Leggett & Platt achieved much in 2015, including record sales and EBIT, significantly improved profit margins, top third 3-year TSR1, and our 44th consecutive annual dividend increase. EPS exceeded $2 for the first time, and the stock set a new record high, trading above $51 for a few days in July.
Our markets improved during the year, and we again achieved better-than-market growth in several lines of business.
Including dividends, our stock’s 2015 TSR was 1.4%, which slightly beat the TSR of the S&P 500 index. Notably, we have exceeded the return of the S&P 500 index in seven of the last eight years.
For the three years ending December 2015, we met our goal of producing TSR that ranks among the top third of the S&P 500 companies. We generated compound annual TSR of 20% per year over those three years, significantly better than the 15% annual TSR of the S&P 500 index.
Our cumulative TSR over the last eight years ranks among the top 11% of the S&P 500 companies. A late-2007 investment in Leggett & Platt grew to 3.5 times its original value by the end of 2015, compared to just 1.7 times original value for the S&P 500 index.
We believe the strategy we adopted in 2007 set the stage for the stock’s strong performance. Eight years ago we adopted TSR as our primary financial metric, changed priorities for uses of cash, adopted role-based management of our business unit portfolio, and implemented strategic planning at the business unit level.
We produce TSR from four sources: revenue growth, margin improvement, dividend yield, and stock buyback. To meet our top-third TSR goal, we seek annual average TSR of 12-15% over the long term, from four separate sources:
4-5% from revenue growth
2-3% from EBIT margin improvement (approximately 20-30 basis points annually)
3-4% from dividend yield
2-4% from lower share count (via stock buyback)
We expect approximately half of our revenue growth to come from GDP expansion, and the other half to come from new proprietary products, market share gains, geographic expansion, and strategic acquisitions.
Growth and Margin
Sales from continuing operations were $3.9 billion in 2015, a record for continuing operations and a 4% increase versus 2014. Unit volume improved 6% and acquisitions added 3% to sales. These gains were partially offset by a 5% decline caused by raw material-related price deflation and currency impacts. Sales benefited from the continued shift in bedding to our proprietary line of ComfortCore® springs, strong growth of adjustable beds, and ongoing content gains and new program awards in automotive. Nearly all of our businesses experienced volume growth during the year.
Continuing operations adjusted2 EBIT margin expanded to 12.9%, our highest level since 1999. We improved margin by 270 basis points versus 2014, greatly exceeding our 20-30 basis point annual improvement target.
Growth and margin improvement generated record EPS. Continuing operations adjusted2 EPS has increased for six consecutive years. Adjusted EPS was $2.34, a 31% increase versus the prior year, primarily due to higher unit volume and pricing discipline.
Dividends and Stock Buyback
We increased our annual dividend for the 44th consecutive year, a record only a few S&P 500 companies have achieved. Dividends generated a 3.0% yield for investors during 2015, one of the higher yields among the companies that comprise the S&P 500 Dividend Aristocrats.
Our target for dividend payout is 50-60% of earnings; however, until 2015 actual payout had been higher than target. As a result, recent dividend growth had been modest, at about 3% per year. With significant earnings improvement in 2015, dividend payout for the year was within the target range. This allows the company flexibility to consider future dividend growth that more closely aligns with EPS growth.
During the year we bought back over 4 million shares of our stock and issued approximately 2 million shares, largely for employee benefit plans. Shares outstanding decreased by 1.6%.
Portfolio management remains a strategic priority for us. Over the past few years, we have enhanced our portfolio and improved our margins by growing our stronger performing businesses and by exiting businesses that struggled to consistently deliver acceptable results.
Last March, we acquired a European private-label manufacturer of high-end upholstered furniture for office, commercial, and other settings. This business complements our North American private-label operation and allows us to support our work furniture customers as they expand globally. During 2015, we also completed the divestitures of the steel tubing business, the two final store fixtures operations, and a small piece of the commercial vehicle products business.
Sources and Uses of Cash
We generated $359 million of cash flow from operations during 2015, net of foam litigation payments of $82 million. For over 25 years, operations have produced significantly more cash than needed to fund dividends and capital expenditures. Divestitures generated an additional $51 million during the year.
Major uses of cash in 2015 included $103 million for capital projects, $172 million for dividend payments, $183 million (net) to repurchase our stock, and $11 million for acquisitions.
We maintained our strong balance sheet, and ended 2015 with net debt to net capital within our longstanding target range of 30-40%. We ended the year with over $400 million of our commercial paper program available.
2016 Outlook and Cash Use Priorities
In 2016, we expect that sales growth will lead to another year of strong margin and EPS, top third 3-year TSR, and our 45th annual dividend increase. We believe cash flow from operations will improve meaningfully.
Our priorities for use of cash are unchanged. Our first priority is to fund profitable organic growth such as product development, market share gains, or geographic expansion. Next, we want to grow the dividend. Third, we seek acquisitions that possess sustainable competitive advantage, expand our market positions, provide entry into more profitable and higher-growth markets, and fit well with our strategy and competencies. Finally, if we haven’t exhausted available cash, we generally prefer to repurchase our stock rather than repay debt or stockpile cash.
After 32 years with the company, and just under a full decade as our CEO, David S. Haffner retired at the end of 2015. Soon after he became CEO in 2006, Dave implemented significant changes to our strategy, metrics, goals, and incentives. He subsequently led us through the 2008-2009 Great Recession, our 2012 expansion into aerospace tubing, and achievement of record adjusted EPS each of the last four years. Dave left the company to us in great shape.
So with both appreciation and excitement, I am deeply humbled to become the fourth CEO of Leggett & Platt in the last 55 years. Please know that I will do my best to help the company extend the legacy of the leaders – Harry Cornell, Felix Wright, and Dave Haffner – who preceded me.
That said, it is important to know that Leggett & Platt is not about any one individual. Our entire leadership team understands well that Leggett & Platt’s accomplishments come about as a direct result of the dedication and hard work of the company’s 20,000 employee-partners. So to our employees we say this: Thank you for your efforts in 2015. Please take satisfaction in the jobs you have done so very well. Together, let’s help propel the company forward toward even greater success.
To our customers, thank you for the trust that you place in us as we work with you to meet or exceed the expectations of our end consumers.
Finally, to our investors, please know that we deeply appreciate and value your continued confidence and commitment to Leggett & Platt.
Karl G. Glassman
President and CEO
February 25, 2016
1 TSR, Total Shareholder Return = (Change in Stock Price + Dividends)/Beginning Stock Price; assume dividends reinvested.
2 For non-GAAP reconciliations, please refer to the Six-Year Financial Data.