LEGGETT & PLATT, INCORPORATED
Page No.
• Highlights 27
• Introduction 27
• Results of Operations 31
• Liquidity and Capitalization 35
• Critical Accounting Policies and Estimates 41
• Contingencies 42
• New Accounting Standards 44
HIGHLIGHTS
We had third quarter trade sales of $1,294 million for the three months ending
September 30, 2022 , a decrease of 2% versus the third quarter 2021. In the first
nine months of 2022, trade sales were $3,951 million versus $3,740 million the
same period of 2021.
EPS was $.52 in the third quarter and $1.88 for the nine months ending
September 30, 2022 , compared to $.71 and $2.17 in the same periods of 2021. EPS
for the nine months ending September 30, 2021 includes a $.16 non-recurring gain
from the sale of real estate.
Earnings Before Interest and Taxes (EBIT) for third quarter and the nine months
ending September 30, 2022 was $113 million and $394 million , respectively. This
is down $31 million and $50 million compared to the same periods in 2021. EBIT
for the nine months ending September 30, 2021 reflects a $28 million
non-recurring gain from the sale of real estate.
Operating cash flow was
InAugust 2022 , the Board of Directors declared a$.44 third quarter 2022 dividend,$.02 cents higher than last year's third quarter dividend, making our annual indicated dividend yield one of the highest among the Dividend Kings and extending our record of consecutive annual increases to over 51 years.
Share repurchases in the third quarter of 2022 were .1 million shares at an
average price of
INTRODUCTION What We DoLeggett & Platt, Incorporated (the Company, we, or our) is a diversified manufacturer that conceives, designs, and produces a wide range of engineered components and products found in many homes, offices, and automobiles. We make components that are often hidden within, but integral to, our customers' products. We are the leadingU.S. -based manufacturer of: a) bedding components; b) automotive seat support and lumbar systems; c) specialty bedding foams and private-label finished mattresses; d) components for home furniture and work furniture; e) flooring underlayment; f) adjustable beds; and g) bedding industry machinery. 27 --------------------------------------------------------------------------------
Our Segments
Our operations are comprised of approximately 130 production facilities located in 18 countries around the world. Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. Our segments are described below. Bedding Products: This segment supplies a variety of components and machinery used by bedding manufacturers in the production and assembly of their finished products, as well as produces private label finished mattresses for bedding brands and adjustable bed bases. This segment is also vertically integrated into the production and supply of specialty foam chemicals, steel rod, and drawn steel wire to our own operations and to external customers. Our trade customers for wire make mechanical springs and many other end products. This segment generated 46% of our trade sales during the first nine months of 2022. Specialized Products: From this segment, we supply lumbar support systems, seat suspension systems, motors and actuators, and control cables used by automotive manufacturers. We also produce and distribute tubing and tube assemblies for the aerospace industry and engineered hydraulic cylinders used in the material-handling and construction industries. This segment contributed 21% of our trade sales in the first nine months of 2022. Furniture, Flooring & Textile Products: Operations in this segment supply a wide range of components for residential and work furniture manufacturers, as well as select lines of private label finished furniture. We also produce or distribute carpet cushion, hard surface flooring underlayment, and textile and geo components. This segment contributed 33% of our trade sales in the first nine months of 2022. Total Shareholder Return Total Shareholder Return (TSR), relative to peer companies, is a primary financial measure that we use to assess long-term performance. TSR = (Change in Stock Price + Dividends) ÷ Beginning Stock Price. We target average annual TSR of 11-14% through an approach that employs four TSR sources: revenue growth, margin expansion, dividends, and share repurchases. We monitor our TSR performance on a rolling three-year basis. We believe our disciplined growth strategy, portfolio management, and prudent use of capital will support achievement of our goal over time.
The table below shows the components of our TSR targets.
Current Targets
Revenue Growth 6-9%
Margin Increase 1%
Dividend Yield 3%
Stock Buyback 1%
Total Shareholder Return 11-14%
Senior executives participate in an incentive program with a three-year
performance period based on two equal measures: (i) our TSR performance compared
to the performance of a group of approximately 300 peers, and (ii) the Company
or segment EBIT Compound Annual Growth Rate.
Customers
We serve a broad suite of customers, with our largest customer representing approximately 6% of our trade sales in 2021. Many are companies whose names are widely recognized. They include bedding brands and manufacturers, residential and office furniture producers, automotive OEM and Tier 1 manufacturers, and a variety of other companies. Organic Sales
We calculate organic sales as trade sales excluding sales attributable to acquisitions and divestitures consummated within the last twelve months. Management uses the organic sales metric, and it is useful to investors as supplemental information to analyze our underlying sales performance from period to period in our legacy businesses.
28
--------------------------------------------------------------------------------Major Factors That Impact Our Business
Many factors impact our business, but those that generally have the greatest impact are discussed below.
Inflationary Trends in Cost of Goods Sold
Our costs have increased significantly as market prices for raw materials (many of which are commodities), have been impacted by inflation. We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. Our costs have also been impacted by higher prices for transportation and energy (partially from the Russian invasion ofUkraine ) as well as labor. Our ability to recover higher costs (through selling price increases) is crucial. When we experience significant increases in costs of goods sold, we typically implement price increases to recover the higher costs. While we have been generally successful in recovering the higher costs, even during these volatile times, the timing of our price increases is important; we typically experience a lag in recovering higher costs. Steel is our principal raw material. At various times in past years, we have experienced significant cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers with selling price adjustments. Over the past few years, we have seen varying degrees of inflation and deflation inU.S. steel pricing. Steel costs inflated throughout 2021 and the first half of 2022. In the third quarter of 2022, costs deflated as demand in the steel markets softened. As a producer of steel rod, we are also impacted by changes in metal margins (the difference in the cost of steel scrap and the market price for steel rod). In 2021, steel rod price increases outpaced steel scrap price increases resulting in significantly expanded metal margins within the steel industry. Metal margins expanded further in the first half of 2022 and were fairly stable in the third quarter of 2022 as steel rod and scrap prices decreased at approximately the same rate. These expanded margins were partially offset by increased energy and input costs in our steel rod business. We have exposure to the cost of chemicals, including TDI, MDI, and polyol. The cost of these chemicals has fluctuated at times, but we have generally passed the changes through to our customers. In 2021, chemical prices inflated due to robust demand and shortages from severe weather, supplier production disruptions, port delays, and logistics challenges. The supply shortages in 2021 resulted in significant restrictions by producers. Late in 2021 and into the first half of 2022, chemical prices leveled off as supply availability improved. Shortages in the labor markets in several industries in which we operate have created challenges in hiring and maintaining adequate workforce levels. Because of these shortages, we have experienced increased labor costs. Some facilities have experienced disruptions in logistics necessary to import, export, or transfer raw materials or finished goods, which has generally resulted in increased freight costs that are typically passed through to our customers. Our supply chains have also been hampered by congested ports. Our other raw materials include woven and nonwoven fabrics and foam scrap. We have experienced changes in the cost of these materials and generally have been able to pass them through to our customers. When we raise our prices to recover higher raw material costs, this sometimes causes customers to modify their product designs and replace higher cost components with lower cost components. We must continue providing product options to our customers that enable them to improve the functionality of their products and manage their costs, while providing higher profits for our operations.
