<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarter ended May 31, 1995 Commission file number 1-8738
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SEALY CORPORATION *
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3284147
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 PIKE STREET
SEATTLE, WASHINGTON 98101
- ---------------------------------------- ------------------------
(Address of principal executive offices)* (Zip Code)
Registrant's telephone number, including area code (206) 625-1233
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----------- ------------
The number of shares of the registrant's common stock outstanding as of
June 30, 1995 was 29,441,080.
- ------------- ----------
* All Corporate and administrative services are provided by Sealy, Inc., 10th
Floor Halle Building, 1228 Euclid Avenue, Cleveland, Ohio 44115.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (NOTE A)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
May 31, May 31,
1995 1994
--------------- ----------------
<S> <C> <C>
Net Sales $153,189 $ 176,751
---------- ----------
Cost and expenses:
Cost of goods sold 86,019 94,201
Selling, general and administrative 46,933 54,865
Amortization of intangibles 3,514 3,514
Interest expense, net 7,925 9,233
---------- ----------
144,391 161,813
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Income before income tax 8,798 14,938
Income tax 4,063 6,326
---------- ----------
Net income $ 4,735 $ 8,612
========== ==========
Earnings per common share $ .15 $ .28
Weighted average number of
common shares and equivalents
outstanding during period 30,666 30,609
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (NOTE A)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
May 31, May 31,
1995 1994
------------- ------------
<S> <C> <C>
Net Sales $303,084 $332,358
-------- --------
Cost and expenses:
Cost of goods sold 169,170 176,534
Selling, general and administrative 100,465 106,417
Amortization of intangibles 7,029 7,029
Interest expense, net 15,864 17,809
--------- ---------
292,528 307,789
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Income before income tax 10,556 24,569
Income tax 6,037 10,812
-------- --------
Net income $ 4,519 $ 13,757
======== ========
Earnings per common share $ .15 $ .45
Weighted average number of
common shares and equivalents
outstanding during period 30,818 30,581
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
May 31, November 30,
1995 1994
------------------ ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash equivalents $ 25,194 $ 21,309
Accounts receivable, less allowance for doubtful
accounts ( 1995 - $8,602; 1994 - $7,774) 72,711 78,313
Inventories (Note B) 47,238 42,623
Prepaid expenses and deferred taxes 20,399 18,470
-------- --------
165,542 160,715
Property, plant and equipment - at cost 158,684 157,388
Less: accumulated depreciation 20,873 16,308
-------- --------
137,811 141,080
Other assets:
Goodwill and other intangibles - net of
accumulated amortization
(1995 - $32,841; 1994 - $25,840) 486,388 493,390
Debt issuance costs and other assets 16,374 15,464
-------- --------
502,762 508,854
$806,115 $810,649
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
May 31, November 30,
1995 1994
------------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion - long-term obligations $ 15,457 $ 20,361
Accounts payable 24,787 28,113
Accrued interest payable 1,900 2,482
Accrued plant consolidation 3,998 2,488
Other accrued expenses 58,312 54,744
--------- ---------
104,454 108,188
Long-term obligations (Note C) 327,441 329,528
Other noncurrent liabilities 30,114 29,605
Deferred income taxes 20,777 21,095
Stockholders' equity:
Common stock 294 294
Additional paid-in capital 266,010 269,229
Retained earnings 58,436 53,917
Foreign currency translation adjustment (1,411) (1,207)
---------- ----------
323,329 322,233
Commitments and contingencies (Note D) -- --
----------- -----------
$806,115 $810,649
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
May 31, May 31,
1995 1994
------------------ -----------------
<S> <C> <C>
Net cash provided by operating activities $15,478 $17,856
Net cash provided by (used in) investing activities:
Property, plant and equipment, net (4,602) (2,011)
Net cash used for financing activities:
Repayment of long-term obligations, net (6,990) (17,797)
-------- --------
Change in cash and equivalents 3,886 (1,952)
Cash and equivalents:
Beginning of period 21,309 20,919
-------- --------
End of period $25,195 $18,967
======== ========
Supplemental disclosures:
-------------------------
Taxes paid, net $ 3,557 $ 2,813
Interest paid $14,782 $18,382
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1995 AND 1994
================================================================================
NOTE A -- BASIS OF PRESENTATION
This report covers Sealy Corporation and its subsidiaries (collectively, the
"Company").
