<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 September 1, 1996 Commission file number 1-8738
--------------------- ------
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 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 October
11, 1996 was 29,351,635.
* 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>
QUARTER ENDED QUARTER ENDED
SEPTEMBER 1, 1996 AUGUST 31, 1995
------------------- ----------------
<S> <C> <C>
Net Sales $192,546 $179,880
---------- ----------
Cost and expenses:
Cost of goods sold 108,112 96,826
Selling, general and administrative 57,238 52,211
Amortization of intangibles 3,552 3,515
Interest expense, net 7,363 8,094
---------- ----------
176,265 160,646
---------- ----------
Income before income tax 16,281 19,234
Income tax 9,198 11,003
----------- ----------
Net income $ 7,083 $ 8,231
=========== ==========
Earnings per common share $ 0.24 $ 0.27
Weighted average number of
common shares and equivalents
outstanding during period 30,126 30,499
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (NOTE A)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 1, 1996 AUGUST 31, 1995
------------------- ----------------
<S> <C> <C>
Net Sales $517,199 $482,964
-------- --------
Cost and expenses:
Cost of goods sold 294,247 267,584
Selling, general and administrative 160,956 151,088
Amortization of intangibles 10,582 10,544
Interest expense, net 21,883 23,958
--------- ---------
487,668 453,174
--------- ---------
Income before income tax 29,531 29,790
Income tax 16,685 17,040
--------- ---------
Net income $ 12,846 $ 12,750
========= =========
Earnings per common share $ 0.43 $ 0.42
Weighted average number of
common shares and equivalents
outstanding during period 30,146 30,712
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 1, NOVEMBER 30,
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,248 $ 17,348
Accounts receivable, less allowance for doubtful
accounts (1996 - $8,254; 1995 - $7,475) 93,094 82,288
Inventories (Note B) 40,016 35,356
Prepaid expenses and deferred taxes 19,040 13,424
-------- ---------
184,398 148,416
Property, plant and equipment - at cost 164,619 159,699
Less: accumulated depreciation (32,761) (25,161)
-------- ---------
131,858 134,538
Other assets:
Goodwill and other intangibles - net of
accumulated amortization
(1996 - $50,454; 1995 - $39,871) 468,355 478,938
Debt issuance costs and other assets 11,377 14,289
-------- ---------
479,732 493,227
-------- ---------
$795,988 $ 776,181
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 1, NOVEMBER 30,
1996 1995
------ -----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - long-term obligations $ 18,654 $ 17,488
Accounts payable 33,703 37,037
Accrued interest payable 7,365 1,694
Accrued incentives and advertising 18,741 25,579
Accrued compensation 12,836 9,899
Other accrued expenses 29,112 24,625
--------- ---------
120,411 116,322
Long-term obligations (Note C) 304,057 269,449
Other noncurrent liabilities 34,889 30,554
Deferred income taxes 29,273 28,975
Stockholders' equity:
Common stock 295 295
Additional paid-in capital 257,709 258,336
Retained earnings 50,770 73,387
Foreign currency translation adjustment (1,416) (1,137)
---------- ---------
307,358 330,881
Commitments and contingencies (Note D) -- --
--------- ---------
$ 795,988 $ 776,181
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 1, 1996 AUGUST 31, 1995
------------------- ----------------
<S> <C> <C>
Net cash provided by operating
activities $ 19,894 $30,184
Net cash used in investing activities:
Property, plant and equipment, net (5,305) (2,312)
Net cash provided by / used in financing activities:
Proceeds from/(Repayment of) long-term
obligations, net 35,774 (46,925)
Dividend paid (35,463) --
-------- -------
311 (46,925)
-------- -------
Change in cash and cash equivalents 14,900 (19,053)
Cash and cash equivalents:
Beginning of period 17,348 21,309
-------- -------
End of period $ 32,248 $ 2,256
======== =======
Supplemental disclosures:
- ------------------------
Cash paid for:
Income taxes $12,100 $ 4,824
Interest paid $14,409 $17,051
Selected noncash expenses:
Depreciation $ 7,984 $ 7,353
Performance share plan $ 1,321 $(5,820)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 1, 1996 AND AUGUST 31, 1995
================================================================================
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, 1995.
