LEGGETT & PLATT, INCORPORATED What We DoLeggett & Platt, Incorporated (the Company, we or our) is a diversified manufacturer, and member of the S&P 500 index, that conceives, designs, and produces a wide range of engineered components and products found in many homes, offices, and automobiles. We make components that are often hidden within, but integral to, our customers' products. We are the leadingU.S. -based manufacturer of: a) bedding components; b) automotive seat support and lumbar systems; c) specialty bedding foams and private-label finished mattresses; d) components for home furniture and work furniture; e) flooring underlayment; f) adjustable beds; and g) bedding industry machinery. 32 -------------------------------------------------------------------------------- Our Segments Our operations are comprised of 140 production facilities located in 18 countries around the world. Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. To reflect how we manage our newly aligned businesses and in conjunction with the change in executive officer leadership, our management organizational structure and all related internal reporting changed effectiveJanuary 1, 2020 . As a result, our segment reporting has changed to reflect the new structure. The modified structure consists of three segments, seven business groups, and 15 business units organized as follows: Furniture, Flooring & Textile Bedding Products 1 Specialized Products Products 2 Segment Segment Segment BEDDING GROUP AUTOMOTIVE GROUP HOME FURNITURE GROUP Steel Rod Automotive Home Furniture Drawn Wire U.S. Spring AEROSPACE PRODUCTS GROUP WORK FURNITURE GROUP Specialty Foam Aerospace Products Work Furniture Adjustable Bed International Spring HYDRAULIC CYLINDERS FLOORING & TEXTILE Machinery GROUP PRODUCTS GROUP Hydraulic Cylinders Flooring Products Fabric Converting Geo Components
1 The new segment consists of the former Residential Products and Industrial Products segments, plus the Consumer
(which is renamed the
(which is renamed the
the Adjustable Bed business unit).
This segment change was retrospectively applied to all prior periods presented. Our segments are described below. Bedding Products: This segment supplies a variety of components and machinery used by bedding manufacturers in the production and assembly of their finished products, as well as produces private-label finished mattresses for bedding brands, and adjustable bed bases. This segment is also backwardly integrated into the production and supply of specialty foam chemicals, steel rod and drawn steel wire to our own operations and to external customers. Our trade customers for wire make mechanical springs and many other end products. This segment generated 48% of our trade sales during the first six months of 2020. Specialized Products: From this segment, we supply lumbar support systems, seat suspension systems, motors and actuators, and control cables used by automotive manufacturers. We also produce and distribute tubing and tube assemblies for the aerospace industry and engineered hydraulic cylinders used in the material-handling and construction industries. This segment contributed 20% of our trade sales in the first six months of 2020. Furniture, Flooring & Textile Products: Operations in this segment supply a wide range of components for residential and work furniture manufacturers, as well as select lines of private-label finished furniture. We also produce or distribute carpet cushion, hard surface flooring underlayment, and textile and geo components. This segment contributed 32% of our trade sales in the first six months of 2020. COVID-19 Impacts on our Business Governments and health organizations have identified an outbreak of a respiratory illness known as COVID-19. TheWorld Health Organization has declared the outbreak a global pandemic. The COVID-19 pandemic has had, and could further have, an adverse impact to, among other things (i) the demand for our products and our customers' products, growth rates in the 33 -------------------------------------------------------------------------------- industries in which we participate, and opportunities in those industries; (ii) our manufacturing operations' ability to remain open, obtain necessary raw materials and parts, maintain appropriate labor levels and ship finished products to customers; (iii) operating costs related to pay and benefits for permanently terminated employees; (iv) the collection of trade and other notes receivables in accordance with their terms due to customer bankruptcy, financial difficulties or insolvency; (v) impairment of goodwill and long-lived assets; and (vi) our ability to access the commercial paper market or borrow under our credit facility; all of which, in the aggregate, have had, and could further have, a material negative impact on our trade sales, earnings, liquidity, cash flow and financial condition. While we are unable to accurately foresee these future impacts, we believe that our financial resources and liquidity levels, along with various contingency plans to reduce costs are sufficient to manage the impact currently anticipated from the COVID-19 pandemic, which will likely include reduced revenues and operating profits for the full year 2020 in all segments and lower operating cash flows. Demand for our Products. Various governments inAsia ,Europe ,North America , and elsewhere have instituted quarantines, shelter-in-place or stay-at-home orders, or restrictions on public gatherings as well as limitations on social interactions. These restrictions and limitations have had, and could further have, an adverse effect on the economies and financial markets of the countries where our products, or our customers' products, are sold resulting in an economic downturn that has had, and could further have, an effect on the demand for our products and our customers' products, growth rates in the industries in which we participate, and opportunities in those industries. Trade sales in the second quarter were down 30% versus the second quarter of 2019, with demand improving each month throughout the quarter. April sales were down over 50%, May sales were down almost 30% and June sales were down just over 15%, all versus the prior year. We continued to see sequential improvement throughout the first three weeks of July, with sales near prior year levels. We sell some of our products to certain manufacturing customers, particularly in the automotive industry, that have facilities where their workforce is unionized. Some unions have put pressure on manufacturers to close plants because of the COVID-19 pandemic. It is possible that these unions may institute work stoppages based on the health and safety concerns of union members contracting COVID-19 in our customers' facilities. A work stoppage for any length of time could stop or reduce production in our customers' facilities, further negatively impacting the demand for our finished products. Impact on our Manufacturing Operations. We have manufacturing facilities inthe United States and 17 other countries. All of these countries have been affected by the COVID-19 pandemic. All of our facilities are open and running at this time, with some capacity restrictions on our plants due to governmental orders. TheU.S. and other governments have ordered that certain non-woven fabrics used to produce ComfortCore® innersprings be prioritized to produce medical supplies, resulting in shortages of the fabrics for non-medical applications. These shortages and very strong bedding demand have caused the Company temporarily to be unable to supply full industry demand for ComfortCore®. The Company has declared force majeure due to the shortages. Also, as demand has improved, we have experienced some temporary labor shortages. Some facilities had experienced problems delivering products to customers because of disruption in logistics necessary to import, export, or to transfer products across borders. At this time, cross border logistics are no longer an issue. Depending on the length and severity of the COVID-19 pandemic, our ability to keep our manufacturing operations open, maintain appropriate labor levels, obtain necessary raw materials and parts and ship finished products to customers may be partially or completely disrupted, either on a temporary or prolonged basis. The realization of these risks to our manufacturing operations, labor force and supply chain could also increase labor, commodity and energy costs. We have been and could be further negatively affected by governmental action in any one or more of the countries in which we operate by the imposition of restrictive measures concerning shelter-in-place or stay-at-home orders, public gatherings and human interactions, mandatory closures of retail establishments that sell our products or our customers' products, and restrictions on the import or export of products. To date, we have had a relatively small number of employees in our manufacturing facilitieswho have tested positive for COVID-19. When this has occurred, we follow adopted procedures which include enhanced disinfecting that targets areas that have likely exposure to COVID-19. The employee is required to observe a quarantine period, monitor symptoms and follow medical guidance prior to returning to work. Contact tracing is performed to identify any other employeeswho had direct contact with the employeewho tested positive for COVID-19. If any direct contacts are identified, they must also self-isolate, monitor symptoms, and follow medical guidance prior to returning to work. A significant increase in COVID-19 cases among our employees may disrupt our ability to produce and deliver finished products to our customers if we are unable to shift production to other manufacturing facilities. 