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 Operations-Discontinued Operations" later in this Item 7 for more information. Unless otherwise noted, discussions below pertain to our continuing operations.

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:

º •
º 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 53rd week were $37.1 million and $14.5 million, respectively.

º •
º 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.

º •
º 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.

º •
º 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.

º •
º 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.

º •
º 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

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

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

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.

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
                                     (percentage of                         (percentage of                         (percentage of
                  (in thousands)       net sales)       (in thousands)        net sales)        (in thousands)       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 %


--------------------------------------------------------------------------------
   º (1)

º (2)
º 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.

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 %

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
                                    (percentage of                        (percentage of                        (percentage of
                 (in thousands)       net sales)       (in thousands)       net sales)       (in thousands)       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


--------------------------------------------------------------------------------
   º (1)

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 53rd week was . . .