Edgar Filing: LEGGETT & PLATT INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 001-07845

LEGGETT & PLATT, INCORPORATED

(Exact name of registrant as specified in its charter)



Missouri		44-0324630
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
No. 1 Leggett Road Carthage, Missouri		64836
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (417) 358-8131

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



Title of Each Class		Name of each exchange on which registered
Common Stock, $.01 par value		New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	¨	Smaller reporting company ¨
		Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing price of our common stock on the New York Stock Exchange) on June 29, 2018 was $5,645,300,000.

There were 131,071,610 shares of the registrant’s common stock outstanding as of February 18, 2019.

DOCUMENTS INCORPORATED BY REFERENCE

Part of Item 10, and all of Items 11, 12, 13 and 14 of Part III are incorporated by reference from the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2019.

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TABLE OF CONTENTS

LEGGETT & PLATT, INCORPORATED—FORM 10-K

FOR THE YEAR ENDED December 31, 2018



		Page Number
Forward-Looking Statements		1
PART I
Item 1.	Business	3

Item 1A.	Risk Factors	17

Item 1B.	Unresolved Staff Comments	22

Item 2.	Properties	22

Item 3.	Legal Proceedings	23

Item 4.	Mine Safety Disclosures	23

Supp. Item.	Executive Officers of the Registrant	23
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25

Item 6.	Selected Financial Data	27

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	57

Item 8.	Financial Statements and Supplementary Data	58

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	58

Item 9A.	Controls and Procedures	58

Item 9B.	Other Information	59
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	60

Item 11.	Executive Compensation	62

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	62

Item 13.	Certain Relationships and Related Transactions, and Director Independence	62

Item 14.	Principal Accounting Fees and Services	63
PART IV
Item 15.	Exhibits, Financial Statement Schedules	64

	Exhibit Index	124

Item 16.	Form 10-K Summary	129

Signatures		130

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Forward-Looking Statements

This Annual Report on Form 10-K and our other public disclosures, whether written or oral, may contain “forward-looking” statements including, but not limited to: our ability to capitalize on current and future market trends, including growth of hybrid and specialty foam mattresses and the e-commerce mattress channel, and demand for compressed mattresses; our plans to maintain all Elite Comfort Solutions, Inc. (ECS) facilities; the financial results of ECS; the pro forma combined financial results of the Company and ECS; our expectation of maintaining the indebtedness under our commercial paper program until such time it is replaced with long-term debt; our belief that operating cash flow, cash on hand and our ability to obtain debt financing will provide sufficient funds available to repay commercial paper borrowings, as well as support our ongoing operations, pay dividends and fund future growth; projections of revenue, income, earnings, capital expenditures, dividends, capital structure, cash flows, tax impacts or other financial items; possible plans, goals, objectives, prospects, strategies or trends concerning future operations; statements concerning future economic performance, possible goodwill or other asset impairment; restructuring costs; and the underlying assumptions relating to the forward-looking statements. These statements are identified either by the context in which they appear or by use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” or the like. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by the cautionary statements described in this provision.

Any forward-looking statement reflects only the beliefs of the Company or its management at the time the statement is made. Because all forward-looking statements deal with the future, they are subject to risks, uncertainties and developments which might cause actual events or results to differ materially from those envisioned or reflected in any forward-looking statement. Moreover, we do not have, and do not undertake, any duty to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement was made. For all of these reasons, forward-looking statements should not be relied upon as a prediction of actual future events, objectives, strategies, trends or results.

Readers should review Item 1A Risk Factors in this Form 10-K for a description of important factors that could cause actual events or results to differ materially from forward-looking statements. It is not possible to anticipate and list all risks, uncertainties and developments which may affect the future operations or performance of the Company, or which otherwise may cause actual events or results to differ materially from forward-looking statements. However, the known, material risks and uncertainties include the following:


•	uncertainty of the financial performance of ECS and the Company following completion of the ECS acquisition;


•	failure to realize the anticipated benefits of the ECS acquisition, including as a result of delay in integrating the businesses of ECS;


•	difficulties and delays in achieving revenue synergies of ECS;


•	inability to retain key personnel and maintain relationships with customers and suppliers of ECS;

•

inability to “deleverage” after the ECS closing in the expected timeframe, due to increases or decreases in our capital needs, which may vary depending on a variety of factors, including, without limitation, any acquisition or divestiture activity and our working capital needs, market conditions, and alternative capital market opportunities, including, without limitation, the relative attractiveness of longer-term debt or equity financing;


•	the Company's and ECS’s ability to achieve their respective short-term and longer-term operating targets;


•	inability to comply with the restrictive covenants in our credit agreement that may limit our operational flexibility and our ability to pay our debt when it comes due;


•	market and other factors or conditions that reduce or eliminate the Company’s ability to obtain long-term debt financing;


•	factors that could affect the industries or markets in which we participate, such as growth rates, market demand for our products, and opportunities in those industries;


•	adverse changes in consumer confidence, housing turnover, employment levels, interest rates, trends in capital spending and the like;


•	factors that could impact raw materials and other costs, including the availability and pricing of steel scrap and rod, chemicals and other raw materials, the availability of labor, wage rates and energy costs;


•	our ability to pass along raw material cost increases through increased selling prices;


•	price and product competition from foreign (particularly Asian and European) and domestic competitors;


•	our ability to maintain profit margins if our customers change the quantity and mix of our components in their finished goods;

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•	our ability to maintain and grow the profitability of acquired companies;


•	adverse changes in foreign currency, customs, shipping rates, political risk, and U.S. or foreign laws, regulations or legal systems (including tax law changes);


•	our ability to realize deferred tax assets on our balance sheet;


•	tariffs imposed by the U.S. government that result in increased costs of imported raw materials and products that we purchase;


•	our ability to maintain the proper functioning of our internal business processes and information systems through technology failures or otherwise;


•	our ability to avoid modification or interruption of our information systems through cybersecurity breaches;


•	a decline in the long-term outlook for any of our reporting units or assets that could result in impairment;


•	the loss of one or more of our significant customers;


•	our ability to collect customer debts due to bankruptcy, financial difficulties or insolvency;


•	our borrowing costs and access to liquidity resulting from credit rating changes;


•	business disruptions to our steel rod mill;


•	risks related to operating in foreign countries, including, without limitation, credit risks, increased customs and shipping rates, disruptions related to the availability of electricity and transportation during times of crisis or war, and political instability in certain countries;


•	uncertainty related to the governing trade provisions between the United States, Mexico and Canada;


•	risks relating to the United Kingdom’s referendum, which called for its exit from the European Union (commonly known as “Brexit”);


•	the amount and timing of share repurchases; and


•	litigation accruals related to various contingencies including antitrust, intellectual property, product liability and warranty, taxation, environmental and workers’ compensation expense.

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PART I

Item 1. Business.

Summary

Leggett & Platt, Incorporated was founded as a partnership in Carthage, Missouri in 1883 and was incorporated in 1901. The Company, a pioneer of the steel coil bedspring, has become an international diversified manufacturer that conceives, designs and produces a wide range of engineered components and products found in many homes, offices, automobiles and aircraft. As discussed below, our operations are organized into 15 business units, which are divided into ten groups under our four segments: Residential Products; Industrial Products; Furniture Products; and Specialized Products.

Overview of Our Segments

Residential Products Segment

BEDDING GROUP

U.S. Spring

International Spring

Specialty Foam ¹

FABRIC & FLOORING PRODUCTS GROUP

Fabric Converting

Geo Components

Flooring Products

MACHINERY GROUP

Machinery

¹ Formed January 16, 2019, with the acquisition of Elite Comfort Solutions, Inc. (ECS)

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

Innovative proprietary products and low cost have made us the largest U.S. manufacturer in many of these businesses. We strive to understand what drives consumer purchases in our markets and focus our product development activities on meeting end-consumer needs. We attain a cost advantage from efficient manufacturing methods, internal production of key raw materials, purchasing leverage, and large-scale production. Sourcing components from us allows our customers to focus on designing, merchandising and marketing their products.

On January 16, 2019, we completed the acquisition of ECS for cash consideration of approximately $1.25 billion. ECS, headquartered in Newnan, Georgia, is a leader in proprietary specialized foam technology, primarily for the bedding and furniture industries. With 16 facilities across the United States, ECS operates a vertically integrated model, developing many of the chemicals and additives used in foam production, producing specialty foam, and manufacturing private-label finished products. These innovative specialty foam products include finished mattresses sold through both traditional and

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online channels, mattress components, mattress toppers and pillows, and furniture foams. ECS has a diversified customer mix and a strong position in the high-growth compressed mattress market segment. The ECS management team will continue to lead the business. Leggett expects to maintain all 16 of ECS’s facilities.

PRODUCTS

Bedding Group



	•		Innersprings (sets of steel coils, bound together, that form the core of a mattress)
	•		Proprietary specialty foam for use primarily in bedding and furniture
	•		Private-label finished mattresses, often sold compressed
	•		Wire forms for mattress foundations
	•		Machines that we use to shape wire into various types of springs

Fabric & Flooring Products Group



	•		Structural fabrics for mattresses, residential furniture and industrial uses
	•		Carpet cushion and hard surface flooring underlayment (made from bonded scrap foam, fiber, rubber and prime foam)
	•		Geo components (synthetic fabrics and various other products used in ground stabilization, drainage protection, erosion and weed control)

Machinery Group



	•		Quilting machines for mattress covers
	•		Industrial sewing/finishing machines
	•		Conveyor lines
	•		Mattress packaging and glue-drying equipment

CUSTOMERS



	•		Manufacturers of finished bedding (mattresses and foundations)
	•		Bedding brands and mattress retailers
	•		Flooring retailers and distributors
	•		Contractors, landscapers, road construction companies, and government agencies using geo components
	•		Manufacturers of upholstered furniture, packaging, filtration and draperies

Industrial Products Segment

WIRE GROUP

Drawn Wire

Steel Rod

The quality of our products and service, together with low cost, have made Leggett & Platt the leading U.S. supplier of high-carbon drawn steel wire. Our Wire Group operates a steel rod mill with an annual output of approximately 500,000 tons, of which a substantial majority is used by our own wire mills. We have three wire mills that supply virtually all the

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wire consumed by our other domestic businesses. We also supply steel wire to trade customers that operate in a broad range of markets.

PRODUCTS

Wire Group



	•		Drawn wire
	•		Steel rod

CUSTOMERS

We use about 65% of our wire output to manufacture our own products, including:



	•		Bedding and furniture components
	•		Automotive seat suspension systems

The Industrial Products segment also has a diverse group of trade customers that include:



	•		Mechanical spring manufacturers
	•		Wire distributors
	•		Packaging and baling companies

Furniture Products Segment

HOME FURNITURE GROUP

Home Furniture

WORK FURNITURE GROUP

Work Furniture

CONSUMER PRODUCTS GROUP

Consumer Products

In our Furniture Products segment, we design, manufacture, and distribute a wide range of components and finished products for the residential furniture, office and commercial furniture, and specialty bedding markets. We supply components used by home and work furniture manufacturers to provide comfort, motion and style in their finished products, as well as select lines of private-label finished furniture. We are also a major supplier of adjustable beds, with domestic manufacturing, distribution, e-commerce fulfillment and global sourcing capabilities.

PRODUCTS

Home Furniture Group



	•		Steel mechanisms and motion hardware (enabling furniture to recline, tilt, swivel, rock and elevate) for reclining chairs, sofas, sleeper sofas and lift chairs
	•		Springs and seat suspensions for chairs, sofas and loveseats

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Work Furniture Group



	•		Components and private-label finished goods for collaborative soft seating
	•		Bases, columns, back rests, casters and frames for office chairs, and control devices that allow chairs to tilt, swivel and elevate

Consumer Products Group



	•		Adjustable beds
	•		Fashion beds and bed frames

CUSTOMERS



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

Our Fashion Bed and Home Furniture businesses have underperformed expectations in recent quarters primarily from weaker demand and higher raw material costs. Accordingly, we are exiting low margin business, reducing operating costs and eliminating excess capacity. We incurred fourth quarter 2018 restructuring-related charges of $16 million ($7 million cash and $9 million non-cash) primarily attributable to the Fashion Bed and Home Furniture businesses. In 2019, we expect an additional estimated $17 million ($5 million cash and $12 million non-cash) in restructuring-related charges for these businesses. The restructuring activity should be substantially complete by the end of 2019.

