UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

ACT OF 1934

For the Quarterly Period Ended March 29, 2014

Commission File Number: 0-25121

SELECT COMFORT CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES ý NO o

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

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

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

As of March 29, 2014, 54,273,000 shares of the Registrant’s Common Stock were outstanding.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

INDEX

		Page
PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statement of Shareholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II: OTHER INFORMATION		22
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	24
SIGNATURES		25

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

	(unaudited) March 29, 2014		December 28, 2013
Assets
Current assets:
Cash and cash equivalents	$	60,409	$	58,223
Marketable debt securities – current	52,147		52,159
Accounts receivable, net of allowance for doubtful accounts of $418 and $425, respectively	15,579		14,979
Inventories	44,590		40,152
Prepaid expenses	7,923		9,216
Deferred income taxes	6,926		6,936
Other current assets	8,613		7,874
Total current assets	196,187		189,539
Non-current assets:
Marketable debt securities – non-current	30,469		34,632
Property and equipment, net	137,567		129,542
Goodwill and intangible assets, net	16,613		16,823
Deferred income taxes	6,396		4,943
Other assets	6,229		6,286
Total assets	$	393,461	$	381,765
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	63,385	$	73,391
Customer prepayments	20,177		15,392
Accrued sales returns	10,737		9,433
Compensation and benefits	19,493		15,242
Taxes and withholding	16,514		12,517
Other current liabilities	10,410		11,207
Total current liabilities	140,716		137,182
Non-current liabilities:
Warranty liabilities	1,897		1,567
Other long-term liabilities	18,725		17,796
Total liabilities	161,338		156,545
Shareholders’ equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value; 142,500 shares authorized, 54,273 and 54,901 shares issued and outstanding, respectively	543		549
Additional paid-in capital	—		5,382
Retained earnings	231,557		219,276
Accumulated other comprehensive income	23		13
Total shareholders’ equity	232,123		225,220
Total liabilities and shareholders’ equity	$	393,461	$	381,765

See accompanying notes to condensed consolidated financial statements.

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Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)

	Three Months Ended
	March 29, 2014		March 30, 2013
Net sales	$	276,412	$	258,237
Cost of sales	105,029		94,821
Gross profit	171,383		163,416
Operating expenses:
Sales and marketing	125,022		109,813
General and administrative	18,896		15,820
Research and development	1,663		2,556
Total operating expenses	145,581		128,189
Operating income	25,802		35,227
Other income, net	102		91
Income before income taxes	25,904		35,318
Income tax expense	8,912		11,847
Net income	$	16,992	$	23,471
Basic net income per share:
Net income per share – basic	$	0.31	$	0.43
Weighted-average shares – basic	54,113		55,095
Diluted net income per share:
Net income per share – diluted	$	0.31	$	0.42
Weighted-average shares – diluted	54,844		56,251

See accompanying notes to condensed consolidated financial statements.

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Condensed Consolidated Statements of Comprehensive Income

(unaudited - in thousands)

	Three Months Ended
	March 29, 2014		March 30, 2013
Net income	$	16,992	$	23,471
Other comprehensive income (loss) – unrealized gain (loss) on available-for-sale marketable debt securities, net of income tax	10		(7		)
Comprehensive income	$	17,002	$	23,464

See accompanying notes to condensed consolidated financial statements.

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Condensed Consolidated Statement of Shareholders’ Equity

(unaudited - in thousands)

	Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
	Shares		Amount
Balance at December 28, 2013	54,901		$	549		$	5,382		$	219,276		$	13	$	225,220
Net income	—		—			—			16,992			—		16,992
Other comprehensive income:
Unrealized gain on available-for-sale marketable debt securities, net of tax	—		—			—			—			10		10
Exercise of common stock options	32		—			411			—			—		411
Tax effect from stock-based compensation	—		—			(166		)	—			—		(166		)
Stock-based compensation	(80	)	—			(108		)	—			—		(108		)
Repurchases of common stock	(580	)	(6		)	(5,519		)	(4,711		)	—		(10,236		)
Balance at March 29, 2014	54,273		$	543		$	—		$	231,557		$	23	$	232,123

See accompanying notes to condensed consolidated financial statements.

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Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

