10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨     No   ý
Common stock outstanding as of April 29, 2016: 134,325,997




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(Amounts in millions)
March 31,
2016
 
December 31,
2015
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
250.2

 
$
253.2

Trade receivables, net
475.8

 
448.7

Other receivables, net
55.5

 
71.5

Total receivables, net
531.3

 
520.2

Inventories
 
 
 
Finished goods
255.5

 
242.8

Work in process
42.7

 
42.6

Raw materials and supplies
245.9

 
241.8

LIFO reserve
(22.0
)
 
(22.6
)
Total inventories, net
522.1

 
504.6

Other current assets
38.3

 
33.2

Total current assets
1,341.9

 
1,311.2

PROPERTY, PLANT AND EQUIPMENT—AT COST
 
 
 
Machinery and equipment
1,119.1

 
1,099.1

Buildings and other
559.8

 
548.2

Land
40.4

 
40.0

Total property, plant and equipment
1,719.3

 
1,687.3

Less accumulated depreciation
1,164.6

 
1,146.5

Net property, plant and equipment
554.7

 
540.8

OTHER ASSETS
 
 
 
Goodwill
817.0

 
806.1

Other intangibles, less accumulated amortization of $128.9 and $139.8 as of March 31, 2016 and December 31, 2015, respectively
180.3

 
188.4

Sundry
130.5

 
117.2

Total other assets
1,127.8

 
1,111.7

TOTAL ASSETS
$
3,024.4

 
$
2,963.7

CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
3.5

 
$
3.4

Accounts payable
332.1

 
307.2

Accrued expenses
256.3

 
286.7

Other current liabilities
88.1

 
103.9

Total current liabilities
680.0

 
701.2

LONG-TERM LIABILITIES
 
 
 
Long-term debt
1,032.0

 
941.5

Other long-term liabilities
177.1

 
184.7

Deferred income taxes
44.1

 
38.6

Total long-term liabilities
1,253.2

 
1,164.8

COMMITMENTS AND CONTINGENCIES

 

EQUITY
 
 
 
Common stock
2.0

 
2.0

Additional contributed capital
528.1

 
529.5

Retained earnings
2,254.4

 
2,209.2

Accumulated other comprehensive loss
(61.5
)
 
(91.1
)
Treasury stock
(1,643.9
)
 
(1,564.0
)
Total Leggett & Platt, Inc. equity
1,079.1

 
1,085.6

Noncontrolling interest
12.1

 
12.1

Total equity
1,091.2

 
1,097.7

TOTAL LIABILITIES AND EQUITY
$
3,024.4

 
$
2,963.7

See accompanying notes to consolidated condensed financial statements.

2


LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
(Amounts in millions, except per share data)
 
2016
 
2015
Net sales
 
$
938.4

 
$
966.2

Cost of goods sold
 
704.8

 
748.4

Gross profit
 
233.6

 
217.8

Selling and administrative expenses
 
105.1

 
97.5

Amortization of intangibles
 
5.1

 
5.2

Goodwill impairment
 
—

 
4.1

Other income, net
 
(3.7
)
 
(.7
)
Earnings from continuing operations before interest and income taxes
 
127.1

 
111.7

Interest expense
 
9.2

 
11.0

Interest income
 
.8

 
1.3

Earnings from continuing operations before income taxes
 
118.7

 
102.0

Income taxes
 
27.7

 
28.7

Earnings from continuing operations
 
91.0

 
73.3

Earnings (loss) from discontinued operations, net of tax
 
.1

 
(.5
)
Net earnings
 
91.1

 
72.8

(Earnings) attributable to noncontrolling interest, net of tax
 
(1.6
)
 
(1.1
)
Net earnings attributable to Leggett & Platt, Inc. common shareholders
 
$
89.5

 
$
71.7

Earnings per share from continuing operations attributable to Leggett & Platt, Inc. common shareholders
 
 
 
 
Basic
 
$
.64

 
$
.51

Diluted
 
$
.63

 
$
.50

Earnings (loss) per share from discontinued operations attributable to Leggett & Platt, Inc. common shareholders
 
 
 
 
Basic
 
$
—

 
$
—

Diluted
 
$
—

 
$
—

Net earnings per share attributable to Leggett & Platt, Inc. common shareholders
 
 
 
 
Basic
 
$
.64

 
$
.51

Diluted
 
$
.63

 
$
.50

 
 
 
 
 
Cash dividends declared per share
 
$
.32

 
$
.31

 
 
 
 
 
Average shares outstanding
 
 
 
 
Basic
 
139.1

 
141.9

Diluted
 
141.2

 
143.8

See accompanying notes to consolidated condensed financial statements.

3


LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
(Amounts in millions)
 
2016
 
2015
Net earnings
 
$
91.1

 
$
72.8

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustments
 
22.4

 
(37.8
)
Cash flow hedges
 
6.5

 
(1.7
)
Defined benefit pension plans
 
.7

 
1.3

Other comprehensive income (loss)
 
29.6

 
(38.2
)
Comprehensive income
 
120.7

 
34.6

Less: comprehensive (income) attributable to noncontrolling interest
 
(1.6
)
 
(1.1
)
Comprehensive income attributable to Leggett & Platt, Inc.
 
$
119.1

 
$
33.5

See accompanying notes to consolidated condensed financial statements.

