Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.38M
2: EX-31.1 Exhibit-31.1 Section 302 Certification of J. HTML 25K
Mitchell Dolloff
3: EX-31.2 Exhibit-31.2 Section 302 Certification of Jeffrey HTML 25K
L. Tate
4: EX-32.1 Exhibit-32.1 Section 906 Certification of J. HTML 22K
Mitchell Dolloff
5: EX-32.2 Exhibit-32.2 Section 906 Certification of Jeffrey HTML 22K
L. Tate
11: R1 Cover Page HTML 73K
12: R2 Consolidated Condensed Balance Sheets (Unaudited) HTML 165K
13: R3 Consolidated Condensed Balance Sheets (Unaudited) HTML 23K
(Parenthetical)
14: R4 Consolidated Condensed Statements of Operations HTML 112K
(Unaudited)
15: R5 Consolidated Condensed Statements of Comprehensive HTML 59K
Income (Loss) (Unaudited)
16: R6 Consolidated Condensed Statements of Cash Flows HTML 104K
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18: R8 Accounting Standards Updates HTML 32K
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20: R10 Segment Information HTML 102K
21: R11 Goodwill Impairment Testing HTML 49K
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23: R13 Accounts and Other Receivables HTML 84K
24: R14 Stock-Based Compensation HTML 122K
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26: R16 Inventories HTML 29K
27: R17 Employee Benefit Plans HTML 40K
28: R18 Statement of Changes in Equity and Accumulated HTML 276K
Other Comprehensive Income (Loss)
29: R19 Fair Value HTML 73K
30: R20 Derivative Financial Instruments HTML 85K
31: R21 Contingencies HTML 30K
32: R22 Risks and Uncertainties HTML 29K
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35: R25 Segment Information (Tables) HTML 97K
36: R26 Goodwill Impairment Testing (Tables) HTML 52K
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47: R37 Revenue (Details) HTML 48K
48: R38 SEGMENT INFORMATION - Summary of Segment Results HTML 71K
from Continuing Operations (Details)
49: R39 SEGMENT INFORMATION - Average Assets for Segments HTML 43K
(Details)
50: R40 Goodwill Impairment Testing (Goodwill) (Details) HTML 63K
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Accounts and Other Receivables (Details)
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56: R46 STOCK-BASED COMPENSATION - Additional Information HTML 52K
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57: R47 STOCK-BASED COMPENSATION - Summary of Performance HTML 43K
Stock Units (Details)
58: R48 STOCK-BASED COMPENSATION - Schedule of Performance HTML 41K
Cycles (Details)
59: R49 ACQUISITIONS - Estimated Fair Values Of The Assets HTML 74K
Acquired And Liabilities Assumed (Details)
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(Exact name of registrant as specified in its charter)
iMissouri
i44-0324630
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
iNo. 1 Leggett Road
iCarthage,
iMissouri
i64836
(Address
of principal executive offices)
(Zip Code)
(i417) i358-8131
Registrant’s telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon Stock, $.01 par value
iLEG
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
Common stock outstanding as of July 27, 2022: i132,618,690
This Quarterly Report on Form 10-Q and our other public disclosures, whether written or oral, may contain “forward-looking” statements including, but not limited to: projections of Company revenue, income, earnings, capital expenditures, dividends, capital structure, cash flows from operations, cash repatriation, restructuring-related costs, tax impacts, effective tax rate, maintenance of indebtedness under the commercial paper program, litigation exposure, acquisitions, industry demand projections, the amount of share repurchases, or other financial items; possible plans, goals, objectives, prospects, strategies or trends concerning future operations; statements concerning future economic performance; possible goodwill or other asset impairment, access to liquidity, compliance with debt covenant requirements, raw material availability and pricing, supply chain disruptions, labor, semiconductor and chemical
shortages, inventory levels, customer requirements, and the underlying assumptions relating to forward-looking statements. These statements are identified either by the context in which they appear or by use of words such as “anticipate,”“believe,”“estimate,”“expect,”“guidance,”“intend,”“may,”“plan,”“project,”“should,” or the like. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by the cautionary statements described in this provision.
Any forward-looking statement reflects only the beliefs of the Company or its management at the time the statement is made. Because all forward-looking statements deal with the future, they are subject to risks, uncertainties, and developments which might
cause actual events or results to differ materially from those envisioned or reflected in any forward-looking statement. Moreover, we do not have, and do not undertake, any duty to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement was made. For all of these reasons, forward-looking statements should not be relied upon as a prediction of actual future events, objectives, strategies, trends, or results.
Readers should review Item 1A Risk Factors in our Form 10-K filed February 22, 2022 and in this Form
10-Q for a description of important factors that could cause actual events or results to differ materially from forward-looking statements. It is not possible to anticipate and list all risks, uncertainties, and developments which may affect our future operations or our performance, or which otherwise may cause actual events or results to differ materially from forward-looking statements. However, the known, material risks and uncertainties include the following:
•the adverse impact on our supply chain and global inflationary impacts from the Russian invasion of Ukraine;
•the adverse impact of delays and non-delivery of raw materials, parts, and finished products in our supply chain from natural disaster, fire or explosion, terrorism, pandemics (such as COVID-19), government
action, strikes or shutdowns at delivery ports, losses due to tampering, third-party vendor issues with quality, failure by our suppliers to comply with applicable laws and regulations, potential tariffs or other trade restrictions, or other reasons beyond our control;
•the adverse impact on our trade sales, earnings, liquidity, cash flow, and financial condition caused by the COVID-19 pandemic, which has had, and depending on the length and severity of the pandemic, the percentage of the population vaccinated, and the effectiveness of any vaccines against new variants, could, in varying degrees, negatively impact, among other things (i) the demand for our products and our customers’ products, growth rates in the industries in which we participate, and opportunities in those industries; (ii) our manufacturing facilities’ ability to remain open and fully operational, obtain necessary raw materials and
parts, maintain appropriate labor levels, and ship finished products to customers due to supply chain disruptions or otherwise; (iii) our ability to collect trade and other notes receivables in accordance with their terms due to customer bankruptcy, financial difficulties, or insolvency; (iv) impairment of goodwill and long-lived assets; (v) restructuring and related costs; and (vi) our ability to borrow under our credit facility, including our ability to comply with the restrictive covenants in our credit facility that may limit our operational flexibility and our ability to pay our debt;
•our ability to manage working capital;
•adverse changes in consumer confidence, housing turnover, employment levels, interest rates, trends in capital spending, and the like;
•factors
that could impact raw materials and other costs, including the availability and pricing of steel scrap and rod, chemicals, semiconductors, the availability of labor, wage rates, and energy costs;
•our ability and the ability of our customers and suppliers to retain an adequate labor force as a result of COVID-19 vaccination and testing mandates;
•our ability to pass along raw material cost increases through increased selling prices;
•price and product competition from foreign (particularly Asian and European) and domestic competitors;
•our ability to maintain profit margins if our customers change the quantity and mix of our components in their finished goods;
•our
ability to access the commercial paper market;
•our ability to maintain and grow the profitability of acquired companies;
•adverse changes in political risk and U.S. or foreign laws, regulations, or legal systems (including tax law changes);
•cash generation sufficient to pay the dividend;
1
•our ability to realize deferred tax assets on our balance sheet;
•cash repatriation from foreign accounts;
•tariffs imposed
by the U.S. government that result in increased costs of imported raw materials and products that we purchase;
•our ability to maintain the proper functioning of our internal business processes and information systems through technology failures or otherwise;
•our ability to avoid modification or interruption of our information systems and industrial control systems through cybersecurity breaches;
•the loss of business with one or more of our significant customers;
•our ability to comply with environmental, social, and governance responsibilities;
•litigation risks related to various contingencies including antitrust, intellectual property,
contract disputes, product liability and warranty, taxation, environmental, and workers’ compensation expense;
•our borrowing costs and access to liquidity resulting from credit rating changes;
•business disruptions to our steel rod mill;
•risks related to operating in foreign countries, including, without limitation, credit risks, ability to enforce intellectual property rights, currency exchange rate fluctuations, industry labor strikes, increased customs and shipping rates, and inconsistent interpretation and enforcement of foreign laws;
•risks relating to the United Kingdom’s exit from the European Union (commonly
known as “Brexit”);
•the effectiveness and enforcement of antidumping and countervailing duties on the import of innersprings, steel wire rod, and finished mattresses;
•our ability to comply with privacy and data protection regulations; and
•our ability to comply with climate change laws and regulations.
Other
intangibles, less accumulated amortization of $i321.3 and $i298.1 as of June 30, 2022 and December 31,
2021, respectively
i665.5
i707.8
Operating
lease right-of-use assets
i189.3
i192.6
Sundry
i103.2
i110.5
Total
other assets
i2,388.4
i2,460.5
TOTAL
ASSETS
$
i5,230.6
$
i5,307.3
CURRENT
LIABILITIES
Current maturities of long-term debt
$
i301.3
$
i300.6
Current
portion of operating lease liabilities
i44.8
i44.5
Accounts
payable
i602.0
i613.8
Accrued expenses
i278.3
i284.6
Other
current liabilities
i105.0
i92.2
Total
current liabilities
i1,331.4
i1,335.7
LONG-TERM
LIABILITIES
Long-term debt
i1,789.5
i1,789.7
Operating
lease liabilities
i149.5
i153.0
Other
long-term liabilities
i133.8
i162.9
Deferred
income taxes
i211.8
i217.4
Total
long-term liabilities
i2,284.6
i2,323.0
COMMITMENTS
AND CONTINGENCIES
i
i
EQUITY
Common
stock
i2.0
i2.0
Additional contributed
capital
i561.3
i557.9
Retained
earnings
i3,041.3
i2,973.0
Accumulated
other comprehensive loss
(i109.2)
(i38.3)
Treasury
stock
(i1,881.4)
(i1,846.6)
Total
Leggett & Platt, Inc. equity
i1,614.0
i1,648.0
Noncontrolling
interest
i.6
i.6
Total equity
i1,614.6
i1,648.6
TOTAL
LIABILITIES AND EQUITY
$
i5,230.6
$
i5,307.3
See
accompanying notes to consolidated condensed financial statements.
3
LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six
Months Ended
Three Months Ended
June 30,
June 30,
(Amounts in millions, except per share data)
2022
2021
2022
2021
Net trade sales
$
i2,656.5
$
i2,420.5
$
i1,334.2
$
i1,269.6
Cost
of goods sold
i2,120.8
i1,903.7
i1,065.8
i1,000.3
Gross
profit
i535.7
i516.8
i268.4
i269.3
Selling
and administrative expenses
i217.1
i218.9
i105.4
i112.6
Amortization
of intangibles
i33.4
i33.8
i16.4
i18.0
Net
gain from sale of assets and businesses
(i1.3)
(i28.6)
(i.7)
(i28.6)
Other
(income) expense, net
i5.9
(i6.9)
i4.3
(i4.6)
Earnings
before interest and income taxes
i280.6
i299.6
i143.0
i171.9
Interest
expense
i41.8
i38.8
i21.1
i19.5
Interest
income
i2.3
i1.7
i1.1
i.8
Earnings
before income taxes
i241.1
i262.5
i123.0
i153.2
Income
taxes
i55.5
i62.7
i27.8
i40.9
Net
earnings
i185.6
i199.8
i95.2
i112.3
(Earnings)
attributable to noncontrolling interest, net of tax
i—
(i.1)
i—
(i.1)
Net
earnings attributable to Leggett & Platt, Inc. common shareholders
$
i185.6
$
i199.7
$
i95.2
$
i112.2
Net
earnings per share attributable to Leggett & Platt, Inc. common shareholders
Basic
$
i1.36
$
i1.47
$
i.70
$
i.83
Diluted
$
i1.36
$
i1.46
$
i.70
$
i.82
Weighted
average shares outstanding
Basic
i136.4
i136.1
i136.3
i136.3
Diluted
i136.8
i136.6
i136.7
i136.8
See
accompanying notes to consolidated condensed financial statements.
4
LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Six
Months Ended
Three Months Ended
June 30,
June 30,
(Amounts in millions)
2022
2021
2022
2021
Net earnings
$
i185.6
$
i199.8
$
i95.2
$
i112.3
Other
comprehensive income (loss), net of tax:
Foreign currency translation adjustments
(i69.8)
(i.8)
(i61.0)
i13.5
Cash
flow hedges
(i1.8)
i2.2
(i2.8)
i1.1
Defined
benefit pension plans
i.7
i1.7
(i.2)
i.9
Other
comprehensive income (loss)
(i70.9)
i3.1
(i64.0)
i15.5
Comprehensive
income (loss)
i114.7
i202.9
i31.2
i127.8
Add:
comprehensive loss attributable to noncontrolling interest
i—
(i.1)
i—
(i.1)
Comprehensive
income (loss) attributable to Leggett & Platt, Inc.
$
i114.7
$
i202.8
$
i31.2
$
i127.7
See
accompanying notes to consolidated condensed financial statements.
