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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, 2017

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, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ¨
 
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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, 2017 was $6,752,500,000.
There were 132,240,307 shares of the registrant’s common stock outstanding as of February 9, 2018.
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 15, 2018.


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TABLE OF CONTENTS
LEGGETT & PLATT, INCORPORATED—FORM 10-K
FOR THE YEAR ENDED December 31, 2017
 
Page
Number
PART I
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Supp. Item.
PART II
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
PART III
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
PART IV
Item 15.
 
 
 
 
 
 
 
Item 16.
 
 


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, tax impacts 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 consumer confidence, 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 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 produced utilizing spare capacity;
our ability to achieve expected levels of cash flow;
our ability to identify and consummate strategically-screened acquisitions;
our ability to maintain and grow the profitability of acquired companies;
adverse changes in foreign currency, tariffs, customs, shipping rates, political risk, and U.S. or foreign laws, regulations or legal systems (including the Tax Cuts and Jobs Act and other tax laws);
our ability to maintain the proper functioning of our internal business processes and information systems through technology failures or otherwise;
our ability to avoid modification or interruption of our information systems through cyber-security breaches;
a decline in the long-term outlook for any of our reporting units that could result in asset impairment;
the amount and timing of share repurchases;
the loss of one or more of our significant customers; and
litigation accruals related to various contingencies including vehicle-related personal injury, antitrust, intellectual property, product liability and warranty, taxation, environmental and workers’ compensation expense.

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PART I

PART I
 
Item 1. Business.

Summary
 
Leggett & Platt, Incorporated was founded as a partnership in Carthage, Missouri in 1883 and was incorporated in 1901. The Company, a pioneer of the steel coil bedspring, has become an international diversified manufacturer that conceives, designs and produces a wide range of engineered components and products found in many homes, offices, automobiles and aircraft. As discussed below, our operations are organized into 14 business units, which are divided into ten groups under our four segments: Residential Products; Industrial Products; Furniture Products; and Specialized Products.

Overview of Our Segments
 
Residential Products Segment

BEDDING GROUP
U.S. Spring
International Spring
 
FABRIC & CARPET CUSHION GROUP
Fabric Converting
Geo Components
Carpet Cushion
 
MACHINERY GROUP
Machinery

Our Residential Products segment began in 1883 with the manufacture of steel coil bedsprings. Today, we supply a variety of components and machinery used by bedding manufacturers in the production and assembly of their finished products. Our range of products offers our customers a single source for many of their component needs. We also produce or distribute carpet cushion, fabric, and geo components.
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 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

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PART I

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)
Machinery Group
 
 
Quilting machines for mattress covers
 
 
Industrial sewing/finishing machines
 
 
Conveyor lines
 
 
Mattress packaging and glue-drying equipment
CUSTOMERS
 
 
Manufacturers of finished bedding (mattresses and foundations)
 
 
Retailers and distributors of carpet cushion
 
 
Contractors, landscapers, road construction companies, and government agencies using geo components
 
 
Manufacturers of upholstered furniture, packaging, filtration and draperies

Industrial Products Segment

WIRE GROUP
Drawn Wire1
Steel Rod
1 Drawn Wire includes our former Wire Products business unit effective January 1, 2018.

The quality of our products and service, together with 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 trade customers that operate in a broad range of markets.
PRODUCTS
Wire Group
 
 
Drawn wire
 
 
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

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PART I

The Industrial Products segment also has a diverse group of trade customers that include:
 
 
Mechanical spring manufacturers
 
 
Wire distributors
 
 
Packaging and baling companies

Furniture Products Segment

HOME FURNITURE GROUP
Home Furniture 1
 
WORK FURNITURE GROUP
Work Furniture
 
CONSUMER PRODUCTS GROUP
Consumer Products 2
1 Home Furniture includes our former Furniture Hardware and Seating & Distribution business units effective January 1, 2018.
2 Consumer Products includes our former Adjustable Bed and Fashion Bed business units effective January 1, 2018.

In our Furniture Products segment, we design, manufacture, and distribute a wide range of components and finished products for the residential furniture, office and commercial furniture, and specialty bedding markets. We supply components used by home and work furniture manufacturers to provide comfort, motion and style in their finished products, as well as select lines of private-label finished furniture. We are also a major supplier of adjustable beds and fashion beds, with domestic manufacturing, distribution, e-commerce fulfillment and global sourcing capabilities.
PRODUCTS
Home Furniture Group
 
 
Steel mechanisms and motion hardware (enabling furniture to recline, tilt, swivel, rock and elevate) for reclining chairs, sofas, sleeper sofas and lift chairs
 
 
Springs and seat suspensions for chairs, sofas and love seats
Work Furniture Group
 
 
Select lines of private-label finished furniture
 
 
Bases, columns, back rests, casters and frames for office chairs, and control devices that allow chairs to tilt, swivel and elevate
 
 
Molded plywood components
Consumer Products Group
 
 
Adjustable beds
 
 
Fashion beds and bed frames
 

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PART I

CUSTOMERS
 
 
Manufacturers of upholstered furniture
 
 
Office furniture manufacturers
 
 
Mattress and furniture retailers
 
 
Department stores and big box retailers
 
 
E-commerce retailers

Specialized Products Segment

AUTOMOTIVE GROUP
Automotive
 
AEROSPACE PRODUCTS GROUP
Aerospace Products
 
HYDRAULIC CYLINDERS GROUP1
Hydraulic Cylinders
1 Formed January 31, 2018, with the acquisition of a manufacturer of hydraulic cylinders.

Our Specialized Products segment designs, manufactures and sells products including automotive seating components, tubing and fabricated assemblies for the aerospace industry, and hydraulic cylinders for the material handling, construction and transportation industries. Our technical capability and deep customer engagement allows us to compete on critical functionality, such as comfort, size, weight and noise. Our reliable product development and launch capability, coupled with our global footprint, makes us a trusted partner for our Tier 1 and OEM customers.
PRODUCTS
Automotive Group
 
 
Mechanical and pneumatic lumbar support and massage systems for automotive seating
 
 
Seat suspension systems
 
 
Motors and actuators, used in a wide variety of vehicle power features
 
 
Cables
Aerospace Products Group
 
 
Titanium, nickel and stainless-steel tubing, formed tube and tube assemblies, primarily used in fluid conveyance systems

Hydraulic Cylinders Group
 
 
Engineered hydraulic cylinders


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PART I

CUSTOMERS
 
 
Automobile OEMs and Tier 1 suppliers
 
 
Aerospace suppliers
 
 
Mobile equipment OEMs, primarily serving material handling and construction markets

Segment Financial Information
 
For information about sales to trade customers, sales by product line, EBIT, and total assets of each of our segments, refer to Note E on page 82 of the Notes to Consolidated Financial Statements.

Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. In conjunction with the change in executive officers, our management organizational structure and all related internal reporting changed effective January 1, 2017. As a result, the composition of our four segments also changed to reflect the new structure. The new segment structure is largely the same as prior years except the Home Furniture Group moved from Residential Products to Furniture Products (formerly Commercial Products) and the Machinery Group moved from Specialized Products to Residential Products.

In addition, the changes in LIFO reserve are now recognized within the segments to which they relate (primarily Industrial Products). Previously segment EBIT (Earnings Before Interest and Taxes) reflected the FIFO basis of accounting for certain inventories and an adjustment to the LIFO basis for these inventories was made at the consolidated financial statement level. These changes were retrospectively applied to all periods presented. The methods and assumptions that we use in estimating our LIFO reserve did not change.

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 an approach that employs four TSR sources: revenue growth, margin expansion, dividends, and share repurchases.

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).

For information about our TSR targets and performance see the discussion under "Total Shareholder Return" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations on page 28.

Returning Cash to Shareholders
 
During the past three years, we generated $1.36 billion of operating cash, and we returned much of this cash to shareholders in the form of dividends and share repurchases. 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.

For information about dividends and share repurchases see the discussion under "Pay Dividends" and "Repurchase Stock" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 44.


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PART I

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 business unit return, growth of EBIT (earnings before interest and taxes), EBIT margin, EBITDA (earnings before interest, taxes, depreciation and amortization), and operating cash flows. 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.

Disciplined Growth
 
We revised our TSR framework in 2016 to moderately increase the expected long-term contribution from revenue growth to 6-9% (from 4-5% previously). Over the last three years, the Company has generated combined unit volume and acquisition growth of 5% per year on average, but this growth was partially offset by divestitures, commodity deflation and currency impact.

Our long-term 6-9% annual revenue 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 annual 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 bolt-on businesses: generally possess annual revenue in excess of $15 million, significant synergies, and a strategic fit with an existing business unit.

Acquisitions
 
2018

On January 31, 2018, we acquired Precision Hydraulic Cylinders (PHC), a leading global manufacturer of engineered hydraulic cylinders primarily for the materials handling market. The purchase price was $85 million. This business has current annual revenues of $81 million and represents a new growth platform for the Company. PHC serves a market of mainly large OEM customers utilizing highly engineered, co-designed components with long product life-cycles, yet representing a small percentage of the end product’s cost. PHC will form a new business group titled Hydraulic Cylinders and report in the Specialized Products segment.

2017

We acquired three businesses and the remaining interest in a joint venture for total consideration (including cash and stock) of $56 million. The first was a Canadian geosynthetic products distributor and installer for civil engineering and construction applications. The second was a Michigan-based surface-critical bent tube manufacturer supporting our private-label seating strategy in Work Furniture. We also acquired a North Carolina manufacturer of rebond carpet cushion. Finally, we acquired the remaining 20% ownership in an Asian joint venture in our Work Furniture business.


