Page No. • Highlights 21 • Introduction 22 • Results of Operations 26 • Liquidity and Capitalization 28 • Critical Accounting Policies and Estimates 33 • Contingencies 33 • New Accounting Standards 35 HIGHLIGHTS We had record first quarter trade sales from continuing operations of$1,322 million for the three months endingMarch 31, 2022 , an increase of 15% versus the first quarter 2021.
EPS increased to
First quarter 2022 EBIT was up
Operating cash flow was
21 --------------------------------------------------------------------------------
In
Share repurchases in the first quarter of 2022 were .6 million shares at an
average price of
InFebruary 2022 , we sold our South African bedding innerspring operation for a cash purchase price of approximately$2 million . This business had annualized sales of approximately$8 million and was reported in our Bedding Products segment. 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. Our Segments
Our operations are comprised of 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 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 48% of our trade sales during the first three 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 20% of our trade sales in the first three 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 32% of our trade sales in the first three 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% 22
-------------------------------------------------------------------------------- Senior executives participate in an incentive program with a three-year performance period based on two equal measures: (i) our TSR performance compared to the performance of a group of approximately 300 peers, and (ii) the Company or segment Earnings Before Interest and Taxes (EBIT) Compound Annual Growth Rate (CAGR). Customers We serve a broad suite of customers, with our largest customer representing approximately 6% of our 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.
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. In 2021, steel costs inflated throughout the majority of the year and inflated further in the first quarter of 2022. 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 quarter of 2022. If these expanded metal margins are sustained, our steel rod mill should continue to experience enhanced profitability. 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 quarter 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. 23 --------------------------------------------------------------------------------
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 operations and our ability to deliver products to our customers. The shortage of semiconductors is also impacting our Adjustable Bed and Hydraulic Cylinders business units. The Russian invasion ofUkraine has caused disruptions in our supply chain and negatively impacted our results of operations. Our Automotive business uses semiconductors, the production of which uses neon gas. Our Aerospace business uses titanium and nickel in the production of aerospace tubing. Several of our businesses use birch plywood in their products. 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 . Also, a significant portion of neon gas is produced in theUkraine . 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 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.
For more information regarding supply chain disruptions, see Inflationary Trends in Cost of Goods Sold on page 23.
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 , 24 --------------------------------------------------------------------------------
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. 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 37 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 17 countries. All of these countries have been affected by the COVID-19 pandemic. All of our facilities are open and running at this time. However, 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. Depending on the length and severity of the COVID-19 pandemic, the percentage of the population vaccinated, and the effectiveness of the vaccines against new variants, our ability to keep our manufacturing operations open and fully operational, build and maintain appropriate labor levels, obtain necessary raw materials and parts, and ship finished products to customers may be partially or completely disrupted, either on a temporary or prolonged basis. 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. The continued realization of these risks to our manufacturing operations, labor force, and supply chain could also increase labor, commodity, and transportation costs. Collection of Trade and Notes Receivables. Some of our customers have been adversely affected by the COVID-19 pandemic. If these parties suffer financial difficulty, they may be unable to pay their debts to us. We are closely monitoring accounts receivable and collections. Although we experienced increased bad debt expense in the first quarter of 2020, we have had favorable customer payment trends and applied a lower qualitative risk for improved macroeconomic conditions which have allowed us to reduce our bad debt reserves in the last half of 2020 through 2021. While favorable customer payment trends continued in the first quarter of 2022, we recorded$1.4 million bad debt related to macro market uncertainties and ordinary customer credit reviews. 