Sealy Corporation Reports Fiscal Third Quarter 2012 Results --3rd Quarter Results from Continuing Operations--

--Net Sales Growth of 9.4% to $365 Million--

--Due to Recent Transaction Announcement with Tempur-Pedic International, Inc., Third Quarter Earnings Conference Call This Evening Cancelled--

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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