4

LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
(Amounts in millions)
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net earnings
$
91.1

 
$
72.8

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
21.1

 
22.5

Amortization of intangibles and debt issuance costs
7.2

 
7.1

Provision for losses on accounts and notes receivable
1.2

 
1.5

Writedown of inventories
1.6

 
2.5

Goodwill impairment
—

 
4.1

Long-lived asset impairments
—

 
1.8

Net gain from sales of assets and businesses
(2.5
)
 
(1.5
)
Deferred income tax expense
6.0

 
9.9

Stock-based compensation
12.4

 
12.2

Tax benefits from stock-based compensation payments (See Note 2)
—

 
(11.4
)
Other, net
(.1
)
 
4.9

Increases/decreases in, excluding effects from acquisitions and divestitures:
 
 
 
Accounts and other receivables
(4.0
)
 
(28.5
)
Inventories
(13.9
)
 
(36.8
)
Other current assets
1.8

 
(.1
)
Accounts payable
22.2

 
(5.0
)
Accrued expenses and other current liabilities
(32.8
)
 
(23.9
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
111.3

 
32.1

INVESTING ACTIVITIES
 
 
 
Additions to property, plant and equipment
(27.7
)
 
(21.7
)
Purchases of companies, net of cash acquired
(16.4
)
 
(12.2
)
Proceeds from sales of assets and businesses
2.3

 
6.3

Other, net
(5.3
)
 
(4.8
)
NET CASH USED FOR INVESTING ACTIVITIES
(47.1
)
 
(32.4
)
FINANCING ACTIVITIES
 
 
 
Payments on long-term debt
(.6
)
 
(2.5
)
Additions to long-term debt
—

 
.4

Change in commercial paper and short-term debt
81.4

 
32.8

Dividends paid
(43.5
)
 
(42.7
)
Issuances of common stock
1.2

 
3.5

Purchases of common stock
(106.6
)
 
(63.9
)
Tax benefits from stock-based compensation payments (See Note 2)
—

 
11.4

Other, net
(1.7
)
 
(1.8
)
NET CASH USED FOR FINANCING ACTIVITIES
(69.8
)
 
(62.8
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
2.6

 
(7.5
)
DECREASE IN CASH AND CASH EQUIVALENTS
(3.0
)
 
(70.6
)
CASH AND CASH EQUIVALENTS—January 1,
253.2

 
332.8

CASH AND CASH EQUIVALENTS—March 31,
$
250.2

 
$
262.2

See accompanying notes to consolidated condensed financial statements.






5


LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions, except per share data)
1. INTERIM PRESENTATION
The interim financial statements of Leggett & Platt, Incorporated (“we”, “us” or “our”) included herein have not been audited by an independent registered public accounting firm. The statements include all adjustments, including normal recurring accruals, which management considers necessary for a fair presentation of our financial position and operating results for the periods presented. We have prepared the statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of results to be expected for an entire year.
The December 31, 2015 financial position data included herein was derived from the audited consolidated financial statements included in Form 10-K, but does not include all disclosures required by GAAP. For further information, refer to the financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2015.
Reclassifications
Certain reclassifications have been made to the prior period's information in the Consolidated Condensed Financial Statements and related notes to conform to the first quarter 2016 income statement and March 31, 2016 balance sheet presentation. The first reclassification was a result of changes in our management organizational structure and related internal reporting (See Note 4 - Segment Information). The final was a balance sheet reclassification associated with new accounting guidance for the presentation of debt issuance costs as discussed below.

2. ACCOUNTING STANDARD UPDATES
    
The Financial Accounting Standards Board (FASB) regularly issues updates to the FASB Accounting Standards Codification that are communicated through issuance of an Accounting Standards Update (ASU).   Below is a summary of the ASUs, effective for current or future periods, most relevant to our financial statements:
 
•
ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting”:  Simplifies the financial reporting of income tax impacts for share-based compensation.  We adopted this guidance in the first quarter of 2016:
◦
All income tax effects of stock-based compensation are now classified within income tax expense, rather than recognizing some of the effects in additional contributed capital.  To the extent tax deductions from stock-based compensation payments differ from the compensation cost recognized for financial reporting purposes, the tax effects are recorded as discrete items in that quarter.
◦
Prospective application was required, and the impact of adopting this new guidance resulted in an additional tax benefit of $5.8 recorded in the first quarter of 2016.
◦
This ASU impacted the calculation of the dilutive effect of stock-based compensation on earnings per share, which resulted in an increase in our average diluted shares outstanding of approximately .5 shares.      
◦
The income tax effects are now classified as cash flow from operations, rather than cash flow from financing activities. We have elected to apply this cash flow classification guidance prospectively.
◦
Consistent with our past practice, when shares are withheld from the issuance of stock to fund the payment of the employee’s taxes, the payment is classified as a financing activity.
◦
We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur.

•
ASU 2016 -02 “ Leases”:  Requires that a lessee recognize assets and liabilities on the balance sheet for lease terms of more than 12 months. This ASU will be effective January 1, 2019, and we are evaluating its impact on our future financial statements.  

•
ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs”:  Changes the presentation of long-term debt issuance costs in the financial statements to a reduction of the related liability rather than as a separate asset. We adopted this ASU in the first quarter of 2016 and retrospectively reclassified net deferred loan costs associated with

6


each of our long-term debt issuances from assets to long-term debt on the balance sheet.  The adoption of this ASU did not have a material impact on our financial statements.             

•
ASU 2014-09 “Revenue from Contracts with Customers”:  Supersedes much of the existing authoritative literature for revenue recognition.  This ASU will be effective January 1, 2018, and we are evaluating its impact on our future financial statements.  

3. INVENTORIES
About 50% of our inventories are valued using the Last-In, First-Out (LIFO) cost method and the remainder using the First-In, First-Out (FIFO) cost method. We calculate our LIFO reserve (the excess of FIFO cost over LIFO cost) on an annual basis. During interim periods, we estimate the current year annual change in the LIFO reserve (i.e., the annual LIFO expense or benefit) and allocate that change ratably to the four quarters. Because accurately predicting inventory prices for the year is difficult, the change in the LIFO reserve for the full year could be significantly different from the amount currently estimated. In addition, a variation in expected ending inventory levels could also impact total change in the LIFO reserve for the year. Any change in the annual LIFO estimate will be reflected in future quarters.
The following table contains the LIFO benefit included in continuing operations for each of the periods presented.
 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
LIFO benefit
 
$
—

 
$
5.0


4. SEGMENT INFORMATION
Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. During the fourth quarter of 2015, our logistics operations, which primarily include intercompany transportation activity, were moved from Residential Furnishings to Industrial Materials. This segment change was retrospectively applied to all prior periods presented.
We have four operating segments that supply a wide range of products:
•
Residential Furnishings—components for bedding and furniture, fabric and carpet cushion
•
Commercial Products—components for office and institutional furnishings, adjustable beds and consumer products
•
Industrial Materials—drawn steel wire, fabricated wire products and steel rod
•
Specialized Products—automotive seating components, tubing and sub-assemblies for the aerospace industry, specialized machinery and equipment, and commercial vehicle interiors
Each reportable segment has a senior operating vice-president that reports to the chief executive officer, who is the chief operating decision maker. The operating results and financial information reported through the segment structure are regularly reviewed and used by the chief operating decision maker to evaluate segment performance, allocate overall resources and determine management incentive compensation.
 
