What We DoLeggett & Platt, Incorporated (the Company, we, or our) is a diversified manufacturer, and member of the S&P 500 index, that conceives, designs, and produces a wide range of engineered components and products found in many homes, offices, and automobiles. We make components that are often hidden within, but integral to, our customers' products. We are the leadingU.S. -based manufacturer of: a) bedding components; b) automotive seat support and lumbar systems; c) specialty bedding foams and private-label finished mattresses; d) components for home furniture and work furniture; e) flooring underlayment; f) adjustable beds; and g) bedding industry machinery. Our Segments Our operations are comprised of over 130 production facilities located in 17 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 backwardly integrated into the production and supply of specialty foam chemicals, steel rod, and drawn steel wire to our own operations and to external customers. Our trade customers for wire make mechanical springs and many other end products. This segment generated 47% of our trade sales during the first three months of 2021. 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 22% of our trade sales in the first three months of 2021. 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 31% of our trade sales in the first three months of 2021. 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 of 2020. 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 fully operational, 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 and cut capital expenditures •Prioritize accounts receivable collections and manage inventory levels •Amend the financial covenant in our revolving credit facility to provide additional liquidity 24 -------------------------------------------------------------------------------- These efforts helped to strengthen cash flow and protect our balance sheet. Consumers quickly moved from travel and entertainment spending to purchasing home-related products and autos. This has benefited our Bedding,Home Furniture , Flooring & Textiles, and Automotive businesses. We also have seen modest recovery in businesses that are in industries most negatively impacted by the COVID-19 pandemic. 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. The fixed cost actions we took in 2020 reduced our first quarter costs by approximately$20 million . As we move through 2021, we expect to focus on controlling our costs by keeping our variable cost structure aligned with demand levels and only adding fixed costs as necessary to support higher volume and future growth opportunities.
Below is a more in-depth discussion of the various 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 the first quarter of 2021 were up 10% versus the first quarter of 2020. Following steep declines in the last two weeks of first quarter 2020, we returned to year-over-year sales growth in the majority of our businesses in the first quarter of 2021. While demand in Aerospace andWork Furniture was lower in first quarter 2021 than first quarter 2020, sales improved sequentially from fourth quarter 2020. 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. 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. OurAutomotive Group uses the microchips in seat comfort products, and to a lesser extent in motors and actuators. Although, to date, ourAutomotive 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. We anticipate these shortages to continue throughout the year. 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. In early 2020, theU.S. and other governments ordered that certain nonwoven fabrics used to produce ComfortCore® innersprings be prioritized to produce medical supplies. This resulted in shortages of the fabrics for non-medical applications beginning in second quarter 2020. These shortages and strong bedding demand caused us to temporarily be unable to supply full industry demand for ComfortCore® and resulted in higher costs for nonwoven fabrics. Beginning in late 2020, nonwoven fabrics supply constraints began to alleviate. As demand improved in mid-2020, we also experienced some temporary labor shortages. In the first quarter of 2021, our supply of nonwoven fabrics, additional staffing, and additional machine capacity has allowed us to increase our production of ComfortCore®. In the first quarter, we added over half of our planned 25% capacity additions through the combination of labor and machinery additions. We will continue to add staffing and machinery as we move through the next two quarters. Some facilities have experienced problems delivering products to customers and disruptions in logistics necessary to import, export, or transfer products, which has generally resulted in increased freight costs. Our supply chains have also been hampered by congested ports. 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. 