Leggett Q1 Earnings Miss, Rise Y/Y

Leggett & Platt Inc. (LEG), the manufacturer of diversified engineered products – reported first-quarter 2014 results, wherein earnings surged 12% year over year, coming in at 37 cents a share.

Improvement in earnings was backed by a better sales mix in all segments coupled with a decent gain on sale of a building, partly offset by lower comparable store sales (comps). However, earnings fell short of the Zacks Consensus Estimate of 38 cents a share.

Delving Deeper

Net sales of the company slipped 1% to $919.1 million from $932.7 million in the prior-year quarter, coming below the Zacks Consensus Estimate of $976 million. The year-over-year decline in the top line was largely attributable to a 3% decrease in comps, owing to poor volumes in Commercial Vehicle Products and Store Fixtures and soft demand in other businesses due to unfavorable weather, partly offset by a 2% benefit from acquisitions.

Due to a falling top line, gross profit declined 5% year over year to $180 million with the gross margin contracting 70 basis points (bps) in the quarter to 19.6%. However, due to lower amortization and selling, general and administrative (SG&A) expenses, Leggett’s operating income climbed 4% to $82.5 million. Although operating margin expanded approximately 50 bps to 9%, on excluding the effect of gain from sale of a building, it remained flat.

Segment Details

First-quarter Residential Furnishings revenues increased 2.5% to $498.8 million on the back of a rise in volumes for International spring and Furniture Components, partly reduced by weak demand in U.S. Spring. Operating income increased 21% year over year to $51.3 million owing to increased sales and improved cost management.

Sales of Commercial Fixturing & Components plunged 22.2% to $89.9 million mainly because of the absence of specific key Store Fixture retailer programs in 2013. Also, the segment recorded an operating loss of $2 million, compared with an income of $1.6 million in the comparable prior-year quarter, primarily due to a decline in sales.

The Industrial Materials segment’s sales witnessed a 5.2% drop to $211.6 million, attributable to poor unit volumes in rod and wire. Operating income slumped 49% year over year to $11.1 million, due to negative impact of weather on expenses, along with lower metal margins and sales.

Specialized Products segment’s sales rose 6.4% year over year to $198.3 million, driven by robust demand for Leggett’s Automotive parts, offset by the downside in Commercial Vehicle Products (:CVP). Operating income for the segment soared 59% to $25 million, backed by strong sales and absence of litigation overhead worth $5 million, present last year.

Financials

Leggett, which competes with Stanley Furniture Co. Inc. (STLY) and Hooker Furniture Corp. (HOFT), ended the first quarter with cash and equivalents of $268.6 million, long-term debt of $811.0 million and shareholders' equity of $1,370.0 million. The company’s net debt to net capital ratio as of Mar 31, 2014 was 31.5%, close to the company’s long-term targeted range of 30%–40%. Moreover, it has roughly $450 million remaining under its current commercial paper program.

During the quarter, Leggett bought back 1.5 million shares, issued 1 million shares and hiked its quarterly dividend from 29 to 30 cents a share, thus marking its 43rd dividend increase in a row. The company’s regular dividend hikes and its common practice of share buybacks reflect its healthy financial position and focus on enhancing shareholder value.

Looking Ahead

Leggett is expecting higher growth in sales, EBIT margin and operating earnings per share (EPS) in 2014. The company continues to project its sales in 2014 to grow in the range of 3%–8% and come in between $3.85 billion and $4.05 billion.

The company now envisions 2014 earnings to lie in the band of $1.70- $1.85 per share, compared to its previously predicted range of $1.65–$1.85. Currently, the Zacks Consensus Estimate is pegged at $1.71 per share, falling within the company’s guidance range.

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 approximately be $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 3 – 6 million shares and issue nearly 2 million shares under the employee benefit plans in 2014.

Management seems impressed with its sound financials and it continues to anticipate record earnings in 2014. Thereafter, Leggett remains positive about its performance, given the strength of various businesses like Bedding, Office, Furniture, Aerospace and Automotive. Also, the company strives to remain in the top 3 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). However, another better-ranked stock in the same industry includes Norcraft Companies Inc. (NCFT) with a Zacks Rank #2 (Buy).

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