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PART I

2016

We acquired three businesses and the remaining interest in a joint venture for total consideration of $65 million. The first was a U.S. manufacturer of aerospace tube assemblies. This business further expands our tube forming and fabrication capabilities, and also adds precision machining to our aerospace platform. We also acquired a distributor of geosynthetic products and a South African producer of mattress innersprings. Finally, we purchased the remaining interest in an Automotive joint venture in China. This business manufactures seat comfort products and lumbar support systems.

2015

We acquired a 70% interest in a European private-label manufacturer of high-end upholstered furniture. This business is complementary to our North American private-label operation and allows us to support our Work Furniture customers as they expand globally. The initial cash outlay for the 70% interest was $12 million and, per the terms of the agreement, we will acquire the remaining 30% in two equal parts, in the second quarters of 2018 and 2020. We have recorded a liability of approximately $14 million for these future payments. The recorded liability is based upon estimates and may fluctuate significantly until the payment dates.

For more information regarding our acquisitions, please refer to Note Q on page 110 of the Notes to Consolidated Financial Statements.
 
Divestitures
 
2017

We divested our final Commercial Vehicle Products (CVP) business for total consideration of $9 million. This business unit was engaged in the manufacture of van interiors, including the racks, shelving and cabinets installed in service vans.

2016

We divested four businesses for net consideration of $72 million. We sold two wire operations, one that manufactured wire partitions, perimeter guarding and storage lockers, and another that manufactured automatic wire strapping equipment and related consumable wire products. We also sold a CVP operation that designed and assembled docking stations for mobile computing equipment in vehicles. Finally, we sold a Machinery business that assembled industrial sewing machines.

2015

We sold four operations for total consideration of $36 million. We sold our final two Store Fixtures operations and a small operation within our CVP business. We also sold our Steel Tubing business unit. This business manufactured welded steel tubing and fabricated tube components.

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


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PART I

Foreign Operations
 
The percentages of our trade sales related to products manufactured outside the United States for the previous three years are shown below. The percentages of foreign trade sales were 31% for 2015, 34% for 2016 and 37% for 2017.

Percentage Foreign Trade Sales

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
Lumbar and seat suspension systems for automotive seating
Seamless and welded tubing and fabricated assemblies for aerospace applications
Select lines of private-label finished furniture
Machinery and equipment designed to manufacture innersprings for mattresses
China
Lumbar and seat suspension systems for automotive seating
Cables, motors, and actuators for automotive applications
Recliner mechanisms and bases for upholstered furniture
Formed wire for upholstered furniture
Innersprings for mattresses
Work furniture components, including chair bases and casters
Canada
Lumbar supports for automotive seats
Fabricated wire for the furniture and automotive industries
Work furniture chair controls, chair bases and table bases

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PART I

Mexico
Innersprings and fabricated wire for the bedding industry
Lumbar and seat suspension systems for automotive seating
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. We have also expanded internationally in instances where our customers move the production of their finished products overseas 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 85% of its trade sales from foreign operations, is particularly subject to the above risks. These and other foreign-related risks could result in cost increases, reduced profits, the inability to carry on our foreign operations and other adverse effects on our business.


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PART I

Geographic Areas of Operation

As of December 31, 2017, we had 121 manufacturing facilities; 73 located in the U.S. and 48 located in 17 foreign countries, as shown below. We also had various sales, warehouse and administrative facilities. However, our manufacturing plants are our most important properties.

 
Residential
Products
Industrial
Products
Furniture
Products
Specialized
Products
North America
 
 
 
 
Canada
n
 
n
n
Mexico
n
n
n
n
United States
n
n
n
n
Europe
 
 
 
 
Austria
 
 
 
n
Belgium
 
 
 
n
Croatia
n
 
 
 
Denmark
n
 
 
 
France
 
 
 
n
Hungary
 
 
 
n
Italy
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 trade sales related to products manufactured, and our tangible long-lived assets located outside the United States, refer to Note E on page 82 of the Notes to Consolidated Financial Statements.


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PART I

Sales by Product Line
 
The following table shows our approximate percentage of trade sales by product line for the last three years:

Product Line
2017
 
2016
 
2015
Bedding Group
21

%
 
22

%
 
23
%
Automotive Group
20

 
 
19

 
 
16
 
Fabric & Carpet Cushion Group
18

 
 
18

 
 
17
 
Home Furniture Group
10

 
 
11

 
 
11
 
Consumer Products Group
10

 
 
8

 
 
8
 
Wire Group1
7

 
 
8

 
 
9
 
Work Furniture Group
7

 
 
7

 
 
6
 
Aerospace Products Group
4

 
 
3

 
 
3
 
Machinery Group
2
 
 
2
 
 
2
 
Commercial Vehicle Products Group2
1
 
 
2
 
 
3
 
Steel Tubing Group3

 
 

 
 
2
 

1Certain operations in the Wire Group were sold in 2016.
2The two remaining Commercial Vehicle Products operations were sold in 2017 and 2016.
3The Steel Tubing Group was sold in 2015.

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.


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PART I

Customer Concentration
 
We serve thousands of customers worldwide, sustaining many long-term business relationships. In 2017, our largest customer accounted for approximately 5% of our consolidated revenues. Our top 10 customers accounted for approximately 33% of these consolidated revenues. The loss of one or more of these customers could have a material adverse effect on the Company as a whole, or on the respective segment in which the customer’s sales are reported, including our Residential Products, Specialized Products and Furniture 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, 2017. No single patent or group of patents, or trademark or group of trademarks, is material to our operations as a whole. Substantially all of our patents relate to products manufactured by the Residential Products, Furniture Products, and Specialized Products segments, while nearly half of our trademarks relate to products manufactured by the Residential Products segment. We had 1,382 patents issued and 584 in process, and 1,021 trademarks registered and 223 in process.

Patents and Trademarks

Some of our most significant trademarks include:
ComfortCore®, Mira-Coil®, VertiCoil®, Quantum®, Nanocoil®, Softech®,  
Lura-Flex®, Superlastic® and Active Support Technology® (mattress innersprings)
Semi-Flex® (box spring components and foundations)
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)


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PART I

Product Development

One of our strongest performing product categories across the company is ComfortCore®, our fabric-encased innerspring coils used in hybrid and other mattresses.  Our ComfortCore® volume continues to grow, and represented 40% of our total innerspring units by the end of 2017.  A growing number of our ComfortCore® innersprings contain a feature we call Quantum® Edge.  These are narrow-diameter, fabric-encased coils that form a perimeter around a ComfortCore® innerspring set, replacing foam in a finished mattress.  Over 30% of our ComfortCore® innersprings have the Quantum® Edge feature, and the volume of ComfortCore® with Quantum® Edge continues to grow.  We are investing in capacity and adding machinery, supplied by our Spuhl® operation, to support the growth in ComfortCore® and Quantum® Edge.

Most of our other businesses are engaged in product development activities to protect our market position and support ongoing growth.


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 our annual cost of research and development to be $25 million each year over the last three years.

Employees
 
At December 31, 2017, we had approximately 22,200 employees, of which 16,300 were engaged in production. Of the 22,200, approximately 12,700 were international employees (6,400 in China). Approximately 15% of our employees are represented by labor unions that collectively bargain for work conditions, wages or other issues. We did not experience any work stoppage related to contract negotiations with labor unions during 2017. Management is not aware of any circumstances likely to result in a material work stoppage related to contract negotiations with labor unions during 2018. We had approximately 7,900 employees in Specialized Products; 6,400 in Residential Products; 5,700 in Furniture Products; and 1,400 in Industrial Products.

Employees

At December 31, 2016, we had approximately 21,300 employees.

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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 innovation, product quality, 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:
Bedding components
Automotive seat support and lumbar systems
Components for home furniture and work furniture
Carpet cushion
Adjustable beds
High-carbon drawn steel wire
Bedding industry machinery

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.
 
For information about antidumping duty orders regarding innerspring and steel wire rod imports, please see "Competition" in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 29.

Seasonality
 
As a diversified manufacturer, we generally have not experienced significant seasonality. However, unusual economic factors in any given year, along with acquisitions and divestitures, can create sales variability and obscure the underlying seasonality of our businesses. Historically, our operating cash flows are stronger in the fourth quarter primarily related to the timing of cash collections from customers and payments to vendors.

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.


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Working Capital Items
 
For information regarding working capital items, please 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.

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 under the Investor Relations section of our website (www.leggett.com). 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, please see Note B on page 77 of the Notes to Consolidated Financial Statements.

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

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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 past years.

As a producer of steel rod, we are also impacted by volatility in metal margins (the difference between the cost of steel scrap and the market price for steel rod). If market conditions cause scrap costs and rod pricing to change at different rates (both in terms of timing and amount), metal margins could be compressed and this would negatively impact our results of operations.

Higher raw material costs in past years led some of our customers to modify their product designs, changing the quantity and mix of our components in their finished goods. In some cases, higher cost components were replaced with lower cost components. This primarily impacted our Residential Products product mix and decreased profit margins. If this were 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.
Although we deny liability in all currently threatened or pending litigation proceedings and believe that we have valid bases to contest all claims made against us, we have, at December 31, 2017, an aggregate litigation contingency accrual of $.4 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 and other matters) are estimated to be $22 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 $22 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, please see Note S on page 115 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 2017, 37% 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.