The accompanying unaudited condensed consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended November 30, 1994.
The accompanying unaudited condensed consolidated financial statements
contain all adjustments which, in the opinion of management, are necessary to
present fairly the financial position of the Company at May 31, 1995, and its
results of operations and cash flows for the periods presented herein. All
adjustments in the periods presented herein are normal and recurring in nature.
The November 30, 1994 condensed consolidated balance sheet included herein is
derived from the audited consolidated balance sheet as of November 30, 1994.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTE B -- INVENTORIES
The major components of inventories were as follows:
<TABLE>
<CAPTION>
May 31, November 30,
1995 1994
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $38,415 $34,081
Work in process 3,399 3,243
Finished goods 5,424 5,298
-------- --------
$47,238 $42,623
======= =======
</TABLE>
7
<PAGE> 8
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1995 AND 1994
================================================================================
NOTE C -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
May 31, November 30,
1995 1994
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Secured Credit Agreement:
Revolving Credit Facility $ 17,000 $ 14,000
Term Loan Facility 120,000 130,000
9 1/2% Senior Subordinated Notes Due 2003 200,000 200,000
Other 5,898 5,889
--------- ---------
342,898 349,889
Less current portion 15,457 20,361
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$327,441 $329,528
======== ========
</TABLE>
The Secured Credit Agreement provides for loans of up to $245 million,
as of May 31, 1995 and consists of the $125 million Revolving Credit Facility
and the $120 million Term Loan Facility. The Revolving Credit Facility
provides for a $30 million discretionary letter of credit facility ("Letters of
Credit") and a discretionary swing loan facility of up to $5 million. The
Revolving Credit Facility terminates and is due and payable on November 30,
1999.
The Term Loan Facility is a $120 million term loan, as of May 31, 1995
with a final maturity of November 30, 1999 and amortizes in fiscal quarterly
principal payments aggregating $10 million for the remainder of fiscal year
ending November 30, 1995, $25 million in each of the fiscal years ending
November 30, 1996 and 1997, and $30 million in each of the fiscal years ending
November 30, 1998 and 1999.
Under terms of the Secured Credit Agreement, the Company is obligated
to pay a commitment fee rate of 0.375% per annum on the unused portion of the
Revolving Credit Facility. The fee, which is payable quarterly in arrears, is
reduced or increased depending on certain financial ratios. Two separate
interest rate options exist under the Secured Credit Agreement and are
available to the Company at its option as follows:
(a) A Floating Rate which is the greater of
(i) A Corporate Base Rate plus a margin, if applicable, or
(ii) A Federal Funds Rate plus 0.25% plus a margin, if
applicable, or
(b) A Eurodollar Rate plus an applicable margin.
The applicable margin is zero for the Floating Rate option and 1.00%
for the Eurodollar Rate option. The applicable margin is reduced or increased
depending on certain financial ratios.
During the six months ended May 31, 1995, the maximum amount
outstanding under the revolving Credit Facility, excluding Letters of Credit,
was $21 million. At May 31, 1995, the Company had approximately $96 million
available under the Revolving Credit Facility, with $17 million outstanding
and Letters of Credit issued totaling approximately $12 million.
8
<PAGE> 9
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1995 AND 1994
================================================================================
All obligations of the Company under the Secured Credit Agreement are
jointly and severally guaranteed by each direct and indirect domestic
subsidiary of the Company and secured by first priority liens on and security
interests in substantially all of the assets of the Company and its domestic
subsidiaries and by first priority pledges of substantially all of the capital
stock of most of the subsidiaries of the Company.
