Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (03-26-12 02:25 AM)

Description

Sealy Corp. 10% Owner MANAGEMENT, LLC H PARTNERS bought 864494 shares on 3-20-2012 at $ 1.7

BUSINESS OVERVIEW

General

Sealy Corporation (hereinafter referred to as the "Company", "Sealy", "we", "our", or "us"), a Delaware corporation organized in 1984, owns one of the largest bedding brands in the world (Sealy®). Based on Furniture/Today , a furniture industry publication, we are a leading bedding manufacturer in the United States with a wholesale market share of approximately 18.9% in 2010.

We manufacture and market a complete line of bedding products, including mattresses and mattress foundations. Our conventional (innerspring) bedding products are manufactured and marketed in the Americas under the Sealy , Sealy Posturepedic , Stearns & Foster and Bassett brand names. In addition, we manufacture and market specialty (non-innerspring) latex and visco-elastic bedding products under the Embody, Stearns & Foster, and Carrington Chase brand names, which we sell in the United States and internationally.

We believe that our brands have made Sealy the number one selling manufacturer in the domestic bedding industry for over 25 years and our Stearns & Foster brand name is one of the leading brands devoted to the attractive luxury category, which sells at higher price points in the industry. We believe that going to market with one of the best selling and most recognized brands in the domestic bedding industry ( Sealy ), one of the leading luxury brands ( Stearns & Foster ), and differentiated specialty bedding offerings gives us a competitive advantage and strengthens our relationships with our customers by allowing us to offer sleep solutions to a broad group of consumers.

In November 2010, we divested the assets of our European manufacturing operations in France and Italy which represented our Europe segment. We also discontinued our operations in Brazil in the fourth quarter of fiscal 2010. In each of these markets, we have transitioned to a license arrangement with third parties. We accounted for these businesses as discontinued operations, and, accordingly, we have reclassified the financial results for all periods presented to reflect them as such. Unless otherwise noted, discussions in this Form 10-K pertain to our continuing operations.

We maintain an internet website at www.sealy.com . We make available on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements, other reports, and any amendments to these reports as soon as reasonably practicable after they are electronically filed or furnished to the SEC. The information on the Company's website is not incorporated by reference into this report. From time to time, we may use our website as a channel of distribution of material Company information. Financial and other material information regarding Sealy is routinely posted on the Company's website and is readily accessible.

Debt Refinancing

On May 13, 2009, we announced a comprehensive plan to refinance our existing senior secured credit facilities and replace them with indebtedness that has longer-dated maturities and eliminates quarterly financial ratio based maintenance covenants (the "Refinancing"). Through the Refinancing, we: 1) entered into a new asset-based revolving credit facility (the "ABL Revolver") which provides commitments of up to $100.0 million maturing in May 2013; 2) issued $350.0 million in aggregate principal amount of senior secured notes due April 2016 (the "Senior Notes"); and 3) issued $177.1 million in aggregate principal amount of senior secured convertible paid in kind ("PIK") notes due July 2016 pursuant to a rights offering to all existing shareholders of the Company (the "Convertible Notes"). The proceeds from the Refinancing were used to repay all of the outstanding amounts due under our previously existing senior secured credit facilities, which consisted of a $125 million senior revolving credit facility and senior secured term loans, and to increase cash for general operating purposes.

Through a merger of the Company with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") in 2004, KKR acquired approximately 92% of the Company's capital stock. Subsequent to the initial public offering in 2006, KKR's ownership decreased. At November 27, 2011, affiliates of KKR controlled approximately 46.2% of our issued and outstanding common stock.

Our Segments

Our segments were identified and aggregated based on our organizational structure, which is organized around geographic areas. Our operating segments in these geographic areas are deemed to meet the criteria for aggregation under the applicable authoritative guidance and as such, these operations are reported as one segment within our Consolidated Financial Statements in Item 8. From a geographical perspective, our operations are concentrated in the United States, Canada, Mexico, South America and Puerto Rico, with our dominant operations being in the United States (also referred to as "domestic" herein). For more information regarding revenues and assets by geographical area, see Note 20 to our Consolidated Financial Statements in Item 8.

Products

We produce sleep sets across a range of technologies, including innerspring, latex foam and visco-elastic "memory foam" and sell them directly to customers in North and South America and indirectly around the world through joint venture and licensee partners. While our strategy is to drive sales growth through domestic specialty products, the majority of our products continue to be in the domestic innerspring market where we offer a complete line of innerspring bedding products in sizes ranging from twin to king size, selling at retail price points from under $300 to approximately $5,000 per queen set domestically. Although we sell conventional innerspring products at all retail price points, we focus our product development and sales efforts on mattress and box spring sets that sell at retail price points above $750 domestically.

During fiscal 2011, we have seen strength in sales of products at the higher and lower end price points. In order to capture this growth potential at the higher end price point, we accelerated the domestic introduction of our Next Generation Stearns & Foster product line to the fourth quarter of fiscal 2011. Our main product introduction for fiscal 2011 related to our Next Generation Posturepedic line which comprises the largest portion of our portfolio. We believe that these products have been well received by customers. For fiscal 2011, we derived approximately 67% of our total domestic sales from products with retail price points of $750 and above.

Our product development efforts include regular introductions across our product lines in order to maintain the competitiveness and the profitability of our products. In the past two years alone, we have introduced several new products including: 1) our Next Generation Posturepedic line which comprises the largest portion of our portfolio and incorporates new benefits and technologies developed specifically for that line; 2) our Next Generation Stearns & Foster line which is offered in three collections, Core, Estate and Luxury Estate and includes traditional innerspring products, but also includes a luxury latex line containing a 100% latex core with cashmere-infused fabric; 3) Embody by Sealy, a premium specialty brand featuring memory foam and latex technologies; and 4) new Sealy branded promotional bedding at lower retail prices.

In our international markets, we also offer a wide range of products including a full line of innerspring and specialty products under the Sealy and local brand names.

Customers

Our five largest customers on a consolidated basis accounted for approximately 39.2% of our net sales for fiscal 2011 with one customer (Costco), representing more than 10% of our net sales during fiscal 2011. While we believe our relationships with these customers are stable, many of these relationships are terminable at will at the option of either party. In the U.S., we serve a large and well diversified base of approximately 3,000 customers, including furniture stores, specialty bedding stores, department stores and warehouse club stores. The credit environment in which our customers operate has stabilized somewhat over the past two years; however, the continued management of credit risk by financial institutions continues to cause a decrease in the availability of credit for mattress retailers. In certain instances, this has caused mattress retailers to exit the market or be forced into bankruptcy. Furthermore, many of our customers rely in part on consumers' ability to finance their mattress purchases with credit from third parties. See "Risk Factors—A substantial decrease in business from our significant customers could have a material effect on our sales and market share" in Item 1A below.

We continue to remain focused on monitoring our customer relationships and working with our customers during these unpredictable and difficult times. We have been able to maintain a leading market share among the top 25 U.S. bedding retailers by wholesale sales dollars. We believe this is due, in part, to the strength of our customer relationships, our large and well-trained sales force, effective marketing, leading brand names and a broad portfolio of quality product offerings.

Sales and Marketing

Our sales depend primarily on our ability to provide quality products with recognized brand names at competitive prices. Additionally, we work to build brand loyalty with our end-use consumers, principally through cooperative advertising with our dealers, along with superior "point-of-sale" materials designed to emphasize the various features and benefits of our products that differentiate them from other brands and targeted in-country national advertising.

