10-K
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, 2015

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.   ý 
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
ý
  
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, 2015 was $6,398,567,985.
There were 135,694,918 shares of the registrant’s common stock outstanding as of February 12, 2016.
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 17, 2016.


Table of Contents


TABLE OF CONTENTS
LEGGETT & PLATT, INCORPORATED—FORM 10-K
FOR THE YEAR ENDED December 31, 2015
 
Page
Number
1

PART I
Item 1.
2

 
 
 
Item 1A.
16

 
 
 
Item 1B.
19

 
 
 
Item 2.
19

 
 
 
Item 3.
20

 
 
 
Item 4.
21

 
 
 
Supp. Item.
21

PART II
Item 5.
24

 
 
 
Item 6.
26

 
 
 
Item 7.
27

 
 
 
Item 7A.
57

 
 
 
Item 8.
58

 
 
 
Item 9.
58

 
 
 
Item 9A.
58

 
 
 
Item 9B.
59

PART III
Item 10.
60

 
 
 
Item 11.
63

 
 
 
Item 12.
63

 
 
 
Item 13.
63

 
 
 
Item 14.
63

PART IV
Item 15.
64

 
 
124

 
 
126



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, and U.S. or foreign laws or regulations (including tax law changes);
adverse changes in 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, technology failures or otherwise;
a decline in the long-term outlook for any of our reporting units that could result in asset impairment;
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.

1

Table of Contents
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 17 business units, which are divided into 10 groups under our four segments: Residential Furnishings; Commercial Products; 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.
 
Innovative proprietary products and low cost have made us the largest U.S. manufacturer in many of these businesses.  We strive to understand what drives consumer purchases in our markets and focus our product development activities on meeting those end-consumer needs. We attain a cost advantage from efficient manufacturing methods, internal production of key raw materials, purchasing leverage, and large-scale production. 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
Machines that we use to shape wire into various types of springs

2

Table of Contents
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

Fabric & Carpet Cushion Group
Structural fabrics for mattresses, residential furniture and industrial uses
Carpet cushion (made from 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 carpet cushion
Contractors, landscapers, road construction companies and government agencies using geo components

Commercial Products Segment

In our Commercial Products segment we design, manufacture, and distribute a wide range of components and finished products for the office seating and specialty retail markets. We are a major supplier of fashion beds and adjustable beds, with domestic manufacturing and distribution capability as well as established relationships with global sources.

Products

Work Furniture Group 
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

Consumer Products Group
Fashion beds and bed frames
Adjustable beds

3

Table of Contents
PART I


Customers
 
Office, institutional and commercial furniture manufacturers
Mattress manufacturers and retailers

Industrial Materials Segment

The quality of our products and service, together with our low cost, have made Leggett & Platt the leading U.S. supplier of high carbon 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. We also supply steel wire to external customers that operate in a broad range of markets.

We sold our Steel Tubing business in the fourth quarter of 2015. This unit supplied steel tubing to many external customers, including automotive seat frame producers, and also supplied a portion of our internal needs.

Products
 
Wire Group
Drawn wire
Fabricated wire products
Steel rod

Customers
 
We use about 70% of our wire output to manufacture our own products, including:
Bedding and furniture components
Automotive seat suspension systems

The Industrial Materials segment also has a diverse group of external customers that include:
Bedding producers
Mechanical spring manufacturers
Waste recyclers and waste removal businesses


4

Table of Contents
PART I

Specialized Products Segment

Our Specialized Products segment designs, manufactures and sells products including automotive seating components, tubing for the aerospace industry, 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.
 
We are considering strategic alternatives for our CVP Group, including the possible divestiture of this business.  For more information, please refer to “Commercial Vehicle Products Divestiture”  on page 31.

Products
 
Automotive Group
Mechanical and pneumatic lumbar support and massage systems for automotive seating
Seat suspension systems
Automotive control cables
Low voltage motors and actuators

Aerospace Products Group
Titanium, nickel and stainless steel tubing and sub-assemblies for the aerospace industry

Machinery Group
Full range of quilting machines for mattress covers
Industrial sewing/finishing machines

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

Customers
 
Automobile seating manufacturers
Aerospace suppliers and OEMs
Bedding manufacturers
Telecommunication, cable, home service and delivery companies



5

Table of Contents
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 third 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, 2015, we met our goal of producing TSR in the top third of the S&P 500. We generated compounded annual TSR of 20% per year, on average, over the last three years, significantly better than the S&P 500's 15% annual TSR over the same time period.
 
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 approximately $1.2 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 $.32 per share. Our target for dividend payout is 50-60% of earnings, however actual payout has been higher in recent years (88% in 2013 and 179% in 2014, impacted by goodwill impairment in both years and litigation accruals in 2014). As a result, dividend growth has been modest, at about 3% per year. With significant earnings improvement in 2015, dividend payout for the year was 55%, within the target range. This allows us flexibility to consider future dividend growth that more closely aligns with EPS growth. We have consistently (for over 25 years) generated operating cash in excess of our annual requirement for capital expenditures and dividends.

Our top priorities for use of cash are organic growth (capital expenditures), dividends, and strategic acquisitions. After funding those priorities, if there is still cash available, we generally intend to repurchase stock rather than repay debt early or stockpile cash. During the last three years, we repurchased a total of 15.6 million shares of our stock and issued 9.1 million shares (through employee benefit plans and stock option exercises), reducing outstanding shares by 5%. In 2015, we repurchased 4.3 million shares (at an average of $45.72) and issued 2.1 million shares (at an average of $23.61).

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 Grow category should provide avenues for profitable growth from competitively advantaged positions in attractive markets. Core business units are expected to enhance productivity, improve 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.


6

Table of Contents
PART I

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 develop and commercialize 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 TSR; (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
 
2015

We acquired a 70% interest in a European private-label manufacturer of high-end upholstered furniture for office, commercial and other settings for a purchase price of $23 million. This business is complementary to our North American private-label operation and allows us to support our Work Furniture customers as they expand globally. We will acquire the remaining 30% over the next five years, under the terms of the agreement, and have recorded a long-term liability of approximately $10 million for the future payments. Future payments are based upon a calculation that incorporates future EBITDA. The recorded liability is based upon estimates and may fluctuate significantly until the 2018 and 2020 payment dates. Fluctuations in this liability will be reflected in interest income or expense on the Consolidated Statement of Operations.
2014
We acquired Tempur Sealy's three U.S. innerspring component production facilities for a purchase price of $45 million. This additional volume enhanced our economies of scale, benefited from our vertical integration in steel rod and wire, and allowed manufacturing optimization across a broad asset base. These factors contributed to the recognition of $18 million in goodwill from this acquisition.

We also acquired a German designer and distributor of high-end, European-styled motion components for a purchase price of $17 million. This business allows us to meet varying design preferences and broadens the range of our furniture component products, which contributed to the recognition of $4 million in goodwill from this acquisition.

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. This business was acquired for a purchase price of $12 million, and $6 million of goodwill was recorded related to this acquisition. Factors that contributed to a purchase price resulting in the recognition of goodwill included its international presence and complimentary fit with our Aerospace Products business unit.


7

Table of Contents
PART I

The second was a French company that added small-diameter, high-pressure seamless tubing to our product portfolio for a cash purchase price of $15 million. 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. The bargain purchase gain is reported in the "Other (income) expense, net" line of our Consolidated Statements of Operations.

