Diversified manufacturer and industry component supplier Leggett & Platt reported first quarter sales of $960 million, an increase of 2% versus first quarter 2016. Organic sales grew 4%, primarily from continued strength in Automotive, but were partially offset by divestitures completed during 2016.
First quarter earnings were $.62 per share. EPS declined one penny versus the prior year, with the benefit from sales growth and a lower effective tax rate more than offset by higher raw material costs and several smaller factors. As expected, EBIT and EBIT margin declined versus first quarter last year due to the pricing lag the company typically experiences when passing along commodity inflation.
President and CEO Karl G. Glassman commented, "Organic sales grew 4% during the first quarter. This is a welcome change after seven consecutive quarters of year-over-year organic sales decreases, which were primarily the result of deflation and currency impacts.
"Volume increased 4% despite demand softness early in the quarter in several of our end markets. For the full year we continue to anticipate meaningful sales growth and record adjusted1 EPS, reflecting our expectations of mid-single digit growth in volume, pass through of higher raw material costs, and less divestiture activity.
"We completed two acquisitions during the first quarter that should increase annual revenue by approximately $50 million. The first is a distributor of geo-synthetic products that adds to the geographic scope and capabilities in our Geo Components business. The second manufactures surface-critical bent tube components in support of the private-label finished seating strategy in our Work Furniture business.
"For a decade now our primary financial goal has been to achieve Total Shareholder Return (TSR) that ranks within the top third of the S&P 500 over rolling three-year periods. For the three years that began January 1, 2015, we have so far (over the last 28 months) generated TSR of 14% annually, which ranks within the top 29 percent of the S&P 500, and exceeds the 9% annual TSR of the S&P 500 index.
"We are achieving these results while maintaining our strong financial base. Net debt to net capital was 40% at quarter end, at the top of our 30% ‑ 40% target range, reflecting working capital investment, our typically strong first quarter stock repurchases, and increased acquisition activity. At quarter end, the company's debt was 1.9 times its trailing 12-month adjusted1 EBITDA."
Dividends and Stock Repurchases
In February, Leggett & Platt's Board of Directors declared a $.34 first quarter dividend, two cents higher than last year's first quarter dividend. Thus, 2017 marks 46 consecutive annual dividend increases for the company, a record of consistent dividend growth that less than a dozen S&P 500 companies have exceeded. Leggett & Platt is proud of its dividend record and plans to extend it.
At yesterday's closing share price of $54.04, the indicated annual dividend of $1.36 per share generates a dividend yield of 2.5%, one of the higher dividend yields among the 51 stocks of the S&P 500 Dividend Aristocrats.
During the first quarter the company purchased 2.2 million shares of its stock at an average price of $48.82, and issued 1.0 million shares through employee benefit plans and option exercises. The number of shares outstanding declined to 132.3 million, a 1.4% reduction over the last 12 months. For the full year, the company expects to repurchase a total of 3 to 4 million shares, and issue about 2 million shares, primarily for employee benefit plans.
2017 Guidance Unchanged
For 2017, the company expects that sales growth will contribute to strong earnings. EPS is expected to be $2.55 to $2.75 for the year. Sales are anticipated to be $3.95-4.05 billion, which equates to growth of 5%-8%. Volume growth is expected to be in the mid-single digits, from strength in Automotive, Bedding, Adjustable Bed, Work Furniture, and Geo Components. Raw material-related price increases should also contribute to sales growth. Based upon this guidance, 2017 EBIT margin should be approximately 13%.
Cash from operations is expected to exceed $450 million in 2017, with working capital increases from sales growth and inflation expected to be a meaningful use of cash. Capital expenditures should be roughly $150 million, and dividend payments are expected to approximate $185 million. Dividend payout is targeted to be 50‑60% of adjusted earnings.
The company's top priorities for use of cash are organic growth, dividends, and strategic acquisitions. After funding those priorities, if there is still cash 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.
SEGMENT RESULTS – First Quarter 2017 (versus the same period in 2016)
Change to Segment Reporting – The company's segment reporting structure has been modified to align with changes made to the management organizational structure that became effective on January 1, 2017. The company filed an 8-K on April 10, 2017 that included revised segment financials from 2012 through 2016 (quarters and years). The new structure is described in the 8-K; there were only two changes to the business unit structure:
- The Home Furniture group moved from Residential Products to the Furniture Products segment (formerly called Commercial Products segment).
- The Machinery group moved from Specialized Products to the Residential Products segment.
In addition, changes in LIFO reserve will now be recognized within the segments to which they relate (primarily Industrial Products).
Residential Products – Total sales were essentially flat, with a 2% same location sales decrease offset by acquisitions. Volume grew 2%, with demand improving late in the quarter; however, this was more than offset by a 4% sales decrease from fewer pass-through sales of adjustable beds. EBIT increased $9 million due to the absence of last year's FIFO inventory impact, and a favorable sales mix in the current quarter.
Industrial Products – Total sales decreased 14%, largely due to divestitures completed during 2016. Same location sales decreased 4%. EBIT decreased $11 million due to the lag in recovering higher steel costs, and reduced volume.
Furniture Products – Total sales were essentially flat, with gains in Adjustable Bed and Work Furniture offset by declines in Fashion Bed and Home Furniture. EBIT decreased $11 million primarily due to steel inflation, costs associated with new program launches, and non-recurrence of last year's gain on a building sale ($2 million).
Specialized Products – Total sales increased 7%. Same location sales increased 9%, with volume gains in Automotive and Aerospace partially offset by currency impact and decline in CVP. Divestitures, net of acquisitions, reduced sales by 2%. EBIT was essentially flat, with the benefit from higher volume offset by costs associated with growth in Automotive, absence of income from a prior year divestiture, and other smaller items.