Specialized Products Segment

AUTOMOTIVE GROUP

Automotive

AEROSPACE PRODUCTS GROUP

Aerospace Products

HYDRAULIC CYLINDERS GROUP

Hydraulic Cylinders

Our Specialized Products segment designs, manufactures and sells products including automotive seating components, tubing and fabricated assemblies for the aerospace industry, and hydraulic cylinders for the material handling, construction and transportation industries. In our automotive business, our technical capability and deep customer engagement allows us to compete on critical functionality, such as comfort, size, weight and noise. Our reliable product development and launch capability, coupled with our global footprint, makes us a trusted partner for our Tier 1 and OEM customers.

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PRODUCTS

Automotive Group



	•		Mechanical and pneumatic lumbar support and massage systems for automotive seating
	•		Seat suspension systems
	•		Motors and actuators, used in a wide variety of vehicle power features
	•		Cables

Aerospace Products Group



	•		Titanium, nickel and stainless-steel tubing, formed tube and tube assemblies, primarily used in fluid conveyance systems

Hydraulic Cylinders Group



	•		Engineered hydraulic cylinders

CUSTOMERS



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

Strategic Direction

Primary Financial Metric

Total Shareholder Return (TSR), relative to peer companies, is a primary financial measure that we use to assess long-term performance. TSR = (Change in Stock Price + Dividends)/Beginning Stock Price. Our goal is to achieve TSR in the top third of the S&P 500 companies over rolling three-year periods through an approach that employs four TSR drivers: revenue growth, margin expansion, dividends, and share repurchases.

Our incentive programs reward return generation and profitable growth. Senior executives participate in a TSR-based incentive program (based on our performance compared to a group of approximately 320 peers).

For information about our TSR targets, see the discussion under "Total Shareholder Return" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations on page 29.

Returning Cash to Shareholders

During the past three years, we generated $1.44 billion of operating cash, and we returned much of this cash to shareholders in the form of dividends ($557 million) and share repurchases ($468 million). Our top priorities for use of cash are organic growth (capital expenditures), dividends, and strategic acquisitions. Historically, after funding those priorities, we generally repurchased stock with remaining available cash. Currently, in connection with the ECS acquisition our debt levels increased, and we expect to focus on deleveraging by temporarily limiting share repurchases, reducing acquisition spending, and using operating cash flow to repay debt.

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

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PART I

Portfolio Management

We utilize a rigorous strategic planning process to help guide decisions regarding business unit roles, capital allocation priorities, and areas in which to grow. We review the portfolio classification of each unit on an annual basis to determine its appropriate role (Grow, Core, Fix or Divest). This review includes criteria such as competitive position, market attractiveness, business unit size, and fit within our overall objectives, as well as financial indicators such as business unit return, growth of EBIT (earnings before interest and taxes), EBIT margin, EBITDA (earnings before interest, taxes, depreciation and amortization), and operating cash flows. Business units in the Grow category should provide avenues for profitable growth from competitively advantaged positions in attractive markets. Core business units are expected to enhance productivity, improve market share, and generate cash flow from operations while using minimal capital. To remain in the portfolio, business units are expected to consistently generate after-tax returns in excess of our cost of capital. Business units that fail to consistently attain minimum return goals will be moved to the Fix or Divest categories.

Disciplined Growth

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

Our long-term 6-9% annual revenue growth objective envisions periodic acquisitions. We primarily seek acquisitions within our Grow businesses, and look for opportunities to enter new, higher growth markets (carefully screened for sustainable competitive advantage). We expect all acquisitions to (a) have a clear strategic rationale, a sustainable competitive advantage, a strong fit with the Company, and be in an attractive and growing market; (b) create value by enhancing TSR; (c) for stand-alone businesses: generally possess annual revenue in excess of $50 million, strong management and future growth opportunities with a strong market position in a market growing faster than GDP; and (d) for bolt-on businesses: generally possess annual revenue in excess of $15 million, significant synergies, and a strategic fit with an existing business unit. With the consummation of the ECS acquisition, the Company expects to temporarily reduce acquisition spending and use its operating cash flow to repay debt.

Acquisitions

2019

On January 16, 2019, we completed the acquisition of Elite Comfort Solutions, Inc. (ECS) for cash consideration of approximately $1.25 billion. This business had revenues of $611 million for fiscal year ended September 2018. ECS is a leader in proprietary specialized foam technology, primarily for the bedding and furniture industries. ECS operates a vertically integrated model, developing many of the chemicals and additives used in foam production, producing specialty foam, and manufacturing private-label finished products. These innovative specialty foam products include finished mattresses sold through both traditional and online channels, mattress components, mattress toppers and pillows, and furniture foams. ECS operates as a new business unit titled Specialty Foam within the Residential Products segment.

2018

In January 2018, we acquired Precision Hydraulic Cylinders (PHC), a leading global manufacturer of

engineered hydraulic cylinders primarily for the materials handling market. The total consideration paid was $87 million. PHC serves a market of mainly large OEM customers utilizing highly engineered components with long product life-cycles that represent a small part of the end product’s cost. PHC represents a new growth platform and formed a new business group titled Hydraulic Cylinders within the Specialized Products segment.

We also acquired two small Geo Components businesses for total consideration of $22 million. They manufacture and distribute silt fencing and home and garden products.

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2017

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

2016

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

For more information regarding our acquisitions, please refer to Note S on page 114 and Note V on page 121 of the Notes to Consolidated Financial Statements.

Divestitures

2018

There were no divestitures in 2018.

2017

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

2016

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

For further information about divestitures and discontinued operations, see Note C on page 81 of the Notes to Consolidated Financial Statements.

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PART I

Foreign Operations

The percentages of our trade sales related to products manufactured outside the United States for the previous three years are shown below. The percentages of foreign trade sales were 34% for 2016, 37% for 2017 and 37% for 2018. Sales by ECS (acquired in January 2019) are not included in the table below. Substantially all ECS sales are in the United States.

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

Europe



•	Innersprings for mattresses
•	Lumbar and seat suspension systems for automotive seating and actuators for automotive applications
•	Seamless and welded tubing and fabricated assemblies for aerospace applications
•	Select lines of private-label finished furniture
•	Machinery and equipment designed to manufacture innersprings for mattresses

China



•	Lumbar and seat suspension systems for automotive seating and actuators for automotive applications
•	Cables, motors, and actuators for automotive applications
•	Recliner mechanisms and bases for upholstered furniture
•	Innersprings for mattresses
•	Work furniture components, including chair bases and casters

Canada



•	Lumbar supports for automotive seats
•	Fabricated wire for the furniture and automotive industries
•	Work furniture chair controls and bases

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Mexico



•	Lumbar and seat suspension systems for automotive seating
•	Adjustable beds
•	Innersprings and fabricated wire for the bedding industry
•	Select lines of private-label finished furniture

Geographic Areas of Operation

As of December 31, 2018, we had 129 manufacturing facilities; 75 located in the U.S. and 54 located in 17 foreign countries, as shown below. We also had various sales, warehouse and administrative facilities. However, our manufacturing plants are our most important properties.



	Residential Products	Industrial Products	Furniture Products	Specialized Products
North America
Canada	n		n	n
Mexico	n	n	n	n
United States	n	n	n	n
Europe
Austria				n
Belgium				n
Croatia	n
Denmark	n
France				n
Hungary				n
Italy	n
Poland			n
Switzerland	n
United Kingdom	n			n
South America
Brazil	n
Asia
China	n		n	n
India				n
South Korea				n
Africa
South Africa	n

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PART I

Sales by Product Line

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



Product Line	2018		2017		2016
Bedding Group	21	%	21	%	22	%
Automotive Group	19		20		19
Fabric & Flooring Products Group	17		18		18
Work Furniture Group	7		7		7
Consumer Products Group	11		10		8
Home Furniture Group	9		10		11
Wire Group ¹	9		7		8
Aerospace Products Group	4		4		3
Hydraulic Cylinders Group ²	2		—		—
Machinery Group	1		2		2
Commercial Vehicle Products Group ³	—		1		2

¹Certain operations in the Wire Group were sold in 2016.

²Formed in January 2018 with the acquisition of a manufacturer of hydraulic cylinders.

³The two remaining Commercial Vehicle Products operations were sold in 2017 and 2016.

Distribution of Products

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

Raw Materials

The products we manufacture require a variety of raw materials. We believe that worldwide supply sources are readily available for all the raw materials we use. Among the most important are:



•	Various types of steel, including scrap, rod, wire, sheet and stainless
•	Chemicals used in foam production
•	Foam scrap
•	Woven and non-woven fabrics
•	Titanium and nickel-based alloys and other high strength metals

We supply our own raw materials for many of the products we make. For example, we produce steel rod that we make into steel wire, which we then use to manufacture:



•	Innersprings and foundations for mattresses
•	Springs and seat suspensions for chairs and sofas
•	Automotive seating suspension systems

We supply a substantial majority of our domestic steel rod requirements through our own rod mill. Our wire drawing mills supply nearly all of our U.S. requirements for steel wire.

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Customer Concentration

We serve thousands of customers worldwide, sustaining many long-term business relationships. In 2018, our largest customer accounted for approximately 6% of our consolidated revenues. Our top 10 customers accounted for approximately 32% of these consolidated revenues. The loss of one or more of these customers could have a material adverse effect on the Company as a whole, or on the respective segment in which the customer’s sales are reported, including our Residential Products, Specialized Products and Furniture Products segments.

Patents and Trademarks

The chart below shows the number of patents issued, patents in process, trademarks registered and trademarks in process held by our operations as of December 31, 2018. No single patent or group of patents, or trademark or group of trademarks, is material to our operations as a whole. Substantially all of our patents relate to products manufactured by the Specialized Products, Furniture Products, and Residential Products segments, while over half of our trademarks relate to products manufactured by the Residential Products segment. We had 1,427 patents issued and 598 in process, and 980 trademarks registered and 143 in process.

In addition to the above patents and trademarks, in January 16, 2019, we added, through the ECS acquisition, intellectual property related to the protection of technology around various foam applications including specialty polyols and additives that enhance foam performance by reducing heat retention, improving durability and diminishing odor.

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Some of our most significant trademarks include:



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

Product Development

One of our strongest performing product categories across the company is ComfortCore^®, our fabric-encased innerspring coils used in hybrid and other mattresses. Our ComfortCore^® volume continues to grow, and represented over 45% of our total innerspring units by the end of 2018. A growing number of our ComfortCore^® innersprings contain a feature we call Quantum^® Edge. These are narrow-diameter, fabric-encased coils that form a perimeter around a innerspring set, replacing foam in a finished mattress. Over 35% of our ComfortCore^® innersprings have the Quantum^® Edge feature, and Quantum^® Edge continues to grow. We have also developed very low height ComfortCore^® innersprings used as comfort layers in the top of mattresses that are a fast growing product. In 2018, sales of these low height innersprings increased over 60%. We are investing in capacity and adding machinery, supplied by our Spuhl^® operation, to support the growth in ComfortCore^® and Quantum^® Edge.

With our January 2019 acquisition of Elite Comfort Solutions, Inc. (ECS), we gained important proprietary technologies in the production of specialty foams, primarily for the bedding and furniture industries. ECS formulates many of the chemicals and additives used in foam production. These branded, specialty polyols and additives enhance foam performance by reducing heat retention, improving durability and diminishing odor. These innovations enable us to create quality mattresses that can be compressed, and we have a significant amount of intellectual property around these specialty chemical formulations.

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

Employees

At December 31, 2018, we had approximately 22,000 employees, of which 15,900 were engaged in production. Of the 22,000, approximately 12,500 were international employees (5,900 in China). Approximately 14% of our employees are represented by labor unions that collectively bargain for work conditions, wages or other issues. We did not experience any work stoppage related to contract negotiations with labor unions during 2018. Management is not aware of any circumstances likely to result in a material work stoppage related to contract negotiations with labor unions during 2019. We had approximately 8,200 employees in Specialized Products; 6,300 in Residential Products; 5,600 in Furniture Products; and 1,100 in Industrial Products.

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At December 31, 2017, we had approximately 22,200 employees.

As previously disclosed, the Company acquired ECS on January 16, 2019. ECS had 980 employees on the acquisition date.

