UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the transition period from to .
Commission File Number 1-7845
LEGGETT & PLATT, INCORPORATED
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. employer
identification No.)
No. 1 Leggett Road
Carthage, Missouri
Registrant’s telephone number, including area code: (417) 358-8131
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
Name of Each Exchange on
Which Registered
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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
The aggregate market value of the voting stock held by non-affiliates of the Registrant (based on the closing price of its common stock on the New York Stock Exchange) on June 30, 2003 was approximately $3,637,475,000.
There were 192,299,870 shares of the Registrant’s common stock outstanding as of March 1, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference from the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2004.
TABLE OF CONTENTS
LEGGETT & PLATT, INCORPORATED—FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
Forward Looking Statements and Related Matters
Item 1.
Business
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
Supp. Item.
Executive Officers of the Registrant
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
This report and other public reports or statements made from time to time by the Company or its management may contain “forward-looking” statements concerning possible future events, objectives, strategies, trends or results. Such statements are identified either by the context in which they appear or by use of words such as “anticipate,” “believe,” “estimate,” “expect,” or the like.
Readers are cautioned that any forward-looking statement reflects only thebeliefs of the Company or its management at the time the statement is made. In addition, readers should keep in mind that, 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, the Company does not have, and does 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.
It is not possible to anticipate and list all risks, uncertainties and developments which may affect the future operations or performance of the Company, or which otherwise may cause actual events or results to differ from forward-looking statements. However, some of these risks and uncertainties include the following:
Furthermore, the Company has made and expects to continue to make acquisitions. Acquisitions present significant challenges and risks, and depending upon market conditions, pricing and other factors, there can be no assurance that we can successfully negotiate and consummate acquisitions or successfully integrate acquired businesses into the Company.
The section in this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operation” contains a disclosure on page 26 of the security ratings of the Company’s public debt, which will be incorporated by reference into the Company’s registration statements filed under the Securities Act of 1933. These security ratings are not a recommendation to buy, sell or hold securities and such ratings are subject to revisions and withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.
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PART I
Item 1. Business.
Leggett & Platt, Incorporated and its subsidiaries are collectively referred to in this Form 10-K as “we,” “us,” “our,” “the Company” or “Leggett.” We were founded as a partnership in Carthage, Missouri in 1883 and became incorporated in 1901. The Company, a pioneer in the development of steel coil bedsprings, is a diversified manufacturer that conceives, designs and produces a wide range of engineered components and products that can be found in many homes, offices, retail stores and automobiles. Our business is organized into 29 business units, those units organized into 11 groups, and those groups into five segments, as indicated below.
Overview of the Residential Furnishings Segment
Segment
Groups
Business Units
Residential Furnishings
Bedding Components
US Spring
International Spring
Wood Products
Home Furniture Components
Furniture Hardware
Seating Components
Sofa Sleeper Components
Consumer Products
Ornamental Beds/Bedding Support
Adjustable Beds
Coated Fabrics
Fabric/Fiber/Foam
Fabric Converting
Fabric Dye and Finishing
Fibers
Carpet Underlay
Prime Foam Products
Our largest segment is Residential Furnishings. Our beginnings stem from an 1885 patent of the steel coil bedspring. Today, we supply a variety of components used by bedding and upholstered furniture manufacturers in the assembly of their finished products. We strive for competitive advantages based on a low cost structure, strong customer relationships and our internal production of key raw materials, including steel rod, wire, tubing, and dimension lumber. Our wide range of products provides our manufacturing customers with a single source for many of the components they need. For example, a bedding manufacturer can come to us for almost every component part of a mattress and box spring, except the outer upholstery fabric. This is also true for manufacturers of upholstered recliner chairs, sofas and loveseats. We have long production runs and numerous production and assembly locations. Because of these advantages, we believe that we can generally produce component parts at a lower cost than our customers can produce the same parts for their own use. This allows our components customers to focus on the design, style and marketing of their residential furnishings products, rather than the production of components. Listed below are examples of components manufactured or distributed by our Residential Furnishings groups:
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Most of our Residential Furnishings customers manufacture finished bedding products (mattresses and box springs) or upholstered furniture for residential use. These customers generally sell to retailers and distributors. We also sell our complete consumer products directly to retailers and distributors.
Key Strategies
Our ability to develop new, proprietary products provides an ongoing opportunity to increase business with customers, including those who continue to make some of their own components. Many of our capabilities, including product innovation, are being used as we move into new regions of the world. Internationally, we locate our operations where demand for components is growing. Finally, we continue to look for acquisitions that expand our customer base, add new product lines or capabilities, or help establish a presence in new geographic regions.
Overview of the Commercial Fixturing & Components Segment
Commercial Fixturing
Fixture & Display
Store Fixtures
& Components
Point of Purchase Displays
Commercial Vehicle Products
Storage Products
Office Furniture Components
US Office Components
International Office Components
Plastics
Our second largest segment is Commercial Fixturing & Components. This segment is divided into two groups, Fixture & Display and Office Furniture Components.
In the Fixture & Display group, our goal is to be the primary, or “one-stop,” fixture supplier of choice for our customers. We have capabilities that include design, production, installation and project management. Products manufactured by our Fixture & Display group include:
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Our Office Furniture Components group manufactures:
Customers of the Commercial Fixturing & Components segment include:
Our Fixture & Display group strategy is to consolidate and coordinate the production of fixture and display products at the lowest cost. Our primary focus is to increase volume with existing accounts and pursue new customers within the industry. We will also look for opportunities to expand into new, related markets.
In October, we announced the adoption of a Fixture & Display group tactical plan to increase our attention and scrutiny of under-performing profit centers in the Fixture & Display group. For further information on the Fixture & Display group tactical plan, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation beginning on page 18.
In our Office Furniture Components group, we will continue striving to develop new products, providing opportunities to supply more components to customers. We also expect to continue making strategic acquisitions that add new products or expand operations into new regions of the world.
Overview of the Aluminum Products Segment
Aluminum Products
Aluminum
Die Casting
Tool & Die
Our Aluminum Products segment is the leading independent producer of non-automotive aluminum die castings in North America. We also produce some zinc and magnesium die castings. We work with customers from the design concept stage to market introduction and then through the product lifecycle to refine the product and reduce cost. We sell aluminum, zinc and magnesium die cast components to a diverse group of customers that manufacture industrial and consumer products. Our customers include:
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We also manufacture and refurbish dies (also known as molds or tools) for all types and sizes of die casting machines. These are sold to customers that buy our die castings and to other die cast manufacturers. We also provide extensive machining, coating, finishing, sub-assembly and other value-added services related to the die cast components that we sell.
Market share growth is a major focus. We plan to continue to pursue large users of castings, work to provide more products used by customers who make some of their aluminum components, and look for opportunities to expand into new markets where die cast components are used. We plan to continue striving to develop technology that allows opportunities for growth in new markets. Finally, we are committed to establishing a global presence, enabling us to supply customers as they take more production overseas. Acquisitions may play a part in accomplishing these plans.
Overview of the Industrial Materials Segment
Industrial Materials
Wire
Wire Drawing
Wire Products
Steel Rod
Tubing
Steel Tubing
The Industrial Materials segment produces steel rod, drawn wire and welded steel tubing as well as specialty wire products. Drawn wire and welded steel tubing are important raw materials that are widely used to manufacture our products. About 50% of the drawn wire and about 25% of the welded steel tubing that we produce is used to manufacture other products within the Company. For example, wire is used to make:
Welded steel tubing is used in many of the same products including:
Currently, our wire mills use over 900,000 tons of steel rod each year. In 2002, we acquired the assets of a steel rod mill in Sterling, Illinois, which is expected to provide a more consistent supply of quality steel rod for the Industrial Materials segment. We expect the rod mill to produce about 450,000 tons annually, nearly all of which will be used by Leggett businesses. After the start-up phase, the mill operated profitably during the second half of 2003. The mill produces only a few sizes and types of rod improving the mill’s operating efficiency. We plan to operate the mill’s electric furnace (which has a capacity of about one million tons) during off-peak times to reduce energy costs. The mill is located near a steel scrap market that over the long term should provide consistent supply to the mill. The rod mill is also located reasonably close to our wire mills.
In addition to supplying a portion of our own raw material needs, we sell drawn wire and welded steel tubing to a diverse group of industrial customers, including:
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We also produce specialty wire products such as:
The core strategy of our wire and tubing businesses is to efficiently supply other Leggett businesses’ raw material requirements. We expect growth, to a large extent, will occur as our internal requirements expand, both domestically and abroad. We also expect to grow as we work with customers on programs that improve their efficiency (for example, packaging multiple components supplied by our other businesses). Finally, we will expand our capabilities to add value through the forming, shaping, and welding of our wire and tube. This may occur through start-up operations or acquisitions.
Overview of the Specialized Products Segment
Specialized Products
Automotive
Machinery
Our Specialized Products segment manufactures components for the automotive industry and designs, builds and sells specialized machinery and equipment.
In the Automotive group, we manufacture:
Primary customers for these products are automobile seating manufacturers.
In the Machinery group, we primarily manufacture:
The primary customers for these products are bedding manufacturers. We also design and produce some of these specialized products for our own use.
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In our Automotive group, we plan to continue the focus on research and development, looking for ways to improve the function and cost of our products. The introduction of new capabilities and products creates the potential for us to expand into new markets. Growing our global presence (to serve developing markets and to expand our sourcing options) will remain a key objective, as will assisting our customers with vendor consolidation (to reduce the complexity and cost of their supply chain).
Our Machinery group designs and manufactures equipment that is used to produce the proprietary innersprings we develop for our bedding customers. In most cases, this equipment is not available in the marketplace. Providing this support is a critical strategy for our machinery operations, and also for our bedding operations. In addition, we will continue striving to develop technology to improve efficiency in our own plants as well as those of our customers.
Acquisitions and Divestitures
In the past 20 years, approximately two-thirds (2/3) of our sales growth has come through acquisitions. Our typical acquisition is a small, private, profitable, entrepreneurial company. Our acquisition targets are usually either complementary to our existing businesses, or companies that allow us to secure quality raw material supply. Over the past ten years, the average acquisition target has had annual revenues between $15 and $20 million, making the risk from any single acquisition low. In our history, we have completed only four acquisitions of businesses with annual sales greater than $100 million. We do not follow a fixed timetable for buying companies. Rather, we aim to be opportunistic by taking advantage of circumstances as they arise. As a result, the pace and size of acquisitions in any given year could be significantly more or less than the average seen over the longer term.
In July 2003, we completed our fourth largest acquisition in the history of the Company, purchasing the assets of RHC Spacemaster, one of our store fixture competitors. We expect these operations to add at least $120 million in annualized sales. In total, we acquired 15 businesses during 2003 representing approximately $220 million in annualized sales. The acquired businesses are expected to add annualized sales within our segments as follows:
Commercial Fixturing & Components
We also sold two businesses during 2003, including one lumber company and one tubing fabrication facility. Annualized sales associated with the two divested businesses were approximately $23 million. For further information on acquisitions and divestitures, see Note B and Note M of the Notes to Consolidated Financial Statements.
Segment Financial Information
For information on sales to customers, sales by product line, earnings before interest and taxes, and total assets of each of our business segments, refer to Note K of the Notes to Consolidated Financial Statements.
Foreign Operations
The percentages of our trade sales from products manufactured outside the United States for the previous three years are shown in the table below.
Year
2003
2002
2001
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The majority of our international operations, measured by trade sales, are in Canada, Europe and Mexico.
