LEGGETT & PLATT, INCORPORATED HIGHLIGHTS
As with most companies, we faced a wide variety of challenges in 2020 stemming from the COVID-19 pandemic. The impact began in January, directly affecting our operations inChina . The crisis accelerated, impacting virtually all geographies by mid-March. We quickly took action to align our variable cost structure to demand levels, significantly reduce fixed costs and cut capital expenditures, prioritize accounts receivable and inventory management, and amend the financial covenant in our revolving credit facility to provide additional liquidity. These efforts helped to strengthen cash flow and protect our balance sheet. By mid-second quarter, we began to see rapid recovery in businesses serving home-related markets. This benefited our Bedding,Home Furniture , Flooring, and Textiles businesses. As sales recovered, we maintained most of the fixed cost reductions, adding costs only to support higher volumes and future growth opportunities. EBIT margins benefited from this cost discipline. Sales decreased 10% in 2020, primarily from pandemic-related economic declines across most of our businesses. Acquisitions added 1% to sales. Organic sales (as defined below) were down 11%, on 10% lower volume and raw material-related selling price decreases of 1%.
Earnings decreased primarily from the impact of lower sales, a change in LIFO impact, and a goodwill impairment charge, partially offset by fixed cost reductions.
In 2020, we generated operating cash flow of$603 million , a$65 million decrease versus a record$668 million in 2019. The decrease was driven primarily by lower earnings. We generated more than enough operating cash flow to fund dividends and capital expenditures, something we have accomplished each year for over 30 years. Because of the economic impacts of the COVID-19 pandemic on our business, we amended our revolving credit agreement in May to change our financial covenant to a 4.75x net debt to trailing 12-month EBITDA metric (from 3.5x total debt). This change increased availability under our revolving credit facility, which serves as back-up for our commercial paper program. We ended 2020 with full availability under the$1.2 billion credit facility. We also continued our focus on deleveraging in 2020 by limiting acquisitions and share repurchases and using operating cash flow to repay debt. We reduced debt by$228 million in 2020 and expect to further reduce debt levels in 2021. Our financial base remains strong. We increased the annual dividend in 2020 to$1.60 per share from$1.58 per share in 2019 and extended our record of consecutive annual increases to 49 years. Consistent with our deleveraging plan, share repurchases were limited in 2020. For the full year, we repurchased 240,000 shares of our stock, primarily surrendered for employee benefit plans. Portfolio management remains a strategic priority. Over the past several years we have enhanced our business portfolio and improved margins by growing our stronger businesses and exiting or restructuring businesses that consistently struggled to deliver acceptable returns. During 2020, we divested two businesses in our Bedding Products segment: a small operation in our former Fashion Bed business and a small specialty wire operation in our Drawn Wire business. Total capital expenditures were$66 million , 54% lower than 2019, reflecting our sharp focus on optimizing cash flow as we navigated the effects of the COVID-19 pandemic.
We incurred the following pretax charges in 2020:
(Dollar amounts in millions) Cash Non-Cash Total
Goodwill impairment $ - $ 25 $ 25
Note impairment - 8 8
Stock write-off from prior year divestiture - 4 4
Restructuring-related charges 8 1 9
Total charges $ 8 $ 38 $ 46
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The$25 million goodwill impairment charge related to our Hydraulic Cylinders business. The$8 million impairment charge related to a note receivable. The$4 million stock write-off was associated with a prior year divestiture that filed bankruptcy in 2020. The restructuring-related charges are primarily attributable to pandemic-related severance costs.
These topics are discussed in more detail in the sections that follow.
INTRODUCTION
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. Our TSR was below the 11-14% target over the most recent 3-year period. Over those same years, the TSR of the S&P 500 at 14% was well above historical averages. As a result, our recent 3-year averages did not meet our top-third goal. For the 3-year period that ended onDecember 31, 2020 , our TSR performance of 1% placed us in the bottom third of the S&P 500. We believe our disciplined growth strategy, portfolio management, and prudent use of capital will support achievement of our goal over time. The table below shows the components of our TSR targets. Long term, accomplishing this level of performance over rolling three-year periods should enable us to consistently attain our top-third TSR goal. Current Targets Revenue Growth 6-9% Margin Increase 1% Dividend Yield 3% Stock Buyback 1% Total Shareholder Return 11-14% Senior executives participate in an incentive program with a three-year performance period based on two equal measures: (i) our TSR performance compared to the performance of a group of approximately 300 peers, and (ii) the Company or segment Earnings Before Interest and Taxes (EBIT) Compound Annual Growth Rate (CAGR). Customers
We serve a broad suite of customers, with our largest customer representing approximately 6% of our sales in 2020. Many are companies whose names are widely recognized. They include bedding brands and manufacturers; residential and office furniture producers; automotive OEM and Tier 1 manufacturers; and a variety of other companies.
Organic Sales
We calculate organic sales as trade sales excluding sales attributable to acquisitions and divestitures consummated within the last twelve months. Management uses the metric, and it is useful to investors, as supplemental information to analyze our underlying sales performance from period to period in our legacy businesses.
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Major Factors That Impact Our Business
Many factors impact our business, but those that generally have the greatest
impact are market demand, raw material cost trends, and competition. However, in
2020 COVID-19 has had the largest impact on our business.
COVID-19 Impacts on our Business
The impact of the COVID-19 pandemic began inJanuary 2020 , directly affecting our operations inChina , as well as the global supply chain. The crisis accelerated, impacting virtually all geographies by mid-March. The pandemic had, and could further have, an adverse impact, in varying degrees, to among other things (i) the demand for our products and our customers' products, growth rates in the industries in which we participate, and opportunities in those industries; (ii) our manufacturing operations' ability to remain open, or fully operate, 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 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 borrow under our credit facility in compliance with restrictive covenants; all of which, in the aggregate, had, and could further have, a material negative impact on our trade sales, earnings, cash flow, and financial condition. In response to the COVID-19 pandemic, we took action to: •Implement comprehensive safety protocols •Monitor and manage supply chain risks •Align our variable cost structure to demand levels •Significantly reduce fixed costs by approximately$90 million and cut capital expenditures by over 50% to$66 million (used primarily for maintenance capital) •Prioritize accounts receivable collections and manage inventory levels •Amend the financial covenant in our revolving credit facility to provide additional liquidity These efforts helped to strengthen cash flow and protect our balance sheet as we moved through the year. By mid-second quarter 2020, we began to see rapid recovery in businesses serving home-related markets. With consumers spending less on travel and entertainment, they began investing more in their homes. This benefited our Bedding,Home Furniture , Flooring, and Textiles businesses. We ended 2020 with fourth quarter sales in many of our businesses above fourth quarter 2019 levels. 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. Below is a more in-depth discussion of the various 2020 impacts of COVID-19 on our business. Demand for our Products. Various governments inAsia ,Europe ,North America , and elsewhere instituted, and some have reinstituted, quarantines, shelter-in-place, or stay-at-home orders, or restrictions on public gatherings as well as limitations on social interactions, which have had, and could further have, an adverse effect on the demand for our products. Trade sales in 2020 were down 10% versus 2019. Following steep declines in the second quarter of 2020, we returned to year-over-year sales growth in the third and fourth quarters in ECS,U.S. and European Spring,Home Furniture , Fabric Converting, and Geo Components. These business units continued to benefit from a consumer spending focus on home products. Automotive trade sales grew in the fourth quarter, while demand continues to be weak in our Aerospace andWork Furniture business units. Impact on our Manufacturing Operations. We have manufacturing facilities inthe United States and 16 other countries. All of these countries have been affected by the COVID-19 pandemic. Our facilities are open but we have, from time to time, some capacity restrictions on our plants due to governmental orders in various parts of the world. We have been and could be further negatively affected by governmental action in any one or more of the countries in which we operate by the imposition, or re-imposition, of restrictive social measures, mandatory closures of retail establishments that sell our products or our customers' products, travel restrictions, and restrictions on the import or export of products. 35
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The U.S. and other governments have ordered that certain nonwoven 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 strong bedding demand have caused the Company temporarily to be
unable to supply full industry demand for ComfortCore®. In an effort to manage
supply chain risks, we are engaging with customers to work through these issues.
The shortages have resulted in higher pricing for nonwoven fabrics. If we are
unable to obtain the fabrics, cannot pass the cost along to our customers, are
required to modify existing contracts to accommodate customers, or pay damage
claims to customers, our results of operations may be negatively impacted. As
demand has improved, we also have experienced some temporary labor shortages. We
are in the process of hiring additional employees and adding equipment,
particularly in our U.S. Spring business, to meet this demand.
Because of the shift of production by semiconductor microchip manufacturers to
consumer electronics, such as laptops and tablets for home-schooling and
home-offices, and away from automotive applications during the COVID-19 related
automotive industry shutdowns in 2020, currently there is a shortage of
microchips in the automotive industry. Our Automotive Group uses the microchips
in seat comfort products, and to a lesser extent in motors and actuators.
