Leggett & Platt 10-K 2010
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2009
For the transition period from to .
Commission File Number 001-07845
LEGGETT & PLATT, INCORPORATED
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (417) 358-8131
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x 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 x
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 x 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 ¨ 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 registrants 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. ¨
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
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, 2009 was approximately $2,298,000,000.
There were 148,455,466 shares of the Registrants common stock outstanding as of February 12, 2010.
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 Companys definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 2010.
LEGGETT & PLATT, INCORPORATEDFORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
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; 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, some of these risks and uncertainties include the following:
Item 1. Business.
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, retail stores and automobiles. As discussed below, our operations are organized into 19 business units, which are divided into 10 groups under our four segments: Residential Furnishings; Commercial Fixturing & Components; Industrial Materials; and Specialized Products. We have also classified certain businesses as discontinued operations.
Overview of Our Segments
Residential Furnishings Segment
Our Residential Furnishings segment began with an 1885 patent of the steel coil bedspring. 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.
Long production runs, internal production of key raw materials, and numerous manufacturing and assembly locations allow us to supply many customers with components at a lower cost than they can produce themselves. In addition to cost savings, sourcing components from us allows our customers to focus on designing, merchandising and marketing their products.
Products manufactured or distributed by our Residential Furnishings groups include:
Fabric & Carpet Underlay Group
Most of our Residential Furnishings customers are manufacturers of finished bedding products (mattresses and foundations) or upholstered furniture for residential use. We also sell many products, including ornamental beds, bed frames, adjustable beds, carpet underlay, and top-of-bed accessories, directly to retailers and distributors. We sell geo components products primarily to dealers, contractors, landscapers, road construction companies and government agencies.
Commercial Fixturing & Components Segment
Our Fixture & Display group designs, produces, installs and manages our customers store fixtures and point-of-purchase projects. Our Office Furniture Components group designs, manufactures, and distributes a wide range of engineered components targeted for the office seating market.
Products manufactured or distributed by our Commercial Fixturing & Components groups include:
Fixture & Display Group
Office Furniture Components Group
Customers of the Commercial Fixturing & Components segment include:
Industrial Materials Segment
We believe that the quality of the Industrial Materials segments products and service, together with low cost, have made us North Americas leading supplier of drawn steel wire and a major producer of welded steel tubing. 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 six wire mills that supply virtually all the wire consumed by our other domestic businesses. Our Tubing group operates two major plants that also supply nearly all of our internal needs for welded steel tubing. In addition to supporting our internal requirements, the Industrial Materials segment supplies many external customers with wire and tubing products.
Products manufactured or distributed by our Industrial Materials groups include:
We use about half of our wire output and about one-quarter of our welded steel tubing output to manufacture our own products. For example, we use our wire and steel tubing to make:
The Industrial Materials segment also has a diverse group of external customers, including:
Specialized Products Segment
Our Specialized Products segment designs, produces and sells components primarily for automotive seating, specialized machinery and equipment, 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 manufactured or distributed by our Specialized Products groups include:
Commercial Vehicle Products Group
Our primary customers for the Specialized Products segment include:
In November 2007 we outlined significant changes to the Companys strategy. We adopted a new primary financial metric, Total Shareholder Return, (TSR = (Change in Stock Price + Dividends Received) / Beginning Stock Price), changed the priorities for use of cash, adopted role-based portfolio management and implemented more rigorous strategic planning. Our goals over several years, in sequential order, have been and continue to be to: i) divest low performing businesses, ii) return more cash to investors, iii) improve margins and returns on remaining assets, and iv) then begin to carefully and conservatively grow the Company (at 4-5% of annual revenue).
We spent 2008 concentrating primarily on the divestitures, which are largely completed. In 2009 we focused on, and improved, margins; that focus will continue in 2010. Disciplined growth will be a priority in future years. Consistent with our new objectives, weve significantly increased dividends and repurchased our stock.
TSR is now the primary financial metric we are using to gauge success of our strategy. Our goal is to achieve TSR in the top 1/3 of the S&P 500, which we believe, in the long term, will require average TSR of 12-15% per year. For the two-year period ended December 31, 2009, our TSR performance places us within the top 4% of the S&P 500.
Consistent with this change, we modified some of our incentive plans to emphasize the importance of TSR. Beginning in January 2008, we introduced a new performance incentive for senior executives based solely on 3-year TSR relative to peers.
We now employ four key levers to improve TSR: i) profitable revenue growth, ii) margin improvement, iii) dividends, and iv) stock repurchases. Historically, we focused primarily on the revenue growth lever. We expect that a more balanced approach will generate consistently higher TSR.
More Cash to Shareholders
In 2007 we announced our intent to: i) generate more cash by improving returns, divesting some assets, and more diligently managing working capital, ii) reduce the amount of cash used for acquisitions and capital spending, and iii) return more cash to shareholders in the form of dividends and stock repurchases.
We generated $1 billion of cash flow from operations in 2008 and 2009 (combined), and we raised over $420 million (after tax) from divestiture proceeds. Furthermore, as anticipated, since 2007 weve reduced combined annual spending for acquisitions and capital expenditures by over 50% (to about $86 million in 2009).
As a result, we were able to raise quarterly dividends, from $.18 (3Q 2007) to $.26 currently. Weve also spent nearly $500 million to repurchase about 27 million shares during 2008 and 2009, which reduced outstanding shares by approximately 12%.
After significant study, in late 2007 we decided to narrow our focus and eliminate approximately 20% of our revenue base. During 2008 we divested 5 of the 7 targeted business units, including the entire Aluminum Products segment. A sixth unit was sold during 2009, and we expect to divest the seventh in 2010.
In late 2008 we concluded that the Store Fixtures business unit, as then structured, was not capable of meeting our return requirements. Accordingly, we narrowed the scope of the Store Fixtures unit to concentrate primarily on the metals part of its industry, in alignment with our core competencies. We also eliminated production facilities, effected
changes to senior management, reduced overhead, and purged accounts with unacceptable margins. This smaller, more focused business unit is now a Core business (as described below).
For information on asset impairments and restructuring costs associated with our strategic direction see the discussion of Asset Impairments and Restructuring-related Charges in Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations on page 37, and Note C on page 85 and Note D on page 89 in the Notes to Consolidated Financial Statements.
We now manage our business units as a portfolio, with different roles (Grow, Core, Fix, Divest) for each business unit based upon competitive advantages, strategic position, and financial health. During 2008 we implemented a rigorous strategic planning process, in part to continually assess each business units portfolio role. Historically, we managed all businesses fairly uniformly, with each awarded capital and expected to grow significantly; that is no longer the case. Business units in the Grow category should provide avenues for profitable growth in competitively advantaged positions. Core business units are expected to enhance productivity, maintain market share, and generate cash flow from operations while using minimal capital. Business units in the Fix category will be given a limited time in which to significantly improve performance (with some latitude given them due to the weak economy). Finally, a few small business units (and portions of business units) are considered non-strategic, and will likely be divested as the M&A market recovers and allows for reasonable sales prices.
Improving Returns and Margins on our Asset Base
To remain in the portfolio, business units are expected to consistently generate after-tax returns in excess of the Companys cost of capital. Each business unit has opportunity to improve, and may employ a variety of means to achieve higher returns including trimming expenses, introducing new products, improving productivity, adopting more disciplined pricing, reducing working capital, and consolidating assets. Business units that fail to consistently maintain minimum return goals will move to the Fix or Divest categories.
During 2009 significant effort went into improving margins, despite economy-driven reductions in sales. EBIT margin for 2008 was 5.7% on $4.1 billion of sales while EBIT margin for 2009 was 7.5% on sales of $3.1 billion. Gross margin for 2008 and 2009 was 17.0% and 20.6%, respectively.
For the near-term we expect to focus on better managing the current asset base and improving returns. That pursuit will require much of senior managements attention, and during this period revenue growth is likely to be minimal. Over the longer term, the Company expects to focus its growth efforts on a narrower set of higher quality opportunities, with a target of 4-5% annual revenue growth. Growth capital will be predominantly earmarked for the Grow business units, which are expected to expand at
rates in excess of U.S. Gross Domestic Product (GDP) growth. Core business units, for the most part, are operating in markets that grow more slowly than GDP, and are expected to at least maintain market share. Longer term growth is expected to incorporate product innovation and opportunities to enter new, higher growth businesses that meet strict criteria.
Acquisitions and Divestitures
Historically, our typical acquisition targets have been small, private, profitable, entrepreneurial companies that manufacture goods either within our existing product lines or one step away from those product lines and complementary to our existing businesses. As part of our change in strategic direction, we expect fewer and more strategic acquisitions to be completed. All acquisitions should create value by enhancing TSR; they should have clear strategic rationale and sustainable competitive advantage in attractive markets.
2009 and 2008 Acquisitions
We had no significant acquisitions in 2009 or 2008.
We acquired three businesses during 2007 with annualized sales of approximately $100 million broken down by segment as follows:
In Commercial Fixturing & Components we added one business located in China that produces office chair controls. We also added one business to the Industrial Materials segment, which produces coated wire products, including racks for dishwashers. Finally, in the Specialized Products segment, we added a business which is a designer and assembler of docking stations that secure computer and other electronic equipment inside vehicles.