The Canadian operations primarily manufacture innersprings for mattresses, fabricated wire for the bedding, furniture and automotive industries, and cut-to-size bed frame lumber. We manufacture shelving for retailers, wire and steel storage systems and racks for the interior of service vans and utility vehicles, point-of-purchase displays for retailers, as well as chair frames and bases, table bases and office chair controls, and plastic injection moldings. We also make lumbar supports for automotive seats and other automotive and furniture seat components.
Our foreign operations in Europe produce, among other things, innersprings for mattresses, fabric for industrial and residential uses, various wire products, office chair mechanisms and automotive lumbar seating systems. We also sell machinery and equipment designed to manufacture innersprings for mattresses and other bedding related components. Finally, we have one operation in Europe that designs and distributes point-of-purchase displays for retailers.
The Mexican operations primarily manufacture innersprings and wire grid tops for mattresses, fabricated wire for the bedding industry, and fabric for industrial and residential uses. We produce aluminum die castings and provide machining, sub-assembly and other value added services related to aluminum die castings. We also produce commercial shelving, material handling equipment, and automotive control cable systems.
We have an increasing Asian presence. Prior to 2003, we owned three production facilities in China. Two of these plants produce mattress innersprings for sale into the Chinese market. The third plant produces machinery and replacement parts for machines used in the bedding industry. In 2003, we began operations in our fourth plant, a facility to manufacture recliner mechanisms and various bases for upholstered furniture. This plant has initially sold products to furniture manufacturers in China who produce upholstered furniture for export and to some Leggett operations on an inter-company basis, but will also position us to sell into the local market as the demand for furniture grows in China.
In 2003, we also added four manufacturing facilities in China. One facility produces small electric motors primarily used in lumbar systems for automotive seating. Another manufactures cables for these lumbar systems. A third produces innersprings for mattresses and sofa cushions, while the fourth facility manufactures innersprings and bedding machinery. We also purchased an assembler and distributor of automotive lumbar supports and seat suspension grids in South Korea.
Finally, our Ornamental Bed unit imports finished beds from Asia for sale in the United States. Many other business units of the Company have long-standing, well-established relationships with suppliers in Asia for components and finished products.
Our strategy regarding international expansion is two-fold. First, we are striving to find opportunities in countries to manufacture components and sub-assemblies for a variety of our existing components customers. Second, we have pursued a strategy, establishing small operations in select countries where we believe we may expand as demand grows.
Our international operations face the risks associated with any operation in a foreign state. These risks include:
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Such risks could result in increases in costs, reduction in profits, the inability to do business and other adverse effects.
Geographic Areas of Operation
We have significant manufacturing, warehousing and distribution facilities in several foreign countries as listed in the chart below.
North
America
Europe
South
Asia/Pacific
Canada
Mexico
United States
Croatia
Denmark
France
Germany
Italy
Russia
Spain
United Kingdom
Brazil
Australia
China
Singapore
South Korea
Austria
Belgium
Greece
Hungary
Sweden
Switzerland
United Arab Emirates
For further information concerning our long-lived assets and sales outside of the United States, refer to Note K of the Notes to Consolidated Financial Statements.
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Sales by Product Line
The following table shows the approximate percentages of our sales to external customers by product line for the last three years:
Product Line
Residential Furniture Components
Finished & Consumer Products
Other Residential Furnishing Products
Store Displays, Fixtures & Storage Products
Office Furnishings & Plastic Components
Wire, Wire Products & Steel Tubing
Automotive Products & Specialized Machinery
Distribution of Products
Our products are sold and distributed primarily through the Company’s sales personnel. However, many of our businesses have relationships and agreements with sales representatives and distributors. We do not believe any of these agreements or relationships would, if terminated, have a material adverse effect on the consolidated financial condition or results of operations of the Company.
Raw Materials
We use a variety of raw materials in manufacturing our products. Some of the most important raw materials include:
The raw materials for many of our businesses are supplied by our own facilities. For example, steel rod is used to produce steel wire, which we use to produce innersprings and box springs for mattresses; displays, shelving and racks for retail customers; and automotive seating systems. Our own wire drawing mills supply nearly all of our requirements for steel wire. The steel rod produced at our rod mill in Sterling, Illinois currently supplies roughly half of our current rod requirements. We also produce welded steel tubing and dimension lumber both for our own consumption and for sale to customers outside the Company.
We believe that worldwide supply sources are available for all the raw materials used by the Company. However, the availability of steel is becoming an issue. Worldwide steel rod production capacity has been
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reduced in recent years due to bankruptcies of domestic steel producers. At the same time, worldwide demand for steel is increasing, driving prices for steel scrap and rod significantly higher. Steel scrap and rod represent about 70% of our steel purchases. Although some uncertainty over steel availability exists, we believe that we are better positioned than many of our competitors to secure supply because of our financial strength and purchasing leverage.
We have experienced higher raw material costs (most notably steel) during the past two years. We purchase about 1.3 million tons of steel annually, accounting for approximately 15% of our cost of goods sold. As of mid-March, market prices for purchase of steel (including scrap, rod, rolled and angle iron) are running $150–250 dollars per ton above prices seen during the summer of 2003. The majority of the increase in steel prices has occurred since November. Most steel vendors have rescinded previous contracts, and moved to 30-day pricing. The Company has announced or implemented steel-related price increases in most segments. The future pricing of steel is uncertain, but could increase significantly in 2004 even beyond current levels. The degree to which we are able to mitigate or recover these escalating costs is a significant factor influencing 2004 earnings.
Customers
We serve thousands of customers worldwide, sustaining many long-standing business relationships. No single customer accounted for more than five percent (5%) of the Company’s consolidated revenues in 2003. Our top ten customers accounted for less than eighteen percent (18%) of the Company’s consolidated revenues in 2003.
Patents and Trademarks
Leggett holds approximately 1,300 patents and has approximately 500 in process for its various product lines. We have registered over 850 trademarks, with more than 150 in process. No single patent or group of patents, or trademark or group of trademarks, is material to our business as a whole. Examples of our most significant trademarks include:
Research and Development
We maintain research, engineering and testing centers in Carthage, Missouri, and also do research and development work at many of our other facilities. We are unable to precisely calculate the cost of research and development because the personnel involved in product and machinery development also spend portions of their time in other areas. However, we believe the cost of research and development was approximately $19 million in 2003, $20 million in 2002, and $19 million in 2001.
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Employees
We have approximately 33,000 active employees, of which approximately 24,800 are engaged in production. Of the total active employees, roughly 9,700 are international employees. Approximately 20% of our employees are represented by labor unions. We did not experience any material work stoppage related to the negotiation of contracts with labor unions during 2003. Management is not aware of any circumstances likely to result in a material work stoppage related to the negotiation of contracts with labor unions during 2004.
The largest group of employees, approximately 14,500, works in the Residential Furnishings segment. Approximately 7,900 employees work in Commercial Fixturing & Components, while approximately 4,200 employees work in Specialized Products. Roughly 4,000 work in the Aluminum Products segment and approximately 1,800 are employed by our Industrial Materials segment.
Competition
Many companies offer products that compete with those manufactured and sold by Leggett. The number of competing companies varies by product line, but the markets for our products are highly competitive in all aspects. A number of our customers manufacture components similar to ours for their own use. The primary competitive factors in our business include price, product quality and innovation, and customer service.
In certain of our markets a portion of U.S. manufacturing is moving overseas. We face increasing competition from foreign competitors, especially those in Asia who supply component parts to our customers’ Chinese and Asian manufacturing facilities. We have, and continue to develop, significant Asian supply sources. We also have, and continue to develop, a manufacturing presence in Asia. Our Asian facilities manufacture products for Asian markets as well as for our customers in other parts of the world.
We believe we are the largest independent manufacturer in North America of the following:
Seasonality
Our business is not significantly seasonal as a whole. However some of our segments are slightly seasonal. For further information, see the discussion of “Seasonality” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, on page 28.
Backlog
Our relationships with our customers and our manufacturing and inventory practices do not provide for a significant backlog of orders.
Working Capital Items
For information regarding working capital items, see the discussion of “Short-term Liquidity” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, on page 24.
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Environmental Regulation
The Company’s various operations are subject to federal, state, and local laws and regulations related to the protection of the environment. Environmental regulations include those relating to air and water emissions, underground storage tanks, waste handling, and the like. We have established policies to ensure that our operations are conducted in keeping with good corporate citizenship and with a positive commitment to the protection of the natural and workplace environments. While we cannot forecast policies that may be adopted by various regulatory agencies, management believes that compliance with these various laws and regulations will not have a material adverse effect on the competitive position, capital expenditures, consolidated financial condition or results of operations of the Company.
Capital expenditures for environmental control facilities were $1.0 million in 2003, $1.2 million in 2002 and $.6 million in 2001. Although future capital expenditures are difficult to estimate, we believe that the capital expenditures for environmental control facilities will not materially differ in 2004 from our recent historical experience.
Internet Access to Other Information
Annual Reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and all amendments to those reports are made available, without cost, at our website at http://www.leggett.com as soon as reasonably practicable after electronically filed with, or furnished to, the Securities and Exchange Commission. In addition to these reports, the Company’s Financial Code of Ethics, Code of Business Conduct and Ethics and Corporate Governance Guidelines, as well as charters for its Audit, Compensation, and Nominating and Corporate Governance Committees can be found at our website, and each of these documents is available in print, without cost, to any shareholder who requests it. Our website does not constitute part of this Annual Report on Form 10-K.
Item 2. Properties.
Our most important physical properties are our manufacturing plants. At December 31, 2003, we had approximately 300 manufacturing plants worldwide. About one-half of the manufacturing plants are in the Residential Furnishings segment. Facilities manufacturing, assembling or distributing products in Residential Furnishings are located in 29 states as well as Asia, Australia, Brazil, Canada, Europe and Mexico. Commercial Fixturing & Components manufacturing plants and distribution facilities are located in 19 states, Canada, Italy, Mexico and the United Kingdom. The Aluminum Products segment has facilities in ten states and Mexico. The Industrial Material facilities are located in 19 states, and the United Kingdom. Specialized Products are produced and distributed in facilities in nine states and other significant operations in Canada, China, Europe, Mexico, South Korea and the United Arab Emirates.
Most of our major manufacturing facilities are owned by the Company. We also conduct certain operations in leased premises. Terms of the leases, including purchase options, renewals and maintenance costs, vary by lease. For additional information regarding lease obligations, reference is made to Note G of the Notes to Consolidated Financial Statements.
Properties of the Company include facilities that, in the opinion of management, are suitable and adequate for the manufacture, assembly and distribution of its products. These properties are located to allow quick and efficient deliveries and necessary service to our diverse customer base.
Item 3. Legal Proceedings.
The Company is a defendant in various workers’ compensation, product liability, vehicle accident, employment, intellectual property, labor practices and other claims and legal proceedings in the ordinary course
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of business, the resolution of which management believes will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.
The Company is also party to a small number of proceedings in which a governmental authority is a party and which involve laws regulating the discharge of materials into the environment. These proceedings deal primarily with waste disposal site remediation. Management believes that potential monetary sanctions, if imposed in any or all of these proceedings, or any capital expenditures or operating expenses attributable to these proceedings, will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
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Supplemental Item. Executive Officers of the Registrant.
The following information is included in accordance with the provisions of Part III, Item 10 of Form 10-K.
The table below sets forth the names, ages and positions of all executive officers of the Company. Executive officers are normally elected annually by the Board of Directors.
Name
Position
Felix E. Wright
Chairman of the Board and Chief Executive Officer
David S. Haffner
President and Chief Operating Officer
Karl G. Glassman
Executive Vice President—President, Residential Furnishings Segment
Jack D. Crusa
Robert G. Griffin
Senior Vice President—President, Fixture and Display Group
Daniel R. Hebert
Senior Vice President—President, Aluminum Products Segment
Robert A. Jefferies, Jr.
