Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following management's discussion and analysis is provided as a supplement to, and should be read in
conjunction with, our Consolidated Financial Statements and accompanying notes included in this filing. Except where the context suggests otherwise, the terms "we," "us" and "our" refer to Sealy
Corporation and its subsidiaries.
On
September 26, 2012, the Company entered into a Merger Agreement with Tempur-Pedic pursuant to which a wholly-owned subsidiary of Tempur-Pedic will merge with and into the
Company, resulting in the Company becoming a subsidiary of Tempur-Pedic See Note 26 to our Consolidated Financial Statements contained within Item 8, "Financial Statements and
Supplementary Data" for more information.
We
have reclassified the financial information for all periods presented below to reflect the operations of our European manufacturing operations in France and Italy and our operations
in Brazil as discontinued operations. See "Results of OperationsDiscontinued Operations" later in this Item 7 for more information. Unless otherwise noted, discussions below
pertain to our continuing operations.
28
2012 Financial Highlights
Revenues for fiscal 2012 were $1,347.9 million, with income from operations of $100.6 million and net income from
continuing operations of $0.8 million. These results were impacted by the following key items:
-
-
Fiscal 2012 was a 53 week year, while fiscal 2011 was a 52 week year. The increase in sales
and gross profit attributable to the 53
rd
week were $37.1 million and $14.5 million, respectively.
-
-
Our U.S. operations experienced a net sales increase of 8.8% and gross profit margins increased 1.8 percentage
points as a percentage of net sales. These results were driven by increased sales of our
Optimum by Sealy Posturepedic
product line, premium-priced Next
Generation
Stearns & Foster
product line and Sealy Brand collection and were partially offset by lower sales of our
Posturepedic
product line.
-
-
Our International operations experienced net sales increases of approximately 12.1%, coupled with gross profit margin
decreases of 1.3 percentage points as a percentage of net sales. The increase in sales was primarily due to increased sales in Canada, Mexico and South America. We also experienced gross margin
erosion in the Canadian market which was partially offset by improvement in Argentina.
-
-
Selling, general, and administrative expenses increased $40.8 million to $455.0 million for
fiscal 2012. As a percentage of sales, these expenses increased to 33.8% of net sales in fiscal 2012 compared to 33.7% of net sales for fiscal 2011. These increases have been
driven by higher spending for national advertising in connection with the promotion of our new
Optimum by Sealy Posturepedic
line of products, increased
compensation costs due to higher projected achievement of incentive targets relative to prior year and higher professional fees incurred during the year related to the pending merger with Tempur-Pedic
International and the acquisition of Comfort Revolution.
-
-
As part of the
Optimum by Sealy Posturepedic
rollout during
fiscal 2012, we further utilized company-owned promotional displays in retail stores to demonstrate the features and specifications of this new product. These displays are capitalized and
amortized over the expected product life. During fiscal 2012, $10.2 million of promotional displays were transferred to various retailers and recorded as assets on our consolidated
balance sheet.
-
-
During the third quarter of fiscal 2012, we obtained a 45% ownership interest in a newly formed company, Comfort
Revolution International, LLC ("Comfort Revolution"), a joint venture with Comfort Revolution, LLC, for a contribution of $10.0 million. Upon formation, Comfort
Revolution, LLC contributed the assets and liabilities of its existing business. Comfort Revolution develops specialty foam and gel bedding products which are believed to complement our
existing product offerings. Due to the difference in Comfort Revolution's fiscal year, which ends on December 31, and the availability of financial statements from Comfort Revolution, the
results of Comfort Revolution are presented on a two month lag. Between June 13, 2012, the acquisition date, and September 30, 2012, the Company recognized revenues and a net loss for
Comfort Revolution of $3.4 million and $2.2 million, respectively.
Business Overview
We manufacture and market a complete line of bedding (innerspring and non-innerspring) products, including mattresses and
box springs, holding leading positions in key market categories such as luxury bedding products and among leading retailers. We believe we are one of the largest bedding manufacturers in the world,
with a wholesale domestic market share of approximately 18.6% in 2011. Our conventional bedding products include the
Sealy
,
Sealy Posturepedic
,
Stearns & Foster
and
Bassett
brands and accounted for approximately 88% of our total domestic net sales for the year ended December 2, 2012. In addition to our innerspring bedding, we also produce a variety of
visco-elastic
29
("memory
foam") and latex foam bedding products. With the introduction of our
Optimum by Sealy Posturepedic
product line in fiscal 2012, we have
seen significant increases in our sales in the specialty bedding category. We distinguish ourselves from our major competitors in part by maintaining our own component parts manufacturing capability
and producing substantially all of our mattress innerspring and latex mattress components requirements.
Our
segments are identified and aggregated based on our organizational structure, which is organized around geographic areas. From a geographical perspective, our operations are
concentrated in the United States, Canada, Mexico, South America and Puerto Rico, with our dominant operations being in the United States. Our foreign subsidiaries contributed 23.1% of our total
revenues during fiscal 2012 compared to 22.6% in fiscal 2011. The increase from the prior year has been driven by sales increases in all of our international operations.
Raw Materials and Commodity Prices
During fiscal 2012, we experienced decreases in the prices of steel as manufacturers are reducing inventories. This trend is
expected to reverse in the beginning of fiscal 2013 as demand for steel products increases. The primary components of polyurethane foam, TDI and Polyol, continue to experience price increases
due to the strength of demand for these products in the market as well as supply constraints due to the shift from oil to natural gas production as the price of oil rises.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements
that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The preparation of financial statements in accordance with
US GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that our management believes are
appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Our management regularly assesses
these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 1 to our Consolidated Financial Statements included in Item 8. We
believe the following accounting estimates are critical to understanding our results of operations and affect the more significant judgments and estimates used in the preparation of our Consolidated
Financial Statements:
Cooperative Advertising, Rebate and Other Promotional Programs
We 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 $275.3 million, $261.4 million and $237.3 million in fiscal 2012,
2011 and 2010, respectively. Of these costs, amounts associated with volume rebates, supply agreement amortization, slotting fees, end consumer rebates and other customer allowances which were
recorded
30
as
a reduction of sales were $132.6 million, $120.4 million and $102.5 million in fiscal 2012, 2011 and 2010, respectively. Amounts recorded as a reduction of sales
in the U.S. were $105.4 million, $99.8 million and $78.7 million, respectively. The costs associated with cooperative advertising were recorded as selling, general and
administrative expenses and were $142.7 million, $141.0 million and $134.8 million in fiscal 2012, 2011 and 2010, respectively.
Allowance for Doubtful Accounts
The credit environment in which our customers operate has stabilized somewhat over the past two years; however, the
continued management of credit risk by financial institutions continues to restrict the availability of credit for mattress retailers. We continue to actively monitor the financial condition of our
customers to determine the potential for any 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
$0.4 million, or approximately 0.0% percent of sales,
in fiscal 2012. Provisions for bad debts recorded in fiscal 2011 and 2010 were $2.3 million (approximately 0.2% of sales) and $2.5 million (approximately 0.2% of
sales), respectively.
Warranties and Product Returns
At the time revenue is recognized, the Company provides for the estimated costs of warranties and reduces revenue for
estimated returns based on historical return experience for warrantable and other product returns. We utilize warranty trends on existing similar product in order to estimate future warranty claims
associated with newly introduced product. Changes in the historical trends of these returns could impact the estimates for future periods.
As
of December 2, 2012 and November 27, 2011, a reserve of $9.8 million and $7.5 million for warrantable product returns is included as a component of other
accrued liabilities and $7.0 million and $6.1 million is included as a component of other noncurrent liabilities within the accompanying Consolidated Balance Sheet, respectively.
During
fiscal 2011, the Company reviewed its computation of reserves for warrantable product returns and refined the calculations of these reserves in order to better predict the
Company's future liability related to these claims. The effect of this change in estimate for warranty claims was to reduce other accrued liabilities and cost of sales by approximately
$3.1 million.
Share-Based Compensation Plans
We have two share-based compensation plans, as described more fully in Note 2 to our Consolidated Financial
Statements included in Item 8. For new awards issued and awards modified, repurchased, or cancelled, the cost is equal to the fair value of the award at the date of the grant, and compensation
expense is recognized for those awards earned over the service period. Certain of the equity awards vest based upon the Company achieving certain Adjusted EBITDA performance targets. During the
service period, management estimates whether or not the Adjusted EBITDA performance targets will be met in order to determine the vesting period for those awards and what amount of compensation cost
should be recognized related to these awards. At the date of grant, we determine the fair value of the awards using the Black-Scholes option pricing formula, the trinomial lattice model or the closing
price of the Company's common stock, as appropriate under the circumstances. Management estimates the period of time the employee will hold the option prior to exercise and the expected volatility of
Sealy Corporation's stock, each of which impacts the fair value of the stock options. The fair value of restricted shares and restricted share units is based upon the closing price of the Company's
common stock as of the grant date. We also estimate the amount of share-based awards that are expected to be forfeited based on the historical forfeiture rates experienced for our outstanding awards.
Self-Insurance Liabilities
We are self-insured for certain losses related to medical claims with excess loss coverage of
$375,000 per claim per year. We also
utilize large deductible policies to insure claims related to general liability, product liability, automobile, and workers' compensation. Our recorded liability represents an estimate of the ultimate
cost of claims incurred as of the balance sheet
31
date.
The estimated workers' compensation liability is discounted and is established based upon analysis of historical data and actuarial estimates, and is reviewed by us and third-party actuaries on
a quarterly basis to ensure that the liability is appropriate. While management believes these estimates are reasonable based on the information currently available, if actual trends, including the
severity or frequency of claims, medical cost inflation, or fluctuations in premiums, differ from our estimates, our results of operations could be impacted. As of December 2, 2012 and
November 27, 2011, $4.2 million and $4.6 million of the recorded liability for workers' compensation was included as a component of other accrued liabilities and
$7.7 million and $7.6 million was included as a component of other noncurrent liabilities within the accompanying Consolidated Balance Sheets, respectively
Impairment of Goodwill
We assess goodwill at least annually for impairment as of the beginning of the fiscal fourth quarter or whenever events or
circumstances indicate that the carrying value of goodwill may not be recoverable from future cash flows. We assess recoverability using several methodologies, including the present value of estimated
future cash flows and comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The analysis is based upon available information
regarding expected future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. If the carrying value of the reporting unit exceeds
the indicated fair value of the reporting unit, a second analysis is performed to allocate the fair value to all assets and liabilities. If, based on the second analysis, it is determined that the
implied fair value of the goodwill of the reporting unit is less than the carrying value, goodwill is considered impaired.
The
total carrying value of our goodwill was $363.2 million and $361.0 million at December 2, 2012 and November 27, 2011, respectively. Based on the results
of our annual impairment testing, the fair value of the reporting units that maintain goodwill balances at December 2, 2012 significantly exceeded their carrying value.
Commitments and Contingencies
We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. A negative
outcome of these matters is considered remote, and management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Income Taxes
We record an income tax valuation allowance when the realization of certain deferred tax assets, including net operating losses, is not
more likely than not. These deferred tax items represent expenses recognized for financial reporting purposes, which may result in tax deductions in the future. Certain judgments, assumptions and
estimates may affect the carrying value of the valuation allowance and income tax expense in the Consolidated Financial Statements. Our net deferred tax assets at December 2, 2012 were
$22.4 million, net of an $18.0 million valuation allowance.
A
valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not be realized.
Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond our control, it is at least reasonably possible that
management's judgment about the need for a valuation allowance for deferred taxes could change in the near term.
Significant
judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite our belief that our 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 matters. We may adjust these liabilities as relevant
circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, 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.
32
Results of Operations
Tabular Information
The following table sets forth our summarized results of operations for fiscal years 2012, 2011 and 2010, expressed in
thousands of dollars as well as a percentage of each year's net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year(1)
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
(percentage of
net sales)
|
|
(in thousands)
|
|
(percentage of
net sales)
|
|
(in thousands)
|
|
(percentage of
net sales)
|
|
Net sales
|
|
$
|
1,347,870
|
|
|
100.0
|
%
|
$
|
1,230,151
|
|
|
100.0
|
%
|
$
|
1,219,471
|
|
|
100.0
|
%
|
Cost of goods sold(2)
|
|
|
808,363
|
|
|
60.0
|
|
|
751,449
|
|
|
61.1
|
|
|
709,971
|
|
|
58.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
539,507
|
|
|
40.0
|
|
|
478,702
|
|
|
38.9
|
|
|
509,500
|
|
|
41.8
|
|
Selling, general and administrative expenses(2)
|
|
|
455,045
|
|
|
33.8
|
|
|
414,235
|
|
|
33.7
|
|
|
398,053
|
|
|
32.6
|
|
Asset impairment loss
|
|
|
827
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
|
678
|
|
|
0.1
|
|
|
289
|
|
|
|
|
|
289
|
|
|
|
|
Restructuring expenses
|
|
|
2,421
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income, net of royalty expense
|
|
|
(20,070
|
)
|
|
(1.5
|
)
|
|
(19,413
|
)
|
|
(1.6
|
)
|
|
(17,529
|
)
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
100,606
|
|
|
7.3
|
|
|
83,591
|
|
|
6.8
|
|
|
128,687
|
|
|
10.6
|
|
Interest expense
|
|
|
89,305
|
|
|
6.6
|
|
|
87,743
|
|
|
7.1
|
|
|
85,617
|
|
|
7.0
|
|
Refinancing and extinguishment of debt
|
|
|
3,748
|
|
|
0.3
|
|
|
1,222
|
|
|
0.1
|
|
|
3,759
|
|
|
0.3
|
|
Other income, net
|
|
|
(605
|
)
|
|
|
|
|
(451
|
)
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
8,158
|
|
|
0.4
|
|
|
(4,923
|
)
|
|
(0.4
|
)
|
|
39,537
|
|
|
3.3
|
|
Income tax provision
|
|
|
12,548
|
|
|
0.9
|
|
|
4,104
|
|
|
0.3
|
|
|
18,488
|
|
|
1.5
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
5,175
|
|
|
0.4
|
|
|
3,371
|
|
|
0.3
|
|
|
3,611
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
785
|
|
|
(0.1
|
)
|
|
(5,656
|
)
|
|
(0.4
|
)
|
|
24,660
|
|
|
2.0
|
|
Loss from discontinued operations
|
|
|
(1,962
|
)
|
|
(0.1
|
)
|
|
(4,232
|
)
|
|
(0.3
|
)
|
|
(38,399
|
)
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,177
|
)
|
|
(0.1
|
)
|
|
(9,888
|
)
|
|
(0.8
|
)
|
|
(13,739
|
)
|
|
(1.1
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
1,187
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
10
|
|
|
|
%
|
$
|
(9,888
|
)
|
|
(0.8
|
)%
|
$
|
(13,739
|
)
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
153.8
|
%
|
|
|
|
|
(83.4
|
)%
|
|
|
|
|
46.8
|
%
|
|
|
|
-
(1)
-
We
use a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal year
ended December 2, 2012 was a 53-week year. The fiscal years ended November 27, 2011 and November 28, 2010 were 52-week years.
-
(2)
-
Included
in our selling, general and administrative expenses for fiscal years 2012, 2011 and 2010 were $76.6 million,
$73.1 million and $67.4 million, respectively, in shipping and handling costs associated with the delivery of finished mattress products to our customers. With respect to these costs,
our cost of goods sold may not be comparable with that reported by other entities.
33
The following table indicates the percentage distribution of our net sales in U.S. dollars throughout our international operations:
Geographic distribution of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year(1)
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
United States
|
|
|
76.9
|
%
|
|
77.4
|
%
|
|
78.0
|
%
|
Canada
|
|
|
14.7
|
|
|
14.8
|
|
|
15.2
|
|
Other
|
|
|
8.4
|
|
|
7.8
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
-
(1)
-
We
use a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal year
ended December 2, 2012 was a 53-week year. The fiscal years ended November 27, 2011 and November 28, 2010 were 52-week years.
The
following table shows our net sales and margin profitability for the major geographic regions of our operations, including local currency results for the significant
international operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year(1)
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
(percentage of
net sales)
|
|
(in thousands)
|
|
(percentage of
net sales)
|
|
(in thousands)
|
|
(percentage of
net sales)
|
|
United States (US Dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,036,433
|
|
|
100.0
|
|
$
|
952,409
|
|
|
100.0
|
|
$
|
951,106
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
622,036
|
|
|
60.0
|
|
|
588,860
|
|
|
61.8
|
|
|
558,607
|
|
|
58.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
414,397
|
|
|
40.0
|
|
$
|
363,549
|
|
|
38.2
|
|
$
|
392,499
|
|
|
41.3
|
|
Total International (US Dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
311,437
|
|
|
100.0
|
|
$
|
277,742
|
|
|
100.0
|
|
$
|
268,365
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
186,327
|
|
|
59.8
|
|
|
162,589
|
|
|
58.5
|
|
|
151,364
|
|
|
56.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
125,110
|
|
|
40.2
|
|
$
|
115,153
|
|
|
41.5
|
|
$
|
117,001
|
|
|
43.6
|
|
Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
198,714
|
|
|
100.0
|
|
$
|
182,350
|
|
|
100.0
|
|
$
|
185,706
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
119,790
|
|
|
60.3
|
|
|
106,069
|
|
|
58.2
|
|
|
102,785
|
|
|
55.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
78,924
|
|
|
39.7
|
|
$
|
76,281
|
|
|
41.8
|
|
$
|
82,921
|
|
|
44.7
|
|
Canadian Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
199,823
|
|
|
100.0
|
|
$
|
180,211
|
|
|
100.0
|
|
$
|
192,713
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
120,429
|
|
|
60.3
|
|
|
104,810
|
|
|
58.2
|
|
|
106,655
|
|
|
55.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
79,394
|
|
|
39.7
|
|
$
|
75,401
|
|
|
41.8
|
|
$
|
86,058
|
|
|
44.7
|
|
Other International (US Dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
112,723
|
|
|
100.0
|
|
$
|
95,392
|
|
|
100.0
|
|
$
|
82,659
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
66,537
|
|
|
59.0
|
|
|
56,520
|
|
|
59.3
|
|
|
48,579
|
|
|
58.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
46,186
|
|
|
41.0
|
|
$
|
38,872
|
|
|
40.7
|
|
$
|
34,080
|
|
|
41.2
|
|
-
(1)
-
We
use a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal year
ended December 2, 2012 was a 53-week year. The fiscal years ended November 27, 2011 and November 28, 2010 were 52-week years.
34
Year Ended December 2, 2012 Compared With Year Ended November 27, 2011
Net Sales.
Our consolidated net sales for the year ended December 2, 2012 were $1,347.9 million, an increase of
$117.7 million,
or 9.6% from the year ended November 27, 2011. Fiscal 2011 was a 52 week year, while fiscal 2012 was a 53 week year. The increase in net sales attributable to the
53
rd
week was approximately $37.1 million. In addition to the impact of the 53
rd
week, we experienced sales increases in all of our major markets.
Domestic
Total U.S. net sales increased $84.0 million to $1,036.4 million from
$952.4 million in fiscal 2011, an increase of 8.8%. Approximately $27.7 million of this increase in net sales was attributable to the 53
rd
week. The remainder
of the U.S. net sales increase was attributable primarily to a 7.6% increase in wholesale average unit selling price while U.S. unit volume remained relatively flat. The improvement in our wholesale
average unit selling price was primarily driven by the success of our
Optimum by Sealy Posturepedic
product line and our Next Generation
Stearns & Foster
product line, both of which sell at higher price points in the market.
Our
innerspring sales for fiscal 2012 increased by 4.2% compared to fiscal 2011. This increase has been primarily driven by the strength of our
Stearns & Foster
product partially offset by
weakness in
Posturepedic
innerspring product. The
success of our
Optimum by Sealy Posturepedic
product line drove a 48.5% increase in the sales of our specialty products for fiscal 2012.
International
International net sales increased $33.7 million, or 12.1% from fiscal 2011 to $311.4 million. Approximately
$9.3 million of this increase in net sales was attributable to the 53
rd
week. The remainder of this net sales increase was primarily attributable to the strong performance
of our South American and Mexico operations where we continue to see steady growth. In Canada, local currency sales increases of 10.9% translated into increases of 9.0% in U.S. dollars due to the
weakening of the Canadian dollar versus the U.S. dollar. Local currency sales increases in our Canadian market were driven by a 10.8% increase in unit volume while average unit selling price remained
flat. The increase in unit volume was due to strategic promotional events.
Gross Profit.
Gross profit for fiscal 2012 was $539.5 million, an increase of $60.8 million compared to
fiscal 2011. The
2012 gross profit includes the impact of the 53
rd
week, which represented $14.5 million. As a percentage of net sales, gross profit in fiscal 2012 increased
1.1 percentage points to 40.0%. The increase as a percentage of net sales was primarily due to increases in gross profit margins in our US operations partially offset by declines in Canada.
U.S. gross profit increased $50.8 million to $414.4 million or 40.0% of net sales, which is an increase of 1.8 percentage points of net sales from the prior year period. The
increase as a percentage of net sales was primarily attributable to operational efficiencies driven by higher sales volumes and improvements in the manufacturing processes which resulted in a
1.5 percentage point increase in U.S. gross profit margin. Additionally, improved pricing and a shift in the mix of our product sales to high priced Next Generation
Stearns & Foster
and
Optimum by Sealy Posturepedic
products resulted in an improvement in our
gross margin by approximately 1.3 percentage points. These improvements were offset by the impact of additional expense recognized related to expected product returns related, primarily, due to
an identified warranty issue with certain foundation units. The local currency gross profit margin in Canada was 39.7% as a percentage of net sales which represents a decrease of 2.1 percentage
points from fiscal 2011. This decrease was primarily driven by the impact of increased sales promotions and higher raw material costs.
Selling, General, and Administrative.
Selling, general, and administrative expenses increased $40.8 million
to $455.0 million for fiscal 2012 compared to $414.2 million for fiscal 2011. A portion of this increase was driven by the inclusion of a 53
rd
week in
fiscal 2012. As a percentage of net sales, selling, general, and administrative expenses were 33.8% for fiscal 2012 compared with 33.7% for
35
fiscal 2011.
The primary changes in selling, general and administrative expenses between fiscal 2012 and 2011 were as follows:
|
|
|
|
|
|
|
(Increase)/
Decrease
|
|
Outbound delivery
|
|
$
|
(3.5
|
)
|
Cooperative advertising/promotional costs
|
|
|
(2.3
|
)
|
Bad debt
|
|
|
1.9
|
|
|
|
|
|
Volume driven variable expenses
|
|
|
(3.9
|
)
|
Operational fixed expenses
|
|
|
(14.2
|
)
|
Product launch costs
|
|
|
(1.6
|
)
|
National advertising
|
|
|
(9.3
|
)
|
Incentive compensation and defined contribution expense
|
|
|
(12.8
|
)
|
|
|
|
|
Fixed operating expenses
|
|
|
(37.9
|
)
|
Non-cash compensation
|
|
|
5.1
|
|
Merger/acquisition costs
|
|
|
(2.5
|
)
|
Other
|
|
|
(1.6
|
)
|
|
|
|
|
Total selling, general and administrative expense change
|
|
$
|
(40.8
|
)
|
|
|
|
|
During 2012,
we increased our level of spending for national advertising in connection with the promotion of our new
Optimum by Sealy
Posturepedic
line of products which drove increases in the related expense. Incentive compensation and defined contribution expense increased based on the change in the
projected achievement of the associated incentive targets relative to prior year. Additionally, we have experienced increases in operational fixed expenses due to higher levels of professional fees
incurred in the current year. Delivery costs have seen increases due to higher diesel prices through much of fiscal 2012.
Royalty Income, net of royalty expense.
Our consolidated royalty income, net of royalty expense, for fiscal 2012 increased
$0.7 million
to $20.1 million from fiscal 2011 primarily due to increased royalties recognized from our Brazil license arrangements.
Interest Expense.
Our consolidated interest expense in fiscal 2012 increased by $1.6 million from the prior year period to
$89.3 million. Our weighted average borrowing costs for fiscal 2012 and 2011 were 11.6% and 11.1%, respectively. Our borrowing cost in 2012 remained relatively consistent
with fiscal 2011 as the reduction of cash interest resulting from our redemptions of Senior Notes during the current year were partially offset by increases in non-cash interest
related to the PIK and beneficial conversion features of our outstanding Convertible Notes.
We
recognize non-cash interest expense related to the PIK interest on our outstanding Convertible Notes and the accretion or amortization of original issue discount and
deferred debt issuance costs. The table below provides a breakout of cash and non-cash interest expense for fiscal 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2012
|
|
2011
|
|
Cash interest expense
|
|
$
|
59,213
|
|
$
|
61,591
|
|
Non-cash interest expense
|
|
|
30,092
|
|
|
26,152
|
|
|
|
|
|
|
|
|
|
$
|
89,305
|
|
$
|
87,743
|
|
|
|
|
|
|
|
Refinancing and extinguishment of debt and interest rate derivatives.
Debt extinguishment and refinancing expenses for fiscal 2012
included
non-cash charges of $1.9 million related to the write-off of debt issuance costs and original issue discount associated with the $35.0 million of Senior Notes
that were repurchased. Also included was a cash charge of $1.1 million which represents the premium that was paid to repurchase these notes.
36
Debt
extinguishment and refinancing expenses for fiscal 2011 included non-cash charges of $0.6 million related to the write-off of debt issuance
costs and original issue discount associated with the $10.0 million of Senior Notes that were repurchased. Also included was a cash charge of $0.3 million which represents the premium
that was paid to repurchase these notes.
Income Tax.
Our effective tax rates for fiscal 2012 and fiscal 2011 were 153.8% and (83.4)%, respectively. The effective rate
for the
fiscal 2012 period increased primarily due to the significance of our permanent tax differences, the most significant of which relates to the non-deductible interest on our
Convertible Notes. In addition, the recognition of expense for withholding taxes attributable to planned repatriation of foreign earnings caused an increase in the effective tax rate.
Discontinued Operations.
During the fourth quarter of fiscal 2010, we divested the assets of our European manufacturing operations
in France
and Italy which represented our Europe segment. Also during the fourth quarter of fiscal 2010, we discontinued our operations in Brazil and transitioned to a license arrangement with third parties in
this market. We accounted for these businesses as discontinued operations, and, accordingly, we have reclassified the results of operations and any losses resulting from disposition for all periods
presented to reflect them as such. Amounts recognized in fiscal 2012 primarily relate to the settlement of certain contingencies related to the sale of our European business unit. Amounts
recognized in fiscal 2011 primarily include charges related to the continued liquidation of certain of the assets related to our Brazil operations as well as charges for services performed in
connection with the discontinuance of these operations.
Year Ended November 27, 2011 Compared With Year Ended November 28, 2010
Net Sales.