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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, 2017, goodwill and other intangible assets represented $991 million, or 28% of our total assets. In addition, net property, plant and equipment and sundry assets totaled $793 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 would 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, please 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 transitioned certain corporate-level shared service systems primarily related to our U.S. operations for general ledger, cash application, purchasing and accounts payable disbursements to a new platform during the first quarter 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 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 a reduction in the amount of taxable income or a change in the source of taxable income 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 flows 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

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drive demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one quarter of our sales.

Demand weakness in our markets can lead to lower unit orders, sales and earnings in our businesses. Several factors, including a weak global economy, low consumer confidence, or a depressed housing market could contribute to conservative spending habits by consumers around the world. Short lead times in most of our markets allow for limited visibility into demand trends. If economic and market conditions deteriorate, we may experience material negative impacts on our business, financial condition, operating cash flows and results of operations.

We are exposed to political, regulatory, and legislative risks that may arise from actions by U.S. or  foreign governments that could negatively impact our results of operations, financial condition and cash flows.

In 2017, 37% of our sales were generated by international operations.  Further, many of our businesses obtain products, components and raw materials from global suppliers. Accordingly, our business is subject to the political, regulatory, and legislative risks inherent in operating in numerous countries. These regulations and laws are complex and may change. If the U.S. or foreign governments adopt or change regulations, this could negatively impact our results of operations, financial condition and cash flows.   

Changes in tax laws or challenges to our tax positions could negatively impact our results of operations, financial condition and cash flows.

We are subject to the tax laws and reporting rules of the U.S. (federal, state and local) and several foreign jurisdictions.  Current economic and political conditions make these tax rules (and governmental interpretation of these rules) in any jurisdiction, including the U.S., subject to significant change and uncertainty.  There have been proposals, most notably by the Organization for Economic Cooperation and Development, the European Union, the U.S., and Canada, to reform tax laws or change interpretations of existing tax rules.  Some of these proposals, if adopted, could significantly impact how multinational corporations are taxed on their earnings and transactions.  Although we cannot predict whether or in what form these proposals will become law, or how they might be interpreted, such changes could have a material adverse effect on our earnings and cash flows.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA), resulting in significant changes to U.S. federal income tax law, including the reduction of the statutory federal income tax rate for corporations and the transition from a worldwide tax system to a territorial system. We are continuing to assess the extensive changes under this legislation and its overall impact on the Company. Based on our current understanding, we expect TCJA to reduce our tax rate in future periods. However, this expectation is based on our current knowledge of the legislation and assumptions we have made. Recognized impacts could differ materially from current estimates based on additional analysis, changes in our interpretation of certain aspects of the legislation, actual financial results for 2018, additional regulatory guidance that might be issued, and other factors, including actions the Company may take as a result of TCJA.

Business disruptions to our steel rod mill, if coupled with an inability to purchase an adequate and/or timely supply of quality steel rod from alternative sources, could have a material negative impact on our Residential Products and Industrial Products segments and Company results of operations.

We purchase steel scrap from third party suppliers.  This scrap is converted into steel rod in our mill in Sterling, Illinois.  Our steel rod mill has annual output of approximately 500,000 tons, a substantial majority of which is used by our three wire mills. Our wire mills convert the steel rod into drawn steel wire.  This wire is used in the production of many of our products, including mattress innersprings.


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A disruption to the operation of, or supply of steel scrap to, our steel rod mill could require us to purchase steel rod from alternative supply sources, subject to market availability.  Ongoing trade action by domestic rod producers against several foreign suppliers could result in the imposition of additional duties on steel rod imports which could result in reduced market availability and/or higher cost of steel rod.

If we experience a disruption to our ability to produce steel rod in our mill, coupled with a reduction of adequate and/or timely supply from alternative market sources of quality steel rod, we could experience a material negative impact on our Residential Products and Industrial Products segments and Company results of operations.

Inability to identify and consummate acquisitions at a sufficient rate and at appropriate prices could negatively impact our annual revenue growth rate.
Our long-term 6-9% annual revenue growth objective envisions periodic acquisitions. We expect to continue our strategy of seeking acquisitions that have a clear strategic rationale, a sustainable competitive advantage, a strong fit with the Company, are in a growing market, and create value by enhancing total shareholder return. Our ability to grow revenues at 6-9% depends, in part, upon our ability to identify and successfully acquire these businesses at appropriate prices. Because of competition among prospective buyers which often leads to higher valuations, the need to satisfy applicable closing conditions or obtain antitrust and other regulatory approvals on acceptable terms, and accounting, regulatory and tax requirements, we may not be able to identify or consummate these acquisitions at a sufficient rate, which could adversely impact our annual revenue growth rate.


Item 1B. Unresolved Staff Comments.
 
None.


Item 2. Properties.

The Company’s corporate office is located in Carthage, Missouri. As of December 31, 2017 we had 121 manufacturing locations, of which 73 are located across the United States and 48 are located in 17 foreign countries. We also had 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
Products
 
Industrial
Products
 
Furniture
Products
 
Specialized
Products
United States
 
73
 
38
 
6
 
25
 
4
Europe
 
15
 
7
 
 
1
 
7
China
 
17
 
2
 
 
5
 
10
Canada
 
6
 
1
 
 
2
 
3
Mexico
 
6
 
2
 
1
 
1
 
2
Other
 
4
 
2
 
 
 
2
Total
 
121
 
52
 
7
 
34
 
28

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

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Manufacturing Locations Owned or Leased by Segment

 
 
Company-
Wide
 
Subtotals by Segment
Manufacturing Locations
 
Residential
Products
 
Industrial
Products
 
Furniture
Products
 
Specialized
Products
Owned
 
70
 
36
 
7
 
19
 
8
Leased
 
51
 
16
 
 
15
 
20
Total
 
121
 
52
 
7
 
34
 
28

In 2017, 69% of the Company's net sales were produced in these 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 J on page 92 of the Notes to Consolidated Financial Statements. Of our 121 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.
 
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 Products. The rod mill consists of approximately 1 million square feet of production space, which we own, and has annual output of approximately 500,000 tons of steel rod, of which a substantial majority is used by our own wire mills. Our wire mills convert the steel rod into drawn steel wire.  This wire is used in the production of many of our products, including mattress innersprings. A disruption to the operation of, or supply of steel scrap to, our steel rod mill could require us to purchase steel rod from alternative supply sources, subject to market availability.  Ongoing trade action by domestic rod producers against several foreign suppliers could result in the imposition of additional duties on steel rod imports which could result in reduced market availability and/or the increase in our cost of steel rod. If we experience a disruption to our ability to produce steel rod in our mill, coupled with a reduction of adequate and/or timely supply from alternative market sources of quality steel rod, we could experience a material negative impact on our Residential Products and Industrial Products segments and Company 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. In certain businesses, productive capacity 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 growth in several of our businesses, including Automotive, U.S. Spring, European Spring and Adjustable Bed.  



Item 3. Legal Proceedings.
 
The information in Note S beginning on page 115 of the Notes to Consolidated Financial Statements is incorporated into this section by reference.



Item 4. Mine Safety Disclosures.
 
Not applicable.


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Supplemental Item. Executive Officers of the Registrant.
 
The following information is included in accordance with the provisions of Part III, Item 10 of Form 10-K and Item 401(b) of Regulation S-K.
 
The table below sets forth the names, ages and positions of all executive officers of the Company. Executive officers are normally appointed annually by the Board of Directors.
 
Name
 
Age
 
Position
Karl G. Glassman
 
59
 
President and Chief Executive Officer
Matthew C. Flanigan
 
56
 
Executive Vice President and Chief Financial Officer
Perry E. Davis
 
58
 
Executive Vice President, President - Residential Products & Industrial Products
J. Mitchell Dolloff
 
52
 
Executive Vice President, President - Specialized Products & Furniture Products
David M. DeSonier
 
59
 
Senior Vice President, Strategy & Investor Relations
Scott S. Douglas
 
58
 
Senior Vice President, General Counsel & Secretary
Russell J. Iorio
 
48
 
Senior Vice President, Corporate Development
Tammy M. Trent
 
51
 
Senior Vice President, Chief Accounting Officer

Subject to the severance benefit agreements with Mr. Glassman, Mr. Flanigan, Mr. Davis, Mr. Dolloff and Mr. Douglas listed as exhibits to this Report (and certain other immaterial agreements with other executive officers), the executive officers generally serve at the pleasure of the Board of Directors. Please see Exhibit Index on page 120 for reference to the agreements.
 
Karl G. Glassman was appointed Chief Executive Officer of the Company in 2016 and President in 2013. He 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 2003 to 2005, Vice President and President of the Office Furniture Components Group from 1999 to 2003 and in various capacities since 1997.

Perry E. Davis was appointed Executive Vice President, President - Residential Products & Industrial Products effective January 1, 2017. He previously served as Senior Vice President and President of the Residential Furnishings segment beginning in 2012. He also 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 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.
 
J. Mitchell Dolloff was appointed Executive Vice President, President - Specialized Products & Furniture Products effective January 1, 2017. He previously served as Senior Vice President and President of the Specialized Products segment beginning in 2016. He served the Company as Vice President from 2014 to 2015. He also served as President of Automotive Asia from 2011 to 2013, Vice President of the Specialized Products segment from 2009 to 2013, and Director of Business Development for Specialized Products from 2007 to 2009. He has served the Company in various other capacities since 2000.


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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. He has served as Assistant Treasurer since 2002. He joined the Company as Vice President—Investor Relations in 2000.
 
