics Show (CES) in 2017 and completed the transition to all 360 smart beds in 2018. The winner of 13 CES
innovation awards and the Edison Award for breakthrough product design and innovation in the Wellness Technology category, the
360 smart bed uses the sleeper’s movements and biometrics to automatically adjust the bed’s firmness throughout the night, providing
the highest quality sleep.
Unlike the “one-size-fits-all” solution offered by other mattress brands, the Sleep Number 360 smart bed offers individualized comfort
that is adjustable on each side of the bed. Our proprietary DualAirTM technology features two independent air chambers and allows
couples to adjust firmness to their individual preference at the touch of a button. Each sleeper can set their ideal firmness, support and
pressure-relieving comfort – their Sleep Number® setting – for deep, restful sleep.
SleepIQ technology, our proprietary sleep tracking technology, is the bed’s operating system. It measures the user's sleep, continuously
gathering hundreds of biometric readings per second, including average heart rate, breathing rate and movement. Using these
measurements, the 360 smart bed automatically adjusts the firmness to keep each sleeper comfortable throughout the night. This data
also enables our proprietary algorithm to deliver a daily SleepIQ® score from 1 to 100, helping sleepers understand how restful their
sleep was the night before. Over time, we expect SleepIQ technology to provide individualized insights so the sleeper knows how to
improve their health and wellness.
The Sleep Number 360 smart bed includes additional smart features, like foot warming, which gently warms your feet to help you fall
asleep faster. The 360 smart bed also connects seamlessly with other smart devices, like the Nest Learning ThermostatTM and fitness
trackers like Apple® HealthKit or Fitbit®, to help sleepers understand how daily activities impact their sleep. The Sleep Number 360
smart bed is more than just a bed – it’s the center of health and wellness.
The Sleep Number 360 smart bed is available at our Sleep Number stores and online at SleepNumber.com, with pricing starting at
$999. We offer our beds in good, better and best price ranges within the premium mattress category. Our Classic, Performance and
Innovation lines come in a broad range of sizes, including twin, full, queen, eastern king and California king.
Additional Sleep Number Innovations
We also offer a full line of exclusive FlexFitTM smart adjustable bases that allow customers to raise the head or foot of the bed. Our
industry-leading FlexFit bases seamlessly integrate with SleepIQ to deliver features like our Partner SnoreTM technology, which allows
your partner to press a button and raise the head of the bed to temporarily relieve snoring.
The SleepIQ Kids® k2 bed extends Sleep Number's DualAir adjustability and SleepIQ technology to the children's mattress market.
The k2 bed adjusts with children as they grow, giving them the best possible sleep.
Our exclusive Sleep Number® bedding collection features a full line of sleep products that are designed to help you get better sleep.
Sleep Number has a wide assortment of pillows designed to fit each individual's size, shape and sleeping position for a more
comfortable sleep.
We also offer a wide assortment of temperature-balancing products including the DualTemp® layer. This proprietary sleep innovation
features active air technology that allows each sleeper to select their ideal temperature at the simple touch of a button and can be used
with any mattress brand or adjustable base.
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Exclusive Distribution
Over 99% of our net sales are generated by our direct-to-consumer business, through a cohesive experience across our Sleep Number
stores, online at SleepNumber.com and via phone.
As the exclusive distributor of Sleep Number products, we target high-quality, convenient and visible store locations based on several
factors, including each market’s overall sales potential, store geographic location, demographics and proximity to other specialty retail
stores. Since 2012, we have overhauled our direct-to-consumer distribution strategy, repositioning a large percentage of our mall
stores to stronger, out-of-mall locations, improving the size and positioning within each location and adding stores in both existing and
new markets. As of December 29, 2018, there were 579 Sleep Number stores in all 50 states, 41% more than six years ago.
Approximately 55% of our stores (including remodels) are less than five years old. With these investments, we created an exclusive,
value-added retail in-store experience through award-winning store design, technology enhancements and stores that are about 50%
larger on average.
Our sleep experts in each store recognize that sleep is not “one size fits all” and provide individualized sleep solutions for each person.
Shopping online is easy, too, at SleepNumber.com. Working in conjunction with our retail stores, we have a cohesive online
experience that helps customers easily research our products and solutions, find and purchase products online, and receive post-sales
support. Our omni-channel experience expands our digital brand, connecting with consumers to drive deeper awareness, consideration
and engagement.
Our retail stores accounted for 91.5% of our net sales in 2018. Average annual net sales per store, based on Company-Controlled
comparable sales, were $2.7 million in 2018. In 2018, 98% of our stores open for a full year, generated net sales over $1 million and
65% of our stores open for a full-year generated net sales over $2 million. We now have 25% of our stores delivering greater than $3
million in annual net sales. In 2018, our online and phone sales accounted for 7.6% of our net sales and increased double digits year-
over-year. Wholesale/Other channel accounted for 0.9% of our net sales in 2018.
Marketing
We use a wide-ranging set of marketing and advertising instruments to expand brand reach, drive emotional brand engagement and
create lifelong customer relationships. This relationship with our customers is an effective driver of repeat purchases and new
customers referrals. Our marketing efforts target a broad customer demographic: 35-64 years old with greater than $75,000 household
income for our core line of products. Our customers care about their own and their family's sleep quality and know that it leads to
better overall health and well-being.
Marketing drives growth in our business by building brand relevance, reputation, awareness, consideration and ongoing engagement
through integrated and authentic communications that amplify the value of the 360 smart bed. This results in increased quality traffic
to our website and stores. Our advertising communications use a mix of national and local marketing to target existing customers for
referral and repeat purchases and to attract new customers. Television is our most efficient media, followed by digital and social
media. Our in-house digital capabilities, content marketing, user experience and data-driven tools allow us to optimize media
investment, messages and audience in real-time. In 2018, media expense represented 13.7% of net sales.
In early 2018, we entered into a multi-year, strategic partnership as the Official Sleep and Wellness Partner of the National Football
League (NFL) to broaden brand reach and engagement, amplify the benefits of our 360 smart beds and link quality sleep to
performance. We also established partnerships with the NFL Players Associations (NFLPA) and the Professional Football Athletic
Trainers Society (PFATS). After year one of our partnership with the NFL, most active NFL players have Sleep Number 360 smart
beds, which are helping players compete more effectively by measuring, understanding and maximizing the benefits of a great night's
sleep. Sleep Number will continue to work with the NFL, the NFLPA, PFATS, trainers, teams and players as they integrate sleep
insights into their overall performance regimens.
Operations
Manufacturing and Distribution
We have two manufacturing plants located in Irmo, South Carolina and Salt Lake City, Utah. The manufacturing operations in South
Carolina and Utah consist of cutting and sewing of the fabric covers for our beds and final assembly and packaging of mattresses and
bases. In addition, our electrical Firmness ControlTM systems are assembled in our Utah plant.
We obtain all the raw materials and components used to produce our beds from outside sources. A number of components, including
our air chambers, our adjustable foundations, various components for our Firmness Control systems, as well as fabrics and zippers, are
sourced from suppliers who currently serve as our sole or primary source of supply for these components. We believe we can obtain
these raw materials and components from other sources of supply, although we could experience some short-term disruption in our
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ability to fulfill orders in the event of an unexpected loss of supply from one of our primary suppliers. We utilize dual sourcing on
targeted components when effective.
We have taken, and continue to take, various measures to mitigate the potential impact of an unexpected disruption in supply from any
sole-source suppliers, including increasing safety stocks and identifying potential secondary sources of supply. All the suppliers that
produce unique or proprietary products for us have in place either contingency or disaster recovery plans, or redundant production
capabilities in multiple locations in order to safeguard against any unforeseen disasters. We review these plans and sites on a regular
basis to ensure the suppliers' ability to maintain an uninterrupted supply of materials and components.
Historically, we manufactured our bed components in our two plants and completed final bed assembly in customers’ homes. We are
pursuing a multi-year evolution to enable delivery of assembled mattresses to customers’ homes. Since 2017, we have opened three
assembly distribution centers to assemble beds prior to delivery: Irmo, South Carolina, Salt Lake City, Utah and Baltimore, Maryland.
We expect to expand this capability to approximately six assembly distribution centers over the next few years. We are also advancing
our outbound logistics network to reduce product handling, hand-offs, damage and costs while in transit to customers’ homes. We see
these initiatives providing a superior and reliable experience for customers with lower costs for the business.
Home Delivery Service
In July 2018, we completed the transition of our entire core mattress line to 360 smart beds. With this change, 100% of our 360 smart
beds sold are now delivered and installed by our home delivery technicians or by our third-party service providers in certain markets.
Customer Service
Through our U.S.-based, in-house customer service team, we provide direct post-purchase support and are able to develop one-to-one
relationships that improve the customer experience and drive our business. This team provides service and support via phone, email,
“live chat” and social media. They also provide a unique opportunity to gather insights that help us continuously improve our product,
strengthen our service quality and advance our innovation. This integration enables operational synergies and drives organizational
efficiencies.
Research and Development
As the leader in consumer-driven sleep innovation, Sleep Number conducts extensive research to understand consumers’ needs and
operates R&D facilities in San Jose, California and Minneapolis, Minnesota. This research drives the design and delivery of our
award-winning sleep innovations, our customer experience and our proprietary SleepIQ technology. As consumers are rapidly
adopting new digital tools and using their personal data to improve health and wellness, developing new technology that improves the
quality of sleep and overall wellness of our customers will remain a top priority for Sleep Number. Our research and development
expenses were $29 million in 2018, $28 million in 2017 and $28 million in 2016.
Information Systems
We use information technology systems to operate, analyze and manage our business, to reduce operating costs and to enhance our
customers' experience. Our major systems include an in-store order entry system, a retail portal system, a payment processing system,
in-bound and out-bound telecommunications systems for direct marketing, delivery scheduling and customer service, e-commerce
systems, a data warehouse system and an enterprise resource planning (ERP) system. These systems are primarily comprised of
packaged applications licensed from various software vendors plus a limited number of internally developed programs. Please refer to
the information set forth in Part I, Item 1A., Risk Factors, for a discussion of certain risks that may be encountered in connection with
our information systems.
Intellectual Property
We hold various U.S. and foreign patents and patent applications regarding certain elements of the design and function of our
products, including air control systems, remote control systems, air chamber features, mattress construction, foundation systems,
sensing systems, as well as other technology. We have numerous U.S. patents, expiring at various dates between February 2019 and
February 2037 and numerous U.S. patent applications pending. We also have numerous foreign patents and patent applications
pending. Notwithstanding these patents and patent applications, we cannot ensure that these patent rights will provide substantial
protection or that others will not be able to develop products that are similar to or competitive with our products.
We have a number of trademarks and service marks registered with the U.S. Patent and Trademark Office, including Sleep Number®,
SleepIQ®, Sleep Number 360®, 360®, SleepIQ Kids®, the Double Arrow logo, Select Comfort®, AirFit®, BAM Labs®, the “B” logo,
Comfortaire®, ComfortFit®, Comfort.Individualized.®, Does Your Bed Do That?®, the DualTemp logo, the DualAir Technology Inside
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logo, FlexTop®, IndividualFit®, Individualized Sleep Experiences®, It®, Know Better Sleep®, Pillow[ology]®, PillowFit®, Probably
the Best Bed in the World®, Responsive Air®, Sleep Number Inner Circle®, Sleep30®, Smart Bed For Smart Kids®, Smart Bed
Technology®, Tech-e®, The Only Bed That Grows With Them®, The Only Bed That Knows You®, Tonight Bedtime. Tomorrow The
World®, We Make Beds Smart® and What’s Your Sleep Number?®. We have several trademarks that are the subject of pending
applications, including SleepIQ LABS™, Auto Snore™, HealthIQ™, HeartIQ™, RespiratoryIQ™, Sleep for the Future℠, Sleep Is
Training™, This Is Not A Bed™ and WellnessIQ™. Each registered mark is renewable indefinitely as long as the mark remains in use
and/or is not deemed to be invalid or canceled. We also have a number of common law trademarks, including ActiveComfort™,
Comfortable. Adjustable. Affordable.™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, Partner
Snore™, the SleepIQ LABS logo, The Bed Reborn™, The Bed That Moves You™, The Best Bed For Couples™ and our bed model
names. Several of our trademarks have been registered, or are the subject of pending applications for registration, in various foreign
countries. We also have other intellectual property rights related to our products, processes and technologies, including trade secrets,
trade dress and copyrights. We protect and enforce our intellectual property rights, including through litigation as necessary.
Industry and Competition
The U.S. bedding industry, including mattresses and foundations, is a mature and generally stable industry. According to the
International Sleep Products Association (ISPA), the industry has grown by approximately 4% annually over the last 20 years and at
an estimated 4% annually, on average, over the past five years. We believe that industry unit growth has been primarily driven by
population growth, an increase in the number of homes (including secondary residences) and the increased size of homes. We believe
growth in average wholesale prices resulted from a shift to both larger and higher-quality beds, which are typically more expensive.
According to ISPA and Company estimates, industry wholesale shipments of mattresses and foundations (excluding adjustable bases)
were approximately $8.2 billion in 2018 compared to $8.4 billion in 2017. Furniture/Today, a furniture industry trade publication, has
ranked Sleep Number as the 5th largest mattress manufacturer and 2nd largest U.S. bedding retailer for 2017, with an 8% market share
of industry retail revenue.
The retail bedding industry is fragmented and highly competitive. Our Company-Controlled distribution channel is exclusive, and we
compete against regional and local specialty bedding retailers, home furnishing stores, mass merchants, national discount stores and
online marketers. Our consumer innovation strategy with exclusive distribution is highly differentiated, and results in a retail-leading
customer experience.
Manufacturers in the bedding industry compete on price, quality, brand name recognition, product availability and product
performance, including the perceived levels of comfort and support provided by a mattress. There is a high degree of concentration
among manufacturers, who produce innerspring, memory foam and hybrid beds, under nationally recognized brand names, including
Tempur Sealy, Stearns & Foster, Serta and Simmons. In recent years, numerous (approximately 200) direct-to-consumer companies
and low-cost importers have entered the market, offering “bed-in-a-box” products to consumers primarily through the Internet. These
companies market directly to consumers, competing primarily on convenience of online shopping and speed of delivery. Their
products are generally foam-based and undifferentiated in terms of sleep benefits.
Governmental Regulation and Compliance
As a vertically integrated manufacturer and retailer, we are subject to extensive federal, state and local laws and regulations affecting
all aspects of our business.
As a manufacturer, we are committed to product quality and safety, including adherence to all applicable laws and regulations
affecting our products. Compliance with health, safety and environmental laws and regulations, including the federal fire retardant
standards developed by the U.S. Consumer Product Safety Commission, which requires rigorous and costly testing, has increased the
cost and complexity of manufacturing our products and may adversely impact the speed and cost of product development efforts.
Further, our manufacturing and other business operations and facilities are, or may, become subject to additional federal, state or local
laws or regulations relating to supply chain transparency, conflict minerals sourcing and disclosure, end-of-life disposal and recycling
requirements, and other laws or regulations relating to environmental protection and health and safety requirements.
As a retailer, we are subject to additional laws and regulations that apply to retailers generally and govern the marketing and sale of
our products and the operation of both our retail stores and our e-commerce activities. Many of the statutory and regulatory
requirements which impact our retail and e-commerce operations are consumer-focused and pertain to activities such as the
advertising and selling of credit-based promotional offers, truth-in-advertising, privacy, “do not call/mail” requirements, warranty
disclosure, delivery timing requirements, accessibility and similar requirements.
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All of our operations are or may become subject to federal, state and local labor laws including, but not limited to, those relating to
occupational health and safety, employee privacy, wage and hour, overtime pay, harassment and discrimination, equal opportunity and
employee leaves and benefits. We are also subject to existing and emerging federal and state laws relating to data security and privacy.
It is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed
to promote such compliance.
Customers
No single customer accounts for 10% or more of our net sales.
Seasonality
Our business is modestly impacted by seasonal influences inherent in the U.S. bedding industry and general retail shopping patterns.
The U.S. bedding industry generally experiences lower sales in the second quarter of the calendar year and increased sales during
selected holiday or promotional periods.
Working Capital
We are able to operate with minimal working capital requirements because we sell directly to customers, utilize a primarily hybrid
"make-to-stock" production process and operate retail stores that serve mainly as showrooms. We have historically generated
sufficient cash flows to self-fund operations through an accelerated cash-conversion cycle. In February 2019, we amended our
revolving credit facility (Credit Agreement) with a syndicate of banks (Lenders). The Credit Agreement provides a revolving credit
facility for general corporate purposes with net aggregate availability of $450 million. The Credit Agreement contains an accordion
feature that allows us to increase the amount of the credit facility from $450 million up to $600 million in total availability, subject to
Lenders' approval. The Credit Agreement matures in February 2024.
Qualified customers are offered revolving credit to finance purchases through a private-label consumer credit facility provided by
Synchrony Bank. Approximately 50% of our net sales in 2018 were financed by Synchrony Bank. Our current agreement with
Synchrony Bank expires December 31, 2023, subject to earlier termination upon certain events. We pay Synchrony Bank a fee for
extended credit promotional financing offers. Under the terms of our 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. As the receivables are owned by Synchrony Bank, at no time are the receivables purchased or acquired from us. We are
not liable to Synchrony Bank for our customers' credit defaults. In connection with all purchases financed under these arrangements,
Synchrony Bank pays us an amount equal to the total amount of such purchases, net of promotional related discounts, upon delivery to
the customer. Customers that do not qualify for credit under our agreement with Synchrony Bank may apply for credit under a
secondary program that we offer through another provider.
Team Members
At December 29, 2018, we employed 4,220 individuals, including 2,167 retail sales and support team members, 382 customer service
team members, 1,185 manufacturing and logistics team members, and 486 management and administrative team members, of which
59 were employed on a part-time or temporary basis. Except for managerial team members and professional support staff, all of our
team members are paid on an hourly basis (plus commissions for sales professionals). Additionally, we provide various broad-
participation incentive compensation programs tied to various performance objectives. None of our team members are represented by
a labor union or covered by a collective bargaining agreement. We regularly survey our team members with regard to engagement, and
review engagement metrics and input with team members. We have a highly engaged team working in a values-driven culture, which
we believe is important for an innovation company with an aspirational vision and life-changing mission.
8
Executive Officers of the Registrant
SHELLY R. IBACH, 59
President and Chief Executive Officer (Joined the Company in April 2007 and was promoted to President and CEO in June 2012)
Shelly R. Ibach, Sleep Number® setting 40, is the President and Chief Executive Officer (CEO) for Sleep Number (NASDAQ:
SNBR). From June 2011 to June 2012, Ms. Ibach served as the Company’s Executive Vice President and Chief Operating Officer and
from October 2008 to June 2011, she served as Executive Vice President, Sales & Merchandising. Ms. Ibach joined the Company in
April 2007 as Senior Vice President of U.S. sales for Company-owned channels. Before joining the Company, Ms. Ibach was Senior
Vice President and General Merchandise Manager for Macy’s home division. From 1982 to 2005, Ms. Ibach held various leadership
and executive positions within Target Corporation.
