Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (10-30-08 04:04 AM)

Leggett & Platt Inc. CEO DAVID S HAFFNER bought 25000 shares on 10-27-2008 at $14.59

BUSINESS OVERVIEW

Business.



Leggett & Platt, Incorporated was founded as a partnership in Carthage, Missouri in 1883 and was incorporated in 1901. The Company, a pioneer of the steel coil bedspring, has become an international diversified manufacturer that conceives, designs and produces a wide range of engineered components and products found in many homes, offices, retail stores and automobiles. As discussed below, our continuing operations are organized into 22 business units, which are divided into 10 groups under our four segments: Residential Furnishings; Commercial Fixturing & Components; Industrial Materials; and Specialized Products. As part of our 2007 Strategic Plan, we also have classified certain businesses as discontinued operations .



The 2007 Strategic Plan



In November 2007, the Company’s Board of Directors approved the 2007 Strategic Plan. As part of this plan, the Company adopted Total Shareholder Return (“TSR” defined as the change in stock price plus dividends received divided by beginning stock price) as its primary strategic objective. The Company also modified its compensation incentive plans for senior executives to emphasize the importance of, and to reward, TSR.



The Company anticipates generating more cash by improving returns, completing planned divestitures, reducing capital expenditures and making fewer acquisitions. The Company anticipates returning much of this cash to shareholders. In support of this objective, in November 2007 the Company increased its annual dividend to the current rate of $1.00 per share from the previous rate of 72 cents per share. The Company also expects to continue repurchasing its common stock. In addition to the standing 10 million share per year repurchase authorization, the Board authorized the repurchase of an additional 20 million shares in 2008 at management’s discretion, limited to the amount of divestiture proceeds.



As part of the 2007 Strategic Plan, the Company will manage its business units as a portfolio with different roles (Grow, Core, Fix or Divest) for each business unit based upon competitive advantages, strategic position and financial health. The Company is implementing a much more rigorous strategic planning process, in part to continually assess each business unit’s role in the portfolio. Those in the Grow category will provide avenues for profitable growth and investment in competitively advantaged positions. Those in the Core category are charged with enhancing productivity, maintaining or improving market share, and generating cash flow while using minimal amounts of capital. Business units in the Fix category will be given limited time in which to rapidly and significantly improve performance, while those in the Divest category will be actively marketed for sale or closed.



After significant study, the Company announced that it intends to eliminate approximately $1.2 billion of its revenue base. This includes the anticipated divestiture of some operations, the pruning of some business and the closure of certain underperforming plants. The largest portion (approximately $900 million in revenue) of the exit activities is the anticipated divestiture of the Company’s Aluminum Products segment and all or a portion of six additional business units. Of the six business units, three are in the Residential Furnishings segment (Fibers—$80 million revenue, Wood Products—$60 million revenue, and Coated Fabrics—$50 million revenue); two are in Commercial Fixturing & Components (Storage Products—$100 million revenue and Plastics—$50 million revenue); and one is in the Specialized Products segment (the dealer portion of Commercial Vehicle Products—$80 million revenue). In addition to these divestitures, the Company anticipates eliminating approximately $100 million (or approximately 20%) of the Store Fixture business unit’s least profitable revenue. This unit was placed in the Fix category and given a 12-month deadline by which to improve performance. Finally, several Grow and Core business units, though otherwise healthy, contain individual plants operating at unacceptable profit levels. The Company anticipates the closure or disposition of a number of these unprofitable facilities, and an ensuing reduction in revenue of approximately $200 million. The Company anticipates that the exit activities will be completed by the end of 2008.



The pre-tax proceeds generated from the divestitures are expected to recover the carrying value of the assets held for sale. At December 31, 2007, $481 million of net assets were classified as held for sale, of which $15 million represented assets not associated with the 2007 Strategic Plan. The net assets held for sale can fluctuate due to changes in working capital until these businesses are divested.

In conjunction with these activities, the Company has incurred costs and impairment charges associated with the exit activities, including employee termination costs, contract termination costs, asset impairment charges (including property, plant and equipment, goodwill and other intangibles), inventory obsolescence and other associated costs (primarily plant closure and asset relocation). The Company expects that the total costs and asset impairment charges associated with the exit activities will be between $302 million and $312 million, of which $287 million were incurred in the fourth quarter of 2007, and that virtually all of the charges will be non-cash. For more information on asset impairments and restructuring costs associated with the exit activities see the discussion of “Asset Impairment and Restructuring” in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation, on page 28, and Note C on page 68 and Note D on page 69 in the Notes to Consolidated Financial Statements.

Overview of Our Four Segments in Continuing Operations

Our Residential Furnishings segment began with an 1885 patent of the steel coil bedspring. Today, we supply a variety of components used by bedding and upholstered furniture manufacturers in the assembly of their finished products. Our wide range of products offers our customers a single source for many of their component needs.



Long production runs, internal production of key raw materials, and numerous manufacturing and assembly locations allow us to supply many customers with components at a lower cost than our customers can produce the same parts for their own use. In addition to cost savings, sourcing components from Leggett allows our customers to focus on designing, merchandising and marketing their products.



Products



Products manufactured or distributed by our Residential Furnishings groups include:



Bedding Group
•

Innersprings (sets of steel coils, bound together, that form the core of a mattress)
•

Wire forms for mattress foundations
•

Adjustable electric beds



Home Furniture & Consumer Products Group
•

Steel mechanisms and hardware (enabling furniture to recline, tilt, swivel, rock and elevate) for reclining chairs and sleeper sofas
•

Springs and seat suspensions for chairs, sofas and loveseats
•

Steel tubular seat frames
•

Bed frames, ornamental beds, comforters, decorative pillows and other “top-of-bed” accessories

Our Fixture & Display group designs, produces, installs and manages our customers’ store fixtures and point-of-purchase projects. Our Office Furniture Components group designs, manufactures, and distributes a wide range of engineered components targeted for the office seating market.



