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LEG > SEC Filings for LEG > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for LEGGETT & PLATT INC

Form 10-Q for LEGGETT & PLATT INC


7-May-2014

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 19,000 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 50% of total sales during the first quarter of 2014.
Commercial Fixturing & Components: Operations in this segment 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. This segment contributed 9% of total sales in the first quarter of 2014. 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 21% of our total sales during the first three months of 2014. 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 20% of our total sales in the first three months of 2014.
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. So far, for the three-year measurement period that will end on December 31, 2014, we have generated TSR of 22% per year on average, which places us just above the midpoint of the S&P 500 companies.
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 approximately 6% of our sales in 2013. 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 of 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-third of our sales.
We continue to retain more production capacity than we currently utilize. Accordingly, unit sales can increase by approximately $400 million (based on current sales mix) without the need for large capital investment. We have meaningful operating leverage that should further benefit earnings as market demand improves. 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 being vertically integrated into steel wire and rod. This is a benefit that our competitors do not have. We also experience favorable purchasing leverage from buying large quantities of raw materials. 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. 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. In late 2013, steel costs increased. We are implementing price increases, and expect to recover these higher costs. 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. In the first quarter of 2014, metal margins continued to be under pressure, but we expect improvement in the back half of this year as overall steel market conditions improve.
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. 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 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 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, logistics and distribution efficiencies, 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.
Premium non-innerspring mattresses (those that have either a foam or air core) experienced rapid growth in the U.S. bedding market through early 2012. These products represent a relatively small portion of the bedding market in units (approximately 10%-12%), but comprise a larger portion of the market in dollars (approximately 25%-30%) due to their higher


average selling prices. In 2013, non-innerspring mattress sales declined and the proportion of the total bedding market that they represent also decreased. Most traditional bedding manufacturers (who are our customers) now offer 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, have been well received by consumers.
For the past five years, there have been antidumping duty orders on innerspring imports from China, South Africa and Vietnam, ranging from 116% to 234%. In March, the Department of Commerce (DOC) and the International Trade Commission (ITC) determined that the duties should be continued. On April 23, 2014, the DOC published its final order continuing the duties through February 2019 (for China) and December 2018 (for South Africa and Vietnam).
In addition, because of the documented evasion of antidumping orders by shipping of goods through third countries and falsely identifying the countries of origin, Leggett, along with several U.S. manufacturers in various industries have formed a coalition and are working with members of Congress, the DOC, and U.S. Customs and Border Protection to seek stronger enforcement of existing antidumping and/or countervailing duty orders. Restructuring
There were no significant restructuring-related costs incurred in either the first three months of 2014 or 2013.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
Earnings per share (EPS) for the first quarter of 2014 were $.37 per diluted share, an increase of 12% compared to $.33 during the first quarter of 2013. This increase reflects an improved mix of sales among business units and a modest gain on the sale of a building. These factors were partially offset by the earnings impact of lower same location sales.
First quarter sales were $919 million, a 1% (or $14 million) decrease versus the prior year. Same location sales declined 3% during the quarter, due to lower volume in Store Fixtures and Commercial Vehicle Products, and weather-related demand weakness in several other businesses in the first two months of the year. These declines were partially offset by continued growth in Automotive, Residential Furniture, and International Spring. Acquisitions improved sales by 2%.
Consistent with market and public company commentary over the past few months, virtually all of our U.S.-based businesses were negatively impacted in the first quarter by extreme winter weather. These impacts included softer than expected market demand, production and transportation inefficiencies, and higher energy costs. Weather-related issues subsided in the latter part of the quarter and sales momentum improved notably. Following a very soft January and February, March same location sales were up 6%.
EBIT margin improved 50 basis points versus first quarter last year, from 8.5% to 9.0%. Excluding the building gain, EBIT margin remained at the level achieved in the first quarter 2013, despite lower sales. 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 55% of our inventories to the last-in, first-out (LIFO) method.
For the full year 2014, we estimate no LIFO benefit or expense. This estimate incorporates certain assumptions about year-end steel prices and inventory levels. Therefore, the LIFO estimate for the full year could be significantly different from that currently estimated.

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

Three Months Ended March 31, 2014 2013 LIFO benefit (expense) $ - $ (2.6 )


Interest Expense and Income Taxes
First quarter 2014 interest expense was lower than in the first quarter of 2013 as a result of the payment of $200 million of notes that matured on April 1, 2013.
The reported first quarter consolidated worldwide effective tax rate on continuing operations was 27%, compared to 29% for the same quarter last year. Both the 2013 and 2014 effective tax rates benefited from a few small favorable discrete items in each quarter. We anticipate that the effective tax rate on continuing operations for the remainder of 2014 will 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.
Discussion of Segment Results
First 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. Reported amounts for 2013 have been retrospectively adjusted to reflect the reclassification of certain operations to discontinued operations. For further information about discontinued operations, see Note 5 on page 8 of the Notes to Consolidated Condensed Financial Statements.

