What We Do

Leggett & Platt is a diversified manufacturer that conceives, designs, and produces a broad variety of engineered components and products found in most homes, offices, automobiles, and many retail stores. We make components that are often hidden within, but integral to, our customers' products.

We are North America's leading independent manufacturer of: components for residential furniture and bedding, carpet underlay, components for office furniture, drawn steel wire, automotive seat support and lumbar systems and bedding industry machinery.

Our Segments

Our continuing operations are composed of 19 business units in four segments, with approximately 19,000 employee-partners, and more than 160 production facilities located in 18 countries around the world. Our segments are described below.

Residential Furnishings: This segment supplies a variety of components mainly used by bedding and upholstered furniture manufacturers in the assembly of their finished products. We also sell carpet cushion, adjustable beds, bed frames, ornamental beds and geo components. This segment generated approximately 47% of total sales during 2008 and about 51% during the first six months of 2009.

Commercial Fixturing & Components: These operations manufacture and sell store fixtures and point-of-purchase displays used in retail stores. We also produce chair controls, bases, and other components for office furniture manufacturers. This segment generated approximately 16% of our total sales in 2008 and about 15% during the first half of 2009.

Industrial Materials:These operations primarily supply steel rod, drawn steel wire, steel billets, and welded steel tubing to other Leggett operations and to external customers. Our wire and tubing is used to make bedding, furniture, automotive seats, wire retail fixtures, mechanical springs, and many other end products. This segment generated approximately 22% of our total sales in 2008 and about 20% during the first half of 2009.

Specialized Products: From this segment we supply lumbar systems and wire components used by automotive seating manufacturers. We manufacture and install the racks, shelving and cabinets used to outfit fleets of service vans. We also produce machinery, both for ourselves and for others, including bedding manufacturers. This segment contributed about 15% of total sales during 2008 and about 14% during the first half of 2009.

Discontinued Operations and Divestitures

On July 31, 2009 we sold the Coated Fabrics business unit. We have now completed six of the seven targeted divestitures and will realize after-tax cash proceeds of $420 million for the completed divestitures, already surpassing our original estimate. The six businesses sold to date include the Aluminum Products segment and four smaller business units (Wood Products, Fibers, Plastics, and the dealer portion of Commercial Vehicle Products) sold in 2008 and the Coated Fabrics business unit sold on July 31, 2009. The company is still finalizing the calculation of gain or loss related to the sale of the Coated Fabrics business unit, but does not anticipate a significant financial statement impact, which will be reflected in the third quarter 2009 discontinued operations results. One additional business unit (Storage Products) is also targeted for divestiture. Although recent market conditions have delayed the timing of this disposition, we are fully committed to selling and actively marketing this business. All of these business units, including the remaining unit, are disclosed in our financial statements as discontinued operations.

We expect to recover the carrying value of net assets held for sale. Net assets classified as held for sale totaled $52 million at June 30, 2009 (this includes $24 million not associated with the above mentioned divestitures.)

Strategic Direction

Total Shareholder Return (TSR) is the key success measure that we use to monitor performance. TSR is driven by the change in our share price and the dividends we pay [TSR = (Change in Stock Price + Dividends) / Beginning Stock Price]. There are four key sources of TSR: revenue growth, margin expansion, dividends, and share repurchases. Historically, our primary objective was profitable growth. Going forward, we intend to generate higher TSR through a balanced approach that employs all four sources of TSR. Our incentive plans emphasize the importance of, and reward, TSR. Beginning in 2008, we introduced TSR-based incentives for senior executives and modified business unit bonuses to give more importance to achieving higher returns on the assets under their direct control. From the end of 2007 through August 3, 2009, our TSR performance places us within the top 4% of the S&P 500 companies.

We have adopted role-based portfolio management and will concentrate future investments in businesses with strong competitive advantages and financial health. Certain of our businesses (categorized as Grow) are positioned to generate value through further growth, while others (categorized as Core) are positioned to drive value by improving EBITDA (earnings before interest, taxes, depreciation and amortization) and optimizing operating cash flow while employing minimal amounts of capital. We allocate capital to each business unit based upon its role in the portfolio. We plan to invest in Grow businesses that hold strong competitive positions and consistently achieve compelling returns on those investments. We plan to maintain or improve our competitive position in Core businesses that typically hold stable positions in solid markets, and focus on improving returns but limit further investment in these operations. In total, we anticipate lower capital expenditures and fewer acquisitions in the near term.

