LEG

Business Context and Reporting Period

Company: Leggett & Platt, Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: A diversified manufacturer of engineered products serving five primary segments: Residential Furnishings, Commercial Fixturing & Components, Aluminum Products, Industrial Materials, and Specialized Products. The company operates globally with significant facilities in the U.S., Canada, Europe, Mexico, and Asia.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3.8% to $4.27 billion, driven by a 0.7% increase in same-location sales and acquisitions totaling approximately $70 million in annualized sales.
• Earnings Improvement: Net earnings rose 24% to $233.1 million ($1.17 per share). This improvement was primarily due to the elimination of goodwill amortization (FASB 142), lower restructuring costs, reduced bad debt, and lower interest expenses.
• Margin Pressure: Gross profit margin declined to 19.2% from 19.9% in 2001, largely due to higher raw material costs (notably steel) and selling price pressure in certain units.
• Debt Reduction: Long-term debt decreased by $169.0 million to $808.6 million. This was primarily due to the reclassification of $124.4 million to current maturities and the payment of $75 million in medium-term notes.
• Acquisitions and Divestitures: Acquired seven businesses (including a bankrupt steel mill) and divested three aluminum businesses (annualized sales of ~$40 million).

Guidance, Outlook, and Risks

• Capital Allocation: Management plans to use proceeds from potential new debt issuances (under a $500 million shelf registration) for general corporate purposes, including debt refinancing, stock repurchases, and acquisitions.
• Steel Mill Start-up: The acquired steel rod mill is in a start-up phase, expected to complete in late 2003. It is projected to supply 50% of the company's steel rod needs and produce $135-$150 million annually. Start-up costs currently exceed revenues.
• Dividend Policy: The company maintains a payout guideline of approximately one-third of the average of the prior three years' earnings. Dividends per share were $0.50 in 2002.
• Key Risks:
  • Raw Material Costs: Exposure to volatile steel and aluminum prices.
  • Foreign Operations: Risks include political instability, currency fluctuations, and trade tariffs (approx. 18% of sales from outside the U.S.).
  • Acquisition Integration: Challenges in integrating acquired businesses and realizing projected cost savings.
  • Accounting Changes: Adoption of FASB 148 regarding stock-based compensation is expected to reduce earnings by approximately 2 cents per share in the first year of implementation (2003).

Investor Verification Checklist

• Goodwill Amortization Impact: Verify the extent to which the 24% earnings increase is driven by the accounting change (FASB 142) eliminating goodwill amortization versus operational improvements.
• Steel Mill Economics: Monitor the timeline and cost overruns associated with the start-up of the acquired steel rod mill and its ability to achieve the projected $135-$150 million annual revenue.
• Raw Material Hedging: Assess the company's ability to pass on increased steel costs to customers, given the noted margin pressure in 2002.
• Debt Maturities: Review the $127.7 million in current maturities of long-term debt and the company's plan to pay these down rather than refinance, given the strong cash position.
• Stock-Based Compensation: Confirm the impact of the new FASB 148 standard on future earnings, as the company currently uses the intrinsic value method (APB 25).