                             Three Months ended      Three Months ended         Change in Net Sales         % Change in
(Dollar amounts in             March 31, 2014          March 31, 2013                                      Same Location
millions)                         Net Sales               Net Sales               $              %           Sales(1)
Residential Furnishings     $           498.8       $           486.8       $     12.0           2.5  %          2.4  %
Commercial Fixturing &
Components                               89.9                   115.6            (25.7 )       (22.2 )         (22.3 )
Industrial Materials                    211.6                   223.2            (11.6 )        (5.2 )         (11.9 )
Specialized Products                    198.3                   186.3             12.0           6.4             6.1
Total                                   998.6                 1,011.9            (13.3 )        (1.3 )
Intersegment sales                      (79.5 )                 (79.2 )            (.3 )

External sales $ 919.1 $ 932.7 $ (13.6 ) (1.5 )% (3.2 )%

                           Three Months     Three Months       Change in EBIT              EBIT Margins(2)
                              ended            ended                                Three Months     Three Months
                            March 31,        March 31,                                  ended            ended
(Dollar amounts in             2014             2013                                  March 31,        March 31,
millions)                      EBIT             EBIT            $           %           2014             2013
Residential Furnishings   $      51.3      $      42.3      $   9.0       21.3  %       10.3  %            8.7 %
Commercial Fixturing &
Components                       (2.0 )            1.6         (3.6 )   (225.0 )        (2.2 )             1.4
Industrial Materials             11.1             21.7        (10.6 )    (48.8 )         5.2               9.7
Specialized Products             25.0             15.7          9.3       59.2          12.6               8.4
Intersegment
eliminations & other             (2.9 )           (4.5 )        1.6
Change in LIFO reserve              -              2.6         (2.6 )
Total                     $      82.5      $      79.4      $   3.1        3.9  %        9.0  %            8.5 %

(1) The change in same location sales excludes the effect of 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
Same location sales in the segment increased 2% in the first quarter. Volume trends were mixed across the segment.
In our U.S. Spring business, sales decreased 4%. Innerspring unit volumes were down 6%, however growth in the Comfort Core innerspring category continued, with those higher-priced and higher-margined units up 19% during the quarter. Boxspring volume decreased 1%. In International Spring, sales grew 10%, primarily from market share gains and increased Comfort Core sales in Europe. In Furniture Components, sales increased 6% in the first quarter. Volume in our seating and


sofa sleeper business grew 6% and motion hardware unit volume was up 5%. Adjustable Bed units were up slightly in the quarter. New adjustable bed programs have begun to ramp up and this should drive volume growth in the back half of the year.
Extreme weather negatively impacted most of our U.S.-based Residential Furnishings businesses early in the quarter, but especially our bedding-related operations and Carpet Underlay. Volume improved across the segment late in the quarter.
Segment EBIT and EBIT margin for the quarter increased versus first quarter of 2013, primarily from higher sales and cost improvements. A $4 million gain from a building sale in the current quarter was largely offset by the non-recurrence of a $3 million hurricane-related insurance gain last year. Commercial Fixturing & Components
Same location sales in the segment decreased 22% in the first quarter. Store Fixtures sales declined significantly due to the non-recurrence, as expected, of certain major retailer programs which occurred in early 2013. Volume in Office Furniture Components grew 4% during the quarter from a combination of new programs and improved market demand.

Segment EBIT and EBIT margin decreased versus the first quarter of 2013 primarily due to lower sales.

We are disappointed with current year demand levels in Store Fixtures. In the second quarter, the group's sales are forecasted to be approximately $25 million lower than they were in the second quarter of 2013 due to the non-recurrence of certain major retailer programs. In the past year, we have refocused our sales efforts in an attempt to decrease customer concentration and seasonality in this business. While we believe we are making progress with new customers, many expected new programs have been slow to start. In response, we are reducing costs at each operation to offset some of the earnings impact from very soft sales.
Industrial Materials
First quarter same location sales in the segment decreased 12%, primarily from lower unit volumes in wire and rod.

EBIT and EBIT margin for the segment decreased during the quarter. In many of the segment's operations, but especially in wire and rod, sales volume, production efficiency, transportation, and energy costs were negatively impacted by extreme weather. In addition, metal margins continued to be under pressure in the first quarter as market conditions did not allow us to fully recover higher scrap costs.

Our domestic aerospace business (which resides in this segment) continues to perform well, and earnings should further benefit in 2014 as we fully integrate our European acquisitions.
Specialized Products
Same location sales for the segment grew 6% in the first quarter. Automotive sales increased 17%, from a combination of expanded content, participation in new vehicle platforms, and demand strength in each of the major markets. Same location sales also increased 3% in Machinery. In Commercial Vehicle Products, sales declined significantly versus a strong first quarter of 2013.

The segment's EBIT and EBIT margins increased during the quarter, primarily from higher sales and the non-recurrence of a litigation accrual from the first quarter of last year.
Discontinued Operations
Earnings from discontinued operations are presented net of tax on the Consolidated Condensed Statements of Operations. During the second quarter of 2013, we exited three small operations. Discontinued operations earnings were essentially flat in the first quarters of 2014 and 2013. For further information about discontinued operations, see Note 5 of the Notes to Consolidated Condensed Financial Statements.