Competition

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

We believe we are the largest U.S.-based manufacturer, in terms of revenue, of the following:



•	Bedding components
•	Automotive seat support and lumbar systems
•	Specialty bedding foams and private-label finished mattresses
•	Components for home furniture and work furniture
•	Flooring underlayment
•	Adjustable beds
•	High-carbon drawn steel wire
•	Bedding industry machinery

We continue to face pressure from foreign competitors as some of our customers source a portion of their components and finished products offshore. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and more lenient regulatory climates. We typically remain price competitive, even versus many foreign manufacturers, as a result of our efficient operations, low labor content, vertical integration in steel and wire, logistics and distribution efficiencies, and large scale purchasing of raw materials and commodities. However, we have also reacted to foreign competition in certain cases by selectively adjusting prices, and by developing new proprietary products that help our customers reduce total costs.

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For information about antidumping duty orders regarding innerspring, steel wire rod and mattress imports, please see "Competition" in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 31.

Seasonality

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

Backlog

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

Working Capital Items

For information regarding working capital items, please see the discussion of "Cash from Operations" in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 41.

Government Contracts

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

Environmental Regulation

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

Internet Access to Information

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

Discontinued Operations

For information on discontinued operations, please see Note C on page 81 of the Notes to Consolidated Financial Statements.

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Item 1A. Risk Factors.

Investing in our securities involves risk. Set forth below and elsewhere in this report are risk factors that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. We may amend or supplement these risk factors from time to time by other reports we file with the SEC.

Inability to timely integrate and fully realize the benefit of the Elite Comfort Solutions, Inc. acquisition could negatively impact our ability to achieve our anticipated cash flows, results of operations, earnings per share, and stock price.

The Company completed the acquisition of Elite Comfort Solutions, Inc. (ECS) for a cash purchase price of approximately $1.25 billion on January 16, 2019. However, we may not be able to successfully integrate the ECS businesses. The financial performance of ECS and the combined company following completion of the transaction may not meet expectations due to a variety of factors, some of which may be outside of our control. The integration may divert management's resources and attention from running our other businesses, and we may fail to realize the anticipated benefits of the transaction, including as a result of delay in integrating ECS. Moreover, we may experience difficulties and delays in achieving revenue synergies associated with the transaction, or we may not achieve these synergies at all. Furthermore, additional unanticipated costs may be incurred in the integration of the ECS business. Finally, we may have difficulties in retaining key personnel and maintaining relationships with customers and suppliers of ECS. Our inability to successfully and timely integrate the ECS businesses could negatively impact our cash flows, results of operations, earnings per share, and stock price.

Our credit agreement contains covenants that may limit our operational flexibility. Furthermore, if we default on our obligations under the credit agreement, our operations may be interrupted and our business, results of operations and financial condition could be adversely affected.

We entered into the Third Amended and Restated Credit Agreement among us, JPMorgan Chase Bank, N.A., as administrative agent (“JPMorgan”) and twelve other lenders in our bank group (the “Credit Agreement”). The Credit Agreement is a five-year multi-currency credit facility providing us the ability, from time to time subject to certain customary conditions, to borrow, repay and re-borrow up to $1.2 billion. The Credit Agreement also provides for a one-time draw of up to $500 million under a five-year term loan facility, which we fully borrowed on January 16, 2019 to consummate the ECS acquisition. The Credit Agreement acts as support for the marketability of our commercial paper program, under which we had $898 million outstanding on January 16, 2019, the ECS acquisition closing date.

The Credit Agreement contains certain covenants, including a covenant that requires us to maintain, as of the last day of each quarter beginning March 31, 2019, a leverage ratio of consolidated funded indebtedness to consolidated EBITDA (each as defined in the Credit Agreement) for the trailing four fiscal quarters of not greater than 4.25 to 1.00, with a single step-down on March 31, 2020 and thereafter, to 3.50 to 1.00. This covenant may restrict our current and future operations, including (i) our flexibility to plan for, or react to, changes in our businesses and industries; and (ii) our ability to use our cash flows, or obtain additional financing, for future working capital, capital expenditures, acquisitions or other general corporate purposes.

Also, if we fail to comply with the covenants specified in the Credit Agreement, we may trigger an event of default, in which case the lenders would have the right to: (i) terminate their commitment to provide additional loans under the Credit Agreement, and (ii) declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. If the debt under the Credit Agreement were to be accelerated, we may not have sufficient cash to repay this debt, which would have an immediate material adverse effect on our business, results of operations and financial condition.

Costs of raw materials could negatively affect our profit margins and earnings.

Raw material cost increases (and our ability to respond to cost increases through selling price increases) can significantly impact our earnings. We typically have short-term commitments from our suppliers; therefore, our raw material costs generally move with the market. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Inability to recover cost increases (or a delay in the recovery time) can negatively impact our earnings. Conversely, if raw material costs decrease, we generally pass through reduced selling prices to our customers. Reduced selling prices combined with higher cost inventory can reduce our segment margins and earnings.

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Steel is our principal raw material. The global steel markets are cyclical in nature and have been volatile in recent years. This volatility can result in large swings in pricing and margins from year to year. Our operations can also be impacted by changes in the cost of chemicals (including TDI, MDI, and polyol), fabrics and foam scrap, which may be subject to significant fluctuation and may negatively impact our profit margins and earnings.

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

Higher raw material costs could lead some of our customers to modify their product designs, changing the quantity and mix of our components in their finished goods and replacing higher cost components with lower cost components. If this were to occur, it could negatively impact our results of operations.

Competition could adversely affect our market share, sales, profit margins and earnings.

We operate in markets that are highly competitive. We believe that most companies in our lines of business compete primarily on price, but, depending upon the particular product, we experience competition based on quality and performance. We face ongoing pressure from foreign competitors as some of our customers source a portion of their components and finished products from Asia and Europe. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and more lenient regulatory climates. If we are unable to purchase key raw materials, such as steel, at prices competitive with those of foreign suppliers, our ability to maintain market share, sales, profit margins and earnings could be harmed by foreign competitors.

Interruption in our customers’ businesses due to bankruptcy, financial difficulties or insolvency could result in their inability to pay their debts to us, and could adversely affect our sales, financial condition, results of operations or cash flows.

Bankruptcy, financial difficulties or insolvency can and has occurred with some of our customers which can impact their ability to pay their debts to us. We have extended trade credit to some of these customers in a material amount, particularly in our Bedding and Consumer Products Groups. Our bad debt reserve contains uncertainties because it requires management to estimate the amount of uncollectible receivables based upon the financial health and payment history of the customer, industry and macroeconomic considerations, and historical loss experience.

Some retailers that carry our products or our customers’ products may undergo restructurings or reorganizations because of financial difficulty. Also, certain of our customers have filed bankruptcy, and others, from time to time, have become insolvent and/or do not have the ability to pay their debts to us as they come due. If our customers suffer significant financial difficulty, they may be unable to pay their debts to us, they may reject their contractual obligations to us under bankruptcy laws or otherwise, or we may have to negotiate significant discounts and/or extend financing terms with these customers.

Any of these risks, if realized, could adversely affect our sales and increase our operating expenses by requiring larger provisions for bad debt, which could have a material adverse effect on our financial condition, results of operations or cash flows.

Tariffs by the United States government could result in increased costs of imports and could have a material adverse effect on our results of operations.

In 2018, the United States imposed broad-ranging tariffs of 25% on imports of steel products and 10% on imports of aluminum products. The Administration has also imposed tariffs on a broad variety of products imported from China. Additional tariffs may be imposed, or current tariffs increased, in the future. Any tariffs that result in increased costs of imported products and materials could require us to increase prices to our domestic customers or, if we are unable to do so, result in lowering our gross margins on products sold. As a result, the tariffs could have a material adverse effect on our results of operations.

We are exposed to litigation contingencies that, if realized, could have a material negative impact on our financial condition, results of operations and cash flows.

Although we deny liability in all currently threatened or pending litigation proceedings and believe that we have valid bases to contest all claims made against us, we have, at December 31, 2018, an aggregate litigation contingency

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accrual of $2 million. Based on current facts and circumstances, aggregate reasonably possible (but not probable) losses in excess of the recorded accruals for litigation contingencies (which include Brazilian value-added tax and other matters) are estimated to be $17 million. If our assumptions or analysis regarding these contingencies is incorrect, or if facts and circumstances change, we could realize loss in excess of the recorded accruals (and in excess of the $17 million referenced above) which could have a material negative impact on our financial condition, results of operations and cash flows. For more information regarding our legal contingencies, please see Note U on page 119 of the Notes to Consolidated Financial Statements.

We are exposed to foreign currency risk which may negatively impact our competitiveness, profit margins and earnings.

We expect that international sales will continue to represent a significant percentage of our total sales, which exposes us to currency exchange rate fluctuations. In 2018, 37% of our sales were generated by international operations. Certain of our operations experience currency-related gains and losses where sales or purchases are denominated in currencies other than their local currency. Further, our competitive position may be affected by the relative strength of the currencies in countries where our products are sold. Foreign currency exchange risks inherent in doing business in foreign countries may have a material adverse effect on our competitiveness, profit margins and earnings.

Our goodwill and other long-lived assets are subject to potential impairment which could negatively impact our earnings.

A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. At December 31, 2018, goodwill and other intangible assets represented $1.01 billion, or 30% of our total assets. In addition, net property, plant and equipment and sundry assets totaled $845 million, or 25% of total assets. After completing the ECS acquisition in January 2019, as discussed in Note V on page 121 of the Notes to Consolidated Financial Statements, our goodwill and other long-lived asset balances are expected to increase. If actual results differ from the assumptions and estimates used in the goodwill and long-lived asset valuation calculations, we could incur impairment charges, which would negatively impact our earnings.

We review our reporting units for potential goodwill impairment in the second quarter as part of our annual goodwill impairment testing, and more often if an event or circumstance occurs making it likely that impairment exists. In addition, we test for the recoverability of long-lived assets at year end, and more often if an event or circumstance indicates the carrying value may not be recoverable. We conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. If we are not able to achieve projected performance levels, future impairments could be possible, which would negatively impact our earnings.

For more information regarding potential goodwill and other long-lived asset impairment, please refer to Note D on page 82 and Note V on page 121 of the Notes to Consolidated Financial Statements.

Technology failures or cyber security breaches could have a material adverse effect on our operations.

We rely on information systems to obtain, process, analyze and manage data, as well as to facilitate the manufacture and distribution of inventory to and from our facilities. We receive, process and ship orders, manage the billing of and collections from our customers, and manage the accounting for and payment to our vendors. Technology failures or security breaches of a new or existing infrastructure could create system disruptions or unauthorized disclosure of confidential information. If this occurs, our operations could be disrupted, or we may suffer financial loss because of lost or misappropriated information. We cannot be certain that advances in criminal capabilities will not compromise our technology protecting information systems. If these systems are interrupted or damaged by these events or fail for any extended period of time, then our results of operations could be adversely affected.

We may not be able to realize deferred tax assets on our balance sheet depending upon the amount and source of future taxable income.

Our ability to realize deferred tax assets on our balance sheet is dependent upon the amount and source of future taxable income. Economic uncertainty or a reduction in the amount of taxable income or a change in the source of taxable income could impact our underlying assumptions on which valuation reserves are established and negatively affect future period earnings and balance sheets.

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We have exposure to economic and other factors that affect market demand for our products which may negatively impact our sales, operating cash flows and earnings.

As a supplier of products to a variety of industries, we are adversely affected by general economic downturns. Our operating performance is heavily influenced by market demand for our components and products. Market demand for the majority of our products is most heavily influenced by consumer confidence. To a lesser extent, market demand is impacted by other broad economic factors, including disposable income levels, employment levels, housing turnover and interest rates. All of these factors influence consumer spending on durable goods, and drive demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one quarter of our sales.

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

Changes in tax laws or challenges to our tax positions could negatively impact our earnings and cash flows.

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

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA), resulting in significant changes to U.S. federal income tax law, including the reduction of the statutory federal income tax rate for corporations and the transition from a worldwide tax system to a modified territorial system. Although we expect TCJA will reduce our tax rate in future periods, this expectation is based on our current understanding of the legislation, the subsequent guidance which has been issued, and assumptions we have made. Recognized impacts could differ materially from current estimates based on additional analysis, any changes to our current interpretation of the legislation, actual financial results, additional regulatory guidance that might be issued, and other factors, including actions the Company may take as a result of TCJA.