Although, to date, our Automotive Group has been able to obtain an adequate
supply of microchips, we are dependent on our suppliers to deliver these
microchips in accordance with our production schedule, and a shortage of the
microchips can disrupt our operations and our ability to deliver products to our
customers. Also, because of the industry shortage, automotive OEMs and other
suppliers have not been able to secure an adequate supply of microchips, and as
a result have reduced their production of automobiles or parts, which in turn
has recently reduced, and may continue to reduce our sale of products. If we
cannot secure an adequate supply of microchips in our supply chain, and the
microchips cannot be sourced from a different supplier, or the automotive OEMs
and other suppliers continue to reduce their production as a result of such
shortage, this may negatively impact our sales, earnings and financial
condition.
Some facilities have experienced problems delivering products to customers because of travel restrictions and disruption in logistics necessary to import, export, or transfer products across borders.
Our inability to keep our manufacturing operations open, build and maintain appropriate labor levels, obtain necessary raw materials and parts, and ship finished products to customers may increase labor and commodity costs and otherwise negatively impact our results of operations.
The Company has implemented comprehensive safety protocols focused on protecting our employees and ensuring a safe work environment. Where possible, our employees are working remotely. However, most of our production employees have returned to work. When employees test positive for COVID-19, we follow adopted protocols 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 employees who had direct contact with the employee who tested positive for COVID-19. If any direct contacts are identified, those employees 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 maintain necessary labor levels and produce and deliver products to our customers if we are unable to shift production to other manufacturing facilities. Severance Costs Related to Workforce Reductions. To align our variable cost structure to reduced demand for our products in certain business units, we decreased the size of our workforce. We incurred severance costs of$7 million in 2020 and we do not expect any additional material charges. However, if circumstances change because of lack of demand, mandatory governmental closure of our facilities, or otherwise, we may incur future material separation costs. Collection of Trade and Notes Receivables. Some 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. We are closely monitoring accounts receivable and collections. However, atDecember 31, 2020 , the level of our accounts receivable in current status was above pre-COVID-19 levels. 36
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Impairment of Goodwill 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. At
December 31, 2020 , goodwill and other intangible assets represented $2.1
billion , or 44% of our total assets.
The 2020 annual goodwill impairment testing resulted in a $25 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. 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. In connection with the preparation and review of the
second quarter financial statements we concluded that an impairment charge was
required with respect to this reporting unit.
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 $857 million at December 31, 2020 .
•Fair value for our Aerospace reporting unit exceeded carrying value by 51%.
Goodwill for the Aerospace reporting unit was $59 million at December 31, 2020 .
•Fair value for our Work Furniture reporting unit exceeded carrying value by
25%. Goodwill for the Work Furniture reporting unit was $97 million at
December 31, 2020 .
If there is a prolonged adverse economic impact from the COVID-19 pandemic, or
otherwise, we may not be able to achieve projected performance levels. Internal
forecasts and industry data suggest that economic impacts of COVID-19 for the
aerospace industry may be longer than previously expected. We are continuing to
monitor all factors impacting this industry. 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 Borrow under our Credit Facility. Our multi-currency credit
facility matures in January 2024 and provides us the ability, from time to time
subject to certain restrictive covenants and customary conditions, to borrow,
repay, and re-borrow up to $1.2 billion . Because of the economic impacts of the
COVID-19 pandemic on our business, in early May 2020 we amended the credit
facility to, among other things, change the restrictive borrowing covenants. The
prior leverage ratio covenant required us to maintain 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 were changed to 4.75 to 1.00 for each
fiscal quarter-end date through March 31, 2021 ; 4.25 to 1.00 at June 30, 2021 ;
3.75 to 1.00 at September 30, 2021 ; and 3.25 to 1.00 at December 31, 2021 and
thereafter. In addition, the amount of total secured debt limit was changed from
15% to 5% of our total consolidated assets until December 31, 2021 , at which
time it will revert back to 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 amended
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. At
December 31, 2020 , the Company was in compliance with all of its debt covenants
and expects to be able to maintain compliance with the amended debt covenant
requirements.
Our credit facility serves as back-up for our commercial paper program. At
December 31, 2020 , we had no commercial paper outstanding and had no borrowing
under the credit facility. As our trailing 12-month consolidated EBITDA,
unrestricted cash, and debt levels change, our borrowing capacity increases or
decreases. Based on our trailing 12-month consolidated EBITDA, unrestricted
cash, and debt levels at December 31, 2020 , our borrowing capacity under the
credit facility was the full $1.2 billion at year 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
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debt levels at that time. Also, our access to the commercial paper market may be
restricted depending on the impact of the COVID-19 pandemic to the short-term
debt markets.
Relief under the CARES Act and Foreign Governmental Subsidies. We are deferring
payment of employer's Social Security match into 2021 and 2022, as provided by
the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Through
December 31, 2020 , we have deferred $19 million . Half of the amount will be paid
in 2021 and half in 2022. We also received $21 million in government subsidies,
primarily in our international locations, in 2020. These deferrals and subsidies
are not expected to have a material impact on our short- or long-term financial
condition, results of operations, liquidity, or capital resources and do not
contain material restrictions on our operations, sources of funding, or
otherwise.
Market Demand
Market demand (including product mix) is impacted by several economic factors,
with consumer confidence being the most significant. Other important factors
include disposable income levels, employment levels, housing turnover, and
interest rates. All of these factors influence consumer spending on durable
goods, and therefore affect demand for our products and components. Some of
these factors also influence business spending on facilities and equipment,
which impacts approximately 20% of our sales.
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 2020, steel costs deflated modestly through the majority of the year followed by significant inflation late in the year. 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 metal margin persisted. As a result, our steel operations experienced enhanced profitability in 2019. In 2020, these metal margins compressed to near normalized levels. 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. In 2019, ECS experienced a negative effect on trade sales due to chemical deflation. In 2020, chemicals deflated further in the first half of the year followed by inflation in the second half of the year as a result of supply shortages. Our other raw materials include woven and nonwoven fabrics and foam scrap. We have experienced changes in the cost of these materials and generally have been able to pass them through to our customers. When we raise our prices to recover higher raw material costs, this sometimes causes customers to modify their product designs and replace higher cost components with lower cost components. We must continue providing product options to our customers that enable them to improve the functionality of their products and manage their costs, while providing higher profits for our operations. 38
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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 most of our
business units, even versus many foreign manufacturers, as a result of our
highly efficient operations, automation, vertical integration in steel and wire,
logistics and distribution efficiencies, and large scale purchasing of raw
materials and commodities. However, we have also reacted to foreign competition
in certain cases by selectively adjusting prices, developing new proprietary
products that help our customers reduce total costs, and shifting production
offshore to take advantage of lower input costs.
Since 2009, there have been antidumping duty orders on innerspring imports from
China , South Africa , and Vietnam , ranging from 116% to 234%. In September 2019 ,
the Department of Commerce (DOC) and the International Trade Commission (ITC)
concluded a second sunset review extending the orders for an additional five
years, through October 2024 ; at which time, the DOC and ITC will conduct a third
sunset review to determine whether to extend the orders for an additional five
years.
Antidumping and countervailing duty cases filed by major U.S. steel wire rod
producers have resulted in the imposition of antidumping duties on imports of
steel wire rod from Brazil , China , Belarus , Indonesia , Italy , Korea , Mexico ,
Moldova , Russia , South Africa , Spain , Trinidad & Tobago , Turkey , Ukraine , United
Arab Emirates , and the United Kingdom , ranging from 1% to 757%, and
countervailing duties on imports of steel wire rod from Brazil , China , Italy ,
and Turkey , ranging from 3% to 193%. In June 2020 , the ITC and DOC concluded a
first sunset review, extending the orders on China through June 2025 , and in
July 2020 , the ITC and DOC concluded a third sunset review, determining to
extend the orders on Brazil , Indonesia , Mexico , Moldova , and Trinidad & Tobago
through August 2025 . Duties will continue through December 2022 for Belarus ,
Italy , Korea , Russia , South Africa , Spain , Turkey , Ukraine , United Arab
Emirates , and the United Kingdom . At those times, the DOC and the ITC will
conduct sunset reviews to determine whether to extend those orders for an
additional five years.
In September 2018 , the Company, along with other domestic mattress producers,
filed petitions with the DOC and the ITC alleging that manufacturers of
mattresses in China were unfairly selling their products in the United States at
less than fair value (dumping) and seeking the imposition of duties on
mattresses imported from China . In October 2019 , the DOC made a final
determination assigning duty rates between 57% to 1,732%. In November 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, through December 2024 , at which time the DOC and ITC will conduct a
sunset review to determine whether to extend the order for an additional five
years.