For more information regarding our acquisitions and factors that contributed to the bargain purchase price referenced above, please refer to Note R on page 109 of the Notes to Consolidated Financial Statements.
 
Divestitures
 
2015

We sold our final two Store Fixtures operations for $8 million and recorded an after-tax gain of $3 million. These divestitures were reported in discontinued operations.

We sold our Steel Tubing business unit for total consideration of $25 million. This operation reached held for sale status in the first quarter of 2015, but did not meet the requirements for discontinued operations. The results for this operation (including a pre-tax loss on sale of $3 million) was included in the Industrial Materials segment.

Finally, we divested a small operation within our CVP business for $3 million, which resulted in a pre-tax gain of $1 million. The business was reported in our Specialized Products segment and did not meet the requirements for discontinued operations.

2014

We divested the majority of the Store Fixtures group for total consideration of $64 million and recorded an after-tax loss of $5 million. The Store Fixtures group was previously part of the Commercial Products segment and was reported in discontinued operations.

2013

There were no significant divestitures in 2013.

For further information about divestitures and discontinued operations, see Note B on page 76 of the Notes to Consolidated Financial Statements.

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 divestiture of the majority of the Store Fixtures business in late 2014, along with the retirement of the Senior Operating Vice President of the Industrial Materials segment, our management organizational structure and all related internal reporting changed in 2015. 

The Adjustable Bed and Fashion Bed businesses were moved from Residential Furnishings to Commercial Products. The Aerospace business was moved from Industrial Materials to Specialized Products. The Spuhl machinery operation (which produces wire forming equipment primarily for our internal use) was moved from Specialized Products to Residential Furnishings. Additionally, our logistics operations, which primarily include intercompany transportation activity, were moved from Residential Furnishings to Industrial Materials. These segment changes were retrospectively applied to all prior periods presented.




8

Table of Contents
PART I

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 operations are principally located in Europe, China, Canada and Mexico. Our products in these foreign locations primarily consist of:
 
Europe

Innersprings for mattresses
Wire and wire products
Lumbar and seat suspension systems for automotive seating
Seamless tubing and specialty formed products for aerospace applications
Select lines of private-label finished furniture
Recliner mechanisms
Machinery and equipment designed to manufacture innersprings for mattresses

9

Table of Contents
PART I

China

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

Canada

Lumbar supports for automotive seats
Fabricated wire for the furniture and automotive industries
Office chair controls, chair bases and table bases

Mexico

Innersprings and fabricated wire for the bedding industry
Automotive control cable systems and seating components
Adjustable beds
Our international expansion strategy is to locate our operations where we believe we would possess a competitive advantage and where demand for our 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 65% 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.


10

Table of Contents
PART I

Geographic Areas of Operation
 
We have manufacturing facilities in countries around the world, as shown below.
 
Residential
Furnishings
  
Commercial
Products
  
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
Hungary
 
  
 
  
 
  
n
Italy
n
  
n
  
 
  
 
Poland
 
 
n
 
 
 
 
Switzerland
n
  
 
  
 
  
 
United Kingdom
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, and our tangible long-lived assets located outside the United States, refer to Note F on page 84 of the Notes to Consolidated Financial Statements.


11

Table of Contents
PART I

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
2015
 
2014
 
2013
Bedding Group
23
%
 
22

%
 
20

%
Fabric & Carpet Cushion Group
17
 
 
18

 
 
18

 
Automotive Group
16
 
 
16

 
 
14

 
Furniture Group
11
 
 
11

 
 
12

 
Wire Group
9
 
 
11

 
 
12

 
Consumer Products Group
8
 
 
7

 
 
8

 
Work Furniture Group
6
 
 
5

 
 
5

 
Aerospace Products Group
3
 
 
3

 
 
2

 
Commercial Vehicle Products Group
3
 
 
3

 
 
4

 
Steel Tubing Group
2
 
 
2

 
 
3

 
Machinery Group
2
 
 
2

 
 
2

 

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 suspension systems

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.

Customer Concentration
 
We serve thousands of customers worldwide, sustaining many long-term business relationships. In 2015, our largest customer accounted for approximately 8% of our consolidated revenues. Our top 10 customers accounted for approximately 29% of these consolidated revenues. The loss of one or more of these customers could have a

12

Table of Contents
PART I

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 Products and Specialized Products segments.

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, 2015. 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:
ComfortCore®, Mira-Coil®, VertiCoil®, Lura-Flex®, and Superlastic® (mattress innersprings)
Semi-Flex® (box spring components and foundations)
Active Support Technology® (mattress innersprings)
Spuhl® (mattress innerspring manufacturing machines)
Wall Hugger® (recliner chair mechanisms)
Super Sagless® (motion and sofa sleeper mechanisms)
No-Sag® (wire forms used in seating)
LPSense® (capacitive sensing)
Hanes® (fabric materials)
Schukra®, Pullmaflex® and Flex-O-Lator® (automotive seating products)
Gribetz® and Porter® (quilting and sewing machines)


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 continued to grow, and represented 30% of our total U.S. innerspring units in 2015.

13

Table of Contents
PART I

Research and Development
 
We maintain research, development and testing centers in many locations around the world. 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 approximately $25 million in each of the last three years.
 
Employees
 
At December 31, 2015, we had approximately 20,000 employees, of which roughly 15,000 were engaged in production. Of the 20,000, approximately 11,000 were international employees (5,600 in China). Roughly 15% of our employees 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 2015. Management is not aware of any circumstances likely to result in a material work stoppage related to contract negotiations with labor unions during 2016. The chart below shows the approximate number of employees by segment.


At December 31, 2014, we had approximately 19,000 employees.

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 and performance 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 cushion
Adjustable bed bases
Components for office furniture
High carbon drawn steel wire

14

Table of Contents
PART I

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 (CBP) to seek stronger enforcement of existing antidumping and/or countervailing duty orders.  As a result of these efforts, the U.S. Congress has passed the Enforcing Orders and Reducing Customs Evasion (ENFORCE) Act.  The ENFORCE Act requires CBP to implement a transparent, time-limited process to investigate allegations of duty evasion and to assess duties where appropriate.

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 40.



15

Table of Contents
PART I

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 information on discontinued operations, see Note B on page 76 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 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.

16

Table of Contents
PART I

     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 and performance. 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 litigation contingencies that, if realized, could have a material negative impact on our financial condition, results of operations and cash flows.
We previously disclosed that we were a party to a series of civil antitrust lawsuits involving the sale of polyurethane foam products. During 2015, we settled the substantial majority of these cases but there are a few cases yet to be resolved. 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 have, at December 31, 2015, an aggregate litigation contingency accrual of $8 million. The accrual amount decreased from the prior year primarily due to cash payments for litigation settlements of $82 million. Based on current facts and circumstances, aggregate reasonably possible (but not probable) losses in excess of the recorded accruals for litigation contingencies (which include Brazilian VAT, antitrust, patent, and other matters) are estimated to be $25 million. 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 (and in excess of the $25 million referenced above) which could have a material negative impact on our financial condition, results of operations and cash flows. For more information regarding our legal contingencies, see Note T on page 114 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 2015, 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.




17

Table of Contents
PART I

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, 2015, goodwill and other intangible assets represented $998 million, or 34% of our total assets. In addition, net property, plant and equipment and sundry assets totaled $658 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.

