Leggett & Platt(LEG) - 2021 Q4 - Annual Report

Part I Business Leggett & Platt is an international diversified manufacturer of engineered components and products for homes and automobiles, operating through three segments and achieving record sales in 2021 despite macro challenges - Leggett & Platt operates through three main segments: Bedding Products, Specialized Products, and Furniture, Flooring & Textile Products, organized into 15 business units and seven groups[17] - The company's primary financial metric for long-term performance is Total Shareholder Return (TSR), with a target average annual return of 11–14%, pursued through revenue growth (target 6-9%), margin expansion, dividends, and share repurchases[33][34] - In 2021, the company recorded record sales and earnings despite macro challenges like semiconductor and chemical shortages, labor availability issues, and transportation difficulties[42] - As of year-end 2021, the company had approximately 20,300 employees, with 11,300 located internationally, and 16% of employees were represented by labor unions[70][71] Overview of Our Segments The company's operations are divided into three segments: Bedding Products, Specialized Products, and Furniture, Flooring & Textile Products - Bedding Products: This segment is vertically integrated, operating a steel rod mill and wire mills to supply its own domestic businesses, and is a major supplier of innersprings, specialty foam, adjustable beds, and private label finished mattresses[18][19][20] - Specialized Products: This segment designs and manufactures automotive comfort systems (lumbar support, massage), aerospace tubing and assemblies, and hydraulic cylinders for various industries[25] - Furniture, Flooring & Textile Products: This segment produces components for residential and commercial furniture (e.g., recliner mechanisms), carpet cushion, hard surface flooring underlayment, and structural fabrics[29] Acquisitions and Divestitures The company actively manages its portfolio through strategic acquisitions and divestitures, completing three acquisitions totaling $153 million in 2021 and divesting several non-core businesses Recent Acquisition Activity | Year | Description | Segment | Purchase Price | | :--- | :--- | :--- | :--- | | 2021 | UK specialty foam & mattress mfg. | Bedding Products | $120M | | 2021 | UK aerospace metallic ducting mfg. | Specialized Products | $28M | | 2021 | Polish bent metal tubing mfg. | Furniture, Flooring & Textile | $5M | | 2019 | Elite Comfort Solutions (ECS) | Bedding Products | ~$1.25B | - The company divested several small operations between 2020 and 2022, including a South African innerspring business, a Mexican specialty wire operation, and the final part of its Fashion Bed business, with combined annual sales of approximately $65 million[50][51][52] Foreign Operations In 2021, 36% of the company's trade sales originated from products manufactured outside the United States, with 47 facilities in 17 foreign countries - Products manufactured outside the U.S. accounted for 36% of trade sales in 2021, up from 34% in both 2020 and 2019[54] - As of December 31, 2021, the company had 131 manufacturing facilities, with 47 located in 17 foreign countries and 84 in the U.S[57] Sources and Availability of Raw Materials The company faces significant supply chain challenges for key raw materials like steel, chemicals, and semiconductors, despite being vertically integrated in steel production - The company is experiencing supply chain constraints for key raw materials, notably a semiconductor shortage affecting the automotive industry and shortages of chemicals (TDI, MDI, polyol) used in foam production[60][61] - The company is vertically integrated in its steel supply chain, with its own rod mill supplying the majority of its domestic steel rod needs and its wire mills supplying nearly all of its U.S. steel wire requirements[62] Human Capital Management The company's human capital strategy focuses on attracting and retaining diverse talent through competitive compensation, development, and an inclusive culture, employing approximately 20,300 people at year-end 2021 - At year-end 2021, the company had approximately 20,300 employees, a slight decrease from 20,400 at year-end 2020[70] - The company has an active Inclusion, Diversity, and Equity (ID&E) plan, which includes hiring an ID&E Director, conducting employee engagement surveys, and gathering representation data to set future goals[80][81] - Workplace safety is managed through a comprehensive program called "SafeGuard," which develops job hazard analyses and specific health and safety practices[85] - Intentional succession planning resulted in the transition of J. Mitchell Dolloff to CEO on January 1, 2022, succeeding Karl G. Glassman[91] Risk Factors The company identifies several significant risks to its business, including operational disruptions from the COVID-19 pandemic, potential goodwill impairment, volatile