Sealy Corporation Reports Fiscal Third Quarter 2012 Results

TRINITY, N.C., Sept. 27, 2012 /PRNewswire/ -- Sealy Corporation (NYSE: ZZ), a leading global bedding manufacturer, today announced results for its third quarter of fiscal 2012. While the Company had originally planned to host a conference call to discuss the recent third quarter results this afternoon at 5pm ET, due to the recent transaction announcement with Tempur-Pedic International, Inc., this call has been cancelled.

Fiscal 2012 3rd Quarter Recap for Continuing Operations

• Net sales increased by $31.4 million to $365.4 million, a 9.4% increase compared to the third quarter of fiscal 2011.
  
   
• Gross profit increased by $11.2 million to $148.2 million compared to the third quarter of fiscal 2011.  Gross margin decreased 0.4 percentage points to 40.6%.
  
   
• Incremental investment in national advertising of $6.6 million over the third quarter of fiscal 2011 to support the Optimum by Sealy Posturepedic Line of specialty bedding.
  
   
• Income from operations of $32.6 million, a decrease of $5.2 million compared to the third quarter of fiscal 2011.
  
    
• Net income from continuing operations was $0.1 million, compared to net income from continuing operations of $7.5 million in the third quarter of fiscal 2011.
  
   
• Adjusted EBITDA of $42.6 million, a decrease of $5.8 million compared to the third quarter of fiscal 2011.

"Our investments in new products and national advertising delivered strong U.S. sales growth," stated Larry Rogers, Sealy's President and Chief Executive Officer.  "Our Adjusted EBITDA and Gross Margin results were in line with our expectations, as we executed on our enhanced advertising campaign surrounding our successful Sealy Posturepedic Optimum specialty bedding launch." 

Fiscal 2012 Third Quarter Results

Total U.S. net sales increased 11.2% to $286.2 million from the third quarter of fiscal 2011. Excluding third party sales from the component plants, wholesale average unit selling prices increased 7.6%, while wholesale unit volume increased 2.7%. The increase in our average unit selling price was driven primarily by increases in all major innerspring lines, improved product mix related to the newly introduced Next Generation Stearns & Foster product line, and our Optimum by Sealy Posturepedic line. The increase in unit volume is attributable to increased sales volume for our Optimum by Sealy Posturepedic, Stearns & Foster and Sealy branded product lines partially offset by lower sales volumes for our Posturepedic innerspring beds.

International net sales increased $2.5 million, or 3.2%, from the third quarter of fiscal 2011 to $79.2 million. This increase was primarily due to increased sales in Mexico and Argentina partially offset by lower sales in Canada. In Canada, local currency sales increases of 1.2% translated into decreases of 3.2% in U.S. dollars due to a weaker Canadian dollar. Local currency sales performance in Canada was driven by a 3.8% increase in average unit selling price, offset by a 2.5% decrease in unit volume.

Gross profit increased by $11.2 million to $148.2 million from the prior year quarter.  Gross margin decreased 0.4 percentage points to 40.6%.  The decrease in percentage of net sales was primarily due to decreases in gross profit margin in our International operations. The gross profit margin in Canada was 40.3% as a percentage of net sales, which represents a decrease of 2.3 percentage points. This decrease was primarily driven by the impact of higher raw material costs. U.S. gross profit margin decreased 0.3 percentage points to 40.5% of net sales.

Selling, general, and administrative expenses were $120.6 million for the third quarter of fiscal 2012, an increase of $16.5 million versus the comparable period a year earlier. As a percentage of net sales, this expense was 33.0% and 31.2% for the quarters ended August 26, 2012 and August 28, 2011, respectively. During the third quarter of fiscal 2012, the Company increased its level of spending for national advertising promoting its new Optimum by Sealy Posturepedic line of specialty products in connection with the Independence and Labor Day holidays in the U.S. Operational fixed expenses have experienced increases due to higher compensation costs coupled with higher product development expenses. Additionally, incentive compensation and defined contribution expenses have increased based on our higher projected achievement of incentive targets relative to the prior year. A decrease in non cash compensation and promotional costs partially offset these increases.

Income from operations for the third quarter of fiscal 2012 decreased 13.8% or $5.2 million to $32.6 million. This year's results included $6.6 million of higher national advertising costs, which primarily related to the rollout of our Optimum by Sealy Posturepedic line as well as higher compensation related expense.

Net income from continuing operations for the third quarter was $0.1 million. 