	Three Months Ended
	March 29, 2014			March 30, 2013
Cash flows from operating activities:
Net income	$	16,992		$	23,471
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,176			6,661
Stock-based compensation	(108		)	432
Net (gain) loss on disposals and impairments of assets	(2		)	27
Excess tax benefits from stock-based compensation	(19		)	(2,401		)
Deferred income taxes	(1,450		)	585
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable	(552		)	2,454
Inventories	(4,438		)	5,269
Income taxes	3,795			7,534
Prepaid expenses and other assets	1,030			(889		)
Accounts payable	3,600			12,955
Customer prepayments	4,785			2,302
Accrued compensation and benefits	4,080			(9,165		)
Other taxes and withholding	36			(1,443		)
Warranty liabilities	185			(239		)
Other accruals and liabilities	1,754			(2,531		)
Net cash provided by operating activities	38,864			45,022
Cash flows from investing activities:
Purchases of property and equipment	(16,660		)	(14,309		)
Proceeds from maturities of marketable debt securities	10,000			5,898
Investments in marketable debt securities	(13,623		)	(12,883		)
Increase in restricted cash	(500		)	—
Proceeds from sales of property and equipment	5			3
Acquisition of business	—			(15,500		)
Investment in non-marketable equity securities	—			(1,500		)
Net cash used in investing activities	(20,778		)	(38,291		)
Cash flows from financing activities:
Repurchases of common stock	(10,236		)	(10,144		)
Net decrease in short-term borrowings	(6,094		)	(4,370		)
Proceeds from issuance of common stock	411			2,282
Excess tax benefits from stock-based compensation	19			2,401
Net cash used in financing activities	(15,900		)	(9,831		)
Net increase (decrease) in cash and cash equivalents	2,186			(3,100		)
Cash and cash equivalents, at beginning of period	58,223			87,915
Cash and cash equivalents, at end of period	$	60,409		$	84,815

See accompanying notes to condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three months ended March 29, 2014 of Select Comfort Corporation and 100%-owned subsidiaries (“Select Comfort” or the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of March 29, 2014, and December 28, 2013, and the results of operations and cash flows for the periods presented. Our historical and quarterly results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013 and other recent filings with the SEC.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the 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, asset impairment charges, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

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

2. Fair Value Measurements

The following tables set forth, by level within the fair value hierarchy, our financial assets that were accounted for at fair value on a recurring basis at March 29, 2014, and December 28, 2013, according to the valuation techniques we used to determine their fair value (in thousands):

	March 29, 2014
	Level 1		Level 2		Level 3		Total
Marketable debt securities – current
U.S. Treasury securities	$	15,009	$	—	$	—	$	15,009
Corporate bonds	—		20,356		—		20,356
U.S. Agency bonds	—		12,018		—		12,018
Municipal bonds	—		4,764		—		4,764
	15,009		37,138		—		52,147
Marketable debt securities – non-current
U.S. Treasury securities	8,989		—		—		8,989
Corporate bonds	—		10,303		—		10,303
U.S. Agency bonds	—		7,502		—		7,502
Municipal bonds	—		3,675		—		3,675
	8,989		21,480		—		30,469
	$	23,998	$	58,618	$	—	$	82,616

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SELECT COMFORT CORPORATION

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Notes to Condensed Consolidated Financial Statements

(unaudited)

	December 28, 2013
	Level 1		Level 2		Level 3		Total
Marketable debt securities – current
U.S. Treasury securities	$	15,011	$	—	$	—	$	15,011
Corporate bonds	—		20,300		—		20,300
U.S. Agency bonds	—		12,025		—		12,025
Municipal bonds	—		4,823		—		4,823
	15,011		37,148		—		52,159
Marketable debt securities – non-current
U.S. Treasury securities	8,978		—		—		8,978
Corporate bonds	—		15,484		—		15,484
U.S. Agency bonds	—		7,498		—		7,498
Municipal bonds	—		2,672		—		2,672
	8,978		25,654		—		34,632
	$	23,989	$	62,802	$	—	$	86,791

We did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.

At March 29, 2014, and December 28, 2013, we had $1.1 million and $1.1 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other assets. We also had corresponding deferred compensation plan liabilities of $1.1 million and $1.1 million at March 29, 2014, and December 28, 2013, respectively, which are included in other long-term liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

3. Investments

Marketable Debt Securities

Investments in marketable debt securities were comprised of the following (in thousands):

	March 29, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury securities	$	23,979	$	19	$	—		$	23,998
Corporate bonds	30,669		5		(15		)	30,659
U.S. Agency bonds	19,516		10		(6		)	19,520
Municipal bonds	8,414		25		—			8,439
	$	82,578	$	59	$	(21	)	$	82,616

	December 28, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury securities	$	23,975	$	15	$	(1	)	$	23,989
Corporate bonds	35,804		3		(23		)	35,784
U.S. Agency bonds	19,517		10		(4		)	19,523
Municipal bonds	7,474		23		(2		)	7,495
	$	86,770	$	51	$	(30	)	$	86,791

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Maturities of marketable debt securities were as follows (in thousands):

	March 29, 2014				December 28, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Marketable debt securities – current (due in less than one year)	$	52,112	$	52,147	$	52,122	$	52,159
Marketable debt securities – non-current (due in one to two years)	30,466		30,469		34,648		34,632
	$	82,578	$	82,616	$	86,770	$	86,791

During the three months ended March 29, 2014 and March 30, 2013, respectively, $10.0 million and $5.8 million of marketable debt securities matured and were redeemed at face value. During the three months endedMarch 29, 2014, there were no other-than-temporary declines in market value.