MELISSA BARRA, 47
Senior Vice President, Chief Strategy and Customer Relationship Officer (Joined the Company in 2013 and was promoted to current
role in January 2015)
Melissa Barra, Sleep Number® setting 30, serves as the Senior Vice President, Chief Strategy and Customer Relationship Officer. Ms.
Barra was Vice President, Consumer Insights and Strategy from February 2013 to January 2015. Prior to joining Sleep Number in
February 2013, Ms. Barra was Vice President, Process Reengineering Officer for Best Buy Co., Inc. from 2011 to 2012. In a dual role,
she also served as Vice President, Finance, New Business Customer Solutions Group from 2010 to 2012. From 2005 to 2010, she held
leadership positions in Strategic Alliances and Corporate Development for Best Buy. Prior to Best Buy, Ms. Barra held corporate
finance and strategy leadership roles in companies in the U.S. and internationally, including Grupo Futuro S.A., Citibank and GE
Capital.
ANNIE L. BLOOMQUIST, 49
Senior Vice President and Chief Product Officer (Joined the Company in 2008 and was promoted to current role in June 2012)
Annie L. Bloomquist, Sleep Number® setting 25, serves as the Senior Vice President and Chief Product Officer and leads all product
innovation, research and development for software and hardware, product brand management, clinical sleep research and
merchandising. Ms. Bloomquist was the Chief Product and Merchandising Officer from June 2011 to June 2012. Ms. Bloomquist
joined Sleep Number in May 2008 as Vice President and General Merchandise Manager. Prior to joining Sleep Number, Ms.
Bloomquist held leadership positions in product and merchandising at Macy’s and Marshall Field’s Department Stores for Target
Corporation.
KEVIN K. BROWN, 50
Senior Vice President and Chief Marketing Officer (Joined the Company in 2014)
Kevin K. Brown. Sleep Number® setting 40, serves as Senior vice President and Chief Marketing Officer and is responsible for
building the Sleep Number brand through stories that set the Company apart, communicate Sleep Number’s innovation and drive
brand advocacy across all customer touchpoints. Before joining Sleep Number in 2014, Mr. Brown served in executive leadership
roles at Meijer, Inc., Sears Holdings Corporation, Jo-Ann Stores, Inc. and Accenture.
DAVID R. CALLEN, 52
Chief Financial Officer (Joined the Company in 2014)
David R. Callen, Sleep Number® setting 50, serves as the Chief Financial Officer for Sleep Number. Prior to joining Sleep Number in
April 2014, Mr. Callen served as the Principal Financial Officer for Ethan Allen Interiors, Inc., from 2007 to 2014. Mr. Callen has
served for 30 years in several high-performing companies in increasingly responsible international financial management positions.
His breadth of experience has emphasized business and financial strategy, brand support, and operational excellence across multiple
industries including automotive, high-tech, dental, outdoor recreational products and public accounting.
ANDY P. CARLIN, 55
Executive Vice President, Chief Sales and Services Officer (Joined the Company in 2008 and was promoted to current role in April
2016)
Andy P. Carlin, Sleep Number® setting 60, serves as the Executive Vice President and Chief Sales and Service Officer for Sleep
Number and leads all sales channels, real estate and home delivery operations. From June 2012 to April 2016, Mr. Carlin was Senior
Vice President and Chief Sales Officer; from May 2011 to June 2012, Mr. Carlin was the Vice President and Chief Sales Officer; and
from January 2009 to May 2011 he was the Vice President of U.S. Retail Sales. Mr. Carlin joined Sleep Number in February 2008 as
Regional Vice President, East Region. Prior to joining Sleep Number, Mr. Carlin spent more than 20 years in sales leadership roles for
companies including Senior Vice President of Store Operations at Gander Mountain from 2003 to 2008, Kohl’s Department Stores
from 1995 to 2003 and the department store division of Target Corporation from 1986 to 1995.
9
PATRICIA A. DIRKS, 62
Senior Vice President and Chief Human Resources Officer (Joined the Company in 2014)
Patricia A. Dirks (Tricia), Sleep Number® setting 25, serves as the Senior Vice President and Chief Human Resources Officer for
Sleep Number and leads all human resources functions. Prior to joining Sleep Number in April 2014, Ms. Dirks served as Senior Vice
President Organizational Effectiveness for Target Corporation. From 2004 to 2009, Ms. Dirks was Vice President Headquarters
Human Resources for Target Corporation. Prior to 2004, Ms. Dirks was Senior Vice President Human Resources at Marshall Field's
Department Stores of Target Corporation.
SAMUEL R. HELLFELD, 40
Senior Vice President and Chief Legal and Risk Officer and Secretary (Joined the Company in 2013 and was promoted to current role
in September 2018)
Samuel R. Hellfeld, Sleep Number® setting 65, serves as the Senior Vice President, Chief Legal and Risk Officer. From October 2015
to September 2018, Mr. Hellfeld served as Vice President, Associate General Counsel. Mr. Hellfeld joined Sleep Number in March
2013 as Corporate Counsel. Prior to joining Sleep Number, Mr. Hellfeld was a Partner in the law firm of Fox Rothschild LLP (fka
Oppenheimer Wolff & Donnelly LLP) practicing in the areas of intellectual property and litigation. Prior to 2010, Mr. Hellfeld was an
Associate at several law firms and also served as Law Clerk in the United States Court of Appeals for the Ninth Circuit and the United
States District Court, Southern District of California.
SURESH KRISHNA, 50
Senior Vice President and Chief Operations, Supply Chain and Lean Officer (Joined the Company in 2016)
Suresh Krishna, Sleep Number® setting 95, serves as the Senior Vice President and Chief Operations, Supply Chain and Lean Officer
of Sleep Number. Prior to joining Sleep Number, Mr. Krishna joined Polaris in 2010 as Vice President of Global Operations and
Integration. In July 2014, he was promoted to Vice President and Business Unit Head of Europe Middle East & Africa (EMEA) for
Polaris. From 2007 to 2010, he served as Vice President Global Operations, Supply Chain and IT at a division of UTC Fire & Security.
Mr. Krishna also served in a variety of roles for Diageo, ABB and earlier in his career, he was an associate at Booz Allen & Hamilton.
J. HUNTER SAKLAD, 49
Senior Vice President, Chief Information Officer (Joined the Company in 2004 and was promoted to current role in December 2012)
Hunter Saklad, Sleep Number® setting 55, is the Senior Vice President and Chief Information Officer at Sleep Number. From June
2011 to December 2012, Mr. Saklad served as the Vice President, Consumer Insight and Strategy at Sleep Number. From March 2006
to June 2011 he was Vice President of Finance and held a variety of positions across Finance serving business partners in marketing,
sales, supply chain, FP&A, investor relations and treasury. Mr. Saklad joined Sleep Number in October 2004 as Sr. Director of
Finance. Prior to joining Sleep Number, Mr. Saklad held finance leadership roles at Ford Motor Company and Visteon.
10
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file
reports, proxy statements and other information with the Securities and Exchange Commission (SEC).
Our corporate website is www.SleepNumber.com. Through a link to a third-party content provider, our corporate website provides free
access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after electronic filing with the SEC. These documents are posted on our website at www.SleepNumber.com — select the “Investors”
link, the "Financials & Filings" link, and then the “SEC Filings” link. The information contained on our website or connected to our
website is not incorporated by reference into this Form 10-K and should not be considered part of this report.
We also make available, free of charge on our website, the charters of the Audit Committee, Management Development and
Compensation Committee, and Corporate Governance and Nominating Committee as well as our Code of Business Conduct
(including any amendment to, or waiver from, a provision of our Code of Business Conduct) adopted by our Board. These documents
are posted on our website — select the “Investors” link, the “Governance” link and then the "Documents & Charters" link.
Copies of any of the above referenced information will also be made available, free of charge, upon written request to:
Sleep Number Corporation
Investor Relations Department
1001 Third Avenue South
Minneapolis, MN 55404
11
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the specific risks set forth below and
other matters described in this Annual Report on Form 10-K before making an investment decision. The risks and uncertainties
described below are not the only ones facing us. Additional risks and uncertainties, including risks and uncertainties not presently
known to us or that we currently see as immaterial, may also harm our business. If any of these risks occur, our business, results of
operations, cash flows and financial condition could be materially and adversely affected.
Current and future economic conditions could materially adversely affect our sales, profitability, cash flows and financial
condition.
Our success depends significantly upon discretionary consumer spending, which is influenced by a number of general economic
factors, including without limitation economic growth, consumer confidence, the housing market, employment and income levels,
interest rates, inflation, taxation, consumer shopping trends and the level of customer traffic in malls and shopping centers. Adverse
trends in any of these economic factors may adversely affect our sales, profitability, cash flows and financial condition.
Our future growth and profitability depend upon the effectiveness and efficiency of our marketing programs.
We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in
generating consumer awareness and sales of our products. We continue to evolve our marketing strategies, adjust our messages, the
amount we spend on advertising and where we spend it. We may not always be successful in developing effective messages, as the
consumer and competition change and in achieving efficiency in our advertising expenditures.
Consumers are increasingly using digital tools as a part of their shopping experience. As a result, our future growth and profitability
will depend in part on (i) the effectiveness and efficiency of our online experience, including without limitation advertising and search
optimization programs, in generating consumer awareness and sales of our products, (ii) our ability to prevent confusion among
consumers that can result from search engines that allow competitors to use or bid on our trademarks to direct consumers to
competitors’ websites, (iii) our ability to prevent Internet publication of false or misleading information regarding our products or our
competitors’ products; (iv) reviews of our products; (v) the nature and tone of consumer sentiment, including those published online or
elsewhere; and (vi) the stability of our website. In recent periods, competitor spending on Internet-based marketing programs has
increased, including without limitation from a number of direct-to-consumer, Internet-based retailers, which has and may continue to
increase the cost of basic search terms and the cost of our Internet-based marketing programs.
If our marketing messages are ineffective or our advertising expenditures and other marketing programs, including digital programs,
are inefficient in creating awareness and consideration of our products and brand name, and in driving consumer traffic to our website
or stores, our sales, profitability, cash flows and financial condition may be adversely impacted. In addition, if we are not effective in
preventing the publication of confusing, false or misleading information regarding our brand or our products, or if there is publication
online or elsewhere of significant negative consumer sentiment regarding our Company, brand or our products, our sales, profitability,
cash flows and financial condition may be adversely impacted.
Our future growth and profitability depend on our ability to execute our Company-Controlled distribution strategy.
The vast majority of our sales occur through our Company-Controlled distribution channels, including our retail stores and our
website. These Company-Controlled distribution channels represent our largest opportunity for growth in sales and improvement in
profitability. Our retail stores carry significant fixed costs. We also make significant capital expenditures as we open new stores and
remodel or reposition existing stores. We are highly dependent on our ability to maintain and increase sales per store to cover these
fixed expenses, provide a return on our capital investments and improve our operating margins.
Many of our stores are mall-based. We depend on the continued popularity of malls as shopping destinations and the ability of mall
anchor tenants and other attractions to generate customer traffic for our mall-based retail stores. Any decrease in mall traffic could
adversely affect our sales, profitability, cash flows and financial condition.
Our Company-Controlled distribution strategy results in relatively few points of distribution, including 579 retail stores in 50 U.S.
states as of the end of 2018 and our website. Several of the mattress manufacturers and retailers with which we compete have
significantly more points of distribution than we do, which makes us highly dependent on our ability to drive consumers to our points
of distribution to gain market share.
Our longer-term Company-Controlled distribution strategy is also dependent on our ability to renew existing store leases and to secure
suitable locations for new store openings, in each case on a cost-effective basis. We may encounter higher than anticipated rents and
other costs in connection with managing our retail store base. We may also be unable to find or obtain suitable new locations.
12
Failure to achieve and maintain a high level of product quality could negatively impact our sales, profitability, cash flows and
financial condition.
Our products are highly differentiated from traditional innerspring mattresses and from viscoelastic and other foam mattresses, which
have little or no technology and do not rely on electronics and air control systems. As a result, our beds may be susceptible to failures
that do not exist with traditional or foam mattresses. Failure to achieve and maintain acceptable quality standards could impact
consumer acceptance of our products or could result in negative media and Internet reports or owner dissatisfaction that could
negatively impact our brand image and sales levels.
In addition, a decline in product quality could result in an increase in return rates and a corresponding decrease in sales, or an increase
in product warranty claims in excess of our warranty reserves. An unexpected increase in return rates or warranty claims could harm
our sales, profitability, cash flows and financial condition.
As a consumer innovation company with differentiated products, we face an inherent risk of exposure to product liability claims or
regulatory actions if the use of our products is alleged to have resulted in personal injury or property damage. If any of our products
proves to be defective, we may be required to recall or redesign such products. We have at times experienced increased returns and
adverse impacts on sales, as well as product liability litigation, as a result of media reports related to the alleged propensity of our
products to develop mold. We may experience additional adverse impacts on sales and additional litigation if any similar media reports
were to occur in the future. We maintain insurance against some forms of product liability claims, but such coverage may not be
applicable to, or adequate for, liabilities actually incurred. A successful claim brought against us outside of, or in excess of, available
insurance coverage, or any claim or product recall that results in significant adverse publicity against us, may have a material adverse
effect on our sales, profitability, cash flows and financial condition.
Our future growth and profitability depend in part on our ability to continue to improve and expand our product line and to
successfully execute new product introductions.
As described in greater detail below, the bedding industry, as well as the market for sleep monitoring products, are both highly
competitive, and our ability to compete effectively and to profitably grow our market share depend in part on our ability to continue to
improve and expand our product line of adjustable firmness air beds, SleepIQ technology and related accessory products. We incur
significant research and development and other expenditures in the pursuit of improvements and additions to our product line. If these
efforts do not result in meaningful product improvements or new product introductions, or if we are not able to gain widespread
consumer acceptance of product improvements or new product introductions, our sales, profitability, cash flows and financial
condition may be adversely affected. In addition, if any significant product improvements or new product introductions are not
successful, our reputation and brand image may be adversely affected.
In 2018, we completed the transition to our new line of 360 smart bed mattresses to replace our prior line of mattresses. This new
product roll-out required transition costs in our supply chain and retail stores. If we are not able to continue to innovate and gain
widespread consumer acceptance of new products, our sales, profitability, cash flows and financial condition may be adversely
affected.
Significant competition could adversely affect our business.
Because of the vertical integration of our business model, our products and distribution channels face significant competition from
both manufacturers of different types of mattresses and a variety of retailers. Our SleepIQ technology also faces significant
competition from various manufacturers and retailers of sleep tracking and monitoring products.
The mattress industry is characterized by a high degree of concentration among the largest manufacturers of innerspring mattresses
and foam mattresses and one dominant national mattress retailer. Many newer competitors in the mattress industry have begun to offer
“bed-in-a-box” or similar products directly to consumers through the Internet and other distribution channels. The emergence of these
new competitors has significantly increased the costs of search terms and digital advertising.
A variety of sleep tracking and monitoring products that compete with our SleepIQ technology have been introduced by various
manufacturers and retailers, both within and outside of the traditional mattress industry.
Some of our competitors have substantially greater financial, marketing and manufacturing resources and greater brand name
recognition than we do and sell products through broader and more established distribution channels. Our national, exclusive
distribution competes with other retailers who generally provide a wider selection of mattress alternatives than we offer. A number of
these retailers also have more points of distribution, greater marketing resources, and greater brand name recognition than we do.
13
These manufacturing and retailing competitors, or new entrants into the market, may compete aggressively and gain market share with
existing or new products, and may pursue or expand their presence in the adjustable firmness air bed segment of the market as well as
in the market for sleep tracking and monitoring products. We have limited ability to anticipate the timing and scale of new product
introductions, advertising campaigns or new pricing strategies by our competitors, which could inhibit our ability to retain or increase
market share, or to maintain our profit margins.
If we are unable to effectively compete with other manufacturers and retailers of mattress and sleep tracking and monitoring products,
our sales, profitability, cash flows and financial condition may be adversely impacted.
Our intellectual property rights may not prevent others from using our technology or trademarks in connection with the sale of
competitive products. We may be subject to claims that our products, processes or trademarks infringe intellectual property rights
of others.
We own various U.S. and foreign patents and patent applications related to certain elements of the design and function of our beds and
related products. We own numerous registered and unregistered trademarks and trademark applications, including in particular our
Sleep Number, Sleep Number 360, 360, and SleepIQ trademarks, as well as other intellectual property rights, including trade secrets,
trade dress and copyrights, which we believe have significant value and are important to the marketing of our products. These
intellectual property rights may not provide adequate protection against infringement or piracy, may not prevent competitors from
developing and marketing products that are similar to or competitive with our beds or other products, and may be costly and time-
consuming to protect and enforce. Our patents are also subject to varying expiration dates. In addition, the laws of some foreign
countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the United
States. If we are unable to protect and enforce our intellectual property, we may be unable to prevent other companies from using our
technology or trademarks in connection with competitive products, which could adversely affect our sales, profitability, cash flows
and financial condition.
We may be subject to claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others.
The defense of these claims, even if we are ultimately successful, may result in costly litigation, and if we are not successful in our
defense, we could be subject to injunctions and liability for damages or royalty obligations, and our sales, profitability, cash flows and
financial condition could be adversely affected.
A reduction in the availability of credit to consumers generally or under our existing consumer credit programs could harm our
sales, profitability, cash flows and financial condition.
A significant percentage of our sales are made under consumer credit programs through third parties. The amount of credit available to
consumers may be adversely impacted by macroeconomic factors that affect the financial position of consumers and as suppliers of
credit adjust their lending criteria. In addition, changes in federal regulations effective in 2010 placed additional restrictions on all
consumer credit programs, including limiting the types of promotional credit offerings that may be offered to consumers.
Synchrony Bank provides credit to our customers through a private label credit card agreement that is currently scheduled to expire on
December 31, 2023, subject to earlier termination upon certain events. Synchrony Bank has discretion to control the content of
financing offers to our customers and to set minimum credit standards under which credit is extended to customers.
Reduction of credit availability due to changing economic conditions, changes in credit standards under our private label credit card
program or changes in regulatory requirements, or the termination of our agreement with Synchrony Bank, could harm our sales,
profitability, cash flows and financial condition.
We could be vulnerable to shortages in supply of components necessary to manufacture our products due to our manufacturing
processes which operate with minimal levels of inventory or due to global shortages of supply of electronic componentry or other
materials, which may harm our ability to satisfy consumer demand and may adversely impact our sales and profitability.
A significant percentage of our products are assembled after we receive orders from customers utilizing manufacturing processes with
minimal levels of raw materials, work-in-process inventories and finished goods inventories. Lead times for ordered components may
vary significantly, and some components used to manufacture our products are provided on a sole source basis. In addition, with the
increasing prevalence of and consumer demand for electronic products, the global supply of electronic componentry is increasingly
strained, which may lead to shortages in supply and increased prices. Any unexpected shortage of materials caused by any disruption
or unavailability of supply or an unexpected increase in the demand for our products, could lead to delays in shipping our beds to
customers and increased costs. Any such delays could adversely affect our sales, customer satisfaction, profitability, cash flows and
financial condition.