5
LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
(Amounts
in millions)
2022
2021
OPERATING ACTIVITIES
Net earnings
$
i185.6
$
i199.8
Adjustments
to reconcile net earnings to net cash provided by operating activities:
Depreciation
i56.0
i58.4
Amortization
of intangibles and supply agreements
i34.2
i35.8
Increase
(decrease) in provision for losses on accounts and notes receivable
i2.2
(i2.1)
Writedown
of inventories
i6.1
i8.4
Net gain from
sales of assets and businesses
(i1.3)
(i28.6)
Deferred
income tax (benefit) expense
(i1.6)
i3.3
Stock-based
compensation
i20.7
i20.3
Other,
net
(i3.0)
(i1.5)
Increases/decreases
in, excluding effects from acquisitions and divestitures:
Accounts and other receivables
(i93.0)
(i120.9)
Inventories
(i55.8)
(i192.8)
Other
current assets
(i10.1)
(i11.7)
Accounts
payable
i5.2
i57.6
Accrued
expenses and other current liabilities
(i16.4)
i4.3
NET
CASH PROVIDED BY OPERATING ACTIVITIES
i128.8
i30.3
INVESTING
ACTIVITIES
Additions to property, plant and equipment
(i40.8)
(i49.0)
Purchases
of companies, net of cash acquired
i—
(i151.9)
Proceeds
from sales of assets and businesses
i2.7
i30.9
Other,
net
i.1
i1.1
NET
CASH USED FOR INVESTING ACTIVITIES
(i38.0)
(i168.9)
FINANCING
ACTIVITIES
Payments on long-term debt
(i.1)
(i25.1)
Change
in commercial paper and short-term debt
i2.5
i156.4
Dividends
paid
(i112.1)
(i106.3)
Issuances of
common stock
i—
i2.4
Purchases
of common stock
(i56.9)
(i9.4)
Other,
net
(i.8)
i.6
NET
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(i167.4)
i18.6
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
(i15.2)
i2.7
DECREASE
IN CASH AND CASH EQUIVALENTS
(i91.8)
(i117.3)
CASH
AND CASH EQUIVALENTS—January 1,
i361.7
i348.9
CASH
AND CASH EQUIVALENTS—June 30,
$
i269.9
$
i231.6
See
accompanying notes to consolidated condensed financial statements.
6
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions, except per share data)
1. iINTERIM
PRESENTATION
iThe interim financial statements of Leggett & Platt, Incorporated (we, us, or our) included herein have not been audited by an independent registered public accounting firm. The statements include all adjustments, including normal recurring accruals, which management considers necessary for a fair statement of our financial position and operating results for the periods presented. We have prepared the statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of results to be expected for an entire year.
The December 31, 2021 financial position data included herein was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP.
ii
Accounts
Receivable and Accounts Payable Programs
We participate in trade receivables sales programs in combination with certain customers and third-party banking institutions. Under each of these programs, we sell our entire interest in the trade receivable for i100% of face value, less a discount. Because control of the sold receivable is transferred to the buyer at the time of sale, accounts receivable balances sold are removed from the Consolidated Condensed Balance Sheets and the related proceeds
are reported as cash provided by operating activities in the Consolidated Condensed Statements of Cash Flows. We had approximately $i45.0 and $i35.0
of trade receivables that were sold and removed from our Consolidated Condensed Balance Sheets at June 30, 2022 and December 31, 2021, respectively.
We sometimes utilize third-party programs that allow our suppliers to be paid earlier at a discount. While these programs assist us in negotiating payment terms with our suppliers, we continue to make payments based on our customary terms. A vendor can elect to take payment from a third party earlier with a discount, and in that case, we pay the third party on the original due date of the invoice. Contracts with our suppliers are negotiated independently of supplier participation in the programs, and we cannot increase payment terms pursuant to the programs. The accounts payable associated with
the third-party programs, which remain on our Consolidated Condensed Balance Sheets, were approximately $i125.0 at June 30, 2022 and $i130.0 at December 31,
2021.
While we utilize the above items as tools in our cash flow management, and offer them as options to facilitate customer and vendor operating cycles, if there were to be a cessation of these programs, we do not expect it would materially impact our operating cash flows or liquidity.
//
2. iACCOUNTING
STANDARDS UPDATES
iThe Financial Accounting Standards Board (FASB) regularly issues updates to the FASB Accounting Standards Codification that are communicated through issuance of an Accounting Standards Update (ASU). The FASB has issued accounting guidance effective for current and future periods that did not have a material impact on our current financial statements, and we do not believe it will have any material impact on our future financial statements.
7
LEGGETT
& PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
3. iREVENUE
i
Revenue
by Product Family
iWe disaggregate revenue by customer group, which is the same as our product families for each of our segments, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. For information on our segment structure, see Note 4.
We have ithree operating segments that supply a wide range of products:
•Bedding
Products: This segment supplies a variety of components and machinery used by bedding manufacturers in the production and assembly of their finished products, as well as produces private label finished mattresses for bedding brands and adjustable bed bases. This segment is also vertically integrated into the production and supply of specialty foam chemicals, steel rod, and drawn steel wire to our own operations and to external customers. Our trade customers for wire make mechanical springs and many other end products.
•Specialized Products: From this segment, we supply lumbar support systems, seat suspension systems, motors and actuators, and control cables used by automotive manufacturers. We also produce and distribute tubing and tube assemblies for the aerospace industry and engineered hydraulic cylinders used in the material-handling and construction
industries.
•Furniture, Flooring & Textile Products: Operations in this segment supply a wide range of components for residential and work furniture manufacturers, as well as select lines of private label finished furniture. We also produce or distribute carpet cushion, hard surface flooring underlayment, and textile and geo components.
Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. Each reportable segment has a vice president who has accountability to, and maintains regular contact with, our chief executive officer, who is the chief operating decision maker (CODM). The operating results and financial information reported through the segment structure are regularly reviewed and used by the CODM to evaluate segment performance, allocate overall resources,
and determine management incentive compensation.
The accounting principles used in the preparation of the segment information are the same as those used for the consolidated financial statements. We evaluate performance based on Earnings Before Interest and Taxes (EBIT). Intersegment sales are made primarily at prices that approximate market-based selling prices. Centrally incurred costs are allocated to the segments based on estimates of services used by the segment. Certain of our general and administrative costs and miscellaneous corporate income and expenses are allocated to the segments based on sales or other appropriate metrics. These allocated corporate costs include depreciation and other costs and income related to assets that are not allocated or otherwise included in the segment assets.
8
LEGGETT
& PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
i
A summary of segment results is shown in the following tables.
2 Depreciation and Amortization: Other relates to non-operating assets (assets not included in segment assets) and is allocated to segment EBIT as discussed above.
3 2021 EBIT: Includes $i28.2 gain on the sale of real estate associated with our exited Fashion Bed business.
/
9
LEGGETT
& PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
i
Average assets for our segments are shown in the table below and reflect the basis for return measures used by management to evaluate segment performance. These segment totals include working capital (all current assets and current liabilities) plus net property, plant and equipment. Segment assets for all years are reflected at their estimated average
for the periods presented.
Average
current liabilities included in segment numbers above
i825.7
i814.1
Unallocated assets1
i2,692.4
i2,828.5
Difference
between average assets and period-end balance sheet
i16.9
i138.5
Total assets
$
i5,230.6
$
i5,307.3
1
Unallocated assets consist primarily of goodwill, other intangibles, cash and deferred tax assets.
/
10
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
5. GOODWILL IMPAIRMENT TEiSTING
We
test goodwill for impairment at the reporting unit level (the business groups that are one level below the operating segments) when triggering events occur, or at least annually. We perform our annual goodwill impairment testing in the second quarter. The 2022 and 2021 goodwill impairment testing indicated no impairments.
The fair values of our reporting units in relation to their respective carrying values and significant assumptions used are presented in the tables below. If actual results differ materially from estimates used in these calculations, we could incur future impairment charges.
i
2022
Fair
Value over Carrying Value divided by Carrying Value
10-year Compound Annual Growth Rate Range for Sales
Terminal Values Long-term Growth Rate for Debt-Free Cash Flow
Discount Rate Ranges
Less than 50% 1
$
i67.5
i7.8%
i3.0
%
i10.0%
50%
- 100% 2
i101.0
ii5.5
i3.0
ii9.0
101%
- 300%
i1,086.9
i3.1
- i3.3
i3.0
i8.0
- i8.5
Greater than 300%
i194.2
i2.9
- i10.4
i3.0
i9.0
$
i1,449.6
i2.9%
- i10.4%
i3.0
%
i8.0%
- i10.0%
1 This category includes ione reporting unit, Aerospace, which had fair value exceeding
its carrying value by i40% at June 30, 2022 as compared to i28%
in 2021. Goodwill associated with the Aerospace reporting unit was $i66.3 at June 30, 2022 and $i67.5 at December 31, 2021.
2
This category includes itwo reporting units (Work Furniture and Bedding) for 2022 and the Work Furniture unit for 2021.
•The fair value of our Work Furniture reporting unit exceeded its carrying value by i78%
at June 30, 2022 as compared to i85% in 2021. Goodwill associated with the Work Furniture reporting unit was $i98.9 at June 30,
2022 and $i101.0 at December 31, 2021.
/
•The fair value of our Bedding reporting unit exceeded its carrying value by i54%
at June 30, 2022 as compared to i171% in 2021. Goodwill associated with the Bedding reporting unit was $i898.9 at June
30, 2022 and $i908.3 at December 31, 2021.
11
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
6.
iEARNINGS PER SHARE (EPS)
i
Basic and diluted earnings per share were calculated as follows:
1The “Trade accounts receivable” and “Other notes receivable” line items above include an aggregate of $i21.9 ($i21.6 for the note and $i.3
for the trade receivable) and $i22.5 ($i22.0 for the note and $i.5
for the trade receivable) as of June 30, 2022 and December 31, 2021, respectively, from a customer that has experienced continued financial difficulty and liquidity problems. The balances for this customer were fully reserved for all periods presented.
/i
Activity related to the allowance for doubtful accounts is
reflected below:
Total
tax benefits associated with stock-based compensation
$
i1.1
$
i1.9
/
14
LEGGETT
& PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
1PSU Awards
For the following programs, we intend to pay i50% in shares of our common stock and i50%
in cash, although we reserve the right, subject to Human Resources and Compensation Committee approval, to pay up to i100% in cash. Cash settlements are recorded as a liability and adjusted to fair value at each reporting period.
1APSU - TSR based
PSU awards are based i50%
upon our TSR compared to a peer group. A small number of PSU awards are based i100% upon relative TSR for certain business unit employees to complement their particular mix of incentive compensation. Grant date fair values are calculated using a Monte Carlo simulation of stock and volatility data for Leggett and each of the peer companies. Grant date fair values are amortized using the straight-line method over the ithree-year
vesting period.
The relative TSR component of the PSU awards contain the following conditions:
•A service requirement—Awards generally “cliff” vest ithree years following the grant date; and
•A market condition—Awards are based on our TSR as compared to the TSR of a group of peer companies. The peer group consists of all the companies
in the Industrial, Materials, and Consumer Discretionary sectors of the S&P 500 and S&P Midcap 400 (approximately i300 companies). Participants will earn from i0%
to i200% of the base award depending upon how our TSR ranks within the peer group at the end of the ithree-year
performance period.
1BPSU - EBIT CAGR based
PSU awards are based i50% upon our, or the applicable segment's, EBIT CAGR. Grant date fair values are calculated using the grant date stock price discounted for dividends over the vesting period. Expense is adjusted every quarter over the ithree-year
vesting period based on the number of shares expected to vest.
The EBIT CAGR component of the PSU awards contain the following conditions:
•A service requirement—Awards generally “cliff” vest ithree years following the grant date; and
•A performance condition—Awards are based on achieving specified EBIT CAGR performance targets for our
or the applicable segment's EBIT during the third year of the performance period compared to EBIT during the fiscal year immediately preceding the performance period. Participants will earn from i0% to i200%
of the base award.
15
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
i
Below is a summary of shares and grant date fair value related to PSU awards for the periods presented:
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
9. iACQUISITIONS
i
The
following table contains the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions during the periods presented (using inputs as discussed in Note 13). Of the goodwill included in the table below, inone
is expected to be deductible for tax purposes.
Manufacturer of specialty foam for the bedding and furniture industries;
Furniture, Flooring & Textile Products
Manufacturer
of bent metal tubing for furniture used in office, residential, and other settings;
Specialized Products
Manufacturer of high-pressure and high-temperature ducting, flexible joints and components
/
The results of operations of the above acquired companies have been included in the consolidated financial statements since the date of acquisition. The unaudited pro forma consolidated net sales, net earnings and earnings per share as though these acquisitions had occurred on January 1 of each year
presented is not materially different from the amounts reflected in the accompanying financial statements.
A brief description of our acquisition activity during the periods presented is included below.
2022
iNo businesses were acquired during the first six months of 2022.
2021
We acquired ithree
businesses:
•A specialty foam and finished mattress manufacturer serving the United Kingdom (UK) and Irish marketplace with itwo manufacturing facilities in the Dublin area. This acquisition became a part of our Bedding Products segment. The acquisition date was June 4. Following the recording of measurement period adjustments subsequent to second quarter 2021 shown above, the final purchase price was $i119.7,
with total goodwill of $i58.3.
17
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
•A Polish manufacturer of bent metal tubing for furniture used in office, residential, and other settings. This acquisition became a part of
our Furniture, Flooring & Textile Products segment. The acquisition date was May 31. Following the recording of measurement period adjustments subsequent to second quarter 2021 shown above, the final purchase price was $i5.4, with total goodwill of $i4.4.
•A
UK manufacturer specializing in metallic ducting systems, flexible joints, and components for space, military, and commercial applications. This acquisition expands the capabilities of our aerospace products business to include flexible joint fabrication and operates within our Specialized Products segment. The acquisition date was January 30. Following the recording of measurement period adjustments subsequent to second quarter 2021 shown above, the final purchase price was $i27.7, with total goodwill of $i8.5.
10. iINVENTORIES
i
The following table
recaps the components of inventory for each period presented:
All
inventories are stated at the lower of cost or net realizable value. We generally use standard costs which include materials, labor, and production overhead at normal production capacity.
Inventories are reviewed at least quarterly for slow-moving and potentially obsolete items using actual inventory turnover and, if necessary, are written down to estimated net realizable value. We have had no material changes in inventory writedowns or slow-moving and obsolete inventory reserves in any of the periods presented.
11. iEMPLOYEE
BENEFIT PLANS
We expect to contribute approximately $i3.0 to our defined benefit pension plans in 2022.
i
The
following table provides interim information as to our defined benefit pension plans:
The
components of net pension expense, other than the service cost component, are included in the line item “Other (income) expense, net” in the Consolidated Condensed Statements of Operations.
