Sealy Corporation Reports Fiscal First Quarter 2011 Results

-1st Quarter Results from Continuing Operations-

-Net Sales of $305.5 Million-

-Income from Operations of $19.7 Million-

-Adjusted EBITDA of $30.0 Million-

Mar 29, 2011, 16:14 ET from Sealy Corporation

TRINITY, N.C., March 29, 2011 /PRNewswire/ -- Sealy Corporation (NYSE: ZZ), a worldwide leading bedding manufacturer, today announced results for its fiscal first quarter 2011.  Unless otherwise noted, the discussion of operational results pertains to Sealy's continuing operations, which excludes its discontinued operations in Europe and Brazil.  

Fiscal 2011 1st Quarter Results

Net sales for the first fiscal quarter were $305.5 million, a decrease of 2.0% compared to the same prior year quarter.

Gross profit for the first fiscal quarter decreased by $14.4 million to $118.5 million from the prior year quarter.  Gross margin decreased by 382 basis points to 38.8%.  

Income from operations for the first fiscal quarter decreased by $17.0 million to $19.7 million.  The decrease was driven primarily by a decline in gross profit.

Net income from continuing operations for the first quarter was $0.1 million or $0.00 per diluted share, compared to $8.3 million or $0.04 per diluted share in the prior year quarter.  The corresponding share counts for 2011 first quarter EPS and 2010 first quarter EPS were 107.8 million and 283.6 million, respectively. For further information on the calculation of diluted shares, please see the attached Reconciliation of Fully Diluted Sharecount schedule.  

Adjusted EBITDA for the first fiscal quarter decreased 39.9% to $30.0 million from $49.9 million. Adjusted EBITDA margin decreased to 9.8%, compared to 16.0% in the prior year period.  

"Our first quarter results were consistent with the expectations and objectives that we established as we entered the year, with overall revenues in-line with our Q1 internal plan.  In addition, the first quarter results reflected the financial impact of the significant strategic investments in our product portfolio, as we launched the Next Generation Posturepedic line in late January 2011.  This launch represents a refresh of approximately 50% of Sealy's entire product portfolio.  We also invested in a new national advertising campaign to support the rollout.  Retailer and consumer feedback on the product rollout, the new advertising campaign and the messaging has been overwhelmingly positive.  The line is being rolled out to our retail partners according to plan and we are on target to achieve our goal of having the new line shipped to at least 60% of our retail partners by Memorial Day.  We continue to reap the benefits from our 2010 product investments, and see positive momentum in both the Sealy Branded promotional line and Embody specialty line.  We remain confident in our ability to execute our plan and expect the strategic investments made in the first half of 2011 to drive improved financial performance, with improving revenue growth in the second quarter, and gross margin and Adjusted EBITDA growth in the second half of 2011," stated Larry Rogers, Sealy's President and Chief Executive Officer.  

Total U.S. net sales decreased 3.1% to $238.7 million from the first quarter of fiscal 2010.  Wholesale unit volume decreased 1.3%, while wholesale average unit selling price decreased 1.9% on a year-over-year basis.  The decreases in unit volume and average unit selling price are attributable to slower sales and heavier discounting on Posturepedic products at the end of their life cycle in advance of the introduction of the Next Generation Posturepedic line. In addition, the growth of our Sealy Branded promotional line products has contributed to the lower average unit selling price as these value priced products made up an increased portion of total sales.

International net sales increased $1.3 million, or 1.9%, from the first quarter of fiscal 2010 to $66.8 million. Excluding the effects of currency fluctuation, international net sales decreased 2.0% from the first quarter of fiscal 2010. This decrease was primarily due to lower sales volumes in our Canadian market, which was partially offset by strong growth in South America.  

Gross profit for the first fiscal quarter decreased by $14.4 million to $118.5 million from the prior year quarter.  Gross margin decreased by 382 basis points to 38.8%. U.S. gross profit margin decreased 432 basis points to 37.9%.  The decrease in gross margin was driven primarily by the launch of the Next Generation Posturepedic line, which began shipping in the first quarter of fiscal 2011.  The launch included costs related to the floor samples and start up efforts of the new line, and unfavorable pricing due to discounting on the old line.  These combined actions negatively impacted U.S. gross margins by approximately 200 basis points.  Higher material costs related to increased commodity prices and other inflation contributed 160 basis points of the decrease in U.S. gross margin.  Additionally, the increased sales of Sealy Branded promotional line products contributed to lower margins in the first quarter of fiscal 2011.  This product mix shift impacted U.S. gross margin by 40 basis points.    

Selling, general, and administrative (SG&A) expenses were $103.7 million for the first quarter of fiscal 2011, an increase of $3.4 million versus the comparable period a year earlier.  Fixed operating costs, exclusive of non-cash compensation expense, increased $6.0 million from the prior year period.  This increase is primarily due to an incremental $2.2 million in costs related to our new advertising campaign and $2.5 million in costs incurred to support the launch of the Next Generation Posturepedic line.  Volume driven variable expenses remained relatively flat with the prior year period. Non-cash compensation expense decreased by $1.2 million compared to the first quarter of fiscal 2010 due primarily to the recognition of expense related to the vesting of restricted share unit grants.