We narrowed our focus and eliminated approximately 15% of our portfolio through the divestiture of the Aluminum Products segment and four additional business units in 2008 (two other divestitures remain). We also concluded that the Store Fixtures unit, in its previous form, was not capable of meeting our return requirements. As a result, we narrowed the unit's scope to focus primarily on the metals part of the fixtures industry, in alignment with Leggett's core competency of producing steel and steel-related products. The Store Fixtures unit which was previously in the Fix category, is now considered a Core business within our portfolio; as such, its primary focus is to optimize operating cash flow and improve profit while minimizing its use of capital.

Activities related to the Fix and Divest businesses resulted in charges that impacted our operating results. Those charges are discussed under the section titled "Asset Impairments and Restructuring-related Charges."

The strategic changes have increased available cash. We expect to continue returning much of this cash to shareholders through dividends and share repurchases.

Customers

We serve a broad suite of customers. In 2008, no single customer represented even 5% of our sales. Many are companies whose names are widely recognized; they include most manufacturers of furniture and bedding, a variety of other manufacturers, and many major retailers.

Major Factors That Impact Our Business

Many factors impact our business, but those that generally have the greatest impact are: market demand, recent economic events, raw material cost trends and competition.

Market Demand

Market demand (including product mix) is impacted by several economic factors, with consumer confidence being most significant. Other important factors include disposable income levels, employment levels, housing turnover, and interest rates. All these factors influence consumer spending on durable goods, and therefore affect demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one-quarter of our sales.

Recent Economic Events

In light of the distress in the U.S. and global economies, we have been impacted, and may continue to be impacted, in several different areas as discussed below.

Lower Market-Wide Demand. During the latter half of 2008 and the first half of 2009, demand weakness in the majority of our markets led to lower unit order activity, sales and earnings. Several factors, including a weak global economy, a depressed housing market, and low consumer confidence contributed to conservative spending habits by consumers around the world. Short lead times in most of our markets allow for very limited long-term visibility into demand trends; however, we currently expect market demand to stabilize at these lower levels for the remainder of 2009.

Despite the global economic decline, we have gained market share in our U.S. bedding components businesses primarily due to (i) bedding manufacturers shifting innerspring purchases from international to domestic sources as a result of antidumping duties imposed on imported innersprings from China, South Africa, and Vietnam; (ii) the deverticalization of a strong regional bedding manufacturer (they now buy from us components they had previously produced for themselves); and (iii) a shift in demand for innerspring mattresses, rather than premium priced, non-innerspring products. These market share gains offset some of the demand weakness.

Customers and Suppliers. Due to the tightening of credit markets and concerns regarding the availability of credit that began in late 2008 and has continued into 2009, our customers may experience difficulties, or may not be able to obtain necessary cash for their purchases. These delays could negatively impact our customers' ability to conduct business and could impact our unit order activity and sales, therefore negatively impacting our cash flows and liquidity. We serve customers in a variety of industries, some of which are experiencing unprecedented decreases in demand. A sustained economic downturn increases the possibility that one or more of our significant customers, or a group of less significant customers, could become insolvent, which could result in uncollectible accounts receivable, increased obsolete inventory or impairment of long-lived assets. These events would adversely impact our net earnings and financial condition.

Management's Response to Recent Economic Events. Activities completed over the past few years (including the divestiture of businesses under our strategic plan, closure of underperforming and underutilized facilities, elimination of sales with unacceptable margins, and other cost reduction initiatives) improved our cost position in advance of the late 2008 economic contraction. During the fourth quarter of 2008, we reduced production well below our normal utilization levels in an effort to bring finished goods inventories in line with demand. We accomplished most of the necessary reduction by year-end, and in the first half of 2009, capacity utilization improved versus year-end levels, resulting in better overhead absorption. Although significant overhead cost reductions were also completed by late last year, we continue to tightly constrain spending in 2009. As we make spending cuts, we are not sacrificing long-term opportunities. We remain focused on new product development and recognize that this important function is critical to our future success. Given our balance sheet, operating cash flow and access to credit, we expect to be able to endure an extended downturn in market demand with no material impact to our financial position or liquidity.

Raw Material Costs

In many of our businesses, we enjoy a cost advantage from buying large quantities of raw materials. This purchasing leverage is a benefit that many of our competitors generally do not have. Still, our costs can vary significantly as market prices for raw materials (many of which are commodities) fluctuate.

Purchasing arrangements vary across the Company. We typically have short-term commitments from our suppliers; accordingly our raw material costs generally move with the market. In certain of our businesses, we have longer-term purchase contracts with pricing terms that provide stability under reasonable market conditions. However, when commodities experience extreme inflation, vendors do not always honor those contracts.