34 -------------------------------------------------------------------------------- Severance Costs Related to Permanent Workforce Reductions. In connection with reduced demand for our products, we have permanently terminated a relatively small number of our employees worldwide. We incurred severance costs of$2 million in the second quarter 2020 and expect to incur approximately$5 million in the last half of the year. If we permanently terminate additional employees because of lack of demand, mandatory governmental closure of our facilities or otherwise, we may incur material separation costs. Collection of Trade and Notes Receivables. Bankruptcy, financial difficulties or insolvency caused by the COVID-19 pandemic, or otherwise, can and has occurred with some of our customers which can impact their ability to pay their debts to us. Prior to the pandemic, we provided trade credit and other financing to some of these customers in a material amount, particularly in our Bedding segment. Our bad debt reserve contains uncertainties because it requires management to estimate the amount of uncollectible receivables and notes based upon the financial health and payment history of the customer, industry and macroeconomic considerations, and historical loss experience. Many of our customers and other third parties have been adversely affected by the social and governmental restrictions and limitations related to the COVID-19 pandemic. If these parties suffer significant financial difficulty, they may be unable to pay their debts to us, they may reject their contractual obligations to us under bankruptcy laws or otherwise, or we may have to negotiate significant discounts and/or extend financing terms with these parties. If we are unable to collect trade receivables and other notes receivables on a timely basis, this inability will require larger provisions for bad debt. Impairment ofGoodwill and Long-Lived Assets. A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. AtJune 30, 2020 , goodwill and other intangible assets represented$2.1 billion , or 46% of our total assets. In addition, net property, plant and equipment, operating lease right-of-use assets, and sundry assets totaled$1.07 billion , or 23% of total assets. We review our reporting units for potential goodwill impairment in the second quarter as part of our annual goodwill impairment testing, and more often if an event or circumstance occurs making it likely that impairment exists. In addition, we test for the recoverability of long-lived assets at year end, and more often if an event or circumstance indicates the carrying value may not be recoverable. We conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. The 2020 goodwill impairment testing resulted in a$25.4 million non-cash goodwill impairment charge in the second quarter of 2020 with respect to our Hydraulic Cylinders reporting unit, which is a part of the Specialized Products segment. Demand for hydraulic cylinders is dependent upon capital spending for material handling equipment. The impairment charge reflects the complete write-off of the goodwill associated with the Hydraulic Cylinders reporting unit and will not result in future cash expenditures. Although we do not believe that a triggering event related to the impairment of goodwill or other long-lived assets occurred in the first quarter of 2020, the anticipated longer-term economic impacts of COVID-19 lowered expectations of future revenue and profitability causing its fair value to fall below its carrying value. We concluded onJuly 30, 2020 , as part of our normal second quarter 2020 annual goodwill impairment testing and in connection with the preparation and review of the second quarter 2020 financial statements, that an impairment charge was required with respect to this reporting unit. We also evaluated other long-lived assets associated with this unit for impairment; no impairments were indicated other than goodwill. Of the remaining six reporting units, three had fair values in excess of carrying value of less than 100%. •Fair value for our Bedding reporting unit exceeded carrying value by 68%. Our 2019 acquisition of ECS is part of our Bedding reporting unit, and goodwill for our Bedding reporting unit was$853 million atJune 30, 2020 . •Fair value for our Aerospace reporting unit exceeded carrying value by 51%.Goodwill for the Aerospace reporting unit was$59 million atJune 30, 2020 . •Fair value for ourWork Furniture reporting unit exceeded carrying value by 25%.Goodwill for theWork Furniture reporting unit was$95 million atJune 30, 2020 . If there is a prolonged adverse economic impact from the COVID-19 pandemic, we may not be able to achieve projected performance levels. If actual results materially differ from the assumptions and estimates used in the goodwill and long-lived asset valuation calculations, we could incur future impairment charges. These non-cash charges could have a material negative impact on our earnings. Our Ability to Access the Commercial Paper Market or Borrow under our Credit Facility. The COVID-19 pandemic has negatively impacted liquidity in the commercial paper market. Our inability to issue commercial paper in appropriate amounts and tenor, for cash management purposes, could cause us to borrow under our credit facility which serves as support for our commercial paper program. If this were to happen, we would incur higher interest costs. 35 -------------------------------------------------------------------------------- The credit facility is a multi-currency credit facility maturing inJanuary 2024 providing us the ability, from time to time subject to certain restrictive covenants and customary conditions, to borrow, repay and re-borrow up to$1.2 billion . The credit facility also provided for a one-time draw of up to$500 million under a five-year term loan facility, which we fully borrowed inJanuary 2019 to consummate the ECS acquisition. Because of the economic impacts of the COVID-19 pandemic on our business, effectiveMay 6, 2020 , we amended the credit facility to, among other things, change the restrictive borrowing covenants. The prior leverage ratio covenant required us to maintain, as of the last day of each quarter, a leverage ratio of consolidated funded indebtedness to trailing 12-month consolidated EBITDA (each as defined in the credit facility) of not greater than 3.50 to 1.00. The covenant was changed in two ways: (i) the calculation of the ratio now subtracts unrestricted cash (as defined in the credit facility) from consolidated funded indebtedness; and (ii) the ratio levels, calculated as of the last day of the applicable fiscal quarter, were changed to 4.75 to 1.00 for each fiscal quarter end date throughMarch 31, 2021 ; 4.25 to 1.00 atJune 30, 2021 ; 3.75 to 1.00 atSeptember 30, 2021 ; and 3.25 to 1.00 atDecember 31, 2021 and thereafter. In addition, the amount of total secured debt limit was changed from 15% to 5% of our total consolidated assets untilDecember 31, 2021 , at which time it will revert back to the 15%. Various interest rate terms were also changed. The impact on our interest expense will depend upon our ability to access the commercial paper market, and if so, the degree of that access. The credit facility also contains an anti-cash hoarding provision that limits borrowing if the Company has a consolidated cash balance (as defined in the credit facility) in excess of$300 million without planned expenditures. AtJune 30, 2020 , the Company is in compliance with all of its debt covenants and expects to be able to maintain compliance with the amended debt covenant requirements. AtJune 30, 2020 , we had used, through commercial paper borrowings,$102 million of the borrowing capacity under the credit facility. However, as our trailing 12-month consolidated EBITDA, unrestricted cash and debt levels change, our additional borrowing capacity increases or decreases. Based on our trailing 12-month consolidated EBITDA, unrestricted cash and debt levels atJune 30, 2020 , our additional borrowing capacity