LEG 12.31.2014 10K
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number 001-07845
LEGGETT & PLATT, INCORPORATED
(Exact name of registrant as specified in its charter)
Missouri
 
44-0324630
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
No. 1 Leggett Road
Carthage, Missouri
 
64836
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (417) 358-8131
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
  
Name of each exchange on
which registered
Common Stock, $.01 par value
  
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated  filer ¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing price of our common stock on the New York Stock Exchange) on June 30, 2014 was $ 4,510,540,015.
There were 138,344,572 shares of the registrant’s common stock outstanding as of February 13, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
 Part of Item 10, and all of Items 11, 12, 13 and 14 of Part III are incorporated by reference from the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2015.


Table of Contents


TABLE OF CONTENTS
LEGGETT & PLATT, INCORPORATED—FORM 10-K
FOR THE YEAR ENDED December 31, 2014
 
Page
Number
1

PART I
Item 1.
2

 
 
 
Item 1A.
15

 
 
 
Item 1B.
18

 
 
 
Item 2.
18

 
 
 
Item 3.
19

 
 
 
Item 4.
19

 
 
 
Supp. Item.
20

PART II
Item 5.
22

 
 
 
Item 6.
24

 
 
 
Item 7.
25

 
 
 
Item 7A.
59

 
 
 
Item 8.
60

 
 
 
Item 9.
60

 
 
 
Item 9A.
60

 
 
 
Item 9B.
61

PART III
Item 10.
62

 
 
 
Item 11.
65

 
 
 
Item 12.
65

 
 
 
Item 13.
65

 
 
 
Item 14.
65

PART IV
Item 15.
66

 
 
121

 
 
123



Table of Contents


Forward-Looking Statements
 
This Annual Report on Form 10-K and our other public disclosures, whether written or oral, may contain “forward-looking” statements including, but not limited to: projections of revenue, income, earnings, capital expenditures, dividends, capital structure, cash flows or other financial items; possible plans, goals, objectives, prospects, strategies or trends concerning future operations; statements concerning future economic performance, possible goodwill or other asset impairment; and the underlying assumptions relating to the forward-looking statements. These statements are identified either by the context in which they appear or by use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” or the like. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by the cautionary statements described in this provision.
 
Any forward-looking statement reflects only the beliefs of the Company or its management at the time the statement is made. Because all forward-looking statements deal with the future, they are subject to risks, uncertainties and developments which might cause actual events or results to differ materially from those envisioned or reflected in any forward-looking statement. Moreover, we do not have, and do not undertake, any duty to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement was made. For all of these reasons, forward-looking statements should not be relied upon as a prediction of actual future events, objectives, strategies, trends or results.
 
Readers should review Item 1A Risk Factors in this Form 10-K for a description of important factors that could cause actual events or results to differ materially from forward-looking statements. It is not possible to anticipate and list all risks, uncertainties and developments which may affect the future operations or performance of the Company, or which otherwise may cause actual events or results to differ materially from forward-looking statements. However, the known, material risks and uncertainties include the following:
 
factors that could affect the industries or markets in which we participate, such as growth rates and opportunities in those industries;
adverse changes in inflation, currency, political risk, U.S. or foreign laws or regulations (including tax law changes), consumer sentiment, housing turnover, employment levels, interest rates, trends in capital spending and the like;
factors that could impact raw materials and other costs, including the availability and pricing of steel scrap and rod and other raw materials, the availability of labor, wage rates and energy costs;
our ability to pass along raw material cost increases through increased selling prices;
price and product competition from foreign (particularly Asian and European) and domestic competitors;
our ability to improve operations and realize cost savings (including our ability to fix under-performing operations and to generate future earnings from restructuring-related activities);
our ability to maintain profit margins if our customers change the quantity and mix of our components in their finished goods;
our ability to realize 25-35% contribution margin on incremental unit volume growth;
our ability to achieve expected levels of cash flow;
our ability to maintain and grow the profitability of acquired companies;
our ability to maintain the proper functioning of our internal business processes and information systems and avoid modification or interruption of such systems, through cyber-security breaches or otherwise;
a decline in the long-term outlook for any of our reporting units that could result in asset impairment;
our ability to control expenses related to "conflict mineral" regulations and to effectively manage our supply chains to avoid loss of customers;
The loss of one or more of our significant customers; and
litigation accruals related to various contingencies including antitrust, intellectual property, product liability and warranty, taxation, environmental and workers’ compensation expense.

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PART I

PART I
 
Item 1. Business.

Summary
 
Leggett & Platt, Incorporated was founded as a partnership in Carthage, Missouri in 1883 and was incorporated in 1901. The Company, a pioneer of the steel coil bedspring, has become an international diversified manufacturer that conceives, designs and produces a wide range of engineered components and products found in many homes, offices, automobiles and commercial aircraft. As discussed below, our continuing operations are organized into 18 business units, which are divided into 9 groups under our four segments: Residential Furnishings; Commercial Fixturing & Components; Industrial Materials; and Specialized Products.

Overview of Our Segments
 
Residential Furnishings Segment


Our Residential Furnishings segment began in 1883 with the manufacture of steel coiled bedsprings. Today, we supply a variety of components used by bedding and upholstered furniture manufacturers in the assembly of their finished products. Our range of products offers our customers a single source for many of their component needs.
 
Efficient manufacturing methods, internal production of key raw materials and machinery, and numerous manufacturing and assembly locations allow us to supply many customers with components at a lower cost than they can produce themselves. In addition to cost savings, sourcing components from us allows our customers to focus on designing, merchandising and marketing their products.
 
Products
 
Bedding Group
Innersprings (sets of steel coils, bound together, that form the core of a mattress)
Wire forms for mattress foundations


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PART I

Furniture Group
Steel mechanisms and hardware (enabling furniture to recline, tilt, swivel, rock and elevate) for reclining chairs and sleeper sofas
Springs and seat suspensions for chairs, sofas and love seats
Steel tubular seat frames
Bed frames and ornamental beds
Adjustable beds

Fabric & Carpet Underlay Group
Structural fabrics for mattresses, residential furniture and industrial uses
Carpet underlay materials (bonded scrap foam, fiber, rubber and prime foam)
Geo components (synthetic fabrics and various other products used in ground stabilization, drainage protection, erosion and weed control, as well as silt fencing)

Customers
 
Manufacturers of finished bedding (mattresses and foundations) and upholstered furniture
Retailers and distributors of adjustable and ornamental beds, bed frames and carpet underlay
Contractors, landscapers, road construction companies and government agencies using geo components

Commercial Fixturing & Components Segment


Our Work Furniture group designs, manufactures, and distributes a wide range of engineered components and products primarily for the office seating market.

Products
 
Bases, columns, back rests, casters and frames for office chairs, and control devices that allow office chairs to tilt, swivel and elevate
Select lines of private label finished furniture

Customers
 
Office, institutional and commercial furniture manufacturers



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PART I

Industrial Materials Segment

We believe that the quality of our products and services, together with low cost, have made us the leading U.S. supplier of drawn steel wire. Our Wire group operates a steel rod mill with an annual output of approximately 500,000 tons, of which a substantial majority is used by our own wire mills. We have three wire mills that supply virtually all the wire consumed by our other domestic businesses. Our Steel Tubing business unit also supplies a portion of our internal needs for welded steel tubing. In addition to supporting our internal requirements, we supply many external customers with wire and steel tubing products.
 
In 2012, we completed the acquisition of Western Pneumatic Tube (Western). Western is a leading provider of integral components for critical aircraft systems, and formed the Aerospace Products business unit within the Tubing Group. Western specializes in fabricating thin-walled, large diameter, welded tubing and specialty formed products from titanium, nickel and other specialty materials for leading aerospace suppliers and OEMs. In 2013, we expanded our Aerospace Products business unit with the acquisition of two companies. The first was a UK-based business that extended our capability in aerospace tube fabrication. The second was a French company that added small-diameter, high-pressure seamless tubing to our product portfolio. For further information about acquisitions, see Note R on page 109 of the Notes to Consolidated Financial Statements.
Products
 
Wire Group
Steel rod
Drawn wire
Steel billets
Fabricated wire products

Tubing Group
Welded steel tubing
Fabricated tube components
Titanium and nickel tubing for the aerospace industry

Customers
 
We use about two-thirds of our wire output and roughly 15-20% of our steel tubing output to manufacture our own products. For example, we use our wire and steel tubing to make:
Bedding and furniture components
Motion furniture mechanisms
Automotive seat components

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PART I


The Industrial Materials segment also has a diverse group of external customers, including:
Bedding and furniture makers
Automotive seating manufacturers
Aerospace suppliers and OEMs
Mechanical spring makers
Waste recyclers and waste removal businesses

Specialized Products Segment

Our Specialized Products segment designs, manufactures and sells products including automotive seating components, specialized machinery and equipment, and service van interiors. Our established design capability and focus on product development have made us a leader in innovation. We also benefit from our broad geographic presence and our internal production of key raw materials and components.
 
Products
 
Automotive Group
Manual and power lumbar support and massage systems for automotive seating
Seat suspension systems
Automotive control cables
Low voltage motors and motion assemblies
Formed metal and wire components for seat frames

Machinery Group
Full range of quilting machines for mattress covers
Machines used to shape wire into various types of springs
Industrial sewing/finishing machines

Commercial Vehicle Products Group
Van interiors (the racks, shelving and cabinets installed in service vans)

Customers
 
Automobile seating manufacturers
Bedding manufacturers
Various Leggett operations (for spring forming equipment)
Telecommunication, cable, home service and delivery companies

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PART I


Strategic Direction
 
Key Financial Metric
 
Total Shareholder Return (TSR), relative to peer companies, is the key 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 1/3 of the S&P 500 companies over rolling three-year periods through a balanced approach that employs four TSR sources: revenue growth, margin expansion, dividends, and share repurchases. For the three-year measurement period that ended December 31, 2014 we generated TSR of 28% per year on average, which placed us in the top quarter of the S&P 500.
 
Our incentive programs reward return generation and profitable growth. Senior executives participate in a TSR-based incentive program (based on our performance compared to a group of approximately 320 peers). Business unit bonuses emphasize the achievement of higher returns on the assets under the unit’s direct control.

Returning Cash to Shareholders
 
During the past three years, we generated $1.25 billion of operating cash, and we returned much of this cash to shareholders in the form of dividends and share repurchases. Dividends and share repurchases are expected to remain significant contributors to long-term TSR.

We currently pay a quarterly dividend of $.31 per share. Our dividend payout target is 50-60% of earnings; however we have been above that target in recent years. Our dividend payout ratio (dividends declared per share/earnings per share) was 67%, 88% and 179% in 2012, 2013 and 2014, respectively. The earnings per share component of the dividend payout ratio was impacted by goodwill impairment charges in 2013 and 2014, and a litigation accrual in 2014. As our markets continue to recover, we expect to move into our target payout range. In the meantime, we expect to generate enough cash to continue to pay and modestly grow the dividend. The Company has consistently (for over 25 years) generated operating cash in excess of our annual requirement for capital expenditures and dividends.

We expect to use cash (after repayment of debt and funding capital expenditures, dividends, and growth opportunities) for share repurchases. Share repurchases were significant in 2013 and 2014. During those two years, we repurchased a total of 11.4 million shares of our stock and issued 7.1 million shares through employee benefit and stock purchase plans. Consistent with our stated plans to repurchase fewer shares in years when acquisition spending is higher, our share repurchases in 2012 were much lower, given the $188 million we invested to acquire Western Pneumatic Tube. In that year, our outstanding shares increased as we repurchased 2.0 million shares and issued 4.7 million shares through employee programs. For the three years combined, we repurchased a total of 13.4 million shares of our stock and issued 11.8 million shares, reducing outstanding shares by 1.1%. In 2014, we repurchased 5.4 million shares (at an average of $33.76) and issued 3.9 million shares (at an average of $22.73). Issuances were largely related to employee stock option exercises.

Portfolio Management
 
We utilize a rigorous strategic planning process to help guide decisions regarding business unit roles, capital allocation priorities, and new areas in which to grow. We review the portfolio classification of each unit on an annual basis to determine its appropriate role (Grow, Core, Fix, or Divest). This review includes criteria such as competitive position, market attractiveness, business unit size, and fit within our overall objectives, as well as financial indicators such as growth of EBIT (earnings before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation and amortization), operating cash flows, and return on assets. Business units in the

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PART I

Grow category should provide avenues for profitable growth from competitively advantaged positions in attractive markets. Core business units are expected to enhance productivity, maintain market share, and generate cash flow from operations while using minimal capital. To remain in the portfolio, business units are expected to consistently generate after-tax returns in excess of our cost of capital. Business units that fail to consistently attain minimum return goals will be moved to the Fix or Divest categories.

Disciplined Growth
 
Long-term, we aim to achieve consistent, profitable growth of 4-5% annually. To attain this goal, we will need to supplement the approximate 2-3% growth that our markets typically produce (in normal economic times) with two additional areas of opportunity. First, we must enhance our success rate at developing and commercializing innovative new products within markets in which we already enjoy strong competitive positions. Second, we need to uncover new growth platforms: opportunities in markets new to us containing margins and growth higher than the Company's average, and in which we would possess a competitive advantage.
 
Our long-term 4-5% annual growth objective envisions periodic acquisitions. We primarily seek acquisitions within our Grow businesses, and look for opportunities to enter new, higher growth markets (carefully screened for sustainable competitive advantage). We expect all acquisitions to (a) have a clear strategic rationale, a sustainable competitive advantage, a strong fit with the Company, and be in an attractive and growing market; (b) create value by enhancing Total Shareholder Return; (c) for stand-alone businesses: generally possess revenue in excess of $50 million, strong management and future growth opportunity with a strong market position in a market growing faster than GDP; and (d) for add-on businesses: generally possess revenue in excess of $15 million, significant synergies, and a strategic fit with an existing business unit.

Acquisitions
 
In 2014, we purchased Tempur Sealy's three U.S. innerspring component production facilities for a purchase price of $44.5 million. In conjunction with this purchase, we also expanded and extended our supply relationship and became the exclusive long-term provider in the U.S. and Canada of wire-based innersprings for Tempur Sealy, and boxsprings for Sealy.

We also acquired Kintec-Solution, a German designer and distributor of high-end, European-styled motion components which became part of our Furniture Hardware business for a purchase price of $16.8 million. This business allows us to meet varying design preferences and broadens the range of our furniture component products.

In 2013, we expanded our Aerospace Products business unit with the acquisition of two companies. The first was a UK-based business acquired for $11.7 million that extended our capability in aerospace tube fabrication. The second was a French company acquired for $14.5 million that added small-diameter, high-pressure seamless tubing to our product portfolio.

In 2012, we acquired Western Pneumatic Tube for a cash purchase price of $188 million and formed the Aerospace Products business unit. Western produces thin-walled, large diameter, welded tubing and specialty formed products from titanium, nickel, stainless steel, and other high strength metals for leading aerospace suppliers and OEMs.
 
For further information about acquisitions, see Note R on page 109 of the Notes to Consolidated Financial Statements.


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PART I

Divestitures
 
In 2014, we divested the majority of the Store Fixtures group for total consideration of $59 million. We continue to pursue the sale of the remaining portion of the group, which is classified as discontinued operations. The Store Fixtures group was previously part of the Commercial Fixturing & Components segment.

There were no significant divestitures in 2012 or 2013.

For further information about divestitures and discontinued operations, see Note B on page 77 of the Notes to Consolidated Financial Statements.

Segment Financial Information
 
For information about sales to external customers, sales by product line, EBIT, and total assets of each of our segments, refer to Note F on page 84 of the Notes to Consolidated Financial Statements.

Foreign Operations
 
The percentages of our external sales in continuing operations related to products manufactured outside the United States for the previous three years are shown below.