Separately, we also utilize a role-based approach (Grow, Core, Fix or Divest) as a supplemental management tool to ensure capital (which is a subset of the overall resources referred to above) is efficiently allocated within the reportable segment structure.
The accounting principles used in the preparation of the segment information are the same as those used for the consolidated financial statements, except that the segment assets and income reflect the FIFO basis of accounting for inventory. Certain inventories are accounted for using the LIFO basis in the consolidated financial statements. We evaluate performance based on EBIT. Intersegment sales are made primarily at prices that approximate market-based selling prices. Centrally incurred costs are allocated to the segments based on estimates of services used by the segment. Certain of our general and administrative costs and miscellaneous corporate income and expenses are allocated to the segments based on sales. These allocated corporate costs include depreciation and other costs and income related to assets that are not allocated or otherwise included in the segment assets.

7
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


A summary of segment results from continuing operations are shown in the following tables.
 
External
Sales
 
Inter-
Segment
Sales
 
Total
Sales
 
EBIT
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
Residential Furnishings
$
481.4

 
$
7.5

 
$
488.9

 
$
47.7

Commercial Products
141.3

 
20.2

 
161.5

 
13.8

Industrial Materials
77.1

 
80.1

 
157.2

 
20.1

Specialized Products
238.6

 
10.4

 
249.0

 
46.3

Intersegment eliminations and other
 
 
 
 
 
 
(.8
)
Change in LIFO reserve
 
 
 
 
 
 
—

 
$
938.4

 
$
118.2

 
$
1,056.6

 
$
127.1

Three Months Ended March 31, 2015
 
 
 
 
 
Residential Furnishings
$
506.0

 
$
7.6

 
$
513.6

 
$
52.1

Commercial Products
123.5

 
17.5

 
141.0

 
8.0

Industrial Materials
117.7

 
101.5

 
219.2

 
8.0

Specialized Products
219.0

 
9.5

 
228.5

 
39.3

Intersegment eliminations and other
 
 
 
 
 
 
(.7
)
Change in LIFO reserve
 
 
 
 
 
 
5.0

 
$
966.2

 
$
136.1

 
$
1,102.3

 
$
111.7


Average assets for our segments are shown in the table below and reflect the basis for return measures used by management to evaluate segment performance. These segment totals include working capital (all current assets and current liabilities) plus net property, plant and equipment. Segment assets for all years are reflected at their estimated average for the periods presented. 
 
March 31,
2016
 
December 31,
2015
Residential Furnishings
$
597.7

 
$
623.7

Commercial Products
121.4

 
110.2

Industrial Materials
151.0

 
186.7

Specialized Products
256.6

 
256.4

Other (1)
.6

 
6.3

Average current liabilities included in segment numbers above
481.2

 
516.6

Unallocated assets (2)
1,374.4

 
1,387.0

Difference between average assets and period-end balance sheet
41.5

 
(123.2
)
Total assets
$
3,024.4

 
$
2,963.7

 
(1)
Businesses sold or classified as discontinued operations.
(2)
Unallocated assets consist primarily of goodwill, other intangibles, cash and deferred tax assets.













8
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



5. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

Discontinued Operations

During the fourth quarter of 2015 we completed the divestiture of the Store Fixtures reporting unit, which was previously part of the Commercial Products segment. Total consideration for these businesses was approximately $72 during a two-year time period. No significant gains or losses were realized on the sale of these businesses.

The table below includes activity related to these operations:
 
Three Months Ended March 31,
 
2016
 
2015
External sales:
 
 
 
Commercial Products - Store Fixtures
$
—

 
$
6.2

 
 
 
 
Earnings (loss):
 
 
 
Commercial Products - Store Fixtures
.1

 
.4

Subsequent activity related to previous divestitures
—

 
(.8
)
Earnings (loss) before interest and income taxes
.1

 
(.4
)
Income tax (expense) benefit
—

 
(.1
)
Earnings (loss) from discontinued operations, net of tax
$
.1

 
$
(.5
)

Assets Held for Sale

Net assets held for sale by segment were as follows:
 
March 31, 2016
 
December 31, 2015
 
Assets
 
Liabilities
 
Net Assets
 
Assets
 
Liabilities
 
Net Assets
Residential Furnishings
$
1.2

 
$
—

 
$
1.2

 
$
1.2

 
$
—

 
$
1.2

Commercial Products
2.9

 
—

 
2.9

 
4.0

 
—

 
4.0

Industrial Materials
3.2

 
—

 
3.2

 
3.2

 
—

 
3.2

Specialized Products
18.4

 
2.7

 
15.7

 
—

 
—

 
—

 
$
25.7

 
$
2.7

 
$
23.0

 
$
8.4

 
$
—

 
$
8.4


The major classes of assets and liabilities held for sale included in the Consolidated Condensed Balance Sheets were as follows:
 
March 31, 2016
 
December 31, 2015
Current assets held for sale not associated with discontinued operations (included in "Other current assets") (1)
$
5.7

 
$
—

Non-current assets held for sale not associated with discontinued operations (included in "Sundry") (1) (2)
20.0

 
8.4

Total assets held for sale
25.7

 
8.4

 
 
 
 
Current liabilities held for sale not associated with discontinued operations (included in "Other current liabilities") (1)
2.7

 
—

Total liabilities held for sale
2.7

 
—

 
 
 
 
Net assets held for sale
$
23.0

 
$
8.4


(1) One Commercial Vehicle Products (CVP) operation within the Specialized Products segment reached held-for-sale status in the first
quarter of 2016, but did not qualify for discontinued operations treatment.
(2) This table includes $7.3 and $8.4 of property, plant and equipment held for sale at March 31, 2016, and December 31, 2015, respectively,
primarily associated with the closings of various operations and prior year restructurings.

