Diversified manufacturer Leggett & Platt reported second quarter sales of $989 million, an increase of 3% versus second quarter 2016. Organic sales grew 4% from continued strength primarily in Automotive and Adjustable Bed, and raw-material related price inflation. Divestitures, net of acquisitions, reduced sales slightly.

Second quarter earnings were $.64 per share, versus $.72 in 2Q 2016. Compared to last year's 2Q adjusted1 EPS of $.66, EPS declined $.02. The earnings benefit from sales growth and a lower effective tax rate was offset primarily by higher raw material costs. EBIT and EBIT margin declined versus second quarter last year due, in part, to the pricing lag the company experiences when passing along commodity inflation.

CEO Comments

President and CEO Karl G. Glassman commented, "The growth we experienced in the first quarter continued into the second, with organic sales growing 4% during 2Q from both volume gains and inflation. This is a welcome change after two years of reported quarterly sales declines in 2015 and 2016.

"Unit volume grew 2% in the second quarter, and 4% in the first quarter. The sequential decrease is attributable to demand softness in some end markets and stronger comps in 2Q last year. For the full year we are lowering our sales guidance range by $50 million, or approximately 1%. We now expect full year sales of $3.9-4.0 billion, and 4%-7% sales growth. Given the lower sales expectation, we are also reducing the midpoint of our full-year EPS guidance by $.05, to $2.60 (from $2.65).

"For a decade now our primary financial goal has been to achieve Total Shareholder Return (TSR) that ranks within the top third of the S&P 500 over rolling three-year periods. In the three-year period that began January 1, 2015, we have so far (over the last 31 months) generated TSR of 11% annually, which ranks within the top 40 percent of the S&P 500, and exceeds the 10% annual TSR of the S&P 500 index.

"We are achieving these results while maintaining our strong financial base. Net debt to net capital1 was 39% at quarter end, near the top of our 30% ‑ 40% target range, reflecting working capital investment, stock repurchases, and increased acquisition activity. At quarter end, the company's debt was 2.0 times its trailing 12-month adjusted1EBITDA."

Dividends and Stock Repurchases

In May, Leggett & Platt's Board of Directors declared a $.36 second quarter dividend, two cents higher than last year's second quarter dividend. This marks the company's 46th annual dividend increase, a record of consecutive dividend increases that fewer than a dozen S&P 500 companies have exceeded. Leggett & Platt is proud of its dividend record and plans to extend it.

At yesterday's closing share price of $51.83, the indicated annual dividend of $1.44 per share generates a dividend yield of 2.8%, one of the higher dividend yields among the 51 stocks of the S&P 500 Dividend Aristocrats.

During the second quarter the company repurchased 0.2 million shares of its stock and also issued 0.2 million shares. For the first half of 2017, the company repurchased 2.4 million shares, and issued 1.2 million through employee benefit plans and option exercises. At quarter's end, 132.3 million shares were outstanding, a 0.8% decline over the last 12 months. For the full year, the company anticipates repurchasing approximately 3 million shares, and issuing approximately 1.5 million shares for employee benefit plans.

2017 Sales and EPS Guidance Modified

For 2017, EPS guidance is narrowed to a range of $2.55 to $2.65 versus the prior expectation of $2.55 to $2.75. The $.05 reduction to the midpoint of EPS guidance primarily reflects lower sales guidance. Sales are now anticipated to be $3.9-4.0 billion, which equates to growth of 4%-7%; this is a $50 million reduction versus the April sales guidance range. Unit volume growth is expected to be in the low-to-mid-single digits, from strength in Automotive, Adjustable Bed, International Spring, Work Furniture, and Geo Components. Raw material-related price increases should also contribute to sales growth. Based upon this guidance, 2017 EBIT margin should be approximately 12.5% to 13.0%.

Cash from operations is expected to approximate $450 million in 2017, with working capital increases from sales growth and inflation being a significant use of cash. Capital expenditures should be roughly $160 million, and dividend payments are expected to approximate $185 million. Dividend payout is targeted to be 50‑60% of adjusted earnings.

The company's top priorities for use of cash are organic growth, dividends, and strategic acquisitions. After funding those priorities, if there is 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.

SEGMENT RESULTS – Second Quarter 2017 (versus the same period in 2016)

Change to Segment Reporting – Effective January 1, the company's segment reporting structure was modified to align with changes made to the management organizational structure. The company filed an 8-K on April 10, 2017 that included revised segment financials from 2012 through 2016 (quarters and years). The new structure is described in the 8-K; there were only two changes to the business unit structure:

The Home Furniture group moved from Residential Products to the Furniture Products segment (formerly called Commercial Products segment).
The Machinery group moved from Specialized Products to the Residential Products segment.

In addition, changes in LIFO reserve are now included within the segments to which they relate (primarily Industrial Products).

Residential Products – Total sales were flat. Acquisitions contributed 3% to sales growth. Same location sales declined 3%, as follows: i) sales volume declined 5%, primarily (4%) from fewer pass-through sales of adjustable beds; ii) inflation contributed 2% to sales growth. EBIT decreased $2 million; however, last year's EBIT included a $7 millionlitigation gain. Setting aside that gain, EBIT improved due to pricing discipline and a favorable sales mix.

Industrial Products – Total sales decreased 7% due to divestitures completed in 2016. EBIT decreased $6 million due to the lag in recovering higher steel costs.

Furniture Products – Total sales increased 7%, primarily due to gains in Adjustable Bed. EBIT decreased $4 million due to an unfavorable sales mix and raw material cost increases.

Specialized Products – Total sales increased 1%. Same location sales increased 5%, with volume gains in Automotive partially offset by a currency impact and a decline in CVP. Divestitures, net of acquisitions, reduced sales by 3%. EBIT declined $11 million; however, 2016 included a net $8 million benefit from two unusual items (a gain on sale, and an offsetting goodwill impairment). The EBIT benefit from higher sales was more than offset by growth-related costs in Automotive, higher raw material costs, and other small items.