Fiscal 2012 Nine Month Results

Net sales for the nine months ended August 26, 2012 increased 3.0% to $989.8 million from $960.9 million for the comparable period a year earlier. Gross profit was $397.6 million, or 40.2% of net sales, versus $380.6 million, or 39.6% of net sales, for the comparable period a year earlier.  Net income from continuing operations was $4.5 million, versus net income from continuing operations of $8.4 million in the prior year period. Adjusted EBITDA increased 3.4% to $115.0 million, or 11.6% of net sales, from $111.2 million, or 11.6% of net sales, compared to the same period in the prior year.  

As of August 26, 2012, the Company's debt net of cash was $671.7 million and Net Debt to Adjusted EBITDA ratio (excluding the Convertible Payment In Kind Notes) was 3.78x, compared to 4.02x at November 27, 2011. 

Results from Discontinued Operations

During the fourth quarter of 2010, the company divested the assets of its manufacturing operations in France and Italy, which represented all of the assets in its Europe segment.  In addition, the company discontinued manufacturing operations in Brazil.  The company has transitioned to a license arrangement with third parties in both of these markets.  These businesses are accounted for as discontinued operations, and accordingly, the company has reclassified its financial data for all periods presented to reflect these actions.  Unless otherwise noted, the reported financial data pertains to Sealy's continuing operations. 

Non-GAAP Measures

Sealy provides information regarding Adjusted EBITDA and Adjusted EBITDA Margin which are not recognized terms under GAAP (Generally Accepted Accounting Principles) and do not purport to be alternatives to operating income or net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. The Company presents Adjusted EBITDA, because the covenants contained in the Company's senior debt agreements are based upon these measures and Adjusted EBITDA is a material component of those covenants. Additionally, management uses Adjusted EBITDA to evaluate the Company's operating performance.  The Company also presents Adjusted EBITDA margin, which is Adjusted EBTIDA reflected as a percentage of net sales because it believes that this measure provides useful incremental information to investors regarding the Company's operating performance.  Additionally, these measures are not intended to be measures of available cash flow for management's discretionary use, as these measures do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, this presentation may not be comparable to other similarly titled measures of other companies.  A reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin to the Company's net income is provided in the attached schedule. 

About Sealy

Sealy owns one of the largest bedding brands in the world, with sales of $1.2 billion in fiscal 2011. The Company manufactures and markets a broad range of mattresses and foundations under the Sealy®, Sealy Posturepedic®, Sealy Embody™, Optimum™ by Sealy Posturepedic®, Stearns & Foster®, and Bassett® brands.  Sealy operates 25 plants in North America, and has the largest market share and highest consumer awareness of any bedding brand on the continent. In the United States, Sealy sells its products to approximately 3,000 customers with more than 11,000 retail outlets. Sealy is also a leading supplier to the hospitality industry. For more information, please visit www.sealy.com.

This document contains forward-looking statements within the meaning of the safe harbor provisions of the Securities Litigation Reform Act of 1995. Terms such as "expect," "believe," and "continue," as well as similar comments, are forward-looking in nature. Factors that could cause actual results to differ materially from the Company's expectations include: the consummation of the Company's transaction with Tempur-Pedic International, Inc., general business and economic conditions, competitive factors, raw materials purchasing, and fluctuations in demand. Please refer to the Company's Securities and Exchange Commission filings for further information.

The condensed consolidated statements of operations and related information presented below have been adjusted for discontinued operations presentation for all periods presented.  However, the condensed consolidated balance sheets and statements of cash flows have not been adjusted for such presentation.

SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
			August 26,		November 27,		August 28,
			2012		2011		2011
ASSETS
Current assets:
	Cash and equivalents		$                       88,833		$         107,975		$            85,934
	Accounts receivable (net of allowance for doubtful accounts,  discounts and returns, 2012—$31,390; 2011—$30,104)		177,954		126,494		171,495
	Inventories		70,819		57,002		58,491
	Other current assets		21,345		29,275		25,385
	Deferred income tax assets		21,770		21,349		21,823
Total current assets			380,721		342,095		363,128
Property, plant and equipment			418,124		406,115		404,645
Less accumulated depreciation			(253,445)		(239,370)		(235,162)
			164,679		166,745		169,483
Goodwill			363,305		361,026		363,340
Intangible assets, net			16,001		1,116		1,190
Deferred income tax assets			1,377		1,772		2,360
Other assets, including debt issuance costs, net			45,426		46,440		48,351
			426,109		410,354		415,241
Total assets			$                     971,509		$         919,194		$          947,852
LIABILITIES AND STOCKHOLDERS'  DEFICIT
Current liabilities:
	Current portion - long-term obligations		$                         2,324		$             1,584		$              1,249
	Accounts payable		96,184		68,774		75,466
	Accrued incentives and advertising		29,267		26,038		27,376
	Accrued compensation		26,224		17,601		15,998
	Accrued interest		15,369		14,074		16,873
	Other accrued liabilities		32,516		28,426		31,414
Total current liabilities			201,884		156,497		168,376
Long-term obligations, net of current portion			758,204		790,297		784,905
Other liabilities			51,927		52,415		50,851
Deferred income tax liabilities			326		549		823
Redeemable noncontrolling interest			12,131		-		-
Stockholders' deficit:
	Common stock, $0.01 par value; Authorized 600,000 shares
	Issued and outstanding: 2012—104,066; 2011—100,916		1,043		1,010		1,009
	Additional paid-in capital		953,598		935,512		932,555
	Treasury stock, at cost:  2012—102; 2011—0		(180)		-		-
	Accumulated deficit		(1,013,769)		(1,016,577)		(1,001,370)
	Accumulated other comprehensive income (loss), net		6,345		(509)		10,703
Total stockholders' deficit			(52,963)		(80,564)		(57,103)
Total liabilities and stockholders' deficit			$                     971,509		$         919,194		$          947,852