Scott S. Douglas was appointed Senior Vice President and General Counsel in 2011. He was appointed Secretary of the Company in 2016. He previously served as Vice President and General Counsel from 2010 to 2011, as Vice President—Law and Deputy General Counsel from 2008 to 2010, as Associate General Counsel—Mergers & Acquisitions from 2001 to 2007, and as 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, Corporate Development in 2016. He previously served the Company as Senior Vice President, Mergers & Acquisitions from 2014 to 2016. He served the Company as Vice President, Mergers & Acquisitions from 2005 to 2014, and Director of Mergers, Acquisitions & Strategic Planning from 2002 to 2005.

Tammy M. Trent was appointed Senior Vice President in 2017 and has served as Chief Accounting Officer since 2015. She served as Staff Vice President, Financial Reporting from 2007 to 2015. She has served the Company in a series of progressively more responsible accounting capacities since 1998. 

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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is traded on the New York Stock Exchange (symbol LEG). The table below highlights quarterly and annual stock market information for the last two years.
 
 
Price Range (1)
 
Volume of
Shares Traded (1)
(in Millions)
 
Dividend
Declared
 
High
 
Low
 
2017
 
 
 
 
 
 
 
First Quarter
$
50.89

 
$
46.24

 
61.1

 
$
0.34

Second Quarter
54.97

 
49.92

 
59.9

 
0.36

Third Quarter
53.96

 
43.17

 
59.9

 
0.36

Fourth Quarter
51.99

 
44.76

 
58.2

 
0.36

For the Year
$
54.97

 
$
43.17

 
239.1

 
$
1.42

2016
 
 
 
 
 
 
 
First Quarter
$
48.50

 
$
36.64

 
60.3

 
$
0.32

Second Quarter
51.20

 
47.11

 
50.7

 
0.34

Third Quarter
54.63

 
45.11

 
55.6

 
0.34

Fourth Quarter
50.79

 
44.02

 
57.0

 
0.34

For the Year
$
54.63

 
$
36.64

 
223.6

 
$
1.34

 
(1) Price and volume data reflect composite transactions; price range reflects intra-day prices; data source is Bloomberg.
 
Shareholders and Dividends
 
As of February 9, 2018, we had 8,497 shareholders of record.
 
Increasing the dividend remains a high priority. In 2017, we increased the quarterly dividend by $.02, or 6% to $.36 per share. In each year for over 25 years, we have generated operating cash in excess of our annual requirement for capital expenditures and dividends. We expect this again to be the case in 2018. We have no restrictions that materially limit our ability to pay such dividends or that we reasonably believe are likely to limit the future payment of dividends.

For more information on dividends see "Pay Dividends" in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 44.


 

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Issuer Purchases of Equity Securities
 
The table below is a listing of our purchases of the Company’s common stock during each calendar month of the fourth quarter of 2017.
 
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 2017
 

 
$

 

 
7,133,023

November 2017
 
5,875

 
$
46.45

 
3,000

 
7,130,023

December 2017
 
6,066

 
$
48.26

 

 
7,130,023

Total
 
11,941

 
$
47.37

 
3,000

 
 

(1)
This number includes 8,941 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 stock units, all of which totaled 11,852 shares for the fourth quarter.
(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, 2018, the Company was authorized by the Board of Directors to repurchase up to 10 million shares in 2018. No specific repurchase schedule has been established.
 



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Item 6. Selected Financial Data.

 
(Unaudited)
2017 1
 
2016 2
 
2015 3
 
2014 4
 
2013 5
(Dollar amounts in millions, except per share data)
 
 
 
 
 
 
 
 
 
Summary of Operations
 
 
 
 
 
 
 
 
 
Net Sales from Continuing Operations
$
3,944

 
$
3,750

 
$
3,917

 
$
3,782

 
$
3,477

Earnings from Continuing Operations
294

 
367

 
328

 
225

 
186

(Earnings) Attributable to Noncontrolling Interest, net of tax

 

 
(4
)
 
(3
)
 
(2
)
Earnings (loss) from Discontinued Operations, net of tax
(1
)
 
19

 
1

 
(124
)
 
13

Net Earnings attributable to Leggett & Platt, Inc. common shareholders
293

 
386

 
325

 
98

 
197

Earnings per share from Continuing Operations
 
 
 
 
 
 
 
 
 
Basic
2.16

 
2.66

 
2.30

 
1.57

 
1.27

Diluted
2.14

 
2.62

 
2.27

 
1.55

 
1.25

Earnings (Loss) per share from Discontinued Operations
 
 
 
 
 
 
 
 
 
Basic
(.01
)
 
.14

 
.01

 
(.88
)
 
.09

Diluted
(.01
)
 
.14

 
.01

 
(.87
)
 
.09

Net Earnings (Loss) per share
 
 
 
 
 
 
 
 
 
Basic
2.15

 
2.80

 
2.31

 
.69

 
1.36

Diluted
2.13

 
2.76

 
2.28

 
.68

 
1.34

Cash Dividends declared per share
1.42

 
1.34

 
1.26

 
1.22

 
1.18

Summary of Financial Position
 
 
 
 
 
 
 
 
 
Total Assets
$
3,551

 
$
2,984

 
$
2,964

 
$
3,136

 
$
3,105

Long-term Debt, including capital leases
$
1,098

 
$
956

 
$
942

 
$
762

 
$
685



All amounts are presented after tax. 
1 
Net earnings from Continuing Operations for 2017 includes a $50 million charge associated with the TCJA; $13 million of net gains on sales of a business and real estate; an $8 million tax benefit from a divestiture; a $10 million pension settlement charge; and a $3 million charge for an impairment of a wire business.

2 
Net earnings from Continuing Operations for 2016 includes $16 million of gains on sales of businesses; a $3 million goodwill impairment charge; and a $5 million gain on a foam litigation settlement. Discontinued operations primarily consists of a gain on a foam litigation settlement.
 
3 
Net earnings from Continuing Operations for 2015 includes $4 million of impairments; $3 million associated with litigation accruals; and an $8 million pension settlement charge.

4 
Net earnings from Continuing Operations for 2014 includes $33 million associated with litigation accruals. Discontinued Operations includes the following items: $93 million goodwill impairment; $5 million loss on the sale of the majority of our Store Fixtures unit; and $22 million associated with litigation accruals.

5 
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 an $8 million bargain purchase gain related to an acquisition.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
HIGHLIGHTS
 
Sales increased 5% in 2017, from growth in volume, raw material-related price inflation and currency impact. Acquisitions added 2% to sales but were offset by divestitures (-2%). Sales growth came primarily from Automotive, reflecting content gains and new program awards, and Adjustable Bed. Several other businesses, including International Spring, Geo Components, Work Furniture and Aerospace, contributed to sales growth this past year.

Earnings from continuing operations decreased significantly from the effects of one-time costs associated with the recently enacted Tax Cuts and Jobs Act (TCJA). Other significant factors that reduced earnings include on going steel inflation and the timing lag associated with passing along higher steel costs. These reductions were partially offset by increased sales and lower income taxes.
 
We continue to optimize our portfolio by increasing investment in those businesses that possess strong competitive advantage and reducing our exposure to businesses and markets that are less attractive. We increased capital expenditures in 2017 to support product categories that are growing. In addition, we acquired three small businesses. We also divested the last remaining operation within the Commercial Vehicle Products group during the year.

Operating cash flow decreased versus 2016, primarily from higher working capital due to sales growth and inflation. However, we once again generated more than enough operating cash flow to comfortably fund dividends and capital expenditures, something we have accomplished each year for more than 25 years.

We raised the quarterly dividend by 6% in 2017 and extended our record of consecutive annual increases to 46 years. We also bought back 3.3 million shares of our stock.

During the year, we issued $500 million of 3.5% notes maturing in 2027. We also extended the term of, and expanded the borrowing capacity under, our revolving credit facility from $750 million to $800 million and correspondingly increased our commercial paper program. We ended 2017 with net debt to net capital at 33%, comfortably within our long-standing targeted range of 30-40%, as discussed on page 47.
 
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, 2017, we generated TSR of 7% per year on average, placing us just below the midpoint of the S&P 500.

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

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INTRODUCTION
 
Total Shareholder Return
 
Total Shareholder Return (TSR), relative to peer companies, is the key financial measure that we use to assess long-term performance. TSR is driven by the change in our share price and the dividends we pay: TSR = (Change in Stock Price + Dividends) / Beginning Stock Price. We seek to achieve TSR in the top third of the S&P 500 over the long term through an 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, 2017, we generated TSR of 7% per year on average, just below the midpoint of the S&P 500.

The table below shows the components of our TSR targets. Accomplishing this level of performance over rolling three-year periods should enable us to consistently attain our top-third TSR goal.
            
 
 
Current Targets
Revenue Growth
 
6-9%
Margin Increase
 
1%
Dividend Yield
 
3%
Stock Buyback
 
1%
  Total Shareholder Return
 
11-14%

Customers
 
We serve a broad suite of customers, with our largest customer representing approximately 5% of our sales. Many are companies whose names are widely recognized. They include producers of residential furniture and bedding, automotive 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.
 

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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.
 
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 decreased significantly, leading to downward pressure on selling prices. We realized a beneficial pricing lag during 2015, as costs generally decreased at a faster rate than selling prices. In 2016, steel costs once again became volatile. Steel inflation during the first half of 2016 was followed by deflation in the third quarter, and significant inflation late in the year. This steel inflation continued throughout 2017. We implemented price increases to recover most of the higher costs, but with the normal lag in realizing selling price increases, the cost inflation led to margin pressure throughout 2017.

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 in past years, were moderately compressed in late 2016, and began to increase modestly in the second half of 2017.
 
