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LEG > SEC Filings for LEG > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for LEGGETT & PLATT INC

Form 10-Q for LEGGETT & PLATT INC


5-Aug-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 19 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 half 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 half 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 six 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 six 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. At June 30, for the three-year measurement period that will end on December 31, 2014, we have so far (over the last 30 months) generated TSR of 22% per year on average, which places us at the midpoint of the S&P 500 over that same time frame.
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, and with our meaningful operating leverage, earnings should further benefit as market demand continues to improve. An additional $100 million of sales from incremental unit volume produced utilizing this spare capacity 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.
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. Since late 2013, metal margins have been under pressure as market conditions have not allowed full recovery of higher costs. A dumping case brought early in 2014 by major U.S. steel rod producers has begun to have a stabilizing effect on the domestic rod market.
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.
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. Acquisitions
On July 1, we jointly announced with Tempur Sealy, the purchase of their three U.S. innerspring component production facilities. In conjunction with this purchase, we also expanded and extended our supply relationship and became the exclusive long-term provider in the U.S. and Canada of wire-based innersprings for Tempur Sealy, and boxsprings for Sealy. The additional production should enhance economies of scale, benefit from our vertical integration in steel rod and wire, and allow manufacturing optimization across a broad asset base. We expect this agreement to add approximately 2% to sales and be neutral to EPS over the first year as we execute our integration plan. See Note 10 for additional information regarding acquisitions. Goodwill Impairment of Store Fixtures Group

A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. We review our ten reporting units for potential goodwill impairment in June of each year, and more often if an event or circumstance occurs making it likely that impairment exists. We performed our annual goodwill impairment review in June 2014, and on July 14, 2014, concluded that an impairment charge of $108 million was required for our Store Fixtures group, which is part of the Commercial Fixturing & Components segment. The impairment charge reflects the complete write-off of the goodwill associated with the Store Fixtures group and, at this time, is not expected to result in significant future cash expenditures.

The Store Fixtures group is dependent upon capital spending by retailers on both new stores and remodeling of existing stores. Because of the seasonal nature of the fixture & display industry (where revenue and profitability are typically expected to increase in the second and third quarters assuming the normal historical pattern of heavy shipments during these months) we reasonably anticipated being awarded significant customer orders in the second quarter of 2014. However, as the second quarter progressed, anticipated orders did not materialize and the Store Fixtures business deteriorated, with declines most pronounced in May and June. Taking these recent developments into account, we lowered our projection of future margins and growth rates (from 4.8% in prior year's review to .5% in the current year for 10-year compound growth rate for EBIT plus depreciation and amortization) and increased the discount rate from 10.5% to 12%, causing fair value to fall below carrying value. The lower expectations of future revenue and profitability are due to reduced overall market demand for the shelving, counters, showcases and garment racks as many retailers are reducing their investments in traditional store space and focusing more on e-commerce initiatives.

We have engaged an investment banker and are exploring strategic alternatives regarding the Store Fixtures group, including the possibility of divestiture of this business.
Restructuring
There were no significant restructuring-related costs incurred in either the first six months of 2014 or 2013.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
Second Quarter:
Earnings per share (EPS) declined to a loss of $.17, from $.48 in 2013, and included a non-cash goodwill impairment charge of $.65 (or $108 million pre-tax) for the complete write off of the goodwill associated with the Store Fixtures group.

Second quarter EPS in 2013 was $.48, which included $.05 from discontinued operations and was primarily driven by a tax benefit from the elimination of three small operations. Continuing operations EPS in the second quarter of 2014 benefited from sales growth, a lower tax rate, and reduced share count. Sales were $1,002 million in the second quarter, a 4% (or $43 million) increase versus the prior year. Same location sales improved 3% due to strong volume gains in most of our residential markets (including bedding, home furniture, geo components, adjustable beds, fabric converting, and carpet underlay), and also in the office furniture and automotive markets.


