Leggett Misses, Lowers Guidance

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 earnings of 31 cents a share fell short of the Zacks Consensus Estimate of 36 cents. However, quarterly earnings were flat compared with the prior-year quarter.

Total sales of the company climbed 8.6% in the quarter to $940.9 million compared with $866.5 million a year ago, primarily backed by sales growth in items that brought little incremental profit. Moreover, increased pricing and favorable currency translations mainly accounted for the growth. Total revenue of the company beats the Zacks Consensus Estimate of $931.0 million.

Margins

Despite flat volume growth, gross profit for the quarter inched up 1.0% to $170.4 million. However, gross margin contracted 140 basis points to 18.1%, reflecting higher cost of goods sold. Operating income dropped 5.3% to $71.6 million, and operating margin shrunk 110 basis points to 7.6% due to an increase of 7.2% in Selling & Administrative Expenses.

The company has anticipated that the demand will pick up in the second half of fiscal 2011. However, it came in the opposite direction and analysts believe that it will take much longer time than anticipated to see favorable economic scenario.

By Segment

Residential Furnishings revenue upped 6.4% to $472.3 million in the quarter due to increased prices, units sold and favorable foreign currency translations. However, increased material costs, unfavorable sales mix and competitive pricing resulted in a fall in operating income by 12.5% to $33.5 million.

Total sales of Commercial Fixturing & Components moved down 5.2% to $141.7 million, primarily due to a decline of 7.0% in unit volume. Consequently, operating income plummeted 33.0% to $6.7 million.

Industrial Materials logged a total sales increase of 18.3% to $216.7 million, backed by an increase in prices and a shift in sales from intra-segment to trades sales. However, operating income plunged 19.9% to $11.7 million due to lower wire and tubing volumes and increased raw material costs.

Specialized Products segment witnessed a significant growth of 17.4% to $187.7 million with operating income increasing robustly by 7.3% to $20.6 million, primarily due to increase in volumes partially offset by increased raw material costs.

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 28 cents a share.

During the quarter under review, the company repurchased 2.6 million shares at an average price of $19.72 per share. The total number of shares purchased during the fiscal has reached to 9.4 million. Year-to-date, the company has issued 2.9 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 $218.8 million, long-term debt of $897.3 million, and shareholders' equity of $1,338.1 million. Leggett expects to generate more than $300 million in cash from operations in 2011.

Guidance

Anticipating a lower market growth expectation, the company has lowered its sales guidance for fiscal 2011 from the range of $3.5 – $3.7 billion to $3.6 billion. On the back of promising sales, Leggett also lowered and narrowed its forecasted 2011 EPS in the range of $1.15 – $1.20 per share from $1.25 – $1.40 per share.

Leggett faces stiff competition from its rivals, such as Flexsteel Industries Inc. ( FLXS ) , Genuine Parts Company ( GPC - Analyst Report ) and Steelcase Inc. ( SCS - Snapshot Report ) , The company currently retains a Zacks #3 Rank, which translates to a short-term Hold rating. However, our long-term recommendation on the stock remains Neutral.