LEG 03.31.13 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from             to
Commission File Number 001-07845
LEGGETT & PLATT, INCORPORATED
(Exact name of registrant as specified in its charter)
 
Missouri
 
44-0324630
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
No. 1 Leggett Road
Carthage, Missouri
 
64836
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (417) 358-8131
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.     Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨     No   ý
Common stock outstanding as of April 30, 2013: 142,894,273





PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Amounts in millions)
March 31,
2013
 
December 31,
2012
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
449.4

 
$
359.1

Trade receivables, net
495.7

 
412.6

Other receivables, net
32.9

 
33.6

Inventories
 
 
 
Finished goods
270.1

 
275.7

Work in process
59.0

 
55.0

Raw materials and supplies
242.0

 
229.4

LIFO reserve
(68.6
)
 
(71.1
)
Total inventories, net
502.5

 
489.0

Other current assets
44.2

 
44.8

Total current assets
1,524.7

 
1,339.1

PROPERTY, PLANT AND EQUIPMENT—AT COST
 
 
 
Machinery and equipment
1,164.9

 
1,161.7

Buildings and other
602.5

 
603.2

Land
45.1

 
45.3

Total property, plant and equipment
1,812.5

 
1,810.2

Less accumulated depreciation
1,245.7

 
1,237.4

Net property, plant and equipment
566.8

 
572.8

OTHER ASSETS
 
 
 
Goodwill
984.2

 
991.5

Other intangibles, less accumulated amortization of $129.4 and $129.1 as of March 31, 2013 and December 31, 2012, respectively
211.3

 
206.3

Sundry
140.9

 
145.2

Total other assets
1,336.4

 
1,343.0

TOTAL ASSETS
$
3,427.9

 
$
3,254.9

CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
201.4

 
$
201.5

Accounts payable
320.0

 
285.4

Accrued expenses
207.8

 
218.9

Other current liabilities
63.4

 
25.2

Total current liabilities
792.6

 
731.0

LONG-TERM LIABILITIES
 
 
 
Long-term debt
953.8

 
853.9

Other long-term liabilities
162.3

 
158.2

Deferred income taxes
79.3

 
69.6

Total long-term liabilities
1,195.4

 
1,081.7

COMMITMENTS AND CONTINGENCIES

 

EQUITY
 
 
 
Common stock
2.0

 
2.0

Additional contributed capital
460.6

 
458.6

Retained earnings
2,117.2

 
2,109.6

Accumulated other comprehensive income
56.9

 
71.0

Treasury stock
(1,204.9
)
 
(1,206.7
)
Total Leggett & Platt, Inc. equity
1,431.8

 
1,434.5

Noncontrolling interest
8.1

 
7.7

Total equity
1,439.9

 
1,442.2

TOTAL LIABILITIES AND EQUITY
$
3,427.9

 
$
3,254.9

See accompanying notes to consolidated condensed financial statements.


2



LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
March 31,
(Amounts in millions, except per share data)
2013
 
2012
Net sales
$
936.0

 
$
946.8

Cost of goods sold
746.6

 
768.5

Gross profit
189.4

 
178.3

Selling and administrative expenses
107.7

 
97.9

Amortization of intangibles
5.7

 
6.2

Other (income) expense, net
(3.6
)
 
(.4
)
Earnings before interest and income taxes
79.6

 
74.6

Interest expense
12.8

 
9.5

Interest income
2.7

 
1.7

Earnings before income taxes
69.5

 
66.8

Income taxes
20.0

 
22.3

Net earnings
49.5

 
44.5

(Earnings) loss attributable to noncontrolling interest, net of tax
(.4
)
 
(.5
)
Net earnings attributable to Leggett & Platt, Inc. common shareholders
$
49.1

 
$
44.0

Earnings per share from continuing operations attributable to Leggett & Platt, Inc. common shareholders
 
 
 
Basic
$
.34

 
$
.31

Diluted
$
.33

 
$
.30

 
 
 
 
Cash dividends declared per share
$
.29

 
$
.28

 
 
 
 
Average shares outstanding
 
 
 
Basic
145.9

 
143.6

Diluted
148.0

 
145.1

See accompanying notes to consolidated condensed financial statements.

3



LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
March 31,
(Amounts in millions)
2013
 
2012
Net earnings
$
49.5

 
$
44.5

Other comprehensive (loss) income, net of tax:
 
 
 
Foreign currency translation adjustments
(16.3
)
 
16.3

Cash flow hedges
.8

 
2.9

Defined benefit pension plans
1.4

 
.7

Other comprehensive (loss) income
(14.1
)
 
19.9

Comprehensive income
35.4

 
64.4

Less: comprehensive (income) loss attributable to noncontrolling interest
(.4
)
 
(.5
)
Comprehensive income (loss) attributable to Leggett & Platt, Inc.
$
35.0

 
$
63.9

See accompanying notes to consolidated condensed financial statements.

4


LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
March 31,
(Amounts in millions)
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net earnings
$
49.5

 
$
44.5

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
22.3

 
22.8

Amortization
5.7

 
6.2

Provision for losses on accounts and notes receivable
1.6

 
2.8

Writedown of inventory
2.0

 
3.1

Asset impairment charges
.2

 
.1

Net gain from sales of assets and businesses
(3.2
)
 
(2.0
)
Deferred income tax expense
7.1

 
2.7

Stock-based compensation
11.5

 
10.5

Other, net
(.8
)
 
1.2

Other changes, excluding effects from acquisitions and divestitures:
 
 
 
Increase in accounts and other receivables
(79.7
)
 
(56.5
)
Increase in inventories
(17.0
)
 
(14.6
)
Decrease in other current assets
2.4

 
.3

Increase in accounts payable
33.5

 
39.9

(Decrease) increase in accrued expenses and other current liabilities
(11.1
)
 
4.1

NET CASH PROVIDED BY OPERATING ACTIVITIES
24.0

 
65.1

INVESTING ACTIVITIES
 
 
 
Additions to property, plant and equipment
(19.8
)
 
(17.6
)
Purchases of companies, net of cash acquired
(.1
)
 
(188.8
)
Proceeds from sales of assets and businesses
1.9

 
4.2

Other, net
(3.2
)
 
(4.6
)
NET CASH USED FOR INVESTING ACTIVITIES
(21.2
)
 
(206.8
)
FINANCING ACTIVITIES
 
 
 
Payments on long-term debt
(.8
)
 
(1.0
)
Change in commercial paper and short-term debt
99.0

 
205.2

Dividends paid

 
(39.0
)
Issuances of common stock
28.4

 
3.5

Purchases of common stock
(41.6
)
 
(6.0
)
Excess tax benefits from stock-based compensation
5.0

 
1.0

NET CASH PROVIDED BY FINANCING ACTIVITIES
90.0

 
163.7

EFFECT OF EXCHANGE RATE CHANGES ON CASH
(2.5
)
 
2.9

INCREASE IN CASH AND CASH EQUIVALENTS
90.3

 
24.9

CASH AND CASH EQUIVALENTS—January 1,
359.1

 
236.3

CASH AND CASH EQUIVALENTS—March 31,
$
449.4

 
$
261.2

See accompanying notes to consolidated condensed financial statements.






5




LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions, except per share data)
1. INTERIM PRESENTATION
The 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 presentation 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. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles 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, 2012 financial position data included herein was derived from the audited consolidated financial statements included in Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2012.
2. NEW ACCOUNTING GUIDANCE
In February 2013 the Financial Accounting Standards Board (FASB) issued ASU 2013-02 "Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires separate disclosure about amounts reclassified out of accumulated other comprehensive income by component. We adopted this guidance in first quarter 2013 and have included all required disclosures in Note 10.
The FASB has issued other accounting guidance effective for current and future periods (that we have not yet adopted), but we do not believe any of the new guidance will have a material impact on our current or future financial statements.
3. INVENTORIES
About 60% of our inventories are valued using the Last-In, First-Out (LIFO) cost method and the remainder using the First-In, First-Out (FIFO) cost method.
We calculate our LIFO reserve (the excess of FIFO cost over LIFO cost) on an annual basis. During interim periods, we estimate the current year annual change in the LIFO reserve (i.e., the annual LIFO expense or benefit) and allocate that change ratably to the four quarters. Because accurately predicting inventory prices for the year is difficult, the change in the LIFO reserve for the full year could be significantly different from the amount currently estimated. In addition, a variation in expected ending inventory levels could also impact total change in the LIFO reserve for the year. Any change in the annual LIFO estimate will be reflected in the remaining quarters.
The following table contains the LIFO (benefit) expense included in earnings for each of the periods presented.
 
 
Three Months Ended
March 31,
 
2013
 
2012
LIFO (benefit) expense
$
(2.6
)
 
$
.5

4. SEGMENT INFORMATION
We have four operating segments that are generally focused on broad end-user markets for our diversified products.
Residential Furnishings—components for bedding, furniture and other furnishings, as well as related consumer products
Commercial Fixturing & Components—retail store fixtures, displays and components for office and institutional furnishings
Industrial Materials—drawn steel wire, specialty wire products, titanium and nickel tubing for the aerospace industry and welded steel tubing sold to trade customers as well as other Leggett segments
Specialized Products—automotive seating components, specialized machinery and equipment, and commercial vehicle interiors

6

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. Each reportable segment has a senior operating vice-president that reports to the chief operating decision maker. The operating results and financial information reported through the segment structure are regularly reviewed and used by the chief operating decision maker to evaluate segment performance, allocate overall resources and determine management incentive compensation.
 