Other Investments

During 2013, we made a minority equity investment in one of our strategic product-development partners. The carrying value of this investment at March 29, 2014 and December 28, 2013 using the cost method is $4.5 million and is included in other assets on our condensed consolidated balance sheets.

4. Inventories

Inventories consisted of the following (in thousands):

	March 29, 2014		December 28, 2013
Raw materials	$	8,234	$	7,118
Work in progress	507		505
Finished goods	35,849		32,529
	$	44,590	$	40,152

5. Goodwill and Intangible Assets

Goodwill and Indefinite-Lived Intangible Assets

The following is a roll forward of goodwill and indefinite-lived trade name/trademarks (in thousands):

	Three Months Ended				Three Months Ended
	March 29, 2014				March 30, 2013
	Goodwill		Indefinite-Lived Trade Name/ Trademarks		Goodwill		Indefinite-Lived Trade Name/ Trademarks
Beginning balance	$	8,963	$	1,396	$	2,850	$	—
Comfortaire purchase	—		—		6,157		1,396
Ending balance	$	8,963	$	1,396	$	9,007	$	1,396

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Definite-Lived Intangible Assets

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

	March 29, 2014				December 28, 2013
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	5,231	$	974	$	5,231	$	850
Customer relationships	2,413		416		2,413		330
Trade names/trademarks	101		101		101		101
	$	7,745	$	1,491	$	7,745	$	1,281

Amortization expense for definite-lived intangible assets for the three months ended March 29, 2014 and March 30, 2013 was $0.2 million and $0.1 million, respectively.

6. Debt

Credit Agreement

Our $20.0 million Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as amended, is an unsecured revolving credit facility that matures on August 31, 2016. The Credit Agreement contains an accordion feature that allows us to increase the amount of the line from $20.0 million to up to $50.0 million in total availability, subject to lender approval.

Any borrowings under the Amendment will, at our request, be classified as either LIBOR Loans or Adjusted Base Rate (“ABR”) Loans (both as defined in the Credit Agreement). The rate of interest payable by us in respect of loans outstanding under the revolving credit facility is (i) with respect to LIBOR Loans, the Adjusted LIBO Rate (as defined in the Credit Agreement) for the interest period then in effect, plus 1.25%; or (ii) with respect to ABR Loans, the ABR (as defined in the Credit Agreement) then in effect for the Daily One-Month LIBO Rate (as defined in the Credit Agreement), plus 1.50% or the prime rate. We are subject to certain financial covenants under the Credit Agreement, including minimum tangible net worth, a requirement to maintain a minimum amount of cash, cash equivalents and marketable debt securities, and to maintain at the administrative agent cash, cash equivalents and marketable debt securities equal to the amount the lenders are committed to lend under the Credit Agreement.

At both March 29, 2014, and December 28, 2013, $20.0 million was available under the Credit Agreement, we had no borrowings and we were in compliance with all financial covenants. We had no outstanding letters of credit as of March 29, 2014 or December 28, 2013.

7. Repurchase of Common Stock

Repurchases of our common stock for the three months ended March 29, 2014 and March 30, 2013 were as follows (in thousands): 

	Three Months Ended
	March 29, 2014		March 30, 2013
Amount repurchased under Board-approved share repurchase program	$	10,011	$	10,009
Amount repurchased in connection with the vesting of employee restricted stock grants	225		135
Total amount repurchased	$	10,236	$	10,144

As of March 29, 2014, the remaining authorization under our Board of Directors ("Board") approved share repurchase program was $126.7 million. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.

The cost of stock repurchases is first charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

8. Stock-Based Compensation

We compensate officers, directors and key employees with stock-based compensation under two stock plans approved by our shareholders in 2004 and 2010 and administered under the supervision of our Board. Compensation expense, net of estimated forfeitures, is recognized ratably over the vesting period.

Stock-based compensation (benefit) expense for the three months ended March 29, 2014 and March 30, 2013, was as follows (in thousands):

	Three Months Ended
	March 29, 2014			March 30, 2013
Options	$	235		$	545
Restricted shares	(343		)	(113		)
Total stock-based compensation (benefit) expense(1)	(108		)	432
Income tax expense (benefit)	37			(148		)
Total stock-based compensation (benefit) expense, net of tax	$	(71	)	$	284

⁽¹⁾ The three months ended March 29, 2014 includes a $1.2 million benefit related to a change in estimated forfeitures due to employee turnover during the quarter. The three months ended March 30, 2013 includes $0.4 million of CEO transition benefit.

9. Employee Benefits

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 the three months endedMarch 29, 2014 and March 30, 2013 our contributions, net of forfeitures, were $0.9 million and $0.7 million, respectively.