25 -------------------------------------------------------------------------------- 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 (except if fully vaccinated or have recovered from COVID-19 within the last 90 days, unless the employee is experiencing symptoms) 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 in 2020. We incurred severance costs of$7 million in 2020 and we do not expect any additional material charges. We did not incur significant severance costs in the first quarter of 2021. 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, atMarch 31, 2021 , the level of our accounts receivable in current status was above pre-COVID-19 levels. We reduced our allowance for doubtful accounts by$3 million during the quarter endedMarch 31, 2021 reflecting continued positive trends in customer payment experience and a lower qualitative risk for improved macroeconomic conditions. Impairment ofGoodwill and Long-Lived Assets. A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. AtMarch 31, 2021 , goodwill and other intangible assets represented$2.1 billion , or 43% of our total assets. In addition, net property, plant and equipment, operating lease right-of-use assets, and sundry assets totaled$1.0 billion , or 21% of total assets. Our annual goodwill impairment testing performed in the second quarter of 2020 resulted in a$25 million non-cash goodwill impairment charge with respect to our Hydraulic Cylinders reporting unit, which is a part of the Specialized Products segment. Of the remaining six reporting units, fair value exceeded carrying value by only a small amount for two units: Aerospace (51%) andWork Furniture (25%). The goodwill balances for these two units as ofMarch 31, 2021 were$66 million and$97 million , respectively. Although both reporting units' sales are below pre-pandemic levels, their sales improved sequentially from fourth quarter 2020. While aerospace industry data suggest that it could be a few years before this business returns to pre-pandemic levels, work furniture industry data suggests this business may begin to normalize in more near-term quarters. We are continuing to monitor all factors impacting these industries. If the adverse economic impact from the COVID-19 pandemic is longer than expected, we may not be able to achieve projected performance levels. If actual results of any of our reporting units 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 inJanuary 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 . Our leverage ratio covenant requires us to maintain a ratio of consolidated funded indebtedness less unrestricted cash (as defined in the credit facility) of 4.75 to 1.00 for each fiscal quarter-end date throughMarch 31, 2021 ; 4.25 to 1.00 atJune 30, 2021 ; 3.75 to 1.00 atSeptember 30, 2021 ; and 3.25 to 1.00 atDecember 31, 2021 and thereafter. In addition, the amount of total secured debt may not exceed 5% of our total consolidated assets untilDecember 31, 2021 , at which time it will revert to 15%. Our 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. AtMarch 31, 2021 , the Company was in compliance with all of its debt covenants and expects to be able to maintain compliance with the debt covenant requirements. 26 -------------------------------------------------------------------------------- Our credit facility serves as back-up for our commercial paper program. AtMarch 31, 2021 , we had$116 million of 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 atMarch 31, 2021 , our borrowing capacity under the credit facility was$1.1 billion atMarch 31, 2021 . 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, debt levels, and leverage ratio requirements 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 deferred$19 million of our 2020 payment of employer'sSocial Security match into 2021 and 2022 as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Half of the amount will be paid inDecember 2021 and half inDecember 2022 . Although we did not receive a significant amount of government subsidies in our international locations for the three months endedMarch 31, 2021 and 2020, we received$21 million for the full year 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. Customers We serve a broad suite of customers, with our largest customer representing approximately 6% of our trade 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. 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 2020, steel costs deflated modestly through the majority of the year followed by significant inflation late in the year. Steel costs inflated further in the first quarter of 2021. 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 early 2021, as steel prices inflated significantly, metal margins expanded. 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 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. In the first quarter of 2021, chemicals experienced further supply shortages from severe weather impacts as well as significant cost inflation. The supply shortages resulted in significant restrictions by producers. We anticipate these chemical allocations will continue to improve but may persist throughout the remainder of the year. 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. 27 --------------------------------------------------------------------------------