under the credit facility was approximately$1.1 billion at quarter end. However, this may not be indicative of the actual borrowing capacity going forward, which may be materially different depending on our consolidated EBITDA, unrestricted cash and debt levels at that time. Because of the adverse economic impacts of the COVID-19 pandemic, our consolidated EBITDA may decrease in future quarters in 2020. For more information about restrictive covenants, see "Our Ability to Access the Commercial Paper Market or Borrow under our Credit Facility" in Item 1A Risk Factors. Also, if we fail to comply with the covenants specified in the credit facility, we may trigger an event of default, in which case the lending banks would have the right to: (i) terminate their commitment to provide additional loans under the credit facility; and (ii) declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. Additionally, our senior notes contain cross-default provisions which could make outstanding amounts under the senior notes immediately payable in the event of an acceleration of amounts due under the credit facility following a material uncured default. If the debt due under the credit facility or senior notes were to be accelerated, we may not have sufficient cash to repay this debt. Our Response to the COVID-19 Pandemic. In response to COVID-19, the Company has focused on protecting our employees and ensuring a safe work environment. We formed a cross-functional crisis response team that meets daily. We help our business leaders manage items such as responding to workplace health and safety issues and protocols, interpreting government orders and securing personal protective equipment. The team developed a comprehensive handbook to document new work procedures and changes to production necessary to facilitate proper social distancing. Our business leaders have implemented training and change management initiatives to drive and maintain new ways of operating. In order to carefully manage cash, we reduced capital expenditures by over 60% to approximately$60 million for 2020 and are limiting acquisition spending. We eliminated non-essential expenses and postponed major projects, of which we expect to produce approximately$100 million of fixed cost savings in 2020. The Company is also closely monitoring accounts receivable and managing our inventories. Cash Dividend Dividends have historically been the primary means by which we return cash to shareholders. Our long-term targeted dividend payout ratio has been approximately 50% of adjusted EPS (which excludes special items such as significant tax law impacts, impairment charges, restructuring-related charges and gains from sales of assets or businesses). In 2019, we increased the quarterly dividend by$.02 , or 5.3%, to$.40 per share. 2019 marked the Company's 48th consecutive annual dividend increase, a record that only ten S&P 500 companies have exceeded. OnAugust 3, 2020 , our Board of Directors declared a third quarter dividend of$.40 per share, equal to the dividend declared in the third quarter of 2019. 36 -------------------------------------------------------------------------------- Credit Rating Downgrade and Liquidity Independent rating agencies evaluate our credit profile on an ongoing basis and have assigned ratings to our long-term and short-term debt. OnApril 21, 2020 , one of our rating agencies, which had our long-term debt rating on negative outlook, lowered that rating by one notch, but changed the outlook to stable. This rating agency did not change our short-term rating. OnMay 5, 2020 , another rating agency lowered our long-term and short-term ratings by one notch with a stable outlook. There is uncertainty whether our short-term ratings will continue to allow us access to the commercial paper market, and if so, the degree of that access. If we are not able to access the commercial paper market, either partially or completely, we expect to borrow under our credit facility for our liquidity needs but at higher interest costs. See "Our borrowing costs and access to liquidity may be impacted by our credit ratings" under Risk Factors on page 56. Customers We serve a broad suite of customers, with our largest customer representing approximately 5% of our trade sales in 2019. Many are companies whose names are widely recognized. They include bedding, residential and work furniture producers, automotive OEM and Tier 1 manufacturers, and a variety of other companies. Raw Material Costs Our costs can vary significantly as market prices for raw materials (many of which are commodities) fluctuate. We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. Our ability to recover higher costs (through selling price increases) is crucial. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Conversely, when costs decrease significantly, we generally pass those lower costs through to our customers. The timing of our price increases or decreases is important; we typically experience a lag in recovering higher costs, and we also realize a lag as costs decline. Steel is our principal raw material. At various times in past years, we have experienced significant cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers with selling price adjustments. Over the past few years we have seen varying degrees of inflation and deflation inU.S. steel pricing. In 2019, steel costs decreased through most of the year. In the first half of 2020, steel costs have deflated modestly. As a producer of steel rod, we are also impacted by changes in metal margins (the difference in the cost of steel scrap and the market price for steel rod). In 2019, although steel prices decreased through the year, a wider than usual metal margin persisted. As a result, our steel operations experienced enhanced profitability in 2019. In the first half of 2020, these metal margins began to compress, but remain wider than usual. With the acquisition of ECS, we now have greater exposure to the cost of chemicals, including TDI, MDI, and polyol. The cost of these chemicals has fluctuated at times, but ECS has generally passed the changes through to its customers, with a lag that varies based on customer contract terms. In 2019, ECS experienced a negative effect on trade sales due to chemical deflation. In the first half of 2020, chemicals have been further deflating. Our other raw materials include woven and non-woven fabrics and foam scrap. We have experienced changes in the cost of these materials in past years and generally have been able to pass them through to our customers. When we raise our prices to recover higher raw material costs, this sometimes causes customers to modify their product designs and replace higher cost components with lower cost components. We must continue providing product options to our customers that enable them to improve the functionality of their products and manage their costs, while providing higher profits for our operations. Competition Many of our markets are highly competitive, with the number of competitors varying by product line. In general, our competitors tend to be smaller, private companies. Many of our competitors, both domestic and foreign, compete primarily on the basis of price. Our success has stemmed from the ability to remain price competitive, while delivering innovation, better product quality, and customer service. We continue to face pressure from foreign competitors as some of our customers source a portion of their components and finished products offshore. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and more lenient regulatory climates. We typically remain price competitive in 37 -------------------------------------------------------------------------------- most of our business units, even versus many foreign manufacturers, as a result of our highly efficient operations, automation, vertical integration in steel and wire, logistics and distribution efficiencies, and large scale purchasing of raw materials and commodities. However, we have also reacted to foreign competition in certain cases by selectively adjusting prices, developing new proprietary products that help our customers reduce total costs and shifting production offshore to take advantage of lower input costs. Since 2009, there have been antidumping duty orders on innerspring imports fromChina ,South Africa andVietnam , ranging from 116% to 234%. InSeptember 2019 , theDepartment of Commerce (DOC) and theInternational Trade Commission (ITC) concluded a second sunset review extending the orders for an additional five years, throughOctober 2024 ; at which time, the DOC and ITC will conduct a third sunset review to determine whether to extend the orders for an additional five years. Antidumping and countervailing duty cases filed by majorU.S. steel wire rod producers have resulted in the imposition of antidumping duties on imports of steel wire rod fromBrazil ,China ,Belarus ,Indonesia ,Italy ,Korea ,Mexico ,Moldova ,Russia ,South Africa ,Spain ,Trinidad & Tobago ,Turkey ,Ukraine ,United Arab Emirates , and theUnited Kingdom , ranging from 1% to 757%, and countervailing duties on imports of steel wire rod fromBrazil ,China ,Italy andTurkey , ranging from 3% to 193%. InJune 2020 , the ITC and DOC concluded a first sunset review, extending the orders onChina throughJune 2025 , and inJuly 2020 , the ITC and DOC concluded a third sunset review, determining to extend the orders onBrazil ,Indonesia ,Mexico ,Moldova , andTrinidad & Tobago throughAugust 2025 . Duties will continue throughDecember 2022 forBelarus ,Italy ,Korea ,Russia ,South Africa ,Spain ,Turkey ,Ukraine ,United Arab Emirates , and theUnited Kingdom . At that time the DOC and the ITC will conduct a sunset review to determine whether to extend those orders for an additional five years. InSeptember 2018 , the Company, along with other domestic mattress producers, filed petitions with the DOC and the ITC alleging that manufacturers of mattresses inChina were unfairly selling their products inthe United States at less than fair value (dumping) and seeking the imposition of duties on mattresses imported fromChina . InOctober 2019 , the DOC made a final determination assigning duty rates between 57% to 1,732%. InNovember 2019 , the ITC made a unanimous final determination that domestic mattress producers were materially injured by reason of the unfairly priced imported mattresses. An antidumping order on imports of Chinese mattresses will remain in effect for five years, throughDecember 2024 , at which time the DOC and ITC will conduct a sunset review to determine whether to extend the order for an additional five years. InMarch 2020 , the Company, along with other domestic mattress producers and two labor unions representing workers at other mattress producers, filed antidumping petitions with the DOC and the ITC alleging that manufacturers of mattresses inCambodia ,Indonesia ,Malaysia ,Serbia ,Thailand ,Turkey , andVietnam were unfairly selling their products inthe United States at less than fair value (dumping) and a countervailing duty petition alleging manufacturers of mattresses inChina were benefiting from subsidies. InMay 2020 , the ITC made a unanimous, affirmative preliminary determination of a reasonable likelihood of injury. DOC's preliminary determination on subsidies is expected in lateAugust 2020 , and its preliminary determination on dumping is expected in lateOctober 2020 . Final determinations are expected in the first half of 2021. Total Shareholder Return Total Shareholder Return (TSR), relative to peer companies, is a primary financial measure that we use to assess long-term performance. TSR = (Change in Stock Price + Dividends) ÷ Beginning Stock Price. Our goal is to achieve TSR in the top third of the S&P 500 companies over the long term through an approach that employs four TSR sources: revenue growth, margin expansion, dividends, and share repurchases. We monitor our TSR performance relative to the S&P 500 on a rolling three-year basis. We believe our disciplined growth strategy, portfolio management, and prudent use of capital will support achievement of our goal over time. Senior executives participate in an incentive program with a three-year performance period based on two equal measures: (i) our TSR performance compared to the performance of a group of approximately 300 peers, and (ii) the Company or segment Earnings Before Interest and Taxes (EBIT) Compound Annual Growth Rate (CAGR). Acquisition ofElite Comfort Solutions OnJanuary 16, 2019 , we acquired ECS for a cash purchase price of approximately$1.25 billion (the "ECS Acquisition"). ECS, headquartered inNewnan, Georgia , is a leader in specialized foam technology, primarily for the bedding and furniture industries. With 16 facilities acrossthe United States , ECS operates a vertically-integrated model, developing many of the chemicals and additives used in foam production, producing specialty foam, and manufacturing private-label finished products. These innovative specialty foam products include finished mattresses sold through both traditional and online channels, 38 -------------------------------------------------------------------------------- mattress components, mattress toppers and pillows, and furniture foams. ECS has a diversified customer mix and a strong position in the high-growth compressed mattress market segment. ECS forms a separate business unit and operates within the Bedding Products segment.
For information on the financing of the ECS acquisition, please see "Commercial Paper Program and Term Loan Financing" on page 47.
Organic Sales This report contains the metric organic sales. In the past, we have disclosed the metric same location sales calculated as net sales excluding sales attributable to acquisitions and divestitures consummated within the last twelve months. In the Company's 2019 Form 10-K filed February 20, 2020, we disclosed the metric organic sales but indicated that it was calculated identically to the prior same location sales metric. Beginning with our first quarter 2020 Form 10-Q (and including the presentation in this Form 10-Q), we have modified the calculation of organic sales. It is now calculated as trade sales (not net sales) excluding sales attributable to acquisitions and divestitures consummated within the last twelve months. Management uses the organic sales metric, and it is useful to investors, as supplemental information to analyze our underlying sales performance from period to period in our legacy businesses. RESULTS OF OPERATIONS
Discussion of Consolidated Results
Second Quarter:
Trade Sales were$845.1 million in the current quarter, a 30% decrease versus the second quarter 2019. Organic sales decreased 31%, with volume down 29%. Trade sales were largely impacted by COVID-related demand declines along with the planned lower volume in business we exited in connection with the 2018 Restructuring Plan (which reduced trade sales 2%). The combination of raw material-related selling price decreases and negative currency impact reduced trade sales 2%. Acquisitions added 1% to trade sales growth in the quarter. Earnings (Loss) Per Share (EPS) decreased to$(.05) in the current year, versus$.64 in the second quarter of 2019, primarily from lower trade sales volume and a goodwill impairment charge, partially offset by fixed cost reductions. Earnings Before Interest and Taxes (EBIT) decreased 83%, to$22.8 million , primarily from lower volume and a$25.4 million goodwill impairment charge in Hydraulic Cylinders, partially offset by fixed cost reductions. Six Months:Trade Sales were$1,890.6 million in the first six months of 2020, a 20% decrease versus the same time period last year. Acquisitions added 2% to sales growth in the first six months of 2020. Organic sales decreased 22%, with volume down 19%. In the first six months of 2020 trade sales were primarily impacted by COVID-related demand declines along with the planned lower volume in business we exited in connection with the 2018 Restructuring Plan (which reduced trade sales 3%). Raw material-related selling price decreases and negative currency impact reduced trade sales 3%. EPS was$.29 for the first six months of 2020, versus$1.09 in the same period of 2019, with the decrease primarily from lower trade sales volume and a goodwill impairment charge, partially offset by fixed cost reductions. EBIT decreased 56%, to$103.5 million , primarily from lower volume and a$25.4 million goodwill impairment charge in Hydraulic Cylinders, partially offset by fixed cost reductions. 39 -------------------------------------------------------------------------------- LIFO/FIFO and the Effect of Changing Prices The last-in, first-out (LIFO) method is primarily used to value our domestic steel-related inventories. LIFO represents approximately 40% of our inventories. With steel cost deflation in the early part of 2020, we recognized a LIFO benefit in the first six months. The LIFO estimate incorporates certain assumptions about year-end steel prices and inventory levels. Therefore, the LIFO calculation for the full year could be materially different from that currently estimated. The following table contains the LIFO benefit included for each of the periods presented: Six Months Ended Three Months Ended June 30, June 30, 2020 2019 2020 2019 LIFO benefit$ 2.0 $ 10.4 $ - $ 10.4
Net Interest Expense and Income Taxes
2020 net interest expense was not materially different than both the six and
three months ended
Our tax rate of 24% in the second quarter of 2019 represented a more normalized
percentage, while in the second quarter of 2020 our abnormally high 354% tax
rate was adversely impacted from nondeductible goodwill impairment, a foreign
tax audit matter, and the anomaly in our tax rate percentage from the
significant reduction in our quarterly earnings.