For further information about acquisitions, see Note R on page 114 of the Notes to Consolidated Financial Statements.
We divested the Coated Fabrics business unit (previously in the Residential Furnishings segment) in the third quarter of 2009. No significant gains or losses were realized on the sale of this unit. Coated Fabrics is reflected as a discontinued operation with 2009 revenue of approximately $12 million. An additional business unit, Storage Products, is targeted for divestiture. Although market conditions have delayed the timing of this disposition, we are fully committed to selling this business.
We divested five significant businesses in 2008 with annualized sales of approximately $780 million. The largest divestiture (approximately $485 million in annualized revenue) was the Aluminum Products segment which was sold in July 2008. We also sold four other business units in 2008 Wood Products and Fibers (previously in the Residential Furnishings segment); Plastics (previously in the Commercial Fixturing & Components segment); and the dealer portion of Commercial Vehicle Products (previously in the Specialized Products segment). We received after-tax cash proceeds of approximately $408 million for the five divested businesses, not including subordinated notes and preferred stock. All of these businesses have been classified as discontinued operations.
In the first quarter of 2007, we divested our Prime Foam Products business unit (previously in the Residential Furnishings segment) and received after-tax cash proceeds of approximately $70 million. Our former Prime Foam Products business unit had annual revenue of approximately $190 million and has been classified as a discontinued operation.
For further information about divestitures and discontinued operations, see Note B on page 83 of the Notes to Consolidated Financial Statements.
Segment Financial Information
For information about sales to external customers, sales by product line, earnings before interest and taxes, and total assets of each of our segments, refer to Note F on page 93 of the Notes to Consolidated Financial Statements.
The percentages of our external sales from continuing operations related to products manufactured outside the United States for the previous three years are shown below.
Our international continuing operations are principally located in Europe, China, Canada and Mexico. The products we make in these countries primarily consist of:
Our international expansion strategy is to locate our operations where we believe demand for components is growing. Also, in instances where our customers move the production of their finished products overseas, we have located facilities nearby to supply them more efficiently.
Our international operations face the risks associated with any operation in a foreign country. These risks include:
Our Specialized Products segment, which derives 74% 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.
Geographic Areas of Operation
We have production, warehousing and distribution facilities in countries around the world. Below is a list of countries where we have facilities associated with continuing operations:
For further information concerning our external sales from continuing operations related to products manufactured outside the United States and our tangible long-lived assets outside the United States, refer to Note F on page 93 of the Notes to Consolidated Financial Statements.
Sales by Product Line
The following table shows our approximate percentage of external sales from continuing operations by classes of similar products for the last three years:
Distribution of Products
In each of our segments, we sell and distribute our products primarily through our own sales 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 or results of operations of the Company.
The products we manufacture in continuing operations require a variety of raw materials. Among the most important are:
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:
We supply the majority of our steel rod requirements through our own rod mill. Our own wire drawing mills supply nearly all of our U.S. requirements for steel wire. We also produce welded steel tubing both for our own consumption and for sale to external customers. In addition, we believe that worldwide supply sources are available for all the raw materials we use.
We have experienced volatility in raw material prices over the past few years, most notably in steel. Steel costs increased significantly in 2008 and we implemented price
increases to recover these higher costs. Market prices for steel began to decrease in late 2008, but with the precipitous drop in demand late in the year and our inability to cancel or return higher priced earlier purchases, we entered 2009 with high steel costs in inventory. As steel costs decreased in 2009, we implemented selective price reductions; however at current commodity cost levels, we have enhanced our margins.
The future pricing of raw materials is uncertain. The degree to which we are able to mitigate or recover higher costs, should they occur, could influence our future earnings. Also, if raw material costs decrease there may be downward pressure on selling prices, temporarily resulting in lower segment margins as we consume higher cost inventories.
Higher raw material costs in recent years have 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 have been replaced with lower cost components, causing us to shift production accordingly. This has primarily impacted profit margins in our Residential Furnishings and Industrial Materials segments. We are responding by developing new products (including new types of innersprings and box springs) that enable our customers to reduce their total costs, and in certain instances, provide higher margin and profit contribution for our operations.
We serve thousands of customers worldwide, sustaining many long-term business relationships. In 2009, no customer accounted for more than 6% of our consolidated revenues from continuing operations. Our top 10 customers accounted for approximately 21% 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 customers sales are reported, including our Residential Furnishings, Commercial Fixturing & Components and Specialized Products segments.
Patents and Trademarks
The chart below shows the approximate numbers of patents issued, patents in process, trademarks registered and trademarks in process held by our continuing operations at the end of 2009. No single patent or group of patents, or trademark or group of trademarks, is material to our continuing operations. Most of our patents and trademarks relate to products sold in the Specialized Products and Residential Furnishings segments.
Some of our most significant trademarks include:
Research and Development
We maintain research, engineering and testing centers in Carthage, Missouri and do additional research and development work at many of our other facilities. 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 the cost of research and development associated with continuing operations ranged from $20 to $30 million per year in each of the last three years.
As of December 31, 2009, we had approximately 18,500 employees associated with our continuing operations, of which roughly 13,200 were engaged in production. Of the 18,500, approximately 8,200 are international employees. Labor unions represent roughly 12% of our employees associated with continuing operations. We did not experience any material work stoppage related to contract negotiations with labor unions during 2009. Management is not aware of any circumstances likely to result in a material work stoppage related to contract negotiations with labor unions during 2010.
The chart below shows the approximate number of employees associated with continuing operations by segment.
As of December 31, 2008, we had approximately 20,600 employees associated with continuing operations.
Employees in Discontinued Operations
At December 31, 2009, we had approximately 300 employees associated with discontinued operations, all of which are in the Commercial Fixturing & Components segment. As of December 31, 2008 and 2007, the Company had approximately 490 and 6,550 employees, respectively, associated with its discontinued operations.
For more information on our discontinued operations, see Note B on page 83 of the Notes to Consolidated Financial Statements.
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 product quality, innovation, 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, performance and availability as well.
We believe we are the largest independent manufacturer in North America, in terms of revenue, of the following:
We face ongoing pressure from foreign competitors as some of our customers source a portion of their components and finished products from Asia. In instances where our customers move production of their finished products overseas, we believe our operations should be located nearby to supply them efficiently. Accordingly, at the end of 2009, Leggett operated 10 facilities in China.
In recent years we experienced increased competition in the U.S. from foreign bedding component manufacturers. We reacted to this competition by selectively adjusting prices, and by developing new proprietary products that help our customers reduce total costs. The increased price competition for bedding components was partially due to lower wire costs in China. Asian manufacturers benefit from cost advantages for commodities such as steel and chemicals. Foreign manufacturers also benefit from lenient regulatory climates related to safety and environmental matters. In late 2007, we filed an antidumping suit related to innerspring imports from China, South Africa and Vietnam. We saw a distinct decline in unfair imports during 2008 after the antidumping investigations began. As a result, we regained market share and performance in our Bedding group improved. The investigations were brought to a favorable conclusion in early 2009. The current antidumping duty rates on innersprings from these countries are significant, ranging from 116% to 234%, and should remain in effect for at least another four years. Imported innersprings from these countries are now supposed to be sold at fair prices, however the duties on certain innersprings are being evaded by various means including shipping the goods through a third country and misclassifying the actual country of origin. Leggett, along with several U.S. manufacturers of steel wire products with active antidumping and antidumping/countervailing duty orders, formed a coalition and are working with members of Congress, the U.S. Department of Commerce, and U.S. Customs and Border Protection to seek stronger enforcement of existing antidumping and/or countervailing duty orders.
As a diversified manufacturer, we generally have not experienced significant seasonality. The timing of acquisitions, dispositions, and economic factors in any year can distort the underlying seasonality in certain of our businesses. Nevertheless, for the Company as a whole, the second and third quarters typically have proportionately greater sales, while the first and fourth quarters are generally lower.
Our four segments tend to experience seasonality as follows:
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.
Working Capital Items
For further information regarding working capital items, see the discussion of Cash from Operations in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations on page 50.
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.
The U.S. Congress is currently considering legislation to address climate change that is intended to reduce overall green house gas emissions, including carbon dioxide. Similar initiatives are being pursued at the state level as well. In addition, the U.S. Environmental Protection Agency has made a determination that green house gas emissions may be a threat to human health and the environment. It is uncertain if, when, and in what form, a mandatory carbon dioxide emissions reduction program may be enacted either through legislation or regulation. However, if enacted, this type of program could materially increase our operating costs, including costs of raw materials, transportation and electricity. In that event, our intent would be to raise prices in order to cover the cost increases.
Internet Access to Information
We routinely post information for investors to our website (www.leggett.com) under the Investor Relations section. 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 Securities and Exchange Commission. In addition to these reports, the Companys Financial Code of Ethics, Code of Business Conduct and Ethics and Corporate Governance Guidelines, as well as charters for its Audit, Compensation, and Nominating and Corporate Governance Committees of our Board of Directors can be found on our website. Information contained on our website does not constitute part of this Annual Report on Form 10-K.
