Fellow Shareholders:
Leggett & Platt had a very good year in 2010. Earnings per share grew by 64% as sales increased 10%. EBIT margin continued to improve, and reached its highest level in four years. We raised the dividend by 4%, generated a 5% dividend yield, and bought back more than 6 million shares of stock.
Our primary financial goal remains to achieve Total Shareholder Return (TSR1) in the top one-third of the S&P 500, as measured over rolling 3-year periods. For the three years ending December 31, 2010, we generated average TSR of 16% per year, while the S&P 500 Index generated average TSR of negative 3% per year. Our three-year TSR results rank within the top 8% of the companies in the S&P 500 index.
Economy Improving
Externally, the biggest impact over the last few years has been the weak economy; however, in 2010 we began to see modest signs of recovery. The automotive and office furniture markets experienced significant improvement from the very depressed demand levels of 2009. Demand for retail store fixtures was also reasonably strong. Our residential bedding and furniture markets started 2010 with strong demand, but demand weakened in the last half of the year as consumer spending on larger-ticket items slowed.
Over the last three years we have significantly reduced our fixed cost structure, but we purposely retained spare production capacity; accordingly, our sales can rebound to over $4 billion without the need for large capital investment. As a result, we have meaningful operating leverage. That leverage was a significant contributor to earnings growth during 2010.
Strategic Progress
Internally, we continue to make meaningful progress on the strategic changes we announced three years ago. As a reminder, our goals were to: i) divest or fix low-performing businesses, ii) return more cash to investors, iii) improve margins and returns on businesses we keep, and iv) then begin to carefully and conservatively grow the company at 4-5% annually.
In 2010 we completed the sale of the seventh, and final, divestiture identified as a part of our strategic realignment. These divestitures collectively generated $433 million of after-tax cash proceeds (over the past three years), exceeding our original $400 million goal.
During the last three years we generated cash of $1.8 billion from operations and divestitures. We returned uch of that cash to investors by: i) increasing quarterly dividends by 50%, from $.18 per share in 2007 to $.27 per share currently, and ii) spending over $600 million to purchase almost 33 million shares, or 20%, of Leggett & Platt's outstanding stock.
We continued to optimize our cost structure in an effort to improve both margins and returns. As a result, EBIT margin improved from 5.7% in 2008, to 7.5% in 2009, to 8.6% in 2010. Assuming the economy continues to recover, margins should improve further.
While achieving these results, we maintained our strong financial base. We ended 2010 with net debt to net capital well below our long-term targeted range, no significant fixed-term debt maturing until 2013, and over $500 million available under our existing commercial paper program and revolver facility.
Future Growth
For the next few years, we anticipate sales improvement from continued economic recovery. For planning purposes, we are assuming 2011 sales of $3.4-3.6 billion; actual growth could be higher or lower, and is heavily dependent on the economy. We expect that each $100 million of incremental sales in 2011 should add 10 cents or more to our earnings per share.
Over the longer term we expect to achieve consistent sales expansion of 4-5% per year. About one half of that growth should occur as part of normal GDP growth. The other half should result from our efforts to develop innovative products and identify higher-growth business platforms.
During 2010 our sales benefited from new products introduced in recent years in our office components, automotive, and home furniture components businesses. Individually, these were modest successes, but they supplemented the market growth that we experienced in these businesses. Product development is a major focus for the company and of crucial importance to our long-term success. During this past year, we improved the process we use to screen project ideas, so that more of our resources are spent developing products with higher probability to significantly enhance future revenue.
Over the past 18 months we have begun the process of identifying new growth platforms. To date, we have uncovered some potential opportunities that we are further assessing (and in a few cases we are beginning to develop those businesses). This activity has included evaluation of emerging market trends, identification of our core competences, and conclusion of several consumer research efforts. Successful development of new growth platforms is vitally important, but takes time when pursued in a disciplined manner. We do not anticipate significant contributions from these activities for a while.
Rolling 3-Year TSR
As we mentioned last year, we are using four levers to pursue our TSR goal: sales growth, margin improvement, dividends, and stock buybacks. In 2008, dividends and stock buybacks largely drove our TSR. During 2009, we benefited significantly from margin improvement. And for 2010, 10% sales growth was a key TSR component. We believe this balanced, four-pronged approach will allow us to consistently generate superior TSR.
We intend to continue monitoring our TSR performance, relative to companies in the S&P 500, on a rolling 3-year basis. As mentioned above, for 2008-2010 – the first three-year period under our new strategy – performance well exceeded our goal, with our TSR ranking among the top 8% of the S&P 500. For the second three-year period, 2009-2011, TSR performance (as of the date of this letter) ranks above the midpoint, but not yet among the top third, of the companies in the S&P 500. Our aim is to consistently produce TSR results that keep us among the top one-third of the S&P 500. We are enthusiastically and wholeheartedly committed to that task.
February 24, 2011
| David S. Haffner President and CEO |
Karl G. Glassman Executive VP and COO |
(1) TSR = (Change in Stock Price + Dividends Received) / Beginning Stock Price; values assume dividends are reinvested.