In March 2020 , the Company, along with other domestic mattress producers and two
labor unions representing workers at other mattress producers, filed antidumping
petitions with the DOC and the ITC alleging that manufacturers of mattresses in
Cambodia , Indonesia , Malaysia , Serbia , Thailand , Turkey , and Vietnam were
unfairly selling their products in the United States at less than fair value
(dumping) and a countervailing duty petition alleging manufacturers of
mattresses in China were benefiting from subsidies. In May 2020 , the ITC made a
unanimous, affirmative preliminary determination of a reasonable likelihood of
injury. In August 2020 , the DOC made a preliminary determination in the
countervailing investigation, assigning China a duty rate of 97.78%, and, in
late October 2020 , the DOC made preliminary determinations in the antidumping
investigations, assigning duty rates of 2.61- 989.9%. Final determinations are
expected in the first half of 2021. See Item 3 Legal Proceedings on page 28
for more information.
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Acquisition of ECS
On January 16, 2019 , we acquired ECS for a cash purchase price of approximately
$1.25 billion . ECS, headquartered in Newnan, Georgia , is a leader in specialized
foam technology, primarily for the bedding and furniture industries. With 16
facilities across the 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, 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
operates within the Bedding Products segment.
For information on the financing of the ECS acquisition, please see the Commercial Paper Program on page 55.
Change in Segment Reporting in 2020
Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. To reflect how we manage our 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, the composition of our segments also changed to reflect the new structure. For information on the change in our segment reporting structure, please see Item 1 Business, Revised Segment Structure on page 7.
RESULTS OF OPERATIONS-2020 vs. 2019
Trade sales decreased 10% in 2020. Acquisitions, net of divestitures, added 1%
to sales growth. Organic sales decreased 11%, with volume down 10%. Trade sales
were primarily impacted by pandemic-related economic declines along with the
planned lower volume in business we exited in connection with the 2018
Restructuring Plan as discussed in Note E beginning on page 93 of the
Notes to Consolidated Financial Statements (which reduced trade sales 2%). Raw
material-related selling price decreases early in the year reduced trade sales
1%.
Earnings decreased primarily from lower trade sales volume, change in LIFO
impact, and a goodwill impairment charge, partially offset by fixed cost
reductions. Further details about our consolidated and segment results are
discussed below.
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Consolidated Results
The following table shows the changes in sales and earnings during 2020, and identifies the major factors contributing to the changes. (Dollar amounts in millions, except per share data)
Amount % 1
Net trade sales:
Year ended December 31, 2019 $ 4,753
Divestitures (14) - %
2019 sales excluding divestitures 4,739
Approximate volume losses (483) (10) %
Approximate raw material-related inflation and currency impact (32) (1)
Organic sales (515) (11)
Acquisition sales growth 56 1
Year ended December 31, 2020 $ 4,280 (10) %
Earnings:
(Dollar amounts, net of tax) Year ended December 31, 2019$ 334 Lower restructuring-related charges ($13 in 2019;$7 in 2020) 6 Goodwill impairment (25) Note impairment 6 Stock write-off from a prior year divestiture
(3)
Other items, including COVID-related economic declines and a change in LIFO impact, partially offset by fixed cost reductions, lower interest expense and lower taxes
(70)
Year ended December 31, 2020$ 248 2019 Earnings Per Diluted Share$ 2.47 2020 Earnings Per Diluted Share
1 Calculations impacted by rounding
Full-year trade sales decreased 10%, to$4,280 million , and organic sales decreased 11%. Volume declined 10%, primarily due to pandemic-related economic declines and the planned exit of business in Fashion Bed and Drawn Wire which reduced sales 2%. Raw material-related selling price deflation early in the year reduced sales by 1%. Acquisitions, net of divestitures, contributed 1% to sales growth. As indicated in the table above, earnings decreased from the goodwill impairment charge, the impairment charge related to a note receivable, and the stock write-off associated with a prior year divestiture that filed bankruptcy in 2020, partially offset by lower restructuring-related charges. Operationally, earnings decreased primarily from the impact of lower sales and a change in LIFO impact, partially offset by fixed cost reductions. 41
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LIFO Impact
The last-in, first-out (LIFO) method is primarily used to value our domestic steel-related inventories, largely in the Bedding Products segment and Furniture, Flooring & Textile Products segment. Prior to 2019, inventories accounted for using the LIFO method represented approximately 50% of our inventories. With the acquisition of ECS in the first quarter of 2019, inventories valued using the LIFO method decreased to roughly 40%, as ECS does not utilize the LIFO method. However, due to the sharp increase in demand that began in the latter part of the second quarter of 2020 and several divestitures and closures of operations using the LIFO method in the last three years, our LIFO inventories have been lower than historical levels, and currently represent about one-third of our total inventories. In 2020, a sharp increase in steel scrap costs during the fourth quarter resulted in a full-year pretax LIFO expense of$8 million . In 2019, decreasing steel costs resulted in a full-year pretax LIFO benefit of$32 million .
For further discussion of inventories, see Note A on page 82 of the Notes to Consolidated Financial Statements.
Interest and Income Taxes
Net interest expense in 2020 was lower by
Our worldwide effective income tax rate was 23% in 2020, compared to 22% in
2019. The following table reflects how our effective income tax rate differs
from the statutory federal income tax rate. See Note N on page 119 of the
Notes to Consolidated Financial Statements for additional details.
Year Ended
2020 2019
Statutory federal income tax rate 21.0 % 21.0 %
Increases (decreases) in rate resulting from:
State taxes, net of federal benefit .8 1.4
Tax effect of foreign operations (2.2) (1.6)
Global intangible low-taxed income (.4) 2.2
Current and deferred foreign withholding taxes 2.8 1.2
Stock-based compensation (.6) (1.1)
Change in valuation allowance .8 .4
Change in uncertain tax positions, net .6 (.3)
Goodwill impairment 1.7 -
Other permanent differences, net (1.4) (.3)
Other, net (.3) (.5)
Effective tax rate 22.8 % 22.4 %
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Segment Results
In the following section we discuss 2020 sales and EBIT (earnings before interest and taxes) for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in
Note F on page 95 of the Notes to Consolidated Financial Statements. All
segment data has been retrospectively adjusted to reflect the change in segment
structure discussed on page 7.
% Change
Change in Sales Organic
(Dollar amounts in millions) 2020 2019 $ % Sales 1
Trade Sales
Bedding Products $ 2,039.3 $ 2,254.3 $ (215.0) (9.5) % (10.0) %
Specialized Products 891.2 1,066.8 (175.6) (16.5) (16.5)
Furniture, Flooring & Textile
Products 1,349.7 1,431.4 (81.7) (5.7) (8.1)
Total trade sales $ 4,280.2 $ 4,752.5 $ (472.3) (9.9) % (10.9) %
Change in EBIT EBIT Margins
2020 2019 $ % 2020 2019
EBIT
Bedding Products $ 185.8 $ 235.8 $ (50.0) (21.2) % 9.1 % 10.5 %
Specialized Products 91.9 170.5 (78.6) (46.1) 10.3 16.0
Furniture, Flooring & Textile
Products 126.2 107.4 18.8 17.5 9.4 7.5
Intersegment eliminations & other (3.4) (.3) (3.1) Total EBIT$ 400.5 $ 513.4 $ (112.9) (22.0) % 9.4 % 10.8 % 2020 2019 Depreciation and Amortization Bedding Products$ 106.7 $ 107.3 Specialized Products 44.3 41.8 Furniture, Flooring & Textile Products 25.5 25.7 Unallocated 2 12.9 17.1
Total Depreciation and Amortization
1 This is the change in sales not attributable to acquisitions or divestitures in the last 12 months. Refer to the Bedding Products and Furniture, Flooring & Textile Products discussions below for a reconciliation of the change in total segment sales to organic sales.
2 Unallocated consists primarily of depreciation and amortization on non-operating assets.
Bedding Products
Trade sales decreased 9.5%. Acquisitions, net of divestitures, increased sales .5%. Organic sales were down 10%. Volume decreased 9%, with raw material-related selling price decreases and negative currency impact reducing sales 1%. EBIT decreased$50 million , primarily from pandemic-related economic declines, change in LIFO impact, lower metal margin in our rod mill, and the$8 million impairment related to a note receivable, partially offset by fixed cost reductions. 43
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Specialized Products
In Specialized Products, trade sales were down 16%. Organic sales were down 16%, with volume down 17%. Currency benefit increased sales 1%.
EBIT decreased$79 million , primarily from pandemic-related economic declines and a$25 million goodwill impairment charge in Hydraulic Cylinders, partially offset by fixed cost reductions.
Furniture, Flooring & Textile Products
Trade sales in Furniture, Flooring & Textile Products decreased 6%. Organic sales were down 8% and volume decreased 8%, with raw material-related selling price decreases offset by a currency benefit. A small Geo Components acquisition completed inDecember 2019 added 2% to trade sales. EBIT increased$19 million , primarily from fixed cost reductions, improved pricing and lower restructuring-related charges, partially offset by lower volume.