For the full year, we are anticipating an effective tax rate of approximately
24%, which includes the expected impact of recently issued global intangible
low-taxed income (GILTI) regulations and other discrete tax items that we expect
to occur from quarter to quarter. Other factors, such as our overall
profitability, the mix and level of earnings among tax jurisdictions, the type
of income earned, business acquisitions and dispositions, the impact of tax
audits, the effect of other tax law changes, and prudent tax planning
strategies, can also influence our rate.
40
--------------------------------------------------------------------------------Discussion of Segment Results
Second Quarter Discussion A description of the products included in each segment, along with segment financial data, appear in Note 4 to the Consolidated Condensed Financial Statements on page 8. All segment data has been retrospectively adjusted to reflect the change in segment structure discussed on page 33. A summary of segment results is shown in the following tables. Trade Sales (Dollar amounts Three Months Ended Three Months Ended Change in Trade Sales in millions) June 30, 2020 June 30, 2019 $ % Change in Organic Sales 1 % Bedding Products$ 410.6 $ 568.4 $ (157.8) (27.8) % (27.8) % Specialized Products 140.8 267.0 (126.2) (47.3) (47.3) Furniture, Flooring and Textile Products 293.7 377.8 (84.1) (22.3) (25.0) Total$ 845.1 $ 1,213.2 $ (368.1) (30.3) % (31.2) % Change in EBIT EBIT Margins Three Three Months Months Three Months Three Months Ended Ended EBIT Ended June 30, Ended June 30, June 30, June 30, (Dollar amounts in millions) 2020 2019 $ % 2020 2019 Bedding Products$ 18.6 $ 63.5 $ (44.9) (70.7) % 4.5 % 11.2 % Specialized Products (19.7) 41.5 (61.2) (147.5) (14.0) 15.5 Furniture, Flooring and Textile Products 23.4 31.5 (8.1) (25.7) 8.0
8.3
Intersegment eliminations & other .5 (.5) 1.0 Total$ 22.8 $ 136.0 $ (113.2) (83.2) % 2.7 % 11.2 % Depreciation and Amortization (Dollar amounts in millions) Three Months Ended
$ 26.3 $ 28.2
Specialized Products 10.6 10.4
Furniture, Flooring & Textile Products 6.3 6.7
Unallocated 3.3 4.7
Total $ 46.5 $ 50.0
1 This is a change in trade sales not attributable to acquisitions or
divestitures in the last 12 months. Refer to the segment discussions below in
Furniture, Flooring & Textile Products for a reconciliation of the change in
total segment trade sales to organic sales.
Bedding Products
Trade sales decreased $158 million , or 28%. Organic sales were down 28%. Trade
sales volume decreased 25%, primarily from COVID-related demand declines, exited
volume in Fashion Bed and the closure of a Drawn Wire facility. Raw
material-related selling price decreases and currency impact reduced trade sales
3%.
The re-opening of brick and mortar retail locations and eCommerce demand
drove sequential improvement throughout the quarter with April trade sales down
54%, May trade sales down 20% and June trade sales down 14% versus prior year.
EBIT decreased
41
--------------------------------------------------------------------------------
Specialized Products
Trade sales decreased $126 million , or 47%. Volume was down 46% primarily from
COVID-related demand declines. Currency impact decreased trade sales 1%.
We saw sequential improvements in the Specialized Products segment throughout
the quarter as automotive OEMs restarted production in Europe and North America
and production in Asia continued to improve. During the quarter, trade sales
were down 63% in April, 54% in May, and 29% in June versus 2019.
EBIT decreased $61 million , primarily from lower volume and a $25 million
goodwill impairment charge in Hydraulic Cylinders, partially offset by fixed
cost reductions.
Furniture, Flooring & Textile Products
Trade sales decreased $84 million , or 22%. Organic sales were down 25%. A small
Geo Components acquisition completed in December 2019 added 3% to trade sales.
Volume decreased 24%, primarily from COVID-related demand declines. Raw
material-related selling price decreases and currency impact reduced trade sales
1%.
This segment initially was less impacted by the COVID-19 pandemic than our other
segments primarily because of the strong demand in our Geotextiles Components
businesses. Fabric Converting and Flooring Products also held up well and Home
Furniture improved as the quarter progressed. Recovery in Work Furniture has
lagged the other businesses in the segment. Industry demand in that business may
be challenged for some time as work environments change to meet evolving
expectations of employers and employees. April trade sales were down 40%, May
trade sales were down 22% and June trade sales were down 7% versus prior year.
Segment EBIT decreased $8 million , primarily from lower volume, partially offset
by fixed cost reductions and lower raw material costs.
42
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Six Month Discussion
A description of the products included in each segment, along with segment
financial data, appear in Note 4 to the Consolidated Condensed Financial
Statements on page 8. All segment data has been retrospectively adjusted to
reflect the change in segment structure discussed on page 33. A summary of
segment results is shown in the following tables.