Supply Chain Disruptions
We have experienced significant supply chain disruptions related to semiconductor shortages, labor availability, and freight challenges, as well as higher costs associated with each of these issues. We have also experienced delays in delivery of raw materials, parts, and finished goods because of shutdown or congested delivery ports, inclement weather, and the invasion ofUkraine . This has resulted in reduced volume and higher costs in many of our businesses, including our Automotive business and Bedding Products segment, primarily related to negative impacts on component demand and finished goods production. Currently there is a shortage of semiconductors in the automotive industry. Automotive OEMs and other suppliers have not been able to secure an adequate supply of semiconductors, and as a result have reduced or completely shut down their production of some automobiles or parts, which in turn has reduced our sale of products. Consumer demand remains strong, but the semiconductor shortage has pushed vehicle inventory to very low levels. OurAutomotive Group uses the semiconductors in seat comfort products, and to a lesser extent in motors and actuators. Although ourAutomotive Group has been able to obtain an adequate supply of semiconductors, we are dependent on our suppliers to deliver these semiconductors in accordance with our production schedule. A shortage of the semiconductors, either to us, the automotive OEMs, or our suppliers, can disrupt our 29 --------------------------------------------------------------------------------
operations and our ability to deliver products to our customers. The shortage of semiconductors is also impacting our Adjustable Bed business unit.
The Russian invasion ofUkraine has caused disruptions in our supply chain and negatively impacted our results of operations. Although we do not have operations inRussia ,Belarus , orUkraine , and we have not had a material amount of sales into these countries, some of our businesses have sourced, directly or indirectly, a portion of their supply chain requirements of nickel, titanium, and birch plywood fromRussia . Our Aerospace business uses nickel and titanium in the production of aerospace tubing. Several of our businesses use birch plywood in their products. Also, a significant portion of neon gas is produced inUkraine . Our Automotive business uses semiconductors, the production of which uses neon gas. Since the invasion began, the prices of these materials have significantly increased. Also, several countries have imposed economic sanctions againstRussia as a result of its military action. It is possible that sanctions could be expanded, or additional measures taken, which could restrict the import of nickel, titanium, and birch plywood fromRussia or greatly increase the cost of procurement via increased duties or otherwise. Also, if the conflict inUkraine expands geographically or in intensity, this may have a negative impact on our operations, including access to energy and other raw materials. A significant portion of global oil production is refined and exported fromRussia . Certain countries, includingthe United States , theUnited Kingdom , andCanada , have banned the import of Russian oil. With decreased supply availability, fuel costs have increased, and may continue to increase. This has impacted, and may continue to impact, both our businesses and consumers. Also, there has been a reduction of natural gas exports fromRussia toEurope from sanction-related impacts and disruption in pipeline delivery, resulting in shortages and higher prices. Higher energy prices have contributed to broader inflationary trends, which have resulted, in some cases, in reduced discretionary consumer spending. If this continues, the demand for our products may be negatively impacted, which would have a negative impact on our results of operations.
For more information regarding supply chain disruptions, see Inflationary Trends in Cost of Goods Sold on page 29.
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 fromChina ,South Africa , andVietnam , ranging from 116% to 234%. InSeptember 2019 , theDepartment of Commerce (DOC) and theInternational Trade Commission (ITC) concluded a second sunset review extending the orders for an additional five years, throughOctober 2024 , at which time the DOC and ITC will conduct a third sunset review to determine whether to extend the orders for an additional five years. Antidumping and countervailing duty cases filed by majorU.S. steel wire rod producers have resulted in the imposition of antidumping duties on imports of steel wire rod fromBrazil ,China ,Belarus ,Indonesia ,Italy ,Korea ,Mexico ,Moldova ,Russia ,South Africa ,Spain ,Trinidad & Tobago ,Turkey ,Ukraine ,United Arab Emirates , and theUnited Kingdom , ranging from 1% to 757%, and countervailing duties on imports of steel wire rod fromBrazil ,China ,Italy , andTurkey , ranging from 3% to 193%. InJune 2020 , the ITC and DOC concluded a first sunset review, extending the orders onChina throughJune 2025 , and inJuly 2020 , the ITC and DOC concluded a third sunset review, determining to extend the orders onBrazil ,Indonesia ,Mexico ,Moldova , andTrinidad & Tobago throughAugust 2025 . Duties will continue throughDecember 2022 forBelarus ,Italy ,Korea ,Russia ,South Africa ,Spain ,Turkey ,Ukraine ,United Arab Emirates , and theUnited Kingdom . At those times, the DOC and the ITC will conduct sunset reviews to determine whether to extend those orders for an additional five years. Since 2019, there has been an antidumping duty order on mattress imports fromChina ranging from 57% to 1,732%. This order will remain in effect throughDecember 2024 , at which time the DOC and ITC will conduct a sunset review to determine whether to extend the order for an additional five years. 30 -------------------------------------------------------------------------------- InMarch 2020 , the Company, along with other domestic mattress producers and two labor unions representing workers at other mattress producers, filed antidumping petitions with the DOC and the ITC alleging that manufacturers of mattresses inCambodia ,Indonesia ,Malaysia ,Serbia ,Thailand ,Turkey , andVietnam were unfairly selling their products inthe United States at less than fair value (dumping) and a countervailing duty petition alleging manufacturers of mattresses inChina were benefiting from subsidies. InMarch 2021 , the DOC made final determinations, assigningChina a countervailing duty rate of 97.78% and antidumping duty rates on the other seven countries from 2.22% - 763.28%. InApril 2021 , the ITC made a unanimous affirmative final determination that domestic mattress producers were materially injured by reason of the unfairly priced or subsidized imported mattresses. Accordingly, the agencies instructed that final antidumping and countervailing duty orders will remain in effect for five years, throughMay 2026 , at which time the DOC and ITC will conduct a sunset review to determine whether to extend the order for an additional five years. Appeals have been filed with theU.S. Court of International Trade as to the DOC's final determinations of margins forCambodia ,Indonesia ,Thailand , andVietnam and the ITC's final determination of injury. See Item 1 Legal Proceedings on page 46 for more information.
COVID-19 Impacts on our Business
Below is a discussion of the various current impacts of COVID-19 on our business.