For more information regarding potential goodwill and other long-lived asset impairment, refer to Note C on page 79 of the Notes to Consolidated Financial Statements.

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. We expect to transition certain corporate-level shared service systems primarily related to our domestic U.S. operations for general ledger, sales invoicing, cash application, purchasing and accounts payable disbursements to a new platform during the last half of 2016 and the first half of 2017. Technology failures or security breaches of a new or existing infrastructure could 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.

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.

18

Table of Contents
PART I

 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 130 manufacturing locations, of which 81 are located across the United States and 49 are located in 18 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
Products
 
Industrial
Materials
 
Specialized
Products
United States
 
81
 
46
 
11
 
8
 
16
Europe
 
18
 
5
 
2
 
 
11
China
 
14
 
4
 
1
 
 
9
Canada
 
8
 
2
 
2
 
 
4
Mexico
 
5
 
2
 
 
1
 
2
Other
 
4
 
2
 
 
 
2
Total
 
130
 
61
 
16
 
9
 
44


 
For more information regarding the geographic location of our manufacturing facilities refer to "Geographic Areas of Operation" under Item 1 Business on page 11.

Manufacturing Facilities Owned or Leased by Segment
 
 
Company-
Wide
 
Subtotals by Segment
Manufacturing Locations
 
Residential
Furnishings
 
Commercial
Products
 
Industrial
Materials
 
Specialized
Products
Owned
 
72
 
41
 
9
 
8
 
14
Leased
 
58
 
20
 
7
 
1
 
30
Total
 
130
 
61
 
16
 
9
 
44

In 2015, seventy-one percent of the Company's net sales allocated to the 130 manufacturing facilities was produced by owned facilities. 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. Of our 130 manufacturing facilities, none are subject to liens or encumbrances that are material to the segment in which they are reported or to the Company as a whole.
 

19

Table of Contents
PART I

None of our physical properties are, by themselves, material to the Company’s overall manufacturing processes, except for our steel rod mill in Sterling, Illinois, which is reported in Industrial Materials. The rod mill consists of approximately 1 million square feet of production space and has annual output of approximately 500,000 tons of steel rod, of which a substantial majority is used by our own wire mills. Although we have alternative sources of steel rod from external sources, a prolonged disruption to the operation of the rod mill could have a material adverse effect on the Industrial Materials segment and the Company’s results of operations.

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, European Spring and Adjustable Bed.  
 
 
Item 3. Legal Proceedings.
 
The information in Note T beginning on page 114 of the Notes to Consolidated Financial Statements is incorporated into this section by reference.

Leggett's Claim for Alleged Antitrust Violations

On October 17, 2008, the Company, along with Carpenter Co., Flexible Foam Products, Inc., Foam Supplies, Inc., Hickory Springs Manufacturing Company, J.M. Huber Corporation, Lubrizol Advanced Materials, Inc., The Sherwin-Williams Company, Skypark Manufacturing, LLC, Vitafoam Incorporated; and their respective affiliates, as plaintiffs, filed a complaint in the United States District Court for the District of New Jersey under the caption Carpenter Co., et al. v. BASF SE, et al., Case No. 2:08-cv-05169 against BASF Corporation, The Dow Chemical Company, Huntsman International LLC, Lyondell Chemical Company, and their affiliates, alleging that defendants conspired to fix prices and allocate customers and markets for certain urethane chemical products. The Company previously settled its claims against certain defendants for immaterial amounts and all other defendants have been dismissed except for The Dow Chemical Company.

The Company, along with co-plaintiffs, seeks to recover three times the amount of damages suffered as a result of the alleged overcharges in the price of the urethane chemical products purchased from the defendant from at least 1994 through at least 2004. The plaintiffs also seek attorney fees, pre-judgment interest and injunctive relief. The defendant denies the claims. Based on the maturation of the proceeding, discovery becoming substantially complete, and the scheduled trial date of March 7, 2016, the Company now believes that it is reasonably likely that it may recover material damages from the defendant. However, because of uncertainties, the Company cannot estimate the amount of recovery. Also, because of these uncertainties, it is possible that the Company may recover only an immaterial amount of the alleged damages, or recover no damages at all.
Environmental Matters Involving Potential Monetary Sanctions of $100,000 or More

On March 27, 2013, Region 5 of the U.S. Environmental Protection Agency (EPA) issued a Notice of Violation/Finding of Violation ("NOV/FOV") 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/FOV alleges that Sterling, since 2008, has exceeded the allowable annual particulate matter and manganese emission limits for its electric arc furnace. Sterling requested a conference with the EPA to discuss the alleged violations. The conference was held on May 20, 2013.


20

Table of Contents
PART I

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 had been no material updates with respect to these matters until mid-July 2015 when the Company learned from counsel for the EPA that the matters had been referred to the U.S. Department of Justice (DOJ). The Company met with representatives of the DOJ on February 2, 2016. At the meeting, the DOJ focused on Sterling’s compliance with capture and control efficiency and fugitive emissions with its electric arc furnace. Sterling intends to vigorously defend these matters in any enforcement action that may be pursued by the EPA or DOJ. Neither the EPA nor DOJ specified any amount of penalty or injunctive relief being sought in the NOV/FOV, Finding of Violation or in any conference or meeting. 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.
 
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 1,2,3
 
Age
 
Position
Karl G. Glassman
 
57
 
President and Chief Executive Officer
Matthew C. Flanigan
 
54
 
Executive Vice President and Chief Financial Officer
Jack D. Crusa
 
61
 
Senior Vice President, Industrial Materials & Specialized Products
Perry E. Davis
 
56
 
Senior Vice President, Residential Furnishings
David M. DeSonier
 
57
 
Senior Vice President, Strategy & Investor Relations
J. Mitchell Dolloff
 
50
 
Senior Vice President, Specialized Products
Scott S. Douglas
 
56
 
Senior Vice President, General Counsel
Russell J. Iorio
 
46
 
Senior Vice President, Mergers & Acquisitions
John G. Moore
 
55
 
Senior Vice President, Chief Legal & HR Officer and Secretary
Dennis S. Park
 
61
 
Senior Vice President, Commercial Products
Tammy M. Trent
 
49
 
Vice President, Chief Accounting Officer

1 
David S. Haffner, age 63, served as the Company's Board Chair and Chief Executive Officer until December 31, 2015.

2 
Joseph D. Downes, Jr., age 71, retired from his position as Senior Vice President - Industrial Materials on April 5, 2015. He continued to be employed by the Company in a lesser position until his retirement on December 31, 2015.

3 
William S. Weil, age 57, retired from his position as Senior Vice President, Chief Accounting Officer and Corporate Controller on May 5, 2015.


21

Table of Contents
PART I


Subject to the employment and severance benefit agreements with 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 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 agreement if not appointed to the
executive position listed in their respective agreement (or above). See Exhibit Index on page 126 for reference to the agreements.
 
Karl G. Glassman was appointed Chief Executive Officer of the Company effective January 1, 2016. He was appointed President of the Company in 2013 and previously served the Company as Chief Operating Officer from 2006 to 2015. He also 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 above, Mr. Crusa assumed the additional position of President of Industrial Materials.
 
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.
 
J. Mitchell Dolloff was appointed Senior Vice President and President of Specialized Products effective January 1, 2016. He previously served the Company as Vice President, President of the Automotive Group from 2014 to 2015, President of Automotive Asia from 2011 to 2013, Vice President of Specialized Products from 2009 to 2013, and Director of Business Development for Specialized Products from 2007 to 2009. He served the Company in various other capacities since 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.
 