9
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



The following businesses were classified as held for sale during 2016 or divested during 2015, but did not meet the discontinued operations criteria.
•
CVP businesses related to our Specialized Products segment:
◦
External sales for the CVP operation that reached held for sale status in the first quarter of 2016 were $7.5 and $7.0, and EBIT was $1.5 and $1.0, for the quarters ended March 31, 2016 and 2015, respectively.
◦
During the fourth quarter of 2015, we divested another small operation within our CVP business unit. External sales for this business were $2.8 and EBIT was $(.3) for the quarter ended March 31, 2015.
•
Our Steel Tubing business, which was sold in the fourth quarter of 2015, reached held for sale status in the first quarter of 2015. External sales for this business were $24.8 and EBIT was $.8 for the quarter ended March 31, 2015. The Steel Tubing business was part of the Industrial Materials segment.

6. IMPAIRMENT CHARGES

Pre-tax impact of impairment charges is summarized in the following table.

Other long-lived asset impairments are reported in "Other (income) expense, net." Charges associated with discontinued operations are reported in "Earnings (loss) from discontinued operations, net of tax."
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
Goodwill
Impairment
 
Other Long-Lived Assets Impairments
 
Total Impairments
 
Goodwill
Impairment
 
Other Long-Lived Assets Impairments
 
Total Impairments
 
Continuing operations:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Furnishings
$
—

 
$
—

 
$
—

 
$
—

 
$
.2

 
$
.2

 
Industrial Materials - Steel Tubing
—

 
—

 
—

 
4.1

 
1.4

 
5.5

 
Total continuing operations
—

 
—

 
—

 
4.1

 
1.6

 
5.7

 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
Subsequent activity related to previous divestitures
—

 
—

 
—

 
—

 
.2

 
.2

 
Total discontinued operations
—

 
—

 
—


—

 
.2

 
.2

 
Total impairment charges
$
—

 
$
—

 
$
—

 
$
4.1

 
$
1.8

 
$
5.9

 


Other Long-Lived Assets
 
We test other long-lived assets for recoverability at year-end and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Fair value and the resulting impairment charges noted above were based primarily upon offers from potential buyers or third party estimates of fair value less selling costs.
 
Goodwill
 
Goodwill is required to be tested for impairment at least once a year and as triggering events occur. We perform our annual goodwill impairment review in the second quarter of each year.

The Steel Tubing unit met the held for sale criteria during the first quarter of 2015. Because fair value less costs to sell had fallen below recorded book value, we fully impaired this unit's goodwill and incurred a $4.1 goodwill impairment charge in the first quarter of 2015.
 






10
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 




The fair values of reporting units in relation to their respective carrying values and significant assumptions used in the second quarter 2015 review are presented in the table below.
Excess of Fair Value over Carrying Value as a Percentage of Fair Value
March 31, 2016
Goodwill Value
 
10-year
Compound
Annual Growth
Rate Range for Sales
 
Terminal
Values Long-
term Growth
Rate for Debt-Free Cash Flow
 
Discount  Rate
Ranges
< 25%
$
—

 
—
%
 
—
%
 
—
%
25% - 49%
—

 
—
%
 
—
%
 
—
%
50% - 74%
595.4

 
.6% - 7.0%

 
3.0
%
 
8.0% - 12.5%

75%+
221.6

 
3.1% - 10.9%

 
3.0
%
 
8.0% - 9.0%

 
$
817.0

 
.6% - 10.9%

 
3.0
%
 
8.0% - 12.5%




7. EARNINGS PER SHARE

Basic and diluted earnings per share were calculated as follows:

 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Earnings:
 
 
 
 
Earnings from continuing operations
 
$
91.0

 
$
73.3

(Earnings) attributable to noncontrolling interest, net of tax
 
(1.6
)
 
(1.1
)
Net earnings from continuing operations attributable to Leggett & Platt, Inc. common shareholders
 
89.4

 
72.2

Earnings (loss) from discontinued operations, net of tax
 
.1

 
(.5
)
Net earnings attributable to Leggett & Platt, Inc. common shareholders
 
$
89.5

 
$
71.7

 
 
 
 
 
Weighted average number of shares (in millions):
 
 
 
 
Weighted average number of common shares used in basic EPS
 
139.1

 
141.9

Dilutive effect of stock-based compensation
 
2.1

 
1.9

Weighted average number of common shares and dilutive potential common shares used in diluted EPS
 
141.2

 
143.8

 
 
 
 
 
Basic and Diluted EPS:
 
 
 
 
Basic EPS attributable to Leggett & Platt, Inc. common shareholders
 
 
 
 
Continuing operations
 
$
.64

 
$
.51

Discontinued operations
 
—

 
—

Basic EPS attributable to Leggett & Platt, Inc. common shareholders
 
$
.64

 
$
.51

Diluted EPS attributable to Leggett & Platt, Inc. common shareholders
 
 
 
 
Continuing operations
 
$
.63

 
$
.50

Discontinued operations
 
—

 
—

Diluted EPS attributable to Leggett & Platt, Inc. common shareholders
 
$
.63

 
$
.50

 
 
 
 
 
Other information:
 
 
 
 
Anti-dilutive shares excluded from diluted EPS computation
 
—

 
—






11
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



8. ACCOUNTS AND OTHER RECEIVABLES
Accounts and other receivables consisted of the following:
 
 
March 31, 2016
 
December 31, 2015
 
Current
 
Long-term
 
Current
 
Long-term
Trade accounts receivable
$
484.8

 
$
—

 
$
457.5

 
$
—

Trade notes receivable
1.3

 
.6

 
.5

 
.6

Total trade receivables
486.1

 
.6

 
458.0

 
.6

Other notes receivable:
 