Demand for our Products. Various governments inNorth America ,Europe ,Asia , and elsewhere instituted, and some have reinstituted, quarantines, shelter-in-place or stay-at-home orders, or restrictions on public gatherings, as well as limitations on social interactions, which have had, and could further have, an adverse effect on the demand for our products. Impact on our Manufacturing Operations. We have manufacturing facilities in 18 countries. All of these countries have been affected by the COVID-19 pandemic. All of our facilities are open and running at this time. If our manufacturing operations are not fully operational, our ability to obtain necessary raw materials and parts, to manufacture and ship finished products to our customers, and to maintain appropriate labor levels, could be negatively impacted, particularly if we are unable to shift production to other manufacturing facilities. Some of our facilities inChina , most notably in our Automotive andHome Furniture businesses, have been temporarily closed from time to time due to strict COVID-related lockdown requirements. If the lockdowns inChina are imposed on a broader geographic scope, this could materially negatively impact our manufacturing capacity, our customers or vendors, and our ability to transport goods in our supply chain. We have also had, at various times, some capacity restrictions on our plants due to governmental orders in other parts of the world. We have been and could be further negatively affected by governmental action in any one or more of the countries in which we operate by the imposition, or re-imposition, of restrictive social measures, mandatory closures of retail establishments that sell our products or our customers' products, travel restrictions, and restrictions on the import or export of products. The continued realization of these risks to our manufacturing operations, labor force, and supply chain could also increase labor, commodity, and transportation costs. Relief under the CARES Act. We deferred$19 million of our 2020 payment of employer'sSocial Security match as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Approximately half was paid inJanuary 2022 in accordance with the holiday schedule for theDecember 31, 2021 deferral date. The remaining deferral is anticipated to be paid inJanuary 2023 .
RESULTS OF OPERATIONS
Discussion of Consolidated Results
Third Quarter:
Trade Sales were$1,294 million in the current quarter, a 2% decrease versus the third quarter 2021. Organic sales decreased 3%. Volume declines of 8% and a negative currency impact of 3% were partially offset by raw material-related selling price increases of 8%. Volume was down primarily from continued demand softness in residential end markets, partially offset by growth in automotive and industrial end markets. Acquisitions, net of divestitures, added 1% to sales. EBIT decreased 21%, to$113 million , primarily from lower volume, lower overhead absorption from reduced production, and operational inefficiencies in Specialty Foam. These decreases were partially offset by metal margin expansion in our Steel Rod business.
Earnings Per Share (EPS) decreased to
31
--------------------------------------------------------------------------------Nine Months:
Trade Sales were$3,951 million in the first nine months of 2022, a 6% increase versus the same period last year. Organic sales increased 5%. Raw material-related selling price increases of 13% were partially offset by volume declines of 6% and currency impact of 2%. Volume was down primarily from demand softness in residential end markets partially offset by growth in industrial end markets and automotive. Acquisitions, net of divestitures, increased sales 1%. EBIT decreased 11% to$394 million , primarily from the non-recurrence of last year's gain on the sale of real estate associated with our former Fashion Bed business, lower volume, lower overhead absorption from reduced production, higher raw material and transportation costs and production inefficiencies in Automotive, and operational inefficiencies in Specialty Foam. These decreases were partially offset by metal margin expansion in our Steel Rod business and pricing discipline in the Furniture, Flooring & Textile Products segment.
EPS decreased to
Net Interest Expense and Income Taxes
2022 net interest expense was
Our worldwide effective tax rate was 24% for the third quarter of 2022, compared to 23% for the same quarter last year. While theU.S. statutory federal income tax rate was 21% in both years, foreign withholding taxes, the impact of foreign earnings, Global Intangible Low-Taxed Income (GILTI), and other less significant items added 3% to our tax rate in 2022 and 2% in 2021. For the full year, we are anticipating an effective tax rate of approximately 23%, including the impact of discrete tax items that we expect to occur in the fourth quarter. We utilize prudent tax planning strategies for opportunities to optimize our tax rate, but other factors, such as our overall profitability, the mix and level of earnings among jurisdictions, the type of income earned, business acquisitions and dispositions, the impact of tax audits, and the effect of tax law changes can also influence our rate. 32 --------------------------------------------------------------------------------
Discussion of Segment Results
Third Quarter Discussion
A description of the products included in each segment, along with segment
financial data, appears in Note 4 to the Consolidated Condensed Financial
Statements on page 8. A summary of segment results is shown in the following
tables.
Three Months Three Months Change in Trade Sales
% Change in Organic
millions) 30, 2022 30, 2021 $ % Sales 1
Bedding Products $ 582.0 $ 664.1 $ (82.1) (12.4) % (12.0) %
Specialized Products 291.3 235.6 55.7 23.6 18.9
Furniture, Flooring & Textile
Products 421.1 419.5 1.6 .4 .2
Total $ 1,294.4 $ 1,319.2 $ (24.8) (1.9) % (2.6) %
Three Months Three Months Change in EBIT EBIT Margins
EBIT Ended September Ended September Three Months Ended Three Months Ended
(Dollar amounts in millions) 30, 2022 30, 2021 $ % September 30, 2022 September 30, 2021
Bedding Products $ 43.9 $ 81.1 $ (37.2) (45.9) % 7.5 % 12.2 %
Specialized Products 31.3 22.4 8.9 39.7 10.7 9.5
Furniture, Flooring & Textile Products 38.3 41.1 (2.8) (6.8) 9.1 9.8
Intersegment eliminations & other (.3) (.4) .1
Total $ 113.2 $ 144.2 $ (31.0) (21.5) % 8.7 % 10.9 %
Depreciation and Amortization Three Months Ended September Three Months Ended September
(Dollar amounts in millions) 30, 2022 30, 2021 Bedding Products $ 25.7 $ 27.3 Specialized Products 9.7 11.7 Furniture, Flooring & Textile Products 5.7 6.0 Unallocated 2 3.0 1.6 Total $ 44.1 $ 46.6 1 This is a change in trade sales not attributable to acquisitions or divestitures in the last 12 months. Refer to the respective segment discussion below for a reconciliation of the change in total segment trade sales to organic sales.
2 Unallocated consists primarily of depreciation and amortization on non-operating assets.
Bedding Products
Trade sales decreased$82 million , or 12%. Organic sales decreased 12% from volume declines of 20% and currency impact of 1% partially offset by raw material-related selling price increases of 9%. Volume was down from continued demand softness inU.S. and European bedding markets partially offset by trade sales growth in Steel Rod and Drawn Wire. Divestitures of small operations in Drawn Wire and International Bedding decreased trade sales less than 1%. EBIT decreased$37 million , primarily from lower volume, lower absorption as production and inventory levels were adjusted to meet reduced demand, and operational inefficiencies in our Specialty Foam business, which are being addressed by continuing integration work, but are taking longer than originally expected to resolve. These decreases were partially offset by higher metal margin. 33 --------------------------------------------------------------------------------
Specialized Products
Trade sales increased
EBIT increased
Furniture, Flooring & Textile Products
Trade sales increased$2 million , or roughly flat versus last year. Organic sales were flat, with raw material-related selling price increases of 7% offset by lower volume of 6% and currency impact of 1%. Volume was down from declines inHome Furniture , Fabric Converting, and Flooring partially offset by growth in Geo Components andWork Furniture . The Textiles acquisition completed in August increased trade sales less than 1%.
EBIT decreased
Nine Month Discussion
A description of the products included in each segment, along with segment
financial data, appears in Note 4 to the Consolidated Condensed Financial
Statements on page 8. A summary of segment results is shown in the following
tables.