In 2011, we launched a new national advertising campaign and product line for our flagship Posturepedic brand. From the new product aesthetics to the marketing and integral use of social media in connecting with consumers, everything in preparation for the Posturepedic launch was thoughtfully planned to transform the way consumers think about the brand.

During 2011, we also introduced several new strategies which were focused on leveraging digital media including our "In Bed" tagger application for mobile devices, inclusion of our advertising messages on YouTube and Hulu and the use of behavioral targeting of online ads to better reach customers that may be particularly interested in purchasing our products. We expect to continue to create new ways to use digital media to maximize the reach of our advertising.

In the U.S., we have two sales structures, customer aligned and geographically aligned. Our national account and regional account sales forces are organized along customer lines, and our field sales force is generally structured based on regions of the country and districts within those regions. These sales forces are measured on sales and customer profitability performance. We have a comprehensive training and development program for our sales force, including our University of Sleep curriculum, which provides ongoing training sessions with programs focusing on advertising, merchandising and sales education, including techniques to help optimize a dealer's business and profitability.

Our sales force emphasizes follow-up service to retail stores and provides retailers with promotional and merchandising assistance, as well as extensive specialized professional training and instructional materials. Training for retail sales personnel focuses on several programs designed to assist retailers in maximizing the effectiveness of their own sales personnel, store operations, and advertising and promotional programs, thereby creating loyalty to, and enhanced sales of, our products.

Operations

We manufacture and distribute products to our customers primarily on a just-in-time basis from our network of 27 company-owned and operated bedding and component manufacturing facilities located around the world. We manufacture most bedding to order and employ just-in-time inventory techniques in our manufacturing process to more efficiently serve our dealers' needs and to minimize their inventory carrying costs. Most bedding orders are scheduled, produced and shipped within five business days of receipt from our plants located in proximity to a majority of our customers. We believe there are a number of important advantages to this operating model such as the ability to provide superior service and custom products to regional, national and global accounts, a significant reduction in our required inventory investment and short delivery times. We believe these operating capabilities, and the ability to serve our customers, provide us with a competitive advantage.

We believe we are the most vertically integrated U.S. manufacturer of innerspring and latex components. We distinguish ourselves from our major competitors by maintaining our own component parts manufacturing capability for producing substantially all of our mattress innerspring and latex component parts requirements. This vertical integration lessens our reliance upon certain key suppliers to the innerspring bedding manufacturing industry and provides us with the following competitive advantages:

•
procurement advantage by lessening our reliance upon industry suppliers and thus increasing our flexibility in production;

•
production cost advantage via cost savings directly related to our vertically integrated components production capabilities; and

•
response time advantage by improving our ability to react to shifts in market demands, thus improving time to market.

Sources and Availability of Raw Materials and Suppliers

Our primary raw materials consist of polyurethane foam, polyester, polyethylene foam and steel innerspring components that we purchase from various suppliers. In the U.S., we rely upon a single supplier for certain polyurethane foam components in our mattress units. Such components are purchased under a supply agreement. We continue to develop alternative supply sources, allowing acquisition of similar component parts that meet the functional requirements of various product lines. We also purchase a significant portion of our box spring parts from third party sources under supply agreements, which require that we maintain certain volume allocations based on a proportional amount of material purchases. These volume allocations do not represent fixed purchase commitments. We are also dependent on a single supplier for the visco-elastic components and assembly of our Embody specialty product line. Except for our dependence regarding polyurethane foam, visco-elastic components and assembly of our Embody specialty product line, we do not consider ourselves to be dependent upon any single outside vendor as a source of supply to our bedding business, and we believe that sufficient alternative sources of supply for the same, similar or alternative components are available.

International

We derived approximately 22.6% of our fiscal 2011 net sales internationally. Our largest international market, Canada, contributed 14.8% of our fiscal 2011 net sales. We have 100% owned subsidiaries in Canada, Mexico, Puerto Rico, Argentina, Uruguay and Chile, which have marketing and manufacturing responsibilities for those markets. We have three manufacturing and distribution center facilities in Canada and one each in Mexico, Puerto Rico, Argentina, and Uruguay, which comprise all of the company-owned manufacturing operations outside of the U.S. at November 27, 2011. We attribute revenue from external customers based on the sales of the manufacturing facilities in these international locations. Long-lived assets attributable to our Canadian operations were $12.2 million, $12.8 million, and $8.5 million as of November 27, 2011, November 28, 2010 and November 29, 2009, respectively.

We also derive income from royalties by licensing our brands, technology and trademarks to other manufacturers, including 14 international independent licensees.

We also participate in a group of joint ventures with our Australian licensee to import, manufacture, distribute and sell Sealy products in Southeast Asia. Our China joint venture recently opened a manufacturing facility in China in order to better serve this growing market and increase the presence of the Sealy brand in this area. We are also exploring opportunities to expand our international reach by establishing either new joint venture or licensing arrangements in India and South America. In addition to the above, we also ship products directly into many small international markets.

Our international operations are subject to the risks of operating in an international environment, including the potential imposition of trade or foreign exchange restrictions, tariff and other tax increases, fluctuations in exchange rates, inflation and unstable political situations, See "Risk Factors" in Item 1A.

For information regarding revenues and long lived assets by geographic area, See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" in Item 7 as well as Note 20 to our Consolidated Financial Statements in Item 8.

Bedding Industry

General

Our U.S. business represents the dominant portion of our operations. The U.S. bedding industry generated wholesale revenues of approximately $5.9 billion during the calendar year 2010, according to the International Sleep Products Association ("ISPA"). Based on a sample of leading mattress manufacturers, including Sealy, ISPA estimates that wholesale revenues for these manufacturers increased approximately 4.1% in 2010. This trend has continued through the first nine months of 2011 with wholesale revenues reported by ISPA increasing 8.3%.

The majority of the wholesale revenue growth has been driven by the specialty bedding category, which represents non-innerspring bedding products including visco-elastic "memory foam", latex foam and other mattress products. According to ISPA, specialty bedding wholesale mattress revenue increased 22.7% in 2010 and these trends have remained strong through the first nine months of 2011 which have seen increases of 28.1% from the levels experienced in the first nine months of 2010. Conversely, wholesale revenue from traditional innerspring mattresses have shown more moderate growth of 0.7% and 4.0% for 2010 and the first nine months of 2011, respectively.

Sales of mattresses at retail price points below $500 and above $1,000 showed stronger performance in 2010 according to ISPA based on a sample of total industry shipments of queen sets. Wholesale revenues generated by these price points gained approximately 2.0% from 2009 to 2010. In fiscal 2011, we have seen these trends continue with stronger sales of mattresses at these price points within our own product portfolio.

One of our main operating strategies is to maintain a wide breadth of product offerings at various price points. In 2011, we introduced our Next Generation Posturepedic line, which comprises the largest portion of our portfolio. Additionally, we introduced our Next Generation Stearns & Foster line in the fourth quarter of 2011 and plan to introduce a new line of specialty product and refresh our Sealy branded promotional product in fiscal 2012.