Separately, we also utilize a role-based approach (Grow, Core, Fix or Divest) as a supplemental management tool to ensure capital (which is a subset of the overall resources referred to above) is efficiently allocated within the reportable segment structure.
The accounting principles used in the preparation of the segment information are the same as those used for the consolidated financial statements, except that the segment assets and income reflect the FIFO basis of accounting for inventory. Certain inventories are accounted for using the LIFO basis in the consolidated financial statements. We evaluate performance based on earnings from operations before interest and income 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. 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.
A summary of segment results from continuing operations are shown in the following tables.
 
External
Sales
 
Inter-
Segment
Sales
 
Total
Sales
 
EBIT
Three Months Ended March 31, 2013:
 
 
 
 
 
 
 
Residential Furnishings
$
484.9

 
$
1.9

 
$
486.8

 
$
42.3

Commercial Fixturing & Components
114.6

 
1.0

 
115.6

 
1.6

Industrial Materials
162.5

 
63.2

 
225.7

 
22.2

Specialized Products
174.0

 
12.7

 
186.7

 
15.4

Intersegment eliminations
 
 
 
 
 
 
(4.5
)
Change in LIFO reserve
 
 
 
 
 
 
2.6

 
$
936.0

 
$
78.8

 
$
1,014.8

 
$
79.6

Three Months Ended March 31, 2012:
 
 
 
 
 
Residential Furnishings
$
490.6

 
$
2.0

 
$
492.6

 
$
40.2

Commercial Fixturing & Components
113.2

 
1.0

 
114.2

 
7.2

Industrial Materials
167.5

 
70.2

 
237.7

 
11.8

Specialized Products
175.5

 
9.8

 
185.3

 
17.9

Intersegment eliminations
 
 
 
 
 
 
(2.0
)
Change in LIFO reserve
 
 
 
 
 
 
(.5
)
 
$
946.8

 
$
83.0

 
$
1,029.8

 
$
74.6


 
















7

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


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.
 
 
March 31,
2013
 
December 31,
2012
Residential Furnishings
$
576.1

 
$
602.9

Commercial Fixturing & Components
144.9

 
159.1

Industrial Materials
248.9

 
243.3

Specialized Products
219.7

 
227.4

Average current liabilities included in segment numbers above
440.7

 
440.7

Unallocated assets (1)
1,758.1

 
1,678.2

Difference between average assets and period-end balance sheet
39.5

 
(96.7
)
Total assets
$
3,427.9

 
$
3,254.9

 
(1)
Primarily goodwill, other intangibles, cash and deferred tax assets.

5. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
 
 
Three Months Ended
March 31,
 
2013
 
2012
Earnings:
 
 
 
Net earnings
$
49.5

 
$
44.5

(Earnings) loss attributable to noncontrolling interest, net of tax
(.4
)
 
(.5
)
Net earnings attributable to Leggett & Platt, Inc. common shareholders
$
49.1

 
$
44.0

 
 
 
 
Weighted average number of shares:
 
 
 
Weighted average number of common shares used in basic EPS
145.9

 
143.6

Additional dilutive shares principally from the assumed exercise of outstanding stock options
2.1

 
1.5

Weighted average number of common shares and dilutive potential common shares used in diluted EPS
148.0

 
145.1

 
 
 
 
Basic and Diluted EPS:
 
 
 
Basic EPS attributable to Leggett & Platt, Inc. common shareholders
$
.34

 
$
.31

Diluted EPS attributable to Leggett & Platt, Inc. common shareholders
$
.33

 
$
.30

 
 
 
 
Other information:
 
 
 
Shares issuable under employee and non-employee stock options
6.9

 
11.6

Anti-dilutive shares excluded from diluted EPS computation

 
2.7











8

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


6. ACCOUNTS AND OTHER RECEIVABLES
Accounts and other receivables consisted of the following:
 
 
March 31, 2013
 
December 31, 2012
 
Current
 
Long-term
 
Current
 
Long-term
Trade accounts receivable
$
514.3

 
$

 
$
430.4

 
$

Trade notes receivable
.9

 
2.3

 
1.1

 
2.9

Total trade receivables
515.2

 
2.3

 
431.5

 
2.9

Other notes receivable:
 
 
 
 
 
 
 
Notes received as partial payment for divestitures
.5

 
5.9

 
.5

 
6.1

Other
.2

 
4.5

 
.5

 
4.3

Income tax receivables
2.8

 

 
8.6

 

Other receivables
29.5

 

 
24.3

 

Subtotal other receivables
33.0

 
10.4

 
33.9

 
10.4

Total accounts and other receivables
548.2

 
12.7

 
465.4

 
13.3

Allowance for doubtful accounts:
 
 
 
 
 
 
 
Trade accounts receivable
(19.5
)
 

 
(18.9
)
 

Trade notes receivable

 
(.3
)
 

 
(.8
)
Total trade receivables
(19.5
)
 
(.3
)
 
(18.9
)
 
(.8
)
Other notes receivable:
 
 
 
 
 
 
 
Other
(.1
)
 
(.8
)
 
(.3
)
 
(.6
)
Total allowance for doubtful accounts
(19.6
)
 
(1.1
)
 
(19.2
)
 
(1.4
)
Total net receivables
$
528.6

 
$
11.6

 
$
446.2

 
$
11.9

Notes are evaluated individually for impairment, and we had no significant impaired notes for the periods presented.
Our investment in notes that were past due more than 90 days was less than $2.0 at March 31, 2013 and December 31, 2012, of which approximately $1.0 had been placed on non-accrual status.
Activity related to the allowance for doubtful accounts is reflected below:
 
 
Balance at December 31, 2012
 
2013
Charges
 
2013
Charge-
offs,
net of
recoveries
 
Balance at March 31, 2013
Trade accounts receivable
$
18.9

 
$
1.6

 
$
1.0

 
$
19.5

Trade notes receivable
.8

 

 
.5

 
.3

Total trade receivables
19.7

 
1.6

 
1.5

 
19.8

Other notes receivable:
 
 
 
 
 
 
 
Other
.9

 

 

 
.9

Total allowance for doubtful accounts
$
20.6

 
$
1.6

 
$
1.5

 
$
20.7












9

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


7. STOCK-BASED COMPENSATION
The following table recaps the components of stock-based and stock-related compensation for each period presented:
 
 
Three Months Ended
March 31,
 
2013
 
2012
 
To be settled with stock
 
To be settled in cash
 
To be settled with stock
 
To be settled in cash
Options (1):
 
 
 
 
 
 
 
         Amortization of the grant date fair value
$
.5

 
$

 
$
2.3

 
$

         Cash payments in lieu of options

 
.8

 

 
.3

Stock-based retirement plans contributions
2.3

 
.5

 
1.9

 
.4

Discounts on various stock awards:

 
 
 

 
 
Deferred Stock Compensation Program
.7

 

 
.5

 

Stock-based retirement plans
.5

 

 
.5

 

Discount Stock Plan
.3

 

 
.2

 

Performance Stock Unit awards (2)
1.6

 
4.3

 
1.7

 
(.1
)
Profitable Growth Incentive awards (1)
.2

 
.2

 

 

Restricted Stock Unit awards
1.7

 

 
.8

 

Other, primarily non-employee directors restricted stock
.5

 

 
.2

 

Total stock-related compensation expense
8.3

 
$
5.8

 
8.1

 
$
0.6

Employee contributions for above stock plans
3.2

 
 
 
2.4

 
 
Total stock-based compensation
$
11.5

 
 
 
$
10.5

 
 
Recognized tax benefits on stock-based compensation expense
$
3.1

 
 
 
$
3.1

 
 
 
(1)
Stock Option Grants and Profitable Growth Incentive Awards
Our most significant stock options have historically been granted annually on a discretionary basis to a broad group of employees.
Previous to 2013, we offered two different option choice programs. One group of employees was offered the choice to receive stock options or to receive a cash alternative equal to approximately one-half of the Black-Scholes value of the option grant foregone. Another group of employees, generally higher level employees, was offered a choice between stock options or restricted stock units (RSUs), on a ratio of four options foregone for each RSU offered. The RSUs vest in one-third increments at 12 months, 24 months and 36 months after the date of grant.
Starting in 2013, options will only be offered in conjunction with the Deferred Compensation Program. Certain key management employees will participate in a new Profitable Growth Incentive (PGI) program. Options for other employees will be replaced with either cash awards or RSUs as offered in 2011 and 2012.
The PGI awards will be issued as growth performance stock units (GPSUs). The number of GPSUs that will ultimately vest (from 0% to 250%) will depend upon the Revenue Growth adjusted by an external GDP factor when applicable and EBITDA Margin of the Company or applicable profit center at the end of a two-year performance period. The 2013 base PGI award was 130,920 shares. We intend to pay half in shares of our common stock and half in cash, although we reserve the right to pay up to 100% in cash. Both components are adjusted to fair value at each reporting period.
       