Nine Months Nine Months
Ended Ended Change in Sales
Trade Sales September 30, September 30, % Change in Organic
(Dollar amounts in millions) 2022 2021 $ % Sales 1
Bedding Products $ 1,833.9 $ 1,808.6 $ 25.3 1.4 % .4 %
Specialized Products 815.5 734.9 80.6 11.0 9.4
Furniture, Flooring & Textile
Products 1,301.5 1,196.2 105.3 8.8 8.6
Total $ 3,950.9 $ 3,739.7 $ 211.2 5.6 % 4.8 %
Nine Months Nine Months
Ended Ended Change in EBIT EBIT Margins
EBIT September 30, September 30, Nine Months Ended Nine Months Ended
(Dollar amounts in millions) 2022 2021 $ % September 30, 2022 September 30, 2021
Bedding Products $ 189.2 $ 245.3 $ (56.1) (22.9) % 10.3 % 13.6 %
Specialized Products 73.0 85.0 (12.0) (14.1) 9.0 11.6
Furniture, Flooring & Textile
Products 132.3 114.1 18.2 16.0 10.2 9.5
Intersegment eliminations & other (.7) (.6) (.1) Total$ 393.8 $ 443.8 $ (50.0) (11.3) % 10.0 % 11.9 % Depreciation and Amortization Nine Months Ended Nine Months Ended (Dollar amounts in millions) September 30, 2022 September 30, 2021 Bedding Products $ 78.1 $ 79.8 Specialized Products 30.4 35.0 Furniture, Flooring & Textile Products 17.5 18.1 Unallocated 2 8.3 7.9 Total $ 134.3 $ 140.8 1This is a change in trade sales not attributable to acquisitions or divestitures in the last 12 months. Refer to the respective segment discussions below for a reconciliation of the change in total segment trade sales to organic sales.
2Unallocated consists primarily of depreciation and amortization on non-operating assets.
34
--------------------------------------------------------------------------------Bedding Products
Trade sales increased$25 million , or 1%. Organic sales were roughly flat, with raw material-related selling price increases of 16% mostly offset by volume declines of 15% and currency impact of 1%. The Kayfoam acquisition completed inJune 2021 , net of divestitures (small operations in Drawn Wire and International Bedding), added 1% to sales growth. EBIT decreased$56 million , primarily from the non-recurrence of last year's$28 million gain on the sale of real estate associated with our former Fashion Bed business. Additionally, lower volume, lower overhead absorption as production and inventory levels were adjusted to meet reduced demand, and operational inefficiencies in Specialty Foam were partially offset by higher metal margin.
Specialized Products
Trade sales increased$81 million , or 11%. Organic sales increased 9%, driven by volume growth of 12% and raw material-related selling price increases of 2% partially offset by currency impact of 5%. The Hydraulic Cylinders acquisition completed inAugust 2022 added 2% to trade sales growth.
EBIT decreased
Furniture, Flooring & Textile Products
Trade sales increased$105 million , or 9%. Organic sales increased 9%, from raw material-related selling price increases of 12% partially offset by lower volume of 2% and currency impact of 1%. A smallWork Furniture acquisition completed inMay 2021 added less than 1% to trade sales.
EBIT increased
LIQUIDITY AND CAPITALIZATION
Liquidity Sources of Cash Cash on Hand AtSeptember 30, 2022 , we had cash and cash equivalents of$226 million primarily invested in interest-bearing bank accounts and in bank time deposits with original maturities of three months or less. Substantially all of these funds are held in the international accounts of our foreign operations. If we were to immediately bring back all our foreign cash to theU.S. in the form of dividends, we would pay foreign withholding taxes of approximately$14 million . Due to capital requirements in various jurisdictions, approximately$13 million of this cash was inaccessible for repatriation atSeptember 30, 2022 .
Cash from Operations
The primary source of funds for our short-term cash requirements is our cash generated from operating activities. Earnings and changes in working capital levels are the two factors that generally have the greatest impact on our cash from operations. Cash from operations for the nine months endedSeptember 30, 2022 was$194 million , up$114 million from the same period last year, reflecting a much smaller use of cash for working capital partially offset by lower earnings. Working capital increased significantly last year due to restocking efforts following inventory depletion in 2020 but increased to a lesser extent this year as we continue to return to levels of inventory more reflective of current demand. This improvement was partially offset by a decrease in accounts payable as purchases slowed due to lower volume and our efforts to reduce inventory levels. 35 -------------------------------------------------------------------------------- We closely monitor our working capital levels and ended the quarter with adjusted working capital at 16.6% of annualized trade sales. The table below explains this non-GAAP calculation. We eliminate cash, current debt maturities, and the current portion of operating lease liabilities from working capital to monitor our operating efficiency and performance related to trade receivables, inventories, and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period. As discussed in Cash on Hand on page 35, substantially all of these funds are held by international operations and may not be immediately available to reduce debt on a dollar-for-dollar basis. (Dollar amounts in millions) September 30, 2022 December 31, 2021 Current assets $ 2,001.0$ 2,065.3 Current liabilities 965.0 1,335.7 Working capital 1,036.0 729.6 Cash and cash equivalents 226.2 361.7
Current debt maturities and current portion of operating lease liabilities
52.1 345.1
Adjusted working capital $ 861.9 $ 713.0
Annualized trade sales 1 $ 5,177.6 $ 5,331.6
Working capital as a percent of annualized trade sales 20.0 % 13.7 %
Adjusted working capital as a percent of annualized trade sales
16.6 % 13.4 %
1 Annualized trade sales equal third quarter 2022 trade sales of $1,294.4
million and fourth quarter 2021 trade sales of $1,332.9 million multiplied by 4.
We believe measuring our working capital against this sales metric is more
useful, since efficient management of working capital includes adjusting those
net asset levels to reflect current business volume.
Three Primary Components of our Working Capital
Amount (in millions) Days
Three Months Ended Twelve Months Ended Three Months Ended
September 30, December 31, September 30, September 30, 2022 September 30, 2021
2022 2021 2021 December 31, 2021
Trade Receivables $ 675.8 $ 620.0 $ 670.2 DSO 1 48 42 47
Inventories $ 976.0 $ 993.2 $ 970.2 DIO 2 84 76 84
Accounts Payable $ 512.5 $ 613.8 $ 607.1 DPO 3 44 53 53
1Days sales outstanding
a. Quarterly: end of period trade receivables ÷ (quarterly net trade sales ÷
number of days in the period)
b. Annually: ((beginning of year trade receivables + end of period trade
receivables) ÷ 2) ÷ (net trade sales ÷ number of days in the period)
2Days inventory on hand
a. Quarterly: end of period inventory ÷ (quarterly cost of goods sold ÷ number
of days in the period)
b. Annually: ((beginning of year inventory + end of period inventory) ÷ 2) ÷
(cost of goods sold ÷ number of days in the period)
3Days payables outstanding
a. Quarterly: end of period accounts payable ÷ (quarterly cost of goods sold ÷
number of days in the period)
b. Annually: ((beginning of year accounts payable + end of period accounts
payable) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period)
We continue to monitor all elements of working capital in order to optimize cash flow.
