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LEG > SEC Filings for LEG > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for LEGGETT & PLATT INC

Form 10-Q for LEGGETT & PLATT INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
What We Do
Leggett & Platt is a diversified manufacturer, and member of the S&P 500 index, that conceives, designs, and produces a wide range of engineered components and products found in most homes, offices, automobiles, and also in many airplanes and retail stores. We make components that are often hidden within, but integral to, our customers' products.
We are the leading U.S. manufacturer of: components for residential furniture and bedding, adjustable bed bases, carpet underlay, components for office furniture, drawn steel wire, thin-walled titanium and nickel tubing for the aerospace industry, automotive seat support and lumbar systems, and bedding industry machinery.
Our Segments
Our continuing operations are comprised of 20 business units in four segments, with approximately 18,000 employees, and 130 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 bed bases, bed frames, ornamental beds and geo components. This segment generated approximately 47% of total sales during the first nine months of 2012.
Commercial Fixturing & Components: Operations in this segment, which contributed approximately 13% of first nine months' 2012 total sales, 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, as well as select lines of private-label finished furniture. Industrial Materials: These operations primarily supply steel rod, drawn steel wire, steel billets, and welded steel tubing to our other operations and to external customers. Our customers use this wire and tubing to make bedding, furniture, automotive seats, mechanical springs, and many other end products. We also supply titanium and nickel tubing for the aerospace industry. This segment generated approximately 22% of our total sales during the first nine months of 2012.
Specialized Products: From this segment we supply lumbar support systems and seat suspension systems used by automotive seating manufacturers. We manufacture and install the racks, shelving and cabinets used to outfit fleets of service vans. We also produce quilting, sewing, and wire forming machinery, some of which is used by other Leggett operations as well as external customers, including bedding manufacturers. This segment contributed about 18% of first nine months 2012 total sales.
Total Shareholder Return
Total Shareholder Return (TSR), relative to peer companies, is the key financial measure that we use to assess long-term 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]. We seek to achieve TSR in the top one-third of the S&P 500 over the long-term through a balanced approach that employs all four TSR sources: revenue growth, margin expansion, dividends, and share repurchases.
We monitor our TSR performance (relative to the S&P 500) on a rolling three-year basis. To date, for the three-year period that began January 1, 2010, we have so far (over the last 34 months) generated TSR of 42%, compared to TSR of 34% for the S&P 500 index; accordingly, our TSR performance ranks in the upper half of the S&P 500 companies over this time period.
Senior executives participate in a TSR-based incentive program (based on our performance compared to the performance of a group of approximately 320 peers). Business unit bonuses emphasize the achievement of higher returns on the assets under the unit's direct control.
Customers
We serve a broad suite of customers, with our largest customer representing less than 6% of our sales in 2011. 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, 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.
Over the last few years we have significantly reduced our fixed cost structure, but purposely retained spare production capacity. Accordingly, unit sales can rebound appreciably without the need for large capital investment. We have meaningful operating leverage that should continue to benefit earnings as market demand rebounds. Until our spare capacity is fully utilized, each additional $100 million of sales from incremental unit volume is expected to generate approximately $25 million to $35 million of additional pre-tax earnings. Raw Material Cost Trends
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. We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. 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 those lower costs through to our customers. The timing of our price increases or decreases is important; 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 with selling price adjustments.
As a producer of steel rod, we are also impacted by volatility in metal margins (the difference in the cost of steel scrap and the market price for steel rod). Metal margins within the steel industry have been volatile during certain periods in recent years.
Our other raw materials include woven and non-woven fabrics, foam scrap, and chemicals. We have experienced changes in the cost of these materials in recent years and, in most years, have been able to 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 segment in the last half of 2011 (however, selective selling price reductions helped contain this activity). As our customers changed the quantity and mix of components in their finished goods to address commodity inflation, our profit margins were negatively impacted. We must continue to find ways to assist our customers in improving the functionality and reducing the cost of their products, while providing 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. Many of these companies (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 offshore. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and more lenient regulatory climates. We typically remain price competitive, even versus many foreign manufacturers, as a result of our highly efficient operations, low labor content, vertical integration in steel and wire, and large scale purchasing of raw materials and commodities. However, we have reacted to foreign competition in certain cases by selectively adjusting prices, and by developing new proprietary products that help our


customers reduce total costs.
The margin pressure we experienced in the last half of 2011 resulted in part from price competition in certain of our businesses as we reduced prices (selectively) to maintain market share in light of depressed industry volume. Premium non-innerspring mattresses (those that have either a foam or air core) have experienced rapid growth in the U.S. bedding market in recent years. While still a relatively small portion of the total market in units (approximately 10%-15%), these products represent a much larger portion of the total market in dollars (approximately 25%-30%) due to their higher average selling prices. We expect these products to continue to grow. Some of our traditional bedding customers are now offering mattresses that combine an innerspring core with top layers comprised of specialty foam and gel. These hybrid products, which allow our bedding customers to address a consumer preference for the feel of a specialty mattress and the characteristics of an innerspring, are being well received by consumers.

