Leggett & Platt (LEG) Beats on Q2 Earnings, Outlook Strong

Zacks

Leggett & Platt Inc. (LEG), the manufacturer of diversified engineered products, reported second-quarter 2014 results, wherein adjusted earnings came in at 48 cents a share surging 9% year over year. Further, it surpassed the Zacks Consensus Estimate by a penny. Improvement in earnings was backed by enhanced sales coupled with a lower tax rate and share count.

 

 

However, including the recently announced non-cash goodwill impairment charge of 65 cents (or $108 million pre-tax), the company reported a loss of 17 cents per share contrary to an earnings of 48 cents in second-quarter 2013.

Delving Deeper

Net sales grew 4% to $1,001.6 million from $958.8 million in the prior-year quarter, above the Zacks Consensus Estimate of $997 million. Rise in sales during the quarter resulted from robust growth in all businesses, except Store Fixtures and Commercial Vehicle Products (:CVP), both of which reported large decline in sales. Excluding the loss from these two businesses, Leggett reported a sales growth of nearly 10%, to which acquisitions contributed marginally.

Same location sales rose 3% benefiting from robust volume increase in most of the company’s residential, office furniture and automotive markets, offset by dismal results at the Commercial Vehicle Products and Store Fixtures businesses.

Benefiting from the top line growth, gross profit rose 3.1% year over year to $205.2 million with the gross margin contracting 30 basis points (bps) in the quarter to 20.5%.

Segment Details

Second-quarter Residential Furnishings sales increased 9.7% to $536.0 million. Same location sales for the segment were up 9% on the back of a rise in unit volumes in most product categories. Operating income increased 27% year over year to $53.7 million owing to increased sales and an encouraging product mix, partly offset by the absence of a $3 million benefit from building sale that was recorded in the prior-year quarter.

Sales of Commercial Fixturing & Components plunged 24.3% to $96.4 million mainly because of the absence of specific key Store Fixture retailer programs that took place in 2013 as well as a sudden decline in overall market demand. Also, the segment recorded an operating loss of $106.9 million, compared with an income of $7.9 million in the prior-year quarter, primarily due to lower sales and the accounting of a $108 million impairment charge.

The Industrial Materials segment's sales witnessed a 2.5% increase to $222.2 million, due to unit volume declines in wire and steel tubing, offset by 6% contribution from acquisitions in the Aerospace business unit. Same location sales declined 4%. Operating income slumped 35% year over year to $14.3 million, due to lower metal margins in rod and wire as well as a decline in same location sales.

Specialized Products segment's sales rose 10.7% year over year to $230.8 million, driven by robust demand for Leggett's Automotive parts, offset by the downside in Commercial Vehicle Products (:CVP) sales. Operating income for the segment soared 25% to $35.4 million, backed by strong sales.

Financials

Leggett, which competes with Genuine Parts Company (GPC), ended the second quarter with cash and equivalents of $304.2 million, long-term debt of $926.0 million and shareholders' equity of $1,262.4 million. The company's net debt to net capital ratio as of Jun 30, 2014 was 35.6% despite the normal seasonality of its business, the impairment charge and the purchase of Tempur Sealy's innerspring plants. This stood near the mid-point of the company's long-term targeted range of 30%—40%. Moreover, it has roughly $340 million left under its current commercial paper program.

During the quarter, Leggett bought back 2.3 million shares for about $33.33 per share and announced a quarterly dividend of 30 cents a share. The company's regular dividend payouts and its common practice of share buybacks reflect its healthy financial position and focus on enhancing shareholder value.

Guidance

Leggett now projects its sales in 2014 to grow in the 4%—6% range and come in the within $3.88—$3.98 billion. Increase in sales is expected to be driven by robust growth in majority of the company’s businesses, offset by decreased demand for store fixtures.

The company reiterated its adjusted earnings guidance for 2014 in the band of $1.70—$1.85 per share.  However, the company’s GAAP earnings forecast has been trimmed to $1.05—1.20 per share due to the inclusion of the 65 cents non-cash impairment charge.

Additionally, continuing its trend of generating more cash than required to fund dividends and capital expenditures, the company expects operating cash flows for 2014 to be over $350 million. Capital expenditure for the year will be approximately $100 million, while the company hopes to spend $170 million toward dividend payout, as predicted before.

Further, Leggett expects to continue with its share repurchase program, having a standing authorization to buy-back up to 10 million shares every year. Further, the company intends to buy back 5—7 million shares and issue nearly 2 million shares under the employee benefit plans in 2014.

Management seems impressed with its sound financials and anticipates record earnings in 2014. Thereafter, Leggett remains optimistic about its performance, given the strength of its various businesses like Automotive, Aerospace, Bedding, Home Furniture, and Office Furniture. Also, the company strives to remain in the top 3 of the S&P 500 companies, on the basis of 3-year rolling period Total Shareholder Return (:TSR).

Other Stocks to Consider

Currently, Leggett carries a Zacks Rank #3 (Hold). Better-ranked stocks in the furniture industry include Norcraft Companies Inc. (NCFT) and Virco Mfg. Corporation (VIRC), both carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on LEG
Read the Full Research Report on GPC
Read the Full Research Report on VIRC
Read the Full Research Report on NCFT


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