Document


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, 2018
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, smaller reporting company, or an 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 Exchange Act).     Yes   ¨     No   ý
Common stock outstanding as of May 1, 2018: 131,269,508



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LEGGETT & PLATT, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(Amounts in millions)
March 31,
2018
 
December 31,
2017
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
494.6

 
$
526.1

Trade receivables, net
578.0

 
522.3

Other receivables, net
80.2

 
72.8

Total receivables, net
658.2

 
595.1

Inventories
 
 
 
Finished goods
307.3

 
285.6

Work in process
57.3

 
53.0

Raw materials and supplies
302.9

 
283.4

LIFO reserve
(56.9
)
 
(50.9
)
Total inventories, net
610.6

 
571.1

Prepaid expenses and other current assets
50.7

 
74.2

Total current assets
1,814.1

 
1,766.5

PROPERTY, PLANT AND EQUIPMENT—AT COST
 
 
 
Machinery and equipment
1,260.8

 
1,210.6

Buildings and other
642.3

 
626.0

Land
42.5

 
40.6

Total property, plant and equipment
1,945.6

 
1,877.2

Less accumulated depreciation
1,235.5

 
1,213.3

Net property, plant and equipment
710.1

 
663.9

OTHER ASSETS
 
 
 
Goodwill
846.8

 
822.2

Other intangibles, less accumulated amortization of $152.5 and $151.7 as of March 31, 2018 and December 31, 2017, respectively
191.7

 
169.1

Sundry
129.7

 
129.1

Total other assets
1,168.2

 
1,120.4

TOTAL ASSETS
$
3,692.4

 
$
3,550.8

CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
154.0

 
$
153.8

Accounts payable
433.4

 
430.3

Accrued expenses
297.7

 
303.4

Other current liabilities
93.0

 
88.7

Total current liabilities
978.1

 
976.2

LONG-TERM LIABILITIES
 
 
 
Long-term debt
1,239.0

 
1,097.9

Other long-term liabilities
186.3

 
202.9

Deferred income taxes
92.7

 
83.0

Total long-term liabilities
1,518.0

 
1,383.8

COMMITMENTS AND CONTINGENCIES

 

EQUITY
 
 
 
Common stock
2.0

 
2.0

Additional contributed capital
514.6

 
514.7

Retained earnings
2,538.3

 
2,511.3

Accumulated other comprehensive income (loss)
9.9

 
(9.5
)
Treasury stock
(1,868.9
)
 
(1,828.3
)
Total Leggett & Platt, Inc. equity
1,195.9

 
1,190.2

Noncontrolling interest
.4

 
.6

Total equity
1,196.3

 
1,190.8

TOTAL LIABILITIES AND EQUITY
$
3,692.4

 
$
3,550.8

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)
2018
 
2017
Net sales
$
1,028.8

 
$
960.3

Cost of goods sold
811.4

 
733.6

Gross profit
217.4

 
226.7

Selling and administrative expenses
104.7

 
106.1

Amortization of intangibles
5.0

 
5.1

Impairments
.2

 
—

Net (gain) loss from sale of assets and businesses
(.2
)
 
(.2
)
Other (income) expense, net
.3

 
(.2
)
Earnings from continuing operations before interest and income taxes
107.4

 
115.9

Interest expense
14.4

 
10.6

Interest income
2.4

 
2.0

Earnings from continuing operations before income taxes
95.4

 
107.3

Income taxes
17.5

 
21.2

Earnings from continuing operations
77.9

 
86.1

Earnings (loss) from discontinued operations, net of tax
—

 
—

Net earnings
77.9

 
86.1

Earnings attributable to noncontrolling interest, net of tax
—

 
—

Net earnings attributable to Leggett & Platt, Inc. common shareholders
$
77.9

 
$
86.1

Earnings per share from continuing operations attributable to Leggett & Platt, Inc. common shareholders
 
 
 
Basic
$
.58

 
$
.63

Diluted
$
.57

 
$
.62

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
$
.58

 
$
.63

Diluted
$
.57

 
$
.62

 
 
 
 
Cash dividends declared per share
$
.36

 
$
.34

 
 
 
 
Weighted average shares outstanding
 
 
 
Basic
135.3

 
136.8

Diluted
136.3

 
138.1

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)
2018
 
2017
Net earnings
$
77.9

 
$
86.1

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments, including acquisition of non-controlling interest
16.7

 
14.3

Cash flow hedges
2.3

 
2.5

Defined benefit pension plans
.4

 
.6

Other comprehensive income
19.4

 
17.4

Comprehensive income
97.3

 
103.5

Less: comprehensive income attributable to noncontrolling interest
—

 
—

Comprehensive income attributable to Leggett & Platt, Inc.
$
97.3

 
$
103.5

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)
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net earnings
$
77.9

 
$
86.1

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
25.5

 
22.8

Amortization of intangibles and debt issuance costs
7.9

 
7.5

Long-lived asset impairments
.2

 
—

Provision for losses on accounts and notes receivable
.2

 
1.6

Writedown of inventories
1.8

 
1.3

Net gain from sales of assets and businesses
(.2
)
 
(.2
)
Deferred income tax expense
1.7

 
6.4

Stock-based compensation
8.7

 
10.3

Other, net
(1.7
)
 
1.4

Increases/decreases in, excluding effects from acquisitions and divestitures:
 
 
 
Accounts and other receivables
(39.2
)
 