Products



Products manufactured or distributed by our Commercial Fixturing & Components groups include:



Fixture & Display Group
•

Custom-designed, full store fixture packages for retailers, including shelving, counters, point-of-purchase displays, showcases, garment racks and decorative woodwork
•

Standardized shelving used by large retailers, grocery stores and discount chains



Office Furniture Components Group
•

Bases, columns, back rests, casters and frames for office chairs, and control devices that allow office chairs to tilt, swivel and elevate

Customers



Customers of the Commercial Fixturing & Components segment include:
•

Retail chains and specialty shops
•

Brand name marketers and distributors of consumer products
•

Office, institutional and commercial furniture manufacturers

The high quality of the Industrial Materials segment’s products and service, together with low cost, have made us North America’s leading supplier of drawn steel wire and a major producer of welded steel tubing. Our Wire group operates a steel rod mill with an annual output of approximately 500,000 tons, nearly all of which is used by our own wire mills. We have six wire mills that supply virtually all the wire consumed by Leggett’s other domestic businesses. Our Tubing group operates two major plants that also supply nearly all of our internal needs for welded steel tubing. In addition to supporting our internal requirements, the Industrial Materials segment supplies many external customers with wire and tubing products.



Products



Products manufactured or distributed by our Industrial Materials groups include:



Wire Group
•

Steel rod
•

Drawn wire
•

Fabricated wire products, such as wire ties to bale cotton; shaped wire for automotive and medical supply applications; tying heads, boxed wire, and parts for automatic baling equipment; coated wire products, including dishwasher racks; and wire retail fixtures and point-of-purchase displays.



Tubing Group
•

Welded steel tubing
•

Fabricated tube components



Customers



Leggett uses about half of our wire output and about one-quarter of our welded steel tubing output to manufacture our own products. For example, we use our wire and steel tubing to make:
•

Bedding and furniture components
•

Motion furniture mechanisms
•

Commercial fixtures, point-of-purchase displays and shelving
•

Automotive seat components and frames



The Industrial Materials segment also has a diverse group of external customers, including:
•

Bedding and furniture makers
•

Automotive seating manufacturers
•

Lawn and garden equipment manufacturers
•

Mechanical spring makers
•

Waste recyclers, waste removal businesses and cotton balers
•

Medical supply businesses

Our Specialized Products segment designs, produces and sells components primarily for automotive seating, specialized machinery and equipment, and service van interiors. Our established design capability and focus on product development have made us a leader in innovation. We also benefit from our broad geographic presence and our internal production of key raw materials and components.



Products



Products manufactured or distributed by our Specialized Products groups include:



Automotive Group
•

Manual and power lumbar support and massage systems for automotive seating
•

Seat suspension systems
•

Automotive control cables, such as shift cables, cruise-control cables, seat belt cables, accelerator cables, seat control cables and latch release cables
•

Low voltage motors and actuation assemblies
•

Formed metal and wire components for seat frames



Machinery Group
•

Full range of quilting machines for mattress covers
•

Machines used to shape wire into various types of springs
•

Industrial sewing machines
•

Other equipment for bedding factory automation



Commercial Vehicle Products Group
•

Van interiors (the racks, shelving and cabinets installed in service vans)
•

Docking stations that mount computers and other electronic equipment inside vehicles
•

Specialty trailers used by telephone, cable and utility companies



Customers



Our primary customers for the Specialized Products segment include:
•

Automobile seating manufacturers
•

Bedding manufacturers
•

Telecom, cable, home service and delivery companies

Acquisitions and Divestitures



Historically, our typical acquisition targets have been small, private, profitable, entrepreneurial companies that manufacture goods either within our existing product lines or “one step away” from those product lines and complementary to our existing businesses. As part of the 2007 Strategic Plan, we expect fewer and more strategic acquisitions to be completed. All acquisitions must create value by enhancing TSR; they must have clear strategic rationale and sustainable competitive advantage in attractive markets.

CEO BACKGROUND

David S. Haffner was appointed Chief Executive Officer in 2006 and has served as President of the Company since 2002. He served as Chief Operating Officer from 1999 to 2006 and as the Company’s Executive Vice President from 1995 to 2002. He has served the Company in other capacities since 1983.



Karl G. Glassman was appointed Chief Operating Officer in 2006 and has served as Executive Vice President of the Company since 2002. He served as President of the Residential Furnishings Segment from 1999 to 2006, as Senior Vice President of the Company from 1999 to 2002 and as President of Bedding Components from 1996 to 1998. He has served the Company in other capacities since 1982.



Jack D. Crusa has served the Company as Senior Vice President since 1999 and President of Specialized Products since 2003. He previously served as President of the Industrial Materials Segment from 1999 through 2004, as President of the Automotive Group from 1996 through 1999 and in various other capacities since 1986.



Joseph D. Downes, Jr. was appointed Senior Vice President of the Company in 2005 and President of the Industrial Materials Segment in 2004. He previously served the Company as President of the Wire Group from 1999 to 2004 and in various other capacities since 1976.



Matthew C. Flanigan has served the Company as Senior Vice President since 2005 and as Chief Financial Officer since 2003. Mr. Flanigan previously served the Company as Vice President from 2003 to 2005, as Vice President and President of the Office Furniture Components Group from 1999 to 2003 and as Staff Vice President of Operations from 1997 to 1999.



Paul R. Hauser became Senior Vice President of the Company in 2005 and President of the Residential Furnishings Segment in 2006. He previously served as Vice President of the Company and President of the Bedding Group from 1999 to 2006. He served in various capacities in the Company’s Bedding Group since 1980.



Daniel R. Hebert became Senior Vice President of the Company and President of the Aluminum Products Segment in 2002. Mr. Hebert previously served as Executive Vice President of the Aluminum Products Segment from 2000 to 2002 and Vice President of Operations from 1996 to 2000.



Ernest C. Jett became Senior Vice President, General Counsel and Secretary in 2005. He was appointed General Counsel in 1997 and Vice President and Secretary in 1995. He previously served the Company as Assistant General Counsel from 1979 to 1995 and as Managing Director of the Legal Department from 1991 to 1997.