Our international continuing operations are principally located in Europe, China, Canada and Mexico. The products we make in these countries primarily consist of:
 
Europe
Innersprings for mattresses
Wire and wire products
Recliner mechanisms
Seamless tubing and specialty formed products for aerospace applications
Lumbar and seat suspension systems for automotive seating
Machinery and equipment designed to manufacture innersprings for mattresses


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PART I

China
Innersprings for mattresses
Recliner mechanisms and bases for upholstered furniture
Formed wire for upholstered furniture
Office furniture components, including chair bases and casters
Lumbar, seat suspension systems and formed metal products for automotive seating
Cables and small electric motors for automotive applications

Canada
Fabricated wire for the furniture and automotive industries
Office chair controls, chair bases and table bases
Lumbar supports for automotive seats
Wire and steel storage systems and racks for service vans and utility vehicles

Mexico
Innersprings and fabricated wire for the bedding industry
Automotive control cable systems and seating components
Shafts for the appliance industry
Our international expansion strategy is to locate our operations where we believe we would possess a competitive advantage and where demand for components is growing. Also, in instances where our customers move the production of their finished products overseas, we have located facilities nearby to supply them more efficiently.
 
Our international operations face the risks associated with any operation in a foreign country. These risks include:
Foreign currency fluctuation
Foreign legal systems that make it difficult to protect intellectual property and enforce contract rights
Credit risks
Increased costs due to tariffs, customs and shipping rates
Potential problems obtaining raw materials, and disruptions related to the availability of electricity and transportation during times of crisis or war
Inconsistent interpretation and enforcement, at times, of foreign tax laws
Political instability in certain countries

Our Specialized Products segment, which derives roughly 81% of its trade sales from foreign operations, is particularly subject to the above risks. These and other foreign-related risks could result in cost increases, reduced profits, the inability to carry on our foreign operations and other adverse effects on our business.


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PART I

Geographic Areas of Operation
 
We have continuing operations manufacturing facilities in countries around the world, as shown below.
 
 
 
 
 
 
 
 
 
Residential
Furnishings
  
Commercial
Fixturing &
Components
  
Industrial
Materials
  
Specialized
Products
North America
 
  
 
  
 
  
 
Canada
n
  
n
  
 
  
n
Mexico
n
  
 
  
n
  
n
United States
n
  
n
  
n
  
n
Europe
 
  
 
  
 
  
 
Austria
 
  
 
  
 
  
n
Belgium
 
  
 
  
 
  
n
Croatia
n
  
 
  
 
  
n
Denmark
n
  
 
  
 
  
 
France
 
 
 
 
n
 
 
Germany
n
  
 
  
 
  
n
Hungary
 
  
 
  
 
  
n
Italy
 
  
n
  
 
  
n
Switzerland
 
  
 
  
 
  
n
United Kingdom
n
  
 
  
n
  
n
South America
 
  
 
  
 
  
 
Brazil
n
  
 
  
 
  
 
Asia
 
  
 
  
 
  
 
China
n
  
n
  
 
  
n
India
 
  
 
  
 
  
n
South Korea
 
  
 
  
 
  
n
Africa
 
  
 
  
 
  
 
South Africa
n
  
 
  
 
  
 
 
For further information concerning our continuing operations external sales related to products manufactured outside the United States and our tangible long-lived assets outside the United States, refer to Note F on page 87 of the Notes to Consolidated Financial Statements.

Sales by Product Line
 
The following table shows our approximate percentage of continuing operations external sales by classes of similar products for the last three years:
 
Product Line
2014
 
2013
 
2012
Bedding Group
21
%
 
19

%
 
19

%
Furniture Group
19
 
 
19

 
 
20

 
Fabric & Carpet Underlay Group
18
 
 
18

 
 
17

 
Automotive Group
16
 
 
15

 
 
14

 
Wire Group
10
 
 
12

 
 
13

 
Tubing Group
5
 
 
5

 
 
5

 
Work Furniture Group
5
 
 
5

 
 
5

 
Commercial Vehicle Products Group
3
 
 
3

 
 
4

 
Machinery Group
3
 
 
4

 
 
3

 

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PART I

Distribution of Products
 
In each of our segments, we sell and distribute our products primarily through our own personnel. However, many of our businesses have relationships and agreements with outside sales representatives and distributors. We do not believe any of these agreements or relationships would, if terminated, have a material adverse effect on the consolidated financial condition, operating cash flows or results of operations of the Company.

Raw Materials
 
The products we manufacture require a variety of raw materials. We believe that worldwide supply sources are readily available for all the raw materials we use. Among the most important are:
Various types of steel, including scrap, rod, wire, sheet, stainless and angle iron
Foam scrap
Woven and non-woven fabrics
Titanium and nickel-based alloys and other high strength metals

We supply our own raw materials for many of the products we make. For example, we produce steel rod that we make into steel wire, which we then use to manufacture:
Innersprings and foundations for mattresses
Springs and seat suspensions for chairs and sofas
Automotive seating components

We supply a substantial majority of our domestic steel rod requirements through our own rod mill. Our wire drawing mills supply nearly all of our U.S. requirements for steel wire. We also produce welded steel tubing, both for our own consumption and for sale to external customers.

Customer Concentration
 
We serve thousands of customers worldwide, sustaining many long-term business relationships. In 2014, our largest customer accounted for approximately 7% of our consolidated continuing operations revenues. Our top 10 customers accounted for approximately 27% of these consolidated continuing operations revenues. The loss of one or more of these customers could have a material adverse effect on the Company, as a whole, or on the respective segment in which the customer’s sales are reported, including our Residential Furnishings, Commercial Fixturing & Components and Specialized Products segments.


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PART I

Patents and Trademarks
 
The chart below shows the approximate number of patents issued, patents in process, trademarks registered and trademarks in process held by our continuing operations as of December 31, 2014. No single patent or group of patents, or trademark or group of trademarks, is material to our operations, as a whole. Most of our patents relate to products sold in the Specialized Products segment, while a substantial majority of our trademarks relate to products sold in the Residential Furnishings and Specialized Products segments.

 
Some of our most significant trademarks include:
Semi-Flex® (box spring components and foundations)
ComfortCore®, Mira-Coil®, VertiCoil®, Lura-Flex®, and Superlastic® (mattress innersprings)
Active Support Technology® (mattress innersprings)
Wall Hugger® (recliner chair mechanisms)
Super Sagless® (motion and sofa sleeper mechanisms)
No-Sag® (wire forms used in seating)
Tack & Jump® and Pattern Link® (quilting machines)
Hanes® (fabric materials)
Schukra®, Pullmaflex® and Flex-O-Lator® (automotive seating products)
Spuhl® (mattress innerspring manufacturing machines)
Gribetz® and Porter® (quilting and sewing machines)
Masterack® (equipment and accessories for vans and trucks)


Product Development

One of our strongest performing product categories across the company is ComfortCore®, our fabric-encased spring coils used in hybrid and other mattresses. Many mattress producers have moved to higher valued innersprings like ComfortCore® in more of their product lines, typically replacing foam cores or traditional innersprings. Our ComfortCore® volume has doubled in just two years, representing 17% of our total U.S. innerspring units in 2014.

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Research and Development
 
We maintain research, development and testing centers in Carthage, Missouri and at many of our other facilities. We are unable to calculate precisely the cost of research and development because the personnel involved in product and machinery development also spend portions of their time in other areas. However, we estimate the cost of research and development was $22 million in 2012, $24 million in 2013 and $26 million in 2014.
 
Employees
 
As of December 31, 2014, we had approximately 19,000 employees in continuing operations, of which roughly 13,500 were engaged in production. Of the 19,000, approximately 9,600 were international employees (5,400 in China). Roughly 15% of our employees in continuing operations are represented by labor unions that collectively bargain for work conditions, wages or other issues. We did not experience any material work stoppage related to contract negotiations with labor unions during 2014. Management is not aware of any circumstances likely to result in a material work stoppage related to contract negotiations with labor unions during 2015. The chart below shows the approximate number of continuing operations employees by segment.



As of December 31, 2013, we had approximately 18,800 employees in continuing operations.

Competition
 
Many companies offer products that compete with those we manufacture and sell. The number of competing companies varies by product line, but many of the markets for our products are highly competitive. We tend to attract and retain customers through product quality, innovation, competitive pricing and customer service. Many of our competitors try to win business primarily on price but, depending upon the particular product, we experience competition based on quality, performance and availability as well. In general, our competitors tend to be smaller, private companies.

We believe we are the largest U.S. manufacturer, in terms of revenue, of the following:
Components for residential furniture and bedding
Carpet underlay
Adjustable bed bases

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Components for office furniture
Drawn steel wire
Automotive seat support and lumbar systems
Bedding industry machinery
Thin-walled, titanium, nickel and other specialty tubing for the aerospace industry
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, even versus many foreign manufacturers, as a result of our efficient operations, low labor content, 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, and by developing new proprietary products that help our customers reduce total costs.
 
Since 2009, there have been antidumping duty orders on innerspring imports from China, South Africa and Vietnam, ranging from 116% to 234%.  In March 2014, the Department of Commerce (DOC) and the International Trade Commission (ITC) determined that the duties should be continued. In April 2014, the DOC published its final order continuing the duties through February 2019 (for China) and December 2018 (for South Africa and Vietnam). Also, a  case brought in January 2014 by major U.S. steel wire rod producers resulted in a ruling in December 2014, and the implementation of antidumping duties of 106% to 110% and countervailing duties of 178% to 193% on imports of Chinese steel wire rod through December 2019.
 
Because of the documented evasion of antidumping orders by certain importers, typically shipping goods through third countries and falsely identifying the countries of origin, Leggett, along with several U.S. manufacturers have formed a coalition and are working with members of Congress, the DOC, and U.S. Customs and Border Protection to seek stronger enforcement of existing antidumping and/or countervailing duty orders.

Seasonality
 
As a diversified manufacturer, we generally have not experienced significant seasonality. However, unusual economic factors in any given year, along with acquisitions and dispositions, can create sales variability and obscure the underlying seasonality of our businesses. Historically, for the Company as a whole, the second and third quarters typically have slightly higher sales, while the first and fourth quarters have generally been lower. Segment level seasonality has also been relatively limited, however the Residential Furnishings segment usually has lower sales in the fourth quarter and the Specialized Products segment typically experiences lower sales in the third quarter.

Backlog
 
Our customer relationships and our manufacturing and inventory practices do not create a material amount of backlog orders for any of our segments. Production and inventory levels are geared primarily to the level of incoming orders and projected demand based on customer relationships.

Working Capital Items
 
For information regarding working capital items, see the discussion of “Cash from Operations” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 38.





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Government Contracts
 
The Company does not have a material amount of sales derived from government contracts subject to renegotiation of profits or termination at the election of any government.

Environmental Regulation
 
Our operations are subject to federal, state, and local laws and regulations related to the protection of the environment. We have policies intended to ensure that our operations are conducted in compliance with applicable laws. While we cannot predict policy changes by various regulatory agencies, management expects that compliance with these laws and regulations will not have a material adverse effect on our competitive position, capital expenditures, financial condition, liquidity or results of operations.

Internet Access to Information
 
We routinely post information for investors to our website (www.leggett.com) under the Investor Relations section. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available, free of charge, on our website as soon as reasonably practicable after electronically filed with, or furnished to, the SEC. In addition to these reports, the Company’s Financial Code of Ethics, Code of Business Conduct and Ethics, and Corporate Governance Guidelines, as well as charters for the Audit, Compensation, and Nominating & Corporate Governance Committees of our Board of Directors, can be found on our website under the Corporate Governance section. Information contained on our website does not constitute part of this Annual Report on Form 10-K.

Discontinued Operations
 
For the periods presented, we classified some of our businesses as discontinued operations since (i) the operations and cash flows of the businesses were clearly distinguished and have been or will be eliminated from our ongoing operations; (ii) the businesses have either been disposed of or are classified as held for sale; and (iii) we will not have any significant continuing involvement in the operations of the businesses after the disposal transactions.

A substantial portion of our Store Fixtures business was sold in the fourth quarter of 2014. It has been classified as a discontinued operation. This business designed, produced, installed and managed customers' store fixture projects. It manufactured custom-designed, full store fixture packages for retailers, including shelving, counters, showcases and garment racks. It also produced standard shelving used by large retailers, grocery stores and discount chains. For more information on discontinued operations, see Note B on page 77 of the Notes to Consolidated Financial Statements.


Item 1A. Risk Factors.
 
Investing in our securities involves risk. Set forth below and elsewhere in this report are risk factors that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. We may amend or supplement these risk factors from time to time by other reports we file with the SEC.
  
Costs of raw materials could negatively affect our profit margins and earnings.
 
Raw material cost increases (and our ability to respond to cost increases through selling price increases) can significantly impact our earnings. We typically have short-term commitments from our suppliers; therefore, our raw

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material costs generally move with the market. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Inability to recover cost increases (or a delay in the recovery time) can negatively impact our earnings. Conversely, if raw material costs decrease, we generally pass through reduced selling prices to our customers. Reduced selling prices combined with higher cost inventory can reduce our segment margins and earnings.

Steel is our principal raw material. The global steel markets are cyclical in nature and have been volatile in recent years. This volatility can result in large swings in pricing and margins from year to year. Our operations can also be impacted by changes in the cost of fabrics and foam scrap. We experienced significant fluctuations in the cost of these commodities in recent years.
 
As a producer of steel rod, we are also impacted by volatility in metal margins (the difference between the cost of steel scrap and the market price for steel rod). If market conditions cause scrap costs and rod pricing to change at different rates (both in terms of timing and amount), metal margins could be compressed and this would negatively impact our results of operations.

Higher raw material costs in past years led some of our customers to modify their product designs, changing the quantity and mix of our components in their finished goods. In some cases, higher cost components were replaced with lower cost components. This primarily impacted our Residential Furnishings and Industrial Materials product mix and decreased profit margins. If this was to occur again it could negatively impact our results of operations.
 
Competition could adversely affect our market share, sales, profit margins and earnings.
 
We operate in markets that are highly competitive. We believe that most companies in our lines of business compete primarily on price, but, depending upon the particular product, we experience competition based on quality, performance and availability as well. We face ongoing pressure from foreign competitors as some of our customers source a portion of their components and finished products from Asia and Europe. 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. If we are unable to purchase key raw materials, such as steel, at prices competitive with those of foreign suppliers, our ability to maintain market share and profit margins could be harmed by foreign competitors.
 
We are exposed to contingencies related to certain foam antitrust proceedings that, if realized, could have a material negative impact on our financial condition, results of operations and cash flows.
We previously disclosed that we are a party to a series of civil antitrust lawsuits involving the sale of polyurethane foam products. We have reached a tentative settlement in the U.S. direct purchaser class action cases by agreeing to pay an aggregate pre-tax amount of $39.8 million, inclusive of plaintiff attorneys’ fees and costs. We paid $4.0 million of this amount in the fourth quarter of 2014. We continue to deny all allegations in all of the cases, but have settled the direct purchaser class proceedings (and various other proceedings) to avoid the risk, uncertainty, expense and distraction of litigation. The settlement is subject to Court approval.
We remain a defendant in other previously disclosed antitrust cases involving the sale of polyurethane foam. We will vigorously defend ourselves and believe that we have valid bases to contest all claims. However, we have established an incremental accrual for the estimated amount that we believe is necessary to resolve all antitrust matters. We also believe and expect, based on current facts and circumstances, that any reasonably possible loss incremental to the recorded accruals will not have a material impact on our consolidated financial position, results of operations or cash flows. Provided, however, if our assumptions or analysis regarding these contingencies is incorrect, or if facts and circumstances change, we could realize loss in excess of the recorded accruals which could have a material negative impact on our financial condition, results of operations and cash flows. For more

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information regarding our legal contingencies, See Footnote T “Contingencies” on page 113 of the Notes to Consolidated Financial Statements.
We are exposed to foreign currency risk which may negatively impact our competitiveness, profit margins and earnings.
 
We expect that international sales will continue to represent a significant percentage of our total sales, which exposes us to currency exchange rate fluctuations. In 2014, 31% of our sales were generated by international operations. The revenues and expenses of our foreign operations are generally denominated in local currencies; however, certain of our operations experience currency-related gains and losses where sales or purchases are denominated in currencies other than their local currency. Further, our competitive position may be affected by the relative strength of the currencies in countries where our products are sold. Foreign currency exchange risks inherent in doing business in foreign countries may have a material adverse effect on our future operations and financial results.