RESULTS OF OPERATIONS-2019 vs. 2018
Trade sales increased 11% in 2019. Acquisitions, primarily ECS, added 14% to sales. Organic sales were down 3%, on 3% lower volume. Raw material-related selling price increases added 1% to sales, offset by a 1% negative currency impact. Sales growth in most businesses, includingU.S. Spring, Automotive,Work Furniture , and Aerospace, was offset primarily by the planned exit of business in Fashion Bed andHome Furniture which reduced sales 3% and weak trade demand for steel rod and wire. Earnings increased from the non-recurrence of a note impairment charge in 2018 and lower restructuring-related and acquisition-related transaction costs. Earnings further improved from lower raw material costs (including LIFO benefit), the ECS acquisition, and improved earnings performance as a result of the restructuring activities in ourHome Furniture and Fashion Bed businesses. Further details about our consolidated and segment results are discussed below. 44
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Consolidated Results
The following table shows the changes in sales and earnings during 2019, and identifies the major factors contributing to the changes. (Dollar amounts in millions, except per share data)
Amount % 1 Net trade sales: Year ended December 31, 2018$ 4,270 Approximate volume losses (112) (3) % Approximate raw material-related inflation and currency impact (22) - Organic sales (134) (3) Acquisition sales growth 617 14 Year ended December 31, 2019$ 4,753 11 %
Earnings:
(Dollar amounts, net of tax) Year ended December 31, 2018$ 306 Lower restructuring-related charges ($14 in 2018;$13 in 2019)
1
Lower ECS transaction costs ($6 in 2018;$1 in 2019)
5
Non-recurrence of note impairment
12
Other items, including contribution from ECS, lower raw material costs (including LIFO benefit) and improved earnings primarily in Furniture, Flooring & Textile Products partially offset by higher interest expense and higher taxes
10
Year ended December 31, 2019$ 334 2018 Earnings Per Diluted Share$ 2.26 2019 Earnings Per Diluted Share
1 Calculations impacted by rounding
Full-year trade sales grew 11%, to$4.75 billion , and organic sales decreased 3%. Volume declined 3%, with gains in most of our businesses, includingU.S. Spring, Automotive,Work Furniture , and Aerospace, more than offset by the planned exit of business in Fashion Bed andHome Furniture which reduced sales 3% and weak trade demand for steel rod and wire. Raw material-related selling price inflation from increases implemented in late 2018 were offset by a negative currency impact. Acquisitions contributed 14% to sales growth.
As indicated in the table above, earnings increased from the non-recurrence of a note impairment charge in 2018 and lower restructuring-related and acquisition-related transaction costs. Operationally, earnings improved primarily from lower raw material costs (including LIFO benefit), the ECS acquisition, and improved earnings performance from the 2018 Restructuring Plan.
LIFO Impact
AtDecember 31, 2019 , approximately 40% of our inventories were valued on the LIFO method. These were primarily our domestic, steel-related inventories. In 2019, decreasing steel costs resulted in a full-year pretax LIFO benefit of$32 million . In 2018, increasing steel costs resulted in a full-year pretax LIFO expense of$31 million .
For further discussion of inventories, see Note A on page 82 of the Notes to Consolidated Financial Statements.
Interest and Income Taxes
Net interest expense in 2019 was higher by
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Our worldwide effective income tax rate was 22% in 2019, compared to 20% in
2018. The following table reflects how our effective income tax rate differs
from the statutory federal income tax rate. See Note N on page 119 of the
Notes to Consolidated Financial Statements for additional details.
Year Ended
2019 2018
Statutory federal income tax rate 21.0 % 21.0 %
Increases (decreases) in rate resulting from:
State taxes, net of federal benefit 1.4 .9
Tax effect of foreign operations (1.6) (.7)
Global intangible low-taxed income 2.2 .7
Current and deferred foreign withholding taxes 1.2 3.8
Stock-based compensation (1.1) (.8)
Change in valuation allowance .4 (2.0)
Change in uncertain tax positions, net (.3) (.3)
Other permanent differences, net (.3) (1.4)
Other, net (.5) (.8)
Effective tax rate 22.4 % 20.4 %
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Segment Results
In the following section we discuss 2019 sales and EBIT for each of our
segments. We provide additional detail about segment results and a
reconciliation of segment EBIT to consolidated EBIT in Note F on page 95 of
the Notes to Consolidated Financial Statements. All segment data has been
retrospectively adjusted to reflect the change in segment structure discussed on
page 7.
% Change
Change in Sales Organic
(Dollar amounts in millions) 2019 2018 $ % Sales 1
Trade Sales
Bedding Products $ 2,254.3 $ 1,795.3 $ 459.0 25.6 % (6.0) %
Specialized Products 1,066.8 1,056.3 10.5 1.0 -
Furniture, Flooring & Textile
Products 1,431.4 1,417.9 13.5 1.0 (2.0)
Total trade sales $ 4,752.5 $ 4,269.5 $ 483.0 11.3 % (3.0) %
Change in EBIT EBIT Margins
2019 2018 $ % 2019 2018
EBIT
Bedding Products $ 235.8 $ 149.8 $ 86.0 57.4 % 10.3 % 8.1 %
Specialized Products 170.5 189.0 (18.5) (9.8) 15.9 17.8
Furniture, Flooring & Textile
Products 107.4 98.6 8.8 8.9 7.4 6.9
Intersegment eliminations & other (.3) (.5) .2 Total EBIT$ 513.4 $ 436.9 $ 76.5 17.5 % 10.8 % 10.2 % 2019 2018 Depreciation and Amortization Bedding Products$ 107.3 $ 47.3 Specialized Products 41.8 39.0 Furniture, Flooring & Textile Products 25.7 27.0 Unallocated 2 17.1 22.8
Total Depreciation and Amortization
1 This is the change in sales not attributable to acquisitions or divestitures in the last 12 months. Refer to each segment discussion below for a reconciliation of the change in total segment trade sales to organic sales.
2 Unallocated consists primarily of depreciation and amortization on non-operating assets.
Bedding Products
Trade sales grew 26%. Acquisitions added 32% to sales partially offset by a 6% organic sales decline. Volume decreased 5%, primarily from our decision to exit Fashion Bed and weak trade demand for steel rod and wire, partially offset by growth inU.S Spring and European Spring. Currency impact reduced sales by 1%. EBIT increased$86 million , primarily from lower raw material costs (including LIFO benefit), earnings from the ECS acquisition (including$45 million of amortization expense and a$5 million non-recurring charge related to acquired inventories) and the non-recurrence of a$16 million non-cash impairment charge related to a note receivable in the fourth quarter of 2018. 47
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Specialized Products
Trade sales were up 1% from the PHC acquisition in early 2018. Organic sales were flat. Volume increased 2% from growth in Automotive and Aerospace. Currency impact, net of raw material-related selling price increases in Hydraulic Cylinders, decreased sales 2%. EBIT decreased$18 million , with earnings from higher sales offset by higher operating costs in Aerospace and Hydraulic Cylinders, negative currency impact, and investment to support future growth in Automotive.
Furniture, Flooring & Textile Products
Trade sales increased 1%. Acquisitions added 3% to sales. Organic sales were down 2%. Volume decreased 3%, primarily from planned declines inHome Furniture and lower sales in Flooring Products, partially offset by growth inWork Furniture and Geo Components. Raw material-related price increases, net of negative current impact, added 1% to sales. EBIT increased$9 million , primarily from improved pricing and lower fixed costs attributable to restructuring activity and lower restructuring-related charges ($6 million in 2019 versus$9 million in 2018).
LIQUIDITY AND CAPITALIZATION
In 2020, we generated$603 million in cash from operations, a$65 million decrease from 2019. Our operations provided more than enough cash to fund both capital expenditures and dividend payments, something we have accomplished each year for over 30 years. We expect this to again be the case in 2021. Total capital expenditures in 2020 were$66 million , 54% lower than 2019, reflecting our sharp focus on optimizing cash flow as we navigated the effects of COVID-19. We raised the annual dividend to$1.60 per share from$1.58 per share and extended our record of consecutive annual increases to 49 years. In May, we amended our revolving credit agreement to change our financial covenant to a 4.75x net debt to trailing 12-month EBITDA metric (from 3.5x total debt). This change increased availability under the revolving credit facility, which serves as back-up for our commercial paper program. We ended 2020 with full availability under the$1.2 billion credit facility. We also continued our focus on deleveraging in 2020 by limiting acquisitions and share repurchases and using operating cash flow to repay debt. We reduced debt by$228 million in 2020 and expect to further reduce debt levels in 2021. In keeping with our deleveraging plan, we repurchased only 240,000 shares of our stock during the year, primarily surrendered for employee benefit plans. 48
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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.
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Cash from operations-2018 $440 million , 2019 $668 million , 2020 $603
million
Cash from operations decreased $65 million in 2020, primarily reflecting lower
earnings.