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.


22

Table of Contents
PART I

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 Products 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.
 
Tammy M. Trent was appointed Vice President, Chief Accounting Officer effective May 5, 2015. She served as Staff Vice President, Financial Reporting from 2007 to 2015. She previously served the Company in a series of progressively more responsible accounting capacities since 1998. 

23

Table of Contents
PART II

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
 
2015
 
 
 
 
 
 
 
First Quarter
$
46.95

 
$
41.36

 
74.2

 
$
0.31

Second Quarter
49.95

 
42.34

 
58.6

 
0.31

Third Quarter
51.28

 
39.58

 
69.7

 
0.32

Fourth Quarter
47.35

 
40.83

 
56.0

 
0.32

For the Year
$
51.28

 
$
39.58

 
258.5

 
$
1.26

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

______________________________
 
Price and volume data reflect composite transactions; price range reflects intra-day prices; data source is Bloomberg.
 
Shareholders and Dividends
 
As of February 12, 2016, we had 8,745 shareholders of record.
 
Increasing the dividend remains a priority. We currently pay a quarterly dividend of $.32 per share. Our target for dividend payout is 50-60% of earnings, however actual payout has been higher in recent years (88% in 2013 and 179% in 2014, impacted by goodwill impairment in both years and litigation accrual in 2014). As a result, dividend growth has been modest, at about 3% per year. With significant earnings improvement in 2015, dividend payout for the year was 55%, within the target range. This allows us flexibility to consider future dividend growth that more closely aligns with EPS growth. We have consistently (for over 25 years) generated operating cash in excess of our annual requirement for capital expenditures and dividends. We expect this again to be the case in 2016. We have no restrictions that currently materially limit our ability to pay such dividends or that we reasonably believe are likely to limit the future payment of dividends.

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 44.


 

24

Table of Contents
PART II

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 2015.
 
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 2015
 
1,035

 
$
45.00

 

 
6,936,199

November 2015
 
322,070

 
$
45.62

 
305,836

 
6,630,363

December 2015
 
332,125

 
$
43.25

 
331,746

 
6,298,617

Total
 
655,230

 
$
44.42

 
637,582

 
 
______________________________

(1)
This number includes 17,648 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, or forfeitures of restricted stock units.
(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, 2016, the Company was authorized by the Board of Directors to repurchase up to 10 million shares in 2016. No specific repurchase schedule has been established.
 



25

Table of Contents
PART II

Item 6. Selected Financial Data.
 
(Unaudited)
2015 1
 
2014 2
 
2013 3
 
2012 4
 
2011 5
(Dollar amounts in millions, except per share data)
 
 
 
 
 
 
 
 
 
Summary of Operations
 
 
 
 
 
 
 
 
 
Net Sales from Continuing Operations
$
3,917

 
$
3,782

 
$
3,477

 
$
3,415

 
$
3,303

Earnings from Continuing Operations
328

 
225

 
186

 
231

 
173

(Earnings) Attributable to Noncontrolling Interest, net of tax
(4
)
 
(3
)
 
(2
)
 
(2
)
 
(3
)
Earnings (loss) from Discontinued Operations, net of tax
1

 
(124
)
 
13

 
19

 
(17
)
Net Earnings attributable to Leggett & Platt, Inc. common shareholders
325

 
98

 
197

 
248

 
153

Earnings per share from Continuing Operations
 
 
 
 
 
 
 
 
 
Basic
2.30

 
1.57

 
1.27

 
1.59

 
1.16

Diluted
2.27

 
1.55

 
1.25

 
1.57

 
1.15

Earnings (Loss) per share from Discontinued Operations
 
 
 
 
 
 
 
 
 
Basic
.01

 
(.88
)
 
.09

 
.13

 
(.11
)
Diluted
.01

 
(.87
)
 
.09

 
.13

 
(.11
)
Net Earnings (Loss) per share
 
 
 
 
 
 
 
 
 
Basic
2.31

 
.69

 
1.36

 
1.72

 
1.05

Diluted
2.28

 
.68

 
1.34

 
1.70

 
1.04

Cash Dividends declared per share
1.26

 
1.22

 
1.18

 
1.14

 
1.10

Summary of Financial Position
 
 
 
 
 
 
 
 
 
Total Assets
$
2,968

 
$
3,141

 
$
3,108

 
$
3,255

 
$
2,915

Long-term Debt, including capital leases
$
945

 
$
767

 
$
688

 
$
854

 
$
833

______________________________

All amounts are presented after tax. 
1 
Net earnings from Continuing Operations for 2015 includes $4 million of impairments and $2 million on the loss on the sale of our steel tubing business; $4 million associated with litigation accruals; and $8 million lump sum pension buyout.
 
2 
Net earnings from Continuing Operations for 2014 includes $33 million associated with litigation accruals. Discontinued Operations includes the following items: $93 million of goodwill impairment, a $5 million loss on the sale of the majority of our Store Fixtures unit, and $22 million associated with litigation accruals.

3 
Net earnings from Continuing Operations for 2013 include charges of $45 million related to the Commercial Vehicle Products group ($43 million goodwill impairment charge and $2 million accelerated amortization of a customer-related intangible asset), and a $9 million bargain purchase gain related to an acquisition.

4 
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.

5 
The Company incurred asset impairment and restructuring-related charges totaling $28 million in 2011. Of these charges, $13 million were associated with continuing operations and $15 million were related to discontinued operations.


26

Table of Contents
PART II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
2015 HIGHLIGHTS
 
Earnings from continuing operations increased significantly (versus 2014) reflecting several factors, including the benefit from higher sales, pricing discipline, and lower foam litigation expense.
 
Sales from continuing operations also grew in 2015, with higher unit volume and acquisitions partially offset by raw material-related price deflation and currency impact. Nearly all of our businesses experienced unit volume growth during the year, from a combination of new program awards, market share gains, and broadly improving end market demand.
 
A major component of our strategy since 2007 has been the optimization of our portfolio of businesses, by increasing investment in businesses that possess strong competitive advantage and reducing our exposure to businesses and markets that are less attractive. In 2015, we made further progress on both fronts. During the year, we expanded our operations to support continued growth of our Automotive business, invested in machinery to support the growing demand for ComfortCore® innersprings, and added three new facilities to support growth in our Adjustable Bed business. We also acquired, in our Work Furniture business, a European private-label manufacturer of high-end upholstered furniture for office, commercial, and other settings. Additionally, in 2015, we completed the divestitures of several small operations including our Steel Tubing business, the two remaining Store Fixtures operations, and a small part of the Commercial Vehicle Products business.

Operating cash decreased versus 2014 levels, primarily due to payments made to settle foam litigation. However, we once again generated more than enough cash from operations to comfortably fund dividends and capital expenditures, something we've accomplished for over 25 years.

2015 marked the 44th 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 2015 with net debt to net capital comfortably within our long-standing targeted range of 30-40%. In August, we repaid $200 million of notes that matured. We ended the year with over $400 million available under our commercial paper program.
 
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 third of the S&P 500 over the long term. For the three years ended December 31, 2015, we generated TSR of 20% per year on average. That placed us in the top third of the S&P 500, meeting our long-term goal.