As a result of our new strategic direction adopted at the end of 2007, several of our businesses are disclosed in our annual financial statements as discontinued operations since (i) the operations and cash flows of the businesses can be clearly distinguished and have been or will be eliminated from our ongoing operations; (ii) the businesses have either been disposed of or are classified as held for sale; and (iii) we do not, or will not have any significant continuing involvement in the operations of the businesses after the disposal transactions. The discontinued operations include:
For further information on discontinued operations, see Note B on page 83 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.
We have exposure to economic and other factors that affect market demand for our products.
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, energy costs and interest rates. All of these factors influence consumer spending on durable goods, and drive demand for our products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one-quarter of our sales.
Demand weakness in the majority of our markets in 2009 led to lower unit orders, sales and earnings in our businesses. Several factors, including a weak global economy, a depressed housing market, and low consumer confidence contributed to conservative spending habits by consumers around the world. Short lead times in most of our markets allow for limited visibility into demand trends; however, we currently expect market demand to stabilize at these lower levels. If economic and market conditions remain depressed or deteriorate further, we may experience material negative impacts on our business, financial condition, operating cash flows and results of operations.
Deteriorating financial condition of our customers could negatively affect our financial position, results of operations, cash flows and liquidity.
We serve customers in a variety of industries, some of which are experiencing unprecedented decreases in demand that began in late 2008 and have continued through 2009, due to the weak global economy. While we currently expect markets to stabilize, a sustained economic downturn increases the possibility that one or more of our significant customers, or a group of less significant customers, could become insolvent, which could adversely impact our sales, net earnings, financial condition, cash flow and liquidity.
Costs of raw materials could adversely affect our operating results.
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 move with the market. When we experience significant increases in raw material costs, we attempt to 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. Also, raw material cost decreases generally allow us to pass through reduced selling prices to our customers. Reduced selling prices tied to higher cost inventory reduces our segment margins and earnings.
Steel is our most significant raw material. The global steel markets are cyclical in nature and have been extremely 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 foam scrap. We experienced significant fluctuations in the cost of this commodity in recent years.
Higher raw material costs in recent 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 has primarily impacted our Residential Furnishings and Industrial Materials product mix and decreased profit margins. This trend could further negatively impact our results of operations.
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. Continued economic uncertainty could change our underlying assumptions on which valuation reserves are established and negatively affect future period earnings and balance sheets.
Asian competition could adversely affect our operating results.
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, performance and availability as well. We face ongoing pressure from foreign competitors as some of our customers source a
portion of their components and finished products from Asia. 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.
Our goodwill and other long-lived assets are subject to potential impairment.
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, 2009, goodwill and other intangible assets represented approximately $1.1 billion, or approximately 36% of our total assets. In addition, net property, plant and equipment, sundry assets and non-current assets held for sale totaled approximately $748 million, or approximately 24% of total assets.
We review our ten 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. The annual goodwill impairment review performed in June 2009 indicated no goodwill impairments. Goodwill associated with reporting units whose fair values exceeded the carrying value by 10-20% was $373.4 million; $112.3 million of goodwill was associated with reporting units that had 20-30% excess fair value; and $442.5 million of goodwill was associated with reporting units that had fair values in excess of the carrying values by greater than 30%. In the fourth quarter of 2009, we recorded a goodwill impairment in discontinued operations of $3.0 million for our Storage Products Unit because the carrying value of the assets held for sale exceeded fair value less costs to sell. Fair value and the resulting impairment charge were based primarily upon offers from potential buyers.
For the year ended 2009, other long-lived asset impairments were $2.8 million, substantially all of which were in continuing operations, for fixed assets to reflect estimates of fair value less costs to sell.
If actual results differ from the assumptions and estimates used in the goodwill and long-lived asset calculations, we could incur future (unanticipated) impairment charges, which could negatively impact our results of operations.
We are exposed to foreign currency risk.
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 2009, 25% of our sales from continuing operations 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.
Item 2. Properties.
The Companys corporate headquarters are located in Carthage, Missouri. At December 31, 2009, we had 238 production, warehouse, sales and administrative facilities associated with continuing operations, of which 174 were disbursed across the United States and 64 were located in foreign countries.
Properties by Location and Segment in Continuing Operations
Properties by Use and Segment in Continuing Operations
Facilities that we own produced approximately 70% of our sales from continuing operations in 2009. We also lease many of our production, 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 K on page 99 of the Notes to Consolidated Financial Statements.
In the opinion of management the Companys 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. We face decisions about further facility consolidation but have chosen to retain excess capacity because we believe that eventually market demand will improve. With our currently low utilization levels, we should be able to readily accommodate that demand improvement when it occurs.
At December 31, 2009 we had eight production or warehouse facilities classified as discontinued operations, of which seven were in the United States and one was in Mexico.
Item 3. Legal Proceedings.
The information in Note T on page 118 of the Notes to Consolidated Financial Statements is incorporated into this section by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
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.
Subject to the employment and severance benefit agreements with Mr. Haffner and Mr. Glassman, and the employment agreement with Mr. Flanigan, listed as exhibits to this Report, the executive officers generally serve at the pleasure of the Board of Directors.
David S. Haffner was appointed Chief Executive Officer in 2006 and has served as President of the Company since 2002. He served as Chief Operating Officer from 1999 to 2006 and as the Companys Executive Vice President from 1995 to 2002. He has served the Company in other capacities since 1983.
Karl G. Glassman was appointed Chief Operating Officer in 2006 and has served as Executive Vice President of the Company since 2002. He served as President of the Residential Furnishings Segment from 1999 to 2006, as Senior Vice President of the Company from 1999 to 2002 and as President of Bedding Components from 1996 to 1998. He has served the Company in other capacities since 1982.
Jack D. Crusa has served the Company as Senior Vice President since 1999 and President of Specialized Products since 2003. He previously served as President of the Industrial Materials Segment from 1999 through 2004, as President of the Automotive Group from 1996 through 1999 and in various other capacities since 1986.
Joseph D. Downes, Jr. was appointed Senior Vice President of the Company in 2005 and President of the Industrial Materials Segment in 2004. He previously served the Company as President of the Wire Group from 1999 to 2004 and in various other capacities since 1976.
Matthew C. Flanigan has served the Company as Senior Vice President since 2005 and as Chief Financial Officer since 2003. Mr. Flanigan previously served the Company as Vice President from 2003 to 2005, as Vice President and President of the Office Furniture Components Group from 1999 to 2003 and as Staff Vice President of Operations from 1997 to 1999.
Paul R. Hauser became Senior Vice President of the Company in 2005 and President of the Residential Furnishings Segment in 2006. He previously served as Vice President of the Company and President of the Bedding Group from 1999 to 2006. He served in various capacities in the Companys Bedding Group since 1980.
Ernest C. Jett has served as Senior Vice President and General Counsel since 2005. He previously served as Corporate Secretary from 1995 through 2009. He was appointed General Counsel in 1997 and Vice President and Secretary in 1995. He previously served the Company as Assistant General Counsel from 1979 to 1995 and as Managing Director of the Legal Department from 1991 to 1997.
Dennis S. Park became Senior Vice President and President of the Commercial Fixturing & Components Segment in 2006. In 2004, he was named President of the Home Furniture and Consumer Products Group and became Vice President of the Company and President of Home Furniture Components in 1996. He served the Company in various other capacities since 1977.
David M. DeSonier was appointed Vice PresidentStrategy & Investor Relations in 2007. He served as Vice PresidentInvestor Relations and Assistant Treasurer from 2002 to 2007. He joined the Company as Vice PresidentInvestor Relations in 2000. Prior to his employment with Leggett & Platt, he worked for Atlantic Richfield (a major integrated oil company) from 1980 to 2000 in strategic planning, investor relations, financial management and analysis, and technical positions.
John G. Moore was appointed Secretary in January 2010, Chief Legal Officer in 2009 and Vice PresidentCorporate Affairs & Human Resources in 2008. He previously served as Vice PresidentCorporate Governance from 2006 to 2008, as Vice President and Associate General Counsel from 2001 to 2006, and as Managing Counsel and Assistant General Counsel from 1998 to 2001. He has served the Company in other capacities since 1994.
William S. Weil has served the Company as Chief Accounting Officer since February 2004. He became Vice President in 2000 and has served the Company as Corporate Controller since 1991. He previously served the Company in various other accounting capacities since 1983.
Item 5. Market for Registrants 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 and volume data reflect composite transactions; price range reflects intra-day prices; data source is Bloomberg.
Shareholders and Dividends
As of February 15, 2010, we had approximately 11,000 shareholders of record.
We are targeting a dividend payout ratio (annual dividends divided by net earnings) of 50-60%, though it has been and will likely be higher for the near term. See the discussion of the Companys targeted dividend payout under Pay Dividends in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations on page 48.
Issuer Repurchases of Equity Securities
The table below is a listing of our repurchases of the Companys common stock during the fourth quarter of 2009.