MANAGEMENT DISCUSSION FROM LATEST 10K

Business Overview

We manufacture and market a complete line of bedding (innerspring and non-innerspring) products, including mattresses and box springs, holding leading positions in key market categories such as luxury bedding products and among leading retailers. Our conventional bedding products include the Sealy , Sealy Posturepedic , Stearns & Foster and Bassett brands and accounted for approximately 91% of our total domestic net sales for the year ended November 27, 2011. In addition to our innerspring bedding, we also produce a variety of visco-elastic ("memory foam") and latex foam bedding products. We expect to gain market share in these product lines as we seek to strengthen our competitive position in the specialty bedding (non-innerspring mattress) market. We distinguish ourselves from our major competitors in part by maintaining our own component parts manufacturing capability and producing substantially all of our mattress innerspring and latex mattress components requirements.

We believe we are one of the largest bedding manufacturers in the world, with a wholesale domestic market share of approximately 18.9% in 2010. We believe that we have experienced domestic market share declines during 2011 based on the relative strength of the specialty sector and our concentration in innerspring product.

Our segments are identified and aggregated based on our organizational structure, which is organized around geographic areas. From a geographical perspective, our operations are concentrated in the United States, Canada, Mexico, South America and Puerto Rico, with our dominant operations being in the United States. Our foreign subsidiaries contributed 22.6% of our total revenues during fiscal 2011 compared to 22.0% in fiscal 2010. The moderate increase from the prior year has been driven by sales increases in our South American and Mexico businesses which have been partially offset by sales decreases in Canada.

Raw Materials and Commodity Prices

During fiscal 2011, the costs of our steel innerspring, polyurethane foam, and polyethlylene component parts increased and ultimately stabilized in the latter part of fiscal 2011. While these costs increased during fiscal 2011, they have stabilized as the prices of the underlying commodities adjusted to market conditions. During fiscal 2011, we saw increases in the cost of diesel fuel which negatively impacted our inbound freight and delivery costs which are recorded as a component of cost of goods sold and selling, general and administrative expenses, respectively. Continued volatility in the price of fuel will continue to have an impact on these costs.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The preparation of financial statements in accordance with US GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that our management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Our management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 1 to our Consolidated Financial Statements included in Item 8. We believe the following accounting estimates are critical to understanding our results of operations and affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

Cooperative Advertising, Rebate and Other Promotional Programs —We enter into agreements with our customers to provide funds to the customer for advertising and promotion of our products. We also enter into volume and other rebate programs with our customers whereby funds may be rebated to the customer. When sales are made to these customers, we record liabilities pursuant to these agreements. We periodically assess these liabilities based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer or whether the customers will meet the requirements to receive rebate funds. We generally negotiate these agreements on a customer-by-customer basis. Some of these agreements extend over several periods and are linked with supply agreements. Most of these agreements coincide with our fiscal year; however, our customers typically have ninety days following the end of a period to submit claims for reimbursement of advertising and promotional costs. Therefore, significant estimates are required at any point in time with regard to the ultimate reimbursement to be claimed by our customers. Subsequent revisions to such estimates are recorded and charged to earnings in the period in which they are identified. Changes in underlying spending patterns related to these incentive programs could impact our margins. Costs of these programs totaled $261.4 million, $237.3 million, and $212.6 million in fiscal 2011, 2010 and 2009, respectively. Of these costs, amounts associated with volume rebates, supply agreement amortization, slotting fees, end consumer rebates and other customer allowances which were recorded as a reduction of sales were $120.4 million, $102.5 million and $94.0 million in fiscal 2011, 2010 and 2009, respectively. Amounts recorded as a reduction of sales in the U.S. were $99.8 million, $78.7 million and $74.8 million, respectively. The costs associated with cooperative advertising were recorded as selling, general and administrative expenses and were $141 million, $134.8 million and $118.6 million in fiscal 2011, 2010 and 2009, respectively.

Allowance for Doubtful Accounts —The credit environment in which our customers operate has stabilized somewhat over the past two years; however, the continued management of credit risk by financial institutions continued to cause a decrease in the availability of credit for mattress retailers. We continue to actively monitor the financial condition of our customers to determine the potential for any nonpayment of trade receivables. In determining our reserve for bad debts, we also consider other general economic factors. Our management believes that our process of specific review of customers, combined with overall analytical review provides a reliable evaluation of ultimate collectibility of trade receivables. We recorded a bad debt provision of $2.3 million, or approximately 0.2% percent of sales, in fiscal 2011. Provisions for bad debts recorded in fiscal 2010 and 2009 were $2.5 million (approximately 0.2% of sales) and $3.7 million (approximately 0.3% of sales), respectively.

Warranties and Product Returns —At the time revenue is recognized, the Company provides for the estimated costs of warranties and reduces revenue for estimated returns based on historical return experience for warrantable and other product returns. We utilize warranty trends on existing similar product in order to estimate future warranty claims associated with newly introduced product. Changes in the historical trends of these returns could impact the estimates for future periods.

During fiscal 2011, the Company reviewed its computation of reserves for warrantable product returns and refined the calculations of these reserves in order to better predict the Company's future liability related to these claims. The effect of this change in estimate for warranty claims was to reduce other accrued liabilities and cost of sales by approximately $3.1 million.

Share-Based Compensation Plans —We have two share-based compensation plans, as described more fully in Note 2 to our Consolidated Financial Statements included in Item 8. For new awards issued and awards modified, repurchased, or cancelled, the cost is equal to the fair value of the award at the date of the grant, and compensation expense is recognized for those awards earned over the service period. Certain of the equity awards vest based upon the Company achieving certain Adjusted EBITDA performance targets. During the service period, management estimates whether or not the Adjusted EBITDA performance targets will be met in order to determine the vesting period for those awards and what amount of compensation cost should be recognized related to these awards. At the date of grant, we determine the fair value of the awards using the Black-Scholes option pricing formula, the trinomial lattice model or the closing price of the Company's common stock, as appropriate under the circumstances. Management estimates the period of time the employee will hold the option prior to exercise and the expected volatility of Sealy Corporation's stock, each of which impacts the fair value of the stock options. The fair value of restricted shares and restricted share units is based upon the closing price of the Company's common stock as of the grant date. We also estimate the amount of share-based awards that are expected to be forfeited based on the historical forfeiture rates experienced for our outstanding awards.

Self-Insurance Liabilities —We are self-insured for certain losses related to medical claims with excess loss coverage of $375,000 per claim per year. We also utilize large deductible policies to insure claims related to general liability, product liability, automobile, and workers' compensation. Our recorded liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated workers' compensation liability is discounted and is established based upon analysis of historical data and actuarial estimates, and is reviewed by us and third-party actuaries on a quarterly basis to ensure that the liability is appropriate. While management believes these estimates are reasonable based on the information currently available, if actual trends, including the severity or frequency of claims, medical cost inflation, or fluctuations in premiums, differ from our estimates, our results of operations could be impacted. As of November 27, 2011 and November 28, 2010, $4.6 million and $4.2 million of the recorded liability for workers' compensation was included as a component of other accrued liabilities and $7.6 million and $7.1 million was included as a component of other noncurrent liabilities within the accompanying Consolidated Balance Sheets, respectively

Impairment of Goodwill —We assess goodwill at least annually for impairment as of the beginning of the fiscal fourth quarter or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable from future cash flows. We assess recoverability using several methodologies, including the present value of estimated future cash flows and comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The analysis is based upon available information regarding expected future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. If the carrying value of the reporting unit exceeds the indicated fair value of the reporting unit, a second analysis is performed to allocate the fair value to all assets and liabilities. If, based on the second analysis, it is determined that the implied fair value of the goodwill of the reporting unit is less than the carrying value, goodwill is considered impaired.