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

27

Table of Contents
PART II

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 third of the S&P 500 over the long-term through a balanced approach that employs four TSR drivers: 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, 2015, we met our top third TSR goal. We generated TSR of 20% per year on average over the last three years, well above the S&P 500's 15% annual TSR for that same time period.
 
Customers
 
We serve a broad suite of customers, with our largest customer representing approximately 8% 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.

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 and we also realize a lag as costs decline, as was the case in the last half of 2015.
 
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. Throughout 2015, market prices for steel scrap, rod, and flat-rolled products decreased significantly, leading to downward pressure on selling prices. We realized a beneficial

28

Table of Contents
PART II

pricing lag during the year, as costs generally decreased at a faster rate than selling prices. Assuming that steel costs stabilize, we expect that 2015's pricing lag benefit will not recur in 2016.

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 providing product options to our customers that enable them to improve the functionality and manage 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 (CBP) to seek stronger enforcement of existing antidumping and/or countervailing duty orders.  As a result of these efforts, the U.S. Congress passed the Enforcing Orders and Reducing Customs Evasion (ENFORCE) Act.  The ENFORCE Act requires CBP to implement a transparent, time-limited process to investigate allegations of duty evasion and to assess duties where appropriate.



29

Table of Contents
PART II

Settlement of Polyurethane Foam Litigation

We previously disclosed that we were one of several defendants in a series of civil antitrust lawsuits involving the sale of polyurethane foam. During 2015, we settled the substantial majority of these cases. Although there are a few cases yet to be resolved, based upon current facts, we do not believe that the outcome of these remaining cases will have a material effect on our consolidated financial position, results of operations, or cash flow.
Accrual for Loss Contingencies and Reasonably Possible Losses in Excess of Accruals

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 have an aggregate litigation contingency accrual of $8 million. The accrual amount decreased from the prior year primarily due to cash payments for litigation settlements of $82 million. Based upon current facts and circumstances, aggregate reasonably possible (but not probable) losses in excess of the recorded accruals for litigation contingencies are estimated to be $25 million. These include Brazilian VAT, antitrust, patent, and other matters. For more information regarding litigation contingency accruals and reasonably possible losses in excess of accruals, see Note T to the Consolidated Financial Statements on page 114.
Leggett's Claim for Alleged Antitrust Violations

We are also a plaintiff in an antitrust case against The Dow Chemical Company. We, along with other plaintiffs, have alleged that several defendants conspired to fix prices and allocate customers and markets for certain urethane chemical products. The trial is scheduled to begin on March 7, 2016. We believe that it is reasonably likely that we may recover material damages. However, because of uncertainties we cannot estimate the amount of recovery, and it is possible that we won't recover any damages at all. For more information regarding our antitrust litigation, see Note T to the Consolidated Financial Statements on page 114.
Discontinued Operations
 
For information regarding discontinued operations, see Note B to the Consolidated Financial Statements on page 76.

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 reflected the complete write-off of the goodwill associated with the Store Fixtures group and was recognized in discontinued operations. For more information, see Note C to the Notes to Consolidated Financial Statements on page 79.

Divestiture of Store Fixtures Operations

On November 1, 2014, we sold the majority of the Store Fixtures business for $64 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.

The two remaining Store Fixtures facilities were sold in 2015 and resulted in an after-tax gain of $3 million, which was also recognized in discontinued operations.

30

Table of Contents
PART II

Commercial Vehicle Products Divestiture

In late 2015, we sold a small CVP operation that did not meet the discontinued operations criteria, leaving two remaining operations within that group. In February 2016, one of these operations reached held-for-sale status. Under a separate arrangement, we have agreed to sell real estate associated with the CVP unit and expect to realize a gain on this transaction. The real estate sale is subject to certain contingencies, which we anticipate will be resolved within the next twelve months. We will continue to explore strategic alternatives for the remaining CVP operation.
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 divestiture of the majority of the Store Fixtures business in late 2014, along with the retirement of the Senior Operating Vice President of the Industrial Materials segment, our management organizational structure and all related internal reporting changed in 2015. 

The Adjustable Bed and Fashion Bed businesses were moved from Residential Furnishings to Commercial Products. The Aerospace business was moved from Industrial Materials to Specialized Products. The Spuhl machinery operation (which produces wire forming equipment primarily for our internal use) was moved from Specialized Products to Residential Furnishings. Additionally, our logistics operations, which primarily include intercompany transportation activity, were moved from Residential Furnishings to Industrial Materials. These segment changes were retrospectively applied to all prior periods presented.



31

Table of Contents
PART II

RESULTS OF OPERATIONS—2015 vs. 2014
 
Sales from continuing operations grew 4% in 2015, with higher unit volume and acquisitions partially offset by raw material-related price deflation and currency impact. Nearly all of our businesses experienced unit volume growth during the year, from a combination of new program awards, market share gains, and broadly improving end market demand.

Full year earnings from continuing operations increased significantly reflecting several factors, including the benefit from higher sales, pricing discipline, and lower foam litigation expense. 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 2015, 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, 2014
$
3,782

 
 
   Approximate volume gains
196

 
6
 %
   Approximate raw material-related deflation and currency impact
(183
)
 
(5
)%
Same location sales
13

 
1
 %
Acquisition sales growth
123

 
3
 %
Divestitures
(1
)
 
 %
Year ended December 31, 2015
$
3,917

 
4
 %
Earnings from continuing operations:
 
 
 
(Dollar amounts, net of tax)
 
 
 
Year ended December 31, 2014
$
225

 
 
Lower foam litigation expense
30

 
 
Lump sum pension buyout
(8
)
 
 
Other, including benefit from higher sales and pricing discipline
81

 
 
Year ended December 31, 2015
$
328

 
 
Earnings Per Diluted Share (continuing operations)—2014
$
1.55

 
 
Earnings Per Diluted Share (continuing operations)—2015
$
2.27

 
 
 

Same location sales (from continuing operations) grew 1%, with volume gains in Automotive, in most of our Residential Furnishings businesses, and in Adjustable Bed, largely offset by raw material-related price deflation and currency impact. 

Full-year 2015 sales growth also benefited from the July 2014 acquisition of Tempur Sealy's three innerspring component production facilities, the March 2015 acquisition of a Work Furniture business, and other smaller acquisitions. The divestiture of the Steel Tubing business occurred in late December, and did not significantly impact the full year sales comparison.

Earnings from continuing operations increased significantly in 2015, primarily from higher sales and pricing discipline. As indicated in the table above, earnings also benefited from the reduction in foam litigation expense ($3 million in 2015 versus $33 million in 2014; further discussed on page 114). Partially offsetting these improvements was a one-time lump sum pension buyout funded from pension plan assets late in 2015.


32

Table of Contents
PART II

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 2014, steel costs were relatively stable and we ended the year with LIFO expense of $1 million. Significant deflation in steel costs during 2015 resulted in a full-year pretax LIFO benefit of $46 million.
 
For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 72.
 
Interest and Income Taxes
 
Net interest expense in 2015 increased slightly versus 2014.
 
Our 2015 worldwide effective income tax rate on continuing operations was 27%, compared to 24% for 2014.  The 2015 tax rate benefited from $11 million of favorable adjustments, including a reduction associated with changes to our permanent reinvestment assertions in China, and a tax benefit associated with our Australian operations. The 2014 tax rate includes $14 million of favorable adjustments primarily related to 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. These adjustments benefited our 2014 rate more favorably due to lower pretax income.
 