Trade Receivables - Our trade receivables and DSO increased atSeptember 30, 2022 compared toDecember 31, 2021 and slightly increased compared toSeptember 30, 2021 . Raw material-related selling price increases were the primary driver of increased trade receivables atSeptember 30, 2022 , but were partially offset by currency impacts versusDecember 31 . Acquisitions further increased trade receivables atSeptember 30, 2022 . Our allowance for doubtful accounts increased by$2 million during the first nine months of 2022 related to macro market uncertainties and ordinary customer credit risk reviews. Favorable customer payment trends continue as we are closely monitoring accounts receivable and collections. We monitor all 36 -------------------------------------------------------------------------------- accounts for possible loss. We also monitor general macroeconomic conditions and other items that could impact the expected collectibility of all customers, or pools of customers, with similar risk. We obtain credit applications, credit reports, bank and trade references, and periodic financial statements from our customers to establish credit limits and terms as appropriate. In cases where a customer's payment performance or financial condition begins to deteriorate or in the event of a customer bankruptcy, we tighten our credit limits and terms and make appropriate reserves based upon the facts and circumstances for each individual customer, as well as pools of customers with similar risk. Inventories - Our inventories decreased and DIO increased atSeptember 30, 2022 compared toDecember 31, 2021 . Inventories increased compared toSeptember 30, 2021 , while DIO remained flat over the same time period. Inventories decreased sinceDecember 31, 2021 as we are reducing inventories to levels needed to support softening demand, primarily in Bedding, while maintaining our ability to service customer requirements. These reductions were partially offset by acquisitions and inflation across most businesses. Inventory levels increased significantly throughout 2021 (primarily in our Steel Rod, Drawn Wire, andU.S. Spring businesses) due to re-stocking efforts following severe depletion in 2020. As supply chain constraints began to improve across the Bedding businesses, we began to adjust inventory levels in the fourth quarter of last year. Inventory levels have trended down since that time, although we built additional safety stock in late 2021 and early 2022 as a precautionary measure before taking our steel rod mill out of operation late in the first quarter of 2022 to replace the reheat furnace. We successfully completed the reheat furnace replacement, enabling us to continue reducing the extra inventory during the second quarter. Sequential softening in trade demand for steel rod drove third quarter steel inventory levels higher. Given the bedding demand environment and the slowing steel market, we are cutting production days in our Steel Rod business during the fourth quarter to reduce those inventories. Our normal seasonal cash flow cycle will continue to be altered to some degree as we continue to balance inventory levels. Our increased inventory levels are not indicative of slow-moving or potential inventory obsolescence. We continuously monitor our slower-moving and potentially obsolete inventory through reports on inventory quantities compared to usage within the previous 12 months. We also utilize cycle counting programs and complete physical counts of our inventory. When potential inventory obsolescence is indicated by these controls, we will take charges for write-downs to maintain an adequate level of reserves. Accounts Payable - Our accounts payable and DPO decreased atSeptember 30, 2022 compared to bothDecember 31 andSeptember 30, 2021 . The decreased accounts payable balances were primarily related to slowed purchases due to lower volume and our efforts to reduce inventory levels, as well as currency impacts. These decreases were partially offset by acquisitions. Our payment terms did not change meaningfully since last year, and we have continued to focus on optimizing payment terms with our vendors. We continue to look for ways to establish and maintain favorable payment terms through our significant purchasing power and also utilize third-party services that offer flexibility to our vendors, which, in turn, helps us manage our DPO as discussed below. Accounts Receivable and Accounts Payable Programs - We participate in trade receivables sales programs in combination with certain customers and third-party banking institutions. Under each of these programs, we sell our entire interest in the trade receivable for 100% of face value, less a discount. Because control of the sold receivable is transferred to the buyer at the time of sale, accounts receivable balances sold are removed from the Consolidated Condensed Balance Sheets and the related proceeds are reported as cash provided by operating activities in the Consolidated Condensed Statements of Cash Flows. We had approximately$45 million and$35 million of trade receivables that were sold and removed from our Consolidated Condensed Balance Sheets atSeptember 30, 2022 andDecember 31, 2021 , respectively. These sales reduced our quarterly DSO by roughly three days at bothSeptember 30, 2022 andDecember 31, 2021 , and the impact to year-to-date operating cash flow provided was approximately$10 million and($10) million atSeptember 30, 2022 andDecember 31, 2021 , respectively. For accounts payable, we have historically looked for ways to optimize payment terms through utilizing third-party programs that allow our suppliers to be paid earlier at a discount. While these programs assist us in negotiating payment terms with our suppliers, we continue to make payments based on our customary terms. A vendor can elect to take payment from a third party earlier with a discount, and in that case, we pay the third party on the original due date of the invoice. Contracts with our suppliers are negotiated independently of supplier participation in the programs, and we cannot increase payment terms pursuant to the programs. As such, there is no direct impact on our DPO, accounts payable, operating cash flows, or liquidity. The accounts payable associated with the third-party programs, which remain on our Consolidated Condensed Balance Sheets, were approximately$80 million atSeptember 30, 2022 and$130 million atDecember 31, 2021 , with the reduction primarily due to lower purchases as discussed above. 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. 37 --------------------------------------------------------------------------------
Commercial Paper Program
Another source of funds for our short-term cash requirements is our
Credit Facility
Our credit facility is a multi-currency facility providing us the ability, from time to time, to borrow, repay, and re-borrow up to$1.2 billion until the maturity date, at which time our ability to borrow under the facility will terminate. The credit facility matures inSeptember 2026 . Currently, there are no borrowings under the credit facility. For more information on our credit facility, see Credit Facility on page 41.
Capital Markets
We also believe that we have the ability to raise debt in the capital markets which acts as a source of funding of long-term cash requirements. Currently, we have$2.1 billion of total debt outstanding with$7.4 million due within 12 months and the remaining maturing through 2051. For more information, please see
Long-Term Debt (including Current Maturities) on page 41.
Uses of Cash
Our long-term priorities for uses of cash are: fund organic growth including capital expenditures, pay dividends, fund strategic acquisitions, and repurchase stock with available cash. Capital Expenditures We are making investments to support expansion in businesses and product lines where sales are profitably growing, for efficiency improvement and maintenance, and for system enhancements. We expect capital expenditures to approximate$115 million in 2022 of which we have spent$66 million as ofSeptember 30, 2022 . Our employee incentive plans emphasize returns on capital, which include net fixed assets and working capital. This emphasis focuses our management on asset utilization and helps ensure that we are investing additional capital dollars where attractive return potential exists.
