10-K 1 leg201610k.htm 10-K DOCUMENT

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number 001-07845
LEGGETT & PLATT, INCORPORATED
(Exact name of registrant as specified in its charter)
Missouri
 
44-0324630
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
No. 1 Leggett Road
Carthage, Missouri
 
64836
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (417) 358-8131
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
  
Name of each exchange on
which registered
Common Stock, $.01 par value
  
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ý 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
  
Accelerated  filer ¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing price of our common stock on the New York Stock Exchange) on June 30, 2016 was $6,600,700,000.
There were 133,744,022 shares of the registrant’s common stock outstanding as of February 10, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
 Part of Item 10, and all of Items 11, 12, 13 and 14 of Part III are incorporated by reference from the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2017.



TABLE OF CONTENTS
LEGGETT & PLATT, INCORPORATED—FORM 10-K
FOR THE YEAR ENDED December 31, 2016
 
Page
Number
1

PART I
Item 1.
3

Item 1A.
19

Item 1B.
22

Item 2.
22

Item 3.
24

Item 4.
24

Supp. Item.
25

PART II
Item 5.
27

Item 6.
29

Item 7.
30

Item 7A.
60

Item 8.
61

Item 9.
61

Item 9A.
61

Item 9B.
62

PART III
Item 10.
63

Item 11.
65

Item 12.
66

Item 13.
66

Item 14.
66

PART IV
Item 15.
67

Item 16.
121

122

124





Forward-Looking Statements
 
This Annual Report on Form 10-K and our other public disclosures, whether written or oral, may contain “forward-looking” statements including, but not limited to: projections of revenue, income, earnings, capital expenditures, dividends, capital structure, cash flows or other financial items; possible plans, goals, objectives, prospects, strategies or trends concerning future operations; statements concerning future economic performance, possible goodwill or other asset impairment; and the underlying assumptions relating to the forward-looking statements. These statements are identified either by the context in which they appear or by use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” or the like. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by the cautionary statements described in this provision.
 
Any forward-looking statement reflects only the beliefs of the Company or its management at the time the statement is made. Because all forward-looking statements deal with the future, they are subject to risks, uncertainties and developments which might cause actual events or results to differ materially from those envisioned or reflected in any forward-looking statement. Moreover, we do not have, and do not undertake, any duty to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement was made. For all of these reasons, forward-looking statements should not be relied upon as a prediction of actual future events, objectives, strategies, trends or results.
 
Readers should review Item 1A Risk Factors in this Form 10-K for a description of important factors that could cause actual events or results to differ materially from forward-looking statements. It is not possible to anticipate and list all risks, uncertainties and developments which may affect the future operations or performance of the Company, or which otherwise may cause actual events or results to differ materially from forward-looking statements. However, the known, material risks and uncertainties include the following:
 
factors that could affect the industries or markets in which we participate, such as growth rates and opportunities in those industries;
adverse changes in inflation, currency, political risk, and U.S. or foreign laws or regulations (including tax law changes);
adverse changes in consumer sentiment, housing turnover, employment levels, interest rates, trends in capital spending and the like;
factors that could impact raw materials and other costs, including the availability and pricing of steel scrap and rod and other raw materials, the availability of labor, wage rates and energy costs;
our ability to pass along raw material cost increases through increased selling prices;
price and product competition from foreign (particularly Asian and European) and domestic competitors;
our ability to maintain profit margins if our customers change the quantity and mix of our components in their finished goods;
our ability to realize 25-35% contribution margin on incremental unit volume produced utilizing spare capacity;
our ability to achieve longer-term operating targets and generate average annual TSR of 11%-14%;
our ability to achieve expected levels of cash flow;
our ability to identify and consummate strategically-screened acquisitions;
our ability to maintain and grow the profitability of acquired companies;
our ability to maintain the proper functioning of our internal business processes and information systems through technology failures or otherwise;
our ability to avoid modification or interruption of our information systems through cyber-security breaches;
a decline in the long-term outlook for any of our reporting units that could result in asset impairment;
the amount and timing of share repurchases;
the loss of one or more of our significant customers; and

1


litigation accruals related to various contingencies including antitrust, intellectual property, product liability and warranty, taxation, environmental and workers’ compensation expense.

2


PART I
 
Item 1. Business.

Summary
 
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 and automobiles. As discussed below, our continuing operations are organized into 17 business units, which are divided into 10 groups under our four segments: Residential Furnishings; Commercial Products; Industrial Materials; and Specialized Products.

Overview of Our Segments
 
Residential Furnishings Segment
fy2016orgchartresident2a01.jpg
Our Residential Furnishings segment began in 1883 with the manufacture of steel coiled bedsprings. Today, we supply a variety of components used by bedding and upholstered furniture manufacturers in the assembly of their finished products. Our range of products offers our customers a single source for many of their component needs.
 
Innovative proprietary products and low cost have made us the largest U.S. manufacturer in many of these businesses.  We strive to understand what drives consumer purchases in our markets and focus our product development activities on meeting those end-consumer needs. We attain a cost advantage from efficient manufacturing methods, internal production of key raw materials, purchasing leverage, and large-scale production. Sourcing components from us allows our customers to focus on designing, merchandising, and marketing their products.

Products
 
Bedding Group
Innersprings (sets of steel coils, bound together, that form the core of a mattress)
Wire forms for mattress foundations
Machines that we use to shape wire into various types of springs

3


Furniture Group
Steel mechanisms and motion hardware (enabling furniture to recline, tilt, swivel, rock and elevate) for reclining chairs and sleeper sofas
Springs and seat suspensions for upholstered furniture

Fabric & Carpet Cushion Group
Structural fabrics for mattresses, residential furniture and industrial uses
Carpet cushion (made from bonded scrap foam, fiber, rubber and prime foam)
Geo components (synthetic fabrics and various other products used in ground stabilization, drainage protection, erosion and weed control)

Customers
 
Manufacturers of finished bedding (mattresses and foundations)
Manufacturers of upholstered furniture
Retailers and distributors of carpet cushion
Contractors, landscapers, road construction companies and government agencies using geo components






















4


Commercial Products Segment

fy2016orgchartcommerciala01.jpg
In our Commercial Products segment we design, manufacture, and distribute a wide range of components and finished products for the office seating and sleep specialty, furniture and other retail markets. We are a major provider of adjustable beds and fashion beds, with domestic manufacturing and distribution capability as well as established relationships with global supply sources.

Products

Work Furniture Group 
Select lines of private-label finished furniture
Bases, columns, back rests, casters and frames for office chairs; control devices that allow office chairs to tilt, swivel and elevate
Molded plywood components

Consumer Products Group
Adjustable beds
Fashion beds and bed frames

Customers
 
Office furniture manufacturers
Mattress and furniture retailers









5


Industrial Materials Segment

fy2016orgchartindustriala01.jpg
The quality of our products and service, together with our low cost, have made Leggett & Platt the leading U.S. supplier of high-carbon drawn steel wire. Our Wire group operates a steel rod mill with an annual output of approximately 500,000 tons, of which a substantial majority is used by our own wire mills. We have three wire mills that supply virtually all of the wire consumed by our other domestic businesses. We also supply steel wire to trade customers that operate in a broad range of markets.
 
Products
 
Wire Group
Drawn wire
Fabricated wire products
Steel rod

Customers
 
We use about 70% of our wire output to manufacture our own products, including:
Bedding and furniture components
Automotive seat suspension systems

The Industrial Materials segment also has a diverse group of trade customers that include:
Bedding producers
Mechanical spring manufacturers
Wire distributors


6


Specialized Products Segment

fy2016orgchartspecializeda01.jpg
Our Specialized Products segment designs, manufactures and sells products including automotive seating components, tubing assemblies for the aerospace industry, bedding industry machinery, 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
 
Automotive Group
Mechanical and pneumatic lumbar support and massage systems for automotive seating
Seat suspension systems
Motors and actuators
Control cables

Aerospace Products Group
Titanium, nickel and stainless steel tubing, formed tube and tube sub-assemblies

Machinery Group
Quilting machines for mattress covers
Industrial sewing/finishing machines

Commercial Vehicle Products Group
Van interiors (the racks, shelving and cabinets installed in service vans)

Customers
 
Automobile seating manufacturers and OEMs
Aerospace suppliers
Bedding manufacturers
Telecommunication, cable, home service and delivery companies






7


Segment Financial Information
 
For information about sales to trade customers, sales by product line, EBIT, and total assets of each of our segments, refer to Note E on page 86 of the Notes to Consolidated Financial Statements.

    Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. Because of the divestiture of the majority of the Store Fixtures business in late 2014, along with the retirement of the Senior Operating Vice President of the Industrial Materials segment, our management organizational structure and all related internal reporting changed effective January 1, 2015. 

The Adjustable Bed and Fashion Bed businesses were moved from Residential Furnishings to Commercial Products. The Aerospace Products business was moved from Industrial Materials to Specialized Products. The Spuhl machinery operation (which produces wire forming equipment primarily for our internal use) was moved from Specialized Products to Residential Furnishings. Additionally, our logistics operations, which primarily include intercompany transportation activity, were moved from Residential Furnishings to Industrial Materials. These segment changes were retrospectively applied to all prior periods presented.

    For information regarding 2017 changes in segment reporting, see "Change in Segment Reporting for 2017" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 33.




8


Strategic Direction
 
Key Financial Metric
 
Total Shareholder Return (TSR), relative to peer companies, is the key financial measure that we use to assess long-term performance. TSR = (Change in Stock Price + Dividends)/Beginning Stock Price. Our goal is to achieve TSR in the top third of the S&P 500 companies over rolling three-year periods through an approach that employs four TSR sources: revenue growth, margin expansion, dividends, and share repurchases.

Our incentive programs reward return generation and profitable growth. Senior executives participate in a TSR-based incentive program (based on our performance compared to a group of approximately 320 peers).

For information about our TSR targets and performance see the discussion under "Total Shareholder Return" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations on page 31.

Returning Cash to Shareholders
 
During the past three years, we generated $1.29 billion of operating cash, and we returned much of this cash to shareholders in the form of dividends and share repurchases. Our top priorities for use of cash are organic growth (capital expenditures), dividends, and strategic acquisitions. After funding those priorities, if there is still cash available, we generally intend to repurchase stock rather than repay debt early or stockpile cash.

For information about dividends and share repurchases see the discussion under "Pay Dividends" and "Repurchase Stock" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 46.