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. InSeptember 2018 , the Company, along with other domestic mattress producers, filed petitions with the DOC and the ITC alleging that manufacturers of mattresses inChina were unfairly selling their products inthe United States at less than fair value (dumping) and seeking the imposition of duties on mattresses imported fromChina . InOctober 2019 , the DOC made a final determination assigning duty rates from 57% to 1,732%. InNovember 2019 , the ITC made a unanimous final determination that domestic mattress producers were materially injured by reason of the unfairly priced imported mattresses. An antidumping order on imports of Chinese mattresses will remain in effect for five years, throughDecember 2024 , at which time the DOC and ITC will conduct a sunset review to determine whether to extend the order for an additional five years. InMarch 2020 , the Company, along with other domestic mattress producers and two labor unions representing workers at other mattress producers, filed antidumping petitions with the DOC and the ITC alleging that manufacturers of mattresses inCambodia ,Indonesia ,Malaysia ,Serbia ,Thailand ,Turkey , andVietnam were unfairly selling their products inthe United States at less than fair value (dumping) and a countervailing duty petition alleging manufacturers of mattresses inChina were benefiting from subsidies. 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. 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. See Item 1 Legal Proceedings on page 41 for more information. 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 28 -------------------------------------------------------------------------------- third of the S&P 500 companies over the long term through an approach that employs four TSR sources: revenue growth, margin expansion, dividends, and share repurchases. We monitor our TSR performance relative to the S&P 500 on a rolling three-year basis. We believe our disciplined growth strategy, portfolio management, and prudent use of capital will support achievement of our goal over time. Senior executives participate in an incentive program with a three-year performance period based on two equal measures: (i) our TSR performance compared to the performance of a group of approximately 300 peers, and (ii) the Company or segment Earnings Before Interest and Taxes (EBIT) Compound Annual Growth Rate (CAGR). Acquisition of Elite Comfort Solutions OnJanuary 16, 2019 , we acquired ECS for a cash purchase price of approximately$1.25 billion (the "ECS Acquisition"). ECS is a leader in specialized foam technology, primarily for the bedding and furniture industries. With 16 facilities acrossthe United States , ECS operates a vertically-integrated model, developing many of the chemicals and additives used in foam production, producing specialty foam, and manufacturing private-label finished products. These innovative specialty foam products include finished mattresses sold through both traditional and online channels, 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 "Commercial Paper Program and Term Loan Financing" on page 36. 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. Climate Change Many scientists, legislators, and others attribute global warming to increased levels of greenhouse gas emissions, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit such emissions. We have developed and implemented a company-wide environmental management system to ensure we are compliant with environmental regulations everywhere we operate, and to drive continual improvement in environmental sustainability. Although we have not experienced a material impact from climate change legislative and regulatory efforts, we have experienced (due to severe weather impacts) supply shortages in chemicals which have restricted foam supply. The restriction of foam supply has constrained overall mattress production in the bedding industry and has reduced our production levels. The cost of chemicals and foam has also increased due to the shortages. Finally, we have experienced increased property insurance premiums, in part, due to enhanced weather-related risks, but this increase in premiums has not had a material impact on our results of operations or financial condition. Change in Method for Valuing Inventories from Last-In, First-Out (LIFO) Cost Method As ofJanuary 1, 2021 , we changed our method for valuing certain inventories (primarily domestic steel-related inventories) to the First-in, First-out (FIFO) cost method from the LIFO cost method. The effects of this change have been retrospectively applied to all periods presented. With the change from LIFO to FIFO, we expect to make tax payments of$21 million , in the aggregate, during the years 2021- 2023 based on current tax rates. The cash outlay during 2021 will approximate$11 million . See Note 10 to the Consolidated Condensed Financial Statements on page 13 for additional information. 29
