Leggett & Platt (LEG)

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In addition to challenges associated with restructuring, Leggett & Platt faced slowed growth in consumer spending on furniture, which was only 2.9% in 2007 and is expected to fall to 0.4% in 2008.^[4] As a result of this, revenue to Leggett & Platt's Residential Furnishings decreased 8% in 2007.^[5] Also, Leggett & Platt was forced to deal with the rising cost of cold rolled steel coil, which increased almost 15% in 2007.^[6] The increase in steel prices was partially responsible for the decrease in Leggett & Platt's operating margin from 9% in 2006 to 4% in 2007.^[3] Additionally, a decrease in the number of supermarkets from 43,686 in 2005^[7] to 34,967 in 2007^[8] resulted in decreased demand for the company's retail fixtures. This resulted in a 6% decrease in Leggett & Platt's Commercial Fixturing & Components segment between 2005 and 2007.^[5] Leggett & Platt competes with companies like Genuine Parts Company (GPC) and CompX International (CIX) as well as smaller private companies and Asian manufacturers.

[edit] Business Overview

In 2007, Leggett & Platt introduced a new plan to sell its least profitable businesses and focus on developing its more profitable one.^[2] The new plan was introduced in response to concerns about the company's operating margins which shrank from nearly 9% in 2006 to 4% in 2007.^[3] As a part of their new business plan, Leggett & Platt finished the sale of its Aluminum Products segment to Kenner & Co. in July 2008.^[9] Leggett & Platt plans to sell the rest of its underperforming business segments by the end of 2008.^[2]

[edit] Business Segments

LEG 2007 Revenue by Segment^[5]

• Residential Furnishings (53% of revenue) designs and manufactures innersprings for mattresses, wire products for mattress bases, adjustable electric beds and components for residential furniture as well as fabrics and foams used in furniture construction and carpet underlay.^[10] Leggett & Platt produces its Residential Furnishings products in large volume to help them gain an economy of scale.^[10] This lets the segment to sell its products to its customers (mattress and furniture manufactures) for less than it would cost Residential Furnishings customers to manufacture the products themselves.^[10]
• Commercial Fixturing & Components (19% of revenue) designs and manufactures standardized shelving display units for retail chains and specialty shops such as grocery stores as well as office furniture components.^[11] Like the company's Residential Furnishings segment, Commercial Fixturing & Components achieves economies of scale by producing large quantities of their products.^[11] This lets Commercial Fixturing & Components to offer their products at competitive prices.^[11] Commercial Fixturing & Components sells its products to retailers, grocery stores and discount chains.^[11]
• Industrial Materials manufactures wire products such as steel rods, drawn wires, springs and other fabricated wire products as well as steel tubing and fabricated tubing products.^[12] Leggett & Platt uses about a quarter of their industrial materials output to produce its other products.^[12] The rest the Industrial Materials segments output is sold to bedding manufacturers, automobile seat manufacturers and other customers.^[12]
• Specialized Products manufactures automobile components such as lumbar support mechanisms, seat frames, shift cables, accelerator cables and cruise control cables.^[13] The segment also manufactures machines for mattress factories and service van interiors.^[13] Specialized Products sells its products to automobile seating manufacturers, mattress manufacturers and telecom and cable companies.^[13]

[edit] Business Financials

LEG 2007 Revenues by Geography^[5]

Leggett & Platt Total Revenues, Operating Income and Net Income^[3][5] ($ in millions)

[edit] Key Trends and Forces

[edit] Demand for furniture affects the demand for Leggett & Platt's furniture components

During 2007, consumer spending on furniture grew only 2.9%.^[4] In 2008 consumer spending on furniture is expected to grow only 0.4%.^[4] As a result of slowing demand for furniture revenue to Leggett & Platt's Residential Furnishings decreased 8% from $2,502 million in 2006 to $2,295 million in 2007.^[5] In general, when spending on furniture decreases, furniture manufacturers decrease production and order less of Leggett & Platt's furniture components. This results in decreased revenue for the company's Residential Furnishings segment. On the other hand, when spending on furniture increases, so does Leggett & Platt's Residential Furnishings revenue.

