Diversified manufacturer Leggett & Platt reported quarterly earnings of $.87 per share. Continuing Operations posted EPS of $.72, including a $.05 gain on the sale of a small operation, a $.03 benefit from a litigation settlement, and an offsetting $.02 goodwill impairment charge. Discontinued Operations EPS of $.15 also reflects a benefit from the litigation settlement (attributable to the company's former Prime Foam business).
Adjusted1 EPS from Continuing Operations was $.66, a second quarter record and a $.13, or 25%, improvement versus 2Q 2015. The EPS increase reflects higher unit volume, favorable product mix, operational improvements, a lower tax rate, and reduced share count. Adjusted1 EBIT margin improved 170 basis points versus second quarter last year, to 13.8%, also reflecting continued management of the business portfolio.
Sales from continuing operations were $959 million, a 4% decline versus 2Q 2015. Unit volume grew 2%, but was more than offset by divestitures, raw material-related price deflation, and currency impacts.
President and CEO Karl G. Glassman commented, "We continue to be pleased with our operational progress in 2016, despite softer than forecasted volume growth. During the second quarter we generated higher margins, strong cash flow from operations, and record second quarter EPS. For the full year, we expect to achieve similar results: strong EBIT margin, significant growth in operating cash flow, and record EPS.
"Cash flow from operations, at $262 million for the first half of the year, was more than double the comparable amount from last year, in part due to the litigation settlement proceeds. For the full year, we expect cash from operations to exceed $500 million.
"We continue to actively manage our portfolio of businesses. During the second quarter we divested two small businesses that collectively produce about $80 million of annual sales, for total cash proceeds of $47 million. In addition, during the quarter we spent $35 million to buy out the minority interest in an Asian automotive joint venture that we have controlled and operated for several years.
"Our primary financial goal is to achieve Total Shareholder Return (TSR2) that ranks in the top third of the S&P 500 over rolling three-year periods. For the three years that began January 1, 2014, we have so far (over the last 31 months) generated TSR of 27% annually; that performance places L&P within the top 6% of the S&P 500.
"We are achieving these results while maintaining our strong financial base. During the quarter we increased to $750 million, and extended until 2021, our existing bank facility. We ended the quarter with over $450 million available through our commercial paper program. Net debt to net capital1 was 37%, comfortably within our 30% - 40% target range. At quarter end, the company's debt was 1.6 times its trailing 12-month adjusted1 EBITDA."
Dividends, and Stock Repurchases
In May, Leggett & Platt's Board of Directors declared a $.34 second quarter dividend, a three cent increase versus last year's second quarter dividend. Thus, 2016 marks the 45th consecutive annual dividend increase for the company, with a compound annual growth rate of 13%. Leggett & Platt is proud of its dividend record and plans to continue it.
At yesterday's closing share price of $53.54, the indicated annual dividend of $1.36 per share generates a dividend yield of 2.5%, one of the higher dividend yields among the 50 stocks of the S&P 500 Dividend Aristocrats.
During the second quarter the company purchased 1.2 million shares of its stock at an average price of $49.39, and issued 0.3 million shares through employee benefit plans and option exercises. The number of shares outstanding declined to 133.4 million, a 2.5% reduction over the last 12 months.
Updated 2016 Continuing Operations EPS Guidance: $2.45 - $2.60
The company is narrowing its EPS guidance, and now expects 2016 EPS from continuing operations of $2.45 to $2.60. This guidance includes the second quarter's net $.06 EPS benefit from unusual items ($.03 of which was included in prior guidance), and assumes a 25% full-year effective tax rate.
Sales guidance is now estimated at approximately $3.9 billion, or basically flat versus 2015. This guidance assumes unit volume growth in the mid-single digits, offset by a 2% reduction from commodity deflation and currency impacts, and a 3% year-over-year decrease from the combination of 4Q 2015 and 2Q 2016 divestitures, net of small acquisitions. The $100 million reduction in sales guidance (versus a prior midpoint of $4.0 billion) is due in equal parts to: i) recent divestitures, and ii) a more modest expectation for unit volume growth during 2016 (i.e. mid single digit growth, versus the prior expectation of mid-to-high single digit growth).
Based on this guidance, the 2016 adjusted EBIT margin should be approximately 13%. Margins in the back half of 2016 are expected to be lower than in the first half primarily due to the expected pricing lag associated with recent commodity inflation.
Discontinued operations EPS for 2016 is forecast at $.15, reflecting second quarter's litigation settlement proceeds.
Cash from operations is expected to exceed $500 million in 2016. Capital expenditures are estimated to be $130 million, and dividend payments should approximate $175 million. The company's target for dividend payout is 50‑60% of net earnings. Actual payout was higher until 2015, but with recent growth in annual earnings, the company is now within its target payout range.
The company's top priorities for use of cash are organic growth, dividends, and strategic acquisitions. After funding those priorities, if cash is available, the company generally intends to repurchase its stock (rather than repay debt early or stockpile cash). Management has standing authorization from the Board of Directors to buy up to 10 million shares each year; however, no specific repurchase commitment or timetable has been established. The company expects to repurchase 4-5 million shares in 2016, and issue about 2 million shares, primarily for employee benefit plans.
All of Leggett's operating segments use the first-in, first out (FIFO) method for valuing inventory. An adjustment is made at the corporate level (i.e., outside the segments) to convert about 50% of the inventories to the last-in, first-out (LIFO) method. These are primarily the company's domestic, steel-related inventories. Increased commodity costs since the beginning of 2016 have resulted in a LIFO expense of $7 million for the first six months of the year. In contrast, during the first half of 2015, the company experienced a LIFO benefit of $10 million related to commodity deflation.
SEGMENT RESULTS – Second Quarter 2016 (versus the same period in 2015)
Residential Furnishings – Total sales decreased $31 million, or 6%. Unit volume decreased 2%, and raw material-related price decreases and currency impact reduced sales by 4%. EBIT (earnings before interest and taxes) increased $15 million from several factors, including a litigation gain of $7 million. EBIT also benefited from pricing discipline, favorable product mix, and absence of last year's foam litigation expense ($2 million); these improvements were partially offset by the impact of lower unit volume.
Commercial Products – Total sales decreased $6 million, or 4%, with growth in Work Furniture more than offset by lower sales in Adjustable Bed. EBIT was flat, with operational improvements offsetting the earnings decrease from lower sales.
Industrial Materials – Total sales decreased $50 million, or 25%. Same location sales decreased 13% from a combination of steel-related price decreases and lower unit volume in Drawn Wire. The remainder of the sales decrease resulted from the divestiture of the Steel Tubing business in December 2015, and the divestiture of a small Wire Products operations in June 2016. EBIT increased $1 million, with the impact from lower volume more than offset by operational improvements.
Specialized Products – Total sales increased $22 million, or 9%. Same location sales increased 9%, with a 10% volume gain partially offset by currency translation impact (-1%). EBIT increased $21 million, and reflected an $11 million divestiture gain, partially offset by a $4 million impairment charge in the CVP business. EBIT also grew significantly from higher unit volume, currency benefits, and cost reductions.