18
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
12. iSTATEMENT
OF CHANGES IN EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
i
The following tables set forth the components of and changes in each component of accumulated other comprehensive income (loss) for each of the periods presented:
Cost
of goods sold; selling and administrative expenses
i—
(i.6)
i—
(i.6)
Interest
expense
i—
i1.8
i—
i1.8
Other
income (expense), net
i—
i—
i1.4
i1.4
Total
reclassifications, pretax
$
i—
$
(i1.6)
$
i1.4
$
(i.2)
2
2021
pretax reclassifications are comprised of:
Net trade sales
$
i—
$
(i3.4)
$
i—
$
(i3.4)
Cost
of goods sold; selling and administrative expenses
i—
i.4
i—
i.4
Interest
expense
i—
i2.3
i—
i2.3
Other
income (expense), net
i—
i—
i2.6
i2.6
Total
reclassifications, pretax
$
i—
$
(i.7)
$
i2.6
$
i1.9
13.
iFAIR VALUE
We utilize fair value measures for both financial and non-financial assets and liabilities.
Items measured at fair value on a recurring basis
Fair value measurements are established using a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following categories:
•Level 1: Quoted prices for identical assets
or liabilities in active markets.
•Level 2: Inputs, other than quoted prices included in Level 1, that are observable for the asset or liability either directly or indirectly. Short-term investments in this category are valued using discounted cash flow techniques with all significant inputs derived from or supported by observable market data. Derivative assets and liabilities in this category are valued using models that consider various assumptions and information from market-corroborated sources. The models used are primarily industry-standard models that consider items such as quoted prices, market interest rate curves applicable to the instruments being valued as of the end of each period, discounted cash flows, volatility factors, current market, and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable
in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
•Level 3: Unobservable inputs that are not corroborated by market data.
22
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
i
The
areas in which we utilize fair value measures of financial assets and liabilities are presented in the table below.
There were no transfers between Level 1 and Level 2 for any of the periods presented.
The fair value for fixed rate debt (Level 1) was approximately $i150.0 less than carrying value
of $i2,083.5 at June 30, 2022 and was approximately $i130.0 greater than carrying value of $i2,082.3
at December 31, 2021.
Items measured at fair value on a non-recurring basis
The primary areas in which we utilize fair value measurements of non-financial assets and liabilities are allocating purchase price to the assets and liabilities of acquired companies (Note 9) and evaluating long-term assets (including goodwill) for potential impairment. Determining fair values for these items requires significant judgment and includes a variety of methods and models that utilize significant Level 3 inputs.
14.
iDERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges
Derivative financial instruments that we use to hedge forecasted transactions and anticipated cash flows are as follows:
Currency Cash Flow Hedges—The foreign currency hedges manage risk associated with exchange rate volatility of various currencies.
Interest Rate Cash Flow
Hedges—We have also occasionally used interest rate cash flow hedges to manage interest rate risks.
The effective changes in fair value of unexpired contracts are recorded in accumulated other comprehensive income and reclassified to income or expense in the period in which earnings are impacted. Cash flows from settled contracts are presented
23
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
in
the category consistent with the nature of the item being hedged. (Settlements associated with the sale or production of product are presented in operating cash flows, and settlements associated with debt issuance are presented in financing cash flows.)
Fair Value Hedges and Derivatives not Designated as Hedging Instruments
These derivatives typically manage foreign currency risk associated with subsidiaries’ assets and liabilities, and gains or losses are recognized currently in earnings. Cash flows from settled contracts are presented in the category consistent with the nature of the item being hedged.
i
The
following table presents assets and liabilities representing the fair value of our most significant derivative financial instruments. The fair values of the derivatives reflect the change in the market value of the derivative from the date of the trade execution and do not consider the offsetting underlying hedged item.
The
following table sets forth the pretax (gains) losses for our hedging activities for the periods presented. This schedule includes reclassifications from accumulated other comprehensive income (see Note 12) as well as derivative settlements recorded directly to income or expense.
Derivatives
Income
Statement Caption
Amount of (Gain) Loss Recorded in Income Six Months Ended June 30,
Amount of (Gain) Loss Recorded in Income Three Months Ended June 30,
2022
2021
2022
2021
Designated as hedging instruments
Interest
rate cash flow hedges
Interest expense
$
i1.8
$
i2.3
$
i.9
$
i1.2
Currency
cash flow hedges
Net trade sales
(i2.3)
(i4.9)
(i.5)
(i2.7)
Currency
cash flow hedges
Cost of goods sold
(i1.1)
i.3
(i.7)
i.1
Currency
cash flow hedges
Other (income) expense, net
i—
i—
(i.1)
i—
Total
cash flow hedges
(i1.6)
(i2.3)
(i.4)
(i1.4)
Fair
value hedges
Other (income) expense, net
i1.0
(i4.0)
i1.5
(i3.5)
Not
designated as hedging instruments
Other (income) expense, net
i.1
(i.2)
i—
(i.5)
Total
derivative instruments
$
(i.5)
$
(i6.5)
$
i1.1
$
(i5.4)
/
24
LEGGETT
& PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
15. iCONTINGENCIES
We are a party to various proceedings and matters involving employment, intellectual property, environmental, taxation, vehicle-related personal injury, antitrust, and other laws. When it is probable, in management's judgment, that we may incur monetary damages
or other costs resulting from these proceedings or other claims, and we can reasonably estimate the amounts, we record appropriate accruals in the financial statements and make charges against earnings. For all periods presented, we have recorded no material charges against earnings. Also, when it is reasonably possible that we may incur additional loss in excess of recorded accruals, and we can reasonably estimate the additional losses or range of losses, we disclose such additional reasonably possible losses in these notes.
Accruals and Reasonably Possible Losses in Excess of Accruals
Accruals for Probable Losses
Although we deny liability in all threatened or pending litigation proceedings in which we are or may be a party, and believe that we have valid bases to contest all claims threatened or made against us, we have recorded a litigation
contingency accrual for our reasonable estimate of probable loss for pending and threatened litigation proceedings, in the aggregate, of less than $ii3.0/
for all periods presented. There were no material adjustments to the accrual, including cash payments and expense, for the three and six-month periods ending June 30, 2022 and June 30, 2021. The accruals do not include accrued expenses related to workers' compensation, vehicle-related personal injury, product and general liability claims, taxation issues and environmental matters, some of which may contain a portion of litigation expense. However, any litigation expense associated with these categories is not anticipated to have a material effect on our financial condition, results of operations, or cash flows.
Reasonably
Possible Losses in Excess of Accruals
Although there are a number of uncertainties and potential outcomes associated with our pending or threatened litigation proceedings, we believe, based on current known facts, that additional losses, if any, are not expected to materially affect our consolidated financial position, results of operations, or cash flows. However, based upon current known facts, as of June 30, 2022, aggregate reasonably possible (but not probable, and therefore, not accrued) losses in excess of the accruals noted above are estimated to be $i10.6.
If our assumptions or analyses regarding any of our contingencies are incorrect, or if facts change, we could realize losses in excess of the recorded accruals (and in excess of the $i10.6 referenced above), which could have a material negative impact on our financial condition, results of operations, and cash flows.
16. iRISKS
AND UNCERTAINTIES
Our Board of Directors oversees the identification, analysis, and mitigation of emerging risks, including the items discussed below.
The Russian invasion of Ukraine has caused supply chain disruptions and global inflationary impacts that have had, and could continue to have, a negative effect on the demand for our products and our results of operations. Although we do not have operations in Russia, Belarus, or Ukraine, and we have not had a material amount of sales into these countries, some of our operations have sourced, directly or indirectly, a portion of their supply chain requirements of nickel, titanium, and birch plywood from Russia. Also, our Automotive business purchases semiconductors, the production of which uses neon gas. A significant portion of neon gas is produced in Ukraine. Since the invasion began, the prices of these materials have significantly
increased. When we experience significant increases in costs, we are generally successful in recovering the costs by implementing price increases. If we are not able to pass through the increased costs to our customers, or if we are unable to obtain the necessary raw materials (or alternatives) in a timely manner, our results of operations could be negatively impacted. Also, if the conflict in Ukraine expands geographically or in intensity, this may have a negative impact on our operations, including access to energy and other raw materials. Furthermore, sanctions against the import of Russian oil have restricted global oil supply and further increased fuel and energy costs contributing to additional global inflationary impacts. This inflationary impact could reduce consumer spending and decrease demand for some of our products, negatively impacting our results of operations.
Because of the COVID-19 pandemic, various governments
in North America, Europe, Asia, and elsewhere instituted, and some have reinstituted, quarantines, shelter-in-place or stay-at-home orders, or restrictions on public gatherings as well as limitations on social interactions, which have had, and could further have, an adverse effect on the demand for our products. All of our facilities are open and running at this time. However, some of our facilities in China, most notably in our Automotive and Home Furniture businesses, have been temporarily closed from time to time due to strict COVID-related lockdown requirements. If the lockdowns in China are imposed on a broader geographic scope, this could materially negatively impact our manufacturing capacity, our customers or vendors, and our ability to transport goods in our supply chain. We have also had, at various times, some capacity restrictions on our plants due to governmental orders in other parts of the world. We have been
25
LEGGETT
& PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
and could be further negatively affected by governmental action in any one or more of the countries in which we operate by the imposition, or re-imposition, of restrictive social measures, mandatory closures of retail establishments that sell our products or our customers’ products, travel restrictions, and restrictions on the import or export of products.
Depending on the length and severity of the COVID-19 pandemic, the percentage of the population vaccinated, and the effectiveness of the vaccines against new variants, our ability to keep our manufacturing operations open and fully operational, build and maintain appropriate labor levels, obtain necessary raw materials and parts, and ship
finished products to customers may be partially or completely disrupted, either on a temporary or prolonged basis. A significant increase in COVID-19 cases among our employees may disrupt our ability to maintain necessary labor levels and produce and deliver products to our customers if we are unable to shift production to other manufacturing facilities. The continued realization of these risks to our manufacturing operations, labor force, and supply chain could also increase labor, commodity, and transportation costs.
Supply chain disruptions have continued into 2022, most notably in semiconductors, labor, and transportation, potentially constraining volume growth.
Currently there is a shortage of semiconductors in the automotive industry. Automotive OEMs and other suppliers have not been able to secure an adequate supply of semiconductors, and as a result have reduced or completely
shut down their production of some automobiles or parts, which in turn has reduced our sale of products. Consumer demand remains strong, but the semiconductor shortage has pushed vehicle inventory to very low levels. Our Automotive Group uses the semiconductors in seat comfort products, and to a lesser extent in motors and actuators. Although our Automotive Group has been able to obtain an adequate supply of semiconductors, we are dependent on our suppliers to deliver these semiconductors in accordance with our production schedule. A shortage of the semiconductors, either to us, the automotive OEMs, or our suppliers, can disrupt our operations and our ability to deliver products to our customers. The shortage of semiconductors is also impacting our Adjustable Bed business unit.
Because of shortages in the labor markets, several industries in which we operate have experienced challenges in hiring and maintaining adequate workforce
levels, as well as increased labor costs. If this continues, our results of operations may be materially negatively impacted.
Some facilities have experienced disruptions in logistics necessary to import, export, or transfer raw materials or finished goods, which has generally resulted in increased transportation costs that are typically passed through to our customers. Our supply chains have also been hampered by congested ports and trucking constraints.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We had record second quarter trade sales of $1,334 million for the three months ending June 30, 2022, an increase of 5% versus the second quarter 2021. In the first six months of 2022, trade sales were $2,657 million versus $2,421 million the same period of 2021.
EPS was $.70 in the second quarter and $1.36 for the six months ending June 30, 2022, compared to $.82 and $1.46 in the same periods
of 2021, both of which include a $.16 non-recurring gain from the sale of real estate.
Earnings Before Interest and Taxes (EBIT) for second quarter and six months ending June 30, 2022 was $143 million and $281 million, respectively. This is down $29 million and $19 million compared to the same periods in 2021, each reflecting a $28 million non-recurring gain from the sale of real estate.
26
Operating cash flow was $129 million in first six months of 2022, an increase of $99 million versus the same period of 2021.
In May 2022, the Board of Directors declared a $.44 second quarter 2022 dividend, $.02 cents higher than last year’s second
quarter dividend, making our annual indicated dividend yield one of the highest among the Dividend Kings and extending our record of consecutive annual increases to over 51 years.
Share repurchases in the second quarter of 2022 were 1.0 million shares at an average price of $35.01. Share repurchases for the first six months of 2022 were 1.6 million shares at an average price of $35.80.
We conducted our annual goodwill impairment testing in the second quarter of 2022, which indicated no impairments. For detailed information on the goodwill impairment testing and results, refer to Note 5 to the Consolidated Condensed Financial Statements on page 11.
INTRODUCTION
What
We Do
Leggett & Platt, Incorporated (the Company, we, or our) is a diversified manufacturer that conceives, designs, and produces a wide range of engineered components and products found in many homes, offices, and automobiles. We make components that are often hidden within, but integral to, our customers’ products.
We are the leading U.S.-based manufacturer of: a) bedding components; b) automotive seat support and lumbar systems; c) specialty bedding foams and private-label finished mattresses; d) components for home furniture and work furniture; e) flooring underlayment; f) adjustable beds; and g) bedding industry machinery.
Our
Segments
Our operations are comprised of 130 production facilities located in 17 countries around the world. Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. Our segments are described below.
Bedding Products: This segment supplies a variety of components and machinery used by bedding manufacturers in the production and assembly of their finished products, as well as produces private label finished mattresses for bedding brands and adjustable bed bases. This segment is also vertically integrated into the production and supply of specialty foam chemicals, steel rod, and drawn steel wire to our own operations and to external customers. Our trade customers for wire make mechanical springs and many other end products. This segment generated 47% of our trade sales during the first
six months of 2022.
Specialized Products: From this segment, we supply lumbar support systems, seat suspension systems, motors and actuators, and control cables used by automotive manufacturers. We also produce and distribute tubing and tube assemblies for the aerospace industry and engineered hydraulic cylinders used in the material-handling and construction industries. This segment contributed 20% of our trade sales in the first six months of 2022.
Furniture, Flooring & Textile Products: Operations in this segment supply a wide range of components for residential and work furniture manufacturers, as well as select lines of private label finished furniture. We also produce or distribute carpet cushion, hard surface flooring underlayment, and textile and geo components. This segment contributed 33% of our trade sales in the first
six months of 2022.