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 past years and generally 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 of their products and manage their costs, while providing higher profits 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 innovation, better product quality, 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 in most of our business units, 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).

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 imposition of duties on imports of Chinese steel wire rod. The

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antidumping duties range from 106% to 110% and the countervailing duties range from 178% to 193%. Both remain in effect through December 2019.  Also, in March 2017 certain U.S. steel wire rod producers filed antidumping and countervailing duty petitions on imports of steel wire rod from Belarus, Italy, Korea, Russia, South Africa, Spain, Turkey, Ukraine, United Arab Emirates, and the United Kingdom. The ITC and the DOC have made final affirmative determinations and imposed antidumping duties on imports from Belarus (280%), Russia (437% to 757%), South Africa (135% to 142%), Ukraine (35% to 44%), and United Arab Emirates (84%). Final antidumping and countervailing duty determinations on the remaining countries are expected in March and April 2018.

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 and several other U.S. manufacturers formed a coalition 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 U.S. Customs and Border Protection to implement a transparent, time-limited process to investigate allegations of duty evasion and to assess duties where appropriate.


Change in Segment Reporting in 2017

Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. In conjunction with a change in executive officers, our management organizational structure and all related internal reporting changed as of January 1, 2017. Effective January 1, 2017, Perry E. Davis became President of the Residential Products and Industrial Products segments, and J. Mitchell Dolloff became President of the Specialized Products and Furniture Products segments.

The composition of our four segments also changed effective January 1, 2017. The table below outlines the new segment structure. We reported under this new structure when we filed our 2017 first quarter 10-Q.
Residential Products
Industrial Products
Furniture Products
Specialized Products
 
 
 
 
Bedding Group
Wire Group
Work Furniture Group
Automotive Group
Fabric & Carpet Cushion Group
 
Home Furniture Group
Aerospace Products Group
Machinery Group
 
Consumer Products Group
CVP Group

The new structure is largely the same as in prior years except that the Home Furniture Group was moved from Residential Products (formerly Residential Furnishings) to Furniture Products (formerly Commercial Products), and the Machinery Group was moved from Specialized Products to Residential Products. The Industrial Products segment (formerly Industrial Materials) had no changes. Our final CVP operation was sold in 2017.

Prior to January 1, 2017, all of our segments used the first-in, first-out (FIFO) method for valuing inventory. In our consolidated financials, we converted approximately 50% of these inventories (primarily our domestic, steel-related inventories) to the last-in, first-out (LIFO) method, and reported the related LIFO benefit or expense outside of the segments.  Effective January 1, 2017, the LIFO benefit or expense was recognized within the segment to which it relates.  This change has been retrospectively applied to all prior periods presented.


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RESULTS OF OPERATIONS—2017 vs. 2016
 
Sales increased 5% in 2017, from growth in volume, raw material-related price inflation, and currency impact. Acquisitions added 2% to sales but were offset by divestitures. Sales growth came primarily from Automotive, reflecting content gains and new program awards, and Adjustable Bed. Several other businesses, including International Spring, Geo Components, Work Furniture and Aerospace, contributed to sales growth this year.

Earnings from continuing operations decreased significantly from the effects of one-time costs associated with the recently enacted TCJA. Other significant factors that reduced earnings include ongoing steel inflation and the timing lag associated with passing along higher steel costs. These reductions were partially offset by increased sales and lower income taxes. 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 2017, and identifies the major factors contributing to the changes.
 
(Dollar amounts in millions, except per share data)
Amount
 
% *
Net sales:
 
 
 
Year ended December 31, 2016
$
3,750

 
 
Divestitures
(78
)
 
(2
)%
  2016 sales excluding divestitures
3,672

 
 
   Approximate volume gains
142

 
4
 %
   Approximate raw material-related inflation and currency impact
65

 
2
 %
Same location sales
207

 
6
 %
Acquisition sales growth
65

 
2
 %
Year ended December 31, 2017
$
3,944

 
5
 %
Earnings from continuing operations:
 
 
 
(Dollar amounts, net of tax)
 
 
 
Year ended December 31, 2016
$
367

 
 
TCJA impact, net
(50
)
 
 
Pension settlement charge
(10
)
 
 
Real estate gain
15

 
 
Divestiture tax benefit
8

 
 
Divestiture loss
(2
)
 
 
Impairment
(3
)
 
 
Non-recurrence of divestiture gains
(17
)
 
 
Non-recurrence of litigation settlement gain
(5
)
 
 
Other, including higher steel costs (and LIFO expense),
 
 
 
    partially offset by higher volume and lower income taxes
(9
)
 
 
Year ended December 31, 2017
$
294

 
 
Earnings Per Diluted Share (continuing operations)—2016
$
2.62

 
 
Earnings Per Diluted Share (continuing operations)—2017
$
2.14

 
 
 * Calculations impacted by rounding



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Sales increased 5% from volume growth, raw-material price increases and currency impact. Acquisitions also contributed 2% to sales growth but were offset by divestitures. The growth came primarily from Automotive and Adjustable Bed. Several other businesses, including International Spring, Geo Components, Work Furniture and Aerospace, also contributed to sales growth this past year. 

During 2017, we divested the last remaining CVP operation, which had total annual sales of $43 million.

As indicated in the table above, earnings from continuing operations decreased primarily from the impact of the recently enacted TCJA. Operationally, earnings decreased largely from steel inflation, the timing lag associated with passing along these higher steel costs, and several smaller items partially offset by higher volume and lower income taxes.

LIFO Impact
 
Approximately 50% of our inventories are valued on the LIFO method. These are primarily our domestic, steel-related inventories. In 2017, increasing steel costs over the course of the year resulted in a full-year pretax LIFO expense of $19 million. In 2016, increasing steel costs, particularly in the fourth quarter, resulted in a full-year pretax LIFO expense of $11 million.
 
For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 71.
 
Interest and Income Taxes
 
Net interest expense in 2017 did not appreciably change.

Our tax rate is determined by a combination of items, some recurring and some discrete.  Recurring items include income earned in various tax jurisdictions and differences in tax rates in those jurisdictions.  These items tend to be relatively stable from year to year.  Conversely, discrete items may not be as consistent from year to year.

On December 22, 2017, President Trump signed into law TCJA, enacting significant changes to the U.S. Internal Revenue Code of 1986, as amended, including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21%, the transition of U.S. taxation from a worldwide tax system to a territorial system, and the imposition of a one-time tax associated with the mandatory deemed repatriation of untaxed foreign earnings. Although these provisions are generally applicable for years after December 31, 2017, several impacted our 2017 earnings, including the one-time deemed repatriation tax, additional taxes for expected foreign cash repatriations, and the revaluation of our U.S. deferred taxes. As a result, we recorded a net tax expense of $50 million in the fourth quarter of 2017 related to these items, which negatively impacted our full year tax rate by 12%. Of this total amount, $67 million is related to the one-time deemed repatriation tax that will be paid on a graduated scale over the next eight years.

The amount recorded is our best estimate and based on our current understanding of TCJA and the guidance currently available, but should be considered provisional. The ultimate impact may differ from the provisional amount and the accounting will be finalized no later than the fourth quarter of 2018.

While the U.S. statutory federal income tax rate was 35% in both years, our worldwide effective income tax rate on continuing operations was 32% in 2017, compared to 25% for 2016.  As discussed above, our rate was negatively impacted by 12% in 2017 due to the effect of TCJA (16% associated with the deemed repatriation tax and 2% from tax on expected future foreign cash repatriations, partially offset by a 6% benefit from the revaluation of our U.S. net deferred tax liabilities). In both years our tax rate benefited from earnings in non-U.S. jurisdictions, which reduced our effective tax rate by 8% in 2017 and 6% in 2016.  In addition, the 2017 tax rate benefited by 2% related to tax attributes from a divested business, 2% related to the tax effects of stock-based compensation deductions in the year, and 3% from other permanent tax differences.

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The 2016 tax rate benefited by 3% related to the tax effects of stock-based compensation deductions in the year and 1% (net) from other items.

We anticipate an effective tax rate for 2018 of approximately 22%, which includes the anticipated tax effects associated with TCJA and certain other expected discrete items, including stock compensation payments. The expected tax impact from stock compensation can fluctuate based on stock price and other factors, and any changes to our 2017 provisional and 2018 expected TCJA amounts could impact our anticipated 2018 tax rate. Our tax rate is also contingent upon other factors such as our overall profitability, the mix of earnings among tax jurisdictions, the type of income earned, business acquisitions and dispositions, the impact of tax audits and other discrete items, and the effect of other tax law changes and prudent tax planning strategies.

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Segment Results
 
In the following section we discuss 2017 sales and EBIT (earnings before interest and taxes) for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in Note E to the Consolidated Financial Statements on page 82. 2016 segment data has been retrospectively adjusted to reflect the change in segment reporting discussed on page 30.
 
