Sealy Corp. Reports Operating Results (10-K)
Sealy Corp. has a market cap of $191 million; its shares were traded at around $1.89 with a P/E ratio of 23.6 and P/S ratio of 0.2.
Highlight of Business Operations:Cooperative Advertising, Rebate and Other Promotional ProgramsWe 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.
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.
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.
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.
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.
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