14
We rely upon several key suppliers and third parties that are, in some instances, the only source of supply or services currently
used by us for particular materials, components or services. A disruption in the supply or substantial increase in cost of any of
these products or services could harm our sales, profitability, cash flows and financial condition.
We currently obtain all the materials and components used to produce our beds from outside sources including some who are located
outside the United States. In several cases, including our air chambers, blow-molded foundations, integrated non-adjustable
foundations, adjustable foundations, various components for our Firmness Control systems, certain foam formulations, as well as our
fabrics and zippers, we have chosen to obtain these materials and components from suppliers who serve as the only source of supply,
or who supply the vast majority of our needs of the particular material or component. While we believe that these materials and
components, or suitable replacements, could be obtained from other sources, in the event of a disruption or loss of supply of relevant
materials or components for any reason, we may not be able to find alternative sources of supply, or if found, may not be found on
comparable terms. If our relationship with the primary supplier of our air chambers or the supplier of our adjustable foundations is
terminated, we could have difficulty in replacing these sources since there are relatively few other suppliers presently capable of
manufacturing these components.
Similarly, we rely on third parties to deliver some of our products to our facilities and customers on a timely and cost-effective basis.
These third-party providers could be vulnerable to labor shortages, liquidity concerns or other factors that may result in delays in
deliveries or increased costs of deliveries. Any significant delay in deliveries to our customers could lead to increased returns and
cause us to lose sales. Any increase in freight charges or other costs of deliveries could increase our costs of doing business and harm
our sales, profitability, cash flows and financial condition.
Fluctuations in commodity prices or third-party logistics costs could result in an increase in component costs and/or delivery costs.
Our business is subject to significant increases or volatility in the prices of certain commodities, including but not limited to electronic
componentry, fuel, oil, natural gas, rubber, cotton, plastic resin, steel and chemical ingredients used to produce foam, as well as third-
party logistic costs. Increases in prices of these commodities or logistics costs or other inflationary pressures may result in significant
cost increases for our raw materials and product components, as well as increases in the cost of delivering our products to our
customers. To the extent we are unable to offset any such increased costs through value engineering and similar initiatives, or through
price increases, our profitability, cash flows and financial condition may be adversely impacted. If we choose to increase prices to
offset the increased costs, our sales volumes could be adversely impacted.
Our business is subject to risks inherent in global sourcing activities.
Our air chambers and some of our other components are manufactured outside the United States, and therefore are subject to risks
associated with foreign sourcing of materials, including but not limited to:
• Existing or potential duties, tariffs or quotas on certain types of goods that may be imported into the United States;
• Political instability resulting in disruption of trade;
• Disruptions in transportation due to acts of terrorism, shipping delays, foreign or domestic dock strikes, customs inspections
or other factors;
• Foreign currency fluctuations; and
• Economic uncertainties, including inflation.
We cannot predict whether the countries in which some of our components are manufactured, or may be manufactured in the future,
will be subject to new or additional trade restrictions imposed by the United States or other foreign governments, including the
likelihood, type, or effect of any such restrictions. The United States government is contemplating various actions regarding trade with
China, including the possibility of levying various tariffs on imports from China. As we source some of our components from China,
any tariffs or other trade restrictions impacting the import of those components from China may have a material adverse impact on us.
These factors could increase our costs of doing business with foreign suppliers, lead to inadequate inventory levels or delays in
shipping beds to our customers, which could harm our sales, customer satisfaction, profitability, cash flows and financial condition.
Disruption of operations in either of our two main manufacturing facilities or three assembly facilities could increase our costs of
doing business or lead to delays in shipping our beds.
We have two main manufacturing plants, which are located in Irmo, South Carolina and Salt Lake City, Utah. We co-located two of
the three currently operated assembly distribution centers at these sites with a third location in Baltimore, Maryland. A significant
percentage of our products are assembled to fulfill orders rather than stocking finished goods inventory in our plants or stores.
Therefore, the disruption of operations of either of our two main manufacturing facilities or three assembly facilities for a significant
period of time may increase our costs of doing business and lead to delays in shipping our beds to customers. Such delays could
adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.
15
Our business is subject to a wide variety of government laws and regulations. These laws and regulations, as well as any new or
changed laws or regulations, could disrupt our operations or increase our compliance costs. Failure to comply with such laws and
regulations could have further adverse impact.
We are subject to a wide variety of laws and regulations relating to the bedding industry or to various aspects of our business. Laws
and regulations at the federal, state and local levels frequently change and we cannot always reasonably predict the impact from, or the
ultimate cost of compliance with, future regulatory or administrative changes. Changes in law, the imposition of new or additional
regulations or the enactment of any new or more stringent legislation that impacts employment and labor, trade, advertising and
marketing practices, pricing, consumer credit offerings, product testing and safety, transportation and logistics, health care, tax,
accounting, privacy and data security, health and safety or environmental issues, among others, could require us to change the way we
do business and could have a material adverse impact on our sales, profitability, cash flows and financial condition. New or different
laws or regulations could increase direct compliance costs for us or may cause our vendors to raise the prices they charge us because
of increased compliance costs. Further, the adoption of a multi-layered regulatory approach to any one of the state or federal laws or
regulations to which we are currently subject, particularly where the layers are in conflict, could require alteration of our
manufacturing processes or operational parameters which may adversely impact our business.
Legislative or regulatory changes that impact our relationship with our workforce, such as minimum wage requirements or health
insurance or other employee benefits mandates, could increase our expenses and adversely affect our operations. While it is our policy
and practice to comply with legal and regulatory requirements and our procedures and internal controls are designed to promote such
compliance, we cannot assure that all of our operations will comply with all such legal and regulatory requirements. Further, laws and
regulations change over time and we may be required to incur significant expenses and/or to modify our operations in order to ensure
compliance. This could harm our profitability or financial condition. If we are found to be in violation of any laws or regulations, we
could become subject to fines, penalties, damages or other sanctions as well as potential adverse publicity or litigation exposure. This
could adversely impact our business, reputation, sales, profitability, cash flows or financial condition.
Regulatory requirements related to flammability standards for mattresses may increase our product costs and increase the risk of
disruption to our business.
The federal Consumer Product Safety Commission adopted flammability standards and related regulations which became effective
nationwide in July 2007 for mattresses and mattress and foundation sets. Compliance with these requirements has resulted in higher
materials and manufacturing costs for our products, and has required modifications to our information systems and business
operations, further increasing our costs and negatively impacting our capacity.
These regulations require manufacturers to implement quality assurance programs and encourage manufacturers to conduct random
testing of products. These regulations also require maintenance and retention of compliance documentation. These quality assurance
and documentation requirements are costly to implement and maintain. If any product testing, other evidence, or regulatory
inspections yield results indicating that any of our products may not meet the flammability standards, we may be required to
temporarily cease production and distribution and/or to recall products from the field, and we may be subject to fines or penalties, any
of which outcomes could harm our business, reputation, sales, profitability, cash flows and financial condition.
Pending or unforeseen litigation and the potential for adverse publicity associated with litigation could adversely impact our
business, reputation, financial results or financial condition.
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. We currently do not expect the outcome of any pending
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 pending claims asserted against us, or claims that
may be asserted in the future that we are currently not aware of, or adverse publicity resulting from any such litigation, could
adversely impact our business, reputation, sales, profitability, cash flows and financial condition.
Any improvements or upgrades to our information systems that may be required to meet the evolving needs of our business as well
as existing and emerging regulatory requirements may be costly to implement and may take longer or require greater resources
than anticipated, and may result in disruptions to our systems or business.
We depend on our information systems for many aspects of our business. In the fourth quarter of 2015, we implemented a new ERP
system and continue to implement operational improvements to our information systems. If our information systems are disrupted in
any material way, or improvements or upgrades are required to meet the evolving needs of our business and existing and emerging
regulatory requirements, we may be required to incur significant capital expenditures in the pursuit of improvements or upgrades to
our information systems. These efforts may take longer and may require greater financial and other resources than anticipated, may
16
cause distraction of key personnel, and may cause short-term disruptions to our existing systems and our business. Any of these
outcomes could impair our ability to achieve critical strategic initiatives and could adversely impact our sales, profitability, cash flows
and financial condition.
Information systems that contain confidential Company data, consumers’ private data, and employees’ private data may be subject
to attacks by hackers or other cyber threats that could compromise the security of the data, which could substantially disrupt our
business and could result in the breach of the data.
Our information systems and information systems of third-party vendors we use to assist in the storage and management of
information contain personal information related to our customers and employees in the ordinary course of our business, such as credit
card and demographic information of our customers, SleepIQ® data, including biometric data, from our customer base and social
security numbers and demographic information of our employees. These information systems also contain confidential Company data
regarding our business and innovations. While we maintain and require our third-party vendors to maintain security measures to
protect this information, a breach of these security measures, such as through third-party action, employee error, malfeasance or
otherwise, could compromise the security of our data and customers’ and employees’ personal information. As the techniques used to
breach such security measures change frequently and may not be recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventive measures. Any failure of our systems and processes or our third-party
vendors’ systems and processes to adequately protect our data or customer or employee personal information from theft or loss could
adversely impact our business, reputation, sales, profitability, cash flows and financial condition.
Our future growth and profitability depend in part upon our ability to attract, retain and motivate qualified personnel.
As a vertically integrated manufacturer and retailer, our future growth and profitability will depend in part upon our ability to attract,
retain and motivate qualified personnel in a wide variety of areas to execute our growth strategy, including qualified management and
executive personnel and qualified retail sales professionals and managers. The failure to attract, retain and motivate qualified
personnel may hinder our ability to execute our business strategy and growth initiatives and may adversely impact our sales,
profitability, cash flows and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
ITEM 2. PROPERTIES
Retail Locations
We currently lease all of our existing retail store locations and expect that our policy of leasing stores, rather than owning stores, will
continue. We lease our retail stores under operating leases which, in addition to the minimum lease payments, may require payment of
a proportionate share of the real estate taxes and certain building operating expenses. Our retail store leases generally provide for an
initial lease term of five to 10 years. In addition, our mall-based retail store leases may require payment of contingent rent based on
net sales in excess of certain thresholds. Certain retail store leases may contain options to extend the term of the original lease.
The following table summarizes the geographic locations of our 579 retail stores as of December 29, 2018:
Retail
Stores
Retail
Stores
Retail
Stores
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
10 Louisiana
1 Maine
10 Maryland
4 Massachusetts
66 Michigan
14 Minnesota
6 Mississippi
2 Missouri
41 Montana
20 Nebraska
1 Nevada
8 New Hampshire
3 New Jersey
21 New Mexico
11 New York
8 North Carolina
8 North Dakota
8 Ohio
2 Oklahoma
14 Oregon
11 Pennsylvania
18 Rhode Island
16 South Carolina
5 South Dakota
12 Tennessee
4 Texas
4 Utah
5 Vermont
4 Virginia
16 Washington
3 West Virginia
20 Wisconsin
16 Wyoming
4 Total
21
5
7
21
1
8
2
11
53
6
1
18
14
2
12
1
579
Manufacturing, Distribution and Headquarters
We lease our 238,000 square-foot corporate headquarters in Minneapolis, Minnesota. The lease term commenced in November 2017
and runs through October 2032. The lease includes three five-year renewal options.
We lease two manufacturing, assembly and distribution centers in Irmo, South Carolina and Salt Lake City, Utah of approximately
151,000 square feet and approximately 101,000 square feet, respectively. The Irmo facility lease runs through June 2026, with two
five-year renewal options. The Salt Lake City facility lease runs through July 2020, with two five-year renewal options. We also lease
one storage facility in Salt Lake City of approximately 57,000 square feet through April 2020, and a second storage facility in Salt
Lake City of approximately 80,000 square feet through November 2019.
We lease a bedding collection and fulfillment center in Brooklyn Park, Minnesota consisting of approximately 60,000 square feet. This
lease runs through July 2020, with two three-year renewal options.
We lease a call center in Jefferson, Louisiana consisting of approximately 28,000 square feet. This lease runs through August 2022,
with two three-year renewal options.
We lease one facility for our SleepIQ LABS’ operations in San Jose, California of approximately 16,000 square feet. This lease runs
through February 2029 and contains two five-year renewal options.
We lease one facility for assembly and distribution of products in Baltimore, Maryland containing approximately 89,000 square feet.
This lease runs through October 2025 and contains two three-year renewal options.
We lease approximately 900 square feet of office space in Portland, Oregon. This lease runs through September 2019.
18
ITEM 3. 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. If a loss is reasonably
possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to
currently pending legal proceedings, we have not established an estimated range of reasonably possible 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 pending legal proceedings to have a material effect on
our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is
possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of
operations, financial position or cash flows. We expense legal costs as incurred.
On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against
Sleep Number alleging that Sleep Number 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 Sleep Number beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees
and costs. Sleep Number removed the case to the United States District Court for the District of New Jersey, which subsequently
granted Sleep Number’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which
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 accepted the certified questions and on April 16, 2018, ruled in our favor on one of the
two questions, holding that a consumer only has standing to bring a claim under the relevant statute if the consumer has been harmed
by the defendant’s conduct. The Third Circuit remanded the case to the federal district court, which initially allowed the plaintiffs to
file its proposed amended complaint, but thereafter rescinded its order and then denied Plaintiffs’ request to file the amended
complaint. We plan to ask the Court to dismiss the case.
On September 18, 2018, former Home Delivery Technician, Donald Cassels, and former Field Services Delivery Assistant, Jose
Cadenas, filed suit in Superior Court in San Francisco County, California alleging representative claims on a purported class action
basis under the California Labor Code Private Attorney General Act. While the two representative plaintiffs were in the Home
Delivery workforce, the Complaint does not limit the purported plaintiff class to that group. The plaintiffs allege that Sleep Number
failed or refused to adopt adequate practices, policies and procedures relating to wage payments, record keeping, employment
disclosures, meal and rest breaks, among other claims, under California law. The plaintiffs purport to represent all former and current
Sleep Number employees in the State of California aggrieved by the alleged practices. The Complaint seeks damages in the form of
civil penalties and plaintiffs’ attorneys’ fees, and expressly disclaims the recovery of any purported individual specific relief or
underpaid wages. After Sleep Number raised issues with the plaintiffs’ choice of venue, the Court transferred venue from the Superior
Court in San Francisco County to Superior Court in Fresno County. We intend to vigorously defend this matter.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
19
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock trades on The NASDAQ Stock Market LLC (NASDAQ Global Select Market) under the symbol “SNBR.” As of
January 26, 2019, there were approximately 215 holders of record of our common stock.
We are not restricted from paying cash dividends under our credit agreement so long as we are not in default under the credit
agreement, our leverage ratio (as defined in our credit agreement) after giving effect to such restricted payments (as defined in our
credit agreement) would not exceed 3.75:1.00 and no default or event of default (as defined in our credit agreement) would result
therefrom. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.
Information concerning share repurchases completed during the fourth quarter of fiscal 2018 is set forth below:
Fiscal Period
September 30, 2018 through October 27, 2018
October 28, 2018 through November 24, 2018
November 25, 2018 through December 29, 2018
Total
Average
Price
Paid per
Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(3)
Total Number
of Shares
Purchased(1)(2)
614,828 $
538,300 $
1,233,468 $
2,386,596
33.96
37.97
34.77
612,303 $
537,913
1,233,378
2,383,594 $
249,204,000
228,779,000
185,899,000
185,899,000
(1) Under our Board-approved $500 million share repurchase program, we repurchased 2,383,594 shares of our common stock at a cost of $84 million (based on trade
dates) during the three months ended December 29, 2018.
(2) In connection with the vesting of employee restricted stock grants, we also repurchased 3,002 shares of our common stock at a cost of $104 thousand during the three
months ended December 29, 2018.
(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.
20
Comparative Stock Performance
The graph below compares the total cumulative shareholder return on our common stock over the last five years to the total
cumulative return on the Standard and Poor’s (S&P) 400 Specialty Stores Index and The NASDAQ Stock Market (U.S.) Index
assuming a $100 investment made on December 28, 2013. Each of the three measures of cumulative total return assumes reinvestment
of dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance. The
information contained in this “Comparative Stock Performance” section shall not be deemed to be “soliciting material” or “filed” or
incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of
1934, as amended, except to the extent that we specifically request that it be treated as soliciting material or incorporate it by reference
into a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG SLEEP NUMBER CORPORATION, S&P 400 SPECIALTY STORES INDEX,
AND THE NASDAQ STOCK MARKET (U.S.) INDEX
$200
$100
$0
1 2 / 2 8 / 1 3
0 1 / 0 3 / 1 5
0 1 / 0 2 / 1 6
1 2 / 3 1 / 1 6
1 2 / 3 0 / 1 7
1 2 / 2 9 / 1 8
Sleep Number Corporation
S&P 400 Specialty Stores Index
The NASDAQ Stock Market (U.S.) Index
12/28/13
01/03/15
01/02/16 12/31/16 12/30/17 12/29/18
151
107 $
78
108
168
134
177 $
84
174
101 $
91
123
127 $
124
115
Sleep Number Corporation
S&P 400 Specialty Stores Index
The NASDAQ Stock Market (U.S.) Index
$
100 $
100
100
21
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share and selected operating data, unless otherwise indicated)
The Consolidated Statements of Operations Data and Consolidated Balance Sheet Data presented below have been derived from our
Consolidated Financial Statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto included in this Annual Report on
Form 10-K.
Consolidated Statements of Operations Data:
Net sales
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Research and development
Operating income
Net income
Net income per share:
Basic
Diluted
Shares used in calculation of net income per share:
Basic
Diluted
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable debt securities
Total assets
Total shareholders’ (deficit) equity
Selected Operating Data:
Stores open at period-end
Stores opened during period
Stores closed during period
Average sales per store (000’s)(2)
Percentage of stores with more than $1.0 million in net
sales(3)
Percentage of stores with more than $2.0 million in net
sales(3)
Average revenue per mattress unit - Company-Controlled
channel(4)
Company-Controlled comparable-sales increase(5)
Total retail square footage (at period-end) (000's)
Average square footage per store open during period(3)
Average sales per square foot(2)
Average store age (in months at period-end)
Earnings before interest, depreciation and amortization
(Adjusted EBITDA)(6)
Free cash flows(6)
Return on invested capital (ROIC)(6)
________________________
2018
2017
Year
2016
2015
2014(1)
$ 1,531,575 $ 1,444,497 $ 1,311,291 $ 1,213,699 $ 1,156,757
927,961 897,347 810,160 740,751 706,850
687,380 650,357 595,845 550,475 512,007
84,864
119,378 127,269 109,674
99,209
8,233
27,991
15,971
75,096 101,746
76,650
67,974
50,519 $
51,417 $
28,775
92,428
69,539 $
27,806
91,915
65,077 $
$
$
$
1.97 $
1.92 $
1.58 $
1.55 $
1.11 $
1.10 $
0.99 $
0.97 $
1.27
1.25
35,256
36,165
41,212
42,085
46,154
46,902
51,252
52,101
53,452
54,193
1,612 $
$
36,114 $ 166,045
470,138 471,834 457,166 500,897 474,187
89,156 160,320 222,339 256,907
(109,550 )
11,609 $
3,651 $
579
53
30
2,707 $
556
36
20
2,618 $
540
72
20
2,555 $
488
38
13
2,536 $
463
57
34
2,512
98 %
98 %
98 %
99 %
65 %
61 %
61 %
62 %
4,482 $
3 %
1,598
2,725
998 $
95
4,283 $
4 %
1,489
2,647
995 $
97
4,046 $
1 %
1,399
2,538
1,013 $
93
4,028 $
3 %
1,214
2,445
1,045 $
99
98 %
59 %
3,671
12 %
1,106
2,302
1,107
97
$
$
$
$ 165,588 $ 169,097 $ 145,689 $ 133,057 $ 148,223
67,874
$
86,025 $ 112,778 $
14.3 %
16.0 %
93,793 $
12.2 %
22,356 $
11.2 %
15.1 %
(1) Fiscal year 2014 had 53 weeks. All other fiscal years presented had 52 weeks.
