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Leggett (LEG) Tops Q2 Earnings, Sales Lag; Revises Outlook

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Keeping its positive streak alive for the fourth straight quarter, Leggett & Platt, Incorporated (LEG - Free Report) posted better-than-expected earnings in the second quarter of 2016, which also improved year over year. However, sales remained soft and missed estimates for the fifth consecutive quarter. Also, management updated its outlook for full-year 2016.

The company’s quarterly adjusted earnings from continuing operations surged 25% year over year to 66 cents per share, surpassing the Zacks Consensus Estimate of 63 cents. The bottom-line growth was mainly aided by greater unit volumes, reduced tax rate, lower share count, improved product mix and operational enhancements.

Including one-time items, earnings from continuing operations soared 36% to 72 cents per share.

LEGGETT & PLATT Price, Consensus and EPS Surprise

LEGGETT & PLATT Price, Consensus and EPS Surprise | LEGGETT & PLATT Quote

Delving Deeper

On the contrary, net sales from continuing operations of this Zacks Rank #4 (Sell) company dropped nearly 4% to $959 million, also falling short of the Zacks Consensus Estimate of $1,002 million. During the reported quarter, improvement from unit volume growth of 2% was more than offset by adverse currency movements, raw material price deflation and divestitures.

Including inter-segment sales, total sales came in at $1,062.3 million, down 5.7% year over year.

Gross profit climbed 1.4% year over year to $234 million, with the gross margin expanding 130 basis points (bps) to 24.4%.

Additionally, the company’s adjusted EBIT margin improved 170 bps to 13.8% in the second quarter, thanks to solid portfolio management. In dollar terms, adjusted EBIT was up 9.4% at $132.1 million.

Segment Details

Second-quarter Residential Furnishings’ sales fell 5.7% to $487.4 million, due to a 2% slip in unit volumes combined with currency headwinds and raw material price deflation, which accounted for a 4% drop in sales. Including inter-segment sales, total sales for the segment declined 5.9% to $493.6 million.

Sales of Commercial Products improved 1% to $136.8 million. However, total sales for the segment (including inter-segment sales) declined 4% to $153.1 million. Benefits from Work Furniture growth was more than offset by soft Adjustable Bed and Fashion Bed sales.  

The Industrial Materials segment's sales plunged 28.5% to $79.9 million, with same location sales slumping 13%, mainly due to steel price deflation and a drop in unit volumes in Drawn Wire. Alongside, sales at the segment were hurt by the divestiture of Steel Tubing (which was concluded in Dec 2015) and the divestiture of a small Wire Products business (in Jun 2016). Total sales, including inter-segment sales, tanked 25% to $150.1 million.

The Specialized Products segment's sales rose 9.2% to $254.8 million, with same location sales rising 9% on the back of 10% volume growth, somewhat negated by a 1% impact from currency headwinds. Total sales for the segment (including inter-segment sales) also jumped 9.2% to $265.5 million.

Financials

Leggett ended the quarter with cash and equivalents of $284.8 million, long-term debt of $1,044.3 million, and shareholders' equity of $1,065.6 million. Leggett’s cash flow from operations came in at $262 million in the first half of 2016.

Further, the company had more than $450 million available in its commercial paper program by the end of the quarter, with its net debt to net capital ratio coming in at 37%, thus falling within its target range of 30%–40%. Also, during the second quarter, Leggett augmented its existing bank facility to $750 million, which will extend up to 2021.

In May 2016, the company raised its quarterly dividend from 32 cents per share to 34 cents, thus marking its 45th straight annual hike and highlighting its commitment to shareholders. Also, during the quarter, the company repurchased nearly 1.2 million shares, while issuing 0.3 million shares related to employee benefit plans and stock option exercises.

Further, Leggett remains focused on its key goal of achieving targeted 3-year Total Shareholder Return (“TSR”), ranking in the top-third of all S&P 500 companies. The company generated annual TSR of 27% (in the last 31 months) for the three-year period starting Jan 1, 2014. This places the company’s annual TSR in the top 6% of the S&P 500 list.

Other Developments

As part of its active portfolio management, Leggett undertook one acquisition and two divestitures during the second quarter. The company purchased a minor stake in an Asian automotive joint venture, which it had been controlling for a few years now, for roughly $35 million. Additionally, Leggett divested two small ventures for about $47 million. These businesses would collectively fetch the company annual sales worth approximately $80 million.

Guidance

Despite the soft volume growth, management remains impressed with the company’s operational progress and going forward, anticipates generating record EPS, robust EBIT margin and enhanced cash flows in 2016. However, in light of the second-quarter results, the company revised its 2016 outlook.

Leggett now projects unit volume growth in 2016 to be in the mid-single digits, compared with the previous forecast of mid-to-high single digits range. Further, the company expects volume growth to be partly offset by 2% commodity deflation and foreign currency headwinds, as well as a 3% reduction from divestitures.

Hence, sales for 2016 are now expected to be roughly $3.9 million, reflecting flat year-over-year growth. Prior to this, the company had anticipated sales to come in the range of $3.9–$4.1 billion, reflecting year-over-year growth of 0%–5%.

Further, management adjusted its full-year earnings outlook, to a range of $2.45–$2.60 per share from continuing operations, compared with $2.40–$2.60 predicted earlier. The latest outlook includes benefits worth 6 cents from one-time items.

The company expects 2016 adjusted EBIT margin to be nearly 13%, with margins in the second half expected to fall short of the first-half margins, reflecting the anticipated impact from pricing lag related to the recent commodity inflation.

Additionally, continuing with its trend of generating more cash than required to fund dividends and capital expenditures, the company continues to expect operating cash flows of nearly $500 million for 2016. Capital expenditures for the year are still anticipated to be approximately $130 million, while the company hopes to spend $175 million toward dividend payouts. The company outlined its target dividend payout ratio to be 50%–$60% of net earnings.

Further, Leggett expects 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. During 2016, the company intends to buy back 4–5 million shares, apart from issuing 2 million shares for employee benefit schemes.

Stocks to Consider

Some better-ranked stocks in the same industry include La-Z-Boy Incorporated (LZB - Free Report) and Virco Mfg. Corporation (VIRC - Free Report) , with a Zacks Rank #2 (Buy) each. A home improvement retailer worth considering is Lowe's Companies, Inc. (LOW - Free Report) , also carrying a Zacks Rank #2.

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