 
 
 
 
 
 
Other
—

 
.4

 
—

 
.4

Income tax receivables
11.6

 
—

 
32.6

 
—

Other receivables
43.9

 
—

 
38.9

 
—

Subtotal other receivables
55.5

 
.4

 
71.5

 
.4

Total trade and other receivables
541.6

 
1.0

 
529.5

 
1.0

Allowance for doubtful accounts:
 
 
 
 
 
 
 
  Trade accounts receivable
(10.2
)
 
—

 
(9.2
)
 
—

  Trade notes receivable
(.1
)
 
(.2
)
 
(.1
)
 
(.2
)
Total trade receivables
(10.3
)
 
(.2
)
 
(9.3
)
 
(.2
)
  Other notes receivable
—

 
(.4
)
 
—

 
(.4
)
Total allowance for doubtful accounts
(10.3
)
 
(.6
)
 
(9.3
)
 
(.6
)
Total net receivables
$
531.3

 
$
.4

 
$
520.2

 
$
.4

Notes that were past due more than 90 days or had been placed on non-accrual status were not significant for the periods presented.
Activity related to the allowance for doubtful accounts is reflected below:
 
 
Balance at December 31, 2015
 
2016
Charges
 
2016
Charge-
offs,
Net of
Recoveries
 
Balance at March 31, 2016
Trade accounts receivable
$
9.2

 
$
1.2

 
$
.2

 
$
10.2

Trade notes receivable
.3

 
—

 
—

 
.3

Total trade receivables
9.5

 
1.2

 
.2

 
10.5

Other notes receivable
.4

 
—

 
—

 
.4

Total allowance for doubtful accounts
$
9.9

 
$
1.2

 
$
.2

 
$
10.9


    













12
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



9. STOCK-BASED COMPENSATION
The following table recaps the components of stock-based and stock-related compensation for each period presented:
 
 
Three Months Ended 
 March 31, 2016
 
Three Months Ended 
 March 31, 2015
 
To be settled with stock
 
To be settled in cash
 
To be settled with stock
 
To be settled in cash
Options:
 
 
 
 
 
 
 
         Amortization of the grant date fair value
$
.9

 
$
—

 
$
.1

 
$
—

         Cash payments in lieu of options
—

 
1.1

 
—

 
1.0

Stock-based retirement plans contributions
1.8

 
.4

 
2.2

 
.4

Discounts on various stock awards:

 
 
 

 
 
Deferred Stock Compensation Program
.6

 
—

 
.6

 
—

Stock-based retirement plans
.4

 
—

 
.4

 
—

Discount Stock Plan
.3

 
—

 
.3

 
—

Performance Stock Unit awards (1)
1.2

 
2.2

 
1.6

 
2.9

Restricted Stock Unit awards
.8

 
—

 
.9

 
—

Profitable Growth Incentive awards (2)
1.6

 
1.2

 
1.9

 
1.7

Other, primarily non-employee directors restricted stock
.3

 
—

 
.4

 
—

Total stock-related compensation expense
7.9

 
$
4.9

 
8.4

 
$
6.0

Employee contributions for above stock plans
4.5

 
 
 
3.8

 
 
Total stock-based compensation
$
12.4

 
 
 
$
12.2

 
 
Tax benefits on stock-based compensation expense
$
2.9

 
 
 
$
3.2

 
 
Tax benefits on stock-based compensation payments (See Note 2)
5.8

 
 
 
—

 
 
Total tax benefits associated with stock-based compensation
$
8.7

 
 
 
$
3.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Included below is the activity in our most significant stock-based plans:

(1) Performance Stock Unit Awards
We grant Performance Stock Unit (PSU) awards in the first quarter of each year to selected officers and other key managers. Expense is recognized using the straight-line method over the three-year vesting period. These awards contain the following conditions:

•
A service requirement—Awards generally “cliff” vest three years following the grant date; and
•
A market condition—Awards are based on our Total Shareholder Return [TSR = (Change in Stock Price + Dividends) / Beginning Stock Price] as compared to the TSR of a group of peer companies. The peer group consists of all the companies in the Industrial, Materials and Consumer Discretionary sectors of the S&P 500 and S&P Midcap 400 (approximately 320 companies). Participants will earn from 0% to 175% of the base award depending upon how our Total Shareholder Return ranks within the peer group at the end of the 3-year performance period.
Grant date fair values are calculated using a Monte Carlo simulation of stock and volatility data for Leggett and each of the peer companies.





13
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 




Below is a summary of the number of shares and related grant date fair value of PSU’s for the periods presented.
 
Three Months Ended March 31,
 
2016
 
2015
Total shares base award
.1

 
.2

Grant date per share fair value
$
40.16

 
$
42.22

Risk-free interest rate
1.3
%
 
1.1
%
Expected life in years
3.0

 
3.0

Expected volatility (over expected life)
19.2
%
 
19.8
%
Expected dividend yield (over expected life)
3.1
%
 
2.9
%
Three-Year Performance Cycle
Award Year
 
Completion Date
 
TSR Performance
Relative to the  Peer Group (1%=Best)
 
Payout as a
Percent of the
Base Award
 
Number of Shares
Distributed
 
Cash Portion
 
Distribution Date
2012
 
December 31, 2014
 
30th percentile
 
157.0%
 
.4 million
 
$
9.9

 
January 2015
2013
 
December 31, 2015
 
27th percentile
 
165.4%
 
.4 million
 
8.5

 
January 2016

For outstanding awards, we intend to pay 65% in shares of our common stock, although we reserve the right to pay up to 100% in cash. The additional amount that represents 35% of the award will be settled in cash, and is recorded as a liability and adjusted to fair value at each reporting period.