Our goodwill and other long-lived assets are subject to potential impairment which could negatively impact our earnings.
 
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. At December 31, 2014, goodwill and other intangible assets represented $1.02 billion, or 33% of our total assets. In addition, net property, plant and equipment and sundry assets totaled $687.3 million, or 22% of total assets. If actual results differ from the assumptions and estimates used in the goodwill and long-lived asset valuation calculations, we could incur impairment charges, which could negatively impact our earnings.
 
We review our reporting units for potential goodwill impairment in June as part of our annual goodwill impairment testing, and more often if an event or circumstance occurs making it likely that impairment exists. In addition, we test for the recoverability of long-lived assets at year end, and more often if an event or circumstance indicates the carrying value may not be recoverable. We conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. If we are not able to achieve projected performance levels, future impairments could be possible, which would negatively impact our earnings.

Technology failures or cyber security breaches could have a material adverse effect on our operations.
 
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. Security breaches of this infrastructure can create system disruptions or unauthorized disclosure of confidential information. If this occurs, our operations could be disrupted, or we may suffer financial loss because of lost or misappropriated information. We cannot be certain that advances in criminal capabilities or new discoveries in the field of cryptography will not compromise our technology protecting information systems. If these systems are interrupted or damaged by these events or fail for any extended period of time, then our results of operations could be adversely affected.

We may not be able to realize deferred tax assets on our balance sheet depending upon the amount and source of future taxable income.
 
Our ability to realize deferred tax assets on our balance sheet is dependent upon the amount and source of future taxable income. Economic uncertainty or tax law changes could impact our underlying assumptions on which valuation reserves are established and negatively affect future period earnings and balance sheets.


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We have exposure to economic and other factors that affect market demand for our products which may negatively impact our sales, operating cash flow and earnings.
 
As a supplier of products to a variety of industries, we are adversely affected by general economic downturns. Our operating performance is heavily influenced by market demand for our components and products. Market demand for the majority of our products is most heavily influenced by consumer confidence. To a lesser extent, market demand is impacted by other broad economic factors, including disposable income levels, employment levels, housing turnover and interest rates. All of these factors influence consumer spending on durable goods, and drive demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one-quarter of our sales.
 
Demand weakness in our markets can lead to lower unit orders, sales and earnings in our businesses. Several factors, including a weak global economy, low consumer confidence, or a depressed housing market could contribute to conservative spending habits by consumers around the world. Short lead times in most of our markets allow for limited visibility into demand trends. If economic and market conditions deteriorate, we may experience material negative impacts on our business, financial condition, operating cash flows and results of operations.


Item 1B. Unresolved Staff Comments.
 
None.
 

Item 2. Properties.
 
The Company’s corporate office is located in Carthage, Missouri. We currently have 133 manufacturing locations in continuing operations, of which 84 are located across the United States and 49 are located in 17 foreign countries. We also have various sales, warehouse and administrative facilities. However, our manufacturing plants are our most important properties.
 
Manufacturing Locations by Segment
 
 
 
Company-
Wide
 
Subtotals by Segment
Manufacturing Locations
 
Residential
Furnishings
 
Commercial
Fixturing &
Components
 
Industrial
Materials
 
Specialized
Products
United States
 
84
 
54
 
4
 
12
 
14
Europe
 
18
 
4
 
1
 
3
 
10
Asia
 
16
 
4
 
1
 
 
11
Canada
 
8
 
2
 
2
 
 
4
Mexico
 
5
 
2
 
 
1
 
2
Other
 
2
 
2
 
 
 
Total
 
133
 
68
 
8
 
16
 
41
__________________________________________________________

 
Manufacturing locations that we own produced approximately 70% of our sales in 2014. We also lease many of our manufacturing, warehouse and other facilities on terms that vary by lease (including purchase options, renewals and maintenance costs). For additional information regarding lease obligations, see Note K on page 92 of the Notes to Consolidated Financial Statements.
 

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In the opinion of management, the Company’s owned and leased facilities are suitable and adequate for the manufacture, assembly and distribution of our products. Our properties are located to allow quick and efficient delivery of products and services to our diverse customer base. Our productive capacity, in general, continues to exceed current operating levels. However, utilization has increased in many of our businesses with improving market demand, and we are investing to support rapid growth in a few of our businesses, including Automotive, U.S. Spring and Adjustable Bed.  
 
 
Item 3. Legal Proceedings.
 
The information in Note T beginning on page 113 of the Notes to Consolidated Financial Statements is incorporated into this section by reference.

Environmental Matter Involving Potential Monetary Sanctions of $100,000 or More
On March 27, 2013, Region 5 of the U.S. Environmental Protection Agency issued a Notice of Violation("NOV") alleging that our subsidiary, Sterling Steel Company, violated the Clean Air Act and the Illinois State Implementation Plan currently in place. Sterling operates a steel rod mill in Sterling, Illinois. The NOV alleges that Sterling, since 2008, has exceeded the allowable annual particulate matter and manganese emission limits for its arc furnace. Sterling requested a conference with the EPA to discuss the alleged violations. The conference was held on May 20, 2013. On July 23, 2013, the EPA issued a Finding of Violation alleging that Sterling violated the opacity limitations of its air permit and Federal and state regulations. A conference to discuss the Finding of Violation occurred in the third quarter of 2013. There have been no material updates with respect to these matters since the third quarter of 2013.

Sterling intends to vigorously defend these matters in any enforcement action that may be pursued by the EPA. The EPA did not specify any amount of penalty or injunctive relief being sought in the NOV, Finding of Violation, or in any conference. Any settlement or adverse finding could result in the payment by Sterling of fines, penalties, capital expenditures, or some combination thereof. Although the outcome of these matters cannot be predicted with certainty, we do not expect them, either individually or in the aggregate, to have a material adverse effect on our financial position, cash flows or results of operations.


Item 4. Mine Safety Disclosures.
 
Not applicable.
 













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Supplemental Item. Executive Officers of the Registrant.
 
The following information is included in accordance with the provisions of Part III, Item 10 of Form 10-K and Item 401(b) of Regulation S-K.
 
The table below sets forth the names, ages and positions of all executive officers of the Company. Executive officers are normally appointed annually by the Board of Directors.
 
Name
 
Age
 
Position
David S. Haffner
 
62
 
Board Chair and Chief Executive Officer
Karl G. Glassman
 
56
 
President and Chief Operating Officer
Matthew C. Flanigan
 
53
 
Executive Vice President and Chief Financial Officer
Jack D. Crusa
 
60
 
Senior Vice President, Specialized Products
Perry E. Davis
 
55
 
Senior Vice President, Residential Furnishings
David M. DeSonier
 
56
 
Senior Vice President, Strategy & Investor Relations
Scott S. Douglas
 
55
 
Senior Vice President, General Counsel
Joseph D. Downes, Jr.
 
70
 
Senior Vice President, Industrial Materials
Russell J. Iorio
 
45
 
Senior Vice President, Mergers & Acquisitions
John G. Moore
 
54
 
Senior Vice President, Chief Legal & HR Officer and Secretary
Dennis S. Park
 
60
 
Senior Vice President, Commercial Fixturing & Components
William S. Weil
 
56
 
Senior Vice President, Controller and Chief Accounting Officer

______________________________

Subject to the employment and severance benefit agreements with Mr. Haffner, Mr. Glassman and Mr. Flanigan, listed as exhibits to this Report, the executive officers generally serve at the pleasure of the Board of Directors. Our employment agreement with Mr. Haffner provides that he may terminate the agreement if not nominated as a director and appointed to the Board's executive committee. Employment agreements with Mr. Glassman and Mr. Flanigan provide that they may terminate their agreements if not nominated as a director of the Company. In addition, each may terminate their respective agreement if not elected to their current executive officer position. See Exhibit Index on page 123 for reference to the agreements.
 
David S. Haffner was elected Board Chair of the Company in 2013 and continues to serve as Chief Executive Officer since his appointment in 2006. He previously served as President from 2002 to 2013, Chief Operating Officer from 1999 to 2006, and as Executive Vice President from 1995 to 2002. He has served the Company in various capacities since 1983.
 
Karl G. Glassman was appointed President of the Company in 2013 and has served as Chief Operating Officer since 2006. He previously served as Executive Vice President from 2002 to 2013, President of Residential Furnishings from 1999 to 2006, Senior Vice President from 1999 to 2002 and in various capacities since 1982.
 
Matthew C. Flanigan was appointed Executive Vice President of the Company in 2013 and has served as Chief Financial Officer since 2003. He previously served as Senior Vice President from 2005 to 2013, Vice President from 1999 to 2005, President of the Office Furniture Components Group from 1999 to 2003 and in various capacities since 1997.

Jack D. Crusa was appointed Senior Vice President in 1999 and President of Specialized Products in 2004. He previously served as President of Industrial Materials from 1999 to 2004, and President of the Automotive Group from 1996 to 1999. He has served the Company in various capacities since 1986. Upon the retirement of Joseph D. Downes, Jr. effective April 5, 2015, as discussed below, Mr. Crusa will assume the additional position of President of Industrial Materials.

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Perry E. Davis was appointed Senior Vice President and President of Residential Furnishings in 2012. He previously served as Vice President of the Company, President—Bedding Group from 2006 to 2012, as Vice President of the Company, Executive VP of the Bedding Group and President—U.S. Spring beginning in 2005. He also served as Executive VP of the Bedding Group and President—U.S. Spring from 2004 to 2005, President—Central Division Bedding Group from 2000 to 2004, and in various capacities since 1981.
 
David M. DeSonier was appointed Senior Vice President—Strategy & Investor Relations in 2011. He previously served as Vice President—Strategy & Investor Relations from 2007 to 2011 and served as Vice President—Investor Relations and Assistant Treasurer from 2002 to 2007. He joined the Company as Vice President—Investor Relations in 2000.
 
Scott S. Douglas was appointed Senior Vice President—General Counsel in 2011. He previously served the Company as Vice President beginning in 2008, and General Counsel beginning in 2010. He also served as Vice President—Law and Deputy General Counsel from 2008 to 2010, Associate General Counsel—Mergers & Acquisitions from 2001 to 2007, and Assistant General Counsel from 1991 to 2001. He has served the Company in various legal capacities since 1987.
 
Joseph D. Downes, Jr. was appointed Senior Vice President of the Company in 2005 and President of the Industrial Materials Segment in 2004. He previously served the Company as President of the Wire Group from 1999 to 2004 and in various capacities since 1976. Mr. Downes will retire from his position as Senior Vice President, President of Industrial Materials, effective April 5, 2015. He will remain as an employee with lesser responsibilities until December 31, 2015.
 
Russell J. Iorio was appointed Senior Vice President, Mergers & Acquisitions in 2014. He previously served the Company as Vice President, Mergers & Acquisitions from 2005 to 2014, and Director of Mergers, Acquisitions & Strategic Planning from 2002 to 2005.

John G. Moore was appointed Senior Vice President, Chief Legal and HR Officer and Secretary in 2011. He was appointed Secretary in 2010, Chief Legal and HR Officer in 2009 and Vice President—Corporate Affairs & Human Resources in 2008. He served as Vice President—Corporate Governance from 2006 to 2008, Vice President and Associate General Counsel from 2001 to 2006, and as Managing Counsel and Assistant General Counsel from 1998 to 2001. He has served the Company in various legal capacities since 1993.
 
Dennis S. Park was appointed Senior Vice President and President of Commercial Fixturing & Components in 2006. He previously served as Vice President and President of Home Furniture and Consumer Products from 2004 to 2006, and Vice President and President of Home Furniture Components from 1996 to 2004. He has served the Company in various capacities since 1977.
 
William S. Weil was appointed Senior Vice President in 2014, Chief Accounting Officer in 2004, Vice President in 2000 and Corporate Controller in 1991. He previously served the Company in various other accounting capacities since 1983. Mr. Weil will retire from the Company effective May 5, 2015. Tammy M. Trent will assume his duties as Chief Accounting Officer at that time.  

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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is traded on the New York Stock Exchange (symbol LEG). The table below highlights quarterly and annual stock market information for the last two years.
 
 
Price Range
 
Volume of
Shares Traded
(in Millions)
 
Dividend
Declared
 
High
 
Low
 
2014
 
 
 
 
 
 
 
First Quarter
$
32.75

 
$
28.90

 
59.4

 
$
0.30

Second Quarter
34.80

 
31.54

 
55.2

 
0.30

Third Quarter
35.94

 
32.53

 
52.7

 
0.31

Fourth Quarter
43.15

 
32.64

 
72.8

 
0.31

For the Year
$
43.15

 
$
28.90

 
240.1

 
$
1.22

2013
 
 
 
 
 
 
 
First Quarter
$
33.80

 
$
27.24

 
74.0

 
$
0.29

Second Quarter
34.28

 
29.59

 
74.7

 
0.29

Third Quarter
32.52

 
28.59

 
63.1

 
0.30

Fourth Quarter
31.33

 
28.00

 
65.2

 
0.30

For the Year
$
34.28

 
$
27.24

 
277.0

 
$
1.18

______________________________
 
Price and volume data reflect composite transactions; price range reflects intra-day prices; data source is Bloomberg.
 
Shareholders and Dividends
 
As of February 13, 2015, we had 8,942 shareholders of record.
 
We expect to continue to pay dividends on our common stock and we are targeting a dividend payout ratio (dividends declared per share/earnings per share) of 50-60%, though it has been and will likely be higher for the near term. Our dividend payout ratio was 67%, 88% and 179% in 2012, 2013 and 2014, respectively. The 2013 and 2014 earnings per share component of the dividend payout ratio was impacted by goodwill impairment charges in both years and a litigation accrual in 2014. See the discussion of the Company’s targeted dividend payout ratio under “Pay Dividends” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 42.

During 2012, the Company declared four quarterly dividends, but paid five of them, given its decision to accelerate the first quarter 2013 dividend payment into December 2012 in anticipation of tax rate increases on individual taxpayers. For 2013, the Company returned to its typical practice and paid the fourth quarter dividend in January 2014. The five dividend payments in 2012 utilized approximately $200 million of cash while the three payments in 2013 utilized roughly $125 million of cash.
 

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Issuer Purchases of Equity Securities
 
The table below is a listing of our purchases of the Company’s common stock during each calendar month of the fourth quarter of 2014.
 
Period
 
Total Number of
Shares Purchased(1)
 
Average
Price
Paid per
Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs(2)
 
Maximum Number of
Shares that May Yet
Be Purchased Under the
Plans or Programs(2)
October 2014
 
44,859

 
$
38.78

 

 
6,525,263

November 2014
 
213,654

 
$
40.88

 
85,999

 
6,439,264

December 2014
 
350,006

 
$
41.76

 
254,484

 
6,184,780

Total
 
608,519

 
$
41.23

 
340,483

 
 
______________________________

(1)
This number includes 268,036 shares which were not repurchased as part of a publicly announced plan or program, all of which were shares surrendered in transactions permitted under the Company’s benefit plans. It does not include shares withheld for taxes on option exercises and stock unit conversions.
(2)
On August 4, 2004, the Board authorized management to repurchase up to 10 million shares each calendar year beginning January 1, 2005. This standing authorization was first reported in the quarterly report on Form 10-Q for the period ended June 30, 2004, filed August 5, 2004, and will remain in force until repealed by the Board of Directors. As such, effective January 1, 2015, the Company was authorized by the Board of Directors to repurchase up to 10 million shares in 2015. No specific repurchase schedule has been established.
 



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Item 6. Selected Financial Data.
 