(59.7
)
Inventories
(21.1
)
 
(30.1
)
Other current assets
(.6
)
 
4.5

Accounts payable
(7.9
)
 
28.8

Accrued expenses and other current liabilities
(9.1
)
 
(23.0
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
44.1

 
57.7

INVESTING ACTIVITIES
 
 
 
Additions to property, plant and equipment
(40.3
)
 
(34.3
)
Purchases of companies, net of cash acquired
(85.8
)
 
(37.9
)
Proceeds from sales of assets and businesses
1.6

 
1.3

Other, net
(2.5
)
 
(6.6
)
NET CASH USED FOR INVESTING ACTIVITIES
(127.0
)
 
(77.5
)
FINANCING ACTIVITIES
 
 
 
Payments on long-term debt
(1.0
)
 
(4.9
)
Change in commercial paper and short-term debt
144.8

 
159.1

Dividends paid
(47.5
)
 
(45.4
)
Issuances of common stock
.3

 
1.3

Purchases of common stock
(55.2
)
 
(104.2
)
Purchase of remaining interest in noncontrolling interest
—

 
(2.6
)
Other, net
(.3
)
 
(.8
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
41.1

 
2.5

EFFECT OF EXCHANGE RATE CHANGES ON CASH
10.3

 
4.0

DECREASE IN CASH AND CASH EQUIVALENTS
(31.5
)
 
(13.3
)
CASH AND CASH EQUIVALENTS—January 1,
526.1

 
281.9

CASH AND CASH EQUIVALENTS—March 31,
$
494.6

 
$
268.6

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 statement 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, 2017 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, 2017.

Reclassifications
Due to required retrospective application, certain reclassifications have been made to the prior period's information in the Consolidated Condensed Statements of Operations to conform to the first quarter 2018 presentation of "Cost of good sold", "Selling and administrative expenses" and "Other (income) expense, net" for new accounting guidance associated with pension costs (See Note 2 - Accounting Standards Updates).

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. The FASB has issued accounting guidance, in addition to the items discussed below, effective for future periods which we do not believe will have a material impact on our future financial statements.

Adopted in 2018:
 
•
On January 1, 2018 we adopted ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) as discussed in Note 3.

•
ASU 2017-07 “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”:  This ASU requires employers to disaggregate the service cost from other components of net periodic benefit costs and to disclose the income statement line item in which each component is included.  This guidance requires service costs to be reported in the same line item as other compensation costs, and the other components of net periodic benefit costs (which include interest costs, expected return on plan assets and actuarial gains and losses) to be reported outside of operating income. We adopted this guidance on January 1, 2018.  Application was required on a retrospective basis and resulted in a reclassification of $1.0 of expense from “Cost of goods sold” and “Selling and administrative expenses” into “Other (income) expense, net” for the three months ended March 31, 2017.  Refer to Note 11 for further information.

•
ASU 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (SAB 118):  This ASU allows SEC registrants to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of the Tax Cuts and Jobs Act (TCJA). We recognized the estimated income tax effects of the TCJA in our 2017 Consolidated Financial Statements in accordance with SAB 118. Refer to Note 15 for further information.


6
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

•
ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”:  We adopted this guidance on January 1, 2018, and it did not materially impact our financial statements.
 
To be adopted in future years:

•
ASU 2016-02 “Leases” (Topic 842): Requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. We plan to adopt the standard as of the first quarter of 2019. We have assembled a cross-functional implementation team and are assessing all potential impacts of the standard. The implementation team is working to gather the data required to account for leases under the new standard, and validating the functionality of third-party lease accounting software.  In addition, we are in the process of identifying and implementing the appropriate changes to business processes and controls to support recognition and disclosure under the new standard. We believe our assets and liabilities will increase for the adoption of this standard through the recording of these right-of-use assets and corresponding lease liabilities. We continue to evaluate its impact on our statements of operations and cash flows.
 
•
ASU 2017-12 “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”: This ASU is intended to simplify and clarify the accounting and disclosure requirements for hedging activities by more closely aligning the results of cash flow and fair value hedge accounting with the risk management activities of an entity. The amendments in this ASU are effective January 1, 2019 with early adoption permitted. We are currently evaluating the effect of the ASU on our results of operations, financial condition and cash flows.

•
ASU 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”: This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recorded.  The ASU will be effective January 1, 2019. Early adoption is permitted and the provisions of the ASU should be applied in either the period of adoption or retrospectively to each period in which the effect of the change in federal corporate income tax rate in the TCJA is recognized.  We are currently evaluating this guidance.

•
ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment": This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, the annual goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value up to the total amount of goodwill for the reporting unit. This ASU will be effective January 1, 2020, with early adoption permitted. We are currently evaluating this guidance, and do not expect it to materially impact our future financial statements.

•
ASU 2016-13 “Financial Instruments - Credit Losses” (Topic 326): This ASU is effective January 1, 2020 and amends the impairment model by requiring a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments including trade receivables. We are currently evaluating this guidance. However, we do not expect it to materially impact our future financial statements.

 
3. REVENUE
    
Initial adoption of new ASU

On January 1, 2018, we adopted ASU 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all the related amendments using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as a reduction to the opening balance of "Retained earnings" of $2.3. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the new standard to be immaterial to our sales, net earnings, balance sheet and cash flows on an ongoing basis.

Substantially all of our revenue continues to be recognized when products are shipped from our facilities or upon delivery to our customers' facilities. Topic 606 also provided clarity that resulted in reclassifications to or from "Net sales" and "Cost of goods sold".