-------------------------------------------------------------------------------- RESULTS OF OPERATIONS Discussion of Consolidated Results First Quarter:Trade Sales were$1,150.9 million in the current quarter, a 10% increase versus the first quarter 2020. Organic sales increased 11%, with volume up 4% from strong demand in residential end markets and Automotive partially offset by weakness in Aerospace. Raw material-related selling price increases of 5% and currency benefit of 2% added to sales growth. Divestitures, net of acquisitions, reduced sales by 1%. Earnings Before Interest and Taxes (EBIT) increased 62%, to$127.7 million , primarily from volume growth, lower fixed costs, and the non-recurrence of an$8 million impairment charge related to a note receivable and a$4 million charge to write off stock associated with a prior year divestiture. Earnings Per Share (EPS) increased to$.64 in the current quarter, versus$.33 in the first quarter of 2020, primarily from volume growth, lower fixed costs, the non-recurrence of an impairment charge and stock write off as discussed above, a lower tax rate, and lower interest expense. Net Interest Expense and Income Taxes First quarter 2021 net interest expense was lower by$2 million than the first quarter 2020 primarily due to reduced debt levels (including commercial paper) and lower interest rates. Our worldwide effective tax rate was 20% for the first quarter of 2021, compared to 25% for the same quarter last year. While theU.S. statutory federal income tax rate was 21% in both years, in 2020, due to the anticipated earnings across our operations, our annual effective tax rate calculation was 3% higher than normal. In 2021, we realized a 2% benefit for prior year tax adjustments related to amended tax returns we expect to file. Less significant items added 1% to our tax rate in both years. 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 from quarter to quarter. 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, the effect of other tax law changes, and prudent tax planning strategies, can also influence our rate. 30 -------------------------------------------------------------------------------- Discussion of Segment Results First Quarter Discussion A description of the products included in each segment, along with segment financial data, appear in Note 4 to the Consolidated Condensed Financial Statements on page 7. As ofJanuary 1, 2021 , we changed our method for valuing certain inventories (primarily domestic steel-related inventories) to the FIFO cost method from the LIFO cost method. The effects of this change have been retrospectively applied to all periods presented. See Note 10 to the Consolidated Condensed Financial Statements on page 13 for additional information. A summary of segment results is shown in the following tables. Three Months Three Months Change in Trade Sales
% Change in Organic millions) 2021 2020 $ % Sales 1 Bedding Products$ 535.8 $ 490.6 $ 45.2 9.2 % 11.9 % Specialized Products 257.6 234.5 23.1 9.9 8.9 Furniture, Flooring & Textile Products 357.5 320.4 37.1 11.6 11.6 Total$ 1,150.9 $ 1,045.5 $ 105.4 10.1 % 11.1 % Change in EBIT EBIT Margins Three Months Three Months Three Months Three Months EBIT Ended March Ended March Ended March 31, Ended March 31, (Dollar amounts in millions) 31, 2021 31, 2020 $ % 2021 2020 Bedding Products$ 63.8 $ 28.3 $ 35.5 125.4 % 11.9 % 5.8 % Specialized Products 35.2 27.7 7.5 27.1 13.7 11.8 Furniture, Flooring & Textile Products 28.3 26.1 2.2 8.4 7.9
8.1
Intersegment eliminations & other .4 (3.5) 3.9 Total$ 127.7 $ 78.6 $ 49.1 62.5 % 11.1 % 7.5 % Depreciation and Amortization Three Months Ended
March Three Months Ended March
(Dollar amounts in millions) 31, 2021 31, 2020 Bedding Products $ 26.1 $ 26.8 Specialized Products 11.1 11.2 Furniture, Flooring & Textile Products 6.1 6.5 Unallocated 2 2.8 3.0 Total $ 46.1 $ 47.5
1 This is a change in trade sales not attributable to acquisitions or divestitures in the last 12 months. Refer to the Bedding Products and Specialized Products segment discussions 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 increased$45 million , or 9%. Organic sales increased 12%. Raw material-related selling price increases added 9% to sales, volume was up 2%, and currency benefit increased sales 1%. Divestitures of small operations in Drawn Wire and our former Fashion Bed business reduced trade sales 3%. EBIT increased$36 million , primarily from volume growth, higher metal margin, lower fixed costs, a reduction of bad debt expense, and the non-recurrence of an$8 million impairment charge related to a note receivable. 