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

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

A disruption to the operation of, or supply of steel scrap to, our steel rod mill could require us to purchase steel rod from alternative supply sources, subject to market availability. Ongoing trade action by the Administration, along with the existence of antidumping and countervailing duty orders against multiple countries, could result in reduced market availability and/or higher cost of steel rod.

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

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Our borrowing costs and access to liquidity may be impacted by our credit ratings.

Independent rating agencies evaluate our credit profile on an ongoing basis and have assigned ratings for our short-term and long-term debt. With the debt financing of the ECS acquisition, one rating agency lowered our long-term debt credit rating by one notch. This agency, along with one other, also placed our long-term debt rating on negative outlook. If our credit ratings further decline, our borrowing costs could increase, including increased costs under our commercial paper program, costs and fees under our credit facility, and our access to future sources of liquidity may be adversely affected.

We are exposed to risks associated with operating in foreign countries that could result in cost increases, reduced profits, the inability to carry on certain foreign operations and may negatively impact our results of operations, financial condition and cash flows.

In 2018, 37% of our sales were generated by international operations. Further, many of our businesses obtain products, components and raw materials from global suppliers. Accordingly, our business is subject to the political, regulatory, and legislative risks inherent in operating in numerous countries. These laws and regulations are complex and may change. If the foreign governments adopt or change laws or regulations, this could negatively impact our results of operations, financial condition and cash flows. Our international locations also face risks associated with operating in a foreign country. These risks include:



•	Credit risks
•	Increased costs due to tariffs, customs and shipping rates
•	Potential problems obtaining raw materials, and disruptions related to the availability of electricity and transportation during times of crisis or war
•	Inconsistent interpretation and enforcement, at times, of foreign tax laws and regulations, and capital requirements
•	Political instability in certain countries

Our Specialized Products segment, which derives roughly 84% of its trade sales from products manufactured in foreign countries, is particularly subject to the above risks. These and other foreign-related risks could result in cost increases, reduced profits, the inability to carry on certain foreign operations and other adverse effects on our business.

The governing trade provisions between the United States, Mexico and Canada may become less favorable to the Company resulting in increased costs, reduced competitiveness and a negative impact on our results of operations.

On November 30, 2018, the United States, Mexico, and Canada signed the United States-Mexico-Canada Agreement (USMCA), the intended successor agreement to the North American Free Trade Agreement (NAFTA). Each country must follow its domestic procedures before the agreement can be ratified and thus take effect. To date, the U.S. Administration has not formally provided notice of intent to withdraw from the existing NAFTA, which would start a 6-month clock, pressing Congress to either ratify USMCA or allow NAFTA to terminate. There is uncertainty as to (i) whether the United States will withdraw from NAFTA, (ii) whether the USMCA will be ratified, or (iii) if the United States withdraws from NAFTA, but the USMCA is not ratified, what trade provisions will govern the relationships between the countries. If the governing trade provisions between the United States, Mexico and Canada become less favorable to the Company, this could increase our costs, reduce our competitiveness and negatively impact our results of operations.

The United Kingdom's potential withdrawal from the European Union could adversely affect us.

In June 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the European Union (EU), commonly referred to as “Brexit.” The ultimate effect of Brexit on us is difficult to predict, but, because we conduct business in the UK and in the EU, the results of the referendum and any withdrawal could cause disruptions and create uncertainty to our businesses, including affecting our relationships with customers and suppliers, altering tariffs and currencies, and fluctuating the value of the British Pound and the Euro relative to the U.S. Dollar. Such disruptions and uncertainties could adversely affect our financial condition, results of operations and/or cash flows from operations.

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Company’s corporate office is located in Carthage, Missouri. As of December 31, 2018, we had 129 manufacturing locations, of which 75 are located across the United States and 54 are located in 17 foreign countries. We also had various sales, warehouse and administrative facilities. However, our manufacturing plants are our most important properties.

Manufacturing Locations by Segment



	Company- Wide	Subtotals by Segment
Manufacturing Locations	Company- Wide	Residential Products	Industrial Products	Furniture Products	Specialized Products
United States	75	41	5	23	6
China	17	2	—	5	10
Europe	15	6	—	1	8
Canada	8	3	—	2	3
Mexico	8	3	1	2	2
Other	6	3	—	—	3
Total	129	58	6	33	32

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

Manufacturing Locations Owned or Leased by Segment



	Company- Wide	Subtotals by Segment
Manufacturing Locations	Company- Wide	Residential Products	Industrial Products	Furniture Products	Specialized Products
Owned	69	34	6	17	12
Leased	60	24	—	16	20
Total	129	58	6	33	32

In addition to the above, upon the acquisition of Elite Comfort Solutions, Inc. (ECS) on January 16, 2019, we added 13 manufacturing facilities located across the United States, of which five are owned. All of these facilities are held within Residential Products.

We lease many of our manufacturing, warehouse and other facilities on terms that vary by lease (including purchase options, renewals and maintenance costs). For additional information regarding lease obligations, see Note L on page 95 of the Notes to Consolidated Financial Statements. Of our 129 manufacturing facilities, none are subject to liens or encumbrances that are material to the segment in which they are reported or to the Company as a whole.

None of our physical properties are, by themselves, material to the Company’s overall manufacturing processes, except for our steel rod mill in Sterling, Illinois, which is reported in Industrial Products. The rod mill consists of approximately 1 million square feet of production space, which we own, and has annual output of approximately 500,000 tons of steel rod, of which a substantial majority is used by our own wire mills. Our wire mills convert the steel rod into drawn steel wire. This wire is used in the production of many of our products, including mattress innersprings. A disruption to the operation of, or supply of steel scrap to, our steel rod mill could require us to purchase steel rod from alternative supply sources, subject to market availability. Ongoing trade actions by the Administration, along with the

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existence of antidumping and countervailing duty orders against multiple countries, could result in reduced market availability and/or the increase in the cost of steel rod. If we experience a disruption to our ability to produce steel rod in our mill, coupled with a reduction of adequate and/or timely supply from alternative market sources of quality steel rod, we could experience a material negative impact on our Residential Products and Industrial Products segments and the Company's results of operations.

In the opinion of management, the Company’s owned and leased facilities are suitable and adequate for the manufacture, assembly and distribution of our products. Our properties are located to allow timely and efficient delivery of products and services to our diverse customer base. In certain businesses, productive capacity continues to exceed current operating levels. However, utilization has increased in many of our businesses with improving market demand, and we are investing to support growth in some of our businesses, including Automotive and U.S. Spring.

Item 3. Legal Proceedings.

The information in Note U beginning on page 119 of the Notes to Consolidated Financial Statements is incorporated into this section by reference.

On September 18, 2018, the Company, along with eight other domestic mattress producers, Corsicana Mattress Company, Elite Comfort Solutions (now a Leggett subsidiary), Future Foam, Inc., FXI, Inc., Innocor, Inc., Kolcraft Enterprises, Inc., Serta Simmons Bedding, LLC, and Tempur Sealy International, Inc., filed petitions with the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) alleging that manufacturers of mattresses in China are unfairly selling their products in the United States at less than fair value (dumping) and seeking the imposition of duties on mattresses imported from China. The ITC made a preliminary determination that there is a reasonable indication of material injury to the domestic mattress industry in this case, and the DOC has begun its investigation into the dumping allegations. If the DOC determines that dumping is present and the ITC reaches a final determination that the domestic industry has been materially injured by this unfair trade practice, the U.S. government will impose duties on mattresses imported from China at the dumping rate determined by the DOC. No assurance can be given that these determinations will be made, that duties will be imposed or as to the amount of any duties that may be imposed.

Item 4. Mine Safety Disclosures.

Not applicable.

Supplemental Item. Executive Officers of the Registrant.

The following information is included in accordance with the provisions of Part III, Item 10 of Form 10-K and Item 401(b) of Regulation S-K.

The table below sets forth the names, ages and positions of all executive officers of the Company. Executive officers are normally appointed annually by the Board of Directors.



Name	Age	Position
Karl G. Glassman	60	President and Chief Executive Officer
Matthew C. Flanigan	57	Executive Vice President and Chief Financial Officer
J. Mitchell Dolloff	53	Executive Vice President and Chief Operating Officer, President—Specialized Products & Furniture Products
Perry E. Davis	59	Executive Vice President, President—Residential Products & Industrial Products
Scott S. Douglas	59	Senior Vice President, General Counsel & Secretary
Russell J. Iorio	49	Senior Vice President, Corporate Development
Susan R. McCoy	54	Senior Vice President, Investor Relations
Tammy M. Trent	52	Senior Vice President, Chief Accounting Officer

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Subject to the severance benefit agreements with Mr. Glassman, Mr. Flanigan, Mr. Davis, Mr. Dolloff and Mr. Douglas listed as exhibits to this Report (and one other immaterial agreement with another executive officer), the executive officers generally serve at the pleasure of the Board of Directors. Please see Exhibit Index on page 124 for reference to the agreements.

Karl G. Glassman was appointed Chief Executive Officer of the Company in 2016 and President in 2013. He previously served the Company as Chief Operating Officer from 2006 to 2015. He also served as Executive Vice President from 2002 to 2013, President of Residential Furnishings from 1999 to 2006, Senior Vice President from 1999 to 2002 and in various capacities since 1982.

Matthew C. Flanigan was appointed Executive Vice President of the Company in 2013 and has served as Chief Financial Officer since 2003. He previously served as Senior Vice President from 2005 to 2013, Vice President from 2003 to 2005, Vice President and President of the Office Furniture Components Group from 1999 to 2003 and in various capacities since 1997. Although Mr. Flanigan has announced his retirement from the Company, his retirement date has not been determined as of the date of this Form 10-K.

J. Mitchell Dolloff was appointed Chief Operating Officer effective January 1, 2019. He was appointed Executive Vice President, President—Specialized Products & Furniture Products effective January 1, 2017. He previously served as Senior Vice President and President of the Specialized Products segment beginning in 2016. He served as Vice President of the Company and President of the Automotive Group from 2014 to 2015. He also served as President of Automotive Asia from 2011 to 2013, Vice President of the Specialized Products segment from 2009 to 2013, and Director of Business Development for Specialized Products from 2007 to 2009. He has served the Company in various other capacities since 2000.

Perry E. Davis was appointed Executive Vice President, President—Residential Products & Industrial Products effective January 1, 2017. He previously served as Senior Vice President and President of the Residential Furnishings segment beginning in 2012. He also served as Vice President of the Company, President—Bedding Group from 2006 to 2012, as Vice President of the Company, Executive VP of the Bedding Group and President—U.S. Spring beginning in 2005. He served as Executive VP of the Bedding Group and President—U.S. Spring from 2004 to 2005, President—Central Division Bedding Group from 2000 to 2004, and in various capacities since 1981.

Scott S. Douglas was appointed Senior Vice President and General Counsel in 2011. He was appointed Secretary of the Company in 2016. He previously served as Vice President and General Counsel from 2010 to 2011, as Vice President—Law and Deputy General Counsel from 2008 to 2010, as Associate General Counsel—Mergers & Acquisitions from 2001 to 2007, and as Assistant General Counsel from 1991 to 2001. He has served the Company in various legal capacities since 1987.

Russell J. Iorio was appointed Senior Vice President, Corporate Development in 2016. He previously served the Company as Senior Vice President, Mergers & Acquisitions from 2014 to 2016. He served the Company as Vice President, Mergers & Acquisitions from 2005 to 2014, and Director of Mergers, Acquisitions & Strategic Planning from 2002 to 2005.

Susan R. McCoy was appointed Senior Vice President, Investor Relations in 2019. She previously served as Vice President, Investor Relations from 2014 to 2019, Staff Vice President, Investor Relations from 2011 to 2014, and Director of Investor Relations from 2002 to 2011. She also served as Due Diligence Manager from 1999 to 2002, Manager of Financial Reporting in 1999 and in a series of progressively more responsible financial capacities since 1986.

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

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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the New York Stock Exchange (symbol LEG). The table below highlights quarterly and annual stock market information for the last two years.



	Price Range ¹				Volume of Shares Traded ¹ (in Millions)	Dividend Declared
	High		Low		Volume of Shares Traded ¹ (in Millions)	Dividend Declared
2018
First Quarter	$	49.88	$	41.25	94.7	$	0.36
Second Quarter	45.39		39.57		78.8	0.38
Third Quarter	46.71		42.19		67.2	0.38
Fourth Quarter	44.22		33.48		93.7	0.38
For the Year	$	49.88	$	33.48	334.4	$	1.50
2017
First Quarter	$	50.89	$	46.24	61.1	$	0.34
Second Quarter	54.97		49.92		59.9	0.36
Third Quarter	53.96		43.17		59.9	0.36
Fourth Quarter	51.99		44.76		58.2	0.36
For the Year	$	54.97	$	43.17	239.1	$	1.42

¹ Price and volume data reflect composite transactions; price range reflects intra-day prices; data source is Bloomberg.