10. Other Income, Net

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

	Three Months Ended
	March 29, 2014			March 30, 2013
Interest income	$	112		$	105
Interest expense	(10		)	(14		)
Other income, net	$	102		$	91

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Notes to Condensed Consolidated Financial Statements

(unaudited)

11. Net Income per Common Share

The following computations reconcile net income per share – basic with net income per share – diluted (in thousands, except per share amounts):

	Three Months Ended
	March 29, 2014		March 30, 2013
Net income	$	16,992	$	23,471
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	54,113		55,095
Effect of dilutive securities:
Options	353		690
Restricted shares	378		466
Diluted weighted-average shares outstanding	54,844		56,251
Net income per share – basic	$	0.31	$	0.43
Net income per share – diluted	$	0.31	$	0.42

Additional potentially dilutive stock options totaling 0.7 million and 1.0 million for the three months ended March 29, 2014 and March 30, 2013, 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).

12. Commitments and Contingencies

Sales Returns

The accrued sales returns estimate is based on historical return rates, which are reasonably consistent from period to period, and is adjusted for any current trends as appropriate. If actual returns vary from expected rates, sales in future periods are adjusted.

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

	Three Months Ended
	March 29, 2014			March 30, 2013
Balance at beginning of year	$	9,433		$	5,330
Additions that reduce net sales	19,021			12,963
Deductions from reserves	(17,717		)	(13,230		)
Acquired sales return reserve(1)	—			50
Balance at end of period	$	10,737		$	5,113

⁽¹⁾ Acquired sales return reserve resulted from the acquisition of Comfortaire Corporation in the first quarter of fiscal 2013.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Warranty Liabilities

We provide a 25-year limited warranty on our beds. The customer participates over the last 23 years of the warranty period by paying a portion of the retail value of replacement parts. 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 claims rates incurred by us and are adjusted for any current trends as appropriate. Actual warranty claim costs could differ from these estimates. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.

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

	Three Months Ended
	March 29, 2014			March 30, 2013
Balance at beginning of year	$	4,153		$	4,858
Additions charged to costs and expenses for current-year sales	1,568			1,469
Deductions from reserves	(1,536		)	(1,403		)
Changes in liability for pre-existing warranties during the current year, including expirations	153			(306		)
Acquired warranty reserve(1)	—			658
Balance at end of period	$	4,338		$	5,276

⁽¹⁾ Acquired warranty reserve resulted from the acquisition of Comfortaire Corporation in the first quarter of fiscal 2013.

Legal Proceedings

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

On August 23, 2013, we filed a complaint in U.S. District Court in the District of Minnesota against Gentherm, Inc. seeking a declaratory judgment that Select Comfort be named as an assignee of certain patents asserted against Select Comfort by Gentherm or in the alternative that the asserted patents are not enforceable or are invalid or that Select Comfort and its products do not infringe any valid claim of the asserted patents. This complaint was filed after Gentherm asserted in a letter that Select Comfort’s recently introduced DualTemp™ layer product infringed certain patents owned by Gentherm. Subsequently, Gentherm filed counterclaims alleging infringement of its patents and seeking various legal and equitable remedies, including injunctive relief, treble damages and attorney’s fees. We believe the claims asserted by Gentherm are without merit, and we intend to vigorously pursue our claims and defend the claims asserted by Gentherm.

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

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

• Risk Factors

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Non-GAAP Data Reconciliations

• Off-Balance-Sheet Arrangements and Contractual Obligations

• Critical Accounting Policies

Risk Factors

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

These risks and uncertainties include, among others:

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

• The effectiveness of our marketing messages;

• The efficiency of our advertising and promotional efforts;

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

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

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

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

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

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

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

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

• Rising commodity costs and other inflationary pressures;

• Risks inherent in global sourcing activities;

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

• Increasing government regulation;

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

• The costs and potential disruptions to our business related to upgrading our management information systems, including the digital platform supporting our website;

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

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

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

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

Overview

Business Overview

We believe we are leading the industry in delivering an unparalleled sleep experience by offering consumers high-quality, innovative and individualized sleep solutions and services, which include a complete line of Sleep Number® beds and bedding. We are the exclusive manufacturer, marketer, retailer and servicer of the revolutionary Sleep Number bed, which allows individuals to adjust the firmness and support of each side at the touch of a button. We offer further individualization through our new sleep tracking technology, SleepIQ^TM, and a solutions-focused line of Sleep Number pillows, sheets, adjustable bases, and other bedding products, including the innovative DualTemp^TM temperature-balancing layer.

As the only national specialty-mattress retailer, we generate revenue by selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Direct Marketing and E-Commerce, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States and Australia, and the QVC shopping channel.

Mission, Vision and Goals

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 plan to achieve this by executing our consumer brand strategy to advance our long-term goals and strengthen our competitive advantages.

Our long-term goals are:

• Everyone will know Sleep Number®;

• Innovative Sleep Number® products will deliver meaningful benefits;

• Customers will easily find and interact with Sleep Number;

• Customers will enthusiastically recommend Sleep Number; and

• We will leverage our business model to fund innovation and growth.