7


The cumulative effect of applying Topic 606 to our Consolidated Condensed Balance Sheet was as follows:
 
Balance at December 31, 2017 as Previously Reported
 
Topic 606 Adjustments
 
Balance at January 1, 2018
Current assets
1,766.5

 
—

 
1,766.5

Net property, plant & equipment
663.9

 
—

 
663.9

Other assets 1
1,120.4

 
.7

 
1,121.1

Total assets
$
3,550.8

 
$
.7

 
$
3,551.5

 
 
 
 
 
 
Other current liabilities 2
$
88.7

 
$
3.0

 
$
91.7

All other current liabilities
887.5

 
—

 
887.5

Long-term liabilities
1,383.8

 
—

 
1,383.8

Retained earnings
2,511.3

 
(2.3
)
 
2,509.0

Other equity
(1,320.5
)
 
—

 
(1,320.5
)
Total liabilities and equity
$
3,550.8

 
$
.7

 
$
3,551.5


1 This represents the deferred tax impact related to Topic 606.
2 This adjustment is associated with constraint on the amount of variable consideration.

The effect of applying Topic 606 on our Consolidated Condensed Statement of Operations and Balance Sheet was as follows:
 
For the three months ended March 31, 2018
 
Amounts as Reported
 
Topic 606 Adjustments
 
Amounts Without Adoption of Topic 606
Net sales 3
$
1,028.8

 
$
2.4

 
$
1,031.2

Cost of goods sold 3
811.4

 
3.0

 
814.4

Gross profit
217.4

 
(.6
)
 
216.8

Selling and administrative expenses
104.7

 
—

 
104.7

All other
5.3

 
—

 
5.3

Earnings from continuing operations before interest and income taxes
107.4

 
(.6
)
 
106.8

Net interest expense
12.0

 
—

 
12.0

Income taxes
17.5

 
(.1
)
 
17.4

Net earnings
$
77.9

 
$
(.5
)
 
$
77.4


3 Primarily associated with a reclassification of customer reimbursements of tooling cost from "Net sales" to "Cost of good sold" and adjustments for variable consideration.


8


 
March 31, 2018
 
Amounts as Reported
 
Topic 606 Adjustments
 
Amounts Without Adoption of Topic 606
Current assets
1,814.1

 
—

 
1,814.1

Net property, plant & equipment
710.1

 
—

 
710.1

Other assets
1,168.2

 
(.6
)
 
1,167.6

Total assets
$
3,692.4

 
$
(.6
)
 
$
3,691.8

 
 
 
 
 
 
Other current liabilities
$
93.0

 
$
(2.4
)
 
$
90.6

All other current liabilities
885.1

 
—

 
885.1

Long-term liabilities
1,518.0

 
—

 
1,518.0

Retained earnings
2,538.3

 
1.8

 
2,540.1

Other equity
(1,342.0
)
 
—

 
(1,342.0
)
Total liabilities and equity
$
3,692.4

 
$
(.6
)
 
$
3,691.8


Performance Obligations and Shipping and Handling Costs
We recognize revenue when performance obligations under the terms of a contract with our customers are satisfied. For the quarter ended March 31, 2018, substantially all of our revenue was recognized upon transfer of control of our products to our customers, which was generally upon shipment from our facility or upon delivery to our customers' facility and was dependent on the terms of the specific contract. This conclusion considers the point at which our customers have the ability to direct the use of and obtain substantially all of the remaining benefits of the products that were transferred. Substantially all of any unsatisfied performance obligations as of March 31, 2018, will be satisfied within one year or less. Shipping and handling costs are included as a component of "Cost of goods sold".
Sales, valued added, and other taxes collected in connection with revenue-producing activities are excluded from revenue.
Sales Allowances and Returns
The amount of consideration we receive and revenue we recognize varies with changes in various sales allowances, discounts and rebates (variable consideration) that we offer to our customers. We reduce revenue by our estimates of variable consideration based on contract terms and historical experience. Changes in estimates of variable consideration for the quarter ended March 31, 2018 were not material.
Some of our products transferred to customers can be returned, and we recognize the following for this right:
•
An estimated refund liability and a corresponding reduction to revenue based on historical returns experience.
•
An asset and a corresponding reduction to cost of sales for our right to recover products from customers upon settling the refund liability. We reduce the carrying amount of these assets by estimates of costs associated with the recovery and any additional expected reduction in value.

Our refund liability and the corresponding asset associated with our right to recover products from our customers were immaterial at March 31, 2018.
Practical Expedients
We have elected to apply the following practical expedients.
•
The existence of a significant financing component - We expect that at contract inception, the time period between when we transfer a promised good to our customer and our receipt of payment from that customer for that good will be one year or less.
•
Costs of obtaining a contract - We generally expense costs of obtaining a contract because the amortization period would be one year or less.