Portfolio Management
 
We utilize a rigorous strategic planning process to help guide decisions regarding business unit roles, capital allocation priorities, and new areas in which to grow. We review the portfolio classification of each unit on an annual basis to determine its appropriate role (Grow, Core, Fix or Divest). This review includes criteria such as competitive position, market attractiveness, business unit size, and fit within our overall objectives, as well as financial indicators such as growth of EBIT (earnings before interest and taxes), EBITDA (earnings before interest, taxes, depreciation and amortization), operating cash flows, and return on assets. Business units in the Grow category should provide avenues for profitable growth from competitively advantaged positions in attractive markets. Core business units are expected to enhance productivity, improve market share, and generate cash flow from operations while using minimal capital. To remain in the portfolio, business units are expected to consistently generate after-tax returns in excess of our cost of capital. Business units that fail to consistently attain minimum return goals will be moved to the Fix or Divest categories.

Disciplined Growth
 
We revised our TSR framework in September 2016 to moderately increase the expected long-term contribution from revenue growth to 6-9% (from 4-5% previously). Over the last three years, our average annual revenue growth has been approximately 3%. Growth from the combination of increased unit volume and acquisitions has approximated 7% during that time period, but this was partially offset by a 4% reduction from divestitures, commodity deflation and currency impact.
 

9


Our long-term 6-9% annual revenue growth objective envisions periodic acquisitions. We primarily seek acquisitions within our Grow businesses, and look for opportunities to enter new, higher growth markets (carefully screened for sustainable competitive advantage). We expect all acquisitions to (a) have a clear strategic rationale, a sustainable competitive advantage, a strong fit with the Company, and be in an attractive and growing market; (b) create value by enhancing TSR; (c) for stand-alone businesses: generally possess revenue in excess of $50 million, strong management and future growth opportunity with a strong market position in a market growing faster than GDP; and (d) for bolt-on businesses: generally possess revenue in excess of $15 million, significant synergies, and a strategic fit with an existing business unit.

Acquisitions
 
    2016

We acquired three small businesses for an aggregate purchase price of roughly $30 million. The first was a U.S. manufacturer of aerospace tube assemblies. This business further expands our tube forming and fabrication capabilities, and also adds precision machining to our aerospace platform. We also acquired a distributor of geo-synthetic products and a South African producer of mattress innersprings.

In addition to these acquisitions, we purchased the remaining interest in an Automotive joint venture in China for $35 million. This business manufactures seat comfort products and lumbar support systems.

2015

We acquired a 70% interest in a European private-label manufacturer of high-end upholstered furniture. This business is complementary to our North American private-label operation and allows us to support our Work Furniture customers as they expand globally. The initial cash outlay for the 70% interest was $12 million and, per the terms of the agreement, we will acquire the remaining 30% in two equal parts, in 2018 and 2020. We have recorded a long-term liability of approximately $11 million for these future payments. The recorded liability is based upon estimates and may fluctuate significantly until the payment dates.
2014
We acquired Tempur Sealy's three U.S. innerspring production facilities for a purchase price of $45 million. This additional volume enhanced our economies of scale, benefited from our vertical integration in steel rod and wire, and allowed manufacturing optimization across a broad asset base.

We also acquired a German designer and distributor of high-end, European-style motion furniture components for a purchase price of $17 million. This business allows us to meet varying design preferences and broadens the range of our furniture component products.

For more information regarding our acquisitions, please refer to Note Q on page 111 of the Notes to Consolidated Financial Statements.
 

10


Divestitures
 
2016

We divested four small businesses for total net consideration of $72 million. We sold two Wire Products operations, one that manufactures wire partitions, perimeter guarding and storage lockers, and another that manufactures automatic wire strapping equipment and related consumable wire products.

We also sold a CVP operation that designs and assembles docking stations for mobile computing equipment in vehicles. Finally, we sold a Machinery business that assembles industrial sewing machines.

2015

We sold four operations for total consideration of $36 million. We sold our final two Store Fixtures operations and a small operation within our CVP business. We also sold our Steel Tubing business unit. This business manufactured welded steel tubing and fabricated tube components.

2014

We divested the majority of the Store Fixtures group for total consideration of $64 million. Our Store Fixtures group designed, produced, installed and managed our customer's store fixture projects.

For further information about divestitures and discontinued operations, see Note B on page 81 of the Notes to Consolidated Financial Statements.



11


Foreign Operations
 
The percentages of our trade sales in continuing operations related to products manufactured outside the United States for the previous three years are shown below.

leg201610k_chart-49294.jpg

Our international operations are principally located in Europe, China, Canada and Mexico. Our products in these foreign locations primarily consist of:
 
Europe

Innersprings for mattresses
Lumbar and seat suspension systems for automotive seating
Seamless and welded tubing and specialty formed products for aerospace applications
Select lines of private-label finished furniture
Recliner mechanisms
Machinery and equipment designed to manufacture innersprings for mattresses

China

Lumbar and seat suspension systems for automotive seating
Cables, motors, and actuators for automotive applications
Recliner mechanisms and bases for upholstered furniture
Formed wire for upholstered furniture
Innersprings for mattresses
Office furniture components, including chair bases and casters

Canada

Lumbar supports for automotive seats
Fabricated wire for the furniture and automotive industries
Office chair controls, chair bases and table bases





12


Mexico

Innersprings and fabricated wire for the bedding industry
Automotive control cable systems and seating components
Adjustable beds
Our international expansion strategy is to locate our operations where we believe we would possess a competitive advantage and where demand for our components is growing. We have also expanded internationally in instances where our customers move the production of their finished products overseas to supply them more efficiently.
 
Our international operations face the risks associated with any operation in a foreign country. These risks include:
Foreign currency fluctuation
Foreign legal systems that make it difficult to protect intellectual property and enforce contract rights
Credit risks
Increased costs due to tariffs, customs and shipping rates
Potential problems obtaining raw materials, and disruptions related to the availability of electricity and transportation during times of crisis or war
Inconsistent interpretation and enforcement, at times, of foreign tax laws
Political instability in certain countries

Our Specialized Products segment, which derives roughly 75% of its trade sales from foreign operations, is particularly subject to the above risks. These and other foreign-related risks could result in cost increases, reduced profits, the inability to carry on our foreign operations and other adverse effects on our business.


13


Geographic Areas of Operation
 
Globally, we have 126 manufacturing facilities; 77 located in the U.S. and 49 located in 18 foreign countries, as shown below. We also have various sales, warehouse and administrative facilities. However, our manufacturing plants are our most important properties.
 
Residential
Furnishings
  
Commercial
Products
  
Industrial
Materials
  
Specialized
Products
North America
 
  
 
  
 
  
 
Canada
n
  
n
  
 
  
n
Mexico
n
  
 
  
n
  
n
United States
n
  
n
  
n
  
n
Europe
 
  
 
  
 
  
 
Austria
 
  
 
  
 
  
n
Belgium
 
  
 
  
 
  
n
Croatia
n
  
 
  
 
  
n
Denmark
n
  
 
  
 
  
 
France
 
 
 
 
 
 
n
Germany
 
  
 
  
 
  
n
Hungary
 
  
 
  
 
  
n
Italy
n
  
 
  
 
  
 
Poland
 
 
n
 
 
 
 
Switzerland
n
  
 
  
 
  
 
United Kingdom
n
  
 
  
 
  
n
South America
 
  
 
  
 
  
 
Brazil
n
  
 
  
 
  
 
Asia
 
  
 
  
 
  
 
China
n
  
n
  
 
  
n
India
 
  
 
  
 
  
n
South Korea
 
  
 
  
 
  
n
Africa
 
  
 
  
 
  
 
South Africa
n
  
 
  
 
  
 
 
For further information concerning our continuing operations trade sales related to products manufactured, and our tangible long-lived assets located outside the United States, refer to Note E on page 86 of the Notes to Consolidated Financial Statements.


14


Sales by Product Line
 
The following table shows our approximate percentage of continuing operations trade sales by product line for the last three years:
 
Product Line
2016
 
2015
 
2014
Bedding Group
22

%
 
23
%
 
22
%
Automotive Group
19

 
 
16
 
 
16
 
Fabric & Carpet Cushion Group
18

 
 
17
 
 
18
 
Furniture Group
11

 
 
11
 
 
11
 
Wire Group
8

 
 
9
 
 
11
 
Consumer Products Group
8

 
 
8
 
 
7
 
Work Furniture Group
7

 
 
6
 
 
5
 
Aerospace Products Group
3

 
 
3
 
 
3
 
Commercial Vehicle Products Group
2

 
 
3
 
 
3
 
Steel Tubing Group1

 
 
2
 
 
2
 
Machinery Group
2

 
 
2
 
 
2
 
1 The Steel Tubing Group was sold in December 2015.

Distribution of Products
 
In each of our segments, we sell and distribute our products primarily through our own personnel. However, many of our businesses have relationships and agreements with outside sales representatives and distributors. We do not believe any of these agreements or relationships would, if terminated, have a material adverse effect on the consolidated financial condition, operating cash flows or results of operations of the Company.

Raw Materials
 
The products we manufacture require a variety of raw materials. We believe that worldwide supply sources are readily available for all the raw materials we use. Among the most important are:
Various types of steel, including scrap, rod, wire, sheet, stainless and angle iron
Foam scrap
Woven and non-woven fabrics
Titanium and nickel-based alloys and other high strength metals

We supply our own raw materials for many of the products we make. For example, we produce steel rod that we make into steel wire, which we then use to manufacture:
Innersprings and foundations for mattresses
Springs and seat suspensions for chairs and sofas
Automotive seating suspension systems

We supply a substantial majority of our domestic steel rod requirements through our own rod mill. Our wire drawing mills supply nearly all of our U.S. requirements for steel wire.





15


Customer Concentration
 
We serve thousands of customers worldwide, sustaining many long-term business relationships. In 2016, our largest customer accounted for approximately 7% of our consolidated revenues. Our top 10 customers accounted for approximately 30% of these consolidated revenues. The loss of one or more of these customers could have a material adverse effect on the Company, as a whole, or on the respective segment in which the customer’s sales are reported, including our Residential Furnishings, Specialized Products and Commercial Products segments.

Patents and Trademarks
 
The chart below shows the approximate number of patents issued, patents in process, trademarks registered and trademarks in process held by our continuing operations as of December 31, 2016. No single patent or group of patents, or trademark or group of trademarks, is material to our operations, as a whole. Most of our patents relate to products sold in the Specialized Products segment, while a substantial majority of our trademarks relate to products sold in the Residential Furnishings and Specialized Products segments.

leg201610k_chart-50869.jpg
 
Some of our most significant trademarks include:
ComfortCore®, Mira-Coil®, VertiCoil®, Quantum®, Nanocoil®, Softech®,  
Lura-Flex®, Superlastic® and Active Support Technology® (mattress innersprings)
Semi-Flex® (box spring components and foundations)
Spuhl® (mattress innerspring manufacturing machines)
Wall Hugger® (recliner chair mechanisms)
Super Sagless® (motion and sofa sleeper mechanisms)
No-Sag® (wire forms used in seating)
LPSense® (capacitive sensing)
Hanes® (fabric materials)
Schukra®, Pullmaflex® and Flex-O-Lator® (automotive seating products)
Gribetz® and Porter® (quilting and sewing machines)





16


Research and Development
 
We maintain research, development and testing centers in many locations around the world. We are unable to calculate precisely the cost of research and development because the personnel involved in product and machinery development also spend portions of their time in other areas. However, we estimate our cost of research and development was approximately $25 million in each of the last three years.
 