Our consolidated net sales for the year ended November 27, 2011 were $1,230.2 million, an increase of
$10.7 million,
or 0.9% from the year ended November 28, 2010. This increase was primarily related to our South American, Mexico and U.S. operations and was partially offset by sales decreases in Canada. Total
U.S. net sales increased $1.3 million to $952.4 million from $951.1 million in fiscal 2010, an increase of 0.1%. The U.S. net sales increase of $1.3 million was
attributable primarily to a 1.1% increase in wholesale unit volume, coupled with a 0.7% decrease in wholesale average unit selling price. The increase in unit volume was primarily attributable to the
performance of our
Sealy
branded and Next Generation
Posturepedic
lines and was partially offset by unit
declines in the
Stearns & Foster
and
Embody
lines. Revenue gains from Next Generation
Posturepedic, Sealy
branded innerspring and
Embody
products were partially offset by declines in
Stearns & Foster
innerspring and
Embody
latex products. International net sales increased
$9.4 million, or 3.5% from fiscal 2010 to $277.7 million. This increase was primarily attributable to the strong performance of our South American and Mexico operations where we
continue to see steady growth. In Canada, local currency sales decreases of 6.5% translated into decreases of 1.8% in U.S. dollars due to the strengthening of the Canadian dollar versus the U.S.
dollar. Local currency sales decreases in our Canadian market were driven by a 2.4% decrease in unit volume and a 4.2% decrease in average unit selling price. The decrease in unit volume was the
result of a weak Canadian retail environment and a shift in the promotional calendar with our major customers which caused lower sales at their retail locations. The decline in average unit selling
price was driven by increases in incentives to our customers to drive higher unit volume in light of the slower retail environment.
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
37
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.
Selling, General, and Administrative.
Selling, general, and administrative expenses increased $16.2 million to $414.2 million
for
fiscal 2011 compared to $398.1 million for fiscal 2010. As a percentage of net sales, selling, general, and administrative expenses were 33.7% for fiscal 2011 compared with 32.6%
for fiscal 2010. The primary changes in selling, general and administrative expenses between fiscal 2011 and 2010 were as follows:
|
|
|
|
|
|
|
(Increase)/
Decrease
|
|
Outbound delivery
|
|
$
|
(5.7
|
)
|
Cooperative advertising/promotional costs
|
|
|
(0.8
|
)
|
Bad debt
|
|
|
0.2
|
|
|
|
|
|
Volume driven variable expenses
|
|
|
(6.3
|
)
|
Product launch costs
|
|
|
(4.2
|
)
|
National advertising
|
|
|
(9.6
|
)
|
Incentive compensation and defined contribution expense
|
|
|
3.5
|
|
Other
|
|
|
(3.6
|
)
|
|
|
|
|
Fixed operating expenses
|
|
|
(13.9
|
)
|
Non-cash compensation
|
|
|
2.6
|
|
Other
|
|
|
1.4
|
|
|
|
|
|
Total selling, general and administrative expense change
|
|
$
|
(16.2
|
)
|
|
|
|
|
The
increases in cooperative advertising/promotional costs, product launch costs and national advertising were significantly impacted in fiscal 2011 by the introduction of our
Next Generation
Posturepedic
line and the acceleration of the rollout of our Next Generation
Stearns &
Foster
product line during the fourth quarter of fiscal 2011. Delivery costs have seen increases due to higher diesel prices through much of fiscal 2011.
Royalty Income, net of royalty expense.
Our consolidated royalty income, net of royalty expense, for fiscal 2011 increased
$1.9 million
to $19.4 million from fiscal 2010 primarily due to increased royalties recognized related to international licenses, including the new Europe and Brazil license arrangements.
Interest Expense.
Our consolidated interest expense in fiscal 2011 increased by $2.1 million from the prior year period to
$87.7 million. Our weighted average borrowing costs for fiscal 2011 and 2010 were 11.1% and 10.7%, respectively. Our borrowing cost in 2011 was unfavorably impacted by
increases in non-cash interest related to the PIK and beneficial conversion features of our outstanding Convertible Notes. This increase was partially offset by decreased cash interest
expense which was primarily driven by the redemption of $10.0 million of outstanding Senior Notes during fiscal 2011.
38
We
recognize non-cash interest expense related to the PIK interest on our outstanding Convertible Notes and the accretion or amortization of original issue discount and
deferred debt issuance costs. The table below provides a breakout of cash and non-cash interest expense for fiscal 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2011
|
|
2010
|
|
Cash interest expense
|
|
$
|
61,591
|
|
$
|
63,121
|
|
Non-cash interest expense
|
|
|
26,152
|
|
|
22,496
|
|
|
|
|
|
|
|
|
|
$
|
87,743
|
|
$
|
85,617
|
|
|
|
|
|
|
|
Refinancing and extinguishment of debt and interest rate derivatives.
Debt extinguishment and refinancing expenses for fiscal 2011
included
non-cash charges of $0.6 million related to the write-off of debt issuance costs and original issue discount associated with the $10.0 million of Senior Notes
that were repurchased. Also included was a cash charge of $0.3 million which represents the premium that was paid to repurchase these notes.
Debt
extinguishment and refinancing expenses for fiscal 2010 included non-cash charges of $2.7 million related to the write-off of debt issuance
costs and original issue discount associated with the $35.0 million of Senior Notes that were repurchased in the period. Also included was a cash charge of $1.1 million which represents
the premium that was paid to repurchase these notes.
Income Tax.
Our effective tax rate for fiscal 2011 and fiscal 2010 was (83.4)% and 46.8%, respectively. The effective rate
for the
fiscal 2011 period decreased primarily due to the consolidated pre-tax net loss sustained by the Company. This decrease was also impacted by increases in non-cash
interest expense which was driven by the accretion of the beneficial conversion features in our Convertible Notes.
Discontinued Operations.
During the fourth quarter of fiscal 2010, we divested the assets of our European manufacturing operations
in France
and Italy which represented our Europe segment. Also during the fourth quarter of fiscal 2010, we discontinued our operations in Brazil and transitioned to a license arrangement with third parties in
this market. We accounted for these businesses as discontinued operations, and, accordingly, we have reclassified the results of operations and any losses resulting from disposition for all periods
presented to reflect them as such. Amounts recognized in fiscal 2011 primarily include charges related to the continued liquidation of certain of the assets related to our Brazil operations as
well as charges for services performed in connection with the discontinuance of these operations. Amounts recognized in fiscal 2010 include an impairment charge of $23.0 million and a
loss on disposal of $2.4 million.
Liquidity and Capital Resources
Principal Sources and Uses of Funds
Our principal source of funds is cash flows from operations. However, we also have the ability to borrow under our asset-based
revolving credit facility (the "Amended ABL Revolver"). Limited borrowings were made against the Amended ABL Revolver during fiscal 2012 during June and July due to the timing of interest
payments under our 2014 Notes and the investment in Comfort Revolution. These borrowings were repaid prior to the end of fiscal 2012. Our principal use of funds consists of operating
expenditures, payments of interest on our senior debt, capital expenditures, and interest payments on our outstanding senior subordinated notes. Capital expenditures totaled $15.9 million for
fiscal 2012. We believe that annual capital expenditure limitations in our current debt agreements will not prevent us from meeting our ongoing capital needs. Our introductions of new products
typically require us to make initial cash investments in inventory, promotional supplies and employee training
39
which
may not be immediately recovered through new product sales. However, we believe that we have sufficient liquidity to absorb such expenditures related to new products and that these expenses will
not have a significant adverse impact on our operating cash flow which we believe to be sufficient to support our operations. At December 2, 2012, we had approximately $50.7 million
available for
borrowing under the Amended ABL Revolver which represents the calculated borrowing base reduced by outstanding letters of credit of $17.4 million. We currently believe that our liquidity is
adequate to meet our anticipated cash requirements. The calculated borrowing base under the Amended ABL Revolver is determined based on our domestic accounts receivable and inventory balances. Our net
weighted average borrowing cost was 11.6%, 11.1% and 10.7% for fiscal 2012, 2011 and 2010, respectively. As of January 24, 2013, we had no borrowings outstanding under the Amended
ABL Revolver. Based on our current cash position and the availability of funds through our Amended ABL Revolver, we believe that we will be able to obtain additional funds as necessary during
fiscal 2013 in order to support our operations. Further, as discussed in Note 12 to the Condensed Consolidated Financial Statements, we entered into a revolving credit agreement with
Comfort Revolution through which we are obligated to provide financing of up to $20.0 million. This obligation may also impact our borrowings on our Amended ABL Revolver in future periods.
Approximately
$85.3 million of our outstanding cash balance at December 2, 2012 was held in foreign jurisdictions. During fiscal 2012, we identified an opportunity
to utilize favorable tax attributes to efficiently repatriate approximately $51.0 million of foreign earnings to the U.S. from our foreign subsidiaries. Such repatriation of foreign cash is
expected to occur in the first quarter of fiscal 2013 and allows us more flexibility in the redemption of our outstanding debt in the U.S. As a result of this decision, we recognized
$4.4 million of additional income tax expense during fiscal 2012 including $3.0 million of deferred tax liabilities on a portion of our undistributed earnings from foreign
operations for which no provision for U.S. federal and/or state income tax and foreign withholding tax had previously been made.
Debt
Our outstanding debt primarily consists of the following: 1) the Amended ABL Revolver; 2) $270.0 million in
aggregate principal amount of Senior Notes; 3) $221.1 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) $268.9 million aggregate principal amount of senior subordinated notes due June 2014, which bear interest at 8.25%
per annum payable semi annually (the "2014 Notes").
At
December 2, 2012 there were no amounts outstanding under the Amended ABL Revolver. During 2012, the Company utilized this facility during the months of June and July due
to the timing of interest payments under our 2014 Notes and the investment in Comfort Revolution. The maximum amount of borrowings under the facility during fiscal 2012 was
$18.0 million. The average amount outstanding under this facility for fiscal 2012 was approximately $0.5 million due to the limited usage of this facility during the year. The
weighted average interest rate paid on such borrowings was 4.25%. The outstanding principal and carrying amounts at December 2, 2012 related to our outstanding notes are as follows:
|
|
|
|
|
|
|
|
|
|
Principal
Amount
|
|
Carrying
Amount
|
|
Senior notes due 2016 (1)
|
|
$
|
270,000
|
|
$
|
263,619
|
|
Convertible notes due 2016 (2)
|
|
|
221,146
|
|
|
194,399
|
|
Senior subordinated notes due 2014
|
|
|
268,945
|
|
|
268,945
|
|
-
(1)
-
The
carrying value of the Senior Notes gives effect to an unamortized original issue discount of $8.9 million.
40
-
(2)
-
The
carrying value of the Convertible Notes includes accrued PIK interest and the effects of the accounting for the beneficial conversion features that were
recognized upon each of the January 15 and July 15 interest payment dates since their issuance. See Note 8 of our Consolidated Financial Statements included in Item 8 for
further details.
Future
interest payments are expected to be paid out of cash flows from operations and borrowings on our Amended ABL Revolver. The borrowing base consists of the following: 1) 85%
of the net amount of eligible accounts receivable and 2) the lesser of (i) 85% of the net orderly liquidation value of eligible inventory or (ii) 75% of the net amount of eligible
inventory. These amounts are reduced by reserves deemed necessary by the security agents for the facility. At December 2, 2012, there were no amounts outstanding under the Amended ABL Revolver.
As
part of our ongoing evaluation of our capital structure, we continually assess opportunities to reduce our debt, which opportunities may from time to time include the redemption or
repurchase of a portion of our Senior Notes, the 2014 Notes or the Convertible Notes to the extent permitted by our debt covenants. During fiscal 2012, 2011 and 2010, the Company
redeemed $35.0 million, $10.0 million and $35.0 million, respectively, of the principal amount of its outstanding Senior Notes at a redemption price of 103% of the principal
amount of the notes, plus accrued and unpaid interest to the redemption date. On January 10, 2013, the Company redeemed an additional $35.0 million of its outstanding Senior Notes at a
redemption price of 103% of the principal amount of the notes or $36.1 million, plus accrued and unpaid interest to the redemption date of $0.9 million.
Our
Board authorized a common stock repurchase program on February 19, 2007 under which we may repurchase up to $100 million of our common stock. As of December 2,
2012, we have repurchased shares for $16.3 million under this program, none of which were repurchased during fiscal 2012 and 2011. From December 2, 2012 through
January 24, 2013, we did not repurchase any additional shares under
this program. We periodically repurchase shares of common stock in order to cover the minimum tax withholding obligations related to the vesting of restricted stock units.
Our
ability to make scheduled payments of principal, or to pay the interest or liquidated damages, if any, on or to refinance our indebtedness, or to fund planned capital expenditures
will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We
will be required to make scheduled principal payments of $4.0 million during the next twelve months, with $1.5 million for our financing obligations and capital leases and the remainder
for debt owed by our international subsidiaries. However, as we continually evaluate our ability to make additional prepayments as permitted under our Amended ABL Revolver agreement and the indentures
governing the Senior Notes, the Convertible Notes and the 2014 Notes, it is possible that we will redeem or repurchase portions of our senior or subordinated debt during that time.
Dividend
Our Amended ABL Revolver agreement and the indentures governing the Senior Notes, the 2014 Notes and the Convertible Notes contain
restrictions on our ability to pay dividends, including a requirement in the Amended ABL Revolver agreement that we meet a minimum fixed charges coverage ratio and restrictions as to the amount
available for payment. Although we meet the minimum fixed charge coverage ratio requirement in our Amended ABL revolver agreement as of December 2, 2012, we do not meet the minimum fixed charge
coverage ratio contained in the indentures governing the Senior Notes, Convertible Notes and 2014 Notes as of December 2, 2012. Our ability to pay a dividend to our common shareholders is
currently limited to $30.0 million under our note indentures and we do not currently expect a dividend will be declared in the first quarter of fiscal 2013.
41
Cash Flow Analysis
The following table summarizes our changes in cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year(1)
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Statement of Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
82,108
|
|
$
|
33,752
|
|
$
|
48,466
|
|
Investing activities
|
|
|
(21,205
|
)
|
|
(22,181
|
)
|
|
(13,589
|
)
|
Financing activities
|
|
|
(46,123
|
)
|
|
(14,829
|
)
|
|
(50,516
|
)
|
Effect of exchange rate changes on cash
|
|
|
5,399
|
|
|
1,978
|
|
|
(6,533
|
)
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
20,179
|
|
|
(1,280
|
)
|
|
(22,172
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
107,975
|
|
|
109,255
|
|
|
131,427
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
128,154
|
|
$
|
107,975
|
|
$
|
109,255
|
|
|
|
|
|
|
|
|
|
-
(1)
-
We
use a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal year
ended December 2, 2012 was a 53-week year. The fiscal years ended November 27, 2011 and November 28, 2010 were 52-week years.
Year Ended December 2, 2012 Compared With Year Ended November 27, 2011
Cash Flows from Operating Activities.
Our cash flow from operations increased $48.3 million to a $82.1 million net source of
cash for
the year ended December 2, 2012, compared to a $33.8 million net source of cash for the year ended November 27, 2011. The increase in net income, excluding non-cash
losses such as impairment charges, was the primary driver of the change in fiscal 2012 as compared with fiscal 2011. Additionally, we have seen improvement in working capital as cash
used for working capital in fiscal 2012 decreased by $32.5 million compared with fiscal 2011. This increase has been driven primarily by increases in accounts payable and accrued
expenses, which have been driven by higher sales levels and expected incentive compensation payments in fiscal 2012.
Cash Flows used in Investing Activities.
Our cash flows used in investing activities decreased approximately $1.0 million from
fiscal 2011 primarily due to lower capital expenditures in fiscal 2012 coupled with approximately $1.7 million of proceeds received from the sale of our existing Phoenix, Arizona
facility as we relocated to a leased facility in that area.
Cash Flows used in Financing Activities.
Our cash flow used in financing activities for the year ended December 2, 2012 was
$46.1 million compared with cash used in financing activities in fiscal 2011 of $14.8 million. This increase has been driven primarily by the level of redemptions of our Senior
Notes in fiscal 2012 compared to fiscal 2011 which included redemptions of $35.0 million and $10.0 million, respectively. Also contributing to this increase was the
repayment of Comfort Revolution's $7.4 million of outstanding debt upon acquisition.
Year Ended November 27, 2011 Compared With Year Ended November 28, 2010
Cash Flows from Operating Activities.
Our cash flow from operations decreased $14.7 million to a $33.8 million net source of
cash for
the year ended November 27, 2011, compared to a $48.5 million net source of cash for the year ended November 28, 2010. The decrease in net income, excluding non-cash
losses such as impairment charges, was the primary driver of the change in fiscal 2011 as compared with fiscal 2010. This decrease has been partially offset by an improvement in working
capital
42
as
cash used for working capital in fiscal 2011 decreased by $13.8 million compared with fiscal 2010. This increase has been driven primarily by decreases in accounts receivable
and inventory, which have been driven by lower sales levels in fiscal 2011.
Cash Flows used in Investing Activities.
Our cash flows used in investing activities increased
approximately $8.6 million from fiscal 2010 primarily due to higher capital expenditures in fiscal 2011 related to equipment purchases used in the production of our Next
Generation
Posturepedic
product.
Cash Flows used in Financing Activities.
Our cash flow used in financing activities for the year ended November 27, 2011 was
$14.8 million compared with cash used in financing activities in fiscal 2010 of $50.5 million. This decrease has been driven primarily by the level of redemptions of our Senior
Notes in fiscal 2011 compared to fiscal 2010 which included redemptions of $10.0 million and $35.0 million, respectively.
Debt Covenants
The covenants contained within our debt agreements are based on what we refer to herein as "Adjusted EBITDA". In the debt agreements
and indentures, Adjusted EBITDA is defined as net income plus interest, taxes, depreciation and amortization adjusted to exclude unusual items and other adjustments permitted in calculating covenant
compliance. Adjusted EBITDA is presented herein as it is a material component of these covenants. Additionally, management uses Adjusted EBITDA to evaluate the Company's operating performance and we
believe that this measure provides useful incremental information to investors regarding our operating performance. While the determination of "unusual items" is subject to interpretation and requires
judgment, we believe the adjustments listed below are in accordance with the covenants. The allowable adjustments to Adjusted EBITDA can differ between debt agreements. Such differences relate
primarily to the inclusion of amounts related to our joint ventures.
Adjusted
EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating
activities as a measure of liquidity. Additionally, it is not intended to be a measure of free cash flow for management's discretionary use, as it does not consider certain cash requirements such as
interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of
other companies.
43
The
following table sets forth a reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA for the years ended December 2, 2012, November 27, 2011, and
November 28, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Net income (loss)
|
|
$
|
(1,177
|
)
|
$
|
(9,888
|
)
|
$
|
(13,739
|
)
|
Interest expense
|
|
|
89,305
|
|
|
87,743
|
|
|
85,617
|
|
Income taxes
|
|
|
12,548
|
|
|
4,104
|
|
|
18,488
|
|
Depreciation and amortization
|
|
|
26,379
|
|
|
24,234
|
|
|
25,664
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
127,054
|
|
|
106,193
|
|
|
116,030
|
|
Adjustments for debt covenants:
|
|
|
|
|
|
|
|
|
|
|
Refinancing charges
|
|
|
3,748
|
|
|
1,222
|
|
|
3,759
|
|
Non-cash compensation
|
|
|
8,117
|
|
|
13,243
|
|
|
15,862
|
|
Severance charges
|
|
|
|
|
|
|
|
|
2,150
|
|
Comfort Revolution acquisition costs
|
|
|
1,158
|
|
|
|
|
|
|
|
Merger costs
|
|
|
2,538
|
|
|
|
|
|
|
|
Restructuring and impairment related charges
|
|
|
2,421
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
1,187
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
1,962
|
|
|
4,232
|
|
|
38,399
|
|
Other (various)(a)
|
|
|
1,948
|
|
|
1,405
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
150,134
|
|
$
|
126,295
|
|
$
|
177,885
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Consists
of various immaterial adjustments.
Our long-term obligations contain various financial tests and covenants but do not require that we meet quarterly financial
ratio targets in order to maintain compliance with the terms of the obligations unless we are in a minimum availability period under the terms of our Amended ABL Revolver.
Our
Amended ABL Revolver requires us to maintain a minimum fixed charge coverage ratio in excess of 1.0 to 1.0 in periods of minimum availability where the availability for two
consecutive calendar days is less than the greater of 1) 12.5% of the borrowing base under the Amended ABL Revolver and 2) $10.0 million. As of December 2, 2012, we were
not in a period of minimum availability and did not have any outstanding borrowings under the Amended ABL Revolver. Non-compliance with the minimum fixed charge coverage ratio in a period
of minimum availability could result in the requirement to immediately repay all amounts outstanding under the Amended ABL Revolver. The fixed charge coverage ratio is defined by the Amended ABL
Revolver agreement as the ratio of Adjusted EBITDA less unfinanced capital expenditures and net cash taxes paid to fixed charges which include cash payments for interest, capital lease obligations,
scheduled principal payments on debt and other restricted payments.
The covenants contained in our debt agreements also restrict our ability to enter into certain transactions (the most significant of
which are summarized below). Our Amended ABL Revolver requires us to meet either (i) an excess availability test of $20.0 million, or (ii) (a) an excess availability of at
least the greater of (x) 17.5% of the lesser of total commitments and the borrowing base and (y) $15.0 million and (b) a minimum fixed charge coverage test of 1.10 to 1.00
in order to make
certain restricted payments including dividend distributions to holders of our common stock, dividends or distributions to the parent company (Sealy Corporation), and debt repayments, subject to
certain
44
exceptions.
The fixed charge coverage ratio is defined by the Amended ABL Revolver agreement as the ratio of Adjusted EBITDA less unfinanced capital expenditures and net cash taxes paid to fixed
charges which include cash payments for interest, capital lease obligations, scheduled principal payments on debt and restricted payments. At December 2, 2012, adjustments to Adjusted EBITDA
for cash taxes paid and unfinanced capital expenditures were $32.5 million. Fixed charges as calculated under the terms of the Amended ABL Revolver agreement were $58.2 million. This
results in a fixed charge coverage ratio of 2.02 to 1.00 at December 2, 2012 under the terms of the Amended ABL Revolver agreement.
The
indentures governing our Senior Notes, Convertible Notes and 2014 Notes also require us to meet a fixed charge coverage ratio of 2.0 to 1.0 in order to incur additional indebtedness
and make certain restricted payments, including dividends or equity distributions, subject to certain exceptions. The fixed charge coverage ratio is defined by the indentures related to these notes as
the ratio of Adjusted EBITDA to fixed charges which include interest expense, and cash dividend payments on certain preferred stock. At December 2, 2012, fixed charges as calculated under the
terms of the indentures governing our Senior Notes, Convertible Notes and 2014 Notes were $82.4 million, resulting in a fixed charge coverage ratio of 1.84 to 1.00.
Although
we meet the minimum fixed charge coverage ratio requirements contained in our Amended ABL Revolver agreement, we do not meet the minimum fixed charge coverage ratio contained in
the indentures governing the Senior Notes, Convertible Notes and 2014 Notes as of December 2, 2012. As such, Sealy Mattress Company and its subsidiaries are limited in their ability to incur
additional new indebtedness and make certain restricted payments, including dividends or equity distributions other than pursuant to specified exceptions. We do not believe that these restrictions
will impact our liquidity or our ability to meet our ongoing capital needs.
As
of and during the fiscal years ended December 2, 2012, November 27, 2011, and November 28, 2010, we were in compliance with the covenants contained in our debt
agreements. These agreements also restrict our ability to pay dividends and repurchase common stock.
Off-Balance Sheet Arrangements
We occupy premises and utilize equipment under operating leases that expire at various dates through 2023. In accordance with
generally accepted accounting principles, the obligations under those leases are not recorded on our balance sheet. Many of these leases provide for payment of certain expenses and contain renewal and
purchase options. During the fiscal years ended December 2, 2012, November 27, 2011, and November 28, 2010, we recognized lease expenses of $20.1 million,
$19.3 million and $19.2 million, respectively.
We
are involved in a group of joint ventures to develop markets for
Sealy
branded products in Asia. These joint ventures are not
considered to be variable interest entities and are therefore not consolidated for financial statement purposes. We account for our interest in the joint ventures under the equity method, and our net
investment of $9.0 million is recorded as a component of other assets including debt issuance costs, net within the Consolidated Balance Sheet at December 2, 2012. We believe that any
possible commitments arising from these joint ventures will not be significant to our consolidated financial position or results of operations.
In
connection with the sale of our European manufacturing operations, we 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 us, outstanding disputes or judicial proceedings. Such guarantees are limited to an aggregate amount of
€1.8 million ($2.3 million) under the terms of the contract. During fiscal 2012, we settled certain outstanding claims related to these guarantees for
€1.8 million ($2.3 million).
45
Contractual Obligations and Commercial Commitments
As previously discussed, our debt at December 2, 2012 consisted of an asset-based revolving credit facility, under which no
amounts were outstanding, $270.0 million of senior notes due 2016, $221.1 million of convertible paid-in kind notes due 2016, $268.9 million outstanding
aggregate principal amount of senior subordinated notes due 2014, $40.0 million due on our financing obligations and an additional $2.6 million of other borrowings, most of which
are owed by our international subsidiaries. The outstanding balance of the Convertible Notes indicated above includes accrued PIK interest and the effects of the accounting for the beneficial
conversion features that were recognized upon each of the January 15
th
and July 15
th
interest payment dates since the issuance of these notes.
See Note 8 of our Consolidated Financial Statements included in Item 8 for further details.
We
periodically engage in various hedging activities in order to mitigate the risk of variability in future cash flows resulting from projected foreign currency and commodity purchase
requirements. Accordingly, we have entered into contractual arrangements for foreign currency forward and option contracts, and fixed price swap agreements for diesel fuel. The related assets and
liabilities associated with the fair value of such derivative instruments are recorded on our balance sheet. Changes in the fair value of these derivatives are recorded in our income statement, except
for those associated with those agreements which have been designated as cash flow hedges for accounting purposes.
Our
contractual obligations and other commercial commitments as of December 2, 2012 are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
After 2017
|
|
Total
Obligations
|
|
Principal maturities of long-term debt
|
|
$
|
4,045
|
|
$
|
270,774
|
|
$
|
1,961
|
|
$
|
460,158
|
|
$
|
2,449
|
|
$
|
30,178
|
|
$
|
769,565
|
|
Projected interest on long-term debt(1)
|
|
|
72,005
|
|
|
51,201
|
|
|
52,686
|
|
|
28,300
|
|
|
1,992
|
|
|
7,675
|
|
|
213,859
|
|
Projected cash flows on derivatives(2)
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268
|
|
Operating leases(3)
|
|
|
12,446
|
|
|
10,799
|
|
|
8,345
|
|
|
6,769
|
|
|
5,155
|
|
|
17,387
|
|
|
60,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,764
|
|
$
|
332,774
|
|
$
|
62,992
|
|
$
|
495,227
|
|
$
|
9,596
|
|
$
|
55,240
|
|
$
|
1,044,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
After 2017
|
|
Total
Commitments
|
|
Standby Letters of Credit(4)
|
|
$
|
17,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,359
|
|
-
(1)
-
$2.6 million
of our outstanding debt at December 2, 2012 is subject to variable interest rates. Interest payments are projected based on rates
in effect at December 2, 2012 assuming no variable rate fluctuations going forward. An increase in the interest rates applicable to the unhedged portion of our variable rate debt by 1% would
result in an insignificant amount of additional annual cash interest expense. Further, these amounts include the paid in kind interest obligation related to our Convertible Notes which does not
represent a cash interest payment.
-
(2)
-
Our
hedging instruments consist of the projected net settlements of our foreign currency and commodity contracts as of December 2, 2012 based on the
expected timing of the net payments to be received under the agreements and have not been included in the above presentation as they do not currently represent obligations of the Company. The fair
value of these instruments can fluctuate based on market conditions.
46
-
(3)
-
Obligations
under operating leases include only projected payments under current lease terms, excluding renewal options and assuming no exercise of any
purchase options.
