Business Context and Reporting Period
Company: Leggett & Platt, Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A diversified manufacturer of engineered components for residential furniture, bedding, retail fixtures, automotive seating, and industrial materials. The company operates through four segments: Residential Furnishings, Commercial Fixturing & Components, Industrial Materials, and Specialized Products.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Net Sales | $1,132.2 | $3,193.6 | $1,092.2 | $3,210.3 |
| Gross Profit | $207.1 | $580.6 | $215.6 | $619.1 |
| Net Earnings | $32.7 | $122.4 | $65.7 | $201.4 |
| Diluted EPS (Total) | $0.20 | $0.72 | $0.37 | $1.11 |
| Operating Cash Flow | N/A | $203.1 | N/A | $435.5 |
| Cash and Equivalents | $211.4 | $211.4 | $188.3 | $188.3 |
| Total Debt (Long-term + Current) | $1,015.3 | $1,015.3 | $1,089.3 | $1,089.3 |
Note: Debt figures derived from Balance Sheet (Current maturities + Long-term debt). Operating Cash Flow is reported for the nine-month period only.
Material Changes vs. Prior Period
- Revenue: Net sales for the three months ended September 30, 2008, increased 3.7% year-over-year to $1.13 billion, driven by price increases and market share gains that offset weak demand. For the nine-month period, sales decreased slightly by 0.5% to $3.19 billion.
- Profitability: Net earnings declined significantly. For the quarter, earnings dropped 50% to $32.7 million ($0.20/share) from $65.7 million ($0.37/share). The nine-month decline was 39% to $122.4 million.
- Discontinued Operations: The company recorded a net loss of $15.7 million from discontinued operations in the third quarter, compared to a gain of $1.6 million in the prior year. This was primarily due to $25.6 million in pre-tax goodwill impairment charges related to assets held for sale (Fibers, Coated Fabrics, and Storage Products units).
- LIFO Impact: Rising steel costs resulted in a significant LIFO expense of $19.7 million in the third quarter and $34.8 million for the nine months, negatively impacting reported earnings.
- Cash Flow: Net cash provided by operating activities for the nine months ended September 30, 2008, was $203.1 million, a decrease of $232.4 million compared to the prior year, largely due to increased working capital requirements (higher inventories and receivables) and lower earnings.
Guidance, Outlook, and Risks
- Strategic Plan: The company is executing a 2007 Strategic Plan to divest non-core assets. It anticipates additional charges of approximately $10 million related to this plan, with completion expected by the end of 2008.
- Capital Allocation: Management plans to reduce capital expenditures to approximately $120 million for 2008. Proceeds from divestitures are being used to repurchase shares; the company repurchased nearly 14 million shares year-to-date.
- Dividends: The company declared a third-quarter dividend of $0.25 per share, a 39% increase over the prior year, marking the 37th consecutive annual dividend increase.
- Market Risks:
- Economic Conditions: Weakness in the U.S. housing market, low consumer confidence, and credit market volatility are reducing demand for durable goods.
- Raw Materials: Significant increases in steel costs are impacting margins. While price increases are being passed to customers, "de-contenting" (customers using fewer components) remains a risk.
- Store Fixtures: The Store Fixtures unit is being restructured to focus on metal products, with sales expected to be trimmed from $325 million to $250-$275 million annually.
- Legal Proceedings: A shareholder derivative suit regarding stock option backdating was dismissed without prejudice in September 2008 but may be refiled. The company also faces litigation related to a nightclub fire (Gray v. Derderian), though a tentative settlement is in place with minimal expected impact.
Investor Verification Checklist
- Divestiture Timing: Verify the status and expected proceeds from the remaining assets held for sale (Fibers, Coated Fabrics, Storage Products), as market conditions may delay sales.
- LIFO Expense Volatility: Monitor year-end steel prices and inventory levels, as the full-year LIFO expense estimate ($47.0 million projected) could vary significantly in the fourth quarter.
- Store Fixtures Restructuring: Track the execution of the plan to consolidate wood facilities and reduce sales volume to improve returns in the Commercial Fixturing segment.
- Credit Market Exposure: Assess the impact of credit market distress on the company's ability to issue commercial paper and the financial health of its customers and suppliers.
- Legal Re-filing: Monitor for the potential re-filing of the shareholder derivative lawsuit regarding stock option backdating.