Leggett Reports Third Quarter Sales Increase For Residential Furnishings Segment

Furniture World Magazine

Fortune 500 diversified manufacturer Leggett & Platt reported record quarterly earnings of $.45 per diluted share for the second quarter. Two significant non-recurring items (a 6 cents per share tax benefit and an offsetting 3 cents per share restructuring- related expense) contributed 3 cents (net) to EPS. Per share earnings in the second quarter of 2005 were $.41. Record quarterly sales of $1.40 billion were 7.1% higher than in the second quarter 2005, due to acquisitions and organic growth. Acquisitions increased sales by about 6%, but were partially offset by a 1% decline in sales due to restructuring activity. Same location sales increased about 2%. 2006: On Track President and CEO David S. Haffner commented, "Quarterly sales and EPS were the highest we've ever attained (with or without the non-recurring items). We're especially pleased with the improvement in both the Commercial and Aluminum segments, which both posted the best second-quarter margins we've seen in six years. Though we're not yet at our target margins, we are progressing well toward our goals. "We have essentially concluded our restructuring initiative, with both the costs and benefits in line with what we projected last fall. We still expect the ongoing annual EBIT benefit from this activity to be about $30-35 million (or about 10-12 cents per share). "Cash flow remains strong, with cash from operations at $217 million for the first half of 2006, a 38% improvement over last year primarily due to our ongoing working capital initiatives. We continue to use cash to fund internal growth, make acquisitions, buy our stock, and pay dividends to shareholders. At the current dividend rate of 17 cents per quarter, full year 2006 dividends should be more than 6% higher than last year, extending Leggett's string of consecutive annual dividend increases to 35 years. Our dividend yield is currently 3.0%. "We remain optimistic about 2006, and expect to post record full year sales and earnings. Accordingly, we raised the lower end of our full year EPS guidance. Sales should grow about 5% versus 2005, and we project a 19% - 35% increase in full year earnings per share." Restructuring Substantially Complete Last fall Leggett identified 36 operations for closure or consolidation; that activity is substantially complete. Through the second quarter, costs related to this program have been $76 million ($58 million in 2005; $18 million in 2006). The company anticipates future offsetting benefits from the sale of buildings, real estate, or equipment. Leverage Increasing As Expected In September, 2004, Leggett announced its intent to increase leverage (i.e. net debt as a percent of net capitalization) toward the company's long-standing target range of 30%-40% while maintaining its decade-long "single A" credit rating. Net debt to net capital has increased from 21.9% at the beginning of 2005 to 28.4% as of June 30, 2006. Stock Repurchase Continuing During the second quarter the company purchased an additional 1.7 million shares of its stock; this was partially offset by the issuance of 0.3 million shares through benefit plans. During the first half of 2006 the company purchased a total of 2.7 million shares. Shares outstanding have declined to 180.8 million as of June 30, a 4.1% decrease versus the 188.6 million shares that were outstanding twelve months earlier. 2006 Outlook: $1.55-$1.75 EPS Earnings growth in 2006 is primarily being influenced by three factors: the level of cost structure improvement (from restructuring efforts), sales growth, and Leggett's ability to recover higher raw material costs. For planning purposes, the company is assuming 2006 total sales growth of about 5%. Same location sales growth is expected to be modest, with unit volume and market share gains partially offset by changes in product mix and some isolated price deflation. Acquisitions are expected to contribute about 5% to sales growth, but should be partially offset by a $90 million, or 2%, decline in revenue due to the company's restructuring and divestiture activity. For the full year 2006, the company expects margin improvement in four of its five segments. The gains should come primarily from operational improvements and lower restructuring costs. In the Industrial Materials segment, margin is expected to decline, largely due to lower selling prices and a lower steel scrap-to-rod price spread. In addition, restructuring and consolidation activity is expected to eventually increase annual earnings by $.10-$.12 per share; the company expects to realize roughly half of that benefit during calendar 2006. The company also anticipates a modest amount of income in the latter half of 2006 from non-recurring items (e.g. the restructuring-related sale of buildings, real estate, or equipment). Together, the sales growth, restructuring activity and margin improvements are projected to result in full year 2006 earnings of $1.55-$1.75 per share, a 19% - 35% improvement over 2005. Guidance has increased modestly (the prior range was $1.50-$1.75). For the third quarter, Leggett anticipates trade sales of $1.40-1.45 billion, a sequential improvement of $0-50 million versus the second quarter (equal to about 5% sales growth versus 3Q 2005). Restructuring costs for 3Q are expected to be minimal (perhaps 1 cent per share). Based on these assumptions, the company anticipates earnings of $.42-$.47 per share for the third quarter. LIFO / FIFO All of Leggett's reporting segments employ the first-in, first-out (FIFO) inventory method. In 2Q 2005, segment EBIT margins were negatively impacted when revenue declined (as reduced commodity costs led to lower product selling prices), but cost-of-goods-sold remained essentially unchanged under the FIFO method. At the corporate level, Leggett uses the last-in, first-out (LIFO) method for determining the cost of approximately half of the company's inventories. A consolidated adjustment (not within the segments) is made to convert the appropriate operations to the LIFO inventory method. In 2Q 2005, the company recorded $20 million of income associated with this LIFO adjustment. That income adjustment did not recur in 2Q 2006; instead there was a $2 million expense. Consequently, second quarter income declined by $22 million (year over year) due to the change in LIFO adjustment. For historical contrast, over the five year period 1999-2003, the largest annual LIFO impact was just over $4 million. SEGMENT RESULTS - Second Quarter 2006 (versus 2Q 2005) Residential Furnishings - Total sales increased $60 million, or 9%, with acquisitions (net of divestitures) contributing $56 million of the increase, and restructuring activity eliminating $13 million in revenue. Same location sales increased 3% due to inflation. EBIT (earnings before interest and income taxes) increased $13.8 million, or 29%. Higher sales, operating improvement, and lack of last year's FIFO impact were primarily responsible for the EBIT increase; these were partially offset by higher energy costs and restructuring related expenses (of $2.6 million). COMPANY DESCRIPTION: Leggett & Platt (NYSE:LEG) is a FORTUNE 500 diversified manufacturer that conceives, designs and produces a broad variety of engineered components and products that can be found in virtually every home, office, retail store, and automobile. The company serves a broad suite of customers that comprise a "Who's Who" of U.S. manufacturers and retailers. The 123-year-old firm is composed of 29 business units, 34,000 employee-partners, and more than 300 facilities located in over 20 countries. Leggett & Platt is North America's leading independent manufacturer of: a) components for residential furniture and bedding; b) retail store fixtures and point of purchase displays; c) components for office furniture; d) non- automotive aluminum die castings; e) drawn steel wire; f) automotive seat support and lumbar systems; g) carpet underlay; h) adjustable beds; and i) bedding industry machinery for wire forming, sewing and quilting. Primary raw materials include steel and aluminum. Main operations include metal stamping, forming, casting, machining, coating, welding, wire drawing, and assembly.