Total Shareholder Return
Total Shareholder Return (TSR), relative to peer companies, is a primary financial measure that we use to assess long-term performance. TSR = (Change in Stock Price + Dividends) ÷ Beginning Stock Price. We target average annual TSR of 11-14% through an approach that employs four TSR sources: revenue growth, margin expansion, dividends, and share repurchases.
We monitor our TSR performance on a rolling three-year basis. We believe our disciplined growth strategy, portfolio management, and prudent use of capital will support achievement of our goal over time.
27
The
table below shows the components of our TSR targets.
Current Targets
Revenue Growth
6-9%
Margin Increase
1%
Dividend Yield
3%
Stock
Buyback
1%
Total Shareholder Return
11-14%
Senior executives participate in an incentive program with a three-year performance period based on two equal measures: (i) our TSR performance compared to the performance of a group of approximately 300 peers, and (ii) the Company or segment EBIT Compound Annual Growth Rate.
Customers
We serve a broad suite of customers, with our largest customer representing
approximately 6% of our trade sales in 2021. Many are companies whose names are widely recognized. They include bedding brands and manufacturers, residential and office furniture producers, automotive OEM and Tier 1 manufacturers, and a variety of other companies.
Organic Sales
We calculate organic sales as trade sales excluding sales attributable to acquisitions and divestitures consummated within the last twelve months. Management uses the organic sales metric, and it is useful to investors as supplemental information to analyze our underlying sales performance from period to period in our legacy businesses.
Major
Factors That Impact Our Business
Many factors impact our business, but those that generally have the greatest impact are discussed below.
Inflationary Trends in Cost of Goods Sold
Our costs have increased significantly as market prices for raw materials (many of which are commodities), have been impacted by inflation. We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. Our costs have also been impacted by higher prices for transportation and energy (partially from the Russian invasion of Ukraine) as well as labor. Our ability to recover higher costs (through selling price increases) is crucial. When we experience significant increases in costs
of goods sold, we typically implement price increases to recover the higher costs. While we have been generally successful in recovering the higher costs, even during these volatile times, the timing of our price increases is important; we typically experience a lag in recovering higher costs.
Steel is our principal raw material. At various times in past years, we have experienced significant cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers with selling price adjustments. Over the past few years, we have seen varying degrees of inflation and deflation in U.S. steel pricing. In 2021, steel costs inflated throughout the majority of the year and inflated further in the first half of 2022.
As a producer of steel rod, we are also impacted by changes in metal margins (the difference in the cost of steel
scrap and the market price for steel rod). In 2021, steel rod price increases outpaced steel scrap price increases resulting in significantly expanded metal margins within the steel industry. Metal margins expanded further in the first half of 2022. These expanded margins were partially offset by increased energy and input costs.
We have exposure to the cost of chemicals, including TDI, MDI, and polyol. The cost of these chemicals has fluctuated at times, but we have generally passed the changes through to our customers. In 2021, chemical prices inflated due to robust demand and shortages from severe weather, supplier production disruptions, port delays, and logistics challenges. The supply shortages in 2021 resulted in significant restrictions by producers. Late in 2021 and into the first half of 2022, chemical prices leveled off as supply availability improved.
Shortages in the
labor markets in several industries in which we operate have created challenges in hiring and maintaining adequate workforce levels. Because of these shortages, we have experienced increased labor costs.
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Some facilities have experienced disruptions in logistics necessary to import, export, or transfer raw materials or finished goods, which has generally resulted in increased freight costs that are typically passed through to our customers. Our supply chains have also been hampered by congested ports.
Our other raw materials include woven and nonwoven fabrics and foam scrap. We have experienced changes in the cost of these materials and generally have been able to pass them through to our customers.
When
we raise our prices to recover higher raw material costs, this sometimes causes customers to modify their product designs and replace higher cost components with lower cost components. We must continue providing product options to our customers that enable them to improve the functionality of their products and manage their costs, while providing higher profits for our operations.
Supply Chain Disruptions
We have experienced significant supply chain disruptions related to semiconductor shortages, labor availability, and freight challenges, as well as higher costs associated with each of these issues. We have also experienced delays in delivery of raw materials, parts, and finished goods because of shutdown or congested delivery ports, inclement weather, and the
invasion of Ukraine. This has resulted in reduced volume and higher costs in many of our businesses, including our Automotive business and Bedding Products segment, primarily related to negative impacts on component demand and finished goods production.
Currently there is a shortage of semiconductors in the automotive industry. Automotive OEMs and other suppliers have not been able to secure an adequate supply of semiconductors, and as a result have reduced or completely shut down their production of some automobiles or parts, which in turn has reduced our sale of products. Consumer demand remains strong, but the semiconductor shortage has pushed vehicle inventory to very low levels. Our Automotive Group uses the semiconductors in seat comfort products, and to a lesser extent in motors and actuators. Although our Automotive Group has been able to obtain an adequate supply of semiconductors, we are dependent on our suppliers
to deliver these semiconductors in accordance with our production schedule. A shortage of the semiconductors, either to us, the automotive OEMs, or our suppliers, can disrupt our operations and our ability to deliver products to our customers. The shortage of semiconductors is also impacting our Adjustable Bed business unit.
The Russian invasion of Ukraine has caused disruptions in our supply chain and negatively impacted our results of operations. Although we do not have operations in Russia, Belarus, or Ukraine, and we have not had a material amount of sales into these countries, some of our businesses have sourced, directly or indirectly, a portion of their supply chain requirements of nickel, titanium, and birch plywood from Russia. Our Aerospace business uses nickel and titanium in the production of aerospace tubing. Several of our businesses use birch plywood in their products. Also, a significant portion of neon gas
is produced in Ukraine. Our Automotive business uses semiconductors, the production of which uses neon gas. Since the invasion began, the prices of these materials have significantly increased. Also, several countries have imposed economic sanctions against Russia as a result of its military action. It is possible sanctions could be expanded, or additional measures taken, which could restrict the import of nickel, titanium, and birch plywood from Russia or greatly increase the cost of procurement via increased duties or otherwise. Also, if the conflict in Ukraine expands geographically or in intensity, this may have a negative impact on our operations, including access to energy and other raw materials.
Many of our markets are highly competitive, with the number of competitors varying by product line. In general, our competitors tend to be smaller, private companies. Many of our competitors, both domestic and foreign, compete primarily on the basis of price. Our success has stemmed from the ability to remain price competitive, while delivering innovation, better product quality, and customer service.
We continue to face pressure from foreign competitors, as some of our customers source a portion of their components and finished products offshore. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and
more lenient regulatory climates. We typically remain price competitive in most of our business units, even versus many foreign manufacturers, as a result of our highly efficient operations, automation, vertical integration in steel and wire, logistics and distribution efficiencies, and large-scale purchasing of raw materials and commodities. However, we have also reacted to foreign competition in certain cases by selectively adjusting prices, developing new proprietary products that help our customers reduce total costs, and shifting production offshore to take advantage of lower input costs.
Since 2009, there have been antidumping duty orders on innerspring imports from China, South Africa, and Vietnam, ranging from 116% to 234%. In September 2019, the Department of Commerce (DOC) and the International Trade
29
Commission
(ITC) concluded a second sunset review extending the orders for an additional five years, through October 2024, at which time the DOC and ITC will conduct a third sunset review to determine whether to extend the orders for an additional five years.
Antidumping and countervailing duty cases filed by major U.S. steel wire rod producers have resulted in the imposition of antidumping duties on imports of steel wire rod from Brazil, China, Belarus, Indonesia, Italy, Korea, Mexico, Moldova, Russia, South Africa, Spain, Trinidad & Tobago, Turkey, Ukraine, United Arab Emirates, and the United Kingdom, ranging from 1% to 757%, and countervailing duties on imports of steel wire rod from Brazil, China, Italy, and Turkey, ranging from 3% to 193%. In June 2020, the ITC and DOC concluded a first sunset review, extending the orders on China through June 2025, and in July 2020, the ITC and DOC concluded a third sunset review, determining
to extend the orders on Brazil, Indonesia, Mexico, Moldova, and Trinidad & Tobago through August 2025. Duties will continue through December 2022 for Belarus, Italy, Korea, Russia, South Africa, Spain, Turkey, Ukraine, United Arab Emirates, and the United Kingdom. At those times, the DOC and the ITC will conduct sunset reviews to determine whether to extend those orders for an additional five years.
Since 2019, there has been an antidumping duty order on mattress imports from China ranging from 57% to 1,732%. This order will remain in effect through December 2024, at which time the DOC and ITC will conduct a sunset review to determine whether to extend the order for an additional five years.
In March 2020, the Company, along with other domestic mattress producers and two labor unions representing
workers at other mattress producers, filed antidumping petitions with the DOC and the ITC alleging that manufacturers of mattresses in Cambodia, Indonesia, Malaysia, Serbia, Thailand, Turkey, and Vietnam were unfairly selling their products in the United States at less than fair value (dumping) and a countervailing duty petition alleging manufacturers of mattresses in China were benefiting from subsidies. In March 2021, the DOC made final determinations, assigning China a countervailing duty rate of 97.78% and antidumping duty rates on the other seven countries from 2.22% – 763.28%. In April 2021, the ITC made a unanimous affirmative final determination that domestic mattress producers were materially injured by reason of the unfairly priced or subsidized imported mattresses. Accordingly, the agencies instructed that final antidumping and countervailing duty orders will remain in effect for five years, through May 2026, at which time the DOC and ITC will conduct a sunset
review to determine whether to extend the order for an additional five years. Appeals have been filed with the U.S. Court of International Trade as to the DOC's final determinations of margins for Cambodia, Indonesia, Thailand, and Vietnam and the ITC's final determination of injury. See Item 1 Legal Proceedings on page 44 for more information.
COVID-19 Impacts on our Business
Below is a discussion of the various current impacts of COVID-19 on our business.
Demand for our Products. Various governments in North America, Europe, Asia, and elsewhere instituted,
and some have reinstituted, quarantines, shelter-in-place or stay-at-home orders, or restrictions on public gatherings as well as limitations on social interactions, which have had, and could further have, an adverse effect on the demand for our products.
Impact on our Manufacturing Operations. We have manufacturing facilities in 17 countries. All of these countries have been affected by the COVID-19 pandemic. All of our facilities are open and running at this time. However, some of our facilities in China, most notably in our Automotive and Home Furniture businesses, have been temporarily closed from time to time due to strict COVID-related lockdown requirements. If the lockdowns in China are imposed on a broader geographic scope, this could materially negatively impact our manufacturing capacity, our customers or vendors, and our ability to transport goods in our supply chain. We have also had, at
various times, some capacity restrictions on our plants due to governmental orders in other parts of the world. We have been and could be further negatively affected by governmental action in any one or more of the countries in which we operate by the imposition, or re-imposition, of restrictive social measures, mandatory closures of retail establishments that sell our products or our customers’ products, travel restrictions, and restrictions on the import or export of products.
Depending on the length and severity of the COVID-19 pandemic, the percentage of the population vaccinated, and the effectiveness of the vaccines against new variants, our ability to keep our manufacturing operations open and fully operational, build and maintain appropriate labor levels, obtain necessary raw materials and parts, and ship finished products to customers may be partially or completely disrupted, either on a temporary or prolonged basis.
A significant increase in COVID-19 cases among our employees may disrupt our ability to maintain necessary labor levels and produce and deliver products to our customers if we are unable to shift production to other manufacturing facilities. The continued realization of these risks to our manufacturing operations, labor force, and supply chain could also increase labor, commodity, and transportation costs.
Relief under the CARES Act. We deferred $19 million of our 2020 payment of employer's Social Security match as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Approximately half was paid in January 2022
30
in accordance with the holiday schedule for the December
31, 2021 deferral date. The remaining deferral is anticipated to be paid in January 2023.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
Second Quarter:
Trade Sales were $1,334 million in the current quarter, a 5% increase versus the second quarter 2021. Organic sales increased 5%. Raw material-related selling price increases of 13% were partially offset by volume declines of 6% and currency impact of 2%. Volume was down
primarily from demand softness in residential end markets partially offset by growth in industrial end markets and Automotive. Acquisitions, net of divestitures, increased sales less than 1%.
EBIT decreased 17%, to $143 million, primarily from the non-recurrence of last year's gain on the sale of real estate associated with our former Fashion Bed business, lower volume, and lower overhead absorption as production and inventory levels were adjusted to meet reduced demand primarily in the Bedding Products segment. These decreases were partially offset by metal margin expansion in our Steel Rod business and pricing discipline in the Furniture, Flooring & Textile Products segment.
Earnings Per Share (EPS) decreased to $.70 in the current quarter, versus $.82 in the second quarter of 2021. This decline reflects lower EBIT partially offset by a lower tax rate ($.04/share).
Six
Months:
Trade Sales were $2,657 million in the first six months of 2022, a 10% increase versus the same period last year. Organic sales increased 9%. Raw material-related selling price increases of 15% were partially offset by volume declines of 5% and currency impact of 1%. Volume was down primarily from demand softness in residential end markets partially offset by growth in industrial end markets and Automotive. Acquisitions, net of divestitures, increased sales 1%.
EBIT decreased 6% to $281 million, primarily from the non-recurrence of last year's gain on the sale of real estate associated with our former Fashion Bed business, lower volume, and lower overhead absorption as production and inventory levels were adjusted to meet reduced demand in the Bedding Products segment. These decreases were partially offset by metal margin expansion in our Steel Rod business and pricing discipline
in the Furniture, Flooring & Textile Products segment.
EPS decreased to $1.36 for the first six months of 2022, versus $1.46 in the same period of 2021, primarily from lower EBIT as discussed above.
Net Interest Expense and Income Taxes
2022 net interest expense was $2 million and $1 million higher than the six and three months ended June 30, 2021, respectively.