NOTE D -- CONTINGENCIES
In accordance with procedures established under the Environmental
Cleanup Responsibility Act (now known as the Industrial Site Recovery Act),
Sealy and one of its subsidiaries are parties to an Administrative Consent
Order ("ACO") issued by the New Jersey Department of Environmental Protection
("DEP") pursuant to which the Company and such subsidiary agreed to conduct
soil and ground water sampling to determine the extent of environmental
contamination found at the plant owned by the subsidiary in South Brunswick,
New Jersey. The Company does not believe that any of its manufacturing
processes was a source of any of the contaminants found to exist above
regulatorily acceptable levels in the groundwater. As the current owners of
the facility, however, the Company and its subsidiary are primarily responsible
for the investigation and any necessary clean-up plan approved by the DEP under
the terms of the ACO. In March 1994, the Company filed a claim in the U.S.
District Court for the district of New Jersey against former owners of the site
and their lenders under the Comprehensive Environmental Response, Compensation
and Liability Act seeking contribution for site investigation and remedial
costs.
In March, 1995, the DEP approved the Company's soil/remediation plans
and in June, 1995, the Company's groundwater remediation plans, which include
additional monitoring by the Company and, depending upon the results of such
monitoring, the possible installation of a groundwater containment system.
While the Company cannot predict the ultimate timing or cost to remediate this
facility based on facts currently known, management believes the previously
established accrual for site investigation and remediation costs is adequate to
cover the Company's probable liability. If additional remediation is required,
however, such as the installation of a groundwater containment system,
management estimates it could cost the Company up to an additional $3 million.
Management does not believe that resolution of this matter will have a material
adverse effect on the Company's financial position or future operations.
NOTE E -- RESTRUCTURING
In March, 1995, management of the Company committed to a formal plan
to cease its unprofitable upholstery operations, which manufactured convertible
sleep sofas. Sealy brand sleep sofas will continue, however, to be
manufactured by a licensee. A charge of $3.2 million was recorded in the
second quarter for costs associated with closing this division. $2.7 million
was recorded in selling, general and administrative expenses, while $.5 was
recorded in cost of goods sold for future warranty claims. These operations
contributed net sales of $1.1 million and $3.9 million to the Company for the
three months ended May 31, 1995 and 1994, respectively, and net sales of $3.3
million and $7.6 million for the six months ended May 31, 1995 and 1994,
respectively. Net losses incurred by these operations were $1.7 million ($.05
per share) and $1.0 million ($.03 per share) for the three months ended May 31,
1995 and 1994, respectively, and $2.0 million ($.06 per share) and $1.3 million
($.04 per share) for the six months ended May 31, 1995 and 1994, respectively.
The fiscal 1994 net sales and net loss for this product line were approximately
$13.3 million and $1.4 million ($.04 per share), respectively.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1995 AND 1994
NET SALES Net sales decreased $23.6 million (13.3%) for the three
months ended May 31, 1995, as compared to the second quarter of fiscal 1994.
The decrease is attributable to a $20.7 million decrease in conventional
bedding sales and a $2.9 million decrease in sofa products.
The bedding sales decrease was due primarily to a 20.8% (or $33.0
million) decline in conventional bedding unit shipments, offset partially by a
9.8%, or $12.3 million, increase in the average unit selling price. The
slowdown in consumer durable goods purchases that occurred in the first and
second quarters of the calendar year and the loss of product placements at low
retail price points were responsible for the decrease in sales of the Company's
branded bedding units ($21.8 million). Decreased shipments of lower priced
promotional and private label bedding units, primarily attributable to the loss
of the Sears, Roebuck & Co. ("Sears") private label business, accounted for the
remainder of the volume decrease ($11.2 million).
Sofa sales decreased $2.9 million due to the Company's decision to
close this business. (See Note E to financial statements).