raw material costs, unfair foreign competition, and evolving regulatory landscapes - Operational Risk: The COVID-19 pandemic could negatively impact manufacturing operations, raw material supply, labor levels, and product shipments due to supply chain disruptions[101][103] - Financial Risk: Goodwill and long-lived assets are subject to impairment; as of the Q2 2021 test, the fair value of the Aerospace reporting unit exceeded its carrying value by 28% ($68 million goodwill), and the Work Furniture unit exceeded its value by 85% ($101 million goodwill), indicating a higher risk of future impairment[112][114] - Market Risk: The company faces volatility in raw material costs and availability, including steel, chemicals, and a current shortage of semiconductors impacting the automotive industry[123][124][126][127] - Competition Risk: The company faces risks from unfair competition, relying on antidumping and countervailing duties on imported innersprings, steel wire rod, and mattresses, which are subject to expiration and review[132] - Regulatory Risk: The company is subject to evolving and complex regulations concerning data privacy (like GDPR), climate change, and increased investor scrutiny regarding Environmental, Social, and Governance (ESG) responsibilities[144][146][149] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[155] Properties As of December 31, 2021, Leggett & Platt operated 131 manufacturing locations globally, with its steel rod mill in Sterling, Illinois, identified as its most critical physical property Manufacturing Locations by Segment (as of Dec 31, 2021) | Segment | United States | Europe | China | Canada | Mexico | Other | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Bedding Products | 35 | 6 | 1 | — | 2 | 2 | 46 | | Specialized Products | 6 | 9 | 10 | 3 | 2 | 3 | 33 | | Furniture, Flooring & Textile | 43 | 2 | 2 | 4 | 1 | — | 52 | | Total | 84 | 17 | 13 | 7 | 5 | 5 | 131 | - The company's steel rod mill in Sterling, Illinois, is considered its most material property, and a disruption to this facility could have a material negative impact on the Bedding Products segment and the company's overall results[159] Legal Proceedings The company is involved in legal matters, notably the successful petition for antidumping and countervailing duties on imported mattresses, and the dismissal of an environmental case in France - The company was part of a group of petitioners that successfully sought antidumping and countervailing duties on mattresses imported from China, Cambodia, Indonesia, Malaysia, Serbia, Thailand, Turkey, and Vietnam, with duties set to remain in effect through May 2026[162] - An environmental case against the company's French subsidiary, Specitubes SAS, which carried a possible fine of up to $600,000, was concluded in December 2021 with the court dismissing both charges[163][164] Mine Safety Disclosures This item is not applicable to the company - Not applicable[165] Information About Our Executive Officers This section provides information on the company's executive officers, including J. Mitchell Dolloff as President and CEO, Karl G. Glassman as Executive Chairman, and Jeffrey L. Tate as Executive Vice President and CFO - J. Mitchell Dolloff was appointed CEO effective January 1, 2022, succeeding Karl G. Glassman, who became Executive Chairman of the Board[168][169] Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | J. Mitchell Dolloff | 56 | President and Chief Executive Officer | | Karl G. Glassman | 63 | Executive Chairman of the Board | | Jeffrey L. Tate | 52 | Executive Vice President and Chief Financial Officer | | Steven K. Henderson | 61 | EVP, President—Specialized Products and Furniture, Flooring & Textile Products | | Benjamin M. Burns | 44 | SVP, Business Support Services | | Scott S. Douglas | 62 | SVP, General Counsel & Secretary | | J. Tyson Hagale | 44 | SVP, President—Bedding Products | | Susan R. McCoy | 57 | SVP, Investor Relations | | Christina Ptasinski | 62 | SVP, Chief Human Resources Officer | | Tammy M. Trent | 55 | SVP, Chief Accounting Officer | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under LEG, with a high priority on increasing dividends, which reached $1.66 per share in 2021, marking 50 consecutive annual increases - The company's common stock is traded on the New York Stock Exchange under the symbol LEG[180] - In 2021, the company increased its annual dividend to $1.66 per share, extending its record of consecutive annual dividend increases to 50 years[182][193] - The Board has authorized the repurchase of up to 10 million shares each calendar year, but no shares were purchased under this plan in Q4 2021[184][185] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Leggett & Platt achieved a 19% increase in trade sales to $5.07 billion, driven by an 18% rise in organic sales, while cash from operations significantly decreased to $271 million due to inflationary impacts and working capital investments Key