Greetings, and welcome to Leggett & Platt's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question- and- answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan McCoy, Senior Vice President of Investor Relations. Thank you, Ms. McCoy. You may begin.
Good morning, and thank you for taking part in Leggett & Platt's fourth quarter conference call. We are conducting the call from different locations again this quarter. Please bear with us if you experience minor delays or mixed audio quality. On the call today are Karl Glassman, Chairman and CEO; Mitch Dolloff, President and COO; Jeff Tate, Executive Vice President and CFO; Steve Henderson, EVP and President of the Specialized Products and Furniture, Flooring, and Textile Products segments; Cassie Branscum, Senior Director of IR; and Tarah Sherwood, Director of IR. The agenda for our call this morning is as follows. Karl will start with a summary of the main points we made in yesterday's press release. Mitch will discuss operating results, and Jeff will cover financial details and address our outlook for 2021. This call is being recorded for Leggett & Platt and is copyrighted material.
The call may not be transcribed, recorded, or broadcast without our express permission. A replay is available from the IR portion of Leggett's website. We posted to the investor relations portion of the web supplement the information we discussed on this call, including non-GAAP reconciliations. I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our most recent 10-K and subsequent 10-Q entitled Risk Factors and Forward-Looking Statements. I'll now turn the call over to Karl.
Good morning, and thank you for joining us today. First, thank you to our employees for your dedication, ingenuity, and tenacity in what was a very challenging year as a result of the COVID-19 pandemic. In 2020, our employees came together across our corporate functions and businesses to develop highly effective protocols to manage the crisis, committed to not only keeping each other safe and healthy while serving our customers, but also found many ways to give back and help their communities, redesigned the way that they work while maintaining and even increasing productivity, amended the financial covenant in our revolving credit facility to provide additional liquidity, all while having a sharp focus on managing working capital and reducing capital expenditure investments, continuing our deleveraging efforts, and delivering our 49th consecutive annual dividend increase. I am extremely proud of all that the team has accomplished.
We finished 2020 as a stronger company as a result of their extraordinary efforts. As we reported yesterday, fourth quarter sales were $1.182 billion, up 3% versus the fourth quarter of 2019. Continued strong demand in residential end markets and growth in automotive was partially offset by continued weakness in aerospace and work furniture. Fourth quarter EBIT was $150 million. EBIT increased $15 million in the quarter, partially offset by a change in LIFO impact. EBIT margin increased 90 basis points to 12.7% and increased 50 basis points versus adjusted fourth quarter 2019 EBIT margin of 12.2%. Fourth quarter EBITDA margin was 16.8% compared to 2019's fourth quarter adjusted EBITDA margin of 16.4%. Earnings per share were a fourth quarter record $0.76. Fourth quarter charges. Fourth quarter EPS increased $0.08 or 12% versus fourth quarter 2019 adjusted EPS of $0.68.
For the full year, 2020 sales decreased 10% to $4.28 billion, primarily from COVID-19 related demand declines across most of our businesses. EBIT decreased $113 million, and adjusted EBIT decreased $83 million to $446 million, primarily from the impacts of lower sales and the change in LIFO, partially offset by fixed cost reductions. Full year EPS was $1.82. Adjusted EPS was $2.13, a 17% decrease from 2019 adjusted EPS of $2.57. In addition, we generated operating cash flow of $603 million. During 2020, we divested two businesses in our Bedding segment, a small specialty wire operation in our Drawn Wire business with annual sales of $30 million, and a small operation in our former Fashion Bed business with annual sales of $15 million. We also reported yesterday that our board of directors declared a $0.40 per share first quarter dividend.
At Friday's closing price of $43.02, the current yield is 3.7%, which is one of the higher yields among the S&P 500 Dividend Aristocrats. We remain committed to our position as a dividend aristocrat. Our enduring fundamentals give us confidence in our ability to create long-term value for our shareholders. We are leaders in most of our markets, focused on innovation and working closely with our customers to provide more of what they need to be successful. We continue to invest in businesses with sustainable competitive advantages in large addressable markets with opportunities to grow and add value over time. Consistent with that objective, on January 30th, 2021, we acquired an aerospace business located in the U.K. that specializes in metallic ducting systems, flexible joints, and components for space, military, and commercial applications for $27 million. Annual sales of approximately $17 million.
