Sealy Corporation Reports Fiscal First Quarter 2011 Results

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.

SOURCE Sealy Corporation

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