Shareholders and Dividends

As of February 18, 2019, we had 8,356 shareholders of record.

Increasing the dividend remains a high priority. In 2018, we increased the quarterly dividend by $.02, or 5.6% to $.38 per share. For 30 years, we have generated operating cash in excess of our annual requirement for capital expenditures and dividends. We expect this again to be the case in 2019. We have no restrictions that materially limit our ability to pay such dividends or that we reasonably believe are likely to limit the future payment of dividends.

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

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Issuer Purchases of Equity Securities

The table below is a listing of our purchases of the Company’s common stock during each calendar month of the fourth quarter of 2018.



Period	Total Number of Shares Purchased ¹	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ²	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs ²
October 2018	—	$	—	—	7,572,661
November 2018	3,671	$	37.48	—	7,572,661
December 2018	462	$	36.19	—	7,572,661
Total	4,133	$	37.34	—

¹This number includes 4,133 shares which were not repurchased as part of a publicly announced plan or program, all of which were shares surrendered in transactions permitted under the Company’s benefit plans. It does not include shares withheld for taxes on option exercises and stock unit conversions, all of which totaled 4,573 shares for the fourth quarter.

²On August 4, 2004, the Board authorized management to repurchase up to 10 million shares each calendar year beginning January 1, 2005. This standing authorization was first reported in the quarterly report on Form 10-Q for the period ended June 30, 2004, filed August 5, 2004, and will remain in force until repealed by the Board of Directors. As such, effective January 1, 2019, the Company was authorized by the Board of Directors to repurchase up to 10 million shares in 2019. No specific repurchase schedule has been established.

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Item 6. Selected Financial Data.



(Unaudited)	2018 ¹		2017 ²			2016 ³		2015 ⁴			2014 ⁵
(Dollar amounts in millions, except per share data)
Summary of Operations
Net Sales from Continuing Operations	$	4,270	$	3,944		$	3,750	$	3,917		$	3,782
Earnings from Continuing Operations	306		294			367		328			225
(Earnings) Attributable to Noncontrolling Interest, net of tax	—		—			—		(4		)	(3		)
Earnings (loss) from Discontinued Operations, net of tax	—		(1		)	19		1			(124		)
Net Earnings attributable to Leggett & Platt, Inc. common shareholders	306		293			386		325			98
Earnings per share from Continuing Operations
Basic	2.28		2.16			2.66		2.30			1.57
Diluted	2.26		2.14			2.62		2.27			1.55
Earnings (Loss) per share from Discontinued Operations
Basic	—		(.01		)	.14		.01			(.88		)
Diluted	—		(.01		)	.14		.01			(.87		)
Net Earnings (Loss) per share
Basic	2.28		2.15			2.80		2.31			.69
Diluted	2.26		2.13			2.76		2.28			.68
Cash Dividends declared per share	1.50		1.42			1.34		1.26			1.22
Summary of Financial Position
Total Assets	$	3,382	$	3,551		$	2,984	$	2,964		$	3,136
Long-term Debt, including capital leases	$	1,168	$	1,098		$	956	$	942		$	762

^{All amounts are presented after tax.}


¹	Earnings from Continuing Operations for 2018 includes a $14 million charge for restructuring; $12 million charge for note impairment; $6 million charge for ECS transaction costs; and a $2 million benefit associated with TCJA.


²	Earnings from Continuing Operations for 2017 includes a $50 million charge associated with the TCJA; $13 million of net gains on sales of a business and real estate; an $8 million tax benefit from a divestiture; a $10 million pension settlement charge; and a $3 million charge for an impairment of a wire business.


³	Earnings from Continuing Operations for 2016 includes $16 million of gains on sales of businesses; a $3 million goodwill impairment charge; and a $5 million gain on a foam litigation settlement. Discontinued operations primarily consists of a gain on a foam litigation settlement.


⁴	Earnings from Continuing Operations for 2015 includes $4 million of impairments; $3 million associated with litigation accruals; and an $8 million pension settlement charge.


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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

HIGHLIGHTS

Sales increased 8% in 2018, from growth in volume, raw material-related price inflation and currency impact. Acquisitions, net of 2017 divestitures, added 2% to sales. Sales growth came primarily from gains in Automotive, Bedding, Adjustable Bed, Work Furniture, and Aerospace partially offset by declines in other businesses, primarily Home Furniture, Fashion Bed and Flooring Products.

Earnings from continuing operations increased from the non-recurrence of charges in 2017 associated with the Tax Cuts and Jobs Act (TCJA), despite restructuring-related and impairment charges incurred in 2018. Earnings further improved primarily from increased metal margins at our steel rod mill and higher sales. These improvements were partially offset by higher raw material costs (including LIFO expense), the lag associated with passing along ongoing inflation, and weak performance in a few of our businesses. This led us to initiate restructuring activity late in the year, primarily in Fashion Bed and Home Furniture, where we are exiting low margin business, reducing operating costs, and eliminating excess capacity.

In November 2018, we announced our plans to acquire Elite Comfort Solutions (ECS), a leader in the production of proprietary specialized foam primarily for the bedding and furniture industries. We completed the acquisition in January 2019. ECS is the largest acquisition in our history, with a purchase price of approximately $1.25 billion.

ECS operates a vertically integrated model, developing many of the chemicals and additives used in foam production, producing specialty foam, and manufacturing private-label finished products. Through this acquisition, we gain critical capabilities in proprietary foam technology, along with scale in the production of private-label finished mattresses. Our combined expertise in spring and foam technology makes us the leading provider of differentiated products for the global bedding industry and positions us to capitalize on current and future market trends.

Portfolio management remains a strategic priority. Over the past several years we have enhanced our business portfolio and improved margins by growing our stronger businesses and exiting or restructuring businesses that consistently struggled to deliver acceptable returns. During 2018 we acquired three businesses: Precision Hydraulic Cylinders (PHC), a leading global manufacturer of engineered hydraulic cylinders primarily for the materials handling market, and two small geo components operations.

We incurred the following charges in the fourth quarter:



(Dollar amounts in millions, except per share data)	Cash	Non-Cash	Total
Restructuring-related charges	$ 7	$ 9	$16
Note impairment	—	16	16
ECS acquisition costs ¹	7	—	7
Total charges	$14	$25	$39

¹Includes $4 million in SG&A charges and $3 million of financing-related charges in interest expense.

The restructuring-related charges are primarily attributable to the Fashion Bed and Home Furniture businesses. In 2019, the Company expects an additional estimated $17 million ($5 million cash/$12 million non-cash) in restructuring-related charges for these businesses. The restructuring activity should be substantially complete by the end of 2019.

In January 2019, we expanded the borrowing capacity under our revolving credit facility from $800 million to $1.2 billion, increased permitted borrowings under our commercial paper program in a corresponding amount, and added additional borrowing capacity in the form of a 5-year $500 million term loan primarily to finance the ECS transaction. After completing the ECS acquisition in January 2019, our debt levels increased. We expect to focus on deleveraging by temporarily limiting share repurchases, reducing other acquisition spending, and using operating cash flow to repay debt.

Operating cash flow was essentially flat versus 2017, and we once again generated more than enough operating cash flow to fund dividends and capital expenditures comfortably, something we have accomplished each year for 30 years.

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We raised the quarterly dividend by 5.6% in 2018 and extended our record of consecutive annual increases to 47 years. We also bought back 2.6 million shares of our stock.

We assess our overall long-term performance by comparing our Total Shareholder Return (TSR) to that of peer companies on a rolling three-year basis. We target TSR in the top third of the S&P 500 over the long term. While our recent performance has not met this target, we strongly believe our disciplined growth strategy and use of capital will support achievement of this goal over time.

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

INTRODUCTION

Total Shareholder Return

Total Shareholder Return (TSR), relative to peer companies, is a primary financial measure that we use to assess long-term performance. TSR is driven by the change in our share price and the dividends we pay: TSR = (Change in Stock Price + Dividends) / Beginning Stock Price. We seek to achieve TSR in the top third of the S&P 500 over the long term through an approach that employs four TSR drivers: revenue growth, margin expansion, dividends, and share repurchases.

We monitor our TSR performance relative to the S&P 500 on a rolling three-year basis. For the three-year measurement period that ended December 31, 2018, we generated TSR of -2% per year on average, in the bottom quartile of the S&P 500. While disappointing, we strongly believe our disciplined growth strategy and use of capital will support achievement of this goal over time.

The table below shows the components of our TSR targets. Accomplishing this level of performance over rolling three-year periods should enable us to consistently attain our top-third TSR goal.



		Current Targets
Revenue Growth		6-9%
Margin Increase		1%
Dividend Yield		3%
Stock Buyback		1%
Total Shareholder Return		11-14%

In connection with the acquisition of ECS our debt levels increased, and we expect to focus on deleveraging by temporarily limiting share repurchases, reducing other acquisition spending and using operating cash flow to repay debt. The ECS transaction does not change our long-term TSR targets and framework. In the near-term, revenue growth will benefit significantly from the initial impact of the acquisition. Increased interest expense will negatively impact TSR in 2019. As we pay down the acquisition debt, the corresponding reduction in interest expense should have a positive impact on TSR. The stock buyback component is expected to be slightly negative to our TSR due to the temporary limiting of share repurchases while we focus on deleveraging. Longer-term, the ECS acquisition is expected to benefit all four TSR drivers through profitable growth and strong operating cash flow.

Senior executives participate in an incentive program with a three-year performance period based on two equal measures: (i) our TSR performance compared to the performance of a group of approximately 320 peers, and (ii) the Company or segment's EBIT Compound Annual Growth Rate (CAGR).

Customers

We serve a broad suite of customers, with our largest customer representing approximately 6% of our sales. Many are companies whose names are widely recognized. They include bedding, residential and office furniture producers, automotive OEM and Tier 1 manufacturers, and a variety of other companies.

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Major Factors That Impact Our Business

Many factors impact our business, but those that generally have the greatest impact are market demand, raw material cost trends, and competition.

Market Demand

Market demand (including product mix) is impacted by several economic factors, with consumer confidence being most significant. Other important factors include disposable income levels, employment levels, housing turnover, and interest rates. All of these factors influence consumer spending on durable goods, and therefore affect demand for our components and products. Some of these factors also influence business spending on facilities and equipment, which impacts approximately one quarter of our sales.

Raw Material Costs

Our costs can vary significantly as market prices for raw materials (many of which are commodities) fluctuate. We typically have short-term commitments from our suppliers; accordingly, our raw material costs generally move with the market. Our ability to recover higher costs (through selling price increases) is crucial. When we experience significant increases in raw material costs, we typically implement price increases to recover the higher costs. Conversely, when costs decrease significantly, we generally pass those lower costs through to our customers. The timing of our price increases or decreases is important; we typically experience a lag in recovering higher costs, and we also realize a lag as costs decline.

Steel is our principal raw material. At various times in past years we have experienced significant cost fluctuations in this commodity. In most cases, the major changes (both increases and decreases) were passed through to customers with selling price adjustments. Steel costs inflated throughout 2017, and continued to increase in the first half of 2018. Depending on the type of steel input, we have seen varying degrees of inflation in the U.S. Long product, the steel industry term for rod and wire, is up significantly since the end of 2017. Flat product (hot or cold rolled sheet steel) which we purchase for use in several of our businesses, but most heavily in Home Furniture, is also up significantly since the end of 2017. We implemented price increases to recover most of the higher costs, but with the normal lag in realizing selling price increases, the cost inflation led to margin pressure in the second half of 2017 and in the first half of 2018. In certain instances when our foreign competitors purchase steel in markets that have not experienced significant inflation (particularly flat product in China) it is more difficult for us to pass through U.S.-based steel price increases to our customers.

As a producer of steel rod, we are also impacted by changes in metal margins (the difference in the cost of steel scrap and the market price for steel rod). Metal margins within the steel industry were moderately compressed in late 2016, began to increase modestly in the second half of 2017 and further expanded in the first half of 2018. Although steel scrap costs increased early in the year, rod prices increased to a much larger degree. Both stabilized by mid-year. Because of these factors, our steel rod mill experienced enhanced profitability in 2018. If these wider metal margins are sustained, our steel rod mill should continue to experience enhanced profitability.