Dividends
Dividends are one of the primary means by which we return cash to shareholders. In August, we declared a quarterly dividend of$.44 per share, which represented a$.02 or 4.8% increase versus third quarter of 2021. Our long-term targeted dividend payout ratio is approximately 50% of adjusted EPS (which excludes special items such as significant tax law impacts, impairment charges, restructuring-related charges, divestiture gains, litigation accruals, and settlement proceeds). Continuing our long track record of increasing the dividend remains a high priority. 2022 marked our 51st consecutive annual dividend increase. We are proud of our dividend record and plan to extend it. Acquisitions
Our long-term, 6-9% annual revenue growth objective envisions periodic acquisitions. We are seeking strategic acquisitions that complement our current products and capabilities.
In the first nine months of 2022, we acquired two businesses for total consideration of$90 million ($63 million cash in the third quarter and$27 million additional contingent consideration to be paid in cash at a later date). InAugust 2022 , we acquired aUnited States converter and distributor of construction fabrics and other supply items for the furniture and bedding industries for$2 million and a leading global manufacturer of hydraulic cylinders for heavy construction machinery with manufacturing locations inGermany andChina and a distribution facility inthe United States for a total consideration of$88 million ($61 million cash in the third quarter and$27 million additional contingent consideration to paid in cash at a later date).
Also, in early
In the first nine months of 2021, we acquired three businesses for total final cash consideration of$153 million . InJanuary 2021 , we acquired aUnited Kingdom (UK ) manufacturer specializing in metallic ducting systems, flexible joints, and components for the space, military, and commercial applications for a final purchase price of$28 million . InMay 2021 , we acquired a Polish manufacturer of bent metal tubing for furniture used in office, residential, and other settings for a final 38 -------------------------------------------------------------------------------- purchase price of$5 million . InJune 2021 , we acquired a specialty foam and finished mattress manufacturer serving theUK and Irish markets, for a final purchase price of$120 million .
Stock Repurchases
Share repurchases is one of our priorities for uses of cash. During the third quarter of 2022, we repurchased .1 million shares of our stock (at an average price of$38.42 ) and issued less than .1 million shares through employee benefit plans. For the first nine months of 2022, we repurchased 1.7 million shares of our stock (at an average price of$35.94 ) and issued .8 million shares through employee benefit plans. For the full year, we currently expect share repurchases to exceed share issuances. We have been authorized by the Board to repurchase up to 10 million shares each year, but we have established no specific repurchase commitment or timetable. The level of repurchases will vary depending on various considerations, including alternative uses of cash and opportunities to repurchase shares at an attractive price.
Short-Term and Long-Term Cash Requirements
In addition to the expected uses of cash discussed above, we have various material short-term (12 months or less) and long-term (more than 12 months) cash requirements. There have been no material changes in the third quarter 2022 to our short-term or long-term cash requirements as previously reported in our cash requirements table on page 48 of our Form 10-K filed February 22, 2022, other than the retirement of our$300 million 3.4% Senior Notes onAugust 15, 2022 (which was classified as short-term) and a$343 million increase in our commercial paper borrowings (which we classify as long-term). 39 --------------------------------------------------------------------------------
Capitalization
Capitalization Table
This table presents key debt and capitalization statistics for the periods presented:
September 30,
(Dollar amounts in millions) 2022 December 31, 2021
Total debt excluding revolving credit/commercial paper $ 1,798.1 $ 2,090.3
Less: Current maturities of long-term debt 7.4 300.6
Scheduled maturities of long-term debt 1,790.7 1,789.7
Average interest rates 1 3.8 % 3.7 %
Average maturities in years 1 11.7 10.8
Revolving credit/commercial paper 2 342.9 -
Average interest rate on period-end balance outstanding 3.4 % - %
Average interest rate during the period (2022-three months;2021-twelve months)
2.8 % .2 %
Total long-term debt 2,133.6 1,789.7
Deferred income taxes and other liabilities 513.8 533.3
Shareholders' equity and noncontrolling interest 1,562.8 1,648.6
Total capitalization $ 4,210.2 $ 3,971.6
Unused committed credit:
Long-term $ 780.0 $ 1,200.0
Short-term - -
Total unused committed credit 2 $
780.0
Cash and cash equivalents $
226.2 $ 361.7
1 These rates include current maturities, but exclude commercial paper to reflect the
averages of outstanding debt with scheduled maturities.
2 The unused committed credit amount is based on our revolving credit facility and
commercial paper program which, at year end 2021 and at the end of the third quarter of
2022, had a total authorized program amount of
capacity is limited by covenants to our credit facility. Reference is made to the
discussion under Commercial Paper Program below and Credit Facil i ty on
page 41 for more details about our borrowing capacity at
Commercial Paper Program
Amounts outstanding related to our commercial paper program were: (Amounts in millions)
September 30, 2022 December 31, 2021 Total authorized program $
1,200.0 $ 1,200.0 Commercial paper outstanding (classified as long-term debt)
342.9 -
Letters of credit issued under the credit agreement - -
Total program usage 342.9 -
Amount limited by restrictive covenants of credit facility
1 77.1 -
Total program available $ 780.0 $ 1,200.0
1Our borrowing capacity is limited by covenants to our credit facility.
Reference is made to the discussion under Credit Facility on page 41 for
more details about our borrowing capacity at
The average and maximum amounts of commercial paper outstanding during the third quarter of 2022 were$202 million and$382 million , respectively. At quarter end, we had no letters of credit outstanding under the credit facility, but we had issued$47 million of stand-by letters of credit under other bank agreements to take advantage of better pricing. Over the long-term, and subject to our capital needs, market conditions, and alternative capital market opportunities, we expect to maintain the indebtedness under the program by continuously repaying and reissuing the commercial paper. We view these borrowings as a 40 -------------------------------------------------------------------------------- source of long-term funds and have classified the borrowings under the commercial paper program as long-term borrowings on our balance sheet. We have the intent to roll over such obligations on a long-term basis and have the ability to refinance these borrowings on a long-term basis as evidenced by our$1.2 billion revolving credit facility maturing in 2026 discussed below.
Credit Facility
Our multi-currency credit facility was amendedSeptember 2021 to create more financial flexibility and matures inSeptember 2026 . It provides us the ability, from time to time subject to certain restrictive covenants and customary conditions, to borrow, repay, and re-borrow up to$1.2 billion . Our credit facility contains restrictive covenants which (a) require us to maintain as of the last day of each fiscal quarter (i) Consolidated Funded Indebtedness minus the lesser of: (A) Unrestricted Cash, or (B)$750 million to (ii) Consolidated EBITDA for the four consecutive trailing quarters, such ratio not being greater than 3.50 to 1.00, provided, however, subject to certain limitations, if we have made a material acquisition in any fiscal quarter, at our election, the maximum leverage ratio shall be 4.00 to 1.00 for the fiscal quarter during which such material acquisition is consummated and the next three consecutive fiscal quarters; (b) limit the amount of total secured debt to 15% of our total consolidated assets, and (c) limit our ability to sell, lease, transfer, or dispose of all or substantially all of our assets and the assets of our subsidiaries, taken as a whole (other than accounts receivable sold in a permitted securitization transaction, products sold in the ordinary course of business, and our ability to sell, lease, transfer, or dispose of any of our assets or the assets of one of our subsidiaries to us or one of our subsidiaries, as applicable) at any given point in time; each (a), (b), and (c) above as determined by the terms of our credit agreement, filed with theSEC on October 1, 2021 as Exhibit 10.1 to our Current Report on Form 8-K. We were in compliance with all of our debt covenants at the end of third quarter 2022, and expect to maintain compliance with the debt covenant requirements. Our credit facility serves as back-up for our commercial paper program. AtSeptember 30, 2022 , we had$343 million 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 atSeptember 30, 2022 , our borrowing capacity under the credit facility was$780 million . However, this may not be indicative of the actual borrowing capacity moving forward, which may be materially different depending on our Consolidated EBITDA, unrestricted cash, debt levels, and leverage ratio requirements at that time.