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, 2022 , goodwill and other intangible assets represented$2.1 billion , or 40% of our total assets. In addition, net property, plant and equipment, operating lease right-of-use assets, and sundry assets totaled$1.1 billion , or 20% of total assets. 25 -------------------------------------------------------------------------------- Our annual goodwill impairment testing performed in the second quarter of 2021 indicated no goodwill impairments. However, fair value exceeded carrying value by less than 100% for two reporting units as summarized in the table below: Fair value in excess of carrying value Goodwill Goodwill impairment testing as performed in the second quarter 2021 As of March 31, 2022 Aerospace 28 %$67 million Work Furniture 85 %$101 million In our Aerospace reporting unit, demand for fabricated duct assemblies is 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. Sales in theWork Furniture reporting unit have recovered to pre-pandemic levels from strong demand for products sold for residential use and improvement in the contract market as companies redesign their footprints and invest in office space to attract and retain employees as more people return to the office. 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. 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
Three Months:
Trade Sales were$1,322 million in the first three months of 2022, a 15% increase versus the same period last year. Organic sales increased 13%, with volume down 4% primarily from demand softness inU.S. and European bedding markets, partially offset by growth in ourWork Furniture , Aerospace, and Hydraulic Cylinders businesses. Inflation driven raw material-related selling price increases added 18% to sales and currency impact decreased sales by 1%. Acquisitions, net of divestitures, increased sales 2%. EBIT increased 8% to$138 million , primarily from metal margin expansion in our Steel Rod business and pricing discipline in the Furniture, Flooring & Textile Products segment, partially offset by lower volume primarily in the Bedding segment, higher raw materials and transportation costs in Automotive generally, and production inefficiencies and related premium freight costs in aNorth American Automotive facility. EPS increased to$.66 for the first three months of 2022, versus$.64 in the same period of 2021, primarily from higher EBIT as discussed above, partially offset by higher tax rate ($.03 /share) and interest expense ($.01 /share).
Net Interest Expense and Income Taxes
Net interest expense for the first quarter 2022 was
Our worldwide effective tax rate was 23% for the first quarter of 2022, compared to 20% 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 2% and 3% to our tax rate in 2022 and 2021, respectively. In 2021, our rate also benefited by 2% for stock compensation-related items and 2% from prior year tax adjustments related to amended tax returns we expected to file. 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. 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. 26 --------------------------------------------------------------------------------
Discussion of Segment Results
Three Month Discussion
A description of the products included in each segment, along with segment financial data, appear in Note 4 Segment Information 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 Sales Trade Sales Ended Ended % Change in Organic
(Dollar amounts in millions)
$ % Sales 1 Bedding Products$ 639.4 $ 535.8 $ 103.6 19.3 % 16.4 % Specialized Products 264.1 257.6 6.5 2.4 2.4 Furniture, Flooring & Textile Products 418.8 357.5 61.3 17.1 16.8 Total$ 1,322.3 $ 1,150.9 $ 171.4 14.9 % 13.5 % Three Months Three Months Change in EBIT EBIT Margins Ended Ended Three Months Three Months EBIT March 31, March 31, Ended
Ended
(Dollar amounts in millions) 2022 2021 $ % March 31, 2022 March 31, 2021 Bedding Products$ 76.2 $ 63.8 $ 12.4 19.4 % 11.9 % 11.9 % Specialized Products 20.3 35.2 (14.9) (42.3) 7.7 13.7 Furniture, Flooring & Textile Products 42.7 28.3 14.4 50.9 10.2
7.9
Intersegment eliminations & other (1.6) .4 (2.0) Total$ 137.6 $ 127.7 $ 9.9 7.8 % 10.4 % 11.1 % Depreciation and Amortization Three Months Ended Three
Months Ended
(Dollar amounts in millions) March 31, 2022 March 31, 2021 Bedding Products $ 26.2 $ 26.1 Specialized Products 10.8 11.1 Furniture, Flooring & Textile Products 5.9 6.1 Unallocated 2 2.8 2.8 Total $ 45.7 $ 46.1 1This is a change in trade sales not attributable to acquisitions or divestitures in the last 12 months. Refer to the discussion below under Bedding Products and Furniture, Flooring & Textile Products 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.
Bedding Products
Trade sales increased
EBIT increased$12 million , primarily from higher metal margin, partially offset by lower volume and lower overhead absorption as production and inventory levels were adjusted to meet reduced demand.