(2) Profitable Growth Incentive Awards

Certain key management employees participate in a Profitable Growth Incentive (PGI) program. The PGI awards are issued as growth performance stock units (GPSUs). The GPSUs vest (0% to 250%) at the end of a two-year performance period. Vesting is based on the Company's or applicable profit center's revenue growth (adjusted by a GDP factor when applicable) and EBITDA margin at the end of a two-year performance period. The 2016 and 2015 base target PGI awards were less than .1 shares. If earned, we intend to pay half in shares of our common stock and half in cash, although we reserve the right to pay up to 100% in cash. Both components are adjusted to fair value at each reporting period.

Two-Year Performance Cycle
Award Year
 
Completion Date
 
Average Payout as a
Percent of the
Base Award
 
Number of  Shares
Distributed
 
Cash Portion
 
Distribution Date
2013
 
December 31, 2014
 
127.0%
 
.1 million
 
$
3.5

 
February 2015
2014
 
December 31, 2015
 
224.7%
 
.2 million
 
$
6.7

 
February 2016


14
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 



10. ACQUISITIONS
The following table contains the estimated fair values (using inputs as discussed in Note 13) of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions during the periods presented, and any additional consideration paid for prior years’ acquisitions. We are finalizing all the information required to complete the purchase price allocations related to certain recent acquisitions and do not anticipate any material modifications.
 
Three Months Ended March 31,
 
2016
 
2015
Accounts receivable
$
1.3

 
$
3.7

Inventory
4.4

 
4.9

Property, plant and equipment
2.2

 
1.9

Goodwill (1)
3.4

 
8.4

Other intangible assets
7.4

 
14.8

Current liabilities
(1.9
)
 
(11.1
)
Long-term liabilities
(.4
)
 
(10.4
)
Net cash consideration
$
16.4

 
$
12.2


(1) All of the goodwill associated with the 2016 and 2015 acquisitions is expected to provide an income tax benefit.

The following table summarizes acquisitions for the periods presented.
Three Months Ended
 
Number of Acquisitions
 
Segment
 
Product/Service
March 31, 2016
 
1
 
Specialized Products
 
Fabricated tubing and pipe assemblies
March 31, 2015
 
1
 
Commercial Products
 
Upholstered office furniture
In February 2016, we expanded our Aerospace Products business unit with an acquisition of a U.S. fabricated tubing business for a purchase price of $16.4. Factors contributing to the recognition of $3.4 in goodwill from the acquisition included: additional production of fabricated tubing and pipe assemblies and benefits from our vertical integration in precision machining and gearing.
In March 2015, we acquired a 70% interest in a European private-label manufacturer of high-end upholstered furniture for office, commercial and other settings for a purchase price of $22.7. This business is complementary to our North American private-label operation and allows us to support our Work Furniture customers as they expand globally. We will acquire the remaining 30% in 2018 and 2020, per the terms of the agreement, and have recorded a long-term liability of approximately $11 for the future payments. Future payments are based upon a calculation that incorporates future EBITDA. The recorded liability is based upon estimates and may fluctuate significantly until the payment dates. Fluctuations in this liability will be reflected in interest income or expense on the Consolidated Condensed Statement of Operations.

The results of operations of the above acquired companies have been included in the consolidated financial statements since the dates of acquisition. The unaudited pro forma consolidated net sales, net earnings and earnings per share as though the 2016 and 2015 acquisitions had occurred on January 1 of each year presented are not materially different from the amounts reflected in the accompanying financial statements. Certain of our acquisition agreements provide for additional consideration to be paid in cash at a later date and are recorded as a liability at the acquisition date. At March 31, 2016, there was no substantial remaining consideration payable other than the liability discussed above.

15
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


11. EMPLOYEE BENEFIT PLANS
The following table provides interim information as to our domestic and foreign defined benefit pension plans. We are reviewing the funding strategy for selected pension plans, and 2016 employer contributions could be moderately higher than the $1.8 previously reported at December 31, 2015.
 
 
Three Months Ended 
 March 31,
 
2016
 
2015
Components of net pension expense
 
 
 
Service cost
$
1.2

 
$
1.0

Interest cost
2.9

 
3.3

Expected return on plan assets
(3.3
)
 
(4.2
)
Recognized net actuarial loss
1.2

 
1.5

Net pension expense
$
2.0

 
$
1.6



12. STATEMENT OF CHANGES IN EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended March 31, 2016
 
Total
Equity
 
Retained
Earnings
 
Common
Stock &
Additional
Contributed
Capital
 
Treasury
Stock
 
Noncontrolling
Interest
 
Accumulated
Other
Comprehensive
Income (Loss)
Beginning balance, January 1, 2016
$
1,097.7

 
$
2,209.2

 
$
531.5

 
$
(1,564.0
)
 
$
12.1

 
$
(91.1
)
Net earnings
91.1

 
91.1

 
—

 
—

 
—

 
—

(Earnings) loss attributable to noncontrolling interest, net of tax
—

 
(1.6
)
 
—

 
—

 
1.6

 
—

Dividends declared
(43.0
)
 
(44.3
)
 
1.3

 
—

 
—

 
—

Dividends paid to noncontrolling interest
(1.6
)
 
—

 
—

 
—

 
(1.6
)
 
—

Treasury stock purchased
(107.2
)
 
—

 
—

 
(107.2
)
 
—

 
—

Treasury stock issued
12.7

 
—

 
(14.6
)
 
27.3

 
—

 
—

Foreign currency translation adjustments
22.4

 
—

 
—

 
—

 
—

 
22.4

Cash flow hedges, net of tax
6.5

 
—

 
—

 
—

 
—

 
6.5

Defined benefit pension plans, net of tax
.7

 
—

 
—

 
—

 
—

 
.7

Stock options and benefit plan transactions, net of tax
11.9

 
—

 
11.9

 
—

 
—

 
—

Ending balance, March 31, 2016
$
1,091.2

 
$
2,254.4

 
$
530.1

 
$
(1,643.9
)
 
$
12.1

 
$
(61.5
)
 

16
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


 
Three Months Ended March 31, 2015
 
Total
Equity
 
Retained
Earnings
 
Common
Stock &
Additional
Contributed
Capital
 
Treasury
Stock
 
Noncontrolling
Interest
 
Accumulated
Other
Comprehensive
Income (Loss)
Beginning balance, January 1, 2015
$
1,154.9