31 -------------------------------------------------------------------------------- Specialized Products Trade sales increased$23 million , or 10%. Organic sales increased 9%, from currency benefit of 6% and volume growth of 3%. Volume growth in Automotive and Hydraulic Cylinders was partially offset by weak demand in Aerospace. A small Aerospace acquisition completed in January added 1% to trade sales. EBIT increased$8 million , primarily from volume in Automotive and lower fixed costs, partially offset by lower volume in Aerospace. Furniture, Flooring & Textile Products Trade sales increased$37 million , or 12%. Volume was up 8%, driven by strong demand in Geo Components,Home Furniture , and Flooring Products' residential business. Raw material-related selling price increases added 3% to sales and currency benefit increased sales 1%. EBIT increased$2 million , primarily from volume growth and lower fixed cost reductions, partially offset by pricing lag associated with passing along higher raw material costs. LIQUIDITY AND CAPITALIZATION Cash from Operations Cash from operations is our primary source of funds. Earnings and changes in working capital levels are the two factors that generally have the greatest impact on our cash from operations. Cash from operations for the three months endedMarch 31, 2021 was$(10.6) million , down$21.0 million from the same period last year, primarily from working capital investments to support growth and inflationary impact, which more than offset higher earnings. We closely monitor our working capital levels and ended the quarter with adjusted working capital at 12.0% of annualized trade sales. The table below explains this non-GAAP calculation. We eliminate cash, current debt maturities, and the current portion of operating lease liabilities from working capital to monitor our operating efficiency and performance related to trade receivables, inventories, and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period. As discussed on page 36, substantially all of these funds are held by international operations and may not be immediately available to reduce debt on a dollar-for-dollar basis. (Amounts in millions) March 31, 2021 December 31, 2020 Current assets$ 1,789.0 $ 1,658.1 Current liabilities 995.6 1,006.0 Working capital 793.4 652.1 Cash and cash equivalents 333.8 348.9 Current debt maturities and current portion of operating lease liabilities 93.6 93.3 Adjusted working capital$ 553.2 $ 396.5 Annualized trade sales 1$ 4,603.6 $ 4,728.0 Working capital as a percent of annualized trade sales 17.2 % 13.8 %
Adjusted working capital as a percent of annualized trade sales
12.0 % 8.4 % 1 Annualized trade sales equal first quarter 2021 trade sales of$1,150.9 million and fourth quarter 2020 trade sales of$1,182.0 million multiplied by 4. We believe measuring our working capital against this sales metric is more useful, since efficient management of working capital includes adjusting those net asset levels to reflect current business volume. 32 --------------------------------------------------------------------------------
Three Primary Components of our Working Capital
Amount (in millions) Days Three Months Ended Twelve Months Ended Three Months Ended March 31, December 31, March 31, March 31, 2021 March 31, 2020 2021 2020 2020 December 31, 2020 Trade Receivables$ 577.4 $ 535.2 $ 546.0 DSO 1 45 47 48 Inventories$ 801.8 $ 691.5 $ 692.3 DIO 2 80 74 76 Accounts Payable$ 536.3 $ 552.2 $ 429.1 DPO 3 53 55 47 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 increased atMarch 31, 2021 compared to bothDecember 31 andMarch 31, 2020 as a result of strong sales late in the first quarter of 2021 and inflation. Our DSO decreased compared to last year. These changes were driven by strong credit discipline and a return to more normalized sales patterns since the onset of COVID-19. We reduced our allowance for doubtful accounts by$3 million during the first quarter of 2021, reflecting continued positive customer payment trends and lower qualitative risk for improved macroeconomic conditions. We are closely monitoring accounts receivable and collections. We monitor all 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 and DIO increased as compared to bothDecember 31 andMarch 31, 2020 . This was due to the planned build of inventories throughout the first quarter to support increased demand and higher costs as a result of inflation. 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 writedowns to maintain an adequate level of reserves. Our reserve balances, as a percentage of period-end inventory, were consistent with our historical average. Accounts Payable - Our accounts payable and DPO both increased compared toMarch 31, 2020 , as we were reducing purchases and fulfilling orders out of existing inventory in the first quarter of 2020. Although our inventories increased as ofMarch 31, 2021 , as discussed above, our accounts payable and DPO both decreased compared toDecember 31, 2020 due to the timing of payments and inventory purchases. 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. 33 -------------------------------------------------------------------------------- Accounts Receivable and Accounts Payable Programs - We have participated in trade receivables sales programs in combination with third-party banking institutions and certain 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 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$40 million and$45 million of trade receivables that were sold and removed from our Consolidated Condensed Balance Sheets atMarch 31, 2021 andDecember 31, 2020 . These sales reduced our quarterly DSO by roughly three days, and the impact to year-to-date operating cash flow was approximately($5) million and$5 million , atMarch 31, 2021 andDecember 31, 2020 , 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 Condensed Balance Sheets, settled through the third-party programs, were approximately$105 million at bothMarch 31, 2021 andDecember 31, 2020 . 