This acquisition expands our aerospace product offering to include key components such as flexible hoses and bellows that are frequently used in fluid conveyance systems. I'll now turn the call over to Mitch.
Thank you, Karl, and good morning, everyone. I'd like to echo Karl's comments and thank our employees for your tremendous efforts this past year. Your flexibility, ingenuity, commitment, and endurance made all the difference as we navigated 2020. We're well-positioned to tackle 2021 and the years ahead, and I'm honored and proud to be on your team. We're making progress with many of the challenges we faced this past year, and we ended the year with fourth quarter sales growth and margin improvement in all three segments. Sales in our bedding product segment increased 3% in the fourth quarter. Strength in the global bedding market drove sales growth in ECS, European Spring, and U.S. Spring. This growth was partially offset by lower volume in Adjustable Bed and exited volume in Fashion Bed and Drawn Wire.
Mattress consumption in the fourth quarter was well above historic levels, driven by the continued focus on home-related products by consumers. However, supply remained constrained across the market by shortages of fabrics, chemicals, and labor, with each of these factors having varying degrees of impact throughout the quarter. In addition, COVID-related restrictions constrained some retail channels and drove continued strong growth of online sales. These factors impacted our primary market channels in very different ways. We estimate that mattress sales in the U.S. bedding market increased by roughly 1 million units or 13% in the fourth quarter. Imported mattresses increased by about 350,000 units, and domestically produced mattresses increased by about 650,000 units. Of the domestically produced mattresses, we estimate that foam and other non-spring base mattresses increased by roughly 600,000 units, and spring mattresses increased by about 50,000 units or 1%.
Our fourth quarter sales growth mirrored these trends, with U.S. Spring sales up 2% year-over-year and ECS sales up 8% year-over-year. We believe that our overall share of the domestic bedding market is fairly consistent year-over-year, perhaps down slightly considering the growth of mattress imports this year. The volatility in demand, market share shifts, and supply chain constraints that the overall industry experienced in 2020. Woven fabrics from alternative suppliers around the globe, improving our production efficiency and fabric inventory position. Supply of the primary chemicals used in our specialty foam operations, TDI, MDI, and polyol, were restricted through the quarter as producers declared force majeure and implemented customer allocations due to reported production disruptions. We expect chemical constraints to persist through at least mid-2021.
We continue to add labor in our U.S. Spring facilities, but also must manage inefficiencies as we train new employees and experience some absenteeism related to COVID-19. As we move through 2021, we plan to continue to add staffing on our Comfort Core lines and will add additional machine capacity to accommodate demand for these products. The combination of labor and machinery additions should add about 25% to our current capacity for Comfort Core once fully in place later this year. Sales in our specialized product segment were up 1% in the fourth quarter, with growth in automotive mostly offset by continued weak demand in aerospace. In our automotive business, volume for the quarter was up 6%, driven by strength in our Asian operations.
We expect the aerospace industry to remain challenged over the next few years, given the disruption in air travel and resulting buildup of aircraft and supply chain inventories. In our aerospace business, we are seeing recovery in the fabricated duct assemblies to near pre-COVID demand levels, but our welded and seamless tube production continued to be challenged as customers deplete their inventories. Sales in our Furniture, Flooring, and Textile Products segment increased 5% in the fourth quarter, driven by continued strong demand in fabric converting, geotextile components, and home furniture. In flooring products, growth in residential sales were more than offset by weak hospitality sales. Recovery in work furniture continues to lag the other businesses in the segment, as the industry has been heavily impacted by the effects of the pandemic.
The fixed cost actions we took earlier in the year reduced fourth quarter costs by approximately $25 million and full-year costs by approximately $90 million. As we move into 2021, we will continue to focus on controlling our costs by keeping our variable cost structure aligned with the current demand levels, and only adding fixed cost as necessary to support higher volumes and support future growth opportunities. I'll now turn the call over to Jeff.