(Dollar amounts in millions)
2017
 
2016
 
Change in Sales
 
% Change
Same Location
Sales (1)
 
 
$
 
%
 
Sales
 
 
 
 
 
 
 
 
 
 
 
Residential Products
$
1,639

 
$
1,589

 
$
50

 
3
 %
 
%
 
 
Industrial Products
546

 
583

 
(37
)
 
(6
)%
 
%
 
 
Furniture Products
1,113

 
1,048

 
65

 
6
 %
 
5
%
 
 
Specialized Products
943

 
906

 
37

 
4
 %
 
8
%
 
 
Total segment sales
4,241

 
4,126

 
115

 
 
 
 
 
 
Intersegment sales elimination
(297
)
 
(376
)
 
79

 
 
 
 
 
 
Trade sales
$
3,944

 
$
3,750

 
$
194

 
5
 %
 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
 
Change in EBIT
 
EBIT Margins (2)
$
 
%
 
2017
 
2016
EBIT
 
 
 
 
 
 
 
 
 
 
 
Residential Products
$
184

 
$
168

 
$
16

 
10
 %
 
11.2
%
 
10.5
%
Industrial Products
21

 
65

 
(44
)
 
(68
)%
 
3.8
%
 
11.2
%
Furniture Products
81

 
107

 
(26
)
 
(24
)%
 
7.3
%
 
10.2
%
Specialized Products
196

 
181

 
15

 
8
 %
 
20.8
%
 
20.0
%
Intersegment eliminations & other
1

 
1

 

 
 
 
 
 
 
Pension settlement charge
(15
)
 
 
 
(15
)
 
 
 
 
 
 
Total EBIT
$
468

 
$
522

 
$
(54
)
 
(10
)%
 
11.9
%
 
13.9
%
______________________________

(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 operated one year earlier.
(2)
Segment margins are calculated on total sales. Overall company margin is calculated on trade sales.

Residential Products
 
Residential Products total sales increased 3% in 2017 from acquisitions, net of a small divestiture. Same locations sales were flat, with volume growth and raw material-related price increases offset by lower pass-through sales of adjustable beds (which originate in Furniture Products but are occasionally distributed through Residential Products). Within our U.S. Spring business, total innerspring units decreased 4%, but growth continued in ComfortCore® (our pocketed coil innersprings), with unit volume in that category up 8%. Volume also increased in our International Spring business.

EBIT and EBIT margin increased in 2017 due to the pass-through of raw material cost increases and higher volume, despite the non-recurrence of a $7 million litigation benefit in 2016.
  

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Industrial Products
 
Total sales in the segment declined 6%, due to divestitures completed in 2016. Same location sales in Industrial Products were flat with steel-related price increases offset by lower volume.
 
EBIT decreased primarily from the non-recurrence of a $16 million divestiture gain in 2016, higher raw material costs (including LIFO expense), the timing lag associated with passing along inflation, an impairment charge of $5 million, and lower volume.

Furniture Products
 
Sales in Furniture Products increased 6%, with same location sales up 5% from growth in Adjustable Bed and Work Furniture. A small acquisition in Work Furniture added 1% to sales growth.

EBIT and EBIT margin decreased, with the benefit from sales growth more than offset by higher steel costs (including LIFO expense), production inefficiencies and other smaller items. 
 
Specialized Products
 
In Specialized Products, total sales increased 4% in 2017, and same location sales increased 8%, with volume gains in Automotive and Aerospace partially offset by lower sales in the former CVP business unit. CVP divestitures reduced sales by 4%. 

EBIT and EBIT margin increased primarily from a $23 million gain related to the sale of real estate formerly associated with CVP and higher volume, partially offset by a non-recurring divestiture gain in 2016 ($11 million) and growth-related costs.

Results from Discontinued Operations
 
Full year earnings from discontinued operations, net of tax, decreased to -$1 million from $19 million in 2016. This decrease is primarily due to the non-recurrence of a litigation gain ($20 million) related to our former Prime Foam business. For further information about discontinued operations, see Note B to the Consolidated Financial Statements on page 77.

 


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RESULTS OF OPERATIONS—2016 vs. 2015
 
Sales decreased 4% in 2016, with slightly higher unit volume and acquisitions more than offset by divestitures, raw material-related price deflation, and currency impact. Sales growth continued in Automotive, reflecting content gains and new program awards, but several other businesses experienced soft market demand and lower unit volume during the year.

Earnings from continuing operations increased from several factors, including divestiture gains. The benefit from increased unit volume and lower income taxes was partially offset by steel inflation and the non-recurrence of a pricing lag benefit associated with deflation late in 2015. 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 2016, and identifies the major factors contributing to the changes.
 
(Dollar amounts in millions, except per share data)
Amount
 
%
Net sales:
 
 
 
Year ended December 31, 2015
$
3,917

 
 
Divestitures
(141
)
 
(4
)%
  2015 sales excluding divestitures
3,776

 
 
   Approximate volume gains
58

 
2
 %
   Approximate raw material-related deflation and currency impact
(111
)
 
(3
)%
Same location sales
(53
)
 
(1
)%
Acquisition sales growth
27

 
1
 %
Year ended December 31, 2016
$
3,750

 
(4
)%
Earnings from continuing operations:
 
 
 
(Dollar amounts, net of tax)
 
 
 
Year ended December 31, 2015
$
328

 
 
Divestiture gains
17

 
 
Litigation settlement gain
5

 
 
Non-recurrence of pension settlement charge
8

 
 
Other, including benefit from higher volume and lower income taxes, partially
 
 
 
    offset by steel inflation and non-recurrence of prior year pricing lag benefit
9

 
 
Year ended December 31, 2016
$
367

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

 
 
Earnings Per Diluted Share (continuing operations)—2016
$
2.62

 
 
 

Sales decreased 4%, with unit volume growth and acquisitions more than offset by divestitures, raw material-related price decreases, and currency impact. Strong growth in Automotive was partially offset by soft demand in several other markets, including bedding and home furniture. 

During 2016, we divested two wire operations, a CVP business and a Machinery operation. These businesses had total combined annual sales of approximately $100 million.

As indicated in the table above, earnings from continuing operations increased from divestiture gains (related to a CVP business and a wire operation), a litigation settlement gain, and the non-recurrence of the prior year's

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pension settlement charge. Operationally, earnings also benefited from higher unit volume and lower income taxes related to a new accounting standard for stock-based compensation. These improvements were partially offset by steel inflation that began to occur in late 2016 and the non-recurrence of the prior year pricing lag benefit (that occurred as steel costs deflated in late 2015).

LIFO Impact
 
Approximately 50% of our inventories are valued on the LIFO method. These are primarily our domestic, steel-related inventories. In 2016, increasing steel costs, particularly in the fourth quarter, resulted in a full-year pretax LIFO expense of $11 million. In 2015, significant deflation in steel costs, particularly in the fourth quarter, 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 71.
 
Interest and Income Taxes
 
Net interest expense in 2016 decreased slightly due to the repayment of $200 million 5% notes in August 2015.

Our tax rate is determined by a combination of items, some recurring and some discrete.  Recurring items include things like income earned in various tax jurisdictions, and differences in tax rates in those jurisdictions.  These items tend to be relatively stable from year to year.  Conversely, discrete items are things that may not be as consistent from year to year.

While the U.S. statutory federal income tax rate was 35% in both years, our worldwide effective income tax rate on continuing operations was 25% in 2016, compared to 27% for 2015.  In both years our tax rate benefited from earnings in non-U.S. jurisdictions, which reduced our effective tax rate by 6% in each year.  In addition, the 2016 tax rate benefited by 3% related to the tax effects of stock-based compensation deductions in the year, and 1% (net) from other items.  The 2015 tax rate benefited by 1% related to the reduction of a tax accrual for Chinese earnings that we decided to reinvest within China to acquire the remaining interest in a joint venture and 1% (net) from other items.

In the first quarter of 2016 we adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting.  This ASU provides that the tax effects of stock-based awards must be treated as discrete items affecting the tax rate in the interim reporting period in which the tax deductions occur.  Many variables (such as timing of award settlements or expirations, changes in stock price over time, ultimate payout levels for awards with performance contingencies, shares cancelled before vesting, and the tax rules in effect at the time of settlement) will impact both the timing and the amount of the tax deductions.  Thus, this ASU is likely to add more volatility to the effective tax rate of companies such as Leggett that use stock-based compensation plans.

 

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Segment Results
 
In the following section we discuss 2016 sales and EBIT for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in Note E to the Consolidated Financial Statements on page 82. All segment data has been retrospectively adjusted to reflect the change in segment reporting discussed on page 30.
(Dollar amounts in millions)
2016
 
2015
 
Change in Sales
 
% Change
Same Location
Sales (1)
 
 
$
 
%
 
Sales
 
 
 
 
 
 
 
 
 
 
 
Residential Products
$
1,589

 
$
1,688

 
$
(99
)
 
(6
)%
 
(6
)%
 
 
Industrial Products
583

 
777

 
(194
)
 
(25
)%
 
(12
)%
 
 
Furniture Products
1,048

 
1,072

 
(24
)
 
(2
)%
 
(3
)%
 
 
Specialized Products
906

 
847

 
59

 
7
 %
 
8
 %
 
 
Total segment sales
4,126

 
4,384

 
(258
)
 
 
 
 
 
 
Intersegment sales elimination
(376
)
 
(467
)
 
91

 
 
 
 
 
 
Trade sales
$
3,750

 
$
3,917

 
$
(167
)
 
(4
)%
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
Change in EBIT
 
EBIT Margins (2)
$
 
%
 
2016
 
2015
EBIT
 
 
 
 
 
 
 
 
 
 
 
Residential Products
$
168

 
$
155

 
$
13

 
8
 %
 
10.5
 %
 
9.2
%
Industrial Products
65

 
77

 
(12
)
 
(16
)%
 
11.2
 %
 
9.9
%
Furniture Products
107

 
118

 
(11
)
 
(9
)%
 
10.2
 %
 
11.0
%
Specialized Products
181

 
150

 
31

 
21
 %
 
20.0
 %
 
17.7
%
Pension settlement charge

 
(12
)
 
12

 
 
 
 
 
 
Intersegment eliminations & other
1

 
(1
)
 
2

 
 
 
 
 
 
Total EBIT
$
522

 
$
487

 
$
35

 
7
 %
 
13.9
 %
 
12.4
%
______________________________

(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 operated one year earlier.
(2)
Segment margins are calculated on total sales. Overall company margin is calculated on trade sales.

