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 nine 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 both in 2008 and during the first nine months 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 19% during the first nine months 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 nine months of 2009.

Discontinued Operations and Divestitures

We have completed six of the seven targeted divestitures announced in November of 2007 and realized 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. 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 $57 million at September 30, 2009 (this includes $34 million of property, plant and equipment associated with the closings of various operations and prior year restructurings 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 October 21, 2009, our TSR performance places us within the top 3% of the S&P 500 companies.

We have implemented a more rigorous strategic planning process to continually assess our business units and help guide future decisions regarding the role of each business unit, capital allocation priorities, and new areas in which to grow. We review the portfolio classification of each unit at least on an annual basis to determine its appropriate role. This review includes several different criteria such as competitive position, market attractiveness, business unit size, and fit within our overall objectives, as well as financial indicators such as EBITDA and operating cash flows relative to the amount of capital employed. To remain in the portfolio, business units are expected to consistently generate after-tax returns in excess of our cost of capital. Business units may employ a variety of means to achieve higher returns, including trimming expenses, introducing new products, improving productivity, adopting more disciplined pricing, reducing working capital, and consolidating assets. Business units that fail to consistently attain minimum return goals will be moved to the Fix or Divest categories.

We narrowed our focus and eliminated approximately 15% of our portfolio through the divestiture of the Aluminum Products segment and five additional business units (one other divestiture remains). We also narrowed the scope of the Store Fixtures unit 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. These activities resulted in charges that impacted our operating results (primarily in 2008). 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 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.

Customers We serve customers in a variety of industries, some of which are experiencing unprecedented decreases in demand that began in late 2008 and have continued into 2009. While we currently expect markets to stabilize, 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.

While the items discussed above could adversely impact our sales, net earnings, financial condition, cash flow and liquidity, we expect to effectively endure an extended downturn in market demand given our strong balance sheet, operating cash flow and access to credit.

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.

There has been 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 the first two quarters were significantly impacted as we consumed the majority of the higher cost steel, which was only partially offset by LIFO benefits. In the third quarter we consumed the remainder of the higher cost steel inventory (approximately $5 million) and recognized a LIFO benefit of $16 million. In the fourth quarter of 2009, we expect no further impact from higher cost steel inventory (our cost of goods sold now reflects contemporary market prices for steel) and we expect to recognize an additional $17 million LIFO benefit. We implemented selective price reductions in 2009, but at current commodity cost levels, we have enhanced 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.

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.

In recent years we experienced increased competition in the U.S. from foreign bedding component manufacturers. We reacted to this competition by selectively adjusting prices, and by developing new proprietary products that help our customers reduce total costs. The increased price competition for bedding components was partially due to lower wire costs in China. Foreign manufacturers benefit from lenient regulatory climates related to safety and environmental matters. In late 2007, we filed an antidumping suit related to innerspring imports from China, South Africa and Vietnam. We saw a distinct decline in unfair imports during 2008 after the antidumping investigations began, and as a result, we regained market share. The investigations were brought to a favorable conclusion in early 2009. We have seen improved performance in our Bedding group as imported innersprings from these countries now have to be sold at fair prices. The current antidumping duty rates on innersprings from these countries are significant, ranging from 116% to 234%, and will remain in effect for at least another four years.

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 $41 million of restructuring-related and asset impairment costs related to this plan in the first nine months of 2009 and 2008, respectively. To date, we have incurred total costs associated with this plan of $341 million ($154 million in continuing operations and $187 million in discontinued operations) and do not anticipate additional significant charges. Other asset impairments and restructuring-related charges incurred outside of the strategic plan for the third 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 perform an 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.

The ten reporting units for goodwill purposes are one level below the operating segments, and are the same as the business groups disclosed in Item 1. Business in Form 10-K. Fair market values of the reporting units are estimated using a discounted cash flow model and comparable market values for similar entities using price to earnings ratios. Key assumptions and estimates used in the cash flow model include discount rate, internal sales growth, margins, capital expenditure requirements, and working capital requirements. Recent performance of the reporting unit is an important factor, but not the only factor, in the assessment.

Significant assumptions used in the June 2009 review 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 $364.2; $108.5 of goodwill was associated with reporting units that had 20-30% excess fair value; and $433.1 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

Third Quarter:

Third quarter sales of $810 million (from continuing operations) were 28% lower than in the third quarter of 2008, due to continuing weak global market demand, steel-related price deflation, and our decision to exit some specific customer programs with unacceptable margins. Price deflation represented approximately one-quarter of the sales decrease.

Earnings per share from continuing operations for the quarter were $.34 per diluted share. In the third quarter of 2008, earnings per share from continuing operations were $.29. Despite much lower sales, earnings from continuing operations improved primarily due to ongoing benefits from the past year's cost reduction initiatives, pricing discipline, a net LIFO benefit, and the absence of certain tax items.