Our worldwide effective
tax rate was 23% for the second quarter of 2022, compared to 27% for the same quarter last year. While the U.S. statutory federal income tax rate was 21% in both years, foreign withholding taxes, the impact of foreign earnings, Global Intangible Low-Taxed Income (GILTI), and other less significant items added 3% to our tax rate in each year. In 2021, our rate was also negatively impacted by 3% from an aggregation of several foreign items occurring in the quarter including: changes in estimates due to tax returns filed, the establishment of a tax reserve, and the deferred tax impact from a tax law change. In 2022, our tax rate benefited by 1% primarily related to changes in estimates due to foreign tax returns filed in the quarter.
For the full year, we are anticipating an effective tax rate of approximately 23%, including the impact of discrete tax items that we expect to occur from quarter to quarter. We utilize prudent tax
planning strategies for opportunities to optimize our tax rate, but other factors, such as our overall profitability, the mix and level of earnings among jurisdictions, the type of income earned, business acquisitions and dispositions, the impact of tax audits, and the effect of tax law changes can also influence our rate.
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Discussion of Segment Results
Second Quarter Discussion
A description of
the products included in each segment, along with segment financial data, appears in Note 4 to the Consolidated Condensed Financial Statements on page 8. A summary of segment results is shown in the following tables.
1 This is a change
in trade sales not attributable to acquisitions or divestitures in the last 12 months. Refer to the respective segment discussion below for a reconciliation of the change in total segment trade sales to organic sales.
2 Unallocated consists primarily of depreciation and amortization on non-operating assets.
Bedding Products
Trade sales increased $4 million, or 1%. Organic sales were flat, with raw material-related selling price increases of 16% offset by volume declines of 15% and currency impact of 1%. Volume was down primarily from demand softness in U.S. and European bedding markets partially offset by strong trade demand in Steel Rod and Drawn Wire. The Kayfoam acquisition, net of divestitures of small operations in Drawn Wire and International Bedding, increased trade
sales 1%.
EBIT decreased $31 million, primarily from the non-recurrence of last year's $28 million gain on the sale of real estate associated with our former Fashion Bed business. Additionally, lower volume and lower absorption as production and inventory levels were adjusted to meet reduced demand were partially offset by higher metal margin.
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Specialized Products
Trade sales increased $18 million, or 8%. Organic sales increased 8%, with volume growth of 11% and raw material-related selling price increases of 3% partially offset by currency impact of 6%. Volume was higher in Automotive, Aerospace, and Hydraulic Cylinders.
EBIT
decreased $6 million, primarily from higher raw material and transportation costs, labor inefficiencies, and currency impact, partially offset by higher volume.
Furniture, Flooring & Textile Products
Trade sales increased $42 million, or 10%. Organic sales increased 10% from raw material-related selling price increases of 13% partially offset by lower volume of 2% and currency impact of 1%. Volume was down from declines in Home Furniture, Textiles, and Flooring partially offset by growth in Work Furniture. Acquisitions increased trade sales less than 1%.
EBIT increased $7 million, primarily from pricing discipline partially offset by lower volume.
Six Month Discussion
A
description of the products included in each segment, along with segment financial data, appears in Note 4 to the Consolidated Condensed Financial Statements on page 8. A summary of segment results is shown in the following tables.
1This is a change
in trade sales not attributable to acquisitions or divestitures in the last 12 months. Refer to the discussion below under Bedding Products and Furniture, Flooring & Textile Products for a reconciliation of the change in total segment trade sales to organic sales.
2Unallocated consists primarily of depreciation and amortization on non-operating assets.
33
Bedding Products
Trade sales increased $107 million, or 9%. Organic sales increased 8%. Inflation-driven raw material-related selling price increases added 21% to sales, partially offset by volume declines of 12% and currency impact of 1%. The Kayfoam acquisition completed
in June 2021, net of divestitures (small operations in Drawn Wire and International Bedding), added 1% to sales growth.
EBIT decreased $19 million, primarily from the non-recurrence of last year's $28 million gain on the sale of real estate associated with our former Fashion Bed business. Additionally, lower volume and lower overhead absorption as production and inventory levels were adjusted to meet reduced demand were partially offset by higher metal margin.
Specialized Products
Trade sales increased $25 million, or 5%. Organic sales grew 5%, driven by volume growth of 7% and raw material-related selling price increases of 2%, partially offset by currency impact of 4%.
EBIT decreased $21 million, primarily from higher raw material and transportation costs, production inefficiencies and related
premium freight costs in a North American Automotive facility, and currency impact, partially offset by higher volume.
Furniture, Flooring & Textile Products
Trade sales increased $104 million, or 13%. Organic sales increased 13%, from raw material-related selling price increases of 15% partially offset by lower volume of 1% and currency impact of 1%. A small Work Furniture acquisition completed in May 2021 added less than 1% to trade sales.
EBIT increased $21 million, primarily from pricing discipline partially offset by lower volume.
LIQUIDITY AND CAPITALIZATION
Liquidity
Sources
of Cash
Cash on Hand
At June 30, 2022, we had cash and cash equivalents of $270 million primarily invested in interest-bearing bank accounts and in bank time deposits with original maturities of three months or less. Substantially all of these funds are held in the international accounts of our foreign operations.
If we were to immediately bring back all our foreign cash to the U.S. in the form of dividends, we would pay foreign withholding taxes of approximately $15 million. Although there are capital requirements in various jurisdictions, none of this cash was inaccessible for repatriation at June 30, 2022.
Cash
from Operations
The primary source of funds for our short-term cash requirements is our cash generated from operating activities. Earnings and changes in working capital levels are the two factors that generally have the greatest impact on our cash from operations. Cash from operations for the six months ended June 30, 2022 was $129 million, up $99 million from the same period last year. Working capital increased significantly last year due to restocking efforts following inventory depletion in 2020 but increased to a lesser extent this year as we continue to return to levels of inventory more reflective of current demand.
34
We
closely monitor our working capital levels and ended the quarter with adjusted working capital at 15.7% of annualized trade sales. The table below explains this non-GAAP calculation. We eliminate cash, current debt maturities, and the current portion of operating lease liabilities from working capital to monitor our operating efficiency and performance related to trade receivables, inventories, and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period. As discussed in Cash on Hand on page 34, substantially all of these funds are held by international operations and may not be immediately available to reduce debt on a dollar-for-dollar basis.
Current debt maturities and current portion of operating lease liabilities
346.1
345.1
Adjusted working capital
$
836.6
$
713.0
Annualized trade sales 1
$
5,336.8
$
5,331.6
Working
capital as a percent of annualized trade sales
14.2
%
13.7
%
Adjusted working capital as a percent of annualized trade sales
15.7
%
13.4
%
1Annualized trade sales equal second quarter 2022 trade sales of $1,334.2 million and fourth quarter 2021 trade sales of $1,332.9 million multiplied by 4. We believe measuring
our working capital against this sales metric is more useful, since efficient management of working capital includes adjusting those net asset levels to reflect current business volume.
a. Quarterly: end of period trade receivables ÷ (quarterly net trade sales ÷ number of days in the period)
b. Annually: ((beginning of year trade receivables + end of period trade receivables) ÷ 2) ÷ (net trade sales ÷ number of days in the period)
2Days inventory on hand
a. Quarterly: end of period inventory ÷ (quarterly cost of goods sold ÷ number of days in the period)
b. Annually: ((beginning of year inventory + end of period inventory) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period)
3Days payables outstanding
a. Quarterly: end of period accounts payable ÷ (quarterly cost of
goods sold ÷ number of days in the period)
b. Annually: ((beginning of year accounts payable + end of period accounts payable) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period)
We continue to monitor all elements of working capital in order to optimize cash flow.
Trade Receivables- Our trade receivables increased at June 30, 2022 compared to December 31 and slightly decreased compared to June 30, 2021. Our DSO decreased versus June 30, 2021 but increased versus December 31, 2021. Raw material-related selling price increases impacted June 30,
2022 accounts receivable balances across the company, although inflationary impacts were mostly offset by volume declines in the Bedding Products segment. Timing of sales and payments and increased Specialized Products segment's sales volume also contributed to increased accounts receivable in the second quarter of 2022 vs. December 31, 2021. Our allowance for doubtful accounts increased by $2 million during the first half of 2022 related to macro
35
market uncertainties and ordinary customer credit risk reviews. Favorable customer payment trends continue as we are closely monitoring accounts receivable and collections. We monitor
all accounts for possible loss. We also monitor general macroeconomic conditions and other items that could impact the expected collectibility of all customers, or pools of customers, with similar risk. We obtain credit applications, credit reports, bank and trade references, and periodic financial statements from our customers to establish credit limits and terms as appropriate. In cases where a customer’s payment performance or financial condition begins to deteriorate or in the event of a customer bankruptcy, we tighten our credit limits and terms and make appropriate reserves based upon the facts and circumstances for each individual customer, as well as pools of customers with similar risk.
Inventories - Our inventories and DIO increased at June 30, 2022 compared to both December 31 and June 30,
2021. Increased inventories versus December 31 were primarily driven by inflation across most businesses, although inventory levels were down in many operations since the beginning of 2022. Inventory levels increased significantly throughout 2021 (primarily in our Steel Rod, Drawn Wire, and U.S. Spring businesses) due to re-stocking efforts following severe depletion in 2020. As supply chain constraints began to improve across the Bedding businesses, we began to adjust inventory levels in the fourth quarter of last year. Inventory levels have trended down since that time, although we built additional safety stock in late 2021 and early 2022 as a precautionary measure before taking our steel rod mill out of operation late in the first quarter of 2022 to replace the reheat furnace. We successfully completed the reheat furnace replacement, enabling us to continue reducing the extra inventory during the second quarter. Inventory levels also increased as compared to second
quarter last year for advance purchases of selected products to proactively address inflation and potential supply chain constraints to ensure consistent service to our customers, primarily in the Furniture, Flooring and Textiles Products segment. We continue to monitor inventory levels while maintaining our ability to service customer requirements. We are well positioned to address further demand changes and will respond quickly and responsibly. Our normal seasonal cash flow cycle will continue to be altered to some degree as we continue to balance inventory levels. Our increased inventory levels are not indicative of slow-moving or potential inventory obsolescence. We continuously monitor our slower-moving and potentially obsolete inventory through reports on inventory quantities compared to usage within the previous 12 months. We also utilize cycle counting programs and complete physical counts of our inventory. When potential inventory obsolescence is indicated by
these controls, we will take charges for write-downs to maintain an adequate level of reserves.
Accounts Payable - Our accounts payable and DPO decreased at June 30, 2022 compared to both December 31 and June 30, 2021. The decreased accounts payable balances were primarily related to the inventory factors discussed above. Our payment terms did not change meaningfully since last year, and we have continued to focus on optimizing payment terms with our vendors. We continue to look for ways to establish and maintain favorable payment terms through our significant purchasing power and also utilize third-party services that offer flexibility to our vendors, which, in turn, helps us manage our DPO as discussed below.
Accounts Receivable and
Accounts Payable Programs - We participate in trade receivables sales programs in combination with certain customers and third-party banking institutions. Under each of these programs, we sell our entire interest in the trade receivable for 100% of face value, less a discount. Because control of the sold receivable is transferred to the buyer at the time of sale, accounts receivable balances sold are removed from the Consolidated Condensed Balance Sheets and the related proceeds are reported as cash provided by operating activities in the Consolidated Condensed Statements of Cash Flows. We had approximately $45 million and $35 million of trade receivables that were sold and removed from our Consolidated Condensed Balance Sheets at June 30, 2022 and December 31, 2021, respectively. These sales reduced our quarterly DSO by roughly
three days, and the impact to year-to-date operating cash flow, provided or (used), was approximately $10 million and ($10) million, at June 30, 2022 and December 31, 2021, respectively.
For accounts payable, we have historically looked for ways to optimize payment terms through utilizing third-party programs that allow our suppliers to be paid earlier at a discount. While these programs assist us in negotiating payment terms with our suppliers, we continue to make payments based on our customary terms. A vendor can elect to take payment from a third party earlier with a discount, and in that case, we pay the third party on the original due date of the invoice. Contracts with our suppliers are negotiated independently of supplier participation
in the programs, and we cannot increase payment terms pursuant to the programs. As such, there is no direct impact on our DPO, accounts payable, operating cash flows, or liquidity. The accounts payable associated with the third-party programs, which remain on our Consolidated Condensed Balance Sheets, were approximately $125 million at June 30, 2022 and $130 million at December 31, 2021.
While we utilize the above items as tools in our cash flow management and offer them as options to facilitate customer and vendor operating cycles, if there were to be a cessation of these programs, we do not expect it would materially impact our operating cash flows or liquidity.
36
Commercial
Paper Program
Another source of funds for our short-term cash requirements is our $1.2 billion commercial paper program. As of June 30, 2022, we had no commercial paper outstanding. For more information on our commercial paper program, see Commercial Paper Program on page 39.
Credit Facility
Our credit facility is a five-year multi-currency facility providing us the ability, from time to time, to borrow, repay, and re-borrow up to $1.2 billion until the maturity date, at which time our ability to borrow under the facility will terminate.
The credit facility matures in September 2026. Currently, there are no borrowings under the credit facility. For more information on our credit facility, see Credit Facility on page 39.
Capital Markets
We also believe that we have the ability to raise debt in the capital markets which acts as a source of funding of long-term cash requirements. Currently, we have $2.1 billion of total debt outstanding with $300 million maturing in August 2022 and the remaining maturing from 2024 to 2051. For more information, please see Long-Term
Debt (including Current Maturities) on page 39.
Uses of Cash
Our long-term priorities for uses of cash are: fund organic growth including capital expenditures, pay dividends, fund strategic acquisitions, and repurchase stock with available cash.
Capital Expenditures
We are making investments to support expansion in businesses and product lines where sales are profitably growing, for efficiency improvement and maintenance, and for system enhancements. We expect capital expenditures to approximate $130 million in 2022 of which we
have spent $41 million as of June 30, 2022. Our employee incentive plans emphasize returns on capital, which include net fixed assets and working capital. This emphasis focuses our management on asset utilization and helps ensure that we are investing additional capital dollars where attractive return potential exists.