Our fiscal 2009 annual evaluation for goodwill impairment indicated a potential impairment of the goodwill for our Argentina reporting unit. As a result, we estimated the implied fair value of the goodwill in this reporting unit compared to carrying amounts and recorded an impairment charge of $1.2 million to impair the entire balance of goodwill recorded in the Argentina reporting unit. The impairment charge is based upon the fair value of the assets and liabilities of the reporting unit.

The total carrying value of our goodwill was $361.0 million and $362.0 million at November 27, 2011 and November 28, 2010, respectively. Based on the results of our annual impairment testing, the fair value of the reporting units that maintain goodwill balances at November 27, 2011 significantly exceeded their carrying value.

Commitments and Contingencies —We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. A negative outcome of these matters is considered remote, and management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Income Taxes —We record an income tax valuation allowance when the realization of certain deferred tax assets, including net operating losses, is not more likely than not. These deferred tax items represent expenses recognized for financial reporting purposes, which may result in tax deductions in the future. Certain judgments, assumptions and estimates may affect the carrying value of the valuation allowance and income tax expense in the Consolidated Financial Statements. Our net deferred tax assets at November 27, 2011 were $22.6 million, net of a $19.0 million valuation allowance.

A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond our controls, it is at least reasonably possible that management's judgment about the need for a valuation allowance for deferred taxes could change in the near term.

Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite our belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust these liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. These adjustments are recognized as a component of income tax expense entirely in the period in which they are identified.

Year Ended November 27, 2011 Compared With Year Ended November 28, 2010

Net Sales. Our consolidated net sales for the year ended November 27, 2011 were $1,230.2 million, an increase of $10.7 million, or 0.9% from the year ended November 28, 2010. This increase was primarily related to our South American, Mexico and U.S. operations and was partially offset by sales decreases in Canada. Total U.S. net sales increased $1.3 million to $952.4 million from $951.1 million in fiscal 2010, an increase of 0.1%. The U.S. net sales increase of $1.3 million was attributable primarily to a 1.1% increase in wholesale unit volume, coupled with a 0.7% decrease in wholesale average unit selling price. The increase in unit volume was primarily attributable to the performance of our Sealy branded and Next Generation Posturepedic lines and was partially offset by unit declines in the Stearns & Foster and Embody lines. Revenue gains from Next Generation Posturepedic, Sealy branded innerspring and Embody products were partially offset by declines in Stearns & Foster innerspring and Embody latex products. International net sales increased $9.4 million, or 3.5% from fiscal 2010 to $277.7 million. This increase was primarily attributable to the strong performance of our South American and Mexico operations where we continue to see steady growth. In Canada, local currency sales decreases of 6.5% translated into decreases of 1.8% in U.S. dollars due to the strengthening of the Canadian dollar versus the U.S. dollar. Local currency sales decreases in our Canadian market were driven by a 2.4% decrease in unit volume and a 4.2% decrease in average unit selling price. The decrease in unit volume was the result of a weak Canadian retail environment and a shift in the promotional calendar with our major customers which caused lower sales at their retail locations. The decline in average unit selling price was driven by increases in incentives to our customers to drive higher unit volume in light of the slower retail environment.

Gross Profit. Gross profit for fiscal 2011 was $478.7 million, a decrease of $30.8 million compared to fiscal 2010. As a percentage of net sales, gross profit in fiscal 2011 decreased 2.9 percentage points to 38.9%. The decrease as a percentage of net sales was primarily due to decreases in gross profit margins in our US and Canadian operations. U.S. gross profit decreased $29.0 million to $363.5 million or 38.2% of net sales, which is a decrease of 3.1 percentage points of net sales from the prior year period. The decrease as a percentage of net sales was primarily attributable to increases in raw material costs due in part to inflation pressures on the underlying commodities. Also contributing to this decrease were certain costs related to the launch of our Next Generation Posturepedic line. These increases were partially offset by continued improvements in operating efficiencies and value engineering efforts. The local currency gross profit margin in Canada was 41.8% as a percentage of net sales which represents a decrease of 2.9 percentage points from fiscal 2010. This decrease was driven primarily by the decline in average unit selling price as we and our customers sought to stimulate demand.

Year Ended November 28, 2010 Compared With Year Ended November 29, 2009

Net Sales. Our consolidated net sales for the year ended November 28, 2010 were $1,219.5 million, an increase of $44.9 million, or 3.8% from the year ended November 29, 2009. This increase was primarily related to our Canadian operations. Total U.S. net sales increased $4.2 million to $951.1 million from $947.0 million in fiscal 2009, an increase of 0.4%. The U.S. net sales increase of $4.2 million was attributable primarily to a 0.6% increase in wholesale unit volume, coupled with a 0.3% decrease in wholesale average unit selling price. The increase in unit volume was primarily attributable to the successful launch of our new Stearns & Foster line which was partially offset by unit declines in other product lines. The decrease in wholesale average unit selling price was due to our response to competitive pressures. International net sales increased $40.7 million, or 17.9% from fiscal 2009 to $268.4 million. This increase was primarily attributable to the strong performance of our Canadian operations. In Canada, local currency sales increases of 11.3% translated into increases of 22.7% in U.S. dollars due to a higher average value of the Canadian dollar versus the U.S. dollar during the first three quarters of fiscal 2010. Local currency sales increases in our Canadian market were driven by a 16.4% increase in unit volume, partially offset by a 4.4% decrease in average unit selling price. The increase in unit volume was driven by the performance of our value oriented beds and the strength of our new Stearns & Foster line. The lower average unit selling price was driven primarily by strategic merchandising and promotional activity. Elsewhere in the Company, we have experienced sales increases in our Mexican and South American markets.

Gross Profit. Gross profit for fiscal 2010 was $509.5 million, an increase of $22.0 million compared to fiscal 2009. As a percentage of net sales, gross profit in fiscal 2010 increased 0.3 percentage points to 41.8%. The increase in percentage of net sales was primarily due to an increase in gross profit margins in our Canadian operations. U.S. gross profit decreased $8.0 million to $392.5 million or 41.3% of net sales, which is a decrease of 1.0 percentage points of net sales from the prior year period. The decrease as a percent of sales was primarily attributable to our response to competitive pressures and greater discounting on products that are near the end of their life cycle in anticipation of our new Posturepedic product that was expected to be introduced in fiscal 2011. Partially offsetting these decreases were improvements in operating efficiencies and value engineering efforts.

Material costs did not have a significant impact on the results as lower costs in the first half of the year were offset as prices increased during the third and fourth quarters. The local currency gross profit margin in Canada was 44.7% as a percentage of net sales which represents an increase of 7.6 percentage points from fiscal 2009. This performance represents a return to historical levels and was driven by a reduction in material costs per unit due to currency fluctuations on raw material purchases, operational efficiencies and higher absorption of fixed manufacturing expenses due to increased sales volume.

Selling, General, and Administrative. Selling, general, and administrative expenses increased $15.5 million to $398.1 million for fiscal 2010 compared to $382.5 million for fiscal 2009. As a percentage of net sales, selling, general, and administrative expenses were consistent between fiscal 2010 and 2009 at 32.6%. The increase in absolute dollars was primarily due to a $16.5 million increase in volume driven variable expenses primarily driven by a $15.4 million increase in cooperative advertising and promotional costs. Fixed operating costs, exclusive of non-cash compensation expense, decreased $12.8 million from the prior year period primarily due to an $11.3 million decrease in cash incentive-based compensation costs and expected defined contribution plan payments. These decreases were offset by increased product launch and advertising costs of $1.5 million. Non-cash compensation expense increased by $3.2 million compared to fiscal 2009 due primarily to the recognition of expense related to the restricted share unit grants that occurred in the third quarter of fiscal 2009.