Financial Highlights (2019-2021) | (in millions, except per share data) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net trade sales | $5,073 | $4,280 | $4,753 | | EBIT | $596 | $408 | $487 | | Cash from operations | $271 | $603 | $668 | | Total debt | $2,090 | $1,900 | $2,118 | | Dividends per share | $1.66 | $1.60 | $1.58 | - Trade sales in 2021 increased 19% year-over-year, with organic sales up 18%, composed of 13% from raw material-related price increases, 4% from volume recovery, and 1% from currency benefits[189] - Cash from operations decreased significantly in 2021 to $271 million from $603 million in 2020, primarily due to inflationary impacts and planned working capital investments to rebuild inventory levels[191] Results of Operations—2021 vs. 2020 For the full year 2021, trade sales increased 19% to $5.073 billion, with consolidated EBIT rising 46.3% to $596 million, driven by organic sales growth, metal margin expansion, and pricing discipline Consolidated Sales and Earnings Change (2020 to 2021) | Metric | 2020 | Change | 2021 | | :--- | :--- | :--- | :--- | | Net Trade Sales | $4,280M | +19% | $5,073M | | Net Earnings | $253M | +59% | $402M | | Diluted EPS | $1.86 | +58% | $2.94 | Segment Sales and EBIT (2021 vs. 2020) | Segment | 2021 Sales | % Change | 2021 EBIT | % Change | 2021 EBIT Margin | | :--- | :--- | :--- | :--- | :--- | :--- | | Bedding Products | $2,455.9M | +20.4% | $321.3M | +67.0% | 13.1% | | Specialized Products | $998.9M | +12.1% | $115.9M | +26.0% | 11.6% | | Furniture, Flooring & Textile | $1,617.8M | +19.9% | $159.5M | +26.1% | 9.9% | | Total | $5,072.6M | +18.5% | $596.0M | +46.3% | 11.7% | Results of Operations—2020 vs. 2019 In 2020, full-year trade sales decreased 10% to $4.280 billion due to pandemic-related volume declines, leading to a 16.3% drop in consolidated EBIT to $407.5 million Consolidated Sales and Earnings Change (2019 to 2020) | Metric | 2019 | Change | 2020 | | :--- | :--- | :--- | :--- | | Net Trade Sales | $4,753M | -10% | $4,280M | | Net Earnings | $314M | -19% | $253M | | Diluted EPS | $2.32 | -20% | $1.86 | Segment Sales and EBIT (2020 vs. 2019) | Segment | 2020 Sales | % Change | 2020 EBIT | % Change | 2020 EBIT Margin | | :--- | :--- | :--- | :--- | :--- | :--- | | Bedding Products | $2,039.3M | -9.5% | $192.4M | -10.5% | 9.4% | | Specialized Products | $891.2M | -16.5% | $92.0M | -45.9% | 10.3% | | Furniture, Flooring & Textile | $1,349.7M | -5.7% | $126.5M | +23.7% | 9.4% | | Total | $4,280.2M | -9.9% | $407.5M | -16.3% | 9.5% | Liquidity and Capitalization The company's liquidity is supported by cash, operating cash flow, and credit facilities, with cash from operations decreasing to $271 million in 2021 due to working capital investments, and total debt at $2.1 billion Cash Flow Summary (2019-2021) | (in millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $271.3 | $602.6 | $668.0 | | Net Cash Used for Investing Activities | ($226.2) | ($49.0) | ($1,418.2) | | Net Cash (Used for) Provided by Financing | ($32.8) | ($461.7) | $731.1 | - Adjusted working capital increased significantly to $713.0 million at the end of 2021, compared to $396.5 million at the end of 2020, reflecting investments to rebuild inventory and inflationary impacts[269] - The company's long-term priorities for cash use are: 1) fund organic growth, 2) pay dividends, 3) fund strategic acquisitions, and 4) repurchase stock[280] - In September 2021, the credit facility was amended to mature in September 2026 and change the primary financial covenant to a net debt to trailing 12-month EBITDA ratio of no greater than 3.50 to 1.00[300][301] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates and judgments, particularly concerning goodwill impairment, inventory valuation (changed to FIFO in 2021), and credit losses - Goodwill is a critical estimate, with $1.4 billion on the balance sheet at year-end 2021; the annual impairment test in Q2 2021 resulted in no impairments, but two reporting units, Aerospace and Work Furniture, had fair values that exceeded carrying values by less than 100%[309] - Effective January 1, 2021, the company changed its inventory valuation method for certain domestic inventories from LIFO to FIFO, believing it better reflects the physical flow of inventory and improves comparability, with the change applied retrospectively[235][415] - The bad debt reserve estimate is critical due to customer diversity and leverage; bad debt expense was ($3) million in 2021, $17 million in 2020 (impacted by the pandemic and a specific customer), and $3 million in 2019[311] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in interest rates and foreign currency exchange rates, with total debt of $2.09 billion at year-end 2021 and significant foreign investments Debt Obligations by Rate Type (as of Dec 31, 2021) | Debt Type | Principal Amount (in millions) | Average Stated Interest Rate | | :--- | :--- | :--- | | Fixed Rate Debt | $2,100.0 | 3.74% | | Variable