Leggett & Platt Inc. LEG reported third-quarter 2018 results, with both the top and bottom lines missing the Zacks Consensus Estimate. While net earnings of 67 cents per share missed the consensus mark of 72 cents by 6.9%, revenues of $1.09 billion missed the same by 1%. The company's performance was poor due to softness in the demand for Home Furniture and European Spring, along with raw material cost inflation and lower overhead recovery in Adjustable Bed. Evidently, the company trimmed its sales and EPS guidance for 2018.
Nonetheless, on a year-over-year basis, earnings increased 10% from the year-ago level of 61 cents per share, given higher metal margin and volume growth in Steel Rod business. However, higher raw material and transportation costs in several businesses, along with reduced overhead recovery and start-up costs partially offset the positives. Also, net sales increased about 8% year over year from $1.01 billion. The uptrend was primarily driven by growth in U.S. Spring, Automotive, Adjustable Bed, Aerospace, Steel Rod and Work Furniture that was partly offset by soft demand in most other businesses.
Leggett & Platt, Incorporated Price, Consensus and EPS Surprise
Leggett & Platt, Incorporated Price, Consensus and EPS Surprise | Leggett & Platt, Incorporated Quote
Organic sales were up 6% and volumes grew 3%. Additionally, the improved sales were driven by a 3% gain, owing to raw material price inflation. Furthermore, acquisitions (net of divestures) added 2% to sales.
Gross profit was up 5% year over year to $227.1 million in the quarter. However, gross margin contracted 640 basis points (bps) to 20.8%.
Notably, adjusted EBIT was up 6.2% to $124.4 million. However, adjusted EBIT margin of 11.4% decreased 20 bps from the prior-year figure of 11.6%.
Residential Products' sales (excluding inter-segment sales) of $446.5 million increased 4.6% from the year-ago quarter, driven by a 3% improvement in same location sales along with 1% contribution from buyouts. Also, raw material price inflation contributed 5% to sales growth, aiding the results. However, volume as well as currency negatively impacted sales by 1% each, despite 5% growth in U.S. Spring.
Including inter-segment sales, total sales of the segment rose 4.3% to $449.9 million.
The Industrial Products segment's sales improved 36.8% to $97.4 million. Total sales, including inter-segment revenues, were up 28.4% to $173.4 million, mainly driven by 19% raw material price inflation and 9% higher volume.
Sales at Furniture Products increased 3.6% to $294.1 million, courtesy of benefits from higher Adjustable Bed and Work Furniture volumes. This was somewhat negatively impacted by declines in Home Furniture and Fashion Bed. Total sales of the segment (including inter-segment sales) grew 3.6% to $298 million.
The Specialized Products segment's sales rose 11.3% to $253.5 million. Same location sales climbed 3%, backed by 5% Automotive and Aerospace volumes, partially offset by 2% unfavorable currency impact. Also, the Precision Hydraulic Cylinders' (PHC) acquisition added 10% to sales growth, which was offset by a 2% impact from the divestiture of Commercial Vehicle Products, CVP. Total sales of the segment (including inter-segment sales) climbed 10.7% to $254.2 million.
Leggett ended third quarter with cash and cash equivalents of $363.5 million, and long-term debt of $1,353.2 million. Furthermore, the company generated $126.5 million of cash flow from operations in the quarter.
The company had net debt-to-capital ratio of 41% at the end of the third quarter. Moreover, Leggett's debt was 2.3 times of the trailing 12-month adjusted EBITDA.
Meanwhile, management repurchased nearly 0.1 million shares in the quarter for an average price of $45.41, and issued 0.4 million shares through employee benefit plans as well as option exercises.
In September 2018, it declared third-quarter dividend of 38 cents per share, reflecting an increase of two cents from the year-ago period. This year marks Leggett's 47th consecutive year of annual dividend increase.
2018 Guidance Trimmed
Following the quarterly results, management has lowered its guidance for 2018. Sales are now projected at approximately $4.25 billion, which is in the lower end of the prior guided range of $4.25-$4.35 billion. The latest sales expectation, however, reflects 8% year over year growth..
Moreover, the company expects low-single-digit volume growth, and raw material price increases to contribute to sales growth. Additionally, acquisitions are likely to contribute 2% to sales growth. Consequently, EBIT margin is envisioned to be nearly 10.8-11.2% compared with 11.3-11.8% guided earlier.
On the basis of these downturn, management reduced earnings projection in the range of $2.40-$2.50 per share from $2.55-$2.70 projected earlier. The downside can be attributed to adverse impacts of lower-than-expected sales in Automotive and pricing lag on raw material increases in European Spring, Flooring Products and Fabric businesses. Also, softness in Home Furniture and European Spring, as well as lower overhead recovery in Adjustable Bed added to the woes.
Notably, the guidance considers an effective tax rate of 21%.
For 2018, Leggett now expects operating cash flow of about $400 million compared with $425 million anticipated earlier. Capital expenditure for the year is projected at $185 million (versus $180 million expected earlier), while the company still intends to spend $195 million for dividend payouts. It continues to target a 50-60% dividend payout ratio of adjusted earnings. Furthermore, it expects payout for 2018 to be near the high end of the aforementioned range.
Meanwhile, management does not plan for any specific repurchase program, as it has a standing authorization to buy back up to 10 million shares every year.
Zacks Rank & Stocks to Consider
Leggett currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Construction sector are Armstrong World Industries, Inc. AWI , Armstrong Flooring, Inc. AFI and NCI Building Systems, Inc. NCS , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Armstrong World, Armstrong Flooring and NCI Building's 2018 earnings are expected to grow 23.5%, 104.8% and 81.3%, respectively.
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