Results of Operations

Quarterly and Annual Results

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

Highlights

Financial highlights for the three months endedMarch 29, 2014 were as follows:

• Net sales increased7% to $276.4 million, compared with $258.2 million for the same period one year ago. Company-Controlled comparable sales increased 2%. The net sales increase was primarily driven by sales from 32 net new stores opened in the past 12 months.

• Retail sales-per-store (for stores open at least one year), on a trailing twelve-month basis, of $2.1 million were in line with sales-per-store in the comparable period one year ago.

• Operating income decreased to $25.8 million, or 9.3% of net sales, compared with $35.2 million, or 13.6% of net sales, for the same period one year ago. The decline in operating income was primarily driven by a 1.3 percentage point (ppt.) decrease in our gross profit rate and a 2.7 ppt. increase in our sales and marketing expense rate. See page 18 for additional details.

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• Net income decreased28% to $17.0 million, or $0.31 per diluted share, compared with net income of $23.5 million, or $0.42 per diluted share, for the same period one year ago.

• Cash provided by operating activities totaled $38.9 million for the three months endedMarch 29, 2014, compared with $45.0 million for the same period one year ago.

• At March 29, 2014, cash, cash equivalents and marketable debt securities totaled $143.0 million and we had no borrowings under our revolving credit facility. In the first quarter of 2014, we repurchased 566,543 shares of our common stock under our Board-approved share repurchase program at a cost of $10.0 million ($17.67 per share). As of March 29, 2014, the remaining authorization under our Board-approved share repurchase program was $126.7 million.

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

	Three Months Ended
	March 29, 2014				March 30, 2013
Net sales	$	276.4	100.0	%	$	258.2	100.0	%
Cost of sales	105.0		38.0	%	94.8		36.7	%
Gross profit	171.4		62.0	%	163.4		63.3	%
Operating expenses:
Sales and marketing	125.0		45.2	%	109.8		42.5	%
General and administrative	18.9		6.8	%	15.8		6.1	%
Research and development	1.7		0.6	%	2.6		1.0	%
Total operating expenses	145.6		52.7	%	128.2		49.6	%
Operating income	25.8		9.3	%	35.2		13.6	%
Operating income – as adjusted (1)	25.8		9.3	%	34.8		13.5	%
Other income, net	0.1		0.0	%	0.1		0.0	%
Income before income taxes	25.9		9.4	%	35.3		13.7	%
Income tax expense	8.9		3.2	%	11.8		4.6	%
Net income	$	17.0	6.1	%	$	23.5	9.1	%
Net income – as adjusted (1)	$	17.0	6.1	%	$	23.2	9.0	%
Net income per share:
Basic	$	0.31			$	0.43
Diluted	$	0.31			$	0.42
Diluted – as adjusted (1)	$	0.31			$	0.41
Weighted-average number of common shares:
Basic	54.1				55.1
Diluted	54.8				56.3

⁽¹⁾  This non-GAAP measure is 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 page 20 for a reconciliation of this non-GAAP measure to the appropriate GAAP measure.

GAAP – generally accepted accounting principles

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

	Three Months Ended
	March 29, 2014		March 30, 2013
Company-Controlled channel	96.1	%	94.8	%
Wholesale/Other channel	3.9	%	5.2	%
Total	100.0	%	100.0	%

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

	Three Months Ended
	March 29, 2014		March 30, 2013
Sales change rates:
Retail comparable-store sales(1)	2	%	(8	%)
Direct and E-Commerce	2	%	(18	%)
Company-Controlled comparable sales change	2	%	(9	%)
Net store openings/closings	7	%	6	%
Total Company-Controlled channel	9	%	(3	%)
Wholesale/Other channel	(21	%)	35	%
Total net sales change	7	%	(2	%)

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

Other sales metrics were as follows: 

	Three Months Ended
	March 29, 2014			March 30, 2013
Average sales per store(1) ($ in thousands)	$	2,120		$	2,118
Average sales per square foot(1)	$	1,042		$	1,256
Stores > $1 million in net sales(1)	97		%	98		%
Stores > $2 million in net sales(1)	47		%	46		%
Average net sales per mattress unit – Company-Controlled channel(2)	$	3,373		$	3,132

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

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

The number of retail stores operating was as follows:

	Three Months Ended
	March 29, 2014		March 30, 2013
Beginning of period	440		410
Opened	17		10
Closed	(14	)	(9	)
End of period	443		411

Comparison of Three Months Ended March 29, 2014 with Three Months Ended March 30, 2013

Net sales

Net sales increased7% to $276.4 million for the three months ended March 29, 2014, compared with $258.2 million for the same period one year ago. The net sales increase was primarily driven by sales from 32 net stores opened in the past 12 months and a 2% increase in comparable sales in our Company-Controlled channel.

The $18.2 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $16.4 million sales increase resulting from net store openings; (ii) a $4.3 million increase in sales from our Company-Controlled comparable retail stores; and (iii) a $0.3 million increase in Direct and E-Commerce sales; partially offset by (iv) a $2.8 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units increased 1% compared to the prior-year period. Average net sales per mattress unit in our Company-Controlled channel increased by 8%.

