LEG

Business Context and Reporting Period

Company: Leggett & Platt, Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Leggett & Platt is a diversified international manufacturer of engineered components for homes, offices, retail stores, and automobiles. Operations are organized into five segments: Residential Furnishings, Commercial Fixturing & Components, Aluminum Products, Industrial Materials, and Specialized Products. The company operates 373 facilities across 33 U.S. states and 24 foreign countries.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Growth: Record sales driven primarily by acquisitions ($279 million contribution), partially offset by restructuring-related closures and divestitures (-$92 million). Internal sales growth was modest at 0.3%.
• Earnings Improvement: Net earnings increased significantly due to lower restructuring charges ($29 million benefit), lower workers' compensation expenses ($14 million benefit), and a $10 million reimbursement of Canadian lumber duties. These were partially offset by product mix changes and price competition.
• Segment Performance:
  • Residential Furnishings: Sales up 6%, EBIT up 63% (driven by lower charges and lumber duty refund).
  • Commercial Fixturing & Components: Sales down 3%, EBIT up 60% (benefited from restructuring benefits despite lower volume).
  • Industrial Materials: Sales down 11%, EBIT down 40% (due to reduced sales and lower profitability at the rod mill as market margins normalized).
  • Specialized Products: Sales up 14%, EBIT up 30% (driven by acquisitions).
• Restructuring Completion: The 2005 Closure and Consolidation Initiative was completed in 2006, involving 36 facilities. The company expects ongoing annual pre-tax earnings benefits of $30-$35 million from this plan.

Guidance, Outlook, and Risks

• Outlook: Management expects to see the full impact of restructuring benefits in 2007. Capital expenditures for 2007 are expected to be approximately $180 million. The company plans to spend $250-$300 million in 2007 on acquisitions and share repurchases combined.
• Dividends: The company raised its dividend for the 35th consecutive year. Dividends declared per share were $0.67 in 2006.
• Key Risks:
  • Raw Material Costs: Volatility in steel, aluminum, and chemical prices. While steel prices stabilized in 2006, foam scrap costs doubled from 2005 levels.
  • Competition: Increasing price competition from Asian manufacturers, particularly in low-end bedding components.
  • Goodwill Impairment: Approximately $300 million of goodwill is associated with the Fixture & Display group, which is operating below long-term expectations. Further deterioration could trigger impairment charges.
  • Economic Sensitivity: Demand is heavily influenced by consumer confidence, housing turnover, and energy costs.
• Unusual Items: A $21 million refund of Canadian softwood lumber duties and interest was received in late 2006, recorded as income.

Investor Verification Checklist

• Restructuring Benefits: Verify the realization of the projected $30-$35 million annual pre-tax earnings benefit from the completed restructuring plan in 2007.
• Fixture & Display Margins: Monitor the profitability of the Fixture & Display group to assess the risk of potential goodwill impairment on the $300 million associated with this segment.
• Raw Material Pass-Through: Confirm the company's ability to pass through cost increases for foam scrap and other commodities to customers without significant volume loss.
• Industrial Materials Normalization: Track the stabilization of margins in the Industrial Materials segment as the steel rod mill returns to normal market spreads.
• Acquisition Integration: Review the performance of the five businesses acquired in 2006 (adding ~$75 million in annualized sales) to ensure they meet integration targets.