33

Table of Contents
PART II


Segment Results (continuing operations)
 
In the following section we discuss 2015 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. Prior year segment data has been retrospectively adjusted to reflect the change in segment structure discussed on page 31.
(Dollar amounts in millions)
2015
 
2014
 
Change in Sales
 
% Change
Same Location
Sales (1)
 
 
$
 
%
 
Sales (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
2,064

 
$
1,958

 
$
106

 
5
 %
 
1
 %
 
 
Commercial Products
623

 
516

 
107

 
21
 %
 
12
 %
 
 
Industrial Materials
777

 
813

 
(36
)
 
(4
)%
 
(4
)%
 
 
Specialized Products
955

 
914

 
41

 
4
 %
 
4
 %
 
 
Total
4,419

 
4,201

 
218

 
 
 
 
 
 
Intersegment sales elimination
(502
)
 
(419
)
 
(83
)
 
 
 
 
 
 
External sales
$
3,917

 
$
3,782

 
$
135

 
4
 %
 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
Change in EBIT
 
EBIT Margins (2)
$
 
%
 
2015
 
2014
EBIT (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
205

 
$
136

 
$
69

 
51
 %
 
9.9
 %
 
6.9
%
Commercial Products
42

 
31

 
11

 
35
 %
 
6.8
 %
 
6.0
%
Industrial Materials
51

 
43

 
8

 
19
 %
 
6.5
 %
 
5.3
%
Specialized Products
156

 
126

 
30

 
24
 %
 
16.3
 %
 
13.7
%
Intersegment eliminations & other
(13
)
 
(3
)
 
(10
)
 
 
 
 
 
 
Change in LIFO reserve
46

 
(1
)
 
47

 
 
 
 
 
 
Total
$
487

 
$
332

 
$
155

 
47
 %
 
12.4
 %
 
8.8
%
______________________________

(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 5% in 2015, with unit volume growth in most product categories and acquisitions partially offset by raw material-related price decreases and currency impact. Volume grew in Bedding, Home Furniture, Geo Components, and Fabric Converting. Within our U.S. Spring business, we again experienced significant growth in ComfortCore® (our pocketed coil innerspring), with unit volume in that product category up 51%. We expect strong growth in this category to continue from our introduction of new ComfortCore® products and our customers' growing use of these components in their product lines.

EBIT and EBIT margin increased in 2015 due to higher sales, pricing discipline, and significantly lower foam litigation expense ($48 million).
 




34

Table of Contents
PART II

Commercial Products
 
Sales in Commercial Products increased 21% in 2015, with same location sales up 12%. Continued strong demand in the Adjustable Bed and Fashion Bed businesses drove this improvement. Unit volume in the Adjustable Bed business increased 51% from a combination of new programs and strength in ongoing customer programs. Acquisitions also contributed 9% to the segment's sales growth during the year. In our Work Furniture business, we acquired a European private-label manufacturer of high-end upholstered furniture for office, commercial, and other settings.

EBIT and EBIT margin increased in 2015, primarily from higher sales and improved operating efficiency. 
 
Industrial Materials
 
Sales in the segment decreased 4% in 2015, with higher unit volume in Drawn Wire more than offset by steel-related price decreases and reduced rod mill trade sales.
 
EBIT and EBIT margin improved versus 2014, with cost reductions more than offsetting $6 million of impairment charges and a $3 million loss on divestiture, both of which related to our Steel Tubing business.
  
Specialized Products
 
In Specialized Products, sales increased 4% in 2015, with volume gains in Automotive and Machinery partially offset by currency impact. Our Automotive business continued to experience strong growth from a combination of factors, including expanded component content (via upgraded features), participation in new vehicle platforms, and continued industry growth in each of the major markets. 

EBIT and EBIT margin increased primarily from higher sales.

Results from Discontinued Operations
 
Full year earnings from discontinued operations, net of tax, increased to $1 million from a loss of $124 million in 2014. This significant increase is primarily due to the non-recurrence of an impairment charge of $93 million related to the goodwill of the Store Fixtures business discussed on page 80, and foam litigation accruals of $22 million discussed on page 114. The divestiture of the majority of that business late in 2014 resulted in an additional loss of $5 million. For further information about discontinued operations, see Note B to the Consolidated Financial Statements on page 76.

35

Table of Contents
PART II

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 Diluted Share (continuing operations)—2013
$
1.25

 
 
Earnings Per Diluted 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 (CVP). 

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 a bargain purchase gain related to the acquisition of an

36

Table of Contents
PART II

aerospace tubing business. Earnings from continuing operations in 2014 were negatively impacted by litigation accruals, which primarily related to the foam antitrust cases discussed on page 114.

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 72.
 
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.

 

37

Table of Contents
PART II


Segment Results (continuing operations)
 
In the following section we discuss 2014 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. All segment data has been retrospectively adjusted to reflect the change in segment structure discussed on page 31.
(Dollar amounts in millions)
2014
 
2013
 
Change in Sales
 
% Change
Same Location
Sales (1)
 
 
$
 
%
 
Sales (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
1,958

 
$
1,725

 
$
233

 
14
 %
 
9
%
 
 
Commercial Products
516

 
469

 
47

 
10
 %
 
10
%
 
 
Industrial Materials
813

 
790

 
23

 
3
 %
 
3
%
 
 
Specialized Products
914

 
817

 
97

 
12
 %
 
8
%
 
 
Total
4,201

 
3,801

 
400

 
 
 
 
 
 
Intersegment sales elimination
(419
)
 
(324
)
 
(95
)
 
 
 
 
 
 
External sales
$
3,782

 
$
3,477

 
$
305

 
9
 %
 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
 
Change in EBIT
 
EBIT Margins (2)
$
 
%
 
2014
 
2013
EBIT (continuing operations)
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
136

 
$
151

 
$
(15
)
 
(10
)%
 
6.9
%
 
8.8
%
Commercial Products
31

 
28

 
3

 
11
 %
 
6.0
%
 
5.9
%
Industrial Materials
43

 
57

 
(14
)
 
(25
)%
 
5.3
%
 
7.2
%
Specialized Products
126

 
34

 
92

 
271
 %
 
13.7
%
 
4.2
%
Intersegment eliminations & other
(3
)
 
9

 
(12
)
 
 
 
 
 
 
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 14% 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, Home Furniture, Geo Components, Fabric Converting, and Carpet Cushion, 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 continued to integrate these higher-valued innersprings into more of their product lines, in many cases replacing lower-valued innersprings. In our Furniture Hardware business, unit volume increased 10% as consumer demand for reclining chairs and sofas continued to grow.

EBIT and EBIT margin 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 114, and higher stock compensation expense.
 


38

Table of Contents
PART II

Commercial Products
 
Sales in Commercial Products increased 10% in 2014. Demand was extremely strong in our Adjustable Bed business, with unit volume increasing 56% from a combination of new programs and strength in ongoing customer programs. We also benefited from market share gains and improved market demand in our Work Furniture business.

EBIT improved slightly and EBIT margin was flat 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. Growth in logistics services (primarily with other Leggett operations) was partially offset by reduced trade sales from our rod mill and lower wire volume.
 
EBIT and EBIT margin 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 12% in 2014. Same location sales were up 8% and Aerospace acquisitions completed in 2013 also contributed to the full-year sales growth. 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 margin 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 80, and foam litigation accruals of $22 million discussed on page 114. 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. For further information about discontinued operations, see Note B to the Consolidated Financial Statements on page 76.



