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

The company's quarterly adjusted earnings of 35 cents a share fell short of the Zacks Consensus Estimate of 37 cents. However, quarterly earnings improved by a penny from the prior-year quarter.

Total sales of the company climbed 8.0% in the quarter to $945.2 million compared with $874.3 million a year ago, primarily backed by an increase in price that brought little incremental profit. Total revenue of the company beats the Zacks Consensus Estimate of $928.0 million.

Margins

Despite flat volume growth, gross profit for the quarter inched up 1.2% to $181.9 million. However, gross margin contracted 140 basis points to 19.2%, reflecting higher cost of goods sold. Operating income dropped 7.1% to $79.1 million, and operating margin shrunk 130 basis points to 8.4% due to an increase of 10.0% in Selling & Administrative Expenses.

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

By Segment

Residential Furnishings revenue upped 2.3% to $467.7 million in the quarter as increase in prices more than offset a decline of 4.0% in unit volume. However, increased material costs resulted in a fall in operating income by 8.0% to $41.2 million.

Total sales of Commercial Fixturing & Components moved down 2.1% to $138.8 million primarily due to a decline of 4.0% in unit volume. Consequently, operating income plummeted 14.0% to $7.5 million.

Industrial Materials logged a total sales increase of 17.7% to $229.1 million, backed by an increase in prices and unit volumes. However, operating income plunged 19.0% to $13.6 million due to benefits from higher volumes and increased prices, more than offset by increase in raw material costs.

Specialized Products segment witnessed a significant growth of 19.5% to $186.5 million with operating income increasing robustly by 14.0% to $21.4 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 2.0 million shares at an average price of $25.86 per share and has issued 0.9 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 4 million shares in fiscal 2011.

Other Financial Details

Leggett exited the quarter with cash and cash equivalents of $203.3 million, long-term debt of $856.6 million, and shareholders' equity of $1,454.7 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 lower market growth expectation, the company has narrowed its sales guidance range for fiscal 2011 from $3.5 – $3.8 billion to $3.5 – $3.7 billion. On the back of promising sales, Leggett also narrowed its forecasted 2011 EPS in the range of $1.25 – $1.40 per share from $1.25 – $1.50 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 #3 Rank, which translates to a short-term 'Hold' rating. However, our long-term recommendation remains 'Neutral'.

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