Sealy Corporation Reports Q2 Fiscal 2009 Results

Sealy Corporation (NYSE: ZZ), the bedding industry’s largest global manufacturer, today announced results for its second quarter of fiscal 2009. Net sales for the second fiscal quarter were $298.5 million compared to $375.4 million in the same prior year period. Gross Profit declined $26.2 million to $122.2 million compared to the same period in the prior year, while Gross Profit Margin increased 140 basis points over the same time period. Income from operations declined $6.3 million to $29.1 million compared to the same period in the prior year.

As a percent of sales, income from operations increased 40 basis points from the same prior year period. Adjusted EBITDA decreased to $41.6 million from $49.8 million, while Adjusted EBITDA margin increased 60 basis points to 13.9% compared to the same prior year period. Net loss for the second quarter was $(5.2) million or $(0.06) per diluted share versus net income of $12.0 million or $0.13 per diluted share for the comparable period last year. Results for the quarter included charges of $11.9 million net of tax or $0.13 per diluted share related to the Company’s refinancing of its senior credit facility on May 29, 2009 and rights for Convertible Notes.

“During the second quarter, we were able to strengthen our competitive position, execute consistently on our strategic initiatives, and substantially improve our operating performance compared to the first quarter of fiscal 2009, despite the continuation of challenging global macro-economic conditions and a difficult retail environment,” stated Larry Rogers, Sealy’s President and Chief Executive Officer.

“We continued to be intensely focused on positively affecting those areas of our business that we can control, including establishing stronger working partnerships with our retailers and suppliers, providing customers with the right Sealy products to address their current needs, unveiling our new Stearns & Foster line, and reducing our cost base to reflect the weaker revenue environment,” added Mr. Rogers.

Total U.S. net sales were $222.5 million compared to $258.7 million in the second quarter of 2008. Wholesale domestic net sales, which exclude third party sales from Sealy’s component plants, were $217.9 million, compared to $252.9 million in the second quarter of 2008. A soft retail environment negatively impacted domestic revenue performance. In the U.S., Average Unit Selling Price (AUSP) decreased 0.7% and unit volume declined 13.2% on a year-over-year basis.

International net sales decreased $40.7 million, or 34.9%, from the second quarter of 2008 to $76.0 million. Excluding the effects of currency fluctuation, net sales declined 22.2% from the second quarter of 2008. This decline was primarily due to the weak retail environment in Canada and Europe.

Gross profit was $122.2 million, a decrease of $26.2 million compared to the same quarter in fiscal 2008, but an increase of $3.9 million from the fiscal 2009 first quarter results. This sequential improvement was primarily due to the easing of material cost inflation and continued improvements in manufacturing efficiencies, partly offset by deleveraging of overhead expenses on lower volumes and a decrease in international gross profit. During the second quarter of fiscal 2008, Gross Profit benefited from a change in accounting estimates related to the Company’s domestic warrantable and other product return reserves, which resulted in an increase to sales of approximately $3.7 million, a reduction of Cost of Sales of approximately $4.5 million, and a corresponding increase in Gross Profit, Income from Operations and Adjusted EBITDA of $8.2 million.

Domestic gross profit decreased by $9.9 million to $96.4 million compared to the prior year period, but increased by $2.0 from the fiscal 2009 first quarter. Price increases implemented in July 2008 and continued improvements in manufacturing efficiencies, were partially offset by higher raw material costs and deleveraging of overhead expenses on lower volumes.

Consolidated gross profit margin was 40.9%, an increase of 140 basis points compared to the prior year quarter, and an increase of 280 basis points from the fiscal 2009 first quarter results.

Selling, general, and administrative (SG&A) expenses were $95.6 million, an improvement of $20.8 million, or 17.9%, versus the comparable period a year earlier. The reduction in SG&A expenses is primarily due to a $9.5 million decline in volume-driven variable expenses. In addition, fixed operating and promotional costs decreased $7.6 million from the prior year period, primarily due to lower product launch costs, national advertising and decreased salary and fringe benefit-related costs. Severance related costs decreased $2.7 million from the second quarter of fiscal 2008.

Total Adjusted EBITDA was $41.6 million, or 13.9% of net sales, which represents an increase of 60 basis points on a year-over-year basis and an increase of 240 basis points from the fiscal 2009 first quarter. The sequential improvement was based on improved gross profit margin performance and continued cost improvements.

Net sales for the six months ended May 31, 2009 decreased 20.7% to $608.4 million from $767.3 million for the comparable period a year earlier. Gross profit was $240.4 million, or 39.5% of net sales, versus $301.6 million, or 39.3% of net sales, for the comparable period a year earlier. Adjusted EBITDA was $77.1 million, or 12.7% of net sales, versus $101.7 million, or 13.3% of net sales, compared to the six month period in the prior year.

As of May 31, 2009, the Company’s debt net of cash was $760.9 million, an increase of $4.1 million compared to $756.8 million as of November 30, 2008. Operating cash flows in the fiscal 2009 second quarter included $15.2 million related to the termination of interest rate swaps and financing cash flows included $20.6 million related to debt issuance costs in conjunction with the Company’s refinancing of its senior credit facilities on May 29, 2009.

“While we expect market conditions to remain challenging, we will continue to take measures to improve our profitability through increasing collaboration with our retailer and supplier partners and the introduction of new products, while aggressively right-sizing our cost structure and maximizing our cash flow.We believe that our company has never been in a stronger strategic position to gain profitable market share and drive increasing value for our shareholders,” concluded Mr. Rogers.

Within the information above, Sealy provides information regarding Adjusted EBITDA which is not a recognized term under GAAP (Generally Accepted Accounting Principles) and does not purport to be an alternative to operating income or net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, it is not intended to be a measure of available cash flow for management’s discretionary use, as it does 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 to the Company’s net income (loss) and cash flows from operations is provided in the attached schedule.

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