39

Table of Contents
PART II

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 2015. 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 2016.

Capital expenditures increased in 2015 from investments to support growth in Automotive, U.S. Spring, and Adjustable Bed. We increased the quarterly dividend and extended our record of consecutive annual increases to 44 years. We also bought back 4.3 million shares of our stock during the year.

In August 2015, we repaid $200 million of 5.0% notes that matured. We ended 2015 with over $400 million of our commercial paper program available. Net debt to net capital at year end was 34.5%, within our long-standing targeted range of 30-40%. The calculation of net debt as a percent of net capital is presented on page 47.
 
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 2015. Though earnings increased during the year, the benefit to operating cash flow was more than offset by foam litigation payments totaling $82 million. The decrease in 2014 (versus 2013) was primarily from higher accounts receivable associated with increased sales volume late in that year.

With the foam litigation settlements largely complete, we expect cash from operations to approximate $450 million in 2016.




 

40

Table of Contents
PART II

We continue to closely monitor our working capital levels, and ended 2015 with adjusted working capital at 9.5% of annualized sales1. The table below explains 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. The increase in adjusted working capital as a percent of annualized sales in 2015 primarily reflects decreased litigation accruals from payments made during the year.

(Dollar amounts in millions)
2015
 
2014
Current assets
$
1,311

 
$
1,430

Current liabilities
(701
)
 
(992
)
Working capital
610

 
438

Cash and cash equivalents
(253
)
 
(333
)
Current debt maturities
3

 
202

Adjusted working capital
$
360

 
$
307

Annualized sales 1
$
3,780

 
$
3,812

Adjusted working capital as a percent of annualized sales
9.5
%
 
7.9
%
Working capital as a percent of annualized sales
16.1
%
 
11.5
%
___________________________________________
1. 
Annualized sales equal 4th quarter sales ($945 million in 2015 and $953 million in 2014) 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.

Three primary components of our working capital are discussed below.

Trade Receivables - The payment trends by our major customers remained stable in 2015, with slight improvements in full year bad debt expense compared to 2014 levels. We continue to look for ways to improve payment patterns of customers and offer programs with incentives for early payment offered in conjunction with third parties when appropriate. Trade Receivables decreased slightly in 2015, primarily due to price deflation and currency translation impacts.  

Total Inventories - The physical flow of materials through our production facilities is materially the same as in prior periods, and we are not experiencing a buildup of inventory. Expense associated with slow moving and obsolete inventories in 2015 was generally in line with that of 2014. Further, we review usage and inventory quantities at the part number level to determine if current inventory amounts are recoverable by future demand, and reserve necessary amounts on a timely basis.

FIFO Inventory decreased in 2015 primarily due to significant steel-related price deflation and currency fluctuations. These decreases were partially offset by the timing of certain customer orders late in the year, opportunistic purchases of raw materials, and continued sales growth (which requires additional inventory for support).

The increase in our fourth quarter DIO is directly related to the effects of the LIFO method of accounting for inventories and the significant deflation in steel prices during 2015. Under LIFO accounting, the most recent raw material purchases are assumed to be the first consumed in production. Significant steel price deflation resulted in a significant decrease in our LIFO reserves, particularly in the fourth quarter, making comparability to prior quarter's DIO difficult.

Accounts Payable - Our payment terms are materially consistent with our past practices. We strive to optimize payment terms with our vendors and third parties that allow flexible payment options. Our accounts payable balance decreased at December 31, 2015 vs. 2014 primarily due to steel deflation (that led to lower cost of raw material purchases), currency fluctuations, and timing of payments for inventory purchases. Steel deflation (which was particularly sharp in the fourth quarter), also drove a decrease in our fourth quarter 2015 DPO.


41

Table of Contents
PART II

The following table presents dollar amounts of key working capital components at the end of the past two years.  
 
Amount (in millions)
 
2015
 
2014
 
Change
Trade Receivables, net
$
449

 
$
470

 
$
(21
)
 
 
 
 
 
 
Inventories at FIFO
$
528

 
$
554

 
$
(26
)
LIFO Reserve
(23
)
 
(73
)
 
50

Total inventories at LIFO, net
$
505

 
$
481

 
$
24

 
 
 
 
 
 
Accounts Payable
$
307

 
$
370

 
$
(63
)

The next chart shows recent trends in key working capital components (expressed in numbers of days at the end of the past five quarters).


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).

 

 

42

Table of Contents
PART II

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


In certain of our businesses and product lines we have minimal excess capacity, and we are investing to support continued growth. In Automotive, we are expanding capacity to support new programs that will begin production in 2016 and later years. In Bedding, we are investing in equipment (that we build in our own Swiss operation) to support ongoing growth in ComfortCore® innersprings. In Adjustable Bed, which operated a single large location until 2015, we have added new locations to broaden our geographic scope and now operate four facilities in North America.

In many of our other businesses, we have available capacity to accommodate additional volume. For each additional $100 million of sales from incremental unit volume produced utilizing spare capacity, we expect to generate approximately $25 million to $35 million of additional pre-tax earnings. With market share gains and higher market demand, our capacity utilization has increased. The earnings and margin improvement that we have realized over the past few years reflects, in part, that higher utilization.

We will continue to make investments to support growth in businesses and product lines where sales are strong, and for efficiency improvement and maintenance. We expect capital expenditures to approximate $130 million in 2016. 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 business units that have been designated as Grow businesses, and are looking for opportunities to enter new, higher growth markets (carefully screened for sustainable competitive advantage).

In 2013, we acquired two small businesses that supply tubing and tubing sub-assemblies to the aerospace market.





43

Table of Contents
PART II

In 2014, we purchased the three Tempur Sealy U.S. innerspring component production facilities for $45 million. We also acquired a German designer and distributor of high-end, European-styled motion components for residential furniture.

In 2015, we acquired a 70% interest in a European private-label manufacturer of high-end upholstered furniture for office, commercial, and other settings for $23 million. This business is complementary to our North American private-label operation and allows us to support our Work Furniture customers as they expand globally.

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

Increasing the dividend remains a high priority. In 2015, we increased the quarterly dividend to $.32 per share and extended our record of consecutive annual dividend increases to 44 years, at an average compound growth rate of 13%. Our targeted dividend payout ratio is approximately 50-60% of net earnings, however the actual payout has been higher in recent years. As a result, dividend growth in recent years has been modest, at about 3% per year. With significant earnings improvement in 2015, the dividend payout ratio for the year was within the target range. This should allow us flexibility to consider future dividend growth that more closely aligns with earnings growth.

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. 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.


44

Table of Contents
PART II

Repurchase Stock

            

As shown in the chart above, share repurchases were significant in each of the last three years. During that time frame, we repurchased a total of 15.6 million shares of our stock and issued 9.1 million shares (through employee benefit plans and stock option exercises), reducing outstanding shares by 5%. In 2015, we repurchased 4.3 million shares (at an average of $45.72) and issued 2.1 million shares (at an average of $23.61).
 
Our top priorities for use of cash are organic growth (via capital expenditures), dividends, and strategic acquisitions. After funding those priorities, if there is still cash available, we generally intend to repurchase stock rather than repay debt or stockpile cash. 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.