Thank you, Mitch, and good morning, everyone. Throughout most of 2020, our primary financial focus was on maximizing liquidity, generating cash, and disciplined uses of cash. Cash from operations was $219 million in the fourth quarter, a decrease of $33 million versus very strong results in the same quarter of 2019, primarily due to working capital investment to replenish inventory levels in certain businesses. For the full year, we generated cash from operations of $603 million, the third highest level in our company's history. This compares to a record $668 million in 2019. The $65 million decrease was driven by lower earnings. We ended the year with a debt to working capital as a percentage of annualized sales at a notable 7.4%, reflecting our continued priority on closely controlling all elements of working capital.
Total capital expenditures for 2020 were $66 million, 54% lower than prior year, reflecting our sharp focus on optimizing cash flow as we navigated the effects of the pandemic. Our balance sheet remained strong, and we ended the year with total liquidity of $1.5 billion, comprised of $349 million in cash on hand and $1.2 billion in available capacity under the $1.2 billion revolving credit facility. In addition, we brought back $36 million of offshore cash in the fourth quarter, bringing our full-year total to $188 million. As of December 31st, our net debt to trailing 12-month EBITDA was 2.44x . In 2020, we reduced debt by $228 million, including $108 million prepayment of a portion of our Term Loan A. Now moving to 2021 guidance.
We expect continued recovery into 2021 as a result of strong consumer demand for home-related items and global automotive, progress with supply chain constraints, and modest improvement in our businesses and industries that have been negatively impacted by the effects of COVID-19. We also expect continued inflation in commodity costs and recovery of those higher costs through selling price increases. 2021 sales are expected to be in the range of $4.6 billion-$4.9 billion, or up 7%-14% over 2020, resulting from mid-single-digit volume growth, raw material related price increases, and currency benefit. $2.30-$2.60, primarily reflecting higher volume, partially offset by increasing steel, chemical, and other raw material costs, as well as the pricing lag associated with passing along these costs, particularly in the first quarter.
This guidance also assumes fixed cost savings as a result of actions taken in 2020 to be approximately $70 million, as compared to approximately $90 million in 2020. This guidance assumes no LIFO impact in 2021. Earnings per share guidance assumes a full-year effective tax rate of 23%. We expect 2021 depreciation and amortization to approximate $195 million, net interest expense of approximately $75 million, and fully diluted shares of 137 million. Based upon this guidance framework, our 2021 full-year EBIT margin should be in the range of 10.5%-11%. Additionally, we anticipate operating cash flow to approximate $450 million, capital expenditures to approximate $150 million, dividends of approximately $220 million, debt repayments of at least $51 million, and controlled acquisition spending and the continued suspension of share repurchases as we prioritize debt repayment after organic growth and dividends.
In summary, our focus on balance sheet strength, funding organic growth, commitment to deleveraging and investment-grade debt ratings, and maintaining our position as a dividend aristocrat has not changed. This discipline allows us to withstand uncertain times and capture both near and long-term investment opportunities. With those comments, I will now turn the call back over to Susan.
That concludes our prepared remarks. We thank you for your attention, and we'll be glad to answer your questions. Karl will direct our Q&A session, and the group will answer your questions. Brock, we're ready to begin the Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. One moment please, while we poll for questions. Our first question today comes from Bobby Griffin of Raymond James. Please proceed with your question.
Good morning, everybody. I hope everyone's doing well and staying healthy. Thank you for taking my questions and congrats on navigating a very challenging year.
Thanks, Bobby.
Thanks, Bobby.
I guess, Karl, first, I wanted to maybe talk a little high level about the business today and how it is positioned for inflation and maybe compare it to the last time we went through a pretty big bout of inflation, which I believe was in 2018. There are some businesses you guys have sold, so maybe we can just walk through either by the segment level or whatnot, whatever might be easiest, of just how Leggett is positioned to attack an inflationary environment today.