Net income from continuing operations for the first quarter was $0.00 per diluted share.  Net loss from discontinued operations for the period was $(0.01) per diluted share.  Included in the net loss from discontinued operations, are the operational results related to the European and Brazilian businesses and the related losses on disposition.  Net loss for the first fiscal quarter was $(0.01) per diluted shares.  For further information on the calculation of diluted shares, please see the attached Reconciliation of Fully Diluted Sharecount schedule.

As of February 27, 2011, the Company's debt net of cash was $689.8 million and Net Debt to Adjusted EBITDA ratio (excluding the Convertible Payment In Kind Notes) was 3.24x.

Results from Continuing Operations

During the fourth quarter 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

Within the information above, 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. We present Adjusted EBITDA, because the covenants contained in our 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.  We also present Adjusted EBITDA margin, which is Adjusted EBTIDA reflected as a percentage of net sales because we believe that this measure provides useful incremental information to investors regarding our 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.  

Additionally, the Company provides certain information on a constant currency basis which reflects a comparison of current period results translated at the prior period currency rates.  This information is provided because we believe that it provides useful incremental information to investors regarding our operating performance.

Conference Call

The Company will hold a conference call today to discuss its fiscal first quarter 2011 results at 5:00 p.m. (Eastern Standard Time).  The conference call can be accessed live over the phone by dialing 1-877-941-2068, or for international callers, 1-480-629-9712. A replay will be available one hour after the call and can be accessed by dialing 1-877-870-5176, or for international callers, 1-858-384-5517. The passcode for the live call and the replay is 4426462. The replay will be available until April 5, 2011.

Interested investors and other parties may also listen to a simultaneous webcast of the conference call by logging onto the Investors section of the Company's website at www.sealy.com. The on-line replay will be available for a limited time beginning immediately following the call in the Investors section of the Company's website at www.sealy.com.

About Sealy

Sealy owns the largest bedding brand in the world, with sales of $1.2 billion in fiscal 2010. The Company manufactures and markets a broad range of mattresses and foundations under the Sealy(R), Sealy Posturepedic(R), Sealy Embody(TM), Stearns & Foster(R), and Bassett(R) 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 7,000 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," "continue," and "grow," as well as similar comments, are forward-looking in nature. Although the Company believes its growth plans are based upon reasonable assumptions, it can give no assurances that such expectations can be attained. Factors that could cause actual results to differ materially from the Company's expectations include: 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)

February 27,

November 28,

February 28,

2011

2010

2010

ASSETS

Current assets:

Cash and equivalents

$           102,390

$           109,255

$           117,055

Accounts receivable, net of allowances for bad debts, cash discounts and returns

154,950

140,778

177,700

Inventories

57,216

57,178

59,536

Other current assets

22,890

19,543

16,091

Deferred income tax assets

20,169

19,127

15,688

Total current assets

357,615

345,881

386,070

Property, plant and equipment - at cost

392,479

385,470

436,097

Less accumulated depreciation

(223,865)

(217,398)

(236,297)

168,614

168,072

199,800

Other assets:

Goodwill

363,455

361,958

360,875

Intangible assets, net

1,314

1,387

1,594

Deferred income tax assets

5,205

6,140

10,670

Other assets, including debt issuance costs, net

52,896

53,319

52,920

422,870

422,804

426,059

Total assets

$           949,099

$           936,757

$        1,011,929

LIABILITIES AND STOCKHOLDERS'  DEFICIT

Current liabilities:

Current portion - long-term obligations

$               2,156

$               2,166

$             10,972

Accounts payable

79,879

66,507

95,461

Accrued incentives and advertising

26,418

34,510

25,689

Accrued compensation

20,655

22,390

28,229

Accrued interest

17,346

14,359

19,161

Other accrued liabilities

33,237

37,198

33,468

Total current liabilities

179,691

177,130

212,980

Long-term obligations, net of current portion

789,999

793,084

829,005

Other liabilities

52,680

53,357

60,225

Deferred income tax liabilities

843

825

1,997

Stockholders' deficit:

Common stock

981

979

947

Additional paid-in capital

921,763

911,066

896,130

Accumulated deficit

(1,007,591)

(1,006,689)

(987,236)

Accumulated other comprehensive income

10,733

7,005

(2,119)

Total shareholders' deficit

(74,114)

(87,639)

(92,278)

Total liabilties and shareholders' deficit

$           949,099

$           936,757

$        1,011,929

SEALY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

Three Months Ended

February 27,

February 28,

2011

2010

Net sales

$            305,529

$            311,888

Cost of goods sold

187,025

179,006

Gross profit

118,504

132,882

Selling, general and administrative expenses

103,734

100,289

Amortization expense

72

72

Royalty income, net of royalty expense

(4,971)

(4,122)

Income from operations

19,669

36,643

Interest expense

21,708

21,733

Other income, net

(105)

(50)