Dennis S. Park became Senior Vice President and President of the Commercial Fixturing & Components Segment in 2006. In 2004, he was named President of the Home Furniture and Consumer Products Group and became Vice President of the Company and President of Home Furniture Components in 1996. He served the Company in various other capacities since 1977.



William S. Weil was appointed the Chief Accounting Officer by the Board of Directors in February 2004. He became Vice President in 2000 and has served the Company as Corporate Controller since 1991. He previously served the Company in various other accounting capacities since 1983.

MANAGEMENT DISCUSSION FROM LATEST 10K

2007 HIGHLIGHTS



We changed strategic course in 2007. During the year we completed an extensive strategic review of our business portfolio. We realigned our goals to focus on improving total shareholder return. We adopted role-based portfolio management (with different roles for each business unit based upon competitive advantages, strategic position, and financial health) and implemented a much more rigorous strategic planning process. We also began eliminating or rapidly improving the parts of our business that have been weighing us down. Many of the planned divestitures and necessary operating improvements should occur during 2008.



As a result of these changes, we expect to generate significant amounts of cash, spend less cash than in recent years, and return more cash to shareholders through dividends and share repurchases. In support of this objective, the Board of Directors authorized a 39% increase to the annual dividend, beginning in January 2008. The Board also approved, in February 2008, the repurchase of up to 20 million shares during 2008 at management’s discretion, limited to the amount of divestiture proceeds. This authorization is in addition to a standing approval to repurchase 10 million shares each year.



Sales and earnings of our ongoing businesses declined in 2007 as demand in many U.S. markets softened. International markets were generally stronger, and growth in our international businesses offset some of the domestic weakness. In addition, we recognized significant, non-cash goodwill and asset impairment charges in late 2007 following the implementation of the strategic plan. These charges represent virtually all of the costs we anticipate for the strategic plan.



Cash from operations increased significantly in 2007 despite generally weak market conditions. This strong cash from operations coupled with the proceeds from the divestiture of our prime foam business (early in the year) resulted in significant available funds. A portion of these funds was used for capital expenditures and acquisitions, and much of the remainder was returned to shareholders through dividends and share repurchases. The balance sheet remains very strong; we ended the year with net debt (as a percentage of net capital) slightly below our long-term, targeted range.



These topics are discussed in more detail in the sections that follow.



INTRODUCTION



What We Do



Leggett & Platt is a FORTUNE 500 diversified manufacturer that conceives, designs, and produces a wide range of engineered components and products found in many homes, retail stores, offices, and automobiles. We make components that are often hidden within, but integral to, our customers’ products.



We are North America’s leading independent manufacturer of components for residential furniture and bedding, adjustable beds, carpet underlay, retail store fixtures and point-of-purchase displays, components for office furniture, drawn steel wire, automotive seat support and lumbar systems, and machinery used by the bedding industry for wire forming, sewing, and quilting.



Our Segments



Our continuing operations are composed of 22 business units, with approximately 24,000 employee-partners, and more than 250 facilities located in 20 countries around the world. Our segments are Residential Furnishings, Commercial Fixturing & Components, Industrial Materials, and Specialized Products.



Residential Furnishings



This segment supplies a variety of components mainly used by bedding and upholstered furniture manufacturers in the assembly of their finished products. We also sell adjustable beds, bed frames, ornamental beds, carpet cushion, geo components, and other finished products.



Commercial Fixturing & Components



Operations in this segment manufacture and sell store fixtures and point-of-purchase displays used by retailers. We also produce chair controls, bases, and other components for office furniture manufacturers.



Industrial Materials



These operations primarily supply steel rod, drawn steel wire, and welded steel tubing to other Leggett operations and to external customers. Our wire and tubing is used to make bedding, furniture, automotive seats, retail store fixtures and displays, mechanical springs, and many other end products.



Specialized Products



From this segment we supply lumbar systems and wire components used by automotive seating manufacturers. We manufacture and install the racks, shelving, and cabinets used to outfit fleets of service vans. We also produce machinery, both for ourselves and for others, including bedding manufacturers.



Discontinued Operations and Other Divestitures



We divested our Prime Foam operations in early 2007 and expect to divest seven additional businesses during 2008. As a result of these activities, several businesses are disclosed in our year-end financial statements as discontinued operations. Those businesses, listed according to the segment in which they previously resided, include:
•

Aluminum Products: entire segment
•

Residential Furnishings: Prime Foam (sold in March 2007), Fibers, and Wood Products
•

Commercial Fixturing & Components: Storage Products and Plastics
•

Specialized Products: Commercial Vehicle Products—Dealer Unit



We also plan to divest our Coated Fabrics business (which is a part of Residential Furnishings) in 2008, but that divestiture is in an early stage and does not yet qualify the business as a discontinued operation.



Customers



We serve a broad suite of customers, with no single one representing even 5% of our sales from continuing operations. Many are companies whose names are widely recognized; they include most manufacturers of furniture and bedding, a variety of other manufacturers, and many major retailers.



We primarily sell our products through our own sales employees, although we also use independent sales representatives and distributors in some of our businesses.



Strategic Changes



During 2007, we completed an extensive review of our business portfolio, triggered in part by our underperformance versus stated growth and operating targets. For each business unit, we considered factors such as competitive advantages, market position, financial performance, and potential growth opportunities. We are making significant changes to our financial targets, portfolio mix, and planning processes as a result of the review.



Total Shareholder Return (TSR) is now the key success measure that we will monitor. TSR is driven by the change in our share price and the dividends we pay [TSR = (Change in Stock Price + Dividends Received) /Beginning Stock Price]. Historically, our primary objective was profitable growth. Going forward, we intend to generate higher TSR through a greater emphasis on improving returns and maximizing cash flow, with growth representing just one of several means to achieve that result. We are modifying our incentive plans to emphasize the importance of, and reward, TSR. Beginning in 2008, we introduced TSR-based incentives for senior executives and modified business unit bonuses to include a link to return on assets.



