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Leggett & Platt Inc. (LEG - Analyst Report), the manufacturer of diversified engineered products and components, recently posted first-quarter 2011 results that outpaced the Zacks Consensus Estimates.

The company's quarterly earnings of 30 cents a share surpassed the Zacks Consensus Estimate of 20 cents, but remains flat compared with the prior-year quarter.

Total sales of the company climbed 9.7% in the quarter to $895.8 million compared with $816.4 million a year ago, backed by a surge in unit volume of Specialized Products and Industrial Materials segments. Increase in price contributed 4% to total revenue, which beats the Zacks Consensus Estimate of $834.0 million.

Margins

Gross profit for the quarter soared 2.7% to $170.0 million. However, gross margin contracted 130 basis points to 19.0%, reflecting higher cost of goods sold. Operating income dropped 3.9% to $74.2 million, and operating margin shrunk 120 basis points to 8.3%.

During the quarter under review, inflation was the main concern for Leggett, which were offset by increasing product prices.

By Segment

Residential Furnishings revenue increased 5.8% to $459.8 million in the quarter due to price increase and expansion in unit volume. However, increased material costs and lower income from building sales resulted in fall in operating income by 14.3% to $42.1 million.

Total sales of Commercial Fixturing & Components declined 9.0% to $129.0 million. However, operating income inched up 3.8% to $8.2 million as the effect of lower sales was more than offset by a rise in gain from building sale.

Industrial Materials logged a total sales increase of 18.7% to $210.3 million as well as rise in operating income of 4.5% to $14.0 million due to benefits from higher volumes and increased prices partially offset by increase in raw material costs.

Specialized Productssegment witnessed a significant growth of 28.2% to $174.8 million with operating income increasing robustly by 115.5% to $18.1 million primarily due to increase in volumes.

Leggett Enhances Return

Leggett remains committed to returning value to shareholders. Fiscal 2011 marked the 40th consecutive year of a hiked dividend, which has been increasing at a CAGR of 14.0%. The board of directors has increased the quarterly dividend by a penny to 27 cents a share.

During the quarter under review, the company repurchased 5.4 million shares at an average price of $23.29 per share and has issued 1.8 million shares under employee benefit and stock purchase plan.

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 $195.4 million, long-term debt of $821.9 million, and shareholders' equity of $1,457.8 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 has increased its sales guidance for fiscal 2011 in the range of $3.5 to $3.8 billion from $3.4 to $3.6 billion. On the back of promising sales, Leggett also increased its forecasted 2011 EPS in the range of $1.25 to $1.50 per share from $1.20 to $1.40 per share.

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, which offers a competitive edge to the company and strengthens its pricing power in the market.

Leggett is in the midst of its three-part strategic plan, which was announced in November 2007 by the company. The company has till now successfully completed the first two-part of its strategic plan. The first part of the strategic plan was to divest low performing businesses while the second part comprised improvement in margins and returns. At present, Leggett is moving toward the third part of its strategic plan to achieve an annual growth rate of 4.0% to 5.0%.

Moreover, Leggett has significant operating leverage to accomplish its third part of strategic plan as the company has a considerable amount of retained spare production to meet the demand of $4.0 billion. Hence, the company will not require making any large capital investment.

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

Leggett currently retains a Zacks #4 Rank, which translates to a short-term 'Sell' rating. However, our long-term recommendation remains 'Neutral'.

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