45

Table of Contents
PART II

Capitalization
 
This table presents key debt and capitalization statistics at the end of the three most recent years.
 
(Dollar amounts in millions)
2015
 
2014
 
2013
Long-term debt outstanding:
 
 
 
 
 
Scheduled maturities
$
764

 
$
767

 
$
673

Average interest rates (1) 
3.7
%
 
4.6
%
 
4.6
%
Average maturities in years (1)
6.8

 
6.4

 
4.7

Revolving credit/commercial paper
181

 

 
16

Average interest rate
.5
%
 

 
.2
%
Total long-term debt
945

 
767

 
689

Deferred income taxes and other liabilities
223

 
226

 
191

Equity
1,098

 
1,155

 
1,399

Total capitalization
$
2,266

 
$
2,148

 
$
2,279

Unused committed credit:
 
 
 
 
 
Long-term
$
419

 
$
600

 
$
584

Short-term

 

 

Total unused committed credit
$
419

 
$
600

 
$
584

Current maturities of long-term debt
$
3

 
$
202

 
$
181

Cash and cash equivalents
$
253

 
$
333

 
$
273

Ratio of earnings to fixed charges (2)
8.6 x

 
6.0 x

 
4.8 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.


46

Table of Contents
PART II

The next table shows the percent of long-term debt to total capitalization at December 31, 2015 and 2014, calculated in two ways:
 
Long-term debt and total capitalization as reported in the previous table.
Long-term debt and 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)
2015
 
2014
Long-term debt
$
945

 
$
767

Current debt maturities
3

 
202

Cash and cash equivalents
(253
)
 
(333
)
Net debt
$
695

 
$
636

Total capitalization
$
2,266

 
$
2,148

Current debt maturities
3

 
202

Cash and cash equivalents
(253
)
 
(333
)
Net capitalization
$
2,016

 
$
2,017

Long-term debt to total capitalization
41.7
%
 
35.7
%
Net debt to net capitalization
34.5
%
 
31.5
%
 
Total debt (which includes long-term debt and current debt maturities) decreased $21 million in 2015. We repaid $200 million of 5.0% notes that matured in August 2015 and funded the payoff with a combination of cash and commercial paper.

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)
2015
 
2014
 
2013
Total program authorized
$
600

 
$
600

 
$
600

Commercial paper outstanding (classified as long-term debt)
(181
)
 

 
(16
)
Letters of credit issued under the credit agreement

 

 

Total program usage
(181
)
 

 
(16
)
Total program available
$
419

 
$
600

 
$
584

 
The average and maximum amount of commercial paper outstanding during 2015 was $136 million and $315 million, respectively. During the fourth quarter, the average and maximum amounts outstanding were $255 million and $289 million respectively. At year end, we had no letters of credit outstanding under the credit agreement, but we had $64 million of stand-by letters of credit outside the agreement to take advantage of more attractive fee pricing.


47

Table of Contents
PART II

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.

Our revolving credit agreement and certain other long-term debt contain restrictive covenants, with which we were comfortably in compliance as of December 31, 2015. For more information, see Note J on page 91
of the Notes to Consolidated Financial Statements.
 
Accessibility of Cash
 
At December 31, 2015, we had cash and cash equivalents of $253 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 $90 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 $107 million. In 2015, 2014, and 2013, we brought back cash of $112 million, $129 million, and $119 million, respectively, in each case at little to no added tax cost.
 

48

Table of Contents
PART II


CONTRACTUAL OBLIGATIONS
 
The following table summarizes our future contractual cash obligations and commitments at December 31, 2015:
 
 
 
 
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
$
945

 
$
3

 
$
153

 
$
182

 
$
607

Capitalized leases
4

 
1

 
2

 
1

 

Operating leases
142

 
36

 
50

 
28

 
28

Purchase obligations ²
296

 
296

 

 

 

Interest payments ³
186

 
28

 
53

 
43

 
62

Deferred income taxes
39

 

 

 

 
39

Other obligations (including pensions and net reserves for tax contingencies) 4
189

 
3

 
16

 
22

 
148

Total contractual cash obligations
$
1,801

 
$
367

 
$
274

 
$
276

 
$
884


_______________________________________________________________________________
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, 2015 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.


49

Table of Contents
PART II

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 72.
 
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.

The Steel Tubing unit met the held for sale criteria during the first quarter of 2015. Because fair value less cost to sell had fallen below recorded book value, we fully impaired this unit's goodwill and incurred a non-cash charge of $4 million in the first quarter of 2015.

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 Products 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 second quarter 2015 goodwill impairment review indicated no impairments, with all reporting units having fair values that exceed carrying value by more than 50%.

We have $806 million of goodwill at December 31, 2015, including $12 million associated with the CVP reporting unit. As discussed in Note C to the Consolidated Financial Statements on page 79, we continue to explore strategic alternatives for this reporting unit. If we are not able to meet projected performance levels, future impairments could be possible.

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.


50

Table of Contents
PART II

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 $2 million in 2015, $1 million in 2014 and $2 million in 2013.
 

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, 2015, the reserve for obsolete and slow-moving inventory was $33 million (approximately 6% of FIFO inventories). This is consistent with the December 31, 2014 and 2013 reserves of $30 million and $36 million, respectively, representing 6% of FIFO inventories.

Additions to inventory reserves in 2015 were $10 million, which were comparable to the previous year. We do not expect obsolescence to change from current levels.


 

51

Table of Contents
PART II

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, 2015, we had accrued $35 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 (significantly less than 1% of annual net sales) over the last three years. At December 31, 2015, our reserves for doubtful accounts totaled $10 million (about 2% of our accounts and customer-related notes receivable of $459 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, 2015, we had less than $1 million of non-customer notes receivable.


 




52

Table of Contents
PART II

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.
 
Each 25 basis point decrease in the discount rate increases pension expense by $.5 million and increases the plans’ benefit obligation by $9 million.  A 25 basis point reduction in the expected return on assets would increase pension expense by $.4 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.


53

Table of Contents
PART II

Description
 
Judgments and
Uncertainties
 
Effect if Actual Results
Differ From Assumptions
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 in Note T to the Consolidated Financial Statements on page 114. With the exception of 2014, our largest annual cost for litigation claims was $6 million for the five years ending December 31, 2015 (excluding legal fees).

During 2014, we recorded expense of $92 million ($57 million for continuing operations and $35 million in discontinued operations) for various proceedings and other claims. By far the largest portion of these accruals was associated with a series of antitrust lawsuits involving the sale of polyurethane foam as discussed in Note T to the Consolidated Financial Statements on page 114. During 2015, we settled the substantial majority of these cases.



54

Table of Contents
PART II

 
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, 2015 and 2014, we had $32 million and $34 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. In cases where we believe it is more likely than not that we may not realize the future potential tax benefits, we establish a valuation allowance against them. 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 $107 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.



55

Table of Contents
PART II


LITIGATION CONTINGENCIES
 
Accruals for Probable Losses
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 have recorded a litigation contingency accrual for our reasonable estimate of probable loss for pending and threatened litigation proceedings, in aggregate, in millions, as follows:
 
Twelve Months Ended December 31,
 
2015
 
2014
Litigation contingency accrual - Beginning of period
$
83.9

 
$
3.7

Adjustment to accruals - expense - Continuing operations
5.7

 
56.8

Adjustment to accruals - expense - Discontinued operations
.7

 
35.4

Cash payments