We are adopting role-based portfolio management and plan to tilt our investments toward businesses with competitive advantages and financial health. Certain of our businesses (growth businesses) are positioned to generate value through further growth, while others (core businesses) are positioned to drive value by improving returns and maximizing cash flow. Both are critical drivers of TSR. We will allocate capital to each business unit (BU) based upon its role in the portfolio. We plan to invest aggressively in growth businesses that hold strong competitive positions and consistently achieve compelling returns on those investments. We plan to maintain or improve our competitive position in core businesses (that typically hold stable positions in solid markets where returns are somewhat lower) and focus on improving returns, but limit further investment in these operations. In total, we anticipate lower capital expenditures and fewer acquisitions in the near term. In addition, we are implementing a more rigorous strategic planning process to continually assess our business units and help guide future decisions regarding the role of each BU, capital allocation priorities, and new areas in which to grow.



After significant study, we are narrowing our focus and eliminating over 20% of the portfolio based upon each BU’s strategic value and financial returns. Most of this activity is expected to occur in 2008. The largest portion of the revenue reduction, approximately $900 million, will come from the divestiture of the Aluminum Products segment and six additional business units. Additionally, the Store Fixtures business unit was given a 12-month deadline by which to significantly improve performance; we expect to prune about $100 million of the unit’s least profitable revenue. Finally, several business units, though otherwise healthy, contain individual plants that are operating at unacceptable profit levels. We expect to close or divest a number of these unprofitable facilities, resulting in a revenue reduction of approximately $200 million.



We believe these changes will increase available cash, and we intend to return more of this cash to shareholders. In support of this objective, the Board of Directors authorized a 39% dividend increase, moving the annual rate to $1.00 per share (from the previous $.72). This increase was effective with the quarterly dividend paid in January 2008. We also expect to continue repurchasing our shares, and have a standing 10 million share annual authorization from the Board. In addition to the standing authorization, the Board has approved the repurchase of up to an additional 20 million shares during 2008 at management’s discretion, limited to the amount of divestiture proceeds.



Major Factors That Impact Our Business



Many factors impact our business, but those that generally have the greatest impact are: market demand for our products, raw material cost trends, and competition.

Market Demand



Market demand (including product mix) is impacted by several economic factors, with consumer confidence being most significant. Other important factors include disposable income levels, employment levels, housing turnover, and interest rates. All these factors influence consumer spending on durable goods, and therefore affect demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one quarter of our sales.



Throughout 2007, demand weakness in the U.S. home-related and retail markets led to lower volume in certain of our businesses. In contrast, we saw strength in most international markets, including bedding, furniture, and automotive, as well as the non-dealer portion of our domestic Commercial Vehicle Products business. Several factors, including higher energy costs, have reduced disposable income, leading to more conservative spending by U.S. consumers on major discretionary purchases. In addition, a slump in the housing market and increased competition from other types of consumer goods (such as electronics) have led to lower demand for our products.



Raw Material Costs



In many of our businesses, we enjoy a cost advantage from buying large quantities of raw materials. This purchasing leverage is a benefit that our competitors generally do not have. Still, our costs can change significantly as market prices for raw materials (many of which are commodities) fluctuate.



Purchasing arrangements vary across the company. We typically have short-term commitments from our suppliers; accordingly our raw material costs generally move with the market. In certain of our businesses, we have longer-term purchase contracts with pricing terms that provide stability under reasonable market conditions. However, when commodities experience extreme inflation, vendors do not always honor those contracts.



Our ability to recover higher costs (through selling price increases) is crucial. We have few long-term, fixed-pricing contracts with customers. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Although we are generally able to pass through most cost increases, we encounter greater difficulty (i) in businesses where we have a smaller market share, and (ii) in products that are of a commodity nature. Inability to recover cost increases (or a delay in the recovery time) negatively impacts our earnings.



Steel is our principal raw material and at various times during the past three years we have experienced cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers via selling price adjustments. In late 2007, once again we began seeing higher steel costs which are continuing into early 2008. Since early December, market prices have increased from 15% to 30%, depending on the type of steel. We have announced price increases to recover some of these higher costs.



We also experienced significant inflation in foam scrap, chemicals, fibers, and resins during the past three years, but recovered most of the higher costs through selling price increases. During 2007 the cost of foam scrap declined from peak levels, resulting in lower selling prices in our carpet underlay business.



When we raise our prices to recover higher raw material costs, this sometimes causes customers to modify their product designs and replace higher cost components with lower cost components. We experienced this de-contenting effect in our Residential Furnishings and Industrial Materials segments in recent years, as our customers changed the quantity and mix of components in their finished goods to address steel and chemical inflation. Our profit margins were negatively impacted as a result of this de-contenting. We are responding by developing new products (including new types of innersprings) that enable our customers to reduce their total costs, and provide higher margin and profit contribution for our operations. Some of these new products were introduced during 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Our Segments

Our continuing operations are composed of 21 business units, with approximately 24,000 employee-partners, and more than 250 facilities located in 20 countries around the world. Our segments are Residential Furnishings, Commercial Fixturing & Components, Industrial Materials, and Specialized Products.

Residential Furnishings: This segment supplies a variety of components mainly used by bedding and upholstered furniture manufacturers in the assembly of their finished products. We also sell adjustable beds, bed frames, ornamental beds, carpet cushion, geo components, and other finished products. This segment has generated approximately 50% of the Company’s total sales during the past two years.

Commercial Fixturing & Components: Operations in this segment, which have contributed approximately 18% of total sales in the past two years, manufacture and sell store fixtures and point-of-purchase displays used by retailers. We also produce chair controls, bases, and other components for office furniture manufacturers.

Industrial Materials: These operations primarily supply steel rod, drawn steel wire, steel billets, and welded steel tubing to other Leggett operations and to external customers. Our wire and tubing is used to make bedding, furniture, automotive seats, retail store fixtures and displays, mechanical springs, and many other end products. This segment has generated approximately 17% of our total sales in the past two years.

Specialized Products: From this segment we supply lumbar systems and wire components used by automotive seating manufacturers. We manufacture and install the racks, shelving and cabinets used to outfit fleets of service vans. We also produce machinery, both for ourselves and for others, including bedding manufacturers. This segment has contributed about 15% of total sales during the past two years.

Discontinued Operations and Other Divestitures

We divested our Prime Foam operations in early 2007 and our Aluminum Products segment in July 2008; we expect to divest six additional businesses during the remainder of 2008. As a result of these activities, several businesses are disclosed in our financial statements as discontinued operations. Those businesses, listed according to the segment in which they previously resided include:


•

Aluminum Products: entire segment (sold July 16, 2008)


•

Residential Furnishings: Prime Foam (sold in March 2007), Fibers, Wood Products, and Coated Fabrics


•

Commercial Fixturing & Components: Storage Products and Plastics


•

Specialized Products: Commercial Vehicle Products – Dealer Unit

On July 16, 2008, we divested our Aluminum Products segment for $300 million in cash, a subordinated note with a face value of $25 million, and shares of preferred stock (with value not to exceed $25 million, dependent upon future performance of the divested business). The Company is still finalizing the calculation of gain or loss on the transaction (including income tax effects) but does not anticipate a significant financial statement impact, which will be reflected in third quarter 2008.

The remaining divestitures are progressing as planned. Investment bankers are assisting with the sale of four of the businesses, and we are in discussions with numerous potential buyers, both financial and strategic. We continue to believe that all of the divestitures will occur during 2008, and expect to recover the carrying value of the assets held for sale. Net assets classified as held for sale totaled $499 million at June 30, 2008 and $481 million at December 31, 2007. With the divestiture of Aluminum Products, $314 million of these net assets at June 30 have been sold.

Strategic Changes

During 2007, we completed an extensive review of our business portfolio in an effort to enhance shareholder return. For each business unit, we considered factors such as competitive advantages, market position, financial performance, and potential growth opportunities. We have made, and continue to implement, significant changes to our financial targets, portfolio mix, and planning processes as a result of the review.

Total Shareholder Return (TSR) is now the key success measure that we will use to monitor performance. TSR is driven by the change in our share price and the dividends we pay [TSR = (Change in Stock Price + Dividends) / Beginning Stock Price]. Historically, our primary objective was profitable growth. Going forward, we intend to generate higher TSR through a greater emphasis on improving returns and maximizing cash flow, with growth representing just one of several means to achieve that result. We are modifying our incentive plans to emphasize the importance of, and reward, TSR. Beginning in 2008, we introduced TSR-based incentives for senior executives and modified business unit bonuses to include a link to return on assets.

We have adopted role-based portfolio management and will concentrate future investments in businesses with competitive advantages and financial health. Certain of our businesses (growth businesses) are positioned to generate value through further growth, while others (core businesses) are positioned to drive value by improving returns and optimizing operating and investing cash flows. Both are critical drivers of TSR. We will allocate capital to each business unit (BU) based upon its role in the portfolio. We plan to invest aggressively in growth businesses that hold strong competitive positions and consistently achieve compelling returns on those investments. We plan to maintain or improve our competitive position in core businesses (those that typically hold stable positions in solid markets where returns are somewhat lower) and focus on improving returns, but limit further investment in these operations. In total, we anticipate lower capital expenditures and fewer acquisitions in the near term. In addition, we have implemented a more rigorous strategic planning process to continually assess our business units and help guide future decisions regarding the role of each BU, capital allocation priorities, and new areas in which to grow.

After significant study, we narrowed our focus and are eliminating over 20% of the portfolio based upon each BU’s strategic value and financial returns. Most of this activity is expected to occur in 2008. The largest portion of the revenue reduction will come from the divestiture of the Aluminum Products segment (sold July 16, 2008) and six additional business units. Additionally, the Store Fixtures business unit has a year-end 2008 deadline by which to significantly improve performance; we continue to prune the unit’s least profitable revenue. Finally, several business units, though otherwise healthy, contain individual plants that are operating at unacceptable profit levels. We expect to continue closing or divesting a number of these facilities.

We believe these changes will increase available cash, and we intend to return more of this cash to shareholders. In support of this objective, the Board of Directors

authorized a 39% dividend increase, moving the annual rate to $1.00 per share (from the previous $.72). This increase was effective with the quarterly dividend paid in January 2008. We also expect to continue repurchasing our shares, and have a standing 10 million share annual authorization from the Board. In addition to the standing authorization, the Board has approved the repurchase of up to an additional 20 million shares during 2008 at management’s discretion, limited to the amount of divestiture proceeds. We have already begun stock purchases with the proceeds from the Aluminum Products divestiture discussed above.

Customers

We serve a broad suite of customers, with no single one representing even 5% of our sales from continuing operations. Many are companies whose names are widely recognized; they include most manufacturers of furniture and bedding, a variety of other manufacturers, and many major retailers.

We primarily sell our products through our own sales employees, although we also use independent sales representatives and distributors in some of our businesses.

Major Factors That Impact Our Business

Many factors impact our business, but those that generally have the greatest impact are: market demand for our products, raw material cost trends and competition.

Market Demand

Market demand (including product mix) is impacted by several economic factors, with consumer confidence being most significant. Other important factors include disposable income levels, employment levels, housing turnover, and interest rates. All these factors influence consumer spending on durable goods, and therefore affect demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one-quarter of our sales.

Throughout 2007 and early 2008, demand weakness in the U.S. home-related, retail, and other markets led to lower volume in certain of our businesses. Several factors, including a weak U.S. economy, higher energy costs, a slump in the housing market, and low consumer confidence have contributed to conservative spending habits by U.S. consumers. During the first half of 2008, our U.S. bedding components business began gaining market share as a result of: i) bedding manufacturers shifting innerspring purchases from international to domestic sources; ii) the deverticalization of a strong regional bedding manufacturer; and, iii) increased demand for innerspring mattresses, rather than premium-priced, non-innerspring products.

Raw Material Costs

In many of our businesses, we enjoy a cost advantage from buying large quantities of raw materials. This purchasing leverage is a benefit that many of our competitors generally do not have. Still, our costs can vary significantly as market prices for raw materials (many of which are commodities) fluctuate.

Purchasing arrangements vary across the company. We typically have short-term commitments from our suppliers; accordingly our raw material costs generally move with the market. In certain of our businesses, we have longer-term purchase contracts with pricing terms that provide stability under reasonable market conditions. However, when commodities experience extreme inflation, vendors do not always honor those contracts.

Our ability to recover higher costs (through selling price increases) is crucial. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs.

Steel is our principal raw material and at various times in past years we have experienced cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers via selling price adjustments. In late 2007 we began seeing higher steel costs, and significant increases have continued to occur in 2008. Since early December, the cost of steel scrap has more than doubled and costs of other types of steel have also increased significantly. We have initiated and continue to implement price increases to recover these higher costs.

We also experienced significant inflation in foam scrap and chemicals in recent years, but recovered most of the higher costs through selling price increases. The cost of foam scrap declined from peak levels during 2007, resulting in lower selling prices that continue into 2008 in our carpet underlay business.

When we raise our prices to recover higher raw material costs, this sometimes causes customers to modify their product designs and replace higher cost components with lower cost components. We experienced this de-contenting effect in our Residential Furnishings and Industrial Materials segments in recent years, as our customers changed the quantity and mix of components in their finished goods to address steel and chemical inflation. Our profit margins were negatively impacted as a result of this de-contenting. We are responding by developing new products (including new types of innersprings) that enable our customers to reduce their total costs, and provide higher margin and profit contribution for our operations. Some of these new products were introduced during 2007, with production of those products ramping up in 2008.

Competition

Many of our markets are highly competitive with the number of competitors varying by product line. In general, our competitors tend to be smaller, private companies.

We believe we gain competitive advantage in our global markets through low cost operations, significant internal production of key raw materials, superior manufacturing expertise and product innovation, higher quality products, extensive customer service capabilities, and greater financial strength. Many of our competitors, both domestic and foreign, compete primarily on the basis of price. Our success has stemmed from the ability to remain price competitive, while delivering product quality, innovation, and customer service.

We continue to face pressure from foreign competitors as some of our customers source a portion of their components and finished products from Asia. In instances where our customers move production of their finished products overseas, our operations must be located nearby to supply them efficiently. At June 30, 2008, Leggett operated 11 facilities in China.

In recent years we experienced increased competition in the U.S. from foreign bedding component manufacturers. We reacted to this competition by selectively adjusting prices, and by developing new proprietary products that help our customers reduce total costs. The increased price competition for bedding components is partially due to lower wire costs in China. Asian manufacturers currently benefit from cost advantages for commodities such as steel and chemicals. Foreign manufacturers also benefit from lenient regulatory climates related to safety and environmental matters.

During 2008, we have seen a distinct decline in the imports of low-priced innersprings since the Department of Commerce (in January) initiated the anti-dumping investigations on innerspring imports from China, South Africa, and Vietnam. In February, the International Trade Commission issued an affirmative preliminary injury determination, and on July 31, the Department of Commerce (DOC) announced preliminary duty rates on innersprings imported from these three countries ranging from 116% - 234%. As a result, DOC will instruct the U.S. Customs and Border Protection to collect a cash deposit or bond based on these preliminary rates. As a result of those declining imports, we have regained some market share and have been able to pass through a portion of our higher raw material costs.

Store Fixtures Business Unit Improvement

As part of the 2007 Strategic Plan, the Store Fixtures business unit was placed in the “fix” category and given a 12 month deadline to improve its after-tax returns to at least equal cost of capital levels. We are not pleased with second quarter results in the business unit and are taking aggressive actions to meet our targets. Since late 2007, we have reduced manufacturing capacity by 27%, cut administrative costs by approximately $2 million, reduced the unit’s total workforce by approximately 20%, pruned $90 million of unprofitable sales, implemented a much more disciplined unit-wide pricing policy, and installed standardized operating systems across the business unit. Despite all these activities, we are not showing the progress we expect. Third quarter performance of the business unit will be critical in our ongoing strategic planning process.

Asset Impairments and Restructuring-related Charges

In the fourth quarter 2007, we recognized $287 million (primarily all non-cash) of impairment and restructuring-related charges associated with the strategic plan. In 2008, we incurred an additional $1.8 million of restructuring-related costs and $5.6 million of asset impairments related to the plan. We anticipate that we will be able to complete the plan with total charges of approximately $300 million. For further information about restructuring and asset impairments, see Note 4 of the Notes to Consolidated Condensed Financial Statements.

RESULTS OF OPERATIONS

Discussion of Consolidated Results

Second quarter sales of $1.06 billion (from continuing operations) were .7% lower than in the second quarter of 2007. Same location sales (sales for locations owned and operated in both the current and prior year periods) declined .5%. Soft market demand and the Company’s decision to exit specific sales volume with unacceptable profit margins was largely offset by market share gains and price inflation. Increased sales from acquisitions were more than offset by sales reductions from divestitures.

Earnings for the quarter were $.27 per diluted share, including $.02 per share of earnings from discontinued operations, $.01 per share of restructuring-related costs, and a $.02 per share charge for a foreign tax adjustment. In the second quarter of 2007, earnings per share were $.33, including $.03 per share from discontinued operations and other items. The year-over-year reduction in continuing operations’ earnings is primarily due to soft demand in several markets.

Earnings from discontinued operations in the second quarter of 2008 were $.02 per share, and included approximately $.03 per share of non-operating charges. In the second quarter of 2007, earnings per share from discontinued operations were $.02.

LIFO/FIFO and the effect of Changing Prices

All of our segments use the first-in, first-out (FIFO) method for valuing inventory. In our consolidated financials, we use the last-in, first-out (LIFO) method for determining cost of about 60% of our inventories. An adjustment is made at the corporate level (i.e. outside the segments) to convert the appropriate operations to the LIFO method. Steel price increases in 2008 have been significant; these increases have led to higher LIFO expense. For the full year, we are projecting LIFO expense of $32.0 million. LIFO expense for the six months ended June 30, 2008 was $16.0 million ($15.1 million in continuing operations and $.9 million in discontinued operations). Within continuing operations, $3.6 million was recognized in the first quarter and $11.5 million was recognized in the second quarter. Accurately predicting steel prices for the remainder of 2008 is extremely difficult. Therefore, LIFO expense for the 2008 full year could be significantly different from that currently estimated. In addition, a variation in expected ending inventory levels could also impact total LIFO expense for the year. Any change in the annual estimate of LIFO expense will be reflected in the remaining 2008 interim periods. See Note 6 of the Notes to Consolidated Condensed Financial Statements for further discussion of inventories.

Interest and Taxes

Second quarter 2008 interest expense decreased $1.1 million compared to the second quarter of 2007, due primarily to a lower level of term notes as a result of maturities paid in 2007. Interest expense for the full year 2008 is expected to be slightly lower than in 2007. Interest income for the full year 2008 is expected to be approximately the same as 2007 amounts.

The reported second quarter consolidated worldwide effective tax rate on continuing operations is 37.6%, significantly higher than the 24.2% rate for the same quarter last year. A portion of this increase was caused by certain non-recurring tax benefits which occurred in the second quarter of 2007 including the realization of foreign tax credits, as well as a non-recurring tax expense in the second quarter of 2008 related to the establishment of a tax reserve associated with a foreign withholding tax exposure. The remaining increase is caused by a migration of income from lower-tax jurisdictions to higher-tax jurisdictions, and uncertainties surrounding the recovery of tax operating losses in certain foreign jurisdictions. The effective rate for the remainder of 2008 may be different from the second quarter tax rate depending on such factors as overall profitability of the Company, the mix of earnings among taxing jurisdictions, the type of income earned and the effect of tax law changes.