Yeah, thank you, Bobby. It is really a good question. I will start and then ask the others to chime in. You are right, the complexity of the business or the makeup of the business is very different today than it was just two, three short years ago. That in 2018, you will remember, we had a hard time passing through steel commodity inflation in the Fashion Bed business. Well, we no longer participate in fashion bed with the last divestiture, last little piece of that taking place in the fourth quarter. We also had a home furniture business that was probably too focused on commodity products. The team did a great job. More upholstered furniture manufacturing moved offshore. We've heavy weighted our manufacturing capacity offshore for what becomes, from an internal perspective, domestic consumption that is then exported to North America and to Europe.
The makeup of the business is certainly healthier. Incrementally, there has been a few divestitures that have taken place that are just- they become material when you add them up, but they are really kind of small, but they tend to be more commodity oriented. The other main change since 2018 is the acquisition of ECS. We acquired ECS. ECS does a really good job of producing specialized foam. It gives them pricing power. They have agreements in place. They have the ability to pass through commodity inflation, actually, probably more effectively and efficiently than we have in our historic spring businesses, where in those businesses, as you will recall, we have a 90-day lag. Just a better mix of businesses. The 2018 timeframe was a learning opportunity that our teams learned from. Mitch, anything that you want to add to that rambling answer?
[Inaudible] is even able to do that even faster than we had over the last year or so. I think that's very helpful. The other thing I would add is that we struggled a little bit getting some raw material inflation through PHC before, and I think we have a better position to do that now as well. Overall, I think at a high level, Bobby, it is a good question, and I think that we're on much firmer footing passing along inflation than we ever have been, really.
All right. Thank you. I appreciate that detail. Very helpful. When we think about the year, and it's obviously very impossible to predict raw materials or where they move, but if, say, we just flatten out from here, is the headwind mostly in 1Q? Is there any type of sizing, or can you put some ranges around what the raw material headwind is for us to maybe tune up our 1Q models of how big of a headwind we need to flow in? Because you did call out some pretty noticeable cost savings at $70 million. That makes me believe the raw material headwind's pretty big, given kind of where the earnings are moving around to.
Bobby, as you said, it's really, really difficult to forecast. You'll remember on the third quarter call in November of last year, we talked that really oddly in 2020, if there was anything that was welcome, it was the fact that the steel input cost, primarily scrap, had been really pretty flat for the year. I should have never made that comment because then scrap jumped pretty aggressively in December, forcing us to actually book some LIFO expense that we didn't anticipate when we last spoke as a group in November. It's so difficult to forecast. Scrap went up significantly. This is steel, by the way. Steel scrap market went up significantly in January at $100 a ton.
It sounds like the early forecast, February scrap won't settle probably until the end of this week, but it looks like there'll be a regression of that inflation by probably $40-$50 a ton. It's difficult. What happens for the rest of the year in ability or inability to make a call on LIFO is also a challenge. Yeah, frankly, we don't know. The lag impact will be most severe in 1Q based on what we know today. ECS is a different set of circumstances. At ECS, the chemical input cost inflation is much more significant than in the steel side of the business. It will probably have a longer duration moving into second quarter. We've announced three price increases. We'll probably announce a fourth relatively soon.
More difficult to forecast the timing of that but the good news, to Mitch's earlier point, is that we get recovery really pretty quickly. Mitch, anything that you want to add to all of that?
I think you covered it, Karl. I think on the chemicals, it's really dynamic. The pricing started surging in the fourth quarter. We see continued increases in Q1, as you said, I think we'll have some disruption there, both from availability and from pricing through the first half of the year. You're right, we are able to, I think, so far, pass that on pretty quickly.
Thanks, Mitch. Bobby, if you don't mind, can we talk about LIFO for just a second?
Sure.
Some of the sell-siders have asked about, some of the investors have asked about LIFO. As Jeff said in his prepared comments, we are forecasting no LIFO expense in 2021, as we typically do early in the year, because to your good point, we lack visibility. LIFO is really a by-product of a calculation that's done on December 31st of every year related to the amount and the value of inventory on hand. The way that I think about the LIFO expense in 4Q, that it was probably a pull forward because over time, LIFO and FIFO match.