(2) Trailing-twelve months Company-Controlled comparable sales per store open at least one year.
(3) For stores open during the entire period indicated (excludes online and phone sales).
(4) Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.
(5) Stores are included in the comparable sales calculation in the 13th full month of operation. Stores that have been remodeled or repositioned within the same shopping
center remain in the comparable-store base. The number of comparable stores used to calculate such data was 524, 512, 459, 442 and 396 for 2018, 2017, 2016, 2015
and 2014, respectively. Fiscal 2014 included 53 weeks, as compared to 52 weeks for the other periods presented. Comparable sales have been adjusted and reported
as if all years had the same number of weeks.
(6) These non-GAAP measures are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates
annual and year-over-year comparisons for investors and financial analysts. See pages 23 and 24 for the reconciliation of these non-GAAP measures to the
appropriate GAAP measures.
22
Non-GAAP Data Reconciliations
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
(in thousands)
We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense,
interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted
EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of
Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted
EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure:
2018
2017
Year
2016
2015
2014
Net income
Income tax expense
Interest expense
Depreciation and amortization
Stock-based compensation
Asset impairments
Adjusted EBITDA
Free Cash Flow
(in thousands)
$
69,539 $
16,982
5,911
61,648
11,412
96
67,974
34,134
53
38,767
6,798
497
$ 165,588 $ 169,097 $ 145,689 $ 133,057 $ 148,223
65,077 $
25,961
975
61,077
15,763
244
51,417 $
24,516
811
56,910
11,961
74
50,519 $
24,911
160
46,916
10,290
261
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 operations,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors
and financial analysts.
Net cash provided by operating activities
Less: Purchases of property and equipment
Free cash flow
2018
Year
2016
$ 131,540 $ 172,607 $ 151,645 $ 107,942 $ 144,468
(76,594 )
67,874
(45,515 )
(59,829 )
86,025 $ 112,778 $
(57,852 )
93,793 $
(85,586 )
22,356 $
2017
2015
2014
$
23
Non-GAAP Data Reconciliations (continued)
Return on Invested Capital (ROIC)
(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:
2018
2017
Year
2016
2015
2014
Net operating profit after taxes (NOPAT)
Operating income
Add: Rent expense(1)
Add: Interest income
Less: Depreciation on capitalized operating leases(2)
Less: Income taxes(3)
NOPAT
Average invested capital
Total (deficit) equity
Less: Cash greater than target (4)
Add: Long-term debt(5)
Add: Capitalized operating lease obligations(6)
Total invested capital at end of period
$
92,428 $
79,390
4
(20,392 )
(36,444 )
$ 114,986 $
91,915 $
74,019
97
(18,865 )
(48,970 )
98,196 $
76,650 $
67,416
94
(17,185 )
(41,933 )
85,042 $
75,096 $ 101,746
57,605
62,369
415
494
(14,265 )
(16,203 )
(48,900 )
(40,384 )
96,601
81,372 $
89,156 $ 160,320 $ 222,339 $ 256,907
$ (109,550 ) $
(37,319 )
—
—
200,458
635,120 592,152 539,328 498,952 460,840
$ 726,028 $ 681,308 $ 699,648 $ 721,291 $ 680,428
—
—
—
—
—
—
Average invested capital(7)
$ 719,055 $ 686,436 $ 699,576 $ 726,756 $ 639,118
Return on invested capital (ROIC)(8)
16.0 %
14.3 %
12.2 %
11.2 %
15.1 %
(1) Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.
(2) Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) for the respective reporting periods
with an assumed thirty-year useful life. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.
(3) Reflects annual effective income tax rates, before discrete adjustments, of 24.1%, 33.3%, 33.0%, 33.2% and 33.6% for 2018, 2017, 2016, 2015 and 2014,
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 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. Our revolving credit facility’s leverage covenant computation is based on a multiple of six times annual
rent expense.
(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.
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
The discussion in this Annual Report contains certain forward-looking statements that relate to future plans, events, financial
results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those
that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,”
“predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or
projections. These risks and uncertainties include, among others:
• Current and future general and industry economic trends and consumer confidence;
• 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, advertising, or trademarks infringe the intellectual property rights of
others;
• Availability of attractive and cost-effective consumer credit options;
• Our manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;
• Our dependence on significant suppliers and third parties and our ability to maintain relationships with key suppliers or third-
parties, including several sole-source suppliers or providers of services;
• Rising commodity costs and other inflationary pressures;
• Risks inherent in global sourcing activities, including tariffs and the potential for shortages in supply;
• Risks of disruption in the operation of either of our three main manufacturing facilities or three assembly facilities;
•
• Pending or unforeseen litigation and the potential for adverse publicity associated with litigation;
• The adequacy of our and third-party information systems to meet the evolving needs of our business and existing and evolving
Increasing government regulation;
risks and regulatory standards applicable to data privacy and security;
• The costs and potential disruptions to our business related to upgrading our information systems;
• The vulnerability of our and third-party information systems to attacks by hackers or other cyber threats that could compromise
the security of our systems, result in a data breach or disrupt our business
• Our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail
sales professionals and managers.
Additional information concerning these and other risks and uncertainties is contained under the caption "Risk Factors" in this
Annual Report on Form 10-K.
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 six sections:
• Overview
• Results of Operations
• Liquidity and Capital Resources
• Off-Balance-Sheet Arrangements and Contractual Obligations
• Critical Accounting Policies and Estimates
• Recent Accounting Pronouncements
25
Overview
Business Overview
Sleep Number is the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number beds and the leader in sleep
innovation. We offer our customers high-quality, individualized sleep solutions and services, including a complete line of Sleep
Number beds, bases and bedding accessories. We are also the pioneer and leader in biometric sleep innovation and tracking. Our
proprietary SleepIQ technology, the operating system of the 360 smart bed, works with our proprietary algorithms and artificial
intelligence to track user’s sleep patterns and biometric changes. SleepIQ allows each bed to use the sleeper’s own data to
automatically and effortlessly adjust the bed’s firmness, delivering proven quality sleep.
Our relentless focus on developing winning innovation for our customers is also helping us to deliver superior shareholder value, by:
(i) increasing consumer demand; (ii) leveraging our business model; and (iii) deploying capital efficiently.
Results of Operations
Fiscal 2018 Summary
Financial highlights for fiscal 2018 were as follows:
• Net sales for 2018 increased 6% to $1.53 billion, compared with $1.44 billion in 2017. Company-Controlled comparable sales
increased 3% and sales from 23 net new stores opened in the past 12 months added 3 percentage points (ppt.) of growth in 2018.
• Net sales accelerated in the back-half of 2018 after we transitioned to selling all Sleep Number 360 smart beds. In January 2017 at
CES, Sleep Number introduced the Sleep Number 360 smart bed line, the most significant innovation in our 30-year history. In
May 2017, we began selling our i7 and i10 smart beds. We launched a third smart bed model (the p6) in December 2017. In April
2018, we introduced the Sleep Number 360 p5 and i8 smart beds, our two most popular models. Our c4 and c2 bed models
completed the transition in June and July 2018, respectively. The Sleep Number 360 smart bed won 13 awards at CES 2017,
including being named the Best of Innovation Honoree in the Home Appliance category. It also received the 2018 Edison Silver
Award for breakthrough product design and innovation in the Wellness Technology category. Sleep Number was ranked #1 in
Customer Satisfaction with Mattresses by J.D. Power in 2018 and the best in six out of seven categories (support, durability,
comfort, features, value and warranty).
• On a trailing twelve-month basis, 2018 net sales per store (for stores open at least one year, including online and phone sales) of
$2.7 million increased 3% from $2.6 million in 2017.
• 2018 operating income of $92 million increased 1% compared with the prior year despite significant gross margin costs
associated with transitioning to all 360 smart beds, including excess freight, storage, product handling, operating inefficiencies
and close-out sales of our prior line of beds. Our 2018 operating income rate decreased to 6.0% of net sales, compared with 6.4%
of net sales in 2017. The increase in operating income was attributable to: (i) the 6% increase in net sales; (ii) the operating
expense leverage resulting from the 6% increase in net sales and reduced corporate incentive compensation; partially offset by
(iii) a 1.5 ppt. decrease in our gross profit rate primarily due to the product transition costs noted above.
• Net income in 2018 increased 7% to $70 million compared with net income of $65 million in 2017. Net income per diluted share
increased 24% to $1.92 versus $1.55 per diluted share in 2017. Net income per diluted share in 2018 benefited from a lower
income tax rate (Tax Cuts and Jobs Act) and a reduction in diluted average shares outstanding (share repurchases).
• We achieved a return on invested capital (ROIC) of 16.0% in 2018, compared with our high-single digit weighted average cost of
capital.
• Cash provided by operating activities in 2018 decreased to $132 million, compared with $173 million for the prior year. Purchases
of property and equipment for 2018 decreased to $46 million, compared with $60 million in 2017.
• We ended 2018 with $200 million of borrowings under our revolving credit facility (as planned), compared with $25 million at
the end of 2017. We utilize our credit facility for general corporate purposes, to meet our seasonal working capital requirements
and to repurchase our stock. In February 2019, we amended our revolving credit facility to increase our net aggregate availability
to $450 million.
In 2018, we repurchased 8.3 million shares of our common stock at a cost of $279 million ($33.60 per share, based on trade date)
under our Board-approved share repurchase program. As of December 29, 2018, the remaining authorization under our Board-
approved share repurchase program was $186 million.
•
26
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.
2018
2017
2016
Net sales
Cost of sales
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Operating income
Other expense, net
Income before income taxes
Income tax expense
Net income
Net income per share:
Basic
Diluted
$
$ 1,531.6
603.6
928.0
% of
Net Sales
$
% of
Net Sales
$
% of
Net Sales
100.0 % $ 1,444.5
547.2
897.3
39.4
60.6
100.0 % $ 1,311.3
501.1
810.2
37.9
62.1
100.0 %
38.2
61.8
687.4
119.4
28.8
835.5
92.4
5.9
86.5
17.0
69.5
44.9
7.8
1.9
54.6
6.0
0.4
5.6
1.1
4.5 % $
650.4
127.3
27.8
805.4
91.9
0.9
91.0
26.0
65.1
45.0
8.8
1.9
55.8
6.4
0.1
6.3
1.8
4.5 % $
595.8
109.7
28.0
733.5
76.7
0.7
75.9
24.5
51.4
45.4
8.4
2.1
55.9
5.8
0.1
5.8
1.9
3.9 %
1.97
1.92
$
$
1.58
1.55
$
$
1.11
1.10
$
$
$
Weighted-average number of common shares:
Basic
Diluted
35.3
36.2
41.2
42.1
46.2
46.9
27
The percentage of our total net sales, by dollar volume, from each of our channels was as follows:
Company-Controlled channel
Wholesale/Other channel
Total
2018
2017
2016
99.1 %
0.9 %
100.0 %
98.7 %
1.3 %
100.0 %
97.7 %
2.3 %
100.0 %
The components of total net sales growth, including comparable net sales changes, were as follows:
Retail comparable-store sales(1)
Online and phone(1)
Company-Controlled comparable sales change(1)
Net opened/closed stores
Total Company-Controlled channel
Wholesale/Other channel
Total net sales change
Net Sales Increase/(Decrease)
2017
2018
2016
3 %
15 %
3 %
3 %
6 %
(26 %)
6 %
3 %
16 %
4 %
7 %
11 %
(38 %)
10 %
0 %
25 %
1 %
7 %
8 %
5 %
8 %
(1) Stores are included in the comparable-store calculation 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:
Average sales per store(1) ($ in thousands)
Average sales per square foot(1)
Stores > $1 million in net sales(2)
Stores > $2 million in net sales(2)
Average revenue per mattress unit – Company-Controlled channel(3)
2018
2017
2016
$
$
$
2,707 $
998 $
98 %
65 %
4,482 $
2,618 $
995 $
98 %
61 %
4,283 $
2,555
1,013
98 %
61 %
4,046
(1) Trailing-twelve months Company-Controlled comparable sales per store open at least one year.
(2) Trailing-twelve months for stores open at least one year (excludes online and phone sales).
(3) Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.
The number of retail stores operating during the last three years was as follows:
Beginning of period
Opened
Closed
End of period
2018
2017
2016
556
53
(30 )
579
540
36
(20 )
556
488
72
(20 )
540
28
Comparison of 2018 and 2017
Net sales
Net sales in 2018 increased 6% to $1.53 billion, compared with $1.44 billion in 2017. The sales increase was driven by a 3%
comparable sales increase in our Company-Controlled channel and 3 percentage points (ppt.) of growth from sales generated by 23 net
new retail stores opened in the past 12 months, partially offset by a decrease in Wholesale/Other channel sales.
The $87 million net sales increase compared with the same period one year ago was primarily comprised of: (i) a $47 million increase
from Company-Controlled comparable sales; and (ii) a $45 million increase resulting from net store openings; partially offset by (iii) a
$5 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units increased 2% compared to the prior-year
period. Average revenue per mattress unit in our Company-Controlled channel increased by 5%.
Net sales accelerated in the back-half of 2018 after we transitioned to selling all Sleep Number 360 smart beds. In January 2017 at
CES, Sleep Number introduced the Sleep Number 360 smart bed line, the most significant innovation in our 30-year history. In May
2017, we began selling our i7 and i10 smart beds. We launched a third smart bed model (the p6) in December 2017. In April 2018, we
introduced the Sleep Number 360 p5 and i8 smart beds, our two most popular models. Our c4 and c2 bed models completed the
transition in June and July 2018, respectively. The Sleep Number 360 smart bed won 13 awards at CES 2017, including being named
the Best of Innovation Honoree in the Home Appliance category. It also received the 2018 Edison Silver Award for breakthrough
product design and innovation in the Wellness Technology category. Sleep Number was ranked #1 in Customer Satisfaction with
Mattresses by J.D. Power in 2018 and the best in six out of seven categories (support, durability, comfort, features, value and
warranty).
Gross profit
Gross profit for 2018 of $928 million increased by $31 million, or 3% compared with $897 million in 2017. The 2018 gross profit rate
decreased to 60.6% of net sales, compared with 62.1% for the prior-year period. The 1.5 ppt. decrease in the gross profit rate was
primarily due to: (i) significant costs associated with transitioning to all 360 smart beds, including excess freight, storage and product
handling; (ii) inefficiencies related to operating two product lines for most of 2018; (iii) close-out sales of our prior line of beds; and
(iv) a higher mix of lower-margin products, including our FlexFit adjustable bases. In addition, our gross profit rate can fluctuate from
year to year due to a variety of other factors, including warranty expenses, sales return and exchange costs, and performance-based
incentive compensation.
Sales and marketing expenses
Sales and marketing expenses in 2018 increased $37 million to $687 million, compared with $650 million last year. The sales and
marketing expense rate decreased slightly to 44.9% of net sales compared with 45.0% for the same period one year ago due to: (i) the
expense leverage from the 6% increase in net sales; partially offset by (ii) an increase in media and promotional expenses that drove
additional customer traffic to our sales channels, including stores, online and phone.
General and administrative expenses
General and administrative (G&A) expenses decreased $8 million to $119 million in 2018, compared with $127 million in the prior
year and decreased to 7.8% of net sales, compared with 8.8% of net sales one year ago. The $8 million decrease in G&A expenses
consisted of the following major components: (i) a $7.0 million reduction in employee compensation resulting from a year-over-year
decrease in Company-wide performance-based incentive compensation; and (ii) $1.0 million decrease in miscellaneous other
expenses. The G&A expense rate decreased by 1.0 ppt. in 2018 compared with the same period one year ago due to the decrease in
expenses discussed above and the leveraging impact of the 6% net sales increase.
Other expense, net
Other expense, net increased to $6 million for the year ended December 29, 2018 compared with $1 million for the same period one
year ago. The increase was driven by increased interest expense from a higher average debt balance on our revolving line of credit and
an increase in the weighted-average interest rate on borrowings outstanding.
Income tax expense
Income tax expense was $17 million for the year ended December 29, 2018, compared with $26 million for the same period one year
ago. The effective tax rate for the year ended December 29, 2018 decreased to 19.6% compared with 28.5% for 2017 reflecting the
changes associated with the “Tax Cuts and Jobs Act” (TCJA), including a reduction in the federal income tax rate to 21% from 35%.
Tax expense for 2017 included a $1.7 million provisional tax benefit from revaluing deferred taxes in accordance with the TCJA. Tax
expense for 2018 included a $2.9 million increase in the 2017 provisional tax benefit based on new information, including a tax
planning analysis. Both periods' tax expense and effective tax rates included stock-based compensation excess tax benefits. See Note
12, Income Taxes, for further information.
29
Comparison of 2017 and 2016
Net sales
Net sales in 2017 increased 10% to $1.44 billion, compared with $1.31 billion for the same period one year ago. The sales increase
was driven by a 4% comparable sales increase in our Company-Controlled channel and 7 percentage points (ppt.) of growth from sales
generated by 16 net new retail stores opened in the past 12 months, partially offset by a decrease in Wholesale/Other channel sales.
The $133 million net sales increase compared with the same period one year ago was primarily comprised of: (i) a $91 million
increase resulting from net store openings; and (ii) a $54 million sales increase from Company-Controlled comparable sales; partially
offset by (iii) a $12 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units increased 5% compared to
the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by 6%.
Gross profit
Gross profit of $897 million increased by $87 million, or 11%, compared with $810 million for the same period one year ago. The
gross profit rate increased to 62.1% of net sales for 2017, compared with 61.8% 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 during the first six
months of 2016. The current-year gross profit rate improvement of 0.3 ppt. benefited from manufacturing and supply chain
efficiencies, including lean initiatives, and lower sales return and exchange costs compared with the same period one year ago. In
addition, our gross profit rate can fluctuate from year to year 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 in 2017 increased 9% to $650 million, compared with $596 million last year. The sales and marketing
expense rate decreased to 45.0% of net sales compared with 45.4% for the same period one year ago due to: (i) leveraging our media
spending, which increased by 2% compared with the prior year, while net sales increased by 10%; partially offset by (ii) an increase in
customer financing expenses, as a larger percentage of our customers took advantage of promotional financing offers; and (iii) an
increase in selling compensation expense, including higher performance-based incentive compensation resulting from the strong 2017
net sales growth and financial performance.