CONF CALL

Dave DeSonier
Good morning and thank you for taking part in Leggett & Platt’s third quarter conference call. I am Dave DeSonier, the Vice President of Strategy and Investor Relations and with me today are the following: Dave Haffner, our CEO and President; Karl Glassman, our Chief Operating Officer; Matt Flanigan, our CFO; and Susan McCoy, our Director of Investor Relations.
The agenda for the call is as follows. Dave Haffner will start with a summary of the major statements we made in yesterday’s press release. Karl Glassman will discuss trends in our various markets. Dave will then address our outlook for the remainder of 2008 and finally, the group will answer any questions you have.
This conference is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our express permission. A replay is available from the IR portion of Leggett’s website.
In addition, I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday’s press release and the section in our 10-K entitled Forward-Looking Statements.
I will now turn the call over to Dave Haffner.
Dave Haffner
I’d like to start this morning with some personal remarks before I get into the details of the quarter and as all of you well know, these are very unusual financial times, possibly the most difficult any of us have ever seen. On behalf of Leggett’s Senior Leadership and Directors, I would like to remind our employees, customers and investors of some of the things that distinguish this company.
First we have a highly experienced and well tenured management team. Our senior leaders including in our segment heads are among the most seasoned in all of the industries that we participate in. These leaders know how to manage well and whether tough times. Second we have always been a financially conservative bunch and find ourselves by design and to be honest also by fortuitous timing in an attractive financial position.
Over the first nine months of this year we’ve been selling less profitable businesses giving us more cash to work with. We are also not heavily leveraged and have substantial available credit. Third, we now how to quickly reduce spending, control costs and manage inventories, meanwhile strengthening our relationships with our many valued customers and historically we’ve grown market share in tough economic times; in part because our customers know that we are going to be there to meet their needs.
When we control costs and get smaller on the peoples side, we don’t do it in an unintelligent way. We let attrition help us first and we’ve been doing that. Then we pull back to reduced work weeks in some locations and we are already doing that. In some locations we know we must move to reduce staff, we are already doing so. Those things said however, our managers know we must keep the critical, best and most productive people and finally we believe in clear direct and candid communication. In tough times we believe that that is even more important.
Now moving onto the prepared remarks for the quarter; yesterday we reported third quarter earnings per share of $0.20. Earnings per share from continuing operations adjusted to exclude non-recurring items were $0.34. In the third quarter of 2007, earnings from continuing operations were $0.36. The year-over-year decrease primarily reflects lower unit volumes due to soft demand in several markets and higher LIFO expense.
Sales from continuing operations increased 4% versus third quarter of last year. Inflation related price increases and market share gains more than offset weak demand in our decision to exit some specific sales volume with unacceptable margins.
During the third quarter, we continue to successfully implement selling price increases to recover higher steel cost and by quarter end, the majority of the necessary increases were in pace. Additionally our vertical integration, specifically into the melt furnace and rod mill at our Sterling operation has continued to give us a significant advantage in this market.
Late in the third quarter, our markets weakened appreciably as consumers reigned in spending during this unprecedented period of credit concerns and stock market volatility. Despite this extremely challenging environment, we are very pleased with the progress we’ve made this year relative to our strategic plan and remain focused on the initiatives that we can control.
During the third quarter we completed four of the targeted divestitures including the sale of the Aluminum Product Segment in July in wood, plastics and the dealer portion of Commercial Vehicle Products, all in late September. We received after-tax cash proceeds of $388 million for the four businesses, not counting the subordinated notes and prepared stock we received in conjunction with the Aluminum sale.
We are in discussions with potential buyers for the three remaining divestitures, which are storage products, fibers and coated fabrics and expect their successful disposition, once credit markets improve. We have concluded that our store fixtures business unit in its current form is not capable of meeting our return requirements. As a result, we intent narrow the unit scope to focus primarily on the metals part of the fixtures industry, in alignment with Leggett’s core competency of producing steel and steel related products.
We plan to eliminate additional store fixture production facilities, effect changes to senior management, reduce unit over head, purge remaining customer accounts with unacceptable margins and trim annual revenues to a range of approximately $250 million to $275 million. We do not expect to incur significant impairment charges related to these activities.
This metal focused operation will be position to deliver returns of at least cost-of-capital levels and it is considered a core business within our portfolio. As such, it’s primarily focus is to generate free cash and improve profit while minimizing the use of capital. In this very turbulent financial environment, our financial profile is especially notable.
Our balance sheet remains in excellent condition. We ended the quarter with net debt of approximately 28% of net capital, which is below the low end of our long-term targeted range of 30% to 40%. We have $375 million of additional availability and four years remaining on our $600 million bank facility and we have no significant maturities of long-term debt until 2012.
We generated $77 million of cash from operations during the third quarter and except comfortably more than $300 million of operating cash for the full-year. This is below our previous full-year estimate primarily due to a temporary increase in working capital. Week market conditions and higher costs will likely result in higher year-end levels of inventories and receivables than previously expected. We are aggressively managing our operations to reduce these levels.
We repurchased a record $7.9 million shares of our stock during the quarter, largely with divestiture proceeds bringing our full-year total to nearly $14 million shares. Year-to-date, our shares outstanding have declined by 7%. We also declared the third quarter dividend of $0.25 per share, representing a 39% increase of last year’s third quarter dividend. The current dividend yield is approximately 5.9%, which was based upon $17 stock price.
This year marks the 37 consecutive annual dividend increase for Leggett at an average compound growth rate of over 14%. In the near-term, we should need approximately $275 million of cash annually to fund dividends and capital expenditures. We fully expect to consistently meet these priorities with operating cash flow.
As we have consistently stated, we plan to use the majority of the divestiture proceeds to repurchase shares, but we may complete those purchases at a slower pace than originally anticipated, as we carefully monitor economic conditions. Returning cash to our shareholders remains at key priority and we expect share repurchases to consistently be one means by which that will be accomplished.
With those comments, I’ll turn the call over to Karl Glassman, who will discuss the segments in more detail.
Karl Glassman
In the residential furnishing segment, same location sales increased 3% in the third quarter. Inflation-related price increases and market share gains in certain product categories more than offset the weak end markets experienced in many parts of the segment. Third quarter EBIT and EBIT margins increased versus the prior year. This increase primarily reflects higher sales and operating improvements resulting from past restructuring activities.
Our residential markets have been weak for the past few quarters, but softened further in late September. Several positive factors that we’ve discussed in prior quarters continue to offset some of the market declines.
Our U.S. bedding components operations have benefited from significant market share gains this year related to innersprings. Lower innersprings imports as a result of anti-dumping investigations, the deverticalization of a strong regional bedding manufacturer and relative strength of innerspring mattresses at lower to middle price points are some of the factors that have led to our share gains.
Our new patented Verticoil Innerspring continues to be in very high demand. This is a better value product for our bedding customers with higher earnings contribution for Leggett. We’ve also gained market share in our furniture components business.
Earlier this year, we entered into an agreement with Berkline, a major manufacturer of upholstered furniture to develop and produce the required mechanisms that they had previously manufactured for themselves. These positive developments are recurring in what are arguably the weakest conditions that some of our markets have experienced in decades and should position us very well once economic conditions improve.
In commercial fixturing and components same location sales declined 16% in the third quarter primarily from reduced capital spending by retailers and our decision in the store fixtures business to walk away from sales with unacceptable margins. EBIT and EBIT margins also decreased versus the prior year primarily reflecting the lower sales and the higher restructuring-related cost.
In industrial materials, same location sales were 47% in the quarter primarily from the pass-through of higher steel costs and increased sales of steel billets. These improvements were partially offset by continued softness in various end markets.
EBIT and EBIT margins increased versus third quarter 2007 primarily due to higher sales including billet sales and operating improvement. In specialized products, same location sales decreased slightly in the second quarter.
Growth in European and Asian automotive, as well as machinery, was offset by lower volume in North American automotive and the fleet portion of commercial vehicle products. EBIT and EBIT margins were lower than in the third quarter of last year primarily due to sales reductions in certain markets and higher steel costs with limited recovery.
As a final comment, all of our segments to use the FIFO method for valuing inventory and adjustment is made at the corporate level to convert about 60% of our inventories to our LIFO method. These are primarily our domestic steel related inventories.
Significant steel cost increases during 2008 have resulted in an estimated LIFO expense in continuing operations of approximately $47 million for the full year, of which $19.7 million was recognized in the third quarter. We increased our full year estimate during the quarter primarily due to expectations for year-end inventory valuations to be higher than previously anticipated. This full year revision caused the larger than forecasted third quarter charge.
With those comments I’ll turn the call back over to Dave.
Dave Haffner
Thank you, Karl. As we announced in yesterday’s press release 2008 earnings per share from continuing operations, excluding non-recurring items are expected to be between $1 and $0.15. This guidance anticipates weak fourth quarter market demand $12 million of LIFO expense and a tax rate of approximately 41%. Sequentially fourth quarter sales are expected to decline approximately $200 million due to lower anticipated unit volume.
Sales from continuing operations for the full year are projected to be approximately 3% lower than in 2007. Inflation-related price increases and market share gains are expected to be offset by weak market demand and the deliberate elimination earlier this year of approximately $100 million of unprofitable sales from the company’s store fixtures business.
We spent much of September reviewing every business unit’s strategic plan, which were the result of a new strategic planning process implemented earlier this year. This process will help guide our long-term decisions about each business unit, including its opportunities and its role in our portfolio. We are very comfortable with our strategic direction and are absolutely committed to the continued execution of our plan.
We believe our actions are reestablishing Leggett as a stronger and more profitable company. Our goal is to consistently generate total shareholder returns of 12% to 15% per year, on average and with those comments I will turn the call back over to Dave DeSonier.
Dave DeSonier
That concludes our prepared remarks. We appreciate your attention and we will be glad to try to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask your single best question and then voluntarily yield to the next participant. If you have additional questions, please re-enter the queue and we’ll answer as many questions as you have. Randy we are ready to begin the Q-and-A.


SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

1054 Views