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. Uses of Cash Finance Capital Requirements 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$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. With the deleveraging progress made over the past year, we are in a strong position to capture both near- and long-term growth opportunities that add capabilities or products to our existing business. In the first quarter of 2021, we acquired a small aerospace business located in theUK that specializes in metallic ducting systems, flexible joints, and components for space, military, and commercial applications for total consideration of approximately$27 million . Additional details about acquisitions are discussed in Note 9 on page 13 to the Consolidated Condensed Financial Statements. Pay Dividends Dividends are one of the primary means by which we return cash to shareholders. In May, we declared a quarterly dividend of$.42 per share, which represented a$.02 or 5.0% increase versus second quarter of 2020. Our long-term targeted dividend payout ratio is approximately 50% of adjusted EPS (which excludes special items such as significant tax law impacts, impairment charges, restructuring-related charges, divestiture gains, litigation accruals, and settlement proceeds). Repurchase Stock Our long-term priorities for uses of cash remain: fund organic growth, pay dividends, fund strategic acquisitions, and repurchase stock with available cash. With the increase in leverage from our acquisition of ECS inJanuary 2019 , we are prioritizing debt repayment after funding organic growth and dividends, and as a result, are temporarily limiting share repurchases. We have been authorized by the Board to repurchase up to 10 million shares each year, but we have established no specific repurchase commitment or timetable. 34 --------------------------------------------------------------------------------
Capitalization
The following table presents our key debt and capitalization statistics:
December 31, (Dollar amounts in millions) March 31, 2021 2020 Total debt excluding revolving credit/commercial paper$ 1,887.7 $ 1,900.2 Less: Current maturities of long-term debt 50.8 50.9 Scheduled maturities of long-term debt 1,836.9 1,849.3 Average interest rates 1 3.7 % 3.7 % Average maturities in years 1 5.1 5.3 Revolving credit/commercial paper 2 116.0 - Average interest rate on period-end balance outstanding .2 % - % Average interest rate during the period (three months) .2 % 2.0 % Total long-term debt 1,952.9 1,849.3 Deferred income taxes and other liabilities 506.9 519.6 Shareholders' equity and noncontrolling interest 1,456.2 1,425.1 Total capitalization$ 3,916.0 $ 3,794.0 Unused committed credit: Long-term$ 1,084.0 $ 1,200.0 Short-term - - Total unused committed credit 2 $
1,084.0
Cash and cash equivalents$ 333.8 $ 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 year end 2020 and at the end of the first quarter
of 2021, had a total authorized program amount of
capacity may be limited by covenants to our credit facility. 35
-------------------------------------------------------------------------------- Commercial Paper Program and Term Loan Financing InJanuary 2019 , we expanded the borrowing capacity under our credit facility from$800 million to$1.2 billion , extended the term toJanuary 2024 , and correspondingly increased permitted borrowings under our commercial paper program primarily to finance the ECS Acquisition. The ECS Acquisition was financed through the issuance of approximately$750 million of commercial paper (of which roughly$500 million was subsequently refinanced through the public issuance of 10-year 4.4% notes due 2029) and the issuance of a$500 million five-year Term Loan A with our current bank group, pursuant to which we pay principal in the amount of$12.5 million each quarter and pay the remaining principal at maturity. As ofMarch 31, 2021 , we had repaid$207.5 million , including$107.5 million in prepayments of a portion of the Term Loan A during 2020. The credit facility allows us to issue letters of credit totaling up to$125 million . When we issue letters of credit under the facility, we reduce our available credit and commercial paper capacity by a corresponding amount. We may borrow funds in advance of expected outflows to provide additional flexibility during the COVID-19 disruption. Amounts outstanding related to our commercial paper program were: December 31, (Amounts in millions) March 31, 2021 2020 Total authorized program$ 1,200.0 $ 1,200.0 Commercial paper outstanding (classified as long-term debt) 116.0 - Letters of credit issued under the credit agreement - - Total program usage 116.0 - Total program available$ 1,084.0 $ 1,200.0 The average and maximum amounts of commercial paper outstanding during the first quarter of 2021 were$88.0 million and$148.0 million , respectively. At quarter