9


Revenue by Category
We disaggregate revenue by customer group, which is the same as our product lines for each of our segments, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
 
Three Months Ended March 31,
 
2018
Residential Products
 
Bedding group
$
221.0

Fabric & Flooring Products group 4
161.3

Machinery group
15.8

 
398.1

Industrial Products
 
Wire group
82.0

 
82.0

Furniture Products
 
Home Furniture group
100.6

Work Furniture group
71.7

Consumer Products group
109.0

 
281.3

Specialized Products
 
Automotive group
212.1

Aerospace Products group
39.8

Hydraulic Cylinders group
15.5

 
267.4

 
$
1,028.8

4 Name changed from Fabric & Carpet Cushion Group as of March 31, 2018

4. SEGMENT INFORMATION
We have four operating segments that supply a wide range of products:

•
Residential Products: This segment supplies a variety of components and machinery used by bedding manufacturers in the production and assembly of their finished products. We also produce or distribute flooring underlayment, fabric, and geo components.
•
Industrial Products: These operations primarily supply steel rod and drawn steel wire to our other operations and to external customers. Our customers use this wire to make mechanical springs and many other end products.
•
Furniture Products: Operations in this segment supply a wide range of components for residential and work furniture manufacturers, as well as select lines of private-label finished furniture, adjustable bed bases, fashion beds, and bed frames.
•
Specialized Products: From this segment we supply lumbar support systems, seat suspension systems, motors and actuators, and control cables used by automotive manufacturers. We also produce and distribute tubing and tube assemblies for the aerospace industry and engineered hydraulic cylinders used in the material-handling and construction industries.

Our reportable segments are the same as our operating segments, which also correspond with our management structure. Each reportable segment has an executive vice president that reports to the chief executive officer, who is the chief operating decision maker (CODM). The operating results and financial information reported through the segment structure are regularly

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

reviewed and used by the CODM to evaluate segment performance, allocate overall resources and determine management incentive compensation.
The accounting principles used in the preparation of the segment information are the same as those used for the consolidated financial statements. We evaluate performance based on Earnings Before Interest and Taxes (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 or other appropriate metrics. 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.
A summary of segment results from continuing operations are shown in the following tables.
 
Trade
Sales
 
Inter-
Segment
Sales
 
Total
Sales
 
EBIT
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
Residential Products
$
398.1

 
$
4.6

 
$
402.7

 
$
35.0

Industrial Products
82.0

 
70.4

 
152.4

 
9.0

Furniture Products
281.3

 
2.9

 
284.2

 
18.0

Specialized Products
267.4

 
.7

 
268.1

 
46.1

Intersegment eliminations and other
 
 
 
 
 
 
(.7
)
 
$
1,028.8

 
$
78.6

 
$
1,107.4

 
$
107.4

Three Months Ended March 31, 2017
 
 
 
 
 
Residential Products
$
391.3

 
$
4.8

 
$
396.1

 
$
42.5

Industrial Products
69.8

 
65.6

 
135.4

 
8.8

Furniture Products
264.8

 
6.3

 
271.1

 
20.3

Specialized Products
234.4

 
1.9

 
236.3

 
43.0

Intersegment eliminations and other
 
 
 
 
 
 
1.3

 
$
960.3

 
$
78.6

 
$
1,038.9

 
$
115.9

 
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,
2018
 
December 31,
2017
Residential Products
$
588.1

 
$
554.6

Industrial Products
156.7

 
150.0

Furniture Products
262.8

 
245.7

Specialized Products
319.3

 
271.7

Average current liabilities included in segment numbers above
616.5

 
557.0

Unallocated assets 1
1,701.1

 
1,693.1

Difference between average assets and period-end balance sheet
47.9

 
78.7

Total assets
$
3,692.4

 
$
3,550.8

 
1 Unallocated assets consist primarily of goodwill, other intangibles, cash, businesses sold and deferred tax assets.    


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

5. DIVESTITURES

We divested our remaining Commercial Vehicle Products operation in the third quarter of 2017. It did not meet discontinued operations criteria, and was part of the Specialized Product Segment. We realized a pretax loss of $3.3 related to the sale of this business and also completed the sale of real estate associated with this operation, realizing a pretax gain of $23.4 in the fourth quarter of 2017. External sales for this business were $8.8 and EBIT was ($1.4) for the quarter ended March 31, 2017.
 
6. INVENTORIES
Approximately 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 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.
The following table contains the LIFO expense included in continuing operations for each of the periods presented.
 
 
Three Months Ended March 31,
 
2018
 
2017
LIFO expense
$
6.0

 
$
.4




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

7. EARNINGS PER SHARE

Basic and diluted earnings per share were calculated as follows:
 
Three Months Ended 
 March 31,
 
2018
 
2017
Earnings:
 
 
 
Earnings from continuing operations
$
77.9

 
$
86.1

Earnings attributable to noncontrolling interest, net of tax
—

 
—

Net earnings from continuing operations attributable to Leggett & Platt, Inc. common shareholders
77.9

 
86.1

Earnings from discontinued operations, net of tax
—

 
—

Net earnings attributable to Leggett & Platt, Inc. common shareholders
$
77.9

 
$
86.1

 
 
 
 
Weighted average number of shares (in millions):
 
 
 
Weighted average number of common shares used in basic EPS
135.3

 
136.8

Dilutive effect of stock-based compensation
1.0

 
1.3

Weighted average number of common shares and dilutive potential common shares used in diluted EPS
136.3

 
138.1

 
 
 
 
Basic and Diluted EPS:
 
 
 
Basic EPS attributable to Leggett & Platt, Inc. common shareholders
 
 
 
Continuing operations
$
.58

 
$
.63

Discontinued operations
—

 
—

Basic EPS attributable to Leggett & Platt, Inc. common shareholders
$
.58

 
$
.63

Diluted EPS attributable to Leggett & Platt, Inc. common shareholders
 
 
 