Goodwill impairment loss. During fiscal 2009, we recognized a total non-cash charge of $1.2 million related to the impairment of goodwill of our Argentina reporting unit. The impairment was indicated by our fiscal 2009 annual impairment testing of goodwill performed in the fourth quarter of fiscal 2009. The goodwill impairment reflected a reduction in the fair value of Argentina as a result of lower expected cash flows for the business and represents the entire goodwill balances for this reporting unit. No such charges were recognized during fiscal 2010.

Restructuring expenses and asset impairment. We recognized pretax restructuring costs of $1.3 million during fiscal 2009. These charges primarily relate to the following actions:

In the second quarter of fiscal 2009, management made the decision to cease manufacturing of certain foundation components and begin purchasing all of these components from third-party suppliers. As a result, we incurred certain insignificant costs related to one-time terminations of employees. Additionally, we recognized an impairment charge of approximately $1.2 million for the related equipment used in this manufacturing process that was not sold. This plan was completed in the second quarter of fiscal 2009.

No such restructuring charges were recognized in fiscal 2010.

Royalty Income, net of royalty expense. Our consolidated royalty income, net of royalty expense, for fiscal 2010 increased $1.1 million to $17.5 million from fiscal 2009 primarily due to increased sales by our international licensees along with favorable fluctuations in international currency rates.

Interest Expense. Our consolidated interest expense in fiscal 2010 increased by $9.0 million from the prior year period to $85.6 million. Our weighted average borrowing costs for fiscal 2010 and 2009 were 10.7% and 9.6%, respectively. Our borrowing cost was unfavorably impacted by our 2009 Refinancing which resulted in increased interest rates and outstanding debt balances.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

BUSINESS OVERVIEW

Our mattress and foundation products include the Sealy, Sealy Posturepedic, Embody by Sealy, Stearns & Foster, and Bassett brands. We produce a variety of innerspring, visco-elastic (memory foam) and latex foam products.

We are currently experiencing the effects of a challenging macro-economic environment due to decreased consumer confidence and less available consumer credit. Additionally, inflation pressures have created an environment where we have experienced higher volatility and increases in our raw material prices. We expect these factors to continue into the fourth quarter of fiscal 2011.

In 2011, we launched our Next Generation Posturepedic line which is the single largest product line in our portfolio. This line of products incorporates the knowledge gained from our consumer research and product reviews with key retail partners as well as new benefits and technologies developed specifically for the line. Through the end of the third quarter of 2011, the Next Generation Posturepedic line has been distributed to essentially all of our customers. In conjunction with the release of our Next Generation Posturepedic line, we also introduced a new national advertising campaign which is being communicated across a variety of mediums including television, print, digital outlets and the retail environment. The three and nine months ended August 28, 2011 include approximately $0.3 million and $24.3 million, respectively, of incremental costs associated with the launch of the Next Generation Posturepedic line, including price discounting for the old line, manufacturing start-up, launch related costs and national advertising expense.

In the fourth quarter of fiscal 2011, we plan to begin shipping our Next Generation Stearns & Foster line which will be offered in three collections, Core, Estate and Luxury Estate. This product will include traditional innerspring products, but will also include a luxury latex line containing a 100% latex core with cashmere-infused fabric. The introduction of this new line will be accompanied by a new marketing program which is designed to increase the effectiveness of the brand messaging.

Our industry has experienced significant volatility in the price of petroleum-based and steel products, which affects the cost of our polyurethane foam, polyester, polyethylene foam and steel innerspring component parts. Domestic supplies of these raw materials are being limited by supplier consolidation, the exporting of these raw materials outside of the U.S. and other forces beyond our control. During fiscal 2010, the cost of these components became more stable, but began increasing in the latter part of the year. Through the first three quarters of fiscal 2011, we have experienced inflation in the cost of raw materials and expect the cost of raw materials to continue to increase and experience volatility through the remainder of the year. The manufacturers of products such as petro-chemicals and wire rod, which are the feed stocks purchased by our suppliers of foam and drawn wire, have enacted cost increases that have had an effect on the prices of our raw materials. We have recently introduced price increases and a fuel surcharge to our customers in order to mitigate the impact of the inflation we have seen, but these price increases may not sufficiently offset additional inflation during the remainder of the fiscal year.

Quarter Ended August 28, 2011 compared with Quarter Ended August 29, 2010

Net Sales. Our consolidated net sales for the quarter ended August 28, 2011, were $334.1 million, an increase of $13.6 million, or 4.2%, from the quarter ended August 29, 2010. This increase was driven by growth in both our domestic and international markets. Total U.S. net sales were $257.3 million for the third quarter of fiscal 2011, an increase of 2.5% from the third quarter of fiscal 2010. The U.S. net sales increase excluding the effects of third party sales from our component plants, was attributable to a 3.9% increase in wholesale average unit selling price, partially offset by a 0.8% decrease in wholesale unit volume. The increase in our average unit selling price was driven by the price increases that we implemented in the third quarter of fiscal 2011 coupled with higher sales of Next Generation Posturepedic beds. The decrease in unit volume is attributable to decreased sales of our Stearns & Foster and Sealy branded products offset by higher sales of our Next Generation Posturepedic line which has now been fully distributed to our retail partners. International net sales increased $7.3 million, or 10.5%, from the third quarter of fiscal 2010 to $76.8 million. This increase was primarily due to increased sales in the Argentina and Mexico markets as well as the effects of a stronger Canadian dollar which benefited the sales in our Canada market in U.S. dollar terms. In Canada, local currency sales decreases of 0.4% translated into increases of 6.9% in U.S. dollars due to the strengthening of the Canadian dollar. Local currency sales performance in Canada was driven by a 5.3% increase in unit volume, offset by a 5.4% decrease in average unit selling price. The increase in unit volume and decrease in average unit selling price was attributable to strategic promotional events to drive higher unit volumes.

Gross Profit. Our consolidated gross profit for the quarter was $137.0 million, an increase of $4.8 million from the comparable prior year period. As a percentage of net sales, gross profit decreased 0.2 percentage points to 41.0%. The decrease in percentage of net sales was primarily due to a decrease in gross profit margin in our Canadian operations with the gross profit margins of our U.S. business showing a slight increase. U.S. gross profit increased $3.4 million to $104.9 million, which as a percentage of net sales represents an increase of 0.4 percentage points to 40.8% of net sales. Our gross profit percentage increased by approximately 1.8 percentage points due primarily to decreases in our warrantable return experience rates as well as a lower mix of discounted floor samples. The change as a percentage of sales was also driven by the aforementioned price increase as well as a shift in the mix of our product sales to higher priced Next Generation Posturepedic from lower priced Sealy branded products. This resulted in an improvement in our gross profit percentage by approximately 1.3 percentage points. These improvements were partially offset by higher material costs related to increased commodity prices and other inflation which resulted in a 2.7 percentage point decrease in U.S. gross profit margin. In local currency, the gross profit margin in Canada was 42.6% as a percentage of net sales, which represents a decrease of 3.0 percentage points. This decrease was primarily driven by the impact of the promotional events discussed above coupled with slightly higher material costs.