Long-Term Debt (including Current Maturities)
We have total debt of$2,141 million . Our 10-year$300 million 3.4% Senior Notes came dueAugust 15, 2022 (August 2022 Notes). We retired theAugust 2022 Notes with commercial paper borrowing. The maturities of the remaining long-term debt range from 2024 through 2051. For more information on our long-term debt, please refer to Footnote J to our Consolidated Financial Statements on page 94 in our
Form 10-K filed
InNovember 2021 , we issued$500 million aggregate principal amount of notes that mature in 2051. The notes bear interest at a rate of 3.5% per year, with semi-annual interest payments that beganMay 15, 2022 . As part of this issuance, we also unwound$300 million of treasury lock agreements we had entered into during 2021 at a gain of approximately$10 million , which will be amortized over the life of the notes. The net proceeds of these notes were used to repay commercial paper, and therefore indirectly were used, to repay theAugust 2022 Notes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America . To do so, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosures. If we used different estimates or judgments our financial statements could change, and some of those changes could be significant. Our estimates are frequently based upon historical experience and are considered by management, at the time they are made, to be reasonable and appropriate. Estimates are adjusted for actual events, as they occur. "Critical accounting estimates" are those that are: (a) subject to uncertainty and change and (b) of material impact to our financial statements. There were no newly identified critical accounting policies or estimates in the first nine months of 2022, and there have been no material changes to our critical accounting policies and estimates as previously disclosed beginning on page 51 in our Form 10-K filed February 22, 2022. 41 --------------------------------------------------------------------------------
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 31.
Litigation
Litigation Contingencies
We are exposed to litigation contingencies that, if realized, could have a material negative impact on our financial condition, results of operations, and cash flows. We deny liability in all currently threatened or pending litigation proceedings and believe we have valid bases to contest all claims made against us. AtSeptember 30, 2022 , our litigation contingency accrual was immaterial (which does not include accrued expenses related to workers' compensation, vehicle-related personal injury, product and general liability claims, taxation issues and environmental matters). Based on current known facts, aggregate reasonably possible (but not probable, and therefore, not recorded) losses in excess of accruals for litigation contingencies are estimated to be$11 million . If our assumptions or analyses regarding any of our contingencies are incorrect, or if facts change, we could realize loss in excess of the recorded accruals (and in excess of the$11 million referenced above) which could have a material negative impact on our financial condition, results of operations, and cash flows. Also, we could be subject to future litigation of various types (including but not limited to litigation related to employment, intellectual property, environmental, taxation, vehicle-related personal injury, antitrust, climate change, and others) that could negatively impact our financial condition, results of operations, and cash flows. For more information regarding our litigation contingencies, see Note 16 Contingencies on page 25 of the Notes to Consolidated Condensed Financial Statements.
Climate Change
Transition Risks
Many scientists, legislators, and others attribute global warming to increased levels of greenhouse gas (GHG) emissions, including carbon dioxide. AtSeptember 30, 2022 , we had approximately 130 production facilities in 18 countries. Most of our facilities are engaged in manufacturing processes that produce GHG, including carbon dioxide. We also maintain a fleet of over-the-road tractor trailers that emit GHG. Our manufacturing facilities are primarily located inNorth America ,Europe , andAsia . There are certain transition risks (meaning risks related to the process of reducing the Company's carbon footprint) that could materially affect our business, capital expenditures, results of operations, financial condition, competitive position and reputation. One of these transition risks is the change in treaties, laws, policies, and regulations that could impose significant operational and compliance burdens. For example, our operations are subject to certain governmental actions like theEuropean Union's (EU) "European Green Deal" (which provides for a 55% reduction in net GHG emissions by 2030 (compared to 1990 levels), and no net emissions of GHG by 2050), and the "Paris Agreement" (which is an international treaty on climate change designed to lower GHG emissions). In addition, specifically with respect to ourAutomotive Group , the EU is moving forward with an effective ban on the sale of new gas-powered automobiles in the EU from 2035 (with interim requirements by 2030), aiming to accelerate the conversion to zero-GHG emission automobiles as part of a broad package to combat global warming. The states ofCalifornia andNew York are also implementing similar provisions. The Company's automotive products can be sold to manufacturers of either gas-powered or electric-powered vehicles. However, if our customers (who may be subject to any of these or other similarly proposed or newly enacted laws and regulations) incur additional costs to comply with such laws and regulations, which in turn, impact their ability to operate at similar levels in certain jurisdictions, the demand for our products could be adversely affected. Also, overall, there continues to be a lack of consistent climate legislation in the jurisdictions in which we operate, which creates economic and regulatory uncertainty. If these laws or regulations (including theSEC's proposed rule regarding climate-related disclosures) impose significant operational restrictions and compliance requirements on us, they could increase costs associated with our operations, including costs for raw materials and transportation. Non-compliance with climate change treaties, legislative and regulatory requirements could also negatively impact our reputation. To date, however, we have not experienced a material impact from climate change legislative and regulatory efforts.