Continuing operations
$
.57

 
$
.62

Discontinued operations
—

 
—

Diluted EPS attributable to Leggett & Platt, Inc. common shareholders
$
.57

 
$
.62

 
 
 
 
Other information:
 
 
 
Anti-dilutive shares excluded from diluted EPS computation
.1

 
—



13
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, 2018
 
December 31, 2017
 
Current
 
Long-term
 
Current
 
Long-term
Trade accounts receivable
$
582.2

 
$
—

 
$
526.1

 
$
—

Trade notes receivable
.7

 
1.0

 
1.0

 
1.2

Total trade receivables
582.9

 
1.0

 
527.1

 
1.2

Other notes receivable
—

 
24.7

 
—

 
24.7

Insurance receivables
43.7

 
—

 
43.0

 
—

Taxes receivable, including income taxes
23.7

 
—

 
15.0

 
—

Other receivables
12.8

 
—

 
14.8

 
—

Subtotal other receivables
80.2

 
24.7

 
72.8

 
24.7

Total trade and other receivables
663.1

 
25.7

 
599.9

 
25.9

Allowance for doubtful accounts:
 
 
 
 
 
 
 
  Trade accounts receivable
(4.8
)
 
—

 
(4.7
)
 
—

  Trade notes receivable
(.1
)
 
—

 
(.1
)
 
(.1
)
Total trade receivables
(4.9
)
 
—

 
(4.8
)
 
(.1
)
  Other notes receivable
—

 
—

 
—

 
—

Total allowance for doubtful accounts
(4.9
)
 
—

 
(4.8
)
 
(.1
)
Total net receivables
$
658.2

 
$
25.7

 
$
595.1

 
$
25.8

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, 2017
 
Add:
Charges
 
Less:
Net Charge-offs/
(Recoveries)
 
Balance at March 31, 2018
Trade accounts receivable
$
4.7

 
$
.3

 
$
.2

 
$
4.8

Trade notes receivable
.2

 
(.1
)
 
—

 
.1

Total trade receivables
4.9

 
.2

 
.2

 
4.9

Other notes receivable
—

 
—

 
—

 
—

Total allowance for doubtful accounts
$
4.9

 
$
.2

 
$
.2

 
$
4.9



14
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, 2018
 
Three Months Ended 
 March 31, 2017
 
To be settled with stock
 
To be settled in cash
 
To be settled with stock
 
To be settled in cash
Stock-based retirement plans contributions
$
1.9

 
$
.2

 
$
1.4

 
$
.4

Discounts on various stock awards:

 
 
 

 
 
Deferred Stock Compensation Program
.5

 
—

 
.7

 
—

Stock-based retirement plans
.2

 
—

 
.3

 
—

Discount Stock Plan
.3

 
—

 
.3

 
—

Performance Stock Unit (PSU) awards: 1
 
 
 
 
 
 
 
     2018 PSU - TSR based 1A
.3

 
.3

 
—

 
—

     2018 PSU - EBIT CAGR based 1B
.6

 
.7

 
—

 
—

     2017 and prior PSU awards 1C
.9

 
(.1
)
 
1.3

 
.2

Restricted Stock Unit awards
.5

 
—

 
.6

 
—

Profitable Growth Incentive (PGI) awards 2
.5

 
.5

 
.4

 
.5

Other, primarily non-employee directors restricted stock
.3

 
—

 
.2

 
—

Total stock-based compensation expense
6.0

 
$
1.6

 
5.2

 
$
1.1

Employee contributions for above stock plans
2.7

 
 
 
5.1

 
 
Total stock-based compensation
$
8.7

 
 
 
$
10.3

 
 
 
 
 
 
 
 
 
 
Tax benefits on stock-based compensation expense
$
1.4

 
 
 
$
1.9

 
 
Tax benefits on stock-based compensation payments
.6

 
 
 
8.8

 
 
Total tax benefits associated with stock-based compensation
$
2.0

 
 
 
$
10.7

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

1 PSU Awards
In November 2017, the Compensation Committee approved changes to merge the PSU and PGI award programs for the 2018 award. The 2018 PSU awards have a component based on relative Total Shareholder Return (TSR) and another component based on Earnings Before Interest and Taxes (EBIT) Compound Annual Growth Rate (CAGR). These components are discussed below.

For outstanding 2018 awards, we intend to pay 50% in shares of our common stock and 50% in cash; although, we reserve the right to pay up to 100% in cash.

For outstanding 2016 and 2017 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 amount that represents 35% of the award will be settled in cash.

Cash settlements are recorded as a liability and adjusted to fair value at each reporting period. We elected to pay the 2015 award (paid in the first quarter 2018) in cash.

 1A 2018 PSU - TSR based
50% of each 2018 PSU award is based upon the Company's TSR compared to a peer group. Grant date fair values are calculated using a Monte Carlo simulation of stock and volatility data for Leggett and each of the peer companies. Grant date fair values are amortized using the straight-line method over the three-year vesting period.

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

The Relative TSR vesting condition of the 2018 PSU award contains 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 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 200% of the base award depending upon how our TSR ranks within the peer group at the end of the three-year performance period.