With the acquisition of ECS we now have greater exposure to the cost of chemicals, including TDI, MDI, and polyol. The cost of these chemicals has fluctuated at times, but ECS has generally passed the changes through to its customers, with a lag that varies based on customer contract terms. Our other raw materials include woven and non-woven fabrics and foam scrap. We have experienced changes in the cost of these materials in past years and generally have been able to pass them through to our customers.

When we raise our prices to recover higher raw material costs, this sometimes causes customers to modify their product designs and replace higher cost components with lower cost components. We must continue providing product options to our customers that enable them to improve the functionality of their products and manage their costs, while providing higher profits for our operations.

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Competition

Many of our markets are highly competitive, with the number of competitors varying by product line. In general, our competitors tend to be smaller, private companies. Many of our competitors, both domestic and foreign, compete primarily on the basis of price. Our success has stemmed from the ability to remain price competitive, while delivering innovation, better product quality, and customer service.

We continue to face pressure from foreign competitors as some of our customers source a portion of their components and finished products offshore. In addition to lower labor rates, foreign competitors benefit (at times) from lower raw material costs. They may also benefit from currency factors and more lenient regulatory climates. We typically remain price competitive in most of our business units, even versus many foreign manufacturers, as a result of our highly efficient operations, low labor content, vertical integration in steel and wire, logistics and distribution efficiencies, and large scale purchasing of raw materials and commodities. However, we have also reacted to foreign competition in certain cases by selectively adjusting prices, developing new proprietary products that help our customers reduce total costs and shifting production offshore to take advantage of lower input costs.

Since 2009, there have been antidumping duty orders on innerspring imports from China, South Africa and Vietnam, ranging from 116% to 234%. In 2014, the Department of Commerce (DOC) and the International Trade Commission (ITC) determined that the orders should be extended for five years. In March 2019, we expect the DOC and the ITC to conduct a second sunset review to determine whether to extend the orders for an additional five years. If it is determined that the revocation of the orders would likely lead to the continuation or recurrence of dumping of innersprings (determined by the DOC) and material injury to the U.S. innerspring industry (determined by the ITC), the orders will be extended. We believe that, without the extension, it is likely that dumping will recur and the U.S. innerspring industry will be materially injured. As a result, we plan to actively participate in the DOC and ITC sunset reviews.

Antidumping and countervailing duty cases filed by major U.S. steel wire rod producers have resulted in the imposition of antidumping duties on imports of steel wire rod from Brazil, China, Belarus, Indonesia, Italy, Korea, Mexico, Moldova, Russia, South Africa, Spain, Trinidad & Tobago, Turkey, Ukraine, United Arab Emirates, and the United Kingdom, ranging from 1% to 757%, and countervailing duties on imports of steel wire rod from Brazil, China, Italy and Turkey, ranging from 3% to 193%. These duties will continue through June 2019 (for Brazil, Indonesia, Mexico, Moldova, and Trinidad & Tobago), through December 2019 (for China), and through December 2022 (for Belarus, Italy, Korea, Russia, South Africa, Spain, Turkey, Ukraine, United Arab Emirates, and the United Kingdom); at which times, respectively, the DOC and the ITC will conduct sunset reviews to determine whether to extend the orders for an additional five years.

We believe mattresses from China are being imported into the U.S. at low prices that violate our trade laws. In September 2018, we, along with other domestic mattress producers, filed an antidumping petition with the U.S. government on behalf of the mattress industry to attempt to remedy this situation. In November, the ITC made a preliminary determination that there is a reasonable indication that the domestic mattress producers are materially injured by reason of the unfairly priced imported mattresses. The DOC is now investigating the dumping allegations. See Item 3 Legal Proceedings on page 23 for more information.

Acquisition of Elite Comfort Solutions

On November 6, 2018, we entered into a definitive agreement to purchase all of the capital stock of Elite Comfort Solutions, Inc. (ECS) for a cash purchase price of approximately $1.25 billion. ECS, headquartered in Newnan, Georgia, is a leader in proprietary specialized foam technology, primarily for the bedding and furniture industries. With 16 facilities across the United States, ECS operates a vertically integrated model, developing many of the chemicals and additives used in foam production, producing foam, and manufacturing private-label finished products. These innovative specialty foam products include finished mattresses sold through both traditional and online channels, mattress components, mattress toppers and pillows, and furniture foams and components. ECS has a diversified customer mix and a strong position in the high-growth compressed mattress market segment. Following the closing of the transaction in January 2019, ECS became a separate business unit and operates within the Residential Products segment.

We financed the purchase price with a combination of commercial paper borrowings and the borrowing under a new five-year $500 million term loan facility. As part of the financing, we increased the capacity under our revolving credit

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facility from $800 million to $1.2 billion, and we concurrently increased permitted borrowings under our commercial paper program in a corresponding amount. As of January 16, 2019, the ECS acquisition closing date, we had $898 million of commercial paper outstanding and had fully borrowed under the $500 million term loan. We are evaluating financing alternatives for the reduction of the commercial paper. We believe that operating cash flow, cash on hand and our ability to obtain debt financing will provide sufficient funds available to repay commercial paper borrowings, as well as support our ongoing operations, pay dividends and fund future growth.

RESULTS OF OPERATIONS—2018 vs. 2017

Sales increased 8% in 2018, from growth in volume, raw material-related price inflation, and currency impact. Acquisitions, net of divestitures completed in 2017, added 2% to sales. Sales growth came primarily from content gains and new program awards in Automotive, market share and content gains in Bedding, growth in Adjustable Bed and raw material-related price increases. Several other businesses, including Work Furniture, Aerospace, and International Spring contributed to sales growth this past year.

Earnings from continuing operations increased from the non-recurrence of charges in 2017 associated with the Tax Cuts and Jobs Act (TCJA), and despite restructuring-related and impairment charges incurred in 2018. Earnings further improved primarily from improved metal margins at our steel rod mill and higher sales. However, these improvements were largely offset by higher raw material costs (including LIFO expense), the lag associated with passing along ongoing inflation, and weak performance in a few of our businesses. This led us to initiate restructuring activity late in the year, primarily in Fashion Bed and Home Furniture, where we are exiting low margin business, reducing operating costs, and eliminating excess capacity. Further details about our consolidated and segment results are discussed below.

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Consolidated Results (continuing operations)

The following table shows the changes in sales and earnings from continuing operations during 2018, and identifies the major factors contributing to the changes.



(Dollar amounts in millions, except per share data)	Amount			% ¹
Net sales:
Year ended December 31, 2017	$	3,944
Divestitures	(25		)	(1	)%
2017 sales excluding divestitures	3,919
Approximate volume gains	99			3	%
Approximate raw material-related inflation and currency impact	145			3	%
Same location sales	244			6	%
Acquisition sales growth	107			3	%
Year ended December 31, 2018	$	4,270		8	%
Earnings from continuing operations:
(Dollar amounts, net of tax)
Year ended December 31, 2017	$	294
Restructuring-related charges	(14		)
Note impairment	(12		)
ECS transaction costs	(6		)
TCJA impact	2
Non-recurrence of TCJA impact, net	50
Non-recurrence of pension settlement charge	10
Non-recurrence of real estate gain	(15		)
Non-recurrence of divestiture tax benefit	(8		)
Non-recurrence of divestiture loss	2
Non-recurrence of impairment of small operation	3
Other items offset	—
Year ended December 31, 2018	$	306
Earnings Per Diluted Share (continuing operations)—2017	$	2.14
Earnings Per Diluted Share (continuing operations)—2018	$	2.26

¹Calculations impacted by rounding

Full-year sales grew 8%, to $4.27 billion, and same location sales increased 6%. Volume grew 3%, with gains in Automotive, Bedding, Adjustable Bed, Work Furniture, and Aerospace partially offset by declines in other businesses, primarily Home Furniture, Fashion Bed, and Flooring Products. Raw material-related price increases and currency impact added 3%. Acquisitions, net of 2017 divestitures, contributed 2% to sales growth.

As indicated in the table above, earnings from continuing operations increased primarily from the non-recurrence of the TCJA and other charges in 2017, despite restructuring-related and impairment charges incurred in 2018. Operationally, earnings improved primarily from increased metal margins at our steel mill and higher sales, offset by higher raw material costs (including LIFO expense), the lag associated with passing along ongoing inflation, and underperformance in a few of our businesses.

LIFO Impact

Approximately 50% of our inventories are valued on the LIFO method. These are primarily our domestic, steel-related inventories. In 2018, increasing steel costs resulted in a full-year pretax LIFO expense of $31 million. In 2017, increasing steel costs resulted in a full-year pretax LIFO expense of $19 million.

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For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 72.

Interest and Income Taxes

Net interest expense in 2018 was higher by $17 million, primarily due to the issuance of $500 million of new debt in the fourth quarter 2017, higher rates on commercial paper, and additional consideration for a prior year acquisition (see Note S to the Consolidated Financial Statements on page 114). 2018's interest expense also includes $3.2 million of financing-related charges incurred in connection with the ECS acquisition.

Our worldwide effective income tax rate on continuing operations was 20.4% in 2018, compared with 32.0% for 2017. The U.S. statutory federal income tax rate was significantly impacted by the enactment of Tax Cuts and Jobs Act (TCJA) in the fourth quarter of 2017, which reduced our U.S. federal corporate income tax rate from 35% in 2017 to 21% in 2018.

The following table reflects how our effective income tax rate from continuing operations differs from these statutory federal income tax rates. See Footnote O to the Consolidated Financial Statements on page 108 for additional details.



	Year Ended December 31
	2018		2017
Statutory federal income tax rate	21.0	%	35.0	%
Increases (decreases) in rate resulting from:
State taxes, net of federal benefit	.9		.9
Tax effect of foreign operations	—		(8.8	)
Current and deferred foreign withholding taxes	3.8		3.6
Deemed repatriation of foreign earnings	(.3	)	15.6
Deferred tax revaluation	(.1	)	(6.0	)
Stock-based compensation	(.8	)	(2.0	)
Tax benefit for outside basis in subsidiary	—		(1.8	)
Change in valuation allowance	(2.0	)	(.4	)
Change in uncertain tax positions, net	(.3	)	(.6	)
Domestic production activities deduction	—		(1.2	)
Other permanent differences, net	(1.4	)	(1.6	)
Other, net	(.4	)	(.7	)
Effective tax rate	20.4	%	32.0	%

At December 31, 2017, we recorded certain provisional amounts related to TCJA in accordance with Staff Accounting Bulletin (SAB) 118 (See Note A to the Consolidated Financial Statements on page 72). We refined this estimate in 2018, and recorded measurement period adjustment benefits related to the deemed repatriation tax and our deferred tax revaluation. In aggregate, these adjustment items decreased our effective tax rate by .4% in 2018. As of December 31, 2018, our accounting has been finalized with respect to the SAB 118 provisional amounts recorded at December 31, 2017.

We anticipate an effective tax rate for 2019 of approximately 24%, which includes the anticipated tax effects associated with TCJA and certain other expected discrete items, primarily related to stock compensation payments (which can fluctuate based on stock price and other factors) and executive compensation limitations. Our tax rate is also contingent upon other factors such as our overall profitability, the mix of earnings among tax jurisdictions, the type of income earned, business acquisitions and dispositions, the impact of tax audits and other discrete items, and the effect of other tax law changes and prudent tax planning strategies.

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Segment Results

In the following section we discuss 2018 sales and EBIT (earnings before interest and taxes) for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in Note G to the Consolidated Financial Statements on page 87.



(Dollar amounts in millions)	2018			2017			Change in Sales					% Change Same Location
(Dollar amounts in millions)	2018			2017			$			%		Sales ¹
Sales
Residential Products	$	1,721		$	1,639		$	82		5	%	4	%
Industrial Products	662			546			116			21	%	21	%
Furniture Products	1,156			1,113			43			4	%	4	%
Specialized Products	1,059			943			116			12	%	6	%
Total segment sales	4,598			4,241			357
Intersegment sales elimination	(328		)	(297		)	(31		)
Trade sales	$	4,270		$	3,944		$	326		8	%	6	%

	2018			2017			Change in EBIT					EBIT Margins ²
	2018			2017			$			%		2018		2017
EBIT
Residential Products	$	133		$	184		$	(51	)	(28	)%	7.7	%	11.2	%
Industrial Products	68			21			47			226	%	10.3	%	3.8	%
Furniture Products	50			81			(31		)	(39	)%	4.3	%	7.3	%
Specialized Products	189			196			(7		)	(3	)%	17.8	%	20.8	%
Intersegment eliminations & other	(3		)	1			(4		)
Pension settlement charge	—			(15		)	15
Total EBIT	$	437		$	468		$	(31	)	(7	)%	10.2	%	11.9	%

¹ This is the change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we operated one year earlier.