^[6]

[edit] Rising raw materials costs compress Leggett & Platt's operating margin

Because it is difficult for Leggett & Platt to pass increases in the cost of raw materials on to customers as price increases, rises in the cost of raw materials often hurt Leggett & Platt's profitability.^[14] Between January 2007 and December 2007 the price of hot rolled steel coil rose from $549 per metric tonne to $630 per metric tonne. During the same period the price of hot rolled steel plate rose from $747 per metric tonne to $837 per metric tonne.^[6] Partially as a result of the increasing price of steel, Leggett and Platt's operating margin decreased from nearly 9% in 2006 to 4% in 2007.^[3]

[edit] Fewer supermarkets result in less demand for Leggett & Platt's Commercial Fixturing & Components products

In 2005, there were 43,686 supermarkets in operation in the United States.^[7] According to the Food Marketing Institute, the number of supermarkets in the U.S. fell to 34,967 in 2007.^[8] As a result of the decrease in the number of supermarkets, Leggett & Platt's Commercial Fixturing & Components decreased from $870 million in 2005 to $820 million in 2007.^[5] In general, when the number of supermarkets decreases, there is less demand for shelves and other products produced by Leggett & Platt's Commercial Fixturing & Components segment. This results in decreased revenues for Commercial Fixturing & Components. On the other hand, when more supermarkets are built, there is more demand for the segment's products resulting in increased revenues.

[edit] Key Competitors

• Genuine Parts Company (GPC) distributes autoparts, industrial parts such as bearings, electrical materials and office supplies. The company's office supplies include office furniture and office furniture components. Genuine Parts' office furniture and office furniture components compete with those produced by Leggett & Platt's Commerical Fixturing & Components segment.^[15]
• CompX International (CIX) manufactures locking mechanisms, instruments for boats and furniture components. The company's furniture components compete with those produced by Leggett & Platt's Commerical Fixturing & Components and Residential Furnishings segments.^[16]
• Most of Leggett & Platt's competition comes from private companies such as Knape & Vogt Manufacturing.^[17] The company also faces stiff competition from Asian manufacturers of mattress springs, wire and other furniture components.^[18]

Leggett & Platt and Key Competitors 2007 ($ in millions)

[edit] References

1. ↑ LEG 2007 10-K Item 1: Business, pg 3
2. ↑ ^{2.0 2.1 2.2} LEG 2007 10-K Item 1: The 2007 Strategic Plan, pgs 3-4
3. ↑ ^{3.0 3.1 3.2 3.3 3.4} LEG 2007 10-K Item 15: Consolidated Statements of Operations, pg 56
4. ↑ ^{4.0 4.1 4.2} Furniture Today: Furniture spending expected to grow 0.4% this year
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6} LEG 2007 10-K Item 15: Segment Information, pgs 93-95
6. ↑ ^{6.0 6.1 6.2} MEPS STEEL PRODUCT PRICE LEVELS ACROSS 2007 - 2008
7. ↑ ^{7.0 7.1} US Census Bureau: US, all industries
8. ↑ ^{8.0 8.1} Food Marketing Institute: Industry Overview 2007
9. ↑ CNN Money: Kenner & Co. buys Leggett & Platt's aluminum unit
10. ↑ ^{10.0 10.1 10.2} LEG 2007 10-K Item 1: Residential Furnishings, pgs 4-5
11. ↑ ^{11.0 11.1 11.2 11.3} LEG 2007 10-K Item 1: Commercial Fixturing & Components Segment
12. ↑ ^{12.0 12.1 12.2} LEG 2007 10-K Item 1: Industrial Materials Segment
13. ↑ ^{13.0 13.1 13.2} LEG 2007 10-K Item 1: Specialized Products Segment, pg 7
14. ↑ LEG 2007 10-K Item 1a: Costs of raw materials could adversely affect our operating results
15. ↑ Google Finance: GPC
16. ↑ Google Finance: CIX
17. ↑ Google Finance: Knape & Vogt Manufacturing
18. ↑ LEG 2007 10-K Item 1: Competition, pg 13