 

SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
			Three Months Ended
			August 26,		August 28,
			2012		2011
Net sales			$         365,434		$         334,067
Cost of goods sold			217,229		197,067
	Gross profit		148,205		137,000
Selling, general and administrative expenses			120,632		104,127
Amortization expense			73		73
Royalty income, net of royalty expense			(5,105)		(5,021)
		Income from operations	32,605		37,821
Interest expense			20,929		21,935
Refinancing and extinguishment of debt			416		28
Other income, net			(131)		(130)
		Income before income taxes	11,391		15,988
Income tax provision			12,156		9,556
Equity in earnings of unconsolidated affiliates			875		1,057
		Income from continuing operations	110		7,489
Loss from discontinued operations			(307)		(891)
		Net (loss) income	(197)		6,598
Net loss attributable to noncontrolling interests			91		-
		Net (loss) income attributable to common shareholders	$              (106)		$             6,598
Earnings (loss) per common share attributable to common shareholders—Basic
	Income from continuing operations per common share		$                    -		$               0.07
	Loss from discontinued operations per common share		-		-
Earnings (loss) per common share attributable to common shareholders—Basic			$                    -		$               0.07
Earnings (loss) per common share attributable to common shareholders—Diluted
	Income from continuing operations per common share		$                    -		$               0.04
	Loss from discontinued operations per common share		-		-
Earnings (loss) per common share attributable to common shareholders—Diluted			$                    -		$               0.04
Weighted average number of common shares outstanding:
	Basic		103,534		100,334
	Diluted		109,800		308,566

 

SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
				Nine Months Ended
				August 26,		August 28,
				2012		2011
Net sales				$         989,755		$         960,892
Cost of goods sold				592,155		580,314
Gross profit				397,600		380,578
Selling, general and administrative expenses				327,254		315,308
Amortization expense				217		217
Royalty income, net of royalty expense				(14,425)		(14,796)
Income from operations				84,554		79,849
Interest expense				65,554		65,309
Refinancing and extinguishment of debt				3,341		1,264
Other income, net				(410)		(337)
Income before income taxes				16,069		13,613
Income tax provision				14,821		7,779
Equity in earnings of unconsolidated affiliates				3,283		2,535
Income from continuing operations				4,531		8,369
Loss from discontinued operations				(1,814)		(3,050)
Net income				2,717		5,319
Net loss attributable to noncontrolling interests				91		-
Net income attributable to common shareholders				$             2,808		$             5,319
Earnings per common share attributable to common shareholders—Basic
Income from continuing operations per common share				$               0.05		$               0.08
Loss from discontinued operations per common share				(0.02)		(0.03)
Earnings per common share attributable to common shareholders—Basic				$               0.03		$               0.05
Earnings per common share attributable to common shareholders—Diluted
Income from continuing operations per common share				$               0.04		$               0.08
Loss from discontinued operations per common share				(0.02)		(0.01)
Earnings per common share attributable to common shareholders—Diluted				$               0.02		$               0.07
Weighted average number of common shares outstanding:
Basic				101,849		98,725
Diluted				109,329		304,659

 

SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
					Nine Months Ended
					August 26,		August 28,
					2012		2011
Operating activities:
	Net income				$           2,717		$          5,319
	Adjustments to reconcile net income to cash provided by (used in) operating activities:
		Depreciation and amortization			18,753		18,001
		Deferred income taxes			348		946
		Amortization of deferred gain on sale-leaseback			(260)		(515)
		Paid in kind interest on convertible notes			17,064		14,551
		Amortization of discount on new senior secured notes			1,250		1,101
		Amortization of debt issuance costs and other			3,139		3,511
		Impairment charges			-		288
		Share-based compensation			6,566		9,239
		Loss (gain) on sale of assets			197		(30)
		Write-off of debt issuance costs related to debt extinguishments			1,862		643
		Loss on repurchase of senior notes			1,050		300
		Dividends received from unconsolidated affiliates			2,500		1,011
		Equity in earnings of unconsolidated affiliates			(3,283)		(2,535)
		Loss on disposition of subsidiary			-		206
		Other, net			(2,252)		(532)
	Changes in operating assets and liabilities:
		Accounts receivable			(45,686)		(29,787)
		Inventories			(20,201)		(1,224)
		Other current assets			6,554		(2,750)
		Other assets			482		2,361
		Accounts payable			25,321		9,255
		Accrued expenses			15,101		(20,338)
		Other liabilities			180		(2,159)
				Net cash provided by operating activities	31,402		6,862
Investing activities:
	Purchase of property, plant and equipment				(10,011)		(17,692)
	Acquisition of Comfort Revolution, inclusive of cash acquired of $159				159		-
	Proceeds from sale of property, plant and equipment				2,544		24
				Net cash used in investing activities	(7,308)		(17,668)
Financing activities:
	Proceeds from issuance of long-term obligations				1,269		2,568
	Repayments of long-term obligations				(9,009)		(3,882)
	Repayment of senior secured notes, including premium of $1,050				(36,050)		(10,300)
	Repurchase of common stock associated with vesting of employee share-based awards				(2,905)		(3,674)
	Exercise of employee stock options				62		621
	Debt issuance costs				(1,120)		(147)
	Other				-		(34)
				Net cash used in financing activities	(47,753)		(14,848)
Effect of exchange rate changes on cash					4,517		2,333
Change in cash and equivalents					(19,142)		(23,321)
Cash and equivalents:
	Beginning of period				107,975		109,255
	End of period				$         88,833		$        85,934
Noncash investing transaction:
	Investment in Comfort Revolution				$         10,000		$                -
	Inventory items transferred to property, plant and equipment				$           8,454		$                -

 

RECONCILIATION OF EBITDA TO NET INCOME NON GAAP MEASURE
				Three Months Ended:					Nine Months Ended:
				August 26, 2012		August 28, 2011			August 26, 2012		August 28, 2011
				(in thousands)					(in thousands)
Net (loss) income				$                    (197)		$                   6,598			$                   2,717		$                   5,319
Interest expense				20,929		21,935			65,554		65,309
Income taxes				12,156		9,556			14,821		7,779
Depreciation and amortization				6,554		5,739			18,753		18,001
				39,442		43,828			101,845		96,408
Adjustments for debt covenants:
	Refinancing charges			416		28			3,341		1,264
	Non-cash compensation			1,799		3,466			6,566		9,239
	KKR consulting fees			130		323			284		981
	Discontinued operations			307		891			1,814		3,050
	Other (various) (a)			487		(149)			1,113		246
Adjusted EBITDA				$                 42,581		$                 48,387			$               114,963		$               111,188
(a)  Consists of various immaterial adjustments

 

SEALY CORPORATION
SHARE COUNT RECONCILIATION
		Three Months Ended				Nine Months Ended
		August 26, 2012		August 28, 2011		August 26, 2012		August 28, 2011
		(in thousands)				(in thousands)
Numerator:
Net income from continuing operations, as reported		$                       201		$                    7,489		$                    4,622		$                    8,369
Net income attributable to participating securities		(1)		(4)		(12)		(7)
Interest on convertible notes		-		5,239		-		14,551
Net income from continuing operations available to common shareholders		$                       200		$                  12,724		$                    4,610		$                  22,913
Denominator:
Denominator for basic earnings per share—weighted average shares		103,534		100,334		101,849		98,725
Effect of dilutive securities:
Convertible debt		-		200,455		-		196,576
Stock options		679		747		693		811
Restricted share units		4,977		6,561		6,213		8,117
Other		610		469		574		430
Denominator for diluted earnings per share—adjusted weighted average shares and assumed conversions		109,800		308,566		109,329		304,659

 

SEALY CORPORATION
INTEREST EXPENSE
	Three Months Ended:				Nine Months Ended:
	August 26, 2012		August 28, 2011		August 26, 2012		August 28, 2011
Cash interest expense	$                     14,061		$                     15,161		$                     44,102		$                     46,145
Non-cash interest expense	6,868		6,774		21,452		19,164
	$                     20,929		$                     21,935		$                     65,554		$                     65,309

SOURCE Sealy Corporation

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