Leggett Misses but Outlook Bright - Analyst Blog

Leggett & Platt Inc. (LEG), the manufacturer of diversified engineered products and components, recently posted fourth-quarter and fiscal 2010 results that missed Zacks estimates.

The company's quarterly earnings of 21 cents a share fell short of the Zacks Consensus Estimate of 23 cents, and also dropped 19.2% from the year-ago figure of 26 cents  a share, hurt by a negative LIFO impact and increase in raw material costs. 

For fiscal 2010, Leggett posted earnings per share of $1.16, rising a sharp 56.8% from 74 cents a share earned in the year-ago quarter. Higher sales coupled with a lower effective tax rate led to the earnings spike. However, earnings fell short of the Zacks Consensus Estimate of $1.17.

Total sales of the company climbed 4% in the quarter to $801.9 million compared with $769.7 million a year ago, backed by a surge in unit volume of specialized products. Total revenue beat the Zacks Consensus Estimate of $780.0 million.  

For 2010, net sales of the company jumped 10% to $3,359.1 million from $3,055.1 million. Net sales fell short of the Zacks Consensus Estimate of $3,337.0 million.  

Margins

Gross profit for the quarter fell 16.9% to $141.5 million, and gross margin contracted 450 basis points to 17.6%, reflecting higher cost of goods sold, partially offset by a modest increase in the top-line. Operating income dropped 34.6% to $50.1 million, and operating margin shrunk 370 basis points to 6.2%.

In fiscal 2010, gross profit climbed 4.1% to $655.4 million and gross margin contracted 110 basis points to 19.5%.  Operating income increased 25.1% to $288.0 million. Operating margin expanded 110 basis points to 8.6%.

By Segment

Residential Furnishings revenue decreased $4 million to $411.3 million in the quarter due to a 3% contraction in unit volume, partially offset by steel-related price inflation. Operating income fell $7 million to $27.4 million.

For fiscal 2010, segment revenue and operating income increased $54 million and $69 million to $1,746.8 million and $159.7 million, respectively.

Total sales of Commercial Fixturing & Components increased a minimal 0.6% to $101.8 million. However, operating loss aggravated 94.0% to $3.5 million as increase in sales was more than offset by a rise in restructuring cost.

For fiscal 2010, revenue at the segment came in at $534.8 million representing an 8.8% year-over year increase. The increase in sales was due to the launch of new programs with office furniture manufacturers and higher sales of store fixtures to retailers.  EBIT from continuing operations increased 204% to $23.1 million, mostly owing to increased sales.

Industrial Materials logged a total sales increase of 8.3% to $170.2 million, while operating income dipped 11.0% to $10.4 million due to lower metal margins that fully offset the benefits from higher volumes.

For fiscal 2010, segment revenue increased 12.1% to $725.2 million while operating margin decreased 8% to $55.2 million.

Specialized Products segment witnessed a significant growth of 16.5% to $177.0 million with operating income increasing by 30.0% to $19.8 million. For fiscal 2010, total revenue increased 25.6% to $629.3 million while operating income soared 283% to $66.2 million.

Leggett Enhances Return

Leggett remains committed to returning value to shareholders. Fiscal 2010 marked the 39th consecutive year of a hiked dividend, which has been increasing at a CAGR of 14.0%.

During the quarter under review, the company repurchased 1.4 million shares at a price of $21.99 per share. For the full year, the company bought back 6.2 million shares and issued 3.6 million shares.

Looking ahead, management plans to buy back a total of 10 million shares, its maximum authorization in a year, and issue around 3 million shares in fiscal 2011.

Other Financial Details

Leggett exited the quarter with cash and cash equivalents of $244.5 million, long-term debt of $762.2 million, and shareholders' equity of $1,524.4 million. Leggett expects to generate more than $300 million in cash from operations in 2011. Leggett plans to deploy $85 million of the cash generated in capital expenditure programs and another $155 million in dividend payouts.

Guidance

Anticipating a steady revival in the economy, the company guides sales in the range of $3.4–$3.6 billion. On the back of promising sales, Leggett forecasts 2011 EPS in a band of $1.20–$1.40.

Leggett & Platt is a leading manufacturer of components used in residential and office furniture, carpet underlay, drawn steel wire and automotive seat support and lumbar systems in North America. Moreover, the company has a well-diversified customer base and solid research and development (R&D) capabilities. This offers a competitive edge to the company and strengthens its pricing power in the market.

The company nevertheless faces stiff competition from its rivals, such as Flexsteel Industries Inc. (FLXS), Genuine Parts Company (GPC) and Steelcase Inc. (SCS).

Leggett currently retains a Zacks #3 Rank, which translates to a short-term Hold rating. However, our long-term recommendation remains Neutral.

 
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