Employees
 
At December 31, 2016, we had approximately 21,300 employees, of which roughly 15,700 were engaged in production. Of the 21,300, approximately 12,000 were international employees (6,200 in China). Roughly 15% of our employees are represented by labor unions that collectively bargain for work conditions, wages or other issues. We did not experience any material work stoppage related to contract negotiations with labor unions during 2016. Management is not aware of any circumstances likely to result in a material work stoppage related to contract negotiations with labor unions during 2017. The chart below shows the approximate number of employees by segment.

leg201610k_chart-52148.jpg

At December 31, 2015, we had approximately 20,000 employees.











17


Competition
 
Many companies offer products that compete with those we manufacture and sell. The number of competing companies varies by product line, but many of the markets for our products are highly competitive. We tend to attract and retain customers through innovation, product quality, competitive pricing and customer service. Many of our competitors try to win business primarily on price but, depending upon the particular product, we experience competition based on quality and performance as well. In general, our competitors tend to be smaller, private companies.

We believe we are the largest U.S. manufacturer, in terms of revenue, of the following:
Components for bedding
Components for residential furniture
Carpet cushion
Adjustable bed bases
Components for work furniture
High-carbon drawn steel wire
Automotive seat support and lumbar systems
Bedding industry machinery

We continue to face pressure from foreign competitors as some of our customers source a portion of their components and finished products offshore. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and more lenient regulatory climates. We typically remain price competitive, even versus many foreign manufacturers, as a result of our efficient operations, low labor content, vertical integration in steel and wire, logistics and distribution efficiencies, and large scale purchasing of raw materials and commodities. However, we have also reacted to foreign competition in certain cases by selectively adjusting prices, and by developing new proprietary products that help our customers reduce total costs.
 
For information about antidumping duty orders regarding innerspring and steel wire rod imports, see "Competition" in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 32.

Seasonality
 
As a diversified manufacturer, we generally have not experienced significant seasonality. However, unusual economic factors in any given year, along with acquisitions and divestitures, can create sales variability and obscure the underlying seasonality of our businesses. Historically, for the Company as a whole, the second and third quarters typically have slightly higher sales, while the first and fourth quarters have generally been lower. Segment level seasonality has also been relatively limited, however the Residential Furnishings segment usually has lower sales in the fourth quarter.

Backlog
 
Our customer relationships and our manufacturing and inventory practices do not create a material amount of backlog orders for any of our segments. Production and inventory levels are geared primarily to the level of incoming orders and projected demand based on customer relationships.




18


Working Capital Items
 
For information regarding working capital items, see the discussion of “Cash from Operations” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 42.

Government Contracts
 
The Company does not have a material amount of sales derived from government contracts subject to renegotiation of profits or termination at the election of any government.

Environmental Regulation
 
Our operations are subject to federal, state, and local laws and regulations related to the protection of the environment. We have policies intended to ensure that our operations are conducted in compliance with applicable laws. While we cannot predict policy changes by various regulatory agencies, management expects that compliance with these laws and regulations will not have a material adverse effect on our competitive position, capital expenditures, financial condition, liquidity or results of operations.

Internet Access to Information
 
We routinely post information for investors under the Investor Relations section of our website (www.leggett.com). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available, free of charge, on our website as soon as reasonably practicable after electronically filed with, or furnished to, the SEC. In addition to these reports, the Company’s Financial Code of Ethics, Code of Business Conduct and Ethics, and Corporate Governance Guidelines, as well as charters for the Audit, Compensation, and Nominating & Corporate Governance Committees of our Board of Directors, can be found on our website under the Corporate Governance section. Information contained on our website does not constitute part of this Annual Report on Form 10-K.

Discontinued Operations
 
For information on discontinued operations, see Note B on page 81 of the Notes to Consolidated Financial Statements.


Item 1A. Risk Factors.
 
Investing in our securities involves risk. Set forth below and elsewhere in this report are risk factors that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. We may amend or supplement these risk factors from time to time by other reports we file with the SEC.
  
Costs of raw materials could negatively affect our profit margins and earnings.
 
Raw material cost increases (and our ability to respond to cost increases through selling price increases) can significantly impact our earnings. We typically have short-term commitments from our suppliers; therefore, our raw material costs generally move with the market. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Inability to recover cost increases (or a delay in the recovery time) can negatively impact our earnings. Conversely, if raw material costs decrease, we generally pass through reduced selling prices to our customers. Reduced selling prices combined with higher cost inventory can reduce our segment margins and earnings.

19



Steel is our principal raw material. The global steel markets are cyclical in nature and have been volatile in recent years. This volatility can result in large swings in pricing and margins from year to year. Our operations can also be impacted by changes in the cost of fabrics and foam scrap. We experienced significant fluctuations in the cost of these commodities in past years.
     
As a producer of steel rod, we are also impacted by volatility in metal margins (the difference between the cost of steel scrap and the market price for steel rod). If market conditions cause scrap costs and rod pricing to change at different rates (both in terms of timing and amount), metal margins could be compressed and this would negatively impact our results of operations.

Higher raw material costs in past years led some of our customers to modify their product designs, changing the quantity and mix of our components in their finished goods. In some cases, higher cost components were replaced with lower cost components. This primarily impacted our Residential Furnishings product mix and decreased profit margins. If this was to occur again it could negatively impact our results of operations.
 
Competition could adversely affect our market share, sales, profit margins and earnings.
 
We operate in markets that are highly competitive. We believe that most companies in our lines of business compete primarily on price, but, depending upon the particular product, we experience competition based on quality and performance. We face ongoing pressure from foreign competitors as some of our customers source a portion of their components and finished products from Asia and Europe. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and more lenient regulatory climates. If we are unable to purchase key raw materials, such as steel, at prices competitive with those of foreign suppliers, our ability to maintain market share and profit margins could be harmed by foreign competitors.
 
We are exposed to litigation contingencies that, if realized, could have a material negative impact on our financial condition, results of operations and cash flows.
Although we deny liability in all currently threatened or pending litigation proceedings and believe that we have valid bases to contest all claims made against us, we have, at December 31, 2016, an aggregate litigation contingency accrual of $3 million. Based on current facts and circumstances, aggregate reasonably possible (but not probable) losses in excess of the recorded accruals for litigation contingencies (which include Brazilian VAT and other matters) are estimated to be $26 million. If our assumptions or analysis regarding these contingencies is incorrect, or if facts and circumstances change, we could realize loss in excess of the recorded accruals (and in excess of the $26 million referenced above) which could have a material negative impact on our
financial condition, results of operations and cash flows. For more information regarding our legal contingencies, see Note S on page 115 of the Notes to Consolidated Financial Statements.
We are exposed to foreign currency risk which may negatively impact our competitiveness, profit margins and earnings.
 
We expect that international sales will continue to represent a significant percentage of our total sales, which exposes us to currency exchange rate fluctuations. In 2016, 34% of our sales were generated by international operations. The revenues and expenses of our foreign operations are generally denominated in local currencies; however, certain of our operations experience currency-related gains and losses where sales or purchases are denominated in currencies other than their local currency. Further, our competitive position may be affected by the relative strength of the currencies in countries where our products are sold. Foreign currency exchange risks inherent in doing business in foreign countries may have a material adverse effect on our future operations and financial results.


20


Our goodwill and other long-lived assets are subject to potential impairment which could negatively impact our earnings.
 
A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. At December 31, 2016, goodwill and other intangible assets represented $956 million, or 32% of our total assets. In addition, net property, plant and equipment and sundry assets totaled $703 million, or 24% of total assets. If actual results differ from the assumptions and estimates used in the goodwill and long-lived asset valuation calculations, we could incur impairment charges, which could negatively impact our earnings.
 
We review our reporting units for potential goodwill impairment in June as part of our annual goodwill impairment testing, and more often if an event or circumstance occurs making it likely that impairment exists. In addition, we test for the recoverability of long-lived assets at year end, and more often if an event or circumstance indicates the carrying value may not be recoverable. We conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. If we are not able to achieve projected performance levels, future impairments could be possible, which would negatively impact our earnings.

For more information regarding potential goodwill and other long-lived asset impairment, refer to Note C on page 83 of the Notes to Consolidated Financial Statements.

Technology failures or cyber security breaches could have a material adverse effect on our operations.
 
We rely on information systems to obtain, process, analyze and manage data, as well as to facilitate the manufacture and distribution of inventory to and from our facilities. We receive, process and ship orders, manage the billing of and collections from our customers, and manage the accounting for and payment to our vendors. We have transitioned certain corporate-level shared service systems primarily related to our U.S. operations for general ledger, cash application, purchasing and accounts payable disbursements to a new platform during the first quarter of 2017. Technology failures or security breaches of a new or existing infrastructure could create system disruptions or unauthorized disclosure of confidential information. If this occurs, our operations could be disrupted, or we may suffer financial loss because of lost or misappropriated information. We cannot be certain that advances in criminal capabilities will not compromise our technology protecting information systems. If these systems are interrupted or damaged by these events or fail for any extended period of time, then our results of operations could be adversely affected.

We may not be able to realize deferred tax assets on our balance sheet depending upon the amount and source of future taxable income.
 
Our ability to realize deferred tax assets on our balance sheet is dependent upon the amount and source of future taxable income. Economic uncertainty or tax law changes could impact our underlying assumptions on which valuation reserves are established and negatively affect future period earnings and balance sheets.

We have exposure to economic and other factors that affect market demand for our products which may negatively impact our sales, operating cash flow and earnings.
 
As a supplier of products to a variety of industries, we are adversely affected by general economic downturns. Our operating performance is heavily influenced by market demand for our components and products. Market demand for the majority of our products is most heavily influenced by consumer confidence. To a lesser extent, market demand is impacted by other broad economic factors, including disposable income levels, employment levels, housing turnover and interest rates. All of these factors influence consumer spending on durable goods, and drive 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.


21


Demand weakness in our markets can lead to lower unit orders, sales and earnings in our businesses. Several factors, including a weak global economy, low consumer confidence, or a depressed housing market could contribute to conservative spending habits by consumers around the world. Short lead times in most of our markets allow for limited visibility into demand trends. If economic and market conditions deteriorate, we may experience material negative impacts on our business, financial condition, operating cash flows and results of operations.

We are exposed to political, regulatory, and legislative risks that may arise from actions by U.S. or  foreign governments that could negatively impact our results of operations, financial condition and cash flows.