(2) Performance Stock Unit Awards
We also grant Performance Stock Unit (PSU) awards in the first quarter of each year to selected officers and other key managers. These awards contain the following conditions:

A service requirement—Awards generally “cliff” vest three years following the grant date; and
A market condition—Awards are based on our Total Shareholder Return [TSR = (Change in Stock Price + Dividends) / Beginning Stock Price] as compared to the TSR of a group of peer companies. The peer group consists of all the

10

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


companies in the Industrial, Materials and Consumer Discretionary sectors of the S&P 500 and S&P Midcap 400 (approximately 320 companies). Participants will earn from 0% to 175% of the base award depending upon how our Total Shareholder Return ranks within the peer group at the end of the 3-year performance period.
Below is a summary of the number of shares and related grant date fair value of PSU’s for the periods presented. Grant date fair values are calculated using a Monte Carlo simulation of stock and volatility data for Leggett and each of the comparator companies and are based upon assumptions listed below. Grant date fair values are amortized using the straight-line method over the three-year vesting period.
 
Three Months Ended
March 31,
 
2013
 
2012
Total shares base award
234,117
 
282,040
Grant date per share fair value
$
27.60

 
$
23.79

Risk-free interest rate
0.4
%
 
0.4
%
Expected life in years
3.0

 
3.0

Expected volatility (over expected life)
29.1
%
 
35.0
%
Expected dividend yield (over expected life)
4.2
%
 
4.8
%
The three-year performance cycle of the 2010 award was completed on December 31, 2012. Our TSR performance, relative to the peer group, ranked at 46th percentile (with 1% being best); accordingly, participants earned 91.0% of the base award and .3 million shares were distributed in January 2013.
 
The above information represents the 65% portion of the award that we intend to pay in shares of our common stock, although we reserve the right to pay up to 100% in cash. There is also an additional amount that represents 35% of the award that we will settle in cash. It is recorded as a liability and is adjusted to fair value at each reporting period. 

8. ACQUISITIONS
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, and any additional consideration paid for prior years’ acquisitions. All goodwill included in the table below is expected to provide an income tax benefit.
 
 
Three Months Ended
March 31,
 
2013
 
2012
Accounts receivable
$

 
$
8.5

Inventory

 
18.8

Property, plant and equipment

 
12.5

Goodwill

 
54.3

Other intangible assets

 
101.9

Other current and long-term assets

 
.6

Current liabilities

 
(7.8
)
Additional consideration for prior years’ acquisitions
.1

 

Net cash consideration
$
.1

 
$
188.8







11

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


The following table summarizes acquisitions for the periods presented. There were no acquisitions during the first quarter of 2013.
 
 
Three Months Ended
 
Number of
Acquisitions
 
Segment
 
Product/Service
 
 
March 31, 2012
 
2

 
Industrial Materials
 
Tubing for the aerospace industry; Tube fabrication
On January 12, 2012, we acquired Western Pneumatic Tube Holding, LLC (Western) for a cash purchase price of $188. Western is a leading provider of integral components for critical aircraft systems, and forms the new Aerospace Products business unit within the Tubing Group. Western specializes in fabricating thin-walled, large diameter, welded tubing and specialty formed products from titanium, nickel and other specialty materials for leading aerospace suppliers and OEMs. Factors that contributed to a purchase price resulting in the recognition of goodwill included Western’s competitive position, and its fit with our strategy to seek businesses with secure, leading positions in growing, profitable, attractive markets.
The results of operations of the above acquired companies have been included in the consolidated financial statements since the dates of acquisition. The unaudited pro forma consolidated net sales, net earnings and earnings per share are not materially different from the amounts reflected in the accompanying financial statements.

Certain of our acquisition agreements provide for additional consideration to be paid in cash at a later date and are recorded as a liability at the acquisition date. At March 31, 2013, there was no substantial remaining consideration payable.
9. EMPLOYEE BENEFIT PLANS
The following table provides interim information as to our domestic and foreign defined benefit pension plans. Expected 2013 employer contributions are not significantly different than the $1.5 previously reported at December 31, 2012.
 
 
Three Months Ended
March 31,
 
2013
 
2012
Components of net pension expense
 
 
 
Service cost
$
.9

 
$
.7

Interest cost
3.0

 
3.2

Expected return on plan assets
(3.8
)
 
(3.7
)
Recognized net actuarial loss
1.5

 
1.6

Net pension expense
$
1.6

 
$
1.8


 





















12

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


10. STATEMENT OF CHANGES IN EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
 
Three Months Ended March 31, 2013
 
Total
Equity
 
Retained
Earnings
 
Common
Stock &
Additional
Contributed
Capital
 
Treasury
Stock
 
Noncontrolling
Interest
 
Accumulated
Other
Comprehensive
Income
Beginning balance, January 1, 2013
$
1,442.2

 
$
2,109.6

 
$
460.6

 
$
(1,206.7
)
 
$
7.7

 
$
71.0

Net earnings
49.5

 
49.5

 

 

 

 

(Earnings) loss attributable to noncontrolling interest, net of tax

 
(.4
)
 

 

 
.4

 

Dividends declared
(41.5
)
 
(41.5
)
 

 

 

 

Treasury stock purchased
(50.1
)
 

 

 
(50.1
)
 

 

Treasury stock issued
38.9

 

 
(13.0
)
 
51.9

 

 

Foreign currency translation adjustments
(16.3
)
 

 

 

 

 
(16.3
)
Cash flow hedges, net of tax
.8

 

 

 

 

 
.8

Defined benefit pension plans, net of tax
1.4

 

 

 

 

 
1.4

Stock options and benefit plan transactions, net of tax
15.0

 

 
15.0

 

 

 

Ending balance, March 31, 2013
$
1,439.9

 
$
2,117.2

 
$
462.6

 
$
(1,204.9
)
 
$
8.1

 
$
56.9

 
 
Three Months Ended March 31, 2012
 
Total
Equity
 
Retained
Earnings
 
Common
Stock &
Additional
Contributed
Capital
 
Treasury
Stock
 
Noncontrolling
Interest
 
Accumulated
Other
Comprehensive
Income
Beginning balance, January 1, 2012
$
1,307.7

 
$
2,027.4

 
$
458.9

 
$
(1,254.3
)
 
$
10.5

 
$
65.2

Net earnings
44.5

 
44.5

 

 

 

 

(Earnings) loss attributable to noncontrolling interest, net of tax

 
(.5
)
 

 

 
.5

 

Dividends declared
(39.2
)
 
(40.3
)
 
1.1

 

 

 

Treasury stock purchased
(7.7
)
 

 

 
(7.7
)
 

 

Treasury stock issued
7.3

 

 
(15.2
)
 
22.5

 

 

Foreign currency translation adjustments
16.3

 

 

 

 

 
16.3

Cash flow hedges, net of tax
2.9

 

 

 

 

 
2.9

Defined benefit pension plans, net of tax
.7

 

 

 

 

 
.7

Stock options and benefit plan transactions, net of tax
10.7

 

 
10.7

 

 

 

Ending balance, March 31, 2012
$
1,343.2

 
$
2,031.1

 
$
455.5

 
$
(1,239.5
)
 
$
11.0

 
$
85.1











13

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


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:
 
 
Foreign
Currency
Translation
Adjustments
 
Cash
Flow
Hedges
 
Defined
Benefit
Pension
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance January 1, 2013
$
163.5

 
$
(25.5
)
 
$
(67.0
)
 
$
71.0

Other comprehensive income (loss) before reclassifications, pretax
(16.3
)
 

 
.5

 
(15.8
)
Amounts reclassified from accumulated other comprehensive income, pretax:


 


 


 


Cost of goods sold; selling and administrative expenses

 
.2

 
1.5

 
1.7

Interest expense

 
1.0

 

 
1.0

Subtotal of reclassifications, pretax

 
1.2

 
1.5

 
2.7

Other comprehensive income (loss), pretax
(16.3
)
 
1.2

 
2.0

 
(13.1
)
Income tax effect

 
(0.4
)
 
(.6
)
 
(1.0
)
Balance March 31, 2013
$
147.2

 
$
(24.7
)
 
$
(65.6
)
 
$
56.9

 
 
 
 
 
 
 
 
Balance January 1, 2012
$
147.6

 
$
(21.5
)
 
$
(60.9
)
 
$
65.2

Other comprehensive income (loss) before reclassifications, pretax
15.6

 
3.8

 
(.4
)
 
19.0

Amounts reclassified from accumulated other comprehensive income, pretax:


 


 


 


Cost of goods sold; selling and administrative expenses

 
.8

 
1.6

 
2.4

Other income/expense, net
.7

 

 

 
.7

Subtotal of reclassifications, pretax
.7

 
.8

 
1.6

 
3.1

Other comprehensive income (loss), pretax
16.3

 
4.6

 
1.2

 
22.1

Income tax effect

 
(1.7
)
 
(.5
)
 
(2.2
)
Balance March 31, 2012
$
163.9

 
$
(18.6
)
 
$
(60.2
)
 
$
85.1

11. FAIR VALUE
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 corroborated 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.