(Unaudited)
2014 1
 
2013 2
 
2012 3
 
2011 4
 
2010
(Dollar amounts in millions, except per share data)
 
 
 
 
 
 
 
 
 
Summary of Operations
 
 
 
 
 
 
 
 
 
Net Sales from Continuing Operations
$
3,782

 
$
3,477

 
$
3,415

 
$
3,303

 
$
2,980

Earnings from Continuing Operations
225

 
186

 
231

 
173

 
177

(Earnings) Attributable to Noncontrolling Interest, net of tax
(3
)
 
(2
)
 
(2
)
 
(3
)
 
(6
)
Earnings (loss) from Discontinued Operations, net of tax
(124
)
 
13

 
19

 
(17
)
 
6

Net Earnings
98

 
197

 
248

 
153

 
177

Earnings per share from Continuing Operations
 
 
 
 
 
 
 
 
 
Basic
1.57

 
1.27

 
1.59

 
1.16

 
1.13

Diluted
1.55

 
1.25

 
1.57

 
1.15

 
1.11

Earnings (Loss) per share from Discontinued Operations
 
 
 
 
 
 
 
 
 
Basic
(.88
)
 
.09

 
.13

 
(.11
)
 
.04

Diluted
(.87
)
 
.09

 
.13

 
(.11
)
 
.04

Net Earnings (Loss) per share
 
 
 
 
 
 
 
 
 
Basic
.69

 
1.36

 
1.72

 
1.05

 
1.17

Diluted
.68

 
1.34

 
1.70

 
1.04

 
1.15

Cash Dividends declared per share
1.22

 
1.18

 
1.14

 
1.10

 
1.06

Summary of Financial Position
 
 
 
 
 
 
 
 
 
Total Assets
$
3,141

 
$
3,108

 
$
3,255

 
$
2,915

 
$
3,001

Long-term Debt, including capital leases
$
767

 
$
688

 
$
854

 
$
833

 
$
762

______________________________
1 
Net earnings from Continuing Operations for 2014 includes $54 million (pretax) associated with litigation accruals. Discontinued Operations includes the following pretax items: $108 million of goodwill impairment, a $9 million loss on the sale of the majority of our Store Fixtures unit, and $35 million associated with litigation accruals.

2 
Net earnings from Continuing Operations for 2013 include pretax charges of $67 million related to the Commercial Vehicle Products group ($63 million goodwill impairment charge and $4 million accelerated amortization of a customer-related intangible asset), and a $9 million bargain purchase gain related to an acquisition.

3 
Net earnings from Continuing Operations for 2012 include a $27 million net tax benefit primarily related to the release of valuation allowances on certain Canadian deferred tax assets, partially offset by deferred withholding taxes on earnings in China.

4 
The Company incurred pretax asset impairment and restructuring-related charges totaling $44 million in 2011. Of these charges, $20 million were associated with continuing operations and $24 million were related to discontinued operations.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
2014 HIGHLIGHTS
 
Sales from continuing operations grew significantly in 2014. Same location sales improved 6% reflecting strong volume gains in Automotive and most of our Residential Furnishings businesses. Acquisitions also contributed 3% to sales growth.
 
Earnings from continuing operations increased (versus 2013) reflecting several factors, including the benefit from higher sales and non-recurrence of prior year goodwill impairment and other charges related to the Commercial Vehicle Products business, partially offset by higher foam litigation accruals in 2014.
 
A major component of our strategy since 2007 has been the optimization of our portfolio of businesses, by increasing investments in businesses that possess strong competitive advantage and reducing our exposure to businesses and markets that are less attractive. In 2014, we made good progress on both fronts. In July, we acquired Tempur Sealy's three innerspring component production facilities. During the year, we also expanded our operations in China to support rapid growth of our Automotive business and invested in machinery to support the significant growth of ComfortCore® innersprings. Additionally, in late 2014, we completed the divestiture of the majority of our Store Fixtures business.

Operating cash for the full year was strong. We again generated more than enough cash from operations to comfortably fund dividends and capital expenditures, something we've accomplished for over 25 years.

2014 marked the 43rd consecutive annual dividend increase for the company, with a compound annual growth rate of 13% over that time period. Only one other S&P 500 company can claim as high a rate of dividend growth for as many years.
 
Our financial profile remains strong. We ended 2014 with net debt to net capital comfortably within our long-standing targeted range. In November we issued $300 million of notes and repaid $180 million of notes that matured. We ended the year with all of our $600 million commercial paper program and revolver facility available.
 
We assess our overall performance by comparing our Total Shareholder Return (TSR) to that of peer companies on a rolling three-year basis. We target TSR in the top one-third of the S&P 500 over the long term. For the three years ended December 31, 2014, we generated TSR of 28% per year on average. That placed us in the top quarter of the S&P 500, exceeding our top one-third goal.

These topics are discussed in more detail in the sections that follow.

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INTRODUCTION
 
Total Shareholder Return
 
Total Shareholder Return (TSR), relative to peer companies, is the key financial measure that we use to assess long-term performance. TSR is driven by the change in our share price and the dividends we pay [TSR = (Change in Stock Price + Dividends) / Beginning Stock Price]. We seek to achieve TSR in the top one-third of the S&P 500 over the long-term through a balanced 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. For the three-year measurement period that ended December 31, 2014, we generated TSR of 28% per year on average. That performance placed us in the top quarter of the S&P 500 companies, exceeding our top one-third goal.
 
Customers
 
We serve a broad suite of customers, with our largest customer representing approximately 7% of our sales. Many are companies whose names are widely recognized. They include most producers of residential furniture and bedding, auto and office seating manufacturers, and a variety of other companies.
 
Major Factors That Impact Our Business
 
Many factors impact our business, but those that generally have the greatest impact are market demand, raw material cost trends, and competition.
 
Market Demand
 
Market demand (including product mix) is impacted by several economic factors, with consumer confidence being most significant. Other important factors include disposable income levels, employment levels, housing turnover, and interest rates. All of these factors influence consumer spending on durable goods, and therefore affect demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one-quarter of our sales.
 
We continue to retain more production capacity than we currently utilize, and with our meaningful operating leverage, earnings should further benefit as market demand continues to improve. For each additional $100 million of sales from incremental unit volume produced utilizing this spare capacity, we expect to generate approximately $25 million to $35 million of additional pre-tax earnings.

Raw Material Costs
 
In many of our businesses, we enjoy a cost advantage from being vertically integrated into steel wire and rod. This is a benefit that our competitors do not have. We also experience favorable purchasing leverage from buying large quantities of raw materials. Still, 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, so we also expect to realize a lag as costs decline.

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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. As we begin 2015, market prices for steel scrap in the U.S. are decreasing.  This is leading to downward pricing pressure on steel rod and other types of steel materials. We expect, in certain cases, to pass the lower costs through to our customers. However, our margins could experience some short-term pressure if steel deflation causes us to reduce our selling prices before we consume our higher cost inventories.

As a producer of steel rod, we are also impacted by changes in metal margins (the difference between the cost of steel scrap and the market price for steel rod). Metal margins within the steel industry have been volatile during certain periods in recent years. In late 2013 and early 2014, metal margins decreased significantly as market conditions did not allow full recovery of higher scrap costs. An antidumping and countervailing duty case filed in January 2014 by major U.S. steel wire rod producers was concluded in December 2014, resulting in the implementation of duties on imports of Chinese steel wire rod. The antidumping duties range from 106% to 110% and the countervailing duties range from 178% to 193%. Both remain in effect through December 2019.
 
Our other raw materials include woven and non-woven fabrics, foam scrap, and chemicals. We have experienced changes in the cost of these materials in recent years, and in most years, 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 to find ways to assist our customers in improving the functionality and reducing the cost of their products, while providing higher margin and profit contribution for our operations.
 
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 better product quality, innovation, 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, even versus many foreign manufacturers, as a result of our highly efficient operations, low labor content, 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, and by developing new proprietary products that help our customers reduce total costs.
 
Since 2009, there have been antidumping duty orders on innerspring imports from China, South Africa and Vietnam, ranging from 116% to 234%. In March 2014, the Department of Commerce (DOC) and the International Trade Commission (ITC) determined that the duties should be continued. In April 2014, the DOC published its final order continuing the duties through February 2019 (for China) and December 2018 (for South Africa and Vietnam). 

Because of the documented evasion of antidumping orders by certain importers, typically shipping goods through third countries and falsely identifying the countries of origin, Leggett, along with several U.S. manufacturers have formed a coalition and are working with members of Congress, the DOC, and U.S. Customs and Border Protection to seek stronger enforcement of existing antidumping and/or countervailing duty orders.


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Tentative Settlement of Polyurethane Foam Litigation

We previously disclosed that we are a defendant in a series of civil antitrust lawsuits involving the sale of polyurethane foam. We have reached a tentative settlement in the U.S. direct purchaser class action cases by agreeing to pay an aggregate amount of $39.8 million, inclusive of plaintiff attorneys’ fees and costs. We continue to deny all allegations in all of the cases, but have settled the direct purchaser class cases to avoid the risk, uncertainty, expense and distraction of litigation. The settlement is subject to Court approval. In the fourth quarter of 2014, we paid $4 million to the Court related to the settlement. A final fairness hearing was held on February 3, 2015, but we have not yet received a ruling.
We recorded a $39.8 million (pre-tax) accrual for this tentative settlement in the third quarter of 2014. Since the payment is partially attributable to our former Prime Foam Products business, which was sold in 2007, $8.3 million of the charge was reflected in discontinued operations.
Accrual for Loss Contingencies

Although we deny liability in all threatened or pending litigation proceedings and believe that we have valid bases to contest all claims made against us, we recorded an additional aggregate litigation accrual in continuing operations of $22 million (pre-tax) in the fourth quarter of 2014, which represents our reasonable estimate of unrecorded probable loss for all pending and threatened litigation proceedings impacting continuing operations. We also recorded an additional $27 million (pre-tax) litigation contingency accrual in discontinued operations in the fourth quarter based upon the same facts, circumstances and analysis. By far the largest portion of these accruals relates to the foam antitrust litigation. We believe, based on current facts, that these accruals are adequate to resolve all pending antitrust matters.
We expect to incur the majority of the resulting cash payments in 2015, with the remainder expected to be paid in 2016. Although there are a number of uncertainties and potential outcomes associated with all of our pending or threatened litigation proceedings, we believe, based on current facts and circumstances, that additional legal contingency losses (other than those quantified and disclosed in Note T to the Consolidated Financial Statements on page 113) are not expected to materially affect our consolidated financial position, results of operations, or cash flows.
Discontinued Operations
 
Some of our prior businesses, including the Store Fixtures business, are disclosed in our financial statements as discontinued operations since (i) the operations and cash flows of the businesses were clearly distinguished and have been or will be eliminated from our ongoing operations; (ii) the businesses have either been disposed of or are classified as held for sale; and (iii) we will not have any significant continuing involvement in the operations of the businesses after the disposal transactions. The Store Fixtures business was previously reported as part of the Commercial Fixturing & Components segment. These operations manufacture and distribute custom-designed, complete store fixture packages for major retailers, including metal and wood shelving, counters, and showcases.

For more information on discontinued operations, see Note B to the Consolidated Financial Statements on page 77.

Goodwill Impairment of Store Fixtures Group

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. We review our reporting units for potential goodwill impairment in June of each year, and more often if an event or circumstance occurs making it likely that impairment exists. We performed our annual goodwill impairment review in June 2014, and on July 14, 2014, concluded that an impairment charge of $108 million ($93 million after tax) was required for our Store Fixtures group. This non-cash impairment charge reflects the complete write-off of the goodwill associated with the Store Fixtures group and was recognized in discontinued operations.

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The Store Fixtures group was dependent upon capital spending by retailers on both new stores and remodeling of existing stores. Because of the seasonal nature of the fixture and display industry (where revenue and profitability were typically expected to increase in the second and third quarters assuming the normal historical pattern of heavy shipments during those months) we reasonably anticipated being awarded significant customer orders in the second quarter of 2014. However, as the second quarter progressed, anticipated orders did not materialize and the Store Fixtures business deteriorated, with declines most pronounced in May and June. Taking these developments into account, we lowered our projection of future margins and growth rates (the 10-year compound growth rate for Earnings Before Interest and Taxes plus Depreciation and Amortization (EBITDA) was reduced to .5% from 4.8% in the prior year's review) and increased the discount rate to 12% from 10.5%, causing fair value to fall below carrying value. The lower expectations of future revenue and profitability were due to reduced overall market demand for shelving, counters, showcases and garment racks as many retailers are reducing their investments in traditional store space and focusing more on e-commerce initiatives.

As indicated in the second quarter 10-Q, we engaged an investment banker to assist with the sale of the Store Fixtures group.

Divestiture of Store Fixtures Operations

On November 1, 2014, we sold the majority of the Store Fixtures business for $59 million. These divested operations represented approximately three-quarters of the business unit's revenues. The transaction resulted in an after-tax loss of $5 million, which was recognized in discontinued operations. We continue to pursue the sale of the two remaining Store Fixtures facilities and do not expect a significant cash impact from these exit activities.

Future Change in Segment Reporting

Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure.  Because of the recent divestiture of the majority of the Store Fixtures business (formerly in the Commercial Fixturing & Components segment) along with the pending retirement of the Senior Operating Vice President of the Industrial Materials segment, our management organizational structure and all related internal reporting will change during the first quarter of 2015.  As a result, the composition of our four segments will also change to reflect the new structure beginning in the first quarter 2015.



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RESULTS OF OPERATIONS—2014 vs. 2013
 
Sales from continuing operations grew 9% in 2014 from a combination of strong organic growth in many of our major businesses and acquisitions. Earnings from continuing operations increased in 2014, largely due to sales growth. Other items in 2013 and 2014 essentially offset.

Further details about our consolidated and segment results are discussed below.
 
Consolidated Results (continuing operations)
 
The following table shows the changes in sales and earnings from continuing operations during 2014, and identifies the major factors contributing to the changes.
 
(Dollar amounts in millions, except per share data)
Amount
 
%
Net sales (continuing operations):
 
 
 
Year ended December 31, 2013
$
3,477

 
 
Same location sales - primarily unit volume growth
189

 
6
%
Acquisition sales growth
116

 
3
%
Year ended December 31, 2014
$
3,782

 
9
%
Earnings from continuing operations:
 
 
 
(Dollar amounts, net of tax)
 
 
 
Year ended December 31, 2013
$
186

 
 
Non-recurrence of Commercial Vehicle Products impairment and related charges
45

 
 
Non-recurrence of acquisition-related bargain purchase gain
(9
)
 
 
Litigation accrual
(33
)
 
 
Other factors, including benefit from higher sales
36

 
 
Year ended December 31, 2014
$
225

 
 
Earnings Per Share (continuing operations)—2013
$
1.25

 
 
Earnings Per Share (continuing operations)—2014
$
1.55

 
 
 

Same location sales (from continuing operations) grew 6%, reflecting strong volume gains in Automotive and in most of the company's Residential Furnishings businesses. These improvements were partially offset by weak demand in Commercial Vehicle Products. 

Sales growth in 2014 also benefited from the acquisition of Tempur Sealy's three innerspring component production facilities and other smaller acquisitions. In conjunction with the purchase of the facilities from Tempur Sealy, we expanded and extended our supply relationship and became the exclusive long-term provider in the U.S. and Canada of wire-based innersprings for Tempur Sealy and boxsprings for Sealy.

Earnings from continuing operations increased in 2014, with several items contributing to the year-over-year comparison. Operationally, earnings growth resulted primarily from higher sales, however this benefit was partially offset by higher stock compensation expense that resulted in large part from the significant increase in Leggett & Platt share price versus the market in late 2014. Reduced metal margins in our steel rod and wire operations and weather-related costs and inefficiencies early in the year also offset some of the earnings benefit from higher sales.

As indicated in the table above, a few additional items impacted the year-over-year earnings comparison. In 2013, earnings from continuing operations reflected non-cash impairment and other charges related to the goodwill and other intangible assets of our CVP business, and an acquisition-related bargain purchase gain. This gain related to the acquisition of an aerospace tubing business in the Industrial Materials segment, and is further discussed in the

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segment comments on page 37. Earnings from continuing operations in 2014 were negatively impacted by litigation accruals, which primarily related to the foam antitrust cases discussed on page 28.

LIFO Impact
 
All of our segments use the first-in, first-out (FIFO) method for valuing inventory. In our consolidated financials, an adjustment is made at the corporate level (i.e., outside the segments) to convert about 50% of our inventories to the last-in, first-out (LIFO) method. These are primarily our domestic, steel-related inventories. Steel inflation in late 2013 resulted in full-year LIFO expense of $4 million. In 2014, steel costs were relatively stable and we ended the year with LIFO expense of $1 million.
 
For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 74.
 
Interest and Income Taxes
 
Net interest expense in 2014 decreased slightly versus 2013.
 