Our ability to recover higher costs (through selling price increases) is crucial. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Conversely, when costs decrease significantly, we generally pass a portion of those lower costs through to our customers. The timing of our price increases or decreases is a critical factor; we typically experience a lag in recovering higher costs, so we also expect to realize a lag as costs decline.

Steel is our principal raw material and at various times in past years we have experienced extreme cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers via selling price adjustments.

We anticipate significant variability in our quarterly earnings this year as a result of steel-related issues. Market prices for steel began to decrease in late 2008, but with the precipitous drop in demand late in the year and our inability to cancel or return higher-priced earlier purchases, we entered 2009 with high steel costs in inventory. Earnings in both first and second quarters were significantly impacted as we consumed the higher cost steel, which was only partially offset by LIFO benefits. In the second half of 2009, our cost of goods sold should reflect more contemporary market prices for steel. We have implemented selective price reductions in 2009, but at current commodity costs, we expect to enhance our margins.

Our other raw materials include woven and non-woven fabrics, foam scrap, fibers, and chemicals. We have experienced changes in the cost of these materials in recent years, and typically pass them through to our customers.

When we raise our prices to recover higher raw material costs, this sometimes causes customers to modify their product designs and replace higher cost components with lower cost components. We experienced this "de-contenting" effect in our Residential Furnishings and Industrial Materials segments in recent years, as our customers changed the quantity and mix of components in their finished goods to address steel and chemical inflation. Our profit margins were negatively impacted by this "de-contenting." We are responding by developing new products (including new types of innersprings and boxsprings) that enable our customers to reduce their total costs, and in certain instances, provide higher margin and profit contribution for our operations. Some of these new products were introduced in recent years, with production of those products continuing to ramp up.

Competition

Many of our markets are highly competitive with the number of competitors varying by product line. In general, our competitors tend to be smaller, private companies.

We believe we gain competitive advantage in our global markets through low cost operations, significant internal production of key raw materials, superior manufacturing expertise and product innovation, higher quality products, extensive customer service capabilities, and greater financial strength. Many of our competitors, both domestic and foreign, compete primarily on the basis of price. Our success has stemmed from the ability to remain price competitive, while delivering product quality, innovation, and customer service.

We continue to face pressure from foreign competitors as some of our customers source a portion of their components and finished products from Asia. In instances where our customers move production of their finished products overseas, our operations must be located nearby to supply them efficiently. We currently operate 10 facilities in China.

Asset Impairments and Restructuring-related Charges

Exit activities associated with the 2007 Strategic Plan discussed in Note 3 of the Notes to Consolidated Condensed Financial Statements were substantially complete by the end of 2008. We incurred $1 million and $2 million of restructuring-related and asset impairment costs related to this plan in the first six months of 2009 and 2008, respectively. To date, we have incurred total costs associated with this plan of $341 million ($154 million continuing and $187 million discontinued operations) and do not anticipate additional significant charges. Other asset impairments and restructuring-related charges incurred outside of the strategic plan for second quarters of 2009 and 2008 were not significant. For more information about restructuring, see Note 4 of the Notes to Consolidated Condensed Financial Statements.

We conduct our annual review for potential goodwill impairment in June of each year and test long-lived assets for recoverability at year end and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

The annual goodwill impairment review performed in June 2009 indicated no goodwill impairments. Significant assumptions included (i) 10-year compound annual growth rates ranging from 2%-9%; (ii) terminal values for each reporting unit using a long-term growth rate of 3%; and (iii) discount rates ranging from 10.5-12.0%. Goodwill associated with reporting units whose fair values exceeded the carrying value by 10-20% was $364 million; $109 million of goodwill was associated with reporting units that had 20-30% excess fair value; and $433 million of goodwill was associated with reporting units that had fair values in excess of the carrying values by greater than 30%. If actual results differ from estimates used in these calculations, the Company could incur future impairment charges.

RESULTS OF OPERATIONS

Discussion of Consolidated Results

Second Quarter:

Second quarter sales of $757 million (from continuing operations) were 29% lower than in the second quarter of 2008, due to extremely weak market demand.

Earnings per share from continuing operations for the quarter were $.12 per diluted share. In the second quarter of 2008, earnings per share from continuing operations were $.25. The year-over-year reduction in quarterly earnings from continuing operations was primarily due to lower unit sales volumes and a non-cash write-down of the note received in last year's aluminum segment divestiture.

Discontinued operations had no effect on earnings per share in the second quarter of 2009. In the second quarter of 2008, earnings per share from discontinued operations were $.02 per share.