We filed an antidumping suit related to innerspring imports from China, South Africa and Vietnam which was brought to a favorable conclusion in 2009. The current antidumping duty rates on innersprings from these countries are significant, ranging from 116% to 234%, and should remain in effect at least until early 2014. Imported innersprings from these countries are now supposed to be sold at fair prices, however the duties on certain innersprings are being evaded by various means including shipping the goods through a third country and falsely identifying the country of origin. In 2009, Leggett, along with several U.S. manufacturers of products with active antidumping or antidumping/countervailing duty orders, formed a coalition and are working with Members of Congress, the U.S. Department of Commerce, and U.S. Customs and Border Protection to seek stronger enforcement of existing antidumping and/or countervailing duty orders.
2011 Restructuring Plan
In December 2011, we approved a restructuring plan to reduce our overhead costs and improve ongoing profitability. The activities primarily entailed the closure of four underperforming facilities. We incurred a $37 million pre-tax (largely non-cash) charge in the 4th quarter of 2011 primarily related to this plan, which included $31 million of long-lived asset impairments and $6 million of other restructuring-related costs. During the first nine months of 2012, we incurred an additional $2 million in restructuring costs and $1 million of long-lived asset impairments related to this plan. We expect plant closures to be complete by the end of the year, with no additional material costs expected. Earnings should benefit in 2012 from the cost savings associated with the 2011 Restructuring Plan and other restructuring activity initiated in the latter part of 2011. Our 2012 forecast anticipates an approximate $15-$20 million pre-tax earnings benefit ($.07-$.10 per share, net of tax) from these activities.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
Third Quarter:
Third quarter sales of $982 million were 4% higher than in the third quarter of 2011. Acquisitions, net of divestitures, increased sales by 1%. Third quarter same location unit volumes increased 7%, but were partially offset by a 4% revenue decline, primarily caused by lower trade sales from our rod mill and changes in currency rates.
EBIT (earnings before interest and income taxes) improved 47% during the quarter as a result of unit volume growth in several businesses (including Store Fixtures, Automotive, U.S. Spring, Furniture Components, Adjustable Bed, Carpet Underlay and Commercial Vehicle Products), lower raw material costs in certain operations, late-2011 restructuring activity, and the Western Pneumatic Tube acquisition.
Earnings per share (EPS) for the quarter were $.45 per diluted share, an increase of 45% compared to $.31 during the third quarter of last year. Nine Months Ended September 30, 2012:
Sales for the first nine months of 2012 were $2.9 billion, 3% higher than the same period of 2011. Acquisitions, net of divestitures, increased sales by 1%. Same location sales grew 2%, with 4% unit volume growth partially offset by lower rod mill trade sales and changes in currency rates.
EPS for the first nine months of 2012 were $1.20 per diluted share, compared to $.98 in the same period of 2011. Current year EPS reflects a $.04 benefit from a special tax item and a $.02 benefit from discontinued operations (both in the second quarter). EPS for the prior year included a $.02 benefit from special tax items (in the second quarter) and a $.03 benefit from other items, including gains from building sales (in the first quarter). The increase in EPS primarily reflects higher unit


volumes, lower raw material costs in certain businesses, savings associated with the restructuring activities initiated in late 2011, and the Western Pneumatic Tube acquisition.
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.
For the full year 2012, we estimate a LIFO benefit of $10 million. This estimate incorporates certain assumptions about year-end steel prices and inventory levels (both are very difficult to accurately predict). Therefore, the LIFO estimate for the full year could be significantly different from that currently estimated. Any further change in the annual estimate of LIFO will be reflected in the fourth quarter.