²Segment margins are calculated on total sales. Overall company margin is calculated on trade sales.

Residential Products

Total sales grew 5%, from a 4% increase in same location sales (due to raw material-related selling price increases) and 1% from acquisitions. Volume was flat, with growth in U.S. Spring, European Spring and Geo Components offset by lower sales in other businesses, primarily Flooring Products.

EBIT decreased $51 million, with $21 million of the decline from a $16 million non-cash impairment charge related to a note receivable, $4 million in costs incurred in connection with the ECS acquisition, and $1 million in restructuring-related charges. In addition, EBIT decreased from higher raw material costs (including LIFO expense) and increased spending to support content and market share gains in U.S. Spring.

Industrial Products

Total sales in Industrial Products grew 21%, from raw material-related selling price increases (18%) and higher volume (3%).

EBIT increased $47 million from improved metal margins at our steel rod mill, higher volume and the non-recurrence of a $5 million impairment of a small wire products operation in 2017. These improvements were partially offset by higher LIFO expense.

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Furniture Products

Total sales in Furniture Products grew 4%. Volume increased 2%, with growth in Adjustable Bed and Work Furniture, partially offset by declines in Home Furniture and Fashion Bed. Raw material-related price increases and currency impact added 2% to sales growth.

EBIT decreased $31 million, $15 million from restructuring-related charges and the remainder primarily from higher steel costs (including LIFO expense), promotional activity, and lower overhead recovery.

Specialized Products

In Specialized Products, total sales grew 12%. Same location sales increased 6% from volume gains in Automotive and Aerospace, and currency benefits. The PHC acquisition added 9% and was partially offset (3%) by 2017’s CVP divestiture.

EBIT decreased $7 million despite higher sales because of the non-recurrence of a $23 million gain on the sale of real estate offset by a $3 million loss from the CVP divestiture in 2017.

Results from Discontinued Operations

There was no significant discontinued operations activity in 2018 or 2017. For further information about discontinued operations, see Note C to the Consolidated Financial Statements on page 81.

RESULTS OF OPERATIONS—2017 vs. 2016

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

Earnings from continuing operations decreased significantly from the effects of one-time costs associated with the TCJA. Other significant factors that reduced earnings include ongoing steel inflation and the timing lag associated with passing along higher steel costs. These reductions were partially offset by increased sales and lower income taxes. Further details about our consolidated and segment results are discussed below.

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Consolidated Results (continuing operations)

The following table shows the changes in sales and earnings from continuing operations during 2017, and identifies the major factors contributing to the changes.



(Dollar amounts in millions, except per share data)	Amount			% ¹
Net sales:
Year ended December 31, 2016	$	3,750
Divestitures	(78		)	(2	)%
2016 sales excluding divestitures	3,672
Approximate volume gains	142			4	%
Approximate raw material-related deflation and currency impact	65			2	%
Same location sales	207			6	%
Acquisition sales growth	65			2	%
Year ended December 31, 2017	$	3,944		5	%
Earnings from continuing operations:
(Dollar amounts, net of tax)
Year ended December 31, 2016	$	367
TCJA impact, net	(50		)
Pension settlement charge	(10		)
Real estate gain	15
Divestiture tax benefit	8
Divestiture loss	(2		)
Impairment of small operation	(3		)
Non-recurrence of divestiture gains	(17		)
Non-recurrence of litigation settlement gain	(5		)
Other, including higher steel costs (and LIFO expense),
partially offset by higher volume and lower income taxes	(9		)
Year ended December 31, 2017	$	294
Earnings Per Diluted Share (continuing operations)—2016	$	2.62
Earnings Per Diluted Share (continuing operations)—2017	$	2.14

¹Calculations impacted by rounding

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

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

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

LIFO Impact

Approximately 50% of our inventories are valued on the LIFO method. These are primarily our domestic, steel-related inventories. In 2017, increasing steel costs over the course of the year resulted in a full-year pretax LIFO expense of

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$19 million. In 2016, increasing steel costs, particularly in the fourth quarter, resulted in a full-year pretax LIFO expense of $11 million.

For further discussion of inventories, see Note A to the Consolidated Financial Statements on page 72.

Interest and Income Taxes

Net interest expense in 2017 did not appreciably change.

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

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

While the U.S. statutory federal income tax rate was 35% in both years, our worldwide effective income tax rate on continuing operations was 32% in 2017, compared to 25% for 2016. As discussed above, our rate was negatively impacted by 12% in 2017 due to the effect of TCJA (16% associated with the deemed repatriation tax and 2% from tax on expected future foreign cash repatriations, partially offset by a 6% benefit from the revaluation of our U.S. net deferred tax liabilities). In both years our tax rate benefited from earnings in non-U.S. jurisdictions, which reduced our effective tax rate by 8% in 2017 and 6% in 2016. In addition, the 2017 tax rate benefited by 2% related to tax attributes from a divested business, 2% related to the tax effects of stock-based compensation deductions in the year, and 3% from other permanent tax differences. The 2016 tax rate benefited by 3% related to the tax effects of stock-based compensation deductions in the year and 1% (net) from other items.

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Segment Results

In the following section we discuss 2017 sales and EBIT for each of our segments. We provide additional detail about segment results and a reconciliation of segment EBIT to consolidated EBIT in Note G to the Consolidated Financial Statements on page 87.



(Dollar amounts in millions)	2017			2016			Change in Sales					% Change Same Location
(Dollar amounts in millions)	2017			2016			$			%		Sales ¹
Sales
Residential Products	$	1,639		$	1,589		$	50		3	%	—	%
Industrial Products	546			583			(37		)	(6	)%	—	%
Furniture Products	1,113			1,048			65			6	%	5	%
Specialized Products	943			906			37			4	%	8	%
Total segment sales	4,241			4,126			115
Intersegment sales elimination	(297		)	(376		)	79
Trade sales	$	3,944		$	3,750		$	194		5	%	6	%

	2017			2016			Change in EBIT					EBIT Margins ²
	2017			2016			$			%		2017		2016
EBIT
Residential Products	$	184		$	168		$	16		10	%	11.2	%	10.5	%
Industrial Products	21			65			(44		)	(68	)%	3.8	%	11.2	%
Furniture Products	81			107			(26		)	(24	)%	7.3	%	10.2	%
Specialized Products	196			181			15			8	%	20.8	%	20.0	%
Pension settlement charge	1			1			—
Intersegment eliminations & other	(15		)	—			(15		)
Total EBIT	$	468		$	522		$	(54	)	(10	)%	11.9	%	13.9	%

¹ This is the change in sales not attributable to acquisitions or divestitures. These are sales that come from the same plants and facilities that we operated one year earlier.

²Segment margins are calculated on total sales. Overall company margin is calculated on trade sales.

Residential Products

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

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

Industrial Products

Total sales in the segment declined 6%, due to divestitures completed in 2016. Same location sales in Industrial Products were flat with steel-related price increases offset by lower volume.

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EBIT decreased primarily from the non-recurrence of a $16 million divestiture gain in 2016, higher raw material costs (including LIFO expense), the timing lag associated with passing along inflation, an impairment charge of $5 million, and lower volume.

Furniture Products

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

EBIT and EBIT margin decreased, with the benefit from sales growth more than offset by higher steel costs (including LIFO expense), production inefficiencies and other smaller items.

Specialized Products

In Specialized Products, total sales increased 4% in 2017, and same location sales increased 8%, with volume gains in Automotive and Aerospace partially offset by lower sales in the former CVP business unit. CVP divestitures reduced sales by 4%.

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

Results from Discontinued Operations

Full year earnings from discontinued operations, net of tax, decreased to -$1 million from $19 million in 2016. This decrease is primarily due to the non-recurrence of a litigation gain ($20 million) related to our former Prime Foam business. For further information about discontinued operations, see Note C to the Consolidated Financial Statements on page 81.

LIQUIDITY AND CAPITALIZATION

Cash from operations was essentially flat in 2018. Our operations once again provided more than enough cash to fund both capital expenditures and dividend payments, something we have accomplished each year for 30 years. We expect this to again be the case in 2019.

We continued to invest in businesses and product categories that are growing, with capital expenditures in 2018 flat versus 2017. We raised the quarterly dividend by 5.6% and extended our record of consecutive annual increases to 47 years. We also bought back 2.6 million shares of our stock during the year.

In January 2019, we expanded the borrowing capacity under our revolving credit facility from $800 million to $1.2 billion, correspondingly increased permitted borrowing under our commercial paper program, and added additional borrowing capacity in the form of a $500 million 5-year term loan primarily to finance the ECS transaction. After completing the ECS acquisition in January 2019, our outstanding commercial paper was $898 million and we had fully borrowed under the $500 million term loan. We expect to focus on deleveraging by temporarily limiting share repurchases, reducing other acquisition spending, and using operating cash flow to repay debt.

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Cash from Operations

Cash from operations is our primary source of funds. Earnings and changes in working capital levels are the two factors that generally have the greatest impact on our cash from operations.

Cash from operations was essentially flat in 2018. Cash from operations should approximate $550 million in 2019, increasing versus 2018 primarily due to the ECS acquisition.

We closely monitor our working capital levels, and we ended 2018 with adjusted working capital at 10.6% of annualized sales ¹. The table below explains this non-GAAP calculation. We eliminate cash and current debt maturities from working capital to monitor our operating efficiency and performance related to trade receivables, inventories, and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period.



(Dollar amounts in millions)	2018			2017
Current assets	$	1,525		$	1,767
Current liabilities	816			976
Working capital	709			791
Cash and cash equivalents	268			526
Current debt maturities	1			154
Adjusted working capital	$	442		$	419
Annualized sales ¹	$	4,188		$	3,936
Working capital as a percent of annualized sales	16.9		%	20.1		%
Adjusted working capital as a percent of annualized sales	10.6		%	10.6		%

¹Annualized sales equal 4th quarter sales ($1,047 million in 2018 and $984 million in 2017) multiplied by 4. We believe measuring our working capital against this sales metric is more useful, since efficient management of working capital includes adjusting those net asset levels to reflect current business volume.

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Three Primary Components of our Working Capital



	Amount (in millions)							Days
	2018		2017		2016			2018	2017	2016
Trade Receivables	$	545	$	522	$	451	DSO ¹	46	45	44

Inventories	$	634	$	571	$	520	DIO ^{2, 4}	65	65	66

Accounts Payable	$	465	$	430	$	351	DPO ^{3, 4}	48	47	42


¹	Days sales outstanding: ((beginning of year trade receivables + end of period trade receivables) ÷ 2) ÷ (net trade sales ÷ number of days in the period).


²	Days inventory on hand: ((beginning of year inventory + end of period inventory) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period).


³	Days payables outstanding: ((beginning of year accounts payable + end of period accounts payable) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period).


⁴	2017 ratios have been retrospectively adjusted to reflect the adoption of ASU 2017-07 that resulted in reclassifications between "Cost of goods sold" and "Selling and administrative expenses" into "Other expense (income), net". For further discussion see Note A to the Consolidated Financial Statements on page 72.

Trade Receivables - Our trade receivables increased $23 million at December 31, 2018 compared to the prior year primarily due to increased sales, acquisitions, and currency fluctuations. Our sales to international customers, which are predominantly in the Specialized Products segment, continue to increase and typically have longer payment terms. We do not believe that the increase in days sales outstanding is indicative of a deterioration of the creditworthiness of our customers, or is reasonably likely to materially impact our liquidity position. Rather, we believe the increase is within a reasonable range of change caused by differences in the timing of sales and cash receipts. We continue to look for ways to improve speed of customer payments, including third party programs with early payment incentives in certain circumstances.