Senior Vice President—Strategic Planning
Matthew C. Flanigan
Vice President—Chief Financial Officer
Ernest C. Jett
Vice President—General Counsel and Secretary
Robert A. Wagner
Vice President—Mergers and Acquisitions
William S. Weil
Vice President—Corporate Controller (Principal Accounting Officer)
Subject to the employment agreements and severance benefit agreements listed as Exhibits to this report, the executive officers serve at the pleasure of the Board of Directors.
Felix E. Wright serves as Chairman of the Company’s Board of Directors and as Chief Executive Officer. Mr. Wright served as Vice Chairman of the Board from 1999 to 2002 and as Chief Operating Officer from 1979 to 1999. He has served in various other capacities since 1959.
David S. Haffner was elected President of the Company in 2002 and has served as the Company’s Chief Operating Officer since 1999. He previously served the Company as Executive Vice President from 1995 to 2002 and has served the Company in other capacities since 1983. Mr. Haffner is also head of Commercial Fixturing & Components.
Karl G. Glassman was elected Executive Vice President of the Company in 2002, and has served as President of the Residential Furnishings segment since 1999. Mr. Glassman previously served the Company as Senior Vice President from 1999 to 2002 and President of Bedding Components from 1996 through 1998. He has served in various other capacities since joining the Company in 1982.
Jack D. Crusa has served the Company in various capacities since 1986, including service as Vice President and President—Automotive Group since 1996. Mr. Crusa became Senior Vice President and President—Industrial Materials in 1999, and was appointed President of Specialized Products in 2003.
Robert G. Griffin has been employed by the Company since 1992. Mr. Griffin was named Vice President and Director of Mergers, Acquisitions and Strategic Planning in 1995, President—Fixture and Display Group in 1998 and Senior Vice President in 1999.
Daniel R. Hebert became Senior Vice President of the Company and President, Aluminum Products Segment in 2002. Mr. Hebert previously served as Executive Vice President of the Aluminum Products Segment from 2000 to 2002, and Vice President, Operations from 1996 to 2000.
Robert A. Jefferies, Jr. has served as Senior Vice President, Strategic Planning of the Company since 2001. He previously served the Company as Senior Vice President, Mergers, Acquisitions and Strategic Planning from 1990 to 2001. He also served the Company as Vice President, General Counsel and Secretary from 1977 to 1990.
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Matthew C. Flanigan has served the Company as Vice President and Chief Financial Officer since April 2003. Mr. Flanigan served the Company as Vice President and President, Office Furniture Components Group since 1999 and previously served the Company as Staff Vice President-Operations from 1997 to 1999.
Ernest C. Jett was appointed General Counsel in 1997, and Vice President and Secretary in 1995. He previously served the Company as Assistant General Counsel from 1979 to 1995 and as Managing Director of the Legal Department from 1991 to 1997.
Robert A. Wagner has served as Vice President, Mergers and Acquisitions since 2001. He previously served the Company as Vice President, Mergers, Acquisitions and Strategic Planning from 1998 to 2001.
William S. Weil was appointed the Principal Accounting Officer by the Board of Directors in February 2004. He became Vice President in 2000 and has served the Company as Corporate Controller since 1991. He previously served the Company in various other accounting capacities since 1983.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
The Company’s common stock is listed on the New York Stock Exchange (symbol LEG). The table below highlights quarterly and annual stock market information for the last two years.
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
For the Year
Price and volume data reflect composite transactions; price range reflects intra-day prices.
The Company had 13,989 shareholders of record on March 1, 2004.
See the discussion of the Company’s target for dividend payout under “Use of Capital Resources” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation beginning on page 26.
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Issuer Repurchases of Equity Securities
The table below is a listing of our repurchases of the Company’s common stock during the last quarter of 2003.
Period
Average Price Paid
per Share
(2)
Total Number of Shares
Purchased as Part of a
Publicly Announced
Plan or Program
(3)(4)
Maximum
Number of Shares
that may yet be
purchased under
the Plans or
Programs
(5)
October 1, 2003 – October 31, 2003
November 1, 2003 –November 30, 2003
December 1, 2003 –December 31, 2003
Total
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Item 6. Selected Financial Data.
Summary of Operations
Net sales
Earnings from continuing operations
Earnings from continuing operations adjusted to exclude goodwill amortization
Earnings per share from continuing operations
Basic
Diluted
Earnings per share from continuing operations adjusted to exclude goodwill amortization
Cash dividends declared per share
Summary of Financial Position
Total assets
Long-term debt
As discussed in Note A of the Notes to Consolidated Financial Statements, the Company began recognizing stock option expense for any options granted after January 1, 2003.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Introduction
Leggett & Platt is a Fortune 500, global, multi-industry, diversified manufacturer. We conceive, design and produce a broad variety of engineered components and products that can be found in virtually every home, office, retail store, and automobile. We provide very little product directly to consumers, but instead serve a broad array of manufacturers and retailers. Our products are often hidden within, and vital to, our customers’ products. Key attributes that contribute to our success include: low cost operations, high quality products, vertical integration, innovation, customer service, financial strength, and long-lived relationships with customers. We are North America’s leading independent manufacturer of a) components for residential furniture and bedding; b) retail store fixtures and point of purchase displays; c) components for office furniture; d) non-automotive aluminum die castings; e) drawn steel wire; f) automotive seat support and lumbar systems; and g) bedding industry machinery for wire forming, sewing and quilting.
Our operations are influenced by broad economic factors including interest rates, housing turnover, employment levels, and consumer sentiment, all of which impact consumer spending on durable goods (which drives demand for our components and products). We are also impacted by trends in business capital spending, as about one-third of our sales relates to this segment of the economy. Heading into 2004, most of these indicators are favorable and improving.
Performance in 2004 will be heavily influenced by three factors: the amount of same location sales growth, our degree of success at recovering escalating steel and other raw material costs, and the extent of improvement in our Fixture & Display operations. Management is devoting significant attention to these areas.
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These factors and others are discussed below.
Results of Operations
Discussion of Consolidated Results
2003 vs. 2002
Sales increased 2.7%, and at $4.39 billion, were a record for the Company. Same location sales increased 1.2%, or $52 million, due to currency rate changes as overall volume was flat. Net earnings decreased 12%, or $27 million, to $206 million. Factors contributing to this decline include the weakening of the U.S. dollar against other major currencies (about $16 million after tax), increased energy costs (about $16 million after tax), and unusually high obsolete and slow-moving inventory reserves (about $6 million after tax). Earnings also decreased from unabsorbed overhead in businesses with lower production levels, operating inefficiency in certain locations, and increased steel costs. Partially offsetting these negative factors were higher sales, lower restructuring costs ($10 million after tax), reduced bad debt expense ($6 million after tax), and income tax rate reductions. The income tax rate reduction, from 35.9% in 2002 to 34.7% in 2003, primarily resulted from the realization of foreign tax credit carryforwards.
2002 vs. 2001
Earnings increased 24% on essentially flat same location sales. Sales totaled $4.27 billion, an increase of 3.8% from 2001. Same location sales increased 0.7%, or $27 million, for the full year. Net earnings increased $46 million to $233 million.
Reduced expenses account for the bulk of the 2002 earnings improvement. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” which required that goodwill no longer be amortized to earnings, but instead be tested periodically for impairment. This change contributed about $20 million to net earnings. Other cost decreases resulted from continuing improvements in operating efficiency, lower restructuring costs, and reduced expenses for energy (about $6 million after tax), bad debts ($8 million after tax), and interest ($11 million after tax). Higher raw material costs (notably steel) and stiff price competition in some business units partially offset these improvements.
Major Trends and Uncertainties
Late in 2003, Leggett began experiencing rapid and significant steel cost increases, and these increases have accelerated in early 2004. As of mid-March, market prices for purchase of steel (including scrap, rod, rolled, and angle iron) are running $150–250 dollars per ton above prices seen during the summer of 2003. The majority of the increase in steel prices has occurred since November. We purchase 1.3 million tons of steel each year, accounting for nearly 15% of our cost of goods sold. Cost increases of this magnitude significantly affect our profitability. We have recently announced or implemented selling price increases in most segments to recover these higher costs. The future pricing of steel is uncertain at this point. The degree to which the Company is able to mitigate or recover these escalating costs is a major factor impacting future results.
Availability of steel is also becoming an issue. Worldwide steel production capacity declined in recent years due to bankruptcies of domestic steel producers. At the same time, worldwide demand for steel is increasing, driving prices significantly higher. Although some uncertainty over steel availability exists, we believe we are
19
better positioned than our competitors to secure supply. Steel scrap and rod represent about 70% of our steel purchases (this material is converted to wire, which is the raw material used by many of our operations). Half of the steel rod we use comes from our own mill, helping ensure supply. In addition, our financial strength and purchasing leverage are advantages many of our competitors don’t enjoy.
Natural gas prices during 2003 were 80% higher on average than in 2002. While we don’t believe this rate of increase will continue, some uncertainty exists. We ended 2003 with prices locked in on about 60% of our domestic and Canadian natural gas requirements through June 2004. These hedge prices averaged $5.63 per mmbtu.
In certain of our markets, a portion of U.S. manufacturing is moving overseas. As that occurs, we must establish operations in new regions of the world to continue supplying our customers. Currently, the largest influence on our markets is coming from China. At the end of 2003, Leggett operated eight Chinese facilities. Generally, we can produce components at a lower cost in the U.S. However, as our customers move the production of their finished products overseas, we must be located nearby to supply them efficiently. In addition to our own facilities in China, we have strong relationships with many Asian suppliers.
As we continue to expand internationally, more facilities are operated in foreign countries resulting in increased exposure to foreign currencies. Leggett currently hedges only a modest amount of these exposures with derivative instruments. Significant changes in the U.S. dollar to foreign currencies could impact future results.
The recent weakening of the U.S. dollar, primarily against the Canadian dollar, contributed to 2003’s earnings decline. Some of our Canadian operations sell to U.S. customers in U.S. dollars but incur their costs in Canadian dollars. These operations have experienced margin deterioration in 2003. Price increases have been implemented in some of these operations, but U.S. competitors, who are not experiencing this impact, make raising prices more difficult.
In October 2003, we announced increased attention to our poorly performing Fixture & Display operations. This tactical plan aims to accomplish improved operating efficiency, better adherence to standard costs, tighter inventory controls, cost reductions, and more competent staffing. The success of this plan could have a significant impact on future operating results. Additional comments regarding the impact of margin improvements in these businesses are included later in this discussion.
In the last half of 2003, the Company began to see improving trends in many of its businesses. All five segments reported increases in same location sales in the fourth quarter, and we expect these improvements to continue in 2004. Additional comments regarding these recent trends are included in the discussion of segment results that follows.
Discussion of Segment Results
A description of the products included in each segment, along with segment financial data, appear in Note K of the Notes to Consolidated Financial Statements. Following is a comparison of EBIT margins (Segment EBIT divided by Segment Total Sales):
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Sales increased 2.5%, or $55 million, as same location sales gained 1.4%. Most operating units experienced a rebound in customer demand in the second half of the year. Full year improvements were reported in several categories, including upholstered furniture components, ornamental and adjustable beds, and carpet underlay. Sales from foreign operations also increased for the year, in part from currency impacts, as foreign currencies now convert to more U.S. dollars. These gains were partially offset by sales declines in our fiber operations. Sales in our U.S. bedding components businesses also decreased for the full year due to weak demand in early 2003. Beginning in June, demand improved and our bedding components operations posted growth during the second half of the year.