We closely monitor our working capital levels and we ended 2020 with working
capital at 12.8% and adjusted working capital at 7.4% of annualized sales.1 The
table below explains this non-GAAP calculation. We eliminate cash and current
debt maturities 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.
(Dollar amounts in millions) 2020 2019
Current assets $ 1,612.1 $ 1,538.1
Current liabilities 1,006.0 928.1
Working capital 606.1 610.0
Cash and cash equivalents 348.9 247.6
Current debt maturities and current portion of operating lease
liabilities 93.3 90.4
Adjusted working capital $ 350.5 $ 452.8
Annualized sales 1 $ 4,728.0 $ 4,579.6
Working capital as a percent of annualized sales 12.8 % 13.3 %
Adjusted working capital as a percent of annualized sales 7.4 % 9.9 %
1 Annualized sales equal fourth quarter sales ($1,182.0 million in 2020 and
$1,144.9 million in 2019) 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.
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Three Primary Components of our Working Capital
Amount (in millions) Days
2020 2019 2018 2020 2019 2018
Trade Receivables $ 535 $ 564 $ 545 DSO 1 47 43 46
Inventories 646 637 634 DIO 2 69 63 65
Accounts Payable 552 463 465 DPO 3 55 46 48
1Days sales outstanding: ((beginning of year trade receivables + end of period
trade receivables) ÷ 2) ÷ (net trade sales ÷ number of days in the period).
2Days inventory on hand: ((beginning of year inventory + end of period
inventory) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period).
3Days payables outstanding: ((beginning of year accounts payable + end of period
accounts payable) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period).
Trade Receivables - At December 31, 2020 , compared to 2019, our trade
receivables decreased by $29 million and our DSO increased. Although our DSO
increased notably in the first half of the year as a result of COVID-19, strong
credit discipline drove steady DSO improvement in the latter half of the year to
a more normal level.
We are closely monitoring accounts receivable and collections. We recognized $17
million of bad debt expense for the year:
•$20 million in the first quarter partially due to COVID-19 impacts on our
customers and risk across our account portfolio; approximately half was
associated with a Bedding customer that was partially reserved in 2018 and had
continued to experience financial difficulties and liquidity problems over the
last two years.
•$3 million reductions to bad debt expense during the last half of the year as
our accounts receivable in current status improved and returned to a standing
consistent with pre-COVID-19 levels.
Although positive trends in the latter half of the year allowed us to reduce
some of first quarter's expense, our full-year expense (in addition to the
reserve for one customer noted above) is higher than our historical experience.
Our first quarter bad debt expense included an increased qualitative risk for
macroeconomic conditions, which we believe continued to be appropriate at year
end. We also monitor general macroeconomic conditions and other items that could
impact the expected collectibility of all customers, or pools of customers, with
similar risk. We obtain credit applications, credit reports, bank and trade
references, and periodic financial statements from our customers to establish
credit limits and terms as appropriate. In cases where a customer's payment
performance or financial condition begins to deteriorate or in the event of a
customer bankruptcy, we tighten our credit limits and terms and make appropriate
reserves based upon the facts and circumstances for each individual customer, as
well as pools of customers, with similar risk.
Inventories - Our inventories increased $9 million at December 31, 2020 compared
to the prior year. Our DIO also increased during 2020. Primary factors
contributing to increased inventory include inventory purchases related to
growing demand and increased raw material costs. Full-year increase in DIO is
primarily a result of lower cost of goods sold. Although we experienced
increased raw material costs and higher freight charges due to raw material
shortages, volumes at the end of the first quarter and into second quarter were
greatly reduced. While inventory balances and DIO fluctuated notably during
2020, the year-end balance and fourth quarter DIO both returned to more normal
levels, and we took steps to carefully control inventory levels as demand
improved. 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.
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Accounts Payable - Our accounts payable increased $89 million at December 31,
2020 compared to the prior year. Our DPO also increased during 2020. The rise
was primarily related to the inventory factors discussed above and continued
focus on optimizing payment terms with our vendors. Our payment terms did not
change meaningfully, as we chose to keep our commitment to our vendors by paying
on time during periods of reduced demand earlier in the year and did not request
an extension of terms. We continue to look for ways to establish and maintain
favorable payment terms through our significant purchasing power and also
utilize third-party services that offer flexibility to our vendors, which in
turn helps us manage our DPO as discussed below.
Accounts Receivable and Accounts Payable Programs
We have participated in trade receivables sales programs with third-party banking institutions and trade receivables sales programs that have been implemented by certain of our customers the last few years. Under each of these programs, we sell our entire interest in the trade receivable for 100% of face value, less a discount. Because control of the sold receivable is transferred to the buyer at the time of sale, accounts receivable balances sold are removed from the Consolidated Balance Sheets and the related proceeds are reported as cash provided by operating activities in the Consolidated Statements of Cash Flows. We had approximately$45 million and$40 million of trade receivables that were sold and removed from our Consolidated Balance Sheets atDecember 31, 2020 and 2019, respectively. These sales reduced our quarterly DSO by roughly three days, and the impact to operating cash flow was approximately$5 million and$25 million atDecember 31, 2020 and 2019, respectively. For accounts payable, we have historically looked for ways to optimize payment terms through utilizing third-party programs that allow our suppliers to be paid earlier at a discount. While these programs assist us in negotiating payment terms with our suppliers, we continue to make payments based on our customary terms. A vendor can elect to take payment from a third party earlier with a discount, and in that case, we pay the third party on the original due date of the invoice. Contracts with our suppliers are negotiated independently of supplier participation in the programs, and we cannot increase payment terms pursuant to the programs. As such, there is no direct impact on our DPO, accounts payable, operating cash flows or liquidity. The accounts payable, which remain on our Consolidated Balance Sheets, settled through the third-party programs, were approximately$105 million and$55 million atDecember 31, 2020 and 2019, respectively. We did not request an extension of terms during the pandemic. However, we increased purchases late in the year as demand returned, which resulted in greater vendor participation by those that have historically utilized these programs, and we have also experienced greater interest by other vendors as they also strive to optimize their customer collections. While we utilize the above items as tools in our cash flow management, and offer them as options to facilitate customer and vendor operating cycles, if there were to be a cessation of these programs, we do not expect it would materially impact our operating cash flows or liquidity. 51
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Uses of Cash
Finance Capital Requirements
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Capital expenditures-2018 $160 million , 2019 $143 million , 2020 $66 million
To carefully manage cash during the pandemic-related economic declines across
most of our businesses, we reduced capital expenditures by over 50% for 2020 (to
be used primarily for maintenance capital) and limited acquisition spending. We
intend to make investments to support expansion in businesses and product lines
where sales are profitably growing, for efficiency improvement and maintenance,
and for system enhancements. We expect capital expenditures to approximate $150
million in 2021. Our employee incentive plans emphasize returns on capital,
which include net fixed assets and working capital. This emphasis focuses our
management on asset utilization and helps ensure that we are investing
additional capital dollars where attractive return potential exists.
Our long-term, 6-9% annual revenue growth objective envisions periodic
acquisitions. We are seeking strategic acquisitions, and we are looking for
opportunities to enter new growth markets (carefully screened for sustainable
competitive advantage). As a reminder, in connection with the acquisition of ECS
our debt levels increased, and we are focused on deleveraging by, among other
factors, controlling the pace of acquisition spending.
In 2018, we acquired three businesses for total consideration of $109 million .
The first is Precision Hydraulic Cylinders (PHC), a leading global manufacturer
of engineered hydraulic cylinders primarily for the materials handling market.
The second and third are both operations in our Geo Components business: a small
producer of geo components, and a manufacturer and distributor of innovative
home and garden products that can be found at many major retailers.
In 2019, we acquired two businesses for total consideration of $1.27 billion . In
January 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 . In December 2019 , we
acquired a small manufacturer and distributor of geosynthetic fabrics, grids and
erosion control products in our Geo Components business unit.
In 2020, we acquired no businesses.
Additional details about acquisitions can be found in Note R on page 125 of the Notes to Consolidated Financial Statements.
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Pay Dividends
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Dividends Paid-2018 $194 million , 2019 $205 million , 2020 $212 million ;
Dividends Declared-2018 $1.50 , 2019 $1.58 , 2020 $1.60
Dividends are the primary means by which we return cash to shareholders. The
cash requirement for dividends in 2021 should approximate $220 million .
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, and
litigation accruals/settlements). Continuing our long track record of increasing
the dividend remains a high priority. In 2020, we increased the annual dividend
by $.02 from $1.58 to $1.60 per share. 2020 marked our 49th consecutive annual
dividend increase, a record that only ten S&P 500 companies currently exceed. We
are proud of our dividend record and plan to extend it.
Repurchase Stock
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Stock , net-2018 $108 million , 2019 $7 million , 2020 $9 million
Share repurchases are the other means by which we return cash to shareholders.