Our 2014 worldwide effective income tax rate on continuing operations was 24%, compared to 22% for 2013.  The 2014 tax rate benefited from $14 million of favorable adjustments, including additional Domestic Production Activities Deduction tax benefits for the current and prior years, incremental deferred foreign tax credits, and net favorable adjustments related to prior year tax return filings. The 2013 tax rate includes $17 million of favorable adjustments primarily related to the impact of Mexico tax law changes, the settlement of certain foreign and state tax audits, and a non-taxable bargain purchase gain.
 

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Segment Results (continuing operations)
 
In the following section we discuss 2014 sales and EBIT (earnings before interest and taxes) from continuing operations for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in Note F to the Consolidated Financial Statements on page 84. For further information about discontinued operations, see Note B to the Consolidated Financial Statements on page 77.
(Dollar amounts in millions)
2014
 
2013
 
Change in Sales
 
% Change
Same Location
Sales (1)
 
 
$
 
%
 
Sales (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
2,223

 
$
1,967

 
$
256

 
13
 %
 
9
 %
 
 
Commercial Fixturing & Components
199

 
187

 
12

 
7
 %
 
7
 %
 
 
Industrial Materials
865

 
844

 
21

 
3
 %
 
(1
)%
 
 
Specialized Products
862

 
790

 
72

 
9
 %
 
9
 %
 
 
Total
4,149

 
3,788

 
361

 
 
 
 
 
 
Intersegment sales elimination
(367
)
 
(311
)
 
(56
)
 
 
 
 
 
 
External sales
$
3,782

 
$
3,477

 
$
305

 
9
 %
 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
 
Change in EBIT
 
EBIT Margins (2)
$
 
%
 
2014
 
2013
EBIT (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
161

 
$
170

 
$
(9
)
 
(5
)%
 
7.3
 %
 
8.6
%
Commercial Fixturing & Components
13

 
11

 
2

 
18
 %
 
6.5
 %
 
5.7
%
Industrial Materials
56

 
71

 
(15
)
 
(21
)%
 
6.5
 %
 
8.4
%
Specialized Products
118

 
26

 
92

 
354
 %
 
13.6
 %
 
3.3
%
Intersegment eliminations & other
(15
)
 
1

 
(16
)
 
 
 
 
 
 
Change in LIFO reserve
(1
)
 
(4
)
 
3

 
 
 
 
 
 
Total
$
332

 
$
275

 
$
57

 
21
 %
 
8.8
 %
 
7.9
%
______________________________

(1)
This is the change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we owned one year earlier.
(2)
Segment margins are calculated on total sales. Overall company margin is calculated on external sales.

Residential Furnishings
 
Residential Furnishings sales increased 13% in 2014, from unit volume growth in most product categories and acquisitions (including the purchase of the three Tempur Sealy innerspring production facilities). Volume grew in Bedding, Adjustable Bed, Home Furniture, Geo Components, Fabric Converting, and Carpet Underlay, from a combination of market share gains and broadly improving market demand in the second half of the year. Within our U.S. Spring business, we experienced significant growth in ComfortCore® (our pocketed coil innerspring), with unit volume in that product category up 52%. Mattress producers continue to integrate these higher-valued innersprings into more of their product lines, in many cases replacing lower-valued innersprings. Demand was also extremely strong in our Adjustable Bed business, with unit volume increasing 56% from a combination of new programs and strength in ongoing customer programs. In our Furniture Hardware business, unit volume increased 10% as consumer demand for reclining chairs and sofas continues to grow.

EBIT and EBIT margins decreased in 2014, with the benefit from higher sales more than offset by a $54 million accrual related to the foam litigation discussed on page 28, and higher stock compensation expense.
 

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Commercial Fixturing & Components
 
Sales in Commercial Fixturing & Components increased 7% in 2014 due to market share gains and improved market demand in our Work Furniture business.

EBIT and EBIT margins improved slightly in 2014, with the benefit from higher sales partially offset by operational challenges with a Chinese joint venture. 
 
Industrial Materials
 
Sales in the segment increased 3% in 2014, primarily from aerospace acquisitions completed in the prior year. Same location sales were down slightly from a combination of reduced trade sales from our rod mill and lower wire volume.
 
EBIT and EBIT margins declined versus 2013, primarily due to reduced metal margin in our steel rod and wire operations, and weather-related costs and inefficiencies early in 2014.
  
Specialized Products
 
In Specialized Products, sales increased 9% in 2014. Our Automotive business continued to experience strong growth, with sales up 17% from a combination of factors, including expanded component content (via upgraded features), participation in new vehicle platforms, and demand strength in each of the major markets. Partially offsetting this growth, CVP sales declined 21%, reflecting delayed vehicle replacement by major fleet operators and a change in an OEM incentive program. Machinery sales increased modestly for the year.
 
EBIT and EBIT margins increased due to higher sales and the non-recurrence of impairment and other charges (of $67 million) related to the goodwill and other intangible assets of our CVP business that were recognized in 2013.

Results from Discontinued Operations
 
Full year earnings from discontinued operations, net of tax, decreased to a loss of $124 million in 2014 (versus earnings of $13 million in 2013). This significant decline is primarily due to an impairment charge of $93 million related to the goodwill of the Store Fixtures business discussed on page 28, and foam litigation accruals of $22 million discussed on page 28. Weak capital spending by retailers in 2014 led to lower volume in the Store Fixtures business, and also contributed to reduced earnings. The divestiture of the majority of that business late in 2014 resulted in an additional loss of $5 million. Earnings in 2013 reflected an $8 million tax benefit attributable to another small operation.



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RESULTS OF OPERATIONS—2013 vs. 2012
 
Sales from continuing operations grew modestly in 2013 from a combination of slightly higher unit volume and acquisitions, partially offset by lower trade sales from our rod mill (sales shifted from trade to intra-segment).

Earnings from continuing operations decreased in 2013 (versus 2012) as a result of impairment and other charges related to the goodwill and other intangible assets of our CVP business, and the non-recurrence of a significant tax benefit from 2012.

Further details about our consolidated and segment results are discussed below. Reported amounts for 2012 have been retrospectively adjusted to reflect only continuing operations.
 
Consolidated Results (continuing operations)
 
The following table shows the changes in sales and earnings from continuing operations during 2013, and identifies the major factors contributing to the changes.
 
(Dollar amounts in millions, except per share data)
Amount
 
%
Net sales (continuing operations):
 
 
 
Year ended December 31, 2012
$
3,415

 
 
Same location sales:
 

 
 

Lower steel mill trade sales
(33
)
 
(1
)%
Approximate unit volume increase
52

 
2
 %
Same location sales increase
19

 
1
 %
Acquisition sales growth
43

 
1
 %
Year ended December 31, 2013
$
3,477

 
2
 %
Earnings from continuing operations:
 
 
 
(Dollar amounts, net of tax)
 
 
 
Year ended December 31, 2012
$
232

 
 
CVP impairment and related charges
(45
)
 
 
Non-recurrence of 2012 significant net tax benefit
(27
)
 
 
Acquisition-related bargain purchase gain
9

 
 
Lower effective tax rate
12

 
 
Other factors, including higher sales and acquisition earnings largely offset by higher raw material costs
5

 
 
Year ended December 31, 2013
$
186

 
 
Earnings Per Share (continuing operations)—2012
$
1.57

 
 
Earnings Per Share (continuing operations)—2013
$
1.25

 
 
 

Same location sales (from continuing operations) grew slightly, with 2% unit volume growth partially offset by a 1% revenue decline from lower trade sales at our rod mill. Sales grew primarily from market strength and new program awards in Automotive and raw material-related price increases in Carpet Underlay. These improvements were partially offset by declines in CVP and Adjustable Bed. The decrease in trade sales of steel rod during 2013 was offset by an increase in intra-segment rod sales, and the rod mill continued to operate at full capacity.
 

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Earnings from continuing operations decreased as a result of non-cash impairment and other charges related to the goodwill and other intangible assets of our CVP business, and the non-recurrence of a significant tax benefit from 2012. Operationally, the earnings benefit from modest unit volume growth and acquisitions was largely offset by an increase in steel costs late in the year that resulted in higher LIFO expense. The other items detailed in the table above also contributed to the change in earnings.

2013 earnings from continuing operations also benefited $8 million ($5 million after tax) from gains on asset sales. These gains are primarily comprised of a $3 million gain related to a hurricane insurance claim, and $3 million for several different properties associated with the closing of various operations in prior years.

LIFO Impact
 
All of our segments use the first-in, first-out (FIFO) method for valuing inventory. In our consolidated financials, an adjustment is made at the corporate level (i.e., outside the segments) to convert about 50% of our inventories to the last-in, first-out (LIFO) method. These are primarily our domestic, steel-related inventories. In 2012, lower commodity costs led to a LIFO benefit of $13 million. Steel inflation in late 2013 resulted in a significant change in our full-year LIFO estimates (interim expectations for a full-year LIFO benefit of $12 million changed instead to a full year expense of $4 million as steel costs increased late in the year) and a concentration of LIFO expense in the fourth quarter.
 
For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 74.
 
Interest and Income Taxes
 
Net interest expense in 2013 was flat with 2012.
 
The 2013 worldwide effective income tax rate on our continuing operations was 22%, compared to 19% for 2012. In both years the tax rate reflects necessary tax reserve reductions and other tax benefits that lowered the overall rate. The 2013 tax rate includes $17 million of favorable adjustments primarily related to the impact of Mexico tax law changes, the settlement of certain foreign and state tax audits, and a non-taxable bargain purchase gain. The impact of these items on the tax rate was magnified by our fourth quarter CVP impairment. In 2012, the tax rate benefited from the release of a $38 million valuation allowance on certain Canadian deferred tax assets, partially offset by the accrual of $11 million of China withholding taxes.
 

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Segment Results (continuing operations)
 
In the following section we discuss 2013 sales and EBIT from continuing operations for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in Note F to the Consolidated Financial Statements on page 84. Reported amounts for 2012 have been retrospectively adjusted to reflect only continuing operations. For further information about discontinued operations, see Note B to the Consolidated Financial Statements on page 77.
(Dollar amounts in millions)
2013
 
2012
 
Change in Sales
 
% Change
Same Location
Sales (1)
 
 
$
 
%
 
Sales (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
1,967

 
$
1,904

 
$
63

 
3
 %
 
3
 %
 
 
Commercial Fixturing & Components
187

 
191

 
(4
)
 
(2
)%
 
(2
)%
 
 
Industrial Materials
844

 
871

 
(27
)
 
(3
)%
 
(8
)%
 
 
Specialized Products
790

 
757

 
33

 
4
 %
 
4
 %
 
 
Total
3,788

 
3,723

 
65

 
 
 
 
 
 
Intersegment sales elimination
(311
)
 
(308
)
 
(3
)
 
 
 
 
 
 
External sales
$
3,477

 
$
3,415

 
$
62

 
2
 %
 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
2012
 
Change in EBIT
 
EBIT Margins (2)
$
 
%
 
2013
 
2012
EBIT (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
170

 
$
152

 
$
18

 
12
 %
 
8.6
 %
 
8.0
%
Commercial Fixturing & Components
11

 
15

 
(4
)
 
(27
)%
 
5.7
 %
 
7.9
%
Industrial Materials
71

 
65

 
6

 
9
 %
 
8.4
 %
 
7.5
%
Specialized Products
26

 
86

 
(60
)
 
(70
)%
 
3.3
 %
 
11.4
%
Intersegment eliminations & other
1

 
(7
)
 
8

 
 
 
 
 
 
Change in LIFO reserve
(4
)
 
13

 
(17
)
 
 
 
 
 
 
Total
$
275

 
$
324

 
$
(49
)
 
(15
)%
 
7.9
 %
 
9.5
%
______________________________

(1)
This is the change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we owned one year earlier.
(2)
Segment margins are calculated on total sales. Overall company margin is calculated on external sales.

Residential Furnishings
 
Residential Furnishings sales increased 3% in 2013 from unit volume growth in certain product categories and raw material-related price increases in Carpet Underlay. Volume grew primarily in European spring, seating components, sofa sleepers, and carpet underlay. These gains were partially offset by lower adjustable bed volume. Within our U.S. Spring business, we experienced unit volume growth in boxsprings and ComfortCore® (which is our pocketed coil innerspring), however total domestic innerspring units decreased modestly. Furniture hardware unit volume also decreased for the full year.
 
EBIT and EBIT margins increased in 2013, primarily due to higher sales, cost improvements, and favorable product mix in U.S. Spring.
 



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Commercial Fixturing & Components
 
Sales in Commercial Fixturing & Components decreased 2% in 2013 due to lower demand in the office seating market which negatively impacted our Work Furniture business.

EBIT and EBIT margins decreased in 2013, primarily from lower sales, unfavorable product mix, and weak performance by our Chinese joint venture operation. 
 
Industrial Materials
 
Sales in the segment decreased 3% in 2013, with revenue from acquisitions more than offset by lower trade sales from our rod mill and steel-related price deflation. The decrease in trade sales of steel rod during the year was more than offset by an increase in intra-segment rod sales, and the rod mill continued to operate at full capacity. A change in the mix of rod sales from trade to intra-segment is generally positive to earnings since that change tends to also shift the production mix to higher-value high carbon rods.
 
EBIT and EBIT margins improved versus 2012, primarily due to the absence of acquisition-related costs at Western Pneumatic Tube and earnings from acquisitions. These gains were partially offset by lower metal margins in steel rod in the second half of 2013.
 
We expanded our Aerospace Products business unit in 2013 with the acquisition of two companies. The first was a U.K.-based business acquired in May that extended our capability in aerospace tube fabrication. We recorded $6 million of goodwill related to this acquisition. The second was a French company acquired in July that added small diameter, high pressure seamless tubing to our product portfolio. This business was acquired at a price less than fair value of the net identifiable assets, and we recorded a $9 million non-taxable bargain purchase gain (reflected in the "Intersegment eliminations and other" line of the table above). The Aerospace Products business unit, which now has annual revenues in excess of $120 million, continues to perform very well and earnings should further benefit as we fully integrate these acquisitions.
 
Specialized Products
 
In Specialized Products, sales increased 4% in 2013, with growth in Automotive partially offset by a decline in Commercial Vehicle Products. Machinery sales grew modestly. Our Automotive business continued to experience strong growth from a combination of factors, including market strength in North America and Asia, participation in additional vehicle platforms, and expanded component content (via upgraded features).
 
EBIT decreased $60 million in 2013. We recognized impairment and other charges (of $67 million) related to the goodwill and other intangible assets of our CVP business, and this was partially offset by the positive impact from higher sales.

We continue to assess strategic alternatives for our CVP group, including possible divestiture of the business. Late in 2013, performance of the business deteriorated. As a result, it became apparent that current market values for certain CVP assets had fallen below recorded book values, and impairment charges related to the goodwill and other intangible assets were recognized. This decline in current market values of the assets resulted from lower expectations of future revenue and profitability, reflecting reduced market demand for the racks, shelving, and cabinets used in telecom, cable, and delivery vans.
 
Results from Discontinued Operations
 
Full year earnings from discontinued operations, net of tax, decreased to $13 million in 2013 from $19 million in 2012. Weak capital spending by retailers in 2013 led to lower volume in the Store Fixtures business, and contributed to lower earnings. Earnings in 2013 and 2012 also reflected $8 million and $6 million of tax benefits, respectively, attributable to a small operation. In addition, 2012 included a $2 million gain from a litigation settlement associated with a previously divested business.

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LIQUIDITY AND CAPITALIZATION
 
Our operations provide most of the cash we require, and debt may also be used to fund a portion of our needs. Cash from operations was once again strong in 2014. For over 25 years, our operations have provided more than enough cash to fund both capital expenditures and dividend payments. We expect this to again be the case in 2015.

Capital expenditures increased in 2014, driven in part by investments to support strong growth in Automotive and U.S. Spring. We also completed five acquisitions, the largest of which included the three Tempur Sealy innerspring facilities, and bought back 5.4 million shares of our stock during the year. We ended 2014 with net debt to net capital at 31.5%, within our long-standing targeted range of 30-40%. The calculation of net debt as a percent of net capital is presented on page 44.