-
(4)
-
We
issue letters of credit in the ordinary course of business primarily to back our various obligations under workers compensation and other insurance
programs, environmental liabilities, and open positions on certain of our derivative instruments. These obligations will renew automatically on an annual basis unless cancelled per our instructions.
As
discussed in Note 16 to our Consolidated Financial Statements included in Item 8, we have a $16.5 million long term obligation arising from underfunded pension
plans. Future minimum pension funding requirements are not included in the schedule above as they are not available for all periods presented. During fiscal 2013, we estimate that we will make
approximately $2.8 million in contributions to the plans. In fiscal 2012, we contributed $1.9 million into the plans.
There
are no agreements to purchase goods or services with fixed or minimum obligations. The schedule above does not include normal purchases which are made in the ordinary course of
business.
Foreign Operations and Export Sales
We operate three manufacturing and distribution center facilities in Canada, and one each in Mexico, Argentina, and Uruguay. We
participate in a group of joint ventures with our Australian licensee to import, manufacture, distribute and sell
Sealy
branded products in South East
Asia, New Zealand and India. We also export products directly into many small international markets, and have license agreements in Australia, Thailand, Japan, the United Kingdom, Continental European
Union countries, Turkey, Brazil, Columbia, Paraguay, India, South Africa, Israel, Saudi Arabia, Jamaica, Venezuela, Colombia, Honduras and the Dominican Republic. Additionally, we have license
agreements in place with our joint ventures including those in Asia, New Zealand, and India as well as in connection with our joint venture with Comfort Revolution.
During
fiscal 2010, we divested the assets of our European manufacturing operations in France and Italy which represented our Europe segment. Also during 2010, we discontinued our
operations in Brazil and transitioned to a license arrangement with third parties in this market. We accounted for these businesses as discontinued operations, and, accordingly, we have reclassified
the selected financial data for all periods presented to reflect them as such.
Impact of Recently Issued Authoritative Accounting Guidance
In September 2011, the FASB issued authoritative guidance that permits an entity to first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the
two-step goodwill impairment test. The Company will adopt this guidance in connection with its goodwill impairment testing performed in fiscal 2013, but does not expect it to have a
significant impact on its financial statements.
Fiscal Year
We use a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than
December 2. The fiscal year ended December 2, 2012 was a 53-week year. The fiscal years ended November 27, 2011 and November 28, 2010 were 52-week
years.
Forward Looking Statements
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995.
When used in this Annual Report on
Form 10-K, the words "believes," "anticipates," "expects," "intends," "projects" and similar expressions are used to identify forward-looking statements within the meaning of
Private
47
Securities
Litigation Reform Act of 1995. Such forward-looking statements relate to future financial and operation results. Any forward-looking statements contained in this report represent our
management's
current expectations, based on present information and current assumptions, and are thus prospective and subject to risks and uncertainties which could cause actual results to differ materially from
those expressed in such forward-looking statements. Actual results could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited
to:
-
-
a decrease in our business relationship with significant customers;
-
-
the completion of our proposed merger with Tempur-Pedic
-
-
reductions in consumer and business spending;
-
-
fluctuations in costs of raw materials, particularly petroleum-based and steel products;
-
-
the level of competition in the bedding industry, including the increasing market share of non-innerspring
bedding products;
-
-
the effectiveness of our customer subsidies and advertising expenditures;
-
-
product liability claims and an increase in return rates;
-
-
our level of indebtedness and restrictions under our debt agreements;
-
-
our dependence on our information technology infrastructure;
-
-
our relationships with our major suppliers, including any delay or interruption in supply;
-
-
our international operations and licensing arrangements;
-
-
encroachments on our trademarks, patents or other intellectual property;
-
-
the success of new products;
-
-
legal and regulatory requirements, including environmental and health and safety requirements and tax regulations;
-
-
a change or deterioration in our labor relations;
-
-
the seasonality of our business;
-
-
departure of key personnel;
-
-
access to financial credit by our customers, vendors or us;
-
-
the under-funding of our pension plans; and
-
-
other risks and factors identified from time to time in the Company's reports filed with the Securities and Exchange
Commission, or the SEC.
All
forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Annual Report on Form 10-K and are expressly
qualified in their entirety by the cautionary statements include in this Annual Report on Form 10-K. Except as may be required by law, we undertake no obligation to publicly update
or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.
48
Item 8.
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Sealy Corporation
Trinity, North Carolina
We
have audited the accompanying consolidated balance sheets of Sealy Corporation and subsidiaries (the "Company") as of December 2, 2012 and November 27, 2011 and the
related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three fiscal years in the
period ended December 2, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sealy Corporation and subsidiaries as of December 2,
2012 and November 27, 2011 and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 2, 2012, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth therein.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 2, 2012, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 4, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 4, 2013
50
SEALY CORPORATION
Consolidated Balance Sheets
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
December 2,
2012
|
|
November 27,
2011
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
128,154
|
|
$
|
107,975
|
|
Accounts receivable (net of allowance for doubtful accounts, discounts and returns, 2012$29,959; 2011$30,104)
|
|
|
152,619
|
|
|
126,494
|
|
Inventories
|
|
|
72,364
|
|
|
57,002
|
|
Prepaid expenses
|
|
|
31,358
|
|
|
29,275
|
|
Deferred income taxes
|
|
|
21,579
|
|
|
21,349
|
|
|
|
|
|
|
|
Total current assets
|
|
|
406,074
|
|
|
342,095
|
|
|
|
|
|
|
|
Property, plant and equipmentat cost:
|
|
|
|
|
|
|
|
Land
|
|
|
6,761
|
|
|
7,351
|
|
Buildings and improvements
|
|
|
128,039
|
|
|
128,700
|
|
Machinery and equipment
|
|
|
281,345
|
|
|
261,650
|
|
Construction in progress
|
|
|
7,861
|
|
|
8,414
|
|
|
|
|
|
|
|
|
|
|
424,006
|
|
|
406,115
|
|
Less accumulated depreciation
|
|
|
(259,983
|
)
|
|
(239,370
|
)
|
|
|
|
|
|
|
|
|
|
164,023
|
|
|
166,745
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
363,229
|
|
|
361,026
|
|
Other intangiblesnet of accumulated amortization (2012$5,005; 2011$3,496)
|
|
|
14,710
|
|
|
1,116
|
|
Deferred income taxes
|
|
|
3,945
|
|
|
1,772
|
|
Debt issuance costs, net, and other assets
|
|
|
53,364
|
|
|
46,440
|
|
|
|
|
|
|
|
|
|
|
435,248
|
|
|
410,354
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,005,345
|
|
$
|
919,194
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
51
SEALY CORPORATION
Consolidated Balance Sheets (Continued)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
December 2,
2012
|
|
November 27,
2011
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Current portion-long term obligations
|
|
$
|
4,045
|
|
$
|
1,584
|
|
Accounts payable
|
|
|
100,796
|
|
|
68,774
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
Customer incentives and advertising
|
|
|
34,664
|
|
|
26,038
|
|
Compensation
|
|
|
33,065
|
|
|
17,601
|
|
Interest
|
|
|
14,484
|
|
|
14,074
|
|
Warranty
|
|
|
9,785
|
|
|
7,522
|
|
Other
|
|
|
26,128
|
|
|
20,904
|
|
Deferred income taxes
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
225,967
|
|
|
156,497
|
|
|
|
|
|
|
|
Long term obligations, net of current portion
|
|
|
765,521
|
|
|
790,297
|
|
Other noncurrent liabilities
|
|
|
60,249
|
|
|
52,415
|
|
Deferred income taxes
|
|
|
93
|
|
|
549
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
|
11,035
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; Authorized 50,000 shares; Issued, none
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; Authorized 600,000 shares; Issued and outstanding: 2012104,322; 2011100,916
|
|
|
1,045
|
|
|
1,010
|
|
Additional paid-in capital
|
|
|
955,777
|
|
|
935,512
|
|
Treasury stock, at cost: 2012655; 20110
|
|
|
(1,138
|
)
|
|
|
|
Accumulated deficit
|
|
|
(1,016,567
|
)
|
|
(1,016,577
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
3,363
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
(57,520
|
)
|
|
(80,564
|
)
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit
|
|
$
|
1,005,345
|
|
$
|
919,194
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
SEALY CORPORATION
Consolidated Statements of Operations
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 2,
2012
|
|
November 27,
2011
|
|
November 28,
2010
|
|
Net sales
|
|
$
|
1,347,870
|
|
$
|
1,230,151
|
|
$
|
1,219,471
|
|
Cost of goods sold
|
|
|
808,363
|
|
|
751,449
|
|
|
709,971
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
539,507
|
|
|
478,702
|
|
|
509,500
|
|
Selling, general and administrative expenses
|
|
|
455,045
|
|
|
414,235
|
|
|
398,053
|
|
Asset impairment loss
|
|
|
827
|
|
|
|
|
|
|
|
Amortization expense
|
|
|
678
|
|
|
289
|
|
|
289
|
|
Restructuring expenses
|
|
|
2,421
|
|
|
|
|
|
|
|
Royalty income, net of royalty expense
|
|
|
(20,070
|
)
|
|
(19,413
|
)
|
|
(17,529
|
)
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
100,606
|
|
|
83,591
|
|
|
128,687
|
|
Interest expense
|
|
|
89,305
|
|
|
87,743
|
|
|
85,617
|
|
Refinancing and extinguishment of debt
|
|
|
3,748
|
|
|
1,222
|
|
|
3,759
|
|
Other income, net
|
|
|
(605
|
)
|
|
(451
|
)
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
8,158
|
|
|
(4,923
|
)
|
|
39,537
|
|
Income tax provision
|
|
|
12,548
|
|
|
4,104
|
|
|
18,488
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
5,175
|
|
|
3,371
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
785
|
|
|
(5,656
|
)
|
|
24,660
|
|
Loss from discontinued operations
|
|
|
(1,962
|
)
|
|
(4,232
|
)
|
|
(38,399
|
)
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,177
|
)
|
|
(9,888
|
)
|
|
(13,739
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
10
|
|
$
|
(9,888
|
)
|
$
|
(13,739
|
)
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share attributable to common shareholdersBasic
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per common share
|
|
$
|
0.02
|
|
$
|
(0.06
|
)
|
$
|
0.26
|
|
Loss from discontinued operations per common share
|
|
|
(0.02
|
)
|
|
(0.04
|
)
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share attributable to common shareholdersBasic
|
|
$
|
|
|
$
|
(0.10
|
)
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share attributable to common shareholdersDiluted
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per common share
|
|
$
|
0.02
|
|
$
|
(0.06
|
)
|
$
|
0.14
|
|
Loss from discontinued operations per common share
|
|
|
(0.02
|
)
|
|
(0.04
|
)
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share attributable to common shareholdersDiluted
|
|
$
|
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
102,470
|
|
|
99,261
|
|
|
95,934
|
|
Diluted
|
|
|
109,151
|
|
|
99,261
|
|
|
289,857
|
|
See accompanying notes to consolidated financial statements.
53
SEALY CORPORATION
Consolidated Statements of Stockholders' Deficit
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
|
|
Additional
Paid-in
Capital
|
|
Treasury
Stock
|
|
Accumulated
Deficit
|
|
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Total
|
|
Balance at November 29, 2009
|
|
|
|
|
|
94,417
|
|
$
|
947
|
|
$
|
885,064
|
|
|
|
|
$
|
(992,950
|
)
|
$
|
(1,053
|
)
|
$
|
(107,992
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(13,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,739
|
)
|
|
|
|
|
(13,739
|
)
|
Foreign currency translation adjustment
|
|
|
8,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,041
|
|
|
8,041
|
|
Adjustment to defined benefit plan liability, net of tax of $(135)
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549
|
|
|
549
|
|
Change in fair value of cash flow hedges, net of tax of $373
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(532
|
)
|
|
(532
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
15,864
|
|
|
|
|
|
|
|
|
|
|
|
15,864
|
|
Exercise of stock options
|
|
|
|
|
|
391
|
|
|
4
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
296
|
|
Vesting of restricted share units, net
|
|
|
|
|
|
2,768
|
|
|
27
|
|
|
(4,627
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,600
|
)
|
Vesting of restricted shares
|
|
|
|
|
|
112
|
|
|
1
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
Excess tax benefit on options exercised
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
Beneficial conversion feature on Convertible Paid-in-Kind Notes
|
|
|
|
|
|
|
|
|
|
|
|
14,263
|
|
|
|
|
|
|
|
|
|
|
|
14,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 28, 2010
|
|
$
|
(5,681
|
)
|
|
97,688
|
|
$
|
979
|
|
$
|
911,066
|
|
|
|
|
$
|
(1,006,689
|
)
|
$
|
7,005
|
|
$
|
(87,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
|
(9,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,888
|
)
|
|
|
|
|
(9,888
|
)
|
Foreign currency translation adjustment
|
|
|
(5,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,347
|
)
|
|
(5,347
|
)
|
Adjustment to defined benefit plan liability, net of tax of $1,898
|
|
|
(3,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,051
|
)
|
|
(3,051
|
)
|
Change in fair value of cash flow hedges, net of tax of $597
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
884
|
|
|
884
|
|
Loss on termination of interest rate swaps, net of tax of $5,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
13,243
|
|
|
|
|
|
|
|
|
|
|
|
13,243
|
|
Exercise of stock options
|
|
|
|
|
|
373
|
|
|
3
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
630
|
|
Vesting of restricted share units, net
|
|
|
|
|
|
2,799
|
|
|
27
|
|
|
(3,678
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,651
|
)
|
Vesting of restricted shares
|
|
|
|
|
|
56
|
|
|
1
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
Excess tax benefit on share based awards
|
|
|
|
|
|
|
|
|
|
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,077
|
)
|
Beneficial conversion feature on Convertible Paid-in-Kind Notes
|
|
|
|
|
|
|
|
|
|
|
|
15,427
|
|
|
|
|
|
|
|
|
|
|
|
15,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 27, 2011
|
|
$
|
(17,402
|
)
|
|
100,916
|
|
$
|
1,010
|
|
$
|
935,512
|
|
$
|
|
|
$
|
(1,016,577
|
)
|
$
|
(509
|
)
|
$
|
(80,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
10
|
|
Foreign currency translation adjustment
|
|
|
8,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,077
|
|
|
8,077
|
|
Adjustment to defined benefit plan liability, net of tax of $2,003
|
|
|
(3,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,227
|
)
|
|
(3,227
|
)
|
Change in fair value of cash flow hedges, net of tax of $624
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(978
|
)
|
|
(978
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
8,117
|
|
|
|
|
|
|
|
|
|
|
|
8,117
|
|
Exercise of stock options
|
|
|
|
|
|
120
|
|
|
1
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Vesting of restricted share units, net
|
|
|
|
|
|
3,286
|
|
|
34
|
|
|
(3,093
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,059
|
)
|
Treasury shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
1,138
|
|
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
Excess tax benefit on share based awards
|
|
|
|
|
|
|
|
|
|
|
|
(768
|
)
|
|
|
|
|
|
|
|
|
|
|
(768
|
)
|
Beneficial conversion features on Convertible Paid in Kind Notes
|
|
|
|
|
|
|
|
|
|
|
|
14,768
|
|
|
|
|
|
|
|
|
|
|
|
14,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 2, 2012
|
|
$
|
3,882
|
|
|
104,322
|
|
$
|
1,045
|
|
$
|
955,777
|
|
$
|
(1,138
|
)
|
$
|
(1,016,567
|
)
|
$
|
3,363
|
|
$
|
(57,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
SEALY CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 2,
2012
|
|
November 27,
2011
|
|
November 28,
2010
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,177
|
)
|
$
|
(9,888
|
)
|
$
|
(13,739
|
)
|
Adjustments to reconcile net income to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
26,379
|
|
|
24,234
|
|
|
28,676
|
|
Deferred income taxes
|
|
|
1,646
|
|
|
1,905
|
|
|
1,121
|
|
Amortization of deferred gain on sale-leaseback
|
|
|
(49
|
)
|
|
(624
|
)
|
|
(646
|
)
|
Paid in kind interest on convertible notes
|
|
|
24,539
|
|
|
19,994
|
|
|
16,109
|
|
Amortization of discount on new senior secured notes
|
|
|
1,578
|
|
|
1,485
|
|
|
1,431
|
|
Amortization of debt issuance costs and other
|
|
|
3,975
|
|
|
4,673
|
|
|
4,750
|
|
Impairment charges
|
|
|
827
|
|
|
288
|
|
|
22,963
|
|
Share-based compensation
|
|
|
8,117
|
|
|
13,243
|
|
|
15,864
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
|
|
|
|
|
|
(417
|
)
|
Loss (gain) on sale of assets
|
|
|
327
|
|
|
(215
|
)
|
|
260
|
|
Write-off of debt issuance costs related to debt extinguishments
|
|
|
1,862
|
|
|
643
|
|
|
2,709
|
|
Loss on repurchase of senior notes
|
|
|
1,050
|
|
|
300
|
|
|
1,050
|
|
Dividends received from unconsolidated affiliates
|
|
|
6,500
|
|
|
1,011
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(5,175
|
)
|
|
(3,371
|
)
|
|
|
|
Loss on disposition of subsidiary
|
|
|
|
|
|
206
|
|
|
2,399
|
|
Other, net
|
|
|
(2,850
|
)
|
|
(2,217
|
)
|
|
2,618
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(20,332
|
)
|
|
10,296
|
|
|
(3,226
|
)
|
Inventories
|
|
|
(20,302
|
)
|
|
(666
|
)
|
|
(12,115
|
)
|
Other current assets
|
|
|
(4,654
|
)
|
|
(6,418
|
)
|
|
(3,628
|
)
|
Other assets
|
|
|
(1,495
|
)
|
|
4,271
|
|
|
(3,791
|
)
|
Accounts payable
|
|
|
29,856
|
|
|
4,774
|
|
|
(4,873
|
)
|
Accrued expenses
|
|
|
28,769
|
|
|
(24,382
|
)
|
|
(8,711
|
)
|
Other liabilities
|
|
|
2,717
|
|
|
(5,790
|
)
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
82,108
|
|
|
33,752
|
|
|
48,466
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(15,914
|
)
|
|
(22,408
|
)
|
|
(16,578
|
)
|
Acquisition of Comfort Revolution, net of cash acquired of $159(1)
|
|
|
159
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
2,383
|
|
|
227
|
|
|
124
|
|
Net proceeds (outflow) from disposition of subsidiary
|
|
|
|
|
|
|
|
|
(340
|
)
|
Advances to Comfort Revolution
|
|
|
(7,833
|
)
|
|
|
|
|
|
|
Repayments of loans and capital from unconsolidated affiliate
|
|
|
|
|
|
|
|
|
3,205
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(21,205
|
)
|
|
(22,181
|
)
|
|
(13,589
|
)
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term obligations
|
|
|
5,236
|
|
|
3,387
|
|
|
4,702
|
|
Repayments of long-term obligations
|
|
|
(11,446
|
)
|
|
(4,619
|
)
|
|
(15,068
|
)
|
Repayment of senior secured notes, including premium of $1,050, $300 and $1,050
|
|
|
(36,050
|
)
|
|
(10,300
|
)
|
|
(36,050
|
)
|
Borrowings under revolving credit facilities
|
|
|
29,000
|
|
|
|
|
|
|
|
Repayments of revolving credit facilities
|
|
|
(29,000
|
)
|
|
|
|
|
|
|
Repurchase of common stock associated with vesting of employee share-based awards
|
|
|
(3,059
|
)
|
|
(3,746
|
)
|
|
(4,806
|
)
|
Exercise of employee stock options
|
|
|
104
|
|
|
630
|
|
|
714
|
|
Debt issuance costs
|
|
|
(908
|
)
|
|
(147
|
)
|
|
|
|
Other
|
|
|
|
|
|
(34
|
)
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(46,123
|
)
|
|
(14,829
|
)
|
|
(50,516
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
5,399
|
|
|
1,978
|
|
|
(6,533
|
)
|
|
|
|
|
|
|
|
|
Change in cash and equivalents
|
|
|
20,179
|
|
|
(1,280
|
)
|
|
(22,172
|
)
|
Cash and equivalents:
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
107,975
|
|
|
109,255
|
|
|
131,427
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
128,154
|
|
$
|
107,975
|
|
$
|
109,255
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
Taxes paid (net of tax refunds of $3,157, $434 and $5 in fiscal 2012, 2011 and 2010, respectively)
|
|
$
|
10,487
|
|
$
|
16,198
|
|
$
|
20,069
|
|
Interest paid
|
|
$
|
58,803
|
|
$
|
61,875
|
|
$
|
66,071
|
|
Noncash investing transaction:
|
|
|
|
|
|
|
|
|
|
|
Extension of capital lease
|
|
$
|
|
|
$
|
2,181
|
|
$
|
|
|
Promotional displays transferred to property, plant and equipment
|
|
$
|
10,131
|
|
$
|
|
|
$
|
|
|
Cash contributed to Comfort Revolution for initial investment
|
|
$
|
10,000
|
|
$
|
|
|
$
|
|
|
See accompanying notes to consolidated financial statements.
55
SEALY CORPORATION
Notes To Consolidated Financial Statements
Note 1:
Basis of Presentation and Significant Accounting Policies
Business
Sealy Corporation and its subsidiaries (the "Company") are engaged in the consumer products business and manufacture, distribute and
sell conventional bedding products including mattresses and box springs, as well as specialty bedding products which include latex and visco-elastic mattresses. The Company's products are manufactured
in a number of countries in North and South America. Substantially all of the Company's trade accounts receivable are from retail customers. The Company also licenses its brands in domestic and
international markets and receives royalty income from these arrangements. Further, the Company participates in joint ventures which manufacture and distribute products under its brand names in
various Asian markets.
Basis of Presentation and Principles of Consolidation
The Consolidated Financial Statements include the accounts of Sealy Corporation, its 100%-owned subsidiary companies and a 45% owned
subsidiary as of June 13, 2012 as noted below. Intercompany transactions are eliminated. The equity method of accounting is used for joint ventures and investments in associated companies over
which the Company has significant influence, but does not have effective control and consolidation is not otherwise required under the Financial Accounting Standards Board's (the "FASB") authoritative
guidance surrounding the consolidation of variable interest entities ("VIE"). Significant influence is generally deemed to exist when the Company has an ownership interest in the voting stock of the
investee of between 20% and 50%, although other factors, such as representation on the investee's Board of Directors, voting rights and the impact of commercial arrangements, are
considered in determining whether the equity
method of accounting is appropriate. The Company's equity in the net income and losses of these investments is reported in selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations. Also, based on triggering events, the Company assesses whether it has any primary beneficial interests in any VIE which would require consolidation of such entity.
On
September 26, 2012, the Company entered into a Merger Agreement with Tempur-Pedic International, Inc. ("Tempur-Pedic") pursuant to which a wholly-owned subsidiary of
Tempur-Pedic will merge with and into the Company, resulting in the Company becoming a subsidiary of Tempur-Pedic (the "Merger"). In connection with the Merger, each share of the Company's common
stock issued and outstanding immediately prior to the Merger will be converted into the right to receive $2.20 per share in cash (the "Merger Consideration"). As part of the transaction, it is
anticipated that the Company's outstanding senior and subordinated notes will also be redeemed in accordance with the provisions of the related note indentures. The proposed merger has been approved
by the Board of Directors of both companies and remains subject to approval by the Company's stockholders, as well as certain additional conditions and approvals of various regulatory authorities.
There are no assurances that the Merger with Tempur-Pedic will be consummated. See Note 26 for further information on this Merger Agreement.
On
June 13, 2012, the Company acquired a 45% ownership interest in Comfort Revolution International, LLC ("Comfort Revolution"), a joint venture with Comfort
Revolution, LLC ("CR Member"). Upon review of the FASB authoritative guidance for consolidation, the Company determined that Comfort Revolution constitutes a VIE for which the Company is
considered to be the primary beneficiary due to the Company's disproportionate share of the economic risk associated with its equity contribution and debt financing and other factors that were
considered in the related-party
56
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
analysis
surrounding the identification of the primary beneficiary. As of December 2, 2012, the Company had recorded net assets of $9.0 million within the accompanying Condensed
Consolidated Balance Sheets related to Comfort Revolution. These assets are only able to be used to settle obligations of Comfort Revolution. Further, the creditors of Comfort Revolution do not have
recourse to the assets of the Company. Since the Company is considered to be the primary beneficiary, the financial statements of Comfort Revolution are consolidated herein.
Due
to the difference in Comfort Revolution's fiscal year, which ends on December 31, and the availability of financial statements from Comfort Revolution, the results of Comfort
Revolution are presented on a two month lag. As such, for fiscal 2012, the results of Comfort Revolution are included from the acquisition date through September 30, 2012. Comfort
Revolution borrowed $7.8 million under its outstanding revolving credit facility with the Company between September 30, 2012 and December 2, 2012. This amount is reflected in the
Company's consolidated balance sheet as of December 2, 2012 as a component of deferred financing costs, net and other assets. The $7.8 million was utilized by Comfort
Revolution primarily to fund working capital requirements and capital expenditures for its manufacturing facility.
As
discussed in Note 13, in November 2010, the Company divested its European manufacturing operations in France and Italy which represented its Europe segment. The Company
also discontinued its operations in Brazil in the fourth quarter of fiscal 2010. In both of these markets, the Company has transitioned to a license arrangement with third parties. We accounted
for these businesses as discontinued operations, and, accordingly, we have reclassified the Consolidated Statements of Operations for all periods presented to reflect them as such. The 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
December 2, 2012, affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") controlled approximately 44.7% of the issued and outstanding common stock of the
Company.
Significant
accounting policies used in the preparation of the Consolidated Financial Statements are summarized below.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than
December 2. The fiscal year ended December 2, 2012 was a 53-week year. The fiscal years ended November 27, 2011, and November 28, 2010 were 52-week
years.
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 Company adopted the portion of this guidance that requires a gross reporting of purchases, sales, issuance and settlements of assets and liabilities measured
using Level 3 fair value measurements in the first quarter of fiscal 2012. The adoption of this guidance did not have a significant impact on the financial statements due to the
immateriality of the Company's assets and liabilities measured using a Level 3 fair value measurement.
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
57
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
Company
adopted this guidance in the first quarter of fiscal 2012. The adoption of this guidance did not have a significant impact on the financial statements of the Company due to the
conclusion that it is more likely than not that the goodwill of reporting units with negative carrying values are not impaired.
In
May 2011, the FASB issued authoritative guidance to improve the consistency of fair value measurement and disclosure requirements between US GAAP and International
Financial Reporting Standards ("IFRS"). The provisions of this guidance change certain of the fair value principles related to the highest and best use premise, the consideration of blockage factors
and other premiums and discounts, the measurement of financial instruments held in a portfolio and instruments classified within shareholders' equity. Further, the guidance provides additional
disclosure requirements surrounding Level 3 fair value measurements, the uses of nonfinancial assets in certain circumstances and identification of the level in the fair value hierarchy used
for assets and liabilities which are not recorded at fair value, but where fair value is disclosed. The Company adopted this guidance in the second quarter of fiscal 2012. The adoption of this
guidance did not have a significant impact on the Company's financial statements.
In
June 2011, the FASB issued authoritative guidance surrounding the presentation of comprehensive income, with an objective of increasing the prominence of items reported in
other comprehensive income ("OCI"). This guidance provides entities with the option to present the total of comprehensive income, the components of net income and the components of OCI in either a
single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, entities must present on the face of the financial statement, items reclassified from
OCI to net income in the section of the financial statement where the components of net income and OCI are presented, regardless of the option selected to present comprehensive income. The guidance is
applicable retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early adoption is permitted. The Company will
adopt this guidance in the first quarter of fiscal 2013, and is currently evaluating its options for the presentation of comprehensive income upon adoption.