1B 2018 PSU - EBIT CAGR based
50% of each 2018 PSU award is based upon the Company's or applicable Segments' EBIT CAGR. Grant date fair values are calculated using the grant date stock price discounted for dividends over the vesting period. Expense is adjusted every quarter over the three-year vesting period based on the number of shares expected to vest.
The EBIT CAGR portion of this award contains the following conditions:
•
A service requirement—Awards generally “cliff” vest three years following the grant date; and
•
A performance condition—Awards are based on achieving specified performance targets that are defined by reference to the Company's or applicable segment's operations at the end of the three-year performance period. Participants will earn from 0% to 200% of the base award.
In connection with the decision to move a significant portion of the long-term incentive opportunity from a two-year to a three-year performance period by eliminating PGI awards, in January 2018, we also granted participants a one-time transition PSU award, based upon EBIT CAGR over a two-year performance period.

1C 2017 and Prior PSU Awards
The 2017 and prior PSU awards are based solely on relative TSR. Vesting conditions are the same as (1A) above other than a maximum payout of 175% of the base award.
Below is a summary of the number of shares and related grant date fair value of PSU’s based on TSR for the periods presented.
 
Three Months Ended March 31,
 
2018
 
2017
Total shares base award
.1

 
.1

Grant date per share fair value
$
42.60

 
$
50.75

Risk-free interest rate
2.4
%
 
1.5
%
Expected life in years
3.0

 
3.0

Expected volatility (over expected life)
19.9
%
 
19.5
%
Expected dividend yield (over expected life)
3.3
%
 
2.8
%
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
2014
 
December 31, 2016
 
10
 
175.0%
 
.4 million
 
$
9.8

 
First quarter 2017
2015
 
December 31, 2017
 
57
 
61.0%
 
—
 
$
6.9

 
First quarter 2018


16
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 based on EBIT CAGR for the periods presented.

 
Three Months Ended March 31,
 
2018
Total shares base award
.1

Grant date per share fair value
$
40.92

Vesting period in years
2.5


2 Profitable Growth Incentive Awards

In 2017 and prior years certain key management employees participated in a Profitable Growth Incentive (PGI) program. The PGI awards were 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 2017 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. We elected to pay the 2016 award (paid in the first quarter of 2018) 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
2015
 
December 31, 2016
 
36.0%
 
<.1 million
 
$
.8

 
First quarter 2017
2016
 
December 31, 2017
 
44.0%
 
—
 
$
2.0

 
First quarter 2018

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. A portion of the goodwill included in the table below is expected to provide an income tax benefit.
 
Three Months Ended March 31,
 
2018
 
2017
Accounts receivable
$
12.1

 
$
6.1

Inventory
14.9

 
5.3

Property, plant and equipment
26.2

 
5.1

Goodwill
23.3

 
18.7

Other intangible assets, primarily customer-related intangibles
27.3

 
12.7

Other current and long-term assets
.8

 
.1

Current liabilities
(9.3
)
 
(3.1
)
Long-term liabilities
(10.5
)
 
(3.5
)
Non-controlling interest
—

 
(1.4
)
Fair value of net identifiable assets
84.8

 
40.0

Additional consideration receivable
1.0

 
—

(Plus)/Less: Additional consideration for prior year acquisitions
—

 
2.1

Net cash consideration
$
85.8

 
$
37.9


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


The following table summarizes acquisitions for the periods presented.
Three Months Ended
 
Number of Acquisitions
 
Segment
 
Product/Service
March 31, 2018
 
1
 
Specialized Products
 
Global manufacturer of engineered hydraulic cylinders
 
 
 
 
 
 
 
March 31, 2017
 
2
 
Residential Products; Furniture Products
 
Distributor and installer of geosynthetic products; Surface-critical bent tube components
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.

The results of operations of the above acquired companies have been included in the consolidated condensed financial statements since the dates of acquisition. The unaudited pro forma consolidated net sales, net earnings and earnings per share as though the 2018 and 2017 acquisitions had occurred on January 1 of the comparable prior annual reporting period 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, 2018 and December 31, 2017, our liability for these future payments was $17.3 ($10.0 current and $7.3 long-term) and $16.5 ($8.9 current and $7.6 long-term), respectively.  Components of the liability are based on estimates and future events, and the amounts may fluctuate significantly until the payment dates.

A brief description of our acquisition activity by year for the periods presented is included below.
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 $84.8. PHC serves a market of mainly large Original Equipment Manufacturer (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 represents a new growth platform and forms a new business group entitled Hydraulic Cylinders within the Specialized Products segment.
2017
We acquired two businesses in the first quarter of 2017:
•
A distributor and installer of geosynthetic products, expanding the geographic scope and capabilities of our Geo Components business.
•
A manufacturer of surface-critical bent tube components in support of the private-label finished seating strategy in our Work Furniture business.
These businesses broaden our geographic scope, capabilities, and product offerings, and added $18.7 ($6.8 to Residential Products and $11.9 to Furniture Products) of goodwill. We also acquired the remaining 20% ownership in an Asian joint venture in our Work Furniture business for $2.6.


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

11. EMPLOYEE BENEFIT PLANS
Employer contributions for 2018 are expected to approximate $21.0. This increase compared to our 2017 employer contributions of $14.9 is due to our current year funding strategy, which incorporates, among other things, Pension Benefit Guaranty Corporation premiums, tax planning, and expectations of future funding requirements.

The following table provides interim information as to our domestic and foreign defined benefit pension plans:
 
 
Three Months Ended 
 March 31,
 
2018
 
2017
Components of net pension expense
 
 
 
Service cost
$
1.0

 
$
1.2

Interest cost
2.0

 
2.8

Expected return on plan assets
(2.9
)
 
(3.4
)
Recognized net actuarial loss
.7

 
1.2

Net pension expense
$
.8

 
$
1.8


The components of net pension expense other than the service cost component are included in the line item "Other (income) expense, net" in the Consolidated Condensed Statements of Operations.