Sale of Unregistered Shares of Common Stock
The Company issued 7,000 shares of common stock for $127,960 (at fair market value) to David S. Haffner, President and Chief Executive Officer as set out below.
The shares were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, in that the transaction did not involve a public offering.
Item 6. Selected Financial Data.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
As we entered 2009, we were facing some of the most challenging market conditions that weve experienced in decades and we recognized that there was little we could do to influence that reality. Therefore, our focus remained on several key activities that we could control, including aggressive cost containment, headcount reduction, facility consolidation, maintaining strict discipline on pricing, and optimizing working capital levels. As a result of our efforts in these areas, we exited 2009 with significantly improved EBIT margins (despite much lower sales), and for the year, we generated the second highest level of operating cash flow in our history.
Our global markets stabilized in 2009, albeit at very low demand levels. For the full year, sales decreased 25% due primarily to weak market demand, but also to a combination of steel-related price deflation and our decision to exit specific customer programs with unacceptable profit margins.
We strive to achieve TSR in the top one-third of the S&P 500 over the long term, which we believe will require average TSR of 12-15% per year. For the period beginning January 1, 2008 through December 31, 2009, our 32% TSR ranks within the top 4% of the S&P 500.
Reflecting confidence in our strategic progress, margin improvement, strong cash generation, and the stability we believe has developed in our markets, in August 2009, we increased our quarterly dividend modestly to $.26 per share. We also utilized essentially all the Boards authorization enabling us to repurchase 10 million shares of our stock in 2009, with the majority of the purchases occurring during the last half of the year.
Our financial profile remains strong. We ended 2009 with net debt to net capital well below our long-term targeted range, no significant fixed-term debt maturing until 2013, and nearly $500 million available under our existing commercial paper program and revolver facility.
These topics are discussed in more detail in the sections that follow.
What We Do
Leggett & Platt is a diversified manufacturer, and member of the S&P 500 index, that conceives, designs, and produces a wide range of engineered components and products found in most homes, offices, and automobiles, and many retail stores. We make components that are often hidden within, but integral to, our customers products.
We are North Americas leading independent manufacturer of: components for residential furniture and bedding, carpet underlay, components for office furniture, drawn steel wire, automotive seat support and lumbar systems, and bedding industry machinery.
Our continuing operations are composed of 19 business units in four segments, with approximately 19,000 employees, and more than 140 production facilities located in 18 countries around the world. Our segments are described below.
This segment supplies a variety of components mainly used by bedding and upholstered furniture manufacturers in the assembly of their finished products. We also sell carpet cushion, adjustable beds, bed frames, ornamental beds, and geo components.
Commercial Fixturing & Components
Operations in this segment manufacture and sell store fixtures and point-of-purchase displays used in retail stores. We also produce chair controls, bases, and other components for office furniture manufacturers.
These operations primarily supply steel rod, drawn steel wire, steel billets, and welded steel tubing to other Leggett operations and to external customers. Our wire and tubing is used to make bedding, furniture, automotive seats, wire retail fixtures, mechanical springs, and many other end products.
From this segment we supply lumbar systems and wire components used by automotive seating manufacturers. We manufacture and install the racks, shelving and cabinets used to outfit fleets of service vans. We also produce machinery, both for ourselves and for others, including bedding manufacturers.
Discontinued Operations and Divestitures
During the past two years, we have divested six businesses. In 2008, we sold our Aluminum Products segment and four smaller business units (Wood Products, Fibers, Plastics, and the dealer portion of Commercial Vehicle Products). In 2009, we sold the Coated Fabrics business unit. We received after-tax cash proceeds of $420 million for these six businesses, exceeding our original estimate of approximately $400 million. One additional business unit (Storage Products) is also targeted for divestiture. Results of operations for all of these businesses are classified as discontinued operations in our financial statements.
For the remaining divestiture, we expect to recover the carrying value of the net assets held for sale. Net assets classified as held for sale totaled $40 million at December 31, 2009 (this includes $22 million not associated with the Storage Products business). Although recent market conditions have delayed the timing of the final disposition, we are fully committed to selling this business.
In late 2007, we outlined significant changes to the Companys strategy. We adopted a new primary financial metric (Total Shareholder Return), adopted role-based portfolio management, implemented more rigorous strategic planning, and changed the priorities for use of cash. Our goals, in sequential order, were to i) divest low performing businesses, ii) return more cash to investors, iii) improve margins and returns, and iv) begin to carefully and conservatively grow the company at 4-5% of annual revenue. We have made significant progress over the past two years.
Total Shareholder Return (TSR) is the key financial measure that we use to monitor 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 focus on four key sources of TSR: revenue growth, margin expansion, dividends, and share repurchases. Historically, our primary objective was profitable growth. Going forward, we intend to generate higher TSR through a balanced approach that employs all four sources of TSR. In 2008, dividends and stock buybacks largely drove our TSR; during 2009, we benefited significantly from margin improvement; and within a few years we expect that modest
annual sales growth will also contribute to TSR. Beginning in 2008, we introduced TSR-based incentives for senior executives and modified business unit bonuses to give more importance to achieving higher returns on the assets under their direct control. For the two-year period ended December 31, 2009, our TSR performance places us within the top 4% of the S&P 500 companies.
We narrowed our focus and eliminated (during 2008 and 2009) approximately 15% of our portfolio through the divestiture of the Aluminum Products segment and five additional business units (one divestiture remains). We also narrowed the scope of the Store Fixtures unit to focus primarily on the metals part of the fixtures industry, in alignment with Leggetts core competency of producing steel and steel-related products. These activities were largely complete by the end of 2008, and resulted in charges that impacted our operating results (primarily in 2007 and 2008). Those charges are discussed on page 37 under the section titled Asset Impairments and Restructuring-related Charges.
We have implemented a more rigorous strategic planning process to assess our business units and help guide future 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 EBITDA growth, operating cash flows, and return on assets. 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.
The majority of our business units are categorized as Core. A much smaller percentage are categorized as Grow; consequently, we recognize as a strategic imperative the need to expand the Grow category by improving i) our success rate at developing innovative new products and ii) our abilities to identify new growth platforms. A few small business units are considered Fix, and must improve their performance within a reasonable time frame (with some latitude given them due to the weak economy). Finally, a few small business units (and portions of business units) are considered non-strategic, and will likely be divested as the M&A market recovers and allows for reasonable sales prices.
The strategic changes have increased available cash. We expect to continue returning much of this cash to shareholders through dividends and share repurchases.
We serve a broad suite of customers, with no single one representing over 6% of our sales. Many are companies whose names are widely recognized; they include most manufacturers of furniture and bedding, a variety of other manufacturers, and many major retailers.
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 (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 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 one-quarter of our sales.
Demand weakness in the majority of our markets during 2009 led to lower unit orders, utilization levels, sales and earnings. Several factors, including weak global economies, a depressed housing market, and low consumer confidence contributed to conservative spending habits by consumers around the world. Short lead times in most of our markets allow for limited visibility into future demand trends; however, we currently expect demand to stabilize at these lower levels. Given our balance sheet strength, operating cash flow and access to credit, we expect to be able to endure an extended downturn in market demand with no material impact to our financial position or liquidity.
Activities completed over the past few years (including the divestiture of businesses under our strategic plan, closure of certain underperforming and underutilized facilities, elimination of sales with unacceptable margins, and other cost reduction initiatives) improved our cost position in advance of the late 2008 economic contraction, and we continued to tightly constrain spending in 2009. We face decisions about further facility consolidation but have chosen to retain excess capacity because we believe that eventually market demand will improve. With our currently low utilization levels, we should be able to readily accommodate that demand improvement when it occurs.
Raw Material Costs
In many of our businesses, we enjoy a cost advantage from buying large quantities of raw materials. This purchasing leverage is a benefit that many of our competitors generally do not have. Still, our costs can vary significantly as market prices for raw materials (many of which are commodities) fluctuate.
Purchasing arrangements vary across the company. We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. In certain of our businesses, we have longer-term purchase contracts with pricing terms that provide stability under reasonable market conditions. However, when commodities experience extreme inflation, vendors do not always honor those contracts.
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 a critical factor; we typically experience a lag in recovering higher costs, so we also expect to realize a lag as costs decline.
Steel is our principal raw material and at various times in past years we have experienced extreme cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers via selling price adjustments. Steel costs increased significantly in 2008 and we implemented price increases to recover these higher costs. Market prices for steel began to decrease in late 2008, but with the precipitous drop in demand late in the year and our inability to cancel or return higher priced earlier purchases, we entered 2009 with high-cost steel in inventory. As steel costs decreased in 2009, we implemented selective price reductions; however at the lower commodity cost levels, we enhanced our margins.
As a producer of steel rod, we are also impacted by volatility in metal margins (the difference in the cost of steel scrap and the market price for steel rod). The increase in scrap costs in late 2009 and early 2010 has resulted in currently lower metal margins in the steel market and in our rod producing operation. While pricing trends in the steel market are difficult to predict, we expect the lower metal margins to continue in 2010.