In 2016, 34% of our sales were generated by international operations.  Further, many of our businesses obtain products, components and raw materials from global suppliers. Accordingly, our business is subject to the political, regulatory, and legislative risks inherent in operating in numerous countries. These regulations and laws are complex and may change. If the U.S. or foreign governments adopt or change regulations, this could negatively impact our results of operation, financial condition and cash flows.   

Changes in tax laws or challenges to our tax positions could negatively impact our results of operations, financial condition and cash flows.

We are subject to the tax laws and reporting rules of the U.S. (federal, state and local) and several foreign jurisdictions.  Current economic and political conditions make these tax rules (and governmental interpretation of these rules) in any jurisdiction, including the U.S., subject to significant change and uncertainty.  There have been proposals, most notably by the Organization for Economic Cooperation and Development, the European Union, the U.S., and Canada, to reform tax laws or change interpretations of existing tax rules.  Some of these proposals, if adopted, could significantly impact how multinational corporations are taxed on their earnings and transactions.  Although we cannot predict whether or in what form these proposals will become law, or how they might be interpreted, such changes could have a material adverse effect on our earnings and cash flows.


Item 1B. Unresolved Staff Comments.
 
None.
 
Item 2. Properties.
 
The Company’s corporate office is located in Carthage, Missouri. We currently have 126 manufacturing locations, of which 77 are located across the United States and 49 are located in 18 foreign countries. We also have various sales, warehouse and administrative facilities. However, our manufacturing plants are our most important properties.
 

22


Manufacturing Locations by Segment
 
 
 
Company-
Wide
 
Subtotals by Segment
Manufacturing Locations
 
Residential
Furnishings
 
Commercial
Products
 
Industrial
Materials
 
Specialized
Products
United States
 
77
 
46
 
10
 
6
 
15
Europe
 
16
 
5
 
1
 
 
10
China
 
16
 
5
 
1
 
 
10
Canada
 
7
 
2
 
2
 
 
3
Mexico
 
6
 
2
 
 
1
 
3
Other
 
4
 
2
 
 
 
2
Total
 
126
 
62
 
14
 
7
 
43

For more information regarding the geographic location of our manufacturing facilities refer to "Geographic Areas of Operation" under Item 1 Business on page 14.
Manufacturing Locations Owned or Leased by Segment
 
 
Company-
Wide
 
Subtotals by Segment
Manufacturing Locations
 
Residential
Furnishings
 
Commercial
Products
 
Industrial
Materials
 
Specialized
Products
Owned
 
71
 
41
 
8
 
7
 
15
Leased
 
55
 
21
 
6
 
 
28
Total
 
126
 
62
 
14
 
7
 
43

In 2016, 73% of the Company's net sales allocated to the 126 manufacturing facilities was produced by owned facilities. We also lease many of our manufacturing, warehouse and other facilities on terms that vary by lease (including purchase options, renewals and maintenance costs). For additional information regarding lease obligations, see Note J on page 94 of the Notes to Consolidated Financial Statements. Of our 126 manufacturing facilities, none are subject to liens or encumbrances that are material to the segment in which they are reported or to the Company as a whole.
 
None of our physical properties are, by themselves, material to the Company’s overall manufacturing processes, except for our steel rod mill in Sterling, Illinois, which is reported in Industrial Materials. The rod mill consists of approximately 1 million square feet of production space and has annual output of approximately 500,000 tons of steel rod, of which a substantial majority is used by our own wire mills. Although we have alternative sources of steel rod from external sources, a prolonged disruption to the operation of the rod mill could have a material adverse effect on the Industrial Materials segment and the Company’s results of operations.

In the opinion of management, the Company’s owned and leased facilities are suitable and adequate for the manufacture, assembly and distribution of our products. Our properties are located to allow quick and efficient delivery of products and services to our diverse customer base. Our productive capacity, in general, continues to exceed current operating levels. However, utilization has increased in many of our businesses with improving market demand, and we are investing to support growth in several of our businesses, including Automotive, U.S. Spring and European Spring.  
 

 



23


Item 3. Legal Proceedings.
 
The information in Note S beginning on page 115 of the Notes to Consolidated Financial Statements is incorporated into this section by reference.
Environmental Matters Involving Potential Monetary Sanctions of $100,000 or More

On March 27, 2013, Region 5 of the U.S. Environmental Protection Agency (EPA) issued a Notice of Violation/Finding of Violation ("NOV/FOV") alleging that our subsidiary, Sterling Steel Company, violated the Clean Air Act and the Illinois State Implementation Plan currently in place. Sterling operates a steel rod mill in Sterling, Illinois. The NOV/FOV alleges that Sterling, since 2008, has exceeded the allowable annual particulate matter and manganese emission limits for its arc furnace. Sterling requested a conference with the EPA to discuss the alleged violations. The conference was held on May 20, 2013.

On July 23, 2013, the EPA issued a Finding of Violation alleging that Sterling violated the opacity limitations of its air permit and Federal and state regulations. A conference to discuss the Finding of Violation occurred in the third quarter of 2013.

There had been no material updates with respect to these matters until mid-July 2015 when the Company learned from counsel for the EPA that the matters had been referred to the U.S. Department of Justice (DOJ). The Company met with representatives of the EPA and the DOJ on February 2, May 25 and June 15, 2016. At the meetings, the government focused on Sterling's compliance with capture and control efficiency and fugitive emissions with its electric arc furnace. On September 26, 2016, the EPA directed Sterling to perform a ventilation study. Sterling submitted its proposed ventilation study to the EPA on November 15, 2016.  On December 28, 2016, the EPA approved the proposed study.  We expect to complete the study in the first half of 2017. Sterling intends to vigorously defend these matters in any enforcement action that may be pursued by the EPA or DOJ. Neither the EPA nor DOJ specified any amount of penalty being sought in any proceeding to enforce the NOV/FOV, Finding of Violation or in any conference or meeting. Any settlement or adverse finding could result in the payment by Sterling of fines, penalties, capital expenditures, or some combination thereof. Although the outcome of these matters cannot be predicted with certainty, we do not expect them, either individually or in the aggregate, to have a material adverse effect on our financial position, cash flows or results of operations.

Item 4. Mine Safety Disclosures.
 
Not applicable.
 














24


Supplemental Item. Executive Officers of the Registrant.
 
The following information is included in accordance with the provisions of Part III, Item 10 of Form 10-K and Item 401(b) of Regulation S-K.
 
The table below sets forth the names, ages and positions of all executive officers of the Company. Executive officers are normally appointed annually by the Board of Directors.
 
Name
 
Age
 
Position
Karl G. Glassman
 
58
 
President and Chief Executive Officer
Matthew C. Flanigan
 
55
 
Executive Vice President and Chief Financial Officer
Perry E. Davis
 
57
 
Executive Vice President, President - Residential Products & Industrial Products
J. Mitchell Dolloff
 
51
 
Executive Vice President, President - Specialized Products & Furniture Products
David M. DeSonier
 
58
 
Senior Vice President, Strategy & Investor Relations
Scott S. Douglas
 
57
 
Senior Vice President, General Counsel & Secretary
Russell J. Iorio
 
47
 
Senior Vice President, Corporate Development
Tammy M. Trent
 
50
 
Vice President, Chief Accounting Officer

Subject to the employment and severance benefit agreements with Mr. Glassman and Mr. Flanigan, listed as exhibits to this Report, the executive officers generally serve at the pleasure of the Board of Directors. Our employment agreements with Mr. Glassman and Mr. Flanigan, which expire in May 2017, provide that they may terminate their agreements if not nominated as a director of the Company. In addition, each may terminate their agreement if not appointed to the executive position listed in their respective agreement (or above). See Exhibit Index on page 124 for reference to the agreements.
 
Karl G. Glassman was appointed Chief Executive Officer of the Company in 2016 and has served as President since 2013. He previously served the Company as Chief Operating Officer from 2006 to 2015. He also served as Executive Vice President from 2002 to 2013, President of Residential Furnishings from 1999 to 2006, Senior Vice President from 1999 to 2002 and in various capacities since 1982.
 
Matthew C. Flanigan was appointed Executive Vice President of the Company in 2013 and has served as Chief Financial Officer since 2003. He previously served as Senior Vice President from 2005 to 2013, Vice President from 2003 to 2005, Vice President and President of the Office Furniture Components Group from 1999 to 2003 and in various capacities since 1997.

Perry E. Davis was appointed Executive Vice President, President - Residential Products & Industrial Products effective January 1, 2017. He previously served as Senior Vice President and President of the Residential Furnishings segment beginning in 2012. He also served as Vice President of the Company, President—Bedding Group from 2006 to 2012, as Vice President of the Company, Executive VP of the Bedding Group and President—U.S. Spring beginning in 2005. He served as Executive VP of the Bedding Group and President—U.S. Spring from 2004 to 2005, President—Central Division Bedding Group from 2000 to 2004, and in various capacities since 1981.
 
J. Mitchell Dolloff was appointed Executive Vice President, President - Specialized Products & Furniture Products effective January 1, 2017. He previously served as Senior Vice President and President of the Specialized Products segment beginning in 2016. He served the Company as Vice President from 2014 to 2015. He also served as President of Automotive Asia from 2011 to 2013, Vice President of the Specialized Products segment from 2009 to 2013, and Director of Business Development for Specialized Products from 2007 to 2009. He served the Company in various other capacities since 2000.



25



David M. DeSonier was appointed Senior Vice President—Strategy & Investor Relations in 2011. He previously served as Vice President—Strategy & Investor Relations from 2007 to 2011. He has served as Assistant Treasurer since 2002. He joined the Company as Vice President—Investor Relations in 2000.
 
Scott S. Douglas was appointed Senior Vice President and General Counsel in 2011. He was appointed Secretary of the Company in 2016. He previously served as Vice President and General Counsel from 2010 to 2011, as Vice President—Law and Deputy General Counsel from 2008 to 2010, as Associate General Counsel—Mergers & Acquisitions from 2001 to 2007, and as Assistant General Counsel from 1991 to 2001. He has served the Company in various legal capacities since 1987.
 
Russell J. Iorio was appointed Senior Vice President, Corporate Development in 2016. He previously served the Company as Senior Vice President, Mergers & Acquisitions from 2014 to 2016. He served the Company as Vice President, Mergers & Acquisitions from 2005 to 2014, and Director of Mergers, Acquisitions & Strategic Planning from 2002 to 2005.

Tammy M. Trent was appointed Vice President, Chief Accounting Officer in 2015. She served as Staff Vice President, Financial Reporting from 2007 to 2015. She previously served the Company in a series of progressively more responsible accounting capacities since 1998. 

26


PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is traded on the New York Stock Exchange (symbol LEG). The table below highlights quarterly and annual stock market information for the last two years.
 
