Leggett & Platt (LEG)
Q3 2010 Earnings Call
October 22, 2010 9:00 a.m. ET
David DeSonier – VP, Strategy and IR
Dave Haffner – President and CEO
Karl Glassman – EVP and COO
Matt Flanigan – CFO
Susan McCoy – Director, IR
Budd Bugatch – Raymond James & Associates
Mark Rupe - Longbow Research
John Baugh – Stifel Nicolaus
Keith Hughes – SunTrust
Robert Kelly – Sidoti & Company
Previous Statements by LEG
» Leggett & Platt, Inc. Q2 2010 Earnings Call Transcript
» Leggett & Platt Q1 2010 Earnings Conference Call
» Leggett & Platt Inc. Q4 2009 Earnings Call Transcript
Good morning and thank you for taking part in Leggett & Platt's third quarter conference call. I'm Dave DeSonier, the Vice President of Strategy and Investor Relations, and with me today are the following: Dave Haffner, our CEO and President; Karl Glassman, the Chief Operating Officer; Matt Flanigan, our CFO; and, Susan McCoy, our Director of Investor Relations.
The agenda for the call this morning is as follows: Dave Haffner will start with the summary of the major statements we made in yesterday's press release, Karl will provide operating highlights, Dave will then address our outlook for the full year, and finally the group will answer any questions you have.
This conference is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded, or broadcast without our expressed permission. A replay is available from the IR portion of Leggett's website. We've posted to the IR portion of the website a set of PowerPoint slides that contains summary financial information. Those slides supplement the information we discuss on this call, including non-GAAP reconciliations.
I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the section in our 10-K entitled Forward-Looking Statements.
I'll now turn the call over to Dave Haffner.
Good morning, and thank you for participating in our call. Yesterday, we reported third quarter results. For the quarter, sales from continuing operations increased 7% over the prior year, reflecting a combination of unit volume growth and previously implemented price increases that partially recovered higher steel costs.
Certain of our key markets, primarily related to residential furnishings, weakened noticeably in the third quarter. As a result, our third-quarter sales were lower than those of second quarter, which rarely occurs. Though aggregate unit volume increased 6% in the third quarter as compared to the third quarter of 2009, this was much slower paced than the 15% unit growth experienced during the first half of 2010. We believe the stronger consumer demand during the first half of the year was driven in part by larger income tax refunds and home purchase incentives.
Third quarter 2010 earnings from continuing operations were $0.31 per share, down from $0.34 in the third quarter of 2009. Several factors, including higher net LIFO expense and higher raw materials costs, led to the decrease. These declines were partially offset by the year-over-year growth in unit volumes, a lower effective tax rate, and a lower share count.
As we discussed throughout last year, in 2009 we experienced a quarterly mismatch in the recognition of LIFO benefits versus the LIFO impact associated with the consumption of higher-cost steel. In the third quarter of 2009 we recognized a net LIFO benefit of approximately $11 million. As anticipated, that benefit did not recur this year. Instead, in the third quarter of 2010 we recognized a net LIFO expense of approximately $4 million.
Raw material costs have temporarily increased beyond the amounts anticipated when we implemented price increases in the second quarter. However, we are seeing costs begin to retreat to expected levels. In September, we completed the seventh and final divestiture that we identified as part of the strategic realignment announced in late 2007.
The divestiture program has reshaped Leggett by narrowing our primary focus to businesses with distinct competitive advantages, value-added engineering and manufacturing operations, and significant barriers to entry. These seven divestitures collectively generated $433 million of after-tax cash proceeds, exceeding the original $400 million goal.
The company's primary financial objective is to consistently achieve total shareholder return within the top one-third of the S&P 500. Since 2008, when we implemented our new strategy, we have comfortably exceeded this goal. Longer term, we believe that modest sales growth, continued merchant improvement, our dividend yield, and stock buybacks will enable us to continue to attain this goal. And, our financial profile remains strong.
We ended the quarter with net debt at 25% of net capital, which is below our long-term targeted range of 30% to 40%. We currently have more than $400 million available and 1.5 years remaining on our $600 million bank facility. And we have no significant fixed-term debt maturities until 2013.
Our cash balance at the end of the second quarter was $277 million. We generated $91 million of cash from operations during the quarter. Working capital remains at a favorable 14.2% of sales, and reflects our ongoing focus on optimizing returns.