During the last three years, we repurchased a total of 4 million shares of our
stock and issued 4 million shares (through employee benefit plans and stock
option exercises). In 2020, we repurchased 240,000 shares (at an average price
of $46.32 ) and issued 1 million shares.
Our long-term priorities for use of cash remain: 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, we are prioritizing debt repayment after funding necessary
expenditures and dividends, and as a result, are temporarily limiting share
repurchases and acquisitions. 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.
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Capitalization
This table presents key debt and capitalization statistics at the end of the
three most recent years.
(Dollar amounts in millions) 2020 2019 2018
Total debt excluding revolving credit/commercial paper
$ 2,056.1 $ 1,099.0 Less: Current maturities of long-term debt 50.9 51.1 1.2 Scheduled maturities of long-term debt 1,849.3 2,005.0 1,097.8 Average interest rates 1 3.7 % 3.6 % 3.6 % Average maturities in years 1 5.3 6.0 6.7 Revolving credit/commercial paper 2 - 61.5 70.0 Weighted average interest rate on year-end balance - % 2.0 % 2.6 % Average interest rate during the year 2.0 % 2.6 % 2.4 % Total long-term debt 1,849.3 2,066.5 1,167.8 Deferred income taxes and other liabilities 508.4 509.3 240.9 Equity 1,390.3 1,312.5 1,157.6 Total capitalization$ 3,748.0 $ 3,888.3 $ 2,566.3 Unused committed credit: 2 Long-term$ 1,200.0 $ 1,138.5 $ 730.0 Short-term - - - Total unused committed credit$ 1,200.0
Cash and cash equivalents$ 348.9
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 the end of 2018, had$800 million of borrowing capacity. InJanuary 2019 , we expanded the size of our revolving credit facility from$800 million to$1.2 billion and correspondingly increased permitted borrowings, subject to covenant restrictions, under our commercial paper program primarily to finance the ECS transaction.
In
InJanuary 2019 , we increased the size of our revolving credit facility from$800 million to$1.2 billion (and increased permitted borrowings, subject to covenant restrictions, under our commercial paper program in a corresponding amount), and added additional borrowing capacity in the form of the five-year term loan facility in the amount of$500 million , all primarily to finance the ECS acquisition. We pay quarterly principal installments of$12.5 million through the maturity date ofJanuary 2024 . Additional principal payments, including a complete early payoff, are allowed without penalty. As ofDecember 31, 2020 , we had repaid$195 million , including prepayments on a portion of Term Loan A of$60 million in the third quarter and$48 million in the fourth quarter of 2020. InMarch 2019 , we issued$500 million aggregate principal amount of notes that mature in 2029. The notes bear interest at a rate of 4.4% per year, with interest payable semi-annually beginning onSeptember 15, 2019 . The net proceeds of these notes were used to repay a portion of the commercial paper indebtedness incurred to finance the ECS acquisition.
Our next large maturity is in
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Commercial Paper Program
In January 2019 , we expanded the borrowing capacity under our credit facility
from $800 million to $1.2 billion , extended the term to January 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 in 2029) and the issuance of a $500 million
five-year Term Loan A, with our current bank group, pursuant to which we pay
principal in the amount of $12.5 million each quarter and the remaining
principal at maturity. 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. Amounts outstanding related to our commercial paper program were:
(Dollar amounts in millions) 2020 2019 2018
Total program authorized $ 1,200.0
- 61.5 70.0
Letters of credit issued under the credit facility - - -
Total program usage - 61.5 70.0
Total program available $ 1,200.0 $ 1,138.5 $ 730.0
The average and maximum amounts of commercial paper outstanding during 2020 were
$145 million and $422 million , respectively. During the fourth quarter, the
average and maximum amounts outstanding were $49 million and $122 million ,
respectively. At year end, we had no letters of credit outstanding under the
credit facility, but we had issued $41 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 commercial paper as a
source of long-term funds and when outstanding, have classified the borrowings
under the commercial paper program as long-term debt 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 in May 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 through March 31, 2021 ; 4.25 to 1.00 at June 30, 2021 ; 3.75 to 1.00 at
September 30, 2021 ; and 3.25 to 1.00 at December 31, 2021 and thereafter; b) the
amount of total secured debt to 5% of our total consolidated assets until
December 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 our 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 2020, and had access
to the full $1.2 billion borrowing capacity under the credit agreement. For more
information about long-term debt, please see Note J on page 103 of the
Notes to Consolidated Financial Statements.
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Accessibility of Cash
At December 31, 2020 , we had cash and cash equivalents of $349 million primarily
invested in interest-bearing bank accounts and in bank time deposits with
original maturities of three months or less. Substantially all of these funds
are held in the international accounts of our foreign operations. During 2020,
2019, and 2018 we brought back $188 million , $279 million , and $314 million of
foreign cash, respectively.
If we were to immediately bring back all our foreign cash to the U.S. in the
form of dividends, we would pay foreign withholding taxes of approximately $20
million . Due to capital requirements in various jurisdictions, approximately $58
million of this cash was inaccessible for repatriation at year end.
CONTRACTUAL OBLIGATIONS
The following table summarizes our future contractual cash obligations and
commitments at
Payments Due by Period 5
Less More
Than 1 1-3 3-5 Than 5
Contractual Obligations Total Year Years Years Years
(Dollar amounts in millions)
Long-term debt ¹ $ 1,896 $ 50 $ 399 $ 453 $ 994
Finance leases 4 1 2 1 -
Operating leases 180 47 72 38 23
Purchase obligations ² 450 445 4 1 -
Interest payments ³ 390 70 123 90 107
Deferred income taxes 194 - - - 194
Other obligations (including pensions and net
reserves for tax contingencies) 4 196 4 31 32 129
Total contractual cash obligations $ 3,310 1The long-term debt payment schedule presented above could be accelerated if we were not able to make the principal and interest payments when due. We are focused on deleveraging by temporarily limiting share repurchases, controlling the pace of acquisition spending, and using operating cash flow to repay debt. 2Purchase obligations primarily include open short-term (30-120 days) purchase orders that arise in the normal course of operating our facilities. 3Interest payments assume debt outstanding remains constant with amounts atDecember 31, 2020 and at rates in effect at the end of the year. 4Other obligations include our net reserves for tax contingencies in the "More Than 5 Years" column, because these obligations are long-term in nature and actual payment dates cannot be specifically determined. Other obligations also include a$32 million long-term deemed repatriation tax payable and our current estimate of$4 million for minimum contributions to defined benefit pension plans. 5Less Than 1 Year (due in 2021), 1-3 Years (due in 2022 and 2023), 3-5 Years (due in 2024 and 2025), and More Than 5 Years (due in 2026 and beyond). 56
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PART II
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America . To do so, we must
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses, and disclosures. If we used different estimates
or judgments our financial statements would change, and some of those changes
could be significant. Our estimates are frequently based upon historical
experience and are considered by management, at the time they are made, to be
reasonable and appropriate. Estimates are adjusted for actual events, as they
occur.
"Critical accounting estimates" are those that are: (a) subject to uncertainty
and change, and (b) of material impact to our financial statements. Listed below
are the estimates and judgments, which we believe could have the most
significant effect on our financial statements.
We provide additional details regarding our significant accounting policies in
Note A on page 82 of the Notes to Consolidated Financial Statements.
Judgments and Effect if Actual Results
Description Uncertainties Differ From Assumptions
Goodwill
Goodwill is assessed for Goodwill is evaluated annually for The June 2020 review resulted in
impairment annually as of impairment as of June 30 using a a non-cash goodwill impairment
June 30 and as triggering events quantitative analysis at the charge of $25 million with
occur. reporting unit level, which is one respect to our Hydraulic
level below our operating segments. Cylinders reporting unit, which
is part of the Specialized
Judgment is required in the Products segment. This impairment
quantitative analysis. We estimate charge reflects the complete
fair value using a combination of: write-off of the goodwill
associated with the Hydraulic
(a) A discounted cash flow model Cylinders reporting unit. Three
that contains uncertainties related other reporting units had fair
to the forecast of future results, values in excess of carrying
as many outside economic and value of less than 100% as
competitive factors can influence discussed in Note C on page
future performance. Revenue growth, 90 of the Notes to Consolidated
cost of sales, and appropriate Financial Statements. At December
discount rates are the most 31, 2020, we had $1.4 billion of
critical estimates in determining goodwill.
enterprise values using the cash
flow model. We had no goodwill impairments in
2019 or 2018.
(b) The market approach, using
price to earnings ratios for Information regarding material
comparable publicly traded assumptions used to determine if
companies that operate in the same a goodwill impairment exists can
or similar industry and with be found in Note A on page 82
characteristics similar to the and Note C on page 90 of
reporting unit. Judgment is the Notes to Consolidated
required to determine the Financial Statements.
appropriate price to earnings
ratio. We conduct impairment testing
based on our current business
strategy in light of present
industry and economic conditions,
as well as future expectations.