COST OF GOODS SOLD As a percentage of net sales, cost of goods sold
for the three months ended May 31, 1995 increased 2.9 percentage points to
56.2%. Rising material costs accounted for 1.1 percentage points of the
increase. Due to lower volume, manufacturing costs as a percent of net sales
increased 1.5 percentage points for the second quarter of fiscal 1995 as
compared to the second quarter of fiscal 1994.
SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and
administrative expenses, as a percentage of net sales, decreased 0.4 percentage
points ($7.9 million) over the level recognized during the second quarter of
fiscal 1994. This decrease is due primarily to a $1.0 million decrease in
Performance Share Plan expense and a $4.6 million reversal to previous plan
expense. The changes in Performance Share Plan expense were due to a
revised estimate of the plan's value. A description of the Performance Share
Plan is provided in the Company's Form 10-K for the year ended November 30,
1994. Other significant changes to selling, general and administrative
expenses include a $2.7 million restructuring charge for the upholstery
operations (see Note E to financial statements) and a $2.5 million decrease in
advertising and promotion expenses. Advertising and promotion expenses as a
percentage of net sales have increased slightly, while absolute spending
declined.
INTEREST EXPENSE Interest expense, net of interest income, decreased
$1.3 million from that incurred during the second quarter of fiscal 1994,
primarily due to reductions in total indebtedness. Compared to May 31, 1994,
outstanding debt declined approximately $46 million to $343 million.
INCOME TAX The Company's effective income tax rate differs from the
Federal statutory rate as a result of the application of purchase accounting,
certain foreign tax rate differentials, and state and local taxes. The
effective income tax rate for 1995 is approximately 57.2% compared to 48.0% for
fiscal year 1994.
NET INCOME For the reasons set forth above, the Company recorded net
income of $4.7 million for the three months ended May 31, 1995 versus $8.6
million for the comparable period in 1994.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1995 AND 1994
NET SALES Net sales decreased $29.3 million (8.8%) for the six
months ended May 31, 1995, as compared to the six months ended May 31, 1994.
The decrease is attributable to a $26.6 million decrease in conventional
bedding sales and a $2.7 million decrease in other products.
The bedding sales decrease was due primarily to a 14.7% (or $43.7
million) decline in conventional bedding unit shipments, offset partially by a
6.7%, or $17.1 million increase in the average unit selling price. The
slowdown in consumer durable goods purchases that occurred in the first and
second quarters of the calendar year and the loss of product placements at low
retail price points were responsible for the decrease in sales of the Company's
branded bedding units ($24.9 million). Decreased shipments of lower priced
promotional and private label bedding units, primarily attributable to the loss
of the Sears private label business, accounted for the remainder of the volume
decrease ($18.8 million).
Sales of products other than conventional bedding represented
approximately 11% of net sales for the six months ended May 31, 1995. Lower
sofa sales of $4.3 million (see Note E to financial statements) were partially
offset by a $1.6 million increase in sales of wood bedroom furniture products.
COST OF GOODS SOLD As a percentage of net sales, cost of goods sold
for the six months ended May 31, 1995 increased 2.7 percentage points to 55.8%.
Rising material costs accounted for 1.3 percentage points of the increase. Due
to lower volume, manufacturing costs as a percent of net sales increased 1.2
percentage points.
SELLING, GENERAL, AND ADMINISTRATIVE For the six months ended May 31,
1995, selling, general, and administrative expenses decreased $6.0 million, as
compared to the six months ended May 31, 1994. This decrease is due primarily
to a $2.1 million decrease in Performance Share Plan expense and a $3.1
million reversal to previous plan expense. The total change in Performance
Share Plan expense is due to a revised estimate of the plan's value. A
description of the Performance Share Plan is provided in the Company's Form
10-K for the year ended November 30, 1994. Other selling, general, and
administrative expenses decreased $3.5 million primarily as a result of a prior
year sales force reduction, lower administrative costs due to prior year plant
closings and lower incentive compensation expense. Partially offsetting the
decreases in selling, general, and administrative expenses was a $2.7 million
restructuring charge for the upholstery operations (see Note E to financial
statements).