EBIT decreased 6%, or $14 million, as higher steel and energy costs, impacts from the weaker U.S. dollar, and unabsorbed overhead from lower production rates at U.S. bedding components operations during the first half of the year more than offset the benefit from increased sales. In addition, lower restructuring costs were offset by the non-recurrence of a partial reversal of a Canadian lumber duty accrual.
Sales increased 4.1%, or $84 million, primarily from a 2.8% increase in same location sales. EBIT increased 26%, or $47 million, partially due to higher sales and cost improvement efforts. Sales of upholstered furniture components increased significantly, but these gains were tempered by flat sales in bedding and other product categories. Elimination of $8 million of goodwill amortization, partial reversal of Canadian lumber duty accruals, reduced bad debt expense, lower energy costs, and lower restructuring costs contributed to the EBIT improvement. Higher raw material costs in steel, lumber and chemicals partially offset these improvements.
Sales increased 7.4%, or $66 million, due to incremental sales from acquisitions, offset slightly by a 0.4% decrease in same location sales. Although certain major retailers continued with new store openings and refurbishments in 2003, most continued at reduced capital spending levels. Demand for office furniture components also remained at very low levels throughout 2003. However, modest improvements occurred in this market late in the year.
In July 2003, we purchased the assets of RHC Spacemaster, a producer of store fixtures. This acquisition should add at least $120 million to annual revenues and is expected to be modestly profitable in the first full year.
EBIT for the segment decreased $22 million, or 45%, primarily due to inventory write-downs, the weakening of the U.S. dollar, higher steel costs, operational inefficiency, and price competition. Lower restructuring costs offset some of these negative factors. In the third quarter of 2003, the Company announced a focused management effort to improve the operating efficiency and margins of the Fixture & Display portion of this segment.
Sales decreased 4.9% as incremental sales from recent acquisitions were unable to overcome the 9.5%, or $90 million, decline in same location sales. Markets for both retail fixtures and office furniture components were down approximately 20%-25% from peak levels in 2000. However, the Company gained market share in its Fixture & Display business, owing in part to the financial difficulties of some competitors brought about by the tough conditions the industry faced in recent years.
EBIT decreased $5 million, or 9%, with the earnings impact from lower same location sales largely offset by $4 million in lower restructuring costs, elimination of $9 million of goodwill amortization, and cost structure improvements.
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Sales decreased $21 million or 4.2%. Same location sales increased 2.5%, but three recent divestitures reduced sales by $32 million. No acquisitions were made during 2003. New programs for castings used in motorcycles, small engines, and large appliances represented the majority of the same location sales increase. These gains were partially offset by a decline in sales of barbeque grill castings.
EBIT increased $4 million, or 14%, partially due to same location sales growth. Lower restructuring and non-recurring charges benefited EBIT by approximately $6 million, but were offset by an unfavorable change in sales mix.
Sales increased $28 million, or 6.0%. This gain reflected an 8.8% increase in same location sales, partially offset by three divestitures. There were no acquisitions during the year. The same location sales growth was primarily attributable to new programs with existing and new customers, as overall market demand did not improve appreciably.
EBIT increased 23%, or $6 million, primarily reflecting the same location sales increases. Cost management efforts, reduced goodwill amortization expense of $3 million, and lower energy costs also benefited EBIT. These improvements were partially offset by restructuring costs of $3 million and non-recurring inventory and equipment obsolescence charges of $3 million. Higher raw material cost and minor impacts from start-up inefficiency associated with new business also reduced EBIT. The divestitures did not have a material impact on earnings.
Sales decreased 5.3%, or $32 million, reflecting a 5.1% reduction in same location sales. The sales decline resulted from weakness in many of our end markets, including wire demand from bedding manufacturers (in the first half of 2003), and tubing demand for ATV’s and accessories. Certain markets began to recover late in the year, and volumes improved, particularly in the wire drawing operations.
EBIT decreased 26%, or $13 million, due to lower sales and production volume, and higher steel and energy costs. These factors were partially offset by the elimination of start-up costs associated with the Sterling rod mill, lower restructuring charges, and a gain from the sale of a tubing fabrication business.
Sales increased 15.9%, primarily due to acquisitions, with same location sales increasing 2.4%. EBIT declined 9%, or $5 million. The majority of the EBIT decline for the year resulted from increased steel prices. These increases began in the second quarter 2002 as a result of tariffs imposed on foreign steel. We experienced delays in implementing price increases in certain businesses, but by late 2002, the majority of the increases had been passed along to customers. Additional EBIT declines resulted from costs associated with the start up of the Sterling rod mill and further restructuring efforts. Reduced bad debt expense and lower amortization benefited EBIT slightly.
Sales increased 11.6%, or $47 million, largely from a 10.7% gain in same location sales. New automotive programs, increased shipments of bedding machinery during the second half of 2003, and currency rates positively impacted sales.
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EBIT increased slightly, reflecting higher sales, but these improvements were offset by impacts from the weaker U.S dollar, sales mix, and other smaller factors.
Sales increased 4.3%, mainly from a 3.9% increase in same location sales. EBIT increased $8 million, or 21%, due to higher automotive sales and elimination of $3 million of goodwill amortization, partially offset by reduced sales volume in our machinery operations. The strong performance of our automotive businesses was due primarily to additional market penetration and strong demand for lumbar and seat components.
Critical Accounting Policies and Estimates
As more fully disclosed in Note A of the Notes to Consolidated Financial Statements, we have adopted numerous accounting policies from among acceptable alternatives. Management must make many critical estimates or assumptions when preparing financial statements. Our major estimates and assumptions are discussed below. The first group of comments addresses estimates that impact our earnings each year, and later, we identify and discuss major estimates that impact earnings less frequently.
The most critical estimates and assumptions impacting our ongoing results are:
With respect to credit losses, our customers are diverse, but many are small-to-medium sized companies and some are highly leveraged. Bankruptcy can occur with some of these customers relatively quickly and with little warning, particularly in a changing economic environment, adding to the difficulty in estimating credit losses.
Worker’s compensation, automobile, product and general liability, property, and medical insurance costs may require an extended period after the actual loss occurred before the exact amount of the cost is known. Estimates of these costs over that period, which in some cases is several years, will vary from the final amount. We carry insurance for individual losses that exceed a certain amount specified for each program.
Changing customer specifications, technology, customer bankruptcy and other factors result in inventory losses that are difficult to estimate precisely. At any financial statement date, the impact of these factors on inventory value may not be completely known.
Income taxes are recorded by the Company at rates in effect in the various tax jurisdictions in which it operates. The Company has tax loss carryforwards in certain jurisdictions and foreign tax credit carryforwards for U.S. tax purposes. Valuation reserves are established against these future potential tax benefits based on Management’s estimate of their ultimate realization. Actual realization of these benefits may vary from Management’s estimates. Also, Management has made certain assumptions about the distribution of earnings from subsidiaries which may not be accurate in the future, thereby affecting the tax impact of such earnings. Finally, ultimate resolution of issues raised by ongoing tax audits is not predictable and could affect the Company’s tax liabilities.
Our accounting estimates of these costs and losses are based on available actuarial estimates, prior experience and close monitoring of each exposure. We believe our reserves for these potential losses are adequate.
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The next group of comments addresses estimates that may occasionally impact our earnings. The most significant of these estimates are:
Losses related to these items are recognized when specific facts which affect the estimate are known.
Goodwill impairment is formally assessed annually, as required by SFAS No. 142, and also when we experience significant negative deviations from the assumptions underlying the fair market valuation of each reporting unit. Asset impairments are monitored by periodically focusing on underperforming locations with insufficient cash flows.
Many assumptions about the future are necessary in the determination of fair market value for each of our eleven reporting units (as defined by SFAS No. 142). The key assumptions are discount rate, organic sales growth, EBIT margins, capital expenditure requirements, and working capital requirements. No goodwill impairment has been determined to date for any of our reporting units.
The key assumptions are re-evaluated annually, or more frequently if significant changes become apparent, using Management’s most recent assessment of the performance potential of each reporting unit. Recent performance of the reporting unit is an important factor, but not the only factor, in Management’s annual assessment. Fair market values calculated for each reporting unit may go up or down each year based on a re-evaluation of the key assumptions.
The Company’s Fixture & Display operations have experienced deterioration in profitability over the past few years, in part due to external market factors, but also due to unsatisfactory internal performance. The Company is responding with a strategic initiative aimed at improving operating efficiency, integrating recent acquisitions, cutting costs, and restoring margins. This endeavor may require changing the business model, raising prices or walking away from certain customer relationships, and shutting down or consolidating certain production facilities. About $300 million of the Company’s goodwill is associated with these operations. In order to avoid possible future impairment of this goodwill, margins must improve.
The Company has not recorded any significant losses for litigation and claims in the last three years, and Management is not aware of any significant unrecorded exposures. We record restructuring or plant closing losses when specific actions have been implemented and the liability incurred. No significant income is reflected in the financial statements for the reversal of restructuring or plant closing losses accrued in a prior period.
Capital Resources and Liquidity
Leggett serves a variety of industries that have different capital expenditure and working capital requirements. We have sufficient capital resources to meet our current operating needs, and also to support future growth. We attempt to achieve a balance between debt and equity, striving to minimize the total cost of capital, without excessive leverage. Leggett maintains a target for long-term debt of 30-40% of total capitalization.
Short-term Liquidity
We rely on cash flow from operations as our primary source of capital. Despite depressed net earnings for the last three years, we have been able to mitigate the impact on cash flow by reducing capital spending and acquisitions, and focusing on working capital management. Also, in 2003 we took advantage of historically low interest rates by issuing fixed rate debt with maturities of 10 and 15 years. As a result, we have been able to increase cash and equivalents to a level that provides adequate liquidity to finance ongoing operations, pay down debt maturing in the near term, and fund a portion of our future growth.
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Cash provided by operating activities was $395 million, $456 million and $535 million for 2003, 2002 and 2001, respectively. The decrease in cash provided by operating activities during 2003 and 2002 compared to 2001 primarily reflects a slowing of working capital decreases, partially offset by increased earnings.
Total working capital increased in 2003, primarily from higher cash balances, currency impacts, and acquisitions. Year end accounts receivable increased due to strong December sales. Working capital levels vary by segment, with Aluminum Products and Commercial Fixturing & Components requirements generally higher than Company averages. Accounts receivable balances in these segments are typically higher due to the longer credit and collection time required to service certain customers of the aluminum die casting and Fixture & Display businesses. These same businesses also require higher inventory investments due to the custom nature of their products, longer manufacturing lead times (in certain cases), and the needs of many customers to receive large volumes of product within short periods of time.
Total Capitalization
The following table shows Leggett’s total capitalization at the end of the three most recent years. The table also shows the amount of unused committed credit available through our revolving bank credit agreements, current maturities of long-term debt, the amount of cash and cash equivalents, and the ratio of earnings to fixed charges.
Long-term debt outstanding:
Scheduled maturities
Average interest rates
Average maturities in years
Revolving credit/commercial paper
Total long-term debt
Deferred income taxes and other liabilities
Shareholders’ equity
Total capitalization
Unused committed credit:
Long-term
Short-term
Total unused committed credit
Current maturities of long-term debt
Cash and cash equivalents
Ratio of earnings to fixed charges *
25
This next table shows the calculation of long-term debt as a percent of total capitalization, net of cash and current maturities, at December 31, 2003 and 2002. We believe that adjusting this measure for cash and current maturities more appropriately reflects financial leverage, since cash is readily available to repay debt. These adjustments also enable meaningful comparisons to historical periods. Prior to the second quarter of 2002, current debt maturities were essentially zero, and prior to the third quarter of 2001, cash balances were much smaller.