In November 2014, we issued $300 million of 3.8% notes and repaid $180 million of 4.65% notes that matured. We ended the year with all of our $600 million commercial paper program available.
 
Cash from Operations
 
Cash from operations is our primary source of funds. Earnings and changes in working capital levels are the two broad factors that generally have the greatest impact on our cash from operations.
        

Cash from operations decreased in 2014 from a combination of factors. Net earnings declined primarily due to a goodwill impairment charge (which was a non-cash item) and increased litigation accruals. This decrease in earnings was partially offset by a net reduction in working capital that resulted from the increased litigation accruals (a significant portion of which was not paid in 2014), partially offset by higher accounts receivable associated with increased sales volume late in the year.



 

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We continue to closely monitor our working capital levels, and ended 2014 with adjusted working capital at 7.9% of annualized sales from continuing operations1. The table below shows this non-GAAP calculation. We eliminate cash and current debt maturities from working capital to monitor our performance related to operating efficiency and believe this provides a more useful measurement. We also exclude working capital associated with discontinued operations to monitor operating performance of our ongoing businesses. The decrease in adjusted working capital as a percent of annualized sales reflects increased litigation accruals in late 2014.

(Dollar amounts in millions)
2014
 
2013
Current assets
$
1,430

 
$
1,282

Current liabilities
(992
)
 
(829
)
Working capital
438

 
453

Cash and cash equivalents
(333
)
 
(273
)
Current debt maturities
202

 
181

Less: Store Fixtures working capital
(5
)
 
(41
)
Adjusted working capital
$
302

 
$
320

Annualized sales from continuing operations 1
$
3,812

 
$
3,436

Adjusted working capital as a percent of annualized sales
7.9
%
 
9.3
%
Working capital as a percent of annualized sales
11.5
%
 
13.2
%
___________________________________________
1.
Annualized sales from continuing operations equal 4th quarter sales from continuing operations ($953 million in 2014 and $859 million in 2013) 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.

The following table presents dollar amounts of key working capital components at the end of the past two years.  
 
Amount (in millions)
 
2014
 
2013
 
Change
Trade Receivables, net 
$
470

 
$
435

 
$
35

Inventory, net
482

 
496

 
(14
)
Accounts Payable
370

 
339

 
31


Trade Receivables increased in 2014 from a combination of strong sales late in the year and acquisitions, partially offset by the divestiture of Store Fixtures.

Inventory decreased in 2014, as increases driven by sales growth and acquisitions were more than offset by the divestiture of Store Fixtures.

Accounts Payable also increased primarily due to the timing of raw material purchases, more favorable payment terms with vendors, and acquisitions, partially offset by the divestiture of Store Fixtures.


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The next chart shows recent trends in key working capital components (expressed in numbers of days at the end of the past five quarters). These amounts have been retrospectively adjusted to reflect only continuing operations.


1.
The inventory ratio represents days of inventory on hand calculated as: ending net inventory ÷ (quarterly cost of goods sold ÷ number of days in the quarter).
2.
The trade receivables ratio represents the days of sales outstanding calculated as: ending net trade receivables ÷ (quarterly net sales ÷ number of days in the quarter).
3.
The accounts payable ratio represents the days of payables outstanding calculated as: ending accounts payable ÷ (quarterly cost of goods sold ÷ number of days in the quarter).

 
Changes in the quarterly Days Sales Outstanding (DSO) reflect normal seasonal fluctuations due to the timing of cash collection and other factors. Changes in the DSO reflected in the table above are consistent with our historical range, and are not indicative of changes in payment trends or credit-worthiness of customers. We experienced a slight increase in DSO during 2014 related to growth in businesses that typically have longer payment terms. However, over the last few years our DSO has generally decreased as a result of improved payment patterns of several large customers and other programs with incentives for early payment offered in conjunction with third parties. Payment trends by major customers remained stable in 2014, with slight improvements in full-year bad debt expense compared to 2013 levels.
 
Our Days Inventory on Hand (DIO) typically fluctuates within a reasonably narrow range as a result of differences in the timing of sales, production levels, and inventory purchases. Expense associated with slow moving and obsolete inventories in 2014 was generally in line with that of 2013.
 
We actively strive to optimize payment terms with our vendors, and we have also implemented various programs with our vendors and third parties that allow flexible payment options. As a result of these activities, we have increased our Days Payable Outstanding (DPO) by more than ten days over the past several years. We continue to optimize accounts payable levels, but the rate of incremental improvement has slowed.
 

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Uses of Cash
 
Finance Capital Requirements
 
Cash is readily available to fund selective growth, both internally (through capital expenditures) and externally (through acquisitions).


Capital expenditures include investments we make to maintain, modernize, and expand manufacturing capacity. We also invest to support new product introductions and specific product categories that are rapidly growing. The increase in capital expenditures during 2014 primarily related to continued global growth in Automotive, capacity additions to support growth of ComfortCore® innersprings (fabric encased coils), and process and quality improvements at our steel rod mill. In 2015, we expect capital expenditures to approximate $120 million as we continue to support growth and opportunities in these businesses. Our incentive plans emphasize returns on capital, which include net fixed assets and working capital. This emphasis heightens the focus on asset utilization and helps ensure that we are investing additional capital dollars where attractive return potential exists.

Our strategic, long-term, 4-5% annual growth objective envisions periodic acquisitions. We are seeking acquisitions primarily within our Grow businesses, and are looking for opportunities to enter new, higher growth markets (carefully screened for sustainable competitive advantage). In January 2012, we purchased Western Pneumatic Tube for $188 million. This acquisition aligns extremely well with our strategy to seek businesses with secure, leading positions in growing, profitable, attractive markets. Western established for us a strong competitive position in the higher return, higher growth aerospace market. In 2013, we acquired two smaller, complementary businesses in this aerospace tubing platform.

On July 1, 2014, we purchased the three Tempur Sealy U.S. innerspring component production facilities for $45 million. This additional volume should enhance our economies of scale, benefit from our vertical integration in steel rod and wire, and allow manufacturing optimization across a broad asset base. In 2014, we also acquired Kintec-Solution, a German designer and distributor of high-end, European-styled motion components for residential furniture.

Additional details about these and other smaller acquisitions can be found in Note R to the Consolidated Financial Statements on page 109.
 

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Pay Dividends
    
 

Dividends are one of the primary means by which we return cash to shareholders. During 2012, we declared four quarterly dividends, but paid five, given our decision to accelerate into December 2012 the dividend typically paid in January 2013 (of $41 million) in anticipation of tax rate increases on individual taxpayers. The chart above reflects that accelerated dividend payment. In 2013, we returned to our prior practice and paid the fourth quarter dividend in January 2014. Therefore, the cash requirement for dividends in 2013 was lower, at $125 million.

Maintaining and increasing the dividend remains a high priority. In 2014, we increased the quarterly dividend to $.31 per share and extended to 43 years our record of consecutive annual dividend increases, at an average compound growth rate of 13%. Our targeted dividend payout ratio is approximately 50-60% of net earnings. The actual payout ratio has been higher in recent years, but as earnings grow, we expect to move into that target range.

Repurchase Stock

            

Stock repurchases are the other means by which we return cash to shareholders. As shown in the chart above, share repurchases were significant in 2013 and 2014. During those two years, we repurchased a total of 11.4 million shares of our stock and issued 7.1 million shares through employee benefit and stock purchase plans. Consistent with our stated plans to repurchase fewer shares in years when acquisition spending is higher, our share repurchases in 2012 were much lower, given the $188 million we invested to acquire Western Pneumatic Tube. In that year, our

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outstanding shares increased as we repurchased 2.0 million shares and issued 4.7 million shares through employee programs. For the three years combined, we repurchased a total of 13.4 million shares of our stock and issued 11.8 million shares, reducing outstanding shares by 1.1%. In 2014, we repurchased 5.4 million shares (at an average of $33.76) and issued 3.9 million shares (at an average of $22.73). Issuances were largely related to employee stock option exercises.
 
Consistent with our stated priorities, we expect to use remaining operating cash (after funding capital expenditures, dividends, and acquisitions) to prudently buy back our stock, subject to the outlook for the economy, our level of cash generation, and potential opportunities to strategically grow the company. 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.

Capitalization
 
This table presents key debt and capitalization statistics at the end of the three most recent years.
 
(Dollar amounts in millions)
2014
 
2013
 
2012
Long-term debt outstanding:
 
 
 
 
 
Scheduled maturities
$
767

 
$
673

 
$
854

Average interest rates (1) 
4.6
%
 
4.6
%
 
4.7
%
Average maturities in years (1)
6.4

 
4.7

 
4.9

Revolving credit/commercial paper

 
16

 

Average interest rate

 
.2
%
 

Total long-term debt
767

 
689

 
854

Deferred income taxes and other liabilities
226

 
191

 
228

Equity
1,155

 
1,399

 
1,442

Total capitalization
$
2,148

 
$
2,279

 
$
2,524

Unused committed credit:
 
 
 
 
 
Long-term
$
600

 
$
584

 
$
600

Short-term

 

 

Total unused committed credit
$
600

 
$
584

 
$
600

Current maturities of long-term debt
$
202

 
$
181

 
$
202

Cash and cash equivalents
$
333

 
$
273

 
$
359

Ratio of earnings to fixed charges (2)
6.0 x

 
4.8 x

 
5.8 x

___________________________________________
(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)
Fixed charges include interest expense, capitalized interest, plus implied interest included in operating leases. Earnings consist principally of income from continuing operations before income taxes, plus fixed charges.


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The next table shows the percent of long-term debt to total capitalization at December 31, 2014 and 2013, calculated in two ways:
 
Long-term debt to total capitalization as reported in the previous table.
Long-term debt to total capitalization each reduced by total cash and increased by current maturities of long-term debt.
 
We believe that adjusting this measure for cash and current maturities allows a more useful comparison to periods during which cash fluctuates significantly. We use these adjusted measures to monitor our financial leverage.
 
(Dollar amounts in millions)
2014
 
2013
Long-term debt
$
767

 
$
689

Current debt maturities
202

 
181

Cash and cash equivalents
(333
)
 
(273
)
Net debt
$
636

 
$
597

Total capitalization
$
2,148

 
$
2,279

Current debt maturities
202

 
181

Cash and cash equivalents
(333
)
 
(273
)
Net capitalization
$
2,017

 
$
2,187

Long-term debt to total capitalization
35.7
%
 
30.2
%
Net debt to net capitalization
31.5
%
 
27.3
%
 
Total debt (which includes long-term debt and current debt maturities) increased $99 million in 2014. In November, we issued $300 million aggregate principal of 10-year notes at a rate of 3.8% per year, and repaid $180 million of 4.65% notes that matured. We also repaid outstanding commercial paper.

In 2013, we repaid $200 million of 4.7% notes that matured. We funded the payoff with a combination of cash and commercial paper.

In August 2012, we issued $300 million of 10-year notes at a rate of 3.4% per year. As a part of this issuance, we also settled forward starting interest swaps and recognized a loss that will be amortized over the life of the notes. The fully weighted effective interest rate associated with these notes is 5.0%.


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Short Term Borrowings
 
We can raise cash by issuing up to $600 million in commercial paper through a program that is backed by a $600 million revolving credit agreement with a syndicate of 12 lenders. This agreement expires in 2019. The credit agreement allows us to issue letters of credit totaling up to $250 million. When we issue letters of credit in this manner, our capacity under the agreement, and consequently, our ability to issue commercial paper, is reduced by a corresponding amount. Amounts outstanding related to our commercial paper program were:
 
(Dollar amounts in millions)
2014
 
2013
 
2012
Total program authorized
$
600

 
$
600

 
$
600

Commercial paper outstanding (classified as long-term debt)

 
(16
)
 

Letters of credit issued under the credit agreement

 

 

Total program usage

 
(16
)
 

Total program available
$
600

 
$
584

 
$
600

 
The average and maximum amount of commercial paper outstanding during 2014 was $156 million and $300 million, respectively. During the fourth quarter, the average and maximum amounts outstanding were $61 million and $167 million respectively. At year end, we had no letters of credit outstanding under the credit agreement, but we had $69 million of stand-by letters of credit outside the agreement to take advantage of more attractive fee pricing.
 
In August 2015, we have $200 million of 5.0% notes that mature. With operating cash flows, our commercial paper program, and our ability to issue debt in the capital markets, we believe we have sufficient funds available to repay maturing debt, as well as support our ongoing operations, pay dividends, fund future growth, and repurchase stock.
 
Accessibility of Cash
 
At December 31, 2014, we had cash and cash equivalents of $333 million primarily invested in interest-bearing bank accounts and in bank time deposits with original maturities of three months or less.
 
A substantial portion of these funds are held in the international accounts of our foreign operations. Though we do not rely on this foreign cash as a source of funds to support our ongoing domestic liquidity needs, we believe we could bring most of this cash back to the U.S. over a period of two to three years without material cost. However, due to capital requirements in various jurisdictions, approximately $89 million of this cash is currently inaccessible for repatriation. Additionally, if we had to bring all of the foreign cash back immediately in the form of dividends, we would incur incremental tax expense of up to approximately $82 million. In 2014, 2013, and 2012, we brought back $129 million, $119 million, and $50 million (respectively) of cash, in each case at little to no added tax cost.
 

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CONTRACTUAL OBLIGATIONS
 
The following table summarizes our future contractual cash obligations and commitments at December 31, 2014:
 
 
 
 
Payments Due by Period
Contractual Obligations
Total
 
Less
Than 1
Year
 
1-3
Years
 
3-5
Years
 
More
Than 5
Years
(Dollar amounts in millions)
 
 
 
Long-term debt ¹
$
963

 
$
201

 
$
4

 
$
152

 
$
606

Capitalized leases
5

 
1

 
3

 
1

 

Operating leases
130

 
38

 
48

 
23

 
21

Purchase obligations ²
287

 
287

 

 

 

Interest payments ³
222

 
35

 
57

 
47

 
83

Deferred income taxes
42

 

 

 

 
42

Other obligations (including pensions and net reserves for tax contingencies) 4
194

 
4

 
37

 
15

 
138

Total contractual cash obligations
$
1,843

 
$
566

 
$
149

 
$
238

 
$
890


_______________________________________________________________________________
1.
The long-term debt payment schedule presented above could be accelerated if we were not able to make the principal and interest payments when due.
2.
Purchase obligations primarily include open short-term (30-120 days) purchase orders that arise in the normal course of operating our facilities.
3.
Interest payments are calculated on debt outstanding at December 31, 2014 at rates in effect at the end of the year.
4.
Other obligations include our net reserves for tax contingencies in the "More Than 5 Years" column because these obligations are long-term in nature and actual payment dates can not be specifically determined. Other obligations also include our current estimate of minimum contributions to defined benefit pension plans.


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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. To do so, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosures. If we used different estimates or judgments our financial statements would change, and some of those changes could be significant. Our estimates are frequently based upon historical experience and are considered by management, at the time they are made, to be reasonable and appropriate. Estimates are adjusted for actual events, as they occur.
 
“Critical accounting estimates” are those that are: a) subject to uncertainty and change, and b) of material impact to our financial statements. Listed below are the estimates and judgments which we believe could have the most significant effect on our financial statements.
 
We provide additional details regarding our significant accounting policies in Note A to the Consolidated Financial Statements on page 74.
 
Description
 
Judgments and
Uncertainties
 
Effect if Actual Results
Differ From Assumptions
Goodwill
 
 
 
 
Goodwill is assessed for impairment annually as of June 30 and as triggering events occur.

In July 2014, we concluded that an impairment was required related to the goodwill of the Store Fixtures group, which was formerly part of the Commercial Fixturing & Components segment and is now reported in discontinued operations. A non-cash charge of $108 million was recorded in the second quarter of 2014 for the complete write-off of the goodwill associated with this business.

In December 2013, we concluded that an impairment was required relating to the goodwill of the Commercial Vehicle Products (CVP) group. A non-cash charge of $63 million was recorded in the fourth quarter of 2013.
 