Selling, General, Administrative. Our consolidated selling, general and administrative expense increased $3.7 million to $104.1 million. As a percentage of net sales, this expense was 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, consisting of a $2.5 million increase in cooperative advertising and promotional costs, and a $1.0 million increase in delivery costs due to higher fuel costs. 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 our new advertising campaign offset by a $2.2 million decrease in expected incentive based compensation for fiscal 2011.

Royalty income, net of royalty expense. Our consolidated royalty income, net of royalty expenses, was $5.0 million for the three months ended August 28, 2011 an increase of $0.5 million from the prior year period due to increased royalties recognized related to international licenses including the new Europe and Brazil license arrangements.

Interest Expense. Our consolidated interest expense for the third quarter of fiscal 2011 remained relatively consistent with the prior year period. Our net weighted average borrowing cost was 11.2% and 10.7% for the three months ended August 28, 2011 and August 29, 2010, respectively. Our net weighted average borrowing cost was unfavorably impacted by increases in non-cash interest expense which was driven by the accretion of the beneficial conversion features in our Convertible Notes.

t Sales. Our consolidated net sales for the nine months ended August 28, 2011, were $960.9 million, an increase of $38.0 million, or 4.1%, from the nine months ended August 29, 2010. This increase was due to increases in the U.S. and Other International businesses as well as the effects of a stronger Canadian dollar relative to the U.S. dollar in our Canada market. Total U.S. net sales were $749.5 million for the first three quarters of fiscal 2011, an increase of 3.2% from the first nine months of fiscal 2010. The U.S. net sales increase of $22.9 million was attributable to a 3.1% increase in wholesale unit volume, which excludes third party sales from our component plants, coupled with a 0.3% increase in wholesale average unit selling price. The increase in unit volume is attributable to the growth of our Sealy branded products which have seen significant increases over the first nine months of fiscal 2010. The release of our Next Generation Posturepedic line has also contributed to the sales growth beginning in the second quarter of fiscal 2011. International net sales increased $15.0 million or 7.7%, from the first nine months of fiscal 2010 to $211.4 million. This increase was primarily due to increased sales in the Argentina and Mexico markets as well as the effects of changes in Canadian and U.S. dollar exchange rates discussed above. In Canada, local currency sales decreases of 2.6% translated into increases of 3.4% in U.S. dollars due to the strengthening of the Canadian dollar. Local currency sales performance in Canada was driven by a 4.7% decrease in average unit selling price, partially offset by a 2.2% increase in unit volume. The decrease in average unit selling price and increase in unit volume was attributable to strategic promotional events to drive higher unit volumes.

Gross Profit. Our consolidated gross profit for the nine months was $380.6 million, a decrease of $6.0 million from the comparable prior year period. As a percentage of net sales, gross profit decreased 2.3 percentage points to 39.6%. While margin decreases were experienced in both the U.S. and Canadian markets, the decrease in percentage of net sales was primarily due to the decrease in gross profit margin in our U.S. operations. U.S. gross profit decreased $8.3 million to $292.5 million, which, as a percentage of net sales, represents a decrease of 2.4 percentage points to 39.0% of net sales. The decrease in percentage of net sales was driven primarily by the product launch costs associated with the Next Generation Posturepedic line which had been distributed to the majority of our customers by the end of the second quarter. The launch included costs related to the discounting of floor samples and start up efforts of the new line which negatively impacted U.S. gross profit margin by approximately 1.2 percentage points. Higher material costs related to increased commodity prices and other inflation contributed an additional 1.7 percentage point decrease in U.S. gross profit margin. In local currency, the gross profit margin in Canada was 41.7% as a percentage of net sales which represents a decrease of 3.0 percentage points. This decrease was primarily driven by the impact of the increased promotional activity coupled with higher material costs.

Selling, General, Administrative. Our consolidated selling, general and administrative expense increased $16.2 million to $315.3 million. As a percentage of net sales, this expense was 32.8% and 32.4% for the nine months ended August 28, 2011 and August 29, 2010, respectively, an increase of 0.4 percentage points. The increase in absolute dollars and as a percentage of net sales was driven by increases in both volume driven variable and fixed expenses. Volume driven variable expenses increased from the first nine months of fiscal 2010 by $11.1 million. This increase consists of a $4.7 million increase in delivery costs due to higher fuel costs, a $4.2 million increase in cooperative advertising and promotional costs and a $2.2 million increase in bad debt expense. Fixed operating costs, exclusive of non-cash compensation expense, increased $11.3 million from the prior year period. This increase is primarily due to an increase of $7.1 million related to our new advertising campaign and $5.2 million in costs incurred to support the launch of the Next Generation Posturepedic line. These increases were offset by a $2.0 million decrease in expected incentive based compensation for fiscal 2011. Non-cash compensation expense decreased by $3.5 million compared to the first three quarters of fiscal 2010 due primarily to the recognition of expense related to the vesting of restricted share unit grants. Additionally, one-time severance costs related to employee terminations decreased by $1.6 million from fiscal 2010.

Royalty income, net of royalty expense. Our consolidated royalty income, net of royalty expenses, was $14.8 million for the nine months ended August 28, 2011 an increase of $2.3 million from the prior year period due to increased royalties recognized related to international licenses including the new Europe and Brazil license arrangements.

LIQUIDITY AND CAPITAL RESOURCES

Principal Sources of Funds

Our principal source of funds is cash flows from operations. However, we also have the ability to borrow under our asset-based revolving credit facility (the "ABL Revolver"). Our principal use of funds consists of operating expenditures, payments of interest on our senior debt, capital expenditures, and interest payments on our outstanding senior subordinated notes. Capital expenditures totaled $17.7 million for the nine months ended August 28, 2011. We expect total 2011 capital expenditures to be approximately $25.0 million. We believe that annual capital expenditure limitations in our current debt agreements will not prevent us from meeting our ongoing capital needs. Our introductions of new products typically require us to make initial cash investments in inventory, machinery and equipment, promotional supplies and employee training which may not be immediately recovered through new product sales. However, we believe that we have sufficient liquidity to absorb such expenditures related to new products and that these expenses will not have a significant adverse impact on our operating cash flow. At August 28, 2011, the Company had approximately $68.8 million available under the ABL Revolver which represents the calculated borrowing base reduced by outstanding letters of credit of $16.9 million, and certain reserves related to our outstanding derivative contracts. The calculated borrowing base under the ABL Revolver is determined based on our U.S. accounts receivable and inventory balances. Our net weighted average borrowing cost was 11.0% and 10.6% for the nine months ended August 28, 2011 and August 29, 2010, respectively. As of June 21, 2011, we had no borrowings outstanding under the ABL Revolver.

Debt

Our outstanding debt primarily consists of the following: 1) the ABL Revolver which provides commitments of up to $100.0 million maturing in May 2013, which bears interest at our choice of either a base rate (determined by reference to the higher of several rates as defined by the ABL Revolver agreement) or a LIBOR rate for U.S. dollar deposits plus an applicable margin of 4.00%; 2) $350.0 million in original aggregate principal amount of senior secured notes due April 2016 (the "Senior Notes"), which bear interest at 10.875% per annum payable semi-annually; 3) $177.1 million in initial aggregate principal amount of senior secured convertible paid in kind ("PIK") notes due July 2016 which are convertible into shares of the Company's common stock (the "Convertible Notes") and bear interest at 8.00% per annum payable semi-annually in the form of additional Convertible Notes; and 4) senior subordinated notes which consist of an original $314 million aggregate principal amount maturing June 15, 2014, bearing interest at 8.25% per annum payable semi annually (the "2014 Notes").