 
Price Range
 
Volume of
Shares Traded
(in Millions)
 
Dividend
Declared
 
High
 
Low
 
2016
 
 
 
 
 
 
 
First Quarter
$
48.50

 
$
36.64

 
60.3

 
$
0.32

Second Quarter
51.20

 
47.11

 
50.7

 
0.34

Third Quarter
54.63

 
45.11

 
55.6

 
0.34

Fourth Quarter
50.79

 
44.02

 
57.0

 
0.34

For the Year
$
54.63

 
$
36.64

 
223.6

 
$
1.34

2015
 
 
 
 
 
 
 
First Quarter
$
46.95

 
$
41.36

 
74.2

 
$
0.31

Second Quarter
49.95

 
42.34

 
58.6

 
0.31

Third Quarter
51.28

 
39.58

 
69.7

 
0.32

Fourth Quarter
47.35

 
40.83

 
56.0

 
0.32

For the Year
$
51.28

 
$
39.58

 
258.5

 
$
1.26

______________________________
 
Price and volume data reflect composite transactions; price range reflects intra-day prices; data source is Bloomberg.
 
Shareholders and Dividends
 
As of February 10, 2017, we had 8,626 shareholders of record.
 
Increasing the dividend remains a high priority. In 2016, we increased the quarterly divided by $.02, or 6% to $.34 per share, our largest quarterly increase since 2007. In each year for over 25 years, we have generated operating cash in excess of our annual requirement for capital expenditures and dividends. We expect this again to be the case in 2017. We have no restrictions that materially limit our ability to pay such dividends or that we reasonably believe are likely to limit the future payment of dividends.

For more information on dividends see "Pay Dividends" in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 46.


 

27


Issuer Purchases of Equity Securities
 
The table below is a listing of our purchases of the Company’s common stock during each calendar month of the fourth quarter of 2016.
 
Period
 
Total Number of
Shares Purchased (1)
 
Average
Price
Paid per
Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)
 
Maximum Number of
Shares that May Yet
Be Purchased Under the
Plans or Programs (2)
October 2016
 
20,310

 
$
45.68

 
20,000

 
6,680,665

November 2016
 
320,109

 
$
47.17

 
312,703

 
6,367,962

December 2016
 
2,873

 
$
48.06

 

 
6,367,962

Total
 
343,292

 
$
47.09

 
332,703

 
 
______________________________

(1)
This number includes 10,589 shares which were not repurchased as part of a publicly announced plan or program, all of which were shares surrendered in transactions permitted under the Company’s benefit plans. It does not include shares withheld for taxes on option exercises and stock unit conversions.
(2)
On August 4, 2004, the Board authorized management to repurchase up to 10 million shares each calendar year beginning January 1, 2005. This standing authorization was first reported in the quarterly report on Form 10-Q for the period ended June 30, 2004, filed August 5, 2004, and will remain in force until repealed by the Board of Directors. As such, effective January 1, 2017, the Company was authorized by the Board of Directors to repurchase up to 10 million shares in 2017. No specific repurchase schedule has been established.
 



28


Item 6. Selected Financial Data.
 
(Unaudited)
2016 1
 
2015 2
 
2014 3
 
2013 4
 
2012 5
(Dollar amounts in millions, except per share data)
 
 
 
 
 
 
 
 
 
Summary of Operations
 
 
 
 
 
 
 
 
 
Net Sales from Continuing Operations
$
3,750

 
$
3,917

 
$
3,782

 
$
3,477

 
$
3,415

Earnings from Continuing Operations
367

 
328

 
225

 
186

 
231

(Earnings) Attributable to Noncontrolling Interest, net of tax

 
(4
)
 
(3
)
 
(2
)
 
(2
)
Earnings (loss) from Discontinued Operations, net of tax
19

 
1

 
(124
)
 
13

 
19

Net Earnings attributable to Leggett & Platt, Inc. common shareholders
386

 
325

 
98

 
197

 
248

Earnings per share from Continuing Operations
 
 
 
 
 
 
 
 
 
Basic
2.66

 
2.30

 
1.57

 
1.27

 
1.59

Diluted
2.62

 
2.27

 
1.55

 
1.25

 
1.57

Earnings (Loss) per share from Discontinued Operations
 
 
 
 
 
 
 
 
 
Basic
.14

 
.01

 
(.88
)
 
.09

 
.13

Diluted
.14

 
.01

 
(.87
)
 
.09

 
.13

Net Earnings (Loss) per share
 
 
 
 
 
 
 
 
 
Basic
2.80

 
2.31

 
.69

 
1.36

 
1.72

Diluted
2.76

 
2.28

 
.68

 
1.34

 
1.70

Cash Dividends declared per share
1.34

 
1.26

 
1.22

 
1.18

 
1.14

Summary of Financial Position
 
 
 
 
 
 
 
 
 
Total Assets
$
2,984

 
$
2,964

 
$
3,136

 
$
3,105

 
$
3,251

Long-term Debt, including capital leases
$
956

 
$
942

 
$
762

 
$
685

 
$
850



All amounts are presented after tax. 
1 
Net earnings from Continuing Operations for 2016 includes $16 million of gains on sales of businesses, a $3 million goodwill impairment, and a $3 million gain on a foam litigation settlement.

2 
Net earnings from Continuing Operations for 2015 includes $4 million of impairments and a $2 million loss on the sale of our Steel Tubing business; $4 million associated with litigation accruals; and an $8 million lump-sum pension buyout.
 
3 
Net earnings from Continuing Operations for 2014 includes $33 million associated with litigation accruals. Discontinued Operations includes the following items: $93 million of goodwill impairment, a $5 million loss on the sale of the majority of our Store Fixtures unit, and $22 million associated with litigation accruals.

4 
Net earnings from Continuing Operations for 2013 include charges of $45 million related to the Commercial Vehicle Products group ($43 million goodwill impairment charge and $2 million accelerated amortization of a customer-related intangible asset), and a $9 million bargain purchase gain related to an acquisition.

5 
Net earnings from Continuing Operations for 2012 include a $27 million net tax benefit primarily related to the release of valuation allowances on certain Canadian deferred tax assets, partially offset by deferred withholding taxes on earnings in China.

29


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
HIGHLIGHTS
 
Sales decreased in 2016, with growth in unit volume and acquisitions more than offset by divestitures, raw material-related price deflation, and currency impact. Sales growth continued in Automotive, reflecting content gains and new program awards, but several other businesses experienced soft market demand and lower unit volume during the year.

Earnings from continuing operations increased reflecting several factors, including divestiture gains, lower income taxes, and reduced share count. Steel inflation in late 2016 and the non-recurrence of a pricing lag benefit associated with deflation in late 2015 offset the benefit from increased unit volume.
 
We continue to optimize our portfolio by increasing investment in those businesses that possess strong competitive advantage and reducing our exposure to businesses and markets that are less attractive. We increased capital expenditures in 2016 to support product categories that are growing. In addition, we acquired three small businesses and purchased the remaining minority interest in a key Automotive joint venture in China. We also divested four small operations during the year.

Operating cash flow increased significantly versus 2015 levels. Payments made to settle foam litigation in 2015 did not recur, and in 2016 we received litigation settlement proceeds related to a separate matter. Cash from operations also benefited from reduced working capital.

We raised the quarterly dividend by 6% in 2016 (the largest increase since 2007) and extended our record of consecutive annual increases to 45 years. We also bought back 4.5 million shares of our stock.


During the year, we extended the term of and expanded the borrowing capacity under our revolving credit facility to $750 million and correspondingly increased our commercial paper program. We ended 2016 with net debt to net capital comfortably within our long-standing targeted range of 30-40%, as discussed on page 49.
 
We assess our overall performance by comparing our Total Shareholder Return (TSR) to that of peer companies on a rolling three-year basis. We target TSR in the top third of the S&P 500 over the long term. For the three years ended December 31, 2016, we generated TSR in the top 11% of the S&P 500.

With this top-third TSR goal continuing to be our primary long-term financial objective, in September we revised our TSR framework to place a moderately higher emphasis on disciplined growth and a lesser requirement on further profit margin expansion.

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

30


INTRODUCTION
 
Total Shareholder Return
 
Total Shareholder Return (TSR), relative to peer companies, is the key financial measure that we use to assess long-term 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. We seek to achieve TSR in the top third of the S&P 500 over the long-term through an approach that employs four TSR drivers: revenue growth, margin expansion, dividends, and share repurchases.
 
We monitor our TSR performance relative to the S&P 500 on a rolling three-year basis. For the three-year measurement period that ended December 31, 2016, we generated TSR of 20% per year on average, well above the S&P 500's 9% annual TSR for that same time period. That performance placed us in the top 11% of the S&P 500, achieving our top-third goal.

During 2016, we reevaluated our long-standing TSR framework and concluded that a few modifications were appropriate. We moderately increased the expected long-term contribution from revenue growth (to 6-9% per year on average) and reduced the expected benefit from additional EBIT margin increases. The table below shows the components of TSR, including our prior targets and our revised current targets. Accomplishing this level of performance over rolling three-year periods should enable us to consistently attain our top-third TSR goal.
        
 
Prior Targets
 
Current Targets
Revenue Growth
4-5%
 
6-9%
Margin Increase
2-3%
 
1%
Change in Multiple
-
 
-
Dividend Yield
3-4%
 
3%
Stock Buyback
2-4%
 
1%
  Total Shareholder Return
12-15%
 
11-14%

Customers
 
We serve a broad suite of customers, with our largest customer representing approximately 7% of our sales. Many are companies whose names are widely recognized. They include most producers of residential furniture and bedding, automotive and office seating manufacturers, and a variety of other companies.

Major Factors That Impact Our Business
 
Many factors impact our business, but those that generally have the greatest impact are market demand, 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 of 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 20% of our sales.





31


Raw Material Costs
 
In many of our businesses, we enjoy a cost advantage from being vertically integrated into steel wire and rod. This is a benefit that our competitors do not have. We also experience favorable purchasing leverage from buying large quantities of raw materials. Still, our costs can vary significantly as market prices for raw materials (many of which are commodities) fluctuate.
 
We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. 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. Conversely, when costs decrease significantly, we generally pass those lower costs through to our customers. The timing of our price increases or decreases is important; we typically experience a lag in recovering higher costs, and we also realize a lag as costs decline.
 
Steel is our principal raw material. At various times in past years we have experienced significant cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers with selling price adjustments. Throughout 2015, market prices for steel scrap, rod, and flat-rolled products decreased significantly, leading to downward pressure on selling prices. We realized a beneficial pricing lag during 2015, as costs generally decreased at a faster rate than selling prices. In 2016, steel costs have once again become volatile. Steel inflation during the first half of the year was followed by deflation in the third quarter, and significant inflation late in the year. With the normal lag in selling price increases, this cost inflation led to margin pressure in the fourth quarter. We are implementing price increases in early 2017 to begin recovering the higher costs.

As a producer of steel rod, we are also impacted by changes in metal margins (the difference between the cost of steel scrap and the market price for steel rod). Metal margins within the steel industry have been volatile in past years and were moderately compressed in late 2016.
 