14

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



Items measured at fair value on a recurring basis
 
 
As of March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Bank time deposits with original maturities of three months or less
$

 
$
124.2

 
$

 
$
124.2

Derivative assets

 
.4

 

 
.4

Diversified investments associated with the Executive Unit Stock Program (ESUP)
9.7

 

 

 
9.7

Total assets
$
9.7

 
$
124.6

 
$

 
$
134.3

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
.2

 
$
.6

 
$

 
$
.8

Liabilities associated with the ESUP
9.7

 

 

 
9.7

Total liabilities
$
9.9

 
$
.6

 
$

 
$
10.5

 
 
 
As of December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Bank time deposits with original maturities of three months or less
$

 
$
125.6

 
$

 
$
125.6

Derivative assets

 
1.2

 

 
1.2

Diversified investments associated with the ESUP
7.0

 

 

 
7.0

Total assets
$
7.0

 
$
126.8

 
$

 
$
133.8

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
.5

 
$
1.3

 
$

 
$
1.8

Liabilities associated with the ESUP
7.1

 

 

 
7.1

Total liabilities
$
7.6

 
$
1.3

 
$

 
$
8.9

The fair value for fixed rate debt (Level 2) was greater than its $1,030.0 carrying value by $40.2 at March 31, 2013 and $45.7 at December 31, 2012. We value this debt using discounted cash flow and secondary market rates provided by Bloomberg.
Items measured at fair value on a non-recurring basis
The primary areas in which we use fair value measurements of non-financial assets and liabilities are allocating purchase price to the assets and liabilities of acquired companies and evaluating long-term assets for potential impairment.
Goodwill
We perform an annual review for potential goodwill impairment in June of each year and as triggering events occur. The goodwill impairment review performed in June 2012 indicated no goodwill impairments.
The ten reporting units for goodwill purposes are one level below the operating segments, and are the same as the business groups disclosed in Item 1. Business in Form 10-K. Fair market values of the reporting units are estimated using a discounted cash flow model and comparable market values for similar entities using price to earnings ratios. Key assumptions and estimates used in the cash flow model include discount rate, internal sales growth, margins, capital expenditure requirements, and working capital requirements. Recent performance of the reporting unit is an important factor, but not the

15

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


only factor, in the assessment. If actual results differ from estimates used in these calculations, we could incur future impairment charges.
Reporting units’ fair values in relation to their respective carrying values and significant assumptions used in the June 2012 review are presented in the table below. The 10-25% category below includes information for one reporting unit (Store Fixtures). The fair value of this unit exceeded its book value by 10% at June 30, 2012.
 
Percentage of fair value in excess of carrying value
March 31, 2013
goodwill value
 
Sales 10-year
compound
annual growth
rate range
 
Terminal
values long-
term growth
rate
 
Discount rate
ranges
10-25%
$
110.6

 
3.9%
 
3%
 
11.0%
25%+
873.6

 
1.4
%
-
6.4%
 
3%
 
7.5
%
-
9.5%
 
$
984.2

 
1.4
%
-
6.4%
 
3%
 
7.5
%
-
11.0%
Fixed Assets
We test long-lived assets for recoverability at year-end and whenever events or changes in circumstances indicate the carrying value may not be recoverable. We had no material fixed asset impairments for the periods presented.
12. RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Strategy & Objectives
We are subject to market and financial risks related to interest rates, foreign currency, and commodities. In the normal course of business, we utilize derivative instruments (individually or in combinations) to manage these risks. We seek to use derivative contracts that qualify for hedge accounting treatment; however, some instruments may not qualify for this treatment. It is our policy not to speculate using derivative instruments.
Cash Flow Hedges
Derivative financial instruments that we use to hedge forecasted transactions and anticipated cash flows are as follows:

Commodity Cash Flow Hedges—The commodity cash flow hedges manage natural gas commodity price risk.
Interest Rate Cash Flow Hedges—In August 2012, we issued $300 of 10-year notes with a coupon rate of 3.40%. As a part of this transaction, we settled our $200 forward starting interest rate swaps we had entered into during 2010 and recognized a loss of $42.7, which will be amortized over the life of the notes.
Currency Cash Flow Hedges—The currency hedges manage risk associated with exchange rate volatility of various foreign currencies.
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 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
Our fair value hedges manage foreign currency risk associated with subsidiaries’ inter-company assets and liabilities. Hedges designated as fair value hedges recognize gain or loss currently in earnings. Cash flows from settled contracts are presented in the category consistent with the nature of the item being hedged.
Hedge Effectiveness
We have deemed ineffectiveness to be immaterial, and as a result, have not recorded any amounts for ineffectiveness. If a hedge was not highly effective, the portion of the change in fair value considered to be ineffective would be recognized immediately in the consolidated condensed statements of operations.



16

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


Derivatives Not Qualifying for Hedge Accounting Treatment
At March 31, 2013 and December 31, 2012, we had derivative transactions that did not qualify for hedge accounting treatment. Gains or losses on these transactions are recorded directly to income and expense in the period impacted, and offset the majority of gains and losses on the underlying hedged item.
We have recorded the following assets and liabilities representing the fair value for 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.
 
Maturity
 
Total USD
Equivalent
Notional
Amount
 
As of March 31, 2013
 
Assets
 
Liabilities
Other
Current
Assets
 
Other Current
Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Commodity hedges
Dec 2013
 
$
1.2

 
$

 
$
.2

Currency Hedges:
 
 
 
 
 
 
 
Future USD sales of Canadian subsidiaries
Dec 2013
 
16.5

 
.1

 

Future USD sales of Chinese subsidiaries
Dec 2013
 
45.0

 

 
.2

Future MXP cost of goods sold of US subsidiary
Dec 2013
 
1.6

 
.1

 

Future EUR sales of Chinese subsidiary
Dec 2013
 
3.0

 
.1

 

Future CHF cost of goods sold of UK subsidiary
Jun 2013
 
2.1

 
.1

 

Total cash flow hedges
 
 
 
 
.4

 
.4

Fair value hedges:
 
 
 
 
 
 
 
ZAR asset on a USD subsidiary
Apr 2013
 
20.2

 

 
.1

USD inter-company note receivables on a Switzerland subsidiary
Jun 2013
 
14.5

 

 
.3

Total fair value hedges
 
 
 
 

 
.4

 
 
 
 
 
$
.4

 
$
.8


 


17

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


 
Maturity
 
Total USD
Equivalent
Notional
Amount
 
As of December 31, 2012
 
Assets
 
Liabilities
Other Current
Assets
 
Other Current
Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Commodity hedges
Dec 2013
 
$
1.7

 
$

 
$
.5

Currency Hedges:
 
 
 
 
 
 
 
Future USD sales of Canadian subsidiaries
Dec 2013
 
22.2

 
.5

 

Future USD sales of Chinese subsidiaries
Dec 2013
 
16.7

 

 
.1

Future USD cost of goods sold of European subsidiary
Dec 2013
 
7.9

 

 
.2

Total cash flow hedges
 
 
 
 
.5

 
.8

Fair value hedges:
 
 
 
 
 
 
 
ZAR asset on a USD subsidiary
Jan 2013
 
21.2

 

 
.9

USD inter-company note receivable on a European subsidiary
Feb 2013
 
3.5

 

 
.1

USD inter-company note receivable on a Switzerland subsidiary
Jan 2013
 
14.5

 
.7

 

Total fair value hedges
 
 
 
 
.7

 
1.0

 
 
 
 
 
$
1.2

 
$
1.8


The following table sets forth the pre-tax (gains) losses from continuing operations for our hedging activities for the years presented. This schedule includes reclassifications from accumulated other comprehensive income as well as derivative settlements recorded directly to income or expense.
 
  
Income Statement
Caption
 
Amount of (Gain) Loss
Recorded in Income
Three Months  Ended
March 31
2013
 
2012
Derivatives designated as hedging instruments
 
 
 
 
 
Commodity cash flow hedges
Cost of goods sold
 
$
.2

 
$
.8

Interest rate cash flow hedges
Interest Expense
 
1.0

 

Foreign currency cash flow hedges
Net Sales
 
(.2
)
 
(.1
)
Foreign currency cash flow hedges
Other (income) expense, net
 

 
.1

Total cash flow hedges
 
 
1.0

 
.8

Fair value hedges
Other (income) expense, net
 
(1.1
)
 
(.6
)
Derivatives not designated as hedging instruments
 
 
 
 
 
Hedge of EUR inter-company note receivable - USD denominated subsidiary
Other (income) expense, net
 

 
.6

Total derivative instruments
 
 
$
(.1
)
 
$
.8

13. CONTINGENCIES
We are a defendant in various proceedings involving employment, antitrust, intellectual property, environmental, taxation and other laws. When it is probable, in management’s judgment, that we may incur monetary damages or other

18

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



costs resulting from these proceedings or other claims, and we can reasonably estimate the amounts, we record appropriate liabilities in the financial statements and make charges against earnings. For all periods presented, we have recorded no material charges against earnings, and the total liabilities recorded are not material to our financial position.

