Business Context and Reporting Period
Company: Leggett & Platt, Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Leggett & Platt is a diversified international manufacturer of engineered components for residential furnishings, commercial fixturing, industrial materials, and specialized products (automotive, machinery, commercial vehicles). The company operates 19 business units across four segments. In 2009, the company continued its strategic shift initiated in 2007, focusing on Total Shareholder Return (TSR), margin improvement, and returning cash to shareholders via dividends and stock repurchases, while divesting low-performing assets.
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net Sales (Continuing Ops) | $3,055 million | $4,076 million | (25.1%) |
| Gross Profit | $629.7 million | $691.2 million | (8.9%) |
| Gross Margin | 20.6% | 17.0% | +360 bps |
| EBIT (Continuing Ops) | $230.3 million | $232.3 million | (0.9%) |
| EBIT Margin | 7.5% | 5.7% | +180 bps |
| Net Earnings (Continuing Ops) | $121.1 million | $127.5 million | (5.0%) |
| Net Earnings (Total) | $115.0 million | $109.0 million | +5.5% |
| Diluted EPS (Total) | $0.70 | $0.62 | +12.9% |
| Operating Cash Flow | $565.3 million | $436.2 million | +29.6% |
| Long-Term Debt | $789.3 million | $851.2 million | (7.3%) |
| Cash & Equivalents | $260.5 million | $164.7 million | +58.2% |
| Net Debt to Net Capital | 23.7% | 28.4% | -470 bps |
Material Changes vs. Prior Period
- Revenue Decline: Sales dropped 25% primarily due to weak global market demand, steel-related price deflation, and the strategic exit of customer programs with unacceptable margins. The Residential Furnishings segment saw a 20% sales decline, while Commercial Fixturing & Components dropped 31%.
- Margin Expansion: Despite the revenue drop, EBIT margins improved from 5.7% to 7.5% and Gross margins from 17.0% to 20.6%. This was driven by aggressive cost containment, headcount reduction, facility consolidation, and pricing discipline.
- LIFO Impact: A significant swing in LIFO accounting occurred. 2008 included a $62 million LIFO expense due to rising steel costs. 2009 included a $67 million LIFO benefit due to falling steel costs and lower inventory levels, which boosted earnings in the second half of the year.
- Divestitures: The company divested the Coated Fabrics unit in Q3 2009. The Aluminum Products segment (divested in 2008) resulted in a $10.6 million write-down of a promissory note in 2009 due to the buyer's financial deterioration.
- Shareholder Returns: The company repurchased approximately 10.9 million shares in 2009 (totaling ~$192 million) and increased the quarterly dividend to $0.26 per share.
Guidance, Outlook, and Risks
- Strategic Focus: Management continues to prioritize margin improvement and returns on assets over revenue growth. The goal is to achieve TSR in the top 1/3 of the S&P 500. Disciplined growth (targeting 4-5% annual revenue growth) is expected to resume once margins stabilize.
- 2010 Outlook: Capital expenditures are expected to be under $90 million. Operating cash flow is projected to approximate $300 million, sufficient to fund dividends and capex. The company expects market demand to stabilize at lower levels but anticipates no material impact to liquidity.
- Raw Material Risks: Steel remains the primary raw material. While costs decreased in 2009, volatility remains a risk. The company notes that lower metal margins in the steel market (scrap vs. rod) may persist into 2010.
- Competition: The company faces ongoing pressure from foreign competitors, particularly in Asia. Antidumping duties on innersprings from China, South Africa, and Vietnam (ranging from 116% to 234%) remain in effect but face evasion challenges.
- Asset Impairments: Goodwill and long-lived assets represent a significant portion of total assets. While no goodwill impairments were recorded in continuing operations in 2009, the company notes that if actual results differ from assumptions, future impairments could occur.
Investor Verification Checklist
- Steel Cost Pass-Through: Verify the company's ability to maintain the improved gross margins if steel commodity prices rise again, given the lag in price adjustments.
- Divestiture Completion: Monitor the status of the Storage Products unit, which is classified as held for sale but has not yet been divested due to market conditions.
- Customer Concentration: Review the top 10 customers (representing ~21% of revenue) for any signs of insolvency or further demand weakness, particularly in the automotive and residential sectors.
- Antidumping Enforcement: Assess the effectiveness of current antidumping duties on Chinese innersprings and the potential impact of duty evasion on market share.
- Working Capital Trends: Monitor Days Sales Outstanding (DSO), which increased to 56 days in 2009 from 49 days in 2008, indicating slower customer payments during the economic downturn.