Current debt maturities
Net debt, after adjustments
Total capitalization, after adjustments
Debt to total capitalization
Before adjustments
After adjustments
Total debt increased $195 million from year-end 2002, primarily due to the issuance of $200 million in 10-year notes at a 4.7% coupon rate in March 2003, and the issuance of $150 million in 15-year notes at a 4.4% coupon rate in June 2003. We issued this debt to take advantage of current low interest rates and to extend maturities. These increases were offset by debt repayments of approximately $144 million. In the first quarter of 2003, we also liquidated an interest rate swap agreement and received $40 million in cash proceeds. The proceeds from the notes and liquidation of the swap agreement will be used for repayment of existing debt (approximately $470 million comes due through the first quarter 2005), stock repurchases, the financing of future acquisitions, and other general corporate purposes.
Obligations having scheduled maturities are the primary source of Leggett’s debt capital. At the end of 2003, these obligations consisted primarily of our medium-term notes. Our public debt currently carries a Moody’s rating of A2 and a Standard & Poor’s rating of A+. We have maintained an ‘A’ rating on our debt for over a decade.
The secondary source of Leggett’s debt capital consists of a $300 million commercial paper program supported by $340 million in revolving credit agreements. Leggett has had no commercial paper outstanding during the last three years. To further facilitate the issuance of debt capital, $150 million remains available under our $500 million shelf registration. We believe that we have sufficient unused committed credit to ensure that future capital resources are adequate for our ongoing operations and growth opportunities. Additional details of long-term debt are discussed in Note F of the Notes to Consolidated Financial Statements.
Uses of Capital Resources
The Company’s investments to modernize and expand manufacturing capacity totaled $389 million in the last three years. In 2004, management anticipates capital spending will approximate $135 million, primarily for maintaining and expanding production capacity. During the last three years, the Company employed $261 million of cash (net of cash acquired) in acquisitions. In 2003, 15 businesses were acquired for $120 million in
26
cash (net of cash acquired). We also assumed $21 million of acquired companies’ debt and other liabilities. Of the 15 acquisitions in 2003, nine should add about $60 million in annual sales to Residential Furnishings, three should contribute approximately $140 million to Commercial Fixturing & Components, and three should increase Specialized Products sales by around $20 million. Additional details of acquisitions are discussed in Note B of the Notes to Consolidated Financial Statements. Segment details are shown in Note K of the Notes to Consolidated Financial Statements.
Cash dividends on the Company’s common stock in the last three years totaled $292 million and increased at an 8.7% compounded annual rate. Our long-term target for dividend payout is approximately one-third of the prior three-years’ average earnings. Calculated in the same manner as our target, dividend payout was 51.3% in 2003, 43.7% in 2002 and 38.8% in 2001. As earnings recover, we expect to move back toward the 30-35% dividend payout target.
Company purchases of its common stock (net of issuances) totaled $79 million in 2003, $81 million in 2002, and $51 million in 2001. These purchases were made primarily to replace shares issued in employee stock plans.
Each year, the Board of Directors authorizes management, at its discretion, to buy up to two million shares of Leggett stock for use in employee benefit plans or for other purposes. This authorization is continuously replenished as shares acquired are reissued. In addition, management is authorized, again at its discretion, to repurchase any shares issued in acquisitions.
At the end of the third quarter 2000, the Board of Directors authorized management to repurchase up to an additional 10 million shares of Leggett stock. The Board of Directors has continued this authorization for an additional period expiring in September 2004. As of December 31, 2003, we had acquired approximately 2.9 million shares under this authorization. A specific repurchase schedule has not been established under this authorization. The amount and timing of purchases will depend on economic and market conditions, acquisition activity, and other factors.
The following table summarizes Leggett’s future contractual obligations and commercial commitments:
Contractual Obligations
Less
Than 1
1-3
Years
3-5
After 5
Long-term debt*
Operating leases
Purchase obligations**
Other long-term obligations
Total contractual cash obligations
Restructuring Activity
During 2003, Leggett divested two small operations, and closed or consolidated six other facilities. Results of operations for 2003 include charges of approximately $2 million relating to these activities, offset by a
27
$3 million gain on the sale of a tubing fabrication business. Certain other facilities are currently being reviewed and may be consolidated or closed during 2004. We anticipate only modest restructuring charges from these activities, in line with those recognized the past few years.
During 2002, we announced the divestiture or closure of seven operations. Three of these facilities were in the Aluminum Products segment, two were in Commercial Fixturing & Components, and two were in Residential Furnishings. In September 2002, we sold our remaining aluminum smelting facility and a tool & die operation, and in November 2002, we sold a small die casting plant. Leggett also announced the closing of two Fixture & Display facilities, the largest of which served the telecom industry. Finally, we closed two fiber operations in our Residential Furnishing segment. Restructuring charges related to these activities totaled $15 million.
During 2001 we closed or consolidated 12 operations. Seven of these facilities were in Residential Furnishings, including four fiber operations, two foam businesses, and one small bedding components plant. In Commercial Fixturing & Components, two Fixture & Display operations were consolidated into other facilities, and another was sold. A wire drawing plant in Industrial Materials was closed. And finally, in Specialized Products, we closed a small automotive operation in Europe. Restructuring charges totaled $18 million in 2001.
Restructuring liabilities are not material to the Company’s balance sheet. Adjustments of previously established accruals relating to restructuring activities have been negligible.
The percent of consolidated net sales by quarter, excluding the impact of acquisitions, is as follows for the last three years:
The Company does not experience significant seasonality, however, as indicated in the above table, quarter-to-quarter sales can vary in proportion to the total year by about 2.5%. The timing of acquisitions and economic factors in any year can distort the underlying seasonality in certain of our businesses. In each of the three years presented, the economic slowdown impacted our various businesses and “normal” seasonality was likely somewhat distorted. Nevertheless, for the Company as a whole, the second and third quarters have proportionately greater sales, while the first and fourth quarters are generally lower.
Residential Furnishings typically has the strongest sales in the second and third quarters due to increased consumer demand for bedding and furniture during the late summer and fall months. Commercial Fixturing & Components generally has heavy third quarter sales of its store fixtures products, with the first and fourth quarters normally lower. This aligns with the industry’s normal construction cycle, and the opening of new stores and completion of remodeling projects in advance of the holiday season. Aluminum Products sales are proportionately greater in the first two calendar quarters due to typically stronger spring and early summer demand for barbeque grills. Industrial Materials sales peak in the third and fourth quarters from higher demand for bedding products and seasonal demand for wire ties used for baling cotton (which is typically harvested in the early fall). Specialized Products has relatively little quarter-to-quarter variation in sales, although the automotive business is somewhat heavier in the second and fourth quarters of the year and somewhat lower in the third quarter, due to model changeovers and plant shutdowns in the automobile industry during the summer.
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New Financial Accounting Standards Board Statements
In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements.” This Interpretation addresses consolidation by business enterprises of variable interest entities. If a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in the consolidated financial statements by March 31, 2004. The Company has a small number of insignificant interests that could be affected by these new accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Disclosures About Market Risk
Leggett & Platt, Incorporated and Subsidiaries
(Unaudited)
(Dollar amounts in millions)
INTEREST RATE
The table below provides information about the Company’s debt obligations sensitive to changes in interest rates. The Company has no other significant financial instruments sensitive to changes in interest rates. During 2000, $350 of 7.65% fixed rate debt maturing in February 2005 and, in 1999, $14 of 6.90% fixed rate debt maturing in June 2004 were issued and converted to variable rate debt by use of interest rate swap agreements. These swap agreements, which contain the same payment dates as the original issues, are used primarily by the Company to manage the fixed/variable interest rate mix of its debt portfolio. In March 2003, the Company sold its rights under the $350 interest rate swap agreement for $39.9. Substantially all of the debt shown in the table below is denominated in United States dollars. The fair value of fixed rate debt was greater than its carrying value by $14.3 and $32.1 at December 31, 2003, and 2002, respectively. The fair value of fixed rate debt was calculated using the U.S. Treasury Bond rate as of December 31, 2003 and December 31, 2002 for similar remaining maturities, plus an estimated “spread” over such Treasury securities representing the Company’s interest costs under its medium-term note program. The fair value of variable rate debt is not significantly different from its recorded amount.
Long-term debt as of
December 31,
Principal fixed rate debt
Average interest rate
Principal variable rate debt
Miscellaneous debt**
Total debt
Less: current maturities
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CROSS-CURRENCY SWAP AGREEMENT
In December 2003, the Company entered into a 38.3 million Swiss Francs (CHF) five-year, cross-currency swap agreement with Wachovia Bank, N.A. This agreement is designated as a net investment hedge. The purpose of this swap is to hedge the CHF denominated assets with a CHF denominated liability, thereby reducing volatility of exposure to the CHF. In addition, the terms of this agreement include that the Company will receive interest on $30 USD at a fixed rate of 6.35% and pay interest on 38.3 million (CHF) at a fixed rate of 4.71%. At December 31, 2003, the market value of the cross-currency swap was approximately $(.5).
EXCHANGE RATE
The Company does not hedge all net foreign currency exposures related to transactions denominated in other than its functional currencies. The Company may occasionally hedge specific commitments or other anticipated cash flows in foreign currencies.
The decision by management to hedge any such transactions is made on a case-by-case basis. The amount of forward contracts outstanding at December 31, 2003 was approximately $17.7 ($13.6 Pay USD/Receive MXN; $2.6 Pay GBP/Receive USD; and $1.5 Pay USD/Receive CNY). The highest amount during 2003 was approximately $18.7 ($14.1 Pay USD/Receive MXN; $2.9 Pay GBP/Receive USD; $1.5 Pay USD/Receive CNY; and $.2 Pay GBP/Receive CAD). The USD/MXN contracts hedge anticipated fixed expenses and the remaining contracts hedge specific asset or liability exposures.
The Company views its investment in foreign subsidiaries as a long-term commitment. The investment in a foreign subsidiary may take the form of either permanent capital or notes. The Company’s net investment in foreign subsidiaries subject to translation exposure at December 31 is as follows:
Functional Currency
Canadian Dollar
European Currencies
Mexican Peso
Other
NATURAL GAS ENERGY SWAP AGREEMENTS
The Company has hedged about 60% of its anticipated domestic and Canadian natural gas purchases through June 2004, of which approximately $9.5 remain outstanding at December 31, 2003. The average price under the contracts is $5.63 per mmbtu. There was no significant gain or loss on these contracts, realized or unrealized, as of December 31, 2003.
COMMODITY PRICE
The Company does not generally use derivative commodity instruments to hedge its exposures to changes in commodity prices, except as noted above. The principal commodity price exposure is aluminum, of which the Company had an estimated $36 (at cost) in inventory at December 31, 2003 and 2002, respectively. The Company has purchasing procedures and arrangements with customers to mitigate its exposure to aluminum price changes. No other commodity exposures are significant to the Company.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements and supplementary data included in this Report are listed in Item 15 and begin immediately after Item 15, and are incorporated herein by reference.
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Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
An evaluation as of the period ending December 31, 2003 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 Rules 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 are effective to ensure that information that is 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 rules and forms.
There was no change in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter ending December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The section entitled “Proposal No. 1—Election of Directors” and subsections entitled “Board Structure and Committee Composition” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 5, 2004, are incorporated by reference.
Please see the “Supplemental Item” in Part I hereof, for a listing of and a description of the positions and offices held by the executive officers of the Company.