(Loss) income before income taxes

(1,934)

14,960

Income tax (benefit) provision

(1,209)

7,627

Equity in earnings of unconsolidated affiliates

855

943

Income (loss) from continuing operations

130

8,276

Loss from discontinued operations

(1,032)

(2,562)

Net (loss) income

$                 (902)

$                5,714

Earnings (loss) per common share—Basic

Income (loss) from continuing operations per common share

$                     -

$                  0.09

Loss from discontinued operations per common share

(0.01)

(0.03)

(Loss) earnings per common share—Basic

$                (0.01)

$                  0.06

Earnings (loss) per common share—Diluted

Income (loss) from continuing operations per common share

$                     -

$                  0.04

Loss from discontinued operations per common share

(0.01)

(0.01)

Earnings (loss) per common share—Diluted

$                (0.01)

$                  0.03

Weighted average number of common shares outstanding:

Basic

97,816

94,524

Diluted

107,828

283,576

SEALY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Three Months Ended

February 27,

February 28,

2011

2010

Operating activities:

Net (loss) income

$                  (902)

$              5,714

Adjustments to reconcile net income to

net cash provided by (used in) operating activities:

Depreciation and amortization

6,054

7,549

Deferred income taxes

322

2,656

Bad debt expense

1,146

312

Amortization of deferred gain on sale-leaseback

(167)

(163)

Paid in kind interest on convertible notes

4,586

3,365

Amortization of discount on new senior secured notes

382

389

Amortization of debt issuance costs and other

1,175

2,067

Share-based compensation

2,879

4,117

(Gain) loss on sale of assets

(231)

171

Dividends received from unconsolidated affiliates

1,011

-

Equity in earnings of unconsolidated affiliates

(855)

(943)

Loss on disposition of subsidiary

206

-

Other, net

638

420

Changes in operating assets and liabilities:

Accounts receivable

(13,605)

(23,217)

Inventories

161

(3,991)

Prepaid expenses and other current assets

(2,796)

2,011

Other assets

(839)

71

Accounts payable

12,547

8,577

Accrued expenses

(13,294)

(19,419)

Other liabilities

(615)

1,565

Net cash used in operating activities

(2,197)

(8,749)

Investing activities:

Purchase of property, plant and equipment

(5,927)

(2,449)

Proceeds from sale of property, plant and equipment

224

57

Net cash used in investing activities

(5,703)

(2,392)

Financing activities:

Proceeds from issuance of long-term obligations

787

516

Repayments of long-term obligations

(1,118)

(3,361)

Exercise of employee stock options, including related excess tax benefits

581

-

Debt issuance costs

(147)

-

Other

(34)

(16)

Net cash provided by (used in) financing activities

69

(2,861)

Effect of exchange rate changes on cash

966

(370)

Change in cash and equivalents

(6,865)

(14,372)

Cash and equivalents:

Beginning of period

109,255

131,427

End of period

$             102,390

$          117,055

RECONCILIATION OF EBITDA TO NET INCOME

NON GAAP MEASURES

Three Months Ended:

February 27,

February 28,

2011

2010

(in thousands)

(percentage of net sales)

(in thousands)

(percentage of net sales)

Net (loss) income

$           (902)

-0.3%

$          5,714

1.8%

     Interest expense

21,708

7.1%

21,733

7.0%

     Income taxes

(1,209)

-0.4%

7,627

2.4%

     Depreciation and amortization (a)

6,054

2.0%

7,866

2.5%

EBITDA

25,651

8.4%

42,940

13.8%

Adjustments for debt covenants:

Non-cash compensation

2,880

0.9%

4,107

1.3%

KKR consulting fees

366

0.1%

496

0.2%

Severance charges

232

0.1%

1,115

0.4%

Discontinued operations

1,032

0.3%

2,562

0.8%

Other (various) (b)

(157)

-0.1%

(1,283)

-0.4%

Adjusted EBITDA

$       30,004

9.8%

$        49,937

16.0%

(a)  Excludes depreciation from discontinued operations

(b)  Consists of various immaterial adjustments

Sealy Corporation

Share Count Reconciliation

Three Months Ended

February 27, 2011

February 28, 2010

(in thousands)

Numerator:

Net income from continuing operations, as reported

$                       130

$                    8,276

Net income attributable to participating securities

-

(25)

Interest on convertible notes

-

3,365

Net income from continuing operations available to common shareholders

$                       130

$                  11,616

Denominator:

Denominator for basic earnings per share—weighted average shares

97,816

94,524

Effect of dilutive securities:

Convertible debt

-

178,204

Stock options

886

1,316

Restricted share units

8,720

9,206

Other

406

326

Denominator for diluted earnings per share—adjusted weighted average shares and assumed conversions

107,828

283,576

Sealy Corporation

Interest Expense

Q1 2011

Three Months Ended

February 27, 2011

February 28, 2010

(in thousands)

Cash interest expense

$                      15,565

$                      16,451

Non-cash interest expense

6,143

5,282

Total interest expense

$                      21,708

$                      21,733

SOURCE Sealy Corporation