Residential Products
 
Residential Products sales decreased 6% in 2016 from a combination of lower unit volume in several product categories, lower pass-through sales of adjustable beds (which originate in Furniture Products but are occasionally distributed through Residential Products), raw material-related price decreases, and currency impact. Within our U.S. Spring business, total innerspring units decreased 6%, but growth continued in ComfortCore® (our pocketed coil innersprings), with unit volume in that category up 4%. Volume also increased in our European Spring business.

EBIT and EBIT margin increased in 2016 due to a litigation gain ($7 million) and non-recurrence of last year's foam litigation expense ($5 million). Operationally, the impact on EBIT from lower unit volume was offset by pricing discipline.
  

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Industrial Products
 
Same location sales in Industrial Products were down 12% from steel-related price decreases and lower unit volume in Drawn Wire. Total sales in the segment declined 25%, also reflecting the divestitures of the Steel Tubing business in late 2015 and two wire operations in 2016.
 
EBIT decreased primarily due to higher raw material costs (including LIFO impact) and lower unit volume. The operational impacts were partially offset by a divestiture gain ($16 million) from the sale of one of the Wire Products operations, and the non-recurrence of the prior year's impairment charge ($6 million) and divestiture loss ($3 million), both associated with the sale of the Steel Tubing business.

Furniture Products
 
Sales in Furniture Products decreased 2%, primarily from lower volume in Home Furniture, steel-related price decreases, and currency impact. These items were partially offset by growth from a Work Furniture acquisition completed in March 2015. Adjustable Bed unit volume increased 1% (versus strong growth in each of the prior two years) as we began ramping up new programs selling directly to major bedding retailers and transitioning away from former programs with bedding manufacturers. The decline in these bedding manufacturer programs also caused the decrease in pass-through sales of adjustable beds discussed in the Residential Products segment above.

EBIT and EBIT margin decreased, primarily from higher raw material costs (including LIFO impact) and lower volume, partially offset by operational improvements, gains from building sales of $3 million, and a favorable sales mix. 
 
Specialized Products
 
In Specialized Products, sales increased 7% in 2016, with volume gains in Automotive and an Aerospace acquisition completed early in the year, partially offset by divestitures, and currency impact. 

EBIT and EBIT margin increased from higher sales, a divestiture gain ($11 million) related to the sale of a CVP operation, and currency impact. These items were partially offset by goodwill impairment of $4 million.

We agreed to sell real estate associated with the CVP business and expected to realize a gain on this transaction in 2017. This property reached held-for-sale status in 2016, causing the fair value of the CVP reporting unit to fall below its carrying value, and triggering the $4 million impairment charge.

Results from Discontinued Operations
 
Full year earnings from discontinued operations, net of tax, increased to $19 million from $1 million in 2015. This increase is primarily due to a litigation gain ($20 million) related to our former Prime Foam business. For further information about discontinued operations, see Note B to the Consolidated Financial Statements on page 77.


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LIQUIDITY AND CAPITALIZATION
 
Cash from operations decreased in 2017, primarily from working capital increases due to sales growth and inflation. Our operations once again provided more than enough cash to fund both capital expenditures and dividend payments, something we have accomplished each year for over 25 years. We expect this to again be the case in 2018.

We continued to invest in businesses and product categories that are growing. This resulted in higher capital expenditures in 2017. We raised the quarterly dividend by 6% and extended our record of consecutive annual increases to 46 years. We also bought back 3.3 million shares of our stock during the year.

In November 2017, we issued $500 million of 3.5% notes maturing in 2027. We also extended the term of our revolving credit facility to November 2022, expanded the borrowing capacity from $750 million to $800 million and correspondingly increased our commercial paper program. We ended 2017 with net debt to net capital at 33%, comfortably within our long-standing targeted range of 30-40%, as discussed 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 factors that generally have the greatest impact on our cash from operations.
        
Cash from Operations

Cash from operations decreased in 2017 primarily from working capital increases due to sales growth and inflation. Cash from operations should approximate $500 million in 2018, with working capital expected to be a smaller use of cash than in 2017.


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We closely monitor our working capital levels, and we ended 2017 with adjusted working capital at 10.6% of annualized sales1. The table below explains this non-GAAP calculation. We eliminate cash and current debt maturities from working capital to monitor our operating efficiency and performance related to trade receivables, inventories, and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period. As discussed on page 48, a substantial amount of our cash is held by international operations and may not be immediately available to reduce debt on a dollar-for-dollar basis.

(Dollar amounts in millions)
2017
 
2016
Current assets
$
1,767

 
$
1,325

Current liabilities
(976
)
 
(707
)
Working capital
791

 
618

Cash and cash equivalents
(526
)
 
(282
)
Current debt maturities
154

 
4

Adjusted working capital
$
419

 
$
340

Annualized sales 1
$
3,936

 
$
3,616

Working capital as a percent of annualized sales
20.1
%
 
17.1
%
Adjusted working capital as a percent of annualized sales
10.6
%
 
9.4
%

1. 
Annualized sales equal 4th quarter sales ($984 million in 2017 and $904 million in 2016) 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

 
Amount (in millions)
 
 
Days
 
2017
 
2016
 
2015
 
 
2017
 
2016
 
2015
Trade Receivables
$
522

 
$
451

 
$
449

 
DSO 1
45
 
44
 
43
 
 
 
 
 
 
 
 
 
 
 
 
 
Inventories
$
571

 
$
520

 
$
505

 
DIO 2
65
 
66
 
60
 
 
 
 
 


 
 
 
 
 
 
 
Accounts Payable
$
430

 
$
351

 
$
307

 
DPO 3
46
 
42
 
41

Calculations of days are as follows:
1.
Days sales outstanding: ((beginning of year trade receivables + end of year trade receivables)÷2) ÷ (net trade sales ÷ number of days in the year).
2.
Days inventory on hand: ((beginning of year inventory + end of year inventory)÷2) ÷ (cost of goods sold ÷ number of days in the year).
3.
Days payables outstanding: ((beginning of year accounts payable + end of year accounts payable)÷2) ÷ (cost of goods sold ÷ number of days in the year).

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Trade Receivables - Our trade receivables increased $71 million at December 31, 2017 compared to the prior year primarily due to increased sales and currency fluctuations. Our sales to international customers, which are predominantly in the Specialized Products segment, continue to increase and typically have longer payment terms. We continue to look for ways to improve speed of customer payments, including third party programs with early payment incentives in certain circumstances.

Our provision for losses on accounts receivable has averaged $2 million, and our allowance for bad debt as a percentage of our net receivables has averaged 2% for the last three years. We have experienced favorable trends in the number of accounts monitored for possible loss or written off in the last few years. We obtain credit applications, credit reports, bank and trade references, and periodic financial statements from our customers to establish credit limits and terms as appropriate. In cases where a customer’s payment performance or financial condition begins to deteriorate, we tighten our credit limits and terms and make appropriate reserves when deemed necessary.

Inventories - The increase in inventories of $51 million at December 31, 2017 compared to the prior year primarily reflects higher levels necessary to support sales growth and meet customer delivery requirements, and higher raw material costs.

Days inventory on hand of 65 days at the end of 2017 is within a reasonable historical range. We believe we have established adequate reserves for any slower moving or obsolete inventories. We continuously monitor our slow-moving and potentially obsolete inventory through reports on inventory quantities compared to usage within the previous 120 days. We also utilize cycle counting programs and complete physical counts of our inventory. When potential inventory obsolescence is indicated by these controls, we will take charges for write-downs to maintain an adequate level of reserves. We have averaged inventory obsolescence charges of $8 million annually for the last three years. Our reserve balances (not including our LIFO reserves) as a percentage of our year-end inventory were 6% at the end of 2017, which is consistent with our historical average.

Accounts Payable - The increase in accounts payables of $79 million at December 31, 2017 compared to the prior year is primarily due to increased purchases to support sales growth, a focused effort on optimizing payment terms, and currency fluctuations. We continue to optimize payment terms through our significant purchasing power and also utilize third party services that allow flexible payment options to enhance our DPO.





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Uses of Cash
 
Finance Capital Requirements
 
Cash is readily available to fund growth.

Capital Expenditures

In certain of our businesses and product lines we have minimal excess production capacity, and we are therefore investing to support continued growth. In Automotive, we are expanding capacity to support new programs that will begin production over the next few years. In Bedding, we are investing in equipment to support ongoing growth in ComfortCore® innersprings and newer product features such as Quantum® Edge. We are also investing to support rapid growth in Adjustable Bed.

We will continue to make investments to support expansion in businesses and product lines where sales are growing, and for efficiency improvement and maintenance. We expect capital expenditures to again approximate $160 million in 2018. Our employee incentive plans emphasize returns on capital, which include net fixed assets and working capital. This emphasis focuses our management on asset utilization and helps ensure that we are investing additional capital dollars where attractive return potential exists.

In some of our businesses, we have capacity to accommodate additional volume. For each $10 million of sales from incremental unit volume produced utilizing spare capacity, we expect to generate approximately $2.5 million to $3.5 million of additional pretax earnings. The earnings and margin improvement that we have realized over the past few years reflects, in part, higher utilization in our businesses from market share gains and higher market demand.