 Shareholder Derivative Lawsuit
On August 10, 2010, a shareholder derivative suit was filed by the New England Carpenters Pension Fund in the Circuit Court of Jasper County, Missouri as Case No. 10AO-CC284. The suit was purportedly brought on our behalf, naming us as a nominal defendant, and certain current and former officers and directors as individual defendants including David S. Haffner, Karl G. Glassman, Matthew C. Flanigan, Ernest C. Jett, Harry M. Cornell, Jr., Felix E. Wright, Robert Ted Enloe, III, Richard T. Fisher, Judy C. Odom, Maurice E. Purnell, Jr., Ralph W. Clark and Michael A. Glauber. The plaintiff alleged, among other things, that the individual defendants: breached their fiduciary duties; backdated and received backdated stock options violating our stock plans; caused or allowed us to issue false and misleading financial statements and proxy statements; sold our stock while possessing material non-public information; committed gross mismanagement; wasted corporate assets; committed fraud; violated the Missouri Securities Act; and were unjustly enriched.
The plaintiff is seeking, among other things: unspecified monetary damages against the individual defendants; certain equitable and other relief relating to the profits from the alleged improper conduct; the adoption of certain corporate governance proposals; the imposition of a constructive trust over the defendants’ stock options and proceeds; punitive damages; the rescission of certain unexercised options; and the reimbursement of litigation costs. The plaintiff is not seeking monetary relief from us. We have director and officer liability insurance in force subject to customary limits and exclusions.
We and the individual defendants filed motions to dismiss the suit in late October 2010, asserting: the plaintiff failed to make demand on our Board and shareholders as required by Missouri law, and this failure to make demand should not be excused; the dismissal of the substantially similar suit in 2009 precludes the 2010 suit; the plaintiff is not a representative shareholder; the suit was based on a statistical analysis of stock option grants and our stock prices that we believe was flawed; the plaintiff failed to state a substantive claim; the common law fraud claim was not pled with sufficient particularity; and the statute of limitations has expired on the fraud claim and all the alleged challenged grants except the December 30, 2005 grant. As to this grant, the motions to dismiss advised the Court that it was made under our Deferred Compensation Program, which (i) provided that options would be dated on the last business day of December, and (ii) was filed with the SEC on December 2, 2005 setting out the pricing mechanism well before the grant date. On April 6, 2011, the suit was dismissed without prejudice.
On May 12, 2011, the plaintiff filed an appeal to the Missouri Court of Appeals. On November 28, 2012, the Missouri Court of Appeals reversed the trial court's dismissal finding that plaintiff sufficiently pleaded it would be futile to make demand on the Board and shareholders. The Court of Appeals did not address the other grounds that had been raised in the motions to dismiss. We filed a request for transfer to the Missouri Supreme Court on December 12, 2012, which was denied by the Court of Appeals. On January 3, 2013, we filed a transfer petition to the Missouri Supreme Court. On February 26, 2013, the Missouri Supreme Court denied our request. The case was sent back to Jasper County, Missouri for further proceedings.
We do not expect that the outcome of this matter will have a material adverse effect on our financial condition, operating cash flows or results of operations.
Antitrust Lawsuits
Beginning in August 2010, a series of civil lawsuits was initiated in several U.S. federal courts and in Canada against over 20 defendants alleging that competitors of our carpet underlay business unit and other manufacturers of polyurethane foam products had engaged in price fixing in violation of U.S. and Canadian antitrust laws.
A number of these lawsuits have been voluntarily dismissed, most without prejudice. Of the U.S. cases remaining, we have been named as a defendant in (a) three direct purchaser class action cases (the first on November 15, 2010) and a consolidated amended class action complaint on behalf of a class of all direct purchasers of polyurethane foam products; (b) an indirect purchaser class consolidated amended complaint filed on March 21, 2011; and an indirect purchaser class action case filed on May 23, 2011; (c) 36 individual direct purchaser cases filed between March 22, 2011 and May 3, 2013; and(d) two individual cases alleging direct and indirect purchaser claims under the Kansas Restraint of Trade Act, one filed on November 29, 2012 and the other on April 11, 2013. All of the pending U.S. federal cases in which we have


19

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



been named as a defendant, have been filed in, transferred to, or are expected to be transferred to the U.S. District Court for the Northern District of Ohio under the name In re: Polyurethane Foam Antitrust Litigation, Case No. 1:10-MD-2196.
 
In the U.S. actions, the plaintiffs, on behalf of themselves and/or a class of purchasers, seek three times the amount of unspecified damages allegedly suffered as a result of alleged overcharges in the price of polyurethane foam products from at least 1999 to the present. Each plaintiff also seeks attorney fees, pre-judgment and post-judgment interest, court costs, and injunctive relief against future violations. On April 15 and May 6, 2011, we filed motions to dismiss the U.S. direct purchaser and indirect purchaser class actions in the consolidated case in Ohio, for failure to state a legally valid claim. On July 19, 2011, the Ohio Court denied the motions to dismiss. Discovery is underway in the U.S. actions.
We have been named in two Canadian class action cases (for direct and indirect purchasers of polyurethane foam products), both under the name Hi Neighbor Floor Covering Co. Limited and Hickory Springs Manufacturing Company, et.al. in the Ontario Superior Court of Justice (Windsor), Court File Nos. CV-10-15164 (amended November 2, 2011) and CV-11-17279 (issued December 30, 2011). In each of the Canadian cases, the plaintiffs, on behalf of themselves and/or a class of purchasers, seek from over 13 defendants restitution of the amount allegedly overcharged, general and special damages in the amount of $100, punitive damages of $10, pre-judgment and post-judgment interest, and the costs of the investigation and the action. We are not yet required to file our defenses in the Canadian actions. In addition, on July 10, 2012, plaintiff in a class action case (for direct and indirect purchasers of polyurethane foam products) styled Option Consommateurs and Karine Robillard v. Produits Vitafoam Canada Limitée, et. al. in the Quebec Superior Court of Justice (Montréal), Court File No. 500-6-524-104, filed an amended motion for authorization seeking to add us and other manufacturers of polyurethane foam products as defendants in this case.
On June 22, 2012, we were also made party to a lawsuit brought in the 16th Judicial Circuit Court, Jackson County, Missouri, Case Number 1216-CV15179 under the caption “Dennis Baker, on Behalf of Himself and all Others Similarly Situated vs. Leggett & Platt, Incorporated.” The plaintiff, on behalf of himself and/or a class of indirect purchasers of polyurethane foam products in the State of Missouri, alleged that we violated the Missouri Merchandising Practices Act based upon our alleged illegal price inflation of flexible polyurethane foam products. The plaintiff seeks unspecified actual damages, punitive damages and the recovery of reasonable attorney fees. We filed a motion to dismiss this action, which was denied on November 5, 2012. Discovery has commenced.
We deny all of the allegations in all of the above actions and will vigorously defend ourselves. These contingencies are subject to many uncertainties. Therefore, based on the information available to date, we cannot estimate the amount or range of potential loss, if any, because, at this juncture of the proceedings, the damages sought by plaintiffs are unspecified, unsupported, and unexplained; discovery is incomplete (class certification issues are not yet ripe, expert liability reports have not been exchanged); and because the litigation involves unsettled legal theories.
Brazilian Value-Added Tax Matters
On December 22, 2011, the Brazilian Finance Ministry, Federal Revenue Office issued a notice of violation against our wholly-owned subsidiary, Leggett & Platt do Brasil Ltda. (“L&P Brazil”) in the amount of approximately $4, under Case No. 10855.724660/2011-43. The Brazilian Revenue Office claimed that for the period beginning November 2006 and continuing through December 2007, L&P Brazil used an incorrect tariff code for the collection and payment of value-added tax primarily on the sale of mattress innerspring units in Brazil. L&P Brazil responded to the notice of violation on January 25, 2012 denying the violation. On December 17, 2012, the Brazilian Revenue Office issued an additional notice of violation in the amount of approximately $6.2 under MPF Case No. 0811000.2011.00438 covering the period from January 1, 2008 through December 31, 2010 on the same subject matter. L&P Brazil responded to the notice of violation on January 17, 2013 denying the violation. It is possible that we may receive an additional notice of violation for years 2011 and 2012.
In addition, L&P Brazil received assessments on December 22, 2011, and June 26, July 2 and November 5, 2012 from the Brazilian Revenue Office where the Revenue Office challenged L&P Brazil’s use of certain tax credits in the years 2006 through 2010. Such credits are generated based upon the tariff classification and rate used by L&P Brazil for value-added tax on the sale of mattress innersprings. Combined with prior assessments, L&P Brazil has received assessments totaling approximately $2.0 on the same or similar denial of tax credit matters.
L&P Brazil is also party to a proceeding involving the State of Sao Paulo, Brazil where the State of Sao Paulo, on April 16, 2009, issued a Notice of Tax Assessment and Imposition of Fine to L&P Brazil seeking approximately $3.3 for the tax years 2006 and 2007, under Case No. 3.111.006 (DRT n°.04-256.169/2009). The State of Sao Paulo argued that L&P Brazil was using an incorrect tariff code for the collection and payment of value-added tax on sales of

