Business Context and Reporting Period
Company: Leggett & Platt, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A diversified manufacturer of engineered components for residential furniture, bedding, automotive seating, office furniture, and retail store fixtures. Operations are organized into four segments: Residential Furnishings, Commercial Fixturing & Components, Industrial Materials, and Specialized Products.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2008 | 3 Months Ended Sep 30, 2009 | 3 Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Net Sales | $2,285.4 million | $3,193.6 million | $809.9 million | $1,132.2 million |
| Gross Profit | $459.5 million | $580.6 million | $187.3 million | $207.1 million |
| Net Earnings (Continuing Ops) | $78.6 million | $135.1 million | $56.2 million | $49.5 million |
| Net Earnings (Total) | $77.9 million | $126.4 million | $55.7 million | $33.8 million |
| Diluted EPS (Total) | $0.48 | $0.72 | $0.34 | $0.20 |
| Operating Cash Flow | $430.4 million | $203.1 million | N/A | N/A |
| Cash and Equivalents | $221.5 million | $164.7 million (Dec 31, 2008) | $221.5 million | $211.4 million (Sep 30, 2008) |
| Total Debt (Long-term + Current) | $774.3 million | $873.6 million (Dec 31, 2008) | $774.3 million | N/A |
| Net Debt to Net Capital | 23.7% | 28.4% | 23.7% | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 28% year-over-year for both the quarter and the nine-month period, driven by weak global demand, steel-related price deflation, and the strategic exit of customer programs with unacceptable margins.
- Earnings Resilience: Despite lower sales, earnings from continuing operations improved in the third quarter ($0.34 vs $0.29 EPS) due to cost reduction initiatives, pricing discipline, and a significant LIFO benefit ($16.0 million in Q3 vs $19.7 million expense in Q3 2008).
- Divestiture Note Write-down: A non-cash charge of $10.6 million was recorded in Q2 2009 related to the collectability of a promissory note from the 2008 divestiture of the Aluminum Products segment. This reduced EBIT by $10.6 million.
- Discontinued Operations: Losses from discontinued operations were minimal in 2009 ($0.7 million for nine months) compared to 2008 ($8.7 million), which included significant goodwill and asset impairments.
- Working Capital: Operating cash flow increased significantly to $430.4 million (from $203.1 million in 2008) due to aggressive management of inventory and accounts receivable.
Guidance, Outlook, and Risks
- Outlook: Management expects market demand to stabilize at lower levels. Full-year 2009 operating cash flow is expected to exceed $500 million. Capital expenditures are expected to be under $100 million.
- LIFO Benefit: An anticipated full-year LIFO benefit of $69 million is projected, with an additional $17 million expected in Q4 2009. Actual results depend on year-end steel prices and inventory levels.
- Shareholder Returns: The company prioritizes dividends and share repurchases. A Q3 dividend of $0.26 per share was declared. The company has authorization to repurchase up to 10 million shares in 2009; 4.1 million shares were repurchased in Q3.
- Risks:
- Customer Insolvency: Risk of customer bankruptcy due to the economic downturn.
- Raw Material Costs: Volatility in steel and other commodity prices; ability to pass costs to customers.
- Credit Ratings: Moody's downgraded the long-term debt rating to "Baa1" in August 2009; S&P maintains "A-" with a negative outlook.
- Legal: Ongoing shareholder derivative suit regarding stock option backdating (dismissed without prejudice in August 2009) and a settled nightclub fire litigation ($2 million self-insured retention).
Investor Verification Checklist
- LIFO Estimates: Verify the accuracy of the projected $69 million full-year LIFO benefit, as it relies on difficult-to-predict year-end steel prices and inventory levels.
- Divestiture Recovery: Monitor the status of the $15 million face value preferred stock received in exchange for the Aluminum Products promissory note to assess potential recovery value.
- Customer Concentration: Review accounts receivable aging and credit quality given the increased risk of customer insolvency in the current economic climate.
- Capital Allocation: Confirm the execution of the "Grow, Core, Fix, Divest" strategy and the discipline in capital spending (targeted <$100M for 2009).
- Legal Contingencies: Track the status of the shareholder derivative suit and any potential re-filing by the plaintiff.