12. STATEMENT OF CHANGES IN EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended March 31, 2018
 
Total
Equity
 
Retained
Earnings
 
Common
Stock &
Additional
Contributed
Capital
 
Treasury
Stock
 
Noncontrolling
Interest
 
Accumulated
Other
Comprehensive
Income (Loss)
Beginning balance, January 1, 2018
$
1,190.8

 
$
2,511.3

 
$
516.7

 
$
(1,828.3
)
 
$
.6

 
$
(9.5
)
Effect of accounting change on prior years (Topic 606-See Note 3)
(2.3
)
 
(2.3
)
 
—

 
—

 
—

 
—

Adjusted beginning balance, January 1, 2018
1,188.5

 
2,509.0

 
516.7

 
(1,828.3
)
 
.6

 
(9.5
)
Net earnings
77.9

 
77.9

 
—

 
—

 
—

 
—

Dividends declared
(47.2
)
 
(48.6
)
 
1.4

 
—

 
—

 
—

Dividends paid to noncontrolling interest
(.2
)
 
—

 
—

 
—

 
(.2
)
 
—

Treasury stock purchased
(55.3
)
 
—

 
—

 
(55.3
)
 
—

 
—

Treasury stock issued
3.9

 
—

 
(10.8
)
 
14.7

 
—

 
—

Foreign currency translation adjustments
16.7

 
—

 
—

 
—

 
—

 
16.7

Cash flow hedges, net of tax
2.3

 
—

 
—

 
—

 
—

 
2.3

Defined benefit pension plans, net of tax
.4

 
—

 
—

 
—

 
—

 
.4

Stock-based compensation transactions, net of tax
9.3

 
—

 
9.3

 
—

 
—

 
—

Ending balance, March 31, 2018
$
1,196.3

 
$
2,538.3

 
$
516.6

 
$
(1,868.9
)
 
$
.4

 
$
9.9

 

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

 
Three Months Ended March 31, 2017
 
Total
Equity
 
Retained
Earnings
 
Common
Stock &
Additional
Contributed
Capital
 
Treasury
Stock
 
Noncontrolling
Interest
 
Accumulated
Other
Comprehensive
Income (Loss)
Beginning balance, January 1, 2017
$
1,094.0

 
$
2,410.5

 
$
508.2

 
$
(1,713.5
)
 
$
2.4

 
$
(113.6
)
Effect of accounting change on prior years (Topic 740)
1.2

 
1.2

 
—

 
—

 
—

 
—

Adjusted beginning balance, January 1, 2017
1,095.2

 
2,411.7

 
508.2

 
(1,713.5
)
 
2.4

 
(113.6
)
Net earnings
86.1

 
86.1

 
—

 
—

 
—

 
—

Dividends declared
(45.0
)
 
(46.2
)
 
1.2

 
—

 
—

 
—

Treasury stock purchased
(106.4
)
 
—

 
—

 
(106.4
)
 
—

 
—

Treasury stock issued
8.2

 
—

 
(18.8
)
 
27.0

 
—

 
—

Foreign currency translation adjustments
14.3

 
—

 
—

 
—

 
—

 
14.3

Cash flow hedges, net of tax
2.5

 
—

 
—

 
—

 
—

 
2.5

Defined benefit pension plans, net of tax
.6

 
—

 
—

 
—

 
—

 
.6

Stock-based compensation transactions, net of tax
11.5

 
—

 
11.5

 
—

 
—

 
—

Purchase of remaining interest in noncontrolling interest, net of acquisitions
(1.6
)
 
—

 
(.6
)
 
—

 
(1.0
)
 
—

Ending balance, March 31, 2017
$
1,065.4

 
$
2,451.6

 
$
501.5

 
$
(1,792.9
)
 
$
1.4

 
$
(96.2
)


20
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)
Balance, January 1, 2018
$
40.5

 
$
(11.5
)
 
$
(38.5
)
 
$
(9.5
)
Other comprehensive income (loss)
16.7

 
2.3

 
(.2
)
 
18.8

Reclassifications, pretax 1
—

 
.3

 
.7

 
1.0

Income tax effect
—

 
(.3
)
 
(.1
)
 
(.4
)
Balance, March 31, 2018
$
57.2

 
$
(9.2
)
 
$
(38.1
)
 
$
9.9

 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
$
(38.6
)
 
$
(17.8
)
 
$
(57.2
)
 
$
(113.6
)
Other comprehensive income (loss)
14.3

 
.4

 
(.2
)
 
14.5

Reclassifications, pretax 2
—

 
2.9

 
1.2

 
4.1

Income tax effect
—

 
(.8
)
 
(.4
)
 
(1.2
)
Balance, March 31, 2017
$
(24.3
)
 
$
(15.3
)
 
$
(56.6
)
 
$
(96.2
)
 
 
 
 
 
 
 
 
 
 
 
1 
2018 pretax reclassifications are comprised of:
 
 
 
 
 
 
 
 
 
Net sales
$
—

 
$
(1.0
)
 
$
—

 
$
(1.0
)
 
 
Cost of goods sold; selling and administrative expenses
—

 
.2

 
—

 
.2

 
 