20

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



mattress innerspring units in the State of Sao Paulo. On September 29, 2010, the Court of Tax and Fees of the State of Sao Paulo ruled in favor of L&P Brazil nullifying the tax assessment. The State filed a special appeal and the Special Appeals court remanded the case back to the Court of Tax and Fees for further findings. On November 9, 2012, the Court of Tax and Fees again ruled in favor of L&P Brazil and nullified the tax assessment. On November 28, 2012, the State filed another special appeal. The determination to accept the special appeal was made on December 26, 2012, and L&P responded to this special appeal on January 24, 2013.
We were also informed on October 4, 2012 that the State of Sao Paulo issued an Auto-Infringement and Imposition of a Fine dated May 29, 2012 under Procedure Number 4.003.484 against L&P Brazil in the amount of approximately $2.3 for the tax years 2009 through 2011. Similar to the prior assessment, the State of Sao Paulo argues that L&P Brazil was using an incorrect tax rate for the collection and payment of value-added tax on sales of mattress innerspring units in the State of Sao Paulo.
On December 18, 2012, the State of Minas Gerais, Brazil issued a tax assessment to L&P Brazil relating to L&P Brazil's classifications of innersprings for the collection and payment of value-added tax on the sale of mattress innersprings in Minas Gerais from March 1, 2008 through August 31, 2012 in the amount of approximately $.7, under PTA Case No. 01.000.182756-62. L&P Brazil filed its response denying any violation on January 17, 2013.
On February 1, 2013, the Brazilian Finance Ministry filed suit against L&P Brazil in the Camanducaia Judicial District Court, Case No. 0002222-35.2013.8.13.0878, alleging the untimely payment of $.2 of social contributions (social security and social assistance payments). L&P Brazil has yet to file its response, but intends to deny the allegations. L&P Brazil intends to argue the payments were not required to be made because of the application of certain tax credits that were generated by L&P Brazil's use of a tariff code for the classification of value-added tax on the sale of mattress innersprings (i.e., the same underlying issue at stake in the other Brazilian matters).
We deny all of the allegations in these actions. We believe that we have valid bases upon which to contest such actions and will vigorously defend ourselves. However, these contingencies are subject to many uncertainties. At this time, we do not believe it is probable that this matter will have a material adverse effect on our financial condition, operating cash flows or results of operations.
 
Patent Infringement Claim
On January 24, 2012, in a case in the United States District Court for the Central District of California, the jury entered a verdict against us in the amount of $5 based upon an allegation by plaintiff that we infringed three patents on an automatic stapling machine and on methods used to assemble box springs. This action was originally filed on October 4, 2010, as case number CV10-7416 RGK (SSx) under the caption Imaginal Systematic, LLC v. Leggett & Platt, Incorporated; Simmons Bedding Company; and Does 1 through 10, inclusive. Leggett is contractually obligated to defend and indemnify Simmons Bedding Company against a claim for infringement.
On summary judgment motions, we unsuccessfully disputed each patent’s validity and denied that we infringed any patent. At the jury trial on damages issues, the plaintiff alleged damages of $16.2. The court denied plaintiff’s attempt to win an attorney fee award and triple the pre-verdict damages.
On April 9, 2012 we appealed the case to the Federal Circuit Court of Appeals. Oral argument was held on February 6, 2013 before a three judge appeal panel in the Federal Circuit in Washington D.C. On February 14, 2013, the Court of Appeals issued a judgment affirming the $5 verdict against us, which was fully accrued for in the first quarter of 2013. We filed a petition for a rehearing of the Court of Appeals decision on March 18, 2013, which was denied by the Court of Appeals. We intend to file a Petition for a Writ of Certiorari to the U.S. Supreme Court on or before July 17, 2013. The U.S. Supreme Court's review is discretionary.
The plaintiff has requested royalties for post-verdict use of the machines, which to date approximate $2, and has requested pre-judgment interest in the amount of $.7. We believe we have valid bases to object to such requests, and intend to do so. We also filed reexamination proceedings in the Patent Office (Case Nos. 95/001,543 filed February 11, 2011; 95/001,546 and 95/001,547 filed February 16, 2011), challenging the validity of each patent at issue. The Patent Office examiner ruled in our favor on the pertinent claims of one of the three patents. The Patent Office examiner initially ruled in our favor on the pertinent claims of the second patent, but subsequently reversed that decision. With respect to the third patent, the Patent Office examiner's decision upheld the validity of all claims. All three of these proceedings are currently on appeal before the Board of Patent Appeals. Due to a change made to all of the machines, we do not believe


21

LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



that the machines currently use the feature alleged to have infringed the third patent. On April 25, 2013, the plaintiff filed a petition to terminate all re-examination proceedings based on the final ruling of the Federal Circuit Court of Appeals.
At this time, we do not believe it is probable that this matter will have a material adverse effect on our financial condition, operating cash flows or results of operations.

22



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
What We Do
Leggett & Platt is a diversified manufacturer, and member of the S&P 500 index, that conceives, designs, and produces a wide range of engineered components and products found in most homes, offices, automobiles, and also in many airplanes and retail stores. We make components that are often hidden within, but integral to, our customers’ products.
We are the leading U.S. manufacturer of: components for residential furniture and bedding, adjustable bed bases, carpet underlay, components for office furniture, drawn steel wire, thin-walled titanium and nickel tubing for the aerospace industry, automotive seat support and lumbar systems, and bedding industry machinery.
Our Segments
Our continuing operations are comprised of 20 business units in four segments, with approximately 18,000 employees, and 130 production facilities located in 17 countries around the world. Our segments are described below.
Residential Furnishings: This segment supplies a variety of components mainly used by bedding and upholstered furniture manufacturers in the assembly of their finished products. We also sell carpet cushion, adjustable bed bases, bed frames, ornamental beds and geo components. This segment generated approximately 48% of total sales during the first quarter of 2013.
Commercial Fixturing & Components: Operations in this segment, which contributed approximately 11% of first quarter 2013 total sales, manufacture and sell store fixtures and point-of-purchase displays used in retail stores. We also produce chair controls, bases, and other components for office furniture manufacturers, as well as select lines of private-label finished furniture.
Industrial Materials: These operations primarily supply steel rod, drawn steel wire, steel billets, and welded steel tubing to our other operations and to external customers. Our customers use this wire and tubing to make bedding, furniture, automotive seats, mechanical springs, and many other end products. We also supply titanium and nickel tubing for the aerospace industry. This segment generated approximately 22% of our total sales during the first quarter of 2013.
Specialized Products: From this segment we supply lumbar support systems and seat suspension systems used by automotive seating manufacturers. We manufacture and install the racks, shelving and cabinets used to outfit fleets of service vans. We also produce quilting, sewing, and wire forming machinery, some of which is used by other Leggett operations as well as external customers, including bedding manufacturers. This segment contributed about 19% of first quarter 2013 total sales.
Total Shareholder Return
Total Shareholder Return (TSR), relative to peer companies, is the key financial measure that we use to assess long-term performance. TSR is driven by the change in our share price and the dividends we pay [TSR = (Change in Stock Price + Dividends) / Beginning Stock Price]. We seek to achieve TSR in the top one-third of the S&P 500 over the long-term through a balanced approach that employs all four TSR sources: revenue growth, margin expansion, dividends, and share repurchases.
We monitor our TSR performance (relative to the S&P 500) on a rolling three-year basis. To date, for the three-year measurement period that began January 1, 2011, we have so far (over the last 28 months) generated annual average TSR of 24%, compared to TSR of 13% for the S&P 500 index; accordingly, our TSR performance ranks in the top 21% of the S&P 500 companies over this time period.
Senior executives participate in a TSR-based incentive program (based on our performance compared to the performance of a group of approximately 320 peers). Business unit bonuses emphasize the achievement of higher returns on the assets under the unit’s direct control.
Customers
We serve a broad suite of customers, with our largest customer representing approximately 6% of our sales in 2012. Many are companies whose names are widely recognized; they include most manufacturers of furniture and bedding, a variety of other manufacturers, and many major retailers.


23



Major Factors That Impact Our Business
Many factors impact our business, but those that generally have the greatest impact are market demand, raw material cost trends, and competition.

Market Demand
Market demand (including product mix) is impacted by several economic factors, with consumer confidence being most significant. Other important factors include disposable income levels, employment levels, housing turnover, and interest rates. All these factors influence consumer spending on durable goods, and therefore affect demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one-third of our sales.
Over the last few years we have significantly reduced our fixed cost structure, but purposely retained spare production capacity. Accordingly, unit sales can rebound appreciably without the need for large capital investment. We have meaningful operating leverage that should further benefit earnings as market demand continues to improve. With our current utilization levels, we should be able to readily accommodate well over $4 billion in revenue (assuming current sales mix). Until our spare capacity is fully utilized, each additional $100 million of sales from incremental unit volume is expected to generate approximately $25 million to $35 million of additional pre-tax earnings.
Raw Material Cost Trends
In many of our businesses, we enjoy a cost advantage from buying large quantities of raw materials. This purchasing leverage is a benefit that many of our competitors generally do not have. Still, our costs can vary significantly as market prices for raw materials (many of which are commodities) fluctuate.
We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. Our ability to recover higher costs (through selling price increases) is crucial. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Conversely, when costs decrease significantly, we generally pass those lower costs through to our customers. The timing of our price increases or decreases is important; we typically experience a lag in recovering higher costs, so we also expect to realize a lag as costs decline.
Steel is our principal raw material and at various times in past years we have experienced extreme cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers with selling price adjustments.
As a producer of steel rod, we are also impacted by volatility in metal margins (the difference in the cost of steel scrap and the market price for steel rod). Metal margins within the steel industry have been volatile during certain periods in recent years.
Our other raw materials include woven and non-woven fabrics, foam scrap, and chemicals. We have experienced changes in the cost of these materials in recent years and, in most years, 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 to find ways to assist our customers in improving the functionality and reducing the cost of their products, while providing higher margin and profit contribution for our operations.
Competition
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 product quality, innovation, 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, even versus many foreign manufacturers, as a result of our highly efficient operations, low labor content, vertical integration in steel and wire, and large scale purchasing of raw materials and commodities. However, we have reacted to foreign competition in certain cases by selectively adjusting prices, and by developing new proprietary products that help our customers reduce total costs.

