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Leggett & Platt Inc. (LEG - Analyst Report) – the manufacturer of diversified engineered products and components – reported record-high earnings per share of 45 cents, a sharp rise of 45% year over year, in the third quarter of 2012. Prior to this, the company had posted record quarterly earnings of 39 cents per share way back in 2006. Quarterly earnings also swept past the Zacks Consensus Estimate of 38 cents. Better-than-expected results were mainly driven by a sturdy operational performance that comprised of superior volume and margin growth.

Total sales escalated 4% to $982.2 million compared with $940.9 million a year ago, while it marginally exceeded the Zacks Consensus Estimate of $981 million. Robust sales performance in the quarter came mainly from a 7% rise in same location sales volumes. However, this increase was slightly impacted by a 4% decline in revenue, which resulted from a slip in rod mill trade sales and fluctuations in currency rates.

Margins

Gross profit for the quarter surged 20.6% to $205.5 million, while gross margin expanded 280 basis points to 20.9%, mainly due to increased sales results and lower cost of goods sold.

Operating income soared 47% year over year to $104.9 million benefiting from higher unit volumes, diminished raw material costs in certain businesses, late-2011 restructuring activity and the acquisition of Western Pneumatic Tube. Simultaneously, operating margin also improved 310 basis points to 10.7%.

Segment Details

Third quarter Residential Furnishings revenue climbed 2% to $481.7 million on the back of a 4% rise in unit volume, offset in part, by currency translation effects. Operating income increased 19% year over year to $39.7 million, benefiting from the enlarged unit volumes as well as diminished raw material costs in certain businesses.

Sales of Commercial Fixturing & Components moved up 14.9% to $162.8 million, primarily due to a 21% increase in same location sales, offset by a decline resulting from a small divestiture. On the other hand, operating income recorded a whopping 187% increase to $19.2 million compared with $6.7 million in the prior-year quarter, driven by higher sales coupled with smaller cost improvement benefits.

Third quarter sales of the Industrial Materials segment witnessed a marginal rise of 0.6% to $218 million backed by a 9% sales gain from the acquisition of Western Pneumatic Tube. However, an 8% decline in same location sales driven by lower trade sales at the steel rod mill offset the sales growth. Operating income escalated 65% to $19.3 million, on the back of Western Pneumatics’ acquisition, reduced steel costs in some businesses and last year's restructuring activities.

Specialized Products segment’s sales inched up 1.8% to $191 million driven by a 5% unit volumes growth, offset by currency effects. Operating income grew 11% to $22.8 million, mainly due to improved sales.

Other Financial Details

Leggett had a solid financial base at the end of the third quarter of fiscal 2012 with cash and equivalents of $264.9 million, long-term debt of $860.2 million, and shareholders' equity of $1,400.8 million. The company’s net debt to net capital ratio as of September 30, 2012, was 33%, well within the company’s long-term targeted range of 30%–40%.

For the nine months, ended September 30, 2012, the company’s cash generated from operations increased 19% to $241.0 million. The strength in the company’s financial base also reflected in its ongoing commercial paper program and revolver facility balance of nearly $600 million as of the quarter’s end.

Simultaneously, the company has an impressive dividend policy alongside a regular share repurchase program, focused on returning better value to the shareholders. In August, the company raised its quarterly dividend by a penny to 29 cents per share. This represents a 3.6% increase from the previous dividend. On an annualized basis, the company’s dividend comes to $1.16 per share, yielding about 4.6% based on a closing price of $25.40 as of October 26, 2012.

Further enhancing investor returns, the company bought back nearly 0.6 million shares and issued 1.1 million shares to employees who exercised their stock options during the third quarter.

Guidance

Leggett forecasted full-year 2012 earnings per share between $1.45 and $1.52, representing a significant rise from earnings per share of 62 cents, 70 cents, $1.15 and $1.04 reported in the trailing four years. Net sales are anticipated in the range of $3.70–$3.75 billion.

However, the company projects fourth quarter earnings and sales to be shy of the third quarter results impacted by the company’s seasonality issues. The company guided fourth quarter earnings per share in the range of 25–32 cents, with sales coming in the $830–$880 million range.

Further, continuing its trend of generating cash in excess of the amount required to fund dividends and capital expenditures, the company predicted operating cash flows of over $350 million. Capital expenditures for the year are expected to be about $80 million, while the company anticipates paying $160 million towards dividend.

Leggett faces stiff competition from its rivals, such as Flexsteel Industries Inc. , 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. Moreover, we remain slightly cautious on the stock and uphold our long-term ‘Neutral’ recommendation.

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