end, we had no letters of credit outstanding under the credit facility, but we had issued$40.4 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 notes. We view the notes as a source of long-term funds and have classified the borrowings under the commercial paper program as long-term borrowings on our balance sheet. We have the intent to roll over such obligations on a long-term basis and have the ability to refinance these borrowings on a long-term basis as evidenced by our$1.2 billion revolving credit facility maturing in 2024 discussed above. With cash on hand, operating cash flow, our commercial paper program and/or our credit facility, and our ability to obtain debt financing, we believe we have sufficient funds available to repay maturing debt, as well as support our ongoing operations. Our credit facility was amended effectiveMay 6, 2020 and contains revised restrictive covenants. The revised covenants limit: a) as of the last day of each fiscal quarter, the leverage ratio of consolidated funded indebtedness (minus unrestricted cash) to trailing 12-month consolidated EBITDA (each as defined in the credit facility) must not exceed 4.75 to 1.00 for each fiscal quarter end date throughMarch 31, 2021 ; 4.25 to 1.00 atJune 30, 2021 ; 3.75 to 1.00 atSeptember 30, 2021 ; and 3.25 to 1.00 atDecember 31, 2021 and thereafter; b) the amount of total secured debt to 5% of our total consolidated assets untilDecember 31, 2021 , at which time it will revert to 15% of our total consolidated assets; and c) our ability to sell, lease, transfer, or dispose of all or substantially all of total consolidated assets. The amendment also added an anti-cash hoarding provision that limits borrowing if the Company has a consolidated cash balance (as defined in the credit facility) in excess of$300 million without planned expenditures. We were comfortably in compliance with our covenants at the end of the first quarter 2021. For more information about the restrictive covenants in our credit facility, see "Our Ability to Borrow under our Credit Facility" on page 26. Accessibility of Cash AtMarch 31, 2021 , we had cash and cash equivalents of$334 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. We currently expect to bring back approximately$165 million of additional foreign cash before year end. If we were to immediately bring back all our foreign cash to theU.S. in the form of dividends, we would pay foreign withholding taxes of approximately$22 million . Although there are capital requirements in various jurisdictions, none of this cash is currently inaccessible for repatriation. 36 --------------------------------------------------------------------------------
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 24. Potential Sale of Real Estate We have agreed to sell certain real estate associated with prior years' restructuring activities in the Bedding Products segment and expect to realize a gain of up to$30 million on this transaction upon closing, which may be as early as the second quarter of 2021. Although substantially all outstanding significant conditions of the sale have been finalized, other factors could impact the timing, the amount of proceeds, and whether the sale is completed. Cybersecurity Risks We rely on our industrial control systems to manufacture our products, and 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. We could still experience material technology failures or cybersecurity breaches, 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, reputational damage, damage to our competitiveness, and negative impact on stock price and long-term shareholder value. Litigation Accrual for Litigation Contingencies and Reasonably Possible Losses in Excess of Accruals We are exposed to litigation contingencies that, if realized, could have a material negative impact on our financial condition, results of operations, and cash flows. We deny liability in all currently threatened or pending litigation proceedings and believe we have valid bases to contest all claims made against us. AtMarch 31, 2021 , our litigation contingency accrual was immaterial (which does not include accrued expenses related to workers' compensation, vehicle-related personal injury, product and general liability claims, taxation issues and environmental matters). Based on current known facts, aggregate reasonably possible (but not probable, and therefore, not recorded) losses in excess of accruals for litigation contingencies are estimated to be$11 million , including$10 million for Brazilian VAT matters and$1 million for other matters. If our assumptions or analyses regarding 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. For more information regarding our litigation contingencies, see Note 15 "Contingencies" on page 21 of the Notes to Consolidated Condensed Financial Statements. ACCOUNTING STANDARDS UPDATES The FASB has issued accounting guidance effective for the current and future periods. See Note 2 to the Consolidated Condensed Financial Statements on page 5 for a more complete discussion. 37
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