24



Premium non-innerspring mattresses (those that have either a foam or air core) have experienced rapid growth in the U.S. bedding market in recent years. While still a relatively small portion of the total market in units (approximately 10%-15%), these products represent a much larger portion of the total market in dollars (approximately 25%-30%) due to their higher average selling prices. We expect these products to continue to grow. Some of our traditional bedding customers are now offering mattresses that combine an innerspring core with top layers comprised of specialty foam and gel. These hybrid products, which allow our bedding customers to address a consumer preference for the feel of a specialty mattress and the characteristics of an innerspring, are being well received by consumers.

We filed an antidumping suit related to innerspring imports from China, South Africa and Vietnam which was brought to a favorable conclusion in 2009. The current antidumping duty rates on innersprings from these countries are significant, ranging from 116% to 234%, and should remain in effect at least until early 2014. Imported innersprings from these countries are now supposed to be sold at fair prices, however the duties on certain innersprings are being evaded by various means including shipping the goods through a third country and falsely identifying the country of origin. In 2009, Leggett, along with several U.S. manufacturers of products with active antidumping or antidumping/countervailing duty orders, formed a coalition and are working with Members of Congress, the U.S. Department of Commerce, and U.S. Customs and Border Protection to seek stronger enforcement of existing antidumping and/or countervailing duty orders. We intend to participate in a Sunset Review of the innerspring order before the Department of Commerce and International Trade Commission, beginning in late 2013. If extended, the current antidumping duty rates on innersprings would remain in effect through 2018.
Restructuring
There were no significant restructuring-related costs incurred in either the first quarter of 2013 or 2012.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
First quarter sales of $936 million were 1% lower than in the first quarter of 2012. Same location sales declined 2%, due in significant part to lower rod mill trade sales. Unit volumes were essentially flat, with lower volumes in bedding, portions of residential furniture, office furniture and machinery offset by growth in carpet underlay, store fixtures and commercial vehicle products. Acquisitions improved sales by 1%.
EBIT (earnings before interest and income taxes) improved 7% during the quarter primarily as a result of cost improvements and favorable product mix within certain business units. These improvements were partially offset by a higher accrual for our TSR-driven and other stock-based incentive compensation plans, which was primarily due to the significant increase in stock price from $27 to $34 during the quarter.
Earnings per share (EPS) for the quarter were $.33 per diluted share, an increase of 10% compared to $.30 during the first quarter of last year.
LIFO/FIFO and the Effect of Changing Prices
All of our segments use the first-in, first-out (FIFO) method for valuing inventory. In our consolidated financials, an adjustment is made at the corporate level (i.e., outside the segments) to convert about 60% of our inventories to the last-in, first-out (LIFO) method.
For the full year 2013, we estimate a LIFO benefit of $10.3 million. This estimate incorporates certain assumptions about year-end steel prices and inventory levels (both are very difficult to accurately predict). Therefore, the LIFO estimate for the full year could be significantly different from that currently estimated. Any further change in the annual estimate of LIFO will be reflected in the remaining quarters.

The following table contains the LIFO (benefit) expense included in earnings for each of the periods presented:
 
 
Three Months Ended
March 31,
 
2013
 
2012
LIFO (benefit) expense
$
(2.6
)
 
.5




25



Interest Expense and Income Taxes
First quarter 2013 interest expense from continuing operations was higher than in the first quarter of 2012 primarily due to the issuance in August 2012 of $300 million of long-term notes. Interest expense for the full year 2013 is expected to approximate 2012 levels, due to the maturity on April 1, 2013 of $200 million notes.
The reported first quarter consolidated worldwide effective tax rate was 29%, compared to 33% for the same quarter last year. The decrease in the 2013 effective rate was primarily attributable to certain first quarter tax benefits associated with the American Taxpayer Relief Act, signed by President Obama on January 2, 2013, as well as certain unfavorable discrete tax items recorded in the first quarter 2012 that did not recur.
We anticipate that the effective rate for the remainder of 2013 to approximate 30%, but that is contingent upon factors such as our overall profitability, the mix of earnings among taxing jurisdictions, the type of income earned, the effect of tax law changes and prudent tax planning strategies, and the impact of tax audits and other discrete items.
Discussion of Segment Results
A description of the products included in each segment, along with segment financial data, appear in Note 4 of the Notes to Consolidated Condensed Financial Statements.
A summary of the segment results are shown in the following tables.
 
(Dollar amounts in millions)
Three Months ended
March 31, 2013
Net Sales
 
Three Months ended
March 31, 2012
Net Sales
 
Change in Net Sales
 
% Change in
Same Location
Sales(1)
$
 
%
 
Residential Furnishings
$
486.8

 
$
492.6

 
$
(5.8
)
 
(1.2
)%
 
(1.5
)%
Commercial Fixturing & Components
115.6

 
114.2

 
1.4

 
1.2

 
1.3

Industrial Materials
225.7

 
237.7

 
(12.0
)
 
(5.0
)
 
(7.0
)
Specialized Products
186.7

 
185.3

 
1.4

 
.8

 
.7

Total
1,014.8

 
1,029.8

 
(15.0
)
 
(1.5
)
 
 
Intersegment sales
(78.8
)
 
(83.0
)
 
4.2

 
 
 
 
External sales
$
936.0

 
$
946.8

 
$
(10.8
)
 
(1.1
)%
 
(1.8
)%
 
 
Three Months
ended
March 31,
2013
EBIT
 
Three Months
ended
March 31,
2012
EBIT
 
Change in EBIT
 
EBIT Margins(2)
(Dollar amounts in millions)
$
 
%
 
Three Months
ended
March 31,
2013
 
Three Months
ended
March 31,
2012
Residential Furnishings
$
42.3

 
$
40.2

 
$
2.1

 
5.2
 %
 
8.7
%
 
8.2
%
Commercial Fixturing & Components
1.6

 
7.2

 
(5.6
)
 
(77.8
)
 
1.4

 
6.3

Industrial Materials
22.2

 
11.8

 
10.4

 
88.1

 
9.8

 
5.0

Specialized Products
15.4

 
17.9

 
(2.5
)
 
(14.0
)
 
8.2

 
9.7

Intersegment eliminations & other
(4.5
)
 
(2.0
)
 
(2.5
)
 
 
 
 
 
 
Change in LIFO reserve
2.6

 
(.5
)
 
3.1

 
 
 
 
 
 
Total
$
79.6

 
$
74.6

 
$
5.0

 
6.7
 %
 
8.5
%
 
7.9
%
 
(1)
The change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we owned one year earlier.
(2)
Segment margins are calculated on total sales. Overall company margin is calculated on external sales.
Residential Furnishings
First quarter sales in this segment decreased $6 million, or 1%, from reduced unit volumes.
In our U.S. Spring business, sales decreased 3% compared to a relatively strong first quarter of 2012. Innerspring unit volumes were down 9% and boxspring units were down 1%, primarily from market weakness at promotional price points. Growth of our pocketed coil product line continued, with those units up 32% in the quarter. This category shift is driving higher average unit selling prices and a favorable product mix, and offset some of the decline in unit volumes in the quarter.

