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04 Annual Report >> Letter to Shareholders | |
Glossary | |
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 To Our Shareholders,A Good Year. 2004 was a very good year for Leggett’s investors. Our stock price rose 31% during the year, and the stock traded at an all-time high of $30.68 in December. In 2004 Leggett’s sales grew to a new record and earnings improved substantially. We generated more cash than was required to fund internal growth, acquisitions, and dividends. Our balance sheet remained strong, and we again reduced net debt-to-cap. Finally, in August the Board increased the dividend by 7%, making 2004 the 33rd consecutive year we have raised the dividend. We are optimistic about 2005, and expect to post record sales and earnings. We project that sales should grow 6% to 10% in 2005, roughly two-thirds from internal growth and one-third from acquisitions. Sales growth, augmented by operational improvements, should lead to full-year earnings of $1.50 – $1.70 per share. We believe steel costs will stabilize, and anticipate continued margin improvement in our Fixture & Display operations. If events unfold as we hope, 2005 should be another good year for our investors. Our executives feel strongly enough about the Company’s prospects that approximately 90 of them decided (in December) to forego a portion of their 2005 cash compensation. Collectively, they are giving up over $7 million of cash salary and bonus, and choosing instead to receive Leggett stock or stock options. Our management team has a keen personal interest in seeing that the stock continues to do well over the long term. Strong 2004 Financial Results. As the accompanying graphs illustrate, financial performance improved significantly in 2004. Full-year sales increased 16% to a record of $5.1 billion. Organic (or internal) sales increased 12%, and acquisitions contributed the remainder of the sales growth. Approximately two-thirds of the organic growth was due to inflation as we implemented price increases to pass along higher raw material costs. Unit volume improved in many businesses, with gains the strongest in upholstered furniture components, carpet underlay, aluminum components, and machinery Full-year earnings were $1.45 per share, a gain of 38% over last year’s $1.05. Higher sales were the primary driver of the increase. Earnings also benefited from operational improvements and cost reduction efforts, and a full year of production from our steel mill, but these gains were partially offset by a weaker U.S. dollar and slightly higher restructuring costs. Our cash flow and balance sheet remain strong. During the year we generated over $340 million in cash from operations. In November we issued $180 million of long-term debt, locking in favorable interest rates for 10 years. Our debt maintains the ‘single A’ rating it has enjoyed for over a decade. At year-end, long-term debt (net of cash) was down to 22% of total capitalization, well below our target range of 30% – 40%.  Operational Achievements. Operationally,
2004 was a busy and productive year. Two external issues demanded a considerable
amount of our time. First was the extreme inflation in raw material costs – most notably
steel. Steel costs have recently reached a plateau, but remain
at record levels. The 1.3 million tons of steel we buy annually (accounting for 17% of our cost of
goods sold) cost us over $200 million more in 2004 than in 2003. Due to the magnitude of these increases,
we were compelled to pass along higher costs to customers.The second major area of time went toward the new auditing and documentation requirements brought about by the Sarbanes-Oxley Act. This law compels companies to meticulously document the systems and procedures used to produce financial reports. Leggett has always been a leader in the areas of conservative accounting practices and high quality of earnings. Even so, compliance with Sarbanes-Oxley entailed a huge investment of time and labor. Turning to issues over which we have some control, the first full year of production from our steel rod mill could not have come at a better time. Given the recent surge in global demand for steel, this mill helped ensure a consistent supply of quality rod for roughly half of our needs. When we made the acquisition (in 2002), we believed this mill presented a sound opportunity. With recent turbulence in the global steel industry, purchase of this mill has turned out to be a timely investment for Leggett. Building on this success, we are planning an expansion during 2005 that should increase future output by 20%. In October, 2003 we announced increased attention to our poorly performing Fixture & Display group. For the Commercial segment as a whole, margins improved from 2.8% in 2003 to 5.1% in 2004. Still, there is more work to be done to reach the long-term margins we expect of this segment. Finally, in late September we announced an agreement to supply aluminum die castings for Briggs & Stratton’s assembly plant in Auburn, Alabama. We will build a 140,000 square foot die casting plant a short distance from the Briggs’ facility. This project is an outstanding example of our ‘deverticalization’ strategy, in which Leggett supplies products to manufacturers who previously made their own components. At full production, we expect this project to contribute about $45 million of annual revenue to our Aluminum segment. Strategic Direction. Profitable growth, both organic and through acquisitions, continues to be the Company’s top priority. In addition, the Company plans to extend its dividend growth record, modestly increase leverage, and use excess cash to buy Leggett stock. Financially, we still aim for a return on equity in the high teens, a net debt-to-cap ratio of 30% – 40%, and top quartile performance versus our peers. Cash will be used primarily to fund our growth and increase the dividend. Remaining cash (if any) will be available to repurchase the Company’s stock. In August, the Board of Directors authorized purchase of up to 10 million shares of Leggett stock annually, but we have established no specific repurchase schedule. In years when many acquisitions are completed, there may be little or no cash available to purchase stock. We expect long-term earnings per share (EPS) growth to average 15% annually, from a combination of double-digit sales growth, margin improvement, and possible reduction in the number of shares of stock. We are targeting 10% – 15% annual sales growth over the long term. An increased emphasis on internal expansion should yield 4% – 6% organic growth each year. Acquisitions are expected to add 6% – 9% to sales annually. We foresee overall sales growth coming from four areas: growth of our current markets, increased market share, international expansion, and entry into new product markets. Margins should improve over the next few years, for two reasons. First, we anticipate higher sales and better capacity utilization, which reduces per-unit fixed costs. But even if sales remain unchanged, we foresee higher margins due to active steps we are taking to improve operating efficiency. We are concentrating those efforts in three areas: improving the Commercial segment EBIT margin, restructuring or eliminating underperforming operations, and reducing costs via purchasing and continuous improvement initiatives.  Dividend Growth Continues. In
August the Board of Directors increased the quarterly dividend
from $.14 to $.15 per share. At an indicated annual rate of $.60
per share, 2005 will mark 34 consecutive years of dividend increases.
According to Mergent’s Dividend Achievers, Leggett is among
the top 100 companies for 10-year growth in dividends. As in prior
years, Leggett was again named to Standard & Poor’s list of 2005 “Dividend Aristocrats.” Over
the longer term, we are one of only two Fortune 500 companies that
has achieved 34 consecutive annual increases in dividends at a
compound annual growth rate of over 14%. We continue to target
dividend payout (over the long run) at approximately one-third
of the average earnings over the last three years. Leggett is proud
of its record of dividend growth, and we expect to extend that
record far into the future.Bell Ringing. On September 13, 2004, members of Leggett & Platt’s executive team rang the closing bell at the New York Stock Exchange in recognition of the 25th anniversary of our listing on the exchange. From the initial partnership of Mr. Leggett and Mr. Platt back in 1883, it took almost 100 years before our stock was traded on the Big Board. When we joined the NYSE in 1979, our sales were $214 million, and earnings were a bit under $7 million (or about 7 cents per split-adjusted share). The stock closed that year at a split-adjusted price of 46 cents per share. Over the last 25 years our sales, net earnings, dividends, and stock price have each grown at compound annual rates between 13% and 18%. Though we’ve enjoyed a long and prosperous history, Leggett & Platt is not a household name. Because many of our components are hidden within our customers’ finished goods, most investors don’t realize how many times daily they encounter Leggett’s products. For that reason, in this annual report we decided to showcase some of the everyday settings in which you’ll find items we produce. Whether you’re a new, long-term, or prospective shareholder, we think you may be surprised to discover that you use Leggett’s products Everyday, Everywhere. |
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