In order to assess goodwill for potential impairment, judgment is required to estimate the fair market value of each reporting unit (which is one level below reportable segments) using the combination of a discounted cash flow model and a market approach using price to earnings ratios for comparable publicly traded companies with characteristics similar to the reporting unit.
 
The cash flow model contains uncertainties related to the forecast of future results as many outside economic and competitive factors can influence future performance. Margins, sales growth, and discount rates are the most critical estimates in determining enterprise values using the cash flow model.

The market approach requires judgment to determine the appropriate price to earnings ratio. Ratios are derived from comparable publicly-traded companies that operate in the same or similar industry as the reporting unit.

 
The remaining goodwill associated with the CVP reporting unit is $13 million. A further decline in the long-term outlook for the business could result in future impairments.
 
At December 31, 2014, all reporting units have fair values that exceed carrying value by more than 40%, and have goodwill of $819 million.  
 
Information regarding material assumptions used to determine if a goodwill impairment exists can be found in Note C to the Consolidated Financial Statements on page 79.


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Description
 
Judgments and
Uncertainties
 
Effect if Actual Results
Differ From Assumptions
Other Long-lived Assets
 
 
 
 
Other long-lived assets are tested for recoverability at year-end and whenever events or circumstances indicate the carrying value may not be recoverable.
 
For other long-lived assets we estimate fair value at the lowest level where cash flows can be measured (usually at a branch level).
 
Impairments of other long-lived assets usually occur when major restructuring activities take place, or we decide to discontinue product lines completely.
 
Our impairment assessments have uncertainties because they require estimates of future cash flows to determine if undiscounted cash flows are sufficient to recover carrying values of these assets.
 
For assets where future cash flows are not expected to recover carrying value, fair value is estimated which requires an estimate of market value based upon asset appraisals for like assets.
 
These impairments are unpredictable. Impairments were $1 million in 2014, and $2 million in 2013 and 2012.
 

Inventory Reserves
 
 
 
 
We reduce the carrying value of inventories to reflect an estimate of net realizable value for obsolete and slow-moving inventory.

We value inventory at net realizable value (what we think we will recover.) Generally a reserve is not required unless we have more than a one-year's supply of the product. If we have had no sales of a given product for 12 months, those items are generally deemed to have no value and are written down completely.

 
Our inventory reserve contains uncertainties because the calculation requires management to make assumptions about the value of products that are obsolete or slow-moving (i.e. not selling very quickly).

Changes in customer behavior and requirements can cause inventory to quickly become obsolete or slow moving.
 
The calculation also uses an estimate of the ultimate recoverability of items identified as slow moving based upon historical experience (65% on average).
 
At December 31, 2014, the reserve for obsolete and slow-moving inventory was $30 million (approximately 6% of FIFO inventories). This is consistent with the December 31, 2013 and 2012 reserves of $36 million in each year, representing 6% of FIFO inventories.

Additions to inventory reserves in 2014 were $10 million, which were comparable to the previous year. We do not expect obsolescence to change from current levels.


 

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Description
 
Judgments and
Uncertainties
 
Effect if Actual Results
Differ From Assumptions
Workers’ Compensation
 
 
 
 
We are substantially self-insured for costs related to workers’ compensation, and this requires us to estimate the liability associated with this obligation.
 
Our estimates of self-insured reserves contain uncertainties regarding the potential amounts we might have to pay (since we are self-insured). We consider a number of factors, including historical claim experience, demographic factors, and potential recoveries from third party insurance carriers.
 
Over the past five years, we have incurred, on average, $9 million annually for costs associated with workers’ compensation. Average year-to-year variation over the past five years has been approximately $1 million. At December 31, 2014, we had accrued $36 million to cover future self-insurance liabilities.
 
Internal safety statistics and cost trends have improved in the last several years and are expected to remain at current lower levels for the foreseeable future.
Credit Losses
 
 
 
 
For accounts and notes receivable, we estimate a bad debt reserve for the amount that will ultimately be uncollectible.
 
When we become aware of a specific customer’s potential inability to pay, we record a bad debt reserve for the amount we believe may not be collectible.


 
Our bad debt reserve contains uncertainties because it requires management to estimate the amount uncollectible based upon an evaluation of several factors such as the length of time that receivables are past due, the financial health of the customer, industry and macroeconomic considerations, and historical loss experience.

Our customers are diverse and many are small-to-medium sized companies, with some being highly leveraged. Bankruptcy can occur with some of these customers relatively quickly and with little warning.

 
A significant change in the financial status of a large customer could impact our estimates.
 
The average annual amount of customer-related bad debt expense was $5 million (less than 1% of annual net sales) over the last three years. At December 31, 2014, our reserves for doubtful accounts totaled $17 million (about 3% of our accounts and customer-related notes receivable of $488 million).

We have not experienced any significant individual customer bankruptcies in the past three years. We believe the financial health of our major customers has modestly improved, but some are highly leveraged, and this could cause circumstances to change in the future.
 
At December 31, 2014, we had $4 million of non-customer notes receivable, primarily related to divested businesses, and have recorded reserves of less than $1 million for these notes. Most of these notes are to be paid by highly leveraged entities, which could result in the need for additional reserves in the future.


 




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Description
 
Judgments and
Uncertainties
 
Effect if Actual Results
Differ From Assumptions
Pension Accounting
 
 
 
 
For our pension plans, we must estimate the cost of benefits to be provided (well into the future) and the current value of those benefit obligations.


 
The pension liability calculation contains uncertainties because it requires management to estimate an appropriate discount rate to calculate the present value of future benefits paid, which also impacts current year pension expense.
 
Determination of pension expense requires an estimate of expected return on pension assets based upon the mix of investments held (bonds and equities). 

Other assumptions include rates of compensation increases, withdrawal and mortality rates, and retirement ages. These estimates impact the pension expense or income we recognize and our reported benefit obligations.
 
The discount rates used to calculate the pension liability for our most significant plans decreased approximately 80 basis points in 2014 due to lower corporate bond yields. Each 25 basis point decrease in the discount rate increases pension expense by $.6 million and increases the plans’ benefit obligation by $12 million. 
 
The expected return on assets was 6.7% in 2014, and 6.6% in 2013 and 2012. A 25 basis point reduction in the expected return on assets would increase pension expense by $.6 million, but have no effect on the plans’ funded status. Assuming a long-term investment horizon, we do not expect a material change to the return on asset assumption.

Mortality assumptions represent our best estimate of the duration of future benefit payments at the measurement date. These estimates are based on each plans' demographics and other relevant facts and circumstances. Longer life expectancies increased our pension liability for our most significant plans by approximately $20 million in 2014.

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Contingencies
 
 
 
 
We evaluate various legal, environmental, and other potential claims against us to determine if an accrual or disclosure of the contingency is appropriate. If it is probable that an ultimate loss will be incurred, we accrue a liability for the reasonable estimate of the ultimate loss.
 
Our disclosure and accrual of loss contingencies (i.e., losses that may or may not occur) contain uncertainties because they are based on our assessment of the likelihood that the expenses will actually occur, and our estimate of the likely cost. Our estimates and judgments are subjective and can involve matters in litigation, the results of which are generally unpredictable.
 
Legal contingencies are related to numerous lawsuits and claims described beginning on page 53. In the four years prior to 2014, the largest annual cost for litigation claims was $6 million (excluding legal fees).

We recorded expense during 2014 for various proceedings and other claims. By far the largest portion of these accruals was associated with a group of antitrust lawsuits related to alleged price fixing of prime foam and carpet underlay products as discussed in Note T to the Consolidated Financial Statements on page 113. In August 2014, we reached a tentative settlement in the U.S. direct purchaser class action cases by agreeing to pay an aggregate amount of $39.8 million, inclusive of attorneys' fees and costs. Because this accrual is partially attributable to our former Prime Foam Products business sold in 2007, $8.3 million is reflected in discontinued operations.

In addition to the above, we recorded litigation accruals in continuing operations of $22 million in the fourth quarter of 2014 which represents our reasonable estimate of unrecorded probable loss for all pending and threatened litigation proceedings impacting continuing operations. We also recorded an additional $27 million litigation contingency accrual in discontinued operations during the fourth quarter.


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Description
 
Judgments and
Uncertainties
 
Effect if Actual Results
Differ From Assumptions
Income Taxes
 
 
 
 
In the ordinary course of business, we must make estimates of the tax treatment of many transactions, even though the ultimate tax outcome may remain uncertain for some time. These estimates become part of the annual income tax expense reported in our financial statements. Subsequent to year end, we finalize our tax analysis and file income tax returns. Tax authorities periodically audit these income tax returns and examine our tax filing positions, including (among other things) the timing and amounts of deductions, and the allocation of income among tax jurisdictions. If necessary, we adjust income tax expense in our financial statements in the periods in which the actual outcome becomes more certain.
 
Our tax liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures related to our various filing positions.
 
Our effective tax rate is also impacted by changes in tax laws, the current mix of earnings by taxing jurisdiction, and the results of current tax audits and assessments. 

At December 31, 2014 and 2013, we had $34 million and $45 million, respectively, of net deferred tax assets on our balance sheet related to net operating losses and other tax carryforwards. The ultimate realization of these deferred tax assets is dependent upon the amount, source, and timing of future taxable income. Valuation allowances are established against future potential tax benefits to reflect the amounts we believe have no more than a 50% probability of being realized. In addition, assumptions have been made regarding the non-repatriation of earnings from certain subsidiaries. Those assumptions may change in the future, thereby affecting future period results for the tax impact of possible repatriation.
 
Potential changes in tax laws could impact assumptions related to the non-repatriation of certain foreign earnings. If all non-repatriated earnings were taxed at current rates, we would incur additional taxes of approximately $82 million.
 
Audits by various taxing authorities continue as governments look for ways to raise additional revenue. Based upon past audit experience, we do not expect any material changes to our tax liability as a result of this audit activity; however, we could incur additional tax expense if we have audit adjustments higher than recent historical experience.

The likelihood of recovery of net operating losses and other tax carryforwards has been closely evaluated and is based upon such factors as the time remaining before expiration, viable tax planning strategies, and future taxable earnings expectations. We believe that appropriate valuation allowances have been recorded as necessary. However, if earnings expectations or other assumptions change such that additional valuation allowances are required, we could incur additional tax expense. Likewise, if fewer valuation allowances are needed, we could incur reduced tax expense.



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CONTINGENCIES
 
We are a party to various proceedings and matters involving employment, antitrust, intellectual property, environmental, taxation and other laws. When it is probable, in management’s judgment, that we may incur monetary damages or other costs resulting from these proceedings or other claims, and we can reasonably estimate the amounts, we record appropriate liabilities in the financial statements and make charges against earnings. For all periods presented, we have recorded no material charges against earnings other than as indicated below.
Foam Antitrust Lawsuits
We deny all allegations in all pending antitrust proceedings. We will vigorously defend ourselves in all proceedings and believe that we have valid bases to contest all claims. However, we have established an accrual for the estimated amount that we believe is necessary to resolve all antitrust matters. We also believe and expect, based on current facts and circumstances, that any reasonably possible losses incremental to the recorded accrual will not have a material impact on our consolidated financial position, results of operations or cash flows. For specific information regarding accruals please see “Accrual for Loss Contingencies” below.
Beginning in August 2010, a series of civil lawsuits was initiated in several U.S. federal courts and in Canada against several defendants alleging that competitors of our carpet underlay business unit and other manufacturers of polyurethane foam products had engaged in price fixing in violation of U.S. and Canadian antitrust laws.
U.S. Direct Purchaser Class Action Cases. We were named as a defendant in three pending direct purchaser class action cases (the first on November 15, 2010) on behalf of a class of all direct purchasers of polyurethane foam products. The direct purchaser class action cases were all filed in or were transferred to the U.S. District Court for the Northern District of Ohio under the name In re: Polyurethane Foam Antitrust Litigation, Case No. 1:10-MD-2196.
The plaintiffs, on behalf of themselves and/or a class of direct purchasers, seek three times the amount of damages allegedly suffered as a result of alleged overcharges in the price of polyurethane foam products from at least 1999 to the present. Each plaintiff also seeks attorney fees, pre-judgment and post-judgment interest, court costs, and injunctive relief against future violations. We filed motions to dismiss the U.S. direct purchaser class actions in the consolidated case in Ohio, for failure to state a legally valid claim, which were denied by the Ohio Court. A motion for class certification was filed on behalf of the direct purchasers. A hearing on the motion was held and the Court certified the direct purchaser class. We filed a Petition for Permission to Appeal from Class Certification Order to the United States Court of Appeals for the Sixth Circuit which was denied. The Court ordered all parties to attend non-binding mediation with a mediator of their choosing.
Tentative Settlement of U.S. Direct Purchaser Class Action Cases. We reached a tentative settlement in the U.S. direct purchaser class action cases on August 14, 2014, by agreeing to pay an aggregate amount of $39.8 million, inclusive of plaintiff attorneys' fees and costs. We continue to deny all allegations in the cases, but settled the direct purchaser class cases to avoid the risk, uncertainty, expense and distraction of litigation. The settlement is subject to Court approval. We recorded a $39.8 million (pre-tax) accrual for the settlement in the third quarter 2014. In the fourth quarter of 2014, we paid $4 million to the Court related to the tentative settlement. Since the accrual is partially attributable to our former Prime Foam Products business, which was sold in the first quarter of 2007, $8.3 million of expense is reflected in discontinued operations. The deadline for direct purchasers to exclude themselves from the litigation and settlement classes was January 26, 2015. A final fairness hearing was held on February 3, 2015, but we have not yet received a ruling.
U.S. Indirect Purchaser Class Action Cases. We were named as a defendant in an indirect purchaser class consolidated amended complaint filed on March 21, 2011 and were subsequently sued in an indirect purchaser class action case filed on May 23, 2011, in the U.S. District Court for the Northern District of Ohio under the name In re: Polyurethane Foam Antitrust Litigation, Case No. 1:10-MD-2196. The plaintiffs, on behalf of themselves and/or a

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class of indirect purchasers, bring damages claims under various states’ antitrust and consumer protection statutes, and are seeking three times an amount of damages allegedly suffered as a result of alleged overcharges in the price of polyurethane foam products from at least 1999 to the present. Each plaintiff also seeks attorney fees, pre-judgment and post-judgment interest, court costs, and injunctive relief against future violations. We filed motions to dismiss the indirect purchaser class action, for failure to state a legally valid claim. The Ohio Court denied the motions to dismiss. Discovery is substantially complete in this case. A motion for class certification was filed on behalf of the indirect purchasers. A hearing on the motion was held and the Court certified the indirect purchaser class. We filed a Petition for Permission to Appeal from Class Certification Order to the United States Court of Appeals for the Sixth Circuit, which was denied. On November 18, 2014, we filed a Petition for a Writ of Certiorari in the U.S. Supreme Court where it remains pending. The Ohio Court ordered all parties to attend non-binding mediation with a mediator of their choosing.
U.S. Individual Direct Purchaser Cases. We have been named as a defendant in 35 individual direct purchaser cases filed between March 22, 2011 and October 16, 2013, which were filed in or transferred to the U.S. District Court for the Northern District of Ohio under the name In re: Polyurethane Foam Antitrust Litigation, Case No. 1:10-MD-2196. The claims in the individual direct purchaser cases are generally the same as those asserted in the direct purchaser class action case, with the exception of one case that also alleges an indirect purchaser claim. Additionally, several individual direct purchaser plaintiffs bring state claims under individual states’ consumer protection and/or antitrust statutes in addition to their federal claims. Once pretrial practice concludes, some of the individual direct purchaser cases are scheduled to be tried in the U.S. District Court for the Northern District of Ohio and others will be remanded back to the federal district courts where the cases were originally filed for trial.
Kansas Restraint of Trade Act Cases. We have been named as a defendant in two individual cases alleging direct and indirect purchaser claims under the Kansas Restraint of Trade Act, one filed on November 29, 2012 and the other on April 11, 2013. These two cases were filed in the U.S. District Court for the District of Kansas and then transferred to the U.S. District Court for the Northern District of Ohio under the name In re: Polyurethane Foam Antitrust Litigation, Case No. 1:10-MD-2196. The claims and allegations of these plaintiffs are generally the same as the other direct and indirect purchaser plaintiffs, with the exception that the Kansas plaintiffs seek full consideration damages (their total purchase amounts for the allegedly price-fixed polyurethane foam products). Once pretrial practice concludes, this case will be remanded back to the District of Kansas federal district court for trial.
Canadian Class Action Cases. We were named in two Canadian class action cases (for direct and indirect purchasers of polyurethane foam products), both under the name Hi Neighbor Floor Covering Co. Limited and Hickory Springs Manufacturing Company, et.al. in the Ontario Superior Court of Justice (Windsor), Court File Nos. CV-10-15164 (amended November 2, 2011) and CV-11-17279 (issued December 30, 2011). In each of these Canadian cases, the plaintiffs, on behalf of themselves and/or a class of purchasers, seek from over 13 defendants restitution of the amount allegedly overcharged, general and special damages in the amount of $100 million, punitive damages of $10 million, pre-judgment and post-judgment interest, and the costs of the investigation and the action. The first issued class action is on behalf of a class of purchasers of polyurethane foam. The second issued class action is on behalf of purchasers of carpet underlay. We are not yet required to file our defenses in these or any other Canadian actions. In addition, on July 10, 2012, plaintiff in a class action case (for direct and indirect purchasers of polyurethane foam products) styled Option Consommateurs and Karine Robillard v. Produits Vitafoam Canada Limitée, et. al. in the Quebec Superior Court of Justice (Montréal), Court File No. 500-6-524-104, filed an amended motion for authorization seeking to add us and other manufacturers of polyurethane foam products as defendants in this case, which was granted. This action has a pending motion for certification, which has been postponed indefinitely. We also were notified in June 2014 of two motions to add us as parties to two class proceedings in British Columbia. Those proceedings are similar to the Ontario proceedings in that one proposes a class of purchasers of polyurethane foam (Majestic Mattress Mfg. Ltd. v. Vitafoam Products et al., No. VLC-S-S-106362 Vancouver Registry) and one proposes a class of purchasers of carpet underlay (Trillium Project Management Ltd. v. Hickory Springs Manufacturing Company et al., No.S106213 Vancouver Registry). The motion to add us as parties to these actions has been scheduled to be heard with the motions for certification in the two actions in April 2015. The British Columbia actions involve British Columbia purchasers only whereas the Ontario