Don't perfectly match at the end of the year. Late year cost inflation resulted in LIFO expense with no FIFO recovery ability until 1Q and 2Q. That's kind of the challenge that we have. At this point, it's pretty easy to call that there won't be a LIFO expense of size.
Clear on the fixed cost savings. The $70 million that Jeff spoke of, that's not an incremental $70 million. That's the amount we expect to retain as we move into 2021. That was the result of the activities that we undertook in 2020. Just wanted to make sure that was clear.
Yep. Is the right way to think about that maybe if we just look at 2019, say, think about the fixed cost structure of the business at the end of 2019, and then basically think, okay, incrementally, you guys have reduced that fixed cost structure by $70 million, and then, of course, there's been some investments having to come on given the demand level that we've seen in some of your end markets. Is that fair?
Yeah, I think that's a fair way to think about it, Bobby.
Okay. Well, I appreciate all the details. Thank you for taking my questions, and I'll jump back in the queue.
Thanks, Bobby.
The next question is from Susan Maklari of Goldman Sachs. Please proceed with your question.
Thank you. Good morning, everyone.
Hi, Susan.
My first question is, I want to talk a little bit about the margin outlook and certainly understanding some of the near-term pressures around inflation and some of the issues that you're dealing with the supply chain. As we kind of look past some of that, and we think about the volumes and some of the changes that you have made from a cost perspective and an operational perspective across the whole business, how should we think about the margin profile and, especially maybe as we think about this for the back half of 2021 and maybe even further out from there, where the business can operate and how you can kind of achieve that?
Yeah. Thanks, Susan. On a longer-term basis, which I think is the genesis of your question, we still are very comfortable with our expectation that EBIT margins will be in a range of 11.5%-12.5%. It's really the short-term issues that we've spoken about, the lag impact, and not really getting a margin on the pass-through as a percentage. We get the recovery from a dollar perspective. Yeah, we're very comfortable with the 11.5%-12% long-term target.
Okay. All right. That's helpful, Karl. Then, my next question is, you mentioned in your remarks that you are adding staffing in Comfort Core. You are expanding that business in terms of capacity for this year. When we kind of think about that for 2021, I guess, can you give us some color, and I know that you kind of don't necessarily want to share exact percentages in there, but give us some color around how Comfort Core has performed over the last couple of quarters and how we should be thinking about that as we look forward and think about its contribution to the bedding segment.
Mitch, you want to grab that?
Yeah, sure. Hi, Susan. By about 25%. We have been increasing our production sequentially from the downturn of the second quarter to the third quarter to the fourth quarter as well, and we continue to see really strong demand for our higher-end products, giving us those content gains. I think that if we look back over time, Comfort Core as a percentage of our total innerspring production was about 58% in the fourth quarter of 2019. It was about 60% in the third quarter of 2020, and about 62% in the fourth quarter of 2020. Continue to see gains there, and similarly, continue to see the percentage of our Comfort Core units that also have Quantum Edge continue to increase as well, up to about 56% in the fourth quarter of 2020.
We're happy and excited to make those capacity expansions and to continue to drive higher content gains across our product line.
Okay. All right. That's very helpful. If I can, I'm going to just sneak one more in here. One of the questions that we've been getting is around some of the issues in the auto industry in general as it relates to the semiconductors and the shortages that that industry is seeing. Can you just comment on whether that's had any impact on your backlog or your supply chains and how you are thinking about that or anything that we should be aware of there?
Steve?
Yeah, sure. Good morning, Susan. First, I want to acknowledge the automotive team, everything they went through last year, it's now carrying over into 2021 to some extent. The chip shortage, it's an industry-wide issue. Each OEM is taking their own approach based on their situation. We're reading a lot just like you are. The situation is still very fluid with limited visibility at this point. We have some ancillary exposure to supply chain constraints in our motor production. We think the majority of the impact will probably come from restrictions on OEM production. We've seen GM, Ford, Chrysler, Volkswagen, others announce temporary reductions of one sort or another. We're not seeing that impact in our orders yet, so there's a bit of a disconnect.
That being said, based on the predictions from IHS, they're saying approximately 858,000 units could be lost in the first quarter. They're saying they can make that up in the second half of the year if it doesn't continue to increase. Based on that, we would see a slight negative sales impact in Q1 but i t's still too early to tell.
