Sealy Corporation Reports Fiscal Third Quarter 2011 Results

TRINITY, N.C., Sept. 27, 2011 /PRNewswire/ -- Sealy Corporation (NYSE: ZZ), a leading global bedding manufacturer, today announced results for its fiscal third quarter 2011.  

Fiscal 2011 3rd Quarter Highlights for Continuing Operations

• Net sales were $334.1 million, an increase of 4.2% compared to the same prior year quarter.

• Gross profit increased by $4.8 million to $137.0 million from the prior year quarter.  

• Income from operations increased by $1.7 million to $37.8 million.  

• Net income from continuing operations was $7.5 million or $0.04 per diluted share, compared to $9.2 million or $0.05 per diluted share in the prior year quarter.  The corresponding share counts for 2011 and 2010 third quarter EPS were 308.6 million and 291.6 million, respectively. For further information on the calculation of diluted shares, please see the attached Reconciliation of Fully Diluted Sharecount schedule.  

• Adjusted EBITDA increased 1.3% to $48.4 million from $47.7 million.

"We continued to reap the benefits of both our recent Next Generation Posturepedic launch and our new advertising campaign in the third quarter, as we delivered year over year sales growth; sequential gross margin improvement; year over year US gross margin improvement; and year over year Adjusted EBITDA growth," stated Larry Rogers, Sealy's President and Chief Executive Officer.  "These results were achieved despite a more challenging macroeconomic environment as well as volatility and increases in the costs of our raw materials."  

"Looking forward, we still feel confident in our ability to execute on the initiatives that we control, which now also include an acceleration in the launch of our Next Generation Stearns & Foster line, but the overall outlook for the consumer environment is less certain.  These events, alongside current raw material inflation, challenge our ability to deliver gross margin expansion and adjusted EBITDA growth in the second half of 2011.  However, with the investments we are making in our product portfolio in 2011 – we feel well positioned for 2012," added Mr. Rogers.

During the quarter, the Company completed the launch of its Next Generation Posturepedic line, which represented the largest and fastest rollout in the Company's history.  The Company believes that the success of this new line launch resulted in Posturepedic gaining innerspring market share.

Sales of Specialty products remain on track to deliver double digit growth for the year and the Company is taking steps to increase its commitment to the Specialty bedding category.  Specifically, a new Specialty Division, to be headed by Mark Delahanty is being created.  Mr. Delahanty will have responsibility for the development, marketing and distribution of new specialty bedding products and will report directly to Mr. Rogers.  The initial deliverable for this new division, will be the launch of the new Embody Specialty line at the Las Vegas Market in late January 2012.  

At the Las Vegas Market in August, Sealy introduced the Next Generation Stearns & Foster line and has already begun shipping it to customers.  This will help drive continuing sales growth starting in fiscal 2012, but carries with it approximately $7.5 million of product launch costs that will be incurred in the fourth quarter of fiscal year 2011.  

Fiscal 2011 Third Quarter Results

Total U.S. net sales increased 2.5% to $257.3 million from the third quarter of fiscal 2010. Excluding third party sales from the component plants, the wholesale average unit selling price increased 3.9% on a year-over-year basis, while wholesale unit volume decreased 0.8%. The increase in average unit selling price was driven by price increases that we implemented in the third quarter of fiscal 2011 and the higher sales of Next Generation Posturepedic beds. The decrease in unit volume is attributable to the decreased sales of Stearns & Foster and Sealy branded products given the strong performance in the prior year. This decrease was partially offset by higher sales of the Next Generation Posturepedic line which has now been fully distributed to retailers.

International net sales increased $7.3 million, or 10.5%, from the third quarter of fiscal 2010 to $76.8 million. The increase in international net sales was primarily due to increased sales in the Argentina and Mexico markets as well as the effects of a stronger Canadian dollar which benefited sales in the Canada market in U.S. dollar terms. Excluding the effects of currency fluctuation, international net sales increased 4.8% from the third quarter of fiscal 2010.

Gross profit for the third fiscal quarter increased by $4.8 million to $137.0 million from the prior year quarter.  Gross margin decreased by 23 basis points to 41.0%. The decrease in percentage of net sales was primarily due to a decrease in gross profit margin in the Canadian operations with the gross profit margin of the U.S. business showing a slight increase. U.S. gross profit margin increased 35 basis points to 40.8%.  

Selling, general, and administrative (SG&A) expenses were $104.1 million for the third quarter of fiscal 2011, an increase of $3.7 million versus the comparable period a year earlier.  As a percentage of net sales, these expenses were 31.2% and 31.3% for the quarters ended August 28, 2011 and August 29, 2010, respectively, a decrease of 0.1 percentage points. The increase in absolute dollars was primarily driven by a $3.6 million increase in volume driven variable expenses. Fixed operating costs, exclusive of non-cash compensation expense, increased $0.7 million from the prior year period. This increase is primarily due to an increase of $3.0 million in costs related to Sealy's new advertising campaign partially offset by a $2.2 million decrease in expected incentive based compensation for fiscal 2011.  

Income from operations for the third fiscal quarter increased 4.6% to $37.8 million.  

Net income from continuing operations for the third quarter was $0.04 per diluted share.  Net loss from discontinued operations for the period was $(0.00) 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.  For further information on the calculation of diluted shares, please see the attached Reconciliation of Fully Diluted Sharecount schedule.

Fiscal 2011 Nine Month Results

Net sales for the nine months ended August 28, 2011 increased 4.1% to $960.9 million from $922.9 million for the comparable period a year earlier. Gross profit was $380.6 million, or 39.6% of net sales, versus $386.6 million, or 41.9% of net sales, for the comparable period a year earlier.  Net income from continuing operations was $8.4 million, versus net income from continuing operations of $21.2 million in the prior year period.  Included in the 2011 period are $24.3 million of incremental costs associated with the launch of the Next Generation Posturepedic line, including price discounting for the old line, manufacturing start up expenses, launch related costs and national advertising expenses.  Adjusted EBITDA decreased 19.4% to $111.2 million from $138.0 million compared to the same period in the prior year.  

As of August 28 2011, the Company's debt net of cash was $700.2 million and Net Debt to Adjusted EBITDA ratio (excluding the Convertible Payment In Kind Notes) based on the trailing 12 months was 3.44x.  

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

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 third quarter 2011 results at 5:00 p.m. (Eastern Daylight Time).  The conference call can be accessed live over the phone by dialing 1-877-941-1427, or for international callers, 1-480-629-9664. 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 4473075. The replay will be available until October 4, 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.

SOURCE Sealy Corporation