Specialized Products
Trade sales increased$7 million , or 2%. Organic sales grew 2%, driven by volume growth of 3% and raw material-related selling price increases of 1%, partially offset by currency impact of 2%.
EBIT decreased
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Furniture, Flooring & Textile Products
Trade sales increased
EBIT increased
LIQUIDITY AND CAPITALIZATION Liquidity Sources of Cash Cash on Hand AtMarch 31, 2022 , we had cash and cash equivalents of$327 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$21 million . Although there are capital requirements in various jurisdictions, none of this cash was inaccessible for repatriation atMarch 31, 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 three months endedMarch 31, 2022 was$39.0 million , up$49.6 million from the same period last year. First quarter is normally our lowest cash flow quarter of the year with increased working capital driven by the normal cadence of our business. Working capital increased significantly last year due to restocking efforts following inventory depletion in 2020 but increased to a lesser extent this year as we began to return to more normal levels of inventory. We closely monitor our working capital levels and ended the quarter with adjusted working capital at 15.2% of annualized trade sales. The table below explains this non-GAAP calculation. We eliminate cash, current debt maturities, and the current portion of operating lease liabilities from working capital to monitor our operating efficiency and performance related to trade receivables, inventories, and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period. As discussed in Cash on Hand on page 28, substantially all of these funds are held by international operations and may not be immediately available to reduce debt on a dollar-for-dollar basis. (Dollar amounts in millions) March 31, 2022 December 31, 2021 Current assets$ 2,138.0 $ 2,065.3 Current liabilities 1,351.2 1,335.7 Working capital 786.8 729.6 Cash and cash equivalents 327.3 361.7 Current debt maturities and current portion of operating lease liabilities 347.1 345.1 Adjusted working capital$ 806.6 $ 713.0 Annualized trade sales 1$ 5,289.2 $ 5,331.6 Working capital as a percent of annualized trade sales 14.9 % 13.7 %
Adjusted working capital as a percent of annualized trade sales
15.2 % 13.4 % 1 Annualized trade sales equal first quarter 2022 trade sales of$1,322.3 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. 28 --------------------------------------------------------------------------------
Three Primary Components of our Working Capital
Amount (in millions) Days Three Months Ended Twelve Months Ended Three Months Ended December 31, March 31, March 31, 2022 March 31, 2021 March 31, 2022 2021 2021 December 31, 2021 Trade Receivables $ 666.5$ 620.0 $ 577.4 DSO 1 45 42 45 Inventories$ 1,045.8 $ 993.2 $ 801.8 DIO 2 89 76 80 Accounts Payable $ 622.0$ 613.8 $ 536.3 DPO 3 53 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 increased atMarch 31, 2022 compared to bothDecember 31 andMarch 31, 2021 . Our DSO remained consistent versusMarch 31, 2021 but increased versusDecember 31, 2021 . Increased trade receivables were primarily related to raw material-related selling price increases. Our allowance for doubtful accounts increased by$1 million during the first quarter 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 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 atMarch 31, 2022 compared to bothDecember 31 andMarch 31, 2021 . Increased inventories versusDecember 31 were primarily driven by inflation and advance purchases of selected products to proactively address inflation, potential supply chain constraints, and to ensure consistent supply to our customers. 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. Supply chain constraints have generally improved across the Bedding businesses, and we are making progress in reducing certain inventories built under higher demand expectations, but will still comfortably support near-term customer requirements and protect against future disruptions. 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 begin reducing the extra inventory. Our normal seasonal cash flow cycle will continue to be altered to some degree as we continue to balance inventory levels. Our recent 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 increased atMarch 31, 2022 compared to bothDecember 31 andMarch 31, 2021 . AtMarch 31, 2022 , our DPO has remained consistent across all periods presented. The increased accounts payable balances were primarily related to the inventory factors discussed above. 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 29 --------------------------------------------------------------------------------
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$40 million and$35 million of trade receivables that were sold and removed from our Consolidated Condensed Balance Sheets atMarch 31, 2022 andDecember 31, 2021 , respectively. These sales reduced our quarterly DSO by roughly three days, and the impact to year-to-date operating cash flow, provided or (used), was approximately$5 million and($10) million , atMarch 31, 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$130 million at bothMarch 31, 2022 andDecember 31, 2021 . 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.