The Company has adopted a code of ethics that applies to its chief executive officer, chief financial officer, principal accounting officer and corporate controller called the Leggett & Platt, Incorporated Financial Code of Ethics. The Company has also adopted a Code of Business Conduct and Ethics for directors, officers and employees and Corporate Governance Guidelines. The Financial Code of Ethics, the Code of Business Conduct and Ethics and the Corporate Governance Guidelines are available on the Company’s Internet Web site at http://www.leggett.com, Investor Relations, Corporate Governance. Each of these documents is available in print to any shareholder, without charge, upon request. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K by posting any amendment or waiver to its Financial Code of Ethics, within five business days, on its website at the above address for at least a 12 month period. The Company’s website does not constitute part of this Annual Report on Form 10-K.
Item 11. Executive Compensation.
The subsection entitled “Director Compensation,” and the section entitled “Executive Compensation and Related Matters” (excluding the subsection “Compensation Committee Report on Executive Compensation”) in the Company’s definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 5, 2004, are incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The sections entitled “Common Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Company’s definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 5, 2004, are incorporated by reference.
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Item 13. Certain Relationships and Related Transactions.
The section entitled “Related Party Transactions” in the Company’s definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 5, 2004 is incorporated by reference.
Item 14. Principal Accounting Fees and Services.
The section entitled “Independent Auditor Fees and Services” in the Company’s definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 5, 2004, is incorporated by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
1. Financial Statements, Notes and Financial Statement Schedule Covered by Report of Independent Auditors.
The Financial Statements and Financial Statement Schedule listed below are included in this Report:
Schedule II—Valuation and Qualifying Accounts and Reserves
All other information schedules have been omitted as the required information is inapplicable, not required, or the information is included in the financial statements or notes thereto.
2. Exhibits—See Exhibit Index.
No other long-term debt instruments are filed since the total amount of securities authorized under any such instrument does not exceed ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such instruments to the SEC upon request.
3. Reports on Form 8-K filed during the last quarter of 2003—A Form 8-K was filed on October 16, 2003 under Item 12 “Results of Operations and Financial Condition” where the Company furnished information regarding financial results for the third quarter ended September 30, 2003.
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LEGGETT & PLATT, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in millions,
except per share data)
Cost of goods sold
Gross profit
Selling and administrative expenses
Amortization of excess cost of purchased companies (in 2001 only) and other intangibles
Restructuring and other (income) deductions, net
Earnings before interest and income taxes
Interest expense
Interest income
Earnings before income taxes
Income taxes
Net earnings
Earnings per share
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEETS
(Amounts in millions,
ASSETS
Current Assets
Accounts and notes receivable, less allowance of $17.9 in 2003 and $19.4 in 2002
Inventories
Finished goods
Work in process
Raw materials and supplies
LIFO reserve
Total inventories
Other current assets
Total current assets
Property, Plant and Equipment—at cost
Machinery and equipment
Buildings and other
Land
Total property, plant and equipment
Less accumulated depreciation
Net property, plant and equipment
Other Assets
Excess cost of purchased companies over net assets acquired, less accumulated amortization of $115.0 in 2003 and $112.2 in 2002
Other intangibles, less accumulated amortization of $35.1 in 2003 and $46.1 in 2002
Sundry
Total other assets
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable
Accrued expenses
Other current liabilities
Total current liabilities
Long-Term Debt
Other Liabilities
Deferred Income Taxes
Shareholders’ Equity
Capital stock
Preferred stock— authorized, 100.0 shares; none issued Common stock—authorized, 600.0 shares of $.01 par value; issued 198.8 shares in 2003 and 2002, respectively
Additional contributed capital
Retained earnings
Accumulated other comprehensive income (loss)
Less treasury stock—at cost (6.7 and 4.3 shares in 2003 and 2002, respectively)
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation
Amortization
Deferred income tax expense (benefit)
Other changes, excluding effects from purchases of companies
(Increase) decrease in accounts receivable, net
(Increase) decrease in inventories
(Increase) decrease in other current assets
Increase (decrease) in accounts payable
Increase in accrued expenses and other current liabilities
Net Cash Provided by Operating Activities
Investing Activities
Additions to property, plant and equipment
Purchases of companies, net of cash acquired
Proceeds from liquidation of interest rate swap agreement
Net Cash Used for Investing Activities
Financing Activities
Additions to debt
Payments on debt
Dividends paid
Issuances of common stock
Purchases of common stock
Net Cash Provided by (Used for) Financing Activities
Increase in Cash and Cash Equivalents
Cash and Cash Equivalents—Beginning of Year
Cash and Cash Equivalents—End of Year
Supplemental Information
Interest paid
Income taxes paid
Property, plant and equipment acquired through capital leases
Liabilities assumed of acquired companies
Common stock issued for acquired companies
Common stock issued for employee stock plans
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock
Balance, beginning and end of period
Additional Contributed Capital
Balance, beginning of period
Stock options and benefit plans transactions
Treasury stock issued
Tax benefit related to stock options
Balance, end of period
Retained Earnings
Cash dividends declared (per share: 2003—$.54; 2002—$.50; 2001—$.48)
Treasury Stock
Treasury stock purchased
Accumulated Other Comprehensive Income (Loss)
Foreign currency translation adjustment
Total Shareholders’ Equity
Comprehensive Income
Foreign currency translation adjustment (net of income tax expense: 2003—$1.6; 2002—$3.1; 2001—$.3)
Total Comprehensive Income
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except per share data)
December 31, 2003, 2002 and 2001
A—Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts of Leggett & Platt, Incorporated (Leggett & Platt) and its majority-owned subsidiaries (the Company). All intercompany transactions and accounts have been eliminated in consolidation.
Cash Equivalents: Cash equivalents include cash in excess of daily requirements which is invested in various financial instruments with original maturities of three months or less.
Sales Recognition: The Company primarily recognizes sales upon the shipment of its products. The Company has no significant and unusual price protection or right of return provisions with its customers. Certain aluminum segment customers have fixed pricing for specified quantities of aluminum used in the production process. The Company generally purchases in advance sufficient quantities of aluminum inventory to “hedge” this fixed pricing commitment. Sales allowances and discounts can be reasonably estimated throughout the period and are deducted from sales in arriving at net sales.
Inventories: All inventories are stated at the lower of cost or market. Cost includes materials, labor and production overhead. Cost is determined by the last-in, first-out (LIFO) method for approximately 50% of the inventories at December 31, 2003 and 2002. The first-in, first-out (FIFO) method is principally used for the remainder. The FIFO cost of inventories at December 31, 2003 and 2002 approximated replacement cost.
Depreciation, Amortization and Asset Impairment: Property, plant and equipment are depreciated by the straight-line method. The rates of depreciation range from 7% to 25% for machinery and equipment, 3% to 7% for buildings and 12% to 33% for other items. Accelerated methods are used for tax purposes.
Intangibles, other than goodwill, are amortized by the straight-line method over their estimated lives. The rates of amortization range from 5% to 33%. In accordance with SFAS No. 142 and 144, long-lived assets, including intangibles, are evaluated annually for probable recovery of their carrying amount. Appropriate adjustment, using current market values, estimates of future cash flows and other methods, is made when recovery of the carrying amount is not reasonably assured.
Goodwill Amortization: As required by SFAS No. 142, the excess cost of purchased companies over net assets acquired (goodwill) ceased being amortized beginning January 1, 2002. Net earnings adjusted to exclude goodwill amortization expense for the year ended December 31, 2001 would have increased $20.2, from $187.6 to $207.8. Basic and diluted earnings per share adjusted to exclude goodwill amortization would have increased $.10, from $.94 to $1.04.
Stock-Based Compensation: Prior to 2003, the Company applied the intrinsic value based method of accounting prescribed by APB Opinion No. 25 and related interpretations in accounting for stock-based compensation plans. Accordingly, in 2002 and 2001, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.
Effective January 1, 2003, the Company adopted the preferable fair value recognition provisions of SFAS No. 123, “Accounting For Stock-Based Compensation.” The Company selected the prospective transition method permitted by SFAS No. 148, “Accounting For Stock-Based Compensation – Transition and Disclosures.” Accordingly, the Company began expensing stock options for any options granted after January 1, 2003 and the 15% discount for employee stock plans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding and unvested awards in each period:
Net earnings – as reported
Add: Stock-based compensation cost, net of taxes, included in net earnings as reported
Deduct: Stock-based compensation cost, net of taxes, if the fair value based method had been applied to all awards
Pro forma net income
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
Restructuring Costs: As required, the Company implemented SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” in 2003. This Statement supercedes previous accounting guidance, principally Emerging Issue Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The adoption of SFAS No. 146 did not have a significant impact on the Company’s financial statements. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of commitment to an exit plan. Accordingly, SFAS No. 146 may affect the timing of recognizing exit and restructuring costs.
Concentration of Credit Risks, Exposures and Financial Instruments: The Company engages in manufacturing, marketing, and distributing engineered products for markets served by the Company as described in Note K. The Company’s operations are principally in the United States, although the Company also has manufacturing subsidiaries in Canada, Europe, Latin America, Asia and Australia and marketing and distribution operations in those and other areas of the world.
The Company performs ongoing credit evaluations of its customers’ financial conditions and generally requires no collateral from its customers, some of which are highly leveraged. The Company maintains allowances for potential credit losses and such losses have generally been within management’s expectations.
The Company has no material guarantees or liabilities for product warranties which would require disclosure under FASB Interpretation No. 45.
From time to time, the Company will enter into contracts to hedge transactions in foreign currencies, natural gas, and interest rates related to fixed rate debt.
The carrying value of cash and short-term financial instruments approximates fair value due to the short maturity of those instruments.
Other Risks: The Company obtains insurance for workers’ compensation, automobile, product and general liability, property loss and medical claims. However, the Company has elected to retain a significant portion of expected losses through the use of deductibles. Provisions for losses expected under these programs are recorded based upon the Company’s estimates of the aggregate liability for claims incurred. These estimates utilize the Company’s prior experience and actuarial assumptions that are provided by the Company’s insurance carriers.
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Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Foreign Currency Translation: The functional currency for most foreign operations is the local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income and expense accounts using monthly average exchange rates. The cumulative effects of translating the functional currencies into the U.S. dollar are included in other comprehensive income. Foreign entities whose functional currency is the U.S. dollar are not significant.
B—Acquisitions
During 2003, the Company acquired 15 businesses for $120.4 in cash, net of cash acquired. The excess of the purchase price over the fair value of the net assets acquired increased goodwill by $54.5 of which $43.7 is expected to provide an income tax benefit. The Company has not yet obtained all information required to complete the purchase price allocations related to certain recent acquisitions. The Company does not believe that the additional information will materially modify the preliminary purchase price allocations. These acquired businesses manufacture and distribute products primarily to the commercial fixturing and components and residential furnishings markets, as well as the other markets the Company serves.
The unaudited pro forma consolidated net sales for the years ended December 31, 2003 and 2002 as though the 2003 acquisitions had occurred on January 1 of each year presented were $4,516.3 and $4,545.0, respectively. The unaudited pro forma consolidated net earnings and earnings per share are not materially different from the amounts reflected in the accompanying financial statements. These pro forma amounts are not necessarily indicative of either results of operations that would have occurred had the purchases been made on January 1 of each year or of future results of the combined companies.
During 2002, the Company acquired seven businesses for $45.6 in cash, net of cash acquired. These amounts include additional consideration of $6.9 paid for prior year acquisitions. The excess of the purchase price over the fair value of the net assets acquired increased goodwill by $12.4 of which $11.4 is expected to provide an income tax benefit. These acquired businesses manufacture and distribute products primarily to the industrial materials and residential furnishings markets, as well as the other markets the Company serves.
In addition to the seven acquisitions noted above, the Company also acquired in 2002 the assets of a rod mill from a bankrupt steel company. The cost to acquire and refurbish this rod mill is included in expenditures for property, plant and equipment.