Six Months Six Months
Trade Sales Ended Ended Change in Sales
(Dollar amounts in June 30, June 30,
millions) 2020 2019 $ % Change in Organic Sales 1 %
Bedding Products $ 901.2 $ 1,122.7 $ (221.5) (19.7) % (21.7) %
Specialized Products 375.3 529.9 (154.6) (29.2) (29.2)
Furniture, Flooring &
Textile Products 614.1 715.7 (101.6) (14.2) (16.4)
Total $ 1,890.6 $ 2,368.3 $ (477.7) (20.2) % (21.8) %
Six Months Six Months
Ended Ended Change in EBIT EBIT Margins
EBIT June 30, June 30, Six Months Ended Six Months Ended
(Dollar amounts in millions) 2020 2019 $ % June 30, 2020 June 30, 2019
Bedding Products $ 48.6 $ 107.6 $ (59.0) (54.8) % 5.4 % 9.6 %
Specialized Products 8.0 77.2 (69.2) (89.6) 2.1 14.6
Furniture, Flooring & Textile
Products 49.9 49.9 - - 8.1 7.0
Intersegment eliminations & other (3.0) (.5) (2.5)
Total $ 103.5 $ 234.2 $ (130.7) (55.8) % 5.5 % 9.9 %
Depreciation and Amortization Six Months Ended Six Months Ended
(Dollar amounts in millions) June 30, 2020 June
30, 2019
Bedding Products $ 53.1 $ 53.0
Specialized Products 21.8 20.6
Furniture, Flooring & Textile Products 12.8
13.3
Unallocated 6.3 9.4
Total $ 94.0 $ 96.3
1 This is a change in trade sales not attributable to acquisitions or
divestitures in the last 12 months. Refer to the segment discussions below in
Bedding Products and Furniture, Flooring & Textile Products for a reconciliation
of the change in total segment trade sales to organic sales.
Bedding Products
Trade sales decreased $222 million , or 20%. Organic sales were down 22% and
volume was down 18%, with raw material-related selling price decreases of 3% and
a negative currency impact of 1%. ECS acquisition completed in mid-January 2019
added 2% to trade sales.
EBIT decreased
Specialized Products
Trade sales decreased $155 million , with organic sales down 29%. Volume
decreased 28% and currency impact reduced trade sales 1%.
EBIT decreased $69 million , primarily from COVID-related demand declines and a
$25 million goodwill impairment charge in Hydraulic Cylinders, partially offset
by fixed cost reductions.
43
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Furniture, Flooring & Textile Products
Trade sales decreased $102 million , or 14%. Organic sales were down 16% and
volume was down 15%, with raw material-related selling price decreases and a
negative currency impact of 1%. A small Geo Components acquisition completed in
December 2019 added 2% to trade sales.
EBIT was flat, with COVID-related demand declines offset by fixed cost
reductions and lower raw material costs.
LIQUIDITY AND CAPITALIZATION
Cash from Operations Cash from operations is our primary source of funds. Earnings and changes in working capital levels are the two factors that generally have the greatest impact on our cash from operations. Cash from operations for the six months endedJune 30, 2020 was$122.5 million , down$81.2 million from the same period last year, primarily reflecting lower earnings. We closely monitor our working capital levels and ended the quarter with adjusted working capital at 15.4% of annualized trade sales which reflected a combination of very weak sales early in the quarter and working capital increases later in the quarter to support demand improvement. The table below explains this non-GAAP calculation. We eliminate cash, current debt maturities and the current portion of operating lease liabilities from working capital to monitor our operating efficiency and performance related to trade receivables, inventories and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period. As discussed on page 48, slightly more than half of these funds are held by international operations and may not be immediately available to reduce debt on a dollar-for-dollar basis. December 31, (Amounts in millions) June 30, 2020 2019 Current assets$ 1,410.3 $ 1,538.1 Current liabilities 775.5 928.1 Working capital 634.8 610.0 Cash and cash equivalents 208.8 247.6 Current debt maturities and current portion of operating lease liabilities 92.9 90.4 Adjusted working capital$ 518.9 $ 452.8 Annualized trade sales 1$ 3,380.4 $ 4,579.6 Working capital as a percent of annualized trade sales 18.8 % 13.3 % Adjusted working capital as a percent of annualized trade sales 15.4 % 9.9 % 1 Annualized trade sales equal second quarter 2020 trade sales of$845.1 million and fourth quarter 2019 trade sales of$1,144.9 million multiplied by 4. We believe measuring our working capital against this sales metric is more useful, since efficient management of working capital includes adjusting those net asset levels to reflect current business volume. 44 --------------------------------------------------------------------------------
Three Primary Components of our Working Capital
Amount (in millions) Days
Three Months Ended Twelve Months Ended Three Months Ended
December 31, June 30, 2020 June 30, 2019
June 30, 2020 2019 June 30, 2019 December 31, 2019
Trade Receivables $ 556.9 $ 564.4 $ 670.8 DSO 1 60 43 50
Inventories $ 574.1 $ 636.7 $ 656.7 DIO 2 75 63 63
Accounts Payable $ 361.4 $ 463.4 $ 452.9 DPO 3 47 46 44
1Days sales outstanding
a. Quarterly: end of period trade receivables ÷ (quarterly net trade sales ÷
number of days in the period).
b. Annually: ((beginning of year trade receivables + end of period trade
receivables) ÷ 2) ÷ (net trade sales ÷ number of days in the period).
2Days inventory on hand
a. Quarterly: end of period inventory ÷ (quarterly cost of goods sold ÷ number
of days in the period).
b. Annually: ((beginning of year inventory + end of period inventory) ÷ 2) ÷
(cost of goods sold ÷ number of days in the period).
3Days payables outstanding
a. Quarterly: end of period accounts payable ÷ (quarterly cost of goods sold ÷
number of days in the period).
b. Annually: ((beginning of year accounts payable + end of period accounts
payable) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period).
Although our DSO and DIO changed considerably in the second quarter 2020, we had
sufficient liquidity to meet our operating needs. We continue to monitor all
elements of working capital in order to optimize cash flow. The timing of the
sales in relation to the quarter end heavily impacted the DSO and DIO metrics.
Trade sales in the second quarter were down 30% versus the second quarter of
2019, with demand improving each month throughout the quarter. April sales were
down over 50%, May sales were down almost 30% and June sales were down just over
15% all versus the prior year.