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actions propose classes of Canadian purchasers. No certification motions will be brought in the Ontario actions until after the British Columbia motions for certification have been determined.
Missouri Class Action Case. On June 22, 2012, we were made a party to a lawsuit brought in the 16th Judicial Circuit Court, Jackson County, Missouri, Case Number 1216-CV15179 under the caption “Dennis Baker, on Behalf of Himself and all Others Similarly Situated vs. Leggett & Platt, Incorporated.” The plaintiff, on behalf of himself and/or a class of indirect purchasers of polyurethane foam products in the State of Missouri, alleged that we violated the Missouri Merchandising Practices Act based upon our alleged illegal price inflation of flexible polyurethane foam products. The plaintiff seeks unspecified actual damages, punitive damages and the recovery of reasonable attorney fees. We filed a motion to dismiss this action, which was denied. Discovery has commenced and plaintiff has filed a motion for class certification. A hearing on the motion was held but we have yet to receive any ruling.
Brazilian Value-Added Tax Matters
We deny all of the allegations in all of the below Brazilian actions. We believe that we have valid bases upon which to contest such actions and will vigorously defend ourselves. However, these contingencies are subject to many uncertainties, and based on current facts and circumstances, we believe that it is reasonably possible (but not probable) that we may incur losses with respect to these assessments. Therefore, no accrual has been recorded for Brazilian VAT matters.
Brazilian Federal Cases. On December 22, 2011, the Brazilian Finance Ministry, Federal Revenue Office issued a notice of violation against our wholly-owned subsidiary, Leggett & Platt do Brasil Ltda. (“L&P Brazil”) in the amount of $2.7 million, under Case No. 10855.724660/2011-43. The Brazilian Revenue Office claimed that for the period beginning November 2006 and continuing through December 2007, L&P Brazil used an incorrect tariff code for the collection and payment of value-added tax primarily on the sale of mattress innerspring units in Brazil. L&P Brazil responded to the notice of violation denying the violation. The Federal Revenue Office denied L&P Brazil’s defenses and upheld the assessment at the first administrative level. L&P Brazil has filed an appeal.
On December 29, 2011, L&P received another assessment in the amount of $.1 million, under case No. 10855.724509/2011-13 on the same subject matter in connection to certain import transactions carried out between 2007 and 2011. L&P has filed its defense.
On December 17, 2012, the Brazilian Revenue Office issued an additional notice of violation in the amount of $4.7 million under MPF Case No. 10855.725260/2012-36 covering the period from January 1, 2008 through December 31, 2010 on the same subject matter. L&P Brazil responded to the notice of violation denying the violation. The Brazilian Revenue Office denied L&P Brazil's defenses and upheld the assessment at the first administrative level. L&P Brazil has appealed this decision, but the appeal was denied by the second administrative level on January 27, 2015.
In addition, L&P Brazil received assessments on December 22, 2011, and June 26, July 2 and November 5, 2012, and September 13, 2013 from the Brazilian Federal Revenue Office where the Revenue Office challenged L&P Brazil’s use of certain tax credits in the years 2005 through 2010. Such credits are generated based upon the tariff classification and rate used by L&P Brazil for value-added tax on the sale of mattress innersprings. On September 4, 2014, the tax authorities issued five additional assessments regarding this same issue (use of credits), covering certain periods of 2011 and 2012. L&P Brazil has filed its defense to all of these assessments. Combined with the prior assessments, L&P Brazil has received assessments totaling $3.1 million on the same or similar denial of tax credit matters.
On February 1, 2013, the Brazilian Finance Ministry filed a Tax Collection action against L&P Brazil in the Camanducaia Judicial District Court, Case No. 0002222-35.2013.8.13.0878, alleging the untimely payment of $.2 million of social contributions (social security and social assistance payments) for the period September to October 2010. L&P Brazil filed its response, a Motion to Stay of Execution. L&P Brazil argued the payments were not required to be made because of the application of certain tax credits that were generated by L&P Brazil's use of a

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correct tariff code for the classification of value-added tax on the sale of mattress innersprings (i.e., the same underlying issue at stake in the other Brazilian matters).
On June 26, 2014, the Brazilian Revenue Office issued a new notice of violation against L&P Brazil in the amount of $.9 million, under Case No. 10660.721523/2014-87, covering the period from 2011 through 2012 on the same subject matter. L&P Brazil has filed its defense denying the assessments.
On July 1, 2014, the Brazilian Finance Ministry rendered a preliminary decision to reject certain offsetting requests presented by L&P Brazil, which originated with Administrative Proceeding No. 10660.720850/2014-11. The Brazilian Finance Ministry alleges that L&P Brazil improperly offset $.1 million of social contributions otherwise due in 2011. L&P Brazil filed its response denying the allegations. L&P Brazil is defending on the basis that the social contribution debts were correctly offset with certain tax credits that were generated by L&P Brazil's use of a correct tariff code classification for value-added tax on the sale of mattress innersprings (i.e., the same underlying issue at stake in the other Federal Brazilian matters).
On September 4, 2014, the Brazilian Federal Revenue issued an assessment against L&P Brazil in the amount of $.2 million, for the period of April 2011 through June 2012, as a penalty for L&P Brazil’s requests to offset certain tax credits. We have filed our defense.
State of São Paulo, Brazil Cases. L&P Brazil is party to a proceeding involving the State of São Paulo, Brazil where the State of São Paulo, on April 16, 2009, issued a Notice of Tax Assessment and Imposition of Fine to L&P Brazil seeking $2.1 million for the tax years 2006 and 2007, under Case No. 3.111.006 (DRT n°.04-256.169/2009). The State of São Paulo argued that L&P Brazil was using an incorrect tariff code for the collection and payment of value-added tax on sales of mattress innerspring units in the State of São Paulo. The Court of Tax and Fees of the State of São Paulo ruled in favor of L&P Brazil nullifying the tax assessment. The State filed a special appeal and the Special Appeals court remanded the case back to the Court of Tax and Fees for further findings. The Court of Tax and Fees again ruled in favor of L&P Brazil and nullified the tax assessment. The State filed another special appeal. On April 17, 2014, the Court of Tax and Fees ruled in the State's favor upholding the original assessment of $2.1 million. On July 31, 2014, L&P Brazil filed an annulment action, Case No. 101712346.2014.8260602 in the Sorocaba State Court, seeking to have the Court of Tax and Fees ruling annulled for an updated assessment amount of $4.2 million. On December 3, 2014, the State of São Paulo filed a Tax Collection action against L&P Brazil in Sorocaba Judicial District Court, Case No. 1501115-34.2014.8.26.0602, seeking to collect the same amounts at issue in annulment action No. 101712346.2014.8260602. The original assessment amount of $4.2 million was increased by 10% to include attorneys' fees.
On October 4, 2012, the State of São Paulo issued a Tax Assessment under Procedure Number 4.003.484 against L&P Brazil in the amount of $1.7 million for the tax years 2009 through 2011. Similar to the 2009 assessment, the State of São Paulo argues that L&P Brazil was using an incorrect tax rate for the collection and payment of value-added tax on sales of mattress innerspring units in the State of São Paulo. On June 21, 2013, the State of São Paulo's attorneys converted the Tax Assessment No. 4.003.484 to a tax collection action against L&P Brazil in the amount of $2.2 million, under Sorocaba Judicial District Court, Case No. 3005528-50.2013.8.26.0602. L&P Brazil filed its response, a Motion to Stay of Execution denying the allegations.
L&P Brazil also received a Notice of Tax Assessment and Imposition of a Fine from the State of São Paulo dated March 27, 2014, under Procedure Number 4.038.746-0 against L&P Brazil in the amount of $1.1 million for the tax years January 2011 through August 2012 regarding the same subject matter. L&P filed its response denying the allegations. The first administrative level denied L&P Brazil’s defense and upheld the assessment. L&P Brazil filed its appeal of this decision.
State of Minas Gerais, Brazil Cases. On December 18, 2012, the State of Minas Gerais, Brazil issued a tax assessment to L&P Brazil relating to L&P Brazil's classifications of innersprings for the collection and payment of value-added tax on the sale of mattress innersprings in Minas Gerais from March 1, 2008 through August 31, 2012 in the amount of $.5 million, under PTA Case No. 01.000.182756-62. L&P Brazil filed its response denying any violation. The first administrative level ruled against us but did reduce the tax to $.3 million (plus interest and

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penalties). We appealed to the second administrative level, which affirmed the first administrative level ruling. The case will now proceed judicially under Case No. 0003673-61.2014.8.13.0878 in Camanducaia Judicial District Court for the updated amount of $.5 million. L&P Brazil filed its response, a Motion to Stay of Execution, on June 5, 2014.
Patent Infringement Claim
At this time, we do not expect that the outcome of this matter will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
First Lawsuit. On January 24, 2012, in a case in the United States District Court for the Central District of California, the jury entered a verdict against us in the amount of $5 million based upon an allegation by plaintiff that we infringed three patents on an automatic stapling machine and on methods used to assemble boxsprings. This action was originally filed on October 4, 2010, as case number CV10-7416 RGK (SSx) under the caption Imaginal Systematic, LLC v. Leggett & Platt, Incorporated; Simmons Bedding Company; and Does 1 through 10, inclusive. Leggett is contractually obligated to defend and indemnify Simmons Bedding Company against a claim for infringement.
On summary judgment motions, we unsuccessfully disputed each patent’s validity and denied that we infringed any patent. At the jury trial on damages issues, the plaintiff alleged damages of $16.2 million. The court denied plaintiff’s attempt to win an attorney fee award and triple the pre-verdict damages. We appealed the case to the Federal Circuit Court of Appeals. Oral argument was held before a three judge appeal panel in the Federal Circuit in Washington D.C. The Court of Appeals issued a judgment affirming the $5 million verdict against us, which was fully accrued for in the first quarter of 2013 and then paid in the second quarter of 2013. We filed a petition for a rehearing of the Court of Appeals decision which was denied.
The plaintiff requested royalties for post-verdict use of the machines, and requested pre-judgment interest in the amount of $.7 million. The District Court ruled that the plaintiff was not entitled to additional ongoing royalties for our continued use of the machines, but did award pre-judgment interest of $.5 million. Both parties filed a notice of appeal of this order to the Federal Circuit Court of Appeals, but plaintiff has since withdrawn its appeal.
We also filed reexamination proceedings in the Patent Office (Case Nos. 95/001,543 filed February 11, 2011; 95/001,546 and 95/001,547 filed February 16, 2011), challenging the validity of each patent at issue in the lawsuit the plaintiff brought. The Patent Office examiner ruled in our favor on the key claims of one of the three patents. The Patent Office examiner initially ruled in our favor on the pertinent claims of the second of the patents, but subsequently reversed that decision. With respect to the third patent, the Patent Office examiner's decision upheld the validity of all claims. All three of these proceedings were appealed to the Board of Patent Appeals. The plaintiff filed petitions to terminate all re-examination proceedings based on the final ruling of the Federal Circuit Court of Appeals. We opposed those petitions. The Patent Office terminated all three re-examination proceedings, and we requested an ex parte reexamination as to one of the patents. The Patent Office did not accept our request.
Second Lawsuit. On July 29, 2013, the plaintiff filed a second lawsuit in the United States District Court for the Central District of California, Case No. CV13-05463 alleging that we and Simmons Bedding Company have continued to infringe the three patents on an automatic stapling machine and the methods used to assemble boxsprings, and that the plaintiff is entitled to additional damages from January 24, 2012 forward. Leggett and Simmons Bedding Company filed their answers, and the Court granted summary judgment finding that the use of an earlier version of the automatic stapling machines constituted infringement, but also finding that use of a redesigned version of the machine does not infringe any Imaginal patent. On October 17, 2014, the parties entered into a Confidential Settlement Agreement and Limited Release, whereby Leggett agreed to pay Imaginal a cash payment, which is not material to the Company, to settle the part of the case concerning the machines found to infringe. Imaginal is appealing the summary judgment ruling that the redesigned stapling machines do not infringe to the U.S. Court of Appeals for the Federal Circuit. The appeal is currently pending.


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Accrual for Loss Contingencies
Although the Company denies liability in all threatened or pending litigation proceedings in which it is or may be a party and believes that it has valid bases to contest all claims threatened or made against it, we recorded, in addition to previously recognized unpaid accruals disclosed above, an additional aggregate (pre-tax) litigation accrual in continuing operations of $22 million in the fourth quarter of 2014 which represents our reasonable estimate of unrecorded probable loss for all pending and threatened litigation proceedings impacting continuing operations. We expect to make most of these cash payments in 2015 with the remainder expected to be paid in 2016. We have relied on several facts and circumstances that have changed since the filing of our last periodic report, most significantly in January 2015, to conclude that some loss is probable with respect to certain proceedings and matters, to arrive at a reasonable estimate of loss and record the accrual, including: the maturation of the pending proceedings and matters; our experience in settlement negotiations and mediation; comparative settlements of other companies in similar proceedings; discovery becoming substantially complete in certain proceedings; certain quantitative metrics used to value probable loss contingencies; and our willingness to settle certain proceedings to forgo the cost and risk of litigation and distraction to our senior executives. We also recorded an additional $27 million litigation contingency accrual in discontinued operations in the fourth quarter based upon the same facts, circumstances and analysis as described above. We expect to make most of these cash payments in 2015 with the remainder expected to be paid in 2016. By far the largest portion of the accruals is for the foam antitrust proceedings.
Although there are a number of uncertainties and potential outcomes associated with all of our pending or threatened litigation proceedings, we believe, based on current facts and circumstances, that additional reasonably possible losses (other than those Brazilian VAT matters quantified and disclosed above), are not expected to materially affect our consolidated financial position, results of operations or cash flows.
For more information regarding discontinued operations, please refer to Note B on page 77 of our Notes to Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
 
As discussed in Note A to the Consolidated Financial Statements on page 77, the FASB has issued accounting guidance effective for current and future periods. We are currently evaluating the newly issued guidance and the impact on our future financial statements. 



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