In
September 2011, the FASB issued authoritative guidance that permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company will adopt this
guidance in connection with its goodwill impairment testing performed in fiscal 2013, but does not expect it to have a significant impact on its financial statements.
In
September 2011, the FASB issued authoritative guidance that increases the Company's disclosures surrounding the multiemployer pension plans in which it participates by
providing users with additional information to 1) assess the potential future cash flow implications relating to the Company's participation in these plans and 2) indicate the financial
health of all of the significant plans in which the Company participates. The Company adopted this guidance in the fourth quarter of fiscal 2012. The adoption of this guidance required the
Company to include additional disclosures surrounding its participation in multiemployer pension plans.
Revenue Recognition
The Company recognizes revenue when realized or realizable and earned, which is when the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred; the sales
58
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
price
is fixed or determinable; and collectibility is reasonably assured. The recognition criteria are met when title and risk of loss have transferred from the Company to the buyer, which is upon
delivery to the customer sites or as determined by legal requirements in foreign jurisdictions. At the time revenue is recognized, the Company provides for the estimated costs of warranties and
reduces revenue for estimated returns and cash discounts. The Company also records reductions to revenue for customer incentive programs offered including volume discounts, promotional allowances,
floor sample discounts, commissions paid to retail associates, slotting fees and supply agreement amortization, and records liabilities pursuant to these agreements. The Company periodically assesses
these liabilities based on actual sales and claims to determine whether the customers will meet the requirements to receive rebate funds. The Company generally negotiates these agreements on a
customer-by-customer basis. Some of these agreements extend over several periods and are linked with supply agreements. Accordingly, $132.6 million,
$120.4 million, and $102.5 million were recorded as a reduction of revenue for fiscal 2012, 2011, and 2010, respectively.
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 receivables related to leasing activities were not
significant to either period. We recorded a bad debt provision of $0.4 million, $2.3 million and $2.5 million in fiscal 2012, 2011 and 2010,
respectively which is recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations.
Product Delivery Costs
Included in the Company's selling, general and administrative expenses in the consolidated statement of operations for
fiscal 2012, 2011 and 2010 were $76.6 million, $73.1 million and $67.4 million, respectively, in shipping and handling costs associated with the delivery of finished
mattress products to its customers, including approximately $2.9 million, $6.1 million and $5.7 million, respectively, of costs associated with internal transfers between plant
locations. Since we include these costs within selling, general and administrative expenses, our cost of goods sold may not be comparable with that reported by other entities.
Concentrations of Credit and Other Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and
cash equivalents, receivables, foreign currency forward and option contracts and interest rate swap arrangements. The Company places its cash and cash equivalents with major financial institutions and
limits the amount of credit exposure to any one institution.
The
Company's accounts receivable arise from sales to numerous customers in a variety of markets and geographies around the world. Receivables arising from these sales are generally not
collateralized. The Company's customers include furniture stores, national mass merchandisers, specialty sleep shops, department stores, contract customers and other stores. The top five customers
accounted for approximately 36.1%, 39.2% and 36.9% of the Company's net sales for the years ended December 2, 2012, November 27, 2011 and November 28, 2010, respectively. One
customer accounted for more than 10% of the Company's net sales in fiscal 2012, 2011 and 2010. The Company performs ongoing credit
59
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
evaluations
of its customers' financial conditions and maintains reserves for estimated credit losses. Such losses, in the aggregate, have not materially exceeded management's estimates.
The
counterparties to the Company's foreign currency and commodity-based fixed price swap agreements are major financial institutions. At December 2, 2012, the Company had not
experienced non-performance by any of its counterparties nor does the Company expect there to be significant non-performance risks associated with its derivative
counterparties.
The
Company is presently dependent upon a single supplier for certain polyurethane foam components in its mattress units. Such components are purchased under a supply agreement, and are
manufactured in accordance with proprietary process designs exclusive to the supplier. The Company has incorporated these methods of construction into many of its branded products. The Company
continually looks to develop alternative supply sources, allowing acquisition of similar component parts which meet the functional requirement of various product lines. The Company also purchases a
significant portion of its box spring components from a single supplier and manufactures only a minor amount of these parts. The Company is also dependent on a single supplier for the visco-elastic
components and assembly of its
Embody
and
Optimum
specialty product lines. The related product in which
these components and assembly processes are used does not represent a significant portion of overall sales. Except for its dependence regarding certain polyurethane foam and visco-elastic components
and assembly of its
Embody
and
Optimum
specialty product lines, the Company does not consider itself to
be dependent upon any single outside vendor as a source of supply to its conventional bedding or specialty businesses, and the Company believes that sufficient sources of supply for the same, similar
or alternative components are available.
Approximately
68% of the employees at the Company's 25 North American plants are represented by various labor unions with separate collective bargaining agreements. The Company's current
collective bargaining agreements, which are typically three years in length, expire at various times beginning in fiscal 2013 through 2015. Of the employees covered by collective
bargaining agreements, approximately 49% are under contracts expiring in fiscal 2013. Certain employees at the Company's international facilities are also covered by collective bargaining
agreements, which expire at various terms between fiscal 2013 and 2015.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the amount of assets and liabilities and disclosures on contingent assets and liabilities at year end and the reported amounts of
revenue and expenses during the reporting period. Actual results may differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination
of the accrued warranty obligation, allowance for doubtful accounts, discounts and returns, cooperative advertising and promotional accruals, share-based compensation, valuation of goodwill and
intangible assets, reserve for workers' compensation claims, benefit plan obligations and expenses, environmental contingencies and tax assets, liabilities and expense.
See
"Income Taxes" below regarding estimates associated with the Company's uncertain tax positions and valuation allowances against net deferred tax assets.
See
"Warranties" below regarding the effect of changes in estimates associated with the Company's reserve for product warranties.
60
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
See
"Self-Insurance" below regarding estimates associated with the Company's reserve for workers' compensation claims.
Foreign Currency
Subsidiaries located outside the U.S. use the local currency as the functional currency. Assets and liabilities are translated at
exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to a separate
component of stockholders' deficit (accumulated other comprehensive income (loss)) and are not tax effected since they relate to investments which are permanent in nature. Foreign currency transaction
gains and losses are recognized in cost of goods sold or selling, general and administrative expenses at the time they occur. The Company recorded foreign currency transaction losses of
$0.4 million, $0.7 million and $4.2 million in fiscal 2012, 2011 and 2010, respectively.
Cash and Equivalents
The Company considers all highly liquid debt instruments with an original maturity at the time of purchase of three months or less to
be cash equivalents. Included as cash equivalents are money market funds that are stated at cost, which approximates market value.
Checks Issued In Excess of Related Bank Account Balances
Accounts payable include book overdrafts in the amounts of $8.9 million and $12.4 million at December 2, 2012 and
November 27, 2011, respectively. The change in the reclassified amount of checks issued in excess of the related bank account balance on our books (which does not represent a negative bank
account balance) is included in cash flows from operations in the statements of cash flows.
Inventory
The cost of inventories is determined by the "first-in, first-out" method, which approximates current cost. The
cost of inventories includes raw materials, direct labor and manufacturing overhead costs. The Company adjusts the basis of its inventory value for excess, obsolete or slow moving inventory based on
changes in customer demand, technology developments or other economic factors.
Supply Agreements
The Company from time to time enters into long term supply agreements with its customers to sell its branded products to customers in
exchange for minimum sales volume or a minimum percentage of the customer's sales or space on the retail floor. Such agreements generally cover a period of two to five years. In these long term
agreements, the Company reserves the right to pass on its cost increases to its customers. Other costs such as transportation and warranty costs are factored into the wholesale price of the Company's
products and passed on to the customer. Initial cash outlays by the Company for such agreements are capitalized and amortized generally as a reduction of sales over the life of the contract. The
majority of these cash outlays are ratably recoverable upon contract termination. Such capitalized amounts are included in "Prepaid expenses" and "Debt issuance costs, net, and other assets" in the
Company's Consolidated Balance Sheets.
61
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation expense is provided based on historical
cost and estimated useful lives ranging from approximately twenty to forty years for buildings and building improvements and three to fifteen years for machinery and equipment. The Company uses the
straight-line method for calculating the provision for depreciation. Depreciation expense for fiscal 2012, 2011 and 2010 was $25.7 million, $23.9 million and
$25.1 million, respectively and is primarily recorded in cost of goods sold on the Consolidated Statements of Operations.
The
Company invests in promotional displays in certain retail stores for certain products to demonstrate product features and specifications. These assets are owned by the Company and
are considered to be productive assets which provide the benefits described above. The Company's investment in promotional displays is carried at cost less accumulated depreciation. Depreciation is
provided by the straight line method for each display over a period of two years, which represents the estimated period of the benefit provided by these assets. Promotional displays of
$11.5 million and related accumulated depreciation of $3.1 million as of December 2, 2012 were recognized as a component of property, plant and equipment and accumulated
depreciation, respectively in the Condensed Consolidated Balance Sheets. Depreciation expense related to these displays for fiscal 2012 was $2.3 million and is recorded as a component of
selling, general and administrative expense in the Condensed Consolidated Statement of Operations.
The
Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future net undiscounted cash flows expected to be generated by the asset group. If
such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
No
impairment charges related to property, plant and equipment were recognized during fiscal 2012, 2011 or 2010 other than those related to discontinued operations.
Assets
to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Fair value is determined based upon estimates of the amount to be recovered
upon disposal of the facility. There were no assets qualifying as held for sale at December 2, 2012 or November 27, 2011.
It
is Company policy to capitalize certain costs incurred in connection with developing or obtaining internal-use software.
62
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
Goodwill
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of the identifiable net tangible and
identifiable intangible assets acquired. Goodwill is not amortized but must be reviewed for impairment at least annually and if a triggering event were to occur in an interim period. The Company
performs at least an annual assessment of goodwill for impairment as of the beginning of the fiscal fourth quarter or whenever events or circumstances indicate that the carrying value of goodwill may
not be recoverable from future cash flows. The Company assesses recoverability using several methodologies to determine fair value of a reporting unit, which include the present value of estimated
future cash flows and comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The analysis is based upon available information
regarding expected future cash flows of each reporting unit discounted at estimated market rates. Discount rates are based upon the cost of capital specific to the reporting unit. If the carrying
value of the reporting unit exceeds the fair value of the reporting unit, a second analysis is performed to allocate the fair value to all assets and liabilities. If, based on the second analysis, it
is determined that the indicated fair value of goodwill of the reporting unit is less than the carrying value, the Company would recognize impairment for the excess of carrying value over fair value
of goodwill.
Debt Issuance Costs
The Company capitalizes costs associated with the issuance of debt and amortizes them as additional interest expense over the lives of
the debt on a
straight-line basis which approximates the effective interest method. Upon the prepayment of the related debt, the Company accelerates the recognition of an appropriate amount of the costs
as refinancing and extinguishment of debt and interest rate derivatives. Additional expense arising from such prepayments during fiscal 2012, 2011 and 2010 was $2.0 million,
$0.6 million and $2.7 million, respectively.
On
May 9, 2012, the Company amended and restated its existing senior secured asset-based revolving credit facility to extend the stated maturity of this facility until
May 2017 and amend certain other provisions. In connection with this amendment, the Company recorded fees of $1.2 million which were deferred and will be amortized over the life of the
amended agreement. As of December 2, 2012, $0.3 million of these fees had not yet been paid and were recorded as a component of other accrued liabilities in the accompanying Condensed
Consolidated Balance Sheets. In addition, the remaining unamortized debt issuance costs associated with the existing senior revolving credit facility will continue to be amortized over the life of the
agreement, as amended, in accordance with the authoritative accounting guidance surrounding debtor's accounting for changes in line-of-credit or revolving-debt
arrangements.
Royalty Income and Expense
The Company recognizes royalty income based on sales of
Sealy
and
Stearns & Foster
branded product by various licensees. The Company recognized gross royalty income of $20.1 million, $19.4 million
and $17.6 million in fiscal 2012, 2011 and 2010, respectively. The increase in royalty income has been driven by increased royalties recognized related to our international
licensees, including the new Brazil license agreements. The Company also pays royalties to other entities for the use of their names on product produced by the Company. The Company recognized royalty
expense of
63
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
an
insignificant amount in fiscal 2012, an insignificant amount in fiscal 2011 and $0.1 million in fiscal 2010.
Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with the FASB's authoritative guidance on accounting
for income taxes. Deferred tax assets
and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. The Company provides valuation allowances against the net deferred tax asset for amounts that are not considered more likely than not to be realized (See Note 15 for disclosure
of amounts related to deferred tax assets and associated valuation allowances).
Significant
judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite management's belief that the
Company's 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 matters. The Company may adjust
these reserves as relevant circumstances evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of issues in the courts. The Company's tax expense includes the
impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest and penalties. 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 its corporate income tax returns by tax authorities. No issues related to these reserved
positions have been presented to the Company. The Company believes that such audits will not result in an assessment and payment of taxes related to these positions during the one year following
December 2, 2012.
Advertising Costs
The Company expenses all advertising costs as incurred. Cooperative advertising costs paid to customers are recorded as a component of
selling, general and administrative expense within the Consolidated Statements of Operations to the extent of the estimated fair value when the customer provides proof of advertising. The Company
periodically assesses the liabilities recorded for cooperative advertising based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer.
Advertising expenses, including cooperative advertising, for fiscal 2012, 2011 and 2010 amounted to $167.3 million, $156.1 million and $140.4 million, respectively.
Warranties
The Company's warranty policy provides a 10-year non-prorated warranty service period on all currently
manufactured
Sealy Posturepedic
innerspring and
Bassett
bedding products and certain other
Sealy
branded
products. In addition, the Company offers a 20 year, limited warranty (15 year non-prorated and 25 year
additional
warranty on certain components of its 2012
Optimum by Sealy Posturepedic
,
Posturepedic Gel
and
Stearns &
Foster
products. Also, the Company has a 20-year warranty on the major components of its
TrueForm
and
MirrorForm
visco-elastic
products and its
SpringFree
latex
64
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
product,
the last ten years of which are prorated on a straight-line basis. 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 the fiscal 2012, 2011 and 2010 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
November 28, 2010
|
|
Accrued warranty obligations at beginning of period
|
|
$
|
13,606
|
|
$
|
17,584
|
|
$
|
16,464
|
|
Warranty claims(1)
|
|
|
(17,336
|
)
|
|
(15,853
|
)
|
|
(19,572
|
)
|
Warranty provisions(2)(3)
|
|
|
20,528
|
|
|
15,034
|
|
|
20,692
|
|
Change in estimate (see Note 3)
|
|
|
|
|
|
(3,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accrued warranty obligations at end of period
|
|
$
|
16,798
|
|
$
|
13,606
|
|
$
|
17,584
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Warranty
claims for the year ended December 2, 2012 include approximately $10.2 million for claims associated with products sold prior to
November 27, 2011 that are still under warranty. 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. The Company utilizes warranty trends on existing similar product in order to estimate future warranty claims associated with newly introduced product. Warranty
claims and provisions shown above do not include estimated salvage recoveries that reduced cost of sales by $5.3 million, $5.0 million and $5.8 million for fiscal 2012,
2011 and 2010, respectively.
-
(2)
-
The
provision for fiscal 2012 includes a decrease of approximately $0.3 million relating to increased recoverable salvage value included in
the warranty obligation estimate. The provision for fiscal 2011 includes an increase of approximately $0.2 million relating to decreased recoverable salvage value included in the
warranty obligation estimate. The provision for fiscal 2010 includes an increase of approximately $0.5 million relating to decreased recoverable salvage value included in the warranty
obligation estimate.
-
(3)
-
The
provision for fiscal 2012 also includes an increase of approximately $1.6 million related to the estimated liability for certain defective
foundation units sold to customers between 2008 and 2011. (See Note 20).
As
of December 2, 2012 and November 27, 2011, $9.8 million and $7.5 million is included as a component of other accrued liabilities and $7.0 million
and $6.1 million is included as a component of other noncurrent liabilities within the accompanying Consolidated Balance Sheet, respectively.
Self-Insurance
The Company is self-insured for certain losses related to medical claims with excess loss coverage of $375,000 per claim
per year. The Company also utilizes large deductible policies to insure claims related to general liability, product liability, automobile, and workers' compensation. The Company's recorded liability
for workers' compensation represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated workers' compensation liability is discounted and
65
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
is
established based upon analysis of historical data and actuarial estimates, and is reviewed by management and third-party actuaries on a quarterly basis to ensure that the liability is appropriate.
The discount rate used to estimate the workers' compensation liability was 2% for both fiscal 2012 and 2011. While the Company believes these estimates are reasonable based on the
information currently available, if actual trends, including the severity or frequency of claims, medical cost inflation, or fluctuations in premiums, differ from the Company's estimates, the
Company's results of operations could be impacted. As of December 2, 2012 and November 27, 2011, $4.2 million and $4.6 million of the recorded liability is included as a
component of other accrued liabilities and $7.7 million and $7.6 million is included as a component of other noncurrent liabilities within the accompanying Consolidated Balance Sheets,
respectively.
Research and Development
Product development costs are charged to operations during the period incurred and are not considered material.
Environmental Costs
Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate, under the FASB's
authoritative guidance on environmental remediation liabilities. Expenditures that relate to an existing condition caused by past operations and that do not provide future benefits are expensed as
incurred. Liabilities are recorded when environmental assessments are made or the requirement for remedial efforts is probable, and the costs can be reasonably estimated. Such liabilities are
discounted where appropriate in accordance with the FASB's authoritative guidance on environmental remediation liabilities. The timing of accruing for these remediation liabilities is generally no
later than the completion of feasibility studies. The Company has an ongoing monitoring and identification process to assess how the activities, with respect to the known exposures, are progressing
against the accrued cost estimates, as well as to identify other potential remediation sites that are presently unknown.
Derivative Financial Instruments
The Company uses financial instruments, including forward, option and swap contracts to manage its exposures to movements in interest
rates, foreign exchange rates and diesel fuel prices. The use of these financial instruments allows the Company to reduce its overall exposure to fluctuations in interest rates, foreign exchange rates
and diesel prices. The Company's hedging relationships are either designated as hedging instruments or are considered to be economic hedges which are not designated as hedging instruments.
The
Company formally documents its designated hedging relationships by identifying the hedging instruments and the hedged items, as well as its risk management objectives and strategies
for undertaking the hedge transaction. The Company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in the cash flows of the hedged item. The effective portion of the change in fair value of a derivative is recorded as a component of accumulated other comprehensive
income in the Consolidated Balance Sheets. When the hedged item affects the income statement, the gain or loss included in accumulated other comprehensive income is reported on the same line in the
Consolidated
66
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 1:
Basis of Presentation and Significant Accounting Policies
(Continued)
Statements
of Operations as the hedged item. In addition, any ineffective portion of the changes in the fair value of derivatives used as cash flow hedges and the changes in the fair value related to
those hedging instruments that are not designated as hedges for accounting purposes are reported in the Consolidated Statements of Operations as the changes occur. If it is determined that a
derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the Company discontinues hedge accounting and any deferred gains or losses are
recorded in the Consolidated Financial Statements.
The
Company's hedging relationships that are considered to be economic hedges are recorded at their fair value at the end of each period. The resulting changes in fair value are included
as a component of earnings in the period that they occur.
Derivatives
are recorded in the Consolidated Balance Sheets at fair value which is based upon an income approach which consists of a discounted cash flow model that takes into account
the present value of the future cash flows under the terms of the contracts using current market information as of the reporting date such as prevailing interest rates and foreign currency spot and
forward rates.
Share-Based Compensation
Compensation expense for share-based compensation awards issued is based on the fair value of the award at the date of the grant, and
compensation expense is recognized for those awards earned over the service period. Certain of the equity awards vest based upon the Company achieving certain Adjusted EBITDA performance targets.
During the service period, management estimates whether or not the Adjusted EBITDA performance targets will be met in order to determine the vesting period for those awards and what amount of
compensation cost should be recognized related to these awards. At the date of grant, we determine the fair value of the awards using the Black-Scholes option pricing formula, the trinomial lattice
model or the closing price of the Company's common stock, as appropriate under the circumstances. Management estimates the period of time the employee will hold the option prior to exercise and the
expected volatility of Sealy Corporation's stock, each of which impacts the fair value of the stock options. The fair value of restricted shares and restricted share units is based upon the closing
price of the Company's common stock as of the grant date. We also estimate the amount of share-based awards that are expected to be forfeited based on the historical forfeiture rates experienced for
our outstanding awards.
Commitments and 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 effect on the Company's consolidated financial position,
results of operations or cash flows.
67
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 2:
Share-Based Compensation
At December 2, 2012, the Company had share-based compensation plans as described below. Share-based compensation expense,
related income tax benefits and cash received from the exercise of stock option awards, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
November 28, 2010
|
|
Stock option awards
|
|
$
|
349
|
|
$
|
1,344
|
|
$
|
1,499
|
|
Restricted shares
|
|
|
|
|
|
444
|
|
|
667
|
|
Restricted share units
|
|
|
7,477
|
|
|
11,245
|
|
|
13,446
|
|
Directors' deferred stock compensation
|
|
|
291
|
|
|
210
|
|
|
251
|
|
|
|
|
|
|
|
|
|
Total share-based compensation
|
|
$
|
8,117
|
|
$
|
13,243
|
|
$
|
15,863
|
|
|
|
|
|
|
|
|
|
Income tax benefits related to share-based compensation
|
|
|
2,326
|
|
|
4,353
|
|
|
6,150
|
|
|
|
|
|
|
|
|
|
Cash received from exercise of stock option awards
|
|
|
104
|
|
|
630
|
|
|
297
|
|
|
|
|
|
|
|
|
|
Intrinsic value of awards excercised or issued
|
|
|
7,370
|
|
|
7,789
|
|
|
10,594
|
|
|
|
|
|
|
|
|
|
Tax benefits realized upon exercise
|
|
|
2,889
|
|
|
3,045
|
|
|
4,107
|
|
|
|
|
|
|
|
|
|
Share-based
compensation cost has been recorded as a component of selling, general and administrative expense in the Consolidated Statements of Operations. No share-based compensation
cost has been capitalized and included in any assets in the accompanying Consolidated Balance Sheets.
Prior to 2004, all outstanding options were issued under the 1998 Plan. On April 6, 2004, certain members of management
who held options elected to rollover their options upon the completion of the merger with KKR (the "Rollover Options").
A
summary of options outstanding under the 1998 Plan as of December 2, 2012, and the activity for the year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
Shares Subject to Options
|
|
Weighted Average
Exercise Price Per Share
|
|
Outstanding November 27, 2011
|
|
|
1,508,275
|
|
$
|
0.99
|
|
Exercised
|
|
|
(72,248
|
)
|
|
0.36
|
|
Forfeited
|
|
|
(10,999
|
)
|
|
2.57
|
|
|
|
|
|
|
|
|
Outstanding December 2, 2012 (all fully vested and exercisable)
|
|
|
1,425,028
|
|
$
|
1.01
|
|
Weighted average remaining contractual term
|
|
|
1.3 years
|
|
|
|
|
Aggregate intrinsic value of in-the-money options at December 2, 2012 (in thousands)
|
|
$
|
1,713
|
|
|
|
|
68
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 2:
Share-Based Compensation (Continued)
2004 Plan
Stock Option Awards
The Company's Board of Directors adopted the 2004 Plan that provides for the grant of cash and cashless exercise stock options,
restricted share awards, restricted share unit awards, stock appreciation rights and/or dividend equivalent rights to management, other key employees and non-employee directors on terms
and subject to conditions as established by the Compensation Committee of Sealy Corporation's Board of Directors or certain of the committee's designees. Upon exercise, the Company will issue new
shares of common stock.
As
of December 2, 2012, there was $0.2 million of unrecognized compensation cost associated with stock option grants under the 2004 Plan. That cost is expected to be
recognized over a weighted average period of 1.1 years. The Company valued these stock option grants using the trinomial lattice model. No options were granted in fiscal 2012, 2011
or 2010.
A
summary of options outstanding under the 2004 Plan as of December 2, 2012, and the activity for the year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
Shares Subject to Options
|
|
Weighted Average
Exercise Price Per Share
|
|
Outstanding November 27, 2011
|
|
|
5,394,364
|
|
$
|
5.43
|
|
Exercised
|
|
|
(47,700
|
)
|
$
|
1.64
|
|
Forfeited
|
|
|
(115,684
|
)
|
$
|
5.54
|
|
|
|
|
|
|
|
|
Outstanding December 2, 2012
|
|
|
5,230,980
|
|
$
|
5.46
|
|
Weighted average remaining contractual term
|
|
|
2.5 years
|
|
|
|
|
Aggregate intrinsic value of in-the-money options (in thousands)
|
|
$
|
759
|
|
|
|
|
Exercisable at December 2, 2012
|
|
|
4,944,520
|
|
|
|
|
Weighted average remaining contractual term
|
|
|
2.6 years
|
|
|
|
|
Aggregate intrinsic value of in-the-money options (in thousands)
|
|
$
|
759
|
|
|
|
|
At December 2, 2012, the Company did not have any restricted shares outstanding. During fiscal 2011, the Company's
remaining 97,324 restricted shares vested. Prior to their vesting, these restricted shares were considered to be non-vested shares, and had the same rights as the Company's outstanding
common shares, including dividend participation rights, except that they could not be sold by the holder until the end of the vesting period. The restricted shares that vested were settled on a net
basis which provided for the repurchase and cancellation of 41,315 shares as a means to cover the required minimum withholding tax payments. A total of 56,009 common shares were delivered to the
holder of these awards. During fiscal 2010, 194,647 of the outstanding restricted shares vested. The restricted shares that vested were settled on a net basis which provided for the repurchase
and
69
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 2:
Share-Based Compensation (Continued)
cancellation
of 82,628 shares as a means to cover the required minimum withholding tax payments. A total of 112,019 common shares were delivered to the holder of these awards.
At
December 2, 2012, 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 and 2) Time-based awards that vest ratably over a three year period.
During 2012,
2011 and 2010, the Company approved the following grants of time-based restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Number of awards granted
|
|
|
587,456
|
|
|
2,395,156
|
|
|
811,000
|
|
Weighted average grant date fair value
|
|
$
|
1.85
|
|
$
|
2.51
|
|
$
|
2.98
|
|
Only
those RSU awards granted to the Company's directors contain dividend participation rights. As of December 2, 2012 there were 360,505 such awards outstanding.
These awards have been considered to be participating securities for the purposes of computing the Company's earnings per share in accordance with the applicable authoritative guidance.