If we are not able to achieve
projected performance levels,
future impairments could be
possible.
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Judgments and Effect if Actual Results
Description Uncertainties Differ From Assumptions
Other Long-Lived Assets
Other long-lived assets are tested Impairments of other long-lived These impairments are
for recoverability at year end and assets usually occur when major unpredictable. Impairments did not
whenever events or circumstances restructuring activities take exceed $8 million per year in any
indicate the carrying value may place, or we decide to discontinue of the last three years.
not be recoverable. selected products.
At December 31, 2020, net property,
For other long-lived assets we Our impairment assessments have plant and equipment was $785
estimate fair value at the lowest uncertainties because they require million, net intangible assets,
level where cash flows can be estimates of future cash flows to other than goodwill, was $702
measured (usually at a branch determine if undiscounted cash million, and operating right-of-use
level). flows are sufficient to recover assets was $162 million .
carrying values of these assets.
For assets where future cash flows
are not expected to recover
carrying value, fair value is
estimated which requires an
estimate of market value based upon
asset appraisals for like assets.
Inventory Reserves
We reduce the carrying value of Our inventory reserve contains At December 31, 2020, the reserve
inventories to reflect an estimate uncertainties because the for obsolete and slow-moving
of net realizable value for calculation requires management to inventory was $31 million
slow-moving (i.e., not selling make assumptions about the value of (approximately 5% of inventories).
very quickly) and obsolete products that are obsolete or This is consistent with the
inventory. slow-moving.
reserves at
2018, representing approximately 4%
Generally, a reserve is required Changes in customer behavior and of inventories.
when we have more than a 12-month requirements can cause inventory to
supply of the product. become obsolete or slow-moving. Additions to inventory reserves in
Restructuring activity and 2020 were $12 million , which was
The calculation also uses an decisions to narrow product slightly higher than our $10
estimate of the ultimate offerings also impact the estimated million three-year average. Our
recoverability of items identified net realizable value of reserve balances as a percentage of
as slow-moving, based upon inventories. period-end inventory have remained
historical experience. consistent, and we do not expect
significant changes to our
If we have had no sales of a given historical obsolescence levels.
product for 12 months, those items
are generally deemed to be
obsolete with no value and are
written down completely.
Finally, costs for approximately
30%-40% of our inventories
(consisting primarily of our
domestic steel-related
inventories) are determined using
the last-in, first-out (LIFO)
method, which produces a cost that
is lower than net realizable value
(see Note A on page 82 of the
Notes to Consolidated Financial
Statements.)
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PART II
Judgments and Effect if Actual Results
Description Uncertainties Differ From Assumptions
Credit Losses
For accounts and notes receivable, Our bad debt reserve contains A significant change in the
we estimate a bad debt reserve for uncertainties because it requires financial status of a large
the amount that will ultimately be management to estimate the amount customer could impact our
uncollectible. uncollectible based upon an estimates. However, we believe we
evaluation of several factors such have established adequate reserves
When we become aware of a specific as the length of time that on our customer accounts.
customer's potential inability to receivables are past due, the Our bad debt expense has
pay, we record a bad debt reserve financial health of the customer, fluctuated over the last three
for the amount we believe may not be industry and macroeconomic years: $17 million in 2020, $3
collectible. We also monitor general considerations, and historical million in 2019, and $17 million
macroeconomic conditions and other loss experience. in 2018. The expense for 2020 and
items that could impact the expected 2018 was impacted by one account
collectibility of all customers or Our customers are diverse and many that is now fully reserved at $25
pools of customers with similar are small-to-medium sized million, including $23 million of
risk. companies, with some being highly a note receivable and $2 million
leveraged. Bankruptcy can occur for a trade account receivable ($9
As discussed in Note H on page with some of these customers million in 2020 and $16 million in
99 of the Notes to Consolidated relatively quickly and with little 2018), as discussed in Note H
Financial Statements, we adopted ASU warning. on page 99 of the Notes to
2016-13 "Financial Consolidated Financial Statements.
Instruments-Credit Losses" (Topic In cases where a customer's 2020's expense was also impacted
326) in 2020, which amended the payment performance or financial by pandemic-related economic
impairment model to require a condition begins to deteriorate, declines. Although we have not forward-looking approach based on
we tighten our credit limits and experienced significant issues
expected losses, rather than terms and make appropriate with customer payment performance
incurred losses, to estimate credit reserves when deemed necessary. during this time, the effects of
losses on certain types of financial Certain of our customers have from the pandemic have adversely
instruments, including trade time to time experienced impacted the operations of many of
receivables. bankruptcy, insolvency, and/or an our customers, which have and
inability to pay their debts to us could further impact their ability
as they come due. If our customers to pay their debts to us. As a
suffer significant financial result, we increased the reserves
difficulty, they may be unable to on trade accounts receivable to
pay their debts to us timely or at reflect this increased risk.
all, they may reject their Excluding the note receivable
contractual obligations to us discussed above, the average
under bankruptcy laws or annual amount of bad debt expense
otherwise, or we may have to associated with trade accounts
negotiate significant discounts receivable was less than $5
and/or extend financing terms with million (significantly less than
these customers. 1% of annual net trade sales) over
the last three years. At
December 31, 2020 , our allowances
for doubtful trade accounts
receivable were $19 million (less
than 4% of our trade receivables
of $555 million ).
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Judgments and Effect if Actual Results
Description Uncertainties Differ From Assumptions
Workers' Compensation
We are substantially self-insured Our estimates of self-insured Over the past five years, we have
for costs related to workers' reserves contain uncertainties incurred, on average, $9 million
compensation, and this requires us regarding the potential amounts we annually for costs associated
to estimate the liability might have to pay. We consider a with workers' compensation.
associated with this obligation. number of factors, including Average year-to-year variation
historical claim experience, over the past five years has been
demographic factors, and
potential approximately
recoveries from third party December 31, 2020, we had accrued
insurance carriers. $32 million to cover future
self-insurance liabilities.
Pension Accounting
For our pension plans, we must The pension liability calculation Each 25 basis point decrease in
estimate the cost of benefits to contains uncertainties because it the discount rate increases
be provided (well into the future) requires management's judgment. pension expense by $.6 million
and the current value of those Assumptions used to measure our and increases the plans' benefit
benefit obligations. pension liabilities and pension obligations by $9.8 million .
expense annually include:
- the discount rate used to Each 25 basis point reduction in
calculate the present value of the expected return on assets
future benefits would increase pension expense by
- an estimate of expected return on $.4 million , but have no effect
pension assets based upon the mix on the plans' funded status.
of investments held (bonds and
equities)
- certain employee-related factors,
such as turnover, retirement age,
and mortality. Mortality
assumptions represent our best
estimate of the duration of future
benefit payments at the measurement
date. These estimates are based on
each plan's demographics and other
relevant facts and circumstances
- the rate of salary increases
where benefits are based on
earnings.
Contingencies
We evaluate various legal, Our disclosure and accrual of loss Legal contingencies are related
environmental, and other potential contingencies (i.e., losses that to numerous lawsuits and claims
claims against us to determine if may or may not occur) contain described in Note T on page
an accrual or disclosure of the uncertainties because they are 130 of the Notes to Consolidated
contingency is appropriate. If it based on our assessment of the Financial Statements.
is probable that an ultimate loss probability that the expenses will
will be incurred and reasonably actually occur and our reasonable During the three-year period
estimable, we accrue a liability estimate of the likely cost. Our ended December 31, 2020, we
for the estimate of the loss. estimates and judgments are
recorded expense of
subjective and can involve matters
in litigation, the results of which
are generally unpredictable.
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PART II
Judgments and Effect if Actual Results
Description Uncertainties Differ From Assumptions
Income Taxes
In the ordinary course of business, Our tax liability for unrecognized Changes in U.S. and foreign tax
we must make estimates of the tax tax benefits contains laws could impact assumptions
treatment of many transactions, even uncertainties because management related to the taxation and
though the ultimate tax outcome may is required to make assumptions repatriation of certain foreign
remain uncertain for some and to apply judgment to estimate earnings. time. These estimates become part of the exposures related to our the annual income tax expense
various filing positions. Audits by various taxing
reported in our financial authorities continue as
statements. Subsequent to year end, Our effective tax rate is also governments look for ways to
we finalize our tax analysis and impacted by changes in tax laws, raise additional revenue. Based
file income tax returns. Tax the current mix of earnings by upon past audit experience, we do
authorities periodically audit these taxing jurisdiction, and the not expect any material changes
income tax returns and examine our results of current tax audits and to our tax liability as a result
tax filing positions, including assessments. of this audit activity; however,
(among other things) the timing and we could incur additional tax
amounts of deductions, and the At December 31, 2020 and 2019, we expense if we have audit
allocation of income among tax had $14 million and $15 million , adjustments higher than recent
jurisdictions. If necessary, we respectively, of net deferred tax historical experience.
adjust income tax expense in our assets on our balance sheet,
financial statements in the periods primarily related to net operating The likelihood of recovery of net in which the actual outcome becomes losses and other tax
operating losses and other tax
more certain. carryforwards. The ultimate carryforwards has been closely
realization of these deferred tax evaluated and is based upon such
assets is dependent upon the factors as the time remaining
amount, source, and timing of before expiration, viable tax
future taxable income. In cases planning strategies, and future
where we believe it is more likely taxable earnings expectations. We
than not that we may not realize believe that appropriate
the future potential tax benefits, valuation allowances have been
we establish a valuation allowance recorded as necessary. However,
against them. if earnings expectations or other
assumptions change such that
additional valuation allowances
are required, we could incur
additional tax expense. Likewise,
if fewer valuation allowances are
needed, we could incur reduced
tax expense.