Rate Debt | $3.8 | N/A | | Total (excluding leases, etc.) | ~$2,103.8 | | - The company utilizes derivative instruments to reduce risks associated with interest rates and foreign currency, with a policy not to speculate using these instruments[332] Net Investment in Foreign Operations (by Functional Currency) | Functional Currency (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | European Currencies | $528.4 | $382.1 | | Chinese Yuan | $269.9 | $260.9 | | Canadian Dollar | $218.6 | $210.5 | | Mexican Peso | $47.1 | $38.6 | | Other | $67.8 | $59.9 | | Total | $1,131.8 | $952.0 | Controls and Procedures As of December 31, 2021, the company's management, including the CEO and CFO, concluded that its disclosure controls and procedures and internal control over financial reporting were effective - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[336] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework (2013), with this assessment audited by PricewaterhouseCoopers LLP[375][376] Part III Directors, Executive Officers, Corporate Governance, and Other Matters This section incorporates information by reference from the company's 2022 Proxy Statement, covering director and executive officer details, compensation, security ownership, and corporate governance guidelines - Information regarding directors, executive compensation, security ownership, related transactions, and accountant fees is incorporated by reference from the company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2022[344][365][366][367][368] - The report provides biographies for the company's Board of Directors, which includes individuals with extensive experience in manufacturing, finance, technology, and consumer retail[347] - The company has adopted a Financial Code of Ethics, a Code of Business Conduct and Ethics, and Corporate Governance Guidelines, all of which are available on its website[362] Part IV Exhibit and Financial Statement Schedules This section contains the company's consolidated financial statements for the three-year period ended December 31, 2021, along with the independent auditor's report and management's report on internal controls - This part includes Management's Annual Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP)[371] - The auditor's report from PricewaterhouseCoopers LLP expresses an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[378] - The auditor's report identifies the goodwill impairment assessment for the Work Furniture and Aerospace reporting units as a critical audit matter due to the significant management judgment involved in determining their fair value[386][387] Consolidated Financial Statements The consolidated financial statements present the company's financial performance and position for the three years ended December 31, 2021, showing net trade sales growth to $5.07 billion and total assets increasing to $5.31 billion Consolidated Statement of Operations Highlights | (in millions, except per share) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net trade sales | $5,072.6 | $4,280.2 | $4,752.5 | | Gross profit | $1,038.3 | $904.1 | $1,024.0 | | Earnings before interest and taxes | $596.0 | $407.5 | $486.8 | | Net earnings attributable to shareholders | $402.4 | $253.0 | $314.0 | | Diluted EPS | $2.94 | $1.86 | $2.32 | Consolidated Balance Sheet Highlights | (in millions) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $2,065.3 | $1,658.1 | | Net Property, Plant and Equipment | $781.5 | $784.8 | | Goodwill | $1,449.6 | $1,388.8 | | Total Assets | $5,307.3 | $4,800.0 | | Total Current Liabilities | $1,335.7 | $1,006.0 | | Long-Term Debt | $1,789.7 | $1,849.3 | | Total Equity | $1,648.6 | $1,425.1 | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial results, including the retrospective adoption of the FIFO inventory method, segment performance, goodwill impairment, acquisitions, and debt instruments - Note A (Accounting Policies): Effective Jan 1, 2021, the company changed its inventory valuation method from LIFO to FIFO for certain domestic inventories, retrospectively applying the change, which resulted in a $49.2 million increase to retained earnings as of Jan 1, 2019[415][416] - Note C (Impairment): The 2020 annual goodwill test resulted in a $25.4 million non-cash impairment charge for the Hydraulic Cylinders reporting unit, with no impairments recorded in 2021 or 2019[464] - Note F (Segment Information): Provides a breakdown of sales, EBIT, and assets for the three reportable segments; in 2021, Bedding Products was the largest segment by sales ($2.46 billion) and EBIT ($321.3 million)[482] - Note J (Long-Term Debt): Total debt was $2.09 billion at year-end 2021; in November 2021, the company issued $500 million of 3.5% senior notes due 2051[496][498] - Note R (Acquisitions): Details the 2019 acquisition of ECS for $1.24 billion, which added $559.3 million of goodwill, and three smaller acquisitions in 2021 for a total of $152.6 million[595][596]