Dividends
Dividends are one of the primary means by which we return cash to shareholders. In May, we declared a quarterly dividend of $.44 per share, which represented a $.02 or 4.8% increase versus second quarter of 2021.
Our long-term targeted dividend payout ratio is approximately 50% of adjusted EPS (which excludes special items such as significant tax
law impacts, impairment charges, restructuring-related charges, divestiture gains, litigation accruals, and settlement proceeds). Continuing our long track record of increasing the dividend remains a high priority. 2022 marked our 51st consecutive annual dividend increase. We are proud of our dividend record and plan to extend it.
Acquisitions
Our long-term, 6-9% annual revenue growth objective envisions periodic acquisitions. We are seeking strategic acquisitions that complement our current products and capabilities.
We have not acquired any businesses in 2022. In the first six months of 2021, we acquired three businesses for total final cash consideration of $153 million.
In January 2021, we acquired a United Kingdom (UK) manufacturer specializing in metallic ducting systems, flexible joints, and components for the space, military, and commercial applications for a final purchase price of $28 million. In May 2021, we acquired a Polish manufacturer of bent metal tubing for furniture used in office, residential, and other settings for a final purchase price of $5 million. In June 2021, we acquired a specialty foam and finished mattress manufacturer serving the UK and Irish markets, for a final purchase price of $120 million.
Stock Repurchases
Share repurchases is one of our priorities for uses of cash. During the second quarter of 2022, we repurchased 1.0 million shares of our stock (at an average price of $35.01) and issued .1
million shares through employee benefit plans. For the first six months of 2022, we repurchased 1.6 million shares of our stock (at an average price of $35.80) and issued .8 million shares through employee benefit plans. For the full year, we currently expect share repurchases to exceed share issuances.
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We have been authorized by the Board to repurchase up to 10 million shares each year, but we have established no specific repurchase commitment or timetable. The level of repurchases will vary depending on various considerations, including alternative uses of cash and opportunities to repurchase shares at an attractive price.
Short-Term
and Long-Term Cash Requirements
In addition to the expected uses of cash discussed above, we have various material short-term (12 months or less) and long-term (more than 12 months) cash requirements. There have been no material changes in the second quarter 2022 to our short-term or long-term cash requirements as previously reported in our cash requirements table on page 48 of our Form 10-K filed February 22, 2022.
Capitalization
Capitalization
Table
This table presents key debt and capitalization statistics for the periods presented:
Total debt excluding revolving credit/commercial paper
$
2,090.8
$
2,090.3
Less:
Current maturities of long-term debt
301.3
300.6
Scheduled maturities of long-term debt
1,789.5
1,789.7
Average interest rates 1
3.7
%
3.7
%
Average maturities
in years 1
10.3
10.8
Revolving credit/commercial paper 2
—
—
Average interest rate on period-end balance outstanding
—
%
—
%
Average
interest rate during the period (2022-three months;2021-twelve months)
1.1
%
.2
%
Total long-term debt
1,789.5
1,789.7
Deferred income taxes and other liabilities
495.1
533.3
Shareholders’
equity and noncontrolling interest
1,614.6
1,648.6
Total capitalization
$
3,899.2
$
3,971.6
Unused committed credit:
Long-term
$
1,200.0
$
1,200.0
Short-term
—
—
Total
unused committed credit2
$
1,200.0
$
1,200.0
Cash and cash equivalents
$
269.9
$
361.7
1
These
rates include current maturities, but exclude commercial paper to reflect the averages of outstanding debt with scheduled maturities.
2
The unused committed credit amount is based on our revolving credit facility and commercial paper program which, at year end 2021 and at the end of the second quarter of 2022, had a total authorized program amount of $1.2 billion. However, our borrowing capacity may be limited by covenants to our credit facility.
38
Commercial
Paper Program
Amounts outstanding related to our commercial paper program were:
Commercial
paper outstanding (classified as long-term debt)
—
—
Letters of credit issued under the credit agreement
—
—
Total program usage
—
—
Total program available
$
1,200.0
$
1,200.0
The
average and maximum amounts of commercial paper outstanding during the second quarter of 2022 were $65 million and $101 million, respectively. At quarter end, we had no letters of credit outstanding under the credit facility, but we had issued $47 million of stand-by letters of credit under other bank agreements to take advantage of better pricing. Over the long-term, and subject to our capital needs, market conditions, and alternative capital market opportunities, we expect to maintain the indebtedness under the program by continuously repaying and reissuing the commercial paper notes. We view the notes as a source of long-term funds and have classified the borrowings under the commercial paper program as long-term borrowings on our balance sheet. We have the intent to roll over such obligations on a long-term basis and have the ability to refinance these borrowings on a long-term basis as evidenced by our $1.2 billion revolving credit facility maturing in 2026 discussed
below.
Credit Facility
Our multi-currency credit facility was amended September 2021 to create more financial flexibility and matures in September 2026. It provides us the ability, from time to time subject to certain restrictive covenants and customary conditions, to borrow, repay, and re-borrow up to $1.2 billion.
Our credit facility contains restrictive covenants which (a) require us to maintain as of the last day of each fiscal quarter (i) Consolidated Funded Indebtedness minus the lesser of: (A) Unrestricted Cash, or (B) $750 million to (ii) Consolidated EBITDA for the four consecutive trailing quarters, such ratio not being greater than 3.50 to 1.00, provided, however, subject to certain limitations, if we have
made a material acquisition in any fiscal quarter, at our election, the maximum leverage ratio shall be 4.00 to 1.00 for the fiscal quarter during which such material acquisition is consummated and the next three consecutive fiscal quarters; (b) limit the amount of total secured debt to 15% of our total consolidated assets, and (c) limit our ability to sell, lease, transfer, or dispose of all or substantially all of our assets and the assets of our subsidiaries, taken as a whole (other than accounts receivable sold in a permitted securitization transaction, products sold in the ordinary course of business, and our ability to sell, lease, transfer, or dispose of any of our assets or the assets of one of our subsidiaries to us or one of our subsidiaries,
as applicable) at any given point in time; each (a), (b), and (c) above as determined by the terms of our credit agreement, filed with the SEC on October 1, 2021 as Exhibit 10.1 to our Current Report on Form 8-K. We were in compliance with all of our debt covenants at the end of second quarter 2022, and expect to maintain compliance with the debt covenant requirements.
Our credit facility serves as back-up for our commercial paper program. At June 30, 2022, we had no commercial paper outstanding and had no borrowing under the credit facility. As our trailing 12-month consolidated EBITDA, unrestricted cash, and debt levels change, our borrowing
capacity increases or decreases. Based on our trailing 12-month consolidated EBITDA, unrestricted cash, and debt levels at June 30, 2022, our borrowing capacity under the credit facility was $994 million. However, this may not be indicative of the actual borrowing capacity moving forward, which may be materially different depending on our consolidated EBITDA, unrestricted cash, debt levels, and leverage ratio requirements at that time.
Long-Term Debt (including Current Maturities)
We have total debt of $2,091 million. Our $300 million 3.4% Senior Notes are due August 15, 2022 (August 2022 Notes). We expect to retire the August 2022 Notes with a combination of cash
on hand and commercial paper borrowing. The maturities of the remaining long-term debt range from 2024 through 2051. For more information on our long-term debt, please refer to Footnote J to our Consolidated Financial Statements on page 94 in our Form 10-K filed February 22, 2022.
In November 2021, we issued $500 million aggregate principal amount of notes that mature in 2051. The notes bear interest at a rate of 3.5% per year, with interest payable semi-annually beginning May 15, 2022. As part of this issuance, we also unwound $300 million of treasury lock agreements we had entered into during 2021 at a gain of approximately $10 million, which will be
amortized over the life of the notes. The net proceeds of these notes were used to repay commercial
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paper, and therefore indirectly will be used, through future commercial paper issuances, to repay a portion of the August 2022 Notes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. To do so, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosures.
If we used different estimates or judgments our financial statements could change, and some of those changes could be significant. Our estimates are frequently based upon historical experience and are considered by management, at the time they are made, to be reasonable and appropriate. Estimates are adjusted for actual events, as they occur. “Critical accounting estimates” are those that are: (a) subject to uncertainty and change and (b) of material impact to our financial statements. There were no newly identified critical accounting policies or estimates in first six months of 2022, and there have been no material changes to our critical accounting policies and estimates as previously disclosed beginning on page 51 in our Form 10-K filed
February 22, 2022.
CONTINGENCIES
For contingencies related to the impact of the COVID-19 pandemic on our business, please see COVID-19 Impacts on our Business on page 30.
Litigation
Accrual for Litigation Contingencies and Reasonably Possible Losses in Excess of Accruals
We are exposed to litigation contingencies that,
if realized, could have a material negative impact on our financial condition, results of operations, and cash flows. We deny liability in all currently threatened or pending litigation proceedings and believe we have valid bases to contest all claims made against us. At June 30, 2022, our litigation contingency accrual was immaterial (which does not include accrued expenses related to workers' compensation, vehicle-related personal injury, product and general liability claims, taxation issues and environmental matters). Based on current known facts, aggregate reasonably possible (but not probable, and therefore, not recorded) losses in excess of accruals for litigation contingencies are estimated to be $11 million. If our assumptions or analyses regarding any of our contingencies are incorrect, or if facts change, we could realize loss in excess of the recorded accruals (and in excess of the $11 million referenced above)
which could have a material negative impact on our financial condition, results of operations, and cash flows. For more information regarding our litigation contingencies, see Note 15 Contingencies on page 25 of the Notes to Consolidated Condensed Financial Statements.
Climate Change
Transition Risks
Many scientists, legislators, and others attribute global warming to increased levels of
greenhouse gas emissions (GHG), including carbon dioxide. At June 30, 2022, we had 130 production facilities in 17 countries worldwide. Most of our facilities are engaged in manufacturing processes that produce GHG, including carbon dioxide. We also maintain a fleet of over-the-road tractor trailers that emit GHG. Our manufacturing facilities are primarily located in North America, Europe, and Asia. There are certain transition risks (meaning risks related to the process of reducing the Company’s carbon footprint) that could materially affect our business, financial condition, and results of operations. One of these transition risks is the change in laws, policies, and regulations that could impose significant operational and compliance burdens. There continues to be a lack of consistent climate legislation in the jurisdictions in which
we operate, which creates economic and regulatory uncertainty. To the extent our customers are subject to any of these or other similarly proposed or newly enacted laws and regulations, additional costs by customers to comply with such laws and regulations could impact their ability to operate at similar levels in certain jurisdictions, which could adversely impact their demand for our products and services. Also, if these laws or regulations (including the Securities and Exchange Commission's (SEC) proposed rule regarding climate-related disclosures) impose significant operational restrictions and compliance requirements on us, they could increase costs associated with our operations, including costs for raw materials and transportation. Non-compliance with climate change legislative and regulatory requirements could also negatively impact our reputation. To date, however, we have not experienced a material impact from climate change legislative and regulatory efforts.
Other
transition risks include (i) market trends that may alter our business opportunities (for instance, potential reduced demand for any product that has a significant GHG footprint); (ii) stakeholder views regarding the reputation of the Company
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or otherwise; (iii) the cost and implementation of technological changes needed to reduce the Company’s carbon footprint; (iv) credit risks related to potential economic costs associated with transitioning to a low-carbon economy that may affect our cash flow and financial condition; and (v) litigation through shareholder activism, by private plaintiffs, or
otherwise. To date, we have not experienced a material impact from any of these risks.
Indirect Consequences of Climate-Related Business Trends
In 2020 and 2021, we experienced (due to severe weather impacts) supply shortages in chemicals which restricted foam supply. The restriction of foam supply constrained overall mattress production in the bedding industry and reduced our production levels. The cost of chemicals and foam also increased due to the shortages. Also, severe weather impacts could have a negative effect on our customers' payments which could result in increased bad debt expense.
Physical Effects of Climate Change
We have experienced increased property insurance premiums, in part, due to enhanced weather-related risks, but this increase
in premiums has not had a material impact on our results of operations or financial condition.
Compliance Costs Related to Climate Change
To date, we have not experienced a material increase in climate-related compliance costs. However, evaluating opportunities to reduce our carbon footprint, setting goals for carbon reduction, and measuring performance in achieving those goals are part of our environmental, sustainability, and governance strategy. We are working on completing our first GHG inventory. Once complete, this baseline measurement will inform a long-term GHG reduction strategy, including setting reduction targets and other key areas of performance. This inventory, with a base year of 2019, will cover three years of data and include Scope 1 and Scope 2 carbon dioxide equivalent emissions. If the SEC’s final rule regarding climate-related disclosures
requires disclosure or evaluation of Scope 3 emissions, we will expand our inventory to cover these emissions as well. The inventory is being prepared consistent with the GHG Protocol Corporate Accounting and Reporting Standard. We are currently evaluating our GHG reduction strategies but do not have an estimate yet of the capital expenditures or operating costs that may be required to implement these strategies.
Cybersecurity Risks
We rely on information systems to obtain, process, analyze, and manage data, as well as to facilitate the manufacture and distribution of inventory to and from our facilities. We receive, process, and ship orders, manage the billing of and collections from our customers, and manage the accounting for and payment to our vendors. We
also manage our production processes with certain industrial control systems. We have a formal process in place for both incident response and cybersecurity continuous improvement that includes a cross-functional Cybersecurity Oversight Committee. Members of the Cybersecurity Oversight Committee update the Board quarterly on cybersecurity activity, with procedures in place for interim reporting if necessary.
Although we have not experienced any material cybersecurity incidents, we have enhanced our cybersecurity protection efforts over the last few years. We use a third party to periodically benchmark our information security program against the National Institute of Standards and Technology’s Cybersecurity Framework. We provide quarterly cybersecurity training for employees with access to our email and data systems, and we have purchased broad form cyber insurance coverage. Although we believe that our cybersecurity protection
systems are adequate, cybersecurity risk has increased due to the COVID-19 pandemic regarding increased remote access, remote work conditions, and associated strain on employees. As such, technology failures or cybersecurity breaches could still create system disruptions or unauthorized disclosure of confidential information. We cannot be certain that the attacker’s capabilities will not compromise our technology protecting information systems, including those resulting from ransomware attached to our industrial control systems. If these systems are interrupted or damaged by any incident or fail for any extended period of time, then our results of operations could be adversely affected. We may incur remediation costs, increased cybersecurity protection costs, lost revenues resulting from unauthorized use of proprietary information, litigation and legal costs, increased insurance premiums, reputational damage, damage to our competitiveness, and negative impact on stock
price and long-term shareholder value.