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 recent years, and typically 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 experienced this de-contenting effect in our Residential Furnishings and Industrial Materials segments in recent years. As our customers changed the quantity and mix of components in their finished goods to address steel and chemical inflation, our profit margins were negatively impacted. We are responding by developing new products (including new types of mattress innersprings and boxsprings) that enable our customers to reduce their total costs, and in certain instances, provide higher margin and profit contribution for our operations.
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.
We believe we gain competitive advantage in our global markets through low cost operations, significant internal production of key raw materials, manufacturing expertise and product innovation, higher quality products, extensive customer service capabilities, and financial strength. 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 product quality, innovation, 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 from Asia. In instances where our customers move production of their finished products overseas, our operations must be located nearby to supply them efficiently. We currently operate 10 facilities in China.
In recent years we experienced increased competition in the U.S. from foreign bedding component manufacturers. We reacted to this competition by selectively adjusting prices,
and by developing new proprietary products that help our customers reduce total costs. The increased price competition for bedding components was partially due to lower wire costs in China. Certain foreign manufacturers also benefit from more lenient regulatory climates related to safety and environmental matters. In late 2007, we filed an antidumping suit related to innerspring imports from China, South Africa and Vietnam. We saw a distinct decline in unfair imports during 2008 after the antidumping investigations began. As a result, we regained market share and performance in our Bedding group improved. The investigations were brought to a favorable conclusion in early 2009. The current antidumping duty rates on innersprings from these countries are significant, ranging from 116% to 234%, and should remain in effect for at least another four years. Imported innersprings from these countries are now supposed to be sold at fair prices, however the duties on certain innersprings are being evaded by various means including shipping the goods through a third country and misclassifying the actual country of origin. Leggett, along with several U.S. manufacturers of steel wire products with active antidumping and antidumping/countervailing duty orders, formed a coalition and are working with members of Congress, the U.S. Department of Commerce, and U.S. Customs and Border Protection to seek stronger enforcement of existing antidumping and/or countervailing duty orders.
Asset Impairments and Restructuring-related Charges
Net impairment and restructuring-related charges (for both continuing and discontinued operations) totaled $405 million over the last three years ($16 million in 2009, $84 million in 2008, and $305 million in 2007). The majority of these charges, or $344 million, occurred as a result of the 2007 Strategic Plan announced in late 2007 ($154 million in continuing operations and $190 million in discontinued operations); we believe this activity to be substantially complete. For further information about asset impairments and restructuring, see Notes C and D to the Consolidated Financial Statements on pages 85 and 89.
For information regarding the methodology and assumptions we use for impairment testing, refer to Critical Accounting Policies and Estimates on page 55, and also Note C to the Consolidated Financial Statements on page 85.
RESULTS OF OPERATIONS2009 vs. 2008
During 2009, sales from continuing operations decreased 25%, reflecting a combination of weak market demand, steel-related price deflation, and our decision to exit some specific sales with unacceptable margins. In the majority of our global markets, demand stabilized at low levels in early 2009.
Despite the significant sales decline, full-year earnings from continuing operations decreased only modestly, from $128 million in 2008 to $121 million in 2009. Cost structure improvements and pricing discipline offset nearly all the impact from lower sales.
Further details about our consolidated and segment results from continuing operations are discussed below. To comply with FASB guidance for presentation of noncontrolling interest (discussed on page 82), earnings for 2008 have been retrospectively adjusted to include the portion of earnings from our joint ventures that are attributable to the minority investors.
Consolidated Results (continuing operations)
The following table shows the changes in sales and earnings from continuing operations during 2009, and identifies the major factors contributing to the changes.
Sales from continuing operations decreased 25% versus 2008, reflecting weak market demand, inflation-related price decreases, and our decision to exit specific customer programs with unacceptable profit margins (the largest portion in our Store Fixtures business).
Full-year earnings from continuing operations also decreased in 2009. The earnings impact from lower unit volume was largely offset by cost reduction initiatives and pricing discipline. Other factors impacting the year-over-year earnings comparison are presented in the table above. The divestiture note write-down (identified in the table) occurred when we learned in 2009 that the aluminum operations divested in July 2008 needed a capital infusion from the buyer due to deterioration in business conditions. This led to a reduction in the value of the note we accepted in 2008 as partial payment for the divesture. Leggett has accepted a more subordinate position in the capital structure of the divested operations.
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 60% of our inventories to the last-in, first-out (LIFO) method. These are primarily our domestic, steel-related inventories. We experienced a large swing in the LIFO impact during the past two years. In 2008, significant steel cost inflation along with moderately higher inventory levels resulted in LIFO expense from continuing operations of $62 million. In 2009, steel cost decreases and lower inventory levels resulted in a LIFO benefit from continuing operations of $67 million. Segment-level earnings in 2008 generally benefited under the FIFO method from the effect of rising commodity costs, but in the first half of 2009, were significantly burdened as we consumed higher cost steel (both in inventory and committed under purchase agreements) while selling prices decreased.
The LIFO impact recognized at the corporate level is generally offset each year by FIFO impacts at the segment level; however, we experienced significant variability in our quarterly earnings in 2009 as these items were recognized. Earnings in the first two quarters of 2009 were significantly impacted as we consumed the majority of the higher cost steel but recognized only about half of the offsetting LIFO benefit (consistent with our historical practice of recording annual LIFO impacts evenly throughout the year). The remainder of the LIFO benefit was recognized in the last half of 2009, a period during which we experienced only minimal impact from higher cost steel.
For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 78.
Interest and Income Taxes
Net interest expense decreased $8 million versus 2008, primarily the result of lower commercial paper borrowings and lower interest rates in 2009.
The consolidated worldwide effective income tax rate for 2009 was higher, at 39.0%, versus 33.8% in 2008. This increase is primarily due to i) tax adjustments resulting from
Mexican tax law changes, and ii) the lower level of earnings and mix among tax jurisdictions. In 2009, tax law changes in Mexico caused us to re-evaluate our deferred tax assets and liabilities in that jurisdiction. As a result of our analysis, we recorded a $6 million tax charge to earnings related to current and prior year losses that may expire before they can be utilized to reduce taxable earnings. In 2008, a tax benefit associated with the write-off of an acquired companys stock was offset by increased reserves for uncertain tax positions and valuation allowances against deferred tax assets for certain foreign entities.
Segment Results (continuing operations)
In the following section we discuss 2009 sales and earnings before interest and taxes (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 F to the Consolidated Financial Statements on page 93.
Residential Furnishings sales decreased in 2009, reflecting weak market demand and steel-related price deflation. Demand in our residential markets was weak throughout 2009 as consumers world-wide continued to defer purchases of large ticket items (such as mattress sets and upholstered furniture) that contain our products.
EBIT and EBIT margins decreased versus 2008, with the earnings impact from significantly lower unit volumes partially offset by cost reductions, pricing discipline, elimination of poorly performing operations, and the absence of 2008s restructuring-related and other costs ($18 million).
Commercial Fixturing & Components
Sales decreased in 2009 due to our decision in the Store Fixtures business to exit specific customer programs with unacceptable margins, reduced capital spending by retailers, and market softness in Office Furniture Components.
EBIT and EBIT margins also decreased versus the prior year, as the impact from lower sales more than offset benefits from cost reductions, prior elimination of poorly performing facilities, and other operating improvements, as well as the absence of 2008s restructuring-related costs ($11 million).
2009 sales decreased, reflecting weak demand in many of our markets (including bedding, furniture, and automotive) and steel-related price deflation.
EBIT and EBIT margins also decreased versus 2008, as lower sales more than offset cost reductions.
Sales decreased in 2009, reflecting weak global demand in our markets.
EBIT and EBIT margins decreased versus the prior year, as the impact from lower sales more than offset benefits from cost reduction initiatives and other operating improvements, as well as the absence of 2008s restructuring-related costs ($5 million).
Results from Discontinued Operations
Full year earnings from discontinued operations, net of tax, increased $13 million, from a loss of $19 million in 2008 to a loss of $6 million in 2009. This earnings increase was primarily due to lower asset impairments and restructuring-related charges, partially offset by $3 million (net of tax) of environmental charges related to an aluminum property.
RESULTS OF OPERATIONS2008 vs. 2007
During 2008, sales from continuing operations decreased 4%. We reported full-year net earnings from continuing operations of $128 million, which included $21 million of restructuring-related charges, impairments, and other items. Our 2008 earnings reflected soft market demand which led to lower unit volume in many of our businesses. In the majority of our markets, demand was soft throughout the year, but weakened appreciably late in the third quarter as consumers further reduced their spending in response to the financial market distress and general U.S. and global economic conditions. Market share gains in certain businesses offset some of the impact from weak demand.
During the year, we also experienced significant inflation in steel costs, and we successfully implemented price increases to recover the majority of these higher costs. Further details about our consolidated and segment results from continuing operations are discussed below. To comply with FASB guidance for presentation of noncontrolling interest (discussed on page 82), earnings have been retrospectively adjusted to include the portion of earnings from our joint ventures that are attributable to the minority investors.
Consolidated Results (continuing operations)
The following table shows the changes in sales and earnings from continuing operations during 2008, and identifies the major factors contributing to the changes.