During 2001, the Company acquired 10 businesses for $95.1 in cash, net of cash acquired, and 61,026 shares of common stock valued at $1.2. These amounts include additional consideration of $13.7 paid for prior year acquisitions. The excess of the purchase price over the fair value of the net assets acquired increased goodwill by $64.3 of which $43.2 is expected to provide an income tax benefit. These acquired businesses manufacture and distribute products primarily to the commercial fixturing and components and industrial materials markets, as well as the other markets the Company serves.
The results of operations of the above acquired companies have been included in the consolidated financial statements since the dates of acquisition. The terms of certain of the Company’s acquisition agreements provide for additional consideration to be paid if the acquired company’s results of operations exceed certain targeted levels. Such additional consideration is payable in cash, and is recorded when earned as additional purchase price. The maximum amount of additional consideration remaining at December 31, 2003 is approximately $38 and will be payable, if earned, through 2006.
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C—Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill are as follows:
Balance as of January 1, 2002
Goodwill acquired during year
Goodwill written off related to sale or closure of facilities
Foreign currency translation adjustment/other
Balance as of December 31, 2002
Goodwill written off related to sale of facilities
Balance as of December 31, 2003
Intangible assets acquired during 2003 and 2002 are as follows:
Gross Carrying
Amount
Weighted Average
Amortization Period
In Years
Non-compete agreements
Patents
Acquisition intangibles, deferred financing and other costs
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The gross carrying amount and accumulated amortization by major amortized intangible asset class is as follows:
Accumulated
Aggregate amortization expense for other intangible assets was $8.4, $10.2 and $11.9 for the years ended December 31, 2003, 2002 and 2001, respectively.
Estimated amortization expense for each of the five years following 2003 is as follows:
Year ended December 31
2004
2005
2006
2007
2008
D—Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
Weighted average shares outstanding, including shares issuable for little or no cash
Additional dilutive shares principally from the assumed exercise of outstanding stock options
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E—Supplemental Balance Sheet Information
Sundry assets, accrued expenses, and other current liabilities at December 31 consist of the following:
Sundry assets
Market value of interest rate swaps
Prepaid pension costs
Wages and commissions payable
Workers’ compensation, medical, auto and product liability insurance
Sales promotions
Outstanding checks in excess of book balances
Dividends payable
F—Long-Term Debt
Long-term debt, weighted average interest rates and due dates at December 31 are as follows:
Medium-term notes, average interest rates of 4.3% for 2003 and 2002, due dates through 2018
Market value adjustment related to medium-term notes’ interest rate swaps
Industrial development bonds, principally variable interest rates of 2.0% and 2.1% for 2003 and 2002, respectively, due dates through 2030
Capitalized leases
Other, partially secured
Less current maturities
The Company had interest rate swap agreements on $14 of its fixed-rate medium-term notes at December 31, 2003 and $364 at December 31, 2002. These swap agreements, which convert fixed rate debt to variable rate debt, contain the same payment dates as the original issues, and are used by the Company to manage the fixed/variable interest rate mix of its debt portfolio. In accordance with SFAS No. 133, the market value of these swaps is shown as an adjustment of the corresponding debt’s market value in the preceding table. Other assets include the corresponding market value of the interest rate swaps.
During the first quarter of 2003, the Company liquidated the interest rate swap agreement on the $350 medium-term note, and received $39.9 in cash proceeds. The market value adjustment at the date the swap
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was liquidated (equivalent to the proceeds from liquidation of the swap agreement) will be amortized as a reduction of interest expense over the remaining life of the medium-term note. The unamortized market value adjustment of the swap agreement liquidated was $22.5, and the market value of the $14 swap agreement was $.6, for a total of $23.1 at December 31, 2003.
On December 16, 2003, the Company entered into a cross-currency swap agreement with Wachovia Bank, N.A. See Note N for more discussion of this agreement.
At December 31, 2003, the revolving credit agreements provided for a maximum line of credit of $339.5. For any revolving credit agreement, the Company may elect to pay interest based on 1) the bank’s base lending rate, 2) LIBOR, 3) an adjusted certificate of deposit rate, or 4) the money market rate, as specified in the revolving credit agreements. Agreement amounts of $106.5 will terminate August 22, 2004; $20.0 will terminate July 31, 2004 and $213.0 will terminate July 31, 2008, at which time any outstanding balances will become due. There were no amounts outstanding under the revolving credit agreements at December 31, 2003.
The revolving credit agreements and certain other long-term debt contain restrictive covenants which, among other restrictions, limit the amount of additional debt and require net earnings to meet or exceed specified levels of funded debt.
Maturities of long-term debt for each of the five years following 2003 are:
G—Lease Obligations
The Company conducts certain operations in leased premises and also leases most of its automotive and trucking equipment and some other assets. Terms of the leases, including purchase options, renewals and maintenance costs, vary by lease.
Total rental expense entering into the determination of results of operations was $55.4, $49.9 and $47.3 for the years ended December 31, 2003, 2002 and 2001, respectively.
Future minimum rental commitments for all long-term noncancelable operating leases are as follows:
Later years
The above lease obligations expire at various dates through 2012. Certain leases contain renewal and/or purchase options. Aggregate rental commitments above include renewal amounts where it is the intention of the Company to renew the lease.
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H—Capital Stock
Stock Activity
Activity in the Company’s stock accounts for each of the three years ended December 31 is as follows:
Treasury
Stock
Balance, January 1, 2001
Shares issued
Balance, December 31, 2001
Balance, December 31, 2002
Balance, December 31, 2003
The Company issues shares for employee stock plans (see Note I) and acquisitions. The Company purchases its common stock to meet the requirements of the employee stock plans, to replace shares issued in acquisitions and to satisfy contractual obligations. The Company will also receive shares in stock option exercises.
Stock Options
At December 31, 2003, the Company had 16,541,543 common shares authorized for issuance under stock option plans. Generally, options become exercisable in varying installments, beginning 18 months after the date of grant, have a maximum term of 10 years, and are issued with exercise prices at market. However, the Company allows senior managers to elect to receive below-market stock options in lieu of cash salary and bonus. These options include a discount feature which does not exceed 15% and have a term of 15 years. A summary of the Company’s stock option plans as of December 31, 2003, 2002 and 2001, and changes during the years ending on those dates is as follows:
Weighted
Average
Exercise Price
Outstanding at January 1, 2001
Granted
Exercised
Forfeited
Outstanding at December 31, 2001
Outstanding at December 31, 2002
Outstanding at December 31, 2003
Options exercisable at
December 31, 2003
December 31, 2002
December 31, 2001
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The following table summarizes information about stock options outstanding at December 31, 2003:
Range of
Exercise Prices
Number
Outstanding
Weighted-Average
Remaining
Contractual Life
Exercise
Price
Exercisable
Weighted-
$ .01–$ 5.00
5.01– 13.50
13.51– 18.00
18.01– 26.00
$ .01–$26.00
The following table summarizes the weighted-average fair value per share of each option granted during the years 2003, 2002 and 2001 as of the grant date. These values are calculated using the Black-Scholes option pricing model based on these weighed-average assumptions.
Weighted-average fair value of options:
Granted at market price
Granted below market price
Weighted-average exercise price of options:
Principal assumptions
Risk-free interest rate
Expected life in years
Expected volatility (over expected life)
Expected dividend yield (over expected life)
The Company also has authorized shares for issuance in connection with certain employee stock benefit plans discussed in Note I.
Par Value Amendment
In 1993, the Company’s shareholders approved an amendment to the Company’s Restated Articles of Incorporation reducing the par value of Common Stock to $.01 from $1. The amendment provided that the stated capital of the Company would not be affected as of the date of the amendment. Accordingly, stated capital of the Company exceeds the amount reported as common stock in the financial statements by approximately $39.
Shareholder Protection Rights Plan
In 1989, the Company declared a dividend distribution of one preferred stock purchase right (a Right) for each share of common stock. The Rights were attached to and traded with the Company’s common stock. The Rights became exercisable only under certain circumstances involving actual or potential acquisitions of the Company’s common stock. The Rights currently remain in existence until February 2009, unless they are exercised, exchanged or redeemed at an earlier date. Depending upon the circumstances, if these Rights become exercisable, the holder may be entitled to purchase shares of Series A junior preferred stock of the Company, shares of the Company’s common stock or shares of common stock of the acquiring entity.
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I—Employee Benefit Plans
The following table and other information in this footnote provide information at December 31 as to the Company’s sponsored domestic and foreign defined benefit pension plans as required by the SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” In adopting the disclosure requirements of SFAS No. 132 (revised 2003), prior years’ information has been restated to include certain foreign and other plans that were previously considered insignificant in the aggregate. The Company uses a September 30 measurement date for the majority of its plans.
Change in Benefit Obligation
Benefit obligation, beginning of period
Service cost
Interest cost
Plan participants’ contributions
Actuarial (gains) losses
Benefits paid
Foreign currency exchange rate changes
Plan amendments and acquisitions
Benefit obligation, end of period
Change in Plan Assets
Fair value of plan assets, beginning of period
Actual return on plan assets
Employer contributions
Fair value of plan assets, end of period
Plan Assets Over (Under) Benefit Obligations
Unrecognized net actuarial (gains) losses
Unrecognized net transition asset
Unrecognized prior service cost
Prepaid pension cost (net of accrued benefit liabilities of $6.6, $5.7 and $5.0 in 2003, 2002 and 2001, respectively)
Components of Net Pension Income (Expense)
Expected return on plan assets
Amortization of net transition asset
Recognized net actuarial gain (loss)
Net pension income (expense)
Weighted Average Assumptions
Discount rate
Rate of compensation increase
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The overall expected long-term rate of return is based on the plans’ historical experience and expectations of future returns based upon the plans’ diversification of investment holdings.
The accumulated benefit obligation for all defined benefit pension plans was $152.4, $139.7 and $124.7 at December 31, 2003, 2002 and 2001, respectively.
Certain plans have accumulated benefit obligations in excess of plan assets at December 31 as follows:
Foreign Plans
Projected/accumulated benefit obligation
Fair value of plan assets
Domestic Plans
Projected benefit obligation
Accumulated benefit obligation
For the foreign plans, the difference between the projected benefit obligation and the accumulated benefit obligation is not significant, as many plans’ benefits are based solely on years of service.
Included in the domestic plans above is a subsidiary’s unfunded supplemental executive retirement plan. The subsidiary owns insurance policies with cash surrender values of $2.0, $1.9 and $1.8 at December 31, 2003, 2002 and 2001, respectively, for the participants in this non-qualified plan. These insurance policies are not included in the plan’s assets.
Plan assets are invested in a diversified portfolio of equity, debt and government securities, including 126,000 shares of the Company’s common stock at December 31, 2003.
The Company’s weighted average asset allocations at December 31, by asset category, are as follows:
Equity securities
Debt securities
The Company’s investment policy and strategies are established with a long-term view in mind. The Company strives for a sufficiently diversified asset mix to minimize the risk of a material loss to the portfolio value that might occur from devaluation of any single investment. In determining the appropriate asset mix, the Company’s financial strength and ability to fund potential shortfalls that might result from poor investment performance are considered. The Company’s weighted average target percentages of the asset portfolios are 67% equities and 33% bonds.
The Company expects to contribute $1.5 to its defined benefit pension plans in 2004.
Contributions to union sponsored, defined benefit, multiemployer pension plans were less than $1.5 in 2003, 2002 and 2001. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. As of 2003, the actuarially computed values of vested benefits for these plans were primarily equal to or less than the assets of the plans. Therefore, the Company would have no material withdrawal liability. However, the Company has no present intention of withdrawing from any of these plans, nor has the Company been informed that there is any intention to terminate such plans.
