Business Context and Reporting Period
Company: Leggett & Platt, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A diversified manufacturer of engineered components for residential furniture, bedding, office furniture, automotive seating, and retail fixtures. Operations are organized into four segments: Residential Furnishings, Commercial Fixturing & Components, Industrial Materials, and Specialized Products.
Key Financial Metrics
| Metric (in millions) | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
|---|---|---|---|---|
| Net Sales | $1,475.5 | $2,061.4 | $757.4 | $1,063.1 |
| Gross Profit | $272.2 | $373.5 | $147.2 | $196.4 |
| Net Earnings (Attributable to L&P) | $22.3 | $89.7 | $19.0 | $46.3 |
| Diluted EPS (Continuing Ops) | $0.14 | $0.48 | $0.12 | $0.25 |
| Operating Cash Flow | $288.4 | $126.5 | N/A | N/A |
| Cash and Equivalents (Balance Sheet) | $222.2 | $164.7 | N/A | N/A |
| Total Debt (Long-term + Current) | $790.0 | $873.6 | N/A | N/A |
| Net Debt to Net Capital | 24.0% | 28.4% | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 28% year-over-year for the six months ended June 30, 2009, driven by extremely weak global market demand across all segments. Same-location sales declined 27.5%.
- Earnings Compression: Net earnings attributable to Leggett & Platt dropped 75% for the six-month period. Earnings per share from continuing operations fell from $0.48 to $0.14.
- Divestiture Note Write-down: A significant non-cash charge of $10.6 million was recorded in the second quarter due to the deterioration of the Aluminum Products segment divested in 2008. The company surrendered a promissory note in exchange for preferred stock with a lower fair value.
- LIFO Benefit: Decreasing steel prices resulted in a $36.0 million LIFO benefit for the six months ended June 30, 2009, compared to a $15.1 million LIFO expense in the prior year period.
- Working Capital: Operating cash flow improved significantly to $288.4 million (up $162 million from prior year), primarily due to a $140 million reduction in working capital (lower inventories and receivables) despite lower earnings.
Guidance, Outlook, and Risks
- Outlook: Management expects market demand to stabilize at lower levels for the remainder of 2009. Second-half cost of goods sold is expected to reflect more contemporary, lower steel prices, potentially enhancing margins.
- Capital Allocation: The company is shifting to a "role-based portfolio management" strategy, focusing capital on "Grow" and "Core" businesses while divesting underperformers. Capital expenditures are expected to decrease to approximately $100 million in 2009.
- Shareholder Returns: The company intends to return excess cash via dividends and share repurchases. A quarterly dividend of $0.25 per share was declared. The Board authorized up to 10 million shares for repurchase in 2009.
- Risks:
- Customer Insolvency: Tightening credit markets increase the risk of customer defaults and uncollectible receivables.
- Raw Material Volatility: Earnings remain sensitive to steel prices and the ability to pass cost changes to customers.
- Legal Proceedings: Ongoing shareholder derivative litigation regarding stock option backdating and a settlement related to the West Warwick nightclub fire (contingent on court approval).
Investor Verification Checklist
- Divestiture Recovery: Verify the final valuation and recovery potential of the preferred stock received in exchange for the Aluminum Products promissory note.
- LIFO Assumptions: Monitor year-end steel price estimates and inventory levels, as the full-year LIFO benefit ($72 million projected) is highly sensitive to these variables.
- Customer Credit Quality: Review the allowance for doubtful accounts ($33.8 million) and any specific customer bankruptcies impacting receivables.
- Divestiture Progress: Track the sale of the remaining "Storage Products" unit, which is currently held for sale but delayed by market conditions.
- Debt Ratings: Monitor credit rating reviews (Moody's and S&P) which have placed the company on negative outlook or review for downgrade, potentially impacting borrowing costs.