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 September 1, 1996, 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.
In 1995, the Company changed its fiscal year to a 52-53 week fiscal year
ending on the Sunday closest to November 30 for years beginning December 1, 1995
and thereafter. As a result, the third quarter of fiscal 1996 began on June 3,
1996 and ended on September 1, 1996 as compared to June 1, 1995 and August 31,
1995 for the third quarter of fiscal 1995. The impact of one less calendar day
in the third quarter and the nine-month period ended September 1, 1996 was not
material.
Certain prior year amounts have been reclassified to conform with the
current year presentation. In particular, $794,000 of expenses included in
selling, general and administrative expenses for the third quarter of fiscal
1995 and $2,382,000 for the nine months ended August 31, 1995 are now included
in cost of goods sold.
NOTE B -- INVENTORIES
The major components of inventories were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 1, NOVEMBER 30,
1996 1995
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $21,721 $19,861
Work in process 11,269 11,195
Finished goods 7,026 4,300
--------- ---------
$40,016 $35,356
======= =======
</TABLE>
7
<PAGE> 8
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 1, 1996 AND AUGUST 31, 1995
================================================================================
NOTE C -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
SEPTEMBER 1, NOVEMBER 30,
1996 1995
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Secured Credit Agreement:
Revolving Credit Facility $ 52,000 $ --
Term Loan Facility 70,469 85,000
9 1/2% Senior Subordinated Notes Due 2003 200,000 200,000
Other 242 1,937
---------- ----------
322,711 286,937
Less current portion 18,654 17,488
---------- ----------
$304,057 $269,449
======== ========
</TABLE>
The Secured Credit Agreement provides for loans of up to $195 million as
of September 1, 1996, and consists of the $125 million Revolving Credit Facility
and the $70 million Term Loan Facility. The Revolving Credit Facility is
inclusive of 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 $70 million term loan as of September 1, 1996,
with a final maturity of November 30, 1999 and amortizes in fiscal quarterly
principal payments. As a result of prepayments by the Company applied pro rata
over the remaining mandatory payments, the current amortization schedule is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING PRINCIPAL PAYMENT
------------------ -----------------
(IN THOUSANDS)
<S> <C>
12/01/96 $ 7,417
11/30/97 18,545
11/29/98 13,352
11/28/99 22,254
12/03/00 8,901
---------
$70,469
=========
</TABLE>
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 1.25% for
the Eurodollar Rate option.
8
<PAGE> 9
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 1, 1996 AND AUGUST 31, 1995
================================================================================
The applicable margin is reduced or increased depending on certain financial
ratios.
During the nine months ended September 1, 1996, the maximum amount
outstanding under the Revolving Credit Facility, excluding Letters of Credit,
was $52 million. At September 1, 1996, the Company had approximately $62 million
available under the Revolving Credit Facility, with Letters of Credit issued
totaling approximately $11 million.
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 groundwater
sampling to determine the extent of environmental contamination at the plant
owned by the subsidiary in South Brunswick, New Jersey. The Company does not
believe that its manufacturing processes were a source 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. By a
November 15, 1993 letter, DEP postponed any required activity by the Company to
delineate and/or remediate contaminants in the fractured bedrock located on the
site, which DEP previously had requested the Company to undertake, and which DEP
could attempt to impose in the future. Because of the nature of certain of the
contaminants, their geological location in and porosity of the fractured
bedrock, the Company and its consultant are unaware of any accepted technology
for successfully remediating the contamination either in the shallow groundwater
or the fractured bedrock. Thus, the groundwater remediation plan proposes no
remedial activity regarding groundwater in the fractured bedrock.