A
summary of restricted share unit awards outstanding as of December 2, 2012 and the activity for the year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
Unvested Restricted
Share Units
|
|
Weighted Average
Grant Date Fair
Value
|
|
Outstanding November 27, 2011
|
|
|
10,728,028
|
|
$
|
2.16
|
|
Granted
|
|
|
587,456
|
|
|
1.85
|
|
Vested
|
|
|
(5,073,855
|
)
|
|
2.06
|
|
Forfeited
|
|
|
(482,320
|
)
|
|
1.48
|
|
|
|
|
|
|
|
|
Outstanding December 2, 2012
|
|
|
5,759,309
|
|
$
|
2.25
|
|
Expected to vest, December 2, 2012
|
|
|
5,533,656
|
|
$
|
2.26
|
|
Weighted average remaining vesting period
|
|
|
4.2 years
|
|
|
|
|
Under the Sealy Corporation Directors' Deferred Compensation Plan (the "Directors Plan"), the members of the Company's Board of
Directors may make an annual election to receive their fees in the form of equity share units in lieu of cash. The number of units received is
determined based on the number of shares that could be purchased with the directors' fees at the current fair value of the shares. Directors will receive additional units for shares that could be
purchased with future dividends, if any. Following a director's departure from the board, but no sooner than six months thereafter, the director may receive payment for the balance of the deferred
compensation share units. The form of payment, whether in shares of stock or in cash equivalent to the fair value of the shares at the time of payment, is at the discretion of the Company. The Company
accounts for share units issued under the Directors Plan as equity awards, recognizing a charge against earnings for the expense associated with the Directors Plan, with a corresponding credit to
additional paid-in capital. Share units issued following the adoption of the applicable authoritative guidance requiring the use of the fair value method are not adjusted for subsequent
changes in the fair value of the underlying stock, although units outstanding at the date of adoption continue to be so adjusted. During fiscal 2012, 2011 and 2010,
70
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 2:
Share-Based Compensation (Continued)
the
Company recognized expense of $0.3 million, $0.2 million and $0.3 million, respectively, related to the Directors Plan. A summary of share units outstanding under the Sealy
Corporation Directors' Deferred Compensation Plan as of December 2, 2012, and activity for the year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
Share Units
|
|
Weighted Average
Grant Date Fair
Value
|
|
Outstanding November 27, 2011
|
|
|
516,983
|
|
$
|
2.89
|
|
Granted
|
|
|
138,063
|
|
|
2.00
|
|
|
|
|
|
|
|
|
Outstanding December 2, 2012 (all fully vested at grant date)
|
|
|
655,046
|
|
$
|
2.70
|
|
|
|
|
|
|
|
|
Note 3:
Change in Estimate
During fiscal 2011, the Company reviewed its computation of reserves for warrantable and other product returns and refined the calculations of these reserves in order to better
predict the Company's future liability related to these claims. The effect of this change in estimate for warranty claims was to reduce other accrued liabilities and cost of sales by approximately
$3.1 million. The change in estimate for other product returns decreased accounts receivable balances by approximately $4.7 million, with a corresponding decrease in net sales. For the
year ended November 27, 2011, the change in estimate decreased operating income by $1.6 million and increased net loss by $0.9 million. This change in estimate also increased net
loss per basic and diluted share by $0.01 for the year ended November 27, 2011.
Note 4:
Inventories
The components of inventory as of December 2, 2012 and November 27, 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
December 2, 2012
|
|
As of
November 27, 2011
|
|
Raw materials
|
|
$
|
33,114
|
|
$
|
25,635
|
|
Work in process
|
|
|
20,132
|
|
|
26,056
|
|
Finished goods
|
|
|
19,118
|
|
|
5,311
|
|
|
|
|
|
|
|
|
|
$
|
72,364
|
|
$
|
57,002
|
|
|
|
|
|
|
|
Note 5:
Assets Constructed on Behalf of the Company
The Company has engaged third parties to construct production facilities to be leased by the Company. When entities are involved with certain structural elements of the construction of
an asset that will be leased when construction of the asset is completed, the FASB's authoritative guidance requires the Company to be considered the owner, for accounting purposes, of these
production facilities. In fiscal 2011, the Company amended one of these leases which had the effect of extending the lease term. Based on this amendment, an additional $2.2 million of
property, plant and equipment with an
offsetting financing obligation was recognized in the Consolidated Balance Sheets. During the lease terms, the Company recognizes building depreciation and interest expense for the obligations.
71
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 5:
Assets Constructed on Behalf of the Company (Continued)
The
Company has recorded $23.0 million and $24.2 million as of December 2, 2012 and November 27, 2011, respectively in buildings related to these facilities. The associated
financial obligations are $40.0 million and $41.2 million as of December 2, 2012 and November 27, 2011, respectively in the Consolidated Balance Sheets. The recording of
these assets is a non-cash item for the purposes of the Consolidated Statements of Cash Flow.
Note 6:
Goodwill and Other Intangible Assets
The Company assesses goodwill at least annually for impairment as of the beginning of the fiscal fourth quarter or whenever events or circumstances indicate that the carrying value of
goodwill may not be recoverable from future cash flows. The Company assesses recoverability using several methodologies, including the present value of estimated future cash flows and comparisons of
multiples of enterprise values to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The analysis is based upon available information regarding expected future cash flows of
each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. If the carrying value of the reporting unit exceeds the indicated fair value of the
reporting unit, a second analysis is performed to allocate the fair value to all assets and liabilities. If, based on the second analysis, it is determined that the implied fair value of the goodwill
of the reporting unit is less than the carrying value, goodwill is considered impaired.
No
impairment of goodwill was identified related to the Company's reporting units during fiscal 2012, 2011 or 2010 related to goodwill. Accumulated goodwill impairment
losses recorded as of December 2, 2012 and November 27, 2011 are $28.6 million.
The
changes in the carrying amount of goodwill for the years ended December 2, 2012 and November 27, 2011 are as follows (in thousands):
|
|
|
|
|
Balance as of November 28, 2010
|
|
$
|
361,958
|
|
Decrease due to foreign currency translation
|
|
|
(932
|
)
|
|
|
|
|
Balance as of November 27, 2011
|
|
$
|
361,026
|
|
Additions due to acquisition of Comfort Revolution
|
|
|
357
|
|
Increase due to foreign currency translation
|
|
|
1,846
|
|
|
|
|
|
Balance as of December 2, 2012
|
|
$
|
363,229
|
|
|
|
|
|
The
Company's intangible assets as of December 2, 2012 and November 27, 2011, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Weighted
Average
Useful Life
|
|
Licenses
|
|
$
|
4,615
|
|
$
|
(4,615
|
)
|
$
|
|
|
$
|
4,612
|
|
$
|
(3,496
|
)
|
$
|
1,116
|
|
|
|
|
Trademarks
|
|
|
3,100
|
|
|
(73
|
)
|
|
3,027
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
Intellectual property
|
|
|
3,300
|
|
|
(95
|
)
|
|
3,205
|
|
|
|
|
|
|
|
|
|
|
|
9.5
|
|
Customer relationships
|
|
|
8,700
|
|
|
(223
|
)
|
|
8,477
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
19,715
|
|
$
|
(5,005
|
)
|
$
|
14,710
|
|
$
|
4,612
|
|
$
|
(3,496
|
)
|
$
|
1,116
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 6:
Goodwill and Other Intangible Assets
(Continued)
Amortization expense related to intangible assets was $0.7 million in fiscal 2012 and $0.3 million for fiscal 2011 and 2010, and has been recorded as a
component of royalty income, net within the accompanying Consolidated Statements of Operations. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred. The Company
has the ability to extend the license outstanding for an additional term of five years after the completion of the initial term. The Company expects to recognize amortization expense relating to these
intangibles of $1.4 million in each of the years from 2013 through 2017 and $7.5 million thereafter.
The
Company's fiscal 2012 annual evaluation for impairment of finite-lived intangible assets indicated a potential impairment of the Company's
Bassett
license due to significantly decreased sales of
product attributable to this brand during the current year. As a result, the Company estimated
the fair value of this license using an income approach. Based upon the comparison of its fair value and carrying value, an impairment charge of $0.8 million was recorded in fiscal 2012
to impair the entire remaining balance of this license. The Company did not record any impairment charges during fiscal 2011 or 2010 related to other intangible assets.
Note 7:
Unconsolidated Affiliate Companies
The Company is involved in a group of joint ventures to develop markets for
Sealy
branded products in Asia, New Zealand and India. Our
ownership interest in these joint ventures is 50% and is accounted for under the equity method. Our net investment of $9.0 million and $9.8 million at December 2, 2012 and
November 27, 2011, respectively, is recorded as a component of other assets including debt issuance costs, net within the Consolidated Balance Sheets. The Company's share of earnings for
fiscal 2012, 2011 and 2010 is recorded in equity in earnings of unconsolidated affiliates.
Summarized
financial information for these joint ventures is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
Current assets
|
|
$
|
27,451
|
|
$
|
25,627
|
|
|
|
|
Noncurrent assets
|
|
|
4,553
|
|
|
4,456
|
|
|
|
|
Current liabilities
|
|
|
16,432
|
|
|
12,223
|
|
|
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Revenues
|
|
$
|
71,952
|
|
$
|
55,925
|
|
|
44,946
|
|
Gross profit
|
|
|
45,668
|
|
|
35,949
|
|
|
27,481
|
|
Income from operations
|
|
|
12,863
|
|
|
8,173
|
|
|
8,372
|
|
Net income
|
|
|
10,350
|
|
|
6,742
|
|
|
6,898
|
|
73
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 8:
Long Term Obligations
Long term debt as of December 2, 2012 and November 27, 2011 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
Asset-based revolving credit facility
|
|
$
|
|
|
$
|
|
|
Senior notes
|
|
|
263,619
|
|
|
296,119
|
|
Convertible notes(1)
|
|
|
194,399
|
|
|
185,268
|
|
Senior subordinated notes
|
|
|
268,945
|
|
|
268,945
|
|
Financing obligations(2)
|
|
|
39,961
|
|
|
41,225
|
|
Other
|
|
|
2,642
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
769,566
|
|
|
791,881
|
|
Less current portion
|
|
|
(4,045
|
)
|
|
(1,584
|
)
|
|
|
|
|
|
|
|
|
$
|
765,521
|
|
$
|
790,297
|
|
|
|
|
|
|
|
-
(1)
-
Convertible
notes includes accrued paid in kind interest of $6.8 million and $6.1 million for which the principal balance of the Convertible
Notes had not yet been increased at December 2, 2012 and November 27, 2011, respectively.
-
(2)
-
Financing
obligations are related to facilities in which the Company was involved in the construction that have been capitalized in accordance with the
FASB's authoritative guidance on the effect of lessee involvement in asset construction. The related leases have terms ranging from 10 to 16 years.
The
Company's outstanding debt as of December 2, 2012 primarily consists of the following: 1) a senior secured asset-based revolving credit facility (the "Amended ABL
Revolver") which is discussed further below; 2) $270.0 million in aggregate principal amount of Senior Notes, which bear interest at 10.875%; 3) $221.1 million in aggregate
principal amount of senior secured convertible PIK notes due June 2016 which bear interest at 8.00% and are convertible into shares of the Company's common stock (the "Convertible Notes") and
4) $268.9 million aggregate principal amount of senior subordinated notes due June 2014, which bear interest at 8.25% per annum payable semi annually (the "2014 Notes").
On May 9, 2012, the Company amended its existing senior secured asset-based revolving credit facility to extend the stated
maturity of this facility until May 2017 and amend certain other provisions. In addition to the extension of the maturity date, the amendment to the facility provides for an increase in the
available accordion feature on the facility which, if exercised and additional commitments are obtained, can increase the total principal amount to $150.0 million. Further, the amendment
provides an adjustment to the interest margins which both reduced the margin rates and provides a feature through which they adjust based on the availability under the facility. In connection with
this amendment, the Company incurred charges of $1.2 million which have been recorded as a component of deferred debt issuance costs, which, along with the remaining unamortized costs from the
old facility, will be amortized over the remaining maturity of the agreement as a component of interest expense (See Note 1).
74
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 8:
Long Term Obligations
(Continued)
The Company's Amended ABL Revolver provides for revolving credit financing of up to $100.0 million (or, if the accordion feature
described above is exercised and additional commitments are obtained, $150.0 million), subject to borrowing base availability, and matures in May 2017. The borrowing base consists of the
following: 1) 85% of the net amount of eligible accounts receivable and 2) the lesser of (i) 85% of the net orderly liquidation value of eligible inventory or (ii) 75% of
the net amount of eligible inventory. These amounts are reduced by reserves deemed necessary by the security agents for the facility. Borrowings under the Amended ABL Revolver bear interest at the
Company's choice of either a base rate (determined by reference to the highest of three rates as defined in the Amended ABL Revolver agreement) or a LIBOR rate for U.S. dollar deposits plus an
applicable margin between 0.75% and 1.25% for base rate loans and 1.75% and 2.25% for LIBOR loans based on current availability. The Amended ABL Revolver also requires the Company to pay a commitment
fee for the unused portion. As of December 2, 2012, there were no amounts outstanding under the Amended ABL Revolver. At December 2, 2012, the Company had approximately
$50.7 million available under the Amended ABL Revolver which represents the calculated borrowing base reduced by outstanding letters of credit of $17.4 million.
The
obligations under the Company's Amended ABL Revolver are guaranteed by Sealy Mattress Corporation and all of its current and future domestic subsidiaries, and are also secured by
substantially all of the assets of the Company and the assets of its current and future domestic subsidiaries through a first-priority security interest in the accounts receivable, inventory, cash,
related general intangibles and instruments and proceeds of the foregoing, and a second-priority security interest in substantially all of the Company's material real property and equipment and all
other assets of its current and future domestic subsidiaries that secure the Senior Notes on a first-priority basis.
The
Amended ABL Revolver agreement requires the Company to maintain a fixed charge coverage ratio in excess of 1.0 to 1.0 in periods of minimum availability under the facility where the
availability for two consecutive calendar days is less than the greater of 1) 12.5% of the borrowing base under the Amended ABL Revolver and 2) $10.0 million. As of
December 2, 2012, the Company was not in a minimum availability period under the Amended ABL Revolver.
In
accordance with FASB authoritative guidance, the Company will classify borrowings under its Amended ABL Revolver, which has a maturity date of more than one year from the balance
sheet date, as a current liability since it includes both a lockbox arrangement and a subjective acceleration clause.
On May 29, 2009, the Company issued $350.0 million aggregate principal amount of Senior Notes maturing April 2016
bearing 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 is based on an imputed interest rate of 11.75%. This discount will be accreted using the
effective interest method over the life of the agreement with the related expense recognized as a component of interest expense in the Consolidated Statement of Operations. For fiscal 2012,
2011 and 2010, the Company recognized additional interest expense of $1.6 million, $1.5 million and $1.4 million, respectively related to the accretion of the OID. The
Senior Notes rank equally in right of payment with all of the Company's existing and future senior indebtedness, including amounts outstanding under the Amended ABL
75
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 8:
Long Term Obligations
(Continued)
Revolver
and the Convertible Notes and senior in right of payment to any existing and future subordinated indebtedness, including the 2014 Notes. The obligations under the Senior Notes are guaranteed
by the Company and all of its current and future domestic subsidiaries, and are also secured by substantially all of the assets of the Company and the assets of its current and future domestic
subsidiaries through a first-priority security interest in substantially all of the Company's material real property and equipment and all other assets of its current and future domestic subsidiaries
that secure the Senior Notes on a first-priority basis, and a second-priority security interest in the accounts receivable, inventory, cash, related general intangibles and instruments and proceeds of
the foregoing.
On
May 20, 2012, December 21, 2011 and May 27, 2011, the Company redeemed $10.0 million, $25.0 million and $10.0 million, respectively, of the
principal amount of its outstanding Senior Notes at a redemption price of 103% of the principal amount of the notes, plus accrued and unpaid interest to the redemption date. In connection with the
repurchases, the Company recognized the following charges which were recorded as a component of refinancing and extinguishment of debt in the Condensed Consolidated Statements of Operations for the
nine months ended:
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
Premium paid to repurchase the notes
|
|
$
|
1,050
|
|
$
|
300
|
|
Write-off of related debt issuance costs and original issue discount
|
|
|
1,862
|
|
|
643
|
|
The
Senior Notes are governed by an indenture which calls for the Company to offer to repurchase the notes at a price equal to 101% of the outstanding principal amount in the event of a
change in control as defined in the indenture. Further, during any twelve month period commencing on the date of issuance, the Company will be entitled to redeem up to 10% of the aggregate principal
amount of the Senior Notes at a redemption price equal to 103% plus accrued and unpaid interest. After April 15, 2012, the Senior Notes are subject to redemption by the Company at 30 to
60 days' notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon, to the applicable redemption date, if redeemed
during the twelve month period beginning on April 15 of each of the years indicated below:
|
|
|
|
|
Year
|
|
Percentage of
Principal Amount
|
|
2012
|
|
|
108.156
|
%
|
2013
|
|
|
105.438
|
%
|
2014
|
|
|
102.719
|
%
|
2015 and thereafter
|
|
|
100.000
|
%
|
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 ("PIK interest"). 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. Interest on Convertible
Notes converted between interest payment dates is forfeited.
76
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 8:
Long Term Obligations
(Continued)
There
have been no conversions of Convertible Notes into shares in fiscal 2012, 2011 or 2010.
The
Convertible Notes rank equally in right of payment with all of the Company's existing and future senior indebtedness, including amounts outstanding under the Amended ABL Revolver and
the Senior Notes, and senior in right of payment to any existing and future subordinated indebtedness, including the existing 2014 Notes. The Convertible Notes are also secured by a third-priority
lien on all of the collateral securing the Amended ABL Revolver and the Senior Notes which liens will be effectively junior to the senior priority liens securing the Senior Notes and the Amended ABL
Revolver.
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 15, 2012 interest payment
date, the fair value of the underlying common stock was $1.87. Therefore, a beneficial conversion feature was recognized for 87% of the total PIK interest payment. Upon the July 15, 2012
interest payment date, the fair value of the underlying common stock was $1.90. Therefore, a beneficial conversion feature was recognized for 90% of the total PIK interest payment. Upon the
January 15
th
and July 15
th
interest payment dates in 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 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
November 28, 2010
|
|
|
|
(in thousands)
|
|
January 15
|
|
$
|
7,114
|
|
$
|
7,563
|
|
$
|
6,991
|
|
July 15
|
|
|
7,654
|
|
|
7,864
|
|
|
7,271
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,768
|
|
$
|
15,427
|
|
$
|
14,262
|
|
|
|
|
|
|
|
|
|
The
outstanding balance of the Convertible Notes at December 2, 2012 was $194.4 million which includes accrued but unpaid interest as well as the total of the unamortized
beneficial conversion features of $33.6 million which are recognized as a discount to the outstanding principal amount. These discounts have been reflected as a reduction of the balance of the
Convertible Notes with an offsetting increase to additional paid-in capital. The recognized discounts will be accreted through interest expense over the remaining term of the Convertible
Notes using the effective interest method.
The outstanding 2014 Notes consist of a $268.9 million aggregate principal amount maturing June 2014, bearing interest at
8.25% per annum payable semiannually in arrears on June 15 and December 15, commencing on December 15, 2004. The 2014 Notes rank junior to all of the Company's existing and future
senior indebtedness and secured indebtedness, including any borrowings under the senior secured credit facilities. The 2014 Notes are guaranteed by all of the Company's domestic subsidiaries.
The
2014 Notes are governed by an indenture which calls for the Company to offer prepayment of the notes at a price equal to 101% of the outstanding principal amount in the event of a
change in
77
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 8:
Long Term Obligations
(Continued)
control
as defined in the indenture. The 2014 Notes are subject to redemption at 30 to 60 days' notice at a redemption price of 100% of the principal amount, plus accrued and unpaid interest
thereon and Special Interest, if any, to the applicable redemption date.
The
Company may also from time to time repurchase outstanding 2014 Notes on the open market for the purpose of retiring such notes as allowed under the restrictions provided by the
Company's other credit agreements and note indentures. No such repurchases were made during fiscal 2012, 2011 or 2010.
The indentures and agreements governing the Amended 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 subsidiaries. For
instance, the agreement governing Sealy Mattress Company's Amended 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
our Senior Notes and the 2014 Notes, we are restricted from paying dividends or making other distributions to Sealy Corporation unless we are able to satisfy certain requirements or use an available
exception from the limitation. As of December 2, 2012, Sealy Mattress Company is restricted in distributing the net assets of its subsidiaries in the amount of $221.4 million to its
parent due to the provisions in its long-term debt agreements. However, $30.0 million would be available for distribution without restriction. At December 2, 2012, the
Company was in compliance with the covenants contained within the related note indentures and agreements.
The
Company's net weighted average borrowing cost was 11.6%, 11.1% and 10.7% for fiscal 2012, 2011 and 2010, respectively. At December 2, 2012, the annual scheduled
maturities of the principal amounts of long term obligations were as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
4,045
|
|
2014
|
|
|
270,774
|
|
2015
|
|
|
1,961
|
|
2016
|
|
|
460,158
|
|
2017
|
|
|
2,449
|
|
Thereafter
|
|
|
30,179
|
|
|
|
|
|
|
|
$
|
769,566
|
|
|
|
|
|
The
obligations recorded as a result of lessee involvement during the asset construction period is included in the above table of scheduled maturities. The interest component of these
payments not included above is $19.3 million.
As
discussed further in Note 26, the Company has entered into a Merger Agreement with Tempur-Pedic pursuant to which a wholly-owned subsidiary of Tempur-Pedic will merge with and
into the Company, resulting in the Company becoming a subsidiary of Tempur-Pedic. As part of the transaction it is anticipated that the Company's outstanding senior and subordinated notes will also be
redeemed in accordance with the provisions of the related note indentures pursuant to the call redemption prices set forth above of 108.156% and 100%, respectively, plus accrued and unpaid interest.
78
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 9:
Commitments
The Company leases certain operating facilities, offices and equipment. The following is a schedule of future minimum annual operating
lease commitments at December 2, 2012 (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
2013
|
|
$
|
16,324
|
|
2014
|
|
|
14,130
|
|
2015
|
|
|
12,367
|
|
2016
|
|
|
11,101
|
|
2017
|
|
|
11,109
|
|
Thereafter
|
|
|
23,471
|
|
|
|
|
|
|
|
$
|
88,502
|
|
|
|
|
|
Rental
expense charged to operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
Dec. 2, 2012
|
|
Year Ended
Nov. 27, 2011
|
|
Year Ended
Nov. 28, 2010
|
|
|
|
(in thousands)
|
|
Minimum rentals
|
|
$
|
17,637
|
|
$
|
17,158
|
|
$
|
17,184
|
|
Contingent rentals (based upon delivery equipment mileage)
|
|
|
2,489
|
|
|
1,952
|
|
|
2,006
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,126
|
|
$
|
19,110
|
|
$
|
19,190
|
|
|
|
|
|
|
|
|
|
The
Company has the option to renew certain plant operating leases, with the longest renewal period extending through 2043. Most of the operating leases provide for increased rent
through increases in general price levels. The Company recognizes rent expense in these situations on a straight-line basis over the lease term. Additionally, some of the leases provide
for contingent rental payments based on the use of the leased assets or adjustments to future payments based on specified indices. Contingent payments directly related to the use of the assets and
future adjustments of payments based on indices are expensed in the period in which the use of the asset occurs and are not included in the schedule of future minimum annual operating lease
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.
During fiscal 2012, 2011 and 2010, certain executive officers of the Company resigned. In accordance with their employment agreements and Company policy, certain benefits are to be paid
to these executive officers in connection with their resignation. Additionally, during these years, the Company terminated other employees who were also entitled to severance benefits. In connection
with the resignation of executive officers and the termination of the other employees, the Company recorded charges related to severance obligations due to these individuals. Severance costs of
$0.8 million, $0.5 million and $2.4 million for fiscal 2012, 2011 and 2010, respectively, were recorded as a component of operating income within the accompanying
Consolidated Statements of Operations. Severance benefits of $0.3 million and $0.1 million have been accrued as of December 2, 2012 and November 27, 2011, respectively as a
component of accrued compensation within the accompanying Consolidated Balance Sheet.
79
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 10:
Fair Value Measurements
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
derivative contracts, which include foreign currency forward and option contracts and diesel swap contracts discussed in Note 11 below. 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 using current market information as of the reporting date such
as prevailing interest rates and foreign currency spot and forward rates. The Company mitigates derivative credit risk by transacting with highly rated counterparties. The Company has evaluated the
credit and non-performance risks associated with its derivative counterparties and believed them to be insignificant at December 2, 2012.
The
following table provides a summary of the fair value of assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 2, 2012 Using
|
|
|
|
December 2, 2012
|
|
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
|
|
$
|
18
|
|
$
|
|
|
$
|
18
|
|
$
|
|
|
Foreign exchange and commodity derivative liabilities
|
|
|
(268
|
)
|
|
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(250
|
)
|
$
|
|
|
$
|
(250
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at November 27, 2011 Using
|
|
|
|
November 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
|
|
$
|
1,379
|
|
$
|
|
|
$
|
1,379
|
|
$
|
|
|
Foreign exchange and commodity derivative liabilities
|
|
|
(34
|
)
|
|
|
|
|
(34
|
)
|
|
|
|
Embedded foreign currency derivative in lease agreement
|
|
|
56
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,401
|
|
$
|
|
|
$
|
1,345
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
Due
to the short maturity of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value. The fair
value of long term debt which is valued using Level 1 inputs based on quoted market prices, at December 2, 2012 was as follows (in thousands):
|
|
|
|
|
Senior Secured Notes
|
|
$
|
294,300
|
|
Convertible Notes
|
|
|
519,111
|
|
Senior Subordinated Notes
|
|
|
271,312
|
|
80
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 11:
Derivative Instruments and Hedging Strategies
The Company uses hedging contracts to manage the risk of its overall exposure to foreign currency and commodity price changes. All of the Company's designated hedging instruments are
considered to be cash flow hedges.
Foreign Currency Exposure
The Company is exposed to foreign currency risk related to purchases of materials 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. The Company designates certain of these forward contract hedges as hedging
instruments and enters into some forward and option contracts that are considered to be economic hedges which are not designated as hedging instruments. Whether designated or undesignated, these
forward and option contracts protect against the change 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 8, 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 follow:
At
December 2, 2012, the Company had outstanding 26 forward foreign currency contracts to sell Canadian dollars and receive a total of $15.0 million US dollars at specified
exchange rates with expiration dates ranging from December 2012 through August 2013. These foreign currency contracts were entered into to protect against the fluctuation in the Canadian
subsidiary's US dollar denominated purchases of raw materials. 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 and equipment related to changes in the foreign currency exchange rates.
The
Company also enters into forward 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 Consolidated Statements of Operations. As of December 2, 2012, the Company did not have any outstanding foreign
currency contracts that were not designated as hedges for accounting purposes.
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 August 2013. Over the next twelve months, the Company expects to reclassify $0.2 million of deferred gains from accumulated other comprehensive income to cost of goods sold as
related forecasted foreign currency payments are made.
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. Periodically, the Company manages this risk by entering 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.
81
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 11:
Derivative Instruments and Hedging Strategies (Continued)
At
December 2, 2012, the Company had outstanding 15 fixed price swap contracts to purchase 1.4 million gallons of diesel fuel at specified prices from December 2012
through October 2013. Since these contracts were not formally designated as cash flow hedges, the $0.1 million change in fair value is recorded as a component of selling, general and
administrative expense in the Consolidated Statements of Operation. The Company's hedging activity for diesel fuel purchases for the fiscal years ended November 27, 2011 and November 28,
2010 was not material.
At
December 2, 2012 and November 27, 2011, the only outstanding derivatives of significance were the Company's foreign exchange derivative instruments. The fair value
carrying amount of these instruments was recorded as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
December 2, 2012
|
|
December 2, 2012
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
$
|
|
|
Other current liabilities
|
|
$
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Commodity fixed price swap contracts
|
|
Other current assets
|
|
|
18
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
18
|
|
|
|
$
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
November 27, 2011
|
|
November 27, 2011
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
$
|
1,368
|
|
Other current liabilities
|
|
$
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
1,368
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
1,368
|
|
|
|
$
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
The
effect of derivative instruments on the Consolidated Statement of Operations for fiscal 2012 and 2011 was not significant.