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Net pension (income) expense, including Company sponsored defined benefit plans, multiemployer plans and other plans, was $7.0, $4.2 and $(.8) in 2003, 2002 and 2001, respectively.
The Company has a Stock Bonus Plan (SBP), which is an Employee Stock Ownership Plan, a nonqualified Executive Stock Unit Program (ESUP) and a Discount Stock Plan (DSP). The SBP and the ESUP provide Company pre-tax contributions of 50% of the amount of employee contributions. Contributions to the ESUP are invested in stock units at 85% of the market price. In addition, the Company matches its contributions when certain profitability levels, as defined in the SBP and the ESUP, have been attained. The ESUP units are considered equivalent to outstanding common shares for accounting and earnings per share purposes. Prior to January 1, 2002, the Company had plans similar to the SBP and ESUP. The Company’s total contributions to these plans were $11.9, $7.8 and $8.3 for 2003, 2002 and 2001, respectively.
Under the DSP, eligible employees may purchase a maximum of 19,000,000 shares of Company common stock. The purchase price per share is 85% of the closing market price on the last business day of each month. Shares purchased under the DSP were 765,388 in 2003, 759,938 in 2002, and 1,052,938 in 2001. Purchase prices ranged from $16 to $22 per share. Since inception of the DSP in 1982, a total of 17,992,923 shares have been purchased by employees.
Upon the adoption of SFAS No. 123 on January 1, 2003, (see Note A), the Company began charging the 15% discount for the above stock plans to expense as shares or units are issued.
J—Income Taxes
The components of earnings before income taxes are as follows:
Domestic
Foreign
Income tax expense is comprised of the following components:
Current
Federal
State and local
Deferred
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Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The major temporary differences that give rise to deferred tax assets or liabilities are as follows:
Property, plant and equipment
Net operating loss and foreign tax credit carryforwards
Prepaid pension cost
Intangible assets
Valuation allowance
Other, net
The valuation allowance primarily relates to state and foreign operating loss carryforwards and foreign tax credit carryforwards for which utilization is uncertain. Cumulative tax losses in certain state and foreign jurisdictions during recent years, and limited carryforward periods in certain jurisdictions were factors considered in determining the valuation allowance.
No significant amount of carryforwards expire in any one year, but the principal amount of the carry-forwards expire in various years after 2005.
Deferred income taxes and withholding taxes have been provided on earnings of the Company’s foreign subsidiaries to the extent it is anticipated that the earnings will be remitted in the future as dividends. The tax effect of most distributions would be significantly offset by available foreign tax credits.
Deferred income taxes and withholding taxes have not been provided on undistributed earnings which are deemed to be permanently reinvested. The cumulative undistributed earnings as of December 31, 2003 which the Company has deemed to be permanently reinvested is approximately $20. If such earnings were distributed, the resulting income taxes and withholding taxes would be approximately $7 based on present income tax laws, which are subject to change.
Deferred tax assets and liabilities included in the consolidated balance sheets are as follows:
Deferred income taxes
Income tax expense, as a percentage of earnings before income taxes, differs from the statutory federal income tax rate as follows:
Statutory federal income tax rate
Increases in rate resulting primarily from state and other jurisdictions
Effect of nondeductible goodwill amortization or write-off on federal statutory rate
Taxes on foreign earnings, including impact of foreign tax credits
Effective tax rate
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K—Segment Information
Reportable segments are primarily based upon the Company’s management organizational structure. This structure is generally focused on broad end-user markets for the Company’s diversified products. Residential Furnishings derives its revenues from components for bedding, furniture and other furnishings, as well as related consumer products. Commercial Fixturing & Components derives its revenues from retail store fixtures, displays, storage, material handling systems, components for office and institutional furnishings, and plastic components. The Aluminum Products revenues are derived from die castings, custom tooling, secondary machining and coating, and smelting of aluminum ingot. The Company sold its single remaining smelting operation in 2002. Industrial Materials derives its revenues from drawn steel wire, specialty wire products and welded steel tubing sold to trade customers as well as other Leggett segments. Specialized Products derives its revenues from machinery, manufacturing equipment, automotive seating suspensions, control cable systems and lumbar supports for automotive, office and residential applications.
The accounting principles used in the preparation of the segment information are the same as 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. The Company evaluates 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 general and administrative costs of the Company are allocated to the segments based on sales. Asset information for the segments includes only inventory, trade receivables, net property, plant and equipment and unamortized purchased intangibles. These segment assets are reflected in the segment information at their estimated average for the year. Acquired companies’ long-lived assets as disclosed include property, plant and equipment, goodwill and other intangibles, and long-term assets. Centrally incurred costs and allocated general and administrative costs include depreciation and other costs related to assets that are not allocated or otherwise included in the segment assets.
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Summarized financial information concerning the Company’s reportable segments is shown in the following tables:
Intersegment eliminations
Adjustment to LIFO method
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Unallocated assets
Adjustment to year-end vs. average assets
Revenues from external customers, by product line, are as follows:
Bedding components
Residential furniture components
Finished & consumer products
Other residential furnishings products
Store displays, fixtures & storage products
Office furnishings & plastic components
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Die cast products
Smelter, tool & die operations
Wire, wire products & steel tubing
Automotive products & specialized machinery
The Company’s operations outside of the United States are principally in Canada, Europe and Mexico. The geographic information that follows regarding sales is based on the area of manufacture. Prior years’ sales information has been restated to be consistent with the current year’s presentation.
External sales
Long-lived assets
L—Contingencies
The Company is involved in various legal proceedings including matters which involve claims against the Company under employment, intellectual property, environmental and other laws. When it appears probable in management’s judgement that the Company will incur monetary damages or other costs in connection with claims and proceedings, and the costs can be reasonably estimated, appropriate liabilities are recorded in the financial statements and charges are made against earnings. No claim or proceeding has resulted in a material charge against earnings, nor are the total liabilities recorded material to the Company’s financial position. While the results of any ultimate resolution cannot be predicted, management believes the possibility of a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows from claims and proceedings is remote.
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M—Restructuring Activity
On January 1, 2003, the Company implemented SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” For the years 2002-2001, the Company utilized Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. The Company is engaged in ongoing disposal activities as a result of the continuing rationalization of its facility base. None of the costs associated with such disposal activities have been material to the Company’s earnings or financial position. In addition, future expenditures associated with current restructurings are expected to be less than $1.
Over the last three years, the Company has sold, consolidated or shutdown several facilities, none of which actions (generically referred to as “restructurings”) individually resulted in a material charge to earnings. These restructurings have had the following impact on the Company’s financial statements:
Charged to cost of goods sold
Inventory write-downs associated with facility restructurings
Charged to other deductions (income), net
Write-downs of property, plant and equipment
Write-off of goodwill
Severance and other restructuring costs, net of proceeds
Restructuring liabilities at year-end
Adjustments of previously established liabilities for restructurings have been negligible for 2003-2001. Net sales for the 12-month period prior to divestiture for businesses sold were $23 in 2003, $40 in 2002 and $30 in 2001. The earnings impact from these divested businesses is not material.
N—Derivative Financial Instruments
The Company’s risk management strategies include the use of derivative instruments to manage the fixed/variable interest rate mix of its debt portfolio, to manage its exposure to fluctuating natural gas prices, and to hedge against its exposure to variability in foreign exchange rates. It is the Company’s policy to enter into risk management strategies that reduce forward price exposure by the transfer of price risk to another party. In this sense, hedging is equivalent to purchasing price protection insurance that will lock in future costs. It is the Company’s policy not to speculate in derivative instruments.
The Company manages the fixed/variable interest rate risk of its debt portfolio partially through the use of interest rate swap agreements. During 2000, $350 of 7.65% fixed rate debt maturing in February 2005 and, in 1999, $14 of 6.90% fixed rate debt maturing in June 2004 were issued and converted to variable rate debt by use of interest rate swap agreements. In March 2003, the Company sold its rights under the $350 interest rate swap agreement for $39.9 in cash proceeds.
Currently, the remaining swap converts $14 of fixed rate debt to variable rate debt and is designated as a fair value hedge. As such, this swap is carried at fair value. Changes in the fair value of this swap and that of the related debt are recorded in “Interest expense” in the accompanying statement of income. The fair value of these swaps was $.6 as of December 31, 2003 and $48.8 as of December 31, 2002.
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The Company is hedging 60% of its anticipated domestic and Canadian natural gas purchases under contract through mid-2004. The Company’s use of these contracts is to manage its exposure to fluctuating natural gas prices. The outstanding contracts were approximately $9.5 as of December 31, 2003. The average price under these contracts is $5.63 per mmbtu. Through December 31, 2003, there was no significant gain or loss, realized or unrealized, on these contracts.
The Company designates forward currency contracts as hedges against the Company’s exposure to variability in exchange rates on certain cash flows denominated in foreign currencies. In December 2003, the Company minimized the volatility of cash flows caused by currency fluctuations by hedging 70% of the expected Peso expenses for certain Mexican subsidiaries through 2004. The changes in fair value of the unexpired contracts will be recorded in other comprehensive income. The amount of contracts outstanding at December 31, 2003 was approximately $13.6 (pay USD/receive MXN). The fair value of these contracts at December 31, 2003 was inconsequential.
In December 2003, the Company entered into a 38.3 Swiss Francs (CHF) five-year, cross-currency swap agreement with Wachovia Bank, N.A. This agreement is designated as a net investment hedge of the Company’s Swiss subsidiaries. The purpose of this swap is to reduce volatility of exposure to the Swiss Franc. At December 31, 2003, there was no significant gain or loss under this agreement. In addition, the terms of this agreement include that the Company will receive interest on $30 at a fixed rate of 6.35% and pay interest on 38.3 CHF at a fixed rate of 4.71%.
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Leggett & Platt, Incorporated:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(1) present fairly, in all material respects, the financial position of Leggett & Platt, Incorporated and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation as of January 1, 2003.
As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for goodwill and other intangible assets as of January 1, 2002.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
January 28, 2004
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Quarterly Summary of Earnings
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SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in millions)
Column A
Description
Year ended December 31, 2003
Allowance for doubtful receivables
Inventory writedown reserve
Year ended December 31, 2002
Year ended December 31, 2001
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:
/S/ FELIX E. WRIGHT
Chairman and
Chief Executive Officer
Dated: March 11, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
(a) Principal Executive Officer:
(b) Principal Financial Officer:
/S/ MATTHEW C. FLANIGAN
(c) Principal Accounting Officer:
/S/ WILLIAM S. WEIL
(d) Directors:
HARRY M. CORNELL, JR.*
Harry M. Cornell, Jr.
RAYMOND F. BENTELE*
Raymond F. Bentele
RALPH W. CLARK*
Ralph W. Clark
ROBERT TED ENLOE, III*
Robert Ted Enloe, III
RICHARD T. FISHER*
Richard T. Fisher
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KARL G. GLASSMAN*
DAVID S. HAFFNER*
JUDY C. ODOM*
Judy C. Odom
MAURICE E. PURNELL, JR.*
Maurice E. Purnell, Jr.
FELIX E. WRIGHT*
*By: /S/ ERNEST C. JETT
Attorney-in-Fact
Under Power-of-Attorney
dated February 11, 2004
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EXHIBIT INDEX
Document Description
Rights Agreement effective February 15, 1999 between the Company and UMB Bank, N.A., as successor Rights Agent to ChaseMellon Shareholder Services, LLC, pertaining to preferred stock rights distributed by the Company, filed December 1, 1998 as Exhibit 4 to the Company’s Form
8-K, is incorporated by reference. (SEC File No. 1-7845)
61
62
63