Sleepless Nights in 2009 at Sealy Corp?

Lawrence Rogers, Chief Executive Officer of Sealy Corp., told analysts on the bedding manufacturer's year-end earnings call that despite a reported 2008 loss of $2.9 million on a year-on-year 12 percent decrease in total net sales of $1.5 billion, he firmly believed that Sealy's broad portfolio of brands, which includes Sealy Posturepedic, Stearns & Foster and Bassett brand names, across different price points -- coupled with strong retail relationships and a diversified geographic presence -- should position the company to maintain its leadership position in the bedding industry amid the challenging economic backdrop. [2007 wholesale market share was approximately 20.9 percent, almost 1.4 times greater than its next largest competitor, according to Furniture/Today, a furniture industry publication.] Albeit Sealy does have greater financial flexibility under recently amended credit agreements, lack of visibility into the timing of an economic turnaround could break an anemic balance sheet, as acknowledged in the 2008 regulatory 10-K filing:

• While we believe that we will have the necessary liquidity through our operating cash flow and revolving credit facility for the next year to fund our debt service requirements, capital expenditures and other operational cash requirements, we may not be able to generate sufficient cash flow from operations, realize anticipated revenue growth and operating improvements or obtain future borrowings under the senior credit agreements in an amount sufficient to enable us to do so. In addition, we rely on the revolving credit facility to provide a significant portion of our operational cash flow needs and debt service requirements. While this facility remains in place through April 2010, we expect there will be a need to refinance this debt upon its maturity. Additionally, the senior and subordinated debt mature in the following years through 2014, and we will likely be required to refinance this debt as it matures. We may not be able to affect any future refinancing of our debt on commercially reasonable terms or at all.

The amendment also loosened the minimum interest coverage to 2.0 times interest expense, increasing to 2.75 times by June 2010.

As of November 30, 2008, the company's debt -- net of cash -- stood at $756.8 million, and Sealy's leverage ratio of total debt to adjusted EBITDA and interest coverage ratio (as defined by the credit agreement) was 4.69 times and 2.87 times.

Rogers admitted on the conference call that the company does not expect to see year-over-year improvement until the second half of 2009. Operating under the notion that sales will continue below prior year levels, management will need to de-leverage its fixed costs, perhaps by shutting down assembly lines or even closing plants.

In addition, the company has a $9.2 million obligation arising from under-funded pension plans, which will require the company to contribute at least $1.2 million to the plans in 2009 (more if the realized returns are less than projected).

As mentioned, Sealy's strategy is to weather the current retail slump by offering a breadth of product offerings across various price points. Once the global economy begins to recover, the company plans to capitalize on mattress sales at the premium end of the market (i.e. greater than $1,000 per set). However, if EBITDA drops below $130 million in 2009 -- tripping debt covenants -- opportunities for growth could quickly fall prey to a discounting policy mandated by bankers looking for debt repayments.