 
$
2,061.3

 
$
504.4

 
$
(1,416.6
)
 
$
8.4

 
$
(2.6
)
Net earnings
72.8

 
72.8

 
—

 
—

 
—

 
—

(Earnings) loss attributable to noncontrolling interest, net of tax
—

 
(1.1
)
 
—

 
—

 
1.1

 
—

Dividends declared
(42.7
)
 
(44.0
)
 
1.3

 
—

 
—

 
—

Treasury stock purchased
(68.9
)
 
—

 
—

 
(68.9
)
 
—

 
—

Treasury stock issued
15.9

 
—

 
(19.5
)
 
35.4

 
—

 
—

Foreign currency translation adjustments
(37.8
)
 
—

 
—

 
—

 
—

 
(37.8
)
Cash flow hedges, net of tax
(1.7
)
 
—

 
—

 
—

 
—

 
(1.7
)
Defined benefit pension plans, net of tax
1.3

 
—

 
—

 
—

 
—

 
1.3

Stock options and benefit plan transactions, net of tax
22.6

 
—

 
22.6

 
—

 
—

 
—

Ending balance, March 31, 2015
$
1,116.4

 
$
2,089.0

 
$
508.8

 
$
(1,450.1
)
 
$
9.5

 
$
(40.8
)



































17
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


The following tables set forth the components of and changes in each component of accumulated other comprehensive income (loss) for each of the periods presented:
 
 
Foreign
Currency
Translation
Adjustments
 
Cash
Flow
Hedges
 
Defined
Benefit
Pension
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
Beginning balance, January 1, 2016
$
(4.8
)
 
$
(28.2
)
 
$
(58.1
)
 
$
(91.1
)
Other comprehensive income (loss) before reclassifications, pretax
22.4

 
4.9

 
(.1
)
 
27.2

Amounts reclassified from accumulated other comprehensive income, pretax:

 

 

 

Net sales
—

 
2.7

 
—

 
2.7

Cost of goods sold; selling and administrative expenses
—

 
.1

 
1.2

 
1.3

Interest expense
—

 
1.0

 
—

 
1.0

Subtotal of reclassifications, pretax
—

 
3.8

 
1.2

 
5.0

Other comprehensive income (loss), pretax
22.4

 
8.7

 
1.1

 
32.2

Income tax effect
—

 
(2.2
)
 
(.4
)
 
(2.6
)
Attributable to noncontrolling interest
—

 
—

 
—

 
—

Ending balance, March 31, 2016
$
17.6

 
$
(21.7
)
 
$
(57.4
)
 
$
(61.5
)
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2015
$
86.8

 
$
(20.1
)
 
$
(69.3
)
 
$
(2.6
)
Other comprehensive income (loss) before reclassifications, pretax
(37.8
)
 
(2.8
)
 
.4

 
(40.2
)
Amounts reclassified from accumulated other comprehensive income, pretax:

 

 

 

Net sales
—

 
(.2
)
 
—

 
(.2
)
Cost of goods sold; selling and administrative expenses
—

 
—

 
1.5

 
1.5

Interest expense
—

 
1.0

 
—

 
1.0

Subtotal of reclassifications, pretax
—

 
.8

 
1.5

 
2.3

Other comprehensive income (loss), pretax
(37.8
)
 
(2.0
)
 
1.9

 
(37.9
)
Income tax effect
—

 
.3

 
(.6
)
 
(.3
)
Attributable to noncontrolling interest
—

 
—

 
—

 
—

Ending balance, March 31, 2015
$
49.0

 
$
(21.8
)
 
$
(68.0
)
 
$
(40.8
)
13. FAIR VALUE
We utilize fair value measures for both financial and non-financial assets and liabilities.
Items measured at fair value on a recurring basis
The areas in which we utilize fair value measures of financial assets and liabilities are presented in the table below.
Fair value measurements are established using a three level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following categories:
•
Level 1: Quoted prices for identical assets or liabilities in active markets.
•
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Short-term investments in this category are valued using discounted cash flow techniques with all significant inputs derived from or corroborated by observable market data. Derivative assets and liabilities in this category are valued using models that consider various assumptions and information from market-corroborated sources. The models used are primarily industry-standard models that consider items such as quoted prices, market interest rate curves applicable to the instruments being valued as of the end of each period, discounted cash flows, volatility factors, current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
•
Level 3: Unobservable inputs that are not corroborated by market data.

18
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


 
As of March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Bank time deposits with original maturities of three months or less
$
—

 
$
105.1

 
$
—

 
$
105.1

Derivative assets (Note 14)
—

 
.8

 
—

 
.8

Diversified investments associated with the Executive Stock Unit Program (ESUP)* (Note 9)
24.2

 
—

 
—

 
24.2

Total assets
$
24.2

 
$
105.9

 
$
—

 
$
130.1

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities* (Note 14)
$
—

 
$
6.6

 
$
—

 
$
6.6

Liabilities associated with the ESUP* (Note 9)
24.1

 
—

 
—

 
24.1

Total liabilities
$
24.1

 
$
6.6

 
$
—

 
$
30.7

 
 
As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Bank time deposits with original maturities of three months or less
$
—