Trade Receivables - Although our trade receivables decreased at June 30, 2020
compared to both year end and June 30, 2019 , our DSO increased considerably
during the second quarter 2020, primarily related to the timing of sales. Our
sales improved sequentially throughout the quarter, most notably in June. We are
closely monitoring accounts receivable and collections. We recognized $20
million in bad debt expense in the first quarter ($8 million on a note
receivable and $12 million on trade accounts receivable), partially due to
COVID-19 impacts on our customers and risk across our account portfolio,
particularly among our bedding customers. By the end of the second quarter, the
level of our accounts receivable in current status had improved and was
consistent with pre-COVID-19 levels, and we had no significant changes in our
reserves in the second quarter. We monitor all accounts for possible loss. We
obtain credit applications, credit reports, bank and trade references, and
periodic financial statements from our customers to establish credit limits and
terms as appropriate. In cases where a customer's payment performance or
financial condition begins to deteriorate or in the event of a customer
bankruptcy, we tighten our credit limits and terms and make appropriate reserves
based upon the facts and circumstances for each individual customer. We had
approximately $25 million and $40 million of trade receivables that were sold
and removed from our Consolidated Condensed Balance Sheets at June 30, 2020 and
December 31, 2019 , respectively.
Inventories - Although our inventories decreased as compared to both year end
and June 30, 2019 , our DIO increased considerably during the second quarter
2020, primarily related to the timing of sales. Our sales improved sequentially
throughout the quarter, most notably in June. We are taking steps to carefully
control inventory levels as demand improves. We believe we have established
adequate reserves for any slower-moving or obsolete inventories. We continuously
monitor our slower-moving and potentially obsolete inventory through reports on
inventory quantities compared to usage within the previous 12 months. We also
utilize cycle counting programs and complete physical counts of our inventory.
When potential inventory obsolescence is indicated by these controls, we will
take charges for write-downs to maintain an adequate level of reserves. Our
reserve balances as a percentage of period-end inventory were consistent with
our historical average.
Accounts Payable - Accounts payable decreased compared to both year end and
June 30, 2019 , as a result of reductions in purchasing unit volumes and
production levels due to COVID-19. Our payment terms did not change meaningfully
since year end, as we chose to keep our commitment to our vendors by paying on
time and did not request an extension of terms. We
45
--------------------------------------------------------------------------------continue to look for ways to optimize payment terms through our significant purchasing power and also utilize third-party services that allow flexible payment options to enhance our DPO.
Uses of Cash Finance Capital Requirements Because of the current uncertainties around the impact of COVID-19 on our businesses and operations, we significantly reduced our expected uses of cash in 2020. We reduced fixed costs by an estimated$100 million . We cut our capital expenditure budget for 2020 by over 60% to approximately$60 million , and are limiting acquisitions. In the first quarter of 2019, we acquired ECS, a leader in the production of proprietary specialized foam used primarily for the bedding and furniture industries, for total consideration of approximately$1.25 billion . Additional details about acquisitions are discussed on page 38 and in Note 9 on page 19 to the Consolidated Condensed Financial Statements. Pay Dividends In May, we declared a quarterly dividend of$.40 per share, which represented a$.02 , or 2.6%, increase versus the first half of 2019. Our long-term targeted dividend payout ratio is approximately 50% of adjusted EPS (which excludes special items such as significant tax law impacts, impairment charges, restructuring-related charges, divestiture gains, litigation accruals and settlement proceeds). For more information about the payment of dividends, please see "Cash Dividend" on page 36. OnAugust 3, 2020 , our Board of Directors declared a third quarter dividend of$.40 per share, equal to the dividend declared in the third quarter of 2019. Repurchase Stock Once we are past the impact from COVID-19 on our business, we expect to continue our long-term priorities for uses of cash: fund organic growth, pay dividends, fund strategic acquisitions, and repurchase stock with available cash. With the increase in leverage from our acquisition of ECS, as previously discussed, and our need to manage cash in light of the COVID-19 pandemic, we are prioritizing debt repayment after funding only necessary expenditures, and as a result, are temporarily limiting share repurchases. We have been authorized by the Board to repurchase up to 10 million shares each year, but we have established no specific repurchase commitment or timetable. 46 --------------------------------------------------------------------------------
Capitalization
The following table presents our key debt and capitalization statistics:
December 31,
(Dollar amounts in millions) June 30, 2020 2019
Total debt excluding revolving credit/commercial paper $ 2,032.3 $ 2,056.1
Less: Current maturities of long-term debt 51.1 51.1
Scheduled maturities of long-term debt 1,981.2 2,005.0
Average interest rates 1 3.6 % 3.6 %
Average maturities in years 1 5.6 6.0
Revolving credit/commercial paper 2 102.0 61.5
Average interest rate on period-end balance outstanding 0.4 % 2.0 %
Average interest rate during the period (three months) 1.9 % 2.6 %
Total long-term debt 2,083.2 2,066.5
Deferred income taxes and other liabilities 508.8 509.3
Shareholders' equity and noncontrolling interest 1,214.6 1,312.5
Total capitalization $ 3,806.6 $ 3,888.3
Unused committed credit:
Long-term $ 1,098.0 $ 1,138.5
Short-term - -
Total unused committed credit 2 $ 1,098.0 $ 1,138.5
Current maturities of long-term debt $ 51.1 $ 51.1
Cash and cash equivalents $ 208.8 $ 247.6 1 These rates include current maturities, but exclude commercial paper to reflect the
averages of outstanding debt with scheduled maturities. The rates also include
amortization of interest rate swaps.
2 The unused committed credit amount is based on our revolving credit facility and
commercial paper program which, at year end 2019 and at the end of the second quarter
of 2020, had a total authorized program amount of
capacity may be limited by covenants to our credit facility.