Commercial Paper Program
Another source of funds for our short-term cash requirements is our$1.2 billion commercial paper program. As ofMarch 31, 2022 , we had$14 million of commercial paper outstanding. For more information on our commercial paper program, see
Commercial Paper Program on page 32.
Credit Facility
Our credit facility is a five-year 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.
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 maturity dates ranging from 2022 to 2051. For more information, please see Long-Term Debt on page 33.
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$150 million in 2022 of which we have spent$19 million as ofMarch 31, 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 February, we declared a quarterly dividend of
30 -------------------------------------------------------------------------------- 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. 2021 marked our 50th 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.
We have not acquired any businesses in 2022.
Stock Repurchases
With the deleveraging we accomplished over the past few years after acquiring ECS inJanuary 2019 , share repurchases have returned as one of our priorities for uses of cash. During the first quarter of 2022, we repurchased .6 million shares of our stock (at an average price of$37.17 ) and issued .7 million shares through employee benefit plans. For the full year, we currently expect share repurchases to offset share issuances. We have been authorized by the Board to repurchase up to 10 million shares each year, but we have established no specific repurchase commitment or timetable. The level of repurchases will vary depending on various considerations, including alternative uses of cash and opportunities to repurchase shares at an attractive price.
Short-Term and Long-Term Cash Requirements
In addition to the expected uses of cash discussed above, we have various material short-term (12 months or less) and long-term (more than 12 months) cash requirements. There have been no material changes in the first quarter 2022 to our short-term or long-term cash requirements as previously reported in our cash requirements table on page 48 of our Form 10-K filed February 22, 2022. 31 --------------------------------------------------------------------------------
Capitalization
Capitalization Table
This table presents key debt and capitalization statistics for the periods presented: (Dollar amounts in millions)
March
31, 2022
Total debt excluding revolving credit/commercial paper$ 2,090.4 $ 2,090.3 Less: Current maturities of long-term debt 301.3 300.6 Scheduled maturities of long-term debt 1,789.1 1,789.7 Average interest rates 1 3.7 % 3.7 % Average maturities in years 1 10.6 10.8 Revolving credit/commercial paper 2 14.0 - Average interest rate on period-end balance outstanding .6 % - %
Average interest rate during the period (2022-three months;2021-twelve months)
.3 % .2 % Total long-term debt 1,803.1 1,789.7 Deferred income taxes and other liabilities 516.1 533.3 Shareholders' equity and noncontrolling interest 1,671.4 1,648.6 Total capitalization$ 3,990.6 $ 3,971.6 Unused committed credit: Long-term$ 1,186.0 $ 1,200.0 Short-term - - Total unused committed credit 2 $
1,186.0
Cash and cash equivalents $
327.3 $ 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 first quarter
of 2022, had a total authorized program amount of
borrowing capacity may be limited by covenants to our credit facility.
Commercial Paper Program
Amounts outstanding related to our commercial paper program were: (Amounts in millions)
March 31, 2022 December 31, 2021 Total authorized program$ 1,200.0
$ 1,200.0 Commercial paper outstanding (classified as long-term debt)
14.0 - Letters of credit issued under the credit agreement - - Total program usage 14.0 - Total program available$ 1,186.0 $ 1,200.0 The average and maximum amounts of commercial paper outstanding during the first quarter of 2022 were$24 million and$53 million , respectively. At quarter end, we had no letters of credit outstanding under the credit facility, but we had issued$48 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 2026 discussed below. 32 --------------------------------------------------------------------------------
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 first quarter 2022, and expect to maintain compliance with the debt covenant requirements. Our credit facility serves as back-up for our commercial paper program. AtMarch 31, 2022 , we had$14 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, 2022 , our borrowing capacity under the credit facility was$1.186 billion . 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
We have total debt of
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 interest payable semi-annually beginningMay 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 may be used, through future commercial paper issuances, to repay a portion of the$300 million 3.4% Senior Notes dueAugust 2022 .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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
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 25.