Our other raw materials include woven and non-woven fabrics, foam scrap, and chemicals. We have experienced changes in the cost of these materials in past years and generally have been able to pass them through to our customers.
 
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 must continue providing product options to our customers that enable them to improve the functionality of their products and manage their costs, while providing higher profits for our operations.
 
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. 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 innovation, better product quality, 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 offshore. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and more lenient regulatory climates. We typically remain price competitive, even versus many foreign manufacturers, as a result of our highly efficient operations, low labor content, vertical integration in steel and wire, logistics and distribution efficiencies, and large scale purchasing of raw materials and commodities. However, we have also reacted to foreign competition in certain cases by selectively adjusting prices, and by developing new proprietary products that help our customers reduce total costs.
 

32


Since 2009, there have been antidumping duty orders on innerspring imports from China, South Africa and Vietnam, ranging from 116% to 234%. In March 2014, the Department of Commerce (DOC) and the International Trade Commission (ITC) determined that the duties should be continued. In April 2014, the DOC published its final order continuing the duties through February 2019 (for China) and December 2018 (for South Africa and Vietnam).

An antidumping and countervailing duty case filed in January 2014 by major U.S. steel wire rod producers was concluded in December 2014, resulting in the imposition of duties on imports of Chinese steel wire rod. The antidumping duties range from 106% to 110% and the countervailing duties range from 178% to 193%. Both remain in effect through December 2019. 

Because of the documented evasion of antidumping orders by certain importers, typically shipping goods through third countries and falsely identifying the countries of origin, Leggett and several other U.S. manufacturers formed a coalition to seek stronger enforcement of existing antidumping and/or countervailing duty orders.  As a result of these efforts, the U.S. Congress passed the Enforcing Orders and Reducing Customs Evasion (ENFORCE) Act.  The ENFORCE Act requires U.S. Customs and Border Protection to implement a transparent, time-limited process to investigate allegations of duty evasion and to assess duties where appropriate.

Leggett Settles Claims as Plaintiff

We previously disclosed that we were a plaintiff in an antitrust case against The Dow Chemical Company. We, along with other plaintiffs, alleged that several defendants conspired to fix prices and allocate customers and markets for certain urethane chemical products. We reached a settlement for our antitrust claims against The Dow Chemical Company in 2016 by agreeing to release our claims regarding this matter for a net cash payment of approximately $38 million (pretax, after deducting expenses). We received payment in 2016 and recorded after-tax income of $25 million. Because the settlement is largely attributable to our former Prime Foam Products business, $20 million was reflected in discontinued operations.

Change in Segment Reporting for 2017

Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. In conjunction with a change in executive officers, our management organizational structure and all related internal reporting changed as of January 1, 2017. Effective January 1, 2017, Perry E. Davis became President of the Residential Products and Industrial Products segments, and J. Mitchell Dolloff became President of the Specialized Products and Furniture Products segments.

The composition of our four segments also changed effective January 1, 2017. The table below outlines the new segment structure. We will report under this new structure when we file our 2017 first quarter10-Q.
Residential Products
Industrial Products
Furniture Products
Specialized Products
Bedding Group
Wire Group
Work Furniture Group
Automotive Group
Fabric & Carpet Cushion Group
 
Home Furniture Group
Aerospace Products Group
Machinery Group
 
Consumer Products Group
CVP Group

The new structure will be largely the same as in prior years except that the Home Furniture Group will be moved from Residential Products (formerly Residential Furnishings) to Furniture Products (formerly Commercial Products), and the Machinery Group will be moved from Specialized Products to Residential Products. The Industrial Products segment (formerly Industrial Materials) will have no changes.

33


RESULTS OF OPERATIONS—2016 vs. 2015
 
Sales decreased 4% in 2016, with slightly higher unit volume and acquisitions more than offset by divestitures, raw material-related price deflation, and currency impact. Sales growth continued in Automotive, reflecting content gains and new program awards, but several other businesses experienced soft market demand and lower unit volume during the year.

Earnings from continuing operations increased from several factors, including divestiture gains. The benefit from increased unit volume and lower income taxes was partially offset by steel inflation and the non-recurrence of a pricing lag benefit associated with deflation late in 2015. Further details about our consolidated and segment results are discussed below.
 
Consolidated Results (continuing operations)
 
The following table shows the changes in sales and earnings from continuing operations during 2016, and identifies the major factors contributing to the changes.
 
(Dollar amounts in millions, except per share data)
Amount
 
%
Net sales:
 
 
 
Year ended December 31, 2015
$
3,917

 
 
Divestitures
(141
)
 
(4
)%
  2015 sales excluding divestitures
3,776

 
 
   Approximate volume gains
58

 
2
 %
   Approximate raw material-related deflation and currency impact
(111
)
 
(3
)%
Same location sales
(53
)
 
(1
)%
Acquisition sales growth
27

 
1
 %
Year ended December 31, 2016
$
3,750

 
(4
)%
Earnings from continuing operations:
 
 
 
(Dollar amounts, net of tax)
 
 
 
Year ended December 31, 2015
$
328

 
 
Divestiture gains
17

 
 
Litigation settlement gain
5

 
 
Non-recurrence of lump-sum pension buyout
8

 
 
Other, including benefit from higher volume and lower income taxes, partially
 
 
 
    offset by steel inflation and non-recurrence of prior year pricing lag benefit
9

 
 
Year ended December 31, 2016
$
367

 
 
Earnings Per Diluted Share (continuing operations)—2015
$
2.27

 
 
Earnings Per Diluted Share (continuing operations)—2016
$
2.62

 
 
 

Sales decreased 4%, with unit volume growth and small acquisitions more than offset by divestitures, raw material-related price decreases, and currency impact. Strong growth in Automotive was partially offset by soft demand in several other markets, including bedding and home furniture. 

During 2016, we divested two Wire Products operations, a CVP business and a Machinery operation. These businesses had total combined annual sales of approximately $100 million.

As indicated in the table above, earnings from continuing operations increased from divestiture gains (related to a CVP business and a Wire Products business), a litigation settlement gain, and the non-recurrence of the prior

34


year's lump-sum pension buyout. Operationally, earnings also benefited from higher unit volume and lower income taxes related to a new accounting standard for stock-based compensation. These improvements were partially offset by steel inflation that began to occur in late 2016 and the non-recurrence of the prior year pricing lag benefit (that occurred as steel costs deflated in late 2015).

LIFO Impact
 
All of our segments use the first-in, first-out (FIFO) method for valuing inventory. In our consolidated financials, an adjustment is made at the corporate level (i.e., outside the segments) to convert about 50% of our inventories to the last-in, first-out (LIFO) method. These are primarily our domestic, steel-related inventories. In 2016, increasing steel costs, particularly in the fourth quarter, resulted in a full-year pretax LIFO expense of $11 million. In 2015, significant deflation in steel costs, particularly in the fourth quarter, resulted in a full-year pretax LIFO benefit of $46 million.
 
For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 75.
 
Interest and Income Taxes
 
Net interest expense in 2016 decreased slightly due to the repayment of a $200 million 5% note in August 2015.

Our tax rate is determined by a combination of items, some recurring and some discrete.  Recurring items include things like income earned in various tax jurisdictions, and differences in tax rates in those jurisdictions.  These items tend to be relatively stable from year to year.  Conversely, discrete items are things that may not be as consistent from year to year.

While the U.S. statutory federal income tax rate was 35% in both years, our worldwide effective income tax rate on continuing operations was 25% in 2016, compared to 27% for 2015.  In both years our tax rate benefited from earnings in non-U.S. jurisdictions, which reduced our effective tax rate by 6% in each year.  In addition, the 2016 tax rate benefited by 3% related to the tax effects of stock-based compensation deductions in the year, and 1% (net) from other items.  The 2015 tax rate benefited by 1% related to the reduction of a tax accrual for Chinese earnings that we decided to reinvest within China to acquire the remaining interest in a joint venture and 1% (net) from other items.

In the first quarter of 2016 we adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting (see Note A to the Consolidated Financial Statements on page 79).  This ASU provides that the tax effects of stock-based awards must be treated as discrete items affecting the tax rate in the interim reporting period in which the tax deductions occur.  Many variables (such as timing of award settlements or expirations, changes in stock price over time, ultimate payout levels for awards with performance contingencies, shares cancelled before vesting, and the tax rules in effect at the time of settlement) will impact both the timing and the amount of the tax deductions.  Thus, this ASU is likely to add more volatility to the effective tax rate of companies such as Leggett that use stock-based compensation plans.

 

35



Segment Results
 
In the following section we discuss 2016 sales and EBIT (earnings before interest and taxes) for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in Note E to the Consolidated Financial Statements on page 86.
(Dollar amounts in millions)
2016
 
2015
 
Change in Sales
 
% Change
Same Location
Sales (1)
 
 
$
 
%
 
Sales
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
1,937

 
$
2,064

 
$
(127
)
 
(6
)%
 
(6
)%
 
 
Commercial Products
630

 
623

 
7

 
1
 %
 
(1
)%
 
 
Industrial Materials
583

 
777

 
(194
)
 
(25
)%
 
(12
)%
 
 
Specialized Products
1,012

 
955

 
57

 
6
 %
 
7
 %
 
 
Total Sales
4,162

 
4,419

 
(257
)
 
 
 
 
 
 
Intersegment sales elimination
(412
)
 
(502
)
 
90

 
 
 
 
 
 
Trade sales
$
3,750

 
$
3,917

 
$
(167
)
 
(4
)%
 
(1
)%
 
 
 
2016
 
2015
 
Change in EBIT
 
EBIT Margins (2)
$
 
%
 
2016
 
2015
EBIT
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
213

 
$
205

 
$
8

 
4
 %
 
11.0
 %
 
9.9
%
Commercial Products
53

 
42

 
11

 
24
 %
 
8.3
 %
 
6.8
%
Industrial Materials
75

 
51

 
24

 
48
 %
 
12.8
 %
 
6.5
%
Specialized Products
192

 
156

 
36

 
23
 %
 
19.0
 %
 
16.3
%
Intersegment eliminations & other

 
(13
)
 
13

 
 
 
 
 
 
Change in LIFO reserve
(11
)
 
46

 
(57
)
 
 
 
 
 
 
Total EBIT
$
522

 
$
487

 
$
35

 
7
 %
 
13.9
 %
 
12.4
%
______________________________

(1)
This is the change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we owned one year earlier.
(2)
Segment margins are calculated on total sales. Overall company margin is calculated on trade sales.

Residential Furnishings
 
Residential Furnishings sales decreased 6% in 2016 from a combination of lower unit volume in several product categories, lower pass-through sales of adjustable beds (which originate in Commercial Products but are occasionally distributed through Residential Furnishings), raw material-related price decreases, and currency impact. Within our U.S. Spring business, total innerspring units decreased 6%, but growth continued in ComfortCore® (our pocketed coil innersprings), with unit volume in that category up 4%. Volume also increased in our European Spring business but declined in Home Furniture.

