Diversified manufacturer Leggett & Platt reported earnings of $.63 per share, a first quarter record. The EPS improvement (versus $.50 in 2015) reflects higher unit volume, a tax-related benefit ($.04) from the adoption of a new accounting standard regarding stock-based compensation, and non-recurrence of last year's impairment charge ($.02) in the now-divested Steel Tubing business unit.
Sales from continuing operations were $938 million, a decline of 3% versus 1Q 2015 as a result of late-2015 divestitures. Unit volume grew 4%, and acquisitions added 1% to sales; however, these gains were offset by raw material-related price deflation and currency rate changes.
EBIT margin improved 190 basis points versus first quarter last year, from 11.6% to 13.5%, as a result of higher unit volume, efficiency improvements, and continued portfolio management.
CEO Comments
President and CEO Karl G. Glassman commented, "We are very pleased with our start to 2016. During the first quarter we generated volume gains and improved margins, strong cash flow from operations, and record first quarter EPS. For the full year, we expect to achieve similar results: strong EBIT margin, significantly improved operating cash flow, and record EPS.
"Overall unit volume grew 4% during the quarter, despite short-term demand softness in certain of our residential end markets. We continue to benefit from ongoing content gains and new program awards in our Automotive business, the bedding market's shift to Comfort Core springs, and demand strength in our Adjustable Bed unit.
"Our primary financial goal is to achieve Total Shareholder Return (TSR1) that ranks in the top third of the S&P 500 over rolling three-year periods. For the three years that began January 1, 2014, we have so far (over the last 28 months) generated TSR of 25% annually; that performance ranks within the top 10 percent of the S&P 500.
"We are achieving these results while maintaining our strong financial base. We ended the quarter with over $300 million available through our commercial paper program. Net debt to net capital was 37%, comfortably within our 30% - 40% target range. At quarter end, the company's debt was 1.6 times its trailing 12-month adjusted2 EBITDA."
Dividends, and Stock Repurchases
In February, Leggett & Platt's Board of Directors declared a $.32 first quarter dividend, one cent higher than last year's first quarter dividend. Thus, 2016 marks the 45th consecutive annual dividend increase for the company, with a compound annual growth rate of 13%. Leggett & Platt is proud of its dividend record and plans to continue it.
At yesterday's closing share price of $48.59, the indicated annual dividend of $1.28 per share generates a dividend yield of 2.6%, one of the higher dividend yields among the 50 stocks of the S&P 500 Dividend Aristocrats.
During the first quarter the company purchased 2.5 million shares of its stock at an average price of $43.75, and issued 1.1 million shares through employee benefit plans and option exercises. The number of shares outstanding declined to 134.2 million, a 2.6% reduction over the last 12 months.
Increasing 2016 Continuing Operations EPS Guidance to $2.40 - $2.60
With strong first quarter earnings, the company is raising EPS guidance by $.10. For 2016, EPS from continuing operations is now expected to be $2.40 to $2.60. The new accounting standard for stock-based compensation resulted in a tax-related first quarter EPS benefit of $.04, but is expected to have a much smaller impact on each of the remaining quarters of 2016. Accordingly, this guidance assumes a 27% full-year effective tax rate.
Sales guidance is unchanged at $3.9-$4.1 billion, which equates to overall growth between zero and 5%. This guidance assumes unit volume growth in the mid-to-high single digits, reflecting strong demand in many of the company's product categories and improvement in the majority of its end markets. As partial offsets to the volume growth, sales guidance includes an approximate 2% reduction from commodity deflation, and a 2% decrease from late 2015 divestitures, net of small acquisitions.
Based upon this guidance, 2016 EBIT margin should be equivalent to, or slightly above, 2015's adjusted EBIT margin of 12.9%. The benefit to margin from higher unit volume should be partially offset by non-recurrence of the 2015 pricing lag.
Discontinued operations EPS for 2016 is forecast at $.15 due to the benefit the company receives, as plaintiff, from settlement of a longstanding antitrust claim. This cash settlement should generate $25 million of after-tax income in the second quarter. The bulk of the benefit ($21 million) is associated with discontinued operations, and specifically attributable to Leggett's former Prime Foam Products business (which was sold in 2007).
Cash from operations is expected to be approximately $500 million in 2016, which includes the $25 million of antitrust settlement proceeds. Capital expenditures should be roughly $130 million, and dividend payments should approximate $175 million. The company's target for dividend payout is 50‑60% of net earnings; however, actual payout was higher for several years prior to 2015, and as a result dividend growth was modest. But with recent growth in annual earnings, the company is now within its target payout range, and has flexibility to consider future dividend growth that more closely aligns with EPS growth.
The company's top priorities for use of cash are organic growth, dividends, and strategic acquisitions. After funding those priorities, if there is still cash available, the company generally intends to repurchase its stock (rather than repay debt early or stockpile cash). Management has standing authorization from the Board of Directors to buy up to 10 million shares each year; however, no specific repurchase commitment or timetable has been established. The company expects to repurchase 4-5 million shares in 2016, and issue about 2 million shares, primarily for employee benefit plans.
SEGMENT RESULTS – First Quarter 2016 (versus the same period in 2015)
Residential Furnishings – Total sales decreased $25 million, or 5%. Same location sales decreased 5%; unit volume increased 2%, but was more than offset by raw material-related price decreases and currency impacts. EBIT (earnings before interest and taxes) decreased $4 million, with the benefit from overall higher unit volume more than offset by a FIFO inventory impact and lower unit volume in stronger-margin businesses.
Commercial Products – Total sales increased $21 million, or 15%. Same location sales grew 7%, primarily from unit volume growth in Adjustable Bed and Fashion Bed. EBIT increased $6 million due to higher sales, operational improvements, and a $2 million gain on sale of a building.
Industrial Materials – Total sales decreased $62 million, or 28%. Same location sales decreased due to steel-related price deflation and lower Drawn Wire volume. Divestiture of the Steel Tubing business in December 2015 reduced sales by $25 million. EBIT increased $12 million, with the impact from lower volume more than offset by cost and efficiency improvements, and non-recurrence of last year's $6 million impairment charge in the Steel Tubing business unit.
Specialized Products – Total sales increased $21 million, or 9%. Same location sales increased 10%, with volume gains across the segment partially offset by currency impacts (-2%). EBIT increased $7 million primarily due to increased volumes.