Okay. All right. That's very helpful. Thanks, everyone.
As a reminder, if you would like to ask a question, please press star one on your telephone. Our next question is from Peter Keith of Piper Sandler. Please proceed with your question.
Hi. Thanks. Good morning, everyone. Hope everyone there is doing well. I wanted to just dig into, again, some of the planned price increases. I think you gave some good context on how the business compares to 2018. Looking specifically at your innerspring business and the steel inflation that's going on right now, because of the supply chain challenges that you guys have experienced in recent months, do you still have the same pricing capabilities to pass through to your major bedding customers in the coming months?
Mitch, why don't you grab that one?
Okay. Sure, Karl. Thanks, and hi, Peter. The short answer is absolutely. We have contractual terms that allow us to pass through the steel inflation that we see. As you've seen over the years, that has a bit of a lag, but that comes through, and we're certainly able to do that for our non-contract customers as well. In fact, went out with an increase in January, and may well, given the continued inflation, have another one coming after that. I don't think that our ability to pass on the inflation in the innerspring business has been impacted at all.
Okay, good. I know there's a lot of new innerspring product that's coming into the market this year. We have not been able to see it because of the Las Vegas market COVID dynamic. Have you guys gained content with some of your major bedding customers this year with these planned launches?
Yeah, I think the answer to that is yes. We see it. We just talked about the increase in our Comfort Core and Quantum Edge share there. It's been a scramble throughout 2020 and continuing here to just supply everybody's need, and I think that strong demand continues.
Okay. Maybe lastly, just to round out on the bedding. It does seem like the really strong demand is continuing Q1, maybe poised for even industry acceleration versus Q4. When we look at your U.S. Spring business, I think we and some of the investors we've talked to were expecting some acceleration in Q4 sequentially as the supply chain delays moderated. Maybe looking forward to Q1, is that something that now with further moderation, strong industry backdrop, and also with the anti-dumping duties, that U.S. Spring is poised for some healthy re-acceleration here?
Yeah, I think so. I think we continue to make improvements in our production. I think that there's, as I talked about in my comments, I think disruption as there are share shifts across the industry and other constraints like chemicals and foam availability that impact some of our customers. I think that creates some cloudiness, but I think from our standpoint, we have the capability to continue to increase our sales in Q1.
Okay. Very good. Thanks so much, guys. Good luck.
Thanks, Peter.
The next question is from Keith Hughes of Truist. Please proceed with your question.
Thank you. Got on a little late. I hope it's not a repeat. The Drawn Wire sales were down 4% in the quarter. Does that have something to do with what's going on with some of the inflation coming in or any kind of commentary on what you're seeing in that business?
Keith, it's a good question and an interesting observation in that all that was a signal is that from our Drawn Wire business, what's most important is they're set up to supply intercompany. With the increased demand in springs that we've focused more of that volume internally, which has a much higher value to us than the external trade business. That's the primary driver, and we did divest a small business. It's a combination.
Okay.
Definitely, Keith, the productive capacity of the Sterling rod mill did not change.
Okay. All right. I think I understand what you're saying there. Adjustables were down as well in the quarter. I know you had had some big promotions with a retailer that had an anniversary. Is that still the driver of the decline there?
Yeah. Just remember, we were up against a comp in 4Q of 2019 of 22% growth, so it was just a tough comp. That business is really good.
Okay. I don't know if you said this earlier, but just overall in bedding, the organic sales about, I guess, 5% in total, with some of the divestitures coming off. Do you anticipate that number to increase notably, particularly with the tariffs in the first half of 2021?
Go ahead, Mitch.
Thanks, Karl. Hi, Keith. Yeah, I think that it's set up to be a really strong year. I think the overall industry, if we continue this consumer focus on the home, I think that we are well-positioned to see continued strong growth.
Okay. Thank you.
There are no further questions at this time. I would like to turn the floor back over to Susan McCoy for closing comments.
Thank you for joining us again today and w e'll talk to you next quarter.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.