General and administrative expenses
General and administrative (G&A) expenses increased $18 million to $127 million in 2017, compared with $110 million in the prior
year and increased to 8.8% of net sales, compared with 8.4% of net sales one year ago. The $18 million increase in G&A expenses
consisted of the following major components: (i) a $12.2 million increase in employee compensation, including a year-over-year
increase in Company-wide performance-based incentive compensation, enhanced digital marketing capabilities, and salary and wage
rate increases that were in line with inflation; (ii) $2.6 million of additional depreciation and amortization expense, including
incremental depreciation expense from capital expenditures that support the growth of our business; and (iii) a $2.8 million increase in
miscellaneous other expenses. The G&A expense rate increased by 0.4 ppt. in 2017 compared with the same period one year ago due
to the increase in expenses discussed above, partially offset by the leveraging impact of the 10% net sales increase.
Research and development expenses
Research and development expenses for the year ended December 30, 2017 were $28 million, consistent with the same period one
year ago. The expense rate for the year ended December 30, 2017 decreased to 1.9% of net sales compared to 2.1% of net sales for the
prior year. The spending level is consistent with our long-term consumer innovation strategy.
Income tax expense
Income tax expense was $26 million for the year ended December 30, 2017, compared with $25 million for the same period one year
ago. The effective tax rate for the year ended December 30, 2017 was 28.5% compared with 32.3% for the prior-year period. The
effective tax rates for 2016 reflects tax benefits associated with our acquisition of BAM Labs, Inc. including higher research and
development tax credits. The effective tax rate for 2017 benefited from: (i) a provisional tax benefit resulting from revaluing deferred
taxes in accordance with the "Tax Cuts and Jobs Act"; (ii) stock-based compensation excess tax benefits in accordance with new
Financial Accounting Standards Board (FASB) guidance effective for us beginning in 2017; and (iii) the recognition of additional tax
credits. Under previous FASB guidance, stock-based compensation excess tax benefits or deficiencies were recognized in additional
paid-in capital in our consolidated balance sheet.
30
Liquidity and Capital Resources
Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value. Our
primary sources of liquidity are cash flows provided by operating activities and cash available under our $450 million revolving credit
facility (increased in February 2019 from $300 million). 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 December 29, 2018, cash and cash equivalents totaled $2 million compared with $4 million as of December 30, 2017. The main
components of the $2 million change in cash and cash equivalents were $132 million of cash provided by operating activities and
$182 million increase in short-term borrowings, which were more than offset by $46 million of cash used to purchase property and
equipment and $272 million of cash used to repurchase our common stock (based on settlement, we repurchased $282 million based
on trade date).
The following table summarizes our cash flows (dollars in millions). Amounts may not add due to rounding differences:
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
2018
2017
$
$
131.5 $
(45.2 )
(88.3 )
(2.0 ) $
172.6
(59.8 )
(123.9 )
(11.1 )
Cash provided by operating activities for the fiscal year ended December 29, 2018 was $132 million compared with $173 million for
the fiscal year ended December 30, 2017. Significant components of the $41 million year-over-year change in cash from operating
activities included: (i) a $4 million increase in net income in 2018 compared with 2017; (ii) a $32 million fluctuation in accounts
payable with both years impacted by business changes and timing of payments; (iii) ) a $22 million fluctuation in the amount accrued
and timing of compensation and benefits payments due to year-over-year changes in Company-wide performance-based incentive
compensation; and (iv) an $18 million fluctuation in prepaid expenses and other assets with both years impacted by timing of rent
payments and changes in business activities.
Net cash used in investing activities was $45 million for the fiscal year ended December 29, 2018, compared with $60 million for the
same period one year ago. Investing activities for the current-year period included $46 million of property and equipment purchases,
compared with $60 million for the same period last year.
Net cash used in financing activities was $88 million for the fiscal year ended December 29, 2018, compared with net cash used in
financing activities of $124 million for the same period one year ago. During the fiscal year ended December 29, 2018, we
repurchased $272 million of our common stock (based on settlement, $269 million under our Board-approved share repurchase
program and $3 million in connection with the vesting of employee restricted stock grants) compared with $155 million during the
same period one year ago. Short-term borrowings fluctuated by $154 million compared with the prior-year period, reflecting $200
million of borrowings under our revolving credit facility as of December 29, 2018, compared with $25 million as of December 30,
2017. Changes in book overdrafts are included in the net change in short-term borrowings. Financing activities for both periods reflect
the cash proceeds from the exercise of employee stock options.
Under our Board-approved share repurchase program, we repurchased 8.3 million shares at a cost of $279 million (based on trade
date, $33.60 per share) during the fiscal year ended December 29, 2018. During 2017, we repurchased 5.4 million shares at a cost of
$150 million ($28.00 per share). As of December 29, 2018, the remaining authorization under our Board-approved share repurchase
program was $186 million. There is no expiration date governing the period over which we can repurchase shares.
In February 2019, we amended our revolving credit facility (Credit Agreement) with a syndicate of banks (Lenders). The Credit
Agreement provides a revolving credit facility for general corporate purposes with net aggregate availability of $450 million. The
Credit Agreement contains an accordion feature that allows us to increase the amount of the credit facility from $450 million up to
$600 million in total availability, subject to Lenders' approval. The Credit Agreement matures in February 2024.
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 December 29, 2018, we had $200 million in outstanding borrowings and $3 million in outstanding letters of credit. As
of December 29, 2018, the weighted-average interest rate on borrowings outstanding under the credit facility was 4.2%, and we were
in compliance with all financial covenants.
31
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 December 29, 2018, 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.
Off-Balance-Sheet Arrangements and Contractual Obligations
As of December 29, 2018, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating
leases and $3 million in outstanding letters of credit, we do not have any off-balance-sheet financing. A summary of our operating
lease obligations is included in the “Contractual Obligations” section (as follows). Additional information regarding our operating
leases is available in Item 2, Properties, and Note 6, Leases, of the Notes to Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Contractual Obligations
The following table presents information regarding our contractual obligations as of December 29, 2018 (in thousands):
Payments Due by Period(1)
Operating leases(2)
Capital leases
Purchase commitments
Total
Total
$ 478,068 $
1,023
31,923
< 1 Year 1 - 3 Years 3 - 5 Years > 5 Years
78,337 $ 139,822 $ 110,591 $ 149,318
348
—
$ 511,014 $ 110,399 $ 140,100 $ 110,849 $ 149,666
139
31,923
278
—
258
—
(1) Our unrecognized tax benefits, including interest and penalties, of $4 million have not been included in the Contractual Obligations table as we are not able to
determine a reasonable estimate of timing of the cash settlement with the respective taxing authorities.
(2) These amounts include the payments related to 46 lease commitments for future retail store locations. These lease commitments provide for minimum rentals over
the next five to ten years, which if consummated based on current cost estimates, would approximate $62 million over the initial lease term.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). In
connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events
and apply judgments that affect the reported amounts of assets, liabilities, sales, expenses and the related disclosure. Predicting future
events is inherently an imprecise activity and as such requires the use of judgment. We base our assumptions, estimates and judgments
on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial
statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to
ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their
effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could
be material.
Our significant accounting policies are discussed in Note 1, Business and Summary of Significant Accounting Policies, of the Notes to
Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form
10-K. Management believes the accounting policies discussed below are the most critical because they require management’s most
difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently
uncertain. Management has reviewed these critical accounting policies and estimates, and related disclosures with the Audit
Committee of our Board.
32
Our critical accounting policies and estimates relate to stock-based compensation, goodwill and indefinite-lived intangible assets, warranty
liabilities and revenue recognition.
Description
Judgments and Uncertainties
Stock-Based Compensation
We have stock-based compensation plans,
which include non-qualified stock options and
stock awards.
See Note 1, Business and Summary of
Significant Accounting Policies, and Note 8,
Shareholders’ Equity, to the Notes to
Consolidated Financial Statements, included in
Item 8, Financial Statements and
Supplementary Data, of this Annual Report on
Form 10-K, for a complete discussion of our
stock-based compensation programs.
Option-pricing models and generally accepted
valuation techniques require management to
make assumptions and to apply judgment to
determine the fair value of our awards. These
assumptions and judgments include estimating
the volatility of our stock price, future
employee forfeiture rates and future employee
stock option exercise behaviors. Changes in
these assumptions can materially affect the fair
value estimates or future earnings adjustments.
Performance-based stock awards require
management to make assumptions regarding
the likelihood of achieving performance
targets.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of cost over the
fair value of identifiable net assets of
businesses acquired. Our indefinite-lived
intangible assets include trade
names/trademarks.
See Note 1, Business and Summary of
Significant Accounting Policies, and Note 5,
Goodwill and Intangible Assets, Net, to the
Notes to Consolidated Financial Statements,
included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on
Form 10-K, for a complete discussion of our
goodwill and indefinite-lived intangible assets.
The determination of fair value involves
uncertainties because it requires management
to make assumptions and to apply judgment to
estimate industry and economic factors and the
profitability of future business strategies.
Management’s assumptions also include
projected revenues, operating profit levels and
discount rates, as well as consideration of any
other factors that may indicate potential
impairment.
Effect if Actual Results
Differ from Assumptions
We do not believe there is a reasonable
likelihood that there will be a material change
in the future estimates or assumptions we use
to determine stock-based compensation
expense. However, if actual results are not
consistent with our estimates or assumptions,
we may be exposed to changes in stock-based
compensation expense that could be material.
In addition, if actual results are not consistent
with the assumptions used, the stock-based
compensation expense reported in our financial
statements may not be representative of the
actual economic cost of the stock-based
compensation. Finally, if the actual forfeiture
rates, or the actual achievement of performance
targets, are not consistent with the assumptions
used, we could experience future earnings
adjustments.
A 10% change in our stock-based
compensation expense for the year ended
December 29, 2018, would have affected net
income by approximately $0.9 million in 2018.
In the fourth quarter of fiscal 2018,
management completed its annual goodwill and
other indefinite-lived intangible asset
impairment tests and determined there was no
impairment. We believe our assumptions and
judgments used in estimating cash flows and
determining fair value were reasonable.
However, unexpected changes to such
assumptions and judgments could affect our
impairment analyses and future results of
operations, including an impairment charge that
could be material.
33
Description
Judgments and Uncertainties
Effect if Actual Results
Differ from Assumptions
Warranty Liabilities
We provide a limited warranty on most of
the products we sell.
See Note 1, Business and Summary of
Significant Accounting Policies, to the Notes
to Consolidated Financial Statements,
included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report
on Form 10-K, for a complete discussion of
our warranty program and liabilities.
The majority of our warranty claims are
incurred within the first year. However, our
warranty liability contains uncertainties
because our warranty obligations cover an
extended period of time. A revision of
estimated claim rates or the projected cost of
materials and freight associated with sending
replacement parts to customers could have a
material adverse effect on future results of
operations.
We have not made any material changes in our
warranty liability assessment methodology during
the past three fiscal years. We do not believe there is
a reasonable likelihood that there will be a material
change in the estimates or assumptions we use to
calculate our warranty liability. However, if actual
results are not consistent with our estimates or
assumptions, we may be exposed to losses or gains
that could be material.
Our estimates of sales returns contain
uncertainties as actual sales return rates may
vary from expected rates, resulting in
adjustments to net sales in future periods.
These adjustments could have an adverse
effect on future results of operations.
Revenue Recognition
Certain accounting estimates relating to
revenue recognition contain uncertainty
because they require management to make
assumptions and to apply judgment
regarding the effects of future events.
See Note 1, Business and Summary of
Significant Accounting Policies, and Note 9,
Revenue Recognition, to the Notes to
Consolidated Financial Statements, included
in Item 8, Financial Statements and
Supplementary Data, of this Annual Report
on Form 10-K, for a complete discussion of
our revenue recognition policies.
Recent Accounting Pronouncements
A 10% change in our warranty liability at
December 29, 2018, would have affected net income
by approximately $0.8 million in 2018.
We have not made any material changes in the
accounting methodology used to establish our sales
returns allowance during the past three fiscal years.
We do not believe there is a reasonable likelihood
that there will be a material change in the estimates
or assumptions we use to calculate our sales returns
allowance. However, if actual results are not
consistent with our estimates or assumptions, we
may be exposed to additional losses or gains in
future periods.
A 10% change in our sales returns allowance at
December 29, 2018 would have affected net income
by approximately $1.5 million in 2018.
See “Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1 – Business
and Summary of Significant Accounting Policies - New Accounting Pronouncements” for recent accounting pronouncements that may
affect our financial reporting.
ITEM 7A. 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 annual net income would decrease by $1.5 million based on the $200 million of
borrowings under our revolving credit facility at December 29, 2018. We do not manage our interest-rate volatility risk through the use
of derivative instruments.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sleep Number Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sleep Number Corporation and subsidiaries (the “Company”,
formerly Select Comfort Corporation) as of December 29, 2018 and December 30, 2017, the related consolidated statements of
income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 29,
2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 29,
2018 and December 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 29, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 29, 2018, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 26, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, MN
February 26, 2019
We have served as the Company’s auditor since 2010
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sleep Number Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Sleep Number Corporation and subsidiaries (the “Company”, formerly
Select Comfort Corporation) as of December 29, 2018, based on the criteria established in Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018, based on criteria
established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 29, 2018, of
the Company and our report dated February 26, 2019 expressed an unqualified opinion on those financial statements and financial
statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 26, 2019
36
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 29, 2018 and December 30, 2017
(in thousands, except per share amounts)
Current assets:
Assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $699 and $714,
respectively
Inventories
Prepaid expenses
Other current assets
Total current assets
Non-current assets:
Property and equipment, net
Goodwill and intangible assets, net
Deferred income taxes
Other non-current assets
Total assets
Liabilities and Shareholders’ (Deficit) Equity
Current liabilities:
Borrowings under revolving credit facility
Accounts payable
Customer prepayments
Accrued sales returns
Compensation and benefits
Taxes and withholding
Other current liabilities
Total current liabilities
Non-current liabilities:
Deferred income taxes
Other non-current liabilities
Total liabilities
Shareholders’ (deficit) equity:
2018
2017
$
1,612 $
3,651
$
$
24,795
84,882
8,009
31,559
150,857
205,631
75,407
—
38,243
470,138 $
199,600 $
144,781
27,066
19,907
27,700
18,380
51,234
488,668
4,822
86,198
579,688
19,312
84,298
17,565
27,665
152,491
208,646
77,588
2,625
30,484
471,834
24,500
129,194
27,767
19,270
34,602
24,234
46,822
306,389
—
76,289
382,678
Undesignated preferred stock; 5,000 shares authorized, no shares issued and
outstanding
Common stock, $0.01 par value; 142,500 shares authorized, 30,868 and 38,813
shares issued and outstanding, respectively
Additional paid-in capital
(Accumulated deficit) retained earnings
Total shareholders’ (deficit) equity
Total liabilities and shareholders’ (deficit) equity
—
—
309
—
(109,859 )
(109,550 )
470,138 $
388
—
88,768
89,156
471,834
$
See accompanying notes to consolidated financial statements.
37
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 29, 2018, December 30, 2017 and December 31, 2016
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Operating income
Other expense, net
Income before income taxes
Income tax expense
Net income
Basic net income per share:
Net income per share – basic
Weighted-average shares – basic
Diluted net income per share:
Net income per share – diluted
Weighted-average shares – diluted
$
2018
1,531,575 $
603,614
927,961
2017
1,444,497 $
547,150
897,347
2016
1,311,291
501,131
810,160
687,380
119,378
28,775
835,533
92,428
5,907
86,521
16,982
69,539 $
650,357
127,269
27,806
805,432
91,915
877
91,038
25,961
65,077 $
$
$
1.97 $
1.58 $
35,256
41,212
$
1.92 $
1.55 $
36,165
42,085
595,845
109,674
27,991
733,510
76,650
717
75,933
24,516
51,417
1.11
46,154
1.10
46,902
See accompanying notes to consolidated financial statements.
38
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 29, 2018, December 30, 2017 and December 31, 2016
(in thousands)
Net income
Other comprehensive income – unrealized gain on available-for-sale
marketable debt securities, net of income tax
Comprehensive income
2018
2017
2016
$
69,539 $
65,077 $
51,417
$
—
69,539 $
—
65,077 $
14
51,431
See accompanying notes to consolidated financial statements.
39
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders’ (Deficit) Equity
Years ended December 29, 2018, December 30, 2017 and December 31, 2016
(in thousands)
Balance at January 2, 2016
Net income
Other comprehensive income:
Unrealized gain on available-for-sale
marketable debt securities, net of tax
Exercise of common stock options
Tax effect from stock-based compensation
Stock-based compensation
Repurchases of common stock
Balance at December 31, 2016
Net income
Exercise of common stock options
Stock-based compensation
Repurchases of common stock
Balance at December 30, 2017
Net income
Exercise of common stock options
Stock-based compensation
Repurchases of common stock
Balance at December 29, 2018
Additional
Common Stock
Paid-in
Shares Amount Capital
49,402 $
—
494 $
—
— $
—
Retained
Earnings
(Accumulated
Accumulated
Other
Comprehensive
Deficit)
Income/(Loss) Total
221,859 $
51,417
(14 ) $ 222,339
51,417
—
—
188
—
11
(6,032 )
43,569 $
—
222
594
(5,572 )
38,813 $
—
186
271
(8,402 )
30,868 $
—
2
—
—
(60 )
436 $
—
2
6
(56 )
388 $
—
2
3
(84 )
309 $
—
2,296
(1,016 )
11,961
(13,241 )
— $
—
3,239
15,757
(18,996 )
— $
—
2,786
11,409
(14,195 )
— $
—
—
—
—
(113,392 )
159,884 $
65,077
—
—
(136,193 )
88,768 $
69,539
—
—
(268,166 )
(109,859 ) $
14
14
2,298
—
(1,016 )
—
—
11,961
— (126,693 )
— $ 160,320
65,077
—
3,241
—
15,763
—
— (155,245 )
— $ 89,156
69,539
—
2,788
—
—
11,412
— (282,445 )
— $ (109,550 )
See accompanying notes to consolidated financial statements.