At August 28, 2011, there were no amounts outstanding under the ABL Revolver. The Senior Notes have an outstanding balance of $295.7 million at August 28, 2011 which gives effect to an unamortized original issue discount of $9.3 million. As of August 28, 2011, the Convertible Notes have an outstanding balance of $180.0 million. We also have an outstanding principal balance of $268.9 million at August 28, 2011 on the 2014 Notes.

Future interest payments are expected to be paid out of cash flows from operations and borrowings on our ABL Revolver. The ABL Revolver provides for revolving credit financing, subject to borrowing base availability. The borrowing base consists of the following: 1) 85% of the net amount of eligible accounts receivable and 2) the lesser of (i) 85% of the net orderly liquidation value of eligible inventory or (ii) 65% of the net amount of eligible inventory. These amounts are reduced by reserves deemed necessary by the lenders. At August 28, 2011, there were no amounts outstanding under the ABL Revolver.

At August 28, 2011, the Company was in compliance with the covenants contained within its ABL Revolver agreement and the indentures governing the Senior Notes, the Convertible Notes and the 2014 Notes. These agreements also restrict our ability to pay dividends and repurchase common stock.

As part of our ongoing evaluation of our capital structure, we continually assess opportunities to reduce our debt, which may from time to time include the redemption or repurchase of part or all of our Senior Notes, the 2014 Notes or the Convertible Notes to the extent permitted by our debt covenants. In addition, our Board authorized a common stock repurchase program under which we may repurchase up to $100 million of our common stock. As of August 28, 2011, we have repurchased shares for $16.3 million under this program, none of which was repurchased during the third quarter of fiscal 2011. From August 28, 2011 through September 20, 2011, we did not repurchase any additional shares under this program.

Our Convertible Notes contain a provision through which we are able to terminate the conversion rights on or after July 15, 2012 if (i) the closing sale price of our common stock equals or exceeds 250% of the conversion price then in effect for at least 20 days prior and (ii) our ratio of Net Debt to Adjusted EBITDA is less than 3.4 to 1.0. In such case, we would recognize the remaining unamortized discount related to the beneficial conversion features as a component of interest expense within our Condensed Consolidated Statement of Operations. As of August 28, 2011, the remaining unamortized discount related to the beneficial conversion features was $26.4 million.

Our ability to make scheduled payments of principal, or to pay the interest or liquidated damages, if any, on or to refinance our indebtedness, or to fund planned capital expenditures will depend on our future performance, which to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We will be required to make scheduled principal payments of $1.2 million during the next twelve months, with $0.9 million for our financing obligations and capital leases and the remainder for debt owed by our international subsidiaries. However, as we continually evaluate our ability to make additional prepayments as permitted under our ABL Revolver agreement and the indentures governing the Senior Notes, the Convertible Notes and the 2014 Notes, it is possible that we will redeem or repurchase additional portions of our Senior Notes, 2014 Notes or the Convertible Notes during that time.

Dividend

Our ABL Revolver agreement and the indentures governing the Senior Notes, the 2014 Notes and the Convertible Notes contain restrictions on our ability to pay dividends, including a requirement in the ABL Revolver agreement that we meet a minimum fixed charge coverage ratio and restrictions as to the amount available for payment. Although we meet the minimum fixed charge coverage ratio requirement in our ABL Revolver agreement as of August 28, 2011, our ability to pay a dividend to our common shareholders is currently limited to $33.8 million under our note indentures and we do not currently expect a dividend will be declared in the fourth quarter of fiscal 2011.

CONF CALL

Mark Boehmer

Good afternoon and thank you for joining Sealy’s 2010 fiscal first quarter investor conference call. Before we begin, let me remind everyone that in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call, may constitute forward-looking statements.

Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Sealy to materially different from the performance indicated or implied by such statements. Such risks and other factors are set forth in the company’s annual report on Form 10-K.

A reconciliation of adjusted EBITDA and adjusted EBITDA margin can be found in our earnings release, which is posted on our website at www.sealy.com.

I will now turn the call over to Larry Rogers, President and Chief Executive Officer of Sealy Corporation.

Lawrence Rogers

Good afternoon. Thank you, Mark. I want to also thank all of your for joining us on this call to discuss Sealy’s 2010 fiscal first quarter results. Joining me today are Jeff Ackerman, our Chief Financial Officer and Mark Boehmer, our Treasurer.

I am very pleased to say that during our fiscal first quarter, our operating and financial performance continued to accelerate in the context of improving but still challenging market conditions.

Total net sales grew 10% year over year to $340 million and represents your second consecutive quarter of year over year growth. Gross profit margin improved 331 basis points from the prior year to 41.3% driven by a 202 basis point improvement in our U.S. market.

Income from operations was up 49% or $11.5 million from the same prior year period, and adjusted EBITDA increase 39% to $49.3 million or 14.5% of sales, a 306 basis point improvement over Q1 2009.

Net income increased 32% to $5.7 million. In addition, with our strong cash flow performance, we drove down the leverage on our balance sheet. Our net debt to EBITDA ratio improved to 3.01 times from 3.2 times at the end of the fourth quarter of 2009.

These results represent a continuing improvement as we build momentum on all facets of the business from sales to adjusted EBITDA.

Let me now put our performance in the context of current industry conditions. We continue to see a solid base developing in the bedding industry demand as a result of the strengthening economic situation and are confident that there has been a stabilization in the industry.

As previously stated, we continue to see a lot of consumer activity surrounding the traditional promotional sales periods, but haven’t experienced consistency in sales follow-through to the degree we would like.

That being said, we delivered sales increases across all of the major geographical business areas due primarily to our innovative new products and better execution. We continue to believe that we are making our own market and driving our own growth on the top of the firming industry baseline.

In addition, we are seeing a number of the traditional industry demand drivers having a more positive impact. Consumer credit conditions appear to have stabilized, which will reduce pressure on the high-end price points and should provide greater buying power across our product lines.

Pent up replacement demand continues to be inconsistent. We expect to see an accelerated recovery in demand when recessionary conditions diminish. Historically, pent up replacement demand following recessionary periods has been a large growth driver for the industry. Thus far, we feel the stabilization in the retail environment has been achieved without a release of pent up demand and we continue to believe this remains a growth opportunity for the industry.

Bedding industry retailers, our retailing partners continue to stress the importance of innovative new products in driving traffic to their stores and their subsequent profitability. It us under this framework, that we view the successful rollout of our new innovative products as paramount to the success of Sealy.

Looking at our first quarter results, we achieved our second consecutive quarter of positive comparisons on a year over year sales basis. Our results today also reflect continued excellent progress against our previously stated set of strategic initiatives for 2010, including our first initiative, to grow profitable market share.

We believe we remain on track to grow profitable market share this year. Our focus on account penetration, new distribution, product launch execution, as well as taking advantage of discrete opportunities in an ever-changing competitive environment remains our path.

On the international side, we achieved a significant turn-around in Canada and gained market share. This was born out by a strong performance in Q1 of a 23% sales growth on a local currency basis.

Our second initiative is to develop strong, innovative products. Again, we believe our ability to develop strong innovative products remains paramount to both Sealy’s and our retailing partners success and profitability, great product wins in this industry and provides us the opportunity and the avenue by which we believe we will outperform average industry growth.