These gains were partially offset by large sales declines in Store Fixtures and Commercial Vehicle Products. Acquisitions contributed modestly to sales growth. Earnings Before Interest and Taxes (EBIT) were $(7) million in the second quarter of 2014, which includes the $108 million non-cash impairment charge. EBIT in the second quarter of 2013 was $99 million. Current quarter EBIT benefited from sales growth largely offset by weak performance in Store Fixtures and the non-recurrence of last year's $4 million gain from building and equipment sales.
Six Months Ended June 30, 2014:
Current year EPS declined to $.20, from $.81 in 2013, and included a non-cash goodwill impairment charge of $.65 (or $108 million pre-tax) for the complete write off of the goodwill associated with the Store Fixtures group. Continuing Operations EPS in the current year benefited primarily from improved sales mix, a lower tax rate, and reduced share count.
Sales from continuing operations increased 2%, to $1.92 billion in the first half of 2014, versus $1.89 billion for the same period of 2013. Same location sales were essentially flat, with volume gains in most of our residential markets, and also in the office furniture and automotive markets offset by large declines in Store Fixtures and Commercial Vehicle Products. Acquisitions added 2% to sales for the six-month period.
EBIT for the first six months of 2014 was $76 million, including $108 million of goodwill impairment, and benefited from an improved mix of sales across our business units. For the first six months of 2013, EBIT was $178 million. 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:

                            Six Months Ended             Three Months Ended
                                June 30,                      June 30,
                             2014           2013           2014            2013

LIFO benefit (expense) $ - $ 4.8 $ - $ 2.2

Interest Expense and Income Taxes
Second quarter 2014 interest expense was slightly lower than in the second quarter of 2013.
The second quarter effective tax rate on continuing operations was (45)%, compared to 27% for the same quarter last year. This quarter's negative tax rate resulted from the impairment charge in our Store Fixtures group, which decreased the rate by 60 percentage points. Both the 2014 and 2013 quarterly tax rates benefited from a few small favorable discrete items which totaled $4 million and $3 million, respectively. The 2014 rate further benefited from a more favorable mix of earnings among tax jurisdictions as compared to 2013. We anticipate an effective tax rate on continuing operations for the remainder of 2014 of approximately 28%. That rate is contingent upon factors such as our overall profitability, the mix of earnings among tax jurisdictions, the type of income earned, the impact of tax audits and other discrete items, and the effect of tax law changes and prudent tax planning strategies.


Discussion of Segment Results
Second 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
(Dollar amounts in             June 30, 2014           June 30, 2013                                       Same Location
millions)                        Net Sales               Net Sales               $               %           Sales(1)
Residential Furnishings     $           536.0      $           488.8       $     47.2            9.7  %           9.3 %
Commercial Fixturing &
Components                               96.4                  127.4            (31.0 )        (24.3 )          (24.3 )
Industrial Materials                    222.2                  216.7              5.5            2.5             (3.5 )
Specialized Products                    230.8                  208.4             22.4           10.7             10.5
Total                                 1,085.4                1,041.3             44.1            4.2
Intersegment sales                      (83.8 )                (82.5 )           (1.3 )
External sales              $         1,001.6      $           958.8       $     42.8            4.5  %           2.9 %




                             Three Months     Three Months         Change in EBIT                EBIT Margins(2)
                                ended            ended                                    Three Months     Three Months
                               June 30,         June 30,                                     ended            ended
(Dollar amounts in               2014             2013                                      June 30,         June 30,
millions)                        EBIT             EBIT            $             %             2014             2013
Residential Furnishings     $      53.7      $      42.4      $   11.3         26.7  %         10.0  %           8.7 %
Commercial Fixturing &
Components                       (106.9 )            7.9        (114.8 )   (1,453.2 )        (110.9 )            6.2
Industrial Materials               14.3             21.9          (7.6 )      (34.7 )           6.4             10.1
Specialized Products               35.4             28.4           7.0         24.6            15.3             13.6
Intersegment eliminations &
other                              (3.4 )           (4.3 )          .9
Change in LIFO reserve                -              2.2          (2.2 )

Total $ (6.9 ) $ 98.5 $ (105.4 ) (107.0 )% (.7 )% 10.3 %

(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 9% with each of the major businesses growing during the quarter.
In our U.S. Spring business, component sales increased 4%. Innerspring unit volume was down 3%, however growth in the Comfort Core premium innerspring category continued, with those higher-priced and higher-margined units up 48% during the quarter. Boxspring unit volume was essentially flat. In International Spring, sales grew 8%, primarily from market share gains and increased Comfort Core sales in Europe. In Furniture Components, sales increased 7%. Volume in our seating and sofa sleeper business grew 4% and motion hardware unit volume was up 14%. Adjustable Bed units grew 35% in the quarter. New adjustable bed programs have begun to ramp up and this should continue to drive significant volume growth in the back half of the year.
Segment EBIT and EBIT margin increased versus second quarter of 2013, primarily from higher sales and favorable product mix, partially offset by the non-recurrence of a prior year gain from building sales (of $3 million). Commercial Fixturing & Components
Same location sales in the segment decreased 24%. Store Fixtures sales declined significantly due to the non-recurrence of major retailer programs from second quarter of 2013 and unanticipated weak overall market demand. Store Fixtures performance did not rebound during the second quarter of 2014 as expected, with the deterioration of revenue and profitability most pronounced in May and June. Volume in Office Furniture Components grew 8% during the quarter largely from new programs that we have been awarded and gradually improving market demand. Segment EBIT and EBIT margin decreased significantly due to the non-cash goodwill impairment charge (of $108 million) and lower Store Fixtures sales.