Physical Effects of Climate Change
Direct Physical Effects. The acute and chronic physical effects of climate change, such as severe weather-related events, natural disasters and/or significant changes in climate patterns could have an increasingly adverse impact on our business and customers. AtSeptember 30, 2022 , we had approximately 130 manufacturing facilities in 18 different countries, primarily located inNorth America ,Europe , andAsia . We serve thousands of customers worldwide. In 2021, our largest customer represented approximately 6% of our sales, and our customers were located in 96 different countries. Although our diverse 42 -------------------------------------------------------------------------------- geographical manufacturing footprint and our broad geographical customer base mitigates the potential physical risk of any local or regional climate change weather-related event having a material effect on our operations and results, the increased frequency and severity of such weather-related events could pose a risk to our operations and results. Over the past few years, we have experienced damage to our operations due to flash floods, windstorms, tornadoes and a hailstorm. These events did not have a material impact on our physical properties, or our ability to manufacture and distribute our products to customers in a timely fashion, and did not have a material effect on our business, financial condition or results of operations. However, in the future, depending on whether severe weather-related events increase in frequency and severity, such events could result in potential damage to our physical assets, local infrastructure, transportation systems, water delivery systems, our customers' or suppliers' operations, as well as prolonged disruptions in our manufacturing operations, all of which could harm our business, results of operations and financial condition. Indirect Physical Effects. The physical effects of climate change could continue to have an adverse impact on our supply chain. In 2020 and 2021, we experienced (due, in part, to severe weather-related impacts) supply shortages in chemicals which restricted foam supply. The restriction of foam supply constrained overall mattress production in the bedding industry and reduced our production levels. The cost of chemicals and foam also increased due to the shortages. Severe weather impacts could also reduce supply of other products in our supply chain that could result in higher prices for our products and the resources needed to produce them. If we are unable to secure an adequate and timely supply of chemicals, foam, or other raw materials or products in our supply chain, or the cost of these raw materials or products materially increases, it could have a negative impact on our business, results of operations, and financial condition. In addition, severe weather-related events may continue to result in increased costs of our property insurance. The cost of the Company's property insurance premiums is directly tied to the overall insurance market and the risk profile of the Company. Although we are not able to precisely quantify the percentage of premium increase in any year due to weather-related risks, we believe, based upon property insurance industry reports, that part of the property insurance premium increases that we have experienced over the last few years were due, in part, to weather-related risks. Provided, however, the total cost of property insurance has not been, and is not expected to be, material to our business, results of operations, and financial condition.
Compliance Costs and Capital Expenditures Related to Climate Change
To date, we have not experienced material climate-related compliance costs. This could change depending upon what treaties, laws and regulations are adopted to which the Company may be subject. Moreover, evaluating opportunities to reduce our carbon footprint, setting goals for carbon reduction, and measuring performance in achieving those goals are part of our environmental, sustainability, and governance strategy. We are working on completing our first GHG inventory. Once complete, this baseline measurement will inform a long-term GHG reduction strategy, including setting reduction targets and other key areas of performance. This inventory, with a base year of 2019, will cover three years of data and include Scope 1 and Scope 2 carbon dioxide equivalent emissions. If theSEC's final rule regarding climate-related disclosures requires disclosure or evaluation of Scope 3 emissions, we will expand our inventory to cover these emissions as well. The inventory is being prepared consistent with the GHG Protocol Corporate Accounting and Reporting Standard. Because we have not yet adopted our long-term GHG reduction strategy, we do not yet have an estimate of the compliance costs that may be required to implement these strategies. Although we have engaged in certain climate-related capital projects (such as projects to reduce carbon usage and energy usage), we have not incurred material capital expenditures. Climate-related capital expenditures for 2022 are expected to be similar to our prior climate-related capital expenditures as a percentage of pre-tax income. Also, any future capital expenditures associated with our GHG reduction strategy are not capable of estimate at this time, but we do not expect them to be material to our business, results of operations, financial condition or cash flow. Cybersecurity Risks We rely on information systems to obtain, process, analyze, and manage data, as well as to facilitate the manufacture and distribution of inventory to and from our facilities. We receive, process, and ship orders, manage the billing of and collections from our customers, and manage the accounting for and payment to our vendors. We also manage our production processes with certain industrial control systems. We have a formal process in place for both incident response and cybersecurity continuous improvement that includes a cross-functionalCybersecurity Oversight Committee . Members of theCybersecurity Oversight Committee update the Board quarterly on cybersecurity activity, with procedures in place for interim reporting if necessary. Although we have not experienced any material cybersecurity incidents, we have enhanced our cybersecurity protection efforts over the last few years. We use a third party to periodically benchmark our information security program against theNational Institute of Standards and Technology's Cybersecurity Framework. We provide quarterly cybersecurity training for 43 -------------------------------------------------------------------------------- employees with access to our email and data systems, and we have purchased broad form cyber insurance coverage. Although we believe that our cybersecurity protection systems are adequate, cybersecurity risk has increased due to remote access, remote work conditions, and associated strain on employees. As such, technology failures or cybersecurity breaches could still create system disruptions or unauthorized disclosure of confidential information. We cannot be certain that the attacker's capabilities will not compromise our technology protecting information systems, including those resulting from ransomware attached to our industrial control systems. If these systems are interrupted or damaged by any incident or fail for any extended period of time, then our results of operations could be adversely affected. We may incur remediation costs, increased cybersecurity protection costs, lost revenues resulting from unauthorized use of proprietary information, litigation and legal costs, increased insurance premiums, reputational damage, damage to our competitiveness, and negative impact on stock price and long-term shareholder value. Finally, burdens associated with regulatory compliance, including any potential regulations adopted by theSEC regarding cybersecurity disclosure, may increase the Company's costs.
Goodwill Impairment Testing
A significant portion of our assets consists of goodwill, the carrying value of which may be reduced if we determine that those assets are impaired. AtSeptember 30, 2022 , goodwill represented$1,450 million , or 28%, of our total assets. Our annual goodwill impairment testing performed in the second quarters of 2022 and 2021 indicated no goodwill impairments. However, fair value exceeded carrying value by less than 100% in 2022 for three reporting units as summarized in the table below: Fair value in excess of carrying value Goodwill Goodwill impairment Goodwill impairment testing as performed in testing as performed in As of the second quarter 2022 the second quarter 2021 September 30, 2022 Bedding 54 % 171 %$893 million Work Furniture 78 % 85 %$97 million Aerospace 40 % 28 %$65 million The Bedding reporting unit's market value decreased primarily because of lower comparable company multiples and higher discount rates. Although the long-term outlook for the Bedding reporting unit remains strong, macro-economic factors also have negatively impacted consumer confidence and spending, which in turn has had an adverse impact on the bedding market's near-term forecast. Although theWork Furniture and Aerospace reporting units' forecasts used in the 2022 goodwill impairment testing improved as compared to the 2021 testing, their fair values were adversely impacted by lower comparable company multiples and higher discount rates.Work Furniture's forecasts improved in 2022; sales continue to grow from improving demand in the contract market as companies redesign their footprints and invest in office space, although demand for products sold for residential use is softening. Aerospace's forecasts improved in 2022, as fabricated duct assemblies are at 2019 levels, and demand for welded and seamless tube products is improving modestly but still below pre-pandemic levels. We expect the industry to return to 2019 demand levels in 2024. The fair value of the Hydraulic Cylinders reporting unit exceeded its carrying value by 32% as of our second quarter 2022 testing, compared to 86% in 2021. At the time of our annual goodwill impairment testing in both 2022 and 2021, there was no goodwill associated with the Hydraulic Cylinders reporting unit, but anAugust 2022 acquisition added goodwill. AtSeptember 30, 2022 , the goodwill balance was$35 million . We are continuing to monitor all factors impacting these reporting units. If actual results or the long-term outlook of any of our reporting units materially differ from the assumptions and estimates used in the goodwill valuation calculations, we could incur impairment charges. These non-cash charges could have a material negative impact on our earnings.
NEW ACCOUNTING STANDARDS
The FASB has issued accounting guidance effective for the current and future periods. See Note 2 Accounting Standards Updates to the Consolidated Condensed Financial Statements on page 7 for a more complete discussion.
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