Commercial Paper Program and Term Loan Financing InJanuary 2019 , we expanded the borrowing capacity under our credit facility from$800 million to$1.2 billion , extended the term toJanuary 2024 and correspondingly increased permitted borrowings under our commercial paper program primarily to finance the ECS Acquisition. The ECS Acquisition was financed through the issuance of approximately$750 million of commercial paper (of which roughly$500 million was subsequently refinanced through the public issuance of 10-year 4.4% notes due 2029) and the issuance of a$500 million five-year Tranche A Term Loan with our current bank group which requires us to pay principal in the amount of$12.5 million each quarter and to pay the remaining principal at maturity. As ofJune 30, 2020 we had repaid$62.5 million , as scheduled, on the Tranche A Term Loan. The credit facility allows us to issue letters of credit totaling up to$125 million . When we issue letters of credit under the facility, we reduce our available credit and commercial paper capacity by a corresponding amount. We may borrow funds in advance of expected outflows to provide additional flexibility during the COVID-19 disruption. Amounts outstanding related to our commercial paper program were: December 31, (Amounts in millions) June 30, 2020 2019 Total authorized program$ 1,200.0 $ 1,200.0 Commercial paper outstanding (classified as long-term debt) 102.0 61.5 Letters of credit issued under the credit agreement - - Total program usage 102.0 61.5 Total program available$ 1,098.0 $ 1,138.5 47
-------------------------------------------------------------------------------- The average and maximum amounts of commercial paper outstanding during the second quarter of 2020 were$305.9 million and$381.3 million , respectively. At quarter-end, we had no letters of credit outstanding under the credit facility, but we had issued$42.2 million of stand-by letters of credit under other bank agreements to take advantage of better pricing. Over the long-term, and subject to our capital needs, market conditions, alternative capital market opportunities, and our ability to continue to access the commercial paper market, we expect to maintain the indebtedness under the program by continuously repaying and reissuing the commercial paper notes. We view the notes as a source of long-term funds and have classified the borrowings under the commercial paper program as long-term borrowings on our balance sheet. We have the intent to roll over such obligations on a long-term basis and have the ability to refinance these borrowings on a long-term basis as evidenced by our$1.2 billion revolving credit facility maturing in 2024 discussed above. With cash on hand, operating cash flow, our commercial paper program and/or our credit facility, and our ability to obtain debt financing, we believe we have sufficient funds available to repay maturing debt, as well as support our ongoing operations. Our credit facility was amended effectiveMay 6, 2020 and contains revised restrictive covenants. The revised covenants limit: a) as of the last day of each fiscal quarter, the leverage ratio of consolidated funded indebtedness (minus unrestricted cash) to trailing 12-month consolidated EBITDA (each as defined in the credit facility) must not exceed 4.75 to 1.00 for each fiscal quarter end date throughMarch 31, 2021 ; 4.25 to 1.00 atJune 30, 2021 ; 3.75 to 1.00 atSeptember 30, 2021 ; and 3.25 to 1.00 atDecember 31, 2021 and thereafter; b) the amount of total secured debt to 5% of our total consolidated assets untilDecember 31, 2021 , at which time it will revert to 15% of our total consolidated assets; and c) our ability to sell, lease, transfer, or dispose of all or substantially all of total consolidated assets. Various interest rate terms were also changed. The impact on our interest expense will depend upon our ability to access the commercial paper market, and if so, the degree of that access. The amendment also added an anti-cash hoarding provision that limits borrowing if the Company has a consolidated cash balance (as defined in the credit facility) in excess of$300 million without planned expenditures. We were comfortably in compliance with our covenants at the end of the second quarter 2020. For more information about the restrictive covenants in our credit facility, see "Our Ability to Access the Commercial Paper Market or Borrow under our Credit Facility" on page 35. Accessibility of Cash AtJune 30, 2020 , we had cash and cash equivalents of$209 million primarily invested in interest-bearing bank accounts and in bank time deposits with original maturities of three months or less. Slightly more than half of these funds are held in the international accounts of our foreign operations. During the first six months of 2020, we brought back$82 million of foreign cash. We currently expect to bring back approximately$40 million of additional foreign cash before year-end. If we were to immediately bring back all our foreign cash to theU.S. in the form of dividends, we would pay foreign withholding taxes of approximately$13 million . Although there are capital requirements in various jurisdictions, all of this cash is currently accessible for repatriation.
CONTRACTUAL OBLIGATIONS
Our contractual obligations table presented on page 47 in our Form 10-K filedFebruary 20, 2020 , had a material change outside the ordinary course of business in the first quarter 2020 due to an increase of$360 million in our commercial paper borrowing to provide additional flexibility during the COVID-19 disruption. Reference is made to the updated disclosure regarding our contractual obligations on page 44 of our Form 10-Q filed May 8, 2020. Since that disclosure, which was as ofMarch 31, 2020 , our total long-term debt, atJune 30, 2020 , has decreased by$332 million primarily due to the reduction of commercial paper borrowings. CONTINGENCIES
For contingencies related to the impact of the COVID-19 pandemic on our business, please see "COVID-19 Impacts on our Business" on page 33.
48
--------------------------------------------------------------------------------Potential Sale of Real Estate
Although the potential sale is subject to significant conditions that may change the timing, the amount and whether the sale is completed at all, we have agreed to sell certain real estate associated with restructuring activities in the Bedding Products segment. If the sale is completed, we expect to realize a gain of up to$30 million on this transaction in the fourth quarter of 2020 or in 2021. Cybersecurity Risks We rely on information systems to obtain, process, analyze and manage data, as well as to facilitate the manufacture and distribution of inventory to and from our facilities. We receive, process and ship orders, manage the billing of and collections from our customers, and manage the accounting for and payment to our vendors. We have a formal process in place for both incident response and cybersecurity continuous improvement that includes a cross functionalCybersecurity Oversight Committee . Members of theCybersecurity Oversight Committee update the Board quarterly on cyber activity, with procedures in place for interim reporting if necessary. Although we have not experienced any material cybersecurity incidents, we have enhanced our cybersecurity protection efforts over the last few years. However, because of risk due to the COVID-19 pandemic regarding increased remote access, remote work conditions and associated strain on employees, technology failures or cybersecurity breaches could still create system disruptions or unauthorized disclosure of confidential information. We cannot be certain that advances in the attacker's capabilities will not compromise our technology protecting information systems. If these systems are interrupted or damaged by any incident or fail for any extended period of time, then our results of operations could be adversely affected. We may incur remediation costs, increased cybersecurity protection costs, lost revenues resulting from unauthorized use of proprietary information, litigation and legal costs, reputational damage, damage to our competitiveness and negative impact on stock price and long-term shareholder value. Litigation
Accrual for Litigation Contingencies and Reasonably Possible Losses in Excess of Accruals
We are exposed to litigation contingencies that, if realized, could have a material negative impact on our financial condition, results of operations and cash flows. We deny liability in all currently threatened or pending litigation proceedings and believe we have valid bases to contest all claims made against us. AtJune 30, 2020 , our litigation contingency accrual was immaterial (which does not include accrued expenses related to workers' compensation, vehicle-related personal injury, product and general liability claims, taxation issues and environmental matters). Based on current known facts, aggregate reasonably possible (but not probable, and therefore, not recorded) losses in excess of accruals for litigation contingencies are estimated to be$11 million , including$10 million for Brazilian VAT matters and$1 million for other matters. If our assumptions or analyses regarding these contingencies are incorrect, or if facts change, we could realize loss in excess of the recorded accruals (and in excess of the$11 million referenced above) which could have a material negative impact on our financial condition, results of operations and cash flows. For more information regarding our litigation contingencies, see
Note 16 "Contingencies" on page 29 of the Notes to Consolidated Condensed Financial Statements.
ACCOUNTING STANDARD UPDATES The FASB has issued accounting guidance effective for the current and future periods. See Note 2 to the Consolidated Condensed Financial Statements on page 6 for a more complete discussion.
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