By William Trent, CFA of Stock Market Beat

Mattress maker Tempur-Pedic (TPX) has had a busy few days. In addition to being included in our Small Cap and Mid Cap Watch Lists, introduced a new product here and another two there, and opened a new manufacturing plant in New Mexico. This state-of-the-art facility, just over 800,000 sq. ft., is the world’s largest mattress factory.

But what we found particularly impressive was their earnings announcement. In it, they reported:

FOURTH QUARTER 2006 FINANCIAL SUMMARY

• Pro forma earnings per share (EPS) were $0.40 per diluted share in the fourth quarter of 2006 as compared to $0.31 per diluted share in the fourth quarter of 2005. GAAP EPS increased to $0.36 per diluted share from $0.30 per diluted share in the fourth quarter of 2005.
• Net sales rose 19% to $256.6 million in the fourth quarter of 2006 from $215.6 million in the fourth quarter of 2005. Retail sales increased 23% worldwide. Domestic retail sales increased 29% and international retail sales increased 12%. Sales in the U.S. furniture and bedding retail channel were especially strong, with an increase of 39%.
• Cash flow provided by operations increased 41% to $32.7 million in the fourth quarter of 2006 from $23.2 million in the fourth quarter of 2005.
• Worldwide, mattress unit growth increased 16%. Domestic mattress unit growth was particularly robust, increasing 23%. International mattress unit growth was up 8%.
• Worldwide, pillow unit growth increased 13%. Domestic pillow unit volume increased 25%. Domestic pillow units and revenue represented new all-time quarterly records.

But unlike other companies we know, their pro-forma adjustments are truly things we would consider one-time in nature.

Pro forma results exclude the impact related to the previously disclosed early redemption of the Company’s senior subordinated debt as well as the favorable impact of an income tax ruling. GAAP and pro forma 2006 results include $3.8 million of stock-based compensation expense, an increase of 31% compared to prior year, resulting from the Company’s adoption of FAS 123 R.

Did you get that? They aren’t stripping out options charges. What they are segregating is the fees they had to pay to pay off debt early and the benefit they received from a tax refund. Heck – with that kind of one-time charges we almost wish they were recurring.

To top it all off, they announced a dividend and share buyback program. It is no surprise the stock has been up on the news, which actually will hurt our Watch List performance since (as we announced) we will be pricing the Watch Lists as of the closing price on Wednesday, January 31. Although the 15% share gains in the last week won’t count in our favor, we thought they were sure worth mentioning.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Starbucks (SBUX) call options; Landstar (LSTR) put options; Plantronics (PLT) put options

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