Our provision expense for losses on trade accounts receivable has averaged $1 million for the last three years. On the balance sheet, our allowance for doubtful accounts as a percentage of our net trade receivables has approximated 1% for the same time period. We monitor all accounts for possible loss. Although we recorded a $16 million reserve ($15 million on a note receivable and $1 million for a trade accounts receivable) regarding a customer in our Residential Products segment that is experiencing financial problems, we have experienced favorable trends in the number of trade accounts receivables monitored for possible loss or written-off over the last few years. We obtain credit applications, credit reports, bank and trade references, and periodic financial statements from our customers to establish credit limits and terms as appropriate. In cases where a customer’s payment performance or financial condition begins to deteriorate or in the event of a customer bankruptcy, we tighten our credit limits and terms and make appropriate reserves based on facts and circumstances for each individual customer.

Inventories - The increase in inventories of $63 million at December 31, 2018 compared to the prior year primarily reflects inflation, higher levels necessary to support sales growth, new programs and acquisitions.

Days inventory on hand of 65 days at the end of 2018 is within a reasonable historical range. We believe we have established adequate reserves for any slower moving or obsolete inventories. We continuously monitor our slower-moving and potentially obsolete inventory through reports on inventory quantities compared to sales within the previous 12 months. We also utilize cycle counting programs and complete physical counts of our inventory. When potential inventory obsolescence is indicated by these controls, we will take charges for write-downs to maintain an adequate level of reserves. Additions to inventory reserves in 2018 were $10 million, which was slightly higher than our $8 million three-year average. This increase is primarily associated with the 2018 Restructuring Plan. Our reserve balances as a percentage of our 2018 year-end inventory were consistent with our historical average.

Accounts Payable - The increase in accounts payables of $35 million at December 31, 2018 compared to the prior year is primarily due to a focused effort on optimizing payment terms, increased purchases to support sales growth, and

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acquisitions. We continue to optimize payment terms through our significant purchasing power and also utilize third party services that allow flexible payment options to enhance our DPO.

Uses of Cash

Finance Capital Requirements

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

We will continue to make investments to support expansion in businesses and product lines where sales are growing, for efficiency improvement and maintenance and for system enhancements. We expect capital expenditures to approximate $195 million in 2019. Our employee incentive plans emphasize returns on capital, which include net fixed assets and working capital. This emphasis focuses our management on asset utilization and helps ensure that we are investing additional capital dollars where attractive return potential exists.

Our long-term 6-9% annual growth objective envisions periodic acquisitions. We are seeking acquisitions primarily within our Grow business units, and we are looking for opportunities to enter new growth markets (carefully screened for sustainable competitive advantage, such as the 2019 ECS transaction discussed on page 29 and the 2018 PHC acquisition discussed below). As a reminder, in connection with the acquisition of ECS our debt levels increased, and we expect to focus on deleveraging by, among other factors, temporarily reducing other acquisition spending.

In 2016, we acquired three businesses and the remaining interest in a joint venture for total consideration of $65 million. The first, a U.S. manufacturer of aerospace tube assemblies, expands our tube forming and fabrication capabilities and adds precision machining to our aerospace platform. The second is a distributor of geosynthetic products, and the third, a South African producer of mattress innersprings. Finally, we purchased the remaining interest in an Automotive joint venture in China. This business manufactures seat comfort products and lumbar support systems.

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

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Flooring Products business. Finally, we acquired the remaining 20% of an Asian joint venture in our Work Furniture business.

In 2018, we acquired three businesses for total consideration of $109 million. The first is Precision Hydraulic Cylinders (PHC), a leading global manufacturer of engineered hydraulic cylinders primarily for the materials handling market. The second and third are both operations in our Geo Components business: a small producer of geo components, and a manufacturer and distributor of innovative home and garden products that can be found at most major retailers.

In January 2019, we acquired ECS, a leader in the production of proprietary specialized foam used primarily for the bedding and furniture industries, for total consideration of approximately $1.25 billion.

Additional details about acquisitions can be found in Note S and Note V to the Consolidated Financial Statements on page 114 and page 121, respectively.

Pay Dividends

Dividends are the primary means by which we return cash to shareholders. The cash requirement for dividends in 2019 should approximate $205 million.

We are modestly changing our dividend payout target (from 50-60%) to approximately 50% of adjusted EPS (which excludes special items such as significant tax law impacts, divestiture gains, impairment charges, restructuring-related charges, litigation accruals and settlement proceeds). Continuing our long track record of increasing the dividend remains a high priority. In 2018, we increased the quarterly dividend by $.02, or 5.6%, to $.38 per share. 2018 marked the Company's 47th annual dividend increase, a record of consecutive dividend increases that only ten S&P 500 companies currently exceed. Leggett & Platt is proud of its dividend record and plans to extend it.

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Repurchase Stock

Share repurchases are the other means by which we return cash to shareholders. As shown in the chart above, share repurchases were significant in each of the last three years. During that time frame, we repurchased a total of 10.5 million shares of our stock and issued 5.4 million shares (through employee benefit plans and stock option exercises), reducing outstanding shares by 4%. In 2018, we repurchased 2.6 million shares (at an average price of $43.10) and issued 1.2 million shares.

Our long-term priorities for use of cash are: fund organic growth, pay dividends, fund strategic acquisitions, and repurchase stock with available cash. With the increase in leverage from our acquisition of ECS, as previously discussed, we will temporarily limit share repurchases, reduce acquisition spending, and prioritize debt repayment after funding organic growth and dividends.

We have been authorized by the Board to repurchase up to 10 million shares each year, but we have established no specific repurchase commitment or timetable.

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Capitalization

This table presents key debt and capitalization statistics at the end of the three most recent years.



(Dollar amounts in millions)	2018			2017			2016

Total debt excluding revolving credit/commercial paper	$	1,099		$	1,252		$	764
Less: Current maturities of long-term debt	1			154			4
Scheduled maturities of long-term debt	1,098			1,098			760
Average interest rates ¹	3.6		%	3.6		%	3.7		%
Average maturities in years¹	6.7			6.9			5.8
Revolving credit/commercial paper	70			—			196
Average interest rate on year-end balance	2.6		%	—		%	1.0		%
Average interest rate during the year	2.4		%	1.4		%	.8		%
Total long-term debt	1,168			1,098			956
Deferred income taxes and other liabilities	241			286			227
Equity	1,158			1,191			1,094
Total capitalization	$	2,567		$	2,575		$	2,277
Unused committed credit: ²
Long-term	$	730		$	800		$	554
Short-term	—			—			—
Total unused committed credit	$	730		$	800		$	554

Cash and cash equivalents	$	268		$	526		$	282


¹	These rates include current maturities, but exclude commercial paper to reflect the averages of outstanding debt with scheduled maturities. The rates also include amortization of interest rate swaps.

The unused credit amount is based upon our revolving credit facility and commercial paper program which, at the end of 2016, had $750 million of borrowing capacity. The credit facility was amended in the fourth quarter of 2017 to increase the borrowing capacity to $800 million and the commercial paper program was increased to a corresponding amount. In January 2019, we expanded the borrowing capacity under our revolving credit facility from $800 million to $1.2 billion and correspondingly increased permitted borrowings under our commercial paper program primarily to finance the ECS transaction.

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

In July 2018, we retired $150 million of 4.40% notes at maturity.

In January 2019, we increased the capacity under our revolving credit facility from $800 million to $1.2 billion (and increased permitted borrowings under our commercial paper program in a corresponding amount), and added additional borrowing capacity in the form of the five-year term loan facility in the amount of $500 million, all primarily to finance the ECS acquisition. As of January 16, 2019, the ECS acquisition closing date, we had $898 million of outstanding commercial paper, and had fully borrowed under the $500 million term loan. We are evaluating financing alternatives for the reduction of the commercial paper.

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Commercial Paper Program

We can raise cash by issuing commercial paper through a program that is backed by our revolving credit facility with a syndicate of 13 lenders. In May 2016, we increased the borrowing capacity under the facility from $600 million to $750 million and extended the term by two years to 2021. In November 2017, we increased the borrowing capacity under the facility from $750 million to $800 million and extended the term by one year to 2022. In January 2019, we expanded the borrowing capacity under our revolving credit facility from $800 million to $1.2 billion, extended the term by two years to 2024 and correspondingly increased permitted borrowings under our commercial paper program primarily to finance the ECS transaction. The credit facility allows us to issue letters of credit totaling up to $125 million. When we issue letters of credit under the facility, we reduce our available credit and commercial paper capacity by a corresponding amount. Amounts outstanding at year-end related to our commercial paper program were:



(Dollar amounts in millions)	2018		2017		2016
Total program authorized	$	800	$	800	$	750
Commercial paper outstanding (classified as long-term debt)	70		—		196
Letters of credit issued under the credit facility	—		—		—
Total program usage	70		—		196
Total program available	$	730	$	800	$	554

The average and maximum amounts of commercial paper outstanding during 2018 were $199 million and $334 million, respectively. During the fourth quarter, the average and maximum amounts outstanding were $253 million and $304 million, respectively. At year end, we had no letters of credit outstanding under the credit facility, but we had issued $47 million of stand-by letters of credit under other bank agreements to take advantage of better pricing. Over the long term, and subject to our capital needs, market conditions and alternative capital market opportunities, we expect to maintain the indebtedness under the program by continuously repaying and reissuing the commercial paper notes until such time as the outstanding notes are replaced with long-term debt. We view the notes as a source of long-term funds and have classified the borrowings under the commercial paper program as long-term borrowings on our balance sheet. We have the intent to roll over such obligations on a long-term basis and have the ability to refinance these borrowings on a long-term basis as evidenced by our revolving credit agreement discussed above. However, we expect that our commercial paper balances may increase or decrease in the short term due to acquisition or divestiture activity and our working capital needs.

With cash on hand, operating cash flow, our commercial paper program, and our ability to obtain debt financing, we believe we have sufficient funds available to repay maturing debt, as well as support our ongoing operations, pay dividends, fund future growth, and repurchase stock. However, with the acquisition of ECS, we have temporarily realigned our capital allocation priorities and will limit share repurchases, reduce other acquisition spending, and use operating cash to repay debt and focus on deleveraging to our long-term leverage target.

Our revolving credit facility and certain other long-term debt obligations contain restrictive covenants. The covenants limit, among other things: (a) as of the last day of each fiscal quarter beginning March 31, 2019, the leverage ratio of consolidated funded indebtedness to consolidated EBITDA (each as defined in the revolving credit facility) for the trailing four fiscal quarters to 4.25 to 1.00, with a single step-down to 3.50 to 1.00 on March 31, 2020, (b) the amount of total secured debt to 15% of our total consolidated assets, and (c) our ability to sell, lease, transfer, or dispose of all or substantially all of total consolidated assets.

We expect to comfortably comply with the covenants on all relevant dates. Prior to the credit facility amendment in January 2019, in addition to (b) and (c) above, we were subject to a restrictive covenant limiting our total amount of indebtedness to 65% of our total capitalization (each as defined in the revolving credit facility), with which we were comfortably in compliance as of December 31, 2018. For more information about long-term debt, please see Note K to the Consolidated Financial Statements on page 94.

Accessibility of Cash

At December 31, 2018, we had cash and cash equivalents of $268 million primarily invested in interest-bearing bank accounts and in bank time deposits with original maturities of three months or less. The majority of these funds are held in the international accounts of our foreign operations.

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PART II

TCJA, enacted at the end of 2017, imposed a one-time U.S. tax on the earnings that produced our foreign cash. The deemed repatriation tax outstanding as of December 31, 2018, was $32 million and will be paid on a graduated scale beginning in 2022 over a four-year period. We can now bring cash to the U.S. without incurring incremental U.S. federal taxes. There likely will be some state-level income tax; however, we believe any such tax will not be material. As a result, the enactment of TCJA increases the likelihood of repatriating cash from past, current and future earnings.

If we were to bring all our current foreign cash back immediately to the U.S. in the form of dividends, we would pay previously accrued foreign withholding taxes of approximately $18 million, based upon historic foreign withholding tax rates. However, due to statutory requirements in various jurisdictions, approximately $29 million of this cash was inaccessible for repatriation at year end. In 2018, 2017, and 2016, we brought back cash of $314 million, $116 million, and $5 million, respectively, at little to no added tax cost.

CONTRACTUAL OBLIGATIONS

The following table summarizes our future contractual cash obligations and commitments at December 31, 2018:

Payments Due by Period ⁵

Contractual Obligations

Total

Less

Than 1

Year

1-3

Years

3-5

Years

Than 5

Years

(Dollar amounts in millions)

Long-term debt ¹

1,164