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
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
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
PART
I
Commercial
Products Segment
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
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
PART
I
Specialized
Products Segment
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
PART
I
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
PART
I
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.
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
PART
I
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
PART
I
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.
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
PART
I
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.
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
PART
I
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
PART
I
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
PART
I
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
PART
I
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
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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
PART
II
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.
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
PART
II
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
PART
II
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
PART
II
Uses of
Cash
Finance
Capital Requirements
Cash is readily available to fund
growth.
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
PART
II
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
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
PART
II
Repurchase
Stock
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
PART
II
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 |
|
$ |
202 |
| ||
|
Cash and cash
equivalents |
$ |
||||||||||