Note 12:
Acquisitions and Dispositions
On June 13, 2012, the Company obtained a 45% ownership interest in a newly formed company, Comfort Revolution, an investment with the CR Member for a contribution of
$10.0 million. Upon
82
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 12:
Acquisitions and Dispositions (Continued)
formation,
the CR Member contributed the assets and liabilities of its existing business. Comfort Revolution develops specialty foam and gel bedding products which are believed to complement the
Company's product offerings and had net revenues of approximately $8.9 million for the fiscal year ended December 31, 2011.
The
Company's $10.0 million equity contribution to Comfort Revolution was used, in part, to retire and terminate an existing $8.1 million of debt and pay
$0.4 million in legal and advisory fees. These amounts were paid to members of the acquired enterprise or their affiliates.
In
connection with the acquisition, the Company entered into a revolving credit facility arrangement with Comfort Revolution under which it is obligated to provide funding up to
$20.0 million for the operations of this entity. This credit facility bears interest at a rate of 12.0% per annum and matures in June 2014. Further, Comfort Revolution will be obligated
to pay royalties to the Company for its sales of
Sealy
and
Stearns & Foster
branded product under
the terms of a licensing arrangement.
The
consolidated statements of operations include the results of Comfort Revolution since the date of acquisition through September 30, 2012. The assets acquired and liabilities
assumed through this acquisition have been recorded at preliminary estimates of fair value based on information currently
available and on current assumptions as to the future operations of Comfort Revolution. The Company will recognize additional assets or liabilities if new information is obtained during the
measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The
measurement period will not exceed one year from the acquisition date. These preliminary estimates are subject to change upon the completion of the acquisition accounting.
The
following is a summary of the preliminary fair values of the assets acquired and liabilities assumed based on the acquisition (amounts in thousands):
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Current assets, including cash and equivalents of $10,159
|
|
$
|
16,010
|
|
Property, plant and equipment
|
|
|
481
|
|
Goodwill
|
|
|
357
|
|
Intangible assets
|
|
|
15,100
|
|
Other assets
|
|
|
35
|
|
|
|
|
|
Total assets acquired
|
|
|
31,983
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Current liabilities
|
|
|
1,659
|
|
Other long-term liabilities
|
|
|
8,102
|
|
|
|
|
|
Total liabilities assumed
|
|
|
9,761
|
|
|
|
|
|
Noncontrolling interest
|
|
|
(12,222
|
)
|
|
|
|
|
Net assets acquired
|
|
$
|
10,000
|
|
|
|
|
|
The
identifiable intangible assets acquired consist of trademarks, customer relationships and intellectual property of $3.1 million, $8.7 million and
$3.3 million, respectively, with such amounts based on a preliminary assessment of the fair value. The fair value of the noncontrolling interest was
83
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 12:
Acquisitions and Dispositions (Continued)
determined
using a market approach based on the Company's acquisition of its 45% ownership stake in Comfort Revolution as well as the enterprise values of comparable companies in the industry.
Between
the acquisition date and September 30, 2012, Comfort Revolution recognized revenues and a net loss of $3.4 million and $2.2 million, respectively. During
fiscal 2012, we incurred acquisition related costs for Comfort Revolution of $0.7 million which have been recorded as a component of selling, general and administrative expense in the
accompanying Condensed Consolidated Statements of Operations.
Note 13:
Discontinued Operations
On November 18, 2010, management committed to a plan to divest the assets of its European manufacturing operations in France and
Italy which represented its Europe segment. Through this transaction, the assets and liabilities of the European manufacturing operations were assumed by C.F.G. S.r.L. ("CFG"). Consideration received
in this transaction was the assumption of the net debt of the European operations, which approximated 6.5 million Euro, by CFG. Concurrent with this transaction, CFG has entered into a license
agreement with Sealy Corporation through which
the Company will receive royalty payments on sales of
Sealy
and
Stearns & Foster
branded product
in the Western European market.
In
the third quarter of fiscal 2010, the Company recorded an impairment charge of $23.0 million, net of tax, on the European manufacturing facility based on the estimated
cash flows associated with the business. This charge included the accumulated foreign currency translation adjustment previously recorded in other comprehensive income. In the fourth quarter of
fiscal 2010, the Company recorded a net loss on disposal of $2.4 million in connection with the sale of the business to CFG.
The
Company expects to receive income in future periods from the license arrangement to sell
Sealy
branded product in these markets over
the term of the agreement which, initially, is five years with options to extend or renew the contract. The Company has concluded that the license fees constitute a passive royalty interest and the
Company has no continuing involvement in the disposed business.
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
€1.8 million ($2.3 million) under the terms of the contract. During fiscal 2012, the Company settled certain outstanding claims related to these guarantees for
€1.8 million ($2.3 million).
During
fiscal 2011, the Company recognized additional expenses related to the disposition of its European manufacturing operations which were primarily related to services
rendered in connection with the disposition. There are no remaining assets or liabilities recorded as of December 2, 2012 related to the European manufacturing operations.
84
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 13:
Discontinued Operations (Continued)
In November 2010, management ceased manufacturing operations in Brazil. Concurrently, the Company entered into a license
agreement with a third party to sell Sealy
product in certain regions of this market. Additionally, the Company entered into a lease agreement with another third party to lease the manufacturing facility and related equipment. The property
that will continue to be leased is not considered part of discontinued operations. See Note 22 for further details surrounding certain terms of the leasing arrangement.
The
Company expects to receive income in future periods from the license arrangement to sell
Sealy
branded product in the Brazilian
markets over the term of the agreement which, initially, is 5 years with options to extend or renew the contracts. The Company has concluded that this constitutes a passive royalty interest and
the Company has no continuing involvement in the disposed business.
During
fiscal 2012, 2011, and 2010, 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 December 2,
2012 were immaterial.
The operating results of the discontinued operations in total are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
November 28, 2010
|
|
Net sales
|
|
$
|
|
|
$
|
|
|
$
|
101,105
|
|
Loss before income taxes(a)
|
|
|
(769
|
)
|
|
(2,116
|
)
|
|
(36,679
|
)
|
Income tax provision (benefit)
|
|
|
|
|
|
(135
|
)
|
|
(679
|
)
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued operations
|
|
|
(769
|
)
|
|
(1,981
|
)
|
|
(36,000
|
)
|
Loss on disposition of business
|
|
|
(1,193
|
)
|
|
(2,251
|
)
|
|
(2,399
|
)
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(1,962
|
)
|
$
|
(4,232
|
)
|
$
|
(38,399
|
)
|
|
|
|
|
|
|
|
|
-
(a)
-
Loss
before income taxes for fiscal 2010 includes a $23.0 million impairment charge related to the assets of the Company's European
manufacturing operations.
Note 14:
Refinancing and Extinguishment of Debt
Expenses related to refinancing and extinguishment of debt included non-cash charges of $1.9 million, $0.6 million and $2.7 million for
fiscal 2012, 2011 and 2010, respectively, related to the write-off of debt issuance costs and original issue discount associated with the redemption of the Senior Notes that
were repurchased during each of these fiscal years. The Company also recognized cash charges of $1.1 million, $0.3 million and $1.1 million for fiscal 2012, 2011
and 2010, respectively, which represent the premiums that were paid to repurchase these notes. See Note 8 for further details.
85
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 15:
Income Taxes
The Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return. Income tax provision (benefit) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
November 28, 2010
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,245
|
|
$
|
(8,892
|
)
|
$
|
97
|
|
International
|
|
|
11,286
|
|
|
10,862
|
|
|
15,168
|
|
State and local
|
|
|
(1,629
|
)
|
|
229
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
|
|
|
10,902
|
|
|
2,199
|
|
|
17,367
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,112
|
)
|
|
2,495
|
|
|
1,975
|
|
International
|
|
|
3,088
|
|
|
366
|
|
|
(1,164
|
)
|
State and local
|
|
|
670
|
|
|
(956
|
)
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
1,646
|
|
|
1,905
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
12,548
|
|
$
|
4,104
|
|
$
|
18,488
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
November 28, 2010
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
(26,977
|
)
|
$
|
(37,941
|
)
|
$
|
(133
|
)
|
International
|
|
|
35,135
|
|
|
33,018
|
|
|
39,670
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,158
|
|
$
|
(4,923
|
)
|
$
|
39,537
|
|
|
|
|
|
|
|
|
|
The
differences between the actual tax expense and tax expense computed at the statutory U.S. Federal tax rate are explained as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
November 28, 2010
|
|
|
|
(in thousands)
|
|
Income tax expense computed at statutory rates
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense
|
|
$
|
2,855
|
|
$
|
(1,723
|
)
|
$
|
13,838
|
|
State and local income taxes, net of federal tax benefit
|
|
|
236
|
|
|
(607
|
)
|
|
1,783
|
|
Country mix impacts of foreign operations
|
|
|
(3,115
|
)
|
|
(2,358
|
)
|
|
524
|
|
Withholding taxes
|
|
|
4,534
|
|
|
1,842
|
|
|
|
|
Change in valuation allowance on deferred tax assets
|
|
|
(87
|
)
|
|
(441
|
)
|
|
(911
|
)
|
Effect of non deductible meals and entertainment
|
|
|
469
|
|
|
368
|
|
|
322
|
|
Non-deductible paid-in-kind interest
|
|
|
8,365
|
|
|
7,145
|
|
|
5,040
|
|
Income tax reserve adjustments
|
|
|
(687
|
)
|
|
(83
|
)
|
|
(671
|
)
|
Foreign dividends
|
|
|
1,305
|
|
|
|
|
|
|
|
Officers compensation
|
|
|
1,033
|
|
|
|
|
|
|
|
Domestic production activities deduction
|
|
|
(479
|
)
|
|
|
|
|
|
|
Foreign tax credit
|
|
|
(2,187
|
)
|
|
|
|
|
|
|
Other items, net
|
|
|
306
|
|
|
(39
|
)
|
|
(1,437
|
)
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
12,548
|
|
$
|
4,104
|
|
$
|
18,488
|
|
|
|
|
|
|
|
|
|
86
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 15:
Income Taxes (Continued)
Unrecognized
tax benefit adjustments result from a reduction in the income tax reserve as a result of the elimination of certain federal and state tax exposures during
fiscal 2012 and 2011 due to the expiration of the statute of limitations.
Deferred
income taxes reflect the tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax
purposes. The Company's total deferred tax assets and liabilities and their significant components are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
Current
Asset
(Liability)
|
|
Noncurrent
Asset
(Liability)
|
|
Current
Asset
(Liability)
|
|
Noncurrent
Asset
(Liability)
|
|
|
|
(in thousands)
|
|
Accrued salaries and benefits
|
|
$
|
6,100
|
|
$
|
7,599
|
|
$
|
6,550
|
|
$
|
8,667
|
|
Allowance for doubtful accounts
|
|
|
3,163
|
|
|
|
|
|
4,939
|
|
|
|
|
Plant shutdown, idle facilities, and environmental costs
|
|
|
276
|
|
|
353
|
|
|
350
|
|
|
394
|
|
Tax credit and loss carryforward benefit
|
|
|
271
|
|
|
20,646
|
|
|
1,399
|
|
|
23,459
|
|
Accrued warranty reserve
|
|
|
3,338
|
|
|
2,657
|
|
|
2,560
|
|
|
2,316
|
|
Other accrued reserves
|
|
|
762
|
|
|
|
|
|
475
|
|
|
|
|
Property, plant and equipment
|
|
|
842
|
|
|
(16,299
|
)
|
|
780
|
|
|
(18,133
|
)
|
Intangible assets
|
|
|
293
|
|
|
(8,778
|
)
|
|
(327
|
)
|
|
(9,075
|
)
|
Debt financing costs
|
|
|
|
|
|
585
|
|
|
|
|
|
789
|
|
Pension obligation
|
|
|
|
|
|
8,170
|
|
|
|
|
|
6,313
|
|
Cash discounts
|
|
|
7,083
|
|
|
|
|
|
5,325
|
|
|
|
|
Inventory
|
|
|
2,062
|
|
|
|
|
|
1,620
|
|
|
|
|
All other
|
|
|
(582
|
)
|
|
1,849
|
|
|
1,952
|
|
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,608
|
|
|
16,782
|
|
|
25,623
|
|
|
15,917
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(5,029
|
)
|
|
(12,930
|
)
|
|
(4,274
|
)
|
|
(14,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,579
|
|
$
|
3,852
|
|
$
|
21,349
|
|
$
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
The
fiscal 2012 and 2011 current and noncurrent deferred tax asset (liability), above, include amounts that are recorded in other current liabilities and
noncurrent assets on the consolidated balance sheets, as appropriate.
The
Company had a valuation allowance against certain deferred tax assets of $18.0 million at December 2, 2012 and $19.0 million at November 27, 2011,
primarily reflecting uncertainties regarding utilization of loss carryforward benefits in certain foreign and state jurisdictions.
At
December 2, 2012, the Company had unused tax affected state net operating loss and tax credit benefits of $7.4 million generally expiring from 2012
through 2028. There is a valuation allowance of $7.4 million against the amount of these tax affected benefits as the Company, at this time, expects that portion to expire unused.
During
fiscal 2012, we identified an opportunity to utilize favorable tax attributes to efficiently repatriate approximately $51.0 million of foreign earnings to the U.S.
from our foreign subsidiaries. Such repatriation of foreign cash is expected to occur in the first quarter of fiscal 2013 and allows us more flexibility in the redemption of our outstanding
debt in the U.S. As a result of this decision, we recognized $4.4 million of additional income tax expense during fiscal 2012 including $3.0 million of deferred tax liabilities on
a portion of our undistributed earnings from foreign operations for which no provision for U.S. federal and/or state income tax and foreign withholding tax had previously been
made. A provision has not been made for U.S. or foreign taxes on the remaining undistributed earnings of foreign subsidiaries considered indefinitely invested.
87
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 15:
Income Taxes (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Unrecognized tax benefits, beginning of year
|
|
$
|
13,922
|
|
$
|
14,770
|
|
Gross increasestax positions related to the current year
|
|
|
1,608
|
|
|
1,737
|
|
Gross increasestax positions related to the prior year
|
|
|
|
|
|
76
|
|
Gross decreasestax positions related to the current year
|
|
|
|
|
|
|
|
Gross decreasestax positions related to the prior year
|
|
|
(1
|
)
|
|
(208
|
)
|
Decreases for lapses in statutes of limitations
|
|
|
(1,487
|
)
|
|
(2,256
|
)
|
Decreases for settlements with taxing authorities
|
|
|
(1,742
|
)
|
|
(197
|
)
|
|
|
|
|
|
|
Unrecognized tax benefits, end of year
|
|
$
|
12,300
|
|
$
|
13,922
|
|
|
|
|
|
|
|
Net change
|
|
($
|
1,622
|
)
|
($
|
848
|
)
|
|
|
|
|
|
|
As
of December 2, 2012, $4.5 million represents the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate
in future periods.
The
Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. Additional interest and penalties, recorded as a component of income tax expense
during fiscal 2012 and 2011, were as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Additional (reduction in) interest, net
|
|
|
16
|
|
|
15
|
|
Additional (reduction in) penalties
|
|
|
(396
|
)
|
|
(281
|
)
|
|
|
|
|
|
|
Accrued
interest and penalties related to the Company's uncertain tax positions recognized in the Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Accrued interest
|
|
|
3,707
|
|
|
3,691
|
|
Accrued penalties
|
|
|
1,495
|
|
|
1,891
|
|
|
|
|
|
|
|
The
Company expects the liability for uncertain tax positions to decrease by $0.8 million within the succeeding twelve months due to expiration of income tax
statute of limitations.
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
provision (benefit) entirely in the period in which they are identified. While the Company is currently undergoing examinations of certain of its corporate income tax returns by tax authorities, no
issues related to these reserves have been presented to the Company and the Company has not been informed that such audits will result in an assessment or payment of taxes related to these positions
during the one year period following
88
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 15:
Income Taxes (Continued)
December 2,
2012. The Company also cannot predict when or if any other future tax payments related to these tax positions may occur.
Federal
years open to examination are fiscal year 2004 and forward. State and international jurisdictions remain open to examination for various years from fiscal year 2000
and forward.
Note 16:
Retirement Plans
Substantially all employees are covered by defined contribution profit sharing plans, where specific amounts (as annually established
by the Company's Board of Directors) are set aside in trust for retirement benefits. Profit sharing expense was $6.6 million for the year ended December 2, 2012 and $4.5 million
for each of the years ended November 27, 2011 and November 28, 2010, respectively.
The Company has a noncontributory, defined benefit pension plan covering current and former hourly employees at four of its active
plants and eight previously closed U.S. facilities. Sealy Canada, Ltd. (a 100% owned subsidiary of the Company) also sponsors a noncontributory, defined benefit pension plan covering hourly
employees at one of its facilities. Both plans provide retirement and survivorship benefits based on the employees' credited years of service. The Company's funding policy provides for contributions
of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes.
Pension
plan assets consist of investments in various equity and fixed income mutual funds as well as money market mutual funds. The long-term rate of return for the plans is
based on the weighted average of the plans' investment allocation and the historical returns for those asset
categories. Because future compensation levels are not a factor in these plans' benefit formula, the accumulated benefit obligation is approximately equal to the projected benefit obligation as
reported below. The discount rate is based on the returns on long-term bonds in the private sector and incorporates a long-term inflation rate. Summarized information for the
plans follows:
Components of net periodic pension cost for employees included in the Consolidated Statements of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
942
|
|
$
|
788
|
|
$
|
1,258
|
|
Interest cost
|
|
|
1,537
|
|
|
1,454
|
|
|
1,713
|
|
Expected return on assets
|
|
|
(1,588
|
)
|
|
(1,447
|
)
|
|
(1,246
|
)
|
Amortization of unrecognized net loss
|
|
|
821
|
|
|
524
|
|
|
498
|
|
Amortization of unrecognized prior service cost
|
|
|
151
|
|
|
167
|
|
|
226
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost
|
|
|
1,863
|
|
|
1,486
|
|
|
2,449
|
|
Less: Net periodic pension cost of discontinued operations
|
|
|
|
|
|
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
1,863
|
|
$
|
1,486
|
|
$
|
1,943
|
|
|
|
|
|
|
|
|
|
89
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 16:
Retirement Plans (Continued)
The
other changes in plan assets and benefit obligations recognized in accumulated other comprehensive income were:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Net loss
|
|
$
|
6,102
|
|
$
|
5,585
|
|
$
|
1,179
|
|
Amortization of prior service cost
|
|
|
(151
|
)
|
|
(167
|
)
|
|
(169
|
)
|
Amortization of net loss
|
|
|
(821
|
)
|
|
(524
|
)
|
|
(498
|
)
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
$
|
5,130
|
|
$
|
4,894
|
|
$
|
512
|
|
|
|
|
|
|
|
|
|
The
following assumptions, calculated on a weighted-average basis, were used to determine pension costs for the Company's pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Settlement (discount) rate(a)
|
|
|
4.72
|
%
|
|
5.48
|
%
|
|
5.70
|
%
|
Expected long term return on plan assets
|
|
|
7.38
|
%
|
|
7.85
|
%
|
|
7.85
|
%
|
Weighted average rate of increase in future compensation levels
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
-
(a)
-
Due
to current economic differences in the interest rates in the jurisdictions of the retirement plans, the discount rates used in fiscal 2012 to determine
the expenses for the United States retirement plan and Canadian retirement plan were 4.75% and 4.45%, respectively.
The measurement date for all of the Company's pension plans is the date of the fiscal year end. The funded status of the pension plans
as of December 2, 2012 and November 27, 2011, was as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
32,525
|
|
$
|
26,580
|
|
Service cost
|
|
|
942
|
|
|
788
|
|
Interest cost
|
|
|
1,537
|
|
|
1,454
|
|
Plan changes
|
|
|
|
|
|
127
|
|
Actuarial losses
|
|
|
6,869
|
|
|
4,687
|
|
Benefits paid
|
|
|
(703
|
)
|
|
(705
|
)
|
Expenses paid
|
|
|
(334
|
)
|
|
(302
|
)
|
Foreign currency exchange rate changes
|
|
|
176
|
|
|
(104
|
)
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
41,012
|
|
$
|
32,525
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
21,161
|
|
$
|
17,905
|
|
Actual return on assets
|
|
|
2,354
|
|
|
551
|
|
Employer contribution
|
|
|
1,890
|
|
|
3,787
|
|
Benefits paid
|
|
|
(703
|
)
|
|
(705
|
)
|
Expenses paid
|
|
|
(334
|
)
|
|
(302
|
)
|
Foreign currency exchange rate changes
|
|
|
140
|
|
|
(75
|
)
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
24,508
|
|
$
|
21,161
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(16,504
|
)
|
$
|
(11,364
|
)
|
90
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 16:
Retirement Plans (Continued)
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Amounts Recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
Noncurrent portion of benefit liability
|
|
$
|
(16,504
|
)
|
$
|
(11,364
|
)
|
Accumulated other comprehensive income
|
|
|
22,281
|
|
|
17,060
|
|
|
|
|
|
|
|
Net amount recognized as of fiscal year end
|
|
$
|
5,777
|
|
$
|
5,696
|
|
|
|
|
|
|
|
Accumulated Benefit Obligation and Fair Value of Assets:
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
(41,012
|
)
|
$
|
(32,525
|
)
|
Projected benefit obligation
|
|
|
(41,012
|
)
|
|
(32,525
|
)
|
Fair value of assets
|
|
|
24,508
|
|
|
21,161
|
|
|
|
|
|
|
|
Unfunded projected benefit obligation
|
|
$
|
(16,504
|
)
|
$
|
(11,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Amounts Recognized in Accumulated Other Comprehensive Income:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
21,033
|
|
$
|
15,687
|
|
Prior service credit
|
|
|
1,248
|
|
|
1,373
|
|
|
|
|
|
|
|
Net amount recognized as of fiscal year end
|
|
$
|
22,281
|
|
$
|
17,060
|
|
|
|
|
|
|
|
The
following assumptions, calculated on a weighted-average basis, were used to determine benefit obligations for the Company's pension plans as of December 2,
2012 and November 27, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Settlement (discount) rate(a)
|
|
|
4.00
|
%
|
|
4.72
|
%
|
|
5.48
|
%
|
Expected long term return on plan assets
|
|
|
6.93
|
%
|
|
7.85
|
%
|
|
7.85
|
%
|
Weighted average rate of increase in future compensation levels
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
-
(a)
The
discount rates used in fiscal 2012 to determine the benefit obligations for the United States retirement plan and Canadian retirement plan were
both 4.00%.
The
amounts in accumulated other comprehensive income/(loss) that are expected to be recognized as components of net income during the next year are as follows:
|
|
|
|
|
Amortization of net loss
|
|
$
|
1,089
|
|
Amortization of prior service cost
|
|
|
145
|
|
During fiscal 2013, we expect to contribute $2.8 million to our pension plans from available cash and equivalents. The
following table presents estimated future benefit payments:
|
|
|
|
|
Fiscal 2013
|
|
$
|
665
|
|
Fiscal 2014
|
|
|
715
|
|
Fiscal 2015
|
|
|
790
|
|
Fiscal 2016
|
|
|
895
|
|
Fiscal 2017
|
|
|
991
|
|
Fiscal 2018 - Fiscal 2022
|
|
|
7,268
|
|
91
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 16:
Retirement Plans (Continued)
Investment Objective and Strategies.
Our investment objectives are to minimize the volatility of the value of our pension assets
relative to pension
liabilities and to ensure assets are sufficient to pay plan benefits. Target and actual asset allocations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
Target
|
|
2012
Actual
|
|
2011
Actual
|
|
Allocation of plan assets:
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
60.00
|
%
|
|
60.37
|
%
|
|
80.24
|
%
|
Debt securities
|
|
|
40.00
|
%
|
|
36.40
|
%
|
|
16.71
|
%
|
Other
|
|
|
0.00
|
%
|
|
3.23
|
%
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
Total plan assets
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
Investment
strategies and policies reflect a balance of risk-reducing and return-seeking considerations. The objective of minimizing the volatility of assets relative to
liabilities is addressed primarily through asset diversification. Assets are broadly diversified across many asset classes to
achieve risk-adjusted returns that, in total, lower asset volatility relative to liabilities. Our policy to rebalance our investment regularly ensures that actual allocations are in line
with target allocations as appropriate.
Strategies
to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes that provide return, diversification and
liquidity.
The
plan's investment fiduciaries are responsible for setting asset allocation targets, and monitoring asset allocation and investment performance. The Company's pension investment
manager has discretion to manage assets to ensure compliance with the asset allocations approved by the plan fiduciaries.
Significant Concentrations of Risk.
Significant concentrations of risk in our plan assets relate to equity, interest rate, and
operating risk. In
order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to equity investments that are expected, over time, to earn higher returns with more volatility than fixed
income investments which more closely match pension liabilities. Within equities, risk is mitigated by constructing a portfolio that is broadly diversified by geography, market capitalization,
investment style and process.
In
order to minimize asset volatility relative to the liabilities, a portion of plan assets are allocated to fixed income investments that are exposed to interest rate risk. Rate
increases will generally result in a decline in fixed income assets while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially
offsetting the related increase in the liabilities.
Operating
risks primarily include the risks of inadequate diversification and insufficient oversight. To mitigate this risk, investments are diversified across and within asset classes
in support of investment objectives. Policies and practices to address operating risks include ongoing oversight, plan and asset class investment guidelines, and periodic reviews to these guidelines
to ensure adherence.
92
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 16:
Retirement Plans (Continued)
Expected Long-Term Return on Plan Assets.
The expected long-term return assumption at December 2, 2012 was 7.50% for
the United States retirement plan and 6.25% for the
Canadian plan. The expected long-term return assumption is based on historical and projected rates of return for current and planned asset classes in the plan's investment portfolio. The
assumption considers various sources, primarily inputs from advisors for long-term capital market returns, inflation, bond yields, and other variables, adjusted for specific aspects of our
investment strategy by plan.
