Leggett & Platt Inc. (LEG), the manufacturer of diversified engineered products, reported third-quarter 2014 results, wherein adjusted earnings came in at 51 cents a share, surging 31% year over year and surpassing the Zacks Consensus Estimate by a penny. Improvement in earnings was backed by enhanced sales coupled with a lower tax rate and share count.
However, including one-time items and discontinued operations, the company reported earnings of 34 cents per share compared with earnings of 49 cents in third-quarter 2013.
Delving Deeper
Net sales grew 14% to $997.4 million from $877.6 million in the prior-year quarter. Rise in sales during the quarter resulted from robust growth in all businesses. However, Leggett’s top-line for the quarter fell short of the Zacks Consensus Estimate of $1,030 million.
Same location sales rose 9% benefiting from robust volume increase in most of the company’s residential and automotive markets, along with a contribution of 5% from acquisitions.
Benefiting from the top-line growth, gross profit rose 16.4% year over year to $209.1 million with gross margin expanding 50 basis points (bps) to 21%.
Segment Details
Third-quarter Residential Furnishings sales increased 18.9% to $604.5 million. Same location sales for the segment were up 11% on the back of a rise in unit volumes in most product categories. However, operating income decreased 31% year over year to $32 million as the benefit from higher sales and a gain of $2 million from hurricane-related insurance claim were more than offset by foam litigation expenses of $32 million.
Sales of Commercial Fixturing & Components inched up 1.8% to $50.2 million. However, the segment’s operating income decreased 3% year over year to $3.4 million.
The Industrial Materials segment's sales witnessed an 8.9% increase to $224.3 million, while same location sales improved 7%. Operating income surged 9% year over year to $17.5 million due to higher sales.
Specialized Products segment's sales rose 14.1% year over year to $219.1 million, driven by robust demand for Leggett's Automotive parts and increased machinery sales. Operating income for the segment soared 29% to $27.8 million, backed by strong sales.
Financials
Leggett, which competes with Genuine Parts Company (GPC), ended the third quarter with cash and equivalents of $242.9 million, long-term debt of $619.2 million and shareholders' equity of $1,228.6 million. The company's net debt to net capital ratio as of Sep 30, 2014 was 34.8%. This stood near the mid-point of the company's long-term targeted range of 30%—40%. Moreover, it has roughly $450 million left under its current commercial paper program.
During the quarter, Leggett bought back 0.8 million shares for about $34.62 per share and raised quarterly dividend by a penny to 31 cents a share. The company's regular dividend payouts and its common practice of share buybacks reflect its healthy financial position and focus on enhancing shareholder value.
Guidance
Leggett still projects its sales from continuing operations in 2014 to grow in the 6%—9% range and come within $3.70—$3.80 billion. Increase in sales is expected to be driven by robust growth in majority of the company’s businesses.
However, the company has raised the lower-end of its adjusted earnings guidance for 2014. Leggett now expects adjusted earnings to come in the band of $1.75 to $1.85 per share compared with the previous guidance of range of $1.70—$1.85 per share. However, the company’s GAAP earnings forecast has been trimmed to 93 cents–$1.03 per share from $1.05—1.20 per share due to the inclusion of the 65 cents non-cash impairment charge and 17 cents foam litigation settlement charge.
Additionally, continuing its trend of generating more cash than required to fund dividends and capital expenditures, the company expects operating cash flows for 2014 to be over $350 million. Capital expenditure for the year will be approximately $100 million, while the company hopes to spend $170 million toward dividend payout, as predicted before.
Further, Leggett expects to continue with its share repurchase program, having a standing authorization to buy-back up to 10 million shares every year. The company also intends to buy back 5 million shares and issue nearly 3 million shares under the employee benefit plans in 2014.
Management seems impressed with its sound financials and anticipates record earnings in 2014. Thereafter, Leggett remains optimistic about its performance, given the strength of its various businesses like Automotive, Aerospace, Bedding, Home Furniture, and Office Furniture. Also, on the basis of 3-year rolling period, the company has generated Total Shareholder Return (TSR) of 22%.
Other Stocks to Consider
Currently, Leggett carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader retail industry include DSW Inc. (DSW) and Express Inc. (EXPR), both carrying a Zacks Rank #1 (Strong Buy).
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