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Sealy Corp. Reports Operating Results (10-Q)

September 29, 2009 | About:

Sealy Corp. (ZZ) filed Quarterly Report for the period ended 2009-08-30.

Sealy Corporation through its subsidiaries is the largest bedding manufacturer in North America and produces a diversified line of mattress and foundation products. Sealy owns and operates a component-manufacturing subsidiary with three plants that produce virtually all of the company's proprietary and patented mattress innerspring requirements and approximately half of its foundation components. with and P/S ratio of 27.3. The dividend yield of Sealy Corp. stocks is 1.5%.

Highlight of Business Operations:

Net Sales. Our consolidated net sales for the quarter ended August 30, 2009, were $349.6 million, a decrease of $55.4 million, or 13.7%, from the quarter ended August 31, 2008. Total Americas net sales were $321.7 million for the third quarter of fiscal 2009, a decrease of 13.8% from the third quarter of fiscal 2008. This decrease was primarily related to decreased sales in the U.S. coupled with decreases in the Canada and Other Americas businesses. Total U.S. net sales were $256.8 million for the third quarter of fiscal 2009, a decrease of 13.3% from the third quarter of fiscal 2008. The U.S. net sales decrease of $39.4 million was attributable to a 12.9% decrease in wholesale unit volume, which excludes third party sales from our component plants, partially offset by a 0.1% increase in wholesale average unit selling price. The decrease in unit volume is primarily attributable to continued weak retail demand as described above under "Business Overview". International net sales decreased $16.0 million or 14.7%, from the third quarter of fiscal 2008 to $92.8 million. Excluding the effects of currency fluctuation, net sales declined 4.3% from the third quarter of fiscal 2008. This decline was primarily due to declines in finished goods sales in Europe and, to a lesser extent, the weak retail environment in the Other Americas. In Canada, local currency sales decreases of 1.0% translated into decreases of 8.6% in U.S. dollars due to a lower average value of the Canadian dollar versus the U.S. dollar. Local currency sales performance in Canada was driven by a 1.8% decrease in average unit selling price, which was partially offset by a 0.8% increase in unit volume. The decreased average unit selling price was driven by the increased volume of lower priced products as well as increased promotional activities. The increase in unit volume is primarily attributable to relatively more promotional activity compared to the third quarter of fiscal 2008 when our business was disrupted by the relocation of our Toronto facility. Elsewhere in the Americas, we have experienced sales decreases in our Mexico and South American markets. In our Europe segment, local currency sales decreases of 3.6% translated into decreases of 12.2% in U.S. dollars due to the decline in value of the Euro versus the U.S. dollar. The decline in local currency sales was driven by a 16.1% decrease in finished goods sales which we believe is reflective of the overall economic slowdown in Europe, which was offset by increases in OEM sales.

Gross Profit. Our consolidated gross profit for the quarter was $146.1 million, a decrease of $18.1 million from the comparable prior year period. As a percentage of net sales, gross profit increased 1.3 percentage points to 41.8% due to an increase in gross profit margins in both of our segments. Total Americas gross profit for the quarter was $138.6 million, a decrease of $20.0 million from the comparable prior year period. As a percentage of net sales, gross profit for the Americas increased 0.6 percentage points to 43.1%. This increase as a percentage of sales was primarily due to an increase in gross profit margins in our U.S. operations partially offset by decreased gross profit margins in Canada. U.S. gross profit decreased $14.1 million to $112.8 million, which, as a percent of sales, represents an increase of 1.0 percentage points to 43.9% of net sales. The increase in percentage of net sales was driven primarily by lower material costs as the related commodity prices remained below prior year levels through the third quarter. Conversely, margins were negatively impacted by less absorption of fixed costs as a result of lower volume. In local currency, the gross profit margin in Canada was 39.7% as a percentage of net sales which represents a decrease of 2.2 percentage points. This decrease was driven by the impact of higher material costs per unit and the lower average unit selling price discussed above. In our Europe segment, the local currency gross profit margin increase of 9.6 percentage points was primarily due to decreased prices of raw materials due to deflation in the prices of the underlying commodities.

Selling, General, Administrative. Our consolidated selling, general and administrative expense decreased $22.6 million to $110.3 million. As a percent of net sales this expense was 31.5% and 32.8% for the quarters ended August 30, 2009 and August 31, 2008, respectively, a decrease of 1.3 percentage points. The decrease as a percent of sales is primarily due to our efforts to improve efficiencies and our cost structure to compensate for the current retail environment. The decrease in absolute dollars is primarily due to a $14.9 million reduction in volume driven variable expenses including a $7.6 million

Interest Expense. Our consolidated interest expense for the third quarter of fiscal 2009 increased $7.7 million as compared with the prior year period to $22.1 million which included $4.2 million of non-cash interest expense. Our net weighted average borrowing cost was 10.4% and 7.2% for the three months ended August 30, 2009 and August 31, 2008, respectively. Our borrowing cost was unfavorably impacted by the Refinancing which resulted in increased interest rates and outstanding debt balances.

Income Tax. Our effective income tax rates regularly differ from the Federal statutory rate principally because of the effect of non-deductible paid in kind interest, non-deductible mark to market adjustments for derivatives associated with the Convertible Notes subscription rights, certain foreign tax rate differentials and state and local income taxes. Our effective tax rate for the three months ended August 30, 2009 was 20.7% compared to 39.1% for the three months ended August 31, 2008. The effective rate for the fiscal 2009 period was lower than the fiscal 2008 period primarily due to the reversal of $10.2 million of the liability for uncertain tax positions and related interest (net) and penalties due to the expiration of statutes of limitations, offset by lower pre-tax income in fiscal 2009.

Read the The complete ReportZZ is in the portfolios of Richard Pzena of Pzena Investment Management LLC.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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