LIQUIDITY AND CAPITALIZATION

Cash from Operations
Cash from operations is our primary source of funds. Earnings and changes in working capital levels are the two broad factors that generally have the greatest impact on our cash from operations. For 2014, we expect cash flow from operations to exceed $350 million.


Increases in working capital from very low year-end 2013 levels led to negative operating cash of $20 million for the first quarter of 2014. This compares with positive operating cash of $24 million in the first quarter of 2013. Working capital typically increases in the first quarter and operating cash is normally at the lowest quarterly level of the year due to the seasonal pattern of our businesses. This year, there was a larger than usual increase in working capital, due to a number of factors:
• Days Sales Outstanding (DSO): Accounts receivable were impacted by the timing of sales in the quarter and growth in businesses and geographies that typically have longer payment terms. Sales improved as the first quarter progressed, contributing to increased receivables toward the end of the quarter and higher DSO of 51 days, versus 48 days in the same quarter last year. In the first quarter of 2014, we incurred $1.1 million of bad debt expense as compared to $1.6 million in first quarter 2013.
•Days Inventory Outstanding (DIO): Inventory also increased in the first quarter, primarily from specific opportunistic raw material purchases, ramp up of new product lines, and weather-related transportation delays. We ended the first quarter with DIO of 63 days, up from 61 days in the first quarter 2013. Expense associated with slow moving and obsolete inventories in the first quarter of 2014 was $2.4 million, as compared to $2.0 million in the first quarter of 2013.
•Days Payable Outstanding (DPO): We continue to gradually optimize accounts payable levels, but the rate of incremental improvement has slowed. We ended first quarter with DPO of 43 days, up from 39 days in the first quarter of last year. We continue to closely monitor our working capital levels, and ended the quarter with adjusted working capital at 13.3% of annualized sales, well below our 15% target. The table below shows this non-GAAP calculation. We eliminate cash and current debt maturities from working capital to monitor our performance related to operating efficiency and believe this provides a more useful measurement.

                                                                                 December 31,
(Amounts in millions)                                         March 31, 2014         2013
Current assets                                               $       1,410      $      1,282
Current liabilities                                                   (834 )            (829 )
Working capital                                                        576               453
Cash and cash equivalents                                             (269 )            (273 )
Current debt maturities                                                181               181
Adjusted working capital                                     $         488      $        361
Annualized sales (1)                                         $       3,676      $      3,588
Adjusted working capital as a percent of annualized sales             13.3 %            10.1 %

(1) Annualized sales equal 1st quarter sales ($919 million) multiplied by 4. We believe measuring our working capital against this sales metric is more useful, since efficient management of working capital includes adjusting those net asset levels to reflect current business volume.


Working Capital Trends
The following chart presents key working capital trends for the last five
quarters:
[[Image Removed]]
(Dollar amounts in millions)  Mar-13     Jun-13     Sep-13     Dec-13     Mar-14
Trade Receivables, net       $ 495.7    $ 504.4    $ 536.3    $ 434.8    $ 525.8
Inventory, net               $ 502.5    $ 510.4    $ 488.9    $ 495.9    $ 519.5
Accounts Payable             $ 320.0    $ 338.3    $ 326.2    $ 339.3    $ 350.2

(1) The trade receivables ratio represents the days of sales outstanding calculated as: ending net trade receivables ÷ (quarterly net sales ÷ number of days in the quarter).

(2) The inventory ratio represents days of inventory on hand calculated as:
ending net inventory ÷ (quarterly cost of goods sold ÷ number of days in the quarter).

(3) The accounts payable ratio represents the days of payables outstanding calculated as: ending accounts payable ÷ (quarterly cost of goods sold ÷ number of days in the quarter).

Uses of Cash
Finance Capital Requirements
Cash is readily available to fund selective growth, both internally (through capital expenditures) and externally (through acquisitions). We expect capital expenditures of approximately $100 million in 2014. We continue to make investments for maintenance, efficiency improvement, and growth in businesses and product lines where sales are strong. With current capacity utilization rates still relatively low, our need to invest in additional productive capacity is limited. As volumes improve, we expect capital expenditure levels to increase, but longer-term they will likely remain at or below total depreciation and amortization. Our incentive plans emphasize returns on capital, which include net fixed assets and working capital. This emphasis heightens the focus on asset utilization and helps insure that we are investing additional capital dollars where attractive return potential exists.
Our strategic, long-term, 4-5% annual growth objective envisions periodic acquisitions. We are seeking acquisitions primarily within our Grow businesses, and are looking for opportunities to enter new, higher growth markets (carefully screened for sustainable competitive advantage). In January 2012, we purchased Western Pneumatic Tube for $188 million. This acquisition aligns extremely well with our strategy to seek businesses with secure, leading positions in growing, profitable, attractive markets. Western established for us a strong competitive position in the higher return, higher growth aerospace market. In 2013, we acquired two smaller, complementary businesses in this aerospace tubing platform.

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