Discontinued operations had no effect on earnings per share in the third quarter of 2009. In the third quarter of 2008, losses from discontinued operations were $.09 per share.

Sales for the first nine months of 2009 (from continuing operations) were $2,285 million, 28% lower than in the first nine months of 2008, also due to extremely weak global market demand and our decision to exit some specific customer programs with unacceptable margins.

Earnings per share from continuing operations for the first nine months of 2009 were $.48 per diluted share, compared to $.77 per diluted share from continuing operations in the first nine months of 2008. The first nine months of 2009 were 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. These items were partially offset by cost reduction efforts and pricing discipline.

Discontinued operations had no effect on earnings per share in the first nine months of 2009. In the first nine months of 2008, losses from discontinued operations were $.05 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 write-down of the note resulted in a $10.6 million non-cash reduction in EBIT ($.04 per share after tax) for the second quarter reported in "Other expense (income), net" on the Consolidated Condensed Statements of Operations, and generated a $6.4 million cash flow benefit in the last half of this year due to lower taxes. On June 30, 2009, the Company surrendered the promissory note, and in exchange, received $15 million face amount (fair value of $3.5 million) of redeemable preferred stock in the divested operations. Management believes it was in the best interest of the Company to accept the preferred stock in exchange for the promissory note due to the higher likelihood of recovery resulting from the modification to the buyer's capital structure.

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 $69 million (for continuing operations). Of this annual benefit, $16.0 million was recognized in the third quarter of 2009 (versus LIFO expense of $19.7 million in the third quarter of 2008). A LIFO benefit of $52.0 million was recognized in the nine months ended September 30, 2009 (versus LIFO expense of $34.8 million in the nine months ending September 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 the fourth quarter. See Note 6 of the Notes to Consolidated Condensed Financial Statements for further discussion of inventories.

Interest and Income Taxes

Third quarter 2009 interest expense from continuing operations decreased $2.6 million compared to the third quarter of 2008, due primarily to a lower level of term notes, 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 third quarter consolidated worldwide effective income tax rate on continuing operations was 35.4%, compared to 42.8% for the same quarter last year. The majority of the decrease was attributable to the establishment of certain valuation allowances and the write-off of other deferred tax assets in 2008 that did not recur in 2009.

Discussion of Segment Results

Third 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 September 30, 2009 and September 30, 2008 are shown in the following tables. To comply with FASB guidance for presentation of noncontrolling interest discussed in "New Accounting Guidance" on page 32, EBIT (earnings before interest and income taxes) amounts for 2008 have been retrospectively adjusted to include noncontrolling interest. (Commercial Fixturing & Components - EBIT from $9.2 million to $9.3 million; Specialized Products - EBIT from $10.8 million to $11.8 million).

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                                                                                                Change in Sales
                                         Three Months                Three Months
                                             ended                      ended                                               % Change in
                                      September 30, 2009          September 30, 2008                                       Same Location
                                             Sales                      Sales                   $              %             Sales(1)
Residential Furnishings               $             443.3        $              580.0        $ (136.7 )      (23.6 )%              (22.5 )%
Commercial Fixturing & Components                   143.3                       199.5           (56.2 )      (28.2 )               (28.3 )
Industrial Materials                                172.2                       293.3          (121.1 )      (41.3 )               (41.3 )
Specialized Products                                124.7                       172.0           (47.3 )      (27.5 )               (27.5 )

Total                                               883.5                     1,244.8          (361.3 )      (29.0 )
Intersegment sales                                  (73.6 )                    (112.6 )          39.0

External sales                        $             809.9        $            1,132.2        $ (322.3 )      (28.5 )%              (28.0 )%

                                      Three Months         Three Months          Change in EBIT                    EBIT Margins(2)
                                         ended                ended                                       Three Months        Three Months
                                     September 30,        September 30,                                       ended               ended
                                          2009                 2008                                       September 30,       September 30,
                                          EBIT                 EBIT               $            %              2009                2008
Residential Furnishings              $         39.1       $         61.8       $ (22.7 )     (36.7 )%               8.8 %              10.7 %
Commercial Fixturing & Components              11.0                  9.3           1.7        18.3                  7.7                 4.7
Industrial Materials                           21.8                 34.0         (12.2 )     (35.9 )               12.7                11.6
Specialized Products                            8.9                 11.8          (2.9 )     (24.6 )                7.1                 6.9
Intersegment eliminations                      (1.8 )               (1.0 )         (.8 )
Change in LIFO reserve                         16.0                (19.7 )        35.7

Total                                $         95.0       $         96.2       $  (1.2 )      (1.2 )%              11.7 %               8.5 %

(1) The percentage change in sales not attributable to acquisitions or divestitures; sales change that comes from the same plants and facilities . . .