We continue to see strong growth out of our Stearns & Foster line that was originally launched in May 2009. This launch was expanded in 2010 with the rollout of the Stearns & Foster Personality line to take advantage of higher end demand of existing price points.

The Personality line’s subsequent success has proved that great products, even at luxury price points will be accepted by the market place. This provides us additional comfort for the success of our upcoming releases, specifically, in our specialty category.

We had a very strong showing at the Las Vegas market in February, receiving a great response from retailers on our new lines. We are very excited about our new Sealy Promotional line, which will be the first new line to start rolling out this year. This line was revamped with better fabrics and with approved aesthetic appearance and we expect to begin seeing this rollout contribute to sales and operating income starting in the third quarter of 2010.

In addition, we will be shipping our Sealy Posturepedic 60th Anniversary products, as we get closer to the Memorial Day holiday. And finally, our specialty and bodyline was launched in Las Vegas. These mattresses, which retail from between $2,000 and $3,300 were very well received at the Las Vegas market and represent a complete refresh of our prior specialty product. We expect to start seeing this rollout contribute to sales in our third quarter.

Our third initiative was to manage the cost structure. We have continued to aggressively manage our cost structure to drive further improvement in operating income and adjusted EBITDA. We are seeing the benefits from this intense focus on costs coupled with improving top line growth and an increase in operating leverage.

On prior earnings calls, we had spoken about a variable contribution margin of approximately 25% flow-through from sales to the EBITDA line. We have outperformed this contribution margin in the first quarter with our adjusted EBITDA margin improving substantially on a year over year basis as we have benefited from our all-encompassing approach to driving profitability.

Our fourth initiative is to de-lever our balance sheet. We have reaped the benefits of our cost rationalization programs and coupled with sales growth, we have continued to generate cash in order to de-lever our balance sheet as measured by the improvement in our net debt to EBITDA ratio.

In February, we announced our intention to redeem $35 million of our 10 7/8% senior notes, which was completed in March. Our net debt to EBITDA excluding the pick notes at the end of the first quarter now stands at 3.01 times.

With that, I would now like to turn the call over to Jeff Ackerman, our Chief Financial Officer.

Jeffrey Ackerman

Thanks Larry. I would now like to provide some more detailed support for our financial performance during our fiscal first quarter and how that compared to the prior year period.

Our net sales were $339.6 million, an increase of 9.6% compared to the prior year period. Wholesale domestic net sales, which exclude third party sales from our component plants, grew 4.6% to $241.6 million. This growth was due to a 2.4% increase in unit volume as we saw improving consumer demand for our products, and an increase in wholesale AUSP of 2.2%.

The growth in unit volume is primarily attributable to the successful launch of the new Stearns & Foster line and better retail demand.

International net sales were $93.3 million, an increase of 24%, or 12% on a constant currency basis. In Canada, we achieved a local currency sales increase of 22.9% driven by a 32.5% increase in unit volume, which was partially offset by a 7.2% decrease in AUSP. This was primarily due to the success of our new Stearns & Foster line, better execution of promotions and an improvement in retail demand.

We also experienced increases in sales in Europe and the other America’s markets; notably in Mexico and South America. In our Europe segment, local currency sales increases of 1.9% translated into 9.6% in U.S. dollars due to favorable foreign exchange rates.

The increase in local currency sales resulted from a 4.4% increase in sales of OEM Latex cores. Finished goods sales in local currency remained relatively flat to the prior year. This is noteworthy given we began transitioning from the Pirelli brand to our own Sealy brand over the quarter.

Our gross profit was $140.1 million and our gross profit margin was 41.3%, an improvement of 331 basis points compared to the first quarter of 2009. U.S. gross margin was 42.3%, an improvement of 202 basis points. International gross margin increased 780 basis points.

In the U.S., the increase in gross profit margin was driven primarily by lower material costs and improved manufacturing efficiencies. The gross margin improvement in our international businesses was primarily due to the following; one, a10.8% increase in Canada’s gross margin driven by lower material cost per unit and leverage of fixed costs on higher volume, partially offset by lower AUSP; and two, a 4.1% increase in Europe’s gross margin due to improvement in conversion costs.

Our consolidated SG&A expenses increased $12.3 million to $109 million. The increase in absolute dollars is primarily due to a $6.3 million increase in volume driven variable expenses including an $8.8 million increase in co-operating advertising and promotional costs. The increase in these costs have been partially offset by a $3.2 million decrease in bad debt expense.

Fixed operating costs, exclusive of non-cash compensation expense increased $2.9 million primarily due to increases in expected to find contribution plan payments, cash compensation costs and professional services. As a percent of net sales, this expense was 32.1% compared to 31.2% in Q1 2009.

This 90 basis point increase was primarily driven by a $3.1 million increase in non-cash compensation costs related to the restricted share units that were granted in the third quarter of fiscal 2009.

Our income from operations was $34.8 million, an increase of 49% or $11.5 million from the prior year period. Our cash interest expense was $17.1 million and flat to the prior year. We are now breaking out equity in earnings of unconsolidated affiliates. Earnings related to our joint venture activities were $943,000 as we saw increased demand in our Asian markets.

Net income was $5.7 million compared to $4.3 million or $0.03 per diluted share compared to $0.05 in the prior year quarter. The corresponding diluted share counts for 2010 first quarter EPS and 2009 first quarter EPS were 283.6 million and 93.6 million respectively. Please see our press release for additional information related to the change in share count.

Furthermore, the best metric for measuring our success, total adjusted EBITDA grew by 38.8% to $49.3 million or 14.5% of net sales. These results represent an increase of 306 basis points over the prior year period.

Now, I’ll review our balance sheet categories. Compared to the first quarter of 2009, days sales outstanding improved by one day. Days inventory on hand improved by one day. Day’s payable decreased by 14 days as we took advantage of cash discounts for earlier payment. In the prior year, we had managed payables consistent with our credit agreement covenants, which were in place at that time.

Capital expenditures totaled $2.4 million during the quarter compared to $2.3 million in the same prior year period. We will continue to invest in our business and make strategic investments for the long term.

At February 28, 2010, the company’s debt net of cash was $722.9 million, an improvement of $38million compared to May 31, 2009 at the conclusion of our 2009 refinancing. As of February 28, 2010 Sealy’s net debt leverage ratio excluding the convertible pick notes improved by over a full turn to 3.01 times compared to 4.03 times as of May 31, 2009. This is well below the 3.4 times leverage ratio hurdle that would allow us to force conversion of the convertible notes in July of 2012.

Subsequent to the quarter end, we took advantage of certain provisions in the company’s debt agreements to redeem $35 million of its senior notes. This action was announced February 1, 2010 and completed on March 16, 2010.

In summary, we are very pleased with our performance in the first quarter as we have now delivered two consecutive quarters of year over year sales growth and three consecutive quarters of year over year adjusted EBITDA growth and expect that our industry will experience accelerating growth coming out of this most recent recessionary period.

Looking forward for the balance of our 2010 fiscal year, we remain optimistic about our new product introductions will drive significant increases in product launch costs in Q2, but should generate improved sales and profitability in the second half of the year.

In our raw materials area, we are beginning to see inflationary pressures on foam and steel, but are working to mitigate their effects. We remain confident in our ability to achieve our 10% adjusted EIBTDA growth target for 2010. We believe our company has never been in a stronger strategic position to gain profitable market share and drive increasing value for our shareholders.

Operator, would you please open the lines for questions.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

19823 Views