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Gross profit

The gross profit rate decreased to 62.0% of net sales for the three months ended March 29, 2014, compared with 63.3% for the prior-year period. Increased sales return and exchange costs, including the impact of the second quarter 2013 change in our 30-night trial policy to 100 nights, reduced the gross profit rate by 1.0 ppt. An increase in logistic costs resulting from the severe winter weather reduced the gross profit rate by 0.2 ppt. The remaining change was due to a variety of other factors that can fluctuate from quarter to quarter, including performance-based incentive compensation and warranty expenses.

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 29, 2014increased14% to $125.0 million, or 45.2% of net sales, compared with $109.8 million, or 42.5% of net sales, for the same period one year ago. The $15.2 million increase mainly resulted from (i) $6.6 million of incremental fixed costs resulting from new, repositioned and remodeled stores; (ii) a $3.5 million increase in variable store compensation; (iii) a $2.1 million increase in financing costs, as a greater percentage of our customers utilized promotional financing to purchase our products; (iv) a $1.5 million increase in production expenses related to our new marketing campaign; and (v) a $1.3 million, or 3%, increase in media spending. The sales and marketing expense rate increased 2.7 ppt. compared with the same period one year ago due to the factors noted above.

General and administrative expenses

General and administrative (“G&A”) expenses increased$3.1 million to $18.9 million for the three months ended March 29, 2014, compared with $15.8 million in the same period one year ago, and increased to 6.8% of net sales, compared with 6.1% of net sales last year. The $3.1 million increase in G&A expenses was primarily due to (i) a $2.5 million increase in performance-based incentive compensation; (ii) a $0.5 million increase in employee compensation to support business growth initiatives, and salary and wage rate increases that were in line with inflation; and (iii) $0.3 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the business. These increases were partially offset by a $0.2 million net decrease in miscellaneous other expenses, including a reduction in stock-based compensation. The G&A expense rate increased by 0.7 ppt. in the current period compared with the same period one year ago due to the net increase in expenses.

Research and development expenses

Research and development ("R&D") expenses for the three months ended March 29, 2014 were $1.7 million, or 0.6% of net sales, compared with $2.6 million, or 1.0% of net sales, for the same period one year ago.

Other income, net

Other income, net was $0.1 million for the three months ended March 29, 2014, consistent with the comparable period one year ago.

Income tax expense

Income tax expense was $8.9 million for the three months ended March 29, 2014 compared with $11.8 million for the same period one year ago. The effective tax rate for the three months ended March 29, 2014 was 34.4%, compared with the prior-year period rate of 33.5%. The 2013 effective tax rate was positively impacted by the retroactive reinstatement of the 2012 R&D tax credit in the first quarter of 2013. In addition, the R&D tax credit expired at the end of 2013 and has not yet been extended by Congress. As a result, our 2014 effective tax rate does not include any benefit from the R&D tax credit.

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Liquidity and Capital Resources

As of March 29, 2014, cash, cash equivalents and marketable debt securities totaled $143.0 million compared with $145.0 million as of December 28, 2013. The $2.0 milliondecrease was primarily due to $38.9 million of cash provided by operating activities offset by $16.7 million of cash used to purchase property and equipment, $10.2 million of cash used to repurchase our common stock and a $6.1 million decrease in short-term borrowings. The $82.6 million of marketable debt securities held as of March 29, 2014 are all highly liquid and include U.S. government and agency securities, corporate debt securities and municipal bonds.

The following table summarizes our cash flows for the three months endedMarch 29, 2014, and March 30, 2013 (dollars in millions). Amounts may not add due to rounding differences:

	Three Months Ended
	March 29, 2014			March 30, 2013
Total cash provided by (used in):
Operating activities	$	38.9		$	45.0
Investing activities	(20.8		)	(38.3		)
Financing activities	(15.9		)	(9.8		)
Net increase (decrease) in cash and cash equivalents	$	2.2		$	(3.1	)

Cash provided by operating activities for the three months endedMarch 29, 2014 was $38.9 million compared with $45.0 million for the three months endedMarch 30, 2013. The $6.2 million year-over-year decrease in cash from operating activities was comprised of a $6.5 milliondecrease in net income for the three months endedMarch 29, 2014 compared with the same period one year ago and a $2.0 milliondecrease in cash from changes in operating assets and liabilities, partially offset by a $2.3 millionincrease in adjustments to reconcile net income to net cash provided by operating activities.

Net cash used in investing activities was $20.8 million for the three months endedMarch 29, 2014, compared with $38.3 million for the same period one year ago. Investing activities for the current-year period included $16.7 million of property and equipment purchases, compared with $14.3 million for the same period one year ago. On a net basis, we increased our investment in marketable debt securities by $3.6 million during the three months endedMarch 29, 2014 compared with a net investment of $7.0 million during the comparable period one year ago.

