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Leggett & Platt Incorporated (LEG - Free Report) posted dismal second-quarter 2017 results, as both earnings and sales fell short of estimates and the bottom line also declined year over year. The earnings debacle could be attributed to raw material price inflation, which in turn also dented margins. The lower-than-expected results also compelled management to tweak its outlook for 2017.

Consequently, shares of this engineered products manufacturer tumbled 6.5% on Jul 27 after-market trading session. Further, Leggett has underperformed the industry over the last one year with its shares down 1.5% against the latter’s 12% growth.



The company’s quarterly adjusted earnings of 64 cents per share dropped about 3% year over year, and also came a penny short of the Zacks Consensus Estimate. During the quarter, benefits from higher sales and lower tax rate were more than offset by increased raw material expenses.

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise
 

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise | Leggett & Platt, Incorporated Quote

Delving Deeper

While net sales rose 3.2% to $989.3 million, it missed the Zacks Consensus Estimate of $1,003.8 million. Including inter-segment sales, total sales came in at $1,062.9 million, up 1% year over year.

Organic sales improved 4%, thanks to a 2% rise in volumes and raw material price inflation. Volumes were largely driven by robust Automotive and Adjustable Bed sales, though it dipped sequentially owing to soft demand in certain markets and tough year-over-year comparisons. Further, divestitures (net of buyouts) had a small impact on sales. Notably, this marked Leggett’s second straight quarter of organic sales growth after seven consecutive declines that were attributed to deflation and currency headwinds.

Gross profit dropped 2% year over year to $230.1 million, while gross margin contracted 110 basis points (bps) to 23.3%. The company’s adjusted EBIT margin declined 140 bps to 12.4% in the second quarter. In dollar terms, adjusted EBIT was down 7.4% at $122.3 million. The fall in EBIT margin is attributed to the pricing lag that the company generally undergoes in times of commodity inflation.

Segment Details

The company changed its segment reporting in sync with the changes made to the organizational structure, effective Jan 1, 2017. As a result, the Home Furniture group has moved from Residential Products to Furniture Products segment (formerly Commercial Products segment). Further, the Machinery group has moved from Specialized Products to Residential Products segment.

Second-quarter Residential Products’ sales of $407.8 million remained nearly flat from last year, as a 3% contribution from buyouts was offset by a 3% fall in same location sales. The drop in same location sales was accountable to a 5% dip in volumes, partly compensated by a 2% positive impact from inflation. Including inter-segment sales, total sales for the segment remained flat at $412 million.

Sales of Furniture Products jumped 13.4% to $267.2 million, thanks to benefits from higher Adjustable Bed sales. Total sales for the segment (including inter-segment sales) grew 7.4% to $271.6 million.

The Industrial Products segment's sales fell 5% to $75.9 million, mainly due to divestitures completed in 2016. Total sales, including inter-segment sales, slumped 7.3% to $139.2 million.

The Specialized Products segment's sales improved 1.3% to $238.4 million. Same location sales rose 5% backed by solid Automotive volumes, partly offset by negative currency impact. Divestitures, net of acquisitions, negatively impacted sales by 3%. Total sales for the segment (including inter-segment sales) climbed 1.2% to $240.1 million.

Financials

Leggett ended the quarter with cash and equivalents of $335.1 million and long-term debt of $1,183.5 million. Leggett generated $156.1 million in cash flow from operations during first-half 2017.

The company had net debt to net capital ratio of 39% at quarter end, close to the higher end of its targeted range of 30–40%. Further, Leggett ended the quarter with its debt double of its trailing 12-month adjusted EBITDA.

In May, management announced second-quarter dividend of 36 cents per share. Additionally, the company repurchased nearly 0.2 million shares during the quarter under review, where it also issued 0.2 million shares through employee benefit plans and option exercises. In first-half 2017, Leggett bought back 2.4 million shares, while it issued 1.2 million shares.

Guidance

Following the unimpressive quarter, management lowered its sales outlook for 2017, which resulted in tweaked EPS and EBIT views.

Sales for 2017 are now anticipated to grow by 4–7% to $3.9–$4.0 billion. This marks a nearly 1% reduction from the old sales guidance of $3.95–$4.05 billion that reflected a 5–8% year-over-year growth. Further, the company now expects low-to-mid-single-digit volume growth, driven by strength in Automotive, Adjustable Bed, International Spring, Work Furniture, and Geo Components businesses. This falls slightly below management’s previous expectation of mid-single-digit volume growth. The company still anticipates raw material price related increases to aid sales growth in 2017.

The company now expects full year EBIT margin of approximately 12.5–13%, compared with the earlier forecast of 13%. Considering all factors, management narrowed its EPS range to a band of $2.55–$2.65 from the previous range of $2.55–$2.75.

Additionally, continuing with its trend of generating more cash than required to fund dividends and capital expenditures, Leggett expects operating cash flows of over $450 million for 2017. Capital expenditures for the year are anticipated to be approximately $160 million, while the company intends to spend $185 million toward dividend payouts. The company outlined the target dividend payout ratio to be 50–60% of net earnings.

Further, this Zacks Rank #3 (Hold) company expects to continue with share repurchase program, having a standing authorization to buy back up to 10 million shares every year, after fulfilling all priority requirements. The company plans to repurchase roughly 3 million shares in full-year 2017, while targeting issuing 1.5 million shares as part of employee benefit plans.

3 Trending Picks From LEG’s Space

Bassett Furniture Industries, Incorporated (BSET - Free Report) has positive estimate revisions for the current fiscal over the last 30 days. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Woodmark Corporation (AMWD - Free Report) , carrying a Zacks Rank #2 (Buy), has outperformed earnings estimate by an average of 12.9% in the trailing four quarters.

Masonite International Corporation (DOOR - Free Report) , also carrying a Zacks Rank #2, has witnessed positive estimate revisions for 2017 over the last seven days. Also, it has out spaced earnings estimate by an average of 10.9% in the trailing four quarters.

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