Finally, burdens associated with regulatory compliance, including any potential regulations adopted by the SEC regarding cybersecurity disclosure, may increase the Company's costs.
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Goodwill Impairment Testing
A significant portion of our assets consists of goodwill, the carrying value of which may be reduced if we determine that those assets are impaired. At June 30, 2022, goodwill
represented $1,430 million, or 27%, of our total assets.
Our annual goodwill impairment testing performed in the second quarters of 2022 and 2021 indicated no goodwill impairments. However, fair value exceeded carrying value by less than 100% in 2022 for three reporting units as summarized in the table below:
Fair value in excess of carrying value
Goodwill
Goodwill
impairment testing as performed in the second quarter 2022
Goodwill impairment testing as performed in the second quarter 2021
The
Bedding reporting unit’s market value decreased primarily because of lower comparable company multiples and higher discount rates. Although the long-term outlook for the Bedding reporting unit remains strong, macro-economic factors also have negatively impacted consumer confidence and spending, which in turn has had an adverse impact on the bedding market's near-term forecast.
Work Furniture's forecast improved compared to last year; sales continue to grow from improving demand in the contract market as companies redesign their footprints and invest in office space, although demand for products sold for residential use is softening. Aerospace’s forecast improved compared to last year, as fabricated duct assemblies are at 2019 levels, and demand for welded and seamless tube products is improving modestly but still below pre-pandemic levels.
We expect the industry to return to 2019 demand levels in 2024. Although the Work Furniture and Aerospace reporting units' forecasts improved as compared to last year, their fair values were adversely impacted by lower comparable company multiples and higher discount rates.
We are continuing to monitor all factors impacting these reporting units. If actual results or the long-term outlook of any of our reporting units materially differ from the assumptions and estimates used in the goodwill valuation calculations, we could incur impairment charges. These non-cash charges could have a material negative impact on our earnings.
NEW ACCOUNTING STANDARDS
The FASB has issued accounting guidance effective for the current and
future periods. See Note 2 Accounting Standards Updates to the Consolidated Condensed Financial Statements on page 7 for a more complete discussion.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
Substantially all of our debt is denominated in United States dollars. The fair value of fixed rate debt was approximately $150 million less than carrying value at June 30, 2022 and approximately
$130 million greater than carrying value at December 31, 2021. The fair value of fixed rate debt was based on quoted market prices in an active market. The fair value of variable rate debt is not significantly different from its recorded amount.
We view our investment in foreign subsidiaries as a long-term commitment. This investment may take the form of either permanent capital or notes. Our net investment (i.e., total assets less total liabilities subject to translation exposure) in foreign operations
with functional currencies other than the U.S. dollar was $1,102 million at June 30, 2022 compared to $1,132 million at December 31, 2021.
Derivative Financial Instruments
We are subject to market and financial risks related to interest rates and foreign currency. In the normal course of business, we utilize derivative instruments (individually or in combinations) to reduce or eliminate these risks. We seek to use
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derivative contracts
that qualify for hedge accounting treatment; however, some instruments may not qualify for hedge accounting treatment. It is our policy not to speculate using derivative instruments. Information regarding cash flow hedges (including interest rate hedges) and fair value hedges is provided in Note 14 Derivative Financial Instruments beginning on page 23 of the Notes to Consolidated Condensed Financial Statements and is incorporated by reference into this section.
MARKET
AND INDUSTRY DATA
Unless indicated otherwise, the information concerning our industries contained herein is based on our general knowledge of and expectations concerning the industries. Our market share is based on estimates using our internal data, data from various industry analyses, internal research, and adjustments and assumptions that we believe to be reasonable. We have not independently verified data from industry analyses and cannot guarantee their accuracy or completeness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Effectiveness of the Company's Disclosure Controls and Procedures
An evaluation as of June 30, 2022 was carried out by the Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures were effective, as of June 30, 2022, to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange
Commission’s (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in the Company's Internal Control Over Financial Reporting
There were no changes during the quarter ended June 30,
2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information in Note 15
Contingencies beginning on page 25 of our Notes to Consolidated Condensed Financial Statements is incorporated into this section by reference. Reference is made to Item 3. Legal Proceedings and Note T Contingencies in the Notes to Consolidated Financial Statements in our Form 10-K filed February 22, 2022 and Note 14 in the Notes to Consolidated Condensed Financial Statements in our Form 10-Q filed May 5, 2022.
Mattress Antidumping Matter
On
March 31, 2020, the Company, along with six other domestic mattress producers, Brooklyn Bedding, Corsicana Mattress Company, Elite Comfort Solutions (a Leggett subsidiary), FXI, Inc., Innocor, Inc., and Kolcraft Enterprises, Inc., and two unions, the International Brotherhood of Teamsters and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO (collectively, "Petitioners"), filed petitions with the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) alleging that manufacturers of mattresses in Cambodia, Indonesia, Malaysia, Serbia, Thailand, Turkey, and Vietnam were unfairly selling their products in the United States at less than fair value (dumping) and manufacturers of mattresses in China were unfairly benefiting
from subsidies, causing harm to the U.S. industry and seeking the imposition of duties on mattresses imported from these countries. On March 18, 2021, the DOC made final determinations on Chinese subsidies, assigning a duty rate of 97.78%, and on dumping, assigning duty rates on imports from Cambodia (52.41%, as amended), Indonesia (2.22%), Malaysia (42.92%), Serbia (112.11%), Thailand (37.48% – 763.28%), Turkey (20.03%), and Vietnam (144.92% - 668.38%). On April 21, 2021, the ITC made a unanimous, affirmative final determination that domestic mattress producers were materially injured by reason of the unfairly priced or subsidized imported mattresses. Accordingly, the agencies instructed that the U.S. government continue to impose duties on mattresses imported from China, Cambodia, Indonesia, Malaysia, Serbia, Thailand, Turkey, and Vietnam at the rate determined by the
DOC for five years, through May 2026, at which time the DOC and ITC will conduct a sunset review to determine whether to extend the order for an additional five years. In July 2021, respondents filed appeals with the U.S. Court of International Trade as to the DOC’s final determinations on antidumping duty rates for Cambodia, Indonesia, and Vietnam and the ITC’s unanimous, final determination of material injury to the domestic industry. Petitioners separately appealed the DOC’s final determinations on antidumping duty rates for Cambodia, Indonesia, and Thailand.
ITEM 1A. RISK FACTORS.
Our 2021 Annual Report on Form 10-K filed February 22,
2022 includes a detailed discussion of our risk factors in Item 1A “Risk Factors.” The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.
Investing in our securities involves risk. Set forth below and elsewhere in this report are risk factors that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. We may amend or supplement these Risk Factors from time to time by other reports we file with the Securities and Exchange Commission (SEC).
GEOPOLITICAL RISK FACTORS
The
Russian invasion of Ukraine has caused supply chain disruptions and global inflationary impacts that have had, and could continue to have, a negative effect on the demand for our products and our results of operations.
Our Automotive and Adjustable Bed businesses use semiconductors, the production of which uses neon gas. Our Aerospace business uses titanium and nickel in the production of aerospace tubing. Several of our businesses use birch plywood in their products. All of our businesses are subject to energy costs that can be impacted by the supply of oil.
Although we do not have operations in Russia, Belarus, or Ukraine, and we have not had a material amount of sales into these countries, some of our businesses have sourced, directly or indirectly, a portion of their supply chain requirements of nickel, titanium, and birch plywood from Russia. Also, a significant portion of neon
gas is produced in Ukraine. Since the invasion began, the prices of these materials have significantly increased. Several countries have imposed economic sanctions against Russia as a result of its military action. The United States, European Union, and G7 countries have also moved to revoke Russia’s “most favored nations” trade status, which has resulted or could result in higher duties on imported products.
It is possible sanctions could be expanded, or additional measures taken, which could restrict the import of nickel, titanium, and birch plywood from Russia or greatly increase the cost of procurement via increased duties or otherwise. If sanctions are imposed or duties are increased on these materials, it could reduce global capacity, impact our ability to obtain
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them
(or alternatives) in a timely manner, or further increase the price of these materials. Inability to obtain sufficient quantities of these materials could disrupt our supply chain. Inability to pass through increased prices to our customers could have a negative impact on our results of operations.
A significant portion of global production of oil is refined and exported from Russia. Certain countries, including the United States, the United Kingdom, and Canada have banned the import of Russian oil. With less supply, fuel costs have increased, and may continue to increase. This has impacted, and may continue to impact, both our businesses and consumers. Also, there has been a reduction of natural gas exports from Russia to Europe resulting in shortages and higher prices. Higher energy prices have contributed to broader inflationary trends, which have resulted, in some cases, in reduced discretionary consumer spending. If this
continues, the demand for our products may be negatively impacted, which would have a negative impact on our sales.
Finally, if the conflict in Ukraine expands geographically or in intensity, this may have a negative impact on our operations, including access to energy and other raw materials.
OPERATIONAL RISK FACTORS
Supply chain disruptions impacting our ability to timely receive competitively-priced raw materials and parts used in our products, or impacting our ability to timely deliver our finished products to customers, may adversely affect our manufacturing processes, financial condition, results of operations, and cash flows.
We have manufacturing facilities in 17 countries, primarily located in North America, Europe, and Asia. In our manufacturing processes, we source raw materials
and parts from a global supply chain. We sell and deliver our finished products to customers all over the world. We rely on third parties to supply certain raw materials, components, and packaging products, and to deliver our finished products. Any interruption or failure by our suppliers, distributors, and other contractors to meet their obligations on schedule or in accordance with our expectations could adversely affect our business and financial results. We have experienced supply chain disruptions related to semiconductor shortages, foam chemical shortages, labor availability, and freight challenges, as well as higher costs associated with each of these issues. We have also experienced delays in delivery of raw materials, parts, and finished goods because of shutdown or congested delivery ports, inclement weather, and the invasion of Ukraine. This has resulted in reduced volume and higher costs in many of our businesses, including our Automotive business and Bedding
Products segment, primarily related to negative impacts on component demand and finished goods production.
We also bear the risk of delays or non-delivery because of natural disaster, fire or explosion, terrorism, pandemics (such as COVID-19), government action, or other reasons beyond our control or the control of our suppliers, all of which could impair our ability to timely manufacture and deliver our products.
Strikes or shutdowns at delivery ports, or loss of or damage to our raw materials, parts, or finished products while they are in transit or storage, losses due to tampering, third-party vendor issues with quality, failure by our suppliers to comply with applicable laws and regulations, potential tariffs or other trade restrictions, or similar problems, could restrict or delay the supply of our raw materials, parts, or delivery of our finished products resulting in harm
to our business and reputation.
The aforementioned supply chain risks can materially adversely affect our manufacturing processes, financial condition, results of operations, and cash flows.
The COVID-19 pandemic has had, and could further have, an adverse impact to (i) our manufacturing operations' ability to remain open and fully operational; and (ii) our ability to obtain necessary raw materials and parts, maintain appropriate labor levels, and ship finished products to customers due to supply chain disruptions or otherwise; all of which, in the aggregate, have had, and could further have, a negative impact on our trade sales, earnings, liquidity, cash flow, financial condition, and our stock price.
All of the countries in which we operate have been, and are continuing to be, affected by the COVID-19 pandemic. All of our facilities
are open and running at this time. However, a few of our facilities in China, most notably in our Automotive and Home Furniture businesses, have been temporarily closed from time to time due to strict COVID-related lockdowns. If the lockdowns in China are imposed on a broader geographic scope, this could materially negatively impact our manufacturing capacity, our customers or vendors, and our ability to transport goods in our supply chain. We have also had, at various times, some capacity restrictions on our plants due to governmental orders in other parts of the world. We have been and could be further negatively affected by governmental action in any one or more of the countries in which we operate by the imposition, or re-imposition, of restrictive social measures, mandatory closures of retail establishments that sell our products or our customers’ products, travel restrictions, and restrictions on the import or export of products.
Depending
on the length and severity of the COVID-19 pandemic, the percentage of the population vaccinated, and the effectiveness of the vaccines against new variants, our ability to keep our manufacturing operations open and fully operational,
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build and maintain appropriate labor levels, obtain necessary raw materials and parts, and ship finished products to customers, due to supply chain disruptions or otherwise, may be partially or completely disrupted, either on a temporary or prolonged basis. A significant increase in COVID-19 cases among our employees may disrupt our ability to maintain necessary labor levels and produce and deliver products to our customers if we are unable to shift production to other manufacturing facilities. The continued realization of these
risks to our manufacturing operations, labor force, and supply chain could also increase labor, commodity, and energy costs.
FINANCIAL RISK FACTORS
Macro market uncertainties have had, and could further have, an adverse impact on the collection of trade and other notes receivable in accordance with their terms due to customer bankruptcy, financial difficulties, or insolvency.
Beginning in early 2020, many of our customers and other third parties were adversely affected by the social and governmental restrictions and limitations related to the COVID-19 pandemic. Because of this, we believed the risk of customer nonpayment increased. As such, in the first quarter of 2020, we increased our allowance for doubtful accounts by $20 million, including $9 million associated with a single customer in our Bedding Products segment (fully reserving
the balances for this customer). As 2020 progressed, worldwide conditions stabilized, and our bad debt expense finished at $17 million for the year. While favorable customer payment trends have continued through 2021 and 2022, we recorded $2 million bad debt in the first half of 2022 related to macro market uncertainties and ordinary customer credit reviews.