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
impact on the Company's financial position or future operations.
9
<PAGE> 10
Item 2 - SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
QUARTER ENDED SEPTEMBER 1, 1996 AND AUGUST 31, 1995
NET SALES Net sales increased $12.7 million, or 7.0%. The increase is
attributable to an $18.8 million, or 10.5% increase in unit volume, partially
offset by a $6.1 million, or 3.1% decrease in the average unit selling price.
Increased unit volume is attributed to incremental placements of new Sealy
Posturepedic products, increased distribution of Stearns & Foster, along with
increased distribution of Samuel Lawrence wood bedroom furniture.
COST OF GOODS SOLD Cost of goods sold for the quarter, as a percentage of
net sales, increased 2.3 percentage points to 56.2%. The increase in the cost of
goods sold percentage is attributed to the lower average unit selling price,
along with inflationary raw material and labor increases.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expenses increased $5.0 million primarily due to increased Performance Share
Plan ("Plan") expense of $3.2 million and other selling, general and
administrative expenses of $4.2 million, partially offset by a net decrease in
marketing spending of $2.4 million. The increase in Plan expense is due to
recording a $2.7 million reduction in the Plan's estimated final value in the
third quarter of 1995, combined with expense recognized in the current year for
final year vesting in the Plan. A description of the Performance Share Plan is
provided in Note 11 to the consolidated financial statements contained in the
Company's Form 10-K for the year ended November 30, 1995.
The increase in other selling, general and administrative expenses is
primarily due to incentive compensation, selling and delivery related to
increased sales volume and administrative expenses for international expansion.
The net decrease in marketing spending is due primarily to adjustments in the
Company's marketing strategies.
Subsequent to September 1, 1996, the Company modified certain compensation
programs, which is expected to result in incremental fourth quarter expense of
$2.5 million.
INTEREST EXPENSE Interest expense, net of interest income, decreased $0.7
million primarily as a result of a $10.0 million decrease in average outstanding
debt and lower noncash interest.
INCOME TAX The Company's provision for income taxes decreased $1.8
million, primarily as a result of lower pretax income. The 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 1996 is approximately 56.5% compared to
57.2% in 1995.
NET INCOME For the reasons set forth above, the Company recorded net
income of $7.1 million for the quarter ended September 1, 1996 compared to net
income of $8.2 million for the third quarter of fiscal 1995.
10
<PAGE> 11
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
NINE MONTHS ENDED SEPTEMBER 1, 1996 AND AUGUST 31, 1995
NET SALES Net sales increased $34.2 million, or 7.1%. The increase is
attributable to a $41.3 million, or 8.6% increase in unit volume, partially
offset by a $7.1 million, or 1.3% decrease in the average unit selling price.
Increased unit volume is attributed to incremental placements of new Sealy
Posturepedic products, increased distribution of Stearns & Foster, along with
increased distribution of Samuel Lawrence wood bedroom furniture. These
increases were partially offset by the elimination of sleep sofa sales
attributable to the closing of this business unit in March, 1995.
COST OF GOODS SOLD Cost of goods sold, as a percentage of net sales,
increased 1.5 percentage points to 56.9%. This increase is primarily
attributable to the lower average unit selling price, inflationary bedding raw
material and labor increases, the start up of a new facility and increased sales
of lower margin wood bedroom furniture.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expenses increased $9.9 million primarily due to increases in Performance Share
Plan ("Plan") expense of $7.1 million and other selling, general and
administrative expenses of $12.0 million, partially offset by a net decrease in
marketing spending of $6.5 million and the effect of a prior year charge for
closing the sleep sofa business, $2.7 million. The increase in Plan expense is
due to recording a $5.8 million reduction in the Plan's estimated final value in
1995, combined with expense recognized in the current year for final year
vesting in the Plan. A description of the Performance Share Plan is provided in
Note 11 to the consolidated financial statements contained in the Company's Form
10-K for the year ended November 30, 1995.