40
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 29, 2018, December 30, 2017 and December 31, 2016
(in thousands)
2018
2017
2016
$
69,539 $
65,077 $
51,417
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Stock-based compensation
Net (gain) loss on disposals and impairments of assets
Excess tax benefits from stock-based compensation
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Income taxes
Prepaid expenses and other assets
Accounts payable
Customer prepayments
Accrued compensation and benefits
Other taxes and withholding
Other accruals and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sales of property and equipment
Proceeds from marketable debt securities
Investments in marketable debt securities
Net cash used in investing activities
Cash flows from financing activities:
Repurchases of common stock
Net increase in short-term borrowings
Proceeds from issuance of common stock
Debt issuance costs
Excess tax benefits from stock-based compensation
Net cash used in financing activities
Net decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, at beginning of period
Cash, cash equivalents and restricted cash, at end of period
Non-cash financing transactions:
Change in unsettled repurchases of common stock
Supplemental Disclosure of Cash Flow Information
Income taxes paid (received)
Interest paid
Capital lease obligations incurred
Purchases of property and equipment included in accounts payable
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
41
61,966
11,412
(51 )
—
7,447
(5,483 )
(584 )
(6,561 )
5,551
(9,894 )
(701 )
(6,872 )
707
5,064
131,540
(45,515 )
272
—
—
(45,243 )
61,291
15,763
249
—
2,042
393
(9,272 )
1,697
(12,405 )
21,779
1,560
15,398
(893 )
9,928
172,607
(59,829 )
36
—
—
(59,793 )
(272,446 )
182,336
2,788
(1,014 )
—
(88,336 )
(155,245 )
28,094
3,241
(12 )
—
(123,922 )
(2,039 )
3,651
1,612 $
(11,108 )
14,759
3,651 $
57,172
11,961
27
(517 )
(1,640 )
9,297
11,574
25,119
(2,195 )
(4,965 )
(25,266 )
2,808
2,723
14,130
151,645
(57,852 )
92
21,053
(5,968 )
(42,675 )
(126,693 )
5,932
2,298
(409 )
517
(118,355 )
(9,385 )
24,144
14,759
9,999 $
— $
—
15,031 $
5,086 $
943 $
12,123 $
22,807 $
753 $
— $
3,964 $
(653 )
608
—
5,517
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Business and Summary of Significant Accounting Policies
Business & Basis of Presentation
Sleep Number Corporation and our 100%-owned subsidiaries (Sleep Number or the Company) have a vertically integrated business
model and are the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number beds which allows us to offer
consumers high-quality, individualized sleep solutions and services. Sleep Number also offers FlextFit adjustable bases, and Sleep
Number pillows, sheets and other bedding products.
We generate revenue by marketing our innovations to new and existing customers, and by selling products through two distribution
channels. Our Company-Controlled channel, which includes retail, online and phone, sells directly to consumers. Our
Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States.
The consolidated financial statements include the accounts of Sleep Number Corporation and our subsidiaries. All significant intra-
entity balances and transactions have been eliminated in consolidation.
Fiscal Year
Our fiscal year ends on the Saturday closest to December 31. Fiscal years and their respective fiscal year ends were as follows: fiscal
2018 ended December 29, 2018; fiscal 2017 ended December 30, 2017; and fiscal 2016 ended December 31, 2016. Fiscal years 2018,
2017 and 2016 each had 52 weeks.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (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 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 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.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The carrying value of
these investments approximates fair value due to their short-term maturity. Our banking arrangements allow us to fund outstanding
checks when presented to the financial institution for payment, resulting in book overdrafts. Book overdrafts are included in accounts
payable in our consolidated balance sheets and in net increase in short-term borrowings in the financing activities section of our
consolidated statements of cash flows. Book overdrafts totaled $38 million and $30 million at December 29, 2018 and December 30,
2017, respectively.
42
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Accounts Receivable
Accounts receivable are recorded net of an allowance for expected losses and consist primarily of receivables from third-party
financiers for customer credit card purchases and receivables from wholesale customers. The allowance is recognized in an amount
equal to anticipated future write-offs. We estimate future write-offs based on delinquencies, aging trends, industry risk trends, our
historical experience and current trends. Account balances are charged off against the allowance when we believe it is probable the
receivable will not be recovered.
Inventories
Inventories include materials, labor and overhead and are stated at the lower of cost or net realizable value. Cost is determined by the
first-in, first-out method. We review inventory quantities on hand and record reserves for obsolescence based on historical selling
prices, current market conditions and forecasted product demand, to reduce inventory to net realizable value.
Property and Equipment
Property and equipment, carried at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. The
cost and related accumulated depreciation of assets sold or retired is removed from the accounts with any resulting gain or loss
included in net income in our consolidated statements of operations. Maintenance and repairs are charged to expense as incurred.
Major renewals and betterments that extend useful life are capitalized.
Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the contractual term of the lease,
with consideration of lease renewal options if renewal appears probable.
Estimated useful lives of our property and equipment by major asset category are as follows:
Leasehold improvements
Furniture and equipment
Production machinery
Computer equipment and software
Goodwill and Intangible Assets, Net
5 to 15 years
3 to 15 years
3 to 7 years
3 to 12 years
Goodwill is the difference between the purchase price of a company and the fair market value of the acquired company's net
identifiable assets. Our intangible assets include developed technologies and trade names/trademarks. Definite-lived intangible assets
are being amortized using the straight-line method over their estimated lives, ranging from 8-10 years.
Asset Impairment Charges
Long-lived Assets and Definite-lived Intangible Assets - we review our long-lived assets and definite-lived intangible assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When
evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the estimated future cash
flows (undiscounted and without interest charges - plus proceeds expected from disposition, if any). If the estimated undiscounted
cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the
carrying value of the asset to the asset’s estimated fair value. When we recognize an impairment loss, the carrying amount of the asset
is reduced to estimated fair value based on discounted cash flows, quoted market prices or other valuation techniques. Assets to be
disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell. We review retail store assets for
potential impairment based on historical cash flows, lease termination provisions and expected future retail store operating results. If
we recognize an impairment loss for a depreciable long-lived asset, the adjusted carrying amount of the asset becomes its new cost
basis and will be depreciated (amortized) over the remaining useful life of that asset.
43
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Goodwill and Indefinite-lived Intangible Assets - goodwill and indefinite-lived intangible assets are not amortized but are tested for
impairment annually or when there are indicators of impairment using a fair value approach. The Financial Accounting Standards
Board's (FASB) guidance allows us to perform either a quantitative assessment or a qualitative assessment before calculating the fair
value of a reporting unit. We have elected to perform the quantitative assessment. The quantitative goodwill impairment test is a two-
step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this
step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair
value is the excess of fair value of the reporting unit over the fair value of all identified assets and liabilities. Fair value is determined
using a market-based approach utilizing widely accepted valuation techniques, including quoted market prices and our market
capitalization. Indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of an asset with its fair
value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. Based on our 2018
assessments, we determined there was no impairment.
Warranty Liabilities
We provide a limited warranty on most of the products we sell. The estimated warranty costs, which are expensed at the time of sale
and included in cost of sales, are based on historical trends and warranty claim rates incurred by us and are adjusted for any current
trends as appropriate. The majority of our warranty claims are incurred within the first year. Our warranty liability contains
uncertainties because our warranty obligations cover an extended period of time and require management to make estimates for claim
rates and the projected cost of materials and freight associated with sending replacement parts to customers. We regularly assess and
adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.
We classify as non-current those estimated warranty costs expected to be paid out in greater than one year. The activity in the accrued
warranty liabilities account was as follows (in thousands):
Balance at beginning of period
Additions charged to costs and expenses for current-year sales
Deductions from reserves
Changes in liability for pre-existing warranties during the current year,
including expirations
Balance at end of period
Fair Value Measurements
2018
2017
2016
9,320 $
12,385
(11,743 )
8,633 $
12,214
(10,752 )
427
10,389 $
(775 )
9,320 $
10,028
9,034
(10,016 )
(413 )
8,633
$
$
Fair value measurements are reported in one of three levels based on the lowest level of significant input used:
• Level 1 – observable inputs such as quoted prices in active markets;
• Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
• Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
We generally estimate fair value of long-lived assets, including our retail stores, using the income approach, which we base on
estimated future cash flows (discounted and with interest charges). The inputs used to determine fair value relate primarily to future
assumptions regarding sales volumes, gross profit rates, retail store operating expenses and applicable probability weightings
regarding future alternative uses. These inputs are categorized as Level 3 inputs under the fair value measurements guidance. The
inputs used represent management’s assumptions about what information market participants would use in pricing the assets and are
based upon the best information available at the balance sheet date.
Dividends
We are not restricted from paying cash dividends under our credit agreement so long as we are not in default under the credit
agreement, our leverage ratio (as defined in our credit agreement) after giving effect to such restricted payments (as defined in our
credit agreement) would not exceed 3.75:1.00 and no default or event of default (as defined in our credit agreement) would result
therefrom. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.
44
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the
consideration we expect to be entitled to in exchange for those goods or services. Revenue recognized excludes sales taxes. Amounts
billed to customers for delivery and setup are included in net sales. For most products, we receive payment before or promptly after,
the products or services are delivered to the customer.
Our beds sold with SleepIQ technology contain multiple performance obligations including the bed and SleepIQ hardware and
software. We analyze our multiple performance obligation(s) to determine whether they are distinct and can be separated or whether
they must be accounted for as a single performance obligation. We determined that the beds sold with the SleepIQ technology have
two performance obligations consisting of: (i) the bed; and (ii) SleepIQ hardware and software. SleepIQ hardware and software are not
separable as the hardware and related software are not sold separately and the software is integral to the hardware's functionality. We
determine the transaction price for multiple performance obligations based on their relative standalone selling prices. The performance
obligation related to the bed is satisfied at a point in time. The performance obligation related to SleepIQ technology is satisfied over
time based on the ongoing access and usage by the customer of software essential to the functionality of SleepIQ technology. The
deferred revenue and costs related to SleepIQ technology are recognized on a straight-line basis over the product's estimated life of
four years because our inputs are generally expended evenly throughout the performance period.
See Note 9, Revenue Recognition, for additional information on revenue recognition.
Cost of Sales, Sales and Marketing, General and Administrative (G&A) and Research & Development (R&D) Expenses
The following tables summarize the primary costs classified in each major expense category (the classification of which may vary
within our industry):
Cost of Sales
Sales & Marketing
• Costs associated with purchasing, manufacturing, shipping,
handling and delivering our products to our retail stores and
customers;
• Physical inventory losses, scrap and obsolescence;
• Related occupancy and depreciation expenses;
• Costs associated with returns and exchanges; and
• Estimated costs to service customer warranty claims.
• Advertising, marketing and media production;
• Marketing and selling materials such as brochures, videos,
websites, customer mailings and in-store signage;
• Payroll and benefits for sales and customer service staff;
• Store occupancy costs;
• Store depreciation expense;
• Credit card processing fees; and
• Promotional financing costs.
G&A
R&D(1)
• Payroll and benefit costs for corporate employees, including
information technology, legal, human resources, finance,
sales and marketing administration, investor relations and
risk management;
• Occupancy costs of corporate facilities;
• Depreciation related to corporate assets;
• Information hardware, software and maintenance;
• Insurance;
• Investor relations costs; and
• Other overhead costs.
Operating Leases
• Internal labor and benefits related to research and development
activities;
• Outside consulting services related to research and development
activities; and
• Testing equipment related to research and development
activities.
__________
(1) Costs incurred in connection with R&D are charged to expense as incurred.
We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may
require payment of a proportionate share of the real estate taxes and certain building operating expenses. Our retail store leases
generally provide for an initial lease term of five to 10 years. In addition, our mall-based retail store leases may require payment of
contingent rent based on net sales in excess of certain thresholds. Certain retail store leases may contain options to extend the term of
the original lease.
45
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Minimum rent expense, which excludes contingent rents, is recognized on a straight-line basis over the lease term, after consideration
of rent escalations and rent holidays. We record any difference between the straight-line rent amounts and amounts payable under the
leases as part of deferred rent, in other current liabilities or other non-current liabilities, as appropriate. The lease term for purposes of
the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease
renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market
conditions. Deferred rent is included in our consolidated balance sheets as follows (in thousands):
Deferred rent included in:
Other current liabilities
Other non-current liabilities
December 29,
2018
December 30,
2017
$
$
1,408 $
11,452
12,860 $
1,447
9,555
11,002
Contingent rent expense is recorded when it is probable the expense has been incurred and the amount is reasonably estimable. Future
payments for real estate taxes and certain building operating expenses for which we are obligated are not included in minimum lease
payments.
Leasehold improvements that are funded by landlord incentives or allowances under an operating lease are recorded as deferred lease
incentives, in other current liabilities or other non-current liabilities, as appropriate and amortized as reductions to rent expense over
the lease term. Deferred lease incentives are included in our consolidated balance sheets as follows (in thousands):
Deferred lease incentives included in:
Other current liabilities
Other non-current liabilities
Pre-Opening Costs
December 29,
2018
December 30,
2017
$
$
2,842 $
11,930
14,772 $
2,784
9,688
12,472
Costs associated with the start-up and promotion of new retail store openings are expensed as incurred.
Advertising Costs
We incur advertising costs associated with print, digital and broadcast advertisements. Advertising costs are charged to expense when
the ad first runs. Advertising expense was $210 million, $194 million and $190 million in 2018, 2017 and 2016, respectively.
Advertising costs deferred and included in prepaid expenses in our consolidated balance sheets were $2 million and $2 million as of
December 29, 2018 and December 30, 2017, respectively.
Insurance
We are self-insured for certain losses related to health and workers’ compensation claims, although we obtain third-party insurance
coverage to limit exposure to these claims. We estimate our self-insured liabilities using a number of factors including historical
claims experience and analysis of incurred but not reported claims. Our self-insurance liability was $8 million and $9 million at
December 29, 2018 and December 30, 2017, respectively. At December 29, 2018, and December 30, 2017, $5 million and $6 million,
respectively, were included in compensation and benefits in our consolidated balance sheets and $3 million and $3 million,
respectively, were included in other non-current liabilities in our consolidated balance sheets.
46
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Software Capitalization
For software developed or obtained for internal use, we capitalize direct external costs associated with developing or obtaining
internal-use software. In addition, we capitalize certain payroll and payroll-related costs for employees who are directly involved with
the development of such applications. Capitalized costs related to internal-use software under development are treated as construction-
in-progress until the program, feature or functionality is ready for its intended use, at which time depreciation commences. We
expense any data conversion or training costs as incurred.
We capitalize costs incurred with the implementation of a cloud computing arrangement, that is a service contract, consistent with our
policy for software developed or obtained for internal use. The capitalized implementation costs of cloud computing arrangements are
expensed over the term of the cloud computing arrangement in the same line item in the statement of operations as the associated fees.
Stock-Based Compensation
We compensate officers, directors and key employees with stock-based compensation under stock plans approved by our shareholders
and administered under the supervision of our Board of Directors (Board). At December 29, 2018, a total of 2.3 million shares were
available for future grant. These plans include non-qualified stock options and stock awards.
We record stock-based compensation expense based on the award’s fair value at the grant date and the awards that are expected to
vest. We recognize stock-based compensation expense over the period during which an employee is required to provide services in
exchange for the award. We reduce compensation expense by estimated forfeitures. Forfeitures are estimated using historical
experience and projected employee turnover. Beginning in 2017, we include, as part of cash flows from operating activities, the
benefit of tax deductions in excess of recognized stock-based compensation expense. In addition, excess tax benefits or deficiencies
that in prior years were recorded in additional paid-in capital are now recorded as discrete adjustments to income tax expense.
Stock Options - stock option awards are granted at exercise prices equal to the closing price of our stock on the grant date. Generally,
options vest proportionally over three years and expire after 10 years. Compensation expense is recognized ratably over the vesting
period.
We determine the fair value of stock options granted and the resulting compensation expense at the date-of-grant using the Black-
Scholes-Merton option-pricing model. Descriptions of significant assumptions used to estimate the expected volatility, risk-free
interest rate and expected term are as follows:
Expected Volatility – expected volatility was determined based on implied volatility of our traded options and historical
volatility of our stock price.
Risk-Free Interest Rate – the risk-free interest rate was based on the implied yield available on U.S. Treasury zero-coupon
issues at the date of grant with a term equal to the expected term.
Expected Term – expected term represents the period that our stock-based awards are expected to be outstanding and was
determined based on historical experience and anticipated future exercise patterns, giving consideration to the contractual
terms of unexercised stock-based awards.
Stock Awards - we issue stock awards to certain employees in conjunction with our stock-based compensation plan. The stock awards
generally vest over three years based on continued employment (time-based). Compensation expense related to stock awards, except
for stock awards with a market condition, is determined on the grant date based on the publicly quoted closing price of our common
stock and is charged to earnings on a straight-line basis over the vesting period. Stock awards with a market condition are valued using
a Monte Carlo simulation model. The significant assumptions used to estimate the expected volatility and risk-free interest rate are
similar to those described above in Stock Options.
Certain time-based stock awards have a performance condition (performance-based). The final number of shares earned for
performance-based stock awards and the related compensation expense is adjusted up or down to the extent the performance target is
met as of the last day of the performance period. The actual number of shares that will ultimately be awarded range from 0% - 200%
of the targeted amount for the 2018, 2017 and 2016 awards. We evaluate the likelihood of meeting the performance targets at each
reporting period and adjust compensation expense, on a cumulative basis, based on the expected achievement of each of the
performance targets. For performance-based stock awards granted in 2018, 2017 and 2016, the performance targets are based on
47
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
growth in net sales and in operating profit, and the performance periods are fiscal 2018 through 2020, 2017 through 2019, and fiscal
2016 through 2018, respectively.
See Note 8, Shareholders’ Equity, for additional information on stock-based compensation.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance is established for any portion of deferred tax assets that are not
considered more likely than not to be realized. We evaluate all available positive and negative evidence, including our forecast of
future taxable income, to assess the need for a valuation allowance on our deferred tax assets.
We record a liability for unrecognized tax benefits from uncertain tax positions taken, or expected to be taken, in our tax returns. We
follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and
estimating our tax positions and tax benefits, which may require periodic adjustments, and may not accurately forecast actual
outcomes.
We classify net interest and penalties related to income taxes as a component of income tax expense in our consolidated statements of
operations.
Net Income Per Share
We calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding
during the period. We calculate diluted net income per share based on the weighted-average number of common shares outstanding
adjusted by the number of potentially dilutive common shares as determined by the treasury stock method. Potentially dilutive shares
consist of stock options and stock awards.
Sources of Supply
We currently obtain materials and components used to produce our beds from outside sources. As a result, we are dependent upon
suppliers that in some instances, are our sole source of supply. We are continuing our efforts to dual-source key components. The
failure of one or more of our suppliers to provide us with materials or components on a timely basis could significantly impact our
consolidated results of operations and net income per share. We believe we can obtain these raw materials and components from other
sources of supply in the ordinary course of business, although an unexpected loss of supply over a short period of time may not allow
us to replace these sources in the ordinary course of business.
New Accounting Pronouncements
Recently Adopted Accounting Guidance
Adoption of ASC Topic 230, Restricted Cash
Effective December 31, 2017, we adopted ASC Topic 230, Restricted Cash, which requires amounts generally described as restricted
cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending
amounts for the periods shown on the statement of cash flows. Amounts for prior periods have been retrospectively adjusted to
conform to the current period presentation.
48
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Adoption of ASC Topic 606, Revenue from Contracts with Customers
On December 31, 2017, we adopted ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective
method applied to those contracts which were not completed as of December 30, 2017. Results for reporting periods beginning after
December 30, 2017 are presented under the new guidance, while prior period amounts are not restated.
The cumulative effect of the changes made to our consolidated balance sheet as of December 31, 2017 resulting from the adoption of
the new revenue guidance was not material and did not impact opening retained earnings. The impact on the timing of net sales
for 2018, as a result of applying the new guidance, was not material.
Practical expedients and exemptions permissible under ASC Topic 606 that we elected are as follows: we do not disclose the value of
unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; and (ii) contracts for which
we recognize revenue at the amount to which we have the right to invoice for services performed.