26



Furniture component sales decreased 7% in the first quarter. Combined volume in our seating and sofa sleeper businesses was roughly flat during the quarter, but motion hardware unit volumes declined 14%, primarily from weak market demand at promotional price points.
Adjustable Bed units decreased for the first time in several years, with volume down 4% in the first quarter. However, in Carpet Underlay we had significant growth. Margins in Carpet Underlay remain under pressure from rising scrap foam costs, and we have implemented price increases to recover these higher costs.
EBIT increased $2 million, with the effect of lower sales more than offset by a $3 million gain related to a hurricane insurance claim, cost improvements, and favorable product mix in the U.S. Spring business unit.
Commercial Fixturing & Components
Total sales increased $1 million, or 1%, during the quarter. Store Fixtures sales increased 6%, but were largely offset by a 6% decrease in Office Furniture Components.
EBIT decreased $6 million, due to the absence of last year's $2 million divestiture gain, costs incurred for programs that will ship in the second quarter, competitive pricing, and lower sales of office furniture components.
Performance of the Store Fixtures group should improve in the second quarter as a result of higher expected sales. However, we will face a very strong third quarter comparison from large programs that shipped last fall. Fourth quarter sales, EBIT, and margins are expected to decline sequentially, consistent with the typical seasonality of this business.
Industrial Materials
Total sales decreased $12 million, or 5%. Same location sales declined 7%, as slightly higher unit volumes were more than offset by reduced trade sales at the rod mill and price deflation in wire and rod.
The decrease in trade sales of steel rod during the quarter was more than offset by an increase in intercompany rod sales, and the rod mill continues to run at 100% capacity utilization. A change in the mix of rod sales from trade to intercompany is generally positive to earnings since that change tends to also shift the production mix to higher-value high carbon rods.
EBIT improved by $10 million, primarily due to the absence of last year's $4 million of acquisition-related costs, cost improvements, and higher unit volume in certain businesses.
Specialized Products
Total sales increased $1 million, or 1%, during the quarter. Sales growth in Commercial Vehicle Products was largely offset by lower Machinery volume. Automotive sales were essentially flat, with growth in North America and Asia offset by lower demand in Europe.
EBIT declined by $3 million, or 14%, with the benefit from cost reductions and higher sales more than offset by a $5 million charge related to a patent infringement verdict.

Portfolio Management

As part of our ongoing strategic planning process to help guide decisions regarding business unit roles, we are currently reviewing the Commercial Vehicle Products (CVP) Group in the Specialized Products Segment.  Although future plans for this group have not yet been finalized, we are exploring possible strategic alternatives, one of which is the possibility of divesting this business.

LIQUIDITY AND CAPITALIZATION
Our operations provide most of the cash we require, and debt may also be used to fund a portion of our needs. For 2013, we expect cash flow from operations to exceed $350 million. Net debt to net capital increased from 29.4% at year-end 2012 to 29.6% as of March 31, 2013. Our long-term target is to have net debt as a percent of net capital in the 30%-40% range. The calculation of net debt as a percent of net capital at March 31, 2013 and December 31, 2012 is presented on page 31.



27



Uses of Cash
Finance Capital Requirements
Cash is readily available to fund selective growth, both internally (through capital expenditures) and externally (through acquisitions). Capital expenditures include investments we make to maintain, modernize, and expand manufacturing capacity. In all our businesses, we invest to maintain facilities and equipment. We also invest to support new product introductions and specific product categories that are rapidly growing. However, with excess productive capacity across our operations (from continued low demand levels), we have reduced spending on expansion projects. We expect capital expenditures of no more than $100 million in 2013. The expected increase versus 2012 primarily relates to new programs that we have been awarded, and that should contribute to earnings and cash flow beginning in 2014.
Our strategic, long-term, 4-5% annual growth objective envisions periodic acquisitions. We are seeking acquisitions within our growth businesses, and are looking for opportunities to enter new, higher growth markets (carefully screened for sustainable competitive advantage). During 2008 through 2010, acquisitions were a lower priority as we primarily focused on improving margins and returns of our existing businesses. In 2011, we again turned our focus to acquisitions, and began actively soliciting opportunities while maintaining our screening discipline. In January 2012, we purchased Western Pneumatic Tube for $188 million. This acquisition aligns extremely well with our strategy to seek businesses with secure, leading positions in growing, profitable, attractive markets. Western established for us a strong competitive position in the higher return, higher growth aerospace market.
Pay Dividends
Dividends are the primary means by which we return cash to shareholders. During 2012, we declared four quarterly dividends, but paid five, given our decision to accelerate into December 2012 the dividend typically paid in January 2013 (of $41 million) in anticipation of individual tax rate increases. In 2013, we expect to return to our typical dividend schedule (and pay the fourth quarter dividend in 2014), therefore the cash requirement for dividends in 2013 will be lower, at approximately $125 million.
Maintaining and increasing the dividend remains a high priority. In February 2013, our Board of Directors declared a quarterly dividend of $.29 per share, and extended to 42 years our record of consecutive annual dividend increases, at an average compound annual growth rate of 13%. Our targeted dividend payout is approximately 50-60% of net earnings. Actual payout has been higher in recent years, but as earnings continue to grow, we expect to move into that target range.
Repurchase Stock
Share repurchases are the other means by which we return cash to shareholders. During the first quarter of 2013, we repurchased 1.6 million shares of our stock and issued 2.4 million shares. Approximately two-thirds of the issuances related to employee stock option exercises, which have increased in recent quarters with the significant share price appreciation. The number of shares outstanding rose .8 million during the quarter, to 142.9 million.
As has been typical since 2007, after funding dividends and capital expenditures, any excess cash flow should be targeted toward acquisitions or stock repurchases. We have a standing authorization from the Board of Directors to repurchase up to 10 million shares each year; however, no specific repurchase commitment or timetable has been established. We expect during 2013 to issue approximately 4 million shares via employee benefit plans, given the high level of stock option exercises.

Cash from Operations
Cash from operations is our primary source of funds. Earnings and changes in working capital levels are the two broad factors that generally have the greatest impact on our cash from operations. For the full year 2013, we expect cash from operations to exceed $350 million.

28



Cash from operations for the three months ended March 31, 2013 was $24 million compared to $65 million for the same period last year. This decrease was consistent with our internal expectations, and results primarily from changes in working capital, with the largest impact from an increase in accounts receivable since the beginning of the year. We continue to closely monitor our working capital levels, and ended the quarter with adjusted working capital at 12.9% of annualized sales, well below our 15% target. The table below shows this calculation. We eliminate cash and current debt maturities from working capital to monitor our operating efficiency and believe this provides a more useful measurement.
(Amounts in millions)
March 31, 2013
 
December 31,
2012
Current assets
$
1,525

 
$
1,339

Current liabilities
(793
)
 
(731
)
Working capital
732

 
608

Cash and cash equivalents
(449
)
 
(359
)
Current debt maturities
201

 
202

Adjusted working capital
$
484

 
$
451

Annualized sales (1)
$
3,744

 
$
3,412

Adjusted working capital as a percent of annualized sales
12.9
%
 
13.2
%
(1)
Annualized sales equal 1st quarter sales ($936 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.
Working Capital Trends
The following chart presents key working capital trends for the last five quarters:
(Dollar amounts in millions)
Mar-12
 
Jun-12
 
Sep-12
 
Dec-12
 
Mar-13
Trade Receivables, net
$
514.6

 
$
512.4

 
$
559.3

 
$
412.6

 
$
495.7

Inventory, net
$
473.3

 
$
517.6

 
$
471.2

 
$
489.0

 
$
502.5

Accounts Payable
$
298.2

 
$
320.2

 
$
292.0

 
$
285.4

 
$
320.0

 
(1)
The trade receivables ratio represents the days of sales outstanding calculated as: ending net trade receivables ÷ (quarterly net sales ÷ number of days in the quarter).
(2)
The inventory ratio represents days of inventory on hand calculated as: ending net inventory ÷ (quarterly cost of goods sold ÷ number of days in the quarter).
(3)
The accounts payable ratio represents the days of payables outstanding calculated as: ending accounts payable ÷ (quarterly cost of goods sold ÷ number of days in the quarter).

29



Days Sales Outstanding (DSO): Changes in the quarterly DSO reflect normal seasonal fluctuations due to the timing of cash collections and other factors. Accelerated payments by some of our large customers in late 2012 resulted in much lower levels of accounts receivable at year-end. In the first quarter, receivables returned to more normal levels, with DSO back to 48 days at the end of March, which is in line with the same quarter last year. Changes in the DSO reflected in the table above are consistent with our historical range, and are not indicative of changes in payment trends or credit worthiness of customers. In the first quarter of 2013, we incurred $1.6 million of bad debt expense as compared to $2.8 million in first quarter 2012.
Days Inventory Outstanding (DIO): Our DIO typically fluctuates within a reasonably narrow range as a result of differences in the timing of sales, production levels, and inventory purchases. After inventory increased at year-end 2012 primarily due to decisions to take advantage of temporarily lower commodity costs, inventory has since returned to more normal levels. During the first quarter of 2013, we recognized expense of $2.0 million associated with obsolete and slow moving inventories as compared to $3.1 million in the first quarter of 2012.
Days Payable Outstanding (DPO): Changes in the DPO reflected in the table above are the result of normal fluctuation in our operating activity. We actively strive to optimize payment terms with our vendors, and over the last few years, have increased our DPO by more than ten days.
Capitalization
The following table presents Leggett’s key debt and capitalization statistics:
 
(Dollar amounts in millions)
March 31, 2013
 
December 31,
2012
Long-term debt outstanding:
 
 
 
Scheduled maturities
$
854

 
$
854

Average interest rates*
4.7
%
 
4.7
%
Average maturities in years*
4.7

 
4.9

Revolving credit/commercial paper
100

 

Total long-term debt
954

 
854

Deferred income taxes and other liabilities
241

 
228

Shareholders’ equity and noncontrolling interest
1,440

 
1,442

Total capitalization
$
2,635


$
2,524

Unused committed credit:
 
 
 
Long-term
$
500

 
$
600

Short-term

 

Total unused committed credit
$
500

 
$
600

Current maturities of long-term debt
$
201