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, 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 33 -------------------------------------------------------------------------------- reasonably possible (but not probable, and therefore, not recorded) losses in excess of accruals for litigation contingencies are estimated to be$12 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$12 million referenced above) which could have a material negative impact on our financial condition, results of operations, and cash flows. For more information regarding our litigation contingencies, see Note 14 Contingencies on page 20 of the Notes to Consolidated Condensed Financial Statements. Climate Change
Change in Laws, Policies, and Regulations
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. AtMarch 31, 2022 , we had 130 production facilities worldwide. Most of our facilities are engaged in manufacturing processes that produce greenhouse gas emissions, including carbon dioxide. We also maintain a fleet of over-the-road tractor trailers that emit greenhouse gases. Our manufacturing facilities are primarily located inNorth America ,Europe , andAsia . There continues to be a lack of consistent climate legislation in the jurisdictions in which we operate, which creates economic and regulatory uncertainty. To the extent our customers are subject to any of these or other similarly proposed or newly enacted laws and regulations, additional costs by customers to comply with such laws and regulations could impact their ability to operate at similar levels in certain jurisdictions, which could adversely impact their demand for our products and services. Also, if these laws or regulations (including theSecurities and Exchange Commission'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 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.
Indirect Consequences of Climate-Related Business Trends
Also, in 2020 and 2021, we experienced (due to severe weather 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. Also, severe weather impacts could have a negative effect on our customers' payments which could result in increased bad debt expense.
Physical Effects of Climate Change
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.
Compliance Costs Related to Climate Change
To date, we have not experienced a material increase in climate-related compliance costs. However, evaluating opportunities to reduce our carbon footprint, setting goals for carbon reduction, and measuring performance in achieving those goals will be part of our environmental, sustainability, and governance strategy moving forward. We are currently working on completing our first greenhouse gas emissions inventory. Once complete, this baseline measurement will inform a long-term greenhouse gas (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. The inventory will be prepared consistent with the GHG Protocol Corporate Accounting and Reporting Standard. We currently do not have an estimate of the capital expenditures or operating costs that may be required to implement our GHG reduction strategies.
Cybersecurity Risks
We rely on information systems to obtain, process, analyze, and manage data, as well as to facilitate the manufacture and distribution of inventory to and from our facilities. We receive, process, and ship orders, manage the billing of and collections from our customers, and manage the accounting for and payment to our vendors. We have a formal process in place for both incident response and cybersecurity continuous improvement that includes a cross-functionalCybersecurity Oversight Committee . Members of theCybersecurity Oversight Committee update the Board quarterly on cyber activity, with procedures in place for interim reporting if necessary. 34 -------------------------------------------------------------------------------- Although we have not experienced any material cybersecurity incidents, we have enhanced our cybersecurity protection efforts over the last few years. We use a third party to periodically benchmark our information security program against theNational Institute of Standards and Technology's Cybersecurity Framework. We provide quarterly cybersecurity training for employees with access to our email and data systems, and we have purchased broad form cyber insurance coverage. However, because of risk due to the COVID-19 pandemic regarding increased remote access, remote work conditions, and associated strain on employees, technology failures or cybersecurity breaches could still create system disruptions or unauthorized disclosure of confidential information. We cannot be certain that the attacker's capabilities will not compromise our technology protecting information systems. If these systems are interrupted or damaged by any incident or fail for any extended period of time, then our results of operations could be adversely affected. We may incur remediation costs, increased cybersecurity protection costs, lost revenues resulting from unauthorized use of proprietary information, litigation and legal costs, increased insurance premiums, reputational damage, damage to our competitiveness, and negative impact on stock price and long-term shareholder value.
NEW ACCOUNTING STANDARDS
The FASB has issued accounting guidance effective for 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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