Sales from continuing operations decreased 4% versus 2007, primarily reflecting weak market demand and our decision to exit specific sales volume with unacceptable profit margins (primarily in our Store Fixtures business). These declines were partially offset by inflation-related price increases and market share gains.
Our U.S. bedding components business gained market share in 2008 as a result of: i) bedding manufacturers shifting innerspring purchases from international to domestic sources; ii) the deverticalization of a strong regional bedding manufacturer (they now buy components from us that they previously produced for themselves); and, iii) increased demand for innerspring mattresses, rather than premium-priced, non-innerspring products.
We experienced significant inflation in steel costs during 2008, and in response, we implemented price increases to recover the higher costs. The magnitude of our selling price increases varied by product line depending on steel content, but in our major Residential and Industrial businesses, prices increased substantially. By late 2008, steel costs began to decrease.
Full-year earnings from continuing operations were higher than in 2007, primarily due to:
Several factors negatively impacted earnings. The most significant were:
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 60% of our inventories to the last-in, first-out (LIFO) method. These are primarily our domestic, steel-related inventories. Significant steel cost increases during the year, along with moderately higher levels of these steel-related inventories, resulted in LIFO expense from continuing operations of $62 million in 2008 (versus a $1 million benefit in 2007). Segment-level earnings in 2008 generally benefited under the FIFO method from the effect of rising commodity costs. For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 78.
Interest and Income Taxes
Net interest expense decreased $9 million versus 2007, primarily the result of debt maturities paid in 2007 and 2008, as well as lower commercial paper borrowings.
The consolidated worldwide effective income tax rate for 2008 was also lower, at 33.8% versus 55.9% in 2007. The 2007 rate was negatively impacted by goodwill impairment charges totaling $143 million, of which $95 million were non-deductible. This caused the 2007 rate as a percent of pre-tax income to be much higher than normal. In 2008, a tax benefit associated with the write-off of an acquired companys stock was offset by increased reserves for uncertain tax positions and valuation allowances against deferred tax assets for certain foreign entities.
In the third quarter of 2008, we recorded a $4 million valuation allowance against certain foreign tax assets. The valuation allowance related to our Canadian automotive operations that produce lumbar supports. In late 2008, the automotive industry was in a dramatic state of decline, which reduced the demand for our components. In addition to demand factors, these operations were also negatively impacted by the strength in recent years of the Canadian dollar versus the U.S. dollar (our Canadian automotive operations sell in U.S. dollars while incurring labor and overhead costs in Canadian dollars, thereby reducing margins). As a result, we believed it was more likely than not that we would not realize the benefit of deferred tax assets associated with these operations. We provide a discussion regarding the recoverability of the Automotive units long-lived assets under Critical Accounting Policies on page 56.
Segment Results (continuing operations)
In the following section we discuss 2008 sales and earnings before interest and taxes (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 F to the Consolidated Financial Statements on page 94.
Residential Furnishings sales decreased in 2008, reflecting weak market demand. This decrease was partially offset by inflation-related price increases and market share gains in our U.S. bedding business (discussed under Consolidated Results above).
Demand in our U.S. residential markets was weak throughout 2008, but softened further in late September reflecting reduced spending by consumers on large ticket items that contain our products. International markets, which were relatively stronger earlier in the year, also experienced much softer demand in the latter part of the year as a result of deteriorating global economic conditions.
EBIT and EBIT margins decreased versus 2007 due to lower sales and higher asset impairments and restructuring-related costs (of $14 million), partially offset by a gain from the sale of a business (of $8 million) and operating improvements in certain locations.
Commercial Fixturing & Components
Sales decreased in 2008 due to several factors, including our decision in the Store Fixtures business to exit specific sales volume with unacceptable margins, reduced capital spending by retailers, and lower demand for office furniture components.
EBIT and EBIT margins increased versus the prior year, primarily due to the non-recurrence of 2007s goodwill impairment charge (of $143 million), partially offset by lower sales.
2008 sales increased significantly, primarily from the pass through of higher steel costs and increased sales of steel billets. Ongoing weak demand in many of our markets (including bedding, furniture, and automotive) offset a portion of the sales gain.
EBIT and EBIT margins also increased versus 2007, primarily due to higher sales and operating improvements in certain locations.
Sales decreased in 2008, primarily reflecting weak demand that continued throughout the year in our North American automotive business and the fleet portion of Commercial Vehicle Products. Our machinery and European and Asian automotive businesses posted full-year sales growth despite demand softening late in the year.
EBIT and EBIT margins decreased versus the prior year, mainly due to lower sales, higher restructuring-related costs (of $4 million), and higher steel costs with limited recovery.
Results from Discontinued Operations
Full year earnings from discontinued operations, net of tax, increased $52 million, from a loss of $71 million in 2007 to a loss of $19 million in 2008. This earnings increase was primarily due to lower asset impairments and restructuring-related charges (of $90 million), partially offset by the non-recurrence of a 2007 tax benefit (of $30 million) associated with a difference in book and tax basis of stock held in the Aluminum segment as a result of that business reaching held for sale status.
LIQUIDITY AND CAPITALIZATION
In this section, we provide details, reflecting both continuing and discontinued operations, about our:
We use cash for the following:
Our operations provide much of the cash we require, and debt may also be used to fund a portion of our needs. In 2008, cash proceeds from completed divestitures were an additional significant source of funds. In 2009, we generated our second highest level of cash from operations in our history, at $565 million. With less benefit from working capital reductions expected in 2010, operating cash should approximate $300 million, readily exceeding our annual requirement for capital expenditures and dividends. We ended 2009 with net debt to net capital of 23.7%, below our long-term target and year-end 2008 levels. Our long-term target is to have net debt as a percent of net capital in the 30%-40% range. Page 53 presents a table of the calculation of net debt as a percent of net capital at the end of the past two years.
Uses of Cash
Finance Capital Requirements
Improving returns of the existing asset base will continue to be a key focus. However, cash is available to fund selective growth, both internally (through capital expenditures) and externally (through acquisitions).
Capital expenditures include investments we make to modernize, maintain, and expand manufacturing capacity. With our move to role-based portfolio management, we are more restrictive in funding capital projects. Capital spending in 2010 is expected to be less than $90 million. Growth capital, which had historically been available to all our businesses, is now predominantly earmarked for our Grow business units. Operations designated as Core business units receive capital primarily for productivity enhancements, but expansion capital is limited.
We have also set a higher bar for acquisitions, and plan to pursue disciplined growth through fewer, but more strategic, opportunities. We will seek acquisitions within our growth businesses, and will also look for longer-term opportunities to enter new, higher growth markets that meet strict criteria.
As a result of the new acquisition criteria, no significant acquisitions were completed in 2008 or 2009. In 2007, we acquired three businesses that were expected to add about $100 million to annual revenue ($20 million in Commercial Fixturing & Components, $50 million in Industrial Materials, and $30 million in Specialized Products). These businesses:
In addition to the initial cash outlays for acquisitions (shown in the accompanying chart), we also assumed debt of $24 million in 2007. We provide additional details about acquisitions in Note R to the Consolidated Financial Statements on page 114.
With continued improvement in margins and returns, a decrease in capital spending and acquisitions, and the completion of most of the divestitures, we expect (and have recently had) more available cash to return to shareholders. Higher annual dividends are one means by which that will occur. In late 2007, we raised our quarterly dividend by 39%,
to $.25 per share. In 2009 we modestly increased the quarterly dividend further, to $.26 per share, and extended to 38 years our record of consecutive annual dividend increases, at an average compound growth rate of 14%. Our targeted dividend payout is approximately 50-60% of net earnings, but has been higher recently and will likely remain above targeted levels in the near term. Maintaining and increasing the dividend remains a high priority. We expect to spend approximately $155 million on dividends in 2010 (slightly less than in 2009 because of share repurchases). Cash from operations has been, and is expected to continue to be, sufficient to readily fund both capital expenditures and dividends.
Share repurchases are the other means by which we return cash to shareholders. During the past three years, we repurchased a total of 38 million shares of our stock and reduced outstanding shares by about 16%. In 2009, we repurchased approximately 6% of shares outstanding at an average per-share price of $18.21. We expect to repurchase additional shares in 2010, with the amount of purchases dependent on factors such as general economic conditions, level of demand in our end markets, and the availability of excess cash. Although no specific repurchase schedule has been established, we have been authorized by the Board to repurchase up to 10 million shares in 2010.
Cash from Operations
Cash from operations is our primary source of funds. Earnings and changes in working capital levels are the two broad factors that generally have the greatest impact on our cash from operations.
In 2009, cash from operations increased $129 million versus 2008 primarily as a result of improving working capital trends.
Cash from operations in 2008, though strong, was $178 million lower than in 2007 primarily due to a smaller year-over-year decrease in working capital. Extremely weak market demand in the latter part of 2008 negatively impacted earnings. Working capital decreased in 2008 as a result of lower inventory and accounts receivable levels. Fourth quarter production cuts led to lower inventory levels (versus the prior year). Accounts receivable also declined primarily due to extremely weak sales late in the year.