INTEREST EXPENSE Interest expense, net of interest income, decreased
$1.9 million from that incurred during the six months ended May 31, 1994,
primarily due to reductions in total indebtedness. Compared to May 31, 1994,
outstanding debt declined approximately $46 million to $343 million.
INCOME TAX The Company's effective income tax rate differs from the
Federal statutory rate as a result of the application of purchase accounting,
certain foreign tax rate differentials, and state and local taxes. The
effective income tax rate for 1995 is approximately 57.2% compared to 48.0% for
fiscal year 1994.
NET INCOME. For the reasons set forth above, the Company recorded net
income of $4.5 million for the six months ended May 31, 1995 versus $13.8
million for the comparable period in 1994.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended May 31, 1995, the Company's principal
source of funds consisted of cash flow from operating activities of $15.5
million. Its principal use of funds consisted of payments of principal,
interest, and capital expenditures. Capital expenditures totaled $6.2 million
for the six months ended May 31, 1995. Management believes that annual capital
expenditure limitations in its Secured Credit Agreement will not significantly
inhibit the Company from meeting its ongoing operating needs. At May 31, 1995,
the Company had approximately $96 million available under its Revolving Credit
Facility with $17 million outstanding and Letters of Credit issued totaling
approximately $12 million. At May 31, 1995, the weighted average interest rate
on the Revolving Credit Facility was 8.1% and on the Term Loan Facility was
7.2%.
Management believes that the Company will have the necessary liquidity
for the next several years to fund its expected capital expenditures,
obligations under its credit agreement and subordinated note indenture,
environmental liabilities, and for other needs required to manage its business,
through cash flow from operations, and availability under the Revolving Credit
Facility.
12
<PAGE> 13
PART II. OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings
See Note D to the Condensed Consolidated Financial Statements, Part I,
Item 1 included herein.
Item 5. Other Information
The Company issued a press release on February 28, 1995 announcing
that the Company intended to file a registration statement with the Securities
and Exchange Commission in connection with a proposed public offering of the
Company's Common Stock. The size and timing of the proposed offering had not
been determined. Subsequently, on March 30, 1995, the Company announced that
it would postpone the planned filing of the registration statement with the
Securities and Exchange Commission in connection with the proposed offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Sealy Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SEALY CORPORATION
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
By: /s/ Lyman M. Beggs Chairman, President and Chief Executive Officer
---------------------------------------------
Lyman M. Beggs (Principal Executive Officer)
By: /s/ Jesse E. Hogan Senior Vice President and Chief Financial Officer
-----------------------------------------------
Jesse E. Hogan (Principal Accounting Officer)
</TABLE>
Date: July 17, 1995
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000748015
<NAME> SEALY CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> MAR-01-1995
<PERIOD-END> MAY-31-1995
<CASH> 25,194
<SECURITIES> 0
<RECEIVABLES> 81,313
<ALLOWANCES> 8,602
<INVENTORY> 47,238
<CURRENT-ASSETS> 165,542
<PP&E> 158,684
<DEPRECIATION> 20,873
<TOTAL-ASSETS> 806,115
<CURRENT-LIABILITIES> 104,454
<BONDS> 0
<COMMON> 294
0
0
<OTHER-SE> 323,035
<TOTAL-LIABILITY-AND-EQUITY> 806,115
<SALES> 153,189
<TOTAL-REVENUES> 153,189
<CGS> 86,019
<TOTAL-COSTS> 86,019
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 971
<INTEREST-EXPENSE> 7,925
<INCOME-PRETAX> 8,798
<INCOME-TAX> 4,063
<INCOME-CONTINUING> 4,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,735
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