The increase in other selling, general and administrative expenses is
primarily due to selling and delivery related to increased sales volume,
incentive compensation, executive severance and transition expenses,
administrative expenses for international expansion and research and
development. The net decrease in marketing spending is due primarily to
adjustments in the Company's marketing strategies.
Subsequent to September 1, 1996, the Company modified certain compensation
programs, which is expected to result in incremental fourth quarter expense of
$2.5 million.
INTEREST EXPENSE Interest expense, net of interest income, decreased $2.1
million primarily as a result of a $39.2 million decrease in average outstanding
debt.
INCOME TAX The Company's provision for income taxes decreased $0.4
million, as a result of a lower effective tax rate in 1996 and lower pretax
income. The 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
1996 is approximately 56.5% compared to 57.2% in 1995.
NET INCOME For the reasons set forth above, the Company recorded net
income of $12.8 million for the nine months ended September 1, 1996 as compared
to net income of $12.8 million for the nine months ended August 31, 1995.
11
<PAGE> 12
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 1, 1996, the Company's principal
sources of cash were net borrowings under its Revolving Credit Facility, $35.8
million and cash provided by operating activities, $19.9 million. The Company's
principal use of funds consists of the dividend payment described below,
interest payments and capital expenditures. Capital expenditures totaled $7.2
million for the nine months ended September 1, 1996. Management believes that
annual capital expenditure limitations in its Secured Credit Agreement will not
significantly inhibit the Company from meeting its ongoing capital needs. At
September 1, 1996, the Company had approximately $62 million available under its
Revolving Credit Facility with Letters of Credit issued totaling approximately
$11 million. At September 1, 1996, the weighted average interest rate on the
Revolving Credit and Term Loan Facilities was 7.2%.
On May 17, 1996, the Company paid a special dividend to all stockholders
and holders of Merger Warrants of record as of May 7, 1996. The dividend
amounted to approximately $35.5 million, or $1.20 per share and was financed
primarily through borrowings under the Revolving Credit Facility.
Management believes that the Company will have the necessary liquidity for
the next several years to fund its expected capital expenditures, obligations
under its Secured Credit Agreement and Senior Subordinated Note Indenture,
environmental liabilities, and for other needs required to manage and operate
its business, through cash flow from operations, and availability under the
Revolving Credit Facility.
Subsequent to September 1, 1996, the Company proceeded to explore the
possible sale of the Samuel Lawrence wood bedroom furniture business. Management
estimates that such transaction could result in a charge to net income of
approximately $10 million.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
None.
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
Signature Title
--------- -----
By: /s/ Ronald L. Jones President and Chief Executive Officer
- -------------------------------- (Principal Executive Officer)
Ronald L. Jones
By: /s/ Jesse E. Hogan Senior Vice President and Chief Financial
- -------------------------------- Officer
Jesse E. Hogan (Principal Accounting Officer)
Date: October 16, 1996
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-01-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> SEP-01-1996
<CASH> 32,248
<SECURITIES> 0
<RECEIVABLES> 101,348
<ALLOWANCES> 8,254
<INVENTORY> 40,016
<CURRENT-ASSETS> 184,398
<PP&E> 164,619
<DEPRECIATION> 32,761
<TOTAL-ASSETS> 795,988
<CURRENT-LIABILITIES> 120,411
<BONDS> 304,057
<COMMON> 295
0
0
<OTHER-SE> 307,063
<TOTAL-LIABILITY-AND-EQUITY> 795,988
<SALES> 517,199
<TOTAL-REVENUES> 517,199
<CGS> 294,247
<TOTAL-COSTS> 294,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,728
<INTEREST-EXPENSE> 21,883
<INCOME-PRETAX> 29,531
<INCOME-TAX> 16,685
<INCOME-CONTINUING> 12,846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,846
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</TABLE>