The following table presents key working capital measures at the end of the past two years.
Working capital levels vary by segment. The Commercial Fixturing & Components segment typically has relatively higher accounts receivable balances due to the longer credit terms required to service certain customers of the Fixture & Display group. This business group also generally requires higher inventory investments due to the custom nature of its products, longer manufacturing lead times (in certain cases), and the needs of many customers to receive large volumes of product within short periods of time.
This table presents key debt and capitalization statistics at the end of the three most recent years.
The next table shows the percent of long-term debt to total capitalization at December 31, 2009 and 2008, calculated in two ways:
We believe that adjusting this measure for cash and current maturities allows a more meaningful comparison to periods during which cash fluctuates significantly. We use these adjusted measures to monitor our financial leverage.
Total debt (which includes long-term debt and current debt maturities) decreased $74 million in 2009. During the year, we reduced our commercial paper borrowings by $52 million and paid off $22 million of other long-term debt that came due.
We can raise cash by issuing up to $600 million in commercial paper through a program that is backed by a $600 million revolving credit agreement with a syndicate of 14 lenders that terminates in 2012. Based on the information currently available to us, we believe that the participating banks continue to have the ability to meet their obligations under the agreement. At December 31, 2009, $25 million of commercial paper was outstanding under this program and is classified as long-term debt. We also maintain an active shelf registration. With anticipated operating cash flows, the commercial paper program and the active shelf registration, we believe we have sufficient funds available to support our ongoing operations, pay dividends, repurchase stock, and fund future growth.
Our commercial paper program continued to operate efficiently during the disruption of the global credit markets in late 2008; those markets stabilized during 2009. Changes in the credit markets and other events of the past year did not materially impact our weighted average effective borrowing rate for commercial paper. If a disruption in the credit market was to become so severe that we were unable to issue commercial paper, we have the contractual right to draw funds directly on our revolving credit agreement. In such event, the cost of borrowing under the revolving credit agreement could be higher than the cost of commercial paper borrowing.
The revolving credit agreement provides for the ability to issue letters of credit up to an aggregate $250 million. Any utilization of these commitments for letters of credit reduces our commercial paper/loan capacity by a corresponding amount. At December 31, 2009, we had issued $84 million of letters of credit under these commitments. Accordingly, at year end, an additional $491 million was available to us under our commercial paper program ($600 million in total program - $25 million of outstanding commercial paper - $84 million of issued letters of credit).
The following table summarizes our future contractual cash obligations and commitments:
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. To do so, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosures. If we used different estimates or judgments our financial statements would change, and some of those changes could be significant. Our estimates are frequently based upon historical experience and are considered by management, at the time they are made, to be reasonable and appropriate. Estimates are adjusted for actual events, as they occur.
Critical accounting estimates are those that are: a) subject to uncertainty and change, and b) of material impact to our financial statements. Listed below are the estimates and judgments which we believe could have the most significant effect on our financial statements.
We provide additional details regarding our significant accounting policies in Note A to the Consolidated Financial Statements on page 78.
Our disclosure and accrual of loss contingencies (i.e., losses that may or may not occur) are based on our assessment of the likelihood that the expenses will actually occur, and our estimate of the likely cost. Our estimates and judgments are subjective and can involve matters in litigation, the results of which are generally very unpredictable.
On July 22, 2004, we were named as one of approximately 80 defendants in several cases consolidated as Gray v. Derderian, Case No. 1:04-CV-312-L, U.S.D.C. R.I. This litigation resulted from a nightclub fire in West Warwick, Rhode Island involving multiple deaths and injuries. There are in excess of 550 plaintiffs in the litigation. Along with other foam manufacturing defendants, Leggett is alleged to have manufactured and sold bulk polyurethane foam to a foam fabricator in Rhode Island, who in turn, is alleged to have fabricated and sold foam sheets to the nightclub. The foam was among other materials alleged to have caught fire when pyrotechnics were ignited inside the nightclub.
We believe we did not manufacture the foam subject to the lawsuit and that we have valid defenses to the claims. Nevertheless, with our consent, our primary insurance carrier reached a tentative settlement with counsel for all plaintiffs on April 29, 2008 and we executed the final settlement agreement on October 6, 2009. The settlement agreement is subject to various court approvals and the signature of all plaintiffs. Pursuant to the settlement agreement, we would pay a $2 million self-insured retention. The remainder of the $18.2 million settlement would be paid by our insurance carrier. We do not believe the settlement or the outcome will have a material effect on Leggetts financial condition, operating cash flows or results of operations. We recorded $2 million of expense in 2008 and currently have a $16.2 million receivable from the insurance carrier and an $18.2 million liability related to this matter, that is included in current assets and current liabilities, respectively, in the Consolidated Balance Sheets.
NEW ACCOUNTING STANDARDS
We adopted new accounting guidance in 2009 as discussed in Note A to the Consolidated Financial Statements on page 82. The Financial Accounting Standards Board has also issued accounting guidance effective for future periods (that we have not yet adopted), but we do not believe this new guidance will have a material impact on our future financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
(Dollar amounts in millions)
The table below provides information about the Companys debt obligations sensitive to changes in interest rates. Substantially all of the debt shown in the table below is denominated in United States dollars. The fair value of fixed rate debt was less than its carrying value by $71.1 at December 31, 2009, and less than its carrying value by $107.1 at December 31, 2008. The increase in the fair market value of the Companys debt is primarily due to the decrease in credit spreads over risk-free rates as compared to the prior year end. The fair value of fixed rate debt was calculated using a Bloomberg secondary market rate, as of December 31, 2009 for similar remaining maturities, plus an estimated spread over such Treasury securities representing the Companys interest costs under its medium-term note program. The fair value of variable rate debt is not significantly different from its recorded amount.
Derivative Financial Instruments
The Company is subject to market and financial risks related to interest rates, foreign currency, and commodities. In the normal course of business, the Company utilizes derivative instruments (individually or in combinations) to reduce or eliminate these risks. The Company seeks to use derivative contracts that qualify for hedge accounting treatment; however, some instruments may not qualify for hedge accounting treatment. It is the Companys policy not to speculate using derivative instruments. Information regarding cash flow hedges, fair value hedges and net investment hedges is provided in Note S on page 115 to the Notes to the Consolidated Financial Statements and is incorporated by reference into this section.
Investment in Foreign Subsidiaries
The Company views its investment in foreign subsidiaries as a long-term commitment, and does not hedge translation exposures. The investment in a foreign subsidiary may take the form of either permanent capital or notes. The Companys net investment (i.e., total assets less total liabilities subject to translation exposure) in foreign subsidiaries, including those held for sale, at December 31 is as follows:
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, Financial Statement Schedule and supplementary financial information included in this Report are listed in Item 15 and begin immediately after Item 15, and are incorporated by reference.
Item 9A. Controls and Procedures.
Effectiveness of the Companys Disclosure Controls and Procedures
An evaluation as of December 31, 2009 was carried out by the Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded the Companys disclosure controls and procedures were effective, as of December 31, 2009, to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures, include without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Managements Annual Report on Internal Control over Financial Reporting and Auditors Attestation Report
Managements Annual Report on Internal Control over Financial Reporting can be found on page 71, and the Report of Independent Registered Public Accounting Firm regarding the effectiveness of the Companys internal control over financial reporting can be found on page 72 of this Form 10-K. Each is incorporated by reference into this Item 9A.
Changes in the Companys Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 9B. Other Information.
Item 10. Directors, Executive Officers and Corporate Governance.
The section entitled Proposal 1Election of Directors and subsections entitled Corporate Governance, Board and Committee Composition and Meetings, Consideration of Director Nominees and Section 16(a) Beneficial Ownership Reporting Compliance in the Companys definitive Proxy Statement for the Companys Annual Meeting of Shareholders to be held on May 13, 2010, are incorporated by reference.
Directors of the Company
Directors are elected annually at the Annual Meeting of Shareholders and hold office until the next annual meeting of shareholders or until their successors are elected and qualified. All current directors have been nominated for re-election at the Companys Annual Meeting of Shareholders to be held May 13, 2010. If a nominated director fails to receive an affirmative majority of the votes cast in the director election, the director has offered to resign from the Board. The Board, in its discretion, may accept the resignation.
Brief biographies of the Companys Board of Directors are provided below. Our employment agreements with Messrs. Haffner and Glassman provide that they may terminate the agreement if not elected as a director. See the Exhibit Index on page 123 for reference to the agreements.
Robert E. Brunner, age 52, has been the Executive Vice President of Illinois Tool Works (ITW), a diversified manufacturer of advanced industrial technology, since 2006. He previously served ITW as PresidentGlobal Auto beginning in 2005 and PresidentNorth American Auto from 2003. Mr. Brunner holds a degree in finance from the University of Illinois and an MBA from Baldwin-Wallace College. Mr. Brunners experience and leadership with ITW, as a diversified manufacturer with a global footprint, provides valuable insight to our Board on operational and international issues. As a director of the National Association of Manufacturers, his familiarity with public policy issues and advocacy affecting the Company is a great asset. He was first elected as a director of the Company in 2009.