Interest expense
—

 
1.1

 
—

 
1.1

 
 
Other income (expense), net
—

 
—

 
.7

 
.7

 
 
Total reclassifications, pretax
$
—

 
$
.3

 
$
.7

 
$
1.0

 
 
 
 
 
 
 
 
 
 
 
2 
2017 pretax reclassifications are comprised of:
 
 
 
 
 
 
 
 
 
Net sales
$
—

 
$
1.6

 
$
—

 
$
1.6

 
 
Cost of goods sold; selling and administrative expenses
—

 
.2

 
—

 
.2

 
 
Interest expense
—

 
1.1

 
—

 
1.1

 
 
Other income (expense), net
—

 
—

 
1.2

 
1.2

 
 
Total reclassifications, pretax
$
—

 
$
2.9

 
$
1.2

 
$
4.1


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
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.

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

The areas in which we utilize fair value measures of financial assets and liabilities are presented in the table below.
 
As of March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Bank time deposits with original maturities of three months or less
$
—

 
$
253.3

 
$
—

 
$
253.3

Derivative assets (Note 14)
—

 
4.9

 
—

 
4.9

Diversified investments associated with the Executive Stock Unit Program (ESUP) 1
34.5

 
—

 
—

 
34.5

Total assets
$
34.5

 
$
258.2

 
$
—

 
$
292.7

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities 1  (Note 14)
$
—

 
$
1.6

 
$
—

 
$
1.6

Liabilities associated with the ESUP 1
34.5

 
—

 
—

 
34.5

Total liabilities
$
34.5

 
$
1.6

 
$
—

 
$
36.1

 
 
As of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Bank time deposits with original maturities of three months or less
$
—

 
$
236.4

 
$
—

 
$
236.4

Derivative assets 1  (Note 14)
—

 
3.9

 
—

 
3.9

Diversified investments associated with the ESUP 1
34.0

 
—

 
—

 
34.0

Total assets
$
34.0

 
$
240.3

 
$
—

 
$
274.3

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities 1  (Note 14)
$
—

 
$
1.9

 
$
—

 
$
1.9

Liabilities associated with the ESUP 1
34.4

 
—

 
—

 
34.4

Total liabilities
$
34.4

 
$
1.9

 
$
—

 
$
36.3

1 Includes both current and long-term amounts.
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 not materially different from its March 31, 2018 and December 31, 2017 $1,250.0 carrying value.
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. Determining fair values for these items requires significant judgment and includes 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 reflects 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.  


22
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

14. DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges
Derivative financial instruments that we use to hedge forecasted transactions and anticipated cash flows are as follows:

Currency Cash Flow Hedges—The foreign currency hedges manage risk associated with exchange rate volatility of various currencies.

We have also occasionally used interest rate cash flow hedges to manage interest rate risks.
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 and Derivatives not Designated as Hedging Instruments
These derivatives typically manage foreign currency risk associated with subsidiaries’ assets and liabilities, and gains or losses are recognized 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.

23
LEGGETT & PLATT, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The following table presents assets and liabilities representing the fair value of 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.
 
Expiring at various dates through:
 
Total USD
Equivalent
Notional
Amount
 
As of March 31, 2018
 
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/purchases of Canadian, Chinese, European, South Korean and Swiss subsidiaries
Jun 2019
 
$
132.5

 
$
3.5

 
$
.7

 
$
.1

Future DKK sales of Polish subsidiary
Sep 2019
 
21.9

 
.3

 
—

 
—

Future EUR sales of UK, Chinese and Swiss subsidiaries
Jun 2019
 
40.1

 
.3

 
.1

 
—

Future MXN purchases of a USD subsidiary
Jun 2019
 
6.6

 
.1

 
—

 
—

Total cash flow hedges
 
 
 
 
4.2

 
.8

 
.1

Fair value hedges:
 
 
 
 
 
 
 
 
 
Intercompany and third party receivables and payables exposed to multiple currencies (DKK, EUR, USD and ZAR) in various countries (CAD, CHF, GBP, PLN and USD)
Dec 2018
 
51.4

 
—

 
.7

 
—

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Non-deliverable hedges (EUR, JPY and USD) exposed to the CNY
Mar 2019
 
28.8

 
.7

 
—

 
—

 
 
 
 
 
$
4.9

 
$
1.5

 
$
.1


 

24
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, 2017
 
Assets
 
Liabilities
Other Current
Assets
 
Sundry
 
Other Current
Liabilities
 
Other Long-Term Liabilities
Derivatives designated as hedging instruments
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Currency hedges:
 
 
 
 
 
 
 
 
 
 
 
Future USD sales/purchases of Canadian, Chinese, European, South Korean and Swiss subsidiaries
Mar 2019
 
$
158.1

 
$
2.2

 
$
.2

 
$
.5

 
$
—

Future MXN purchases of a USD subsidiary
Mar 2019
 
6.6

 
—

 
—

 
.5

 
—

Future JPY sales of a Chinese subsidiary
Dec 2018
 
11.2

 
.1

 
—

 
—

 
—

Future DKK sales of a Polish subsidiary
Dec 2018
 
16.0

 
.6

 
—

 
—

 
—

Future EUR sales of Chinese, Swiss and UK subsidiaries
Mar 2019
 
38.8

 
—

 
—

 
.3

 
.1

Total cash flow hedges
 
 
 
 
2.9

 
.2

 
1.3

 
.1

Fair value hedges: