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EX-32 - EX-32 - SEALY CORP | a2203071zex-32.htm |
EX-31.1 - EX-31.1 - SEALY CORP | a2203071zex-31_1.htm |
EX-31.2 - EX-31.2 - SEALY CORP | a2203071zex-31_2.htm |
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended: February 27, 2011 |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the Transition Period from to |
Commission file number 001-08738
SEALY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation) |
36-3284147 (I.R.S. Employer Identification No.) |
|
Sealy Drive One Office Parkway Trinity, North Carolina (Address of principal executive offices) |
27370 (Zip Code) |
|
(336) 861-3500 Registrant's telephone number, including area code |
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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares of the registrant's common stock outstanding as of March 17, 2011 is approximately: 98,120,413.
SEALY CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
|
Three Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
February 27, 2011 |
February 28, 2010 |
|||||||
Net sales |
$ | 305,529 | $ | 311,888 | |||||
Cost of goods sold |
187,025 | 179,006 | |||||||
Gross profit |
118,504 | 132,882 | |||||||
Selling, general and administrative expenses |
103,734 |
100,289 |
|||||||
Amortization expense |
72 | 72 | |||||||
Royalty income, net of royalty expense |
(4,971 | ) | (4,122 | ) | |||||
Income from operations |
19,669 | 36,643 | |||||||
Interest expense |
21,708 | 21,733 | |||||||
Other income, net |
(105 | ) | (50 | ) | |||||
(Loss) income before income taxes |
(1,934 | ) | 14,960 | ||||||
Income tax (benefit) provision |
(1,209 | ) | 7,627 | ||||||
Equity in earnings of unconsolidated affiliates |
855 | 943 | |||||||
Income from continuing operations |
130 | 8,276 | |||||||
(Loss) from discontinued operations |
(1,032 | ) | (2,562 | ) | |||||
Net (loss) income |
$ | (902 | ) | $ | 5,714 | ||||
(Loss) earnings per common shareBasic |
|||||||||
Income from continuing operations per common share |
$ | | $ | 0.09 | |||||
Loss from discontinued operations per common share |
(0.01 | ) | (0.03 | ) | |||||
(Loss) earnings per common shareBasic |
$ | (0.01 | ) | $ | 0.06 | ||||
(Loss) earnings per common shareDiluted |
|||||||||
Income from continuing operations per common share |
$ | | $ | 0.04 | |||||
(Loss) from discontinued operations per common share |
(0.01 | ) | (0.01 | ) | |||||
(Loss) earnings per common shareDiluted |
$ | (0.01 | ) | $ | 0.03 | ||||
Weighted average number of common shares outstanding: |
|||||||||
Basic |
97,816 | 94,524 | |||||||
Diluted |
107,828 | 283,576 |
See accompanying notes to Condensed Consolidated Financial Statements.
1
SEALY CORPORATION
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
|
February 27, 2011 |
November 28, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||
Current assets: |
||||||||
Cash and equivalents |
$ | 102,390 | $ | 109,255 | ||||
Accounts receivable (net of allowance for doubtful accounts, discounts and returns, 2011$26,538; 2010$25,812) |
154,950 | 140,778 | ||||||
Inventories |
57,216 | 57,178 | ||||||
Other current assets |
22,890 | 19,543 | ||||||
Deferred income tax assets |
20,169 | 19,127 | ||||||
Total current assets |
357,615 | 345,881 | ||||||
Property, plant and equipmentat cost |
392,479 | 385,470 | ||||||
Less accumulated depreciation |
(223,865 | ) | (217,398 | ) | ||||
|
168,614 | 168,072 | ||||||
Goodwill |
363,455 | 361,958 | ||||||
Intangible assets, net |
1,314 | 1,387 | ||||||
Deferred income tax assets |
5,205 | 6,140 | ||||||
Other assets, including debt issuance costs, net |
52,896 | 53,319 | ||||||
|
422,870 | 422,804 | ||||||
Total assets |
$ | 949,099 | $ | 936,757 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT |
||||||||
Current liabilities: |
||||||||
Current portionlong-term obligations |
$ | 2,156 | $ | 2,166 | ||||
Accounts payable |
79,879 | 66,507 | ||||||
Accrued incentives and advertising |
26,418 | 34,510 | ||||||
Accrued compensation |
20,655 | 22,390 | ||||||
Accrued interest |
17,346 | 14,359 | ||||||
Other accrued liabilities |
33,237 | 37,198 | ||||||
Total current liabilities |
179,691 | 177,130 | ||||||
Long-term obligations, net of current portion |
789,999 | 793,084 | ||||||
Other liabilities |
52,680 | 53,357 | ||||||
Deferred income tax liabilities |
843 | 825 | ||||||
Stockholders' deficit: |
||||||||
Common stock, $0.01 par value; Authorized 600,000 shares Issued and outstanding: 201197,949; 201097,688 |
981 | 979 | ||||||
Additional paid-in capital |
921,763 | 911,066 | ||||||
Accumulated deficit |
(1,007,591 | ) | (1,006,689 | ) | ||||
Accumulated other comprehensive income, net |
10,733 | 7,005 | ||||||
Total stockholders' deficit |
(74,114 | ) | (87,639 | ) | ||||
Total liabilities and stockholders' deficit |
$ | 949,099 | $ | 936,757 | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
2
SEALY CORPORATION
Condensed Consolidated Statement of Stockholders' Deficit
(in thousands)
(unaudited)
|
|
Common Stock | |
|
Accumulated Other Comprehensive Income (Loss) |
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Comprehensive Income (Loss) |
Additional Paid-in Capital |
Accumulated Deficit |
|
||||||||||||||||||
|
Shares | Amount | Total | |||||||||||||||||||
Balance at November 28, 2010 |
97,688 | $ | 979 | $ | 911,066 | $ | (1,006,689 | ) | $ | 7,005 | $ | (87,639 | ) | |||||||||
Net loss |
(902 | ) | (902 | ) | (902 | ) | ||||||||||||||||
Foreign currency translation adjustment |
4,390 | 4,390 | 4,390 | |||||||||||||||||||
Adjustment to defined benefit plan liability, net of tax of $68 |
62 | 62 | 62 | |||||||||||||||||||
Change in fair value of cash flow hedges, net of tax of $(339) |
(724 | ) | (724 | ) | (724 | ) | ||||||||||||||||
Share-based compensation |
2,879 | 2,879 | ||||||||||||||||||||
Exercise of stock options |
261 | 2 | 578 | 580 | ||||||||||||||||||
Excess tax benefit on share based awards |
(323 | ) | (323 | ) | ||||||||||||||||||
Beneficial conversion feature on Convertible paid in kind Notes |
7,563 | 7,563 | ||||||||||||||||||||
Balance at February 27, 2011 |
$ | 2,826 | 97,949 | $ | 981 | $ | 921,763 | $ | (1,007,591 | ) | $ | 10,733 | $ | (74,114 | ) | |||||||
See accompanying notes to Condensed Consolidated Financial Statements.
3
SEALY CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
Three Months Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
February 27, 2011 |
February 28, 2010 |
||||||||
Operating activities: |
||||||||||
Net (loss) income |
$ | (902 | ) | $ | 5,714 | |||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||||
Depreciation and amortization |
6,054 | 7,549 | ||||||||
Deferred income taxes |
322 | 2,656 | ||||||||
Bad debt expense |
1,146 | 312 | ||||||||
Amortization of deferred gain on sale-leaseback |
(167 | ) | (163 | ) | ||||||
Paid in kind interest on convertible notes |
4,586 | 3,365 | ||||||||
Amortization of discount on new senior secured notes |
382 | 389 | ||||||||
Amortization of debt issuance costs and other |
1,175 | 2,067 | ||||||||
Share-based compensation |
2,879 | 4,117 | ||||||||
(Gain) loss on sale of assets |
(231 | ) | 171 | |||||||
Dividends received from unconsolidated affiliates |
1,011 | | ||||||||
Equity in earnings of unconsolidated affiliates |
(855 | ) | (943 | ) | ||||||
Loss on disposition of subsidiary |
206 | | ||||||||
Other, net |
638 | 420 | ||||||||
Changes in operating assets and liabilities: |
||||||||||
Accounts receivable |
(13,605 | ) | (23,217 | ) | ||||||
Inventories |
161 | (3,991 | ) | |||||||
Other current assets |
(2,796 | ) | 2,011 | |||||||
Other assets |
(839 | ) | 71 | |||||||
Accounts payable |
12,547 | 8,577 | ||||||||
Accrued expenses |
(13,294 | ) | (19,419 | ) | ||||||
Other liabilities |
(615 | ) | 1,565 | |||||||
Net cash used in operating activities |
(2,197 | ) | (8,749 | ) | ||||||
Investing activities: |
||||||||||
Purchase of property, plant and equipment |
(5,927 | ) | (2,449 | ) | ||||||
Proceeds from sale of property, plant and equipment |
224 | 57 | ||||||||
Net cash used in investing activities |
(5,703 | ) | (2,392 | ) | ||||||
Financing activities: |
||||||||||
Proceeds from issuance of long-term obligations |
787 | 516 | ||||||||
Repayments of long-term obligations |
(1,118 | ) | (3,361 | ) | ||||||
Exercise of employee stock options, including related excess tax benefits |
581 | | ||||||||
Debt issuance costs |
(147 | ) | | |||||||
Other |
(34 | ) | (16 | ) | ||||||
Net cash provided by (used in) financing activities |
69 | (2,861 | ) | |||||||
Effect of exchange rate changes on cash |
966 | (370 | ) | |||||||
Change in cash and equivalents |
(6,865 | ) | (14,372 | ) | ||||||
Cash and equivalents: |
||||||||||
Beginning of period |
109,255 | 131,427 | ||||||||
End of period |
$ | 102,390 | $ | 117,055 | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
4
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1: Basis of Presentation and Significant Accounting Policies
The interim Condensed Consolidated Financial Statements are unaudited, and certain related information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with Rule 10-01 of Regulation S-X. The accompanying interim Condensed Consolidated Financial Statements were prepared following the same policies and procedures used in the preparation of the annual financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Sealy Corporation and its subsidiaries (collectively, the "Company"). The results of operations for the interim periods are not necessarily indicative of the results for the fiscal year. Our third fiscal quarter sales are typically 5% to 15% higher than other fiscal quarters. These Condensed Consolidated Financial Statements should be read in conjunction with the annual consolidated financial statements for the year ended November 28, 2010 included within the Company's Annual Report on Form 10-K (File No. 001-08738).
As discussed in Note 12, in the fourth quarter of fiscal 2010, the Company divested its European manufacturing operations in France and Italy, which represented our Europe segment, and also discontinued its operations in Brazil. The Company has transitioned to a license arrangement with third parties in these markets. These businesses have been accounted for as discontinued operations, and, accordingly, the Condensed Consolidated Statements of Operations for all periods presented have been reclassified to reflect them as such. The Condensed Consolidated Balance Sheet and Statements of Cash Flows have not been adjusted for discontinued operations presentation. Unless otherwise noted, discussions in these notes pertain to our continuing operations
At February 27, 2011, affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") controlled approximately 47.6% of the issued and outstanding common stock of the Company.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amount of assets and liabilities and disclosures on contingent assets and liabilities at period end and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.
The Company's significant accounting policies are described in Note 1 to the annual consolidated financial statements for the year ended November 28, 2010 included within the Company's Annual Report on Form 10-K. In accordance with the adoption of recently issued authoritative guidance surrounding the credit quality of an entity's financing receivables and its allowance for credit losses, we have provided the additional disclosure below:
Allowance for Doubtful Accounts
The Company continues to actively monitor the financial condition of its customers to determine the potential for nonpayment of trade receivables. In determining its allowance for doubtful accounts, the Company considers the current financial condition of its customers as well as other general economic factors. The Company's management believes that its process of specific review of customers, combined with its overall analytical review provides a reliable evaluation of ultimate collectability of trade receivables. The amounts receivable related to leasing activities were not significant to either period.
5
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 2: Recently Issued Authoritative Accounting Guidance
In January 2010, the FASB issued authoritative guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance, which the Company adopted in the second quarter of fiscal 2010, requires new disclosures on the transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and timing of the transfers. Additionally, the guidance requires a gross reporting of purchases, sales, issuance and settlements of assets and liabilities measured using Level 3 fair value measurements. The Company will adopt this guidance in the first quarter of fiscal 2012. The adoption of this guidance will increase the level of disclosures in the financial statements related to fair value measurements.
In July 2010, the FASB issued authoritative guidance that requires expanded disclosures about the credit quality of an entity's financing receivables and its allowance for credit losses on a disaggregated basis. The Company has adopted the portion of this guidance that pertains to disclosures as of the end of the first quarter of fiscal 2011 and has provided the required disclosures herein. The Company will adopt the portion of this guidance that pertains to the disclosure of the allowance activity that occurs during a reporting period in the second quarter of fiscal 2011.
In December 2010, the FASB issued authoritative guidance that modifies the requirements of step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The Company will adopt this guidance in the first quarter of fiscal 2012. The Company is still assessing the potential impact of adoption.
Note 3: Share-Based Compensation
The Company maintains the 1998 Stock Option Plan ("1998 Plan") and the 2004 Stock Option Plan for Key Employees of Sealy Corporation and its Subsidiaries ("2004 Plan") which are collectively referred to as the "Option Plans". The Company accounts for all new share-based awards granted and outstanding awards using the fair value based method under FASB authoritative guidance surrounding share-based payments. Total share-based compensation recognized during the three months ended February 27, 2011 and February 28, 2010 was $2.9 million and $4.1 million, respectively.
Stock Option Awards
During the three months ended February 27, 2011 and February 28, 2010, the Company granted no new options to purchase shares of its common stock.
6
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 3: Share-Based Compensation (Continued)
A summary of option activity under the 1998 Plan for the three months ended February 27, 2011, is presented below:
|
Shares Subject to Options | Weighted Average Exercise Price Per Share |
||||||
---|---|---|---|---|---|---|---|---|
Outstanding November 28, 2010 |
1,776,804 | $ | 1.17 | |||||
Exercised |
(231,791 | ) | 2.28 | |||||
Forfeited |
(22,000 | ) | 2.12 | |||||
Outstanding February 27, 2011 (all fully vested and exercisable) |
1,523,013 | $ | 0.99 | |||||
Weighted average remaining contractual term |
3.1 years |
|||||||
Aggregate intrinsic value of in-the-money options at February 27, 2011 (in thousands) |
$ | 2,830 |
A summary of option activity under the 2004 Plan for the three months ended February 27, 2011, is presented below:
|
Shares Subject to Options | Weighted Average Exercise Price Per Share |
||||||
---|---|---|---|---|---|---|---|---|
Outstanding November 28, 2010 |
6,420,012 | $ | 5.50 | |||||
Exercised |
(30,031 | ) | $ | 1.67 | ||||
Forfeited |
(527,213 | ) | $ | 5.67 | ||||
Outstanding February 27, 2011 |
5,862,768 | $ | 5.50 | |||||
Weighted average remaining contractual term |
4.3 years | |||||||
Aggregate intrinsic value of in-the-money options (in thousands) |
$ | 1,806 | ||||||
Exercisable at February 27, 2011 |
4,309,302 | |||||||
Weighted average remaining contractual term |
4.3 years | |||||||
Aggregate intrinsic value of in-the-money options (in thousands) |
$ | 1,360 |
As of February 27, 2011, the Company had approximately $1.1 million of unrecognized compensation expense related to stock option awards, which is expected to be recognized over a weighted average period of 2.9 years.
The Company has granted stock options to employees that have accelerated vesting provisions which take effect if certain performance levels are achieved by the Company. If the Company does not meet these performance targets, then the vesting of the options occurs over the remainder of the requisite service period. As of February 27, 2011, the performance targets for these stock options have not been met. As such, the related unrecognized compensation cost is being recognized over the remainder of the requisite service period for those options that vest over the remaining service period. Further, the Company has not recognized compensation cost in the current period for certain options to purchase 667,532 shares of common stock that contain performance targets for fiscal years through
7
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 3: Share-Based Compensation (Continued)
2010 which will not vest, but have not yet been cancelled. No compensation cost will be recognized related to these options.
Restricted Shares and Share Unit Awards
The Company has outstanding 97,324 restricted shares that are considered to be non-vested shares, and have the same rights as the Company's outstanding common shares, including dividend participation rights, except that they cannot be sold by the holder until the end of the vesting period. As of February 27, 2011, the remaining unrecognized compensation cost related to restricted stock awards was $0.3 million which is expected to be recognized over the remaining vesting period of 0.4 years. None of these awards vested during the three months ended February 27, 2011 or February 28, 2010.
During the three months ended February 27, 2011, the Company approved grants of 115,100 time-based restricted stock units ("RSUs"). The weighted average grant date fair value of these awards was $2.61 and is based on the closing price of the Company's common stock on the date of grant. There were no RSUs granted during the three months ended February 28, 2010. The Company has outstanding RSU awards of several types: 1) Time-based RSU awards accrete in the number of RSUs at an annual rate of 8% payable semi-annually until the RSUs are vested or forfeited; 2) Time-based RSU awards that vest ratably over a three year period; and 3) Performance-based RSUs which do not vest unless certain targets that are tied to the Company's earnings performance are met. A summary of the outstanding unvested RSU awards by type as of February 27, 2011 follows:
|
Number of Awards | Unrecognized Compensation Expense (in thousands) |
||||||
---|---|---|---|---|---|---|---|---|
Time-based vesting awards with accretion factor |
11,566,184 | $ | 7,487 | |||||
Time-based vesting awards without accretion factor |
926,100 | 1,256 | ||||||
Performance-based awards outstanding |
430,968 | 18 | ||||||
Total |
12,923,252 | $ | 8,761 | |||||
Performance-based awards where targets are not expected to be met |
114,800 | $ | 88 | |||||
8
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 3: Share-Based Compensation (Continued)
A summary of restricted share unit award activity for the three months ended February 27, 2011, is presented below:
|
Unvested Restricted Share Units |
Weighted Average Grant Date Fair Value |
||||||
---|---|---|---|---|---|---|---|---|
Outstanding November 28, 2010 |
12,811,956 | $ | 2.07 | |||||
Granted |
115,100 | 2.61 | ||||||
Forfeited |
(3,804 | ) | 2.00 | |||||
Outstanding February 27, 2011 |
12,923,252 | $ | 2.08 | |||||
Weighted average remaining vesting period |
1.5 years |
Note 4: Inventories
The major components of inventories were as follows (in thousands):
|
February 27, 2011 | November 28, 2010 | |||||
---|---|---|---|---|---|---|---|
Raw materials |
$ | 24,446 | $ | 26,449 | |||
Work in process |
23,366 | 22,629 | |||||
Finished goods |
9,404 | 8,100 | |||||
|
$ | 57,216 | $ | 57,178 | |||
Note 5: Warranty Costs
The Company's warranty policy provides a 10-year non-prorated warranty service period on all currently manufactured Sealy Posturepedic, Stearns & Foster and Bassett bedding products and certain other Sealy branded products. In addition, the Company has a 20-year warranty on the major components of its TrueForm and MirrorForm visco-elastic products and its SpringFree latex product, the last ten years of which are prorated on a straight-line basis. Though discontinued in 2008, the Company also offered a 20-year limited warranty on its RightTouch product line which covered only certain parts of the product and will be prorated for part of the twenty years. The Company's policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded. The estimate involves an average lag time in days between the sale of a bed and the date of its return, applied to the current rate of the warranty returns.
The change in the Company's accrued warranty obligations for each of the three months ended February 27, 2011 and February 28, 2010 was as follows (in thousands):
|
February 27, 2011 | February 28, 2010 | |||||
---|---|---|---|---|---|---|---|
Accrued warranty obligations at beginning of period |
$ | 17,584 | $ | 16,464 | |||
Warranty claims |
(3,561 | ) | (4,546 | ) | |||
Warranty provisions |
3,434 | 4,404 | |||||
Accrued warranty obligations at end of period |
$ | 17,457 | $ | 16,322 | |||
9
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 5: Warranty Costs (Continued)
As of February 27, 2011 and November 28, 2010, $10.4 million and $10.5 million is included as a component of other accrued liabilities and $7.0 million and $7.1 million is included as a component of other noncurrent liabilities within the accompanying Condensed Consolidated Balance Sheet, respectively. In estimating its warranty obligations, the Company considers the impact of recoverable salvage value on warranty cost in determining its estimate of future warranty obligations. Warranty claims and provisions shown above do not include estimated salvage recoveries that reduced cost of sales by $1.4 million and $1.5 million for the three months ended February 27, 2011 and the three months ended February 28, 2010, respectively.
Note 6: Goodwill and Other Intangible Assets
The Company performs an annual assessment of its goodwill for impairment as of the beginning of the fiscal fourth quarter. The Company also assesses its goodwill and other intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows.
The changes in the carrying amount of goodwill for the three months ended February 27, 2011 are as follows (in thousands):
Balance as of November 28, 2010 |
$ | 361,958 | ||
Increase due to foreign currency translation |
1,497 | |||
Balance as of February 27, 2011 |
$ | 363,455 | ||
Total other intangibles of $1.3 million (net of accumulated amortization of $3.3 million) as of February 27, 2011 consist primarily of licenses, which are amortized using a straight-line method over periods ranging from 5 to 15 years. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred. During the three months ended February 27, 2011 and February 28, 2010, the Company recognized amortization expense associated with intangibles of $0.1 million. The Company expects to recognize amortization expense relating to these intangibles of $0.2 million for the remainder of 2011, $0.3 million in 2012, $0.3 million in 2013, $0.3 million in 2014 and $0.2 million in 2015.
Note 7: Unconsolidated Affiliate Companies
The Company is involved in a group of joint ventures to develop markets for Sealy branded products in Asia. Our ownership interest in these joint ventures is 50% and is accounted for under the equity method. The Company's share of earnings is recorded in equity in earnings of unconsolidated affiliates in the Condensed Consolidated Statements of Operations.
10
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 7: Unconsolidated Affiliate Companies (Continued)
Summarized statements of operations for these joint ventures for each of the three month periods ended February 27, 2011 and February 28, 2010 are as follows (in thousands):
|
February 27, 2011 | February 28, 2010 | |||||
---|---|---|---|---|---|---|---|
Revenues |
$ | 12,318 | $ | 11,552 | |||
Gross profit |
7,795 | 6,512 | |||||
Income from operations |
1,956 | 2,264 | |||||
Net income |
1,709 | 1,886 |
Note 8: Long-Term Obligations
Long-term obligations as of February 27, 2011 and November 28, 2010 consisted of the following (in thousands):
|
February 27, 2011 | November 28, 2010 | |||||
---|---|---|---|---|---|---|---|
Asset-based revolving credit facility |
$ | | $ | | |||
Senior secured notes |
304,699 | 304,318 | |||||
Convertible notes(1) |
178,204 | 181,341 | |||||
Senior subordinated notes |
268,945 | 268,945 | |||||
Financing obligations |
39,612 | 39,896 | |||||
Other |
695 | 750 | |||||
|
792,155 | 795,250 | |||||
Less current portion |
(2,156 | ) | (2,166 | ) | |||
|
$ | 789,999 | $ | 793,084 | |||
- (1)
- Includes paid in kind ("PIK") interest of $1.9 million from January 16, 2011 through February 27, 2011 for which the principal balance of the Convertible Notes has not yet been increased.
The Company's outstanding debt primarily consists of the following: 1) an asset-based revolving credit facility (the "ABL Revolver") which provides commitments of up to $100.0 million maturing in May 2013; 2) $350.0 million in original aggregate principal amount of senior secured notes due April 2016 (the "Senior Notes"); 3) $177.1 million in aggregate principal amount of senior secured convertible PIK notes due June 2016 which are convertible into shares of the Company's common stock (the "Convertible Notes") and 4) senior subordinated notes which consist of an original $314 million aggregate principal amount maturing June 15, 2014, bearing interest at 8.25% per annum payable semi annually (the "2014 Notes").
ABL Revolver
The ABL Revolver provides for revolving credit financing of up to $100.0 million, subject to borrowing base availability, and matures in May 2013. As of February 27, 2011, there were no amounts outstanding under the ABL Revolver. At February 27, 2011, the Company had approximately $61.9 million available under the ABL Revolver which represents the calculated borrowing base reduced by outstanding letters of credit of $16.0 million.
11
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 8: Long-Term Obligations (Continued)
The ABL Revolver agreement requires the Company to maintain a fixed charge coverage ratio in excess of 1.1 to 1.0 in periods of minimum availability where the availability for two consecutive calendar days is less than the greater of 1) 15% of the total commitment under the ABL Revolver and 2) $15.0 million. As of February 27, 2011, the Company was not in a minimum availability period under the ABL Revolver.
Senior Secured Notes
The Senior Notes mature in April 2016 and bear interest at 10.875% per annum payable semi-annually in arrears on April 15 and October 15. The total proceeds received by the Company from the issuance of these notes was $335.9 million, resulting in an original issue discount ("OID") of $14.1 million which will be accreted over the life of the agreement with the related expense recognized as a component of interest expense in the Condensed Consolidated Statement of Operations. For each of the three months ended February 27, 2011 and February 28, 2010, the Company recognized additional interest expense of $0.4 million related to the accretion of the OID.
Convertible PIK Notes
The Convertible Notes mature in July 2016 and bear interest at 8.00% per annum payable semi-annually in arrears on January 15 and July 15. The Company does not pay interest in cash related to the Convertible Notes, but instead increases the amount of the Convertible Notes by an amount equal to the interest payable for the interest period ending immediately prior. The amount of interest payable for each interest period is calculated on the basis of the accreted principal amount as of the first day of such interest period. The Convertible Notes are convertible into shares of the Company's common stock at an initial conversion price of $1.00 per share.
During the three months ended February 27, 2011, there were no conversions of Convertible Notes into common shares.
The Company accounts for the PIK interest on the Convertible Notes in accordance with the applicable FASB authoritative guidance pertaining to convertible instruments and derivative financial instruments indexed to, and potentially settled in, a company's own stock. This guidance requires an allocation of a portion of the issuance amount to an embedded beneficial conversion feature based on the difference between the effective conversion price of the convertible debt and the fair value of the underlying common stock. Upon the January 15th interest payment dates in both fiscal 2011 and 2010, the fair value of the underlying common stock was more than double the conversion price of the Convertible Notes. Therefore, a beneficial conversion feature was recognized for the entire amount of the PIK interest payment of $7.6 million during the three months ended February 27, 2011. The recognition of the beneficial conversion feature resulted in the recognition of a discount, which was reflected as a reduction of the balance of the Convertible Notes with an offsetting increase to additional paid-in capital. The recognized discount will be accreted through interest expense over the remaining term of the Convertible Notes.
The indentures and agreements governing the ABL Revolver, Senior Notes, Convertible Notes and the 2014 Notes also impose certain restrictions including, but not limited to, the payment of dividends or other equity distributions and the incurrence of debt or liens upon the assets of the Company or its
12
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 8: Long-Term Obligations (Continued)
subsidiaries. For instance, the agreement governing Sealy Mattress Company's ABL Revolver contains restrictions on the ability of Sealy Corporation's subsidiaries to pay dividends or make other distributions to Sealy Corporation subject to specified exceptions including the satisfaction of a minimum fixed charge coverage ratio and average daily availability levels. Likewise, under the indentures governing Sealy Mattress Company's Senior Notes and 2014 Notes, Sealy Mattress Company is restricted from paying dividends or making other distributions to Sealy Corporation unless Sealy Mattress Company is able to satisfy certain requirements or use an available exception from the limitation. As of February 27, 2011, Sealy Mattress Company is restricted in distributing the net assets of its subsidiaries in the amount of $239.6 million to its parent due to the provisions in its long-term debt agreements. However, $30.3 million would be available for distribution without restriction. At February 27, 2011, the Company was in compliance with the covenants contained within the related note indentures and agreements.
Note 9: Derivative Instruments and Hedging Strategies
The Company uses hedging contracts to manage the risk of its overall exposure to changes in interest rates, commodity prices and foreign currency exchange rates. All of the Company's designated hedging instruments are considered to be cash flow hedges.
Interest Rate Risk
Prior to the disposition of the European operations, the Company was exposed to interest rate risk associated with fluctuations in the interest rates on its variable interest rate debt. However, the Company now has predominantly fixed rate debt outstanding. In order to manage the risk of variable interest rates prior to this event, the Company had entered into several interest rate swap agreements that converted the debt's variable interest rate to a fixed interest rate. The swap agreements pertaining to the Company's European debt were considered to be economic hedges which were not designated as hedging instruments. The gains and losses on both designated and undesignated swap agreements offset losses and gains on the transactions being hedged. The fair values of the interest rate agreements were estimated as described in Note 10, taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable.
As of February 27, 2011 and November 28, 2010, the Company did not have any outstanding interest rate swap agreements.
Foreign Currency Exposure
The Company is exposed to foreign currency risk related to purchases of materials and certain equipment made in a foreign currency. To manage the risk associated with fluctuations in foreign currencies, the Company enters into foreign currency forward and option contracts. As with its interest rate swap instruments, the Company designates certain of these contracts as hedging instruments and enters into some contracts that are considered to be economic hedges which are not designated as hedging instruments. Whether designated or undesignated, these contracts protect against the reduction in value of forecasted foreign currency cash flows resulting from payments in a foreign currency. The fair values of foreign currency agreements are estimated as described in Note 10, taking into consideration current interest rates and the current creditworthiness of the counterparties or the
13
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 9: Derivative Instruments and Hedging Strategies (Continued)
Company, as applicable. Details of the specific instruments used by the Company to hedge its exposure to foreign currency fluctuations are as follows:
At February 27, 2011, the Company had 51 forward foreign currency contracts and 2 foreign currency option contracts to sell a total of 36.9 million Canadian dollars and receive U.S. dollars at specified exchange rates with expiration dates ranging from March 2011 through February 2012. These hedges were entered into to protect against the fluctuation in the Canadian subsidiary's U.S. dollar denominated purchases of raw materials. Further, the Company had outstanding five foreign currency forward contracts to purchase a total of 1.0 million Swiss francs for U.S. dollars at specified exchange rates with expiration dates ranging from March 2011 through June 2011. These hedges were entered into to protect against the fluctuations in the scheduled payments to be made for certain equipment denominated in Swiss francs. The Company has formally designated these contracts as cash flow hedges, and they are expected to be highly effective in offsetting fluctuations in the forecasted purchases of these raw materials related to changes in the foreign currency exchange rates.
The Company also enters into foreign currency contracts that are not designated as hedges for accounting purposes. The changes in fair value of these foreign currency hedges are included as a part of selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. At February 27, 2011 and November 28, 2010, the Company did not have any outstanding foreign currency contracts that were not designated as hedges for accounting purposes.
At February 27, 2011, the maximum length of time over which the Company is hedging its exposure to the reduction in value of forecasted foreign currency cash flows through foreign currency forward agreements is through February 2012. Over the next 12 months, the Company expects to reclassify $1.3 million of deferred losses from accumulated other comprehensive income to selling, general and administrative expense as related forecasted foreign currency payments are made.
For the three months ended February 27, 2011 and February 28, 2010, recognized foreign currency transaction gains were $0.3 million and $1.2 million, respectively. These gains are recognized in cost of goods sold or selling, general and administrative expenses at the time they occur.
Commodity Price Exposure
The Company is exposed to risk associated with fluctuations in the prices of diesel fuel used in the transportation of its finished product to its customers. To manage this risk, the Company enters into fixed price swap agreements. The Company designates these fixed price swap contracts as hedging instruments. These contracts protect against the reduction in value of forecasted cash flows resulting from the purchases of diesel fuel. The fair values of the fixed price swap agreements are estimated as described in Note 10, taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable. Details of the specific instruments used by the Company to hedge its exposure to foreign currency fluctuations are as follows:
At November 28, 2010, the Company had two fixed price swap contracts outstanding to purchase 0.2 million gallons of diesel fuel at specified prices. These hedges were entered into to protect against the fluctuations in the prices of diesel fuel purchased by certain of the Company's U.S. manufacturing facilities. The Company formally designated these contracts as cash flow hedges, and they are expected
14
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 9: Derivative Instruments and Hedging Strategies (Continued)
to be highly effective in offsetting fluctuations in the forecasted purchases of diesel fuel related to changes in the underlying diesel fuel prices. No such contracts were outstanding at February 27, 2011.
Embedded Derivatives
The Company evaluates its outstanding debt arrangements in accordance with the FASB's authoritative guidance on derivative instruments and hedging, which requires bifurcation of embedded derivative instruments and measurement of fair value for accounting purposes. The Company concluded that the contingent redemption option upon a change of control or a qualifying asset sale within its Senior Notes qualifies as an embedded derivative instrument which should be bundled as a compound embedded derivative and bifurcated from the Senior Notes. Due to the low probability of the occurrence of the contingent events requiring redemption, the fair value of this embedded derivative instrument was determined to be immaterial.
The Company concluded that the floor on the foreign exchange rate related to the payments to be made associated with the lease of its former Brazilian manufacturing facility and the related purchase option qualifies as an embedded derivative instrument that should be bifurcated from the lease agreement and recorded at fair value at the end of each reporting period. As of February 27, 2011 and November 28, 2010, the fair value of this derivative was $0.1 million and $0.4 million, respectively and is recorded as a component of debt issuance costs, net, and other assets in the Consolidated Balance Sheet. The initial fair value of the embedded derivative was recorded as deferred lease income and is being amortized over the term of the lease.
At February 27, 2011 and November 28, 2010, the fair value carrying amount of the Company's derivative instruments was recorded as follows (in thousands):
|
Asset Derivatives | Liability Derivatives | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
February 27, 2011 | February 27, 2011 | ||||||||||
|
Balance Sheet Location |
Fair Value | Balance Sheet Location |
Fair Value | ||||||||
Derivatives designated as hedging instruments |
||||||||||||
Foreign exchange contracts |
Other current assets | $ | 50 | Other current liabilities | $ | (1,310 | ) | |||||
Total derivatives designated as hedging instruments |
50 | (1,310 | ) | |||||||||
Derivatives not designated as hedging instruments |
||||||||||||
Embedded foreign currency derivative |
Other noncurrent assets | 166 | Other noncurrent liabilities | | ||||||||
Total derivatives not designated as hedging instruments |
166 | | ||||||||||
Total derivatives |
$ | 216 | $ | (1,310 | ) | |||||||
15
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 9: Derivative Instruments and Hedging Strategies (Continued)
|
Asset Derivatives | Liability Derivatives | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
November 28, 2010 | November 28, 2010 | ||||||||||
|
Balance Sheet Location |
Fair Value | Balance Sheet Location |
Fair Value | ||||||||
Derivatives designated as hedging instruments |
||||||||||||
Foreign exchange contracts |
Other current assets | $ | 85 | Other current liabilities | $ | (163 | ) | |||||
Commodity fixed price swap contracts |
Other current assets | 44 | Other current liabilities | | ||||||||
Total derivatives designated as hedging instruments |
129 | (163 | ) | |||||||||
Derivatives not designated as hedging instruments: |
||||||||||||
Embedded foreign currency derivative |
Other noncurrent assets | 380 | Other noncurrent liabilities | | ||||||||
Total derivatives |
$ | 509 | $ | (163 | ) | |||||||
The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three months ended February 27, 2011 and February 28, 2010, was as follows (in thousands):
Three Months Ended February 27, 2011 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Derivatives in Designated Cash Flow Hedging Relationships |
Amount of Gain/(Loss) Recognized in OCI on Derivatives (Effective Portion) |
Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount of Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
||||||||||
Diesel fixed price swap contracts |
| Selling, general and administrative expenses |
63 | Selling, general and administrative expenses |
| ||||||||||
Foreign exchange contracts |
(746 | ) | Cost of goods sold |
(106 | ) | Cost of goods sold |
| ||||||||
Total |
$ | (746 | ) | $ | (43 | ) | $ | | |||||||
Three Months Ended February 28, 2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Derivatives in Designated Cash Flow Hedging Relationships |
Amount of Gain/(Loss) Recognized in OCI on Derivatives (Effective Portion) |
Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount of Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
||||||||||
Diesel fixed price swap contracts |
17 | Selling, general and administrative expenses |
| Selling, general and administrative expenses |
16 | ||||||||||
Foreign exchange contracts |
(136 | ) | Selling, general and administrative expenses |
57 | Selling, general and administrative expenses |
| |||||||||
Total |
$ | (119 | ) | $ | 57 | $ | 16 | ||||||||
Three Months Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
|
February 27, 2011 | February 28, 2010 | |||||||
Derivatives Not Designated as Hedging Instruments |
Location of Gain/(Loss) Recognized in Income on Derivatives |
Amount of Gain/(Loss) Recognized in Income on Derivatives |
Amount of Gain/(Loss) Recognized in Income on Derivatives |
|||||||
Interest rate contracts |
(Loss) from discontinued operations | $ | | $ | 30 | |||||
Total |
$ | | $ | 230 | ||||||
16
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 10: Fair Value of Financial Instruments
For assets and liabilities measured at fair value on a recurring basis during the period, the Company uses an income approach to value the assets and liabilities for outstanding interest rate swaps, foreign currency derivative contracts and diesel fixed price swap contracts discussed above. See Note 9. These contracts are valued using an income approach, which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts by using current market information available as of the reporting date such as prevailing interest rates and foreign currency spot and forward rates. We mitigate derivative credit risk by transacting with highly rated counterparties. There were no non-financial assets or liabilities requiring initial measurement or subsequent remeasurement during the first quarter of fiscal 2011 or 2010. The following table provides a summary of the fair values of assets and liabilities (in thousands):
|
|
Fair Value Measurements at February 27, 2011 Using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
February 27, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||
Foreign exchange and commodity derivative assets |
$ | 50 | $ | | $ | 50 | $ | | ||||||
Foreign exchange and commodity derivative liabilities |
(1,310 | ) | | (1,310 | ) | | ||||||||
Embedded foreign currency derivative in lease agreement |
166 | | | 166 | ||||||||||
Total |
$ | (1,094 | ) | $ | | $ | (1,260 | ) | $ | 166 | ||||
|
|
Fair Value Measurements at November 28, 2010 Using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
November 28, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||
Foreign exchange and commodity derivative assets |
$ | 129 | $ | | $ | 129 | $ | | ||||||
Foreign exchange and commodity derivative liabilities |
(163 | ) | | (163 | ) | | ||||||||
Embedded foreign currency derivative in lease agreement |
380 | | | 380 | ||||||||||
Total |
$ | 346 | $ | | $ | (34 | ) | $ | 380 | |||||
17
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 10: Fair Value of Financial Instruments (Continued)
Due to the short maturity of cash and equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value. The carrying amounts of long term debt, based on quoted market prices, at February 27, 2011 were as follows (in thousands):
Senior Secured Notes |
$ | 359,100 | ||
Convertible Notes |
587,154 | |||
Senior Subordinated Notes |
275,669 |
Note 11: Other Income, Net
Other income, net, includes interest income for the three months ended February 27, 2011 and February 28, 2010 of an insignificant amount.
Note 12: Discontinued Operations
In the fourth quarter of fiscal 2010, management divested the assets of its European manufacturing operations in France and Italy and ceased manufacturing operations in Brazil. These businesses have been accounted for as discontinued operations. During the three months ended February 27, 2011, the Company continued the liquidation of certain of its assets related to its Brazil operations. The charges related to these activities were recorded as a component of discontinued operations. The remaining current assets and liabilities of the Brazilian operations reflected within the Consolidated Balance Sheet at February 27, 2011 and November 28, 2010 were immaterial. The Company also recognized additional expenses related to the disposition of its European manufacturing operations which were primarily related to services rendered in connection with the disposition.
The operating results of the discontinued operations in total are summarized below (in thousands):
|
February 27, 2011 | February 28, 2010 | ||||||
---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 27,739 | ||||
Loss before income taxes |
(418 |
) |
(2,399 |
) |
||||
Income tax provision (benefit) |
| 163 | ||||||
Loss from operations of discontinued operations |
(418 | ) | (2,562 | ) | ||||
Loss on disposition of business, net of tax of $164 |
(614 | ) | | |||||
Loss from discontinued operations |
$ | (1,032 | ) | $ | (2,562 | ) | ||
In connection with the sale of the Company's European manufacturing operations, the Company made certain guarantees with respect to the existence of liabilities and deficiencies related to assets as of the closing date that were not reflected in the European business' financial statements as of the closing date. Further, certain guarantees were made with respect to losses or damages incurred by the purchaser related to any misrepresentations or warranties made by the Company, outstanding disputes or judicial proceedings. Such guarantees are limited to an aggregate amount of 3.5 million Euro under the terms of the contract. As of February 27, 2011, the Company knows of no outstanding contingencies that would be covered by this guarantee.
18
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 13: Defined Benefit Pension Expense
The components of net periodic pension cost recognized for the Company's defined benefit pension plans in the U.S. and Canada for the three months ended February 27, 2011 and February 28, 2010 are as follows (in thousands):
|
Three Months Ended | ||||||
---|---|---|---|---|---|---|---|
|
February 27, 2011 | February 28, 2010 | |||||
Service cost |
$ | 199 | $ | 179 | |||
Interest cost |
360 | 337 | |||||
Expected return on plan assets |
(367 | ) | (305 | ) | |||
Amortization of unrecognized losses |
35 | 37 | |||||
Amortization of unrecognized prior service cost |
144 | 129 | |||||
Net periodic pension cost* |
$ | 371 | $ | 377 | |||
Cash contributions |
$ | 220 | $ | 0 | |||
Weighted average expected return on plan assets |
7.85 | % | 7.85 | % | |||
- *
- Net periodic pension cost recognized for the three months ended February 27, 2011 is based upon preliminary estimates pending the final actuarial determination of such costs for fiscal 2010. Similarly, net periodic pension cost for the three months ended February 28, 2010 is based upon preliminary estimates.
The Company expects to make additional cash contributions to the defined benefit pension plans of approximately $1.5 million during the remainder of fiscal 2011.
Note 14: Income Taxes
The Company's effective income tax rates regularly differ from the Federal statutory rate principally because of the effect of non-deductible paid in kind interest, certain foreign tax rate differentials and state and local income taxes. The effective tax rate for the three months ended February 27, 2011 was approximately 62.5%, compared to approximately 51.0%, for the three months ended February 28, 2010. The effective rate for the three months ended February 27, 2011 was higher than the rate for the three months ended February 28, 2010, primarily due to the decrease in income before income taxes.
The Condensed Consolidated Balance Sheet as of February 27, 2011 includes accrued interest of $3.8 million and penalties of $2.2 million due to unrecognized tax benefits. As of November 28, 2010, the Company had recorded accrued interest of $3.7 million and penalties of $2.2 million due to unrecognized tax benefits.
The Company expects the liability for uncertain tax positions to decrease by approximately $1.3 million within the succeeding twelve months due to expiration of income tax statutes of limitations. Federal years open to examination are fiscal year 2006 and forward. State and international jurisdictions remain open to examination for fiscal year 2004 and forward.
19
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 14: Income Taxes (Continued)
Significant judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite the Company's belief that its liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matter. The Company may adjust these liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, or resolution of issues in the courts. These adjustments are recognized as a component of income tax expense entirely in the period in which they are identified. The Company is currently undergoing examinations of certain of its corporate income tax returns by tax authorities. Issues related to certain of these reserves have been presented to the Company and the Company believes that such audits will not result in a material assessment or payment of taxes related to these positions during the one year period following February 27, 2011. The Company also cannot predict when or if any other future tax payments related to these tax positions may occur.
Note 15: Comprehensive Income
Comprehensive income for the three months ended February 27, 2011 and February 28, 2010 was $2.8 million and $4.6 million, respectively. The decrease in comprehensive income for the three months ended February 27, 2011 compared to the three months ended February 28, 2010, was driven primarily by a decrease in net income offset by an increase in gains from foreign exchange translation.
The following table provides the components of accumulated other comprehensive income in the Condensed Consolidated Balance Sheets (in thousands):
|
February 27, 2011 | November 28, 2010 | |||||
---|---|---|---|---|---|---|---|
Unrealized gain (loss) on cash flow hedges, net of tax of $(505) and $(64), respectively |
$ | (793 | ) | $ | (69 | ) | |
Unrealized actuarial loss and prior service credit for pension liability, net of tax of $4,660 and $4,717, respectively |
(7,325 | ) | (7,387 | ) | |||
Accumulated foreign currency translation adjustment |
18,851 | 14,461 | |||||
|
$ | 10,733 | $ | 7,005 | |||
Note 16: Commitments and Contingencies
Commitments
The Company has employment agreements with certain of its executive officers and key employees which, among other things, provide severance benefits to those employees. For the three months ended February 27, 2011, severance costs of $0.2 were recorded as a component of operating income within the accompanying Condensed Consolidated Statements of Operations. For the three months ended February 28, 2010, severance costs of $1.3 million, were recorded as a component of operating income within the accompanying Condensed Consolidated Statements of Operations. Severance benefits of $0.4 million and $0.5 million have been accrued as of February 27, 2011 and November 28, 2010, respectively. The entire liability has been recorded as a component of accrued compensation within the
20
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 16: Commitments and Contingencies (Continued)
accompanying Condensed Consolidated Balance Sheets as of February 27, 2011 and November 28, 2010, respectively.
Contingencies
The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
The Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. The Company and one of its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, the Company and its subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the property in 1997. The Company and its subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with the approval of the New Jersey Department of Environmental Protection and continues to operate a groundwater remediation system on the site. During 2005, with the approval of the New Jersey Department of Environmental Protection, the Company removed and disposed of sediment in Oakeys Brook adjoining the site. The Company continues to monitor ground water at the site. The Company has recorded a reserve as a component of other accrued liabilities and other noncurrent liabilities in the accompanying Condensed Consolidated Balance Sheets as of February 27, 2011 for $2.0 million ($2.1 million prior to discounting at 4.75%) associated with this remediation project.
The Company is also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation voluntarily, it obtained Connecticut Department of Environmental Protection approval of the remediation plan. The Company has completed essentially all soil remediation under the remediation plan and is currently monitoring groundwater at the site. The Company identified cadmium in the ground water at the site and removed the contaminated soil and rock from the site during fiscal 2007. The Company has recorded a liability of approximately $0.1 million associated with the additional work and ongoing monitoring. The Company believes the contamination is attributable to the manufacturing operations of previous, unrelated, unaffiliated occupants of the facility.
The Company cannot predict the ultimate timing or costs of the South Brunswick and Oakville environmental matters. Based on facts currently known, the Company believes that the accruals recorded are adequate and does not believe the resolution of these matters will have a material adverse effect on the financial position or future operations of the Company. However, in the event of an adverse decision by the agencies involved, or an unfavorable result in the New Jersey natural resources damages matter, these matters could have a material adverse effect.
During fiscal 2010, the Company was assessed $8.0 million by the Brazilian government for the failure to provide certain income tax filings. Due to the accumulated net operating losses in this jurisdiction, the Company's exposure is expected to be limited. At February 27, 2011, the Company has
21
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 16: Commitments and Contingencies (Continued)
recorded a reserve of $1.1 million related to the expected requirement to pay certain sales tax, fees and penalties associated with this assessment as a component of accrued expenses.
Note 17: Related Party Transactions
During the three months ended February 27, 2011, the Company incurred costs for consulting services rendered by KKR and Capstone Consulting LLC (a consulting company that works exclusively with KKR's portfolio companies) of $0.4 million. As of February 27, 2011, $0.3 million of this amount was accrued as a component of other accrued liabilities and accounts payable in the accompanying Condensed Consolidated Balance Sheets. We also participate in a lease arrangement with a KKR affiliate for our Clarion facility for a six month initial term with two six month renewal options available. We have received lease income on this property of an insignificant amount during the first quarter of fiscal 2011.
During the three months ended February 28, 2010, the Company incurred costs for consulting services rendered by KKR and Capstone Consulting LLC of $0.5 million. As discussed above, we also participate in a lease arrangement with a KKR affiliate for our Clarion facility. We received lease income on this property of an insignificant amount during the first quarter of fiscal 2010.
Sealy Holding LLC, an affiliate of KKR, holds an aggregate amount of $105.6 million of the Company's Convertible Notes. In connection with the PIK interest payment on the Convertible Notes, the par value of the notes held by KKR was increased by $4.1 million, representing interest from July 15, 2010 to January 15, 2011.
During the first quarter of fiscal 2011 and 2010, the Company's joint ventures made a distribution to the Company of $1.0 million. These amounts have been reflected as a reduction of the investment in these joint ventures in the accompanying Condensed Consolidated Balance Sheets as of February 27, 2011 and November 28, 2010.
Note 18: Geographical Information
Sales by geographic area are as follows (in thousands):
|
Three Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
February 27, 2011 | February 28, 2010 | |||||||
United States |
$ | 238,743 | $ | 246,374 | |||||
Canada |
43,506 | 44,727 | |||||||
Other International |
23,280 | 20,787 | |||||||
Total |
$ | 305,529 | $ | 311,888 | |||||
Total International |
$ | 66,786 | $ | 65,514 |
Long lived assets (principally property, plant and equipment) outside the United States were $34.1 million and $34.4 million as of February 27, 2011 and November 28, 2010, respectively.
22
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 19: Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share for the three months ended:
|
Three Months Ended | ||||||
---|---|---|---|---|---|---|---|
|
February 27, 2011 | February 28, 2010 | |||||
|
(in thousands) |
||||||
Numerator: |
|||||||
Net income from continuing operations, as reported |
$ | 130 | $ | 8,276 | |||
Net income attributable to participating securities |
| (25 | ) | ||||
Interest on convertible notes |
| 3,365 | |||||
Net income from continuing operations available to common shareholders |
$ | 130 | $ | 11,616 | |||
Denominator: |
|||||||
Denominator for basic earnings per shareweighted average shares |
97,816 | 94,524 | |||||
Effect of dilutive securities: |
|||||||
Convertible debt |
| 178,204 | |||||
Stock options |
886 | 1,316 | |||||
Restricted share units |
8,720 | 9,206 | |||||
Other |
406 | 326 | |||||
Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions |
107,828 | 283,576 | |||||
Options and share units (in thousands) not included in the computation of diluted earnings per share because their impact is antidilutive for the three months ended February 27, 2011 are 4,404. Additionally, for the three months ended February 27, 2011, the outstanding Convertible Notes were excluded from the computation of diluted earnings per share since their inclusion would be antidilutive. The Convertible Notes not included in the computation of diluted earnings per share for the three months ended February 27, 2011 convert into a weighted average 192,661 shares (in thousands). Options and share units (in thousands) not included in the calculation of diluted earnings per share because their impact is antidilutive for the three months ended February 28, 2010 are 7,808.
Note 20: Guarantor/Non-Guarantor Financial Information
Sealy Corporation, Sealy Mattress Corporation (a 100% owned subsidiary of Sealy Corporation) and each of the subsidiaries of Sealy Mattress Company (the "Issuer") that guarantee the Senior Notes, the Convertible Notes and the 2014 Notes (the "Guarantor Subsidiaries"), and are 100% owned subsidiaries of the Issuer, have fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to the Senior Notes, the Convertible Notes and the 2014 Notes (collectively, the "Guaranteed Notes") of the Issuer. Substantially all of the Issuer's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided, in part, by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to
23
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 20: Guarantor/Non-Guarantor Financial Information (Continued)
obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Guaranteed Notes. Although holders of the Guaranteed Notes will be direct creditors of the Issuer's principal direct subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non-Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the Guaranteed Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Issuer, including the holders of the Guaranteed Notes.
The following supplemental Condensed Consolidating Financial Statements present:
- 1.
- Condensed
Consolidating Balance Sheets as of February 27, 2011 and November 28, 2010, Condensed Consolidating Statements of Operations for the
three months ended February 27, 2011 and February 28, 2010, and Condensed Consolidating Statements of Cash Flows for the three months ended February 27, 2011 and
February 28, 2010.
- 2.
- Sealy
Corporation, who became a guarantor of the 2014 Notes effective May 25, 2006 and who is guarantor of the Senior Notes and a
co-issuer of the Convertible Notes (as "Guarantor Parent"), Sealy Mattress Corporation (a guarantor), the Issuer, combined Guarantor Subsidiaries and combined Non- Guarantor
Subsidiaries with their investments in subsidiaries accounted for using the equity method (see Note 1).
- 3.
- Elimination entries necessary to consolidate the Guarantor Parent and all of its subsidiaries.
Separate financial statements of each of the Guarantor Subsidiaries are not presented because management believes that these financial statements would not be material to investors.
24
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 20: Guarantor/Non-Guarantor Financial Information (Continued)
SEALY CORPORATION
Supplemental Condensed Consolidating Balance Sheets
February 27, 2011
(in thousands)
|
Sealy Corporation |
Sealy Mattress Corporation |
Sealy Mattress Company |
Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and equivalents |
$ | 1,655 | $ | | $ | 9,234 | $ | 42,221 | $ | 49,280 | $ | | $ | 102,390 | ||||||||||
Accounts receivable, net |
| | 24 | 97,669 | 57,257 | | 154,950 | |||||||||||||||||
Inventories |
| | 1,890 | 47,167 | 8,362 | (203 | ) | 57,216 | ||||||||||||||||
Other current assets and deferred income taxes |
400 | | 775 | 36,881 | 5,003 | | 43,059 | |||||||||||||||||
Total current assets |
2,055 | | 11,923 | 223,938 | 119,902 | (203 | ) | 357,615 | ||||||||||||||||
Property, plant and equipment, at cost |
| | 9,502 | 345,857 | 37,120 | | 392,479 | |||||||||||||||||
Less accumulated depreciation |
| | (5,472 | ) | (197,972 | ) | (20,421 | ) | | (223,865 | ) | |||||||||||||
|
| | 4,030 | 147,885 | 16,699 | | 168,614 | |||||||||||||||||
Other assets: |
||||||||||||||||||||||||
Goodwill |
| | 24,741 | 301,942 | 36,772 | | 363,455 | |||||||||||||||||
Intangible assets, net |
| | | 1,305 | 9 | | 1,314 | |||||||||||||||||
Net investment in subsidiaries |
(177,012 | ) | 239,554 | 383,404 | 128,881 | | (574,827 | ) | | |||||||||||||||
Due from (to) affiliates |
279,046 | (416,566 | ) | 550,209 | (131,087 | ) | (102,820 | ) | (178,782 | ) | | |||||||||||||
Debt issuance costs, net and other assets |
| | 20,953 | 20,563 | 16,585 | | 58,101 | |||||||||||||||||
|
102,034 | (177,012 | ) | 979,307 | 321,604 | (49,454 | ) | (753,609 | ) | 422,870 | ||||||||||||||
Total assets |
$ | 104,089 | $ | (177,012 | ) | $ | 995,260 | $ | 693,427 | $ | 87,147 | $ | (753,812 | ) | $ | 949,099 | ||||||||
Liabilities and Stockholders' (Deficit) Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current portionlong-term obligations |
$ | | $ | | $ | | $ | 1,668 | $ | 488 | $ | | $ | 2,156 | ||||||||||
Accounts payable |
| | 610 | 59,017 | 20,252 | | 79,879 | |||||||||||||||||
Accrued customer incentives and advertising |
| | | 19,657 | 6,761 | | 26,418 | |||||||||||||||||
Accrued compensation |
| | 362 | 17,484 | 2,809 | | 20,655 | |||||||||||||||||
Accrued interest |
| | 1,537 | 15,809 | | | 17,346 | |||||||||||||||||
Other accrued liabilities |
(1 | ) | | 1,660 | 25,759 | 5,819 | | 33,237 | ||||||||||||||||
Total current liabilities |
(1 | ) | | 4,169 | 139,394 | 36,129 | | 179,691 | ||||||||||||||||
Long-term obligations |
178,204 | | 751,848 | 38,151 | | (178,204 | ) | 789,999 | ||||||||||||||||
Other liabilities |
| | | 46,307 | 6,373 | | 52,680 | |||||||||||||||||
Deferred income tax liabilities |
| | (311 | ) | 523 | 631 | | 843 | ||||||||||||||||
Stockholders' equity (deficit) |
(74,114 | ) | (177,012 | ) | 239,554 | 469,052 | 44,014 | (575,608 | ) | (74,114 | ) | |||||||||||||
Total liabilities and stockholders' equity (deficit) |
$ | 104,089 | $ | (177,012 | ) | $ | 995,260 | $ | 693,427 | $ | 87,147 | $ | (753,812 | ) | $ | 949,099 | ||||||||
25
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 20: Guarantor/Non-Guarantor Financial Information (Continued)
SEALY CORPORATION
Supplemental Condensed Consolidating Balance Sheets
November 28, 2010
(in thousands)
|
Sealy Corporation |
Sealy Mattress Corporation |
Sealy Mattress Company |
Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and equivalents |
$ | 1,010 | $ | | $ | 9,234 | $ | 59,108 | $ | 39,903 | $ | | $ | 109,255 | ||||||||||
Accounts receivable, net |
7 | | 23 | 80,202 | 60,546 | | 140,778 | |||||||||||||||||
Inventories |
| | 1,605 | 47,230 | 8,684 | (341 | ) | 57,178 | ||||||||||||||||
Other current assets and deferred income taxes |
410 | | 448 | 32,541 | 5,271 | | 38,670 | |||||||||||||||||
Total current assets |
1,427 | | 11,310 | 219,081 | 114,404 | (341 | ) | 345,881 | ||||||||||||||||
Property, plant and equipment, at cost |
| | 9,452 | 340,077 | 35,941 | | 385,470 | |||||||||||||||||
Less accumulated depreciation |
| | (5,326 | ) | (192,881 | ) | (19,191 | ) | | (217,398 | ) | |||||||||||||
|
| | 4,126 | 147,196 | 16,750 | | 168,072 | |||||||||||||||||
Other assets: |
||||||||||||||||||||||||
Goodwill |
| | 24,741 | 301,942 | 35,275 | | 361,958 | |||||||||||||||||
Intangible assets, net |
| | | 1,377 | 10 | | 1,387 | |||||||||||||||||
Net investment in subsidiaries |
(179,840 | ) | 236,674 | 383,319 | 114,072 | | (554,225 | ) | | |||||||||||||||
Due from (to) affiliates |
272,114 | (416,514 | ) | 547,919 | (124,622 | ) | (97,023 | ) | (181,874 | ) | | |||||||||||||
Debt issuance costs, net and other assets |
| | 22,142 | 20,522 | 16,795 | | 59,459 | |||||||||||||||||
|
92,274 | (179,840 | ) | 978,121 | 313,291 | (44,943 | ) | (736,099 | ) | 422,804 | ||||||||||||||
Total assets |
$ | 93,701 | $ | (179,840 | ) | $ | 993,557 | $ | 679,568 | $ | 86,211 | $ | (736,440 | ) | $ | 936,757 | ||||||||
Liabilities and Stockholders' (Deficit) Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current portionlong-term obligations |
$ | | $ | | $ | | $ | 1,724 | $ | 442 | $ | | $ | 2,166 | ||||||||||
Accounts payable |
| | 446 | 44,406 | 21,655 | | 66,507 | |||||||||||||||||
Accrued customer incentives and advertising |
| | | 24,446 | 10,064 | | 34,510 | |||||||||||||||||
Accrued compensation |
| | 383 | 17,840 | 4,167 | | 22,390 | |||||||||||||||||
Accrued interest |
| | 1,239 | 13,120 | | | 14,359 | |||||||||||||||||
Other accrued liabilities |
(1 | ) | | 530 | 28,198 | 8,471 | | 37,198 | ||||||||||||||||
Total current liabilities |
(1 | ) | | 2,598 | 129,734 | 44,799 | | 177,130 | ||||||||||||||||
Long-term obligations |
181,341 | | 754,603 | 38,481 | | (181,341 | ) | 793,084 | ||||||||||||||||
Other liabilities |
| | | 46,746 | 6,611 | | 53,357 | |||||||||||||||||
Deferred income tax liabilities |
| | (318 | ) | 530 | 613 | | 825 | ||||||||||||||||
Stockholders' equity (deficit) |
(87,639 | ) | (179,840 | ) | 236,674 | 464,077 | 34,188 | (555,099 | ) | (87,639 | ) | |||||||||||||
Total liabilities and stockholders' equity (deficit) |
$ | 93,701 | $ | (179,840 | ) | $ | 993,557 | $ | 679,568 | $ | 86,211 | $ | (736,440 | ) | $ | 936,757 | ||||||||
26
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 20: Guarantor/Non-Guarantor Financial Information (Continued)
SEALY CORPORATION
Supplemental Condensed Consolidating Statements of Operations
Three Months Ended February 27, 2011
(in thousands)
|
Sealy Corporation |
Sealy Mattress Corporation |
Sealy Mattress Company |
Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | | $ | 21,158 | $ | 224,625 | $ | 65,029 | $ | (5,283 | ) | $ | 305,529 | ||||||||
Cost and expenses: |
|||||||||||||||||||||||
Cost of goods sold |
| | 12,130 | 142,655 | 37,661 | (5,421 | ) | 187,025 | |||||||||||||||
Selling, general and administrative |
| | 1,954 | 83,757 | 18,023 | | 103,734 | ||||||||||||||||
Amortization expense |
| | | 72 | | | 72 | ||||||||||||||||
Royalty (income) expense, net |
| | | (4,971 | ) | | | (4,971 | ) | ||||||||||||||
Income from operations |
| | 7,074 | 3,112 | 9,345 | 138 | 19,669 | ||||||||||||||||
Interest expense |
| 77 | 20,645 | 572 | 414 | | 21,708 | ||||||||||||||||
Other (income) expense, net |
| | | | (105 | ) | | (105 | ) | ||||||||||||||
Loss (income) from equity investees |
902 | 850 | 4,370 | | | (6,122 | ) | | |||||||||||||||
Loss (income) from non- guarantor equity investees |
| | | (5,611 | ) | | 5,611 | | |||||||||||||||
Capital charge and intercompany interest allocation |
| | (18,770 | ) | 17,974 | 796 | | | |||||||||||||||
Income (loss) before income taxes |
(902 | ) | (927 | ) | 829 | (9,823 | ) | 8,240 | 649 | (1,934 | ) | ||||||||||||
Income tax provision (benefit) |
| (25 | ) | 1,679 | (5,541 | ) | 2,633 | 45 | (1,209 | ) | |||||||||||||
Equity in earnings of unconsolidated affiliates |
| | | | 855 | | 855 | ||||||||||||||||
Income (loss) from continuing operations |
(902 | ) | (902 | ) | (850 | ) | (4,282 | ) | 6,462 | 604 | 130 | ||||||||||||
Loss from discontinued operations |
| | | (181 | ) | (851 | ) | | (1,032 | ) | |||||||||||||
Net income (loss) |
$ | (902 | ) | $ | (902 | ) | $ | (850 | ) | $ | (4,463 | ) | $ | 5,611 | $ | 604 | $ | (902 | ) | ||||
27
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 20: Guarantor/Non-Guarantor Financial Information (Continued)
SEALY CORPORATION
Supplemental Condensed Consolidating Statements of Operations
Three Months Ended February 28, 2010
(in thousands)
|
Sealy Corporation |
Sealy Mattress Corporation |
Sealy Mattress Company |
Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | | $ | 21,583 | $ | 233,420 | $ | 63,885 | $ | (7,000 | ) | $ | 311,888 | ||||||||
Cost and expenses: |
|||||||||||||||||||||||
Cost of goods sold |
| | 12,927 | 137,342 | 35,647 | (6,910 | ) | 179,006 | |||||||||||||||
Selling, general and administrative |
19 | | 1,959 | 81,101 | 17,210 | | 100,289 | ||||||||||||||||
Amortization of intangibles |
(1 | ) | | | 72 | 1 | | 72 | |||||||||||||||
Royalty (income) expense, net |
(1 | ) | | | (4,121 | ) | | | (4,122 | ) | |||||||||||||
Income from operations |
(17 | ) | | 6,697 | 19,026 | 11,027 | (90 | ) | 36,643 | ||||||||||||||
Interest expense |
1 | 80 | 20,716 | 664 | 272 | | 21,733 | ||||||||||||||||
Other (income) expense, net |
| | | | (50 | ) | | (50 | ) | ||||||||||||||
Loss (income) from equity investees |
(5,693 | ) | (5,710 | ) | (4,667 | ) | | | 16,070 | | |||||||||||||
Loss (income) from non- guarantor equity investees |
| | | (4,422 | ) | | 4,422 | | |||||||||||||||
Capital charge and intercompany interest allocation |
| | (18,856 | ) | 16,620 | 2,236 | | | |||||||||||||||
Income (loss) before income taxes |
5,675 | 5,630 | 9,504 | 6,164 | 8,569 | (20,582 | ) | 14,960 | |||||||||||||||
Income tax expense (benefit) |
71 | (63 | ) | 3,794 | 1,478 | 2,418 | (71 | ) | 7,627 | ||||||||||||||
Equity in earnings of unconsolidated affiliates |
| | | | 943 | | 943 | ||||||||||||||||
Income (loss) from continuing operations |
5,604 | 5,693 | 5,710 | 4,686 | 7,094 | (20,511 | ) | 8,276 | |||||||||||||||
Loss from discontinued operations |
110 | | | | (2,672 | ) | | (2,562 | ) | ||||||||||||||
Net income (loss) |
$ | 5,714 | $ | 5,693 | $ | 5,710 | $ | 4,686 | $ | 4,422 | $ | (20,511 | ) | $ | 5,714 | ||||||||
28
SEALY CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Note 20: Guarantor/Non-Guarantor Financial Information (Continued)