 
$
176.0

 
$
—

 
$
176.0

Derivative assets (Note 14)
—

 
.6

 
—

 
.6

Diversified investments associated with the ESUP* (Note 9)
22.0

 
—

 
—

 
22.0

Total assets
$
22.0

 
$
176.6

 
$
—

 
$
198.6

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities* (Note 14)
$
—

 
$
14.8

 
$
—

 
$
14.8

Liabilities associated with the ESUP* (Note 9)
22.2

 
—

 
—

 
22.2

Total liabilities
$
22.2

 
$
14.8

 
$
—

 
$
37.0

* - Includes both current and long-term amounts combined.
There were no transfers between Level 1 and Level 2 for any of the periods presented.
The fair value for fixed rate debt (Level 2) was greater than its $750 carrying value by $24 and $13 at March 31, 2016, and December 31, 2015, respectively. We value this debt using discounted cash flow and secondary market rates provided by Bloomberg.
Items measured at fair value on a non-recurring basis
The primary areas in which we use fair value measurements of non-financial assets and liabilities are allocating purchase price to the assets and liabilities of acquired companies as discussed in Note 10, and evaluating long-term assets (including goodwill) for potential impairment as discussed in Note 6. Determination of fair values for these items requires significant judgment and are calculated utilizing a variety of methods and models that utilize significant Level 3 inputs.
Long lived assets, acquisitions and the second step of a goodwill impairment test utilize the following methodologies in determining fair value: (i) Buildings and machinery are valued at an estimated replacement cost for an asset of comparable age and condition. Market pricing of comparable assets is used to estimate replacement cost where available. (ii) The most common identified intangible assets are customer relationships and tradenames. Customer relationships are valued using an excess earnings method, using various inputs such as the estimated customer attrition rate, future earnings forecast, the amount of contributory asset charges, and a discount rate. Tradenames are valued using a relief from royalty method, which is based upon comparable market royalty rates for tradenames of similar value. (iii) Inventory is valued at current replacement cost for raw materials, with a step-up for work in process and finished goods items that reflect the amount of ultimate profit earned as of the valuation date. (iv) Other working capital items are generally recorded at face value, unless there are known conditions that would impact the ultimate settlement amount of the particular item.  


19
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


14. RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Strategy & Objectives
We are subject to market and financial risks related to interest rates, foreign currency, and commodities. In the normal course of business, we utilize derivative instruments (individually or in combinations) to manage these risks. We seek to use derivative contracts that qualify for hedge accounting treatment; however, some instruments may not qualify for this treatment. It is our policy not to speculate using derivative instruments.
Cash Flow Hedges
Derivative financial instruments that we use to hedge forecasted transactions and anticipated cash flows are as follows:

•
Interest Rate Cash Flow Hedges - In August 2012, we issued $300 of 10-year notes with a coupon rate of 3.40%. As a part of this transaction, we settled our $200 forward starting interest rate swaps we had entered into during 2010 and recognized a loss of $42.7, which will be amortized out of accumulated other comprehensive income to interest expense over the life of the notes.

•
Currency Cash Flow Hedges—The foreign currency hedges manage risk associated with exchange rate volatility of various currencies.
The effective changes in fair value of unexpired contracts are recorded in accumulated other comprehensive income and reclassified to income or expense in the period in which earnings are impacted. Cash flows from settled contracts are presented in the category consistent with the nature of the item being hedged. (Settlements associated with the sale or production of product are presented in operating cash flows and settlements associated with debt issuance are presented in financing cash flows.) 

Fair Value Hedges
Our fair value hedges typically manage foreign currency risk associated with subsidiaries’ inter-company assets and liabilities. Hedges designated as fair value hedges recognize gain or loss currently in earnings. Cash flows from settled contracts are presented in the category consistent with the nature of the item being hedged.
Hedge Effectiveness
We have deemed ineffectiveness to be immaterial, and as a result, have not recorded any amounts for ineffectiveness. If a hedge was not highly effective, the portion of the change in fair value considered to be ineffective would be recognized immediately in the consolidated statements of operations.
We have recorded the following assets and liabilities representing the fair value for our most significant derivative financial instruments. The fair values of the derivatives reflect the change in the market value of the derivative from the date of the trade execution, and do not consider the offsetting underlying hedged item.











20
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


 
Expiring at various dates through:
 
Total USD
Equivalent
Notional
Amount
 
As of March 31, 2016
 
         Assets
 
Liabilities
Other Current
Assets
 
Other Current
Liabilities
 
Other Long-Term Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Currency Hedges:
 
 
 
 
 
 
 
 
 
Future USD sales of Canadian, Chinese and Swiss subsidiaries
Dec 2017
 
$
175.7

 
$
—

 
$
3.8

 
$
.4

Future DKK sales of Polish subsidiary
Dec 2016
 
17.7

 
—

 
.1

 
—

Future USD purchases of Canadian, European, and South Korean subsidiaries
Dec 2017
 
15.6

 
—

 
.4

 
.1

Future EUR sales of Chinese, UK and Swiss subsidiaries
Dec 2017
 
13.7

 
.2

 
.4

 
.1

Future MXN purchases of a USD subsidiary
Dec 2017
 
6.1

 
—

 
.6

 
.2

Future GBP sales of a Swiss subsidiary
May 2016
 
4.8

 
.1

 
—

 
—

Total cash flow hedges
 
 
 
 
.3

 
5.3

 
.8

Fair value hedges:
 
 
 
 
 
 
 
 
 
DKK inter-company note receivable on a USD subsidiary
Apr 2016
 
3.0

 
.1

 
—

 
—

USD inter-company note receivable on a Swiss subsidiary
Aug 2016
 
8.0

 
—

 
.2

 
—

Total fair value hedges
 
 
 
 
.1

 
.2

 
—

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Non-deliverable hedge on USD exposure to CNY
Feb 2017
 
14.0

 
—

 
.2

 
—

Non-deliverable hedge on EUR exposure to CNY
Dec 2016
 
2.3

 
.1

 
.1

 
—

Hedge of EUR Cash on USD and UK subsidiaries
May 2017
 
11.3

 
.2

 
—

 
—

Hedge of GBP Cash on USD subsidiary
Apr 2016
 
10.6

 
.1

 
—

 
—

Total derivatives not designated as hedging instruments
 
 
 
 
.4

 
.3

 
—

 
 
 
 
 
$
.8

 
$
5.8

 
$
.8


 

21
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 


 
Expiring at various dates through:
 
Total USD
Equivalent
Notional
Amount
 
As of December 31, 2015
 
Assets
 
Liabilities
Other Current
Assets
 
Other Current
Liabilities
 
Other Long-Term Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Currency Hedges:
 
 
 
 
 
 
 
 
 
Future USD sales of Canadian, Chinese and Swiss subsidiaries
Dec 2017
 
$
219.8

 
$
—