Our long-term 6-9% annual growth objective envisions periodic acquisitions. We are seeking acquisitions primarily within our Grow business units, and we are looking for opportunities to enter new growth markets (carefully screened for sustainable competitive advantage).
In 2015, we acquired a 70% interest in a European private-label manufacturer of high-end upholstered furniture for an initial cash outlay of $12 million and will acquire the remaining 30% in two equal parts, in the second quarters of 2018 and 2020, respectively, for a currently estimated amount of $14 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.

In 2016, we acquired three businesses and the remaining interest in a joint venture for total consideration of $65 million. The first, a U.S. manufacturer of aerospace tube assemblies, expands our tube forming and fabrication

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capabilities and adds precision machining to our aerospace platform. The second is a distributor of geosynthetic products, and the third, a South African producer of mattress innersprings. Finally, we purchased the remaining interest in an Automotive joint venture in China. This business manufactures seat comfort products and lumbar support systems.

In 2017, we acquired three businesses and the remaining interest in a joint venture for total consideration of $56 million (cash and stock). The first, a Canadian distributor and installer of geosynthetic products expands the geographic scope and capabilities of our Geo Components business. The second is a U.S. manufacturer of surface-critical bent tube components which supports the private-label finished seating strategy in our Work Furniture business. The third is a U.S. producer of rebond carpet underlay which adds to our production capacity and expands the geographic footprint in our Carpet Cushion business. Finally, we acquired the remaining 20% of an Asian joint venture in our Work Furniture business.

Additional details about acquisitions can be found in Note Q to the Consolidated Financial Statements on page 110.
 
Pay Dividends
    
 Dividends PaidDividends Declared

Increasing the dividend remains a high priority. In 2017, we increased the quarterly dividend by $.02, or 6%, to $.36 per share. This extended our record of consecutive annual dividend increases to 46 years. Our targeted dividend payout ratio is 50-60% of continuing operations adjusted EPS (which exclude special items such as significant tax law impacts, divestiture gains, impairment charges, litigation accruals and settlement proceeds). We expect future dividend growth to approximate earnings growth.


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Repurchase Stock

            Stock Repurchases, net

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 12.1 million shares of our stock and issued 6.2 million shares (through employee benefit plans and stock option exercises), reducing outstanding shares by 4%. In 2017, we repurchased 3.3 million shares (at an average price of $48.66) and issued 1.7 million shares.
 
Our top priorities for uses of cash are organic growth (via capital expenditures), dividends, and strategic acquisitions. After funding those priorities, to the extent there is remaining cash available, we generally intend to repurchase stock. 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.

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Capitalization
 
This table presents key debt and capitalization statistics at the end of the three most recent years.
 
(Dollar amounts in millions)
2017
 
2016
 
2015
Long-term debt outstanding:
 
 
 
 
 
Scheduled maturities
$
1,098

 
$
760

 
$
761

Average interest rates (1)
3.6
%
 
3.7
%
 
3.7
%
Average maturities in years (1)
6.9

 
5.8

 
6.8

Revolving credit/commercial paper

 
196

 
181

Average interest rate on year-end balance
%
 
1.0
%
 
.5
%
Average interest rate during the year
1.4
%
 
.8
%
 
.5
%
Total long-term debt
1,098

 
956

 
942

Deferred income taxes and other liabilities
286

 
227

 
223

Equity
1,191

 
1,094

 
1,098

Total capitalization
$
2,575

 
$
2,277

 
$
2,263

Unused committed credit: (2)
 
 
 
 
 
Long-term
$
800

 
$
554

 
$
419

Short-term

 

 

Total unused committed credit
$
800

 
$
554

 
$
419

Current maturities of long-term debt
$
154

 
$
4

 
$
3

Cash and cash equivalents
$
526

 
$
282

 
$
253

Ratio of earnings to fixed charges (3)
8.1 x

 
9.6 x

 
8.6 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)
The unused credit amount is based upon our revolving credit facility and commercial paper program which, at the end of 2015, had $600 million of borrowing capacity. The credit facility was amended in the second quarter of 2016 to increase the borrowing capacity to $750 million and the commercial paper program was increased to a corresponding amount. The credit facility was amended again in the fourth quarter of 2017 to increase the borrowing capacity to $800 million and the commercial paper program was increased to a corresponding amount.
(3)
Fixed charges include interest expense, capitalized interest, plus implied interest included in operating leases. Earnings consist principally of income from continuing operations before income taxes, plus fixed charges.


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The next table shows the ratio of long-term debt to total capitalization at December 31, 2017 and 2016, 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 (non-GAAP) measures as supplemental information to track leverage trends across time periods with variable levels of cash. Our long-term target is to have net debt as a percentage of net capital in the 30-40% range. As discussed on page 48, a substantial amount of cash is held by our international operations. Therefore, we may not be able to use all of our cash to reduce our debt on a dollar-for-dollar basis, as reflected in the net debt to net capital ratio.
 
(Dollar amounts in millions)
2017
 
2016
Long-term debt
$
1,098

 
$
956

Current debt maturities
154

 
4

Cash and cash equivalents
(526
)
 
(282
)
Net debt
$
726

 
$
678

Total capitalization
$
2,575

 
$
2,277

Current debt maturities
154

 
4

Cash and cash equivalents
(526
)
 
(282
)
Net capitalization
$
2,203

 
$
1,999

Long-term debt to total capitalization
42.6
%
 
42.0
%
Net debt to net capitalization
33.0
%
 
33.9
%
 
Total debt (which includes long-term debt and current debt maturities) increased $292 million in 2017, primarily from the $500 million debt issuance described below, partially offset by a reduction in commercial paper.

In November 2017, we issued $500 million aggregate principal amount of notes that mature in 2027. The notes bear interest at a rate of 3.5% per year, with interest payable semi-annually beginning on May 15, 2018. The net proceeds of these notes were used to pay down commercial paper, which in turn provided borrowing capacity under our commercial paper program for general corporate purposes and the repayment or refinancing of existing indebtedness, at maturity.

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Short Term Borrowings
 
We can raise cash by issuing commercial paper through a program that is backed by our revolving credit facility with a syndicate of 14 lenders. In May 2016, we increased the borrowing capacity under the facility from $600 million to $750 million and extended the term by two years to 2021. In November 2017, we increased the borrowing capacity under the facility from $750 million to $800 million and extended the term by one year to 2022. The credit facility allows us to issue letters of credit totaling up to $250 million. When we issue letters of credit under the facility, we reduce our available credit and commercial paper capacity by a corresponding amount. Amounts outstanding at year-end related to our commercial paper program were:
 
(Dollar amounts in millions)
2017
 
2016
 
2015
Total program authorized
$
800

 
$
750

 
$
600

Commercial paper outstanding (classified as long-term debt)

 
(196
)
 
(181
)
Letters of credit issued under the credit facility

 

 

Total program usage

 
(196
)
 
(181
)
Total program available
$
800

 
$
554

 
$
419

 
The average and maximum amounts of commercial paper outstanding during 2017 were $436 million and $625 million, respectively. During the fourth quarter, the average and maximum amounts outstanding were $309 million and $625 million, respectively. At year end, we had no letters of credit outstanding under the credit facility, but we had issued $51 million of stand-by letters of credit under other bank agreements to take advantage of better pricing.

With cash on hand, operating cash flow, 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 (including $150 million of 4.4% notes due July 1, 2018), as well as support our ongoing operations, pay dividends, fund future growth, and repurchase stock.

Our revolving credit facility and certain other long-term debt obligations contain restrictive covenants. Based upon our planned use of cash, we could utilize the full $800 million of commercial paper, and we would expect to remain in compliance with all of the covenants. The covenants limit, among other things: a) our total amount of indebtedness to 65% of our total capitalization (each as defined in the revolving credit facility), b) the amount of total secured debt to 15% of our total consolidated assets, and c) our ability to sell, lease, transfer, or dispose of all or substantially all of total consolidated assets. For more information about long-term debt, please see Note I to the Consolidated Financial Statements on page 91.
 
Accessibility of Cash
 

At December 31, 2017, we had cash and cash equivalents of $526 million primarily invested in interest-bearing bank accounts and in bank time deposits with original maturities of three months or less. Over 80% of these funds are held in the international accounts of our foreign operations. We do not rely on this foreign cash as a source of funds to support our ongoing U.S. liquidity needs. During 2018, we expect to repatriate approximately $300 million of foreign cash. The timing and exact amounts of these cash repatriations are difficult to predict, and are, among other things, subject to local governmental requirements.

As discussed previously, TCJA enacted at the end of 2017 imposed a one-time U.S. tax on the earnings that produced our foreign cash. This deemed repatriation tax totaled $67 million and will be paid on a graduated scale over the next eight years. We can now bring cash to the U.S. without incurring incremental U.S. federal taxes. There likely will be some state-level income tax; however, we believe any such tax will not be material. As a result, the enactment of TCJA increases the likelihood of repatriating cash from past, current and future foreign earnings.

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If we were to bring all our current foreign cash back immediately to the U.S. in the form of dividends, we would pay previously accrued foreign withholding taxes of approximately $21 million, based upon historic foreign withholding tax rates. However, due to statutory requirements in various jurisdictions, approximately $36 million of this cash was inaccessible for repatriation at year end. In 2017, 2016, and 2015, we brought back cash of $116 million, $5 million, and $112 million, respectively, at little to no added tax cost.


CONTRACTUAL OBLIGATIONS
 
The following table summarizes our future contractual cash obligations and commitments at December 31, 2017:
 
 
 
 
Payments Due by Period 5
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
$
1,246

 
$
152

 
$