See Note 9, Revenue Recognition, for further details regarding our revenue recognition policy.
Accounting Guidance Issued but Not Yet Adopted as of December 29, 2018
We are the lessee under various agreements for facilities, equipment and vehicles that are currently accounted for as operating leases.
In February 2016, the FASB issued ASC Topic 842, Leases, that requires most leases to be recognized on the balance sheet and
expands disclosure requirements. Leases will be classified as finance or operating, with classification affecting the pattern and
classification of expense recognition in the income statement.
This new guidance is effective for us beginning December 30, 2018 (fiscal 2019). The provisions of this new guidance require a
modified-retrospective approach, with elective reliefs. The new guidance will apply to all leases existing at the date of initial
application. We have the option to choose either (1) the effective date, or (2) the beginning of the earliest comparative period
presented in the financial statements as the date of initial application. We expect to adopt the new standard using the effective date
option.
The new guidance establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the
balance sheet for all leases with a term longer than 12 months. On adoption, we expect to recognize additional lease liabilities and
corresponding ROU assets of approximately $300 million based on the present value of the remaining minimum rental payments for
existing operating leases.
The new guidance provides a number of optional practical expedients in transition. We expect to elect the package of practical
expedients, which permits us to not reassess under the new standard our prior conclusions about lease identification, lease
classification and initial direct costs. We do not expect to elect the use of hindsight. The new guidance also provides practical
expedients for an entity’s ongoing accounting. We expect to elect the short-term lease recognition exemption for all leases that qualify,
primarily small equipment leases. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and
this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also expect
to elect the practical expedient option to not separate lease and non-lease components for all of our leases.
We will be providing significant new disclosures about our leasing activities and have implemented a new lease accounting system in
connection with the adoption. We also expect that adoption of the new guidance will require changes to our internal controls over
financial reporting. We continue to evaluate the effect of the new standard on our consolidated financial statements and related
disclosures.
(2) Fair Value Measurements
At December 29, 2018 and December 30, 2017, we had $6 million and $4 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 $6 million and $4 million at December 29, 2018 and December 30, 2017, 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.
49
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(3) Inventories
Inventories consisted of the following (in thousands):
Raw materials
Work in progress
Finished goods
Finished goods inventories consisted of the following (in thousands):
Finished beds, including retail display beds and deliveries in-transit to those
customers who have utilized home delivery services
Finished components that were ready for assembly for the completion of beds
Retail accessories
(4) Property and Equipment
Property and equipment consisted of the following (in thousands):
Land
Leasehold improvements
Furniture and equipment
Production machinery, computer equipment and software
Construction in progress
Less: Accumulated depreciation and amortization
(5) Goodwill and Intangible Assets, Net
Goodwill and Indefinite-Lived Intangible Assets
December 29,
2018
December 30,
2017
4,549 $
3
80,330
84,882 $
6,577
170
77,551
84,298
December 29,
2018
December 30,
2017
25,313 $
38,665
16,352
80,330 $
24,825
34,709
18,017
77,551
December 29,
2018
December 30,
2017
1,999 $
109,722
108,841
238,659
10,385
(263,975 )
205,631 $
1,999
102,495
94,265
224,758
5,661
(220,532 )
208,646
$
$
$
$
$
$
Goodwill was $64 million at December 29, 2018 and December 30, 2017. Indefinite-lived trade name/trademarks totaled $1.4 million
at December 29, 2018 and December 30, 2017.
Definite-Lived Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets
(in thousands):
December 29, 2018
December 30, 2017
Developed technologies
Trade names/trademarks
$
$
18,851 $
101
18,952 $
8,886 $
101
8,987 $
50
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
6,705
101
6,806
18,851 $
101
18,952 $
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Amortization expense in 2018, 2017 and 2016 for definite-lived intangible assets was $2 million, $3 million and $2 million,
respectively. Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total future amortization for definite-lived intangible assets
(6) Leases
Rent expense was as follows (in thousands):
Facility Rents:
Minimum rents
Contingent rents
Total
Equipment Rents
$
$
2,180
2,213
2,181
2,181
1,210
—
9,965
2018
2017
2016
$
$
$
71,851 $
1,847
73,698 $
5,692 $
66,239 $
2,845
69,084 $
4,935 $
59,002
3,099
62,101
5,316
The aggregate minimum rental commitments under operating leases for subsequent years are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
We also had $0.9 million in capital lease commitments at December 29, 2018.
$
$
78,337
73,331
66,491
59,515
51,076
149,318
478,068
51
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(7) Credit Agreement
Our revolving credit facility as of December 29, 2018, had a net aggregate availability of $300 million. The credit facility is for
general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. The credit agreement
provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to
comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit
agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio. We were in compliance with all
financial covenants as of December 29, 2018.
The following tables summarizes our borrowings under the credit facility ($ in thousands):
Outstanding borrowings
Outstanding letters of credit
Additional borrowing capacity
Weighted-average interest rate
December 29,
2018
December 30,
2017
$
$
$
199,600 $
3,497 $
96,903 $
4.2 %
24,500
3,150
125,500
3.1 %
In February 2019, we amended our revolving credit facility (Credit Agreement, as amended) to increase our net aggregate availability
from $300 million to $450 million. We maintained the accordion feature which allows us to increase the amount of the credit facility
from $450 million to $600 million, subject to Lenders’ approval. The Credit Agreement, as amended, matures in February 2024. There
were no other significant changes to the credit facility’s terms and conditions.
(8) Shareholders’ Equity
Stock-Based Compensation Expense
Total stock-based compensation expense was as follows (in thousands):
Stock options
Stock awards
Total stock-based compensation expense(1)
Income tax benefit
Total stock-based compensation expense, net of tax
2018
2017
2016
$
$
2,482 $
8,930
11,412
2,750
8,662 $
2,344 $
13,419
15,763
5,249
10,514 $
2,281
9,680
11,961
3,947
8,014
(1) Decrease in 2018 stock-based compensation expense reflects the cumulative impact of the change in the expected achievements of certain performance targets.
Stock Options
A summary of our stock option activity was as follows (in thousands, except per share amounts and years):
Balance at December 30, 2017
Granted
Exercised
Canceled/Forfeited
Outstanding at December 29, 2018
Exercisable at December 29, 2018
Vested and expected to vest at December 29, 2018
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value (1)
Stock
Options
1,355 $
170
(186 )
(17 )
1,322 $
898 $
1,295 $
20.23
33.72
14.96
26.43
22.64
20.76
22.55
6.2 $
23,515
5.9 $
4.8 $
5.9 $
13,009
10,332
12,841
(1) Aggregate intrinsic value includes only those options where the current share price is equal to or greater than the share price on the date of grant.
52
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Other information pertaining to options was as follows (in thousands, except per share amounts):
Weighted-average grant date fair value of stock options granted
Total intrinsic value (at exercise) of stock options exercised
2018
2017
2016
$
$
13.96 $
3,459 $
10.33 $
3,586 $
8.85
2,088
Cash received from the exercise of stock options for the fiscal year ended December 29, 2018 was $2.8 million. Our tax benefit related
to the exercise of stock options for the fiscal year ended December 29, 2018 was $0.8 million.
At December 29, 2018, there was $2.7 million of total stock option compensation expense related to non-vested stock options not yet
recognized, which is expected to be recognized over a weighted-average period of 1.7 years.
During 2016, 30,500 market-based stock options were granted and had a weighted-average grant date fair value of $10.25 per option.
These options are reflected in the stock option activity table above. There were no market-based stock options granted in 2018 or
2017. The assumptions used to calculate the fair value of market-based stock options granted using the Monte Carlo simulation model
were as follows:
Valuation Assumptions
Expected dividend yield
Expected volatility
Risk-free interest rate
2018
2017
2016
NA
NA
NA
NA
NA
NA
0 %
50 %
1.8 %
Except for the market-based stock options discussed above, the fair value of options granted was calculated using the Black-Scholes-
Merton option-pricing model.
The assumptions used to calculate the fair value of options granted using the Black-Scholes-Merton option-pricing model were as
follows:
Valuation Assumptions
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term (in years)
Stock Awards
2018
2017
2016
0 %
43 %
2.7 %
5.0
0 %
46 %
2.0 %
5.1
0 %
50 %
1.4 %
5.2
Stock award activity was as follows (in thousands, except per share amounts):
Time-
Based
Stock
Awards
Weighted-
Average
Grant Date
Fair Value
Performance-
and
Market-
Based
Stock Awards
Weighted-
Average
Grant Date
Fair Value
23.41
34.46
33.34
27.44
23.91
1,063 $
200
(151 )
(51 )
1,061 $
Outstanding at December 30, 2017
Granted
Vested
Canceled/Forfeited
Outstanding at December 29, 2018
395 $
222
(172 )
(62 )
383 $
23.77
33.53
24.28
26.76
28.66
53
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
At December 29, 2018, there was $4.2 million of unrecognized compensation expense related to non-vested time-based stock awards,
which is expected to be recognized over a weighted-average period of 1.8 years and $12.4 million of unrecognized compensation
expense related to non-vested performance-based and market-based stock awards, which is expected to be recognized over a
weighted-average period of 1.9 years.
During 2018, 5,027 performance-based stock awards with a market condition were granted and had a weighted-average grant date fair
value of $35.97 per award. These stock awards are reflected in the "Performance- and Market-Based Stock Awards" column in the
stock award activity table above. During 2017, 270,895 performance-based stock awards with a market condition were granted and
had a weighted-average grant date fair value of $22.40 per award. There were no market-based stock awards granted in 2016.
The assumptions used to calculate the fair value of the 2018 and 2017 performance-based stock awards with a market condition, using
the Monte Carlo simulation model, were as follows:
Valuation Assumptions
Expected dividend yield
Expected volatility
Risk-free interest rate
Repurchases of Common Stock
2018
2017
2016
0 %
43 %
2.6 %
0 %
46 %
1.5 %
NA
NA
NA
Repurchases of our common stock were as follows (in thousands):
Amount repurchased under Board-approved share repurchase program
Amount repurchased in connection with the vesting of employee restricted
stock grants
Total amount repurchased
2018
2017
2016
$
279,101 $
150,000 $
125,000
$
3,344
282,445 $
5,245
155,245 $
1,693
126,693
As of December 29, 2018, the remaining authorization under our Board-approved share repurchase program was $186 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.
Net Income per Common Share
The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):
Net income
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding
Dilutive effect of stock-based awards
Diluted weighted-average shares outstanding
Net income per share – basic
Net income per share – diluted
2018
2017
2016
$
69,539 $
65,077 $
51,417
35,256
909
36,165
1.97 $
1.92 $
41,212
873
42,085
1.58 $
1.55 $
46,154
748
46,902
1.11
1.10
$
$
Additional potential dilutive stock options totaling 0.2 million, 0.4 million and 0.6 million for 2018, 2017 and 2016, respectively, have
been excluded from our diluted net income per share calculations because these securities’ exercise prices were anti-dilutive (e.g.,
greater than the average market price of our common stock).
54
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(9) Revenue Recognition
Deferred contract liabilities and deferred contract assets are included in our consolidated balance sheets as follows (in thousands):
Deferred Contract Liabilities included in:
Other current liabilities
Other non-current liabilities
Deferred Contract Assets included in:
Other current assets
Other non-current assets
December 29,
2018
December 30,
2017
32,395 $
42,194
74,589 $
29,534
43,159
72,693
December 29,
2018
December 30,
2017
20,553 $
29,456
50,009 $
17,208
25,772
42,980
$
$
$
$
During the year ended December 29, 2018, we recognized revenue of $30 million that was included in the deferred contract liability
balance at the beginning of the year.
Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of our revenues for
2018 and 2017.
Net sales from each of our channels was as follows (in thousands):
Retail
Online and phone
Company-Controlled channel
Wholesale/Other channel
Total
Obligation for Sales Returns
2018
2017
1,401,991 $
115,831
1,517,822
13,753
1,531,575 $
1,324,690
101,145
1,425,835
18,662
1,444,497
$
$
We accept sales returns during a 100-night trial period. Accrued sales returns represent a refund liability for the amount of
consideration that we do not expect to be entitled to because it will be refunded to customers. The refund liability estimate is based on
historical return rates and is adjusted for any current trends as appropriate. Each reporting period we remeasure the liability to reflect
changes in the estimate, with a corresponding adjustment to net sales. The activity in the sales returns liability account for 2018 and
2017 was as follows (in thousands):
Balance at beginning of year
Additions that reduce net sales
Deduction from reserves
Balance at end of period
(10) Profit Sharing and 401(k) Plan
2018
2017
19,270 $
79,326
(78,689 )
19,907 $
15,222
77,226
(73,178 )
19,270
$
$
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 year, we may make a discretionary contribution equal to a percentage of the employee’s
contribution. During 2018, 2017 and 2016, our contributions, net of forfeitures, were $5 million, $5 million and $5 million,
respectively.
55
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(11) Other Expense, Net
Other expense, net, consisted of the following (in thousands):
Interest expense
Interest income
Other expense, net
(12) Income Taxes
Income tax expense consisted of the following (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Income tax expense
2018
2017
2016
$
$
5,911 $
(4 )
5,907 $
975 $
(98 )
877 $
811
(94 )
717
2018
2017
2016
$
$
12,483 $
2,871
15,354
708
920
1,628
16,982 $
19,153 $
4,046
23,199
2,734
28
2,762
25,961 $
21,634
5,289
26,923
(105 )
(2,302 )
(2,407 )
24,516
The following table provides a reconciliation between the statutory federal income tax rate and our effective income tax rate:
Statutory federal income tax
State income taxes, net of federal benefit
Manufacturing deduction
Tax Cuts and Jobs Act effects
Changes in unrecognized tax benefits
R&D tax credits
Other
Effective income tax rate
2018
2017
2016
21.0 %
3.3
—
(3.9 )
1.2
(2.0 )
—
19.6 %
35.0 %
2.5
(3.5 )
(1.9 )
(0.6 )
(1.1 )
(1.9 )
28.5 %
35.0 %
2.6
(3.3 )
—
1.2
(1.4 )
(1.8 )
32.3 %
We file income tax returns with the U.S. federal government and various state jurisdictions. In the normal course of business, we are
subject to examination by federal and state taxing authorities. We are no longer subject to federal income tax examinations for years
prior to 2015 or state income tax examinations prior to 2014.
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted. The TCJA reduced the statutory federal tax rate from 35% to
21% starting in 2018. In addition, there were various other tax law changes that impacted us. In connection with the reduction of the
federal tax rate, we recognized a provisional tax benefit of $1.7 million for the year ended December 30, 2017. This provisional tax
benefit was related to the re-measurement of U.S. deferred tax assets and liabilities using a federal tax rate of 21%, which, under the
TCJA, is expected to be in place when such deferred assets and liabilities reverse in future periods. During 2018, we updated our
provisional tax benefit based on new information, including a tax planning analysis, and recorded an additional $2.9 million tax
benefit.
The TCJA has significant complexity and our 2018 tax liability may differ from these estimates, due to, among other things, guidance
that may be issued by the U.S. Treasury Department, the Internal Revenue Service, state tax jurisdictions, and related interpretations
and clarifications of tax law.
56
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Deferred Income Taxes
The tax effects of temporary differences that give rise to deferred income taxes were as follows (in thousands):
Deferred tax assets:
Stock-based compensation
Deferred rent and lease incentives
Warranty and returns liabilities
Net operating loss carryforwards and credits
Compensation and benefits
Other
Total gross deferred tax assets
Valuation allowance
Total gross deferred tax assets after valuation allowance
Deferred tax liabilities:
Property and equipment
Deferred revenue
Other
Total gross deferred tax liabilities
Net deferred tax (liabilities) assets
2018
2017
7,633 $
6,994
6,857
2,324
3,699
3,406
30,913
(615 )
30,298
29,912
1,749
3,459
35,120
(4,822 ) $
6,940
6,007
6,602
3,240
3,315
3,321
29,425
(615 )
28,810
21,475
723
3,987
26,185
2,625
$
$
At December 29, 2018, we had net operating loss carryforwards for federal purposes of $1 million, which will expire between 2025
and 2027, and for state income tax purposes of $6 million, which will expire between 2028 and 2038.
We evaluate our deferred income taxes quarterly to determine if valuation allowances are required. As part of this evaluation, we
assess whether valuation allowances should be established for any deferred tax assets that are not considered more likely than not to
be realized, using all available evidence, both positive and negative. This assessment considers, among other matters, the nature,
frequency, and severity of historical losses, forecasts of future profitability, taxable income in available carryback periods and tax
planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. We have
provided a $0.6 million valuation allowance resulting primarily from our inability to utilize certain foreign net operating losses, and
federal net operating losses associated with our 2015 acquisition of BAM Labs, Inc.
Unrecognized Tax Benefits
Reconciliations of the beginning and ending amounts of unrecognized tax benefits were as follows (in thousands):
Beginning balance
Increases related to current-year tax positions
Increases related to prior-year tax positions
Decreases related to prior-year tax positions
Lapse of statute of limitations
Settlements with taxing authorities
Ending balance
2018
Federal and State Tax
2017
2016
$
$
2,839 $
778
595
—
(333 )
(13 )
3,866 $
3,460 $
330
87
(1,038 )
—
—
2,839 $
2,077
326
1,594
—
(333 )
(204 )
3,460
As of December 29, 2018 and December 30, 2017, we had $4 million and $3 million, respectively, of unrecognized tax benefits,
which if recognized, would affect our effective tax rate. The amount of unrecognized tax benefits is not expected to change materially
within the next 12 months.
57
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(13) Commitments and Contingencies
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. If a loss is reasonably
possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to
currently pending legal proceedings, we have not established an estimated range of reasonably possible 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 pending legal proceedings to have a material effect on
our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is
possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of
operations, financial position or cash flows. We expense legal costs as incurred.
On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against
Sleep Number alleging that Sleep Number 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 Sleep Number beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees
and costs. Sleep Number removed the case to the United States District Court for the District of New Jersey, which subsequently
granted Sleep Number’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which
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 accepted the certified questions and on April 16, 2018, ruled in our favor on one of the
two questions, holding that a consumer only has standing to bring a claim under the relevant statute if the consumer has been harmed
by the defendant’s conduct. The Third Circuit remanded the case to the federal district court, which initially allowed the plaintiffs to
file its proposed amended complaint, but thereafter rescinded its order and then denied Plaintiffs’ request to file the amended
complaint. We plan to ask the Court to dismiss the case.
On September 18, 2018, former Home Delivery Technician, Donald Cassels, and former Field Services Delivery Assistant, Jose
Cadenas, filed suit in Superior Court in San Francisco County, California alleging representative claims on a purported class action
basis under the California Labor Code Private Attorney General Act. While the two representative plaintiffs were in the Home
Delivery workforce, the Complaint does not limit the purported plaintiff class to that group. The plaintiffs allege that Sleep Number
failed or refused to adopt adequate practices, policies and procedures relating to wage payments, record keeping, employment
disclosures, meal and rest breaks, among other claims, under California law. The plaintiffs purport to represent all former and current
Sleep Number employees in the State of California aggrieved by the alleged practices. The Complaint seeks damages in the form of
civil penalties and plaintiffs’ attorneys’ fees, and expressly disclaims the recovery of any purported individual specific relief or
underpaid wages. After Sleep Number raised issues with the plaintiffs’ choice of venue, the Court transferred venue from the Superior
Court in San Francisco County to Superior Court in Fresno County. We intend to vigorously defend this matter.
