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Rating Action:

MOODY'S CONFIRMS DEBT RATINGS OF SEALY MATTRESS CO.; OUTLOOK CHANGED TO POSITIVE

21 Jan 2000
MOODY'S CONFIRMS DEBT RATINGS OF SEALY MATTRESS CO.; OUTLOOK CHANGED TO POSITIVE Moody's Investors Service confirmed the B3 ratings of Sealy Corporation's $125 million of 9.875% senior subordinated notes and $128 million (face amount) of 10.875% senior subordinated discount notes, both due 2007. Moody's also confirmed the Ba3 rating of its $550 million secured credit facility, which includes a $100 million revolving credit and $450 million (original amount) of term loans. The company's senior implied rating is B1 and the senior unsecured issuer rating is B2. The outlook has been changed to positive from stable.

The rating confirmations continue to reflect the company's continued market leadership of the US bedding industry, which is largely dominated by the top three producers, Sealy, Serta and Simmons; highly recognizable brand names, including Sealy, Sealy Posturepedic, and Stearns & Foster; improving operating results and profit margins during fiscal 1999; and the corresponding enhancement of its debt protection measures. However, despite the fact that Sealy's leverage has diminished since its 1997 recapitalization by Bain Capital, its debt burden remains high and its interest coverage moderate. The ratings also take into consideration the inherent risks of the mature and increasingly competitive bedding industry; and the possibility that Sealy will pursue debt-financed acquisitions or use its cash flow for expansionary purposes aimed at growing market share and improving its operating efficiencies. While margin competition does exist in the industry, to date, the major players have acted as responsible competitors.

The change in the rating outlook to positive from stable reflects Moody's expectation that Sealy's market position and cash flow will continue to strengthen and will more firmly support the company's heavy debt burden. Nevertheless, its total debt is not likely to decline substantially in the near term. To the extent that the cash Sealy generates in the future is not retained in the business, the rating outlook may be revised.

With total sales approaching $1 billion, Sealy Corporation has retained its status as the largest bedding manufacturer in North America, followed by Serta, Inc. (#2), and Simmons Company (#3). Buoyed by the strength of the US economy, the bedding industry remains fairly robust, despite its mature status. Unit growth was in the mid-to-high single digit range during 1999, slightly higher than the 1998 figure. Fiscal 2000 growth is expected to remain healthy despite a possible slowdown of the US economy. The bedding industry, which is roughly $3.9 billion in size, remains highly competitive with the top mattress manufacturers representing nearly 60% of the overall market, the balance accounted for by smaller producers. Looking ahead, the top manufacturers will likely continue to roll-up smaller ones, thereby driving market share gains. In any event, leverage ratios across the industry will likely remain fairly high.

Sealy's market share gained modestly in 1999, largely at the expense of the smaller regional manufacturers who are finding it increasing difficult to compete with the large national brands. Brand strength could become an increasingly important rating consideration as retailers continue to rationalize their suppliers and lower their inventory levels.

For the last twelve months ended August 29, 1999, the company's revenues and EBITDA increased to approximately $954 million and $136 million (14% margin), respectively, compared with approximately $891 million and $110 million (12% margin) at the end of fiscal 1998 (ended November 30th). During the first nine months of 1999, unit volume increased by slightly more than 5%, slightly higher than that of the industry, while average unit selling price improved by a little more than 4%, the latter attributable to an improved sales mix of higher margin products. During the year, the company introduced the highly successful Sealy Posturepedic Golden Anniversary Line (mid-price point) and the Crown Jewel DSS Line and focused on selling its premium priced Stearns & Foster brand. Historically, price increases have not play a material role in increasing the Sealy's sales or profitability. However, the fact that the company re-engineers its product line every 2-3 years generally allows for higher average unit selling prices.

Given a possible weakening of the US economy in fiscal 2000, Sealy could be challenged in its efforts to sell higher levels of premium-priced products. As a result, there could be some margin pressure.

Sealy's improved manufacturing process appears to be paying operational dividends as the company has been able to achieve modest plant efficiencies, a reduction in manufacturing overhead and reduced prices for raw materials. For the last twelve ended August 29, 1999, cost of goods sold as a percentage of sales decreased by approximately 110 basis points to 55% boosting gross margins by the equivalent amount to 45%. Much of this improvement reflects an increase in sales of higher end units. Despite higher marketing expenses associated with increased sales volume and additional cooperative advertising and promotions, operating margin (EBIT) improved to nearly 12% from 10% in fiscal 1998. Going forward, aggressive advertising will likely remain a key component in the company's efforts to further strengthen its brand name and increase its market share.

Despite the substantial improvements in Sealy's profitability during 1999, additional margin improvements could be difficult to achieve. Profit enhancements may only be modest and largely the result of greater capacity.

Reflecting Sealy's stronger cash flow, its EBITA leverage has declined since late 1997 and its other credit measures have also improved from weaker levels. With total debt of nearly $707 million at August 29, 1999, almost 65% of which was secured bank debt, the company's trailing twelve month debt-to-EBITA stood at approximately 5.7-times (5.2-times EBITDA) versus nearly 7.0-times EBITA (6.3-times EBITDA) at the end of fiscal 1998. Additionally, EBITA-to-total interest expense has improved to almost 2-times (2.1-times using EBITDA) from 1.5-times (1.6-times using EBITDA) during the same period. Additional improvements in the company's full year 1999 leverage and interest coverage are possible. After spending a heavy $33.1 million on capital expenditures during 1998, largely due to the acquisitions of new facilities in High Point, North Carolina, management scaled back to $21 million over the last twelve months. Retained cash (EBITDA minus Capex minus cash interest expense minus taxes) remains fairly modest at roughly 8% of total funded debt.

Notwithstanding the notable reduction in Sealy's EBITA leverage, Moody's remains cautious with regard to its future debt levels. The potential is high for either debt-financed acquisitions or other expansion-related investments. Sealy will likely focus on aggressively grow its cashflow rather than reducing its debt. The company's financial flexibility benefits from substantial unused availability under the $100 million revolving credit facility.

During the third quarter of 1999, Sealy contributed $29.8 million, primarily cash, to Mattress Holdings International, LLC (MHI) a company controlled by Sealy's controlling stockholder, Bain Capital, Inc. The company's investment in MHI was used to enhance business relationships and to help build incremental retail sales. Although additional contributions are likely, they are currently limited to 5% of its total assets.

Headquartered in High Point, North Carolina, Sealy Corporation is the largest bedding manufacturer in North America. It manufacturers and sells a complete line of mattress and box springs, including those sold under the Sealy, Sealy Posturepedic, and Stearns and Foster brand names. The company's sales approach $980 million.




No Related Data.
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