Six-Months:

Sales for the first half of 2009 (from continuing operations) were $1,476 million, 28% lower than in the first half of 2008, also due to extremely weak market demand.

Earnings per share from continuing operations for the first half of 2009 were $.14 per diluted share, compared to $.48 per diluted share from continuing operations in the first half of 2008. The first half of 2009 was negatively impacted by lower unit sales volumes, increased provision for bad debts associated with a customer bankruptcy, and a non-cash write-down of the note received in last year's aluminum segment divestiture.

Discontinued operations had no effect on earnings per share in the first half of 2009. In the first half of 2008, earnings per share from discontinued operations were $.04 per share.

Divestiture Note Write-down

Late in the second quarter of 2009, the Company learned that the aluminum operations divested in July 2008 needed a capital infusion due to deterioration in business conditions and determined that the collectability of the promissory note was not reasonably assured. The company recorded a $10.6 million ($.04 per share after tax) non-cash reduction in the value of the promissory note. On June 30, 2009, the Company surrendered the promissory note, and in exchange, received

LIFO/FIFO and the Effect of Changing Prices

All of our segments use the first-in, first-out (FIFO) method for valuing inventory. In our consolidated financials, an adjustment is made at the corporate level (i.e. outside the segments) to convert about 60% of our inventories to the last-in, first-out (LIFO) method. Steel cost decreases contribute to an anticipated full year LIFO benefit of $72.0 million (for continuing operations). Of this annual benefit, $19.0 million was recognized in the second quarter of 2009 (versus LIFO expense of $11.5 million in the second quarter of 2008). A LIFO benefit of $36.0 million was recognized in the six months ended June 30, 2009 (versus LIFO expense of $15.1 million in the six months ending June 30, 2008). Our LIFO estimate for the full year incorporates certain assumptions about year-end steel prices and inventory levels (both are very difficult to accurately predict). Therefore, LIFO benefit for the full year could be significantly different from that currently estimated. Any further change in the annual estimate of LIFO benefit will be reflected in subsequent quarters. See Note 6 of the Notes to Consolidated Condensed Financial Statements for further discussion of inventories.

Interest and Income Taxes

Second quarter 2009 interest expense from continuing operations decreased $4.0 million compared to the second quarter of 2008, due primarily to a lower level of term notes as a result of maturities paid in 2008, less commercial paper issued and lower rates in 2009 compared to 2008. Interest expense for the full year 2009 is expected to be lower than in 2008.

The reported second quarter consolidated worldwide effective income tax rate on continuing operations was 41.6%, compared to 36.7% for the same quarter last year. This increase is primarily due to the low level and the mix among tax jurisdictions of earnings in 2009. We anticipate the tax rate for the remainder of 2009 will be lower than the second quarter tax rate depending on factors such as the Company's overall profitability, the mix of earnings among taxing jurisdictions, the type of income earned, and the effect of tax law changes (the full year rate is currently estimated to be approximately 39%).

Discussion of Segment Results

Second Quarter Discussion

A description of the products included in each segment, along with segment financial data, appear in Note 9 of the Notes to Consolidated Condensed Financial Statements.

A summary of the segment results (in millions) from continuing operations for the quarters ended June 30, 2009 and June 30, 2008 are shown in the following tables. To comply with SFAS 160 discussed under "New Accounting Standards" on page 32, EBIT amounts for 2008 have been retrospectively adjusted to include noncontrolling interest. Commercial Fixturing & Components-(EBIT from $8.6 million to $8.9 million); Specialized Products - (EBIT from $14.4 million to $15.8 million).

                                                                                   Change in Sales
                                      Three Months          Three Months
                                          ended                 ended                                         % Change in
                                      June 30, 2009         June 30, 2008                                    Same Location
                                          Sales                 Sales               $             %            Sales(1)
Residential Furnishings              $         420.3       $         557.8       $ (137.5 )     (24.7 )%             (23.0 )%
Commercial Fixturing & Components              131.4                 184.0          (52.6 )     (28.6 )              (28.8 )
Industrial Materials                           152.5                 247.3          (94.8 )     (38.3 )              (38.3 )
Specialized Products                           119.9                 179.5          (59.6 )     (33.2 )              (33.2 )

Total                                          824.1               1,168.6         (344.5 )     (29.5 )
Intersegment sales                             (66.7 )              (105.5 )         38.8

External sales                       $         757.4       $       1,063.1       $ (305.7 )     (28.8 )%             (28.0 )%

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                                                                                     Change in EBIT                    EBIT Margins(2)
                                     Three Months           Three Months                                       Three Months        Three Months
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