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Judgments and Effect if Actual Results
Description Uncertainties Differ From Assumptions
Acquisitions
When acquisitions occur, we value The purchase price allocation for In 2020, no businesses were
the assets acquired, liabilities business acquisitions contains acquired, as discussed in Note
assumed, and any noncontrolling uncertainties because it requires R on page 125 of the Notes to
interest in acquired companies at management's judgment. Determining Consolidated Financial
estimated acquisition date fair fair value of identifiable assets, Statements.
values.
management to make estimates, which The judgments made in determining
consideration transferred, are based on all available the estimated fair value assigned
compared to fair value of the information. Critical estimates to the assets acquired, as well
assets acquired and the include the timing and amount of as the estimated life of the
liabilities assumed. Our future revenues and expenses assets, can materially impact net
estimates of fair value are based associated with an asset, as well income in periods subsequent to
upon assumptions believed to be as an appropriate discount rate. the acquisition through
reasonable but which are Determining fair values for these depreciation and amortization,
inherently uncertain. items requires significant judgment and in certain instances through
and includes a variety of methods impairment charges, if the asset
and models that utilize significant becomes impaired in the future.
Level 3 inputs, as discussed in We regularly review for
Note A on page 82 of the Notes impairments. Unanticipated events
to Consolidated Financial and circumstances may occur which
Statements. may affect the accuracy or
validity of such assumptions,
estimates, or actual results.
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PART II
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 35.
Litigation
Accruals for Probable Losses
We are exposed to litigation contingencies that, if realized, could have a
material negative impact on our financial condition, results of operations, and
cash flows. Although we deny liability in all currently threatened or pending
litigation proceedings in which we are or may be a party, and believe we have
valid bases to contest all claims made against us, we have recorded a litigation
contingency accrual for our reasonable estimate of probable loss for pending and
threatened litigation proceedings, in aggregate, in millions, as follows:
Year Ended
2020 2019 2018
Litigation contingency accrual - Beginning of period$ .7
Adjustment to accruals - expense .1 .6 1.8 Currency (.1) - - Cash payments (.2) (1.8) (.3) Litigation contingency accrual - End of period$ .5
The above litigation contingency accruals do not include accrued expenses related to workers' compensation, vehicle-related personal injury, product and general liability claims, taxation issues, and environmental matters, some of which may contain a portion of litigation expense. However, any litigation expense associated with these categories is not anticipated to have a material effect on our financial condition, results of operations, or cash flows. For more information regarding accrued expenses, see Note I under "Accrued expenses" on page 102 of the Notes to Consolidated Financial Statements. Reasonably Possible Losses in Excess of Accruals Although there are a number of uncertainties and potential outcomes associated with all of our pending or threatened litigation proceedings, we believe, based on current known facts, that additional losses, if any, are not expected to materially affect our consolidated financial position, results of operations, or cash flows. However, based upon current known facts, as ofDecember 31, 2020 , aggregate reasonably possible (but not probable, and therefore not accrued) losses in excess of the accruals noted above are estimated to be$12 million , including$11 million for Brazilian value-added tax matters and$1 million for other matters. If our assumptions or analyses regarding these contingencies are incorrect, or if facts change, we could realize losses in excess of the recorded accruals (and in excess of the$12 million referenced above), which could have a material negative impact on our financial condition, results of operations, and cash flows. For more information regarding litigation contingencies, please refer to Note
T on page 130 of the Notes to Consolidated Financial Statements, which is incorporated herein by reference.
Aerospace and Work Furniture Reporting Units'
Fair value for our Aerospace and
Sales for both of these units were adversely impacted by the COVID-19 pandemic.
If there is a prolonged adverse economic impact, or otherwise, we may not be
able to achieve projected performance levels. Although we do not believe that a
triggering event has occurred, internal forecasts and industry data suggest that
economic impacts of COVID-19 for the aerospace industry may be longer than
previously expected during the second quarter impairment testing. We are
continuing to monitor all factors impacting this industry.
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The goodwill associated with the Aerospace and
Continued negative market trends may impact future earnings. If we are not able to achieve projected performance levels, future impairments may be possible.
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 prior years' restructuring activities in the Bedding Products segment. If the sale is completed, we expect to realize a gain of up to$25 million to$30 million on this transaction 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. We use a third party to periodically benchmark our information security program against theNational Institute of Standards and Technology's Cybersecurity Framework. We provide quarterly cybersecurity training for employees with access to our email and data systems, and we have purchased broad form cyber insurance coverage. 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 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. NEW ACCOUNTING STANDARDS
The FASB has issued accounting guidance effective for current and future periods. See Note A on page 82 of the Notes to Consolidated Financial Statements for a more complete discussion.
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PART II
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
(Unaudited)
(Dollar amounts in millions)
Interest Rates
The table below provides information about the Company's debt obligations
sensitive to changes in interest rates. Substantially all of the debt shown in
the table below is denominated in United States dollars. The fair value of fixed
rate debt was approximately $170 million greater than carrying value at
December 31, 2020 and approximately $100 million greater than carrying value at
December 31, 2019 . The fair value of the fixed rate debt was based on quoted
prices in an active market. The fair value of variable rate debt is not
significantly different from its recorded amount.
Long-term debt as of Scheduled Maturity Date
December 31, 2021 2022 2023 2024 2025 Thereafter 2020 2019
Principal fixed rate debt $ - $ 300.0 $ - $ 300.0 $ - $ 1,000.0 $ 1,600.0 $ 1,600.0
Average stated interest
rate - 3.40 % - 3.80 % - 3.95 % 3.82 % 3.82 %
Principal variable rate 50.0 50.0 50.0 155.0 - 3.8 308.8 466.3
debt 1
Unamortized discounts and
deferred loan costs (12.7) (14.9)
Commercial Paper 2 - 61.5
Miscellaneous debt,
primarily finance leases 4.1 4.7
Total debt 1,900.2 2,117.6
Less: current maturities 50.9 51.1
Total long-term debt $ 1,849.3 $ 2,066.5
1In January 2019 , we issued a $500 million five-year Term Loan A with our
current bank group. We pay quarterly principal installments of $12.5 million
through the maturity date of January 2024 , at which time we will pay the
remaining principal. Additional principal payments, including a complete early
payoff, are allowed without penalty. As of December 31, 2020 , we had repaid $195
million , including prepayments on a portion of Term Loan A of $60 million in the
third quarter and $48 million in the fourth quarter of 2020. The Term Loan A
bears a variable interest rate as defined in the agreement and was 3.0% at
December 31, 2020 . Interest is payable based upon a time interval that depends
on the selection of interest rate period.
2The weighted average interest rate for the average commercial paper outstanding
during the years ended December 31, 2020 and 2019 was 2.0% and 2.6%,
respectively. In January 2019 , we increased the size of the revolving facility
from $800 million to $1.2 billion , added a five-year $500 million term loan
facility, and extended the term from 2022 to 2024.
Derivative Financial Instruments
The Company is subject to market and financial risks related to interest rates
and foreign currency. In the normal course of business, the Company utilizes
derivative instruments (individually or in combinations) to reduce or eliminate
these risks. The Company seeks to use derivative contracts that qualify for
hedge accounting treatment; however, some instruments may not qualify for hedge
accounting treatment. It is the Company's policy not to speculate using
derivative instruments. Information regarding cash flow hedges and fair value
hedges is provided in Note S beginning on page 127 of the Notes to
Consolidated Financial Statements and is incorporated by reference into this
section.
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Investment in Foreign Subsidiaries
We view our investment in foreign subsidiaries as a long-term commitment. This investment may take the form of either permanent capital or notes. Our net investment (i.e., total assets less total liabilities subject to translation exposure) in foreign operations with functional currencies other than theU.S. dollar atDecember 31 is as follows: Functional Currency (amounts in millions) 2020 2019 European Currencies$ 382.1 $ 348.6 Chinese Renminbi 260.9273.8 Canadian Dollar 210.5254.4 Mexican Peso 38.6 36.3 Other 59.9 66.1 Total$ 952.0 $ 979.2
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