Consumer Credit Arrangements
We refer customers seeking extended financing to certain third-party financiers (Card Servicers). The Card Servicers, if credit is
granted, establish the interest rates, fees, and all other terms and conditions of the customer’s account based on their evaluation of the
creditworthiness of the customer. As the receivables are owned by the Card Servicers, at no time are the receivables purchased or
acquired from us. We are not liable to the Card Servicers for our customers’ credit defaults.
58
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
Commitments
As of December 29, 2018, we had $32 million of inventory purchase commitments. As part of the normal course of business, there are
a limited number of inventory supply contracts that contain penalty provisions for failure to purchase contracted quantities. We do not
currently expect any payments under these provisions. At December 29, 2018, we had entered into 46 lease commitments for future
retail store locations. These lease commitments provide for minimum rentals over the next five to 10 years, which if consummated
based on current cost estimates, would approximate $62 million over the initial lease term. The minimum rentals for these lease
commitments have been included in the future minimum lease payments in Note 6, Leases.
(14) Summary of Quarterly Financial Data (unaudited)
The following is a condensed summary of our quarterly results (in thousands, except net income (loss) per share amounts). Quarterly
diluted net income (loss) per share amounts may not total to the respective annual amount due to changes in weighted-average shares
outstanding during the year.
2018
Net sales
Gross profit
Operating income
Net income
Net income per share – diluted
2017
Net sales
Gross profit
Operating income (loss)
Net income (loss)
Net income (loss) per share – diluted
Third
Fourth
Second
First
$ 388,633 $ 316,338 $ 414,779 $ 411,825 $ 1,531,575
927,961
92,428
69,539
1.92
250,517
25,321
18,257
0.52 $
237,477
26,901
20,548
0.52 $
188,888
2,086
3,744
0.10 $
251,079
38,120
26,990
0.81 $
$
Fiscal
Year
Third
Fourth
Second
First
$ 393,899 $ 284,673 $ 402,646 $ 363,279 $ 1,444,497
897,347
91,915
65,077
1.55
253,465
39,029
25,603
0.62 $
246,459
35,828
24,461
0.56 $
176,619
(3,061 )
(778 )
(0.02 ) $
220,804
20,119
15,791
0.39 $
$
Fiscal
Year
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 9A. 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 chief executive officer and chief
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 annual 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 annual report.
Management’s Report on Internal Control Over Financial Reporting
Sleep Number’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed 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. Our internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Sleep Number’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f). Management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness of our internal control over financial reporting based on the framework in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation under these criteria, management concluded that our internal control over financial reporting was effective as
of December 29, 2018. The report of Deloitte & Touche LLP, our independent registered public accounting firm, regarding the
effectiveness of our internal control over financial reporting is included in this report in “Part II, Item 8, Financial Statements and
Supplementary Data” under “Report of Independent Registered Public Accounting Firm.”
Fourth Quarter Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 29, 2018 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
60
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information under the captions “Election of Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in our Proxy Statement for our 2019 Annual Meeting of Shareholders is incorporated herein by reference.
Information concerning our executive officers is included in Part I of this report under the caption “Executive Officers of the
Registrant.”
We have adopted a Code of Business Conduct applicable to our directors, officers and employees (including our principal executive
officer, principal financial officer and principal accounting officer). The Code of Business Conduct is available on the Investor
Relations section of our website at www.SleepNumber.com. Select the "Investors" link, the “Governance” link and then the
"Documents & Charters" link. In the event that we amend or waive any of the provisions of the Code of Business Conduct applicable
to our principal executive officer, principal financial officer and principal accounting officer, we intend to disclose the same on our
website at www.SleepNumber.com.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption “Executive Compensation” in our Proxy Statement for our 2019 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Stock Ownership
The information under the caption “Stock Ownership of Management and Certain Beneficial Owners” in our Proxy Statement for our
2019 Annual Meeting of Shareholders is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The information under the caption “Equity Compensation Plan Information” in our Proxy Statement for our 2019 Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the caption “Corporate Governance” in our Proxy Statement for our 2019 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy
Statement for our 2019 Annual Meeting of Shareholders is incorporated herein by reference.
61
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Consolidated Financial Statements and Schedule
(1)
Financial Statements
All financial statements as set forth under Item 8 of this report.
(2)
Consolidated Financial Statement Schedule
The following Report and financial statement schedule are included in this Part IV:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is included in the consolidated
financial statements or notes thereto.
(3)
Exhibits
The exhibits to this Report are listed in the Exhibit Index below.
We will furnish a copy of the exhibits referred to above at a reasonable cost to any shareholder upon receipt of a written
request. Requests should be sent to: Sleep Number Corporation, Investor Relations Department, 1001 Third Avenue South,
Minneapolis, MN 55404.
The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this
Annual Report on Form 10-K pursuant to Item 15(c):
1. Sleep Number Corporation 2004 Stock Incentive Plan (Amended and Restated as of January 1, 2007)
2. Form of Nonstatutory Stock Option Award Agreement under the 2004 Stock Incentive Plan
3. Form of Restricted Stock Award Agreement under the 2004 Stock Incentive Plan
4. Form of Performance Stock Award Agreement under the 2004 Stock Incentive Plan
5. Form of Nonstatutory Stock Option Award Agreement (Subject to Performance Adjustment) under the 2004 Stock Incentive
Plan
6. Sleep Number Corporation Amended and Restated 2010 Omnibus Incentive Plan
7. Form of Nonstatutory Stock Option Award Agreement under the 2010 Omnibus Incentive Plan
8. Form of Restricted Stock Award Agreement under the 2010 Omnibus Incentive Plan
9. Form of Performance Stock Award Agreement under the 2010 Omnibus Incentive Plan
10. Sleep Number Executive Investment Plan (December 1, 2014 Restatement)
11. Employment Offer Letter from Sleep Number Corporation to Shelly R. Ibach dated February 9, 2007
12. Sleep Number Corporation Executive Physical Plan
13. Summary of Executive Tax and Financial Planning Program
14. Amended and Restated Sleep Number Corporation Executive Severance Pay Plan
15. First Amendment to Amended and Restated Sleep Number Corporation Executive Severance Pay Plan
16. Summary of Non-Employee Director Compensation
62
ITEM 16. FORM 10-K SUMMARY
Not applicable.
63
SLEEP NUMBER CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED December 29, 2018
Exhibit
No.
Description
Method of Filing
3.1
Third Restated Articles of Incorporation of the Company,
as amended
3.2
Articles of Amendment to Third Restated Articles of
Incorporation of the Company
3.3
Articles of Amendment to Third Restated Articles of
Incorporation of the Company
3.4
Restated Bylaws of the Company
Incorporated by reference to Exhibit 3.1 contained in Sleep
Number's Annual Report on Form 10-K for the fiscal year
ended January 1, 2000 (File No. 0-25121)
Incorporated by reference to Exhibit 3.1 contained in Sleep
Number's Current Report on Form 8-K filed May 16, 2006
(File No. 0-25121)
Incorporated by reference to Exhibit 3.1 contained in Sleep
Number's Current Report on Form 8-K filed May 25, 2010
(File No. 0-25121)
Incorporated by reference to Exhibit 3.1 contained in Sleep
Number's Current Report on Form 8-K filed May 22, 2017
(File No. 0-25121)
10.1
Lease Agreement dated September 9, 2015 between the
Incorporated by reference to Exhibit 10.3 contained in
Company and Truluck Industries, Inc.
10.2
Lease Agreement dated September 30, 1998 between the
Company and ProLogis Development Services
Incorporated
10.3
Second Amendment to Lease Agreement dated June 15,
2015 between the Company and CLFP - SLIC 8, L.P.
(successor in interest to ProLogis Development Services
Incorporated)
Sleep Number's Quarterly Report on Form 10-Q for the
quarter ended October 3, 2015 (File No. 0-25121)
Incorporated by reference to Exhibit 10.28 contained in
Sleep Number's Registration Statement on Form S-1, as
amended, filed October 29, 1998 (Reg. No. 333-62793)
Incorporated by reference to Exhibit 10.4 contained in
Sleep Number's Quarterly Report on Form 10-Q for the
quarter ended October 3, 2015 (File No. 0-25121)
10.4
Lease Agreement between DCI 1001 Minneapolis Venture,
LLC, as Landlord, and Sleep Number Corporation, as
Tenant, dated October 21, 2016
Incorporated by reference to Exhibit 10.12 contained in
Sleep Number’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2016 (File No. 0-25121)
10.5
First Amendment, dated June 22, 2017, to Lease
Incorporated by reference to Exhibit 10.1 contained in
Agreement between DCI 1001 Minneapolis Venture, LLC,
as Landlord, and Sleep Number Corporation, as Tenant,
dated October 21, 2016
Sleep Number's Quarterly Report on Form 10-Q for the
quarter ended July 1, 2017 (File No. 0-25121)
10.6
Sleep Number Corporation 2004 Stock Incentive Plan
Incorporated by reference to Exhibit 10.16 contained in
(Amended and Restated as of January 1, 2007)
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended December 30, 2006 (File No. 0-25121)
10.7
Form of Nonstatutory Stock Option Award Agreement
Incorporated by reference to Exhibit 10.28 contained in
under the Sleep Number Corporation 2004 Stock Incentive
Plan
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended December 31, 2005 (File No. 0-25121)
10.8
Form of Restricted Stock Award Agreement under the
Sleep Number Corporation 2004 Stock Incentive Plan
10.9
Form of Performance Stock Award Agreement under the
Sleep Number Corporation 2004 Stock Incentive Plan
Incorporated by reference to Exhibit 10.29 contained in
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended December 31, 2005 (File No. 0-25121)
Incorporated by reference to Exhibit 10.30 contained in
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended December 31, 2005 (File No. 0-25121)
10.10
Form of Nonstatutory Stock Option Award Agreement
(Subject to Performance Adjustment) under the Sleep
Number Corporation 2004 Stock Incentive Plan
Incorporated by reference to Exhibit 10.20 contained in
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended December 30, 2006 (File No. 0-25121)
64
Exhibit
No.
Description
Method of Filing
10.11
Sleep Number Corporation Amended and Restated 2010
Incorporated by reference to Exhibit 10.1 contained in
Omnibus Incentive Plan
Sleep Number's Current Report on Form 8-K filed May 15,
2013 (File No. 0-25121)
10.12
Form of Nonstatutory Stock Option Award Agreement
Incorporated by reference to Exhibit 10.20 contained in
under the 2010 Omnibus Incentive Plan
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended January 1, 2011 (File No. 0-25121)
10.13
Form of Restricted Stock Award Agreement under the 2010
Incorporated by reference to Exhibit 10.21 contained in
Omnibus Incentive Plan
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended January 1, 2011 (File No. 0-25121)
10.14
Form of Performance Stock Award Agreement under the
Incorporated by reference to Exhibit 10.22 contained in
2010 Omnibus Incentive Plan
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended January 1, 2011 (File No. 0-25121)
10.15
Form of Performance-Based Restricted Stock Unit Award
Incorporated by reference to Exhibit 10.2 contained in
Agreement - EPS Target
Sleep Number's Quarterly Report on Form 10-Q for the
quarter ended April 1, 2017 (File No. 0-25121)
10.16
Sleep Number Executive Investment Plan (December 1,
Incorporated by reference to Exhibit 10.21 contained in
2014 Restatement)
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended January 3, 2015 (File No. 0-25121)
10.17
Employment Offer Letter from Sleep Number Corporation
Incorporated by reference to Exhibit 10.30 contained in
to Shelly R. Ibach dated February 9, 2007
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended December 29, 2012 (File No. 0-25121)
10.18
Sleep Number Corporation Executive Physical Plan
Incorporated by reference to Exhibit 10.27 contained in
10.19
Summary of Executive Tax and Financial Planning
Program
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended January 3, 2015 (File No. 0-25121)
Incorporated by reference to Exhibit 10.27 contained in
Sleep Number’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2016 (File No. 0-25121)
10.20
Amended and Restated Sleep Number Corporation
Incorporated by reference to Exhibit 10.2 contained in
Executive Severance Pay Plan
Sleep Number's Quarterly Report on Form 10-Q for the
quarter ended July 1, 2017 (File No. 0-25121)
10.21
Summary of Non-Employee Director Compensation
Incorporated by reference to Exhibit 10.30 contained in
Sleep Number's Annual Report on Form 10-K for the fiscal
year ended January 2, 2016 (File No. 0-25121)
10.22
Master Supply Agreement dated July 16, 2013 between the
Incorporated by reference to Exhibit 10.1 contained in
Company and Supplier (1)
Sleep Number's Quarterly Report on Form 10-Q for the
quarter ended September 28, 2013 (File No. 0-25121)
10.23
Retailer Program Agreement effective as of January 1,
2014 by and between Synchrony Bank, Sleep Number
Corporation and Select Comfort Retail Corporation (1)
Incorporated by reference to Exhibit 10.1 contained in
Sleep Number's Quarterly Report on Form 10-Q for the
quarter ended June 28, 2014 (File No. 0-25121)
10.24
First Amendment to Retailer Program Agreement, dated
Incorporated by reference to Exhibit 10.1 contained in
effective as of October 1, 2014 by and between Synchrony
Bank, Sleep Number Corporation and Select Comfort
Retail Corporation
Sleep Number's Current Report on Form 8-K filed October
1, 2014 (File No. 0-25121)
10.25
Second Amendment to Retailer Program Agreement, dated
November 4, 2015 by and between Synchrony Bank, Sleep
Number Corporation and Select Comfort Retail
Corporation (1)
Incorporated by reference to Exhibit 10.5 contained in
Sleep Number’s Quarterly Report on Form 10-Q for the
quarter ended October 3, 2015 (File No. 0-25121)
65
Exhibit
No.
10.26
Description
Method of Filing
Third Amendment to Retailer Program Agreement, dated
June 26, 2018 by and between Synchrony Bank, Sleep
Number Corporation and Select Comfort Retail
Corporation (1)
Incorporated by reference to Exhibit 10.1 contained in
Sleep Number’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2018 (File No. 0-25121)
10.27
Sleep Number Corporation Non-Employee Director
Incorporated by reference to Exhibit 10.1 contained in
Deferral Plan
10.28
Amended and Restated Credit and Security Agreement,
dated as of February 14, 2018 among Sleep Number
Corporation, U.S. Bank National Association and the
several banks and other financial institutions from time to
time party thereto
Sleep Number's Current Report on Form 8-K filed
September 16, 2011 (File No. 0-25121)
Incorporated by reference to Exhibit 10.29 contained in
Sleep Number’s Annual Report on Form 10-K filed for the
fiscal year ended December 30, 2017 (File No. 0-25121)
10.29
First Amendment to Amended and Restated Credit and
Filed herewith
Security Agreement, dated as of February 11, 2019 among
Sleep Number Corporation, U.S. Bank National
Association and the several banks and other financial
institutions from time to time party thereto
21.1
Subsidiaries of the Company
Incorporated by reference to Exhibit 21.1 contained in
Sleep Number’s Annual Report on Form 10-K for the
fiscal year ended December 30, 2017 (File No. -25121)
23.1
Consent of Independent Registered Public Accounting
Filed herewith
Firm
24.1
Power of Attorney
Included on signature page
31.1
Certification of CEO pursuant to Section 302 of the
Filed herewith
Sarbanes-Oxley Act of 2002
31.2
Certification of CFO pursuant to Section 302 of the
Filed herewith
Sarbanes-Oxley Act of 2002
32.1
Certification of CEO pursuant to Section 906 of the
Furnished herewith(2)
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2
Certification of CFO pursuant to Section 906 of the
Furnished herewith(2)
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101
The following financial information from the Company's
Filed herewith
Annual Report on Form 10-K for the period ended
December 29, 2018, filed with the SEC on February 26,
2019, formatted in eXtensible Business Reporting
Language: (i) Consolidated Balance Sheets as of
December 29, 2018 and December 30, 2017; (ii)
Consolidated Statements of Operations for the years ended
December 29, 2018, December 30, 2017 and December 31,
2016; (iii) Consolidated Statements of Comprehensive
Income for the years ended December 29, 2018, December
30, 2017 and December 31, 2016; (iv) Consolidated
Statements of Shareholders' Equity for the years ended
December 29, 2018, December 30, 2017 and December 31,
2016; (v) Consolidated Statements of Cash Flows for the
years ended December 29, 2018, December 30, 2017 and
December 31, 2016; and (vi) Notes to Consolidated
Financial Statements.
(1) Confidential treatment has been requested by the issuer with respect to designated portions contained within document. Such portions have been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934, as amended.
(2) This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Act of 1934, as amended, (15 U.S.C. 78r) or otherwise subject to the liability of
that section. Such exhibit will not be deemed to be incorporated by reference into any document filed under the Securities Act of 1933, as amended, or under the
Securities Exchange Act of 1934, as amended, except as otherwise expressly stated in any such filing.
66
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Dated: February 26, 2019
SLEEP NUMBER CORPORATION
(Registrant)
By:
By:
By:
/s/ Shelly R. Ibach
Shelly R. Ibach
Chief Executive Officer
(principal executive officer)
/s/ David R. Callen
David R. Callen
Chief Financial Officer
(principal financial officer)
/s/ Robert J. Poirier
Robert J. Poirier
Chief Accounting Officer
(principal accounting officer)
67
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints Shelly R. Ibach, David
R. Callen and Sam R. Hellfeld, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and
all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any
of them or their or such person’s substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date or dates indicated.
Name
/s/ Jean-Michel Valette
Jean-Michel Valette
/s/ Shelly R. Ibach
Shelly R. Ibach
/s/ Daniel I. Alegre
Daniel I. Alegre
/s/ Stephen L. Gulis, Jr.
Stephen L. Gulis, Jr.
/s/ Michael J. Harrison
Michael J. Harrison
/s/ Deborah L. Kilpatrick
Deborah L. Kilpatrick
/s/ Brenda J. Lauderback
Brenda J. Lauderback
/s/ Barbara R. Matas
Barbara R. Matas
/s/ Kathleen L. Nedorostek
Kathleen L. Nedorostek
/s/ Vicki A. O'Meara
Vicki A. O'Meara
/s/ Michael A. Peel
Michael A. Peel
Title
Date
Chairman of the Board
February 21, 2019
February 26, 2019
February 25, 2019
February 24, 2019
February 21, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 22, 2019
February 26, 2019
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
68
SLEEP NUMBER CORPORATION AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
(in thousands)
Description
Allowance for doubtful accounts
Balance at beginning of period
Additions charged to costs and expenses
Deductions from reserves
Balance at end of period
2018
2017
2016
$
$
714 $
815
(830 )
699 $
884 $
915
(1,085 )
714 $
1,039
1,224
(1,379 )
884
69