Net cash used in financing activities was $15.9 million for the three months endedMarch 29, 2014, compared with $9.8 million for the same period one year ago. During the three months endedMarch 29, 2014, we repurchased $10.2 million of our stock ($10.0 million under our Board-approved share repurchase program and $0.2 million in connection with the vesting of employee restricted stock grants) compared with $10.1 million ($10.0 million under our Board-approved share repurchase program and $0.1 million in connection with the vesting of employee restricted stock grants) during the same period one year ago. Changes in book overdrafts are included in the net change in short-term borrowings. Financing activities for both periods reflect the vesting of employee restricted stock awards and exercise of employee stock options along with the associated excess tax benefits.

Under the Board-approved $290 million share repurchase program, we repurchased 566,543 shares at a cost of $10.0 million ($17.67 per share) during the three months endedMarch 29, 2014. During the three months endedMarch 30, 2013, we repurchased 458,637 shares at a cost of $10.0 million ($21.82 per share). As of March 29, 2014, the remaining authorization under our Board-approved share repurchase program was $126.7 million. There is no expiration date governing the period over which we can repurchase shares.

Our $20.0 million Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as amended, is an unsecured revolving credit facility that matures August 31, 2016. The Credit Agreement contains an accordion feature that allows us to increase the amount of the line from $20.0 million to up to $50.0 million in total availability, subject to lender approval. As of March 29, 2014 we were in compliance with all financial covenants.

Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth. The $143.0 million of cash, cash equivalents and marketable debt securities, 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.

We have an agreement with GE Capital Retail Bank to offer qualified customers revolving credit arrangements to finance purchases from us (“GE Agreement”). The GE Agreement contains certain financial covenants, including a minimum tangible net worth requirement and a minimum cash requirement. As of March 29, 2014 we were in compliance with all financial covenants.

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

Non-GAAP Data Reconciliations

Reported to Adjusted Statements of Operations Data (in thousands, except per share amounts)

In addition to disclosing results that are determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we also disclose non-GAAP results that exclude certain significant charges or credits. Our "as adjusted" data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we believe that the disclosure of results excluding certain significant charges or credits provides additional insights into underlying business performance and facilitates year-over-year comparisons. Below are our reconciliations of our non-GAAP financial measures to the most comparable GAAP financial measures.

	Three Months Ended
	March 29, 2014		March 30, 2013
	As Reported		As Reported		CEO Transition Benefit(1)			As Adjusted
Operating income	$	25,802	$	35,227	$	(391	)	$	34,836
Other income, net	102		91		—			91
Income before income taxes	25,904		35,318		(391		)	34,927
Income tax expense(2)	8,912		11,847		(134		)	11,713
Net income	$	16,992	$	23,471	$	(257	)	$	23,214
Net income per share –
Basic	$	0.31	$	0.43	$	0.00		$	0.42
Diluted	$	0.31	$	0.42	$	0.00		$	0.41
Basic Shares	54,113		55,095		55,095			55,095
Diluted Shares	54,844		56,251		56,251			56,251

⁽¹⁾ In February 2012, we announced that William R. McLaughlin, then President and Chief Executive Officer would retire from the Company effective June 1, 2012. In recognition of Mr. McLaughlin’s contributions, the Compensation Committee approved the modification of Mr. McLaughlin’s currently unvested stock awards, including performance-based stock awards. The performance-based stock awards are subject to applicable performance adjustments through 2014 based on free cash flow and actual market share growth versus performance targets. During the three months endedMarch 30, 2013, we incurred $0.4 million ($0.3 million, net of income tax) of non-recurring, non-cash expenses associated with these stock award modifications which is included in general and administrative expenses in the condensed consolidated statement of operations.

⁽²⁾ Reflects effective income tax rates, before discrete adjustments, of 34.3% for 2013.

GAAP - generally accepted accounting principles

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

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

Our Adjusted EBITDA calculations for the three months and trailing-twelve months ended March 29, 2014 and March 30, 2013 are as follows (dollars in thousands):

	Three Months Ended					Trailing-Twelve Months Ended
	March 29, 2014			March 30, 2013		March 29, 2014		March 30, 2013
Net income	$	16,992		$	23,471	$	53,602	$	79,148
Income tax expense	8,912			11,847		27,995		41,872
Interest expense	10			14		47		62
Depreciation and amortization	8,885			6,333		32,151		21,838
Stock-based compensation	(108		)	432		3,692		3,774
Asset impairments	3			30		100		174
Adjusted EBITDA	$	34,694		$	42,127	$	117,587	$	146,868

Free Cash Flow

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

The following table summarizes our free cash flow calculations for the three months and trailing-twelve months ended March 29, 2014, and March 30, 2013 (dollars in thousands): 

	Three Months Ended				Trailing-Twelve Months Ended
	March 29, 2014		March 30, 2013		March 29, 2014		March 30, 2013
Net cash provided by operating activities	$	38,864	$	45,022	$	81,947	$	101,130
Subtract: Purchases of property and equipment	16,660		14,309		79,162		56,621
Free cash flow	$	22,204	$	30,713	$	2,785	$	44,509

Off-Balance-Sheet Arrangements and Contractual Obligations

As of March 29, 2014, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating leases, we do not have any off-balance-sheet financing. There were no outstanding letters of credit at March 29, 2014.