The following table contains the LIFO (income) expense included in earnings for each of the periods presented:

Nine Months Ended Three Months Ended September 30, September 30, 2012 2011 2012 2011 LIFO (income) expense $ (7.8 ) $ 8.1 $ (5.7 ) (.9 )

Interest Expense and Income Taxes
Third quarter 2012 interest expense from continuing operations was higher than in the third quarter of 2011 primarily due to the issuance in August 2012 of $300 million of long-term notes. Interest expense for the full year 2012 is expected to be higher than in 2011 by approximately $6 million.
The reported third quarter consolidated worldwide effective tax rate was 30%, compared to 29% for the same quarter last year. The slight increase in the 2012 effective rate was primarily attributable to a change in the composition of earnings among taxing jurisdictions.
We expect our 2012 fourth quarter tax rate to approximate 30%, but that is contingent upon factors such as our overall profitability, the mix of earnings among taxing jurisdictions, the type of income earned, the effect of tax law changes and prudent tax planning strategies, and the impact of tax audits and other discrete items.
We have approximately $40 million of Canadian deferred tax assets comprised primarily of tax loss carryforwards that expire in varying amounts between 2014 and 2032. There is a full valuation allowance against these deferred tax assets. We weigh all available evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized, however realization ultimately depends on the existence of future taxable income. Although uncertain, it is reasonably possible that we could reverse a portion or all of the valuation allowance in the foreseeable future, perhaps as early as the fourth quarter of 2012, which, in turn, would reduce our income tax expense and increase net earnings in the period the reversal is recorded. However, such an adjustment is contingent upon several factors, including our ability to amalgamate certain Canadian subsidiaries, enactment of pending Canadian tax legislation, forecasts of our future Canadian taxable income, and a determination of the amount, if any, that must be recorded as a liability for unrecognized tax benefits. At this time, because of these uncertainties, we cannot reasonably estimate the amount or range of amounts, if any, of any possible reversal of the valuation allowance. Any such reversal would be a non-cash adjustment in the year recorded. Discussion of Segment Results
Third Quarter Discussion
A description of the products included in each segment, along with segment financial data, appear in Note 4 of the Notes to Consolidated Condensed Financial Statements.
A summary of the segment results are shown in the following tables.


                                   Three Months ended      Three Months ended            Change in Net Sales             % Change in
                                   September 30, 2012      September 30, 2011                                           Same Location
(Dollar amounts in millions)            Net Sales               Net Sales                  $                  %           Sales(1)
Residential Furnishings           $           481.7       $           472.3       $       9.4                  2.0 %           1.9 %
Commercial Fixturing & Components             162.8                   141.7              21.1                 14.9            21.2
Industrial Materials                          218.0                   216.7               1.3                   .6            (8.1 )
Specialized Products                          191.0                   187.7               3.3                  1.8             1.8
Total                                       1,053.5                 1,018.4              35.1                  3.4
Intersegment sales                            (71.3 )                 (77.5 )             6.2
External sales                    $           982.2       $           940.9       $      41.3                  4.4 %           3.1 %




                            Three Months       Three Months        Change in EBIT                EBIT Margins(2)
                                ended             ended                                  Three Months       Three Months
                            September 30,     September 30,                                 ended               ended
(Dollar amounts in              2012               2011                                 September 30,       September 30,
millions)                       EBIT               EBIT             $           %            2012               2011
Residential Furnishings    $        39.7     $        33.5      $    6.2      18.5 %           8.2 %               7.1 %
Commercial Fixturing &
Components                          19.2               6.7          12.5     186.6            11.8                 4.7
Industrial Materials                19.3              11.7           7.6      65.0             8.9                 5.4
Specialized Products                22.8              20.6           2.2      10.7            11.9                11.0
Intersegment
eliminations & other                (1.8 )            (1.8 )           -
Change in LIFO reserve               5.7                .9           4.8
Total                      $       104.9     $        71.6      $   33.3      46.5 %          10.7 %               7.6 %

(1) The change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we owned one year earlier.

(2) Segment margins are calculated on total sales. Overall company margin is calculated on external sales.

Residential Furnishings
Third quarter sales in this segment increased $9 million, or 2%, all from same location sales. Unit volume increased 4%, but was partially offset by currency rate changes.
In our U.S. Spring business, sales were up 5%; innerspring unit volumes increased 5% and boxspring units increased 3%. European Spring sales were down 10%, from a combination of 4% lower unit volumes and currency impacts. Furniture Group sales increased 4%, with flat unit volumes in our Furniture Hardware business augmented by continued solid performance in our Seating and Distribution business. We had significant growth in Adjustable Bed again this quarter, with unit shipments up 21%. We also had meaningful growth in Carpet Underlay.
EBIT increased $6 million, from unit volume growth and lower raw material costs in certain businesses.
Commercial Fixturing & Components
Total sales increased $21 million, or 15%; same location sales increased 21%, but were partially offset by a decline attributable to a small divestiture. Fixture and Display sales increased significantly, as anticipated, primarily due to a large store remodel program. Sales in Office Furniture Components were down slightly during the quarter, which we believe is roughly in line with the overall market for office seating.
EBIT increased $13 million primarily due to higher sales, with a smaller benefit from cost improvements.
The seasonality of our store fixtures business this year is expected to be consistent with the historical pattern in which fourth quarter sales, EBIT, and margins are significantly lower than third quarter. Retailers generally plan the majority of their remodeling and new store activity so that it is complete ahead of the holiday season. This results in lower volume levels within the store fixture industry during the fourth quarter. Industrial Materials
Total sales increased $1 million, or 1%. The Western Pneumatic Tube acquisition increased sales by 9%; however, same