EBIT and EBIT margin increased in 2016 due to a litigation gain ($7 million) and non-recurrence of last year's foam litigation expense ($5 million). Operationally, the impact on EBIT from lower unit volume was partially offset by pricing discipline.
 




36


Commercial Products
 
Sales in Commercial Products increased slightly from a Work Furniture acquisition completed in March 2015. Same location sales were down slightly for the year. Adjustable Bed unit volume increased 1% (versus strong growth in each of the prior two years) as we began ramping up new programs selling directly to major bedding retailers and transitioning away from former programs with bedding manufacturers. The decline in these bedding customer programs also caused the decrease in "pass-through sales of adjustable beds" discussed in the Residential Furnishings segment above.

EBIT and EBIT margin increased in 2016, primarily from operational improvements, gains from building sales of $3 million, and a favorable sales mix. 
 
Industrial Materials
 
Same location sales in Industrial Materials were down 12% from steel-related price decreases and lower unit volume in Drawn Wire. Total sales in the segment declined 25%, also reflecting the divestitures of the Steel Tubing business in late 2015 and two small Wire Products operations in 2016.
 
EBIT and EBIT margin increased due to a divestiture gain ($16 million) from the sale of one of the Wire Products operations, and the non-recurrence of the prior year's impairment charge ($6 million) and divestiture loss ($3 million), both associated with the sale of the Steel Tubing business. The impact during the year from operational improvements and lower unit volume essentially offset.
  
Specialized Products
 
In Specialized Products, sales increased 6% in 2016, with volume gains in Automotive and a small Aerospace acquisition completed early in the year, partially offset by divestitures of two small CVP operations, and currency impact. 

EBIT and EBIT margin increased from higher sales, a divestiture gain ($11 million) related to the sale of a CVP operation, and currency impact. These items were partially offset by goodwill impairment of $4 million.

We have agreed to sell real estate associated with the remaining CVP business and expect to realize a gain on this transaction in the first half of 2017. This property reached held for sale status in 2016, causing the fair value of the CVP reporting unit to fall below its carrying value, and triggering the $4 million impairment charge.

Results from Discontinued Operations
 
Full year earnings from discontinued operations, net of tax, increased to $19 million from $1 million in 2015. This increase is primarily due to a litigation gain ($20 million) related to our former Prime Foam business. For further information about discontinued operations, see Note B to the Consolidated Financial Statements on page 81.

 


37


RESULTS OF OPERATIONS—2015 vs. 2014
 
Sales from continuing operations grew 4% in 2015, with higher unit volume and acquisitions partially offset by raw material-related price deflation and currency impact. Nearly all of our businesses experienced unit volume growth during the year from a combination of new program awards, market share gains, and broadly improving end market demand.

Full year earnings from continuing operations increased significantly reflecting several factors, including the benefit from higher sales, pricing discipline, and lower foam litigation expense. Further details about our consolidated and segment results are discussed below.
 
Consolidated Results (continuing operations)
 
The following table shows the changes in sales and earnings from continuing operations during 2015, and identifies the major factors contributing to the changes.
 
(Dollar amounts in millions, except per share data)
Amount
 
%
Net sales (continuing operations):
 
 
 
Year ended December 31, 2014
$
3,782

 
 
   Approximate volume gains
196

 
6
 %
   Approximate raw material-related deflation and currency impact
(183
)
 
(5
)%
Same location sales
13

 
1
 %
Acquisition sales growth
123

 
3
 %
Divestitures
(1
)
 
 %
Year ended December 31, 2015
$
3,917

 
4
 %
Earnings from continuing operations:
 
 
 
(Dollar amounts, net of tax)
 
 
 
Year ended December 31, 2014
$
225

 
 
Lower foam litigation expense
30

 
 
Lump-sum pension buyout
(8
)
 
 
Other, including benefit from higher sales and pricing discipline
81

 
 
Year ended December 31, 2015
$
328

 
 
Earnings Per Diluted Share (continuing operations)—2014
$
1.55

 
 
Earnings Per Diluted Share (continuing operations)—2015
$
2.27

 
 
 

Same location sales (from continuing operations) grew 1%, with volume gains in Automotive, in most of our Residential Furnishings businesses, and in Adjustable Bed, largely offset by raw material-related price deflation and currency impact. 

Full year 2015 sales growth also benefited from the July 2014 acquisition of Tempur Sealy's three innerspring component production facilities, the March 2015 acquisition of a Work Furniture business, and other smaller acquisitions. In late 2015, we sold our Steel Tubing business (which had total annual sales of approximately $100 million), and a small CVP operation. These divestitures did not significantly impact the comparison of 2015's sales to the prior year.

Earnings from continuing operations increased significantly in 2015, primarily from higher sales and pricing discipline. As indicated in the table above, earnings also benefited from the reduction in foam litigation expense ($3

38


million in 2015 versus $33 million in 2014). Partially offsetting these improvements was a one-time lump-sum pension buyout funded from pension plan assets late in 2015.

LIFO Impact
 
All of our segments use the first-in, first-out (FIFO) method for valuing inventory. In our consolidated financials, an adjustment is made at the corporate level (i.e., outside the segments) to convert about 50% of our inventories to the last-in, first-out (LIFO) method. These are primarily our domestic, steel-related inventories. In 2014, steel costs were relatively stable and we ended the year with LIFO expense of $1 million. Significant deflation in steel costs during 2015, particularly in the fourth quarter, resulted in a full-year pretax LIFO benefit of $46 million.
 
For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 75.
 
Interest and Income Taxes
 
Net interest expense in 2015 increased slightly versus 2014.
 
Our tax rate is determined by a combination of items, some recurring and some discrete.  Recurring items include things like income earned in various tax jurisdictions, and differences in tax rates in those jurisdictions.  These items tend to be relatively stable from year to year.  Conversely, discrete items are things that may not be as consistent from year to year.

While the U.S. statutory federal income tax rate was 35% in both years, our worldwide effective income tax rate on continuing operations was 27% in 2015, compared to 24% for 2014.  In both years our tax rate benefited from earnings in non-U.S. jurisdictions, which reduced our effective tax rate by 6% in 2015, and 7% in 2014.  In addition, the 2015 tax rate benefited by 1% related to the reduction of a tax accrual for Chinese earnings that we decided to reinvest within China to acquire the remaining interest in a joint venture, and 1% (net) from other items.  The 2014 tax rate benefited by 3% related to additional Domestic Production Activities Deductions claimed for the current and prior years, and 1% (net) from other items.

 

39



Segment Results (continuing operations)
 
In the following section we discuss 2015 sales and EBIT from continuing operations for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in Note E to the Consolidated Financial Statements on page 86.
(Dollar amounts in millions)
2015
 
2014
 
Change in Sales
 
% Change
Same Location
Sales (1)
 
 
$
 
%
 
Sales (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
2,064

 
$
1,958

 
$
106

 
5
 %
 
1
 %
 
 
Commercial Products
623

 
516

 
107

 
21
 %
 
12
 %
 
 
Industrial Materials
777

 
813

 
(36
)
 
(4
)%
 
(4
)%
 
 
Specialized Products
955

 
914

 
41

 
4
 %
 
4
 %
 
 
Total Sales
4,419

 
4,201

 
218

 
 
 
 
 
 
Intersegment sales elimination
(502
)
 
(419
)
 
(83
)
 
 
 
 
 
 
Trade sales
$
3,917

 
$
3,782

 
$
135

 
4
 %
 
1
 %
 
 
 
2015
 
2014
 
Change in EBIT
 
EBIT Margins (2)
$
 
%
 
2015
 
2014
EBIT (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
205

 
$
136

 
$
69

 
51
 %
 
9.9
 %
 
6.9
%
Commercial Products
42

 
31

 
11

 
35
 %
 
6.8
 %
 
6.0
%
Industrial Materials
51

 
43

 
8

 
19
 %
 
6.5
 %
 
5.3
%
Specialized Products
156

 
126

 
30

 
24
 %
 
16.3
 %
 
13.7
%
Intersegment eliminations & other
(13
)
 
(3
)
 
(10
)
 
 
 
 
 
 
Change in LIFO reserve
46

 
(1
)
 
47

 
 
 
 
 
 
Total EBIT
$
487

 
$
332

 
$
155

 
47
 %
 
12.4
 %
 
8.8
%
______________________________

(1)
This is the change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we owned one year earlier.
(2)
Segment margins are calculated on total sales. Overall company margin is calculated on trade sales.

Residential Furnishings
 
Residential Furnishings sales increased 5% in 2015, with unit volume growth in most product categories and acquisitions partially offset by raw material-related price decreases and currency impact. Volume grew in Bedding, Home Furniture, Geo Components, and Fabric Converting. Within our U.S. Spring business, we again experienced significant growth in ComfortCore® (our pocketed coil innersprings), with unit volume in that product category up 51%. We expect strong growth in this category to continue from our introduction of new ComfortCore® products and our customers' growing use of these components in their product lines.

EBIT and EBIT margin increased in 2015 due to higher sales, pricing discipline, and significantly lower foam litigation expense ($48 million).
 

40


Commercial Products
 
Sales in Commercial Products increased 21% in 2015, with same location sales up 12%. Continued strong demand in the Adjustable Bed and Fashion Bed businesses drove this improvement. Unit volume in the Adjustable Bed business increased 51% from a combination of new programs and strength in ongoing customer programs. In our Work Furniture business, we acquired a European private-label manufacturer of high-end upholstered furniture. Acquisitions contributed 9% to the segment's sales growth during the year.

EBIT and EBIT margin increased in 2015, primarily from higher sales and improved operating efficiency. 
 
Industrial Materials
 
Sales in the segment decreased 4% in 2015, with higher unit volume in Drawn Wire more than offset by steel-related price decreases and reduced rod mill trade sales.
 
EBIT and EBIT margin improved versus 2014, with cost reductions more than offsetting a $6 million impairment charge and a $3 million divestiture loss, both of which related to the sale of our Steel Tubing business late in the year.
  
Specialized Products
 
In Specialized Products, sales increased 4% in 2015, with volume gains in Automotive and Machinery partially offset by currency impact. Our Automotive business continued to experience strong growth from a combination of factors, including expanded component content (via upgraded features), participation in new vehicle platforms, and continued industry growth in each of the major markets. 

EBIT and EBIT margin increased primarily from higher sales.

Results from Discontinued Operations
 
Full year earnings from discontinued operations, net of tax, increased to $1 million from a loss of $124 million in 2014. This significant increase is primarily due to the non-recurrence of a goodwill impairment charge of $93 million related to the Store Fixtures business, and foam litigation accruals of $22 million. The divestiture of the majority of the Store Fixtures business late in 2014 resulted in an additional loss of $5 million. Two remaining Store Fixtures facilities were sold in 2015 and resulted in a gain of $3 million.

