Leggett (LEG) Misses on Q4 Earnings & Sales, Guides for 2018

Leggett & Platt Inc. LEG reported lower-than-expected sales and earnings for fourth-quarter 2017. However, both top and bottom lines improved year over year. This marked the company’s third consecutive quarter of sales miss, while earnings lagged estimates for the second time in three months. Further, management outlined its earnings and sales outlook for 2018.

The company’s shares declined about 1% in the after-hours session on Feb 5, mainly due to lower-than-expected top and bottom line. Moreover, Leggett has lost 5.3% in the last three months, against the industry’s gain of 8%.

The company’s quarterly adjusted earnings of 59 cents per share rose nearly 11% year over year. However, earnings missed the Zacks Consensus Estimate of 61 cents. The year-over-year increase in bottom line stemmed from higher sales.

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On a GAAP basis, earnings per share of 27 cents declined nearly 55% from 60 cents earned in the prior-year quarter. The bottom line was primarily impacted by the recently enacted Tax Cuts and Jobs Act (TCJA), which hurt earnings by 37 cents per share for both the fourth quarter and full-year 2017.

Delving Deeper

While net sales increased about 9% to $984.5 million, it considerably lagged the Zacks Consensus Estimate of $999 million. Including inter-segment sales, total sales came in at $1,054.8 million, up 6.7% year over year.

Additionally, sales gained from a 5% rise in volume and 4% from raw material price inflation and currency.

Gross profit dropped 4% year over year to $196 million, while gross margin contracted 270 basis points (bps) to 19.9%. The company’s EBIT margin declined 90 bps to 12.2% in the fourth quarter. In dollar terms, adjusted EBIT improved 8.7% to $112 million.

Segment Details

Fourth-quarter Residential Products’ net sales (excluding inter-segment sales) of $394.4 million increased 6.6% from last year, driven by 3% improvement in same location sales. Further, contributions of 3% from raw material price inflation and currency, as well as 4% from acquisitions aided results. Meanwhile, volumes reflected only marginal improvement as growth in most businesses was fully offset by 2% sales decline, due to lower pass-through sales of adjustable beds. Including inter-segment sales, total sales for the segment rose 6.8% to $399.5 million.

Net sales of Furniture Products jumped 13.2% to $280.4 million, thanks to benefits from higher Adjustable Bed sales that led to an 8% rise in same location sales. Additionally, the segment gained from a small acquisition in Work Furniture, which added 2% to sales. Total sales for the segment (including inter-segment sales) grew 9.8% to $282.8 million.

The Industrial Products segment's net sales improved 22.6% to $74.8 million. Same location sales jumped 7% driven by rise in steel prices, partly mitigated by lower volumes. Moreover, divestitures completed in 2016 hurt sales growth by 3%. Total sales, including inter-segment sales, jumped 4.2% to $136 million.

The Specialized Products segment's net sales rose 4.4% to $234.9 million. Same location sales rose 10%, backed by solid Automotive volumes and favorable currency impact. Divestiture of CVP hurt sales by 6%. Total sales for the segment (including inter-segment sales) climbed 4.5% to $236.5 million.

Financials

Leggett ended 2017 with cash and cash equivalents of $526.1 million, and long-term debt of $1,097.9 million. The company generated $182.2 million in cash flow from operations in the fourth quarter, with full-year cash flows of $443.7 million.

The company had net debt to net capital ratio of 33% at the end of 2017, the lowest in three years and comfortably within its targeted range of 30-40%. Further, Leggett’s debt was 2.1 times of trailing 12-month adjusted EBITDA.

In 2017, the company repurchased nearly 3.3 million shares for an average price of $48.66 and issued 1.7 million shares through employee benefit plans and option exercises.

Guidance

Anticipating improved earnings and margins in 2018, driven by solid sales growth, management outlined its outlook for 2018. Sales for 2018 are expected to grow nearly 6.9% to $4.2-$4.3 billion. The company’s solid sales view is backed by expectations of mid-single-digit volume growth and raw material-related price increases. Additionally, the Precision Hydraulic Cylinders’ (PHC) acquisition is likely to contribute 2% to sales growth.

Consequently, adjusted EBIT margin is expected to be nearly 12-12.5%. The company anticipates margins to be under pressure in the first quarter owing to the recent steel cost inflation. However, on assuming that costs will stabilize, the company predicts margins to improve through the rest of 2018.

Based on above iterations, management projects earnings from continuing operations in the range of $2.65-$2.85 per share. This guidance takes into account an effective tax rate of 22%.

Additionally, continuing with its trend of generating more cash than required to fund dividends and capital expenditures, Leggett expects operating cash flows of about $500 million for 2018. Capital expenditures for the year are anticipated to be approximately $160 million, while the company intends to spend $195 million toward dividend payouts. The company outlined the target dividend payout ratio to be 50-60% of adjusted earnings. Furthermore, it expects payout for 2018 to be near the midpoint of the aforementioned range.

Further, this Zacks Rank #3 (Hold) company expects to continue its share repurchase program, having a standing authorization to buy back up to 10 million shares every year, after fulfilling all priority requirements. For 2018, the company plans to repurchase nearly 2-3 million shares and issue about 1 million shares primarily for employee benefit plans.

2020 Operating Targets

Additionally, the company slightly modified and extended its long-term targets by a year, owing to a modest decline in 2017 adjusted earnings per share from continuing operations. Earlier, the company had announced a set of 3-year operating targets that would have resulted in the achievement of its top-third TSR goal through 2019.

The company’s operating targets for 2020 now include revenues of $5 billion, EBIT margin of 13% and EPS of $3.50. The EPS target assumes effective tax rate of 22% owing to the recent U.S. tax reform.

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La-Z-Boy delivered an average positive earnings surprise of 3.3% in the trailing four quarters. Further, the stock has returned 8% in three months.

Select Comfort has gained 12.6% in the last three months. Moreover, it has a long-term earnings growth rate of 20.3%.

Churchill Downs has improved 18.4% in the last three months. Further, the company has a long-term earnings growth rate of 16.1%.

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