The
investments in plan assets primarily consist of mutual funds and money market funds. Investments in mutual funds and money market funds are valued at the net asset value per share or
unit multiplied by the number of shares or units held as of the measurement date. The fair value of the Company's pension benefit plan assets at December 2, 2012 by asset category was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fundsU.S. companies
|
|
$
|
10,053
|
|
$
|
|
|
$
|
10,053
|
|
$
|
|
|
Mutual fundsInternational companies
|
|
|
4,734
|
|
|
|
|
|
4,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity funds
|
|
|
14,787
|
|
|
|
|
|
14,787
|
|
|
|
|
Mutual fundsfixed income
|
|
|
8,797
|
|
|
|
|
|
8,797
|
|
|
|
|
Money market funds
|
|
|
924
|
|
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,508
|
|
$
|
|
|
$
|
24,508
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 27, 2011
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fundsU.S. companies
|
|
$
|
7,322
|
|
$
|
|
|
$
|
7,322
|
|
$
|
|
|
Mutual fundsInternational companies
|
|
|
9,552
|
|
|
|
|
|
9,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity funds
|
|
|
16,874
|
|
|
|
|
|
16,874
|
|
|
|
|
Mutual fundsfixed income
|
|
|
3,632
|
|
|
|
|
|
3,632
|
|
|
|
|
Money market funds
|
|
|
655
|
|
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,161
|
|
$
|
|
|
$
|
21,161
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Employer Benefit Plans
Approximately 68% of our domestic employees are represented by various labor unions with separate collective bargaining agreements. As
of December 2, 2012, our domestic and international manufacturing plants employed 859 and 486 employees, respectively, who were covered under collective
93
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 16:
Retirement Plans (Continued)
bargaining
agreements expiring within one year. Hourly employees working at ten of the Company's domestic manufacturing facilities are covered by union sponsored retirement plans. Further, employees
working at three of the Company's domestic manufacturing facilities are covered by union sponsored health and welfare plans. These plans cover both active employees and retirees. Through the health
and welfare plans, employees received medical, dental, vision, prescription and disability coverage. The Company's cost associated with these plans consists of periodic contributions to these plans
based upon employee participation. The expense recognized by the Company for such contributions was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Multi-employer retirement plan expense
|
|
$
|
5,092
|
|
$
|
5,284
|
|
$
|
4,779
|
|
Multi-employer health and welfare plan expense
|
|
$
|
3,098
|
|
$
|
3,089
|
|
$
|
2,755
|
|
The
risks of participating in multi-employer pension plans are different from the risks of participating in single-employer pension plans in the following respects: 1) Assets
contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers; 2) If a participating employer ceases its contributions to
the plan, the unfunded obligations of the plan allocable to the withdrawing employer may be borne by the remaining participant employers; 3) If the Company withdraws from the multi-employer
pension plans in which it participates, the Company may be required to pay those plans an amount based on its allocable share of the underfunded status of the plan. As discussed in Note 25, the
Company expects to incur a withdrawal liability of $1.8 million related to the relocation of its Portland, Oregon manufacturing facility.
The
following table presents information regarding the multi-employer pension plans that are significant to the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Protection Act
Zone Status(1)
|
|
|
|
Contributions of
Sealy Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration Date
of Collective
Bargaining
Agreement
|
|
|
EIN/Pension Plan Number
|
|
FIP/RP Status
Pending/
Implemented(2)
|
|
Surcharge
Imposed(3)
|
Pension Fund
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
United Furniture Workers Pension Fund A(4)
|
|
|
13-5511877-001
|
|
Red
|
|
Red
|
|
Implemented
|
|
$
|
1,117
|
|
$
|
1,546
|
|
$
|
890
|
|
Yes, 10%
|
|
2013 and 2014
|
Pension Plan of the National Retirement Fund(4)
|
|
|
13-6130178-001
|
|
Red
|
|
Red
|
|
Implemented
|
|
$
|
890
|
|
|
927
|
|
|
1,039
|
|
Yes, 10%
|
|
2013
|
-
(1)
-
The
Pension Protection Act of 2006 ranks the funded status of multi-employer pension plans depending upon a plan's current and projected funding. A
plan is in the Red Zone (Critical) if it has a current funded percentage less than 65%. A plan is in the Yellow Zone (Endangered) if it has a current funded percentage of less than 80%, or projects a
credit balance deficit within seven years. A plan is in the Green Zone (Healthy) if it has a current funded percentage greater than 80% and does not have a projected credit balance deficit within
seven years. The zone status is based on the plan's year end rather than the Company's. The zone status listed above is based on information that the Company received from the plan and is certified by
the plan's actuary for the most recent year available.
-
(2)
-
Funding
Improvement Plan or Rehabilitation Plan as defined in the Employment Retirement Security Act of 1974 has been implemented or is pending.
-
(3)
-
Indicates
whether the Company paid a surcharge to the plan in the most current year due to funding shortfalls and the amount of the surcharge.
-
(4)
-
The
Company was not listed in the plan's Form 5500 as providing more than 5% of the total contributions for the most recent plan year available.
94
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 17:
Redeemable Noncontrolling Interest
The Company is party to a put and call arrangement with respect to the common securities that represent the 55% noncontrolling interest from the acquisition of Comfort Revolution. The
call arrangement may be exercised by the Company upon the fifth anniversary of the acquisition date. Likewise, the put arrangement may be exercised by the CR Member upon the sixth anniversary of the
acquisition date. The redemption value of both the put and the call arrangement is equal to 7.5 times earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined in the
related LLC agreement, of Comfort Revolution for the preceding 12 months, adjusted for net debt outstanding and multiplied by the 55% ownership interest held by the CR Member. Due to the
existing put and call arrangements, the noncontrolling interest is considered to be redeemable in accordance with the related authoritative accounting guidance and is recorded on the balance sheet as
a redeemable noncontrolling interest outside of permanent equity. The redeemable noncontrolling interest is recognized at the higher of 1) the accumulated earnings associated with the
noncontrolling interest or 2) the redemption value as of the balance sheet date. At December 2, 2012, the redeemable noncontrolling interest was recorded based on the fair value upon
acquisition and the accumulated losses of Comfort Revolution since the acquisition date. The redemption amount as of December 2, 2012 is an insignificant amount.
A
reconciliation of redeemable noncontrolling interests for the year ended December 2, 2012 is as follows (in thousands):
|
|
|
|
|
Balance, beginning of period
|
|
$
|
|
|
Acquisition of redeemable noncontrolling interest
|
|
|
12,222
|
|
Net loss attributable to noncontrolling interest
|
|
|
(1,187
|
)
|
|
|
|
|
Balance, end of period
|
|
$
|
11,035
|
|
|
|
|
|
95
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 18:
Summary of Interim Financial Information (Unaudited)
Quarterly financial data for the years ended December 2, 2012 and November 27, 2011, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(Amounts in thousands, except for
share and per share data)
|
|
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
312,290
|
|
$
|
312,031
|
|
$
|
365,434
|
|
$
|
358,115
|
|
Gross profit
|
|
|
122,375
|
|
|
127,020
|
|
|
148,205
|
|
|
141,907
|
|
Income (loss) from continuing operations
|
|
|
1,606
|
|
|
2,815
|
|
|
110
|
|
|
(3,746
|
)
|
Loss from discontinued operations
|
|
|
(370
|
)
|
|
(1,137
|
)
|
|
(307
|
)
|
|
(148
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
91
|
|
|
1,096
|
|
Net income (loss) attributable to common shareholders
|
|
|
1,236
|
|
|
1,678
|
|
|
(106
|
)
|
|
(2,798
|
)
|
Earnings per shareBasic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
0.02
|
|
|
0.03
|
|
|
|
|
|
(0.03
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) attributable to common shareholders
|
|
|
0.02
|
|
|
0.02
|
|
|
|
|
|
(0.03
|
)
|
Earnings per shareDiluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
0.01
|
|
|
0.03
|
|
|
|
|
|
(0.03
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) attributable to common shareholders
|
|
|
0.01
|
|
|
0.02
|
|
|
|
|
|
(0.03
|
)
|
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
305,529
|
|
$
|
321,296
|
|
$
|
334,067
|
|
$
|
269,259
|
|
Gross profit
|
|
|
118,504
|
|
|
125,074
|
|
|
137,000
|
|
|
98,124
|
|
Income from continuing operations
|
|
|
130
|
|
|
750
|
|
|
7,489
|
|
|
(14,025
|
)
|
Loss from discontinued operations
|
|
|
(1,032
|
)
|
|
(1,127
|
)
|
|
(891
|
)
|
|
(1,182
|
)
|
Net income (loss)
|
|
|
(902
|
)
|
|
(377
|
)
|
|
6,598
|
|
|
(15,207
|
)
|
Earnings per shareBasic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
0.01
|
|
|
0.07
|
|
|
(0.14
|
)
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
|
|
|
(0.01
|
)
|
|
|
|
|
0.07
|
|
|
(0.15
|
)
|
Earnings per shareDiluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
0.01
|
|
|
0.04
|
|
|
(0.14
|
)
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
|
|
|
(0.01
|
)
|
|
|
|
|
0.04
|
|
|
(0.15
|
)
|
Note 19:
Accumulated Other Comprehensive Income
Comprehensive (loss) income includes net income, foreign currency translation adjustments, net accumulated derivative gains and losses on cash flow hedges not yet realized and changes in
actuarial losses and prior service credits for defined benefit pension liabilities. The following table provides the
96
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 19:
Accumulated Other Comprehensive Income (Continued)
components
of accumulated other comprehensive income in the Condensed Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
Unrealized gain (loss) on cash flow hedges, net of tax of $(104) and $519, respectively
|
|
$
|
(164
|
)
|
$
|
815
|
|
Unrealized actuarial loss and prior service credit for pension liability, net of tax of $8,616 and $6,623, respectively
|
|
|
(13,666
|
)
|
|
(10,438
|
)
|
Accumulated foreign currency translation adjustment
|
|
|
17,193
|
|
|
9,114
|
|
|
|
|
|
|
|
|
|
$
|
3,363
|
|
$
|
(509
|
)
|
|
|
|
|
|
|
Note 20:
Contingencies
During fiscal 2012, the Company identified a manufacturing defect with respect to certain of its foundation units that were sold
to certain customers during the 2008 through 2011 fiscal years. The Company plans to repair or replace these defective foundation units and is expected to incur costs of $1.6 million related to
the replacement products, and charges for transportation and labor. This expense was recorded as a component of cost of goods sold in the accompanying Condensed Consolidated Statement of Operations.
On July 19, 2012, a purported shareholder of the Company filed a shareholder derivative complaint in the Court of Chancery of
the State of Delaware against the members of the Company's Board of Directors (the "Board"), styled
Plourde, v. Rogers et al.
, Civ. Action
No. 7709-VCP. The complaint alleges that the Board and certain executive officers had breached their fiduciary duty to the Company from at least April 2009 through the
present by acting in the interests of Kohlberg Kravis & Roberts & Co. L.P. ("KKR"), the Company's largest shareholder, instead of in the interests of the Company. The
complaint alleges that the Board allowed the Company to pay unreasonable fees to KKR's in-house consulting firm, caused the Company to make misstatements and omissions about its financial
results and relationship with KKR, and changed director and officer compensation arrangements to align with KKR's interests. The complaint alleges that three of the current members of the Board are
directly affiliated with KKR, and that other Board members are not independent. The complaint seeks unspecified damages and asserts against the Board claims for: (1) breach of the duty of
candor/disclosure, (2) breach of the duty to oversee the Company, and (3) gross mismanagement. On January 29, 2013, the Delaware Court of Chancery granted a Notice and Order of
Dismissal submitted by the plaintiff, which dismissed without prejudice this derivative case.
Six
purported class action lawsuits have been filed relating to the Merger. One suit was filed in North Carolina state court and five were filed in the Delaware Court of Chancery by
purported stockholders of the Company against the Company, the Company's directors, the Silver Lightning Merger Company ("Sub"), and Tempur-Pedic.
Justewicz v.
Sealy Corp., et al
. ("North Carolina Action")
97
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 20:
Contingencies (Continued)
was
filed on October 3, 2012, in the General Court of Justice, Superior Court Division in North Carolina ("North Carolina Court"). On November 13, 2012, the Delaware Court of Chancery
consolidated all five Delaware actions into a single action, now styled as
In re Sealy Corporation Shareholder Litigation
("Delaware Action"). Plaintiff
in the North Carolina Action and plaintiffs in the Delaware Action allege, among other things, that the defendants have breached their fiduciary duties to the Company's stockholders and that the
Company, Sub and Tempur-Pedic aided and abetted the Company's directors' alleged breach of fiduciary duties. The complaints also claim that the Merger Consideration is inadequate, that the Merger
Agreement contains unfair deal protection provisions, that the Company's directors are subject to conflicts of interests, and that the Preliminary Information Statement filed by the Company on
October 30, 2012, omits material information concerning the negotiation process leading to the proposed transaction and the valuation of the Company.
On
October 12, 2012, plaintiff in the North Carolina Action brought a Motion for Expedited Discovery and for a Hearing and Briefing Schedule on Plaintiff's Motion for a
Preliminary Injunction. On October 24, 2012, defendants in the North Carolina Action brought a Motion to Stay the North Carolina Action in favor of the Delaware Action. On November 7,
2012, the North Carolina Action plaintiff amended his complaint to add allegations claiming that the Preliminary Information Statement filed by the Company on October 30, 2012, did not provide
sufficient information. Following briefing and a hearing on November 8, 2012, the North Carolina Court stayed the North Carolina Action.
On
November 19, 2012, plaintiffs in the Delaware Action filed a consolidated amended complaint, a motion for expedited proceedings, and a motion for a preliminary injunction.
The
Company believes that the allegations in these lawsuits are entirely without merit. On January 22, 2013, solely to avoid the burden, expense and uncertainties inherent in
litigation, and without admitting any liability or wrongdoing, the parties to the Delaware Action entered into a memorandum of understanding setting forth an
agreement-in-principle providing for a settlement of the Delaware Action (the "Proposed Settlement"). In connection with the Proposed Settlement, the Company agreed to include
certain supplemental disclosures in an amended information statement. The Proposed Settlement provides for the release of all claims by Company stockholders concerning the Merger Agreement, the
Merger, and the disclosures made in connection with the Merger, including all claims that were asserted or could have been asserted in the Delaware Action and the North Carolina Action. The Proposed
Settlement does not provide for the payment of additional monetary consideration to Company stockholders and the Proposed Settlement does not affect the rights of any Company stockholder to seek
appraisal pursuant to Section 262 of the Delaware General Corporation Law. The Proposed Settlement is subject to definitive documentation and approval by the Delaware Court of Chancery.
In
March 2012,
Hernandez et al v. Sealy Mattress Manufacturing Co.
was filed in Superior Court in California with respect to
some allegations of improper wage and hour calculations in accordance with California state law. The Company is vigorously defending this lawsuit and it is too early to determine
a potential liability related to this action as there has been little discovery and the matter has not yet been presented for class certification.
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
98
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 20:
Contingencies (Continued)
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. Previously, we removed and disposed of contaminated soil from the site with the New Jersey
Department of Environmental Protection approval, the Company has installed 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. During 2012, with the
approval of the New Jersey Department of Environmental Protection, the Company commenced the removal and disposal of additional contaminated soil from the site. The Company has recorded a reserve as a
component of other accrued expenses and other noncurrent liabilities in the accompanying Consolidated Balance Sheets as of December 2, 2012 for $1.6 million ($2.0 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. In
December 2012, the Company received from the Connecticut Department of Energy and Environmental Protection approval of the Company's closure report for the upper parcel of the Company's
Oakville, Connecticut site. 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 unaffiliated occupants of the facility.
While
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 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.
In 1998,
the Company sold an inactive facility located in Putnam, Connecticut. During 2012, the Company received a letter from the attorney for the current owner of that
property claiming that Sealy may have some responsibility for an environmental condition on the property. The Company has requested additional information on this matter and is awaiting receipt of
that information.
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 December 2, 2012, the Company had recorded a reserve of $1.0 million related to the expected
requirement to pay certain sales tax, fees and penalties associated with this assessment as a component of accrued expenses.
As
of December 2, 2012, the Company had been notified of several outstanding contingencies related to the disposition of its European operations in fiscal 2010. See
Note 13 for further details.
99
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 21:
Segment and Geographic Information and Product Related Information
The Company's segments are identified based on the Company's organizational structure which is organized around geographic areas. The segments are able to be aggregated for reporting
purposes based on similar economic characteristics in accordance with applicable authoritative literature surrounding segment presentation.
The Company produces sleep sets across a range of technologies, including innerspring, latex foam and visco-elastic "memory foam". The
U.S. mattress industry groups these products in categories based on innerspring and specialty technologies. The products for international locations are aggregated as they are substantially similar
and the international markets do not have similar product categorization. In the domestic market the Company's net revenue by product type for fiscal year 2012, 2011 and 2010 was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Net salesDomestic innerspring bedding
|
|
$
|
887,956
|
|
$
|
852,352
|
|
$
|
861,001
|
|
Net salesDomestic specialty bedding
|
|
|
121,059
|
|
|
81,448
|
|
|
69,928
|
|
|
|
|
|
|
|
|
|
Total bedding sales
|
|
|
1,009,015
|
|
|
933,800
|
|
|
930,929
|
|
Other revenue(1)
|
|
|
27,418
|
|
|
18,608
|
|
|
20,177
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,036,433
|
|
$
|
952,409
|
|
$
|
951,106
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Other
revenue includes external sales of Comfort Revolution and the Company's components and U.S. latex businesses.
Net sales to external customers by geographic area are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
United States
|
|
$
|
1,036,433
|
|
$
|
952,409
|
|
$
|
951,106
|
|
Canada
|
|
|
198,714
|
|
|
182,350
|
|
|
185,706
|
|
Other International
|
|
|
112,723
|
|
|
95,392
|
|
|
82,659
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,347,870
|
|
$
|
1,230,151
|
|
$
|
1,219,471
|
|
|
|
|
|
|
|
|
|
Total International
|
|
$
|
311,437
|
|
$
|
277,742
|
|
$
|
268,365
|
|
Long
lived assets (principally property, plant and equipment) outside the United States were $35.2 million and $35.4 million as of December 2, 2012 and
November 27, 2011, respectively.
Note 22:
Leasing Activities
In connection with the exit of the manufacturing operations in Brazil, the Company entered into a lease arrangement for its former manufacturing facility and related equipment. The
leased assets have a cost basis and carrying value of $5.0 million and $1.9 million, respectively as of December 2, 2012.
100
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 22:
Leasing Activities (Continued)
The
following is a schedule of minimum future rental income at December 2, 2012 (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
2013
|
|
$
|
886
|
|
2014
|
|
|
886
|
|
2015
|
|
|
886
|
|
2016
|
|
|
886
|
|
2017
|
|
|
886
|
|
Thereafter
|
|
|
4,539
|
|
|
|
|
|
|
|
$
|
8,969
|
|
|
|
|
|
The
provisions of this lease include an option to purchase the manufacturing facility and related equipment for a total of $15.0 million, net of lease payments received.
Note 23:
Related Party Transactions
During fiscal 2012, the Company incurred costs for consulting services rendered by KKR (who controlled approximately 44.7% of our issued and outstanding common stock at
December 2, 2012) and Capstone Consulting LLC (a consulting company that works exclusively with KKR's portfolio companies) of $0.5 million. The Company also participates in a
lease arrangement with a KKR affiliate for our Clarion facility for a six month term with additional six month renewal options available. We received lease income on this property of an insignificant
amount during fiscal 2012.
Sealy
Holding LLC, an affiliate of KKR, holds an aggregate amount of $118.7 million of the Company's Convertible Notes. In connection with the PIK interest payment on the
Convertible Notes on January 15, 2012 and July 15, 2012, the par value of the notes held by KKR was increased by $4.4 million and $4.6 million, respectively.
During
fiscal 2012, the Company's joint ventures declared a distribution of $6.5 million which has been reflected as a reduction of the investment in these joint ventures
in the accompanying Consolidated Balance Sheet as of December 2, 2012. During fiscal 2012, the Company also earned $0.9 million in licensing fees from the Company's joint
ventures.
During
fiscal 2011, the Company incurred costs for consulting services rendered by KKR (who controlled approximately 46.2% of our issued and outstanding common stock at
November 27, 2011) and Capstone Consulting LLC (a consulting company that works exclusively with KKR's portfolio companies) of $1.3 million. As of November 27, 2011,
$0.2 million of this amount was accrued as a component of other accrued liabilities and accounts payable in the accompanying Condensed Consolidated Balance Sheets. The Company also participates
in a lease arrangement with a KKR affiliate for our Clarion facility for a six month term with additional six month renewal options available. We received lease income on this property of an
insignificant amount during fiscal 2011.
In
connection with the PIK interest payment on the Convertible Notes on January 15, 2011 and July 15, 2011, the par value of the notes held by KKR was increased by
$4.1 million and $4.2 million, respectively.
During
fiscal 2011, the Company's joint ventures declared a distribution of $1.0 million which has been reflected as a reduction of the investment in these joint ventures
in the accompanying
101
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 23:
Related Party Transactions (Continued)
Consolidated
Balance Sheet as of November 27, 2011. During fiscal 2011, the Company also earned $0.2 million in licensing fees from the Company's joint ventures.
During
fiscal 2010, the Company incurred costs for consulting services rendered by KKR (who controlled approximately 47.7% of our issued and outstanding common stock at
November 28, 2010) and Capstone Consulting LLC (a consulting company that works exclusively with KKR's portfolio companies) of $1.9 million. As of November 28, 2010,
$0.2 million of this amount was accrued as a component of other accrued liabilities and accounts payable in the accompanying Condensed Consolidated Balance Sheets. The Company also participates
in a lease arrangement with a KKR affiliate for our Clarion facility for a six month term with an additional six month renewal options available. We received lease income on this property of an
insignificant amount during fiscal 2010.
In
connection with the PIK interest payment on the Convertible Notes on January 15, 2010 and July 15, 2010, the par value of the notes held by KKR was increased by
$3.8 million and $3.9 million, respectively.
During
fiscal 2010, the Company's joint ventures declared a distribution of $1.0 million which has been reflected as a reduction of the investment in these joint ventures
in the accompanying Consolidated Balance Sheet as of November 28, 2010. As of November 29, 2009, the Company had an outstanding loan receivable of $2.2 million from one of its
joint ventures. During fiscal 2010, the entire balance of this loan was repaid to the Company. During fiscal 2010, the Company also earned $0.1 million in licensing fees from the Company's
joint ventures.
During
fiscal 2010, interest expense of $5.1 million has been recorded related to KKR Financial LLC's portion of the outstanding Senior Notes. At November 28,
2010, $4.5 million of this amount has been paid and $0.6 million remains accrued. These notes were no longer held by KKR Financial at November 27, 2011.
102
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 24:
Earnings Per Share
Basic and diluted earnings/(loss) per share were computed using the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2, 2012
|
|
November 27, 2011
|
|
November 28, 2010
|
|
|
|
(in thousands)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations, as reported
|
|
$
|
1,972
|
|
$
|
(5,656
|
)
|
$
|
24,660
|
|
Net income (loss) attributable to participating securities
|
|
|
(6
|
)
|
|
10
|
|
|
(57
|
)
|
Interest on convertible notes
|
|
|
|
|
|
|
|
|
16,109
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to common shareholders
|
|
$
|
1,966
|
|
$
|
(5,646
|
)
|
$
|
40,712
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per shareweighted average shares
|
|
|
102,470
|
|
|
99,261
|
|
|
95,934
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
|
|
|
|
|
|
183,615
|
|
Stock options
|
|
|
449
|
|
|
|
|
|
1,087
|
|
Restricted share units
|
|
|
5,640
|
|
|
|
|
|
8,865
|
|
Other
|
|
|
592
|
|
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions
|
|
|
109,151
|
|
|
99,261
|
|
|
289,857
|
|
|
|
|
|
|
|
|
|
For
fiscal 2012, 4,084 options and share units (in thousands) were not included in the computation of diluted earnings per share because their impact is antidilutive.
Additionally, for fiscal 2012, a weighted average 214,808 shares (in thousands) of the outstanding Convertible Notes were excluded from the computation of diluted earnings per share since their
inclusion would be antidilutive. Since the Company reported a net loss for fiscal 2011, the 222,622 outstanding options to purchase common stock, restricted shares, share units and rights for
Convertible Notes (in thousands) are considered antidilutive and are not included in the calculation of diluted earnings per share. Options and share units not included in the calculation of diluted
earnings per share because their impact is antidilutive (in thousands) for fiscal 2010 are 4,927.
As
of December 2, 2012, November 27, 2011 and November 28, 2010, the Company's capital stock consists of voting Class A common stock, par value $0.01 per
share ("Class A Common"). The Board of Directors of the Company is authorized to issue preferred stock, par value $0.01 per share, with such designations and other terms as may be stated in the
resolutions providing for the issue of any such preferred stock adopted from time to time by the Board of Directors.
On
May 26, 2009, in order to have sufficient authorized but unissued shares of common stock for issuance with any conversion of the Convertible Notes, the Company amended its
Certificate of Incorporation to increase the number of voting Class A shares of common stock authorized for issuance by 400,000,000 to a total of 600,000,000 shares. The number of authorized
shares of preferred stock, par value $0.01 per share, remained unchanged at 50,000,000.
103
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 24:
Earnings Per Share (Continued)
On
February 19, 2007, the Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $100 million of the Company's common stock. The
Company has repurchased $16.3 million under this program as of December 2, 2012, all of which were repurchased in fiscal 2007.
Note 25:
Restructuring Activities
During fiscal 2012, the Company recognized pre-tax restructuring charges of $2.4 million related to the planned move of its manufacturing facility in Portland,
Oregon to a new location in Lacey, Washington. The Company did not recognize any such charges during fiscal 2011 and fiscal 2010.
In
the fourth quarter of fiscal 2012, management made the decision to relocate its manufacturing facility in Portland, Oregon to a new location in Lacey, Washington in order to
realize operational cost savings in the new location. Closure of this facility is expected to occur in early fiscal 2013 and is expected to result in the elimination or relocation of
approximately 145 positions. The following table summarizes the charges recognized by the Company and the related restructuring liabilities balance (included as a component of other accrued
liabilities within the accompanying Consolidated Balance Sheets) as of December 2, 2012 related to this restructuring activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Restructuring Activities
|
|
|
|
Liabilities
November 27, 2011
|
|
Charges to
Expense
|
|
Cash
Payments
|
|
Non-cash
Utilized
|
|
Liabilities
December 2, 2012
|
|
|
|
(in thousands)
|
|
Severance and employee benefits
|
|
$
|
|
|
$
|
621
|
|
$
|
|
|
$
|
|
|
$
|
621
|
|
Multi-employer pension withdrawal liability
|
|
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
2,421
|
|
$
|
|
|
$
|
|
|
$
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company expects to incur additional restructuring charges related to this activity of approximately $1.7 million, principally in the form of relocation costs, which are
expected to be recorded in the first and second quarters of fiscal 2013, after which time the plan should be complete.
Note 26:
Merger Agreement with Tempur-Pedic International
On September 26, 2012, the Company entered into a Merger Agreement with Tempur-Pedic pursuant to which a wholly-owned subsidiary of Tempur-Pedic will merge with and into the
Company, resulting in the Company becoming a subsidiary of Tempur-Pedic. In connection with the Merger, each share of the Company's common stock issued and outstanding immediately prior to the Merger
will be converted into the right to receive $2.20 per share in cash. As part of the transaction, it is anticipated that the Company's outstanding senior and subordinated notes will also be redeemed in
accordance with the provisions of the related note indentures.
Completion
of the Merger is subject to several conditions, including (i) the adoption of the Merger Agreement by the affirmative vote or written consent of the holders of at least
a majority of the outstanding shares of the Company's common stock which occurred when holders of greater than a majority of the Company's outstanding shares of common stock delivered a written
consent on September 26, 2012; (ii) the expiration or termination of the applicable waiting period under the
104
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 26:
Merger Agreement with Tempur-Pedic International (Continued)
Hart-Scott-Rodino
Antitrust Improvements Act of 1976 ("HSR Act"); (iii) the clearance by the SEC of an information statement of the type contemplated by
Rule 14c-2 promulgated under the Exchange Act related to the Merger and Merger Agreement, which after clearance must be sent to stockholders of the Company at least 20 days
prior to the merger; (iv) the absence of a material adverse effect on the Company; and (v) other customary closing conditions.