2014 Goodwill Impairment of Store Fixtures Group

A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. We review our reporting units for potential goodwill impairment in June of each year, and more often if an event or circumstance occurs making it likely that impairment exists. In 2014, we concluded that an impairment charge of $108 million ($93 million after tax) was required for our Store Fixtures group. This non-cash impairment charge reflected the complete write-off of the goodwill associated with the Store Fixtures group. For more information, see Note C to the Consolidated Financial Statements on page 83.

For further information about discontinued operations, see Note B to the Consolidated Financial Statements on page 81.


41


LIQUIDITY AND CAPITALIZATION
 
Cash from operations was very strong in 2016. In each year for over 25 years, our operations have provided more than enough cash to fund both capital expenditures and dividend payments. We expect this to again be the case in 2017.

We continue to invest to support businesses and product categories that are growing. This resulted in higher capital expenditures in 2016, and we expect further increases in 2017.

We raised the quarterly dividend by 6% (the largest increase since 2007) and extended our record of consecutive annual increases to 45 years. We also bought back 4.5 million shares of our stock during the year.

In May 2016, we extended the term of our revolving credit facility to May 2021 and expanded the borrowing capacity from $600 million to $750 million and correspondingly increased our commercial paper program. We ended 2016 with net debt to net capital comfortably within our long-standing targeted range of 30-40%, as discussed on page 49.
 
Cash from Operations
 
Cash from operations is our primary source of funds. Earnings and changes in working capital levels are the two factors that generally have the greatest impact on our cash from operations.
        
leg201610k_chart-49587.jpg

Cash from operations increased significantly in 2016. Payments we made to settle foam litigation in 2015 (totaling $82 million) did not recur, and in 2016 we received litigation settlement proceeds (of $25 million net of taxes paid) related to the antitrust claims discussed on page 33. Cash from operations also reflected higher earnings and lower working capital. The reduction in working capital was driven primarily by changes in accounts payable that were largely due to steel price inflation in late 2016 (versus deflation in late 2015).

Cash from operations should exceed $450 million in 2017, with working capital increases attributable to sales growth and inflation expected to be uses of cash.

42



We closely monitor our working capital levels, and we ended 2016 with adjusted working capital at 9.4% of annualized sales1. The table below explains this non-GAAP calculation. We eliminate cash and current debt maturities from working capital to monitor our operating efficiency and performance related to trade receivables, total inventories, and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period. As discussed on page 50, a substantial amount of our cash is held by international operations and may not be immediately available to reduce debt on a dollar for dollar basis.

(Dollar amounts in millions)
2016
 
2015
Current assets
$
1,325

 
$
1,311

Current liabilities
(707
)
 
(701
)
Working capital
618

 
610

Cash and cash equivalents
(282
)
 
(253
)
Current debt maturities
4

 
3

Adjusted working capital
$
340

 
$
360

Annualized sales 1
$
3,616

 
$
3,780

Working capital as a percent of annualized sales
17.1
%
 
16.1
%
Adjusted working capital as a percent of annualized sales
9.4
%
 
9.5
%
___________________________________________
1. 
Annualized sales equal 4th quarter sales ($904 million in 2016 and $945 million in 2015) multiplied by 4. We believe measuring our working capital against this sales metric is more useful, since efficient management of working capital includes adjusting those net asset levels to reflect current business volume.


Three Primary Components of our Working Capital

 
Amount (in millions)
 
Days
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Trade Receivables
$
451

 
$
449

 
$
469

DSO 1
44
 
43
 
44
Inventories
$
520

 
$
505

 
$
481

DIO 2
66
 
60
 
59
 
 
 
 
 


 
 
 
 
 
 
Accounts Payable
$
351

 
$
307

 
$
370

DPO 3
42
 
41
 
43

Calculations of days are as follows:
1.
Days sales outstanding: ((beginning of year trade receivables + end of year trade receivables)÷2) ÷ (net trade sales ÷ number of days in the year).
2.
Days inventory on hand: ((beginning of year trade inventory + end of year inventory)÷2) ÷ (cost of goods sold ÷ number of days in the year).
3.
Days payables outstanding: ((beginning of year accounts payable + end of year accounts payable)÷2) ÷ (cost of goods sold ÷ number of days in the year).

43



Trade Receivables - Our net trade receivables and our days sales outstanding at December 31, 2016 did not meaningfully change compared to the prior year. We continue to look for ways to improve speed of customer payments, including third party programs with early payment incentives in certain circumstances. We obtain credit applications, credit reports, bank and trade references, and periodic financial statements from our customers to establish credit limits and terms. In cases where a customer’s payment performance or financial condition begins to deteriorate, we tighten our credit limits and terms and make appropriate reserves. Our provision for losses on accounts receivable has averaged $3 million and our allowance for bad debt as a percentage of our net receivables has averaged 2% for the last three years.

Inventories - The increase in inventories of $15 million at December 31, 2016 compared to the prior year primarily reflects higher levels necessary to support sales growth and meet customer delivery requirements, as well as opportunistic purchases of raw materials,

Days inventory on hand of 66 days at the end of 2016 is within a reasonable historical range, and we believe the increase compared to the prior year does not indicate a greater risk of inventory obsolescence. We continuously monitor our slow moving and potentially obsolete inventory through reports on inventory quantities compared to usage within the previous 120 days. We also utilize cycle counting programs and complete physical counts of our inventory. When potential inventory obsolescence is indicated by these controls, we will take charges for write-downs to maintain an adequate level of reserves. We have averaged inventory obsolescence charges of $10 million annually for the last three years. Our reserve balances (not including our LIFO reserves) as a percentage of our year-end inventory were 6.4% at the end of 2016, which is consistent with our historical average.

Accounts Payable - The increase in accounts payables of $44 million at December 31, 2016 compared to the prior year is primarily due to steel price volatility experienced in both 2016 (increasing prices, particularly toward the end of the year) and 2015 (decreasing prices, particularly toward the end of the year). Steel is our principal raw material. Our payment terms did not change meaningfully in 2016 or 2015. We continue to optimize payment terms through our significant purchasing power and also utilize third party services that allow flexible payment options.
 






44


Uses of Cash
 
Finance Capital Requirements
 
Cash is readily available to fund growth.

leg201610k_chart-51049.jpgleg201610k_chart-52239.jpg

In certain of our businesses and product lines we have minimal excess capacity, and we are investing to support continued growth. In Automotive, we are expanding capacity to support new programs that will begin production over the next few years. In Bedding, we are investing in equipment to support ongoing growth in ComfortCore® innersprings and newer product features.

We will continue to make investments to support expansion in businesses and product lines where sales are growing, and for efficiency improvement and maintenance. We expect capital expenditures to approximate $150 million in 2017. Our employee incentive plans emphasize returns on capital, which include net fixed assets and working capital. This emphasis focuses our management on asset utilization and helps ensure that we are investing additional capital dollars where attractive return potential exists.

In some of our businesses, we have capacity to accommodate additional volume. For each $100 million of sales from incremental unit volume produced utilizing spare capacity, we expect to generate approximately $25 million to $35 million of additional pre-tax earnings. The earnings and margin improvement that we have realized over the past few years reflects, in part, higher utilization in our businesses from market share gains and higher market demand.

Our long-term 6-9% annual growth objective envisions periodic acquisitions. We are seeking acquisitions primarily within our Grow business units, and we are looking for opportunities to enter new growth markets (carefully screened for sustainable competitive advantage).

In 2014, we purchased Tempur Sealy's three U.S. innerspring production facilities for $45 million. We also acquired a German designer and distributor of high-end, European-style motion components for residential furniture.


45


In 2015, we acquired a 70% interest in a European private-label manufacturer of high-end upholstered furniture for an initial cash outlay of $12 million and will acquire the remaining 30% in two equal parts, in 2018 and 2020 for a currently estimated amount of $11 million. This business is complementary to our North American private-label operation and allows us to support our Work Furniture customers as they expand globally.

In 2016, we acquired three small businesses for a total purchase price of $30 million. The first, a U.S. manufacturer of aerospace tube assemblies, expands our tube forming and fabrication capabilities and adds precision machining to our aerospace platform. The second is a distributor of geosynthetic products, and the third, a South African producer of mattress innersprings. In addition to these acquisitions, we purchased the remaining interest in an Automotive joint venture in China for $35 million.

Additional details about acquisitions can be found in Note Q to the Consolidated Financial Statements on page 111.
 
Pay Dividends
    
 leg201610k_chart-53844.jpgleg201610k_chart-54928.jpg

Increasing the dividend remains a high priority. In 2016, we increased the quarterly dividend by $.02, or 6%, to $.34 per share, our largest quarterly increase since 2007. This extended our record of consecutive annual dividend increases to 45 years. Our targeted dividend payout ratio is approximately 50-60% of continuing operations adjusted EPS (which would exclude special items such as divestiture gains, impairment charges, litigation accruals and settlement proceeds). We expect future dividend growth to approximate earnings growth.




46


Repurchase Stock

            leg201610k_chart-55959.jpg

As shown in the chart above, share repurchases were significant in each of the last three years. During that time frame, we repurchased a total of 14.3 million shares of our stock and issued 8.4 million shares (through employee benefit plans and stock option exercises), reducing outstanding shares by 4%. In 2016, we repurchased 4.5 million shares (at an average price of $46.52) and issued 2.4 million shares.
 
Our top priorities for uses of cash are organic growth (via capital expenditures), dividends, and strategic acquisitions. After funding those priorities, to the extent there is remaining cash available, we generally intend to repurchase stock rather than repay debt early or stockpile cash. We have been authorized by the Board to repurchase up to 10 million shares each year, but we have established no specific repurchase commitment or timetable.


47


Capitalization
 
This table presents key debt and capitalization statistics at the end of the three most recent years.
 
(Dollar amounts in millions)
2016
 
2015
 
2014
Long-term debt outstanding:
 
 
 
 
 
Scheduled maturities
$
760

 
$
761

 
$
762

Average interest rates (1)
3.7
%
 
3.7
%
 
4.6
%
Average maturities in years (1)
5.8

 
6.8

 
6.4

Revolving credit/commercial paper
196

 
181

 

Average interest rate on year-end balance
1.0
%
 
.5
%
 
%
Average interest rate during the year
.8
%
 
.5
%
 
.2
%
Total long-term debt
956

 
942

 
762

Deferred income taxes and other liabilities
227

 
223

 
227

Equity
1,094

 
1,098

 
1,155

Total capitalization
$
2,277

 
$
2,263

 
$
2,144

Unused committed credit: (2)
 
 
 
 
 
Long-term
$
554

 
$
419

 
$
600

Short-term

 

 

Total unused committed credit
$
554

 
$
419

 
$
600

Current maturities of long-term debt
$
4

 
$
3