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Leggett (LEG) Tops on Q2 Earnings & Sales, Trims 2018 View

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Leggett & Platt Inc. (LEG - Free Report) reported better-than-expected results in the second quarter of 2018, buoyed by solid contribution from several businesses including Automotive, Bedding, Adjustable Bed, Aerospace, Geo Components and Work Furniture. However, soft demand for Home Furniture and Fashion Bed partially offset the positives. Evidently, the company trimmed its sales and EPS guidance for 2018.

The company’s quarterly adjusted earnings of 63 cents per share topped the Zacks Consensus Estimate of 61 cents but decreased 2% year over year. Higher sales growth was more than offset primarily by higher raw material costs as well as the timing of the pricing lag the company experiences when passing along the higher costs.

Delving Deeper

Net sales increased about 11% to $1,102.5 million and surpassed the consensus mark of $1,093 million.

Organic sales increased 10% and volumes were up 6% backed by strength in Automotive, Bedding, Adjustable Bed and several other businesses. Additionally, improved sales were driven by a 4% gain, owing to raw material price inflation and currency. Furthermore, acquisitions contributed around 3% to sales, partly offset by divestitures.

Gross profit amounted to $231 million in the quarter, flat year over year.  However, gross margin contracted 230 basis points (bps) to 21%. Also, the company’s adjusted EBIT margin declined 140 bps to 11% in the second quarter. Adjusted EBIT was down 1% to $121.1 million due to  pricing lag and commodity inflation.

Segment Details

Residential Products’ sales (excluding inter-segment sales) of $438.8 million increased 7.6% from the year-ago quarter, driven by a 7% improvement in same location sales along with contribution from buyouts. Also, higher volumes (up 4%) as well as contribution of 3% from raw material price inflation and currency aided the results. Including inter-segment sales, total sales of the segment rose 7.6% to $443.5 million.

The Industrial Products segment's sales improved 27% to $96.4 million. Total sales, including inter-segment sales, were up 22.5% to $170.5 million, mainly driven by raw material price inflation and higher volume.

Sales at Furniture Products increased 9.1% to $291.4 million, courtesy of benefits from higher Adjustable Bed and Work Furniture sales. This was somewhat negated by declines in Home Furniture and Fashion Bed. However, total sales of the segment (including inter-segment sales) grew 8.6% to $295 million.

The Specialized Products segment's sales rose 15.7% to $275.9 million. Same location sales climbed 11%, backed by solid Automotive and Aerospace volumes, as well as favorable currency impact. Also, the Precision Hydraulic Cylinders’ (PHC) acquisition added nearly 9% to sales growth, which was offset by a 5% impact from the divestiture of CVP. Total sales of the segment (including inter-segment sales) climbed 15.2% to $276.5 million.

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise

 

Financials

Leggett ended second quarter with cash and cash equivalents of $446.4 million, and long-term debt of $1,298 million. Furthermore, the company generated $80.5 million in cash flow from operations in the quarter.

The company had net debt-to-capital ratio of 42% at the end of the second quarter. Moreover, Leggett’s debt was 2.5 times of the trailing 12-month adjusted EBITDA.

In addition, management repurchased nearly 1.3 million shares in the quarter for an average price of $41.02, and issued 0.1 million shares through employee benefit plans and option exercises. Also, in May, it declared second-quarter dividend of 38 cents per share, reflecting an increase of two cents from the year-ago period. This marks Leggett’s 47th consecutive year of dividend increase.

Guidance

Leggett has been significantly gaining from inflation and currency, which have been aiding its top line. Further, management remains optimistic of growth opportunities in the Bedding business and projects market improvement as the year progresses. However, ongoing steel cost inflation has been largely weighing on its margins.

Following the quarterly results, management updated its guidance for 2018. Sales are now projected to grow nearly 8-10% year over year to $4.25-$4.35 billion, down from the previously guided range of $4.3-$4.4. The lower expectation has mainly stemmed from soft demand for Home Furniture and Fashion Bed, and lower-than-expected Adjustable Bed sales, despite strong year-over-year growth of the business. The company continues to expect mid-single-digit volume growth, raw material price increases and favorable currency. Additionally, the acquisition is likely to contribute 2% to sales growth.

Consequently, EBIT margin is envisioned to be nearly 11.3-11.8% compared with 11.5-12% guided earlier.

Based on the above iterations, management projects earnings from continuing operations in the range of $2.55-$2.70 per share, down 7 cents from $2.60-$2.80 projected earlier. The downside can be attributed to adverse impacts of continued steel cost inflation in the Home Furniture business as well as lower-than-expected sales. Notably, the guidance takes into account an effective tax rate of 21%. The Zacks Consensus Estimate for the year is pegged at $2.65.

The company seems to be continuing with its trend of generating more cash to fund dividends and capital expenditures. For 2018, Leggett expects operating cash flow of about $425 million compared with $450 million anticipated earlier. Capital expenditure for the year is still projected at $180 million ($160 expected earlier), while the company intends to spend $195 million for dividend payouts. The company also outlined the target dividend payout ratio to be 50-60% of adjusted earnings. Furthermore, it expects payout for 2018 to be near the midpoint of the aforementioned range.

Meanwhile, management plans to continue with its share repurchase program, having a standing authorization to buy back up to 10 million shares every year, after fulfilling all priority requirements.

Zacks Rank & Stocks to Consider in the Consumer Discretionary Space

Leggett currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks from the same space include Activision Blizzard , JAKKS Pacific (JAKK - Free Report) and Boyd Gaming (BYD - Free Report) , each carrying a Zacks Rank #2 (Buy).

Activision Blizzard, JAKKS Pacific and Boyd Gaming’s earnings for 2018 are expected to increase 15.4%, 53.9% and 27.2%, respectively.

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