If our customers continue to be adversely affected by macro market uncertainties, they may suffer significant financial difficulty. Macro market uncertainties may include, but are not limited to, rising interest rates, inflation, increased geopolitical tensions, impacts of the COVID-19 pandemic, and political economic policy changes. As a result, our customers may be unable to pay their debts to us, they may reject their contractual obligations to us under bankruptcy laws or otherwise, or we may have to negotiate significant discounts and/or extend financing terms with
these parties. If we are unable to collect trade receivables and other notes receivable on a timely basis, larger provisions for bad debt may be required and result in a negative impact on our earnings, liquidity, cash flow, and financial condition.
Our goodwill and other long-lived assets are subject to potential impairment which could negatively impact our earnings.
A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. At June 30, 2022, goodwill and other intangible assets represented $2.1 billion, or 40% of our total assets. In addition, net property, plant and equipment, operating lease right-of-use assets, and sundry assets totaled $1.0 billion, or 20% of total assets.
We
review our reporting units for potential goodwill impairment in the second quarter as part of our annual goodwill impairment testing, and more often if an event or circumstance occurs making it likely that impairment exists. In addition, we test for the recoverability of long-lived assets at year end, and more often if an event or circumstance indicates the carrying value may not be recoverable. We conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations.
Our annual goodwill impairment testing performed in the second quarter of 2022 and 2021 indicated no goodwill impairments. However, fair value exceeded carrying value by less than 100% for three reporting units as summarized in the table below:
Fair
value in excess of carrying value
Goodwill
Goodwill impairment testing as performed in the second quarter 2022
Goodwill impairment testing as performed in the second quarter 2021
The Bedding reporting unit’s market value decreased primarily because of lower
comparable company multiples and higher discount rates. Although the long-term outlook for the Bedding reporting unit remains strong, macro-economic factors also have negatively impacted consumer confidence and spending, which in turn has had an adverse impact on the bedding market's near-term forecast.
Work Furniture's forecast improved compared to last year; sales continue to grow from improving demand in the contract market as companies redesign their footprints and invest in office space, although demand for products sold for residential use is softening. Aerospace’s forecast improved compared to last year, as fabricated duct assemblies are at 2019 levels, and demand
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for
welded and seamless tube products is improving modestly but still below pre-pandemic levels. We expect the industry to return to 2019 demand levels in 2024. Although the Work Furniture and Aerospace reporting units' forecasts improved as compared to last year, their fair values were adversely impacted by lower comparable company multiples and higher discount rates.
We are continuing to monitor all factors impacting these reporting units. If actual results or the long-term outlook of any of our reporting units materially differ from the assumptions and estimates used in the goodwill valuation calculations, we could incur impairment charges. These non-cash charges could have a material negative impact on our earnings.
We may not be able to realize deferred tax assets on our balance sheet depending upon the amount and source of future taxable income.
Our
ability to realize deferred tax assets on our balance sheet is dependent upon the amount and source of future taxable income. As of June 30, 2022, we had $115 million of deferred tax assets ($130 million less a $15 million valuation allowance). After netting of deferred tax liabilities, the net amount presented within Sundry assets on our Consolidated Condensed Balance Sheet is $8 million. It is possible the amount and source of our taxable income could materially change in the future. Particularly, our mix of earnings by taxing jurisdiction may materially change in that we may have more or less taxable income generated in North America, Europe, or Asia as compared to prior years. This change may impact our underlying assumptions on which valuation allowances are established and negatively affect future period earnings and balance sheets. As a result, we may not be able to realize deferred tax assets on our balance sheet.
MARKET
RISK FACTORS
Inflation-impacted raw material and labor costs have negatively affected, and could continue to negatively affect, our profit margins and earnings.
Raw material cost increases impacted by inflationary pressures or otherwise (and our ability to respond to cost increases through selling price increases) can significantly impact our earnings. We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Inability to recover cost increases (or a delay in the recovery time) can negatively impact our earnings.
Steel is our principal raw material. The global steel markets are cyclical in nature and have been volatile in recent years. This
volatility can result in large swings in pricing and margins from year to year.
As a producer of steel rod, we are also impacted by volatility in metal margins (the difference between the cost of steel scrap and the market price for steel rod). If market conditions cause scrap costs and rod pricing to change at different rates (both in terms of timing and amount), metal margins could be compressed, and this would negatively impact our results of operations.
We have exposure to the cost of chemicals, including TDI, MDI, and polyol. The cost of these chemicals has fluctuated at times, but we have generally passed the changes through to our customers. In 2021, chemical prices inflated due to robust demand and shortages from severe weather, supplier production disruptions, port delays, and logistics challenges. The supply shortages in 2021 resulted in significant restrictions by producers.
Late in 2021 and into the first half of 2022, chemical prices leveled off as supply availability improved. We import certain chemicals to supplement domestic supply, but port delays and logistics issues could limit access to those products. If we are unable to obtain the chemicals or pass the cost along to our customers, our results of operations may be negatively impacted.
Currently there is a shortage of semiconductors in the automotive industry. Automotive OEMs and other suppliers have not been able to secure an adequate supply of semiconductors, and as a result have reduced or completely shut down their production of some automobiles or parts, which in turn has reduced our sale of products. Consumer demand remains strong, but the semiconductor shortage has pushed vehicle inventory to very low levels. Our Automotive Group uses the semiconductors in seat comfort products, and to a lesser extent in motors and actuators. Although
our Automotive Group has been able to obtain an adequate supply of semiconductors, we are dependent on our suppliers to deliver these semiconductors in accordance with our production schedule. A shortage of the semiconductors, either to us, the automotive OEMs, or our suppliers, can disrupt our operations and our ability to deliver products to our customers. The shortage of semiconductors is also impacting our Adjustable Bed business unit. If we, our customers, or our suppliers cannot secure an adequate supply of semiconductors, this may negatively impact our sales, earnings, and financial condition.
Some facilities have experienced disruptions in logistics necessary to import or transfer raw materials, which has generally resulted in increased transportation costs that are typically passed through to our customers. Our supply chains have also been hampered by congested ports and trucking constraints. This could impact the
availability of certain raw materials and parts that we use in our manufacturing process.
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Higher raw material costs could lead some of our customers to modify their product designs, changing the quantity and mix of our components in their finished goods and replacing higher-cost components with lower-cost components. If this were to occur, it could negatively impact our results of operations.
Shortages in the labor markets in several industries in which we operate have created challenges in hiring and maintaining adequate workforce levels. Because of these shortages, we have experienced increased labor costs. If this continues, our results of operations may be materially negatively impacted.
TECHNOLOGY
AND CYBERSECURITY RISK FACTORS
Technology failures or cybersecurity breaches could have a material adverse effect on our operations.
We have 130 production facilities in 17 different countries, primarily in North America, Europe, and Asia. We rely on several on-premise and cloud-based computerized systems and networks to obtain, secure, process, analyze, and manage data, as well as to facilitate the manufacture and distribution of inventory to and from our production facilities. We receive, process, manufacture, and ship orders, manage the billing of and collections from our customers, and manage the accounting for and payments to our vendors. We also manage our production processes with certain industrial control systems. We also have risk associated with the network connectivity and systems for consolidated reporting. Technology failures or security breaches of a new or existing
infrastructure, including our industrial control systems, could impede normal operations, create system disruptions, or create unauthorized disclosure of confidential information.
We have a formal process in place for both incident response and cybersecurity continuous improvement that includes a cross-functional Cybersecurity Oversight Committee. Members of the Cybersecurity Oversight Committee update the Board of Directors quarterly on cybersecurity activity, with procedures in place for interim reporting if necessary.
Although we have not experienced any material technology failures or cybersecurity breaches, we have enhanced our cybersecurity protection efforts over the last few years and continue to do so. We use a third party to periodically benchmark our information security program against the National Institute of Standards and Technology’s Cybersecurity Framework. We provide
quarterly cybersecurity training for employees with access to our email and data systems, and we have purchased broad-form cyber insurance coverage. Although we believe that our cybersecurity protection systems are adequate, cybersecurity risk has increased due to the COVID-19 pandemic regarding increased remote access, remote work conditions, and associated strain on employees. As such, technology failures or cybersecurity breaches could still create system disruptions or unauthorized disclosure of confidential information. We cannot be certain that the attacker’s capabilities will not compromise our technology protecting information systems, including those resulting from ransomware attached to our industrial control systems. If this occurs, our operations could be disrupted, or we may suffer financial loss because of lost or misappropriated information. Also, we may incur remediation costs, increased cybersecurity protection costs, lost revenues resulting from unauthorized
use of proprietary information, litigation and legal costs, increased insurance premiums, reputational damages, proprietary and confidentiality impacts, damage to our competitiveness, and negative impact on our stock price and long-term shareholder value.
REGULATORY RISK FACTORS
Climate change transition risks, including change in laws and regulations, and impacts from climate change could negatively impact our business, capital expenditures, results of operations, financial condition, competitive position, and reputation.
Many scientists, legislators, and others attribute global warming to increased levels of greenhouse gas emissions (GHG), including carbon dioxide. At June 30, 2022, we had 130 production facilities in 17 countries worldwide. Most of our facilities are engaged in manufacturing
processes that produce GHG, including carbon dioxide. We also maintain a fleet of over-the-road tractor trailers that emit GHG. Our manufacturing facilities are primarily located in North America, Europe, and Asia. There are certain transition risks (meaning risks related to the process of reducing the Company’s carbon footprint) that could materially affect our business, financial condition, and results of operations. One of these transition risks is the change in laws, policies, and regulations that could impose significant operational and compliance burdens. There continues to be a lack of consistent climate legislation in the jurisdictions in which we operate, which creates economic and regulatory uncertainty. To the extent our customers are subject to any of these or other similarly proposed or newly enacted laws and regulations, additional costs by customers to comply with such laws
and regulations could impact their ability to operate at similar levels in certain jurisdictions, which could adversely impact their demand for our products and services. Also, if these laws or regulations (including the SEC's proposed rule regarding climate-related disclosures) impose significant operational restrictions and compliance requirements on us, they could increase costs associated with our operations, including costs for raw materials and transportation. Non-compliance with climate change legislative and regulatory requirements could also negatively impact our reputation. To date, however, we have not experienced a material impact from climate change legislative and regulatory efforts.
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Other transition risks include (i) market trends that may alter
our business opportunities (for instance, potential reduced demand for any product that has a significant GHG footprint); (ii) stakeholder views regarding the reputation of the Company or otherwise; (iii) the cost and implementation of technological changes needed to reduce the Company’s carbon footprint; (iv) credit risks related to potential economic costs associated with transitioning to a low-carbon economy that may affect our cash flow and financial condition; and (v) litigation through shareholder activism, by private plaintiffs, or otherwise. To date, we have not experienced a material impact from any of these risks.
In 2020 and 2021, we experienced (due to severe weather impacts) supply shortages in chemicals which restricted foam supply. The restriction
of foam supply constrained overall mattress production in the bedding industry and reduced our production levels. The cost of chemicals and foam also increased due to the shortages. However, supply availability improved in late fourth quarter of 2021. If we are unable to secure an adequate supply of chemicals and foam, or the cost of these raw materials materially increases, it could have a negative impact on our business, results of operations, and financial condition. Also, severe weather impacts could have a negative effect on our customers' payments which could result in increased bad debt expense.
We have experienced increased property insurance premiums, in part, due to enhanced weather-related risks, but this increase in premiums has not had a material impact on our results of operations or financial condition. However, a more severe impact is possible.
LITIGATION RISK FACTORS
We
are exposed to litigation contingencies that, if realized, could have a material negative impact on our financial condition, results of operations, and cash flows.
Although we deny liability in all currently threatened or pending litigation proceedings and believe that we have valid bases to contest all claims made against us, we have recorded an immaterial aggregate litigation contingency accrual at June 30, 2022. Based on current facts and circumstances, aggregate reasonably possible (but not probable) losses in excess of the recorded accruals for litigation contingencies are estimated to be $11 million. If our assumptions or analyses regarding any of our contingencies are incorrect, or if facts and circumstances change, we could realize loss in excess of the recorded accruals (and in excess of the $11 million referenced above) which could have a material negative impact on
our financial condition, results of operations, and cash flows. For more information regarding our legal contingencies, please see Note 15 Contingencies on page 25 of the Notes to Consolidated Condensed Financial Statements.
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ITEM 2. UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
The table below is a listing of our purchases of the Company’s common stock by calendar month for the periods presented.
Period
Total
Number of
Shares
Purchased
1
Average
Price
Paid
per
Share 1
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs 2
Maximum
Number
of
Shares that
may yet be
Purchased
Under the
Plans or
Programs 2
April 2022
—
$
—
—
9,592,748
May 2022
236,123
$
36.17
236,123
9,356,625
June
2022
764,400
$
34.63
764,400
8,592,225
Total
1,000,523
$
34.99
1,000,523
1This
number does not include shares withheld for taxes on stock unit conversions, as well as forfeitures of stock units, all of which totaled 8,089 shares for the second quarter of 2022. The average price paid per share including these shares was $35.01.
2On August 4, 2004, the Board authorized management to repurchase up to 10 million shares each calendar year beginning January 1, 2005. This standing authorization was first reported in the quarterly report on Form 10-Q for the period ended June 30, 2004, filed August 5,
2004, and remained in force until repealed by the Board of Directors. On February 22, 2022, the Board repealed the August 4, 2004 resolution but re-adopted the resolutions with minor administrative changes providing for the same authority, which will remain in force until repealed by the Board. This standing authorization was again reported in the Annual Report on Form 10-K for the year ended December 31, 2021, filed February 22, 2022. As such, effective January 1, 2022, the
Company was authorized by the Board of Directors to repurchase up to 10 million shares in 2022. No specific repurchase schedule has been established.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Filed
as Exhibit 101 to this report are the following formatted in inline XBRL (eXtensible Business Reporting Language):
(i) Consolidated Condensed Balance Sheets at June 30, 2022 and December 31, 2021; (ii) Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2022 and June 30, 2021; (iii) Consolidated Condensed Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and June 30, 2021; (iv) Consolidated Condensed Statements of Cash Flows for the six months ended June 30,
2022 and June 30, 2021; and (v) Notes to Consolidated Condensed Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