Ralph W. Clark, age 69, held various executive positions at International Business Machines Corporation (IBM) from 1988 until 1994, including Division PresidentGeneral and Public Sector. He also served as Chairman of Frontec AMT Inc., a software company, from 1994 until his retirement in 1998 when the company was sold. Mr. Clark holds a masters degree in economics from the University of Missouri. Through Mr. Clarks career with IBM and Frontec and his current board service with privately-held companies, he has valuable experience in general management, marketing, information technology, finance and strategic planning. He was first elected as a director of the Company in 2000.
R. Ted Enloe, III, age 71, has been Managing General Partner of Balquita Partners, Ltd., a family securities and real estate investment partnership, since 1996. He also served as President and Chief Executive Officer of Optisoft, Inc., a manufacturer of intelligent
traffic systems, from 2003 to 2005. Mr. Enloe currently serves as a director of Silicon Laboratories Inc., a designer of mixed-signal integrated circuits, and Live Nation, Inc., a venue operator, promoter and producer of live entertainment events. He holds a bachelors degree in petroleum engineering from Louisiana Polytechnic University and a law degree from Southern Methodist University. Mr. Enloe brings extensive knowledge of public and private company operations and oversight from his past and present directorships in various industries. His wide-ranging experience combined with his intimate knowledge of the Company from over forty years on the Board provides an exceptional mix of familiarity and objectivity. He was first elected as a director of the Company in 1969.
Richard T. Fisher, age 71, has been Senior Managing Director, Midwest Division of Oppenheimer & Co., an investment banking firm, since 2002. He served as Managing Director of CIBC World Markets Corp., an investment banking firm, from 1990 to 2002. Mr. Fisher holds a degree in economics from the Wharton School of the University of Pennsylvania. Mr. Fishers career in investment banking provides the Board a unique perspective on the Companys strategic initiatives, financial outlook and investor markets. His valuable business skills and long-term perspective of the Company fully inform his leadership as the Companys independent Board Chair. He was first elected as a director of the Company in 1972 and has served as the independent Board Chair since 2008.
Karl G. Glassman, age 51, was appointed Chief Operating Officer of the Company in 2006 and Executive Vice President in 2002. He previously served the Company as President of the Residential Furnishings Segment from 1999 to 2006, Senior Vice President from 1999 to 2002, President of Bedding Components from 1996 to 1998, and in various capacities since 1982. He holds a degree in business management and finance from California State UniversityLongbeach. With over two decades experience between leading the Companys largest segment and as its Chief Operating Officer, Mr. Glassman provides in-depth operational knowledge to the Board and is a key interface between the Boards oversight and strategic planning and its implementation at all levels of the Company around the world. Mr. Glassman was first elected as a director of the Company in 2002.
David S. Haffner, age 57, was appointed Chief Executive Officer of the Company in 2006 and has served as President of the Company since 2002. He previously served as the Companys Chief Operating Officer from 1999 to 2006, Executive Vice President from 1995 to 2002 and in other capacities since 1983. Mr. Haffner serves as a director of Bemis Company, Inc., a manufacturer of flexible packaging and pressure sensitive materials. He holds a bachelors degree in engineering from the University of Missouri and a masters degree in business administration from the University of Wisconsin. As the Companys CEO, Mr. Haffner provides comprehensive insight to the Board across the spectrum from strategic planning to implementation to execution and reporting, as well as its relationships with investors, the finance community and other key stakeholders. Mr. Haffner was first elected as a director of the Company in 1995.
Joseph W. McClanathan, age 57, has served as President and Chief Executive Officer of the Energizer Household Products Division of Energizer Holdings, Inc., a manufacturer of portable power solutions, since November 2007. Prior to his current position, he served Energizer as President and Chief Executive Officer of the Energizer Battery Division from 2004 to 2007, as PresidentNorth America from 2002 to 2004, and as Vice PresidentNorth America from 2000 to 2002. Mr. McClanathan holds a degree in management from Arizona State University. Through his leadership experience at Energizer, Mr. McClanathan
offers an exceptional perspective to the Board on manufacturing operations, marketing and development of international capabilities. He was first elected as a director of the Company in 2005.
Judy C. Odom, age 57, served as Chairman of the Board and Chief Executive Officer of Software Spectrum, Inc., a computer software company, until 2002. She is a director of Harte Hanks Inc., a direct marketing company. Ms. Odom has been a Certified Public Accountant and holds a degree in business administration from Texas Tech University. Ms. Odoms background in accounting, finance and as a board chair and CEO provide her with leadership and technical expertise to chair our Audit Committee. Her entrepreneurial experience in co-founding Software Spectrum provides a valuable point of view, especially as the Company evaluates new growth opportunities. Ms. Odom was first elected as a director of the Company in 2002.
Maurice E. Purnell, Jr., age 70, has been Of Counsel to the law firm of Locke Lord Bissell & Liddell LLP, or its predecessor firm, since 2002, where he had been a partner since 1972. Mr. Purnell holds a bachelors degree in history from Washington & Lee University, a masters in business administration from the Wharton School of the University of Pennsylvania and a law degree from Southern Methodist University. With over forty years of experience in securities law, financing and acquisitions in his corporate law practice, Mr. Purnell is well suited to advise the Board on business and compliance matters and chair our Nominating & Corporate Governance Committee. He was first elected as a director of the Company in 1988.
Phoebe A. Wood, age 56, served as Vice Chairman, Chief Financial Officer and in other capacities at Brown-Forman Corporation, a diversified consumer products manufacturer, from 2001 until her retirement in 2008. Ms. Wood previously held various positions at Atlantic Richfield Company, an oil and gas company, from 1976 to 2000. Ms. Wood is a director of Invesco, Ltd., an independent global investment manager. She holds a bachelors degree from Smith College and a masters in business administration from UCLA. From her career in finance, culminating as the CFO of Brown-Forman, Ms. Wood provides the Board with a wealth of understanding on the financing, accounting and compliance issues it faces in overseeing Leggett. Ms. Wood was first elected as a director of the Company in 2005.
Please see the Supplemental Item in Part I hereof, for a listing of and a description of the positions and offices held by the executive officers of the Company.
The Company has adopted a code of ethics that applies to its chief executive officer, chief financial officer, principal accounting officer and corporate controller called the Leggett & Platt, Incorporated Financial Code of Ethics. The Company has also adopted a Code of Business Conduct and Ethics for directors, officers and employees and Corporate Governance Guidelines. The Financial Code of Ethics, the Code of Business Conduct and Ethics and the Corporate Governance Guidelines are available on the Companys Internet website at http://www.leggett.com.
The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K by posting any amendment or waiver to its Financial Code of Ethics, within four business days, on its website at the above address for at least a 12 month period. We routinely post important information to our website. However, the Companys website does not constitute part of this Annual Report on Form 10-K.
Item 11. Executive Compensation.
The subsections entitled Board and Committee Composition and Meetings and Director Compensation together with the entire section entitled Executive Compensation and Related Matters in the Companys definitive Proxy Statement for the Companys Annual Meeting of Shareholders to be held on May 13, 2010, are incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The entire sections entitled Security Ownership and Equity Compensation Plan Information in the Companys definitive Proxy Statement for the Companys Annual Meeting of Shareholders to be held on May 13, 2010, are incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The subsections entitled Transactions with Related Persons, Director Independence and Board and Committee Composition and Meetings in the Companys definitive Proxy Statement for the Companys Annual Meeting of Shareholders to be held on May 13, 2010, are incorporated by reference.
Item 14. Principal Accounting Fees and Services.
The subsections entitled Audit and Non-Audit Fees and Pre-Approval Procedures for Audit and Non-Audit Services in the Companys definitive Proxy Statement for the Companys Annual Meeting of Shareholders to be held on May 13, 2010, are incorporated by reference.
Item 15. Exhibits, Financial Statement Schedules.
(a) Financial Statements and Financial Statement Schedules.
The Reports, Financial Statements and Financial Statement Schedule listed below are included in this Form 10-K:
We have omitted other information schedules because the information is inapplicable, not required, or in the financial statements or notes.
(b) ExhibitsSee Exhibit Index beginning on page 123.
We did not file other long-term debt instruments because the total amount of securities authorized under any of these instruments does not exceed ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such instruments to the SEC upon request.
Managements Annual Report on Internal Control Over Financial Reporting
Management of Leggett & Platt, Incorporated is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Leggett & Platts internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Companys internal control over financial reporting includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management (including ourselves), we conducted an evaluation of the effectiveness of Leggett & Platts internal control over financial reporting, as of December 31, 2009, based on the criteria in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under this framework, we concluded that Leggett & Platts internal control over financial reporting was effective as of December 31, 2009.
Leggett & Platts internal control over financial reporting, as of December 31, 2009, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on page 72 of this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Leggett & Platt, Incorporated:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of Leggett & Platt, Incorporated and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
St. Louis, MO
February 24, 2010
Consolidated Statements of Operations
The accompanying notes are an integral part of these financial statements.
Consolidated Balance Sheets