Industrial Materials
Same location sales in the segment decreased 4%, primarily from lower unit volume in wire and steel tubing.

EBIT and EBIT margin for the segment decreased versus second quarter of 2013. Metal margins in rod and wire continued to be under pressure as market conditions did not allow us to fully recover higher costs. EBIT was also impacted by lower unit volume in wire and steel tubing, and the non-recurrence of a prior year gain from equipment sales (of $1 million).

Our aerospace business (which resides in this segment) continues to perform very well domestically, and earnings should further benefit as we fully integrate our European acquisitions.
Specialized Products
Same location sales for the segment grew 10%. Automotive sales increased 21% from a combination of expanded content, participation in new vehicle platforms, and demand strength in each of the major geographic markets. Same location sales also increased 3% in Machinery. These combined improvements were partially offset by a 22% sales decrease in Commercial Vehicle Products.

The segment's EBIT and EBIT margin increased during the quarter primarily from higher sales.
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 for 2013 were primarily attributable to tax-driven benefits. We have had no discontinued operations activity during 2014. For further information about discontinued operations, see Note 5 of the Notes to Consolidated Condensed Financial Statements.
Six-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.

                           Six Months ended     Six Months ended        Change in Net Sales          % Change in
(Dollar amounts in          June 30, 2014        June 30, 2013                                      Same Location
millions)                     Net Sales            Net Sales              $               %           Sales(1)
Residential Furnishings   $        1,034.8     $          975.6     $     59.2            6.1  %          5.9  %
Commercial Fixturing &
Components                           186.3                243.0          (56.7 )        (23.3 )         (23.3 )
Industrial Materials                 433.8                439.9           (6.1 )         (1.4 )          (7.8 )
Specialized Products                 429.1                394.7           34.4            8.7             8.4
Total                              2,084.0              2,053.2           30.8            1.5
Intersegment sales                  (163.3 )             (161.7 )         (1.6 )
External sales            $        1,920.7     $        1,891.5     $     29.2            1.5  %         (0.1 )%



                          Six Months      Six Months          Change in EBIT             EBIT Margins(2)
                             ended           ended                                   Six Months    Six Months
                           June 30,        June 30,                                    ended          ended
(Dollar amounts in           2014            2013                                     June 30,      June 30,
millions)                    EBIT            EBIT            $             %            2014          2013
Residential Furnishings  $     105.0     $      84.7     $   20.3         24.0  %       10.1  %         8.7 %
Commercial Fixturing &
Components                    (108.9 )           9.5       (118.4 )   (1,246.3 )       (58.5 )          3.9
Industrial Materials            25.4            43.6        (18.2 )      (41.7 )         5.9            9.9
Specialized Products            60.4            44.1         16.3         37.0          14.1           11.2
Intersegment
eliminations & other            (6.3 )          (8.8 )        2.5
Change in LIFO reserve             -             4.8         (4.8 )
Total                    $      75.6     $     177.9     $ (102.3 )      (57.5 )%        3.9  %         9.4 %

(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 6% in the first half of 2014, reflecting a combination of higher unit volume in most businesses and favorable product mix.
Segment EBIT and EBIT margin for the six month period increased versus the first half of 2013, primarily from higher sales and favorable product mix. A $4 million gain from a building sale in the first quarter of 2014 was offset by the non-recurrence of gains of $6 million in the first half of 2013 ($3 million in the first quarter for a hurricane-related insurance gain and $3 million in the second quarter related to building sales). Commercial Fixturing & Components
Same location sales in the segment decreased 23% in the first half of 2014. Store Fixtures sales declined significantly due to the non-recurrence of certain major retailer programs from 2013, and unanticipated weak overall market demand. Volume in Office Furniture Components grew from a combination of new programs and improved market demand.
Segment EBIT and EBIT margin decreased significantly due to the non-cash . . .

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