The
Merger Agreement may be terminated by either the Company or Tempur-Pedic if the Merger has not been consummated by June 26, 2013 (subject to certain extensions) or if a court
or other governmental entity of competent jurisdiction issues a final, non-appealable order permanently restraining, enjoining or otherwise prohibiting the Merger. In addition, among other
things, Tempur-Pedic may, but is not required to, terminate the Merger Agreement if the Company enters into, or publicly proposes to enter into, an agreement relating to the acquisition by a third
party of greater than 20% of the stock of the Company or greater than 20% of the consolidated assets or revenues of the Company and its subsidiaries. In case of such termination, Tempur-Pedic would be
entitled to a break-up fee of $25.0 million. In addition, in certain circumstances when the Merger Agreement is terminated and upon such termination the applicable waiting period
under the HSR Act has not expired or been terminated, Tempur-Pedic will be required to pay a reverse termination fee of either $90.0 million or $40.0 million to the Company, depending on
the circumstances of such termination.
Note 27:
Subsequent Event
On January 10, 2013, the Company redeemed $35.0 million of its outstanding Senior Notes at a redemption price of 103% of the principal amount of the notes or
$36.1 million, plus accrued and unpaid interest to the redemption date of $0.9. In connection with the redemption, the Company also recognized charges of $1.1 million related to the
premium paid to redeem the notes and $1.6 million related to the write-off of related debt issuance costs and original issue discount.
Note 28:
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"), are 100% owned subsidiaries of the Issuer, and 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 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.
105
SEALY CORPORATION
Notes To Consolidated Financial Statements (Continued)
Note 28:
Guarantor/Non-Guarantor Financial Information (Continued)
The
following supplemental condensed consolidating financial statements present:
1. Condensed
consolidating balance sheets as of December 2, 2012 and November 27, 2011 and condensed consolidating statements of operations and cash flows for
the fiscal years ended December 2, 2012, November 27, 2011 and November 28, 2010.
2. Sealy
Corporation (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 for further details.
3. Elimination
entries necessary to consolidate the Guarantor Parent and all of its subsidiaries.
There
are no material contingencies, guarantees or redeemable stock requirements outstanding pertaining to Sealy Corporation as a standalone entity. The long-term obligations
recorded on the separate company financial statements for Sealy Corporation presented below relate to the Company's Convertible Notes, the terms of which are further discussed in Note 8. Sealy
Corporation has not received cash dividends from any of its subsidiaries or its equity method investees during the fiscal years ended December 2, 2012, November 27, 2011 and
November 28, 2010.
106
SEALY CORPORATION
Supplemental Condensed Consolidating Balance Sheets
December 2, 2012
(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
|
|
$
|
155
|
|
$
|
|
|
$
|
237
|
|
$
|
42,391
|
|
$
|
85,371
|
|
$
|
|
|
$
|
128,154
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
45
|
|
|
83,043
|
|
|
69,531
|
|
|
|
|
|
152,619
|
|
Inventories
|
|
|
|
|
|
|
|
|
1,545
|
|
|
55,760
|
|
|
15,218
|
|
|
(159
|
)
|
|
72,364
|
|
Other current assets and deferred income taxes
|
|
|
2,867
|
|
|
|
|
|
432
|
|
|
45,488
|
|
|
4,150
|
|
|
|
|
|
52,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,022
|
|
|
|
|
|
2,259
|
|
|
226,682
|
|
|
174,270
|
|
|
(159
|
)
|
|
406,074
|
|
Property, plant and equipment, at cost
|
|
|
|
|
|
|
|
|
10,509
|
|
|
374,522
|
|
|
38,975
|
|
|
|
|
|
424,006
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
|
|
(6,273
|
)
|
|
(231,037
|
)
|
|
(22,673
|
)
|
|
|
|
|
(259,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,236
|
|
|
143,485
|
|
|
16,302
|
|
|
|
|
|
164,023
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
24,741
|
|
|
301,942
|
|
|
36,546
|
|
|
|
|
|
363,229
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,710
|
|
|
|
|
|
14,710
|
|
Net investment in subsidiaries
|
|
|
|
|
|
221,350
|
|
|
373,737
|
|
|
282,728
|
|
|
|
|
|
(877,815
|
)
|
|
|
|
Due from (to) affiliates
|
|
|
328,968
|
|
|
|
|
|
529,218
|
|
|
|
|
|
|
|
|
(858,186
|
)
|
|
|
|
Debt issuance costs, net and other assets
|
|
|
|
|
|
|
|
|
20,084
|
|
|
17,379
|
|
|
19,846
|
|
|
|
|
|
57,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,968
|
|
|
221,350
|
|
|
947,780
|
|
|
602,049
|
|
|
71,102
|
|
|
(1,736,001
|
)
|
|
435,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
331,990
|
|
$
|
221,350
|
|
$
|
954,275
|
|
$
|
972,216
|
|
$
|
261,674
|
|
$
|
(1,736,160
|
)
|
$
|
1,005,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' (Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portionlong-term obligations
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
1,483
|
|
$
|
2,562
|
|
$
|
|
|
$
|
4,045
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
242
|
|
|
69,700
|
|
|
30,854
|
|
|
|
|
|
100,796
|
|
Accrued customer incentives and advertising
|
|
|
|
|
|
|
|
|
|
|
|
24,421
|
|
|
10,243
|
|
|
|
|
|
34,664
|
|
Accrued compensation
|
|
|
|
|
|
|
|
|
385
|
|
|
27,917
|
|
|
4,763
|
|
|
|
|
|
33,065
|
|
Accrued interest
|
|
|
|
|
|
|
|
|
1,304
|
|
|
13,180
|
|
|
|
|
|
|
|
|
14,484
|
|
Other accrued liabilities
|
|
|
6
|
|
|
|
|
|
3,699
|
|
|
26,886
|
|
|
5,322
|
|
|
|
|
|
35,913
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6
|
|
|
|
|
|
5,630
|
|
|
163,587
|
|
|
56,744
|
|
|
|
|
|
225,967
|
|
Long-term obligations
|
|
|
194,399
|
|
|
|
|
|
726,963
|
|
|
38,516
|
|
|
42
|
|
|
(194,399
|
)
|
|
765,521
|
|
Investments in subsidiaries
|
|
|
195,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195,558
|
)
|
|
|
|
Due to affiliates
|
|
|
|
|
|
416,908
|
|
|
|
|
|
100,740
|
|
|
145,584
|
|
|
(663,232
|
)
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
53,075
|
|
|
7,174
|
|
|
|
|
|
60,249
|
|
Deferred income tax liabilities
|
|
|
(453
|
)
|
|
|
|
|
332
|
|
|
121
|
|
|
93
|
|
|
|
|
|
93
|
|
Redeemable noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,035
|
|
|
|
|
|
11,035
|
|
Stockholders' equity (deficit)
|
|
|
(57,520
|
)
|
|
(195,558
|
)
|
|
221,350
|
|
|
616,177
|
|
|
41,002
|
|
|
(682,971
|
)
|
|
(57,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
331,990
|
|
$
|
221,350
|
|
$
|
954,275
|
|
$
|
972,216
|
|
$
|
261,674
|
|
$
|
(1,736,160
|
)
|
$
|
1,005,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
SEALY CORPORATION
Supplemental Condensed Consolidating Balance Sheets
November 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
|
|
$
|
|
|
$
|
9,123
|
|
$
|
50,170
|
|
$
|
47,027
|
|
$
|
|
|
$
|
107,975
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
69,345
|
|
|
57,149
|
|
|
|
|
|
126,494
|
|
Inventories
|
|
|
|
|
|
|
|
|
1,476
|
|
|
47,391
|
|
|
8,293
|
|
|
(158
|
)
|
|
57,002
|
|
Other current assets and deferred income taxes
|
|
|
9,153
|
|
|
|
|
|
1,154
|
|
|
34,427
|
|
|
5,890
|
|
|
|
|
|
50,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,808
|
|
|
|
|
|
11,753
|
|
|
201,333
|
|
|
118,359
|
|
|
(158
|
)
|
|
342,095
|
|
Property, plant and equipment, at cost
|
|
|
|
|
|
|
|
|
10,174
|
|
|
359,908
|
|
|
36,033
|
|
|
|
|
|
406,115
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
|
|
(5,902
|
)
|
|
(213,043
|
)
|
|
(20,425
|
)
|
|
|
|
|
(239,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,272
|
|
|
146,865
|
|
|
15,608
|
|
|
|
|
|
166,745
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
24,741
|
|
|
301,942
|
|
|
34,343
|
|
|
|
|
|
361,026
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
1,088
|
|
|
28
|
|
|
|
|
|
1,116
|
|
Net investment in subsidiaries
|
|
|
(196,903
|
)
|
|
219,918
|
|
|
368,983
|
|
|
161,796
|
|
|
(1
|
)
|
|
(553,793
|
)
|
|
|
|
Due from (to) affiliates
|
|
|
290,797
|
|
|
(416,821
|
)
|
|
546,305
|
|
|
(143,182
|
)
|
|
(91,275
|
)
|
|
(185,824
|
)
|
|
|
|
Debt issuance costs, net and other assets
|
|
|
|
|
|
|
|
|
16,649
|
|
|
12,654
|
|
|
18,909
|
|
|
|
|
|
48,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,894
|
|
|
(196,903
|
)
|
|
956,678
|
|
|
334,298
|
|
|
(37,996
|
)
|
|
(739,617
|
)
|
|
410,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
104,702
|
|
$
|
(196,903
|
)
|
$
|
972,703
|
|
$
|
682,496
|
|
$
|
95,971
|
|
$
|
(739,775
|
)
|
$
|
919,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' (Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portionlong-term obligations
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
1,286
|
|
$
|
298
|
|
$
|
|
|
$
|
1,584
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
186
|
|
|
45,985
|
|
|
22,603
|
|
|
|
|
|
68,774
|
|
Accrued customer incentives and advertising
|
|
|
|
|
|
|
|
|
|
|
|
18,014
|
|
|
8,024
|
|
|
|
|
|
26,038
|
|
Accrued compensation
|
|
|
|
|
|
|
|
|
392
|
|
|
14,416
|
|
|
2,793
|
|
|
|
|
|
17,601
|
|
Accrued interest
|
|
|
|
|
|
|
|
|
1,271
|
|
|
12,803
|
|
|
|
|
|
|
|
|
14,074
|
|
Other accrued liabilities
|
|
|
(2
|
)
|
|
|
|
|
465
|
|
|
21,997
|
|
|
5,966
|
|
|
|
|
|
28,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
(2
|
)
|
|
|
|
|
2,314
|
|
|
114,501
|
|
|
39,684
|
|
|
|
|
|
156,497
|
|
Long-term obligations
|
|
|
185,268
|
|
|
|
|
|
750,332
|
|
|
39,965
|
|
|
|
|
|
(185,268
|
)
|
|
790,297
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
46,086
|
|
|
6,329
|
|
|
|
|
|
52,415
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
139
|
|
|
72
|
|
|
338
|
|
|
|
|
|
549
|
|
Stockholders' equity (deficit)
|
|
|
(80,564
|
)
|
|
(196,903
|
)
|
|
219,918
|
|
|
481,872
|
|
|
49,620
|
|
|
(554,507
|
)
|
|
(80,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
104,702
|
|
$
|
(196,903
|
)
|
$
|
972,703
|
|
$
|
682,496
|
|
$
|
95,971
|
|
$
|
(739,775
|
)
|
$
|
919,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
SEALY CORPORATION
Supplemental Condensed Consolidating Statements of Operations
Year Ended December 2, 2012
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sealy
Corporation
|
|
Sealy
Mattress
Corporation
|
|
Sealy
Mattress
Company
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
|
|
$
|
93,342
|
|
$
|
959,245
|
|
$
|
308,174
|
|
$
|
(12,891
|
)
|
$
|
1,347,870
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
50,812
|
|
|
585,906
|
|
|
184,535
|
|
|
(12,890
|
)
|
|
808,363
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
10,495
|
|
|
357,600
|
|
|
86,950
|
|
|
|
|
|
455,045
|
|
Asset impairment loss
|
|
|
|
|
|
|
|
|
|
|
|
827
|
|
|
|
|
|
|
|
|
827
|
|
Amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
389
|
|
|
|
|
|
678
|
|
Restructuring expenses
|
|
|
|
|
|
|
|
|
|
|
|
2,421
|
|
|
|
|
|
|
|
|
2,421
|
|
Royalty (income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(20,070
|
)
|
|
|
|
|
|
|
|
(20,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
32,035
|
|
|
32,272
|
|
|
36,300
|
|
|
(1
|
)
|
|
100,606
|
|
Interest expense
|
|
|
|
|
|
318
|
|
|
84,996
|
|
|
2,455
|
|
|
1,536
|
|
|
|
|
|
89,305
|
|
Refinancing and extinguishment of debt
|
|
|
|
|
|
|
|
|
3,748
|
|
|
|
|
|
|
|
|
|
|
|
3,748
|
|
Other (income) expense, net
|
|
|
|
|
|
|
|
|
45
|
|
|
(13
|
)
|
|
(637
|
)
|
|
|
|
|
(605
|
)
|
Loss (income) from equity investees
|
|
|
2,648
|
|
|
2,330
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
(4,975
|
)
|
|
|
|
Loss (income) from non- guarantor equity investees
|
|
|
|
|
|
|
|
|
|
|
|
(24,258
|
)
|
|
|
|
|
24,258
|
|
|
|
|
Capital charge and intercompany interest allocation
|
|
|
(307
|
)
|
|
|
|
|
(52,804
|
)
|
|
50,634
|
|
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(2,341
|
)
|
|
(2,648
|
)
|
|
(3,947
|
)
|
|
3,454
|
|
|
32,924
|
|
|
(19,284
|
)
|
|
8,158
|
|
Income tax provision (benefit)
|
|
|
(2,351
|
)
|
|
|
|
|
(1,617
|
)
|
|
3,450
|
|
|
13,066
|
|
|
|
|
|
12,548
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,175
|
|
|
|
|
|
5,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
10
|
|
|
(2,648
|
)
|
|
(2,330
|
)
|
|
4
|
|
|
25,033
|
|
|
(19,284
|
)
|
|
785
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,962
|
)
|
|
|
|
|
(1,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
10
|
|
|
(2,648
|
)
|
|
(2,330
|
)
|
|
4
|
|
|
23,071
|
|
|
(19,284
|
)
|
|
(1,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,187
|
|
|
|
|
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
10
|
|
$
|
(2,648
|
)
|
$
|
(2,330
|
)
|
$
|
4
|
|
$
|
24,258
|
|
$
|
(19,284
|
)
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
SEALY CORPORATION
Supplemental Condensed Consolidating Statements of Operations
Year Ended November 27, 2011
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sealy
Corporation
|
|
Sealy
Mattress
Corporation
|
|
Sealy
Mattress
Company
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
|
|
$
|
85,993
|
|
$
|
893,141
|
|
$
|
271,546
|
|
$
|
(20,529
|
)
|
$
|
1,230,151
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
47,832
|
|
|
566,171
|
|
|
158,158
|
|
|
(20,712
|
)
|
|
751,449
|
|
Selling, general and administrative
|
|
|
7
|
|
|
|
|
|
7,969
|
|
|
329,743
|
|
|
76,516
|
|
|
|
|
|
414,235
|
|
Amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
289
|
|
Royalty (income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(19,413
|
)
|
|
|
|
|
|
|
|
(19,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
(7
|
)
|
|
|
|
|
30,192
|
|
|
16,351
|
|
|
36,872
|
|
|
183
|
|
|
83,591
|
|
Interest expense
|
|
|
|
|
|
307
|
|
|
83,614
|
|
|
2,355
|
|
|
1,467
|
|
|
|
|
|
87,743
|
|
Refinancing and extinguishment of debt
|
|
|
|
|
|
|
|
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
1,222
|
|
Other (income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
(444
|
)
|
|
|
|
|
(451
|
)
|
Loss (income) from equity investees
|
|
|
9,549
|
|
|
9,242
|
|
|
5,938
|
|
|
|
|
|
|
|
|
(24,729
|
)
|
|
|
|
Loss (income) from non- guarantor equity investees
|
|
|
|
|
|
|
|
|
|
|
|
(20,926
|
)
|
|
|
|
|
20,926
|
|
|
|
|
Capital charge and intercompany interest allocation
|
|
|
(303
|
)
|
|
|
|
|
(48,977
|
)
|
|
45,782
|
|
|
3,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(9,253
|
)
|
|
(9,549
|
)
|
|
(11,605
|
)
|
|
(10,853
|
)
|
|
32,351
|
|
|
3,986
|
|
|
(4,923
|
)
|
Income tax provision (benefit)
|
|
|
635
|
|
|
|
|
|
(2,363
|
)
|
|
(3,979
|
)
|
|
9,789
|
|
|
22
|
|
|
4,104
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,371
|
|
|
|
|
|
3,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(9,888
|
)
|
|
(9,549
|
)
|
|
(9,242
|
)
|
|
(6,874
|
)
|
|
25,933
|
|
|
3,964
|
|
|
(5,656
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
775
|
|
|
(5,007
|
)
|
|
|
|
|
(4,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,888
|
)
|
$
|
(9,549
|
)
|
$
|
(9,242
|
)
|
$
|
(6,099
|
)
|
$
|
20,926
|
|
$
|
3,964
|
|
$
|
(9,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
SEALY CORPORATION
Supplemental Condensed Consolidating Statements of Operations
Year Ended November 28, 2010
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sealy
Corporation
|
|
Sealy
Mattress
Corporation
|
|
Sealy
Mattress
Company
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
|
|
$
|
82,045
|
|
$
|
902,131
|
|
$
|
262,125
|
|
$
|
(26,830
|
)
|
$
|
1,219,471
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
49,007
|
|
|
540,751
|
|
|
147,056
|
|
|
(26,843
|
)
|
|
709,971
|
|
Selling, general and administrative
|
|
|
4
|
|
|
|
|
|
7,552
|
|
|
320,241
|
|
|
70,256
|
|
|
|
|
|
398,053
|
|
Asset impairment loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
289
|
|
Restructuring expenses and asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty (income) expense, net
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
(17,528
|
)
|
|
|
|
|
|
|
|
(17,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
(3
|
)
|
|
|
|
|
25,486
|
|
|
58,378
|
|
|
44,813
|
|
|
13
|
|
|
128,687
|
|
Interest expense
|
|
|
1
|
|
|
319
|
|
|
81,618
|
|
|
2,507
|
|
|
1,172
|
|
|
|
|
|
85,617
|
|
Refinancing and extinguishment of debt and interest rate derivatives
|
|
|
|
|
|
|
|
|
3,759
|
|
|
|
|
|
|
|
|
|
|
|
3,759
|
|
Other (income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
(227
|
)
|
|
|
|
|
(226
|
)
|
Loss (income) from equity investees
|
|
|
16,983
|
|
|
16,664
|
|
|
14,384
|
|
|
|
|
|
|
|
|
(48,031
|
)
|
|
|
|
Loss (income) from non- guarantor equity investees
|
|
|
|
|
|
|
|
|
|
|
|
3,707
|
|
|
|
|
|
(3,707
|
)
|
|
|
|
Capital charge and intercompany interest allocation
|
|
|
(319
|
)
|
|
|
|
|
(55,765
|
)
|
|
51,682
|
|
|
4,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(16,668
|
)
|
|
(16,983
|
)
|
|
(18,510
|
)
|
|
481
|
|
|
39,466
|
|
|
51,751
|
|
|
39,537
|
|
Income tax provision (benefit)
|
|
|
(3,181
|
)
|
|
|
|
|
(1,846
|
)
|
|
10,860
|
|
|
12,523
|
|
|
132
|
|
|
18,488
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,611
|
|
|
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(13,487
|
)
|
|
(16,983
|
)
|
|
(16,664
|
)
|
|
(10,379
|
)
|
|
30,554
|
|
|
51,619
|
|
|
24,660
|
|
Loss from discontinued operations
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
(3,886
|
)
|
|
(34,261
|
)
|
|
|
|
|
(38,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(13,739
|
)
|
$
|
(16,983
|
)
|
$
|
(16,664
|
)
|
$
|
(14,265
|
)
|
$
|
(3,707
|
)
|
$
|
51,619
|
|
$
|
(13,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
SEALY CORPORATION
Supplemental Condensed Consolidating Statements of Cash Flows
Year Ended December 2, 2012
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sealy
Corporation
|
|
Sealy
Mattress
Corporation
|
|
Sealy
Mattress
Company
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net cash provided by operating activities
|
|
$
|
|
|
$
|
|
|
$
|
34,050
|
|
$
|
20,374
|
|
$
|
27,684
|
|
$
|
|
|
$
|
82,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
|
|
|
|
|
|
(554
|
)
|
|
(11,892
|
)
|
|
(3,468
|
)
|
|
|
|
|
(15,914
|
)
|
Proceeds from the sale of property, plant, and equipment
|
|
|
|
|
|
|
|
|
90
|
|
|
2,057
|
|
|
236
|
|
|
|
|
|
2,383
|
|
Acquisition of Comfort Revolution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
159
|
|
Advances to Comfort Revolution
|
|
|
|
|
|
|
|
|
(7,833
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,833
|
)
|
Net activity in investment in and advances from (to) subsidiaries and affiliates
|
|
|
(1,604
|
)
|
|
|
|
|
2,319
|
|
|
(14,000
|
)
|
|
13,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,604
|
)
|
|
|
|
|
(5,978
|
)
|
|
(23,835
|
)
|
|
10,212
|
|
|
|
|
|
(21,205
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity received upon exercise of stock including related excess tax benefits
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
(3,059
|
)
|
|
|
|
|
|
|
|
(3,059
|
)
|
Proceeds from issuance of long term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,236
|
|
|
|
|
|
5,236
|
|
Repayments of long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
(1,259
|
)
|
|
(10,187
|
)
|
|
|
|
|
(11,446
|
)
|
Repayment of senior secured notes
|
|
|
|
|
|
|
|
|
(36,050
|
)
|
|
|
|
|
|
|
|
|
|
|
(36,050
|
)
|
Borrowings under revolving credit facilities
|
|
|
|
|
|
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
29,000
|
|
Repayments of revolving credit facilities
|
|
|
|
|
|
|
|
|
(29,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(29,000
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
(908
|
)
|
|
|
|
|
|
|
|
|
|
|
(908
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
104
|
|
|
|
|
|
(36,958
|
)
|
|
(4,318
|
)
|
|
(4,951
|
)
|
|
|
|
|
(46,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,399
|
|
|
|
|
|
5,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and equivalents
|
|
|
(1,500
|
)
|
|
|
|
|
(8,886
|
)
|
|
(7,779
|
)
|
|
38,344
|
|
|
|
|
|
20,179
|
|
Cash and equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
1,655
|
|
|
|
|
|
9,123
|
|
|
50,170
|
|
|
47,027
|
|
|
|
|
|
107,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
155
|
|
$
|
|
|
$
|
237
|
|
$
|
42,391
|
|
$
|
85,371
|
|
$
|
|
|
$
|
128,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
SEALY CORPORATION
Supplemental Condensed Consolidating Statements of Cash Flows
Year Ended November 27, 2011
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sealy
Corporation
|
|
Sealy
Mattress
Corporation
|
|
Sealy
Mattress
Company
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net cash provided by (used in) operating activities
|
|
$
|
|
|
$
|
|
|
$
|
24,871
|
|
$
|
(4,405
|
)
|
$
|
13,286
|
|
$
|
|
|
$
|
33,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
|
|
|
|
|
|
(688
|
)
|
|
(19,267
|
)
|
|
(2,453
|
)
|
|
|
|
|
(22,408
|
)
|
Proceeds from the sale of property, plant, and equipment
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
207
|
|
|
|
|
|
227
|
|
Net activity in investment in and advances from (to) subsidiaries and affiliates
|
|
|
15
|
|
|
|
|
|
(13,813
|
)
|
|
19,574
|
|
|
(5,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
15
|
|
|
|
|
|
(14,501
|
)
|
|
327
|
|
|
(8,022
|
)
|
|
|
|
|
(22,181
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity received upon exercise of stock including related excess tax benefits
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
630
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
(3,746
|
)
|
|
|
|
|
|
|
|
(3,746
|
)
|
Proceeds from issuance of long term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,387
|
|
|
|
|
|
3,387
|
|
Repayments of long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
(1,114
|
)
|
|
(3,505
|
)
|
|
|
|
|
(4,619
|
)
|
Repayment of senior secured notes
|
|
|
|
|
|
|
|
|
(10,300
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,300
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
Other
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
630
|
|
|
|
|
|
(10,481
|
)
|
|
(4,860
|
)
|
|
(118
|
)
|
|
|
|
|
(14,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,978
|
|
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and equivalents
|
|
|
645
|
|
|
|
|
|
(111
|
)
|
|
(8,938
|
)
|
|
7,124
|
|
|
|
|
|
(1,280
|
)
|
Cash and equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
1,010
|
|
|
|
|
|
9,234
|
|
|
59,108
|
|
|
39,903
|
|
|
|
|
|
109,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,655
|
|
$
|
|
|
$
|
9,123
|
|
$
|
50,170
|
|
$
|
47,027
|
|
$
|
|
|
$
|
107,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
SEALY CORPORATION
Supplemental Condensed Consolidating Statements of Cash Flows
Year Ended November 28, 2010
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sealy
Corporation
|
|
Sealy
Mattress
Corporation
|
|
Sealy
Mattress
Company
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net cash provided by operating activities
|
|
$
|
|
|
$
|
|
|
$
|
24,638
|
|
$
|
7,152
|
|
$
|
16,676
|
|
$
|
|
|
$
|
48,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
|
|
|
|
|
|
(169
|
)
|
|
(13,770
|
)
|
|
(2,639
|
)
|
|
|
|
|
(16,578
|
)
|
Proceeds from the sale of property, plant, and equipment
|
|
|
|
|
|
|
|
|
27
|
|
|
13
|
|
|
84
|
|
|
|
|
|
124
|
|
Net proceeds from sale of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340
|
)
|
|
|
|
|
(340
|
)
|
Repayments of loans and capital investments from unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,205
|
|
|
|
|
|
3,205
|
|
Net activity in investment in and advances from (to) subsidiaries and affiliates
|
|
|
(61
|
)
|
|
|
|
|
(8,438
|
)
|
|
4,913
|
|
|
3,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(61
|
)
|
|
|
|
|
(8,580
|
)
|
|
(8,844
|
)
|
|
3,896
|
|
|
|
|
|
(13,589
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity received upon exercise of stock including related excess tax benefits
|
|
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714
|
|
Repurchase of common stock associated with vesting of employee share-based awards
|
|
|
|
|
|
|
|
|
|
|
|
(4,806
|
)
|
|
|
|
|
|
|
|
(4,806
|
)
|
Proceeds from issuance of long term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,702
|
|
|
|
|
|
4,702
|
|
Repayments of long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
(2,344
|
)
|
|
(12,724
|
)
|
|
|
|
|
(15,068
|
)
|
Repayment of senior secured notes
|
|
|
|
|
|
|
|
|
(36,050
|
)
|
|
|
|
|
|
|
|
|
|
|
(36,050
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
714
|
|
|
|
|
|
(36,058
|
)
|
|
(7,150
|
)
|
|
(8,022
|
)
|
|
|
|
|
(50,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,533
|
)
|
|
|
|
|
(6,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and equivalents
|
|
|
653
|
|
|
|
|
|
(20,000
|
)
|
|
(8,842
|
)
|
|
6,017
|
|
|
|
|
|
(22,172
|
)
|
Cash and equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
357
|
|
|
|
|
|
29,234
|
|
|
67,950
|
|
|
33,886
|
|
|
|
|
|
131,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,010
|
|
$
|
|
|
$
|
9,234
|
|
$
|
59,108
|
|
$
|
39,903
|
|
$
|
|
|
$
|
109,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114