There has been no material change in our contractual obligations since the end of fiscal 2013. See Note 6, Debt, of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended December 28, 2013 for additional information regarding our other contractual obligations.

Critical Accounting Policies

We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. There were no significant changes in our critical accounting policies since the end of fiscal 2013.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in the overall level of interest rates affect interest income generated from our short-term and long-term investments in marketable debt securities. If overall interest rates were one percentage point lower than current rates, our annual interest income would not change by a significant amount based on our investments in marketable debt securities as of March 29, 2014 and the current low interest-rate environment. We do not manage our investment interest-rate volatility risk through the use of derivative instruments.

As of March 29, 2014, we had no borrowings under our revolving credit facility.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

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

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the fiscal quarter ended March 29, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

On August 23, 2013, we filed a complaint in U.S. District Court in the District of Minnesota against Gentherm, Inc. seeking a declaratory judgment that Select Comfort be named as an assignee of certain patents asserted against Select Comfort by Gentherm or in the alternative that the asserted patents are not enforceable or are invalid or that Select Comfort and its products do not infringe any valid claim of the asserted patents. This complaint was filed after Gentherm asserted in a letter that Select Comfort’s recently introduced DualTemp™ layer product infringed certain patents owned by Gentherm. Subsequently, Gentherm filed counterclaims alleging infringement of its patents and seeking various legal and equitable remedies, including injunctive relief, treble damages and attorney’s fees. We believe the claims asserted by Gentherm are without merit, and we intend to vigorously pursue our claims and defend the claims asserted by Gentherm.

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ITEM 1A. RISK FACTORS

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

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

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

Fiscal Period	TotalNumber of Shares Purchased(1)(2)	AveragePrice Paidper Share		Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms(1)	ApproximateDollar Valueof Shares thatMay Yet BePurchasedUnder thePlans orPrograms
December 29, 2013 through January 25, 2014	162,525	$	17.88	162,525	$	133,796,000
January 26, 2014 through February 22, 2014	115,401	17.32		115,401	131,797,000
February 23, 2014 through March 29, 2014	301,797	17.66		288,617	126,691,000
Total	579,723	$	17.66	566,543	$	126,691,000

⁽¹⁾  Under the current Board-approved $290.0 million share repurchase program, we repurchased 566,543 shares of our common stock at a cost of $10.0 million (based on trade dates) during the three months ended March 29, 2014. As of March 29, 2014, the remaining authorization under our Board-approved share repurchase program was $126.7 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.

⁽²⁾  In connection with the vesting of employee restricted stock grants, we also repurchased 13,180 shares of our common stock at a cost of $225 thousand, during the three months ended March 29, 2014.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS

Exhibit Number	Description	Method of Filing
10.1	Twelfth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014
10.2	Thirteenth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014	Incorporated by reference to Exhibit 10.2 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014
10.3	Offer Letter dated March 14, 2014 from Select Comfort Corporation to David R. Callen	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed March 20, 2014
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith
32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith
101	The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended March 29, 2014, filed with the SEC on April 25, 2014, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of March 29, 2014 and December 28, 2013; (ii) Condensed Consolidated Statements of Operations for the three months ended March 29, 2014 and March 30, 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2014 and March 30, 2013; (iv) Condensed Consolidated Statement of Shareholders' Equity for the three months ended March 29, 2014; (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2014 and March 30, 2013; and (vi) Notes to Condensed Consolidated Financial Statements.	Filed herewith

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SIGNATURES

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

		SELECT COMFORT CORPORATION
		(Registrant)
Dated:	April 25, 2014	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)
		By:	/s/ Robert J. Poirier
			Robert J. Poirier
			Chief Accounting Officer
			(principal accounting officer)

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EXHIBIT INDEX

Exhibit Number	Description	Method of Filing
10.1	Twelfth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014
10.2	Thirteenth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014	Incorporated by reference to Exhibit 10.2 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014
10.3	Offer Letter dated March 14, 2014 from Select Comfort Corporation to David R. Callen	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed March 20, 2014
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith
32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith
101	The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended March 29, 2014, filed with the SEC on April 25, 2014, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of March 29, 2014 and December 28, 2013; (ii) Condensed Consolidated Statements of Operations for the three months ended March 29, 2014 and March 30, 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2014 and March 30, 2013; (iv) Condensed Consolidated Statement of Shareholders' Equity for the three months ended March 29, 2014; (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2014 and March 30, 2013; and (vi) Notes to Condensed Consolidated Financial Statements.	Filed herewith

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