location sales decreased 8%. Lower trade sales from our steel rod mill more than offset a 2% unit volume increase.
The decrease in trade sales of steel rod during the quarter was largely offset by an increase in intercompany rod sales, so total rod production in the quarter was roughly flat with the prior year. The rod mill continues to run at 100% capacity utilization.
EBIT improved by $8 million, as a result of lower steel costs in certain businesses, the Western Pneumatic Tube acquisition and cost savings from the 2011 restructuring activity.
Specialized Products
Total sales increased $3 million, or 2%; unit volume grew by 5%, but was partially offset by the impact of currency exchange rates. Unit volumes increased in both Automotive and Commercial Vehicle Products during the quarter. These improvements were partially offset by lower Machinery sales. The increase in automotive sales reflects strong growth in both North America and Asia, but sales decreased in Europe, from a combination of currency exchange rates and lower volume.
EBIT improved $2 million, or 11%, largely due to higher sales. Nine-Month Discussion
A description of the products included in each segment, along with segment financial data, appear in Note 4 of the Notes to Consolidated Condensed Financial Statements. A summary of the segment results are shown in the following tables.

                             Nine Months ended      Nine Months ended         Change in Net Sales          % Change in
(Dollar amounts in           September 30, 2012     September 30, 2011                                    Same Location
millions)                        Net Sales              Net Sales               $               %           Sales(1)
Residential Furnishings     $         1,449.0      $         1,399.8      $     49.2            3.5  %           3.2 %
Commercial Fixturing &
Components                              391.9                  409.5           (17.6 )         (4.3 )            1.4
Industrial Materials                    691.7                  656.1            35.6            5.4             (2.4 )
Specialized Products                    572.2                  549.0            23.2            4.2              4.3
Total                                 3,104.8                3,014.4            90.4            3.0
Intersegment sales                     (237.0 )               (232.5 )          (4.5 )
External sales              $         2,867.8      $         2,781.9      $     85.9            3.1  %           1.9 %




                            Nine Months       Nine Months        Change in EBIT                 EBIT Margins(2)
                               ended             ended                                  Nine Months         Nine Months
                           September 30,     September 30,                                 Ended               ended
(Dollar amounts in             2012              2011                                  September 30,       September 30,
millions)                      EBIT              EBIT             $           %             2012               2011
Residential Furnishings   $       119.9     $       116.8     $    3.1        2.7 %           8.3 %               8.3 %
Commercial Fixturing &
Components                         29.5              22.4          7.1       31.7             7.5                 5.5
Industrial Materials               48.9              39.3          9.6       24.4             7.1                 6.0
Specialized Products               66.6              60.1          6.5       10.8            11.6                10.9
Intersegment
eliminations & other               (7.0 )            (5.6 )       (1.4 )
Change in LIFO reserve              7.8              (8.1 )       15.9
Total                     $       265.7     $       224.9     $   40.8       18.1 %           9.3 %               8.1 %

(1) The change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we owned one year earlier.

(2) Segment margins are calculated on total sales. Overall company margin is calculated on external sales.

Residential Furnishings
Sales in this segment increased 4% during the first nine months of 2012 largely from unit volume growth.
EBIT increased $3 million versus the prior year, primarily due to higher unit volumes, partially offset by the absence of a $4 million gain from a building sale that occurred in early 2011, and a shift in sales mix to lower margin products in certain businesses.


Commercial Fixturing & Components
Total sales declined $18 million, or 4%. The decline resulted primarily from the divestiture of a UK-based point-of-purchase operation in January 2012, partially offset by a 1% increase in same location sales.
EBIT increased $7 million versus the first nine months of 2011, primarily due to benefits from restructuring activity and other cost savings, along with slightly higher same location sales.
Industrial Materials
Total sales increased $36 million, or 5%. Sales growth from the Western Pneumatic Tube acquisition was partially offset by a 2% decline in same location sales. Lower trade sales at the steel rod mill more than offset a modest improvement in unit volumes in other parts of the segment.
EBIT increased $10 million, or 24%, primarily due to earnings benefits from the . . .

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